10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

CHECK ONE:

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: March 31, 2012

OR

¨ 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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

5,882,367

(Outstanding shares of the issuer’s common stock as of April 30, 2012)

Part I. FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands)

	March 31, 2012			December 31, 2011
	(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents	$	6,454		$	6,692
Receivables, less allowance for doubtful accounts of $3,421 and $2,882, respectively		28,260			26,342
Other receivables		782			1,739
Prepaid expenses and other current assets		3,007			3,448
Income tax refundable		827			1,058
Deferred income taxes		6,261			6,041
Total current assets		45,591			45,320
PROPERTY AND EQUIPMENT, at cost		92,534			93,351
Less accumulated depreciation		(46,904	)		(47,326	)
Discontinued operations, net		1,053			1,053
Property and equipment, net (variable interest entity restricted – 2012: $7,374; 2011: $7,298)		46,683			47,078
OTHER ASSETS:
Deferred income taxes		10,374			10,352
Deferred financing and other costs, net		1,438			1,318
Other assets		3,264			3,680
Acquired leasehold interest, net		8,900			8,996
Total other assets		23,976			24,346
	$	116,250		$	116,744

The accompanying notes are an integral part of these interim consolidated financial statements.

(Continued)

2

ADVOCAT INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

(continued)

	March 31, 2012			December 31, 2011
	(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations (variable interest entity nonrecourse – 2012: $176; 2011: $173)	$	1,322		$	1,131
Trade accounts payable		3,927			3,928
Accrued expenses:
Payroll and employee benefits		13,172			13,589
Current portion of self-insurance reserves		8,720			8,470
Other current liabilities		3,517			2,767
Total current liabilities		30,658			29,885
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion (variable interest entity nonrecourse – 2012: $5,646; 2011: $5,067)		28,882			28,768
Self-insurance reserves, less current portion		12,409			12,049
Other noncurrent liabilities		17,989			18,155
Total noncurrent liabilities		59,280			58,972
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE PREFERRED STOCK
$.10 par value, 5,000 shares authorized, issued and outstanding		4,918			4,918
SHAREHOLDERS’ 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, 6,099,000 and 6,061,000 shares issued, and 5,867,000 and 5,829,000 shares outstanding, respectively		61			61
Treasury stock at cost, 232,000 shares of common stock		(2,500	)		(2,500	)
Paid-in capital		18,452			18,219
Retained earnings		4,614			6,480
Accumulated other comprehensive loss		(913	)		(945	)
Total shareholders’ equity of Advocat Inc.		19,714			21,315
Noncontrolling interests		1,680			1,654
Total shareholders’ equity		21,394			22,969
	$	116,250		$	116,744

The accompanying notes are an integral part of these interim consolidated financial statements.

3

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)

	Three Months Ended March 31,
	2012			2011
PATIENT REVENUES, net	$	77,098		$	77,130
EXPENSES:
Operating		61,541			60,857
Lease		5,822			5,714
Professional liability		2,329			1,691
General and administrative		6,822			6,054
Depreciation and amortization		1,822			1,556
Total expenses		78,336			75,872
OPERATING INCOME (LOSS)		(1,238	)		1,258
OTHER INCOME (EXPENSE):
Interest expense, net		(700	)		(451	)
Debt retirement costs		—			(112	)
		(700	)		(563	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,938	)		695
BENEFIT (PROVISION) FOR INCOME TAXES		703			(249	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS		(1,235	)		446
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating income (loss), net of taxes of $(78) and $(4), respectively		(141	)		(8	)
NET INCOME (LOSS)		(1,376	)		438
Less: comprehensive income attributable to noncontrolling interests		(78	)		—
NET INCOME (LOSS) ATTRIBUTABLE TO ADVOCAT INC.		(1,454	)		438
PREFERRED STOCK DIVIDENDS		(86	)		(86	)
NET INCOME (LOSS) FOR ADVOCAT INC. COMMON STOCKHOLDERS	$	(1,540	)	$	352
NET INCOME (LOSS) PER COMMON SHARE FOR ADVOCAT INC. STOCKHOLDERS:
Per common share – basic
Continuing operations	$	(0.24	)	$	0.06
Discontinued operations		(0.03	)		—
	$	(0.27	)	$	0.06
Per common share – diluted
Continuing operations	$	(0.24	)	$	0.06
Discontinued operations		(0.03	)		—
	$	(0.27	)	$	0.06
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$	0.055		$	0.055
WEIGHTED AVERAGE COMMON SHARES:
Basic		5,795			5,752
Diluted		5,795			5,877

The accompanying notes are an integral part of these interim consolidated financial statements.

4

ADVOCAT INC. AND SUBSIDIARIES

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands and unaudited)

	Three Months Ended March  31,
	2012			2011
NET INCOME (LOSS)	$	(1,376	)	$	438
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge		51			(299	)
Income tax (provision) benefit		(19	)		114
		32			(185	)
COMPREHENSIVE INCOME (LOSS)		(1,344	)		253
Less: comprehensive income attributable to noncontrolling interest		(78	)		—
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ADVOCAT INC.	$	(1,422	)	$	253

The accompanying notes are an integral part of these consolidated financial statements.

5

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

	Three Months Ended March 31,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,376	)	$	438
Discontinued operations		(141	)		(8	)
Net income (loss) from continuing operations		(1,235	)		446
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization		1,822			1,556
Provision for doubtful accounts		884			569
Deferred income tax provision (benefit)		(261	)		109
Provision for self-insured professional liability, net of cash payments		829			66
Stock based compensation		164			201
Other		91			238
Changes in other assets and liabilities affecting operating activities:
Receivables, net		(1,684	)		(3,732	)
Prepaid expenses and other assets		28			177
Trade accounts payable and accrued expenses		319			1,306
Net cash provided by continuing operations		957			936
Discontinued operations		65			(12	)
Net cash provided by operating activities		1,022			924
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(1,328	)		(2,048	)
Change in restricted cash		440			(1,828	)
Deposits and other deferred balances		(69	)		(28	)
Net cash used in investing activities		(957	)		(3,904	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations		(329	)		(20,579	)
Proceeds from issuance of debt and capital leases		634			23,430
Financing costs		(118	)		(879	)
Issuance/redemption of equity grants		106			199
Payment of common stock dividends		(319	)		(318	)
Payment of preferred stock dividends		(86	)		(86	)
Contributions from (distributions to) noncontrolling interests		(52	)		27
Payment for preferred stock restructuring		(139	)		(135	)
Net cash provided by (used in) financing activities		(303	)		1,659

(Continued)

6

ADVOCAT INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands and unaudited)

(continued)

	Three Months Ended March 31,
	2012			2011
NET DECREASE IN CASH AND CASH EQUIVALENTS	$	(238	)	$	(1,321	)
CASH AND CASH EQUIVALENTS, beginning of period		6,692			8,862
CASH AND CASH EQUIVALENTS, end of period	$	6,454		$	7,541
SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	$	583		$	296
Cash payments of income taxes	$	60		$	25

The accompanying notes are an integral part of these interim consolidated financial statements.

7

ADVOCAT INC.

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2012 AND 2011

1. BUSINESS

Advocat Inc. (together with its subsidiaries, “Advocat” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. The Company’s centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers offer a variety of comprehensive rehabilitation services as well as nutritional support services.

As of March 31, 2012, the Company’s continuing operations consist of 47 nursing centers with 5,445 licensed nursing beds, including 90 beds at our recently opened West Virginia nursing center. This new nursing center is licensed to operate by the state of West Virginia and has limited its number of patients while it completes the Medicare and Medicaid certification process. The Company owns 9 and leases 38 of its nursing centers. The Company’s continuing operations include centers in Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.

2. CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements include the operations and accounts of Advocat and its subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Any variable interest entities (“VIEs”) in which the Company has an interest are consolidated when the Company identifies that it is the primary beneficiary. The Company has one variable interest entity and it relates to a nursing center in West Virginia described in Note 8.

The interim consolidated financial statements for the three month periods ended March 31, 2012 and 2011, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2012 and the results of operations and cash flows for the three month periods ended March 31, 2012 and 2011. The Company’s consolidated balance sheet at December 31, 2011 was derived from its audited consolidated financial statements as of December 31, 2011.

The results of operations for the three month periods ended March 31, 2012 and 2011 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

3. LONG-TERM DEBT AND INTEREST RATE SWAP

The Company has agreements with a syndicate of banks for a mortgage loan and the Company’s revolving credit facility. Under the terms of the agreements, the syndicate of banks provided mortgage debt (“Mortgage Loan”) with an original balance of $23 million with a five year maturity through March 2016 and the Company’s $15 million revolving credit facility (“Revolver”) through March 2016. The Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5% but is fixed at 7.07% based on the interest rate swap described below. The Mortgage Loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these facilities. The Mortgage Loan and the Revolver are cross-collateralized. The Company’s Revolver has an interest rate of LIBOR plus 4.5%.

8

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. As of March 31, 2012, the Company had no borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.00% of the amount outstanding. The Company has a letter of credit of $4,551,000 to serve as a security deposit for a lease. Considering the balance of eligible accounts receivable at March 31, 2012, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15,000,000, the balance available for borrowing under the revolving credit facility is $10,449,000.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. The Company is in compliance with all such covenants at March 31, 2012.

On March 13, 2012, the Company entered into amendments to its Mortgage Loan and Revolver with the syndicate of banks. The amendments allow for the exclusion of certain expenses when calculating the debt covenants and lowers the requirements for the minimum fixed charge coverage ratio from 1.05 times fixed charges to 1.0 times for each of the covenant measurement periods ending June 30, 2012 and September 30, 2012. The Company paid the syndicate of banks an amendment fee of $30,000 in connection with this amendment.

The Company has consolidated $5,822,000 in debt that was added by the variable interest entity that owns the West Virginia nursing center. The borrower is subject to covenants concerning total liabilities to tangible net worth as well as current assets compared to current liabilities. The borrower is in compliance with all such covenants at March 31, 2012. The borrower’s liabilities do not provide creditors with recourse to the general assets of the Company.

Interest Rate Swap transaction-

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 7.07% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss).

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at March 31, 2012, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $1,473,000 at March 31, 2012. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at March 31, 2012 is $913,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $560,000. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis consistent with the measurement at December 31, 2011. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the Financial Accounting Standards Board’s (“FASB’s”) guidance on Fair Value Measurements and Disclosures.

9

4. INSURANCE MATTERS

Professional Liability and Other Liability Insurance-

For claims made after March 9, 2001, the Company has purchased professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. The Company has essentially exhausted all general and professional liability insurance available for claims asserted prior to July 1, 2011.

Effective June 1, 2010, the Company’s nursing centers are covered by one of two professional liability insurance policies. The Company’s nursing centers in Arkansas and Tennessee, two centers in West Virginia and all but one facility in Kentucky are currently covered by an insurance policy with coverage limits of $250,000 per medical incident and total annual aggregate policy limits of $750,000. This policy provides the only commercially affordable insurance coverage available for claims made during this period against these nursing centers. The Company’s nursing centers in Alabama, Florida, Ohio, Texas and one center each in West Virginia and Kentucky are currently covered by an insurance policy with coverage limits of $1,000,000 per medical incident, subject to a deductible of $495,000 per claim, with a total annual aggregate policy limit of $15,000,000 and a sublimit per center of $3,000,000.

Reserve for Estimated Self-Insured Professional Liability Claims-

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $19,937,000 as of March 31, 2012. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains the Actuarial Division of Willis of Tennessee, Inc. (“Willis”), a third-party actuarial firm, to provide an estimate of the accrual for incurred general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Willis primarily uses historical data regarding the frequency and cost of the Company’s past claims over a multi-year period and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods. The actuary also estimates the Company’s professional liability accrual for past periods by using currently-known information to adjust the initial reserve that was created the period.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim information obtained, the semi-annual estimates received from Willis, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

10

The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $1,372,000 and $1,311,000 for the three months ended March 31, 2012 and 2011, respectively.

The Company follows the FASB Accounting Standards Update, “Presentation of Insurance Claims and Related Insurance Recoveries,” that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the Company has assets and equal liabilities of $500,000 at March 31, 2012 and $750,000 at December 31, 2011, respectively.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains Willis semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

Other Insurance-

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers’ compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2008 through June 30, 2012, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $330,000 at March 31, 2012. The Company has a non-current receivable for workers’ compensation policy’s covering previous years of $669,000 as of March 31, 2012. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of March 31, 2012, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $862,000 at March 31, 2012. The differences between actual settlements and reserves are included in expense in the period finalized.

11

5. STOCK-BASED COMPENSATION

During 2012, the Compensation Committee of the Board of Directors approved a grant of approximately 39,000 shares of restricted common stock to certain employees and members of the Board of Directors. The restricted shares vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. Upon vesting, all restrictions are removed.

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $164,000 and $201,000 in the three month periods ended March 31, 2012 and 2011, respectively.

6. RECENT ACCOUNTING GUIDANCE

In June 2011, the FASB issued updated guidance in the form of a FASB Accounting Standards Update on “Comprehensive Income - Presentation of Comprehensive Income,” to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update eliminates the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted this guidance effective January 1, 2012 and has applied it retrospectively. There was no significant impact to the Company’s interim consolidated financial statements.

In July 2011, the FASB issued updated guidance in the form of a FASB Accounting Standards Update on “Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.” This guidance impacts health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay. This updated guidance requires an impacted health care entity to present its provision for doubtful accounts as a deduction from revenue, similar to contractual discounts. Accordingly, patient service revenue for entities subject to this updated guidance will be required to be reported net of both contractual discounts and provision for doubtful accounts. The updated guidance also requires certain qualitative disclosures about the entity’s policy for recognizing revenue and bad debt expense for patient service transactions. The guidance was effective for the Company starting January 1, 2012. Based on the Company’s assessment of its admission procedures, the Company is not an impacted health care entity under this guidance since it assesses each patient’s ability or the patient’s payor source’s ability to pay. As a result of this assessment, the Company will continue to record bad debt expense as a component of operating expense, and adoption will not have an impact on the Company’s consolidated financial statements.

