##### 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, 2008
 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 Number:  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 is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company.
See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
 Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
    
    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
 5,670,987
 (Outstanding shares of the issuers common stock as of August 1, 2008)




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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 1A. RISK FACTORSITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSITEM 6. EXHIBITSSIGNATURESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATION OF THE CEO & CFO    Table of Contents  
 Part I. FINANCIAL INFORMATION
 
 ITEM 1    FINANCIAL STATEMENTS
 ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,091
    
    
    $
    11,658Receivables, less allowance for doubtful
accounts of $2,815 and $2,158, respectively
    
    
    23,395
    
    
    
    26,444Current portion of note receivable
    
    
    4,724
    
    
    
    629Prepaid expenses and other current assets
    
    
    2,570
    
    
    
    2,130Insurance refunds receivable
    
    
    
    
    
    
    1,234Prepaid income taxes
    
    
    1,461
    
    
    
    Deferred income taxes
    
    
    2,665
    
    
    
    2,110Total current assets
    
    
    43,906
    
    
    
    44,205PROPERTY AND EQUIPMENT, at cost
    
    
    68,673
    
    
    
    64,294Less accumulated depreciation
    
    
    (36,310
    )
    
    
    (34,091
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,455Property and equipment, net
    
    
    33,818
    
    
    
    31,658OTHER ASSETS:Deferred income taxes
    
    
    16,060
    
    
    
    16,568Note receivable, net of current portion
    
    
    
    
    
    
    4,983Deferred financing and other costs, net
    
    
    1,091
    
    
    
    1,239Other assets
    
    
    2,266
    
    
    
    1,945Acquired leasehold interest, net
    
    
    10,312
    
    
    
    9,492Total other assets
    
    
    29,729
    
    
    
    34,227$
    107,453
    
    
    $
    110,090
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 June 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    4,144
    
    
    $
    1,942Trade accounts payable
    
    
    5,416
    
    
    
    6,636Accrued expenses:Payroll and employee benefits
    
    
    10,104
    
    
    
    11,360Current portion of self-insurance reserves
    
    
    5,460
    
    
    
    4,597Income taxes payable
    
    
    
    
    
    
    393Other current liabilities
    
    
    3,750
    
    
    
    3,600Total current liabilities
    
    
    28,874
    
    
    
    28,528NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    29,303
    
    
    
    32,513Self-insurance reserves, less current portion
    
    
    14,564
    
    
    
    17,578Other noncurrent liabilities
    
    
    10,657
    
    
    
    9,137Total noncurrent liabilities
    
    
    54,524
    
    
    
    59,228COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, including premium of $3,823 and $4,672 at
June 30, 2008 and December 31, 2007, respectively.
    
    
    8,741
    
    
    
    9,590SHAREHOLDERS 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, 5,903,000 and 5,878,000 shares issued, and
5,671,000 and 5,804,000 shares outstanding,
respectively
    
    
    59
    
    
    
    59Treasury stock at cost, 232,000 and 74,000 shares of
Common stock, respectively
    
    
    (2,500
    )
    
    
    (817
    )Paid-in capital
    
    
    16,450
    
    
    
    15,804Retained earnings (accumulated deficit)
    
    
    1,305
    
    
    
    (2,302
    )Total shareholders equity
    
    
    15,314
    
    
    
    12,744$
    107,453
    
    
    $
    110,090
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended June 30,2008
    
    
    2007PATIENT REVENUES, net
    
    $
    70,845
    
    
    $
    55,381EXPENSES:Operating
    
    
    55,999
    
    
    
    41,907Lease
    
    
    5,746
    
    
    
    4,611Professional liability
    
    
    1,401
    
    
    
    (3,378
    )General and administrative
    
    
    4,647
    
    
    
    4,196Depreciation and amortization
    
    
    1,317
    
    
    
    932Total expenses
    
    
    69,110
    
    
    
    48,268OPERATING INCOME
    
    
    1,735
    
    
    
    7,113OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    62
    
    
    
    366Interest income
    
    
    120
    
    
    
    256Interest expense
    
    
    (703
    )
    
    
    (776
    )(521
    )
    
    
    (154
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,214
    
    
    
    6,959PROVISION FOR INCOME TAXES
    
    
    (505
    )
    
    
    (2,698
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    709
    
    
    
    4,261NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(12) and $(11), respectively
    
