##### 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, 2008
 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 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. (Check one):
 Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ 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, 2008 (based on the
closing price of such shares on the NASDAQ Capital Market) was approximately $39,764,000. 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 27, 2009, 5,670,987 shares of the registrants $0.01 par value Common Stock were
outstanding.
 Documents Incorporated by Reference
 Registrants definitive proxy materials for its 2009 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND 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 PROCEDURES.ITEM 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 SCHEDULESEX-10.60EX-10.61EX-10.62EX-10.63EX-21EX-23.1EX-31.1EX-31.2EX-32    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 Introductory Summary.
    
    
    Committed to Compassion
    
    Striving for Excellence
    
    Serving Responsibly
  Operating and Growth Strategy.
  Provide a broad range of cost-effective services.
 Increase occupancy through physical plant improvements and emphasis on marketing efforts
 Improve quality of payor mix.
 Cluster operations on a regional basis.
 2




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Increase revenues and profitability at existing facilities.
 Improve physical plants
 Development of additional specialty services
 Acquisition, leasing and development of new homes
 Nursing Centers and Services.
   Number of
    
    Licensed Nursing
    
    Available Nursing
    
    AssistedCenters
    
    Beds (1)
    
    Beds (1)
    
    Living UnitsOperating Locations:Alabama
    
    
    6
    
    
    
    711
    
    
    
    704
    
    
    
    0Arkansas
    
    
    12
    
    
    
    1,311
    
    
    
    1,165
    
    
    
    12Florida
    
    
    5
    
    
    
    502
    
    
    
    462
    
    
    
    0Kentucky
    
    
    6
    
    
    
    474
    
    
    
    470
    
    
    
    2Ohio
    
    
    1
    
    
    
    151
    
    
    
    122
    
    
    
    0Tennessee
    
    
    5
    
    
    
    617
    
    
    
    586
    
    
    
    0Texas
    
    
    13
    
    
    
    1,857
    
    
    
    1,631
    
    
    
    0West Virginia
    
    
    2
    
    
    
    150
    
    
    
    150
    
    
    
    050
    
    
    
    5,773
    
    
    
    5,290
    
    
    
    14Classification:Owned
    
    
    9
    
    
    
    942
    
    
    
    864
    
    
    
    0Leased
    
    
    41
    
    
    
    4,831
    
    
    
    4,426
    
    
    
    14Total
    
    
    50
    
    
    
    5,773
    
    
    
    5,290
    
    
    
    14
 3




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(1)
    
    The number of Licensed beds is based on the licensed capacity of the facility. The Company
reports its occupancy based on licensed beds. The number of Available Beds represents
licensed beds less beds removed from service. Available beds is subject to change based
upon the needs of the facilities, including configuration of patient rooms and offices, status
of beds (private, semi-private, ward, etc.) and renovations.   Life Steps Unit
 Lighthouse Unit
 Enhanced Therapy Services.
 Other Specialty Programming.
 Continuous Quality Improvement
 Organization .
 4




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Marketing.
     Acquisitions and New Lease.
 2007 Acquisition and New Lease
 West Virginia facility
 Divestitures.
  5




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Nursing Center Profession.
  Demographic trends.
 Cost containment pressures.
 Limited supply of centers.
 Reduced reliance on family care.
 Competition.
   6




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Payor Sources.
   Year Ended December 31,(Dollars in thousands)2008
    
    
    2007
    
    
    2006Medicaid
    
    $
    154,048
    
    
    
    53.3
    %
    
    $
    136,566
    
    
    
    55.7
    %
    
    $
    121,138
    
    
    
    56.4
    %Medicare
    
    
    91,090
    
    
    
    31.5
    
    
    
    76,364
    
    
    
    31.2
    
    
    
    65,666
    
    
    
    30.6Private Pay and other
    
    
    43,659
    
    
    
    15.2
    
    
    
    32,131
    
    
    
    13.1
    
    
    
    27,849
    
    
    
    13.0Total
    
    $
    288,797
    
    
    
    100.0
    %
    
    $
    245,061
    
    
    
    100.0
    %
    
    $
    214,653
    
    
    
    100.0
    %
  Year Ended December 31,2008
    
    2007
    
    2006Medicaid
    
    
    3,014
    
    
    
    69.4
    %
    
    
    2,708
    
    
    
    71.0
    %
    
    
    2,483
    
    
    
    71.6
    %Medicare
    
    
    578
    
    
    
    13.3
    
    
    
    523
    
    
    
    13.7
    
    
    
    487
    
    
    
    14.0Private Pay and other
    
    
    754
    
    
    
    17.3
    
    
    
    585
    
    
    
    15.3
    
    
    
    500
    
    
    
    14.4Total
    
    
    4,346
    
    
    
    100.0
    %
    
    
    3,816
    
    
    
    100.0
    %
    
    
    3,470
    
    
    
    100.0
    %
  Reimbursement.
     7




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Employees.
   Supplies and Equipment.
  Government Regulation.
  8




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Licensure and Certification.
 Medicare and Medicaid.
   HIPAA Compliance
  9




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Self-Referral and Anti-Kickback Legislation.
 Available Information.
  
 ITEM 1A. RISK FACTORS
  We are substantially self-insured and have significant potential professional liability exposure.
   10




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We have had substantial downward adjustments to our accrual for professional liability claims which
has caused significant increases in our net earnings.
  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.
    11




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We are subject to significant government regulation.
   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
  12




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If we are unable to improve occupancy and increase profitability of the operations of the
facilities acquired in August 2007 from Senior Management Services, our profits will continue to be
lower than the profits generated prior to completion of that acquisition.
  If we are unable to complete construction of the Paris, Texas replacement facility in a timely
manner and at our budgeted costs, and if we are unable to develop the necessary census and payor
mix as projected, we will not realize the anticipated potential benefits from the project and our
business and results of operations could be adversely affected.
  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.
  13




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Omega Master Lease.
       Florida Leases.
 Other Leases.
 14




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ITEM 3. LEGAL PROCEEDINGS
       
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  15




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market Information.
 Period
    
    High
    
    Low2007 - 1st Quarter
    
    
    17.89
    
    
    
    10.732007 - 2nd Quarter
    
    
    13.77
    
    
    
    11.072007 - 3rd Quarter
    
    
    12.71
    
    
    
    9.252007 - 4th Quarter
    
    
    12.00
    
    
    
    9.992008 - 1st Quarter
    
    
    12.54
    
    
    
    9.672008 - 2nd Quarter
    
    
    12.44
    
    
    
    9.962008 - 3rd Quarter
    
    
    10.86
    
    
    
    2.862008 - 4th Quarter
    
    
    4.99
    
    
    
    1.55
  Holders
 Dividends
 Equity Compensation Plan Information
  Number ofSecuritiesAvailable forNumber of
    
    
    
    
    
    
    Future IssuanceSecurities to be
    
    
    
    
    
    
    Under EquityIssued Upon
    
    
    Weighted-Average
    
    
    Compensation PlansExercise of
    
    
    Exercise Price of
    
    
    (excludingOutstanding
    
    
    Outstanding
    
    
    SecuritiesOptions, Warrants
    
    
    Options, Warrants
    
    
    Reflected in Columnand Rights
    
    
    and Rights
    
    
    (a))Plan Category
    
    (a)
    
    
    (b)
    
    
    (c)(1)Equity Compensation Plans Approved
by Security Holders
    
    
    548,000
    
    
    $
    6.78
    
    
    
    303,000Equity Compensation Plans Not
Approved by Security Holders
    
    None
    
    
    None
    
    
    NoneTotal
    
    
    548,000
    
    
    $
    6.78
    
    
    
    303,000
 
 (1)
    
    Includes 153,000 shares available for issuance under the 2005 Long-Term
Incentive Plan and 150,000 shares reserved for issuance under the Advocat Inc. 2008
Stock Purchase Plan for Key Personnel (Stock Purchase Plan). The Stock Purchase Plan
was approved in 2008 and allows for the granting of rights to purchase shares of our
common stock by key personnel and is administered by the compensation committee of the
Board. 16




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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands, except per share amounts)Statement of Operations DataREVENUES:Patient revenues, net
    
    $
    288,797
    
    
    $
    245,061
    
    
    $
    214,653
    
    
    $
    201,234
    
    
    $
    188,712EXPENSES:Operating
    
    
    228,236
    
    
    
    187,463
    
    
    
    163,386
    
    
    
    153,273
    
    
    
    145,524Lease
    
    
    22,962
    
    
    
    20,019
    
    
    
    16,082
    
    
    
    15,836
    
    
    
    15,283Professional liability
    
    
    1,658
    
    
    
    (1,663
    )
    
    
    (5,354
    )
    
    
    (4,532
    )
    
    
    (2,001
    )General and administrative
    
    
    18,486
    
    
    
