##### 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: March 31, 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 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 x 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 x Non-accelerated filer o Smaller
reporting Company o
 Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No x
 5,668,987
 (Outstanding shares of the issuers common stock as of May 1, 2008)
 1




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TABLE OF CONTENTS  Part I. FINANCIAL INFORMATIONINTERIM CONSOLIDATED BALANCE SHEETSINTERIM CONSOLIDATED STATEMENTS OF INCOMEINTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSPART II  OTHER INFORMATIONEX-10.1 Sixth Amendment to Consolidated Amended and restated Master Lease dated March 14, 2008, by and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp.EX-10.2 Second Amendment to Loan Agreement and Joinder dated as of March 14, 2008, is by and among Diversicare Paris, LLC, a Delaware limited liability company, those certain entities set forthEX-31.1 Section 302 Certification of the CEOEX-31.2 Section 302 Certification of the CFOEX-32 Section 906 Certification of the CEO and CFO    Table of Contents  
 Part I. FINANCIAL INFORMATION
 ITEM 1   FINANCIAL STATEMENTS
 ADVOCAT INC.
 
 INTERIM CONSOLIDATED BALANCE SHEETS
 (in thousands)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    10,289
    
    
    $
    11,658Receivables, less allowance for doubtful
accounts of $2,539 and $2,158, respectively
    
    
    26,139
    
    
    
    26,444Current portion of note receivable
    
    
    608
    
    
    
    629Prepaid expenses and other current assets
    
    
    3,037
    
    
    
    2,130Insurance refunds receivable
    
    
    
    
    
    
    1,234Deferred income taxes
    
    
    2,746
    
    
    
    2,110Total current assets
    
    
    42,819
    
    
    
    44,205PROPERTY AND EQUIPMENT, at cost
    
    
    66,200
    
    
    
    64,294Less accumulated depreciation
    
    
    (35,094
    )
    
    
    (34,091
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,455Property and equipment, net
    
    
    32,561
    
    
    
    31,658OTHER ASSETS:Deferred income taxes
    
    
    16,130
    
    
    
    16,568Note receivable, net of current portion
    
    
    4,880
    
    
    
    4,983Deferred financing and other costs, net
    
    
    1,185
    
    
    
    1,239Other assets
    
    
    2,072
    
    
    
    1,945Acquired leasehold interest, net
    
    
    9,414
    
    
    
    9,492Total other assets
    
    
    33,681
    
    
    
    34,227$
    109,061
    
    
    $
    110,090
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(continued)
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    2,094
    
    
    $
    1,942Trade accounts payable
    
    
    5,239
    
    
    
    6,636Accrued expenses:Payroll and employee benefits
    
    
    10,642
    
    
    
    11,360Current portion of self-insurance reserves
    
    
    7,161
    
    
    
    4,597Income taxes payable
    
    
    1,608
    
    
    
    393Other current liabilities
    
    
    2,837
    
    
    
    3,600Total current liabilities
    
    
    29,581
    
    
    
    28,528NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    31,868
    
    
    
    32,513Self-insurance reserves, less current portion
    
    
    13,499
    
    
    
    17,578Other noncurrent liabilities
    
    
    9,905
    
    
    
    9,137Total noncurrent liabilities
    
    
    55,272
    
    
    
    59,228COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and
outstanding, including premium of $4,247 and $4,672 at
March 31, 2008 and December 31, 2007, respectively.
    
    
    9,165
    
    
    
    9,590SHAREHOLDERS EQUITY:Series A preferred stock, authorized 200,000 shares,
    
    
    
    
    
    
    $.10 par value, none issued and outstandingCommon stock, authorized 20,000,000 shares, $.01 par
value, 5,901,000 and 5,878,000 shares issued, and
5,723,000 and 5,804,000 shares outstanding,
respectively
    
    
    59
    
    
    
    59Treasury stock at cost, 178,000 and 74,000 shares of
Common stock, respectively
    
    
    (1,923
    )
    
    
    (817
    )Paid-in capital
    
    
    16,206
    
    
    
    15,804Retained earnings (accumulated deficit)
    
    
    701
    
    
    
    (2,302
    )Total shareholders equity
    
    
    15,043
    
    
    
    12,744$
    109,061
    
    
    $
    110,090
  3




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ADVOCAT INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts, unaudited)
 Three Months Ended March 31,2008
    
