##### 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, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from _________ to _______.
 Commission file No.: 1-12996
 Advocat Inc.
 (exact name of registrant as specified in its charter)
 Delaware
    
    62-1559667(State or other jurisdiction of
    
    (IRS Employer Identification No.)incorporation or organization)
 1621 Galleria Boulevard, Brentwood, TN 37027  (Address of principal executive offices)       (Zip Code)
 (615) 771-7575  (Registrants telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report.)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act. (Check one):
 Large
accelerated filer o Accelerated
filer þ Non-accelerated
filer 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 þ
 5,877,287  (Outstanding shares of the issuers common stock as of November 1, 2007)




---



TABLE OF CONTENTS  Part I. FINANCIAL INFORMATIONINTERIM CONSOLIDATED BALANCE SHEETSINTERIM CONSOLIDATED STATEMENTS OF INCOMEINTERIM CONSOLIDATED STATEMENTS OF INCOMEINTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSNOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSPART II  OTHER INFORMATIONEX-10.1 Operations Transfer AgreementEX-10.2 Loan and Security AgreementEX-10.3 Loan and Security AgreementEX-10.4 GuarantyEX-10.5 Revolving Credit NoteEX-10.6 Term Loan NoteEX-10.7 Fifth Amendment to Consolidated Amended and Restated Master LeaseEX-31.1 Certification of CEOEX-31.2 Certification of CFOEX-32 Certification of CEO and CFO    Table of Contents  
 Part I. FINANCIAL INFORMATION
 ITEM 1  FINANCIAL STATEMENTS
 ADVOCAT INC.
 
 INTERIM CONSOLIDATED BALANCE SHEETS
 (in thousands)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    13,939
    
    
    $
    12,344Receivables, less allowance for doubtful accounts of $2,254 and $2,122, respectively
    
    
    23,531
    
    
    
    16,902Current portion of note receivable
    
    
    619
    
    
    
    534Prepaid expenses and other current assets
    
    
    2,577
    
    
    
    2,706Insurance refunds receivable
    
    
    2,712
    
    
    
    3,519Deferred income taxes
    
    
    2,985
    
    
    
    1,785Total current assets
    
    
    46,363
    
    
    
    37,790PROPERTY AND EQUIPMENT, at cost
    
    
    61,395
    
    
    
    59,954Less accumulated depreciation
    
    
    (32,874
    )
    
    
    (32,757
    )Discontinued operations, net
    
    
    1,455
    
    
    
    1,576Property and equipment, net
    
    
    29,976
    
    
    
    28,773OTHER ASSETS:Deferred income taxes
    
    
    16,936
    
    
    
    21,849Note receivable, net of current portion
    
    
    4,971
    
    
    
    4,758Deferred financing and other costs, net
    
    
    1,300
    
    
    
    905Cash restricted for capital expenditures
    
    
    
    
    
    
    864Other assets
    
    
    1,853
    
    
    
    1,962Acquired leasehold interest, net
    
    
    9,703
    
    
    
    Total other assets
    
    
    34,763
    
    
    
    30,338$
    111,102
    
    
    $
    96,901CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    3,922
    
    
    $
    4,587Short-term debt
    
    
    
    
    
    
    2,662Trade accounts payable
    
    
    5,816
    
    
    
    4,566Accrued expenses:Payroll and employee benefits
    
    
    10,571
    
    
    
    9,363Current portion of self-insurance reserves
    
    
    4,100
    
    
    
    4,838Other current liabilities
    
    
    5,030
    
    
    
    3,600Total current liabilities
    
    
    29,439
    
    
    
    29,616NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    34,617
    
    
    
    24,267Self-insurance reserves, less current portion
    
    
    17,031
    
    
    
    22,159Other noncurrent liabilities
    
    
    8,353
    
    
    
    5,733Total noncurrent liabilities
    
    
    60,001
    
    
    
    52,159COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and outstanding, including premium of $5,097
and $6,371 at September 30, 2007 and December 31, 2006, respectively.
    
