ADVOCAT INC (Form: 10-Q, Received: 05/10/2011 16:06:41)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CHECK ONE:


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2011


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission file No.: 1-12996

Advocat Inc.

(exact name of registrant as specified in its charter)


Delaware		62-1559667

(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

1621 Galleria Boulevard, Brentwood, TN 37027

(Address of principal executive offices) (Zip Code)

(615) 771-7575

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and a “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting Company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

5,817,387

(Outstanding shares of the issuer’s common stock as of April 28, 2011)

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION
	ITEM 1 — FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II — OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS.
	ITEM 6. EXHIBITS
SIGNATURES
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-10.5
EX-10.6
EX-10.7
EX-10.8
EX-31.1
EX-31.2
EX-32

Part I. FINANCIAL INFORMATION


ITEM 1		— FINANCIAL STATEMENTS

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands)


	March 31,			December 31,
	2011			2010
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	7,541		$	8,862
Receivables, less allowance for doubtful accounts of $2,936 and $2,822, respectively		27,185			23,801
Prepaid expenses and other current assets		3,618			3,840
Income tax refundable		1,323			1,439
Deferred income taxes		4,238			4,207
Current assets of discontinued operations		682			686

Total current assets		44,587			42,835


PROPERTY AND EQUIPMENT, at cost		82,104			78,690
Less accumulated depreciation		(42,903	)		(41,563	)
Discontinued operations, net		1,053			1,053

Property and equipment, net		40,254			38,180


OTHER ASSETS:
Deferred income taxes		12,382			12,408
Deferred financing and other costs, net		1,590			834
Other assets		4,383			2,319
Acquired leasehold interest, net		9,284			9,380

Total other assets		27,639			24,941

	$	112,480		$	105,956

The accompanying notes are an integral part of these interim consolidated financial statements.

(Continued)

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)


	March 31,			December 31,
	2011			2010
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations	$	519		$	582
Trade accounts payable		4,384			3,120
Accrued expenses:
Payroll and employee benefits		11,327			11,047
Current portion of self-insurance reserves		8,129			7,379
Other current liabilities		3,659			4,479

Total current liabilities		28,018			26,607


NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion		26,733			23,819
Self-insurance reserves, less current portion		11,816			11,659
Other noncurrent liabilities		17,027			16,748

Total noncurrent liabilities		55,576			52,226


COMMITMENTS AND CONTINGENCIES

SERIES C REDEEMABLE PREFERRED STOCK $.10 par value, 5,000 shares authorized, issued and outstanding		4,918			4,918

SHAREHOLDERS’ EQUITY:
Series A preferred stock, authorized 200,000 shares, $.10 par value, none issued and outstanding		—			—
Common stock, authorized 20,000,000 shares, $.01 par value, 6,049,000 and 5,976,000 shares issued, and 5,817,000 and 5,744,000 shares outstanding, respectively		60			60
Treasury stock at cost, 232,000 shares of common stock		(2,500	)		(2,500	)
Paid-in capital		18,195			17,896
Retained earnings		6,781			6,749
Accumulated other comprehensive loss		(185	)		—

Total shareholders’ equity of Advocat Inc.		22,351			22,205
Noncontrolling interests		1,617			—

Total shareholders’ equity		23,968			22,205

	$	112,480		$	105,956

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)


	Three Months Ended March 31,
	2011			2010
PATIENT REVENUES, net	$	77,130		$	70,152


EXPENSES:
Operating		60,857			55,402
Lease		5,714			5,602
Professional liability		1,691			1,414
General and administrative		6,054			4,702
Depreciation and amortization		1,556			1,416

Total expenses		75,872			68,536

OPERATING INCOME		1,258			1,616

OTHER INCOME (EXPENSE):
Interest income		3			2
Interest expense		(454	)		(398	)
Debt retirement costs		(112	)		(127	)

		(563	)		(523	)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		695			1,093
PROVISION FOR INCOME TAXES		(249	)		(386	)


NET INCOME FROM CONTINUING OPERATIONS		446			707


NET INCOME FROM DISCONTINUED OPERATIONS:
Operating income (loss), net of taxes of $(4) and $206, respectively		(8	)		378
Loss on disposal, net of taxes of $0 and $(96), respectively		—			(177	)

DISCONTINUED OPERATIONS		(8	)		201

NET INCOME		438			908
Less: Net Income attributable to noncontrolling interests		—			—

NET INCOME ATTRIBUTABLE TO ADVOCAT INC.		438			908

PREFERRED STOCK DIVIDENDS		(86	)		(86	)


NET INCOME FOR COMMON STOCK	$	352		$	822


NET INCOME PER COMMON SHARE:
Per common share – basic
Continuing operations	$	0.06		$	0.11
Discontinued operations		—			0.03

	$	0.06		$	0.14

Per common share – diluted
Continuing operations	$	0.06		$	0.11
Discontinued operations		—			0.03

	$	0.06		$	0.14


COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.055		$	0.05


WEIGHTED AVERAGE COMMON SHARES:
Basic		5,752			5,717

Diluted		5,877			5,913

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)


	Three Months Ended March 31,
	2011			2010
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	438		$	908
Discontinued operations		(8	)		201

Net income from continuing operations		446			707
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Depreciation and amortization		1,556			1,416
Provision for doubtful accounts		569			488
Deferred income tax provision (benefit)		109			(54	)
Provision for self-insured professional liability, net of cash payments		66			71
Stock based compensation		201			196
Amortization of deferred balances		46			76
Provision for leases in excess of cash payments		113			225
Payment from lessor for leasehold improvement		—			120
Debt retirement costs		79			127
Changes in other assets and liabilities affecting operating activities:
Receivables, net		(3,732	)		(679	)
Prepaid expenses and other assets		177			229
Trade accounts payable and accrued expenses		1,306			348

Net cash provided by continuing operations		936			3,270
Discontinued operations		(12	)		682

Net cash provided by operating activities		924			3,952


CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,048	)		(649	)
Increase in restricted Cash		(1,828	)		—
Deposits and other deferred balances		(28	)		—

Net cash used by continuing operations		(3,904	)		(649	)
Discontinued operations		—			(45	)

Net cash used in investing activities		(3,904	)		(694	)


CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations		(20,579	)		(3,807	)
Proceeds from issuance of debt and capital leases		23,430			3,463
Financing costs		(879	)		(373	)
Exercise of stock options		2			—
Proceeds from issuance of restricted share units		197			62
Payment of common stock dividends		(318	)		(286	)
Payment of preferred stock dividends		(86	)		(86	)
Contributions from noncontrolling interests		27			—
Payment for preferred stock restructuring		(135	)		(131	)

Net cash provided by financing activities		1,659			(1,158	)

(Continued)

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)


	Three Months Ended March 31,
	2011			2010
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS	$	(1,321	)	$	2,100

CASH AND CASH EQUIVALENTS, beginning of period		8,862			8,609


CASH AND CASH EQUIVALENTS, end of period	$	7,541		$	10,709


SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	$	296		$	338


Cash payments of income taxes	$	25		$	57

The accompanying notes are an integral part of these interim consolidated financial statements.

ADVOCAT INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2011 AND 2010

1. BUSINESS

Advocat Inc. (together with its subsidiaries, “Advocat” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. The Company’s centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers offer a variety of comprehensive rehabilitation services as well as nutritional support services.

As of March 31, 2011, the Company’s continuing operations consist of 46 nursing centers with 5,364 licensed nursing beds. The Company owns 9 and leases 37 of its nursing centers. The Company’s continuing operations include centers in Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.

2. CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements include the operations and accounts of Advocat and its subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Any variable interest entities (“VIEs”) in which the Company has an interest are consolidated when the Company identifies that it is the primary beneficiary. The Company has one variable interest entity and it relates to the facility under construction in West Virginia described in Note 8.

The interim consolidated financial statements for the three month periods ended March 31, 2011 and 2010, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2011 and the results of operations and cash flows for the three month periods ended March 31, 2011 and 2010. The Company’s consolidated balance sheet at December 31, 2010 was derived from its audited consolidated financial statements as of December 31, 2010. Certain amounts in the Company’s 2010 consolidated financial statements have been reclassified to conform to the 2011 presentation.

The results of operations for the three month periods ended March 31, 2011 and 2010 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

3. LONG-TERM DEBT AND INTEREST RATE SWAP

On March 1, 2011, the Company entered into an agreement with a syndicate of banks to refinance the Company’s mortgage loan that was scheduled to mature in August 2011 and to extend the maturity of the Company’s revolving credit facility.

Under the terms of the new agreement, the syndicate of banks provided mortgage debt (“Mortgage Loan”) of $23 million and the proceeds were used to retire the Company’s previous mortgage loan and will fund approximately $2.4 million in capital improvements at the Company’s owned centers. The Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5%, but is fixed at 7.07% based on the interest rate swap transaction described below. The new mortgage loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these centers.

The new agreement extended the maturity of the Company’s $15 million revolving credit facility (“Revolver”) from March 2013 to March 2016. As amended, the Revolver has an interest rate of LIBOR plus 4.5%.

In connection with the March 2011 refinancing agreements, the Company recognized debt retirement costs of $112,000 which were recorded in earnings during the first quarter of 2011. These costs relate primarily to the write off of deferred financing costs of the retired mortgage debt. In connection with this refinancing, the Company recorded total deferred loan costs of $776,000, of which $689,000 were paid at closing with proceeds from the new facility. The Mortgage Loan and the revolver are cross-collateralized.

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. As of March 31, 2011, the Company has $3,463,000 in borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.0% of the amount outstanding. The Company has a letter of credit of $4,551,000 to serve as a security deposit for the Company’s leases. Considering the balance of eligible accounts receivable at March 31, 2011, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15,000,000, the balance available for borrowing under the revolving credit facility is $6,986,000.

The Company’s lending agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. The Company is in compliance with all such covenants at March 31, 2011.

Interest Rate Swap transaction:

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 7.07% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company’s balance sheets. In accordance with this guidance, the Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at March 31, 2011, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $299,000 at March 31, 2011. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at March 31, 2011 is $185,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $114,000. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms

of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the Company’s interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB’s guidance on Fair Value Measurements and Disclosures .

4. INSURANCE MATTERS

Professional Liability and Other Liability Insurance-

For claims made after March 9, 2001, the Company has purchased professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. The Company has essentially exhausted all general and professional liability insurance available for claims asserted prior to May 31, 2010.

Effective June 1, 2010, the Company’s nursing centers are covered by one of two professional liability insurance policies. The Company’s 25 nursing centers in Arkansas, Kentucky, Tennessee, and West Virginia are currently covered by an insurance policy with coverage limits of $250,000 per medical incident and total annual aggregate policy limits of $750,000. This policy provides the only commercially affordable insurance coverage available for claims made during this period against these nursing centers. The Company’s 21 nursing centers in Alabama, Florida, Ohio and Texas are currently covered by an insurance policy with coverage limits of $1,000,000 per medical incident, subject to a deductible of $495,000 per claim, with a total annual aggregate policy limit of $15,000,000 and a sublimit per center of $3,000,000.

Reserve for Estimated Self-Insured Professional Liability Claims-

Because the Company anticipates that its actual liability for existing and anticipated claims will exceed the Company’s professional liability insurance coverage, the Company has recorded total liabilities for professional liability and other claims of $17,928,000 as of March 31, 2011. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

Final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. The Company evaluates the adequacy of this liability on a quarterly basis and engages a third-party actuarial firm to conduct an analysis semi-annually in the second and fourth quarters. The semi-annual actuarial analysis is prepared by the Actuarial Division of Willis of Tennessee, Inc. (“Willis”). The Company believes that, absent unanticipated events, it normally takes substantial time for significant trends to develop with respect to the Company’s overall exposure for professional liability claims. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and the Company believes that a semi-annual evaluation is appropriate.

These semi-annual actuarial analyses of the Company’s liability are assessed and adjusted based on numerous factors, including claims actually reported, lawsuits filed, lawsuits resolved, changes in the Company’s occupied beds and relevant claim development data. The Company records any revisions in estimates and differences between actual settlements and reserves, with changes in estimated losses being recorded in the consolidated statements of income in the period identified. Any increase in the accrual decreases income in the period and any reduction in the accrual increases income during the period. In those quarters where Willis does not prepare an actuarial analysis, the Company

evaluates its professional liability claims and settlements in order to determine whether there has been a material change in its anticipated liability for those claims.

Although the Company retains Willis to assist management in estimating the appropriate accrual for these claims, professional liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $1,311,000 and $1,184,000 for the three months ended March 31, 2011 and 2010, respectively.

Adoption of New Accounting Pronouncements — Self-Insured Professional Liability Claims-

In August 2010, the FASB issued updated guidance in the form of a FASB Accounting Standards Update on “Presentation of Insurance Claims and Related Insurance Recoveries” to clarify that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. The update is intended to improve accounting guidance by eliminating an existing industry exception and reduce diversity in practice by removing the ability to offset insurance recoveries against liabilities. The Company adopted this guidance effective January 1, 2011 and as a result recorded assets and equal liabilities of $619,000 at March 31, 2011 and $438,000 at December 31, 2010, respectively.

Other Insurance -

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers’ compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2008 through June 30, 2011, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $478,000 at March 31, 2011. The Company has a non-current receivable for workers’ compensation policy’s covering previous years of $424,000 as of March 31, 2011. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of March 31, 2011, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $1,538,000 at March 31, 2011. The differences between actual settlements and reserves are included in expense in the period finalized.

5. STOCK-BASED COMPENSATION

During 2011, the Compensation Committee of the Board of Directors approved a grant of 38,900 shares of restricted common stock to certain employees and members of the Board of Directors. The restricted shares vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. Upon vesting, all restrictions are removed.

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $201,000 and $196,000 in the three month periods ended March 31, 2011 and 2010, respectively.

6. DISCONTINUED OPERATIONS

Effective March 31, 2010, the Company terminated operations of four nursing centers in Florida under a lease that, as amended, would have expired in August 2010. These four homes contributed revenues of $6,885,000 and net income of $211,000 during the three months ended March 31, 2010. Effective March 31, 2010, the Company transitioned operations at these leased facilities to a new operator and has reclassified the operations of these facilities as discontinued operations for 2010 presented in the accompanying interim consolidated financial statements. The $177,000 net loss on lease termination primarily relates to severance, legal and other costs incurred to facilitate the transition as well as the transfer of inventory.

7. EARNINGS PER COMMON SHARE

Information with respect to basic and diluted net income per common share is presented below:


	Three Months Ended
	March 31,
	2011		2010
Net income per common share:
Per common share – basic
Income from continuing operations	$	0.06	$	0.11
Income (loss) from discontinued operations
Operating income, net of taxes		—		0.06
Loss on disposal, net of taxes		—		(0.03	)

Discontinued operations, net of taxes		—		0.03

Net income	$	0.06	$	0.14


Per common share – diluted
Income from continuing operations	$	0.06	$	0.11
Income (loss) from discontinued operations
Operating income, net of taxes		—		0.06
Loss on disposal, net of taxes		—		(0.03	)

Discontinued operations, net of taxes		—		0.03

Net income	$	0.06	$	0.14

The effects of 320,000 and 225,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in 2011 and 2010, respectively, because these securities would have been anti-dilutive.

8. WEST VIRGINIA FACILITY

On June 17, 2009, the Company completed the acquisition of certain assets of a skilled nursing facility in West Virginia. The Company had entered into an option agreement to purchase these assets for $850,000 during 2006 and the purchase price of $850,000 is included in other noncurrent assets in the Company’s Interim Consolidated Balance Sheet. The Company did not assume any liabilities or working capital in connection with the acquisition. The existing facility closed in February 2009.

The Company has an agreement with a real estate developer that will construct, furnish, and equip a 90 bed skilled nursing center near Milton, West Virginia, to replace the facility described above. The Company will lease the new facility upon completion. The initial lease term is 20 years from the date the center is completed and fit for occupancy as a skilled nursing center. The Company has the option to renew the lease for two additional five-year periods. Construction on the nursing center began in November 2010, and it is estimated the center will be completed in late 2011. The agreement provides the Company the right to purchase the center beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the total project cost.

The Company has no equity interest in the entity constructing the new facility, and does not guarantee any debt obligations of the entity. The owners of the facility have provided guarantees of the debt of the entity, and based on those guarantees the entity is considered to be a variable interest entity (“VIE”). The Company owns the underlying Certificate of Need that is required for operation as a skilled nursing center. Based primarily on the ownership of the Certificate of Need and the fixed price purchase option described above, the Company is considered to be the primary beneficiary of the VIE, based on the Company’s ability to direct the activities that most significantly impact the economic performance of the VIE and the right to receive benefits from the VIE that could potentially be significant to the VIE.

As of March 31, 2011, the Company’s Interim Consolidated Balance Sheet includes $2,353,000 of net property and equipment, $736,000 in liabilities and $1,617,000 in noncontrolling interests equity associated with the real estate developer’s interests in the VIE. These assets can be used only to settle obligations of the VIE. Additionally, none of these liabilities provide creditors with recourse to the general credit of the Company.

9. EVENT SUBSEQUENT TO THE BALANCE SHEET

In April 2011, the Company entered into an amendment to the Master lease with Omega under which Omega agreed to provide an additional $5,000,000 to fund renovations to four nursing centers located in Arkansas, Kentucky, Ohio and Texas that are leased from Omega. The annual base rent related to these facilities will be increased to reflect the amount of capital improvements to the respective facilities as the related expenditures are made. The increase is based on a rate of 10.25% per year of the amount financed under this amendment. This arrangement is similar to amendments entered into in 2009, 2006 and 2005 that provided financing totaling $15,000,000 that was used to fund renovations at twelve nursing centers leased from Omega.


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Advocat Inc. provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. Our centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, we offer a variety of comprehensive rehabilitation services as well as nutritional support services. As of March 31, 2011, our continuing operations consist of 46 nursing centers with 5,364 licensed nursing beds. We own 9 and lease 37 of our nursing centers included in continuing operations.

Strategic operating initiatives. In 2010, we completed a strategic planning process, and have identified several strategic operating initiatives to improve occupancy and skilled mix in our nursing centers by enhancing our registered nurse coverage and adding specialized clinical care. The investments in nursing and clinical care are being conducted in concert with additional investments in facility based marketing representatives to develop referral and managed care relationships. These investments will better attract quality payor sources for patients covered by Medicare, managed care as well as certain private pay individuals. These marketing and nurse coverage efforts will also enable us to improve our Medicare rate by becoming the preferred referral for higher acuity patients.

Another strategic operating initiative is to implement Electronic Medical Records (“EMR”). We believe we can improve operations, profitability and our quality programs in our nursing centers by implementing EMR. EMR provides the ability to electronically record the care provided to our patients and improves customer and employee satisfaction, improves facility regulatory compliance and provides real-time monitoring and scheduling of care delivery. It is anticipated that the improved documentation of care will also provide greater tracking and capture of services we provide to patients.

As part of our strategic operating initiatives we will accelerate our program for improving our physical plants. Since 2005 we have been completing strategic renovations of certain facilities that improve occupancy, quality of care and profitability. We plan to continue these facility renovation projects and accelerate this strategy using the knowledge obtained in the first few years of this program. Our strategic operating strategy will also include pursuing and investigating opportunities to acquire, lease or develop new facilities, focusing primarily on opportunities within our existing areas of operation.

We are incurring expenses in connection with these initiatives, as described in “Results of Operations.” These investments in business initiatives will increase our operating expenses for the next one or two years, and there is typically a time delay between incurring such expenses and attaining the revenues and cash flows expected from these initiatives and developments.

Divestitures . Effective March 31, 2010, we terminated operations of four nursing centers in Florida under a lease that, as amended, would have expired in August 2010. We have reclassified the operations of these facilities as discontinued operations in the accompanying interim consolidated financial statements for 2010. The $0.2 million net loss on lease termination primarily relates to severance, legal and other costs incurred to facilitate the transition as well as the transfer of working capital.

Basis of Financial Statements. Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income to vary significantly from period to period. Our critical accounting policies are more fully described in our 2010 Annual Report on Form 10-K.

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, managed care, and private pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a managed care replacement plan often referred to as Medicare replacement products. The private pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the private pay and other are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The following table sets forth net patient and resident revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands):


	Three Months Ended March 31,
	2011				2010
Medicaid	$	37,881	49.1	%	$	37,674	53.7	%
Medicare		26,826	34.8			21,425	30.5
Managed care		3,062	4.0			2,273	3.2
Private Pay and other		9,361	12.1			8,780	12.6

Total	$	77,130	100.0	%	$	70,152	100.0	%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:


	Three Months Ended March 31,
	2011				2010
Medicaid		2,790	67.3	%		2,880	69.1	%
Medicare		598	14.4			548	13.2
Managed care		80	1.9			66	1.6
Private Pay and other		676	16.4			671	16.1

Total		4,144	100.0	%		4,165	100.0	%

Consistent with the nursing home industry in general, changes in the mix of a center’s patient population among Medicaid, Medicare, managed care, and private pay and other can significantly affect the profitability of the center’s operations.

Health Care Industry

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time.

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act”, (“Patient Protection Act”) along with the “Health Care and Education Reconciliation Act of 2010” (“Reconciliation Act”) collectively defined as the “Legislation.” We expect this Legislation to impact our Company, our employees and our patients and residents in a variety of ways. Some aspects of these new laws are immediate while others will be phased in over the next ten years when all mandates become effective. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. Two of the main provisions of the Legislation become effective in 2014 whereby most individuals will be required to either have health insurance or pay a fine and employers with 50 or more employees will either have to provide minimum essential coverage or will be subject to additional taxes. We have not estimated the financial impact of the Legislation and the costs associated with complying with the increased levels of health insurance we will be required to provide our employees and their dependents in future years. We expect the Legislation will result in increased operating expenses.

We also expect for this Legislation to continue to impact our Medicaid and Medicare reimbursement as well, though the exact timing and level of that impact is currently unknown. We anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process. The Legislation expands the role of home based and community services, which may place downward pressure on our sustaining population of Medicaid residents.

Medicare and Medicaid Reimbursement

A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare, managed care, private pay and other third party sources. We employ specialists in reimbursement at the corporate level to monitor regulatory developments, to comply with reporting requirements, and to ensure that proper payments are made to our operated nursing centers. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown.

Medicare

Effective October 1, 2010, Medicare rates were increased by CMS implementation of a market basket adjustment and the implementation of MDS 3.0 and Resource Utilization Group IV (“RUG IV”). The net impact of the market basket adjustment increased Medicare reimbursement to skilled nursing centers by approximately 1.7% compared to the fiscal year ending September 30, 2010. The rate increase was determined as the net effect of a 2.3% inflation increase as measured by the SNF “market basket,” offset by a 0.6% decrease intended to correct a CMS forecasting error that was made in an inflation

increase for the Medicare fiscal year ending September 30, 2009. CMS also implemented MDS 3.0, a new patient assessment tool for the collection of clinical data to be used for classification into the RUG categories for all Medicare patients and those Medicaid patients in RUG-based reimbursement states. In addition to the patient assessment tool, CMS expanded RUG categories to 66 under RUG IV up from 53 under RUG III. As discussed in our results of operations, these Medicare reimbursement changes have increased our Medicare revenue and our Medicare rate per patient day. The new regulations have also resulted in an increase in costs to complete the patient assessments required by these new rules.

CMS issued a proposed rule on April 28, 2011, regarding Medicare payment rates for skilled nursing centers for fiscal year 2012. The proposed rule discussed two options for updating payment rates for skilled nursing centers under the prospective payment system that, if finalized, would be effective for skilled nursing centers on October 1, 2011. We cannot predict at this time which, if either, of the options proposed will be implemented or what their ultimate impact will be. Option one is intended to address the increase in Medicare payments that have occurred following the changes implemented by CMS in October 2010 as part of the transition to the new RUG IV system and imposes (a) a negative adjustment to RUG IV therapy rates, and (b) a net market basket increase of 1.5%. CMS has projected the net impact of the proposed changes under option one would be an 11.3% decrease in payments to skilled nursing centers.

Under option two, skilled nursing centers would receive the net 1.5% market basket payment increase discussed in option one, while CMS continues to collect more data regarding the RUG IV system that was implemented on October 1, 2010. Under both option one and two, the 1.5% net market basket increase is the result of a 2.7% market basket inflation increase, less a 1.2% adjustment to account for the effect of a productivity adjustment.

The proposed rule would also change the method for payment of group therapy services under RUG IV. Under the proposed rule, group therapy would be defined as therapy sessions with four patients who are performing similar therapy activities. An additional change, for purposes of assigning patients to RUGs IV payment categories, would be that the minutes of group therapy would now be allocated consistent with the rules for concurrent therapy and allocated based upon the number of patients in the therapy session.

Therapy Services. There are annual Medicare Part B reimbursement limits on therapy services that can be provided to an individual. The limits effective January 1, 2011 impose a $1,870 per patient annual ceiling on physical and speech therapy services, and a separate $1,870 per patient annual ceiling on occupational therapy services. CMS established an exception process to permit therapy services in certain situations and as is standard within our industry, we provide services that are reimbursed under the exceptions process. The exceptions process has been extended several times, most recently by the Medicare and Medicaid Extenders Act of 2010 which extended this exception process through December 31, 2011. It is unknown if any further extension of the therapy cap exceptions will be included in future legislation. If the exception process is discontinued, it is expected that the reimbursement limitations will reduce therapy revenues and negatively impact our operating results and cash flows.

Medicaid

Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. The federal government made an effort to address the financial challenges state Medicaid programs are facing by increasing the amount of Medicaid funding available to states. On February 17, 2009, the American Recovery and Reinvestment Act of 2009, (“ARRA”) was enacted. Among other provisions, ARRA provided $87 billion for a temporary period to assist states in maintaining and expanding Medicaid enrollment. Pressures on state budgets are expected to continue in the future and are expected to result in Medicaid rate reductions as the ARRA provisions that assist states in maintaining and expanding Medicaid ended on December 31, 2010. In August 2010, the federal government passed legislation that is providing limited additional funding to assist states in

matching Medicaid, similar to some of the ARRA provisions. The additional matching funds will continue through June 2011 and will be less in the second quarter of 2011 than the first quarter of 2011. It is unclear what additional matching fund enhancements, if any, will continue past June 30, 2011.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in the third quarter of 2010 were the primary contributor to our 2.4% increase in average rate per day for Medicaid patients in 2011, but were accompanied by provider tax increases in certain states, which reduced the net effective Medicaid rate increase to approximately 1.8%.

We are unable to predict what, if any, reform proposals or reimbursement limitations will be implemented in the future, or the effect such changes would have on our operations. For the three months ended March 31, 2011, we derived 34.8% and 49.1% of our total patient and resident revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our profitability.

We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so, if at all. However, private payors, including managed care payors, are increasingly demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments, which can result in significant losses to health care providers if patients require expensive treatment not adequately covered by the capitated rate.

Licensure and other Health Care Laws

All our nursing centers must be licensed by the state in which they are located in order to accept patients, regardless of payor source. In most states, nursing centers are subject to certificate of need laws, which require us to obtain government approval for the construction of new nursing centers or the addition of new licensed beds to existing centers. Our nursing centers must comply with detailed statutory and regulatory requirements on an ongoing basis in order to qualify for licensure, as well as for certification as a provider eligible to receive payments from the Medicare and Medicaid programs. Generally, the requirements for licensure and Medicare/Medicaid certification are similar and relate to quality and adequacy of personnel, quality of medical care, record keeping, dietary services, resident rights, and the physical condition of the center and the adequacy of the equipment used therein. Each center is subject to periodic inspections, known as “surveys” by health care regulators, to determine compliance with all applicable licensure and certification standards. Such requirements are both subjective and subject to change. If the survey concludes that there are deficiencies in compliance, the center is subject to various sanctions, including but not limited to monetary fines and penalties, suspension of new admissions, non-payment for new admissions and loss of licensure or certification. Generally, however, once a center receives written notice of any compliance deficiencies, it may submit a written plan of correction and is given a reasonable opportunity to correct the deficiencies. There can be no assurance that, in the future, we will be able to maintain such licenses and certifications for our facilities or that we will not be required to expend significant sums in order to comply with regulatory requirements. Recently, we have experienced an increase in the severity of survey citations and the size of monetary penalties, consistent with industry trends.

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of March 31, 2011, summarized by the period in which payment is due, as follows (dollar amounts in thousands):


			Less than		1 to 3		3 to 5		After
Contractual Obligations	Total		1 year		Years		Years		5 Years
Long-term debt obligations (1)	$	35,856	$	2,302	$	4,535	$	29,019	$	—
Settlement obligations (2)	$	503	$	503	$	—	$	—	$	—
Series C Preferred Stock (3)	$	4,918	$	4,918	$	—	$	—	$	—
Elimination of Preferred Stock Conversion feature (4)	$	5,151	$	687	$	1,374	$	1,374	$	1,716
Operating leases	$	572,279	$	22,690	$	47,028	$	49,309	$	453,252
Required capital expenditures under operating leases (5)	$	19,947	$	290	$	580	$	580	$	18,497

Total	$	638,654	$	31,390	$	53,517	$	80,282	$	473,465


(1)		Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our revolving line of credit and capital lease obligations.

(2)		Settlement obligations relate to professional liability cases that will be paid within the next twelve months. The liabilities are included in our current portion of self insurance reserves.

(3)		Series C Preferred Stock equals the redemption value at the preferred shareholder’s earliest redemption date.

(4)		Payments to Omega for the elimination of the preferred stock conversion feature in connection with restructuring the preferred stock and master lease agreements. Monthly payments of approximately $57,000 will be made through the end of the initial lease period that ends in September 2018.

(5)		Includes annual expenditure requirements under operating leases.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to 2.5 times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $2.0 million as of March 31, 2011. The terms of such agreements are from one to three years and automatically renew for one year if not terminated by us or the employee. In addition, upon the occurrence of any triggering event, those certain members of management may elect to require that we purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of our common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of our stock on March 31, 2011, the maximum contingent liability for the repurchase of the equity grants is approximately $0.7 million. No amounts have been accrued for this contingent liability for members of management we currently employ.

Results of Operations

The results of operations presented have been reclassified to present the effects of certain divestitures discussed in the overview to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The following tables present the unaudited interim statements of income and related data for the three month periods ended March 31, 2011 and 2010:


	Three Months Ended March 31,
(in thousands)	2 011			2 010			Change			%
PATIENT REVENUES, net	$	77,130		$	70,152		$	6,978			9.9

EXPENSES:
Operating		60,857			55,402			5,455			9.8
Lease		5,714			5,602			112			2.0
Professional liability		1,691			1,414			277			19.6
General and administrative		6,054			4,702			1,352			28.8
Depreciation and amortization		1,556			1,416			140			9.9

Total expenses		75,872			68,536			7,336			10.7

OPERATING INCOME		1,258			1,616			(358	)		(22.2	)

OTHER INCOME (EXPENSE):
Interest income		3			2			1			50.0
Interest expense		(454	)		(398	)		(56	)		(14.1	)
Debt retirement costs		(112	)		(127	)		15			11.8

		(563	)		(523	)		(40	)		7.6

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		695			1,093			(398	)		(36.4	)
PROVISION FOR INCOME TAXES		(249	)		(386	)		137			35.5

NET INCOME FROM CONTINUING OPERATIONS	$	446		$	707		$	(261	)		(36.9	)


	Three Months Ended
	March 31,
*Percentage of Net Revenues*	2011			2010
PATIENT REVENUES, net		100.0	%		100.0	%

EXPENSES:
Operating		78.9			79.0
Lease		7.5			8.0
Professional liability		2.2			2.0
General and administrative		7.8			6.7
Depreciation and amortization		2.0			2.0

Total expenses		98.4			97.7

OPERATING INCOME		1.6			2.3

OTHER INCOME (EXPENSE):
Interest income		—			—
Interest expense		(0.6	)		(0.6	)
Debt retirement costs		(0.1	)		(0.2	)

		(0.7	)		(0.8	)

INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		0.9			1.5
PROVISION FOR INCOME TAXES		(0.3	)		(0.5	)

NET INCOME FROM CONTINUING OPERATIONS		0.6	%		1.0	%

Three Months Ended March 31, 2011 Compared With Three Months Ended March 31, 2010

Patient Revenues

Patient revenues increased to $77.1 million in 2011 from $70.2 million in 2010, an increase of $6.9 million, or 9.9%.

The following table summarizes key revenue and census statistics for continuing operations for each period:


	Three Months Ended
	March 31,
	2011			2010
Skilled nursing occupancy		77.3	%		77.5	%
As a percent of total census:
Medicare census		14.4	%		13.2	%
Managed care census		1.9	%		1.6	%
As a percent of total revenues:
Medicare revenues		34.8	%		30.5	%
Medicaid revenues		49.1	%		53.7	%
Managed care revenues		4.0	%		3.2	%
Average rate per day:
Medicare	$	455.36		$	393.64
Medicaid	$	148.67		$	145.25
Managed care	$	413.75		$	383.15

Medicare census increased approximately 9.1% in 2011, and contributed approximately $1.8 million to the revenue increase experienced in the first quarter. This increase is primarily attributable to the investments we have made to improve our skilled care offerings. The average Medicare rate per patient day for 2011 increased 15.7% compared to 2010. On October 1, 2010, CMS implemented RUG IV in connection with the MDS 3.0 patient assessment tool, RUG IV expanded RUG categories to 66 from 53 under RUG III. Also on October 1, 2010, CMS implemented a Medicare rate increase of 1.7% for the annual SNF market basket adjustment. The combined effect of these rate changes, together with changes in patient acuity levels, increased revenue by $3.3 million in the first quarter of 2011.

Medicaid average daily census was 3.1% lower in 2011, decreasing revenue by $1.2 million in the first quarter of 2011. The average Medicaid rate per patient day for 2011 increased 2.4% compared to 2010, and resulted in revenue increases of $0.9 million in 2011. This increase is the result of rate increases in certain states, partially funded by increased provider taxes, and increasing patient acuity levels. Taking higher provider taxes into consideration, the net increase in average rate per day for Medicaid patients was 1.8%. The decrease in Medicaid census reflects our focus on improving our skilled mix.

Managed care rates and census contributed approximately $0.7 million of the total revenue increase. The average managed care rate per patient day for 2011 increased 8.0% compared to 2010 and managed care average daily census increased 21.2%. The remaining revenue increases resulted from increased Medicare Part B, private and hospice payors.

Operating expense

Operating expense increased to $60.9 million in 2011 from $55.4 million in 2010, an increase of $5.5 million, or 9.8%. The increase in operating expense is primarily attributable to cost increases associated with our increased revenue as well as investment in our operating initiatives focused on improving our skilled mix and occupancy. Operating expense decreased to 78.9% of revenue in 2011, compared to 79.0% of revenue in 2010.

The largest component of operating expense is wages, which increased to $37.1 million in 2011 from $33.7 million in 2010, an increase of $3.4 million, or 9.9%. The increase in wages was primarily due to labor costs associated with the 10.4% increase in Medicare and managed care patients, competitive labor markets in most of the areas in which we operate and regular merit and inflationary raises for personnel (increase of approximately 2.4% for the year). In accordance with our strategic initiatives to increase our high acuity patient care capabilities and grow our skilled mix and occupancy we have added additional registered nurses and therapists to attract and serve the needs of these patients, including approximately $1.3 million in therapy staffing costs, $0.5 million in nursing center staffing costs to improve our ability to market and care for high acuity patients and $0.4 million for increased wages that resulted from the transition to the new MDS 3.0 patient assessment tool in our facilities.

Provider taxes increased approximately $0.2 million in 2011, primarily due to increases in tax rates and higher census in certain states in which we operate.

Workers compensation insurance expense increased approximately $0.3 million in 2011 compared to 2010. The increase is the result of better claims experience in 2010 compared to 2011.

The remaining increases in operating expenses are primarily related to growth in Medicare and managed care census.

Lease expense

Lease expense increased to $5.7 million in 2011 from $5.6 million in 2010. The primary reason for the increase in lease expense was rent for lessor funded property renovations.

Professional liability

Professional liability expense was $1.7 million in 2011 compared to $1.4 million in 2010, an increase of $0.3 million. We were engaged in 33 professional liability lawsuits as of March 31, 2011, compared to 35 as of March 31, 2010. Our cash expenditures for professional liability costs of continuing operations were $1.3 million and $1.2 million for 2011 and 2010, respectively. Professional liability cash expenditures can fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies and on the costs incurred in defending and settling existing claims.

General and administrative expense

General and administrative expenses were approximately $6.1 million in 2011, compared to $4.7 million in 2010, an increase of $1.4 million, or 28.8%. Costs of our strategic initiatives accounted for approximately $0.9 million, over one half of the increase, including compensation costs related to new positions of approximately $0.4 million, costs related to the continued implementation of electronic medical records of approximately $0.2 million, charges for severance and hiring costs of $0.2 million and consulting services costs of $0.1 million. Performance-based incentive expense was $0.2 million higher in 2011.

Depreciation and amortization

Depreciation and amortization expense was approximately $1.6 million and $1.4 million in 2011 and 2010, respectively.

Interest expense

Interest expense increased to $0.5 million in 2011 compared to $0.4 million in 2010. As discussed further in “Capital Resources” the increase in interest expense is due to the change in interest rates on

our Mortgage Loan to a fixed rate of 7.07% from 3.98% at March 31, 2010 and the additional $2.4 million in borrowings for capital improvements at our owned homes.

Income from continuing operations before income taxes; income from continuing operations per common share

As a result of the above, continuing operations reported a loss before income taxes of $0.7 million in 2011 compared to income of $1.1 million in 2010. The provision for income taxes was $0.2 million in 2011, an effective rate of 35.8% and $0.4 million in 2010, an effective rate of 35.3%. The basic and diluted income per common share from continuing operations were each $0.06 in 2011 compared to $0.11 each in 2010.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is the net cash flow provided by the operating activities of our facilities. We believe that these internally generated cash flows will be adequate to service existing debt obligations, fund required capital expenditures as well as provide cash flows for investing opportunities. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long term. Options for our cash include, but are not limited to, capital improvements, dividends, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations, preferred stock redemptions as well as initiatives to improve facility performance. We review these potential uses and align them to our cash flows with a goal of achieving long term success. We plan to invest in business initiatives and development that will increase our operating expenses for the next one to two years as part of our plan to improve our high acuity offerings.

Net cash provided by operating activities of continuing operations totaled $0.9 million and $3.3 million in 2011 and 2010, respectively. Operating activities of discontinued operations used cash of $12,000 and provided cash of $0.7 million in 2011 and 2010, respectively.

Investing activities of continuing operations used cash of $3.9 million and $0.6 million in 2011 and 2010, respectively. These amounts primarily represent cash used for purchases of property and equipment. We have used between $6.4 million and $9.4 million for capital expenditures of continuing operations in each of the three calendar years ended December 31, 2010. The $2.0 million in purchases of property and equipment during 2011 also includes $0.4 million in assets added by the entity constructing the West Virginia facility that we are consolidating. We borrowed $2.4 million in our March 2011 mortgage refinancing to complete renovations at the four owned nursing centers that secure the mortgage loan, and have classified those funds as restricted cash. Investing activities of discontinued operations used cash of $45,000 during 2010.

Financing activities of continuing operations provided cash of $1.7 million in 2011 and used cash of $1.2 million in 2010. Net cash provided in 2011 primarily resulted from payment and refinancing of existing mortgage obligations of $20.6 million and paying $0.8 million in financing costs in connection with the new mortgage loan under which we borrowed $23.0 million, including approximately $2.4 million to fund capital improvements at our owned centers. Net cash used in 2010 primarily resulted from payment and refinancing of existing debt obligations of $3.8 million and paying $0.4 million in financing costs in connection with the new revolving credit facility under which we borrowed $3.5 million. Financing activities reflect a total of $0.4 million for common and preferred stock dividends in both 2011 and 2010.

Our cash expenditures related to self-insured professional liability costs from continuing operations were $1.3 million and $1.2 million for the three months ended March 31, 2011 and 2010, respectively. Although we work diligently to limit the cash required to settle and defend professional liability claims, a

significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

Electronic Medical Records

During 2010, we developed a plan to introduce EMR to all our facilities. We expect to complete our EMR implementation plan during the remainder of 2011. It is anticipated that our investment in EMR will provide operational improvements through automation of record keeping and improvement in clinical records quality. Through March 31, 2011 we have capitalized $2.2 million related to our EMR initiative and expensed $0.8 million for training costs since we began this implementation. During the three months ended March 31, 2011, we capitalized $0.4 million related to the EMR initiative and expensed $0.3 million in training costs. We expect to have total training expenses during 2010 and 2011 related to implementing our electronic medical record system of between $1.8 million and $2.0 million and total capital expenditures during this period of approximately $3.6 million.

Dividends

On May 10, 2011, the Board of Directors declared a quarterly dividend on common shares of $0.055 per share. We first began paying a quarterly common dividend in August 2009. While the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, our financial condition, funds from operations, the level of our capital expenditures and our future business prospects and opportunities.

Preferred Stock

At March 31, 2011, we have outstanding 5,000 shares of Series C Redeemable Preferred Stock (“Preferred Stock”) that has a stated value of approximately $4.9 million which pays an annual dividend rate of 7% of its stated value. Dividends on the Preferred Stock are paid quarterly in cash. The Preferred Stock was issued to Omega in 2006 and is not convertible, but has been redeemable at its stated value at Omega’s option since September 30, 2010, and since September 30, 2007, has been redeemable at its stated value at our option. Redemption under our option or Omega’s is subject to certain limitations. We believe we have adequate resources to redeem the Preferred Stock if Omega were to elect to redeem it.

Professional Liability

Since March 9, 2001, we purchased professional liability insurance coverage for our facilities that, based on historical claims experience, was substantially less than the amount required to satisfy claims that were incurred. We have essentially exhausted all of our insurance coverage for claims first asserted prior to May 31, 2010.

Effective June 1, 2010, our nursing centers are covered by one of two professional liability insurance policies. Our 25 nursing centers in Arkansas, Kentucky, Tennessee, and West Virginia are currently covered by an insurance policy with coverage limits of $250,000 per medical incident and total annual aggregate policy limits of $750,000. This policy provides the only commercially affordable insurance coverage available for claims made during this period against these nursing centers. Our 21 nursing centers in Alabama, Florida, Ohio and Texas are currently covered by an insurance policy with coverage limits of $1.0 million per medical incident, subject to a deductible of $0.5 million per claim, with a total annual aggregate policy limit of $15.0 million and a sublimit per center of $3.0 million.

As of March 31, 2011, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred but unreported claims of $17.9 million. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of March 31, 2011, we had $27.3 million of outstanding long term debt and capital lease obligations. The $27.3 million total includes $0.4 million in capital lease obligations and $0.4 million in a construction loan for the nursing center under construction in West Virginia. The balance of the long term debt is comprised of $23.0 million owed on our mortgage loan and $3.5 million owed on our revolving line of credit.

On March 1, 2011, we entered into an agreement with a syndicate of banks to refinance our mortgage loan that was scheduled to mature in August 2011 and extend the maturity of our revolving credit facility. Under the terms of the new agreement, the syndicate of banks provided mortgage debt of $23 million and the proceeds were used to retire our previous mortgage loan and will fund approximately $2.4 million in capital improvements at our owned centers. The Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5% but is fixed at 7.07% based on the interest rate swap transaction described below. The new mortgage loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these centers.

The new agreement extended the maturity of our $15 million revolving credit facility from March 2013 to March 2016. As amended, the Revolver has an interest rate of LIBOR plus 4.5%.

In connection with the March 2011 refinancing agreements, we recognized debt retirement costs of $0.1 million which were recorded in earnings during the first quarter of 2011. These costs relate to the write off of deferred financing costs of the Mortgage Loan. In connection with the March 2011 refinancing, we recorded total deferred loan costs of $0.8 million. The Mortgage Loan and the revolver are cross-collateralized.

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. As of March 31, 2011, we have $3.5 million in borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.0% of the amount outstanding. We have a letter of credit of $4.6 million to serve as a security deposit for our leases. Considering the balance of eligible accounts receivable at March 31, 2011, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15.0 million, the balance available for borrowing under the revolving credit facility is approximately $7.0 million.

Our lending agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. We are in compliance with all such covenants at March 31, 2011.

Our calculated compliance with financial covenants is presented below:


			Level at
	Requirement		March 31, 2011
Minimum fixed charge coverage ratio		≥1.05:1.00	1.15:1.00
EBITDAR (mortgaged facilities)	≥$3.3 million		$4.2 million

As part of the debt agreements entered into in March 2011, we entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 7.07% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

Lease agreement — West Virginia Nursing Center

On July 14, 2010 we entered into an agreement with a real estate developer that will construct, furnish, and equip a 90 bed skilled nursing center near Milton, West Virginia which we will lease upon completion. The center will utilize a Certificate of Need we initially obtained in the June 2009 acquisition of certain assets of a skilled nursing center in Milton, West Virginia. The initial lease term is 20 years from the date the center is completed and fit for occupancy as a skilled nursing center. We have the option to renew the lease for two additional five-year periods. Construction on the nursing center began in November 2010 and it is estimated the center will be completed in late 2011. Annual lease costs will be based initially on 10.25% of the total project costs and provides for annual increases in lease payments equal to the increase in the Consumer Price Index, not to exceed 2.5%. The lease agreement grants us the right to purchase the center beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the total project cost.

Center Renovations

During 2005, we began an initiative to complete strategic renovations of certain facilities to improve occupancy, quality of care and profitability. We developed a plan to begin with those facilities with the greatest potential for benefit, and began the renovation program during the third quarter of 2005. As of March 31, 2011, we have completed renovations at fifteen facilities and we are developing plans for additional renovation projects.

A total of $22.2 million has been spent on these renovation programs to date, with $15.0 million financed through Omega, $6.1 million financed with internally generated cash, and $1.1 million financed with long-term debt.

For the fifteen facilities with renovations completed as of the beginning of the first quarter 2011 compared to the last twelve months prior to the commencement of renovation, average occupancy increased from 69.8% to 77.4% and Medicare average daily census increased from a total of 177 to 238 in the first quarter of 2011.

In April 2011, we entered into an amendment to the Master lease with Omega under which Omega agreed to provide an additional $5.0 million to fund renovations to four nursing centers located in Arkansas, Kentucky, Ohio and Texas that are leased from Omega. The annual base rent related to these facilities will be increased to reflect the amount of capital improvements to the respective facilities as the related expenditures are made. The increase is based on a rate of 10.25% per year of the amount financed under this amendment. This arrangement is similar to amendments entered into in 2009, 2006 and 2005 that provided financing totaling $15.0 million that was used to fund renovations at twelve nursing centers leased from Omega.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other third-party revenue sources. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard,

accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by us in the processing of our invoices, could adversely affect our liquidity and results of operations.

Accounts receivable attributable to patient services of continuing operations totaled $29.2 million at March 31, 2011 compared to $26.7 million at December 31, 2010, representing approximately 34 days revenue in accounts receivable for both periods.

The allowance for bad debt was $2.9 million and $2.8 million at March 31, 2011 and December 31, 2010, respectively. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Inflation

Based on contract pricing for food and other supplies and recent market conditions, we expect cost increases in 2011 to be higher than the increases in 2010. We expect salary and wage increases for our skilled health care providers to continue to be higher than average salary and wage increases, as is common in the health care industry.

Off-Balance Sheet Arrangements

We have a letter of credit outstanding of approximately $4.6 million as of March 31, 2011, which serves as a security deposit for our facility lease with Omega. The letter of credit was issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to, our ability to successfully construct and operate the new nursing center in West Virginia, our ability to increase census at our renovated facilities, changes in governmental reimbursement, including the impact of an April 2011 proposed regulation that could result in a reduction in Medicare reimbursement as of October 2011, government regulation, the impact of the recently adopted federal health care reform or any future health care reform, any increases in the cost of borrowing under our credit agreements, our ability to comply with covenants contained in those credit agreements, the outcome of professional liability lawsuits and claims, our ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, the impact of future licensing surveys, the outcome of proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations applicable to our business, costs and impacts associated with the implementation of our electronic medical records plan, the costs of investing in our business initiatives and development, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our facilities, changing economic

and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations, the effect of changes in accounting policies as well as others. Investors also should refer to the risks identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2010 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of March 31, 2011, we had outstanding borrowings of approximately $26.5 million that were subject to variable interest rates. In connection with our March 2011 financing agreement, we entered into an interest rate swap with respect to the mortgage loan to mitigate the floating interest rate risk of such borrowing. Therefore, only approximately $3.5 million of the $26.5 million remains subject to variable interest rate risk after the March 1, 2011 refinancing transaction. In the event that interest rates were to change 1%, the impact on future pre-tax cash flows would be approximately $35,000 annually, representing the impact of increased or decreased interest expense on variable rate debt.


ITEM 4.		CONTROLS AND PROCEDURES

Advocat, with the participation of our principal executive and financial officers has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2011. Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that has occurred during our fiscal quarter ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facility. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of March 31, 2011, we are engaged in 33 professional liability lawsuits. Seven lawsuits are currently scheduled for trial during the next twelve months, and it is expected that additional cases will be set for trial. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against us and certain of our subsidiaries and Garland Nursing & Rehabilitation Center (the “Facility”). The complaint alleges that the defendants breached their statutory and contractual obligations to the residents of the Facility over the past five years. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. We intend to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of the lawsuits, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.


ITEM 6.		EXHIBITS

The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ADVOCAT INC.
May 10, 2011	By:	/s/ William R. Council, III
		William R. Council, III
		President and Chief Executive Officer, Principal Executive Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant


	By:	/s/ L. Glynn Riddle, Jr.
		L. Glynn Riddle, Jr.
		Executive Vice President and Chief Financial Officer, Secretary, Principal Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant


Exhibit
Number		Description of Exhibits
3.1		Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement No. 33-76150 on Form S-1).

3.2		Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the Company’s quarterly report on Form 10-Q for the quarter ended September 30, 2006).

3.3		Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement No. 33-76150 on Form S-1).

3.4		Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2007).

3.5		Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company’s Form 8-A filed March 30, 1995).

3.6		Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.4 to the Company’s quarterly report on Form 10-Q for the quarter ended March 31, 2001).

4.1		Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company’s Registration Statement No. 33-76150 on Form S-1).

4.2		Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998).

4.3		Amendment No. 1 to the Amended and Restated Rights Agreement, dated March 19, 2005, by and between Advocat Inc. and SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit 2 to Form 8-A/A filed on March 24, 2005).

4.4		Second Amendment to the Amended and Restated Rights Agreement, dated August 15, 2008, by and between Advocat Inc. and ComputerShare Trust Company, N.A., as successor to SunTrust Bank (incorporated by reference to Exhibit 3 to Form 8-A/A filed on August 18, 2008).

4.5		Third Amendment to Amended and Restated Rights Agreement, dated August 14, 2009, between Advocat, Inc. and Computershare Trust Company, N.A, as successor to SunTrust Bank, (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A/A filed on August 14, 2009).

10.1		Eleventh Amendment to the Amended and Restated Master Lease (“Master Lease”) between the Company and Sterling Acquisition Corp., an affiliate of Omega Healthcare Investors, Inc.

10.2		Amended and Restated Revolving Loan and Security Agreement, dated as of February 28, 2011, is by and among Diversicare Management Services Co., a Tennessee corporation, and those certain other entities set forth, The PrivateBank and Trust Company, an Illinois banking corporation in its individual capacity, and the other financial institutions parties thereto, and The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as administrative agent for the Lenders

10.3		Amended and Restated Guaranty dated as of February 28, 2011, by Advocat Inc., to and for the benefit of The PrivateBank and Trust Company

10.4		Term Loan and Security Agreement dated as of February 28, 2011, is by and among the subsidiaries of the Company, The PrivateBank and Trust Company, an Illinois banking corporation in its individual capacity and the other financial institutions parties thereto, and The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as administrative agent for the Lenders

10.5		Guaranty dated as of February 28, 2011, by Advocat Inc., a Delaware corporation to and for the benefit of The PrivateBank and Trust Company,

10.6		Swap Agreement between the Company and The PrivateBank and Trust Company dated as of March 1, 2011

*10.7		Employment Agreement effective June 28, 2010, by and among Advocat Inc., a Delaware corporation, and William David Houghton

*10.8		Amendment No. 1. effective March 9, 2011 to Employment Agreement by and among Advocat Inc., a Delaware corporation, and William David Houghton

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a).

32		Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).


*		Indicates management contract or compensatory plan or arrangement

Exhibit 10.1

ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

This Eleventh Amendment to Consolidated Amended and Restated Master Lease (this “ Amendment ”) is executed and delivered as of April 18, 2011 by and between STERLING ACQUISITION CORP., a Kentucky corporation (“ Lessor ”), the address of which is 200 International Circle, Suite 3500, Hunt Valley, MD 21030, and DIVERSICARE LEASING CORP., a Tennessee corporation, the address of which is 1621 Galleria Boulevard, Brentwood, TN 37027.

RECITALS:

A. Lessee has executed and delivered to Lessor a Consolidated Amended and Restated Master Lease dated as of November 8, 2000, but effective as of October 1, 2000 (the “ Master Lease ”), as amended by a First Amendment to Consolidated Amended and Restated Master Lease dated as of September 30, 2001, a Second Amendment to Consolidated Amended and Restated Master Lease dated as of June 15, 2005 (the “ Second Amendment ”), a Third Amendment to Consolidated Amended and Restated Master Lease dated as of October 20, 2006 (the “ Third Amendment ”), a Fourth Amendment to Consolidated Amended and Restated Master Lease dated as of April 1, 2007, a Fifth Amendment to Consolidated Amended and Restated Master Lease dated as of August 10, 2007, a Sixth Amendment to Consolidated Amended and Restated Master Lease dated as of March 14, 2008, a Seventh Amendment to Consolidated Amended and Restated Master Lease dated as of October 24, 2008, an Eighth Amendment to Consolidated Amended and Restated Master Lease dated as of March 31, 2009, a Ninth Amendment to Consolidated Amended and Restated Master Lease dated as of May 5, 2009 (the “ Ninth Amendment ”), and a Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8, 2009 (collectively, the “ Existing Master Lease ”) pursuant to which Lessee leases from Lessor certain healthcare facilities.

B. Lessee has requested that Lessor to make available to Lessee additional capital improvements funds in the amount of Five Million Dollars ($5,000,000), and Lessor desires to do so on the terms and conditions of this Amendment.

NOW THEREFORE, the parties agree as follows:

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

2. Tenant Improvement Allowance . Pursuant to the Second Amendment, Lessor made available to Lessee an Improvement Allowance of Five Million Dollars ($5,000,000). Pursuant to the Third Amendment, Lessor made an additional Improvement Allowance of Five Million Dollars ($5,000,000) available to Lessee. Pursuant to the Ninth Amendment, Lessor made an additional Improvement Allowance of Five Million Dollars ($5,000,000) available to Lessee. Lessor hereby makes available to Lessee an additional improvement allowance equal to

Five Million Dollars ($5,000,000) to be used for certain capital improvements to the Facilities. Such additional improvement allowance shall be used only for completion of capital improvements to the Facilities listed on Exhibit A to this Amendment, which shall be approved and constructed in accordance with the terms and provisions of Paragraph 2 of the Second Amendment. The term “Capital Improvements” as and where used in Paragraph 2 of the Second Amendment shall be deemed to include such capital improvements. The additional improvement allowance shall be requested and disbursed in accordance with the provisions of Paragraph 3 of the Second Amendment. The term “Improvement Allowance”, as and where used in Paragraph 3 of the Second Amendment, shall be deemed to include and refer to the additional improvement allowance provided for in this paragraph, except that such additional improvement allowance shall be available for Capital Improvements completed on or before February 28, 2012 and the final request for disbursement shall be no later than May 31, 2012. The annual Base Rent payable under the Existing Master Lease shall be increased by the Improvement Allowance Adjustment Amount for each disbursement of such additional improvement allowance as provided in Paragraph 4 of the Second Amendment. In the event Lessor fails to pay Lessee any installment request for the additional improvement allowance as provided in Paragraph 3 of the Second Amendment, Lessee shall have the rights and remedies provided in Paragraph 4 of the Second Amendment and the provisions of Paragraph 4 of the Second Amendment shall apply to Lessee’s exercise of such rights and remedies.

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


		To Lessee:		Diversicare Leasing Corp. c/o Advocat Inc. 1621 Galleria Boulevard Brentwood, TN 37027 Attention: Chief Financial Officer Telephone No.: (615) 771-7575 Facsimile No.: (615) 771-7409

		To Lessor:		Sterling Acquisition Corp. c/o Omega Healthcare Investors, Inc. 200 International Circle, Suite 3500 Hunt Valley, MD 21030 Telephone No.: (410) 427-1700 Facsimile No.: (410) 427-8800

		And with copy to (which shall not constitute notice):		Doran Derwent, PLLC 5960 Tahoe Dr., S.E., Suite 101 Grand Rapids, Michigan 49546 Attn: Mark E. Derwent Telephone No.: (616) 451-8690 Facsimile No.: (616) 451-8697

4. Representations and Warranties of Lessee . Lessee hereby represents and warrants to Lessor that (i) it has the right and power and is duly authorized to enter into this Amendment; and (ii) the execution of this Amendment does not and will not constitute a breach of any provision contained in any agreement or instrument to which Lessee is or may become a party or by which Lessee is or may be bound or affected.

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

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

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

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

[SIGNATURE PAGES AND ACKNOWLEDGEMENTS FOLLOW]

Signature Page to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


LESSOR: STERLING ACQUISITION CORP., a Kentucky corporation
By:	/s/ Daniel J. Booth
	Name:	Daniel J. Booth
	Title:	Chief Operating Officer


STATE OF MARYLAND			)

COUNTY OF BALTIMORE			)

This instrument was acknowledged before me on the 15th day of April, 2011, by Daniel J. Booth, the COO of STERLING ACQUISITION CORP., a Kentucky corporation, on behalf of said company.



	/s/ Chin-Tsu Tai
	Notary Public, Baltimore County, MD
	My commission expires: September 9, 2012

Signature Page 1 of 2

Signature Page to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


LESSEE: DIVERSICARE LEASING CORP., a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP and CFO


STATE OF TENNESSEE			)

COUNTY OF WILLIAMSON			)

This instrument was acknowledged before me on the 18th day of April, 2011, by Glynn Riddle, the EVP & CFO of DIVERSICARE LEASING CORP., a Tennessee corporation, on behalf of said company



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Signature Page 2 of 2

Acknowledgement to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

The undersigned hereby consent to the transactions contemplated by this Eleventh Amendment to Consolidated Amended and Restated Master Lease (this “ Amendment ”), ratify and affirm their respective Guaranties, Pledge Agreements, Security Agreements, Subordination Agreements and other Transaction Documents, and acknowledge and agree that the performance of the Master Lease and obligations described therein are secured by their Guaranties, Pledge Agreements, Security Agreement, Subordination Agreement and other Transaction Documents on the same terms and conditions in effect prior to this Amendment.


ADVOCAT, INC. a Delaware corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO


STATE OF TENNESSEE		)

COUNTY OF WILLIAMSON		)

The foregoing instrument was acknowledged before me this 18th day of April, 2011, by Glynn Riddle, who is EVP & CFO of ADVOCAT, INC. a Delaware corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Acknowledgement Page 1 of 5

Acknowledgment to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

The foregoing instrument was acknowledged before me this 18th day of April, 2011, by Glynn Riddle, who is EVP & CFO of DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Acknowledgement Page 2 of 5

Acknowledgment to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


ADVOCAT FINANCE INC., a Delaware corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

The foregoing instrument was acknowledged before me this 18th day of April, 2011, by Glynn Riddle, who is EVP & CFO of ADVOCAT FINANCE INC., a Delaware corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Acknowledgement Page 3 of 5

Acknowledgment to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

The foregoing instrument was acknowledged before me this 18th day of April, 2011, by Glynn Riddle, who is EVP & CFO of STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation, on behalf of the corporation, who acknowledged the same to be his or her free act and deed and the free act and deed of the corporation.



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Acknowledgement Page 4 of 5

Acknowledgment to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE


DIVERSICARE TEXAS I, LLC
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

DIVERSICARE BALLINGER, LLC DIVERSICARE DOCTORS, LLC DIVERSICARE ESTATES, LLC DIVERSICARE HUMBLE, LLC DIVERSICARE KATY, LLC DIVERSICARE NORMANDY TERRACE, LLC DIVERSICARE TREEMONT, LLC
BY:	DIVERSICARE TEXAS I, LLC,
	its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

The foregoing instrument was acknowledged before me this 18th day of April, 2011, by Glynn Riddle, who is EVP & CFO of DIVERSICARE TEXAS I, LLC, on behalf of itself and as the sole member of each of DIVERSICARE BALLINGER, LLC, DIVERSICARE DOCTORS, LLC, DIVERSICARE ESTATES, LLC, DIVERSICARE HUMBLE, LLC, DIVERSICARE KATY, LLC, DIVERSICARE NORMANDY TERRACE, LLC, and DIVERSICARE TREEMONT, LLC, each a Delaware limited liability company, on behalf of the limited liability companies, who acknowledged the same to be his or her free act and deed and the free act and deed of the limited liability companies.



	/s/ Jacqueline S. Reed
	Notary Public, Tenn. County, Williamson
	My commission expires: 1/12/2014

Acknowledgement Page 5 of 5

Exhibit A to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

1. Best Care Nursing and Rehabilitation Center Therapy Addition Omega Project Summary

April 5, 2011

Project Address:
Best Care Nursing and Rehabilitation Center
Dogwood Ridge
Wheelersburg, Ohio 45694

Preliminary Project Scope:

Take the existing 739 square feet of current therapy space and incorporate into a 1,765 square foot addition to give the facility a new 2504 therapy department. Also adding a 338 square foot canopy for new exterior entrance from parking lot, plus stuccoing walls seen when using this entrance.

Facility Data:

Facility built: 1974
Facility current square footage: 41,330
Square including therapy addition: 43,095
Currently licensed for 139 beds which will not change

Estimated Project Cost:

Construction: $381,457.00

6% Contingency: $22,887.00

Total Estimated Project Cost: $404,344.00

Exhibit A — Page 1 of 4

Exhibit A to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

2. Carter Nursing & Rehabilitation Center Omega Project Summary

April 5, 2011

Project Address:
Carter Nursing and Rehabilitation Center
250 McDavid Road
Grayson, Kentucky 41143

Preliminary Project scope:

	1.		Replace existing roof with architectural style shingles.

	2.		Build new front entrance to include covered drive, lobby, offices and guest bathrooms.

	3.		Redesign and update interior to better meet the resident needs such therapy, dining, dayroom and etc. (See blueprints for total project scope)

Facility Data:

Licensed beds: 120 (No change)
Room type breakdown:

	•		52 — semi private

	•		4 — four bed wards

Built in: 1985
Facility Current Square Footage: 31’862
Facility Square Footage after Renovation: 34,330
August Average Daily Census: 107

Estimated Project Cost:
Construction: $1,161,771.00

Common area furniture and design cost: $180,000.00

Direct Supply quote: $212,113.00
(Resident room FF&E)

New facility sign: $8,000

6% contingency funds figure on all cost listed above: $93,713

Total Estimated Project Cost: $1,655,597.00

Exhibit A — Page 2 of 4

Exhibit A to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

4. Oakmont Healthcare and Rehabilitation Center of Humble Omega Project Summary

Project Address:
Oakmont Healthcare and Rehabilitation Center of Humble
8450 Will Clayton Parkway
Humble, Texas 77338

Preliminary Scope of Work:

Rebuild portico, then paint the pink brick exterior to enhance the curb appearance and insure that the portico does not look like an addition. Add employee parking at the rear of the facility. Renovate main lobby to create a more appealing look. Relocate and enlarge the therapy department. Replace the flooring throughout. Replace acoustical ceilings including grid in corridors and common area’s. Re-skin the existing handrail to eliminate the aqua color. Eliminate the accordion doors located in main dining room. Update all the common areas. Partial FF&E replacement and install artwork through out facility. Relocate activity department. Remodel existing main showers to include two new whirlpools. Replace both nurses’ stations.

Facility Data:

Licensed Beds: 134
Room type breakdown after renovation:

	•		56 — semi private

	•		13 — private

	•		Available Bed total after renovation: 125 ( Note: We could convert private rooms back to semi private and get back to 134 beds if needed)

Built in: 1985
Facility Square Footage: 47,618
Dec-2010 Average Daily Census: 124

Estimated Project Cost: Construction: $1,181,965.00

Common area furniture and design cost: $222,000.00

Extra parking lot in rear of facility: $85,000.00

Resident room furniture: $65,000.00

6% contingency funds figure on all cost listed above: $93,238.00

Total Estimated Project Cost: $1,647,203.00

Exhibit A — Page 3 of 4

Exhibit A to
ELEVENTH AMENDMENT TO CONSOLIDATED
AMENDED AND RESTATED MASTER LEASE

4. Pocahontas Healthcare and Rehabilitation Center Omega Project Summary

Project Address:
Pocahontas Healthcare and Rehabilitation Center
105 Country Club Road
Pocahontas, Arkansas 72455

Preliminary Scope of Work:

Renovate the entire facility to include replacement of handrails, suspended ceiling and lights in all common areas, replace all common area and resident FF&E, artwork, signage, replace parking lot, redesign main entrance, replace all toilets and sinks in resident and public bathrooms, new windows and develop top line therapy gym.

Facility Data:
Licensed Beds: 97
Room type breakdown:

	•		48 — semi private

	•		1 — private

	•		Available Bed total after renovation: 97

Built in: 1984
Facility Square Footage: 25,922
Dec-2010 Average Daily Census: 67

Estimated Project Cost:
Construction: $815,000.00

Common area furniture and design cost: $165,000.00

Resident room furniture: $178,733.00

6% contingency funds figure on all cost listed above: $69,524.00

Total Estimated Project Cost: $1,228.257.00

Exhibit A — Page 4 of 4

Exhibit 10.2

AMENDED AND RESTATED

REVOLVING LOAN AND SECURITY AGREEMENT

dated as of February 28, 2011

by and among

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation,
as a Borrower

and

those certain additional Borrowers set forth on Schedule 1 hereto,

and

THE PRIVATEBANK AND TRUST COMPANY,
as Administrative Agent for the Lenders

and

The Financial Institutions Parties Hereto as the Lenders

AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT

This AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (this “ Agreement ”), dated as of February 28, 2011, is by and among DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, and those certain other entities set forth on Schedule 1 hereto, which are signatories hereto (such entities individually and collectively, the “ Borrower ”), THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its individual capacity (“ PrivateBank ”), and the other financial institutions parties hereto (together with PrivateBank, the “ Lenders ”), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its capacity as administrative agent for the Lenders (together with its successors and assigns, the “ Administrative Agent ”).

RECITALS

WHEREAS , Advocat Inc., a Delaware corporation (“ Parent ”), legally and beneficially owns or controls, either directly, or indirectly through its Subsidiaries, all of the issued and outstanding Stock of each Borrower;

WHEREAS , the Borrower and PrivateBank are parties to that certain Loan and Security Agreement dated as of March 17, 2010 (as amended, the “ Original Loan Agreement ”);

WHEREAS , certain Affiliates of the Borrower are entering into that certain Term Loan and Security Agreement to be dated of even date herewith by and among such Affiliates, the Lenders and Administrative Agent (as the same may be amended, supplemented or modified from time to time, the “ Term Loan Agreement ”); and

WHEREAS , in connection with the Term Loan Agreement, the parties desire to amend and restate the Original Loan Agreement (and the Borrowers have agreed to continue to secure all of their Liabilities under the Original Loan Agreement and the “Financing Agreements” entered into in connection therewith by continuing their grant of a security interest in and lien upon the Collateral described herein but in favor of the Administrative Agent for the ratable benefit of the Lenders and the Administrative Agent), upon the terms and provisions and subject to the conditions set forth herein.

NOW, THEREFORE , in consideration of the mutual agreements contained herein, and of any loans or other financial accommodations now or hereafter made to or for the benefit of the Borrower by the Lenders, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1. DEFINITIONS .

1.1 General Terms . When used herein, the following terms shall have the following meanings:

“ Account Debtor ” means the Person who is obligated on or under an Account.

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“ Accounts ” means collectively (a) any right to payment of a monetary obligation, arising from the delivery of goods or the provision of services, (b) without duplication, any “account” (as that term is defined in the Code now or hereafter in effect), any accounts receivable (whether in the form of payments for services rendered or goods sold, rents, license fees or otherwise), any “health-care-insurance receivables” (as that term is defined in the Code now or hereafter in effect), any “payment intangibles” (as that term is defined in the Code now or hereafter in effect) and all other rights to payment and/or reimbursement of every kind and description, in each case arising from the delivery of goods or the provision of services, (c) all accounts, general intangibles, Intellectual Property, rights, remedies, guarantees, supporting obligations, letter of credit rights and security interests in respect of the foregoing, all rights of enforcement and collection, all books and records evidencing or related to the foregoing, and all rights under the Financing Agreements in respect of the foregoing, (d) all information and data compiled or derived by any Borrower or to which any Borrower is entitled in respect of or related to the foregoing, and (e) all proceeds of any of the foregoing.

“ ACH Transactions ” means any cash management or related services (including the Automated Clearing House processing of electronic fund transfers through the direct Federal Reserve Fedline system) provided by any Lender for the account of Borrower or its Subsidiaries.

“ Adjusted EBITDA ” means the sum of (a) EBITDA, and (b) the amounts deducted (or less amounts added) in computing EBITDA for the period for (i) the non-cash provision (benefit) for self-insured professional and general liability expenses, (ii) non-cash rent expense, (iii) non-cash stock based compensation expense, (iv) non-cash debt retirement, and (v) all other non-cash expenses reasonably approved by the Administrative Agent, less (c) the Cash Cost of Self-Insured Professional and General Liability.

“ Adjusted EBITDAR ” means (a) Adjusted EBITDA plus (b) cash rent expense (rent expense adjusted to remove effects of non-cash rent).

“ Administrative Agent ” means The PrivateBank and Trust Company, an Illinois banking corporation, in its capacity as administrative agent for the Lenders hereunder and any successor thereto in such capacity.

“ Affiliate ” means, with respect to any Person, any other Person directly or indirectly controlling (including, without limitation, all shareholders, members, directors, partners, managers, and officers of such Person), controlled by, or under direct or indirect common control with, such Person. A Person shall be deemed to control another Person if such first Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of voting securities, by contract or otherwise.

“ Affiliated Term Borrowers ” means Diversicare Afton Oaks, LLC, Diversicare Briarcliff, LLC, Diversicare Chisolm, LLC and Diversicare Hartford, LLC, each a Delaware limited liability company.

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“ Affiliate Term Loan Financing Agreement ” means each “Financing Agreement” as defined in the Term Loan Agreement, as any of the same may be restated, modified, supplemented or amended from time to time.

“ Affiliate Term Loan Liabilities ” means the “Liabilities” as defined in the Term Loan Agreement.

