##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 (Mark One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
 For the transition period from  to .
 Commission file number 1-12996
 ADVOCAT INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    62-1559667(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1621 Galleria Boulevard, Brentwood, TN
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (615) 771-7575
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each Exchange on which registeredCommon Stock, $0.01 par value per share
    
    The NASDAQ Capital Market
 Securities registered pursuant to Section 12(g) of the Act :
 None.
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
 Yes o No þ
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
 Yes o No þ
 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 smaller reporting company in Rule 12b-2 of the Exchange Act.
 Large accelerated filero
    
    Accelerated filer o
    
    Non-accelerated filero
    
    o Smaller reporting companyþ(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
Act). Yes o No þ .
 The aggregate market value of Common Stock held by non-affiliates on June 30, 2010 (based on the
closing price of such shares on the NASDAQ Capital Market) was approximately $14,460,000. For
purposes of the foregoing calculation only, all directors, named executive officers and persons
known to the registrant to be holders of 5% or more of the registrants Common Stock have been
deemed affiliates of the registrant.
 On February 17, 2011, 5,743,756 shares of the registrants $0.01 par value Common Stock were
outstanding.
 Documents Incorporated by Reference
 Registrants definitive proxy materials for its 2011 annual meeting of shareholders are
incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. RESERVEDPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESSIGNATURESEX-21EX-23.1EX-31.1EX-31.2EX-32    Table of Contents  
 PART I
 
 ITEM 1.
    
    BUSINESS
 Introductory Summary.
   Principal Address and Website.
  Operating and Growth Strategy.
  
    
    Committed to Compassion
    
    Striving for Excellence
    
    Serving Responsibly
  Provide a broad range of cost-effective services.
 Improve occupancy and skilled mix in our nursing centers
 Implement Electronic Medical Records.
 2




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Cluster operations on a regional basis.
  Increase revenues and profitability at existing facilities.
 Improve physical plants
 Development of additional specialty services
 Acquisition, leasing and development of new centers
 
    
    West Virginia Facility.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. 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.
    
    Texas Facility.In August 2009, we completed the construction of a 119 bed
leased skilled nursing center, Brentwood Terrace, located in Paris, Texas, replacing an
existing 102 bed leased facility. The new facility was financed with funding from our
lessor, and is leased under a long term operating lease with renewal options through
2035.
 Nursing Centers and Services.
  3




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Number of
    
    
    Licensed Nursing
    
    
    Available NursingCenters
    
    
    Beds(1)
    
    
    Beds(1)Operating Locations:Alabama
    
    
    6
    
    
    
    711
    
    
    
    704Arkansas
    
    
    12
    
    
    
    1,311
    
    
    
    1,160Florida
    
    
    1
    
    
    
    79
    
    
    
    79Kentucky
    
    
    6
    
    
    
    489
    
    
    
    485Ohio
    
    
    1
    
    
    
    139
    
    
    
    110Tennessee
    
    
    5
    
    
    
    617
    
    
    
    576Texas
    
    
    13
    
    
    
    1,868
    
    
    
    1,675West Virginia
    
    
    2
    
    
    
    150
    
    
    
    15046
    
    
    
    5,364
    
    
    
    4,939Classification:Owned
    
    
    9
    
    
    
    936
    
    
    
    848Leased
    
    
    37
    
    
    
    4,428
    
    
    
    4,091Total
    
    
    46
    
    
    
    5,364
    
    
    
    4,939
 
 (1)
    
    The number of Licensed Nursing Beds is based on the licensed capacity of the
facility. The Company reports its occupancy based on licensed nursing beds. The number of
Available Nursing Beds represents Licensed Nursing Beds less beds removed from service.
Available Nursing Beds is subject to change based upon the needs of the facilities,
including configuration of patient rooms, common usage areas and offices, status of beds
(private, semi-private, ward, etc.) and renovations.   Life Steps Unit
 Lighthouse Unit
 Enhanced Therapy Services.
 Other Specialty Programming.
 4




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Continuous Quality Improvement
 Implement Electronic Medical Records
 
    
    Tracking Activities of Daily Living (ADLs).ADLs are the routine functions
that each person must perform on a daily basis, including but not limited to: getting
dressed, bathing, and eating, The ADL tracking will allow us to improve the documentation
of the activities of our nursing, dietary and housekeeping staff in assisting with ADLs
quickly, efficiently and electronically.
    
    Nursing Notes. Nursing notes are an important component of our medical records.
Licensed nursing professionals make notes on the care and condition of each resident. The
EMR system has a module for nursing notes and allows for improved capture, monitoring and
review of resident records.
    
    Medications.Our residents often receive a number of daily medications. This
module assists with tracking the required medications and documenting the administration of
those medications.
  Organization .
 Marketing.
  5




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Acquisitions, Development Projects and Divestitures.
      Nursing Center Profession.
  Demographic trends.
 6




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Cost containment pressures.
 Limited supply of centers.
 Reduced reliance on family care.
 Competition.
   Revenue Sources
  7




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Year Ended December 31,2010
    
    
    2009
    
    
    2008Medicaid
    
    $
    155,035
    
    
    
    53.4
    %
    
    $
    149,987
    
    
    
    54.2
    %
    
    $
    140,524
    
    
    
    53.3
    %Medicare
    
    
    88,920
    
    
    
    30.7
    
    
    
    85,433
    
    
    
    30.8
    
    
    
    84,647
    
    
    
    32.1Managed care
    
    
    8,619
    
    
    
    3.0
    
    
    
    7,412
    
    
    
    2.7
    
    
    
    5,993
    
    
    
    2.3Private Pay
and other
    
    
    37,556
    
    
    
    12.9
    
    
    
    34,147
    
    
    
    12.3
    
    
    
    32,673
    
    
    
    12.3Total
    
    $
    290,130
    
    
    
    100.0
    %
    
    $
    276,979
    
    
    
    100.0
    %
    
    $
    263,837
    
    
    
    100.0
    %
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Medicaid
    
    
    2,886
    
    
    
    68.8
    %
    
    
    2,854
    
    
    
    69.6
    %
    
    
    2,773
    
    
    
    69.2
    %Medicare
    
    
    544
    
    
    
    13.0
    
    
    
    534
    
    
    
    13.0
    
    
    
    548
    
    
    
    13.7Managed care
    
    
    59
    
    
    
    1.4
    
    
    
    51
    
    
    
    1.2
    
    
    
    45
    
    
    
    1.1Private Pay
and other
    
    
    704
    
    
    
    16.8
    
    
    
    661
    
    
    
    16.2
    
    
    
    641
    
    
    
    16.0Total
    
    
    4,193
    
    
    
    100.0
    %
    
    
    4,100
    
    
    
    100.0
    %
    
    
    4,007
    
    
    
    100.0
    %
  Medicare and Medicaid Reimbursement
  Medicare
   Therapy Services.
 8




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Supply Services.
 Medicaid
     Employees.
   9




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Supplies and Equipment.
  Government Regulation.
  Licensure and Certification.
 Health care and health insurance reform.
  10




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Medicare and Medicaid.
   Health Insurance Portability and Accountability Act of 1996 Compliance
    Self-Referral and Anti-Kickback Legislation.
 11




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Reporting Obligations under Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007
(MMSEA).
 Available Information.
   
 ITEM 1A. RISK FACTORS
  We are substantially self-insured and have significant potential professional liability exposure.
   We have had substantial adjustments to our accrual for professional liability claims which has
caused significant changes in our net earnings.
  12




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Our outstanding indebtedness is subject to various financial covenants and floating rates of
interest which could be subject to fluctuations based on changing interest rates.
   We are highly dependent on reimbursement by third-party payors.
    We are subject to significant government regulation.
   13




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The health care industry has been the subject of increased regulatory scrutiny recently.
  We are subject to claims under the self-referral and anti-kickback legislation.
  We operate in an industry that is highly competitive
  Healthcare reform legislation could adversely affect our revenue and financial condition.
  Investing in our business initiatives and development could adversely impact our results of
operations and financial condition.
  14




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Our ability and intent to pay cash dividends in the future may be limited.
  We have a number of policies in place that could be considered anti-takeover protections.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  Description of Lease Agreements.
  Omega Master Lease.
  15




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Other Leases.
  
 ITEM 3. LEGAL PROCEEDINGS
    16




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ITEM 4. RESERVED
 17




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market Information.
 Period
    


    High
    
    
    Low2009    1st
    
Quarter

    $
    3.78
    
    
    $
    1.962009    2nd
    
Quarter

    
    3.90
    
    
    
    2.212009    3rd
    
Quarter

    
    7.27
    
    
    
    2.672009    4th
    
Quarter

    
    8.94
    
    
    
    5.332010    1st
    
Quarter

    
    8.44
    
    
    
    5.402010    2nd
    
Quarter

    
    6.98
    
    
    
    4.652010    3rd
    
Quarter

    
    5.95
    
    
    
    4.002010    4th
    
Quarter

    
    5.95
    
    
    
    4.49
  Holders
 Dividends
 Equity Compensation Plan Information
  Number of SecuritiesNumber of Securities
    
    
    
    
    
    
    Available for Futureto be Issued Upon
    
    
    Weighted-Average
    
    
    Issuance Under EquityExercise of
    
    
    Exercise Price of
    
    
    Compensation PlansOutstanding Options,
    
    
    Outstanding Options,
    
    
    (excluding SecuritiesWarrants and Rights
    
    
    Warrants and Rights
    
    
    Reflected in Column (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)(1)Equity Compensation
Plans Approved by
Security Holders
    
    
    610,000
    
    
    $
    6.59
    
    
    
    441,000Equity Compensation
Plans Not Approved
by Security Holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    610,000
    
    
    $
    6.59
    
    
    
    441,000
 
 (1)
    
    Includes 76,000 shares available for issuance under the 2005 Long-Term Incentive
Plan, 101,000 shares reserved for issuance under the Advocat Inc. 2008 Stock Purchase Plan
for Key Personnel and 264,000 shares available for issuance under the 2010 Long-Term
Incentive Plan. The 2010 Long-Term Incentive Plan was approved in 2010 and allows for the
granting of options and stock appreciation rights for our common stock and is administered
by the compensation committee of the Board. 18




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands, except per share amounts)Statement of Operations DataREVENUES:Patient revenues, net
    
    $
    290,130
    
    
    $
    276,979
    
    
    $
    263,837
    
    
    $
    219,911
    
    
    $
    190,077EXPENSES:Operating
    
    
    229,081
    
    
    
    219,567
    
    
    
    207,998
    
    
    
    167,852
    
    
    
    144,804Lease
    
    
    22,600
    
    
    
    21,791
    
    
    
    21,331
    
    
    
    18,388
    
    
    
    14,431Professional liability
    
    
    5,364
    
    
    
    8,228
    
    
    
    1,532
    
    
    
    (1,559
    )
    
    
    (6,918
    )General and administrative
    
    
    19,680
    
    
    
    17,926
    
    
    
    17,973
    
    
    
    17,062
    
    
    
    20,551Depreciation and amortization
    
    
    5,825
    
    
    
    5,446
    
    
    
    5,065
    
    
    
    3,884
    
    
    
    3,312282,550
    
    
    