    
    10,015
    
    
    
    11,289SHAREHOLDERS 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, 5,877,000 and 5,866,000 shares
issued and outstanding, respectively
    
    
    59
    
    
    
    59Paid-in capital
    
    
    15,637
    
    
    
    15,123Accumulated deficit
    
    
    (4,049
    )
    
    
    (11,345
    )Total shareholders equity
    
    
    11,647
    
    
    
    3,837$
    111,102
    
    
    $
    96,901
  2




---



##### Table of Contents



ADVOCAT INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts, unaudited)
 Three Months Ended September 30,2007
    
    
    2006PATIENT REVENUES, net
    
    $
    63,884
    
    
    $
    53,394EXPENSES:Operating
    
    
    49,239
    
    
    
    41,328Lease
    
    
    5,162
    
    
    
    3,860Professional liability
    
    
    (6
    )
    
    
    782General and administrative
    
    
    4,073
    
    
    
    3,906Stock-based compensation
    
    
    195
    
    
    
    92Depreciation and amortization
    
    
    1,033
    
    
    
    898Post acquisition integration costs
    
    
    326
    
    
    
    Total expenses
    
    
    60,022
    
    
    
    50,866OPERATING INCOME
    
    
    3,862
    
    
    
    2,528OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    330
    
    
    
    29Interest income
    
    
    264
    
    
    
    146Interest expense
    
    
    (956
    )
    
    
    (892
    )Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )(478
    )
    
    
    (911
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    3,384
    
    
    
    1,617PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    1,363
    
    
    
    (7,972
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    2,021
    
    
    
    9,589NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(10) and $0, respectively
    
    
    (100
    )
    
    
    (143
    )Gain (loss) on sale, net of taxes of $17 and $0, respectively
    
    
    28
    
    
    
    (2
    )Discontinued operations
    
    
    (72
    )
    
    
    (145
    )NET INCOME
    
    
    1,949
    
    
    
    9,444PREFERRED STOCK DIVIDENDS
    
    
    86
    
    
    
    86NET INCOME FOR COMMON STOCK
    
    $
    1,863
    
    
    $
    9,358NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.33
    
    
    $
    1.64Discontinued operations
    
    
    (0.01
    )
    
    
    (0.02
    )$
    0.32
    
    
    $
    1.62Per common share  dilutedContinuing operations
    
    $
    0.32
    
    
    $
    1.41Discontinued operations
    
    
    (0.02
    )
    
    
    (0.02
    )$
    0.30
    
    
    $
    1.39WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,877
    
    
    
    5,801Diluted
    
    
    6,136
    
    
    
    6,783
  3




---



##### Table of Contents



ADVOCAT INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
 (in thousands, except per share amounts, unaudited)
 Nine Months Ended September 30,2007
    
    
    2006PATIENT REVENUES, net
    
    $
    173,857
    
    
    $
    159,464EXPENSES:Operating
    
    
    132,875
    
    
    
    121,606Lease
    
    
    14,369
    
    
    
    11,513Professional liability
    
    
    (2,961
    )
    
    
    (5,476
    )General and administrative
    
    
    12,168
    
    
    
    11,103Stock-based compensation
    
    
    454
    
    
    
    5,104Depreciation and amortization
    
    
    2,874
    
    
    
    2,750Post acquisition integration costs
    
    
    326
    
    
    
    Total expenses
    
    
    160,105
    
    
    
    146,600OPERATING INCOME
    
    
    13,752
    
    
    
    12,864OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    743
    
    
    
    269Other income
    
    
    
    
    
    
    207Interest income
    
    
    771
    
    
    
    494Interest expense
    
    
    (2,548
    )
    
    
    (2,768
    )Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )(1,150
    )
    
    
    (1,992
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    12,602
    
    
    
    10,872PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    4,940
    
    
    
    (9,088
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    7,662
    
    
    
    19,960NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(10) and $0, respectively
    
    
    (101
    )
    
    
    (257
    )Loss on sale, net of taxes of $(6) and $0, respectively
    
    
    (7
    )
    
    
    (122
    )Discontinued operations
    
    
    (108
    )
    
    
    (379
    )NET INCOME
    
    
    7,554
    
    
    
    19,581PREFERRED STOCK DIVIDENDS
    
    
    258
    
    
    
    254NET INCOME FOR COMMON STOCK
    
    $
    7,296
    
    
    $
    19,327NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    1.26
    
    
    $
    3.42Discontinued operations
    
    
    (0.02
    )
    
    
    (0.07
    )$
    1.24
    
    
    $
    3.35Per common share  dilutedContinuing operations
    
    $
    1.21
    
    
    $
    3.00Discontinued operations
    
    
    (0.02
    )
    
    
    (0.06
    )$
    1.19
    
    
    $
    2.94WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,874
    
    
    
    5,763Diluted
    
    
    6,131
    
    
    
    6,622
  4




---



##### Table of Contents



ADVOCAT INC.
 
