SETTLEMENT AND RESTRUCTURING AGREEMENT

         THIS AGREEMENT,  made as of the 1st day of October,  2000, by and among
ADVOCAT INC., a Delaware corporation  ("Advocat"),  of 277 Mallory Station Road,
Suite 130,  Franklin,  Tennessee 37067,  DIVERSICARE  LEASING CORP., a Tennessee
corporation ("DLC"), of 277 Mallory Station Road, Suite 130, Franklin, Tennessee
37067,  STERLING HEALTH CARE MANAGEMENT,  INC., a Kentucky corporation ("SHCM"),
of 277 Mallory Station Road, Suite 130, Franklin,  Tennessee 37067,  DIVERSICARE
MANAGEMENT  SERVICES  CO., a  Tennessee  corporation  ("DMSC"),  of 277  Mallory
Station Road, Suite 130,  Franklin,  Tennessee 37067,  ADVOCAT FINANCE,  INC., a
Delaware  corporation ("AFI"), of 277 Mallory Station Road, Suite 130, Franklin,
Tennessee  37067,  OMEGA  HEALTHCARE  INVESTORS,  INC.,  a Maryland  corporation
("Omega"),  of 900  Victors  Way,  Suite 350,  Ann Arbor,  Michigan  48108,  and
STERLING  ACQUISITION  CORP.,  a Kentucky  corporation  ("Acquisition"),  of 900
Victors Way, Suite 350, Ann Arbor, Michigan 48108.

RECITALS:

         A.  Omega,  individually  and/or  through its  wholly-owned  subsidiary
Acquisition,  as lessor,  and Advocat,  through its wholly owned subsidiary DLC,
and/or DLC's wholly owned  subsidiary SHCM, as lessees,  are parties,  via mesne
assignments,   subleases  and  other  agreements,  to  four  (4)  master  leases
(identified  on Schedule 1 hereto as the "1992 Master  Lease",  the "1994 Master
Lease",  the "1997 Master Lease",  and the "West Liberty Master  Sublease",  and
collectively  referred  to  herein  as the  "Master  Leases")  covering,  in the
aggregate,  twenty-eight  (28)  nursing  care  facilities  located  variously in
Kentucky,  Tennessee, West Virginia,  Alabama, Arkansas and Ohio, listed by name
and location on Schedule 1 (the "Master Leased Facilities").

         B. Omega is the mortgagee of three (3) nursing care facilities  located
in Florida (the "Florida Mortgaged Facilities"),  listed by name and location on
Schedule  2 hereto,  owned by  Counsel  Nursing  Properties,  Inc.,  a  Delaware
corporation  ("CNP"),  and leased by CNP to DLC,  pursuant to a Mortgage Note in
the original  principal amount of $7,031,250,  as amended and restated (the "CNP
Note"),  secured by a Mortgage and Security Agreement and Fixture Filing of even
date therewith (the "CNP  Mortgage").  DLC is obligated,  under the terms of the
subject  lease(s),  to make debt service payments under the CNP Note directly to
Omega.

         C. Omega is also the  mortgagee  of four (4)  nursing  care  facilities
located in Florida (the "Florida Managed Facilities"),  listed by name, location
and owner on Schedule 3 hereto,  owned by various sister corporations of Emerald
Healthcare,  Inc.,  a Florida  corporation  ("Emerald"),  and managed by DMSC, a
wholly owned subsidiary of Advocat.

         D. Counsel Corporation, an Ontario corporation ("Counsel") has provided
a financial undertaking to Omega relative to the obligations of the lessee under
the 1992 Master Lease and of CNP under the CNP Note and CNP Mortgage.

         E. Advocat and/or certain of its  subsidiaries  and/or  affiliates have
provided  guaranties  pertaining  to the Master  Leases and the CNP Note and CNP
Mortgage  (the  "Advocat  Guaranties"),   and  DMSC  has  (i)  subordinated  its
management  fees  with  respect  to the  Florida  Managed  Facilities,  and (ii)
undertaken  to make  certain  advances to the  Florida  Managed  Facilities,  as
provided in the relevant documents.

         F. Advocat and its  subsidiaries  have been in default of their various
obligations  to Omega and its  subsidiaries  since  March 1, 2000 by virtue  of,
among other things, non-payment of rental and other obligations under the Master
Leases and debt service under the CNP Note.

         G.  Advocat has made  partial  payments to Omega since April 24,  2000,
being the date of a  Standstill  Agreement  (the  "Standstill  Agreement"),  the
expiration date of which has been extended by the parties through  September 30,
2000.

         H. The parties have reached a settlement of the foregoing defaults, and
have agreed upon a restructuring  of their various  agreements and  undertakings
with respect to the Master Leased Facilities,  the Florida Mortgaged  Facilities
and  the  Florida  Managed  Facilities,  all  as  more  particularly  set  forth
hereinbelow.

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and the  mutual
covenants contained herein, and for other good and valuable  consideration,  the
receipt  and  adequacy of which are  acknowledged  hereby,  Omega,  Acquisition,
Advocat, DLC, SHCM, AFI and DMSC covenant and agree as follows:

         1. Acknowledgment of Default.  A. Advocat, DLC, SHCM, AFI and DMSC each
acknowledges and agrees that: (i) DLC and SHCM are in material default under the
Master  Leases;  (ii)  CNP is in  material  default  under  the CNP Note and CNP
Mortgage,  and Advocat and DLC are in material  default of their  obligations to
Omega with  respect  thereto;  (iii) all required  notices of default  under the
Master Leases,  the CNP Note and CNP Mortgage,  and the Advocat  Guaranties have
been given or waived by all necessary  parties,  (iv) all grace and cure periods
relating to the  aforementioned  defaults under the Master Leases,  the CNP Note
and CNP Mortgage,  the Advocat  Guaranties,  or otherwise required by applicable
law, have expired without the defaults having been cured,  and (v) the existence
of the defaults now entitles  Omega and its  subsidiaries  to exercise  (subject
only to the terms of the Standstill  Agreement) all of their  respective  rights
and remedies under the Master Leases,  the CNP Mortgage,  the Advocat Guaranties
and applicable law.  Advocat,  DLC, SHCM, AFI and DMSC further  acknowledge that
none of Advocat, DLC, SHCM, AFI or DMSC has any claim or cause of action against
Omega, Acquisition,  or any of their respective subsidiaries and affiliates, nor
any  defense to their  respective  obligations  under the Master  Leases or with
respect to the CNP Note and CNP  Mortgage  or any defense to or right of set-off
against the Master  Lease  Arrearage,  the  Interest  Arrearage,  and/or the CNP
Principal (all as defined below).  The parties hereto acknowledge and agree that
the foregoing  defaults  under the Master Leases and the applicable and relevant
obligations of Advocat under the Advocat Guaranties with respect thereto will be
cured and/or settled upon and by virtue of the  consummation of the transactions
contemplated  by  this  Agreement  relating  to the  Master  Leased  Facilities.
<PAGE>
Further, the parties acknowledge and agree that the foregoing defaults under the
CNP Note and CNP  Mortgage,  and the  applicable  and  relevant  obligations  of
Advocat under the Advocat  Guaranties  with respect thereto will be cured and/or
settled  upon  consummation  of the  transactions  contemplated  by  Paragraph 3
relating to the Florida Mortgaged  Facilities.  However,  except as specifically
provided herein,  pending consummation of those transactions,  Omega retains all
rights under the CNP Note and the CNP  Mortgage  against CNP and Counsel and all
rights  under  the  Advocat  Guaranties  as they  relate to the CNP Note and CNP
Mortgage.

         B. The parties to this Agreement  acknowledge and agree that the unpaid
balance (excluding out-of-pocket costs and expenses incurred by Omega and/or its
subsidiaries, and net of payments made pursuant to the Standstill Agreement) for
Minimum Rent,  Additional  Rent and franchise and similar tax obligations of DLC
and SHCM under the Master Leases as of September 30, 2000 is $2,985,111.99  (the
"Master Lease Arrearage"),  and that the unpaid balance (excluding out-of-pocket
costs  and  expenses  incurred  by Omega  and/or  its  subsidiaries,  and net of
payments  made  pursuant to the  Standstill  Agreement)  for  interest,  accrual
interest, late charges and prepayment penalty under the CNP Note as of September
30,  2000,  is  $1,056,568.25  (the  "Interest  Arrearage").  The  parties  also
acknowledge  that the  principal  balance  on the CNP  Note,  in the  amount  of
$7,031,025 (the "CNP Principal") is due and owing.

         2.       Closings.

         A.       Initial Closing.

                  (I) Time  and  Place.  The  consummation  of the  transactions
contemplated  by this Agreement and  pertaining to the Master Leased  Facilities
and the Florida Managed  Facilities (the "Initial  Closing") shall take place on
or before November 15, 2000 (the "Initial Closing Date"), with an effective date
of October 1, 2000 (the  "Effective  Date").  The  Initial  Closing  Date may be
extended by mutual agreement of the parties, but no such extension shall operate
to postpone the Effective Date. The Initial Closing shall be held at the offices
of Harwell Howard Hyne Gabbert & Manner, P.C., 315 Deaderick Street, Suite 1800,
Nashville,  Tennessee  37238-1800,  or at such other  place as shall be mutually
agreed upon by Omega and Advocat.

                  (II) Initial Closing  Documents.  The following  documents and
instruments shall be executed and/or delivered at the Initial Closing:

(i) The Amended and Restated Master Lease (reference Paragraph 4.A);

(ii)The Amended and Restated Security Agreement (reference Paragraph 4.B);

(iii) UCC Financing Statements (reference Paragraph 4.B);

(iv) The Amended and Restated Guaranty (reference Paragraph 4.C);
<PAGE>
(v) The Amended and Restated Memoranda of Leases (reference Paragraph 4.D);

(vi) The Reaffirmation of Obligations (reference Paragraph 5);

(vii)  The  intercreditor  agreement  to  be  executed  by  and  between  Omega,
Acquisition and AmSouth (reference Paragraphs 4 and 8);

(viii) The Subordinated Note (reference Paragraph 10);

(ix) The Stock Subscription Agreement (reference Paragraph 11);

(x) The parties shall execute a closing  statement  reflecting the  transactions
contemplated to occur at the Initial Closing;

(xi) In addition,  Advocat,  DLC, SHCM, AFI and DMSC shall each deliver to Omega
and Acquisition a certificate, signed by the Secretary or Assistant Secretary of
each such entity,  confirming the incumbency of its respective officers,  and to
which are attached the following:

(aa) a copy of the articles of  incorporation or certificate of incorporation of
each  entity,  as  amended,  and  certified  by the  Secretary  of  State of the
jurisdiction  of  incorporation  as of a date not more than 40 days prior to the
Initial Closing;

(bb) a true,  correct and complete copy of the current bylaws of each entity, as
amended;

(cc) a true,  correct and complete copy of the resolutions  adopted by the Board
of Directors  of each entity,  authorizing  the  execution  and delivery of this
Agreement and the consummation of the transactions contemplated herein;

(dd) a  certificate  of good  standing for each entity,  issued as of a date not
earlier than 40 days prior to the Initial  Closing by the  Secretary of State of
the jurisdiction of its incorporation; and

(ee) a certificate of authority issued by the relevant Secretaries of
State of the  jurisdictions  in which the Master Leased  Facilities are located,
confirming that DLC, SHCM and DMSC, as  appropriate,  are authorized to transact
business as a foreign corporation in such states.

                  (III) Initial Closing  Actions.  At the Initial  Closing,  the
following actions shall be taken:


(i) Acquisition shall call, and AmSouth Bank shall fund,  $3,000,000 of the 1992
Letter  of  Credit  (reference  Paragraph  7),  for  payment  to  Omega  and for
application  against  amounts owing under the CNP Note. Upon receipt by Omega of
the  $3,000,000,  the amount of any claim which Omega may assert on the CNP Note
shall be reduced by the amount by which the claim would have been reduced if the
$3,000,000 were applied first against the Interest Arrearage, second against the
applicable  Prepayment  Premium (as defined in the CNP Note),  and third against
the CNP Principal.
<PAGE>
(ii) Acquisition shall release the balance of the 1992 letter of credit over and
above the foregoing  $3,000,000 and shall release the Other Letter of Credit (as
defined in Paragraph 7).

                  (IV)  Prorations.  There will be no prorations with respect to
the Master Leased  Facilities  between and among the parties hereto,  as DLC and
SHCM are,  and DLC will  remain  solely  responsible  for all taxes,  insurance,
utilities  and other items  typically  prorated  under the terms of the existing
leases thereof and continuing under the Amended and Restated Master Lease.

         B.       Deferred Closing.

                  (I) Time  and  Place.  The  consummation  of the  transactions
contemplated  by  this  Agreement  and  pertaining  to  the  Florida   Mortgaged
Facilities and CNP/Counsel obligations (the "Deferred Closing") shall take place
on or before one hundred  twenty (120) days after the Initial  Closing Date (the
"Deferred  Closing  Date").   The  parties   acknowledge  that  Omega's  limited
forbearance  under  Paragraph  3.D shall expire at the end of the  foregoing one
hundred twenty (120) day period, unless extended by Omega in writing, at Omega's
sole election.  The Deferred Closing Date may be extended by mutual agreement of
the parties, but no such extension shall operate to postpone the Effective Date.
The Deferred Closing shall be held at the offices of Harwell Howard Hyne Gabbert
&  Manner,  P.C.,  315  Deaderick  Street,  Suite  1800,  Nashville,   Tennessee
37238-1800, or at such other place as shall be mutually agreed upon by Omega and
Advocat.

                  (II) Deferred Closing Documents.  The following  documents and
instruments shall be executed and/or delivered at the Deferred Closing:

(i) All documents and instruments  necessary or appropriate to the conveyance of
the Hardee Manor facility from CNP to Acquisition,  and its  incorporation  into
the Amended and Restated Master Lease (reference Paragraph 3.A);

(ii) An escrow  agreement  with  respect  to  Desoto  Manor  and  Leesburg,  and
amendment of the CNP Mortgage related thereto (reference Paragraph 3.B);
<PAGE>
(iii) An  amendment to the Amended and Restated  Security  Agreement  (reference
Paragraph 4.B), adding Hardee Manor thereto;

(iv) UCC Financing Statements for Hardee Manor(reference Paragraph 4.B);

(v) An Amended and  Restated  Memorandum  of Lease for Hardee  Manor  (reference
Paragraph 4.D);

(vi) The Mutual Release by and between  Counsel and Omega  (reference  Paragraph
9);

(vii) The parties shall execute a closing statement  reflecting the transactions
contemplated hereby;


                  (III) Prorations.  There will be no prorations with respect to
Hardee  Manor  between and among the parties  hereto,  as DLC is and will remain
solely responsible for all taxes, insurance, utilities and other items typically
prorated under the terms of the existing leases thereof and continuing under the
Amended and Restated Master Lease.


         3.  Disposition  of  Florida  Mortgaged  Facilities;  Forbearance.  The
Florida Mortgaged  Facilities shall be transferred  and/or closed, in accordance
with the following and subject to the limitations contained in Paragraph 3.D:

         A. Hardee Manor. At or before the Deferred Closing, Advocat shall cause
CNP to convey,  transfer and assign Hardee Manor (including without  limitation,
land,  building and other  improvements,  all furniture,  fixtures and equipment
located therein and used or usable in connection with the operation  thereof) to
Acquisition, in lieu of partial foreclosure of the mortgage covering the Florida
Mortgaged Facilities.  Such conveyance and assignment shall be free and clear of
the existing  lease to DLC, all  mortgages  and other liens and/or  encumbrances
whatsoever other than the existing CNP Mortgage. Upon conveyance to Acquisition,
Hardee  Manor  shall be added to the  Amended and  Restated  Master  Lease to be
executed by Acquisition, as lessor, and DLC, as lessee, pursuant to Paragraph 4,
below. Advocat and DLC agree to promptly and timely cooperate,  and to cause CNP
to cooperate,  with Acquisition in connection with any necessary  certificate of
need ("CON") and/or licensing  transfers  necessary or appropriate to effect the
conveyance  of Hardee  Manor to  Acquisition  and the  addition  thereof  to the
Amended and Restated Master Lease.

         B. Desoto  Manor and  Leesburg.  Within one hundred  twenty  (120) days
after the Initial  Closing,  Advocat shall cause CNP to place warranty deeds and
<PAGE>
bills of sale covering Desoto Manor and Leesburg  irrevocably into escrow with a
title  company  designated  by Omega.  The  deeds and bills of sale  shall be in
recordable  form,  but blank as to grantee.  At the same time,  the CNP Mortgage
shall  be  amended  to (i)  discharge  Hardee  Manor  from  the  lien of the CNP
Mortgage;  (ii) provided that the conditions of Subparagraph 3.D and Paragraph 9
hereof  have  been met,  release  CNP,  Advocat  and DLC from  their  respective
obligations to pay the debt under the CNP Note and CNP Mortgage;  and (iii) have
the CNP  Mortgage  continue in full force and effect for the purpose of securing
the continuing  post-Closing  obligations of Advocat,  DMSC,  SHCM and DLC under
this Agreement.  DLC shall have the period of one hundred twenty (120) days from
and after the Initial  Closing (the  "Advocat  Option  Period")  during which to
elect to either retain or sell Desoto Manor and/or  Leesburg.  Written notice of
such  election  shall be  given by DLC to  Acquisition  not  later  than two (2)
business days  following the  expiration of the Advocat  Option  Period.  If DLC
elects to retain either or both facilities, Acquisition's name shall be inserted
as grantee in the  applicable  warranty  deed(s) and  bill(s) of sale,  and such
instruments shall be released from escrow to Acquisition. Simultaneously, Desoto
Manor  and/or  Leesburg,  as the case may be,  shall be added to the Amended and
Restated  Master  Lease,  which shall be amended for such purpose and to provide
for  rent at fair  market  value  for  the  added  facility  or  facilities.  If
Acquisition  and DLC cannot in good faith agree upon fair market  value  rental,
then such  determination  shall be made by an  arbitrator  jointly  selected  by
Acquisition and DLC, whose decision shall be final. If DLC elects to sell either
or  both  of  Desoto  Manor  and/or  Leesburg,  then in  such  event  Omega  and
Acquisition shall have the period of forty-five (45) days from and after receipt
of DLC's  notice to that effect (the "Omega  Option  Period"),  during  which to
elect (as to each  applicable  facility),  by written  notice to Advocat and DLC
given  within two (2) business  days  following  expiration  of the Omega Option
Period,  either to acquire the  facility(ies) for a purchase price of one dollar
($1.00),  or to permit DLC to sell the  facility(ies)  to one or more  unrelated
third  parties.   If  Omega  elects  to  acquire  either  or  both   facilities,
Acquisition's  name (or such other name as Omega may designate in writing) shall
be inserted as grantee in the applicable  warranty  deed(s) and bill(s) of sale,
and such instruments shall be released from escrow to Omega. If Omega elects not
to acquire either or both facilities,  DLC's name (or such other name as Advocat
may  designate  in  writing)  shall be  inserted  as grantee  in the  applicable
warranty  deed(s) and bill(s) of sale,  and such  instruments  shall be released
from  escrow  to  Advocat.  If  Omega  and  Acquisition  permit  the sale of the
facility(ies),   Advocat  and  DLC  shall   promptly   commence   marketing  the
facility(ies). Advocat and DLC shall have the period of one hundred eighty (180)
days during  which to attempt to sell the  facility(ies)  as  operating  nursing
homes.  If they are unable to accomplish the sale of one or both (as applicable)
facility(ies)  within  such  one  hundred  eighty  (180)  days,  the  applicable
facility(ies)  shall be closed,  and the real estate and other assets comprising
the  facilities  sold as soon as reasonably  practicable.  In any event,  eighty
percent  (80%) of the Net  Sales  Proceeds  from the sale of  either  or both of
Desoto Manor and/or Leesburg shall be paid over to or at the direction of Omega.
As used herein,  "Net Sale Proceeds" shall be the gross sale price less (i) bona
fide  commissions  payable to third party  brokers not related to or  affiliated
with Advocat, DLC, CNP or any subsidiary or affiliate thereof, and (ii) ordinary
and customary  closing costs and expenses,  including title insurance  premiums,
transfer or stamp taxes, and property tax prorations).

         C. Indemnity Obligation.  Advocat, DLC and DMSC, jointly and severally,
shall  defend,  indemnify  and  hold  harmless  Omega,  Acquisition,  and  their
respective  officers,  directors,  shareholders,  successors  and  assigns  (the
"Indemnified Parties"),  with respect to any of the Florida Mortgaged Facilities
conveyed to Omega, Acquisition, or designees thereof, from and against:
<PAGE>
                  1.       Health Care Laws.

                  All cost report  settlements  and audits  arising  from CNP's,
Advocat's or DLC's ownership or operation of such Florida  Mortgaged  Facilities
prior to the conveyance of such Facilities to the  Indemnified  Parties or their
designees,  and any liability,  including  without  limitation  Medicare  and/or
Medicaid  clawback  liability,  pursuant  to any  federal,  state or local laws,
rules,   ordinances,   regulations   and   all   administrative   and   judicial
interpretations  applicable to it  pertaining to operation of a skilled  nursing
facility prior to such conveyance,  including without limitation, Title XVIII of
the Social Security Act, 42 U.S.C. Sections 1395-1395ccc (the Medicare statute);
Title XIX of the Social  Security  Act,  42 U.S.C.  Sections  1396 et seq.  (the
Medicaid statute); the Federal Programs Anti-Kickback Statute, 42 U.S.C. Section
1320a-7b(b);  the Stark Law, 42 U.S.C.  Section 1395nn; the False Claims Act, 31
U.S.C. Sections 3729 et seq. (as amended); the Program Fraud Civil Remedies Act,
31  U.S.C.  Section  3801 et seq.;  the  federal  Anti-Kickback  Act,  42 U.S.C.
Sections  52 et seq.;  the Civil  Monetary  Penalties  Law,  42  U.S.C.  Section
1320a-7a;  and the Criminal Penalties Law for Acts Involving Federal Health Care
Programs,   42  U.S.C.  Section  1320a-7b;   and  all  applicable   implementing
regulations,  rules,  ordinances  and orders,  as well as any similar  state and
local  statutes and  regulations  relating to health care service  providers and
suppliers (the "Health Care Laws").

         2.       Environmental.

         Any claims,  (including,  without  limitation,  third party  claims for
personal  injury or real or  personal  property  damage  or  damage  to  natural
resources or the environment),  actions,  administrative  proceedings (including
formal proceedings),  judgments,  damages,  penalties, fines, costs, liabilities
(including  sums paid in settlements of claims),  interest or losses,  including
reasonable  attorneys'  fees and expenses  (including any such fees and expenses
incurred in enforcing  this  Agreement or  collecting  any sums due  hereunder),
reasonable  consultant fees, and reasonable expert fees, together with all other
costs and expenses of any kind or nature (collectively,  the "Costs") that arise
directly  or  indirectly  from  or in  connection  with  the  violation  of  any
applicable  Environmental  Law (as defined below) by CNP,  Advocat and/or DLC or
the  presence,  storage,  transportation,  disposal or release of any  Hazardous
Substance (as defined  below) in or into the  structure,  building,  air,  soil,
surface water,  groundwater or soil vapor (collectively,  the "Environment") at,
on,  under,  from,  or within the Florida  Mortgaged  Facilities  or any portion
thereof,  to the extent that such Costs  result from such  conditions  or events
occurring  prior  to  the  date  of  conveyance  of  the  Facility(ies)  to  the
Indemnified Parties, their designees, or any of them.


         As used  herein,  "Environmental  Laws"  shall  mean  and  refer to all
federal,  state  and  local,  civil  and  criminal  laws,  regulations,   rules,
ordinances, codes, decrees, judgments,  directives, policies or guidance, common
law, or judicial or administrative orders relating to pollution or protection of
the  environmental,  natural  resources or human  health and safety,  including,

<PAGE>

without  limitation,  laws  relating  to  releases  or  threatened  releases  of
Hazardous Substances [as defined below] (including, without limitation, releases
to ambient air, surface water, groundwater, land, surface and subsurface strata)
or  otherwise  relating  to  the  manufacture,  processing,  distribution,  use,
treatment,  storage,  release,  transport,  disposal or  handling  of  Hazardous
Substances.  "Environmental  laws" includes,  without  limitation,  CERCLA,  the
Hazardous  Materials  Transportation  Act (19 U.S.C.  ss.ss.1801  et seq.),  the
Resource  Conservation  and Recovery Act (42 U.S.C.  ss.ss.  6901 et seq.),  the
Federal Water Pollution  Control Act (33 U.S.C.  ss.ss. 1251 et seq.), the Clean
Air Act (42 U.S.C.  ss.ss.7401 et seq.),  the Toxic  Substances  Control Act (15
U.S.C.  ss.ss.2601  et seq.),  the Oil  Pollution  Act (33 U.S.C.  ss.ss.2701 et
seq.),  the  Emergency  Planning  and  Community  Right-to-Know  Act (42  U.S.C.
ss.ss.11001  et  seq.),  the  Occupational  Safety  and  Health  Act (29  U.S.C.
ss.ss.651 et seq.),  and all other state and local laws  analogous to any of the
above.  "Hazardous  Substances"  shall mean and refer to any  hazardous or toxic
substance,  material or waste, pollutant or contaminant,  flammable or explosive
material,  radioactive  material,  dioxins,  heavy metals,  radon gas, asbestos,
petroleum  products  or  by-products,   polychlorinated  biphenyls,  medical  or
infectious waste or materials,  or any other substance,  waste or material which
is included under or regulated by any Environmental Law.


         3.       Other Matters.

         Any and all losses, damages, costs, expenses, liabilities,  obligations
and claims of any kind (including, without limitation,  reasonable attorney fees
and other legal costs and  expenses)  which the  Indemnified  Parties may at any
time  suffer or incur,  or become  subject  to, as a result of or in  connection
with:

          (a) the  operation of the Florida  Mortgaged  Facilities  prior to the
     respective date(s) of conveyance thereof to the Indemnified Parties,  their
     designees, or any of them; or

          (b) any suit,  action or other proceeding  brought by any governmental
     authority  or person  arising  out of, or in any way related to, any of the
     matters referred to in this Paragraph 3.C.

         D. Limited  Forbearance;  Action upon/Release of CNP Note Indebtedness.
Subject to the timely consummation of those transactions  covered by the Initial
Closing,  and provided  that (i) DLC shall make current  interest  payments,  in
arrears,  on the CNP Note in the amount of $16,666.00 per month from the Initial
Closing Date  (commencing  November 15, 2000) through the Deferred Closing Date,
(ii) Advocat, DLC, SHCM and DMSC shall otherwise comply in all respects with the
terms and conditions of this Agreement, and (iii) no Triggering Event shall have
occurred as defined in Paragraph  4.G,  Omega agrees to forbear from  exercising
its remedies under the CNP Note and CNP Mortgage,  and based on the undertakings
of Counsel and/or Advocat (including the Advocat Guaranty) with respect thereto,
for the period of one hundred twenty (120) days  following the Initial  Closing.
During the time,  and so long as, DLC shall  timely make the  interest  payments

<PAGE>

under sub-subparagraph  3.D.(i),  Acquisition shall reduce the monthly Base Rent
installments  under the Amended and Restated Master Lease by an equal amount. If
the Deferred  Closing timely occurs,  including the consummation of the transfer
of Hardee Manor and its incorporation into the Amended and Restated Master Lease
pursuant to and as contemplated in Paragraph 3.A, and further  conditioned  upon
Omega's receipt at the Initial  Closing of the $3,000,000  payment in accordance
with  Paragraph  7,  below,  Omega  shall  release  Advocat  and DLC from  their
obligations  to pay the principal and any further unpaid  interest  indebtedness
(beyond that to which the $3,000,000  payment is applied) under the CNP Note and
the CNP Mortgage; provided, however, that Advocat shall not be released from its
guaranty  of the  CNP  Mortgage  to the  extent  of any  continuing  obligations
following  its  amendment  as  contemplated  by  Paragraph  3.B. If the Deferred
Closing  does not occur  within one  hundred  twenty  (120) days  following  the
Initial  Closing,  Omega  shall be free to  exercise  any and all its rights and
remedies under the CNP Note, the CNP Mortgage, the Advocat Guaranty with respect
thereto, and the undertakings of Counsel with respect thereto.

         4.  Amended  and  Restated   Master  Lease;   Divestiture   of  Certain
Facilities; Cash Management System Requirements.

         A. Omega  shall  cause  title to the  Master  Leased  Facilities  to be
consolidated  into  Acquisition at or prior to the Initial  Closing.  SHCM shall
simultaneously  assign its interest in the Master Leased  Facilities  covered by
the 1997 Master Lease to DLC. At the Initial  Closing,  Acquisition,  as lessor,
and DLC,  as lessee,  shall  enter into an Amended  and  Restated  Master  Lease
consolidating,  amending  and  restating  the  Master  Leases,  and  adding  (or
providing for the  subsequent  addition,  pursuant to Paragraph  3.A, of) Hardee
Manor to the Master Leased  Facilities,  all in substantially  the form attached
hereto as Exhibit "B" (the "Amended and Restated Master  Lease").  In connection
therewith:

         B. At Initial Closing,  DLC shall enter into and execute an Amended and
Restated Security  Agreement,  covering all of the Master Leased Facilities,  in
substantially the form attached hereto as Exhibit "C", together with amended and
restated UCC financing  statements  for each of the Master Leased  Facilities in
form satisfactory to Acquisition.

         C. Also at Initial  Closing,  Advocat,  AFI and DMSC  shall  execute an
Amended and Restated  Guaranty,  in  substantially  the form attached  hereto as
Exhibit "D".

         D. Also at Initial  Closing,  Acquisition  and DLC shall  enter into an
Amended and Restated  Memorandum of Lease for each of the jurisdictions in which
the Master Leased  Facilities are located,  in  substantially  the form attached
hereto  as  Exhibit  "E";  provided,  however,  that  an  Amended  and  Restated
Memorandum  of Lease for  Hardee  Manor  shall be entered  into at the  Deferred
Closing.

         E. Also at Initial Closing, DLC and SHCM shall enter into a sublease of
the Master Leased  Facilities  covered by the 1997 Master  Lease,  in conformity
with the requirements of Paragraph 13 of this Agreement.  DLC and SHCM shall, at
Initial Closing, execute and deliver to Acquisition the collateral documents for
subleases as described in Paragraph 13.

<PAGE>

         F. No later than one hundred  eighty (180) days  following  the Initial
Closing,  Advocat  and DLC shall  create a new wholly  owned  subsidiary  of DLC
("NewSub"), and shall transfer to NewSub all of DLC's ownership,  tenancy and/or
operation  of each  facility,  including  all accounts  receivable  and personal
property,  included in the Master Leased Facilities (including within the Master
Leased Facilities for purposes of this determination  Hardee Manor, Desoto Manor
and Leesburg) leased by DLC under the Amended and Restated Master Lease, so that
the assets of NewSub shall be limited to the Master  Leased  Facilities.  NewSub
shall  assume  all  obligations  of  DLC  with  respect  to  the  Master  Leased
Facilities. NewSub shall be created as a single purpose entity, and its articles
of  incorporation   and  bylaws  (or  articles  of  organization  and  operating
agreement,  if NewSub is created as a limited  liability  company) shall contain
language   reasonably   satisfactory   to  Omega  and  in  compliance  with  its
obligations, if any, to AmSouth with respect, and limited, to potential guaranty
of DLC's obligations to AmSouth and/or pledge of its stock/membership  interests
to AmSouth,  to effectuate such status.  In connection  with the foregoing,  DLC
shall promptly  initiate and  diligently  pursue to completion all necessary and
appropriate  actions  to  make  SHCM  and  all  other  Sublessees  wholly  owned
subsidiaries  of  NewSub.  Upon  the  completion  of the  requirements  of  this
Paragraph  4.F, all  references  to DLC in  Paragraph  4.G shall be deemed to be
requirements of NewSub.


         G. Within ninety (90) days from the Initial Closing, DLC (or NewSub, as
the case may be) and its  permitted  sublessees  (the  "Sublessees")  will, as a
material  inducement to Omega and Acquisition to enter into this Agreement,  and
as an express covenant under the Amended and Restated Master Lease,  establish a
new cash  management  system (the "New Cash  Management  System").  The new Cash
Management System will include the following procedures:

(i) If a Facility is  operated  by a  Sublessee,  all  receipts  related to that
Facility  shall be  deposited  daily  into one or more  accounts  in the name of
Sublessee.

(ii) If a Facility is operated by DLC or NewSub,  all  receipts  related to that
Facility shall be deposited daily into one or more accounts maintained by DLC or
NewSub in the name of the Facility.  The accounts  maintained by each  Sublessee
and by DLC or NewSub in the name of Facilities into which funds are deposited as
set forth in this  clause  (ii) and in clause (i) are herein  referred to as the
"Facility Accounts".

(iii) On a daily  basis,  the  balance in each  Facility  Account  may, at DLC's
(NewSub's)  option,  be transferred into a concentration  account  maintained by
Advocat (the "Advocat Concentration Account").

(iv) DLC  ("NewSub")  shall  promptly  establish,  with  AmSouth Bank or another
financial   instution   satisfactory  to  Omega  and  Acquisition,   a  separate
concentration account, unrelated to the Advocat Concentration Account, and which
shall be referred to herein as the "DLC  Concentration  Account".  DLC  (NewSub)
shall make, and thereafter maintain, a deposit or deposits in amounts sufficient
to keep the DLC Concentration Account open and operative at all times.

<PAGE>

(v) In the absence of a Triggering  Event,  funds from Facility  Accounts  swept
into the Advocat  Concentration Account may continue to be commingled with funds
from other facilities owned or operated by Advocat,  DLC and/or their respective
affiliates,  and utilized in accordance with existing  practices.  Advocat shall
maintain  financial  records  which will make it possible to identify  (x) funds
deposited into the Advocat  Concentration  Account from the Facilities,  and (y)
expenses of the Facilities paid with funds in the Advocat Concentration Account.
For  purposes  hereof,  "Triggering  Event"  shall  mean  any one or more of the
following:

         (1)      DLC (or NewSub, as the case may be) shall fail to pay the Base
                  Rent and/or Impositions as defined in the Amended and Restated
                  Master  Agreement,  or Advocat  fails to pay any  principal or
                  interest due under the  Subordinated  Note in accordance  with
                  its terms,  and Omega  shall  provide a copy of notice of such
                  default to AmSouth Bank;

         (2)      Acquisition  gives  notice of  termination  of the Amended and
                  Restated  Master  Lease  following  an Event of  Default,  and
                  provides a copy of such notice to AmSouth Bank;

         (3)      An  involuntary  bankruptcy  proceeding  is initiated  against
                  Advocat,  DLC (or  NewSub,  as the case may be), or Advocat or
                  DLC (or New Sub,  as the case may be):  (i)  admits in writing
                  its  inability to pay its debts  generally as they become due,
                  (ii)  files a petition  in  bankruptcy  or a petition  to take
                  advantage  of  any  insolvency  law,  (iii)  makes  a  general
                  assignment for the benefit of its creditors,  (iv) consents to
                  the appointment of a receiver of itself or of the whole or any
                  substantial  part of its property,  or (v) files a petition or
                  answer seeking reorganization or arrangement under the Federal
                  bankruptcy laws or any other  applicable law or statute of the
                  United States of America or any state thereof,  subject to the
                  applicable  provisions of the  Bankruptcy  Code (11 USC ss.101
                  et. seq.);

         (4)      AmSouth  Bank or any  successor  thereto  declares an event of
                  default,  and accelerates any or all of the  indebtedness,  or
                  commences any action  against DLC (or NewSub,  as the case may
                  be) or any  sublessee,  or takes  any  action  to  realize  on
                  AmSouth's  junior interest in accounts  receivable,  under any
                  document or  instrument  evidencing  an obligation of Advocat,
                  DLC,  NewSub  or any  affiliate  of any  of the  foregoing  to
                  AmSouth Bank; or

         (5)      AmSouth  Bank  declines,  for any  reason,  to fund a  working
                  capital  or other  advance  under  any line of credit or other
                  credit facility of Advocat, DLC or any affiliate of either.

<PAGE>

(vi) In connection with the foregoing, and as a material inducement to Omega and
Acquisition  to enter into this  Agreement,  Advocat  and/or  DLC shall  provide
AmSouth written notice clearly  identifying the Facility Accounts at AmSouth and
any other  account  at  AmSouth  which  holds only funds of NewSub or any of its
sublesees.

(vii) From and after a Triggering Event,  except for incidental expenses paid at
the Facility level, all expenses of DLC/NewSub and the Sublessees (the "Facility
Expenses") shall be paid by DLC/NewSub, either on its own behalf or on behalf of
the Sublessees,  from the DLC Concentration  Account.  After a Triggering Event,
under no  circumstances  will funds of DLC/NewSub or any Sublessee be commingled
with funds  belonging  to Advocat or any  affiliate  of Advocat  (except for the
Sublessees).

         H. As a material  inducement  for Omega and  Acquisition  to enter into
this Agreement, and as an express covenant under the Amended and Restated Master
Lease,  Advocat and DLC/New Sub shall not transfer,  or permit the transfer,  of
the  Advocat  Concentration  Account  or the DLC  Concentration  Account  to any
financial  institution  other  than  AmSouth  Bank,  unless  the new  depository
institution  (the  "Replacement  Bank")  shall  first  execute an  intercreditor
agreement with Omega and Acquisition  substantially similar to the intercreditor
agreement executed with AmSouth Bank pursuant to Paragraph 8.D, below.

         5. Florida Managed Facilities.  All existing contractual  relationships
of the parties,  including  without  limitation for purposes hereof the existing
management  agreements and subordination of management fees with and by DMSC and
the  Advocat  guaranties  of DMSC's  performance,  with  respect to the  Florida
Managed  Facilities  shall  remain in  existence  without  modification.  Omega,
Advocat and DMSC shall  execute,  at the Initial  Closing,  a  Reaffirmation  of
Obligations  in  substantially  the form  attached  hereto as Exhibit  "F".  The
parties acknowledge that DMSC has not heretofore executed and joined in the Cash
Collateral  Agreement  dated as of August 1,  1998,  pertaining  to the  Florida
Managed  Facilities.  Advocat  and Omega shall  negotiate,  prior to January 31,
2001,  an  amendment  to that  instrument  which will (i)  resolve,  in a manner
consistent with the intent of the Cash Collateral  Agreement,  DMSC's reasonable
objections to the flow of funds established  thereby, and (ii) provide a consent
by Advocat and DMSC to the sale or transfer of the Florida  Managed  Facilities,
or any of them, to or at the  direction of Omega,  provided,  however,  that any
such sale or  transfer  shall be subject to the  concomitant  assignment  of the
existing DMSC  management  agreement,  which will remain in effect in accordance
with its terms following such sale or transfer.

         6. Capital Expenditures Undertaking. As a material inducement for Omega
and Acquisition  entering into this Agreement and  consummating the transactions
contemplated  hereby,  and as an express covenant under the Amended and Restated
Master Lease, DLC (or NewSub, as applicable) agrees to undertake special project
capital  expenditures  ("Special Project Capital  Expenditures") with respect to
the Master Leased Facilities  (including,  for purposes hereof,  Hardee Manor if
and when it is added to the  Amended  and  Restated  Master  Lease  pursuant  to
Paragraph 3.A) in the cumulative  amount of not less than One Million and no/100
Dollars  ($1,000,000.00)  during the first two (2) Lease Years under the Amended

<PAGE>

and Restated Master Lease. The Special Project Capital Expenditures shall be for
items  intended to enhance the  marketability  and  functionality  of the Master
Leased  Facilities,   and  shall  be  subject  to  the  reasonable  approval  of
Acquisition,  to be  obtained  in writing in  advance  of the  expenditure.  The
Special Project Capital  Expenditures shall be in addition to the annual Minimum
Qualified Capital  Expenditures  required under Section 8.3.2 of the Amended and
Restated Master Lease. Advocat shall guaranty the performance of and payment for
the Special Project Capital  Expenditures.  DLC/NewSub shall in any event expend
not less than Two Hundred Fifty  Thousand and no/100  Dollars  ($250,000.00)  by
June 30,  2001,  and  shall  expend  (unless  prevented  from  doing so by Force
Majeure,  as defined in the Amended and Restated Master Lease) not less than Two
Hundred Fifty Thousand and no/100 Dollars ($250,000.00),  on a cumulative basis,
in each  subsequent  six (6) month  period  thereafter  during  the two (2) year
period  therefor.  DLC/NewSub  shall not  receive a credit for  expenditures  on
Special  Project  Capital  Expenditures  against  its annual  Minimum  Qualified
Capital Expenditures obligations under Section 8.3.2 of the Amended and Restated
Master Lease;  provided,  however, that the Special Project Capital Expenditures
shall be  undertaken  and  performed in  accordance  with the  requirements  for
Qualified  Capital  Expenditures  projects under the Amended and Restated Master
Lease,  and that  failure  (i) to  spend,  or have  plans  in  place  reasonably
acceptable to Omega to spend, for Special Project Capital Expenditures, at least
Five Hundred Thousand and no/100 Dollars  ($500,000.00),  on a cumulative basis,
by September 30, 2001 or to spend, or have plans in place reasonably  acceptable
to Omega to  spend,  for  Special  Project  Capital  Expenditures,  at least One
Million and no/100 Dollars  ($1,000,000.00),  on a cumulative  basis, by May 31,
2002, or (ii) to timely deposit the required expenditure amount into the Special
Project Capital Expenditures Reserve described below, shall in either such event
constitute an Event of Default under the Amended and Restated  Master Lease.  If
and to the extent the Minimum Qualified Capital  Expenditures budget of $325 per
bed per year during the first two (2) Lease Years is not  sufficient to fund all
the scheduled capital expenditure items set forth on Schedule 4, attached hereto
and  incorporated  herein by  reference,  DLC/NewSub  may utilize funds from the
Special  Project  Capital  Expenditures  funding to  complete  Schedule 4 items.
Without  limitation of the foregoing,  if and to the extent  DLC/NewSub fails to
make Special  Project  Capital  Expenditures  of Two Hundred Fifty  Thousand and
no/100 Dollars ($250,000.00) by June 20, 2001 and Two Hundred Fifty Thousand and
no/100  Dollars  ($250,000.00)  in each six (6) month  period  thereafter,  on a
cumulative  basis in  accordance  with the  foregoing,  an  amount  equal to the
unexpended amount, less any funds already so deposited, shall be deposited on or
before  the  fifteenth  (15th)  day of  the  month  following  the  end of  such
applicable  period, by DLC/NewSub into the Capital  Expenditure  Reserve Account
established  and  administered  under and  pursuant to the Amended and  Restated
Lease.  DLC/NewSub  shall  provide  reports  to  Acquisition  of the  status  of
completion and funding of Special  Project Capital  Expenditures,  commencing on
June 30, 2001 for the prior six (6) month period, and at the end of each six (6)
month period thereafter during the first two (2) Lease years.

