UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended: September 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _________ to ________.
 Commission file No.: 1-12996
 Advocat Inc.
 (exact name of registrant as specified in its charter)
 Delaware
    
    62-1559667(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification No.)
 1621 Galleria Boulevard, Brentwood, TN
    
    37027(Address of principal executive offices)
    
    (Zip Code)
 (615) 771-7575  (Registrants
telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report.)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and a smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(Do not check if a smaller reporting company)
    
    Smaller reporting company þ
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
 5,742,436  (Outstanding shares of
the issuers common stock as of October 29, 2010)




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##### 



Part I. FINANCIAL INFORMATION
 ITEM 1    FINANCIAL STATEMENTS
 ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,388
    
    
    $
    8,609Receivables, less allowance for doubtful
accounts of $2,940 and $2,566, respectively
    
    
    23,078
    
    
    
    21,559Other receivables
    
    
    104
    
    
    
    1,406Prepaid expenses and other current assets
    
    
    3,636
    
    
    
    2,498Deferred income taxes
    
    
    4,698
    
    
    
    4,792Current assets of discontinued operations
    
    
    701
    
    
    
    2,870Total current assets
    
    
    41,605
    
    
    
    41,734PROPERTY AND EQUIPMENT, at cost
    
    
    76,940
    
    
    
    76,270Less accumulated depreciation
    
    
    (40,738
    )
    
    
    (40,461
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,553Property and equipment, net
    
    
    37,657
    
    
    
    37,362OTHER ASSETS:Deferred income taxes
    
    
    13,395
    
    
    
    13,804Deferred financing and other costs, net
    
    
    846
    
    
    
    639Other assets
    
    
    1,810
    
    
    
    1,963Acquired leasehold interest, net
    
    
    9,476
    
    
    
    9,764Total other assets
    
    
    25,527
    
    
    
    26,170$
    104,789
    
    
    $
    105,266
   2




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##### 



ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    20,804
    
    
    $
    2,278Trade accounts payable
    
    
    2,768
    
    
    
    4,537Accrued expenses:Payroll and employee benefits
    
    
    11,218
    
    
    
    9,314Current portion of self-insurance reserves
    
    
    7,607
    
    
    
    7,860Other current liabilities
    
    
    4,018
    
    
    
    4,171Current liabilities of discontinued operations
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    46,415
    
    
    
    29,400NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    3,716
    
    
    
    22,551Self-insurance reserves, less current portion
    
    
    12,041
    
    
    
    12,235Other noncurrent liabilities
    
    
    16,794
    
    
    
    15,195Total noncurrent liabilities
    
    
    32,551
    
    
    
    49,981COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, stated value of $4,918 including premium
of $1,274 at December 31, 2009
    
    
    4,918
    
    
    
    6,192SHAREHOLDERS 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, 5,974,000 and 5,949,000 shares issued, and
5,742,000 and 5,717,000 shares outstanding,
respectively
    
    
    60
    
    
    
    59Treasury stock at cost, 232,000 shares of common stock
    
    
    (2,500
    )
    
    
    (2,500
    )Paid-in capital
    
    
    17,935
    
    
    
    17,647Retained earnings
    
    
    5,410
    
    
    
    4,487Total shareholders equity
    
    
    20,905
    
    
    
    19,693$
    104,789
    
    
    $
    105,266
  3




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##### 



ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share amounts, unaudited)
 Three Months Ended September 30,2010
    
    
    2009PATIENT REVENUES, net
    
    $
    72,996
    
    
    $
    70,392EXPENSES:Operating
    
    
    58,534
    
    
    
    56,315Lease
    
    
    5,661
    
    
    
    5,462Professional liability
    
    
    1,684
    
    
    
    817General and administrative
    
    
    4,954
    
    
    
    4,428Depreciation and amortization
    
    
    1,453
    
    
    
    1,382Total expenses
    
    
    72,286
    
    
    
    68,404OPERATING INCOME
    
    
    710
    
    
    
    1,988OTHER INCOME (EXPENSE):Interest income
    
    
    
    
    
    
    5Interest expense
    
    
    (413
    )
    
    
    (456
    )(413
    )
    
    
    (451
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    297
    
    
    
    1,537PROVISION FOR INCOME TAXES
    
    
    (68
    )
    
    
    (600
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    229
    
    
    
    937NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:Operating income (loss), net of taxes of $(5) and $124, respectively
    
    
    (9
    )
    
