Document:

Exhibit
10.1

SECOND AMENDMENT, WAIVER AND CONSENT TO CREDIT AGREEMENT

THIS SECOND AMENDMENT, WAIVER AND
CONSENT TO CREDIT AGREEMENT (this
“Amendment”), dated as of October 23, 2006, is entered into by and among
OHI ASSET, LLC, a Delaware limited
liability company, OHI ASSET (ID), LLC,
a Delaware limited liability company, OHI ASSET (LA), LLC,
a Delaware limited liability company, OHI ASSET (TX), LLC,
a Delaware limited liability company, OHI ASSET (CA), LLC,
a Delaware limited liability company, DELTA INVESTORS I, LLC,
a Maryland limited liability company, DELTA INVESTORS II, LLC,
a Maryland limited liability company and TEXAS LESSOR - STONEGATE,
LP, a Maryland limited partnership (each of the foregoing entities
shall be hereinafter referred to individually as a “Borrower” and
collectively as the “Borrowers”), the Lenders (as defined below) and BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, the “Administrative Agent”),
Swing Line Lender and L/C Issuer.

RECITALS

WHEREAS, the Borrowers, the lenders
from time to time party thereto (the “Lenders”) and the Administrative
Agent, are party to that certain Credit Agreement dated as of March 31, 2006,
as amended by that certain First Amendment to Credit Agreement dated as of June
30, 2006 (as amended, restated, supplemented or otherwise modified from time to
time, the “Existing Credit Agreement”);

WHEREAS, Omega Healthcare
Investors, Inc. (the “Parent”) determined that it may have to restate
certain of its annual and quarterly financial statements, including but not
limited to, the 2005 Audited Financial Statements and the first two quarters of
fiscal year 2006 (the “Applicable Restatements”) as a result of the
possible recharacterization of the Advocat restructuring that occurred in
November, 2000 (the “Advocat Recharacterization”);

WHEREAS, the Parent is engaged
in work to determine the financial results as they relate to the Advocat
Recharacterization and, although the review and investigation are not
concluded, at this time the Parent believes that it may be responsible for
taxes and tax penalties in an amount of up to $8,000,000;

WHEREAS, pursuant to Section
4.02, upon any request for an Extension of Credit, the Parent (on behalf of
itself and the Borrowers) makes certain representations and warranties,
including representations pursuant to Sections 5.01(a), 5.01(c), 5.16 and 5.20,
relating to (i) the extent to which the Audited Financial Statements as well as
the most recent financial statements furnished to the Administrative Agent
pursuant to Section 6.01 are prepared in accordance with GAAP and present
fairly the consolidated financial condition, results of operations and cash
flows of the Consolidated Parties as of the dates thereof and for the periods
covered thereby (the “Financial Statement Representations”), (ii)
payment of all Federal, state and other material taxes and other governmental
charges (the “Taxes Representations”), and (iii) all matters having been
disclosed and no misstatements or omissions existing on materials furnished by
each Credit Party (the “Disclosure Representations”);

 

 

WHEREAS, following the
completion of the Applicable Restatements, it may be determined that one or
more Events of Default had previously occurred under (i) Section 8.01(b) as a
result of the Borrowers’ failure to comply with the covenants set forth in
Sections 6.01(b) and 6.06, (ii) Section 8.01(c) as a result of the Borrowers’
failure to comply with the covenants set forth in Section 6.09 and (iii)
Section 8.01(d) as a result of the inaccuracy of the Financial Statement
Representations, the Taxes Representations and the Disclosure Representations
(collectively, the “Restatement Defaults”);

WHEREAS, the Parent and the
Borrowers have requested that the Lenders (i) waive the inaccuracy of the
Financial Statement Representations, the Taxes Representations and the
Disclosure Representations solely with respect to the financial statements that
are the subject of the Applicable Restatements (the “Specified Prior
Financial Statements”) and the Advocat Recharacterization, and any
corresponding certifications otherwise made or deemed made pursuant to the
Existing Credit Agreement with respect to the Specified Prior Financial
Statements, in each case to the extent of the Applicable Restatements and only
to the extent related to the Advocat Recharacterization, and (ii) waive the
Restatement Defaults (if and to the extent any shall have occurred), in each
case, as of the Amendment No. 2 Effective Date (as defined in Subpart 5.1);
and

WHEREAS, the Required Lenders
have directed the Administrative Agent to execute this Amendment, subject to
the terms and conditions set forth herein.

NOW, THEREFORE, in consideration
of the premises and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:

PART 1

DEFINITIONS

SUBPART 1.1  Certain Definitions.  Unless otherwise defined herein or the
context otherwise requires, the following terms used in this Amendment,
including its preamble and recitals, have the following meanings:

“Amended Credit Agreement” means the Existing
Credit Agreement as amended hereby.

“Amendment No. 2 Effective Date” is defined in Subpart
5.1.

SUBPART 1.2  Other Definitions.  Unless otherwise defined herein or the
context otherwise requires, terms used in this Amendment, including its
preamble and recitals, have the meanings provided in the Existing Credit
Agreement.

 

 

PART 2

WAIVER

SUBPART 2.1  Waiver of Financial Statement
Representations, Taxes Representations and Disclosure Representations.  Subject to the satisfaction of all of the
terms and conditions set forth in this Amendment, the Lenders hereby waive (i)
the inaccuracies in the Financial Statement Representations, the Taxes
Representations and the Disclosure Representations with respect to the
Specified Prior Financial Statements and only to the extent related to the
Advocat Recharacterization and (ii) any corresponding inaccuracies in the
certifications otherwise made or deemed made pursuant to the Existing Credit
Agreement with respect to the Specified Prior Financial Statements, in each
case, solely to the extent of the Applicable Restatements and only to the
extent related to the Advocat Recharacterization.