    17,552
    
    
    
    21,032
    
    
    
    13,311
    
    
    
    11,692Depreciation and amortization
    
    
    5,306
    
    
    
    4,093
    
    
    
    3,614
    
    
    
    3,454
    
    
    
    3,180Asset impairment and other charges
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219276,648
    
    
    
    227,464
    
    
    
    198,760
    
    
    
    181,342
    
    
    
    173,897OPERATING INCOME
    
    
    12,149
    
    
    
    17,597
    
    
    
    15,893
    
    
    
    19,892
    
    
    
    14,815OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (1,005
    )
    
    
    808
    
    
    
    21
    
    
    
    161
    
    
    
    784Other income
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    
    
    
    
    Interest income
    
    
    454
    
    
    
    1,016
    
    
    
    679
    
    
    
    534
    
    
    
    286Interest expense
    
    
    (2,870
    )
    
    
    (3,549
    )
    
    
    (3,707
    )
    
    
    (3,382
    )
    
    
    (3,069
    )Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    (194
    )
    
    
    
    
    
    
    (3,421
    )
    
    
    (1,841
    )
    
    
    (2,994
    )
    
    
    (2,687
    )
    
    
    (1,999
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    8,728
    
    
    
    15,756
    
    
    
    12,899
    
    
    
    17,205
    
    
    
    12,816PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    2,958
    
    
    
    6,270
    
    
    
    (9,496
    )
    
    
    (13,811
    )
    
    
    266NET INCOME FROM CONTINUING OPERATIONS
    
    
    5,770
    
    
    
    9,486
    
    
    
    22,395
    
    
    
    31,016
    
    
    
    12,550DISCONTINUED OPERATIONS, net of taxes
    
    
    (35
    )
    
    
    (99
    )
    
    
    (451
    )
    
    
    (5,714
    )
    
    
    (9,769
    )NET INCOME
    
    $
    5,735
    
    
    $
    9,387
    
    
    $
    21,944
    
    
    $
    25,302
    
    
    $
    2,781INCOME (LOSS) PER COMMON SHARE:Basic-Continuing operations
    
    $
    0.95
    
    
    $
    1.56
    
    
    $
    3.81
    
    
    $
    5.36
    
    
    $
    2.16Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )
    
    
    (1.00
    )
    
    
    (1.72
    )Net per common share
    
    $
    0.95
    
    
    $
    1.54
    
    
    $
    3.74
    
    
    $
    4.36
    
    
    $
    0.44Diluted-Continuing operations
    
    $
    0.92
    
    
    $
    1.49
    
    
    $
    3.42
    
    
    $
    4.76
    
    
    $
    1.94Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.07
    )
    
    
    (0.88
    )
    
    
    (1.52
    )Net per common share
    
    $
    0.92
    
    
    $
    1.48
    
    
    $
    3.35
    
    
    $
    3.88
    
    
    $
    0.42WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,693
    
    
    
    5,870
    
    
    
    5,784
    
    
    
    5,725
    
    
    
    5,660Diluted
    
    
    5,887
    
    
    
    6,127
    
    
    
    6,507
    
    
    
    6,498
    
    
    
    6,437
 December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004(in thousands)Balance Sheet DataWorking capital (deficit)
    
    $
    10,885
    
    
    $
    15,677
    
    
    $
    8,174
    
    
    $
    (39,970
    )
    
    $
    (45,489
    )Total assets
    
    $
    105,870
    
    
    $
    110,090
    
    
    $
    96,901
    
    
    $
    93,762
    
    
    $
    72,392Short-term borrowings and long-term debt including current
portion
    
    $
    32,410
    
    
    $
    34,455
    
    
    $
    31,516
    
    
    $
    47,547
    
    
    $
    47,024Preferred Stock  Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,750
    
    
    $
    4,432Preferred Stock  Series C (including unamortized premium)
    
    $
    7,891
    
    
    $
    9,590
    
    
    $
    11,289
    
    
    
    
    
    
    
    Shareholders Equity (deficit)
    
    $
    17,551
    
    
    $
    12,744
    
    
    $
    3,837
    
    
    $
    (16,870
    )
    
    $
    (41,854
    )
 17




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Overview






Acquisitions and New Lease


Divestitures.




Basis of Financial Statements.


Selected Financial and Operating Data




Year Ended December 31,(Dollars in thousands)2008
    
    
    2007
    
    
    2006Revenues:Patient revenues, net
    
    $
    288,797
    
    
    
    100
    %
    
    $
    245,061
    
    
    
    100.0
    %
    
    $
    214,653
    
    
    
    100.0
    %Expenses:Operating
    
    
    228,236
    
    
    
    79.0
    
    
    
    187,463
    
    
    
    76.5
    
    
    
    163,386
    
    
    
    76.1Lease
    
    
    22,962
    
    
    
    8.0
    
    
    
    20,019
    
    
    
    8.2
    
    
    
    16,082
    
    
    
    7.5Professional liability
    
    
    1,658
    
    
    
    0.6
    
    
    
    (1,663
    )
    
    
    (0.7
    )
    
    
    (5,354
    )
    
    
    (2.5
    )General & administrative
    
    
    18,486
    
    
    
    6.4
    
    
    
    17,552
    
    
    
    7.1
    
    
    
    21,032
    
    
    
    9.8Depreciation and amortization
    
    
    5,306
    
    
    
    1.8
    
    
    
    4,093
    
    
    
    1.7
    
    
    
    3,614
    
    
    
    1.7276,648
    
    
    
    95.8
    
    
    
    227,464
    
    
    
    92.8
    
    
    
    198,760
    
    
    
    92.6Operating income
    
    
    12,149
    
    
    
    4.2
    
    
    
    17,597
    
    
    
    7.2
    
    
    
    15,893
    
    
    
    7.4Other income (expense):Foreign currency transaction gain (loss)
    
    
    (1,005
    )
    
    
    (0.4
    )
    
    
    808
    
    
    
    0.3
    
    
    
    21
    
    
    
    0.0Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    0.1Interest income
    
    
    454
    
    
    
    0.2
    
    
    
    1,016
    
    
    
    0.4
    
    
    
    679
    
    
    
    0.3Interest expense
    
    
    (2,870
    )
    
    
    (1.0
    )
    
    
    (3,549
    )
    
    
    (1.5
    )
    
    
    (3,707
    )
    
    
    (1.7
    )Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    
    
    
    
    (194
    )
    
    
    (0.1
    )(3,421
    )
    
    
    (1.2
    )
    
    
    (1,841
    )
    
    
    (0.8
    )
    
    
    (2,994
    )
    
    
    (1.4
    )Income from continuing operations before income taxes
    
    
    8,728
    
    
    
    3.0
    
    
    
    15,756
    
    
    
    6.4
    
    
    
    12,899
    
    
    
    6.0Provision (benefit) for income taxes
    
    
    2,958
    
    
    
    1.0
    
    
    
    6,270
    
    
    
    2.5
    
    
    
    (9,496
    )
    
    
    (4.4
    )Net income from continuing operations
    
    $
    5,770
    
    
    
    2.0
    %
    
    $
    9,486
    
    
    
    3.9
    %
    
    $
    22,395
    
    
    
    10.4
    %


18



---



##### Table of Contents



December 31,2008
    
    2007
    
    2006Licensed Nursing Home Beds:Owned
    
    
    942
    
    
    
    942
    
    
    
    942Leased
    
    
    4,831
    
    
    
    4,831
    
    
    
    3,463Total
    
    
    5,773
    
    
    
    5,773
    
    
    
    4,405Assisted Living Units:Owned
    
    
    
    
    
    
    17
    
    
    
    17Leased
    
    
    14
    
    
    
    49
    
    
    
    49Total
    
    
    14
    
    
    
    66
    
    
    
    66Total Beds/Units:Owned
    
    
    942
    
    
    
    959
    
    
    
    959Leased
    
    
    4,845
    
    
    
    4,880
    
    
    
    3,512Total
    
    
    5,787
    
    
    
    5,839
    
    
    
    4,471Facilities:Owned
    
    
    9
    
    
    
    9
    
    
    
    9Leased
    
    
    41
    
    
    
    41
    
    
    
    33Total
    
    
    50
    
    
    
    50
    
    
    
    42Average Occupancy:Nursing centers
    
    
    75.3
    %(1)
    
    
    77.6
    %(2)
    
    
    78.8
    %Assisted living units
    
    
    64.3
    %
    
    
    63.1
    
    
    
    60.0Total
    
    
    75.2
    %
    
    
    77.4
    %
    
    
    78.5
    %
 
 (1)
    
    On a same center basis, occupancy was 77.9% for 2008.(2)
    
