##### 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: September 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 
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
 5,676,987
(Outstanding shares of the issuers common stock as of November 2, 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 PROCEEDINGS.ITEM 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)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    12,126
    
    
    $
    7,598Receivables, less allowance for doubtful
accounts of $3,254 and $3,279, respectively
    
    
    25,290
    
    
    
    23,503Receivable for leased facility construction costs
    
    
    1,079
    
    
    
    228Current portion of note receivable
    
    
    
    
    
    
    466Prepaid expenses and other current assets
    
    
    2,506
    
    
    
    1,748Income tax refundable
    
    
    762
    
    
    
    1,369Deferred income taxes
    
    
    4,511
    
    
    
    3,967Total current assets
    
    
    46,274
    
    
    
    38,879PROPERTY AND EQUIPMENT, at cost
    
    
    78,380
    
    
    
    73,517Less accumulated depreciation
    
    
    (42,674
    )
    
    
    (38,555
    )Construction in progress  leased facility
    
    
    
    
    
    
    1,039Discontinued operations, net
    
    
    1,455
    
    
    
    1,455Property and equipment, net
    
    
    37,161
    
    
    
    37,456OTHER ASSETS:Deferred income taxes
    
    
    13,768
    
    
    
    13,899Note receivable, net of current portion
    
    
    
    
    
    
    3,486Deferred financing and other costs, net
    
    
    754
    
    
    
    1,009Other assets
    
    
    1,974
    
    
    
    2,031Acquired leasehold interest, net
    
    
    9,860
    
    
    
    10,149Total other assets
    
    
    26,356
    
    
    
    30,574$
    109,791
    
    
    $
    106,909
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    3,567
    
    
    $
    2,238Trade accounts payable
    
    
    5,352
    
    
    
    4,600Accrued construction costs  leased facility
    
    
    1,079
    
    
    
    228Accrued expenses:Payroll and employee benefits
    
    
    10,884
    
    
    
    9,545Current portion of self-insurance reserves
    
    
    7,842
    
    
    
    6,469Other current liabilities
    
    
    4,048
    
    
    
    4,914Total current liabilities
    
    
    32,772
    
    
    
    27,994NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    25,328
    
    
    
    30,172Self-insurance reserves, less current portion
    
    
    11,432
    
    
    
    10,212Non-cash obligation for construction in progress  leased facility
    
    
    
    
    
    
    1,039Other noncurrent liabilities
    
    
    13,920
    
    
    
    12,050Total noncurrent liabilities
    
    
    50,680
    
    
    
    53,473COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, including premium of $1,699 and $2,973, respectively
    
    
    6,617
    
    
    
    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
    
    
    17,479
    
    
    
    16,903Retained earnings
    
    
    4,684
    
    
    
    3,089Total shareholders equity
    
    
    19,722
    
    
    
    17,551$
    109,791
    
    
    $
    106,909
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended Sept. 30,2009
    
    
    2008PATIENT REVENUES, net
    
    $
    77,058
    
    
    $
    72,206EXPENSES:Operating
    
    
    61,824
    
    
    
    58,297Lease
    
    
    5,869
    
    
    
    5,753Professional liability
    
    
    902
    
    
    
    278General and administrative
    
    
    4,618
    
    
    
    4,642Depreciation and amortization
    
    
    1,528
    
    
    
    1,355Total expenses
    
    
    74,741
    
    
    
    70,325OPERATING INCOME
    
    
    2,317
    
    
    
    1,881OTHER INCOME (EXPENSE):Foreign currency transaction loss
    
    
    
    
    
    
    (126
    )Interest income
    
    
    5
    
    
    
    91Interest expense
    
    
    (456
    )
    
    
    (692
    )(451
    )
    
    
    (727
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,866
    
    
    
    1,154PROVISION FOR INCOME TAXES
    
    
    (727
    )
    
    
    (480
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    1,139
    
    
    
    674Discontinued operations, operating loss,
net of tax benefit of $6 and $4, respectively
    