    
    195DISCONTINUED OPERATIONS
    
    
    (9
    )
    
    
    195NET INCOME
    
    
    220
    
    
    
    1,132PREFERRED STOCK DIVIDENDS
    
    
    (86
    )
    
    
    (86
    )NET INCOME FOR COMMON STOCK
    
    $
    134
    
    
    $
    1,046NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.02
    
    
    $
    0.15Discontinued operations
    
    
    
    
    
    
    0.03$
    0.02
    
    
    $
    0.18Per common share  dilutedContinuing operations
    
    $
    0.02
    
    
    $
    0.15Discontinued operations
    
    
    
    
    
    
    0.03$
    0.02
    
    
    $
    0.18COMMON STOCK DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.055
    
    
    $
    0.05WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,742
    
    
    
    5,676Diluted
    
    
    5,813
    
    
    
    5,747
  4




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##### 



ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Nine Months Ended September 30,2010
    
    
    2009PATIENT REVENUES, net
    
    $
    214,640
    
    
    $
    207,432EXPENSES:Operating
    
    
    170,324
    
    
    
    163,720Lease
    
    
    16,899
    
    
    
    16,207Professional liability
    
    
    4,095
    
    
    
    6,392General and administrative
    
    
    14,719
    
    
    
    13,559Depreciation and amortization
    
    
    4,301
    
    
    
    4,053Total expenses
    
    
    210,338
    
    
    
    203,931OPERATING INCOME
    
    
    4,302
    
    
    
    3,501OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    191Other income
    
    
    
    
    
    
    549Interest income
    
    
    
    
    
    
    159Interest expense
    
    
    (1,224
    )
    
    
    (1,423
    )Debt retirement costs
    
    
    (127
    )
    
    
    (1,351
    )
    
    
    (524
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    2,951
    
    
    
    2,977PROVISION FOR INCOME TAXES
    
    
    (1,028
    )
    
    
    (1,141
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,923
    
    
    
    1,836NET INCOME FROM DISCONTINUED OPERATIONS:Operating income, net of taxes of $196 and $375, respectively
    
    
    359
    
    
    
    589Loss on disposal, net of taxes of $(96) and $0, respectively
    
    
    (177
    )
    
    
    DISCONTINUED OPERATIONS
    
    
    182
    
    
    
    589NET INCOME
    
    
    2,105
    
    
    
    2,425PREFERRED STOCK DIVIDENDS
    
    
    (258
    )
    
    
    (258
    )NET INCOME FOR COMMON STOCK
    
    $
    1,847
    
    
    $
    2,167NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.29
    
    
    $
    0.28Discontinued operations
    
    
    0.03
    
    
    
    0.10$
    0.32
    
    
    $
    0.38Per common share  dilutedContinuing operations
    
    $
    0.28
    
    
    $
    0.27Discontinued operations
    
    
    0.03
    
    
    
    0.11$
    0.31
    
    
    $
    0.38COMMON STOCK DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.16
    
    
    $
    0.15WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,729
    
    
    
    5,675Diluted
    
    
    5,868
    
    
    
    5,742
  5




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##### 



ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)
 Nine Months Ended September 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,105
    
    
    $
    2,425Discontinued operations
    
    
    182
    
    
    
    589Net income from continuing operations
    
    
    1,923
    
    
    
    1,836Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    4,301
    
    
    
    4,053Provision for doubtful accounts
    
    
    1,617
    
    
    
    1,589Deferred income tax provision (benefit)
    
    
    488
    
    
    
    (349
    )Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    (81
    )
    
    
    1,852Stock based compensation
    
    
    487
    
    
    
    556Amortization of deferred balances
    
    
    167
    
    
    
    283Provision for leases in excess of cash payments
    
    
    669
    
    
    
    1,029Non-cash gain on settlement of contingent liability
    
    
    
    
    
    
    (549
    )Payment from lessor for leasehold improvement
    
    
    120
    
    
    
    Foreign currency transaction gain
    
    
    
    
    
    
    (191
    )Debt retirement costs
    
    
    127
    
    
    
    Non-cash interest income
    
    
    
    
    
    
    (41
    )Changes in other assets and liabilities affecting operating
activities:Receivables, net
    
    
    (1,834
    )
    
    
    (3,585
    )Prepaid expenses and other assets
    
    
    (1,076
    )
    
    
    (153
    )Trade accounts payable and accrued expenses
    
    
    (528
    )
    
    
    1,564Net cash provided by continuing operations
    
    
    6,380
    
    
    