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands and unaudited)
 Nine Months Ended September 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    7,554
    
    
    $
    19,581Discontinued operations
    
    
    (108
    )
    
    
    (379
    )Net income from continuing operations
    
    
    7,662
    
    
    
    19,960Adjustments to reconcile net income from continuing operations to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,874
    
    
    
    2,750Provision for doubtful accounts
    
    
    809
    
    
    
    1,231Deferred income tax provision (benefit)
    
    
    3,713
    
    
    
    (9,263
    )Provision for (benefit from) self-insured professional liability, net of cash payments
    
    
    (6,010
    )
    
    
    (8,116
    )Stock-based compensation
    
    
    454
    
    
    
    5,104Amortization of deferred balances
    
    
    221
    
    
    
    185Provision for leases in excess of cash payments
    
    
    1,753
    
    
    
    14Gain on sale of bed license
    
    
    
    
    
    
    (207
    )Foreign currency transaction gain
    
    
    (743
    )
    
    
    (269
    )Debt retirement costs
    
    
    116
    
    
    
    194Non-cash interest expense
    
    
    
    
    
    
    86Non-cash interest income
    
    
    (99
    )
    
    
    (236
    )Net cash provided by operating activities before changes in other assets and liabilities
    
    
    10,750
    
    
    
    11,433Changes in other assets and liabilities affecting operating activities:Receivables, net
    
    
    (7,520
    )
    
    
    (1,781
    )Prepaid expenses and other assets
    
    
    449
    
    
    
    (748
    )Trade accounts payable and accrued expenses
    
    
    2,965
    
    
    
    (1,548
    )Net cash provided by continuing operations
    
    
    6,644
    
    
    
    7,356Discontinued operations
    
    
    (21
    )
    
    
    203Net cash provided by operating activities
    
    
    6,623
    
    
    
    7,559CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (4,015
    )
    
    
    (2,168
    )Acquisition of leasehold interest
    
    
    (9,218
    )
    
    
    Proceeds from sale of discontinued operations and bed license
    
    
    180
    
    
    
    10,431Decrease (increase) in restricted cash deposits
    
    
    247
    
    
    
    (110
    )Note receivable issued
    
    
    (1,800
    )
    
    
    Notes receivable collection
    
    
    2,500
    
    
    
    718Decrease (increase) in cash restricted for capital expenditures
    
    
    864
    
    
    
    (1,108
    )Deposits and other deferred balances
    
    
    417
    
    
    
    (18
    )Net cash provided by (used in) continuing operations
    
    
    (10,825
    )
    
    
    7,745Discontinued operations
    
    
    
    
    
    
    (24
    )Net cash provided by (used in) investing activities
    
    
    (10,825
    )
    
    
    7,721CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (9,353
    )
    
    
    (44,637
    )Proceeds from issuance of debt
    
    
    16,500
    
    
    
    30,625Proceeds from exercise of stock options
    
    
    60
    
    
    
    373Payment of preferred stock dividends
    
    
    (258
    )
    
    
    Payment for preferred stock restructuring
    
    
    (326
    )
    
    
    Financing costs
    
    
    (826
    )
    
    
    (764
    )Net cash provided by (used in) financing activities
    
    
    5,797
    
    
    
    (14,403
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    1,595
    
    
    
    877CASH AND CASH EQUIVALENTS, beginning of period
    
    
    12,344
    
    
    
    7,070CASH AND CASH EQUIVALENTS, end of period
    
    $
    13,939
    
    
    $
    7,947SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    2,294
    
    
    $
    2,626Cash payments of income taxes
    
    $
    838
    
    
    $
    356NON-CASH TRANSACTIONS:
   5




---



##### Table of Contents



ADVOCAT INC.
 