    272,958
    
    
    
    253,899
    
    
    
    205,627
    
    
    
    176,180OPERATING INCOME
    
    
    7,580
    
    
    
    4,021
    
    
    
    9,938
    
    
    
    14,284
    
    
    
    13,897OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    
    
    
    
    191
    
    
    
    (1,005
    )
    
    
    808
    
    
    
    21Other income
    
    
    
    
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    207Interest income
    
    
    2
    
    
    
    161
    
    
    
    453
    
    
    
    1,016
    
    
    
    679Interest expense
    
    
    (1,634
    )
    
    
    (1,877
    )
    
    
    (2,870
    )
    
    
    (3,545
    )
    
    
    (3,707
    )Debt retirement costs
    
    
    (127
    )
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (194
    )(1,759
    )
    
    
    (976
    )
    
    
    (3,422
    )
    
    
    (1,837
    )
    
    
    (2,994
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    5,821
    
    
    
    3,045
    
    
    
    6,516
    
    
    
    12,447
    
    
    
    10,903(PROVISION) BENEFIT FOR INCOME TAXES
    
    
    (1,858
    )
    
    
    (1,165
    )
    
    
    (2,208
    )
    
    
    (4,953
    )
    
    
    10,347NET INCOME FROM CONTINUING OPERATIONS
    
    
    3,963
    
    
    
    1,880
    
    
    
    4,308
    
    
    
    7,494
    
    
    
    21,250DISCONTINUED OPERATIONS, net of taxes
    
    
    (114
    )
    
    
    721
    
    
    
    1,427
    
    
    
    1,893
    
    
    
    694NET INCOME
    
    $
    3,849
    
    
    $
    2,601
    
    
    $
    5,735
    
    
    $
    9,387
    
    
    $
    21,944INCOME (LOSS) PER COMMON SHARE:Basic-Continuing operations
    
    $
    0.63
    
    
    $
    0.27
    
    
    $
    0.70
    
    
    $
    1.22
    
    
    $
    3.62Discontinued operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25
    
    
    
    0.32
    
    
    
    0.12Net per common share
    
    $
    0.61
    
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    1.54
    
    
    $
    3.74Diluted-Continuing operations
    
    $
    0.62
    
    
    $
    0.26
    
    
    $
    0.67
    
    
    $
    1.17
    
    
    $
    3.24Discontinued operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25
    
    
    
    0.31
    
    
    
    0.11Net per common share
    
    $
    0.60
    
    
    $
    0.39
    
    
    $
    0.92
    
    
    $
    1.48
    
    
    $
    3.35CASH DIVIDENDS DECLARED PER COMMON SHARE
    
    $
    0.215
    
    
    $
    0.15
    
    
    
    
    
    
    
    
    
    
    
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,732
    
    
    
    5,678
    
    
    
    5,693
    
    
    
    5,870
    
    
    
    5,784Diluted
    
    
    5,854
    
    
    
    5,797
    
    
    
    5,887
    
    
    
    6,127
    
    
    
    6,507
 December 31,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006(in thousands)Balance Sheet DataWorking capital
    
    $
    16,416
    
    
    $
    12,334
    
    
    $
    10,885
    
    
    $
    15,677
    
    
    $
    8,174Total assets
    
    $
    105,518
    
    
    $
    105,451
    
    
    $
    107,339
    
    
    $
    110,090
    
    
    $
    96,901Short-term borrowings and long-term debt including current
portion
    
    $
    24,014
    
    
    $
    24,829
    
    
    $
    32,410
    
    
    $
    34,455
    
    
    $
    31,516Preferred Stock  Series C (including unamortized premium)
    
    $
    4,918
    
    
    $
    6,192
    
    
    $
    7,891
    
    
    $
    9,590
    
    
    $
    11,289Shareholders Equity
    
    $
    22,205
    
    
    $
    19,693
    
    
    $
    17,551
    
    
    $
    12,744
    
    
    $
    3,837
 19




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
   Divestitures.
    Basis of Financial Statements.
 20




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Selected Financial and Operating Data
  Year Ended December 31,(Dollars in thousands)2010
    
    
    2009
    
    
    2008Revenues:Patient revenues, net
    
    $
    290,130
    
    
    
    100.0
    %
    
    $
    276,979
    
    
    
    100.0
    %
    
    
    263,837
    
    
    
    100.0
    %Expenses:Operating
    
    
    229,081
    
    
    
    79.0
    
    
    
    219,567
    
    
    
    79.3
    
    
    
    207,998
    
    
    
    78.8Lease
    
    
    22,600
    
    
    
    7.8
    
    
    
    21,791
    
    
    
    7.8
    
    
    
    21,331
    
    
    
    8.1Professional liability
    
    
    5,364
    
    
    
    1.8
    
    
    
    8,228
    
    
    
    3.0
    
    
    
    1,532
    
    
    
    0.6General & administrative
    
    
    19,680
    
    
    
    6.8
    
    
    
    17,926
    
    
    
    6.5
    
    
    
    17,973
    
    
    
    6.8Depreciation and amortization
    
    
    5,825
    
    
    
    2.0
    
    
    
    5,446
    
    
    
    1.9
    
    
    
    5,065
    
    
    
    1.9282,550
    
    
    
    97.4
    
    
    
    272,958
    
    
    
    98.5
    
    
    
    253,899
    
    
    
    96.2Operating income
    
    
    7,580
    
    
    
    2.6
    
    
    
    4,021
    
    
    
    1.5
    
    
    
    9,938
    
    
    
    3.8Other income (expense):Foreign currency transaction gain (loss)
    
    
    
    
    
    
    
    
    
    
    191
    
    
    
    0.1
    
    
    
    (1,005
    )
    
    
    (0.4
    )Other income
    
    
    
    
    
    
    
    
    
    
    549
    
    
    
    0.2
    
    
    
    
    
    
    
    Interest income
    
    
    2
    
    
    
    
    
    
    
    161
    
    
    
    
    
    
    
    453
    
    
    
    0.2Interest expense
    
    
    (1,634
    )
    
    
    (0.6
    )
    
    
    (1,877
    )
    
    
    (0.7
    )
    
    
    (2,870
    )
    
    
    (1.1
    )Debt retirement costs
    
    
    (127
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,759
    )
    
    
    (0.6
    )
    
    
    (976
    )
    
    
    (0.4
    )
    
    
    (3,422
    )
    
    
    (1.3
    )Income from continuing operations before income taxes
    
    
    5,821
    
    
    
    2.0
    
    
    
    3,045
    
    
    
    1.1
    
    
    
    6,516
    
    
    
    2.5Provision for income taxes
    
    
    (1,858
    )
    
    
    (0.6
    )
    
    
    (1,165
    )
    
    
    (0.4
    )
    
    
    (2,208
    )
    
    
    (0.9
    )Net income from continuing operations
    
    $
    3,963
    
    
    
    1.4
    %
    
    $
    1,880
    
    
    
    0.7
    %
    
    
    4,308
    
    
    
    1.6
    %
  December 31,2010
    
    
    2009
    
    
    2008Licensed Nursing Center Beds:Owned
    
    
    936
    
    
    
    936
    
    
    
    942Leased
    
    
    4,428
    
    
    
    4,848
    
    
    
    4,831Total
    
    
    5,364
    
    
    
    5,784
    
    
    
    5,773Facilities:Owned
    
    
    9
    
    
    
    9
    
    
    
    9Leased
    
    
    37
    
    
    
    41
    
    
    
    41Total
    
    
    46
    
    
    
    50
    
    
    
    50
 Critical Accounting Policies and Judgments
  Revenues
 Patient Revenues
  21




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##### Table of Contents



Allowance for Doubtful Accounts
  Professional Liability and Other Self-Insurance Reserves
 Accrual for Professional and General Liability Claims -
        22




---



##### Table of Contents



Accrual for Other Self-Insured Claim s-
   Asset Impairment
 Fair Value Measurements and
Disclosures.
 Business Combinations
 Business Combinations
 Stock-Based Compensation
  23




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##### Table of Contents



Income Taxes
  Contractual Obligations and Commercial Commitments
  Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    32,742
    
    
    $
    2,133
    
    
    $
    4,377
    
    
    $
    4,126
    
    
    $
    22,106Settlement Obligations (2)
    
    
    940
    
    
    
    940
    
    
    
    
    
    
    
    
    
    
    
    Series C Preferred Stock (3)
    
    
    4,918
    
    
    
    4,918
    
    
    
    
    
    
    
    
    
    
    
    Elimination of Preferred Stock Conversion feature (4)
    
    
    5,323
    
    
    
    687
    
    
    
    1,374
    
    
    
    1,374
    
    
    
    1,888Operating leases
    
    
    577,888
    
    
    
    22,560
    
    
    
    46,751
    
    
    
    49,009
    
    
    
    459,568Required capital expenditures under
mortgage loans and operating leases (5)
    
    
    20,965
    
    
    
    448
    
    
    
    611
    
    
    
    611
    
    
    
    19,295Total
    
    $
    642,776
    
    
    $
    31,686
    
    
    $
    53,113
    
    
    $
    55,120
    
    
    $
    502,857
 
 (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. The maturity of this debt was extended by the new credit
agreements entered into on March 1, 2011 and is reflected as such in the table above.(2)
    
    Settlement obligations are amounts of payments remaining due under already-entered
settlements of professional liability cases. The liabilities are included in our self
insurance reserves.(3)
    
    Series C Preferred Stock reflects 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 for capital maintenance under mortgage loan
covenants and annual capital expenditure requirements under operating leases.  Payor Sources
  24




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Medicaid
    
    $
    155,035
    
    
    
    53.4
    %
    
    $
    149,987
    
    
    
    54.2
    %
    
    $
    140,524
    
    
    
    53.3
    %Medicare
    
    
    88,920
    
    
    
    30.7
    
    
    
    85,433
    
    
    
    30.8
    
    
    
    84,647
    
    
    
    32.1Managed care
    
    
    8,619
    
    
    
    3.0
    
    
    
    7,412
    
    
    
    2.7
    
    
    
    5,993
    
    
    
    2.3Private Pay and
other
    
    
    37,556
    
    
    
    12.9
    
    
    
    34,147
    
    
    
    12.3
    
    
    
    32,673
    
    
    
    12.3Total
    
    $
    290,130
    
    
    
    100.0
    %
    
    $
    276,979
    
    
    
    100.0
    %
    
    $
    263,837
    
    
    
    100.0
    %
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Medicaid
    
    
    2,886
    
    
    
    68.8
    %
    
    
    2,854
    
    
    
    69.6
    %
    
    
    2,773
    
    
    
    69.2
    %Medicare
    
    
    544
    
    
    
    13.0
    
    
    
    534
    
    
    
    13.0
    
    
    
    548
    
    
    
    13.7Managed care
    
    
    59
    
    
    
    1.4
    
    
    
    51
    
    
    
    1.2
    
    
    
    45
    
    
    
    1.1Private Pay and
other
    
    
    704
    
    
    
    16.8
    
    
    
    661
    
    
    
    16.2
    
    
    
    641
    
    
    
    16.0Total
    
    
    4,193
    
    
    
    100.0
    %
    
    
    4,100
    
    
    