“ Agreement ” means this Loan and Security Agreement as the same may be restated, modified, supplemented or amended from time to time.

“ Allocable Amount ” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

“ Applicable Base Rate Margin ” means, with respect to Base Rate Loans, two hundred (200) basis points.

“ Applicable Libor Margin ” means, with respect to Libor Loans, an amount equal to four hundred fifty (450) basis points.

“ Assignment Agreement ” shall have the meaning ascribed to such term in Section 12.15 hereof.

“ Bank Product ” means (a) any of the following financial accommodations extended to Borrower or its Subsidiaries by any Lender: (i) ACH Transactions, (ii) cash and treasury management, including controlled disbursement, accounts or services, or (iii) any transaction under or pursuant to any Hedging Agreement, and (b) any other service or facility extended to the Borrower by any Lender or any Affiliate of such Lender including: (i) credit cards, (ii) credit card processing services, (iii) debit cards, or (iv) purchase cards; provided that consistent with Section 8.9 hereof the Deposit Accounts specified therein shall be maintained with PrivateBank and not any other Lender.

“ Bank Product Agreements ” means those agreements entered into from time to time by Borrower or its Subsidiaries with any Lender in connection with the obtaining of any of the Bank Products.

“ Bank Product Obligations ” means all obligations, liabilities, reimbursement obligations, fees, or expenses owing by Borrower or its Subsidiaries to Lenders pursuant to or evidenced by a Bank Product Agreement and irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, now existing or hereafter arising.

“ Base Rate ” means the corporate base rate of interest per annum identified from time to time by the Administrative Agent, as its base or prime rate, which rate shall not necessarily be the lowest rate of interest which the Administrative Agent charges its customers. Any change in the Base Rate shall be effective as of the effective date of such change.

“ Base Rate Loan ” means a Loan that bears interest at an interest rate based on the Base Rate.

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“ Base Rent ” means the “Base Rent” as such term is defined in such Omega Master Lease Agreement.

“ Blocked Account Agreement ” means the Administrative Agent’s standard blocked account agreement (or similar agreement) signed by the Borrower relating to the Commercial Blocked Account, the Government Blocked Account, and payments on all such Accounts, as the same may be modified, supplemented, restated or amended from time to time, all of the foregoing which must be in form and substance reasonably acceptable to the Administrative Agent.

“ Blocked Persons List ” shall have the meaning ascribed to such term in Section 7.29 hereof.

“ Borrower Agent ” means Diversicare Management Services Co., a Tennessee corporation.

“ Borrower Cash Management Program ” means the business practice of Parent and Borrowers whereby cash receipts for Parent and Borrowers are transferred/swept into a central concentration account and all cash disbursements are funded by transfers from such central concentration account.

“ Borrowing Base ” means with respect to any Borrower, at any time, without duplication, an amount equal to up to eighty percent (80%) of the face amount (less discounts, credits and allowances which have knowingly been taken by or granted to Account Debtors in connection therewith) of all existing Eligible Accounts that are set forth in the Schedule of Accounts then most recently delivered by the Borrower to the Administrative Agent.

“ Borrowing Date ” means a date on which a Libor Loan is made hereunder.

“ Borrowing Notice ” shall have the meaning ascribed to such term in Section 2.12 hereof.

“ Business Day ” means (a) with respect to any borrowing, payment or rate selection of Libor Loans, a day other than Saturday or Sunday on which banks are open for business in Chicago, Illinois and on which dealings in United States dollars are carried on in the London interbank market, and (b) for all other purposes, a day other than Saturday or Sunday on which banks are open for business in Chicago, Illinois.

“ Capital Expenditures ” means, as to any Person, any and all expenditures of such Person for fixed or capital assets, including, without limitation, the incurrence of Capitalized Lease Obligations, all as determined in accordance with GAAP, except that Capital Expenditures shall not include (i) expenditures for fixed or capital assets to the extent such expenditures are paid for or reimbursed from the proceeds of insurance, condemnation awards and other settlements in respect of lost, destroyed, damaged, condemned or stolen assets, (ii) expenditures for assets purchased substantially concurrently with the trade-in of existing assets to the extent of the trade-in credit thereof; and (iii) any payment of liabilities or incurrence of incidence comprising the purchase price for the acquisition, whether by purchase, merger, consolidation or otherwise, by Borrower of the assets of, or the equity interest in, a Person or a division, line of business or

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other business unit of a Person engaged in a business of the type conducted by Borrower as of the date hereof or in a business reasonably related thereto.

“ Capitalized Lease Obligations ” means any amount payable with respect to any lease of any tangible or intangible property (whether real, personal or mixed), however denoted, which either (a) is required by GAAP to be reflected as a liability on the face of the balance sheet of the lessee thereunder, or (b) based on actual circumstances existing and ascertainable, either at the commencement of the term of such lease or at any subsequent time at which any property becomes subject thereto, can reasonably be anticipated to impose on such lessee substantially the same economic risks and burdens, having regard to such lessee’s obligations and the lessor’s rights thereunder both during and at the termination of such lease, as would be imposed on such lessee by any lease which is required to be so reflected or by the ownership of the leased property. For avoidance of doubt, prepaid leases shall not be deemed “Capital Lease Obligations” except to the extent required under GAAP.

“ Capmark ” means Capmark Finance Inc., a California corporation.

“ Cash Collateral Account ” shall have the meaning ascribed to such term in Section 4.3 hereof.

“ Cash Cost of Self-Insured Professional and General Liability ” means the total cash expenditures associated with professional and general liability related settlements, legal fees and administration costs for all facilities owned or leased by the Borrower. For purposes of measuring the Cash Cost of Self-Insured Professional and General Liability for individual facilities or groups of facilities, these amounts shall be allocated on the basis of licensed beds of the facility or group of facilities in relation to the total number of licensed beds for all facilities owned or leased by the Borrower.

“ CERCLA ” means the Comprehensive Environmental Release Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.

“ Certificates ” shall have the meaning ascribed to such term in Section 5.2 hereof.

“ CHAMPUS ” means the Civilian Health and Medical Program of the Uniformed Service, a part of TRICARE, a medical benefits program supervised by the U.S. Department of Defense.

“ Closing Date ” means February 28, 2011.

“ Closing Fee ” shall have the meaning ascribed to such term in Section 2.16 hereof.

“ CMS ” means the Centers for Medicare and Medicaid Services of HHS and any Person succeeding to the functions thereof.

“ Collateral ” shall have the meaning ascribed to such term in Section 6.1 hereof.

“ Commercial Blocked Account ” shall have the meaning ascribed to such term in Section 4.3 hereof.

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“ Commercial Leases ” means the collective reference to all Leases other than admission agreements or residency agreements.

“ Commitment ” means the Revolving Loan Commitment.

“ Compliance Certificate ” shall have the meaning ascribed to such term in Section 8.1(c) hereof.

“ CON ” shall have the meaning ascribed to such term in Section 10.2 hereof.

“ Credit Party ” means each Borrower, the Guarantor, and each other Person that is or becomes primarily or secondarily liable for the Liabilities, whether as a principal, surety, guarantor, endorser or otherwise.

“ Credit Termination Date ” means the earlier of (i) the Stated Maturity Date, (ii) such other date on which the Commitments shall terminate pursuant to Section 11.2 hereof, or (iii) such other date as is mutually agreed in writing between the Borrower and the Administrative Agent.

“ Default ” means an event, circumstance or condition which through the passage of time or the service of notice or both would (assuming no action is taken to cure the same) mature into an Event of Default.

“ Default Rate ” shall have the meaning ascribed to such term in Section 2.7(a) hereof.

“ Defaulting Lender ” means any Lender that (a) has failed to fund any portion of requested Loans or participations in Letter of Credit Obligations required to be funded by it hereunder within one Business Day of the date required to be funded by it hereunder unless such failure has been cured, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute or unless such failure has been cured, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

“ Demand Deposit Account ” shall have the meaning ascribed to such term in Section 4.3 hereof.

“ Deposit Accounts ” means any deposit, securities, operating, lockbox, blocked or cash collateral account (including, without limitation, the Cash Collateral Account, the Demand Deposit Account, the Commercial Blocked Account and the Government Blocked Account), together with any funds, instruments or other items credited to any such account from time to time, and all interest earned thereon.

“ Duly Authorized Officer ” means the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer and the Assistant Secretary of the Borrower.

“ EBITDA ” means with respect to the Borrower, for any period of determination, the net earnings of the Borrower before nonrecurring items (in accordance with GAAP and as

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reasonably agreed to by the Administrative Agent), interest, taxes, depreciation, and amortization (including amortized transaction expense), all as determined in accordance with GAAP, consistently applied, and excluding up to $1.8 million of non-capital training expenses associated with the implementation of an electronic medical system during 2010 and 2011.

“ EBITDAR ” means with respect to the Borrower, for any period of determination, the sum of the net earnings of the consolidated Borrower before nonrecurring items (in accordance with GAAP and as reasonably agreed to by the Administrative Agent), cash interest, taxes, depreciation, amortization and rent, all as determined in accordance with GAAP, consistently applied, and excluding up to $1.8 million of non-capital training expenses associated with the implementation of an electronic medical system during 2010 and 2011.

“ Eligible Accounts ” means an Account owing to the Borrower which meets each of the following requirements, as determined by the Administrative Agent in its sole and absolute discretion:

(a) Accounts which do not remain unpaid more than ninety (90) calendar days from the invoice date;

(b) is to be paid pursuant to either a Medicaid Provider Agreement or a Medicare Provider Agreement, or is a liability of an Account Debtor which is (i) a commercial insurance company (or managed care company) acceptable to the Administrative Agent in its reasonable determination, organized under the laws of any jurisdiction in the United States and having its principal office in the United States, or (ii) any other institutional Account Debtor acceptable to the Administrative Agent, including health maintenance organizations, unions, or any other type of Account Debtor, not included in the categories of Account Debtors listed in the foregoing clause (i), organized under the laws of any jurisdiction in the United States, having its principal office in the United States, in either case, in which such obligor agrees to pay the Borrower for the applicable services rendered or performed or, if applicable, goods sold;

(c) the Account Debtor of which has received notice to forward payment to either the Commercial Blocked Account and/or the Government Blocked Account, as applicable;

(d) those Accounts of Borrower as to which the Administrative Agent has a first priority perfected Lien and that comply with all of the representations and warranties made to the Administrative Agent under this Agreement and the Financing Agreements;

(e) to the extent such Account does not include any contingent payments;

(f) to the extent such Account does not include late charges or finance charges, and is net of any contractual discount and/or Medicare/Medicaid fee schedule adjustments; and

(g) which complies with such other terms and conditions as may be specified from time to time by the Administrative Agent in its reasonable discretion;

provided , however , the following Accounts of the Borrower are not Eligible Accounts:

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(i) Accounts to be paid pursuant to a Medicare Provider Agreement or Private Insurance/Managed Care Accounts, or any other otherwise Eligible Account, which, in either case, remain unpaid more than ninety (90) calendar days from the billing date; (ii) all Private Pay Accounts; (iii) Accounts with respect to which the Account Debtor is a director, officer, employee, equityholder, or Affiliate of the Borrower; (iv) Accounts with respect to which the Account Debtor is the United States of America or any department, agency or instrumentality thereof, unless such Account Debtor deposits all payments arising under the Government Accounts to the Government Blocked Account in accordance with the terms of the Blocked Account Agreement; (v) Accounts with respect to which the Account Debtor is not subject to service of process within the continental United States of America; (vi) Accounts known by Borrower (whether actual or constructive knowledge) to be in dispute (but only to the extent of such disputed amount) or with respect to which the Account Debtor has asserted, or the Borrower or the Administrative Agent has reason to believe the Account Debtor is entitled to assert, a counterclaim or right of setoff (but only to the extent of such counterclaim or setoff amount); (vii) Accounts with respect to which the prospect of payment or performance by the Account Debtor is or will be impaired, as determined by the Administrative Agent in the exercise of its reasonable discretion; (viii) Accounts that are not valid, legally enforceable obligations of the Account Debtor thereunder; (ix) Accounts with respect to which the Account Debtor is the subject of bankruptcy or a similar insolvency proceeding or has made an assignment for the benefit of creditors or whose assets have been conveyed to a receiver or trustee; (x) Accounts with respect to which the Account Debtor’s obligation to pay the Account is conditional upon the Account Debtor’s approval; (xi) Accounts which arise out of services or, if applicable, sales not made in the ordinary course of the Borrower’s business; (xii) Accounts with respect to which any document or agreement executed or delivered in connection therewith, or any procedure used in connection with any such document or agreement, fails in any material respect to comply with the requirements of applicable law, or with respect to which any representation or warranty contained in this Agreement is untrue or misleading in any material respect; (xiii) Accounts with respect to which Borrower is or may become liable to the Account Debtor for services rendered, or if applicable, goods sold, by the Account Debtor to Borrower, to the extent of Borrower’s existing or potential liability to such Account Debtor; and (xiv) Medicaid pending Accounts;

provided , further , an Account which is at any time an Eligible Account, but which subsequently fails to meet any of the foregoing requirements for eligibility, shall forthwith cease to be an Eligible Account, and further, with respect to any Account, if the Administrative Agent at any time hereafter determines in its reasonable discretion that the prospect of payment or performance by the Account Debtor with respect thereto is materially impaired for any reason whatsoever, such Account shall cease to be an Eligible Account after notice of such determination is given to the Borrower; provided , further , forty-five percent (45%) of all credit amounts in any of the foregoing that are not deemed to be Eligible Account categories and criteria shall be deducted from the “current” Accounts as reasonably determined by the Administrative Agent in its reasonable credit judgment.

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disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances, or wastes, chemical substances, or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation, including, without limitation, the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., as amended; CERCLA; the Toxic Substance Act, 15 U.S.C. § 2601 et seq., as amended; the Clean Water Act, 33 U.S.C. § 466 et seq., as amended; the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended; state and federal superlien and environmental cleanup programs; and U. S. Department of Transportation regulations.

“ Environmental Notice ” means any summons, citation, directive, information request, notice of potential responsibility, notice of violation or deficiency, order, claim, complaint, investigation, proceeding, judgment, letters or other communication, written or oral to the Borrower or any officer thereof, actual or threatened, from the United States Environmental Protection Agency or other federal, state or local agency or authority, or any other entity or individual, public or private, concerning any intentional or unintentional act or omission which involves Management of Hazardous Substances on or off the property of the Borrower which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, or the imposition of any Lien on property, or any alleged violation of or responsibility under Environmental Laws which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, and, after due inquiry and investigation, any knowledge of any facts which could give rise to any of the foregoing.

“ Equipment ” means “equipment” as defined in the Code, including, without limitation, any and all of the Borrower’s machinery, equipment, vehicles, fixtures, furniture, computers, appliances, tools, and other tangible personal property (other than Inventory), whether located on the Borrower’s premises or located elsewhere, together with any and all accessions, parts and appurtenances thereto, whether presently owned or hereafter acquired by the Borrower.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, together with the regulations thereunder.

“ ERISA Affiliate ” means any corporation, trade or business, which together with the Borrower would be treated as a single employer under Section 4001 of ERISA.

“ Event of Default ” shall have the meaning ascribed to such term in Section 11.1 hereof.

“ Facility ” or “ Facilities ” shall mean any one or more of the skilled nursing homes, assisted living facilities, retirement homes, rehabilitation centers, or senior adult care homes or facilities located on the Property and owned or operated by the Borrower in connection with their business. Set forth on Schedule 1.1(a) is a list of all Facilities in existence on the Closing Date owned or operated by the Borrower.

“ Fee Letter ” means “Fee Letter” means that certain letter agreement dated February 28, 2011 by and between PrivateBank and Borrower Agent, pursuant to which, among other things, the arrangement relating to compensation for certain services rendered by the Administrative

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Agent is set forth (together with any similar letter from Administrative Agent to the Lenders regarding their respective share of any particular fee payable by Borrower).

“ Financing Agreements ” means any and all agreements, instruments, certificates and documents, including, without limitation, security agreements, loan agreements, notes, guarantees, keep well agreements, landlord waivers, mortgages, deeds of trust, subordination agreements, intercreditor agreements, pledges, powers of attorney, consents, assignments, collateral assignments, interest rate protection agreements, reimbursement agreements, contracts, notices, leases, collateral assignments of key man life insurance policies, financing statements and all other written matter (including, without limitation, this Agreement, the Revolving Credit Notes, any Subordination Agreement, the Intercreditor Agreement, the Guaranty, the Pledge Agreements, the Blocked Account Agreement, the Certificates, the Fee Letter, the Master Letter of Credit Agreement, any Letter of Credit Documents, any Hedging Agreement and any other Bank Product Agreement), in each case evidencing, securing or relating to the Loans and the Liabilities, whether heretofore, now, or hereafter executed by or on behalf of the Borrower, any Affiliate, or any other Person, and delivered to or in favor of the Administrative Agent, the Issuing Lender or any Lender, together with all agreements and documents referred to therein or contemplated thereby, as each may be amended, modified or supplemented from time to time.

“ Fiscal Quarter ” means the three (3) month period ending on March 31, June 30, September 30 and December 31 of each calendar year.

“ Fiscal Year ” means the twelve (12) month period commencing on January 1 and ending on December 31 of each calendar year.

“ Fixed Charge Coverage Ratio ” means, on any date of determination, the ratio of (a) Adjusted EBITDAR for the period of 12 consecutive months then ended, to (b) Fixed Charges, all as determined for the Parent and the Borrower on a consolidated basis, all as determined in accordance with GAAP, consistently applied.

“ Fixed Charges ” means, for any period of determination, the sum of, without duplication: (a) regularly scheduled payments of principal with respect to all Indebtedness for borrowed money; plus (b) cash interest expense of Borrower for its Indebtedness that has been paid during such period (including, without limitation, interest attributable to issued and outstanding Letters of Credit); plus (c) Net Capital Expenditures; plus (d) cash rent expense that has been paid during such period; plus (e) dividends on common stock; plus (f) the Required Dividends and Redemption Amounts (except for amounts paid to redeem the Series C Preferred Stock pursuant to the Restructuring Stock Issuance and Subscription Agreement, which amounts shall be excluded from the calculation of Fixed Charges), all of the foregoing as determined in accordance with GAAP, consistently applied.

“ GAAP ” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or any successor authority) that are applicable to the circumstances as of the date of determination.

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“ General Intangibles ” means “general intangibles” as defined in the Code, including, without limitation, any and all general intangibles, choses in action, causes of action, rights to the payment of money (other than Accounts), and all other intangible personal property of the Borrower of every kind and nature wherever located and whether currently owned or hereafter acquired by the Borrower (other than Accounts), including, without limitation, corporate or other business records, inventions, designs, patents, patent applications, service marks, service mark applications, trademark applications, brand names, trade names, trademarks and all goodwill symbolized thereby and relating thereto, trade styles, trade secrets, registrations, domain names, websites, computer software, advertising materials, distributions on certificated and uncertificated securities, investment property, securities entitlements, goodwill, operational manuals, product formulas for industrial processes, blueprints, drawings, copyrights, copyright applications, rights and benefits under contracts, licenses, license agreements, permits, approvals, authorizations which are associated with the operation of the Borrower’s business and granted by any Person, franchises, customer lists, deposit accounts, tax refunds, tax refund claims, and any letters of credit, guarantee claims, security interests or other security held by or granted to the Borrower to secure payment by an Account Debtor of any of Borrower’s Accounts, and, to the maximum extent permitted by applicable Law, any recoveries or amounts received in connection with any litigation or settlement of any litigation.

“ Governing Documents ” shall have the meaning ascribed to such term in Section 9.14 hereof.

“ Government Accounts ” means Accounts on which any federal or state governmental unit or any intermediary for any federal or state governmental unit is the Account Debtor.

“ Governmental Approvals ” means, collectively, all consents, licenses, and permits and all other authorizations or approvals required from any Governmental Authority to operate the Locations.

“ Governmental Authority ” means and includes any federal, state, District of Columbia, county, municipal, or other government and any political subdivision, department, commission, board, bureau, agency or instrumentality thereof, whether domestic or foreign.

“ Government Blocked Account ” shall have the meaning ascribed to such term in Section 4.3 hereof.

“ Guarantor ” means Parent in its capacity as the guarantor pursuant to the Guaranty.

“ Guaranty ” means that certain Amended and Restated Guaranty of even date herewith by Guarantor in favor of the Administrative Agent, in form and substance reasonable satisfactory to the Administrative Agent, as the same may be amended, restated, reaffirmed, modified or supplemented from time to time.

“ Hazardous Substances ” means hazardous substances, materials, wastes, and waste constituents and reaction by-products, pesticides, oil and other petroleum products, and toxic substances, including, without limitation, asbestos and PCBs, as those terms are defined pursuant to Environmental Laws.

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“ Healthcare Laws ” means all applicable Laws relating to the possession, control, warehousing, marketing, sale and distribution of pharmaceuticals, the operation of medical or senior housing facilities (such as, but not limited to, nursing homes, skilled nursing facilities, rehabilitation hospitals, intermediate care facilities, assisted living and adult care facilities), patient healthcare, patient healthcare information, patient abuse, the quality and adequacy of medical care, rate setting, equipment, personnel, operating policies, fee splitting, including, without limitation, (a) all federal and state fraud and abuse laws, including, but not limited to the federal Anti-Kickback Statute (42 U.S.C. §1320a-7b(6)), the Stark Law (42 U.S.C. §1395nn), the civil False Claims Act (31 U.S.C. §3729 et seq.); (b) TRICARE; (c) CHAMPUS, (d) Medicare; (e) Medicaid; (f) HIPAA; (g) quality, safety and accreditation standards and requirements of all applicable state laws or regulatory bodies; (h) all laws, policies, procedures, permits, requirements, certifications, and regulations pursuant to which licenses, approvals and accreditation certificates are issued in order to operate medical, senior housing facilities, assisted living facilities, or skilled nursing facilities; and (i) any and all other applicable health care laws, regulations, manual provisions, policies and administrative guidance, each of (a) through (i) as may be amended from time to time.

“ Hedging Agreement ” means any interest rate, currency or commodity swap agreement, cap agreement or collar agreement, and any other agreement or arrangement designed to protect a Person against fluctuations in interest rates, currency exchange rates or commodity prices, in each case in form and substance satisfactory to the Administrative Agent, as the same may be amended or modified from time to time.

“ HHS ” means the United States Department of Health and Human Services and any Person succeeding to the functions thereof.

“ HIPAA ” means the Health Insurance Portability and Accountability Act of 1996, as the same may be amended, modified or supplemented from time to time, and any successor statute thereto, and any and all rules or regulations promulgated from time to time thereunder.

“ HUD Financing ” shall have the meaning given to it in the Term Loan Agreement.

“ Indebtedness ” with respect to any Person means, as of the date of determination thereof, (a) all of such Person’s indebtedness for borrowed money, (b) all indebtedness of such Person or any other Person secured by any Lien with respect to any property or asset owned or held by such Person, regardless whether the indebtedness secured thereby shall have been assumed by such Person or such Person has become liable for the payment thereof, (c) all Capitalized Lease Obligations of such Person and obligations or liabilities created or arising under conditional sale or other title retention agreement with respect to property used and/or acquired by Borrower even though the rights and remedies of the lessor, seller and/or lender thereunder are limited to repossession of such property, (d) all unfunded pension fund obligations and liabilities, (e) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (f) all obligations in respect of letters of credit, whether or not drawn, and bankers’ acceptances issued for the account of such Person, (g) deferred and/or accrued taxes and all unfunded pension fund obligations and liabilities, (h) all guarantees by such Person, or any undertaking by such Person to be liable for, the debts or obligations of any other Person, described in clauses (a) through (h), and (i) all Bank Product Obligations of such Person.

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“ Indemnified Parties ” shall have the meaning ascribed to such term in Section 12.16 hereof.

“ Insurer ” means a Person that insures a Patient against certain of the costs incurred in the receipt by such Patient of Medical Services, or that has an agreement with the Borrower to compensate the Borrower for providing goods or services to a Patient.

“ Intellectual Property ” means all of the following in any jurisdiction throughout the world: (a) all inventions (whether patentable or unpatentable and whether or not reduced to practice), all improvements thereto, and all patents, patent applications, and patent disclosures, together with all reissuances, continuations, continuations-in-part, revisions, extensions, and reexaminations thereof, (b) all trademarks, service marks, trade dress, logos, slogans, trade names, corporate names, Internet domain names, and rights in telephone numbers, together with all translations, adaptations, derivations, and combinations thereof and including all goodwill associated therewith, and all applications, registrations, and renewals in connection therewith, (c) all copyrightable works, all copyrights, and all applications, registrations, and renewals in connection therewith, (d) all mask works and all applications, registrations, and renewals in connection therewith, (e) all trade secrets and confidential business information (including ideas, research and development, know-how, formulas, compositions, manufacturing and production processes and techniques, technical data, designs, drawings, specifications, customer and supplier lists, pricing and cost information, and business and marketing plans and proposals), (f) all computer software (including source code, executable code, data, databases, and related documentation), (g) all material advertising and promotional materials, (h) all other proprietary rights, and (i) all copies and tangible embodiments thereof (in whatever form or medium).

“ Intercreditor Agreement ” means that certain Subordination and Intercreditor Agreement dated as of the Original Closing Date, as amended by that certain First Amendment to Subordination and Intercreditor Agreement dated of even date herewith, by and among the Borrower, Administrative Agent and Sterling Acquisition Corp., a Kentucky corporation, in its capacity as a lessor under the applicable Omega Senior Leases.

“ Inventory ” means “inventory” as defined in the Code, including, without limitation, any and all inventory and goods of the Borrower, wheresoever located, whether now owned or hereafter acquired by the Borrower, which are held for sale or lease, furnished under any contract of service or held as raw materials, work-in-process or supplies, and all materials used or consumed in the Borrower’s business, and shall include such property the sale or other disposition of which has given rise to Accounts and which has been returned to or repossessed or stopped in transit by the Borrower.

“ Issuing Lender ” means the Administrative Agent or any other Lender in its respective capacity as an issuer of Letters of Credit, on behalf of the Lenders, hereunder, and its successors and assigns in such capacity, and “Issuing Lenders” shall mean all such Lenders, in their capacity as issuers of Letters of Credit, collectively; provided , however , until Administrative Agent determines otherwise in writing, the sole Issuing Lender hereunder shall be PrivateBank.

“ Joint Liability Payment ” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

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“ Laws ” means, collectively, all federal, state and local laws, statutes, codes, ordinances, orders, rules and regulations, including judicial opinions or presidential authority in the applicable jurisdiction and Healthcare Laws and Environmental Laws, now or hereafter in effect, and in each case as amended or supplemented from time to time.

“ L/C Disbursement ” means a payment made by the Issuing Lender pursuant to a Letter of Credit.

“ L/C Fee ” has the meaning ascribed to such term in Section 2.18 hereof.

“ Leased Real Property ” means all leasehold or subleasehold estates and other rights to use or occupy any land, buildings, structures, improvements, fixtures, or other interest in real property held by the Parent or Borrower.

“ Leases ” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties, and other agreements with respect thereto, pursuant to which the Borrower or Parent holds any Leased Real Property (including, without limitation, the Commercial Leases and Operating Leases).

“ Lender Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Letter of Credit ” means any commercial or standby letter of credit which is issued by an Issuing Lender at the request of and for the account of Borrower in accordance with the terms of this Agreement, including any “Letter of Credit” as such term is defined in the Master Letter of Credit Agreement.

“ Letter of Credit Documents ” means, with respect to any Letter of Credit, collectively and individually, any application therefor and any other agreements, instruments or other documents (whether general in application or applicable only to such Letter of Credit) governing or providing for the (a) the rights and obligations of the parties concerned or at the risk with respect to such Letter of Credit or (b) any collateral security for any of such obligations, each as the same may be modified and supplemented and in effect from time to time.

“ Letter of Credit Obligations ” means, at any time and without duplication, the sum of (a) the aggregate undrawn face amount of all Letters of Credit outstanding at such time plus (b) the aggregate amount of all drawings under Letters of Credit for which the Issuing Lender has not at such time been reimbursed (either by the Borrower or by a Revolving Loan made by the Lenders).

“ Liabilities ” means any and all of each of the Borrower’s liabilities, obligations and Indebtedness to the Lenders, the Issuing Lender and the Administrative Agent of any and every kind and nature, whether heretofore, now or hereafter owing, arising, due or payable and howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct, indirect, contingent, absolute, fixed or otherwise (including, without limitation, payments of or for principal, interest, default interest, reimbursement obligations, fees, costs, expenses, and/or indemnification, and obligations of performance, and the Closing Fee, the Unused Line Fee, the L/C Fee and all Bank Product Obligations, and any interest that accrues after commencement of any insolvency or bankruptcy proceeding regardless of whether allowed or allowable in whole or

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in part as a claim in any such insolvency or bankruptcy proceeding) and whether arising or existing under written agreement, oral agreement, or by operation of law, including, without limitation, all of each Borrower’s Indebtedness, liabilities and obligations to the Lenders, Issuing Lender and the Administrative Agent under this Agreement (whether relating to any of the Loans or otherwise and including, without limitation, all of each Borrower’s Bank Product Obligations) or the Financing Agreements to which Borrower is a party, and any refinancings, substitutions, extensions, renewals, replacements and modifications for or of any or all of the foregoing.

“ Libor Base Rate ” means a rate of interest equal to (a) the per annum rate of interest at which United States dollar deposits in an amount comparable to the amount of the relevant Libor Loan and for a period equal to the Libor Interest Period are offered in the London Interbank Eurodollar market at 11:00 A.M. (London time) two (2) Business Days prior to the commencement of such Libor Interest Period (or three (3) Business Days prior to the commencement of such Libor Interest Period if banks in London, England were not open and dealing in offshore United States dollars on such second preceding Business Day), as displayed in the Bloomberg Financial Markets system (or other authoritative source selected by the Administrative Agent in its sole discretion) or, if the Bloomberg Financial Markets system or another authoritative source is not available, as the Libor Base Rate is otherwise determined by the Administrative Agent in its sole and absolute discretion, divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), such rate to remain fixed for such Libor Interest Period. The Administrative Agent’s determination of the Libor Base Rate shall be conclusive, absent manifest error.

“ Libor Interest Period ” means, with respect to any Libor Loan, successive one (1) month periods, provided , however , that: (a) each Libor Interest Period occurring after the initial Libor Interest Period of any Libor Loan shall commence on the day on which the preceding Libor Interest Period for such Libor Loan expires, with interest for such day to be calculated at the Libor Rate in effect for the new Libor Interest Period; (b) whenever the last day of any Libor Interest Period would otherwise occur on a day other than a Business Day, the last day of such Libor Interest Period shall be extended to occur on the next succeeding Business Day; (c) whenever the first day of any Libor Interest Period occurs on a date for which there is no numerically corresponding date in the month in which such Libor Interest Period terminates, such Libor Interest Period shall end on the last day of such month, unless such day is not a Business Day, in which case the Libor Interest Period shall terminate on the first Business Day of the following month, provided , further , that so long as the Libor Rollover remains in effect, all subsequent Libor Interest Periods shall terminate on the date of the month numerically corresponding to the date on which the initial Libor Interest Period commenced; and (D) if at any time the Libor Interest Period for a Libor Loan expires less than one month before the Stated Maturity Date, such Libor Loan shall automatically renew at the then current Libor Rate for a Libor Interest Period terminating on the Stated Maturity Date.

“ Libor Loan ” means a Loan which bears interest at a Libor Rate.

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“ Libor Rate ” means, with respect to a Libor Loan for the relevant Libor Interest Period, the sum of the Libor Base Rate applicable to that Libor Interest Period, plus the Applicable Libor Margin.

“ Libor Rollover ” means that each Libor Loan shall automatically renew for the Libor Interest Period specified in the Borrowing Notice at the then current Libor Rate, except that a Libor Interest Period for a Libor Loan shall not automatically renew with respect to any principal amount which is scheduled to be repaid before the last day of the applicable Libor Interest Period, and any such amounts shall bear interest at the Base Rate, until repaid.

“ Licenses ” shall have the meaning ascribed to such term in Section 10.2 hereof

“ Lien ” means any lien, security interest, mortgage, pledge, hypothecation, collateral assignment, or other charge, encumbrance or preferential arrangement, including, without limitation, the retained security title of a conditional vendor or lessor.

“ Loan Account ” shall have the meaning ascribed to such term in Section 2.5 hereof.

“ Loans ” means, individually, a Revolving Loan, and collectively, the Revolving Loans, and, if applicable, any and all other advances made by the Lenders (or, if applicable, the Administrative Agent or Issuing Lender) to the Borrower pursuant to the terms of this Agreement or any other Financing Agreement.

“ Location ” or “ Locations ” mean one or more of the healthcare or other facilities owned by the Borrower on the Property as identified on Schedule 1.1(a) hereto.

“ Manage ” or “ Management ” means to generate, handle, manufacture, process, treat, store, use, re-use, refine, recycle, reclaim, blend or burn for energy recovery, incinerate, accumulate speculatively, transport, transfer, dispose of, release, threaten to release or abandon Hazardous Substances.

“ Management Agreements ” means, collectively, those certain Management Agreements (i) between Diversicare Management Services Co., as Manager, and each Borrower that is the owner or operator of a Facility, for the operation and management of the Facilities, and (ii) Manager and Diversicare Therapy Services, LLC, for bookkeeping, accounting, payroll, billing and management of its contract therapy services.

“ Master Letter of Credit Agreement ” shall have the meaning ascribed to such term in Section 2.1B hereto.

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Agreement or the ability of the Credit Parties, taken as a whole, to perform their payment or other obligations under any Financing Agreement to which they are parties, (c) a material adverse change in, or a material adverse effect upon, the legality, validity or enforceability of any Financing Agreement, (d) a material adverse change in, or a material adverse effect upon, the existence, perfection or priority of any security interest granted in any Financing Agreement or the value of any material Collateral not resulting from any action or inaction by the Administrative Agent, (e) the termination of Borrower’s continued participation in a Medicare or Medicaid reimbursement program, which individually or in the aggregate, could reasonably be expected to result in a material adverse change or a material adverse effect described in the immediately preceding clauses (a) through (d) above, or (f) any other liability of the Credit Parties, or any one or more of them, in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate as a result the final adjudication of one or more violations of any Healthcare Law which remains unpaid for a period of thirty (30) days, unless such liability is being contested or appealed by appropriate proceedings and Borrower has established appropriate reserves adequate for payment in the event such appeal or contest is ultimately unsuccessful, provided further that in the event such contest or appeal is ultimately unsuccessful, the Borrower shall pay the assessment no later than the deadline set forth by the applicable agency.

“ Maximum Revolving Facility ” means an amount equal to Fifteen Million and No/100 Dollars ($15,000,000.00).

“ Medicaid Certification ” means, with respect to Borrower, certification by the Medicaid program in each state in which the Borrower conducts business which is under or affected by the Medicaid Regulations that the Borrower complies with all of the applicable requirements for participation set forth in the Medicaid Regulations.

“ Medicaid Provider Agreement ” means an agreement entered into with the Medicaid program in each state in which the Borrower conducts business which is under or affected by the Medicaid Regulations under which such state Medicaid program agrees to pay for covered services provided by the Borrower to Medicaid beneficiaries in accordance with the terms of such agreement and the Medicaid Regulations.

“ Medicaid Regulations ” or “ Medicaid ” mean collectively all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the health insurance program established by Title XIX of the Social Security Act (42 U.S.C. §§ 1396, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

“ Medical Services ” means medical and health care services provided to a Patient by any Borrower, including, but not limited to, medically necessary health care services provided to a Patient and performed by a Borrower which are covered by a policy of insurance issued by an Insurer, and including, but not limited to, physician services, nurse and therapist services, dental services, skilled nursing facility services, rehabilitation services, home health care services, behavioral health services, hospice services, medical equipment and pharmaceuticals.

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“ Medicare Certification ” means certification of CMS or a state agency or entity under contract with CMS that the Borrower complies with all of the applicable requirements for participation set forth in the Medicare Regulations.

“ Medicare Provider Agreement ” means an agreement entered into with CMS or a state agency under contract with CMS under which CMS agrees to pay for covered services provided by the Borrower to Medicare beneficiaries in accordance with the terms of such agreement and the Medicare Regulations.

“ Medicare Regulations ” or “ Medicare ” mean collectively all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. § 1395, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

“ Multiemployer Plan ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Net Capital Expenditures ” means Capital Expenditures minus the sum of (a) any financing used in connection with such expenditures (including, without limitation, any financing of capital improvements provided by a landlord and recovered through rental payments) and (b) amounts actually incurred in connection with those certain Capital Expenditures currently contemplated in connection with the Facilities as identified (in both dollar amount and specific projects) on Schedule 1.1(d) attached hereto to be made between the Original Closing Date and the date that is the three year anniversary of the Original Closing Date up to an aggregate amount not to exceed $3,600,000 with respect to amounts incurred pursuant to this clause (b), (c) $1,800,000.00 of Capital Expenditures for the purchase of certain Electronic Medical Records for 2011, and (d) an additional $1,000,000.00 per year of Capital Expenditures from the Closing Date through Stated Maturity Date for renovation capital expenditures associated with the Guarantor’s strategic growth plan.

“ Non-U.S. Participant ” shall have the meaning ascribed to such term in Section 3.3 hereof.

“ OFAC Lists ” means, collectively, the Specially Designated Nationals and Blocked Persons List maintained by the Office of Foreign Asset Control, the Department of the Treasury pursuant to Executive Order No. 13224, 66 Fed. Reg. 49079 (Sept. 25, 2001) and/or any other list of terrorists or terrorist organizations maintained pursuant to any of the rules and regulations of or by the Office of Foreign Asset Control, the Department of the Treasury or pursuant to any other applicable Executive Orders.

“ Omega ” means Omega Healthcare Investors, Inc., a Maryland corporation.

“ Omega Debt Documents ” means, collectively, the Omega Master Lease Agreement, the Omega Senior Leases and the security agreements, pledges, documents, instruments and

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agreements executed in connection therewith, in each case as the same may be amended or modified in conformity with Section 9.16 of this Agreement.

“ Omega Letter of Credit ” means that certain letter of credit issued by the Administrative Agent to Omega or its designee, and any amendment, renewal or replacement thereof, on terms and conditions satisfactory to the Administrative Agent in its sole and absolute discretion.

“ Omega Master Lease Agreement ” means that certain Consolidated, Amended and Restated Master Lease dated as of November 8, 2000, by and between Diversicare Leasing Corp., a Tennessee corporation (“ DLC ”) and Sterling Acquisition Corp., a Kentucky corporation, as amended by that certain (a) First Amendment to Consolidated, Amended and Restated Master Lease dated as of September 30, 2001, by and between DLC and Omega, (b) Second Amendment to Consolidated, Amended and Restated Master Lease dated as of June 15, 2005, by and between DLC and Omega, (c) Third Amendment to Consolidated, Amended and Restated Master Lease dated as of October 20, 2006, by and between DLC and Omega, but effective as of October 1, 2006, (d) Fourth Amendment to Consolidated, Amended and Restated Master Lease dated as of April 1, 2007, by and between DLC and Omega, (e) that certain Fifth Amendment to Consolidated, Amended and Restated Master Lease dated as of August 10, 2007, by and between DLC and Omega, (f) that certain Sixth Amendment to Consolidated, Amended and Restated Master Lease dated as of March 14, 2008, by and between DLC and Omega, (g) that certain Seventh Amendment to Consolidated Amended and Restated Master Lease dated as of October 24, 2008, (h) that certain Eighth Amendment to Consolidated Amended and Restated Master Lease dated as of March 31, 2009, (i) that certain Ninth Amendment to Consolidated Amended and Restated Master Lease dated as of May 5, 2009, and (j) that certain Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8, 2009.

“ Omega Security Interests ” means the security interests of Omega and the Omega Senior Lessor in certain assets of the Borrower, the rights pertaining to and priorities of which are as specified in the Intercreditor Agreement.

“ Omega Senior Leases ” means the Commercial Leases described on Schedule 1.1(e) attached hereto.

“ Omega Senior Lessor ” means Sterling Acquisition Corp., a Kentucky corporation.

“ Operating Lease ” means the collective reference to all Commercial Leases between the Borrower and the Operators, respectively, pursuant to which the Operators lease and operate each Location.

“ Operators ” or “ Operator ” means the respective operators of the Locations, all of which are licensed under all applicable Healthcare Laws.

“ Original Closing Date ” means March 17, 2010.

“ Parent ” shall have the meaning ascribed to such term in the Recitals hereof.

“ Participant ” shall have the meaning ascribed to such term in Section 12.15(d) hereof.

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“ Patient ” means any Person receiving Medical Services from the Operators and all Persons legally liable to pay the Operators for such Medical Services other than Insurers or Governmental Authorities.

“ Patriot Act ” shall have the meaning ascribed to such term in Section 8.16 hereof.

“ PBGC ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Permitted Liens ” shall have the meaning ascribed to such term in Section 9.1 hereof.

“ Person ” means any individual, sole proprietorship, partnership, joint venture, trust, limited liability company, unincorporated organization, association, corporation, institution, entity, party, or government (whether national, federal, state, provincial, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof).

“ Plan ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Pledge Agreements ” means, collectively, that certain (a) Amended and Restated Pledge Agreement of even date herewith made by Parent in favor of the Administrative Agent, (b) Amended and Restated Pledge Agreement of even date herewith made by Diversicare Management Services Co., a Tennessee corporation, in favor of the Administrative Agent, (c) Amended and Restated Pledge Agreement of even date herewith made by Advocat Finance, Inc., a Delaware corporation, in favor of the Administrative Agent, (d) Amended and Restated Pledge Agreement of even date herewith made by Diversicare Leasing Corp., a Tennessee corporation, in favor of the Administrative Agent, (e) Amended and Restated Pledge Agreement of even date herewith made by Diversicare Assisted Living Services, Inc., a Tennessee corporation, in favor of the Administrative Agent, (f) Amended and Restated Pledge Agreement of even date herewith made by Diversicare Assisted Living Services NC, LLC, a Tennessee limited liability company, in favor of the Administrative Agent, and (g) Pledge Agreement of even date herewith made by Senior Care Florida Leasing, LLC, a Delaware limited liability company, in favor of the Administrative Agent, each of the foregoing in form and substance reasonable satisfactory to the Administrative Agent, as the same may be modified, supplemented or amended from time to time in accordance with the terms thereof.

“ Pledgor ” means the “Pledgor” as such term is respectively defined in each Pledge Agreement.

“ Preferred Stock ” means the 5,000 shares of Series C Preferred Stock of Parent issued to Omega pursuant to that certain Restructuring Stock Issuance and Subscription Agreement dated October 20, 2006.

“ Preferred Stock Certificate of Designation ” means that certain Certificate of Designation of the Preferred Stock dated October 20, 2006, as in effect as of the date hereof.

“ Private Insurance/Managed Care Account ” means Accounts owing from insurance companies or managed care companies to a Person for services provided or rendered by the Borrower to a Person where the Person has assigned the right to the Account to the Borrower.

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“ Private Insurance/Managed Care Contracts ” means contracts and agreements between the Borrower (or an Affiliate thereof) and insurance companies and/or managed care companies pursuant to which the Borrower has the right to make a claim for and receive payment for services rendered or furnished to a Person that is an intended beneficiary of such contract or agreement.

“ Private Pay Accounts ” means Accounts owing directly from an individual for services provided or rendered by the Borrower to such individual.

“ Pro Rata Share ” means (a) with respect to a Lender’s obligation to make any Loan hereunder and right to receive payments of principal, interest and fees with respect to such Loans, the Revolving Loan Commitment Percentage of such Lender, and (b) for all other purposes with respect to any Lender, the percentage obtained by dividing (i) such Lender’s then outstanding principal amount of Loans and unused Revolving Loan Commitments, by (ii) the then aggregate outstanding principal amount of Loans and unused Revolving Loan Commitments of all Lenders.

“ Prohibited Transaction ” shall have the meaning ascribed to such term in ERISA.

“ Property ” means any and all real property owned, leased, sub-leased or used at any time by Borrower.

“ Rate Option ” means the Libor Rate or the Base Rate.

“ Real Property Asset ” means a parcel of real property, together with all improvements (if any) thereon, including any Facility, owned in fee simple by a Borrower.

“ Register ” shall have the meaning ascribed to such term in Section 12.15(d) hereof.

“ Release ” means any actual or threatened spilling, leaking, pumping, pouring, emitting, emptying, discharging, injecting, escaping, leaching, dumping or disposing of Hazardous Substances into the environment, as “environment” is defined in CERCLA.

“ Released Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Releasing Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Required Dividends and Redemption Amounts ” means (i) any amounts actually paid as dividends on, or for the redemption (upon the option of the holder or, with Administrative Agent’s prior consent, the option of Parent) of, the 5,000 shares of Series C Preferred Stock of Parent issued to Omega pursuant to the Restructuring Stock Issuance and Subscription Agreement and the Preferred Stock Certificate of Designation and (ii) the amounts actually included in Base Rent paid under the Omega Master Lease Agreement representing payments for the replacement of preferred stock previously owned by Omega with said Series C Preferred Stock pursuant to said Restructuring Stock Issuance and Subscription Agreement, which amounts are not included in rent expense in the income statement of the Credit Parties.

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“ Required Lenders ” means, as of any date of determination, (a) if there are three (3) or fewer Lenders, Lenders holding one hundred percent (100%) of the sum of the outstanding principal balance of the Revolving Loans (and the Revolving Loan Commitment), or (b) if there are more than three (3) Lenders, Lenders holding sixty-six and two-thirds percent (66-2/3%) or more of the sum of the outstanding principal balance of the Revolving Loans (and the Revolving Loan Commitment), provided, that the commitments of, and the portion of the Liabilities held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.

“ Respond ” or “ Response ” means any action taken pursuant to Environmental Laws to correct, remove, remediate, cleanup, prevent, mitigate, monitor, evaluate, investigate or assess the Release of a Hazardous Substance.

“ Restricted Agreements ” means, collectively, each Management Agreement, Omega Debt Document, Commercial Lease, agreement, document or instrument entered into in connection with (directly or indirectly) the Cash Management Program, the Restructuring Stock Issuance and Subscription Agreement, the Preferred Stock Certificate of Designation, any other agreement, document or instrument between or among the Credit Parties and any agreement, document or instrument pertaining to (directly or indirectly) any of the foregoing.

“ Restrictions ” shall have the meaning ascribed to such term in Section 10.3 hereof.

“ Restructuring Stock Issuance and Subscription Agreement ” means that certain Restructuring Stock Issuance and Subscription Agreement dated October 20, 2006, by and between Parent and Omega, as in effect as of the date hereof.

“ Revolving Credit Note(s) ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Revolving Loan Commitment ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Revolving Loan Commitment Percentage ” means, as to any Lender, the percentage set forth opposite such Lender’s name on Annex A hereto under the column “Revolving Loan Commitment Percentage”, or, if different, in the most recent Assignment Agreement to which such Lender is a party.

“ Revolving Loans ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Rose Terrace Lease ” means the Borrower’s land acquisition, development, construction and lease of a new skilled nursing facility in Cabell County, West Virginia.

“ Schedule of Accounts ” means an aged trial balance and reconciliation to the Borrowing Base in form and substance reasonably satisfactory to the Administrative Agent (which may at the Administrative Agent’s discretion include copies of original invoices) listing the Accounts of the Borrower, certified on behalf of the Borrower by a Duly Authorized Officer, to be delivered on a monthly basis to the Administrative Agent by the Borrower pursuant to Section 8.1(d) hereof.

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“ Service Fee ” shall have the meaning ascribed to such term in Section 8.9 hereof.

“ Solvent ” means, with respect to any Person on a particular date, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person; (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured; (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay as such debts and liabilities mature; and (d) such Person is not engaged in a business or transaction, and is not about to engage in a business or transaction, for which such Person’s property would constitute an unreasonably small capital. The amount of contingent liabilities (such as litigation, guaranties and pension plan liabilities) at any time shall be computed as the amount that, in light of all the facts and circumstances existing at the time, represents the amount that can be reasonably be expected to become an actual or matured liability, but shall not include incurred but not reported professional liability claims.

“ Stated Maturity Date ” means February 28, 2016.

“ Stock ” shall mean all certificated and uncertificated shares, options, warrants, general or limited partnership interests, membership interests or units, limited liability company interests, participation or other equivalents (regardless of how designated) of or in a corporation, partnership, limited liability company or equivalent entity whether voting or nonvoting, including common stock, preferred stock, or any other “equity security” (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934).

“ Subordinated Debt ” means any and all Indebtedness owing by the Borrower to a third party that has been subordinated to the Liabilities in writing on terms and conditions satisfactory to the Administrative Agent in its sole and absolute discretion.

“ Subordination Agreement ” means, collectively, those certain subordination agreements that have been and may in the future be entered into from time to time by holders of Subordinated Debt and the Administrative Agent, each in form and substance satisfactory to the Administrative Agent in its sole and absolute discretion, each as the same may be modified, supplemented, amended or restated from time to time.

“ Subsidiary ” means, with respect to any Person, (i) any corporation of which an aggregate of more than fifty percent (50%) of the outstanding Stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether, at the time, Stock of any other class or classes of such corporation shall have or might have voting power by reason of the happening of any contingency) is at the time, directly or indirectly, owned legally or beneficially by such Person and/or one or more Subsidiaries of such Person, or with respect to which any such Person has the right to vote or designate the vote of fifty percent (50%) or more of such Stock whether by proxy, agreement, operation of law or otherwise, and (ii) any partnership or limited liability company in which such Person or one or more Subsidiaries of such Person has an equity interest (whether in the form of voting or participation in profits or capital contribution) of more than fifty percent (50%) or of which any such Person is

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a general partner, managing member or manager or may exercise the powers of a general partner, managing member or manager.

“ Tax Code ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Taxes ” shall have the meaning ascribed to such term in Section 3.3 hereof.

“ Tenant ” means any tenant, resident or occupant under any Lease.

“ Term Loan ” means that certain term loan to be made on the date hereof by the Lenders to the Affiliated Term Borrowers pursuant to the Term Loan Agreement.

“ Term Loan Agreement ” means that certain Term Loan and Security Agreement dated of even date herewith by and among the Affiliated Term Borrowers, the Lenders and the Administrative Agent, as the same may be restated, modified, supplemented or amended from time to time.

“ TRICARE ” means the medical program for active duty members, qualified family members, CHAMPUS eligible retirees and their family members and survivors, of all uniformed services.

“ Uniform Commercial Code ” or “ UCC ” or “ Code ” means the Uniform Commercial Code as the same may, from to time, be in effect in the State of Illinois; provided, however, that if, by reason of mandatory provisions of law, any or all of the attachment, perfection or priority of, or remedies with respect to, Administrative Agent’s Lien on the Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of Illinois, the term “Uniform Commercial Code” or “UCC” or “Code” shall mean the Uniform Commercial Code as in effect in such other jurisdiction for purposes of the provisions of this Agreement or the other Financing Agreements relating to such attachment, perfection, priority or remedies and for purposes of definitions related to such provisions; provided further that, to the extent that the Uniform Commercial Code of a particular jurisdiction is used to define a term herein or in any Financing Agreement and such term is defined differently in different Articles or Divisions of such Uniform Commercial Code, then the definition of such term contained in Article or Division 9 of such Uniform Commercial Code shall control.

“ Unused Line Fee ” means a fee in an amount equal to fifty basis points (0.50%) per annum times the amount by which the Maximum Revolving Facility exceeds the average daily balance of the Revolving Loans (which, for clarification, includes the amounts outstanding under any Letters of Credit), payable to the Administrative Agent for the Lenders for their Pro Rata Share.

“ Withholding Certificate ” shall have the meaning ascribed to such term in Section 3.3 hereof.

1.2 Interpretation .

(1) All accounting terms used in this Agreement or the other Financing Agreements shall have, unless otherwise specifically provided herein or therein, the

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meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, however, that all financial covenants and calculations in the Financing Agreements shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower and Administrative Agent shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing. Unless otherwise specified, references in this Agreement or any of the attachments hereto or appendices hereof to a Section, subsection or clause refer to such Section, subsection or clause as contained in this Agreement. The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole, including all annexes, exhibits and schedules attached hereto, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement or any such annex, exhibit or schedule.

(2) Wherever from the context it appears appropriate, each term stated in either the singular or plural shall include the singular and the plural, and pronouns stated in the masculine, feminine or neuter gender shall include the masculine, feminine and neuter genders. The words “including”, “includes” and “include” shall be deemed to be followed by the words “without limitation”; the word “or” is not exclusive; references to Persons include their respective successors and assigns (to the extent and only to the extent permitted by the Financing Agreements) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in any Financing Agreement refers to the knowledge (or an analogous phrase) of Borrower, except as otherwise expressly provided for herein, such words are intended to signify that a Duly Authorized Officer of Borrower has actual knowledge or awareness of a particular fact or circumstance or that a prudent individual in the position of such Duly Authorized Officer of Borrower, would reasonably be expected to have known or been aware of such fact or circumstance in the course of performing his or her duties.

2. COMMITMENT; INTEREST; FEES .

2.1 Revolving Loans . On the terms and subject to the conditions set forth in this Agreement, and provided there does not then exist a Default or an Event of Default, each Lender, severally and for itself alone, agrees to make such Lender’s Pro Rata Share of revolving loans (such loans are collectively called “ Revolving Loans ” and individually called a “ Revolving Loan ”) to the Borrower from time to time on and after the Closing Date and prior to the Credit Termination Date, so long as the aggregate amount of such advances outstanding at any time to the Borrower do not exceed the lesser of: (i) the Maximum Revolving Facility at such time minus any reserves established by the Administrative Agent pursuant to Section 2.1(b) hereof and (ii) the Borrowing Base at such time minus any reserves established by the Administrative Agent pursuant to Section 2.1(b) hereof, in each case, if at any time applicable, minus all Letter of Credit Obligations. The Borrower shall have the right to repay and reborrow any of the Revolving Loans without premium or penalty (subject to Section 3.4 hereof); provided , however , that it shall be a condition precedent to any reborrowing that as of the date of any reborrowing (any such date herein called a “ Reborrowing Date ”) all of the conditions to borrowing set forth in Section 5.1 of this Agreement shall be satisfied and all representations and warranties made

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herein shall be true and correct in all material respects as of such Reborrowing Date. The Lenders’ commitment hereunder to make Revolving Loans is hereinafter called the “ Revolving Loan Commitment .” The payment obligations of the Borrower to the Lenders hereunder are and shall be joint and several as provided in Section 12.21 hereof. The failure of any Lender to make a requested Revolving Loan on any date shall not relieve any other Lender of its obligation to make a Revolving Loan on such date, but no Lender shall be responsible for the failure of any other Lender to make any Revolving Loan to be made by such other Lender. Each Lender’s obligation to fund any Revolving Loan shall be limited to such Lender’s Revolving Loan Commitment Percentage of the Revolving Loan Commitment.

(1) Each advance to the Borrower under this Section 2.1 shall be in integral multiples of Ten Thousand Dollars ($10,000) and shall, on the day of such advance, be deposited, in immediately available funds, in the Borrower’s demand deposit account with the Administrative Agent, or in such other account as the Borrower Agent may, from time to time, designate in writing with the Administrative Agent’s approval.

(2) The Borrower acknowledges and agrees that the Administrative Agent may from time to time (i) upon five (5) calendar days notice, increase or decrease the advance rates with respect to Eligible Accounts in the Administrative Agent’s reasonable discretion (provided, prior to a Default, the Administrative Agent will not reduce any such advance rate by more than ten percent (10%), but after the occurrence and during the period of any Default, the Administrative Agent may reduce any such advance rate in any amount in its reasonable discretion), and/or (ii) establish reserves against the Borrowing Base, the Eligible Accounts in the Administrative Agent’s reasonable discretion.

(3) The Revolving Loans shall be evidenced by a separate promissory note or amended and restated promissory note (hereinafter, as the same may be amended, restated, modified or supplemented from time to time, and together with any renewals or extensions thereof or exchanges or substitutions therefor, called the “Revolving Credit Note(s)”), duly executed and delivered by the Borrower, substantially in the form set forth in Exhibit A attached hereto, with appropriate insertions, dated the Closing Date, jointly and severally payable to the order of each Lender, respectively, in the principal amount equal to such Lender’s Pro Rata Share of the Maximum Revolving Facility. THE PROVISIONS OF THE REVOLVING CREDIT NOTES NOTWITHSTANDING, THE REVOLVING LOANS THEN OUTSTANDING SHALL BECOME IMMEDIATELY DUE AND PAYABLE ON A JOINT AND SEVERAL BASIS UPON THE EARLIEST TO OCCUR OF (X) STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES PURSUANT TO SECTION 11.2 HEREOF; AND (Z) TERMINATION OF THIS AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS.

(4) Accrued interest on the Revolving Loans shall be due and payable and shall be made by the Borrower to the Administrative Agent in accordance with Section 2.7 hereof. Monthly interest payments on the Revolving Loans shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Revolving Loans. Upon maturity, the outstanding principal balance of the Revolving Loans shall be immediately due and payable, together with any remaining accrued interest thereon.

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2.1(B) Letters of Credit .

Subject to the terms and conditions of this Agreement (and any other reasonable documentation or Letter of Credit Documents required by the applicable Issuing Lender for the benefit of the Lenders from Borrower in connection with the issuance of any Letter of Credit) and upon (i) the execution by Borrower Agent, the Borrower and the Issuing Lender of a Master Letter of Credit Agreement in form and substance acceptable to the Issuing Lender (together with all amendments, modifications and restatements thereof, the “ Master Letter of Credit Agreement ”), and (ii) the execution and delivery by the Borrower, and the acceptance by the Issuing Lender, in its sole and absolute discretion, of a Letter of Credit Application, and provided there does not then exist a Default or an Event of Default, the Issuing Lender (on behalf of the Lenders, on a Pro Rata Share basis) agrees to issue for the account of the Borrower such Letters of Credit in the standard form of the Issuing Lender and otherwise in form and substance acceptable to the Issuing Lender, from time to time during the term of this Agreement, provided that the Letter of Credit Obligations may not at any time exceed, in the aggregate at any time, the lesser of (A) the Borrowing Base (minus (x) any reserves established by the Administrative Agent pursuant to Section 2.1(c) hereof), and (y) the outstanding aggregate principal amount of the Revolving Loans (which, for clarification, includes all then existing Letter of Credit Obligations), or (B) Ten Million and No/100 Dollars ($10,000,000.00); provided , further , the expiration date on any Letter of Credit will not be more than one (1) year from the date of issuance for such Letter of Credit and not later than the date that is five (5) Business Days prior to the Credit Termination Date. The Borrower shall jointly and severally reimburse Issuing Lender, Administrative Agent and each Lender immediately upon demand, for any payments required to be made by Issuing Lender, such Lender or Administrative Agent to any Person with respect to any Letter of Credit (including pursuant to Section 2.18 hereof); provided , however , Administrative Agent acknowledges that no such fees or charges regarding any Letter of Credit are due or owing on the Closing Date as a result of Borrower entering into this Agreement. The amount of any payments made by the Issuing Lender with respect to draws made by a beneficiary under (or such costs, fees and expenses in connection with) a Letter of Credit for which the Borrower has failed to reimburse the Issuing Lender upon the earlier of (1) the Issuing Lender’s demand for repayment, or (2) five (5) days from the date of such payment to such beneficiary by the Issuing Lender, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Issuing Lender to such beneficiary. Upon the occurrence of an Event of a Default and at the option of the Issuing Lender, all Letter of Credit Obligations shall be converted to Revolving Loans consisting of Base Rate Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. To the extent the provisions of the Master Letter of Credit Agreement differ from, or are inconsistent with, the terms of this Agreement, the provisions of this Agreement shall govern. For clarification, it is acknowledged that upon an issuance of a Letter of Credit, a Revolving Loan in such amount shall be deemed to have been made and shall concurrently reduce availability for additional borrowing by such amount.

The Issuing Lender will, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment by the beneficiary under any Letter of Credit issued by the Issuing Lender to ascertain that the same appear on their face to be in conformity with the terms and conditions of such Letter of Credit. If, after examination, the Issuing Lender has determined that a demand for payment under such Letter of Credit does not

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conform to the terms and conditions of such Letter of Credit, then the Issuing Lender will, as soon as reasonably practicable, give notice to the beneficiary to the effect that negotiation was not in accordance with the terms and conditions of such Letter of Credit, stating the reasons therefor and that the relevant document is being held at the disposal of such beneficiary or is being returned to such beneficiary, as the Issuing Lender may elect. The beneficiary may attempt to correct any such nonconforming demand for payment under such Letter of Credit if, and to the extent that, such beneficiary is entitled (without regard to the provisions of this sentence) and able to do so. If the Issuing Lender determines that a demand for payment under such Letter of Credit conforms to the terms and conditions of such Letter of Credit, then the Issuing Lender will make payment to the beneficiary in accordance with the terms of such Letter of Credit. The Issuing Lender has the right to require the beneficiary to surrender such Letter of Credit to Issuing Lender on the stated expiration date of such Letter of Credit.

As between the Borrower and the Issuing Lender, the Borrower assumes all risks of the acts and omissions of, or misuse of Letters of Credit by, the respective beneficiaries of the Letters of Credit. In furtherance and not in limitation of the foregoing, subject to the provisions of the Letter of Credit applications, the Issuing Lender will not be responsible: (i) for the form, validity, sufficiency, accuracy, genuineness or legal effect of any document submitted by any party in connection with the application for or issuance of the Letters of Credit, even if it should in fact prove to be in any or all respects invalid, insufficient, inaccurate, fraudulent or forged; provided, however, that the Issuing Lender will examine such documents to insure conformity thereof with any demand for payment; (ii) for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason; (iii) for failure of the beneficiary of a Letter of Credit to comply fully with conditions required in order to draw upon such Letter of Credit; (iv) for errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, telex, facsimile or otherwise, except to the extent arising out of the Issuing Lender’s willful misconduct; (v) for any loss or delay in the transmission or otherwise of any document required in order to make a drawing under any Letter of Credit or of the proceeds thereof, except to the extent arising out of the Issuing Lender’s gross negligence or willful misconduct; (vi) for the misapplication by the beneficiary of a Letter of Credit of the proceeds of any drawing under such Letter of Credit; or (vii) for any consequences arising from causes beyond the control of the Issuing Lender, including, without limitation, any acts by governmental authorities. In furtherance of the foregoing, and without limiting the generality thereof, the Borrower agrees to and shall indemnify and hold harmless the Issuing Lender and the Administrative Agent (and each of their respective directors, stockholders, officers, employees, agents, and affiliates) from and against each and every claim, loss, cost, expense and liability which might arise against the Issuing Lender (or any such other Person) arising out of or in connection with any Letter of Credit or otherwise by reason of any transfer, sale, delivery, surrender or endorsement of any bill of lading, warehouse receipt or other document held by the Issuing Lender or for its account, except solely to the extent arising out of the Issuing Lender’s gross negligence or willful misconduct. None of the above affects, impairs or prevents the vesting of any of the Issuing Lender’s or Administrative Agent’s rights or powers under this Agreement or the Borrower’s obligation to make reimbursement.

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By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) by the Issuing Lender, and without any further action on the part of the Issuing Lender or the other Lenders, the Issuing Lender hereby grants to each other Lender, and each Lender hereby acquires from the Issuing Lender, a participation in such Letter of Credit equal to such Lender’s Pro Rate Share (deemed as if being a Revolving Loan) of the aggregate amount available to be drawn under such Letter of Credit. Each Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or Event of Default or reduction or termination of the Revolving Loan Commitments, and that each such payment shall be made without any offset, counterclaim, defense, abatement, withholding or reduction whatsoever.

In consideration and in furtherance of the foregoing, each Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Lender, such Lender’s Pro Rate Share of each L/C Disbursement made by the Issuing Lender promptly upon the request of such Issuing Lender (made through the Administrative Agent) at any time from the time of such L/C Disbursement until such L/C Disbursement is reimbursed by Borrower or at any time after any reimbursement payment is required to be refunded to Borrower for any reason. Each such payment shall be made in the same manner as provided herein with respect to Revolving Loans made by such Lender, and the Administrative Agent shall promptly pay to the Issuing Lender the amounts so received by it from the Lenders. Promptly following receipt by the Administrative Agent of any payment from Borrowers pursuant to this Subsection, the Administrative Agent shall distribute such payment to the Issuing Lender or, to the extent that the other Lenders have made payments pursuant to this paragraph to reimburse the Issuing Lender, then to such Lenders and such Issuing Lender as their interests may appear. Any payment made by a Lender pursuant to this Subsection to reimburse the Issuing Lender for any L/C Disbursement shall not constitute a Loan and shall not relieve any Borrower of its obligation to reimburse such L/C Disbursement.

If the Issuing Lender shall make any L/C Disbursement in respect of a Letter of Credit, Borrower shall reimburse the Issuing Lender in respect of such L/C Disbursement by paying to the Administrative Agent an amount equal to such L/C Disbursement not later than 1:00 p.m., Chicago time, on (A) the Business Day that Borrower Agent or Parent receives notice of such L/C Disbursement, if such notice is received prior to 12:00 noon, Chicago time, or (B) the Business Day immediately following the day that Borrower Agent or Parent receives such notice, if such notice is not received prior to such time. If Borrower fails for any reason to make such payment when due, the Administrative Agent shall notify each Lender of the applicable L/C Disbursement, the payment then due from Borrower in respect thereof and such Lender’s Pro Rate Share thereof, and upon the written request (which may be by e-mail) of the Issuing Lender, each other Lender shall pay to the Administrative Agent, for the account of the Issuing Lender, such Lender’s Pro Rate Share thereof in accordance herewith.

The obligations of Borrower with respect to any Letter of Credit issued pursuant to this Agreement are absolute, unconditional and irrevocable and shall be payable and performed strictly in accordance with the terms of this Agreement and the Letter of Credit under all circumstances whatsoever, including, without limitation, (i) any lack of validity or enforceability

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of any Letter of Credit, any other Letter of Credit Document or any Financing Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect, or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit, (iii) payment by the Issuing Lender under a Letter of Credit against presentation of a draft or other document that does not comply strictly with the terms of such Letter of Credit, or any payment by the Issuing Lender under any Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any bankruptcy, reorganization or other insolvency law, (iv) the existence of any claim, counterclaim, setoff, defense or other right that Borrower may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the Issuing Lender or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction, (v) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of or defense to Borrowers’ obligations hereunder, (vi) any amendment or waiver of or consent to any departure from any or all of the Financing Agreements, (vii) any improper use which may be made of any Letter of Credit or any improper acts or omissions of any beneficiary or transferee of any Letter of Credit in connection therewith, (viii) the existence of any claim, set-off, defense or any right which any Borrower may have at any time against any beneficiary or any transferee of any Letter of Credit (or Persons for whom any such beneficiary or any such transferee may be acting), any Lender or any other Person, whether in connection with any Letter of Credit, any transaction contemplated by any Letter of Credit, this Agreement, or any other Financing Agreement, or any unrelated transaction, (ix) the insolvency of any Person issuing any documents in connection with any Letter of Credit, (x) any breach of any agreement between any Borrower and any beneficiary or transferee of any Letter of Credit, (xi) any irregularity in the transaction with respect to which any Letter of Credit is issued, including any fraud by the beneficiary or any transferee of such Letter of Credit, (xii) any errors, omissions, interruptions or delays in transmission or delivery of any messages, by mail, cable, telegraph, wireless or otherwise, whether or not they are in code, (xiii) any act, error, neglect or default, omission, insolvency or failure of business of any of the correspondents of the Issuing Lender, and (xiv) any other circumstances arising from causes beyond the control of the Issuing Lender; except, in each case above, as result from the gross negligence or willful misconduct of Issuing Lender.

No Issuing Lender shall be under any obligation to issue any Letter of Credit if: (i) the issuance of such Letter of Credit would violate one or more policies of the Issuing Lender applicable to letters of credit generally; (ii) except as otherwise agreed by the Administrative Agent and the Issuing Lender, such Letter of Credit is in an initial stated amount less than $100,000, in the case of a commercial Letter of Credit, or $500,000, in the case of a standby Letter of Credit; (iii) except as otherwise agreed by the Administrative Agent and the Issuing Lender, such Letter of Credit is to be denominated in a currency other than United States Dollars; (iv) such Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder; or (v) any Lender is at such time a Defaulting Lender hereunder, unless the Issuing Lender has entered into satisfactory arrangements with the

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Borrower or such Defaulting Lender to eliminate the Issuing Lender’s risk with respect to such Defaulting Lender.

2.2 [Intentionally Omitted.] .

2.3 Reduction of Revolving Loan Commitment by the Borrower . The Borrower may from time to time, on at least five (5) Business Days’ prior written notice received by the Administrative Agent, permanently reduce the amount of the Revolving Loan Commitment but only upon first repaying the amount, if any, by which the aggregate unpaid principal amount of the Revolving Credit Note exceeds the then reduced amount of the Revolving Loan Commitment.

2.4 Principal Balance of Liabilities Not to Exceed the Maximum Revolving Facility . The sum of the aggregate outstanding principal balance of the Loans to the Borrower made under this Agreement shall not, at any time, exceed the Maximum Revolving Facility. The Borrower agrees that if at any time any such excess shall arise, the Borrower shall immediately pay on a joint and several basis to the Administrative Agent for distribution to the applicable Issuing Lender and Lenders such amount as may be necessary to eliminate such excess.

2.5 The Borrower’s Loan Account . The Administrative Agent, on behalf of each Lender, shall maintain a loan account (the “ Loan Account ”) on its books for the Borrower in which shall be recorded (a) all Loans made by the Lenders (including Administrative Agent) to the Borrower pursuant to this Agreement, (b) all payments made by the Borrower on all such Loans, and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Loan Account shall be made in accordance with the Administrative Agent’s customary accounting practices as in effect from time to time. The Borrower promises to pay the amount reflected as owing by Borrower under its Loan Account and all of its other obligations hereunder as such amounts become due or are declared due pursuant to the terms of this Agreement. Notwithstanding the foregoing, the failure so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the Borrower’s obligations under this Agreement or under the Revolving Credit Note to repay the outstanding principal amount of any of the Loans together with all interest accruing thereon.

2.6 Statements . All Loans to the Borrower, and all other debits and credits provided for in this Agreement, shall be evidenced by entries made by the Administrative Agent in its internal data control systems showing the date, amount and reason for each such debit or credit. Until such time as the Administrative Agent shall have rendered to the Borrower Agent written statements of account as provided herein, the balance in the Loan Account, as set forth on the Administrative Agent’s most recent computer printout, shall be rebuttably presumptive evidence of the amounts due and owing the Lenders by the Borrower. From time to time the Administrative Agent shall render to the Borrower Agent a statement setting forth the balance of the Loan Account, including principal, interest, expenses and fees. Each such statement shall be subject to subsequent adjustment by the Administrative Agent but shall, absent manifest errors or omissions, be presumed correct and binding upon the Borrower.