SUBPART 2.2  Waiver of Restatement Defaults.  Subject to the satisfaction of all of the
terms and conditions set forth in this Amendment, the Lenders hereby waive the
Restatement Defaults (if and to the extent any shall have occurred).

SUBPART 2.3  Reservation of Rights.  Except for the specific waivers set forth in Subpart
2.1 and Subpart 2.2 above, nothing contained herein shall be deemed
to constitute a waiver of (i) any rights or remedies the Administrative Agent
or any Lender may have under the Existing Credit Agreement or any other Credit
Documents or under applicable law or (ii) any Credit Party’s obligation to
comply fully with any duty, term, condition, obligation or covenant contained
in the Existing Credit Agreement and the other Credit Documents not
specifically waived, consented to or amended herein.  The specific waivers set forth herein are
effective only with respect to the inaccuracies in the Financial Statement
Representations, the Taxes Representations, the Disclosure Representations, the
Specified Prior Financial Statements, the Applicable Restatements and any
corresponding Restatement Defaults, and shall not obligate the Lenders to waive
any other Default or Event of Default, now existing or hereafter arising.

PART 3

CONSENT

In connection with the Applicable Restatements, the
Lenders hereby consent to the extension of the deadline by which the quarterly
financial statements and related certifications must be delivered to the
Administrative Agent pursuant to Section 6.01(b) and Section 6.02(b), for the
fiscal quarter ended September 30, 2006 (the “September Financials”).  Failure to deliver the September Financials
by January 31, 2007, shall constitute an Event of Default.  This consent is limited to the extent
described herein and shall not be construed to be a consent to the modification
of any other terms of the Existing Credit Agreement or of the other Credit
Documents.

PART 4

AMENDMENTS TO EXISTING CREDIT AGREEMENT

Effective on (and subject to the occurrence of) the
Amendment No. 2 Effective Date, the Existing Credit Agreement is hereby amended
in accordance with this Part 4.

 

 

SUBPART 4.1 
Section 1.01 of the Existing Credit Agreement is
hereby amended in the following respects:

(a)           The definition of “Funds from
Operations” is hereby amended by adding a new clause (b)(v) to read as
follows:

“(v) the one-time
tax liability relating to the Advocat Recharacterization in an amount not to
exceed $8,000,000.”

(b)           The following new definitions are
added to Section 1.01 of the Existing Credit Agreement in appropriate
alphabetical order:

“Advocat Recharacterization” has the meaning
described in the Recitals to the Second Amendment.

“Second Amendment” means the Second Amendment,
Waiver and Consent to Credit Agreement, dated as of October 23, 2006, among the
Borrowers, the Lenders and the Administrative Agent.

PART 5

CONDITIONS TO EFFECTIVENESS

SUBPART 5.1  Amendment No. 2 Effective Date.  This Amendment shall be and become effective
as of October 23, 2006 (the “Amendment No. 2 Effective Date”) when all
of the conditions set forth in this Part 5 shall have been satisfied.

SUBPART 5.2 
Execution of Counterparts of Amendment.  The Administrative Agent shall have received
counterparts of this Amendment, which collectively shall have been duly
executed on behalf of (i) the Borrowers, (ii) the Required Lenders and (iii) the Administrative Agent.

SUBPART 5.3  Execution of Guarantor Consent.  The Administrative Agent shall have received
an acknowledgement and consent from each of the Guarantors.

SUBPART 5.4  Other Items.  The Administrative Agent shall have received
such other documents, agreements or information which may be reasonably
requested by the Administrative Agent.

 

 

PART 6

MISCELLANEOUS

SUBPART 6.1   Construction.  This Amendment is a Credit Document executed
pursuant to the Existing Credit Agreement and shall (unless otherwise expressly
indicated therein) be construed, administered and applied in accordance with
the terms and provisions of the Amended Credit Agreement.

SUBPART 6.2  Representations and Warranties.  Each Borrower hereby represents and warrants
that it:  (a) has the requisite corporate
power and authority to execute, deliver and perform this Amendment, as
applicable and (b) is duly authorized to, and has been authorized by all
necessary corporate action, to execute, deliver and perform this Amendment, (c)
after giving effect to Part 2 of this Amendment, the representations and
warranties contained in Section 6 of the Amended Credit Agreement are true and
correct in all material respects on and as of the date hereof upon giving
effect to this Amendment as though made on and as of such date (except for
those which expressly relate to an earlier date) and (d) no Default or Event of
Default exists under the Existing Credit Agreement on and as of the date hereof
upon giving effect to this Amendment.

SUBPART 6.3  Counterparts.  This Amendment may be executed by the parties
hereto in several counterparts, each of which shall be deemed to be an original
and all of which shall constitute together but one and the same agreement.

SUBPART 6.4  Binding Effect.  This Amendment, the Amended Credit Agreement
and the other Credit Documents embody the entire agreement between the parties
and supersede all prior agreements and understandings, if any, relating to the
subject matter hereof.  These Credit
Documents represent the final agreement between the parties and may not be
contradicted by evidence of prior, contemporaneous or subsequent oral
agreements of the parties.  Except as
expressly modified and amended in this Amendment, all the terms, provisions and
conditions of the Credit Documents shall remain unchanged and shall continue in
full force and effect.