    100.0
    %
    
    
    4,007
    
    
    
    100.0
    %
  Results of Operations
  Year Ended December 31,(in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    290,130
    
    
    $
    276,979
    
    
    $
    13,151
    
    
    
    4.7
    %EXPENSES:Operating
    
    
    229,081
    
    
    
    219,567
    
    
    
    9,514
    
    
    
    4.3Lease
    
    
    22,600
    
    
    
    21,791
    
    
    
    809
    
    
    
    3.7Professional liability
    
    
    5,364
    
    
    
    8,228
    
    
    
    (2,864
    )
    
    
    (34.8
    )General and administrative
    
    
    19,680
    
    
    
    17,926
    
    
    
    1,754
    
    
    
    9.8Depreciation and amortization
    
    
    5,825
    
    
    
    5,446
    
    
    
    379
    
    
    
    7.0Total expenses
    
    
    282,550
    
    
    
    272,958
    
    
    
    9,592
    
    
    
    3.5OPERATING INCOME
    
    
    7,580
    
    
    
    4,021
    
    
    
    3,559
    
    
    
    88.5OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    191
    
    
    
    (191
    )
    
    
    (100.0
    )Other income
    
    
    
    
    
    
    549
    
    
    
    (549
    )
    
    
    (100.0
    )Interest income
    
    
    2
    
    
    
    161
    
    
    
    (159
    )
    
    
    (98.8
    )Interest expense
    
    
    (1,634
    )
    
    
    (1,877
    )
    
    
    243
    
    
    
    12.9Debt retirement costs
    
    
    (127
    )
    
    
    
    
    
    
    (127
    )
    
    
    (100.0
    )(1,759
    )
    
    
    (976
    )
    
    
    (783
    )
    
    
    (80.2
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    5,821
    
    
    
    3,045
    
    
    
    2,776
    
    
    
    91.2PROVISION FOR INCOME TAXES
    
    
    (1,858
    )
    
    
    (1,165
    )
    
    
    (693
    )
    
    
    (59.5
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    3,963
    
    
    $
    1,880
    
    
    $
    2,083
    
    
    
    110.8
    %
 25




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##### Table of Contents



Year Ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    276,979
    
    
    $
    263,837
    
    
    $
    13,142
    
    
    
    5.0
    %EXPENSES:Operating
    
    
    219,567
    
    
    
    207,998
    
    
    
    11,569
    
    
    
    5.6Lease
    
    
    21,791
    
    
    
    21,331
    
    
    
    460
    
    
    
    2.2Professional liability
    
    
    8,228
    
    
    
    1,532
    
    
    
    6,696
    
    
    
    437.1General and administrative
    
    
    17,926
    
    
    
    17,973
    
    
    
    (47
    )
    
    
    (0.3
    )Depreciation and amortization
    
    
    5,446
    
    
    
    5,065
    
    
    
    381
    
    
    
    7.5Total expenses
    
    
    272,958
    
    
    
    253,899
    
    
    
    19,059
    
    
    
    7.5OPERATING INCOME
    
    
    4,021
    
    
    
    9,938
    
    
    
    (5,917
    )
    
    
    (59.5
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (1,005
    )
    
    
    1,196
    
    
    
    (119.0
    )Other income
    
    
    549
    
    
    
    
    
    
    
    549
    
    
    
    Interest income
    
    
    161
    
    
    
    453
    
    
    
    (292
    )
    
    
    (64.5
    )Interest expense
    
    
    (1,877
    )
    
    
    (2,870
    )
    
    
    993
    
    
    
    34.6(976
    )
    
    
    (3,422
    )
    
    
    2,446
    
    
    
    71.5INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    3,045
    
    
    
    6,516
    
    
    
    (3,471
    )
    
    
    (53.3
    )PROVISION FOR INCOME TAXES
    
    
    (1,165
    )
    
    
    (2,208
    )
    
    
    (1,043
    )
    
    
    (47.2
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    1,880
    
    
    $
    4,308
    
    
    $
    (2,428
    )
    
    
    (56.4
    )%
 Year Ended December 31, 2010 Compared with Year Ended December 31, 2009
 Patient Revenues
   Year EndedDecember 312010
    
    
    2009Skilled nursing occupancy
    
    
    78.1
    %
    
    
    76.6
    %As a percent of total census:Medicare census
    
    
    13.0
    %
    
    
    13.0
    %Managed care census
    
    
    1.4
    %
    
    
    1.2
    %As a percent of total revenues:Medicare revenues
    
    
    30.7
    %
    
    
    30.8
    %Medicaid revenues
    
    
    53.4
    %
    
    
    54.2
    %Managed care revenues
    
    
    3.0
    %
    
    
    2.7
    %Average rate per day:Medicare
    
    $
    403.67
    
    
    $
    397.74Medicaid
    
    $
    146.84
    
    
    $
    143.65Managed care
    
    $
    386.08
    
    
    $
    378.85
   26




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##### Table of Contents



Operating expense
        Lease expense
  Professional liability
  27




---



##### Table of Contents



General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gain
  Other income
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common share
  Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
 Patient Revenues
  28




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##### Table of Contents



Year EndedDecember 31,2009
    
    
    2008Skilled nursing occupancy
    
    
    76.6
    %
    
    
    74.9
    %As a percent of total census:Medicare census
    
    
    13.0
    %
    
    
    13.7
    %Managed care census
    
    
    1.2
    %
    
    
    1.1
    %As a percent of total revenuesMedicare revenues
    
    
    30.8
    %
    
    
    32.1
    %Medicaid revenues
    
    
    54.2
    %
    
    
    53.3
    %Managed care revenues
    
    
    2.7
    %
    
    
    2.3
    %Average rate per day:Medicare
    
    $
    397.74
    
    
    $
    384.71Medicaid
    
    $
    143.65
    
    
    $
    138.20Managed care
    
    $
    378.85
    
    
    $
    346.52
  Operating expense
        29




---



##### Table of Contents



Lease expense
  Professional liability
  General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gain (loss)
  Other income
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  30




---



##### Table of Contents



Liquidity and Capital Resources
 Liquidity
      Electronic Medical Records
  Dividends
  31




---



##### Table of Contents



Redeemable Preferred Stock
  Note Receivable
  Professional Liability
    Capital Resources
     32




---



##### Table of Contents



Level atRequirement
    
    
    December 31, 2010Minimum fixed charge coverage ratio
    
    
    ≥1.05:1.00
    
    
    
    1.16Debt service coverage ratio (mortgaged facilities)
    
    
    ≥1.30:1.00
    
    
    
    3.89
  Lease Agreement  West Virginia Nursing Center
  Texas Facility
  Facility Renovations
  33




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##### Table of Contents



Receivables
    Inflation
  Off-Balance Sheet Arrangements
  Recent Accounting Guidance
 Presentation of Insurance Claims and Related Insurance Recoveries
 Forward-Looking Statements
  34




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  35




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##### Table of Contents



Changes in Internal Control over Financial Reporting
   
 ITEM 9B. OTHER INFORMATION
  36




---



##### Table of Contents



PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
  
 ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  37




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##### Table of Contents



PART IV
 
 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
  Form 10-KPagesFinancial StatementsReport of Independent Registered Public Accounting Firm
    

    F-1Consolidated Balance Sheets as of December 31, 2010 and 2009
    

    F-2Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008
    

    F-3Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2010, 2009 and 2008
    

    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
    

    F-5Notes to Consolidated Financial Statements as of December 31, 2010, 2009 and 2008
    
    F-7 to F-30Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    S-1 to S-2
 Exhibits
  38




---



##### Table of Contents



SIGNATURES
  ADVOCAT INC./s/ Wallace E. OlsonWallace E. OlsonChairman of the Board March 7, 2011/s/ William R. Council, IIIWilliam R. Council, IIIPresident and Chief Executive Officer
(Principal Executive Officer) March 7, 2011/s/ L. Glynn Riddle, Jr.L.   Glynn Riddle, Jr.Executive Vice President, Chief Financial Officer, Secretary
(Principal Financial and Accounting Officer) March 7, 2011  /s/ Wallace E. Olson

Wallace E. Olson
    
    
    
    /s/ William C. ONeil. Jr.

William C. ONeil, Jr.Chairman of the Board
    
    
    
    DirectorMarch 7, 2011
    
    
    
    March 7, 2011/s/ William R. Council, III

William R. Council, III
    
    
    
    /s/ Richard M. Brame

Richard M. BramePresident and Chief Executive Officer
    
    
    
    DirectorDirector
    
    
    
    March 7, 2011March 7, 2011/s/ Robert Z. Hensley

Robert Z. Hensley
    
    
    
    /s/ Chad A. McCurdy

Chad A. McCurdyDirector
    
    
    
    DirectorMarch 7, 2011
    
    
    
    March 7, 2011
 39




---



##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES




---



##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets
    
    
    F-2Consolidated Statements of Income
    
    
    F-3Consolidated Statements of Shareholders Equity
    
    
    F-4Consolidated Statements of Cash Flows
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-7Schedule II  Valuation and Qualifying Accounts
    
    
    S-1




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      
 F - 1




---



##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
 2010
    
    
    2009ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    8,862,000
    
    
    $
    8,609,000Receivables, less allowance for doubtful
accounts of $2,822,000 and $2,566,000,
respectively
    
    
    23,916,000
    
    
    
    21,711,000Other receivables
    
    
    352,000
    
    
    
    1,406,000Prepaid expenses and other current assets
    
    
    2,935,000
    
    
    
    2,043,000Income tax refundable
    
    
    1,439,000
    
    
    
    455,000Deferred income taxes
    
    
    4,207,000
    
    
    
    4,792,000Current assets of discontinued operations
    
    
    686,000
    
    
    
    2,903,000Total current assets
    
    
    42,397,000
    
    
    
    41,919,000PROPERTY AND EQUIPMENT, at cost
    
    
    78,690,000
    
    
    
    76,270,000Less accumulated depreciation
    
    
    (41,563,000
    )
    
    
    (40,461,000
    )Discontinued operations, net
    
    
    1,053,000
    
    
    
    1,553,000Property and equipment, net
    
    
    38,180,000
    
    
    
    37,362,000OTHER ASSETS:Deferred income taxes
    
    
    12,408,000
    
    
    
    13,804,000Deferred financing and other costs, net
    
    
    834,000
    
    
    
    639,000Other assets
    
    
    2,319,000
    
    
    
    1,963,000Acquired leasehold interest, net
    
    
    9,380,000
    
    
    
    9,764,000Total other assets
    
    
    24,941,000
    
    
    
    26,170,000$
    105,518,000
    
    
    $
    105,451,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt and
capitalized lease obligations
    
    $
    582,000
    
    
    $
    2,278,000Trade accounts payable
    
    
    3,120,000
    
    
    
    4,537,000Accrued expenses:Payroll and employee benefits
    
    
    11,047,000
    
    
    
    9,314,000Current portion of self-insurance reserves
    
    
    6,753,000
    
    
    
    7,860,000Other current liabilities
    
    
    4,479,000
    
    
    
    4,323,000Current liabilities of discontinued
operations
    
    
    
    
    
    
    1,273,000Total current liabilities
    
    
    25,981,000
    
    
    