12

7. EARNINGS (LOSS) PER COMMON SHARE

Information with respect to basic and diluted net income (loss) per common share is presented below:

		0000000000			0000000000
	Three Months Ended March  31,
	2012			2011
Numerator: Income (loss) amounts attributable to Advocat Inc. shareholders:
Net income (loss) from continuing operations	$	(1,235	)	$	446
Less: comprehensive income attributable to noncontrolling interests		(78	)		—
Income (loss) from continuing operations attributable to Advocat Inc.		(1,313	)		446
Preferred stock dividends		(86	)		(86	)
Income (loss) from continuing operations attributable to Advocat Inc. shareholders		(1,399	)		360
Income (loss) from discontinued operations, net of income taxes		(141	)		(8	)
Net income (loss) attributable to Advocat Inc. shareholders	$	(1,540	)	$	352

		0000000000			0000000000
	Three Months Ended March  31,
	2012			2011
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	(0.24	)	$	0.06
Income (loss) from discontinued operations
Operating income (loss), net of taxes		(0.03	)		—
Discontinued operations, net of taxes		(0.03	)		—
Net income (loss)	$	(0.27	)	$	0.06
Per common share – diluted
Income (loss) from continuing operations	$	(0.24	)	$	0.06
Income (loss) from discontinued operations
Operating income (loss), net of taxes		(0.03	)		—
Discontinued operations, net of taxes		(0.03	)		—
Net income (loss)	$	(0.27	)	$	0.06

The effects of 151,000 and 320,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in 2012 and 2011, respectively, because these securities would have been anti-dilutive. The weighted average common shares for basic and diluted earnings for common shares were the same due to the quarterly loss in 2012.

8. WEST VIRGINIA FACILITY

On December 28, 2011, the Company completed construction of Rose Terrace Health and Rehabilitation Center (“Rose Terrace”), its third health care center in West Virginia. The state of the art 90-bed skilled nursing center is located in Culloden, West Virginia, along the Huntington-Charleston corridor, and offers 24-hour skilled nursing care designed to meet the care needs of both short and long term nursing patients. The Rose Terrace nursing center utilizes a Certificate of Need the

13

Company obtained in June 2009, when the Company completed the acquisition of certain assets of a skilled nursing center in West Virginia. The new nursing center is licensed to operate by the state of West Virginia and expects to obtain its full Medicare and Medicaid certifications in the first half of 2012.

The Company has a lease agreement with the real estate developer that constructed, furnished, and equipped Rose Terrace that provides an initial lease term of 20 years and the option to renew the lease for two additional five-year periods. The agreement provides the Company the right to purchase the center beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the total project cost.

The Company has no equity interest in the entity that constructed the new facility and does not guarantee any debt obligations of the entity. The owners of the facility have provided guarantees of the debt of the entity and, based on those guarantees, the entity is considered to be a variable interest entity (“VIE”). The Company owns the underlying Certificate of Need that is required for operation as a skilled nursing center. During 2011, the Company determined it is the primary beneficiary of the VIE based primarily on the ownership of the Certificate of Need, the fixed price purchase option described above, the Company’s ability to direct the activities that most significantly impact the economic performance of the VIE and the right to receive potentially significant benefits from the VIE. Accordingly, as the primary beneficiary, the Company consolidates the balance sheet and results of operations of the VIE.

The following table summarizes the accounts and amounts included in the Company’s Consolidated Balance Sheet that are associated with the real estate developer’s interests in the VIE. These assets can be used only to settle obligations of the VIE and none of these liabilities provide creditors with recourse to the general assets of the Company.

	March 31, 2012		December 31, 2011
Land	$	787,000	$	787,000
Building and improvements		6,014,000		5,938,000
Furniture, fixtures and equipment		573,000		573,000
Other assets		128,000		46,000
	$	7,502,000	$	7,344,000
Current accruals	$	—	$	450,000
Notes payable, including current portion		5,822,000		5,240,000
Non-controlling interests equity		1,680,000		1,654,000
	$	7,502,000	$	7,344,000

9. EVENT SUBSEQUENT TO THE BALANCE SHEET

Lease Agreement

In April 2012, the Company entered into a lease agreement to operate an 88-bed skilled nursing center in Clinton, Kentucky. The center is subject to a mortgage insured through the United States Department of Housing and Urban Development. The current annual lease payments are approximately $360,000. The lease has an initial ten year term with two five year renewal options and contains an option to purchase the property for $3.3 million during the first five years. The center has not had residents since April 2011 after being de-certified by Medicare and Medicaid. The lease may be terminated if the center does not obtain certifications under the Medicare and Kentucky Medicaid programs by October 15, 2012.

14

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Advocat Inc. provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. Our centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, we offer a variety of comprehensive rehabilitation services as well as nutritional support services. As of March 31, 2012, our continuing operations consist of 47 nursing centers with 5,445 licensed nursing beds. We own 9 and lease 38 of our nursing centers included in continuing operations.

Strategic operating initiatives. Our key strategic operating initiatives include improving skilled mix in our nursing centers by enhancing our registered nurse coverage and adding specialized clinical care. The investments in nursing and clinical care were conducted in concert with additional investments in nursing center based marketing representatives to develop referral and managed care relationships. These investments have attracted and are expected to continue to attract quality payor sources for patients covered by Medicare, managed care as well as certain private pay individuals. These marketing and nurse coverage efforts have already enabled us to improve our Medicare rate by bringing in additional referrals of higher acuity patients.

Another strategic operating initiative was to implement Electronic Medical Records (“EMR”). We completed the implementation of Electronic Medical Records in all our nursing centers in December 2011.

As part of our strategic operating initiatives we have accelerated our program for improving our physical plants. Since 2005, we have been completing strategic renovations of certain facilities that improve quality of care and profitability. We plan to continue these nursing center renovation projects and accelerate this strategy using the knowledge obtained in the first few years of this program. Our strategic operating initiatives will also include pursuing and investigating opportunities to acquire, lease or develop new facilities, focusing primarily on opportunities within our existing areas of operation.

We are incurring expenses in connection with these initiatives, as described in “Results of Operations.” These investments in business initiatives have increased our operating expenses during 2012 and 2011 as well as the latter portion of 2010 and while we expect the increases to be on a lower scale, we expect to see additional costs over the next year. We have already experienced increased acuity and rate per day which continue to contribute to our increases in revenue. We expect to continue this trend in the future.

Basis of Financial Statements. Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating expenses include the costs, other than lease, professional liability, depreciation and amortization expenses, incurred in the operation of the nursing centers we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.

Critical Accounting Policies and Judgments

A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of operations and requires management’s most difficult, subjective or complex judgments often involving estimates of the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income or loss to vary significantly from period to period. Our critical accounting policies are more fully described in our 2011 Annual Report on Form 10-K.

15

Revenue Sources

We classify our revenues from patients and residents into four major categories: Medicaid, Medicare, managed care, and private pay and other. Medicaid revenues are composed of the traditional Medicaid program established to provide benefits to those in need of financial assistance in the securing of medical services. Medicare revenues include revenues received under both Part A and Part B of the Medicare program. Managed care revenues include payments for patients who are insured by a third-party entity, typically called a Health Maintenance Organization, often referred to as an HMO plan, or are Medicare beneficiaries who assign their Medicare benefits to a managed care replacement plan often referred to as Medicare replacement products. The private pay and other revenues are composed primarily of individuals or parties who directly pay for their services. Included in the private pay and other are patients who are hospice beneficiaries as well as the recipients of Veterans Administration benefits. Veterans Administration payments are made pursuant to renewable contracts negotiated with these payors.

The following table sets forth net patient and resident revenues related to our continuing operations by payor source for the periods presented (dollar amounts in thousands):

		0000000000	0000000000			0000000000	0000000000
	Three Months Ended March 31,
	2012				2011
Medicaid	$	38,837	50.4	%	$	37,881	49.1	%
Medicare		25,550	33.1			26,826	34.8
Managed care		3,274	4.3			3,062	4.0
Private Pay and other		9,437	12.2			9,361	12.1
Total	$	77,098	100.0	%	$	77,130	100.0	%

The following table sets forth average daily skilled nursing census by payor source for our continuing operations for the periods presented:

		0000000000	0000000000			0000000000	0000000000
	Three Months Ended March 31,
	2012				2011
Medicaid		2,780	67.8	%		2,790	67.3	%
Medicare		592	14.4			598	14.4
Managed care		89	2.2			80	1.9
Private Pay and other		639	15.6			676	16.4
Total		4,100	100.0	%		4,144	100.0	%

Consistent with the nursing home industry in general, changes in the mix of a center’s patient population among Medicaid, Medicare, managed care, and private pay and other can significantly affect the profitability of the center’s operations.

Health Care Industry

The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse. Over the last several years, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations as well as laws and regulations governing quality of care issues in the skilled nursing profession in general. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant

16

repayments for patient services previously billed. Compliance with such laws and regulations is subject to ongoing government review and interpretation, as well as regulatory actions in which government agencies seek to impose fines and penalties. The Company is involved in regulatory actions of this type from time to time.

In March 2010, significant legislation concerning health care and health insurance was passed, including the “Patient Protection and Affordable Care Act”, (“Patient Protection Act”) along with the “Health Care and Education Reconciliation Act of 2010” (“Reconciliation Act”) collectively defined as the “Legislation.” We expect this Legislation to impact our Company, our employees and our patients and residents in a variety of ways. Some aspects of these new laws are immediate while others will be phased in over the next ten years when all mandates become effective. This Legislation significantly changes the future responsibility of employers with respect to providing health care coverage to employees in the United States. Two of the main provisions of the Legislation become effective in 2014 whereby most individuals will be required to either have health insurance or pay a fine and employers with 50 or more employees will either have to provide minimum essential coverage or will be subject to additional taxes. We have not estimated the financial impact of the Legislation and the costs associated with complying with the increased levels of health insurance we will be required to provide our employees and their dependents in future years. We expect the Legislation will result in increased operating expenses.

We also expect for this Legislation to continue to impact our Medicaid and Medicare reimbursement as well, though the exact timing and level of that impact is currently unknown. We anticipate that many of the provisions of the Legislation may be subject to further clarification and modification through the rule making process. The Legislation expands the role of home based and community services, which may place downward pressure on our sustaining population of Medicaid residents.

Medicare and Medicaid Reimbursement

A significant portion of our revenues are derived from government-sponsored health insurance programs. Our nursing centers derive revenues under Medicaid, Medicare, managed care, private pay and other third party sources. We employ specialists in reimbursement at the corporate level and use third party services to monitor regulatory developments, to comply with reporting requirements and to ensure that proper payments are made to our operated nursing centers. It is generally recognized that all government-funded programs have been and will continue to be under cost containment pressures, but the extent to which these pressures will affect our future reimbursement is unknown.

Medicare

Effective October 1, 2011, Medicare rates were reduced by a nationwide average of 11.1%, the net effect of a reduction to restore overall payments to their intended levels on a prospective basis and the application of a 2.7% market basket increase and a negative 1.0% productivity adjustment required by the Patient Protection Act. The final CMS rule also adjusts the method by which group therapy is counted for reimbursement purposes and, for patients receiving therapy, changes the timing of reassessment for purposes of determining patient RUG categories. These October 2011 Medicare reimbursement changes decreased our Medicare revenue and our Medicare rate per patient day. The new regulations also resulted in an increase in costs to provide therapy services to our patients.

The Budget Control Act of 2011 (“BCA”), enacted on August 2, 2011, increased the United States debt ceiling and linked the debt ceiling increase to corresponding deficit reductions through 2021. The BCA also established a 12 member joint committee of Congress known as the Joint Select Committee on Deficit Reduction (“Super Committee”). The Super Committee’s objective was to create proposed legislation to reduce the United States federal budget deficit by $1.5 trillion for fiscal years 2012 through 2021. Part of the BCA required this legislation to be enacted by December 23, 2011 or approximately $1.2 trillion in domestic and defense spending reductions would automatically begin

17

January 1, 2013, split between domestic and defense spending. As no legislation was passed that would achieve the targeted savings, payments to Medicare providers are potentially subject to these automatic spending reductions, limited to not more than a 2% reduction. At this time it is unclear how this automatic reduction may be applied to various Medicare healthcare programs. Reductions to Medicare reimbursement from the BCA could have a material adverse effect on our operating results and cash flows.

The Medicare Payment Advisory Commission (MedPAC) recently recommended that Congress provide no payment update in the coming fiscal year, beginning October 1, 2012, for skilled nursing center care. With an expected increase in the costs to care for our patients, a freeze in our Medicare rate will likely further negatively impact our operating results and cash flows.

Therapy Services. There are annual Medicare Part B reimbursement limits on therapy services that can be provided to an individual. The limits impose a $1,870 per patient annual ceiling on physical and speech therapy services, and a separate $1,870 per patient annual ceiling on occupational therapy services. CMS established an exception process to permit therapy services in certain situations and we provide services that are reimbursed under the exceptions process. The exceptions process has been extended several times, most recently by the Middle Class Tax Relief and Job Creation Act of 2012 which extended this exception process through December 31, 2012. It is unknown if any further extension of the therapy cap exceptions will be included in future legislation. If the exception process is discontinued, it is expected that the reimbursement limitations will reduce therapy revenues and negatively impact our operating results and cash flows.

On November 2, 2010, CMS released a final proposed rule as part of the Medicare Physician Fee Schedule (“MPFS”) that was effective January 1, 2011. The policy impacts the reimbursement we receive for Medicare Part B therapy services in our facilities. The policy provides that Medicare Part B pay the full rate for the therapy unit of service that has the highest Practice Expense (PE) component for each patient on each day they receive multiple therapy treatments. Reimbursement for the second and subsequent therapy units for each patient each day they receive multiple therapy treatments is reimbursed at a rate equal to 75% of the applicable PE component.

Medicare Part B therapy services in our centers are determined according to MPFS. Annually since 1997, the MPFS has been subject to a sustainable growth rate adjustment (“SGR”) intended to keep spending growth in line with allowable spending. Each year since the SGR was enacted, this adjustment produced a scheduled negative update to payment for physicians, therapists and other healthcare providers paid under the MPFS. Congress has stepped in with so-called “doc fix” legislation numerous times to stop payment cuts to physicians, most recently by the Middle Class Tax Relief and Job Creation Act of 2012, which stopped these payment cuts through December 31, 2012. Without the temporary fix we would have experienced an estimated 27% reduction in Medicare Part B payments. If the fix to payment cuts is discontinued, it is expected that we will see a reduction in therapy revenues that will negatively impact our operating results and cash flows.

