##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2009
 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.
  Delaware
    
    62-1559667(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)1621 Galleria Boulevard, Brentwood, TN
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (615) 771-7575
 Securities registered pursuant to Section 12(b) of the Act:
 Title of each class
    
    Name of each Exchange on which registeredCommon Stock, $0.01 par value per share
    
    The NASDAQ Capital Market
 Securities registered pursuant to Section 12(g) of the Act :
 None.
 Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes o No þ
 Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes o No þ
 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
 Large accelerated filero
    
    Accelerated filer o
    
    Non-accelerated filer
    
    o Smaller reporting companyþ(Do not check if a smaller reporing company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes o No þ .
 The aggregate market value of Common Stock held by non-affiliates on June 30, 2009 (based on the
closing price of such shares on the NASDAQ Capital Market) was approximately $8,056,000. 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 26, 2010, 5,717,077 shares of the registrants $0.01 par value Common Stock were
outstanding.
 Documents Incorporated by Reference
 Registrants definitive proxy materials for its 2010 annual meeting of shareholders are
incorporated by reference into Part III, Items 10, 11, 12, 13 and 14 of this Form 10-K.




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TABLE OF CONTENTS  PART IITEM 1.BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. RESERVEDPART IIITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER            PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED CONSOLIDATED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICESPART IVITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESSIGNATURESEX-21EX-23.1EX-31.1EX-31.2EX-32    Table of Contents  
 PART I
 
 ITEM 1. BUSINESS
 Introductory Summary.
    
    
    Committed to Compassion
    
    Striving for Excellence
    
    Serving Responsibly
 Principal Address and Website.
  Operating and Growth Strategy.
  Provide a broad range of cost-effective services.
 Increase occupancy through physical plant improvements and 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
 
    
    Texas Facility.In August 2009, we completed the construction of a 119 bed
leased skilled nursing facility, Brentwood Terrace, located in Paris, Texas, replacing
an existing 102 bed leased facility. The new facility was financed with funding from
our lessor, and is leased under a long term operating lease with renewal options through
2035. The daily census as of December 31, 2009 increased to 95 compared to 67 as of
August 25, 2009, the day we moved into the new facility, and Medicare census increased to 10
compared to 7. For the fourth quarter of 2009, average daily census increased to 89
compared to 37 for the second quarter of 2008, when we began construction, and Medicare
average daily census increased to over 10 from 3.
    
    West Virginia Facility.On June 17, 2009 we completed the acquisition of
certain assets of a skilled nursing facility in West Virginia. We are currently seeking
financing for the construction of a new 90 bed replacement facility. The existing
facility closed in February 2009. No assurances can be given we will be able to arrange
construction financing on suitable terms for this project.
 Nursing Centers and Services.
   3




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Number of
    
    
    Licensed Nursing
    
    
    Available Nursing
    
    
    AssistedCenters
    
    
    Beds (1)(2)
    
    
    Beds (1)(2)
    
    
    Living UnitsOperating Locations:Alabama
    
    
    6
    
    
    
    711
    
    
    
    704
    
    
    
    0Arkansas
    
    
    12
    
    
    
    1,311
    
    
    
    1,183
    
    
    
    12Florida (3)
    
    
    5
    
    
    
    502
    
    
    
    462
    
    
    
    0Kentucky
    
    
    6
    
    
    
    474
    
    
    
    470
    
    
    
    2Ohio
    
    
    1
    
    
    
    151
    
    
    
    122
    
    
    
    0Tennessee
    
    
    5
    
    
    
    617
    
    
    
    586
    
    
    
    0Texas
    
    
    13
    
    
    
    1,868
    
    
    
    1,676
    
    
    
    0West Virginia
    
    
    2
    
    
    
    150
    
    
    
    150
    
    
    
    050
    
    
    
    5,784
    
    
    
    5,353
    
    
    
    14Classification:Owned
    
    
    9
    
    
    
    936
    
    
    
    866
    
    
    
    0Leased
    
    
    41
    
    
    
    4,848
    
    
    
    4,487
    
    
    
    14Total
    
    
    50
    
    
    
    5,784
    
    
    
    5,353
    
    
    
    14
 
 (1)
    
    The number of Licensed Nursing Beds is based on the licensed capacity of the
facility. The Company reports its occupancy based on licensed nursing beds. The number of
Available Nursing Beds represents Licensed Nursing Beds less beds removed from service.
Available Nursing Beds is subject to change based upon the needs of the facilities,
including configuration of patient rooms and offices, status of beds (private,
semi-private, ward, etc.) and renovations.(2)
    
    An additional 15 licensed beds were placed into service in a leased facility in
Kentucky effective January 1, 2010.(3)
    
    The number of facilities in Florida is expected to decrease to 1 during 2010 upon
expiration of the lease term for 4 facilities.   Life Steps Unit
 Lighthouse Unit
 Enhanced Therapy Services.
 Other Specialty Programming.
 Continuous Quality Improvement
 4




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Organization .
 Marketing.
     Acquisitions and New Lease.
 2007 Acquisition and New Lease
 5




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West Virginia facility
 Divestitures.
      Nursing Center Profession.
  Demographic trends.
 Cost containment pressures.
 6




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Limited supply of centers.
 Reduced reliance on family care.
 Competition.
   Revenue Sources
   Year Ended December 31,2009
    
    
    2008
    
    
    2007Medicaid
    
    $
    165,445
    
    
    
    54.8
    %
    
    $
    154,048
    
    
    
    53.6
    %
    
    $
    136,694
    
    
    
    56.0
    %Medicare
    
    
    90,700
    
    
    
    30.0
    
    
    
    89,900
    
    
    
    31.3
    
    
    
    75,252
    
    
    
    30.9Managed care
    
    
    8,070
    
    
    
    2.7
    
    
    
    6,902
    
    
    
    2.4
    
    
    
    3,527
    
    
    
    1.5Private Pay and other
    
    
    37,816
    
    
    
    12.5
    
    
    
    36,757
    
    
    
    12.7
    
    
    
    28,434
    
    
    
    11.6Total
    
    $
    302,031
    
    
    
    100.0
    %
    
    $
    287,607
    
    
    
    100.0
    %
    
    $
    243,907
    
    
    
    100.0
    %
 7




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Year Ended December 31,2009
    
    
    2008
    
    
    2007Medicaid
    
    
    3,099
    
    
    
    69.9
    %
    
    
    3,014
    
    
    
    69.4
    %
    
    
    2,708
    
    
    
    71.0
    %Medicare
    
    
    564
    
    
    
    12.7
    
    
    
    578
    
    
    
    13.3
    
    
    
    523
    
    
    
    13.7Managed care
    
    
    56
    
    
    
    1.3
    
    
    
    51
    
    
    
    1.2
    
    
    
    27
    
    
    
    0.7Private Pay and other
    
    
    713
    
    
    
    16.1
    
    
    
    703
    
    
    
    16.1
    
    
    
    558
    
    
    
    14.6Total
    
    
    4,432
    
    
    
    100.0
    %
    
    
    4,346
    
    
    
    100.0
    %
    
    
    3,816
    
    
    
    100.0
    %
  Medicare and Medicaid Reimbursement
        8




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Employees.
   Supplies and Equipment.
  Government Regulation.
  Licensure and Certification.
 9




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Medicare and Medicaid.
   Health Insurance Portability and Accountability Act of 1996 Compliance
    Self-Referral and Anti-Kickback Legislation.
 10




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Reporting Obligations under Section 111 of the Medicare, Medicaid and SCHIP Extension Act of 2007
(MMSEA).
 Available Information.
   
 ITEM 1A. RISK FACTORS
  We are substantially self-insured and have significant potential professional liability exposure.
   We have had substantial adjustments to our accrual for professional liability claims which has
caused significant changes in our net earnings.
  11




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Our outstanding indebtedness is subject to various financial covenants and floating rates of
interest which could be subject to fluctuations based on changing interest rates.
  We are currently seeking a replacement of our debt financing, and new financing may have less
favorable terms than our current debt financing.
  We are highly dependent on reimbursement by third-party payors.
    We are subject to significant government regulation.
  12




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The health care industry has been the subject of increased regulatory scrutiny recently.
  We are subject to claims under the self-referral and anti-kickback legislation.
  We operate in an industry that is highly competitive
  Healthcare reform legislation could adversely affect our revenue and financial condition.
  13




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Our ability and intent to pay cash dividends in the future may be limited.
  We have a number of policies in place that could be considered anti-takeover protections.
  
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
  Description of Lease Agreements.
  Omega Master Lease.
   14




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Florida Leases.
 Other Leases.
 
 ITEM 3. LEGAL PROCEEDINGS
    15




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ITEM 4. RESERVED
 16




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PART II
 
 ITEM 5.
    
    MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
 Market Information.
 Period
    
    High
    
    
    Low2008    1st   Quarter
    
    
    12.54
    
    
    
    9.672008    2nd  Quarter
    
    
    12.44
    
    
    
    9.962008    3rd   Quarter
    
    
    10.86
    
    
    
    2.862008    4th   Quarter
    
    
    4.99
    
    
    
    1.552009    1st    Quarter
    
    
    3.78
    
    
    
    1.962009    2nd   Quarter
    
    
    3.90
    
    
    
    2.212009    3rd    Quarter
    
    
    7.27
    
    
    
    2.672009    4th    Quarter
    
    
    8.94
    
    
    
    5.33
  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
    
    
    603,000
    
    
    $
    6.72
    
    
    
    148,000Equity Compensation Plans Not
Approved by Security Holders
    
    None
    
    None
    
    NoneTotal
    
    
    603,000
    
    
    $
    6.72
    
    
    
    148,000
 
 (1)
    
    Includes 35,000 shares available for issuance under the 2005 Long-Term Incentive
Plan and 113,000 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. 17




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ITEM 6.
    
    SELECTED CONSOLIDATED FINANCIAL DATA
  Year Ended December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands, except per share amounts)Statement of Operations DataREVENUES:Patient revenues, net
    
    $
    302,031
    
    
    $
    287,607
    
    
    $
    243,907
    
    
    $
    213,594
    
    
    $
    199,859EXPENSES:Operating
    
    
    240,095
    
    
    
    227,633
    
    
    
    186,957
    
    
    
    162,747
    
    
    
    152,506Lease
    
    
    23,422
    
    
    
    22,962
    
    
    
    20,019
    
    
    
    16,082
    
    
    
    15,836Professional liability
    
    
    9,132
    
    
    
    1,658
    
    
    
    (1,663
    )
    
    
    (5,354
    )
    
    
    (4,532
    )General and administrative
    
    
    18,496
    
    
    
    18,486
    
    
    
    17,552
    
    
    
    21,032
    
    
    
    13,311Depreciation and amortization
    
    
    5,999
    
    
    
    5,306
    
    
    
    4,093
    
    
    
    3,614
    
    
    
    3,454297,144
    
    
    
    276,045
    
    
    
    226,958
    
    
    
    198,121
    
    
    
    180,575OPERATING INCOME
    
    
    4,887
    
    
    
    11,562
    
    
    
    16,949
    
    
    
    15,473
    
    
    
    19,284OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (1,005
    )
    
    
    808
    
    
    
    21
    
    
    
    161Other income
    
    
    549
    
    
    
    
    
    
    
    
    
    
    
    207
    
    
    
    Interest income
    
    
    161
    
    
    
    454
    
    
    
    1,016
    
    
    
    679
    
    
    
    534Interest expense
    
    
    (1,877
    )
    
    
    (2,870
    )
    
    
    (3,549
    )
    
    
    (3,707
    )
    
    
    (3,382
    )Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (194
    )
    
    
    (976
    )
    
    
    (3,421
    )
    
    
    (1,841
    )
    
    
    (2,994
    )
    
    
    (2,687
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    3,911
    
    
    
    8,141
    
    
    
    15,108
    
    
    
    12,479
    
    
    
    16,597(PROVISION) BENEFIT FOR INCOME TAXES
    
    
    (1,497
    )
    
    
    (2,759
    )
    
    
    (6,012
    )
    
    
    9,510
    
    
    
    13,839NET INCOME FROM CONTINUING OPERATIONS
    
    
    2,414
    
    
    
    5,382
    
    
    
    9,096
    
    
    
    21,989
    
    
    
    30,436DISCONTINUED OPERATIONS, net of taxes
    
    
    187
    
    
    
    353
    
    
    
    291
    
    
    
    (45
    )
    
    
    (5,134
    )NET INCOME
    
    $
    2,601
    
    
    $
    5,735
    
    
    $
    9,387
    
    
    $
    21,944
    
    
    $
    25,302INCOME (LOSS) PER COMMON SHARE:Basic-Continuing operations
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    1.49
    
    
    $
    3.74
    
    
    $
    5.26Discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05
    
    
    
    
    
    
    
    (0.90
    )Net per common share
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    1.54
    
    
    $
    3.74
    
    
    $
    4.36Diluted-Continuing operations
    
    $
    0.36
    
    
    $
    0.86
    
    
    $
    1.43
    
    
    $
    3.35
    
    
    $
    4.67Discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05
    
    
    
    
    
    
    
    (0.79
    )Net per common share
    
    $
    0.39
    
    
    $
    0.92
    
    
    $
    1.48
    
    
    $
    3.35
    
    
    $
    3.88CASH DIVIDENDS DECLARED PER COMMON SHARE
    
    $
    0.15
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,678
    
    
    
