Document:

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                                                                   EXHIBIT 10.4

                     AMENDED AND RESTATED SECURITY AGREEMENT

         THIS AMENDED AND RESTATED SECURITY AGREEMENT (the "Security Agreement")
is made and entered into as of November 8, 2000 by and between DIVERSICARE
LEASING CORP., a Tennessee corporation (the "Debtor"), and STERLING ACQUISITION
CORP., a Kentucky corporation ("Secured Party").

                                    RECITALS:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

         "Settlement and Restructuring Agreement" means that certain settlement
and restructuring agreement by and among Advocat, Inc., a Delaware corporation,
Debtor,

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Sterling Health Care Management, Inc., a Kentucky corporation, Diversicare
Management Services Co., a Tennessee corporation, Omega Healthcare Investors,
Inc., a Maryland corporation, and Secured Party of even date herewith.

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

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

                             ARTICLE II - AGREEMENT

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

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

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

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

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

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

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

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

                  (g)      Medicare. To the extent permitted by law, all rights
to reimbursements under that certain federal program providing health insurance
for eligible elderly and other

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individuals, under which physicians, hospitals, skilled nursing homes, home
health care, and other providers are reimbursed for certain covered services
they provide to the beneficiaries of such program, which program is more fully
described in Title XVIII of the Social Security Act (42 U.S.C.ss.ss. 1395 et
seq.) and the regulations promulgated thereunder; and

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

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

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

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

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

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

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

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

         3.       PERFECTION OF SECURITY INTEREST.

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

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transactions contemplated hereunder, Debtor shall make appropriate entries on
its books and records disclosing the security interests created hereby in the
Collateral.

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

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

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

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

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

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

                  (f)      Debtor shall not remove any records concerning the
Collateral located at the Facilities or its chief executive offices nor keep any
of its records concerning the

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same at any other location unless written notice thereof is given to Secured
Party at least ten (10) days prior to the removal of such records to any new
addresses; and

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

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

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

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

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

         5.       COLLECTION OF ACCOUNTS.

                  (a)      Secured Party hereby authorizes and permits Debtor to
collect the Accounts from its debtors. This privilege may be terminated by
Secured Party at any time after notice from Secured Party upon the occurrence
and during the continuance of a Triggering Event under the Settlement and
Restructuring Agreement (a "Notice of Default"), and Debtor shall execute, upon
demand therefor, such assignments so as to vest in Secured Party full title to
the Accounts (to the extent permitted under applicable law), and Secured Party
thereupon shall be entitled to and have all of the ownership, title, rights,
securities and guarantees of Debtor with respect thereto, and with respect to
the property

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evidenced thereby, including the right of stoppage in transit, and Secured Party
may notify any debtor or debtors of the assignments of the Accounts and collect
the same; thereafter, Debtor will receive all payments on the Accounts as agent
of and for Secured Party and will transmit to Secured Party, on the day of
receipt thereof, all original checks, drafts, acceptances, notes and other
evidence of payment received in payment of or on account of the Accounts,
including all cash moneys similarly received by Debtor. Until such delivery,
Debtor shall keep all such remittances separate and apart from Debtor's own
funds, capable of identification as the property of Secured Party, and shall
hold the same in trust for Secured Party. After Notice of Default from the
Secured Party, all items or amounts that are delivered by Debtor to Secured
Party on account of partial or full payment or otherwise as Proceeds of any of
the Collateral shall be deposited in accordance with the terms of the Settlement
and Restructuring Agreement. To the extent permitted by law, Secured Party or
its representatives is hereby authorized to endorse, in the name of Debtor, any
item, howsoever received by Secured Party, representing any payment on or other
proceeds of any of the Collateral, and may endorse or sign the name of Debtor to
any accounts, invoices, assignments, financing statements, notices to debtors,
bills of lading, storage receipts, or other instruments or documents in respect
to Accounts or the property covered thereby requested by Secured Party. Debtor
shall promptly give Secured Party, upon demand, copies of all Accounts, to be
accompanied by such information and by such documents or copies thereof as
Secured Party may reasonably require. After Notice of Default from Secured
Party, Debtor shall maintain such records with respect to the Accounts and the
conduct and operation of its business as Secured Party may reasonably request,
and will furnish to Secured Party all information with respect to the Accounts
and the conduct and operation of its business, including balance sheets,
operating statements and other financial information, as Secured Party may
reasonably request from time to time.