    29,585,000NONCURRENT LIABILITIES:Long-term debt and capitalized lease
obligations, less current portion
    
    
    23,819,000
    
    
    
    22,551,000Self-insurance reserves, less current portion
    
    
    11,847,000
    
    
    
    12,235,000Other noncurrent liabilities
    
    
    16,748,000
    
    
    
    15,195,000Total noncurrent liabilities
    
    
    52,414,000
    
    
    
    49,981,000COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK,$.10 par
value, 5,000 shares authorized, issued and
outstanding, stated value of $4,918,000
including premium of $0 and $1,274,000,
respectively
    
    
    4,918,000
    
    
    
    6,192,000SHAREHOLDERS 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, 5,976,000 and 5,949,000
shares issued, 5,744,000 and 5,717,000
shares outstanding, respectively
    
    
    60,000
    
    
    
    59,000Treasury stock at cost, 232,000 shares of
common stock
    
    
    (2,500,000
    )
    
    
    (2,500,000
    )Paid-in capital
    
    
    17,896,000
    
    
    
    17,647,000Retained earnings
    
    
    6,749,000
    
    
    
    4,487,000Total shareholders equity
    
    
    22,205,000
    
    
    
    19,693,000$
    105,518,000
    
    
    $
    105,451,000
  F - 2




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2010
    
    
    2009
    
    
    2008REVENUES:Patient revenues, net
    
    $
    290,130,000
    
    
    $
    276,979,000
    
    
    $
    263,837,000EXPENSES:Operating
    
    
    229,081,000
    
    
    
    219,567,000
    
    
    
    207,998,000Lease
    
    
    22,600,000
    
    
    
    21,791,000
    
    
    
    21,331,000Professional liability
    
    
    5,364,000
    
    
    
    8,228,000
    
    
    
    1,532,000General and administrative
    
    
    19,680,000
    
    
    
    17,926,000
    
    
    
    17,973,000Depreciation and amortization
    
    
    5,825,000
    
    
    
    5,446,000
    
    
    
    5,065,000282,550,000
    
    
    
    272,958,000
    
    
    
    253,899,000OPERATING INCOME
    
    
    7,580,000
    
    
    
    4,021,000
    
    
    
    9,938,000OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    
    
    
    
    191,000
    
    
    
    (1,005,000
    )Other income
    
    
    
    
    
    
    549,000
    
    
    
    Interest income
    
    
    2,000
    
    
    
    161,000
    
    
    
    453,000Interest expense
    
    
    (1,634,000
    )
    
    
    (1,877,000
    )
    
    
    (2,870,000
    )Debt retirement costs
    
    
    (127,000
    )
    
    
    
    
    
    
    (1,759,000
    )
    
    
    (976,000
    )
    
    
    (3,422,000
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
    
    
    5,821,000
    
    
    
    3,045,000
    
    
    
    6,516,000PROVISION FOR INCOME TAXES
    
    
    (1,858,000
    )
    
    
    (1,165,000
    )
    
    
    (2,208,000
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    3,963,000
    
    
    
    1,880,000
    
    
    
    4,308,000NET INCOME FROM DISCONTINUED OPERATIONS:Operating income, net of tax provision of
$177,000, $449,000 and $731,000, respectively
    
    
    344,000
    
    
    
    721,000
    
    
    
    1,427,000Disposal and impairment, net of tax benefit
of $217,000
    
    
    (458,000
    )
    
    
    
    
    
    
    DISCONTINUED OPERATIONS
    
    
    (114,000
    )
    
    
    721,000
    
    
    
    1,427,000NET INCOME
    
    
    3,849,000
    
    
    
    2,601,000
    
    
    
    5,735,000PREFERRED STOCK DIVIDENDS
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (344,000
    )NET INCOME FOR COMMON STOCK
    
    $
    3,505,000
    
    
    $
    2,257,000
    
    
    $
    5,391,000NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.63
    
    
    $
    0.27
    
    
    $
    0.70Discontinued operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25$
    0.61
    
    
    $
    0.40
    
    
    $
    0.95Per common share  dilutedContinuing operations
    
    $
    0.62
    
    
    $
    0.26
    
    
    $
    0.67Discontinued operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25$
    0.60
    
    
    $
    0.39
    
    
    $
    0.92COMMON STOCK DIVIDENDS DECLARED PER SHARE OF
COMMON STOCK$
    0.215
    
    
    $
    0.15
    
    
    $
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,732,000
    
    
    
    5,678,000
    
    
    
    5,693,000Diluted
    
    
    5,854,000
    
    
    
    5,797,000
    
    
    
    5,887,000
  F - 3




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 RetainedEarningsCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    (AccumulatedShares Issued
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    TotalBALANCE, DECEMBER 31, 2007
    
    
    5,878,000
    
    
    $
    59,000
    
    
    
    74,000
    
    
    $
    (817,000
    )
    
    $
    15,804,000
    
    
    $
    (2,302,000
    )
    
    $
    12,744,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,735,000
    
    
    
    5,735,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,000
    )
    
    
    (344,000
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    158,000
    
    
    
    (1,683,000
    )
    
    
    
    
    
    
    
    
    
    
    (1,683,000
    )Exercise of stock options
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,000
    
    
    
    
    
    
    
    235,000Tax impact of equity
grant exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,000
    )
    
    
    
    
    
    
    (3,000
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    867,000
    
    
    
    
    
    
    
    867,000BALANCE, DECEMBER 31, 2008
    
    
    5,903,000
    
    
    
    59,000
    
    
    
    232,000
    
    
    
    (2,500,000
    )
    
    
    16,903,000
    
    
    
    3,089,000
    
    
    
    17,551,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,601,000
    
    
    
    2,601,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,000
    )
    
    
    (344,000
    )Common stock dividends
declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,000
    
    
    
    (859,000
    )
    
    
    (853,000
    )Exercise of stock options
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,000
    )
    
    
    
    
    
    
    (76,000
    )Purchase of restricted
share units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,000
    
    
    
    
    
    
    
    76,000Tax impact of equity
grant exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,000
    
    
    
    
    
    
    
    118,000Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    620,000
    
    
    
    
    
    
    
    620,000BALANCE, DECEMBER 31, 2009
    
    
    5,949,000
    
    
    
    59,000
    
    
    
    232,000
    
    
    
    (2,500,000
    )
    
    
    17,647,000
    
    
    
    4,487,000
    
    
    
    19,693,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,849,000
    
    
    
    3,849,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    

    
    
    
    
    
    (344,000
    )
    
    
    (344,000
    )Common stock dividends
declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    (1,243,000
    )
    
    
    (1,234,000
    )Exercise of stock options
    
    
    27,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    (51,000
    )
    
    
    
    
    
    
    (50,000
    )Purchase of restricted
share units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    29,000
    
    
    
    
    
    
    
    29,000Tax impact of equity
grant exercises
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,000
    )
    
    
    
    
    
    
    (90,000
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    352,000
    
    
    
    
    

    
    
    352,000BALANCE, DECEMBER 31, 2010
    
    
    5,976,000
    
    
    $
    60,000
    
    
    
    232,000
    
    
    $
    (2,500,000
    )
    
    $
    17,896,000
    
    
    $
    6,749,000
    
    
    $
    22,205,000
  F - 4




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2010
    
    
    2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,849,000
    
    
    $
    2,601,000
    
    
    $
    5,735,000Discontinued operations
    
    
    (114,000
    )
    
    
    721,000
    
    
    
    1,427,000Net income from continuing operations
    
    
    3,963,000
    
    
    
    1,880,000
    
    
    
    4,308,000Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:Depreciation and amortization
    
    
    5,825,000
    
    
    
    5,446,000
    
    
    
    5,065,000Provision for doubtful accounts
    
    
    2,127,000
    
    
    
    1,965,000
    
    
    
    2,015,000Deferred income tax provision (benefit)
    
    
    2,041,000
    
    
    
    (528,000
    )
    
    
    816,000Provision for (benefit from) self-insured
professional liability, net of cash payments
    
    
    (754,000
    )
    
    
    2,774,000
    
    
    
    (5,603,000
    )Stock-based compensation
    
    
    597,000
    
    
    
    689,000
    
    
    
    867,000Amortization of deferred balances
    
    
    213,000
    
    
    
    382,000
    
    
    
    426,000Provision for leases in excess of cash payments
    
    
    782,000
    
    
    
    1,254,000
    
    
    
    1,729,000Payment from lessor for leasehold improvement
    
    
    120,000
    
    
    
    771,000
    
    
    
    Non-cash gain on settlement of contingent liability
    
    
    
    
    
    
    (549,000
    )
    
    
    Foreign currency transaction (gain) loss
    
    
    
    
    
    
    (191,000
    )
    
    
    1,005,000Debt retirement costs
    
    
    127,000
    
    
    
    
    
    
    
    Non-cash interest income
    
    
    
    
    
    
    (41,000
    )
    
    
    (121,000
    )Changes in other assets and liabilities affecting
operating activities:Receivables, net
    
    
    (3,787,000
    )
    
    
    (4,200,000
    )
    
    
    381,000Prepaid expenses and other assets
    
    
    (1,817,000
    )
    
    
    621,000
    
    
    
    210,000Trade accounts payable and accrued expenses
    
    
    (94,000
    )
    
    
    (4,000
    )
    
    
    (3,498,000
    )Net cash provided by continuing operations
    
    
    9,343,000
    
    
    
    10,269,000
    
    
    
    7,600,000Discontinued operations
    
    
    713,000
    
    
    
    2,109,000
    
    
    
    1,878,000Net cash provided by operating activities
    
    
    10,056,000
    
    
    
    12,378,000
    
    
    
    9,478,000
  F - 5




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2010
    
    
    2009
    
    
    2008CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    $
    (6,363,000
    )
    
    $
    (6,372,000
    )
    
    $
    (9,403,000
    )Payment for construction in progress  leased
facility
    
    
    
    
    
    
    (6,891,000
    )
    
    
    (811,000
    )Notes receivable collected
    
    
    
    
    
    
    4,184,000
    
    
    
    765,000Deposits and other deferred balances
    
    
    
    
    
    
    59,000
    
    
    
    (138,000
    )Net cash used in continuing operations
    
    
    (6,363,000
    )
    
    
    (9,020,000
    )
    
    
    (9,587,000
    )Discontinued operations
    
    
    (45,000
    )
    
    
    (187,000
    )
    
    
    (349,000
    )Net cash used in investing activities
    
    
    (6,408,000
    )
    
    
    (9,207,000
    )
    
    
    (9,936,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (4,278,000
    )
    
    
    (7,581,000
    )
    
    
    (2,045,000
    )Proceeds from issuance of debt
    
    
    3,463,000
    
    
    
    
    
    
    
    Financing costs
    
    
    (511,000
    )
    
    
    (42,000
    )
    
    
    (79,000
    )Payment of common stock dividends
    
    
    (1,203,000
    )
    
    
    (573,000
    )
    
    
    Payment of preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (344,000
    )Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    (1,683,000
    )Construction allowance receipts  leased facility
    
    
    
    
    
    
    6,891,000
    
    
    
    811,000Payment for preferred stock restructuring
    
    
    (528,000
    )
    