    5,693
    
    
    
    5,870
    
    
    
    5,784
    
    
    
    5,725Diluted
    
    
    5,797
    
    
    
    5,887
    
    
    
    6,127
    
    
    
    6,507
    
    
    
    6,498
 December 31,2009
    
    
    2008
    
    
    2007
    
    
    2006
    
    
    2005(in thousands)Balance Sheet DataWorking capital (deficit)
    
    $
    12,334
    
    
    $
    10,885
    
    
    $
    15,677
    
    
    $
    8,174
    
    
    $
    (39,970
    )Total assets
    
    $
    105,266
    
    
    $
    107,339
    
    
    $
    110,090
    
    
    $
    96,901
    
    
    $
    93,762Short-term borrowings and long-term debt including
current portion
    
    $
    24,829
    
    
    $
    32,410
    
    
    $
    34,455
    
    
    $
    31,516
    
    
    $
    47,547Preferred Stock  Series B
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    4,750Preferred Stock  Series C (including unamortized premium)
    
    $
    6,192
    
    
    $
    7,891
    
    
    $
    9,590
    
    
    $
    11,289
    
    
    
    Shareholders Equity (deficit)
    
    $
    19,693
    
    
    $
    17,551
    
    
    $
    12,744
    
    
    $
    3,837
    
    
    $
    (16,870
    )
 18




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ITEM 7.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 Overview
   2007 Acquisition and New Lease
 Divestitures.
      Basis of Financial Statements.
 19




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Selected Financial and Operating Data
  Year Ended December 31,(Dollars in thousands)2009
    
    
    2008
    
    
    2007Revenues:Patient revenues, net
    
    $
    302,031
    
    
    
    100.0
    %
    
    $
    287,607
    
    
    
    100.0
    %
    
    $
    243,907
    
    
    
    100.0
    %Expenses:Operating
    
    
    240,095
    
    
    
    79.5
    
    
    
    227,633
    
    
    
    79.1
    
    
    
    186,957
    
    
    
    76.7Lease
    
    
    23,422
    
    
    
    7.8
    
    
    
    22,962
    
    
    
    8.0
    
    
    
    20,019
    
    
    
    8.2Professional liability
    
    
    9,132
    
    
    
    3.0
    
    
    
    1,658
    
    
    
    0.6
    
    
    
    (1,663
    )
    
    
    (0.7
    )General & administrative
    
    
    18,496
    
    
    
    6.1
    
    
    
    18,486
    
    
    
    6.4
    
    
    
    17,552
    
    
    
    7.2Depreciation and amortization
    
    
    5,999
    
    
    
    2.0
    
    
    
    5,306
    
    
    
    1.9
    
    
    
    4,093
    
    
    
    1.7297,144
    
    
    
    98.4
    
    
    
    276,045
    
    
    
    96.0
    
    
    
    226,958
    
    
    
    93.1Operating income
    
    
    4,887
    
    
    
    1.6
    
    
    
    11,562
    
    
    
    4.0
    
    
    
    16,949
    
    
    
    6.9Other income (expense):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    0.1
    
    
    
    (1,005
    )
    
    
    (0.4
    )
    
    
    808
    
    
    
    0.3Other income
    
    
    549
    
    
    
    0.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Interest income
    
    
    161
    
    
    
    
    
    
    
    454
    
    
    
    0.2
    
    
    
    1,016
    
    
    
    0.5Interest expense
    
    
    (1,877
    )
    
    
    (0.6
    )
    
    
    (2,870
    )
    
    
    (1.0
    )
    
    
    (3,549
    )
    
    
    (1.4
    )Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (116
    )
    
    
    (0.1
    )(976
    )
    
    
    (0.3
    )
    
    
    (3,421
    )
    
    
    (1.2
    )
    
    
    (1,841
    )
    
    
    (0.7
    )Income from continuing operations before income taxes
    
    
    3,911
    
    
    
    1.3
    
    
    
    8,141
    
    
    
    2.8
    
    
    
    15,108
    
    
    
    6.2Provision for income taxes
    
    
    (1,497
    )
    
    
    (0.5
    )
    
    
    (2,759
    )
    
    
    (1.0
    )
    
    
    (6,012
    )
    
    
    (2.5
    )Net income from continuing operations
    
    $
    2,414
    
    
    
    0.8
    %
    
    $
    5,382
    
    
    
    1.8
    %
    
    $
    9,096
    
    
    
    3.7
    %
  December 31,2009
    
    
    2008
    
    
    2007Licensed Nursing Home Beds:Owned
    
    
    936
    
    
    
    942
    
    
    
    942Leased (3)
    
    
    4,848
    
    
    
    4,831
    
    
    
    4,831Total
    
    
    5,784
    
    
    
    5,773
    
    
    
    5,773Assisted Living Units:Owned
    
    
    
    
    
    
    
    
    
    
    17Leased
    
    
    14
    
    
    
    14
    
    
    
    49Total
    
    
    14
    
    
    
    14
    
    
    
    66Total Beds/Units:Owned
    
    
    936
    
    
    
    942
    
    
    
    959Leased
    
    
    4,862
    
    
    
    4,845
    
    
    
    4,880Total
    
    
    5,798
    
    
    
    5,787
    
    
    
    5,839Facilities:Owned
    
    
    9
    
    
    
    9
    
    
    
    9Leased
    
    
    41
    
    
    
    41
    
    
    
    41Total
    
    
    50
    
    
    
    50
    
    
    
    50Average Occupancy:Nursing centers
    
    
    76.7
    %
    
    
    75.3
    %(1)
    
    
    77.6
    %(2)Assisted living units
    
    
    72.8
    %
    
    
    64.3
    %
    
    
    63.1Total
    
    
    76.7
    %
    
    
    75.2
    %
    
    
    77.4
    %
 
 (1)
    
    On a same center basis, occupancy was 77.9% for 2008.(2)
    
    On a same center basis, occupancy was 78.8% for 2007.(3)
    
    An additional 15 beds were placed into service in a leased facility effective
January 1, 2010. 20




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##### Table of Contents



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 -
    21




---



##### Table of Contents



Accrual atDecember 31,
    
    
    December 31,2009
    
    
    2008Policy Year End:May 31, 2010
    
    $
    3,763,000
    
    
    $
    March 9, 2009
    
    
    8,713,000
    
    
    
    3,837,000March 9, 2008
    
    
    4,377,000
    
    
    
    5,769,000March 9, 2007
    
    
    1,060,000
    
    
    
    3,202,000March 9, 2006
    
    
    357,000
    
    
    
    1,102,000March 9, 2005 and earlier
    
    
    232,000
    
    
    
    1,049,000$
    18,502,000
    
    
    $
    14,959,000
    Accrual for Other Self-Insured Claim s-
     22




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##### Table of Contents



Asset Impairment
 Fair
Value Measurements and Disclosures"
 Business Combinations
 Business Combinations
 Stock-Based Compensation
  Income Taxes
  23




---



##### Table of Contents



Contractual Obligations and Commercial Commitments
  Less than
    
    
    1 to 3
    
    
    3 to 5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    26,310
    
    
    $
    3,186
    
    
    $
    23,124
    
    
    $
    
    
    
    $
    Settlement Obligations (2)
    
    $
    735
    
    
    $
    735
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,176
    
    
    $
    5,176
    
    
    $
    
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    6,009
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    2,574Operating leases
    
    $
    599,088
    
    
    $
    22,285
    
    
    $
    45,577
    
    
    $
    47,822
    
    
    $
    483,404Required capital expenditures under mortgage loans
and operating leases (5)
    
    $
    23,631
    
    
    $
    671
    
    
    $
    983
    
    
    $
    840
    
    
    $
    21,137Total
    
    $
    660,949
    
    
    $
    32,740
    
    
    $
    71,058
    
    
    $
    50,036
    
    
    $
    507,115
 
 (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 that will be
paid in 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 to Omega for the elimination of the preferred stock conversion feature in
connection with restructuring the preferred stock and master lease agreements. Monthly
payments of approximately $57,000 will be made through the end of the initial lease
period that ends in September 2018.(5)
    
    Includes annual expenditure requirements for capital maintenance under mortgage loan
covenants and annual capital expenditure requirements under operating leases.  Payor Sources
   Year Ended December 31,2009
    
    
    2008
    
    
    2007Medicaid
    
    $
    165,445
    
    
    
    54.8
    %
    
    $
    154,048
    
    
    
    53.6
    %
    
    $
    136,694
    
    
    
    56.0
    %Medicare
    
    
    90,700
    
    
    
    30.0
    
    
    
    89,900
    
    
    
    31.3
    
    
    
    75,252
    
    
    
    30.9Managed care
    
    
    8,070
    
    
    
    2.7
    
    
    
    6,902
    
    
    
    2.4
    
    
    
    3,527
    
    
    
    1.5Private Pay and other
    
    
    37,816
    
    
    
    12.5
    
    
    
    36,757
    
    
    
    12.7
    
    
    
    28,434
    
    
    
    11.6Total
    
    $
    302,031
    
    
    
    100.0
    %
    
    $
    287,607
    
    
    
    100.0
    %
    
    $
    243,907
    
    
    
    100.0
    %
 24




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##### Table of Contents



Results of Operations
  Year Ended December 31,(in thousands)
    
    2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    302,031
    
    
    $
    287,607
    
    
    $
    14,424
    
    
    
    5.0
    %EXPENSES:Operating
    
    
    240,095
    
    
    
    227,633
    
    
    
    12,462
    
    
    
    5.5
    %Lease
    
    
    23,422
    
    
    
    22,962
    
    
    
    460
    
    
    
    2.0
    %Professional liability
    
    
    9,132
    
    
    
    1,658
    
    
    
    7,474
    
    
    
    450.8
    %General and administrative
    
    
    18,496
    
    
    
    18,486
    
    
    
    10
    
    
    
    0.1
    %Depreciation and amortization
    
    
    5,999
    
    
    
    5,306
    
    
    
    693
    
    
    
    13.1
    %Total expenses
    
    
    297,144
    
    
    
    276,045
    
    
    
    21,099
    
    
    
    7.6
    %OPERATING INCOME
    
    
    4,887
    
    
    
    11,562
    
    
    
    (6,675
    )
    
    
    (57.7
    )%OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (1,005
    )
    
    
    1,196
    
    
    
    119.0
    %Other income
    
    
    549
    
    
    
    
    
    
    
    549
    
    
    
    Interest income
    
    
    161
    
    
    
    454
    
    
    
    (293
    )
    
    
    64.5
    %Interest expense
    
    
    (1,877
    )
    
    
    (2,870
    )
    
    
    993
    
    
    
    34.6
    %(976
    )
    
    
    (3,421
    )
    
    
    2,445
    
    
    
    71.5
    %INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    3,911
    
    
    
    8,141
    
    
    
    (4,230
    )
    
    
    (52.0
    )%PROVISION FOR INCOME TAXES
    
    
    (1,497
    )
    
    
    (2,759
    )
    
    
    (1,262
    )
    
    
    (45.7
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    2,414
    
    
    $
    5,382
    
    
    $
    (2,968
    )
    
    
    (55.1
    )%
 Year Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    287,607
    
    
    $
    243,907
    
    
    $
    43,700
    
    
    
    17.9
    %EXPENSES:Operating
    
    
    227,633
    
    
    
    186,957
    
    
    
    40,676
    
    
    
    21.8
    %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
    
    
    276,045
    
    
    
    226,958
    
    
    
    49,087
    
    
    
    21.6
    %OPERATING INCOME
    
    
    11,562
    
    
    
    16,949
    
    
    
    (5,387
    )
    
    
    (31.8
    )%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
    
    
    8,141
    
    
    
    15,108
    
    
    
    (6,967
    )
    
    
    (46.1
    )%PROVISION FOR INCOME TAXES
    
    
    (2,759
    )
    
    
    (6,012
    )
    
    
    (3,253
    )
    
    
    (54.1
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    5,382
    
    
    $
    9,096
    
    
    $
    (3,714
    )
    
    
    (40.8
    )%
 25




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##### Table of Contents



SAME CENTER
    
    Year Ended December 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    234,941
    
    
    $
    224,476
    
    
    $
    10,465
    
    
    
    4.7
    %EXPENSES:Operating
    
    
    180,356
    
    
    
    170,007
    
    
    
    10,349
    
    
    
    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
    
    
    222,604
    
    
    
    207,308
    
    
    
    15,296
    
    
    
    7.4
    %OPERATING INCOME
    
    
    12,337
    
    
    
    17,168
    
    
    
    (4,831
    )
    
    
    (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
    
    $
    9,474
    
    
    $
    15,702
    
    
    $
    (6,228
    )
    
    
    (39.7
    )%
 Year Ended December 31, 2009 Compared With Year Ended December 31, 2008
 Patient Revenues
   Year EndedDecember 31,2009
    
    2008Skilled nursing occupancy
    
    
    76.7
    %
    
    
    75.3
    %Medicare census as percent of total
    
    
    12.7
    %
    
    
    13.3
    %Managed care census as percent of total
    
    
    1.3
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    30.0
    %
    
    
    31.3
    %Medicaid revenues as percent of total
    
    
    54.8
    %
    
    
    53.6
    %Managed care revenues as percent of total
    
    
    2.7
    %
    
    
    2.4
    %Medicare average rate per day
    
    $
    398.88
    
    
    $
    386.30Medicaid average rate per day
    
    $
    146.05
    
    
    $
    139.45Managed care average rate per day
    
    $
    372.76
    
    
    $
    343.73
  26




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##### Table of Contents



Operating expense
        Lease expense
  Professional liability
  General and administrative expense
  27