    
    2007PATIENT REVENUES, net
    
    $
    71,466
    
    
    $
    54,592EXPENSES:Operating
    
    
    55,536
    
    
    
    41,743Lease
    
    
    5,704
    
    
    
    4,596Professional liability
    
    
    (1,043
    )
    
    
    423General and administrative
    
    
    4,559
    
    
    
    4,144Depreciation and amortization
    
    
    1,242
    
    
    
    909Total expenses
    
    
    65,998
    
    
    
    51,815OPERATING INCOME
    
    
    5,468
    
    
    
    2,777OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (229
    )
    
    
    47Interest income
    
    
    160
    
    
    
    251Interest expense
    
    
    (831
    )
    
    
    (816
    )(900
    )
    
    
    (518
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    4,568
    
    
    
    2,259PROVISION FOR INCOME TAXES
    
    
    (1,467
    )
    
    
    (879
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    3,101
    
    
    
    1,380NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:Operating income (loss), net of taxes of $(7) and $11, respectively
    
    
    (12
    )
    
    
    16Loss on sale, net of taxes of $0 and $(23), respectively
    
    
    
    
    
    
    (35
    )DISCONTINUED OPERATIONS
    
    
    (12
    )
    
    
    (19
    )NET INCOME
    
    
    3,089
    
    
    
    1,361PREFERRED STOCK DIVIDENDS
    
    
    (86
    )
    
    
    (86
    )NET INCOME FOR COMMON STOCK
    
    $
    3,003
    
    
    $
    1,275NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.52
    
    
    $
    0.22Discontinued operations
    
    
    
    
    
    
    $
    0.52
    
    
    $
    0.22Per common share  dilutedContinuing operations
    
    $
    0.50
    
    
    $
    0.21Discontinued operations
    
    
    
    
    
    
    $
    0.50
    
    
    $
    0.21WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,754
    
    
    
    5,870Diluted
    
    
    6,017
    
    
    
    6,126
  4




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ADVOCAT INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands and unaudited)
 Three Months Ended March 31,2008
    
    
    2007CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    3,089
    
    
    $
    1,361Discontinued operations
    
    
    (12
    )
    
    
    (19
    )Net income from continuing operations
    
    
    3,101
    
    
    
    1,380Adjustments to reconcile net income from continuing
operations to net cash provided by operating activities:Depreciation and amortization
    
    
    1,242
    
    
    
    909Provision for doubtful accounts
    
    
    556
    
    
    
    110Deferred income tax provision (benefit)
    
    
    (198
    )
    
    
    350Provision for (benefit from) self-insured professional
liability, net of cash payments
    
    
    (1,413
    )
    
    
    (472
    )Stock based compensation
    
    
    178
    
    
    
    69Amortization of deferred balances
    
    
    129
    
    
    
    69Provision for leases in excess of cash payments
    
    
    466
    
    
    
    583Foreign currency transaction (gain) loss
    
    
    229
    
    
    
    (47
    )Non-cash interest income
    
    
    (33
    )
    
    
    (30
    )Changes in other assets and liabilities affecting operating
Activities:Receivables, net
    
    
    (323
    )
    
    
    755Prepaid expenses and other assets
    
    
    328
    
    
    
    850Trade accounts payable and accrued expenses
    
    
    (1,765
    )
    
    
    (1,532
    )Net cash provided by continuing operations
    
    
    2,497
    
    
    
    2,994Discontinued operations
    
    
    (12
    )
    
    
    40Net cash provided by operating activities
    
    
    2,485
    
    
    
    3,034CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,067
    )
    
    
    (1,737
    )Decrease in cash restricted for capital
expenditures
    
    
    
    
    
    
    662Deposits and other deferred balances
    
    
    (150
    )
    
    
    (113
    )Net cash used by continuing operations
    
    
    (2,217
    )
    
    
    (1,188
    )Discontinued operations
    
    
    (49
    )
    
    
    Net cash used by investing activities
    
    
    (2,266
    )
    
    
    (1,188
    )CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (493
    )
    
    
    (1,617
    )Financing costs
    
    
    (4
    )
    
    
    Repurchase of common stock
    
    
    (1,106
    )
    
    
    Proceeds from exercise of stock options
    
    
    224
    
    
    
    27Payment of preferred stock dividends
    
    
    (86
    )
    
    
    (86
    )Payment for preferred stock restructuring
    
    
    (123
    )
    
    
    (86
    )Net cash used by financing activities
    
    
    (1,588
    )
    
    
    (1,762
    )
  5




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
(continued)
 Three Months Ended March 31,2008
    
    
    2007NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
    
    $
    (1,369
    )
    
    $
    84CASH AND CASH EQUIVALENTS, beginning of period
    
    
    11,658
    
    
    
    12,344CASH AND CASH EQUIVALENTS, end of period
    
    $
    10,289
    
    
    $
    12,428SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    733
    
    
    $
    707Cash payments of income taxes
    
    $
    435
    
    
    $
    176
  6




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ADVOCAT INC.
 