    On a same center basis, occupancy was 78.8% for 2007. Critical Accounting Policies and Judgments
  Revenues
 Patient Revenues
  Allowance for Doubtful Accounts
  Professional Liability and Other Self-Insurance Reserves
 Accrual for Professional and General Liability Claims -
  19




---



##### Table of Contents



Accrual atDecember 31,Policy Year Ending March 9,
    
    2008
    
    
    20072009
    
    $
    3,837,000
    
    
    $
    2008
    
    
    5,769,000
    
    
    
    5,134,0002007
    
    
    3,202,000
    
    
    
    7,625,0002006
    
    
    1,102,000
    
    
    
    4,757,0002005
    
    
    774,000
    
    
    
    2,339,0002004 and earlier
    
    
    275,000
    
    
    
    820,000$
    14,959,000
    
    
    $
    20,675,000
    20




---



##### Table of Contents



Accrual for Other Self-Insured Claim s-
     Asset Impairment
  Business Combinations
  21




---



##### Table of Contents



Stock-Based Compensation
  Income Taxes
  Contractual Obligations and Commercial Commitments
  Less than
    
    
    2 to 3
    
    
    4 to 5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    35,468
    
    
    $
    3,425
    
    
    $
    27,914
    
    
    $
    4,129
    
    
    $
    Settlement Obligations (2)
    
    $
    3,495
    
    
    $
    3,035
    
    
    $
    460
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,521
    
    
    $
    344
    
    
    $
    5,177
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    6,696
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    3,261Operating leases
    
    $
    605,933
    
    
    $
    22,154
    
    
    $
    43,670
    
    
    $
    45,495
    
    
    $
    494,614Required capital expenditures under mortgage loans (5)
    
    $
    617
    
    
    $
    229
    
    
    $
    245
    
    
    $
    143
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    29,295
    
    
    $
    815
    
    
    $
    1,630
    
    
    $
    1,635
    
    
    $
    25,215Total
    
    $
    687,025
    
    
    $
    30,689
    
    
    $
    80,470
    
    
    $
    52,776
    
    
    $
    523,090
 
 (1)
    
    Long-term debt obligations include scheduled future payments of principal and
interest of long-term debt.(2)
    
    Settlement obligations relate to professional liability cases settled in 2008 that
will be paid in installments through March 2010. The liabilities are included in our
self insurance reserves.(3)
    
    Series C Preferred Stock includes quarterly dividend payments and redemption value at
the preferred shareholders earliest redemption date.(4)
    
    Payments for the elimination of preferred stock conversion feature.(5)
    
    Includes annual expenditure requirements for capital maintenance under mortgage loan covenants.(6)
    
    Includes annual capital expenditure requirements under operating leases. 22




---



##### Table of Contents



Payor Sources
    23




---



##### Table of Contents



Results of Operations
  Year Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    288,797
    
    
    $
    245,061
    
    
    $
    43,736
    
    
    
    17.8
    %EXPENSES:Operating
    
    
    228,236
    
    
    
    187,463
    
    
    
    40,773
    
    
    
    21.7
    %Lease
    
    
    22,962
    
    
    
    20,019
    
    
    
    2,943
    
    
    
    14.7
    %Professional liability
    
    
    1,658
    
    
    
    (1,663
    )
    
    
    3,321
    
    
    
    199.7
    %General and administrative
    
    
    18,486
    
    
    
    17,552
    
    
    
    934
    
    
    
    5.3
    %Depreciation and amortization
    
    
    5,306
    
    
    
    4,093
    
    
    
    1,213
    
    
    
    29.6
    %Total expenses
    
    
    276,648
    
    
    
    227,464
    
    
    
    49,184
    
    
    
    21.6
    %OPERATING INCOME
    
    
    12,149
    
    
    
    17,597
    
    
    
    (5,448
    )
    
    
    (31.0
    )%OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (1,005
    )
    
    
    808
    
    
    
    (1,813
    )
    
    
    (224.4
    )%Interest income
    
    
    454
    
    
    
    1,016
    
    
    
    (562
    )
    
    
    (55.3
    )%Interest expense
    
    
    (2,870
    )
    
    
    (3,549
    )
    
    
    679
    
    
    
    19.1
    %Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0
    %(3,421
    )
    
    
    (1,841
    )
    
    
    (1,580
    )
    
    
    (85.8
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    8,728
    
    
    
    15,756
    
    
    
    (7,028
    )
    
    
    (44.6
    )%PROVISION FOR INCOME TAXES
    
    
    2,958
    
    
    
    6,270
    
    
    
    (3,312
    )
    
    
    (52.8
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    5,770
    
    
    $
    9,486
    
    
    $
    (3,716
    )
    
    
    (39.2
    )%
 Year Ended December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    245,061
    
    
    $
    214,653
    
    
    $
    30,408
    
    
    
    14.2
    %EXPENSES:Operating
    
    
    187,463
    
    
    
    163,386
    
    
    
    24,077
    
    
    
    14.7
    %Lease
    
    
    20,019
    
    
    
    16,082
    
    
    
    3,937
    
    
    
    24.5
    %Professional liability
    
    
    (1,663
    )
    
    
    (5,354
    )
    
    
    3,691
    
    
    
    68.9
    %General and administrative
    
    
    17,552
    
    
    
    21,032
    
    
    
    (3,480
    )
    
    
    (16.50
    )%Depreciation and amortization
    
    
    4,093
    
    
    
    3,614
    
    
    
    479
    
    
    
    13.3
    %Total expenses
    
    
    227,464
    
    
    
    198,760
    
    
    
    28,704
    
    
    
    14.4
    %OPERATING INCOME
    
    
    17,597
    
    
    
    15,893
    
    
    
    1,704
    
    
    
    10.7
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    808
    
    
    
    21
    
    
    
    787
    
    
    
    3,747.6
    %Other income
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    (100.0
    )%Interest income
    
    
    1,016
    
    
    
    679
    
    
    
    337
    
    
    
    49.6
    %Interest expense
    
    
    (3,549
    )
    
    
    (3,707
    )
    
    
    158
    
    
    
    4.3
    %Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    40.2
    %(1,841
    )
    
    
    (2,994
    )
    
    
    1,153
    
    
    
    38.5
    %INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    15,756
    
    
    
    12,899
    
    
    
    2,857
    
    
    
    22.1
    %PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    6,270
    
    
    
    (9,496
    )
    
    
    15,766
    
    
    
    166.0
    %NET INCOME FROM CONTINUING OPERATIONS
    
    $
    9,486
    
    
    $
    22,395
    
    
    $
    (12,909
    )
    
    
    (57.6
    )%
 24




---



##### Table of Contents



SAME CENTER
    
    Year Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    235,792
    
    
    $
    225,449
    
    
    $
    10,343
    
    
    
    4.6
    %EXPENSES:Operating
    
    
    180,806
    
    
    
    170,429
    
    
    
    10,377
    
    
    
    6.1
    %Lease
    
    
    18,909
    
    
    
    18,506
    
    
    
    403
    
    
    
    2.2
    %Professional liability
    
    
    1,499
    
    
    
    (1,854
    )
    
    
    3,353
    
    
    
    180.9
    %General and administrative
    
    
    17,615
    
    
    
    16,866
    
    
    
    749
    
    
    
    4.4
    %Depreciation and amortization
    
    
    4,225
    
    
    
    3,783
    
    
    
    442
    
    
    
    11.7
    %Total expenses
    
    
    223,054
    
    
    
    207,730
    
    
    
    15,324
    
    
    
    7.4
    %OPERATING INCOME
    
    
    12,738
    
    
    
    17,719
    
    
    
    (4,981
    )
    
    
    (28.1
    )%OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (1,005
    )
    
    
    808
    
    
    
    (1,813
    )
    
    
    (224.4
    )%Interest income
    
    
    454
    
    
    
    1,016
    
    
    
    (562
    )
    
    
    (55.3
    )%Interest expense
    
    
    (2,312
    )
    
    
    (3,174
    )
    
    
    862
    
    
    
    27.2
    %Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0
    %(2,863
    )
    
    
    (1,466
    )
    
    
    (1,397
    )
    
    
    (95.3
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    $
    9,875
    
    
    $
    16,253
    
    
    $
    (6,378
    )
    
    
    (39.2
    )%
 SAME CENTER
    
    Year Ended December 31,(in thousands)
    
    2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    225,449
    
    
    $
    214,653
    
    
    $
    10,796
    
    
    
    5.0
    %EXPENSES:Operating
    
    
    170,429
    
    
    
    163,386
    
    
    
    7,043
    
    
    
    4.3
    %Lease
    
    
    18,506
    
    
    
    16,082
    
    
    
    2,424
    
    
    
    15.1
    %Professional liability
    
    
    (1,854
    )
    
    
    (5,354
    )
    
    
    3,500
    
    
    