    7,894Discontinued operations
    
    
    1,135
    
    
    
    1,649Net cash provided by operating activities
    
    
    7,515
    
    
    
    9,543CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (4,400
    )
    
    
    (4,683
    )Payment for construction in progress  leased center
    
    
    
    
    
    
    (4,813
    )Notes receivable collection
    
    
    
    
    
    
    4,184Deposits and other deferred balances
    
    
    
    
    
    
    59Net cash used by continuing operations
    
    
    (4,400
    )
    
    
    (5,253
    )Discontinued operations
    
    
    (45
    )
    
    
    (184
    )Net cash used in investing activities
    
    
    (4,445
    )
    
    
    (5,437
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (4,119
    )
    
    
    (3,515
    )Proceeds from issuance of debt and capital leases
    
    
    3,810
    
    
    
    Financing costs
    
    
    (451
    )
    
    
    (28
    )Construction allowance receipts  leased center
    
    
    
    
    
    
    4,813Exercise of stock options
    
    
    (47
    )
    
    
    2Proceeds from issuance of restricted share units
    
    
    57
    
    
    
    76Payment of common stock dividends
    
    
    (888
    )
    
    
    (286
    )Payment of preferred stock dividends
    
    
    (258
    )
    
    
    (258
    )Payment for preferred stock restructuring
    
    
    (395
    )
    
    
    (382
    )Net cash (used in) provided by financing activities
    
    
    (2,291
    )
    
    
    422
  6




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##### 



ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Nine Months Ended September 30,2010
    
    
    2009NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    $
    779
    
    
    $
    4,528CASH AND CASH EQUIVALENTS, beginning of period
    
    
    8,609
    
    
    
    7,598CASH AND CASH EQUIVALENTS, end of period
    
    $
    9,388
    
    
    $
    12,126SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts capitalized
    
    $
    1,037
    
    
    $
    1,152Cash payments of income taxes
    
    $
    895
    
    
    $
    1,356
  7




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##### 



ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2010 AND 2009
 BUSINESS
   BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   LONG-TERM DEBT
   8




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##### 



INSURANCE MATTERS
 Professional Liability and Other Liability Insurance-
    Reserve for Estimated Self-Insured Professional Liability Claims-
  9




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##### 



Accrual atSeptember 30,
    
    
    December 31,2010
    
    
    2009Period:May 31, 2011
    
    $
    1,836,000
    
    
    $
    May 31, 2010
    
    
    8,333,000
    
    
    
    3,763,000March 9, 2009
    
    
    5,243,000
    
    
    
    8,713,000March 9, 2008
    
    
    2,170,000
    
    
    
    4,377,000March 9, 2007
    
    
    136,000
    
    
    
    1,060,000March 9, 2006 and earlier
    
    
    584,000
    
    
    
    589,000$
    18,302,000
    
    
    $
    18,502,000
  10




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##### 



Other Insurance
   STOCK-BASED COMPENSATION
    DISCONTINUED OPERATIONS
  11




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##### 



EARNINGS PER COMMON SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.29
    
    
    $
    0.28Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.10Loss on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.10Net income
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    0.32
    
    
    $
    0.38Per common share  dilutedIncome from continuing operations
    
    $
    0.02
    
    
    $
    0.15
    
    
    $
    0.28
    
    
    $
    0.27Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    0.03
    
    
    
    0.06
    
    
    
    0.11Loss on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    0.03
    
    
    
    0.03
    
    
    
    0.11Net income
    
    $
    0.02
    
    
    $
    0.18
    
    
    $
    0.31
    
    
    $
    0.38
  ROSE TERRACE LEASE AGREEMENT
  12




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##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   Divestitures
 Basis of Financial Statements.
 Critical Accounting Policies and Judgments
 
  13




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##### 



Revenue Sources
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Medicaid
    
    $
    39,630
    
    
    
    54.3
    %
    
    $
    38,491
    
    
    
    54.7
    %
    
    $
    115,636
    
    
    
    53.9
    %
    
    $
    111,276
    
    
    
    53.6
    %Medicare
    
    
    21,809
    
    
    
    29.9
    
    
    
    21,438
    
    
    
    30.5
    
    
    
    65,275
    
    
    
    30.4
    
    
    
    65,447
    
    
    
    31.6Managed care
    
    
    1,825
    
    
    
    2.5
    
    
    
    1,815
    
    
    
    2.6
    
    
    
    6,052
    
    
    
    2.8
    
    
    
    5,442
    
    
    