SUBPART 6.5  GOVERNING LAW.  THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

SUBPART 6.6  Severability.  If any provision of this Amendment is
determined to be illegal, invalid or unenforceable, such provision shall be
fully severable and the remaining provisions shall remain in full force and
effect and shall be construed without giving effect to the illegal, invalid or
unenforceable provisions.

SUBPART 6.7  Affirmation.  Except
as specifically amended above, the Credit Documents (and all covenants, terms,
conditions and agreements therein), shall remain in full force and effect, and
are hereby ratified and confirmed in all respects by each Borrower.  Each Borrower covenants and agrees to comply
with all of the terms, covenants and conditions of the Existing Credit
Agreement, as otherwise waived, consented to and amended hereby,

 

notwithstanding any prior course of conduct, waivers,
releases or other actions or inactions on Lenders’ part which might otherwise
constitute or be construed as a waiver of or amendment to such terms, covenants
and conditions.

SUBPART 6.8  No
Waiver.  The execution, delivery and
effectiveness of this Amendment shall not, except as expressly provided in this
Amendment, operate as a waiver of any right, power or remedy of Lenders, nor
constitute a waiver of any provision of any Credit Document or any other
documents, instruments and agreements executed or delivered in connection with
any of the foregoing.  Except as
otherwise provided for in this Amendment, nothing herein is intended or shall
be construed as a waiver of any existing Defaults or Events of Default under
the Credit Documents or any of Lenders’ rights and remedies in respect of such
Defaults or Events of Default.

SIGNATURE PAGES FOLLOW

 

 

IN WITNESS WHEREOF, each of the
parties hereto has caused a counterpart of this Second Amendment, Waiver and Consent to Credit Agreement to be duly
executed and delivered as of the date first above written.

	
  BORROWERS:

  	
   

  	
  OHI ASSET, LLC

  
	
   

  	
   

  	
  OHI ASSET (ID),
  LLC

  
	
   

  	
   

  	
  OHI ASSET (LA),
  LLC

  
	
   

  	
   

  	
  OHI ASSET (TX),
  LLC

  
	
   

  	
   

  	
  OHI ASSET (CA),
  LLC

  
	
   

  	
   

  	
  DELTA INVESTORS
  I, LLC

  
	
   

  	
   

  	
  DELTA INVESTORS
  II, LLC

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  Omega Healthcare Investors, Inc.,

  
	
   

  	
   

  	
   

  	
   

  	
  the Sole Member
  of each such company

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By: 

  	
  /s/ Taylor Pickett

  
	
   

  	
   

  	
   

  	
   

  	
  Name:

  	
  C. Taylor Pickett

  
	
   

  	
   

  	
   

  	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  TEXAS LESSOR - STONEGATE, LP

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  By:

  	
  Texas Lessor — Stonegate GP, Inc.,

  
	
   

  	
   

  	
   

  	
   

  	
  Its General Partner

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
  By: 

  	
  /s/ Taylor
  Pickett

  
	
   

  	
   

  	
   

  	
   

  	
  Name: 

  	
  C. Taylor
  Pickett

  
	
   

  	
   

  	
   

  	
   

  	
  Title: 

  	
  President and
  Chief Executive Officer

  

 

 

 

	
  LENDERS:

  	
  BANK OF AMERICA, N.A.,

  
	
   

  	
  as Administrative Agent

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Angela Lau

  
	
   

  	
  Name:

  	
  Angela Lau

  
	
   

  	
  Title:

  	
  Assistant Vice
  President

  
	
   

  	
   

  	
   

  
	
   

  	
  BANK OF AMERICA, N.A., as L/C Issuer, Swing Line
  Lender and as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Amie L.
  Edwards

  
	
   

  	
  Name:

  	
  Amie L. Edwards

  
	
   

  	
  Title:

  	
  Vice President

  
				

 

 

 

	
   

  	
  UBS LOAN FINANCE LLC

  
	
   

  	
  as a Lender

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Richard L.
  Tavrow

  
	
   

  	
  Name:

  	
  Richard L.
  Tavrow

  
	
   

  	
  Title:

  	
  Director

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Trja R. Otsa

  
	
   

  	
  Name:

  	
  Trja R. Otsa

  
	
   

  	
  Title:

  	
  Associate
  Director

  

 

 

 

	
  

  	
  DEUTSCHE BANK
  TRUST COMPANY AMERICAS, as a Lender

  	 

	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Carin Keegan

  	 

	
   

  	
  Name:

  	
  Carin Keegan

  	 

	
   

  	
  Title:

  	
  Vice President

  	 

	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ Evelyn
  Thierry

  	 

	
   

  	
  Name:

  	
  Evelyn Thierry

  	 

	
   

  	
  Title:

  	
  Vice President

  	 

 

 

 

	
  

  	
  GENERAL ELECTRIC CAPITAL CORPORATION,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Nicholas A. Aponte

  
	
   

  	
  Name:

  	
  Nicholas A. Aponte

  
	
   

  	
  Title:

  	
  Duly Authorized Signatory

  

 

 

 

	
  

  	
  LASALLE BANK, N.A.,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Geraldine M. Rudig

  
	
   

  	
  Name:

  	
  Geraldine M. Rudig

  
	
   

  	
  Title:

  	
  Senior Vice President

  

 

 

	
  

  	
  CITICORP NORTH AMERICA, INC.,

  
	
   

  	
  as a Lender

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ricardo James

  
	
   

  	
  Name:

  	
  Ricardo James

  
	
   

  	
  Title:

  	
  Director

  

 

CONSENT OF GUARANTORS

Each of the
undersigned Guarantors, as a guarantor under the Guaranty, dated as of March
31, 2006, as amended (the “Guaranty”), hereby acknowledges and consents
to the terms of the Second Amendment, Waiver and Consent to Credit Agreement
(the “Amendment”) to which this Consent of Guarantors is attached, and agrees that the Amendment does not operate to
reduce or discharge such Guarantor’s obligations under the Guaranty or the
other Credit Documents.  Each Guarantor
further confirms that the Guaranty remains in full force and effect
after giving effect thereto and represents and warrants that there is no
defense, counterclaim or offset of any type or nature under the Guaranty.

