Asset Purchase Agreement 11/28/05

ASSET PURCHASE AGREEMENT


THIS ASSET PURCHASE AGREEMENT ("AGREEMENT"), is made effective as of November 28, 2005, by and among DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company ("DALS I"), DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company ("DALS II") (DALS I and DALS II are collectively, "SELLERS"), and AGEMARK ACQUISITION, LLC, a North Carolina limited liability company ("BUYER").


A. Sellers own and operate certain adult care home facilities located in the State of North Carolina, as more fully described on Exhibit A (collectively, the "FACILITIES").


B. Sellers desire to sell and transfer the assets of the Facilities to Buyer and Buyer desires to purchase the same from Sellers subject to the terms and conditions of this Agreement.


In consideration of the mutual covenants contained in this Agreement and of other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties intending to be legally bound hereby agree as follows:


ARTICLE 1. PURCHASE AND SALE


1.1 Purchase and Sale. Sellers agree at Closing (as defined herein), to sell, transfer, assign, convey and deliver to Buyer, and Buyer agrees to purchase, acquire and accept from Sellers all right, title and interest in and to certain assets of Sellers related to the Facilities (collectively, the "ASSETS"), as set forth below, but expressly excluding the "Excluded Assets" (as defined in Section 1.2 below):


(1) All right, title and interest of Sellers in and to all of the land and real estate owned by Sellers and used in connection with the Facilities as listed on Exhibit 1.1(1) attached hereto and in and to all structures, improvements, fixed assets and fixtures including fixed machinery and fixed equipment situated thereon or forming a part thereof and all appurtenances, easements and rights-of-way related thereto (collectively, the "REAL ESTATE");


(2) All tangible personal property, medical and other equipment, machinery, data processing and computer hardware and software, furniture, furnishings, appliances, vehicles and other tangible personal property owned by Sellers and located at the Facilities (collectively, the "EQUIPMENT AND FURNISHINGS");


(3) All inventory of goods and supplies used or maintained in connection with the Facilities including food, cleaning materials, disposables, linens, consumables, office supplies, and medical supplies (collectively, the "INVENTORY");


(4) All personnel, resident/occupant and other records related to the Facilities (including hard, electronic and microfiche copies) and all manuals, books and records used in operating the Facilities including, without limitation, personnel policies and files and manuals, accounting records, and computer files;


(5) To the extent transferable, all licenses, permits, registrations, certificates, accreditations and approvals necessary to operate the Facilities;


(6) All plans and surveys, including "as-built" plans, those relating to utilities, easements and roads, and plats, specifications, engineers' drawings, architectural renderings and similar items in Sellers' possession;


(7) All goodwill and, to the extent assignable by Sellers, all warranties (express or implied) and rights and claims related to the Assets or the operation of the Facilities, including those set forth on Exhibit 1.1(7) attached;


(8) All resident escrows, deposits and any prepaid rent or any other fees paid by Facility residents related to the Facilities (the "DEPOSITS"), including those set forth on Exhibit 1.1(8) attached;


(9) The Leases and Contracts, as defined in Section 3.9, and as set forth on Exhibit 3.(9) attached; and


(10) Sellers' interest in any intellectual property owned, leased or licensed by either Seller and utilized in connection with the Facilities, including without limitation, all names used by the Facilities and all derivatives thereof.


1.2 Excluded Assets. Sellers are not selling and Buyer is not purchasing or assuming obligations with respect to the following (collectively, the "EXCLUDED ASSETS"):


(1) Sellers' corporate and fiscal records and other records that Sellers are required by law to retain in their possession and that are not included in Section 1.1(4) above;


(2) All accounts not included in Section 1.1(8) above, notes and other receivables;


(3) All cash, cash equivalents, cash deposits and escrows, bank accounts, money market accounts, other accounts, certificates of deposit and other investments of Sellers other than the Facilities' petty cash;


(4) Sellers' provider agreements with Medicaid or any other governmental payor program and any corresponding provider numbers;


(5) Sellers' wide area network and associated software provided on the Diversicare wide area network;


(6) Sellers' continuous quality improvement program, manuals and materials, management information systems, policy, procedure and educational manuals and materials and similar proprietary property of Sellers;


(7) Any rights in or to the use of the name "Advocat" or "Diversicare" or any derivative thereof, except as set forth in Section 10.5 below;


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(8) Any rights in or to the adult care home facility located at 400 Goldsboro Avenue, Carolina Beach, New Hanover County, North Carolina, known as "Diversicare Assisted Living of Carolina Beach", including all real and personal property related thereto;


(9) The National Contracts, as defined in Section 3.9 below;


(10) The regional office of Sellers' parent, Diversicare Assisted Living Services NC, LLC, a Tennessee limited liability company ("DALS"), located at 770-D Park Centre Drive, Kernersville, North Carolina 27284 (the "REGIONAL OFFICE"), including DALS's lease of real property for said Regional Office and all tangible personal property located at the Regional Office; and


(11) Any other items listed on Exhibit 1.2.


