Our board of directors believes that, overall, the risks associated with the sale of Diversicare Canada to Holdings are outweighed by the potential benefit of the sale of Diversicare Canada to Holdings.

     In view of the wide variety of factors considered, our board of directors did not find it practicable to quantify or otherwise assign relative weight to the specific factors considered. However, our board of directors did consider the most significant factors to be (1) the Company’s obligations under its debt maturities, (2) the possible reduction in the value of Diversicare Canada because of potential loss of profitable contracts and leases, as well as (3) the loss of our most profitable segment. After taking into account all of the factors set forth above, our board of directors unanimously determined that the sale of Diversicare Canada to Holdings is in the best interest of the Company and its stockholders and that we should proceed with the sale of Diversicare Canada to Holdings upon the terms offered.

THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTEFORTHE TRANSACTION.

Effect of the Transaction on Our Stockholders

     If the Transaction is approved and consummated, our stockholders will continue to retain their ownership in the Company. No distribution of cash or securities will be made to our stockholders. We have had operating losses in each of the last five years and as of June 30, 2003 we have a $57.3 million working capital deficit. Under Section 170 of the Delaware General Corporation Law, a corporation may only pay dividends on its outstanding stock either out of its surplus or out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Company does not have a surplus nor has it had net profits in either fiscal 2002 or 2003. As a result, we are not permitted under Delaware law to pay any dividends to our stockholders.

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Use of Net Cash Proceeds

     The proceeds (after payment of expenses of the Transaction, including taxes) from the Transaction will be used to reduce the outstanding debt of the Company. Currently it is expected that payments received under the promissory note will also be required to be paid to the bank.

Accounting Treatment of the Sale

     The Transaction will be reflected on our consolidated balance sheet as a sale of all of the stock of our Canadian subsidiary. We will recognize a gain or loss to the extent the Transaction price differs from the book value of the subsidiary’s stock. Based on the financial position of Diversicare Canada as of June 30, 2003, we anticipate a pre-tax gain of approximately U.S. $0.3 million on the Transaction. However, the final amount of any gain or loss we report in our consolidated financial statements will depend on the financial position of Diversicare Canada at the time of closing, foreign currency exchange rates at the time of closing, and other factors.

Material Income Tax Consequences to Us of the Sale

     The following is a summary of material income tax consequences to us and our stockholders of the Transaction. This discussion is for general information only and is based on the provisions of the Internal Revenue Code of 1986, as amended, Treasury Department Regulations issued pursuant thereto and published rulings and court decisions in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect.

     The Transaction will be a taxable transaction to us for federal, state, local and foreign income tax purposes. In general, we will recognize gains or losses on the Transaction equal to the difference, if any, between the amount realized by us from the sale of the stock of the Canadian subsidiary, less our adjusted tax basis in the stock of the Canadian subsidiary. The sale will not be a taxable transaction for our stockholders. We are still evaluating the tax consequences of the transaction, but we presently expect to recognize a taxable gain for U.S. federal and state income tax purposes. We believe that any tax due on this transaction may be offset by taxable losses of US operations and available tax loss carry-forwards. However, the ultimate amount of tax due on this gain will depend on the financial position of Diversicare Canada at the time of closing, the amount of existing available tax losses and carry-forwards at the time of the transaction, foreign currency exchange rates, and other factors, including possible limitations of the use of tax loss carry-forwards imposed by the U.S. Internal Revenue Code.

     For Canadian tax purposes, we anticipate a taxable gain on this transaction that may require tax payments of up to approximately (Cdn.) $1.2 million (approximately U.S. $0.9 million). We are still evaluating the amount of the tax that may be due, and the ultimate amount of any Canadian tax due will depend upon the financial position of Diversicare Canada at the time of closing and other factors. To the extent paid, any such Canadian tax will create deductions that may be used to offset U.S. taxable income from this transaction.

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Plans after the Sale of our Canadian Operations

     If our stockholders approve the Transaction and we consummate the sale of Diversicare Canada, we will continue our operations of nursing homes and assisted living facilities in the United States. Immediately following the Transaction, it is expected that we will operate 48 nursing homes and 14 assisted living facilities located in nine states primarily in the southeast United States.

     Our United States operations have had a history of substantial losses. Our United States operations, at various times in the past, have been able to rely on the profits and cash flow generated by our Canadian operations in order to support the United States operations. Although we believe that the United States operations have improved cash flow over the recent periods and that with the estimated pay-down of U.S. $4.6 million of our debt obligations, we should be in an improved financial position, we can give you no assurances that following the sale of Diversicare Canada we will be able to fund our obligations or even to continue as a going concern. Notwithstanding the completion of the Transaction and the reduction of our outstanding debt, we may require additional capital to repay the remaining outstanding indebtedness and fund ongoing operations, including professional liability claims.