Dated as of
October 23, 2006

	
  PARENT:

  	
  OMEGA HEALTHCARE INVESTORS, INC.,

  
	
   

  	
  a Maryland corporation

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Taylor Pickett 

  
	
   

  	
  Name:

  	
  C. Taylor Pickett

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  
	
  SUBSIDIARY GUARANTORS:

  	
  ARIZONA LESSOR — INFINIA, INC.

  
	
   

  	
  BALDWIN HEALTH CENTER, INC.

  
	
   

  	
  BAYSIDE STREET II, INC.

  
	
   

  	
  CANTON HEALTH CARE LAND, INC.

  
	
   

  	
  COLORADO LESSOR — CONIFER, INC.

  
	
   

  	
  COPLEY HEALTH CENTER, INC.

  
	
   

  	
  DIXON HEALTH CARE CENTER, INC.

  
	
   

  	
  FLORIDA LESSOR — EMERALD, INC.

  
	
   

  	
  FLORIDA LESSOR — MEADOWVIEW, INC.

  
	
   

  	
  GEORGIA LESSOR — BONTERRA/

  
	
   

  	
  PARKVIEW, INC.

  
	
   

  	
  HANOVER HOUSE, INC.

  
	
   

  	
  HUTTON I LAND, INC.

  
	
   

  	
  HUTTON II LAND, INC.

  
	
   

  	
  HUTTON III LAND, INC.

  
	
   

  	
  INDIANA LESSOR — JEFFERSONVILLE, INC.

  
	
   

  	
  INDIANA LESSOR — WELLINGTON MANOR, INC.

  
	
   

  	
  LEATHERMAN PARTNERSHIP 89-1, INC.

  
	
   

  	
  LEATHERMAN PARTNERSHIP 89-2, INC.

  
	
   

  	
  LEATHERMAN PARTNERSHIP 90-1, INC.

  
	
   

  	
  LONG TERM CARE ASSOCIATES — TEXAS, INC.

  
	
   

  	
  MERIDIAN ARMS LAND, INC.

  

 

 

 

	
  

  	
  OHI (CONNECTICUT), INC.

  
	
   

  	
  OHI (FLORIDA), INC.

  
	
   

  	
  OHI (ILLINOIS), INC.

  
	
   

  	
  OHI (INDIANA), INC.

  
	
   

  	
  OHI (IOWA), INC.

  
	
   

  	
  OHIMA, INC.

  
	
   

  	
  ORANGE VILLAGE CARE CENTER, INC.

  
	
   

  	
  PAVILLION NORTH PARTNERS, INC.

  
	
   

  	
  PAVILLION NURSING CENTER NORTH, INC.

  
	
   

  	
  ST. MARY’S PROPERTIES, INC.

  
	
   

  	
  STERLING ACQUISITION CORP.

  
	
   

  	
  THE SUBURBAN PAVILION, INC.

  
	
   

  	
  TEXAS LESSOR — STONEGATE, LIMITED, INC.

  
	
   

  	
  TEXAS LESSOR — STONEGATE GP, INC.

  
	
   

  	
  WASHINGTON LESSOR - SILVERDALE, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Taylor Pickett 

  
	
   

  	
  Name:

  	
  C. Taylor Pickett

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
  COLONIAL GARDENS, LLC

  
	
   

  	
  NRS VENTURES, L.L.C.

  
	
   

  	
  OHI ASSET (CO), LLC

  
	
   

  	
  OHI ASSET (CT) LENDER, LLC

  
	
   

  	
  OHI ASSET (FL), LLC

  
	
   

  	
  OHI ASSET (IL), LLC

  
	
   

  	
  OHI ASSET (OH), LLC

  
	
   

  	
  OHI ASSET (OH) LENDER, LLC

  
	
   

  	
  OHI ASSET (OH) NEW PHILADELPHIA, LLC

  
	
   

  	
  OHI ASSET (PA), LLC

  
	
   

  	
  OHI ASSET II (CA), LLC

  
	
   

  	
  OHI ASSET II (OH), LLC

  
	
   

  	
  OHI ASSET II (TX), LLC

  
	
   

  	
  OHI ASSET ESSEX (OH), LLC

  
	
   

  	
  WILCARE, LLC

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Omega Healthcare Investors, Inc., as the Sole Member
  of each of the companies

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Taylor Pickett 

  
	
   

  	
  Name:

  	
  C. Taylor Pickett

  
	
   

  	
  Title:

  	
  President and Chief Executive Oficer

  
	
   

  	
   

  

 

 

 

	
  

  	
  HOUSE OF HANOVER, LTD.