1.3 Assumed Contracts, Leases and Liabilities.


(1) At Closing, Buyer will assume and agree to pay or perform, as the case may be, those obligations of Sellers (i) arising from and after Closing under the Leases and Contracts (as defined in Section 3.9 below) and (ii) arising from all accrued vacation and sick leave for Employees (as defined in Section 3.13) who are hired by Buyer or Buyer's agent at Closing (collectively, the "ASSUMED LIABILITIES").


(2) Except for the Assumed Liabilities, Buyer shall not assume, and shall not be liable for, any debt, liability or obligation of Sellers of any type or description whatsoever, whether related or unrelated to the Assets, the Facilities or the transactions contemplated within this Agreement and Sellers shall remain liable and responsible for the payment or performance, as the case may be, of all such debts, liabilities and obligations.


1.4 Excluded Liabilities. Without limiting the foregoing, Sellers shall remain responsible for all debts, liabilities and obligations not expressly assumed by Buyer (collectively, the "Excluded Liabilities"), including but not limited to the following:


(1) All obligations pursuant to or related to any loan or debt obligations;


(2) Liabilities, indebtedness, commitments or obligations and responsibilities of any kind whatsoever (other than the Assumed Liabilities) of Sellers arising from operations of the Facilities, relating to the time through Closing;


(3) All liabilities and commitments relating to the time periods through Closing for income tax and other taxes; all employee (and former employee) wages, salaries and benefits (unless specifically referred to in Section 1.3(1)),


(4) any liabilities of the Sellers under this Agreement;


(5) any liability of the Sellers arising out of the injury to or death of any person, or damage to or destruction of any property, whether based on negligence, breach of warranty, strict liability, enterprise liability or any other legal or equitable theory arising from or related to services provided by the Sellers, to the extent any of such liabilities arose on or prior to the Closing; and


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(6) amounts owed by Sellers to any third party payors, including Medicare and Medicaid, for the periods through Closing as a result of any settlement or other adjustment process used by such third party payors, including cost reports filed or to be filed.


ARTICLE 2. PURCHASE PRICE; ALLOCATIONS;
ACCOUNTS RECEIVABLE AND RESIDENT FUNDS


2.1 Purchase Price. The purchase price payable by Buyer to Sellers for the Assets shall be Eleven Million and No/100 Dollars ($11,000,000.00) (the "PURCHASE PRICE"). The Purchase Price shall be payable at Closing by wire transfer to an account designated by Sellers of immediately available, same day federal funds. At Closing, the Escrow Amounts (as defined herein), together with any interest earned thereon, shall be applied to the Purchase Price and Buyer shall also receive a credit for vacation and sick leave as assumed by Buyer, or Buyer's agent, pursuant to Section 1.3(1) above. The amount of the credit for the assumed vacation and sick leave shall be equal to the amount accrued by Sellers for such obligations, determined in accordance with generally accepted accounting principles, applied consistently with Sellers' past practices. At Closing, this amount shall be estimated based on Sellers' most currently available financial reports and if there is any change in the amount accrued by Sellers between the date of said financial report and the Closing Date, the parties agree to settle on the appropriate adjustment in accordance with Section 2.2 below.


2.2 Apportionable Income and Expenses. All income and expense attributable to the operation of the Facilities (measured on an accrual basis) through 11:59 p.m. on the date of Closing shall be for the account of Sellers. Thereafter, such income and expense shall be for the account of Buyer. All apportionable items of operating income and expense applicable to any periods commencing before Closing and continuing after Closing shall be prorated between Sellers and, to the extent they are included within the Assumed Liabilities, Buyer. Apportionable operating income and expenses shall include, but shall not be limited to, such items as prepaid income, power and utility charges, personal property taxes, real estate taxes and rents.