     There have been a number of circumstances that have occurred in the United States long term care market that have significantly affected the Company. Among these are dramatic increases in claims related to alleged negligence in providing care to patients, changes in governmental reimbursement, and government regulation and health care reforms. In addition, the Company has faced issues which include our poor financial condition and operating losses, scheduled debt maturities, defaults under debt and lease agreements, and professional liability insurance coverage that could be substantially less than claims incurred. There can be no assurances that we will be able to overcome these issues. The Company will continue to be subject to all of the risks it is currently subject to, several of which are identified in the Company’s annual report on Form 10-K for the year ended December 31, 2002. If we are unable to generate enough cash flow to meet the ongoing obligations of our United States operations, it will have a material adverse impact on our liquidity and capital resources. In the event we are unable to generate sufficient cash flow to meet our obligations (including debt maturities and professional liability obligations) additional capital may be required. If we are unable to acquire additional capital, such inability would have a material adverse effect on our operations and our ability to continue as a going concern.

Interest of Certain Persons in the Sale of Diversicare Canada

     The executive officers and directors of Advocat do not have interests in the sale of Diversicare Canada that are different from or in addition to their interest as stockholders generally, except for Paul Richardson. Mr. Richardson is the President of Diversicare Canada and as such, his employment agreement is with Diversicare Canada. Mr. Richardson is not an officer of Advocat. Upon the closing of the Transaction, Mr. Richardson will remain an employee of Diversicare Canada and certain provisions of his employment agreement may be triggered by the change of control of Diversicare Canada. Any obligations under Mr. Richardson’s employment agreement will remain the obligations of Diversicare Canada and are

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not obligations of Advocat. Holdings may be involved in negotiations with Mr. Richardson regarding the terms of his employment agreement; however, Advocat has not been involved in any such negotiations and does not have any knowledge of such negotiations.

Regulatory Matters

     The Transaction must be approved by the Ministry of Health and Long Term Care under the Nursing Home Act (Ontario). Holdings and Diversicare Canada are in the process of obtaining such approval,however, the approval has not yet been received. We do not know of any reason why The Minister of Health and Long Term Care would not approve the Transaction, but we cannot be certain when or if Holdings will receive such approval.

DESCRIPTION OF THE SHARE PURCHASE AGREEMENT

     The following is a summary of the material terms of the Share Purchase Agreement, a copy of which is attached as Annex A to this document and is incorporated herein by reference. This summary is qualified in its entirety by reference to the Share Purchase Agreement. You should carefully read the Share Purchase Agreement in its entirety because it, and not this document, is the legal document that governs the Transaction. A vote in favor of the Transaction will constitute your approval of the Share Purchase Agreement. All capitalized terms not defined herein have the same meanings as used in the Share Purchase Agreement.

Closing

     The closing of the Transaction will take place on the first business day fifteen (15) days following the day on which all approvals necessary to complete the Transaction have been received from the Ministry of Health and Long Term Care pursuant to the Nursing Homes Act (Ontario), but will terminate, unless otherwise agreed by the parties, if the Transaction has not closed by February 28, 2004.

Sale of the equity of Diversicare Canada Management Services Co., Inc.

     Pursuant to the terms and conditions of the Share Purchase Agreement, Diversicare Leasing Corp, a Tennessee corporation (“Vendor”) and indirect wholly-owned subsidiary of Advocat will sell to DCMS Holdings, Inc., an Ontario corporation 1,000 shares of Diversicare Canada Management Services Co., Inc., an Ontario corporation and indirect wholly-owned subsidiary of Advocat, which represents all of the issued and outstanding shares of Diversicare Canada (the “Purchased Shares”). The Share Purchase Agreement is governed by the laws of the province of Ontario, Canada and the laws of Canada applicable therein without regard to the conflicts of law principles of such province.

Purchase Price

     Holdings has agreed to acquire the Purchased Shares for Canadian Sixteen Million Five Hundred Thousand dollars ($16,500,000), subject to certain adjustments as set forth in the Share

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Purchase Agreement. Canadian One Million dollars ($1,000,000) of the purchase price will be paid as a deposit in two portions according to the following schedule: (Cdn.) $250,000 has already been received and (Cdn.) $750,000 will be delivered no later than ten (10) days before the date that Advocat sets for its special meeting to approve the sale of the Purchased Shares. At the closing, the deposited amount plus (Cdn.) $7,500,000 will be paid to Advocat. If the closing does not occur by reason of Holdings’ default alone, the deposited funds will be retained by Advocat as a pre-estimate of liquidated damages. If the closing does not occur for any other reason, the deposited funds will be returned to Holdings, including accrued interest, without set-off or deduction.

