##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 CHECK ONE:
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarterly Period Ended: June 30, 2009
 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
    
    (IRS Employer Identification No.)incorporation or organization)
 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
    
    Smaller reporting company þ(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
 5,675,987  (Outstanding shares of the issuers common stock as of August 3, 2009)




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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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6. EXHIBITSSIGNATURESEX-10.1EX-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 31,2009
    
    
    2008(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    12,101
    
    
    $
    7,598Receivables, less allowance for doubtful
accounts of $3,628 and $3,279, respectively
    
    
    25,018
    
    
    
    23,503Receivable for leased facility construction costs
    
    
    1,399
    
    
    
    228Current portion of note receivable
    
    
    
    
    
    
    466Prepaid expenses and other current assets
    
    
    2,802
    
    
    
    1,748Income tax refundable
    
    
    230
    
    
    
    1,369Deferred income taxes
    
    
    4,095
    
    
    
    3,967Total current assets
    
    
    45,645
    
    
    
    38,879PROPERTY AND EQUIPMENT, at cost
    
    
    76,909
    
    
    
    73,517Less accumulated depreciation
    
    
    (41,243
    )
    
    
    (38,555
    )Construction in progress  leased facility
    
    
    5,163
    
    
    
    1,039Discontinued operations, net
    
    
    1,455
    
    
    
    1,455Property and equipment, net
    
    
    42,284
    
    
    
    37,456OTHER ASSETS:Deferred income taxes
    
    
    14,259
    
    
    
    13,899Note receivable, net of current portion
    
    
    
    
    
    
    3,486Deferred financing and other costs, net
    
    
    831
    
    
    
    1,009Other assets
    
    
    2,031
    
    
    
    2,031Acquired leasehold interest, net
    
    
    9,957
    
    
    
    10,149Total other assets
    
    
    27,078
    
    
    
    30,574$
    115,007
    
    
    $
    106,909
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    3,325
    
    
    $
    2,238Trade accounts payable
    
    
    5,351
    
    
    
    4,600Accrued construction costs  leased facility
    
    
    1,399
    
    
    
    228Accrued expenses:Payroll and employee benefits
    
    
    11,309
    
    
    
    9,545Current portion of self-insurance reserves
    
    
    7,751
    
    
    
    6,469Other current liabilities
    
    
    3,263
    
    
    
    4,914Total current liabilities
    
    
    32,398
    
    
    
    27,994NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    26,134
    
    
    
    30,172Self-insurance reserves, less current portion
    
    
    11,861
    
    
    
    10,212Non-cash obligation for construction in progress  leased facility
    
    
    5,163
    
    
    
    1,039Other noncurrent liabilities
    
    
    13,299
    
    
    
    12,050Total noncurrent liabilities
    
    
    56,457
    
    
    
    53,473COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, including premium of $2,124 and $2,973 at
June 30, 2009 and December 31, 2008, respectively
    
    
    7,042
    
    
    
    7,891SHAREHOLDERS 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, 5,908,000 and 5,903,000 shares issued, and
5,676,000 and 5,671,000 shares outstanding, respectively
    
    
    59
    
    
    
    59Treasury stock at cost, 232,000 shares of common stock
    
    
    (2,500
    )
    
    
    (2,500
    )Paid-in capital
    
    
    17,341
    
    
    
    16,903Retained earnings
    
    
    4,210
    
    
    
    3,089Total shareholders equity
    
    
    19,110
    
    
    
    17,551$
    115,007
    
    
    $
    106,909
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended June 30,2009
    
    
    2008PATIENT REVENUES, net
    
    $
    76,051
    
    
    $
    70,845EXPENSES:Operating
    
    
    59,398
    
    
    
    55,999Lease
    
    
    5,785
    
    
    
    5,746Professional liability
    
    
    2,955
    
    
    
    1,401General and administrative
    
    
    4,801
    
    
    
    4,647Depreciation and amortization
    
    
    1,475
    
    
    
    1,317Total expenses
    
    
    74,414
    
    
    
    69,110OPERATING INCOME
    
    
    1,637
    
    
    
    1,735OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    276
    
    
    
    62Interest income
    
    
    79
    
    
    
    120Interest expense
    
    
    (485
    )
    