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

         6.       INSPECTIONS/INFORMATION. Debtor shall permit Secured Party or
its agents upon reasonable written request and during business hours to have
access to and

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

         7.       DEFAULT/REMEDIES

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

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

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

                  (b)      Whenever a Security Agreement Event of Default shall
have occurred and so long as its continues, Secured Party may exercise from time
to time any rights and remedies, including the right to immediate possession of
the Collateral, available to it under the Lease, this Security Agreement or
applicable law. Secured Party shall have the right to hold any property then in
or upon the Facilities (but excluding any property belonging to patients at the
Facilities) at the time of repossession not covered by this Security Agreement
until return is demanded in writing by Debtor. Debtor agrees, in case of the
occurrence of a Security Agreement Event of Default and upon the request of
Secured

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Party, to assemble, at its expense, all of the Collateral at a convenient place
acceptable to Secured Party and to pay all costs of Secured Party of collection
of all the Liabilities, and enforcement of rights hereunder, including
reasonable attorneys' fees and legal expenses, including participation in
bankruptcy proceedings, and the expenses of locating the Collateral and the
expenses of any repairs to any realty or other property to which any of the
Collateral may be affixed or be a part. If the Collateral is disposed of at a
public sale, the parties agree that a public sale with at least ten (10)
calendar days prior notice to, Debtor and notice to the public by one
publication in a local newspaper is commercially reasonable. If any notification
of intended disposition of any of the Collateral is required by law, such
notification, if mailed, shall be deemed reasonably and properly given if sent
at least ten (10) days before such disposition, by first class mail, postage
prepaid, addressed to the Debtor either at the address set forth in the notice
section hereof, or at any other address of the Debtor appearing on the records
of Secured Party.

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

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

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claim under this Section 8, then the obligations of Debtor shall be extended
with respect to such claim or potential claim until the final resolution of such
claim or potential claim by the parties thereto.

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

                  (a)      Attachment. In applying the law of any jurisdiction
in which Revised Article 9 is in effect, the Collateral is all assets of the
Debtor, whether or not within the scope of Revised Article 9. The Collateral
shall include, without limitation and without limitation to the Collateral as
defined herein, the following categories of assets as defined in Revised Article
9: goods (including inventory, equipment and any accessions thereto),
instruments (including promissory notes), documents, accounts (including
health-care-insurance receivables), chattel paper (whether tangible or
electronic), deposit accounts, letter-of-credit rights (whether or not the
letter of credit is evidenced by a writing), commercial tort claims, securities
and all other investment property, general intangibles (including payment
intangibles and software), supporting obligations and any and all proceeds of
any thereof, wherever located, whether now owned and hereafter acquired. If the
Debtor, or any of them, shall at any time, whether or not Revised Article 9 is
in effect in any particular jurisdiction, acquire a commercial tort claim with
respect to a Facility, as defined in Revised Article 9, Debtor shall immediately
notify the Secured Party, in a writing signed by Debtor, of the details thereof
and grant to Secured Party in such writing a security interest therein and in
the proceeds thereof, all upon the terms of this Security Agreement, with such
writing to be in form and substance satisfactory to Secured Party.

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

                                       12
<PAGE>   13

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

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

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

         10.      GENERAL

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

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

                  (c)      Any delay on the part of Secured Party in exercising
any power, privilege or right under the Lease, this Security Agreement or under
any other instrument or document executed by Debtor in connection herewith shall
not operate as a waiver thereof. No single or partial exercise thereof, or the
exercise of any other power, privilege

                                       13
<PAGE>   14

or right shall preclude other or further exercise thereof, or the exercise of
any other power, privilege or right. The waiver by Secured Party of any default
by Debtor shall not constitute a waiver of any subsequent defaults but shall be
restricted to the default so waived.

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

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

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

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

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

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

                  (J)      THIS SECURITY AGREEMENT SHALL BE CONSTRUED, AND THE
RIGHTS AND OBLIGATIONS OF THE DEBTOR AND SECURED PARTY SHALL BE DETERMINED, IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN, EXCEPT THAT THE LAWS OF THE
STATE WHERE THE COLLATERAL IS LOCATED SHALL GOVERN THIS SECURITY AGREEMENT (A)
TO THE EXTENT NECESSARY

                                       14
<PAGE>   15

TO PERFECT AND/OR ENFORCE THE LIENS CREATED BY THIS SECURITY AGREEMENT AND TO
THE EXTENT NECESSARY TO OBTAIN THE BENEFIT OF THE RIGHTS AND REMEDIES SET FORTH
HEREIN WITH RESPECT TO THE COLLATERAL, AND (B) FOR PROCEDURAL REQUIREMENTS THAT
MUST BE GOVERNED BY THE LAWS OF THE STATE IN WHICH THE COLLATERAL IS LOCATED.

