##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the Quarterly Period Ended:June 30, 2007
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934For the transition period from _________ to
_______.
 Commission file No.: 1-12996
 Advocat Inc.
 (exact name of registrant as specified in its charter)
 Delaware
    
    62-1559667(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification No.)
 1621 Galleria Boulevard, Brentwood, TN 37027  (Address of principal executive offices) (Zip Code)
 (615) 771-7575  (Registrants telephone number, including area code)
 
 (Former name, former address and former fiscal year, if changed since last report.)
 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
 Indicate by check mark whether the registrant 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 August 1, 2007)




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TABLE OF CONTENTS  Part I. FINANCIAL INFORMATIONITEM 1  FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGS.ITEM 1A. RISK FACTORSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.ITEM 6. EXHIBITSEx-31.1 Sections 302 Certification of the CEOEx-31.2 Sections 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)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    13,046
    
    
    $
    12,344Restricted cash
    
    
    25
    
    
    
    25Receivables, less allowance for doubtful accounts of $2,111 and $2,122, respectively
    
    
    17,379
    
    
    
    16,902Current portion of note receivable
    
    
    576
    
    
    
    534Prepaid expenses and other current assets
    
    
    2,800
    
    
    
    2,681Insurance refunds receivable
    
    
    2,719
    
    
    
    3,519Deferred income taxes
    
    
    2,719
    
    
    
    1,785Total current assets
    
    
    39,264
    
    
    
    37,790PROPERTY AND EQUIPMENT, at cost
    
    
    62,159
    
    
    
    59,954Less accumulated depreciation
    
    
    (34,083
    )
    
    
    (32,757
    )Discontinued operations, net
    
    
    1,576
    
    
    
    1,576Property and equipment, net
    
    
    29,652
    
    
    
    28,773OTHER ASSETS:Deferred income taxes
    
    
    18,224
    
    
    
    21,849Note receivable, net of current portion
    
    
    4,536
    
    
    
    4,758Deferred financing and other costs, net
    
    
    770
    
    
    
    905Cash restricted for capital expenditures
    
    
    
    
    
    
    864Other assets
    
    
    2,334
    
    
    
    1,962Total other assets
    
    
    25,864
    
    
    
    30,338$
    94,780
    
    
    $
    96,901CURRENT LIABILITIES:Current portion of long-term debt
    
    $
    3,780
    
    
    $
    4,587Current portion of settlement promissory notes
    
    
    
    
    
    
    128Short-term debt
    
    
    2,534
    
    
    
    2,534Trade accounts payable
    
    
    4,144
    
    
    
    4,566Accrued expenses:Payroll and employee benefits
    
    
    8,301
    
    
    
    9,363Current portion of self-insurance reserves
    
    
    4,102
    
    
    
    4,838Other current liabilities
    
    
    4,013
    
    
    
    3,600Total current liabilities
    
    
    26,874
    
    
    
    29,616NONCURRENT LIABILITIES:Long-term debt, less current portion
    
    
    22,544
    
    
    
    24,267Self-insurance reserves, less current portion
    
    
    17,789
    
    
    
    22,159Other noncurrent liabilities
    
    
    7,544
    
    
    
    5,733Total noncurrent liabilities
    
    
    47,877
    
    
    
    52,159COMMITMENTS AND CONTINGENCIESSERIES C REDEEMABLE PREFERRED STOCK$.10 par value, 5,000 shares authorized, issued and outstanding, including premium of $5,521
and $6,371 at June 30, 2007 and December 31, 2006, respectively.
    
