##### 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, 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
    
    (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
  Large accelerated filer o
    
    Accelerated filer þ
    
    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
 5,670,987  (Outstanding shares of the issuers common stock as of November 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 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 31,2008
    
    
    2007(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    9,967
    
    
    $
    11,658Receivables, less allowance for doubtful
accounts of $3,206 and $2,158, respectively
    
    
    23,585
    
    
    
    26,444Current portion of note receivable
    
    
    4,685
    
    
    
    629Prepaid expenses and other current assets
    
    
    2,178
    
    
    
    2,130Insurance refunds receivable
    
    
    
    
    
    
    1,234Prepaid income taxes
    
    
    1,306
    
    
    
    Deferred income taxes
    
    
    2,298
    
    
    
    2,110Total current assets
    
    
    44,019
    
    
    
    44,205PROPERTY AND EQUIPMENT, at cost
    
    
    71,094
    
    
    
    64,294Less accumulated depreciation
    
    
    (37,280
    )
    
    
    (34,091
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,455Property and equipment, net
    
    
    35,269
    
    
    
    31,658OTHER ASSETS:Deferred income taxes
    
    
    16,107
    
    
    
    16,568Note receivable, net of current portion
    
    
    
    
    
    
    4,983Deferred financing and other costs, net
    
    
    994
    
    
    
    1,239Other assets
    
    
    2,334
    
    
    
    1,945Acquired leasehold interest, net
    
    
    10,245
    
    
    
    9,492Total other assets
    
    
    29,680
    
    
    
    34,227$
    108,968
    
    
    $
    110,090
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    4,122
    
    
    $
    1,942Trade accounts payable
    
    
    5,732
    
    
    
    6,636Accrued expenses:Payroll and employee benefits
    
    
    11,052
    
    
    
    11,360Current portion of self-insurance reserves
    
    
    4,637
    
    
    
    4,597Income taxes payable
    
    
    
    
    
    
    393Other current liabilities
    
    
    5,006
    
    
    
    3,600Total current liabilities
    
    
    30,549
    
    
    
    28,528NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    28,805
    
    
    
    32,513Self-insurance reserves, less current portion
    
    
    13,755
    
    
    
    17,578Other noncurrent liabilities
    
    
    11,411
    
    
    
    9,137Total noncurrent liabilities
    
    
    53,971
    
    
    
    59,228COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, including premium of $3,398 and $4,672 at
September 30, 2008 and December 31, 2007, respectively
    
    
    8,316
    
    
    
    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
    
    
    16,684
    
    
    
    15,804Retained earnings (accumulated deficit)
    
    
    1,889
    
    
    
    (2,302
    )Total shareholders equity
    
    
    16,132
    
    
    
    12,744$
    108,968
    
    
    $
    110,090
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended September 30,2008
    
    
    2007PATIENT REVENUES, net
    
    $
    72,206
    
    
    $
    63,884EXPENSES:Operating
    
    
    58,297
    
    
    
    49,253Lease
    
    
    5,753
    
    
    
    5,162Professional liability
    
    
    278
    
    
    
    (6
    )General and administrative
    
    
    4,642
    
    
    
    4,580Depreciation and amortization
    
    
    1,355
    
    
    
    1,033Total expenses
    
    
    70,325
    
    
    
    60,022OPERATING INCOME
    
    
    1,881
    
    
    
    3,862OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (126
    )
    
    
    330Interest income
    
    
    91
    
    
    
    264Interest expense
    
    
    (692
    )
    
    
    (956
    )Debt retirement costs
    
    
    
    
    
    
    (116
    )(727
    )
    
    
    (478
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    1,154
    
    
    
    3,384PROVISION FOR INCOME TAXES
    
    
    (480
    )
    
    
    (1,363
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    674
    
    
    
    2,021NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(4) and $(10), respectively
    
    
    (4
    )
    
    
    (100
    )Gain on sale, net of taxes of $0 and $17, respectively
    
    
    
    
    
    
    28DISCONTINUED OPERATIONS
    
    
    (4
    )
    
    
    (72
    )NET INCOME
    
    
    670
    
    
    
    1,949PREFERRED STOCK DIVIDENDS
    
    
    86
    
    
    
    86NET INCOME FOR COMMON STOCK
    
    $
    584
    
    
    $
    1,863NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.10
    
    
    $
    0.33Discontinued operations
    
    
    