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2.7 Interest . (a) The Borrower agrees to jointly and severally pay to the Administrative Agent on behalf of the Lenders interest on the daily outstanding principal balance of (i) the Base Rate Loans at the Base Rate from time to time in effect, plus the Applicable Base Rate Margin, and (ii) the Libor Loans at the Libor Rate; provided , however , that immediately following the occurrence and during the continuance of an Event of Default, and notwithstanding any other provisions of this Agreement to the contrary, the Borrower agrees to pay to the Administrative Agent on behalf of the Lenders interest on the outstanding principal balance of the Loans at the per annum rate of three percent (3%) plus the rate otherwise payable hereunder with respect to such Loans (the “ Default Rate ”).

(b) Accrued interest on each Base Rate Loan shall be payable on the first calendar day of each month and at maturity, commencing with the first day of the calendar month after the initial disbursement of such loan. Accrued interest on each Libor Loan shall be payable on the last day of the Libor Interest Period relating to such Libor Loan and at maturity, commencing with the first such last day of the initial Libor Interest Period. Monthly interest payments on the Loans shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Loans. Upon maturity, the outstanding principal balance of all Loans shall be immediately due and payable, together with any remaining accrued interest thereon. Interest shall be computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). If any payment of principal of, or interest on, the Revolving Credit Note falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension.

2.8 Method for Making Payments . All payments that the Borrower is required to make to the Administrative Agent on behalf of the Lenders under this Agreement or under any of the other Financing Agreements shall be made in immediately available funds not later than 1:00 p.m. (Chicago time) on the date of payment at the Administrative Agent’s office at 120 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the Administrative Agent directs in writing from time to time, or, in the Administrative Agent’s sole and absolute discretion after the occurrence and during the continuance of any Default, by appropriate debits to the Loan Account. Borrower hereby irrevocably authorizes and instructs the Administrative Agent after the occurrence and during the continuance of any Default to direct debit any of Borrower’s operating accounts with Administrative Agent or any Lender for all principal, interest, fees and expenses due hereunder with respect to the Loans and the other Liabilities. Payments made after 1:00 p.m. (Chicago time) shall be deemed to have been made on the next succeeding Business Day. Administrative Agent shall promptly remit to each Lender its Pro Rata Share of all such payments received in collected funds by Administrative Agent for the account of such Lender; provided , however , all payments due by Borrower under Section 3 , as applicable, shall be made by Borrower directly to Lender entitled thereto without setoff, counterclaim or other defense.

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any of the other Financing Agreements, shall survive such termination until all of the Liabilities under this Agreement and the other Financing Agreements have been indefeasibly paid in full in cash. In addition, the Liabilities may be accelerated as set forth in Section 11.2 hereof. Upon the effective date of termination, all of the Liabilities shall become immediately due and payable on a joint and several basis without notice or demand. Notwithstanding any termination, until all of the Liabilities hereunder shall have been indefeasibly paid and satisfied in full in cash, the Administrative Agent shall be entitled to retain its Liens (for the ratable benefit of the Lenders and the Administrative Agent) in and to all existing and future Collateral and the Borrower shall continue to remit collections of Accounts of the Borrower and proceeds as provided herein.

2.10 Optional Prepayment of Loans . Borrower may, at its option, permanently prepay, without penalty or premium (other than as specified in Section 3.4 hereof), at any time during the term of this Agreement all or any portion of any of the Revolving Loans.

2.11 Limitation on Charges . It being the intent of the parties that the rate of interest and all other charges to the Borrower be lawful, if for any reason the payment of a portion of the interest or other charges otherwise required to be paid under this Agreement would exceed the limit which the Lenders may lawfully charge the Borrower, then the obligation to pay interest or other charges shall automatically be reduced to such limit and, if any amounts in excess of such limit shall have been paid, then such amounts shall at the sole option of the Administrative Agent (or otherwise at the direction of the Required Lenders) either be refunded to the Borrowers or credited to the principal amount of the Liabilities (or any combination of the foregoing) so that under no circumstances shall the interest or other charges required to be paid by the Borrowers hereunder exceed the maximum rate allowed by applicable Laws, and Borrowers shall not have any action against any Lender or the Administrative Agent for any damages arising out of the payment or collection of any such excess interest.

2.12 Method of Selecting Rate Options; Additional Provisions Regarding Libor Loans . The Borrower may select a Libor Rate with respect to a Revolving Loan as provided in this Section 2.12 ; provided , however , that with respect to each and all Libor Loans made hereunder (i) the initial advance shall be in an amount not less than Five Hundred Thousand Dollars ($500,000) and in integral multiples of One Hundred Thousand Dollars ($100,000) thereafter; and (ii) there shall not exist at any one time outstanding more than five (5) separate traunches of Libor Loans. Revolving Loans shall bear interest at the Base Rate unless the Borrower provides a Borrowing Notice to the Administrative Agent in the form of Exhibit B , signed by a Duly Authorized Officer of the Borrower, irrevocably electing that all or a portion of the Revolving Loans are to bear interest at a Libor Rate (the “ Borrowing Notice ”). The Borrowing Notice shall be delivered to the Administrative Agent not later than two (2) Business Days before the Borrowing Date for each Libor Loan, specifying:

(1) The Borrowing Date, which shall be a Business Day, of such Loan;

(2) The type and aggregate amount of such Loan;

(3) The Rate Option selected for such Loan; and

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(4) The Libor Interest Period applicable thereto.

Each Libor Loan shall bear interest from and including the first day of the Libor Interest Period applicable thereto to (but not including) the last day of such Libor Interest Period at the interest rate determined as applicable to such Libor Loan. If at the end of an Libor Interest Period for an outstanding Libor Loan, the Borrower has failed to select a new Rate Option or to pay such Libor Loan, then such Loan, if a Revolving Loan, shall be automatically converted to a Base Rate Loan on and after the last day of such Libor Interest Period until paid or until the effective date of a new Rate Option with respect thereto selected by the Borrower. An outstanding Revolving Loan that is a Base Rate Loan may be converted to a Libor Loan at any time subject to the notice provisions applicable to the type of Loan selected. The Borrower may not select a Libor Rate for a Revolving Loan if there exists a Default or Event of Default. The Borrower shall select Libor Interest Periods with respect to Libor Loans so that such Libor Interest Period does not expire after the end of the Credit Termination Date.

2.13 Setoff . (a) Other than with respect to Government Accounts, Borrower agrees that the Administrative Agent and each Lender has all rights of setoff and banker’s liens provided by applicable law. The Borrower agrees that, if at any time (i) any amount owing by it under this Agreement or any Financing Agreement is then due and payable to the Administrative Agent or Lenders, or (ii) or an Event of Default shall have occurred and be continuing, then the Administrative Agent or Lenders, in their sole discretion, may set off against and apply to the payment of any and all Liabilities, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with the Administrative Agent or such Lender.

(b) Without limitation of Section 2.13(a) hereof, the Borrower agrees that, upon and after the occurrence of any Event of Default, the Administrative Agent and each Lender is hereby authorized, at any time and from time to time, without prior notice to the Borrower (provided, however, prior to an Event of Default the Administrative Agent and such Lender shall use reasonable efforts to provide notice of any such action within a reasonable time thereafter but the Administrative Agent and such Lender shall not be liable for any failure to provide such notice), (i) to set off against and to appropriate and apply to the payment of any and all Liabilities any and all amounts which the Administrative Agent or Lender is obligated to pay over to the Borrower (whether matured or unmatured, and, in the case of deposits, whether general or special, time or demand and however evidenced), and (ii) pending any such action, to the extent necessary, to deposit such amounts with the Administrative Agent as Collateral to secure such Liabilities and to dishonor any and all checks and other items drawn against any deposits so held as the Administrative Agent in its sole discretion may elect.

(c) The rights of the Administrative Agent and Lenders under this Section 2.13 are in addition to all other rights and remedies which the Administrative Agent and Lenders may otherwise have in equity or at law.

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and interest on the Loans (or such participation) then held by them, then such Lender shall purchase from the other Lenders such participations in the Loans held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.

2.14 Termination of Commitment . On the date on which the Commitment terminates pursuant to Section 11.2 hereof, all Loans and other Liabilities shall become immediately due and payable, without presentment, demand or notice of any kind.

2.15 Unused Line Fee. . Borrower hereby agrees to pay to the Administrative Agent for the Lenders on a Pro Rata Share basis the Unused Line Fee, which shall be payable in arrears, on the first day of each month commencing on April 1, 2011, and on the Stated Maturity Date, which fee shall be nonrefundable and deemed fully earned on the date of payment thereof.

2.16 Closing Fee . On the Closing Date, the Borrower shall pay to the Administrative Agent a one-time closing fee pursuant to the Fee Letter in immediately available funds, which fee shall be nonrefundable and deemed fully earned as of such date (“ Closing Fee ”).

2.17 Late Charge . If any installment of principal or interest due hereunder shall become overdue for five (5) days after the date when due, the Borrower shall pay to the Administrative Agent (for the ratable benefit of the Lenders) on demand a “late charge” of five cents ($.05) for each dollar so overdue in order to defray part of the increased cost of collection occasioned by any such late payment, as liquidated damages and not as a penalty.

2.18 L/C Fees . For each Letter of Credit, the Borrower will pay to the Administrative Agent for the Lenders a fee (“ L/C Fee ”) equal to three percent (3.00%) per annum of the undrawn face amount of each Letter of Credit, provided , that the L/C Fee will not be less than the Administrative Agent’s standard minimum amount for such fees in effect at such time. The L/C Fee is and shall be payable quarterly in advance, on the first day of each Fiscal Quarter during which each such Letter of Credit remains outstanding, and such fee shall be nonrefundable and deemed fully earned as of such payment date. The L/C Fee will be computed on the basis of a 360 day year for the actual number of days elapsed (which results in a larger fee being paid than if computed on the basis of a 365-day year). In addition, the Borrower will pay to the Issuing Lender all customary charges and out-of-pocket and additional expenses in connection with the issuance and administration (and, if applicable, amendment) of any Letters of Credit issued under this Agreement.

3. CHANGE IN CIRCUMSTANCES .

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policy, guideline or directive (whether or not having the force of law), or any change therein, or any change in the interpretation or administration thereof, or the compliance of any Lender therewith, or Regulation D of the Board of Governors of the Federal Reserve System,

(1) subjects any Lender to any tax, duty, charge or withholding on or from payments due from the Borrower (excluding taxation of the overall net income or receipts of such Lender or any branch profits taxes), or changes the basis of taxation of payments to such Lender in respect of its Loans or other amounts due it hereunder, or

(2) imposes, modifies, or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (other than reserves and assessments taken into account in determining the interest rate applicable to Libor Loans), or

(3) imposes any other condition the result of which is to increase the cost to any Lender of making, funding or maintaining advances or reduces any amount receivable by such Lender in connection with advances, or requires any Lender to make any payment calculated by reference to the amount of advances held or interest received by it, by an amount deemed material by such Lender, or

then, within three (3) Business Days of demand by such Lender, the Borrower agrees to pay such Lender that portion of such increased expense incurred (including, in the case of clause (d), any reduction in the rate of return on capital to an amount below that which it could have achieved but for such law, rule, regulation, policy, guideline or directive and after taking into account such Lender’s policies as to capital adequacy) or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining the Loans.

3.2 Availability of Rate Options . If Administrative Agent determines (or Required Lenders advise Administrative Agent in writing) that maintenance of any Libor Loans would violate any applicable law, rule, regulation or directive of any government or any division, agency, body or department thereof, whether or not having the force of law, the Lenders shall suspend the availability of the Libor Rate option and the Administrative Agent shall require any Libor Loans outstanding to be promptly converted to a Base Rate Loan subject to the Borrower’s compliance with Section 3.4 hereof; or if Administrative Agent determines (or Required Lenders advise Administrative Agent in writing) that (i) deposits of a type or maturity appropriate to match fund Libor Loans are not available, the Lenders shall suspend the availability of the Libor Rate after the date of any such determination, or (ii) the Libor Rate does not accurately reflect the cost of making a Libor Loan, then, if for any reason whatsoever the provisions of Section 3.1 hereof are inapplicable, the Lenders shall, at their option, suspend the availability of the Libor Rate after the date of any such determination or permit (solely in the case of clause (ii) ) the Borrower to pay the Lenders for any increased cost the Lenders may incur.

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3.3 Taxes . All payments by the Borrower under this Agreement shall be made free and clear of, and without deduction for, any present or future income, excise, stamp or other taxes, fees, levies, duties, withholdings or other charges of any nature whatsoever, now or hereafter imposed by any taxing authority, other than franchise taxes and taxes imposed on or measured by any Lender’s net income or receipts or branch profits taxes (such non-excluded items being called “ Taxes ”). If any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower shall:

(1) pay directly to the relevant authority the full amount required to be so withheld or deducted;

(2) promptly forward to the Administrative Agent an official receipt or other documentation satisfactory to the Administrative Agent evidencing such payment to such authority; and

(3) pay to the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by the Lenders will equal the full amount the Lenders would have received had no such withholding or deduction been required.

Moreover, if any Taxes are directly asserted against any Lender with respect to any payment received by such Lender hereunder, such Lender may pay such Taxes and the Borrower agrees to promptly pay such additional amounts (including, without limitation, any penalties, interest or expenses) as is necessary in order that the net amount received by the Lenders after the payment of such Taxes (including, without limitation, any Taxes on such additional amount) shall equal the amount the Lenders would have received had not such Taxes been asserted.

To the extent permitted by applicable law, each Lender that is not a United States person within the meaning of Code Section 7701(a)(30) (a “ Non-U.S. Participant ”) shall deliver to Borrower and Administrative Agent on or prior to the Closing Date (or in the case of a Lender that is an Assignee, on the date of such assignment to such Lender) two accurate and complete original signed copies of IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable form prescribed by the IRS) certifying to such Lender’s entitlement to a complete exemption from United States withholding tax on interest payments to be made hereunder or on any Loan. If a Lender that is a Non-U.S. Participant is claiming a complete exemption from withholding on interest pursuant to Code Sections 871(h) or 881(c), such Lender shall deliver (along with two accurate and complete original signed copies of IRS Form W-8BEN) a certificate in form and substance reasonably acceptable to Administrative Agent (any such certificate, a “ Withholding Certificate ”). In addition, each Lender that is a Non-U.S. Participant agrees that from time to time after the Closing Date (or in the case of a Lender that is an Assignee, after the date of the assignment to such Lender), when a lapse in time (or change in circumstances occurs) renders the prior certificates hereunder obsolete or inaccurate in any material respect, such Lender shall, to the extent permitted under applicable law, deliver to Borrower and Administrative Agent two new and accurate and complete original signed copies of an IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable forms prescribed by the IRS), and if applicable, a new Withholding Certificate, to confirm or establish

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the entitlement of such Lender or Administrative Agent to an exemption from United States withholding tax on interest payments to be made hereunder or on any Loan.

Each Lender that is not a Non-U.S. Participant (other than any such Lender which is taxed as a corporation for U.S. federal income tax purposes) shall provide two properly completed and duly executed copies of IRS Form W-9 (or any successor or other applicable form) to Borrower and Administrative Agent certifying that such Lender is exempt from United States backup withholding tax. To the extent that a form provided pursuant to this Section is rendered obsolete or inaccurate in any material respects as result of change in circumstances with respect to the status of a Lender, such Lender shall, to the extent permitted by applicable law, deliver to Borrower and Administrative Agent revised forms necessary to confirm or establish the entitlement to such Lender’s or Administrative Agent’s exemption from United States backup withholding tax. Borrower shall not be required to pay additional amounts to a Lender, or indemnify any Lender, under this Section to the extent that such obligations would not have arisen but for the failure of such Lender to comply with this Section.

Each Lender agrees to and shall indemnify Administrative Agent and hold Administrative Agent harmless for the full amount of any and all present or future Taxes and related liabilities (including penalties, interest, additions to tax and expenses, and any Taxes imposed by any jurisdiction on amounts payable to Administrative Agent under this Section 3.3 ) which are imposed on or with respect to principal, interest or fees payable to such Lender hereunder as a result of the failure by such Lender to deliver, or as a result of the inaccuracy, inadequacy or deficiency of, any documentation required to be delivered by such Lender to the Administrative Agent as set forth above. Such indemnification shall be made within thirty (30) days from the date Administrative Agent makes written demand therefor.

3.4 Funding Indemnification . If any payment of a Libor Loan occurs on a date that is not the last day of the applicable Libor Interest Period, whether because of acceleration, prepayment or otherwise, or a Libor Loan is not made on the date specified by the Borrower, the Borrower shall indemnify the Lender for any loss or cost incurred by it resulting therefrom, including, without limitation, any loss or cost in liquidating or employing deposits acquired to fund or maintain the Libor Loan.

3.5 Lender Statements . Each affected Lender shall deliver a written statement to the Borrower and Administrative Agent as to the amount due, if any, under Sections 3.1 , 3.3 or 3.4 hereof. Such written statement shall set forth in reasonable detail the calculations upon which such Lender determined such amount and shall be final, conclusive and binding on the Borrower in the absence of demonstrable error. Unless otherwise provided herein, the amount specified in the written statement shall be payable on demand after receipt by the Borrower of the written statement.

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Administrative Agent in writing) that the Libor Base Rate will not adequately and fairly reflect the cost to Lenders of maintaining or funding the Loan or any portion thereof for such Libor Interest Period, or that the making or funding of Libor Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of Administrative Agent (or Required Lenders) adversely affects such Loans, then, in either case, so long as such circumstances shall continue: (i) Lenders shall not be under any obligation to make, convert into or continue Libor Loans and (ii) on the last day of the then current Libor Interest Period for each Libor Loan, each such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each affected Lender shall promptly give the Borrower written notice of any determination made by it under this Section accompanied by a statement setting forth in reasonable detail the basis of such determination.

3.7 Illegality . If any applicable law or regulation, or any interpretation thereof by any court or any governmental or other regulatory body charged with the administration thereof, should make it unlawful for any Lender or its lending office to make, maintain or fund any Libor Loan, then the obligation of such Lender to make, convert into or continue such Libor Loan shall, upon the effectiveness of such event, be suspended for the duration of such unlawfulness, and on the last day of the current Libor Interest Period for such Libor Loan (or, in any event, if Administrative Agent or Required Lenders so request, on such earlier date as may be required by the relevant law, regulation or interpretation), the Libor Loans shall, unless then repaid in full, automatically convert to Base Rate Loans.

3.8 Right of Lenders to Fund through Other Offices . Each Lender may, if it so elects, fulfill its commitment as to any Libor Loan by causing a foreign branch or Affiliate of such Lender to make such Loan; provided that such election shall not increase the costs to Borrower hereunder and that in such event for the purposes of this Agreement such Loan shall be deemed to have been made by such Lender and the obligation of Borrower to repay such Loan shall nevertheless be to such Lender and shall be deemed held by it, to the extent of such Loan, for the account of such branch or Affiliate.

3.9 Discretion of Lenders as to Manner of Funding . Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of all or any part of its Loans in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Lender had actually funded and maintained each Libor Loan during each Libor Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Libor Interest Period and bearing an interest rate equal to the Libor Rate for such Libor Interest Period.

4. ELIGIBILITY REQUIREMENTS; CASH COLLATERAL ACCOUNT; ATTORNEY-IN-FACT .

4.1 Account Warranties; Schedule of Accounts . (a) The amounts shown on the Schedule of Accounts and all invoices and statements delivered to the Administrative Agent with respect to any Account, are and will be actually and absolutely owing to the Borrower and are and will not be contingent for any reason. There are no set-offs, counterclaims or disputes existing or asserted with respect to any Accounts included on any Schedule of Accounts and the

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Borrower has not made any agreement with any Account Debtor for any deduction from such Account, except for discounts or allowances allowed by the Borrower in the ordinary course of business for prompt payment, all of which discounts or allowances are reflected in the calculation of the invoice related to such Account. There are no reserves against the collection of Accounts not set forth in the applicable Schedule of Accounts or the financial statements delivered pursuant to Section 8.1 hereof and there are no facts, events or occurrences which in any way impair the validity or enforcement of any of the Accounts or tend to reduce the amount payable thereunder from the amount of the invoice shown on any Schedule of Accounts, and on all contracts, invoices and statements delivered to the Administrative Agent with respect thereto.

(b) Verification of Accounts . The Administrative Agent and Lenders shall have the right, at any time or times hereafter, in the name of the Administrative Agent or a nominee of the Administrative Agent, to verify the validity, amount or any other matter relating to any Accounts of the Borrower, by mail, telephone, facsimile or otherwise.

4.2 Account Covenants . The Borrower shall promptly upon its learning thereof: (a) inform the Administrative Agent in writing of any delay in the Borrower’s performance of any of its obligations to any Account Debtor or of any assertion of any claims, offsets or counterclaims by any Account Debtor of the Borrower other than made in the ordinary course of business, either of which could have a Material Adverse Effect; (b) furnish to and inform the Administrative Agent of all adverse information relating to the financial condition of any Account Debtor of the Borrower which could have a Material Adverse Effect; and (c) notify the Administrative Agent in writing if any of Borrower’s then existing Accounts scheduled to the Administrative Agent with respect to which the Administrative Agent for the Lenders has made an advance are no longer Eligible Accounts.

4.3 Collection of Accounts and Payments (a) A blocked account (the “ Commercial Blocked Account ”) shall have been established in the Borrower’s name with Administrative Agent, pursuant to which Administrative Agent shall have control over the Commercial Blocked Account in accordance with the Blocked Account Agreement, pursuant to which the Borrower shall direct all Account Debtors (other than Account Debtors obligated on Government Accounts) to directly remit and to which the Borrower shall remit all payments on Accounts of the Borrower (other than Government Accounts) and in which the Borrower will immediately deposit all payments made for Inventory of the Borrower, if any, or services provided by the Borrower and all other proceeds of the Collateral in the identical form in which such payment was made, whether in cash or by check. In addition, on or prior to the Closing Date, a blocked account (the “ Government Blocked Account ”) shall have been established in the Borrower’s name with Administrative Agent, pursuant to which the Borrower shall have control over the Government Blocked Account in accordance with the Blocked Account Agreement, pursuant to which the Borrower shall direct all Account Debtors obligated on Government Accounts to directly remit and to which the Borrower shall remit all payments on Government Accounts of the Borrower and all other proceeds of the foregoing Collateral in the identical form in which such payment was made, whether in cash or by check. All amounts deposited in the Commercial Blocked Account and the Government Blocked Account will be automatically transferred, on a daily basis, to a demand deposit account (the “ Demand Deposit Account ”). The Demand Deposit Account will be established in the Borrower’s name with the Administrative Agent. Notwithstanding the foregoing, the Borrower hereby irrevocably authorizes the

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Administrative Agent upon the occurrence of a Default or an Event of Default to cause all amounts deposited in the Commercial Blocked Account to be automatically transferred, on a daily basis, to a concentration account at the Administrative Agent’s offices in Chicago, Illinois (the “ Cash Collateral Account ”) during the period of such Default or Event of Default. In addition, upon the occurrence of a Default or an Event of Default the Borrower shall transfer, on a daily basis, all amounts in the Government Blocked Account to the Cash Collateral Account during the period of such Default or Event of Default. The Borrower hereby agrees that all payments made to the Commercial Blocked Account, received in the Cash Collateral Account, or otherwise received by the Administrative Agent, whether in respect of the Accounts of the Borrower or as proceeds of other Collateral or otherwise, will be the sole and exclusive property of the Administrative Agent for the ratable benefit of the Lenders, the Issuing Lender and Administrative Agent (to the extent of the Liabilities). The Borrower further agrees that all payments made to the Commercial Blocked Account and the Government Blocked Account and transferred to the Cash Collateral Account will be applied on account of the Liabilities of the Borrower as follows: (a) each day’s available balance in respect of checks and other instruments received by the Administrative Agent in the Cash Collateral Account or otherwise at its offices in Chicago, Illinois will be credited by the Administrative Agent (conditional upon final collection) to the Borrower’s Loan Account and shall reduce outstandings on the Revolving Loans two (2) Business Days’ after receipt by the Administrative Agent, and (b) all cash payments received by the Administrative Agent in the Cash Collateral Account or otherwise at its offices in Chicago, Illinois, including, without limitation, payments made by wire transfer of immediately available funds received by the Administrative Agent, will be credited by the Administrative Agent to the Borrower’s Loan Account on the receipt of immediately available funds by the Administrative Agent. If during the period of such Default or Event of Default, the Borrower (or any director, officer, employee, affiliate, or agent thereof) shall receive any payment from any Account Debtor (other than an Account Debtor obligated on a Government Account), the Borrower hereby agrees that all such payments shall be the sole and exclusive property of the Administrative Agent (to the extent of the Liabilities), and the Borrower shall hold such payments in trust as the Administrative Agent’s trustee and immediately deliver said payments to the Cash Collateral Account established pursuant to this Section and shall be applied in accordance with this Section. The Borrower agrees to pay to the Administrative Agent any and all reasonable fees, costs and expenses which the Administrative Agent incurs in connection with opening and maintaining the Commercial Blocked Account, the Government Blocked Account and the Cash Collateral Account for the Borrower and depositing for collection by the Administrative Agent any check or item of payment received and/or delivered to the Administrative Agent on account of the Borrower’s Liabilities. The Borrower shall cooperate with the Administrative Agent in the identification and reconciliation on a daily basis of all amounts received in the Commercial Blocked Account and the Government Blocked Account. If more than five percent (5%) of the amount of payments on the Accounts since the date of the most recent Revolving Loan is not identified or reconciled to the satisfaction of the Administrative Agent within five (5) Business Days of receipt, the Administrative Agent for the Lenders shall not be obligated to make further Revolving Loans until such amount is identified or is reconciled to the sole and absolute satisfaction of the Administrative Agent. The Administrative Agent may utilize its own staff or, if it deems necessary, engage an outside auditor, in either case at the Borrower’s expense, to make such examination and report as may be necessary to identify and reconcile such amount.

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4.4 Appointment of the Administrative Agent as the Borrower’s Attorney-in-Fact . The Borrower hereby irrevocably designates, makes, constitutes and appoints the Administrative Agent (and all Persons designated by the Administrative Agent in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact, and authorizes the Administrative Agent, in the Borrower’s or the Administrative Agent’s name, after an Event of Default has occurred and is continuing to do the following: (a) at any time, (i) endorse the Borrower’s name upon any items of payment or proceeds thereof and deposit the same in the Administrative Agent’s account on account of the Borrower’s Liabilities, (ii) endorse the Borrower’s name upon any chattel paper, document, instrument, invoice, or similar document or agreement relating to any Account of the Borrower or any goods pertaining thereto to collect the proceeds thereof; (iii) sign the Borrower’s name on any verification of Accounts of the Borrower and notices thereof to Account Debtors (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable Law to do so); (iv) take control in any manner of any item of payment on or proceeds of any Account of the Borrower and apply such item of payment or proceeds to the Liabilities, and (i) demand payment of any Accounts of the Borrower; (ii) enforce payment of Accounts of the Borrower by legal proceedings or otherwise; (iii) exercise all of the Borrower’s rights and remedies with respect to proceedings brought to collect any Account; (iv) sell or assign any Account of the Borrower upon such terms, for such amount and at such time or times as the Administrative Agent deems advisable, (v) settle, adjust, compromise, extend or renew any Account of the Borrower; (vi) discharge and release any Account of the Borrower; (vii) prepare, file and sign the Borrower’s name on any proof of claim in bankruptcy or other similar document against any Account Debtor (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable Law to do so); (viii) have access to any lock box or postal box into which the Borrower’s mail is deposited, and open and process all payments on Accounts addressed to the Borrower and deposited therein, and (ix) do all other acts and things which are necessary, in the Administrative Agent’s reasonable discretion, to fulfill the Borrower’s obligations under this Agreement. The Borrower hereby ratifies and approves all acts under such power of attorney and neither Administrative Agent nor any other Person acting as Borrower’s attorney hereunder will be liable for any acts or omissions or for any error of judgment or mistake of fact or law made in good faith except as result of its gross negligence, willful misconduct or illegal activity. The appointment of Administrative Agent (and any of the Administrative Agent’s officers, employees or agents designated by the Administrative Agent) as Borrower’s attorney, and each and every one of Administrative Agent’s rights and powers, being coupled with an interest, are irrevocable until all of the Liabilities have been fully repaid and this Agreement shall have expired or been terminated in accordance with the terms hereunder. Notwithstanding anything to the contrary contained in this Section 4.4 , any reference to “any Account of the Borrower” contained in this Section shall be deemed to exclude any Government Accounts to the extent that the failure to do so would violate applicable Law. Without restricting the generality of the foregoing, after an Event of Default has occurred and is continuing, Borrower hereby appoints and constitutes the Administrative Agent its lawful attorney-in-fact with full power of substitution in the Property to use unadvanced funds remaining under the Revolving Credit Note or which may be reserved, escrowed or set aside for any purposes hereunder at any time, or to advance funds in excess of the face amount of the Revolving Credit Note, to pay, settle or compromise all existing bills and claims, which may be liens or security interests, or to avoid such bills and claims becoming liens against the Collateral; to execute all applications and

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certificates in the name of Borrower prosecute and defend all actions or proceedings in connection with the Collateral (including any Leases pertaining to Property); and to do any and every act which the Borrower might do in its own behalf; it being understood and agreed that this power of attorney shall be a power coupled with an interest and cannot be revoked.

4.5 Notice to Account Debtors . Following the occurrence of a Default or Event of Default, the Administrative Agent may, in its sole discretion, at any time or times, without prior notice to the Borrower, notify any or all Account Debtors of the Borrower (other than Account Debtors obligated on Government Accounts to the extent that it would otherwise violate applicable Law to do so) that the Accounts of the Borrower have been assigned to the Administrative Agent, that the Administrative Agent has a Lien therein, and that all payments upon such Accounts be made directly to the Cash Collateral Account or otherwise directly to the Administrative Agent. Notwithstanding anything to the contrary contained in this Section 4.5 , any reference to “Accounts of the Borrower” contained in this Section shall be deemed to exclude any Government Accounts to the extent that the failure to do so would violate applicable Law.

4.6 Equipment Warranties . The Borrower represents and warrants that (a) the Borrower’s Equipment is not subject to any Lien whatsoever except for the Permitted Liens; and (b) each item of Equipment that is material to the operations of Borrower is in working condition and repair, ordinary wear and tear excepted, and is currently used or usable in Borrower’s business.

4.7 Equipment Records . The Borrower shall at all times hereafter keep correct and accurate records itemizing and describing the kind, type, age and condition of its Equipment, the Borrower’s cost therefor and accumulated depreciation thereon, and retirements, sales, or other dispositions thereof, all of which records shall be available during Borrower’s usual business hours at the request of the Administrative Agent.

5. CONDITIONS OF LOANS .

5.1 Conditions to all Loans . Notwithstanding any other term or provision contained in this Agreement, the making of any Loan (and, for clarification, issuance of any Letter of Credit) provided for in this Agreement shall be conditioned upon the following:

(1) The Borrower’s Request. The Administrative Agent shall have received, (i) with respect to a request by Borrower for a Base Rate Loan, by no later than 11:00 a.m. (Chicago time) on the day on which such Loan is requested to be made hereunder, a telephonic request from any Person who the Administrative Agent reasonably believes is authorized by Borrower to make a borrowing request on behalf of Borrower, for a Loan in a specific amount, and (ii) with respect to a request by Borrower for a Libor Loan, by no later than 1:00 p.m. (Chicago time) two (2) Business Days prior to the day on which a Libor Loan is requested, the Borrowing Notice required under Section 2.12 hereof. In addition, each request for a Loan shall be accompanied or preceded by all other documents not previously delivered as required to be delivered to the Administrative Agent under Section 5.2 hereof, and a request for any Revolving Loan shall be accompanied or preceded by a borrowing base certificate from the Borrower, signed by a Duly Authorized Officer, in form and substance satisfactory to the

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Administrative Agent. The Administrative Agent shall have no liability to the Borrower or any other Person as a result of acting on any telephonic request that the Administrative Agent believes in good faith to have been made by any Person authorized by Borrower to make a borrowing request on behalf of Borrower. Promptly upon receipt of such borrowing request, Administrative Agent will advise each Lender thereof. Not later than 1:00 p.m. (Chicago time), on the date of a proposed borrowing of a Loan, each Lender shall provide Administrative Agent at the office specified by Administrative Agent with immediately available funds covering such Lender’s Pro Rata Share of such borrowing and, so long as Administrative Agent has not received written notice that the conditions precedent set forth in Section 5 with respect to such borrowing have not been satisfied, Administrative Agent shall pay over the funds received by Administrative Agent to Borrower on the requested borrowing date.

(2) Financial Condition. No Material Adverse Change (or material adverse change, as determined by the Administrative Agent in its reasonable good faith discretion, in the prospects of Borrower) shall have occurred at any time or times subsequent to the most recent request for any Loan under this Agreement.

(3) No Default. Neither a Default nor an Event of Default shall have occurred and be continuing.

(4) Other Requirements. The Administrative Agent shall have received, in form and substance reasonably satisfactory to the Administrative Agent, all certificates, orders, authorities, consents, affidavits, schedules, instruments, agreements, financing statements, and other documents which are provided for hereunder or under or in connection with any Financing Agreement, or which the Administrative Agent may at any time reasonably request.

(5) Representations and Warranties. All of the representations and warranties contained in the Financing Agreements to which the Borrower is a party and in this Agreement (including, without limitation, those set forth in Section 7 hereof), shall be true and correct in all material respects (without duplication of materiality) as of the date the request for the Loan is made, as though made on and as of such date (unless expressly stated to relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date).

(6) Letter of Credit Prohibition. As to requested Letters of Credit, no order, judgment or decree of any governmental authority will, or will purport to, enjoin or restrain any Issuing Lender from issuing the requested Letter of Credit nor will any law or governmental rule, regulation, policy, guideline or directive (whether or not having the force of law) from any governmental authority with jurisdiction over any Issuing Lender prohibit or request that such Issuing Lender refrain from the issuance of Letters of Credit in particular or impose upon such Issuing Lender with respect to any Letter of Credit any restrictive or reserve requirement (for which such Issuing Lender is not otherwise compensated) or any uncovered loss, cost or expense which was not in effect as of the Closing Date.

5.2 Initial Loans . Any Lender’s obligation to make the initial Revolving Loans and issue any Letter of Credit hereunder is, in addition to the conditions precedent

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specified in Section 5.1 hereof, subject to the satisfaction of each of the following conditions precedent:

(1) Fees and Expenses. The Borrower shall have paid all fees owed to the Administrative Agent and Lenders and reimbursed Administrative Agent and the Lenders for all costs, disbursements, fees and expenses due and payable hereunder on or before the Closing Date, including, without limitation, all fees and costs identified in Section 12.2(a) hereof.

(2) Documents. The Administrative Agent shall have received all of the following, each duly executed and delivered and dated the Closing Date, or such earlier date as shall be satisfactory to the Administrative Agent, each in form and substance reasonably satisfactory to the Administrative Agent in its sole determination:

(1) Financing Agreements . This Agreement, the Revolving Credit Notes, the Guaranty, each Pledge Agreement, the Intercreditor Agreement, the Subordination Agreements (if any), the Blocked Account Agreement, the Master Letter of Credit Agreement and such other Financing Agreements as the Administrative Agent may require (provided each Lender shall also receive a fully-executed original of this Agreement and such Lender’s respective Revolving Credit Note).

(2) Resolutions; Incumbency and Signatures . Copies of resolutions of the Board of Directors of the Borrower, and, if required, the shareholder of the Borrower, authorizing or ratifying the execution, delivery and performance by the Borrower of this Agreement, the Financing Agreements to which the Borrower is a party and any other document provided for herein or therein to be executed by Borrower, certified by a Duly Authorized Officer. A certificate of a Duly Authorized Officer certifying the names of the officers of the Borrower authorized to make a borrowing request and sign this Agreement and the Financing Agreements to which the Borrower is a party, together with a sample of the true signature of each such officer; the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein. A copy of resolutions of the Board of Directors of Parent authorizing or ratifying the execution, delivery and performance by Parent of the Guaranty and its Pledge Agreement. A copy of resolutions of the Board of Directors of each Pledgor authorizing or ratifying the execution, delivery and performance by such Pledgor of its respective Pledge Agreement.

(3) Consents . Certified copies of all documents evidencing any necessary consents and governmental approvals, if any, with respect to this Agreement, the Financing Agreements, and any other documents provided for herein or therein to be executed by Borrower.

(4) Opinion of Counsel . An opinion of Harwell Howard Hyne Gabbert & Manner, the legal counsel to the Borrower, Pledgors and Parent, in form and substance reasonably satisfactory to Administrative Agent.

(5) Certain Restricted Agreements Correct and complete copies of the fully executed Commercial Leases, Management Agreements, the nursing home

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licenses of each Borrower, and any other Restricted Agreement, together with all applicable amendments thereto; provided, the Administrative Agent acknowledges that these items were previously furnished to it.

(6) [Intentionally Omitted.]

(7) Governing Documents and Good Standings . Administrative Agent shall have received (i) copies, certified as correct and complete by the applicable state of organization of each Borrower and Guarantor, of the certificate of incorporation, certificate of formation or certificate of limited liability partnership, as applicable, of each Borrower and Guarantor, with any amendments to any of the foregoing, (ii) copies, certified as correct and complete by an authorized officer, member or partner of each Borrower and Guarantor, of all other documents necessary for performance of the obligations of Borrower and Guarantor under this Agreement and the other Financing Agreements, and (iii) certificates of good standing for each Borrower and Guarantor issued by the state of organization of each Borrower and Guarantor and by each state in which each Borrower and Guarantor is doing and currently intends to do business for which qualification is required (such certificates set forth in (i) through (iii), the “ Certificates ”); provided, the Administrative Agent acknowledges that these items were previously furnished to it.

(8) Term Loan Agreement and Affiliate Term Loan Financing Agreements . Fully-executed copies of the Term Loan Agreement and the Affiliate Term Loan Financing Agreements.

(9) UCC Financing Statements; Termination Statements; UCC Searches . UCC Financing Statements or UCC Amendment Statements, as requested by the Administrative Agent, naming the Borrower as debtor and the Administrative Agent as secured party with respect to the Collateral, together with such UCC termination statements necessary to release all Liens (other than Permitted Liens) and other rights in favor of any Person in any of the Collateral except the Administrative Agent (for the ratable benefit of the Lenders and the Administrative Agent), and other documents as the Administrative Agent deems necessary or appropriate, shall have been filed in all jurisdictions that the Administrative Agent deems necessary or advisable. UCC Financing Statements or UCC Amendment Statements, as requested by the Administrative Agent, naming the respective Pledgor, as applicable, as debtor and the Administrative Agent as secured party with respect to the Collateral (as defined in the applicable Pledge Agreement), and other documents relating thereto, if any, as the Administrative Agent deems necessary or appropriate, shall have been filed in all jurisdictions that the Administrative Agent deems necessary or advisable. Bring down UCC tax, lien, pending suit and judgment searches for the Borrower, the Pledgors and the Guarantor (including, for each, any assumed name or trade name) and each dated a date reasonably near to the Closing Date in all jurisdictions deemed necessary by the Administrative Agent, the results of which shall be satisfactory to the Administrative Agent in its sole and absolute determination.

(10) Insurance Certificates . Certificates from the Borrower’s insurance carriers evidencing that all required insurance coverage is in effect, each designating the Administrative Agent as an additional insured thereunder; provided, the Administrative Agent acknowledges that these items were previously furnished to it.

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(11) Pay Off Letter . Pay Off Letter from Capmark, in form and substance reasonably satisfactory to Administrative Agent.

(12) Capmark Terminations . Written evidence, satisfactory to the Administrative Agent, of the terminations of the Capmark Intercreditor Agreement and the Capmark Blocked Account Agreement (each as defined in the Original Loan Agreement), including signed copies of (i) Termination of Intercreditor and Blocked Account Agreements (Capmark Facilities), and (ii) Termination of Intercreditor Agreement (Florida Facilities).

(13) Omega Debt Documents . Correct and complete copies of the fully-executed Omega Debt Documents (including all exhibits, schedules and appendices thereto); provided, the Administrative Agent acknowledges that these items were previously furnished to it.

(14) Operating Agreement Amendments . Correct and complete copies of duly executed Amendment to Limited Liability Company Agreements dated February 2011 for each of the Borrowers (including Senior Care Southern Pines, LLC, Senior Care Cedar Hills, LLC, Senior Care Golfcrest, LLC, Senior Care Florida Leasing, LLC, and Senior Care Golfview, LLC).

(15) First Amendment to Intercreditor Agreement; etc. Correct and complete copy of a duly executed First Amendment to Subordination and Intercreditor Agreement dated of even date herewith, by and among the Borrower, Administrative Agent and Sterling Acquisition Corp., a Kentucky corporation; and signed copy of that certain Termination of Intercreditor Agreement (Florida Facilities).

(16) Other . Such other documents, certificates and instruments as the Administrative Agent may reasonably request.

(3) Field Examinations. At the Administrative Agent’s sole option, the Administrative Agent shall have completed its field examinations of the Borrower’s books and records, assets, and operations which examinations will be satisfactory to the Administrative Agent in its sole and absolute discretion; provided, the Administrative Agent acknowledges that these items were previously satisfied.

(4) Certificate. The Administrative Agent shall have received a certificate signed on behalf of the Borrower by a Duly Authorized Officer and dated the Closing Date certifying satisfaction of the conditions specified in Sections 5.1 and 5.2 hereof.

(5) Closing Fee. The Borrower shall have paid the Administrative Agent the Closing Fee.

(6) Omega Letter of Credit. The Omega Letter of Credit shall have been issued to Omega on terms and conditions satisfactory to the Administrative Agent in its sole and absolute discretion; provided, the Administrative Agent acknowledges that this item was previously satisfied.

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(7) Bank Meetings. Borrower’s senior management shall have made themselves and Borrower’s facilities reasonably available (through scheduled bank meetings, company visits, or other venues) to Administrative Agent and Lenders and their representatives.

(8) Term Loan Agreement. Satisfaction of each of the conditions precedent contained in the Term Loan Agreement, as determined by the Administrative Agent.

6. COLLATERAL.

6.1 Security Interest . Subject only to the Omega Security Interests (the priorities with respect to each of which shall be as set forth in the Intercreditor Agreement), as security for the prompt and complete payment and performance of all of the Liabilities and the Affiliate Term Loan Liabilities when due or declared due, each Borrower hereby grants, pledges, conveys and transfers to the Administrative Agent (for the ratable benefit of the Lenders, Issuing Lenders and Administrative Agent) a continuing security interest in and to all of such Borrower’s right, title and interest in and to the following property and interests in property, whether now owned or existing or hereafter owned, arising or acquired, and wheresoever located (collectively, the “ Collateral ”): (a) all of Borrower’s Accounts, including, without limitation, Health-Care-Insurance Receivables (as defined in the Code), contract rights, General Intangibles, tax refunds, chattel paper, instruments, notes, letters of credit, bills of lading, warehouse receipts, shipping documents, documents and documents of title, and all of the Borrower’s Tangible Chattel Paper, Documents, Electronic Chattel Paper, Letter-of-Credit Rights, Software, Supporting Obligations and Payment Intangibles (each as defined in the Code); (b) all of Borrower’s Deposit Accounts and other deposit accounts (general or special) with, and credits and other claims against, the Lender, or any other financial institution with which the Borrower maintains deposits; (c) all of the Borrower’s monies, and any and all other property and interests in property of the Borrower, including, without limitation, Investment Property, Instruments, Security Entitlements, Uncertificated Securities, Certificated Securities, Financial Assets, Chattel Paper and Documents (each as defined in the Code), now or hereafter coming into the actual possession, custody or control of Administrative Agent or any Lender or any agent or affiliate thereof in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and, independent of and in addition to the Administrative Agent’s and each Lender’s rights of setoff (which the Borrower acknowledges), the balance of any account or any amount that may be owing from time to time by Administrative Agent or any Lender to the Borrower; (d) all insurance proceeds of or relating to any of the foregoing property and interests in property, and all insurance proceeds relating to any key man life insurance policy covering the life of any officer or employee of Borrower; (e) all proceeds and profits derived from the operation of the Borrower’s business (including, without limitation, the proceeds of Government Accounts); (f) all of the Borrower’s books and records, computer printouts, manuals and correspondence relating to any of the foregoing and to the Borrower’s business; and (g) all accessions, improvements and additions to, substitutions for, and replacements, products, profits and proceeds of any of the foregoing.

The Administrative Agent acknowledges that it will not have control over or right of setoff against the Deposit Accounts into which any Government Accounts of Borrower are

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directly paid to the extent such control or right of setoff is or would be prohibited by applicable Healthcare Laws, provided , however , that as soon as any such prohibition or restriction lapses or is legally removed the Borrower shall immediately take such all actions as are reasonably necessary to provide the Administrative Agent with control over and/or the right of setoff against such Deposit Accounts (at Borrower’s cost).

6.2 Preservation of Collateral and Perfection of Security Interests Therein . The Borrower agrees that it shall execute and deliver to Administrative Agent, concurrently with the execution of this Agreement, and at any time or times hereafter at the reasonable request of Administrative Agent instruments and documents as Administrative Agent may reasonably request, in a form satisfactory to Administrative Agent, to perfect and keep perfected the Liens in the Collateral or to otherwise protect and preserve the Collateral and Administrative Agent’s Liens therein (including, without limitation, if and as applicable, financing statements, and Borrower shall pay the cost of filing or recording the same in all public offices deemed necessary by Administrative Agent). If the Borrower fails to do so, Administrative Agent is authorized to file such financing statements. The Borrower further agrees that a carbon, photographic, photostatic or other reproduction of this Agreement or of a financing statement is sufficient as a financing statement.

6.3 Loss of Value of Collateral . The Borrower agrees to immediately notify the Administrative Agent of any material loss or depreciation in the value of the Collateral or any portion thereof.

6.4 Right to File Financing Statements . Notwithstanding anything to the contrary contained herein, the Administrative Agent may at any time and from time to time file financing statements, continuation statements and amendments thereto that describe the Collateral in particular and which contain any other information required by the Code for the sufficiency or filing office acceptance of any financing statement, continuation statement or amendment, including whether the Borrower is an organization, the type of organization and any organization identification number issued to the Borrower. The Borrower agrees to furnish any such information to the Administrative Agent promptly upon request. Any such financing statements, continuation statements or amendments may be signed (if at any time required) by the Administrative Agent on behalf of the Borrower and may be filed at any time with or without signature and in any jurisdiction as reasonably determined by the Administrative Agent. The Administrative Agent agrees to use its reasonable efforts to notify the Borrower of the Administrative Agent taking any such action provided in this Section; provided , however , the Borrower agrees that the failure of the Administrative Agent to so notify the Borrower for any reason shall not in any way invalidate the actions taken by the Administrative Agent pursuant to this Section.

6.5 Third Party Agreements . The Borrower shall at any time and from time to time take such steps as the Administrative Agent may reasonably require for the Administrative Agent: (i) to obtain an acknowledgment, in form and substance reasonably satisfactory to the Administrative Agent, of any third party having possession of any of the Collateral that the third party holds for the benefit of the Administrative Agent, (ii) to obtain “control” (as defined in the Code) of any Investment Property, Deposit Accounts, Letter of Credit Rights or Electronic Chattel Paper (each as defined in the Code), with any agreements establishing control to be in

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form and substance reasonably satisfactory to the Administrative Agent, and (iii) otherwise to ensure the continued perfection and priority of the Administrative Agent’s security interest in any of the Collateral and of the preservation of its rights therein.

6.6 All Loans One Obligation . All Liabilities of the Borrowers under this Agreement and each of the Financing Agreements, and all of the Affiliate Term Loan Liabilities under the Term Loan Agreement and each of the Affiliate Term Loan Financing Agreements, are cross-collateralized and cross-defaulted. Payment of all sums and indebtedness to be paid by Borrower to Lenders, Issuing Lender and Administrative Agent under this Agreement shall be secured by, among other things, the Financing Agreements. All loans or advances made to Borrower under this Agreement shall constitute one Loan, and all of Borrower’s Liabilities and other liabilities of Borrower to Lenders, Issuing Lender and Administrative Agent shall constitute one general obligation secured by Administrative Agent’s Lien on all of the Collateral of Borrower and by all other liens heretofore, now, or at any time or times granted to Lender to secure the Loans (for the ratable benefit of the Lenders and the Administrative Agent). Borrower agrees that all of the rights of Administrative Agent, Issuing Lender and Lenders set forth in this Agreement shall apply to any amendment, restatement or modification of, or supplement to, this Agreement, any supplements or exhibits hereto and the Financing Agreements, unless otherwise agreed in writing by the Administrative Agent or Required Lenders.

6.7 Commercial Tort Claim . If the Borrower shall at any time hereafter acquire a Commercial Tort Claim (as defined in the Code), the Borrower shall promptly notify the Administrative Agent of same in a writing signed by the Borrower (describing such claim in reasonable detail) and grant to the Administrative Agent (for the ratable benefit of the Lenders and the Administrative Agent) in such writing (at the sole cost and expense of the Borrower) a continuing, first-priority security interest therein and in the proceeds thereof, with such writing to be in form and substance satisfactory to the Administrative Agent in its sole and absolute determination.

6.8 Cash Collateral . If any Letter of Credit is outstanding at any time after or during (i) the occurrence and during the continuation of an Event of Default, (ii) demand by Administrative Agent for payment of the Liabilities as provided in Section 11.2 , (iii) this Agreement has terminated for any reason, (iv) the amount of the aggregate outstanding principal balance of the Revolving Loans plus Letter of Credit Obligations exceeds the Borrowing Base or (v) prepayment of the Liabilities under Section 2.10 and termination of this Agreement (but with any Letter of Credit remaining outstanding), each Issuing Lender may (in its sole and absolute discretion) request of Borrower, and Borrower shall promptly deliver to Administrative Agent, for the benefit of such Issuing Lender, cash collateral for any Letter of Credit in an amount equal to the undrawn face amount of such Letters of Credit outstanding at such time, except, in the case of clause (iv), such cash collateral shall be in an amount equal to the excess (x) of the sum of (A) the aggregate principal balance of the Revolving Loans plus (B) the Letter of Credit Obligations over (y) the Borrowing Base. If Borrower fails to deliver such cash collateral to Administrative Agent promptly upon such Issuing Lender’s request for such cash collateral, Administrative Agent may, for the benefit of such Issuing Lender, without in any way limiting Administrative Agent’s rights or remedies arising from such failure to deliver cash, retain, as cash collateral, cash proceeds of the Collateral in an amount equal to such cash collateral not delivered by Borrower. Each Issuing Lender or Administrative Agent

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may at any time apply any or all of such cash and cash collateral to the payment of any or all of the Liabilities relating to the Revolving Loans, including, without limitation, to the payment of any or all of Borrower’s reimbursement obligations with respect to any Letter of Credit or any other Letter of Credit Obligations. Pending such application, Administrative Agent may (but is not obligated to) (a) invest the same in a savings account, under which deposits are available for immediate withdrawal, with Administrative Agent or such other bank as Administrative Agent may, in its sole and absolute discretion select or (b) hold the same as a credit balance in an account with Administrative Agent in Borrower’s name. Interest payable on any such savings account described in the foregoing sentence will be collected by Administrative Agent and will be paid to Borrower as it is received by Administrative Agent less any fees or other amounts owing by Borrower to Issuing Lender or Administrative Agent with respect to any Letter of Credit and less any amounts necessary to pay any of the Liabilities which may be due and payable at such time. Administrative Agent has no obligation to pay interest on any credit balances in any account opened for Borrower as a result of this Section 6.8 . If Borrower is required to provide an amount of cash collateral hereunder as a result of the occurrence of any of the events described in clause (i) or clause (iv) above in this Section 6.8 , such amount (or the appropriate portion thereof) to the extent not applied as aforesaid shall upon Borrower’s written request be released and returned to Borrower within five (5) Business Days after Administrative Agent’s receipt of such request as long as the event causing such cash collateral to be provided has been cured, eliminated or waived as determined by Administrative Agent.

7. REPRESENTATIONS AND WARRANTIES.

The Borrower represents and warrants to Administrative Agent and Lenders that as of the date of this Agreement, and continuing as long as any Liabilities remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect:

7.1 Existence . The Borrower is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation or formation. The Borrower is duly (a) qualified and in good standing as a foreign corporation or foreign limited liability company and (b) authorized to do business in each jurisdiction where such qualification is required because of the nature of its activities or properties. The Borrower has all requisite power to carry on its business as now being conducted and as proposed to be conducted. Parent legally and beneficially owns or controls, either directly or indirectly through its subsidiaries, all of the issued and outstanding capital Stock of the Borrower.

7.2 Corporate Authority . The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which Borrower is a party and the performance of its obligations hereunder and thereunder: (i) are within its powers; (ii) are duly authorized by the board of directors, mangers or members of the Borrower, each as applicable, and, if applicable, Parent; and (iii) are not in contravention of the terms of its operating agreement, bylaws, or of an indenture, agreement or undertaking to which it is a party or by which it or any of its property is bound. The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which it is a party and the performance of its obligations hereunder and thereunder: (i) do not require any governmental consent, registration or approval; (ii) do not contravene any contractual or governmental restriction

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binding upon it; and (iii) will not, except in favor of Administrative Agent, result in the imposition of any Lien upon any property of Borrower under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which it is a party or by which it or any of its property may be bound or affected.

7.3 Binding Effect . This Agreement and all of the other Financing Agreements to which the Borrower is a party are the legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their respective terms, subject to bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting the enforcement of creditor’s rights and remedies generally.

7.4 Financial Data.

(1) All income statements, balance sheets, cash flow statements, statements of operations, and other financial data which have been or shall hereafter be furnished to the Administrative Agent and Lenders for the purposes of or in connection with this Agreement do and will present fairly in all material respects in accordance with GAAP, consistently applied, the financial condition of the Borrower as of the dates thereof and the results of its operations for the period(s) covered thereby. The foregoing notwithstanding all unaudited financial statements furnished or to be furnished to the Administrative Agent and Lenders by or on behalf of Borrower are not and will not be prepared in accordance with GAAP to the extent that such financial statements (a) are subject to cost report and other year-end audit adjustments, (b) do not contain footnotes, (c) were prepared without physical inventories, (d) are not restated for subsequent events, (e) may not contain a statement of construction in process, and (f) may not fully reflect the following liabilities: (i) vacation, holiday and similar accruals, (ii) liabilities payable in connection with workers’ compensation claims, (iii) liabilities payable to any employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) maintained by Borrower or its affiliates on account of Borrower’s employees, (iv) federal, state and local income or franchise taxes and (v) bonuses payable to certain employees (collectively, the “GAAP Exceptions”).

(2) Since December 31, 2009, there has been no Material Adverse Change with respect to Borrower.

7.5 Collateral . Except for the Permitted Liens, all of the Borrower’s assets and property (including, without limitation, the Collateral) is and will continue to be owned by Borrower (except for items of Inventory disposed of in the ordinary course of business and sales of Equipment being replaced in the ordinary course of business, or as a result of casualty loss or condemnation, with other Equipment with a value equal to or greater than the Equipment being sold), has been fully paid for and is free and clear of all Liens. No financing statement or other document similar in effect covering all or any part of the Collateral is on file in any recording or filing office, other than those identifying the Administrative Agent as the secured creditor or except for Permitted Liens. The organizational number assigned by the Secretary of State of the Borrower’s state of incorporation or formation, as applicable, is as set forth on Schedule 1 hereto.

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7.6 Solvency . The Borrower, as determined on a consolidated basis, is Solvent. The Borrower, as determined on a consolidated basis, will not be rendered insolvent by the execution and delivery of this Agreement or any Financing Agreement, or by completion of the transactions contemplated hereunder or thereunder.

7.7 Principal Place of Business; State of Organization . Set forth on Schedule 1 hereto, is, as of the Closing Date, (a) the principal place of business and chief executive office of Borrower and (b) the Borrower’s state of incorporation or formation. The books and records of the Borrower are at the principal place of business and chief executive office of the Borrower.

7.8 Other Names . As of the Closing Date the Borrower is not using, and shall not thereafter use, any name (including, without limitation, any trade name, trade style, assumed name, division name or any similar name), other than the names set forth on Schedule 7.8 attached hereto.

7.9 Tax Liabilities . The Borrower has filed all material federal, state and local tax reports and returns required by any law or regulation to be filed by it, except for extensions duly obtained, and has either duly paid all taxes, duties and charges indicated due on the basis of such returns and reports, or made adequate provision for the payment thereof, and the assessment of any material amount of additional taxes in excess of those paid and reported is not reasonably expected.

7.10 Loans . Except as otherwise permitted by Section 9.2 hereof, the Borrower is not obligated on any loans or other Indebtedness.

7.11 Margin Securities . The Borrower does not own any margin securities and none of the Loans advanced hereunder will be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System.

7.12 Organizational Chart . Set forth on Schedule 7.12 hereto is a true and complete copy of an organizational chart setting forth the Borrower and each of its Subsidiaries and Affiliates as of the Closing Date.

7.13 Litigation and Proceedings . As of the Closing Date (and on any date that a request for a Revolving Loan is made), no judgments are outstanding against the Borrower that could be an Event of Default under clause (e) of Section 11.1 , nor is there as of such date pending, or to the best of Borrower’s knowledge, threatened, except, as of the Closing Date, as shown on Schedule 7.13 (and on any date that a request for a Revolving Loan is made, as Administrative Agent has from time to time been provided notice of in accordance with Section 8.1(e) , below) any (i) litigation, suit, action or contested claim (other than a personal injury tort claim), or federal, state or municipal governmental proceeding, by or against the Borrower or any of its Property which if adversely determined could have a Material Adverse Effect, or (ii) any tort claim for personal injury, including death, against the Borrower as to which (a) litigation has been instituted and is pending or (b) or a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2009.

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7.14 Other Agreements . The Borrower is not in default under or in breach of any agreement, contract, lease, or commitment to which it is a party or by which it is bound which could reasonably be expected to have a Material Adverse Effect. The Borrower does not know of any dispute regarding any agreement, contract, instrument, lease or commitment to which it is a party which could reasonably be expected to have a Material Adverse Effect.

7.15 Compliance with Laws and Regulations . The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which it is a party and the performance of the Borrower’s obligations hereunder and thereunder are not in contravention of any applicable law, rule or regulation. The Borrower has obtained all licenses, authorizations, approvals, licenses and permits necessary in connection with the operation of its business, except to the extent the failure to obtain any of the foregoing could reasonably be expected to not result in a Material Adverse Effect. The Borrower is in compliance with all laws, orders, rules, regulations and ordinances of all federal, foreign, state and local governmental authorities applicable to it and its business, operations, property, and assets, except to the extent any such non-compliance could reasonably be expected to not result in a Material Adverse Effect.

7.16 Intellectual Property . As of the Closing Date, the Borrower does not own or otherwise possess any material Intellectual Property. To the Borrower’s best knowledge, none of its Intellectual Property infringes on the rights of any other Person; provided that the name “Diversicare” is shared in Canada with various Diversicare entities that were sold in 2004.

7.17 Environmental Matters . The Borrower has not Managed Hazardous Substances on or off its Property other than in compliance with applicable Environmental Laws, except to the extent any such non-compliance could reasonably be expected to not result in a Material Adverse Effect. Except as set forth on Schedule 7.17 hereto, the Borrower has complied in all material respects with applicable Environmental Laws regarding transfer, construction on and operation of its business and Property, including, but not limited to, notifying authorities, observing restrictions on use, transferring, modifying or obtaining permits, licenses, approvals and registrations, making required notices, certifications and submissions, complying with financial liability requirements, and, except where not required to do so pursuant to any Commercial Lease, Managing Hazardous Substances and Responding to the presence or Release of Hazardous Substances connected with operation of its business or Property. The Borrower does not have any contingent liability with respect to the Management of any Hazardous Substance that could reasonably be expected to result in a Material Adverse Effect. As of the Closing Date (and on any date that a request for a Revolving Loan is made), the Borrower has not received any Environmental Notice that could reasonably be expected to result in a Material Adverse Effect.

7.18 Disclosure . As of the Closing Date (and on any date that a request for a Revolving Loan is made), none of the representations or warranties made by the Borrower herein or in any Financing Agreement to which the Borrower is a party and no other written information provided or statements made by the Borrower or its representatives to the Administrative Agent or Lenders contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the Closing Date (and on any date that a request for a Revolving

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Loan is made), the Borrower has disclosed to the Administrative Agent and Lenders all facts of which the Borrower has knowledge which might result in a Material Adverse Effect either prior or subsequent to the consummation of the transactions contemplated hereby or which, to Borrower’s knowledge, at any time hereafter might reasonably be expected to result in a Material Adverse Effect.

7.19 Pension Related Matters . Each employee pension plan (other than a multiemployer plan within the meaning of Section 3(37) of ERISA and to which the Borrower or any ERISA Affiliate has or had any obligation to contribute (a “ Multiemployer Plan ”)) maintained by the Borrower or any of its ERISA Affiliates to which Title IV of ERISA applies and (a) which is maintained for employees of the Borrower or any of its ERISA Affiliates or (b) to which the Borrower or any of its ERISA Affiliates made, or was required to make, contributions at any time within the preceding five (5) years (a “ Plan ”), complies, and is administered in accordance, with its terms and all material applicable requirements of ERISA and of the Internal Revenue Code of 1986, as amended, and any successor statute thereto (the “ Tax Code ”), and with all material applicable rulings and regulations issued under the provisions of ERISA and the Tax Code setting forth those requirements. No “Reportable Event” or “Prohibited Transaction” (as each is defined in ERISA) or withdrawal from a Multiemployer Plan caused by the Borrower has occurred and no funding deficiency described in Section 302 of ERISA caused by the Borrower exists with respect to any Plan or Multiemployer Plan which could have a Material Adverse Effect. The Borrower and each ERISA Affiliate has satisfied all of their respective funding standards applicable to such Plans and Multiemployer Plans under Section 302 of ERISA and Section 412 of the Tax Code and the Pension Benefit Guaranty Corporation and any entity succeeding to any or all of its functions under ERISA (“ PBGC ”) has not instituted any proceedings, and there exists no event or condition caused by the Borrower which would reasonably be expected to constitute grounds for the institution of proceedings by PBGC, to terminate any Plan or Multiemployer Plan under Section 4042 of ERISA which could have a Material Adverse Effect.

7.20 Perfected Security Interests . The Lien in favor of the Administrative Agent provided pursuant to Section 6.1 hereof is a valid and perfected first priority security interest in the Collateral (subject only to the Permitted Liens and the terms of the Intercreditor Agreement), and all filings and other actions necessary to perfect such Lien have been or will be duly taken.

7.21 [Intentionally Omitted.] .

7.22 Broker’s Fees . The Borrower does not have any obligation to any Person in respect of any finder’s, brokers or similar fee in connection with the Loans or this Agreement.

7.23 Investment Company Act . The Borrower is not an “investment company” or a company “controlled” by an “investment company”, within the meaning of the Investment Company Act of 1940, as amended.

7.24 [Intentionally Omitted.] .

7.25 [Intentionally Omitted.] .

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7.26 Offenses and Penalties Under the Medicare/Medicaid Programs . Except as listed on Schedule 7.26 attached hereto, as of the Closing Date, neither the Borrower nor any Affiliate and/or employee of the Borrower or any Affiliate is currently, to the best knowledge of the Borrower, after due inquiry, under investigation or prosecution for, nor has the Borrower or any Affiliate or, to the best knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate been convicted of: (a) any offense related to the delivery of an item or service under the Medicare or Medicaid programs; (b) a criminal offense related to neglect or abuse of patients in connection with the delivery of a health care item or service; (c) fraud, theft, embezzlement or other financial misconduct; (d) the obstruction of an investigation of any crime referred to in subsections (a) through (c) of this Section; or (e) unlawful manufacture, distribution, prescription, or dispensing of a controlled substance. Except as listed on Schedule 7.26 , as of the Closing Date, neither the Borrower nor any Affiliate and/or, to the best knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate has been required to pay any civil money penalty under applicable laws regarding false, fraudulent or impermissible claims or payments to induce a reduction or limitation of health care services to beneficiaries of any state or federal health care program, nor, to the best knowledge of the Borrower, after due inquiry, is the Borrower nor any Affiliate and/or to the best knowledge of Borrower, after due inquiry, any current employee of the Borrower or any Affiliate currently the subject of any investigation or proceeding that may result in such payment. Neither Borrower nor any Affiliate and/or employee of the Borrower or any Affiliate has been excluded from participation in the Medicare, Medicaid or maternal and Child Health Services Program, or any program funded under the “Block grants” to States for Social Services (Title XX) Program.

7.27 Medicaid/Medicare and Private Insurance/Managed Care Contracts .

(1) The Borrower has:

(2) Obtained and maintains Medicaid Certification and Medicare Certification to the extent required for reimbursement under the Medicaid Regulations or the Medicare Regulations, as the case may be; and

(3) Entered into and maintains in good standing its Medicaid Provider Agreement and its Medicare Provider Agreement to the extent required for reimbursement under Medicaid Regulations or the Medicare Regulations, as the case may be, and its Private Insurance/Managed Care Contracts.

(4) There are no proceedings pending, or, to the best knowledge of the Borrower, after due inquiry, threatened by any governmental authority seeking to modify, revoke or suspend, to the extent required for reimbursement, any Medicaid Provider Agreement, Medicare Provider Agreement, Medicare Certification or Medicaid Certification. Since the date of the most recent Medicare Certification and Medicaid Certification, the Borrower has not taken any action that would have a material adverse effect on the Certification or the Medicare Provider Agreement or Medicaid Provider Agreement.

(5) Neither the Borrower nor any Affiliate of the Borrower nor any current officer or director of the foregoing has engaged in any of the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment under Medicare or Medicaid; (ii) knowingly and willfully making or causing to be made any false statement or representation of a

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material fact for use in determining rights to any benefit or payment under Medicare or Medicaid; (iii) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right to any benefit or payment under Medicare or Medicaid on its own behalf or on behalf of another, with intent to secure such benefit or payment fraudulently; or (iv) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration: (A) in return for referring any individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in party by Medicare or Medicaid; or (B) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole in part by Medicare or Medicaid.

(6) The Borrower is not out of material compliance with any applicable conditions of participation of the Medicare or Medicaid programs nor with any Private Insurance/Managed Care Contracts, nor does any condition exist or has any event occurred which, in itself, or with the giving of notice or lapse of time, or both, would reasonably be expected to result in the suspension, revocation, impairment, forfeiture or non-renewal of (i) any contract of the Borrower in connection with the Medicare or Medicaid programs or (ii) any Private Insurance/Managed Care Contracts.

7.28 Consideration . Each Borrower is a direct or indirect subsidiary of Parent, and are Affiliates of each other. The Affiliates of the Borrower will derive substantial direct and indirect benefit (financial and otherwise) from funds made available to the Borrower pursuant to this Agreement, and it is and will be to such Affiliates’ advantage to assist the Borrower in procuring such funds from the Lenders. Each of the Borrower’s Affiliates desires to induce the Lender to enter into this Agreement with the Borrower.

7.29 USA Patriot Act . Borrower represents and warrants to Administrative Agent and Lenders that neither the Borrower nor any of its Affiliates is identified in any list of known or suspected terrorists published by any United States government agency (collectively, as such lists may be amended or supplemented from time to time, referred to as the “ Blocked Persons Lists ”) including, without limitation, (a) the annex to Executive Order 13224 issued on September 23, 2001, and (b) the Specially Designated Nationals List published by the Office of Foreign Assets Control.

7.30 Absence of Foreign or Enemy Status . Neither the Borrower nor any Affiliate of the Borrower is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act (50 U.S.C. App. §§ 1 et seq. ), as amended. Neither the Borrower nor any Affiliate of the Borrower is in violation of, nor will the use of any of the Loans violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R. Subtitle B, Chapter V).

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7.31 HIPAA Compliance . Borrower has not received any notice from any governmental authority that such governmental authority has imposed or intends to impose any enforcement actions, fines or penalties for any failure or alleged failure to comply with HIPAA, or its implementing regulations.

7.32 Labor Matters . Except as shown on Schedule 7.32 , as of the Closing Date, there are no strikes or other labor disputes pending or, to the knowledge of Borrower, threatened against Borrower or any Affiliate of Borrower. Except as shown on Schedule 7.32 , as of the Closing Date, hours worked and payments made to the employees of the Borrower and Affiliates of Borrower have not been in violation of the Fair Labor Standards Act or any other applicable Law dealing with such matters. All payments due from the Borrower or Affiliates of Borrower, or for which any claim may be made against any of them, on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued as a liability on their books, as the case may be. The consummation of the transactions contemplated by the Financing Agreements will not give rise to a right of termination or right of renegotiation on the part of any union under any collective bargaining agreement to which Borrower is a party or by which it is bound.

7.33 Capitalization . The authorized Stock of each Borrower, as of the Closing Date, is set forth on Schedule 7.33 hereto. Parent or another Borrower, as the case may be, legally and beneficially owns all of the issued and outstanding Stock of each Borrower. All issued and outstanding Stock of the Borrower is duly authorized and validly issued, fully paid, nonassessable, free and clear of all Liens or pledges other than Permitted Liens, and such Stock was issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. No shares of the Stock of Borrower, other than those owned by Parent or Borrower, are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from Borrower of any equity securities of Borrower.

7.34 Government Contracts . The Borrower is not a party to any contract or agreement (including, but not limited to, any Lease) that requires Borrower to comply with the Federal Assignment of Claims Act, as amended (31 U.S.C. Section 3727) or, to the best of Borrower’s knowledge, any similar state or local law.

7.35 OFAC . Neither the Borrower, nor Guarantor, nor any beneficial owner of the Borrower or Guarantor, is currently listed on the OFAC Lists.

7.36 Commercial Leases . As of the Closing Date, the Commercial Leases as to which a Borrower is the lessee and the expiration dates of their current terms are as set forth on Schedule 7.36 attached hereto. The Borrower has delivered correct and complete copies of the fully-signed Commercial Leases to the Administrative Agent on or prior to the Closing Date. The Borrower is not in default or breach of any Commercial Lease and, to the Borrower’s knowledge, no other party to any Commercial Lease is in default or breach thereunder.

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8. AFFIRMATIVE COVENANTS.

The Borrower covenants and agrees with Administrative Agent and Lenders that, as long as any Liabilities of the Borrower remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect:

8.1 Reports, Certificates and Other Information . The Borrower Agent shall deliver to the Administrative Agent and each Lender:

(1) Financial Statements.

(2) On or before the one hundred twentieth (120th) day after each of Parent’s Fiscal Years, a copy of the annual financial statements on a consolidated basis for Parent, duly certified and audited by independent certified public accountants of nationally recognized standing selected by the Borrower, together with the supporting consolidating statements for each Borrower, consisting of, at least, balance sheets and statements of income and cash flow for such period, prepared in conformity with GAAP. In lieu of its obligations hereunder, Parent may submit to Administrative Agent and Lenders, upon its filing thereof, a copy of its form 10-K as filed with the United States Security and Exchange Commission.