---



##### Table of Contents



Depreciation and amortization
  Foreign currency transaction gain (loss)
  Other income
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Year Ended December 31, 2008 Compared with Year Ended December 31, 2007
   Patient Revenues
 28




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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
    
    
    31.1
    %
    
    
    30.5
    %New Texas Facilities
    
    
    31.9
    %
    
    
    34.7
    %Total continuing operations
    
    
    31.3
    %
    
    
    30.9
    %Medicaid revenues as percent of total:Same center
    
    
    55.1
    %
    
    
    57.0
    %New Texas Facilities
    
    
    46.8
    %
    
    
    44.8
    %Total continuing operations
    
    
    53.6
    %
    
    
    56.0
    %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
    29




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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
 30




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##### Table of Contents



Liquidity and Capital Resources
 Liquidity
     Dividends
  Preferred Stock
  Note Receivable
  Professional Liability
  31




---



##### Table of Contents



Capital Resources
       Level atRequirement
    
    December 31, 2009Minimum fixed charge coverage ratio
    
    
    ≥ 1.10:1.00
    
    
    
    1.28Minimum adjusted EBITDA (as defined)
    
    ≥ $10.5 million
    
    $17.0 millionMaximum leverage ratio (leased facilities)
    
    
    ≤ 1.50:1.00
    
    
    
    0.29Debt service coverage ratio (mortgaged facilities)
    
    
    ≥ 1.30:1.00
    
    
    
    3.58
 32




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##### 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
  Recent Accounting Guidance
  34




---



##### Table of Contents



Accounting guidance adopted in 2009
 Earnings Per share
 Intangibles
 Business Combinations
 Subsequent Events
 Forward-Looking Statements
  35




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##### Table of Contents



ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
  Changes in Internal Control over Financial Reporting
   36




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##### Table of Contents



37




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##### Table of Contents



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




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##### 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, 2009 and 2008
    
    F-2Consolidated Statements of Income for the Years Ended December 31, 2009, 2008 and 2007
    
    F-3Consolidated Statements of Shareholders Equity for the Years Ended December 31, 2009, 2008 and 2007
    
    F-4Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
    
    F-5Notes to Consolidated Financial Statements as of December 31, 2009, 2008 and 2007
    
    F-7 to F-33Financial 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. OlsonWallace E. OlsonChairman of the BoardMarch 9, 2010 /s/ William R. Council, IIIWilliam R. Council, IIIPresident and Chief Executive Officer
(Principal Executive Officer)March 9, 2010 /s/ L. Glynn Riddle, JrL. Glynn Riddle, Jr.Executive Vice President, Chief Financial Officer,
Secretary (Principal Financial and Accounting Officer)March 9, 2010  /s/ Wallace E. Olson
    
    /s/ William C. ONeil. Jr.Wallace E. Olson
Chairman of the Board
March 9, 2010
    
    William C. ONeil, Jr.
Director March 9, 2010/s/ William R. Council, III
    
    /s/ Richard M. BrameWilliam R. Council, III
President and Chief Executive Officer Director
    
    Richard M. Brame
Director
March 9, 2010March 9, 2010/s/ Robert Z. Hensley
    
    /s/ Chad A. McCurdyRobert Z. Hensley
Director
March 9, 2010
    
    Chad A. McCurdy
Director
March 9, 2010
 41




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES




---



##### Table of Contents



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




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##### 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, 2009 AND 2008
 2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    8,609,000
    
    
    $
    7,598,000Receivables, less allowance for doubtful
accounts of $2,863,000 and $3,279,000,
respectively
    
    
    24,381,000
    
    
    
    23,933,000Receivable for leased facility construction costs
    
    
    1,406,000
    
    
    
    228,000Current portion of note receivable
    
    
    
    
    
    
    466,000Prepaid expenses and other current assets
    
    
    2,091,000
    
    
    
    1,748,000Income tax refundable
    
    
    455,000
    
    
    
    1,369,000Deferred income taxes
    
    
    4,792,000
    
    
    
    3,967,000Total current assets
    
    
    41,734,000
    
    
    
    39,309,000PROPERTY AND EQUIPMENT, at cost
    
    
    78,120,000
    
    
    
    73,517,000Less accumulated depreciation
    
    
    (42,213,000
    )
    
    
    (38,555,000
    )Construction in progress  leased facility
    
    
    
    
    
    
    1,039,000Discontinued operations, net
    
    
    1,455,000
    
    
    
    1,455,000Property and equipment, net
    
    
    37,362,000
    
    
    
    37,456,000OTHER ASSETS:Deferred income taxes
    
    
    13,804,000
    
    
    
    13,899,000Note receivable, net of current portion
    
    
    
    
    
    
    3,486,000Deferred financing and other costs, net
    
    
    639,000
    
    
    
    1,009,000Other assets
    
    
    1,963,000
    
    
    
    2,031,000Acquired leasehold interest, net
    
    
    9,764,000
    
    
    
    10,149,000Total other assets
    
    
    26,170,000
    
    
    
    30,574,000$
    105,266,000
    
    
    $
    107,339,000LIABILITIES AND SHAREHOLDERS EQUITYCURRENT LIABILITIES:Current portion of long-term debt
    
    $
    2,278,000
    
    
    $
    2,238,000Trade accounts payable
    
    
    3,352,000
    
    
    
    4,600,000Accrued construction costs  leased facility
    
    
    1,406,000
    
    
    
    228,000Accrued expenses:Payroll and employee benefits
    
    
    10,177,000
    
    
    
    9,545,000Current portion of self-insurance reserves
    
    
    7,860,000
    
    
    
    6,469,000Other current liabilities
    
    
    4,327,000
    
    
    
    5,344,000Total current liabilities
    
    
    29,400,000
    
    
    
    28,424,000NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    22,551,000
    
    
    
    30,172,000Self-insurance reserves, less current portion
    
    
    12,235,000
    
    
    
    10,212,000Non-cash obligation for construction in
progress  leased facility
    
    
    
    
    
    
    1,039,000Other noncurrent liabilities
    
    
    15,195,000
    
    
    
    12,050,000Total noncurrent liabilities
    
    
    49,981,000
    
    
    
    53,473,000COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK,$.10 par
value, 5,000 shares authorized, issued and
outstanding, stated value of $4,918,000
including premium of $1,274,000 and $2,973,000,
respectively
    
    
    6,192,000
    
    
    
    7,891,000SHAREHOLDERS 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, 5,949,000 and 5,903,000
shares issued, 5,717,000 and 5,671,000
shares outstanding, respectively
    
    
    59,000
    
    
    
    59,000Treasury stock at cost, 232,000 shares of
common stock
    
    
    (2,500,000
    )
    
    
    (2,500,000
    )Paid-in capital
    
    
    17,647,000
    
    
    
    16,903,000Retained earnings
    
    
    4,487,000
    
    
    
    3,089,000Total shareholders equity
    
    
    19,693,000
    
    
    
    17,551,000$
    105,266,000
    
    
    $
    107,339,000
  F- 2




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,2009
    
    
    2008
    
    
    2007REVENUES:Patient revenues, net
    
    $
    302,031,000
    
    
    $
    287,607,000
    
    
    $
    243,907,000EXPENSES:Operating
    
    
    240,095,000
    
    
    
    227,633,000
    
    
    
    186,957,000Lease
    
    
    23,422,000
    
    
    
    22,962,000
    
    
    
    20,019,000Professional liability
    
    
    9,132,000
    
    
    
    1,658,000
    
    
    
    (1,663,000
    )General and administrative
    
    
    18,496,000
    
    
    
    18,486,000
    
    
    
    17,552,000Depreciation and amortization
    
    
    5,999,000
    
    
    
    5,306,000
    
    
    
    4,093,000297,144,000
    
    
    
    276,045,000
    
    
    
    226,958,000OPERATING INCOME
    
    
    4,887,000
    
    
    
    11,562,000
    
    
    
    16,949,000OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191,000
    
    
    
    (1,005,000
    )
    
    
    808,000Other income
    
    
    549,000
    
    
    
    
    
    
    
    Interest income
    
    
    161,000
    
    
    
    454,000
    
    
    
    1,016,000Interest expense
    
    
    (1,877,000
    )
    
    
    (2,870,000
    )
    
    
    (3,549,000
    )Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    (116,000
    )(976,000
    )
    
    
    (3,421,000
    )
    
    
    (1,841,000
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    3,911,000
    
    
    
    8,141,000
    
    
    
    15,108,000PROVISION FOR INCOME TAXES
    
    
    (1,497,000
    )
    
    
    (2,759,000
    )
    
    
    (6,012,000
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    2,414,000
    
    
    
    5,382,000
    
    
    
    9,096,000NET INCOME FROM DISCONTINUED OPERATIONS:Operating income, net of tax provision of $117,000,
$180,000 and $199,000, respectively
    
    
    187,000
    
    
    
    353,000
    
    
    
    299,000Loss on sale, net of tax benefit of $6,000, in 2007
    
    
    
    
    
    
    
    
    
    
    (8,000
    )DISCONTINUED OPERATIONS
    
    
    187,000
    
    
    
    353,000
    
    
    
    291,000NET INCOME
    
    
    2,601,000
    
    
    
    5,735,000
    
    
    
    9,387,000PREFERRED STOCK DIVIDENDS
    
    
    344,000
    
    
    
    344,000
    
    
    
    344,000NET INCOME FOR COMMON STOCK
    
    $
    2,257,000
    
    
    $
    5,391,000
    
    
    $
    9,043,000NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    1.49Discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05$
    0.40
    
    
    $
    0.95
    
    
    $
    1.54Per common share  dilutedContinuing operations
    
    $
    0.36
    
    
    $
    0.86
    
    
    $
    1.43Discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05$
    0.39
    
    
    $
    0.92
    
    
    $
    1.48COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
  
    $
    0.15
    
    
    $
    
    
    
    $
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,678,000
    
    
    
    5,693,000
    
    
    
    5,870,000Diluted
    
    
    5,797,000
    
    
    
    5,887,000
    
    
    
    6,127,000
  F- 3




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 RetainedEarningsCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    (AccumulatedShares Issued
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit)
    
    
    TotalBALANCE, DECEMBER 31, 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
    
    
    
    17,551,000Exercise of stock options
    
    
    46,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,000
    )
    
    
    
    
    
    
    (76,000
    )Net Income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,601,000
    
    
    
    2,601,000Preferred stock dividends
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (344,000
    )
    
    
    (344,000
    )Common dividends declared
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (859,000
    )
    
    
    (859,000
    )Purchase of restricted share units
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76,000
    
    
    
    
    
    
    
    76,000Tax impact of stock options
exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    118,000
    
    
    
    
    
    
    
    118,000Stock based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    626,000
    
    
    
    
    
    
    
    626,000BALANCE, DECEMBER 31, 2009
    
    
    5,949,000
    
    
    $
    59,000
    
    
    
    232,000
    
    
    $
    (2,500,000
    )
    
    $
    17,647,000
    
    
    $
    4,487,000
    
    
    $
    19,693,000
  F- 4




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2009
    
    
    2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,601,000
    
    
    $
    5,735,000
    
    
    $
    9,387,000Discontinued operations
    
    
    187,000
    
    
    
    353,000
    
    
    
    291,000Net income from continuing operations
    
    
    2,414,000
    
    
    
    5,382,000
    
    
    
    9,096,000Adjustments to reconcile net income from continuing
operations to net cash provided by operating
activities:Depreciation and amortization
    
    
    5,999,000
    
    
    
    5,306,000
    
    
    
    4,093,000Provision for doubtful accounts
    
    
    2,181,000
    
    
    
    2,334,000
    
    
    
    1,130,000Deferred income tax provision (benefit)
    
    
    (678,000
    )
    
    
    775,000
    
    
    
    4,925,000Provision for (benefit from) self-insured
professional liability, net of cash payments
    
    
    3,543,000
    
    
    
    (5,717,000
    )
    
    
    (5,054,000
    )Stock-based compensation
    
    
    689,000
    
    
    
    867,000
    
    
    
    648,000Amortization of deferred balances
    
    
    382,000
    
    
    
    426,000
    
    
    
    334,000Provision for leases in excess of cash payments
    
    
    1,187,000
    
    
    
    1,711,000
    
    
    
    2,234,000Payment from lessor for leasehold improvement
    
    
    771,000
    
    
    
    
    
    
    
    Non-cash gain on settlement of contingent liability
    
    
    (549,000
    )
    
    
    
    
    
    
    Foreign currency transaction (gain) loss
    
    
    (191,000
    )
    
    
    1,005,000
    
    
    
    (808,000
    )Debt retirement costs
    
    
    
    
    
    
    
    
    
    
    116,000Non-cash interest income
    
    
    (41,000
    )
    
    
    (121,000
    )
    
    
    (132,000
    )Changes in other assets and liabilities affecting
operating activities:Receivables, net
    
    
    (4,047,000
    )
    
    
    381,000
    
    
    