    65.4
    %General and administrative
    
    
    16,866
    
    
    
    21,032
    
    
    
    (4,166
    )
    
    
    (19.8
    )%Depreciation and amortization
    
    
    3,783
    
    
    
    3,614
    
    
    
    169
    
    
    
    4.7
    %Total expenses
    
    
    207,730
    
    
    
    198,760
    
    
    
    8,970
    
    
    
    4.5
    %OPERATING INCOME
    
    
    17,719
    
    
    
    15,893
    
    
    
    1,826
    
    
    
    11.5
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    808
    
    
    
    21
    
    
    
    787
    
    
    
    3,747.6
    %Other income
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    (100.0
    )%Interest income
    
    
    1,016
    
    
    
    679
    
    
    
    337
    
    
    
    49.6
    %Interest expense
    
    
    (3,174
    )
    
    
    (3,707
    )
    
    
    533
    
    
    
    14.4
    %Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    40.2
    %(1,466
    )
    
    
    (2,994
    )
    
    
    1,528
    
    
    
    51.0
    %INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    $
    16,253
    
    
    $
    12,899
    
    
    $
    3,354
    
    
    
    26.0
    %
 Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
   Patient Revenues
 25




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##### Table of Contents



Year EndedDecember 31,2008
    
    2007Skilled nursing occupancy:Same center
    
    
    77.9
    %
    
    
    78.8
    %New Texas Facilities
    
    
    66.8
    %
    
    
    67.4
    %Total continuing operations
    
    
    75.3
    %
    
    
    77.6
    %Medicare census as percent of total:Same center
    
    
    13.7
    %
    
    
    13.8
    %New Texas Facilities
    
    
    11.7
    %
    
    
    12.9
    %Total continuing operations
    
    
    13.3
    %
    
    
    13.7
    %Medicare revenues as percent of total:Same center
    
    
    31.4
    %
    
    
    30.8
    %New Texas Facilities
    
    
    32.4
    %
    
    
    35.3
    %Total continuing operations
    
    
    31.5
    %
    
    
    31.2
    %Medicaid revenues as percent of total:Same center
    
    
    54.9
    %
    
    
    56.7
    %New Texas Facilities
    
    
    46.5
    %
    
    
    44.3
    %Total continuing operations
    
    
    53.3
    %
    
    
    55.7
    %Medicare average rate per day:Same center
    
    $
    383.15
    
    
    $
    351.80New Texas Facilities
    
    $
    400.05
    
    
    $
    390.54Total continuing operations
    
    $
    386.30
    
    
    $
    355.11Medicaid average rate per day:Same center
    
    $
    145.37
    
    
    $
    140.13New Texas Facilities
    
    $
    114.87
    
    
    $
    110.69Total continuing operations
    
    $
    139.45
    
    
    $
    137.79
  Operating expense
    26




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##### Table of Contents



Lease expense
 Professional liability.
 General and administrative expense
 Depreciation and amortization
 Foreign currency transaction gain (loss)
 Interest expense
 Income from continuing operations before income taxes; income from continuing operations per common
share
 27




---



##### Table of Contents



Income from discontinued operations
 Year Ended December 31, 2007 Compared With Year Ended December 31, 2006
   Patient Revenues
  Year EndedDecember 31,2007
    
    2006Skilled nursing occupancy:Same center
    
    
    78.8
    %
    
    
    78.8
    %New Texas Facilities
    
    
    67.4
    %
    
    
    n/aTotal continuing operations
    
    
    77.6
    %
    
    
    78.8
    %Medicare census as percent of total:Same center
    
    
    13.8
    %
    
    
    14.0
    %New Texas Facilities
    
    
    12.9
    %
    
    
    n/aTotal continuing operations
    
    
    13.7
    %
    
    
    14.0
    %Medicare revenues as percent of total:Same center
    
    
    30.8
    %
    
    
    30.6
    %New Texas Facilities
    
    
    35.3
    %
    
    
    n/aTotal continuing operations
    
    
    31.2
    %
    
    
    30.6
    %Medicaid revenues as percent of total:Same center
    
    
    56.7
    %
    
    
    56.4
    %New Texas Facilities
    
    
    44.3
    %
    
    
    n/aTotal continuing operations
    
    
    55.7
    %
    
    
    56.4
    %Medicare average rate per day:Same center
    
    $
    351.80
    
    
    $
    324.48New Texas Facilities
    
    $
    390.54
    
    
    
    n/aTotal continuing operations
    
    $
    355.11
    
    
    $
    324.48Medicaid average rate per day:Same center
    
    $
    140.12
    
    
    $
    133.78New Texas Facilities
    
    $
    110.69
    
    
    
    n/aTotal continuing operations
    
    $
    137.79
    
    
    $
    133.78
  28




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##### Table of Contents



Operating expense
     Lease expense
 Professional liability.
 General and administrative expense
   Depreciation and amortization
 29




---



##### Table of Contents



Foreign currency transaction gain
 Interest expense
 Debt retirement costs.
 Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Liquidity and Capital Resources
 Liquidity
    30




---



##### Table of Contents



Note Receivable
  Professional Liability
   Capital Resources
     31




---



##### Table of Contents



Transaction with Omega
     32




---



##### Table of Contents



New Facility Construction
 Texas Facility .
   West Virginia Facility.
 Share Repurchase
   Amendment to Shareholders Rights Plan
  Facility Renovations
  33




---



##### Table of Contents



Receivables
    Inflation
  Off-Balance Sheet Arrangements
  34




---



##### Table of Contents



Recent Accounting Pronouncements
      Forward-Looking Statements
  35




---



##### 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
  36




---



##### Table of Contents



Changes in Internal Control over Financial Reporting
   37




---



##### Table of Contents



Report of Independent Registered Public Accounting Firm
 
 Internal Control-Integrated Framework
      
 
 ITEM 9B. OTHER INFORMATION
  38




---



##### 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
  39




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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, 2008 and 2007
    
    F-2Consolidated Statements of Income for the Years Ended December 31, 2008, 2007 and 2006
    
    F-3Consolidated Statements of Shareholders Equity (Deficit) for the Years Ended December
31, 2008, 2007 and 2006
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and 2006
    
    F-5Notes to Consolidated Financial Statements as of December 31, 2008, 2007 and 2006
    
    F-7 to F-34Financial Statement ScheduleSchedule II  Valuation and Qualifying Accounts
    
    S-1 to S-2
 Exhibits
  40




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##### Table of Contents



SIGNATURES
  ADVOCAT INC./s/ Wallace E. Olson

Wallace E. Olson
Chairman of the Board
March 10, 2009/s/ William R. Council, III

William R. Council, III
President and Chief Executive Officer
(Principal Executive Officer)
March 10, 2009/s/ L. Glynn Riddle, Jr.

L. Glynn Riddle, Jr.
Executive Vice President, Chief Financial Officer, Secretary
(Principal Financial and Accounting Officer)
March 10, 2009
  /s/ Wallace E. Olson
    
    
    
    /s/ William C. ONeil. Jr.Wallace E. Olson
Chairman of the Board
March 10, 2009
    
    
    
    William C. ONeil, Jr.
Director
March 10, 2009/s/ William R. Council, III
    
    
    
    /s/ Richard M. BrameWilliam R. Council, III
President and Chief Executive Officer
Director
March 10, 2009
    
    
    
    Richard M. Brame
Director
March 10, 2009/s/ Robert Z. Hensley
    
    
    
    /s/ Chad A. McCurdyRobert Z. Hensley
Director
March 10, 2009
    
    
    
    Chad A. McCurdy
Director
March 10, 2009
 41




---



##### 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 (Deficit)
    
    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
 
     Internal Control  Integrated Framework
  
 F-1




---



##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2008 AND 2007
 ASSETS
    
    2008
    
    
    2007CURRENT ASSETS:Cash and cash equivalents
    
    $
    7,598,000
    
    
    $
    11,658,000Receivables, less allowance for doubtful accounts of $3,279,000 and $2,158,000, respectively
    
    
    23,731,000
    
    
    
    26,444,000Current portion of note receivable
    
    
    466,000
    
    
    
    629,000Prepaid expenses and other current assets
    
    
    1,748,000
    
    
    
    2,130,000Insurance refunds receivable
    
    
    
    
    
    
    1,234,000Income tax refundable
    
    
    1,369,000
    
    
    
    Deferred income taxes
    
    
    3,967,000
    
    
    
    2,110,000Total current assets
    
    
    38,879,000
    
    
    
    44,205,000PROPERTY AND EQUIPMENT, at cost
    
    
    73,517,000
    
    
    
    64,294,000Less accumulated depreciation
    
    
    (38,555,000
    )
    
    
    (34,091,000
    )Discontinued operations, net
    
    
    1,455,000
    
    
    