(3) On or before the forty-fifth (45th) day of the end of each of Parent’s first, second and third Fiscal Quarters, a copy of internally prepared quarterly financial statements for Borrower prepared in accordance with GAAP and in a manner substantially consistent with the financial statements referred to in Section 8.1(a)(1) hereof (subject, however, to the GAAP Exceptions), signed on behalf of the Borrower by a Duly Authorized Officer and consisting of, at least, an income statement, a balance sheet, and statement of cash flow as at the close of such Fiscal Quarter and statements of earnings for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the close of such Fiscal Quarter.

(4) Borrower Base Certificates. On or before the thirtieth (30th) day after the end of each calendar month, a borrowing base certificate (in form and substance satisfactory to the Administrative Agent), signed on behalf of the Borrower by a Duly Authorized Officer.

(5) Compliance Certificates. Contemporaneously with the furnishing of each quarterly financial statements, a duly completed compliance certificate with appropriate insertions, in form and substance satisfactory to the Administrative Agent (a “Compliance Certificate”), dated the date of such annual financial statement or such calendar month and signed on behalf of the Borrower by a Duly Authorized Officer, which Compliance Certificate shall state that no Default or Event of Default has occurred and is continuing, or, if there is any such event, describes it and the steps, if any, being taken to cure it. Each Compliance Certificate shall contain a computation of, and show compliance with, each of the financial ratios and restrictions set forth in Section 9.12 hereof (each such computation and calculation to be in form and substance acceptable to the Administrative Agent).

(6) Schedule of Accounts. On or before the tenth (10th) day of each calendar month, a Schedule of Accounts, as of the last day of the immediately preceding calendar month and in form and substance reasonably satisfactory to the Administrative Agent.

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(7) Notice of Default, Regulatory Matters, Litigation Matters or Adverse Change in Business. Forthwith upon learning of the occurrence of any of the following, written notice thereof which describes the same and the steps being taken by the Borrower with respect thereto: (i) the occurrence of a Default or an Event of Default; (ii) the institution or threatened institution of, or any adverse determination in, any litigation (other than a personal injury tort claim), arbitration proceeding or governmental proceeding in which any injunctive relief or money damages is sought which if adversely determined could have a Material Adverse Effect; (iii) the receipt of any notice from any governmental agency concerning any violation or potential violation of any regulations, rules or laws applicable to Borrower which could have a Material Adverse Effect; or (iv) any Material Adverse Change. With regard to personal injury tort claims, upon request by Administrative Agent, Borrower shall review with Administrative Agent the occurrence of any personal injury or other action which could reasonably give rise to a personal injury tort claim against the Borrower as to which (i) litigation has been instituted and is pending or (ii) a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2009.

(8) Insurance Reports. (i) At any time after a Default and upon the request of the Administrative Agent, a certificate signed by a Duly Authorized Officer that summarizes the property, casualty, liability and malpractice insurance policies carried by the Borrower, and (ii) written notification of any material change in any such insurance by the Borrower within five (5) Business Days after receipt of any notice (whether formal or informal) of such change by any of its insurers.

(9) Annual Projections. Upon the Administrative Agent’s reasonable request from time to time, an annual projection for the current Fiscal Year showing Borrower’s projected operating plan, revenues and expenses on a monthly basis and a balance sheet and cash flow statement for the Borrower, in form and substance reasonably satisfactory to Administrative Agent.

(10) Affiliate Transactions. Upon the Administrative Agent’s reasonable request from time to time, a reasonably detailed description of each of the material transactions between the Borrower and any of its Affiliates during the time period reasonably requested by the Administrative Agent, which shall include, without limitation, the amount of money either paid or received, as applicable, by the Borrower in such transactions.

(11) Health Care. Furnish to the Administrative Agent each of the following, to the extent applicable: (i) upon Administrative Agent’s request, a copy of any healthcare related licensure and annual or biannual certification survey report and any statement of deficiencies and any survey (other than the annual or biannual survey) indicating a violation or deficiency, and within the time period required by the particular agency for submission, a copy of the plan of correction with respect thereof if such Plan of Correction is required by such agency issuing the statement of deficiency or notice of violation, and correct or cause to be corrected any deficiency or violation within the time period required for cure by such agency, subject to such agency’s normal appeal process, if such deficiency or violation could adversely affect either the right to continue participation in Medicare, Medicaid or other reimbursement programs for existing patients or the right to admit new Medicare patients, Medicaid patients or other reimbursement program patients or result in the loss or suspension of Borrower’s licenses

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and permits to operate Borrower’s business; (ii) within five (5) Business Days of the receipt by the Borrower, any and all notices disclosing an adverse finding from any licensing, certifying and/or reimbursement agencies that Borrower’s license, Medicare or Medicaid certification or entitlement to payments pursuant to any reimbursement contract or program of Borrower is being downgraded to a substandard category, revoked, or suspended, or that action is pending or being considered to downgrade to a substandard category, revoke, or suspend any rights pursuant to the Borrower’s license, certification or reimbursement contract or program; and (iii) upon request of Administrative Agent, a complete and accurate copy of the annual Medicaid, Medicare and other cost reports for Borrower.

(12) Interim Reports. Promptly upon receipt thereof, copies of any reports submitted to Parent or Borrower by the independent accountants in connection with any interim audit of the books of any such Person and copies of each management control letter provided to Parent or Borrower by independent accountants.

(13) Reports to the SEC. Upon the Administrative Agent’s reasonable request from time to time, copies of any and all regular, annual, periodic or special reports of Parent, any Borrower or any Affiliate thereof filed with the Securities and Exchange Commission (“SEC”); copies of any and all registration statements of Parent, any Borrower or any Affiliate thereof filed with the SEC; and copies of any and all proxy statements or other written communications made to security holders generally.

(14) Other Information. Such other information, certificates, schedules, exhibits or documents (financial or otherwise) concerning the Borrower and its operations, business, properties, condition or otherwise as the Administrative Agent or any Lender may reasonably request from time to time.

8.2 Inspection; Audit Fees . Borrower shall keep proper books of record and account in accordance with GAAP in which full, true and correct entries shall be made of all dealings and transactions in relation to its business and activities; and shall permit (at the expense of the Borrower provided the Borrower shall be responsible for such reasonable expenses no more than one (1) time per year unless an Event of Default has occurred and is continuing), representatives of the Administrative Agent or any Person appointed by Administrative Agent to visit and inspect any of their respective properties, to examine and make abstracts or copies from any of their respective books and records (in each case excluding patient medical records and other records to the extent confidential or where such examination is prohibited under applicable Laws, including without limitation HIPPA), to conduct a collateral audit and analysis of their respective Inventory and Accounts and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants as often as may reasonably be desired. In the absence of an Event of Default, the Administrative Agent shall give the Borrower commercially reasonable prior written notice of such exercise. No notice shall be required during the existence and continuance of any Event of Default.

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the conduct of its business, shall continue in, and limit its operations to, the same general line of business as that currently conducted and shall comply with all applicable laws (including, without limitation, Healthcare Laws), orders, regulations and ordinances of all federal, foreign, state and local governmental authorities, except to the extent any such non-compliance could reasonably be expected to result in a Material Adverse Effect. The Borrower shall keep proper books of record and account in which full and true entries will be made of all dealings or transactions of or in relation to the business and affairs of the Borrower, in accordance with GAAP (subject, however, to the GAAP Exceptions), consistently applied.

8.4 Claims and Taxes . The Borrower agrees to pay or cause to be paid all license fees, bonding premiums and related taxes and charges and shall pay or cause to be paid all of the Borrower’s real and personal property taxes, assessments and charges and all of the Borrower’s franchise, income, unemployment, use, excise, old age benefit, withholding, sales and other taxes and other governmental charges assessed against the Borrower, or payable by the Borrower, at such times and in such manner as to prevent any penalty from accruing or any Lien from attaching to its property, provided that the Borrower shall have the right to contest in good faith, by an appropriate proceeding promptly initiated and diligently conducted, the validity, amount or imposition of any such tax, assessment or charge, and upon such good faith contest to delay or refuse payment thereof, if (a) the Borrower establishes adequate reserves to cover such contested taxes, assessments or charges, and (b) such contest does not have a Material Adverse Effect.

8.5 State of Incorporation or Formation . The Borrower’s state of incorporation or formation, as applicable, set forth on Schedule 1 hereto shall remain the Borrower’s state of incorporation or formation, as applicable, unless: (a) the Borrower provides the Administrative Agent with at least thirty (30) days prior written notice of any proposed change, (b) no Event of Default then exists or will exist immediately after such proposed change, and (c) the Borrower provides the Administrative Agent with, at Borrower’s sole cost and expense, such financing statements, and if applicable, landlord waivers, bailee letters and processor letters, and such other agreements and documents as the Administrative Agent shall reasonably request in connection therewith.

8.6 Liability and Malpractice Insurance . The Borrower shall maintain, at its expense, general liability and professional malpractice insurance through commercial insurance in such amounts and with such deductibles consistent with its past practices, and shall deliver to the Administrative Agent the original (or a certified) copy of each policy of insurance and evidence of the payment of all premiums therefor. Such policies of insurance shall contain an endorsement showing the Administrative Agent as additional insured thereunder. Administrative Agent acknowledges that general liability and professional malpractice insurance coverage is currently unavailable generally in the nursing home industry at commercially affordable rates. Borrower has in place and will maintain either (i) so long it is available at commercially affordable rates, indemnity insurance with coverage limits of One Million Dollars ($1,000,000.00) per medical incident, subject to a deductible of Four Hundred Ninety-Five Thousand Dollars ($495,000.00) per claim, with a total annual aggregate policy limit of Fifteen Million Dollars ($15,000,000.00) and a sublimit per Facility of Three Million Dollars ($3,000,000.00) or (ii) general liability and professional malpractice insurance with single limit coverage of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) per occurrence and

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Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) cumulative. Administrative Agent agrees that until such time as insurance coverage is generally available in the nursing home industry at commercially affordable rates, Administrative Agent agrees to accept Borrower’s current coverage. Borrower shall provide Administrative Agent, (a) on an annual basis, information from its insurance representative, insurance carrier or from comparable insurance carriers regarding availability of insurance and (b) with respect to the insurance policies contemplated by this Section 8.6 and those certain insurance policies contemplated by Section 8.7 below, prompt (but in any event, within five (5) Business Days of any such occurrence) written notice of any alteration or cancellation of such insurance policy.

Upon the occurrence of an Event of Default under this Agreement, the Borrower irrevocably makes, constitutes and appoints the Administrative Agent (and all officers, employees or agents designated by the Administrative Agent in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact for the purpose, subject at all times to the terms and conditions of the Omega Debt Documents and any other Commercial Leases, of making, settling and adjusting claims on behalf of the Borrower under all such policies of insurance, endorsing the name of the Borrower on any check, draft, instrument or other item of payment received by the Borrower or the Administrative Agent pursuant to any such policies of insurance, and for making all determinations and decisions of Borrower with respect to such policies of insurance.

UNLESS THE BORROWER PROVIDES THE ADMINISTRATIVE AGENT WITH EVIDENCE OF THE INSURANCE COVERAGE REQUIRED BY THIS AGREEMENT WITHIN THREE BUSINESS DAYS FOLLOWING ADMINISTRATIVE AGENT’S REQUEST, THE ADMINISTRATIVE AGENT MAY PURCHASE INSURANCE AT THE BORROWER’S EXPENSE TO PROTECT THE ADMINISTRATIVE AGENT’S INTERESTS IN THE COLLATERAL. THIS INSURANCE MAY, BUT NEED NOT, PROTECT THE INTERESTS IN THE COLLATERAL. THE COVERAGE PURCHASED BY THE ADMINISTRATIVE AGENT MAY NOT PAY ANY CLAIMS THAT THE BORROWER MAKES OR ANY CLAIM THAT IS MADE AGAINST THE BORROWER IN CONNECTION WITH THE COLLATERAL. THE BORROWER MAY LATER CANCEL ANY SUCH INSURANCE PURCHASED BY THE ADMINISTRATIVE AGENT, BUT ONLY AFTER PROVIDING THE ADMINISTRATIVE AGENT WITH EVIDENCE THAT THE BORROWER HAS OBTAINED INSURANCE AS REQUIRED BY THIS AGREEMENT. IF THE ADMINISTRATIVE AGENT PURCHASES INSURANCE FOR THE COLLATERAL, THE BORROWER WILL BE RESPONSIBLE FOR THE COSTS OF THAT INSURANCE, INCLUDING INTEREST AND ANY OTHER CHARGES THAT THE

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ADMINISTRATIVE AGENT MAY IMPOSE IN CONNECTION WITH THE PLACEMENT OF THE INSURANCE, UNTIL THE EFFECTIVE DATE OF THE CANCELLATION OR EXPIRATION OF THE INSURANCE. THE COSTS OF THE INSURANCE MAY BE ADDED TO THE LIABILITIES SECURED HEREBY. THE COSTS OF THE INSURANCE MAY BE MORE THAN THE COST OF INSURANCE THE BORROWER MAY BE ABLE TO OBTAIN ON ITS OWN.

8.8 Environmental . The Borrower shall promptly notify and furnish Administrative Agent with a copy of any and all Environmental Notices which are received by it. Except where not required to do so pursuant to any Commercial Lease, the Borrower shall take prompt and appropriate action in response to any and all such Environmental Notices and shall promptly furnish Administrative Agent with a description of the Borrower’s Response thereto. The Borrower shall (a) obtain and maintain all permits required under all applicable federal, state, and local Environmental Laws, except as to which the failure to obtain or maintain would not have a Material Adverse Effect; and (b) except where not required to do so pursuant to any Commercial Lease, keep and maintain the Property and each portion thereof in compliance with, and not cause or permit the Property or any portion thereof to be in violation of, any Environmental Law, except as to which the failure to comply with or the violation of which, would not have a Material Adverse Effect. During the term of this Agreement, the Borrower shall not permit others to, Manage, whether on or off Borrower’s Property, Hazardous Substances, except to the extent such Management does not or is not reasonably likely to result in or create a Material Adverse Effect. Except where not required to do so pursuant to any Commercial Lease, the Borrower shall take prompt action in material compliance with applicable Environmental Laws to Respond to the on-site or off-site Release of Hazardous Substances connected with operation of its business or Property.

8.9 Banking Relationship . The Borrower and the Parent shall at all times maintain all of their respective primary deposit and operating accounts with the Administrative Agent and the Administrative Agent will act as the principal depository and remittance agent for the Borrower and Parent. The Borrower agrees to pay to the Administrative Agent reasonable and customary fees for banking services/cash management services of Borrower and Guarantor (the “ Service Fee ”). The Administrative Agent shall be and hereby is authorized to charge any deposit or operating account of the Borrower in respect of the Service Fee. Notwithstanding the foregoing in this Section 8.9 , Borrower maintains as of the Closing Date certain non-material accounts with Regions Bank as identified on Schedule 8.9 and the existence of such accounts will not violate this Section 8.9 as long as the aggregate amount contained therein does not at any time exceed Fifty Thousand Dollars ($50,000), and (ii) Borrower maintains as of the Closing Date certain employee payroll accounts with Bank of America as identified on Schedule 8.9 and the existence of such accounts will not violate this Section 8.9 ; provided , however , that upon written notice to Borrower from Administrative Agent, Borrower and Guarantor shall move all such employee payroll accounts to Administrative Agent within ninety (90) days, which ninety (90) day timeframe will be reasonably extended by Administrative Agent as long as Borrower and Guarantor are making a good faith effort to move such accounts to Administrative Agent.

8.10 Intellectual Property . Subject to the terms of the Intercreditor Agreement, if after the Closing Date the Borrower shall own or otherwise possess any registered patents, copyrights, trademarks, trade names, or service marks other than those owned by Parent or any

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derivation thereof (or file an application to attempt to register any of the foregoing), the Borrower shall promptly notify the Administrative Agent in writing of same and execute and deliver any documents or instruments (at the Borrower’s sole cost and expense) reasonably required by Administrative Agent to perfect a security interest in and lien on any such federally registered Intellectual Property in favor of the Administrative Agent and assist in the filing of such documents or instruments with the United States Patent and Trademark Office and/or United States Copyright Office or other applicable registrar.

8.11 Change of Location; Etc . Any of the Collateral may be moved to another location within the continental United States so long as: (i) the Borrower provides the Administrative Agent with at least thirty (30) days prior written notice, (ii) no Event of Default then exists, and (iii) the Borrower provides the Administrative Agent with, at Borrower’s sole cost and expense, such financing statements, landlord waivers, bailee and processor letters and other such agreements and documents as the Administrative Agent shall reasonably request. The Borrower shall defend and protect the Collateral against and from all claims and demands of all Persons at any time claiming any interest therein adverse to the Administrative Agent. If the Borrower desires to change its principal place of business and chief executive office or its name, the Borrower shall notify the Administrative Agent thereof in writing no later than thirty (30) days prior to such change and the Borrower shall provide the Administrative Agent with, at Borrower’s sole cost and expense, such financing statements, amendment statements and other documents as the Administrative Agent shall reasonably request in connection with such change. If the Borrower shall decide to change the location where its books and records are maintained, the Borrower shall notify the Administrative Agent thereof in writing no later than thirty (30) days prior to such change.

8.12 Health Care Related Matters . The Borrower shall cause all licenses, permits, certificates of need, reimbursement contracts and programs, and any other agreements necessary for the use and operation of its business or as may be necessary for participation in Medicaid, Medicare and other applicable reimbursement programs, to remain in full force and effect, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrowers on a consolidated basis. The Borrower shall at all times maintain in full force and effect the Medicare Certification, the Medicaid Certification, the Medicare Provider Agreement and the Medicaid Provider Agreement, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis. The Borrower shall comply at all times with the CMS, except to the extent that such failure to comply would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis. The Borrower shall take all necessary steps to protect personally identifiable health information for each patient substantially in accordance with the CMS laws and regulations, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrower on a consolidated basis.

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in the event any of them or any Affiliate is at any time identified on any Blocked Persons List, such event shall be an Event of Default, and shall entitle Administrative Agent and Lenders to exercise any and all remedies provided in any Financing Agreements or otherwise permitted by Law. In addition, Administrative Agent and Lenders may immediately contact the Office of Foreign Assets Control and any other government agency Administrative Agent or Lenders deem appropriate in order to comply with its respective obligations under any Law regulating or relating to terrorism and international money laundering.

8.14 Government Accounts . If the Borrower desires Government Accounts to be considered Eligible Accounts, the Borrower shall take any and all action reasonably required by the Administrative Agent in order to provide the Administrative Agent with a perfected security interest in such Government Accounts and execute and deliver all documentation reasonably required by the Administrative Agent in connection therewith, including, without limitation, a Blocked Account Agreement.

8.15 Further Assurances . The Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may from time to time be necessary or as the Administrative Agent or any Lender may from time to time reasonably request in order to carry out the intent and purposes of this Agreement and the other Financing Agreements and the transactions contemplated hereby and thereby, including, subject to the terms of the Intercreditor Agreement, all such actions to establish, create, preserve, protect and perfect a first-priority Lien in favor of the Administrative Agent (for the ratable benefit of Lenders and Administrative Agent) on the Collateral (including Collateral acquired after the date hereof), including on any and all unencumbered assets of Borrower whether now owned or hereafter acquired.

8.16 Compliance with Anti-Terrorism Orders . Administrative Agent and Lenders hereby notify Borrowers that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “ Patriot Act ”), and the policies and practices of Administrative Agent and Lenders, the Administrative Agent and Lenders are required to obtain, verify and record certain information and documentation that identifies each Borrower, which information includes the name and address of each Borrower and such other information that will allow the Administrative Agent and Lenders to identify each Borrower in accordance with the Patriot Act. In addition, Borrowers shall (a) ensure that no Person who owns a controlling interest in or otherwise controls any Borrower is or shall be listed on the OFAC Lists, (b) not use or permit the use of the proceeds of the Loan to violate any of the foreign asset control regulations of OFAC or any enabling statute or Executive Order relating thereto, and (c) comply with all applicable Bank Secrecy Act laws and regulations, as amended. Borrower shall not permit the transfer of any interest in Borrower to any Person (or any beneficial owner of such entity) who is listed on the OFAC Lists. Borrower shall not knowingly enter into a Lease with any party who is listed on the OFAC Lists. Borrower shall immediately notify Administrative Agent and Lenders if Borrower has knowledge that the Guarantor, manger or any member or beneficial owner of Borrower, Guarantor, Manager is listed on the OFAC Lists or (i) is indicted on or (ii) arraigned and held over on charges involving money laundering or predicate crimes to money laundering. Borrower shall immediately notify Administrative Agent and Lenders if Borrower knows that any Tenant is listed on the OFAC Lists or (A) is

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convicted on, (B) pleads nolo contendere to, (C) is indicted on or (D) is arraigned and held over on charges involving money laundering or predicate crimes to money laundering.

8.17 Blocked Account Agreements and Account Debtors .

(1) The Borrower shall have entered into the Blocked Account Agreement.

(2) The Borrower shall instruct and direct each Account Debtor to send all payments with respect to each Account to the Commercial Blocked Account and the Government Blocked Account, as the case may be, for deposit established pursuant to this Agreement.

9. NEGATIVE COVENANTS .

The Borrower covenants and agrees with Administrative Agent and Lenders that as long as any Liabilities remain outstanding, and (even if there shall be no such Liabilities outstanding) as long as this Agreement remains in effect (unless the Required Lenders shall give (or Administrative Agent upon instruction by Required Lenders to give) prior written consent thereto):

9.1 Encumbrances . The Borrower shall not create, incur, assume or suffer to exist any Lien of any nature whatsoever on any of its assets or property, including, without limitation, the Collateral, other than the following (“ Permitted Liens ”): (i) Liens securing the payment of taxes, either not yet due or the validity of which is being contested in good faith by appropriate proceedings, and as to which the Borrower shall, if appropriate under GAAP, have set aside on its books and records adequate reserves, provided, that such contest does not have a material adverse effect on the ability of the Borrower to pay any of the Liabilities, or the priority or value of the Administrative Agent’s Lien in the Collateral; (ii) deposits under workmen’s compensation, unemployment insurance, social security and other similar laws; (iii) Liens in favor of the Administrative Agent (for the ratable benefit of Lenders and Administrative Agent); (iv) liens imposed by law, such as mechanics’, materialmen’s, landlord’s, warehousemen’s, carriers’ and other similar liens, securing obligations incurred in the ordinary course of business that are not past due for more than thirty (30) calendar days, or that are being contested in good faith by appropriate proceedings and for which appropriate reserves have been established, or that are not yet due and payable; (v) purchase money security interests upon or in any property acquired or held by the Borrower in the ordinary course of business to secure the purchase price of such property so long as: (a) the aggregate indebtedness relating to such purchase money security interests and Capitalized Lease Obligations does not at any time exceed Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) in the aggregate at any time, (b) each such lien shall only attach to the property to be acquired; and (c) the indebtedness incurred shall not exceed one hundred percent (100%) of the purchase price of the item or items purchased; (v) pledges and deposits made in the ordinary course of business in compliance with workmen’s compensation laws, unemployment insurance and other social security laws or regulations, or deposits to secure performance of tenders, statutory obligations, trade contracts (other than for Indebtedness), leases (other than Capital Lease Obligations), surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of

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Borrower’s business as presently conducted; (vi) any Lien securing a judgment; provided, that any Lien securing a judgment in excess of Two Hundred Fifty Thousand Dollars ($250,000.00) that remains unsatisfied or undischarged for more than thirty (30) days shall not be a Permitted Lien, unless such judgment is either (x) fully insured and such insurer has admitted liability or (y) is being contested or appealed by appropriate proceedings and the enforcement of such judgment is stayed during the course of such contest or appeal, provided that Borrower has established reserves adequate for payment of such judgment and in the event such contest or appeal is ultimately unsuccessful pays such judgment within ten (10) days of the final, non-appealable ruling rendered in such contest or appeal; (vii) financing statements with respect to a lessor’s rights in and to personal property leased to a Borrower in the ordinary course of business other than through a Capitalized Lease Obligations; (viii) Liens in favor of Omega and the Omega Senior Lessor, subject in all cases to the provisions of the Intercreditor Agreement; and (ix) Liens securing any HUD Financing, subject to satisfaction of Section 6.8 of the Term Loan Agreement (as well as execution of a customary intercreditor agreement required by HUD (as defined in the Term Loan Agreement) reasonably acceptable to Administrative Agent and Lenders); and (x) Liens securing any Indebtedness incurred in connection with the acquisition of the land and improvements comprising the Rose Terrace Facility pursuant to the purchase option provided under the Rose Terrace Lease.

9.2 Indebtedness; Capital Expenditures . Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any Indebtedness, except (i) the Liabilities, (ii) the HUD Financing (subject to satisfaction of Section 6.8 of the Term Loan Agreement), (iii) the Commercial Leases, and any extensions or renewals thereof, (iv) trade obligations and normal accruals in the ordinary course of business not yet due and payable, (v) the indebtedness not to at any time exceed Three Million and No/100 Dollars ($3,000,000.00) relating to the purchase money security interests and Capitalized Lease Obligations permitted pursuant to Section 9.1 hereof (which shall include the purchase of a certain electronic medical records system), (vi) intercompany Indebtedness of the Borrower to the extent permitted under Section 9.4 , and (vii) the Indebtedness incurred in connection with the exercise of the purchase option contained in the Rose Terrace Lease.

9.3 Consolidations, Mergers or Transactions . The Borrower shall not be a party to any merger, consolidation, or exchange of Stock, or purchase, except in connection with the exercise of the purchase option contained in the Rose Terrace Lease, or otherwise acquire all or substantially all of the assets or Stock of any class of, or any other evidence of an equity interest in, or any partnership, limited liability company, or joint venture interest in, any other Person, provided , that, with prior written notice to Administrative Agent, a Borrower may merge or consolidate with, or dissolve into, another Borrower so long as the surviving entity remains a Borrower for all purposes under this Agreement and the other Financing Agreements. The Borrower shall not form or establish any Subsidiary without the Administrative Agent’s prior written consent, unless each of the requirements identified on Schedule 9.3 hereto are satisfied, as reasonably determined by the Administrative Agent. With prior notice to Administrative Agent, Borrower may dissolve an inactive Subsidiary that does not conduct any business operations and has assets with a book value not in excess of Ten Thousand and No/100 Dollars ($10,000.00) (“ Inactive Subsidiary ”), provided that any assets are transferred to Parent or an existing Subsidiary which is a Borrower under this Agreement.

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9.4 Investments or Loans . The Borrower shall not make, incur, assume or permit to exist any loans or advances, or any investments in or to any other Person, except (i) investments in short-term direct obligations of the United States Government, agency or instrumentality thereof; or any (ii) investments in negotiable certificates of deposit issued by the Administrative Agent or by any other bank reasonably satisfactory to the Administrative Agent, payable to the order of the Borrower or to bearer, (iii) investments in commercial paper rated at least A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (iv) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (iii), above; provided that, in each case, such investment is reasonably acceptable to the Administrative Agent, (iv) other short-term investments as may be permitted by Administrative Agent, (vi) loans or advances made by any Borrower to Parent or any other Borrower, (vii) loans and advances to employees permitted under Section 9.8 ; and (viii) investments by the Borrowers in their respective Subsidiaries existing on the date hereof and additional investments by the Borrower in their respective Subsidiaries so long as such Subsidiary is a Borrower under this Agreement.

9.5 Guarantees . The Borrower shall not guarantee, endorse or otherwise in any way become or be responsible for obligations of any other Person, whether by agreement to purchase the Indebtedness of any other Person or through the purchase of goods, supplies or services, or maintenance of working capital or other balance sheet covenants or conditions, or by way of stock purchase, capital contribution, advance or loan for the purpose of paying or discharging any Indebtedness or obligation of such other Person or otherwise, except (i) endorsements of negotiable instruments for collection in the ordinary course of business, and (ii) the Indebtedness permitted under Section 9.2 , above. Administrative Agent acknowledges that, prior to entering into this Agreement, the Borrower has guaranteed certain ordinary course obligations for supply purchases of Morris Memorial Convalescing and Crippled Children’s Home, Inc. and acknowledges such guarantees do not violate this Section 9.2 .

9.6 Disposal of Property . The Borrower shall not sell, assign, lease, convey, lease, transfer or otherwise dispose of (whether in one transaction or a series of transactions) all or any substantial part of its properties, assets and rights to any Person (or sell or assign, with or without recourse, any receivables) except (a) sales of Inventory in the ordinary course of business, (b) sales of Equipment being replaced in the ordinary course of business with other Equipment with a fair market value and orderly liquidation value equal to or greater than the Equipment being replaced, and (c) transfers of Inventory and Equipment located at a Facility made by Borrower to the owner or new operator of the Facility in connection with the transfer of operations upon the termination of the Commercial Lease for such Facility, and (d) the conveyance, sale, transfer, assignment or other disposition (a “ Disposition ”) of any one or more of the Real Property Assets listed on Schedule 9.6 (which shall be limited to that certain vacant Carolina Beach property and the five unencumbered Facilities that were once Capmark Facilities) provided that:

(a) at the time of each such Disposition, no Default or Event of Default shall have occurred and be continuing or would result from such transaction (including, without

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limitation, any breach or violation of any financial ratio covenant set forth in Section 9.12 hereof);

(b) that such Disposition is an arm’s length transaction for the fair value of the Real Property Asset being sold, transferred or otherwise disposed of;

(d) at least five (5) Business Days prior to the consummation of the Disposition, the Borrower whose Real Property Asset is being disposed of shall have delivered to the Administrative Agent an Officer’s Certificate certifying that such transactions comply with the foregoing provisions (which shall have attached thereto reasonable back-up data and calculations showing such compliance).

Solely for purposes of this Section 9.6 , to the extent the applicable Licenses constitute General Intangibles that are a part of the Collateral, Administrative Agent will (upon written request of Borrower and at Borrower’s cost) release any security interest granted hereunder in such Licenses required, necessary or used in connection with the Real Property Asset that is the subject of such a Disposition.

9.7 Use of Proceeds . The Borrower shall use the proceeds of the Revolving Loan for working capital purposes.

9.8 Loans to Officers; Consulting and Management Fees . The Borrower shall not make any loans to its officers, directors, shareholders, manager, member, or employees or to any other Person, and the Borrower shall not pay any consulting, management fees or similar fees to its officers, directors, manager, member, shareholders, manager, employees, or Affiliates or any other Person, whether for services rendered to the Borrower or otherwise; provided , however , the Borrower shall be permitted to (i) make advances to its employees in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any Fiscal Year of Borrower for all such employees collectively, in each case, provided that both immediately before such contemplated payment(s) or after giving effect to any such payment(s) no Default or Event of Default shall exist or have occurred or result therefrom; (ii) pay reasonable outside directors fees; and (iii) pay the management fees permitted by the Management Agreements. Administrative Agent acknowledges that travel advances issued in the ordinary course of business do not constitute loans for purposes of this Section 9.8 .

9.9 Dividends and Stock Redemptions . The Borrower shall not (a) declare, make or pay any dividend or other distribution (whether in cash, property or rights or obligations) to or for the benefit of any officer, shareholder, member, manager, director, or any Affiliate other than (i) to Guarantor, provided that both immediately before such contemplated payment(s) or after giving effect to any such payment(s) Borrower is in compliance with Section 9.12(a) hereof, (ii) the Required Dividends and Redemption Amounts, (iii) distributions under the Borrower Cash Management Program, including distributions for Guarantor’s normal quarterly dividends to common shareholders, and (iv) payment of the management fees under the Management Agreements, or (b) purchase or redeem any of the Stock of the Borrower or any

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options or warrants with respect thereto, declare or pay any dividends or distributions thereon, or set aside any funds for any such purpose. Notwithstanding the foregoing or anything to the contrary contained herein, the foregoing declarations, payments, distributions, purchases or redemptions set forth in this Section 9.9 shall, in each case, be in both manner and amount consistent with the Borrower’s historical practices.

9.10 Payments in Respect of Subordinated Debt .

(1) The Borrower shall not make any payment, directly or indirectly, to Omega (or any Affiliate or Subsidiary thereof) in contravention of the Intercreditor Agreement.

(2) The Borrower shall not make any payment in respect of any Indebtedness for borrowed money that is subordinated to the Liabilities (including, without limitation, the Subordinated Debt); provided, however, the Borrower shall be permitted to make solely those payments expressly permitted pursuant to the terms of the Subordination Agreements, in each case, as long as the Borrower is in compliance with Section 9.12 hereof both immediately before and after any such contemplated or actual payment, provided, further, that both immediately before any such contemplated payment or after giving effect to any such payments no Default or Event of Default shall exist or have occurred or result therefrom, unless otherwise permitted expressly under the terms of the Subordinations Agreements.

9.11 Transactions with Affiliates . Except as expressly permitted under this Agreement, and except for the Management Agreements and payment of the fee permitted by the terms of the Management Agreements, and the Borrower Cash Management Program, the Borrower shall not transfer any cash or property to any Affiliate or enter into any transaction, including, without limitation, the purchase, lease, sale or exchange of property or the rendering of any service to any Affiliate; provided , however , except as otherwise expressly restricted under this Agreement, that the Borrower may transfer cash or property to Affiliates and enter into transactions with Affiliates for fair value in the ordinary course of business pursuant to terms that are no less favorable to the Borrower than the terms upon which such transfers or transactions would have been made had such transfers or transactions been made to or with a Person that is not an Affiliate.

9.12 Financial Ratios . Commencing with the Fiscal Quarter ending March 31, 2011 and continuing thereafter:

(a) Minimum Fixed Charge Coverage Ratio . The Parent shall not permit its Fixed Charge Coverage Ratio to be less than 1.05 to 1.00, measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

(b) Minimum Adjusted EBITDA . The Parent shall not permit its Adjusted EBITDA to be less than Ten Million and No/100 Dollars ($10,000,000.00), measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

(c) Parent’s Cash Balance . The Parent shall not permit its Cash Balance (as defined below), tested as of the last day of each month, to be less than Four Million Dollars ($4,000,000); provided , a violation of this requirement for any month may be cured within

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fifteen (15) days of the last day of such month and will not constitute an Event of Default unless not cured by such day. As used in this Section, the term “ Cash Balances ” means the aggregate amount of unrestricted cash of Parent collectively on deposit with PrivateBank. For the avoidance of doubt, (x) cash deposits contained in any escrow, pledged, hypothecated, assigned or restricted accounts shall not be included in the calculation of the Cash Balance; and (y) any draws on the Revolving Loan Commitment deposited in any account ultimately controlled by the Parent shall also not be included in the calculation of Cash Balance.

The Borrower acknowledges and agrees that the calculation and computation of the foregoing financial ratios and covenants shall be pursuant to and in accordance with the last sentence of Section 8.1(e) hereof.

9.13 Change in Nature of Business . Borrower shall not engage, directly or indirectly, in any business other than providing residential long term care, assisted living and skilled nursing care; provided , however , that Diversicare Therapy Services, LLC shall not engage, directly or indirectly, in any business other than physical and occupational therapies and speech pathology services to residents and patients of nursing centers, acute and long term care hospitals, outpatient clinics, home health agencies, assisted living facilities and hospice providers.

9.14 Other Agreements . The Borrower shall not enter into any agreement containing any provision which would be violated or breached by the performance of its obligations hereunder or under any Financing Agreement to which Borrower is a party or which would violate or breach any provision hereof or thereof, or that would or is reasonably likely to adversely affect the Administrative Agent’s or any Lender’s interests or rights under this Agreement and the other Financing Agreements to which Borrower is a party or the likelihood that the Liabilities will be paid in full when due, nor shall the Borrower’s bylaws, articles of incorporation, operating agreement, partnership agreement or other governing document (each a “ Governing Document ”), as applicable, be amended or modified in any way that would violate or breach any provision hereof or of any Financing Agreement to which Borrower is a party, or that would or is reasonably likely to adversely affect the Administrative Agent’s or any Lender’s interests or rights under this Agreement and the other Financing Agreements to which Borrower is a party or the likelihood that the Liabilities will be paid in full when due; provided, prior to any amendment or modification of any of the Borrower’s Governing Documents, the Borrower shall furnish a correct and complete copy of any such proposed amendment or modification to the Administrative Agent.

9.15 Blocked Accounts and Lock Box Accounts . The Borrower shall not establish or open any other blocked account (other than the Commercial Blocked Account and the Government Blocked Account) or any lock box accounts after the Closing Date. The Borrower shall not amend, modify or otherwise change any terms of the Commercial Blocked Account Agreement or the Government Blocked Account Agreement, without the Administrative Agent’s prior written consent.

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Agreement and the other Financing Agreements to which Borrower is a party, without the Administrative Agent’s prior written consent (including, without limitation, except as expressly permitted by the terms of the Intercreditor Agreement, amending or modifying the Omega Debt Documents in order to (a) increase the rate of interest on or fees payable in respect of the debt unless such increase is not due and payable prior to the date the Liabilities are repaid in full, (b) accelerate the date of any regularly scheduled fees, interest or principal payment on the debt, (c) shorten the final maturity date of the debt, (d) increase the principal amount of the debt, or (e) make the covenants or events of default contained in the Omega Debt Documents materially more restrictive). Within three (3) Business Days after entering into any non-adverse amendment, modification or supplement to any Restricted Agreement, the Borrower Agent shall deliver to the Administrative Agent a complete and correct copy of such amendment, modification or supplement.

9.17 State of Incorporation or Formation . The Borrower shall not change its state of incorporation or formation, as applicable, from that set forth on Schedule 1 hereto.

9.18 Environmental . Except as to environmental conditions for which it is not responsible pursuant to any Commercial Lease, the Borrower shall not permit the Property or any portion thereof to be involved in the use, generation, manufacture, storage, disposal or transportation of Hazardous Substances except in compliance in all material respects with all Environmental Laws.

9.19 Fiscal Year . The Borrower shall not change its Fiscal Year.

9.20 Restrictions on Fundamental Changes . Without duplication of any of the foregoing, Borrower shall not:

(1) except as expressly permitted in accordance with Section 9.3 hereof, liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution);

(2) except as required upon the termination of a Commercial Lease, transfer, assign, convey or grant to any other Person, other than another Borrower, the right to operate or control any Location, whether by lease, sublease, management agreement, joint venture agreement or otherwise;

(3) without providing Administrative Agent with thirty (30) days’ prior written notice, change its legal name (and Borrower shall provide Administrative Agent with, at Borrower’s sole cost and expense, such amendment and financing statements and other documents as Administrative Agent shall reasonably request in connection with such contemplated change);

(4) except as expressly permitted in accordance with Section 9.3 hereof, suffer or permit to occur any change in the legal or beneficial ownership of the capital stock, partnership interests or membership interests, or in the capital structure, or any material change in the organizational documents or governing documents, of Borrower;

(5) change the licensed operator, manager or property manager for any Property; or

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(6) consent to or acknowledge any of the foregoing.

9.21 Margin Stock . Borrower shall not carry or purchase any “margin security” within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System.

9.22 Truth of Statements and Certificates . Borrower shall not furnish to the Administrative Agent or any Lender any certificate or other document that contains any untrue statement of a material fact or that omits to state a material fact necessary to make it not misleading in light of the circumstances under which it was furnished.

The Borrower agrees that compliance with this Article 9 is a material inducement to the Lenders’ advancing credit under this Agreement. The Borrower further agrees that in addition to all other remedies available to the Administrative Agent and the Lenders, the Administrative Agent and Lenders shall be entitled to specific enforcement of the covenants in this Article 9 , including injunctive relief.

10. HEALTH CARE MATTERS .

Without limiting the generality of any representation or warranty made in Article 7 or any covenant made in Articles 8 or 9 , each Borrower represents and warrants on a joint and several basis to and covenants with the Administrative Agent and each Lender, and shall be deemed to represent, warrant and covenant on each day on which any advance or accommodation in respect of any Loan is requested or made or any Liabilities shall be outstanding under this Agreement, that:

10.1 Funds from Restricted Grants . None of the Property or the Collateral is subject to, and Borrower shall indemnify and hold the Administrative Agent and Lenders harmless from and against, any liability in respect of amounts received by Borrower or others for the purchase or improvement of the Property or Collateral or any part thereof under restricted or conditioned grants or donations, including, without limitation, monies received under the Public Health Service Act, 42 U.S.C. Section 291 et seq .

10.2 Certificate of Need . If required under applicable Law, each Borrower has and shall maintain in full force and effect a valid certificate of need (“ CON ”) or similar certificates, license, permit, registration, certification or approval issued by the State Regulator for the requisite number of beds in each Property (the “ Licenses ”). Borrower shall cause to be operated the Location and the Property in a manner such that the Licenses shall remain in full force and effect at all times, except to the extent the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrowers on a consolidated basis. True and complete copies of the Licenses have been delivered to Administrative Agent.

10.3 Licenses . The Licenses: (i) are and shall continue in full force and effect at all times throughout the term of this Agreement and are and shall be free from restrictions or known conflicts which would materially impair the use or operation of any Property for its current use, and if any Licenses become provisional, probationary, conditional or restricted in any way (collectively “ Restrictions ”), Borrower shall take or cause to be taken prompt action to correct such Restrictions; (ii) may not be, and have not been, and will not be transferred to any

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location other than the Property; and (iii) other than the Omega Security Interest and any HUD Financing (subject to satisfaction of Section 6.8 of the Term Loan Agreement) have not been and will not be pledged as collateral security for any other loan or indebtedness. Except as may be required under and pursuant to the Omega Debt Documents, Borrower shall not do (or suffer to be done) any of the following:

(1) Rescind, withdraw, revoke, amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Licenses for any Property without Administrative Agent’s prior written consent;

(2) Amend or otherwise change any Property’s licensed beds capacity and/or the number of beds approved by the State Regulator without Administrative Agent’s prior written consent; or

(3) Replace, assign or transfer all or any part of any Property’s beds to another site or location (other than to any other Property) without Administrative Agent’s prior written consent.

11. DEFAULT, RIGHTS AND REMEDIES OF THE ADMINISTRATIVE AGENT .

11.1 Event of Default . Any one or more of the following shall constitute an “Event of Default” under this Agreement:

(1) the Borrower fails to pay (i) any principal or interest payable hereunder or under the Revolving Credit Note on the date due, declared due or demanded (including, without limitation, any amount due under Section 2.15); or (ii) any other amount payable to the Administrative Agent or any Lender or Issuing Lender under this Agreement or under any other Financing Agreement to which the Borrower is a party (including, without limitation, the Revolving Credit Note) within five (5) calendar days after the date when any such payment is due and, with respect to clause (ii) only, such failure is not cured within five (5) calendar days after notice to Borrower by Administrative Agent;

(2) the Borrower fails or neglects to perform, keep or observe any of the covenants, conditions or agreements set forth in (i) Sections 2.4, 4.3, 8.5, 8.6, 8.9, 8.11, or Section 8.12 hereof, (ii) any Section of Article 9 hereof (other than Section 9.18 hereof), or (iii) any Section of Article 10 hereof and, with respect to such Sections in Article 10 only, such failure or neglect shall continue for a period of five (5) calendar days after the earlier of (1) the date the Borrower actually knew of such failure or neglect and (2) notice to the Borrower by the Administrative Agent.

(3) the Borrower fails or neglects to perform, keep or observe any of the covenants, conditions, promises or agreements contained in this Agreement (which is not otherwise specifically referenced in this Section 11.1) and such failure or neglect shall continue for a period of thirty (30) calendar days after the earlier of (i) the date the Borrower actually knew of such failure or neglect and (ii) notice to the Borrower by the Administrative Agent;

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(4) any representation or warranty heretofore, now or hereafter made by the Borrower in connection with this Agreement or any of the other Financing Agreements to which Borrower is a party is untrue, misleading or incorrect in any material respect, or any schedule, certificate, statement, report, financial data, notice, or writing furnished at any time by the Borrower to the Administrative Agent or any Lender or Issuing Lender is untrue, misleading or incorrect in any material respect, on the date as of which the facts set forth therein are stated or certified;

(5) a judgment, decree or order requiring payment in excess of Two Hundred Fifty Thousand Dollars ($250,000) shall be rendered against the Borrower and such judgment or order shall remain unsatisfied or undischarged and in effect for thirty (30) consecutive days without a stay of enforcement or execution, provided that this clause (e) shall not apply to any judgment, decree or order for which the Borrower is fully insured and with respect to which the insurer has admitted liability, or such judgment, decree or order is being contested or appealed by appropriate proceedings;

(6) a notice of Lien, levy or assessment is filed or recorded with respect to any of the assets of the Borrower (including, without limitation, the Collateral), by the United States, or any department, agency or instrumentality thereof, or by any state, county, municipality or other governmental agency or any taxes or debts owing at any time or times hereafter to any one or more of them become a Lien, upon any of the assets of the Borrower (including, without limitation, the Collateral), provided that this clause (f) shall not apply to any Liens, levies, or assessments which a Borrower is contesting in good faith (provided the Borrower has complied with the provisions of clauses (a) and (b) of Section 8.4 hereof) or which relate to current taxes not yet due and payable;

(7) any material portion of the Collateral is attached, seized, subjected to a writ or distress warrant, or is levied upon, or comes within the possession of any receiver, trustee, custodian or assignee for the benefit of creditors;

(8) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed against the Borrower or any guarantor of the Liabilities, including Parent, and any such proceeding is not dismissed within sixty (60) days of the date of its filing, or a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by the Borrower or any guarantor of the Liabilities, including Parent, or the Borrower or any guarantor of the Liabilities, including Parent, makes an assignment for the benefit of creditors, or the Borrower or any guarantor of the Liabilities, including Parent, takes any action to authorize any of the foregoing;

(9) except as permitted for an Inactive Subsidiary, the Borrower or Parent voluntarily or involuntarily dissolves or is dissolved, or its existence terminates or is terminated; provided that in the case of an administrative dissolution or revocation of existence for failure to file the proper reports or returns with the applicable governmental authorities, no Event of Default shall be deemed to have occurred if an application for reinstatement is (i) filed promptly (but in any event, within fifteen (15) calendar days) upon Parent or Borrower receiving notice of such dissolution or revocation from the applicable

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governmental authority and (ii) diligently pursued to completion (if reasonably capable of being completed), as determined by the Administrative Agent in its sole and absolute discretion;

(10) the Credit Parties, taken as a whole, fail, at any time, to be Solvent;

(11) the Borrower or any guarantor of the Liabilities, including Parent, is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business affairs;

(12) a breach by the Borrower shall occur under any agreement, document or instrument (other than an agreement, document or instrument evidencing the lending of money), whether heretofore, now or hereafter existing between the Borrower and any other Person and the effect of such breach if not cured within any applicable cure period will or is likely to have or create a Material Adverse Effect;

(13) the Borrower shall fail to make any payment due on any other obligation for borrowed money or shall be in breach of any agreement evidencing the lending of money and the effect of such failure or breach if not cured within any applicable cure period would be to permit the acceleration of any obligation, liability or indebtedness in excess of Five Hundred Thousand Dollars ($500,000);

(14) there shall be instituted in any court criminal proceedings against the Borrower, or the Borrower shall be indicted for any crime, in either case for which forfeiture of a material amount of its property is a potential penalty, unless (i) such actions are being contested or appealed in good faith by appropriate proceedings, (ii) the potential forfeiture has been stayed during the pendency of such proceedings, and (iii) no Medicare or Medicaid reimbursement obligations are materially adversely affected by such proceedings;

(15) Parent shall at any time after the Closing Date have voting power over less than one hundred percent (100%) of the issued and outstanding Stock of Diversicare Management Services Co.;

(16) any Lien securing the Liabilities shall, in whole or in part, cease to be a perfected first priority Lien (subject only to the Permitted Liens); this Agreement or any of the Financing Agreements to which the Borrower is a party, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligations of the Borrower; or the Borrower shall directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability;

(17) any default or event of default shall occur under or pursuant to any Omega Debt Document, or any breach of, noncompliance with or default under the Intercreditor Agreement, any Subordination Agreement, or any other Financing Agreement (including, without limitation, the Guaranty, each Pledge Agreement and the Master Letter of Credit Agreement) by any party thereto (other than by the Administrative Agent), and the same is not cured or remedied within any applicable cure period, provided that if such default or event of default, breach, noncompliance or default, requires the giving of notice by Administrative

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Agent to any party in addition to or other than Borrower, Administrative Agent shall have provided Borrower with such notice at the same time as it provides such notice to such other party;

(18) if the Borrower fails, within three (3) Business Days of receipt to forward any collections it receives with respect to any Accounts to the Commercial Blocked Account or the Government Blocked Account, as the case may be;

(19) institution by the PBGC, the Borrower or any ERISA Affiliate of steps to terminate any Plan or to organize, withdraw from or terminate a Multiemployer Plan if as a result of such reorganization, withdrawal or termination, the Borrower or any ERISA Affiliate could be required to make a contribution to such Plan or Multiemployer Plan, or could incur a liability or obligation to such Plan or Multiemployer Plan, in excess of Two Hundred Fifty Thousand Dollars ($250,000), or (ii) a contribution failure occurs with respect to any Plan sufficient to give rise to a Lien under ERISA, which Lien is not fully discharged within fifteen (15) days;

(20) a Material Adverse Change shall occur;

(21) Borrower or any Affiliate of Borrower, shall challenge or contest, in any action, suit or proceeding, the validity or enforceability of this Agreement, or any of the other Financing Agreements, the legality or the enforceability of any of the Liabilities or the perfection or priority of any Lien granted to the Administrative Agent;

(22) Parent shall revoke or attempt to revoke, terminate or contest its obligations under the Guaranty, or the Guaranty or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

(23) any Pledgor shall revoke or attempt to revoke, terminate or contest in any way any Pledge Agreement, or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

(24) Borrower shall be prohibited or otherwise restrained from conducting the business theretofore conducted by it in any manner that has or could reasonably be expected to have or result in a Material Adverse Effect;

(25) there shall occur with respect to the Operator of any Location any Medicare or Medicaid survey deficiencies at Level I, J, K, L or worse (i) which deficiencies are not cured within the amount of time permitted by the applicable reviewing agency; (ii) which result in the imposition by any Government Authority or the applicable state survey agency of sanctions in the form of either a program termination, temporary management, denial of payment for new admission (which continues for thirty (30) days or more or pertains to more than one Location) or facility closure and (iii) which sanctions could have a Material Adverse Effect as determined by Administrative Agent in its reasonable discretion. Upon the occurrence of such event, Borrower shall submit to Administrative Agent its plan of correction for dealing with such event, and shall periodically review its progress under the plan of correction with Administrative Agent. Provided that Administrative Agent remains satisfied

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with the progress under the plan of correction, then such Event shall not be an Event of Default unless formal notice is given by Administrative Agent to Borrower;

(26) a state or federal regulatory agency shall have revoked any license, permit, certificate or Medicaid or Medicare qualification pertaining to the Real Property or any Location, regardless of whether such license, permit, certificate or qualification was held by or originally issued for the benefit of Borrower, a tenant or any other Person, the revocation of which could reasonably be expected to have a Material Adverse Effect;

(27) any material default by Borrower under the terms of any material Lease following the expiration of any applicable notice and cure period (if any);

(28) William R. Council III or L. Glynn Riddle, Jr. shall not be senior officers of the Borrower and devote significant time and energy to the business of the Borrower; provided, however, it shall not constitute an Event of Default if any such individual shall fail for any reason to be a senior officer of the Borrower or fail to devote significant time and energy to the business of the Borrower, and such individual shall be promptly replaced by the Borrower, whether on an interim or permanent basis, with an individual with substantially similar skills and experience (but in no event later than within 90 calendar days of the former individual’s resignation, termination, permanent disability or death) and otherwise acceptable to the Administrative Agent in its reasonable and good faith determination;

(29) any subordination provision in any document or instrument governing Subordinated Debt, or any subordination provision in any guaranty by any Subsidiary of any Subordinated Debt, shall cease to be in full force and effect, or any Credit Party or any other Person (including the holder of any applicable Subordinated Debt) shall contest in any manner the validity, binding nature or enforceability of any such provision; or

(30) an “Event of Default” shall occur under or pursuant to the Term Loan Agreement or any Affiliate Term Loan Financing Agreement.

Notwithstanding the foregoing, in the situations described in clauses (l), (t), (x) and (z), above, where an Event of Default is triggered by the occurrence of a Material Adverse Change or a Material Adverse Effect, events which could reasonably be expected to have or result in a Material Adverse Effect or Material Adverse Change, such occurrence shall not be deemed to be an Event of Default hereunder provided that Borrower shall within forty-eight (48) hours after the occurrence thereof submit to Administrative Agent in writing a plan of correction for dealing with such Material Adverse Change or Material Adverse Effect that is acceptable to Administrative Agent in its sole and absolute discretion, and, if such plan of correction is so acceptable, for so long as Administrative Agent remains satisfied in all respects with the progress under such plan of correction and until written notice that Administrative Agent is not so satisfied is given by Administrative Agent to Borrower.

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hereby expressly waived), be immediately due and payable; and upon the occurrence of any other Event of Default, the Administrative Agent may at its sole option (or, upon written request of Required Lenders shall) declare the Commitment (if it has not theretofore terminated) to be terminated and any or all of the Liabilities may, at the sole option of the Administrative Agent (or, upon written request of Required Lenders shall), and without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be declared, and thereupon shall become, immediately due and payable, whereupon the Commitment shall immediately terminate. Upon the occurrence of any Default or Event of Default the Lender may, at its option, cease making any additional Revolving Loans.

11.3 Rights and Remedies Generally .

(1) Upon the occurrence of any Event of Default, the Administrative Agent and Lenders shall have, in addition to any other rights and remedies contained in this Agreement and in any of the other Financing Agreements, all of the rights and remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by Laws, including, without limitation, the right of Administrative Agent to sell, assign, or lease any or all of the Collateral. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and the Administrative Agent, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order. All sums received from Borrower and/or the Collateral in respect of the Loans may be applied by the Administrative Agent to any Liabilities in such order of application and in such amounts as the Administrative Agent shall deem appropriate in its discretion (subject to Section 12.8). Borrower waives any right it may have to require the Administrative Agent to pursue any Person for any of the Liabilities.

(2) Upon notice to Borrower after an Event of Default, Borrower at its own expense shall assemble all or any part of the Collateral as determined by Administrative Agent and make it available to Administrative Agent at any location designated by Administrative Agent. In such event, Borrower shall, at its sole cost and expense, store and keep any Collateral so assembled at such location pending further action by Administrative Agent and provide such security guards and maintenance services as shall be necessary to protect and preserve such Collateral. In addition to all such rights and remedies, the sale, lease or other disposition of the Collateral, or any part thereof, by the Administrative Agent after an Event of Default may be for cash, credit or any combination thereof, and the Administrative Agent (on behalf of Lenders and itself) may purchase all or any part of the Collateral at public or, if permitted by law, private sale, and in lieu of actual payment of such purchase price, may set-off the amount of such purchase price against the Liabilities of the Borrower then owing. Any sales of such Collateral may be adjourned from time to time with or without notice. The Administrative Agent may, in its sole discretion, cause the Collateral to remain on the Borrower’s premises, at the Borrower’s expense, pending sale or other disposition of such Collateral. The Administrative Agent shall have the right after an Event of Default to conduct such sales on the Borrower’s premises, at the Borrower’s expense, or elsewhere, on such occasion or occasions as the Administrative Agent may see fit.

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11.4 Entry Upon Premises and Access to Information . Upon the occurrence of any Event of Default, the Administrative Agent shall have the right to enter upon the premises of the Borrower where the Collateral is located without any obligation to pay rent to the Borrower, or any other place or places where such Collateral is believed to be located and kept, and remove such Collateral therefrom to the premises of the Administrative Agent or any agent of the Administrative Agent, for such time as the Administrative Agent may desire, in order to effectively collect or liquidate such Collateral. Upon the occurrence of any Event of Default, the Administrative Agent shall have the right to obtain access to the Borrower’s data processing equipment, computer hardware and software relating to the Collateral and subject to the privacy requirements and regulations of HIPPA and of any applicable state or federal patients bill of rights, to use all of the foregoing and the information contained therein in any manner the Administrative Agent deems appropriate. Upon the occurrence of any Event of Default, the Administrative Agent shall have the right to receive, open and process all mail addressed to the Borrower and relating to the Collateral.

11.5 Sale or Other Disposition of Collateral by the Administrative Agent . Any notice required to be given by the Administrative Agent of a sale, lease or other disposition or other intended action by the Administrative Agent, with respect to any of the Collateral, which is deposited in the United States mails, postage prepaid and duly addressed to the Borrower at the address specified in Section 12.12 hereof, at least ten (10) calendar days prior to such proposed action shall constitute fair and reasonable notice to the Borrower of any such action. The net proceeds realized by the Administrative Agent upon any such sale or other disposition, after deduction for the expense of retaking, holding, preparing for sale, selling or the like and the attorneys’ and paralegal’ fees and legal expenses incurred by the Administrative Agent in connection therewith, shall be applied as provided herein toward satisfaction of the Liabilities, including, without limitation, such Liabilities described in Sections 8.2 and 11.2 hereof. The Administrative Agent shall account to the Borrower for any surplus realized upon such sale or other disposition, and the Borrower shall remain liable for any deficiency. The commencement of any action, legal or equitable, or the rendering of any judgment or decree for any deficiency shall not affect the Administrative Agent’s Liens in the Collateral until the Liabilities are fully paid in cash. The Borrower agrees that the Administrative Agent has no obligation to preserve rights to the Collateral against any other Person. If and to the extent applicable, the Administrative Agent is hereby granted a license or other right to use, without charge, the Borrower’s labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trade styles, trademarks, service marks and advertising matter or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale and selling any such Collateral, and the Borrower’s rights and benefits under all licenses and franchise agreements, if any, shall inure to the Administrative Agent’s benefit until the Liabilities of the Borrower are paid in full in cash. Borrower covenants and agrees not to interfere with or impose any obstacle to Administrative Agent’s exercise of its rights and remedies with respect to the Collateral.

11.6 Waivers (General) .

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protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Financing Agreements, the Revolving Credit Notes or any other notes, commercial paper, Accounts, contracts, documents, instruments, chattel paper and guaranties at any time held by Administrative Agent or any Lender on which Borrower may in any way be liable, and hereby ratifies and confirms whatever Administrative Agent and Lenders may do in this regard; (ii) all rights to notice and a hearing prior to Administrative Agent’s taking possession or control of, or to Administrative Agent’s replevy, attachment or levy upon, any Collateral or any bond or security which might be required by any court prior to allowing Administrative Agent to exercise any of its remedies; and (iii) the benefit of all valuation, appraisal and exemption Laws. Borrower acknowledges that it has been advised by counsel of its choice and decision with respect to this Agreement, the other Financing Agreements and the transactions evidenced hereby and thereby.

(2) Borrower for itself and all endorsers, guarantors and sureties and their heirs, legal representatives, successors and assigns, (i) agrees that its liability shall not be in any manner affected by any indulgence, extension of time, renewal, waiver, or modification granted or consented to by Administrative Agent; (ii) consents to any indulgences and all extensions of time, renewals, waivers, or modifications that may be granted by Administrative Agent with respect to the payment or other provisions of this Agreement, the Revolving Credit Notes, and to any substitution, exchange or release of the Collateral, or any part thereof, with or without substitution, and agrees to the addition or release of any Borrower, endorsers, guarantors, or sureties, or whether primarily or secondarily liable, without notice to Borrower and without affecting its liability hereunder; (iii) agrees that its liability shall be unconditional and without regard to the liability of any other tax; and (iv) expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing.

(3) Each and every covenant and condition for the benefit of Administrative Agent and Lenders contained in this Agreement and the other Financing Agreements may be waived by Administrative Agent; provided, however, that to the extent that Administrative Agent may have acquiesced in any noncompliance with any requirements or conditions precedent to the Closing of any Loan or to any subsequent disbursement of Loan proceeds, such acquiescence shall not be deemed to constitute a waiver by Administrative Agent of such requirements with respect to any future disbursements of Loan proceeds and Administrative Agent may at any time after such acquiescence require Borrower to comply with all such requirements. Any forbearance by Administrative Agent in exercising any right or remedy under any of the Financing Agreements, or otherwise afforded by applicable Law, including any failure to accelerate the Stated Maturity Date shall not be a waiver of or preclude the exercise of any right or remedy nor shall it serve as a novation of the Revolving Credit Note or as a reinstatement of the Loan or a waiver of such right of acceleration or the right to insist upon strict compliance of the terms of the Financing Agreements. Administrative Agent’s acceptance of payment of any sum secured by any of the Financing Agreements after the due date of such payment shall not be a waiver of Administrative Agent’s right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Administrative Agent shall not be a waiver of Administrative Agent’s right to accelerate the maturity of the Loan, nor shall Administrative Agent’s receipt of any condemnation awards,

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insurance proceeds, or damages under this Agreement operate to cure or waive Borrower’s or Guarantor’s default in payment of sums secured by any of the Financing Agreements.

(4) Without limiting the generality of anything contained in this Agreement or the other Financing Agreements, Borrower agrees that if an Event of Default is continuing (i) Administrative Agent is not subject to any “one action” or “election of remedies” law or rule, and (ii) all liens and other rights, remedies or privileges provided to Administrative Agent shall remain in full force and effect until Administrative Agent has exhausted all of its remedies against the Collateral and any other properties owned by Borrower and the Financing Agreements and other security instruments or agreements securing the Liabilities has been foreclosed, sold and/or otherwise realized upon in satisfaction of the Liabilities.

(5) Nothing contained herein or in any other Financing Agreement shall be construed as requiring Administrative Agent to resort to any part of the Collateral for the satisfaction of any of Borrower’s obligations under the Financing Agreements in preference or priority to any other Collateral, and Administrative Agent may seek satisfaction out of all of the Collateral or any part thereof, in its absolute discretion in respect of Borrower’s obligations under the Financing Agreements. In addition, Administrative Agent shall have the right from time to time to partially foreclose upon any Collateral in any manner and for any amounts secured by the Financing Agreements then due and payable as determined by Administrative Agent in its sole discretion, including, without limitation, the following circumstances: (i) if Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Administrative Agent may foreclose upon all or any part of the Collateral to recover such delinquent payments, or (ii) if Administrative Agent elects to accelerate less than the entire outstanding principal balance of the Revolving Credit Note, Administrative Agent may foreclose all or any part of the Collateral to recover so much of the principal balance of the Revolving Credit Note as Administrative Agent may accelerate and such other sums secured by one or more of the Financing Agreements as Administrative Agent may elect. Notwithstanding one or more partial foreclosures, any unforeclosed Collateral shall remain subject to the Financing Agreements to secure payment of sums secured by the Financing Agreements and not previously recovered.

(6) To the fullest extent permitted by law, Borrower, for itself and its successors and assigns, waives in the event of foreclosure of any or all of the Collateral any equitable right otherwise available to Borrower which would require the separate sale of any of the Collateral or require Administrative Agent to exhaust its remedies against any part of the Collateral before proceeding against any other part of the Collateral; and further in the event of such foreclosure Borrower does hereby expressly consent to and authorize, at the option of Administrative Agent, the foreclosure and sale either separately or together of each part of the Collateral.

11.7 Waiver of Notice . UPON THE OCCURRENCE OF AN EVENT OF DEFAULT, THE BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY THE ADMINISTRATIVE AGENT OF ITS RIGHTS TO REPOSSESS THE COLLATERAL WITHOUT JUDICIAL

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PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON THE COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.

11.8 Injunctive Relief . The parties acknowledge and agree that, in the event of a breach or threatened breach of any Credit Party’s obligations under any Financing Agreements, Administrative Agent may have no adequate remedy in money damages and, accordingly, shall be entitled to an injunction (including without limitation, a temporary restraining order, preliminary injunction, writ of attachment, or order compelling an audit) against such breach or threatened breach, including, without limitation, maintaining the cash management and collection procedure described herein. However, no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against any other legal or equitable remedies in the event of a breach or threatened breach of any provision of this Agreement. Each Credit Party waives the requirement of the posting of any bond in connection with such injunctive relief.

11.9 Marshalling; Recourse to Borrower . Administrative Agent shall have no obligation to marshal any assets in favor of any Credit Party, or against or in payment of any of the other Liabilities or any other obligation owed to the Administrative Agent or Lenders by any Credit Party. Notwithstanding anything to the contrary contained herein or in any other Financing Agreement, the Loans and the other Liabilities shall be fully recourse to Borrower, and Administrative Agent shall be authorized, in its sole and absolute discretion, to enforce any or all of its remedies hereunder against Borrower, including all present and future revenue and assets of Borrower, whether or not such assets have been pledged as collateral for the Loans.

11.10 Advice of Counsel . The Borrower acknowledges that it has been advised by its counsel with respect to this transaction and this Agreement, including, without limitation, all waivers contained herein.

12. MISCELLANEOUS .

12.1 Waiver; Amendment . The Administrative Agent’s or Lenders’ failure, at any time or times hereafter, to require strict performance by the Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Administrative Agent thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Administrative Agent, Issuing Lender or the Lenders, as applicable, of an Event of Default under this Agreement or a default under any of the other Financing Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the other Financing Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Financing Agreements and no Event of Default under this Agreement or default under any of the other Financing Agreements shall be deemed to have been suspended or waived by the Administrative Agent unless such suspension or waiver is in writing signed by an officer of the Administrative Agent, and directed to the Borrower specifying such suspension or waiver.

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Except as otherwise set forth herein, no amendment or modification or waiver of, or consent with respect to (as reasonably determined by Administrative Agent) any provision of this Agreement or the other Financing Agreements shall in any event be effective unless the same shall be in writing and acknowledged by Borrower and either (i) Required Lenders, or (ii) Administrative Agent with a certification that consent from the Required Lenders has been obtained, and then any such amendment, modification, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. Notwithstanding anything contained herein to the contrary, no amendment, modification, waiver or consent shall (a) extend or increase the Commitment of any Lender without the written consent of such Lender, as applicable, (b) extend the date scheduled for payment of any principal (exclusive of mandatory prepayments) of or interest on the Loans or any fees payable hereunder without the written consent of each Lender directly affected thereby, (c) extend the Stated Maturity Date of the Loans without the written consent of all Lenders (except in accordance with the terms of this Agreement), (d) reduce the principal amount of the Loans, the rate of interest thereon or any fees payable hereunder, without the consent of each Lender directly affected thereby (except for any periodic adjustments of interest rates and fees as provided for in this Agreement), or (e) release any party from its obligations under any guaranty at any time hereafter provided, if any, or all or substantially all of the Collateral granted hereunder or under any of the Financing Agreements (except as otherwise specifically permitted or provided in this Agreement), change the definition of Required Lenders, any provision of this Section 12.1 or reduce the aggregate Pro Rata Share required to effect an amendment, modification, waiver or consent, without, in each case with respect to this subsection (e), the written consent of all Lenders, or (f) waive any material condition set forth in Section 5 without the prior written consent of each Lender directly affected thereby. No provision in this Agreement with respect to the timing or application of mandatory prepayments of the Loans shall be amended, modified or waived without the consent of Required Lenders. No provision of Section 13 or other provision of this Agreement affecting Administrative Agent or any Issuing Lender, in such capacity, as such shall be amended, modified or waived without the consent of Administrative Agent or such Issuing Lender, as applicable. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the prior written consent of such Lender.

12.2 Costs and Attorneys’ Fees .

(1) Borrower agrees to pay jointly and severally on demand all of the costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and out-of-pocket expenses of the Administrative Agent’s counsel, all UCC tax, lien, judgment, pending suit, and bankruptcy search fees and costs, UCC filing fee and costs, recording, filing and registration fees and charges, mortgage or documentary taxes, all costs of Intralinks or other similar transmission system, if applicable, all corporate search fees and certified documents, all financial and legal due diligence expenses, all audit, field exam and appraisal costs and fees, costs incurred by Administrative Agent in connection with travel expenses of its associates, background checks on members of management of Borrower, and, if applicable, real estate appraisal fees, survey fees, recording and title insurance costs, and any environmental report or analysis) in connection with the structuring, preparation, negotiation, execution, delivery and closing of: (i) this Agreement, the other Financing Agreements and all

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other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder, and (ii) any and all amendments, modifications, supplements and waivers executed and delivered pursuant hereto or any other Financing Agreement or in connection herewith or therewith. Borrower further agrees that the Administrative Agent, in its sole discretion, may deduct all such unpaid amounts from the aggregate proceeds of the Loans or debit such amounts from the operating accounts of Borrower maintained with the Administrative Agent.

(2) The costs and expenses that the Administrative Agent and Lenders incur in any manner or way with respect to the following shall be part of the Liabilities, payable by Borrower jointly and severally on demand if at any time after the date of this Agreement the Administrative Agent or any Lender: (i) employs counsel in good faith for advice or other representation, (ii) with respect to the amendment, modification or enforcement of this Agreement or the other Financing Agreements, or with respect to any Collateral securing the Liabilities hereunder, (iii) to represent the Administrative Agent and Lender in any work-out or any type of restructuring of the Liabilities, or any litigation, contest, dispute, suit or proceeding or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether instituted by the Administrative Agent, Lenders, Borrower or any other Person) in any way or respect relating to this Agreement, the other Financing Agreements, Borrower’s affairs or any Collateral hereunder or (iv) to enforce any of the rights of the Administrative Agent or Lenders with respect to Borrower provided in this Agreement, under any of the other Financing Agreements, or otherwise (whether at law or in equity) (including any foreclosure sale, deed in lieu transaction or costs incurred in connection with any litigation or bankruptcy or administrative hearing and any appeals therefrom and any post-judgment enforcement action including, without limitation, supplementary proceedings in connection with the enforcement of this Agreement); (v) takes any action to protect, preserve, store, ship, appraise, prepare for sale, collect, sell, liquidate or otherwise dispose of any Collateral hereunder; and/or (vi) seeks to enforce or enforces any of the rights and remedies of the Administrative Agent or Lenders with respect to Borrower or any guarantor of the Liabilities. Without limiting the generality of the foregoing, such expenses, costs, charges and fees include: reasonable fees, costs and expenses of attorneys, accountants and consultants; court costs and expenses; court reporter fees, costs and expenses; long distance telephone charges; and courier and telecopier charges.

(3) Borrower further agrees to pay, and to save the Administrative Agent and Lenders harmless from all liability for, any documentary stamp tax, intangible tax, or other stamp tax or taxes of any kind which may be payable in connection with or related to the execution or delivery of this Agreement, the other Financing Agreements, the borrowing hereunder, the issuance of the Revolving Credit Note or of any other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, provided that Borrower shall not be liable for Administrative Agent’s or any Lender’s income tax liabilities.

(4) All of the Borrower’s obligations provided for in this Section 12.2 shall be Liabilities secured by the Collateral and shall survive repayment of the Loans or any termination of this Agreement or any Financing Agreements.