    2.6Private Pay and other
    
    
    9,732
    
    
    
    13.3
    
    
    
    8,648
    
    
    
    12.2
    
    
    
    27,677
    
    
    
    12.9
    
    
    
    25,267
    
    
    
    12.2Total
    
    $
    72,996
    
    
    
    100.0
    %
    
    $
    70,392
    
    
    
    100.0
    %
    
    $
    214,640
    
    
    
    100.0
    %
    
    $
    207,432
    
    
    
    100.0
    %
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Medicaid
    
    
    2,901
    
    
    
    68.7
    %
    
    
    2,883
    
    
    
    69.9
    %
    
    
    2,890
    
    
    
    68.9
    %
    
    
    2,842
    
    
    
    69.5
    %Medicare
    
    
    541
    
    
    
    12.8
    
    
    
    526
    
    
    
    12.7
    
    
    
    551
    
    
    
    13.1
    
    
    
    544
    
    
    
    13.3Managed care
    
    
    48
    
    
    
    1.1
    
    
    
    48
    
    
    
    1.2
    
    
    
    56
    
    
    
    1.3
    
    
    
    50
    
    
    
    1.2Private Pay and other
    
    
    733
    
    
    
    17.4
    
    
    
    667
    
    
    
    16.2
    
    
    
    699
    
    
    
    16.7
    
    
    
    652
    
    
    
    16.0Total
    
    
    4,223
    
    
    
    100.0
    %
    
    
    4,124
    
    
    
    100.0
    %
    
    
    4,196
    
    
    
    100.0
    %
    
    
    4,088
    
    
    
    100.0
    %
  Health Care Industry
  14




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##### 



Medicare and Medicaid Reimbursement
  Medicare
   15




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##### 



Therapy Services.
  Supply Services.
 Medicaid
  16




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##### 



Licensure and other Health Care Laws
  17




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##### 



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)
    
    $
    25,830
    
    
    $
    21,782
    
    
    $
    4,048
    
    
    $
    
    
    
    $
    Settlement obligations (2)
    
    $
    2,061
    
    
    $
    2,061
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    4,918
    
    
    $
    4,918
    
    
    $
    
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    5,494
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    2,059Operating leases
    
    $
    583,525
    
    
    $
    22,436
    
    
    $
    46,470
    
    
    $
    48,769
    
    
    $
    465,850Required capital expenditures under
mortgage loans and operating leases (5)
    
    $
    21,717
    
    
    $
    541
    
    
    $
    621
    
    
    $
    621
    
    
    $
    19,934Total
    
    $
    643,545
    
    
    $
    52,425
    
    
    $
    52,513
    
    
    $
    50,764
    
    
    $
    487,843
 
 (1)
    
    Long-term debt obligations include scheduled future payments of principal and
interest of long-term debt and amounts outstanding on our revolving line of credit and
capital lease obligations.(2)
    
    Settlement obligations relate to professional liability cases that will be paid
within the next twelve months. The liabilities are included in our current portion of
self insurance reserves.(3)
    
    Series C Preferred Stock equals the redemption value at the preferred shareholders
earliest redemption date.(4)
    
    Payments to Omega for the elimination of the preferred stock conversion feature in
connection with restructuring the preferred stock and master lease agreements. Monthly
payments of approximately $57,000 will be made through the end of the initial lease
period that ends in September 2018.(5)
    
    Includes annual expenditure requirements for capital maintenance under mortgage loan
covenants and annual capital expenditure requirements under operating leases.  18




---



##### 



Results of Operations
   Three Months Ended September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    72,996
    
    
    $
    70,392
    
    
    
    2,604
    
    
    
    3.7EXPENSES:Operating
    
    
    58,534
    
    
    
    56,315
    
    
    
    2,219
    
    
    
    3.9Lease
    
    
    5,661
    
    
    
    5,462
    
    
    
    199
    
    
    
    3.6Professional liability
    
    
    1,684
    
    
    
    817
    
    
    
    867
    
    
    
    106.1General and administrative
    
    
    4,954
    
    
    
    4,428
    
    
    
    526
    
    
    
    11.9Depreciation and amortization
    
    
    1,453
    
    
    
    1,382
    
    
    
    71
    
    
    
    5.1Total expenses
    
    
    72,286
    
    
    
    68,404
    
    
    
    3,882
    
    
    
    5.7OPERATING INCOME
    
    
    710
    
    
    
    1,988
    
    
    
    (1,278
    )
    