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

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

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

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

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

                            [signatures on next page]

                                       15
<PAGE>   16

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

                                   SECURED PARTY:

                                   STERLING ACQUISITION CORP.

                                   By:      /s/ Susan A. Kovach
                                      --------------------------------------
                                            Susan A. Kovach
                                   Its:     Vice President

                                   DEBTOR:

                                   DIVERSICARE LEASING CORP.

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

                                       16
<PAGE>   17

                                   SCHEDULE 1

DEBTOR:              DIVERSICARE LEASING CORP.

SECURED PARTY:       STERLING ACQUISITION CORP.

FACILITIES:

ALABAMA

CANTERBURY HEALTH FACILITY
1720 Knowles Road
Phenix City, Alabama 36869
Russell County

LYNWOOD NURSING HOME
4164 Halls Mills Road
Mobile, Alabama 36693
Mobile County

NORTHSIDE HEALTHCARE
700 Hutchins Avenue
Gadsden, Alabama 35904
Etowah County

WESTSIDE HEALTHCARE
4320 Judith Lane
Huntsville, Alabama 35805
Madison County

ARKANSAS

ASH FLAT NURSING AND REHABILITATION CENTER
HC 67, Box 5A
Ash Flat, Arkansas 72513
Sharp County
<PAGE>   18

DES ARC NURSING AND REHABILITATION CENTER
2216 West Main Street
Des Arc, Arkansas 72040
Prairie County

EUREKA SPRINGS NURSING AND REHABILITATION CENTER
235 Huntsville Road
Eureka Springs, Arkansas 72632
Carroll County

FAULKNER NURSING AND REHABILITATION CENTER
2603 Dave Ward Drive
Conway, Arkansas 72032
Faulkner County

GARLAND NURSING AND REHABILITATION CENTER
610 Carpenter Dam Road
Hot Springs, Arkansas 71901
Garland County

OUACHITA NURSING AND REHABILITATION CENTER
1411 Country Club Road
Camden, Arkansas 71701
Ouachita County

THE PINES NURSING AND REHABILITATION CENTER
534 Carpenter Dam Road
Hot Springs, Arkansas 71901
Garland County

POCAHONTAS NURSING AND REHABILITATION CENTER
105 Country Club Road
Pocahontas, Arkansas 72455
Randolph County

RICH MOUNTAIN NURSING AND REHABILITATION CENTER
306 Hornbeck
Mena, Arkansas 71953
Polk County

                                        2
<PAGE>   19

SHERIDAN NURSING AND REHABILITATION CENTER
113 South Briarwood Drive
Sheridan, Arkansas 72150
Grant County

STILLMEADOW NURSING AND REHABILITATION CENTER
105 Russelville Road
Malvern, Arkansas 72104
Hot Spring County

WALNUT RIDGE NURSING AND REHABILITATION CENTER
1500 West Main
Walnut Ridge, Arkansas 72476
Lawrence County

KENTUCKY

BOYD NURSING AND REHABILITATION
12800 Princeland Drive
Ashland, Kentucky 41102
Boyd County

CARTER NURSING AND REHABILITATION CENTER
P.O. Box 904 (250 McDavid Boulevard)
Grayson, Kentucky 41143
Carter County

ELLIOTT NURSING AND REHABILITATION CENTER
P.O. Box 694 (Route 32 East, Howard Creek Road)
Sandy Hook, Kentucky 41171
Elliott County

SOUTH SHORE NURSING AND REHABILITATION CENTER
P.O. Box 489 (James Hannah Drive)
South Shore, Kentucky 41175
Greenup County

WEST LIBERTY NURSING AND REHABILITATION CENTER
P.O. Box 219 (774 Liberty Road)
West Liberty, Kentucky 41472
Morgan County

                                        3
<PAGE>   20

WURTLAND HEALTH CARE CENTER
P.O. Box 677 (100 Wurtland Avenue)
Greenup, Kentucky 41144
Greenup County

OHIO

BEST CARE
2159 Dogwood Ridge
Wheelersburg, Ohio 45694
Scioto County

TENNESSEE

LAUREL MANOR HEALTH CARE FACILITY
902 Buchanan Road
New Tazwell, Tennessee 37825
Claiborne County

MANOR HOUSE OF DOVER
Highway 49 East, P.O. Box 399
Dover, Tennessee 37058
Stewart County

MAYFIELD REHABILITATION AND SPECIAL CARE CENTER
200 Mayfield Drive
Smyrna, Tennessee 37167
Rutherford County

                                        4
<PAGE>   21

                                    EXHIBIT A

                     FORM OF EXHIBIT TO FINANCING STATEMENT

Debtor:             DIVERSICARE LEASING CORP.