    
    (19
    )
    
    
    (17
    )DISCONTINUED OPERATIONS
    
    
    (19
    )
    
    
    (17
    )NET INCOME
    
    
    690
    
    
    
    4,244PREFERRED STOCK DIVIDENDS
    
    
    86
    
    
    
    86NET INCOME FOR COMMON STOCK
    
    $
    604
    
    
    $
    4,158NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.11
    
    
    $
    0.71Discontinued operations
    
    
    
    
    
    
    $
    0.11
    
    
    $
    0.71Per common share  dilutedContinuing operations
    
    $
    0.11
    
    
    $
    0.68Discontinued operations
    
    
    (0.01
    )
    
    
    $
    0.10
    
    
    $
    0.68WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,676
    
    
    
    5,874Diluted
    
    
    5,906
    
    
    
    6,131
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Six Months Ended June 30,2008
    
    
    2007PATIENT REVENUES, net
    
    $
    142,311
    
    
    $
    109,973EXPENSES:Operating
    
    
    111,535
    
    
    
    83,650Lease
    
    
    11,450
    
    
    
    9,207Professional liability
    
    
    358
    
    
    
    (2,955
    )General and administrative
    
    
    9,206
    
    
    
    8,340Depreciation and amortization
    
    
    2,559
    
    
    
    1,841Total expenses
    
    
    135,108
    
    
    
    100,083OPERATING INCOME
    
    
    7,203
    
    
    
    9,890OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (167
    )
    
    
    413Interest income
    
    
    280
    
    
    
    507Interest expense
    
    
    (1,534
    )
    
    
    (1,592
    )(1,421
    )
    
    
    (672
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    5,782
    
    
    
    9,218PROVISION FOR INCOME TAXES
    
    
    (1,972
    )
    
    
    (3,577
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    3,810
    
    
    
    5,641NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(19) and $0, respectively
    
    
    (31
    )
    
    
    (1
    )Loss on sale, net of taxes of $0 and $(23), respectively
    
    
    
    
    
    
    (35
    )DISCONTINUED OPERATIONS
    
    
    (31
    )
    
    
    (36
    )NET INCOME
    
    
    3,779
    
    
    
    5,605PREFERRED STOCK DIVIDENDS
    
    
    172
    
    
    
    172NET INCOME FOR COMMON STOCK
    
    $
    3,607
    
    
    $
    5,433NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.64
    
    
    $
    0.93Discontinued operations
    
    
    (0.01
    )
    
    
    $
    0.63
    
    
    $
    0.93Per common share  dilutedContinuing operations
    
    $
    0.61
    
    
    $
    0.89Discontinued operations
    
    
    
    
    
    
    $
    0.61
    
    
    $
    0.89WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,715
    
    
    
    5,872Diluted
    
    
    5,947
    
    
    
    6,128
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Six Months Ended June 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,779
    
    
    $
    5,605Discontinued operations
    
    
    (31
    )
    
    
    (36
    )Net income from continuing operations
    
    
    3,810
    
    
    
    5,641Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    2,559
    
    
    
    1,841Provision for doubtful accounts
    
    
    1,023
    
    
    
    412Deferred income tax provision (benefit)
    
    
    (47
    )
    
    
    2,691Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    (2,031
    )
    
    
    (5,120
    )Stock based compensation
    
    
    411
    
    
    
    259Amortization of deferred balances
    
    
    230
    
    
    
    136Provision for leases in excess of cash payments
    
    
    917
    
    
    
    1,167Foreign currency transaction (gain) loss
    
    
    167
    
    
    
    (413
    )Non-cash interest income
    
    
    (69
    )
    
    
    (69
    )Changes in other assets and liabilities affecting operating
activities:Receivables, net
    
    
    1,423
    
    
    
    (889
    )Prepaid expenses and other assets
    
    
    (691
    )
    
    
    620Trade accounts payable and accrued expenses
    
    
    (3,219
    )
    
    
    (1,339
    )Net cash provided by continuing operations
    
    
    4,483
    
    
    
    4,937Discontinued operations
    
    
    (31
    )
    
    
    (1
    )Net cash provided by operating activities
    
    
    4,452
    
    
    
    4,936CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (4,531
    )
    
    
    (2,719
    )Notes receivable collection
    
    
    765
    
    
    
    700Decrease in cash restricted for capital expenditures
    
    
    