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12.3 Expenditures by the Administrative Agent . In the event the Borrower shall fail to pay taxes, insurance, audit fees and expenses, consulting fees, filing, recording and search fees, assessments, fees, costs or expenses which the Borrower is, under any of the terms hereof or of any of the other Financing Agreements, required to pay, or fails to keep the Collateral free from other Liens, except as permitted herein, the Administrative Agent may, in its sole discretion, pay or make expenditures for any or all of such purposes, and the amounts so expended, together with interest thereon at the Default Rate (from the date the obligation or liability of Borrower is charged or incurred until actually paid in full to Administrative Agent and Lenders, as applicable) and shall be part of the Liabilities of the Borrower, payable on demand and secured by the Collateral.

12.4 Custody and Preservation of Collateral . The Administrative Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral in its possession if it takes such action for that purpose as the Borrower shall request in writing, but failure by the Administrative Agent to comply with any such request shall not of itself be deemed a failure to exercise reasonable care, and no failure by the Administrative Agent to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by a Borrower, shall of itself be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral.

12.5 Reliance by the Lenders . The Borrower acknowledges that the Lenders and Administrative Agent, in entering into this Agreement and agreeing to make Loans and otherwise extend credit to the Borrower hereunder, has relied upon the accuracy of the covenants, agreements, representations and warranties made herein by the Borrower and the information delivered by the Borrower to the Administrative Agent and Lenders in connection herewith (including, without limitation, all financial information and data).

12.6 Assignability; Parties . This Agreement (including, without limitation, any and all of the Borrower’s rights, obligations and liabilities hereunder) may not be assigned by the Borrower without the prior written consent of Administrative Agent and Required Lenders. Whenever in this Agreement there is reference made to any of the parties hereto, such reference shall be deemed to include, wherever applicable, a reference to the successors and permitted assigns of the Borrower and the successors and assigns of the Administrative Agent and (subject to Section 12.15 hereof) the Lenders.

12.7 Severability; Construction . Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Agreement. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any of the provisions of this Agreement.

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12.8 Application of Payments . Notwithstanding any contrary provision contained in this Agreement or in any of the other Financing Agreements, after the occurrence of a Default or an Event of Default the Borrower irrevocably waives the right to direct the application of any and all payments at any time or times hereafter received by the Administrative Agent or any Lender from the Borrower or with respect to any of the Collateral, and the Borrower does hereby irrevocably agree that any and all payments so received shall be applied in the following manner:

First , to payment of that portion of the Liabilities constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to Administrative Agent) payable to Administrative Agent;

Second , to payment of that portion of the Liabilities constituting fees, indemnities and other amounts (other than principal, interest and L/C Fees) payable to Lenders and the Issuing Lenders (including fees, charges and disbursements of counsel to the respective Lenders and Issuing Lenders), ratably among them in proportion to the respective amounts described in this clause Second payable to them;

Third , to payment of that portion of the Liabilities constituting accrued and unpaid L/C Fees and interest on the Loans, Letter of Credit Obligations and other Liabilities, ratably among Lenders and the Issuing Lenders in proportion to the respective amounts described in this clause Third payable to them;

Fourth , to payment of that portion of the Liabilities constituting unpaid principal of the Loans and L/C Disbursements, ratably among Lenders and the Issuing Lenders in proportion to the respective amounts described in this clause Fourth held by them;

Fifth , to Administrative Agent for the account of the Issuing Lenders, to Cash Collateralize that portion of Letter of Credit Obligations comprised of the aggregate undrawn amount of Letters of Credit; and

Last , to all other Liabilities, and then, after all such Liabilities have been indefeasibly paid in full in cash, any balance to the Borrower or as otherwise required by applicable law.

Amounts used to cash collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as cash collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Liabilities, if any, in the order set forth above.

12.9 Payments Set Aside . To the extent that the Borrower makes a payment or payments to the Administrative Agent or Lenders or the Administrative Agent or Lenders enforce their respective Liens or exercises their respective rights of setoff, and such payment or payments or the proceeds of such enforcement or setoff or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any bankruptcy law, state or federal law, common law or equitable cause, then to the extent of such recovery, the obligation or part thereof originally

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intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.

12.10 Sections and Titles; UCC Termination Statements . The sections and titles contained in this Agreement shall be without substantive meaning or content of any kind whatsoever and are not a part of the agreement between the parties hereto. At such time as all of the Liabilities shall have been indefeasibly paid in full in cash and this Agreement shall terminate in accordance with its terms, the Administrative Agent will, upon Borrower’s written request and at the Borrower’s cost and expense, timely file all Uniform Commercial Code termination statements reasonably required by the Borrower to evidence the termination of the Liens in the Collateral in favor of the Administrative Agent (for the ratable benefit of Lenders and Administrative Agent).

12.11 Continuing Effect; Inconsistency . This Agreement, the Administrative Agent’s Liens in the Collateral, and all of the other Financing Agreements shall continue in full force and effect so long as any Liabilities shall be owed to the Lenders, Issuing Lender and Administrative Agent, and (even if there shall be no such Liabilities outstanding) so long as this Agreement has not been terminated as provided in Section 2.9 hereof. To the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern. The relationship between Administrative Agent, Issuing Lenders and Lenders on the one hand and Borrower on the other hand shall be that of creditor-debtor only. No term in this Agreement or in any other Financing Agreement and no course of dealing between the parties shall be deemed to create any relationship or agency, partnership or joint venture or any fiduciary duty by Administrative Agent, any Issuing Lender or any Lender to Borrower or any other party. In exercising its rights hereunder and under any other Financing Agreements or taking any actions herein or therein, Administrative Agent, Issuing Lenders and Lenders may act through its respective employees, agents or independent contractors as authorized by Administrative Agent, such Issuing Lender or such Lender.

12.12 Notices . Any notice or other communication required or permitted under this Agreement shall be in writing and personally delivered, mailed by registered or certified U.S. mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid nationally recognized overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Agreement:

(1) If to the Administrative Agent, at:

The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Adam Panos
Telephone No.: 312-564-1278
Facsimile No.: 312-564-6889

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With a copy to:

Duane Morris LLP
190 South LaSalle Street — Suite 3700
Chicago, Illinois 60603
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

(2) If to the Borrower or Borrower Agent, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093
Facsimile No.: 615-251-1059

If mailed, notice shall be deemed to be given three (3) days after being sent, and if sent by personal delivery, telecopier or prepaid courier, notice shall be deemed to be given when delivered. If any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender unless expressly set forth in such notice.

12.13 Equitable Relief . The Borrower recognizes that, in the event the Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy at law may prove to be inadequate relief to the Administrative Agent and Lenders; therefore, the Borrower agrees that the Administrative Agent and Lenders, if the Administrative Agent or Lenders so request, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.

12.14 Entire Agreement . This Agreement, together with the Financing Agreements executed in connection herewith, constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all prior written or oral understandings, discussions and agreements with respect thereto (including, without limitation, any term sheet, proposal letter or commitment letter).

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12.15 Participations and Assignments . (a) Any Lender may at any time assign to one or more Persons (other than (i) a natural person or (ii) any Defaulting Lender or its wholly-owned subsidiaries) (any such Person, an “ Assignee ”) all or any portion of such Lender’s Pro Rata Share of the Loans, with the prior written consent of Administrative Agent, and, so long as no Event of Default has occurred and is continuing, Borrower (all of which consents shall not be unreasonably withheld, conditioned or delayed and shall not be required for an assignment by a Lender to another Lender or an Affiliate of a Lender). Except as Administrative Agent may otherwise agree (and, so long as no Event of Default has occurred and is continuing, Borrower otherwise consents in writing, which consent shall not be unreasonably withheld, conditioned or delayed), any such assignment shall be in a minimum aggregate amount equal to Five Million Dollars ($5,000,000) or, if less, the remaining Loan held by the assigning Lender. Borrower and Administrative Agent shall be entitled to continue to deal solely and directly with such Lender in connection with the interests so assigned to an Assignee until Administrative Agent shall have received and accepted an effective assignment agreement in substantially the form of Exhibit C hereto (an “ Assignment Agreement ”) executed, delivered and fully completed by the applicable parties thereto and a processing fee of Five Thousand Dollars ($5,000). No assignment may be made to any Person if at the time of such assignment Borrower would be obligated to pay any greater amount under Sections 3.1 or 3.3 to the Assignee than Borrower is then obligated to pay to the assigning Lender under such Sections (and if any assignment is made in violation of the foregoing, Borrower will not be required to pay such greater amounts). Any attempted assignment not made in accordance with this Section 12.15 shall be treated as the sale of a participation hereunder. Borrower shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless Borrower has expressly objected to such assignment within three (3) Business Days after notice thereof. Notwithstanding the foregoing, (x) no consent of Borrower or Administrative Agent shall be required for any assignment to a Lender or an Affiliate of a Lender (provided that no assignment shall be made to any Defaulting Lender or its wholly-owned subsidiaries) and (y) the consent of each Issuing Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding).

(b) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (ii) the assigning Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, the assigning Lender) pursuant to an effective Assignment Agreement, Borrower shall execute and deliver to Administrative Agent for delivery to the Assignee (and, as applicable, the assigning Lender) a Revolving Credit Note in the principal amount of the Assignee’s Revolving Loan Commitment (and, as applicable, a Revolving Credit Note in the principal amount of the Revolving Loan Commitment retained by the assigning Lender). Each such Revolving Credit Note shall be dated the effective date of such assignment. Upon receipt by the assigning Lender of such Revolving Credit Note, the assigning Lender shall return to Borrower any prior Revolving Credit Note held by it.

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(c) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

(d) Subject to the last sentence in Section 13.9 , any Lender may at any time (without any required consent) sell to one or more Persons (other than (i) a natural person or (ii) a Defaulting Lender or its wholly-owned subsidiaries) participating interests in its respective Loan or other interests hereunder (any such Person, a “ Participant ”). In the event of a sale by a Lender of a participating interest to a Participant, (a) such Lender’s obligations under this Agreement shall remain unchanged for all purposes, (b) Administrative Agent and Borrower shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and (c) all amounts payable by Borrower shall be determined as if such Lender had not sold such participation and shall be paid directly to such Lender. No Participant shall have any direct or indirect voting rights under this Agreement except with respect to any event described in Section 12.1 expressly requiring the unanimous vote of all Lenders or, as applicable, all affected Lenders. Each Lender agrees to incorporate the requirements of the preceding sentence into each participation agreement which such Lender enters into with any Participant. Borrower agrees that if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with Lenders, and Lenders agree to share with each Participant, as provided in Section 2.13(d) . Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.1 or 3.3 as if it were a Lender (provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Sections 3.1 or 3.3 than would have been paid to the participating Lender on such date if no participation had been sold and that each Participant complies with Section 3.3 as if it were an Assignee).

(d) Administrative Agent will maintain a copy of each Assignment Agreement delivered and accepted by it and register (the “ Register ”) for the recordation of names and addresses of Lenders, the Revolving Loan Commitment Percentage of each Lender and the Loans of each Lender from time to time and whether such Lender is the original Lender or the Assignee. No assignment shall be effective unless and until the Assignment Agreement is accepted and registered in the Register. All records of transfer of a Lender’s interest in the Register shall be conclusive, absent manifest error, as to the ownership of the interests in such Loan. Administrative Agent shall not incur any liability of any kind with respect to any Lender with respect to the maintenance of the Register. Upon the reasonable written request of Borrower, Administrative Agent will furnish a copy of the Register to the Borrower Agent or Borrower (at the cost, if any, to Borrower).

12.16 Indemnity . The Borrower agrees to jointly and severally defend, protect, indemnify and hold harmless the Administrative Agent, each Lender and the Issuing Lender and

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each and all of their respective officers, directors, employees, attorneys, affiliates, and agents (“ Indemnified Parties ”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated by a party thereto, or otherwise), claim, cause of action, judgment, suit, action or proceeding, which may ever be imposed on, incurred by, or asserted against any Indemnified Party (whether direct, indirect or consequential, and whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement or the other Financing Agreements, or any act, event or transaction related or attendant thereto, the making and the management of the Loans (including, without limitation, any liability under federal, state or local environmental laws or regulations) or the use or intended use of the proceeds of the Loans hereunder; provided , that the Borrower shall not have any obligation to any Indemnified Party hereunder with respect to matters caused by or resulting from the gross negligence, willful misconduct or illegal activity of such Indemnified Party. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable Law, to the payment and satisfaction of all matters incurred by the Indemnified Parties. Any liability, obligation, loss, damage, penalty, cost or expense incurred by the Indemnified Parties shall be paid to the Indemnified Parties on demand, together with interest thereon at the Default Rate from the date incurred by the Indemnified Parties until paid by the Borrower, be added to the Liabilities, and be secured by the Collateral. The provisions of and undertakings and indemnifications set out in this Section 12.16 shall survive the satisfaction and payment of the Liabilities of the Borrower and the termination of this Agreement. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE BORROWER OR TO ANY OTHER PARTY TO ANY FINANCING AGREEMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

12.17 Representations and Warranties . Notwithstanding anything to the contrary contained herein, (i) each representation or warranty contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and the other Financing Agreements and the making of the Loans and the repayment of the Liabilities hereunder, and (ii) each representation and warranty contained in this Agreement and each other Financing Agreement shall be remade on the date of each Loan made hereunder.

12.18 Counterparts . This Agreement and any amendment or supplement hereto or any waiver granted in connection herewith may be executed in any number of counterparts and by the different parties on separate counterparts and each such counterpart shall be deemed

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to be an original, but all such counterparts shall together constitute but one and the same Agreement.

12.19 Limitation of Liability of Administrative Agent and Lenders . It is hereby expressly agreed that:

(1) Administrative Agent and Lenders may conclusively rely and shall be protected in acting or refraining from acting upon any document, instrument, certificate, instruction or signature believed to be genuine and may assume and shall be protected in assuming that any Person purporting to give any notice or instructions in connection with any transaction to which this Agreement relates has been duly authorized to do so. Administrative Agent and Lenders shall not be obligated to make any inquiry as to the authority, capacity, existence or identity of any Person purporting to have executed any such document or instrument or have made any such signature or purporting to give any such notice or instructions;

(2) Administrative Agent and Lenders shall not be liable for any acts, omissions, errors of judgment or mistakes of fact or law, including, without limitation, acts, omissions, errors or mistakes with respect to the Collateral, except for those arising out of or in connection with Administrative Agent’s and Lender’s gross negligence, willful misconduct or illegal activity. Without limiting the generality of the foregoing, Administrative Agent and Lenders shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties, but may do so at its option, and all expenses incurred in connection therewith shall be payable by Borrower; and

(3) Administrative Agent and Lenders shall not be liable for any action taken in good faith and believed to be authorized or within the rights or powers conferred by this Agreement and the other Financing Agreements.

12.20 Borrower Authorizing Accounting Firm . Borrower shall authorize its accounting firm and/or service bureaus to provide Administrative Agent with such information as is requested by Administrative Agent in accordance with this Agreement. Borrower authorizes Administrative Agent to contact directly any such accounting firm and/or service bureaus to obtain such information.

12.21 Joint and Several Liability; Binding Obligations .

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acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon and measured and enforceable individually against each Person comprising Borrower as well as all such Persons when taken together. By way of illustration, but without limiting the generality of the foregoing, the terms of Article XI of this Agreement are to be applied to each individual Person comprising the Borrower (as well as to all such Persons taken as a whole), such that the occurrence of any of the events described in Article XI of this Agreement as to any Person comprising the Borrower shall constitute an Event of Default even if such event has not occurred as to any other Persons comprising the Borrower or as to all such Persons taken as a whole (except as otherwise expressly provided therein by, for example, the use of the term “Material Adverse Effect”).

(2) Each Borrower acknowledges that it will enjoy significant benefits from the business conducted by the other Borrowers because of, inter alia , their combined ability to bargain with other Persons including, without limitation, their ability to receive the credit facilities hereunder and other Financing Agreements which would not have been available to an individual Borrower acting alone. Each Borrower has determined that it is in its best interest to procure the Loans with the credit support of the other Borrowers as contemplated by this Agreement and the other Financing Agreements as well as permit the cross-collateralization and cross-default with the Affiliate Term Loan Liabilities, Term Loan Agreement and Affiliate Term Loan Financing Agreements as contemplated hereunder.

(3) The Administrative Agent and the Lenders have advised the Borrowers that the Administrative Agent and the Lenders are unwilling to enter into this Agreement and the other Financing Agreements and make available the Loans extended hereby or thereby to any Borrower unless each Borrower agrees, among other things, to be jointly and severally liable for the due and proper payment of the Liabilities of each other Borrower under this Agreement and other Financing Agreements. Each Borrower has determined that it is in its best interest and in pursuit of its purposes that it so induce the Lenders to extend credit pursuant to this Agreement and the other documents executed in connection herewith (i) because of the desirability to each Borrower of the Loans and the interest rates and the modes of borrowing available hereunder, (ii) because each Borrower may engage in transactions jointly with other Borrowers and (iii) because each Borrower may require, from time to time, access to funds under this Agreement for the purposes herein set forth. Each Borrower, individually, expressly understands, agrees and acknowledges, that the Loans would not be made available on the terms herein in the absence of the collective credit of all of the Persons constituting the Borrower, the joint and several liability of all such Persons, and the cross-collateralization of the collateral of all such Persons hereunder and under the other Financing Agreements. Accordingly, each Borrower, individually acknowledges that the benefit to each of the Persons comprising the Borrower as a whole constitutes reasonably equivalent value, regardless of the amount of the Loans actually borrowed by, advanced to, or the amount of collateral provided by, any individual Borrower.

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liability on its existing debts as they fall due for payment and that the sum of its debts is not and will not then be greater than all of its property at a fair valuation, that such Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature and that the value of the benefits to be derived by such Borrower from the access to funds under this Agreement (including, without limitation, the inter-Borrower arrangement set forth in this Section) is reasonably equivalent to the obligations undertaken pursuant hereto.

(5) The Borrower Agent (on behalf of each Borrower) shall maintain records specifying (a) all Liabilities incurred by each Borrower, (b) the date of such incurrence, (c) the date and amount of any payments made in respect of such Liabilities and (d) all inter-Borrower obligations pursuant to this Section. The Borrower Agent shall make copies of such records available to the Administrative Agent, upon request.

(6) To the extent that applicable Law otherwise would render the full amount of the joint and several obligations of any Borrower hereunder and under the other Financing Agreements invalid or unenforceable, such Borrower’s obligations hereunder and under the other Financing Agreements shall be limited to the maximum amount which does not result in such invalidity or unenforceability, provided, however, that each Borrower’s obligations hereunder and under the other Financing Agreements shall be presumptively valid and enforceable to their fullest extent in accordance with the terms hereof or thereof, as if this Section were not a part of this Agreement.

(7) To the extent that any Borrower shall make a payment under this Section of all or any of the Liabilities (other than any Loan made to that Borrower for which it is primarily liable) (a “Joint Liability Payment”) which, taking into account all other Joint Liability Payments then previously or concurrently made by any other Borrower, exceeds the amount which such Borrower would otherwise have paid if each Borrower had paid the aggregate Liabilities satisfied by such Joint Liability Payments in the same proportion that such Borrower’s “Allocable Amount” (as defined below) (as determined immediately prior to such Joint Liability Payments) bore to the aggregate Allocable Amounts of each of the Borrowers as determined immediately prior to the making of such Joint Liability Payments, then, following indefeasible payment in full in cash of the Liabilities and termination of the Loans, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Joint Liability Payments. As of any date of determination, the “Allocable Amount” of any Borrower shall be equal to the maximum amount of the claim which could then be recovered from such Borrower under this Section without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law.

(8) The term “Borrower” as used herein shall mean either one or more particular Borrowers or all of the Borrowers collectively as the Administrative Agent shall determine in its sole and absolute good faith discretion.

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(9) The term “Revolving Borrower” as used herein shall mean either one or more particular Revolving Borrowers or all of the Revolving Borrowers collectively as the Administrative Agent shall determine in its sole and absolute good faith discretion.

(10) [Intentionally Omitted.]

(11) Each Borrower hereby agrees that, except as hereinafter provided, its obligations hereunder shall be unconditional, irrespective of (i) the absence of any attempt to collect the Liabilities from any obligor or other action to enforce the same; (ii) the waiver or consent by Administrative Agent with respect to any provision of any instrument evidencing the Liabilities, or any part thereof, or any other agreement heretofore, now or hereafter executed by a Borrower and delivered to Administrative Agent or any Lender; (iii) failure by Administrative Agent to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral for the Liabilities; (iv) the institution of any proceeding under the United States Bankruptcy Code, or any similar proceeding, by or against a Borrower or Administrative Agent’s election in any such proceeding of the application of Section 1111(b)(2) of the United States Bankruptcy Code; (v) any borrowing or grant of a security interest by a Borrower as debtor-in-possession, under Section 364 of the United States Bankruptcy Code; (vi) the disallowance, under Section 502 of the United States Bankruptcy Code, of all or any portion of Administrative Agent’s claim(s) for repayment of any of the Liabilities; or (vii) any other circumstance other than payment in full of the Liabilities which might otherwise constitute a legal or equitable discharge or defense of a guarantor or surety.

(12) Until all Liabilities have been paid and satisfied in full, no payment made by or for the account of a Borrower including, without limitation, (i) a payment made by such Borrower on behalf of the liabilities of any other Borrower or (ii) a payment made by any other Person under any guaranty, shall entitle such Borrower, by subrogation or otherwise, to any payment from any other Borrower or from or out of any other Borrower’s property and such Borrower shall not exercise any right or remedy against any other Borrower or any property of any other Borrower by reason of any performance of such Borrower of its joint and several obligations hereunder.

(13) Any notice given by one Borrower hereunder shall constitute and be deemed to be notice given by all Borrowers, jointly and severally. Notice given by Administrative Agent to any one Borrower hereunder or pursuant to any Financing Agreements in accordance with the terms hereof or thereof shall constitute notice to each and every Borrower. The knowledge of one Borrower shall be imputed to all Borrowers and any consent by one Borrower shall constitute the consent of and shall bind all Borrowers.

(14) This Section is intended only to define the relative rights of Borrower and nothing set forth in this Section is intended to or shall impair the obligations of Borrower, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement or any other Financing Agreements. Nothing contained in this Section shall limit the liability of any Borrower to pay the Loans made directly or indirectly to that Borrower and accrued interest, fees and expenses with respect thereto for which such Borrower shall be primarily liable.

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(15) The parties hereto acknowledge that the rights of contribution and indemnification hereunder shall constitute assets of each Borrower to which such contribution and indemnification is owing. The rights of any indemnifying Borrower against the other Borrowers under this Section shall be exercisable upon the full and indefeasible payment of the Liabilities and the termination of the Loans.

12.22 Confidentiality . Borrower shall not disclose the contents of this Agreement and the other Financing Agreements to any third party (including, without limitation, any financial institution or intermediary) unless required by applicable Laws without Administrative Agent’s prior written consent, other than to Borrower’s officers, lawyers and other professional advisors on a need-to-know basis, Omega, and in connection with any filings required to be made under any applicable federal or state securities laws or regulations (“ Securities Laws ”). Borrower agrees to inform all such Persons who receive information concerning this Agreement that such information is confidential and may not be disclosed to any other Person, except as required by applicable Laws, including Securities Laws.

12.23 Fax Signatures . A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

12.24 Release . For and in consideration of any Loan and each advance or other financial accommodation hereunder, each Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with specific and express intent, for and on behalf of itself and its agents, attorneys, heirs, successors, and assigns (collectively the “ Releasing Parties ”) does hereby fully and completely release, acquit and forever discharge the Administrative Agent, Issuing Lender and each Lender, and each of their respective successors, assigns, heirs, affiliates, subsidiaries, parent companies, principals, directors, officers, employees, shareholders and agents (hereinafter called the “ Lender Parties ”), and any other person, firm, business, corporation, insurer, or association which may be responsible or liable for the acts or omissions of the Lender Parties, or who may be liable for the injury or damage resulting therefrom (collectively the “ Released Parties ”), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses, fees (including, without limitation, reasonable attorneys’ fees) and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) have or may have, against the Released Parties or any of them (whether directly or indirectly) relating to events occurring on or before the date of this Agreement, other than any claim as to which a final determination is made in a judicial proceeding (in which the Administrative Agent and Lenders or any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that one of the Released Parties acted in a grossly negligent manner or with actual willful misconduct. Each Borrower acknowledges that the foregoing release is a material inducement to Administrative Agent’s and each Lender’s decision to extend to Borrower the financial accommodations hereunder and has been relied upon by the Lenders in agreeing to make the Loans and in making each advance of Loan proceeds hereunder.

12.25 Time; Reliance . Time is of the essence in Borrower’s performance under this Agreement and all other Financing Agreements. Notwithstanding anything to the contrary

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contained in any Financing Agreement, if and to the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern.

12.26 Relationship . The relationship between, on the one hand, the Administrative Agent and Lenders, and the Borrower, on the other hand, shall be that of creditor-debtor only. No term in this Agreement or in the other Financing Agreements and no course of dealing between the parties shall be deemed to create any relationship of agency, partnership or joint venture or any fiduciary duty by the Administrative Agent and Lenders to Borrower or any other party.

12.27 Borrower Agent . Each Borrower hereby irrevocably appoints Borrower Agent as the borrowing agent and attorney-in-fact for all Borrowers which appointment shall remain in full force and effect unless and until Administrative Agent shall have received prior written notice signed by each Borrower that such appointment has been revoked and that another Borrower has been appointed Borrower Agent. Each Borrower hereby irrevocably appoints and authorizes the Borrower Agent (i) to provide Administrative Agent with all notices with respect to Loans obtained for the benefit of Borrower and all other notices and instructions under this Agreement, (ii) for all purposes of delivery or receipt of communications, preparation and delivery of financial reports, receipt and payment of Liabilities, requests for waivers, amendments or other accommodations and/or actions under this Agreement, and to duly execute and deliver on behalf of Borrower any and all instruments, amendments, modifications, reaffirmations, agreements, certificates and documents made to, in favor of or with Administrative Agent and Lenders in connection with this Agreement or the Financing Agreements, and (iii) to take such other action as Borrower Agent deems appropriate on its behalf to obtain Loans and to exercise such other powers as are reasonably incidental thereto to carry out the purposes of this Agreement. Each Borrower agrees that any notice, election, communication, representation, instrument, amendment, modification, reaffirmation, certificate, document, agreement or undertaking made on its behalf by Borrower Agent shall be legally binding upon and enforceable against each such Borrower. It is understood that the handling of the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth in this Agreement, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and Administrative Agent and Lenders shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Administrative Agent and Lenders to do so, and in consideration thereof, but without limiting any other provision contained in this Agreement, each Borrower hereby jointly and severally agrees to indemnify Administrative Agent and each Lender and hold Administrative Agent and Lenders harmless against any and all liability, expense, loss or claim of damage or injury, made against Administrative Agent or any Lender by any Borrower or by any third party or Person whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral as herein provided, (b) the Administrative Agent’s relying on any instructions of the Borrower Agent, or (c) any other action taken by the Administrative Agent hereunder or under the other Financing Agreements, except that Borrowers will have no liability to the Administrative Agent under this Section with respect to any liability that has been finally

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determined by a court of competent jurisdiction to have resulted solely from the gross negligence, willful misconduct, or illegal activity of Administrative Agent.

12.29 Additional Provisions .

(1) Consents. Each Borrower, as joint and several primary obligor of the Liabilities directly incurred by any other Borrower, authorizes Administrative Agent, without giving notice to such Borrower or to any other Borrower (to the extent permitted hereunder) or obtaining such Borrower’s consent or any other Borrower’s consent (to the extent permitted hereunder) and without affecting the liability of such Borrower for the Liabilities directly incurred by the other Borrower, from time to time to:

(2) compromise, settle, renew, extend the time for payment, change the manner or terms of payment, discharge the performance of, decline to enforce, or release all or any of the Liabilities; grant other indulgences to any Borrower in respect thereof; or modify in any manner any documents relating to the Liabilities;

(3) declare all Liabilities due and payable upon the occurrence and during the continuance of an Event of Default;

(4) take and hold security for the performance of the Liabilities of any Borrower and exchange, enforce, waive and release any such security;

(5) apply and reapply such security and direct the order or manner of sale thereof as Administrative Agent, in its sole discretion, may determine;

(6) release, surrender or exchange any deposits or other property securing the Liabilities or on which Administrative Agent at any time may have a Lien; release, substitute or add any one or more endorsers or guarantors of the Liabilities of any other Borrower or such Borrower; or compromise, settle, renew, extend the time for payment, discharge the performance of, decline to enforce, or release all or any obligations of any such endorser or guarantor or other Person who is now or may hereafter be liable on any Liabilities or release, surrender or exchange any deposits or other property of any such Person;

(7) apply payments received by Administrative Agent from any Borrower to any Liabilities, in such order as Administrative Agent shall determine, in its sole discretion, subject to Section 12.8 ; and

(8) assign this Agreement in whole or in part.

(9) Waivers. Each Borrower, as a primary, joint and several obligor with respect to the Liabilities directly incurred by any other Borrower, hereby waives:

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(10) any defense based upon any legal disability or other defense of any other Borrower, or by reason of the cessation or limitation of the liability of any other Borrower from any cause (other than full payment of all Liabilities), including, but not limited to, failure of consideration, breach of warranty, statute of frauds, statute of limitations, accord and satisfaction, and usury;

(11) any defense based upon any legal disability or other defense of any other guarantor or other Person;

(12) any defense based upon any lack of authority of the officers, directors, members, managers, partners or agents acting or purporting to act on behalf of any other Borrower or any principal of any other Borrower or any defect in the formation of any other Borrower or any principal of any other Borrower;

(13) any defense based upon the application by any other Borrower of the proceeds of the Loans for purposes other than the purposes represented by such other Borrower to Administrative Agent or intended or understood by Administrative Agent or such Borrower;

(14) any defense based on such Borrower’s rights, under statute or otherwise, to require Administrative Agent to sue any other Borrower or otherwise to exhaust its rights and remedies against any other Borrower or any other Person or against any collateral before seeking to enforce its right to require such Borrower to satisfy the Liabilities of any other Borrower;

(15) any defense based on Administrative Agent’s failure at any time to require strict performance by any Borrower of any provision of the Financing Agreements. Such Borrower agrees that no such failure shall waive, alter or diminish any right of Administrative Agent thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Administrative Agent from foreclosing on any Lien, or exercising any rights available to Administrative Agent thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of such Borrower;

(16) [intentionally omitted];

(17) any defense based upon Administrative Agent’s election of any remedy against such Borrower or any other Borrower or any of them; any defense based on the order in which Administrative Agent enforces its remedies;

(18) any defense based on (A) Administrative Agent’s surrender, release, exchange, substitution, dealing with or taking any additional collateral, (B) Administrative Agent’s abstaining from taking advantage of or realizing upon any Lien or other guaranty, and (C) any impairment of collateral securing the Liabilities, including, but not limited to, Administrative Agent’s failure to perfect or maintain a Lien in such collateral;

(19) any defense based upon Administrative Agent’s failure to disclose to such Borrower any information concerning any other Borrower’s financial condition or any other circumstances bearing on any other Borrower’s ability to pay the Liabilities;

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

(21) any defense based upon Administrative Agent’s election, in any proceeding instituted under the Bankruptcy Code, of the application of Bankruptcy Code §1111(b)(2) or any successor statute;

(22) any defense based upon any borrowing or any grant of a security interest under Bankruptcy Code §364;

(23) [intentionally omitted];

(24) except as otherwise expressly set forth herein : notice of acceptance hereof; notice of the existence, creation or acquisition of any Liability; notice of any Event of Default; notice of the amount of the Liabilities outstanding from time to time; notice of any other fact which might increase such Borrower’s risk; diligence; presentment; demand of payment; protest; filing of claims with a court in the event of any other Borrower’s receivership or bankruptcy and all other notices and demands to which such Borrower might otherwise be entitled (and agrees the same shall not have to be made on the other Borrower as a condition precedent to such Borrower’s obligations hereunder);

(25) [intentionally omitted];

(26) any defense based on application of fraudulent conveyance or transfer law or shareholder distribution law to any of the Liabilities or the security therefor;

(27) any defense based on Administrative Agent’s failure to seek relief from stay or adequate protection in any other Borrower’s bankruptcy proceeding or any other act or omission by Administrative Agent which impairs such Borrower’s prospective subrogation rights;

(28) any defense based on legal prohibition of Administrative Agent’s acceleration of the maturity of the Liabilities during the occurrence of an Event of Default or any other legal prohibition on enforcement of any other right or remedy of Administrative Agent with respect to the Liabilities and the security therefor;

(29) any defense available to a surety under applicable Law; and

(30) the benefit of any statute of limitations affecting the liability of such Borrower hereunder or the enforcement hereof.

Each Borrower further agrees that its obligations hereunder shall not be impaired in any manner whatsoever by any bankruptcy, extensions, moratoria or other relief granted to any other Borrower pursuant to any statute presently in force or hereafter enacted.

(31) Additional Waivers. Each Borrower authorizes Administrative Agent to exercise, in its sole discretion, any right, remedy or combination thereof

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which may then be available to Administrative Agent, since it is such Borrower’s intent that the Liabilities be absolute, independent and unconditional obligations of such Borrower under all circumstances. Notwithstanding any foreclosure of any Lien with respect to any or all of any property securing the Liabilities, whether by the exercise of the power of sale contained therein, by an action for judicial foreclosure or by an acceptance of a deed in lieu of foreclosure, each Borrower shall remain bound under such Borrower’s guaranty of the Liabilities directly incurred by any other Borrower.

(32) Primary Obligations. This Agreement is a primary and original obligation of each of the Borrowers and each of the Borrowers shall be liable for all existing and future Liabilities of any other Borrower as fully as if such Liabilities were directly incurred by such Borrower.

12.30 Nonliability of Administrative Agent and Lenders . The relationship between the Borrowers on the one hand and the Administrative Agent and Lenders on the other hand shall be solely that of borrower and lender. The Administrative Agent and Lenders do not have any fiduciary relationship with or duty to any Credit Party arising out of or in connection with this Agreement or any of the other Financing Agreements, and the relationship between the Credit Parties, on the one hand, and the Administrative Agent and Lenders, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. The Administrative Agent does not undertake any responsibility to any Credit Party to review or inform any Credit Party of any matter in connection with any phase of any Credit Party’s business or operations. The Borrower Agent agrees, on behalf of itself and each other Borrower, that the Administrative Agent and Lenders shall have no liability to any Credit Party (whether sounding in tort, contract or otherwise) for losses suffered by any Credit Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Financing Agreements, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence, willful misconduct or illegal activity of the party from which recovery is sought. NO LENDER OR ADMINISTRATIVE AGENT SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER OR ADMINISTRATIVE AGENT HAVE ANY LIABILITY WITH RESPECT TO, AND THE BORROWER AGENT ON BEHALF OF ITSELF AND EACH OTHER CREDIT PARTY, HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Each Borrower and the Borrower Agent acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Financing Agreements to which it is a party. No joint venture is created hereby or by the other Financing Agreements or otherwise exists by virtue of the transactions contemplated hereby by the Administrative Agent and Lenders or among the Credit Parties and the Administrative Agent and Lenders.

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12.31 Amendment and Restatement . On the date hereof (the “ Restatement Date ”), the Original Loan Agreement shall be amended, restated and superseded in its entirety by this Agreement. The parties hereto acknowledge and agree that (a) this Agreement, the Revolving Credit Notes delivered pursuant to this Agreement (the “ Restated Notes ”) and the other Financing Agreements executed and delivered in connection herewith do not constitute a novation, payment and reborrowing, or termination of the “Liabilities” (as defined in the Original Loan Agreement) under the Original Loan Agreement as in effect prior to the Restatement Date; (b) such “Liabilities” are in all respects continuing with only the terms thereof being amended and modified as provided in this Agreement; (c) the Liens granted in the Collateral pursuant to the Financing Agreements securing payment of such “Liabilities” are in all respects continuing and in full force and effect and secure the payment of the Liabilities (as defined in this Agreement) and are hereby fully ratified and affirmed; and (d) upon the effectiveness of this Agreement all loans outstanding under the Original Loan Agreement immediately before the effectiveness of this Agreement will be part of the Loans hereunder on the terms and conditions set forth in this Agreement. Without limitation on the foregoing, each of the Borrowers hereby fully and unconditionally ratifies and affirms all of the Financing Agreements, as amended, and agrees that all security interests granted to PrivateBank in the collateral thereunder shall from and after the date hereof secure all Liabilities hereunder but in favor of the Administrative Agent for the ratable benefit of the Lenders and the Administrative Agent. Notwithstanding the modifications effected by this Agreement of the representations, warranties and covenants of the Borrowers contained in the Original Loan Agreement, each of the Borrowers acknowledges and agrees that any choses in action or other rights created in favor of PrivateBank and its successors and assigns arising out of the representations and warranties of the Borrowers contained in or delivered (including representations and warranties delivered in connection with the making of the loans or other extensions of credit thereunder) in connection with the Original Loan Agreement, shall survive the execution and delivery of this Agreement but in favor of the Lenders and the Administrative Agent; provided, however, that it is understood and agreed that the Borrowers’ monetary obligations under the Original Loan Agreement in respect of the loans and letters of credit thereunder are evidenced by this Agreement. All indemnification obligations of the Borrowers pursuant to the Original Loan Agreement shall survive the amendment and restatement of the Original Loan Agreement pursuant to this Agreement. On and after the Restatement Date, (a) each reference in the Financing Agreements to the “Loan Agreement”, “Loan and Security Agreement”, “thereunder”, “thereof” or similar words referring to the Loan Agreement shall mean and be a reference to this Agreement and (b) each reference in the Financing Agreements to a “Note” or “Revolving Credit Note” shall mean and be a Revolving Credit Note as defined in this Agreement.

13. AGENCY .

Administrative Agent, Lenders and Borrower agree that, except for the rights expressly granted to Borrower under Section 13.9 , Borrower shall not be a party to the agreements contained in this Section 13 , and shall have no obligations under this Section 13 . Without limitation of the foregoing, Administrative Agent, Lenders and Borrower agree that in no event shall Borrower be required to seek comment from, deliver notices to or otherwise deal with any Lender other than Administrative Agent (except as otherwise specifically stated in this Agreement), nor shall Borrower be required to make an independent investigation of whether Administrative Agent has obtained any consents from the Lenders or as may be required (it

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being agreed that all communications from Administrative Agent may conclusively be deemed to be authorized by Lenders in accordance with this Section 13 ). Borrower shall not have any benefits or rights as a third party beneficiary of any term or condition contained in this Section 13 .

13.1 Appointment and Authorization . Each Lender hereby irrevocably appoints, designates and authorizes Administrative Agent to take such action on its behalf under the provisions of this Agreement and each other Financing Agreement and to exercise such powers and perform such duties as are expressly delegated to it by the terms of this Agreement or any other Financing Agreement, together with such powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary contained elsewhere in this Agreement or in any other Financing Agreement, Administrative Agent shall not have any duty or responsibility except those expressly set forth herein, nor shall Administrative Agent have or be deemed to have any fiduciary relationship with any Lender or participant, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Financing Agreement or otherwise exist against Administrative Agent. The duties of Administrative Agent shall be mechanical and administrative in nature. Without limiting the generality of the foregoing sentence, the use of the term “agent” herein and in other Financing Agreements with reference to Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

13.2 Delegation of Duties . Administrative Agent may execute any of its duties under this Agreement or any other Financing Agreement by or through agents, employees or attorneys-in-fact and shall be entitled to advice of legal counsel, independent public accountants, and other consultants or experts concerning all matters pertaining to such duties. Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.

13.3 Exculpation of Administrative Agent . None of Administrative Agent nor any of its directors, officers, employees, Affiliates or agents shall (a) be liable to any Lender or any other Person for any action taken or omitted to be taken by any of them under or in connection with this Agreement or any other Financing Agreement or the transactions contemplated hereby (except to the extent resulting from its own gross negligence or willful misconduct in connection with its duties expressly set forth herein as determined by a final, nonappealable judgment by a court of competent jurisdiction), or (b) be responsible in any manner to any Lender or participant for any recital, statement, representation or warranty made by Borrower or any Affiliate, or any officer thereof, contained in this Agreement or in any other Financing Agreement, or in any certificate, report, statement or other document referred to or provided for in, or received by Administrative Agent under or in connection with, this Agreement or any other Financing Agreement, or the validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Financing Agreement (or the creation, perfection or priority of any Lien or security interest therein), or for any failure of Borrower or any other party to any Financing Agreement to perform its obligations and Liabilities hereunder or thereunder, or be responsible for or have any duty to ascertain or verify the satisfaction of any conditions specified in this Agreement or any other Financing Agreement,

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except receipt of items required to be delivered to Administrative Agent. Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Financing Agreement, or to inspect the properties, books or records of Borrower or its Affiliates.

13.4 Reliance by Administrative Agent . Administrative Agent shall be entitled to rely, and shall be fully protected in relying, upon any writing, communication, signature, resolution, representation, notice, consent, certificate, electronic mail message, affidavit, letter, telegram, facsimile, telex or telephone message, statement or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons, and upon advice and statements of legal counsel (including legal counsel to Borrower), independent accountants and other experts selected by Administrative Agent. Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Financing Agreement unless it shall first receive such advice or concurrence of the Required Lenders or such other number or percentage of Lenders as shall be required elsewhere in this Agreement as it deems appropriate and, if it so requests, confirmation from Lenders of their obligation to indemnify Administrative Agent against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Financing Agreement in accordance with a request or consent of the Required Lenders or such other number or percentage of Lenders as shall be required elsewhere in this Agreement and such request and any action taken or failure to act pursuant thereto shall be binding upon each Lender. For purposes of determining compliance with the conditions specified in Section 5.2 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless Administrative Agent shall have received written notice from such Lender prior to the Closing Date specifying its objection thereto.

13.5 Notice of Default . Administrative Agent shall not be deemed to have knowledge or notice of the occurrence of any Default or Event of Default except with respect to defaults in the payment of principal, interest and fees required to be paid to Administrative Agent for the account of the Lenders, unless Administrative Agent shall have received written notice from a Lender or Borrower referring to this Agreement, describing such Default or Event of Default and stating that such notice is a “notice of default”. Administrative Agent will notify Lenders of its receipt of any such notice. Administrative Agent shall take such action with respect to such Default or Event of Default as may be requested by the Required Lenders in accordance with Section 11.2 ; provided that unless and until Administrative Agent has received any such request, Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable or in the best interest of Lenders.

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material information in its possession. Each Lender represents to Administrative Agent that it has, independently and without reliance upon Administrative Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower, and made its own decision to enter into this Agreement and to extend credit to Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Financing Agreements, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower. Except for notices, reports and other documents expressly herein required to be furnished to Lenders by Administrative Agent, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of Borrower which may come into the possession of Administrative Agent.

13.7 Indemnification . Whether or not the transactions contemplated hereby are consummated, each Lender shall indemnify, defend and hold harmless upon demand Administrative Agent and its directors, officers, employees, Affiliates and agents (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to its applicable Pro Rata Share, from and against any and all liability, loss, damage, claim, demand, action, penalty, cost or expense (including, without limitation, reasonable attorneys’ fees), provided that no Lender shall be liable for any payment to any such Person of any portion thereof to the extent determined by a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the applicable Person’s own gross negligence or willful misconduct. No action taken in accordance with the directions of Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including, without limitation, reasonable attorneys’ fees and costs) incurred by Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Financing Agreement, or any document contemplated by or referred to herein, to the extent that Administrative Agent is not reimbursed for such expenses by or on behalf of Borrower. If any indemnity furnished to Administrative Agent for any purpose shall, in the reasonable, good faith opinion of Administrative Agent, be insufficient or become impaired, Administrative Agent may call for additional reasonable indemnity and cease, or not commence, to do the acts indemnified against even if so directed by Required Lenders until such additional reasonable indemnity is furnished. The undertaking in this Section shall survive repayment of the Loans and other Liabilities, cancellation of any promissory notes, any foreclosure under, or modification, release or discharge of, any or all of the Financing Agreements, termination of this Agreement and the resignation or replacement of Administrative Agent.

13.8 Administrative Agent in Individual Capacity . PrivateBank and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from,

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acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Affiliates as though PrivateBank were not Administrative Agent hereunder and without notice to or consent of any Lender. Each Lender acknowledges that, pursuant to such activities, PrivateBank or its Affiliates may receive information regarding Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of Borrower or such Affiliates) and acknowledge that Administrative Agent shall be under no obligation to provide such information to them. With respect to its Loans, PrivateBank and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though PrivateBank were not Administrative Agent, and the terms “Lender” and “Lenders” include PrivateBank and its Affiliates, to the extent applicable, in their individual capacities.

13.9 Successor Administrative Agent . Administrative Agent may resign as Administrative Agent upon thirty (30) days’ notice to Lenders. If Administrative Agent resigns under this Agreement, Required Lenders shall, with (so long as no Default or Event of Default exists) the consent of Borrower (which shall not be unreasonably withheld, conditioned or delayed), appoint from among Lenders a successor agent for Lenders. Notwithstanding the immediately foregoing sentence, if no successor agent is appointed prior to the effective date of the resignation of Administrative Agent, Administrative Agent may appoint, after consulting with Lenders and Borrower, a successor agent from among Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to and become vested with all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor agent, and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 13 and Sections 12.2 and 12.16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor agent has accepted appointment as Administrative Agent by the date which is thirty (30) days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and Lenders shall perform all of the duties of Administrative Agent hereunder until such time, if any, as Required Lenders appoint a successor agent as provided for above. The fees payable by Borrower to a successor agent in its capacity as such agent shall be the same as those payable to its predecessor unless otherwise agreed in writing between Borrower and such successor.

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Lender as agent for the purpose of perfecting Administrative Agent’s security interest in assets and Collateral which, in accordance with the Uniform Commercial Code in any applicable jurisdiction, can be perfected by possession or control. Should any Lender (other than Administrative Agent) obtain possession or control of any such assets or Collateral, such Lender shall promptly notify Administrative Agent thereof in writing, and, promptly upon Administrative Agent’s written request therefor, shall deliver such assets or Collateral to Administrative Agent or in accordance with Administrative Agent’s instructions or transfer control to Administrative Agent in accordance with Administrative Agent’s instructions. Each Lender agrees that, except as otherwise expressly provided herein, it will not have any right individually to enforce or seek to enforce this Agreement or any Financing Agreement or to realize upon any Collateral for the Liabilities unless instructed in writing to do so by Administrative Agent, it being understood and agreed that such rights and remedies may be exercised only by Administrative Agent.

13.11 Administrative Agent May File Proofs of Claim . In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to Borrower, Administrative Agent (irrespective of whether the principal of the Loans shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether Administrative Agent shall have made any demand on Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, and all other Liabilities that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of Lenders and Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of Lenders and Administrative Agent and their respective agents and attorneys and all other amounts due Lenders and Administrative Agent under this Agreement) allowed in such judicial proceedings; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;

and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to Administrative Agent and, in the event that Administrative Agent shall consent to the making of such payments directly to Lenders, to pay to Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of Administrative Agent and its agents and attorneys, and any other amounts due Administrative Agent under this Agreement.

Nothing contained herein shall be deemed to authorize Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment or composition affecting the Liabilities or the rights of any Lender or to authorize Administrative Agent to vote in respect of the claim of any Lender in any such proceeding.

13.12 Other Agents; Arrangers and Managers . None of Lenders or other Persons identified on the facing page or signature pages of this Agreement as, if applicable, a “joint

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arranger,” “syndication agent,” “documentation agent,” “co-agent,” “book manager,” “lead manager,” “joint lead lender”, “arranger,” “lead arranger” or “co-arranger”, if any, shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of Lenders or other Persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.

13.13 Revolving Loan Principal Payment; Return of Payments; Defaulting Lender . (a)(i) As long as Administrative Agent does not have actual knowledge that the material conditions set forth in Section 5.1 have not been satisfied, Administrative Agent shall have the right, on behalf of Lenders, to disburse funds to Borrower for all Revolving Loans requested by Borrower pursuant to the terms of this Agreement (“ Administrative Agent Advances ”). Absent the prior receipt by Administrative Agent of a written notice from any Lender pursuant to which such Lender notifies Administrative Agent that such Lender shall cease making Revolving Loans (whether due to the existence of a Default or Event of Default or otherwise), Administrative Agent shall be conclusively entitled to assume, for purposes of the preceding sentence, that each Lender will fund its Pro Rata Share of all Revolving Loans requested by Borrower. Each Lender shall reimburse Administrative Agent on demand, in accordance with the provisions of the immediately following paragraph, for all funds disbursed on its behalf by Administrative Agent pursuant to the first sentence of this subsection (i), or if Administrative Agent so requests, each Lender will remit to Administrative Agent its Pro Rata Share of any Revolving Loan before Administrative Agent disburses the same to Borrower. If Administrative Agent elects to require that each Lender make funds available to Administrative Agent prior to a disbursement by Administrative Agent to Borrower, Administrative Agent shall advise each Lender by telephone, facsimile or e-mail of the amount of such Lender’s Pro Rata Share of the Revolving Loan requested by Borrower no later than noon (Chicago time) on the date of funding of such Revolving Loan, and each such Lender shall pay Administrative Agent on such date such Lender’s Pro Rata Share of such requested Revolving Loan, in same day funds, by wire transfer to the account specified in writing by Administrative Agent to Lenders at any time or from time to time (“ Payment Account ”). If any Lender fails to pay the amount of its Pro Rata Share within one (1) Business Day after Administrative Agent’s demand, Administrative Agent shall promptly notify Borrower, and Borrower shall immediately repay such amount to Administrative Agent. Any repayment required pursuant to this Section shall be without premium or penalty. Nothing in this Section or elsewhere in this Agreement or the other Financing Agreements shall be deemed to require Administrative Agent to advance funds on behalf of any Lender or to relieve any Lender from its obligation to fulfill its commitments hereunder or to prejudice any rights that Administrative Agent or Borrower may have against any Lender as a result of any default by such Lender hereunder.

(ii) On a Business Day of each week as selected from time to time by Administrative Agent, or more frequently (including daily), if Administrative Agent so elects (each such day being a “ Settlement Date ”), Administrative Agent will advise each Lender by telephone, facsimile or e-mail of the amount of each such Lender’s Pro Rata Share of the Revolving Loan balance (including any Administrative Agent Advances) as of the close of business of the Business Day immediately preceding the Settlement Date. If payments are necessary to adjust

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the amount of such Lender’s actual Pro Rata Share of the Revolving Loan facility balance to such Lender’s required Pro Rata Share of the Revolving Loan facility balance as of any Settlement Date, the party from which such payment is due (i) shall be deemed, irrevocably and unconditionally, to have purchased, without recourse or warranty, an undivided interest and participation in the Revolving Loan facility sufficient to equate such Lender’s actual Pro Rata Share of the Revolving Loan facility balance as of such Settlement Date with such Lender’s required Pro Rata Share of the Revolving Loan facility as of such date, and (ii) shall pay Administrative Agent, without setoff or discount, in same day funds, by wire transfer to the Payment Account not later than noon (Chicago time) on the Business Day following the Settlement Date the full purchase price for such interest and participation, equal to one hundred percent (100%) of the principal amount of the Revolving Loans being purchased and sold. In the event settlement shall not have occurred by the date and time specified in the immediately preceding sentence, interest shall accrue on the unsettled amount at the Federal Funds Rate (as defined below).

(iii) On each Settlement Date, Administrative Agent shall advise each Lender by telephone, facsimile or e-mail of the amount of such Lender’s Pro Rata Share of principal, interest and fees paid for the benefit of Lenders with respect to each applicable Loan, to the extent of such Lender’s credit exposure with respect thereto, and shall make payment to such Lender not later than noon (Chicago time) on the Business Day following the Settlement Date of such amounts in accordance with wire instructions delivered by such Lender to Administrative Agent, as the same may be modified from time to time by written notice to Administrative Agent; provided, that, in the case such Lender is a Defaulted Lender, Administrative Agent shall be entitled to set off the funding short-fall against that Defaulted Lender’s respective share of all payments received from Borrower.

(iv) The provisions of this Section 13.13(a) shall be deemed to be binding upon Administrative Agent and Lenders notwithstanding the occurrence of any Default or Event of Default, or any insolvency or bankruptcy proceeding pertaining to Borrower or any other Credit Party, provided that absent Required Lenders’ consent, Administrative Agent shall not make any advances to Borrower in the event Administrative Agent has actual knowledge that the material conditions set forth in Section 5.1 have not been satisfied.

(b) Payments of principal of the Revolving Loan facility will be settled on the date of receipt if received by Administrative Agent prior to noon (Chicago time) or on the Business Day immediately following the date of receipt if received after noon (Chicago time).

(c) If Administrative Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Administrative Agent from Borrower and such related payment is not received by Administrative Agent, then Administrative Agent will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind, together with interest accruing on a daily basis at the Federal Funds Rate. If Administrative Agent determines at any time that any amount received by Administrative Agent under this Agreement must be returned to Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Financing Agreement, Administrative Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will

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repay to Administrative Agent on demand any portion of such amount that Administrative Agent has distributed to such Lender, together with interest at such rate, if any, as Administrative Agent is required to pay to Borrower or such other Person, without setoff, counterclaim or deduction of any kind.

As used herein, the term “ Federal Funds Rate ” means, for any day, the rate of interest per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that (i) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day and (ii) if no such rate is so published on such next preceding Business Day, the Federal Funds Rate for such day shall be the average rate quoted to Administrative Agent on such day on such transactions as determined by Administrative Agent.

(d) The failure of any Defaulting Lender to make any Loan, advance or any payment required by it hereunder shall not relieve any other Lender of its obligations to make such Loan, advance or payment, but neither any Lender nor Administrative Agent shall be responsible for the failure of any Defaulting Lender to make a Loan, advance or make any other payment required hereunder. Notwithstanding anything set forth herein to the contrary, a Defaulting Lender shall not have any voting or consent rights under or with respect to any Financing Agreement or constitute a “Lender” (or be included in the calculation of “Required Lenders” hereunder) for any voting or consent rights under or with respect to any Financing Agreement except with respect to items which require the vote or consent of all Lenders or all affected Lenders. At Borrower’s written request, Administrative Agent or a Person reasonably acceptable to Administrative Agent shall have the right with Administrative Agent’s consent and in Administrative Agent’s sole discretion (but shall have no obligation) to purchase from any Defaulting Lender, and each Defaulting Lender agrees that it shall, at Administrative Agent’s request, sell and assign to Administrative Agent or such Person, all of the lending commitments and commitment interests of that Defaulting Lender for an amount equal to the principal balance of all Loans held by such Defaulting Lender and all accrued interest and fees with respect thereto through the date of sale, such purchase and sale to be consummated pursuant to an executed Assignment Agreement.

13.14 PrivateBank Credit Hold . As between PrivateBank and Bankers Trust Company, PrivateBank agrees to hold and maintain in its own portfolio at least fifty-one percent (51.0%) of the Revolving Loan Commitment until the earlier of the Stated Maturity Date (unless sooner accelerated in accordance with the terms of this Agreement) or Bankers Trust Company is no longer a Lender hereof.

14. JURISDICTION; JURY TRIAL WAIVER

14.1 SUBMISSION TO JURISDICTION; WAIVER OF VENUE . THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

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(1) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER FINANCING AGREEMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

(2) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE BORROWER WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

(3) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE BORROWER AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE BORROWER IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE BORROWER. SOLELY TO THE EXTENT PROVIDED BY APPLICABLE LAW, SHOULD THE BORROWER, AFTER BEING SERVED, FAIL TO APPEAR OR ANSWER TO ANY SUMMONS, COMPLAINT, PROCESS OR PAPERS SO SERVED WITHIN THE NUMBER OF DAYS PRESCRIBED BY LAW AFTER THE DELIVERY OR MAILING THEREOF, THE BORROWER SHALL BE DEEMED IN DEFAULT AND AN ORDER AND/OR JUDGMENT MAY BE ENTERED BY THE COURT AGAINST THE BORROWER AS DEMANDED OR PRAYED FOR IN SUCH SUMMONS, COMPLAINT, PROCESS OR PAPERS. NOTHING HEREIN SHALL AFFECT THE ADMINISTRATIVE AGENT’S OR ANY LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE ADMINISTRATIVE AGENT’S OR ANY LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE BORROWER OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

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14.2 GOVERNING LAW

. THIS AGREEMENT SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

14.3 JURY TRIAL . THE BORROWER, ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS AGREEMENT, THE FINANCING AGREEMENTS OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO OR THERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS AGREEMENT OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS AGREEMENT AND THE FINANCING AGREEMENTS. THE ADMINISTRATIVE AGENT, THE LENDERS AND THE BORROWER AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

[Signature Page Follows]

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IN WITNESS WHEREOF , this Amended and Restated Revolving Loan and Security Agreement has been duly executed as of the day and year first above written.


BORROWER : DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, as Borrower Agent
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

ADVOCAT ANCILLARY SERVICES, INC. , a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

ADVOCAT FINANCE, INC. , a Delaware corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

ADVOCAT DISTRIBUTION SERVICES, INC. , a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE ASSISTED LIVING SERVICES, INC. , a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE ASSISTED LIVING SERVICES NC, LLC , a Tennessee limited liability company
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE LEASING CORP. , a Tennessee corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

STERLING HEALTH CARE MANAGEMENT, INC. , a Kentucky corporation
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

SENIOR CARE CEDAR HILLS, LLC , a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member


BY:	DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


SENIOR CARE GOLFCREST, LLC , a Delaware limited liability company

BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member

BY:	DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

SENIOR CARE GOLFVIEW, LLC , a Delaware limited liability company

BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member

BY:	DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


SENIOR CARE SOUTHERN PINES, LLC , a Delaware limited liability company

BY:	SENIOR CARE FLORIDA LEASING, LLC , its sole member

BY:	DIVERSICARE LEASING CORP. , its sole member

By:	/s/Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE AFTON OAKS, LLC , a Delaware limited liability company

BY:	DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC , a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC , a Delaware limited liability company BY: DIVERSICARE ASSISTED LIVING SERVICES NC, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE CHISOLM, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE HARTFORD, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE HILLCREST, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE LAMPASAS, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE PINEDALE, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE WINDSOR HOUSE, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE YORKTOWN, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE BALLINGER, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member


By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE DOCTORS, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE ESTATES, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE HUMBLE, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE KATY, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE NORMANDY TERRACE, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE TEXAS I, LLC , a Delaware limited liability company
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


DIVERSICARE TREEMONT, LLC , a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE ROSE TERRACE, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE PARIS, LLC, a Delaware limited liability company BY: DIVERSICARE TEXAS I, LLC , its sole member

By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

DIVERSICARE THERAPY SERVICES, LLC , a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member


By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Amended and Restated Revolving Loan and Security Agreement


Acknowledged and Agreed solely for purposes of Sections 8.9 and 9.12 hereof : ADVOCAT INC.
By:	/s/ Matthew J. Weishaar
	Name:	Matthew J. Weishaar
	Its: Asst Secretary

Amended and Restated Revolving Loan and Security Agreement


ADMINISTRATIVE AGENT : THE PRIVATEBANK AND TRUST COMPANY , in its capacity as administrative agent
By:	/s/ Adam D. Panos
	Name:	Adam D. Panos
	Its:	Associate Managing Director

Amended and Restated Revolving Loan and Security Agreement


LENDER : THE PRIVATEBANK AND TRUST COMPANY
By:	/s/ Adam D. Panos
	Name:	Adam D. Panos
	Its: Associate Managing Director

Amended and Restated Revolving Loan and Security Agreement


LENDER : BANKERS TRUST COMPANY
By:	/s/ Ron M. Doll
	Name:	Ron M. Doll
	Its: Vice President

Amended and Restated Revolving Loan and Security Agreement

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES


Schedule 1		Borrowers
Schedule 1.1(a)		Facilities
Schedule 1.1(b)		Intentionally Omitted
Schedule 1.1(d)		Certain Capital Expenditures
Schedule 1.1(e)		Omega Leases
Schedule 7.8		Other Names
Schedule 7.12		Organizational Chart
Schedule 7.13		Litigation
Schedule 7.17		Environmental Matters
Schedule 7.26		Medicare and Medicaid Penalties
Schedule 7.32		Labor Matters
Schedule 7.33		Capitalization
Schedule 7.36		Commercia Leases
Schedule 8.9		Certain Corporate Accounts
Schedule 9.3		Requirements for Subsidiary Formation
Schedule 9.6		Real Property Assets

EXHIBITS


Exhibit A		Form of Revolving Credit Note
Exhibit B		Form of Borrowing Notice
Exhibit C		Form of Assignment Agreement

ANNEX


Annex A		Lenders, Revolving Loan Commitment Percentages, and Notice Information

Exhibit 10.3

AMENDED AND RESTATED GUARANTY

THIS AMENDED AND RESTATED GUARANTY (“ Guaranty ”) dated as of February 28, 2011, by ADVOCAT INC. , a Delaware corporation (“ Guarantor ”), is to and for the benefit of THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its capacity as administrative agent for the Lenders identified below (together with its successors and assigns, the “ Administrative Agent ”).

R E C I T A L S:

A. DIVERSICARE MANAGEMENT SERVICES CO. , a Tennessee corporation, (together with each (i) of the other borrowers set forth on Schedule 1 to the Loan Agreement (as defined below) and (ii) additional borrowers from time to time party to the Loan Agreement (whether pursuant to an amendment, written joinder or otherwise), individually and collectively referred to herein as, “ Borrower ”, has requested that the Administrative Agent on behalf of the Lenders make certain revolving loans (individually and collectively, the “ Loan ”) to Borrower pursuant to and in accordance with that certain Amended and Restated Revolving Loan and Security Agreement dated of even date herewith by and among Borrower, the lenders party thereto (collectively, the “ Lenders ”), and the Administrative Agent (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “ Loan Agreement ”); capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement.

B. As security for repayment of the Loan, in addition to this Guaranty, certain other loan and security documents have been executed and delivered to the Administrative Agent. The Loan Agreement, the Amended and Restated Revolving Credit Notes, the Amended and Restated Pledge Agreements, the Amended and Restated Blocked Account Agreements, this Guaranty, each other guaranty delivered in favor of the Administrative Agent on behalf of the Lenders in connection with the Loan Agreement, and any and all other instruments, agreements, and documents executed in conjunction herewith and therewith (including, without limitation, each of the “Financing Agreements” (as defined in the Loan Agreement)) are hereinafter sometimes collectively referred to herein as the “ Loan Documents .”

C. The Guarantor and Borrower are Affiliates of each other. Guarantor will derive substantial direct and indirect benefit (financial and otherwise) from the Loan made to Borrower under the Loan Agreement. The Guarantor desires to induce the Administrative Agent on behalf of the Lenders to make the Loan to Borrower.

D. Administrative Agent on behalf of the Lenders is unwilling to make the Loan pursuant to the Loan Agreement unless Guarantor guarantees the payment of the principal and interest and all other amounts due or owing to the Administrative Agent and Lenders provided in the Loan Agreement and other Loan Documents and the performance by Borrower of all of the covenants on Borrower’s part to be performed and observed pursuant to the terms thereof, and Guarantor has agreed to execute and deliver this Guaranty to Administrative Agent (for the ratable benefit of Lenders and Administrative Agent).

NOW, THEREFORE, FOR GOOD AND VALUABLE CONSIDERATION RECEIVED , the adequacy and sufficiency of which is hereby acknowledged, and in further consideration of any advances, credit or other financial accommodation heretofore, now or that may hereafter at any time be extended to Borrower by Administrative Agent on behalf of Lenders under, pursuant to or in connection with the Loan Documents, (a) Guarantor hereby, jointly and severally, together with each Other Guarantor (as defined in Section 3 below), and, unconditionally and irrevocably, guarantees, irrespective of the validity or enforceability of any instrument, writing or agreement relating to or the subject of any such advances, financial accommodation or loans (including, but not limited to, the Loan Documents), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, (i) the full and prompt payment to Administrative Agent and Lenders at maturity, whether by acceleration or otherwise, and at all times thereafter of any and all “Liabilities” (as defined in the Loan Agreement) of every kind and nature of Borrower to Administrative Agent and Lenders (arising out of or in connection with the Loan, the Loan Agreement, and each of the other Loan Documents to which Borrower (or any of its Affiliates) is a party, including, without limitation, for principal, interest, default interest, charges, fees, indemnification, costs, expenses, reasonable attorneys’ fees, or otherwise), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, howsoever evidenced, whether now existing or hereafter created or arising, directly or indirectly, primary or secondary, absolute or contingent, due or to become due, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise, and (ii) the prompt, full and faithful performance and discharge by Borrower of each and every of the terms, conditions, agreements, covenants, representations and warranties on the part of Borrower contained in any agreement, the Loan Agreement and each of the other Loan Documents to which Borrower is a party, and any other promissory notes, loan agreements, or security agreements, or in any modification or addenda thereto or substitution thereof in connection with any advance, credit or financial accommodation afforded by Administrative Agent on behalf of Lenders to Borrower (collectively the “ Guaranteed Liabilities ”); and (b) Guarantor further agrees to pay all costs and expenses, legal and/or otherwise (including, but not limited to, court costs and reasonable attorneys’ fees and expenses), paid or incurred by Administrative Agent on behalf of Lenders in endeavoring to collect the Guaranteed Liabilities, the Extraordinary Claims (as hereinbelow defined), or in either case, any part thereof, or in enforcing this Guaranty or in defending any suit based on any act of commission or omission of Administrative Agent or Lenders with respect to the Indebtedness, the Collateral (as defined in the Loan Agreement), or this Guaranty or in connection with any Recovery Claim (as hereinbelow defined) (the “ Enforcement Costs ”); and (c) Guarantor further agrees to pay any and all costs, losses, damages and reasonable attorney’s fees incurred by the Administrative Agent in connection with any of the following: (i) misapplication or misappropriation of any insurance or condemnation proceeds; and (ii) Borrower or Guarantor institutes or becomes by virtue of a counterclaim a party to any case, action, suit, or proceeding which reduces, impedes or impairs Administrative Agent’s right of recourse to the Collateral or any part thereof or Borrower or Guarantor engages in any act, omission, or misrepresentation which has the effect of suspending, delaying, reducing, impeding, or impairing the Administrative Agent’s right of recourse to the Collateral or any part thereof (each of the aforesaid are collectively referred to as an “ Extraordinary Claims ”). The

Guaranteed Liabilities, the Enforcement Costs, and the Extraordinary Claims are collectively referred to as the “ Guaranteed Obligations .” Capitalized terms used herein and not otherwise defined herein shall have the meaning given to them in the Loan Agreement.

Guarantor hereby further agrees as follows:

1. Continuing Guaranty . This Guaranty includes any and all Guaranteed Obligations arising under successive transactions continuing, compromising, extending, increasing, modifying, releasing, or renewing the Guaranteed Obligations, changing the interest rate, payment terms, or other terms and conditions thereof, or creating new or additional Guaranteed Obligations after prior Guaranteed Obligations have been satisfied in whole or in part. To the maximum extent permitted by law, Guarantor hereby waives any right to revoke this Guaranty as to future Liabilities. If such a revocation is effective notwithstanding the foregoing waiver, Guarantor acknowledges and agrees that (a) no such revocation shall be effective until written notice thereof has been received by Administrative Agent, (b) no such revocation shall apply to any Guaranteed Obligations in existence on such date (including, but not limited to, any subsequent continuation, extension, or renewal thereof, or change in the interest rate, payment terms, or other terms and conditions thereof), (c) no such revocation shall apply to any Guaranteed Obligations made or created after such date to the extent made or created pursuant to a legally binding commitment of Administrative Agent in existence on the date of such revocation, (d) no payment by Guarantor, Borrower, or from any other source, prior to the date of such revocation shall reduce the maximum obligation of Guarantor hereunder, and (e) any payment by Borrower or from any source other than Guarantor, subsequent to the date of such revocation, shall first be applied to that portion of the Guaranteed Obligations as to which the revocation is effective and which are not, therefore, guaranteed hereunder, and to the extent so applied shall not reduce the maximum obligation of Guarantor hereunder.

2. Performance Under This Guaranty . If Borrower fails to make any payment of any Guaranteed Obligations on or before the due date thereof and after the expiration of the applicable notice and cure period, if any, or if Borrower shall fail, after the expiration of the applicable notice and cure period, if any, to perform, keep, observe, or fulfill any other obligation, covenant or agreement referred to or contained in any instrument, writing, document or agreement relating to the Guaranteed Obligations, Guarantor immediately shall cause such payment to be made or each of such obligations to be performed, kept, observed, or fulfilled to the extent such obligations constitute Guaranteed Obligations.

Guarantor ”) or whether Borrower or any such Other Guarantor is joined in such action. Guarantor agrees that Guarantor’s liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement of any lien, security interest, mortgage or realization upon any security or collateral Administrative Agent may at any time possess. Guarantor agrees that any release which may be given by Administrative Agent to Borrower or any Other Guarantor shall not release Guarantor. Guarantor consents and agrees that Administrative Agent shall be under no obligation to marshal any assets of Borrower or any Other Guarantor in favor of said Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

4. Return of Payments . Guarantor agrees that, if at any time all or any part of any payment theretofore applied by Administrative Agent to any amounts due under the Loan or the Loan Agreement is rescinded or returned by Administrative Agent or any Lender for any reason whatsoever (including, without limitation, the insolvency, bankruptcy, liquidation or reorganization of any party), such amounts shall, for the purposes of this Guaranty, be deemed to have continued in existence to the extent of such payment, notwithstanding such application by Administrative Agent and this Guaranty shall continue to be effective or be reinstated, as the case may be, as to such amounts due under the Loan and the Loan Agreement, all as though such application by Administrative Agent or Lenders had not been made.

5. Waivers .

(a) Guarantor hereby waives: (1) notice of acceptance hereof; (2) notice of any Loan or other financial accommodations made or extended to Borrower or the creation or existence of any Guaranteed Obligations; (3) notice of the amount of the Guaranteed Obligations, subject, however, to Guarantor’s right to make inquiry of Administrative Agent to ascertain the amount of the Guaranteed Obligations at any reasonable time; (4) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase Guarantor’s risk hereunder; (5) notice of presentment for payment, demand, protest, and notice thereof as to any promissory notes or other instruments, writing or agreements evidencing Guaranteed Obligations; (6) notice of any event of default by Borrower under any instrument, writing or agreement with Administrative Agent or any Lender including the Loan Documents; and (7) all other notices (except if such notice is specifically required to be given to Guarantor hereunder) and demands to which Guarantor might otherwise be entitled.

commercial code sale or otherwise, Administrative Agent may, at its discretion, purchase all or any part of such collateral offered for sale, for its own account (on behalf of the Lenders and itself), and may apply against the amount bid therefore the balance due it pursuant to the terms of the Loan Agreement and other Loan Documents. Guarantor further agrees that Guarantor is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Administrative Agent and Lenders by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. Guarantor consents to any and all forbearances and extensions of the time of payment of the Loan Agreement or any of the other Loan Documents, and to any and all changes in the terms, covenants and conditions thereof hereafter made or granted, and to any part of the collateral therefor; it being the intention and agreement hereof that Guarantor shall remain unconditionally liable as a principal as, to and until the Guaranteed Obligations shall have been fully repaid to Administrative Agent on behalf of the Lenders, and the terms, covenants and conditions of the Loan Agreement and of the other Loan Documents and all other notes, instruments, writing or agreements evidencing or securing the Guaranteed Obligations shall have been fully performed and observed, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of Borrower or Guarantor.