    
    
    
    (0.01
    )$
    0.10
    
    
    $
    0.32Per common share  dilutedContinuing operations
    
    $
    0.10
    
    
    $
    0.32Discontinued operations
    
    
    
    
    
    
    (0.02
    )$
    0.10
    
    
    $
    0.30WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,671
    
    
    
    5,877Diluted
    
    
    5,859
    
    
    
    6,136
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Nine Months Ended September 30,2008
    
    
    2007PATIENT REVENUES, net
    
    $
    214,517
    
    
    $
    173,857EXPENSES:Operating
    
    
    169,832
    
    
    
    132,903Lease
    
    
    17,203
    
    
    
    14,369Professional liability
    
    
    636
    
    
    
    (2,961
    )General and administrative
    
    
    13,848
    
    
    
    12,920Depreciation and amortization
    
    
    3,914
    
    
    
    2,874Total expenses
    
    
    205,433
    
    
    
    160,105OPERATING INCOME
    
    
    9,084
    
    
    
    13,752OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (293
    )
    
    
    743Interest income
    
    
    371
    
    
    
    771Interest expense
    
    
    (2,226
    )
    
    
    (2,548
    )Debt retirement costs
    
    
    
    
    
    
    (116
    )(2,148
    )
    
    
    (1,150
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    6,936
    
    
    
    12,602PROVISION FOR INCOME TAXES
    
    
    (2,452
    )
    
    
    (4,940
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    4,484
    
    
    
    7,662NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(23) and $(10), respectively
    
    
    (35
    )
    
    
    (101
    )Loss on sale, net of taxes of $0 and $(6), respectively
    
    
    
    
    
    
    (7
    )DISCONTINUED OPERATIONS
    
    
    (35
    )
    
    
    (108
    )NET INCOME
    
    
    4,449
    
    
    
    7,554PREFERRED STOCK DIVIDENDS
    
    
    258
    
    
    
    258NET INCOME FOR COMMON STOCK
    
    $
    4,191
    
    
    $
    7,296NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.74
    
    
    $
    1.26Discontinued operations
    
    
    
    
    
    
    (0.02
    )$
    0.74
    
    
    $
    1.24Per common share  dilutedContinuing operations
    
    $
    0.71
    
    
    $
    1.21Discontinued operations
    
    
    
    
    
    
    (0.02
    )$
    0.71
    
    
    $
    1.19WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,700
    
    
    
    5,874Diluted
    
    
    5,919
    
    
    
    6,131
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Nine Months Ended September 30,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    4,449
    
    
    $
    7,554Discontinued operations
    
    
    (35
    )
    
    
    (108
    )Net income from continuing operations
    
    
    4,484
    
    
    
    7,662Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    3,914
    
    
    
    2,874Provision for doubtful accounts
    
    
    1,684
    
    
    
    809Deferred income tax provision
    
    
    273
    
    
    
    3,713Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    (3,636
    )
    
    
    (6,010
    )Stock-based compensation
    
    
    645
    
    
    
    454Amortization of deferred balances
    
    
    335
    
    
    
    221Provision for leases in excess of cash payments
    
    
    1,371
    
    
    
    1,753Foreign currency transaction (gain) loss
    
    
    293
    
    
    
    (743
    )Debt retirement costs
    
    
    
    
    
    
    116Non-cash interest income
    
    
    (96
    )
    
    
    (99
    )Changes in other assets and liabilities affecting operating
activities:Receivables, net
    
    
    1,140
    
    
    
    (7,520
    )Prepaid expenses and other assets
    
    
    (133
    )
    
    
    872Trade accounts payable and accrued expenses
    
    
    (1,365
    )
    
    
    2,965Net cash provided by continuing operations
    
    
    8,909
    
    
    
    7,067Discontinued operations
    
    
    (35
    )
    
    
    (21
    )Net cash provided by operating activities
    
    
    8,874
    
    
    
    7,046CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (7,259
    )
    
    
    (4,015
    )Acquisition of leasehold interest
    
    
    
    
    
    
    (9,218
    )Proceeds from sale of discontinued operations and bed license
    
    
    
    
    
    
    180Decrease (increase) in restricted cash deposits
    
    
    
    
    
    
    247Note receivable issued
    
    
    
    
    
    
    (1,800
    )Notes receivable collection
    
    
    765
    
    
    