    
    (703
    )(130
    )
    
    
    (521
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,507
    
    
    
    1,214PROVISION FOR INCOME TAXES
    
    
    (570
    )
    
    
    (505
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    937
    
    
    
    709Discontinued operations, Operating loss,
net of tax benefit of $3 and $12, respectively
    
    
    (7
    )
    
    
    (19
    )NET INCOME
    
    
    930
    
    
    
    690PREFERRED STOCK DIVIDENDS
    
    
    86
    
    
    
    86NET INCOME FOR COMMON STOCK
    
    $
    844
    
    
    $
    604NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.15
    
    
    $
    0.11Discontinued operations
    
    
    
    
    
    
    $
    0.15
    
    
    $
    0.11Per common share  dilutedContinuing operations
    
    $
    0.15
    
    
    $
    0.11Discontinued operations
    
    
    
    
    
    
    (0.01
    )$
    0.15
    
    
    $
    0.10WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,676
    
    
    
    5,676Diluted
    
    
    5,746
    
    
    
    5,906
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Six Months Ended June 30,2009
    
    
    2008PATIENT REVENUES, net
    
    $
    149,809
    
    
    $
    142,311EXPENSES:Operating
    
    
    117,628
    
    
    
    111,535Lease
    
    
    11,561
    
    
    
    11,450Professional liability
    
    
    6,197
    
    
    
    358General and administrative
    
    
    9,374
    
    
    
    9,206Depreciation and amortization
    
    
    2,884
    
    
    
    2,559Total expenses
    
    
    147,644
    
    
    
    135,108OPERATING INCOME
    
    
    2,165
    
    
    
    7,203OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (167
    )Other income
    
    
    549
    
    
    
    Interest income
    
    
    154
    
    
    
    280Interest expense
    
    
    (967
    )
    
    
    (1,534
    )(73
    )
    
    
    (1,421
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    2,092
    
    
    
    5,782PROVISION FOR INCOME TAXES
    
    
    (792
    )
    
    
    (1,972
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,300
    
    
    
    3,810Discontinued operations, operating loss,
net of tax benefit of $3 and $19
    
    
    (7
    )
    
    
    (31
    )NET INCOME
    
    
    1,293
    
    
    
    3,779PREFERRED STOCK DIVIDENDS
    
    
    172
    
    
    
    172NET INCOME FOR COMMON STOCK
    
    $
    1,121
    
    
    $
    3,607NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.20
    
    
    $
    0.64Discontinued operations
    
    
    
    
    
    
    (0.01
    )$
    0.20
    
    
    $
    0.63Per common share  dilutedContinuing operations
    
    $
    0.20
    
    
    $
    0.61Discontinued operations
    
    
    
    
    
    
    $
    0.20
    
    
    $
    0.61WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,674
    
    
    
    5,715Diluted
    
    
    5,738
    
    
    
    5,947
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Six Months Ended June 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    1,293
    
    
    $
    3,779Discontinued operations
    
    
    (7
    )
    
    
    (31
    )Net income from continuing operations
    
    
    1,300
    
    
    
    3,810Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    2,884
    
    
    
    2,559Provision for doubtful accounts
    
    
    1,441
    
    
    
    1,023Deferred income tax provision (benefit)
    
    
    (488
    )
    
    
    (47
    )Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    3,115
    
    
    
    (2,031
    )Stock based compensation
    
    
    394
    
    
    
    411Amortization of deferred balances
    
    
    190
    
    
    
    230Provision for leases in excess of cash payments
    
    
    654
    
    
    
    917Non-cash gain on settlement of contingent liability
    
    
    (549
    )
    
    
    Foreign currency transaction (gain) loss
    
    
    (191
    )
    
    
    167Non-cash interest income
    
    
    (41
    )
    
    
    (69
    )Changes in other assets and liabilities affecting operating
activities:Receivables, net
    
    
    (2,956
    )
    
    
    1,423Prepaid expenses and other assets
    
    
    85
    
    
    
    (691
    )Trade accounts payable and accrued expenses
    
    
    1,195
    
    
    
    (3,219
    )Net cash provided by continuing operations
    
    
    7,033
    
    
    
    4,483Discontinued operations
    
    
    (7
    )
    
