##### Table of Contents



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: June 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 filero
    
    Accelerated filero
    
    Non-accelerated filero
    
    Smaller reporting Companyþ(Do not check if a smaller reporting company)
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes
o No þ
 5,742,074  (Outstanding shares of the issuers common stock as of July 30, 2010)




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TABLE OF CONTENTS  Part I. FINANCIAL INFORMATIONITEM 1    FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 5. Other InformationITEM 6. EXHIBITSSIGNATURESEX-10.3EX-10.4EX-31.1EX-31.2EX-32    Table of Contents  
 Part I. FINANCIAL INFORMATION
 
 ITEM 1    FINANCIAL STATEMENTS
 ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    12,904
    
    
    $
    8,609Receivables, less allowance for doubtful
accounts of $2,726 and $2,566, respectively
    
    
    22,145
    
    
    
    21,559Other receivables
    
    
    817
    
    
    
    1,406Prepaid expenses and other current assets
    
    
    2,946
    
    
    
    2,498Deferred income taxes
    
    
    4,694
    
    
    
    4,792Current assets of discontinued operations
    
    
    792
    
    
    
    2,870Total current assets
    
    
    44,298
    
    
    
    41,734PROPERTY AND EQUIPMENT, at cost
    
    
    75,571
    
    
    
    76,270Less accumulated depreciation
    
    
    (40,339
    )
    
    
    (40,461
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,553Property and equipment, net
    
    
    36,687
    
    
    
    37,362OTHER ASSETS:Deferred income taxes
    
    
    13,853
    
    
    
    13,804Deferred financing and other costs, net
    
    
    891
    
    
    
    639Other assets
    
    
    1,812
    
    
    
    1,963Acquired leasehold interest, net
    
    
    9,572
    
    
    
    9,764Total other assets
    
    
    26,128
    
    
    
    26,170$
    107,113
    
    
    $
    105,266
   2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    633
    
    
    $
    2,278Trade accounts payable
    
    
    5,423
    
    
    
    4,537Accrued expenses:Payroll and employee benefits
    
    
    11,310
    
    
    
    9,314Current portion of self-insurance reserves
    
    
    7,578
    
    
    
    7,860Other current liabilities
    
    
    3,737
    
    
    
    4,171Current liabilities of discontinued operations
    
    
    
    
    
    
    1,240Total current liabilities
    
    
    28,681
    
    
    
    29,400NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    23,697
    
    
    
    22,551Self-insurance reserves, less current portion
    
    
    12,095
    
    
    
    12,235Other noncurrent liabilities
    
    
    16,304
    
    
    
    15,195Total noncurrent liabilities
    
    
    52,096
    
    
    
    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 $425 and $1,274, respectively
    
    
    5,343
    
    
    
    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
    
    
    17,839
    
    
    
    17,647Retained earnings
    
    
    5,594
    
    
    
    4,487Total shareholders equity
    
    
    20,993
    
    
    
    19,693$
    107,113
    
    
    $
    105,266
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended June 30,2010
    
    
    2009PATIENT REVENUES, net
    
    $
    71,492
    
    
    $
    69,305EXPENSES:Operating
    
    
    56,388
    
    
    
    54,068Lease
    
    
    5,636
    
    
    
    5,377Professional liability
    
    
    997
    
    
    
    2,670General and administrative
    
    
    5,063
    
    
    
    4,678Depreciation and amortization
    
    
    1,432
    
    
    
    1,351Total expenses
    
    
    69,516
    
    
    
    68,144OPERATING INCOME
    
    
    1,976
    
    
    
    1,161OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    276Interest income
    
    
    
    
    
    
    79Interest expense
    
    
    (415
    )
    
    
    (485
    )(415
    )
    
    
    (130
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,561
    
    
    
    1,031PROVISION FOR INCOME TAXES
    
    
    (574
    )
    
    
    (387
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    987
    
    
    
    644NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:Operating income (loss), net of taxes of $(5) and $182, respectively
    
    
    (10
    )
    
    
    286DISCONTINUED OPERATIONS
    
    
    (10
    )
    
    
    286NET INCOME
    
    
    977
    
    
    