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 MARCH 31, 2008 AND 2007
 BUSINESS
   BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   ACQUISITION
  7




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Current assets
    
    $
    70,000Property and equipment
    
    
    132,000Deferred tax asset
    
    
    116,000Acquired leasehold interest intangible
    
    
    9,639,000Total assets acquired
    
    
    9,957,000Current liabilities
    
    
    862,000Total net assets acquired
    
    $
    9,095,000
  AMENDMENT TO MASTER LEASE AGREEMENT FOR REPLACEMENT FACILITY
   8




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INSURANCE MATTERS
 Professional Liability and Other Liability Insurance-
   Reserve for Estimated Self-Insured Professional Liability Claims-
   9




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March 31,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    390,000
    
    
    $
    2008
    
    
    5,085,000
    
    
    
    5,134,0002007
    
    
    7,069,000
    
    
    
    7,625,0002006
    
    
    4,032,000
    
    
    
    4,757,0002005
    
    
    1,866,000
    
    
    
    2,339,0002004 and earlier
    
    
    820,000
    
    
    
    820,000$
    19,262,000
    
    
    $
    20,675,000
  Other Insurance-
   10




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STOCK-BASED COMPENSATION
    RECLASSIFICATIONS
  DISCONTINUED OPERATIONS
   11




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EARNINGS PER COMMON SHARE
  Three Months EndedMarch 31,2008
    
    
    2007Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.52
    
    
    $
    0.22Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    0.01Loss on sale, net of taxes
    
    
    
    
    
    
    (0.01
    )Discontinued operations, net of taxes
    
    
    
    
    
    
    Net income
    
    $
    0.52
    
    
    $
    0.22Per common share  dilutedIncome from continuing operations
    
    $
    0.50
    
    
    $
    0.21Income (loss) from discontinued operationsOperating income, net of taxes
    
    
    
    
    
    
    0.01Loss on sale, net of taxes
    
    
    
    
    
    
    (0.01
    )Discontinued operations, net of taxes
    
    
    
    
    
    
    Net income
    
    $
    0.50
    
    
    $
    0.21
  LONG-TERM DEBT
  12




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INCOME TAXES
  13




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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
  14




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Allowance for Doubtful Accounts
  Professional Liability and Other Self-Insurance Reserves
 Accrual for Professional and General Liability Claims -
    15




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March 31,
    
    
    December 31,2008
    
    
    2007Policy Year End March 9,2009
    
    $
    390,000
    
    
    $
    2008
    
    
    5,085,000
    
    
    
    5,134,0002007
    
    
    7,069,000
    
    
    
    7,625,0002006
    
    
    4,032,000
    
    
    
    4,757,0002005
    
    
    1,866,000
    
    
    
    2,339,0002004 and earlier
    
    
    820,000
    
    
    
    820,000$
    19,262,000
    
    
    $
    20,675,000
    Accrual for Other Self-Insured Claim s-
   16




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Asset Impairment
  Business Combinations
  Stock-Based Compensation
  Income Taxes
  17




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Health Care Industry
  Medicare and Medicaid Reimbursement
    18




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Licensure and other Health Care Laws
  19




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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)
    
    $
    40,311
    
    
    $
    4,151
    
    
    $
    10,308
    
    
    $
    25,852
    
    
    $
    Settlement Obligations (2)
    
    $
    4,905
    
    
    $
    4,905
    
    
    $
    
    
    
    $
    
    
    
    $
    Series C Preferred Stock (3)
    
    $
    5,778
    
    
    $
    344
    
    
    $
    5,434
    
    
    $
    
    
    
    $
    Elimination of Preferred Stock Conversion feature (4)
    
    $
    7,211
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    3,776Operating leases
    