         7. Letters of  Credit/Security  Deposit.  The parties  acknowledge that
Omega and  Acquisition  now hold security  deposits with respect to the CNP Note
and Master Leased Facilities as follows: (i) a letter of credit in the amount of
$3,800,000 (the "1992 Letter of Credit") which secures  obligations  relating to
the CNP Note and the 1992  Master  Lease,  (ii) a second  letter of credit  (the
"Other Letter of Credit") in the amount of $1,150,000 which secures  obligations
under all of the Master  Leases  other than the 1992 Master  Lease,  and (iii) a
cash deposit in the amount of $340,304.35,  which secures  obligations under all
of the Master  Leases  other than the 1992 Master  Lease.  The cash  deposit was
previously applied by Omega/Acquisition  against unpaid rent, but the letters of

<PAGE>

credit have not been called,  pursuant to and based on the Standstill Agreement.
The  letters  of  credit  were  issued  by  AmSouth  Bank   ("AmSouth")  or  its
predecessors.  AmSouth  maintains  a first  priority  security  interest  in the
accounts  receivable of the Master  Leased  Facilities,  as security for,  among
other things,  the letters of credit. At the Initial Closing,  and in connection
with  (and  conditioned   upon)  the   consummation  of  the   restructuring  of
Advocat/DLC/SHCM's  debt with and by AmSouth,  including without  limitation the
release by AmSouth  of its first  priority  security  interest  in the  accounts
receivable  of the Master Leased  Facilities  (including,  for purposes  hereof,
Hardee  Manor),  Omega/Acquisition  shall (x) call and retain  $3,000,000 of the
1992 Letter of Credit, (y) release and relinquish the remaining $800,000 balance
of the 1992  Letter of  Credit,  and the  $1,150,000  under the Other  Letter of
Credit,  and  (z)  reverse  the  prior  application  of the  cash  deposit.  The
$3,000,000  shall be applied  against the  balance  owing on the CNP Note as set
forth  in  Paragraph  2B.(III).  The  prior  cash  deposit  shall be held as the
security deposit under the Amended and Restated Master Lease. In connection with
the foregoing,  Omega and Acquisition shall terminate and discharge the existing
Letter of Credit  Agreements.  The parties hereto agree that (i)  Acquisition is
incurring  substantial losses by the restructuring of the 1992 Master Lease into
the Amended and Restated Master Lease,  and (ii) not more than $3,000,000 of the
1992 Letter of Credit is fairly allocable to the CNP Note.

         8. AmSouth  Restructuring.  The obligation of Omega and  Acquisition to
proceed  to  Initial  Closing  hereunder  and  to  consummate  the  transactions
contemplated hereby is expressly conditioned on the simultaneous consummation of
a  debt  restructuring  by  and  between  AmSouth  and  Advocat/DLC  (and  their
respective subsidiaries and affiliates), incorporating the following:

         A. AmSouth shall release and relinquish its existing  $3,000,000  first
priority  security  interest in the  accounts  receivable  of the Master  Leased
Facilities and the Florida Mortgaged  Facilities.  The parties  acknowledge that
AmSouth  will  continue to have a fully  subordinated  security  interest in the
subject accounts receivable,  which shall be subject to the terms and conditions
of the intercreditor agreement referred to in subparagraph 8.D, below.

         B. The $3,000,000 draw by Omega on the letters of credit shall become a
separate  indebtedness  of Advocat to  AmSouth,  in  reduction  of the  existing
promissory note, line of credit and overline indebtedness of Advocat to AmSouth.
The  new  indebtedness  shall  be  evidenced  by  a  new  promissory  note  (the
"Non-Accrual  Note"),  which  shall not bear  interest,  and which shall be paid
solely as follows:  (i) first,  all net proceeds from the  anticipated  sale, if
any,  received by Advocat or its  subsidiaries/affiliates  of the  nursing  home
facilities located in Texas and owned by Texas Diversicare  Limited  Partnership
("TDLP") and the  Carteret  nursing home  facility,  located in North  Carolina,
shall be applied against the  Non-Accrual  Note; (ii) in the event the foregoing
amounts are not  sufficient  to liquidate  the  Non-Accrual  Note in full,  then
surplus  cash flow of Advocat (to be defined in terms  satisfactory  to Advocat,
but  in  no  event  shall   surplus   cash   include  any  amounts   payable  to
Omega/Acquisition  under the Amended and Restated  Master Lease, or required for
the  operation  of  the  Master  Leased  Facilities)  shall  be  applied  to the
Non-Accrual Note until it has been paid in full.
<PAGE>

         C. At the Effective Date, the interest rate on the existing  promissory
note,  overline and line of credit (the "AmSouth  Debt") shall be established at
nine and one-half percent (9 1/2%) per annum.  Principal payments on the AmSouth
Debt shall be made solely from surplus cash flow (defined in accordance with and
subject to subparagraph B, above) after payment in full of the Non-Accrual Note.

         D. Documentation of the foregoing debt  restructuring  shall be in form
satisfactory to Omega,  and at Initial Closing,  Omega,  Acquisition and AmSouth
shall  enter into an  intercreditor  agreement  in form  satisfactory  to Omega,
implementing  both the matters set forth in this Paragraph 8 and the matters set
forth in Subparagraphs 4.F and 4.G.

         9. Counsel.  Upon the last to occur of (i) consummation of the transfer
of Hardee Manor to Acquisition in accordance  with Paragraph 3.A, (ii) execution
by CNP  of  all  documents  and  instruments  necessary  or  appropriate  to the
consummation  of the  transactions  contemplated  by  Paragraph  3.B,  and (iii)
Advocat's   certification  to  Omega  that  it  has  satisfactorily  reached  an
accommodation with Counsel with respect to Advocat's  Canadian  subsidiaries and
affiliates and their  contractual and other  relationships  with Counsel,  Omega
shall  release  Counsel  and  its  subsidiaries,  and the  officers,  directors,
shareholders,  attorneys,  successors  and assigns  thereof,  and Counsel  shall
release Omega, Acquisition and their respective subsidiaries,  and the officers,
directors, shareholders, attorneys, successors and assign thereof, pursuant to a
Mutual Release in form satisfactory to the parties thereto.

         10.  Subordinated  Note. At Initial Closing,  Advocat shall execute and
deliver  to  Omega a  Subordinated  Note in the par  amount  of  $1,700,000,  in
substantially the form attached hereto as Exhibit "H".

         11. Preferred  Stock. At Initial Closing,  Advocat shall issue to Omega
its preferred  stock having a liquidation  preference  valued at $3,300,000 plus
accrued and unpaid  dividends,  if any, and having conversion  rights,  dividend
provisions,  mandatory conversion and mandatory redemption provisions and dates,
and such other terms and  conditions as are set forth in the Stock  Subscription
Agreement  to  be  executed  by  Omega  and  Advocat  at  Initial  Closing,   in
substantially the form attached hereto as Exhibit "I".

         12.  Closing  and Sale of  Facilities.  Omega  and  Advocat  shall  use
commercially reasonable efforts, following the Initial Closing, (i) to define an
appropriate  process under which certain of the Master Leased  Facilities  which
are, or which may later become, no longer economically viable as skilled nursing
facilities, and approving or implementing the alternative use of such facilities
during the term of the  Amended  and  Restated  Master  Lease,  (ii) to work out
structural  issues relating to licensure and liability  compartmentalization  by
the  potential  use of  subleases,  and (iii) to work out  structural  issues to
minimize,  to the extent  practicable,  the corporate state tax in Alabama.  The
foregoing  undertakings  are  independent  of, and shall not  modify,  impair or
abrogate in any way the  effectiveness  of the Amended and Restated Master Lease
or  any  other  undertakings  or  liabilities  of  Advocat/DLC/SHCM  under  this
Agreement  or under any other  document or  instrument  executed  in  connection
herewith or otherwise  remaining in effect  between or among them  following the
Initial Closing hereunder. Any implementation of agreement reached in connection

<PAGE>

with, or as a result of, the undertakings and consideration by Omega and Advocat
as described  in this  Paragraph  shall be  implemented  by written  instrument,
signed  by  Omega,  Advocat,  and  any  other  party  to be  charged  therewith.
Notwithstanding  any of the foregoing,  and in any event: (a) none of the Master
Leased  Facilities  listed on Schedule 5, attached  hereto,  shall be subject to
closure or alternative  uses during the initial term of the Amended and Restated
Master Lease without the prior written consent of Omega and any lender holding a
first mortgage on the subject facilities; and (b) there will be no adjustment in
base rent under the Amended and Restated  Master Lease as a  consequence  of the
closing or  alternative  use of any of the Master Leased  Facilities  (provided,
however,  that with respect to closed facilities,  the CPI adjustments otherwise
required by the Amended and Restated  Master Lease shall not apply after closure
thereof).

         13. Sublease of Facilities.  Omega and Acquisition acknowledge that, at
or following the Initial  Closing,  DLC/NewSub may desire to sublease certain of
the Master Leased Facilities to wholly-owned  subsidiaries of DLC,  including in
particular but without  limitation SHCM. Omega and Acquisition hereby consent to
such  subleasing  of certain  of the  Master  Leased  Facilities,  provided  the
following  conditions  are  satisfied  prior  to any  such  sublease:  (a)  each
sublessee shall execute,  as security for the Amended and Restated Master Lease,
but subject to the terms and conditions of the AmSouth  intercreditor  agreement
executed pursuant to Paragraph 8.D, (i) a Sublease Guaranty in the form attached
hereto as Exhibit "J" whereby each  sublessee  jointly and severally  guaranties
Advocat's/DLC's/SHCM's  obligations under the Amended and Restated Master Lease,
(ii) a  Security  Agreement  based  upon the form of the  Amended  and  Restated
Security Agreement attached hereto as Exhibit "C", and (iii) those UCC financing
statements as deemed necessary by Acquisition to secure those interests  granted
by the  Security  Agreement;  and,  (b)  Advocat or DLC,  as  applicable,  shall
execute,  as security for the Amended and Restated Master Lease,  but subject to
the  terms  and  conditions  of the  AmSouth  intercreditor  agreement  executed
pursuant to Paragraph 8.D, (i) a pledge of the stock (or  membership  interests,
if a limited  liability  company) of any such sublessee in the form of the Stock
Pledge  Agreement  attached  hereto  as  Exhibit  "K" , and  (ii)  a  collateral
assignment of the sublease.

         14. Payments Until Initial Closing;  Deferred Compensation.  A. Advocat
shall continue to pay Omega  $209,134.62 per week during the period from October
1, 2000  through the Initial  Closing  Date,  which shall be credited at Initial
Closing  against the accrued Base Rent  otherwise due and payable at the Initial
Closing.

         B. Advocat and DLC  acknowledge and agree that the amount of rent which
Acquisition is forbearing  from receiving as a consequence of entering into this
Agreement   and  the  Master  Lease   totals  at  least  Five  Million   Dollars
($5,000,000).  In order to  induce  Omega  and  Acquisition  to enter  into this
Agreement,  Advocat and DLC jointly and severally  agree to pay  Acquisition  as
damages the amount of  ($5,000,000),  together  with  interest  thereon from the
Effective  Date through the date of payment at the rate of eleven  percent (11%)
per  annum.  Such  amount  shall be payable  at the  expiration  of the Term (as
defined in the Amended and Restated Master Lease) or earlier  termination of the
Lease.  Omega and Acquisition  agree to waive and forever forgive any obligation
of either Advocat or DLC to pay such amount provided DLC/ NewSub fulfills in all

<PAGE>

material  respects its obligations  under the Amended and Restated Master Lease,
to transfer the  Facilities  and Lessee's  Personal  Property (as defined in the
Amended and Restated  Master Lease,  subject to the excluded  items  therein) to
Acquisition at the expiration of the Term or earlier  termination of the Amended
and Restated Master Lease.  However,  unless waived and forgiven as set forth in
the preceding sentence,  such amount shall be immediately due and payable at the
end of the Term or  earlier  termination  of the  Master  Lease.  Payment of the
amount owing under this  Paragraph  14.B shall be a  non-recourse  obligation of
Advocat and DLC secured  (which  security  interest  shall be  acknowledged  and
covered by the Amended and Restated Security Agreement to be executed at Initial
Closing,  and by the security agreements to be executed by any sublessees of the
Facilities)  solely by the Lessee's  Personal Property located at the Facilities
at the expiration of the Term or earlier termination of the Amended and Restated
Master Lease.  Advocat and DLC  acknowledge  that their  obligations  under this
Paragraph  14.B are  independent  of and do not  arise  under  the  Amended  and
Restated Master Lease.

         15. Survival of Provisions;  Default.  A.  Representations  made by any
party hereto,  as well as the provisions hereof which contemplate or necessarily
involve actions or representations by any party hereto after the Initial Closing
and/or the  Deferred  Closing,  shall  survive  the Initial  Closing  and/or the
Deferred Closing, as the case may be.

           B. In the event of a default by Advocat,  DLC,  SHCM,  AFI or DMSC in
the timely  performance of their  respective  obligations  under this Agreement,
Omega  and  Acquisition  shall  have  the  right,  upon  written  notice  to the
defaulting  party,  to  pursue  an  action  for  specific  performance  of  this
Agreement,  and to pursue any other remedies under  applicable law. In the event
of a  default  by  Omega  or  Acquisition  in the  timely  performance  of their
respective  obligations under this Agreement,  Advocat, DLC, SHCM , AFI and DMSC
shall have the right,  upon written notice to the defaulting party, to pursue an
action  for  specific  performance  of this  Agreement,  and to pursue any other
remedies under applicable law.

         16. Time of the  Essence.  Time shall be of the essence in all respects
with respect to Advocat's and DLC's performance under this Agreement.

         17.  Notices.  All notices given pursuant to this Agreement shall be in
writing and shall be delivered by ordinary  first class mail (postage  prepaid),
personal delivery, overnight courier service, or confirmed fax, at the addresses
set forth below:

         If to Advocat, DLC, SHCM, AFI or DMSC:
<PAGE>

                                    Advocat Inc.
                                    277 Mallory Station Road, Suite 130
                                    Franklin, Tennessee 37067
                                    Attention: Chief Financial Officer
                                    Telephone No.: (615) 771-7575
                                    Facsimile No.: (615) 771-7409


         With a copy to:            Harwell Howard Hyne Gabbert & Manner, P.C.
                                    315 Deaderick Street
                                    Nashville, Tennessee 37238
                                    Attention: Mark Manner
                                    Telephone No.:  (615) 256-0500
                                    Facsimile No.: (615) 251-1059


         If to Omega or Acquisition:

                                   Omega Healthcare Investors, Inc.
                                   900 Victors Way, Suite 350
                                   Ann Arbor, Michigan 48108
                                   Attention: Susan Allene Kovach
                                   Telephone No.: (734) 887-0200
                                   Facsimile No.: (734) 887-0201

         With a copy to:           Fred J. Fechheimer
                                   Dykema Gossett PLLC
                                   39577 Woodward Avenue, Suite 300
                                   Bloomfield Hills, Michigan 48304-2820
                                   Telephone No.: (248) 203-0743
                                   Facsimile No.:  (248) 203-0763

All notices  given by personal  delivery or confirmed  fax will be  conclusively
deemed given upon the date of personal  delivery or faxing,  as applicable;  all
notices given by mail or overnight  courier service will be conclusively  deemed
given on the business day immediately following the date the notice is deposited
in the mail or with the overnight courier service.

         18. Authority.  Advocat,  DLC, SHCM, AFI and DMSC jointly and severally
represent and warrant to Omega and Acquisition that the execution,  delivery and
performance  of this  Agreement  has been duly  approved and  authorized  by all

<PAGE>

necessary  corporate  action of  Advocat,  DLC,  SHCM,  AFI and DMSC  (including
without  limitation,  all necessary  action of the shareholders and directors of
Advocat,  DLC,  SHCM,  AFI and DMSC),  and that no consent or approval  from any
other person or entity is required for the due and valid execution, delivery and
performance  of this Agreement by Advocat,  DLC,  SHCM, AFI and DMSC.  Omega and
Acquisition jointly and severally  represent and warrant to Advocat,  DLC, SHCM,
AFI and DMSC that the execution,  delivery and performance of this Agreement has
been duly approved and authorized by all necessary corporate action of Omega and
Acquisition   (including  without  limitation,   all  necessary  action  of  the
shareholders  and  directors of Omega and  Acquisition),  and that no consent or
approval  from any other  person or  entity  is  required  for the due and valid
execution, delivery and performance of this Agreement by Omega and Acquisition.

         19. Releases.  A. Subject to, and in consideration  for, Omega entering
into this  Agreement and  consummating  the  transactions  contemplated  hereby,
Advocat,  DLC, SHCM, AFI and DMSC  (collectively,  the "Advocat  Entities",  and
individually,   an   "Advocat   Entity"),   conditioned   upon   and   effective
simultaneously with the consummation of the transactions  contemplated hereby at
Initial Closing,  releases and forever  discharges Omega,  Acquisition and their
respective  successors,  assigns,  agents,  shareholders,  directors,  officers,
employees,  agents,  parent corporations,  subsidiary  corporations,  affiliated
corporations,  affiliates,  and each of them,  from any and all  claims,  debts,
liabilities,  demands,  obligations,  costs,  expenses,  actions  and  causes of
action,  of every nature and  description,  whether known or unknown,  absolute,
mature,   or  not   yet   due,   liquidated   or   non-liquidated,   contingent,
non-contingent,  direct or indirect or otherwise,  which any Advocat  Entity now
has or at any time may hold, by reason of any matter,  cause or thing  occurred,
done,  omitted  or  suffered  to be  done on or  prior  to the  Initial  Closing
(collectively,  "Omega Liabilities"),  other than from Omega Liabilities arising
out of this  Agreement  or any  document or  instrument  executed in  connection
herewith  or in  consummation  of the  transactions  contemplated  hereby.  Each
Advocat  Entity waives the benefits of any law,  which may provide in substance:
"A general release does not extend to claims which the creditor does not know or
suspect to exist in his favor at the time of  executing  the  release,  which if
known by him must have materially affected his settlement with the debtor." Each
Advocat  Entity  understands  that the facts which it believes to be true at the
time of  making  the  release  provided  for  herein  may  later  turn out to be
different than it believes now or at the time of granting such release, and that
information which is not now or then known or suspected may later be discovered.
Each Advocat  Entity accepts this  possibility,  and each Advocat Entity assumes
the risk of the facts  turning out to be  different  and new  information  being
discovered; and each Advocat Entity further agrees that the release provided for
herein  shall in all  respects  continue  to be  effective  and not  subject  to
termination  or  rescission  because of any  difference in such facts or any new
information.

         B. Release of Advocat Entities.  Subject to, and in consideration  for,
the  Advocat  Entities   entering  into  this  Agreement  and  consummating  the
transactions  contemplated hereby, Omega and Acquisition  (together,  the "Omega
Entities", and individually, an "Omega Entity"),  conditioned upon and effective
simultaneously with the consummation of the respective transactions contemplated
hereby at Initial  Closing or thereafter in  accordance  herewith,  releases and
forever  discharges  the Advocat  Entities  (expressly  excluding,  for purposes
hereof, Counsel Corporation and CNP) and their respective  successors,  assigns,

<PAGE>

agents,   shareholders,   directors,   officers,   employees,   agents,   parent
corporations, subsidiary corporations, affiliated corporations,  affiliates, and
each of them, from any and all claims, debts, liabilities, demands, obligations,
costs, expenses,  actions and causes of action, of every nature and description,
whether  known or  unknown,  absolute,  mature,  or not yet due,  liquidated  or
non-liquidated,  contingent,  non-contingent,  direct or indirect or  otherwise,
which any Omega  Entity  now has or at any time may hold,  with  respect  to the
following  obligations  arising  under the Master  Leases and in existence as of
September  30, 2000 (but not as to any such  obligations  arising from and after
October 1, 2000 under the Amended and Restated Master Lease, nor as to any other
obligations  under the Master Leases not specifically  included in the following
listing):

(i). The payment of "Minimum  Rent" and  "Additional  Fixed Rent" (as defined in
and to the extent applicable to the Master Leases);

(ii). The payment of any franchise tax incurred by an Omega Entity in connection
with the collection of any type of rent under the Master Leases;

(iii). The payment of any late fees or default  interest  incurred in connection
with the failure to pay Minimum Rent and any franchise tax; and

(iv).  The payment of attorneys'  fees and costs  incurred by an Omega Entity in
connection  with the  collection  of past due  amounts  owing  under the  Master
Leases.

As of the last to occur of (aa)  transfer of Hardee  Manor to  Acquisition,  and
incorporation  of Hardee  Manor into the Amended and  Restated  Master  Lease in
accordance  with  Paragraph  3.A,  (bb)  execution by CNP of all  documents  and
instruments  necessary to effect the disposition of DeSoto Manor and Leesburg in
accordance  with  Paragraph  3.B, and (cc) receipt by  Omega/Acquisition  of the
$3,000,000.00  in  letter  of  credit  proceeds  pursuant  to  Paragraph  7, the
foregoing  release by the Omega  Entities  shall also  extend to the  payment of
principal  under  the CNP Note  and the CNP  Mortgage  (but  not any  continuing
obligations   under  the  CNP  Mortgage   following  the  amendment  thereof  as
contemplated  in  Subparagraph  3.B,  above,  nor  Advocat's  guaranty  of  such
continuing   obligations  under  the  CNP  Mortgage,  nor  Advocat's  and  DLC's
continuing obligations under Paragraph 14.B, above).

Each Omega Entity understands that the facts which it believes to be true at the
time of  making  the  release  provided  for  herein  may  later  turn out to be
different than it believes now or at the time of granting such release, and that
information which is not now or then known or suspected may later be discovered.
Each Omega Entity  accepts this  possibility,  and each Omega Entity assumes the
risk  of the  facts  turning  out to be  different  and  new  information  being
discovered;  and each Omega Entity further agrees that the release  provided for
herein  shall in all  respects  continue  to be  effective  and not  subject  to
termination  or  rescission  because of any  difference in such facts or any new
information.
<PAGE>

         Notwithstanding anything to the contrary contained in this Paragraph 19
or  otherwise,  this  release  shall only be  effective on and as of the Initial
Closing or such later  applicable  date set forth in this  Paragraph  19, as the
case may be and not otherwise.

              20.  Non-Disclosure.  A. Until Omega and Advocat mutually agree to
publicly  announce this  Agreement,  (i) the parties  hereto,  and each of their
officers,  directors,  employees,  agents,  consultants and advisors, shall keep
confidential  all terms hereof and information  contained  herein (except to the
extent required either (a) in connection with the satisfaction of the conditions
contained herein (including,  without limitation,  providing such information to
its creditors and their advisors),  (b) by the Securities  Exchange Act of 1934,
as amended, and the rules and regulations  promulgated thereunder (the "Exchange
Act"),  or (c) reporting  requirements,  if any, of the New York Stock  Exchange
("NYSE Requirements"), (ii) neither Advocat, DLC, SHCM, DMSC, nor any persons or
entities  affiliated with any of them or their officers,  directors,  employees,
agents,  consultants  and  advisors  (within  the  meaning of Rule 405 under the
Securities  Act of 1933,  as amended)  shall trade in Omega's  stock,  and (iii)
neither Omega,  Acquisition,  nor any persons or entities affiliated with any of
them or their officers,  directors,  employees, agents, consultants and advisors
(within the meaning of Rule 405 under the  Securities  Act of 1933,  as amended)
shall trade in Advocat's  stock.  Advocat,  DLC, SHCM and DMSC  acknowledge that
Omega  may  disclose  the  existence  of this  Agreement  and  the  transactions
contemplated  hereby in  appropriate  public  filings under the Exchange Act, or
pursuant  to the NYSE  Requirements.  Omega  and  Acquisition  acknowledge  that
Advocat may  disclose  the  existence  of this  Agreement  and the  transactions
contemplated  hereby in  appropriate  public  filings under the Exchange Act. No
press releases with respect to this Agreement or the  transactions  contemplated
hereby shall be issued absent the prior mutual approval of Omega and Advocat.

              B.  Notwithstanding  subparagraph A, above,  each party hereto may
and shall give all required  notices of the existence of this  Agreement and the
pending  consummation  of the  transactions  contemplated  hereby to any and all
appropriate governmental authorities.

              C. The parties  agree not to disclose or permit  their  respective
representatives,  attorneys,  auditors or agents to  disclose,  except as may be
required  by  law  or  performance  hereunder,   any  confidential,   non-public
information  of the others which is obtained by any of them in  connection  with
the transactions contemplated by this Agreement.

              21. MUTUAL WAIVER OF RIGHT TO JURY TRIAL. EACH PARTY HERETO HEREBY
WAIVES  THE  RIGHT TO TRIAL BY JURY IN ANY  ACTION  OR  PROCEEDING  BASED  UPON,
ARISING  OUT OF, OR IN ANY WAY  RELATING  TO:  (i) THIS  AGREEMENT,  OR (ii) ANY
CONDUCT,  ACTS OR  OMISSIONS  OF ANY  PARTY  HERETO  OR ANY OF THEIR  DIRECTORS,
TRUSTEES, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED
WITH THEM; IN EACH OF THE FOREGOING CASES,  WHETHER SOUNDING IN CONTRACT OR TORT
OR OTHERWISE.
<PAGE>

              22. Miscellaneous. The recitals to this Agreement are incorporated
into and made a part of this  Agreement.  This  Agreement may be executed in any
number  of  counterparts,  each of  which  counterparts,  when so  executed  and
delivered,  shall be deemed to be an original,  but all such counterparts  taken
together shall constitute one and the same  instrument.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective heirs,
legatees, personal representatives,  successors and permitted assigns; provided,
however,  neither  Advocat,  DLC,  SHCM,  AFI nor DMSC may assign its respective
rights or duties  hereunder or in  connection  herewith or any  interest  herein
(voluntarily,  by operation of law, as security or otherwise)  without the prior
written  consent of Omega,  which consent may be withheld in the sole discretion
of Omega.  This  Agreement  shall not be  construed so as to confer any right or
benefit  upon any person  other than the  parties  to this  Agreement  and their
respective successors and permitted assigns. This Agreement shall be governed by
and construed only in accordance with Michigan law,  without regard to conflicts
of law principles; provided, however, that applicable state law shall control to
the  extent  necessary  to  effect  the real  property  remedies  of  Omega  and
Acquisition  set  forth  herein.  Any  provision  of  this  Agreement  which  is
prohibited or unenforceable in any jurisdiction  shall, as to such jurisdiction,
be ineffective to the extent of such  prohibition  or  unenforceability  without
invalidating  the  remaining  provisions  hereof or  affecting  the  validity or
enforceability  of such provision in any other  jurisdiction,  which  provisions
shall  remain in full  force and  effect.  This  Agreement,  the  Schedules  and
Exhibits  hereto,  constitute  the entire  agreement  between the  parties  with
respect to the transaction herein  contemplated and, except as set forth herein,
supersede  all  prior  agreements  or  negotiations  between  the  parties.  Any
modification  or  amendment  to this  Agreement  shall be  effective  only if in
writing and executed by the party against whom  enforcement of the  modification
or  amendment  is  sought.  Section  headings  used  in this  Agreement  are for
convenience  of  reference  only and shall not affect the  construction  of this
Agreement. ADVOCAT, DLC, SHCM, AFI AND DMSC EACH HAS ENTERED INTO THIS AGREEMENT
VOLUNTARILY,  WITHOUT DURESS OR INFLUENCE,  WITHOUT  RELYING ON ANY AGREEMENT OR
REPRESENTATION NOT SPECIFICALLY SET FORTH IN THIS AGREEMENT, AND AFTER HAVING AN
ADEQUATE OPPORTUNITY TO CONSULT WITH COUNSEL OF THEIR CHOICE.

              23. Exhibits and Schedules.  The following  Exhibits and Schedules
are attached to, and incorporated by reference in, this Agreement:


              EXHIBITS:

              Exhibit "A"           [Intentionally Deleted]

              Exhibit "B"           Amended and Restated Master Lease - Filed
                                      Separately

              Exhibit "C"           Form of Amended and Restated Security
                                      Agreement

              Exhibit "D"           Form of Amended and Restated Guaranty
<PAGE>

              Exhibit "E"           Form of Amended and Restated Memorandum of
                                      Lease

              Exhibit "F"           Form of Reaffirmation of Obligations
                                      (Florida Managed Facilities)

              Exhibit "G"           [Intentionally Deleted]

              Exhibit "H"           Form of Subordinated Note

              Exhibit "I"           Form of Stock Subscription Agreement

              Exhibit "J"           Form of Sublease Guaranty

              Exhibit "K"           Form of Stock Pledge Agreement

              Exhibit "L            [Intentionally Deleted]

              SCHEDULES:

              Schedule 1            Master Leased Facilities

              Schedule 2            Florida Mortgaged Facilities

              Schedule 3            Florida Managed Facilities

              Schedule 4            Certain Qualified Capital Expenditures Items

              Schedule 5            Master Leased Facilities Not Subject to
                                      Closure

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


                         [SIGNATURES ON FOLLOWING PAGE]




ADVOCAT INC., a Delaware corporation        DIVERSICARE LEASING CORP., a
Tennessee corporation

<PAGE>


By: /s/ James F. Mills, Jr.               By: /s/ James F. Mills, Jr.
    ------------------------                  --------------------------
Its: Senior Vice President                Its: Senior Vice President




STERLING HEALTH CARE MANAGEMENT                      DIVERSICARE MANAGEMENT
INC., a Kentucky corporation corporation             SERVICES CO., a Tennessee


By:  /s/ James F. Mills, Jr.                         By: /s/ James F. Mills, Jr.
     -----------------------                             ----------------------
     James F. Mills, Jr.                                 James F. Mills, Jr.
Its: Senior Vice President                           Its: Senior Vice President



ADVOCAT FINANCE, INC., a Delaware
corporation


By:  /s/ James F. Mills, Jr.
     -------------------------
Its:  Senior Vice President


OMEGA HEALTHCARE INVESTORS, INC.,                 STERLING ACQUISITION CORP., a
a Maryland corporation                            Kentucky corporation



By: /s/ Susan Allene Kovach                       By:  /s/ Susan Allene Kovach
    -----------------------                            ------------------------
        Susan Allene Kovach                                Susan Allene Kovach
        Vice President                                     Vice President


<PAGE>
                                    EXHIBIT C

                 FORM OF AMENDED AND RESTATED SECURITY AGREEMENT


         THIS AMENDED AND RESTATED SECURITY AGREEMENT (the "Security Agreement")
is made  and  entered into as of November  ,  2000  by and between  DIVERSICARE
LEASING CORP., a Tennessee corporation (the "Debtor"),  and STERLING ACQUISITION
CORP., a Kentucky corporation ("Secured Party").


                                    RECITALS:

         A. Capitalized  terms used and not otherwise  defined herein shall have
the meanings given them in Article I below.

         B.  Concurrently  herewith,  Secured Party and Debtor have entered into
the Lease, pursuant to which Secured Party has leased to Debtor the Facilities.

         C. This  Security  Agreement  is  intended  to  consolidate,  amend and
restate those certain  security  agreements  previously  delivered to secure the
1992 Master Lease,  the 1994 Master Lease,  the 1997 Master Lease,  and the West
Liberty Master Lease into one document.

         D. The  obligations  of the  Original  Security  Agreements  have  been
assigned to, and assumed by, the Debtor.

         E. The rights,  title and  interests to the  Collateral  secured by the
Original  Security  Agreements have been assigned to, and assumed by, the Debtor
subject to the security interests of the Secured Party.

         F. The rights and  obligations of the lessee under the Original  Master
Leases  have been  assigned  to,  and  assumed  by,  the  Debtor,  as the lessee
thereunder.

         G. The rights and  obligations of the lessors under the Original Master
Leases have been assigned to, and assumed by, the Secured  Party,  as the lessor
thereunder.

         H. As a condition to Secured Party's agreement to enter into the Lease,
Secured Party has required  Debtor to enter into this Security  Agreement and to
grant, amend and restate security interests to Secured Party as herein provided.

         NOW,  THEREFORE,  in order to induce  Secured  Party to enter  into the
Lease, and for other good and valuable consideration the receipt and sufficiency
of which hereby are acknowledged, the parties agree as follows:
<PAGE>


                             ARTICLE I - DEFINITIONS

         This Security  Agreement is executed and  delivered in connection  with
the Lease. Terms defined in the Commercial Code (as hereinafter defined) and not
otherwise  defined in this  Security  Agreement  or in the Lease  shall have the
meanings  ascribed to those  terms in the  Commercial  Code.  In addition to the
other definitions  contained  herein,  when used in this Agreement the following
terms shall have the following meanings:

         "1992  Master  Lease"  means the certain  master lease dated August 14,
1992  between  Omega  Healthcare  Investors,  Inc.  as lessor,  and  Diversicare
Corporation of America, as lessee, for the facilities described therein.

         "1994 Master  Lease" means the certain  master lease dated  December 1,
1994 between Secured Party as lessor, and Sterling Health Care Management, Inc.,
as lessee, for the facilities described therein.

         "1997 Master Lease" means the certain  master lease dated March 1, 1997
between Secured Party as lessor,  and Sterling Health Care Management,  Inc., as
lessee, for the facilities described therein.

         "Collateral" means the collateral described in Article II, Section 2
below.

         "Commercial Code" means the Uniform  Commercial Code, as enacted and in
force from time to time in the state in which the Facilities are located.

         "Debtor's Personal Property" means any tangible personal property owned
by Debtor and not used in connection with the operation of the Facilities.

         "Facilities" means the healthcare facilities identified on attached
Schedule 1.

         "Lease"  means the  Consolidated  Amended  and  Restated  Master  Lease
executed  concurrently  herewith by Secured  Party,  as lessor,  and Debtor,  as
lessee of the Facilities.

         "Original  Master Leases" means the 1992 Master Lease,  the 1994 Master
Lease,  the 1997 Master Lease, and the West Liberty Master Lease, collectively.

         "Original  Security  Agreements" means any and all security  agreements
delivered to secure the Original Master Leases or any one of them.

         "Settlement and Restructuring  Agreement" means that certain settlement
and restructuring  agreement by and among Advocat, Inc., a Delaware corporation,
Debtor,   Sterling  Health  Care  Management,   Inc.,  a  Kentucky  corporation,
Diversicare Management Services Co., a Tennessee  corporation,  Omega Healthcare
Investors,  Inc.,  a  Maryland  corporation,  and  Secured  Party  of even  date
herewith.
<PAGE>

         "Subordinated Note" means that certain  subordinated note from Advocat,
Inc., a Delaware  corporation to Omega  Healthcare  Investors,  Inc., a Maryland
corporation  in  the  original   principal   amount  of  Three  Million  Dollars
($3,000,000.00) Dollars of even date herewith.

         "West Liberty Master Lease" means the certain first amendment to master
sublease  dated  March 3,  1999  between  OS  Leasing  Company  as  lessor,  and
Diversicare Leasing Corp., as lessee, for the facilities described therein.


                             ARTICLE II - AGREEMENT

         1. GRANT OF SECURITY INTEREST.  Debtor hereby grants to Secured Party a
continuing  security  interest  in the  Collateral  to secure the payment of all
amounts now or  hereafter  due and owing to Secured  Party from Debtor under the
Lease, or any extension or renewal  thereof,  and any and all other  obligations
incurred  in  connection  therewith,  together  with all  other  obligations  or
indebtedness  of Debtor and/or  Advocat,  Inc. to Secured Party under the Lease,
Settlement and Restructuring  Agreement,  and Subordinated Note however created,
evidenced or arising, whether direct or indirect, absolute or contingent, now or
hereafter   existing,   due  or  to  become  due,  plus  all  interest,   costs,
out-of-pocket  expenses  and  reasonable  attorneys'  fees  which may be made or
incurred by Secured Party in the  administration,  and  collection  thereof (the
"Liabilities"),  and in the  protection,  maintenance,  and  liquidation  of the
Collateral.  This Security  Agreement  shall be and become  effective  when, and
continue in effect as long as, any  Liabilities  of Debtor to Secured  Party are
outstanding and unpaid, and except as otherwise  permitted pursuant to the terms
of this Agreement,  the Settlement and  Restructuring  Agreement,  or the Lease,
Debtor  will not sell,  assign,  transfer,  pledge or  otherwise  dispose  of or
encumber any  Collateral to any third party while this Security  Agreement is in
effect  without  the  prior  and  express  written  consent  of  Secured  Party.
Notwithstanding  the  foregoing,  the  obligation of Debtor to pay Secured Party
Five Million Dollars  ($5,000,000) plus interest thereon as set forth in Section
15 of the Settlement and  Restructuring  Agreement  shall be secured only by the
Equipment (as hereinafter defined).

         2. COLLATERAL. The "Collateral" covered by this Agreement is all of the
personal  property  described  below  that  Debtor  now owns or shall  hereafter
acquire or create,  immediately  upon the acquisition or creation  thereof,  and
that is located at or used  exclusively in connection with, or arises from or in
connection with Debtor's use and operation of, the Facilities, consisting of the
following:

                  (a)  Accounts.  To the extent  permitted by law, all accounts,
Health Care Insurance  Receivables (as defined in Revised Article 9, hereinafter

<PAGE>

deferred),  accounts receivable,  deposits,  prepaid items,  documents,  chattel
paper,  instruments,  contract  rights  (including  rights under any  management
agreement  or  franchise  agreement  with  respect to the  Facilities),  general
intangibles,  choses in action,  including  any right to any refund of any taxes
paid to any governmental authority prior to or after the date of this Agreement,
and all  ledgers,  printouts,  papers,  data,  file  materials  and  information
relating to any account debtors in respect  thereof,  and/or to the operation of
the Debtor's  business  relating to the Facilities,  and all rights of access to
such books, records, ledgers,  printouts,  data, file materials and information,
and all property in which such books, records,  ledgers,  printouts,  data, file
materials and information are stored (the "Accounts"); and

                  (b)  Certificates of Need. To the extent permitted by law, all
Certificates  of Need now or hereafter  issued in connection with the Facilities
(the "Certificates"); and

                  (c) Equipment.  All equipment,  furniture,  fixtures and other
personal  property  used in  connection  with the  operation of the  Facilities,
whether now owned or hereafter acquired by Debtor, together with all accessions,
additions,  parts, attachments,  accessories, or appurtenances thereto including
but not  limited to linens,  motor  vehicles,  furniture,  fixtures  and movable
equipment,  leasehold  improvements,  and all  books  and  records  now owned or
hereafter acquired  pertaining to any of the above described property other than
Debtor's  Personal  Property,  but specifically  excluding any computer readable
memory and any  computer  hardware or software  necessary to process such memory
(the "Equipment") and

                  (d) Insurance  Rights.  All rights  under  contracts  of
insurance  now owned or  hereafter acquired covering any of the Collateral
("Insurance Rights"); and

                  (e) Inventory. All inventory and goods, now owned or hereafter
acquired, including but not limited to, raw materials, work in process, finished
goods, food, medicines, tangible property, stock in trade, wares and merchandise
used in or sold in the  ordinary  course  of  business  at the  Facilities  (the
"Inventory"); and

                  (f)  Medicaid.  To the extent  permitted by law, all rights to
reimbursement under that certain program of medical  assistance,  funded jointly
by the federal government and the states,  for impoverished  individuals who are
aged, blind and/or disabled, and/or members of families with dependent children,
which  program is more fully  described in Title XIX of the Social  Security Act
(42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder; and

                  (g)  Medicare.  To the extent  permitted by law, all rights to
reimbursements under that certain federal program providing health insurance for
eligible  elderly  and other  individuals,  under which  physicians,  hospitals,
skilled nursing homes,  home health care, and other providers are reimbursed for
certain  covered  services  they provide to the  beneficiaries  of such program,
which program is more fully  described in Title XVIII of the Social Security Act
(42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder; and
<PAGE>

                  (h) Other Property. All other tangible and intangible property
of Debtor now or hereinafter acquired by Debtor and located at the Facilities or
used  exclusively in connection with the operation of the Facilities,  including
without  limitation,  but specifically  excluding  Debtor's  continuous  quality
improvement  program,  manuals and materials;  management  information  systems;
policy, procedure and educational manuals and materials; and similar proprietary
property including any right to the use of the name "Diversicare"' and

                  (i) Patient  Agreements.  To the extent  permitted by law, any
and all contracts,  authorizations,  agreements or consents made by or on behalf
of any patient or resident of any of the Facilities, or any other person seeking
or obtaining  services or goods from Debtor,  pursuant to which Debtor  provides
skilled nursing care,  intermediate  care,  personal care and/or assisted living
facilities,  or any form of  patient  or  residential  care,  as well as related
services at any of the Facilities (as such contracts, authorizations, agreements
or  consents  may be  amended,  supplemented,  renewed,  replaced,  extended  or
modified from time to time);  including consents to treatment and assignments of
payment of benefits (collectively, the "Patient Agreements");and

                  (j) Permits. To the extent permitted by law, (i) the operating
licenses for each of the Facilities, any certificate of need, any other license,
permit,  approval or  certificate  which from time to time,  may be issued or is
required to be issued by the United States,  any state or local  government,  or
any  agency or  instrumentality  of any of the  foregoing  with  respect  to the
construction,  installation or operation of any of the Facilities or any portion
or component of any of the  Facilities,  the  providing of any  professional  or
other  services  by  the  Debtor,  the  purchase,  sale,  dispensing,   storage,
prescription  or use of drugs,  medications or the like by Debtor,  or any other
operations or businesses of Debtor; and (ii)  certifications and eligibility for
participation  by Debtor,  in respect of its operation of any of the Facilities,
in programs or arrangements  of or  reimbursement  from any third-party  payors,
including  Medicare  and  Medicaid;  and (iii) all other  licenses  permits  and
certificates used or useful in connection with the ownership,  operation, use or
occupancy of any of the Facilities (collectively, the "Permits"); and

                  (k) Investment  Property.  All Investment Property (as defined
in the Uniform Commercial Code), other than a security,  whether certificated or
uncertificated, in a subsidiary or affiliate of Debtor; and,

                  (l)  Proceeds.  Proceeds  arising out of the  operation of the
Facilities, including, without limitation, proceeds of hazard or other insurance
policies and eminent  domain or  condemnation  awards,  of all of the  foregoing
described  Inventory or  Equipment,  together with any and all deposits or other
sums at any time credited by or due from Secured Party to Debtor and any and all
instruments,  documents,  policies and  certificates  of insurance,  securities,

<PAGE>

goods, accounts receivable,  choses in action, chattel paper, cash, property and
the proceeds thereof (whether or not the same are Collateral or Proceeds thereof
hereunder) owned by Debtor or in which Debtor has an interest,  which are now or
at any time  hereafter in possession or under the control of Secured Party or in
transit by mail or carrier to or from Secured Party or in the  possession of any
third party acting on behalf of Secured Party, without regard to whether Secured
Party received the same in pledge,  for safekeeping,  as agent for collection or
transmission or otherwise,  or whether Secured Party has conditionally  released
the same (the "Proceeds"); and

                  (m) Reimbursement  Contracts.  To the extent permitted by law,
all rights to third-party  reimbursement  contracts for the Facilities which are
now or hereafter in effect with respect to residents or patients  qualifying for
coverage under the same, including Medicare and Medicaid, managed care plans and
private  insurance  agreements,  and any  successor  program  or  other  similar
reimbursement  program and/or  private  insurance  agreements,  now or hereafter
existing; and

                  (n) Rights. All rights, remedies,  powers and/or privileges of
Debtor with respect to any of the foregoing.