    930PREFERRED STOCK DIVIDENDS
    
    
    (86
    )
    
    
    (86
    )NET INCOME FOR COMMON STOCK
    
    $
    891
    
    
    $
    844NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.16
    
    
    $
    0.10Discontinued operations
    
    
    
    
    
    
    0.05$
    0.16
    
    
    $
    0.15Per common share  dilutedContinuing operations
    
    $
    0.15
    
    
    $
    0.10Discontinued operations
    
    
    
    
    
    
    0.05$
    0.15
    
    
    $
    0.15COMMON STOCK DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.055
    
    
    $
    0.05WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,726
    
    
    
    5,676Diluted
    
    
    5,874
    
    
    
    5,746
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Six Months Ended June 30,2010
    
    
    2009PATIENT REVENUES, net
    
    $
    141,644
    
    
    $
    137,040EXPENSES:Operating
    
    
    111,790
    
    
    
    107,405Lease
    
    
    11,238
    
    
    
    10,745Professional liability
    
    
    2,411
    
    
    
    5,575General and administrative
    
    
    9,765
    
    
    
    9,131Depreciation and amortization
    
    
    2,848
    
    
    
    2,671Total expenses
    
    
    138,052
    
    
    
    135,527OPERATING INCOME
    
    
    3,592
    
    
    
    1,513OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    191Other income
    
    
    
    
    
    
    549Interest income
    
    
    
    
    
    
    154Interest expense
    
    
    (811
    )
    
    
    (967
    )Debt retirement costs
    
    
    (127
    )
    
    
    (938
    )
    
    
    (73
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    2,654
    
    
    
    1,440PROVISION FOR INCOME TAXES
    
    
    (960
    )
    
    
    (541
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,694
    
    
    
    899NET INCOME FROM DISCONTINUED OPERATIONS:Operating income, net of taxes of $201 and $251, respectively
    
    
    368
    
    
    
    394Loss on disposal, net of taxes of $(96) and $0, respectively
    
    
    (177
    )
    
    
    DISCONTINUED OPERATIONS
    
    
    191
    
    
    
    394NET INCOME
    
    
    1,885
    
    
    
    1,293PREFERRED STOCK DIVIDENDS
    
    
    (172
    )
    
    
    (172
    )NET INCOME FOR COMMON STOCK
    
    $
    1,713
    
    
    $
    1,121NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.27
    
    
    $
    0.13Discontinued operations
    
    
    0.03
    
    
    
    0.07$
    0.30
    
    
    $
    0.20Per common share  dilutedContinuing operations
    
    $
    0.26
    
    
    $
    0.13Discontinued operations
    
    
    0.03
    
    
    
    0.07$
    0.29
    
    
    $
    0.20COMMON STOCK DIVIDENDS DECLARED PER SHARE
OF COMMON STOCK
    
    $
    0.105
    
    
    $
    0.10WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,722
    
    
    
    5,674Diluted
    
    
    5,894
    
    
    
    5,738
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Six Months Ended June 30,2010
    
    
    2009CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,885
    
    
    $
    1,293Discontinued operations
    
    
    191
    
    
    
    394Net income from continuing operations
    
    
    1,694
    
    
    
    899Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    2,848
    
    
    
    2,671Provision for doubtful accounts
    
    
    940
    
    
    
    1,274Deferred income tax provision (benefit)
    
    
    64
    
    
    
    (411
    )Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    (193
    )
    
    
    2,558Stock based compensation
    
    
    333
    
    
    
    394Amortization of deferred balances
    
    
    121
    
    
    
    190Provision for leases in excess of cash payments
    
    
    447
    
    
    
    688Non-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
    
    
    (937
    )
    
    
    (2,956
    )Prepaid expenses and other assets
    
    
    (412
    )
    
    
    85Trade accounts payable and accrued expenses
    
    
    2,094
    
    
    
    1,195Net cash provided by continuing operations
    
    
    7,246
    
    
    
    5,806Discontinued operations
    
    
    1,093
    
    
    
    1,220Net cash provided by operating activities
    
    
    8,339
    
    
    
    7,026CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,079
    )
    
    
    (3,260
    )Payment for construction in progress  leased facility
    
    
    
    
    