The Middle Class Tax Relief and Job Creation Act of 2012 also resulted in a reduction of bad debt treated as an allowable cost. Medicare reimburses providers for beneficiaries’ unpaid coinsurance and deductible amounts after reasonable collection efforts at a rate between 70 and 100 percent of beneficiary bad debt. This provision reduces bad debt reimbursement for all providers to 65 percent.

18

Medicaid

Several states in which we operate face budget shortfalls, which could result in reductions in Medicaid funding for nursing centers. The federal government made an effort to address the financial challenges state Medicaid programs are facing by increasing the amount of Medicaid funding available to states. Pressures on state budgets are expected to continue in the future and are expected to result in Medicaid rate reductions.

We receive the majority of our annual Medicaid rate increases during the third quarter of each year. The rate changes received in the third quarters of 2011 and 2010 were the primary contributor to our 4.6% increase in average rate per day for Medicaid patients in 2012 compared to 2011.

We are unable to predict what, if any, reform proposals or reimbursement limitations will be implemented in the future, or the effect such changes would have on our operations. For the three months ended March 31, 2012, we derived 33.1% and 50.4% of our total patient revenues related to continuing operations from the Medicare and Medicaid programs, respectively. Any health care reforms that significantly limit rates of reimbursement under these programs could, therefore, have a material adverse effect on our profitability.

We will attempt to increase revenues from non-governmental sources to the extent capital is available to do so. However, private payors, including managed care payors, are increasingly demanding that providers accept discounted fees or assume all or a portion of the financial risk for the delivery of health care services. Such measures may include capitated payments, which can result in significant losses to health care providers if patients require expensive treatment not adequately covered by the capitated rate.

Licensure and other Health Care Laws

All our nursing centers must be licensed by the state in which they are located in order to accept patients, regardless of payor source. In most states, nursing centers are subject to certificate of need laws, which require us to obtain government approval for the construction of new nursing centers or the addition of new licensed beds to existing centers. Our nursing centers must comply with detailed statutory and regulatory requirements on an ongoing basis in order to qualify for licensure, as well as for certification as a provider eligible to receive payments from the Medicare and Medicaid programs. Generally, the requirements for licensure and Medicare/Medicaid certification are similar and relate to quality and adequacy of personnel, quality of medical care, record keeping, dietary services, resident rights, and the physical condition of the center and the adequacy of the equipment used therein. Each center is subject to periodic inspections, known as “surveys” by health care regulators, to determine compliance with all applicable licensure and certification standards. Such requirements are both subjective and subject to change. If the survey concludes that there are deficiencies in compliance, the center is subject to various sanctions, including but not limited to monetary fines and penalties, suspension of new admissions, non-payment for new admissions and loss of licensure or certification. Generally, however, once a center receives written notice of any compliance deficiencies, it may submit a written plan of correction and is given a reasonable opportunity to correct the deficiencies. There can be no assurance that, in the future, we will be able to maintain such licenses and certifications for our facilities or that we will not be required to expend significant sums in order to comply with regulatory requirements. Recently, we have experienced an increase in the severity of survey citations and the size of monetary penalties, consistent with industry trends.

19

Contractual Obligations and Commercial Commitments

We have certain contractual obligations of continuing operations as of March 31, 2012, summarized by the period in which payment is due, as follows (dollar amounts in thousands):

Contractual Obligations	Total		Less than 1 year		1 to 3 Years		3 to 5 Years		After 5 Years
Long-term debt obligations (1)	$	37,667	$	3,294	$	6,015	$	28,358	$	—
Settlement obligations (2)	$	2,895	$	2,895	$	—	$	—	$	—
Executive severance (3)	$	1,830	$	1,830	$	—	$	—	$	—
Series C Preferred Stock (4)	$	4,918	$	4,918	$	—	$	—	$	—
Elimination of Preferred Stock Conversion feature (5)	$	4,464	$	687	$	1,374	$	1,374	$	1,029
Operating leases	$	556,785	$	23,239	$	47,705	$	49,925	$	435,916
Required capital expenditures under operating leases (6)	$	18,410	$	274	$	549	$	549	$	17,038
Total	$	626,969	$	37,137	$	55,643	$	80,206	$	453,983

⁽¹⁾  Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts outstanding on our capital lease obligations.

⁽²⁾  Settlement obligations relate to professional liability cases that will be paid within the next twelve months. The professional liabilities are included in our current portion of self-insurance reserves.

⁽³⁾  Executive severance includes separation payments that will be paid within the next twelve months. The separation payments are included in our accrued payroll and employee benefits.

⁽⁴⁾  Series C Preferred Stock equals the redemption value at the preferred shareholder’s earliest redemption date.

⁽⁵⁾  Payments to Omega, from whom we lease 36 nursing centers, for the elimination of the preferred stock conversion feature in connection with restructuring the preferred stock and master lease agreements. Monthly payments of approximately $57,000 will be made through the end of the initial lease period that ends in September 2018.

⁽⁶⁾ Includes annual expenditure requirements under operating leases.

We have employment agreements with certain members of management that provide for the payment to these members of amounts up to 2 times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.0 million as of March 31, 2012. The terms of such agreements are from one to three years and automatically renew for one year if not terminated by us or the employee. In addition, upon the occurrence of any triggering event, those certain members of management may elect to require that we purchase equity awards granted to them for a purchase price equal to the difference in the fair market value of our common stock at the date of termination versus the stated equity award exercise price. Based on the closing price of our stock on March 31, 2012, there is no maximum contingent liability for the repurchase of the equity grants. No amounts have been accrued for these contingent liabilities.

20

Results of Operations

The following tables present the unaudited interim statements of operations and related data for the three month periods ended March 31, 2012 and 2011:

(in thousands)	Three Months Ended March 31,
	2011			2011			Change			%
PATIENT REVENUES, net	$	77,098		$	77,130		$	(32	)		—
EXPENSES:
Operating		61,541			60,857			684			1.1
Lease		5,822			5,714			108			1.9
Professional liability		2,329			1,691			638			37.7
General and administrative		6,822			6,054			768			12.7
Depreciation and amortization		1,822			1,556			266			17.1
Total expenses		78,336			75,872			2,464			3.2
OPERATING INCOME (LOSS)		(1,238	)		1,258			(2,496	)		(198.4	)
OTHER INCOME (EXPENSE):
Interest expense, net		(700	)		(451	)		(249	)		(55.2	)
Debt retirement costs		—			(112	)		112			(100.0	)
		(700	)		(563	)		(137	)		24.3
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(1,938	)		695			(2,633	)		(378.8	)
BENEFIT (PROVISION) FOR INCOME TAXES		703			(249	)		(952	)		(382.3	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS	$	(1,235	)	$	446		$	(1,681	)		(376.9	)

Percentage of Net Revenues	Three Months Ended March  31,
	2012			2011
PATIENT REVENUES, net		100.0	%		100.0	%
EXPENSES:
Operating		79.8			78.9
Lease		7.6			7.4
Professional liability		3.0			2.2
General and administrative		8.8			7.9
Depreciation and amortization		2.4			2.0
Total expenses		101.6			98.4
OPERATING INCOME (LOSS)		(1.6	)		1.6
OTHER INCOME (EXPENSE):
Interest expense, net		—			(0.6	)
Debt retirement costs		(0.9	)		(0.1	)
		(0.9	)		(0.7	)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		(2.5	)		0.9
BENEFIT (PROVISION) FOR INCOME TAXES		0.9			(0.3	)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS		(1.6	)%		0.6	%

21

Three Months Ended March 31, 2012 Compared With Three Months Ended March 31, 2011

Patient Revenues

Patient revenues were $77.1 million in 2012 and 2011. Our newly opened West Virginia nursing center has received its license to operate, with its Medicare and Medicaid certification in process, and contributed $0.1 million in revenue during the first quarter of 2012 as its federal certification is in process.

The following table summarizes key revenue and census statistics for continuing operations for each period:

	Three Months Ended March 31,
	2012			2011
Skilled nursing occupancy		76.5	%(1)		77.3	%
As a percent of total census:
Medicare census		14.4	%		14.4	%
Managed care census		2.2	%		1.9	%
As a percent of total revenues:
Medicare revenues		33.1	%		34.8	%
Medicaid revenues		50.4	%		49.1	%
Managed care revenues		4.3	%		4.0	%
Average rate per day:
Medicare	$	415.57		$	455.36
Medicaid	$	155.51		$	148.67
Managed care	$	391.42		$	413.75

⁽¹⁾  Skilled nursing occupancy excludes our recently opened West Virginia nursing center. This new nursing center is licensed to operate by the state of West Virginia and has limited its number of patients while we complete the Medicare and Medicaid certification process.

The average Medicaid rate per patient day for 2012 increased 4.6% compared to 2011, resulting in an increase in revenue of $1.7 million. This average rate per day for Medicaid patients is the result of rate increases in certain states and increasing patient acuity levels. The average Medicare rate per patient day for 2012 decreased 8.7% compared to 2011, resulting in a net decrease in revenue of $2.1 million. This decrease is primarily attributable to the October 1, 2011, CMS implemented Medicare rate decrease of 11.1% offset by investments we have made to improve our skilled care offerings.

Our total average daily census decreased by approximately 1.1% compared to 2011, resulting in a revenue decrease of approximately $0.6 million. We experienced an increase of $0.8 million in revenue delivery to our Medicare B patients in 2012 compared to 2011.

Operating expense

Operating expense increased to $61.5 million in 2012 from $60.9 million in 2011, an increase of $0.6 million, or 1.1%. Operating expense increased to 79.8% of revenue in 2012, compared to 78.9% of revenue in 2011.

The largest component of operating expenses is wages, which increased to $38.0 million in 2012 from $37.1 million in 2011, an increase of $0.9 million, or 2.4%. Merit and inflationary raises for personnel were approximately 4.0% for the first quarter. The extra day in February for leap year contributed $0.4 million of the wage increases.

Workers compensation insurance expense decreased approximately $0.3 million in 2012 compared to 2011. The decrease is the result of better claims experience in 2012 compared to 2011.

22

Employee health insurance costs were approximately $0.4 million lower in 2012 compared to 2011. The Company is self-insured for the first $175,000 in claims per employee each year, and we experienced a lower level of claims costs during 2012. Employee health insurance costs can vary significantly from year to year, and we continually evaluate the provisions of these plans.

Our newly opened West Virginia nursing center contributed $0.4 million in additional costs.

Bad debt expense increased approximately $0.3 million in 2012 compared to 2011.

Lease expense

Lease expense increased to $5.8 million in 2012 from $5.7 million in 2011. The primary reason for the increase in lease expense was rent for lessor funded property renovations.

Professional liability

Professional liability expense was $2.3 million in 2012 compared to $1.7 million in 2011, an increase of $0.6 million. We were engaged in 39 professional liability lawsuits as of March 31, 2012, compared to 38 as of December 31, 2011. Our cash expenditures for professional liability costs of continuing operations were $1.4 million and $1.3 million for 2012 and 2011, respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies and on the costs incurred in defending and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.

General and administrative expense

General and administrative expenses were approximately $6.8 million in 2012 compared to $6.1 million in 2011, an increase of $0.7 million, or 12.7%. Wage costs increased by $0.4 million while costs of our strategic initiatives accounted for approximately $0.3 million, including consulting services, legal and acquisition related expenses. Performance-based incentive expense was $0.3 million lower in 2012. We also experienced an increase of approximately $0.7 million in severance costs. Our cost increases were offset by a decrease in implementation costs of Electronic Medical Records when compared to 2011.

Depreciation and amortization

Depreciation and amortization expense was approximately $1.8 million in 2012 and $1.6 million in 2011. The increase in 2012 is primarily due to depreciation and amortization expenses related to capital expenditures for additions to property and equipment, including equipment related to our EMR initiative.

Interest expense, net

Interest expense increased to $0.7 million in 2012 compared to $0.5 million in 2011. As discussed further in “Capital Resources” the increase in interest expense is partially due to the change in interest rates on our Mortgage Loan to a fixed rate of 7.07% from 4.01% and the additional $2.4 million in borrowings for capital improvements at our owned homes. The interest expense related to the new nursing center in West Virginia was responsible for $0.1 million in increased interest in 2012.

23

Income (loss) from continuing operations before income taxes; income (loss) from continuing operations per common share

As a result of the above, continuing operations reported income (loss) before income taxes of $(1.9) million and $0.7 million in 2012 and 2011, respectively. The provision (benefit) for income taxes was $(0.7) million in 2012, an effective rate of 36.3% and $0.2 million in 2011, an effective rate of 35.8%. The basic and diluted income (loss) per common share from continuing operations were both $(0.24) in 2012 compared to $0.06 in 2011.

Liquidity and Capital Resources

Liquidity

Our primary source of liquidity is the net cash flow provided by the operating activities of our facilities. We believe that these internally generated cash flows will be adequate to service existing debt obligations, fund required capital expenditures as well as provide cash flows for investing opportunities. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that we believe will most benefit us over the long term. Options for our cash include, but are not limited to, capital improvements, dividends, purchase of additional shares of our common stock, acquisitions, payment of existing debt obligations, preferred stock redemptions as well as initiatives to improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long term success.

Net cash provided by operating activities of continuing operations totaled $1.0 million in 2012 and $0.9 million in 2011.

Investing activities of continuing operations used cash of $1.0 million and $3.9 million in 2012 and 2011, respectively. These amounts primarily represent cash used for purchases of property and equipment. We have used between $6.4 million and $13.4 million for capital expenditures of continuing operations in each of the three calendar years ended December 31, 2011. Purchases of property include $0.1 and $0.4 million during 2012 and 2011, respectively, for assets added by the entity that constructed the West Virginia nursing center that we are consolidating. We used $0.4 million in restricted cash to fund capital improvements at the four owned nursing centers that secure the mortgage loan during 2012 and saw a net increase in these restricted funds during 2011 when the funds were borrowed.