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  OHI Asset (OH), LLC, as the Sole Member of the
  company

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  Omega Healthcare Investors, Inc., as the Sole Member
  of the company

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ Taylor Pickett

  	 

	
   

  	
  Name:

  	
  C. Taylor Pickett

  	 

	
   

  	
  Title:

  	
  President and Chief Executive Officer

  	 

	
   

  	
   

  	 

	
   

  	
  PAVILLION NORTH, LLP

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  Pavillion Nursing Center North, Inc. as its General
  Partner

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  /s/ Taylor Pickett

  	 

	
   

  	
  Name:

  	
  C. Taylor Pickett

  	 

	
   

  	
  Title:

  	
  President and Chief Executive Officer

  	 

	
   

  	
   

  	 

	
   

  	
  OHI ASSET (PA) TRUST

  	 

	
   

  	
  OHI ASSET II (PA) TRUST

  	 

	
   

  	
  OHI ASSET III (PA) TRUST

  	 

	
   

  	
   

  	
   

  	
   

  	 

	
   

  	
  By:

  	
  OHI Asset (PA), LLC, as the Sole Trustee of the
  Trusts

  	 

	
   

  	
   

  	 

	
   

  	
  By:

  	
  Omega Healthcare Investors, Inc., as the Sole Member

  	 

	
   

  	
   

  	 

	
   

  	
   

  	
  By:

  	
  /s/ Taylor Pickett

  
	
   

  	
   

  	
  Name:

  	
  C. Taylor Pickett

  
	
   

  	
   

  	
  Title:

  	
  President and Chief Executive OfficerExhibit 10.2

RESTRUCTURING STOCK ISSUANCE AND
SUBSCRIPTION AGREEMENT

This Restructuring Stock Issuance and Subscription Agreement (“Agreement”)
is entered into this 20th day of October, 2006 between Advocat Inc., a
Delaware corporation (“Advocat”), and Omega Healthcare Investors, Inc.,
a Maryland corporation (“Omega”).

RECITALS

A.            Advocat and Omega
and certain of their affiliates have entered into that certain Settlement and
Restructuring Agreement dated November 8, 2000 (the “2000 Agreement”)
pursuant to which Advocat and Omega have agreed to restructure their
relationship.

B.            Pursuant to the 2000
Agreement, on November 8, 2000, Advocat issued to Omega 393,658 shares of
Series B Preferred Stock (the “Series B Preferred Stock”) and delivered
to Omega its Subordinated Note in the face amount of $1,700,000 (the “2000
Note”).

C.            Also pursuant to the
2000 Agreement, STERLING ACQUISITION CORP., a Kentucky corporation (“Lessor”),
which is a wholly owned subsidiary of Omega, and DIVERSICARE LEASING
CORPORATION, a Tennessee corporation (“Lessee”), which is a wholly owned
subsidiary of Advocat, entered into that certain Consolidated Amended and
Restated Master Lease dated as of November 8, 2000, but effective as of October
1, 2000, which has subsequently been amended by a First Amendment to
Consolidated Amended and Restated Master Lease dated as of September 30, 2001
and a Second Amendment to Consolidated Amended and Restated Master Lease dated
as of June 15, 2005 (as amended, the “Master Lease”).

E.             The parties desire to
further restructure their relationship, including (i) the surrender for
cancellation by Omega of the Series B Preferred Stock and the 2000 Note, (ii)
the issuance to Omega by Advocat of shares of new Series C Preferred Stock
Stock having the powers, preferences and rights as provided in the Certificate
of Designation of Advocat (“Designation”) as attached hereto as Exhibit
A, (iii) the delivery to Omega by Advocat of a new subordinated promissory
note substantially in the form attached as Exhibit B (the “New Note”),
and (iv) the amendment of the Master Lease by Lessor and Lessee to increase the
rent payable under, and extend the term of, the Master Lease, all as set forth
in this Agreement.

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

1.             Restructuring Transactions.

1.1           Surrender of Series B Preferred Stock.  Omega hereby surrenders to Advocat for
cancellation the Series B Preferred Stock. 
On or before the date of this Agreement, Advocat shall pay accrued and
unpaid dividends for the period of July 1, 2006 thru September 30, 2006.  Except as set forth in the preceding
sentence, upon the surrender of the Series B Preferred Stock, Omega releases
Advocat from any obligation to pay any accrued but unpaid dividends with
respect to the Series B Preferred Stock. 
Advocat shall promptly cancel the Series B Preferred Stock.

 1

 

 

1.2           Cancellation of 2000 Note. 
Omega hereby surrenders to Advocat for cancellation the 2000 Note.  On or before the date of this Agreement,
Advocat shall pay accrued and unpaid interest on the 2000 Note for the period
of July 1, 2006 thru September 30, 2006. 
Except as set forth in the preceding sentence, Omega hereby releases
Advocat from any obligation to pay any outstanding Principal or accrued
interest with respect to the 2000 Note.

1.3           Issuance of New Shares. Advocat hereby issues to Omega and
Omega accepts from Advocat, subject to the terms and conditions hereof, five
thousand (5,000) shares of Advocat Series C Preferred Stock (the “New Shares”).  Advocat shall deliver to Omega concurrently
with the execution and delivery of this Agreement a stock certificate
evidencing its ownership of the New 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.

1.4           Delivery of New Note.
 Advocat hereby delivers to Omega the New
Note.

1.5           Amendment of Master Lease.  Omega hereby agrees to cause Lessor, and
Advocat hereby agrees to cause Lessee, to deliver concurrently with the
execution of this Agreement the Third Amendment to Consolidated Amended and
Restated Master Lease substantially in the form of Exhibit C to this
Agreement.

2.             Termination of Registration Rights Agreement.  Omega and Advocat hereby terminate the
Registration Rights Agreement dated as of November 8, 2000.

3.             Representations
and Warranties of Advocat. 
Advocat hereby represents and warrants to Omega as of the date of this
Agreement 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.

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 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 New Shares pursuant to this 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 New Shares,
such New 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 Amended and Restated Rights Agreement dated
as of December 7, 1998 by and between Advocat and SunTrust Bank, 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;

(c)           result in the creation of any Lien
(as defined in Section 10.7 below) upon, or any Person (as defined in Section
10.7 below) obtaining the right to acquire, any of the New 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 10.7 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, other than
Consents obtained by Advocat.