    
    10,439
    
    
    
    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
    
    
    15,443
    
    
    
    15,123Accumulated deficit
    
    
    (5,912
    )
    
    
    (11,345
    )Total shareholders equity
    
    
    9,590
    
    
    
    3,837$
    94,780
    
    
    $
    96,901
  2




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Three Months Ended June 30,2007
    
    
    2006PATIENT REVENUES, net
    
    $
    55,381
    
    
    $
    53,423EXPENSES:Operating
    
    
    41,896
    
    
    
    40,188Lease
    
    
    4,611
    
    
    
    3,828Professional liability
    
    
    (3,378
    )
    
    
    (3,982
    )General and administrative
    
    
    4,017
    
    
    
    3,716Stock-based compensation
    
    
    190
    
    
    
    5,012Depreciation
    
    
    932
    
    
    
    917Total expenses
    
    
    48,268
    
    
    
    49,679OPERATING INCOME
    
    
    7,113
    
    
    
    3,744OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    366
    
    
    
    249Interest income
    
    
    256
    
    
    
    165Interest expense
    
    
    (776
    )
    
    
    (877
    )(154
    )
    
    
    (463
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    6,959
    
    
    
    3,281PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    2,698
    
    
    
    (387
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    4,261
    
    
    
    3,668NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $(11) and $0, respectively
    
    
    (17
    )
    
    
    (94
    )Loss on sale, net of taxes of $0 and $0, respectively
    
    
    
    
    
    
    (128
    )Discontinued operations
    
    
    (17
    )
    
    
    (222
    )NET INCOME
    
    
    4,244
    
    
    
    3,446PREFERRED STOCK DIVIDENDS
    
    
    86
    
    
    
    85NET INCOME FOR COMMON STOCK
    
    $
    4,158
    
    
    $
    3,361NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.71
    
    
    $
    0.62Discontinued operations
    
    
    0.00
    
    
    
    (0.04
    )$
    0.71
    
    
    $
    0.58Per common share  dilutedContinuing operations
    
    $
    0.68
    
    
    $
    0.55Discontinued operations
    
    
    0.00
    
    
    
    (0.03
    )$
    0.68
    
    
    $
    0.52WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,874
    
    
    
    5,746Diluted
    
    
    6,131
    
    
    
    6,596
  3




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts, unaudited)
 Six Months Ended June 30,2007
    
    
    2006PATIENT REVENUES, net
    
    $
    109,973
    
    
    $
    106,070EXPENSES:Operating
    
    
    83,636
    
    
    
    80,278Lease
    
    
    9,207
    
    
    
    7,653Professional liability
    
    
    (2,955
    )
    
    
    (6,258
    )General and administrative
    
    
    8,095
    
    
    
    7,197Stock-based compensation
    
    
    259
    
    
    
    5,012Depreciation
    
    
    1,841
    
    
    
    1,852Total expenses
    
    
    100,083
    
    
    
    95,734OPERATING INCOME
    
    
    9,890
    
    
    
    10,336OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    413
    
    
    
    240Other income
    
    
    
    
    
    
    207Interest income
    
    
    507
    
    
    
    348Interest expense
    
    
    (1,592
    )
    
    
    (1,876
    )(672
    )
    
    
    (1,081
    )INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    9,218
    
    
    
    9,255PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    3,577
    
    
    
    (1,116
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    5,641
    
    
    
    10,371NET LOSS FROM DISCONTINUED OPERATIONS:Operating loss, net of taxes of $0 and $0, respectively
    
    
    (1
    )
    
    
    (114
    )Loss on sale, net of taxes of $(23) and $0, respectively
    
    
    (35
    )
    
    
    (120
    )Discontinued operations
    
    
    (36
    )
    
    
    (234
    )NET INCOME
    
    
    5,605
    
    
    
    10,137PREFERRED STOCK DIVIDENDS
    
    
    172
    
    
    
    168NET INCOME FOR COMMON STOCK
    
    $
    5,433
    
    
    $
    9,969NET INCOME PER COMMON SHARE:Per common share  basicContinuing operations
    
    $
    0.93
    
    
    $
    1.78Discontinued operations
    
    
    0.00
    
    
    
    (0.04
    )$
    0.93
    
    
    $
    1.74Per common share  dilutedContinuing operations
    
    $
    0.89
    
    
    $
    1.58Discontinued operations
    
    
    0.00
    
    
    
    (0.04
    )$
    0.89
    
    
    $
    1.54WEIGHTED AVERAGE COMMON SHARES:Basic
    
    
    5,872
    
    
    
    5,743Diluted
    
    
    6,128
    
    
    
    6,544
  4




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ADVOCAT INC.
 INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands and unaudited)
 Six Months Ended June 30,2007
    