If final prorations cannot be made at Closing for any item being prorated under this Section 2.2, Buyer and Sellers agree to allocate such items on a fair and equitable basis as soon as invoices or bills are available and applicable reconciliation have been completed, with final adjustment to be made as soon as reasonably possible after the Closing (but in no event later than ninety (90) days after the Closing, except that adjustments arising from any tax protest shall not be subject to such ninety (90) day limitation, but shall be made as soon as reasonably possible), to the effect that income and expenses are received and paid by the parties on an accrual basis with respect to their period of ownership. Payments in connection with the final adjustment shall be due no later than ninety (90) days after the Closing, except that adjustments arising from any tax protest shall not be subject to such 90-day limitation, but shall be made as soon as reasonably possible. Sellers shall have reasonable access to, and the right to inspect and audit, Buyer's books to confirm the final prorations for a period of one (1) year after the Closing. To the extent invoices or bills for the current real estate tax year are not yet issued, the parties shall prorate such taxes on the basis of the most recent tax year and will adjust such proration within five (5) business days after Sellers or Buyer receive the real estate tax invoice for the current tax year.


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2.3 Allocation of Purchase Price. The Purchase Price shall be allocated among the Assets in the manner set forth in Exhibit 2.3 attached hereto (the "ALLOCATION"). The parties to this Agreement agree that the Allocation shall be used by them for all purposes including tax, reimbursement and other purposes. Each party to this Agreement agrees that it will report the transaction completed pursuant to this Agreement in accordance with the Allocation, including any report made under Section 1060 of the Internal Revenue Code of 1986, as amended (the "CODE"), and that no party will take a position inconsistent with the Allocation except with the prior written consent of the other parties hereto.


2.4 Escrow Deposit. Buyer has previously deposited with Chicago Title ("ESCROW AGENT") the sum of One Hundred Thousand and No/100 Dollars ($100,000.00) (together with all interest thereon, the "ESCROWED AMOUNT"). The Escrowed Amount shall be held by Escrow Agent and paid, disbursed or applied as a credit against the Purchase Price as provided in this Agreement. The Escrowed Amount shall be held or placed by Escrow Agent in an interest bearing account and the term "Escrowed Amount" shall include any interest thereon. If the Closing occurs, the Escrowed Amount will be credited against the Purchase Price. If the Closing does not occur or the Agreement is otherwise terminated (i) by reason of Buyer's default, Escrow Agent shall be irrevocably authorized and directed to release the Escrowed Amount to Sellers and such amounts shall be retained by Sellers as liquidated damages; or (ii) for any other reason, Escrow Agent shall be irrevocably authorized and directed to release the Escrowed Amount to the Buyer. This Agreement shall constitute both an agreement among Sellers and Buyer and escrow instructions for Escrow Agent. If Escrow Agent requires a separate or additional escrow agreement to hold the Escrowed Amount, Buyer and Sellers hereby agree upon request by Escrow Agent to promptly execute and deliver such agreement; provided, that such agreement shall not modify or amend the provisions of this Agreement unless otherwise consented and agreed to in writing by Sellers and Buyer.


2.5 Accounts Receivable.


(1) Sellers are not selling, and shall retain all right, title and interest in and to all unpaid accounts receivable with respect to the Facilities which relate to the period prior to the Closing Date, including, but not limited to, any accounts receivable arising from rate adjustments which relate to the period prior to the Closing Date even if such adjustments occur after the Closing Date ("SELLERS' A/R"). Buyer (i) shall do nothing to interfere with any and all of Sellers' rights with respect to the Sellers' A/R, including but not limited to, the right to collect the same and to enforce any and all of Sellers' rights with respect to Sellers' A/R; provided the Sellers shall not initiate any litigation for collections against parties who continue to be residents of the Facilities after Closing without Buyer's consent, and (ii) agrees that if it receives any proceeds with respect to the Sellers' A/R, Buyer will hold such proceeds in trust for Sellers and shall promptly turn over those proceeds to Sellers without demand, in the form received. Sellers agree that if Sellers receive any amounts with respect to accounts receivable for services provided after the Closing of the Facilities, such amounts shall promptly (and in no event more than five (5) business days after receipt by Sellers) be forwarded to Buyer.


(2) Within ten (10) business days following the Closing Date, Sellers shall provide Buyer with a schedule setting forth by patient its outstanding accounts receivable with respect to the Facilities as of the Closing Date.