Financing activities of continuing operations used cash of $0.3 million in 2012 and provided cash of $1.7 million in 2011. Financing activities in 2012 also reflect debt of $0.6 million that was added by the entity that owns the West Virginia nursing center that we are consolidating as well as payment of existing debt obligations of $0.3 million. Net cash provided in 2011 primarily resulted from payment and refinancing of existing mortgage obligations of $20.6 million and paying $0.8 million in financing costs in connection with the new mortgage loan under which we borrowed $23.0 million, including approximately $2.4 million to fund capital improvements at our owned centers. Financing activities reflect $0.4 million in common stock and preferred stock dividends in 2012 and 2011, respectively.

Our cash expenditures related to professional liability claims were $1.4 million and $1.3 million in 2012 and 2011, respectively. Although we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet all of our cash needs as they become due.

24

Dividends

On May 8, 2012, the Board of Directors declared a quarterly dividend on common shares of $0.055 per share. While the Board of Directors intends to pay quarterly dividends, the Board will make the determination of the amount of future cash dividends, if any, to be declared and paid based on, among other things, the Company’s financial condition, funds from operations, the level of its capital expenditures and its future business prospects and opportunities.

Redeemable Preferred Stock

At March 31, 2012, we have outstanding 5,000 shares of Series C Redeemable Preferred Stock (“Preferred Stock”) that has a stated value of approximately $4.9 million which pays an annual dividend rate of 7% of its stated value. Dividends on the Preferred Stock are paid quarterly in cash. The Preferred Stock was issued to Omega in 2006 and is not convertible, but has been redeemable at its stated value at Omega’s option since September 30, 2010, and since September 30, 2007, has been redeemable at its stated value at our option. Redemption under our option or Omega’s is subject to certain limitations. We believe we have adequate resources to redeem the Preferred Stock if Omega were to elect to redeem it.

Professional Liability

For claims made after March 9, 2001, we have purchased professional liability insurance coverage for our nursing centers that, based on historical claims experience, is likely to be substantially less than the amount required to satisfy claims that were incurred. We have essentially exhausted all of our general and professional liability insurance coverage for claims first asserted prior to July 1, 2011.

Currently, our nursing centers are covered by one of two professional liability insurance policies. Our nursing centers in Arkansas, Tennessee, all but one facility in Kentucky and two centers in West Virginia are covered by an insurance policy with coverage limits of $250,000 per medical incident and total annual aggregate policy limits of $750,000. This policy provides the only commercially affordable insurance coverage available for claims made during this period against these nursing centers. Our nursing centers in Alabama, Florida, Ohio, Texas and one center in each of Kentucky and West Virginia are covered by an insurance policy with coverage limits of $1.0 million per medical incident, subject to a deductible of $0.5 million per claim, with a total annual aggregate policy limit of $15.0 million and a sublimit per center of $3.0 million.

As of March 31, 2012, we have recorded total liabilities for reported and settled professional liability claims and estimates for incurred but unreported claims of $19.9 million, including $2.9 million for settlements that are expected to be paid in the remainder of 2012. Our calculation of this estimated liability is based on an assumption that the Company will not incur a significantly material adverse judgment with respect to any asserted claim; however, a significant judgment could be entered against us in one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash flows.

Capital Resources

As of March 31, 2012, we had $30.2 million of outstanding long term debt and capital lease obligations. The $30.2 million total includes $1.8 million in capital lease obligations and $5.8 million in a note payable for the nursing center that was recently constructed in West Virginia. The balance of the long term debt is comprised of $22.6 million owed on our mortgage loan.

We have agreements with a syndicate of banks for a mortgage loan and our revolving credit facility. Under the terms of the agreements, the syndicate of banks provided mortgage debt (“Mortgage Loan”) with an original balance of $23 million with a five year maturity through March 2016 and a $15 million

25

revolving credit facility (“Revolver”) through March 2016. The Mortgage Loan has a term of five years with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5% but is fixed at 7.07% based on the interest rate swap described below. The Mortgage Loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these facilities. The Mortgage Loan and the Revolver are cross-collateralized. Our Revolver has an interest rate of LIBOR plus 4.5%.

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. As of March 31, 2012, we had no borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.00% of the amount outstanding. We have a letter of credit of $4.6 million to serve as a security deposit for our Omega lease. Considering the balance of eligible accounts receivable at March 31, 2012, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15.0 million, the balance available for borrowing under the revolving credit facility is $10.4 million. Eligible accounts receivable are calculated as defined and consider 80% of certain net receivables while excluding receivables from private pay patients, those pending approval by Medicaid and receivables greater than 90 days. The Mortgage Loan and the Revolver are cross-collateralized.

Our lending agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. We are in compliance with all such covenants at March 31, 2012.

On March 13, 2012, we entered into amendments to our Mortgage Loan and Revolver with the syndicate of banks. The amendments allow for the exclusion of certain expenses when calculating the debt covenants and lowers the requirements for the minimum fixed charge coverage ratio from 1.05 times fixed charges to 1.0 times for each of the covenant measurement periods ending June 30, 2012 and September 30, 2012. We paid the syndicate of banks an amendment fee of $30,000 in connection with this amendment.

Our calculated compliance with financial covenants is presented below:

	Requirement		Level at March 31, 2012
Minimum fixed charge coverage ratio		³1.05:1.00		1.16:1.00
Minimum adjusted EBITDA	³$	10.0 million	$	14.7 million
EBITDAR (mortgaged facilities)	³$	3.3 million	$	3.7 million

We have consolidated $5.8 million in debt that was added by the entity that owns the West Virginia nursing center. The borrower is subject to covenants concerning total liabilities to tangible net worth as well as current assets compared to current liabilities. The borrower is in compliance with all such covenants at March 31, 2012. The borrower’s liabilities do not provide creditors with recourse to our general assets.

As part of the debt agreements entered into in March 2011, we entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. The interest rate swap agreement requires us to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 7.07% while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.

26

Nursing Center Renovations

During 2005, we began an initiative to complete strategic renovations of certain facilities to improve occupancy, quality of care and profitability. We developed a plan to begin with those facilities with the greatest potential for benefit, and began the renovation program during the third quarter of 2005. As of March 31, 2012, we have completed renovations at sixteen facilities. We currently have two other projects in process that we expect to complete in 2012 and we are developing plans for additional renovation projects.

A total of $25.8 million has been spent on these renovation programs to date, with $17.9 million financed through Omega, $6.1 million financed with internally generated cash, and $1.8 million financed with long-term debt.

For the fifteen facilities with renovations completed as of the beginning of the first quarter 2012 compared to the last twelve months prior to the commencement of renovation, average occupancy increased from 69.8% to 76.2% and Medicare average daily census increased from a total of 177 to 230 in the first quarter of 2012.

Receivables

Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other third-party revenue sources. Our future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on our liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by us in the processing of our invoices, could adversely affect our liquidity and results of operations.

Accounts receivable attributable to patient services of continuing operations totaled $31.7 million at March 31, 2012 compared to $29.2 million at December 31, 2011, representing approximately 37 days and 34 days revenue in accounts receivable, respectively. The increase in accounts receivable is due to increases in payor sources with longer payment cycles, including managed care payors, as well as an increase in Medicaid patients undergoing the initial qualification process.

The allowance for bad debt was $3.4 million and $2.9 million at March 31, 2012 and December 31, 2011, respectively. We continually evaluate the adequacy of our bad debt reserves based on patient mix trends, aging of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the incidence of uncollectible accounts.

Off-Balance Sheet Arrangements

We have a letter of credit outstanding of approximately $4.6 million as of March 31, 2012, which serves as a security deposit for our facility lease with Omega. The letter of credit was issued under our revolving credit facility. Our accounts receivable serve as the collateral for this revolving credit facility.

27

Forward-Looking Statements

The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in conjunction with our consolidated financial statements included herein. Certain statements made by or on behalf of us, including those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements made herein. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but not limited to, our ability to complete the Medicare and Medicaid certification process and successfully operate the new nursing center in West Virginia, our ability to successfully license, certify and operate the new nursing center in Kentucky, our ability to increase census at our renovated facilities, changes in governmental reimbursement, including the impact of the CMS final rule that has resulted in a reduction in Medicare reimbursement as of October 2011 and our ability to mitigate the impact of the reduction, government regulation, the impact of the recently adopted federal health care reform or any future health care reform, any increases in the cost of borrowing under our credit agreements, our ability to comply with covenants contained in those credit agreements, the outcome of professional liability lawsuits and claims, our ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, the impact of future licensing surveys, the outcome of proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations applicable to our business, costs and impacts associated with the implementation of our electronic medical records plan, the costs of investing in our business initiatives and development, our ability to control costs, changes to our valuation of deferred tax assets, changes in occupancy rates in our facilities, changing economic and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations, the effect of changes in accounting policies as well as others. Investors also should refer to the risks identified in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as risks identified in “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2011 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of March 31, 2012, we had outstanding borrowings of approximately $22.6 million that were subject to variable interest rates. In connection with our March 2011 financing agreement, we entered into an interest rate swap with respect to the mortgage loan to mitigate the floating interest rate risk of such borrowing. Therefore, we have no outstanding borrowings subject to variable interest rate risk after the March 2011 financing transaction.

28

ITEM 4. CONTROLS AND PROCEDURES

Advocat, with the participation of our principal executive and financial officers has evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, as of March 31, 2012. Based on this evaluation, the principal executive and financial officers have determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal control over financial reporting that has occurred during our fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to lawsuits alleging malpractice, product liability, or related legal theories, many of which involve large claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect to the quality of care provided to residents of our facility. Like other health care providers, in the ordinary course of our business, we are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.

As of March 31, 2012, we are engaged in 39 professional liability lawsuits. Five lawsuits are currently scheduled for trial during the next twelve months, and it is expected that additional cases will be set for trial. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.

In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against us and certain of our subsidiaries and Garland Nursing & Rehabilitation Center (the “Facility”). The complaint alleges that the defendants breached their statutory and contractual obligations to the residents of the Facility over the past five years. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. The Company intends to defend the lawsuit vigorously.

We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or results of operations. An unfavorable outcome in any of the lawsuits, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows or results of operations.

ITEM 6. EXHIBITS

The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page.

30

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ADVOCAT INC.
May 9, 2012	By:	/s/ Kelly J. Gill
		Kelly J. Gill
		President 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,
		Principal Accounting Officer and
		An Officer Duly Authorized to Sign on Behalf of the Registrant

31

Exhibit Number	Description of Exhibits
3.1	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	Bylaw Amendment adopted November 5, 2007 (incorporated by reference to Exhibit 3.4 to the Company’s annual report on Form 10-K for the year ended December 31, 2007).
3.5	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).
3.6	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	Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998).
4.3	Amendment No. 1 to the Amended and Restated Rights Agreement, dated March 19, 2005, by and between Advocat Inc. and SunTrust Bank, as Rights Agent (incorporated by reference to Exhibit 2 to Form 8-A/A filed on March 24, 2005).
4.4	Second Amendment to the Amended and Restated Rights Agreement, dated August 15, 2008, by and between Advocat Inc. and ComputerShare Trust Company, N.A., as successor to SunTrust Bank (incorporated by reference to Exhibit 3 to Form 8-A/A filed on August 18, 2008).
4.5	Third Amendment to Amended and Restated Rights Agreement, dated August 14, 2009, between Advocat, Inc. and Computershare Trust Company, N.A, as successor to SunTrust Bank, (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form 8-A/A filed on August 14, 2009).
10.1	First Amendment to Term Loan and Security Agreement and a First Amendment to Amended and Restated Revolving Loan and Security Agreement each by and among the subsidiaries of the Company, The PrivateBank and Trust Company, an Illinois banking corporation in its individual capacity and the other financial institutions parties thereto, and The PrivateBank and Trust Company, an Illinois banking corporation in its capacity as administrative agent for the Lenders.
*10.2	Amended and Restated Employment Agreement effective as of April 1, 2012, by and between Advocat Inc., a Delaware corporation, and Kelly Gill.
*10.3	Amended and Restated Retention Bonus Agreement entered into as of March 15, 2012, by and between Advocat Inc., a Delaware corporation, and L. Glynn Riddle, Jr.
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).
101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB	XBRL Taxonomy Extension Labels Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

* Indicates management contract or compensatory plan or arrangement.

EX-10.1

Exhibit 10.1

FIRST AMENDMENT TO

TERM LOAN AND SECURITY AGREEMENT

THIS FIRST AMENDMENT TO TERM LOAN AND SECURITY AGREEMENT (“Amendment”) is entered into as of March 12, 2012, by and among THE PRIVATEBANK AND TRUST COMPANY, an Illinois banking corporation (“Administrative Agent”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders and DIVERSICARE AFTON OAKS, LLC, DIVERSICARE BRIARCLIFF, LLC, DIVERSICARE CHISOLM, LLC and DIVERSICARE HARTFORD, LLC, each a Delaware limited liability company (individually and collectively, (the “Borrower”).

WHEREAS, Borrower, Administrative Agent, and the financial institutions thereto (the “Lenders”) are parties to that certain Term Loan and Security Agreement dated as of February 28, 2011 (as amended, modified or supplemented prior to or after the date hereof, the “Loan Agreement”); and

WHEREAS, Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto agree as follows:

1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to such terms in the Loan Agreement.

2. Amendment. Subject to the terms and conditions contained herein, Borrower, Administrative Agent and Lenders hereby amend and restate Section 9.12(b) of the Loan Agreement as follows:

(b) Minimum Fixed Charge Coverage Ratio. The Guarantor shall not permit its Fixed Charge Coverage Ratio to be less than (1) 1.05 to 1.00, measured as of the last day of the Fiscal Quarter ending March 31, 2012 for the trailing twelve (12) month period; (2) 1.00 to 1.00, measured as of the last day of the Fiscal Quarters ending June 30, 2012 and September 30, 2012, for the trailing twelve (12) month periods and (3) 1.05 to 1.00, measured as of the last day of each subsequent Fiscal Quarter for the trailing twelve (12) month period.