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 SEPTEMBER 30, 2007 AND 2006
 BUSINESS
    BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   ACQUISITION
    6




---



##### Table of Contents



INSURANCE MATTERS
 Professional Liability and Other Liability Insurance-
   Reserve for Estimated Self-Insured Professional Liability Claims-
    7




---



##### Table of Contents



September 30,
    
    
    December 31,2007
    
    
    2006Policy Year End March 9,2008
    
    $
    3,454,000
    
    
    $
    2007
    
    
    6,372,000
    
    
    
    6,992,0002006
    
    
    4,027,000
    
    
    
    7,629,0002005
    
    
    3,629,000
    
    
    
    6,042,0002004
    
    
    1,454,000
    
    
    
    3,228,0002003 and earlier
    
    
    782,000
    
    
    
    1,826,000$
    19,718,000
    
    
    $
    25,717,000
  Other Insurance-
    STOCK-BASED COMPENSATION
  8




---



##### Table of Contents



RECLASSIFICATIONS
  DISCONTINUED OPERATIONS
     EARNINGS PER SHARE
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.33
    
    
    $
    1.64
    
    
    $
    1.26
    
    
    $
    3.42Gain (loss) from discontinued operationsOperating loss, net of taxes
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.05
    )Gain (loss) on sale, net of taxes
    
    
    0.01
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Discontinued operations, net of taxes
    
    
    (0.01
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.07
    )Net income
    
    $
    0.32
    
    
    $
    1.62
    
    
    $
    1.24
    
    
    $
    3.35Per common share  dilutedIncome from continuing operations
    
    $
    0.32
    
    
    $
    1.41
    
    
    $
    1.21
    
    
    $
    3.00Gain (loss) from discontinued operationsOperating loss, net of taxes
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.04
    )Gain (loss) on sale, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.02
    )Discontinued operations, net of taxes
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.02
    )
    
    
    (0.06
    )Net income
    
    $
    0.30
    
    
    $
    1.39
    
    
    $
    1.19
    
    
    $
    2.94
  9




---



##### Table of Contents



LONG-TERM DEBT AND FINANCING TRANSACTION
     SALE OF BED LICENSE
  INCOME TAXES
    10




---



##### Table of Contents



EVENT SUBSEQUENT TO THE BALANCE SHEET DATE
   ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   2007 Acquisition.
 Divestitures.
  Basis of Financial Statements.
 Critical Accounting Policies and Judgments
  Revenues
 Patient Revenues
  11




---



##### Table of Contents



Allowance for Doubtful Accounts
  Professional Liability and Other Self-Insurance Reserves
  Accrual for Professional and General Liability Claims-
     12




---



##### Table of Contents



Accrual for Other Self-Insured Claim
    Asset Impairment
  13




---



##### Table of Contents



Accounting for Business Combinations
  Stock-Based Compensation
  Income Taxes
  Health Care Industry
  Medicare and Medicaid Reimbursement-
  14




---



##### Table of Contents



Licensure and other Health Care Laws-
  15




---



##### Table of Contents



Contractual Obligations and Commercial Commitments
  Less than
    
    
    2 to 3
    
    
    4 to 5
    
    
    After 5Contractual Obligations
    
    Total
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    YearsLong-term debt obligations (1)
    
    $
    50,289
    
    
    $
    7,198
    
    
    $
    12,280
    
    
    $
    30,811
    
    
    $
    Series C Preferred Stock (2)
    
    $
    5,951
    
    
    $
    344
    
    
    $
    689
    
    
    $
    4,918
    
    
    $
    Elimination of Preferred Stock
Conversion feature (3)
    
    $
    7,555
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    4,120Operating leases
    
    $
    595,766
    
    
    $
    20,820
    
    
    $
    42,466
    
    
    $
    42,093
    
    
    $
    490,387Required capital expenditures
under mortgage loans (4)
    
    $
    938
    
    
    $
    245
    
    
    $
    490
    
    
    $
    203
    
    
    $
    Required capital expenditures
under operating leases (5)
    
    $
    32,369
    
    
    $
    1,121
    
    
    $
    2,204
    
    
    $
    2,111
    
    
    $
    26,933Total
    
    $
    692,868
    
    
    $
    30,415
    
    
    $
    59,503
    
    
    $
    81,510
    
    
    $
    521,440
 (1) Long-term debt obligations include scheduled future payments of principal
and interest of long-term debt.(2) Series C Preferred Stock includes quarterly dividend payments and
redemption value at preferred shareholders earliest redemption date.(3) Payments for the elimination of preferred stock conversion feature.(4) Includes expenditure requirements for capital maintenance under mortgage
loan covenants.(5) Includes capital expenditure requirements under operating leases.
  Results of Operations
  16