    
    
    
    864Deposits and other deferred balances
    
    
    (326
    )
    
    
    (253
    )Net cash used by continuing operations
    
    
    (4,092
    )
    
    
    (1,408
    )Discontinued operations
    
    
    (49
    )
    
    
    Net cash used by investing activities
    
    
    (4,141
    )
    
    
    (1,408
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (1,008
    )
    
    
    (2,534
    )Financing costs
    
    
    (4
    )
    
    
    (60
    )Repurchase of common stock
    
    
    (1,683
    )
    
    
    Proceeds from exercise of stock options
    
    
    235
    
    
    
    60Payment of preferred stock dividends
    
    
    (172
    )
    
    
    (86
    )Payment for preferred stock restructuring
    
    
    (246
    )
    
    
    (206
    )Net cash used by financing activities
    
    
    (2,878
    )
    
    
    (2,826
    )
  6




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Six Months Ended June 30,2008
    
    
    2007NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    $
    (2,567
    )
    
    $
    702CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,658
    
    
    
    12,344CASH AND CASH EQUIVALENTS, end of period
    
    $
    9,091
    
    
    $
    13,046SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    1,346
    
    
    $
    1,496Cash payments of income taxes
    
    $
    3,848
    
    
    $
    565
  7




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ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2008 and 2007
 BUSINESS
   BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   ACQUISITION
   8




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Current assets
    
    $
    70,000Property and equipment
    
    
    145,000Deferred tax asset
    
    
    116,000Acquired leasehold interest intangible
    
    
    10,653,000Total assets acquired
    
    
    10,984,000Current liabilities
    
    
    1,889,000Total net assets acquired
    
    $
    9,095,000
  9




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AMENDMENT TO MASTER LEASE AGREEMENT FOR REPLACEMENT FACILITY
    INSURANCE MATTERS
 Professional Liability and Other Liability Insurance-
   Reserve for Estimated Self-Insured Professional Liability Claims-
  10




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June 30,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    1,739,000
    
    
    $
    2008
    
    
    6,977,000
    
    
    
    5,134,0002007
    
    
    5,175,000
    
    
    
    7,625,0002006
    
    
    2,782,000
    
    
    
    4,757,0002005
    
    
    1,422,000
    
    
    
    2,339,0002004 and earlier
    
    
    550,000
    
    
    
    820,000$
    18,645,000
    
    
    $
    20,675,000
  Other Insurance-
  11




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STOCK-BASED COMPENSATION
    12




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RECLASSIFICATIONS
  DISCONTINUED OPERATIONS
     13




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EARNINGS PER COMMON SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.11
    
    
    $
    0.71
    
    
    $
    0.64
    
    
    $
    0.93Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Loss on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    
    
    
    
    (0.01
    )
    
    
    Net income
    
    $
    0.11
    
    
    $
    0.71
    
    
    $
    0.63
    
    
    $
    0.93Per common share  dilutedIncome from continuing operations
    
    $
    0.11
    
    
    $
    0.68
    
    
    $
    0.61
    
    
    $
    0.89Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Loss on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    
    
    
    
    
    
    
    
    Net income
    
    $
    0.10
    
    
    $
    0.68
    
    
    $
    0.61
    
    
    $
    0.89
  LONG-TERM DEBT
    14




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INCOME TAXES
   AMENDMENT TO SHAREHOLDERS RIGHTS PLAN
  15




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   Acquisitions and New Lease
 Divestitures.
 Basis of Financial Statements.
 Critical Accounting Policies and Judgments
  Revenues
 Patient Revenues
  16




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Allowance for Doubtful Accounts
  Professional Liability and Other Self-Insurance Reserves
 Accrual for Professional and General Liability Claims -
    17




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June 30,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    1,739,000
    
    
    $
    2008
    
    
    6,977,000
    
    
    
    5,134,0002007
    
    
    5,175,000
    
    
    
    7,625,0002006
    
    
    2,782,000
    
    
    
    4,757,0002005
    
    
    1,422,000
    
    
    
    2,339,0002004 and earlier
    
    
    550,000
    
    
    
    820,000$
    18,645,000
    
    
    $
    20,675,000
    Accrual for Other Self-Insured Claim s-
   18




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Asset Impairment
  Business Combinations
  Stock-Based Compensation
  19




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Income Taxes
  Health Care Industry
  Medicare and Medicaid Reimbursement
    20