3. Continuing Effect; No Waiver. Except as expressly set forth in Section 2 of this Amendment, nothing in this Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any other Financing Agreement, or a waiver of any other terms or provisions thereof, and the Loan Agreement and the other Financing Agreements shall remain unchanged and shall continue in full force and effect, in each case as modified hereby. Administrative Agent’s and Lender’s failure, at any time or times hereafter, to require strict performance by Borrower of any provision or term of the Loan Agreement, this Amendment or the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent or any Lender hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent and a Lender of a

breach of this Amendment or any Event of Default under the Loan Agreement shall not, except as expressly set forth herein, suspend, waive or affect any other breach of this Amendment or any Event of Default under the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Amendment, shall be deemed to have been suspended or waived by Administrative Agent and Lenders unless such suspension or waiver is (i) in writing and signed by Administrative Agent and Lenders and (ii) delivered to Borrower. In no event shall Administrative Agent’s and Lenders’ execution and delivery of this Amendment establish a course of dealing among Administrative Agent, Lenders, Borrower or any other obligor, or in any other way obligate Administrative Agent and Lenders to hereafter provide any amendments or waivers with respect to the Loan Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (i) to be a consent to a modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein); or (ii) to prejudice any right or remedy which Administrative Agent and Lenders may now have under or in connection with the Loan Agreement or any of the Financing Agreements.

4. Reaffirmation and Confirmation. Borrower hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Financing Agreements represent the valid, enforceable and collectible obligations of Borrower, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Financing Agreement. Borrower hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Liabilities. The Liens and rights securing payment of the Liabilities are hereby ratified and confirmed by Borrower in all respects.

5. Representations and Warranties. In order to induce Administrative Agent and Lenders to enter into this Amendment, Borrower hereby represents and warrants to Administrative Agent and Lenders, both before and after giving effect to this Amendment that:

(a) this Amendment and the Loan Agreement, as modified hereby, constitute legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms;

(b) all representations and warranties contained in the Loan Agreement and the other Financing Agreements are true and correct on and as of the date of this Amendment, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date); and

(c) No Default or Event of Default has occurred and is continuing.

6. Conditions to Effectiveness of Consent. This Amendment shall become effective as of the date first written above upon the satisfaction of the following conditions precedent:

(a) Each party hereto shall have executed and delivered this Amendment to Administrative Agent.

2

(b) Borrower shall have delivered to Administrative Agent resolutions of the Borrower’s governing body authorizing the execution and delivery of this Amendment.

(c) The Administrative Agent shall have received a fully-earned non-refundable amendment fee in the amount of $30,000, of which (i) $22,105.20 shall be for the benefit of The PrivateBank and Trust Company, as Lender and (ii) $7,894.80 shall be for the benefit of Bankers Trust Company, as Lender.

7. Release.

(a) In consideration of the agreements of Administrative Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Administrative Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Administrative Agent, each Lender and all such other Persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims” of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which has arisen at any time on or prior to the date of this Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with any of the Loan Agreement, or any of the other Financing Agreements or transactions thereunder or related thereto, except as otherwise provided in this Amendment or any other document executed or delivered in connection herewith by the Administrative Agent.

(b) Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c) Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

8. Miscellaneous.

(a) Expenses. Borrower, jointly and severally, agrees to pay on demand all costs and expenses of Administrative Agent (including the reasonable fees and expenses of outside counsel for Administrative Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. Notwithstanding anything contained herein to the contrary, neither Administrative

3

Agent nor any Lender shall be obligated to reimburse Borrower for any other existing or hereafter arising expenses. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

(b) Governing Law. This Amendment shall be a contract made under and governed by, and construed and enforced in accordance with, the internal laws of the State of Illinois without regard to conflicts of law principles.

(c) Counterparts. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Consent. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally valid, effective and enforceable as a signed original for all purposes.

[Signature pages follow]

4

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Term Loan and Security Agreement to be duly executed by their respective officers thereunto duly authorized and delivered as of the date first above written.

BORROWER:

DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE CHISOLM, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

[Signature Page to First Amendment to Term Loan and Security Agreement]

DIVERSICARE HARTFORD, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

[Signature Page to First Amendment to Term Loan and Security Agreement]

ADMINISTRATIVE AGENT:
THE PRIVATEBANK AND TRUST COMPANY, in its capacity as administrative agent
By:	/s/Adam D. Panos
	Name:  Adam D. Panos
	Its:  Managing Director

[Signature Page to First Amendment to Term Loan and Security Agreement]

LENDER:
THE PRIVATEBANK AND TRUST COMPANY
By:	/s/Adam D. Panos
	Name:  Adam D. Panos
	Its:  Managing Director

[Signature Page to First Amendment to Term Loan and Security Agreement]

LENDER:
BANKERS TRUST COMPANY
By:	/s/Jon M. Doll
	Name: Jon M. Doll
	Its:  Vice President

[Signature Page to First Amendment to Term Loan and Security Agreement]

CONSENT AND REAFFIRMATION

The undersigned hereby (i) acknowledges receipt of a copy of the foregoing First Amendment to Term Loan and Security Agreement (the “Amendment”); (ii) consents to Borrower’s execution and delivery of the Amendment; (iii) agrees to be bound by the Amendment; and (iv) reaffirms that the Financing Agreements to which it is a party (including the Guaranty) shall continue to remain in full force and effect. Although the undersigned has been informed of the matters set forth in the Amendment and has acknowledged and agreed to same, the undersigned understands that Administrative Agent and Lenders have no obligation to inform the undersigned of such matters in the future or to seek the undersigned’s acknowledgment or agreement to future amendments, waivers or consents, and nothing herein shall create such a duty.

IN WITNESS WHEREOF, the undersigned has duly executed this Consent and Reaffirmation on and as of the date of the Amendment.

ADVOCAT INC.
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President

FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING

LOAN AND SECURITY AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED REVOLVING LOAN AND SECURITY AGREEMENT (“Amendment”) is entered into as of March 12, 2012, by and among THE PRIVATEBANK AND TRUST COMPANY, an Illinois banking corporation (“Administrative Agent”) in its capacity as administrative agent for the Lenders (as defined below), the Lenders, and DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, and those certain other entities signatories hereto (such entities individually and collectively, “Borrower”).

WHEREAS, Borrower, Administrative Agent, and the financial institutions thereto (the “Lenders”) are parties to that certain Amended and Restated Revolving Loan and Security Agreement dated as of February 28, 2011 (as amended, modified or supplemented, the “Loan Agreement”); and

WHEREAS, Borrower, Administrative Agent and Lenders desire to amend the Loan Agreement as provided in and subject to the terms and conditions of this Amendment.

NOW, THEREFORE, in consideration of the premises and mutual agreements herein contained, the parties hereto hereby agree as follows:

9. Defined Terms. Unless otherwise defined herein, capitalized terms used herein shall have the meanings assigned to such terms in the Loan Agreement.

10. Amendment. Subject to the terms and conditions contained herein, Borrower, Administrative Agent and Lenders hereby amend the Loan Agreement as follows:

(a) The term “Adjusted EBITDA” contained in Section 1.1 of the Loan Agreement is hereby amended and restated as follows:

“Adjusted EBITDA” means the sum of (a) EBITDA, and (b) the amounts deducted (or less amounts added) in computing EBITDA for the period for (i) the non-cash provision (benefit) for self-insured professional and general liability expenses, (ii) non-cash rent expense, (iii) non-cash stock based compensation expense, (iv) non-cash debt retirement, and (v) all other non-cash expenses reasonably approved by the Administrative Agent, less the sum of (c) the Cash Cost of Self-Insured Professional and General Liability (provided such amount is exclusive of (d)); (d) $3,000,000 attributed to the settlement of liability claims during September 2011 in the amount of $4,700,000, solely for the Fiscal Quarters ending June 30, 2012 and September 30, 2012; and (e) up to $2,500,000 in the aggregate attributed to start-up costs and losses associated with the Rose Terrace Lease, the Joint Venture (as defined in the Consent to Amended and Restated Revolving Loan and Security Agreement dated as of March 12, 2012 by and among the Borrower, the Administrative Agent and the Lenders (the “Consent”)) and the Arbor Place Lease (as defined in the Consent) solely for the Fiscal Quarters ending June 30, 2012 and September 30, 2012.

11

(b) Section 9.12(a) of the Loan Agreement is hereby amended and restated as follows:

(a) Minimum Fixed Charge Coverage Ratio. The Parent shall not permit its Fixed Charge Coverage Ratio to be less than (1) 1.05 to 1.00, measured as of the last day of the Fiscal Quarter ending March 31, 2012 for the trailing twelve (12) month period; (2) 1.00 to 1.00, measured as of the last day of the Fiscal Quarters ending June 30, 2012 and September 30, 2012, for the trailing twelve (12) month periods and (3) 1.05 to 1.00, measured as of the last day of each subsequent Fiscal Quarter for the trailing twelve (12) month period.

11. Continuing Effect; No Waiver. Except as expressly set forth in Section 2 of this Amendment, nothing in this Amendment shall constitute a modification or alteration of the terms, conditions or covenants of the Loan Agreement or any other Financing Agreement, or a waiver of any other terms or provisions thereof, and the Loan Agreement and the other Financing Agreements shall remain unchanged and shall continue in full force and effect, in each case as modified hereby. Administrative Agent’s and Lender’s failure, at any time or times hereafter, to require strict performance by Borrower of any provision or term of the Loan Agreement, this Amendment or the Financing Agreements shall not waive, affect or diminish any right of Administrative Agent or any Lender hereafter to demand strict compliance and performance herewith or therewith. Any suspension or waiver by Administrative Agent and a Lender of a breach of this Amendment or any Event of Default under the Loan Agreement shall not, except as expressly set forth herein, suspend, waive or affect any other breach of this Amendment or any Event of Default under the Loan Agreement, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Amendment, shall be deemed to have been suspended or waived by Administrative Agent and Lenders unless such suspension or waiver is (i) in writing and signed by Administrative Agent and Lenders and (ii) delivered to Borrower. In no event shall Administrative Agent’s and Lenders’ execution and delivery of this Amendment establish a course of dealing among Administrative Agent, Lenders, Borrower or any other obligor, or in any other way obligate Administrative Agent and Lenders to hereafter provide any amendments or waivers with respect to the Loan Agreement. The terms and provisions of this Amendment shall be limited precisely as written and shall not be deemed (i) to be a consent to a modification of any other term or condition of the Loan Agreement or of any of the Financing Agreements (except as expressly provided herein); or (ii) to prejudice any right or remedy which Administrative Agent and Lenders may now have under or in connection with the Loan Agreement or any of the Financing Agreements.

12. Reaffirmation and Confirmation. Borrower hereby ratifies, affirms, acknowledges and agrees that the Loan Agreement and the other Financing Agreements represent the valid, enforceable and collectible obligations of Borrower, and further acknowledges that there are no existing claims, defenses, personal or otherwise, or rights of setoff whatsoever with respect to the Loan Agreement or any other Financing Agreement. Borrower hereby agrees that this Amendment in no way acts as a release or relinquishment of the Liens and rights securing payments of the Liabilities. The Liens and rights securing payment of the Liabilities are hereby ratified and confirmed by Borrower in all respects.

12

13. Representations and Warranties. Borrower represents and warrants to Administrative Agent and the Lenders, both before and after giving effect to this Amendment that:

(a) this Amendment and the Loan Agreement, as modified hereby, constitute legal, valid and binding obligations of Borrower and are enforceable against Borrower in accordance with their respective terms;

(b) all representations and warranties contained in the Loan Agreement and the other Financing Agreements are true and correct on and as of the date of this Amendment, in each case as if made on and as of such date, other than representations and warranties that expressly relate solely to an earlier date (in which case such representations and warranties were true and correct on and as of such earlier date); and

(c) No Default or Event of Default has occurred and is continuing.

14. Conditions to Effectiveness of Consent. This Amendment shall become effective as of the date first written above upon the satisfaction of the following conditions precedent:

(a) Each party hereto shall have executed and delivered this Amendment to Administrative Agent.

(b) Borrower shall have delivered to Administrative Agent resolutions of the Borrower’s governing body authorizing the execution and delivery of this Amendment.

15. Release.

(a) In consideration of the agreements of Administrative Agent and Lenders contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably releases, remises and forever discharges Administrative Agent and Lenders, and their successors and assigns, and their present and former shareholders, affiliates, subsidiaries, divisions, predecessors, directors, officers, attorneys, employees, agents and other representatives (Administrative Agent, each Lender and all such other Persons being hereinafter referred to collectively as the “Releasees” and individually as a “Releasee”), of and from all demands, actions, causes of action, suits, covenants, contracts, controversies, agreements, promises, damages and any and all other claims, counterclaims, defenses, rights of set-off, demands and liabilities whatsoever (individually, a “Claim” and collectively, “Claims” of every name and nature, known or unknown, suspected or unsuspected, both at law and in equity, which Borrower or any of its successors, assigns, or other legal representatives may now or hereafter own, hold, have or claim to have against the Releasees or any of them for, upon, or by reason of any circumstance, action, cause or thing whatsoever which has arisen at any time on or prior to the date of this Amendment, including, without limitation, for or on account of, or in relation to, or in any way in connection with any of the Loan Agreement, or any of the other Financing Agreements or transactions thereunder or related thereto, except as otherwise provided in this Amendment or any other document executed or delivered in connection herewith by the Administrative Agent.

13

(b) Borrower understands, acknowledges and agrees that the release set forth above may be pleaded as a full and complete defense and may be used as a basis for an injunction against any action, suit or other proceeding which may be instituted, prosecuted or attempted in breach of the provisions of such release.

(c) Borrower agrees that no fact, event, circumstance, evidence or transaction which could now be asserted or which may hereafter be discovered shall affect in any manner the final, absolute and unconditional nature of the release set forth above.

16. Miscellaneous.

(a) Expenses. Borrower, jointly and severally, agrees to pay on demand all costs and expenses of Administrative Agent (including the reasonable fees and expenses of outside counsel for Administrative Agent) in connection with the preparation, negotiation, execution, delivery and administration of this Amendment and all other instruments or documents provided for herein or delivered or to be delivered hereunder or in connection herewith. Notwithstanding anything contained herein to the contrary, neither Administrative Agent nor any Lender shall be obligated to reimburse Borrower for any other existing or hereafter arising expenses. All obligations provided herein shall survive any termination of this Amendment and the Loan Agreement as amended hereby.

(b) Governing Law; Recitals. This Amendment shall be a contract made under and governed by, and construed and enforced in accordance with, the internal laws of the State of Illinois without regard to conflicts of law principles; The recitals hereto are hereby incorporated into this Amendment by this reference thereto.