(c) Guarantor hereby waives: (1) any rights to assert against Administrative Agent or Lenders any defense (legal or equitable), setoff, counterclaim, or claim which Guarantor may now or at any time hereafter have against Borrower or any other party liable to Administrative Agent or Lenders (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid); and (2) any defense, setoff, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future lack of perfection, sufficiency, validity, or enforceability of the Guaranteed Obligations or any security therefor (including, but not limited to, any of the Loan Documents). Without limiting the generality of the foregoing or any other provisions of this Guaranty, Guarantor agrees that this Guaranty shall not be discharged, limited, impaired or affected by: (a) the transfer of all or any part of the personal property or real property described in any of the Loan Documents; (b) any sale, pledge, surrender, indulgence, alteration, substitution, exchange, modification or other disposition of any of the Guaranteed Obligations, all of which Lender is expressly authorized to make from time to time; (c) any failure, neglect or omission on the part of Administrative Agent or Lenders to realize or protect any of the Guaranteed Obligations, or any personal property or real property or lien security given as security therefor, or to exercise any lien upon or right of appropriation of monies, credits or property of Borrower toward liquidation of the Indebtedness, or performance of the covenants guaranteed hereby; and (d) any proceedings with respect to the voluntary or involuntary liquidation, dissolution, sale or other disposition of all or substantially all the assets, the marshaling of assets and liabilities, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, imposition or readjustment of, or other similar proceedings affecting Borrower or any Other Guarantor or any of their respective assets, it being expressly understood and agreed that no such proceeding shall affect, modify, limit or discharge the liability or obligation of Guarantor hereunder in any manner whatsoever, and that Guarantor shall continue to remain absolutely liable under this Guaranty to the same extent, and in the same manner, as if such proceedings had not been instituted.(d) Guarantor hereby waives any right of

subrogation Guarantor has or may have as against Borrower until all preference periods under all applicable laws have expired. In addition, Guarantor hereby waives any right to proceed against Borrower, now or hereafter for contribution, indemnity, reimbursement and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or by operation of law, which Guarantor may now have or hereafter have as against Borrower. Until the Guaranteed Obligations are indefeasibly paid in full hereunder, Guarantor also hereby waives any right to recourse to or with respect to any asset of Borrower. Guarantor agrees that in light of the immediately foregoing waivers, the execution of the Guaranty shall not be deemed to make Guarantor a “creditor” of Borrower, and that for purposes of Sections 547 and 550 of the Bankruptcy Code, Guarantor shall not be deemed a “creditor” of Borrower.

6. Releases . No release or discharge of the Other Guarantor, or of any other person or entity, whether primarily or secondarily liable for or obligated with respect to the Guaranteed Obligations, or the institution of bankruptcy, receivership, insolvency, reorganization, dissolution or liquidation proceedings by or against the Other Guarantor or any other person or entity, or the entry of any restraining or other order in any such proceeding, shall release or discharge Guarantor, unless and until all of the Guaranteed Obligations shall have been fully paid. Notwithstanding anything to the contrary contained herein, Administrative Agent agrees that the obligations of Guarantor under this Guaranty shall terminate, subject to Sections 4 and 8 hereof, at the earlier of such time as (a) Administrative Agent on behalf of Lenders and itself shall have received indefeasible payment in full in cash of all Guaranteed Liabilities and all other Guaranteed Obligations under this Guaranty and all financing arrangements and accommodations by and among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities. Release of this Guaranty, if it occurs, however, shall not affect, in any respect, the Loan or any other instrument securing or guarantying the Loan.

7. Right of Setoff . Guarantor agrees that Administrative Agent and Lenders have all rights of setoff and banker’s liens provided by applicable law. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, any and all moneys, credits, deposits, accounts, or other property belonging to the Guarantor in transit to or in the possession or under the control of Administrative Agent or any Lender, or any agent or bailee thereof, may, without notice and opportunity to be heard, be setoff against, and appropriated and applied against and towards the payment of any and all of the liabilities of Guarantor under this Guaranty. Following any default by Guarantor hereunder or an Event of Default by Borrower under the Loan Agreement, subject to the terms of any Intercreditor Agreement, Guarantor does hereby assign and transfer to Administrative Agent (for the ratable benefit of Lenders and itself) any and all cash, negotiable instruments, documents of title, chattel paper, securities, certificates of deposit, deposit accounts, other cash equivalents and other assets of said Guarantor in transit to, or in the possession or control of Administrative Agent, or any agent or bailee of Administrative Agent for any purpose and to apply the same on any or all of the Guaranteed Obligations. The rights of the Administrative Agent and Lenders under this Section are in addition to all other rights and remedies which the Administrative Agent and Lenders may otherwise have in equity or at law.

8. Recovery Claim . Should a claim (“ Recovery Claim ”) be made upon Administrative Agent or Lenders at any time for recovery of any amount received by Administrative Agent or Lenders in payment of the Guaranteed Obligations (whether received from Borrower, Guarantor pursuant hereto, or otherwise) and should Administrative Agent or any Lender repay all or part of said amount by reason of (a) any judgment, decree, or order of any court or administrative body having jurisdiction over Administrative Agent or any Lender or any of its respective property; or (b) any reasonable settlement or compromise of any such Recovery Claim effected by Administrative Agent or such Lender with the claimant (including Borrower), Guarantor shall remain liable to Administrative Agent and Lenders for the amount so repaid to the same extent as if such amount had never originally been received by Administrative Agent and Lenders, notwithstanding any termination hereof or the return of this document to Guarantor or the cancellation of any note or other instrument evidencing any of the Indebtedness.

9. Assignments . In the event Administrative Agent shall sell, assign or transfer the Guaranteed Obligations, or any part hereof, or grant participations therein, each and every immediate or remote successive assignee, transferee, holder of or participant or other interests therein, of all or any part of the Guaranteed Obligations shall have the right to enforce this Guaranty by suit or otherwise for the benefit of such assignee, transferee, holder or participant, as fully as if such assignee, transferee, holder or participant were herein by name specifically given such rights, powers and benefits; but Administrative Agent (for the ratable benefit of the Lenders and itself) shall have an unimpaired, prior and superior right to enforce this Guaranty for Administrative Agent’s benefit as to so much of the guaranteed debt as it has not sold, assigned or transferred.

10. Representations and Warranties . Guarantor agrees that the following shall constitute representations and warranties of Guarantor to Administrative Agent (for the benefit of Lenders and itself), which shall survive the execution and delivery hereof, and that Administrative Agent on behalf of the Lenders intends to make the Loan and other financial accommodations, if any, guaranteed hereby in reliance thereon:

(a) Guarantor is not in default under any agreement to which Guarantor is a party, the effect of which will materially impair performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms of this Guaranty, and neither the execution and delivery of this Guaranty nor compliance with the terms and provisions of this Guaranty, will violate any law or any presently existing regulation, order, writ, injunction or decree of any court or governmental department, commission, board, bureau, agency or instrumentality, will conflict or will be inconsistent with, or will result in any breach of, any of the terms, covenants, conditions or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind which creates, represents, evidences or provides for any lien, charge or encumbrance upon any of the property or assets of the Guarantor, or any other indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which Guarantor is a party or by which Guarantor may be bound of which the Guarantor is a party or by which Guarantor may be bound, or in the event of any such conflict, the required consent or waiver of the other party or parties thereto has been validly granted, is in full force and effect and is valid and sufficient therefor. This Guaranty is the legal, valid and binding obligation of the Guarantor and is enforceable against the Guarantor in accordance with its terms.

(b) Except as set forth on Schedule 10(b) hereof, there are no actions, suits or proceedings pending or to the best of Guarantor’s knowledge threatened against the Guarantor before any court or any governmental, administrative, regulatory, adjudicatory or arbitrational body or agency of any kind which will materially adversely affect performance by the Guarantor of Guarantor’s obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

(c) Neither this Guaranty nor any document, financial statement, credit information, written certificate or written statement heretofore furnished or required herein to be furnished to Lender by the Guarantor contains any untrue statement of material fact or omits to state a fact material to this Guaranty.

(d) Guarantor is currently informed of the financial condition of Borrower and of all other circumstances which a diligent inquiry would reveal and which would bear upon the risk of nonpayment of the Guaranteed Obligations. Guarantor will continue to keep informed of the financial condition of Borrower and of all other circumstances which bear upon the risk of nonpayment or nonperformance of the Guaranteed Obligations.

(e) As of the date hereof, the present fair saleable value of Guarantor’s assets is greater than the amount required to pay Guarantor’s total Indebtedness (contingent or otherwise), and is greater than the amount that will be required to pay such Indebtedness as it matures and as it becomes absolute and matured. The transactions contemplated hereby were effectuated without actual intent to hinder, delay or defraud present or future creditors of Guarantor; it is Guarantor’s express intention that Guarantor will maintain a Solvent financial condition, giving effect to the Guaranteed Obligations incurred hereunder, as long as any of the Guaranteed Obligations remain outstanding or Guarantor is obligated to Administrative Agent or any Lender in any other manner whatsoever. At all times until the Guaranteed Obligations remain satisfied and paid in full, the Guarantor shall keep and maintain assets sufficient to honor and pay any and all of the Guaranteed Obligations as and when due, subject to any express monetary limitation set forth herein.

11. Subordination . Any rights of Guarantor, whether now existing or later arising, to receive payment on account of any Indebtedness (including interest) owed to Guarantor by Borrower, or to withdraw capital invested by Guarantor in Borrower, if any, or to receive and retain distributions from Borrower if and solely as expressly provided in the Loan Agreement, shall at all times be subordinate as to Lien and time of payment, and in all other respects to the full and prior repayment to Administrative Agent and Lenders of all of the Liabilities owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan). Except for dividends or distributions permitted by Section 9.9 of the Loan Agreement, Guarantor shall not be entitled to enforce or receive payment of any sums hereby subordinated until the Loan have been paid and performed in full, and any such sums received in violation of this Guaranty shall not be commingled with other monies of Guarantor and shall be received by Guarantor in trust for Administrative Agent on behalf of Lenders and itself.

12. Payments; Application . All payments to be made hereunder by Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made

in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by Guarantor hereunder shall be applied as follows; first, to all costs and expenses (including, but not limited to, reasonable attorneys’ fees, expenses and court costs) incurred by Administrative Agent in enforcing this Guaranty or in collecting the Guaranteed Obligations; second, to all accrued and unpaid interest and fees owing to Administrative Agent and Lenders constituting Guaranteed Obligations; and third, to the balance of the Guaranteed Obligations, all subject to the terms of the Loan Agreement.

13. [Intentionally Omitted]

14. Notices . Any notice or other communication required or permitted under this Guaranty shall be in writing and personally delivered, mailed by registered or certified U.S. mail (return receipt requested and postage prepaid), sent by telecopier (with a confirming copy sent by regular mail), or sent by prepaid nationally recognized overnight courier service, and addressed to the relevant party at its address set forth below, or at such other address as such party may, by written notice, designate as its address for purposes of notice under this Guaranty:

If to Administrative Agent, at:

The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Adam Panos
Telephone No.: 312-564-1278
Facsimile No.: 312-564-6889

With a copy to:

Duane Morris LLP
190 South LaSalle Street — Suite 3700
Chicago, Illinois 60603
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

If to Guarantor, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093
Facsimile No.: 615-251-1059

If mailed, notice shall be deemed to be given three (3) days after being sent, and if sent by personal delivery, telecopier, or prepaid courier, notice shall be deemed to be given when delivered. If any notice is tendered to an addressee and delivery thereof is refused by such addressee, such notice shall be effective upon such tender unless expressly set forth in such notice.

15. Cumulative Remedies . No remedy under this Guaranty is intended to be exclusive of any other remedy, but each and every remedy shall be cumulative and in addition to any and every other remedy given hereunder and those provided by law or in equity. No delay or omission by Administrative Agent to exercise any right under this Guaranty shall impair any such right nor be construed to be a waiver thereof. No failure on the part of Administrative Agent to exercise, and no delay in exercising, any right hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right.

16. Financial Information . Without limiting anything contained in this Guaranty, Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall deliver to Administrative Agent, upon Administrative Agent’s written request and to the extent not included in the Guarantor’s public filings with the United States Securities and Exchange Commission, on at least an annual basis, and at such other times as Administrative Agent may reasonably request, (i) financial statements (showing all changes in Guarantor’s financial condition which occurred during the preceding fiscal year and Guarantor’s current financial position), (ii) federal and state tax returns of Guarantor, as applicable, and (iii) such other financial information as Administrative Agent or the Lenders may reasonably request. Copies of annual tax returns shall be delivered to Administrative Agent upon Administrative Agent’s written request therefore. The failure of Guarantor to perform or observe any of its obligations hereunder within the period of time specified in any notice from Administrative Agent to Guarantor, which notice shall in no event be less than five (5) business days, advising Guarantor of such failure, shall constitute a default under this Guaranty and an Event of Default under the Loan Agreement and the other Loan Documents.

17. Books and Records . Guarantor agrees that Administrative Agent’s books and records showing the Liabilities among Administrative Agent on behalf of Lenders and Borrower shall be admissible in any action or proceeding and shall be binding upon Guarantor for the purpose of establishing the items therein set forth and shall constitute prima facie proof thereof absent manifest error.

“include or includes” are used in this Guaranty, they should be interpreted in a non-exclusive manner as though the words “, without limitation,” immediately followed the same. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Guaranty is prohibited or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. As used herein, except in circumstances where under the Loan Documents the term is intended to mean or refer to all of the Borrowers or all of the Credit Parties on a consolidated basis, the term “Borrower” refers to any one or all of the Borrowers under the Loan Agreement, as applicable, provided, however, in the event of any disagreement between Administrative Agent and Guarantor as to whether or not a reference to Borrower means any or all of such Borrower(s) individually or collectively herein, and the circumstances are not covered by the Loan Documents, the Administrative Agent shall in reasonable good faith make such determination.

19. Bankruptcy . So long as any Guaranteed Obligations shall be owing to Administrative Agent or Lenders, Guarantor shall file in any bankruptcy or other proceeding against Borrower in which the filing of claims is required or permitted by law all claims which Guarantor may have against Borrower relating to any Indebtedness of Borrower to Guarantor and will assign to Administrative Agent (for the ratable benefit of Lenders and itself) all rights of Guarantor thereunder. If Guarantor does not file any such claim, Administrative Agent, as attorney-in-fact for Guarantor, is hereby authorized to do so in the name of Guarantor or, in Administrative Agent’s discretion, to assign the claim to a nominee and to cause proof of claim to be filed in the name of Administrative Agent’s nominee. The foregoing power of attorney is coupled with an interest and cannot be revoked. Administrative Agent or its nominee shall have the sole right to accept or reject any plan proposed in such proceeding and to take any other action which a party filing a claim is entitled to do. In all such cases, whether in administration, bankruptcy or otherwise, the person or persons authorized to pay such claim shall pay to Administrative Agent the amount payable on such claim and, to the full extent necessary for that purpose, Guarantor hereby assigns to Administrative Agent (for the ratable benefit of Lenders and itself) all of Guarantor’s rights to any such payments or distributions to which Guarantor would otherwise be entitled; provided, however, Guarantor’s obligations hereunder shall not be satisfied except to the extent that Administrative Agent receives cash by reason of any such payment or distribution. If Administrative Agent receives anything hereunder other than cash, the same shall be held as collateral for amounts due under this Guaranty. At such time as all Guaranteed Obligations have been fully paid, any sums or other collateral received by Administrative Agent pursuant to this Section 19 remaining in the possession of Administrative Agent shall be paid or delivered to Guarantor.

obligations owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan and other Liabilities) have been indefeasibly paid in full in cash and otherwise performed in full and all financing arrangements and accommodations among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities.

21. Costs and Expenses . If any lawsuit is commenced which arises out of or which relates to this Guaranty, the Loan Documents or the Loan, including, without limitation, any insolvency, bankruptcy or similar proceeding, Guarantor agrees to pay all of Administrative Agent’s costs and expenses, including, without limitation, reasonable attorneys’ fees which may be incurred in any effort to collect or enforce any term of this Guaranty. From the time(s) incurred until paid in full to Administrative Agent on behalf of Lenders, all sums shall bear interest at the “Default Rate” set forth in the Loan Agreement.

22. Entire Agreement; Amendments; Other Agreements . This Guaranty constitutes the entire agreement between Guarantor and Administrative Agent pertaining to the subject matter contained herein, and may not be altered, amended, or modified, nor may any provision hereof be waived or noncompliance therewith consented to, except by means of a writing executed by Guarantor as to which such consent or waiver is applicable and by Administrative Agent. Any such alteration, amendment, modification, waiver, or consent shall be effective only to the extent specified therein and for the specific purpose for which it is given. No course of dealing and no delay or waiver of any right or default under this Guaranty shall be deemed a waiver of any other similar or dissimilar right or default or otherwise prejudice the rights and remedies hereunder. The Guarantor shall not enter into any agreement containing any provision which would be violated or breached by the performance of Guarantor’s obligations hereunder or which would violate or breach any provision hereof, or that would or is reasonably likely to adversely affect the Administrative Agent’s interests or rights under this Guaranty. Time is of the essence for the payment and performance of this Guaranty. The recitals hereto are hereby made a part of and incorporated into this Guaranty by this reference thereto. A signature delivered or sent by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for any and all purposes.

23. Successors and Assigns . This Guaranty shall be binding upon Guarantor’s representatives, heirs, legal beneficiaries, successors, and assigns, as applicable, and shall inure to the benefit of the successors and assigns of Administrative Agent; provided, however, Guarantor shall not be permitted to assign this Guaranty or any of Guarantor’s rights, liabilities or obligations hereunder without the prior written consent of the Administrative Agent. In the event of the dissolution, bankruptcy or failure to maintain a Solvent financial condition, as applicable, of the Guarantor, the Loan Agreement and any and all sums due thereunder, along with all of the other Guaranteed Obligations, shall at once, without any notice or demand from Administrative Agent, be due and payable.

24. SUBMISSION OF JURISDICTION . THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

(a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS GUARANTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT HEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

(b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW IN CONNECTION WITH ANY SUCH ACTION OR PROCEEDING (i) ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME, (ii) THE RIGHT TO ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE GUARANTOR WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

(c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, RETURN RECEIPT REQUESTED, TO THE GUARANTOR AT ITS ADDRESS SET FORTH ABOVE OR AT SUCH OTHER ADDRESS OF WHICH THE LENDER SHALL HAVE BEEN NOTIFIED PURSUANT THERETO. THE GUARANTOR AGREES THAT SUCH SERVICE, TO THE FULLEST EXTENT PERMITTED BY LAW (i) SHALL BE DEEMED IN EVERY RESPECT EFFECTIVE SERVICE OF PROCESS UPON THE GUARANTOR IN ANY SUIT, ACTION OR PROCEEDING, AND (ii) SHALL BE TAKEN AND HELD TO BE VALID PERSONAL SERVICE UPON AND PERSONAL DELIVERY TO THE GUARANTOR. NOTHING HEREIN SHALL AFFECT THE LENDER’S RIGHT TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR LIMIT THE LENDER’S RIGHT TO BRING PROCEEDINGS AGAINST THE GUARANTOR OR ITS PROPERTY IN ANY COURT OR ANY OTHER JURISDICTION.

25. GOVERNING LAW . THIS GUARANTY SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

AGREEMENTS OR TRANSACTIONS RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY. THE ADMINISTRATIVE AGENT AND THE GUARANTOR AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

27. No Pledge of Equity . Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, Guarantor shall remain the owner (either directly or through one of its Subsidiaries) of 100% of the equity in each Borrower; and without the prior written consent of Administrative Agent, Guarantor shall not assign, sell, convey, gift, transfer, pledge, hypothecate, grant a security interest in, encumber or in any other manner permit any lien (other than Permitted Liens) to exist in or on, all or any portion of the equity in or of any Borrower, except for those pledges to the Omega Senior Lessor in effect on the date hereof.

28. REVIEW BY GUARANTOR . The Guarantor acknowledges that Guarantor has thoroughly read and reviewed the terms and provisions of this Guaranty, and that such terms and provisions are clearly understood by the Guarantor, and has been fully and unconditionally consented to by the Guarantor with the full benefit and advice of counsel chosen by the Guarantor.

[Signature Page Follows]

IN WITNESS WHEREOF , Guarantor has executed and delivered this Amended and Restated Guaranty as of the date set forth in the first paragraph hereof.


Guarantor: ADVOCAT INC.
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

[ Signature Page — Amended and Restated Guaranty]

Exhibit 10.3

SCHEDULE 10(b)

Guaranty of Advocat, Inc.

LITIGATION

See attached list of pending or threatened litigation against Advocat, Inc.

Exhibit 10.4

TERM LOAN AND SECURITY AGREEMENT

dated as of February 28, 2011

by and among

DIVERSICARE AFTON OAKS, LLC, DIVERSICARE BRIARCLIFF, LLC,
DIVERSICARE CHISOLM, LLC, and DIVERSICARE HARTFORD, LLC,
collectively, Borrower

and

THE PRIVATEBANK AND TRUST COMPANY,
as Administrative Agent for the Lenders

and

The Financial Institutions Parties Hereto as the Lenders

TERM LOAN AND SECURITY AGREEMENT

This TERM LOAN AND SECURITY AGREEMENT (this “ Agreement ”), dated as of February 28, 2011, is by and among DIVERICARE AFTON OAKS, LLC, DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE CHISOLM, LLC and DIVERSICARE HARTFORD, LLC , each a Delaware limited liability company (individually and collectively, the “ Borrower ”), THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its individual capacity (“ PrivateBank ”), and the other financial institutions parties hereto (together with PrivateBank, the “ Lenders ”), and THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its capacity as administrative agent for the Lenders (together with its successors and assigns, the “ Administrative Agent ”).

RECITALS

WHEREAS , Diversicare Leasing Corp., a Tennessee corporation (“ Pledgor ”), legally and beneficially owns or controls all of the issued and outstanding Stock of each Borrower;

WHEREAS , the Borrower has requested that the Lenders provide the Borrower with a certain term loan;

WHEREAS , in connection with this Agreement, certain Affiliates of the Borrower are entering into that certain Amended and Restated Revolving Loan and Security Agreement to be dated of even date herewith by and among such Affiliates of the Borrower, the Lenders and Administrative Agent (as the same may be amended, supplemented or modified from time to time, the “ Revolving Loan Agreement ”); and

WHEREAS , the Lenders are willing to make such term loan to the Borrower, upon the terms and provisions and subject to the conditions set forth herein.

NOW, THEREFORE , in consideration of the mutual agreements contained herein, and of the term loan to be made to or for the benefit of the Borrower by the Lenders, and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, the parties hereto (intending to be legally bound) hereby agree as follows:

1. DEFINITIONS .

1.1 General Terms . When used herein, the following terms shall have the following meanings:

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“ Affiliated Revolving Borrowers ” means each of the entities identified on Schedule 1 attached hereto.

“ Affiliate Revolving Loan Financing Agreement ” means each “Financing Agreement” as defined in the Revolving Loan Agreement, as any of the same may be restated, modified, supplemented or amended from time to time.

“ Affiliate Revolving Loan Liabilities ” means the “Liabilities” as defined in the Revolving Loan Agreement.

“ Agreement ” means this Term Loan and Security Agreement as the same may be restated, modified, supplemented or amended from time to time.

“ Allocable Amount ” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

“ Applicable Libor Margin ” means, with respect to Libor Loans, an amount equal to four hundred fifty (450) basis points.

“ Appraisal ” means a complete, self-contained appraisal of the Property performed in accordance with FIRREA and the Administrative Agent’s appraisal requirements by an independent appraiser MAI licensed in the state in which the Property is located and selected and retained by the Administrative Agent.

“ Assignment Agreement ” shall have the meaning ascribed to such term in Section 12.15 hereof.

“ Assignment of Rents and Leases ” means each of those certain Assignment of Rents and Leases dated of even date herewith made by Borrower in favor of the Administrative Agent, with respect to each parcel of Property, respectively, in form and substance reasonably satisfactory to the Administrative Agent, as the same may be amended, supplemented, and modified from time to time.

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Section 8.9 hereof the Deposit Accounts specified therein shall be maintained with PrivateBank and not any other Lender.

“ Bank Product Agreements ” means those agreements entered into from time to time by Borrower or its Subsidiaries with any Lender in connection with the obtaining of any of the Bank Products.

“ Base Rate ” means, solely with respect to Sections 2.7(b), 3.2, 3.6 and 3.7 hereof, the greater of (a) the corporate base rate of interest per annum identified from time to time by the Administrative Agent, as its base or prime rate, which rate shall not necessarily be the lowest rate of interest which the Administrative Agent charges its customers, and (b) the greater of (i) two percent (2.0%) per annum, and (ii) the Libor Rate as in effect immediately before such time as the Libor Base Rate became unavailable. Any change in the Base Rate shall be effective as of the effective date of such change.

“ Base Rate Loan ” means a Loan that bears interest at an interest rate based upon the Base Rate, solely with respect to Sections 2.7(b), 3.2, 3.6 and 3.7 hereof.

“ Blocked Persons List ” shall have the meaning ascribed to such term in Section 7.29 hereof.

“ Borrower Agent ” means Diversicare Management Services Co., a Tennessee corporation.

“ Borrower Cash Management Program ” means the business practice of Guarantor and Borrowers whereby cash receipts for Guarantor, Borrowers and the Affiliated Revolving Borrowers are transferred/swept into a central concentration account and all cash disbursements are funded by transfers from such central concentration account.

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lessee by any lease which is required to be so reflected or by the ownership of the leased property. For avoidance of doubt, prepaid leases shall not be deemed “Capital Lease Obligations” except to the extent required under GAAP.

“ Capmark ” means Capmark Finance Inc., a California corporation.

“ CERCLA ” means the Comprehensive Environmental Release Compensation and Liability Act, 42 U.S.C. § 9601 et seq., as amended.

“ Certificates ” shall have the meaning ascribed to such term in Section 5.1(e)(7) hereof.

“ CHAMPUS ” means the Civilian Health and Medical Program of the Uniformed Service, a part of TRICARE, a medical benefits program supervised by the U.S. Department of Defense.

“ Closing Date ” means February 28, 2011.

“ Closing Fee ” shall have the meaning ascribed to such term in Section 2.16 hereof.

“ CMS ” means the Centers for Medicare and Medicaid Services of HHS and any Person succeeding to the functions thereof.

“ Collateral ” shall have the meaning ascribed to such term in Section 6.1 hereof.

“ Commercial Leases ” means the collective reference to all Leases other than admission agreements or residency agreements.

“ Commitment ” means the Term Loan Commitment.

“ Compliance Certificate ” shall have the meaning ascribed to such term in Section 8.1(c) hereof.

“ CON ” shall have the meaning ascribed to such term in Section 10.2 hereof.

“ Credit Termination Date ” means the earlier of (i) the Stated Maturity Date, (ii) such other date on which the Commitments shall terminate pursuant to Section 11.2 hereof, or (iii)

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such other date as is mutually agreed in writing between the Borrower and the Administrative Agent.

“ Default Rate ” shall have the meaning ascribed to such term in Section 2.7(a) hereof.

“ Defaulting Lender ” means any Lender that (a) has failed to fund its portion of the Loan required to be funded by it hereunder at Closing, (b) has otherwise failed to pay over to the Administrative Agent or any other Lender any other amount required to be paid by it hereunder within one Business Day of the date when due, unless the subject of a good faith dispute or unless such failure has been cured, or (c) has been deemed insolvent or become the subject of a bankruptcy or insolvency proceeding.

“ Deposit Accounts ” means any deposit, securities, operating, lockbox, blocked or cash collateral account, together with any funds, instruments or other items credited to any such account from time to time, and all interest earned thereon.

“ Duly Authorized Officer ” means the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer and the Assistant Secretary of the Borrower.

“ Environmental Indemnity Agreement ” means that certain Environmental Indemnity Agreement of even date herewith made by the Borrower in favor of the Administrative Agent, in form and substance acceptable to the Administrative Agent, as the same may be amended or modified from time to time.

“ Environmental Laws ” means all federal, state, local, and foreign statutes, regulations, ordinances, and similar provisions having the force or effect of law, all judicial and administrative orders and determinations, and all common law concerning public health and safety, worker health and safety, pollution, or protection of the environment, including all those relating to the presence, use, production, generation, handling, transportation, treatment, storage, disposal, distribution, labeling, testing, processing, discharge, release, threatened release, control, or cleanup of any hazardous materials, substances, or wastes, chemical substances, or mixtures, pesticides, pollutants, contaminants, toxic chemicals, petroleum products or byproducts, asbestos, polychlorinated biphenyls, noise, or radiation, including, without limitation, the Resource Conservation and Recovery Act, 42 U.S.C. § 6901 et seq., as amended; CERCLA; the Toxic Substance Act, 15 U.S.C. § 2601 et seq., as amended; the Clean Water Act, 33 U.S.C. § 466 et seq., as amended; the Clean Air Act, 42 U.S.C. § 7401 et seq., as amended; state and federal superlien and environmental cleanup programs; and U. S. Department of Transportation regulations.

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individual, public or private, concerning any intentional or unintentional act or omission which involves Management of Hazardous Substances on or off the property of the Borrower which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, or the imposition of any Lien on property, or any alleged violation of or responsibility under Environmental Laws which could result in the Borrower incurring a material liability or which could have a Material Adverse Effect, and, after due inquiry and investigation, any knowledge of any facts which could give rise to any of the foregoing.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, together with the regulations thereunder.

“ ERISA Affiliate ” means any corporation, trade or business, which together with the Borrower would be treated as a single employer under Section 4001 of ERISA.

“ Event of Default ” shall have the meaning ascribed to such term in Section 11.1 hereof.

“ Existing Lender Refinancing ” means the refinancing of all Indebtedness owed to Capmark from the proceeds of the Term Loan.

“ Facility ” or “ Facilities ” shall mean any one or more of the skilled nursing homes or facilities located on the Property as further identified on Schedule 1.1(a) .

“ Fee Letter ” means that certain letter agreement dated February 28, 2011 by and between PrivateBank and Borrower, pursuant to which, among other things, the arrangement relating to compensation for certain services rendered by the Administrative Agent is set forth (together with any similar letter from Administrative Agent to the Lenders regarding their respective share of any particular fee payable by Borrower).

“ Financing Agreements ” means any and all agreements, instruments, certificates and documents, including, without limitation, security agreements, loan agreements, notes, guarantees, keep well agreements, landlord waivers, mortgages, deeds of trust, subordination agreements, intercreditor agreements, pledges, powers of attorney, consents, assignments, collateral assignments, interest rate protection agreements, reimbursement agreements, contracts, notices, leases, subordination and attornment agreement, collateral assignments of key man life insurance policies, financing statements and all other written matter (including, without limitation, this Agreement, the Term Loan Notes, the Mortgages, the Assignment of Rents and Leases, the Environmental Indemnity Agreement, the Subordination of Management Agreements, the Guaranty, the Pledge Agreement, the Certificates, the Fee Letter, each Hedging Agreement and any other Bank Product Agreement), in each case evidencing, securing or relating to the Loan and the Liabilities, whether heretofore, now, or hereafter executed by or on behalf of the Borrower, any Affiliate, or any other Person, and delivered to or in favor of the Administrative Agent or any Lender, together with all agreements and documents referred to

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therein or contemplated thereby, as each may be amended, modified or supplemented from time to time.

“ FIRREA ” means the Financial Institutions Reform, Recovery And Enforcement Act of 1989, as amended from time to time.

“ Fiscal Quarter ” means the three (3) month period ending on March 31, June 30, September 30 and December 31 of each calendar year.

“ Fiscal Year ” means the twelve (12) month period commencing on January 1 and ending on December 31 of each calendar year.

“ Governing Documents ” shall have the meaning ascribed to such term in Section 9.14 hereof.

“ Governmental Approvals ” means, collectively, all consents, licenses, and permits and all other authorizations or approvals required from any Governmental Authority to operate the Locations.

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“ Guarantor ” means Advocat Inc., a Delaware corporation in its capacity as the guarantor pursuant to the Guaranty or as otherwise provided in this Agreement.

“ Guaranty ” means that certain Guaranty of even date herewith by Guarantor in favor of the Administrative Agent, as the same may be amended, restated, reaffirmed, modified or supplemented from time to time.

“ HHS ” means the United States Department of Health and Human Services and any Person succeeding to the functions thereof.

“ HUD ” means the United States Department of Housing and Urban Development and any successor thereto.

“ HUD Financing ” means an Indebtedness of a Borrower or Borrowers that is insured by HUD under one of its programs for HUD insured loans for long term care facilities, including a

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HUD insured loan under Section 223(f) for senior housing facilities and Section 232 for nursing home and assisted living facilities of the National Housing Act, and any refinancing, refunding, extension or renewal thereof, and which Indebtedness is to be secured by the assets and properties owned or held by such Borrower or Borrowers, including the Facility or Facilities owned and operated by such Borrower or Borrowers.

“ Indemnified Parties ” shall have the meaning ascribed to such term in Section 12.16 hereof.

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consumed in the Borrower’s business, and shall include such property the sale or other disposition of which has given rise to Accounts and which has been returned to or repossessed or stopped in transit by the Borrower.

“ Joint Liability Payment ” shall have the meaning ascribed to such term in Section 12.21(g) hereof.

“ Leases ” means all leases, subleases, licenses, concessions and other agreements (written or oral), including all amendments, extensions, renewals, guaranties, and other agreements with respect thereto, pursuant to which the Borrower holds any leased real property (including, without limitation, the Commercial Leases and Operating Leases).

“ Lender Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Liabilities ” means any and all of each of the Borrower’s liabilities, obligations and Indebtedness to the Lenders and the Administrative Agent of any and every kind and nature, whether heretofore, now or hereafter owing, arising, due or payable and howsoever evidenced, created, incurred, acquired, or owing, whether primary, secondary, direct, indirect, contingent, absolute, fixed or otherwise (including, without limitation, payments of or for principal, interest, default interest, reimbursement obligations, interest rate hedging obligations fees, costs, expenses, and/or indemnification, and obligations of performance, and the Closing Fee, the Prepayment Premium, and all Bank Product Obligations, and any interest that accrues after commencement of any insolvency or bankruptcy proceeding regardless of whether allowed or allowable in whole or in part as a claim in any such insolvency or bankruptcy proceeding) and whether arising or existing under written agreement, oral agreement, or by operation of law, including, without limitation, all of each Borrower’s Indebtedness, liabilities and obligations to the Lenders and the Administrative Agent under this Agreement (whether relating to the Loan or otherwise and including, without limitation, all of each Borrower’s Bank Product Obligations) or each Hedging Agreement and any and all other Financing Agreements to which Borrower is a party, and any refinancings, substitutions, extensions, renewals, replacements and modifications for or of any or all of the foregoing.

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the Administrative Agent in its sole and absolute discretion, divided by (b) a number determined by subtracting from 1.00 the then stated maximum reserve percentage for determining reserves to be maintained by member banks of the Federal Reserve System for Eurocurrency funding or liabilities as defined in Regulation D (or any successor category of liabilities under Regulation D), such rate to remain fixed for such Libor Interest Period. The Administrative Agent’s determination of the Libor Base Rate shall be conclusive, absent manifest error.

“ Libor Loan ” means a Loan which bears interest at a Libor Rate.

“ Libor Rollover ” means that each Libor Loan shall automatically renew for the Libor Interest Period specified in this Agreement at the then current Libor Rate, except that a Libor Interest Period for a Libor Loan shall not automatically renew with respect to any principal amount which is scheduled to be repaid before the last day of the applicable Libor Interest Period, and any such amounts shall bear interest at the Base Rate, until repaid.

“ Licenses ” shall have the meaning ascribed to such term in Section 10.2 hereof

“ Loan Account ” shall have the meaning ascribed to such term in Section 2.5 hereof.

“ Loan ” means the Term Loan, and, if applicable, any and all other advances made by the Lenders (or, if applicable, the Administrative Agent) to the Borrower pursuant to the terms of this Agreement or any other Financing Agreement.

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“ Location ” or “ Locations ” mean one or more of the healthcare or other facilities owned by the Borrower on the Property as identified on Schedule 1.1(a) hereto.

“ Management Agreements ” means, collectively, those certain Management Agreements between (i) Manager and each Borrower for the operation and management of the Facilities and (ii) Manager and Diversicare Therapy Services, LLC, for bookkeeping, accounting, payroll, billing and management of its contract therapy services.

“ Manager ” means Diversicare Management Services Co.

“ Material Adverse Change ” or “ Material Adverse Effect ” means, with respect to any event, act, condition or occurrence of whatever nature (including any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), whether singly or in conjunction with any other event or events, act or acts, condition or conditions, occurrence or occurrences, whether or not related, any of the following: (a) a material adverse change in, or a material adverse effect upon, the financial condition, operations, business or properties of the Credit Parties, taken as a whole, (b) a material adverse change in, or a material adverse effect upon, the rights and remedies of the Administrative Agent or the Lenders under any Financing Agreement or the ability of the Credit Parties, taken as a whole, to perform their payment or other obligations under any Financing Agreement to which they are parties, (c) a material adverse change in, or a material adverse effect upon, the legality, validity or enforceability of any Financing Agreement, (d) a material adverse change in, or a material adverse effect upon, the existence, perfection or priority of any security interest granted in any Financing Agreement or the value of any material Collateral not resulting from any action or inaction by the Administrative Agent, or (e) any liability of the Credit Parties, or any one or more of them, in excess of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) in the aggregate as a result the final adjudication of one or more violations of any Healthcare Law which remains unpaid for a period of thirty (30) days, unless such liability is being contested or appealed by appropriate proceedings and Borrower has established appropriate reserves adequate for payment in the event such appeal or contest is ultimately unsuccessful, provided further that in the event such contest or appeal is ultimately unsuccessful, the Borrower shall pay the assessment no later than the deadline set forth by the applicable agency.

“ Maximum Term Facility ” means an amount equal to Twenty-Three Million and No/100 Dollars ($23,000,000.00).

“ Medicaid ” mean collectively all federal statutes (whether set forth in Title XIX of the Social Security Act or elsewhere) affecting the health insurance program established by Title XIX of the Social Security Act (42 U.S.C. §§ 1396, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of

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the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

“ Medicare ” mean collectively all federal statutes (whether set forth in Title XVIII of the Social Security Act or elsewhere) affecting the health insurance program for the aged and disabled established by Title XVIII of the Social Security Act (42 U.S.C. § 1395, et seq.), together with all applicable provisions of all rules, regulations, manuals, final orders and administrative, reimbursement and other applicable guidelines of all governmental authorities, including HHS, CMS or the Office of the Inspector General of HHS, or any Person succeeding to the functions of any of the foregoing (whether or not having the force of law).

“ Mortgages ” means, collectively, each of those certain Mortgage, Deed of Trust, Security Agreement, Assignment of Leases and Rents and Fixture Filing dated of even date herewith made by the Borrower, respectively, granting and conveying to the Administrative Agent for the ratable benefit of the Lenders a first mortgage Lien on that certain Property as identified on Schedule 1.1(b) , as the same may be amended, restated, supplemented or modified from time to time

“ Multiemployer Plan ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Non-U.S. Participant ” shall have the meaning ascribed to such term in Section 3.3 hereof.

“ Operating Lease ” means the collective reference to any Commercial Leases between the Borrower and any Operators, respectively, pursuant to which such Operators lease and operate each Location.

“ Operators ” or “ Operator ” means the respective operators of the Locations, all of which are licensed under all applicable Healthcare Laws.

“ Participant ” shall have the meaning ascribed to such term in Section 12.15(d) hereof.

“ Patriot Act ” shall have the meaning ascribed to such term in Section 8.16 hereof.

“ PBGC ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Permitted Liens ” shall have the meaning ascribed to such term in Section 9.1 hereof.

“ Person ” means any individual, sole proprietorship, partnership, joint venture, trust, limited liability company, unincorporated organization, association, corporation, institution,

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entity, party, or government (whether national, federal, state, provincial, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof).

“ Plan ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Pledge Agreement ” means that certain Pledge Agreement of even date herewith made by Pledgor in favor of the Administrative Agent, in form and substance reasonable satisfactory to the Administrative Agent, as the same may be modified, restated, supplemented or amended from time to time in accordance with the terms thereof.

“ Pledgor ” means Diversicare Leasing Corp., a Tennessee corporation.

“ Prepayment Premium ” means, with respect to prepayment of the Loan, three percent (3%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs on or prior to the first (1st) year anniversary of the Closing Date; two percent (2%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs after the first anniversary hereof and on or prior to the second (2nd) year anniversary of the Closing Date; and one percent (1%) of the amount of the outstanding principal balance of the Loan prepaid if such prepayment occurs after the second anniversary hereof and on or prior to the third (3rd) anniversary of the Closing Date; provided, for the avoidance of doubt, there will be no Prepayment Premium if any such prepayment occurs after the third (3rd) year anniversary of the Closing Date.

“ Pro Rata Share ” means (a) with respect to a Lender’s obligation to make a portion of the Loan hereunder and right to receive payments of principal, interest and fees with respect to the Term Loan, the Term Loan Commitment Percentage of such Lender, and (b) for all other purposes to any Lender, the percentage obtained by dividing (i) such Lender’s then outstanding principal amount of the Loan, by (ii) the then aggregate outstanding principal amount of the Loan of all Lenders.

“ Prohibited Transaction ” shall have the meaning ascribed to such term in ERISA.

“ Property ” means any and all real property owned, leased, sub-leased or used at any time by Borrower, including the real estate identified on Schedule 1.1(b) .

“ Register ” shall have the meaning ascribed to such term in Section 12.15(d) hereof.

“ Released Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Releasing Parties ” shall have the meaning ascribed to such term in Section 12.24 hereof.

“ Required Lenders ” means, as of any date of determination, (a) if there are three (3) or fewer Lenders, Lenders holding one hundred percent (100%) of the sum of the outstanding

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principal balance of the Loan (and the Term Loan Commitment), or (b) if there are more than three (3) Lenders, Lenders holding sixty-six and two-thirds percent (66-2/3%) or more of the sum of the outstanding principal balance of the Loan (and the Term Loan Commitment), provided, that the commitments of, and the portion of the Liabilities held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.

“ Restricted Agreements ” means, collectively, each Management Agreement, Commercial Lease, agreement, document or instrument entered into in connection with (directly or indirectly) the Cash Management Program, any other agreement, document or instrument between or among the Credit Parties and any agreement, document or instrument pertaining to (directly or indirectly) any of the foregoing.

“ Restrictions ” shall have the meaning ascribed to such term in Section 10.3 hereof.

“ Revolving Loan Agreement ” means that certain Amended and Restated Revolving Loan and Security Agreement dated of even date herewith by and among the Affiliated Revolving Borrowers, the Lenders and the Administrative Agent, as the same may be restated, modified, supplemented or amended from time to time.

“ Service Fee ” shall have the meaning ascribed to such term in Section 8.9 hereof.

“ Stated Maturity Date ” means February 28, 2016.

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in Rule 3a11-1 of the General Rules and Regulations promulgated by the Securities and Exchange Commission under the Securities Exchange Act of 1934).

“ Subordination Agreement ” means, collectively, any subordination agreements entered into from time to time by holders of Subordinated Debt and the Administrative Agent, each in form and substance satisfactory to the Administrative Agent in its sole and absolute discretion, each as the same may be modified, supplemented, amended or restated from time to time.

“ Subordination of Management Agreements ” means that certain Subordination of Management Agreements of even date herewith made by the Manager in favor of the Administrative Agent, in form and substance reasonable satisfactory to the Administrative Agent, as the same may be modified, restated, supplemented or amended from time to time in accordance with the terms thereof.

“ Tax Code ” shall have the meaning ascribed to such term in Section 7.19 hereof.

“ Taxes ” shall have the meaning ascribed to such term in Section 3.3 hereof.

“ Tenant ” means any tenant, resident or occupant under any Lease.

“ Term Loan ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Term Note(s) ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Term Loan Commitment ” shall have the meaning ascribed to such term in Section 2.1 hereof.

“ Term Loan Commitment Percentage ” means, as to any Lender, the percentage set forth opposite such Lender’s name on Annex A hereto under the column “Term Loan Commitment

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Percentage”, or, if different, in the most recent Assignment Agreement to which such Lender is a party.

“ TRICARE ” means the medical program for active duty members, qualified family members, CHAMPUS eligible retirees and their family members and survivors, of all uniformed services.

“ Withholding Certificate ” shall have the meaning ascribed to such term in Section 3.3 hereof.

1.2 Interpretation .

(1) All accounting terms used in this Agreement or the other Financing Agreements shall have, unless otherwise specifically provided herein or therein, the meaning customarily given such term in accordance with GAAP, and all financial computations thereunder shall be computed, unless otherwise specifically provided therein, in accordance with GAAP consistently applied; provided, however, that all financial covenants and calculations in the Financing Agreements shall be made in accordance with GAAP as in effect on the Closing Date unless Borrower and Administrative Agent shall otherwise specifically agree in writing. That certain items or computations are explicitly modified by the phrase “in accordance with GAAP” shall in no way be construed to limit the foregoing. Unless otherwise specified, references in this Agreement or any of the attachments hereto or appendices hereof to a Section, subsection or clause refer to such Section, subsection or clause as contained in this Agreement. The words “herein,” “hereof” and “hereunder” and other words of similar import refer to this Agreement as a whole, including all annexes, exhibits and schedules attached hereto, as the same may from time to time be amended, restated, modified or supplemented, and not to any particular section, subsection or clause contained in this Agreement or any such annex, exhibit or schedule.

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their respective successors and assigns (to the extent and only to the extent permitted by the Financing Agreements) or, in the case of governmental Persons, Persons succeeding to the relevant functions of such Persons; and all references to statutes and related regulations shall include any amendments of the same and any successor statutes and regulations. Whenever any provision in any Financing Agreement refers to the knowledge (or an analogous phrase) of Borrower, except as otherwise expressly provided for herein, such words are intended to signify that a Duly Authorized Officer of Borrower has actual knowledge or awareness of a particular fact or circumstance or that a prudent individual in the position of such Duly Authorized Officer of Borrower, would reasonably be expected to have known or been aware of such fact or circumstance in the course of performing his or her duties.

2. COMMITMENT; INTEREST; FEES .

2.1 Term Loan . On the terms and subject to the conditions set forth in this Agreement, and provided there does not then exist a Default or an Event of Default, each Lender, severally and for itself alone, agrees to make such Lender’s Pro Rata Share of a term loan (the “ Term Loan ”) in one advance to the Borrower on the Closing Date in the aggregate amount of the Maximum Term Facility. Any amounts paid or applied to the principal balance of the Term Loan (whether by mandatory prepayment or otherwise) may not be reborrowed hereunder. The Lenders’ commitment hereunder to make the Term Loan is hereinafter called the “ Term Loan Commitment .” The payment obligations of the Borrower to the Lenders hereunder are and shall be joint and several as provided in Section 12.21 hereof. Each Lender’s obligation to fund the Term Loan shall be limited to such Lender’s Term Loan Commitment Percentage of the Term Loan Commitment.

(1) The advance to the Borrower under this Section 2.1 shall be deposited, in immediately available funds, in the Borrower’s demand deposit account with the Administrative Agent, or in such other account as the Borrower Agent designates in writing with the Administrative Agent’s approval.

(2) The principal balance of the Term Loan shall be amortized over twenty-five (25) years and shall be jointly and severally repaid by Borrower in consecutive equal monthly installments as follows:


Year 1:		$380,000 ($31,667/month)
Year 2:		$410,000 ($34,167/month)
Year 3:		$430,000 ($35,834/month)
Year 4:		$460,000 ($38,334/month)
Year 5:		$490,000 ($40,834/month)

, together with interest accrued thereon, each payable on the first day of each calendar month, commencing on April 1, 2011, and otherwise in accordance with Section 2.7 hereof, with a final installment of the aggregate unpaid principal balance of the Term Loan, together with interest accrued thereon, payable on the Credit Termination Date.

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(3) The Term Loan shall be evidenced by a separate promissory note (hereinafter, as the same may be amended, restated, modified or supplemented from time to time, and together with any renewals or extensions thereof or exchanges or substitutions therefor, called the “Term Loan Note(s)”), duly executed and delivered by the Borrower, substantially in the form set forth in Exhibit A attached hereto, with appropriate insertions, dated the Closing Date, jointly and severally payable to the order of each Lender, respectively, in the principal amount equal to such Lender’s Pro Rata Share of the Maximum Term Facility. THE PROVISIONS OF THE TERM LOAN NOTES NOTWITHSTANDING, THE TERM LOAN THEN OUTSTANDING SHALL BECOME IMMEDIATELY DUE AND PAYABLE ON A JOINT AND SEVERAL BASIS UPON THE EARLIEST TO OCCUR OF (X) STATED MATURITY DATE; (Y) THE ACCELERATION OF THE LIABILITIES PURSUANT TO SECTION 11.2 HEREOF; AND (Z) TERMINATION OF THIS AGREEMENT (WHETHER BY PREPAYMENT OR OTHERWISE) IN ACCORDANCE WITH ITS TERMS.

(4) Accrued interest on the Term Loan shall be due and payable and shall be made by the Borrower to the Administrative Agent in accordance with Section 2.7 hereof. Monthly interest payments on the Term Loan shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Term Loan. Upon maturity, the outstanding principal balance of the Term Loan shall be immediately due and payable, together with any remaining accrued interest thereon.

2.2 [Intentionally Omitted.].

2.3 [Intentionally Omitted.].

2.4 [Intentionally Omitted.]

2.5 The Borrower’s Loan Account . The Administrative Agent, on behalf of each Lender, shall maintain a loan account (the “ Loan Account ”) on its books for the Borrower in which shall be recorded (a) the Loan made by the Lenders (including Administrative Agent) to the Borrower pursuant to this Agreement, (b) all payments made by the Borrower on the Loan, and (c) all other appropriate debits and credits as provided in this Agreement, including, without limitation, all fees, charges, expenses and interest. All entries in the Loan Account shall be made in accordance with the Administrative Agent’s customary accounting practices as in effect from time to time. The Borrower promises to pay the amount reflected as owing by Borrower under its Loan Account and all of its other obligations hereunder as such amounts become due or are declared due pursuant to the terms of this Agreement. Notwithstanding the foregoing, the failure so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the Borrower’s obligations under this Agreement or under the Term Loan Note to repay the outstanding principal amount of the Loan together with all interest accruing thereon.

2.6 Statements . The Loan to the Borrower, and all other debits and credits provided for in this Agreement, shall be evidenced by entries made by the Administrative Agent in its internal data control systems showing the date, amount and reason for each such debit or

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credit. Until such time as the Administrative Agent shall have rendered to the Borrower Agent written statements of account as provided herein, the balance in the Loan Account, as set forth on the Administrative Agent’s most recent computer printout, shall be rebuttably presumptive evidence of the amounts due and owing the Lenders by the Borrower. From time to time the Administrative Agent shall render to the Borrower Agent a statement setting forth the balance of the Loan Account, including principal, interest, expenses and fees. Each such statement shall be subject to subsequent adjustment by the Administrative Agent but shall, absent manifest errors or omissions, be presumed correct and binding upon the Borrower.

2.7 Interest . (a) The Borrower agrees to jointly and severally pay to the Administrative Agent on behalf of the Lenders interest on the daily outstanding principal balance of the Term Loan at the Libor Rate; provided , however , that immediately following the occurrence and during the continuance of an Event of Default, and notwithstanding any other provisions of this Agreement to the contrary, the Borrower agrees to pay to the Administrative Agent on behalf of the Lenders interest on the outstanding principal balance of the Loan at the per annum rate of three percent (3%) plus the rate otherwise payable hereunder with respect to such Loan (the “ Default Rate ”).

(b) Accrued interest on each Libor Loan shall be payable on the last day of the Libor Interest Period relating to such Libor Loan and at maturity, commencing with the first such last day of the initial Libor Interest Period. If at any time applicable in accordance with Sections 3.2, 3.6 or 3.7 hereof, accrued interest on each Base Rate Loan shall be payable on the first calendar day of each month and at maturity. Notwithstanding the foregoing in this Section 2.7(b) , the first interest payment hereunder shall be due and payable on April 1, 2011. Monthly interest payments on the Loan shall be computed using the interest rate then in effect and based on the outstanding principal balance of the Loan. Upon maturity, the outstanding principal balance of the Loan shall be immediately due and payable, together with any remaining accrued interest thereon. Interest shall be computed on the basis of a year of three hundred sixty (360) days for the actual number of days elapsed (which results in more interest being paid than if computed on the basis of a 365-day year). If any payment of principal of, or interest on, the Term Loan Note falls due on a day that is not a Business Day, then such due date shall be extended to the next following Business Day, and additional interest shall accrue and be payable for the period of such extension.

2.8 Method for Making Payments . All payments that the Borrower is required to make to the Administrative Agent on behalf of the Lenders under this Agreement or under any of the other Financing Agreements shall be made in immediately available funds not later than 1:00 p.m. (Chicago time) on the date of payment at the Administrative Agent’s office at 120 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the Administrative Agent directs in writing from time to time, or, in the Administrative Agent’s sole and absolute discretion after the occurrence and during the continuance of any Default, by appropriate debits to the Loan Account. Borrower hereby irrevocably authorizes and instructs the Administrative Agent after the occurrence and during the continuance of any Default to direct debit any of Borrower’s operating accounts with Administrative Agent or any Lender for all principal, interest, fees and expenses due hereunder with respect to the Loan and the other Liabilities. Payments made after 1:00 p.m. (Chicago time) shall be deemed to have been made on the next succeeding Business Day. Administrative Agent shall promptly remit to each Lender its Pro

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Rata Share of all such payments received in collected funds by Administrative Agent for the account of such Lender; provided , however , all payments due by Borrower under Section 3 , as applicable, shall be made by Borrower directly to Lender entitled thereto without setoff, counterclaim or other defense.

2.9 Term of this Agreement . The Borrower shall have the right to terminate this Agreement following prepayment of all of the Liabilities as provided under Section 2.10 hereof; provided , however , that (a) all of the Administrative Agent’s and each Lender’s rights and remedies under this Agreement, and (b) the Liens created under Section 6.1 hereof and under any of the other Financing Agreements, shall survive such termination until all of the Liabilities under this Agreement and the other Financing Agreements have been indefeasibly paid in full in cash. In addition, the Liabilities may be accelerated as set forth in Section 11.2 hereof. Upon the effective date of termination, all of the Liabilities shall become immediately due and payable on a joint and several basis without notice or demand. Notwithstanding any termination, until all of the Liabilities hereunder shall have been indefeasibly paid and satisfied in full in cash, the Administrative Agent shall be entitled to retain its Liens (for the ratable benefit of the Lenders and the Administrative Agent) in and to all existing and future Collateral.

2.10 Optional Prepayment of Loan . The Borrower may, at its option, permanently prepay, at any time during the term of this Agreement the Loan or any portion thereof but in minimum amounts of no less than One Hundred Thousand Dollars ($100,000), subject to the following conditions: (i) not less than ten (10) days prior to the date upon which the Borrower desires to make any such prepayment, Borrower shall deliver to the Administrative Agent a written notice of its intention to prepay all or such portion of the Loan, which notice shall be revocable (provided, that any and all costs or expenses incurred or suffered by the Administrative Agent and the Lenders as a result of the revocation of notice by the Borrower shall be borne solely by the Borrower) and state the amount of the prepayment and the prepayment date, (ii) the Borrower shall pay (A) the Prepayment Premium (in view of the impracticality and extreme difficulty of ascertaining actual damages and by mutual agreement of the parties as to a reasonable calculation of each Lender’s lost profits as a result of such prepayment), (B) any amount due pursuant to Section 3.4 hereof, (C) any amounts due in connection with such prepayment under any Hedging Agreement, and (D) all liabilities, including any applicable swap or hedging breakage or termination fee, if any, in connection with any Hedging Agreement; provided , however , no Prepayment Premium shall be required or due in the event of a prepayment of the Loan or any portion thereof with the proceeds of a HUD Financing. Any such Prepayment Premium shall constitute a part of the Liabilities and be secured by the Collateral. Prepayments of the Loan shall be applied against installments payable under the Term Loan Notes in the inverse order of maturity. The parties agree that the Prepayment Premium is not a penalty. BORROWER HEREBY EXPRESSLY ACKNOWLEDGES THAT SUCH PREPAYMENT PREMIUM IS REASONABLE AND WILL FAIRLY COMPENSATE THE LENDERS FOR ANY COSTS AND CHARGES INCURRED BY LENDERS AS A RESULT OF THE PREPAYMENT OF ALL OR ANY PORTION OF THE LOAN. BORROWER ACKNOWLEDGES THAT THE INCLUSION OF THIS AGREEMENT TO PAY THE PREPAYMENT PREMIUM FOR THE RIGHT TO PREPAY ALL OR ANY PORTION OF THE LOAN WAS SEPARATELY NEGOTIATED WITH ADMINISTRATIVE AGENT AND LENDERS, THAT THE ECONOMIC VALUE OF THE VARIOUS ELEMENTS OF THIS AGREEMENT WERE DISCUSSED, THAT THE

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CONSIDERATION GIVEN BY BORROWER FOR THE LOAN WAS ADJUSTED TO REFLECT THE SPECIFIC AGREEMENT NEGOTIATED AMONG BORROWER, ADMINISTRATIVE AGENT AND LENDERS AND CONTAINED IN THIS SECTION.

2.12 [Intentionally Omitted.] .

2.13 Setoff . (a) Borrower agrees that the Administrative Agent and each Lender has all rights of setoff and banker’s liens provided by applicable law. The Borrower agrees that, if at any time (i) any amount owing by it under this Agreement or any Financing Agreement is then due and payable to the Administrative Agent or Lenders, or (ii) or an Event of Default shall have occurred and be continuing, then the Administrative Agent or Lenders, in their sole discretion, may set off against and apply to the payment of any and all Liabilities, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter with the Administrative Agent or such Lender.

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(d) If any Lender shall obtain any payment or other recovery (whether voluntary, involuntary, by application of offset or otherwise), on account of (a) principal of or interest on the Term Loan, but excluding (i) any payment pursuant to Section 3.8 or Section 12.15 and (ii) payments of interest on any Base Rate Loan that but for Sections 3.2, 3.6 and 3.7 would be a Libor Loan, or (b) other recoveries obtained by all Lenders on account of principal of and interest on the Loan (or such participation) then held by them, then such Lender shall purchase from the other Lenders such participations in the Loan held by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided that if all or any portion of the excess payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of such recovery.

2.14 Termination of Commitment . On the date on which the Commitment terminates pursuant to Section 11.2 hereof, the Loan and other Liabilities shall become immediately due and payable, without presentment, demand or notice of any kind.

2.15 [Intentionally Omitted.].

3. CHANGE IN CIRCUMSTANCES .

3.1 Yield Protection . If, after the date of this Agreement (for purposes of this Agreement, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all guidelines and regulations adopted in connection therewith are deemed to have been adopted after the date hereof), the adoption of any law or any governmental or quasi-governmental rule, regulation, policy, guideline or directive (whether or not having the force of law), or any change therein, or any change in the interpretation or administration thereof, or the compliance of any Lender therewith, or Regulation D of the Board of Governors of the Federal Reserve System,

(2) imposes, modifies, or increases or deems applicable any reserve, assessment, insurance charge, special deposit or similar requirement against assets of,

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deposits with or for the account of, or credit extended by, any Lender (other than reserves and assessments taken into account in determining the interest rate applicable to Libor Loans), or

(4) affects the amount of capital required or expected to be maintained by any Lender or any corporation controlling such Lender and such Lender determines the amount of capital required is increased by or based upon the existence of this Agreement or its obligation to make the Loan hereunder or of commitments of this type, then, within three (3) Business Days of demand by such Lender, the Borrower agrees to pay such Lender that portion of such increased expense incurred (including, in the case of clause (d), any reduction in the rate of return on capital to an amount below that which it could have achieved but for such law, rule, regulation, policy, guideline or directive and after taking into account such Lender’s policies as to capital adequacy) or reduction in an amount received which such Lender determines is attributable to making, funding and maintaining the Loan.

(1) pay directly to the relevant authority the full amount required to be so withheld or deducted;

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(2) promptly forward to the Administrative Agent an official receipt or other documentation satisfactory to the Administrative Agent evidencing such payment to such authority; and

To the extent permitted by applicable law, each Lender that is not a United States person within the meaning of Code Section 7701(a)(30) (a “ Non-U.S. Participant ”) shall deliver to Borrower and Administrative Agent on or prior to the Closing Date (or in the case of a Lender that is an Assignee, on the date of such assignment to such Lender) two accurate and complete original signed copies of IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable form prescribed by the IRS) certifying to such Lender’s entitlement to a complete exemption from United States withholding tax on interest payments to be made hereunder or on the Loan. If a Lender that is a Non-U.S. Participant is claiming a complete exemption from withholding on interest pursuant to Code Sections 871(h) or 881(c), such Lender shall deliver (along with two accurate and complete original signed copies of IRS Form W-8BEN) a certificate in form and substance reasonably acceptable to Administrative Agent (any such certificate, a “ Withholding Certificate ”). In addition, each Lender that is a Non-U.S. Participant agrees that from time to time after the Closing Date (or in the case of a Lender that is an Assignee, after the date of the assignment to such Lender), when a lapse in time (or change in circumstances occurs) renders the prior certificates hereunder obsolete or inaccurate in any material respect, such Lender shall, to the extent permitted under applicable law, deliver to Borrower and Administrative Agent two new and accurate and complete original signed copies of an IRS Form W-8BEN, W-8ECI, or W-8IMY (or any successor or other applicable forms prescribed by the IRS), and if applicable, a new Withholding Certificate, to confirm or establish the entitlement of such Lender or Administrative Agent to an exemption from United States withholding tax on interest payments to be made hereunder or on the Loan.

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backup withholding tax. Borrower shall not be required to pay additional amounts to a Lender, or indemnify any Lender, under this Section to the extent that such obligations would not have arisen but for the failure of such Lender to comply with this Section.

3.6 Basis for Determining Interest Rate Inadequate or Unfair . If with respect to any Libor Interest Period: (a) Administrative Agent reasonably determines (or Required Lenders advise Administrative Agent in writing), which determination shall be binding and conclusive on the Borrower, that by reason of circumstances affecting the interlender Libor Base market adequate and reasonable means do not exist for ascertaining the applicable Libor Base Rate; or (b) Administrative Agent reasonably determines (or Required Lenders advise Administrative Agent in writing) that the Libor Base Rate will not adequately and fairly reflect the cost to Lenders of maintaining or funding the Loan or any portion thereof for such Libor Interest Period, or that the making or funding of Libor Loans has become impracticable as a result of an event occurring after the date of this Agreement which in the opinion of Administrative Agent (or Required Lenders) adversely affects such Loan, then, in either case, so long as such circumstances shall continue: (i) Lenders shall not be under any obligation to make, maintain, convert into or continue Libor Loans and (ii) on the last day of the then current Libor Interest Period for each Libor Loan, each such Loan shall, unless then repaid in full, automatically convert to a Base Rate Loan. Each affected Lender shall promptly give the Borrower written notice of any determination made by it under this Section accompanied by a statement setting forth in reasonable detail the basis of such determination.

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3.9 Discretion of Lenders as to Manner of Funding . Notwithstanding any provision of this Agreement to the contrary, each Lender shall be entitled to fund and maintain its funding of its portion of the Loan in any manner it sees fit, it being understood, however, that for the purposes of this Agreement all determinations hereunder shall be made as if such Lender had actually funded and maintained each Libor Loan during each Libor Interest Period for such Loan through the purchase of deposits having a maturity corresponding to such Libor Interest Period and bearing an interest rate equal to the Libor Rate for such Libor Interest Period.

4. ATTORNEY-IN-FACT .

4.1 Appointment of the Administrative Agent as the Borrower’s Attorney-in-Fact . The Borrower hereby irrevocably designates, makes, constitutes and appoints the Administrative Agent (and all Persons designated by the Administrative Agent in writing to the Borrower) as the Borrower’s true and lawful attorney-in-fact, and authorizes the Administrative Agent, in the Borrower’s or the Administrative Agent’s name, after an Event of Default has occurred and is continuing to do the following: (a) at any time, (i) endorse the Borrower’s name upon any items of payment or proceeds thereof and deposit the same in the Administrative Agent’s account on account of the Borrower’s Liabilities, and (ii) do all other acts and things which are necessary, in the Administrative Agent’s reasonable discretion, to fulfill the Borrower’s obligations under this Agreement. The Borrower hereby ratifies and approves all acts under such power of attorney and neither Administrative Agent nor any other Person acting as Borrower’s attorney hereunder will be liable for any acts or omissions or for any error of judgment or mistake of fact or law made in good faith except as result of its gross negligence, willful misconduct or illegal activity. The appointment of Administrative Agent (and any of the Administrative Agent’s officers, employees or agents designated by the Administrative Agent) as Borrower’s attorney, and each and every one of Administrative Agent’s rights and powers, being coupled with an interest, are irrevocable until all of the Liabilities have been fully repaid and this Agreement shall have expired or been terminated in accordance with the terms hereunder.

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Without restricting the generality of the foregoing, after an Event of Default has occurred and is continuing, Borrower hereby appoints and constitutes the Administrative Agent its lawful attorney-in-fact with full power of substitution in the Property to advance funds in excess of the face amount of the Term Loan Note, to pay, settle or compromise all existing bills and claims, which may be liens or security interests, or to avoid such bills and claims becoming liens against the Collateral; to execute all applications and certificates in the name of Borrower prosecute and defend all actions or proceedings in connection with the Collateral (including any Leases pertaining to Property); and to do any and every act which the Borrower might do in its own behalf; it being understood and agreed that this power of attorney shall be a power coupled with an interest and cannot be revoked.

5. CONDITIONS OF LOAN .

5.1 Conditions to Loan . Notwithstanding any other term or provision contained in this Agreement, the Administrative Agent’s and Lenders’ obligation to make the Term Loan hereunder is subject to the satisfaction of each of the following conditions precedent:

(1) The Borrower’s Request. The Administrative Agent shall have received a borrowing notice from Borrower, signed by a Duly Authorized Officer of the Borrower, irrevocably electing the Loan to be made on the Closing Date. If at any time applicable, if at all, the Administrative Agent and Lenders shall have no liability to the Borrower or any other Person as a result of acting on any telephonic request that the Administrative Agent believes in good faith to have been made by any Person authorized by Borrower to make a borrowing request on behalf of Borrower. Promptly upon receipt of such borrowing request, Administrative Agent will advise each Lender thereof. Not later than 1:00 p.m. (Chicago time), on the date of the proposed borrowing of the Loan, each Lender shall provide Administrative Agent at the office specified by Administrative Agent with immediately available funds covering such Lender’s Pro Rata Share of such borrowing and, so long as Administrative Agent has not received written notice that the conditions precedent set forth in Section 5 with respect to such borrowing have not been satisfied, Administrative Agent shall pay over the funds received by Administrative Agent to Borrower on the requested borrowing date.

(2) No Default. Neither a Default nor an Event of Default shall have occurred or be in existence.

(3) Representations and Warranties. All of the representations and warranties contained in the Financing Agreements to which the Borrower is a party and in this Agreement (including, without limitation, those set forth in Section 7 hereof), are true and correct.

(4) Fees and Expenses. The Borrower shall have paid all fees owed to the Administrative Agent and Lenders and reimbursed Administrative Agent and the Lenders for all costs, disbursements, fees and expenses due and payable hereunder on or before the Closing Date, including, without limitation, all fees and costs identified in Section 12.2(a) hereof.

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(5) Documents. The Administrative Agent shall have received all of the following, each duly executed and delivered and dated the Closing Date, or such earlier date as shall be satisfactory to the Administrative Agent, each in form and substance reasonably satisfactory to the Administrative Agent in its sole determination:

(1) Financing Agreements . This Agreement, the Term Loan Notes, the Guaranty, the Pledge Agreement, the Mortgage, the Assignment of Rents and Leases, the Environmental Indemnity Agreement, the Subordination of Management Agreements, and such other Financing Agreements as the Administrative Agent may require (provided each Lender shall also receive a fully-executed original of this Agreement and such Lender’s respective Term Loan Note).

(2) Resolutions; Incumbency and Signatures . Copies of resolutions of the Board of Directors of the Borrower, and, if required, the shareholder of the Borrower, authorizing or ratifying the execution, delivery and performance by the Borrower of this Agreement, the Financing Agreements to which the Borrower is a party and any other document provided for herein or therein to be executed by Borrower, certified by a Duly Authorized Officer. A certificate of a Duly Authorized Officer certifying the names of the officers of the Borrower authorized to make a borrowing request and sign this Agreement and the Financing Agreements to which the Borrower is a party, together with a sample of the true signature of each such officer; the Lender may conclusively rely on each such certificate until formally advised by a like certificate of any changes therein. A copy of resolutions of the Board of Directors of Guarantor and Pledgor authorizing or ratifying the execution, delivery and performance by Guarantor and Pledgor, respectively, of the Guaranty and its Pledge Agreement.

(4) Opinions of Counsel . An opinion of Harwell Howard Hyne Gabbert & Manner, the legal counsel to the Borrower, Guarantor and Pledgor, and local counsel opinions in the jurisdictions where the Facilities are located with respect to the Mortgages, each in form and substance reasonably satisfactory to Administrative Agent.

(5) Certain Restricted Agreements Correct and complete copies of the fully executed Commercial Leases, Management Agreements, the nursing home licenses of each Borrower, and any other Restricted Agreement, together with all applicable amendments thereto.

(6) Financial Condition Certificate . A Financial Condition Certificate, in form and substance reasonably satisfactory to the Administrative Agent, signed on behalf of the Borrower by a Duly Authorized Officer of the Borrower.

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incorporation, certificate of formation or certificate of limited liability partnership, as applicable, of each Borrower, Pledgor and Guarantor, with any amendments to any of the foregoing, (ii) copies, certified as correct and complete by an authorized officer, member or partner of each Borrower, Pledgor and Guarantor, of all other documents necessary for performance of the obligations of Borrower, Pledgor and Guarantor under this Agreement and the other Financing Agreements, and (iii) certificates of good standing for each Borrower, Pledgor and Guarantor issued by the state of organization of each Borrower, Pledgor and Guarantor and by each state in which each Borrower and Guarantor is doing and currently intends to do business for which qualification is required (such certificates set forth in (i) through (iii), the “ Certificates ”).