    (10,633,000
    )Prepaid expenses and other assets
    
    
    621,000
    
    
    
    210,000
    
    
    
    2,781,000Trade accounts payable and accrued expenses

    
    
    (157,000
    )
    
    
    (3,498,000
    )
    
    
    3,374,000Net cash provided by continuing
operations
    
    
    12,124,000
    
    
    
    9,061,000
    
    
    
    12,104,000Discontinued operations
    
    
    254,000
    
    
    
    417,000
    
    
    
    583,000Net cash provided by operating activities
    
    
    12,378,000
    
    
    
    9,478,000
    
    
    
    12,687,000
  F- 5




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,2009
    
    
    2008
    
    
    2007CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    $
    (6,559,000
    )
    
    $
    (9,703,000
    )
    
    $
    (6,827,000
    )Payment for construction in progress  leased
facility
    
    
    (6,891,000
    )
    
    
    (811,000
    )
    
    
    Acquisition of leasehold interest
    
    
    
    
    
    
    
    
    
    
    (9,096,000
    )Proceeds from sale of discontinued operations
and bed license
    
    
    
    
    
    
    
    
    
    
    180,000Decrease in restricted cash deposits
    
    
    
    
    
    
    
    
    
    
    1,110,000Note receivable issued
    
    
    
    
    
    
    
    
    
    
    (1,800,000
    )Notes receivable collected
    
    
    4,184,000
    
    
    
    765,000
    
    
    
    2,500,000Deposits and other deferred balances
    
    
    59,000
    
    
    
    (138,000
    )
    
    
    (120,000
    )Net cash used in continuing operations
    
    
    (9,207,000
    )
    
    
    (9,887,000
    )
    
    
    (14,053,000
    )Discontinued operations
    
    
    
    
    
    
    (49,000
    )
    
    
    Net cash used in investing activities
    
    
    (9,207,000
    )
    
    
    (9,936,000
    )
    
    
    (14,053,000
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (7,581,000
    )
    
    
    (2,045,000
    )
    
    
    (13,437,000
    )Proceeds from issuance of debt
    
    
    
    
    
    
    
    
    
    
    16,500,000Financing costs
    
    
    (42,000
    )
    
    
    (79,000
    )
    
    
    (839,000
    )Payment of common stock dividends
    
    
    (573,000
    )
    
    
    
    
    
    
    Payment of preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (344,000
    )Repurchases of common stock
    
    
    
    
    
    
    (1,683,000
    )
    
    
    (817,000
    )Construction allowance receipts  leased facility
    
    
    6,891,000
    
    
    
    811,000
    
    
    
    Payment for preferred stock restructuring
    
    
    (512,000
    )
    
    
    (497,000
    )
    
    
    (448,000
    )Issuance of restricted share units
    
    
    76,000
    
    
    
    
    
    
    
    Net settlement of exercised stock options
    
    
    (78,000
    )
    
    
    
    
    
    
    Proceeds from exercise of stock options
    
    
    3,000
    
    
    
    235,000
    
    
    
    65,000Net cash provided by (used) in financing
activities
    
    
    (2,160,000
    )
    
    
    (3,602,000
    )
    
    
    680,000NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
    
    
    1,011,000
    
    
    
    (4,060,000
    )
    
    
    (686,000
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    7,598,000
    
    
    
    11,658,000
    
    
    
    12,344,000CASH AND CASH EQUIVALENTS, end of period
    
    $
    8,609,000
    
    
    $
    7,598,000
    
    
    $
    11,658,000SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts
capitalized
    
    $
    1,512,000
    
    
    $
    2,506,000
    
    
    $
    3,303,000Cash payments of income taxes, net of refunds
    
    $
    1,413,000
    
    
    $
    3,841,000
    
    
    $
    1,658,000
 NON-CASH TRANSACTIONS:
   F- 6




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##### Table of Contents



ADVOCAT INC. AND SUBSIDIARIES
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 DECEMBER 31, 2009, 2008 AND 2007
 1.
    
    COMPANY AND ORGANIZATION
 Advocat Inc. (together with its subsidiaries, Advocat or the Company) provides long-term
care services to nursing center patients in eight states, primarily in the Southeast and Southwest
United States. The Companys centers provide a range of health care services to their patients and
residents. In addition to the nursing, personal care and social services usually provided in
long-term care centers, the Company offers a variety of comprehensive rehabilitation services as
well as nutritional support services.As of December 31, 2009, the Companys continuing operations consist of 50 nursing centers with
5,784 licensed nursing beds and 14 assisted living units. The Company owns 9 and leases 41 of its
nursing centers. The Companys continuing operations include centers in Alabama, Arkansas,
Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.
 2.
    
    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 ConsolidationThe consolidated financial statements include the operations and accounts of Advocat and its
subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been
eliminated in consolidation. The Companys net income on the Consolidated Statements of Income
equals Other Comprehensive Income.The Company is managed as one reporting unit for internal purposes and for managing the enterprise.
Therefore, management has concluded that the Company is operated as a single reportable segment,
as defined in The Financial Accounting Standards Boards (FASB) guidance on Segment Reporting.Revenues
 Patient RevenuesThe fees charged by the Company to patients in its nursing centers are recorded on an
accrual basis. These rates are contractually adjusted with respect to individuals receiving
benefits under federal and state-funded programs and other third-party payors. Rates under
federal and state-funded programs are determined prospectively for each facility and may be
based on the acuity of the care and services provided. These rates may be based on
facilitys actual costs subject to program ceilings and other limitations or on established
rates based on acuity and services provided as determined by the federal and state-funded
programs. Amounts earned under federal and state programs with respect to nursing home
patients are subject to review by the third-party payors which may result in retroactive
adjustments. In the opinion of management, adequate provision has been made for any
adjustments that may result from such reviews. Retroactive adjustments, if any, are
recorded when objectively determinable, generally within three years of the close of a
reimbursement year depending upon the timing of appeals and third-party settlement reviews
or audits. During the years ended December 31, 2009, 2008 and 2007, the Company recorded
$109,000, $30,000 and $(2,000) of net favorable (unfavorable) estimated settlements from
federal and state programs for periods prior to the beginning of fiscal 2009, 2008 and 2007,
respectively.
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Allowance for Doubtful AccountsThe Companys allowance for doubtful accounts is estimated utilizing current agings of
accounts receivable, historical collections data and other factors. Management monitors
these factors and determines the estimated provision for doubtful accounts. Historical bad
debts have generally resulted from uncollectible private balances, some uncollectible
coinsurance and deductibles and other factors. Receivables that are deemed to be
uncollectible are written off. The allowance for doubtful accounts balance is assessed on a
quarterly basis, with changes in estimated losses being recorded in the Consolidated
Statements of Income in the period identified.The Company includes the provision for doubtful accounts in operating expenses in its
Consolidated Statements of Income. The provisions for doubtful accounts of continuing
operations were $2,181,000, $2,334,000 and $1,130,000 for 2009, 2008 and 2007, respectively.
 Lease ExpenseAs of December 31, 2009, the Company operates 41 nursing centers under operating leases,
including 40 owned or financed by Omega Healthcare Investors, Inc. (together with its subsidiaries,
Omega) and one owned by another party. The Companys operating leases generally require the
Company to pay stated rent, subject to increases based on changes in the Consumer Price Index, a
minimum percentage increase, or increases in the net revenues of the leased properties. The
Companys Omega leases require the Company to pay certain scheduled rent increases. Such scheduled
rent increases are recorded as additional lease expense on a straight-line basis recognized over
the term of the related leases.See Notes 3, 7 and 12 for a discussion regarding the amendment of the Companys Master Lease with
Omega in 2007 and 2006, the termination of leases for certain facilities and the addition of
certain leased facilities.Classification of ExpensesThe Company classifies all expenses (except lease, interest, depreciation and amortization
expenses) that are associated with its corporate and regional management support functions as
general and administrative expenses. All other expenses (except lease, professional liability,
interest, depreciation and amortization expenses) incurred by the Company at the facility level are
classified as operating expenses.Property and EquipmentProperty and equipment are recorded at cost with depreciation being provided over the shorter
of the remaining lease term (where applicable) or the assets estimated useful lives on the
straight-line basis as follows:
 Buildings and improvements
    
    
    
    
    
    
    5 to 40 yearsLeasehold improvements
    
    
    
    
    
    
    2 to 10 yearsFurniture, fixtures and equipment
    
    
    
    
    