    
    (7
    )
    
    
    (4
    )NET INCOME
    
    
    1,132
    
    
    
    670PREFERRED STOCK DIVIDENDS
    
    
    (86
    )
    
    
    (86
    )NET INCOME FOR COMMON STOCK
    
    $
    1,046
    
    
    $
    584NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.19
    
    
    $
    0.10Discontinued operations
    
    
    (0.01
    )
    
    
    $
    0.18
    
    
    $
    0.10Per common share  dilutedContinuing operations
    
    $
    0.18
    
    
    $
    0.10Discontinued operations
    
    
    
    
    
    
    $
    0.18
    
    
    $
    0.10COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON
STOCK
    
    $
    0.10
    
    
    $
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,676
    
    
    
    5,671Diluted
    
    
    5,747
    
    
    
    5,859
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Nine Months Ended Sept. 30,2009
    
    
    2008PATIENT REVENUES, net
    
    $
    226,867
    
    
    $
    214,517EXPENSES:Operating
    
    
    179,452
    
    
    
    169,832Lease
    
    
    17,430
    
    
    
    17,203Professional liability
    
    
    7,099
    
    
    
    636General and administrative
    
    
    13,992
    
    
    
    13,848Depreciation and amortization
    
    
    4,412
    
    
    
    3,914Total expenses
    
    
    222,385
    
    
    
    205,433OPERATING INCOME
    
    
    4,482
    
    
    
    9,084OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (293
    )Other income
    
    
    549
    
    
    
    Interest income
    
    
    159
    
    
    
    371Interest expense
    
    
    (1,423
    )
    
    
    (2,226
    )(524
    )
    
    
    (2,148
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    3,958
    
    
    
    6,936PROVISION FOR INCOME TAXES
    
    
    (1,519
    )
    
    
    (2,452
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    2,439
    
    
    
    4,484Discontinued operations, operating loss,
net of tax benefit of $9 and $23, respectively
    
    
    (14
    )
    
    
    (35
    )NET INCOME
    
    
    2,425
    
    
    
    4,449PREFERRED STOCK DIVIDENDS
    
    
    (258
    )
    
    
    (258
    )NET INCOME FOR COMMON STOCK
    
    $
    2,167
    
    
    $
    4,191NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.38
    
    
    $
    0.74Discontinued operations
    
    
    
    
    
    
    $
    0.38
    
    
    $
    0.74Per common share  dilutedContinuing operations
    
    $
    0.38
    
    
    $
    0.71Discontinued operations
    
    
    
    
    
    
    $
    0.38
    
    
    $
    0.71COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON
STOCK
    
    $
    0.10
    
    
    $
    WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,675
    
    
    
    5,700Diluted
    
    
    5,742
    
    
    
    5,919
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Nine Months Ended Sept. 30,2009
    
    
    2008CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    2,425
    
    
    $
    4,449Discontinued operations
    
    
    (14
    )
    
    
    (35
    )Net income from continuing operations
    
    
    2,439
    
    
    
    4,484Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    4,412
    
    
    
    3,914Provision for doubtful accounts
    
    
    1,798
    
    
    
    1,684Deferred income tax provision (benefit)
    
    
    (413
    )
    
    
    273Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    2,459
    
    
    
    (3,636
    )Stock based compensation
    
    
    556
    
    
    
    645Amortization of deferred balances
    
    
    283
    
    
    
    335Provision for leases in excess of cash payments
    
    
    978
    
    
    
    1,371Non-cash gain on settlement of contingent liability
    
    
    (549
    )
    
    
    Foreign currency transaction (gain) loss
    
    
    (191
    )
    
    
    293Non-cash interest income
    
    
    (41
    )
    
    
    (96
    )Changes in other assets and liabilities affecting operating
activities:Receivables, net
    
    
    (3,585
    )
    
    
    1,140Prepaid expenses and other assets
    
    
    (153
    )
    
    
    (133
    )Trade accounts payable and accrued expenses
    
    
    1,564
    
    
    