Secured Party:      STERLING ACQUISITION CORP.

                            Description of Collateral

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

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

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

         (c)      Equipment. All equipment, furniture, fixtures and other
personal property used in connection with the operation of the Facilities,
whether now owned or hereafter acquired by Debtor, together with all accessions,
additions, parts, attachments, accessories, or appurtenances thereto including
but not limited to linens, motor vehicles, furniture, fixtures and movable
equipment, leasehold improvements, and all books and records now owned or
hereafter acquired pertaining to any of the above described property other than
Debtor's Personal Property, but specifically excluding any computer readable
memory and any computer hardware or (except as set forth herein) software
necessary to process such memory (the "Equipment") and
<PAGE>   22

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

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

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

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

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

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

                                       2
<PAGE>   23

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

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

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

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

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

                                       3
<PAGE>   24

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

                                        4<PAGE>   1
                                                                    EXHIBIT 10.5

                               SECURITY AGREEMENT

         THIS SECURITY AGREEMENT (the "Security Agreement") is made and entered
into as of November 8, 2000 by and between STERLING HEALTH CARE MANAGEMENT INC.,
a Kentucky corporation (the "Debtor"), and STERLING ACQUISITION CORP., a
Kentucky corporation ("Secured Party").

                                    RECITALS:

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

         B.       Concurrently herewith, Diversicare Leasing Corp., a Tennessee
corporation ("DLC"), as lessee, and Secured Party, as lessor, have entered into
the Lease, pursuant to which Secured Party has leased to DLC certain healthcare
facilities described therein.

         C.       Subject to Secured Party's consent, DLC, as sublessor, and
Debtor, as sublessee, have entered into the Sublease, pursuant to which DLC has
subleased the Facilities to Debtor.

         D.       As a condition to Secured Party's agreement to consent to the
Sublease, Secured Party has required Debtor to enter into this Security
Agreement and to grant the security interests to Secured Party as herein
provided.

         NOW, THEREFORE, in order to induce Secured Party to consent to the
Sublease, and for other good and valuable consideration the receipt and
sufficiency of which hereby are acknowledged, the parties agree as follows:

                             ARTICLE I - DEFINITIONS

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

<PAGE>   2

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

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

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

         "Lease" means the Consolidated Amended and Restated Master Lease
executed concurrently herewith by Secured Party, as lessor, and Debtor, as
lessee of certain healthcare facilities, including but not limited to the
Facilities.

         "Settlement and Restructuring Agreement" means that certain settlement
and restructuring agreement by and among Advocat, Inc., a Delaware corporation
("Advocat"), Debtor, DLC, Diversicare Management Services Co., a Tennessee
corporation, Omega Healthcare Investors, Inc., a Maryland corporation, and
Secured Party of even date herewith.

         "Sublease" means the Master Sublease dated November ___, 2000 by DLC,
as sublessor, and Debtor, as lessee of the Facilities.

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

                             ARTICLE II - AGREEMENT

         1.       GRANT OF SECURITY INTEREST. Debtor hereby grants to Secured
Party a continuing security interest in the Collateral to secure the payment of
all amounts now or hereafter due and owing to Secured Party from DLC under the
Lease, or any extension or renewal thereof, and any and all other obligations
incurred in connection therewith, together with all other obligations or
indebtedness of Debtor, DLC, or Advocat to Secured Party under the Lease,
Settlement and Restructuring Agreement, and Subordinated Note however created,
evidenced or arising, whether direct or indirect, absolute or contingent, now or
hereafter existing, due or to become due, plus all interest, costs,
out-of-pocket expenses and reasonable attorneys' fees which may be made or
incurred by Secured Party in the administration, and collection thereof (the
"Liabilities"), and in the protection, maintenance, and liquidation of the
Collateral. This Security Agreement shall be and become effective when, and
continue in effect as long as, any Liabilities of Debtor DLC, and/or Advocat to
Secured Party are outstanding and unpaid, and except as otherwise

                                        2

<PAGE>   3
permitted pursuant to the terms of this Agreement, the Settlement and
Restructuring Agreement, or the Lease, Debtor will not sell, assign, transfer,
pledge or otherwise dispose of or encumber any Collateral to any third party
while this Security Agreement is in effect without the prior and express written
consent of Secured Party. Notwithstanding the foregoing, the obligation of DLC
to pay Secured Party Five Million Dollars ($5,000,000) plus interest thereon as
set forth in Section 15 of the Settlement and Restructuring Agreement shall be
secured only by the Equipment (as hereinafter defined).