         The form of a description of the Collateral to be attached to financing
statements  executed by Debtor in  connection  herewith  is  attached  hereto as
Exhibit A. Except to the extent set forth above, the term  "Collateral" does not
include Debtor's Personal Property.

         3.       PERFECTION OF SECURITY INTEREST.

                  (a) Debtor hereby authorizes Secured Party to file one or more
financing or continuation statements, and amendments thereto, relating to all or
any part of the Collateral pledged by Debtor hereunder, without the signature of
Grantor where permitted by law. A copy of each such statement and amendment will
be timely provided to Debtor. Debtor shall execute and deliver to Secured Party,
concurrently with Debtor's execution of this Security Agreement, and at any time
or times hereafter at the request of Secured Party, all financing statements and
continuation financing statements (where not covered by the foregoing sentence),
assignments,  affidavits,  reports, notices, letters of authority, vehicle title
notations and all other documents that Secured Party may reasonably  request, in
a form  reasonably  satisfactory  to  Secured  Party,  to perfect  and  maintain
perfected  Secured Party's  security  interests in the  Collateral.  In order to
fully consummate all of the transactions  contemplated  hereunder,  Debtor shall
make  appropriate  entries  on its books and  records  disclosing  the  security
interests created hereby in the Collateral.

         4.  WARRANTIES  AND  COVENANTS.  In  addition  to  the  warranties  and
representations,  if any, made in the Lease,  Debtor  warrants,  represents  and
agrees that:

                  (a) To the extent  permitted  by law,  Debtor has rights in or
the power to transfer  the  Collateral,  and is and will be the lawful  owner or
lessee of all of the Collateral, with the right, to the extent permitted by law,
to subject the owned or leased  property to the  security  interests  of Secured
Party hereunder;
<PAGE>

                  (b) Except for the security interests in the Collateral herein
granted to Secured Party and as described in the  Settlement  and  Restructuring
Agreement, there are no other adverse claims, liens, restrictions on transfer or
pledge,  or security  interests in the Collateral that are known to Debtor,  and
there are no financing  statements  covering any of the Collateral  filed in any
public office created by or known to Debtor prior to the date hereof,  except as
previously  disclosed by Debtor to Secured  Party.  Debtor shall defend  Secured
Party  against  any  claims  and  demands  of any and all other  persons  to the
Collateral inconsistent with this Agreement;

                  (c)  All of the  Collateral  is or  will  be  (upon  delivery)
located at the Facilities or at the chief executive offices of Debtor;

                  (d) Except as permitted  under the Lease or hereunder,  Debtor
shall not remove  the  Collateral  from the  Facilities  or its chief  executive
offices  without  Secured  Party's  prior  written  consent and shall not use or
permit the Collateral to be used for any unlawful purpose whatsoever.  Except as
permitted  under the Lease or hereunder,  Debtor shall not remove any Collateral
from the  state in which  the  Facilities  or its chief  executive  offices  are
located, without the prior written consent of Secured Party;

                  (e)  Except as  permitted  under the Lease,  Debtor  shall not
conduct business under any name at the Facilities other than that given above or
set forth on attached  Schedule 1, nor will Debtor change or reorganize the type
of business entity under which it presently does business, except upon prior and
express  written  approval of Secured  Party,  and, if such approval is granted,
Debtor  agrees  that  all  documents,   instruments  and  agreements  reasonably
requested by Secured Party and relating to such change shall be prepared,  filed
and recorded at Debtor's expense before the change occurs;

                  (f)  Debtor  shall  not  remove  any  records  concerning  the
Collateral located at the Facilities or its chief executive offices nor keep any
of its records  concerning the same at any other location  unless written notice
thereof is given to Secured Party at least ten (10) days prior to the removal of
such records to any new addresses; and

                  (g) Debtor has the right and power and is duly  authorized  to
enter into this Security  Agreement.  The  execution of this Security  Agreement
does not and will not  constitute  a breach of any  provision  contained  in any
agreement  or  instrument  to which  Debtor is or may become a party or by which
Debtor is or may be bound or affected.

                  (h) Debtor  shall not  change the state of its  incorporation,
and shall not change its corporate name without  providing  Secured Party thirty
(30) days prior written notice.
<PAGE>

                  (i)  Debtor's  (i) chief  executive  office is  located in the
state of Tennessee,  (ii) state of incorporation is the state first set forth in
the first paragraph of this Security  Agreement (the "Debtor State"),  and (iii)
exact  legal  name is as set  forth  in the  first  paragraph  of this  Security
Agreement.

                  (j) Debtor shall at all times  maintain the Collateral in good
order  and  repair  and  with  reasonable  promptness  make  all  necessary  and
appropriate  repairs  thereto  of every  kind and  nature  whether  ordinary  or
extraordinary,  foreseen  or  unforeseen,  or arising  by reason of a  condition
whether or not existing prior to the date of this Security Agreement.  It is the
intention of this  provision  that the level of  maintenance  of the  Collateral
shall be not less than that of a first class nursing home operator making use of
the Collateral for its intended use.

                  (k) All agreements and papers required to be filed, registered
or recorded in order to create in favor of the Secured Party a perfected lien in
the  Collateral  have been,  or will be,  filed,  registered  or recorded in the
appropriate filing offices, and to the best of Debtor's knowledge, no further or
subsequent  filing,  refiling,   registration,   re-registration,   recorded  or
re-recording  is  necessary  in  any  jurisdiction,  except  as  provided  under
applicable law with respect to the filing of continuation statements.

         5.       COLLECTION OF ACCOUNTS.

                  (a) Secured  Party  hereby  authorizes  and permits  Debtor to
collect the Accounts  from its debtors.  This  privilege  may be  terminated  by
Secured  Party at any time after notice from Secured  Party upon the  occurrence
and during the  continuance  of a  Triggering  Event  under the  Settlement  and
Restructuring Agreement (a "Notice of Default"),  and Debtor shall execute, upon
demand  therefor,  such assignments so as to vest in Secured Party full title to
the Accounts (to the extent  permitted under  applicable law), and Secured Party
thereupon  shall be entitled to and have all of the  ownership,  title,  rights,
securities  and guarantees of Debtor with respect  thereto,  and with respect to
the property evidenced thereby,  including the right of stoppage in transit, and
Secured  Party may  notify  any  debtor or  debtors  of the  assignments  of the
Accounts and collect the same;  thereafter,  Debtor will receive all payments on
the  Accounts  as agent of and for  Secured  Party and will  transmit to Secured
Party, on the day of receipt thereof, all original checks, drafts,  acceptances,
notes and other evidence of payment  received in payment of or on account of the
Accounts,  including all cash moneys  similarly  received by Debtor.  Until such
delivery,  Debtor  shall  keep all such  remittances  separate  and  apart  from
Debtor's own funds,  capable of identification as the property of Secured Party,
and shall hold the same in trust for Secured Party. After Notice of Default from
the Secured Party,  all items or amounts that are delivered by Debtor to Secured
Party on account of partial or full  payment or  otherwise as Proceeds of any of
the Collateral shall be deposited in accordance with the terms of the Settlement
and  Restructuring  Agreement.  To the extent permitted by law, Secured Party or
its  representatives is hereby authorized to endorse, in the name of Debtor, any

<PAGE>

item, howsoever received by Secured Party,  representing any payment on or other
proceeds of any of the Collateral, and may endorse or sign the name of Debtor to
any accounts, invoices,  assignments,  financing statements, notices to debtors,
bills of lading,  storage receipts, or other instruments or documents in respect
to Accounts or the property covered thereby  requested by Secured Party.  Debtor
shall promptly give Secured Party,  upon demand,  copies of all Accounts,  to be
accompanied  by such  information  and by such  documents  or copies  thereof as
Secured  Party may  reasonably  require.  After  Notice of Default  from Secured
Party,  Debtor shall  maintain such records with respect to the Accounts and the
conduct and operation of its business as Secured Party may  reasonably  request,
and will furnish to Secured Party all  information  with respect to the Accounts
and the  conduct  and  operation  of its  business,  including  balance  sheets,
operating  statements  and other  financial  information,  as Secured  Party may
reasonably request from time to time.

                  (b) Until such time as Secured  Party shall  notify  Debtor of
the  revocation of such power and  authority by reason of an a Triggering  Event
(and effective only during the continuance thereof), Debtor (i) may, only in the
ordinary course of business,  at its own expense,  sell,  lease or furnish under
contracts  of  service  any of the  Inventory  normally  held by Debtor for such
purpose;  (ii)  may use  and  consume  any raw  materials,  work in  process  or
materials,  the use and  consumption  of which is necessary in order to carry on
Debtor's business at the Facilities;  (iii) replace Equipment in accordance with
the  provisions of the Lease;  and (iv) shall,  at its own expense,  endeavor to
collect, as and when due, all amounts due with respect to any of the Collateral,
including  the taking of such action with respect to such  collection as Secured
Party may reasonably  request or, in the absence of such request,  as Debtor may
deem  advisable.  A sale in the ordinary  course of business shall not include a
transfer in partial or total satisfaction of a debt.

         6.  INSPECTIONS/INFORMATION.  Debtor shall permit  Secured Party or its
agents upon reasonable  written request and during business hours to have access
to and to inspect  any of the  Collateral.  Secured  Party may from time to time
inspect, check, make copies of, or extracts from the books, records and files of
Debtor relating to the  Collateral,  and Debtor shall make the same available to
Secured Party upon reasonable written notice and during business hours.  Secured
Party's right of access and inspection  shall be subject to any  prohibitions or
limitations  on  disclosure  under  applicable  law,   including  any  so-called
"Patient's Bill of Rights" or similar legislation, including such limitations as
may be  necessary  to  preserve  the  confidentiality  of  the  Facility-patient
relationship and the physician-patient relationship.

         7.       DEFAULT/REMEDIES

                  (a) The  occurrence of any "Event of Default"  under the Lease
or a default under the Settlement and Restructuring Agreement shall constitute a
Security  Agreement  Event of Default  without  any  additional  notice or grace
period.  In addition,  the following shall also constitute a Security  Agreement
Event of Default:
<PAGE>

                    (i) If any of the  representations  or  warranties  made  by
                    Debtor  hereunder  prove  to be  untrue  when  made  in  any
                    material  respect,   the  Secured  Party  or  Collateral  is
                    materially and adversely  affected thereby,  and same is not
                    cured  within  fifteen (15) days after  written  notice from
                    Secured Party thereof; or

                    (ii) If  Debtor  fails to  perform  any term,  covenant,  or
                    condition of this Security Agreement and such failure is not
                    cured  within  fifteen (15) days after  written  notice from
                    Secured  Party  thereof;  unless such  default by its nature
                    cannot be cured within said fifteen (15) days in which event
                    Debtor shall have such additional  time, not to exceed sixty
                    (60) days from the date of such notice, as may be reasonably
                    required  under  the  circumstances  to cure  such  default,
                    provided Debtor commences such cure within said fifteen (15)
                    day period and diligently prosecutes such cure thereafter.

                  (b) Whenever a Security  Agreement Event of Default shall have
occurred and so long as its  continues,  Secured Party may exercise from time to
time any rights and remedies, including the right to immediate possession of the
Collateral,  available  to it  under  the  Lease,  this  Security  Agreement  or
applicable law.  Secured Party shall have the right to hold any property then in
or upon the Facilities (but excluding any property  belonging to patients at the
Facilities) at the time of repossession  not covered by this Security  Agreement
until  return is demanded in writing by Debtor.  Debtor  agrees,  in case of the
occurrence  of a Security  Agreement  Event of Default  and upon the  request of
Secured  Party,  to  assemble,  at  its  expense,  all of  the  Collateral  at a
convenient  place  acceptable  to Secured  Party and to pay all costs of Secured
Party of collection of all the Liabilities, and enforcement of rights hereunder,
including reasonable attorneys' fees and legal expenses, including participation
in bankruptcy  proceedings,  and the expenses of locating the Collateral and the
expenses  of any  repairs  to any realty or other  property  to which any of the
Collateral  may be affixed or be a part.  If the  Collateral is disposed of at a
public  sale,  the  parties  agree  that a public  sale  with at least  ten (10)
calendar  days  prior  notice  to,  Debtor  and  notice  to  the  public  by one
publication in a local newspaper is commercially reasonable. If any notification
of intended  disposition  of any of the  Collateral  is  required  by law,  such
notification,  if mailed,  shall be deemed reasonably and properly given if sent
at least ten (10) days before  such  disposition,  by first class mail,  postage
prepaid,  addressed to the Debtor  either at the address set forth in the notice
section hereof,  or at any other address of the Debtor  appearing on the records
of Secured Party.

                  (c) TO THE EXTENT PERMITTED BY LAW, DEBTOR AGREES THAT SECURED
PARTY SHALL,  UPON THE  OCCURRENCE OF ANY SECURITY  AGREEMENT  EVENT OF DEFAULT,
HAVE THE RIGHT TO  PEACEFULLY  RETAKE ANY OF THE  COLLATERAL.  DEBTOR WAIVES ANY
RIGHT  IT MAY  HAVE,  IN SUCH  INSTANCE,  TO A  JUDICIAL  HEARING  PRIOR TO SUCH
RETAKING.

<PAGE>

         8.  INDEMNITY.  In addition to the  indemnities set forth in the Lease,
Debtor  shall  protect  (except  to the  extent  same  is  caused  by the  gross
negligence or wilful  misconduct of Secured Party),  indemnify and hold harmless
Secured Party and its officers, employees, directors and agents from and against
all liabilities,  obligations, claims, damages, penalties, causes of action, and
out-of-pocket  costs and expenses  whatsoever  (including,  without  limitation,
reasonable attorneys' fees and expenses) imposed upon or incurred by or asserted
against Secured Party or its officers, employees, directors or agents, by reason
of the ownership,  use,  construction and operation of the Collateral by Debtor,
its  officers,  directors,  servants,  agents  and  employees  or by  reason  of
enforcement of Secured  Party's rights  hereunder or under the Lease. As used in
this Security  Agreement,  the term "attorneys'  fees" includes fees incurred in
any  appeal  and/or  enforcement  proceedings.  In  case  any  action,  suit  or
proceeding is brought  against  Secured Party by reason of any such  occurrence,
Debtor,  upon request of Secured  Party,  shall at Debtor's  expense  cause such
action,  suit or proceeding  to be resisted and defended by counsel  approved by
Secured Party with respect to proceedings and matters  involving  Secured Party.
Any amounts  payable to Secured  Party  under this  Section 8 which are not paid
within thirty (30) days after written demand therefor shall bear interest at the
Overdue Rate as  specified  in the Lease from the date of such demand,  and such
amounts,  together with such  interest,  shall be  indebtedness  secured by this
Security Agreement.  The obligations of Secured Party under this Section 8 shall
survive the  expiration  or earlier  termination  of the Term of the Lease for a
period of three (3) years;  provided,  however,  if Secured  Party has delivered
notice to Debtor of a claim or  potential  claim under this  Section 8, then the
obligations  of Debtor shall be extended with respect to such claim or potential
claim until the final resolution of such claim or potential claim by the parties
thereto.

         9.  CONCERNING  REVISED ARTICLE 9 OF THE UNIFORM  COMMERCIAL  CODE. The
parties  acknowledge  and agree to the  following  provisions  of this  Security
Agreement  in  anticipation  of  the  possible  application,   in  one  or  more
jurisdictions to the transactions  contemplated hereby, of the revised Article 9
of the Uniform Commercial Code in the form or substantially in the form approved
in  1998  by  the  American  Law  Institute  and  the  National   Conference  of
Commissioners on Uniform State Law ("Revised Article 9").

                  (a)  Attachment.  In applying the law of any  jurisdiction  in
which  Revised  Article 9 is in  effect,  the  Collateral  is all  assets of the
Debtor,  whether or not within  the scope of Revised  Article 9. The  Collateral
shall include,  without  limitation and without  limitation to the Collateral as
defined herein, the following categories of assets as defined in Revised Article
9:  goods  (including   inventory,   equipment  and  any  accessions   thereto),
instruments  (including  promissory  notes),   documents,   accounts  (including
health-care-insurance   receivables),   chattel  paper   (whether   tangible  or
electronic),  deposit  accounts,  letter-of-credit  rights  (whether  or not the
letter of credit is evidenced by a writing),  commercial tort claims, securities

<PAGE>

and all  other  investment  property,  general  intangibles  (including  payment
intangibles  and software),  supporting  obligations and any and all proceeds of
any thereof,  wherever located, whether now owned and hereafter acquired. If the
Debtor,  or any of them, shall at any time,  whether or not Revised Article 9 is
in effect in any particular  jurisdiction,  acquire a commercial tort claim with
respect to a Facility, as defined in Revised Article 9, Debtor shall immediately
notify the Secured Party, in a writing signed by Debtor,  of the details thereof
and grant to Secured  Party in such writing a security  interest  therein and in
the proceeds thereof,  all upon the terms of this Security Agreement,  with such
writing to be in form and substance satisfactory to Secured Party.

                  (b)  Perfection  by Filing.  Secured Party may at any time and
from time to time, pursuant to the provisions of this Agreement,  file financing
statements,  continuation  statements and  amendments  thereto that describe the
Collateral as all assets of Debtor or words of similar  effect and which contain
any  other  information  required  by  Part  5 of  Revised  Article  9  for  the
sufficiency or filing office acceptance of any financing statement, continuation
statement or amendment,  including  whether that Debtor is an organization,  the
type of organization and any organization identification number(s) issued to the
Debtor.  Debtor agrees to furnish any such information to Secured Party promptly
upon  request.  Any  such  financing  statements,   continuation  statements  or
amendments  may be signed by Secured  Party on behalf of Debtor,  as provided in
this Agreement,  and may be filed at any time in any jurisdiction whether or not
Revised Article 9 is then in effect in that jurisdiction.

                  (c) Other  Perfection,  etc. Debtor shall at any time and from
time to time,  whether or not Revised  Article 9 is in effect in any  particular
jurisdiction,  take such  steps as  Secured  Party may  reasonably  request  for
Secured  Party  (a)  to  obtain  an   acknowledgment,   in  form  and  substance
satisfactory  to Secured  Party,  of any bailee having  possession of any of the
Collateral  that the bailee  holds such  Collateral  for Secured  Party,  (b) to
obtain "control" of any investment property, deposit accounts,  letter-of-credit
rights or electronic chattel paper (as such terms are defined in Revised Article
9 with  corresponding  provisions in Rev.  ss.ss.9-104,  9-105,  9-106 and 9-107
relating to what constitutes  "control" for such items of Collateral),  with any
agreements  establishing  control to be in form and  substance  satisfactory  to
Secured Party, and (c) otherwise to insure the continued perfection and priority
of  Secured  Party's  security  interest  in any of  the  Collateral  and of the
preservation  of its rights therein,  whether in anticipation  and following the
effectiveness of Revised Article 9 in any jurisdiction.

                  (d) Savings Clause.  Nothing contained in this Section 9 shall
be construed to narrow the scope of Secured Party's security  interest in any of
the Collateral or the  perfection or priority  thereof or to impair or otherwise
limit any of the rights, powers,  privileges or remedies of Secured Party except
(and then only to the extent)  mandated by Revised  Article 9 to the extent then
applicable.
<PAGE>

                  (e) Nothing  contained in this Section 9 shall be construed as
granting a security  interest in any assets of Debtor,  except  assets which are
located at or are used exclusively in connection with, or which arise from or in
connection with Debtor's use and operation of, the Facilities.

         10.      GENERAL

                  (a) Time shall be deemed of the essence  with  respect to this
Security Agreement.

                  (b) Secured Party shall be deemed to have exercised reasonable
care in the custody and  preservation  of any Collateral in its possession if it
takes such action for that purpose as Debtor requests in writing, but failure of
Secured  Party to comply with any such  request  shall not of itself be deemed a
failure to exercise  reasonable  care.  Failure of Secured  Party to preserve or
protect any rights with  respect to such  Collateral  against any prior  parties
shall not be deemed a failure to  exercise  reasonable  care in the  custody and
preservation of such Collateral.

                  (c) Any delay on the part of Secured Party in  exercising  any
power,  privilege or right under the Lease, this Security Agreement or under any
other instrument or document executed by Debtor in connection herewith shall not
operate as a waiver  thereof.  No single or  partial  exercise  thereof,  or the
exercise of any other power,  privilege or right shall preclude other or further
exercise  thereof,  or the exercise of any other power,  privilege or right. The
waiver by Secured  Party of any default by Debtor shall not  constitute a waiver
of any subsequent defaults but shall be restricted to the default so waived.

                  (d) All rights, remedies and powers of Secured Party hereunder
are irrevocable and cumulative,  and not alternative or exclusive,  and shall be
in  addition  to all  rights,  remedies  and  power is given by the Lease or the
Commercial Code, or any other applicable laws now existing or hereafter enacted.

                  (e)  Whenever  the  singular  is used  hereunder,  it shall be
deemed to include the plural (and vice-versa), and reference to one gender shall
be  construed  to include all other  genders,  including  neuter,  whenever  the
context of this  Security  Agreement so requires.  Section  captions or headings
used in this Security Agreement are for convenience and reference only and shall
not affect the construction thereof.

                  (f)  Whenever   possible  each   provision  of  this  Security
Agreement shall be interpreted in such manner as to be effective and valid under
applicable  law,  but if any  provision  of this  Security  Agreement  shall  be
prohibited  by  or  invalid  under  applicable  law,  such  provision  shall  be
ineffective  to  the  extent  of  such   prohibition   or  invalidity,   without
invalidating the remainder of such provision or the remaining provisions of this
Security Agreement.
<PAGE>

                  (g)  This  Security  Agreement  may be  executed  in  multiple
counterparts,  each of which shall be  considered  an original but all of which,
when taken together, shall constitute one agreement.

                  (h) The rights and privileges of Secured Party hereunder shall
inure to the benefit of its successors and assigns,  and this Security Agreement
shall be binding on all assigns  and  successors  of Debtor as may be  permitted
under the Lease.

                  (i) In the  event  of any  action  to  enforce  this  Security
Agreement  or  to  protect  the  security  interest  of  Secured  Party  in  the
Collateral,  or to protect,  preserve,  maintain,  process,  assemble,  develop,
insure,  market or sell any Collateral,  Debtor agrees to pay the costs owed and
expenses  thereof,  together with  reasonable  and  documented  attorneys'  fees
(including fees incurred in appeals and post judgment enforcement proceedings).

                  (j) THIS SECURITY AGREEMENT SHALL BE CONSTRUED, AND THE RIGHTS
AND  OBLIGATIONS  OF THE  DEBTOR  AND  SECURED  PARTY  SHALL BE  DETERMINED,  IN
ACCORDANCE  WITH THE LAWS OF THE STATE OF MICHIGAN,  EXCEPT THAT THE LAWS OF THE
STATE WHERE THE  COLLATERAL IS LOCATED SHALL GOVERN THIS SECURITY  AGREEMENT (A)
TO THE EXTENT  NECESSARY  TO PERFECT  AND/OR  ENFORCE THE LIENS  CREATED BY THIS
SECURITY  AGREEMENT  AND TO THE EXTENT  NECESSARY  TO OBTAIN THE  BENEFIT OF THE
RIGHTS AND REMEDIES SET FORTH HEREIN WITH RESPECT TO THE COLLATERAL, AND (B) FOR
PROCEDURAL  REQUIREMENTS THAT MUST BE GOVERNED BY THE LAWS OF THE STATE IN WHICH
THE COLLATERAL IS LOCATED.

                  (k) DEBTOR  CONSENTS  TO IN PERSONAM  JURISDICTION  BEFORE THE
STATE AND  FEDERAL  COURTS OF THE STATE IN WHICH THE  COLLATERAL  IS LOCATED AND
MICHIGAN  AND AGREES THAT ALL DISPUTES  CONCERNING  THIS  SECURITY  AGREEMENT BE
HEARD IN THE  STATE  AND  FEDERAL  COURTS  LOCATED  IN THE  STATE  IN WHICH  THE
COLLATERAL IS LOCATED OR IN MICHIGAN.  DEBTOR AGREES THAT SERVICE OF PROCESS MAY
BE EFFECTED UPON IT UNDER ANY METHOD  PERMISSIBLE UNDER THE LAWS OF THE STATE IN
WHICH THE COLLATERAL IS LOCATED OR MICHIGAN,  AND DEBTOR  IRREVOCABLY WAIVES ANY
OBJECTION  TO VENUE IN THE  STATE AND  FEDERAL  COURTS OF THE STATE IN WHICH THE
COLLATERAL IS LOCATED AND MICHIGAN.

                  (l) No amendment to this Security Agreement shall be effective
unless the same shall be in writing and signed by the parties.

                  (m) Nothing  contained herein shall be construed as in any way
modifying or limiting the effect of terms or conditions  set forth in the Lease,
but each and every term and condition hereof shall be in addition thereto.
<PAGE>

                  (n) All notices  required or permitted  to be given  hereunder
shall be given and deemed effective as provided in the Lease. The parties hereby
agree that a notice sent as specified  in this  paragraph at least ten (10) days
before the date of any intended  public sale or the date after which any private
sale or other  intended  disposition  of the  Collateral  is to be made shall be
deemed to be reasonable notice of such sale or other disposition.

                  (o) Upon the full payment,  satisfaction  and discharge of the
Liabilities  herein secured,  the security  interests  provided for herein shall
terminate  and Secured  Party shall file,  register or record UCC-3  termination
statements  or  other   appropriate   evidence  of  such  termination  with  the
appropriate  filing  offices in all  jurisdictions  necessary  to evidence  such
termination of the security interests herein provided.

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


                           SECURED PARTY:

                           STERLING ACQUISITION CORP.


                         By:
                             --------------------
                         Its:

                            DEBTOR:

                            DIVERSICARE LEASING CORP.


                         By:
                             -----------------------

                         Its:



<PAGE>





                                   SCHEDULE 1



DEBTOR:                           DIVERSICARE LEASING CORP.


SECURED PARTY:                    STERLING ACQUISITION CORP.


FACILITIES:

Alabama

Canterbury Health Facility
1720 Knowles Road
Phenix City, Alabama 36869
Russell County

Lynwood Nursing Home
4164 Halls Mills Road
Mobile, Alabama 36693
Mobile County

Northside Healthcare
700 Hutchins Avenue
Gadsden, Alabama 35904
Etowah County

Westside Healthcare
4320 Judith Lane
Huntsville, Alabama 35805
Madison County

Arkansas

Ash Flat Nursing and Rehabilitation Center
HC 67, Box 5A
Ash Flat, Arkansas 72513
Sharp County

<PAGE>

Des Arc Nursing and Rehabilitation Center
2216 West Main Street
Des Arc, Arkansas 72040
Prairie County

Eureka Springs Nursing and Rehabilitation Center
235 Huntsville Road
Eureka Springs, Arkansas 72632
Carroll County

Faulkner Nursing and Rehabilitation Center
2603 Dave Ward Drive
Conway, Arkansas 72032
Faulkner County

Garland Nursing and Rehabilitation Center
610 Carpenter Dam Road
Hot Springs, Arkansas 71901
Garland County

Ouachita Nursing and Rehabilitation Center
1411 Country Club Road
Camden, Arkansas 71701
Ouachita County

The Pines Nursing and Rehabilitation Center
534 Carpenter Dam Road
Hot Springs, Arkansas 71901
Garland County

Pocahontas Nursing and Rehabilitation Center
105 Country Club Road
Pocahontas, Arkansas 72455
Randolph County

Rich Mountain Nursing and Rehabilitation Center
306 Hornbeck
Mena, Arkansas 71953
Polk County

Sheridan Nursing and Rehabilitation Center
113 South Briarwood Drive
Sheridan, Arkansas 72150
Grant County
<PAGE>

Stillmeadow Nursing and Rehabilitation Center
105 Russelville Road
Malvern, Arkansas 72104
Hot Spring County

Walnut Ridge Nursing and Rehabilitation Center
1500 West Main
Walnut Ridge, Arkansas 72476
Lawrence County

Kentucky

Boyd Nursing and Rehabilitation
12800 Princeland Drive
Ashland, Kentucky 41102
Boyd County

Carter Nursing and Rehabilitation Center
P.O. Box 904 (250 McDavid Boulevard)
Grayson, Kentucky 41143
Carter County

Elliott Nursing and Rehabilitation Center
P.O. Box 694 (Route 32 East, Howard Creek Road)
Sandy Hook, Kentucky 41171
Elliott County

South Shore Nursing and Rehabilitation Center
P.O. Box 489 (James Hannah Drive)
South Shore, Kentucky 41175
Greenup County

West Liberty Nursing and Rehabilitation Center
P.O. Box 219 (774 Liberty Road)
West Liberty, Kentucky 41472
Morgan County

Wurtland Health Care Center
P.O. Box 677 (100 Wurtland Avenue)
Greenup, Kentucky 41144
Greenup County
<PAGE>

Ohio


Best Care
2159 Dogwood Ridge
Wheelersburg, Ohio 45694
Scioto County

Tennessee

Laurel Manor Health Care Facility
902 Buchanan Road
New Tazwell, Tennessee 37825
Claiborne County

Manor House of Dover
Highway 49 East, P.O. Box 399
Dover, Tennessee 37058
Stewart County

Mayfield Rehabilitation and Special Care Center
200 Mayfield Drive
Smyrna, Tennessee 37167
Rutherford County


<PAGE>





                                    EXHIBIT A

                     FORM OF EXHIBIT TO FINANCING STATEMENT


Debtor:                             DIVERSICARE LEASING CORP.

Secured Party:                    STERLING ACQUISITION CORP.


                            Description of Collateral

        All personal  property of Debtor described  below,  which it now owns or
shall hereafter acquire or create,  immediately upon the acquisition or creation
thereof and wherever situated, including, without limitation, the following:


         (a) Accounts. To the extent permitted by law, all accounts, Health Care
Insurance  Receivables (as defined in Revised Article 9, hereinafter  deferred),
accounts  receivable,   deposits,  prepaid  items,  documents,   chattel  paper,
instruments, contract rights (including rights under any management agreement or
franchise agreement with respect to the Facilities), general intangibles, choses
in  action,  including  any  right  to any  refund  of  any  taxes  paid  to any
governmental  authority  prior to or after the date of this  Agreement,  and all
ledgers, printouts, papers, data, file materials and information relating to any
account  debtors in respect  thereof,  and/or to the  operation  of the Debtor's
business  relating  to the  Facilities,  and all rights of access to such books,
records,  ledgers,  printouts,  data,  file materials and  information,  and all
property in which such books, records, ledgers,  printouts, data, file materials
and information are stored (the "Accounts"); and

         (b)  Certificates  of  Need.  To  the  extent  permitted  by  law,  all
Certificates  of Need now or hereafter  issued in connection with the Facilities
(the "Certificates"); and

         (c) Equipment.  All equipment,  furniture,  fixtures and other personal
property used in connection  with the operation of the  Facilities,  whether now
owned or hereafter acquired by Debtor, together with all accessions,  additions,
parts,  attachments,  accessories,  or appurtenances  thereto  including but not
limited to linens,  motor vehicles,  furniture,  fixtures and movable equipment,
leasehold  improvements,  and all  books  and  records  now  owned or  hereafter
acquired  pertaining to any of the above described  property other than Debtor's
Personal Property,  but specifically  excluding any computer readable memory and
any  computer  hardware or (except as set forth  herein)  software  necessary to
process such memory (the "Equipment") and

         (d)      Insurance  Rights.  All rights  under  contracts of  insurance
now owned or  hereafter  acquired covering any of the Collateral ("Insurance
Rights"); and
<PAGE>

         (e)  Inventory.  All  inventory  and  goods,  now  owned  or  hereafter
acquired, including but not limited to, raw materials, work in process, finished
goods, food, medicines, tangible property, stock in trade, wares and merchandise
used in or sold in the  ordinary  course  of  business  at the  Facilities  (the
"Inventory"); and

         (f)  Medicaid.   To  the  extent   permitted  by  law,  all  rights  to
reimbursement under that certain program of medical  assistance,  funded jointly
by the federal government and the states,  for impoverished  individuals who are
aged, blind and/or disabled, and/or members of families with dependent children,
which  program is more fully  described in Title XIX of the Social  Security Act
(42 U.S.C. ss.ss. 1396 et seq.) and the regulations promulgated thereunder; and

         (g)  Medicare.   To  the  extent   permitted  by  law,  all  rights  to
reimbursements under that certain federal program providing health insurance for
eligible  elderly  and other  individuals,  under which  physicians,  hospitals,
skilled nursing homes,  home health care, and other providers are reimbursed for
certain  covered  services  they provide to the  beneficiaries  of such program,
which program is more fully  described in Title XVIII of the Social Security Act
(42 U.S.C. ss.ss. 1395 et seq.) and the regulations promulgated thereunder; and

         (h) Other  Property.  All other  tangible  and  intangible  property of
Debtor now or  hereinafter  acquired by Debtor and located at the  Facilities or
used  exclusively in connection with the operation of the Facilities,  including
without  limitation,  but specifically  excluding  Debtor's  continuous  quality
improvement  program,  manuals and materials;  management  information  systems;
policy, procedure and educational manuals and materials; and similar proprietary
property including any right to the use of the name "Diversicare"' and

         (i) Patient  Agreements.  To the extent  permitted  by law, any and all
contracts,  authorizations,  agreements  or consents made by or on behalf of any
patient or resident of any of the  Facilities,  or any other  person  seeking or
obtaining  services  or goods from  Debtor,  pursuant to which  Debtor  provides
skilled nursing care,  intermediate  care,  personal care and/or assisted living
facilities,  or any form of  patient  or  residential  care,  as well as related
services at any of the Facilities (as such contracts, authorizations, agreements
or  consents  may be  amended,  supplemented,  renewed,  replaced,  extended  or
modified from time to time);  including consents to treatment and assignments of
payment of benefits (collectively, the "Patient Agreements");and

         (j) Permits. To the extent permitted by law, (i) the operating licenses
for each of the Facilities,  any certificate of need, any other license, permit,
approval or certificate which from time to time, may be issued or is required to
be issued by the United States, any state or local government,  or any agency or
instrumentality  of any of  the  foregoing  with  respect  to the  construction,
installation  or operation of any of the  Facilities or any portion or component
of any of the Facilities, the providing of any professional or other services by

<PAGE>

the Debtor,  the purchase,  sale,  dispensing,  storage,  prescription or use of
drugs,  medications or the like by Debtor, or any other operations or businesses
of Debtor; and (ii)  certifications and eligibility for participation by Debtor,
in  respect  of  its  operation  of  any  of  the  Facilities,  in  programs  or
arrangements of or reimbursement from any third-party payors, including Medicare
and Medicaid;  and (iii) all other  licenses  permits and  certificates  used or
useful in connection with the ownership,  operation,  use or occupancy of any of
the Facilities (collectively, the "Permits"); and

         (k) Investment  Property.  All  Investment  Property (as defined in the
Uniform  Commercial  Code),  other  than a  security,  whether  certificated  or
uncertificated, in a subsidiary or affiliate of Debtor; and,

         (l) Proceeds.  Proceeds arising out of the operation of the Facilities,
including,  without  limitation,  proceeds of hazard or other insurance policies
and eminent domain or  condemnation  awards,  of all of the foregoing  described
Inventory or Equipment,  together with any and all deposits or other sums at any
time  credited  by or  due  from  Secured  Party  to  Debtor  and  any  and  all
instruments,  documents,  policies and  certificates  of insurance,  securities,
goods, accounts receivable,  choses in action, chattel paper, cash, property and
the proceeds thereof (whether or not the same are Collateral or Proceeds thereof
hereunder) owned by Debtor or in which Debtor has an interest,  which are now or
at any time  hereafter in possession or under the control of Secured Party or in
transit by mail or carrier to or from Secured Party or in the  possession of any
third party acting on behalf of Secured Party, without regard to whether Secured
Party received the same in pledge,  for safekeeping,  as agent for collection or
transmission or otherwise,  or whether Secured Party has conditionally  released
the same (the "Proceeds"); and

         (m) Reimbursement Contracts. To the extent permitted by law, all rights
to  third-party  reimbursement  contracts  for the  Facilities  which are now or
hereafter  in effect  with  respect to  residents  or  patients  qualifying  for
coverage under the same, including Medicare and Medicaid, managed care plans and
private  insurance  agreements,  and any  successor  program  or  other  similar
reimbursement  program and/or  private  insurance  agreements,  now or hereafter
existing; and

         (n) Rights.  All rights,  remedies,  powers and/or privileges of Debtor
with respect to any of the foregoing.

        Except as stated above,  the term Collateral  does not include  Debtor's
Personal  Property (as defined in the Security  Agreement of even date  herewith
between  Secured  Party and Debtor  related to that  certain  Lease of even date
herewith between Secured Party, as lessor, and Debtor, as lessee).

<PAGE>
                                   EXHIBIT D

                                FORM OF GUARANTY


         This  GUARANTY   ("Guaranty")   is   given  as  of  November    ,  2000
("Effective Date"), by ADVOCAT,  INC., a Delaware corporation,  whose address is
277 Mallory  Station  Road,  Suite 130,  Franklin,  Tennessee  37067("Advocat"),
ADVOCAT FINANCE, INC. , a Delaware corporation  ("Finance") whose address is 277
Mallory  Station Road,  Suite 130,  Franklin,  Tennessee  37067 and  DIVERSICARE
MANAGEMENT SERVICES CO., a Tennessee corporation ("Management") whose address is
277 Mallory  Station Road,  Suite 130,  Franklin,  Tennessee  37067(jointly  and
severally  the   "Guarantors"   and   individually   referred  to  herein  as  a
"Guarantor"),  in favor of STERLING  ACQUISITION  CORP., a Kentucky  corporation
("Lessor")  whose  address is 900 Victors Way,  Suite 350,  Ann Arbor,  Michigan
48108, with reference to the following facts:

                                    RECITALS

         A.  Diversicare  Leasing Corp., a Delaware  corporation (the "Lessee"),
has executed and delivered to Lessor a Consolidated  Amended and Restated Master
Lease dated of even date  herewith  (the "Master  Lease")  pursuant to which the
Lessee is leasing from Lessor certain healthcare  facilities  identified therein
(the "Facilities").

         B. By a guaranty  dated May ___,  1994 and by an amended  and  restated
guaranty dated February 1, 1997, Advocat  guaranteed certain  obligations of the
Lessee and certain predecessors in interest as set forth therein.

         C. By a guaranty dated  February 1, 1997,  Finance  guaranteed  certain
obligations  of the Lessee and  certain  predecessors  in  interest as set forth
therein.

         D. By a guaranty dated February 1, 1997,  Management guaranteed certain
obligations  of the Lessee and  certain  predecessors  in  interest as set forth
therein.

         E.   Pursuant  to  Section  19(B)  of  that  certain   Settlement   and
Restructuring Agreement by and among Lessor, Omega Healthcare Investors, Inc., a
Maryland corporation,  Advocat,  Management, and Sterling Health Care Management
Corporation,  a  Kentucky  corporation  of even date  herewith,  and only to the
extent set forth therein,  Lessor released Advocat,  Finance and Management from
liability under those guarantees described above.

         F. Each Guarantor  continues to maintain a direct financial interest in
the Lessee and it is to the advantage of each  Guarantor  that Lessor enter into
the Master Lease.

         G. As a material  inducement to Lessor to lease the Facilities pursuant
to the  Master  Lease,  each  Guarantor  has  agreed to  jointly  and  severally
guarantee  the  payment of all  amounts  due from,  and the  performance  of all
obligations  undertaken  by the Lessee  under the Master  Lease and any security
agreements,  promissory notes, letter of credit agreements,  guarantees or other
documents  which evidence,  secure or otherwise  relate to the Master Lease (the
Master Lease and all such documents, and any and all amendments,  modifications,
extensions and renewals thereof, are hereinafter referred to collectively as the
"Sterling Transaction Documents"), all as hereinafter set forth.
<PAGE>

         WHEREFORE, the parties hereby agree as follows:

         1.  Defined Terms.  All  capitalized  terms used herein and not defined
herein shall have the meaning for such terms set forth in the Master Lease.

         2. Guaranty. Guarantors hereby unconditionally and irrevocably, jointly
and severally,  guarantee to Lessor (i) the payment when due of all Rent and all
other sums payable by the Lessee under the Master  Lease,  and (ii) the faithful
and prompt  performance when due of each and every one of the terms,  conditions
and  covenants  to be kept  and  performed  by the  Lessee  under  the  Sterling
Transaction  Documents,  any and all amendments,  modifications,  extensions and
renewals of the Sterling Transaction Documents, including without limitation all
indemnification  obligations,  insurance  obligations,  and all  obligations  to
operate,  rebuild,  restore or replace any  facilities  or  improvements  now or
hereafter  located on the real estate covered by the Master Lease.  In the event
of the failure of Lessee to pay any such  amounts  owed,  or to render any other
performance  required of Lessee under the Sterling Transaction  Documents,  when
due,  Guarantors shall forthwith perform or cause to be performed all provisions
of the Sterling Transaction Documents to be performed by Lessee thereunder,  and
pay all  damages  that may result from the  non-performance  thereof to the full
extent  provided under the Sterling  Transaction  Documents  (collectively,  the
"Obligations").  As to the Obligations,  each  Guarantor's  liability under this
Guaranty is without limit.

