Document:

EX-10.2

 

Exhibit 10.2

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

     This Third Amendment to Consolidated Amended and Restated Master Lease (this
“Amendment”) is executed and delivered as of this 20th day of October, 2006, to
be effective as of October 1, 2006 (the “Effective Date”) by and between STERLING
ACQUISITION CORP., a Kentucky corporation (“Lessor”), the address of which is 9690 Deereco
Road, Suite 100, Timonium, MD 21093, and DIVERSICARE LEASING CORP., a Tennessee corporation, the
address of which is 1621 Galleria Boulevard, Brentwood, TN 37027.

RECITALS:

     A. Lessee has executed and delivered to Lessor a Consolidated Amended and Restated Master
Lease dated as of November 8, 2000, but effective as of October 1, 2000, as 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 (the
“Existing Master Lease”) pursuant to which Lessee leased from Lessor certain healthcare
facilities.

     B. Pursuant to that certain Restructuring, Stock Issuance and Subscription Agreement dated as
of the date of this Amendment among Advocat Inc., a Delaware corporation (“Advocat”), Omega
Healthcare Investors, Inc. (“Omega”), a Maryland corporation, Lessor, and Lessee, Lessor
and Lessee have agreed, among other things, to (i) have the Initial Term expire as of September 30,
2006, (ii) exercise the first twelve year Renewal Term, (iii) add a second twelve year Renewal
Term, and (iv) increase the Base Rent payable under the Existing Master Lease, all as set forth in
this Amendment.

     NOW THEREFORE, the parties agree as follows:

     1. Definitions. Any capitalized term used but not defined in this Amendment will have
the meaning assigned to such term in the Existing Master Lease. From and after the date of this
Amendment, each reference in the Existing Master Leases or the other Transaction Documents to the
“Lease” or “Master Lease” means, as applicable, the Existing Master Lease or Existing Master Leases
as modified by this Amendment.

     2. Term. Section 1.2 of the Existing Master Lease is hereby amended and restated as
follows:

     1.2 Term. The initial term of this Lease (“Initial Term”) shall be six
(6) Lease Years. The Initial Term shall commence on the Commencement Date and end on the
Initial Term Expiration Date, subject to renewal as set forth in Section 1.3, below.

     3. Renewal Options. Section 1.3 of the Existing Master Lease is hereby amended and
restated as follows:

 

 

     1.3 Options to Renew. Lessee is hereby granted two (2) options to renew this
Lease for an additional, successive period of twelve (12) Lease Years, for a maximum Term if
such options are exercised of thirty (30) Lease Years, on the following terms and
conditions: (a) the second option to renew is exercisable only by Notice to Lessor at least
three hundred sixty-five (365) days prior to the expiration of the first Renewal Term; (b)
the absence of any Event of Default both at the time a renewal option is exercised and at
the commencement of a Renewal Term is a condition precedent to any renewal of the Term; and
(c) during a Renewal Term, all of the terms and conditions of this Lease shall remain in
full force and effect.

     4. Exercise of First Renewal Option. Lessor and Lessee hereby agree that the first
Renewal Option has been exercised and the first Renewal Term has commenced as of the Effective
Date.

     5. Tenant Improvement Allowance.

          (a) Pursuant to the Existing Master Lease, Lessor agreed to make available to Lessee the
Improvement Allowance. As of the Effective Date, Lessor has advanced $3,854,180.35 of the
Improvement Allowance, leaving a balance of $1,145,819.65 which may be funded. Lessee acknowledges
and agrees that, as of the Effective Date, the Improvement Allowance Adjustment Amount (which is an
annual amount) is $395,053.49.

          (b) In connection with this Amendment, Lessor has agreed to make available to Lessee an
additional improvement allowance equal to $5,000,000.00 to be used for certain capital improvements
to the Facilities. Such additional improvement allowance shall be used only for completion of
capital improvements to the Facilities which shall be approved and constructed in accordance with
the terms and provisions of Paragraph 2 of the Second Amendment to Consolidated and Restated Master
Lease dated as of June 25, 2005 (the “Second Amendment”). The term “Capital Improvements” as and
where used in Paragraph 2 of the Second Amendment shall be deemed to include such capital
improvements. The additional $5,000,000.00 improvement allowance shall be requested and disbursed
in accordance with the provisions of Paragraph 3 of the Second Amendment. The term “Improvement
Allowance”, as and where used in Paragraph 3 of the Second Amendment, shall be deemed to include
and refer to the additional $5,000,000.00 improvement allowance, except that such additional
improvement allowance shall be available for Capital Improvements completed on or before June 30,
2008 and the final request for disbursement shall be no later than August 31, 2008. The Base Rent
payable under the Existing Master Lease shall be increased by the Improvement Allowance Adjustment
Amount for each disbursement of such additional $5,000,000.00 improvement allowance as provided in
Paragraph 4 of the Second Amendment. In the event Lessor fails to pay Lessee any installment
request for the additional improvement allowance as provided in Paragraph 3 of the Second
Amendment, Lessee shall have the rights and remedies
provided in Paragraph 4 of the Second Amendment and the provisions of Paragraph 4 of the
Second Amendment shall apply to Lessee’s exercise of such rights and remedies.