    
    (31
    )Net cash provided by operating activities
    
    
    7,026
    
    
    
    4,452CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (3,396
    )
    
    
    (4,531
    )Payment for construction in progress  leased facility
    
    
    (2,953
    )
    
    
    Notes receivable collection
    
    
    4,184
    
    
    
    765Deposits and other deferred balances
    
    
    
    
    
    
    (326
    )Net cash used by continuing operations
    
    
    (2,165
    )
    
    
    (4,092
    )Discontinued operations
    
    
    
    
    
    
    (49
    )Net cash used in investing activities
    
    
    (2,165
    )
    
    
    (4,141
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (2,951
    )
    
    
    (1,008
    )Financing costs
    
    
    (12
    )
    
    
    (4
    )Repurchase of common stock
    
    
    
    
    
    
    (1,683
    )Construction allowance receipts  leased facility
    
    
    2,953
    
    
    
    Proceeds from exercise of stock options
    
    
    2
    
    
    
    235Issuance of restricted share units
    
    
    76
    
    
    
    Payment of preferred stock dividends
    
    
    (172
    )
    
    
    (172
    )Payment for preferred stock restructuring
    
    
    (254
    )
    
    
    (246
    )Net cash used in financing activities
    
    
    (358
    )
    
    
    (2,878
    )
  6




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Six Months Ended June 30,2009
    
    
    2008NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    $
    4,503
    
    
    $
    (2,567
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    7,598
    
    
    
    11,658CASH AND CASH EQUIVALENTS, end of period
    
    $
    12,101
    
    
    $
    9,091SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts capitalized
    
    $
    799
    
    
    $
    1,346Cash payments of income taxes, net of refunds
    
    $
    182
    
    
    $
    3,848
  7




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ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2009 AND 2008
 BUSINESS
   BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   ACQUISITION
  8




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COMPLETION OF REPLACEMENT FACILITY
   INSURANCE MATTERS
 Professional Liability and Other Liability Insurance-
   9




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Reserve for Estimated Self-Insured Professional Liability Claims-
     Accrual atJune 30,
    
    
    December 31,2009
    
    
    2008Policy Year End:May 31, 2010
    
    $
    1,677,000
    
    
    $
    March 9, 2009
    
    
    8,668,000
    
    
    
    3,837,000March 9, 2008
    
    
    4,770,000
    
    
    
    5,769,000March 9, 2007
    
    
    2,301,000
    
    
    
    3,202,000March 9, 2006
    
    
    370,000
    
    
    
    1,102,000March 9, 2005 and earlier
    
    
    288,000
    
    
    
    1,049,000$
    18,074,000
    
    
    $
    14,959,000
  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 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.64Operating loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.01
    )Net income
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.63Per common share  dilutedIncome from continuing operations
    
    $
    0.15
    
    
    $
    0.11
    
    
    $
    0.20
    
    
    $
    0.61Operating loss from discontinued operations
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    Net income
    
    $
    0.15
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.61
  NOTE RECEIVABLE
  GAIN ON SETTLEMENT WITH CMS
  13




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RECENT ACCOUNTING PRONOUNCEMENTS
     14




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AMENDMENT TO MASTER LEASE FOR ADDITIONAL CAPITAL IMPROVEMENT FUNDS
  SUBSEQUENT EVENT
  15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   Basis of Financial Statements.
 Critical Accounting Policies and Judgments
 Form 10-K.
 Health Care Industry
  16




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Revenue Sources
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Medicaid
    
    $
    40,831
    
    
    
    53.7
    %
    
    $
    37,361
    
    
    
    52.7
    %
    
    $
    80,055
    
    
    
    53.4
    %
    
    $
    74,935
    
    
    
    52.7
    %Medicare
    
    
    23,922
    
    
    
    31.5
    
    
    
    22,726
    
    
    
    32.1
    
    
    
    47,558
    
    
    
    31.8
    
    
    
    46,037
    
    
    
    32.4Managed care
    
    
    1,877
    
    
    
    2.5
    
    
    
    1,841
    
    
    
    2.6
    
    
    
    3,927
    
    
    
    2.6
    
    
    
    3,147
    
    
    
    2.2Private Pay and other
    
    
    9,421
    
    
    
    12.3
    
    
    
    8,917
    
    
    