    
    2 to 15 years
 Interest incurred during construction periods is capitalized as part of the building cost.
Maintenance and repairs are expensed as incurred, and major betterments and improvements are
capitalized. Property and equipment obtained through purchase acquisitions are stated at their
estimated fair value determined on the respective dates of acquisition.In accordance with FASB guidance on Property, Plant and Equipmentspecifically the discussion
around the accounting for the impairment or disposal of long-lived assets, the Company evaluates
the recoverability of the carrying values of its properties and other long-lived assets on a
property by property basis. On a quarterly basis, the Company reviews its properties for
recoverability when events or circumstances, including significant physical changes in the
property, significant adverse changes in general economic conditions, and significant
deteriorations of the underlying cash flows or fair values of the property, indicate that the
carrying amount of the property may not be recoverable. The need to recognize an impairment is
based on estimated future undiscounted cash flows from a property
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compared to the carrying value of that property. If recognition of an impairment is necessary, it is
measured as the amount by which the carrying amount of the property exceeds the fair value of the
property.The construction in progress  leased facility asset and non-cash obligation for construction in
progress  leased facility liability are discussed in detail in Note 12.Cash and Cash EquivalentsCash and cash equivalents include cash on deposit with banks and all highly liquid investments
with original maturities of three months or less when purchased.Deferred Financing and Other CostsThe Company records deferred financing and lease costs for expenditures related to entering
into or amending debt and lease agreements. These expenditures include lenders and attorneys fees.
Financing costs are amortized using the effective interest method over the term of the related
debt. The amortization is reflected as interest expense in the accompanying consolidated
statements of income. Deferred lease costs are amortized on a straight-line basis over the term of
the related leases. See Note 6 for further discussion.Acquired Leasehold InterestThe Company has recorded an acquired leasehold interest intangible asset related to the
acquisition further described in Note 3. The intangible asset is accounted for in accordance with
the FASBs guidance on goodwill and other intangible assets, and is amortized on a straight-line
basis over the remaining life of the acquired lease, including renewal periods, a period of
approximately 28 years from the date of acquisition. The lease terms for the seven SMSA facilities
provide for an initial term and renewal periods at the Companys option through May 31, 2035. As
the renewal periods of the acquired leased facilities are solely based on the Companys option, it
is expected that costs (if any) to renew the lease through its current amortization period would be
nominal and the decision to continue to lease the acquired facilities lies solely within the
Companys intent to continue to operate the SMSA facilities. Any renewal costs would be included
in deferred lease costs and amortized over the renewal period. Amortization expense of
approximately $384,000, $367,000 and $137,000 related to this intangible asset was recorded during
the years ended December 31, 2009, 2008 and 2007, respectively. The Company evaluates the
recoverability of the carrying value of the acquired leasehold intangible in accordance with the
FASBs guidance on accounting for the impairment or disposal of long-lived assets. Included in
this evaluation is whether significant adverse changes in general economic conditions, and
significant deteriorations of the underlying cash flows or fair values of the intangible asset,
indicate that the carrying amount of the intangible asset may not be recoverable. The need to
recognize an impairment is based on estimated future undiscounted cash flows from the asset
compared to the carrying value of that asset. If recognition of an impairment is necessary, it is
measured as the amount by which the carrying amount of the intangible asset exceeds the fair value
of the intangible asset.Self InsuranceSelf insurance reserves primarily represent the accrual for self insured risks associated with
general and professional liability claims, employee health insurance and workers compensation.
The Companys health insurance reserve is based on known claims incurred and an estimate of
incurred but unreported claims determined by an analysis of historical claims paid. The Companys
workers compensation reserve relates primarily to periods of self insurance prior to May 1997 and
consists of an estimate of the future costs to be incurred for the known claims.The Company retains the Actuarial Division of Willis of Tennessee, Inc. (Willis), a third-party
actuarial firm, to estimate the appropriate accrual for incurred general and professional liability
claims. The actuary primarily uses historical data regarding the frequency and cost of the
Companys claims over a multi-year period and information regarding the Companys number of
occupied beds to develop estimates of the Companys ultimate professional liability cost for
current periods. The actuary estimates the Companys
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professional liability accrual for past
periods by using currently-known information to adjust the initial
reserve that was created for that period. All losses are projected on an undiscounted basis. The
self insurance reserves include estimates of liability for incurred but not reported claims,
estimates of liability for reported but unresolved claims, actual liabilities related to
settlements, including settlements to be paid over time, and estimates of related legal costs
incurred and expected to be incurred.One of the key assumptions in the actuarial analysis is that historical losses provide an accurate
forecast of future losses. Changes in legislation such as tort reform, changes in our financial
condition, changes in our risk management practices and other factors may affect the severity and
frequency of claims incurred in future periods as compared to historical claims.Another key assumption is the limit of claims to a maximum of $4.5 million. The actuary has
selected this limit based on the Companys historical data. While most of the Companys claims
have been for amounts less than the $4.5 million, there have been claims at higher amounts, and
there may be claims above this level in the future. The facts and circumstances of each claim vary
significantly, and the amount of ultimate liability for an individual claim may vary due to many
factors, including whether the case can be settled by agreement, the quality of legal
representation, the individual jurisdiction in which the claim is pending, and the views of the
particular judge or jury deciding the case. To date, the Company has not experienced an uninsured
loss in excess of this limit. In the event that the Company believes it has incurred a loss in
excess of this limit, an adjustment to the reserves determined by the actuary would be necessary.Although the Company retains Willis to assist management in estimating the appropriate accrual for
these claims, professional liability claims are inherently uncertain, and the liability associated
with anticipated claims is very difficult to estimate. As a result, the Companys actual
liabilities may vary significantly from the accrual, and the amount of the accrual has and may
continue to fluctuate by a material amount in any given quarter. Each change in the amount of this
accrual will directly affect the Companys reported earnings and financial position for the period
in which the change in accrual is made.Income TaxesThe Company follows the FASBs guidance on Accounting for Income Taxes, which requires an
asset and liability approach for financial accounting and reporting of income taxes. Under this
method, deferred tax assets and liabilities are determined based upon differences between financial
reporting and tax bases of assets and liabilities and are measured using the enacted tax laws that
will be in effect when the differences are expected to reverse. The Company assesses the need for
a valuation allowance to reduce the deferred tax assets by the amount that is believed is more
likely than not to not be utilized through the turnaround of existing temporary differences, future
earnings, or a combination thereof, including certain net operating loss carryforwards we do not
expect to realize due to change in ownership limitations. The Company follows the guidance on
financial statement recognition and measurement of tax positions taken, or expected to be taken, in
tax returns evaluating the need to recognize or unrecognize uncertain tax positions. See Note 11
for additional information related to the provision for income taxes.Disclosure of Fair Value of Financial InstrumentsEffective January 1, 2008, the Company adopted the FASBs guidance on Fair Value Measurements
and Disclosures. The new guidance provided rules for using fair value to measure assets and
liabilities and established a fair value hierarchy that prioritizes the information used to develop
the measurements. It applies whenever other guidance requires (or permits) assets or liabilities
to be measured at fair value but did not expand the use of fair value in any new circumstances.
The adoption of this guidance did not have an impact on the Companys financial position, results
of operations or cash flows as the Company did not elect to modify the carrying value of any of its
assets or liabilities under fair value accounting.
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A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to
measure fair value into three broad levels is described below:
 Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date
for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level
1 inputs.Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated
by market data.Level 3: Unobservable inputs are used when little or no market data is available. The fair value
hierarchy gives the lowest priority to Level 3 inputs.
 As noted above, the Company did not elect to expand the use of fair value measurements for assets
and liabilities. As such, its long-term debt obligations, receivables and trade accounts payable
are still reported at their carrying values. It is noted that the assessment of carrying value
compared to fair value for impairment analysis, as discussed in Note 2 Property and Equipment,
follow these fair value principles and hierarchy.The carrying amounts of cash and cash equivalents, receivables, trade accounts payable and accrued
expenses approximate fair value because of the short-term nature of these accounts. The carrying
amount of the Companys debt is still reported at its carrying value, though the Company estimates
that  the fair value of its mortgage loan is an amount less than its carrying value as the Companys current mortgage loan agreement
and interest rate were entered into during 2006 and the Company
anticipates its rate is lower than what is currently available. At
December 31, 2009, the Companys mortgage loan has a carrying value of $21,177,000
and the estimated fair value is $20,198,000. The estimate of fair value was calculated by discounting the future cash flows of the mortgage loan at
rates the company expects would be currently offered for similar mortgage loans.
The Companys self-insurance reserves are reported on an
undiscounted basis as the timing of estimated settlements cannot be determined.Use of EstimatesThe preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.Net Income per Common ShareThe Company utilizes the FASBs guidance on Earnings Per Sharefor the financial reporting of
net income per common share. Basic earnings per common share excludes dilution and is computed by
dividing income available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per common share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were exercised or converted into
common stock or otherwise resulted in the issuance of common stock that then shared in the earnings
of the Company. See Note 10 for additional disclosures about the Companys Net Income per Common
Share.Stock-Based CompensationThe Company follows the FASBs guidance on Stock Compensationto account for share-based
payments granted to employees. The Company had no unvested awards granted to employees on the
effective date the current guidance took effect.The Company recorded non-cash stock-based compensation expense for equity grants issued of
$689,000, $867,000 and $648,000 during the years ended December 31, 2009, 2008 and 2007,
respectively. Such amounts are included as components of general and administrative expense or
operating expense based upon the classification of cash compensation paid to the related employees.
Of these amounts, non-cash stock-based compensation expense of $38,000, $61,000 and $22,000 was
recorded as a component of operating expense in 2009, 2008 and 2007, respectively. Non-cash
stock-based compensation expense of $651,000, $806,000 and $626,000 was recorded as a component of
general and administrative expense in 2009, 2008 and 2007, respectively. See Note 9 for additional
disclosures about the Companys stock-based compensation plans.
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Recent Accounting PronouncementsIn June 2009, the FASB issued its final Statement of Financial Accounting Standards (SFAS)
No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles, a replacement of FASB Statement No. 162 (SFAS 168). SFAS 168 establishes
the FASB Accounting Standards Codification (Codification), which officially launched July 1,
2009, to become the source of authoritative U.S. generally accepted accounting principles (GAAP)
recognized by the FASB to be applied by nongovernmental entities, superseding existing FASB,
American Institute of Certified Public Accountants (AICPA), Emerging Issues Task Force (EITF),
and related accounting literature. Rules and interpretive releases of the Securities and Exchange
Commission (SEC) under authority of federal securities laws are also sources of authoritative
U.S. GAAP for SEC registrants. SFAS 168 reorganizes the previously issued GAAP pronouncements into
accounting topics and displays them using a consistent structure. The subsequent issuances of new
standards will be in the form of Accounting Standards Updates that will be included in the
Codification. SFAS 168 was effective for the Company as of the interim period ended September 30,
2009. As the Codification was not intended to change or alter existing GAAP, it did not have an
impact on the Companys consolidated financial statements. The only impact was that references to
authoritative accounting literature are in accordance with the Codification and the descriptions of
accounting guidance referenced in italics are the descriptive titles of the Codification Topics.Accounting guidance adopted in 2009In June 2008, the FASB issued guidance on Earnings Per Share in determining whether instruments
granted in share-based payment transactions are participating securities. The guidance provides
that unvested share-based payment awards that contain nonforfeitable rights to dividends or
dividend equivalents (whether paid or unpaid) are participating securities and shall be included in
the computation of earnings per share pursuant to the two-class method. The Company adopted this
guidance effective January 1, 2009, and did not require the Company to retrospectively adjust its
earnings per share data based on the Companys analysis of its stock based compensation awards.In April 2008, the FASB issued guidance on Intangibles in determining the useful life of
intangible assets. This guidance amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of recognized intangible assets
with the intention of improving the consistency between the useful life of a recognized intangible
asset and the period of expected cash flows used to measure the fair value of the asset. The
Company adopted the guidance effective January 1, 2009 with the portion of the guidance used in
determining the useful life of a recognized intangible asset being applied prospectively to
intangible assets acquired after January 1, 2009 and did not have an impact on the Companys
financial position or results of operations. The new required disclosures were adopted as of
January 1, 2009 and relate to an acquired leasehold interest intangible asset of approximately
$10,653,000 acquired in the SMSA Acquisition. The intangible asset is subject to full amortization
over the remaining life of the lease, including renewal periods, a period of approximately 28 years
from the date of acquisition. The lease terms for the seven SMSA facilities provide for an initial
term and renewal periods at the Companys option through May 31, 2035. As the renewal periods of
the acquired leased facilities are solely based on the Companys option, it is expected that costs
(if any) to renew the lease through its current amortization period would be nominal and the
decision to continue to lease the acquired facilities lies solely within the Companys intent to
continue to operate the SMSA facilities. Any renewal costs would be included in deferred lease
costs and amortized over the renewal period. Amortization expense of approximately $384,000,
$367,000 and $137,000 related to this intangible asset was recorded during the years ended December
31, 2009, 2008 and 2007, respectively.Effective January 1, 2009, the Company adopted the new guidance on Business Combinations which
established principles and requirements for how an acquirer recognizes and measures in its
financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree as well as the goodwill acquired or gain recognized in a bargain purchase.
The new guidance also establishes disclosure requirements to enable the evaluation of the nature
and financial effects of the business combination. During the fourth quarter of 2008, the Company
expensed $202,000 in acquisition costs related to the transaction discussed in Note 3. Under the
business combination accounting guidance in effect prior to January 1, 2009, these costs were
considered part of the purchase price and
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as such were capitalized, but effective January 1, 2009,
the accounting guidance required these costs be expensed as incurred.In May 2009, the FASB issued guidance on Subsequent Events that is intended to establish general
standards of accounting and disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. The guidance requires issuers to
reflect in their financial statements and disclosures the effects of subsequent events that provide
additional evidence about conditions at the balance sheet date. Disclosures should include the
nature of the event and either an estimate of its financial effect or a statement that an estimate
cannot be made. The guidance was effective for the Company for the interim period ended June 30,
2009. As the requirements under the guidance are consistent with its current practice, the
implementation did not have an impact on the Companys consolidated financial statements. The
Company has evaluated subsequent events and noted that no subsequent events occurred (that are not
already disclosed) that would otherwise make the financial statements misleading if they were not
disclosed or recorded.ReclassificationsAs discussed in Note 7, the consolidated financial statements of the Company have been
reclassified to reflect as discontinued operations certain divestitures and lease terminations.
Certain amounts in the 2008 and 2007 Consolidated Financial Statements have been reclassified to
conform with the presentation of 2009.
 3.
    
    ACQUISITIONS
 On June 17, 2009, the Company completed the acquisition of certain assets of a skilled nursing
facility in West Virginia. The Company had entered into an option agreement to purchase these
assets for $850,000 during 2006. The Company advanced the $850,000 purchase price to the owners of
the existing facility prior to January 1, 2009. Due to delays in the regulatory approval process as
well as declining census in the existing facility, the Company advanced an additional $196,000 to
the owners of the existing facility during 2008 and $231,000 during 2009. The purchase price of
$850,000 is included in other noncurrent assets in the Companys Consolidated Balance Sheet and the
amounts advanced in excess of the purchase price have been charged to operating expenses. The
Company did not assume any liabilities or working capital in connection with the acquisition. The
Company is currently seeking financing for the construction of a new 90 bed replacement facility.
The existing facility closed in February 2009.Effective August 11, 2007, the Company purchased the leasehold interests and operations of seven
skilled nursing facilities from Senior Management Services of America North Texas, Inc. (SMSA or
SMSA Acquisition) for an initial purchase price of approximately $9,957,000, including
approximately $8,570,000 in cash, the assumption of approximately $862,000 in liabilities, and
transaction costs of $525,000. These facilities include 1,266 licensed nursing beds, with 1,105
nursing beds available for use at the date of the acquisition. The SMSA facilities had unaudited
revenues of approximately $52.1 million for the year ended December 31, 2006. The SMSA facilities
are in the Companys existing geographic and operational footprint and are expected to contribute
to the Companys growth strategy and existing base of operations.The facilities were part of a larger organization that had been in bankruptcy since January 2007.
Under the terms of the purchase agreement, the Company acquired the leases and leasehold interests
in the facilities, inventory and certain equipment, but did not acquire working capital or assume
liabilities, apart from certain obligations for employee paid-time-off benefits, specified lease
related obligations and 2007 property taxes.The facilities are leased from a subsidiary of Omega Healthcare Investors, Inc. (Omega). Prior
to the SMSA Acquisition, the Company leased 28 facilities from Omega under a master lease agreement
(the Master Lease). In connection with this acquisition, the Company amended the Master Lease to
include the seven SMSA facilities. The substantive terms of the SMSA lease, including payment
provisions and lease period including renewal options, were not changed by this amendment. The
lease terms for the seven SMSA facilities provide for an initial term and renewal periods at the
Companys option through
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May 31, 2035. The lease provides for annual increases in lease payments
equal to the increase in the Consumer Price Index, not to exceed 2.5%.The SMSA Acquisition is accounted for using the purchase method of accounting. The purchase price
of this transaction was allocated to the identifiable assets acquired based upon their respective
fair values, and the liabilities assumed are based on the expected or paid settlement amounts. The
purchase price allocation was subject to change during the twelve month period subsequent to the
acquisition date for items including actual settlement of the assumed liabilities and is now final.
The operating results have been included in the Companys Consolidated Financial Statements since
the date of the acquisition.In May 2009, the Company reached an agreement with the Centers for Medicare and Medicaid Services
(CMS) to settle cost report obligations related to facilities acquired in 2007. The Company also
settled its claims against the seller, Senior Management Services of America North Texas, Inc.
(SMSA). The settlement payments were made in the second quarter of 2009 and total approximately
$283,000, with related legal and other costs totaling an additional $175,000. Payment of the
settlements and legal fees were less than the amounts previously accrued and resulted in a gain on
settlement of $549,000 that was recorded as other income in the first quarter of 2009. The
liability resulted from the August 2007 acquisition of the leasehold interests and operations of
seven skilled nursing facilities from SMSA. In May 2008, the Company received notification of
payments due to CMS related to Medicare reimbursement for 1997 and earlier periods for one of the
acquired facilities. The total amount requested by CMS was approximately $1,180,000, including
accrued interest of approximately $668,000. In the second quarter of 2008, the Company recorded a
liability of $1,022,000 for its estimate of its ultimate liability for this assessment and defense
costs, resulting in an increase in the acquired leasehold interest intangible asset. The Companys
estimate of the liability took into consideration the facts and circumstances, including the number
of operators of the property in the intervening period since the original assessment and delays by
CMS in seeking collection.The following table summarizes the final purchase price allocation of the net assets acquired,
including the adjustment described above:
 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
 The purchase price allocation resulted in an acquired leasehold interest intangible asset of
approximately $10,653,000. The intangible asset is subject to full amortization over the remaining
life of the lease, including renewal periods, a period of approximately 28 years. Amortization
expense of approximately $384,000, $367,000 and $137,000 related to this intangible asset was
recorded during the years ended December 31, 2009, 2008 and 2007, respectively.The expected amortization expense for the acquired leasehold interest intangible asset are as
follows:
 2010
    
    $
    384,0002011
    
    
    384,0002012
    
    
    384,0002013
    
    
    384,0002014
    
    
    384,000thereafter
    
    
    7,844,000$
    9,764,000
 In connection with the SMSA Acquisition, the Company incurred expenses of $347,000 for post
acquisition integration costs during 2007, including $201,000 for travel and other out-of-pocket
expenses related to integration activities and $146,000 in severance and relocation costs resulting
from the Texas
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regional office restructuring necessitated by the acquisition. Such expenses are
classified as a component of general and administrative expense in the 2007 Consolidated Statement
of Income.The SMSA Acquisition was financed with proceeds of a new loan, as discussed in Note 6.
 4.
    