     6. Settlement and Restructuring Agreement. Lessor and Omega (which joins in this
Amendment for the sole purpose of agreeing to the provisions of this Section 6) hereby acknowledge
and agree that the obligations of Lessee and its Affiliates, Advocat, SHCM, AFI

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and DMSC (as
defined in the Settlement and Restructuring Agreement) to comply with Paragraph 4.F (creation of
New Sub), Paragraphs 4.G and 4.H (New Cash Management System) and Paragraph 14.B (Deferred
Compensation) of the Settlement and Restructuring Agreement are hereby waived and released by
Lessor and Omega. Except for the obligations waived and released in the preceding sentence,
neither Lessor or Omega, nor Lessee, Advocat, SHCM, AFI or DMSC, are aware of any default, or nay
circumstances which with the giving of notice or passage of time (or both) would constitute a
default, on the part of Lessee, Advocat, SHCM, AFI, or DMSC in the performance of any of their
respective obligations under the Settlement and Restructuring Agreement as of the date of this
Amendment. Notwithstanding the foregoing, Lessor and Omega acknowledge and agree that, from and
after the Effective Date, Lessee shall have the right, but shall not be obligated, to create the
NewSub as contemplated by Paragraph 4.F. of the Settlement and Restructuring Agreement and, subject
to the requirements of Paragraph 4.F., make the transfer of the Facilities provided for therein.

     7. Definitions.

          (a) The following definitions set forth in Section 2.1 of the Existing Master Lease are hereby
amended and restated as follows:

     Advocat: Advocat, Inc., a Delaware corporation, and its successors by merger,
consolidation, reorganization or other business combination.

     Approval Threshold: Two Hundred Thousand Dollars ($200,000.00).

     Base Amount: means (i) during the first three months of the first Renewal Term
(October 1, 2006 thru December 31, 2006), the annual sum of Twelve Million Nine Hundred
Forty Three Thousand Three Hundred Fifty and 96/100 Dollars ($12,943,350.96), and (ii) on
and after January 1, 2007, the annual sum of Thirteen Million Six Hundred Thirty Thousand
One Hundred Fifty Six Dollars and 18/100 ($13,630,156.18).

     Base Rent:

     (A) During the Initial Term, the Base Rent shall be:

(1) For the first Initial Term (being the period of October 1, 2000 thru
September 30, 2006), the amount set forth for such period in the Existing
Master Lease;

(2) For the first (1st) Lease Year of the first Renewal Term
(October 1, 2006 thru September 30, 2007), the Base Amount plus the
Improvement Allowance Adjustment Amount (as adjusted during such Lease
Year);

(3) For each of the second (2nd) through twelfth
(12th) Lease Years of the first Renewal Term, the lesser of (i)
the Base Amount as of the end of first (1st) Lease Year of the Renewal Term
plus Improvement Allowance Adjustment Amount, increased by a percentage
equal to two (2) times the percentage increase in the CPI (if positive) from
the commencement date

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of the first Renewal Term to the Adjustment Date in
each of the second (2nd) through twelfth (12th) Lease Years, as
applicable (the “Adjustment Date”), and (ii) the product of the Base
Amount as of the end of the first Lease Year plus the Improvement Allowance
Adjustment Amount and the following factor:

	 	 	 	 	 
	Lease Year During	 	 
	First Renewal Term	 	Applicable Factor
	2

	 	 	1.030	 
	3

	 	 	1.061	 
	4

	 	 	1.093	 
	5

	 	 	1.126	 
	6

	 	 	1.159	 
	7

	 	 	1.194	 
	8

	 	 	1.230	 
	9

	 	 	1.267	 
	10

	 	 	1.305	 
	11

	 	 	1.344	 
	12

	 	 	1.384	 

     Under no circumstances will the Base Rent in any Lease Year be less than the
Base Rent during the preceding Lease Year.

     (B) During the second Renewal Term, the Base Rent shall be:

     (1) For the first Lease Year of the second Renewal Term, the greater of (a) the
Base Rent during the last Lease Year of the Initial Term and (b) the Fair Market
Rent for the Leased Properties on the first day of such Renewal Term as agreed upon
by Lessor and Lessee, or, if prior to the commencement of the Renewal Term they are
unable to agree, as determined by an appraisal pursuant to Article XXXII of this
Lease; provided, however, that the Base Rent for the first Lease Year of the second
Renewal Term shall not exceed one hundred ten percent (110%) of the Base Rent for
the Lease Year immediately preceding the commencement of the second Renewal Term;
and

     (2) For each of the second (2nd) through the twelfth
(12th) Lease Years during the second Renewal Term, the lesser of (i) the
Base Rent for the first (1st)
Lease Year of the second Renewal Term, increased by a percentage equal to two
(2) times the percentage increase in the CPI (if positive) from the commencement
date of the second Renewal Term to the Adjustment Date in each of the second
(2nd) through twelfth (12th) Lease Years, as applicable (the
“Adjustment Date”), and (ii) the product of the Base Rent during the first
(1st) Lease Year of the second Renewal Term and the following factor:

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	Lease Year During	 	 
	Second Renewal Term	 	Applicable Factor
	2

	 	 	1.030	 
	3

	 	 	1.061	 
	4

	 	 	1.093	 
	5

	 	 	1.126	 
	6

	 	 	1.159	 
	7

	 	 	1.194	 
	8

	 	 	1.230	 
	9

	 	 	1.267	 
	10

	 	 	1.305	 
	11

	 	 	1.344	 
	12

	 	 	1.384	 

     Under no circumstances will the Base Rent in any Lease Year during the Renewal Term
be less than the Base Rent during the preceding Lease Year.

     Current Ratio: At any period, the Facilities Current Assets divided by the
Facilities Current Liabilities.