         3. Survival of Obligations.  The  obligations of Guarantors  under this
Guaranty with respect to the Sterling  Transaction  Documents  shall survive and
continue in full force and effect (until and unless all Obligations, the payment
and  performance  of which  are  hereby  guaranteed,  have been  fully  paid and
performed) notwithstanding:

         (a)      any amendment, modification, or extension of any Sterling
                  Transaction Document;

         (b)      any compromise,  release,  consent,  extension,  indulgence or
                  other  action  or  inaction  in  respect  of any  terms of any
                  Sterling Transaction Document or any other guarantor;

         (c)      any  substitution  or  release,  in whole  or in part,  of any
                  security for this Guaranty which Lessor may hold at any time;

         (d)      any exercise or non-exercise by Lessor of any right,  power or
                  remedy  under  or  in  respect  of  any  Sterling  Transaction
                  Document or any security held by Lessor with respect  thereto,
                  or any waiver of any such right, power or remedy;

         (e)      any  bankruptcy,  insolvency,   reorganization,   arrangement,
                  adjustment, composition, liquidation, or the like of Lessee or
                  any other guarantor;

         (f)      any  limitation of the Lessee's  liability  under any Sterling
                  Transaction   Document  or  any  limitation  of  the  Lessee's
                  liability  thereunder which may now or hereafter be imposed by
                  any  statute,  regulation  or rule of law, or any  illegality,
                  irregularity,  invalidity or unenforceability,  in whole or in
                  part,  of  any  Sterling  Transaction  Document  or  any  term
                  thereof;
<PAGE>

         (g)      any  sale,  lease,  or  transfer  of all or  any  part  of any
                  interest in any Facility to any other  person,  firm or entity
                  other than to Lessor;

         (h)      any act or  omission  by  Lessor  with  respect  to any of the
                  security  instruments  given or made as a part of the Sterling
                  Transaction  Documents  or any  failure  to  file,  record  or
                  otherwise perfect any of the same;

         (i)      any  extensions  of time for  performance  under the  Sterling
                  Transaction Documents, whether prior to or after maturity;

         (j)      the  release  of any  collateral  from  any  lien in  favor of
                  Lessor,   or  the  release  of  Lessee  from   performance  or
                  observation  of any of the  agreements,  covenants,  terms  or
                  conditions  contained in any Sterling  Transaction Document by
                  operation of law or otherwise;

         (k)      the fact that Lessee may or may not be personally  liable,  in
                  whole or in part, under the terms of any Sterling  Transaction
                  Document to pay any money judgment;

         (l)      the failure to give Guarantors any notice of acceptance,
                  default or otherwise;

         (m)      any other guaranty now or hereafter  executed by Guarantors or
                  anyone  else  in  connection  with  any  Sterling  Transaction
                  Document;

         (n)      any rights,  powers or privileges  Lessor may now or hereafter
                  have against any other person, entity or collateral; or

         (o)      any other circumstances,  whether or not Guarantors had notice
                  or knowledge thereof, other than the payment or performance of
                  all of the Obligations.

         4. Primary  Liability.  The liability of Guarantor  with respect to the
Sterling Transaction Documents shall be joint and several,  primary,  direct and
immediate, and Lessor may proceed against any Guarantor: (i) prior to or in lieu
of proceeding  against Lessee,  its assets,  any security deposit,  or any other
guarantor; and (ii) prior to or in lieu of pursuing any other rights or remedies
available  to Lessor.  All rights and  remedies  afforded to Lessor by reason of
this  Guaranty  or by law are  separate,  independent  and  cumulative,  and the
exercise  of any  rights or  remedies  shall not in any way limit,  restrict  or
prejudice the exercise of any other rights or remedies.

         In the event of any default under any Sterling Transaction  Document, a
separate action or actions may be brought and prosecuted against the Guarantors,
or any one of them, whether or not Lessee is joined therein or a separate action
or actions are brought against Lessee.  Lessor may maintain  successive  actions
for other  defaults.  Lessor's  rights  hereunder  shall not be exhausted by its
exercise of any of its rights or remedies or by any such action or by any number
of successive  actions until and unless all  indebtedness  and  obligations  the
payment and performance of which are hereby  guaranteed have been paid and fully
performed.
<PAGE>

         5.  Obligations  Not Affected.  In such manner,  upon such terms and at
such times as Lessor in its sole discretion  deems  necessary or expedient,  and
without  notice  to  Guarantors,  Lessor  may:  (a)  amend,  alter,  compromise,
accelerate,  extend  or  change  the  time  or  manner  for the  payment  or the
performance of any obligation hereby guaranteed;  (b) extend, amend or terminate
any of the Sterling Transaction  Documents;  or (c) release Lessee by consent to
any assignment (or otherwise) as to all or any portion of the obligations hereby
guaranteed.  Any  exercise or  non-exercise  by Lessor of any right hereby given
Lessor, dealing by Lessor with Guarantors or any other guarantor,  Lessee or any
other  person,  or change,  impairment,  release or  suspension  of any right or
remedy of Lessor  against any person  including  Lessee and any other  guarantor
will  not  affect  any  of the  obligations  of  Guarantors  hereunder  or  give
Guarantors any recourse or offset against Lessor.

         6. Waiver.  With respect to the Sterling  Transaction  Documents,  each
Guarantor  hereby waives and  relinquishes  all rights and remedies  accorded by
applicable law to sureties and/or guarantors or any other accommodation parties,
under any statutory provisions, common law or any other provision of law, custom
or  practice,  and agrees not to assert or take  advantage of any such rights or
remedies including, but not limited to:

         (a)      any right to require  Lessor to proceed  against Lessee or any
                  other  person or to proceed  against or exhaust  any  security
                  held by Lessor at any time or to  pursue  any other  remedy in
                  Lessor's power before  proceeding  against any Guarantor or to
                  require that Lessor cause a marshaling  of Lessee's  assets or
                  the assets,  if any,  given as collateral for this Guaranty or
                  to proceed  against  Lessee and/or any  collateral,  including
                  collateral,  if any,  given to secure  Guarantors'  obligation
                  under  this  Guaranty,  held by  Lessor  at any time or in any
                  particular order;

         (b)      any defense that may arise by reason of the incapacity or lack
                  of authority of any other person or persons;

         (c)      notice of the  existence,  creation or incurring of any new or
                  additional  indebtedness  or  obligation  or of any  action or
                  non-action  on the part of Lessee,  Lessor,  any  creditor  of
                  Lessee or any  Guarantor  or on the part of any  other  person
                  whomsoever  under this or any other  instrument  in connection
                  with any obligation or evidence of indebtedness held by Lessor
                  or in connection with any obligation hereby guaranteed;

         (d)      any defense based upon an election of remedies by Lessor which
                  destroys  or  otherwise  impairs  the  subrogation  rights  of
                  Guarantors  or the  right of  Guarantors  to  proceed  against
                  Lessee for reimbursement, or both;
<PAGE>

         (e)      any  defense  based  upon  any  statute  or rule of law  which
                  provides  that  the  obligation  of a surety  must be  neither
                  larger in amount nor in other  respects more  burdensome  than
                  that of the principal;

         (f)      any duty on the part of Lessor to disclose to  Guarantors  any
                  facts  Lessor  may  now  or  hereafter  know about the Lessee,
                  regardless  of whether  Lessor has reason to believe  that any
                  such  facts  materially  increase  the  risk beyond that which
                  each  Guarantor  intends  to  assume or has reason to  believe
                  that   such   facts  are   unknown  to  Guarantors  or  has  a
                  reasonable  opportunity   to   communicate  such   facts   to
                  Guarantors,   it   being   understood  and  agreed  that  each
                  Guarantor is fully  responsible for being and keeping informed
                  of   the  financial   condition  of  the  Lessee  and  of  all
                  circumstances   bearing   on   the  risk   of  non-payment  or
                  non-performance  of  any  obligations  or indebtedness  hereby
                  guaranteed;

         (g)      any  defense  arising  because of  Lessor's  election,  in any
                  proceeding  instituted  under the federal  Bankruptcy Code, of
                  the   application  of  Section  1111  (b)(2)  of  the  federal
                  Bankruptcy Code; and

         (h)      any  defense  based on any  borrowing  or grant of a  security
                  interest under Section 364 of the federal Bankruptcy Code.

         (i)      any extension of time conferred by any law now or hereafter in
                  effect and any  requirement  or notice of  acceptance  of this
                  Guaranty or any other notice to which the  undersigned may now
                  or  hereafter  be entitled to the extent such waiver of notice
                  is permitted by applicable law.

         7. Warranties. With respect to the Sterling Transaction Documents, each
Guarantor warrants that: (a) this Guaranty is executed at Lessee's request;  and
(b)  Guarantor  has  established  adequate  means of obtaining  from Lessee on a
continuing  basis  financial  and other  information  pertaining to the Lessee's
financial  condition.  Guarantors  agree to keep  adequately  informed from such
means of any facts,  events or  circumstances  which might in any way affect any
Guarantor's risks hereunder, and Guarantors further agree that Lessor shall have
no obligation to disclose to Guarantors  information or material acquired in the
course of Lessor's relationship with Lessee.

         8.  No-Subrogation.  Guarantors  shall have no right of subrogation and
waive any right to enforce any remedy which Lessor now has or may hereafter have
against Lessee and any benefit of, and any right to participate in, any security
now or hereafter held by Lessor with respect to the Master Lease.

         9. Subordination.  Upon the occurrence of an Event of Default under any
Sterling Transaction Document, which is not cured by Guarantor, the indebtedness
or obligations of Lessee to any Guarantor  shall not be paid in whole or in part
nor will  Guarantors  accept any payment of or on account of any amounts  owing,
without the prior written consent of Lessor and at Lessor's request,  Guarantors
shall  cause the  Lessee to pay to  Lessor  all or any part of the  subordinated
indebtedness until the obligations under the Sterling Transaction Documents have
been paid in full.  Any payment by Lessee in violation of this Guaranty shall be
received by Guarantors in trust for Lessor,  and Guarantors shall cause the same
to be paid to Lessor immediately on account of the amounts owing from the Lessee
to Lessor.  No such payment will reduce or affect in any manner the liability of
Guarantors under this Guaranty.
<PAGE>

         10. No Delay. Any payments required to be made by Guarantors  hereunder
shall become due on demand in accordance with the terms hereof  immediately upon
the happening of an Event of Default under any Sterling Transaction Document.

         11. Application of Payments.  With respect to the Sterling  Transaction
Documents,  and with or without notice to Guarantors,  Lessor,  in Lessor's sole
discretion  and at any time and from  time to time and in such  manner  and upon
such terms as Lessor  deems  appropriate,  may (a) apply any or all  payments or
recoveries from Lessee or from any other guarantor under any other instrument or
realized from any  security,  in such manner and order of priority as Lessor may
determine, to any indebtedness or other obligation of Lessee with respect to the
Sterling  Transaction  Documents and whether or not such  indebtedness  or other
obligation is guaranteed hereby or is otherwise secured or is due at the time of
such application,  and (b) refund to Lessee any payment received by Lessor under
the Sterling Transaction Documents.

           12.      Guaranty Default.

           (a) As used herein,  the term Guaranty Default shall mean one or more
of the following events (subject to applicable cure periods):

                    (i)    the failure of any  Guarantor  to pay the amounts
                           required to be paid  hereunder at the times specified
                           herein;

                    (ii)   the failure of any  Guarantor  to observe and perform
                           any covenants, conditions or agreement on its part to
                           be observed or  performed,  other than as referred to
                           in Subsection (i) above,  for a period of thirty (30)
                           days after  written  notice of such  failure has been
                           given to Guarantors  by Lessor,  unless Lessor agrees
                           in writing to an  extension of such time prior to its
                           expiration;

                    (iii) the  occurrence of a default under any other  guaranty
                          between Lessor and any Guarantor.

        (b) Upon the  occurrence  of a Guaranty  Default,  Lessor shall have the
right  to  bring  such  actions  at  law  or in  equity,  including  appropriate
injunctive  relief,  as it deems  appropriate to compel  compliance,  payment or
deposit,  and  among  other  remedies  to  recover  its  attorneys'  fees in any
proceeding, including any appeal therefrom and any post-judgement proceedings.

        13.   Financial   Statements.   Each   Guarantor   shall  deliver  those
Consolidated  Financial Statements and other certificates as required by Article
XXIII of the Master Lease in the form and at the times set forth therein.
<PAGE>


        14.       Miscellaneous.

        (a) No term,  condition  or  provision  of this  Guaranty  may be waived
except by an express  written  instrument  to that effect  signed by Lessor.  No
waiver of any term,  condition or provision  of this  Guaranty  will be deemed a
waiver of any other term, condition or provision, irrespective of similarity, or
constitute a continuing waiver of the same term, condition or provision,  unless
otherwise expressly provided.

        (b) If any one or more of the terms,  conditions or provisions contained
in this Guaranty is found in a final award or judgment  rendered by any court of
competent  jurisdiction to be invalid,  illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining terms, conditions and
provisions  of this  Guaranty  shall  not in any  way be  affected  or  impaired
thereby, and this Guaranty shall be interpreted and construed as if the invalid,
illegal, or unenforceable term,  condition or provision had never been contained
in this Guaranty.

        (c) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE  WITH
THE LAWS OF THE STATE OF MICHIGAN,  EXCEPT THAT THE LAWS OF THE STATE IN WHICH A
FACILITY IS LOCATED SHALL GOVERN THIS  AGREEMENT TO THE EXTENT  NECESSARY (i) TO
OBTAIN THE BENEFIT OF THE- RIGHTS AND  REMEDIES SET FORTH HEREIN WITH RESPECT TO
SUCH FACILITY,  AND (ii) FOR PROCEDURAL  REQUIREMENTS  WHICH MUST BE GOVERNED BY
THE LAWS OF THE STATE IN WHICH SUCH FACILITY IS LOCATED. EACH GUARANTOR CONSENTS
TO IN PERSONAM  JURISDICTION BEFORE THE STATE AND FEDERAL COURTS OF MICHIGAN AND
AGREES  THAT ALL  DISPUTES  CONCERNING  THIS  GUARANTY BE HEARD IN THE STATE AND
FEDERAL  COURTS  LOCATED  IN THE  STATE OR  STATES  IN  WHICH  THE  FACILITY  OR
FACILITIES  ARE LOCATED OR IN MICHIGAN.  EACH  GUARANTOR  AGREES THAT SERVICE OF
PROCESS MAY BE EFFECTED UPON IT UNDER ANY METHOD  PERMISSIBLE  UNDER THE LAWS OF
THE STATE OR STATES IN WHICH THE FACILITY OR FACILITIES  ARE LOCATED OR MICHIGAN
AND IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF
THE STATE OR STATES IN WHICH THE  FACILITY  OR  FACILITIES  ARE  LOCATED  AND OF
MICHIGAN.

        (d) EACH  GUARANTOR  AND LESSOR HEREBY WAIVE TRIAL BY JURY AND THE RIGHT
THERETO IN ANY ACTION OR PROCEEDING  OF ANY KIND ARISING ON,  UNDER,  OUT OF, BY
REASON OF OR RELATING IN ANY WAY TO THIS GUARANTY OR THE INTERPRETATION,  BREACH
OR ENFORCEMENT THEREOF.

        (e) In the event of any suit, action, arbitration or other proceeding to
interpret  this  Guaranty,  or to determine  or enforce any right or  obligation
created  hereby,  the prevailing  party in the action shall recover such party's
actual  costs  and  expenses  reasonably   incurred  in  connection   therewith,
including,  but not  limited  to,  attorneys'  fees and  costs of  appeal,  post
judgment enforcement  proceedings (if any) and bankruptcy  proceedings (if any).
Any court, arbitrator or panel of arbitrators shall, in entering any judgment or
making any award in any such suit, action,  arbitration or other proceeding,  in
addition to any and all other relief awarded to such prevailing  party,  include
in  such-judgment  or award such party's  costs and expenses as provided in this
paragraph.
<PAGE>

         (f) Each  Guarantor (i)  represents  that it has been  represented  and
advised by counsel in  connection  with the  execution  of this  Guaranty;  (ii)
acknowledges receipt of a copy of the Sterling Transaction Documents;  and (iii)
further  represents  that  Guarantor  has been  advised by counsel  with respect
thereto. This Guaranty shall be construed and interpreted in accordance with the
plain meaning of its language,  and not for or against Guarantors or Lessor, and
as a whole, giving effect to all of the terms, conditions and provisions hereof.

         (g) Except as provided  in any other  written  agreement  now or at any
time  hereafter in force between  Lessor and  Guarantors,  this  Guaranty  shall
constitute  the entire  agreement of Guarantors  with Lessor with respect to the
subject  matter  hereof,  and  no  representation,   understanding,  promise  or
condition  concerning  the subject  matter hereof will be binding upon Lessor or
Guarantors unless expressed herein.

         (h) All stipulations,  obligations,  liabilities and undertakings under
this Guaranty shall be binding upon Guarantors and their  respective  successors
and  assigns  and shall  inure to the  benefit of Lessor  and to the  benefit of
Lessor's successors and assigns.

         (i) The  term  "Guarantor"  as used in this  Guaranty  shall  mean  the
"Guarantor and each of them, jointly and severally.

         (j) Whenever the singular shall be used  hereunder,  it shall be deemed
to include the plural (and  vice-versa)  and  reference  to one gender  shall be
construed to include all other genders,  including neuter,  whenever the context
of this Guaranty so requires.  Section captions or headings used in the Guaranty
are for convenience  and reference  only, and shall not affect the  construction
thereof.

                            [signatures on next page]


<PAGE>





         IN WITNESS  WHEREOF,  the  undersigned has executed this Guaranty as of
the date first written above.

                                   GUARANTORS:

                                  ADVOCAT, INC.


                                  By:
                                      -----------------------
                                  Its:     Executive Vice President



                                 ADVOCAT FINANCE, INC.

                                  By:
                                      -----------------------
                                  Its:     Executive Vice President


                                 DIVERSICARE MANAGEMENT SERVICES CO.


                                  By:
                                      -----------------------
                                  Its:     Executive Vice President

STATE OF ____________)
                                    ) ss.
COUNTY OF _________        )

         The foregoing  instrument was acknowledged before me this _____ day of
November, 2000, by James F. Mills, Jr., the Executive Vice President of Advocat,
Inc. known to me to be the person who executed this Guaranty.




                                    Notary Public, __________ County,
                                    My Commission Expires: _______________


<PAGE>



STATE OF ____________)
                                    ) ss.
COUNTY OF _________        )

         The foregoing  instrument was acknowledged before me this _____ day of
November,  2000, by James F. Mills, Jr.,  the  Executive  Vice  President of
Advocat  Finance,  Inc.  known to me to be the person who  executed  this
Guaranty.




                                     Notary Public, __________ County,
                                     My Commission Expires: _______________



STATE OF ____________)
                                    ) ss.
COUNTY OF _________        )

         The foregoing  instrument was acknowledged before me this _____ day of
November,  2000, by James F. Mills, Jr.,  the  Executive  Vice  President  of
Diversicare  Management  Services  Co.  known to me to be the person who
executed this Guaranty.




                                        Notary Public, __________ County,
                                        My Commission Expires: _______________

<PAGE>

                                   EXHIBIT E


         FORM OF MEMORANDUM OF CONSOLIDATED, AMENDED AND RESTATED LEASE



         THIS LEASE,  made and  entered  into as of October  _____,  2000 by and
between Sterling Acquisition Corp., a Kentucky corporation, having its principal
office at c/o Omega Healthcare Investors,  Inc., 900 Victors Way, Suite 350, Ann
Arbor,  Michigan  48108 as Lessor and  Diversicare  Leasing  Corp.,  a Tennessee
corporation,  having its  principal  office at c/o  Advocat,  Inc.,  277 Mallory
Station Road, Suite 130, Franklin, Tennessee 37067 as Lessee with respect to the
real property  identified  in Exhibit "A" attached  hereto and located in Phenix
City, Alabama.

                                   WITNESSETH:

1.       Omega   Healthcare   Investors,   Inc.,  a  Maryland   corporation  and
         Diversicare  Corporation of America,  a Delaware  corporation,  entered
         into a Master Lease dated August 11, 1992 (the  "Original  Lease"),  as
         evidenced by the Short Form Lease dated August 11, 1992 and recorded on
         August  14,  1992 in Book 753 at Page 186 in the Office of the Judge of
         Probate of Russell  County,  Alabama and as Assigned by the  Assignment
         and Assumption of Lease dated May 10, 1994 and recorded on June 7, 1994
         in Book 788 at Page 286 in the Office of the Aforesaid.

2.       Lessor and Lessee, as the successors-in-interest to the Original Lease,
         have entered into a Consolidated,  Amended and Restated Master Lease of
         even date herewith (the "Amended Lease").

3.       For and in  consideration of the rents reserved and the other covenants
         contained in the Amended Lease,  Lessor has and does hereby continue to
         lease to Lessee,  and Lessee has and does  hereby  continue to take and
         rent from  Lessor,  all of Lessor's  rights and  interest in and to the
         parcel of real property  described in Exhibit "A" and the improvements,
         fixtures, personal and other property included within the definition of
         "Leased Properties" as set forth in the Lease.
<PAGE>



4.       The Initial Term of the Amended Lease is approximately ten (10) years,
         commencing October 1, 2000 (the "Commencement Date") and ending on
         September 30, 2012.

5.       As more particularly provided in the Amended Lease, Lessee may elect to
         renew  the  original  term for one (1) ten (10) year  optional  renewal
         periods ("Renewal  Terms") for a maximum term, if exercised,  of twenty
         (20) years after the Commencement Date.

6.       This  instrument  is executed  and  recorded  for the purpose of giving
         notice of Lessee's  interest in the Leased Properties and giving notice
         of the  existence of the Lease,  to which  reference is made for a full
         statement of the terms and conditions thereof. The respective addresses
         of the parties hereto are:


                  Lessee:

                                    Diversicare Leasing Corp.
                                    c/o Advocat, Inc.
                                    277 Mallory Station Road, Suite 130
                                    Franklin, Tennessee 37067
                                    Attn: Chief Financial Officer
                                    Telephone:       (615) 771-7575
                                    Telecopier:      (615) 771-7409

                  Lessor:

                                    Sterling Acquisition Corp.
                                    c/o Omega Healthcare Investors, Inc.
                                    900 Victors Way, Suite 350
                                    Ann Arbor, Michigan 48108
                                    Attn.: F. Scott Kellman and
                                           Susan Allene Kovach
                                    Telephone:       (734) 887-0200
                                    Telecopier:      (734) 887-0201


<PAGE>


         IN WITNESS  WHEREOF,  the parties  have caused  this  instrument  to be
executed by their duly authorized  officer or officers and general partners,  as
applicable, all as of the day and date first above written.

LESSOR:                                     LESSEE:

STERLING ACQUISITION CORP.,                 DIVERSICARE LEASING CORP.,
a Kentucky corporation                      a Tennessee corporation

By:                                         By:
Name:                                       Name
Its:                                        Its:


<PAGE>


STATE OF MICHIGAN )
                                    )SS
COUNTY OF WASHTENAW        )

         On this _____ day of October,  2000, before me,  __________________,  a
Notary Public  within and for the County and State  aforesaid,  duly  qualified,
commissioned and acting, appeared in person the within named Susan A. Kovach, to
me  personally  well  known,  who stated that they were the Vice  President,  of
STERLING ACQUISITION CORP., a Kentucky corporation,  and were duly authorized in
their respective  capacities to execute the foregoing  Memorandum of Amended and
Restated Lease for and in the name and behalf of said  corporation,  and further
stated and  acknowledged  that they had so signed,  executed and delivered  said
Memorandum  of  Amended  and  Restated  Lease  in the  capacities  and  for  the
consideration and purposed therein mentioned and set forth.

         IN TESTIMONY  WHEREOF, I have hereunto set my hand and official seal on
this _____ day of October, 2000.
                                  -------------------------------
                                  Notary Public

                                  (NOTARY SEAL)

                                   My commission expires:__________

STATE OF _______________ )
                                    )SS
COUNTY OF _____________ )

         On this _____ day of October,  2000, before me,  __________________,  a
Notary Public  within and for the County and State  aforesaid,  duly  qualified,
commissioned and acting, appeared in person the within named  _________________,
to me personally well known,  who stated that they were the  __________________,
of DIVERSICARE LEASING CORP., a Tennessee corporation,  and were duly authorized
in their  respective  capacities to execute the foregoing  Memorandum of Amended
and  Restated  Lease  for and in the name and  behalf of said  corporation,  and
further stated and acknowledged that they had so signed,  executed and delivered
said  Memorandum  of Amended and Restated  Lease in the  capacities  and for the
consideration and purposed therein mentioned and set forth.

         IN TESTIMONY  WHEREOF, I have hereunto set my hand and official seal on
this _____ day of October, 2000.
                                  -------------------------------
                                  Notary Public

                                  (NOTARY SEAL)

                                   My commission expires:__________


<PAGE>


                                    Exhibit A

Name of Facility: Canterbury Health Facility

Facility Address: 1720 Knowles Road
                  Phenix City, Alabama 36868

Legal Description:

Part of Section  22,  Township 17 N, Range 30 E, Phenix  City,  Russell  County,
Alabama,  and being more  particularly  described  as  follows:  COMMENCE at the
northeastern  most corner of the  intersection of 23rd Court and Knowles Road in
Phenix City,  Alabama,  and run thence in a  northeasterly  direction  along the
Right of Way of Knowles  Road a distance  of 200.84  feet to the iron pin at the
point of beginning of the property  herein  conveyed;  thence North 43 deg. 11.5
min.  west a distance of 596.82 feet to an iron pin;  thence North 02 deg.  40.5
min. west 331.28 feet to an iron pin; thence North 87 deg. 03.5 min. East 621.16
feet to an iron pin;  thence south 38 deg. 00.5 min. East 439.27 feet to an iron
pin located on the right of way of Knowles  Road;  thence  South 45 deg. 03 min.
west along said ROW a distance  of 408.50 feet to an iron pin;  thence  continue
along said ROW along a curve  having a radius of 2824.93 feet an arc distance of
241.14 feet to the iron pin at the point of beginning.

SUBJECT TO a sixty foot  easement  for ingress and egress to the general  public
along the northeastern most line of subject property.

Being the same property conveyed to Omega Healthcare  Investors, Inc. by General
Warranty Deed from Counsel Nursing  Properties,  Inc. recorded in Vol. 753, Page
105 in the Probate Office of Russell County, Alabama.
<PAGE>
                                   EXHIBIT F

                      FORM OF REAFFIRMATION OF OBLIGATIONS
                          (FLORIDA MANAGED FACILITIES)

         THIS  REAFFIRMATION OF OBLIGATIONS is made this day of November,  2000,
by Advocat, Inc., a Delaware corporation ("Advocat"), and Diversicare Management
Services Co., a Tennessee  corporation ("DMSC"), to and for the benefit of Omega
Healthcare Investors, Inc., a Maryland corporation ("Omega").

RECITALS:

         A.  Omega is the holder of two (2)  Mortgage  Notes  (each a  "Mortgage
Note", and collectively,  the "Mortgage  Notes"),  being respectively a purchase
money note in the  original  principal  amount of  $12,891,500.00  and a working
capital note in the original  principal amount of $2,000,000.00 [a related third
Mortgage  Note,   representing  a  liquidity  deposit  loan  in  the  amount  of
$908,500.00  having  been  previously  paid in full] in the  aggregate  original
principal amount of $14,891,500.00  (such  indebtedness being referred to herein
as the "Loans"),  evidenced by four (4) Loan Agreements (the "Loan Agreements"),
and secured by four (4)  Mortgages,  Security  Agreements  and  Fixture  Filings
(collectively, the "Mortgages"), covering the following four (4) skilled nursing
facilities located in the State of Florida (each a "Facility", and collectively,
the "Facilities"):

Facility                                    Owner/Mortgagor

Emerald-Cedar Hills                         Emerald-Cedar Hills, Inc.

Emerald-Southern Pines                      Emerald-Southern Pines, Inc.

Emerald-Golfcrest                           Emerald-Golfcrest, Inc.

Emerald-Golfview                            Emerald-Golfview, Inc.

         B.  The  foregoing   Owners/Mortgagors  (the  "Emerald  Entities")  are
affiliates of Emerald Healthcare,  Inc., a Florida corporation  ("Emerald"),  by
virtue of common ownership thereof by R. Brent Maggio ("Maggio").

         C. DMSC is the  manager of each of the  Facilities,  pursuant to and by
virtue of four (4) separate management agreements,  one with each of the Emerald
Entities (the "Management  Agreements"),  and Advocat guaranteed the performance
by and  obligations  of DMSC  under the  Management  Agreements,  including  the
obligation to make certain working capital advances to the Emerald Entities,  by
virtue of four (4) separate  Guaranties  (the  "Guaranties"),  one given to each
Emerald Entity.
<PAGE>

         D.  DMSC  subordinated  its  rights  under the  Management  Agreements,
including  without  limitation  its fees  payable  thereunder,  to Omega and its
rights  under  the  Mortgage  Notes  and  Mortgages,  by  virtue  of  a  certain
Subordination  of Management  Agreement and Management Fees dated as of February
20, 1996 (the "Subordination Agreement").

         E. Omega,  Emerald,  the Emerald  Entities  and Maggio are parties to a
certain Cash  Collateral  Agreement dated as of August 1, 1998, not yet executed
by DMSC,  pursuant to which,  among other things,  DMSC was to have agreed,  and
Emerald, the Emerald Entities and Maggio have consented,  that DMSC would retain
and pay over to Omega all "Net Cash Receipts" (as defined in the Cash Collateral
Agreement) from the Facilities,  subject to and in accordance with its terms and
conditions.

         F. Omega and its  subsidiary  Sterling  Acquisition  Corp.,  a Kentucky
corporation     ("Acquisition"),     and     Advocat,     DMSC,     and    their
affiliates/subsidiaries   Sterling  Healthcare  Management,   Inc.,  a  Kentucky
corporation  ("SHCM") and  Diversicare  Leasing  Corp.,  a Delaware  corporation
("DLC"),  are parties to a certain Settlement and Restructuring  Agreement dated
as of October 1, 2000 (the "Settlement Agreement"),  pursuant to which they have
resolved  certain defaults of Advocat,  SHCM and DLC under  obligations to Omega
and Acquisition with respect to other skilled nursing home facilities  leased to
and operated by SHCM and/or DLC, and have restructured their  relationships with
respect thereto.

         G. As a condition  of, and an inducement  to Omega and  Acquisition  to
enter into,  the Settlement  Agreement,  Advocat and DMSC have agreed that their
obligations  to Omega with respect to the  Facilities  will remain in full force
and effect.

         NOW,  THEREFORE,  in  consideration  of the  foregoing  and  for  other
valuable  consideration,  the  receipt and  adequacy  of which are  acknowledged
hereby:

         1.  Advocat  and DMSC  acknowledge,  ratify and  reaffirm,  as if fully
restated herein in their  entirety,  the Management  Agreements,  Guaranties and
Subordination Agreement  (collectively,  the "Florida Emerald Agreements"),  and
all  of  their  individual  and  collective   responsibilities  and  obligations
thereunder,  and further covenant and agree that such instruments shall continue
to remain in full force and effect,  unabated and without  being  limited in any
respect by virtue of the Settlement  Agreement and the documents and instruments
executed  and or  delivered by the parties  thereto in the  consummation  of the
transactions contemplated therein.

         2. As indicated above,  DMSC has not heretofore  executed and joined in
the Cash  Collateral  Agreement.  Advocat  and Omega shall  negotiate,  prior to
January 31, 2001, an amendment to that instrument  which will (i) resolve,  in a
manner  consistent  with the  intent of the Cash  Collateral  Agreement,  DMSC's
reasonable  objections  to the  flow of  funds  established  thereby,  and  (ii)
acknowledge and reaffirm the consent by Advocat and DMSC to the sale or transfer
of the Florida Managed Facilities as provided in Paragraph 4, below.
<PAGE>

         3. Advocat and DMSC,  jointly and  severally,  warrant and represent to
Omega that (i) the Florida Emerald Agreements are in full force and effect as of
the date hereof, (ii) to their knowledge,  Advocat and DMSC have fully performed
all their respective  obligations  under the Florida Emerald  Agreements,  (iii)
neither has received any notice or  allegation of default from Emerald or any of
the Emerald  Entities with respect to the  obligations  of Advocat or DMSC under
the Florida Emerald Agreements, and (iv) neither the execution of the Settlement
Agreement  by  Advocat  and  DMSC,  nor  the  consummation  of the  transactions
contemplated thereby is inconsistent with, nor would constitute a default under,
the Management Agreements or the Guaranties.  The foregoing  representations and
warranties shall survive the  consummation of the  transactions  contemplated by
the Settlement Agreement.

         4.   Advocat  and  DMSC  each   consents  to  any   conveyance(s)   and
assignment(s) by one or more of the Emerald Entities and/or Emerald  Healthcare,
Inc. and/or Maggio, of their respective ownership and/or equity interests one or
more of the Facilities and/or the related Emerald  Entity(ies),  to Omega or its
designee, and Advocat and DMSC covenant and agree to recognize and attorn to the
assignment   of  the   relevant   Management   Agreement(s)   relating  to  such
Facility(ies).

         5. Advocat and DMSC acknowledge and agree that this Reaffirmation,  and
the  matters  set forth  herein,  constitute  a material  inducement  to Omega's
agreement  to enter into the  Settlement  Agreement,  and that  Omega  would not
consummate the  transactions  contemplated  in the  Settlement  Agreement in the
absence of the reaffirmations, representations and warranties set forth herein.

         6. This  Reaffirmation is given to, and for the express benefit of, and
may be relied upon by Omega and its successors and assigns.


                         [SIGNATURES ON FOLLOWING PAGE]







<PAGE>



         IN WITNESS WHEREOF,  Advocat and DMSC have executed this  Reaffirmation
as of the date first above written.

WITNESSES:                          ADVOCAT, INC., a Delaware
                                    corporation



                                    By:
                                    Its:


                                    DIVERSICARE MANAGEMENT SERVICES CO.,
                                    a Tennessee corporation


                                    By:
                                    Its:


STATE OF TENNESSEE                          )
                                       :SS
COUNTY OF                                   )


         The foregoing instrument was acknowledged before me this          day
of     , 2000, by               , the                                        of
Advocat, Inc., a Delaware corporation, on behalf of the corporation.



                                                   Notary Public
                                                   County, Tennessee
                                                   My commission expires:


STATE OF TENNESSEE                          )
                                       :SS
COUNTY OF                                   )


         The foregoing instrument was acknowledged before me this day of , 2000,
by , the of Diversicare  Management  Services Co., a Tennessee  corporation,  on
behalf of the corporation.



                                                     Notary Public
                                                     County, Tennessee
                                                     My commission expires:
<PAGE>

                                   EXHIBIT H

                           FORM OF SUBORDINATED NOTE

$1,700,000                                                  Franklin, Tennessee
                                                Dated as of November ____, 2000

         FOR VALUE  RECEIVED,  Advocat  Inc.,  a Delaware  corporation,  with an
address of 277  Mallory  Station  Road,  Suite 130,  Franklin,  Tennessee  37067
("Borrower"),  hereby  promises to pay to Omega  Healthcare  Investors,  Inc., a
Maryland  corporation  with an address of 900 Victors Way, Suite 350, Ann Arbor,
Michigan 48108  ("Payee"),  or to order,  the principal sum of One Million Seven
Hundred Thousand Dollars ($1,700,000),  and to pay interest from the date hereof
on the unpaid  principal  amount hereof at a rate of interest at all times equal
to seven  percent (7%) per annum,  which  interest  shall be accrued  quarterly.
Accrued interest ( including, but not limited to, all interest accruing from the
date of this Note but not paid  pursuant to this  sentence)  shall be payable in
cash quarterly  beginning with the quarter following the payment in full of that
certain Reimbursement Note dated the same date as this Note made by the Borrower
to AmSouth Bank (the  "Reimbursement  Note").  To the extent accrued interest is
not  paid  quarterly,  including  interest  payments  not made  pursuant  to the
preceding sentence, it shall be compounded quarterly.  Interest will be computed
on the basis of a 360-day year of twelve 30-day months.  The quarterly  interest
payments  shall be made on March 31,  June 30,  September  30 and  December  31.
Borrower may pre-pay  this Note in part or in full at any time without  penalty.
All  payments of principal  and interest  shall be in lawful money of the United
States,  and shall be made by wire transfer of  immediately  available  funds to
Payee or to such other account as is designated by Payee in writing to Borrower.
All outstanding  principal and accrued interest shall be due and payable in full
on September 30, 2007 (the "Maturity Date").

         1. (a) On the Maturity Date, the Borrower may, at its option subject to
the limitations  contained  below in Sections 1(b) and 1(c),  convert all or any
portion of the outstanding principal and accrued unpaid interest on this Note as
follows:

         (1)      If the  holder of this Note also  holds  shares of  Borrower's
                  Series B Convertible  Preferred Stock  ("Preferred  Stock") on
                  the  Maturity  Date,  then to shares of Preferred  Stock.  The
                  number of shares of Series B  Preferred  Stock to be issued in
                  respect of any of the principal and/or accrued unpaid interest
                  shall be equal to the amount of such principal  and/or accrued
                  unpaid interest divided by the Stated Value (as defined in the
                  Certificate of Designation of Series B Preferred Stock) of the
                  Series B Convertible Preferred Stock on the Maturity Date.



<PAGE>

         (2)      If the holder of this Note does not hold  shares of  Preferred
                  Stock on the  Maturity  Date,  then to  shares  of  Borrower's
                  Common Stock, $0.01 par value ("Common Stock").  The number of
                  shares of Common  Stock to be issued in  respect of any of the
                  principal and/or accrued unpaid interest shall be equal to (A)
                  (1)  the  amount  of  such  principal  and/or  accrued  unpaid
                  interest  divided  by (2) the  Stated  Value of the  Preferred
                  Stock (as defined in the  Certificate of Designation of Series
                  B  Preferred  Stock)  which  would then be in effect as of the
                  Maturity  Date  multiplied by (B) the  Conversion  Rate of the
                  Preferred  Stock (as defined in the Certificate of Designation
                  of Series B Preferred  Stock) which would then be in effect as
                  of the Maturity Date.

         (b) Borrower may not convert  outstanding  principal or accrued  unpaid
interest  into equity  securities  of Borrower  pursuant to Section  1(a) if the
aggregate  amount of outstanding  principal and accrued interest to be converted
is less than $250,000.  Borrower  shall not issue  fractions of shares of equity
securities upon conversion of this Note. If any fractional  share would,  except
for the  provisions of this Section  1(b),  be issuable upon  conversion of this
Note,  Borrower shall pay to the person entitled to receive such equity security
an amount in cash equal to (1) in the case of Preferred Stock, the value of such
fractional share  calculated  using the Stated Value,  calculated to the nearest
one-one  hundredth  (1/100) of a share; or (2) in the case of Common Stock,  the
value of such fractional  share  calculated using the quotient of (x) the Stated
Value of the  Preferred  Stock which would then be in effect as of the  Maturity
Date divided by (y) the Conversion Price of the Preferred Stock which would then
be in  effect  as of  the  Maturity  Date,  calculated  to the  nearest  one-one
hundredth (1/100) of a share.

         (c)   Notwithstanding   anything  in  this  Note,  the  Settlement  and
Restructuring  Agreement  dated the same date as this Agreement  among Borrower,
Payee and certain other  parties (the  "Restructuring  Agreement")  or any other
document, instrument or agreement between Borrower and Payee or any affiliate of
Payee,  Borrower may not convert any  outstanding  principal  or accrued  unpaid
interest into equity securities of Borrower, including Preferred Stock or Common
Stock, and the holders of this Note shall continue to hold this Note, unless, as
of the date of the proposed conversion:

                  (1)      Payee's accountants or legal counsel render a written
                           opinion (the "Conversion Opinion") to Payee that such
                           conversion  will not  result  in,  cause or  create a
                           material  risk of,  the Payee  losing its status as a
                           Real  Estate  Investment  Trust  under  the  Internal
                           Revenue Code of 1986, as amended; provided,  however,
                           that  Borrower  may convert a portion of  outstanding
                           principal  or accrued  unpaid  interest  into  equity
                           securities  of  Borrower  if Payee's  accountants  or
                           legal  counsel  render  a  Conversion   Opinion  with
                           respect to such portion and if subparagraphs (2) thru
                           (5) of this Section 1(c) are satisfied as of the date
                           of the proposed conversion;
<PAGE>

                  (2)      the Common Stock is registered pursuant to Section 12
                           of the  Securities  Exchange Act of 1934,  as amended
                           (the "34  Act") and  Borrower  has  timely  filed all
                           reports required to be filed by Borrower under the 34
                           Act within the previous two years;


                  (3)      no Default (as defined in Section 4 below) has
                           occurred and is continuing;

                  (4)      the Common  Stock is listed for trading on the Nasdaq
                           National Market,  the New York Stock Exchange or upon
                           a comparable national stock exchange; and

                  (5)      the average weekly trading volume of the Common Stock
                           over the prior four weeks was at least 500,000 shares
                           traded (as adjusted for stock splits, stock dividends
                           or similar transactions).

All costs associated with the Conversion Opinion shall be paid by Borrower.