     The remaining Canadian Eight Million dollars ($8,000,000) of the purchase price will be paid in the form of seller financing, evidenced by a promissory note, in accordance with the following schedule:

     Interest shall not accrue during the first and second years following closing, but in each of the third, fourth and fifth years following closing, principal shall accrue interest at five percent (5%) per year, payable semi-annually and compounded monthly.

     In the event any portion of principal or interest of the seller financing that is not paid when due and notice is given, then the entire unpaid balance shall accrue interest at the lesser of (i) the rate of ten percent (10%) per annum and (ii) the maximum rate permitted by applicable law, and Vendor may, at its option, declare the entire unpaid balance due and payable in full. The seller financing may be prepaid in whole or in part at any time without notice, bonus or penalty. The seller financing may from time to time be accelerated and due by Holdings upon the occurrence of certain events related to the renewal or extension of various Diversicare Canada agreements. The promissory note is secured by a pledge of all of the stock of Diversicare Canada.

Adjustments to Purchase Price

     Not later than sixty (60) days following the closing date, Vendor will deliver to Holdings closing financial statements of Diversicare Canada. Holdings will have thirty (30) days to review the closing financial statements and advise Vendor as to their acceptability or as to any specific objections. If Holdings reports any specific objections that are not resolved between the parties within a further period of 15 days, an independent major chartered accounting firm, mutually chosen by the parties or by the Chair of the Institute of Chartered Accountants of

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Ontario if the parties cannot agree on an accounting firm within 7 days, will resolve such unresolved objections. Any upward or downward adjustment to the purchase price pursuant to this procedure will be due and payable in full within 20 days of the final determination.

     The purchase price shall be adjusted and reduced on a dollar for dollar basis in the event the closing financial statements confirm that (i) current assets of Diversicare Canada do not exceed all liabilities of Diversicare Canada, excluding Mortgage Debt as defined in the Share Purchase Agreement, by (Cdn.) $3,600,000; (ii) Diversicare Canada is in arrears under any of its obligations pertaining to certain specified leased real property; and (iii) standard real estate closing adjustments, including those pertaining to taxes, municipal obligations, maintenance, operating costs and/or leases, confirm that Diversicare Canada is in arrears with respect to certain owned real property.

     The adjustments related to obligations pertaining to certain specified leased real property and the standard real estate closing adjustments set forth above will only be made to the extent that they are not included in the Net Working Capital Calculation and will be reduced on a dollar-for-dollar basis up to the amount by which the Net Working Capital Calculation exceeds (Cdn.) $3,600,000. In the event the closing financial statements confirm that the Net Working Capital Calculation, minus these adjustments is greater than (Cdn.) $3,600,000, such amount (net of any tax required to be paid) shall be paid to Vendor by Holdings within 30 days.

Representations and Warranties

     The Share Purchase Agreement contains extensive representations and warranties made by each party that are the usual and customary representations and warranties made in connection to the sale of a subsidiary. See “Representations and Warranties of the Vendor and Advocat Regarding the Vendor, Advocat and the Purchased Shares,” “Representations and Warranties of the Vendor and Advocat Regarding Diversicare Canada, the Subsidiary and the Affiliates” and Representations and Warranties Regarding the Purchaser” in the Share Purchase Agreement.

     “Representations and Warranties of the Vendor and Advocat Regarding the Vendor, Advocat and the Purchased Shares” — Vendor and Advocat make specific representations and warranties related to, among other things:

	•		Corporate power and authority to enter into the Share Purchase Agreement, and due execution, delivery and enforceability of the Share Purchase Agreement;
	•		Absence of a breach or violation of material agreements, orders, decrees, permits or laws as a result of the transaction; authorizations, consents, approvals and filings required to entire into the Share Purchase Agreement or to complete the transactions contemplated by the Share Purchase Agreement;
	•		Vender’s beneficial ownership of the Purchased Shares and consent of Vendor’s secured lenders and their release and discharge of any lien or security interest held by them on the Purchased Shares, and their release of the guarantee issued by Diversicare Canada in favor of the obligations of Advocat to such secured lenders; and that Holdings will have good and valid title to the Purchased Shares free and clear of any liens or other encumbrances or restrictions created in the articles or bylaws of Diversicare Canada;

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	•		No bankruptcy, insolvency, reorganization;
	•		No shareholders’ agreements, voting trust agreements or other similar agreements to which Vendor or Advocat is a party which would preclude the completion of the transactions described in the Share Purchase Agreement;
	•		Broker’s fee; and
	•		Corporate organization, qualification and good standing, and ownership of subsidiaries.