(8) Revolving Loan Agreement and Affiliate Revolving Loan Financing Agreements . Fully-executed copies of the Revolving Loan Agreement and the Affiliate Revolving Loan Financing Agreements.

(9) UCC Financing Statements; Termination Statements; UCC Searches . UCC Financing Statements, as requested by the Administrative Agent, naming the Borrower as debtor and the Administrative Agent as secured party with respect to the Collateral, together with such UCC termination statements necessary to release all Liens (other than Permitted Liens) and other rights in favor of any Person in any of the Collateral except the Administrative Agent (for the ratable benefit of the Lenders and the Administrative Agent), and other documents as the Administrative Agent deems necessary or appropriate, shall have been filed in all jurisdictions that the Administrative Agent deems necessary or advisable. UCC Financing Statements, as requested by the Administrative Agent, naming the Pledgor as debtor and the Administrative Agent as secured party with respect to the Collateral (as defined in the Pledge Agreement), and other documents, if any, as the Administrative Agent deems necessary or appropriate, shall have been filed in all jurisdictions that the Administrative Agent deems necessary or advisable. UCC tax, lien, pending suit and judgment searches for the Borrower, the Pledgor and the Guarantor (including, for each, any assumed name or trade name) and each dated a date reasonably near to the Closing Date in all jurisdictions deemed necessary by the Administrative Agent, the results of which shall be satisfactory to the Administrative Agent in its sole and absolute determination.

(11) Pay Off Letter . Pay Off Letter from Capmark, in form and substance reasonably satisfactory to Administrative Agent.

(12) Certificate of Occupancy . To the extent available, a true and complete copy of each certificate of occupancy with respect to the Facilities, respectively.

(13) Environmental Assessments . A Phase I environmental report of the Property prepared by an environmental audit firm reasonably acceptable to the Administrative Agent, the results of which shall be satisfactory to the Administrative Agent in its sole and absolute determination; provided Administrative Agent acknowledges receipt of such item.

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(14) Title Insurance . A title insurance policy in the form of ALTA Form Mortgagee Title Insurance Policy shall be issued by an insurer (reasonably acceptable to the Administrative Agent) in favor of the Administrative Agent for the Property. Each title insurance policy shall contain such endorsements as deemed appropriate by the Administrative Agent that are available in the applicable State. Copies of all documents of record concerning the Property as identified on the commitment for the ALTA Policy referred to above.

(15) Survey . An ALTA plat of survey shall be prepared on the Property (certified to the 2005 ALTA standards).

(16) Appraisal . An Appraisal prepared by an independent appraiser of the Property, which appraisal shall satisfy the requirements of the FIRREA, if applicable, and shall evidence compliance with the supervisory loan-to-value limits set forth in the Federal Deposit Insurance Corporation Improvement Act of 1991 (including a loan-to-value ratio on a “stabilized value” not to exceed 75%). Such appraisal (and the results thereof) shall be satisfactory to the Administrative Agent in its sole and absolute determination.

(17) Flood Insurance . A flood insurance policy, if applicable, concerning the Property, reasonably satisfactory to the Administrative Agent, if required by the Flood Disaster Protection Act of 1973.

(18) Property Condition Report . Property Condition Reports for each parcel of Property, the form, substance and results of which shall be satisfactory to the Administrative Agent in its sole and absolute determination.

(19) Capmark Terminations . Written evidence, satisfactory to the Administrative Agent, of the terminations of that certain Capmark Intercreditor Agreement and that certain Capmark Blocked Account Agreement (each as defined in the “Original Loan Agreement, “ as such term is defined in the Revolving Loan Agreement), including a signed copy of that certain Termination of Intercreditor and Blocked Account Agreements (Capmark Facilities).

(20) Other . The Administrative Agent shall have received, in form and substance reasonably satisfactory to the Administrative Agent, all certificates, orders, authorities, consents, affidavits, schedules, instruments, agreements, financing statements, and other documents which are provided for hereunder or under or in connection with any Financing Agreement, which the Administrative Agent may reasonably request on or prior to the Closing Date.

(6) Field Examinations. At the Administrative Agent’s sole option, the Administrative Agent shall have completed its field examinations of the Borrower’s books and records, assets, and operations which examinations will be satisfactory to the Administrative Agent in its sole and absolute discretion.

(7) Certificate. The Administrative Agent shall have received a certificate signed on behalf of the Borrower by a Duly Authorized Officer and dated the Closing Date certifying satisfaction of the conditions specified in this Section 5.

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(8) Closing Fee. The Borrower shall have paid the Administrative Agent the Closing Fee.

(9) Proposal Letter. The Borrower shall have delivered, performed and satisfied, in the sole discretion of the Administrative Agent, any other items set forth in that certain proposal letter dated November 10, 2010, accepted by Guarantor on behalf of Borrower and made in favor of the Administrative Agent.

(10) Bank Meetings. Borrower’s senior management shall have made themselves and Borrower’s facilities reasonably available (through scheduled bank meetings, company visits, or other venues) to Administrative Agent and Lenders and their representatives.

(11) Revolving Loan Agreement. Satisfaction of each of the conditions precedent contained in the Revolving Loan Agreement, as determined by the Administrative Agent.

6. COLLATERAL.

6.1 Security Interest . As security for the prompt and complete payment and performance of all of the Liabilities and the Affiliate Revolving Loan Liabilities when due or declared due, each Borrower hereby grants, pledges, conveys and transfers to the Administrative Agent (for the ratable benefit of the Lenders and Administrative Agent) a continuing security interest in and to all of such Borrower’s right, title and interest in and to the following property and interests in property, whether now owned or existing or hereafter owned, arising or acquired, and wheresoever located (collectively, the “ Collateral ”): (a) all of Borrower’s accounts receivable, including, without limitation, Accounts and Health-Care-Insurance Receivables (each as defined in the Code), (b) all of the Borrower’s General Intangibles, including, without limitation, General Intangibles related to accounts receivable and money; (c) all of Borrower’s Deposit Accounts and other deposit accounts (general or special) with, and credits and other claims against, the Administrative Agent or any Lender, or any other financial institution with which the Borrower maintains deposits; (d) all of the Borrower’s contracts, licenses, chattel paper, instruments, notes, letters of credit, contract rights, bills of lading, warehouse receipts, shipping documents, contracts, tax refunds, documents and documents of title, and all of the Borrower’s Tangible Chattel Paper, Documents, Electronic Chattel Paper, Letter-of-Credit Rights, letters of credit, Software, Supporting Obligations, Payment Intangibles, and Goods (each as defined in the Code); (e) all of the Borrower’s Inventory and Equipment and motor vehicles and trucks; (f) all of the Borrower’s monies, and any and all other property and interests in property of the Borrower, including, without limitation, Investment Property, Instruments, Security Entitlements, Uncertificated Securities, Certificated Securities, Chattel Paper, and Financial Assets (each as defined in the Code), now or hereafter coming into the actual possession, custody or control of the Administrative Agent, any Lender or any agent or Affiliate thereof in any way or for any purpose (whether for safekeeping, deposit, custody, pledge, transmission, collection or otherwise), and, independent of and in addition to the Administrative Agent’s and each Lender’s rights of setoff (which the Borrower acknowledges), the balance of

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any account or any amount that may be owing from time to time by Administrative Agent or any Lender to the Borrower; (g) all insurance proceeds of or relating to any of the foregoing property and interests in property, and any key man life insurance policy covering the life of any officer or employee of Borrower; (h) all proceeds and profits derived from the operation of the Borrower’s business; (i) all of the Borrower’s books and records, computer printouts, manuals and correspondence relating to any of the foregoing and to the Borrower’s business; and (j) all accessions, improvements and additions to, substitutions for, and replacements, products, profits and proceeds of any of the foregoing.

The Administrative Agent acknowledges that it will not have control over or right of setoff against the Deposit Accounts into which any Government Accounts (as defined in the Revolving Loan Agreement) of Borrower are directly paid to the extent such control or right of setoff is or would be prohibited by applicable Healthcare Laws, provided, however, that as soon as any such prohibition or restriction lapses or is legally removed the Borrower shall immediately take such all actions as are reasonably necessary to provide the Administrative Agent with control over and/or the right of setoff against such Deposit Accounts (at Borrower’s cost).

6.3 Loss of Value of Collateral . The Borrower agrees to immediately notify the Administrative Agent of any material loss or depreciation in the value of the Collateral or any portion thereof.

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required) by the Administrative Agent on behalf of the Borrower and may be filed at any time with or without signature and in any jurisdiction as reasonably determined by the Administrative Agent. The Administrative Agent agrees to use its reasonable efforts to notify the Borrower of the Administrative Agent taking any such action provided in this Section; provided , however , the Borrower agrees that the failure of the Administrative Agent to so notify the Borrower for any reason shall not in any way invalidate the actions taken by the Administrative Agent pursuant to this Section.

6.6 All Loans One Obligation . All Liabilities of the Borrowers under this Agreement and each of the Financing Agreements, and all of the Affiliate Revolving Loan Liabilities under the Revolving Loan Agreement and each of the Affiliate Revolving Loan Financing Agreements, are cross-collateralized and cross-defaulted. Payment of all sums and indebtedness to be paid by Borrower to Lenders and Administrative Agent under this Agreement shall be secured by, among other things, the Financing Agreements. All loans or advances made to Borrower under this Agreement shall constitute one Loan, and all of Borrower’s Liabilities and other liabilities of Borrower to Lenders and Administrative Agent shall constitute one general obligation secured by Administrative Agent’s Lien on all of the Collateral of Borrower and by all other liens heretofore, now, or at any time or times granted to Lender to secure the Loan (for the ratable benefit of the Lenders and the Administrative Agent). Borrower agrees that all of the rights of Administrative Agent and Lenders set forth in this Agreement shall apply to any amendment, restatement or modification of, or supplement to, this Agreement, any supplements or exhibits hereto and the Financing Agreements, unless otherwise agreed in writing by the Administrative Agent or Required Lenders.

6.8 HUD Financing; Prepayment and Release . Notwithstanding the provisions of Section 6.6 , upon any one or more of the Borrowers obtaining HUD Financing for their respective Facility or Facilities, Administrative Agent will fully release and discharge the

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lien and security interest granted to Administrative Agent to secure the Loan (for the ratable benefit of the Lenders and the Administrative Agent) under this Agreement and the Financing Agreements on the specific Collateral of such Borrower or Borrowers (the “ Released Collateral ”), and will fully release and discharge such Borrower or Borrowers (the “ Released Borrowers ”) from their obligations under this Agreement and any Financing Agreement, including the Term Loan Note (except for contingent indemnification obligations that survive by their terms herein), provided that and conditioned upon satisfaction of each of the foregoing, in the sole determination of the Administrative Agent:

(1) Administrative Agent shall receive written notice within thirty (30) days of such Borrower or Borrowers decision to seek and obtain such HUD Financing;

(2) Both before and after giving effect to the HUD Financing, no Default or Event of Default shall have occurred and be continuing (including, without limitation, any breach of any financial ratio covenant set forth in Section 9.12 );

(3) [Intentionally Omitted];

(4) The release documents are reasonably acceptable to Administrative Agent and customary for recording the release of liens and security interests in the applicable Collateral in the jurisdictions where the liens and security in the Released Collateral are filed or recorded. Borrower shall be responsible for the cost and expense of preparing and recording the applicable release documents;

(5) All reasonably requested instruments, documents and agreements by the Administrative Agent and Lenders in connection with such HUD Financing are duly executed and delivered by Borrower and any Affiliate thereof (including amendments to this Agreement and the other Financing Agreements); and

(6) The Released Borrowers shall, substantially simultaneously with (and in any event not later than the first (1 ^st ) Business Day following the receipt of the net cash proceeds from the insurance or incurrence of the HUD Financing), apply and pay in immediately available funds without setoff or deduction of any kind an amount equal to one hundred percent (100%) of such net cash proceeds to prepay the outstanding Term Loan amount in accordance with Section 2.10 and any other related then due and owing Liabilities of the Released Borrowers. As used in this Section, “ Net cash proceeds ” shall mean the cash proceeds of the HUD Financing net of all taxes and customary and reasonable fees, commissions, costs and other expenses actually incurred in connection therewith.

Notwithstanding the release and discharge of the Released Borrowers and the Released Collateral as provided in this Section 6.8 , this Agreement, the other Financing Agreements and the Lien of the Administrative Agent on the Collateral (and any other Lien provided by the other Financing Agreements, including pursuant to the applicable Mortgages), shall remain and continue in full force and effect as to the Borrowers other than the Released Borrowers and the Collateral (and other assets and property subject to the other Financing Agreements) other than the Released Collateral.

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7. REPRESENTATIONS AND WARRANTIES.

7.1 Existence . The Borrower is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the state of its incorporation or formation. The Borrower is duly (a) qualified and in good standing as a foreign corporation or foreign limited liability company and (b) authorized to do business in each jurisdiction where such qualification is required because of the nature of its activities or properties. The Borrower has all requisite power to carry on its business as now being conducted and as proposed to be conducted. Pledgor legally and beneficially owns or controls, either directly or indirectly through its subsidiaries, all of the issued and outstanding capital Stock of the Borrower.

7.2 Corporate Authority . The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which Borrower is a party and the performance of its obligations hereunder and thereunder: (i) are within its powers; (ii) are duly authorized by the board of directors, manger or members of the Borrower, each as applicable, and, if applicable, Pledgor; and (iii) are not in contravention of the terms of its operating agreement, bylaws, or of an indenture, agreement or undertaking to which it is a party or by which it or any of its property is bound. The execution and delivery by the Borrower of this Agreement and all of the other Financing Agreements to which it is a party and the performance of its obligations hereunder and thereunder: (i) do not require any governmental consent, registration or approval; (ii) do not contravene any contractual or governmental restriction binding upon it; and (iii) will not, except in favor of Administrative Agent, result in the imposition of any Lien upon any property of Borrower under any existing indenture, mortgage, deed of trust, loan or credit agreement or other material agreement or instrument to which it is a party or by which it or any of its property may be bound or affected.

7.4 Financial Data.

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not restated for subsequent events, (e) may not contain a statement of construction in process, and (f) may not fully reflect the following liabilities: (i) vacation, holiday and similar accruals, (ii) liabilities payable in connection with workers’ compensation claims, (iii) liabilities payable to any employee welfare benefit plan (within the meaning of Section 3(1) of ERISA) maintained by Borrower or its affiliates on account of Borrower’s employees, (iv) federal, state and local income or franchise taxes and (v) bonuses payable to certain employees (collectively, the “GAAP Exceptions”).

(2) Since December 31, 2009, there has been no Material Adverse Change with respect to Borrower.

7.10 Loans . Except as otherwise permitted by Section 9.2 hereof, the Borrower is not obligated on any loans or other Indebtedness.

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7.11 Margin Securities . The Borrower does not own any margin securities and the Loan advanced hereunder will not be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any Indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System.

7.13 Litigation and Proceedings . As of the Closing Date, no judgments are outstanding against the Borrower that could be an Event of Default under clause (e) of Section 11.1 , nor is there as of such date pending, or to the best of Borrower’s knowledge, threatened, except, as of the Closing Date, as shown on Schedule 7.13 , any (i) litigation, suit, action or contested claim (other than a personal injury tort claim), or federal, state or municipal governmental proceeding, by or against the Borrower or any of its Property which if adversely determined could have a Material Adverse Effect, or (ii) any tort claim for personal injury, including death, against the Borrower as to which (a) litigation has been instituted and is pending or (b) or a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2009.

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7.17 Environmental Matters . The Borrower has not Managed Hazardous Substances on or off its Property other than in compliance with applicable Environmental Laws, except to the extent any such non-compliance could reasonably be expected to not result in a Material Adverse Effect. Except as set forth on Schedule 7.17 hereto, the Borrower has complied in all material respects with applicable Environmental Laws regarding transfer, construction on and operation of its business and Property, including, but not limited to, notifying authorities, observing restrictions on use, transferring, modifying or obtaining permits, licenses, approvals and registrations, making required notices, certifications and submissions, complying with financial liability requirements, and, except where not required to do so pursuant to any Commercial Lease, Managing Hazardous Substances and Responding to the presence or Release of Hazardous Substances connected with operation of its business or Property. The Borrower does not have any contingent liability with respect to the Management of any Hazardous Substance that could reasonably be expected to result in a Material Adverse Effect. As of the Closing Date, the Borrower has not received any Environmental Notice that could reasonably be expected to result in a Material Adverse Effect.

7.18 Disclosure . As of the Closing Date, none of the representations or warranties made by the Borrower herein or in any Financing Agreement to which the Borrower is a party and no other written information provided or statements made by the Borrower or its representatives to the Administrative Agent or Lenders contains any untrue statement of a material fact or omits to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. As of the Closing Date, the Borrower has disclosed to the Administrative Agent and Lenders all facts of which the Borrower has knowledge which might result in a Material Adverse Effect either prior or subsequent to the consummation of the transactions contemplated hereby or which, to Borrower’s knowledge, at any time hereafter might reasonably be expected to result in a Material Adverse Effect.

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not instituted any proceedings, and there exists no event or condition caused by the Borrower which would reasonably be expected to constitute grounds for the institution of proceedings by PBGC, to terminate any Plan or Multiemployer Plan under Section 4042 of ERISA which could have a Material Adverse Effect.

7.20 Perfected Security Interests . The Lien in favor of the Administrative Agent provided pursuant to Section 6.1 hereof is a valid and perfected first priority security interest in the Collateral (subject only to the Permitted Liens), and all filings and other actions necessary to perfect such Lien have been or will be duly taken.

7.21 [Intentionally Omitted.] .

7.22 Broker’s Fees . The Borrower does not have any obligation to any Person in respect of any finder’s, brokers or similar fee in connection with the Loan or this Agreement.

7.24 [Intentionally Omitted.] .

7.25 [Intentionally Omitted.] .

7.27 Medicaid/Medicare . Neither the Borrower nor any Affiliate of the Borrower nor any current officer or director of the foregoing has engaged in any of the following: (i) knowingly and willfully making or causing to be made a false statement or representation of a material fact in any application for any benefit or payment under Medicare or Medicaid; (ii) knowingly and willfully making or causing to be made any false statement or

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representation of a material fact for use in determining rights to any benefit or payment under Medicare or Medicaid; (iii) failing to disclose knowledge by a claimant of the occurrence of any event affecting the initial or continued right to any benefit or payment under Medicare or Medicaid on its own behalf or on behalf of another, with intent to secure such benefit or payment fraudulently; or (iv) knowingly and willfully soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind or offering to pay such remuneration: (A) in return for referring any individual to a Person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare or Medicaid; or (B) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service or item for which payment may be made in whole in part by Medicare or Medicaid.

7.28 Consideration . Borrower acknowledges that it desires to have this Agreement and the Financing Agreements to which the Borrower is a party cross-collateralized and cross-defaulted and have the Collateral serve as collateral for all of the Liabilities and Affiliate Revolving Loan Liabilities. The Affiliated Revolving Borrowers and the Borrowers are Affiliates of each other. Each Borrower will derive substantial direct and indirect benefit (financial and otherwise) from funds made available to the Affiliated Revolving Borrowers pursuant to this Agreement, and it is and will be to each Borrower’s and Affiliated Revolving Borrower’s advantage to assist each other in procuring such funds from the Lenders.

7.30 Absence of Foreign or Enemy Status . Neither the Borrower nor any Affiliate of the Borrower is an “enemy” or an “ally of the enemy” within the meaning of Section 2 of the Trading with the Enemy Act (50 U.S.C. App. §§ 1 et seq. ), as amended. Neither the Borrower nor any Affiliate of the Borrower is in violation of, nor will the use of the Loan violate, the Trading with the Enemy Act, as amended, or any executive orders, proclamations or regulations issued pursuant thereto, including, without limitation, regulations administered by the Office of Foreign Asset Control of the Department of the Treasury (31 C.F.R. Subtitle B, Chapter V).

7.31 [Intentionally Omitted.] .

7.32 Labor Matters . There are no strikes or other labor disputes pending or, to the knowledge of Borrower, threatened against Borrower. All payments due from the Borrower on account of wages and employee and retiree health and welfare insurance and other benefits have been paid or accrued as a liability on its books.

7.33 Capitalization . The authorized Stock of each Borrower, as of the Closing Date, is set forth on Schedule 7.33 hereto. Pledgor legally and beneficially owns all of the issued

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and outstanding Stock of each Borrower. All issued and outstanding Stock of the Borrower is duly authorized and validly issued, fully paid, non-assessable, free and clear of all Liens or pledges other than Permitted Liens, and such Stock was issued in compliance with all applicable state, federal and foreign laws concerning the issuance of securities. No shares of the Stock of Borrower, other than those owned by Pledgor are issued and outstanding. There are no preemptive or other outstanding rights, options, warrants, conversion rights or similar agreements or understandings for the purchase or acquisition from Borrower of any equity securities of Borrower.

7.35 OFAC . Neither the Borrower, nor Guarantor, nor any beneficial owner of the Borrower or Guarantor, is currently listed on the OFAC Lists.

7.36 Commercial Leases . As of the Closing Date, there are no Commercial Leases as to which a Borrower is the lessee and no Operating Leases between Borrower and any Operators of the Facilities. As of the Closing Date, each Borrower is the Operator of the Facility owned by such Borrower.

8. AFFIRMATIVE COVENANTS.

8.1 Reports, Certificates and Other Information . The Borrower Agent shall deliver to the Administrative Agent and each Lender:

(1) Financial Statements.

(2) On or before the one hundred twentieth (120th) day after each of Guarantor’s Fiscal Years, a copy of the annual financial statements on a consolidated basis for Guarantor, duly certified and audited by independent certified public accountants of nationally recognized standing selected by the Borrower, together with the supporting consolidating statements for each Borrower, consisting of, at least, balance sheets and statements of income and cash flow for such period, prepared in conformity with GAAP. In lieu of its obligations hereunder, Guarantor may submit to Administrative Agent and Lenders, upon its filing thereof, a copy of its form 10-K as filed with the United States Security and Exchange Commission.

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(3) On or before the forty-fifth (45th) day of the end of each of Guarantor’s first, second and third Fiscal Quarters, a copy of internally prepared quarterly financial statements for Borrower prepared in accordance with GAAP and in a manner substantially consistent with the financial statements referred to in Section 8.1(a)(1) hereof (subject, however, to the GAAP Exceptions), signed on behalf of the Borrower by a Duly Authorized Officer and consisting of, at least, an income statement, a balance sheet, and statement of cash flow as at the close of such Fiscal Quarter and statements of earnings for such Fiscal Quarter and for the period from the beginning of such Fiscal Year to the close of such Fiscal Quarter.

(4) On or before (i) the forty-fifth (45 ^th ) day after the end of each calendar month ending the Borrower’s first, second and third Fiscal Quarters, (ii) the seventy-fifth (75 ^th ) day after the end of the calendar month ending the Borrower’s final Fiscal Quarter, and (iii) the thirtieth (30th) day after the end of each calendar month, a copy of internally prepared financial statements for Borrower prepared in accordance with GAAP and in a manner substantially consistent with the financial statements referred to in Section 8.1(a)(1) hereof, signed on behalf of the Borrower by a Duly Authorized Officer and consisting of, at least, an income statement and a balance sheet, as at the close of such calendar month and statements of earnings for such calendar month and for the period from the beginning of such Fiscal Year to the close of such calendar month.

(5) [Intentionally Omitted.]

(6) Compliance Certificates. Contemporaneously with the furnishing of each quarterly financial statements, a duly completed compliance certificate with appropriate insertions, in form and substance satisfactory to the Administrative Agent (a “Compliance Certificate”), dated the date of such annual financial statement or such calendar month and signed on behalf of the Borrower by a Duly Authorized Officer, which Compliance Certificate shall state that no Default or Event of Default has occurred and is continuing, or, if there is any such event, describes it and the steps, if any, being taken to cure it. Each Compliance Certificate shall contain a computation of, and show compliance with, each of the financial ratios and restrictions set forth in Section 9.12 hereof (each such computation and calculation to be in form and substance acceptable to the Administrative Agent).

(7) Real Estate Taxes. As paid, evidence of timely payment of real estate taxes owed on the Property.

(8) Notice of Default, Regulatory Matters, Litigation Matters or Adverse Change in Business. Forthwith upon learning of the occurrence of any of the following, written notice thereof which describes the same and the steps being taken by the Borrower with respect thereto: (i) the occurrence of a Default or an Event of Default; (ii) the institution or threatened institution of, or any adverse determination in, any litigation (other than a personal injury tort claim), arbitration proceeding or governmental proceeding in which any injunctive relief or money damages is sought which if adversely determined could have a Material Adverse Effect; (iii) the receipt of any notice from any governmental agency concerning any violation or potential violation of any regulations, rules or laws applicable to Borrower which could have a Material Adverse Effect; or (iv) any Material Adverse Change.

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With regard to personal injury tort claims, upon request by Administrative Agent, Borrower shall review with Administrative Agent the occurrence of any personal injury or other action which could reasonably give rise to a personal injury tort claim against the Borrower as to which (i) litigation has been instituted and is pending or (ii) a request for medical records has been made upon Borrower by an attorney for the claimant on or after January 1, 2009.

(9) Insurance Reports. (i) At any time after a Default and upon the request of the Administrative Agent, a certificate signed by a Duly Authorized Officer that summarizes the property, casualty, liability and malpractice insurance policies carried by the Borrower, and (ii) written notification of any material change in any such insurance by the Borrower within five (5) Business Days after receipt of any notice (whether formal or informal) of such change by any of its insurers.

(10) [Intentionally Omitted.]

(11) Affiliate Transactions. Upon the Administrative Agent’s reasonable request from time to time, a reasonably detailed description of each of the material transactions between the Borrower and any of its Affiliates during the time period reasonably requested by the Administrative Agent, which shall include, without limitation, the amount of money either paid or received, as applicable, by the Borrower in such transactions.

(12) [Intentionally Omitted.]

(13) Interim Reports. Promptly upon receipt thereof, copies of any reports submitted to Guarantor or Borrower by the independent accountants in connection with any interim audit of the books of any such Person and copies of each management control letter provided to Guarantor or Borrower by independent accountants.

(14) Reports to the SEC. Upon the Administrative Agent’s reasonable request from time to time, copies of any and all regular, annual, periodic or special reports of Guarantor, any Borrower or any Affiliate thereof filed with the Securities and Exchange Commission (“SEC”); copies of any and all registration statements of Guarantor, any Borrower or any Affiliate thereof filed with the SEC; and copies of any and all proxy statements or other written communications made to security holders generally.

(15) Other Information. Such other information, certificates, schedules, exhibits or documents (financial or otherwise) concerning the Borrower and its operations, business, properties, condition or otherwise as the Administrative Agent or any Lender may reasonably request from time to time.

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medical records and other records to the extent confidential or where such examination is prohibited under applicable Laws, including without limitation HIPPA), to conduct a collateral audit and analysis of their respective Inventory and Accounts and to discuss their respective affairs, finances and accounts with their respective officers, employees and independent public accountants as often as may reasonably be desired. In the absence of an Event of Default, the Administrative Agent shall give the Borrower commercially reasonable prior written notice of such exercise. No notice shall be required during the existence and continuance of any Event of Default.

8.3 Conduct of Business . The Borrower shall maintain its corporate existence, shall maintain in full force and effect all licenses, permits, authorizations, bonds, franchises, leases, patents, trademarks and other Intellectual Property, contracts and other rights necessary to the conduct of its business, shall continue in, and limit its operations to, the same general line of business as that currently conducted and shall comply with all applicable laws (including, without limitation, Healthcare Laws), orders, regulations and ordinances of all federal, foreign, state and local governmental authorities, except to the extent any such non-compliance could reasonably be expected to result in a Material Adverse Effect. The Borrower shall keep proper books of record and account in which full and true entries will be made of all dealings or transactions of or in relation to the business and affairs of the Borrower, in accordance with GAAP (subject, however, to the GAAP Exceptions), consistently applied.

8.5 State of Incorporation or Formation . The Borrower’s state of incorporation or formation, as applicable, set forth on Schedule 1 hereto shall remain the Borrower’s state of incorporation or formation, as applicable, unless: (a) the Borrower provides the Administrative Agent with at least thirty (30) days prior written notice of any proposed change, (b) no Event of Default then exists or will exist immediately after such proposed change, and (c) the Borrower provides the Administrative Agent with, at Borrower’s sole cost and expense, such financing statements, and such other agreements and documents as the Administrative Agent shall reasonably request in connection therewith.

8.6 Liability Insurance . The Borrower shall maintain, at its expense, general liability and environmental insurance through commercial insurance in such amounts and with such deductibles consistent with its past practices, and shall deliver to the Administrative Agent the original (or a certified) copy of each policy of insurance and evidence of the payment of all

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premiums therefor. Such policies of insurance shall contain an endorsement showing the Administrative Agent as additional insured thereunder. Administrative Agent acknowledges that general liability insurance coverage is currently unavailable generally in the nursing home industry at commercially affordable rates. Borrower has in place and will maintain either (i) so long it is available at commercially affordable rates, for the States of Texas, Alabama, Florida and Ohio, indemnity insurance with coverage limits of One Million Dollars ($1,000,000.00) per medical incident, subject to a deductible of Four Hundred Ninety-Five Thousand Dollars ($495,000.00) per claim, with a total annual aggregate policy limit of Fifteen Million Dollars ($15,000,000.00) and a sublimit per Facility of Three Million Dollars ($3,000,000.00) or (ii) general liability and malpractice insurance with single limit coverage of Two Hundred Fifty Thousand and No/100 Dollars ($250,000.00) per occurrence and Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) cumulative. Administrative Agent agrees that until such time as insurance coverage is generally available in the nursing home industry at commercially affordable rates, Administrative Agent agrees to accept Borrower’s current coverage. Borrower shall provide Administrative Agent, (a) on an annual basis, information from its insurance representative, insurance carrier or from comparable insurance carriers regarding availability of insurance and (b) with respect to the insurance policies contemplated by this Section 8.6 and those certain insurance policies contemplated by Section 8.7 below, prompt (but in any event, within five (5) Business Days of any such occurrence) written notice of any alteration or cancellation of such insurance policy.

8.7 Property and Other Insurance . The Borrower shall, at its expense, keep and maintain its assets material to the Business of Borrower insured against (i) loss or damage by fire, theft, explosion, flood, earthquake, spoilage and all other hazards and risks and (ii) business interruption, in such amounts with such deductibles (which may include self-insurance trusts) ordinarily insured against by other owners or users of such properties in similar businesses of comparable size operating in the same or similar locations. Borrower, at Borrower’s expense, shall keep and maintain workers compensation insurance as may be required by applicable Laws. The Borrower Agent shall deliver to the Administrative Agent the original (or a certified) copy of each policy of insurance and evidence of payment of all premiums therefor. All such policies of insurance shall be in form and substance reasonably satisfactory to the Administrative Agent. Such policies of insurance shall contain an endorsement, in form and substance satisfactory to the Administrative Agent, showing the Administrative Agent as “Lender’s Loss Payee” and all loss payable to the Administrative Agent (for the ratable benefit of the Lenders), as its interests may appear, as provided in this Section. Such endorsement shall provide that such insurance company will give the Administrative Agent at least thirty (30) days prior written notice before any such policy or policies of insurance shall be altered or canceled and that no act or default of the Borrower or any other Person shall affect the right of the Administrative Agent to recover under such policy or policies of insurance in case of loss or damage. The Borrower hereby directs all insurers under such policies of insurance to pay all proceeds of insurance policies directly to the Administrative Agent and the Administrative Agent shall absent an Event of Default permit the Borrower to use such proceeds to restore or rebuild the damaged property as the Borrower shall determine in its reasonable and good faith determination.

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Borrower’s true and lawful attorney-in-fact for the purpose, subject at all times to the terms and conditions of the Commercial Leases (if and as applicable), of making, settling and adjusting claims on behalf of the Borrower under all such policies of insurance, endorsing the name of the Borrower on any check, draft, instrument or other item of payment received by the Borrower or the Administrative Agent pursuant to any such policies of insurance, and for making all determinations and decisions of Borrower with respect to such policies of insurance.

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applicable Environmental Laws to Respond to the on-site or off-site Release of Hazardous Substances connected with operation of its business or Property.

8.9 Banking Relationship . Except as otherwise provided in the Revolving Loan Agreement: The Borrower and the Guarantor shall at all times maintain all of their respective primary deposit and operating accounts with the Administrative Agent and the Administrative Agent will act as the principal depository and remittance agent for the Borrower and Guarantor. The Borrower agrees to pay to the Administrative Agent reasonable and customary fees for banking services/cash management services of Borrower and Guarantor (the “ Service Fee ”). The Administrative Agent shall be and hereby is authorized to charge any deposit or operating account of the Borrower in respect of the Service Fee.

8.10 Intellectual Property . If after the Closing Date the Borrower shall own or otherwise possess any registered patents, copyrights, trademarks, trade names, or service marks other than those owned by Guarantor or any derivation thereof (or file an application to attempt to register any of the foregoing), the Borrower shall promptly notify the Administrative Agent in writing of same and execute and deliver any documents or instruments (at the Borrower’s sole cost and expense) reasonably required by Administrative Agent to perfect a security interest in and lien on any such federally registered Intellectual Property in favor of the Administrative Agent and assist in the filing of such documents or instruments with the United States Patent and Trademark Office and/or United States Copyright Office or other applicable registrar.

8.12 Health Care Related Matters . To the extent applicable, the Borrower shall cause all licenses, permits, certificates of need, reimbursement contracts and programs, and any other agreements necessary for the use and operation of its business or as may be necessary for participation in Medicaid and other applicable reimbursement programs, to remain in full force and effect, except to the extent that the failure to do so would not cause a Material Adverse Effect or a material adverse effect on the prospects of the Borrowers on a consolidated basis.

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8.13 US Patriot Act . Borrower covenants to Administrative Agent and Lenders that if Borrower becomes aware that it or any of its Affiliates is identified on any Blocked Persons List (as identified in Section 7.29 hereof), Borrower shall immediately notify Administrative Agent and Lenders in writing of such information. Borrower further agrees that in the event any of them or any Affiliate is at any time identified on any Blocked Persons List, such event shall be an Event of Default, and shall entitle Administrative Agent and Lenders to exercise any and all remedies provided in any Financing Agreements or otherwise permitted by Law. In addition, Administrative Agent and Lenders may immediately contact the Office of Foreign Assets Control and any other government agency Administrative Agent or Lenders deem appropriate in order to comply with its respective obligations under any Law regulating or relating to terrorism and international money laundering.

8.14 [Intentionally Omitted.] .

8.15 Further Assurances . The Borrower shall, at its own cost and expense, cause to be promptly and duly taken, executed, acknowledged and delivered all such further acts, documents and assurances as may from time to time be necessary or as the Administrative Agent or any Lender may from time to time reasonably request in order to carry out the intent and purposes of this Agreement and the other Financing Agreements and the transactions contemplated hereby and thereby, including, all such actions to establish, create, preserve, protect and perfect a first-priority Lien in favor of the Administrative Agent (for the ratable benefit of Lenders and Administrative Agent) on the Collateral (including Collateral acquired after the date hereof), including on any and all unencumbered assets of Borrower whether now owned or hereafter acquired.

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8.17 Hedging Agreement . Within fifteen (15) days of the Closing Date, the Borrower will execute and deliver to the Administrative Agent a Hedging Agreement covering an amount no less than Twenty-Three Million Dollars ($23,000,000) for no less than five (5) years.

9. NEGATIVE COVENANTS .

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appealable ruling rendered in such contest or appeal; and (vii) financing statements with respect to a lessor’s rights in and to personal property leased to a Borrower in the ordinary course of business other than through a Capitalized Lease Obligations.

9.2 Indebtedness; Capital Expenditures . Borrower shall not incur, create, assume, become or be liable in any manner with respect to, or permit to exist, any Indebtedness, except (i) the Liabilities, (ii) HUD Financing (but only for purposes of payment and release of a Borrower and such Borrower’s Collateral in accordance with Section 6.8 hereof), (iii) the Commercial Leases, and any extensions or renewals thereof, (iv) trade obligations and normal accruals in the ordinary course of business not yet due and payable, (v) the indebtedness not to at any time exceed Seven Hundred Fifty Thousand and No/100 Dollars ($750,000.00) relating to the purchase money security interests and Capitalized Lease Obligations permitted pursuant to Section 9.1 hereof, and (vi) intercompany Indebtedness of the Borrower to the extent permitted under Section 9.4 .

9.3 Consolidations, Mergers or Transactions . The Borrower shall not be a party to any merger, consolidation, or exchange of Stock, or purchase or otherwise acquire all or substantially all of the assets or Stock of any class of, or any other evidence of an equity interest in, or any partnership, limited liability company, or joint venture interest in, any other Person; provided , that, with prior written notice to Administrative Agent, a Borrower may merge or consolidate with, or dissolve into, another Borrower so long as the surviving entity remains a Borrower for all purposes under this Agreement and the other Financing Agreements. The Borrower shall not form or establish any Subsidiary without the Administrative Agent’s prior written consent, unless each of the requirements identified on Schedule 9.3 hereto are satisfied, as reasonably determined by the Administrative Agent. With prior notice to Administrative Agent, Borrower may dissolve an inactive Subsidiary that does not conduct any business operations and has assets with a book value not in excess of Ten Thousand and No/100 Dollars ($10,000.00) (“ Inactive Subsidiary ”), provided that any assets are transferred to Guarantor or an existing Subsidiary which is a Borrower under this Agreement or the Revolving Loan Agreement.

9.4 Investments or Loans . The Borrower shall not make, incur, assume or permit to exist any loans or advances, or any investments in or to any other Person, except (i) investments in short-term direct obligations of the United States Government, agency or instrumentality thereof; or any (ii) investments in negotiable certificates of deposit issued by the Administrative Agent or by any other bank reasonably satisfactory to the Administrative Agent, payable to the order of the Borrower or to bearer, (iii) investments in commercial paper rated at least A-1 by Standard & Poor’s Corporation or P-1 by Moody’s Investors Service, Inc., or carrying an equivalent rating by a nationally recognized rating agency if both of the two named rating agencies cease publishing ratings of investments, (iv) investments in money market funds which invest substantially all their assets in securities of the types described in clauses (i) through (iii), above; provided that, in each case, such investment is reasonably acceptable to the Administrative Agent, (iv) other short-term investments as may be permitted by Administrative Agent, (vi) loans or advances made by any Borrower to Guarantor, any other Borrower or any Affiliated Revolving Borrower, (vii) loans and advances to employees permitted under Section 9.8 ; and (viii) investments by the Borrowers in their respective Subsidiaries existing on the date

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hereof and additional investments by the Borrower in their respective Subsidiaries so long as such Subsidiary is a Borrower under this Agreement.

9.7 Use of Proceeds . The Borrower shall use the proceeds of the Term Loan only for the following purposes: (a) the Existing Lender Refinancing, (b) payment of certain ordinary course capital expenditure purposes, and (c) to pay reasonable and actually incurred transaction costs and expenses in connection with this Agreement and the transactions contemplated hereby.

9.8 Loans to Officers; Consulting and Management Fees . The Borrower shall not make any loans to its officers, directors, manager, member, or employees or to any other Person, and the Borrower shall not pay any consulting, management fees or similar fees to its officers, directors, member, manager, employees, or Affiliates or any other Person, whether for services rendered to the Borrower or otherwise; provided , however , the Borrower shall be permitted to (i) make advances to its employees in an aggregate amount not to exceed One Hundred Thousand Dollars ($100,000) in any Fiscal Year of Borrower for all such employees collectively, in each case, provided that both immediately before such contemplated payment(s) or after giving effect to any such payment(s) no Default or Event of Default shall exist or have occurred or result therefrom; (ii) pay reasonable outside directors fees; and (iii) pay the management fees permitted by the Management Agreements. Administrative Agent acknowledges that travel advances issued in the ordinary course of business do not constitute loans for purposes of this Section 9.8 .

9.9 Dividends and Stock Redemptions . The Borrower shall not (a) declare, make or pay any dividend or other distribution (whether in cash, property or rights or obligations) to or for the benefit of any officer, member, director, or any Affiliate other than (i) to Guarantor, provided that both immediately before such contemplated payment(s) or after giving effect to any such payment(s) Borrower is in compliance with Section 9.12(a) hereof, (ii) the Required Dividends and Redemption Amounts, (iii) distributions under the Borrower Cash Management Program, including distributions for Guarantor’s normal quarterly dividends to

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common shareholders, and (iv) payment of the management fees under the Management Agreements, or (b) purchase or redeem any of the Stock of the Borrower or any options or warrants with respect thereto, declare or pay any dividends or distributions thereon, or set aside any funds for any such purpose. Notwithstanding the foregoing or anything to the contrary contained herein, the foregoing declarations, payments, distributions, purchases or redemptions set forth in this Section 9.9 shall, in each case, be in both manner and amount consistent with the Borrower’s historical practices.

9.10 Payments in Respect of Subordinated Debt .

(1) [Intentionally Omitted.]

(2) The Borrower shall not make any payment in respect of any Indebtedness for borrowed money that is subordinated to the Liabilities (including, without limitation, the Subordinated Debt); provided, however, the Borrower shall be permitted to make solely those payments expressly permitted pursuant to the terms of any Subordination Agreements, in each case, as long as the Borrower is in compliance with Section 9.12 hereof both immediately before and after any such contemplated or actual payment, provided, further, that both immediately before any such contemplated payment or after giving effect to any such payments no Default or Event of Default shall exist or have occurred or result therefrom, unless otherwise permitted expressly under the terms of such Subordinations Agreement.

9.12 Financial Ratios . Commencing with the Fiscal Quarter ending March 31, 2011 and continuing thereafter:

(a) Minimum EBITDAR . The consolidated Borrower shall not permit its EBITDAR to be less than $3,300,000, measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period; provided , Administrative Agent acknowledges the minimum EBITDAR herein will need to be adjusted to a mutually acceptable dollar amount as a result of any HUD Financing in accordance with Section 6.8 .

(b) Minimum Fixed Charge Coverage Ratio . The Guarantor shall not permit its Fixed Charge Coverage Ratio to be less than 1.05 to 1.00, measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

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(c) Minimum Adjusted EBITDA . The Guarantor shall not permit its Adjusted EBITDA to be less than Ten Million and No/100 Dollars ($10,000,000.00), measured as of the last day of each Fiscal Quarter for the trailing twelve (12) month period.

(d) Guarantor’s Cash Balance . The Guarantor shall not permit its Cash Balance (as defined below), tested as of the last day of each month, to be less than Four Million Dollars ($4,000,000); provided , a violation of this requirement for any month may be cured within fifteen (15) days of the last day of such month and will not constitute an Event of Default unless not cured by such day. As used in this Section, the term “ Cash Balances ” means the aggregate amount of unrestricted cash of Guarantor collectively on deposit with PrivateBank. For the avoidance of doubt, (x) cash deposits contained in any escrow, pledged, hypothecated, assigned or restricted accounts shall not be included in the calculation of the Cash Balance; and (y) any draws on the Revolving Loan Commitment (as defined in the Revolving Loan Agreement) deposited in any account ultimately controlled by the Guarantor shall also not be included in the calculation of Cash Balance.

The Borrower and the Guarantor acknowledge and agree that the calculation and computation of the foregoing financial ratios and covenants shall be pursuant to and in accordance with the last sentence of Section 8.1(e) hereof.

Administrative Agent, Lenders, Borrower and Guarantor acknowledge and agree that for purposes of the calculation and computation of the foregoing financial ratios and covenants in subparagraphs (b), (c) and (d), the terms “Minimum EBITDAR” and “Fixed Charge Coverage Ratio,” together with the terms “EDITDAR,” “EDITDA,” “Adjusted EBITDA,” “Adjusted EBITDAR,” “Capital Expenditures,” “Net Capital Expenditures” and “Fixed Charges” for purposes of this Section, shall all be as defined, calculated and measured in the Revolving Loan Agreement, on a consolidated basis, for all Borrowers thereunder.

9.13 Change in Nature of Business . Borrower shall not engage, directly or indirectly, in any business other than owning, operating and/or leasing the Property to the Operators and matters incidental or directly related thereto.

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shall furnish a correct and complete copy of any such proposed amendment or modification to the Administrative Agent.

9.15 Blocked Accounts and Lock Box Accounts . The Borrower shall not establish or open any blocked account or any lock box accounts after the Closing Date unless in favor of and with the Administrative Agent.

9.16 Amendments to Restricted Agreements . The Borrower shall not amend, modify or supplement any Restricted Agreement, in any manner that would or is reasonably likely to adversely affect the Administrative Agent’s or any Lender’s interests under this Agreement and the other Financing Agreements to which Borrower is a party, without the Administrative Agent’s prior written consent. Within three (3) Business Days after entering into any non-adverse amendment, modification or supplement to any Restricted Agreement, the Borrower Agent shall deliver to the Administrative Agent a complete and correct copy of such amendment, modification or supplement.

9.17 State of Incorporation or Formation . The Borrower shall not change its state of incorporation or formation, as applicable, from that set forth on Schedule 1 hereto.

9.19 Fiscal Year . The Borrower shall not change its Fiscal Year.

9.20 Restrictions on Fundamental Changes . Without duplication of any of the foregoing, Borrower shall not:

(1) except as expressly permitted in accordance with Section 9.3 hereof, liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution);

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(5) change the licensed operator, manager or property manager for any Property; or

(6) consent to or acknowledge any of the foregoing.

9.21 Margin Stock . Borrower shall not carry or purchase any “margin security” within the meaning of Regulations U, T or X of the Board of Governors of the Federal Reserve System.

9.23 Commercial Leases . Without the prior written consent of Administrative Agent, which consent will not unreasonably be withheld: (a) Borrower shall not enter into any Commercial Lease as to which a Borrower would be the lessee; (b) no Person shall be the Operator of the Facility other than Borrower; and (c) no Operating Lease will be entered into between Borrower and any Operator of the Facilities.

10. HEALTH CARE MATTERS .

10.1 [Intentionally Omitted] .

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correct such Restrictions; (ii) may not be, and have not been, and will not be transferred to any location other than the Property; and (iii) have not been and will not be pledged as collateral security for any other loan or indebtedness. Borrower shall not do (or suffer to be done) any of the following:

(1) Rescind, withdraw, revoke, amend, modify, supplement, or otherwise alter the nature, tenor or scope of the Licenses for any Property without Administrative Agent’s prior written consent;

(2) Amend or otherwise change any Property’s licensed beds capacity and/or the number of beds approved by the State Regulator without Administrative Agent’s prior written consent; or

(3) Replace, assign or transfer all or any part of any Property’s beds to another site or location (other than to any other Property) without Administrative Agent’s prior written consent.

11. DEFAULT, RIGHTS AND REMEDIES OF THE ADMINISTRATIVE AGENT .

11.1 Event of Default . Any one or more of the following shall constitute an “Event of Default” under this Agreement:

(1) the Borrower fails to pay (i) any principal or interest payable hereunder or under the Term Loan Note on the date due, declared due or demanded (including, without limitation, any amount due under Section 2.15); or (ii) any other amount payable to the Administrative Agent or any Lender under this Agreement or under any other Financing Agreement to which the Borrower is a party (including, without limitation, the Term Loan Notes) within five (5) calendar days after the date when any such payment is due and, with respect to clause (ii) only, such failure is not cured within five (5) calendar days after notice to Borrower by Administrative Agent;

(2) the Borrower fails or neglects to perform, keep or observe any of the covenants, conditions or agreements set forth in (i) Sections 8.5, 8.6, 8.7, 8.9, 8.11, 8.12, or Section 8.17 hereof, (ii) any Section of Article 9 hereof (other than Section 9.18 hereof), or (iii) any Section of Article 10 hereof and, with respect to such Sections in Article 10 only, such failure or neglect shall continue for a period of five (5) calendar days after the earlier of (1) the date the Borrower actually knew of such failure or neglect and (2) notice to the Borrower by the Administrative Agent.

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(4) any representation or warranty heretofore, now or hereafter made by the Borrower in connection with this Agreement or any of the other Financing Agreements to which Borrower is a party is untrue, misleading or incorrect in any material respect, or any schedule, certificate, statement, report, financial data, notice, or writing furnished at any time by the Borrower to the Administrative Agent or any Lender is untrue, misleading or incorrect in any material respect, on the date as of which the facts set forth therein are stated or certified;

(8) a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed against the Borrower or any guarantor of the Liabilities, including Guarantor, and any such proceeding is not dismissed within sixty (60) days of the date of its filing, or a proceeding under any bankruptcy, reorganization, arrangement of debt, insolvency, readjustment of debt or receivership law or statute is filed by the Borrower or any guarantor of the Liabilities, including Guarantor, or the Borrower or any guarantor of the Liabilities, including Guarantor, makes an assignment for the benefit of creditors, or the Borrower or any guarantor of the Liabilities, including Guarantor, takes any action to authorize any of the foregoing;

(9) except as permitted for an Inactive Subsidiary, the Borrower or Guarantor voluntarily or involuntarily dissolves or is dissolved, or its existence terminates or is terminated; provided that in the case of an administrative dissolution or revocation of existence for failure to file the proper reports or returns with the applicable governmental authorities, no Event of Default shall be deemed to have occurred if an application for reinstatement is (i) filed promptly (but in any event, within fifteen (15) calendar days) upon Guarantor or Borrower receiving notice of such dissolution or revocation from the applicable

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governmental authority and (ii) diligently pursued to completion (if reasonably capable of being completed), as determined by the Administrative Agent in its sole and absolute discretion;

(10) the Credit Parties, taken as a whole, fail, at any time, to be Solvent;

(11) the Borrower or any guarantor of the Liabilities, including Guarantor, is enjoined, restrained, or in any way prevented by the order of any court or any administrative or regulatory agency from conducting all or any material part of its business affairs;

(15) Guarantor shall at any time after the Closing Date have voting power over less than one hundred percent (100%) of the issued and outstanding Stock of Diversicare Management Services Co., or directly or indirectly of the Pledgor;

(17) any breach, non-compliance, default or event of default shall occur under or pursuant to any Subordination Agreement, or any other Financing Agreement (including, without limitation, the Guaranty, any Hedging Agreement and each Pledge Agreement) by any party thereto (other than by the Administrative Agent), and the same is not cured or remedied within any applicable cure period, provided that if such default or event of default, breach, noncompliance or default, requires the giving of notice by Administrative Agent to any party in addition to or other than Borrower, Administrative Agent shall have

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provided Borrower with such notice at the same time as it provides such notice to such other party;

(18) [Intentionally Omitted];

(20) a Material Adverse Change shall occur;

(22) Guarantor shall revoke or attempt to revoke, terminate or contest its obligations under the Guaranty, or the Guaranty or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

(23) Pledgor shall revoke or attempt to revoke, terminate or contest in any way the Pledge Agreement, or any provision thereof shall cease to be in full force and effect in accordance with its terms and provisions;

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(26) a state or federal regulatory agency shall have revoked any license, permit, certificate or Medicaid or Medicare qualification pertaining to the Property or any Location, regardless of whether such license, permit, certificate or qualification was held by or originally issued for the benefit of Borrower, a tenant or any other Person, the revocation of which could reasonably be expected to have a Material Adverse Effect;

(27) any material default by Borrower under the terms of any material Lease following the expiration of any applicable notice and cure period (if any);

(30) an “Event of Default” shall occur under or pursuant to the Revolving Loan Agreement or any Affiliate Revolving Loan Financing Agreement.

11.2 Acceleration . Upon the occurrence of any Event of Default described in Sections 11.1(h) , (i) , or (j) , the Commitment (if it has not theretofore terminated) shall automatically and immediately terminate and all of the Liabilities shall immediately and automatically, without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be immediately due and payable; and upon the occurrence of any other Event of Default, the Administrative Agent may at its sole option (or, upon written request of Required Lenders shall) declare the Commitment (if it has not theretofore terminated) to be

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terminated and any or all of the Liabilities may, at the sole option of the Administrative Agent (or, upon written request of Required Lenders shall), and without presentment, demand, protest or notice of any kind (all of which are hereby expressly waived), be declared, and thereupon shall become, immediately due and payable, whereupon the Commitment shall immediately terminate.

11.3 Rights and Remedies Generally .

(1) Upon the occurrence of any Event of Default, the Administrative Agent and Lenders shall have, in addition to any other rights and remedies contained in this Agreement and in any of the other Financing Agreements, all of the rights and remedies of a secured party under the Code or other applicable laws, all of which rights and remedies shall be cumulative, and non-exclusive, to the extent permitted by Laws, including, without limitation, the right of Administrative Agent to sell, assign, or lease any or all of the Collateral. The exercise of any one right or remedy shall not be deemed a waiver or release of any other right or remedy, and the Administrative Agent, upon the occurrence of an Event of Default, may proceed against Borrower, and/or the Collateral, at any time, under any agreement, with any available remedy and in any order. All sums received from Borrower and/or the Collateral in respect of the Loan may be applied by the Administrative Agent to any Liabilities in such order of application and in such amounts as the Administrative Agent shall deem appropriate in its discretion (subject to Section 12.8). Borrower waives any right it may have to require the Administrative Agent to pursue any Person for any of the Liabilities.

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Administrative Agent, for such time as the Administrative Agent may desire, in order to effectively collect or liquidate such Collateral. Upon the occurrence of any Event of Default, the Administrative Agent shall have the right to obtain access to the Borrower’s data processing equipment, computer hardware and software relating to the Collateral and subject to the privacy requirements and regulations of HIPPA and of any applicable state or federal patients bill of rights, to use all of the foregoing and the information contained therein in any manner the Administrative Agent deems appropriate. Upon the occurrence of any Event of Default, the Administrative Agent shall have the right to receive, open and process all mail addressed to the Borrower and relating to the Collateral.

11.6 Waivers (General) .

(1) Except as otherwise provided for in this Agreement and to the fullest extent permitted by applicable Law, Borrower hereby waives: (i) presentment, demand and protest, and notice of presentment, dishonor, intent to accelerate, acceleration, protest, default, nonpayment, maturity, release, compromise, settlement, extension or renewal of any or all Financing Agreements, the Term Loan Notes or any other notes, commercial paper, Accounts, contracts, documents, instruments, chattel paper and guaranties at any time held by Administrative Agent or any Lender on which Borrower may in any way be liable, and hereby ratifies and confirms whatever Administrative Agent and Lenders may do in this regard; (ii) all

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rights to notice and a hearing prior to Administrative Agent’s taking possession or control of, or to Administrative Agent’s replevy, attachment or levy upon, any Collateral or any bond or security which might be required by any court prior to allowing Administrative Agent to exercise any of its remedies; and (iii) the benefit of all valuation, appraisal and exemption Laws. Borrower acknowledges that it has been advised by counsel of its choice and decision with respect to this Agreement, the other Financing Agreements and the transactions evidenced hereby and thereby.

(2) Borrower for itself and all endorsers, guarantors and sureties and their heirs, legal representatives, successors and assigns, (i) agrees that its liability shall not be in any manner affected by any indulgence, extension of time, renewal, waiver, or modification granted or consented to by Administrative Agent; (ii) consents to any indulgences and all extensions of time, renewals, waivers, or modifications that may be granted by Administrative Agent with respect to the payment or other provisions of this Agreement, the Term Loan Notes, and to any substitution, exchange or release of the Collateral, or any part thereof, with or without substitution, and agrees to the addition or release of any Borrower, endorsers, guarantors, or sureties, or whether primarily or secondarily liable, without notice to Borrower and without affecting its liability hereunder; (iii) agrees that its liability shall be unconditional and without regard to the liability of any other tax; and (iv) expressly waives the benefit of any statute or rule of law or equity now provided, or which may hereafter be provided, which would produce a result contrary to or in conflict with the foregoing.

(3) Each and every covenant and condition for the benefit of Administrative Agent and Lenders contained in this Agreement and the other Financing Agreements may be waived by Administrative Agent. Any forbearance by Administrative Agent in exercising any right or remedy under any of the Financing Agreements, or otherwise afforded by applicable Law, including any failure to accelerate the Stated Maturity Date shall not be a waiver of or preclude the exercise of any right or remedy nor shall it serve as a novation of the Term Loan Note or as a reinstatement of the Loan or a waiver of such right of acceleration or the right to insist upon strict compliance of the terms of the Financing Agreements. Administrative Agent’s acceptance of payment of any sum secured by any of the Financing Agreements after the due date of such payment shall not be a waiver of Administrative Agent’s right to either require prompt payment when due of all other sums so secured or to declare a default for failure to make prompt payment. The procurement of insurance or the payment of taxes or other liens or charges by Administrative Agent shall not be a waiver of Administrative Agent’s right to accelerate the maturity of the Loan, nor shall Administrative Agent’s receipt of any condemnation awards, insurance proceeds, or damages under this Agreement operate to cure or waive Borrower’s or Guarantor’s default in payment of sums secured by any of the Financing Agreements.

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Liabilities has been foreclosed, sold and/or otherwise realized upon in satisfaction of the Liabilities.

(5) Nothing contained herein or in any other Financing Agreement shall be construed as requiring Administrative Agent to resort to any part of the Collateral for the satisfaction of any of Borrower’s obligations under the Financing Agreements in preference or priority to any other Collateral, and Administrative Agent may seek satisfaction out of all of the Collateral or any part thereof, in its absolute discretion in respect of Borrower’s obligations under the Financing Agreements. In addition, Administrative Agent shall have the right from time to time to partially foreclose upon any Collateral in any manner and for any amounts secured by the Financing Agreements then due and payable as determined by Administrative Agent in its sole discretion, including, without limitation, the following circumstances: (i) if Borrower defaults beyond any applicable grace period in the payment of one or more scheduled payments of principal and interest, Administrative Agent may foreclose upon all or any part of the Collateral to recover such delinquent payments, or (ii) if Administrative Agent elects to accelerate less than the entire outstanding principal balance of the Term Loan Notes, Administrative Agent may foreclose all or any part of the Collateral to recover so much of the principal balance of the Term Loan Note as Administrative Agent may accelerate and such other sums secured by one or more of the Financing Agreements as Administrative Agent may elect. Notwithstanding one or more partial foreclosures, any unforeclosed Collateral shall remain subject to the Financing Agreements to secure payment of sums secured by the Financing Agreements and not previously recovered.

(6) To the fullest extent permitted by Law, Borrower, for itself and its successors and assigns, waives in the event of foreclosure of any or all of the Collateral any equitable right otherwise available to Borrower which would require the separate sale of any of the Collateral or require Administrative Agent to exhaust its remedies against any part of the Collateral before proceeding against any other part of the Collateral; and further in the event of such foreclosure Borrower does hereby expressly consent to and authorize, at the option of Administrative Agent, the foreclosure and sale either separately or together of each part of the Collateral.

11.8 Injunctive Relief . The parties acknowledge and agree that, in the event of a breach or threatened breach of any Credit Party’s obligations under any Financing Agreements, Administrative Agent may have no adequate remedy in money damages and, accordingly, shall be entitled to an injunction (including without limitation, a temporary restraining order, preliminary injunction, writ of attachment, or order compelling an audit) against such breach or threatened breach. However, no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against any other legal or equitable remedies in the event of a breach or threatened breach of any provision of this Agreement. Each

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Credit Party waives the requirement of the posting of any bond in connection with such injunctive relief.

11.9 Marshalling; Recourse to Borrower . Administrative Agent shall have no obligation to marshal any assets in favor of any Credit Party, or against or in payment of any of the other Liabilities or any other obligation owed to the Administrative Agent and Lenders by any Credit Party. Notwithstanding anything to the contrary contained herein or in any other Financing Agreement, the Loan and other Liabilities shall be fully recourse to Borrower, and Administrative Agent shall be authorized, in its sole and absolute discretion, to enforce any or all of its remedies hereunder against Borrower, including all present and future revenue and assets of Borrower, whether or not such assets have been pledged as collateral for the Loan.

12. MISCELLANEOUS .

12.1 Waiver; Amendment . The Administrative Agent’s or Lenders’ failure, at any time or times hereafter, to require strict performance by the Borrower of any provision of this Agreement shall not waive, affect or diminish any right of the Administrative Agent thereafter to demand strict compliance and performance therewith. Any suspension or waiver by the Administrative Agent or the Lenders, as applicable, of an Event of Default under this Agreement or a default under any of the other Financing Agreements shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the other Financing Agreements, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of the Borrower contained in this Agreement or any of the other Financing Agreements and no Event of Default under this Agreement or default under any of the other Financing Agreements shall be deemed to have been suspended or waived by the Administrative Agent unless such suspension or waiver is in writing signed by an officer of the Administrative Agent, and directed to the Borrower specifying such suspension or waiver.

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payable hereunder, without the consent of each Lender directly affected thereby (except for any periodic adjustments of interest rates and fees as provided for in this Agreement), or (e) release any party from its obligations under any guaranty at any time hereafter provided, if any, or all or substantially all of the Collateral granted hereunder or under any of the Financing Agreements (except as otherwise specifically permitted or provided in this Agreement), change the definition of Required Lenders, any provision of this Section 12.1 or reduce the aggregate Pro Rata Share required to effect an amendment, modification, waiver or consent, without, in each case with respect to this subsection (e), the written consent of all Lenders, or (f) waive any material condition set forth in Section 5 without the prior written consent of each Lender directly affected thereby. No provision in this Agreement with respect to the timing or application of mandatory prepayments of the Loan shall be amended, modified or waived without the consent of Required Lenders. No provision of Section 13 or other provision of this Agreement affecting Administrative Agent as such shall be amended, modified or waived without the prior written consent of Administrative Agent. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that the Commitment of such Lender may not be increased or extended without the consent of such Lender.

12.2 Costs and Attorneys’ Fees .

(1) Borrower agrees to jointly and severally pay on demand all of the costs and expenses of the Administrative Agent (including, without limitation, the reasonable fees and out-of-pocket expenses of the Administrative Agent’s counsel, all UCC tax, lien, judgment, pending suit, and bankruptcy search fees and costs, UCC filing fee and costs, recording, filing and registration fees and charges, mortgage or documentary taxes, all costs of Intralinks or other similar transmission system, if applicable, all corporate search fees and certified documents, all financial and legal due diligence expenses, all audit, field exam and appraisal costs and fees, costs incurred by Administrative Agent in connection with travel expenses of its associates, background checks on members of management of Borrower, and real estate appraisal fees, survey fees, recording and title insurance costs, and any environmental report or analysis) in connection with the structuring, preparation, negotiation, execution, delivery and closing of: (i) this Agreement, the other Financing Agreements and all other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder, and (ii) any and all amendments, modifications, supplements and waivers executed and delivered pursuant hereto or any other Financing Agreement or in connection herewith or therewith. Borrower further agrees that the Administrative Agent, in its sole discretion, may deduct all such unpaid amounts from the aggregate proceeds of the Loan or debit such amounts from the operating accounts of Borrower maintained with the Administrative Agent.

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any type of restructuring of the Liabilities, or any litigation, contest, dispute, suit or proceeding or to commence, defend or intervene or to take any other action in or with respect to any litigation, contest, dispute, suit or proceeding (whether instituted by the Administrative Agent, Lenders, Borrower or any other Person) in any way or respect relating to this Agreement, the other Financing Agreements, Borrower’s affairs or any Collateral hereunder or (iv) to enforce any of the rights of the Administrative Agent or Lenders with respect to Borrower provided in this Agreement, under any of the other Financing Agreements, or otherwise (whether at law or in equity) (including any foreclosure sale, deed in lieu transaction or costs incurred in connection with any litigation or bankruptcy or administrative hearing and any appeals therefrom and any post-judgment enforcement action including, without limitation, supplementary proceedings in connection with the enforcement of this Agreement); (v) takes any action to protect, preserve, store, ship, appraise, prepare for sale, collect, sell, liquidate or otherwise dispose of any Collateral hereunder; and/or (vi) seeks to enforce or enforces any of the rights and remedies of the Administrative Agent or Lenders with respect to Borrower or any guarantor of the Liabilities. Without limiting the generality of the foregoing, such expenses, costs, charges and fees include: reasonable fees, costs and expenses of attorneys, accountants and consultants; court costs and expenses; court reporter fees, costs and expenses; long distance telephone charges; and courier and telecopier charges.

(3) Borrower further agrees to pay, and to save the Administrative Agent and Lenders harmless from all liability for, any documentary stamp tax, intangible tax, or other stamp tax or taxes of any kind which may be payable in connection with or related to the execution or delivery of this Agreement, the other Financing Agreements, the borrowing hereunder, the issuance of the Term Loan Note or of any other instruments, agreements, certificates or documents provided for herein or delivered or to be delivered hereunder or in connection herewith, provided that Borrower shall not be liable for Administrative Agent’s or any Lender’s income tax liabilities.

(4) All of the Borrower’s obligations provided for in this Section 12.2 shall be Liabilities secured by the Collateral and shall survive repayment of the Loan or any termination of this Agreement or any Financing Agreements.

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itself be deemed a failure to exercise reasonable care, and no failure by the Administrative Agent to preserve or protect any right with respect to such Collateral against prior parties, or to do any act with respect to the preservation of such Collateral not so requested by a Borrower, shall of itself be deemed a failure to exercise reasonable care in the custody or preservation of such Collateral.

12.5 Reliance by the Lenders . The Borrower acknowledges that the Lenders and Administrative Agent, in entering into this Agreement and agreeing to make the Loan to the Borrower hereunder, has relied upon the accuracy of the covenants, agreements, representations and warranties made herein by the Borrower and the information delivered by the Borrower to the Administrative Agent and Lenders in connection herewith (including, without limitation, all financial information and data).

Second , to payment of that portion of the Liabilities constituting fees, indemnities and other amounts (other than principal and interest) payable to PrivateBank and the other Lenders (including fees, charges and disbursements of counsel to the respective Lenders), ratably

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among them in proportion to the respective amounts described in this clause Second payable to them;

Third , to payment of that portion of the Liabilities constituting accrued and unpaid interest on the Loan and other Liabilities, ratably among Lenders in proportion to the respective amounts described in this clause Third payable to them;

Fourth , to payment of that portion of the Liabilities constituting unpaid principal of the Loan, ratably among Lenders in proportion to the respective amounts described in this clause Fourth held by them; and

Last , to all other Liabilities, and then, after all such Liabilities have been indefeasibly paid in full in cash, any balance to the Borrower or as otherwise required by applicable law.

12.11 Continuing Effect; Inconsistency . This Agreement, the Administrative Agent’s Liens in the Collateral, and all of the other Financing Agreements shall continue in full force and effect so long as any Liabilities shall be owed to the Lenders and Administrative Agent, and (even if there shall be no such Liabilities outstanding) so long as this Agreement has not been terminated as provided in Section 2.9 hereof. To the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern. The relationship between Administrative Agent and Lenders on the one hand and Borrower on the other hand shall be that of creditor-debtor only. No term in this Agreement or in any other Financing Agreement and no course of dealing between the parties shall be deemed to create any relationship or agency, partnership or joint venture or any fiduciary duty by Administrative Agent or any Lender to Borrower or any other party. In exercising its rights hereunder and under

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any other Financing Agreements or taking any actions herein or therein, Administrative Agent and Lenders may act through its respective employees, agents or independent contractors as authorized by Administrative Agent or such Lender.

(1) If to the Administrative Agent, at:

The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Adam Panos
Telephone No.: 312-564-1278
Facsimile No.: 312-564-6889

With a copy to:

Duane Morris LLP
190 South LaSalle Street — Suite 3700
Chicago, Illinois 60603
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

(2) If to the Borrower or Borrower Agent, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093
Facsimile No.: 615-251-1059

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12.14 Entire Agreement . This Agreement, together with the Financing Agreements (and, as applicable, the Revolving Loan Agreement) executed in connection herewith, constitutes the entire agreement among the parties with respect to the subject matter hereof, and supersedes all prior written or oral understandings, discussions and agreements with respect thereto (including, without limitation, any term sheet, proposal letter or commitment letter). Notwithstanding anything to the contrary contained in this Agreement, Borrower is and shall be required to observe, perform and comply with each of the terms, representations, warranties, covenants, conditions and provisions set forth in the Revolving Loan Agreement applicable to Borrower and such terms, representations, warranties, covenants, conditions and provisions are hereby incorporated into this Agreement by this reference thereto.

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assignment not made in accordance with this Section 12.15 shall be treated as the sale of a participation hereunder. Borrower shall be deemed to have granted its consent to any assignment requiring its consent hereunder unless Borrower has expressly objected to such assignment within three (3) Business Days after notice thereof. Notwithstanding the foregoing, no consent of Borrower or Administrative Agent shall be required for any assignment to a Lender or an Affiliate of a Lender (provided that no assignment shall be made to any Defaulting Lender or its wholly-owned subsidiaries).

(b) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to such Assignment Agreement, shall have the rights and obligations of a Lender hereunder and (ii) the assigning Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, the assigning Lender) pursuant to an effective Assignment Agreement, Borrower shall execute and deliver to Administrative Agent for delivery to the Assignee (and, as applicable, the assigning Lender) a Term Loan Note in the principal amount of the Assignee’s Term Loan Commitment (and, as applicable, a Term Loan Note in the principal amount of the Term Loan Commitment retained by the assigning Lender). Each such Term Loan Note shall be dated the effective date of such assignment. Upon receipt by the assigning Lender of such Term Loan Note, the assigning Lender shall return to Borrower any prior Term Loan Note held by it.

(c) Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement and applicable promissory note to secure obligations of such Lender, including any pledge or assignment to secure obligations to any Federal Reserve Bank (including as collateral security pursuant to Regulation A and any Operating Circular issued by such Federal Reserve Bank), and such Loan(s) and promissory note(s) shall be fully transferable as provided therein, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.

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Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with Lenders, and Lenders agree to share with each Participant, as provided in Section 2.13(d) . Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.1 or 3.3 as if it were a Lender (provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Sections 3.1 or 3.3 than would have been paid to the participating Lender on such date if no participation had been sold and that each Participant complies with Section 3.3 as if it were an Assignee).

(d) Administrative Agent will maintain a copy of each Assignment Agreement delivered and accepted by it and register (the “ Register ”) for the recordation of names and addresses of Lenders, the Term Loan Commitment Percentage of each Lender and the portion of the Loan of each Lender and whether such Lender is the original Lender or the Assignee. No assignment shall be effective unless and until the Assignment Agreement is accepted and registered in the Register. All records of transfer of a Lender’s interest in the Register shall be conclusive, absent manifest error, as to the ownership of the interests in such Loan. Administrative Agent shall not incur any liability of any kind with respect to any Lender with respect to the maintenance of the Register. Upon the reasonable written request of Borrower, Administrative Agent will furnish a copy of the Register to the Borrower Agent or Borrower (at the cost, if any, to Borrower).