---



##### Table of Contents



(in thousands)
    
    Three Months Ended September 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    63,884
    
    
    $
    53,394
    
    
    $
    10,490
    
    
    
    19.6
    %EXPENSES:Operating
    
    
    49,239
    
    
    
    41,328
    
    
    
    7,911
    
    
    
    19.1
    %Lease
    
    
    5,162
    
    
    
    3,860
    
    
    
    1,302
    
    
    
    33.7
    %Professional liability
    
    
    (6
    )
    
    
    782
    
    
    
    (788
    )
    
    
    (100.8
    )%General and administrative
    
    
    4,073
    
    
    
    3,906
    
    
    
    167
    
    
    
    4.3
    %Stock-based compensation
    
    
    195
    
    
    
    92
    
    
    
    103
    
    
    
    112.0
    %Depreciation and amortization
    
    
    1,033
    
    
    
    898
    
    
    
    135
    
    
    
    15.0
    %Post acquisition integration costs
    
    
    326
    
    
    
    
    
    
    
    326
    
    
    
    100.0
    %Total expenses
    
    
    60,022
    
    
    
    50,866
    
    
    
    9,156
    
    
    
    18.0
    %OPERATING INCOME
    
    
    3,862
    
    
    
    2,528
    
    
    
    1,334
    
    
    
    52.8
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    330
    
    
    
    29
    
    
    
    301
    
    
    
    1,037.9
    %Interest income
    
    
    264
    
    
    
    146
    
    
    
    118
    
    
    
    80.8
    %Interest expense
    
    
    (956
    )
    
    
    (892
    )
    
    
    (64
    )
    
    
    7.2
    %Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    (40.2
    )%(478
    )
    
    
    (911
    )
    
    
    433
    
    
    
    (47.5
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    3,384
    
    
    
    1,617
    
    
    
    1,767
    
    
    
    109.3
    %PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    1,363
    
    
    
    (7,972
    )
    
    
    9,335
    
    
    
    (117.0
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    2,021
    
    
    $
    9,589
    
    
    $
    (7,568
    )
    
    
    (78.9
    )%
 (in thousands)
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    173,857
    
    
    $
    159,464
    
    
    $
    14,393
    
    
    
    9.0
    %EXPENSES:Operating
    
    
    132,875
    
    
    
    121,606
    
    
    
    11,269
    
    
    
    9.3
    %Lease
    
    
    14,369
    
    
    
    11,513
    
    
    
    2,856
    
    
    
    24.8
    %Professional liability
    
    
    (2,961
    )
    
    
    (5,476
    )
    
    
    2,515
    
    
    
    (45.9
    )%General and administrative
    
    
    12,168
    
    
    
    11,103
    
    
    
    1,065
    
    
    
    9.6
    %Stock-based compensation
    
    
    454
    
    
    
    5,104
    
    
    
    (4,650
    )
    
    
    (91.1
    )%Depreciation and amortization
    
    
    2,874
    
    
    
    2,750
    
    
    
    124
    
    
    
    4.5
    %Post acquisition integration costs
    
    
    326
    
    
    
    
    
    
    
    326
    
    
    
    100.0
    %Total expenses
    
    
    160,105
    
    
    
    146,600
    
    
    
    13,505
    
    
    
    9.2
    %OPERATING INCOME
    
    
    13,752
    
    
    
    12,864
    
    
    
    888
    
    
    
    6.9
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    743
    
    
    
    269
    
    
    
    474
    
    
    
    176.2
    %Other income
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    (100.0
    )%Interest income
    
    
    771
    
    
    
    494
    
    
    
    277
    
    
    
    56.1
    %Interest expense
    
    
    (2,548
    )
    
    
    (2,768
    )
    
    
    220
    
    
    
    (7.9
    )%Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    (40.2
    )%(1,150
    )
    
    
    (1,992
    )
    
    
    842
    
    
    
    (42.3
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    12,602
    
    
    
    10,872
    
    
    
    1,730
    
    
    
    15.9
    %PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    4,940
    
    
    
    (9,088
    )
    
    
    14,028
    
    
    
    (154.4
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    7,662
    
    
    $
    19,960
    
    
    $
    (12,298
    )
    