    
    (512,000
    )
    
    
    (497,000
    )Issuance of restricted share units
    
    
    57,000
    
    
    
    76,000
    
    
    
    Net settlement of exercised stock options
    
    
    (51,000
    )
    
    
    (78,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    
    
    
    
    3,000
    
    
    
    235,000Net cash used in financing
activities
    
    
    (3,395,000
    )
    
    
    (2,160,000
    )
    
    
    (3,602,000
    )NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    253,000
    
    
    
    1,011,000
    
    
    
    (4,060,000
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    8,609,000
    
    
    
    7,598,000
    
    
    
    11,658,000CASH AND CASH EQUIVALENTS, end of period
    
    $
    8,862,000
    
    
    $
    8,609,000
    
    
    $
    7,598,000SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts
capitalized
    
    $
    1,383,000
    
    
    $
    1,512,000
    
    
    $
    2,506,000Cash payments of income taxes, net of refunds
    
    $
    926,000
    
    
    $
    1,413,000
    
    
    $
    3,841,000
 NON-CASH TRANSACTIONS:
   F - 6




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2010, 2009 AND 2008
 1. COMPANY AND ORGANIZATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Consolidation
  Segment Reporting.
 Revenues
 Patient Revenues
  F - 7




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##### Table of Contents



Allowance for Doubtful Accounts
   Lease Expense
   Classification of Expenses
  Property and Equipment
  Buildings and improvements
    
    -
    
    5 to 40 yearsLeasehold improvements
    
    -
    
    2 to 10 yearsFurniture, fixtures and equipment
    
    -
    
    2 to 15 years
  Property, Plant and Equipment,
 F - 8




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##### Table of Contents



Cash and Cash Equivalents
  Deferred Financing and Other Costs
  Acquired Leasehold Interest
   December 312010
    
    
    2009Intangible
    
    $
    10,652,000
    
    
    $
    10,652,000Accumulated Amortization
    
    
    (1,272,000
    )
    
    
    (888,000
    )Net Intangible
    
    $
    9,380,000
    
    
    $
    9,764,000
  F - 9




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##### Table of Contents



2011
    
    $
    384,0002012
    
    
    384,0002013
    
    
    384,0002014
    
    
    384,0002015
    
    
    384,000Thereafter
    
    
    7,460,000$
    9,380,000
 Self Insurance
      F - 10




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##### Table of Contents



Income Taxes
 Accounting for Income Taxes
 Disclosure of Fair Value of Financial Instruments
 Fair Value Measurements
and Disclosures
       F - 11




---



##### Table of Contents



Use of Estimates
  Net Income per Common Share
 Earnings Per Share
 Stock-Based Compensation
 Stock Compensation
  Recent Accounting Pronouncements
 Presentation of Insurance Claims and Related Insurance Recoveries
 Reclassifications
  3. ACQUISITIONS
 West Virginia Facility
  F - 12




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##### Table of Contents



Gain on Settlement of acquisition liability
  4. RECEIVABLES
  December 31,2010
    
    
    2009Medicare
    
    $
    10,603,000
    
    
    $
    8,940,000Medicaid and other non-federal government programs
    
    
    9,758,000
    
    
    
    9,738,000Other patient and resident receivables
    
    
    6,262,000
    
    
    
    5,214,000Other receivables and advances
    
    
    115,000
    
    
    
    385,000$
    26,738,000
    
    
    $
    24,277,000Other receivables
    
    $
    352,000
    
    
    $
    1,406,000
    F - 13




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##### Table of Contents



5. PROPERTY AND EQUIPMENT
 Property and equipment, at cost, consists of the following:
 December 31,2010
    
    
    2009Land
    
    $
    1,919,000
    
    
    $
    1,919,000Buildings and leasehold improvements
    
    
    54,032,000
    
    
    
    52,297,000Furniture, fixtures and equipment
    
    
    22,739,000
    
    
    
    22,054,000$
    78,690,000
    
    
    $
    76,270,000
  6. LONG-TERM DEBT AND CAPITALIZED LEASE OBLIGATIONS
 Long-term debt consists of the following:
 December 31,2010
    
    
    2009Mortgage loan payable
to a commercial finance
company; issued in August
2006; refinanced in March
2011 as described below;
payable monthly, interest at
3.75% above LIBOR (4.01% and
3.98% at December 31, 2010
and 2009, respectively).
    
    $
    20,551,000
    
    
    $
    21,177,000Revolving credit
facility borrowings payable
to a bank; entered into in
March 2010; amended in March 2011 as described below; secured by
receivables of the Company;
interest at 3.5% above LIBOR
with LIBOR subject to a
floor of 3.0% (6.5% at
December 31, 2010).
    
    
    3,463,000
    
    
    
    Term loan payable to a
bank; issued in August 2007;
secured by receivables and
all other unencumbered
assets of the Company,
including land held for
sale; interest at 2.5% above
LIBOR (2.74% at December 31,
2009).
    
    
    
    
    
    
    3,652,00024,014,000
    
    
    
    24,829,000Less current portion
    
    
    (442,000
    )
    
    
    (2,278,000
    )$
    23,572,000
    
    
    $
    22,551,000
    F - 14




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##### Table of Contents



2011
    
    $
    442,0002012
    
    
    389,0002013
    
    
    416,0002014
    
    
    445,0002015
    
    
    476,000Thereafter
    
    
    21,846,000Total
    
    $
    24,014,000
    Capitalized Lease Obligations
  F - 15




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##### Table of Contents



2011
    
    $
    143,0002012
    
    
    143,0002013
    
    
    107,000Total
    
    
    393,000Amounts related to interest
    
    
    (6,000
    )Principal payments on capitalized lease obligation
    
    $
    387,000
 7. DISCONTINUED OPERATIONS
     8. COLLECTION OF NOTE RECEIVABLE
  9. SHAREHOLDERS EQUITY, STOCK PLANS AND PREFERRED STOCK
 Shareholders Rights Plan
  F - 16




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##### Table of Contents



Stock-Based Compensation Plans
 Stock Compensation
 Overview of Plans
     Equity Grants and Valuations
  F - 17




---



##### Table of Contents



Year EndedDecember 31,2010
    
    2009
    
    2008Expected volatility (range)
    
    62% - 89%
    
    95% - 111%
    
    113% - 122%Risk free interest rate (range)
    
    2.21% - 3.28%
    
    2.02% - 2.40%
    
    2.49% - 3.43%Expected dividends
    
    3.22%
    
    
    
    Weighted average expected term (years)
    
    6.0
    
    6.0
    
    6.0
    Year EndedDecember 31,2010
    
    2009
    
    2008Weighted Average grant date fair value
    
    $2.61
    
    $1.91
    
    $9.39Total Intrinsic Value of Options Exercised
    
    $192,000
    
    $320,000
    
    $26,000
  WeightedRange of
    
    Average
    
    OptionsExercise Prices
    
    Exercise Prices
    
    Outstanding$10.40 to $11.59
    
    $11.19
    
    
    172,000$0.35 to $6.21
    
    $4.78
    
    
    438,000610,000
  F - 18




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##### Table of Contents



WeightedAverageShares
    
    
    Exercise PriceOutstanding,
December 31, 2009
    
    
    603,000
    
    
    $
    6.72Granted
    
    
    153,000
    
    
    
    5.62Exercised
    
    
    (68,000
    )
    
    
    2.70Expired or cancelled
    
    
    (78,000
    )
    
    
    9.12Outstanding,
December 31, 2010
    
    
    610,000
    
    
    $
    6.59Exercisable, December 31, 2010
    
    
    379,000
    
    
    $
    7.28
   Restricted Share UnitsOutstanding, December 31, 2009
    
    
    36,317Granted
    
    
    12,209Dividend Equivalents
    
    
    1,542Vested
    
    
    (1,757
    )Cancelled
    
    
    (9,829
    )Outstanding December 31, 2010
    
    
    38,482
 Series A Preferred Stock
  Series B and Series C Redeemable Preferred Stock
   F - 19




---



##### Table of Contents



Series C Preferred Stock
 2010
    
    
    2009
    
    
    2008Balance at the beginning of the period
    
    $
    6,192,000
    
    
    $
    7,891,000
    
    
    $
    9,590,000Amortization of preferred stock premium
    
    
    (1,274,000
    )
    
    
    (1,699,000
    )
    
    
    (1,699,000
    )Balance at the end of the period
    
    $
    4,918,000
    
    
    $
    6,192,000
    
    
    $
    7,891,000
 10. NET INCOME (LOSS) PER COMMON SHARE
  2010
    
    
    2009
    
    
    2008Basic net income per common shareNet income from continuing operations
    
    $
    3,963,000
    
    
    $
    1,880,000
    
    
    $
    4,308,000Preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (344,000
    )Net income from continuing operations
for common stock
    
    
    3,619,000
    
    
    
    1,536,000
    
    
    
    3,964,000Discontinued operations:Operating income, net of taxes
    
    
    344,000
    
    
    
    721,000
    
    
    
    1,427,000Loss on disposal and impairment, net of
taxes
    
    
    (458,000
    )
    
    
    
    
    
    
    Income (loss) from discontinued operations
    
    
    (114,000
    )
    
    
    721,000
    
    
    
    1,427,000Net income for common stock
    
    $
    3,505,000
    
    
    $
    2,257,000
    
    
    $
    5,391,000Basic weighted average common shares outstanding
    
    
    5,732,000
    
    
    
    5,678,000
    
    
    
    5,693,000Basic net income per common share:Net income from continuing operations
    
    $
    0.63
    
    
    $
    0.27
    
    
    $
    0.70Income (loss) from discontinued operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25Basic net income per common share
    
    $
    0.61
    
    
    $
    0.40
    
    
    $
    0.95
 F - 20




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Diluted net income per common shareNet income from continuing operations
for common stock
    
    $
    3,619,000
    
    
    $
    1,536,000
    
    
    $
    3,964,000Discontinued operations:Operating income, net of taxes
    
    
    344,000
    
    
    
    721,000
    
    
    
    1,427,000Loss on disposal and impairment,
net of taxes
    
    
    (458,000
    )
    
    
    
    
    
    
    Income (loss) from discontinued
operations
    
    
    (114,000
    )
    
    
    721,000
    
    
    
    1,427,000Net income for common stock
    
    $
    3,505,000
    
    
    $
    2,257,000
    
    
    $
    5,391,000Basic weighted average common shares
outstanding
    
    
    5,732,000
    
    
    
    5,678,000
    
    
    
    5,693,000Incremental shares from assumed exercise
of options, SoSARs and Restricted
Stock Units
    
    
    122,000
    
    
    
    119,000
    
    
    
    194,000Diluted weighted average common shares
outstanding
    
    
    5,854,000
    
    
    
    5,797,000
    
    
    
    5,887,000Diluted net income per common shareNet income from continuing operations
    
    $
    0.62
    
    
    $
    0.26
    
    
    $
    0.67Net income (loss) from discontinued
operations operations
    
    
    (0.02
    )
    
    
    0.13
    
    
    
    0.25Diluted net income per common share
    
    $
    0.60
    
    
    $
    0.39
    
    
    $
    0.92
   2010
    
    
    2009
    
    
    2008SOSARs/Options Excluded
    
    
    323,000
    
    
    