    (1,365
    )Net cash provided by continuing operations
    
    
    9,557
    
    
    
    8,909Discontinued operations
    
    
    (14
    )
    
    
    (35
    )Net cash provided by operating activities
    
    
    9,543
    
    
    
    8,874CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (4,867
    )
    
    
    (7,259
    )Payment for construction in progress  leased facility
    
    
    (4,813
    )
    
    
    Notes receivable collection
    
    
    4,184
    
    
    
    765Deposits and other deferred balances
    
    
    59
    
    
    
    (413
    )Net cash used in continuing operations
    
    
    (5,437
    )
    
    
    (6,907
    )Discontinued operations
    
    
    
    
    
    
    (49
    )Net cash used in investing activities
    
    
    (5,437
    )
    
    
    (6,956
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (3,515
    )
    
    
    (1,528
    )Financing costs
    
    
    (28
    )
    
    
    (4
    )Repurchase of common stock
    
    
    
    
    
    
    (1,683
    )Construction allowance receipts  leased facility
    
    
    4,813
    
    
    
    Proceeds from exercise of stock options
    
    
    2
    
    
    
    235Issuance of restricted share units
    
    
    76
    
    
    
    Payment of common stock dividends
    
    
    (286
    )
    
    
    Payment of preferred stock dividends
    
    
    (258
    )
    
    
    (258
    )Payment for preferred stock restructuring
    
    
    (382
    )
    
    
    (371
    )Net cash provided by (used in) financing activities
    
    
    422
    
    
    
    (3,609
    )
  6




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Nine Months Ended Sept. 30,2009
    
    
    2008NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    $
    4,528
    
    
    $
    (1,691
    )CASH AND CASH EQUIVALENTS, beginning of period
    
    
    7,598
    
    
    
    11,658CASH AND CASH EQUIVALENTS, end of period
    
    $
    12,126
    
    
    $
    9,967SUPPLEMENTAL INFORMATION:Cash payments of interest, net of amounts capitalized
    
    $
    1,152
    
    
    $
    1,938Cash payments of income taxes, net of refunds
    
    $
    1,356
    
    
    $
    3,848
  NON-CASH TRANSACTIONS:
  7




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##### Table of Contents



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




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




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Reserve for Estimated Self-Insured Professional Liability Claims-
     Accrual atSeptember 30,
    
    
    December 31,2009
    
    
    2008Policy Year End:May 31, 2010
    
    $
    2,705,000
    
    
    $
    March 9, 2009
    
    
    8,459,000
    
    
    
    3,837,000March 9, 2008
    
    
    4,169,000
    
    
    
    5,769,000March 9, 2007
    
    
    1,492,000
    
    
    
    3,202,000March 9, 2006
    
    
    358,000
    
    
    
    1,102,000March 9, 2005 and earlier
    
    
    235,000
    
    
    
    1,049,000$
    17,418,000
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.19
    
    
    $
    0.10
    
    
    $
    0.38
    
    
    $
    0.74Operating loss from discontinued operations
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.18
    
    
    $
    0.10
    
    
    $
    0.38
    
    
    $
    0.74Per common share  dilutedIncome from continuing operations
    
    $
    0.18
    
    
    $
    0.10
    
    
    $
    0.38
    
    
    $
    0.71Operating loss from discontinued operations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.18
    
    
    $
    0.10
    
    
    $
    0.38
    
    
    $
    0.71
  NOTE RECEIVABLE
  GAIN ON SETTLEMENT WITH CMS
  13




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RECENT ACCOUNTING GUIDANCE
  Accounting guidance adopted in 2009
 Earnings Per share
 Intangibles
 Business Combinations
 14




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Subsequent Events
 AMENDMENT TO MASTER LEASE FOR ADDITIONAL CAPITAL IMPROVEMENT FUNDS
  AMENDMENT TO SHAREHOLDERS RIGHTS PLAN AND COMMON DIVIDEND
   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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##### Table of Contents



Revenue Sources
   Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Medicaid
    
    $
    42,566
    
    
    