     Debt Service: With respect to any fiscal period of the Facilities, the sum of
(a) all interest due on Debt during the period (other than interest imputed, pursuant to
GAAP, on any Capitalized Lease Obligations and interest on Debt that comprises Purchase
Money Financing), (b) all payments of principal of Debt required to be made during the
period and (c) all Rent due during the period.

     Distribution: Any payment or distribution of cash or any assets of the
Facilities to one or more shareholders of Lessee or to any Affiliate of Lessee, whether in
the form of a dividend, a fee for management in excess of the fee required by the terms of a
Management Agreement, a payment for services rendered (except as provided in the next
sentence), a reimbursement for overhead incurred on behalf of the Facilities, or a payment
on any debt required by this Lease to be subordinated to the rights of Lessee.
Notwithstanding the foregoing, none of the following are a Distribution: (i) payment of the
fee permitted by the terms of the Management Agreement, (ii) any payment pursuant to a
contract with an Affiliate of Lessee or Sublessee which contract is upon terms and
conditions that are fair and substantially similar to those that would be available on an
arm’s length basis, (iii) reimbursement by Lessee or Sublessee to an Affiliate for third
party expenses (but not overhead) paid by the Affiliate on behalf of or which are
fairly allocable to the Facilities, and (iv) so long as (1) Advocat and Lessee maintain
financial records which will make it possible to identify (x) funds deposited into such
account from the Facilities and (y) expenses of the Facilities paid with funds in such
account and (2) no Event of Default under subsections (a), (b), (c), (d), (k), (o) or (p) of
the definition of Event of Default has occurred and is continuing, deposit of Lessee’s or
Sublesser’s funds

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into a concentration account maintained by Advocat to be used in
accordance with existing practices.

     EBITDARM: For any period, the sum of (a) Net Income of Lessee arising solely
from the operation of the Facilities during the period, and (b) the amounts deducted in
computing the Net Income of the Lessee for the period for (i) the provision for
self-insured, professional and general liability, (ii) depreciation, (iii) amortization,
(iv) Base Rent, (v) interest (including any payments in the nature of interest under
Capitalized Leases and interest on any Purchase Money Financing), (vi) income taxes (or, if
greater, income taxes actually paid during the period) and (vii) management fees, less (c)
the Cash Cost of Self-Insured Professional and General Liability. The Cash Cost of
Self-Insured Professional and General Liability shall mean: For any period, the total cash
expenditure associated with professional and general liability related settlements, legal
fees, or administration for all facilities owned and/or operated by Lessee and Affiliates
divided by the total number of licensed beds for all facilities owned and/or operated by
Lessee and Affiliates, then multiplied by the number of licensed beds for the Facilities
that are part of the Leased Properties subject to this Lease.

     Expiration Date: The Initial Term Expiration Date, the First Renewal Term
Expiration Date or the Second Renewal Term Expiration Date, as applicable.

     Facilities Current Assets: At any date, all assets of the Facilities that, on
a consolidated basis in conformity with GAAP, should be carried as current assets on the
balance sheet of Lessee (which includes Sublessee) at such date.

     Facilities Current Liabilities: At any date, all liabilities of the Facilities
that, on a consolidated basis in conformity with GAAP, should be carried as current
liabilities on the balance sheet of Lessee (which includes Sublessee) at such date.

     First Renewal Term Expiration Date: September 30, 2018.

     Initial Term Expiration Date: September 30, 2006

     Second Renewal Term Expiration Date: September 30, 2030.

     Security Deposit: means (i) the Three Hundred Forty Thousand Three Hundred Four
and 35/100 Dollars ($340,304.35), delivered and held in accordance with Article XXXIX hereof
plus accrued interest, (ii) any Increase (as defined in Section 39.2), and (iii) the A/R
Replacement Security Deposit (as defined below).

     Stock Issuance and Subscription Agreement: The Restructuring Stock Issuance and
Subscription Agreement of even date with this Amendment by and between Advocat, Omega,
Lessor and Lessee.

     Subordinated Note: The Subordinated Note of even date herewith from Advocat to
Omega in the original principal amount of Two Million Five Hundred Thirty-Three Thousand Six
Hundred Fourteen and 53/100 Dollars ($2,533,614.53).

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     Transfer: The (a) assignment, mortgaging or other encumbering of all or any
part of Lessee’s interest in this Lease or in the Leased Properties, or (b) subletting of
the whole or any part of any Leased Property, or (c) entering into of any Management
Agreement or other arrangement under which any Facility is operated by or licensed to be
operated by an entity other than Lessee, or (d) merger, consolidation or reorganization of a
corporate Lessee or Manager (except, for Manager only, to an Affiliate), or the sale,
issuance, or transfer, cumulatively or in one transaction, of any voting stock of Lessee or
Manager (except, for Manager only, to an Affiliate) by Persons who are stockholders of
record of Lessee, which results in a change of Control of Lessee or Manager (except, for
Manager only, to an Affiliate), or (e) sale, issuance or transfer, cumulatively or in one
transaction, of any interest, or the termination of any interest, in Lessee or Manager
(except, for Manager only, to an Affiliate), if Lessee or such Manager, is a joint venture,
partnership, limited liability company or other association, which results in a change of
Control of such joint venture, partnership or other association, or (d) sale, issuance or
transfer, cumulatively or in one transaction, of any direct or indirect interest in Lessee
if after such transaction(s), Lessee ceases to be Controlled, directly or indirectly, by
Advocat, or (e) merger, consolidation, reorganization or other business combination
involving Advocat in which Advocat is not the surviving entity unless the successor entity
of Advocat executes and delivers to Lessor a Guaranty, in substantially the form of the
Guaranty executed by Advocat, pursuant to which the successor entity guarantees to Lessor
the payment and performance by Lessee of its obligations under this Lease.