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Licensure and other Health Care Laws
  21




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Contractual Obligations and Commercial Commitments
  1 year
    
    
    2 to 3
    
    
    4 to 5
    
    
    AfterContractual Obligations
    
    Total
    
    
    or less
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    38,942
    
    
    $
    6,007
    
    
    $
    7,476
    
    
    $
    25,459
    
    
    $
    Settlement Obligations (2)
    
    $
    3,450
    
    
    $
    3,450
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,693
    
    
    $
    344
    
    
    $
    5,349
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    7,040
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    3,605Operating leases
    
    $
    614,157
    
    
    $
    21,546
    
    
    $
    43,756
    
    
    $
    44,761
    
    
    $
    504,094Required capital expenditures under mortgage loans (5)
    
    $
    734
    
    
    $
    224
    
    
    $
    490
    
    
    $
    20
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    30,183
    
    
    $
    927
    
    
    $
    1,837
    
    
    $
    1,831
    
    
    $
    25,588Total
    
    $
    700,199
    
    
    $
    33,185
    
    
    $
    60,282
    
    
    $
    73,445
    
    
    $
    533,287
 
 (1)
    
    Long-term debt obligations include scheduled future payments of principal
and interest of long-term debt.(2)
    
    Settlement obligations relate to professional liability cases settled in
2008 that will be paid in installments through January 2009. 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.  22




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Results of Operations
  Three Months Ended June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT
REVENUES, net
    
    $
    70,845
    
    
    $
    55,381
    
    
    $
    15,464
    
    
    
    27.9EXPENSES:Operating
    
    
    55,999
    
    
    
    41,907
    
    
    
    14,092
    
    
    
    33.6Lease
    
    
    5,746
    
    
    
    4,611
    
    
    
    1,135
    
    
    
    24.6Professional liability
    
    
    1,401
    
    
    
    (3,378
    )
    
    
    4,779
    
    
    
    141.5General and administrative
    
    
    4,647
    
    
    
    4,196
    
    
    
    451
    
    
    
    10.7Depreciation and amortization
    
    
    1,317
    
    
    
    932
    
    
    
    385
    
    
    
    41.3Total expenses
    
    
    69,110
    
    
    
    48,268
    
    
    
    20,842
    
    
    
    43.2OPERATING INCOME
    
    
    1,735
    
    
    
    7,113
    
    
    
    (5,378
    )
    
    
    (75.6
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    62
    
    
    
    366
    
    
    
    (304
    )
    
    
    (83.1
    )Interest income
    
    
    120
    
    
    
    256
    
    
    
    (136
    )
    
    
    (53.1
    )Interest expense
    
    
    (703
    )
    
    
    (776
    )
    
    
    73
    
    
    
    9.4(521
    )
    
    
    (154
    )
    
    
    (367
    )
    
    
    (238.3
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    1,214
    
    
    
    6,959
    
    
    
    (5,745
    )
    
    
    (82.6
    )PROVISION FOR INCOME TAXES
    
    
    (505
    )
    
    
    (2,698
    )
    
    
    (2,193
    )
    
    
    (81.0
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    709
    
    
    $
    4,261
    
    
    $
    (3,552
    )
    
    
    (83.4
    )
 Six Months Ended June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    142,311
    
    
    $
    109,973
    
    
    $
    32,338
    
    
    
    29.4EXPENSES:Operating
    
    
    111,535
    
    
    
    83,650
    
    
    
    27,885
    
    
    
    33.3Lease
    
    
    11,450
    
    
    
    9,207
    
    
    
    2,243
    
    
    
    24.4Professional liability
    
    
    358
    
    
    
    (2,955
    )
    
    
    3,313
    
    
    
    112.1General and administrative
    
    
    9,206
    
    
    
    8,340
    
    
    
    866
    
    
    
    10.4Depreciation and amortization
    
    
    2,559
    
    
    
    1,841
    
    
    
    718
    
    
    
    39.0Total expenses
    
    
    135,108
    
    
    
    100,083
    
    
    
    35,025
    
    
    
    35.0OPERATING INCOME
    
    
    7,203
    
    
    
    9,890
    
    
    
    (2,687
    )
    
    
    (27.2
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (167
    )
    
    
    413
    
    
    
    (580
    )
    
    
    (140.4
    )Interest income
    
    
    280
    
    
    