(c) Counterparts; Faxes. This Amendment may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same agreement. A signature hereto sent or delivered by facsimile or other electronic transmission shall be as legally valid, effective and enforceable as a signed original for all purposes.

[Signature pages follow]

14

IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Amended and Restated Revolving Loan and Security Agreement to be duly executed by their respective officers thereunto duly authorized and delivered as of the date first above written.

BORROWER:
DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation, as Borrower Agent
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

ADVOCAT ANCILLARY SERVICES, INC., a Tennessee corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

ADVOCAT FINANCE, INC., a Delaware corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE MANAGEMENT SERVICES CO., a Tennessee corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

ADVOCAT DISTRIBUTION SERVICES, INC., a Tennessee corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE ASSISTED LIVING SERVICES, INC., a Tennessee corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, a Tennessee limited liability company
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE LEASING CORP., a Tennessee corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

STERLING HEALTH CARE MANAGEMENT, INC., a Kentucky corporation
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

SENIOR CARE CEDAR HILLS, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

SENIOR CARE GOLFCREST, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

SENIOR CARE GOLFVIEW, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

SENIOR CARE FLORIDA LEASING, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

SENIOR CARE SOUTHERN PINES, LLC, a Delaware limited liability company
BY:	SENIOR CARE FLORIDA LEASING, LLC, its sole member
	BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE AFTON OAKS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE ASSISTED LIVING SERVICES NC I, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE ASSISTED LIVING SERVICES NC II, LLC, a Delaware limited liability company
BY:	DIVERSICARE ASSISTED LIVING SERVICES NC, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE BRIARCLIFF, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE CHISOLM, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE HARTFORD, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE HILLCREST, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE LAMPASAS, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE PINEDALE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE WINDSOR HOUSE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE YORKTOWN, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE BALLINGER, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE DOCTORS, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE ESTATES, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE HUMBLE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE KATY, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE NORMANDY TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE TEXAS I, LLC, a Delaware limited liability company
By: /s/Sam Daniel
Name:	Sam Daniel
Its:	Executive Vice President and Secretary Treasurer

DIVERSICARE TREEMONT, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer
DIVERSICARE ROSE TERRACE, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer
DIVERSICARE PARIS, LLC, a Delaware limited liability company
BY:	DIVERSICARE TEXAS I, LLC, its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer
DIVERSICARE THERAPY SERVICES, LLC, a Delaware limited liability company
BY:	DIVERSICARE LEASING CORP., its sole member
	By: /s/Sam Daniel
	Name:	Sam Daniel
	Its:	Executive Vice President and Secretary Treasurer

ADMINISTRATIVE AGENT:
THE PRIVATEBANK AND TRUST COMPANY, in its capacity as administrative agent
By: /s/Adam D.Panos
	Name: Adam D. Panos
	Its:  Managing Director

EX-10.2

Exhibit 10.2

AMENDED AND RESTATED

EMPLOYMENT AGREEMENT

This Amended and Restated Agreement (this “Agreement”) made effective as of April 1, 2012, by and between Advocat Inc., a Delaware corporation (the “Company”), and Kelly Gill (the “Executive”), amends and restates the Employment Agreement between the parties dated April 10, 2010, as amended on November 4, 2011 (the “Original Agreement”).

WHEREAS, the latest extended term of the Original Agreement term ends March 31, 2012; and

WHEREAS, subsequent to entering into the Original Agreement, the Company appointed Executive the Chief Executive Officer of the Company, and the Executive agreed to serve in such position; and

WHEREAS, the parties have agreed to amend and restate the Original Agreement to reflect the change in position, to extend the term, to clarify certain ambiguous terms and to make other changes as set forth herein.

In consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows:

SECTION I

EMPLOYMENT

The Company agrees to employ the Executive and the Executive agrees to be employed by the Company for the Period of Employment as provided in Section III.A. below and upon the terms and conditions provided in the Agreement.

SECTION II

POSITION AND RESPONSIBILITIES

During the Period of Employment, the Executive agrees to serve as Chief Executive Officer of the Company and to be responsible for the typical management responsibilities expected of an officer holding such position and such other responsibilities as may be assigned to the Executive from time to time by the Board of Directors of the Company.

SECTION III

TERMS AND DUTIES

A. Period of Employment. The period of Executive’s employment under this Agreement will commence as of the date hereof and shall continue through March 31, 2013, subject to extension or termination as provided in this Agreement (the “Period of Employment”). On each anniversary of the commencement of the Period of Employment, the period of Executive’s employment shall be extended for additional one (1) year periods, unless either party gives notice thirty (30) days in advance of the expiration of the then current period of employment of such party’s intent not to extend the Period of Employment.

B. Duties. During the Period of Employment, the Executive shall devote all of his business time, attention and skill to the business and affairs of the Company and its subsidiaries. The Executive will perform faithfully the duties that may be assigned to him from time to time by the Board of Directors.

SECTION IV

COMPENSATION AND BENEFITS

A. Compensation. For all services rendered by the Executive in any capacity during the Period of Employment, the Executive shall be compensated as follows: The Company shall pay the Executive a base salary (“Base Salary”) of Four Hundred Fifty Thousand Dollars ($450,000.00) per annum. Base Salary shall be payable according to the customary payroll practices of the Company but in no event less frequently than once each month. The Base Salary shall be reviewed annually and shall be subject to increase according to the policies and practices adopted by the Company from time to time.

B. Annual Incentive Awards. The Company will pay the Executive annual incentive compensation awards as may be granted by the Board of Directors or a Compensation Committee, in either case, in its sole discretion, to the Executive under any executive bonus or incentive plan in effect from time to time. In all events, any such incentive bonuses or payments will be made on or before March 15 following the Executive’s taxable year in which such award is no longer subject to a substantial risk of forfeiture as defined by Treasury Regulation Section 1.409A-1(d).

C. Additional Benefits. The Executive will be entitled to participate in all compensation or employee benefit plans or programs and receive all benefits and perquisites for which any salaried employees are eligible under any existing or future plan or program established by the Company for salaried employees. The Executive will participate to the extent permissible under the terms and provisions of such plans or programs in accordance with program provisions. These may include group hospitalization, health, dental care, life or other insurance, tax qualified pension, car allowance, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans including capital accumulation programs, restricted stock programs, stock purchase programs and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any of the plans or programs applicable to salaried or senior executives as long as such amendment or termination is applicable to all salaried employees or senior executives. The Executive will be entitled to twenty (20) days paid vacation annually.

2

SECTION V

BUSINESS EXPENSES

The Company will reimburse the Executive for all reasonable travel and other expenses incurred by the Executive in connection with the performance of his duties and obligations under this Agreement.

SECTION VI

DISABILITY

A. In the event of Disability of the Executive during the Period of Employment, the Company will continue to pay the Executive according to the compensation provisions of this Agreement during the period of his Disability, until such time as Executive’s long term disability insurance benefits are available. However, in the event the Executive is Disabled for a continuous period of six (6) months after the Executive first becomes Disabled, the Company may terminate the employment of the Executive. In this case, normal compensation will cease except for earned but unpaid Base Salary and incentive compensation awards which would be payable on a pro-rated basis for the year in which the Disability occurred. In the event of such termination, all unvested Options held by Executive shall be deemed fully vested on the date of such termination.

B. Until such time as the Executive’s employment is terminated as provided in Section VI.A or otherwise in accordance with this Agreement, during the period the Executive is receiving payments of either regular compensation or disability insurance benefits described in this Agreement and as long as he is physically and mentally able to do so, the Executive will furnish information and assistance to the Company and from time to time will make himself available to the Company to undertake assignments consistent with his prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of the Agreement, the Executive’s obligation to furnish such information and assistance will end.

SECTION VII

DEATH

In the event of the death of the Executive during the Period of Employment, the Company’s obligation to make payments under this Agreement shall cease as of the date of death, except for earned but unpaid Base Salary and incentive compensation awards which will be paid on a pro-rated basis for that year. The Executive’s designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided in this Agreement.

SECTION VIII

EFFECT OF TERMINATION OF EMPLOYMENT

A. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge (as defined later in this Agreement) other than pursuant to Section XI, but only if Executive has executed and not revoked within the revocation period a valid release agreement in a form reasonably acceptable to the Company, the Company will pay the Executive in

3

a lump sum an amount equal to 100% of his Base Salary as in effect at the time of the termination upon the effectiveness of the release, subject to Section XII. Earned but unpaid Base Salary and incentive compensation awards will be paid in a lump sum upon such Termination or Constructive Discharge. The group hospitalization, health, dental care and life insurance benefits described in this Agreement as in effect at the date of termination of employment will be continued for eighteen (18) months. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge, or pursuant to Section XI, all unvested options and SARS (“Options”) or restricted stock or restricted stock units granted to the Executive under the Company’s 2005 Long-Term Incentive Plan, 2010 Long-Term Incentive Plan or other stock option program or plan (the “Plan”) shall be deemed vested, and the Company shall cause each Option to remain exercisable until the earlier of (i) the latest date upon which the Option could have expired by its original terms under any circumstances or the tenth anniversary of the original date of grant of such Option or (ii) the later of the fifteenth (15th) day of the third (3rd) month following the date on which the Option would have expired or December 31 of the calendar year in which the Option would have expired. Any restricted stock units that are held by the Executive at the time of such termination of employment shall be settled in accordance with their terms.

B. If the Executive’s employment terminates due to a Termination for Cause, earned but unpaid Base Salary will be paid through the date the termination occurs. No other payments will be made or benefits provided by the Company.

C. Upon termination of the Executive’s employment other than for reasons due to death, Disability, or pursuant to Paragraph A of this Section or Section XI, the Period of Employment and the Company’s obligation to make payments under this Agreement will cease as of the date of the termination except as expressly set forth in this Agreement.

D. For this Agreement, the following terms have the following meanings:

1. “Termination for Cause” means termination of the Executive’s employment by the Company’s Board of Directors acting in good faith by the Company by written notice to the Executive specifying the event relied upon for such termination, due to the Executive’s serious, willful misconduct with respect to his duties under this Agreement, including but not limited to conviction for a felony or perpetration of a common law fraud, which has resulted or is likely to result in material economic damage to the Company.

2. “Constructive Discharge” means termination of the Executive’s employment by the Executive in accordance with this Section VIII.D.2 as a result of any of the following: a material diminution of Base Salary of the Executive other than reductions applicable to all employees of the Company; a material diminution in the Executive’s authority, duties or responsibilities; a material diminution in the budget over which the Executive retains authority; a material change in geographic location at which the Executive must perform the services; or any other action or inaction that constitutes a material breach of the terms of this Agreement. Provided, however, that such condition shall not constitute a reason for Constructive Discharge unless the Executive provides the Company a written notice which describes the circumstances being relied on for the termination with respect to this Agreement within ninety (90) days after the event giving rise

4

to the notice and provides the Company with thirty (30) days to remedy the condition. Further, any termination of employment by the Executive must occur within one hundred twenty (120) days from the initial existence of the condition giving rise to the Constructive Discharge.

3. “Without Cause Termination” means termination of the Executive’s employment by the Company or the giving of notice by the Company of its intent not to extend the Period of Employment as provided in Section III.A upon expiration of the Period of Employment or any extension thereof; provided, however, that a Without Cause Termination shall not include termination by reason of death, Disability or Termination for Cause.

E. Stock Option Settlement. If the Executive’s employment terminates due to either a Without Cause Termination or a Constructive Discharge or pursuant to Section XI, Executive may require the Company to repurchase any vested Options (whether such Options vested prior to termination of employment or pursuant to this Agreement) for an amount equal to the difference between the fair market value of a share of the Company’s common stock on the date of termination and the per share exercise price set forth in the Options, times the number of shares granted to the Executive under the Options remaining unexercised as of the date of termination. If the Company gives the Executive notice of a Without Cause Termination pursuant to Section VIII.D.1 or notice pursuant to Section XI, such right must be exercised within ten (10) days after such notice by written notice from the Executive to the Company or if the Executive gives the Company notice of termination for Constructive Discharge or pursuant to Section XI, this right must be exercised by the Executive in such notice or by separate written notice delivered to the Company contemporaneously with such notice of termination. The Options for which such settlement is elected will be settled as soon as reasonable practicable after the date of the Executive’s termination of employment, subject to Section XII, if applicable. Any Option held by the Executive for which no such election is made shall continue according to their terms as modified by Sections VIII.A and XI.

F. Payment in Lieu of any Benefit. In the event the Company is unable for whatever reason to provide continued coverage for the Executive under one or more of such employee benefit plans or programs as required pursuant to this Section VIII or Section XI, the Company shall be required to make a lump sum cash payment equal to the economic value of such coverage without any discount or reduction for the time value of money. With respect to an employee benefit plan or program of the Company that provides coverage on an insured basis, such economic value shall be the cost of the total premiums expected to be paid by the Company for such coverage of the Executive during the period such benefits are to be provided under this Agreement, grossed up for any income, payroll or similar taxes to which such payments may be subject. With respect to all other employee benefit plans or programs of the Company, the economic value shall be the expected net cost to the Company of providing such coverage to the Executive during the period such benefits are to be provided under this Agreement, grossed up for any income, payroll or similar taxes to which such payments may be subject. The lump sum cash payment shall be paid to the Executive within the earlier of (i) thirty (30) days of the date the Company determines that the coverage required by this Section VIII cannot be provided, or (ii) ninety (90) days following the Executive’s date of termination.

5

SECTION IX

OTHER DUTIES OF THE EXECUTIVE DURING

AND AFTER THE PERIOD OF EMPLOYMENT

A. The Executive will, with reasonable notice during or after the Period of Employment, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party.

B. The Executive recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers or other relationships of the Company, as hereinafter defined, is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this information is essential to the performance of the Executive’s duties under this Agreement. The Executive will not, during the Period of Employment or after except to the extent reasonably necessary in performance of the Executive’s duties under this Agreement, give to any person, firm, association, corporation or governmental agency any information concerning the affairs, business, clients, customers or other relationships of the Company except as required by law. The Executive will not make use of this type of information for his own purposes or for the benefit of any person or organization other than the Company. The Executive will also use his best efforts to prevent the disclosure of this information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Executive or otherwise coming into his possession are confidential and will remain the property of the Company.