    
    (2,953
    )Notes receivable collection
    
    
    
    
    
    
    4,184Net cash used by continuing operations
    
    
    (2,079
    )
    
    
    (2,029
    )Discontinued operations
    
    
    (45
    )
    
    
    (136
    )Net cash used by investing activities
    
    
    (2,124
    )
    
    
    (2,165
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (3,962
    )
    
    
    (2,951
    )Proceeds from issuance of debt
    
    
    3,463
    
    
    
    Financing costs
    
    
    (426
    )
    
    
    (12
    )Construction allowance receipts  leased facility
    
    
    
    
    
    
    2,953Exercise of stock options
    
    
    (46
    )
    
    
    2Proceeds from issuance of restricted share units
    
    
    57
    
    
    
    76Payment of common stock dividends
    
    
    (572
    )
    
    
    Payment of preferred stock dividends
    
    
    (172
    )
    
    
    (172
    )Payment for preferred stock restructuring
    
    
    (262
    )
    
    
    (254
    )Net cash used by financing activities
    
    
    (1,920
    )
    
    
    (358
    )
  6




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Six Months Ended June 30,2010
    
    
    2009NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    $
    4,295
    
    
    $
    4,503CASH AND CASH EQUIVALENTS, beginning of period
    
    
    8,609
    
    
    
    7,598CASH AND CASH EQUIVALENTS, end of period
    
    $
    12,904
    
    
    $
    12,101SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts capitalized
    
    $
    642
    
    
    $
    799Cash payments of income taxes
    
    $
    662
    
    
    $
    182
  7




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##### Table of Contents



ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2010 AND 2009
 BUSINESS
   BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   REVOLVING CREDIT AGREEMENT
  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 atJune 30,
    
    
    December 31,2010
    
    
    2009Policy Year End:May 31, 2011
    
    $
    459,000
    
    
    $
    May 31, 2010
    
    
    9,039,000
    
    
    
    3,763,000March 9, 2009
    
    
    5,393,000
    
    
    
    8,713,000March 9, 2008
    
    
    2,320,000
    
    
    
    4,377,000March 9, 2007
    
    
    436,000
    
    
    
    1,060,000March 9, 2006 and earlier
    
    
    584,000
    
    
    
    589,000$
    18,231,000
    
    
    $
    18,502,000
  10




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Other Insurance
   STOCK-BASED COMPENSATION
     11




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DISCONTINUED OPERATIONS
     12




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EARNINGS PER COMMON SHARE
  Three       Months Ended
    
    
    Six  Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.16
    
    
    $
    0.10
    
    
    $
    0.27
    
    
    $
    0.13Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    0.05
    
    
    
    0.06
    
    
    
    0.07Loss on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.07Net income
    
    $
    0.16
    
    
    $
    0.15
    
    
    $
    0.30
    
    
    $
    0.20Per common share  dilutedIncome from continuing operations
    
    $
    0.15
    
    
    $
    0.10
    
    
    $
    0.26
    
    
    $
    0.13Income (loss) from discontinued operationsOperating income (loss), net of taxes
    
    
    
    
    
    
    0.05
    
    
    
    0.06
    
    
    
    0.07Loss on disposal, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.03
    )
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    0.05
    
    
    
    0.03
    
    
    
    0.07Net income
    
    $
    0.15
    
    
    $
    0.15
    
    
    $
    0.29
    
    
    $
    0.20
  CHANGES IN COMPANY EXECUTIVES
    13




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SUBSEQUENT EVENT  ROSE TERRACE LEASE AGREEMENT
  14




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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
 
  15




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Revenue Sources
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Medicaid
    
    $
    38,333
    
    
    
    53.6
    %
    
    $
    36,905
    
    
    
    53.3
    %
    
    $
    76,006
    
    
    
    53.7
    %
    
    $
    72,785
    
    
    
    53.1
    %Medicare
    
    
    22,036
    
    
    
    30.8
    
    
    
    22,155
    
    
    
    32.0
    
    
    
    43,461
    
    
    
    30.7
    
    
    
    44,009
    
    
    
    32.1Managed care
    
    
    1,954
    
    
    
    2.7
    
    
    
    1,707
    
    
    