    507
    
    
    
    (227
    )
    
    
    (44.8
    )Interest expense
    
    
    (1,534
    )
    
    
    (1,592
    )
    
    
    58
    
    
    
    3.6(1,421
    )
    
    
    (672
    )
    
    
    (749
    )
    
    
    (111.5
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    5,782
    
    
    
    9,218
    
    
    
    (3,436
    )
    
    
    (37.3
    )PROVISION FOR INCOME TAXES
    
    
    (1,972
    )
    
    
    (3,577
    )
    
    
    (1,605
    )
    
    
    (44.9
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    3,810
    
    
    $
    5,641
    
    
    $
    (1,831
    )
    
    
    (32.5
    )
 23




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##### Table of Contents



Three Months EndedJune 30,Percentage of Net Revenues
    
    2008
    
    2007PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    79.0
    
    
    
    75.7Lease
    
    
    8.1
    
    
    
    8.3Professional liability
    
    
    2.0
    
    
    
    (6.1
    )General and administrative
    
    
    6.6
    
    
    
    7.6Depreciation and amortization
    
    
    1.9
    
    
    
    1.7Total expenses
    
    
    97.6
    
    
    
    87.2OPERATING INCOME
    
    
    2.4
    
    
    
    12.8OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    0.1
    
    
    
    0.7Interest income
    
    
    0.2
    
    
    
    0.5Interest expense
    
    
    (1.0
    )
    
    
    (1.4
    )(0.7
    )
    
    
    (0.2
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    1.7
    
    
    
    12.6PROVISION FOR INCOME TAXES
    
    
    (0.7
    )
    
    
    (4.9
    )NET INCOME FROM CONTINUING
OPERATIONS
    
    
    1.0
    %
    
    
    7.7
    %
 Six Months EndedJune 30,Percentage of Net Revenues
    
    2008
    
    2007PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    78.4
    
    
    
    76.1Lease
    
    
    8.0
    
    
    
    8.4Professional liability
    
    
    0.2
    
    
    
    (2.7
    )General and administrative
    
    
    6.5
    
    
    
    7.6Depreciation and amortization
    
    
    1.8
    
    
    
    1.6Total expenses
    
    
    94.9
    
    
    
    91.0OPERATING INCOME
    
    
    5.1
    
    
    
    9.0OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (0.1
    )
    
    
    0.4Interest income
    
    
    0.2
    
    
    
    0.5Interest expense
    
    
    (1.1
    )
    
    
    (1.5
    )(1.0
    )
    
    
    (0.6
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    4.1
    
    
    
    8.4PROVISION FOR INCOME TAXES
    
    
    (1.4
    )
    
    
    (3.3
    )NET INCOME FROM CONTINUING
OPERATIONS
    
    
    2.7
    %
    
    
    5.1
    %
  24




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##### Table of Contents



SAME CENTER
    
    Three Months Ended June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    58,282
    
    
    $
    55,381
    
    
    $
    2,901
    
    
    
    5.2EXPENSES:Operating
    
    
    44,416
    
    
    
    41,907
    
    
    
    2,509
    
    
    
    6.0Lease
    
    
    4,735
    
    
    
    4,611
    
    
    
    124
    
    
    
    2.7Professional liability
    
    
    1,386
    
    
    
    (3,378
    )
    
    
    4,764
    
    
    
    141.0General and administrative
    
    
    4,444
    
    
    
    4,196
    
    
    
    248
    
    
    
    5.9Depreciation and amortization
    
    
    1,047
    
    
    
    932
    
    
    
    115
    
    
    
    12.3Total expenses
    
    
    56,028
    
    
    
    48,268
    
    
    
    7,760
    
    
    
    16.1OPERATING INCOME
    
    
    2,254
    
    
    
    7,113
    
    
    
    (4,859
    )
    
    
    (68.3
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    62
    
    
    
    366
    
    
    
    (304
    )
    
    
    (83.1
    )Interest income
    
    
    120
    
    
    
    256
    
    
    
    (136
    )
    
    
    (53.1
    )Interest expense
    
    
    (567
    )
    
    
    (776
    )
    
    
    209
    
    
    
    26.9(385
    )
    
    
    (154
    )
    
    
    (231
    )
    
    
    (150.0
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    $
    1,869
    
    
    $
    6,959
    
    
    $
    (5,090
    )
    