         2. (a) Payment of this Note shall be  subordinated  in right of payment
and distribution of the assets of Borrower  (including without  limitation,  any
distribution  of the assets of  Borrower  to its  creditors  in any  insolvency,
bankruptcy,  reorganization  or similar  proceeding with respect to Borrower) to
all Senior  Indebtedness  (as defined below);  provided,  that Borrower may make
regular  quarterly  payments  of  interest  due on this Note as  provided in the
preceding   paragraph  and  payment  of  principal  upon  maturity   ("Permitted
Payments"),  unless (i) a Default (as  defined in any such Senior  Indebtedness)
has  occurred  or (ii) an event or  condition  which with the passage of time or
giving of notice, or both, could become a Default has occurred and is continuing
(collectively,  the "Default Restrictions").  For purposes of this Note, "Senior
Indebtedness"  shall mean the principal,  premium,  if any, and unpaid  interest
(including  interest  accruing  on or  after  the  filing  of  any  petition  in
bankruptcy or for reorganization  relating to the Company whether or not a claim
for  post-filing  interest  is  allowed  in  such  proceeding),  fees,  charges,
expenses,  reimbursement and indemnification  obligations, and all other amounts
payable under or with respect of (i) any indebtedness of the Company  (excluding
this Note and indebtedness by its terms expressly ranking subordinate to or pari
passu  with  this  Note,  herein,  the  "Subordinated  Indebtedness")  for money
borrowed, whether or not evidenced by debentures,  notes or similar instruments,
issued, incurred, or assumed by the Company and whether outstanding on the dates
of this Note or hereafter  created or incurred;  (ii) all indebtedness and other
obligations  guaranteed by the Company,  or the payment and performance of which
is secured by a lien on property or assets of the Company;  (iii) the Borrower's
Credit Facility with AmSouth Bank; (iv) the Borrower's mortgage obligations with
General Motors Acceptance Corporation; and (v) the Reimbursement Note.

<PAGE>

         (b) Borrower  shall  notify  Payee in writing  before or at the time an
interest  payment is due if a Default  Restriction  has  occurred.  Except  with
respect to payments  made to Payee  pursuant to Section  1(a) in the form of the
Corporation's  Series B Preferred  Stock or Common Stock,  if Payee receives any
cash payment on account of principal or of interest on this Note in violation of
these subordination provisions,  Payee shall receive the same as trustee for the
holders of the  Senior  Indebtedness  and will pay or  deliver  the same to such
holders immediately and Payee hereby assigns to such holders all rights of Payee
to  any  such  payments  and  Payee  shall  execute  such  agreements  as may be
reasonably  required to effectuate this  assignment.  Any amounts so paid to the
holders  of the  Senior  Indebtedness  shall be deemed  not to have been paid by
Borrower, or received by Payee, under this Note. If any event or condition which
is the subject of a Default  Restriction  shall be cured or waived in writing by
the holders of the Senior  Indebtedness,  within the applicable grace period, if
any,  provided in the Senior  Indebtedness,  Borrower  shall resume  payments of
interest  (including  any  past  due  interest)  on  this  Note  and may pay the
principal  of this Note,  according  to the terms set forth  herein,  subject to
future application of the Default Restrictions.  Payee acknowledges that this is
a continuing agreement of subordination, and the Borrower and its senior lenders
may amend,  modify or  extend,  and such  lenders  may grant  waivers  under the
provisions  of any such  Senior  Indebtedness  without  approval of or notice to
Payee.

         (c) Until the Senior  Indebtedness is paid in full, Payee shall not (a)
initiate or participate  with others in any suit,  action or proceeding  against
Borrower  to enforce  payment or collect all or part of the  indebtedness  under
this Note,  (b) accelerate the maturity of or increase the principal of or amend
the  subordination  provisions  of this Note,  (c) increase the interest rate on
this Note,  or (d)  exercise  any right of setoff  with  respect to, or take any
security from Borrower for, this Note.  Except to the extent expressly  provided
in this Note, nothing contained herein shall impair, between Borrower and Payee,
the obligations of Borrower to make payments of principal of or interest on this
Note to Payee as and when the same shall  become due and  payable in  accordance
with the terms hereof.

         (d) The holder of this Note by his acceptance  hereof  acknowledges and
agrees that the foregoing subordination  provisions are, and are intended to be,
an inducement and a consideration to each holder of Senior Indebtedness, whether
such Senior Indebtedness was created or acquired before or after the issuance of
this Note, and each holder of Senior  Indebtedness shall be deemed  conclusively
to have relied upon such subordination provisions in acquiring and continuing to
hold such Senior Indebtedness.
<PAGE>

         3. This Note is secured by all guaranties,  security interests,  liens,
assignments  and  encumbrances  granted  concurrently   herewith,   and  granted
previously  or from time to time  hereafter  by  Borrower  or any of  Borrower's
affiliates to Payee, or any of Payee's  affiliates,  including,  but not limited
to, the security  interests  granted by  Diversicare  Leasing  Corp., a Delaware
corporation,   to  Sterling  Acquisition  Corp.,  a  Kentucky  corporation,   in
connection  with the  Amended  and  Restated  Master  Lease (as  defined  in the
Restructuring Agreement) (collectively, the "Security Documents").  Reference is
hereby  made to the  Security  Documents  for  additional  terms and  conditions
concerning this Note.

         4. The occurrence of any of the following shall  constitute a "Default"
under this Note: (i) the Borrower fails to pay when due, whether by acceleration
or  otherwise,  any amount  payable under this Note; or (ii) an Event of Default
under the Amended and Restated  Master Lease; or (iii) an Event of Default under
any of the Security Documents.

         5. If a Default has occurred and is  continuing,  Payee may (subject to
the  limitations  set  forth  in  Section  2 of this  Note)  without  demand  of
performance  and  without  other  notice  declare  the unpaid  principal  of and
interest on this Note to be  immediately  due and  payable,  whereupon  the same
shall be due and payable without presentation,  demand, protest or notice of any
kind,  all of which  are  expressly  waived,  anything  herein  to the  contrary
notwithstanding.  Payee may proceed to protect and enforce Payee's rights either
by suit in equity and/or by action at law, whether for specific performance,  or
proceed to enforce any other legal or equitable  right as a holder of this Note.
All remedies of Payee  provided  herein are cumulative and concurrent and may be
exercised  independently,  successively or together against Borrower at the sole
discretion of Payee, shall not be exhausted by any exercise thereof,  and may be
exercised as often as occasion therefor may occur, and shall not be construed to
be waived or released by Payee's  delay in  exercising,  or failure to exercise,
them or any of them at any time it may be entitled to do so.

         6. All notices,  requests and other  communications  hereunder shall be
made in the manner set forth in the Restructuring Agreement.

         7.  Borrower  waives  presentment  for  payment,   demand,   notice  of
nonpayment, notice of protest and protest of this Note, and all other notices in
connection  with the  delivery,  acceptance,  performance,  default  (except  as
expressly provided herein) or enforcement of the payment of this Note and agrees
that the  liability  of  Borrower  shall not be in any  manner  affected  by any
indulgence,  extension  of time,  renewal,  waiver or  modification  granted  or
consented to by Payee.
<PAGE>

         8. Acceptance by Payee of any payment in an amount less than the amount
then due shall be deemed an acceptance on account only,  and Payee's  acceptance
of any such partial  payment  shall not  constitute a waiver of Payee's right to
receive the entire  amount  due.  Upon any  Default,  neither the failure of the
Payee to promptly  exercise its right to declare the  outstanding  principal and
accrued unpaid  interest  hereunder to be immediately  due and payable,  nor the
failure  of Payee to  demand  strict  performance  of any  other  obligation  of
Borrower or any other  person who may be liable  hereunder,  shall  constitute a
waiver of any such rights,  nor a waiver of such rights in  connection  with any
future  default on the part of  Borrower  or any other  person who may be liable
under this Note.

         9. Payee shall not by any act of omission  or  commission  be deemed to
have  waived any of its rights or  remedies  hereunder  unless such waiver be in
writing and signed by Payee, and then only to the extent  specifically set forth
therein;  a waiver of one event shall not be construed as continuing or as a bar
or waiver of such right or remedy on a subsequent event.

         10.  Unless a  Default  has  occurred  and not been  fully  cured,  all
payments  received  by Payee  under this Note shall be  applied,  subject to the
limitations  set forth in Section 2 of this Note,  first against  interest which
has accrued and not been paid, and second to principal, with the balance applied
against  principal  and any other amounts which may be owing to Payee under this
Note.  Following the  occurrence  of a Default,  and until such Default is fully
cured,  Payee may apply,  subject to the  limitations  set forth in Section 2 of
this Note, any payment which it receives,  whether directly from the Borrower or
as a consequence of realizing upon any security which it holds,  in its sole and
absolute  discretion,  to any amount owing to it under this Note or the Security
Documents.

         11. The Borrower shall pay to Payee,  immediately upon demand,  any and
all taxes  (including,  but not  limited to,  state  franchise  taxes)  assessed
against  Payee by reason of its  holding  of this Note and the  receipt by it of
interest  payments  hereunder  (other than income  taxes  assessed by the United
States,  or by any foreign  government or political  subdivision  thereof having
jurisdiction  over the Payee on such interest  payments),  and any and all other
sums and charges that may at any time become due and payable  under the Security
Agreements.

         12. The Borrower,  and any other person who may be liable  hereunder in
any capacity, agree to pay all costs of collection and any litigation, including
attorney fees (including any appeals  relating to such enforcement or collection
proceedings),  in case the  principal  of the Note or any  payment  of  interest
thereon  is not paid as it  becomes  due,  or in case it  becomes  necessary  to
protect the security for this Note, whether suit is brought or not.

         13. All payments by the Borrower  shall be paid in full without  setoff
or  counterclaim  and  without  reduction  for and free from any and all  taxes,
levies, imposts,  duties, fees, charges,  deductions or withholdings of any type
or nature  imposed by any  government  or any  political  subdivision  or taxing
authority thereof.

         14. IT IS SPECIFICALLY AGREED THAT TIME IS OF THE ESSENCE OF THIS NOTE.



<PAGE>


         15. All agreements between the Borrower, and any other party liable for
the  payment  of the  indebtedness  evidenced  by this Note,  and Payee,  or any
subsequent  holder of this Note,  whether now existing or hereafter  arising and
whether written or oral, are hereby limited so that in no  contingency,  whether
by reason of demand or  acceleration  of the maturity of this Note or otherwise,
shall the interest contracted for, charged,  received, paid or agreed to be paid
to the  holder  of  this  Note  exceed  the  maximum  amount  permissible  under
applicable law. If, from any circumstance  whatsoever,  interest would otherwise
be payable to the holder of this Note in excess of the  maximum  lawful  amount,
the interest  payable to the holder of this Note shall be reduced to the maximum
amount  permitted by applicable law; and if from any  circumstance the holder of
this Note shall ever receive anything of value deemed interest by applicable law
in  excess of the  maximum  lawful  amount,  an  amount  equal to any  excessive
interest shall be applied to the reduction of the principal of this Note and not
to the payment of interest,  or if such  excessive  interest  exceeds the unpaid
balance of the  principal  of this Note,  such  excess  shall be refunded to the
Borrower  or to  another  party,  or  parties,  liable  for the  payment  of the
indebtedness evidenced by this Note, as applicable.  All interest paid or agreed
to be  paid to the  holder  of this  Note  shall,  to the  extent  permitted  by
applicable  law, be amortized,  prorated,  allocated and spread through the full
period of this Note  (including  the period of any renewal or extension  hereof)
until payment in full of the principal so that the interest for such full period
shall not exceed the maximum  permitted by applicable law. This Section 15 shall
control all agreements between the Borrower and the holder of this Note.

         16.  If  any  provision  hereof  is  found  by  a  court  of  competent
jurisdiction to be prohibited or unenforceable,  it shall be ineffective only to
the extent of such  prohibition  or  unenforceability,  and such  prohibition or
unenforceability  shall not  invalidate  the  balance of such  provision  to the
extent  it  is  not  prohibited  or  unenforceable,  nor  invalidate  the  other
provisions hereof,  all of which shall be liberally  construed in favor of Payee
in order to effect the provisions of this Note.

         17. This Note shall be governed by and construed in accordance with the
internal  substantive  laws of the  State of  Delaware,  without  regard  to any
conflict of laws rule or principle  that would result in the  application of the
domestic substantive law of any other jurisdiction.

                          Signature on following page.


<PAGE>


         IN WITNESS WHEREOF,  Borrower has caused this  Subordinated  Note to be
executed  and  delivered by its proper and duly  authorized  officer the day and
year written above.

                                  ADVOCAT INC.


                                  By:
                                      -----------------------


AGREED TO AND ACCEPTED BY PAYEE;

OMEGA HEALTHCARE INVESTORS, INC.


By:
    --------------------
<PAGE>
                                    EXHIBIT I

               FORM OF STOCK ISSUANCE AND SUBSCRIPTION AGREEMENT

     This Stock Issuance and  Subscription  Agreement  ("Agreement")  is entered
into this ____ day of November,  2000 between Advocat Inc. ("Advocat") and Omega
Healthcare Investors, Inc. ("Omega").

         WHEREAS, Advocat and Omega and certain of their affiliates have entered
into that certain  Settlement and  Restructuring  Agreement dated November ____,
2000 (the  "Restructuring  Agreement")  pursuant to which Advocat and Omega have
agreed to restructure their relationship.

         WHEREAS, in accordance with Section 11 of the Restructuring  Agreement,
Advocat  has  agreed  to issue  Series B  Preferred  Stock  having  the  powers,
preferences  and rights as provided in the Certificate of Designation of Advocat
("Designation") as attached hereto as Exhibit A.

         NOW, THEREFORE,  for good and valuable  consideration,  the receipt and
sufficiency  of which  are  hereby  acknowledged,  Advocat  and  Omega  agree as
follows:

         1.  Issuance of Shares.  In  consideration  of the mutual  promises and
agreements set forth in, and the consummation of the  transactions  contemplated
by,  the  Restructuring  Agreement,  Advocat  hereby  issues  to Omega and Omega
accepts from Advocat, subject to the terms and conditions hereof, 393,658 shares
of Advocat Series B Convertible  Preferred Stock (the  "Shares").  Advocat shall
deliver to Omega  concurrently with the execution and delivery of this Agreement
a stock  certificate  evidencing  its  ownership  of the  Shares  and  bearing a
restrictive legend stating substantially the following:

         The shares  represented by this  certificate  have not been  registered
         under the  Securities  Act of 1933,  as amended.  Such shares have been
         acquired  for  investment  and  may  not be  offered  for  sale,  sold,
         delivered  after  sale,  transferred,  pledged or  hypothecated  in the
         absence of an effective  registration  statement  covering  such shares
         under the Securities Act or an opinion of counsel  satisfactory  to the
         company that such registration is not required.

         2. Registration  Rights Agreement.  Concurrently with the execution and
delivery  of this  Agreement,  Advocat  shall  execute  and  deliver  to Omega a
Registration   Rights   Agreement   (the   "Registration    Rights   Agreement")
substantially in the form of Exhibit B to this Agreement.

         3. Representations and Warranties of Advocat. Advocat hereby represents
and warrants to Omega as follows:

                  3.1 Advocat is a corporation duly organized,  validly existing
         and in good standing  under the laws of the State of Delaware,  and has
         all requisite  corporate  power and authority to own, lease and operate
         its properties and to carry on its business as now being conducted.

<PAGE>

                  3.2  Advocat  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 hereby.

                  3.3 The execution, delivery and consummation of this Agreement
         have been duly and properly  authorized by all necessary  action on the
         part of Advocat. The Board of Directors of Advocat has duly and validly
         approved  and taken all  corporate  action  required to be taken by the
         Board  of  Directors   for  the   consummation   of  the   transactions
         contemplated by this Agreement and the  Registration  Rights  Agreement
         including,  but not  limited  to, all  actions  required  to render the
         provisions  of Section  203 of the  Delaware  General  Corporation  Act
         restricting  business   combinations  with  "interested   shareholders"
         inapplicable to such  transactions and to provide that none of Omega or
         any of its affiliates shall become an"interested  shareholder" upon the
         execution and delivery of this  Agreement or the  acquisition of Shares
         or shares of Advocat's  Common Stock  pursuant to this  Agreement,  the
         conversion of the Shares,  or the acquisition of Shares pursuant to the
         Subordinated Note (as defined in the Restructuring Agreement).

                  3.4 This Agreement,  upon due execution and delivery  thereof,
         will   constitute   the  valid  and  binding   obligation  of  Advocat,
         enforceable in accordance with its terms.

                  3.5 Upon the issuance of the Shares,  such Shares will be duly
         authorized, validly issued, fully paid and nonassessable.

                  3.6  The  execution  and  delivery  of  this  Agreement,   the
         consummation of the transactions contemplated by this Agreement and the
         compliance with the terms of this Agreement do not and will not:

                           (a)  conflict  with or  result  in any  breach of any
                  provision  of any  agreement  or  other  instrument  to  which
                  Advocat is a party or by which it or any of its  property  may
                  be bound,  or  conflict  with or  result in any  breach of any
                  provision  of  Advocat's  Charter,  as amended by the attached
                  Designation,  Bylaws or the Rights Agreement dated as of March
                  13, 1995 by and between  Advocat  and Third  National  Bank in
                  Nashville, as amended (the "Rights Plan");

                           (b)  conflict  with,   result  in  a  breach  of  any
                  provision of,  constitute (with or without due notice or lapse
                  of time or both) a default under,  result in the  modification
                  or cancellation  of, result in any increase in the obligations
                  of Advocat or any of its  subsidiaries  under, or give rise to
                  any right of  termination or  acceleration  in respect of, any
                  contract, agreement, commitment, understanding, arrangement or
                  restriction  of any  kind to  which  Advocat  is a party or to
                  which Advocat or any of its property is subject;
<PAGE>

                           (c) result in the creation of any Lien (as defined in
                  Section 9.7 below) upon,  or any Person (as defined in Section
                  9.7 below) obtaining the right to acquire,  any of the Shares,
                  any equity interest in Advocat or any of Advocat's assets;

                           (d)  violate  or  conflict  with any law,  ordinance,
                  code, rule,  regulation,  decree, order or ruling of any court
                  or Governmental  Entity (as defined in Section 9.7 below),  to
                  which Advocat or any of its assets is subject;

                           (e) require any authorization, consent, order, permit
                  or  approval  of, or notice  to, or  filing,  registration  or
                  qualification   with,  any  governmental,   administrative  or
                  judicial authority  ("Consent"),  other than (1) the filing of
                  the Designation  with the Delaware  Secretary of State and (2)
                  the  filing  of a Form  D with  the  Securities  and  Exchange
                  Commission; or

                           (f)   require  any  Consent  of  any  Person  to  the
                  execution, delivery or performance of this Agreement or to the
                  consummation   of  the   transactions   contemplated   hereby,
                  including (but not limited to) Consents from parties to leases
                  or other agreements or commitments.

                  3.7 The  authorized  capital  stock  of  Advocat  consists  of
         20,000,000  shares of common  stock,  $0.01 par  value,  and  1,000,000
         shares of preferred  stock,  $0.10 par value of which 200,000 have been
         designated Series A Junior Participating  Preferred Stock of which none
         are issued and outstanding  and 600,000 have been  designated  Series B
         Convertible  Preferred  Stock of which none are issued and  outstanding
         immediately prior to the issuance of the Shares. After giving effect to
         the consummation of the transactions  (i.e., the Closing)  contemplated
         by this  Agreement,  the  only  shares  of  capital  stock  issued  and
         outstanding, reserved for issuance or committed to be issued will be:

                           (a) 5,491,621 fully paid and non-assessable
                  shares of Common Stock, duly issued and outstanding;

                           (b) 200,000  shares of Series A Junior Preferred
                  Stock  reserved for issuance  pursuant to the Rights Plan;

                           (c) 393,658 fully paid and  non-assessable  shares of
                  Series  B  Convertible   Preferred  Stock,   duly  issued  and
                  outstanding and owned of record and beneficially by Omega;

                           (d)  706,561  shares of Common Stock reserved for
                  issuance  upon  conversion  of the Series B Preferred Stock;
<PAGE>

                           (f)  441,892  shares of  Common  Stock  reserved  for
                  issuance  upon  the  conversion  of  all  accrued  and  unpaid
                  dividends on the Shares (calculated  assuming (1) a conversion
                  date of September  30, 2007,  (2) no change in the  Conversion
                  Price (as  defined in the  Designation)  and (3) no payment of
                  dividends on the Shares as of such date); and

                           (f)  206,342  shares of Series B Preferred  Stock and
                  370,356  shares of Common Stock reserved for issuance upon the
                  conversion of all unpaid  principal and one fiscal  quarter of
                  accrued interest under the Note (calculated assuming no change
                  in the Conversion Price) to either Series B Preferred Stock or
                  Common Stock, as applicable.

         There are no  declared  but unpaid  dividends  or  undeclared  dividend
         arrearages  on any shares of capital  stock of  Advocat.  Except as set
         forth on Schedule  3.7,  there are no  outstanding  options,  warrants,
         rights, calls, agreements,  convertible securities or other commitments
         or rights to purchase or acquire any unissued stock or other securities
         from Advocat,  and no other  securities of Advocat are reserved for any
         purpose.  Except as set forth on  Schedule  3.7,  there are no material
         contracts,  commitments,  agreements,  understandings,  arrangements or
         restrictions  to which  Advocat is a party which  relate to the capital
         stock of Advocat.

                  3.8 As of the date of this Agreement, the aggregate book value
         of  Advocat's  outstanding  "securities"  (as that term is  defined  in
         Investment Company Act of 1940) exceeds $60,000,000.

         4. Representations and Warranties of Omega. Omega hereby represents and
warrants to Advocat as follows:

                  4.1  Omega  is an  "accredited  investor"  as  defined  in the
         Securities Act of 1933, as amended (the  "Securities  Act"),  and rules
         and regulations promulgated thereunder.

                  4.2 The Shares are being  acquired by Omega solely for its own
         account  for  investment,  with  no  present  intention  of  making  or
         participating  in a  distribution  thereof  within  the  meaning of the
         Securities Act. None of the Shares will be sold or transferred by Omega
         in violation of the  Securities  Act, any state  securities  law or any
         other applicable securities  legislation and the financial condition of
         Omega  is such  that  Omega  can  bear  the  risk  of  this  investment
         indefinitely.

                  4.3 Omega is aware  that the Shares  have not been  registered
         under  the  Securities  Act or any  state  securities  law or any other
         applicable  securities  legislation,  that  the  Shares  must  be  held
         indefinitely  unless they are  subsequently  registered or an exemption
         from such registration is available and that, except as provided in the
         Registration  Rights  Agreement,  Advocat  is  under no  obligation  to
         register the Shares under the Securities Act, any state securities law,
         or any other applicable securities legislation.  Omega is aware that an
         exemption  from the  registration  requirements  of the  Securities Act

<PAGE>

         pursuant  to Rule  144  thereunder  is not  presently  available;  that
         Advocat has not  covenanted  to make  available an  exemption  from the
         registration  requirements  pursuant to such Rule 144 or any  successor
         rule for resale of the Shares; and that even if an exemption under Rule
         144 were  available,  the Rule  generally  permits only routine  public
         market sales of  securities in limited  amounts in accordance  with the
         terms and conditions of such Rule.

                  4.4 Omega  confirms that Advocat has made  available to Omega,
         or its  representatives,  the opportunity to ask questions of Advocat's
         officers and directors and to acquire such additional information about
         the business and financial condition of Advocat as Omega has requested,
         which additional information has been received.

                  4.5 Omega confirms that no  representations or warranties have
         been  made by  Advocat  other  than as set forth or  confirmed  in this
         Agreement,  in the  Restructuring  Agreement  and in the  documents and
         agreements  which evidence or secure the  transactions  contemplated by
         the Transaction Documents (as defined in Section 9.7 below).

         5.       Indemnification.

                  5.1  Advocat  agrees  to  indemnify  and hold  Omega,  and its
         successors  and  assigns,   harmless  from  and  against  any  and  all
         liabilities,    losses,   damages,   injuries,   liabilities,   claims,
         deficiencies,   judgments,   fines,   costs  and  expenses,   including
         reasonable counsel fees ("Losses"),  suffered, incurred or sustained by
         Omega or its  successors  or assigns  that result  from,  relate to, or
         arise out of:

                           (a) any breach of any  representation or warranty or
                  nonfulfillment of any agreement or covenant on the part of
                  Advocat under this Agreement; or

                           (b) any action, suit, claim or proceeding incident to
                  any of the foregoing or to the enforcement of this Section 5.

                  5.2 (a) If any third party shall  notify Omega with respect to
         any matter (a "Third Party  Claim")  which may give rise to a claim for
         indemnification  against Advocat (the "Indemnifying  Party") under this
         Section,  then Omega shall promptly  notify Advocat of such Third Party
         Claim in writing; provided, however, that no delay on the part of Omega
         in notifying  Advocat shall relieve  Advocat from any obligation  under
         this  Section  unless  (and  then  solely  to the  extent)  Advocat  is
         prejudiced by such delay.

                  (b)  Advocat  will have the right to assume the defense of the
         Third Party Claim with counsel  reasonably  acceptable  to Omega at any
         time within fifteen (15) days after Omega has given notice of the Third
         Party Claim;  provided,  however, that Advocat must conduct the defense

<PAGE>

         of the Third Party Claim actively and diligently to preserve its rights
         to assume the defense of the Third Party Claim;  and  provided  further
         that Omega may retain separate  co-counsel at its sole cost and expense
         and participate in the defense of the Third Party Claim.

                  (c) So long as  Advocat  has  assumed  and is  conducting  the
         defense of the Third  Party Claim in  accordance  with  Section  5.2(b)
         above,  Advocat  will not consent to the entry of any judgment or enter
         into any  settlement  with respect to the Third Party Claim without the
         prior written consent of Omega (not to be withheld unreasonably) unless
         the judgment or proposed  settlement involves only the payment of money
         damages by Advocat and does not impose an injunction or other equitable
         relief upon Omega.

                  (d) If Advocat  does not assume or conduct  the defense of the
         Third Party Claim in accordance with Section 5.2(b) above, however, (i)
         Omega may defend  against,  and consent to the entry of any judgment or
         enter into any settlement with respect to, the Third Party Claim in any
         manner it reasonably may deem  appropriate  (and Omega need not consult
         with, or obtain any consent from,  Advocat in connection  with any such
         defense,   consent  or  settlement),   and  (ii)  Advocat  will  remain
         responsible for any Losses Omega may suffer resulting from, arising out
         of,  relating  to, in the nature of, or caused by the Third Party Claim
         to the fullest extent provided in this Section 5.

         6. Financial  Statements and Other  Information.  If, at any time while
Omega holds any of the Shares (or any Common Stock of Advocat),  Advocat  ceases
to  have  registered  any  of  its  securities  pursuant  to  Section  12 of the
Securities  Exchange Act of 1934,  as amended (the "34 Act"),  or to timely file
all  reports  required  to be filed by Advocat  under the 34 Act,  Advocat  will
deliver to Omega, as applicable:

                  (a)  Audited   Annual   Financial   Statements.   As  soon  as
         practicable  after the end of each fiscal  year of Advocat,  and in any
         event  within  ninety  (90) days  thereafter,  a  consolidated  audited
         balance sheet of Advocat and its  subsidiaries  (if any), as of the end
         of such year, and consolidated audited statements of income, changes in
         retained  earnings  and  changes  in  cash  flows  of  Advocat  and its
         subsidiaries  (if any),  for such fiscal year,  prepared in  accordance
         with  GAAP and  setting  forth  in each  case in  comparative  form the
         figures for the previous fiscal year, all in reasonable  detail and, in
         the   case  of  the   consolidated   statements,   certified,   without
         qualification  or  explanation,   by  independent   public  accountants
         selected by Advocat and reasonably acceptable to Omega; and

                  (b)  Unaudited  Quarterly  Financial  Statements.  As  soon as
         practicable  after the end of each  fiscal  quarter of each fiscal year
         and, in any event within forty-five (45) days thereafter,  consolidated
         unaudited balance sheets of Advocat and its subsidiaries (if any) as of
         the end of such period, and consolidated unaudited statements of income
         and changes in cash flows of Advocat and its  subsidiaries (if any) for
         such  period  and for the  current  fiscal  year to date,  prepared  in

<PAGE>

         accordance with GAAP and setting forth in comparative  form the figures
         for the corresponding  periods of the previous fiscal year,  subject to
         changes  resulting  from  normal  year-end  audit  adjustments  and the
         absence of  footnotes,  all in  reasonable  detail and certified by the
         principal financial officer of the Company.

         7.  Redemption  Right upon Default.  Upon the occurrence of an Event of
Default (as defined in Section 10.7 below) and while it  continues,  Omega shall
have the option,  in addition to all other rights and remedies  available to it,
to cause Advocat to redeem all or any part of the Shares  pursuant to Section 11
of the Designation.

         8.  Public  Status.   So  long  as  any  of  the  Shares  shall  remain
outstanding,  Advocat shall cause the Common Stock to remain registered pursuant
to Section  12 of the 34 Act and shall use  commercially  reasonable  efforts to
timely file all reports required to be filed by the Company under the 34 Act.

         9.  Further Assurances and Information.

                  9.1 If, subsequent to the date of this Agreement,  the Federal
         government  issues or passes  rules,  regulations  or laws which  would
         cause Omega to lose, or be at a material risk of losing,  its status as
         a Real Estate Investment Trust under the Internal Revenue Code of 1986,
         as amended,  as a result of Omega  holding  the Shares,  and if Omega's
         attorneys or accountants  recommend a restructuring of the relationship
         between Omega and Advocat as set forth in the Restructuring  Agreement,
         then so long as the proposed  restructuring does not place Advocat in a
         materially  worse  position  relative to its position under the current
         structure  of the  relationship,  Advocat  shall  use its  commercially
         reasonable efforts to promptly take, or promptly cause to be taken, all
         actions and to execute all documents that are  reasonably  requested by
         Omega to restructure the relationship.

                  9.2 Within ten (10) days of the  receipt of a written  request
         from  Omega,  Advocat  shall  provide  to Omega  reasonable  access  to
         Advocat's books and records for the purpose of estimating the aggregate
         fair market value of Advocat's  outstanding  "securities" (as that term
         is defined  in  Investment  Company  Act of 1940) as of the date of the
         request.

         10.      Miscellaneous.

                  10.1 The representations,  warranties and agreements contained
         herein shall survive the  execution and delivery of this  Agreement and
         the purchase of the Shares.

                  10.2 This  Agreement  shall be binding upon and shall inure to
         the benefit of the parties and their  respective  permitted  successors
         and assigns. This Agreement may not be assigned, by operation of law or
         otherwise,  without  the prior  written  consent  of the  non-assigning
         party;  provided,  however, that Omega and any subsequent holder of the
         Shares may assign the rights  granted  pursuant  to Sections 5 and 6 of
         this Agreement to any subsequent holder of the Shares.
<PAGE>

                  10.3  This  Agreement,  the  Restructuring  Agreement  and the
         documents  which evidence or secure the  transactions  contemplated  by
         this Agreement and the  Restructuring  Agreement  constitute the entire
         agreement  of the parties  relating to the  subject  matter  hereof and
         there are no terms other than those  contained  herein.  This Agreement
         may not be  modified  or  amended  except  in a  writing  signed by the
         parties hereto.

                  10.4 This  Agreement  shall be  governed by and  construed  in
         accordance  with the  laws of the  State of  Delaware,  without  giving
         effect to its conflicts of law provisions.

                  10.5 This Agreement may be executed in counterparts, which
         together shall constitute one and the same agreement.

                  10.6 All notices and other communications under this Agreement
         shall be made in the manner specified in the Restructuring Agreement.

                  10.7 As used in this Agreement, the following terms shall have
         the following meanings:

                           "Event  of  Default"  means (i) if  Advocat  fails to
                  observe or perform or cause to be  observed or  performed  any
                  term, covenant or condition of this Agreement and such failure
                  is not cured  within a period of thirty (30) days after notice
                  thereof  from  Omega,  (ii) a  representation  or  warranty of
                  Advocat made in this Agreement is untrue when made or (iii) an
                  Event of Default under any of the Transaction Documents.

                           "Governmental Entity" means any Federal, state, local
                  or foreign government or any court of competent  jurisdiction,
                  administrative  agency  or  commission  or other  governmental
                  authority or instrumentality, domestic or foreign.

                           "Lien" or "Liens" means any pledge,  lien (including,
                  without limitation,  any tax lien), charge,  claim,  community
                  property interest, condition, equitable interest, encumbrance,
                  security interest,  mortgage,  option, restriction on transfer
                  (including  without limitation any buy-sell agreement or right
                  of first  refusal or offer),  forfeiture,  penalty,  equity or
                  other right of another Person of every nature and  description
                  whatsoever.

                           "Person" means any individual, legal entity, business
                  enterprise,   or  government,   governmental   body  or  unit,
                  including any corporation,  partnership,  limited partnership,
                  or limited liability company.
<PAGE>

                           "Transaction  Documents"  means this  Agreement,  the
                  Restructuring Agreement, the Amended and Restated Master Lease
                  (as defined in the Restructuring Agreement),  the Subordinated
                  Note, all documents which evidence or secure the  transactions
                  contemplated by this Agreement,  the Restructuring  Agreement,
                  the Amended and Restated Master Lease, the  Subordinated  Note
                  and  all  guaranties,   security  agreements,   cross  default
                  agreements and other documents granted concurrently  herewith,
                  and  granted  previously  or from  time to time  hereafter  by
                  Advocat to Omega, or any of Omega's affiliates..

                          Signatures on following page.


<PAGE>


         In witness  whereof the parties have executed this  Agreement as of the
date first set forth above.

                                  ADVOCAT INC.


                                  By:

                                  Title:


                                  OMEGA HEALTHCARE INVESTORS, INC.


                                  By:

                                  Title:


Exhibits and Schedules:

Exhibit A         Form of Designation
Exhibit B         Form of Registration Rights Agreement
Schedule 3.7      Options, Warrants, Etc.
<PAGE>
                                    EXHIBIT A

                                     FORM OF
                           CERTIFICATE OF DESIGNATION
                                       OF
                                  ADVOCAT INC.
                        Pursuant to the Provisions of the
                        Delaware General Corporation Law
--------------------------------------------------------------------------------

To the Secretary of State of the State of Delaware:
         Pursuant  to the  provisions  of Section  151 of the  Delaware  General
Corporation Law (the "Delaware Act"), the undersigned  corporation  submits this
Certificate of Designation for the purpose of designating a series of shares and
fixing and determining the relative rights and preferences thereof:

         1. The name of the corporation is Advocat Inc.
         2. The following resolution,  designating a series of shares of Advocat
Inc. (the  "Corporation")  and fixing and  determining  the relative  rights and
preferences  thereof,  was  duly  adopted  by  the  Board  of  Directors  of the
Corporation at a duly called meeting held on November 7, 2000.

         RESOLVED,  that pursuant to the powers expressly delegated to the Board
of Directors by Sections 4 and 12 of the  Certificate  of  Incorporation  of the
Corporation  and  pursuant to Section 102 of the Delaware  Act, the  Corporation
designates  as Series B  Convertible  Preferred  Stock (the  "Series B Preferred
Stock") that number of shares  having the powers,  preferences  and rights as is
set forth below.

         RESOLVED, that the President,  Chairman of the Board of Directors, Vice
President or Secretary of the Corporation, and each of them, be, and hereby are,
authorized  and  directed  to execute,  file and  deliver all such  instruments,
agreements,  applications  or other  documents or amendments to any thereof that
may be required, necessary or desirable to carry fully into effect the foregoing
resolution  and that the  execution,  filing or delivery of all of such shall be
deemed conclusive evidence of the approval and authorization by this Corporation
of such acts.  All terms used  herein  which are  defined in the  Charter of the
Corporation  shall have the same meaning  herein,  unless  defined herein or the
context otherwise requires.
<PAGE>

Section  1.  Designation  and  Amount.  Of  the  authorized  800,000  shares  of
undesignated  Preferred Stock,  600,000 shall be designated Series B Convertible
Preferred  Stock.  Such  number of  shares  may be  increased  or  decreased  by
resolution of the Board of Directors;  provided, that no resolution shall reduce
the  number  of shares of  Series B  Preferred  Stock to a number  less than the
number of shares then outstanding.

Section 2.  Dividends and  Distributions.  (a) The holders of Series B Preferred
Stock  shall be  entitled  to  receive,  when and as  declared  by the  Board of
Directors of the Corporation (the "Board of Directors"),  out of the net profits
of the  Corporation,  dividends  per share  equal to 7% per annum of the  Stated
Value (as herein defined) of such Series B Preferred Stock,  payable  quarterly.
No dividend shall be paid in cash prior to the later of (1) October 1, 2002, and
(2) the end of the fiscal quarter following the date that certain  reimbursement
promissory  note issued by the  Corporation to AmSouth Bank dated November ____,
2000 (the  "Reimbursement  Note") has been paid in full (the  "Dividend  Payment
Date"). Dividends on the outstanding shares of Series B Preferred shall begin to
accrue  and  accumulate  (whether  or not  declared)  from the Issue Date of the
Series B Preferred  Stock,  calculated on the basis of a 360-day year consisting
of twelve 30-day  months,  and shall accrue and  accumulate on a daily basis and
compound on a quarterly basis (to the extent not otherwise  declared and paid as
set forth above), in each case whether or not declared.  In the event the Series
B  Preferred  Stock is  converted  as  provided  in Section 8 below prior to the
Dividend Payment Date, accrued but unpaid dividends payable upon such conversion
shall be payable by promissory note maturing no later than the Dividend  Payment
Date in  substantially  the same form as the  Subordinated  Note (as  defined in
Section 11 below) or by conversion as provided in Section 8(e) below, but not in
cash.  Notwithstanding  anything to the  contrary  in this  Section 2, after the
Dividend  Payment Date,  the Board of Directors  shall declare  dividends on the
Series B Preferred Stock to the extent,  in its good faith  judgment,  there are
Available  Funds (defined in Section 12 below) to pay such quarterly  dividends.
To the extent there are  insufficient  Available Funds to pay all holders of the
Preferred  Stock  the full  quarterly  dividend  for any  quarter,  the Board of
Directors  shall declare a dividend to all holders of the  Preferred  Stock on a
pro rata basis to the extent of Available  Funds,  if any.  Holders of shares of
the Preferred Stock shall be entitled to receive such dividends in preference to
and in priority over dividends upon Junior Stock (defined in Section 12 below) .
All dividends  declared upon the Series B Preferred  Stock shall be declared pro
rata per share. For purposes hereof,  the term "Stated Value" shall mean $8.3829
per share, subject to appropriate adjustment in the event of any stock dividend,
stock split,  stock  distribution  or  combination  with respect to the Series B
Preferred Stock.

         (b) Dividends on the Series B Preferred  Stock shall be cumulative  and
compounded  quarterly and shall  continue to accrue  whether or not declared and
whether  or not in any  fiscal  year  there  shall  be net  profits  or  surplus
available for the payment of dividends in such fiscal year.

Section  3.  Liquidation,  Dissolution  or  Winding  Up. (a) In the event of any
voluntary  or  involuntary  liquidation,   dissolution  or  winding  up  of  the
Corporation,  the holders of shares of Series B Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation  available for

<PAGE>

distribution  to its  stockholders,  before  any  payment  shall  be made to the
holders of Junior  Stock,  an amount in cash equal to the Stated Value per share
plus any dividends  thereon  accrued but unpaid.  If upon any such  liquidation,
dissolution  or  winding  up of the  Corporation  the  remaining  assets  of the
Corporation  available  for  the  distribution  to  its  stockholders  shall  be
insufficient  to pay the holders of shares of Series B Preferred  Stock the full
amount  to which  they  shall be  entitled,  the  holders  of shares of Series B
Preferred Stock shall share ratably in any  distribution of the remaining assets
and funds of the Corporation in proportion to the respective amounts which would
otherwise  be  payable  in  respect  to  the  shares  held  by  them  upon  such
distribution  if all amounts payable on or with respect to said shares were paid
in full.

         (b) If any  shares of  Series A  Preferred  Stock are then  outstanding
based upon a Distribution  Date (as defined in the Rights  Agreement dated as of
March 13, 1995 by and between Advocat and Third National Bank in Nashville - the
"Rights  Agreement")  caused by an  Acquiring  Person (as  defined in the Rights
Agreement) other than the holder of the Series B Preferred Stock, then after the
payment of all preferential amounts required to be paid to the holders of Series
B  Preferred  Stock  pursuant  to  Section  3(a)  above and any other  series of
Preferred Stock which is senior in priority to the Series A Preferred Stock upon
the dissolution,  liquidation or winding up of the Corporation,  no distribution
shall be made (1) as to the  holders  of shares of stock  ranking  junior to the
Series A Preferred  Stock unless prior thereto the holders of Series B Preferred
Stock shall have  received an amount equal to accrued and unpaid  dividends  and
distributions  thereon,  whether or not  declared,  to the date of such payment,
plus an  amount  equal  to the  greater  of (i)  $100.00  per  share  or (ii) an
aggregate  amount  per  share,  subject  to  adjustment,  equal to 100 times the
aggregate  amount to be distributed per share to holders of Common Stock, or (2)
to the  holders  of Series A  Preferred  Stock or any other  stock  ranking on a
parity with the Series A Preferred Stock,  except  distributions made ratably on
the Series B Preferred  Stock and all other such parity stock in  proportion  to
the total amount to which the holders of all such shares are entitled  upon such
liquidation,  dissolution or winding up.  Notwithstanding the foregoing,  in the
event a holder of Series B  Preferred  Stock  transfers  any  shares of Series B
Preferred  Stock to an  Acquiring  Person,  then  the  rights  to  distributions
subsequent to the date of such transfer provided to such holder pursuant to this
Section 3(b) shall be null and void. In the event the  Corporation  shall at any
time after the date hereof  declare or pay any dividend on Common Stock  payable
in  shares  of  Common  Stock  or  effect  a  subdivision   or   combination  or
consolidation of the outstanding shares of Common Stock (by  reclassification or
otherwise)  into a greater or lesser number of shares of Common  Stock,  then in
each  such case the  aggregate  amount  to which  holders  of shares of Series B
Preferred  Stock were entitled  immediately  prior to the event  described under
clause  (1)  above  of the  immediately  prior  sentence  shall be  adjusted  by
multiplying  such amount by a fraction  the  numerator of which is the number of
shares  of  Common  Stock  outstanding  immediately  after  such  event  and the
denominator  of  which is the  number  of  shares  of  Common  Stock  that  were
outstanding immediately prior to such event.
<PAGE>

         (c) If no shares of Series A Preferred Stock are then outstanding, then
after the payment of all preferential amounts required to be paid to the holders
of Series B Preferred  Stock and any other  series of  Preferred  Stock upon the
dissolution, liquidation or winding up of the Corporation, the holders of shares
of Common  Stock then  outstanding  shall be entitled  to receive the  remaining
assets and funds of the Corporation available for distribution to stockholders.