         2.       COLLATERAL. The "Collateral" covered by this Agreement is all
of the personal property described below that Debtor now owns or shall hereafter
acquire or create, immediately upon the acquisition or creation thereof,
consisting of the following:

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

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

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

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

                                        3

<PAGE>   4
                  (e)      Inventory. All inventory and goods, now owned or
hereafter acquired, including but not limited to, raw materials, work in
process, finished goods, food, medicines, tangible property, stock in trade,
wares and merchandise (the "Inventory"); and

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

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

                  (h)      Other Property. All other tangible and intangible
property of Debtor now or hereinafter acquired by Debtor, but specifically
excluding Debtor's continuous quality improvement program, manuals and
materials; management information systems; policy, procedure and educational
manuals and materials; and similar proprietary property including any right to
the use of the name "Diversicare"' and

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

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

                                        4

<PAGE>   5
or any portion or component of any of the Facilities, the providing of any
professional or other services by the Debtor, the purchase, sale, dispensing,
storage, prescription or use of drugs, medications or the like by Debtor, or any
other operations or businesses of Debtor; and (ii) certifications and
eligibility for participation by Debtor, in respect of its operation of any of
the Facilities, in programs or arrangements of or reimbursement from any
third-party payors, including Medicare and Medicaid; and (iii) all other
licenses permits and certificates used or useful in connection with the
ownership, operation, use or occupancy of any of the Facilities (collectively,
the "Permits"); and

                  (k)      Investment Property. All Investment Property (as
defined in the Commercial Code); and,

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

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

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

         The form of a description of the Collateral to be attached to financing
statements executed by Debtor in connection herewith is attached hereto as
EXHIBIT A.

                                        5

<PAGE>   6
         3.       PERFECTION OF SECURITY INTEREST.

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

         4.       WARRANTIES AND COVENANTS. Debtor warrants, represents and
agrees that:

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

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

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

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

                                        6

<PAGE>   7
shall not remove any Collateral from the state in which the Facilities or its
chief executive offices are located, without the prior written consent of
Secured Party;

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

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

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

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

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

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

                                        7

<PAGE>   8
                  (k)      All agreements and papers required to be filed,
registered or recorded in order to create in favor of the Secured Party a
perfected lien in the Collateral have been, or will be, filed, registered or
recorded in the appropriate filing offices, and to the best of Debtor's
knowledge, no further or subsequent filing, refiling, registration,
re-registration, recorded or re-recording is necessary in any jurisdiction,
except as provided under applicable law with respect to the filing of
continuation statements.

         5.       COLLECTION OF ACCOUNTS.

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

                                        8

<PAGE>   9
Accounts and the conduct and operation of its business, including balance
sheets, operating statements and other financial information, as Secured Party
may reasonably request from time to time.

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

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

         7.       DEFAULT/REMEDIES

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

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

                                        9

<PAGE>   10
                                    fifteen (15) days after written notice from
                                    Secured Party thereof; or

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

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

                  (c)      TO THE EXTENT PERMITTED BY LAW, DEBTOR AGREES THAT
SECURED PARTY SHALL, UPON THE OCCURRENCE OF ANY SECURITY AGREEMENT EVENT OF
DEFAULT, HAVE THE RIGHT TO PEACEFULLY RETAKE

                                       10

<PAGE>   11
ANY OF THE COLLATERAL. DEBTOR WAIVES ANY RIGHT IT MAY HAVE, IN SUCH INSTANCE, TO
A JUDICIAL HEARING PRIOR TO SUCH RETAKING.