    2,500Decrease in cash restricted for capital expenditures
    
    
    
    
    
    
    864Deposits and other deferred balances
    
    
    (413
    )
    
    
    (6
    )Net cash used by continuing operations
    
    
    (6,907
    )
    
    
    (11,248
    )Discontinued operations
    
    
    (49
    )
    
    
    Net cash used in investing activities
    
    
    (6,956
    )
    
    
    (11,248
    )
  6




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Nine Months Ended September 30,2008
    
    
    2007CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    $
    (1,528
    )
    
    $
    (9,353
    )Proceeds from issuance of debt
    
    
    
    
    
    
    16,500Financing costs
    
    
    (4
    )
    
    
    (826
    )Repurchase of common stock
    
    
    (1,683
    )
    
    
    Proceeds from exercise of stock options
    
    
    235
    
    
    
    60Payment of preferred stock dividends
    
    
    (258
    )
    
    
    (258
    )Payment for preferred stock restructuring
    
    
    (371
    )
    
    
    (326
    )Net cash provided by (used in) financing activities
    
    
    (3,609
    )
    
    
    5,797NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    
    (1,691
    )
    
    
    1,595CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,658
    
    
    
    12,344CASH AND CASH EQUIVALENTS, end of period
    
    $
    9,967
    
    
    $
    13,939SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    1,938
    
    
    $
    2,294Cash payments of income taxes
    
    $
    3,848
    
    
    $
    838
  7




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ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 September 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-
   10




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Reserve for Estimated Self-Insured Professional Liability Claims-
     September 30,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    2,992,000
    
    
    $
    2008
    
    
    6,252,000
    
    
    
    5,134,0002007
    
    
    4,664,000
    
    
    
    7,625,0002006
    
    
    1,731,000
    
    
    
    4,757,0002005
    
    
    999,000
    
    
    
    2,339,0002004 and earlier
    
    
    400,000
    
    
    
    820,000$
    17,038,000
    
    
    $
    20,675,000
  11




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Other Insurance-
      STOCK-BASED COMPENSATION
   12




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RECLASSIFICATIONS
  DISCONTINUED OPERATIONS
     13




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EARNINGS PER COMMON SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.10
    
    
    $
    0.33
    
    
    $
    0.74
    
    
    $
    1.26Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Loss on sale, net of taxes
    
    
    
    
    
    
    0.01
    
    
    
    
    
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Net income
    
    $
    0.10
    
    
    $
    0.32
    
    
    $
    0.74
    
    
    $
    1.24Per common share  dilutedIncome from continuing operations
    
    $
    0.10
    
    
    $
    0.32
    
    
    $
    0.71
    
    
    $
    1.21Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Loss on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Discontinued operations, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Net income
    
    $
    0.10
    
    
    $
    0.30
    
    
    $
    0.71
    
    
    $
    1.19
  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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September 30,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    2,992,000
    
    
    $
    2008
    
    
    6,252,000
    
    
    
    5,134,0002007
    
    
    4,664,000
    
    
    
    7,625,0002006
    
    
    1,731,000
    
    
    
    4,757,0002005
    
    
    999,000
    
    
    
    2,339,0002004 and earlier
    
    
    400,000
    
    
    
    820,000$
    17,038,000
    
    
    $
    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)
    
    $
    38,436
    
    
    $
    6,083
    
    
    $
    28,071
    
    
    $
    4,282
    
    
    $
    Settlement Obligations (2)
    
    $
    2,050
    
    
    $
    2,050
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,607
    
    
    $
    344
    
    
    $
    5,263
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    6,868
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    3,433Operating leases
    
    $
    608,864
    
    
    $
    21,799
    
    
    $
    43,645
    
    
    $
    45,027
    
    
    $
    498,393Required capital expenditures under mortgage loans (5)
    
    $
    694
    
    
    $
    245
    
    
    $
    449
    
    
    $
    
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    28,980
    
    
    $
    854
    
    
    $
    1,708
    
    
    $
    1,713
    
    
    $
    24,705Total
    
    $
    691,499
    
    
    $
    32,062
    
    
    $
    80,510
    
    
    $
    52,396
    
    
    $
    526,531
 
 (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 September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    72,206
    
    
    $
    63,884
    
    
    $
    8,322
    
    
    
    13.0EXPENSES:Operating
    
    
    58,297
    
    
    