    2.5
    
    
    
    4,227
    
    
    
    3.0
    
    
    
    3,627
    
    
    
    2.7Private Pay and other
    
    
    9,169
    
    
    
    12.9
    
    
    
    8,538
    
    
    
    12.2
    
    
    
    17,950
    
    
    
    12.6
    
    
    
    16,619
    
    
    
    12.1Total
    
    $
    71,492
    
    
    
    100.0
    %
    
    $
    69,305
    
    
    
    100.0
    %
    
    $
    141,644
    
    
    
    100.0
    %
    
    $
    137,040
    
    
    
    100.0
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Medicaid
    
    
    2,887
    
    
    
    68.8
    %
    
    
    2,837
    
    
    
    69.4
    %
    
    
    2,884
    
    
    
    69.0
    %
    
    
    2,826
    
    
    
    69.4
    %Medicare
    
    
    565
    
    
    
    13.5
    
    
    
    553
    
    
    
    13.5
    
    
    
    556
    
    
    
    13.3
    
    
    
    553
    
    
    
    13.6Managed care
    
    
    54
    
    
    
    1.3
    
    
    
    49
    
    
    
    1.2
    
    
    
    60
    
    
    
    1.4
    
    
    
    52
    
    
    
    1.3Private Pay and other
    
    
    690
    
    
    
    16.4
    
    
    
    651
    
    
    
    15.9
    
    
    
    681
    
    
    
    16.3
    
    
    
    639
    
    
    
    15.7Total
    
    
    4,196
    
    
    
    100.0
    %
    
    
    4,090
    
    
    
    100.0
    %
    
    
    4,181
    
    
    
    100.0
    %
    
    
    4,070
    
    
    
    100.0
    %
  16




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Health Care Industry
    Medicare and Medicaid Reimbursement
  Medicare
  17




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Therapy Services.
  Supply Services.
 Medicaid
  18




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Licensure and other Health Care Laws
  19




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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)
    
    $
    25,922
    
    
    $
    1,702
    
    
    $
    24,220
    
    
    $
    
    
    
    $
    Settlement obligations (2)
    
    $
    150
    
    
    $
    150
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,004
    
    
    $
    5,004
    
    
    $
    
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    5,666
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    2,231Operating leases
    
    $
    587,443
    
    
    $
    22,262
    
    
    $
    46,076
    
    
    $
    48,350
    
    
    $
    470,755Required capital expenditures under
mortgage loans and operating leases (5)
    
    $
    21,907
    
    
    $
    556
    
    
    $
    683
    
    
    $
    663
    
    
    $
    20,005Total
    
    $
    646,092
    
    
    $
    30,361
    
    
    $
    72,353
    
    
    $
    50,387
    
    
    $
    492,991
 
 (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.(2)
    
    Settlement obligations relate to a professional liability case that will be paid in
2010. The liabilities are included in our current portion of 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.  20




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##### Table of Contents



Results of Operations
   (in thousands)
    
    Three Months Ended June 30,2010
    
    
    2009
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    71,492
    
    
    $
    69,305
    
    
    
    2,187
    
    
    
    3.2EXPENSES:Operating
    
    
    56,388
    
    
    
    54,068
    
    
    
    2,320
    
    
    
    4.3Lease
    
    
    5,636
    
    
    
    5,377
    
    
    
    259
    
    
    
    4.8Professional liability
    
    
    997
    
    
    
    2,670
    
    
    
    (1,673
    )
    
    
    (62.7
    )General and administrative
    
    
    5,063
    
    
    
    4,678
    
    
    
    385
    
    
    
    8.2Depreciation and amortization
    
    
    1,432
    
    
    
    1,351
    
    
    
    81
    
    
    
    6.0Total expenses
    
    
    69,516
    
    
    
    68,144
    
    
    
    1,372
    
    
    
    2.0OPERATING INCOME
    
    
    1,976
    
    
    
    1,161
    
    
    
    815
    
    
    
    70.2OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    276
    
    
    
    (276
    )
    
    
    (100.0
    )Interest income
    
    
    
    
    
    
    79
    
    
    
    (79
    )
    
    
    (100.0
    )Interest expense
    
    
    (415
    )
    