          (b) The following subparagraphs of the definition of “Event of Default” set forth in Section
2.1 of the Existing Master Lease are hereby amended and restated as follows:

          (g) Any representation or warranty made by Lessee in the Stock Issuance and
Subscription Agreement, or in the certificates delivered in connection therewith, proves to
be untrue when made in any material respect, Lessor is materially and adversely affected
thereby, and Lessee fails within thirty (30) days after Notice from Lessor thereof to cure
such condition by terminating such adverse effect and making Lessor whole for any damage
suffered therefrom, or, if with due diligence such cure cannot be effected within thirty
(30) days, if Lessee 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 prior to the time that such condition causes a default in any Facility
Mortgage or any other lease to which Lessee is subject and prior to the time that the same
results in civil or criminal penalties to Lessor, Lessee, any Affiliates or either or the
Leased Properties;

*****

          (i) Subject to Section 33.2, Lessee defaults, or permits a default (which default was
not exclusively in Lessor’s control) under any Facility Mortgage, related documents or
obligations thereunder which default is not cured within any applicable cure period provided
for therein;

*****

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          (m) Intentionally Deleted;

          (n) Intentionally Deleted;

*****

          (q) A default by Lessee occurs under any other contract affecting any Facility or
Lessee, which default results in a material adverse affect on any Facility or Lessee, and
which default is not cured within the applicable time period, if any; provided that such
conditions shall not be an Event of Default if such conditions at any time are applicable to
two (2) or fewer Facilities and Lessee is in good faith contesting such default and, if
legal proceedings are commenced with respect to such default, will conduct such contest
pursuant to the provisions of Section 12.1 as if such default constituted a “Claim” under
such Section;

          (r) AmSouth Bank (or its successors and assigns) declares an event of default under the
AmSouth Loan Documents, and accelerates any or all of the indebtedness evidenced and secured
thereby, or commences any action against Lessee or Sublessee to realize on AmSouth’s
interest in the accounts receivable from the Facilities under the AmSouth Loan Documents.

     8. Lessee’s Personal Property.

     (a) Section 6.3 of the Existing Master Lease is hereby amended and restated in its entirety as
follows:

     6.3 Lessee’s Personal Property. Lessee shall provide and maintain during the
Term such Personal Property, in addition to Lessor’s Personal Property, as shall be
necessary and appropriate in order to operate the Facilities for the Primary Intended Use in
compliance with all licensure and certification requirements, in compliance with all
applicable Legal Requirements and Insurance Requirements and otherwise in accordance with
customary practice in the industry for the Primary Intended Use (“Lessee’s Personal
Property”). Except to the extent specifically allowed under Section 8.2.1.4, without the
prior written consent of Lessor, which consent shall not be unreasonably withheld, Lessee
shall not permit or suffer Lessee’s Personal Property to be subject to any lien, charge,
encumbrance, financing statement or contract of sale or the like other than that provided
for in Section 6.4 below. Except for those items of Personal Property listed on Schedule A
which shall at all times belong to and may be removed by Lessee, upon the expiration of the
Term or the earlier termination of this Lease, without the payment of any additional
consideration by Lessor, Lessee shall be deemed to have sold, assigned, transferred and
conveyed to Lessor all of Lessee’s right, title and interest in and to any of
Lessee’s Personal Property. In connection with any Personal Property sold, assigned,
transferred or conveyed to Lessor pursuant to the preceding sentence, Lessor shall assume
any lease or equipment financing obligations of Lessee permitted under Section 8.2.1.4
hereof. Both parties agree that Lessor owned all of the Personal Property at the Facilities
at the commencement of the Existing Leases.

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     (b) Section 34.1 of the Existing Master Lease is hereby amended and restated in its entirety
as follows:

     34.1 Disposition of Personal Property on Termination: Upon the expiration or
earlier termination of this Lease, Lessee shall immediately surrender, turn over and deliver
to Lessor, without the payment of any additional consideration by Lessor, all Personal
Property then located on or at or used in the operation of the Leased Properties, other than
the items of Personal Property listed on Schedule A attached hereto. Upon Lessor’s request,
Lessee shall, without any charge or cost to Lessor, execute and deliver to Lessor such bills
of sale, assignments or other instruments necessary, appropriate or reasonably requested by
Lessor to establish Lessor’s ownership of such Personal Property.

          (c) Lessee acknowledges and agrees that, as of the date of this Amendment, all of Lessee’s
Personal Property currently located at the Facilities, other than the items of Personal Property
listed on Schedule A attached to the Existing Master Lease, is Personal Property that shall be
sold, assigned, transferred and conveyed to the Lessor as provided in Section 6.3, above, upon the
expiration or earlier termination of the Term.