    1,455,000Property and equipment, net
    
    
    36,417,000
    
    
    
    31,658,000OTHER ASSETS:Deferred income taxes
    
    
    13,899,000
    
    
    
    16,568,000Note receivable, net of current portion
    
    
    3,486,000
    
    
    
    4,983,000Deferred financing and other costs, net
    
    
    1,009,000
    
    
    
    1,239,000Other assets
    
    
    2,031,000
    
    
    
    1,945,000Acquired leasehold interest, net
    
    
    10,149,000
    
    
    
    9,492,000Total other assets
    
    
    30,574,000
    
    
    
    34,227,000$
    105,870,000
    
    
    $
    110,090,000
 LIABILITIES
AND SHAREHOLDERS EQUITY
    
    2008
    
    
    2007CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    2,238,000
    
    
    $
    1,942,000Trade accounts payable
    
    
    4,828,000
    
    
    
    6,636,000Accrued expenses:Payroll and employee benefits
    
    
    9,545,000
    
    
    
    11,360,000Current portion of self-insurance reserves
    
    
    6,469,000
    
    
    
    4,597,000Other current liabilities
    
    
    4,914,000
    
    
    
    3,993,000Total current liabilities
    
    
    27,994,000
    
    
    
    28,528,000NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    30,172,000
    
    
    
    32,513,000Self-insurance reserves, less current portion
    
    
    10,212,000
    
    
    
    17,578,000Other noncurrent liabilities
    
    
    12,050,000
    
    
    
    9,137,000Total noncurrent liabilities
    
    
    52,434,000
    
    
    
    59,228,000COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK,$.10 par value, 5,000 shares
authorized, issued and outstanding, including premium of $2,973,000 and $4,672,000 at
December 31, 2008 and 2007, respectively
    
    
    7,891,000
    
    
    
    9,590,000SHAREHOLDERS 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, 5,903,000 and 5,878,000
shares issued, 5,671,000 and 5,804,000 shares outstanding, respectively
    
    
    59,000
    
    
    
    59,000Treasury stock at cost, 232,000 and 74,000 shares of common stock at December 31, 2008
and 2007, respectively
    
    
    (2,500,000
    )
    
    
    (817,000
    )Paid-in capital
    
    
    16,903,000
    
    
    
    15,804,000Retained earnings (accumulated deficit)
    
    
    3,089,000
    
    
    
    (2,302,000
    )Total shareholders equity
    
    
    17,551,000
    
    
    
    12,744,000$
    105,870,000
    
    
    $
    110,090,000
  F-2




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2008
    
    
    2007
    
    
    2006REVENUES:Patient revenues, net
    
    $
    288,797,000
    
    
    $
    245,061,000
    
    
    $
    214,653,000EXPENSES:Operating
    
    
    228,236,000
    
    
    
    187,463,000
    
    
    
    163,386,000Lease
    
    
    22,962,000
    
    
    
    20,019,000
    
    
    
    16,082,000Professional liability
    
    
    1,658,000
    
    
    
    (1,663,000
    )
    
    
    (5,354,000
    )General and administrative
    
    
    18,486,000
    
    
    
    17,552,000
    
    
    
    21,032,000Depreciation and amortization
    
    
    5,306,000
    
    
    
    4,093,000
    
    
    
    3,614,000276,648,000
    
    
    
    227,464,000
    
    
    
    198,760,000OPERATING INCOME
    
    
    12,149,000
    
    
    
    17,597,000
    
    
    
    15,893,000OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (1,005,000
    )
    
    
    808,000
    
    
    
    21,000Other income
    
    
    
    
    
    
    
    
    
    
    207,000Interest income
    
    
    454,000
    
    
    
    1,016,000
    
    
    
    679,000Interest expense
    
    
    (2,870,000
    )
    
    
    (3,549,000
    )
    
    
    (3,707,000
    )Debt retirement costs
    
    
    
    
    
    
    (116,000
    )
    
    
    (194,000
    )(3,421,000
    )
    
    
    (1,841,000
    )
    
    
    (2,994,000
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES
    
    
    8,728,000
    
    
    
    15,756,000
    
    
    
    12,899,000PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    2,958,000
    
    
    
    6,270,000
    
    
    
    (9,496,000
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    5,770,000
    
    
    
    9,486,000
    
    
    
    22,395,000NET INCOME FROM DISCONTINUED OPERATIONS:Operating loss, net of tax provision
(benefit) of $(18,000), $(59,000) and $0,
respectively
    
    
    (35,000
    )
    
    
    (91,000
    )
    
    
    (337,000
    )Loss on sale, net of tax provision (benefit)
of $0, $(6,000) and $0, respectively
    
    
    0
    
    
    
    (8,000
    )
    
    
    (114,000
    )DISCONTINUED OPERATIONS
    
    
    (35,000
    )
    
    
    (99,000
    )
    
    
    (451,000
    )NET INCOME
    
    
    5,735,000
    
    
    
    9,387,000
    
    
    
    21,944,000PREFERRED STOCK DIVIDENDS
    
    
    344,000
    
    
    
    344,000
    
    
    
    340,000NET INCOME FOR COMMON STOCK
    
    $
    5,391,000
    
    
    $
    9,043,000
    
    
    $
    21,604,000NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.95
    
    
    $
    1.56
    
    
    $
    3.81Discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )$
    0.95
    
    
    $
    1.54
    
    
    $
    3.74Per common share  dilutedContinuing operations
    
    $
    0.92
    
    
    $
    1.49
    
    
    $
    3.42Discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.07
    )$
    0.92
    
    
    $
    1.48
    
    
    $
    3.35WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,693,000
    
    
    
    5,870,000
    
    
    
    5,784,000Diluted
    
    
    5,887,000
    
    
    
    6,127,000
    
    
    
    6,507,000
  F-3




---



##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY (DEFICIT)
 RetainedEarningsCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    (AccumulatedShares Issued
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    TotalBALANCE, DECEMBER 31, 2005
    
    
    5,725,000
    
    
    $
    57,000
    
    
    
    
    
    
    $
    
    
    
    $
    16,022,000
    
    
    $
    (32,949,000
    )
    
    $
    (16,870,000
    )Exercise of stock options
    
    
    141,000
    
    
    
    2,000
    
    
    
    
    
    
    
    
    
    
    
    556,000
    
    
    
    
    
    
    
    558,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,944,000
    
    
    
    21,944,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (340,000
    )
    
    
    (340,000
    )Elimination of preferred
stock conversion feature
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,700,000
    )
    
    
    
    
    
    
    (6,700,000
    )Tax impact of stock
options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    61,000
    
    
    
    
    
    
    
    61,000Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,184,000
    
    
    
    
    
    
    
    5,184,000BALANCE, DECEMBER 31, 2006
    
    
    5,866,000
    
    
    
    59,000
    
    
    
    
    
    
    
    
    
    
    
    15,123,000
    
    
    
    (11,345,000
    )
    
    
    3,837,000Exercise of stock options
    
    
    12,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    65,000
    
    
    
    
    
    
    
    65,000Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,387,000
    
    
    
    9,387,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,000
    )
    
    
    (344,000
    )Repurchase of common stock
    
    
    
    
    
    
    
    
    
    
    74,000
    
    
    
    (817,000
    )
    
    
    
    
    
    
    
    
    
    
    (817,000
    )Tax impact of stock
options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,000
    )
    
    
    
    
    
    
    (32,000
    )Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    648,000
    
    
    
    
    
    
    
    648,000BALANCE, DECEMBER 31, 2007
    
    
    5,878,000
    
    
    
    59,000
    
    
    
    74,000
    
    
    
    (817,000
    )
    
    
    15,804,000
    
    
    
    (2,302,000
    )
    
    
    12,744,000Exercise of stock options
    
    
    25,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,000
    
    
    
    
    
    
    
    235,000Net 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
    )Tax impact of stock
options exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (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
    
    
    $
    17,551,000
  F-4




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    5,735,000
    
    
    $
    9,387,000
    
    
    $
    21,944,000Discontinued operations
    
    
    (35,000
    )
    
    
    (99,000
    )
    
    
    (451,000
    )Net income from continuing operations
    
    
    5,770,000
    
    
    
    9,486,000
    
    
    
    22,395,000Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:Depreciation and amortization
    
    
    5,306,000
    
    
    
    4,093,000
    
    
    
    3,614,000Provision for doubtful accounts
    
    
    2,343,000
    
    
    
    1,089,000
    
    
    
    1,610,000Deferred income tax provision (benefit)
    
    
    830,000
    
    
    
    5,137,000
    
    
    
    (9,719,000
    )Provision for (benefit from) self-insured
professional liability, net of cash payments
    
    
    (5,717,000
    )
    
    
    (5,054,000
    )
    
    
    (9,323,000
    )Stock-based compensation
    
    
    867,000
    
    
    