     “Representations and Warranties of the Vendor and Advocat Regarding the Corporation, the Subsidiary and the Affiliates” — Vendor and Advocat make specific representations and warranties about Diversicare Canada related to, among other things:

	•		Capitalization;
	•		Capitalization of Diversicare Canada, no outstanding subscriptions, options or warrants for unissued shares, no preemptive rights, etc;
	•		Subsidiaries and Affiliates of Diversicare Canada;
	•		Financial Statements of Diversicare Canada;
	•		Holdings’ access to corporate records; accuracy of such records;
	•		No undisclosed liabilities;
	•		Operation of the business in the ordinary course;
	•		Absence of material changes to methods of accounting, investment of funds or general business operations;
	•		Title to property;
	•		Real property;
	•		Material contracts;
	•		Litigation;
	•		Compliance with applicable laws and required permits;
	•		Environmental, health and safety matters;
	•		Taxes;
	•		Employee benefit plans;
	•		Employee matters;
	•		Collective agreements;
	•		Absence of material adverse changes;
	•		Diversicare Canada is not now and never has been a “reporting issuer,” as defined in theSecurities Act(Ontario);
	•		Receivables;
	•		Permits, licenses, software and intellectual property;
	•		Trademarks, name and logos;
	•		Accident history and workers compensation;
	•		Fixed Assets;
	•		Insurance;
	•		Diversicare VI Limited Partnership Participation Right;
	•		2003 Budgets;
	•		Net Assets; and
	•		Release of Advocat overhead allocation expense.

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     “Representations and Warranties Regarding Holdings” — Holdings makes specific representations and warranties related to, among other things:

	•		Corporate organization, qualification and good standing;
	•		Corporate power and authority to enter into the Share Purchase Agreement, and due execution, delivery and enforceability of the Share Purchase Agreement;
	•		Absence of breach, default or conflict arising from execution, delivery and performance of the Share Purchase Agreement; No authorizations, consents, approvals and filings required for Purchaser to enter into the Share Purchase Agreement or to complete the transactions contemplated by the Share Purchase Agreement;
	•		No bankruptcy, insolvency, reorganization;
	•		Litigation;
	•		Broker’s Fees;
	•		Holdings is not a “non-Canadian” within the meaning of such term in theInvestment Canada Act(Canada); and
	•		No approval or consent for the transactions contemplated herein is required pursuant to theCompetition Act(Canada).

Covenants of Vendor, Advocat and Diversicare Canada Prior to Closing

     Vendor, Advocat and Diversicare Canada have undertaken several covenants in the Share Purchase Agreement, including those related to access to information and the provision of documents and information to Holdings. The following summarizes the more significant of these covenants.

Operations of Diversicare Canada. Diversicare Canada will carry on its business in substantially the same manner as it had heretofore, including the following:

	•		Not introduce new methods of management, operation or accounting;
	•		Maintain real property and facilities;
	•		Perform all material obligations under agreements relating to or affecting Diversicare Canada’s assets and business;
	•		Keep in full force and effect present insurance policies or other comparable insurance coverage until closing;
	•		Maintain and preserve the business organization intact, retain present employees (subject to terminations in the ordinary course) and maintain relationship with suppliers, customers and others;
	•		Advise Holdings promptly in writing of any change in any document, schedule or other information delivered pursuant to the Share Purchase Agreement;
	•		Advise Holdings promptly of any damage to, destruction of or loss of any assets, owned or leased real property of Diversicare Canada, whether or not covered by insurance, which has resulted in diminution of value to the business greater than (Cdn.) $25,000;

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	•		File on a timely basis and in the ordinary course of business, consistent with past practice, all notices, reports or other filings required to be filed with or reported to any governmental authority wherever located with respect to the continuing operations of Diversicare Canada;
	•		File on a timely basis and in the ordinary course of business, consistent with past practice, all applications or other documents necessary to maintain, renew or extend any permit, license, variance or any other approval required by any governmental authority necessary for the continuing operation of the Business and the existence of Diversicare Canada, whether or not such approval would expire before or after the closing; and
	•		Provide any notice necessary to exercise any option to purchase leased property to the extent such notice must be given between the date of the Share Purchase Agreement and the closing; provided that Holdings shall provide Vendor with indemnities and other security reasonably acceptable to Vendor assuring Vendor that it will not suffer any damages as a result of the delivery of such notice if the closing does not occur.

     Diversicare Canada has also agreed to limitations, prohibitions and other provisions related to the conduct of Diversicare Canada’s business from the date of the Share Purchase Agreement to the closing with respect to:

	•		Making any change in its charter documents or bylaws or enter into any shareholders’ agreements;
	•		Authorizing, issuing, transferring or distributing any securities or permitting any dividends or other distribution in respect of the Purchased Shares;
	•		Except as permitted by the Share Purchase Agreement, entering into any contract or commitment or incurring or agreeing to incur any liability with respect to material capital expenditures which would negatively affect Diversicare Canada’s business;
	•		Entering into any commitments which would result in a net loss to Diversicare Canada;
	•		Increasing the compensation payable or to become payable to any director, officer, employee or agent, or make any bonus payment to any such person, in excess of those amounts disclosed in the Share Purchase Agreement;
	•		Creating, assuming or otherwise permitting the imposition of any lien upon any Diversicare Canada assets whether now owned or hereafter acquired other than those encumbrances permitted by the Share Purchase Agreement;
	•		Other than in the normal course of business, selling, assigning, financing, leasing or otherwise transferring or disposing of any property or equipment having a value in excess of (Cdn.) $25,000, or enter into any transaction or agreement having a duration in excess of one year;
	•		Merging or consolidating or agreeing to merge or consolidate with or into any firm, corporation or other entity;
	•		Waiving any material rights or claims of Diversicare Canada;
	•		Amending or terminating any material agreement or any permit, license or other right affecting the Assets or Diversicare Canada; or
	•		Entering into any other transaction outside the ordinary course of its business or otherwise prohibited by the Share Purchase Agreement.

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Certain Covenants and Additional Understandings

     Vendor, Advocat, Diversicare Canada and Holdings have made certain additional covenants and have agreed to certain additional understandings, the more significant of which are described as follows:

Confidentiality. Holdings agrees to hold in confidence all documents and information concerning Vendor and Diversicare Canada furnished to Holdings in connection with the transactions contemplated by the Share Purchase Agreement and will not release or disclose any such confidential information to any other person, except its representatives retained by it in connection with the Share Purchase Agreement and bound by the Share Purchase Agreement’s confidentiality terms.

Noncompetition Covenants of Vendor and Advocat. Vendor and Advocat will neither disclose nor use nor permit to use in any way that is potentially harmful to or competitive with Diversicare Canada’s business any confidential information relating to any financial information, marketing strategies, pricing policies or characteristics, customers, suppliers and customer and supplier information, customer and supplier lists, product or product specifications, designs, costs, costs of materials, business or business prospects, plans, proposals, codes, trade secrets, marketing studies, research, reports, investigations, or other information of similar character which relate to Diversicare Canada’s business.

Non-Interference with Customer and Supplier Relationships. Vendor and Advocat will not, from the date of the closing and for a period of five (5) years thereafter, directly or indirectly, on their own behalf or on behalf of any other person, solicit or do business with any customer or supplier of Diversicare Canada or its subsidiary in all of the Provinces of Canada for the purpose of selling or marketing any product or service which is competitive with any product or service which constitutes, or is part of, Diversicare Canada’s business as of the closing date.

Non-Competition. Vendor and Advocat will not, from the date of the closing and for a period of five (5) years thereafter, directly or indirectly own an interest in, operate or participate in any way in or with any person or other entity producing, providing, selling, distributing, consulting or providing services to, or marketing or re-marketing products, goods, equipment, or services directly competitive with or in the same line of business as the business carried on by Diversicare Canada as of the closing date. This prohibition applies in all of the provinces of Canada, but does not prohibit the ownership of less than two percent (2%) of the outstanding stock of any publicly-traded corporation, partnership or other legal entity as long as Vendor or Advocat is not otherwise in violation of the Share Purchase Agreement. The covenant also does not prohibit the acquisition (whether through asset purchase, stock purchase or merger with or into the acquirer or a subsidiary thereof) of Vendor or Advocat or their Affiliates by an entity then doing business within any of the restricted areas.

Non-Recruitment by Vendor and Advocat. Vendor and Advocat will not for a period five years hire away, or cause any other person to hire away, any employee of Diversicare Canada or any affiliate of Diversicare Canada as of the closing unless and until such person has not been employed by Diversicare Canada for a period of at least one (1) year, or directly or indirectly

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entice or solicit or seek to induce or influence any individuals employed by Diversicare Canada as of the closing to leave their employment.

Post Closing Access to Information. Holdings will for five years from the closing give, or cause to be given, to Vendor’s representatives, access to the books and records which relate to Diversicare Canada’s business that relate to periods prior to the closing, and will permit such persons to examine and copy such records to the extent reasonably requested by the Vendor in connection with the preparation of the closing financial statements, tax and financial reporting matters, audits, legal proceedings, governmental investigations and other legitimate purposes, so long as such access does not unreasonably disrupt Diversicare Canada’s business operations, violate the terms of any contract to which Diversicare Canada is a party. The Vendor or its representatives will agree to enter into an appropriate confidentiality agreement when gaining access to any of Diversicare Canada’s proprietary, confidential or classified information.

Notice to Authorities. The parties have agreed that if required by law and/or requested by the other party, each will give, as promptly as practicable, notice to applicable authorities advising them of the transactions contemplated by the Share Purchase Agreement and each will use its commercially reasonable efforts to ensure that as of the closing, all approvals have been taken and obtained.