    
    (485
    )
    
    
    70
    
    
    
    (14.4
    )(415
    )
    
    
    (130
    )
    
    
    (285
    )
    
    
    219.2INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,561
    
    
    
    1,031
    
    
    
    530
    
    
    
    51.4PROVISION FOR INCOME TAXES
    
    
    (574
    )
    
    
    (387
    )
    
    
    (187
    )
    
    
    48.3NET INCOME FROM CONTINUING OPERATIONS
    
    $
    987
    
    
    $
    644
    
    
    
    343
    
    
    
    53.3
 (in thousands)
    
    Six Months Ended June 30,2010
    
    
    2009
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    141,644
    
    
    $
    137,040
    
    
    
    4,604
    
    
    
    3.4EXPENSES:Operating
    
    
    111,790
    
    
    
    107,405
    
    
    
    4,385
    
    
    
    4.1Lease
    
    
    11,238
    
    
    
    10,745
    
    
    
    493
    
    
    
    4.6Professional liability
    
    
    2,411
    
    
    
    5,575
    
    
    
    (3,164
    )
    
    
    (56.8
    )General and administrative
    
    
    9,765
    
    
    
    9,131
    
    
    
    634
    
    
    
    6.9Depreciation and amortization
    
    
    2,848
    
    
    
    2,671
    
    
    
    177
    
    
    
    6.6Total expenses
    
    
    138,052
    
    
    
    135,527
    
    
    
    2,525
    
    
    
    1.9OPERATING INCOME
    
    
    3,592
    
    
    
    1,513
    
    
    
    2,079
    
    
    
    137.4OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    191
    
    
    
    (191
    )
    
    
    (100.0
    )Other income
    
    
    
    
    
    
    549
    
    
    
    (549
    )
    
    
    (100.0
    )Interest income
    
    
    
    
    
    
    154
    
    
    
    (154
    )
    
    
    (100.0
    )Interest expense
    
    
    (811
    )
    
    
    (967
    )
    
    
    156
    
    
    
    (16.1
    )Debt retirement costs
    
    
    (127
    )
    
    
    
    
    
    
    (127
    )
    
    
    (938
    )
    
    
    (73
    )
    
    
    (865
    )
    
    
    1,184.9INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    2,654
    
    
    
    1,440
    
    
    
    1,214
    
    
    
    84.3PROVISION FOR INCOME TAXES
    
    
    (960
    )
    
    
    (541
    )
    
    
    (419
    )
    
    
    77.4NET INCOME FROM CONTINUING OPERATIONS
    
    $
    1,694
    
    
    $
    899
    
    
    
    795
    
    
    
    88.4
 21




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Percentage of Net Revenues
    
    2010
    
    
    2009
    
    
    2010
    
    
    2009PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    78.9
    
    
    
    78.0
    
    
    
    78.9
    
    
    
    78.4Lease
    
    
    7.9
    
    
    
    7.8
    
    
    
    7.9
    
    
    
    7.8Professional liability
    
    
    1.4
    
    
    
    3.9
    
    
    
    1.7
    
    
    
    4.1General and administrative
    
    
    7.0
    
    
    
    6.7
    
    
    
    6.9
    
    
    
    6.7Depreciation and amortization
    
    
    2.0
    
    
    
    1.9
    
    
    
    2.0
    
    
    
    1.9Total expenses
    
    
    97.2
    
    
    
    98.3
    
    
    
    97.4
    
    
    
    98.9OPERATING INCOME
    
    
    2.8
    
    
    
    1.7
    
    
    
    2.6
    
    
    
    1.1OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    
    
    
    
    0.4
    
    
    
    
    
    
    
    0.1Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.4Interest income
    
    
    
    
    
    
    0.1
    
    
    
    (0.6
    )
    
    
    0.1Interest expense
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (0.1
    )
    
    
    (0.7
    )(0.6
    )
    
    
    (0.2
    )
    
    
    (0.7
    )
    
    
    (0.1
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    2.2
    
    
    
    1.5
    
    
    
    1.9
    
    
    
    1.1PROVISION FOR INCOME TAXES
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    (0.7
    )
    