    $
    618,813
    
    
    $
    21,390
    
    
    $
    43,714
    
    
    $
    44,448
    
    
    $
    509,261Required capital expenditures under mortgage loans (5)
    
    $
    816
    
    
    $
    245
    
    
    $
    490
    
    
    $
    81
    
    
    $
    Required capital expenditures under operating leases (6)
    
    $
    30,528
    
    
    $
    955
    
    
    $
    1,876
    
    
    $
    1,849
    
    
    $
    25,848Total
    
    $
    708,362
    
    
    $
    32,677
    
    
    $
    63,196
    
    
    $
    73,604
    
    
    $
    538,885
 
 (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.  20




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Results of Operations
  Three Months Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    71,466
    
    
    $
    54,592
    
    
    $
    16,874
    
    
    
    30.9EXPENSES:Operating
    
    
    55,536
    
    
    
    41,743
    
    
    
    13,793
    
    
    
    33.0Lease
    
    
    5,704
    
    
    
    4,596
    
    
    
    1,108
    
    
    
    24.1Professional liability
    
    
    (1,043
    )
    
    
    423
    
    
    
    (1,466
    )
    
    
    (346.6
    )General and administrative
    
    
    4,559
    
    
    
    4,144
    
    
    
    415
    
    
    
    10.0Depreciation and amortization
    
    
    1,242
    
    
    
    909
    
    
    
    333
    
    
    
    36.6Total expenses
    
    
    65,998
    
    
    
    51,815
    
    
    
    14,183
    
    
    
    27.4OPERATING INCOME
    
    
    5,468
    
    
    
    2,777
    
    
    
    2,691
    
    
    
    96.9OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (229
    )
    
    
    47
    
    
    
    (276
    )
    
    
    (587.2
    )Interest income
    
    
    160
    
    
    
    251
    
    
    
    (91
    )
    
    
    (36.3
    )Interest expense
    
    
    (831
    )
    
    
    (816
    )
    
    
    (15
    )
    
    
    (1.8
    )(900
    )
    
    
    (518
    )
    
    
    (382
    )
    
    
    (73.7
    )INCOME FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
    
    
    4,568
    
    
    
    2,259
    
    
    
    2,309
    
    
    
    102.2PROVISION FOR INCOME TAXES
    
    
    (1,467
    )
    
    
    (879
    )
    
    
    (588
    )
    
    
    (66.9
    )NET INCOME FROM CONTINUING OPERATIONS
    
    $
    3,101
    
    
    $
    1,380
    
    
    
    1,721
    
    
    
    124.7
 Percentage of Net Revenues
    
    Three Months EndedMarch 31,2008
    
    
    2007PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    77.7
    
    
    
    76.5Lease
    
    
    8.0
    
    
    
    8.4Professional liability
    
    
    (1.5
    )
    
    
    0.8General and administrative
    
    
    6.4
    
    
    
    7.6Depreciation and amortization
    
    
    1.7
    
    
    
    1.6Total expenses
    
    
    92.3
    
    
    
    94.9OPERATING INCOME
    
    
    7.7
    
    
    
    5.1OTHER INCOME (EXPENSE):Foreign currency transaction gain (loss)
    
    
    (0.3
    )
    
    
    0.1Interest income
    
    
    0.2
    
    
    
    0.4Interest expense
    
    
    (1.2
    )
    
    
    (1.5
    )(1.3
    )
    
    
    (1.0
    )INCOME FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
    
    
    6.4
    
    
    
    4.1PROVISION FOR INCOME TAXES
    
    
    (2.1
    )
    
    
    (1.6
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    4.3
    %
    
    
    2.5
    %
 21




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SAME CENTER
    
    Three Months Ended March 31,(in thousands)
    
    2008
    
    
    2007
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    58,543
    
    
    $
    54,592
    
    
    
    3,951
    
    
    
    7.2EXPENSES:Operating
    
    
    44,212
    
    
    
    41,743
    
    
    
    2,469
    
    
    
    5.9Lease
    
    
    4,702
    
    
    
    4,596
    
    
    
    106
    
    
    
    2.3Professional liability
    
    
    (969
    )
    
    
    423
    
    
    
    (1,392
    )
    
    
    (329.1
    )General and administrative
    
    
    4,321
    
    
    
    4,144
    
    
    
    177
    
    
    
    4.3Depreciation and amortization
    
    
    981
    
    
    
    909
    
    
    