    228,000
    
    
    
    216,000
 11. INCOME TAXES
  Year Ended December 31,2010
    
    
    2009
    
    
    2008Current provision :Federal
    
    $
    (139,000
    )
    
    $
    1,543,000
    
    
    $
    1,155,000State
    
    
    (44,000
    )
    
    
    150,000
    
    
    
    237,000(183,000
    )
    
    
    1,693,000
    
    
    
    1,392,000Deferred provision (benefit):Federal
    
    
    1,851,000
    
    
    
    (544,000
    )
    
    
    855,000State
    
    
    190,000
    
    
    
    16,000
    
    
    
    (39,000
    )2,041,000
    
    
    
    (528,000
    )
    
    
    816,000Provision for income taxes of
continuing operations
    
    $
    1,858,000
    
    
    $
    1,165,000
    
    
    $
    2,208,000
 F - 21




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##### Table of Contents



Year Ended December 31,2010
    
    
    2009
    
    
    2008Provision for federal income taxes
at statutory rates
    
    $
    1,979,000
    
    
    $
    1,035,000
    
    
    $
    2,215,000Provision for state income taxes,
net of federal benefit
    
    
    97,000
    
    
    
    221,000
    
    
    
    158,000Valuation allowance changes
affecting the provision (benefit)
for income taxes
    
    
    (2,000
    )
    
    
    (76,000
    )
    
    
    66,000Work opportunity tax credits
    
    
    (580,000
    )
    
    
    (600,000
    )
    
    
    (654,000
    )Nondeductible expenses
    
    
    357,000
    
    
    
    516,000
    
    
    
    361,000Other
    
    
    7,000
    
    
    
    69,000
    
    
    
    62,000Provision (benefit) for income taxes
    
    $
    1,858,000
    
    
    $
    1,165,000
    
    
    $
    2,208,000
  December 31,2010
    
    
    2009Current deferred assets:Credit carryforwards
    
    $
    580,000
    
    
    $
    Allowance for doubtful accounts
    
    
    953,000
    
    
    
    1,044,000Accrued liabilities
    
    
    3,813,000
    
    
    
    4,579,0005,346,000
    
    
    
    5,623,000Less valuation allowance
    
    
    (196,000
    )
    
    
    (243,000
    )5,150,000
    
    
    
    5,380,000Current deferred liabilities:Prepaid expenses
    
    
    (943,000
    )
    
    
    (588,000
    )$
    4,207,000
    
    
    $
    4,792,000
 December 31,2010
    
    
    2009Noncurrent deferred assets:Net operating loss and other carryforwards
    
    $
    2,050,000
    
    
    $
    2,032,000Deferred lease costs
    
    
    471,000
    
    
    
    527,000Depreciation
    
    
    (872,000
    )
    
    
    182,000Tax goodwill and intangibles
    
    
    (158,000
    )
    
    
    391,000Stock-based compensation
    
    
    1,847,000
    
    
    
    2,144,000Accrued rent
    
    
    4,394,000
    
    
    
    4,059,000Impairment of long-lived assets
    
    
    513,000
    
    
    
    355,000Noncurrent self-insurance reserves
    
    
    4,843,000
    
    
    
    4,749,00013,088,000
    
    
    
    14,439,000Less valuation allowance
    
    
    (680,000
    )
    
    
    (635,000
    )$
    12,408,000
    
    
    $
    13,804,000
  F - 22




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##### Table of Contents



2010
    
    
    2009
    
    
    2008Balance at the beginning of the period
    
    $
    76,000
    
    
    $
    70,000
    
    
    $
    307,000Decreases due to settlement with taxing authorities
    
    
    
    
    
    
    
    
    
    
    (234,000
    )Changes in tax positions for prior years
    
    
    8,000
    
    
    
    6,000
    
    
    
    (3,000
    )Balance at the end of the period
    
    $
    84,000
    
    
    $
    76,000
    
    
    $
    70,000
   F - 23




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##### Table of Contents



12. COMMITMENTS AND CONTINGENCIES
 Lease Commitments
  2011
    
    $
    22,560,0002012
    
    
    23,094,0002013
    
    
    23,657,0002014
    
    
    24,206,0002015
    
    
    24,802,000Thereafter
    
    
    459,569,000$
    577,888,000
  Omega Leases
 General Terms
    F - 24




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##### Table of Contents



Brentwood Terrace
    Texas Leased Nursing Centers
  Renovation Funding
   F - 25




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##### Table of Contents



Insurance Matters
 Professional Liability and Other Liability Insurance-
   Reserve for Estimated Self-Insured Professional Liability Claims-
     F - 26




---



##### Table of Contents



Other Insurance
   Employment Agreements
  Health Care Industry and Legal Proceedings
  F - 27




---



##### Table of Contents



Reimbursement
   F - 28




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##### Table of Contents



13.
    
    QUARTERLY FINANCIAL INFORMATION (Unaudited)
  Quarter2010
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    70,152,000
    
    
    $
    71,492,000
    
    
    $
    72,996,000
    
    
    $
    75,490,000Professional liability expense (1)
    
    
    1,414,000
    
    
    
    997,000
    
    
    
    1,684,000
    
    
    
    1,269,000Net income from continuing operations
    
    
    707,000
    
    
    
    987,000
    
    
    
    229,000
    
    
    
    2,040,000Income (loss) from discontinued
operations(2)
    
    
    201,000
    
    
    
    (10,000
    )
    
    
    (9,000
    )
    
    
    (296,000
    )Net income for common stock
    
    $
    822,000
    
    
    $
    891,000
    
    
    $
    134,000
    
    
    $
    1,658,000Basic net income per common share:Net income from continuing
operations
    
    $
    0.11
    
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.34Income (loss) from discontinued
operations
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net income (loss) per common share
    
    $
    0.14
    
    
    $
    0.16
    
    
    $
    0.02
    
    
    $
    0.29Diluted net income per common share:Net income from continuing
operations
    
    $
    0.11
    
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.34Income (loss) from discontinued
operations
    
    
    0.03
    
    
    
    
    
    
    
    
    
    
    
    (0.05
    )Net income (loss) per common share
    
    $
    0.14
    
    
    $
    0.15
    
    
    $
    0.02
    
    
    $
    0.29
 
 (1)
    
    The Companys quarterly results are significantly affected by the amounts
recorded for professional liability expense, as discussed further in Note 12. The amount
of expense recorded for professional liability in each quarter of 2010 is set forth in the
table above.(2)
    
    The loss from discontinued operations in the fourth quarter was the result of an
impairment charge of $273,000 net of tax to reduce the carrying value of land held for sale
in discontinued operations. F - 29




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##### Table of Contents



Quarter2009
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    67,735,000
    
    
    $
    69,305,000
    
    
    $
    70,392,000
    
    
    $
    69,547,000Professional liability expense(1)
    
    
    2,905,000
    
    
    
    2,670,000
    
    
    
    817,000
    
    
    
    1,836,000Other income(2)
    
    
    549,000
    
    
    
    
    
    
    
    
    
    
    
    Net income from continuing operations
    
    
    255,000
    
    
    
    644,000
    
    
    
    937,000
    
    
    
    44,000Income from discontinued operations
    
    
    108,000
    
    
    
    286,000
    
    
    
    195,000
    
    
    
    132,000Net income for common stock
    
    $
    277,000
    
    
    $
    844,000
    
    
    $
    1,046,000
    
    
    $
    90,000Basic net income per common share:Net income (loss) from continuing
operations
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    (0.01
    )Income from discontinued
operations
    
    
    0.02
    
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.03Net income per common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.18
    
    
    $
    0.02Diluted net income per common share:Net income (loss) from continuing
operations
    
    $
    0.03
    
    
    $
    0.10
    
    
    $
    0.15
    
    
    $
    (0.01
    )Income from discontinued
operations0.02
    
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.03Net income per common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.18
    
    
    $
    0.02
 
 (1)
    
    The Companys quarterly results are significantly affected by the amounts
recorded for professional liability expense, as discussed further in Note 12. The amount
of expense recorded for professional liability in each quarter of 2009 is set forth in the
table above.(2)
    
    During the first quarter of 2009, as discussed further in Note 3, the Company
reached an agreement with CMS to settle for an amount less than the amounts previously
accrued, resulting in a gain on settlement of $549,000 that was recorded as other income. F - 30




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##### Table of Contents



ADVOCAT INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
OF CONTINUING OPERATIONS
(in thousands)
 Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EAdditions
    
    
    DeductionsBalanceat
    
    
    Charged
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceDescription
    
    Beginning
    
    
    to
    
    
    Charged
    
    
    
    
    
    
    (Write-offs)
    
    
    atof
    
    
    Costs and
    
    
    to Other
    
    
    
    
    
    
    net of
    
    
    End ofPeriod
    
    
    Expenses
    
    
    Accounts
    
    
    Other
    
    
    Recoveries
    
    
    PeriodYear ended
December 31, 2010: Allowance for
doubtful accounts
    
    $
    2,566
    
    
    $
    2,127
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,871
    )
    
    $
    2,822Year ended
December 31, 2009: Allowance for
doubtful accounts
    
    $
    2,839
    
    
    $
    1,965
    
    
    $
    12
    
    
    $
    
    
    
    $
    (2,250
    )
    
    $
    2,566Year ended
December 31, 2008: Allowance for
doubtful accounts
    
    $
    1,917
    
    
    $
    2,015
    
    
    $
    9
    
    
    $
    
    
    
    $
    (1,102
    )
    
    $
    2,839
 S-1




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##### Table of Contents



ADVOCAT INC.
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
 Column A
    
    Column B
    
    
    Column C
    
    
    Column D
    
    
    Column EAdditions
    
    
    DeductionsBalance at
    
    
    Charged
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    
    to
    
    
    Charged
    
    
    
    
    
    
    
    
    
    
    atof
    
    
    Costs and
    
    
    to Other
    
    
    
    
    
    
    
    
    
    
    End ofDescription
    
    Period
    
    
    Expenses
    
    
    Accounts(2)
    
    
    Other
    
    
    Payments
    
    
    PeriodYear ended
December 31, 2010:Professional
Liability Reserve
    
    $
    18,502
    
    
    $
    4,391
    
    
    $
    (497
    )
    
    $
    
    
    
    $
    (5,145
    )(1)
    
    $
    17,251Workers Compensation
Reserve
    
    $
    472
    
    
    $
    872
    
    
    $
    
    
    
    $
    509
    
    
    $
    (1,507
    )
    
    $
    346Health Insurance
Reserve
    
    $
    1,121
    
    
    $
    8,931
    
    
    $
    
    
    
    $
    
    
    
    $
    (9,049
    )
    
    $
    1,003Year ended
December 31, 2009:Professional
Liability Reserve
    
    $
    14,959
    
    
    $
    7,598
    
    
    $
    769
    
    
    $
    
    
    
    $
    (4,824
    )(1)
    
    $
    18,502Workers Compensation
Reserve
    
    $
    492
    
    
    $
    1,689
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,709
    )
    
    $
    472Health Insurance
Reserve
    
    $
    1,230
    
    
    $
    9,944
    
    
    $
    
    
    