         (d) The Corporation will mail written notice of any  distribution  upon
liquidation,  dissolution  or  winding  up,  not less than 30 days  prior to the
payment date stated therein, to each record holder of Series B Preferred Stock.

Section 4.Certain Restrictions.(a) At any time when there are accrued and unpaid
dividends and distributions, whether or not declared and whether before or after
the Dividend Payment Date, on shares of  Series B  Preferred  Stock outstanding,
the Corporation shall not:

                  (i) declare or pay dividends on, make any other  distributions
                  on,  or  redeem  or   purchase   or   otherwise   acquire  for
                  consideration  any shares of Junior Stock  (provided  that the
                  Corporation  may redeem shares of Common Stock from  employees
                  pursuant  to  rights  of  the  Corporation   under  employment
                  agreements or employee benefit plans);

                  (ii) except as  permitted  in  subparagraph  4(a)(iii)  below,
                  redeem, purchase or otherwise acquire for consideration shares
                  of any stock  ranking on a parity  (either as to  dividends or
                  upon liquidation, dissolution or winding up) with the Series B
                  Preferred Stock, provided that the Corporation may at any time
                  redeem,  purchase  or  otherwise  acquire  shares  of any such
                  parity  stock  in  exchange  for  shares  of any  stock of the
                  Corporation  ranking  junior  (either as to  dividends or upon
                  dissolution,  liquidation  or  winding  up)  to the  Series  B
                  Preferred Stock; or

                  (iii)  purchase or  otherwise  acquire for  consideration  any
                  shares of Series B Preferred Stock,  except in accordance with
                  a pro rata purchase offer for all or any portion of the shares
                  of Series B Preferred  Stock made in writing to all holders of
                  such shares upon such terms as the Board of  Directors,  after
                  consideration  of the  respective  annual  dividend  rates and
                  other relative rights and preferences of the respective series
                  and classes, shall determine in good faith will result in fair
                  and  equitable   treatment  among  the  respective  series  or
                  classes.

         (b) The Corporation  shall not permit any subsidiary of the Corporation
to purchase or otherwise  acquire for  consideration  any shares of stock of the
Corporation unless the Corporation could, under subparagraph (a) of this Section
4, purchase or otherwise acquire such shares at such time and in such manner.
<PAGE>

         (c)  So  long  as  any  shares  of  Series  B  Preferred  Stock  remain
outstanding,  the Corporation  shall not, without the vote or written consent by
the  holders of at least a majority of the then  outstanding  shares of Series B
Preferred Stock, voting together as a single class:

                  (i) authorize or issue, or obligate itself to issue, any other
                  equity security  (including any security  convertible  into or
                  exercisable for any equity  security) senior to or on a parity
                  with the Series B  Preferred  Stock as to  dividend  rights or
                  redemption rights or liquidation preferences;

                  (ii)  permit  any  subsidiary  to issue or sell,  or  obligate
                  itself  to issue or sell,  except  to the  Corporation  or any
                  wholly owned subsidiary, any stock or other equity interest of
                  such subsidiary;

                  (iii)  increase  or  decrease  (other  than by  redemption  or
                  conversion) the total number of authorized shares of Preferred
                  Stock.

Section 5. Voting Rights. Except as otherwise provided by law and Sections 4 and
14 of this Designation,  the holders of shares of Series B Preferred Stock shall
have no  voting  rights  and their  consent  shall not be  required  for  taking
corporation action.

Section 6. Reacquired  Shares.  Any shares of Series B Preferred Stock purchased
or  otherwise  acquired by the  Corporation  in any manner  whatsoever  shall be
retired and canceled  promptly after the  acquisition  thereof.  All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock that may be reissued as a part of a new series of Preferred Stock, subject
to the  restrictions  set  forth in other  Certificates  of  Designation,  or to
Certificates  of  Amendment,  creating a series of Preferred  Stock or any other
similar stock or is otherwise required by law.

Section 7.  Consolidation,  Merger, Etc. If the Corporation shall enter into any
consolidation, merger, share exchange, combination or other transaction in which
all or  substantially  all of the shares of the Corporation are exchanged for or
changed into other stock or securities,  cash, and/or any other property, and if
any  shares  of  Series A  Preferred  Stock are then  outstanding  based  upon a
Distribution  Date caused by an  Acquiring  Person  other than the holder of the
Series B Preferred Stock, then in any such case, at the option of the holders of
Series B Preferred  Stock,  each share of Series B Preferred  Stock shall at the
same time be similarly exchanged or changed into an amount per share, subject to
the provisions hereinafter set forth, equal to 100 times the aggregate amount of
stock,  securities,  cash and/or property (payable in kind), as the case may be,
into which or for which each share of Common Stock is changed or  exchanged.  If
the  Corporation  shall at any time  declare or pay any  dividend  on the Common
Stock,  or  effect  a  subdivision  or  combination  or   consolidation  of  the
outstanding  shares of Common Stock (by  reclassification  or otherwise)  into a
greater or lesser number of shares of Common  Stock,  then in each such case the
amount set forth in the  preceding  sentence  with  respect to the  exchange  or
change of shares of Series A Preferred  Stock  shall be adjusted by  multiplying

<PAGE>

such amount by a  fraction,  the  numerator  of which is the number of shares of
Common Stock  outstanding  immediately  after such event and the  denominator of
which is the number of shares of Common Stock that were outstanding  immediately
prior to such event.  Notwithstanding  the  foregoing,  in the event a holder of
Series B Preferred  Stock transfers any shares of Series B Preferred Stock to an
Acquiring  Person,  then the rights to  distributions  subsequent to the date of
such transfer  provided to such holder  pursuant to this Section 7 shall be null
and void.

Section  8.  Conversion.  (a) Each  share of  Series B  Preferred  Stock  may be
converted at any time, at the option of the holder  thereof,  into the number of
fully-paid  and  nonassessable  shares of Common Stock  obtained by dividing the
Stated Value by the  Conversion  Price then in effect (the  "Conversion  Rate"),
provided, however, that on any redemption of any Series B Preferred Stock or any
liquidation of the  Corporation,  the right of conversion shall terminate at the
close of business on the full  business  day next  preceding  the date fixed for
such redemption or for the payment of any amounts  distributable  on liquidation
to the  holders of Series B  Preferred  Stock.  The  initial  conversion  price,
subject to adjustment as provided  herein,  is equal to $4.6705 (the "Conversion
Price").  The initial  Conversion Rate for the Series B Preferred Stock shall be
1.7949  shares of Common  Stock for each one share of Series B  Preferred  Stock
surrendered for conversion.

         (b) The Corporation shall not issue fractions of shares of Common Stock
upon  conversion of Series B Preferred  Stock or scrip in lieu  thereof.  If any
fraction of a share of Common Stock  would,  except for the  provisions  of this
Section 8(b), be issuable upon conversion of any Series B Preferred  Stock,  the
Corporation  shall in lieu thereof pay to the person entitled  thereto an amount
in cash  equal to the  Current  Value (as  defined  in Section 12 below) of such
fraction of a share of Common Stock, calculated to the nearest one-one hundredth
(1/100) of a share.

         (c) In order to exercise the  conversion  privilege,  the holder of any
Series B Preferred  Stock to be converted  shall  surrender its  certificate  or
certificates  therefor to the  principal  office of the  transfer  agent for the
Series B Preferred Stock (or if no transfer agent be at the time appointed, then
the Corporation at its principal  office),  and shall give written notice to the
Corporation  at such  office  that the  holder  elects to  convert  the Series B
Preferred Stock represented by such  certificates,  or any number thereof.  Such
notice  shall  also  state  the  name or  names  (with  address)  in  which  the
certificate or  certificates  for shares of Common Stock which shall be issuable
on such  conversion  shall be issued,  subject to any  restrictions  on transfer
relating  to shares of the Series B  Preferred  Stock or shares of Common  Stock
upon  conversion  thereof.  If so  required  by  the  Corporation,  certificates
surrendered  for  conversion   shall  be  endorsed  or  accompanied  by  written
instrument or instruments of transfer,  in form satisfactory to the Corporation,
duly authorized in writing. The date of receipt by the transfer agent (or by the
Corporation  if  the  Corporation  serves  as its  own  transfer  agent)  of the
certificates  and notice shall be the  conversion  date. As soon as  practicable
after  receipt  of  such  notice  and  the  surrender  of  the   certificate  or
certificates  for Series B Preferred Stock as aforesaid,  the Corporation  shall
cause to be  issued  and  delivered  at such  office to such  holder,  or on its
written order, a certificate  or  certificates  for the number of full shares of
Common Stock issuable on such  conversion and, if less than all shares of Series
B Preferred Stock  represented by the certificate or certificates so surrendered
are being  converted,  a residual  certificate or certificates  representing the
shares of Series B Preferred Stock not converted.
<PAGE>

         (d) The  Corporation  shall at all times  when the  Series B  Preferred
Stock shall be outstanding  reserve and keep available out of its authorized but
unissued  stock,  for the purposes of effecting  the  conversion of the Series B
Preferred  Stock,  such number of its duly authorized  shares of Common Stock as
shall  from  time  to  time  be  sufficient  to  effect  the  conversion  of all
outstanding Series B Preferred Stock.

         (e) Upon any such  conversion,  any accrued but unpaid dividends on the
Series B Preferred Stock  surrendered  for conversion  (the "Unpaid  Dividends")
shall be paid:

         (1) to the extent available and subject to the limitations contained in
Section 9(c)(1), by conversion into additional shares of Common Stock;

         (2) to the extent the Unpaid Dividends can not be converted into Common
Stock, if the Reimbursement Note has been paid in full, then in cash; and

         (3) any remaining Unpaid Dividends, by promissory note.

A holder of shares of Series B Preferred  Stock may waive the payment of accrued
but  unpaid  dividends  in its sole  discretion.  If the holder of shares of the
Series B Preferred  Stock to be converted  accepts a promissory  note as payment
for any unpaid dividends  accrued on the shares to be converted,  the promissory
note shall be in substantially  the same form as the Subordinated  Note and will
mature  on the last day of the  quarter  following  the  payment  in full of the
Reimbursement Note. The number of additional shares of Common Stock to be issued
in respect of any Unpaid  Dividends shall be equal to the amount of such accrued
but unpaid  dividends  divided by the Current Value of the Common Stock.  To the
extent that any such dividend would result in the issuance of a fractional share
of Common Stock (which shall be determined with respect to the aggregate  number
of shares of Common Stock held of record by each holder) then the Current  Value
of such  fraction of a Share shall be paid in cash (unless  there are no legally
available  funds with which to make such cash payment,  in which event such cash
payment shall be made as soon as possible).

         (f) All  shares of  Series B  Preferred  Stock  which  shall  have been
surrendered  for  conversion as herein  provided shall no longer be deemed to be
outstanding and all rights with respect to such shares, including the rights, if
any, to receive notices and to vote,  shall forthwith cease and terminate except
only the right to the  holder  thereof  to  receive  shares  of Common  Stock in
exchange therefor and payment of any accrued and unpaid dividends thereon.

Section 9. Mandatory  Conversion.  (a) Subject to the  limitations  set forth in
Section 9(c) below, the Corporation shall have the right to cause the conversion
of Series B Preferred  Stock into shares of Common  Stock at its then  effective
Conversion  Price  at  any  time,   provided  that  the  Current  Value  of  the
Corporation's  Common Stock on the date of the notice  described in Section 9(b)
below and on the Conversion  Date (as defined in Section 9(b) below) is equal to
or greater than 150% of the Conversion  Price.  In such a mandatory  conversion,
the  Corporation  will pay accrued and unpaid  dividends  as provided in Section
8(e).
<PAGE>

         (b) All holders of record of shares of Series B Preferred Stock will be
given at least 30 days' prior written  notice (the  "Conversion  Notice") of the
date  fixed  (the  "Conversion  Date") and the place  designated  for  mandatory
conversion of all (or if limited pursuant to Section  9(c)(1),  such portion) of
such  shares  of  Series B  Preferred  Stock  pursuant  to this  Section  9. The
Conversion  Notice will be sent by mail, first class,  postage prepaid,  to each
record  holder of shares of Series B Preferred  Stock at such  holder's  address
appearing on the stock register. On or before the date fixed for conversion each
holder of shares of Series B Preferred  Stock shall surrender its certificate or
certificates  for all such shares to the Corporation at the place  designated in
the Conversion Notice, and shall thereafter receive  certificates for the number
of shares of Common  Stock to which such  holder is  entitled  pursuant  to this
Section 9. Subject to Section 9(c), on the date fixed for conversion, all rights
with respect to the Series B Preferred Stock so converted will terminate, except
only the rights of the holders thereof,  upon surrender of their  certificate or
certificates  therefor,  to  receive  certificates  for the  number of shares of
Common  Stock into which such Series B Preferred  Stock has been  converted  and
payment of any  accrued  and unpaid  dividends  thereon.  If so  required by the
Corporation,  certificates  surrendered  for  conversion  shall be  endorsed  or
accompanied  by  written   instrument  or  instruments  of  transfer,   in  form
satisfactory to the  Corporation,  duly executed by the registered  holder or by
his  attorneys  duly  authorized  in  writing.  Subject  to  Section  9(c),  all
certificates evidencing shares of Series B Preferred Stock which are required to
be surrendered  for conversion in accordance with the provisions of Section 9(a)
shall,  from  and  after  the  date  such  certificates  are so  required  to be
surrendered,  be deemed to have been  retired  and  canceled  and the  shares of
Series B Preferred Stock represented thereby converted into Common Stock for all
purposes,  notwithstanding  the  failure  of the  holder or  holders  thereof to
surrender  such  certificates  on or prior to such date. As soon as  practicable
after the date of such mandatory conversion and the surrender of the certificate
or certificates for Series B Preferred Stock as aforesaid, the Corporation shall
cause to be issued and  delivered to such  holder,  or on its written  order,  a
certificate  or  certificates  for the  number of full  shares  of Common  Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Section  8(b) hereof in respect of any fraction of a share of Common
Stock otherwise issuable upon such conversion.

         (c) Notwithstanding  anything in this Designation to the contrary,  the
Corporation may not require conversion of the shares of Series B Preferred Stock
into shares of Common Stock pursuant to this  Designation and the holders of the
Series B  Preferred  Stock  shall  continue to hold shares of Series B Preferred
Stock  after  delivery of a  Conversion  Notice,  unless,  as of the date of the
proposed conversion:

                    (1) the  accountants or legal counsel of the holders of such
                    Series B Preferred  Stock to be  converted  render a written
                    opinion (the "Conversion  Opinion") to such holders prior to
                    conversion that such conversion will not result in, cause or
                    create a material  risk of, the holders  losing its or their

<PAGE>

                    status as a Real Estate  Investment Trust under the Internal
                    Revenue Code of 1986, as amended;  provided,  however,  that
                    the  Corporation  may  convert  a  portion  of the  Series B
                    Preferred  Stock to Common Stock pursuant to Section 9(a) if
                    the  accountants  or legal  counsel  of the  holders of such
                    Series B Preferred Stock to be converted render a Conversion
                    Opinion with  respect to such  portion and if  subparagraphs
                    (2) thru (5) of this  Section  9(c) are  satisfied as of the
                    date of the proposed conversion;

                    (2) the Common Stock is registered pursuant to Section 12 of
                    the  Securities  Exchange  Act of 1934,  as amended (the "34
                    Act") and the  Corporation  has  timely  filed  all  reports
                    required  to be filed by the  Corporation  under  the 34 Act
                    within the previous two years;

                    (3) no Event of Default (as defined in Section 12 below) has
                    occurred and is continuing;

                    (4) the  Common  Stock is listed  for  trading on the Nasdaq
                    National  Market,  the New  York  Stock  Exchange  or upon a
                    comparable national stock exchange; And

                    (5) the average  weekly  trading  volume of the Common Stock
                    over the prior four weeks was at least 500,000 shares traded
                    (as adjusted for stock  splits,  stock  dividends or similar
                    transactions).

All  costs  associated  with  the  Conversion  Opinion  shall  be  paid  by  the
Corporation.

         (d) If the Corporation may not convert all or any portion of the shares
of Series B Preferred  Stock (the  "Unconverted  Shares")  to the  Corporation's
Common Stock pursuant to Section 9(a) solely because of the limitation set forth
in Section 9(c)(1),  then, provided that the Reimbursement Note has been paid in
full, on the Conversion  Date, the Corporation may redeem all of the Unconverted
Shares at a per share  price in cash  equal to the  greater  of (1) the  Current
Value on the date of the Conversion Notice and (2) the closing price on the last
Trading Day (as defined in Section 12) immediately prior to the Conversion Date,
plus an amount equal to any dividends accrued but unpaid thereon (such amount is
hereinafter referred to as the "Corporation's Redemption Price").

         (e) On or  prior  to the  Conversion  Date,  each  holder  of  Series B
Preferred  Stock to be redeemed shall  surrender its certificate or certificates
representing  such shares to the  Corporation,  and thereupon the  Corporation's
Redemption  Price for such  shares  shall be  payable to the order of the person

<PAGE>

whose name appears on such  certificate or certificates as the owner thereof and
each surrendered  certificate shall be canceled.  In the event less than all the
shares represented by any such certificate are redeemed, a new certificate shall
be issued  representing  the  unredeemed  shares.  From and after the Conversion
Date,  unless  there  shall have been a default in payment of the  Corporation's
Redemption  Price,  all rights of the  holders of the Series B  Preferred  Stock
redeemed  (except the right to receive the  Redemption  Price upon  surrender of
their certificate or certificates)  shall cease with respect to such shares, and
such shares shall not thereafter be transferred on the books of the  Corporation
or be deemed to be outstanding for any purpose whatsoever.

Section 10.    Conversion Price. The Conversion Price per share for the Series B
Preferred  Stock  shall  be subject to adjustment from  time to time as provided
below.

         (a) Adjustments to Conversion Price Based on Changes in Capitalization.
If outstanding shares of the Junior Stock of the Corporation shall be subdivided
into a  greater  number  of  shares,  or a  dividend  in  Junior  Stock or other
securities of the Corporation  convertible into or exchangeable for Junior Stock
(in which latter event the number of shares of Junior  Stock  issuable  upon the
conversion  or  exchange  of such  securities  shall  be  deemed  to  have  been
distributed) shall be paid in respect to the Junior Stock of the Corporation, or
upon any other event which would reasonably require equitable adjustment for the
benefit of the  holders of Series B Preferred  Stock,  the  Conversion  Price in
effect  immediately  prior to such  subdivision  or at the  record  date of such
dividend  or at the date of such  other  event  shall,  simultaneously  with the
effectiveness of such subdivision or other event or immediately after the record
date  of  such  dividend,  be  proportionately   reduced,  and  conversely,   if
outstanding shares of the Common Stock of the Corporation shall be combined into
a smaller number of shares,  the Conversion Price in effect immediately prior to
such  combination   shall,   simultaneously   with  the  effectiveness  of  such
combination,  be  proportionately  increased.  Any  adjustment to the Conversion
Price under this subsection (a) shall become  effective at the close of business
on the date the  subdivision  or  combination  or other event referred to herein
becomes effective.

         (b) Adjustments to Conversion  Price Based on Future  Issuances.  If at
any time or from time to time the  Corporation  shall  issue or sell  Additional
Shares of Junior  Stock (as  hereinafter  defined)  other than in a  transaction
which falls within  subsection (a), for a consideration  per share less than the
then existing Conversion Price, then, and thereafter successively upon each such
issuance or sale, the Conversion Price shall,  pursuant to the following formula
(the "Conversion Formula"), be adjusted to a Conversion Price (calculated to the
nearest cent) determined by dividing:

                  (i) an  amount  equal to the sum of (A) the  Conversion  Price
                      immediately prior to such issue or sale, multiplied by the
                      number of shares of Junior Stock  outstanding at the close
                      of  business  on the day next  preceding  the date of such
                      issue or sale,  plus (B) the aggregate  consideration,  if
                      any,  received or to be received by the  Corporation  upon
                      such issue or sale, by
<PAGE>

                  (ii)  the number of shares of Junior Stock  outstanding at the
                        close  of  business  on the  date of such  issue or sale
                        after giving  effect to the issuance of such  Additional
                        Shares of Junior Stock.

         (c)  Definitions for Purposes of this Section 10.  Notwithstanding  any
contrary  definitions  in these  Articles,  for purposes of this Section 10, the
following definitions shall apply:

(1)  Consideration.  For the purpose of making any  adjustment in the Conversion
Price or number of shares of Common Stock acquired upon conversion of the Series
B  Preferred  Stock,  as  provided  above,  the  consideration  received  by the
Corporation for any issue or sale of securities shall:

                  (i) to  the  extent it  consists  of cash, be deemed to be the
                      amount of cash received by the Corporation for such shares
                      (or, if  such  shares  are  offered  by  the   Corporation
                      for subscription,  the subscription  price,  or,  if  such
                      shares  are  sold  to  underwriters  or dealers for public
                      offering without  a  subscription   offering, the  initial
                      public offering   price),   without   deducting  therefrom
                      any   compensation   or   discount  paid   or  allowed  to
                      underwriters  or  dealers  or  others  performing  similar
                      services  or  for  any  expenses  incurred  in  connection
                      therewith;

                  (ii) to the extent it consists of property other than cash, be
                        computed at the fair market value  thereof as determined
                        in  good  faith  by  the  Board  of   Directors  of  the
                        Corporation,  at or  about,  but as of,  the date of the
                        adoption of the resolution specifically authorizing such
                        issuance  or  sale,   irrespective   of  any  accounting
                        treatment  thereof;  provided,  however,  that such fair
                        market value as  determined by the Board of Directors of
                        the  Corporation,  when added to any cash  consideration
                        received in connection with such issuance or sale, shall
                        not exceed the aggregate  market price of the Additional
                        Shares of Junior Stock being  issued,  as of the date of
                        the adoption of such resolution; and

                  (iii) Additional Shares

                           (A)  if   Additional   Shares  of  Junior   Stock  or
                           Convertible  Securities (as  hereinafter  defined) or
                           rights  or  options  to  purchase  either  Additional
                           Shares of Junior Stock or Convertible  Securities are
                           issued  or  sold   together   with  other   stock  or
                           securities  or other  assets of the  Corporation  for
                           consideration  which covers both,  the  consideration
                           received for the  Additional  Shares of Junior Stock,
                           Convertible  Securities or rights or options shall be
                           computed  as that  portion  of the  consideration  so
                           received which is reasonably determined in good faith

<PAGE>

                           by the Board of  Directors of the  Corporation  to be
                           allocable to such Additional  Shares of Junior Stock,
                           Convertible  Securities or rights or options. For the
                           purpose of making any  adjustment  in the  Conversion
                           Price provided in this Section 10, if at any time, or
                           from time to time, the  Corporation  issues any stock
                           or  other  securities   convertible  into  Additional
                           Shares  of  Junior   Stock   (such   stock  or  other
                           securities   being   hereinafter   referred   to   as
                           "Convertible  Securities")  or issues  any  rights or
                           options to purchase Additional Shares of Junior Stock
                           or  Convertible  Securities  (such  rights or options
                           being hereinafter referred to as "Rights"), then, and
                           in each such case, the Corporation shall be deemed to
                           have  issued  at the  time  of the  issuance  of such
                           Rights or  Convertible  Securities the maximum number
                           of  Additional  Shares of Junior Stock  issuable upon
                           exercise or  conversion  thereof and to have received
                           in  consideration  for the issuance of such shares an
                           amount equal to the  aggregate  Effective  Conversion
                           Price of such Rights or Convertible  Securities.  For
                           the   purposes  of  this   Section   10,   "Effective
                           Conversion  Price"  shall mean an amount equal to the
                           sum of the lowest  amount of  consideration,  if any,
                           received  or  receivable  by  the  Corporation   with
                           respect to any one  Additional  Share of Junior Stock
                           upon issuance of the Rights or Convertible Securities
                           and upon their exercise or conversion,  respectively.
                           No further  adjustment of the Conversion  Price shall
                           be  made  as a  result  of  the  actual  issuance  of
                           Additional  Shares of Junior Stock on the exercise of
                           any  such  Rights  or  the  conversion  of  any  such
                           Convertible Securities;

                           (B) if the purchase price or rate at which any Rights
                           or  Convertible  Securities are  convertible  into or
                           exchangeable  for  Additional  Shares of Junior Stock
                           shall  change  at any time  (other  than  under or by
                           reason of  provisions  designed  to  protect  against
                           dilution),  the Conversion Price then in effect shall
                           forthwith be readjusted as otherwise  provided herein
                           to the  Conversion  Price  that  would  have  been in
                           effect  at such time had such  Rights or  Convertible
                           Securities  still   outstanding   provided  for  such
                           changed purchase price,  additional  consideration or
                           conversion  right,  as the case  may be,  at the time
                           initially  issued,  granted or sold.  If the purchase
                           price,  or the rate or the  additional  consideration
                           (if any) payable  upon the  exercise,  conversion  or
                           exchange  of any  Rights  or  Convertible  Securities
                           shall  be  changed  at  any  time  or  by  reason  of
                           provisions with respect  thereto  designed to protect
                           against dilution, then in the case of the delivery of
                           shares of Junior Stock upon  exercise,  conversion or
                           exchange of any such Rights or Convertible  Security,
                           the Conversion  Price then in effect hereunder shall,
                           upon  issuance  of such  shares of Junior  Stock,  be
                           adjusted  to such amount as would have  obtained  had

<PAGE>

                           such Right or Convertible  Security never been issued
                           and had adjustments  been made only upon the issuance
                           of the shares of Junior Stock  delivered as aforesaid
                           and for the consideration  actually received for such
                           Convertible Security and the Junior Stock;

                           (C) in the event of the  termination or expiration of
                           any right to exercise,  convert or exchange Rights or
                           Convertible Securities,  the Conversion Price then in
                           effect shall,  upon such  termination,  be changed to
                           the  Conversion  Price that would have been in effect
                           at the time of such  expiration  or  termination  had
                           such  Right or  Convertible  Security,  to the extent
                           outstanding  immediately  prior to such expiration or
                           termination,  never  been  issued,  and the shares of
                           Junior Stock issuable  thereunder  shall no longer be
                           deemed to be outstanding Junior Stock.

         (2)  Outstanding  Junior  Stock.  For  purposes of this  Section 10, in
determining  the  number  of  shares  of the  Junior  Stock of this  Corporation
outstanding  at any time,  there  shall be  included,  in addition to the Junior
Stock then issued and outstanding,  all Junior Stock then issuable upon exercise
of  all  outstanding  Rights  and  conversion  of  all  outstanding  Convertible
Securities.

         (3)  Additional  Shares of Junior Stock.  "Additional  Shares of Junior
Stock" as used in this  Section  10 shall  mean all  shares  of Junior  Stock or
Convertible  Securities and Rights issued by the  Corporation  subsequent to the
date of these Designation, other than (i) shares of Common Stock issued pursuant
to the  conversion of Series B Preferred  Stock,  and (ii) the issuance and sale
of, or the grant of options to purchase Common Stock, to employees, directors or
officers of, or bona fide  consultants to, the Corporation and its  subsidiaries
pursuant  to stock  plans or options or  agreements  adopted or  approved by the
Corporation's  Board of Directors  (including  shares issued or sold pursuant to
the  exercise  of any stock  option or  purchased  pursuant to a grant under the
Corporation's  stock  option  plans  or stock  purchase  plans  or  pursuant  to
agreements entered into for employee  compensation purposes prior to the date of
this Designation).

         (d)  Certification  of  Adjustments.  In each case of an  adjustment or
readjustment of the Conversion  Price or the number of shares of Common Stock or
other  securities  issuable upon conversion of the Series B Preferred  Stock, if
the change is greater than 1% from the previous change the  Corporation,  at its
expense,  shall cause independent public accountants selected by the Corporation
to compute such adjustment or  readjustment in accordance with this  Certificate
and to prepare a certificate showing such adjustment or readjustment,  and shall
mail such certificate,  by first-class mail, postage prepaid, to each registered
holder of the Series B Preferred  Stock at the holder's  address as shown on the
Corporation's  stock  transfer  books.  The  certificate  shall set  forth  such
adjustment  or  readjustment,  showing  in detail  the  facts  upon  which  such
adjustment or readjustment is based, including a statement of (i) the Conversion

<PAGE>

Price at the time in  effect  for the  Series B  Preferred  Stock,  and (ii) the
number  of shares of Common  Stock  and the type and  amount,  if any,  of other
property  which at the time would be received  upon  conversion  of the Series B
Preferred Stock. The form of such certificate shall be reasonably  acceptable to
the holders of record of a majority  of the shares of Series B  Preferred  Stock
then outstanding.

Section 11. Mandatory Redemption.

         (a) At any time on or  after  the  earlier  to occur of (1) an Event of
Default and (2) September 30, 2007,  holders of the Series B Preferred Stock may
require  the  Corporation  to redeem  all or a portion of the shares of Series B
Preferred Stock held by such holders (to the extent that such  redemption  shall
not violate any applicable provisions of the laws of the State of Delaware) at a
price in cash equal to the Stated  Value per share,  plus an amount equal to any
dividends accrued but unpaid thereon (such amount is hereinafter  referred to as
the "Redemption Price");  provided,  however, that if the Reimbursement Note has
not been paid in full as of the date the holders of the Series B Preferred Stock
require the  Corporation to redeem such shares of Series B Preferred  Stock (the
"Redemption  Date"), the Corporation may pay the Redemption Price by delivery of
a  promissory  note in the amount of the  Redemption  Price to the holder of the
Series B Preferred Stock to be redeemed. If the holder of shares of the Series B
Preferred Stock to be redeemed is to receive a promissory note as payment of the
Redemption Price, the promissory note shall be in substantially the same form as
the Subordinated  Note and will mature on the last day of the quarter  following
the payment in full of the  Reimbursement  Note. If the Corporation is unable on
the Redemption  Date to redeem any shares of Preferred Stock then to be redeemed
because  such  redemption  would  violate  the  applicable  laws of the State of
Delaware,  then the  Corporation  shall redeem such shares as soon thereafter as
redemption would not violate such laws.

         (b) On or  prior  to the  Redemption  Date,  each  holder  of  Series B
Preferred  Stock to be redeemed shall  surrender its certificate or certificates
representing such shares to the Corporation,  and thereupon the Redemption Price
of such shares shall be payable to the order of the person whose name appears on
such  certificate  or  certificates  as the owner  thereof and each  surrendered
certificate shall be canceled. In the event less than all the shares represented
by any  such  certificate  are  redeemed,  a new  certificate  shall  be  issued
representing the unredeemed  shares.  From and after the Redemption Date, unless
there shall have been a default in payment of the Redemption  Price,  all rights
of the holders of the Series B  Preferred  Stock  redeemed  (except the right to
receive  the   Redemption   Price  upon   surrender  of  their   certificate  or
certificates) shall cease with respect to such shares, and such shares shall not
thereafter be  transferred  on the books of the  Corporation  or be deemed to be
outstanding for any purpose whatsoever.

Section 12. Certain Definitions.  As  used  in this  Certificate,  the following
terms shall have the following respective meanings:

         "Available  Funds"  shall  mean any  funds  legally  available  for the
payment of dividends and interest accrued with respect to shares of the Series B
Preferred Stock.
<PAGE>

         "Business  Day" shall mean any day other than a  Saturday,  Sunday or a
day on which the Rights  Agent is  authorized  or  obligated by law or executive
order to close.

         "Current  Value" of any share of Preferred  Stock,  Common Stock or any
other  property on any date shall be  determined as provided in this Section 12.
In the case of publicly  traded  securities,  Current Value on any date shall be
deemed to be the average of the daily closing prices per share of such stock for
the  thirty  (30)  consecutive  Trading  Days  immediately  prior to such  date;
provided, however, that in the event the Current Value per share of any security
is determined  during a period which includes any date that is within 30 Trading
Days after the  announcement  by the issuer of such  security  of a dividend  or
distribution payable in shares of such securities or securities convertible into
shares  of  such  securities  (other  than  the  Rights),  or  any  subdivision,
combination or reclassification of such securities, then, and in each such case,
the Current Value shall be properly adjusted to take into account ex-dividend or
post-effective  date  trading.  The closing price for each day shall be the last
quoted  price or, if not so  quoted,  the  average of the high bid and low asked
prices in the  over-the-counter  market, as reported by the National Association
of Securities  Dealers,  Inc. , Automated  Quotation System or such other system
then in use, or, if on any such date such  securities are not quoted by any such
organization,  the average of the closing bid and asked prices as furnished by a
professional  market  maker making a market in such  securities  selected by the
Board or, if the  securities  are listed or  admitted to trading on the New York
Stock Exchange, the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular way,
in either case as reported in the principal  consolidated  transaction reporting
system or, if such  securities  are not listed or admitted to trading on the New
York Stock  Exchange,  as reported  in the  principal  consolidated  transaction
reporting  system with respect to securities  listed on the  principal  national
securities  exchange on which such securities are listed or admitted to trading.
If the security is not publicly held or not so listed or traded, "Current Value"
means  the fair  value  of a share of  Preferred  Stock,  Common  Stock or other
property,  as  determined  by  a  "Big  Five"  or  other  nationally  recognized
accounting  firm (jointly  selected by the  Corporation  and holders of Series B
Preferred  Stock),  which shall be determined  based on the fair market value of
the Corporation and the number of outstanding shares of stock of the Corporation
(assuming full conversion of all convertible shares of stock of the Corporation)
and without any discount  relating to minority  ownership,  lack of liquidity or
similar factors.  If the holders of Series B Preferred Stock (voting as a class)
and the Corporation are unable to agree on the accounting  firm, then each shall
choose an accounting  firm,  and those  accounting  firms shall  jointly  select
another   nationally   recognized   accounting   firm  to   perform   the  value
determination.

         "Event of Default"  shall have such meaning as is ascribed to it in the
Stock Issuance and  Subscription  Agreement  between the  Corporation  and Omega
Healthcare Investors, Inc., a Maryland corporation.

         "Issue  Date"  means the date on which the shares of Series B Preferred
are issued.
<PAGE>

         "Junior  Stock" shall mean any shares of any series or class of capital
stock of the Corporation, other than the Series B Preferred Stock.

         "Subordinated  Note"  means  the  Subordinated  Note  in  the  original
principal amount of $1,700,000 from the Corporation in favor of Omega Healthcare
Investors, Inc., a Maryland corporation.

         "Trading  Day"  shall  mean  a day  on  which  the  principal  national
securities  exchange on which the shares of such security are listed or admitted
to trading is open for the  transaction  of  business  or, if the shares of such
security  are not  listed or  admitted  to trading  on any  national  securities
exchange, a Business Day.

Section 13. Costs.  The Corporation  shall pay all taxes and other  governmental
charges (other than any income or other taxes imposed upon the profits  realized
by the  recipient)  that may be imposed in respect of the issue or  delivery  of
shares of Common Stock or other securities or property upon conversion of shares
of Series B Preferred  Stock,  including  without  limitation,  any tax or other
charge (other than any transfer  tax) imposed in  connection  with the issue and
delivery  of  shares  of Common  Stock or other  securities  at the time of such
conversion  in a name other than that in which the shares of Series B  Preferred
Stock so converted were registered.

Section 14.  Amendment.  The  Corporation  shall not amend,  alter or repeal its
Certificate of  Incorporation,  its Bylaws or this Certificate of Designation in
any manner which would  materially  alter or change the powers,  preferences  or
rights of the Series B Preferred  Stock so as to effect them  adversely  without
the  affirmative  vote of the holders of at least a majority of the  outstanding
shares of Series B Preferred Stock, voting together as a class.

         This Certificate of Designation to the Charter of the Corporation shall
be effective  immediately upon filing thereof with the Secretary of the State of
Delaware.

                                                     ADVOCAT INC.
                                                     By:
                                                     Title:
                                                     Dated: November ____, 2000

<PAGE>
                                    EXHIBIT B

                          FORM OF REGISTRATION RIGHTS AGREEMENT

This Registration Rights Agreement (this "Agreement") is made as of November __,
2000 by and among  ADVOCAT INC., a Delaware  corporation  (the  "Company"),  and
OMEGA  HEALTHCARE  INVESTORS,  INC.,  a  Maryland  corporation  (the  "Preferred
Stockholder").

                                    RECITALS

A. The Company,  the Preferred  Stockholder  and certain others are parties to a
Settlement  and  Restructuring  Agreement  dated  as of the  same  date  as this
Agreement (the "Restructuring Agreement").

B. Pursuant to the Restructuring Agreement, the Preferred Stockholder has agreed
to acquire  shares of the Company's Series B Convertible  Preferred  Stock  (the
"Preferred  Stock")  pursuant to that certain  Stock  Issuance and  Subscription
Agreement dated the same date as this Agreement (the "Stock Issuance Agreement")
provided that the Company enters into this Agreement.

C. Also pursuant  to the Restructuring Agreement,  the Company has issued to the
Preferred  Stockholder a  Subordinated  Note in the stated  principal  amount of
$1,700,000  dated the same date as this  Agreement,  which is  convertible  into
Common Stock of the Company (the "Subordinated Note").

                                   AGREEMENTS

In  consideration of the foregoing and the mutual covenants herein contained and
other good and valuable consideration,  the receipt and sufficiency of which are
acknowledged, the parties hereto agree as follows:

1.       Definitions.  In addition to terms defined elsewhere herein, as used in
this Agreement, the terms:

"Approved  Registration  Rights  Agreement"means a written agreement between the
Company and a holder of Common Stock or capital  stock  convertible  into Common
Stock which grants such holder  registration rights with respect to Common Stock
and (1) has been  consented to in writing by the  Preferred  Stockholder  or (2)
such  holder  has paid to the  Company an amount in the  aggregate  in excess of
$5,000,000 for such stock at a per share purchase price (assuming the conversion
of any  convertible  securities  into Common Stock) equal to or greater than the
Current Value as of the date of such transaction.

"Commission" means the Securities and Exchange Commission.
<PAGE>

"Current Value"  shall have the meaning assigned to such term in the Certificate
of  Designation  of  Advocat Inc.  pursuant to which the Company  designated the
Preferred Stock.

"Exchange Act" means the Securities Exchange Act of 1934, as amended.

"Public  Offering" means any offering by the Company of its equity securities to
the public pursuant to an effective  registration statement under the Securities
Act or any comparable  statement  under any comparable  federal  statute then in
effect.

"Registrable  Shares"  means at any time (i) any  shares  of Common  Stock  then
outstanding  and  beneficially  held,  directly  or  indirectly,  by a Preferred
Stockholder;  (ii) any shares of Common  Stock then  issuable  upon  exercise or
conversion  of any  Preferred  Stock,  or upon  conversion  of any accrued,  but
unpaid,  dividends  on the  Preferred  Stock,  held by a  Preferred  Stockholder
(including  any shares of Common Stock  issuable  upon exercise or conversion of
any Preferred  Stock  issuable  upon exercise or conversion of the  Subordinated
Note);  (iii)  any  shares  of Common  Stock  then  issuable  upon  exercise  or
conversion of the  Subordinated  Note;  and (iv) any shares of Common Stock then
issuable  directly  or  indirectly  upon the  conversion  or  exercise  of other
securities which were issued as a dividend or other distribution with respect to
or in  replacement  of any shares  referred to in (i), (ii) or (iii);  provided,
however,  that  Registrable  Shares shall not include any shares which have been
registered  pursuant to the Securities Act or which have been sold to the public
pursuant to Rule 144 under the Securities Act. For purposes of this Agreement, a
person will be deemed to be a holder of Registrable  Shares whenever such person
has the then-existing right to acquire such Registrable Shares (by conversion or
otherwise),  whether  or not such  acquisition  actually  has been  effected.  A
security shall cease to be a Registrable  Share when (i) it has been effectively
registered  under the  Securities  Act and  disposed of in  accordance  with the
registration  statement  covering  it or (ii) it is  distributed  to the  public
pursuant  to Rule  144 (or any  similar  provision  then  in  effect  under  the
Securities Act).

"Securities Act" means the Securities Act of 1933, as amended.

2. Demand Registration.

2.1  Requests  for  Registration.  Subject to the terms of this  Agreement,  the
Preferred   Stockholder  may,  at  any  time,  request  registration  under  the
Securities Act of all or part of its  Registrable  Shares  (provided that if the
request is for less than all of the  Registrable  Shares then held,  the request
must be for at least 25% of the  number of  shares  of  Common  Stock  which the
Preferred  Stockholder  would hold upon  conversion  of all shares of  Preferred
Stock held by the Preferred  Stockholder as of the date of this  Agreement),  on
Form S-1 or any similar long-form registration ("Long-Form Registration") or, if
available,  on  Form  S-2  or  S-3 or any  similar  short-form  registration  (a
"Short-Form Registration" - a Long Form Registration and Short Form Registration
are defined as a "Demand  Registration").  Within thirty (30) days after receipt

<PAGE>

of any request  pursuant to this  Section  2.1,  the  Company  will,  subject to
Section 2.2 below,  give  written  notice of such  request to all other  parties
hereto and will include in such registration all Registrable Shares with respect
to which the Company has received  written  requests for inclusion within thirty
(30) days after delivery of the Company's notice. The Preferred Stockholder will
be entitled to request two (2) Demand  Registrations  in which the Company  will
pay all  Registration  Expenses (as defined in Section 6 below).  A registration
will not  constitute  one of the  permitted  Demand  Registrations  until it has
become  effective.  The  Company  shall be  entitled  to  include  in any Demand
Registration shares to be sold by the Company for its own account, provided that
in the event that the number of shares  included  by the Company  exceeds  fifty
percent (50%) of the shares registered in such  registration,  such registration
will not count as a Demand Registration hereunder.

2.2  Priority.   The  Company  will  include  in  any  Demand  Registration  any
Registrable  Shares;  provided,  however,  if  the  Demand  Registration  is  an
underwritten  offering  and the  managing  underwriter(s)  advise the Company in
writing that in their opinion the number of securities  requested to be included
exceeds the number of securities  which can reasonably be sold in such offering,
the Company will include in such  registration,  first,  the Registrable  Shares
requested to be included in such  registration  or any previous  registration by
the Preferred Stockholder,  second, the securities that the Company will include
in such registration,  and third,  other securities  requested to be included in
such registration.

2.3  Restrictions.  The  Company  will not be  obligated  to effect  any  Demand
Registration  within nine months after the effective  date of a previous  Demand
Registration.  The Company may  postpone  for up to six (6) months the filing or
the effectiveness of a registration  statement for a Demand  Registration if the
Company's  Board of Directors  determines in good faith that the offering  would
have a harmful effect on the Company; provided,  however, that the Company shall
not be  entitled to delay the  effectiveness  of any Demand  Registration  for a
period in excess of nine (9) months in any twelve (12) month period  pursuant to
this and the preceding sentence.