    12.6
    
    
    
    18,269
    
    
    
    12.2
    
    
    
    18,192
    
    
    
    12.7Total
    
    $
    76,051
    
    
    
    100.0
    %
    
    $
    70,845
    
    
    
    100.0
    %
    
    $
    149,809
    
    
    
    100.0
    %
    
    $
    142,311
    
    
    
    100.0
    %
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Medicaid
    
    
    3,082
    
    
    
    69.7
    %
    
    
    2,966
    
    
    
    68.8
    %
    
    
    3,066
    
    
    
    69.7
    %
    
    
    2,981
    
    
    
    69.0
    %Medicare
    
    
    584
    
    
    
    13.2
    
    
    
    597
    
    
    
    13.9
    
    
    
    586
    
    
    
    13.3
    
    
    
    599
    
    
    
    13.9Managed care
    
    
    53
    
    
    
    1.2
    
    
    
    55
    
    
    
    1.3
    
    
    
    55
    
    
    
    1.3
    
    
    
    49
    
    
    
    1.1Private Pay and other
    
    
    700
    
    
    
    15.9
    
    
    
    692
    
    
    
    16.0
    
    
    
    693
    
    
    
    15.7
    
    
    
    694
    
    
    
    16.0Total
    
    
    4,419
    
    
    
    100.0
    %
    
    
    4,310
    
    
    
    100.0
    %
    
    
    4,400
    
    
    
    100.0
    %
    
    
    4,323
    
    
    
    100.0
    %
  Medicare and Medicaid Reimbursement
   17




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Licensure and other Health Care Laws
  Contractual Obligations and Commercial Commitments
  Lessthan
    
    
    1 to 3
    
    
    3 to 5
    
    
    AfterContractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    31,712
    
    
    $
    4,385
    
    
    $
    25,351
    
    
    $
    1,976
    
    
    $
    Settlement Obligations (2)
    
    $
    1,826
    
    
    $
    1,826
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,349
    
    
    $
    344
    
    
    $
    5,005
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    6,353
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    2,918Operating leases
    
    $
    597,706
    
    
    $
    22,346
    
    
    $
    44,102
    
    
    $
    46,251
    
    
    $
    485,007Required capital expenditures under mortgage loans (5)
    
    $
    490
    
    
    $
    224
    
    
    $
    245
    
    
    $
    21
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    24,822
    
    
    $
    499
    
    
    $
    1,013
    
    
    $
    1,063
    
    
    $
    22,247Total
    
    $
    668,258
    
    
    $
    30,311
    
    
    $
    77,090
    
    
    $
    50,685
    
    
    $
    510,172
 
 (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 that will be
paid in installments through March 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 preferred shareholders earliest redemption date.(4)
    
    Payments for the elimination of preferred stock conversion feature.(5)
    
    Includes annual expenditure requirements for capital maintenance under mortgage loan covenants.(6)
    
    Includes annual capital expenditure requirements under operating leases.  19




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,(in thousands)
    
    2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    76,051
    
    
    $
    70,845
    
    
    $
    5,206
    
    
    
    7.3EXPENSES:Operating
    
    
    59,398
    
    
    
    55,999
    
    
    
    3,399
    
    
    
    6.1Lease
    
    
    5,785
    
    
    
    5,746
    
    
    
    39
    
    
    
    0.7Professional liability
    
    
    2,955
    
    
    
    1,401
    
    
    
    1,554
    
    
    
    110.9General and administrative
    
    
    4,801
    
    
    
    4,647
    
    
    
    154
    
    
    
    3.3Depreciation and amortization
    
    
    1,475
    
    
    
    1,317
    
    
    
    158
    
    
    
    12.0Total expenses
    
    
    74,414
    
    
    
    69,110
    
    
    
    5,304
    
    
    
    7.7OPERATING INCOME
    
    
    1,637
    
    
    
    1,735
    
    
    
    (98
    )
    
    
    (5.6
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    276
    
    
    
    62
    
    
    
    214
    
    
    
    345.2Interest income
    
    
    79
    
    
    
    120
    
    
    
    (41
    )
    
    
    (34.2
    )Interest expense
    
    
    (485
    )
    
    
    (703
    )
    
    
    218
    
    
    
    31.0(130
    )
    