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 shares
have been designated Series A Junior Participating Preferred Stock of which
none are issued and outstanding, 600,000 shares have been designated Series B
Convertible Preferred Stock, 393,658 shares of which were held prior to the
date of this Agreement by Omega, and five thousand (5,000) shares have been
designated Series C Preferred Stock of which none are issued and outstanding
immediately prior to the issuance of the New 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)           5,835,287 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)           Five
thousand (5,000) shares of Series C Preferred Stock, duly issued and
outstanding and owned of record and beneficially by Omega;

(d)           405,500
shares of Common Stock reserved for issuance upon the exercise of outstanding
options; and

(e)           368,100
shares of Common Stock reserved for issuance pursuant to the Advocat Inc. 2005
Long-Term Incentive Plan.

There are no declared but
unpaid dividends or undeclared dividend arrearages on any shares of capital
stock of Advocat other than undeclared dividend arrearages with respect to the
Series B Preferred Stock, which obligation shall terminate upon the surrender
of the Series B Preferred Stock. Except for the Series B Preferred Stock which
is cancelled pursuant to this Agreement and the securities for which shares of
Common Stock have been reserved under (d) and (e) above, there are no
outstanding convertible securities of Advocat.

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 New 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 New 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 New Shares
have not been registered under the Securities Act or any state securities law
or any other applicable securities legislation, that the New Shares must be
held indefinitely unless they are subsequently registered or an exemption from
such registration is available and that Advocat is under no obligation to
register the New 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 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 New 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, and in the documents and agreements which
evidence or secure the transactions contemplated by the Transaction Documents
(as defined in Section 10.7 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 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 New Shares, 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 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 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 New
Shares pursuant to Section 11 of the Designation.

8.             AmSouth
Consent.  Omega hereby
acknowledges the AmSouth Consent, a copy of which is attached hereto, and
hereby agrees that Omega will not deem it to be an Event of Default (as defined
in Section 10.7 below) if Advocat does not pay dividends on the Series C
Preferred Stock because Advocat is prohibited from paying such dividends as
provided in the AmSouth Consent; provided such failure to pay dividends does
not continue for more than two consecutive quarters.

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 New Shares, and if Omega’s attorneys
or accountants recommend a restructuring of the relationship between Omega and
Advocat as set forth in this 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 New 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 New Shares may assign the rights granted pursuant
to Sections 5 and 6 of this Agreement to any subsequent holder of the New
Shares.

10.3         This Agreement and the documents which
evidence or secure the transactions contemplated by this 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         Notices.  Any notice, request or other communication to
be given by any party hereunder shall be in writing and shall be sent by
registered or certified mail, postage prepaid, by overnight delivery with a
commercial overnight carrier, with written verification of receipt or by hand
delivery or facsimile transmission to the following address:

	
  To Advocat:

  	
   

  	
  Advocat, Inc.

  
	
   

  	
   

  	
  1621 Galleria Boulevard

  
	
   

  	
   

  	
  Brentwood, TN 37027

  
	
   

  	
   

  	
  Attn: Chief Financial Officer

  
	
   

  	
   

  	
  Telephone No.: (615) 771-7575

  
	
   

  	
   

  	
  Facsimile No.: (615) 771-7409

  
	
  With copy to

  	
   

  	
  Harwell Howard Hyne
  Gabbert & Manner, P.C.

  
	
  (which shall not

  	
   

  	
  315 Deaderick Street, Suite 1800

  
	
  constitute
  notice):

  	
   

  	
  Nashville, TN 37238

  
	
   

  	
   

  	
  Attn: John N. Popham, IV

  
	
   

  	
   

  	
  Telephone No.: (615) 256-0500

  
	
   

  	
   

  	
  Facsimile No.: (615) 251-1057

  
	
  To Omega:

  	
   

  	
  Omega Healthcare
  Investors, Inc.

  
	
   

  	
   

  	
  9690 Deereco Road, Suite 100

  
	
   

  	
   

  	
  Timonium, MD 21093

  

 

 

 

	
  

  	
   

  	
  Attn.: Daniel J. Booth

  
	
   

  	
   

  	
  Telephone No.: (410) 427-1700

  
	
   

  	
   

  	
  Facsimile No.: 
  (410) 427-8800

  
	
   

  	
   

  	
   

  
	
  And with copy to

  	
   

  	
  Doran Derwent, PLLC

  
	
  (which shall not

  	
   

  	
  125 Ottawa Ave., N.W., Suite 420

  
	
  constitute notice):

  	
   

  	
  Grand Rapids, Michigan 49503

  
	
   

  	
   

  	
  Attn: Mark E. Derwent

  
	
   

  	
   

  	
  Telephone No.: (616) 233-9720

  
	
   

  	
   

  	
  Facsimile No.: (616) 451-8697

  

or to such other address
as either party may hereafter designate. Notice shall be deemed to have been
given on the date of delivery if such delivery is made on a business day, or if
not, on the first business day after delivery. If delivery is refused, notice
shall be deemed to have been given on the date delivery was first attempted.
Notice sent by facsimile transmission shall be deemed given upon confirmation
that such notice was received at the number specified above or in a notice to
the sender.