    55.2
    %
    
    $
    39,325
    
    
    
    54.5
    %
    
    $
    122,621
    
    
    
    54.1
    %
    
    $
    114,260
    
    
    
    53.3
    %Medicare
    
    
    22,856
    
    
    
    29.7
    
    
    
    21,917
    
    
    
    30.4
    
    
    
    70,413
    
    
    
    31.0
    
    
    
    67,953
    
    
    
    31.7Managed care
    
    
    2,013
    
    
    
    2.6
    
    
    
    1,760
    
    
    
    2.4
    
    
    
    5,940
    
    
    
    2.6
    
    
    
    4,907
    
    
    
    2.3Private Pay and other
    
    
    9,623
    
    
    
    12.5
    
    
    
    9,204
    
    
    
    12.7
    
    
    
    27,893
    
    
    
    12.3
    
    
    
    27,397
    
    
    
    12.7Total
    
    $
    77,058
    
    
    
    100.0
    %
    
    $
    72,206
    
    
    
    100.0
    %
    
    $
    226,867
    
    
    
    100.0
    %
    
    $
    214,517
    
    
    
    100.0
    %
  Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Medicaid
    
    
    3,128
    
    
    
    70.3
    %
    
    
    3,039
    
    
    
    69.9
    %
    
    
    3,085
    
    
    
    69.9
    %
    
    
    3,000
    
    
    
    69.2
    %Medicare
    
    
    549
    
    
    
    12.3
    
    
    
    550
    
    
    
    12.6
    
    
    
    574
    
    
    
    13.0
    
    
    
    583
    
    
    
    13.5Managed care
    
    
    53
    
    
    
    1.2
    
    
    
    53
    
    
    
    1.2
    
    
    
    54
    
    
    
    1.2
    
    
    
    50
    
    
    
    1.2Private Pay and other
    
    
    721
    
    
    
    16.2
    
    
    
    708
    
    
    
    16.3
    
    
    
    704
    
    
    
    15.9
    
    
    
    699
    
    
    
    16.1Total
    
    
    4,451
    
    
    
    100.0
    %
    
    
    4,350
    
    
    
    100.0
    %
    
    
    4,417
    
    
    
    100.0
    %
    
    
    4,332
    
    
    
    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)
    
    $
    30,810
    
    
    $
    4,574
    
    
    $
    23,266
    
    
    $
    2,970
    
    
    $
    Settlement Obligations (2)
    
    $
    920
    
    
    $
    920
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,262
    
    
    $
    344
    
    
    $
    4,918
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    6,181
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    2,746Operating leases
    
    $
    591,498
    
    
    $
    22,091
    
    
    $
    44,310
    
    
    $
    46,478
    
    
    $
    478,619Required capital expenditures under mortgage loans (5)
    
    $
    464
    
    
    $
    260
    
    
    $
    204
    
    
    $
    
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    24,271
    
    
    $
    501
    
    
    $
    1,002
    
    
    $
    1,002
    
    
    $
    21,766Total
    
    $
    659,406
    
    
    $
    29,377
    
    
    $
    75,074
    
    
    $
    51,824
    
    
    $
    503,131
 
 (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
  (in thousands)
    
    Three Months Ended September 30,2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    77,058
    
    
    $
    72,206
    
    
    $
    4,852
    
    
    
    6.7EXPENSES:Operating
    
    
    61,824
    
    
    
    58,297
    
    
    
    3,527
    
    
    
    6.1Lease
    
    
    5,869
    
    
    
    5,753
    
    
    
    116
    
    
    
    2.0Professional liability
    
    
    902
    
    
    
    278
    
    
    
    624
    
    
    
    224.5General and administrative
    
    
    4,618
    
    
    
    4,642
    
    
    
    (24
    )
    
    
    (0.5
    )Depreciation and amortization
    
    
    1,528
    
    
    
    1,355
    
    
    
    173
    
    
    
    12.8Total expenses
    
    
    74,741
    
    
    