    
    (0.4
    )NET INCOME
FROM CONTINUING OPERATIONS
    
    
    1.4
    %
    
    
    0.9
    %
    
    
    1.2
    %
    
    
    0.7
    %
 Three Months Ended June 30, 2010 Compared With Three Months Ended June 30, 2009
 Patient Revenues
   Three Months EndedJune 30,2010
    
    
    2009Skilled nursing occupancy
    
    
    78.2
    %
    
    
    76.4
    %Medicare census as percent of total
    
    
    13.5
    %
    
    
    13.5
    %Managed care census as percent of total
    
    
    1.3
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    30.8
    %
    
    
    32.0
    %Medicaid revenues as percent of total
    
    
    53.6
    %
    
    
    53.3
    %Managed care revenues as percent of total
    
    
    2.7
    %
    
    
    2.5
    %Medicare average rate per day
    
    $
    389.13
    
    
    $
    400.57Medicaid average rate per day
    
    $
    145.32
    
    
    $
    142.44Managed care average rate per day
    
    $
    389.14
    
    
    $
    374.18
  22




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Operating expense
         Lease expense
  Professional liability
  23




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##### Table of Contents



General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gain
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Six Months Ended June 30, 2010 Compared With Six Months Ended June 30, 2009
 Patient Revenues
  24




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##### Table of Contents



Six Months EndedJune 30,2010
    
    
    2009Skilled nursing occupancy
    
    
    77.9
    %
    
    
    76.1
    %Medicare census as percent of total
    
    
    13.3
    %
    
    
    13.6
    %Managed care census as percent of total
    
    
    1.4
    %
    
    
    1.3
    %Medicare revenues as percent of total
    
    
    30.7
    %
    
    
    32.1
    %Medicaid revenues as percent of total
    
    
    53.7
    %
    
    
    53.1
    %Managed care revenues as percent of total
    
    
    3.0
    %
    
    
    2.7
    %Medicare average rate per day
    
    $
    391.33
    
    
    $
    399.78Medicaid average rate per day
    
    $
    145.28
    
    
    $
    142.10Managed care average rate per day
    
    $
    385.86
    
    
    $
    376.14
  Operating expense
        25




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##### Table of Contents



Lease expense
  Professional liability
  General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gain
  Other income
  Interest expense
  26




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##### Table of Contents



Income from continuing operations before income taxes; income from continuing operations per common
share
  Liquidity and Capital Resources
 Liquidity
     Dividends
  27




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##### Table of Contents



Preferred Stock
  Professional Liability
      Capital Resources
  28




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##### Table of Contents



Level atRequirement
    
    June 30, 2010Minimum fixed charge coverage ratio
    
    >1.05:1.00
    
    
    1.20Debt service coverage ratio (mortgaged facilities)
    
    >1.30:1.00
    
    
    3.65
     29




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##### Table of Contents



Forward-Looking Statements
  30




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 4.
    
    CONTROLS AND PROCEDURES
  31




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##### Table of Contents



32




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
     
 ITEM 1A.
    
    RISK FACTORS
  Healthcare reform legislation could adversely affect our revenue and financial condition.
  33




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##### Table of Contents



ITEM 5.
    
    Other Information
  
 ITEM 6.
    
    EXHIBITS
  34




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##### Table of Contents



SIGNATURES
  ADVOCAT INC.August 9, 2010
    By:
    /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 35




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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 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
    
    Employment Agreement effective April 5, 2010, by and among
Advocat Inc., a Delaware corporation, and Kelly Gill
(incorporated by reference to Exhibit 10.1 to the Companys
Quarterly Report on Form 10-Q for the quarter ended March 31,
2010).10.2
    
    Termination of Lease and Subleases dated April 1, 2010
between the registrant and Omega Health Investors, Inc. and
certain affiliates (incorporated by reference to Exhibit 10.4
to the Companys Quarterly Report on Form 10-Q for the
quarter ended March 31, 2010).*10.3
    
    Separation Agreement dated May 25, 2010, between the
registrant and Raymond L. Tyler.




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.4
    
    Lease Agreement dated as of July 14, 2010 by and between a
subsidiary of the registrant and A.B.E., LLC.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.