    49,253
    
    
    
    9,044
    
    
    
    18.4Lease
    
    
    5,753
    
    
    
    5,162
    
    
    
    591
    
    
    
    11.4Professional liability
    
    
    278
    
    
    
    (6
    )
    
    
    284
    
    
    
    4,733.3General and administrative
    
    
    4,642
    
    
    
    4,580
    
    
    
    62
    
    
    
    1.4Depreciation and amortization
    
    
    1,355
    
    
    
    1,033
    
    
    
    322
    
    
    
    31.2Total expenses
    
    
    70,325
    
    
    
    60,022
    
    
    
    10,303
    
    
    
    17.2OPERATING INCOME
    
    
    1,881
    
    
    
    3,862
    
    
    
    (1,981
    )
    
    
    (51.3
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (126
    )
    
    
    330
    
    
    
    (456
    )
    
    
    (138.2
    )Interest income
    
    
    91
    
    
    
    264
    
    
    
    (173
    )
    
    
    (65.5
    )Interest expense
    
    
    (692
    )
    
    
    (956
    )
    
    
    264
    
    
    
    27.6Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0(727
    )
    
    
    (478
    )
    
    
    (249
    )
    
    
    (52.1
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    1,154
    
    
    
    3,384
    
    
    
    (2,230
    )
    
    
    (65.9
    )PROVISION FOR INCOME TAXES
    
    
    (480
    )
    
    
    (1,363
    )
    
    
    (883
    )
    
    
    (64.8
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    674
    
    
    $
    2,021
    
    
    $
    (1,347
    )
    
    
    (66.7
    )
 Nine Months Ended September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    214,517
    
    
    $
    173,857
    
    
    $
    40,660
    
    
    
    23.4EXPENSES:Operating
    
    
    169,832
    
    
    
    132,903
    
    
    
    36,929
    
    
    
    27.8Lease
    
    
    17,203
    
    
    
    14,369
    
    
    
    2,834
    
    
    
    19.7Professional liability
    
    
    636
    
    
    
    (2,961
    )
    
    
    3,597
    
    
    
    121.5General and administrative
    
    
    13,848
    
    
    
    12,920
    
    
    
    928
    
    
    
    7.2Depreciation and amortization
    
    
    3,914
    
    
    
    2,874
    
    
    
    1,040
    
    
    
    36.2Total expenses
    
    
    205,433
    
    
    
    160,105
    
    
    
    45,328
    
    
    
    28.3OPERATING INCOME
    
    
    9,084
    
    
    
    13,752
    
    
    
    (4,668
    )
    
    
    (33.9
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (293
    )
    
    
    743
    
    
    
    (1,036
    )
    
    
    (139.4
    )Interest income
    
    
    371
    
    
    
    771
    
    
    
    (400
    )
    
    
    (51.9
    )Interest expense
    
    
    (2,226
    )
    
    
    (2,548
    )
    
    
    322
    
    
    
    12.6Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0(2,148
    )
    
    
    (1,150
    )
    
    
    (998
    )
    
    
    (86.8
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    6,936
    
    
    
    12,602
    
    
    
    (5,666
    )
    
    
    (45.0
    )PROVISION FOR INCOME TAXES
    
    
    (2,452
    )
    
    
    (4,940
    )
    
    
    (2,488
    )
    
    
    (50.4
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    4,484
    
    
    $
    7,662
    
    
    $
    (3,178
    )
    
    
    (41.5
    )
 23




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,Percentage of Net Revenues
    
    2008
    
    
    2007
    
    
    2008
    
    
    2007PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    80.7
    
    
    
    77.1
    
    
    
    79.2
    
    
    
    76.4Lease
    
    
    8.0
    
    
    
    8.1
    
    
    
    8.0
    
    
    
    8.3Professional liability
    
    
    0.4
    
    
    
    
    
    
    
    0.3
    
    
    
    (1.7
    )General and administrative
    
    
    6.4
    
    
    
    7.2
    
    
    
    6.5
    
    
    
    7.4Depreciation and amortization
    
    
    1.9
    
    
    
    1.6
    
    
    
    1.8
    
    
    
    1.7Total expenses
    
    
    97.4
    
    
    
    94.0
    
    
    
    95.8
    
    
    
    92.1OPERATING INCOME
    
    
    2.6
    
    
    
    6.0
    
    
    
    4.2
    
    
    