    
    (521
    )
    
    
    391
    
    
    
    75.0INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,507
    
    
    
    1,214
    
    
    
    293
    
    
    
    24.1PROVISION FOR INCOME TAXES
    
    
    (570
    )
    
    
    (505
    )
    
    
    65
    
    
    
    12.9NET INCOME FROM CONTINUING OPERATIONS
    
    $
    937
    
    
    $
    709
    
    
    $
    228
    
    
    
    32.2
 Six Months Ended June 30,(in thousands)
    
    2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    149,809
    
    
    $
    142,311
    
    
    $
    7,498
    
    
    
    5.3EXPENSES:Operating
    
    
    117,628
    
    
    
    111,535
    
    
    
    6,093
    
    
    
    5.5Lease
    
    
    11,561
    
    
    
    11,450
    
    
    
    111
    
    
    
    1.0Professional liability
    
    
    6,197
    
    
    
    358
    
    
    
    5,839
    
    
    
    1,631.0General and administrative
    
    
    9,374
    
    
    
    9,206
    
    
    
    168
    
    
    
    1.8Depreciation and amortization
    
    
    2,884
    
    
    
    2,559
    
    
    
    325
    
    
    
    12.7Total expenses
    
    
    147,644
    
    
    
    135,108
    
    
    
    12,536
    
    
    
    9.3OPERATING INCOME
    
    
    2,165
    
    
    
    7,203
    
    
    
    (5,038
    )
    
    
    (69.9
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (167
    )
    
    
    358
    
    
    
    214.4Other income
    
    
    549
    
    
    
    
    
    
    
    549
    
    
    
    100.0Interest income
    
    
    154
    
    
    
    280
    
    
    
    (126
    )
    
    
    (45.0
    )Interest expense
    
    
    (967
    )
    
    
    (1,534
    )
    
    
    567
    
    
    
    37.0(73
    )
    
    
    (1,421
    )
    
    
    1,348
    
    
    
    94.9INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    2,092
    
    
    
    5,782
    
    
    
    (3,690
    )
    
    
    (63.8
    )PROVISION FOR INCOME TAXES
    
    
    (792
    )
    
    
    (1,972
    )
    
    
    (1,180
    )
    
    
    (59.8
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    1,300
    
    
    $
    3,810
    
    
    $
    (2,510
    )
    
    
    (65.9
    )
 20




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Percentage of Net Revenues
    
    2009
    
    
    2008
    
    
    2009
    
    
    2008PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    78.1
    
    
    
    79.0
    
    
    
    78.5
    
    
    
    78.4Lease
    
    
    7.6
    
    
    
    8.1
    
    
    
    7.7
    
    
    
    8.0Professional liability
    
    
    3.9
    
    
    
    2.0
    
    
    
    4.1
    
    
    
    0.2General and administrative
    
    
    6.3
    
    
    
    6.6
    
    
    
    6.3
    
    
    
    6.5Depreciation and amortization
    
    
    1.9
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    1.8Total expenses
    
    
    97.8
    
    
    
    97.6
    
    
    
    98.5
    
    
    
    94.9OPERATING INCOME
    
    
    2.2
    
    
    
    2.4
    
    
    
    1.5
    
    
    
    5.1OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    (0.1
    )Other income
    
    
    
    
    
    
    
    
    
    
    0.4
    
    
    
    Interest income
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2Interest expense
    
    
    (0.6
    )
    
    
    (1.0
    )
    
    
    (0.7
    )
    
    
    (1.1
    )(0.2
    )
    
    
    (0.7
    )
    
    
    (0.1
    )
    
    
    (1.0
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    2.0
    
    
    
    1.7
    
    
    
    1.4
    
    
    
    4.1PROVISION FOR INCOME TAXES
    
    
    (0.8
    )
    
    
    (0.7
    )
    
    
    (0.5
    )
    
    
    (1.4
    )NET INCOME FROM CONTINUING
OPERATIONS
    
    
    1.2
    %
    
    
    1.0
    %
    
    
    0.9
    %
    
    
    2.7
    %
 Three Months Ended June 30, 2009 Compared With Three Months Ended June 30, 2008
 Patient Revenues
   Three Months EndedJune 30,2009
    