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 in any material respect, Omega is materially and
adversely affected thereby, and Advocat fails within thirty (30) days after
Notice from Omega thereof to cure such condition by terminating such adverse
effect and making Omega whole for any damages suffered therefrom, or, if with
due diligence such cure cannot be effected within thirty (30) days, if Advocat
has failed to commence to cure the same within the thirty (30) days or failed
thereafter to proceed promptly and with due diligence to cure such condition
and complete such cure, (iii) an Event of Default under any of the Transaction
Documents which is not cured within the applicable cure period, (iv) if Advocat
fails to observe or perform any term, covenant or condition of the New Shares
other than the payment of a dividend as provided in the following item and such
failure is not cured within a period of thirty (30) days after notice thereof
from Omega; and (v) if Advocat fails to pay when due any dividend on the New
Shares and such failure is not cured within a period of five (5) days after
notice thereof from Omega provided that Advocat shall be entitled to such
notice and may avail itself of such cure period no more than two (2) times in any
calendar year.

“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.

“Transaction
Documents” means this Agreement, the Master Lease, the New Note, the New
Shares, all documents which evidence or secure the transactions contemplated by
this Agreement, the Master Lease, the New Note, the New Shares 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.

 

 

In witness whereof the
parties have executed this Restructuring Stock Issuance and Subscription
Agreement as of the date first set forth above.

 

	
   

  	
  ADVOCAT INC.

  
	
   

  	
  By:

  	
  /s/ William R.
  Council, III

  	
   

  
	
   

  	
  Name:

  	
  William R.
  Council, III

  	
   

  
	
   

  	
  Title:

  	
  President and Chief
  Executive Officer

  	
   

  
	
   

  	
  OMEGA HEALTHCARE
  INVESTORS, INC.

  
	
   

  	
  By:

  	
  /s/ Taylor
  Pickett

  	
   

  
	
   

  	
  Name:

  	
  Taylor Pickett

  	
   

  
	
   

  	
  Title:

  	
  Chief Executive
  Officer

  	
   

  
						

 

 

 

Exhibits
and Schedules:

Exhibit A      Designation

Exhibit B      New Note

Exhibit C      Third Amendment to Consolidated Amended
and Restated Master Lease

EXHIBIT A

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 October 20, 2006.

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 C Preferred Stock (the “Series C 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.

Section 1.               Designation
and Amount.  Of the authorized
1,000,000 shares of Preferred Stock, five thousand (5,000) shares shall be
designated Series C Preferred Stock.

Section 2.               Dividends
and Distributions.  (a) The holders
of Series C 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 C Preferred Stock, payable quarterly.  Dividends on the outstanding shares of Series
C Preferred shall begin to accrue and accumulate (whether or not declared) from
the Issue Date of the Series C 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.  Notwithstanding anything to
the contrary in this Section 2, the Board of Directors shall declare dividends
on the Series C 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 C Preferred Stock shall be declared pro rata
per share.  For purposes hereof, the term
“Stated Value” shall mean Nine Hundred Eighty Three Dollars and Sixty
Four Cents ($983.64) per share; provided, however, that if at any time the
aggregate Stated Value of the Series C Preferred Stock exceeds the aggregate
REIT Maximum Stated Value (as defined in Section 12 below), any accrued but
unpaid dividends shall be reduced to an amount calculated based on the REIT
Maximum Stated Value, and any future dividends shall be calculated based on the
REIT Maximum Stated Value.

(b)           Dividends on the
Series C 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 C Preferred Stock then outstanding
shall be entitled to be paid out of the assets of the Corporation available for
distribution to its stockholders, before any payment shall be made to the
holders of Junior Stock, an amount in cash equal to the lesser of (i) Stated
Value per share plus any dividends thereon accrued but unpaid and (ii) the REIT
Maximum Value (the amount so described, the “Liquidation Amount”).  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 C Preferred Stock the full amount to which they
shall be entitled, the holders of shares of Series C 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 Amended and Restated Rights Agreement dated as of December
7, 1998 by and between Advocat and Sun Trust - the “Rights Agreement”)
caused by an Acquiring Person (as defined in the Rights Agreement) other than
the holder of the Series C 

 2
 

 

Preferred Stock, then unless and until the payment of
all preferential amounts required to be paid to the holders of Series C
Preferred Stock pursuant to Section 3(a) above or Section 11 below 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 as to the holders of shares of
Junior Stock.

(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 C 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 C Preferred Stock.

Section 4.               Certain
Restrictions.  (a) At any time when
there are accrued and unpaid dividends and distributions, whether or not
declared, on shares of Series C 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 C
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 C Preferred Stock; or

(iii)                               purchase
or otherwise acquire for consideration any shares of Series C Preferred Stock
(other than a redemption pursuant to Section 11(b) below), except in accordance
with a pro rata purchase offer for all or any portion of the shares of Series C
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.

 3
 

 

(c)           So long as any
shares of Series C 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 C 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 C 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 C 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 C
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.               Intentionally
omitted.

Section 8.               Intentionally
omitted.

Section 9.               Intentionally
omitted.

Section 10.             Intentionally
omitted.

Section 11.             Redemption.

(a)           Redemption
at Option of Holder.  At any time on
or after the earlier to occur of (1) an Event of Default, (2) a Redemption
Event, and (3) September 30, 2010, holders of the Series C Preferred Stock may
require the Corporation to redeem all or a portion of the shares of Series C
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 lesser of
(i) the Stated Value per share, plus an amount equal to any dividends accrued
but unpaid thereon and (ii) the REIT Maximum Value (such amount is hereinafter
referred to as the “Redemption Price”). 
If the Corporation is unable on the date the holders of the Series C
Preferred Stock require the Corporation to redeem such shares of Series C
Preferred Stock (the “Redemption Date”) to redeem any shares of
Preferred Stock then to be redeemed because such 

 4
 

 

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)           Redemption by the
Corporation.  If at the time of such
redemption, the REIT Maximum Value is greater than or equal to the Stated
Value, then the Corporation, at its option, may at any time on or after
September 30, 2007 redeem, in whole or in part, shares of Series C Preferred
Stock on any Redemption Date set by the Board of Directors, upon ninety (90)
days written notice to each record holder of Series C Preferred Stock at a
price in cash equal to the Redemption Price. 
The Corporation shall pay the Redemption Price in cash, out of funds
legally available therefor.