2.4  Selection of  Underwriters.  The Company shall have the right to select the
managing  underwriter(s)  to administer  the offering  anticipated by any Demand
Registration,  provided  that  such  managing  underwriters  shall be  qualified
nationally  recognized  underwriters and subject to the Preferred  Stockholder's
approval which will not be unreasonably withheld or delayed.

3. Piggyback Registration.

3.1 Right to  Piggyback.  Whenever  the Company  proposes to register any of its
securities  under the Securities Act (other than on a registration  on Forms S-8
and  S-4  (or  comparable  forms)  or a  registration  of  non-convertible  debt
securities) on a registration form which may be used for the registration of any
Registrable  Shares (a "Piggyback  Registration"),  the Company will give prompt
written  notice to all holders of the  Registrable  Shares of its  intention  to

<PAGE>

effect such a registration and will include in such registration all Registrable
Shares (in  accordance  with the  priorities  set forth in Sections  3.2 and 3.3
below) with  respect to which the  Company has  received  written  requests  for
inclusion  within fifteen (15) days after the delivery of the Company's  notice.
The Company may withdraw its proposal at any time prior to the effective date of
the offering.

3.2  Priority  on  Primary  Registrations.  If a  Piggyback  Registration  is an
underwritten  primary  registration  on behalf of the Company  and the  managing
underwriters  advise the Company in writing that in their  opinion the number of
securities  requested  to be  included in such  registration  exceeds the number
which can reasonably be sold in such offering,  the Company will include in such
registration first, the securities that the Company proposes to sell; second, on
a pro rata basis (a) the  Registrable  Shares  requested  to be included in such
registration or any previous  registration by the Preferred  Stockholder and (b)
other securities required to be included in such Piggyback Registration pursuant
to an Approved  Registration  Rights  Agreement  (provided that in any event the
Preferred  Stockholder  shall be  entitled  to include  not less than 50% of the
number of such shares);  and third, other securities requested to be included in
such registration.

3.3 Priority on Secondary Registrations.  If one or more stockholders other than
a Preferred Stockholder requests that the Company make an underwritten secondary
registration  on its or their  behalf and the managing  underwriters  advise the
Company in writing that in their opinion the number of  securities  requested to
be included in such registration exceeds the number which can reasonably be sold
in such offering,  the Company will include in such registration first, on a pro
rata basis (a) the Registrable  Shares, if any, requested to be included therein
by the Preferred Stockholder and (b) other securities required to be included in
such  Piggyback  Registration  pursuant  to  the  Approved  Registration  Rights
Agreements  (provided  that in any  event  the  Preferred  Stockholder  shall be
entitled  to  include  in the  Piggyback  Registration  not less than 50% of the
number of such shares),  and, second,  other securities requested to be included
in such registration.

3.4 Other  Registrations.  If the Company has  previously  filed a  registration
statement with respect to Registrable  Shares  pursuant to Section 2 or pursuant
to this Section 3, and if such previous  registration  has not been withdrawn or
abandoned,  the  Company  will  not  file or  cause  to be  effected  any  other
registration  of any of its  equity  securities  or  securities  convertible  or
exchangeable  into or exercisable for its equity securities under the Securities
Act  (except  on Forms S-8 or S-4 or any  successor  form),  whether  on its own
behalf or at the  request of any holder or holders of such  securities,  until a
period  of at least six  months  has  elapsed  from the  effective  date of such
previous registration.

3.5 Selection of Underwriters.  In connection with any Piggyback Registration in
which the Purchaser has elected to include Registrable Shares, the Company shall
have the right to select the managing underwriters to administer any offering of
the Company's  securities in which the Company  participates  provided that such
managing underwriters shall be qualified nationally recognized underwriters.
<PAGE>

4. Holdback Agreements.

4.1 Holders' Agreements.  Each holder of Registrable Shares agrees not to effect
any public sale or distribution of equity  securities of the Company  (including
pursuant to Rule 144 under the Securities  Act), or any  securities  convertible
into or exchangeable or exercisable  for such  securities,  during the seven (7)
days prior to,  and during the one  hundred  eighty  (180) days  following,  the
effective  date of any  underwritten  registration  of the Company's  securities
(except as part of such underwritten registration),  or such other period as the
underwriters  managing  the  registered  public  offering  otherwise  reasonably
determine or reasonably require.

4.2 Company's  Agreements.  The Company agrees (i) not to effect any public sale
or distribution of its equity securities,  or any securities convertible into or
exchangeable or exercisable for such securities, during the seven (7) days prior
to, and during the one hundred eighty (180) days  following,  the effective date
of  any  underwritten   Demand   Registration  or  any  underwritten   Piggyback
Registration  (except as part of such  underwritten  registration or pursuant to
registrations  on Form  S-8 or any  successor  form),  unless  the  underwriters
managing  the  registered  public  offering  otherwise  agree,  and (ii) use its
reasonable  efforts to cause each  holder of at least  five  percent  (5%) (on a
fully diluted basis) of its equity  securities,  or any  securities  convertible
into or  exchangeable  or exercisable  for such securities who has acquired such
securities  directly  from the Company to agree not to effect any public sale or
distribution of any such  securities  during such period (except as part of such
underwritten  registration,  if otherwise  permitted),  unless the  underwriters
managing the registered public offering otherwise agree.

5.  Registration  Procedures.  Whenever the holders of  Registrable  Shares have
requested that any Registrable Shares be registered  pursuant to this Agreement,
the Company will use commercially  reasonable efforts to effect the registration
and sale of such  Registrable  Shares in accordance  with the intended method of
disposition thereof and, pursuant thereto,  the Company will as expeditiously as
possible:

     (a) prepare and file with the  Commission  a  registration  statement  with
respect to such Registrable  Shares and use commercially  reasonable  efforts to
cause such  registration  statement to become  effective  (provided  that before
filing a registration statement or prospectus,  or any amendments or supplements
thereto,  the Company will furnish copies of all such  documents  proposed to be
filed to the  counsel or  counsels  for the  holders of the  Registrable  Shares
covered by such registration statement);

     (b) prepare and file with the Commission such amendments and supplements to
such registration  statement and the prospectus(es) used in connection therewith
as may be necessary to keep such registration  statement  effective for a period
of four months or until  distribution is complete and comply with the provisions
of the Securities Act with respect to the disposition of all securities  covered
by such  registration  statement  during  such  period  in  accordance  with the
intended  methods  of  disposition  by the  sellers  thereof  set  forth in such
registration statement;
<PAGE>

     (c) furnish to each seller of  Registrable  Shares such number of copies of
such  registration  statement,   each  amendment  and  supplement  thereto,  the
prospectus(es)   included  in  such  registration   statement   (including  each
preliminary  prospectus)  and such other documents as such seller may reasonably
request in order to facilitate the disposition of the  Registrable  Shares owned
by such seller;

     (d) use  commercially  reasonable  efforts  to  register  or  qualify  such
Registrable  Shares  under  such  other  securities  or  blue  sky  laws of such
jurisdictions  as any seller  reasonably  requests and do any and all other acts
and things which may be reasonably  necessary or advisable to enable such seller
to consummate the disposition in such  jurisdictions  of the Registrable  Shares
owned by such  seller  (provided  that the  Company  will not be required to (i)
qualify  generally  to do  business  in any  jurisdiction  where  it  would  not
otherwise be required to qualify but for this subparagraph,  (ii) subject itself
to  taxation in any such  jurisdiction  or (iii)  consent to general  service of
process in any such jurisdiction);

     (e)  notify  each  seller of such  Registrable  Shares,  at any time when a
prospectus  relating  thereto is required to be delivered  under the  Securities
Act, of the happening of any event as a result of which the prospectus  included
in such registration  statement  contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not misleading,  and,
at the request of any such seller,  the Company  will  prepare a  supplement  or
amendment to such prospectus so that, as thereafter  delivered to the purchasers
of such  Registrable  Shares,  such  prospectus  will  not  contain  any  untrue
statement  of a material  fact or omit to state any fact  necessary  to make the
statements therein not misleading;

     (f) cause  all such  Registrable  Shares  to be  listed on each  securities
exchange or national  quotation system on which similar securities issued by the
Company are then listed or quoted;

     (g) provide a transfer agent and registrar for all such Registrable  Shares
not later than the effective date of such registration statement;

     (h) enter into such customary agreements (including underwriting agreements
in customary  form) and take all such other actions as the holders of a majority
of the Registrable  Shares being sold or the  underwriters,  if any,  reasonably
request in order to expedite or facilitate the  disposition of such  Registrable
Shares (including, without limitation,  effecting a stock split or a combination
of shares), subject to any necessary shareholder approvals;
<PAGE>

     (i) upon prior notice and during normal  business  hours,  make  reasonably
available for inspection by any seller of Registrable  Shares,  any  underwriter
participating in any disposition  pursuant to such registration  statement,  and
any  attorney,  accountant  or  other  agent  retained  by any  such  seller  or
underwriter,  all financial and other records, pertinent corporate documents and
properties  of  the  Company,  and  cause  the  Company's  officers,  directors,
employees  and  independent  accountants  to supply all  information  reasonably
requested  by any such seller,  underwriter,  attorney,  accountant  or agent in
connection with such registration statement;

     (j) advise each seller of such Registrable Shares,  promptly after it shall
receive notice or obtain knowledge thereof, of the issuance of any stop order by
the Commission  suspending the effectiveness of such  registration  statement or
the  initiation or  threatening  of any proceeding for such purpose and promptly
use all  reasonable  efforts to  prevent  the  issuance  of any stop order or to
obtain its withdrawal if such stop order should be issued;

     (k) as  long  as  practicable  prior  to  the  filing  of any  registration
statement or  prospectus,  or any amendment or  supplement to such  registration
statement  or  prospectus,  furnish  a copy  thereof  to  each  seller  of  such
Registrable  Shares and  refrain  from filing any such  registration  statement,
prospectus,  amendment or supplement to which counsel  selected by the Preferred
Stockholder  shall have  reasonably  objected on the grounds that such  document
does not comply in all material respects with the requirements of the Securities
Act or the rules and regulations thereunder, unless, in the case of an amendment
or  supplement,  in the  opinion of counsel  for the  Company the filing of such
amendment or supplement is  reasonably  necessary to comply with any  applicable
federal or state law and such filing will not violate applicable laws; and

     (l) at the request of any seller of such  Registrable  Shares in connection
with an underwritten offering,  furnish on the date or dates provided for in the
underwriting agreement: (i) an opinion of counsel, addressed to the underwriters
and  the  sellers  of  Registrable   Shares,   covering  such  matters  as  such
underwriters and sellers may reasonably  request,  including such matters as are
customarily  furnished in connection with an underwritten  offering;  and (ii) a
letter or letters  from the  independent  certified  public  accountants  of the
Company  addressed to the  underwriters  and the sellers of Registrable  Shares,
covering such matters as such  underwriters and sellers may reasonably  request,
in which letter(s) such accountants shall state, without limiting the generality
of the foregoing,  that they are independent certified public accountants within
the  meaning  of the  Securities  Act and that in their  opinion  the  financial
statements and other financial data of the Company  included in the registration
statement, the prospectus(es), or any amendment or supplement thereto, comply in
all  material  respects  with  the  applicable  accounting  requirements  of the
Securities  Act. In the case of an  underwritten  offering where the Company has
elected  not to conduct a "road  show",  the Company  will,  on no more than two
separate  occasions,  provide  for a  reasonable  period  of  time  officers  or
employees  reasonably selected by the underwriters to assist the underwriters in
their sales efforts on behalf of the sellers of Registrable Shares. In the event
that the requested assistance involves travel, costs incidental thereto shall be
for the account of such  sellers.
<PAGE>

     Each Holder  agrees that upon receipt of any notice from the Company of the
happening  of any event of the kind set forth in  Sections  5(e) and (j)  above,
such Holder will  discontinue its disposition of Registrable  Shares pursuant to
the registration statement relating thereto until such Holder receives copies of
the  supplement or amendment  contemplated  by Section 5(e) or the withdrawal of
the stop order contemplated by Section 5(j).

6. Registration Expenses.

6.1 Company's Expenses. All expenses incident to the Company's performance of or
compliance with this Agreement,  including  without  limitation all registration
and filing fees,  fees and expenses of  compliance  with  securities or blue sky
laws,  printing  expenses,   messenger  and  delivery  expenses,  and  fees  and
disbursements  of counsel for the Company and all independent  certified  public
accountants,  underwriters  (excluding  discounts  and  commissions)  and  other
persons  retained  by  the  Company  (all  such  expenses  being  herein  called
"Registration  Expenses"),  will be borne by the Company. The Company shall not,
however,  be required to pay for expenses of any  registration  proceeding begun
hereunder,  the  request  for  which  has  been  subsequently  withdrawn  by the
initiating holder unless (a) such withdrawal was at the Company's  request;  (b)
the withdrawal is based upon material adverse information concerning the Company
of which the initiating holder was not aware at the time of such request; or (c)
the  requesting  holder  agrees to  forfeit  its right to one  requested  Demand
Registration hereunder.

6.2  Holder's  Expenses.  Notwithstanding  anything  to the  contrary  contained
herein, each holder of Registrable Shares will pay all discounts and commissions
attributable to their respective  shares and all attorney fees and disbursements
for counsel  they retain in  connection  with the  registration  of  Registrable
Shares,  except that the Company will  reimburse  the party  initiating a Demand
Registration  (unless such demand is  withdrawn  in the manner  described in the
last sentence of Section 6.1) for the reasonable fees and  disbursements  of one
counsel  (subject to the approval of the Company which shall not be unreasonably
withheld or delayed) chosen by the party initiating such Demand  Registration in
connection with such Demand Registrations.

7. Indemnification.

7.1 By the Company. The Company agrees to indemnify,  to the extent permitted by
law,  each holder of  Registrable  Shares,  its officers and  directors and each
person who  controls  such holder  (within the  meaning of the  Securities  Act)
against all losses, claims, damages, liabilities and expenses (including without
limitation, attorney's fees) caused by any untrue or alleged untrue statement of
material fact contained in any registration statement, prospectus or preliminary
prospectus,  or any amendment thereof or supplement  thereto, or any omission or
alleged  omission of a material fact required to be stated  therein or necessary
to make the statements  therein not  misleading,  except insofar as the same are

<PAGE>

caused by or contained in any information furnished in writing to the Company by
such holder  expressly for use therein or by such holder's  failure to deliver a
copy  of  the  registration   statement  or  prospectus  or  any  amendments  or
supplements  thereto after the Company has furnished such holder with the number
of copies of the same requested  pursuant to Section 5(c). In connection with an
underwritten  offering,  the Company will  indemnify  such  underwriters,  their
officers and directors and each person who controls  such  underwriters  (within
the meaning of the  Securities  Act) to the same  extent as provided  above with
respect  to the  indemnification  of the  holders  of  Registrable  Shares.  The
payments  required  by this  Section  7.1 will be made  periodically  during the
course of the  investigation  or  defense,  as and when  bills are  received  or
expenses incurred.

7.2 By Each Holder.  In connection  with any  registration  statement in which a
holder of Registrable Shares is participating,  each such holder will furnish to
the Company in writing such information and affidavits as the Company reasonably
requests  for  use  in  connection  with  any  such  registration  statement  or
prospectus and, to the extent permitted by law, will indemnify the Company,  its
directors  and officers  and each person who  controls  the Company  (within the
meaning of the Securities Act) against any losses, claims, damages,  liabilities
and  expenses  (i)  resulting  from any untrue or alleged  untrue  statement  of
material fact contained in the registration statement, prospectus or preliminary
prospectus,  or any amendment thereof or supplement  thereto, or any omission or
alleged  omission of a material fact required to be stated  therein or necessary
to make the statements therein not misleading,  but only to the extent that such
untrue  statement or omission is contained  in any  information  or affidavit so
furnished  in  writing  by such  holder  and (ii) for such  holder's  failure to
deliver to any transferee a prospectus or and amendment or supplement previously
provided to the holder by the Company; provided that the obligation to indemnify
will be  several,  not joint and  several,  among such  holders  of  Registrable
Shares.

7.3 Procedure.  Any person entitled to  indemnification  hereunder will (i) give
prompt  written  notice to the  indemnifying  party of any claim with respect to
which it seeks  indemnification  and (ii)  unless  in such  indemnified  party's
reasonable  judgment  a  conflict  of  interest  between  such  indemnified  and
indemnifying  parties  may  exist  with  respect  to  such  claim,  permit  such
indemnifying  party to assume the defense of such claim with counsel  reasonably
satisfactory  to  the  indemnified  party.  If  such  defense  is  assumed,  the
indemnifying  party will not be subject to any liability for any settlement made
by the  indemnified  party  without its consent  (but such  consent  will not be
unreasonably  withheld). An indemnifying party who is not entitled to, or elects
not to,  assume the defense of a claim will not be obligated to pay the fees and
expenses  of  more  than  one  counsel  for  all  parties  indemnified  by  such
indemnifying party with respect to such claim, unless in the reasonable judgment
of any  indemnified  party,  a  conflict  of  interest  may exist  between  such
indemnified party and any other of such indemnified parties with respect to such
claim.

7.4 Survival. The indemnification  provided for under this Agreement will remain
in full force and effect regardless of any investigation made by or on behalf of
the  indemnified  party or any officer,  director or controlling  person of such
indemnified  party and will  survive the  transfer of  securities,  but shall be

<PAGE>

subject to and subordinated to any contrary indemnification  provision contained
in any  underwriting  agreement  entered into in connection with an underwritten
public  offering.  The  Company  also  agrees  to make  such  provisions  as are
reasonably  requested by any indemnified party for contribution to such party in
the event the Company's indemnification is unavailable for any reason.

8.  Compliance  with Rule 144. At the request of any holder who proposes to sell
securities in compliance with Rule 144 of the  Commission,  the Company will use
its commercially  reasonable  efforts to (i) forthwith  furnish to such holder a
written  statement of compliance with the filing  requirements of the Commission
as set forth in Rule 144, as such rule may be amended from time to time and (ii)
make  available to the public and such holders such  information  as will enable
the holders to make sales pursuant to Rule 144.

9. Participation in Underwritten Registrations.  To the extent such requirements
are  consistent  with  the  terms  hereof,  no  person  may  participate  in any
registration  hereunder which is  underwritten  unless such person (a) agrees to
sell its  securities  on the basis  provided  in any  underwriting  arrangements
approved  by  such  person  or  persons  entitled   hereunder  to  approve  such
arrangements, (b) completes and executes all questionnaires, powers of attorney,
custody  agreements,  indemnities,  underwriting  agreements and other documents
reasonably  required  under the  terms of such  underwriting  arrangements,  (c)
provides all information  reasonably requested by the Company in connection with
such registration, including copies of documents, instruments and agreements and
(d) complies with all applicable federal and state securities laws in connection
with such registration.

10. Miscellaneous.

10.1 No Inconsistent  Agreements.  The Company will not hereafter enter into any
agreement with respect to its securities  which is inconsistent  with the rights
granted to the holders of Registrable Shares in this Agreement.

10.2 Public Status. The Company shall use its commercially reasonable efforts to
cause the  Common  Stock to remain  registered  pursuant  to  Section  12 of the
Securities  Exchange  Act of 1934,  as  amended  (the "34  Act")  and  shall use
commercially  reasonable efforts to timely file all reports required to be filed
by the Company under the 34 Act.

10.3 Adjustments  Affecting  Registrable  Shares.  The Company will not take any
action,  or permit any change to occur,  with  respect to its  securities  which
would  adversely  affect the  ability of the  holders of  Registrable  Shares to
include such Registrable  Shares in a registration  undertaken  pursuant to this
Agreement or which would adversely affect the  marketability of such Registrable
Shares in any such  registration,  including,  without  limitation,  effecting a
stock split or combination of shares.
<PAGE>

10.4 Other Registration Rights. Except as provided in this Agreement or pursuant
to an Approved  Registration  Rights  Agreement,  the Company will not hereafter
grant to any person or persons the right to request the Company to register  any
equity securities of the Company, or any securities  convertible or exchangeable
into or exercisable  for such  securities,  without the prior written consent of
the Preferred Stockholder.

10.5 Successors and Assigns.  Except as otherwise expressly provided herein, all
covenants and  agreements  contained in this Agreement by or on behalf of any of
the  parties  hereto  will  bind and  inure  to the  benefit  of the  respective
successors  and assigns of the parties  hereto,  whether so expressed or not. In
addition,  and  whether  or not  any  express  assignment  has  been  made,  the
provisions  of  this  Agreement  which  are  for the  benefit  of the  Preferred
Stockholder or holders of shares of stock hereunder are also for the benefit of,
and enforceable by, any subsequent holders of such shares of stock.

10.6 Severability.  Whenever possible,  each provision of this Agreement will be
interpreted  in such manner as to be effective and valid under  applicable  law,
but if any  provision of this  Agreement is held to be  prohibited by or invalid
under  applicable law, such provision will be ineffective  only to the extent of
such  prohibition  or  invalidity,  without  invalidating  the remainder of this
Agreement.

10.7  Descriptive  Headings.  The  descriptive  headings of this  Agreement  are
inserted for  convenience  of reference only and do not constitute a part of and
shall not be utilized in interpreting this Agreement.

10.8 Notices.  Any notices  required or permitted to be sent hereunder  shall be
made in the manner provided for in the Restructuring Agreement.

10.9 Governing  Law. All questions  concerning  the  construction,  validity and
interpretation of this Agreement, and the performance of the obligations imposed
by this  Agreement,  hall be  governed  by the  laws of the  State  of  Delaware
applicable to contracts made and wholly to be performed in that state.

10.10  Final  Agreement.   This  Agreement,   together  with  the  Restructuring
Agreement, the Stock Issuance Agreement and all other agreements entered into by
the parties hereto  pursuant to the  Restructuring  Agreement,  constitutes  the
complete and final agreement of the parties  concerning the matters  referred to
herein, and supersedes all prior agreements and understandings.
<PAGE>

10.11 Execution in Counterparts. This Agreement may be executed in any number of
counterparts,  each of which when so executed and  delivered  shall be deemed an
original, and such counterparts together shall constitute one instrument.  10.12
No Strict Construction. The language used in this Agreement will be deemed to be
the language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction will be used against any party.

                          Signatures on following page.



<PAGE>


         IN WITNESS WHEREOF,  the parties hereto have executed this Registration
Rights Agreement on the date first set forth above.


                                            THE COMPANY:
                                            ADVOCAT INC.
                                            By: ___________________________
                                            Name: ___________________________
                                            Title: ___________________________

                                            PREFERRED STOCKHOLDER:
                                            OMEGA HEALTHCARE INVESTORS, INC.
                                            By: ___________________________
                                            Name: ___________________________
                                            Title: ___________________________

<PAGE>
                                   EXHIBIT J

                                FORM OF GUARANTY
                                   (SUBLEASE)


         This  GUARANTY  ("Guaranty")  is  given  as  of  _______________,  2000
("Effective Date"), by  ____________________________________,  ("Guarantor"), in
favor of STERLING  ACQUISITION  CORP., a Kentucky  corporation  ("Lessor") whose
address is 900 Victors Way, Suite 350, Ann Arbor, Michigan 48108, with reference
to the following facts:

                                    RECITALS

         A. Diversicare  Leasing Corp., a Tennessee  corporation (the "Lessee"),
executed and  delivered  to Lessor a  Consolidated  Amended and Restated  Master
Lease dated ___________,  2000 (the "Master Lease") pursuant to which the Lessee
is leasing from Lessor certain  healthcare  facilities  identified  therein (the
"Facilities").

         B.  Guarantor,  subject to the  consent of Lessor,  intends to sublease
certain  Facilities from the Lessee pursuant to a sublease dated _______,  20___
(the  "Sublease")  by  and  between  Lessee,  as  sublessor  and  Guarantor,  as
sublessee.

         C. Guarantor is a wholly owned subsidiary of the Lessee and maintains a
direct  financial  interest in the Lessee.  It is to the  advantage of Guarantor
that Lessor  consent to the  Sublease and  continue to lease the  Facilities  to
Lessee pursuant to the Master Lease.

         D. As a material  inducement  for Lessor to consent to the Sublease and
to  continue to lease the  Facilities  to Lessee  pursuant to the Master  Lease,
Guarantor has agreed to guarantee  the payment of all amounts due from,  and the
performance of all  obligations  undertaken by the Lessee under the Master Lease
and any security  agreements,  promissory  notes,  letter of credit  agreements,
guarantees or other documents which evidence,  secure or otherwise relate to the
Master  Lease  (the  Master  Lease  and  all  such  documents,  and  any and all
amendments,  modifications,  extensions and renewals  thereof,  are  hereinafter
referred  to  collectively  as the  "Sterling  Transaction  Documents"),  all as
hereinafter set forth.

         WHEREFORE, the parties hereby agree as follows:

         1. Defined Terms.  All  capitalized  terms used herein and not defined
herein shall have the meaning for such terms set forth in the Master Lease.

         2.  Guaranty.   Guarantor  hereby   unconditionally   and  irrevocably,
guarantees  to Lessor  (i) the  payment  when due of all Rent and all other sums
payable by the Lessee under the Master  Lease,  and (ii) the faithful and prompt
performance  when  due of  each  and  every  one of the  terms,  conditions  and
covenants to be kept and performed by the Lessee under the Sterling  Transaction
Documents, any and all amendments, modifications, extensions and renewals of the

<PAGE>

Sterling Transaction Documents, including without limitation all indemnification
obligations,  insurance  obligations,  and all obligations to operate,  rebuild,
restore or replace any facilities or  improvements  now or hereafter  located on
the real estate covered by the Master Lease.  In the event of the failure of the
Lessee to pay any such amounts owed, or to render any other performance required
of the Lessee  under the Sterling  Transaction  Documents,  when due,  Guarantor
shall forthwith  perform or cause to be performed all provisions of the Sterling
Transaction  Documents  to be performed  by the Lessee  thereunder,  and pay all
damages  that may result  from the  non-performance  thereof to the full  extent
provided   under  the  Sterling   Transaction   Documents   (collectively,   the
"Obligations"). As to the Obligations, Guarantor's liability under this Guaranty
is without limit.

         3. Survival of  Obligations.  The  obligations of Guarantor  under this
Guaranty with respect to the Sterling  Transaction  Documents  shall survive and
continue in full force and effect (until and unless all Obligations, the payment
and  performance  of which  are  hereby  guaranteed,  have been  fully  paid and
performed) notwithstanding:

         (a)      any amendment, modification, or extension of any Sterling
                  Transaction Document;

         (b)      any compromise,  release,  consent,  extension,  indulgence or
                  other  action  or  inaction  in  respect  of any  terms of any
                  Sterling Transaction Document or any other guarantor;

         (c)      any  substitution  or  release,  in whole  or in part,  of any
                  security for this Guaranty which Lessor may hold at any time;

         (d)      any exercise or non-exercise by Lessor of any right,  power or
                  remedy  under  or  in  respect  of  any  Sterling  Transaction
                  Document or any security held by Lessor with respect  thereto,
                  or any waiver of any such right, power or remedy;

         (e)      any  bankruptcy,  insolvency,   reorganization,   arrangement,
                  adjustment, composition, liquidation, or the like of Lessee or
                  any other guarantor;

         (f)      any  limitation of the Lessee's  liability  under any Sterling
                  Transaction   Document  or  any  limitation  of  the  Lessee's
                  liability  thereunder which may now or hereafter be imposed by
                  any  statute,  regulation  or rule of law, or any  illegality,
                  irregularity,  invalidity or unenforceability,  in whole or in
                  part,  of  any  Sterling  Transaction  Document  or  any  term
                  thereof;

         (g)      any  sale,  lease,  or  transfer  of all or  any  part  of any
                  interest in any Facility to any other  person,  firm or entity
                  other than to Lessor;

         (h)      any act or  omission  by  Lessor  with  respect  to any of the
                  security  instruments  given or made as a part of the Sterling
                  Transaction  Documents  or any  failure  to  file,  record  or
                  otherwise perfect any of the same;
<PAGE>

         (i)      any  extensions  of time for  performance  under the  Sterling
                  Transaction Documents, whether prior to or after maturity;

         (j)      the  release  of any  collateral  from  any  lien in  favor of
                  Lessor,  or the  release of the  Lessee  from  performance  or
                  observation  of any of the  agreements,  covenants,  terms  or
                  conditions  contained in any Sterling  Transaction Document by
                  operation of law or otherwise;

         (k)      the fact that the Lessee may or may not be personally  liable,
                  in  whole  or  in  part,  under  the  terms  of  any  Sterling
                  Transaction Document to pay any money judgment;

         (l)      the failure to give Guarantor any notice of acceptance,
                  default or otherwise;

         (m)      any other  guaranty now or hereafter  executed by Guarantor or
                  anyone  else  in  connection  with  any  Sterling  Transaction
                  Document;

         (n)      any rights,  powers or privileges  Lessor may now or hereafter
                  have against any other person, entity or collateral; or

         (o)      any other  circumstances,  whether or not Guarantor had notice
                  or knowledge thereof, other than the payment or performance of
                  all of the Obligations.

         4. Primary  Liability.  The liability of Guarantor  with respect to the
Sterling Transaction Documents shall be joint and several,  primary,  direct and
immediate, and Lessor may proceed against the Guarantor: (i) prior to or in lieu
of proceeding against the Lessee, its assets, any security deposit, or any other
guarantor; and (ii) prior to or in lieu of pursuing any other rights or remedies
available  to Lessor.  All rights and  remedies  afforded to Lessor by reason of
this  Guaranty  or by law are  separate,  independent  and  cumulative,  and the
exercise  of any  rights or  remedies  shall not in any way limit,  restrict  or
prejudice the exercise of any other rights or remedies.

         In the event of any default under any Sterling Transaction  Document, a
separate action or actions may be brought and prosecuted  against the Guarantor,
or any one of them,  whether or not the  Lessee is joined  therein or a separate
action or actions are brought against the Lessee. Lessor may maintain successive
actions for other defaults.  Lessor's rights hereunder shall not be exhausted by
its  exercise  of any of its rights or  remedies or by any such action or by any
number of successive  actions until and unless all  indebtedness and obligations
the payment and  performance of which are hereby  guaranteed  have been paid and
fully performed.

         5.  Obligations  Not Affected.  In such manner,  upon such terms and at
such times as Lessor in its sole discretion  deems  necessary or expedient,  and
without  notice  to  Guarantor,   Lessor  may:  (a)  amend,  alter,  compromise,
accelerate,  extend  or  change  the  time  or  manner  for the  payment  or the
performance of any obligation hereby guaranteed;  (b) extend, amend or terminate
any of the Sterling Transaction Documents;  or (c) release the Lessee by consent
to any  assignment  (or  otherwise) as to all or any portion of the  obligations

<PAGE>

hereby  guaranteed.  Any exercise or  non-exercise by Lessor of any right hereby
given  Lessor,  dealing by Lessor with  Guarantor  or any other  guarantor,  the
Lessee or any other person, or change, impairment,  release or suspension of any
right or remedy of Lessor against any person  including the Lessee and any other
guarantor will not affect any of the obligations of Guarantor  hereunder or give
Guarantor any recourse or offset against Lessor.

         6.  Waiver.  With  respect  to  the  Sterling  Transaction   Documents,
Guarantor  hereby waives and  relinquishes  all rights and remedies  accorded by
applicable law to sureties and/or guarantors or any other accommodation parties,
under any statutory provisions, common law or any other provision of law, custom
or  practice,  and agrees not to assert or take  advantage of any such rights or
remedies including, but not limited to:

         (a)      any right to require  Lessor to proceed  against the Lessee or
                  any other person or to proceed against or exhaust any security
                  held by Lessor at any time or to  pursue  any other  remedy in
                  Lessor's  power  before  proceeding  against  Guarantor  or to
                  require that Lessor cause a marshaling of the Lessee's  assets
                  or the assets,  if any,  given as collateral for this Guaranty
                  or to  proceed  against  the  Lessee  and/or  any  collateral,
                  including  collateral,  if any,  given to  secure  Guarantor's
                  obligation under this Guaranty,  held by Lessor at any time or
                  in any particular order;

         (b)      any defense that may arise by reason of the incapacity or lack
                  of authority of any other person or persons;

         (c)      notice of the  existence,  creation or incurring of any new or
                  additional  indebtedness  or  obligation  or of any  action or
                  non-action on the part of the Lessee,  Lessor, any creditor of
                  the Lessee or the Guarantor or on the part of any other person
                  whomsoever  under this or any other  instrument  in connection
                  with any obligation or evidence of indebtedness held by Lessor
                  or in connection with any obligation hereby guaranteed;

         (d)      any defense based upon an election of remedies by Lessor which
                  destroys  or  otherwise  impairs  the  subrogation  rights  of
                  Guarantor  or the right of  Guarantor  to proceed  against the
                  Lessee for reimbursement, or both;

         (e)      any  defense  based  upon  any  statute  or rule of law  which
                  provides  that  the  obligation  of a surety  must be  neither
                  larger in amount nor in other  respects more  burdensome  than
                  that of the principal;

         (f)      any duty on the part of Lessor  to disclose to  Guarantor  any
                  facts  Lessor  may  now  or  hereafter  know about the Lessee,
                  regardless  of whether  Lessor has reason to believe  that any
                  such facts  materially  increase  the risk  beyond  that which
                  Guarantor intends to assume or has reason to believe that such
                  facts are unknown to Guarantor or has a reasonable opportunity
                  to communicate such facts to Guarantor,  it  being  understood
                  and agreed that Guarantor is  fully  responsible for being and

<PAGE>

                  keeping  informed of the  financial  condition  of  the Lessee
                  and of  all  circumstances  bearing on the risk of non-payment
                  or non-performance  of any obligations or indebtedness  hereby
                  guaranteed;

         (g)      any  defense  arising  because of  Lessor's  election,  in any
                  proceeding  instituted  under the federal  Bankruptcy Code, of
                  the   application  of  Section  1111  (b)(2)  of  the  federal
                  Bankruptcy Code; and

         (h)      any  defense  based on any  borrowing  or grant of a  security
                  interest under Section 364 of the federal Bankruptcy Code.

         (i)      any extension of time conferred by any law now or hereafter in
                  effect and any  requirement  or notice of  acceptance  of this
                  Guaranty or any other notice to which the  undersigned may now
                  or  hereafter  be entitled to the extent such waiver of notice
                  is permitted by applicable law.

         7.  Warranties.  With  respect to the Sterling  Transaction  Documents,
Guarantor  warrants that: (a) this Guaranty is executed at the Lessee's request;
and (b) Guarantor has established adequate means of obtaining from the Lessee on
a continuing  basis financial and other  information  pertaining to the Lessee's
financial  condition.  Guarantor  agrees to keep  adequately  informed from such
means of any  facts,  events  or  circumstances  which  might in any way  affect
Guarantor's risks hereunder, and Guarantor further agrees that Lessor shall have
no obligation to disclose to Guarantor  information or material  acquired in the
course of Lessor's relationship with Lessee.

         8.  No-Subrogation.  Guarantor  shall have no right of subrogation  and
waive any right to enforce any remedy which Lessor now has or may hereafter have
against Lessee and any benefit of, and any right to participate in, any security
now or hereafter held by Lessor with respect to the Master Lease.

         9. Subordination.  Upon the occurrence of an Event of Default under any
Sterling Transaction Document, which is not cured by Guarantor, the indebtedness
or obligations of Lessee to Guarantor  shall not be paid in whole or in part nor
will Guarantor accept any payment of or on account of any amounts owing, without
the prior written  consent of Lessor and at Lessor's  request,  Guarantor  shall
cause  the  Lessee  to  pay  to  Lessor  all or  any  part  of the  subordinated
indebtedness until the obligations under the Sterling Transaction Documents have
been paid in full. Any payment by the Lessee in violation of this Guaranty shall
be received by Guarantor in trust for Lessor, and Guarantor shall cause the same
to be paid to Lessor immediately on account of the amounts owing from the Lessee
to Lessor.  No such payment will reduce or affect in any manner the liability of
Guarantor under this Guaranty.

         10. No Delay. Any payments  required to be made by Guarantor  hereunder
shall become due on demand in accordance with the terms hereof  immediately upon
the happening of an Event of Default under any Sterling Transaction Document.
<PAGE>

         11. Application of Payments.  With respect to the Sterling  Transaction
Documents,  and with or without  notice to Guarantor,  Lessor,  in Lessor's sole
discretion  and at any time and from  time to time and in such  manner  and upon
such terms as Lessor  deems  appropriate,  may (a) apply any or all  payments or
recoveries from Lessee or from any other guarantor under any other instrument or
realized from any  security,  in such manner and order of priority as Lessor may
determine, to any indebtedness or other obligation of Lessee with respect to the
Sterling  Transaction  Documents and whether or not such  indebtedness  or other
obligation is guaranteed hereby or is otherwise secured or is due at the time of
such application,  and (b) refund to Lessee any payment received by Lessor under
the Sterling Transaction Documents.

           12.      Guaranty Default.

           (a) As used herein,  the term Guaranty Default shall mean one or more
of the following events (subject to applicable cure periods):

                    (i)    the failure of Guarantor to pay the amounts  required
                           to be paid  hereunder at the times specified herein;

                    (ii)   the failure of  Guarantor  to observe and perform any
                           covenants,  conditions or agreement on its part to be
                           observed or  performed,  other than as referred to in
                           Subsection  (i)  above,  for a period of thirty  (30)
                           days after  written  notice of such  failure has been
                           given to Guarantor by Lessor, unless Lessor agrees in
                           writing  to an  extension  of such time  prior to its
                           expiration;

                    (iii)  the  occurrence of a default under any other guaranty
                           between Lessor and Guarantor.

        (b) Upon the  occurrence  of a Guaranty  Default,  Lessor shall have the
right  to  bring  such  actions  at  law  or in  equity,  including  appropriate
injunctive  relief,  as it deems  appropriate to compel  compliance,  payment or
deposit,  and  among  other  remedies  to  recover  its  attorneys'  fees in any
proceeding, including any appeal therefrom and any post-judgement proceedings.

        13.  Financial  Statements.  Guarantor shall deliver those  Consolidated
Financial  Statements and other certificates as required by Article XXIII of the
Master Lease in the form and at the times set forth therein.

        14.  Miscellaneous.

        (a) No term,  condition  or  provision  of this  Guaranty  may be waived
except by an express  written  instrument  to that effect  signed by Lessor.  No
waiver of any term,  condition or provision  of this  Guaranty  will be deemed a
waiver of any other term, condition or provision, irrespective of similarity, or
constitute a continuing waiver of the same term, condition or provision,  unless
otherwise expressly provided.

        (b) If any one or more of the terms,  conditions or provisions contained
in this Guaranty is found in a final award or judgment  rendered by any court of
competent  jurisdiction to be invalid,  illegal or unenforceable in any respect,
the validity, legality and enforceability of the remaining terms, conditions and
provisions  of this  Guaranty  shall  not in any  way be  affected  or  impaired
thereby, and this Guaranty shall be interpreted and construed as if the invalid,
illegal, or unenforceable term,  condition or provision had never been contained
in this Guaranty.
<PAGE>

        (c) THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE  WITH
THE LAWS OF THE STATE OF MICHIGAN,  EXCEPT THAT THE LAWS OF THE STATE IN WHICH A
FACILITY IS LOCATED SHALL GOVERN THIS  AGREEMENT TO THE EXTENT  NECESSARY (i) TO
OBTAIN THE BENEFIT OF THE- RIGHTS AND  REMEDIES SET FORTH HEREIN WITH RESPECT TO
SUCH FACILITY,  AND (ii) FOR PROCEDURAL  REQUIREMENTS  WHICH MUST BE GOVERNED BY
THE LAWS OF THE STATE IN WHICH SUCH FACILITY IS LOCATED.  GUARANTOR  CONSENTS TO
IN PERSONAM  JURISDICTION  BEFORE THE STATE AND FEDERAL  COURTS OF MICHIGAN  AND
AGREES  THAT ALL  DISPUTES  CONCERNING  THIS  GUARANTY BE HEARD IN THE STATE AND
FEDERAL  COURTS  LOCATED  IN THE  STATE OR  STATES  IN  WHICH  THE  FACILITY  OR
FACILITIES ARE LOCATED OR IN MICHIGAN.  GUARANTOR AGREES THAT SERVICE OF PROCESS
MAY BE EFFECTED UPON IT UNDER ANY METHOD PERMISSIBLE UNDER THE LAWS OF THE STATE
OR STATES IN WHICH THE  FACILITY  OR  FACILITIES  ARE  LOCATED OR  MICHIGAN  AND
IRREVOCABLY WAIVES ANY OBJECTION TO VENUE IN THE STATE AND FEDERAL COURTS OF THE
STATE OR STATES IN WHICH THE FACILITY OR FACILITIES ARE LOCATED AND OF MICHIGAN.

        (d)  GUARANTOR  AND  LESSOR  HEREBY  WAIVE  TRIAL BY JURY AND THE  RIGHT
THERETO IN ANY ACTION OR PROCEEDING  OF ANY KIND ARISING ON,  UNDER,  OUT OF, BY
REASON OF OR RELATING IN ANY WAY TO THIS GUARANTY OR THE INTERPRETATION,  BREACH
OR ENFORCEMENT THEREOF.

        (e) In the event of any suit, action, arbitration or other proceeding to
interpret  this  Guaranty,  or to determine  or enforce any right or  obligation
created  hereby,  the prevailing  party in the action shall recover such party's
actual  costs  and  expenses  reasonably   incurred  in  connection   therewith,
including,  but not  limited  to,  attorneys'  fees and  costs of  appeal,  post
judgment enforcement  proceedings (if any) and bankruptcy  proceedings (if any).
Any court, arbitrator or panel of arbitrators shall, in entering any judgment or
making any award in any such suit, action,  arbitration or other proceeding,  in
addition to any and all other relief awarded to such prevailing  party,  include
in  such-judgment  or award such party's  costs and expenses as provided in this
paragraph.

         (f) Guarantor (i) represents  that it has been  represented and advised
by counsel in connection with the execution of this Guaranty;  (ii) acknowledges
receipt  of a copy of the  Sterling  Transaction  Documents;  and (iii)  further
represents that Guarantor has been advised by counsel with respect thereto. This
Guaranty shall be construed and interpreted in accordance with the plain meaning
of its  language,  and not for or against  Guarantor or Lessor,  and as a whole,
giving effect to all of the terms, conditions and provisions hereof.