     9. Certain Covenants. Sections 8.2.1.1, 8.2.1.2, 8.2.1.3, 8.2.1.4 and 8.2.1.6 of the
Existing Master Lease are hereby amended and restated in their entirety as follows:

              8.2.1.1 Limitation of Distributions. In the absence of an Event of Default, or
other event that with notice and/or the passage of time would become an Event of Default, in
or with respect to any Lease Year, Lessee shall not make any Distributions, unless all three
(3) of the following conditions have been met for the prior four (4) calendar quarters and
such conditions will still be met following such payment or distribution: (1) Lessee’s
Coverage Ratio for the preceding four (4) calendar quarters equals or exceeds 1.7; (2)
Lessee’s Stressed Coverage Ratio for the preceding four (4) calendar quarters equals or
exceeds 1.25; and (3) if such Distribution had been made on the last day of the preceding
month, following such Distribution Lessee’s Current Ratio would have equaled or exceeded
1.3. From and during an Event of Default, or other event that with notice and/or the
passage of time would become an Event of Default, Lessee shall not make any Distributions.
This Subsection is a limitation on Distributions, and Lessee’s failure to comply with one or
more of the three (3) conditions set forth above shall not be a default or Event of Default
hereunder, unless a Distribution is made during a period of time when any one or more of
such conditions is not satisfied.

              8.2.1.2 Accounts Receivable Financing. Except as may be expressly provided in
Section 39.5 of this Lease and the Intercreditor Agreement, Lessee and/or Sublessee shall
not pledge or otherwise encumber any of the accounts receivable
generated through the operation of the Facilities to secure principal and interest on
any Debt.

              8.2.1.3 Guarantees Prohibited. Neither Lessee nor any Sublessee shall
guarantee any indebtedness of any Affiliate or other third party, except those guarantees
for the benefit of AmSouth in effect as of the Commencement Date or as may be required

9

 

under
the AmSouth Loan Documents as of the Commencement Date or those guarantees for the benefit
of any working capital lender to whom a first priority security interest in the accounts
receivable from the Facilities has been granted in accordance with the requirements of
Section 39.5 of this Lease.

              8.2.1.4 Equipment Financing. The aggregate amount of principal, interest and
lease payments due from Lessee and/or Sublessee with respect to any equipment leases or
financing secured by equipment utilized in the operation of the Facilities shall not at any
time during the Term exceed $750,000.00 in any one Lease Year.

* * * **

              8.6 Separateness. From and after a transfer of Lessee’s interest to New Sub as
contemplated by the Settlement and Restructuring Agreement, New Sub, as Lessee hereunder,
shall:

              a. Maintain records and books of account separate from those of any Affiliate.

              b. Conduct its own business in its own names and not in the name of any Affiliate
(except to the extent that the business of the Facilities may be conducted in the name of
the Manager).

              c. Maintain financial statements separate from any Affiliate.

              d. Maintain any contractual relationship with any and all Affiliates, except upon terms
and conditions that are fair and substantially similar to those that would be available on
an arm’s length basis.

              e. Except for the benefit of AmSouth (or its successors and assigns) as set forth in
the Intercreditor Agreement or as otherwise required under the AmSouth Loan Documents, or
for the benefit of any working capital lender as required under the Line of Credit Documents
described in Section 39.5 of this Lease, not guarantee or become obligated for the debts of
any other entity, including any Affiliate, or hold out its credit, jointly or severally, as
being available to satisfy the obligations of others, except for obligations which represent
Lessee’s or Sublessee’s trade payables or accrued expenses incurred by Manager in the
ordinary course of owning and operating the Facilities.

              f. Except for the benefit of AmSouth (or its successors and assigns) as set forth in
the Intercreditor Agreement, or any working capital lender as set forth in
the intercreditor agreement required under Section 39.5 of this Lease, not pledge its
assets, jointly or severally, for the benefit of any other entity, including any Affiliate.

              g. Hold itself out an to the public as a legal entity separate from any Affiliates.

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              h. At all times cause its Board of Directors to hold appropriate meetings (or act by
unanimous consent) to authorize all appropriate corporate actions, and in authorizing such
actions, to observe all formalities.

     10. Amount of Alternations and Additions. The amount specified in the first clause
(c) of Section 10.1 of the Existing Master Lease shall be and hereby is increased from One Hundred
Thousand Dollars ($100,00.00) to One Hundred Fifty Thousand Dollars ($150,000.00).

     11. Insurance.

          (a) Section 13.2.1 of the Existing Master Lease is amended and restated as follows:

          13.2.1 Loss or damage by fire, vandalism and malicious mischief, earthquake, extended
coverage perils commonly known as “Special Risk”, and all physical loss perils normally
included in such Special Risk insurance, including but not limited to sprinkler leakage, in
an amount not less than one hundred percent (100%) of Replacement Cost) provided that
earthquake coverage and flood coverage may have a sublimit coverage of $5,000,000.00);

          (b) Paragraph 5 of the Second Amended is hereby amended and restated in its entirety as
follows:

      5. Insurance. Lessor acknowledges that the liability insurance coverage and
the malpractice insurance coverage required pursuant to Sections 13.2.4 and 13.2.5 of the
Lease, are currently unavailable generally in the nursing home industry at commercially
affordable rates and that Lessee currently maintains and has in place general liability and
malpractice insurance with single limit coverage of One Hundred Thousand Dollars
($100,000.00) per occurrence and Five Hundred Thousand Dollars ($500,000.00) cumulative,
with a deductible of Twenty Five Thousand Dollars ($25,000.00). Lessor hereby agrees that,
the provisions of Sections 13.2.4 and 13.2.5 of the Lease to the contrary notwithstanding,
until such time as the insurance coverage required therein is generally available in the
nursing home industry at commercially affordable rates, Lessee shall not be required obtain
the coverages required therein and Lessor agrees to accept Lessee’s current coverage in lieu
thereof for the first Renewal Term of the Lease. Lessee shall not be deemed to be in
default of the provisions of Article XIII of the Lease as a result thereof. Lessee shall
provide Lessor, on an annual basis, information from its insurance carrier and from
comparable insurance carriers of the costs of insurance premiums to meet Lessor’s insurance
requirements. At such time as the premium amounts quoted are commercially affordable,
Lessee shall immediately purchase any and all insurance policies necessary to meet the
requirements of Sections 13.2.4 and 13.2.5 of the Lease. This provision does not relieve
Lessee from its agreement of indemnity under
Article XXI of the Lease nor does it modify the provisions thereof. Notwithstanding
the foregoing, Lessee acknowledges and agrees that the provisions of this Paragraph 5 shall
not be applicable in the event of any Transfer. Lessee acknowledges and agrees that Lessor
shall have the right to withhold its consent to any proposed Transfer unless,

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among other
things, the Transferee agrees to provide the insurance coverage required by the provisions
of Sections 13.2.4 and 13.2.5 of the Lease.