    7.9OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (0.2
    )
    
    
    0.5
    
    
    
    (0.1
    )
    
    
    0.4Interest income
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.4Interest expense
    
    
    (0.9
    )
    
    
    (1.4
    )
    
    
    (1.0
    )
    
    
    (1.4
    )Debt retirement costs
    
    
    
    
    
    
    (0.2
    )
    
    
    
    
    
    
    (0.1
    )(1.0
    )
    
    
    (0.7
    )
    
    
    (1.0
    )
    
    
    (0.7
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    1.6
    
    
    
    5.3
    
    
    
    3.2
    
    
    
    7.2PROVISION FOR INCOME TAXES
    
    
    0.7
    
    
    
    2.1
    
    
    
    1.1
    
    
    
    2.8NET INCOME FROM CONTINUING
OPERATIONS
    
    
    0.9
    %
    
    
    3.2
    %
    
    
    2.1
    %
    
    
    4.4
    %
  SAME CENTER
    
    Three Months Ended September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    58,919
    
    
    $
    57,289
    
    
    $
    1,630
    
    
    
    2.8EXPENSES:Operating
    
    
    46,139
    
    
    
    43,313
    
    
    
    2,826
    
    
    
    6.5Lease
    
    
    4,731
    
    
    
    4,634
    
    
    
    97
    
    
    
    2.1Professional liability
    
    
    139
    
    
    
    (90
    )
    
    
    229
    
    
    
    254.4General and administrative
    
    
    4,412
    
    
    
    4,174
    
    
    
    238
    
    
    
    5.7Depreciation and amortization
    
    
    1,065
    
    
    
    944
    
    
    
    121
    
    
    
    12.8Total expenses
    
    
    56,486
    
    
    
    52,975
    
    
    
    3,511
    
    
    
    6.6OPERATING INCOME
    
    
    2,433
    
    
    
    4,314
    
    
    
    (1,881
    )
    
    
    (43.6
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (126
    )
    
    
    330
    
    
    
    (456
    )
    
    
    (138.2
    )Interest income
    
    
    91
    
    
    
    264
    
    
    
    (173
    )
    
    
    (65.5
    )Interest expense
    
    
    (560
    )
    
    
    (819
    )
    
    
    259
    
    
    
    31.6Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0(595
    )
    
    
    (341
    )
    
    
    (254
    )
    
    
    (74.5
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    $
    1,838
    
    
    $
    3,973
    
    
    $
    (2,135
    )
    
    
    (53.7
    )
 24




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##### Table of Contents



SAME CENTER
    
    Nine Months Ended September 30,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    175,744
    
    
    $
    167,262
    
    
    $
    8,482
    
    
    
    5.1EXPENSES:Operating
    
    
    134,767
    
    
    
    126,964
    
    
    
    7,803
    
    
    
    6.1Lease
    
    
    14,168
    
    
    
    13,841
    
    
    
    327
    
    
    
    2.4Professional liability
    
    
    556
    
    
    
    (3,045
    )
    
    
    3,601
    
    
    
    118.3General and administrative
    
    
    13,177
    
    
    
    12,513
    
    
    
    664
    
    
    
    5.3Depreciation and amortization
    
    
    3,093
    
    
    
    2,785
    
    
    
    308
    
    
    
    11.1Total expenses
    
    
    165,761
    
    
    
    153,058
    
    
    
    12,703
    
    
    
    8.3OPERATING INCOME
    
    
    9,983
    
    
    
    14,204
    
    
    
    (4,221
    )
    
    
    (29.7
    )OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (293
    )
    
    
    743
    
    
    
    (1,036
    )
    
    
    (139.4
    )Interest income
    
    
    371
    
    
    
    771
    
    
    
    (400
    )
    
    
    (51.9
    )Interest expense
    
    
    (1,784
    )
    
    
    (2,411
    )
    
    
    627
    
    
    
    26.0Debt retirement costs
    
    
    
    
    
    
    (116
    )
    
    
    116
    
    
    
    100.0(1,706
    )
    
    
    (1,013
    )
    
    
    (693
    )
    
    
    (68.4
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    $
    8,277
    
    
    $
    13,191
    
    
    $
    (4,914
    )
    
    
    (37.3
    )
 Three Months Ended September 30, 2008 Compared With Three Months Ended September 30, 2007
   Patient Revenues
  25