    70,325
    
    
    
    4,416
    
    
    
    6.3OPERATING INCOME
    
    
    2,317
    
    
    
    1,881
    
    
    
    436
    
    
    
    23.2OTHER INCOME (EXPENSE):Foreign currency transaction loss
    
    
    
    
    
    
    (126
    )
    
    
    126
    
    
    
    100.0Interest income
    
    
    5
    
    
    
    91
    
    
    
    (86
    )
    
    
    (94.5
    )Interest expense
    
    
    (456
    )
    
    
    (692
    )
    
    
    236
    
    
    
    34.1(451
    )
    
    
    (727
    )
    
    
    276
    
    
    
    38.0INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,866
    
    
    
    1,154
    
    
    
    712
    
    
    
    61.7PROVISION FOR INCOME TAXES
    
    
    (727
    )
    
    
    (480
    )
    
    
    (247
    )
    
    
    (51.5
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    1,139
    
    
    $
    674
    
    
    $
    465
    
    
    
    69.0
 (in thousands)
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    226,867
    
    
    $
    214,517
    
    
    $
    12,350
    
    
    
    5.8EXPENSES:Operating
    
    
    179,452
    
    
    
    169,832
    
    
    
    9,620
    
    
    
    5.7Lease
    
    
    17,430
    
    
    
    17,203
    
    
    
    227
    
    
    
    1.3Professional liability
    
    
    7,099
    
    
    
    636
    
    
    
    6,463
    
    
    
    1,016.2General and administrative
    
    
    13,992
    
    
    
    13,848
    
    
    
    144
    
    
    
    1.0Depreciation and amortization
    
    
    4,412
    
    
    
    3,914
    
    
    
    498
    
    
    
    12.7Total expenses
    
    
    222,385
    
    
    
    205,433
    
    
    
    16,952
    
    
    
    8.3OPERATING INCOME
    
    
    4,482
    
    
    
    9,084
    
    
    
    (4,602
    )
    
    
    (50.7
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    191
    
    
    
    (293
    )
    
    
    484
    
    
    
    165.2Other income
    
    
    549
    
    
    
    
    
    
    
    549
    
    
    
    100.0Interest income
    
    
    159
    
    
    
    371
    
    
    
    (212
    )
    
    
    (57.1
    )Interest expense
    
    
    (1,423
    )
    
    
    (2,226
    )
    
    
    803
    
    
    
    36.1(524
    )
    
    
    (2,148
    )
    
    
    1,624
    
    
    
    75.6INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    3,958
    
    
    
    6,936
    
    
    
    (2,978
    )
    
    
    (42.9
    )PROVISION FOR INCOME TAXES
    
    
    (1,519
    )
    
    
    (2,452
    )
    
    
    (933
    )
    
    
    (38.1
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    2,439
    
    
    $
    4,484
    
    
    $
    (2,045
    )
    
    
    (45.6
    )
 20




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##### Table of Contents



Percentage of Net Revenues
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    80.2
    
    
    
    80.7
    
    
    
    79.1
    
    
    
    79.2Lease
    
    
    7.6
    
    
    
    8.0
    
    
    
    7.7
    
    
    
    8.0Professional liability
    
    
    1.2
    
    
    
    0.4
    
    
    
    3.1
    
    
    
    0.3General and administrative
    
    
    6.0
    
    
    
    6.4
    
    
    
    6.2
    
    
    
    6.5Depreciation and amortization
    
    
    2.0
    
    
    
    1.9
    
    
    
    1.9
    
    
    
    1.8Total expenses
    
    
    97.0
    
    
    
    97.4
    
    
    
    98.0
    
    
    
    95.8OPERATING INCOME
    
    
    3.0
    
    
    
    2.6
    
    
    
    2.0
    
    
    
    4.2OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    
    
    
    
    (0.2
    )
    
    
    0.1
    
    
    
    (0.1
    )Other income
    
    
    
    
    
    
    
    
    
    
    0.2
    
    
    
    Interest income
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Interest expense
    