C. During the Period of Employment and for a twelve (12) month period thereafter, the Executive will not use his status with the Company to obtain loans, goods or services from another organization on terms that would not be available to him in the absence of his relationship to the Company. During the Period of Employment and for a twelve (12) month period following termination of the Period of Employment, other than termination due to a Without Cause Termination, a Constructive Discharge or termination pursuant to Section XI: (i) the Executive will not make any statements or perform any acts intended to advance the interest of any existing or prospective competitors of the Company in any way that will injure the interest of the Company; (ii) the Executive without prior express written approval by the Board of Directors of the Company will not directly or indirectly own or hold any proprietary interest in or be employed by or receive compensation from any party engaged in the same or any similar business in the same geographic areas the Company does business; and (iii) the Executive without express prior written approval from the Board of Directors, will not solicit any members of the then current clients of the Company or discuss with any employee of the Company information or operation of any business intended to compete with the Company. For the purposes of this Agreement, proprietary interest means legal or equitable ownership, whether through stock holdings or otherwise, of a debt or equity interest (including options, warrants, rights and convertible interests) in a business firm or entity, or ownership of more than 5% of any class of equity interest in a publicly-held company. The Executive acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. For a twelve (12) month period after termination of the Period of Employment for any reason, the Executive will not directly or indirectly (i) hire any employee of the Company or (ii) solicit or encourage any such employee to leave the employ of the Company.

6

D. The Executive acknowledges that his breach or threatened or attempted breach of any provision of this Section IX would cause irreparable harm to the Company not compensable in monetary damages and that the Company shall be entitled, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of this Section IX without being required to prove damages or furnish any bond or other security.

E. The Executive shall not be bound by the provisions of this Section IX in the event of the default by the Company in its obligations under this Agreement which are to be performed upon or after termination of this Agreement.

SECTION X

INDEMNIFICATION, LITIGATION

The Company will indemnify the Executive to the fullest extent permitted by the laws of the state of incorporation in effect at that time, or certificate of incorporation and by-laws of the Company whichever affords the greater protection to the Executive. The Executive will be entitled to any insurance proceeds related to any award, or any fees or expenses incurred in connection with any action, suit or proceeding to which he may be made a party by reason of being a director or officer of the Company.

SECTION XI

CHANGE IN CONTROL

In the event there is a Change in Control (as defined below) of the Company and (1) within ninety (90) days prior to such event the Executive is terminated due to either a Without Cause Termination or a Constructive Discharge or (2) within six (6) months following such event the Executive is terminated due to either a Without Cause Termination or a Constructive Discharge or elects to resign upon written notice to the Company, but only if Executive has executed and not revoked within the revocation period a valid release agreement in a form reasonably acceptable to the Company, the Company shall pay to the Executive upon the effectiveness of such release, subject to Section XII, in a lump sum an amount equal to 200% of his Base Salary as in effect at the time of such termination or resignation. In addition, earned but unpaid Base Salary and pro-rated incentive compensation awards will be paid through the date of termination for the year in which termination or resignation occurs. Any Options or restricted stock or restricted stock units granted to the Executive pursuant to the Plan prior to resignation or termination, but subject to vesting restrictions, will be fully vested upon a Change in Control whether or not the Executive resigns. Any restricted stock units that are held by the Executive at the time of such termination of employment shall be settled in accordance with their terms. Subject to Section VIII.F, the group hospitalization, health, dental care and life insurance benefits described in this Agreement as in effect at the date of termination of employment will also be continued for twenty-four (24) months from the effective date of termination pursuant to a Change of Control.

7

SECTION XII

CODE SECTION 409A

A. Administration and Construction. To the extent applicable (as determined by Section XII.B, below), the parties hereto intend that this Agreement comply with Section 409A. This Agreement shall be construed in such a manner as to be in compliance with Section 409A. Any term used in this Agreement which is defined in Section 409A or the regulations promulgated thereunder (the “Regulations”) shall have the meaning set forth therein unless otherwise specifically defined herein. Should any provision be found to be not in compliance with Section 409A, the parties are hereby contractually obligated to execute any and all amendments to this Agreement deemed necessary and required by legal counsel for the parties to achieve compliance with Section 409A. To the extent the legal counsel for the parties disagree as to the terms or other provisions of any amendment deemed necessary to comply with Section 409A, such dispute shall be resolved in accordance with Section XII.B.

B. Procedures for Determining Application of Section 409A. Executive and the Company shall cooperate to determine the application of Section 409A for purposes of this Agreement. If Executive and the Company are unable to agree on the application of Section 409A within ten (10) business days after the Executive’s separation from service with the Company or otherwise disagree with respect to any amendment to the Agreement in order to comply with Section 409A, then the application of Section 409A (or dispute with respect to Section 409A) for purposes of this Agreement shall be determined by an accounting firm of recognized national standing acceptable to the Executive and the Company. The accounting firm shall be instructed to use every reasonable effort to make its determination within ten (10) business days after it is retained. The parties will cooperate fully with the accounting firm. The costs and expenses for the services of the accounting firm shall be borne equally by the Executive and the Company. The determination of such accounting firm shall be final and binding on all parties.

C. Section 409A Compliance.

1. All payments to be made to the Executive upon a termination of employment may only be made upon a “separation from service” (defined below) of the Executive. For purposes of Section 409A, (i) the Executive may not, directly or indirectly, designate the calendar year of payment; and (ii) no acceleration of the time and form of payment of any nonqualified deferred compensation to the Executive, or any portion thereof, shall be permitted.

2. Delayed Payments.

(i) Notwithstanding any other payment schedule provided herein to the contrary, if, and only if, the Executive is deemed on his termination date to be a “specified employee” within the meaning of that term under section 409A(a)(2)(B) of the Code, then the terms of this Subsection shall apply as required by Section 409A. Any payment that is considered deferred compensation under Section 409A payable on account of a “separation from service” shall be made on the date that is the earlier of (y) the expiration of the six (6) month period measured from the date of such “separation from service” of the Executive or

8

(z) the date of the Executive’s death (the “Delay Period”) to the extent required under Section 409A. Upon the expiration of the Delay Period, all payments delayed pursuant to the immediately preceding sentence (whether they otherwise would have been payable in a single sum or in installments in the absence of such delay) shall be paid to the Executive in a lump sum by the Company, and all remaining payments due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(ii) To the extent that any benefits to be provided during the Delay Period are considered deferred compensation under Section 409A provided on account of a “separation from service,” and such benefits are not otherwise exempt from Section 409A, the Executive shall pay the cost of such benefits during the Delay Period, and the Company shall reimburse the Executive, to the extent that such costs otherwise would have been paid by the Company or to the extent that such benefits otherwise would have been provided by the Company at no cost to the Executive, the Company’s share of the cost of such benefits upon expiration of the Delay Period, and any remaining benefits shall be reimbursed or provided by the Company in accordance with the procedures specified herein.

3. Notwithstanding the applicable provisions of this Agreement regarding the timing of payments, any payment or benefit due hereunder which is contingent upon receipt of a release shall be made in accordance with this Subsection. Any such payment or other benefits described in Section VIII or XI will be paid or begin to be paid within sixty (60) days following the Executive’s termination of employment (subject to Subsection XII.C.2, if applicable). Notwithstanding the foregoing, if such 60-day period begins in one taxable year of the Executive and ends in the subsequent taxable year of the Executive, the payments will be paid or begin to be paid in the subsequent taxable year (subject to XII.C.2).

4. Notwithstanding any other provision of the plans or programs constituting the benefits described herein, (i) the amount of expenses eligible for reimbursement and the provision of in-kind benefits during any calendar year shall not affect the amount of expenses eligible for reimbursement or the provision of in-kind benefits in any other calendar year; (ii) the reimbursement of an eligible expense shall be made on or before December 31 of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursement or right to in-kind benefit shall not be subject to liquidation or exchange for another benefit.

D. Section 409A Definitions.

1. Section 409A. Section 409A shall mean section 409A of the Internal Revenue Code of 1986, as amended (the “Code”) and the final regulations issued thereunder.

2. For purposes of this Agreement, the phrase termination of employment or any similar term or phrase shall mean the Executive’s “separation from service” as defined by the default provisions of Treas. Reg. § 1.409A-1(h).

9

3. A “Change in Control” shall mean any of the following:

(i) Change of Ownership of the Company. The date that any one person, or more than one person acting as a group, acquires ownership of stock of the Company that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company. However, if any one person, or more than one person acting as a group, is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the Company. An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the Company acquires its stock in exchange for property will be treated as an acquisition of stock for purposes of this Section XII.D.3(i). This Section XII.D.3(i) applies only when there is a transfer of stock of the Company (or issuance of stock of the Company) and stock in the Company remains outstanding after the transaction.

(ii) Change in the Effective Control of the Company.

(a) The date any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the Company possessing thirty percent (30%) or more of the total voting power of the stock of the Company. If any one person, or more than one person acting as a group, is considered to effectively control the Company (within the meaning of this Section XII.D.3(ii)(a)), the acquisition of additional control of the Company by the same person or persons is not considered to cause a change in the effective control of the Company (or to cause a change in the ownership of the corporation within the meaning of Section XII.D.3(i)).

(b) The date a majority of members of the Company’s Board of Directors is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board of Directors before the date of the appointment or election.

(iii) Change in the Ownership of a Substantial Portion of the Company’s Assets. The date that any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have a total gross fair market value equal to or more than eighty percent (80%) of the total gross fair market value of all of the assets of the corporation immediately before such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the Company, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets. Notwithstanding the foregoing, a Change in Control shall not be deemed to have occurred for purposes of this Agreement when there is a transfer to an entity that is controlled by the shareholders of the Company immediately after the transfer as provided in the following sentence. A transfer of assets by the Company is not treated as a change in the ownership of such assets if the assets are transferred to (w) a shareholder of the

10

Company (immediately before the asset transfer) in exchange for or with respect to its stock in the Company, (x) an entity, fifty percent (50%) or more of the total voting power of which is owned, directly or indirectly, by the Company, (y) a Person, or more than one Person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total voting power of all the outstanding stock of the Company, or (z) an entity, at least fifty percent (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in clause (y) above.

For purposes of this Section XII.D.3, persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time, or as a result of the same public offering. However, persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders only with respect to the ownership in that corporation before the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

This definition of “Change in Control” is intended to be consistent with the phrase “change in the ownership or effective control of the corporation, or in the ownership of a substantial portion of the assets of the corporation” as used in section 409A(a)(2)(A)(v) of the Code and the Regulations promulgated thereunder and shall be interpreted and applied in a manner consistent with such intent. Further, this definition is intended to comply with Section 409A and shall be interpreted in accordance therewith.

(4) “Disability” or “Disabled” as used in this Agreement means the Executive is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than twelve (12) months.

SECTION XIII

WITHHOLDING TAXES

The Company may directly or indirectly withhold from any payments under this Agreement all federal, state, city or other taxes that shall be required pursuant to any law or governmental regulation.

SECTION XIV

EFFECTIVE PRIOR AGREEMENTS

This Agreement contains the entire understanding between the Company and the Executive with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates and the Executive.

11

SECTION XV

CONSOLIDATION, MERGER OR SALE OF ASSETS

Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertakings of the Company hereunder. Upon such a consolidation, merger or sale of assets, the term “the Company” as used in this Agreement will mean such other corporation and this Agreement shall continue in full force and effect. This Section XV is not intended to modify or limit the rights of the Executive hereunder, including without limitation, the rights of Executive under Section XI.

SECTION XVI

MODIFICATION

This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.

SECTION XVII

GOVERNING LAW; ARBITRATION

This Agreement has been executed and delivered in the State of Tennessee and its validity, interpretation, performance and enforcement shall be governed by the laws of that state.

Any dispute among the parties hereto shall be settled by arbitration in Nashville, Tennessee, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof.

SECTION XVIII

NOTICES

All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or if delivered by hand, overnight delivery service or confirmed facsimile transmission, to the following:

(a) If to the Company, at 1621 Galleria Boulevard, Brentwood, TN 37027-2926, Attention: Corporate Secretary, or at such other address as may have been furnished to the Executive by the Company in writing; or

(b) If to the Executive, at such address of the Executive as may have been furnished to the Company by the Executive in writing.

12

SECTION XIX

BINDING AGREEMENT

This Agreement shall be binding on the parties’ successors, heirs and assigns.

[signature page follows]

13

IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written.

ADVOCAT INC.
By:	/s/ Richard Brame
Title:	Chairman of Compensation Committee
EXECUTIVE:
/s/ Kelly Gill
Kelly Gill

14

EX-10.3

Exhibit 10.3

AMENDED AND RESTATED

RETENTION BONUS AGREEMENT

THIS AMENDED AND RESTATED RETENTION BONUS AGREEMENT (“Agreement”) is made and entered into as of March 15, 2012, by and between ADVOCAT INC., a Delaware corporation (hereinafter, the “Company”), and L. GLYNN RIDDLE, JR. (“Riddle”) and amends and restates the Retention Bonus Agreement between the parties dated December 20, 2011 (the “Original Agreement”).

WHEREAS, Original Agreement term ends March 31, 2012;

WHEREAS, the Company has requested and Riddle has agreed that Riddle will remain as Chief Financial Officer past the term of the Original Agreement; and

WHEREAS, the parties have agreed to amend and restate the Original Agreement to extend the term and to make other changes as set forth herein.

In consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows:

1. Retention. The Company hereby retains Riddle in the position of Chief Financial Officer and Riddle hereby accepts said retention by the Company on the terms and conditions specified herein.

2. Term. The term of this Agreement shall commence on the date hereof and, unless earlier terminated in accordance with the provisions set forth herein below, shall terminate upon the earlier of (i) the date the new Chief Financial Officer is hired by and begins working for the Company or (ii) December 31, 2012 (the “Retention Period”). Notwithstanding anything to the contrary in this Section 2, the provisions of Section 9 will survive the expiration or earlier termination of this Agreement.

3. Duties of Riddle. Riddle shall continue to perform the duties of CFO and those duties which are assigned to him by the Board of Directors or Chief Executive Officer of the Company through the Retention Period. Riddle agrees to devote his full time, attention and skill to his duties hereunder throughout the Retention Period and to be in a position to sign the certifications required to be filed with the Company’s SEC filings. In connection herewith, the Company agrees to ensure that Riddle remains connected and has access to all information of the Company required to enable Riddle to be in a position to sign such certifications. The parties acknowledge that Riddle may continue to actively seek a new job opportunity during the term of this Agreement.