    RECEIVABLES
 Receivables, before the allowance for doubtful accounts, consist of the following components:
 December 31,2009
    
    
    2008Medicare
    
    $
    10,244,000
    
    
    $
    10,440,000Medicaid and other non-federal government programs
    
    
    11,025,000
    
    
    
    10,187,000Other patient and resident receivables
    
    
    5,613,000
    
    
    
    6,368,000Other receivables and advances
    
    
    362,000
    
    
    
    217,000$
    27,244,000
    
    
    $
    27,212,000Receivable for leased facility construction costs
    
    $
    1,406,000
    
    
    $
    228,000
 The receivable for leased facility construction is related to renovation projects
funded by Omega. See Note 12 for additional discussion of these receivables and leased facility
construction projects.The Company provides credit for a substantial portion of its revenues and continually monitors the
credit-worthiness and collectability from its patients, including proper documentation of
third-party coverage. The Company is subject to accounting losses from uncollectible receivables
in excess of its reserves.Substantially all receivables are pledged as collateral on the Companys debt obligations.
 5.
    
    PROPERTY AND EQUIPMENT
 Property and equipment, at cost, consists of the following:
 December 31,2009
    
    
    2008Land
    
    $
    1,919,000
    
    
    $
    1,903,000Buildings and leasehold improvements
    
    
    53,459,000
    
    
    
    49,098,000Furniture, fixtures and equipment
    
    
    22,742,000
    
    
    
    22,516,000$
    78,120,000
    
    
    $
    73,517,000
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6.
    
    LONG-TERM DEBT
 Long-term debt consists of the following:
 December 31,2009
    
    
    2008Mortgage loan
payable to a commercial
finance company; issued
in August 2006; secured
by seven nursing centers,
related equipment, and a
second lien on the
accounts receivable of
these facilities; payable
monthly, interest at
3.75% above LIBOR (3.98%
and 4.95% at December 31,
2009 and 2008,
respectively).
    
    $
    21,177,000
    
    
    $
    21,768,000Term loan payable
to a bank; issued in
August 2007; secured by
receivables and all other
unencumbered assets of
the Company, including
land held for sale;
interest at 2.5% above
LIBOR (2.74% and 4.0% at
December 31, 2009 and
2008, respectively).
    
    
    3,652,000
    
    
    
    10,642,00024,829,000
    
    
    
    32,410,000Less current portion
    
    
    (2,278,000
    )
    
    
    (2,238,000
    )$
    22,551,000
    
    
    $
    30,172,000
 As of December 31, 2009, the Companys weighted average interest rate on long-term debt was
approximately 3.8%.In August 2007, the Company entered into an agreement with a bank for a $16,500,000 term loan to
finance the SMSA Acquisition and repay certain existing indebtedness. The term loan carries an
interest rate of LIBOR plus 2.5%, a maturity of August 2012, and principal payments based on a ten
year amortization, with additional payments based upon certain asset dispositions and excess cash
flows, as defined in the debt agreements. The term loan is secured by receivables and all other
unencumbered assets of the Company, including land held for sale. In connection with the
transaction, the Company expensed existing deferred financing costs of $116,000 during 2007. The
deferred financing costs written off relate to debt that was retired with proceeds of this loan,
and are reflected as debt retirement costs in the 2007 income statement. In connection with the
new debt incurred in the 2007 financing, the Company recorded deferred loan costs of $764,000.The bank loan agreement also includes a $15,000,000 revolving credit facility that provides
revolving credit loans as well as the issuance of letters of credit. The revolver is secured by
accounts receivable, and there are limits on the maximum amount of loans that can be outstanding
under the revolver based on borrowing base restrictions. The revolver has a term of three years,
expires in August 2010 with interest at the Companys option of LIBOR plus 2.25% or the banks
prime lending rate. Annual fees for letters of credit issued under this revolver are 2.25% of the
amount outstanding. The Company has a letter of credit of approximately $8,117,000 to serve as a
security deposit for all of the Companys leases with Omega. Considering the balance of eligible
accounts receivable at December 31, 2009, the letter of credit and the maximum loan amount of
$15,000,000, the balance available for revolving credit loans as of December 31, 2009 is
$6,883,000. As of December 31, 2009, the Company has no borrowings outstanding under the revolving
credit facility.The mortgage loan has a term of five years, with principal and interest payable monthly based on a
25 year amortization. Interest is based on 30 day LIBOR plus a margin of 3.75%. The mortgage loan
is secured by seven owned nursing centers, related equipment, and a second lien on the accounts
receivable of these facilities. The mortgage loan matures in August 2011.
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Scheduled principal payments of long-term debt are as follows:
 2010
    
    $
    2,278,0002011
    
    
    22,198,0002012
    
    
    353,0002013
    
    
    2014
    
    
    Thereafter
    
    
    Total
    
    $
    24,829,000
 The Companys debt agreements require additional payments from proceeds received upon certain asset
dispositions and excess cash flows, as defined in the debt agreements. In addition, the Companys
debt agreements allow for voluntary prepayments of principal outstanding, and during 2009 and 2007,
the Company made voluntary prepayments of $3,500,000 and $3,000,000, respectively. These
prepayments reduce the required amounts that must be paid in the future from excess cash flows and
asset dispositions.The Companys debt agreements contain various financial covenants, the most restrictive of which
relate to cash flow, census and debt service coverage ratios. The Company is in compliance with
all such covenants at December 31, 2009.
 7.
    
    DISCONTINUED OPERATIONS
 The Centers for Medicare and Medicaid Services (CMS) has issued regulations that became
effective October 1, 2009 that prohibit the Company from billing Medicare Part B for certain
enteral nutrition, urological, ostomy and tracheostomy supplies. Beginning October 1, these
services will be provided by third parties. The Company will still be required to provide the
labor for the delivery of services but will no longer be a supplier and will not be entitled to any
compensation. These services produced revenues of $974,000, $1,190,000 and $1,154,000 and net
income of $204,000, $388,000 and $390,000 during the years ended December 31, 2009, 2008 and 2007,
respectively. The related revenue and cost of goods sold for providing these services have been
reclassified as discontinued operations in the accompanying consolidated financial statements.Effective March 31, 2007, the Company terminated operations at its leased facility in Eureka
Springs, Arkansas. The owner of the property, a subsidiary of Omega, sold the property and the
Company cooperated in an orderly transition to the new owner. The facility had low occupancy and
operated at a loss. The facility had been leased subject to the Omega master lease. Under the terms
of that lease, the master lease rental payment was not reduced. This facility contributed revenues
of $575,000 during the year ended December 31, 2007.The Company owns real estate related to a North Carolina assisted living facility it closed in
April 2006. The net assets of discontinued operations presented on the balance sheet represent the
real estate related to this assisted living facility. The Company is continuing its efforts to
sell this land. In September 2007, the Company sold the bed license for this North Carolina
assisted living facility for a sales price of $183,000, and recognized a pretax gain on sale of
discontinued operations of $45,000.The Company has classified the operations and the real estate described above as discontinued
operations for all periods presented in the Companys Consolidated Financial Statements. The
results of discontinued operations do not reflect any allocation of corporate general and
administrative expense or any allocation of corporate interest expense.As discussed further in Note 12, the Company leases four nursing centers in Florida under a lease
that, as amended, expires in August 2010. The operating margins of the four facilities subject to
this lease do not meet the Companys goals. These four homes contributed revenues of $25,053,000,
$23,772,000, and $23,996,000 and net income of $541,000, $1,076,000 and $1,602,000 in the years
ended December 31, 2009, 2008 and 2007 respectively. The facilities are, on average, 50 years old (including three of the
Companys ten oldest facilities)
and have several structural limitations that significantly impair marketing ability in the
very competitive marketplace in Florida. Limitations include multiple three- and four-bed wards (a total of 61 wards
representing 223 licensed beds, or approximately 53% of the total licensed beds for these facilities) and limited
common areas, parking and therapy space. Three of the 4 buildings are substantially landlocked,
without the ability to expand to eliminate
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##### Table of Contents



the structural challenges. The fourth building is in an economically challenged area of town. The
Company believes these buildings will require replacement or extensive capital investment to remain
competitive over the next five to ten years. In the near term, prospects for future reimbursement
increases in Florida are limited, as the state of Florida faces multi-billion dollar deficits.In 2009, the average occupancy of these facilities was 78.5%, compared to 76.7% for the Company as a whole.
Medicare census was 8.7% of total census for these four facilities, compared to 12.7% for the Company as a whole. As a result
of the low Medicare census, operating margins for these facilities are lower than average, and operating expneses were 82.2% of revenue for these
four facilities, compared to an average of 79.5% for the Company as a whole.The Company initiated discussions with Omega to indicate the terms under which it would be prepared
to enter into a long term extension of this lease at a reduced lease rate and participation in the
long term project of replacing these facilities with a competitive offering. Omega elected to
evaluate the market and requested a short term extension of the existing lease to pursue
opportunities. The Company agreed to extend the lease through August 2010 on a monthly basis until a replacement
tenant or buyer can be put into place. When a new operator is in place the lease will terminate
and the Company will cooperate in an orderly transition to the new operator. These facilities are
included in continuing operations at December 31, 2009. The Company will reclassify the operations
of these facilities to discontinued operations once the transfer is completed.
 8.
    
    NOTE RECEIVABLE
 On June 30, 2009, the Company collected the balance due on a note receivable denominated in
Canadian dollars issued in the sale of its Canadian subsidiary in 2004. The Company received
installments totaling approximately $4.9 million Canadian ($4,184,000 US) during May and June 2009.
In accordance with the Companys bank term loan agreement, $1.8 million (US) of the proceeds
received in collection on this note receivable were paid on the principal balance of the Companys
long-term debt obligations. The note receivable resulted from the May 2004 sale of the Companys
Canadian subsidiary, Diversicare Canada Management Services Co., Inc. (DCMS), to DCMS Holding,
Inc. (Holding), a privately-owned Ontario corporation. The sales price was $16.5 million
Canadian which was approximately $11.8 million US at the May 11, 2004 exchange rate. All U.S.
dollar amounts parenthetically referenced are also at the May 11, 2004 exchange rate.
Approximately $8.5 million Canadian ($6.1 million US) was received at closing, with the balance,
$8.0 million Canadian ($5.7 million US), originally scheduled to be received in annual installments
of $600,000 Canadian ($428,000 US) on the anniversary of the closing for the first four years and a
final installment of $5.6 million Canadian ($4.0 million US) on the fifth anniversary of closing.
The installment portion of the purchase price was evidenced by a promissory note that was
discounted to estimated fair value and was initially recorded in the accompanying balance sheet at
$4.7 million US. The Company received payments of $4,184,000, $765,000 and $700,000 in 2009, 2008
and 2007, respectively. Foreign currency transaction gain or loss related to this note was
recorded as other income or expense in the Consolidated Statements of Income.
 9.
    