         12. Notices. The addresses of the Lessor and the Lessee for purposes of giving any
notice, request or other communication currently set forth in Section 31.1 of the Existing Master
Lease are hereby amended and restated as follows:

	 	 	 	 	 
	 

	 	To Lessee:
	 	Diversicare Leasing Corp.
	 

	 	 	 	c/o Advocat Inc.
	 

	 	 	 	1621 Galleria Boulevard
	 

	 	 	 	Brentwood, TN 37027
	 

	 	 	 	Attention: Chief Financial Officer
	 

	 	 	 	Telephone No.: (615) 771-7575
	 

	 	 	 	Facsimile No.: (615) 771-7409
	 
	 	 	 	 
	 

	 	To Lessor:
	 	Sterling Acquisition Corp.
	 

	 	 	 	c/o Omega Healthcare Investors, Inc.
	 

	 	 	 	9690 Deereco Road, Suite 100
	 

	 	 	 	Timonium, MD 21093
	 

	 	 	 	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 410
	 

	 	constitute notice):
	 	Grand Rapids, Michigan 49503
	 

	 	 	 	Attn: Mark E. Derwent
	 

	 	 	 	Telephone No.: (616) 233-9720
	 

	 	 	 	Facsimile No.: (616) 451-8697

13. Facility Mortgage. Section 33.2 of the Existing Master Lease is herby amended and
restated as follows:

      33.2 Compliance With Facility Mortgage. Except for payments due under any
Facility Mortgage (which shall be the responsibility of the Mortgagor thereunder), Lessee
covenants and agrees that, to the extent within Lessee’s control, it will duly and
punctually observe, perform and comply with all of the terms, covenants and conditions
(including, without limitation, covenants requiring the keeping of books and records and
delivery of financial statements and other information) of any Facility Mortgage as to which
Lessee has been given Notice and that it will not directly or indirectly do any act or
suffer or permit any condition or thing to occur that is within Lessee’s control, which
would or might constitute a default under a Facility Mortgage as to which Lessee has been
given Notice. Anything in this Lease to the contrary notwithstanding, (i) if the time for
performance of any act required of Lessee by the terms of a Facility Mortgage as to
which Lessee has been given Notice is shorter than the time allowed by this Lease for
performance of such act by Lessee, then Lessee shall perform such act within the time limits
specified in this Lease and (ii) Lessee shall not be required to comply with the terms,
covenants and conditions of any Facility Mortgage that materially (i) alter the

12

 

economic
terms of this Lease, (ii) diminish the rights of Lessee under this Lease in any material
respect, or (iii) increase the obligations of Lessee under this Lease in any material
respect.

14. New Section 39.5 is hereby added to the Existing Master Lease as follows:

          39.5 Line of Credit; A/R Replacement Security Deposit.

     (a) Line of Credit. As of the date of this Amendment, pursuant to the Security
Agreement, Lessee has granted to Lessor a first priority security interest in the accounts
receivable generated by the Facilities. Lessee currently has a working capital line of
credit with AmSouth Bank under the AmSouth Loan Documents. AmSouth Bank currently has a
security interest in the accounts receivable from the Facilities that is subordinate to the
security interest of the Lessor in accordance with the Intercreditor Agreement. If Lessee
and/or the Sublessees, or any Affiliate of Lessee (other than Affiliates who are the
operators of the Florida Managed Facilities, as defined in the Settlement and Restructuring
Agreement), obtain, concurrently with or after the date of this Amendment, a working capital
line of credit (the “Line of Credit”) from a third-party working capital lender that
requires that, in order to secure the Line of Credit, Lessee and/or the Sublessees must
grant to the working capital lender a first priority security interest in the accounts
receivable from the Facilities accruing during the Term, then Lessor will subordinate its
security interest in the accounts receivable from the Facilities accruing during the Term to
the security interest of such working capital lender, provided that:

     (i) The working capital lender executes and delivers to Lessor an intercreditor
agreement in form and substance reasonably satisfactory to Lessor; and

     (ii) The lien of Lessor in accounts receivable from the Facilities shall be
subordinated to the lien of the working capital lender therein only to the extent of
amounts advanced from time to time by the working capital lender to Lessee and/or
the Sublessees with respect to the Facilities and only in the amount of
$12,000,000.00, plus interest, penalties and other charges under the loan documents
evidencing the Line of Credit (the “Line of Credit Documents”) with respect
to principal amounts advanced;

     (iii) Lessee delivers to Lessor the A/R Replacement Security Deposit and the
Letter of Credit Agreement (as defined below);

     (iv) The Advocat/AmSouth Indebtedness (as defined in the Intercreditor
Agreement) has been repaid in full; and

     (v) As of the date of entry by Lessor into the intercreditor agreement, no
Event of Default has occurred and is continuing.