    648,000
    
    
    
    5,184,000Amortization of deferred balances
    
    
    426,000
    
    
    
    334,000
    
    
    
    289,000Provision for leases in excess of cash payments
    
    
    1,711,000
    
    
    
    2,234,000
    
    
    
    606,000Gain on sale of bed license
    
    
    
    
    
    
    
    
    
    
    (207,000
    )Foreign currency transaction (gain) loss
    
    
    1,005,000
    
    
    
    (808,000
    )
    
    
    (21,000
    )Debt retirement costs
    
    
    
    
    
    
    116,000
    
    
    
    194,000Non-cash interest income
    
    
    (121,000
    )
    
    
    (132,000
    )
    
    
    (270,000
    )Non-cash interest expense
    
    
    
    
    
    
    
    
    
    
    86,000Changes in other assets and liabilities affecting
operating activities:Receivables, net
    
    
    381,000
    
    
    
    (10,633,000
    )
    
    
    (393,000
    )Prepaid expenses and other assets
    
    
    210,000
    
    
    
    2,781,000
    
    
    
    928,000Trade accounts payable and accrued expenses
    
    
    (3,498,000
    )
    
    
    3,374,000
    
    
    
    425,000Net cash provided by continuing operations
    
    
    9,513,000
    
    
    
    12,665,000
    
    
    
    15,398,000Discontinued operations
    
    
    (35,000
    )
    
    
    22,000
    
    
    
    265,000Net cash provided by operating activities
    
    
    9,478,000
    
    
    
    12,687,000
    
    
    
    15,663,000
  F-5




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2008
    
    
    2007
    
    
    2006CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    $
    (9,703,000
    )
    
    $
    (6,827,000
    )
    
    $
    (4,089,000
    )Acquisition of leasehold interest
    
    
    
    
    
    
    (9,096,000
    )
    
    
    Proceeds from sale of discontinued operations and
bed license
    
    
    
    
    
    
    180,000
    
    
    
    10,439,000Decrease in restricted cash deposits
    
    
    
    
    
    
    246,000
    
    
    
    212,000Decrease (increase) in cash restricted for capital
expenditures
    
    
    
    
    
    
    864,000
    
    
    
    (864,000
    )Note receivable issued
    
    
    
    
    
    
    (1,800,000
    )
    
    
    Notes receivable collected
    
    
    765,000
    
    
    
    2,500,000
    
    
    
    718,000Deposits and other deferred balances
    
    
    (138,000
    )
    
    
    (120,000
    )
    
    
    (422,000
    )Net cash provided (used) by continuing
operations
    
    
    (9,076,000
    )
    
    
    (14,053,000
    )
    
    
    5,994,000Discontinued operations
    
    
    (49,000
    )
    
    
    
    
    
    
    (28,000
    )Net cash provided (used) in investing activities
    
    
    (9,125,000
    )
    
    
    (14,053,000
    )
    
    
    5,966,000CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (2,045,000
    )
    
    
    (13,437,000
    )
    
    
    (46,601,000
    )Proceeds from issuance of debt
    
    
    
    
    
    
    16,500,000
    
    
    
    30,625,000Financing costs
    
    
    (79,000
    )
    
    
    (839,000
    )
    
    
    (765,000
    )Payment of preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (172,000
    )Repurchases of common stock
    
    
    (1,683,000
    )
    
    
    (817,000
    )
    
    
    Payment for preferred stock restructuring
    
    
    (497,000
    )
    
    
    (448,000
    )
    
    
    Proceeds from exercise of stock options
    
    
    235,000
    
    
    
    65,000
    
    
    
    558,000Net cash provided (used) in financing
activities
    
    
    (4,413,000
    )
    
    
    680,000
    
    
    
    (16,355,000
    )NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (4,060,000
    )
    
    
    (686,000
    )
    
    
    5,274,000CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,658,000
    
    
    
    12,344,000
    
    
    
    7,070,000CASH AND CASH EQUIVALENTS, end of period
    
    $
    7,598,000
    
    
    $
    11,658,000
    
    
    $
    12,344,000SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts
capitalized
    
    $
    2,506,000
    
    
    $
    3,303,000
    
    
    $
    3,425,000Cash payments of income taxes, net of refunds
    
    $
    3,841,000
    
    
    $
    1,658,000
    
    
    $
    378,000
 NON-CASH INVESTING AND FINANCING ACTIVITIES:
   F-6




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2008, 2007 AND 2006
 1. COMPANY AND ORGANIZATION
   2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Consolidation
   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
   F-8




---



##### Table of Contents



Cash and Cash Equivalents
  Deferred Financing and Other Costs
  Acquired Leasehold Interest
  Self Insurance
    F-9




---



##### Table of Contents



Income Taxes
  Disclosure of Fair Value of Financial Instruments
   F-10




---



##### Table of Contents



Use of Estimates
  Net Income per Common Share
  Stock-Based Compensation
   Recent Accounting Pronouncements
   F-11




---



##### Table of Contents



3. ACQUISITIONS
    F-12




---



##### Table of Contents



Current assets
    
    $
    70,000Property and equipment
    
    
    145,000Deferred tax asset
    
    
    116,000Acquired leasehold interest intangible
    
    
    10,653,000Total assets acquired
    
    
    10,984,000Current liabilities
    
    
    1,889,000Total net assets acquired
    
    $
    9,095,000
   2009
    
    $
    384,0002010
    
    
    384,0002011
    
    
    384,0002012
    
    
    384,0002013
    
    
    384,000thereafter
    
    
    8,229,000$
    10,149,000
   F-13




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##### Table of Contents



4. RECEIVABLES
  December 31,2008
    
    
    2007Medicare
    
    $
    10,440,000
    
    
    $
    13,891,000Medicaid and other non-federal government programs
    
    
    10,187,000
    
    
    
    9,594,000Other patient and resident receivables
    
    
    6,368,000
    
    
    
    4,417,000Other receivables and advances
    
    
    15,000
    
    
    
    700,000$
    27,010,000
    
    
    $
    28,602,000
     F-14




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##### Table of Contents



5. PROPERTY AND EQUIPMENT
  December 31,2008
    
    
    2007Land
    
    $
    1,903,000
    
    
    $
    1,573,000Buildings and leasehold improvements
    
    
    49,098,000
    
    
    
    42,835,000Furniture, fixtures and equipment
    
    
    22,516,000
    
    
    
    19,886,000$
    73,517,000
    
    
    $
    64,294,000
  6. LONG-TERM DEBT
  December 31,2008
    
    
    2007Mortgage loan payable to a commercial
finance company; issued in August 2006;
secured by seven nursing centers;
payable monthly, interest at 3.75%
above LIBOR (4.95% and 8.35% at
December 31, 2008 and 2007,
respectively).
    
    $
    21,768,000
    
    
    $
    22,163,000Term loan payable to a bank; issued in
August 2007; interest 2.5% above LIBOR
(4.0% and 7.1% at December 31, 2008 and
2007, respectively).
    
    
    10,642,000
    
    
    
    12,292,00032,410,000
    
    
    
    34,455,000Less current portion
    
    
    (2,238,000
    )
    
    
    (1,942,000
    )$
    30,172,000
    
    
    $
    32,513,000
    F-15




---



##### Table of Contents



2009
    
    $
    2,238,0002010
    
    
    3,901,0002011
    
    
    22,216,0002012
    
    
    4,055,0002013
    
    
    Thereafter
    
    
    Total
    
    $
    32,410,000
    F-16




---



##### Table of Contents



7. DISCONTINUED OPERATIONS
      8. NOTE RECEIVABLE
   F-17




---



##### Table of Contents



9. SHAREHOLDERS EQUITY, STOCK PLANS AND PREFERRED STOCK
 Shareholders Rights Plan
   Stock-Based Compensation Plans
      F-18




---



##### Table of Contents



Year EndedDecember 31,2008
    
    
    2007
    
    
    2006Expected volatility (range)
    
    
    113% - 122
    %
    
    
    119% - 143
    %
    
    
    140% - 153
    %Risk free interest rate (range)
    
    
    2.49% - 3.43
    %
    
    
    3.96% - 4.68
    %
    
    
    5.07% - 5.10
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    Weighted average expected term (years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    5.04
    Year EndedDecember 31,2008
    
    
    2007
    
    
    2006Weighted Average grant date fair value
    
    $
    9.39
    
    
    $
    10.55
    
    
    $
    15.90Total Intrinsic Value of Options Exercised
    
    $
    26,000
    
    
    $
    105,000
    
    
    $
    1,640,000
  WeightedRange of
    
    Average
    
    OptionsExercise Prices
    
    Exercise Prices
    
    Outstanding$10.38 to $11.72
    
    $
    11.22
    
    
    