    2008Skilled nursing occupancy
    
    
    76.6
    %
    
    
    74.7
    %Medicare census as percent of total
    
    
    13.2
    %
    
    
    13.9
    %Managed care census as percent of total
    
    
    1.2
    %
    
    
    1.3
    %Medicare revenues as percent of total
    
    
    31.5
    %
    
    
    32.1
    %Medicaid revenues as percent of total
    
    
    53.7
    %
    
    
    52.7
    %Managed care revenue as percent of total
    
    
    2.5
    %
    
    
    2.6
    %Medicare average rate per day
    
    $
    401.29
    
    
    $
    380.01Medicaid average rate per day
    
    $
    145.22
    
    
    $
    138.05Managed care average rate per day
    
    $
    371.16
    
    
    $
    336.18
  21




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Operating expense
         Lease expense
  Professional liability
  22




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##### Table of Contents



General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gains
  Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Six Months Ended June 30, 2009 Compared With Six Months Ended June 30, 2008
 Patient Revenues
  23




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##### Table of Contents



Six Months EndedJune 30,2009
    
    2008Skilled nursing occupancy
    
    
    76.2
    %
    
    
    74.9
    %Medicare census as percent of total
    
    
    13.3
    %
    
    
    13.9
    %Managed care census as percent of total
    
    
    1.3
    %
    
    
    1.1
    %Medicare revenues as percent of total
    
    
    31.8
    %
    
    
    32.4
    %Medicaid revenues as percent of total
    
    
    53.4
    %
    
    
    52.7
    %Managed care revenues as percent of total
    
    
    2.6
    %
    
    
    2.2
    %Medicare average rate per day
    
    $
    400.69
    
    
    $
    381.18Medicaid average rate per day
    
    $
    144.03
    
    
    $
    138.03Managed care average rate per day
    
    $
    371.95
    
    
    $
    328.00
  Operating expense
       24




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Lease expense
  Professional liability
  General and administrative expense
  Depreciation and amortization
  Foreign currency transaction gain (loss)
  Other income
  25




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##### Table of Contents



Interest expense
  Income from continuing operations before income taxes; income from continuing operations per common
share
  Liquidity and Capital Resources
  Liquidity
    26




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##### Table of Contents



Dividends
  Note Receivable
  Professional Liability
  Capital Resources
    27




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##### Table of Contents



New Facility Construction
 Texas Facility .
 West Virginia Facility
 Facility Renovations
    Receivables
  28




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##### Table of Contents



Inflation
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
   29




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##### Table of Contents



30




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##### Table of Contents



Forward-Looking Statements
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   31




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   32




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PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
      33




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##### Table of Contents



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The annual meeting of shareholders was held on May 29, 2009.(b)
    
    Matters voted upon at the meeting:
 1.
    
    Election of Directors:
 A.
    
    Voting results for current directors, recommended by the Board of Directors
 William R. Council, IIIFor
    
    
    2,834,901Withheld
    
    
    783,297Eligible Shares
    
    
    4,593,299Richard M. BrameFor
    
    
    2,834,885Withheld
    
    
    783,313Eligible Shares
    
    
    4,593,299
 B.
    
    Voting results for director nominees proposed by a shareholder, not recommended by
the Board of Directors
 Paul KesslerFor
    
    
    974,701Withheld
    
    
    400Eligible Shares
    
    
    4,593,299Richard McKilliganFor
    
    
    974,701Withheld
    
    
    400Eligible Shares
    
    
    4,593,299
 Our continuing directors include Wallace E. Olson, William C. ONeil, Jr., Robert Z. Hensley and Chad A. McCurdy
 
 ITEM 6. EXHIBITS
  34




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##### Table of Contents



SIGNATURES
  August 6, 2009
    
    ADVOCAT INC.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
    
    Rights Agreement dated March 13, 1995, between the Company and Third National Bank in
Nashville (incorporated by reference to Exhibit 1 to the Companys Current Report on Form 8-K
dated March 13, 1995).4.3
    
    Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to
Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995).4.4
    
    Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1
to Form 8-A filed March 30, 1995).4.5
    
    Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference
to Exhibit 1 to Form 8-A/A filed December 7, 1998).4.6
    
    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).10.1
    
    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 corporation31.1
    
    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).