    
    (73.1
    )
 SAME CENTER
    
    Six Months Ended June 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    116,825
    
    
    $
    109,973
    
    
    $
    6,852
    
    
    
    6.2EXPENSES:Operating
    
    
    88,628
    
    
    
    83,650
    
    
    
    4,978
    
    
    
    6.0Lease
    
    
    9,437
    
    
    
    9,207
    
    
    
    230
    
    
    
    2.5Professional liability
    
    
    417
    
    
    
    (2,955
    )
    
    
    3,372
    
    
    
    114.1General and administrative
    
    
    8,765
    
    
    
    8,340
    
    
    
    425
    
    
    
    5.1Depreciation and amortization
    
    
    2,028
    
    
    
    1,841
    
    
    
    187
    
    
    
    10.2Total expenses
    
    
    109,275
    
    
    
    100,083
    
    
    
    9,192
    
    
    
    9.2OPERATING INCOME
    
    
    7,550
    
    
    
    9,890
    
    
    
    (2,340
    )
    
    
    (23.7
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (167
    )
    
    
    413
    
    
    
    (580
    )
    
    
    (140.4
    )Interest income
    
    
    280
    
    
    
    507
    
    
    
    (227
    )
    
    
    (44.8
    )Interest expense
    
    
    (1,224
    )
    
    
    (1,592
    )
    
    
    368
    
    
    
    23.1(1,111
    )
    
    
    (672
    )
    
    
    (439
    )
    
    
    (65.3
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    $
    6,439
    
    
    $
    9,218
    
    
    $
    (2,779
    )
    
    
    (30.1
    )
 Three Months Ended June 30, 2008 Compared With Three Months Ended June 30, 2007
   Patient Revenues
 25




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##### Table of Contents



Three Months EndedJune 30,2008
    
    2007Skilled nursing occupancy:Same center
    
    
    77.7
    %
    
    
    78.6
    %New Texas Facilities
    
    
    64.9
    %
    
    
    N/ATotal continuing operations
    
    
    74.6
    %
    
    
    78.6
    %Medicare census as percent of total:Same center
    
    
    14.6
    %
    
    
    14.3
    %New Texas Facilities
    
    
    11.0
    %
    
    
    N/ATotal continuing operations
    
    
    13.9
    %
    
    
    14.3
    %Medicare revenues as percent of total:Same center
    
    
    32.4
    %
    
    
    31.4
    %New Texas Facilities
    
    
    30.6
    %
    
    
    N/ATotal continuing operations
    
    
    32.1
    %
    
    
    31.4
    %Medicaid revenues as percent of total:Same center
    
    
    54.1
    %
    
    
    56.3
    %New Texas Facilities
    
    
    46.2
    %
    
    
    N/ATotal continuing operations
    
    
    52.7
    %
    
    
    56.3
    %Medicare average rate per day:Same center
    
    $
    376.50
    
    
    $
    344.48New Texas Facilities
    
    $
    397.94
    
    
    
    N/ATotal continuing operations
    
    $
    380.01
    
    
    $
    344.48Medicaid average rate per day:Same center
    
    $
    143.85
    
    
    $
    137.75New Texas Facilities
    
    $
    113.38
    
    
    
    N/ATotal continuing operations
    
    $
    138.05
    
    
    $
    137.75
   Operating expense
 26




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##### Table of Contents



Lease expense
 Professional liability.
 General and administrative expense
 Depreciation and amortization
 Foreign currency transaction gain
 Interest expense
 27




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##### Table of Contents



Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Six Months Ended June 30, 2008 Compared With Six Months Ended June 30, 2007
   Patient Revenues
 28




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##### Table of Contents



Six Months EndedJune 30,2008
    
    2007Skilled nursing occupancy:Same center
    
    
    78.0
    %
    
    
    78.5
    %New Texas Facilities
    
    
    64.9
    %
    
    
    N/ATotal continuing operations
    
    
    74.9
    %
    
    
    78.5
    %Medicare census as percent of total:Same center
    
    
    14.3
    %
    
    
    14.6
    %New Texas Facilities
    
    
    12.2
    %
    
    
    N/ATotal continuing operations
    
    
    13.9
    %
    
    
    14.6
    %Medicare revenues as percent of total:Same center
    
    
    32.2
    %
    
    
    31.8
    %New Texas Facilities
    
    
    33.1
    %
    
    
    N/ATotal continuing operations
    
    
    32.4
    %
    
    
    31.8
    %Medicaid revenues as percent of total:Same center
    
    
    54.3
    %
    
    
    55.9
    %New Texas Facilities
    
    
    45.2
    %
    
    
    N/ATotal continuing operations
    
    
    52.7
    %
    
    
    55.9
    %Medicare average rate per day:Same center
    
    $
    377.96
    
    
    $
    341.80New Texas Facilities
    
    $
    395.78
    
    
    