    219,000$0.15 to $5.44
    
    $
    3.85
    
    
    
    329,000548,000
  F-19




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##### Table of Contents



WeightedAverageShares
    
    
    Exercise PriceOutstanding,December 31, 2007
    
    
    472,000
    
    
    $
    6.02Granted
    
    
    111,000
    
    
    
    10.90Exercised
    
    
    (25,000
    )
    
    
    9.94Expired or cancelled
    
    
    (10,000
    )
    
    
    8.81Outstanding,December 31, 2008
    
    
    548,000
    
    
    $
    6.78Exercisable, December 31, 2008
    
    
    367,000
    
    
    $
    4.63
     Series A Preferred Stock
  F-20




---



##### Table of Contents



Series B and Series C Preferred Stock
      F-21




---



##### Table of Contents



10. NET INCOME (LOSS) PER COMMON SHARE
  2008
    
    
    2007
    
    
    2006Basic net income per common shareNet income from continuing operations
    
    $
    5,770,000
    
    
    $
    9,486,000
    
    
    $
    22,395,000Preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (340,000
    )Net income from continuing operations
for common stock
    
    
    5,426,000
    
    
    
    9,142,000
    
    
    
    22,055,000Discontinued operations:Operating loss, net of taxes
    
    
    (35,000
    )
    
    
    (91,000
    )
    
    
    (337,000
    )Loss on sale, net of taxes
    
    
    
    
    
    
    (8,000
    )
    
    
    (114,000
    )Loss from discontinued operations
    
    
    (35,000
    )
    
    
    (99,000
    )
    
    
    (451,000
    )Net income for common stock
    
    $
    5,391,000
    
    
    $
    9,043,000
    
    
    $
    21,604,000Basic weighted average common shares
outstanding
    
    
    5,693,000
    
    
    
    5,870,000
    
    
    
    5,784,000Basic net income (loss) per common share:Net income from continuing operations
    
    $
    0.95
    
    
    $
    1.56
    
    
    $
    3.81Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.05
    )Loss on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Loss from discontinued operations
    
    
    
    
    
    
    (0.02
    )
    
    
    (0.07
    )Basic net income per common share
    
    $
    0.95
    
    
    $
    1.54
    
    
    $
    3.74
 2008
    
    
    2007
    
    
    2006Diluted net income per common shareNet income from continuing operations
for common stock
    
    $
    5,426,000
    
    
    $
    9,142,000
    
    
    $
    22,055,000Add dilutive preferred stock dividends, for effect of assumed conversion of preferred stock
    
    
    
    
    
    
    
    
    
    
    272,000Assumed interest on unpaid dividends
    
    
    
    
    
    
    
    
    
    
    (102,000
    )Net income from continuing operations
for diluted net income per common share
    
    
    5,426,000
    
    
    
    9,142,000
    
    
    
    22,225,000Discontinued operations:Operating loss, net of taxes
    
    
    (35,000
    )
    
    
    (91,000
    )
    
    
    (337,000
    )Loss on sale
    
    
    
    
    
    
    (8,000
    )
    
    
    (114,000
    )Net loss from discontinued operations
    
    
    (35,000
    )
    
    
    (99,000
    )
    
    
    (451,000
    )Net income for diluted net income per common
share
    
    $
    5,391,000
    
    
    $
    9,043,000
    
    
    $
    21,774,000Basic weighted average common shares outstanding
    
    
    5,693,000
    
    
    
    5,870,000
    
    
    
    5,784,000Incremental shares from assumed exercise of stock options
    
    
    194,000
    
    
    
    257,000
    
    
    
    215,000Incremental shares from assumed conversion
of preferred stock
    
    
    
    
    
    
    
    
    
    
    508,000Diluted average common shares outstanding
    
    
    5,887,000
    
    
    
    6,127,000
    
    
    
    6,507,000Diluted net income per common shareNet income from continuing operations
    
    $
    0.92
    
    
    $
    1.49
    
    
    $
    3.42Income (loss) from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.05
    )Loss on sale of discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Net loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    (0.07
    )Diluted net income per common share
    
    $
    0.92
    
    
    $
    1.48
    
    
    $
    3.35
 F-22




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##### Table of Contents



11. INCOME TAXES
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Current provision :Federal
    
    $
    1,765,000
    
    
    $
    223,000
    
    
    $
    State
    
    
    363,000
    
    
    
    910,000
    
    
    
    223,0002,128,000
    
    
    
    1,133,000
    
    
    
    223,000Deferred provision (benefit):Federal
    
    
    872,000
    
    
    
    5,061,000
    
    
    
    (8,010,000
    )State
    
    
    (42,000
    )
    
    
    76,000
    
    
    
    (1,709,000
    )830,000
    
    
    
    5,137,000
    
    
    
    (9,719,000
    )Provision (benefit) for income taxes of
continuing operations$
    2,958,000
    
    
    $
    6,270,000
    
    
    $
    (9,496,000
    )
  Year Ended December 31,2008
    
    
    2007
    
    
    2006Provision for federal income taxes
at statutory rates
    
    $
    2,968,000
    
    
    $
    5,357,000
    
    
    $
    4,222,000Provision for state income taxes at
statutory rates, net of federal
benefit
    
    
    349,000
    
    
    
    630,000
    
    
    
    497,000Valuation allowance changes
affecting the provision (benefit)
for income taxes
    
    
    66,000
    
    
    
    42,000
    
    
    
    (14,553,000
    )Work opportunity tax credits
    
    
    (654,000
    )
    
    
    
    
    
    
    Nondeductible expenses
    
    
    363,000
    
    
    
    200,000
    
    
    
    248,000Other
    
    
    (134,000
    )
    
    
    41,000
    
    
    
    90,000Provision (benefit) for income taxes
    
    $
    2,958,000
    
    
    $
    6,270,000
    
    
    $
    (9,496,000
    )
 F-23




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##### Table of Contents



December 31,2008
    
    
    2007Current deferred assets:Allowance for doubtful accounts
    
    $
    1,217,000
    
    
    $
    749,000Accrued liabilities
    
    
    3,486,000
    
    
    
    2,584,0004,703,000
    
    
    
    3,333,000Less valuation allowance
    
    
    (246,000
    )
    
    
    (161,000
    )4,457,000
    
    
    
    3,172,000Current deferred liabilities:Prepaid expenses
    
    
    (490,000
    )
    
    
    (1,062,000
    )$
    3,967,000
    
    
    $
    2,110,000
 December 31,2008
    
    
    2007Noncurrent deferred assets:Net operating loss and other carryforwards
    
    $
    2,231,000
    
    
    $
    2,527,000Deferred lease costs
    
    
    594,000
    
    
    
    654,000Depreciation
    
    
    524,000
    
    
    
    1,805,000Tax goodwill and intangibles
    
    
    1,522,000
    
    
    
    1,610,000Stock-based compensation
    
    
    1,972,000
    
    
    
    1,657,000Accrued rent
    
    
    3,638,000
    
    
    
    2,498,000Impairment of long-lived assets
    
    
    355,000
    
    
    
    355,000Noncurrent self-insurance reserves
    
    
    4,008,000
    
    
    
    6,887,00014,844,000
    
    
    
    17,993,000Less valuation allowance
    
    
    (708,000
    )
    
    
    (785,000
    )14,136,000
    
    
    
    17,208,000Noncurrent deferred liabilities:Note receivable
    
    
    (237,000
    )
    
    
    (640,000
    )$
    13,899,000
    
    
    $
    16,568,000
  F-24




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##### Table of Contents



Balance at January 1, 2008
    
    $
    307,000Decreases due to settlement with taxing authorities
    
    
    (234,000
    )Decreases in tax positions for prior years
    
    
    (3,000
    )Balance at December 31, 2008
    
    $
    70,000
   F-25




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##### Table of Contents



12. COMMITMENTS AND CONTINGENCIES
 Lease Commitments
  2009
    
    $
    22,154,0002010
    
    
    21,720,0002011
    
    
    21,950,0002012
    
    
    22,472,0002013
    
    
    23,023,000Thereafter
    
    
    494,614,000$
    605,933,000
  Omega Leases
     F-26




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##### Table of Contents



Florida Leases
  F-27




---



##### Table of Contents



Insurance Matters
 Professional Liability and Other Liability Insurance
   Reserve for Estimated Self-Insured Professional Liability Claims
    F-28




---



##### Table of Contents



Accrual atDecember 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    3,837,000
    
    
    $
    2008
    
    
    5,769,000
    
    
    
    5,134,0002007
    
    
    3,202,000
    
    
    
    7,625,0002006
    
    
    1,102,000
    
    
    
    4,757,0002005
    
    
    774,000
    
    
    
    2,339,0002004 and earlier
    
    
    275,000
    
    
    