    
    (61.6
    )%
 17




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedPercentage of Net Revenues
    
    September 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    77.1
    
    
    
    77.4
    
    
    
    76.4
    
    
    
    76.3Lease
    
    
    8.1
    
    
    
    7.2
    
    
    
    8.3
    
    
    
    7.2Professional liability
    
    
    
    
    
    
    1.5
    
    
    
    (1.7
    )
    
    
    (3.4
    )General and administrative
    
    
    6.4
    
    
    
    7.3
    
    
    
    6.9
    
    
    
    7.0Stock-based compensation
    
    
    0.3
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    3.1Depreciation and amortization
    
    
    1.6
    
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7Post acquisition integration costs
    
    
    0.5
    
    
    
    
    
    
    
    0.2
    
    
    
    Total expenses
    
    
    94.0
    
    
    
    95.3
    
    
    
    92.1
    
    
    
    91.9OPERATING INCOME
    
    
    6.0
    
    
    
    4.7
    
    
    
    7.9
    
    
    
    8.1OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    0.5
    
    
    
    0.1
    
    
    
    0.4
    
    
    
    0.2Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1Interest income
    
    
    0.4
    
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.3Interest expense
    
    
    (1.4
    )
    
    
    (1.7
    )
    
    
    (1.4
    )
    
    
    (1.8
    )Debt retirement costs
    
    
    (0.2
    )
    
    
    (0.4
    )
    
    
    (0.1
    )
    
    
    (0.1
    )(0.7
    )
    
    
    (1.7
    )
    
    
    (0.7
    )
    
    
    (1.3
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    5.3
    
    
    
    3.0
    
    
    
    7.2
    
    
    
    6.8PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    2.1
    
    
    
    (15.0
    )
    
    
    2.8
    
    
    
    (5.7
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    3.2
    %
    
    
    18.0
    %
    
    
    4.4
    %
    
    
    12.5
    %
  (in thousands)
    
    Three Months Ended September 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    57,289
    
    
    $
    53,394
    
    
    $
    3,895
    
    
    
    7.3
    %EXPENSES:Operating
    
    
    43,302
    
    
    
    41,328
    
    
    
    1,974
    
    
    
    4.8
    %Lease
    
    
    4,634
    
    
    
    3,860
    
    
    
    774
    
    
    
    20.1
    %Professional liability
    
    
    (90
    )
    
    
    782
    
    
    
    (872
    )
    
    
    (111.5
    )%General and administrative
    
    
    3,994
    
    
    
    3,906
    
    
    
    88
    
    
    
    2.3
    %Stock-based compensation
    
    
    191
    
    
    
    92
    
    
    
    99
    
    
    
    107.6
    %Depreciation and amortization
    
    
    944
    
    
    
    898
    
    
    
    46
    
    
    
    5.1
    %Post acquisition integration costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    52,975
    
    
    
    50,866
    
    
    
    2,109
    
    
    
    4.1
    %OPERATING INCOME
    
    
    4,314
    
    
    
    2,528
    
    
    
    1,786
    
    
    
    70.6
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    330
    
    
    
    29
    
    
    
    301
    
    
    
    1,037.9
    %Interest income
    
    
    264
    
    
    
    146
    
    
    
    118
    
    
    
    80.8
    %Interest expense
    
    
    (819
    )
    
    
    (892
    )
    
    
    73
    
    
    
    (8.2
    )%Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    (40.2
    )%(341
    )
    
    
    (911
    )
    
    
    570
    
    
    
    (62.6
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    $
    3,973
    
    
    $
    1,617
    
    
    $
    2,356
    
    
    
    145.7
    %
 18




---



##### Table of Contents



(in thousands)
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    167,262
    
    
    $
    159,464
    
    
    $
    7,798
    
    
    
    4.9
    %EXPENSES:Operating
    
    
    126,938
    
    
    
    121,606
    
    
    
    5,332
    
    
    
    4.4
    %Lease
    
    
    13,841
    
    
    
    11,513
    
    
    
    2,328
    
    
    
    20.2
    %Professional liability
    
    
    (3,045
    )
    
    
    (5,476
    )
    
    
    2,431
    
    
    
    (44.4
    )%General and administrative
    
    
    12,089
    
    
    
    11,103
    
    
    
    986
    
    
    
    8.9
    %Stock-based compensation
    
    
    450
    
    
    