    72
    
    
    
    7.9Total expenses
    
    
    53,247
    
    
    
    51,815
    
    
    
    1,432
    
    
    
    2.8OPERATING INCOME
    
    
    5,296
    
    
    
    2,777
    
    
    
    2,519
    
    
    
    90.7OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    (229
    )
    
    
    47
    
    
    
    (276
    )
    
    
    (587.2
    )Interest income
    
    
    160
    
    
    
    251
    
    
    
    (91
    )
    
    
    (36.3
    )Interest expense
    
    
    (657
    )
    
    
    (816
    )
    
    
    159
    
    
    
    19.5(726
    )
    
    
    (518
    )
    
    
    (208
    )
    
    
    (40.2
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    4,570
    
    
    
    2,259
    
    
    
    2,311
    
    
    
    102.3
 Three Months Ended March 31, 2008 Compared With Three Months Ended March 31, 2007
   Patient Revenues
  22




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Three Months EndedMarch 31,2008
    
    
    2007Skilled nursing occupancy:Same center
    
    
    78.3
    %
    
    
    78.3
    %New Texas Facilities
    
    
    64.9
    %
    
    
    N/ATotal continuing operations
    
    
    75.1
    %
    
    
    78.3
    %Medicare census as percent of total:Same center
    
    
    13.9
    %
    
    
    14.8
    %New Texas Facilities
    
    
    13.3
    %
    
    
    N/ATotal continuing operations
    
    
    13.7
    %
    
    
    14.8
    %Medicare revenues as percent of total:Same center
    
    
    31.9
    %
    
    
    32.3
    %New Texas Facilities
    
    
    35.6
    %
    
    
    N/ATotal continuing operations
    
    
    32.5
    %
    
    
    32.3
    %Medicaid revenues as percent of total:Same center
    
    
    54.4
    %
    
    
    55.6
    %New Texas Facilities
    
    
    44.2
    %
    
    
    N/ATotal continuing operations
    
    
    52.6
    %
    
    
    55.6
    %Medicare average rate per day:Same center
    
    $
    379.48
    
    
    $
    339.21New Texas Facilities
    
    $
    394.01
    
    
    
    N/ATotal continuing operations
    
    $
    382.35
    
    
    $
    339.21Medicaid average rate per day:Same center
    
    $
    143.75
    
    
    $
    137.21New Texas Facilities
    
    $
    112.74
    
    
    
    N/ATotal continuing operations
    
    $
    138.02
    
    
    $
    137.21
  Operating expense
  23




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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
 Income from continuing operations before income taxes; income from continuing operations per common
share
 24




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Income from discontinued operations
 Liquidity and Capital Resources
 Capital Resources
     25




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New Facility Construction
    Share Repurchase
   Professional Liability
  26




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Liquidity
    Facility Renovations
   27




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##### Table of Contents



Receivables
    Inflation
  Off-Balance Sheet Arrangements
  28




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Recent Accounting Pronouncements
    Forward-Looking Statements
  29




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   ITEM 4. CONTROLS AND PROCEDURES
   30




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PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
    ITEM 1A. RISK FACTORS
  If we are unable to complete construction of the Paris 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.
  31




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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)January 1 through 31
    
    
    52,800
    
    
    $
    10.77
    
    
    
    127,300
    
    
    $
    1,114,000February 1 through 29
    
    
    200
    
    
    $
    11.48
    
    
    
    127,500
    
    
    $
    1,112,000March 1 through 31
    
    
    50,600
    
    
    $
    10.57
    
    
    
    178,100
    
    
    $
    577,000Total
    
    
    103,600
 
 (1)
    
    All share repurchases between January 1, 2008 and March 31, 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 allows 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.  ITEM 6. EXHIBITS
  32




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SIGNATURES
  ADVOCAT INC.May 7, 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 Registrant By:
    /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 33




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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
    
    Sixth Amendment to Consolidated Amended and Restated Master Lease dated March 14, 2008, by
and between Sterling Acquisition Corp., a Kentucky corporation, and Diversicare Leasing Corp.,
a Tennessee corporation10.2
    
    Second Amendment to Loan Agreement
and Joinder dated as of March 14, 2008, is by
and among Diversicare Paris, LLC, a Delaware limited liability
company, those certain entities set forth on Schedule 1 thereto,
which are signatories thereto, and LaSalle Bank National Assocation,
a national banking association.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).