    
    (0.6
    )
    
    
    (0.9
    )
    
    
    (0.6
    )
    
    
    (1.0
    )(0.6
    )
    
    
    (1.0
    )
    
    
    (0.2
    )
    
    
    (1.0
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    2.4
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    3.2PROVISION FOR INCOME TAXES
    
    
    (0.9
    )
    
    
    (0.7
    )
    
    
    (0.7
    )
    
    
    (1.1
    )NET INCOME FROM CONTINUING
OPERATIONS
    
    
    1.5
    %
    
    
    0.9
    %
    
    
    1.1
    %
    
    
    2.1
    %
 Three Months Ended September 30, 2009 Compared With Three Months Ended September 30, 2008
 Patient Revenues
   Three Months EndedSeptember 30,2009
    
    2008Skilled nursing occupancy
    
    
    77.1
    %
    
    
    75.3
    %Medicare census as percent of total
    
    
    12.3
    %
    
    
    12.6
    %Managed care census as percent of total
    
    
    1.2
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    29.7
    %
    
    
    30.4
    %Medicaid revenues as percent of total
    
    
    55.2
    %
    
    
    54.5
    %Managed care revenue as percent of total
    
    
    2.6
    %
    
    
    2.4
    %Medicare average rate per day
    
    $
    402.69
    
    
    $
    385.86Medicaid average rate per day
    
    $
    147.73
    
    
    $
    140.19Managed care average rate per day
    
    $
    375.63
    
    
    $
    338.39
  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 gain (loss)
  Interest expense
  Income
from continuing operations before income taxes; income from continuing operations per common share
  Nine Months Ended September 30, 2009 Compared With Nine Months Ended September 30, 2008
 Patient Revenues
  23




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##### Table of Contents



Nine Months EndedSeptember 30,2009
    
    2008Skilled nursing occupancy
    
    
    76.5
    %
    
    
    75.0
    %Medicare census as percent of total
    
    
    13.0
    %
    
    
    13.4
    %Managed care census as percent of total
    
    
    1.2
    %
    
    
    1.2
    %Medicare revenues as percent of total
    
    
    31.0
    %
    
    
    31.7
    %Medicaid revenues as percent of total
    
    
    54.1
    %
    
    
    53.3
    %Managed care revenues as percent of total
    
    
    2.6
    %
    
    
    2.3
    %Medicare average rate per day
    
    $
    401.33
    
    
    $
    382.66Medicaid average rate per day
    
    $
    145.35
    
    
    $
    138.76Managed care average rate per day
    
    $
    373.16
    
    
    $
    331.70
  Operating expense
      24




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##### Table of Contents



Lease expense
  Professional liability
  General and administrative expense
  Depreciation and amortization
  25




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##### Table of Contents



Foreign currency transaction gain (loss)
  Other income
  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
  28




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##### Table of Contents



Receivables
    Inflation
  Off-Balance Sheet Arrangements
  29




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##### Table of Contents



Recent Accounting Guidance
  Accounting guidance adopted in 2009
 Earnings Per share
 Intangibles
 Business Combinations
 Subsequent Events
 30




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##### Table of Contents



Forward-Looking Statements
  31




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   32




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
      
 ITEM 6.
    
    EXHIBITS
  33




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##### Table of Contents



SIGNATURES
  November 9, 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 34




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibits
 3.1
    
    Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to
the Companys Registration Statement No. 33-76150 on Form S-1).3.2
    
    Certificate of Designation of Registrant (incorporated by reference to Exhibit 3.5 to the
Companys quarterly report on Form 10-Q for the quarter ended September 30, 2006).3.3
    
    Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Companys Registration
Statement No. 33-76150 on Form
S-1).3.4
    
    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).4.7
    
    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
    
    Tenth Amendment to Consolidated Amended and Restated Master Lease dated as of September 8,
2009 by and between Sterling Acquisition Corp., a Kentucky corporation and Diversicare Leasing
Corp., a Tennessee corporation.




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##### Table of Contents



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).