13

 

     (b) Lessee acknowledges and agrees that on the occurrence of a “Default”, “Event of
Default” or similar event or occurrences which causes the lender under the Line of Credit
Documents to accelerate any or all of the indebtedness thereby or to exercise any rights or
remedies under such documents to realize on its interest in the accounts receivable from the
Facilities, or to cease funding under the Line of Credit, which is not cured within any
applicable cure period under the Line of Credit Documents or any written agreement by
lender, shall constitute an Event of Default under this Lease.

     (c) Concurrently with the delivery of the intercreditor agreement by Lessor pursuant to
Section 39.5(a) above, Lessee shall deliver to Lessor an additional Security Deposit in the
amount equal to six (6) times the monthly Base Rent then payable under this Lease (the
“Initial Amount”), in the form of an absolute, unconditional site draft letter of
credit for a term of one (1) year (renewable automatically) issued by an “A” rated financial
institution (“A/R Replacement Security Deposit”), which Lessor shall hold as
security for the full and faithful performance by Lessee of each and every term, provision,
covenant and condition of this Lease in accordance with, and subject to, the terms and
conditions of a Letter of Credit Agreement in form and substance reasonably acceptable to
Lessor (the “Letter of Credit Agreement”). On the first anniversary of the
delivery of the A/R Replacement Security Deposit, and each subsequent anniversary, the
amount of the A/R Replacement Security Deposit required to be maintained by Lessee on
deposit with Lessor shall be reduced by 16.66% (or 1/6) of the Initial Amount if and only if
on the applicable anniversary date (i) Lessee has maintained a Stressed Coverage Ratio for
the trailing twelve months of at least 1.45 and (ii) no Event of Default exists.
Notwithstanding the foregoing, at no time shall the A/R Replacement Security Deposit be less
than fifty percent (50%) of the Initial Amount.

     15. Representations and Warranties of Lessee. Lessee hereby represents and warrants
to Lessor that (i) it has the right and power and is duly authorized to enter into this Agreement;
(ii) the execution of this Agreement does not and will not constitute a breach of any provision
contained in any agreement or instrument to which Lessee is or may become a party or by which
Lessee is or may be bound or affected; (iii) Lessee (or the Sublessee of the Boone and Laurel
Facilities is described in Section 22.1) is the licensed operator of all of the Facilities and,
except for the Boone and Laurel Facilities described in Section 22.1, has not subleased all or any
portion of any of the Facilities; (iv) “NewSub” (as defined in the Settlement and Restructuring
Agreement) was never created; and (v) the Reimbursement Note (as defined in the Intercreditor
Agreement) has been repaid in full.

     16. Expenses of Lessor. Lessee shall pay all reasonable expenses of Lessor incurred
in connection with this Amendment, including reasonable attorneys’ fees.

     17. Execution and Counterparts . This Amendment may be executed in any number of counterparts, each of which, when so
executed and delivered, shall be deemed to be an original, but when taken together shall constitute
one and the same Amendment.

     18. Headings. Section headings used in this Amendment are for reference only and
shall not affect the construction of the Amendment.

14

 

     19. Enforceability. Except as expressly and specifically set forth herein, the
Existing Master Lease remains unmodified and in full force and effect. In the event of any
discrepancy between the Existing Master Lease and this Amendment, the terms and conditions of this
Amendment will control and the Existing Master Lease is deemed amended to conform hereto.

[SIGNATURE PAGES, ACKNOWLEDGEMENTS, AND JOINDER FOLLOW]

15

 

Signature Page to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

	 	 	 	 	 	 	 
	 	 	LESSOR:	 	 
	 
	 	 	 	 	 	 
	 	 	STERLING ACQUISITION CORP., a Kentucky
corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Taylor Picket
 

Taylor Picket
	 	 
	 

	 	Title:
	 	Chief Executive Officer	 	 

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF  
 

	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	)	 	ss.	 	 	 	 
	COUNTY OF

	 	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

     This
instrument was acknowledged before me on the
                    
day of                                        ,
2006, by                                                             , the               
            
               of STERLING ACQUISITION
CORP., a Kentucky corporation, on behalf of said company.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,
	 	 	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My commission expires:	 	 	 	 

Signature Page 1 of 2

 

Signature Page to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

LESSEE:

	 	 	 	 	 	 	 
	 	 	DIVERSICARE LEASING CORP., a Tennessee corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ William R. Council, III
 

William R. Council, III
	 	 
	 

	 	Title:
	 	President and CEO	 	 

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF  
 

	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	)	 	SS	 	 	 	 
	COUNTY OF

	 	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

     This instrument was acknowledged before me on the                     
 day of                     , 2006, by
                    ,
 the                      of DIVERSICARE LEASING CORP., a Tennessee
corporation, on behalf of said company

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,
	 	 	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My commission expires:	 	 	 	 

Signature
Page 2 of 2

 

Acknowledgment to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

     The undersigned hereby consent to the transactions contemplated by this Third Amendment to
Consolidated Amended and Restated Master Lease (the “Third Amendment”), ratify and affirm their
respective Guaranties, Pledge Agreements, Security Agreements, Subordination Agreements and other
Transaction Documents, and acknowledge and agree that the performance of the Master Lease and
obligations described therein are secured by their Guaranties, Pledge Agreements, Security
Agreement, Subordination Agreement and other Transaction Documents on the same terms and conditions
in effect prior to this Amendment. The undersigned hereby join in the execution of this Third
Amendment for the limited purpose of agreeing to the provisions of Section 6 and for no other
purpose.