    
    2006CASH FLOWS FROM OPERATING ACTIVITIES:Net income
    
    $
    5,605
    
    
    $
    10,137Discontinued operations
    
    
    (36
    )
    
    
    (234
    )Net income from continuing operations
    
    
    5,641
    
    
    
    10,371Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:Depreciation
    
    
    1,841
    
    
    
    1,852Provision for doubtful accounts
    
    
    412
    
    
    
    921Deferred income tax provision (benefit)
    
    
    2,691
    
    
    
    (1,223
    )Provision for (benefit from) self-insured professional liability, net of cash payments
    
    
    (5,120
    )
    
    
    (7,744
    )Stock-based compensation
    
    
    259
    
    
    
    5,012Amortization of deferred balances
    
    
    136
    
    
    
    87Provision for leases in excess of cash payments
    
    
    1,167
    
    
    
    11Gain on sale of bed license
    
    
    
    
    
    
    (207
    )Foreign currency transaction gain
    
    
    (413
    )
    
    
    (240
    )Non-cash interest expense
    
    
    
    
    
    
    86Non-cash interest income
    
    
    (69
    )
    
    
    (206
    )Net cash provided by operating activities before changes in other assets and liabilities
    
    
    6,545
    
    
    
    8,720Changes in other assets and liabilities affecting operating activities:Receivables, net
    
    
    (889
    )
    
    
    (257
    )Prepaid expenses and other assets
    
    
    368
    
    
    
    (67
    )Trade accounts payable and accrued expenses
    
    
    (1,339
    )
    
    
    (2,041
    )Net cash provided by continuing operations
    
    
    4,685
    
    
    
    6,355Discontinued operations
    
    
    (1
    )
    
    
    232Net cash provided by operating activities
    
    
    4,684
    
    
    
    6,587CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment
    
    
    (2,719
    )
    
    
    (1,386
    )Proceeds from sale of discontinued operations and bed license
    
    
    
    
    
    
    10,421Decrease in restricted cash deposits
    
    
    
    
    
    
    275Notes receivable collection
    
    
    700
    
    
    
    718Decrease in cash restricted for capital expenditures
    
    
    864
    
    
    
    Deposits and other deferred balances
    
    
    (1
    )
    
    
    (25
    )Net cash provided by (used in) continuing operations
    
    
    (1,156
    )
    
    
    10,003Discontinued operations
    
    
    
    
    
    
    (12
    )Net cash provided by (used in) investing activities
    
    
    (1,156
    )
    
    
    9,991CASH FLOWS FROM FINANCING ACTIVITIES:Repayment of debt obligations
    
    
    (2,534
    )
    
    
    (13,121
    )Proceeds from exercise of stock options
    
    
    60
    
    
    
    169Payment of preferred stock dividends
    
    
    (86
    )
    
    
    Payment for preferred stock restructuring
    
    
    (206
    )
    
    
    Financing costs
    
    
    (60
    )
    
    
    (193
    )Net cash used in financing activities
    
    
    (2,826
    )
    
    
    (13,145
    )NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    702
    
    
    
    3,433CASH AND CASH EQUIVALENTS, beginning of period
    
    
    12,344
    
    
    
    7,070CASH AND CASH EQUIVALENTS, end of period
    
    $
    13,046
    
    
    $
    10,503SUPPLEMENTAL INFORMATION:Cash payments of interest
    
    $
    1,496
    
    
    $
    1,999Cash payments of income taxes
    
    $
    565
    
    
    $
    204
    5




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ADVOCAT INC.
 NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
 JUNE 30, 2007 AND 2006
 BUSINESS
    BASIS OF PRESENTATION OF FINANCIAL STATEMENTS
   INSURANCE MATTERS
 Professional
Liability and Other Liability Insurance
   Reserve for Estimated Self-Insured Professional Liability Claims
  6




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June 30,
    
    December 31,2007
    
    2006Policy Year End March 9,2008
    
    $
    2,011,000
    
    
    $
    2007
    
    
    6,469,000
    
    
    
    6,992,0002006
    
    
    4,643,000
    
    
    
    7,629,0002005
    
    
    4,629,000
    
    
    