(c)           On or prior to the
Redemption Date, each holder of Series C 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 C 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 C Preferred Stock.

“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.

“Event of Default” shall have such meaning as
is ascribed to it in the Restructuring 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 C Preferred are issued.

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

“Redemption Event” means (i) the entry by the
Corporation into any agreement, which if consummated, would result in the
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,
(ii) the issuance by the Corporation of any Common Stock other than (A) the
issuance pursuant to the exercise of any stock options granted to any
employees, directors or officers of, or bona fide 

 5
 

 

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 or (B)
shares of Common Stock issued in connection with a bona fide acquisition by the
Corporation whether by merger, consolidation, purchase of assets, purchase or
exchange of stock or other similar transactions with a non-financing purpose
approved by Corporation’s Board of Directors; provided that the Corporation is
the surviving entity of such transaction or series of transactions.

“REIT Maximum Stated Value” means a stated
value per share for the Series C Preferred Stock that results in the Series C
Preferred Stock having an aggregate stated value of no more than 9.99% of the
total fair market value of the outstanding equity securities of the Corporation
(not including any outstanding options or warrants to acquire equity securities
of the Corporation that are held by persons other than the holder of the Series
C Preferred Stock and its affiliates).

“REIT Maximum Value” means an amount payable at
any time to holders of shares of Series C Preferred Stock upon a liquidation,
redemption or other event described in this Designation that shall not exceed
the amount that would result in the Series C Preferred Stock being treated for
federal income tax purposes as having a fair market value of no more than 9.99%
of the total fair market value of the outstanding equity securities of the
Corporation (not including any outstanding options or warrants to acquire
equity securities of the Corporation that are held by persons other than the
holder (and its affiliates) of the Series C Preferred Stock).

Section 13.             Intentionally
omitted.

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 C 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 C Preferred Stock, voting together as a class.

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

	
  

  	
  ADVOCAT INC.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  
	
   

  	
  Name:

  	
   

  
	
   

  	
  Title:

  	
   

  

 

Dated: October 20, 2006

 6

 

 

SUBORDINATED NOTE

	
  $2,533,614.53

  	
   

  	
  Franklin, Tennessee

  

 

Dated as of October 1,
2006

FOR VALUE RECEIVED, Advocat Inc., a Delaware corporation, with an
address of 1621 Galleria Boulevard, Brentwood, TN 37027 (“Borrower”),
hereby promises to pay to Omega Healthcare Investors, Inc., a Maryland
corporation with an address of 9690 Deereco
Road, Suite 100, Timonium, MD 21093 (“Payee”), or to order, the
principal sum of Two Million Five Hundred Thirty Three Thousand Six Hundred
Fourteen Dollars and Fifty Three Cents ($2,533,614.53), 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 shall be payable (subject to
Section 2) in cash quarterly beginning on December 31, 2006 and continuing on
the last day of each quarter thereafter. To the extent accrued interest is not
paid quarterly, 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 (subject to
Section 2) in full on September 30, 2007 (the “Maturity Date”).

1.             Intentionally
omitted.

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; and
(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.

 

 

(b)           Borrower shall
notify Payee in writing before or at the time an interest payment is due if a
Default Restriction has occurred.  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.

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 (“Lessee”),
to Sterling Acquisition Corp., a Kentucky corporation (“Lessor”), in
connection with the Consolidated Amended and Restated Master Lease between
Lessor and Lessee dated as of November 8, 2000, as amended by a First Amendment
to Consolidated Amended and Restated Master Lease dated as of September 30,
2001, a Second Amendment to Consolidated Amended and Restated Master Lease
dated as of June 15, 2005, and a Third Amendment to Consolidated Amended and
Restated Master Lease dated as of the date of this Note (as amended, the “Master
Lease”), and the Restructuring, Stock Issuance and Subscription Agreement
among Borrower, Payee, Lessee and Lessor dated as of the date of this Note (the
“Restructuring Agreement”) (collectively, the “Security Documents”).  Reference is

 2
 

 

 

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
Principal or interest payable under this Note and such failure is not cured
within a period of five (5) days after notice thereof from Omega provided that
Borrower shall be entitled to such notice and may avail itself of such cure
period no more than two (2) times in any calendar year; (ii) the Borrower fails
to perform any other obligation under this Note and such failure is not cured
within a period of thirty (30) days after notice thereof from Omega; (iii) an
Event of Default under the Master Lease which is not cured during any
applicable cure period; or (iii) an Event of Default under any of the Security
Documents which is not cured during any applicable cure period.

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 (except as specifically required in
Section 4 of this Note), all of which are expressly waived.  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.

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.

 3
 

 

 

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.

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

 4
 

 

 

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.

 5
 

 

 

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:

  	
   

  
	
   

  	
   

  	
   

  	
  Name:

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  AGREED TO AND ACCEPTED BY PAYEE;

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  OMEGA HEALTHCARE INVESTORS, INC.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  By:

  	
   

  	
   

  	
   

  	
   

  
	
  Name:

  	
   

  	
   

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  	
   

  	
   

  

 

 6

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