    N/ATotal continuing operations
    
    $
    381.18
    
    
    $
    341.80Medicaid average rate per day:Same center
    
    $
    143.79
    
    
    $
    137.49New Texas Facilities
    
    $
    113.07
    
    
    
    N/ATotal continuing operations
    
    $
    138.03
    
    
    $
    137.49
  Operating expense
  29




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##### Table of Contents



Lease expense
 Professional liability.
 General and administrative expense
 Depreciation and amortization
 Foreign currency transaction gain (loss)
 Interest expense
 30




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##### Table of Contents



Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Liquidity and Capital Resources
 Capital Resources
     31




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##### Table of Contents



New Facility Construction
    Share Repurchase
   Professional Liability
  32




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##### Table of Contents



Liquidity
    Amendment to
Shareholders Rights Plan
  Facility Renovations
  33




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##### Table of Contents



Receivables
    Inflation
  34




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##### Table of Contents



Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
 The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.
    Forward-Looking Statements
  35




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
  36




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37




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
    
 ITEM 1A. RISK FACTORS
  If we are unable to complete construction of the Paris, Texas replacement facility in a timely
manner and at our budgeted costs, and if we are unable to develop the necessary census and payor
mix as projected, we will not realize the anticipated potential benefits from the project and our
business and results of operations could be adversely affected.
  38




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Repurchase of Common Stock
 Total Number ofShares Purchased
    
    Maximumas
    
    ApproximateTotal Number
    
    
    
    
    
    Part of Publicly
    
    Dollar Value of Sharesof
    
    Average Price
    
    Announced Plans
    
    That May Yet BeShares
    
    Paid per
    
    or
    
    Purchased Under thePeriod
    
    Purchased
    
    Share
    
    Programs (1)
    
    Plans or Programs (1)April 1 through 22
    
    
    53,700
    
    
    $
    10.75
    
    
    
    231,800
    
    
    $
    Total
    
    
    53,700
 
 (1)
    
    All share repurchases between April 1, 2008 and April 22, 2008 were made
pursuant to a share repurchase program authorized by the Companys Board of Directors
and publicly announced on November 6, 2007, which allowed for the repurchase of up to
$2.5 million of our common stock from time to time pursuant to a plan under 10b5-1 and
in compliance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended,
through November 6, 2008. The total number of shares purchased includes shares
purchased in 2007 following the announcement of the plan. Repurchases under the plan
were completed in April 2008. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 (a)
    
    The annual meeting of shareholders was held on June 3, 2008.(b)
    
    Matters voted upon at the meeting:
 1.
    
    Election of Directors:
 Wallace E. OlsonFor
    
    
    4,883,545Withheld
    
    
    173,638Eligible Shares
    
    
    5,057,183Chad A. McCurdyFor
    
    
    4,974,328Withheld
    
    
    82,855Eligible Shares
    
    
    5,057,183
 39




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##### Table of Contents



Our continuing directors include William C. ONeil, Jr., Robert Z. Hensley, William R. Council, III and Richard M. Brame.2.
    
    Approval of the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel
 For
    
    
    2,603,583Against
    
    
    509,436Withheld
    
    
    46,836Broker Non-Votes
    
    
    1,897,328Eligible Shares
    
    
    5,057,183
 3.
    
    Shareholder Proposal of Bristol Capital Advisors, LLC
 For
    
    
    445,715Against
    
    
    2,387,436Withheld
    
    
    326,704Broker Non-Votes
    
    
    1,897,328Eligible Shares
    
    
    5,057,183
 
 ITEM 6. EXHIBITS
  40




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##### Table of Contents



SIGNATURES
  ADVOCAT INC.August 6, 2008By:
    /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 41




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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
    
    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).3.5
    
    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).10.1
    
    Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (incorporated by reference to Annex A
of the Companys 2008 Proxy Statement filed May 2, 2008).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).