    5,104
    
    
    
    (4,654
    )
    
    
    (91.2
    )%Depreciation and amortization
    
    
    2,785
    
    
    
    2,750
    
    
    
    35
    
    
    
    1.3
    %Post acquisition integration costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total expenses
    
    
    153,058
    
    
    
    146,600
    
    
    
    6,458
    
    
    
    4.4
    %OPERATING INCOME
    
    
    14,204
    
    
    
    12,864
    
    
    
    1,340
    
    
    
    10.4
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    743
    
    
    
    269
    
    
    
    474
    
    
    
    176.2
    %Other income
    
    
    
    
    
    
    207
    
    
    
    (207
    )
    
    
    (100.0
    )%Interest income
    
    
    771
    
    
    
    494
    
    
    
    277
    
    
    
    56.1
    %Interest expense
    
    
    (2,411
    )
    
    
    (2,768
    )
    
    
    357
    
    
    
    (12.9
    )%Debt retirement costs
    
    
    (116
    )
    
    
    (194
    )
    
    
    78
    
    
    
    (40.2
    )%(1,013
    )
    
    
    (1,992
    )
    
    
    979
    
    
    
    (49.1
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    $
    13,191
    
    
    $
    10,872
    
    
    $
    2,319
    
    
    
    21.3
    %
 Three Months Ended September 30, 2007 Compared With Three Months Ended September 30, 2006
  Patient Revenues
  19




---



##### Table of Contents



Three Months EndedSeptember 30,2007
    
    
    2006Skilled nursing occupancy:Same center
    
    
    79.1
    %
    
    
    78.8
    %SMSA Acquisition
    
    
    68.4
    %
    
    
    n/aTotal continuing operations
    
    
    77.6
    %
    
    
    78.8
    %Medicare census as percent of total:Same center
    
    
    13.1
    %
    
    
    13.0
    %SMSA Acquisition
    
    
    12.0
    %
    
    
    n/aTotal continuing operations
    
    
    13.0
    %
    
    
    13.0
    %Medicare revenues as percent of total:Same center
    
    
    29.7
    %
    
    
    29.3
    %SMSA Acquisition
    
    
    33.1
    %
    
    
    n/aTotal continuing operations
    
    
    30.0
    %
    
    
    29.3
    %Medicaid revenues as percent of total:Same center
    
    
    57.9
    %
    
    
    57.6
    %SMSA Acquisition
    
    
    46.0
    %
    
    
    n/aTotal continuing operations
    
    
    56.7
    %
    
    
    57.6
    %Medicare average rate per day:Same center
    
    $
    351.51
    
    
    $
    320.53SMSA Acquisition
    
    $
    375.13
    
    
    
    n/aTotal continuing operations
    
    $
    354.12
    
    
    $
    320.53Medicaid average rate per day:Same center
    
    $
    142.04
    
    
    $
    133.67SMSA Acquisition
    
    $
    109.62
    
    
    
    n/aTotal continuing operations
    
    $
    138.59
    
    
    $
    133.67
  Operating expense
     20




---



##### Table of Contents



Lease expense
 Professional liability.
 General and administrative expense
  Stock-based compensation.
 Depreciation and amortization
 Post acquisition integration costs.
 Foreign currency transaction gain
 Interest expense
 Debt retirement costs.
 Income from continuing operations before income taxes; income from continuing operations per common
share
 21




---



##### Table of Contents



Income from discontinued operations
 Nine Months Ended September 30, 2007 Compared With Nine Months Ended September 30, 2006
  Patient Revenues
  Nine Months EndedSeptember 30,2007
    
    
    2006Skilled nursing occupancy:Same center
    
    
    78.7
    %
    
    
    78.6
    %SMSA Acquisition
    
    
    68.4
    %
    
    
    n/aTotal continuing operations
    
    
    78.2
    %
    
    
    78.6
    %Medicare census as percent of total:Same center
    
    
    14.0
    %
    
    
    13.9
    %SMSA Acquisition
    
    
    12.0
    %
    
    
    n/aTotal continuing operations
    
    
    13.9
    %
    
    
    13.9
    %Medicare revenues as percent of total:Same center
    
    
    31.1
    %
    
    
    30.6
    %SMSA Acquisition
    
    
    33.1
    %
    
    
    n/aTotal continuing operations
    
    
    31.2
    %
    
    
    30.6
    %Medicaid revenues as percent of total:Same center
    
    
    56.6
    %
    
    
    56.2
    %SMSA Acquisition
    
    
    46.0
    %
    
    
    n/aTotal continuing operations
    
    
    56.2
    %
    
    
    56.2
    %Medicare average rate per day:Same center
    
    $
    344.88
    
    
    $
    321.87SMSA Acquisition
    
    $
    375.13
    
    
    