         (g) Except as provided  in any other  written  agreement  now or at any
time  hereafter in force  between  Lessor and  Guarantor,  this  Guaranty  shall
constitute  the entire  agreement of  Guarantor  with Lessor with respect to the
subject  matter  hereof,  and  no  representation,   understanding,  promise  or
condition  concerning  the subject  matter hereof will be binding upon Lessor or
Guarantor unless expressed herein.

         (h) All stipulations,  obligations,  liabilities and undertakings under
this Guaranty  shall be binding upon Guarantor and their  respective  successors
and  assigns  and shall  inure to the  benefit of Lessor  and to the  benefit of
Lessor's successors and assigns.

         (i) Whenever the singular shall be used  hereunder,  it shall be deemed
to include the plural (and  vice-versa)  and  reference  to one gender  shall be
construed to include all other genders,  including neuter,  whenever the context

<PAGE>

of this Guaranty so requires.  Section captions or headings used in the Guaranty
are for convenience  and reference  only, and shall not affect the  construction
thereof.

         IN WITNESS  WHEREOF,  the  undersigned has executed this Guaranty as of
the date first written above.

                                   GUARANTOR:

                                   -------------------------------------

                                   By:  ________________________________
                                   Name:________________________________
                                   Its: ________________________________

STATE OF ___________       )
                                    ) ss.
COUNTY OF _________        )

                                    The foregoing instrument was acknowledged
                                    before me this _____ day of _________, 2000,
                                    by , the  ________________ of _____________
                                    known to me to be the person who executed
                                    this Guaranty.

<PAGE>
                                   EXHIBIT K

                            FORM OF PLEDGE AGREEMENT
                     (Sterling Health Care Management, Inc.)

         This Pledge  Agreement (this  "Agreement") is made as of November ____,
2000, between  DIVERSICARE LEASING CORP., a Tennessee  corporation  ("Pledgor"),
and STERLING ACQUISITION CORP., a Kentucky corporation ("Creditor").

                               STATEMENT OF FACTS

         A. Pledgor is the owner of 100% of the  outstanding  equity interest in
Sterling  Health Care  Management,  Inc., a Kentucky  corporation  (the "Pledged
Company").

         B. Pledgor and Creditor are parties to a certain Consolidated,  Amended
and  Restated  Master  Lease dated  November  ___,  2000 (the  "Master  Lease"),
pursuant to which  Creditor  leased  certain  skilled  nursing  facilities  (the
"Facilities") to Pledgor.

         C.  Pledgor,  subject to the consent of  Creditor,  intends to sublease
certain  Facilities to the Pledged Company pursuant to a sublease dated November
___,  2000 (the  "Sublease")  by and between  Pledgor,  as sublessor and Pledged
Company, as sublessee.

         D. As an  inducement  for  Creditor to consent to the  Sublease  and to
continue  to lease the  Facilities  to Pledgor  pursuant  to the  Master  Lease,
Pledgor  has  agreed  that  the due  performance  and  observance  of  Pledgor's
obligations  under the Master  Lease and security  agreements,  letter of credit
agreements,  guarantees or other documents  which evidence,  secure or otherwise
relate to the Master Lease (collectively, the "Lease Documents") will be secured
by a lien on the  Pledged  Collateral  (as that term is defined  below)  granted
pursuant to this Agreement.

         The parties therefore agree as follows:

         1. Intercreditor Agreement. Creditor, Omega Healthcare Investors, Inc.,
a Maryland  corporation  and AmSouth  Bank,  successor  in interest by merger to
First American National Bank ("AmSouth") are parties to a certain  Intercreditor
Agreement   dated  October  1,  2000  (the   "Intercreditor   Agreement").   The
Intercreditor  Agreement  governs  the  priority of AmSouth  and  Creditor  with
respect to their security  interests in the Pledged  Collateral (as  hereinafter
defined).  Pursuant  to the terms of the  Intercreditor  Agreement,  AmSouth  is
acting as collateral  agent for AmSouth and Creditor with respect to the Pledged
Collateral during the term of the Intercreditor Agreement.

         2.  Pledge;  Grant of  Security  Interest.  Subject to the terms of the
Intercreditor Agreement,  Pledgor hereby grants to Creditor a security interest,
on the following terms and subject to the following conditions, in:

<PAGE>

                    (a) all Pledgor's  right,  title and interest in the Pledged
                    Company (the "Pledged Securities");

                    (b) any equity  securities issued by the Pledged Company and
                    any options,  warrants or rights to acquire such securities,
                    owned or acquired by Pledgor, directly or indirectly, now or
                    at any time in the future;

                    (c) any securities or other  property  issued or distributed
                    to Pledgor  with  respect  to any  securities  described  in
                    clauses (a) or (b) above as a dividend or distribution or as
                    a  result   of  any   amendment   of  the   certificate   of
                    incorporation   or   other   charter   documents,    merger,
                    consolidation, redesignation,  reclassification, purchase or
                    sale  of  assets,   dissolution,  or  plan  of  arrangement,
                    compromise or reorganization of the issuer thereof;

                    (d) any rights  incidental  to the  ownership  of any of the
                    securities  described in clauses (a), (b) or (c) above, such
                    as voting,  conversion and registration rights and rights of
                    recovery for violations of applicable securities laws; and,

                    (e)  the  proceeds  of the  exercise,  redemption,  sale  or
                    exchange of any of the foregoing, or any dividend,  interest
                    payment or other distribution of cash or property in respect
                    thereof.

         All  of the  foregoing  may  be  referred  to  herein  as the  "Pledged
Collateral".

         3. Secured Obligations. The security interest described in Section 2 of
this Agreement  secures the prompt and full payment when due (and not merely the
ultimate  collectibility)  of all Rent and all other sums payable by the Pledgor
under  (i) the  Master  Lease and the full  performance  of all  obligations  of
Pledgor under the Lease  Documents,  (ii) any leases of the  Facilities  made by
Creditor  after the filing of a petition  for relief  pursuant to Section 364 of
the Bankruptcy Code (11 U.S.C.  ss.364) by Pledgor, and (iii) the obligations of
the mortgagors of the Florida  Mortgaged  Facilities (as defined in that certain
Settlement and  Restructuring  Agreement by and among Advocat,  Inc., a Delaware
corporation,  Pledgor,  Pledged Company,  Diversicare Management Services Co., a
Tennessee corporation, Omega Healthcare Investors, Inc., a Maryland corporation,
and Creditor of even date herewith (collectively the "Secured Obligations").

         4.       Delivery.

                    (a) Before,  or at the same time as the Pledgor has executed
                    and  delivered  this  Agreement  to  Creditor,  Pledgor  has
                    delivered to AmSouth,  as collateral agent, a fully executed
                    Assignment in Blank  (substantially in the form of Exhibit A
                    hereto) and with all necessary transfer tax stamps affixed.

<PAGE>

                    (b) If,  at any  time,  Pledgor  obtains  possession  of any
                    certificate or instrument  constituting or representing  any
                    of the  Pledged  Collateral  (other than  interest  and cash
                    dividends),   Pledgor  shall  deliver  such  certificate  or
                    instrument to AmSouth,  as collateral agent,  forthwith duly
                    endorsed  in  blank  without  restriction  or  with a  fully
                    executed  Assignment in Blank  (substantially in the form of
                    Exhibit A hereto) and with all necessary transfer tax stamps
                    affixed.

                    (c) If no Event of Default  (as defined in Section 11 below)
                    hasoccurred  and is  continuing,  Pledgor may retain for its
                    own use and shall not be required to deliver to Creditor any
                    interest  payments  on or any cash  dividends  or other cash
                    distributions;  if an Event of Default has  occurred  and is
                    continuing,  then  all  such  interest,  dividends  and cash
                    distributions  shall be delivered to AmSouth,  as collateral
                    agent,  for  application  by AmSouth,  as collateral  agent,
                    toward payment of the Secured Obligations in compliance with
                    the Intercreditor Agreement.

                    (d)  If  any of the  Pledged  Collateral  is  uncertificated
                    securities,   the  Pledgor  shall  either  (a)  procure  the
                    issuance of security  certificates to represent such Pledged
                    Collateral  and  endorse and deliver  such  certificates  as
                    required by  paragraph  (b) of this  Section 4, or (b) cause
                    the issuer thereof to register AmSouth, as collateral agent,
                    as the registered owner of such securities, or (c) cause the
                    issuer  thereof  to  enter  into an  agreement,  in form and
                    substance  satisfactory  to Creditor,  among Creditor and/or
                    AmSouth,  the  registered  owner of such  security,  and the
                    issuer  to the  effect  that the  issuer  will  comply  with
                    instructions  originated by Creditor  and/or AmSouth without
                    further consent by the registered owner.

                    (e) At Pledgor's expense,  Pledgor shall deliver to Creditor
                    and/or  AmSouth,   as  collateral   agent,   such  financing
                    statements,     continuation    statements,     conveyances,
                    certificates,   legal  opinions  or  other   instruments  as
                    Creditor  may at any time  reasonably  request or require to
                    protect,  assure  or  enforce  its  interests,   rights  and
                    remedies  under this  agreement.  The form of description of
                    the  Pledged   Collateral   to  be  attached  to   financing
                    statements  to be executed  by Debtor is attached  hereto as
                    Schedule 1.

                    (f) If AmSouth's security interest in the Pledged Collateral
                    is  terminated,  all  deliveries  required by this Section 4
                    shall be made directly to Creditor.

         5. Voting Rights. If no Event of Default has occurred or is continuing,
the Pledged  Collateral  will be registered in the name of Pledgor,  and Pledgor
may exercise any voting or consensual  rights that Pledgor may have as the owner
of the Pledged  Collateral for any purpose which is not  inconsistent  with this
Agreement.  Pledgor  shall  deliver to  Creditor  copies of all  notices,  proxy
statements,  proxies and other  information  or  instruments  in its  possession
concerning  such  exercise  and shall  not  exercise  any such  right if, in the
judgment of Creditor,  such exercise would have a material adverse effect on the
value of the Pledged  Collateral  or would  result in a violation  of any of the
terms of the  Lease  Documents.  If an  Event of  Default  has  occurred  and is
continuing,  Creditor,  subject to the terms of the Intercreditor Agreement, may
exercise  all voting or  consensual  rights of the owners of any of the  Pledged

<PAGE>

Collateral and Pledgor shall deliver to Creditor all notices,  proxy statements,
proxies and other  information and instruments  relating to the exercise of such
rights  received by Pledgor  from the  issuers of any of the Pledged  Collateral
promptly upon receipt  thereof and shall at the request of Creditor  execute and
deliver to Creditor any proxies or other  instruments which are, in the judgment
of  Creditor,  necessary  for  Creditor  to  validly  exercise  such  voting and
consensual rights.

         6.  Duty  of  Creditor.  The  duty  of the  Creditor  and  AmSouth,  as
collateral agent, with respect to the Pledged  Collateral shall be solely to use
reasonable care in the physical custody  thereof,  and the Creditor shall not be
under any  obligation  to take any action  with  respect  to any of the  Pledged
Collateral or to preserve rights against prior parties.  The powers conferred on
Creditor  hereunder are solely to protect its interest in the Pledged Collateral
and do not impose any duty upon it to exercise any such  powers.  Pledgor is not
looking to the Creditor to provide it with  investment  advice.  Creditor  shall
have no duty to ascertain or take any action with respect to calls, conversions,
exchanges,   maturities,   tenders  or  other  matters  concerning  any  Pledged
Collateral,  whether or not Creditor has or is deemed to have  knowledge of such
matters,  or as to the  taking of any  necessary  steps to  preserve  any rights
pertaining to any Pledged Collateral.

         7.   Subsequent   Changes   Affecting   Pledged   Collateral.   Pledgor
acknowledges  that it has made its own  arrangements  for  keeping  informed  of
changes or potential changes affecting the Pledged  Collateral  (including,  but
not  limited  to,  conversions,   subscriptions,   exchanges,   reorganizations,
dividends,  tender  offers,  mergers,  consolidations  and  shareholder or other
meetings)  and Pledgor  agrees that  Creditor  has no  responsibility  to inform
Pledgor of such matters or to take any action with  respect  thereto even if any
of the Pledged  Collateral  has been  registered  in the name of Creditor or its
agent or nominee.

         8.  Return of Pledged  Collateral.  The  security  interest  granted to
Creditor  hereunder  shall not terminate  and Creditor  shall not be required to
return  the  Pledged  Collateral  to Pledgor  unless  and until (a) the  Secured
Obligations have been fully paid or performed,  (b) all of Pledgor's obligations
hereunder  have been fully paid or  performed,  and (c) Pledgor  has  reimbursed
Creditor for any expenses of returning  the Pledged  Collateral  and filing such
termination  statements  and other  instruments  as are  required to be filed in
public offices under applicable laws.

         9.  Representations  and  Warranties.  Pledgor  hereby  represents  and
warrants to Creditor as follows:

                    (a)  Enforceability.  This  Agreement has been duly executed
                    and delivered by Pledgor,  constitutes its valid and legally
                    binding  obligation  and is enforceable  against  Pledgor in
                    accordance with its terms. Pledgor has the legal capacity to
                    enter into and perform all of its obligations and agreements
                    under this  Agreement.  No consent or approval for the entry
                    into and  performance  by  Pledgor  of its  obligations  and
                    agreements  under this Agreement is necessary other than the
                    consent of AmSouth.

<PAGE>

                    (b) No Conflict. The execution,  delivery and performance of
                    this  Agreement,  the grant of the security  interest in the
                    Pledged  Collateral  hereunder and the  consummation  of the
                    transactions  contemplated  hereby will not, with or without
                    the giving of notice or the lapse of time,  (a)  violate any
                    material  law   applicable  to  Pledgor;   (b)  violate  any
                    judgment,   writ,  injunction  or  order  of  any  court  or
                    governmental  body or officer  applicable  to  Pledgor;  (c)
                    violate or result in the breach of any material agreement to
                    which Pledgor is a party or by which any of its  properties,
                    including  the  Pledged  Collateral,  is bound;  (d) violate
                    Pledgor's articles of incorporation or organization, bylaws,
                    partnership,  shareholder  or operating  agreement;  nor (e)
                    violate  any  restriction  on  the  transfer  of  any of the
                    Pledged  Collateral.  Pledgor has the full and  unrestricted
                    right to pledge,  assign and create a security  interest  in
                    the Pledged  Collateral as described in and  contemplated by
                    this Agreement.  The execution,  delivery and performance of
                    this  Agreement  by  Pledgor  will not  affect or in any way
                    impair the Pledged  Collateral  or Pledgor's  or  Creditor's
                    rights or interests therein.

                    (c) No Consents. No consent,  approval,  license,  permit or
                    other  authorization  of any third party or any governmental
                    body or  officer  is  required  for  the  valid  and  lawful
                    execution  and  delivery  of this  Agreement,  the valid and
                    lawful  creation and perfection of the  Creditor's  security
                    interest in the Pledged  Collateral  or the valid and lawful
                    exercise by Creditor of remedies  available to it under this
                    Agreement  or  applicable  law or of the  voting  and  other
                    rights  granted  to it in  this  Agreement  except  for  the
                    consent  of  AmSouth  as  provided   in  the   Intercreditor
                    Agreement  and as may be  required  for the offer or sale of
                    those items of Pledged Collateral which are securities under
                    applicable securities laws.

                    (d)  Organization.   Pledgor  is  duly  organized,   validly
                    existing and in good standing under the laws of the State of
                    Tennessee.   Pledged  Company  is  duly  organized,  validly
                    existing and in good standing under the laws of its State of
                    Kentucky.  The Pledged  Securities are all of the issued and
                    outstanding securities issued by Pledge Company. The Pledged
                    Securities  have been duly  authorized and validly issued by
                    Pledge  Company and are fully paid and  non-assessable.  The
                    certificates  which  represent  the Pledged  Securities  are
                    valid and genuine  and have not been  altered and Pledgor is
                    the  appropriate  person to  endorse  them.  Except for this
                    Agreement, the Intercreditor Agreement, and other agreements
                    with AmSouth, neither Pledgor nor Pledge Company is bound by
                    any certificate of  incorporation  or  organization,  bylaw,
                    agreement or instrument  (including options,  warrants,  and
                    convertible  securities)  which  relates  to the  voting of;
                    restricts  the  transfer  of;  requires  Pledgor  or  Pledge
                    Company to issue or sell;  or  creates  rights in any person
                    (other  than  the  record   owner)  with   respect  to;  any
                    securities issued by Pledge Company.

<PAGE>

                    (e)  Security  Interest.  Subject  to the  rights of AmSouth
                    pursuant  to  Section  6  of  the  Intercreditor  Agreement,
                    Pledgor  is the  sole  record  and  beneficial  owner of the
                    Pledged  Securities,  subject to the  security  interest  of
                    AmSouth, free and clear of all other liens, encumbrances and
                    adverse claims,  and Pledgor has the  unrestricted  right to
                    grant  the  security  interest  provided  for  herein to the
                    Creditor.   Pledgor  has  duly  endorsed  and  delivered  to
                    AmSouth,  as  collateral  agent,  all  of  the  certificates
                    representing  the  Pledged  Securities  and has  granted  to
                    Creditor  a valid  and  perfected  first  priority  security
                    interest in the Pledged Securities,  subject to the security
                    interest of AmSouth, free of all other liens,  encumbrances,
                    transfer  restrictions and adverse claims. The certificates,
                    instruments  and other  writings  delivered  by  Pledgor  to
                    AmSouth, as collateral agent, pursuant to this Agreement are
                    all of the  certificates,  instruments  and  other  writings
                    representing  the  Pledged  Collateral  and all  rights  and
                    interests  with  respect  thereto.   The  security  interest
                    granted  hereby to Creditor  does now and shall at all times
                    during the term of this  Agreement  continue to constitute a
                    first and prior lien on the Pledged Collateral, subject only
                    to the security  interest of AmSouth and such matters as may
                    be  specifically  agreed to in  writing  by  Creditor.  This
                    representation  shall be deemed  made with  respect  to each
                    item of property that becomes Pledged  Collateral  after the
                    date hereof.

                    (f) Name and Address.  Pledgor's principal place of business
                    is  correctly  set forth under its  signature  at the end of
                    this Agreement.

         10. Agreements. So long as this Agreement is in effect, Pledgor shall:

                    (a)  Subject to the rights of AmSouth as  pledgee,  maintain
                    the  Pledged  Collateral  free  from  all  pledges,   liens,
                    encumbrances and security interests or other claims in favor
                    of others,  other than the  security  interests  in favor of
                    AmSouth and  Creditor,  and Pledgor  will defend the Pledged
                    Collateral against all claims and demands of all persons.

                    (b) Comply with the  requirements  of all applicable  state,
                    local and  federal  laws  necessary  to grant to  Creditor a
                    valid lien upon, and a duly perfected  security interest in,
                    the Pledged  Collateral in compliance with the  requirements
                    of this Agreement.

                    (c) Appear in and defend  any action or  proceeding  arising
                    out  of or  connected  with  this  Agreement,  and  pay  all
                    reasonable  costs  and  expenses  of  Creditor   (including,
                    without limitation,  reasonable attorneys' fees) in any such
                    action or proceeding in which Creditor appears or determines
                    to become involved.

                    (d) Not,  without  the prior  written  consent of  Creditor,
                    sell, assign,  encumber,  pledge,  hypothecate,  transfer or
                    otherwise  dispose  of the  Pledged  Collateral  or any part
                    thereof or any interest therein.

<PAGE>

                    (e) Provide  Creditor,  and Creditor's agents and attorneys,
                    reasonable  access to the books and  records of Pledgor  for
                    inspection  purposes  and  permit  Creditor  and  Creditor's
                    agents and attorneys to make copies hereof.

                    (f) Notify the  Creditor  at least  thirty  (30) days before
                    Pledgor  changes  its name or the  address of its  principal
                    place of business.

         11. Events of Default.  The  occurrence  of any of the following  shall
constitute an "Event of Default" under this Agreement:

                    (a) If the  Pledgor or the  Pledged  Company  fail to pay or
                    perform,  as the case may be, any of the Secured Obligations
                    when the same become due and payable or performable,  as the
                    case may be; or

                    (b) If an Event of Default  occurs under a Lease Document or
                    any guaranty,  promissory  note,  security  agreement,  loan
                    agreement or other agreement between Creditor and Pledgor or
                    Pledged Company; or

                    (c) If there is a breach of any  representation  or warranty
                    made by Pledgor in this Agreement; or

                    (d) If Pledgor:

                       (i) makes an assignment  for the benefit of, or enters
                           into any  composition or arrangement with, creditors;
                           or

                      (ii) generally does not pay its debts as such debts become
                           due; or

                     (iii) conceals,  removes,  or  permits to be  concealed  or
                           removed,  any part of its  property,  with  intent to
                           hinder,  delay or  defraud  its  creditors  or any of
                           them,  or makes or suffers a  transfer  of any of its
                           property   which   may  be   fraudulent   under   any
                           bankruptcy,  fraudulent conveyance or similar law, or
                           makes  any  transfer  of its  property  to or for the
                           benefit of a creditor at a time when other  creditors
                           similarly situated have not been paid; or

                    (e) The filing (i) of a involuntary  petition  under Section
                    303  of the  Bankruptcy  Code  (11  U.S.C.  ss.303)  against
                    Pledgor  which is not  dismissed  within thirty (30) days of
                    being  filed,  or (ii) of a  voluntary  petition  for relief
                    under any chapter of the Bankruptcy  Code (11 U.S.C.  ss.101
                    et seq.)

<PAGE>

                    (f) The  commencement  of a proceeding by or against Pledgor
                    under any statute or other law  providing  for an assignment
                    for the benefit of creditors, the appointment of a receiver,
                    or any other  similar law or  regulation,  whether  federal,
                    state or local, not dismissed within 30 days.

                    (g)  The  garnishment,  attachment,  levy or  other  similar
                    action taken by or on behalf of any creditor of the Pledgor,
                    or any of its properties which could have a material adverse
                    effect on the Pledgor.

         12. Remedies. Subject to the terms of the Intercreditor Agreement: Upon
and at any time after an Event of Default under this Agreement,  Creditor shall,
at its option and without  further  notice to Pledgor  (except for such  further
notices, if any, that may be required by law) be entitled to exercise any or all
rights and remedies provided  hereunder or by law,  including without limitation
the rights and remedies of a secured party under the Michigan Uniform Commercial
Code. Any requirement under the Michigan Uniform Commercial Code or otherwise of
reasonable  notice  shall be met if Creditor  sends  Pledgor  notice of sale and
other notices  required by law at least ten (10) days prior to the date of sale,
disposition  or other event  giving rise to the required  notice.  Any sale held
pursuant  to the  exercise  of  Creditor's  rights  hereunder  may be  public or
private,  and at such sale Creditor  shall have the right,  at any time and from
time to time, to the extent permitted by law, to sell, assign and deliver all or
any part of the Pledged Collateral,  at Creditor's office or elsewhere,  without
demand of  performance,  advertisement  of notice of intention to sell or of the
time or place of sale or  adjournment  thereof or any other notice (all of which
are hereby waived by Pledgor to the extent permitted by law), except such notice
as is required by  applicable  law and cannot be waived,  for cash, on credit or
for other property, for immediate or future delivery,  without any assumption or
credit risk, and,  provided that such is not in violation of applicable law, for
such  terms  as  Creditor  in  its  absolute  and  uncontrolled  discretion  may
determine.  In furtherance of Creditor's rights hereunder,  Creditor or AmSouth,
as collateral agent,  shall have the right, for and in the name, place and stead
of  Pledgor,  to  execute  endorsements,  assignments  or other  instruments  of
conveyance or transfer with respect to all or any of the Pledged Collateral. All
amounts collected by Creditor as the result of any action taken pursuant to this
Section 12, and the liquidation value of any other property received as a result
of such action,  shall,  subject to the Intercreditor  Agreement,  be applied by
Creditor as follows:

         (i)      First, to the payment of all fees and costs including, without
                  limitation, reasonable attorneys' fees, incurred in connection
                  with  the   collection  of  the  Secured   Obligations  or  in
                  connection  with the  exercise or  enforcement  of  Creditor's
                  rights, powers or remedies under this Agreement.

         (ii)     Second,  to the  payment and  satisfaction  of all of the
                  Secured Obligations.

<PAGE>

                    (b)  Creditor  shall  not be  obligated  to make any sale of
                    Pledged Collateral  regardless of notice of sale having been
                    given.  Creditor may adjourn any public or private sale from
                    time to time by  announcement  at the time and  place  fixed
                    therefor, and such sale may, without further notice, be made
                    at the time and  place  to  which it was so  adjourned.  If,
                    under the Michigan Uniform Commercial Code, the Creditor may
                    purchase  any part of the  Pledged  Collateral,  it may,  in
                    payment of any part of the purchase price thereof cancel any
                    part of the Secured Obligations.

                    (c) Pledgor shall  execute and deliver to the  purchasers of
                    the Pledged  Collateral all  instruments and other documents
                    necessary or proper to sell,  convey,  and transfer title to
                    such  Pledged  Collateral  and,  if  approval of any sale of
                    Pledged  Collateral by any  governmental  body or officer is
                    required,  Pledgor shall  prepare or cooperate  fully in the
                    preparation of and cause to be filed with such  governmental
                    body  or  officer  all  necessary  or  proper  applications,
                    reports,  and  forms and do all other  things  necessary  or
                    proper to expeditiously obtain such approval.

                    (d) The  remedies  provided  in this  Agreement  in favor of
                    Creditor  shall  not  be  deemed  exclusive,  but  shall  be
                    cumulative,  and shall be in addition to all other  remedies
                    in favor of Creditor existing at law or in equity.

         13.  Appointment  of Creditor as Agent.  Pledgor  hereby  appoints  and
constitutes   Creditor,   its   successors   and  assigns,   as  its  agent  and
attorney-in-fact  for  the  purpose  of  carrying  out  the  provisions  of this
Agreement  and taking any  action or  executing  any  instrument  that  Creditor
considers necessary for such purpose, including the power to endorse and deliver
in the name of and on behalf of Pledgor securities  certificates and execute and
deliver in the name of and on behalf of Pledgor  instructions  to the issuers of
uncertificated  securities, and to execute and file in the name of and on behalf
of Pledgor financing statements (which may be photocopies of this Agreement) and
continuations  and amendments to financing  statements in the State of Tennessee
or  elsewhere  and Forms 144 with the  United  States  Securities  and  Exchange
Commission.  This appointment is coupled with an interest and is irrevocable and
will not be  affected by the  dissolution  or  bankruptcy  of Pledgor nor by the
lapse of time. If Pledgor  fails to perform any act required by this  Agreement,
Creditor may perform such act in the name of and on behalf of Pledgor and at its
expense  which shall be  chargeable  to Pledgor  under this  Agreement.  Pledgor
hereby  consents  and agrees  that the  issuers of or  obligors  of the  Pledged
Collateral or any registrar or transfer  agent or trustee for any of the Pledged
Collateral  shall be  entitled  to accept the  provisions  hereof as  conclusive
evidence  of the rights of  Creditor  to effect any  transfer  pursuant  to this
Agreement  and the authority  granted to Creditor  herein,  notwithstanding  any
other  notice or  direction to the  contrary  heretofore  or hereafter  given by
Pledgor,  or any other  person,  to any of such issuers,  obligors,  registrars,
transfer agents, or trustees.  Notwithstanding the foregoing,  the terms of this
Section  13 shall not apply so long as  AmSouth  is acting as  collateral  agent
pursuant to the terms of the Intercreditor Agreement.

         14. Impact of Regulations.  Pledgor  acknowledges  that compliance with
the  Securities  Act of 1933 and the rules and  regulations  thereunder  and any
relevant state securities laws and other applicable laws may impose  limitations
on the right of Creditor to sell or otherwise dispose of securities  included in
the Pledged Collateral.  For this reason,  Pledgor hereby authorizes Creditor to
sell any  securities  included in the Pledged  Collateral  in such manner and to

<PAGE>

such  persons as would,  in the  judgment of  Creditor,  help to ensure that the
transfer of such securities  will be given prompt and effective  approval by any
relevant regulatory authorities and will not require any of the securities to be
registered  or  qualified  under  any  applicable   securities   laws.   Pledgor
understands  that  a  sale  under  the  foregoing   circumstances  may  yield  a
substantially  lower price for such Pledged  Collateral  than would otherwise be
obtainable if the same were registered and sold in the open market,  and Pledgor
shall not attempt to hold  Creditor  responsible  for selling any of the Pledged
Collateral  at an  inadequate  price even if  Creditor  accepts  the first offer
received or if only one possible  purchaser appears or bids at any such sale. If
Creditor  shall sell any securities  included in the Pledged  Collateral at such
sale,  Creditor  shall have the right to rely upon the advice and opinion of any
qualified appraiser or investment banker as to the commercially reasonable price
obtainable  on the sale thereof but shall not be obligated to obtain such advice
or opinion.

         15. Expenses. Pledgor will forthwith upon demand pay to Creditor:

                  (i) the  amount  of any  taxes  which  Creditor  may have been
         required to pay by reason of holding the Pledged  Collateral or to free
         any of the  Pledged  Collateral  from any lien  encumbrance  or adverse
         claim thereon other than liens in favor of AmSouth, and

                  (ii)  the  amount  of any  and  all  reasonable  out-of-pocket
         expenses,  including the fees and  disbursements  of counsel and of any
         brokers, investment brokers, appraisers or other experts, that Creditor
         may incur in connection with (A) the  administration  or enforcement of
         this Agreement, including such expenses as are incurred to preserve the
         value of the Pledged Collateral and the validity,  perfection, rank and
         value of Creditor's security interest therein, (B) the collection, sale
         or other disposition of any of the Pledged Collateral, (C) the exercise
         by Creditor of any of the rights  conferred  upon it hereunder,  or (D)
         any action or proceeding to enforce its rights under this  Agreement or
         in pursuit of any non-judicial  remedy hereunder  including the sale of
         the Pledged Collateral.

Any such amount not paid within  thirty (30) days of demand shall bear  interest
(computed  on the  basis  of the  number  of days  elapsed  over a year of three
hundred sixty-five (365) days) at a rate per annum equal to the Overdue Rate (as
defined in the Master Lease).

         16.  Indemnity.  The  Pledgor  shall  indemnify  the  Creditor  and its
directors,  officers,  employees,  agents and attorneys  against,  and hold them
harmless  from,  any  liability,  cost  or  expense,   including  the  fees  and
disbursements  of  their  legal  counsel,  incurred  by any of  them  under  the
corporate or securities laws applicable to holding or selling any of the Pledged
Collateral,   except  for  liability,   cost  or  expense  arising  out  of  the
recklessness or willful misconduct of the indemnified parties.

         17. Performance by Creditor. Subject to the Intercreditor Agreement, if
Pledgor  fails  to duly and  punctually  perform,  observe  or  comply  with any
condition, term or covenant contained in this Agreement,  Creditor, upon fifteen
(15) days prior written notice (provided,  however,  no notice shall be required

<PAGE>

if an Event of Default  exists  under the Master  Lease) and without  waiving or
releasing any of the Secured  Obligations,  may at any time  thereafter  perform
such condition,  term or covenant for the account and at the expense of Pledgor.
All sums paid or advanced in  connection  with the  foregoing  and all costs and
expenses (including, without limitation, reasonable attorneys' fees) incurred in
connection  therewith shall be paid by Pledgor to Creditor on demand,  and shall
constitute  and become a part of the Secured  Obligations  and Pledgor agrees to
reimburse  Creditor  for any  payment  made or any expense  incurred  (including
reasonable  attorneys' fees to the extent permitted by law) by Creditor pursuant
to this Agreement.

         18. Waivers. Pledgor hereby waives presentment, demand, protest, notice
of any default under the Lease Documents (except as otherwise provided herein or
therein). Neither the failure of nor any delay by any party to this Agreement to
enforce any right  hereunder or to demand  compliance with its terms is a waiver
of any right  hereunder.  No action taken  pursuant to this  Agreement on one or
more  occasions is a waiver of any right  hereunder or  constitutes  a course of
dealing that  modifies  this  Agreement.  No waiver of any right or remedy under
this  Agreement  shall be  binding on any party  unless it is in writing  and is
signed by the party to be charged.  No such waiver of any right or remedy  under
any  term of this  Agreement  shall  in any  event  be  deemed  to  apply to any
subsequent default under the same or any other term contained herein.

         19. Entire Agreement. This Agreement, the schedules and exhibits hereto
and the  agreements  and  instruments  required  to be  executed  and  delivered
hereunder  set forth the entire  agreement  of the parties  with  respect to the
subject matter hereof and supersede and discharge all prior agreements  (written
or oral) and negotiations  and all  contemporaneous  oral agreements  concerning
such subject matter and negotiations.  There are no oral conditions precedent to
the effectiveness of this Agreement.

         20.  Amendments.  No amendment,  modification  or  termination  of this
Agreement  shall be binding on any party  hereto  unless it is in writing and is
signed by the party to be charged.

         21. Severability.  If any term or provision set forth in this Agreement
shall be invalid or  unenforceable,  the  remainder  of this  Agreement,  or the
application of such terms or provisions to persons or circumstances,  other than
those to which it is held  invalid or  unenforceable,  shall be construed in all
respects as if such invalid or unenforceable term or provision were omitted.

         22.  Successors.  The terms of this Agreement shall be binding upon the
Pledgor, its heirs and personal representatives,  and shall inure to the benefit
of Creditor,  its corporate  successors and any holder, owner or assignee of any
rights in the Lease  Documents and will be enforceable by them as their interest
may appear.

         23. Third Parties.  Nothing herein  expressed or implied is intended or
shall be construed  to give any person other than the parties  hereto any rights
or remedies under this Agreement.

<PAGE>

         24. Saturdays, Sundays and Holidays. Where this Agreement authorizes or
requires a payment or performance on a Saturday,  Sunday or public holiday, such
payment  or  performance  shall  be  deemed  to be  timely  if made on the  next
succeeding business day.

         25.  Joint  Preparation.  This  Agreement  shall be deemed to have been
prepared  jointly by the  parties  hereto.  Any  ambiguity  herein  shall not be
interpreted  against any party hereto and shall be interpreted as if each of the
parties hereto had prepared this Agreement.

         26. Rules of  Construction.  In this  Agreement,  words in the singular
number include the plural, and in the plural include the singular;  words of the
masculine  gender  include the  feminine  and the neuter,  and when the sense so
indicates  words of the neuter  gender may refer to any gender and the word "or"
is disjunctive but not exclusive.  The captions and section numbers appearing in
this Agreement are inserted only as a matter of convenience. They do not define,
limit or describe the scope or intent of the provisions of this Agreement.

         27. Notices. All notices,  demands or requests required or permitted to
be given to either party hereto shall be in writing and shall be deemed given if
delivered  personally,  sent by reputable overnight courier, with acknowledgment
of receipt requested, or mailed by registered, overnight or certified mail, with
full postage paid thereon, return receipt requested (such notice to be effective
on the date such receipt is acknowledged), as follows:

                  Pledgor:
                  Diversicare Leasing Corp.
                  277 Mallory Station Road, Suite 130
                  Franklin, Tennessee 37067
                  Telephone No.: (615) 256-0500
                  Facsimile No.: (615) 771-7409

                  Creditor:
                  Sterling Acquisition Corp.
                  900 Victors Way, Suite 350
                  Ann Arbor, Michigan 48108
                  Attn:  Susan Allene Kovach, General Counsel
                  Telephone No.:  (734) 887-0200
                  Facsimile No.:   (734) 887-0201

or to such place and with such other copies as Pledgor or Creditor may designate
for itself by written notice to the other.

         28.  Counterparts.  This  Agreement  may be  executed  in any number of
counterparts, all of which shall constitute one and the same instrument, and any
party hereto may execute this  Agreement by signing and  delivering  one or more
counterparts.

<PAGE>

         29.  Choice  of Law;  Jurisdiction;  Venue.  This  Agreement  shall  be
construed,  and the rights and  obligations of the Pledgor and Creditor shall be
determined,  in accordance  with the laws of the State of Michigan,  except that
the laws of the state where the Pledged  Collateral is located shall govern this
Agreement  (a) to the extent  necessary  to  perfect  and/or  enforce  the liens
created by this  Agreement and to the extent  necessary to obtain the benefit of
the rights and remedies set forth herein with respect to the Pledged Collateral,
and (b) for  procedural  requirements  that must be  governed by the laws of the
state in which  the  Pledged  Collateral  is  located.  Pledgor  consents  to in
personam  jurisdiction before the state and Federal courts of the state in which
the Pledged  Collateral  is located and  Michigan  and agrees that all  disputes
concerning  this  Agreement be heard in the state and federal  courts located in
the state in which the collateral is located or in Michigan. Pledgor agrees that
service of process may be effected  upon it under any method  permissible  under
the laws of the  state in which the  collateral  is  located  or  Michigan,  and
Pledgor  irrevocably  waives  any  objection  to venue in the state and  Federal
courts of the state in which the collateral is located and Michigan.

         30. Waiver of Jury Trial.  The Pledgor hereby  voluntarily,  knowingly,
irrevocably and  unconditionally  waives and  relinquishes its Right to Trial by
Jury under the  Constitution  of the United States of America or of the State of
Michigan or any other  constitution,  statute or law in any civil legal  action,
suit or  proceeding  arising  out of or related to the  negotiation,  execution,
delivery,  performance,  breach or  enforcement  of this  Agreement or any other
agreement, document or instrument negotiated,  executed, delivered, entered into
or  performed  in  connection  with this  Agreement  or any of the  transactions
contemplated  hereby  or  thereby;  any  waiver,   modification,   amendment  or
termination  hereof or  thereof  or any  action  taken or  omission  made by the
Pledgor  or the  Creditor  or  any  of  their  respective  directors,  officers,
employees,  agents or attorneys  in  connection  with the payment,  performance,
exercise or  enforcement  of any right,  duty or  obligation  created or implied
hereby or thereby or arising hereunder or thereunder;  regardless of whether any
claim,  counterclaim  or  defense  in any such  action,  suit or  proceeding  is
characterized  as arising out of fraud,  negligence,  recklessness,  intentional
misconduct,  a breach of contract or fiduciary  duty, or violation of a statute,
law, ordinance, rule or regulation.

                            [signatures on next page]


<PAGE>


         IN WITNESS WHEREOF,  the parties have executed this Pledge Agreement as
of the date first above stated.

                                    PLEDGOR:

                                                     DIVERSICARE LEASING CORP.,
                                                     a Tennessee corporation
Address of
Place of Business:

277 Mallory Station Road, Suite 130         By:      __________________________
Fra                                         Its:     Senior Vice President

                                    CREDITOR:

                                                     Sterling Acquisition Corp.,
                                                     a Kentucky corporation


                                                     By:      __________________
                                                     Its:


STATE OF ______________ )
                        ) ss.
COUNTY OF ____________  )

The foregoing  instrument was  acknowledged  before me this ___ day of November,
2000 by James F. Mills,  Jr. who is the Senior  Vice  President  of  DIVERSICARE
LEASING CORP., a Tennessee corporation, on behalf of the corporation.



                                          --------------------------------------
                                          Notary Public,
                                           __________ County,
                                          My commission expires:



<PAGE>


STATE OF ___________       )
                           ) ss.
COUNTY OF ____________     )

         The foregoing  instrument  was  acknowledged  before me this ___ day of
November,  2000 by  Susan  A.  Kovach,  who is the Vice  President  of  STERLING
ACQUISITION CORP, a Kentucky corporation, on behalf of the corporation.



                                         --------------------------------------
                                         Notary Public,
                                         __________ County,
                                         My commission expires:


<PAGE>




                                    EXHIBIT A

                               ASSIGNMENT IN BLANK

                            DIVERSICARE LEASING CORP.

         For value received,  DIVERSICARE LEASING CORP., a Tennessee corporation
("Assignor"),        sells,        assigns        and        transfers        to
_____________________________________      ("Assignee"),     ___________________
(__________)   shares  of  common  stock  in   ____________________________,   a
_______________  corporation (the "Company"),  represented by Stock  Certificate
Number __ in the amount of _________ shares dated ______________ (the "Shares"),
and further irrevocably  appoints AMSOUTH BANK,  successor in interest by merger
to First  American  National Bank, as attorney in fact to transfer the Shares on
the books of the Company,  with full power of  substitution  and  resubstitution
(which power shall survive the dissolution of Assignor).


                                                     DIVERSICARE LEASING CORP.


Dated: November ___, 2000                   By:      ___________________________
                                            Its:


                                                     Signature Guaranteed:



                                            By:      ___________________________


<PAGE>





                                   SCHEDULE 1

                     FORM OF SCHEDULE TO FINANCING STATEMENT


Debtor:           DIVERSICARE LEASING CORP., a Tennessee corporation

Secured Party:    STERLING ACQUISITION CORP., a Kentucky corporation

                            Description of Collateral

                  The personal property of Debtor described below,  which it now
owns or shall hereafter  acquire or create,  immediately upon the acquisition or
creation thereof and wherever located, consisting of the following:

         (a)      all Debtor's right, title and interest in Sterling Health Care
                  Management, Inc., a Kentucky corporation ("Pledge Company");

         (b)      any  equity  securities  issued  by  Pledge  Company  and  any
                  options, warrants or rights to acquire such securities,  owned
                  or acquired by Debtor,  directly or indirectly,  now or at any
                  time in the future;

         (c)      any  securities or other  property  issued or  distributed  to
                  Debtor with respect to any securities described in clauses (a)
                  or (b) above as a dividend or  distribution  or as a result of
                  any amendment of the  certificate  of  incorporation  or other
                  charter  documents,  merger,   consolidation,   redesignation,
                  reclassification,  purchase or sale of assets, dissolution, or
                  plan  of  arrangement,  compromise  or  reorganization  of the
                  issuer thereof;

         (d)      any  rights   incidental  to  the  ownership  of  any  of  the
                  securities  described in clauses (a), (b) or (c) above such as
                  voting,  conversion  and  registration  rights  and  rights of
                  recovery for violations of applicable securities laws; and

         (e)      the proceeds of the exercise,  redemption, sale or exchange of
                  any of the  foregoing  or any  dividend,  interest  payment or
                  other distribution of cash or property in respect thereof.



                                    Notary Public, __________ County,
                                    My Commission Expires: _____________