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(3) In furtherance and not in limitation of the requirements set forth in Section 2.5, payments received by Buyer from and after the Closing Date from third party payors, including but not limited to Medicare, Medicaid, managed care and health insurance, shall be handled as follows:


(a) If such payments specifically indicate on the accompanying remittance advice, or the parties otherwise agree, that they relate to the period prior to the Closing Date, the payments shall be forwarded to Sellers by Buyer, along with the applicable remittance advice, promptly, but in no event more than five (5) business days, after receipt thereof;


(b) If such payments indicate on the accompanying remittance advice, or the parties otherwise agree, that they relate to the period on or after the Closing Date, they shall be retained by Buyer; and


(c) If the period(s) for which such payments are made is not indicated on the accompanying remittance advice, and the parties are unable to agree as to the periods for which such payments relate, the parties shall assume that each payment received within ninety (90) days after the Closing Date relates to the oldest outstanding unpaid receivables for reimbursement and, based on such assumption, the portion thereof which relates to the period on and after the Closing Date shall be retained by Buyer and the balance shall be remitted to Sellers promptly, but in no event more than five (5) business days, after receipt thereof. After said ninety (90) day period, such payments which fail to designate the period to which they relate shall be first applied to current balances with any excess applied to reduce pre-Closing balances.


(d) Any payments received by Buyer within ninety (90) days after the Closing Date from or on behalf of private pay patients with outstanding balances as of the Closing Date which fail to designate the period to which they relate, will first be applied by Buyer to reduce the patients' pre-Closing Date balances, with any excess applied to reduce any balances due for services rendered by Buyer after the Closing Date.


(e) In the event the parties mutually determine that they misapplied any payment hereunder, the party that erroneously received the payment shall remit it to the other party promptly, but in no event more than five (5) business days, after the determination of misapplication is made.


(f) For the six (6) month period following the Closing Date or until Sellers receive payment of all accounts receivable attributed to the operation of the Facilities prior to the Closing Date, whichever is sooner, Buyer shall provide Sellers with an accounting by the 20th day of each month setting forth all amounts received by Buyer during the preceding month with respect to Sellers' A/R which are set forth in the schedule provided by Sellers pursuant to Section 2.5. Sellers shall have the right to inspect all cash receipts of Buyer during weekday business hours in order to confirm Buyer's compliance with the obligations imposed on it under this Section.


(4) The obligations of the parties to forward the accounts receivable payments pursuant to this Section 2.5 are absolute and unconditional and irrespective of


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any circumstances whatsoever which might constitute a legal or equitable discharge, offset, counterclaim or defense of the parties, the right to assert any of which is hereby waived.


2.6 Transfer on Resident Trust Funds.


(1) Upon execution of this Agreement, Sellers shall prepare and deliver to Buyer a current true, correct, and complete accounting and inventory (properly reconciled) of any resident trust funds and residents' property held by Sellers in trust for residents at the Facility (collectively the "RESIDENT TRUST FUNDS"). Not less than fourteen (14) days prior to Closing, Sellers shall prepare and deliver to Buyer an updated true, correct and complete accounting and inventory (properly reconciled) of the Resident Trust Funds.


(2) As of the Closing Date, Sellers hereby agree to transfer to Buyer the Resident Trust Funds and Buyer hereby agrees that it will accept such Resident Trust Funds in trust for the residents/responsible parties and be solely accountable to the residents/responsible parties for such Resident Trust Funds in accordance with the terms of this Agreement and applicable statutory and regulatory requirements.


(3) Within five (5) days after the Closing Date, Sellers shall prepare a final reconciliation comparing the actual Resident Trust Fund balance on the Closing Date to the amount of the Resident Trust Funds transferred to Buyer at the Closing and to the extent the former exceeds the latter, Sellers shall remit such excess to Buyer or to the extent the latter exceeds the former, Buyer shall remit such excess to Sellers.


(4) Sellers shall have no responsibility to the applicable resident/ responsible party and regulatory authorities with respect to any Resident Trust Funds delivered to Buyer.


ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF SELLERS


As a material inducement to Buyer to enter into this Agreement and to consummate the transactions contemplated herein, Sellers hereby represent and warrant to Buyer, which representations and warranties shall be true and correct on the date hereof and as of the date of Closing, as follows:


3.1 Organization, Qualification and Authority. Each Seller is a limited liability company organized, validly existing and in good standing in the State of Delaware, and is in good standing and qualified to do business as a foreign corporation in the State of North Carolina. Each Seller has full power and authority to own, lease and operate its facilities and assets as presently owned, leased and operated and to carry on its business as it is now being conducted. Each Seller has the full right, power and authority to execute, deliver and carry out the terms of this Agreement and all documents and agreements necessary to give effect to the provisions of this Agreement and to consummate the transactions contemplated on the part of such Seller hereby. The execution, delivery and consummation of this Agreement, and all other agreements and documents executed in connection herewith by each Seller, have been duly authorized by all necessary action on the part of such Seller and Sellers have provided Buyer certified copies of resolutions or consents of each Seller evidencing such authorizations. No other action, consent or approval on the part of Sellers or any other person or entity is necessary to authorize Sellers' due and valid


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execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith. This Agreement and all other agreements and documents executed in connection herewith by Sellers, upon execution and delivery thereof, constitute the valid and binding obligations of each Seller, enforceable in accordance with their respective terms.