    6,042,0002004
    
    
    1,819,000
    
    
    
    3,228,0002003 and earlier
    
    
    1,038,000
    
    
    
    1,826,000$
    20,609,000
    
    
    $
    25,717,000
  Other
Insurance
   7




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STOCK-BASED COMPENSATION
    Expected volatility (range)
    
    133% - 143%Risk free interest rate (range)
    
    4.45% - 4.46%Expected dividends
    
    Weighted average expected term (years)
    
    6.0
  RECLASSIFICATIONS
  DISCONTINUED OPERATIONS
    8




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EARNINGS PER SHARE
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income per common share:Per common share  basicIncome from continuing operations
    
    $
    0.71
    
    
    $
    0.62
    
    
    $
    0.93
    
    
    $
    1.78Loss from discontinued operationsOperating loss, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Loss on sale, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Discontinued operations, net of taxes
    
    
    
    
    
    
    (0.04
    )
    
    
    
    
    
    
    (0.04
    )Net income
    
    $
    0.71
    
    
    $
    0.58
    
    
    $
    0.93
    
    
    $
    1.74Per common share  dilutedIncome from continuing operations
    
    $
    0.68
    
    
    $
    0.55
    
    
    $
    0.89
    
    
    $
    1.58Loss from discontinued operationsOperating loss, net of taxes
    
    
    
    
    
    
    (0.01
    )
    
    
    
    
    
    
    (0.02
    )Loss on sale, net of taxes
    
    
    
    
    
    
    (0.02
    )
    
    
    
    
    
    
    (0.02
    )Discontinued operations, net of taxes
    
    
    
    
    
    
    (0.03
    )
    
    
    
    
    
    
    (0.04
    )Net income
    
    $
    0.68
    
    
    $
    0.52
    
    
    $
    0.89
    
    
    $
    1.54
  LONG-TERM DEBT
    SALE OF BED LICENSE
  INCOME TAXES
  9




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EVENT SUBSEQUENT TO THE BALANCE SHEET DATE  PENDING ACQUISITION AND FINANCING COMMITMENT
       10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Overview
   Pending Acquisition.
    Divestitures.
  Basis of Financial Statements.
 Critical Accounting Policies and Judgments
  11




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




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Accrual
for Other Self-Insured Claims
   13




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Asset Impairment
  Stock-Based Compensation
  Income Taxes
  Health Care Industry
  Medicare
and Medicaid Reimbursement
  14




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Licensure
and other Health Care Laws
  Contractual Obligations and Commercial Commitments
  15




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Contractual Obligations
    
    Total
    
    Less than1 year
    
    2 to 3
Years
    
    4 to 5Years
    
    After 5
YearsLong-term and short-term debt
obligations (1)
    
    $
    37,473
    
    
    $
    8,669
    
    
    $
    5,132
    
    
    $
    23,672
    
    
    $
    Series C Preferred Stock (2)
    
    $
    6,037
    
    
    $
    344
    
    
    $
    689
    
    
    $
    5,004
    
    
    $
    Elimination of Preferred Stock
Conversion feature (3)
    
    $
    7,727
    
    
    $
    687
    
    
    $
    1,374
    
    
    $
    1,374
    
    
    $
    4,292Operating leases
    
    $
    493,390
    
    
    $
    16,540
    
    
    $
    34,318
    
    
    $
    33,498
    
    
    $
    409,034Required capital expenditures
under mortgage loans (4)
    
    $
    1,094
    
    
    $
    292
    
    
    $
    536
    
    
    $
    266
    
    
    $
    Required capital expenditures
under operating leases (5)
    
    $
    20,290
    
    
    $
    724
    
    
    $
    1,421
    
    
    $
    1,289
    
    
    $
    16,856Total
    
    $
    566,011
    
    
    $
    27,256
    
    
    $
    43,470
    
    
    $
    65,103
    
    
    $
    430,182
 
 (1)
    
    Long-term and short-term debt obligations include scheduled future payments of principal and interest of long-term and short-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
  (in thousands)
    
    Three Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    55,381
    
    
    $
    53,423
    
    
    $
    1,958
    
    
    