    
    (64.3
    )OTHER INCOME (EXPENSE):Interest income
    
    
    
    
    
    
    5
    
    
    
    (5
    )
    
    
    (100.0
    )Interest expense
    
    
    (413
    )
    
    
    (456
    )
    
    
    43
    
    
    
    9.4(413
    )
    
    
    (451
    )
    
    
    38
    
    
    
    8.4INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    297
    
    
    
    1,537
    
    
    
    (1,240
    )
    
    
    (80.7
    )PROVISION FOR INCOME TAXES
    
    
    (68
    )
    
    
    (600
    )
    
    
    532
    
    
    
    88.7NET INCOME FROM CONTINUING OPERATIONS
    
    $
    229
    
    
    $
    937
    
    
    
    (708
    )
    
    
    (75.6
    )
 Nine Months Ended September 30,(in thousands)
    
    2010
    
    
    2009
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    214,640
    
    
    $
    207,432
    
    
    
    7,208
    
    
    
    3.5EXPENSES:Operating
    
    
    170,324
    
    
    
    163,720
    
    
    
    6,604
    
    
    
    4.0Lease
    
    
    16,899
    
    
    
    16,207
    
    
    
    692
    
    
    
    4.3Professional liability
    
    
    4,095
    
    
    
    6,392
    
    
    
    (2,297
    )
    
    
    (35.9
    )General and administrative
    
    
    14,719
    
    
    
    13,559
    
    
    
    1,160
    
    
    
    8.6Depreciation and amortization
    
    
    4,301
    
    
    
    4,053
    
    
    
    248
    
    
    
    6.1Total expenses
    
    
    210,338
    
    
    
    203,931
    
    
    
    6,407
    
    
    
    3.1OPERATING INCOME
    
    
    4,302
    
    
    
    3,501
    
    
    
    801
    
    
    
    22.9OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    191
    
    
    
    (191
    )
    
    
    (100.0
    )Other income
    
    
    
    
    
    
    549
    
    
    
    (549
    )
    
    
    (100.0
    )Interest income
    
    
    
    
    
    
    159
    
    
    
    (159
    )
    
    
    (100.0
    )Interest expense

    
    
    (1,224
    )
    
    
    (1,423
    )
    
    
    199
    
    
    
    14.0Debt retirement costs
    
    
    (127
    )
    
    
    
    
    
    
    (127
    )
    
    
    (1,351
    )
    
    
    (524
    )
    
    
    (827
    )
    
    
    157.8INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    2,951
    
    
    
    2,977
    
    
    
    (26
    )
    
    
    (0.9
    )PROVISION FOR INCOME TAXES
    
    
    (1,028
    )
    
    
    (1,141
    )
    
    
    113
    
    
    
    9.9NET INCOME FROM CONTINUING OPERATIONS
    
    $
    1,923
    
    
    $
    1,836
    
    
    
    87
    
    
    
    4.7
 19




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##### 



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percentage of Net Revenues
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    80.2
    
    
    
    80.0
    
    
    
    79.4
    
    
    
    78.9Lease
    
    
    7.7
    
    
    
    7.8
    
    
    
    7.9
    
    
    
    7.8Professional liability
    
    
    2.3
    
    
    
    1.2
    
    
    
    1.9
    
    
    
    3.1General and administrative
    
    
    6.8
    
    
    
    6.3
    
    
    
    6.8
    
    
    
    6.5Depreciation and amortization
    
    
    2.0
    
    
    
    1.9
    
    
    
    2.0
    
    
    
    2.0Total expenses
    
    
    99.0
    
    
    
    97.2
    
    
    
    98.0
    
    
    
    98.3OPERATING
INCOME OTHER INCOME (EXPENSE):
    
    
    1.0
    
    
    
    2.8
    
    
    
    2.0
    
    
    
    1.7Foreign currency transaction gain
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.3Interest income
    
    
    
    
    
    
    
    
    
    
    (0.5
    )
    
    
    0.1Interest expense
    
    
    (0.6
    )
    
    
    (0.6
    )
    
    
    (0.1
    )
    
    
    (0.7
    )(0.6
    )
    
    
    (0.6
    )
    
    
    (0.6
    )
    
    
    (0.2
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    0.4
    
    
    
    2.2
    
    
    
    1.4
    
    
    
    1.5PROVISION FOR INCOME TAXES
    
    
    (0.1
    )
    
    
    (0.9
    )
    
    
    (0.5
    )
    