	 	 	 	 	 	 	 
	 	 	ADVOCAT, INC. a Delaware corporation	 	 
	 
	 	 	 	 	 	 
	 

	 	By:

Name:
	 	/s/ William R. Council, III
 

William R. Council, III
	 	 
	 

	 	Title:
	 	President and CEO	 	 

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF  
 

	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	)	 	ss.	 	 	 	 
	COUNTY OF

	 	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

     The
foregoing instrument was acknowledged before me this ___ day of ______, 2006, by
________________________,
who is ________________________ of ADVOCAT, INC. a
Delaware corporation, on behalf
of the corporation, who acknowledged the same to be his or her free act and deed and the free act
and deed of the corporation.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,  
 

	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My Commission Expires: 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 

Acknowledgement
— Page 1 of 4

 

Acknowledgment to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

	 	 	 	 	 
	 	 	DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation
	 
	 	 	 	 
	 

	 	By:

Name:
	 	/s/ William R. Council, III
 
 William
R. Council, III
	 

	 	Title:
	 	President and CEO

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF  
 

	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	)	 	ss.	 	 	 	 
	COUNTY OF

	 	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

     The
foregoing instrument was acknowledged before me this ___ day of ____________, 2006, by
_______________, who is ___________________________of DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee
corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and
deed and the free act and deed of the corporation.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,  
 

	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My Commission Expires: 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 

Acknowledgement
— Page 2 of 4

 

Acknowledgment to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

	 	 	 	 	 
	 	 	ADVOCAT FINANCE INC., a Delaware corporation
	 
	 	 	 	 
	 

	 	By:

Name:
	 	/s/ William R. Council, III
 
 William
R. Council, III
	 

	 	Title:
	 	President and CEO

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF  
 

	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 
	 

	 	 	 	)	 	ss.	 	 	 	 
	COUNTY OF

	 	 	)	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 	 	 

     The
foregoing instrument was acknowledged before me this ___ day of ____________, 2006, by
__________________, who is ___________________________of ADVOCAT FINANCE INC., a Delaware corporation, on
behalf of the corporation, who acknowledged the same to be his or her free act and deed and the
free act and deed of the corporation.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,  
 

	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My Commission Expires: 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 

Acknowledgement
— Page 3 of 4

 

Acknowledgment to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

	 	 	 	 	 
	 	 	STERLING HEALTH CARE MANAGEMENT, INC., a
	 	 	Kentucky corporation
	 
	 	 	 	 
	 

	 	By:
	 	/s/ William R. Council, III
	 

	 	 	 	 
	 

	 	Name:
	 	William R. Council, III
	 

	 	Title:
	 	President and CEO

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF

	 	 	 	 	)	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	 	  )	 	 	ss.
	 	 
	COUNTY OF

	 	 	  )	 	 	 	 	 
	 

	 	 
	 	 	 	 	 	 

     This foregoing instrument was acknowledged before me on the ______ day of _________, 2006, by _________, who is ________________________ of STERLING
HEALTH CARE MANAGEMENT, INC., a Kentucky corporation, on behalf of said corporation, who
acknowledged the same to be his or her free act and deed and the free act and deed of the
corporation.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,  
 

	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My Commission Expires: 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 

Acknowledgement
— Page 4 of 4

 

Joinder to

THIRD AMENDMENT TO CONSOLIDATED

AMENDED AND RESTATED MASTER LEASE

     The undersigned hereby join in the execution of this Third Amendment to Consolidated Amended
and Restated Master Lease for the limited purpose of agreeing to the provisions of Section 6 and
for no other purpose.

	 	 	 	 	 
	 	 	OMEGA HEALTHCARE INVESTORS, INC.,
	 	 	a Maryland corporation
	 
	 	 	 	 
	 

	 	By:

Name:
	 	/s/ Taylor Picket
 
 Taylor
Picket
	 

	 	Title:
	 	Chief Executive Officer

	 	 	 	 	 	 	 	 	 	 	 
	STATE OF

	 	 	 	 	)	 	 	 	 	 
	 

	 	 	 	 	 	 	 	 
	 

	 	 	 	 	  )	 	 	ss.
	 	 
	COUNTY OF

	 	 	  )	 	 	 	 	 
	 

	 	 
	 	 	 	 	 	 

     This
instrument was acknowledged before me on the ______ day of __________,
2006, by
_______________, the of ______________________________ OMEGA HEALTHCARE
INVESTORS, INC., a Maryland corporation, on behalf of said corporation.

	 	 	 	 	 	 	 	 	 
	 	 	 
	 

	 	Notary Public,  
 

	 	County,	 	 
	 

	 	 	 	 
	 	 	 	 
	 	 	My Commission Expires: 
	 	 	 	 	 	 
	 

	 	 	 	 	 	 	 

Joinder — Page 1 of 1EX-10.3

 

Exhibit 10.3

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:
	 	/s/ William R. Council, III	 	 
	 

	 	Name:
	 	 

William R. Council, III
	 	 
	 

	 	Title:
	 	President and CEO	 	 

	 	 	 	 	 
	AGREED TO AND ACCEPTED BY PAYEE;	 	 
	 
	 	 	 	 
	OMEGA HEALTHCARE INVESTORS, INC.	 	 
	 
	 	 	 	 
	By: 

Name:

	 	/s/ Taylor Picket
 

Taylor Picket
	 	 
	Title:

	 	Chief Executive Officer	 	 

6

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