3.2 Absence of Default. The execution, delivery and consummation of this Agreement and all other agreements and documents executed in connection herewith by Sellers will not constitute a violation of, or be in conflict with, and will not, with or without the giving of notice or the passage of time, or both, result in a breach of, constitute a default under, or create or cause the acceleration of the maturity of any debt, indenture, obligation or liability affecting the Assets or the Facilities pursuant to, or result in the creation or imposition of any security interest, lien, charge or other encumbrance upon any of the Assets under: (1) any term or provision of the governing documents of each Seller; (2) any contract, lease, purchase order, agreement, document, instrument, indenture, mortgage, pledge, assignment, permit, license, approval or other commitment to which either Seller is a party or by which either Seller and/or the Assets are bound; (3) any judgment, decree, order, regulation or rule of any court or regulatory authority; or (4) any law, statute, rule, regulation, order, writ, injunction, judgment or decree of any court or governmental authority or arbitration tribunal to which either Seller and/or the Assets are subject or that would have an adverse effect on Buyer, the Facilities or the Assets.


3.3 Financial Statements. Attached hereto as Exhibit 3.3 are true and correct copies of the unaudited balance sheets for each Facility as of December 31, 2003 and 2004, and unaudited income statements for the years then ending, and the interim unaudited balance sheet and income statement of each Facility for the eight (8) month period ended August 31, 2005 (collectively, the "FINANCIAL STATEMENTS"). The Financial Statements are based on the books and records of Sellers and present fairly and accurately the financial position of the Facilities as of the periods specified, the results of its operation, and all costs and expenses for the periods specified. The Financial Statements are true, complete and correct and contain no untrue or misleading statements and do not omit anything which would cause them to be misleading or inaccurate in any respect. The Financial Statements have been prepared in compliance with generally accepted accounting principles on an accrual basis, except that they do not include footnotes and they are subject to normal year-end adjustments.


3.4 Operations Since August 31, 2005. Except as set forth on Exhibit 3.4, since August 31, 2005, there has been no:


(1) Material change in the condition, financial or otherwise, of Sellers, the Facilities or the Assets that has, or could reasonably be expected to have, an adverse effect on any of the Assets, the Facilities or future prospects of the Facilities, or the results of the operations of Sellers;


(2) Uninsured loss, damage or destruction in excess of $10,000.00 of or to any of the Assets;


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(3) Sale, lease, transfer or other disposition by Sellers of, or mortgages or pledges of or the imposition of any lien or encumbrance on, any portion of the Assets, except as set forth on Exhibit 3.4(3) attached hereto;


(4) Increase in the compensation payable by Sellers to any of their employees other than those made in the ordinary course of business, or any increase in, or institution of, any bonus, insurance, pension, profit-sharing or other employee benefit plan or arrangements;


(5) Strike, work stoppage or other labor dispute at any Facility;


(6) Amendment to or change in the terms of any of the Leases and Contracts or termination, waiver or cancellation of any rights or claims of Sellers thereunder;


(7) Assumption or creation of any liability outside of Sellers' ordinary course of business in excess of $10,000.00, except as set forth on Exhibit 3.4(7) attached hereto; or


(8) Institution or settlement of any litigation, action or proceeding before any court or governmental body relating to Sellers, the Facilities or the Assets, except as set forth on Exhibit 3.4(8) attached hereto.


3.5 Employment Discrimination. Except as disclosed in Exhibit 3.5 attached hereto, no person or party (including, without limitation, any governmental agency) has asserted, or to the best knowledge of Sellers, has threatened to assert, any claim for any action or proceeding against either Seller (or any officer, director, employee, agent or member of such Seller) arising out of any statute, ordinance or regulation relating to wages, collective bargaining, discrimination in employment or employment practices or occupational safety and health standards including, without limitation, the Fair Labor Standards Act, Title VII of the Civil Rights Act of 1964, as amended, the Occupational Safety and Health Act, the Age Discrimination in Employment Act of 1967, the Americans With Disabilities Act and the Family and Medical Leave Act.


3.6 Licenses and Permits. The Facilities have all licenses, permits, registrations, certificates and accreditations (collectively, the "LICENSES AND PERMITS") necessary for Sellers to own, occupy and operate the Facilities as adult care home facilities. To the knowledge of Sellers, there is no default under any of the ...