    SHAREHOLDERS EQUITY, STOCK PLANS AND PREFERRED STOCK
 Shareholders Rights PlanOn August 14, 2009, the Companys Board of Directors amended its current Amended and Restated
Rights Agreement (the Rights Agreement) which was originally adopted in 1995. The amendment
changes the definition of Acquiring Person to be such person that acquires 20% or more of the
shares of Common Stock of the Company up from the 15% that previously defined an acquiring person.
On August 1, 2008, another amendment was approved which provided for an increase of the exercise
price of the rights under the Rights Agreement (the Rights) to $50 from $15 and for the extension
of the expiration date of the Rights to August 2, 2018.In addition, the amendment includes a share exchange feature that provides the Companys Board of
Directors the option of exchanging, in whole or in part, each Right, other than those of the
hostile acquiring holder, for one share of the Companys common stock. This provision is intended
to avoid requiring Rights holders to pay cash to exercise their Rights and to alleviate the
uncertainty as to whether holders will exercise their Rights. The Plan is designed to protect the
Companys shareholders from unfair or coercive takeover tactics. The rights may be exercised only
upon the occurrence of certain triggering events, including the acquisition of, or a tender offer
for, 20.0% or more of the Companys common stock without the Companys prior approval.
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##### Table of Contents



Stock-Based Compensation PlansThe Company follows the FASBs guidance on Stock Compensationto account for share-based
payments granted to employees.In 1994, the Company adopted the 1994 Incentive and Nonqualified Stock Option Plan for Key
Personnel (the Key Personnel Plan) and the 1994 Nonqualified Stock Option Plan for the Directors
(the Director Plan). Under both plans, the option exercise price equals the stocks closing
market price on the day prior to the grant date. The maximum term of any option granted pursuant
to either the Key Personnel Plan or to the Director Plan is ten years. In accordance with their
terms, the Key Personnel Plan and the Director Plan expired in May 2004 and no further grants can
be made under these plans.In December 2005, the Compensation Committee of the Board of Directors adopted the 2005 Long-Term
Incentive Plan (the 2005 Plan). The 2005 Plan allows the Company to issue stock options and other
share and cash based awards. Under the 2005 Plan, 700,000 shares of the Companys common stock have
been reserved for issuance upon exercise of equity awards granted thereunder. All options under
this plan expire 10 years from the date the shares were authorized by the Board of Directors.During 2009, 2008 and 2007, the Compensation Committee of the Board of Directors approved the grant
of Stock Only Stock Appreciation Rights (SOSARs) at the market price of the Companys common
stock on the date. The SOSARs vest one-third on the first, second and third anniversaries of the
grant date. The SOSARs are valued and recorded in the same manner as stock options, and will be
settled with issuance of new stock for the difference between the market price on the date of
exercise and the exercise price.In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel
(Stock Purchase Plan). The Stock Purchase Plan provides for the granting of rights to purchase
shares of the Companys common stock to directors and officers and is administered by the
Compensation Committee of the Board of Directors. The maximum number of shares of the Companys
common stock to be authorized and reserved for issuance under the Stock Purchase Plan is 150,000
shares, subject to equitable adjustment as set forth in the Stock Purchase Plan.The Stock Purchase Plan allows participants to elect to utilize a specified portion of base salary,
annual cash bonus, or director compensation to purchase restricted shares or restricted share units
(RSUs) at a price equal to 85% of the fair market value of a share of the Companys common stock
on the date on which such restricted shares or restricted share units are purchased.The restriction period for restricted shares or restricted share units issued under the Stock
Purchase Plan is generally two years from the date of purchase. During the restriction period the
shares will have all rights of other shares including voting rights and the rights to receive
dividends, however, the restricted share certificates will not be delivered to the shareholder and
the shares cannot be sold, assigned or disposed of during the restriction period. No grants of
restricted shares or restricted share units can be made under the Stock Purchase Plan after April
25, 2018.During 2009 and 2008, several of the Companys officers elected to use a percentage of their annual
bonus to purchase RSUs under the Stock Purchase Plan. In March 2009, the Company issued a total
of 36,896 RSUs to twenty employees in lieu of paying a total of $76,000 in cash to such employees.
Unrestricted shares of common stock will be issued in exchange for the RSUs in March 2011,
subject to the conditions of the Stock Purchase Plan. RSU expense is recorded as annual bonus
amounts are recorded during the year earned. The discount on RSUs issued is 15% of the share
price on the date the RSUs are issued and is amortized to expense over the restriction period.The Company recorded non-cash stock-based compensation expense for equity grants and RSUs issued
under the Plans of $689,000, $867,000 and $648,000 during the years ended December 31, 2009, 2008
and 2007, respectively. Such amounts are included as components of general and administrative
expense or operating expense based upon the classification of cash compensation paid to the related
employees. As of December 31, 2009, there was $317,000 (including $9,000 related to non-vested
RSUs) in unrecognized compensation costs related to stock-based compensation to be recognized over
the applicable remaining vesting periods. The Company estimated the total recognized and
unrecognized compensation using the Black-Scholes-Merton equity grant valuation model.
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##### Table of Contents



The table below shows the weighted average assumptions the Company used to develop the fair value
estimates under its option valuation model.
 Year EndedDecember 31,2009
    
    
    2008
    
    
    2007Expected volatility (range)
    
    
    95% - 111
    %
    
    
    113% - 122
    %
    
    
    119% - 143
    %Risk free interest rate (range)
    
    
    2.02% - 2.40
    %
    
    
    2.49% - 3.43
    %
    
    
    3.96% - 4.68
    %Expected dividends
    
    
    
    
    
    
    
    
    
    
    Weighted average expected term (years)
    
    
    6.0
    
    
    
    6.0
    
    
    
    6.0
 In computing the fair value estimates using the Black-Scholes-Merton valuation model, the Company
took into consideration the exercise price of the equity grants and the market price of the
Companys stock on the date of grant. The Company used an expected volatility that equals the
historical volatility over the most recent period equal to the expected life of the equity grants.
The risk free interest rate is based on the U.S. treasury yield curve in effect at the time of
grant. The Company used an expected dividend yield of zero since prior to these grants being
issued, it had not paid cash dividends on its common stock.In computing the fair value of these SOSARs, the Company estimated the SOSARs expected term based
on the average of the vesting term and the original contractual terms of the grants, consistent
with the Securities and Exchange Commissions interpretive guidance often referred to as the
Simplified Method. The Company continues to use the Simplified Method since the Companys
exercise history is not representative of the expected term of the SOSARs granted in 2009. The
Companys recent exercise history is primarily from options granted in 2005 that were vested at
grant date and were significantly in-the-money due to an increase in stock price during the period
between grant date and formal approval by shareholders, and from older options granted several
years ago that had fully vested.The table below describes the resulting weighted average grant date fair values calculated as well
as the intrinsic value of options exercised under the Companys equity awards during each of the
following years:
 Year EndedDecember 31,2009
    
    
    2008
    
    
    2007Weighted Average grant date fair value
    
    $
    1.91
    
    
    $
    9.39
    
    
    $
    10.55Total Intrinsic Value of Options Exercised
    
    $
    320,000
    
    
    $
    26,000
    
    
    $
    105,000
 The following table summarizes information regarding stock options and SOSAR grants outstanding as
of December 31, 2009:
 WeightedRange of
    
    Average
    
    
    OptionsExercise Prices
    
    Exercise Prices
    
    
    Outstanding$10.38 to $11.59
    
    $
    11.19
    
    
    
    228,000$0.35 to $5.44
    
    $
    3.99
    
    
    
    375,000603,000
 As of December 31, 2009, the outstanding equity grants have a weighted average remaining life of
6.92 years and those outstanding equity grants that are exercisable have a weighted average
remaining life of 5.98 years. During the year ended December 31, 2009 approximately 63,000 option
grants were exercised under these plans, resulting in proceeds of $3,000.
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##### Table of Contents



Summarized activity of the equity compensation plans is presented below:
 WeightedAverageShares
    
    
    Exercise PriceOutstanding,
December 31, 2008
    
    
    548,000
    
    
    $
    6.78Granted
    
    
    125,000
    
    
    
    3.38Exercised
    
    
    (63,000
    )
    
    
    0.40Expired or cancelled
    
    
    (7,000
    )
    
    
    9.51Outstanding,
December 31, 2009
    
    
    603,000
    
    
    $
    6.72Exercisable, December 31, 2009
    
    
    383,000
    
    
    $
    6.69
 As of December 31, 2009, the aggregate intrinsic value for the Companys equity grants
outstanding and equity grants exercisable were $591,000 and $386,000, respectively.Series A Preferred StockThe Company is authorized to issue up to 200,000 shares of Series A Preferred Stock. The
Companys Board of Directors is authorized to establish the terms and rights of each series,
including the voting powers, designations, preferences, and other special rights, qualifications,
limitations, or restrictions thereof.Series B and Series C Preferred StockAs part of the consideration paid to Omega for restructuring the terms of the Omega Master
Lease in November 2000, the Company issued to Omega 393,658 shares of the Companys Series B
Redeemable Convertible Preferred Stock (Series B Preferred Stock) with a stated value of
$3,300,000 and an annual dividend rate of 7% of the stated value. In October 2006, the Company and
Omega entered into a Restructuring Stock Issuance and Subscription Agreement (Restructuring
Agreement) to restructure the Series B Preferred Stock, eliminating the option of Omega to convert
the Series B Preferred Stock into shares of Advocat common stock. Advocat and Omega also entered
into a Third Amendment to Consolidated Amended and Restated Master Lease (Lease Amendment) to
extend the term of its lease covering 28 nursing centers it leased from Omega.At the time of the Restructuring Agreement, the Series B Preferred Stock had a recorded value
(including accrued dividends) of approximately $4,918,000 and was convertible into approximately
792,000 shares of common stock. The Company issued 5,000 shares of a new Series C Preferred Stock
to Omega in exchange for the 393,658 shares of Series B Preferred Stock held by Omega. The new
Series C Preferred Stock has a stated value of approximately $4,918,000 and an annual dividend rate
of 7% of its stated value payable quarterly in cash. The Series C Preferred Stock is not
convertible, but is redeemable at its stated value at Omegas option after September 30, 2010, and
is redeemable at its stated value at the Companys option after September 30, 2007, subject to
certain limitations. In connection with the termination of the conversion feature, the Company
agreed to pay Omega an additional $687,000 per year under the Lease Amendment.The Company recorded the fair value of the elimination of the conversion feature as a reduction in
Paid In Capital with an offsetting increase to record a premium on the Series C Preferred Stock.
As a result, the Series C Preferred Stock was initially recorded at a total value of $11,619,000,
equal to the stated value of the Series B Preferred Stock, $4,918,000, plus the negotiated value of
the conversion feature, $6,701,000. The additional rental payments of $687,000 annually were
discounted over the twelve year term of the renewal so that the net present value of the payments
equals the $6,701,000 preferred stock premium. When payments are made, the preferred stock premium
is reduced, interest expense is recorded and cash is reduced.
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##### Table of Contents



The Series C Preferred Stock shares have preference in liquidation but do not have voting rights.
The total redemption value is equal to the stated value plus any accrued but unpaid dividends. The
liquidation preference value is equal to the redemption value.
 Series C Redeemable Preferred Stock2009
    
    
    2008
    
    
    2007Balance at the beginning of the period
    
    $
    7,891,000
    
    
    $
    9,590,000
    
    
    $
    11,289,000Amortization of preferred stock premium
    
    
    (1,699,000
    )
    
    
    (1,699,000
    )
    
    
    (1,699,000
    )Balance at the end of the period
    
    $
    6,192,000
    
    
    $
    7,891,000
    
    
    $
    9,590,000
 10. NET INCOME (LOSS) PER COMMON SHARE
 Information with respect to the calculation of basic and diluted net income ( loss) per common
share is presented below:
 2009
    
    
    2008
    
    
    2007Basic net income per common shareNet income from continuing operations
    
    $
    2,414,000
    
    
    $
    5,382,000
    
    
    $
    9,096,000Preferred stock dividends
    
    
    (344,000
    )
    
    
    (344,000
    )
    
    
    (344,000
    )Net income from continuing operations
for common stock
    
    
    2,070,000
    
    
    
    5,038,000
    
    
    
    8,752,000Discontinued operations:Operating income, net of taxes
    
    
    187,000
    
    
    
    353,000
    
    
    
    299,000Loss on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    (8,000
    )Income from discontinued operations
    
    
    187,000
    
    
    
    353,000
    
    
    
    291,000Net income for common stock
    
    $
    2,257,000
    
    
    $
    5,391,000
    
    
    $
    9,043,000Basic weighted average common shares outstanding
    
    
    5,678,000
    
    
    
    5,693,000
    
    
    
    5,870,000Basic net income per common share:Net income from continuing operations
    
    $
    0.37
    
    
    $
    0.89
    
    
    $
    1.49Income from discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05Basic net income per common share
    
    $
    0.40
    
    
    $
    0.95
    
    
    $
    1.54
 2009
    
    
    2008
    
    
    2007Diluted net income per common shareNet income from continuing operations
for diluted net income per common share
    
    $
    2,070,000
    
    
    $
    5,038,000
    
    
    $
    8,752,000Discontinued operations:Operating loss, net of taxes
    
    
    187,000
    
    
    
    353,000
    
    
    
    299,000Loss on sale
    
    
    
    
    
    
    
    
    
    
    (8,000
    )Net loss from discontinued operations
    
    
    187,000
    
    
    
    353,000
    
    
    
    291,000Net income for diluted net income per common share
    
    $
    2,257,000
    
    
    $
    5,391,000
    
    
    $
    9,043,000Basic weighted average common shares outstanding
    
    
    5,678,000
    
    
    
    5,693,000
    
    
    
    5,870,000Incremental shares from assumed exercise
of options, SoSARs and Restricted Stock Units
    
    
    119,000
    
    
    
    194,000
    
    
    
    257,000Diluted weighted average common shares outstanding
    
    
    5,797,000
    
    
    
    5,887,000
    
    
    
    6,127,000Diluted net income per common shareNet income from continuing operations
    