Conditions Precedent to Holdings’ Obligations

     All obligations of Holdings under the Share Purchase Agreement are, at Holdings’ option, subject to satisfaction or waiver of each of the following conditions, prior to or at the closing:

	•		No order or injunction by a court or governmental authority prohibits or materially restricts or materially hinders the closing or the performance by any person of any of its material obligations in the Share Purchase Agreement or that would materially adversely affect the operation of Diversicare Canada’s business by Holdings after closing;
	•		The representations and warranties of the Vendor and Advocat remain accurate at the closing except for such changes as are contemplated by the Share Purchase Agreement, and the Vendor and Advocat will have performed their covenants required in the Share Purchase Agreement;
	•		Diversicare Canada shall not have paid any bonus or compensation or made any loan to Vendor, Advocat or any person not at arm’s length;
	•		Vendor will have delivered to Holdings the certificates representing ownership of the Purchased Shares, properly endorsed or otherwise acceptable to Holdings’ counsel, acting reasonably;
	•		Vendor will have caused each director or officer of Diversicare Canada and affiliates not remaining in office, as determined by Holdings, to have executed and delivered a written resignation and release as a director and/or officer, effective the close of business on the closing date;
	•		Holdings will have received an acceptable opinion from the Vendor’s Solicitor;

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	•		All of the consents required for the consummation of the transactions will have been obtained at or prior to the closing on terms and conditions acceptable to Holdings;
	•		No circumstance, event or change shall have occurred that has or could reasonably be expected to have a material adverse effect on Diversicare Canada, as determined by Holdings in its reasonable discretion.
	•		Holdings will have access to the senior employment personnel of Diversicare Canada with a view to entering into new employment contracts with such senior employment personnel and Diversicare Canada;
	•		The corporate approvals required to complete the transactions set out in the Share Purchase Agreement will have been delivered to Holdings;
	•		The assets of Diversicare Canada will include all tangible property and assets as described in the Share Purchase Agreement and ancillary documents other than the assets otherwise excluded by the Share Purchase Agreement or ancillary documents. Vendor will deliver a certificate of Diversicare Canada’s accounts receivable aged trial balance;
	•		At closing, the Net Working Capital Calculation will be (Cdn.) $3,600,000. Diversicare Canada may distribute to Vendor the amount reasonably determined by Holdings and Vendor to exceed (Cdn.) $3,600,000 at closing, provided that there is no adverse tax effect to Diversicare Canada;
	•		Diversicare VI Limited Partnership transaction shall have closed, or, in the alternative, Holdings is satisfied that Diversicare Canada’s twelve and one-half percent (12.5%) participation right in the retirement home and the nursing home which are owned by Diversicare VI, L.P. is as described in the Information Memorandum, and that such participation right cannot be terminated for any reason whatsoever, even if the management contract in respect of such homes are terminated;
	•		There will exist no guarantees or covenants given by Diversicare Canada whatsoever to secure the obligations of any other party, including the Vendor, except for the Affiliate Guarantees, as described in the Share Purchase Agreement. All other guarantees will have been fully discharged and released at closing to the satisfaction of Holdings;
	•		Holdings will have received evidence satisfactory to it that the annual overhead allocation expense charged to Diversicare Canada by Advocat of (Cdn.) $600,000 has been fully and finally released, that it shall not be continuing;
	•		Vendor will deliver to Holdings a certificate (as described in the Share Purchase Agreement) issued by the Minister of National Revenue under subsection 116(2) of the Tax Act; and
	•		Vendor and Diversicare Canada will have executed and delivered an agreement outlining their respective rights in the name “Diversicare” (Vendor’s being exclusive to the U.S. and Diversicare Canada’s being exclusive to Canada).

Conditions Precedent to the Vendor’s Obligations

     All obligations of Vendor under the Share Purchase Agreement are, at Vendor’s option, subject to satisfaction or waiver of each of the following conditions, prior to or at the closing:

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	•		Holdings’ representations and warranties will remain accurate at closing and Holdings will have performed its covenants required in the Share Purchase Agreement;
	•		Holdings will have paid the Closing Payment in the amount and in the manner contemplated by Article Two of the Share Purchase Agreement;
	•		Holdings will have executed and delivered to the Vendor all other instruments and documents required by the Share Purchase Agreement, and such other instruments and documents as the Vendor or their counsel may reasonably request consistent with the Share Purchase Agreement;
	•		No order or injunction by a court or governmental authority prohibits or materially restricts or materially hinders the closing or the performance by any person of any of its material obligations in the Share Purchase Agreement or that would materially adversely affect the operation of Diversicare Canada’s business by Holdings after closing;
	•		Holdings will have executed and delivered to Vendor the Pledge Agreement;
	•		Vendor will have received an acceptable opinion from Holdings’ Solicitor;
	•		All consents required for the consummation of the transactions will have been obtained at or prior to the closing on terms and conditions acceptable to Holdings; and
	•		All Excluded Assets shall have been transferred by Diversicare Canada to Vendor.