    3.7
    %EXPENSES:Operating
    
    
    41,896
    
    
    
    40,188
    
    
    
    1,708
    
    
    
    4.3
    %Lease
    
    
    4,611
    
    
    
    3,828
    
    
    
    783
    
    
    
    20.5
    %Professional liability
    
    
    (3,378
    )
    
    
    (3,982
    )
    
    
    604
    
    
    
    (15.2
    )%General and administrative
    
    
    4,017
    
    
    
    3,716
    
    
    
    301
    
    
    
    8.1
    %Stock-based compensation
    
    
    190
    
    
    
    5,012
    
    
    
    (4,822
    )
    
    
    (96.2
    )%Depreciation
    
    
    932
    
    
    
    917
    
    
    
    15
    
    
    
    1.6
    %Total expenses
    
    
    48,268
    
    
    
    49,679
    
    
    
    (1,411
    )
    
    
    (2.8
    )%OPERATING INCOME
    
    
    7,113
    
    
    
    3,744
    
    
    
    3,369
    
    
    
    90.0
    %OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    366
    
    
    
    249
    
    
    
    117
    
    
    
    47.0
    %Interest income
    
    
    256
    
    
    
    165
    
    
    
    91
    
    
    
    55.2
    %Interest expense
    
    
    (776
    )
    
    
    (877
    )
    
    
    101
    
    
    
    (11.5
    )%(154
    )
    
    
    (463
    )
    
    
    309
    
    
    
    (66.7
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    6,959
    
    
    
    3,281
    
    
    
    3,678
    
    
    
    112.1
    %PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    2,698
    
    
    
    (387
    )
    
    
    3,085
    
    
    
    (797.0
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    4,261
    
    
    $
    3,668
    
    
    $
    593
    
    
    
    16.2
    %
 16




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##### Table of Contents



(in thousands)
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    Change
    
    
    %PATIENT REVENUES, net
    
    $
    109,973
    
    
    $
    106,070
    
    
    $
    3,903
    
    
    
    3.7
    %EXPENSES:Operating
    
    
    83,636
    
    
    
    80,278
    
    
    
    3,358
    
    
    
    4.2
    %Lease
    
    
    9,207
    
    
    
    7,653
    
    
    
    1,554
    
    
    
    20.3
    %Professional liability
    
    
    (2,955
    )
    
    
    (6,258
    )
    
    
    3,303
    
    
    
    (52.8
    )%General and administrative
    
    
    8,095
    
    
    
    7,197
    
    
    
    898
    
    
    
    12.5
    %Stock-based compensation
    
    
    259
    
    
    
    5,012
    
    
    
    (4,753
    )
    
    
    (94.8
    )%Depreciation
    
    
    1,841
    
    
    
    1,852
    
    
    
    (11
    )
    
    
    (0.6
    )%Total expenses
    
    
    100,083
    
    
    
    95,734
    
    
    
    4,349
    
    
    
    4.5
    %OPERATING INCOME
    
    
    9,890
    
    
    
    10,336
    
    
    
    (446
    )
    
    
    (4.3
    )%OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    413
    
    
    
    240
    
    
    
    173
    
    
    
    72.1
    %Other income
    
    
    0
    
    
    
    207
    
    
    
    (207
    )
    
    
    (100.0
    )%Interest income
    
    
    507
    
    
    
    348
    
    
    
    159
    
    
    
    45.7
    %Interest expense
    
    
    (1,592
    )
    
    
    (1,876
    )
    
    
    284
    
    
    
    (15.1
    )%(672
    )
    
    
    (1,081
    )
    
    
    409
    
    
    
    (37.8
    )%INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
    
    
    9,218
    
    
    
    9,255
    
    
    
    (37
    )
    
    
    (0.4
    )%PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    3,577
    
    
    
    (1,116
    )
    
    
    4,693
    
    
    
    (420.5
    )%NET INCOME FROM CONTINUING OPERATIONS
    
    $
    5,641
    
    
    $
    10,371
    
    
    $
    (4,730
    )
    
    
    (45.6
    )%
 Percentage of Net Revenues
    
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006PATIENT REVENUES, net
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %EXPENSES:Operating
    