    $
    0.36
    
    
    $
    0.86
    
    
    $
    1.43Net income from discontinued operations
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.05Diluted net income per common share
    
    $
    0.39
    
    
    $
    0.92
    
    
    $
    1.48
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11. INCOME TAXES
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Current provision :Federal
    
    $
    1,837,000
    
    
    $
    1,645,000
    
    
    $
    214,000State
    
    
    338,000
    
    
    
    339,000
    
    
    
    873,0002,175,000
    
    
    
    1,984,000
    
    
    
    1,087,000Deferred provision (benefit):Federal
    
    
    (694,000
    )
    
    
    814,000
    
    
    
    4,854,000State
    
    
    16,000
    
    
    
    (39,000
    )
    
    
    71,000(678,000
    )
    
    
    775,000
    
    
    
    4,925,000Provision for income taxes of
continuing operations
    
    $
    1,497,000
    
    
    $
    2,759,000
    
    
    $
    6,012,000
  Year Ended December 31,2009
    
    
    2008
    
    
    2007Provision for federal income taxes
at statutory rates
    
    $
    1,330,000
    
    
    $
    2,768,000
    
    
    $
    5,137,000Provision for state income taxes,
net of federal benefit
    
    
    283,000
    
    
    
    198,000
    
    
    
    604,000Valuation allowance changes
affecting the provision (benefit)
for income taxes
    
    
    (76,000
    )
    
    
    66,000
    
    
    
    42,000Work opportunity tax credits
    
    
    (600,000
    )
    
    
    (654,000
    )
    
    
    Nondeductible expenses
    
    
    516,000
    
    
    
    361,000
    
    
    
    201,000Other
    
    
    44,000
    
    
    
    20,000
    
    
    
    28,000Provision (benefit) for income taxes
    
    $
    1,497,000
    
    
    $
    2,759,000
    
    
    $
    6,012,000
 The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:
 December 31,2009
    
    
    2008Current deferred assets:Allowance for doubtful accounts
    
    $
    1,044,000
    
    
    $
    1,217,000Accrued liabilities
    
    
    4,579,000
    
    
    
    3,486,0005,623,000
    
    
    
    4,703,000Less valuation allowance
    
    
    (243,000
    )
    
    
    (246,000
    )5,380,000
    
    
    
    4,457,000Current deferred liabilities:Prepaid expenses
    
    
    (588,000
    )
    
    
    (490,000
    )$
    4,792,000
    
    
    $
    3,967,000
 F - 23




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##### Table of Contents



December 31,2009
    
    
    2008Noncurrent deferred assets:Net operating loss and other carryforwards
    
    $
    2,032,000
    
    
    $
    2,231,000Deferred lease costs
    
    
    527,000
    
    
    
    594,000Depreciation
    
    
    182,000
    
    
    
    524,000Tax goodwill and intangibles
    
    
    391,000
    
    
    
    1,522,000Stock-based compensation
    
    
    2,144,000
    
    
    
    1,972,000Accrued rent
    
    
    4,059,000
    
    
    
    3,638,000Impairment of long-lived assets
    
    
    355,000
    
    
    
    355,000Noncurrent self-insurance reserves
    
    
    4,749,000
    
    
    
    4,008,00014,439,000
    
    
    
    14,844,000Less valuation allowance
    
    
    (635,000
    )
    
    
    (708,000
    )13,804,000
    
    
    
    14,136,000Noncurrent deferred liabilities:Note receivable
    
    
    
    
    
    
    (237,000
    )$
    13,804,000
    
    
    $
    13,899,000
     F - 24




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##### Table of Contents



2009
    
    
    2008Balance at the beginning of the period
    
    $
    70,000
    
    
    $
    307,000Decreases due to settlement with taxing authorities
    
    
    
    
    
    
    (234,000
    )Changes in tax positions for prior years
    
    
    6,000
    
    
    
    (3,000
    )Balance at the end of the period
    
    $
    76,000
    
    
    $
    70,000
   12. COMMITMENTS AND CONTINGENCIES
 Lease Commitments
  2010
    
    $
    22,285,0002011
    
    
    22,520,0002012
    
    
    23,057,0002013
    
    
    23,624,0002014
    
    
    24,198,000Thereafter
    
    
    483,404,000$
    599,088,000
  Omega Leases
   F - 25




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##### Table of Contents



F - 26




---



##### Table of Contents



Florida Leases
  Insurance Matters
 Professional Liability and Other Liability Insurance
  F - 27




---



##### Table of Contents



Reserve for Estimated Self-Insured Professional Liability Claims-
     Accrual atDecember 31,2009
    
    
    2008Policy Year End:May 31, 2010
    
    $
    3,763,000
    
    
    $
    March 9, 2009
    
    
    8,713,000
    
    
    
    3,837,000March 9, 2008
    
    
    4,377,000
    
    
    
    5,769,000March 9, 2007
    
    
    1,060,000
    
    
    
    3,202,000March 9, 2006
    
    
    357,000
    
    
    
    1,102,0002005 and earlier
    
    
    232,000
    
    
    
    1,049,000$
    18,502,000
    
    
    $
    14,959,000
  Other Insurance
  F - 28




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##### Table of Contents



Employment Agreements
  Health Care Industry and Legal Proceedings
  F - 29




---



##### Table of Contents



Reimbursement
  F - 30




---



##### Table of Contents



F - 31




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##### Table of Contents



13. QUARTERLY FINANCIAL INFORMATION (Unaudited)
  Quarter2009
    
    First
    
    
    Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    73,455,000
    
    
    $
    75,712,000
    
    
    $
    76,737,000
    
    
    $
    76,127,000Professional liability expense(1)
    
    
    3,242,000
    
    
    
    2,955,000
    
    
    
    902,000
    
    
    
    2,033,000Other income(2)
    
    
    549,000
    
    
    
    
    
    
    
    
    
    
    
    Net income from continuing operations
    
    
    292,000
    
    
    
    873,000
    
    
    
    1,075,000
    
    
    
    174,000Income from discontinued operations
    
    
    71,000
    
    
    
    57,000
    
    
    
    57,000
    
    
    
    2,000Net income for common stock
    
    $
    277,000
    
    
    $
    844,000
    
    
    $
    1,046,000
    
    
    $
    90,000Basic net income per common share:Net income from continuing operations
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.02Income from discontinued operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income per common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.18
    
    
    $
    0.02Diluted net income per common share:Net income from continuing
operations
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    0.17
    
    
    $
    0.02Income from discontinued
operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    Net income per common share
    
    $
    0.05
    
    
    $
    0.15
    
    
    $
    0.18
    
    
    $
    0.02
 
 (1)
    
    The Companys quarterly results are significantly affected by the amounts
recorded for professional liability expense, as discussed further in Note 12. The amount
of expense recorded for professional liability in each quarter of 2009 is set forth in the
table above.(2)
    
    During the first quarter of 2009, as discussed further in Note 3, the Company
reached an agreement with CMS to settle for an amount less than the amounts previously
accrued, resulting in a gain on settlement of $549,000 that was recorded as other income. F-32




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##### Table of Contents



Quarter2008
    
    First
    
    

Second
    
    
    Third
    
    
    FourthNet revenues
    
    $
    71,157,000
    
    
    $
    70,562,000
    
    
    $
    71,931,000
    
    
    $
    73,957,000Professional liability expense
(benefit)(1)
    
    
    (1,043,000
    )
    
    
    1,401,000
    
    
    
    278,000
    
    
    
    1,022,000Net income from continuing
operations
    
    
    3,006,000
    
    
    
    608,000
    
    
    
    594,000
    
    
    
    1,174,000Income from discontinued
operations
    
    
    83,000
    
    
    
    82,000
    
    
    
    76,000
    
    
    
    112,000Net income for common stock
    
    $
    3,003,000
    
    
    $
    604,000
    
    
    $
    584,000
    
    
    $
    1,200,000Basic net income per common share:Net income from continuing
operations
    
    $
    0.51
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.19Income from discontinued
operations
    
    
    0.01
    
    
    
    0.02
    
    
    
    0.01
    
    
    
    0.02Net income per common share
    
    $
    0.52
    
    
    $
    0.11
    
    
    $
    0.10
    
    
    $
    0.21Diluted net income per common share:Net income from continuing
operations
    
    $
    0.49
    
    
    $
    0.09
    
    
    $
    0.09
    
    
    $
    0.19Income from discontinued
operations
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.01
    
    
    
    0.02Net 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




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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, 2009: Allowance
for doubtful
accounts
    
    $
    3,279
    
    
    $
    2,181
    
    
    $
    12
    
    
    $
    
    
    
    $
    (2,609
    )
    
    $
    2,863Year ended December
31, 2008: Allowance
for doubtful
accounts
    
    $
    2,158
    
    
    $
    2,334
    
    
    $
    9
    
    
    $
    
    
    
    $
    (1,222
    )
    
    $
    3,279Year ended December
31, 2007: Allowance
for doubtful
accounts
    
    $
    2,122
    
    
    $
    1,130
    
    
    $
    (18
    )
    
    $
    
    
    
    $
    (1,076
    )
    
    $
    2,158
 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, 2009:Professional
Liability Reserve
    
    $
    14,959
    
    
    $
    8,429
    
    
    $
    
    
    
    $
    
    
    
    $
    (4,886
    ) (3)
    
    $
    18,502Workers Compensation
Reserve
    
    $
    492
    
    
    $
    489
    
    
    $
    
    
    
    $
    
    
    
    $
    (509
    )
    
    $
    472Health Insurance
Reserve
    
    $
    1,230
    
    
    $
    9,944
    
    
    $
    
    
    
    $
    
    
    
    $
    (10,053
    )
    
    $
    1,121Year 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
    )
    
    $
    1,138
 (1)
    
    Amounts charged to costs and expenses are negative during this year 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




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits3.1
    
    Certificate of Incorporation of the Registrant (incorporated
by reference to Exhibit 3.1 to the Companys Registration
Statement No. 33-76150 on Form S-1).3.2
    
    Certificate of Designation of Registrant (incorporated by
reference to Exhibit 3.5 to the Companys quarterly report on
Form 10-Q for the quarter ended September 30, 2006).3.3
    
    Bylaws of the Company (incorporated by reference to Exhibit
3.2 to the Companys Registration Statement No. 33-76150 on
Form S-1).3.4
    
    Bylaw Amendment adopted November 5, 2007 (incorporated by
reference to Exhibit 3.4 to the Companys annual report on
Form 10-K for the year ended December 31, 2007).3.5
    
    Amendment to Certificate of Incorporation dated March 23, 1995
(incorporated by reference to Exhibit A of Exhibit 1 to the
Companys Form 8-A filed March 30, 1995).3.6
    
    Certificate of Designation of Registrant (incorporated by
reference to Exhibit 3.4 to the Companys quarterly report on
Form 10-Q for the quarter ended March 31, 2001).4.1
    
    Form of Common Stock Certificate (incorporated by reference to
Exhibit 4 to the Companys Registration Statement No. 33-76150
on Form S-1).4.2
    
    Amended and Restated Rights Agreement dated as of December 7,
1998 (incorporated by reference to Exhibit 1 to Form 8-A/A
filed December 7, 1998).4.3
    
    Amendment No. 1 to the Amended and Restated Rights Agreement,
dated March 19, 2005, by and between Advocat Inc. and SunTrust
Bank, as Rights Agent (incorporated by reference to Exhibit 2
to Form 8-A/A filed on March 24, 2005).4.4
    
    Second Amendment to the Amended and Restated Rights Agreement,
dated August 15, 2008, by and between Advocat Inc. and
ComputerShare Trust Company, N.A., as successor to SunTrust
Bank (incorporated by reference to Exhibit 3 to Form 8-A/A
filed on August 18, 2008).4.5
    
    Third Amendment to Amended and Restated Rights Agreement,
dated August 14, 2009, between Advocat, Inc. and Computershare
Trust Company, N.A, as successor to SunTrust Bank,
(incorporated by reference to Exhibit 4 to the Companys
Registration Statement on Form 8-A/A filed on August 14,
2009).*10.1
    
    1994 Incentive and Non-Qualified Stock Plan for Key Personnel
(incorporated by reference to Exhibit 10.3 to the Companys
Registration Statement No. 33-76150 on Form S-1).*10.2
    
    1994 Non-Qualified Stock Option Plan for Directors
(incorporated by reference to Exhibit 10.4 to the Companys
Registration Statement No. 33-76150 on Form S-1).*10.3
    
    Master Agreement and Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.6 to the Companys
Registration Statement No. 33-76150 on Form S-1).10.4
    
    Form of Director Indemnification Agreement (incorporated by
reference to Exhibit 10.8 to the Companys Registration
Statement No. 33-76150 on Form S-1).10.5
    
    Advocat Inc. Guaranty in favor of Omega Healthcare Investors,
Inc. dated May 10, 1994 (incorporated by reference to Exhibit
10.11 to the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 1994).*10.6
    
    Amendment to 1994 Incentive and Non-Qualified Stock Plan for
Key Personnel (incorporated by reference to Exhibit A to the
Companys Schedule 14A filed March 31, 1997).*10.7
    
    Amendment to 1994 Non-Qualified Stock Option Plan for
Directors (incorporated by reference to Exhibit A to the
Companys Schedule 14A filed April 19, 1996).




---



##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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




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##### Table of Contents



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