Satisfaction of Conditions

     The Parties will use their respective best efforts to cause those conditions of closing under their reasonable control to have been satisfied on or prior to the closing. However, if any of the conditions to closing have not been fulfilled or waived at or before the time of closing, Holdings or Vendor, as the case may be, may terminate the Share Purchase Agreement by notice in writing to the other. Each party may waive compliance with any such condition without prejudicing any other rights under the Share Purchase Agreement.

Survival of Representations and Warranties, Indemnification

Vendor and Advocat. The warranties and covenants made by Vendor and Advocat in the Share Purchase Agreement will survive the closing and will continue in full force and effect for the benefit of Holdings, subject to the following:

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made by another parties contained in the Share Purchase Agreement (a “Warranty Claim”) may be made or brought by Holdings after the date which is two (2) years and nine (9) months following the closing date, except as follows:

Holdings. The representations, warranties and covenants made by Holdings will survive the closing and will continue in full force and effect for the benefit of the Vendor, except that:

	•		No Warranty Claim relating to any representation, warranty or covenant by Holdings may be made or brought by the Vendor after the date which is two (2) years and nine (9) months following the closing date; and
	•		Any Warranty Claim based on the article entitled Certain Covenants and Additional Understandings of the Share Purchase Agreement may be made or brought by Holdings within the periods specified in such article.

Indemnity by Vendor and Advocat. The Vendor and Advocat will, jointly and severally, in the case of representations, warranties and covenants provided by each, indemnify and save harmless Holdings from and against any claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees on a solicitor and own client basis, which may be made or brought against Holdings or which Holdings may suffer or incur as a result of, in respect of or arising out of the following:

	•		any failure of Vendor or Advocat to comply with, or any breach or non-fulfilment by either of, any covenant or agreement of each contained in the Share Purchase Agreement or in any Ancillary Document; and
	•		any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by Vendor or Advocat contained in the Share Purchase Agreement or in any ancillary document.

Limitations on Vendor’s Indemnification Covenants. Holdings will not be entitled to make any Warranty Claim until the aggregate of all damages, losses, liabilities and expenses incurred by Holdings as a result of all such Warranty Claim(s) is equal to an aggregate of not less than (Cdn.) $50,000 and then only with respect to individual Warranty Claims of not less than (Cdn.) $5,000. Thereafter, Holdings will be able (subject to the survival of representations, warranties and covenants by Vendor and Advocat) to make Warranty Claims to the extent of all

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of its damages, losses, liabilities and expenses, but any such amount cannot exceed the amount of the purchase price actually paid by Holdings.

Indemnity by Holdings. Holdings will indemnify Vendor and Advocat and save them harmless from and against any and all claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees, which may be made or brought against Vendor or Advocat or which Vendor or Advocat may suffer or incur in respect of or arising out of the following:

	•		any failure of Holdings to comply with, or any breach or non-fulfilment by Holdings of, any covenant or agreement of Holdings set forth in the Share Purchase Agreement or any ancillary document; and
	•		any misrepresentation, inaccuracy, incorrectness or breach of any representation or warranty made by Holdings to the Vendor in the Share Purchase Agreement or any ancillary document.

Limitation on Holdings’ Indemnification Covenants. Neither Vendor nor Advocat may make any Warranty Claim until the aggregate of all damages, losses, liabilities and expenses incurred by Vendor as a result of all Warranty Claim(s), is equal to an aggregate of not less than (Cdn.) $50,000 and only with respect to individual Warranty Claims of not less than (Cdn.) $5,000. After the amount of such damages, losses, liabilities and expenses incurred exceeds these thresholds, Vendor and Advocat shall be entitled to make Warranty Claims to the extent of all of their damages, losses, liabilities and expenses.

Amendments and Waivers

     The Share Purchase Agreement may not be amended, modified or supplemented except by written agreement of the Parties. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant under the Share Purchase Agreement, whether intentional or not, will be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant under the Share Purchase Agreement or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.

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STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS

     The table below sets forth, as of September 22, 2003, the number and percentage of outstanding shares of the Company’s common stock owned by all persons known to the Company to be holders of 5% or more of such securities, by each director, by each of the three most highly compensated executive officers, and by all directors and executive officers of the Company as a group. Unless otherwise indicated, all holdings are of record and beneficial.