    
    (0.6
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    0.3
    %
    
    
    1.3
    %
    
    
    0.9
    %
    
    
    0.9
    %
 Three Months Ended September 30, 2010 Compared With Three Months Ended September 30, 2009
 Patient Revenues
   Three Months EndedSeptember 30,2010
    
    2009Skilled nursing occupancy
    
    
    78.7
    %
    
    
    77.0
    %Medicare census as percent of total
    
    
    12.8
    %
    
    
    12.7
    %Managed care census as percent of total
    
    
    1.1
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    29.9
    %
    
    
    30.5
    %Medicaid revenues as percent of total
    
    
    54.3
    %
    
    
    54.7
    %Managed care revenues as percent of total
    
    
    2.5
    %
    
    
    2.6
    %Medicare average rate per day
    
    $
    388.37
    
    
    $
    401.88Medicaid average rate per day
    
    $
    148.21
    
    
    $
    144.96Managed care average rate per day
    
    $
    394.11
    
    
    $
    379.91
 20




---



##### 



Operating expense
       Lease expense
  21




---



##### 



Professional liability
  General and administrative expense
  Depreciation and amortization
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Nine Months Ended September 30, 2010 Compared With Nine Months Ended September 30, 2009
 Patient Revenues
  22




---



##### 



Nine Months EndedSeptember 30,2010
    
    2009Skilled nursing occupancy
    
    
    78.2
    %
    
    
    76.4
    %Medicare census as percent of total
    
    
    13.1
    %
    
    
    13.3
    %Managed care census as percent of total
    
    
    1.3
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    30.4
    %
    
    
    31.6
    %Medicaid revenues as percent of total
    
    
    53.9
    %
    
    
    53.6
    %Managed care revenues as percent of total
    
    
    2.8
    %
    
    
    2.6
    %Medicare average rate per day
    
    $
    390.35
    
    
    $
    400.46Medicaid average rate per day
    
    $
    146.27
    
    
    $
    143.08Managed care average rate per day
    
    $
    388.24
    
    
    $
    377.35
  Operating expense
     23




---



##### 



Lease expense
  Professional liability
  General and administrative expense
  24




---



##### 



Depreciation and amortization
  Foreign currency transaction gain
  Other income
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Liquidity and Capital Resources
 Liquidity
   25




---



##### 



Electronic Medical Records
  Dividends
  Preferred Stock
  26




---



##### 



Professional Liability
     Capital Resources
   27




---



##### 



Level atRequirement
    
    September 30, 2010Minimum fixed charge coverage ratio
    
    
    31.05:1.00
    
    
    
    1.17Debt service coverage ratio (mortgaged facilities)
    
    
    31.30:1.00
    
    
    
    3.51
       28




---



##### 



Forward-Looking Statements
  29




---



##### 



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  ITEM 4. CONTROLS AND PROCEDURES
  30




---



##### 



31




---



##### 



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
     ITEM 1A. RISK FACTORS
  Healthcare reform legislation could adversely affect our revenue and financial condition.
  32




---



##### 



Investing in our business initiatives and development could adversely impact our results of
operations and financial condition.
  ITEM 6. EXHIBITS
  33




---



##### 



SIGNATURES
  ADVOCAT INC.November 4, 2010By:
    /s/ William R. Council, IIIWilliam R. Council, IIIPresident and Chief Executive Officer, Principal Executive
Officer and
An Officer Duly Authorized to Sign on Behalf of the RegistrantBy:
    /s/ L. Glynn Riddle, Jr.L. Glynn Riddle, Jr.Executive Vice President and Chief Financial Officer, Secretary,
Principal Accounting Officer and
An Officer Duly Authorized to Sign on Behalf of the Registrant 34




---



##### 



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 March 24, 2005).4.4
    
    Second Amendment to Amended and Restated Rights Agreement, dated as of August 15, 2008, between Advocat, Inc. and
Computershare Trust Company, N.A., a federally chartered trust company, as successor to SunTrust Bank,
(incorporated by reference to the Companys Registration Statement on Form 8-A/A filed on August 19, 2008).4.5
    
    Third Amendment to Amended and Restated Rights Agreement, dated as of August 14, 2009, between Advocat, Inc. and
Computershare Trust Company, N.A., a federally chartered trust company, 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
    
    Lease Agreement dated as of July 14, 2010 by and between a subsidiary of the registrant and A.B.E., LLC
(incorporated by reference to Exhibit 10.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended
June 30, 2010).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).