    $
    
    
    
    $
    (10,053
    )
    
    $
    1,121Year ended
December 31, 2008:Professional
Liability Reserve
    
    $
    20,675
    
    
    $
    960
    
    
    $
    (113
    )
    
    $
    
    
    
    $
    (6,563
    )(1)
    
    $
    14,959Workers Compensation
Reserve
    
    $
    362
    
    
    $
    1,533
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,403
    )
    
    $
    492Health Insurance
Reserve
    
    $
    1,138
    
    
    $
    8,232
    
    
    $
    
    
    
    $
    
    
    
    $
    (8,140
    )
    
    $
    1,230
 
 (1)
    
    Payments include amounts paid for claims settled during the period as well as payments
made under structured arrangements for claims settled in earlier periods.(2)
    
    As discussed in Note 7 of the Consolidated Financial
Statements, the Company has presented the results of certain
divestiture and lease termination transactions as discontinued
operations. The amounts charged to Other Accounts represent the
amounts charged to discontinued operations. S-2




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits3.1
    
    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
    
    1994 Incentive and Non-Qualified Stock Plan for Key Personnel
(incorporated by reference to Exhibit 10.3 to the Companys
Registration Statement No. 33-76150 on Form S-1).*10.2
    
    1994 Non-Qualified Stock Option Plan for Directors
(incorporated by reference to Exhibit 10.4 to the Companys
Registration Statement No. 33-76150 on Form S-1).*10.3
    
    Master Agreement and Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.6 to the Companys
Registration Statement No. 33-76150 on Form S-1).10.4
    
    Form of Director Indemnification Agreement (incorporated by
reference to Exhibit 10.8 to the Companys Registration
Statement No. 33-76150 on Form S-1).10.5
    
    Advocat Inc. Guaranty in favor of Omega Healthcare Investors,
Inc. dated May 10, 1994 (incorporated by reference to Exhibit
10.11 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).*10.6
    
    Amendment to 1994 Incentive and Non-Qualified Stock Plan for
Key Personnel (incorporated by reference to Exhibit A to the
Companys Schedule 14A filed March 31, 1997).*10.7
    
    Amendment to 1994 Non-Qualified Stock Option Plan for
Directors (incorporated by reference to Exhibit A to the
Companys Schedule 14A filed April 19, 1996).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits*10.8
    
    Amendment No. 3 Advocat Inc. 1994 Incentive and Nonqualified
Stock Option Plan For Key Personnel (incorporated by reference
to Exhibit A to the Companys Schedule 14A filed April 3,
1998).10.9
    
    Settlement and Restructuring Agreement dated as of October 1,
2000 among Registrant, Diversicare Leasing Corp., Sterling
Health Care Management, Inc., Diversicare Management Services
Co., Advocat Finance, Inc., Omega Healthcare Investors, Inc.
and Sterling Acquisition Corp. (incorporated by reference to
Exhibit 10.83 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2000).10.10
    
    Consolidated Amended and Restated Master Lease dated November
8, 2000, effective October 1, 2000, between Sterling
Acquisition Corp. (as Lessor) and Diversicare Leasing Corp.
(as Lessee) (incorporated by reference to Exhibit 10.84 to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).10.11
    
    Management Agreement effective October 1, 2000, between
Diversicare Leasing Corp. and Diversicare Management Services
Co. (incorporated by reference to Exhibit 10.85 to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).10.12
    
    Amended and Restated Security Agreement dated as of November
8, 2000 between Diversicare Leasing Corp and Sterling
Acquisition Corp. (incorporated by reference to Exhibit 10.86
to the Companys Annual Report on Form 10-K for the fiscal
year ended December 31, 2000).10.13
    
    Security Agreement dated as of November 8, 2000 between
Sterling Health Care Management, Inc. and Sterling Acquisition
Corp. (incorporated by reference to Exhibit 10.87 to the
Companys Annual Report on Form 10-K for the fiscal year ended
December 31, 2000).10.14
    
    Guaranty given as of November 8, 2000 by Registrant, Advocat
Finance, Inc., Diversicare Management Services Co., in favor
of Sterling Acquisition Corp. (incorporated by reference to
Exhibit 10.88 to the Companys Annual Report on Form 10-K for
the fiscal year ended December 31, 2000).10.15
    
    Reaffirmation of Obligations (Florida Managed Facilities) by
Registrant and Diversicare Management Services Co. to and for
the benefit of Omega Healthcare Investors (incorporated by
reference to Exhibit 10.89 to the Companys Annual Report on
Form 10-K for the fiscal year ended December 31, 2000).10.16
    
    Revenue Sharing Agreement as of the 30 day of September, 2001,
by and among Advocat Inc.,Diversicare Leasing Corp., Omega
Healthcare Investors, Inc. and OHI Sunshine, Inc.
(incorporated by reference to Exhibit 10.125 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2001).10.17
    
    First Amendment to Consolidated Amended and Restated Master
lease dated September 30, 2001 by and between Sterling
Acquisition Corp and Diversicare Leasing Corporation.
(incorporated by reference to Exhibit 10.126 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2001).10.18
    
    Purchase and Sale Agreement dated as of the
25th day of July, 2002 by and between
Diversicare Leasing Corp. and Sterling Healthcare, Inc.
(incorporated by reference to Exhibit 10.3 to the Companys
Quarterly Report on Form 10-Q for the quarter ended September
30, 2002).10.19
    
    Share Purchase Agreement dated as of August 25, 2003 by and
between Diversicare Leasing Corp., a Tennessee corporation,
Advocat Inc., a Delaware corporation, Diversicare Canada
Management Services Co., Inc., an Ontario corporation, and
DCMS Holdings Inc., an Ontario corporation (incorporated by
reference to Annex A to the Companys Proxy Statement filed
October 6, 2003).10.20
    
    Lease Termination Agreement dated as of May 29, 2003, by and
among (i) Diversicare Assisted Living Services, Inc., a
Tennessee corporation, and Advocat Inc., a Delaware
corporation, and (ii) 570 Center Street, LLC, a South Carolina
limited liability company, and Albert M. Lynch, an individual
(incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.21
    
    Master Lease Agreement dated as of May 1, 2003 by and between
Emerald-Cedar Hills, Inc. Emerald-Golfview, Inc.,
Emerald-Southern Pines, Inc. and Emerald-Golfcrest, Inc. and
Senior Care Florida Leasing, LLC(incorporated by reference to
Exhibit 10.13 to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003).10.22
    
    Security Agreement as of April 1, 2003 by and between Senior
Care Florida Leasing, LLC, a Delaware limited liability
company, Senior Care Golfview, LLC, a Delaware limited
liability company, Senior Care Golfcrest, LLC, a Delaware
limited liability company, Senior Care Southern Pines, LLC, a
Delaware limited liability company, Senior Care Cedar Hills,
LLC, a Delaware limited liability company and Omega Healthcare
Investors, Inc., a Maryland corporation (incorporated by
reference to Exhibit 10.16 to the Companys Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).10.23
    
    First Amendment to Share Purchase Agreement dated as of
February 17, 2004, among Diversicare Leasing Corp., a
corporation incorporated under the laws of Tennessee, and
Advocat Inc., a corporation incorporated under the laws of
Delaware, and Diversicare Canada Management Services Co.,
Inc., a corporation incorporated under the laws of Ontario,
and DCMS Holdings Inc., a corporation incorporated under the
laws of Ontario (incorporated by reference to Exhibit 10.142
to the Companys Annual Report on Form 10-K for the year ended
December 31, 2003).10.24
    
    Purchase and Sale Agreement dated as of 4th day of November,
2004, by and between McKesson Medical-Surgical Minnesota
Supply Inc. a Minnesota corporation, Advocat Distribution
Services, Inc., a Tennessee corporation and Diversicare
Management Services, Inc. (incorporated by reference to
Exhibit 10.121 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2004).10.25
    
    Purchase and Sale Agreement made and entered into as of the
14th day of November, 2003 with Addendum dated as of October
14, 2004 by and between Diversicare Assisted Living Services
NC II, LLC, a Delaware limited liability company, and Margaret
Sutton (incorporated by reference to Exhibit 10.122 to the
Companys Annual Report on Form 10-K for the year ended
December 31, 2004).10.26
    
    Purchase Agreement made and entered into as of the 14th day of
January, 2005, by and between (i) Diversicare Leasing Corp., a
Tennessee corporation, and (ii) Salt Creek Holding Company,
Inc., a Texas corporation, and Goliad Manor, Inc., a Texas
corporation (incorporated by reference to Exhibit 10.123 to
the Companys Annual Report on Form 10-K for the year ended
December 31, 2004).10.27
    
    Purchase Agreement made and entered into as of the 14th day of
January, 2005, by and between (i) Diversicare Leasing Corp., a
Tennessee corporation and (ii) Devils Run Holding Company,
Inc., a Texas corporation and Refugio Nursing and
Rehabilitation Center, Inc., a Texas corporation.
(incorporated by reference to Exhibit 10.124 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2004).10.28
    
    Second Amendment to Consolidated Amended and Restated Master
Lease dated as of June 15, 2005 by and between Sterling
Acquisition Corp. and Diversicare Leasing Corporation
(incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended June 30,
2005).10.29
    
    Purchase and Sale Agreement dated July 5, 2005 by and between
Osborne F. Wilson Development Corp., Inc. and a subsidiary of
the Company (incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2005).10.30
    
    Asset Purchase Agreement dated as of November 28, 2005, by and
among Diversicare Assisted Living Services NC I, LLC, a
Delaware limited liability company, Diversicare Assisted
Living Services NC II, LLC, a Delaware limited liability
company, and Agemark Acquisition, LLC, a North Carolina
limited liability company. (incorporated by reference to
Exhibit 10.146 to the Companys Annual Report on Form 10-K for
the year ended December 31, 2005).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.31
    
    First Amendment to Amended and Restated Master Lease Agreement
dated as of December 31, 2005 by and between Florida
Lessor-Emerald, Inc. and Senior Care Florida Leasing, LLC.
(incorporated by reference to Exhibit 10.147 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2005).10.32
    
    First Amendment to Master Lease Agreement dated as of December
31, 2005 by and between Emerald-Cedar Hills, Inc.,
Emerald-Golfview, Inc., Emerald-Southern Pines, Inc. and
Emerald-Golfcrest, Inc. and Senior Care Florida Leasing, LLC.
(incorporated by reference to Exhibit 10.148 to the Companys
Annual Report on Form 10-K for the year ended December 31,
2005).*10.33
    
    Amended and Restated Employment Agreement dated as of March
31, 2006, by and among Advocat Inc., a Delaware corporation,
and William R. Council, III (incorporated by reference to
Exhibit 10.1 to the Companys quarterly report on Form 10-Q
for the quarter ended March 31, 2006).*10.34
    
    Employment Agreement dated as of March 31, 2006, by and among
Advocat Inc., a Delaware corporation, and Raymond L. Tyler.
(incorporated by reference to Exhibit 10.2 to the Companys
quarterly report on Form 10-Q for the quarter ended March 31,
2006).*10.35
    