    
    75.7
    
    
    
    75.2
    
    
    
    76.1
    
    
    
    75.7Lease
    
    
    8.3
    
    
    
    7.2
    
    
    
    8.3
    
    
    
    7.2Professional liability
    
    
    (6.1
    )
    
    
    (7.5
    )
    
    
    (2.7
    )
    
    
    (5.9
    )General and administrative
    
    
    7.3
    
    
    
    7.0
    
    
    
    7.4
    
    
    
    6.8Stock-based compensation
    
    
    0.3
    
    
    
    9.4
    
    
    
    0.2
    
    
    
    4.7Depreciation
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.7
    
    
    
    1.8Total expenses
    
    
    87.2
    
    
    
    93.0
    
    
    
    91.0
    
    
    
    90.3OPERATING INCOME
    
    
    12.8
    
    
    
    7.0
    
    
    
    9.0
    
    
    
    9.7OTHER INCOME (EXPENSE):Foreign currency transaction gain
    
    
    0.7
    
    
    
    0.5
    
    
    
    0.4
    
    
    
    0.2Other income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.2Interest income
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.5
    
    
    
    0.3Interest expense
    
    
    (1.4
    )
    
    
    (1.6
    )
    
    
    (1.5
    )
    
    
    (1.7
    )(0.2
    )
    
    
    (0.8
    )
    
    
    (0.6
    )
    
    
    (1.0
    )INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
    
    
    12.6
    
    
    
    6.2
    
    
    
    8.4
    
    
    
    8.7PROVISION (BENEFIT) FOR INCOME TAXES
    
    
    4.9
    
    
    
    (0.7
    )
    
    
    3.3
    
    
    
    (1.1
    )NET INCOME FROM CONTINUING OPERATIONS
    
    
    7.7
    %
    
    
    6.9
    %
    
    
    5.1
    %
    
    
    9.8
    %
 Three Months Ended June 30, 2007 Compared With Three Months Ended June 30, 2006
  Patient Revenues
 17




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##### Table of Contents



Operating expense
     Lease expense
 Professional liability.
 General and administrative expense
  Stock-based compensation.
 Depreciation
 Foreign currency transaction gain
 Interest expense
 18




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##### Table of Contents



Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Six Months Ended June 30, 2007 Compared With Six Months Ended June 30, 2006
  Patient Revenues
  Operating expense
     Lease expense
 19




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##### Table of Contents



Professional liability.
 General and administrative expense
  Stock-based compensation.
 Depreciation
 Foreign currency transaction gain
 Interest expense
 Income from continuing operations before income taxes; income from continuing operations per common
share
 Income from discontinued operations
 Liquidity and Capital Resources
   20




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21




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##### Table of Contents



Facility Renovations
    West Virginia Facility Option Agreement
  Receivables
    22




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##### Table of Contents



Inflation
  Recent Accounting Pronouncements
   Forward-Looking Statements
  
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  23




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##### Table of Contents



ITEM 4.
    
    CONTROLS AND PROCEDURES
   24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 ITEM 1.
    
    LEGAL PROCEEDINGS.
    
 ITEM 1A.  RISK FACTORS
  If we are unable to successfully complete the previously announced acquisition of seven skilled
nursing facilities from Senior Management Services of America North Texas, Inc. or close on the
proposed loan agreement with LaSalle Bank NA, our business could be adversely affected.
  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.
  25




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##### Table of Contents



ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
 (a)
    
    The annual meeting of shareholders was held on May 17, 2007.(b)
    
    Matters voted upon at the meeting:
 1.
    
    Election of Directors:William C. ONeil, Jr.For
    3,819,030Withheld
    932,644Eligible Shares
    4,751,674Robert Z. HensleyFor
    3,819,330Withheld
    932,344Eligible Shares
    4,751,674
  
 ITEM 6.
    
    EXHIBITS
  26




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##### Table of Contents



SIGNATURES
  ADVOCAT INC.
August 8, 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 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 27




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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
    
    
    Bylaws of the Company (incorporated by reference to
Exhibit 3.2 to the Companys Registration Statement
No. 33-76150 on Form S-1)3.3
    
    
    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)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).