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

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

                  (a)      Attachment. In applying the law of any jurisdiction
in which Revised Article 9 is in effect, the Collateral is all assets of the
Debtor, whether or not within the scope of Revised Article 9. The Collateral
shall include, without limitation and without limitation to the Collateral as
defined herein, the following categories of assets as defined in Revised Article
9: goods (including inventory, equipment and any accessions thereto),

                                       11

<PAGE>   12
instruments (including promissory notes), documents, accounts (including
health-care-insurance receivables), chattel paper (whether tangible or
electronic), deposit accounts, letter-of-credit rights (whether or not the
letter of credit is evidenced by a writing), commercial tort claims, securities
and all other investment property, general intangibles (including payment
intangibles and software), supporting obligations and any and all proceeds of
any thereof, wherever located, whether now owned and hereafter acquired. If the
Debtor, or any of them, shall at any time, whether or not Revised Article 9 is
in effect in any particular jurisdiction, acquire a commercial tort claim, as
defined in Revised Article 9, Debtor shall immediately notify the Secured Party,
in a writing signed by Debtor, of the details thereof and grant to Secured Party
in such writing a security interest therein and in the proceeds thereof, all
upon the terms of this Security Agreement, with such writing to be in form and
substance satisfactory to Secured Party.

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

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

                                       12

<PAGE>   13
                  (d)      Savings Clause. Nothing contained in this Section 9
shall be construed to narrow the scope of Secured Party's security interest in
any of the Collateral or the perfection or priority thereof or to impair or
otherwise limit any of the rights, powers, privileges or remedies of Secured
Party except (and then only to the extent) mandated by Revised Article 9 to the
extent then applicable.

         10.      GENERAL

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

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

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

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

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

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

                                       13

<PAGE>   14
invalidating the remainder of such provision or the remaining provisions of this
Security Agreement.

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

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

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

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

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

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

                                       14

<PAGE>   15
                  (m)      Nothing contained herein shall be construed as in any
way modifying or limiting the effect of terms or conditions set forth in the
Lease, but each and every term and condition hereof shall be in addition
thereto.

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

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

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

                                         SECURED PARTY:

                                         STERLING ACQUISITION CORP.

                                         By:   /s/ Susan A. Kovach
                                            --------------------------------
                                                   Susan A. Kovach
                                         Its:      Vice President

                                         DEBTOR:

                                         STERLING HEALTH CARE MANAGEMENT, INC.

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

                                       15

<PAGE>   16
                                   SCHEDULE 1

DEBTOR:                           STERLING HEALTH CARE MANAGEMENT, INC.

SECURED PARTY:                    STERLING ACQUISITION CORP.

FACILITIES:

WEST VIRGINIA

BOONE HEALTHCARE
P.O. Box 605 (Route 119, Lick Creek Road)
Danville, West Virginia 25053
Boone County

LAUREL NURSING AND REHABILITATION CENTER
HC 75, Box 153 (Clinic Road)
Ivydale, West Virginia 25113
Clay County

<PAGE>   17

                                    EXHIBIT A

                     FORM OF EXHIBIT TO FINANCING STATEMENT

Debtor:                           STERLING HEALTH CARE MANAGEMENT, INC.

Secured Party:                    STERLING ACQUISITION CORP.

                            Description of Collateral

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

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

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

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

<PAGE>   18

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

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

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

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

         (h)      Other Property. All other tangible and intangible property of
Debtor now or hereinafter acquired by Debtor, but specifically excluding
Debtor's continuous quality improvement program, manuals and materials;
management information systems; policy, procedure and educational manuals and
materials; and similar proprietary property including any right to the use of
the name "Diversicare"' and

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

         (j)      Permits. To the extent permitted by law, (i) the operating
licenses for each of the Facilities, any certificate of need, any other license,
permit, approval or certificate

                                        2

<PAGE>   19
which from time to time, may be issued or is required to be issued by the United
States, any state or local government, or any agency or instrumentality of any
of the foregoing with respect to the construction, installation or operation of
any of the Facilities or any portion or component of any of the Facilities, the
providing of any professional or other services by the Debtor, the purchase,
sale, dispensing, storage, prescription or use of drugs, medications or the like
by Debtor, or any other operations or businesses of Debtor; and (ii)
certifications and eligibility for participation by Debtor, in respect of its
operation of any of the Facilities, in programs or arrangements of or
reimbursement from any third-party payors, including Medicare and Medicaid; and
(iii) all other licenses permits and certificates used or useful in connection
with the ownership, operation, use or occupancy of any of the Facilities
(collectively, the "Permits"); and

         (k)      Investment Property. All Investment Property (as defined in
the Commercial Code); and,

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

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

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

                                        3

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