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(1)		Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them, subject to community property laws, where applicable.
(2)		The percentages shown are based on 5,493,2875,675,987 shares of common stock outstanding plus, as to each individual and group listed, the number of shares of common stock deemed to be owned by such holder pursuant to Rule 13d-3 under the Exchange Act, assuming exercise of options or SOSARs held by such holder that are exercisable within 60 days of September 22, 2003.April 15, 2009.
(3)		Mr. Olson is a general partner of Five Course Partners and is deemed to beneficially own theMcCurdy’s shares include 1,000 shares owned by Five Course Partners.his child and 567,100 owned by Marlin Capital Partners, LLC of which Mr. Olson’s shares also includeMcCurdy is the Managing Partner. Includes 10,000 shares purchasable upon exercise of options at an exercise price of $0.25 issued under the Company’s Director Stock Option Plan (the “Director Plan”), 179,500options.
(4)		Mr. Olson’s shares owned jointly with his wife,include 1,300 shares owned jointly with his daughter and 250,700548,900 owned by a partnership controlled by Mr. Olson.
(4)		Based solely on Schedule 13G filing made by Mr. Zadeh on June 13, 2002. The Company has reason to believe, based on non-objecting beneficial owners lists received that Mr. Zadeh may control up to 970,386 shares. The Company is currently trying to verify this with Mr. Zadeh.
(5)		Includes 158,200 shares held by Margolin Shoe Inc. which indicates Mr. Kohanchi as the contact person.
(6)		Based solely of the Company’s list of non-objecting beneficial owners provided by ADP.
(7)		Includes 85,000, 30,000, 25,000, 20,000 and 36,5004,999 shares purchasable upon exercise of options at exercise prices of $9.50, $9.75, $10.0625, $1.8125 and $0.35 per share, respectively, issued under the Company’s Key Personnel Stock Option Plan (the “Key Personnel Plan”). Also includes 4,000 shares owned by Mr. Richardson’s wife and a family trust of which Mr. Richardson disclaims beneficial ownership.SOSARs.
(8)(5)		Includes 50,000 shares purchasable upon exercise of an option at an exercise price of $0.35 per share issued under the Key Personnel Plan.Based solely on a Schedule 13G filed by Ameriprise Financial, Inc. and RiverSource Investments, LLC on February 12, 2009.
(6)		Based solely on a Schedule 13G/A filed by Altrinsic Global Advisors, LLC on February 10, 2009.
(7)		Based solely on a Preliminary Proxy statement filed by Bristol Investment Fund, LTD on April 10, 2009.
(8)		Based solely on a Schedule 13G filed by FMR LLC on February 17, 2009.
(9)		Based solely on a Schedule 13G filed by Wellington Management Company, LLP on February 17, 2009.
(10)		Includes 15,000, 1,000, 1,000, 1,000, 1,000, 1,000, 1,000, 1,000 and 13,600149,999 shares purchasable upon exercise of options at exercise pricesand SOSARs. Ownership does not include 12,802 Restricted Share Units purchased on March 13, 2009 in lieu of $9.50, $13.125, $11.125, $7.125, $8.3125, $5.5625, $0.15, $1.0625cash bonus. Restricted Share Units will be converted to shares and $0.35 per share, respectively, issued under the Director Plan.delivered on March 13, 2011.
(10)(11)		Includes 25,000 shares purchasable upon exercise of an option at an exercise price of $0.35 per share issued under the Key Personnel Plan.
(11)		Includes 5,000 shares purchasable upon exercise of an option at an exercise price of $0.23 per share issued under the Director Plan.
(12)		Includes 271,500 and 50,60021,999 shares purchasable upon exercise of options issued under the Key Personnel Plan and the Director Plan, respectively.

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ADVOCAT INC.

UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

     The following unaudited pro forma consolidated financial statements illustrate the effect of the disposition of the Canadian operations, under the terms of the proposed transaction, on the historical financial position and results of the Company. The unaudited pro forma consolidated statement of operations for the six months ended June 30, 2003 gives effect to the disposition as if it occurred on January 1, 2003. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2002 gives effect to the disposition as if it occurred on January 1, 2002. The unaudited pro forma consolidated balance sheet as of June 30, 2003 gives effect to the disposition as if it occurred on June 30, 2003.

     We based this pro forma financial information on our historical consolidated financial statements, removing the assets and liabilities to be acquired and assumed by the purchaser and the revenues and expenses associated with the business activities to be transferred to the purchaser. The pro forma adjustments are based on preliminary estimates of currently available information and assumptions that are believed to be reasonable. The unaudited pro forma consolidated financial statements are presented for informational purposes only and are not intended to be indicative of either future results of operations or results that might have been achieved if the transactions occurred on the dates specified.

     The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and the Quarterly Report on Form 10-Q for the period ended June 30, 2003, incorporated by reference herein. See “Where You Can Find More Information.”

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ADVOCAT INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Six Months Ended June 30, 2003
(In thousands, except per share data)

See accompanying introductory comments and notes to the Unaudited Pro Forma Consolidated Financial Statements.

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ADVOCAT INC.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

For the Twelve Months Ended December 31, 2002
(In thousands, except per share data)

See accompanying introductory comments and notes to the Unaudited Pro Forma Consolidated Financial Statements.

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UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

June 30, 2003
(In thousands)