    820,000$
    14,959,000
    
    
    $
    20,675,000
  Other Insurance
     F-29




---



##### Table of Contents



Employment Agreements
  Health Care Industry and Legal Proceedings
   F-30




---



##### Table of Contents



Reimbursement
   F-31




---



##### Table of Contents



F-32




---



##### Table of Contents



13. QUARTERLY FINANCIAL INFORMATION (Unaudited)
  Quarter2008
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    71,466,000
    
    
    $
    70,845,000
    
    
    $
    72,206,000
    
    
    $
    74,280,000Professional liability expense
(benefit)(1)
    
    
    (1,043,000
    )
    
    
    1,401,000
    
    
    
    278,000
    
    
    
    1,022,000Net income from continuing
operations

    
    
    3,101,000
    
    
    
    709,000
    
    
    
    674,000
    
    
    
    1,286,000Income (loss) from
discontinued operations
    
    
    (12,000
    )
    
    
    (19,000
    )
    
    
    (4,000
    )
    
    
    Net income for common stock
    
    $
    3,003,000
    
    
    $
    604,000
    
    
    $
    584,000
    
    
    $
    1,200,000Basic net income per common share:Net income from continuing
operations
    
    $
    0.52
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.21Income (loss) from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income per common share
    
    $
    0.52
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.21Diluted net income per common share:Net income from continuing
operations
    
    $
    0.50
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.21Income (loss) from
discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    Net income per common share
    
    $
    0.50
    
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.21
 
 (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 (benefit) recorded for professional liability in each quarter of 2008 is set
forth in the table above. F-33




---



##### Table of Contents



Quarter2007
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    54,592,000
    
    
    $
    55,381,000
    
    
    $
    63,884,000
    
    
    $
    71,204,000Professional liability expense
(benefit)(1)
    
    
    423,000
    
    
    
    (3,378,000
    )
    
    
    (6,000
    )
    
    
    1,298,000Net income from continuing
operations
    
    
    1,380,000
    
    
    
    4,261,000
    
    
    
    2,021,000
    
    
    
    1,824,000Income (loss) from
discontinued operations
    
    
    (19,000
    )
    
    
    (17,000
    )
    
    
    (72,000
    )
    
    
    9,000Net income for common stock
    
    $
    1,275,000
    
    
    $
    4,158,000
    
    
    $
    1,863,000
    
    
    $
    1,747,000Basic net income per common share:Net income from continuing
operations
    
    $
    0.22
    
    
    $
    0.71
    
    
    $
    0.33
    
    
    $
    0.30Loss from discontinued
operations
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income per common share
    
    $
    0.22
    
    
    $
    0.71
    
    
    $
    0.32
    
    
    $
    0.30Diluted net income per common share:Net income from continuing
operations
    
    $
    0.21
    
    
    $
    0.68
    
    
    $
    0.32
    
    
    $
    0.28Income (loss) from
discontinued operations
    
    
    
    
    
    
    
    
    
    
    (0.02
    )
    
    
    0.01Net income per common
share
    
    $
    0.21
    
    
    $
    0.68
    
    
    $
    0.30
    
    
    $
    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 (benefit) recorded for professional liability in each quarter of 2007 is set
forth in the table above. F-34




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits
 3.1
    
    Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to
the Companys Registration Statement No. 33-76150 on Form S-1).3.2
    
    Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the
Companys quarterly report on Form 10-Q for the quarter ended September 30, 2006).3.3
    
    Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys Registration
Statement No. 33-76150 on Form S-1).3.4
    
    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).3.5
    
    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
    
    Rights Agreement dated March 13, 1995, between the Company and Third National Bank in
Nashville (incorporated by reference to Exhibit 1 to the Companys Current Report on Form 8-K
dated March 13, 1995).4.3
    
    Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to
Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995).4.4
    
    Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1
to Form 8-A filed March 30, 1995).4.5
    
    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).*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).




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibits*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).*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).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.13
    
    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
    
    Amended and Restated Employment Agreement dated as of March 28, 2003, 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,
2003).10.20
    
    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).10.21
    
    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




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibitsreference to Exhibit 10.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended June 30, 2003).10.22
    
    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).10.23
    
    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).10.24
    
    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).10.25
    
    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).10.26
    
    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).10.27
    
    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) 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).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.28
    
    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).10.29
    
    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).10.30
    
    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).10.31
    
    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).10.32
    
    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).10.33
    
    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).*10.36
    
    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).*10.37
    
    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).




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits*10.38
    
    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).10.39
    
    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).10.40
    
    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).10.41
    
    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).10.42
    
    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).10.43
    
    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).10.44
    
    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).10.45
    
    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 Exhibits10.46
    
    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).10.47
    
    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).10.48
    
    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).10.49
    
    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).10.50
    
    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).10.51
    
    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).10.52
    
    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).10.53
    
    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




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibitsnational 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).10.54
    
    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).10.55
    
    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).10.56
    
    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).10.57
    
    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).10.58
    
    Second Amendment to Amended and Restated Rights Agreement dated as of August 15, 2008
between the Company and Computershare Trust Company, N.A., a federally chartered trust
company, as successor to SunTrust Bank (incorporated by reference to Exhibit 3 to Form 8-A/A
filed August 19, 2008).10.59
    
    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).10.60
    
    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.10.61
    
    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.*10.62
    
    Amendment No. 4 to the 1994 Incentive and Nonqualified Stock Option Plan for    Key Personnel.*10.63
    
    First Amendment to the Advocat Inc. 2005 Long-Term Incentive Plan.21
    
    Subsidiaries of the Registrant.




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits23.1
    
    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.




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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 EBalance
    
    Additions
    
    Deductionsat
    
    Charged
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceBeginning
    
    to
    
    Charged
    
    
    
    (Write-offs)
    
    atof
    
    Costs and
    
    to Other
    
    
    
    
    
    net of
    
    End ofDescription
    
    Period
    
    Expenses
    
    Accounts
    
    Other
    
    Recoveries
    
    PeriodYear ended
December 31, 2008:Allowance for
doubtful accounts
    
    $
    2,158
    
    
    $
    2,343
    
    
    $
    
    
    
    $
    
    
    
    $
    (1,222
    )
    
    $
    3,279Year ended
December 31, 2007:Allowance for
doubtful accounts
    
    $
    2,122
    
    
    $
    1,089
    
    
    $
    23
    
    
    $
    
    
    
    $
    (1,076
    )
    
    $
    2,158Year ended
December 31, 2006:Allowance for
doubtful accounts
    
    $
    1,722
    
    
    $
    1,610
    
    
    $
    4
    
    
    $
    
    
    
    $
    (1,214
    )
    
    $
    2,122
 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, 2008:Professional
Liability Reserve
    
    $
    20,675
    
    
    $
    1,038
    
    
    $
    
    
    
    $
    
    
    
    $
    (6,754
    )(3)
    
    $
    14,959Workers Compensation
Reserve
    
    $
    362
    
    
    $
    933
    
    
    $
    
    
    
    $
    
    
    
    $
    (803
    )
    
    $
    492Health Insurance
Reserve
    
    $
    1,138
    
    
    $
    8,232
    
    
    $
    
    
    
    $
    
    
    
    $
    (8,140
    )
    
    $
    1,230Year ended
December 31, 2007:Professional
Liability Reserve
    
    $
    25,717
    
    
    $
    (2,278
    )(1)
    
    $
    12
    
    
    $
    
    
    
    $
    (2,776
    )(3)
    
    $
    20,675Workers Compensation
Reserve
    
    $
    474
    
    
    $
    12
    
    
    $
    
    
    
    $
    
    
    
    $
    (124
    )
    
    $
    362Health Insurance
Reserve
    
    $
    932
    
    
    $
    6,705
    
    
    $
    15
    
    
    $
    
    
    
    $
    (6,514
    )
    
    $
    1,138Year ended
December 31, 2006:Professional
Liability Reserve
    
    $
    34,527
    
    
    $
    (5,962
    )(1)
    
    $
    513
    
    
    $
    
    
    
    $
    (3,361
    ) (3)
    
    $
    25,717Workers Compensation
Reserve
    
    $
    560
    
    
    $
    (3
    )
    
    $
    
    
    
    $
    
    
    
    $
    (83
    )
    
    $
    474Health Insurance
Reserve
    
    $
    963
    
    
    $
    5,591
    
    
    $
    61
    
    
    $
    
    
    
    $
    (5,683
    )
    
    $
    932
 
 (1)
    
    Amounts charged to costs and expenses are negative during these years as a result of
downward revisions in previous estimates of the Companys anticipated professional liability
costs.(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.(3)
    
    Payments include amounts paid for claims settled during the period as well as payments made
under promissory notes and other structured arrangements for claims settled in earlier
periods. S-2