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##### Table of Contents



Three Months EndedSeptember 30,2008
    
    2007Skilled nursing occupancy:Same center
    
    
    77.7
    %
    
    
    79.1
    %New Texas Facilities
    
    
    67.8
    %
    
    
    68.4
    %Total continuing operations
    
    
    75.3
    %
    
    
    77.6
    %Medicare census as percent of total:Same center
    
    
    13.0
    %
    
    
    13.3
    %New Texas Facilities
    
    
    11.4
    %
    
    
    12.0
    %Total continuing operations
    
    
    12.6
    %
    
    
    13.1
    %Medicare revenues as percent of total:Same center
    
    
    30.1
    %
    
    
    29.7
    %New Texas Facilities
    
    
    31.6
    %
    
    
    33.1
    %Total continuing operations
    
    
    30.4
    %
    
    
    30.0
    %Medicaid revenues as percent of total:Same center
    
    
    55.9
    %
    
    
    57.9
    %New Texas Facilities
    
    
    47.9
    %
    
    
    46.0
    %Total continuing operations
    
    
    54.5
    %
    
    
    56.7
    %Medicare average rate per day:Same center
    
    $
    382.96
    
    
    $
    351.51New Texas Facilities
    
    $
    398.02
    
    
    $
    375.13Total continuing operations
    
    $
    385.86
    
    
    $
    354.12Medicaid average rate per day:Same center
    
    $
    146.66
    
    
    $
    142.04New Texas Facilities
    
    $
    113.91
    
    
    $
    109.62Total continuing operations
    
    $
    140.19
    
    
    $
    138.59
  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 (loss)
 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
 Nine Months Ended September 30, 2008 Compared With Nine Months Ended September 30, 2007
   Patient Revenues
 28




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##### Table of Contents



Nine Months EndedSeptember 30,2008
    
    2007Skilled nursing occupancy:Same center
    
    
    77.9
    %
    
    
    78.7
    %New Texas Facilities
    
    
    65.9
    %
    
    
    68.4
    %Total continuing operations
    
    
    75.0
    %
    
    
    78.2
    %Medicare census as percent of total:Same center
    
    
    13.9
    %
    
    
    14.2
    %New Texas Facilities
    
    
    11.9
    %
    
    
    12.0
    %Total continuing operations
    
    
    13.4
    %
    
    
    14.1
    %Medicare revenues as percent of total:Same center
    
    
    31.5
    %
    
    
    31.1
    %New Texas Facilities
    
    
    32.7
    %
    
    
    33.1
    %Total continuing operations
    
    
    31.7
    %
    
    
    31.2
    %Medicaid revenues as percent of total:Same center
    
    
    54.9
    %
    
    
    56.6
    %New Texas Facilities
    
    
    46.1
    %
    
    
    46.0
    %Total continuing operations
    
    
    53.3
    %
    
    
    56.2
    %Medicare average rate per day:Same center
    
    $
    379.53
    
    
    $
    344.88New Texas Facilities
    
    $
    396.52
    
    
    $
    375.13Total continuing operations
    
    $
    382.66
    
    
    $
    346.04Medicaid average rate per day:Same center
    
    $
    144.76
    
    
    $
    139.05New Texas Facilities
    
    $
    113.36
    
    
    $
    109.62Total continuing operations
    
    $
    138.76
    
    
    $
    137.89
  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)
 30




---



##### Table of Contents



Interest expense
 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
    32




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##### Table of Contents



Share Repurchase
   Professional Liability
   33




---



##### Table of Contents



Liquidity
    Amendment to Shareholders Rights Plan
  Facility Renovations
  34




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##### Table of Contents



Receivables
    Inflation
  35




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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
  36




---



##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   37




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
   38




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS.
     39




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##### Table of Contents



ITEM 1A. RISK FACTORS
  If we are unable to improve occupancy and increase profitability of the operations of the
facilities acquired in August 2007 from Senior Management Services, our profits will continue to be
lower than the profits generated prior to completion of that acquisition.
  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.
  
 ITEM 6. EXHIBITS
  40




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##### Table of Contents



SIGNATURES
  ADVOCAT INC.November 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).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
    
    Seventh Amendment to Consolidated Amended and Restated Master Lease executed and delivered as
of October 24, 2008 by and between Sterling Acquisition Corp., a Kentucky corporation and
Diversicare Leasing Corp.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).