12.16 Indemnity . The Borrower agrees to jointly and severally defend, protect, indemnify and hold harmless the Administrative Agent, each Lender and each and all of their respective officers, directors, employees, attorneys, affiliates, and agents (“ Indemnified Parties ”) from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and disbursements of any kind or nature whatsoever (including, without limitation, the fees and disbursements of counsel for the Indemnified Parties in connection with any investigative, administrative or judicial proceeding, whether or not the Indemnified Parties shall be designated by a party thereto, or otherwise), claim, cause of action, judgment, suit, action or proceeding, which may ever be imposed on, incurred by, or asserted against any Indemnified Party (whether direct, indirect or consequential, and whether based on any federal or state laws or other statutory regulations, including, without limitation, securities, environmental and commercial laws and regulations, under common law or at equitable cause, or on contract or otherwise) in any manner relating to or arising out of this Agreement or the other Financing Agreements, or any act, event or transaction related or attendant thereto, the making and the management of the Loan (including, without limitation, any liability under federal, state or local environmental laws or regulations) or the use or intended use of the proceeds of the Loan hereunder; provided , that the Borrower shall not have any obligation to any Indemnified Party hereunder with respect to matters caused by or resulting from the gross negligence, willful misconduct or illegal activity of such Indemnified Party. To the extent that the undertaking to indemnify, pay and hold harmless set forth in the preceding sentence may be unenforceable because it is violative of any law or public policy, the Borrower shall contribute the maximum portion which it is permitted to pay and satisfy under applicable Law, to the payment and satisfaction of all matters incurred by the Indemnified Parties. Any liability, obligation, loss,

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damage, penalty, cost or expense incurred by the Indemnified Parties shall be paid to the Indemnified Parties on demand, together with interest thereon at the Default Rate from the date incurred by the Indemnified Parties until paid by the Borrower, be added to the Liabilities, and be secured by the Collateral. The provisions of and undertakings and indemnifications set out in this Section 12.16 shall survive the satisfaction and payment of the Liabilities of the Borrower and the termination of this Agreement. NO INDEMNIFIED PERSON SHALL BE RESPONSIBLE OR LIABLE TO THE BORROWER OR TO ANY OTHER PARTY TO ANY FINANCING AGREEMENT, ANY SUCCESSOR, ASSIGNEE OR THIRD PARTY BENEFICIARY OR ANY OTHER PERSON ASSERTING CLAIMS DERIVATIVELY THROUGH SUCH PARTY, FOR INDIRECT, PUNITIVE, EXEMPLARY OR CONSEQUENTIAL DAMAGES WHICH MAY BE ALLEGED AS A RESULT OF CREDIT HAVING BEEN EXTENDED, SUSPENDED OR TERMINATED UNDER THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR AS A RESULT OF ANY OTHER TRANSACTION CONTEMPLATED HEREUNDER OR THEREUNDER.

12.17 Representations and Warranties . Notwithstanding anything to the contrary contained herein, each representation or warranty contained in this Agreement or any of the other Financing Agreements shall survive the execution and delivery of this Agreement and the other Financing Agreements and the making of the Loan and the repayment of the Liabilities hereunder.

12.19 Limitation of Liability of Administrative Agent and Lenders . It is hereby expressly agreed that:

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12.21 Joint and Several Liability; Binding Obligations .

(1) Borrower is defined collectively to include all Persons constituting the Borrower; provided, however, that any references herein to “any Borrower”, “each Borrower” or similar references, shall be construed as a reference to each individual Person comprising the Borrower; provided, further, in case of any question as to which particular Person is to be deemed a Borrower in any given context for purposes of any term or provision contained in this Agreement, the Lender shall make such determination. Each Person comprising Borrower shall be jointly and severally liable for all of the liabilities and obligations of Borrower under this Agreement, regardless of which of the Borrowers actually receives the proceeds of the Loan hereunder, or the manner in which the Borrowers, or the Administrative Agent or Lenders accounts therefor in their respective books and records. In addition, each entity comprising Borrower hereby acknowledges and agrees that all of the representations, warranties, covenants, obligations, conditions, agreements and other terms contained in this Agreement shall be applicable to and shall be binding upon and measured and enforceable individually against each Person comprising Borrower as well as all such Persons when taken together. By way of illustration, but without limiting the generality of the foregoing, the terms of Article XI of this Agreement are to be applied to each individual Person comprising the Borrower (as well as to all such Persons taken as a whole), such that the occurrence of any of the events described in Article XI of this Agreement as to any Person comprising the Borrower shall constitute an Event of Default even if such event has not occurred as to any other Persons comprising the Borrower or as to all such Persons taken as a whole (except as otherwise expressly provided therein by, for example, the use of the term “Material Adverse Effect”).

(2) Each Borrower acknowledges that it will enjoy significant benefits from the business conducted by the other Borrowers because of, inter alia , their combined ability to bargain with other Persons including, without limitation, their ability to receive the credit facilities hereunder and other Financing Agreements which would not have been available to an individual Borrower acting alone. Each Borrower has determined that it is in its best interest to procure the Loan with the credit support of the other Borrowers as contemplated by this Agreement and the other Financing Agreements as well as permit the cross-collateralization and cross-default with the Affiliate Term Loan Liabilities, Term Loan Agreement and Affiliate Term Loan Financing Agreements as contemplated hereunder.

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thereby to any Borrower unless each Borrower agrees, among other things, to be jointly and severally liable for the due and proper payment of the Liabilities of each other Borrower under this Agreement and other Financing Agreements. Each Borrower has determined that it is in its best interest and in pursuit of its purposes that it so induce the Lenders to extend credit pursuant to this Agreement and the other documents executed in connection herewith (i) because of the desirability to each Borrower of the Loan and the interest rates and the modes of borrowing available hereunder, (ii) because each Borrower may engage in transactions jointly with other Borrowers and (iii) because each Borrower may require, from time to time, access to funds under this Agreement for the purposes herein set forth. Each Borrower, individually, expressly understands, agrees and acknowledges, that the Loan would not be made available on the terms herein in the absence of the collective credit of all of the Persons constituting the Borrower, the joint and several liability of all such Persons, and the cross-collateralization of the collateral of all such Persons hereunder and under the other Financing Agreements. Accordingly, each Borrower, individually acknowledges that the benefit to each of the Persons comprising the Borrower as a whole constitutes reasonably equivalent value, regardless of the amount of the Loan actually borrowed by, advanced to, or the amount of collateral provided by, any individual Borrower.

(4) Each Borrower has determined that it has and, after giving effect to the transactions contemplated by this Agreement and the other Financing Agreements (including, without limitation, the inter-Borrower arrangement set forth in this Section) will have, assets having a fair saleable value in excess of the amount required to pay its probable liability on its existing debts as they fall due for payment and that the sum of its debts is not and will not then be greater than all of its property at a fair valuation, that such Borrower has, and will have, access to adequate capital for the conduct of its business and the ability to pay its debts from time to time incurred in connection therewith as such debts mature and that the value of the benefits to be derived by such Borrower from the access to funds under this Agreement (including, without limitation, the inter-Borrower arrangement set forth in this Section) is reasonably equivalent to the obligations undertaken pursuant hereto.

(7) To the extent that any Borrower shall make a payment under this Section of all or any of the Liabilities (a “Joint Liability Payment”) which, taking into

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account all other Joint Liability Payments then previously or concurrently made by any other Borrower, exceeds the amount which such Borrower would otherwise have paid if each Borrower had paid the aggregate Liabilities satisfied by such Joint Liability Payments in the same proportion that such Borrower’s “Allocable Amount” (as defined below) (as determined immediately prior to such Joint Liability Payments) bore to the aggregate Allocable Amounts of each of the Borrowers as determined immediately prior to the making of such Joint Liability Payments, then, following indefeasible payment in full in cash of the Liabilities and termination of the Loan, such Borrower shall be entitled to receive contribution and indemnification payments from, and be reimbursed by, each other Borrower for the amount of such excess, pro rata based upon their respective Allocable Amounts in effect immediately prior to such Joint Liability Payments. As of any date of determination, the “Allocable Amount” of any Borrower shall be equal to the maximum amount of the claim which could then be recovered from such Borrower under this Section without rendering such claim voidable or avoidable under Section 548 of Chapter 11 of the Bankruptcy Code or under any applicable state Uniform Fraudulent Transfer Act, Uniform Fraudulent Conveyance Act or similar statute or common law.

(9) [Intentionally Omitted.]

(10) [Intentionally Omitted.]

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any property of any other Borrower by reason of any performance of such Borrower of its joint and several obligations hereunder.

(14) This Section is intended only to define the relative rights of Borrower and nothing set forth in this Section is intended to or shall impair the obligations of Borrower, jointly and severally, to pay any amounts as and when the same shall become due and payable in accordance with the terms of this Agreement or any other Financing Agreements. Nothing contained in this Section shall limit the liability of any Borrower to pay the Loan made directly or indirectly to that Borrower and accrued interest, fees and expenses with respect thereto for which such Borrower shall be primarily liable.

12.22 Confidentiality . Borrower shall not disclose the contents of this Agreement and the other Financing Agreements to any third party (including, without limitation, any financial institution or intermediary) unless required by applicable Laws without Administrative Agent’s prior written consent, other than to Borrower’s officers, lawyers and other professional advisors on a need-to-know basis, and in connection with any filings required to be made under any applicable federal or state securities laws or regulations (“ Securities Laws ”). Borrower agrees to inform all such Persons who receive information concerning this Agreement that such information is confidential and may not be disclosed to any other Person, except as required by applicable Laws, including Securities Laws.

12.23 Fax Signatures . A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally binding and enforceable as a signed original for all purposes.

12.24 Release . For and in consideration of the Loan hereunder, each Borrower, voluntarily, knowingly, unconditionally, and irrevocably, with specific and express intent, for and on behalf of itself and its agents, attorneys, heirs, successors, and assigns (collectively the “ Releasing Parties ”) does hereby fully and completely release, acquit and forever discharge the Administrative Agent and each Lender, and each of their respective successors, assigns, heirs, affiliates, subsidiaries, parent companies, principals, directors, officers, employees, shareholders and agents (hereinafter called the “ Lender Parties ”), and any other person, firm, business, corporation, insurer, or association which may be responsible or liable for the acts or omissions of the Lender Parties, or who may be liable for the injury or damage resulting therefrom

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(collectively the “ Released Parties ”), of and from any and all actions, causes of action, suits, debts, disputes, damages, claims, obligations, liabilities, costs, expenses, fees (including, without limitation, reasonable attorneys’ fees) and demands of any kind whatsoever, at law or in equity, whether matured or unmatured, liquidated or unliquidated, vested or contingent, choate or inchoate, known or unknown that the Releasing Parties (or any of them) have or may have, against the Released Parties or any of them (whether directly or indirectly) relating to events occurring on or before the date of this Agreement, other than any claim as to which a final determination is made in a judicial proceeding (in which the Administrative Agent and Lenders or any of the Released Parties have had an opportunity to be heard) which determination includes a specific finding that one of the Released Parties acted in a grossly negligent manner or with actual willful misconduct. Each Borrower acknowledges that the foregoing release is a material inducement to Administrative Agent’s and each Lender’s decision to extend to Borrower the financial accommodations hereunder and has been relied upon by the Lenders in agreeing to make the Loan hereunder.

12.25 Time; Reliance . Time is of the essence in Borrower’s performance under this Agreement and all other Financing Agreements. Notwithstanding anything to the contrary contained in any Financing Agreement, if and to the extent any terms or provisions contained in any Financing Agreement are inconsistent or conflict with the terms and provisions of this Agreement, the terms and provisions of this Agreement shall control and govern.

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the Loan Account and Collateral of Borrowers in a combined fashion, as more fully set forth in this Agreement, is done solely as an accommodation to Borrowers in order to utilize the collective borrowing powers of Borrowers in the most efficient and economical manner and at their request, and Administrative Agent and Lenders shall not incur liability to any Borrower as a result hereof. Each Borrower expects to derive benefit, directly or indirectly, from the handling of the Loan Account and the Collateral in a combined fashion since the successful operation of each Borrower is dependent on the continued successful performance of the integrated group. To induce the Administrative Agent and Lenders to do so, and in consideration thereof, but without limiting any other provision contained in this Agreement, each Borrower hereby jointly and severally agrees to indemnify Administrative Agent and each Lender and hold Administrative Agent and Lenders harmless against any and all liability, expense, loss or claim of damage or injury, made against Administrative Agent or any Lender by any Borrower or by any third party or Person whosoever, arising from or incurred by reason of (a) the handling of the Loan Account and Collateral as herein provided, (b) the Administrative Agent’s relying on any instructions of the Borrower Agent, or (c) any other action taken by the Administrative Agent hereunder or under the other Financing Agreements, except that Borrowers will have no liability to the Administrative Agent under this Section with respect to any liability that has been finally determined by a court of competent jurisdiction to have resulted solely from the gross negligence, willful misconduct, or illegal activity of Administrative Agent.

12.28 Acting Through Agents . In exercising any rights under the Financing Agreements or taking any actions provided for therein, the Administrative Agent may act through its employees, agents or independent contractors as authorized by the Administrative Agent. Borrower shall authorize its accounting firm and/or service bureaus to provide Administrative Agent with such information as is requested by Administrative Agent in accordance with this Agreement. Borrower authorizes the Administrative Agent to contact directly any such accounting firm and/or service bureaus to obtain such information.

12.29 Additional Provisions .

(3) declare all Liabilities due and payable upon the occurrence and during the continuance of an Event of Default;

(4) take and hold security for the performance of the Liabilities of any Borrower and exchange, enforce, waive and release any such security;

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(5) apply and reapply such security and direct the order or manner of sale thereof as Administrative Agent, in its sole discretion, may determine;

(7) apply payments received by Administrative Agent from any Borrower to any Liabilities, in such order as Administrative Agent shall determine, in its sole discretion, subject to Section 12.8 ; and

(8) assign this Agreement in whole or in part.

(9) Waivers. Each Borrower, as a primary, joint and several obligor with respect to the Liabilities directly incurred by any other Borrower, hereby waives:

(11) any defense based upon any legal disability or other defense of any other guarantor or other Person;

(13) any defense based upon the application by any other Borrower of the proceeds of the Loan for purposes other than the purposes represented by such other Borrower to Administrative Agent or intended or understood by Administrative Agent or such Borrower;

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of Administrative Agent thereafter to demand strict compliance and performance therewith. Nothing contained herein shall prevent Administrative Agent from foreclosing on any Lien, or exercising any rights available to Administrative Agent thereunder, and the exercise of any such rights shall not constitute a legal or equitable discharge of such Borrower;

(16) [intentionally omitted];

(21) any defense based upon Administrative Agent’s election, in any proceeding instituted under the Bankruptcy Code, of the application of Bankruptcy Code §1111(b)(2) or any successor statute;

(22) any defense based upon any borrowing or any grant of a security interest under Bankruptcy Code §364;

(23) [intentionally omitted];

(25) [intentionally omitted];

(26) any defense based on application of fraudulent conveyance or transfer law or shareholder distribution law to any of the Liabilities or the security therefor;

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(29) any defense available to a surety under applicable Law; and

(30) the benefit of any statute of limitations affecting the liability of such Borrower hereunder or the enforcement hereof.

(31) Additional Waivers. Each Borrower authorizes Administrative Agent to exercise, in its sole discretion, any right, remedy or combination thereof which may then be available to Administrative Agent, since it is such Borrower’s intent that the Liabilities be absolute, independent and unconditional obligations of such Borrower under all circumstances. Notwithstanding any foreclosure of any Lien with respect to any or all of any property securing the Liabilities, whether by the exercise of the power of sale contained therein, by an action for judicial foreclosure or by an acceptance of a deed in lieu of foreclosure, each Borrower shall remain bound under such Borrower’s guaranty of the Liabilities directly incurred by any other Borrower.

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Agreements, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence, willful misconduct or illegal activity of the party from which recovery is sought. NO LENDER OR ADMINISTRATIVE AGENT SHALL BE LIABLE FOR ANY DAMAGES ARISING FROM THE USE BY OTHERS OF ANY INFORMATION OR OTHER MATERIALS OBTAINED THROUGH INTRALINKS OR OTHER SIMILAR INFORMATION TRANSMISSION SYSTEMS IN CONNECTION WITH THIS AGREEMENT, NOR SHALL ANY LENDER OR ADMINISTRATIVE AGENT HAVE ANY LIABILITY WITH RESPECT TO, AND THE BORROWER AGENT ON BEHALF OF ITSELF AND EACH OTHER CREDIT PARTY, HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER FINANCING AGREEMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Each Borrower and the Borrower Agent acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Financing Agreements to which it is a party. No joint venture is created hereby or by the other Financing Agreements or otherwise exists by virtue of the transactions contemplated hereby by the Administrative Agent and Lenders or among the Credit Parties and the Administrative Agent and Lenders.

13. AGENCY .

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limiting the generality of the foregoing sentence, the use of the term “agent” herein and in other Financing Agreements with reference to Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any applicable law. Instead, such term is used merely as a matter of market custom, and is intended to create or reflect only an administrative relationship between independent contracting parties.

13.2 Delegation of Duties . Administrative Agent may execute any of its duties under this Agreement or any other Financing Agreement by or through agents, employees or attorneys-in-fact and shall be entitled to advice of legal counsel and other consultants, independent public accountants or experts concerning all matters pertaining to such duties. Administrative Agent shall not be responsible for the negligence or misconduct of any agent or attorney-in-fact that it selects in the absence of gross negligence or willful misconduct.

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and expense which may be incurred by it by reason of taking or continuing to take any such action. Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this Agreement or any other Financing Agreement in accordance with a request or consent of the Required Lenders or such other number or percentage of Lenders as shall be required elsewhere in this Agreement and such request and any action taken or failure to act pursuant thereto shall be binding upon each Lender. For purposes of determining compliance with the conditions specified in Section 5.1 , each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless Administrative Agent shall have received written notice from such Lender prior to the Closing Date specifying its objection thereto.

13.6 Credit Decision . Each Lender acknowledges that Administrative Agent has not made any representation or warranty to it, and that no act by Administrative Agent hereafter taken, including any consent and acceptance of any assignment or review of the affairs of Borrower, shall be deemed to constitute any representation or warranty by Administrative Agent to any Lender as to any matter, including whether Administrative Agent has disclosed material information in its possession. Each Lender represents to Administrative Agent that it has, independently and without reliance upon Administrative Agent and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower, and made its own decision to enter into this Agreement and to extend credit to Borrower hereunder. Each Lender also represents that it will, independently and without reliance upon Administrative Agent and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Financing Agreements, and to make such investigations as it deems necessary to inform itself as to the business, prospects, operations, property, financial and other condition and creditworthiness of Borrower. Except for notices, reports and other documents expressly herein required to be furnished to Lenders by Administrative Agent, Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, prospects, operations, property, financial or other condition or creditworthiness of Borrower which may come into the possession of Administrative Agent.

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13.7 Indemnification . Whether or not the transactions contemplated hereby are consummated, each Lender shall indemnify, defend and hold harmless upon demand Administrative Agent and its directors, officers, employees, Affiliates and agents (to the extent not reimbursed by or on behalf of Borrower and without limiting the obligation of Borrower to do so), according to its applicable Pro Rata Share, from and against any and all liability, loss, damage, claim, demand, action, penalty, cost or expense (including, without limitation, reasonable attorneys’ fees), that Administrative Agent suffers or incurs in connection with this Agreement or any other Financing Agreement or any action taken or omitted by Administrative Agent hereunder or thereunder, provided that no Lender shall be liable for any payment to any such Person of any portion thereof to the extent determined by a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the applicable Person’s own gross negligence or willful misconduct. No action taken in accordance with the directions of Required Lenders shall be deemed to constitute gross negligence or willful misconduct for purposes of this Section. Without limitation of the foregoing, each Lender shall reimburse Administrative Agent upon demand for its ratable share of any costs or out-of-pocket expenses (including, without limitation, reasonable attorneys’ fees and costs) incurred by Administrative Agent in connection with the preparation, execution, delivery, administration, modification, amendment or enforcement (whether through negotiations, legal proceedings or otherwise) of, or legal advice in respect of rights or responsibilities under, this Agreement, any other Financing Agreement, or any document contemplated by or referred to herein, to the extent that Administrative Agent is not reimbursed for such expenses by or on behalf of Borrower. If any indemnity furnished to Administrative Agent for any purpose shall, in the reasonable, good faith opinion of Administrative Agent, be insufficient or become impaired, Administrative Agent may call for additional reasonable indemnity and cease, or not commence, to do the acts indemnified against even if so directed by Required Lenders until such additional reasonable indemnity is furnished. The undertaking in this Section shall survive repayment of the Loan and other Liabilities, cancellation of any promissory notes, any foreclosure under, or modification, release or discharge of, any or all of the Financing Agreements, termination of this Agreement and the resignation or replacement of Administrative Agent.

13.8 Administrative Agent in Individual Capacity . PrivateBank and its Affiliates may make loans to, issue letters of credit for the account of, accept deposits from, acquire equity interests in and generally engage in any kind of banking, trust, financial advisory, underwriting or other business with Borrower and its Affiliates as though PrivateBank were not Administrative Agent hereunder and without notice to or consent of any Lender. Each Lender acknowledges that, pursuant to such activities, PrivateBank or its Affiliates may receive information regarding Borrower or its Affiliates (including information that may be subject to confidentiality obligations in favor of Borrower or such Affiliates) and acknowledge that Administrative Agent shall be under no obligation to provide such information to them. With respect to its portion of the Loan, PrivateBank and its Affiliates shall have the same rights and powers under this Agreement as any other Lender and may exercise the same as though PrivateBank were not Administrative Agent, and the terms “Lender” and “Lenders” include PrivateBank and its Affiliates, to the extent applicable, in their individual capacities.

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exists) the consent of Borrower (which shall not be unreasonably withheld, conditioned or delayed), appoint from among Lenders a successor agent for Lenders. Notwithstanding the immediately foregoing sentence, if no successor agent is appointed prior to the effective date of the resignation of Administrative Agent, Administrative Agent may appoint, after consulting with Lenders and Borrower, a successor agent from among Lenders. Upon the acceptance of its appointment as successor agent hereunder, such successor agent shall succeed to and become vested with all the rights, powers and duties of the retiring Administrative Agent and the term “Administrative Agent” shall mean such successor agent, and the retiring Administrative Agent’s appointment, powers and duties as Administrative Agent shall be terminated. After any retiring Administrative Agent’s resignation hereunder as Administrative Agent, the provisions of this Section 13 and Sections 12.2 and 12.16 shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Administrative Agent under this Agreement. If no successor agent has accepted appointment as Administrative Agent by the date which is thirty (30) days following a retiring Administrative Agent’s notice of resignation, the retiring Administrative Agent’s resignation shall nevertheless thereupon become effective and Lenders shall perform all of the duties of Administrative Agent hereunder until such time, if any, as Required Lenders appoint a successor agent as provided for above. The fees payable by Borrower to a successor agent in its capacity as such agent shall be the same as those payable to its predecessor unless otherwise agreed in writing between Borrower and such successor.

13.10. Collateral Matters . Lenders irrevocably authorize Administrative Agent, at its option and in its discretion, (a) to release any Lien granted to or held by Administrative Agent under this Agreement and any other Financing Agreement (i) if all Liabilities are indefeasibly paid in full in cash; (ii) constituting property sold or to be sold or disposed of, financed or refinanced, as part of or in connection with any sale, disposition, financing or refinancing which is expressly permitted by this Agreement or the Revolving Loan Agreement at any time; or (iii) subject to Section 13.1 , if approved, authorized or ratified in writing by Required Lenders; or (b) to subordinate its interest in any Collateral to any holder of a Lien on such Collateral which is expressly permitted by this Agreement or the Revolving Loan Agreement at any time. Upon request by Administrative Agent at any time, Lenders will promptly confirm in writing Administrative Agent’s authority to release, or subordinate its interest in, particular types or items of Collateral pursuant to this Section 13.10 . Administrative Agent and each Lender hereby appoint each other Lender as agent for the purpose of perfecting Administrative Agent’s security interest in assets and Collateral which, in accordance with the Uniform Commercial Code in any applicable jurisdiction, can be perfected by possession or control. Should any Lender (other than Administrative Agent) obtain possession or control of any such assets or Collateral, such Lender shall promptly notify Administrative Agent thereof in writing, and, promptly upon Administrative Agent’s written request therefor, shall deliver such assets or Collateral to Administrative Agent or in accordance with Administrative Agent’s instructions or transfer control to Administrative Agent in accordance with Administrative Agent’s instructions. Each Lender agrees that, except as otherwise expressly provided herein, it will not have any right individually to enforce or seek to enforce this Agreement or any Financing Agreement or to realize upon any Collateral for the Liabilities unless instructed in writing to do so by Administrative Agent, it being understood and agreed that such rights and remedies may be exercised only by Administrative Agent.

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13.11 Administrative Agent May File Proofs of Claim . In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to Borrower, Administrative Agent (irrespective of whether the principal of the Loan shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether Administrative Agent shall have made any demand on Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:

(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loan, and all other Liabilities that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of Lenders and Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of Lenders and Administrative Agent and their respective agents and attorneys and all other amounts due Lenders and Administrative Agent under this Agreement) allowed in such judicial proceedings; and

(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender to make such payments to Administrative Agent and, in the event that Administrative Agent shall consent to the making of such payments directly to Lenders, to pay to Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of Administrative Agent and its agents and attorneys, and any other amounts due Administrative Agent under this Agreement.

13.12 Other Agents; Arrangers and Managers . None of Lenders or other Persons identified on the facing page or signature pages of this Agreement as, if applicable, a “joint arranger,” “syndication agent,” “documentation agent,” “co-agent,” “book manager,” “lead manager,” “joint lead lender”, “arranger,” “lead arranger” or “co-arranger”, if any, shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than, in the case of such Lenders, those applicable to all Lenders as such. Without limiting the foregoing, none of Lenders or other Persons so identified shall have or be deemed to have any fiduciary relationship with any Lender. Each Lender acknowledges that it has not relied, and will not rely, on any of Lenders or other Persons so identified in deciding to enter into this Agreement or in taking or not taking action hereunder.

13.13 Return of Payments . If Administrative Agent pays an amount to a Lender under this Agreement in the belief or expectation that a related payment has been or will be received by Administrative Agent from Borrower and such related payment is not received by Administrative Agent, then Administrative Agent will be entitled to recover such amount from such Lender on demand without setoff, counterclaim or deduction of any kind, together with

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interest accruing on a daily basis at the Federal Funds Rate (as defined below). If Administrative Agent determines at any time that any amount received by Administrative Agent under this Agreement must be returned to Borrower or paid to any other Person pursuant to any insolvency law or otherwise, then, notwithstanding any other term or condition of this Agreement or any other Financing Agreement, Administrative Agent will not be required to distribute any portion thereof to any Lender. In addition, each Lender will repay to Administrative Agent on demand any portion of such amount that Administrative Agent has distributed to such Lender, together with interest at such rate, if any, as Administrative Agent is required to pay to Borrower or such other Person, without setoff, counterclaim or deduction of any kind. As used herein, the term “ Federal Funds Rate ” means for any day, a fluctuating interest rate equal for each day during such period to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Administrative Agent from three Federal funds brokers of recognized standing selected by Administrative Agent; provided, Administrative Agent’s determination of such rate shall be binding and conclusive absent manifest error.

13.14 PrivateBank Credit Hold . As between PrivateBank and Bankers Trust Company, PrivateBank agrees to hold and maintain in its own portfolio at least fifty-one percent (51.0%) of the Term Loan Commitment until the earlier of the Stated Maturity Date (unless sooner accelerated in accordance with the terms of this Agreement) or Bankers Trust Company is no longer a Lender hereof.

14. JURISDICTION; JURY TRIAL WAIVER

14.1 SUBMISSION TO JURISDICTION; WAIVER OF VENUE . THE BORROWER HEREBY IRREVOCABLY AND UNCONDITIONALLY:

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ASSERT OR IMPOSE ANY CLAIM, NONCOMPULSORY SET-OFF, COUNTERCLAIM OR CROSS-CLAIM IN RESPECT THEREOF IN SUCH PROCEEDING; PROVIDED, HOWEVER, THIS WAIVER DOES NOT PRECLUDE THE RIGHT TO ASSERT A DEFENSE IN SUCH ACTION OR PROCEEDING OR TO ASSERT OR IMPOSE ANY CLAIM, COUNTERCLAIM OR CROSS-CLAIM WHICH THE BORROWER WISHES TO PURSUE IN A SEPARATE PROCEEDING AT ITS SOLE COST AND EXPENSE, AND (iii) ALL STATUTES OF LIMITATIONS WHICH MAY BE RELEVANT THERETO; AND

14.2 GOVERNING LAW

. THIS AGREEMENT SHALL BE CONSTRUED IN ALL RESPECTS IN ACCORDANCE WITH, AND ENFORCED AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO CONFLICTS OF LAW PRINCIPLES.

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AGREEMENT DELIVERED OR WHICH MAY IN THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS AGREEMENT AND THE FINANCING AGREEMENTS. THE ADMINISTRATIVE AGENT, THE LENDERS AND THE BORROWER AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

[Signature Page Follows]

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IN WITNESS WHEREOF , this Term Loan and Security Agreement has been duly executed as of the day and year first above written.


BORROWER : DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer


DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. ,its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer


DIVERSICARE CHISOLM, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Term Loan and Security Agreement


DIVERSICARE HARTFORD, LLC, a Delaware limited liability company BY: DIVERSICARE LEASING CORP. , its sole member
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Its:	Executive Vice President & Chief Financial Officer

Acknowledged and Agreed
solely for purposes of Sections 8.9 and 9.12 hereof :

ADVOCAT INC.



By:	/s/ Matthew J. Weishaar
	Name:	Matthew J. Weishaar
	Its:	Asst Secretary

Term Loan and Security Agreement


ADMINISTRATIVE AGENT : THE PRIVATEBANK AND TRUST COMPANY , in its capacity as administrative agent
By:	/s/ Adam D. Panos
	Name:	Adam D. Panos
	Its:	Associate Managing Director

Term Loan and Security Agreement


LENDER : THE PRIVATEBANK AND TRUST COMPANY
By:	/s/ Adam D. Panos
	Name:	Adam D. Panos
	Its:	Associate Managing Director

Term Loan and Security Agreement


LENDER : BANKERS TRUST COMPANY
By:	/s/ Jon M. Doll
	Name:	Jon M. Doll
	Its:	Vice President

Term Loan and Security Agreement

LIST OF SCHEDULES AND EXHIBITS

SCHEDULES


Schedule 1		Borrowers
Schedule 1.1(a)		Facilities
Schedule 1.1(b)		Real Property
Schedule 7.8		Other Names
Schedule 7.12		Organizational Chart
Schedule 7.13		Litigation
Schedule 7.17		Environmental Matters
Schedule 7.26		Medicare and Medicaid Penalties
Schedule 7.33		Capitalization
Schedule 9.3		Requirements for Subsidiary Formation

EXHIBITS

Exhibit A Form of Term Loan Note
Exhibit B Form of Assignment Agreement

ANNEX

Annex A Lenders, Term Loan Commitment Percentages, and Notice Information

Exhibit 10.5

GUARANTY

THIS GUARANTY (“ Guaranty ”) dated as of February 28, 2011, by ADVOCAT INC. , a Delaware corporation (“ Guarantor ”), is to and for the benefit of THE PRIVATEBANK AND TRUST COMPANY , an Illinois banking corporation in its capacity as administrative agent for the Lenders identified below (together with its successors and assigns, the “ Administrative Agent ”).

R E C I T A L S:

A. Diversicare Afton Oaks, LLC, Diversicare Briarcliff, LLC, Diversicare Chisolm, LLC and Diversicare Hartford, LLC, each a Delaware limited liability company (individually and collectively referred to herein as, “ Borrower ”), have requested that the Administrative Agent on behalf of the Lenders make a certain term loan (the “ Loan ”) to Borrower pursuant to and in accordance with that certain Term Loan and Security Agreement dated of even date herewith by and among Borrower, the lenders party thereto (collectively, the “ Lenders ”), and the Administrative Agent (as the same may be amended, supplemented, amended and restated or otherwise modified from time to time, the “ Loan Agreement ”); capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Loan Agreement.

B. As security for repayment of the Loan, in addition to this Guaranty, certain other loan and security documents have been executed and delivered to the Administrative Agent. The Loan Agreement, the Term Loan Notes, the Pledge Agreements, this Guaranty, each other guaranty delivered in favor of the Administrative Agent on behalf of the Lenders in connection with the Loan Agreement, and any and all other instruments, agreements, and documents executed in conjunction herewith and therewith (including, without limitation, each of the “Financing Agreements” (as defined in the Loan Agreement)) are hereinafter sometimes collectively referred to herein as the “ Loan Documents .”

jointly and severally, together with each Other Guarantor (as defined in Section 3 below), and, unconditionally and irrevocably, guarantees, irrespective of the validity or enforceability of any instrument, writing or agreement relating to or the subject of any such advances, financial accommodation or loans (including, but not limited to, the Loan Documents), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, (i) the full and prompt payment to Administrative Agent and Lenders at maturity, whether by acceleration or otherwise, and at all times thereafter of any and all “Liabilities” (as defined in the Loan Agreement) of every kind and nature of Borrower to Administrative Agent and Lenders (arising out of or in connection with the Loan, the Loan Agreement, and each of the other Loan Documents to which Borrower (or any of its Affiliates) is a party, including, without limitation, for principal, interest, default interest, charges, fees, indemnification, costs, expenses, reasonable attorneys’ fees, or otherwise), and whether or not due or to become due before or after any bankruptcy or insolvency proceeding involving Borrower or would have become due but for Borrower’s bankruptcy proceeding, howsoever evidenced, whether now existing or hereafter created or arising, directly or indirectly, primary or secondary, absolute or contingent, due or to become due, and howsoever owned, held or acquired, whether through discount, overdraft, purchase, direct loan or as collateral, or otherwise, and (ii) the prompt, full and faithful performance and discharge by Borrower of each and every of the terms, conditions, agreements, covenants, representations and warranties on the part of Borrower contained in any agreement, the Loan Agreement and each of the other Loan Documents to which Borrower is a party, and any other promissory notes, loan agreements, or security agreements, or in any modification or addenda thereto or substitution thereof in connection with any advance, credit or financial accommodation afforded by Administrative Agent on behalf of Lenders to Borrower (collectively the “ Guaranteed Liabilities ”); and (b) Guarantor further agrees to pay all costs and expenses, legal and/or otherwise (including, but not limited to, court costs and reasonable attorneys’ fees and expenses), paid or incurred by Administrative Agent on behalf of Lenders in endeavoring to collect the Guaranteed Liabilities, the Extraordinary Claims (as hereinbelow defined), or in either case, any part thereof, or in enforcing this Guaranty or in defending any suit based on any act of commission or omission of Administrative Agent or Lenders with respect to the Indebtedness, the Collateral (as defined in the Loan Agreement), or this Guaranty or in connection with any Recovery Claim (as hereinbelow defined) (the “ Enforcement Costs ”); and (c) Guarantor further agrees to pay any and all costs, losses, damages and reasonable attorney’s fees incurred by the Administrative Agent in connection with any of the following: (i) misapplication or misappropriation of any insurance or condemnation proceeds; and (ii) Borrower or Guarantor institutes or becomes by virtue of a counterclaim a party to any case, action, suit, or proceeding which reduces, impedes or impairs Administrative Agent’s right of recourse to the Collateral or any part thereof or Borrower or Guarantor engages in any act, omission, or misrepresentation which has the effect of suspending, delaying, reducing, impeding, or impairing the Administrative Agent’s right of recourse to the Collateral or any part thereof (each of the aforesaid are collectively referred to as an “ Extraordinary Claims ”). The Guaranteed Liabilities, the Enforcement Costs, and the Extraordinary Claims are collectively referred to as the “ Guaranteed Obligations .” Capitalized terms used herein and not otherwise defined herein shall have the meaning given to them in the Loan Agreement.

Guarantor hereby further agrees as follows:

3. Primary Obligations . This Guaranty is a primary and original obligation of Guarantor, is not merely the creation of a surety relationship, and is an absolute, unconditional, and continuing guaranty of payment and performance and not of collection which shall remain in full force and effect without respect to future changes in conditions, including any change of law or any invalidity or irregularity with respect to the issuance of any instrument, writing or agreement relating to the Guaranteed Obligations. Guarantor agrees that Guarantor is directly and severally with any other guarantors of the Guaranteed Obligations liable to Administrative Agent and Lenders, that the obligations of Guarantor hereunder are independent of the obligations of Borrower or any other guarantor, and that a separate action may be brought against Guarantor whether such action is brought against Borrower or any other guarantor of Borrower’s Indebtedness, obligations or liabilities to Administrative Agent and Lenders (each an “ Other Guarantor ”) or whether Borrower or any such Other Guarantor is joined in such action. Guarantor agrees that Guarantor’s liability hereunder shall be immediate and shall not be contingent upon the exercise or enforcement of any lien, security interest, mortgage or realization upon any security or collateral Administrative Agent may at any time possess. Guarantor agrees that any release which may be given by Administrative Agent to Borrower or any Other Guarantor shall not release Guarantor. Guarantor consents and agrees that

Administrative Agent shall be under no obligation to marshal any assets of Borrower or any Other Guarantor in favor of said Guarantor, or against or in payment of any or all of the Guaranteed Obligations.

5. Waivers .

(b) Guarantor hereby waives the right by statute or otherwise to require Administrative Agent or any Lender to institute suit against Borrower or under any other guaranty; or to exhaust any rights and remedies which Lender has or may have against Borrower or under any other guaranty; provided , however , that nothing herein contained shall prevent Administrative Agent from suing on the Loan Agreement or foreclosing any security interest or lien created by any of the other Loan Documents, or from exercising any other rights thereunder, and if such commercial code sale or other remedy is availed of, only the net proceeds therefrom, after deduction of all charges and expenses of every kind and nature whatsoever relating to the proceedings or sale, shall be applied in reduction of the amount due on the Loan Agreement and other Loan Documents, and Administrative Agent shall not be required to institute or prosecute proceedings to cover any deficiency as a condition of any payment hereunder or enforcement hereof. At any sale of the security or collateral for the Loan, or any part thereof, whether by commercial code sale or otherwise, Administrative Agent may, at its discretion, purchase all or any part of such collateral offered for sale, for its own account (on behalf of the Lenders and itself), and may apply against the amount bid therefore the balance due it pursuant to the terms of the Loan Agreement and other Loan Documents. Guarantor further agrees that Guarantor is bound to the payment of all Guaranteed Obligations, whether now existing or hereafter accruing, as fully as if such Guaranteed Obligations were directly owing to Administrative Agent and

Lenders by Guarantor. Guarantor further waives any defense arising by reason of any disability or other defense (other than the defense that the Guaranteed Obligations shall have been fully and finally performed and indefeasibly paid) of Borrower or by reason of the cessation from any cause whatsoever of the liability of Borrower in respect thereof. Guarantor consents to any and all forbearances and extensions of the time of payment of the Loan Agreement or any of the other Loan Documents, and to any and all changes in the terms, covenants and conditions thereof hereafter made or granted, and to any part of the collateral therefor; it being the intention and agreement hereof that Guarantor shall remain unconditionally liable as a principal as, to and until the Guaranteed Obligations shall have been fully repaid to Administrative Agent on behalf of the Lenders, and the terms, covenants and conditions of the Loan Agreement and of the other Loan Documents and all other notes, instruments, writing or agreements evidencing or securing the Guaranteed Obligations shall have been fully performed and observed, notwithstanding any act, omission or thing which might otherwise operate as a legal or equitable discharge of Borrower or Guarantor.

(d) Guarantor hereby waives any right of subrogation Guarantor has or may have as against Borrower until all preference periods under all applicable laws have expired. In addition, Guarantor hereby waives any right to proceed against Borrower, now or hereafter for contribution, indemnity, reimbursement and any other suretyship rights and claims, whether direct or indirect, liquidated or contingent, whether arising under express or implied contract or

by operation of law, which Guarantor may now have or hereafter have as against Borrower. Until the Guaranteed Obligations are indefeasibly paid in full hereunder, Guarantor also hereby waives any right to recourse to or with respect to any asset of Borrower. Guarantor agrees that in light of the immediately foregoing waivers, the execution of the Guaranty shall not be deemed to make Guarantor a “creditor” of Borrower, and that for purposes of Sections 547 and 550 of the Bankruptcy Code, Guarantor shall not be deemed a “creditor” of Borrower.

any court or administrative body having jurisdiction over Administrative Agent or any Lender or any of its respective property; or (b) any reasonable settlement or compromise of any such Recovery Claim effected by Administrative Agent or such Lender with the claimant (including Borrower), Guarantor shall remain liable to Administrative Agent and Lenders for the amount so repaid to the same extent as if such amount had never originally been received by Administrative Agent and Lenders, notwithstanding any termination hereof or the return of this document to Guarantor or the cancellation of any note or other instrument evidencing any of the Indebtedness.

of Guarantor’s obligations pursuant to and as contemplated by the terms and provisions of this Guaranty.

12. Payments; Application . All payments to be made hereunder by Guarantor shall be made in lawful money of the United States of America at the time of payment, shall be made in immediately available funds, and shall be made without deduction (whether for taxes or otherwise) or offset. All payments made by Guarantor hereunder shall be applied as follows; first, to all costs and expenses (including, but not limited to, reasonable attorneys’ fees, expenses and court costs) incurred by Administrative Agent in enforcing this Guaranty or in collecting the

Guaranteed Obligations; second, to all accrued and unpaid interest and fees owing to Administrative Agent and Lenders constituting Guaranteed Obligations; and third, to the balance of the Guaranteed Obligations, all subject to the terms of the Loan Agreement.

13. [Intentionally Omitted]

If to Administrative Agent, at:

The PrivateBank and Trust Company
120 South LaSalle Street
Chicago, Illinois 60603
Attention: Adam Panos
Telephone No.: 312-564-1278
Facsimile No.: 312-564-6889

With a copy to:

Duane Morris LLP
190 South LaSalle Street — Suite 3700
Chicago, Illinois 60603
Attention: Brian P. Kerwin
Telephone No: 312-499-6737
Facsimile No: 312-499-6701

If to Guarantor, at:

Advocat Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Attention: Glynn Riddle
Telephone No.: 615-771-7575
Facsimile No.: 615-771-7409

With a copy to:

Harwell Howard Hyne Gabbert & Manner
315 Deaderick Street, Suite 1800
Nashville, Tennessee 37238
Attention: John N. Popham IV
Telephone No.: 615-251-1093
Facsimile No.: 615-251-1059

18. Interpretation and Severability of Provisions . The headings of sections and paragraphs in this Guaranty are for convenience of reference only and shall not be construed in any way to limit or define the content, scope or intent of the provisions hereof. As used in this Guaranty, the singular shall include the plural, and masculine, feminine and neuter pronouns shall be fully interchangeable, where the context so requires. Whenever the words “including”, “include or includes” are used in this Guaranty, they should be interpreted in a non-exclusive manner as though the words “, without limitation,” immediately followed the same. Wherever possible, each provision of this Guaranty shall be interpreted in such manner as to be effective and valid under applicable law. If any provision of this Guaranty is prohibited or unenforceable under applicable law, such provision shall be ineffective to the extent of such prohibition or

unenforceability without invalidating the remaining provisions hereof. As used herein, except in circumstances where under the Loan Documents the term is intended to mean or refer to all of the Borrowers or all of the Credit Parties on a consolidated basis, the term “Borrower” refers to any one or all of the Borrowers under the Loan Agreement, as applicable, provided, however, in the event of any disagreement between Administrative Agent and Guarantor as to whether or not a reference to Borrower means any or all of such Borrower(s) individually or collectively herein, and the circumstances are not covered by the Loan Documents, the Administrative Agent shall in reasonable good faith make such determination.

20. Additional and Independent Obligations . Guarantor’s obligations under this Guaranty are in addition to Guarantor’s obligations under any other existing or future guaranties, each of which shall remain in full force and effect until it is expressly modified or released in a writing signed by Administrative Agent. Guarantor’s obligations under this Guaranty are independent of those of Borrower and any Other Guarantor. Administrative Agent may bring a separate action against Guarantor without first proceeding against Borrower, any Other Guarantor, any other person or entity or any security that Administrative Agent may hold, and without pursuing any other remedy. Administrative Agent’s rights under this Guaranty shall not be exhausted by any action by Administrative Agent until all of the Indebtedness, liabilities and obligations owing to Administrative Agent and Lenders pursuant to the Loan Agreement and the other Loan Documents (including, without limitation, the Loan and other Liabilities) have been indefeasibly paid in full in cash and otherwise performed in full and all financing arrangements and accommodations among Borrower, Administrative Agent and Lenders shall have been irrevocably terminated and Administrative Agent and Lenders have no obligations to make any

loans, financial accommodations or advance any funds to Borrower which could constitute Liabilities.

24. SUBMISSION OF JURISDICTION . THE GUARANTOR HEREBY IRREVOCABLY AND UNCONDITIONALLY:

THE COURTS OF THE UNITED STATES OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS AND APPELLATE COURTS FROM ANY THEREOF;

26. JURY TRIAL . THE GUARANTOR AND THE ADMINISTRATIVE AGENT HEREBY IRREVOCABLY AND KNOWINGLY WAIVE (TO THE FULLEST EXTENT PERMITTED BY LAW) ANY RIGHT TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING (INCLUDING, WITHOUT LIMITATION, ANY COUNTERCLAIM) ARISING OUT OF THIS GUARANTY OR ANY OTHER AGREEMENTS OR TRANSACTIONS RELATED HERETO, INCLUDING, WITHOUT LIMITATION, ANY ACTION OR PROCEEDING (A) TO ENFORCE OR DEFEND ANY RIGHTS UNDER OR IN CONNECTION WITH THIS GUARANTY OR ANY INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN

THE FUTURE BE DELIVERED IN CONNECTION HEREWITH, OR (B) ARISING FROM ANY DISPUTE OR CONTROVERSY IN CONNECTION WITH OR RELATED TO THIS GUARANTY. THE ADMINISTRATIVE AGENT AND THE GUARANTOR AGREE THAT ANY SUCH ACTION OR PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT A JURY.

27. No Pledge of Equity . Guarantor agrees that, so long as any of the Guaranteed Obligations remain outstanding, except in the case of a Borrower that has been released from the Guaranteed Obligations in connection with any party’s prepayment thereof in accordance with the terms of the Loan Documents and is no longer a Borrower thereunder, Guarantor shall remain the owner (either directly or through one of its Subsidiaries) of 100% of the equity in each Borrower; and without the prior written consent of Administrative Agent, Guarantor shall not assign, sell, convey, gift, transfer, pledge, hypothecate, grant a security interest in, encumber or in any other manner permit any lien (other than Permitted Liens) to exist in or on, all or any portion of the equity in or of any Borrower.

[Signature Page Follows]

IN WITNESS WHEREOF , Guarantor has executed and delivered this Guaranty as of the date set forth in the first paragraph hereof.


Guarantor: ADVOCAT INC.
By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

[ Signature Page — Guaranty]

Exhibit 10.5

SCHEDULE 10(b)

Guaranty of Advocat, Inc.

LITIGATION

See attached list of pending or threatened litigation against Advocat, Inc.

Exhibit 10.6


		The PrivateBank and Trust Co Capital Markets Operations 70 West Madison Suite 500 Chicago, IL 60603


TO:		DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE AFTON OAKS, LLC, DIVERSICARE CHISOLM, LLC AND DIVERSICARE HARTFORD, LLC

FROM:		The PrivateBank and Trust Company

DATE:		01 March 2011

RE:		Interest Rate Swap

REF NO.:		3000911 (5675 / 5676)

The purpose of this communication is to set forth the terms and conditions of the Interest Rate Swap Transaction entered into on the Trade Date referred to below (the “Interest Rate Swap Transaction”), between The PrivateBank and Trust Company (“Party A” or “we”) and DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE AFTON OAKS, LLC, DIVERSICARE CHISOLM, LLC AND DIVERSICARE HARTFORD, LLC (“Party B” or “you”). This communication constitutes a “Confirmation” as referred to in the Interest Rate Swap Agreement specified below.

This Confirmation incorporates the definitions and provisions contained in the 2000 ISDA Definitions as published by the International Swaps and Derivatives Association, Inc. (the “Definitions”). In the event of any inconsistency between the Definitions and this Confirmation, this Confirmation will govern.

This Confirmation is subject to and incorporates the terms of the ISDA Master Agreement and Schedule dated February 16, 2011 between Party A and Party B (the “ISDA Master Agreement”). All provisions contained in, or incorporated by reference to, the ISDA Master Agreement shall govern this Confirmation except as expressly modified below. In the event of any inconsistency between the provisions of that ISDA Master Agreement and this Confirmation, this Confirmation shall prevail for the purpose of this Interest Rate Swap Agreement.

The terms of the particular Interest Rate Swap Transaction to which this communication relates are as follows:


Notional Amount:		USD 23,000,000.00

Trade Date:		March 1, 2011

Effective Date:		March 1, 2011

Termination Date:		March 1,2016 subject to adjustment in accordance with the Following Business Day Convention.


Fixed Amounts:

Fixed Rate Payer:		Party B

Fixed Rate:		2.57%

Fixed Rate Day Count Fraction:		Act/360

Fixed Rate Calculation Periods:		From and including the First (1st) day of each month to but excluding the First (1st) of the following month, starting with the Effective Date and continuing until the Termination Date, subject to adjustment in accordance with the Following Business Day Convention.

Page 1 of 5


Fixed Rate Payer Payment Dates:		First (1st) calendar day of each month beginning with April 1, 2011, continuing until the Termination Date, subject to adjustment in accordance with the Following Business Day Convention.

Floating Amounts:

Floating Rate Payer:		Party A

Floating Rate Calculation Periods:		From and including the First (1st) day of each month to but excluding the First (1st) of the following month, starting with the Effective Date and continuing until the Termination Date, subject to adjustment in accordance with the Following
		Business Day Convention.

Floating Rate Payer Payment Dates:		First (1st) calendar day of each month beginning with April 1, 2011, continuing until the Termination Date, subject to adjustment in accordance with the Following Business Day Convention.


Floating Rate Option:		USD-LIBOR-BBA

Designated Maturity:		1 Month (No interpolation)

Floating Rate Day Count:		Act/360

Floating Rate for initial Calculation Period:		0.2610%

Reset Dates:		First day of each Floating Rate Calculation Period

Compounding:		Inapplicable

Business Days:	USNYC

Calculation Agent:	Party A

Governing Law:	New York

Payment Instructions Parties A and B:	Party A will debit/credit the DDA account of Party B for payment.

Please confirm that the foregoing correctly sets forth the terms of our agreement with respect to the Interest Rate Swap Transaction by signing in the space provided below and sending a copy of the executed Confirmation to The PrivateBank and Trust Company, Attention: Dominic Bracco, Facsimile number 312.683.0445.

Page 2 of 5

The Private Bank and Trust Comapany



By:	/s/ Scott Venable
	Name:	Scott Venable
	Title:	Managing Director

DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE AFTON OAKS, LLC, DIVERSICARE CHISOLM, LLC AND DIVERSICARE HARTFORD, LLC



By:	/s/ Glynn Riddle
	Name:	Glynn Riddle
	Title:	EVP & CFO

Page 3 of 5

Notional Schedule


Start Date	End Date	Notional (USD)
1-Mar-11	1-Apr-11	23,000,000
1-Apr-11	2-May-11	22,968,333
2-May-11	1-Jun-11	22,936,666
1-Jun-11	1-Jul-11	22,904,999
1-Jul-11	1-Aug-11	22,873,332
1-Aug-11	1-Sep-11	22,841,665
1-Sep-11	3-Oct-11	22,809,998
3-Oct-11	1-Nov-11	22,778,331
1-Nov-11	1-Dec-11	22,746,664
1-Dec-11	3-Jan-12	22,714,997
3-Jan-12	1-Feb-12	22,683,330
1-Feb-12	1-Mar-12	22,651,663
1-Mar-12	2-Apr-12	22,619,996
2-Apr-12	1-May-12	22,585,829
1-May-12	1-Jun-12	22,551,662
1-Jun-12	2-Jul-12	22,517,495
2-Jul-12	1-Aug-12	22,483,328
1-Aug-12	4-Sep-12	22,449,161
4-Sep-12	1-Oct-12	22,414,994
1-Oct-12	1-Nov-12	22,380,827
1-Nov-12	3-Dec-12	22,346,660
3-Dec-12	2-Jan-13	22,312,493
2-Jan-13	1-Feb-13	22,278,326
1-Feb-13	1-Mar-13	22,244,159
1-Mar-13	1-Apr-13	22,209,992
1-Apr-13	1-May-13	22,174,158
1-May-13	3-Jun-13	22,138,324
3-Jun-13	1-Jul-13	22,102,490
1-Jul-13	1-Aug-13	22,066,656
1-Aug-13	3-Sep-13	22,030,822
3-Sep-13	1-Oct-13	21,994,988
1-Oct-13	1-Nov-13	21,959,154
1-Nov-13	2-Dec-13	21,923,320
2-Dec-13	2-Jan-14	21,887,486
2-Jan-14	3-Feb-14	21,851,652
3-Feb-14	3-Mar-14	21,815,818
3-Mar-14	1-Apr-14	21,779,984

Page 4 of 5


Start Date	End Date	Notional (USD)
1-Apr-14	1-May-14	21,741,650
1-May-14	2-Jun-14	21,703,316
2-Jun-14	1-Jul-14	21,664,982
1-Jul-14	1-Aug-14	21,626,648
1-Aug-14	2-Sep-14	21,588,314
2-Sep-14	1-Oct-14	21,549,980
1-Oct-14	3-Nov-14	21,511,646
3-Nov-14	1-Dec-14	21,473,312
1-Dec-14	2-Jan-15	21,434,978
2-Jan-15	2-Feb-15	21,396,644
2-Feb-15	2-Mar-15	21,358,310
2-Mar-15	1-Apr-15	21,319,976
1-Apr-15	1-May-15	21,279,142
1-May-15	1-Jun-15	21,238,308
1-Jun-15	1-Jul-15	21,197,474
1-Jul-15	3-Aug-15	21,156,640
3-Aug-15	1-Sep-15	21,115,806
1-Sep-15	1-Oct-15	21,074,972
1-Oct-15	2-Nov-15	21,034,138
2-Nov-15	1-Dec-15	20,993,304
1-Dec-15	4-Jan-16	20,952,470
4-Jan-16	1-Feb-16	20,911,636
1-Feb-16	1-Mar-16	20,870,802

Page 5 of 5

Exhibit 10.7

EMPLOYMENT AGREEMENT

This Agreement made effective as of June 28, 2010 by and between Advocat Inc., a Delaware corporation (the “Company”), and William David Houghton (the “Executive”).

In consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows:

SECTION I
EMPLOYMENT

The Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the Period of Employment as provided in Section III.A. below and upon the terms and conditions provided in the Agreement.

SECTION II
POSITION AND RESPONSIBILITIES

During the Period of Employment, the Executive agrees to serve as Chief Information Officer of the Company and to be responsible for the typical management responsibilities expected of an officer holding such positions and such other responsibilities as may be assigned to Executive from time to time by the Chief Executive Officer and Board of Directors of the Company.

SECTION III
TERMS AND DUTIES

A. Period of Employment

The period of Executive’s employment under this Agreement will commence as of the date hereof and shall continue through March 31, 2012, subject to extension or termination as provided in this Agreement (“Period of Employment”). On March 31, 2012 and each March 31 thereafter, the period of Employee’s employment shall be extended for additional one (1) year period, unless either party gives notice thirty (30) days in advance of the expiration of the then current period of employment of such party’s intent not to extend the Period of Employment.

B. Duties

During the Period of Employment, the Executive shall devote all of his business time, attention and skill to the business and affairs of the Company and its subsidiaries. The Executive will perform faithfully the duties which may be assigned to him from time to time by the Chief Executive Officer and the Board of Directors.

SECTION IV
COMPENSATION AND BENEFITS

A. Compensation

For all services rendered by the Executive in any capacity during the Period of Employment, the Executive shall be compensated as follows:

1. Base Salary

The Company shall pay the Executive a base salary (“Base Salary”) as follows: Two Hundred Thousand ($200,000) per annum.

Base Salary shall be payable according to the customary payroll practices of the Company but in no event less frequently than once each month. The base salary shall be reviewed annually and shall be subject to increase according to the policies and practices adopted by the Company from time to time.

B. Annual Incentive Awards

The Company will pay the Executive annual incentive compensation awards as may be granted by the Board or a Compensation Committee to the Executive under any executive bonus or incentive plan in effect from time to time.

C. Additional Benefits

The Executive will be entitled to participate in all compensation or employee benefit plans or programs and receive all benefits and perquisites for which any salaried employees are eligible under any existing or future plan or program established by the Company for salaried employees. The Executive will participate to the extent permissible under the terms and provisions of such plans or programs in accordance with program provisions. These may include group hospitalization, health, dental care, life or other insurance, tax qualified pension, car allowance, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans including capital accumulation programs, Restricted Stock programs, stock purchase programs and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any of the plans or programs applicable to salaried or senior executives as long as such amendment or termination is applicable to all salaried employees or senior executives. The Executive will be entitled to an annual four-week paid vacation.

SECTION V
BUSINESS EXPENSES

The Company will reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in connection with the performance of his duties and obligations under this Agreement.

SECTION VI
DISABILITY

A. In the event of disability of the Executive during the Period of Employment, the Company will continue to pay the Executive according to the compensation provisions of this Agreement during the period of his disability, until such time as Executive’s long term disability insurance benefits are available. However, in the event the Executive is disabled for a continuous period of six (6) months after the Executive first becomes disabled, the Company may terminate the employment of the Executive. In this case, normal compensation will cease except for earned but unpaid Base Salary and Incentive Compensation Awards which would be payable on a pro-rated basis for the year in which the disability occurred. In the event of such termination, all unvested stock options held by Executive shall be deemed fully vested on the date of such termination.

B. During the period the Executive is receiving payments of either regular compensation or disability insurance described in this Agreement and as long as he is physically and mentally able to do so, the Executive will furnish information and assistance to the Company and from time to time will make himself available to the Company to undertake assignments consistent with his prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of the Agreement, the Executive’s obligation to fulfill information and assistance will end.

C. The term “disability” will have the same meaning as under any disability insurance provided pursuant to this Agreement or otherwise.

SECTION VII
DEATH

In the event of the death of the Executive during the Period of Employment, the Company’s obligation to make payments under this Agreement shall cease as of the date of death, except for earned but unpaid Base Salary and Incentive Compensation Awards which will be paid on a pro-rated basis for that year. The Executive’s designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided in this Agreement.

SECTION VIII
EFFECT OF TERMINATION OF EMPLOYMENT

A. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge, as defined later in this Agreement, the Company will pay the Executive in a lump sum an amount equal to 50% of his Base Salary as in effect at the time of the termination upon such Termination or Constructive Discharge or, if necessary to comply with Code Section 409A(a)(2)(B)(i), on the six (6) month anniversary of such Termination or Constructive Discharge. Earned but unpaid Base Salary and Incentive Compensation Awards will be paid in a lump sum upon such Termination or Constructive Discharge. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will be continued for six (6) months. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge, or pursuant to Section XI, all unvested options, SARS or restricted stock grants (“Options”) granted to the Executive under the Company’s 2010 Long-Term Incentive Plan or other stock option program or plan (the “Plan”) shall be deemed vested, and the Company shall cause the Options to remain exercisable until the later of (i) the fifteenth (15 ^th ) day of the third (3 ^rd ) month following the date on which the Options would have expired or (ii) December 31 of the calendar year in which the Option would have expired.

B. If the Executive’s employment terminates due to a Termination for Cause, earned but unpaid Base Salary will be paid on a pro-rated basis for the year in which the termination occurs. No other payments will be made or benefits provided by the Company.

C. Upon termination of the Executive’s employment other than for reasons due to death, disability, or pursuant to Paragraph A of this Section or Section XI, the Period of Employment and the Company’s obligation to make payments under this Agreement will cease as of the date of the termination except as expressly defined in this Agreement.

D. For this Agreement, the following terms have the following meanings:

1. “Termination for Cause” means termination of the Executive’s employment by the Company’s Board of Directors acting in good faith by the Company by written notice to the Executive specifying the event relied upon for such termination, due to the Executive’s serious, willful misconduct with respect to his duties under this Agreement, including but not limited to conviction for a felony or perpetration of a common law fraud, which has resulted or is likely to result in material economic damage to the Company.

2. “Constructive Discharge” means termination of the Executive’s employment by the Executive due to a failure of the Company to fulfill its obligations under this Agreement in any material respect including any reduction of the Executive’s Base Salary or other compensation other than reductions applicable to all employees of the Company or failure to appoint or reappoint the Executive to the position specified in Section II hereof, or other material change by the Company in the functions, duties or responsibilities of the position which would reduce the ranking or level, responsibility, importance or scope of the position. The Executive will provide the Company a written notice which describes the circumstances being

relied on for the termination with respect to the Agreement within ninety (90) days after the event giving rise to the notice. The Company will have thirty (30) days to remedy the situation prior to the Termination for Constructive Dismissal.

3. “Without Cause Termination” means termination of the Executive’s employment by the Company other than due to death, disability, Termination for Cause or pursuant to Section XI.

E. Stock Option Repurchase .

If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge or pursuant to Section XI, Executive may require the Company to repurchase any Options for an amount equal to the difference between the fair market value of a share of the Company’s common stock on the date of termination and the per share exercise price set forth in the Options, times the number of shares (whether vested or unvested) granted to the Executive under the Options.

SECTION IX
OTHER DUTIES OF THE EXECUTIVE DURING
AND AFTER THE PERIOD OF EMPLOYMENT

A. The Executive will, with reasonable notice during or after the Period of Employment, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party.

B. The Executive recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers or other relationships of the Company, as hereinafter defined, is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this information are essential to the performance of the Executive’s duties under this Agreement. The Executive will not during the Period of Employment or after except to the extent reasonably necessary in performance of the duties under this Agreement, give to any person, firm, association, corporation or governmental agency any information concerning the affairs, business, clients, customers or other relationships of the Company except as required by law. The Executive will not make use of this type of information for his own purposes or for the benefit of any person or organization other than the Company. The Executive will also use his best efforts to prevent the disclosure of this information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Executive or otherwise coming into his possession are confidential and will remain the property of the Company.

C. During the Period of Employment and for a twelve (12) month period thereafter, the Executive will not use his status with the Company to obtain loans, goods or services from another organization on terms that would not be available to him in the absence of his relationship to the Company. During the Period of Employment and for a twelve (12) month period following termination of the Period of Employment, other than termination due to a Without Cause Termination, a Constructive Discharge or termination pursuant to Section XI: the

Executive will not make any statements or perform any acts intended to advance the interest of any existing or prospective competitors of the Company in any way that will injure the interest of the Company; the Executive without prior express written approval by the Board of Directors of the Company will not directly or indirectly own or hold any proprietary interest in or be employed by or receive compensation from any party engaged in the same or any similar business in the same geographic areas the Company does business; and the Executive without express prior written approval from the Board of Directors, will not solicit any members of the then current clients of the Company or discuss with any employee of the Company information or operation of any business intended to compete with the Company. For the purposes of the Agreement, proprietary interest means legal or equitable ownership, whether through stock holdings or otherwise, of a debt or equity interest (including options, warrants, rights and convertible interests) in a business firm or entity, or ownership of more than 5% of any class of equity interest in a publicly-held company. The Executive acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. For a twelve (12) month period after termination of the Period of Employment for any reason, the Executive will not directly or indirectly hire any employee of the Company or solicit or encourage any such employee to leave the employ of the Company.

D. The Executive acknowledges that his breach or threatened or attempted breach of any provision of this Section IX would cause irreparable harm to the Company not compensable in monetary damages. Accordingly, the Company shall be entitled, in addition to all other applicable remedies, to equitable relief in any court of competent jurisdiction to prevent or otherwise restrain or terminate any actual or threatened breach, default or violation by the Executive of any provision contained in this Section IX or to enforce any such provision.

E. The Executive shall not be bound by the provisions of Section IX in the event of the default by the Company in its obligations under this Agreement which are to be performed upon or after termination of this Agreement.

SECTION X
INDEMNIFICATION, LITIGATION

The Company will indemnify the Executive to the fullest extent permitted by the laws of the state of incorporation in effect at that time, or certificate of incorporation and by-laws of the Company whichever affords the greater protection to the Executive. The Executive will be entitled to any insurance proceeds related to any award, or any fees or expenses incurred in connection with any action, suit or proceeding to which he may be made a party by reason of being a director or officer of the Company.

SECTION XI
CHANGE IN CONTROL

In the event there is a Change in Control of the ownership of the Company and within the six (6) month period following such event, the Company terminates the Executive for any reason other than other than due to death, disability or Termination for Cause, or the Executive elects to resign upon written notice to the Company, the Company shall pay to the Executive on such

termination or resignation or, if necessary to comply with Code Section 409A(a)(2)(B)(i), on the six (6) month anniversary of the Executive’s termination or resignation in a lump sum an amount equal to 100% of his Base Salary as in effect at the time of such resignation. In addition, earned but unpaid Base Salary and Incentive Compensation Awards will be paid on a pro-rated basis for the year in which termination or resignation occurs. Any options, SARS or restricted stock grants granted to the Executive prior to termination pursuant to the Plan, but subject to vesting restrictions, will be fully vested upon a Change in Control whether or not the Executive resigns. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will also be continued for twelve (12) months from the effective date of termination pursuant to Change of Control.

A “Change in Control” shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of more than 50% of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary, (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Securities and Exchange Act of 1934 (“Exchange Act”)), shall acquire more than 50% of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record) ) or (v) the individuals who, as of the date hereof, constitute the Board of the Company (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company’s shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a person or group other than the Board. For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act.

SECTION XII
PROCEDURES FOR DETERMINING
THE APPLICATION OF CODE SECTION 409A

The Executive and the Company shall cooperate to determine the application of Code Section 409A for purposes of Sections VIII and XI of this Agreement. If the Executive and the Company are unable to agree on the application of Code Section 409A within ten (10) business days after the Executive’s separation from service with the Company, then the application of Code Section 409A for purposes of Sections VIII and XI of this Agreement shall be determined by an accounting firm of recognized national standing acceptable to the Executive and the Company. The accounting firm shall be instructed to use every reasonable effort to make its

determination within ten (10) business days after it is retained. The parties will cooperate fully with the accounting firm. The costs and expenses for the services of the accounting firm shall be borne equally by the Executive and the Company.

SECTION XIII
WITHHOLDING TAXES

The Company may directly or indirectly withhold from any payments under this Agreement all federal, state, city or other taxes that shall be required pursuant to any law or governmental regulation.

SECTION XIV
EFFECTIVE PRIOR AGREEMENTS

This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates, and the Executive.

SECTION XV
CONSOLIDATION, MERGER OR SALE OF ASSETS

Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale of Assets, the term “the Company” as used will mean the other corporation and this Agreement shall continue in full force and effect. This Section XV is not intended to modify or limit the rights of the Executive hereunder, including without limitation, the rights of Executive under Section XI.

SECTION XVI
MODIFICATION

This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.

SECTION XVII
GOVERNING LAW; ARBITRATION

This Agreement has been executed and delivered in the State of Tennessee and its validity, interpretation, performance and enforcement shall be governed by the laws of that state.

With the exception of the Company’s right to seek injunctive relief and damages in court to restrain and remedy violations of Article IX of this Agreement, any dispute among the parties

hereto shall be settled by arbitration in Nashville, Tennessee, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof.

SECTION XVIII
NOTICES

All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or if delivered by hand, overnight delivery service or confirmed facsimile transmission, to the following:

(a) If to the Company, at 1621 Galleria Boulevard, Brentwood, TN 37027-2926, Attention: President or Chief Executive Officer, or at such other address as may have been furnished to the Executive by the Company in writing; or

(b) If to the Executive, at 440 Tinnan Avenue, Franklin, TN 37067, or such other address as may have been furnished to the Company by the Executive in writing.

SECTION XIX
BINDING AGREEMENT

This Agreement shall be binding on the parties’ successors, heirs and assigns.

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


ADVOCAT INC.
By:	/s/ William R. Council, III
	William R. Council, III
	Title:	President and Chief Executive Officer

EXECUTIVE:
/s/ William David Houghton
William David Houghton

Exhibit 10.8

AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT

This amendment is made effective as of March 9, 2011 by and between Advocat Inc., a Delaware corporation (the “Company”), and William David Houghton (the “Executive”).

The Company and the Executive are parties to that certain employment agreement dated June 28, 2010 (the “Employment Agreement”). In exchange for continued employment with the Company, the Executive has agreed to amend the Employment Agreement as set forth herein.

The parties therefore agree as follows:

1. Section VIII(A) of the Employment Agreement is hereby amended and restated as follows:

A. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge, as defined later in this Agreement, the Company will pay the Executive in a lump sum an amount equal to 100% of his Base Salary as in effect at the time of the termination upon such Termination or Constructive Discharge or, if necessary to comply with Code Section 409A(a)(2)(B)(i), on the six (6) month anniversary of such Termination or Constructive Discharge. Earned but unpaid Base Salary and Incentive Compensation Awards will be paid in a lump sum upon such Termination or Constructive Discharge. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will be continued for twelve (12) months. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge, or pursuant to Section XI, all unvested options, SARS or restricted stock grants (“Options”) granted to the Executive under the Company’s 2010 Long-Term Incentive Plan or other stock option program or plan (the “Plan”) shall be deemed vested, and the Company shall cause the Options to remain exercisable until the later of (i) the fifteenth (15th) day of the third (3rd) month following the date on which the Options would have expired or (ii) December 31 of the calendar year in which the Option would have expired.

2. Except as otherwise provided herein, the Employment Agreement continues in full force and effect.

[Signature page follows.]

IN WITNESS WHEREOF, the undersigned have executed this amendment as of the date first above written.


ADVOCAT INC.
By:	/s/ William R. Council, III
	William R. Council, III
	Title:	President and Chief Executive Officer

EXECUTIVE:
/s/ David Houghton
David Houghton

Exhibit 31.1

CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

(i) CERTIFICATION

I, William R. Council, III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2011



	/s/ William R. Council, III
	William R. Council, III
	Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002

(ii) CERTIFICATION

I, L. Glynn Riddle, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 10, 2011



	/s/ L. Glynn Riddle, Jr.
	L. Glynn Riddle, Jr.
	Chief Financial Officer

Exhibit 32

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q
OF ADVOCAT INC.
FOR THE QUARTER ENDED MARCH 31, 2011

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s best knowledge and belief, the Quarterly Report on Form 10-Q for Advocat Inc. (the “Company”) for the period ending March 31, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”):

(a)

fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b)

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of May 10, 2011.



	/s/ William R. Council, III
	William R. Council, III
	Chief Executive Officer

	/s/ L. Glynn Riddle, Jr.
	L. Glynn Riddle, Jr.
	Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

STATE OF TENNESSEE

COUNTY OF WILLIAMSON