    Employment Agreement dated as of March 31, 2006, by and among
Advocat Inc., a Delaware corporation, and L. Glynn Riddle.
(incorporated by reference to Exhibit 10.3 to the Companys
quarterly report on Form 10-Q for the quarter ended March 31,
2006).10.36
    
    First Amendment to Asset Purchase Agreement dated as of March
29, 2006, by and among Diversicare Assisted Living Services NC
I, LLC, a Delaware limited liability company, Diversicare
Assisted Living Services NC II, LLC, a Delaware limited
liability company, and Agemark Acquisition, LLC, a North
Carolina limited liability company (incorporated by reference
to Exhibit 10.20 to the Companys quarterly report on Form
10-Q for the quarter ended March 31, 2006).10.37
    
    Second amendment to Asset Purchase Agreement effective as of
April 14, 2006, by and among Diversicare Assisted Living
Services NC I, LLC, a Delaware limited liability company,
Diversicare Assisted Living Services NC II, LLC, a Delaware
limited liability company, and Agemark Acquisition, LLC, a
North Carolina limited liability company. (incorporated by
reference to Exhibit 10.1 to the Companys quarterly report on
Form 10-Q for the quarter ended June 30, 2006).10.38
    
    Loan Agreement dated as of the 7th day of August, 2006, by and
between certain subsidiaries of the Registrant and Capmark
Finance Inc., formerly known as GMAC Commercial Mortgage
Corporation (incorporated by reference to Exhibit 10.1 to the
Companys quarterly report on Form 10-Q for the quarter ended
September 30, 2006).10.39
    
    Promissory Note dated August 7, 2006 in the amount of
$22,500,000 issued by certain subsidiaries of the Registrant
to Capmark Finance Inc. (incorporated by reference to Exhibit
10.2 to the Companys quarterly report on Form 10-Q for the
quarter ended September 30, 2006).10.40
    
    Payment and Performance Guaranty Agreement effective as of the
7th day of August, 2006, by Advocat Inc., for the benefit of
Capmark Finance Inc., formerly known as GMAC Commercial
Mortgage Corporation (incorporated by reference to Exhibit
10.4 to the Companys quarterly report on Form 10-Q for the
quarter ended September 30, 2006).10.41
    
    Restructuring Stock Issuance and Subscription Agreement dated
as of October 20, 2006 between Advocat Inc. and Omega
Healthcare Investors, Inc. (incorporated by reference to
Exhibit 10.1 to the Companys current report on Form 8-K filed
October 24, 2006).10.42
    
    Third Amendment to Consolidated Amended and Restated Master
Lease executed as of October 20, 2006, to be effective as of
October 1, 2006 by and between Sterling Acquisition Corp. and
Diversicare Leasing Corporation (incorporated by reference to
Exhibit 10.2 to the Companys current report on Form 8-K filed
October 24, 2006).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.43
    
    Subordinated Promissory Note in the amount of $2,533,614.53
issued to Omega HealthCare Investors Inc. dated as of October
1, 2006 (incorporated by reference to Exhibit 10.3 to the
Companys current report on Form 8-K filed October 24, 2006).10.44
    
    Fourth Amendment to Consolidated Amended and Restated Master
Lease executed and delivered as of April 1, 2007 by and
between Sterling Acquisition Corp., a Kentucky corporation,
and Diversicare Leasing Corp., a Tennessee corporation
(incorporated by reference to Exhibit 10.1 to the Companys
quarterly report on Form 10-Q for the quarter ended March 31,
2007).10.45
    
    Operations Transfer Agreement effective as of July 20, 2007,
by and among certain subsidiaries of the Company, and Senior
Management Services of America North Texas, Inc., a Texas
corporation, Senior Management Services of Estates at Fort
Worth, Inc., a Texas corporation, Senior Management Services
of Doctors at Dallas, Inc., a Texas corporation, Senior
Management Services of Humble, Inc., a Texas corporation,
Senior Management Services of Katy, Inc., a Texas corporation,
Senior Management Services of Treemont, Inc., a Texas
corporation, Senior Management Services of Heritage Oaks at
Ballinger, Inc., a Texas corporation, and Senior Management
Services of Normandy at San Antonio, Inc., a Texas corporation
(incorporated by reference to Exhibit 10.1 to the Companys
quarterly report on Form 10-Q for the quarter ended September
30, 2007).10.46
    
    Loan and Security Agreement made as of August 10, 2007,
between Diversicare Leasing Corp., a Tennessee corporation,
and Bridge Associates LLC, as trustee for the SMSA Creditors
Trust, a Texas trust. (Incorporated by reference to Exhibit
10.2 to the Companys quarterly report on Form 10-Q for the
quarter ended September 30, 2007).10.47
    
    Loan and Security Agreement dated as of August 10, 2007, is by
and among the Company and certain subsidiaries and LaSalle
Bank National Association, a national banking association
(incorporated by reference to Exhibit 10.3 to the Companys
quarterly report on Form 10-Q for the quarter ended September
30, 2007).10.48
    
    Guaranty dated as of August 10, 2007, by Advocat Inc., a
Delaware corporation to and for the benefit of LaSalle Bank
National Association, a national banking association
(incorporated by reference to Exhibit 10.4 to the Companys
quarterly report on Form 10-Q for the quarter ended September
30, 2007).10.49
    
    Revolving Credit Note dated August 10, 2007 in the principal
amount of $21,000,000.00 from the Company and certain
subsidiaries to LaSalle Bank National Association, a national
banking association (incorporated by reference to Exhibit 10.5
to the Companys quarterly report on Form 10-Q for the quarter
ended September 30, 2007).10.50
    
    Term Loan Note dated August 10, 2007 in the principal amount
of $16,500,000.00 from the Company and certain subsidiaries to
LaSalle Bank National Association, a national banking
association (incorporated by reference to Exhibit 10.6 to the
Companys quarterly report on Form 10-Q for the quarter ended
September 30, 2007).10.51
    
    Fifth Amendment to Consolidated Amended and Restated Master
Lease dated as of August 10, 2007 by and between Sterling
Acquisition Corp., a Kentucky corporation and Diversicare
Leasing Corp., a Tennessee corporation (incorporated by
reference to Exhibit 10.7 to the Companys quarterly report on
Form 10-Q for the quarter ended September 30, 2007).10.52
    
    First Amendment to Loan Agreement dated as of December 18,
2007, by and among the Company and certain subsidiaries and
LaSalle Bank National Association, a national banking
association (incorporated by reference to Exhibit 10.56 to the
Companys annual report on Form 10-K for the year ended
December 31, 2007).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.53
    
    Sixth Amendment to Consolidated Amended and Restated Master
Lease dated as of March 14, 2008 by and between Sterling
Acquisition Corp., a Kentucky corporation and Diversicare
Leasing Corp., a Tennessee corporation (incorporated by
reference to Exhibit 10.1 to the Companys quarterly report on
Form 10-Q for the quarter ended March 31, 2008).10.54
    
    Second Amendment to Loan Agreement and Joinder dated as of
March 14, 2008 by and among Diversicare Paris, LLC, a Delaware
limited liability company and certain subsidiaries and LaSalle
Bank National Association, a national banking association
(incorporated by reference to Exhibit 10.2 to the Companys
quarterly report on Form 10-Q for the quarter ended March 31,
2008).10.55
    
    Seventh Amendment to Consolidated Amended and Restated Master
Lease dated as of October 24, 2008 by and between Sterling
Acquisition Corp., a Kentucky corporation and Diversicare
Leasing Corp., a Tennessee corporation (incorporated by
reference to Exhibit 10.1 to the Companys quarterly report on
Form 10-Q for the quarter ended September 30, 2008).10.56
    
    Third Amendment to Loan Agreement dated as of December 12,
2008, by and among the Company and certain subsidiaries and
Bank of America, N.A., a national banking association, as
successor by merger to LaSalle Bank National Association
(incorporated by reference to Exhibit 10.60 to the Companys
annual report on Form 10-K for the year ended December 31,
2008).10.57
    
    First Amendment effective December 23, 2008, to Loan Agreement
dated as of the 7th day of August, 2006, by and between
certain subsidiaries of the Company and Capmark Finance Inc.,
formerly known as GMAC Commercial Mortgage Corporation
(incorporated by reference to Exhibit 10.61 to the Companys
annual report on Form 10-K for the year ended December 31,
2008).*10.58
    
    Amendment No. 4 to the 1994 Incentive and Nonqualified Stock
Option Plan for Key Personnel (incorporated by reference to
Exhibit 10.62 to the Companys annual report on Form 10-K for
the year ended December 31, 2008).*10.59
    
    Advocat Inc. 2005 Long-Term Incentive Plan (incorporated by
reference to Appendix A to the Companys Definitive Proxy
Statement on Schedule 14A filed on April 20, 2006).*10.60
    
    First Amendment to the Advocat Inc. 2005 Long-Term Incentive
Plan (incorporated by reference to Exhibit 10.63 to the
Companys annual report on Form 10-K for the year ended
December 31, 2008).*10.61
    
    Amendment No. 1 effective March 9, 2009 to Amended and
Restated Employment Agreement by and between Advocat Inc. and
Raymond L. Tyler. (incorporated by reference to Exhibit 10.1
to the Companys quarterly report on Form 10-Q for the quarter
ended March 31, 2009).10.62
    
    Ninth Amendment to Consolidated Amended and Restated Master
Lease dated as of May 5, 2009 by and between Sterling
Acquisition Corp., a Kentucky corporation and Diversicare
Leasing Corp., a Tennessee corporation (incorporated by
reference to Exhibit 10.1 to the Companys quarterly report on
Form 10-Q for the quarter ended June 30, 2009).10.63
    
    Tenth Amendment to Consolidated Amended and Restated Master
Lease dated as of September 8, 2009 by and between Sterling
Acquisition Corp., a Kentucky corporation and Diversicare
Leasing Corp., a Tennessee corporation (incorporated by
reference to Exhibit 10.1 to the Companys quarterly report on
Form 10-Q for the quarter ended September 30, 2009).*10.64
    
    Employment Agreement effective April 5, 2010, by and among
Advocat Inc., a Delaware corporation, and Kelly Gill
(incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010).10.65
    
    Termination of Lease and Subleases dated April 1, 2010 between
the registrant and Omega Health Investors, Inc. and certain
affiliates (incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended
March 31, 2010).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits*10.66
    
    Separation Agreement dated May 25, 2010, between the registrant and Raymond L. Tyler.
(incorporated by reference to Exhibit 10.3 to the Companys Quarterly Report on Form
10-Q for the quarter ended June 30, 2010).10.67
    
    Lease Agreement dated as of July 14, 2010 by and between a subsidiary of the
registrant and A.B.E., LLC. (incorporated by reference to Exhibit 10.4 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2010).10.68
    
    Second Amendment to Master Lease Dated March 2, 2010 between the registrant and
OHI Asset (FL), LLC, an affiliate of Omega Healthcare Investors. (incorporated
by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010).10.69
    
    $15 million revolving credit facility dated March 17, 2010 between the registrant and
The Privatebank and Trust Company (incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter
ended March 31, 2010).21
    
    Subsidiaries of the Registrant.23.1
    
    Consent of BDO Seidman.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.