    n/aTotal continuing operations
    
    $
    346.04
    
    
    $
    321.87Medicaid average rate per day:Same center
    
    $
    139.05
    
    
    $
    132.85SMSA Acquisition
    
    $
    109.62
    
    
    
    n/aTotal continuing operations
    
    $
    137.89
    
    
    $
    132.85
 22




---



##### Table of Contents



Operating expense
     Lease expense
 Professional liability.
 General and administrative expense
  Stock-based compensation.
 Depreciation and amortization
 Post acquisition integration costs.
 23




---



##### Table of Contents



Foreign currency transaction gain
 Interest expense
 Debt retirement costs.
 Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Liquidity and Capital Resources
    24




---



##### Table of Contents



Facility Renovations
    25




---



##### Table of Contents



West Virginia Facility Option Agreement
  Receivables
    Inflation
  Off-Balance Sheet Arrangements
  Recent Accounting Pronouncements
   26




---



##### Table of Contents



Forward-Looking Statements
  ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   ITEM 4. CONTROLS AND PROCEDURES
  27




---



##### Table of Contents



28




---



##### Table of Contents



PART II  OTHER INFORMATION
 ITEM 1. LEGAL PROCEEDINGS.
    ITEM 1A. RISK FACTORS
  If we are unable to successfully integrate the business operations of the SMSA facilities into our
business operations, we will not realize the anticipated potential benefits from the acquisition
and our business could be adversely affected.
  ITEM 6. EXHIBITS
  29




---



##### Table of Contents



SIGNATURES
  ADVOCAT INC.
November 6, 2007By:
    /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 30




---



##### 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
    
    Bylaws of the Registrant (incorporated by reference to Exhibit 3.2 to
the Companys Registration Statement No. 33-76150 on Form S-1)3.3
    
    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)3.4
    
    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)3.5
    
    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).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
    
    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
    
    Operations Transfer Agreement effective as of July 20, 2007, by
and among certain subsidiaries of the Company, and Senior
Management Services of America North Texas, Inc., a Texas
corporation, Senior Management Services of Estates at Fort Worth,
Inc., a Texas corporation, Senior Management Services of Doctors
at Dallas, Inc., a Texas corporation, Senior Management Services
of Humble, Inc., a Texas corporation, Senior Management Services
of Katy, Inc., a Texas corporation, Senior Management Services of
Treemont, Inc., a Texas corporation, Senior Management Services of
Heritage Oaks at Ballinger, Inc., a Texas corporation, and Senior
Management Services of Normandy at San Antonio, Inc., a Texas
corporation10.2
    
    Loan and Security Agreement made as of August 10, 2007, between
Diversicare Leasing Corp., a Tennessee corporation, and Bridge
Associates LLC, as trustee for the SMSA Creditors Trust, a Texas
trust.




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibits10.3
    
    Loan and Security Agreement dated as of August 10, 2007, is by and
among the Company and certain subsidiaries and LaSalle Bank
National Association, a national banking association10.4
    
    Guaranty dated as of August 10, 2007, by Advocat Inc., a Delaware
corporation to and for the benefit of LaSalle Bank National
Association, a national banking association10.5
    
    Revolving Credit Note dated August 10, 2007 in the principal
amount of $21,000,000.00 from the Company and certain subsidiaries
to LaSalle Bank National Association, a national banking
association10.6
    
    Term Loan Note dated August 10, 2007 in the principal amount of
$16,500,000.00 from the Company and certain subsidiaries to
LaSalle Bank National Association, a national banking association10.7
    
    Fifth Amendment to Consolidated Amended and Restated Master Lease
dated as of August 10, 2007 by and between Sterling Acquisition
Corp., a Kentucky corporation and Diversicare Leasing Corp., a
Tennessee corporation31.1
    
    Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a).32
    
    Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Rule 13a-14(b) or Rule 15d-14(b).