4. Compensation.

(a) As compensation for the duties and services performed by Riddle, the Company will increase Riddle’s annual base salary as provided in the Employment Agreement to $300,000, subject to federal and state withholding allowances and in accordance with the Company’s standard payroll practices. Such base salary may be further increased from time to time in the ordinary course by the Board of Directors.

(b) In addition, the Company acknowledges that Riddle is performing his job for the benefit of the Company at a time when he has expressed a desire to resign. Thus, the Company agrees that, in addition to, and without limitation of, any other compensation contemplated hereby, but only if Riddle continues to be employed by the Company through March 31, 2012 and has executed and not revoked within the revocation period a valid release agreement in a form reasonably acceptable to the Company, upon termination of employment, the Company will pay Riddle a lump sum payment equal to 3/4ths of his annual base salary upon the effectiveness of the release. In all events this payment shall be made on or before March 15, 2013.

5. Options, SARs and Restricted Stock. As a further inducement for Riddle to remain through the Retention Period, one hundred percent (100%) of all unvested options, SOSARs, and restricted stock granted to Riddle under the Company’s 1994 Non-Qualified Stock Option Plan, 2005 Long Term Incentive Plan, or 2010 Long Term Incentive Plan or any other equity plan shall be deemed vested as of March 31, 2012, provided that Riddle continues to be employed by the Company through such date. The Company shall cause the options and SOSARs vested pursuant to this Section 5 to remain exercisable for nine months following the end of the Retention Period or such shorter period that does not constitute an extension under Treasury Regulation Section 1.409A-1(b)(5)(v)(C)(1). All Restricted Stock that vests prior to the end of the Retention Period and those shares that vest as a result of this Section 5 shall be promptly issued to Riddle upon vesting.

6. Restricted Stock Units. All of the restricted share units in the account of Riddle under the 2008 Stock Purchase Plan For Key Personnel (“2008 Stock Plan”), shall be deemed vested as of March 31, 2012, provided that Riddle continues to be employed by the Company through such date. The delivery to Riddle by the Company of unrestricted shares of common stock of the Company equal to the number of restricted shares units held by Riddle under the 2008 Stock Plan adjusted for dividends through the actual settlement date, rounded down to the nearest whole share, shall be made upon the settlement date provided in such restricted share unit agreement, subject to Section 10(c), below, and the Company will make a payment to Riddle in amount representing the value of any remaining fractional restricted share units held by Riddle using the value per share as determined under Section 2(p) of the 2008 Stock Plan. Any restricted stock units that are held by Riddle at the time of such termination of employment shall be settled in accordance with their terms.

7. Benefits. Riddle shall also be entitled to participate in all benefit plans and programs through the Retention Period that are available to Riddle as of the date of this Agreement, provided such are continued after the date hereof. If Riddle elects to continue COBRA benefits at the end of the Retention Period, each month for the first nine (9) months following the end of the Retention Period, the Company shall reimburse Riddle for the cost of group health and dental insurance premiums under COBRA, subject to any required withholding. In addition, should Riddle elect to continue any disability insurance or life insurance under the Company’s plans, the Company shall reimburse Riddle f or the first nine months of such continued coverage, for the cost of such disability insurance premiums, and life insurance premiums, subject to any required withholding. Note that the Company will not continue EIRP payments to Riddle following the end of the Retention Period.

2

8. Termination.

(a) The Company shall have the right at any time, by written notice to Riddle to terminate this Agreement for any reason. In the event that the Company shall terminate Riddle pursuant to this section, Riddle shall be entitled to the benefits as provided in Sections 4(b), 5, 6, and 7 of this Agreement and the end of the Retention Period shall be the date of such termination. Notwithstanding the above, it is the intent of the Company at all times to comply with the Americans With Disabilities Act, the Family and Medical Leave Act and any other applicable federal and state employment laws.

(b) Riddle shall have the right at any time, by written notice to the Company to terminate this Agreement for any reason. In the event that Riddle shall terminate his employment pursuant to this section, Riddle shall be entitled to the benefits as provided in Sections 4(b), 5, 6, and 7 of this Agreement and the end of the Retention Period shall be the date of such termination.

9. Confidential Information. In consideration of the covenants of the Company contained herein, Riddle agrees that the provisions of Section IX of the Employment Agreement will remain in full force and effect during and after the Retention Period and that for purposes of Section IX of the Employment Agreement Riddle will be deemed to have submitted his voluntary resignation at the end of the Retention Period. Provided Riddle maintains the confidentiality of Company information, the Company acknowledges that it will consent to Riddle’s employment as chief financial officer, or other financial position with a company operating in the nursing home industry.

10. Section 409A Compliance.

(a) This Agreement and any payments or benefits provided pursuant to the Employment Agreement shall be interpreted, operated and administered in a manner intended to avoid the imposition of additional taxes under Section 409A of the Code. Further, the parties acknowledge and agree that the form and timing of the payments and benefits to be provided pursuant to this Agreement are intended comply with Section 409A of the Code or to be exempt from, or to comply with, one or more exceptions to the requirements of Section 409A of the Code. Notwithstanding any provision of this Agreement to the contrary, the Company, its affiliates, subsidiaries, successors, and each of their respective officers, directors, employees and representatives, neither represent nor warrant the tax treatment under any federal, state, local, or foreign laws or regulations thereunder (individually and collectively referred to as the “Tax Laws”) of any payment or benefits contemplated by this Agreement including, but not limited to, when and to what extent such payments or benefits may be subject to tax, penalties and interest under the Tax Laws.

(b) If and to the extent required to comply with Section 409A, no payment or benefit required to be paid under this Agreement on account of termination of Riddle’s employment shall be made unless and until Riddle incurs a “separation from service” within the meaning of Section 409A. For purposes of Section 409A, (i) Riddle may not, directly or indirectly, designate the calendar year of payment; and (ii) no acceleration of the time and form of payment of any nonqualified deferred compensation to Riddle, or any portion thereof, shall be permitted.

3

(c) Delayed Payments.

(i) Notwithstanding any other payment schedule provided herein to the contrary, if, and only if, Riddle is deemed on his termination date to be a “specified employee” within the meaning of that term under section 409A(a)(2)(B) of the Code, then the terms of this Subsection shall apply as required by Section 409A. Any payment that is considered deferred compensation under Section 409A payable on account of a “separation from service” shall be made on the date that is the earlier of (y) the expiration of the six (6) month period measured from the date of such “separation from service” of Riddle or (z) the date of Riddle’s death (the “Delay Period”) to the extent required under Section 409A. Upon the expiration of the Delay Period, all payments delayed pursuant to the immediately preceding sentence (whether they otherwise would have been payable in a single sum or in installments in the absence of such delay) shall be paid to Riddle in a lump sum by the Company, and all remaining payments due under this Agreement shall be paid or provided in accordance with the normal payment dates specified for them herein.

(ii) To the extent that any benefits to be provided during the Delay Period are considered deferred compensation under Section 409A provided on account of a “separation from service,” and such benefits are not otherwise exempt from Section 409A, Riddle shall pay the cost of such benefits during the Delay Period, and the Company shall reimburse Riddle, to the extent that such costs otherwise would have been paid by the Company or to the extent that such benefits otherwise would have been provided by the Company at no cost to Riddle, the Company’s share of the cost of such benefits upon expiration of the Delay Period, and any remaining benefits shall be reimbursed or provided by the Company in accordance with the procedures specified herein.

(d) Notwithstanding any other provision of the plans or programs constituting the benefits described herein, (i) the amount of expenses eligible for reimbursement and the provision of in-kind benefits during any calendar year shall not affect the amount of expenses eligible for reimbursement or the provision of in-kind benefits in any other calendar year; (ii) the reimbursement of an eligible expense shall be made on or before December 31 of the calendar year following the calendar year in which the expense was incurred; and (iii) the right to reimbursement or right to in-kind benefit shall not be subject to liquidation or exchange for another benefit.

(e) Notwithstanding the applicable provisions of this Agreement regarding the timing of payments, any payment or benefit due hereunder which is contingent upon receipt of a release will be paid or begin to be paid within sixty (60) days following Riddle’s termination of employment (subject to Section 10(c), if applicable). Notwithstanding the foregoing, if such 60-day period begins in one taxable year of Riddle and ends in the subsequent taxable year of Riddle, the payments will be paid or begin to be paid in the subsequent taxable year (subject to Section 10(c), if applicable).

11. Assignments; Successors and Assigns. The rights and obligations of Riddle hereunder are not assignable or delegable and any prohibited assignment or delegation will be null and void. The Company may assign and delegate this Agreement to a successor in interest to the

4

Company’s business. Any such assignment shall expressly include the obligations herein and shall not relieve the Company of same. The provisions hereof shall inure to the benefit of and be binding upon the permitted successors and assigns of the parties hereto.

12. Governing Law/Arbitration. This Agreement shall be interpreted under, subject to and governed by the substantive laws of the State of Tennessee without giving effect to provisions thereof regarding conflict of laws, and all questions concerning its validity, construction, and administration shall be determined in accordance thereby.

13. Counterparts. This Agreement may be executed simultaneously in any number of counterparts, each of which will be deemed an original but all of which will together constitute one and same instrument.

14. Invalidity. The invalidity or unenforceability of any provision of this Agreement shall not affect any other provision hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision was omitted. Furthermore, in lieu of such illegal, invalid, or unenforceable provision there shall be added automatically as a part of this Agreement a provision as similar in terms to such illegal, invalid, or unenforceable provision as may be possible and be legal, valid and enforceable.

15. Exclusiveness. This Agreement and the Employment Agreement constitute the entire understanding and agreement between the parties with respect to the retention by the Company of Riddle and supersedes any and all other agreements, oral or written, between the parties. Except for the provisions of Section IX of the Employment Agreement, this Agreement supersedes and replaces the Employment Agreement. Section IX of the Employment Agreement continues in full force and effect.

16. Modification. This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived.

17. Notices. All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or when delivered if by hand, overnight delivery service or confirmed facsimile transmission, to the following:

(a) If to the Company, at 1621 Galleria Boulevard, Brentwood, TN 37027, Attention: CEO, or at such other address as may have been furnished to Riddle by the Company in writing; or

(b) If to Riddle, at the address stated below, or such other address as may have been furnished to the Company by Riddle in writing.

5

18. Consolidation, Merger or Sale of Assets. Nothing in this Agreement shall preclude the Company from consolidating or merging in to or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertaking of the Company hereunder. No such consolidation, merger or transfer shall affect the rights of Riddle or the obligations of the Company hereunder.

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.

“COMPANY”
ADVOCAT INC.
By:	/s/ Kelly Gill
Title:	President & CEO
“RIDDLE”
/s/ L. Glynn Riddle, Jr.
L. Glynn Riddle, Jr.
Riddle’s Principal Address:
1203 Signature Court
Franklin, Tennessee 37064

6

EX-31.1

Exhibit 31.1

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(i) CERTIFICATION

I, Kelly J. Gill, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2012

/s/ Kelly J. Gill

Kelly J. Gill

Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATIONS PURSUANT TO SECTION 302 OF

THE SARBANES-OXLEY ACT OF 2002

(ii) CERTIFICATION

I, L. Glynn Riddle, Jr., certify that:

1. I have reviewed this quarterly report on Form 10-Q of Advocat Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15e and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 9, 2012

/s/ L. Glynn Riddle, Jr.

L. Glynn Riddle, Jr.

Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION OF QUARTERLY REPORT ON FORM 10-Q

OF ADVOCAT INC.

FOR THE QUARTER ENDED MARCH 31, 2012

The undersigned hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the undersigned’s best knowledge and belief, the Quarterly Report on Form 10-Q for Advocat Inc. (the “Company”) for the period ending March 31, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Report”):

(a) fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(b) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

This Certification is executed as of May 9, 2012.

/s/ Kelly J. Gill

Kelly J. Gill

Chief Executive Officer

/s/ L. Glynn Riddle, Jr.

L. Glynn Riddle, Jr.

Chief Financial Officer

A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.

XML

Consolidattion and Basis of Presentation of Financial Statements

3 Months Ended

Mar. 31, 2012

Business/Consolidation And Basis Of Presentation Of Financial Statements [Abstract]

CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

2. CONSOLIDATION AND BASIS OF PRESENTATION OF FINANCIAL STATEMENTS

The interim consolidated financial statements include the operations and accounts of Advocat and its subsidiaries, all wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation. Any variable interest entities (“VIEs”) in which the Company has an interest are consolidated when the Company identifies that it is the primary beneficiary. The Company has one variable interest entity and it relates to a nursing center in West Virginia described in Note 8.

The interim consolidated financial statements for the three month periods ended March 31, 2012 and 2011, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all normal, recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2012 and the results of operations and cash flows for the three month periods ended March 31, 2012 and 2011. The Company’s consolidated balance sheet at December 31, 2011 was derived from its audited consolidated financial statements as of December 31, 2011.

The results of operations for the three month periods ended March 31, 2012 and 2011 are not necessarily indicative of the operating results that may be expected for a full year. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011.

XML

Business

3 Months Ended

Mar. 31, 2012

Business/Consolidation And Basis Of Presentation Of Financial Statements [Abstract]

BUSINESS

1. BUSINESS

Advocat Inc. (together with its subsidiaries, “Advocat” or the “Company”) provides long-term care services to nursing center patients in eight states, primarily in the Southeast and Southwest. The Company’s centers provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care centers, the Company’s nursing centers offer a variety of comprehensive rehabilitation services as well as nutritional support services.

As of March 31, 2012, the Company’s continuing operations consist of 47 nursing centers with 5,445 licensed nursing beds, including 90 beds at our recently opened West Virginia nursing center. This new nursing center is licensed to operate by the state of West Virginia and has limited its number of patients while it completes the Medicare and Medicaid certification process. The Company owns 9 and leases 38 of its nursing centers. The Company’s continuing operations include centers in Alabama, Arkansas, Florida, Kentucky, Ohio, Tennessee, Texas and West Virginia.

XML

Interim Consolidated Balance Sheets (USD $) In Thousands, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
CURRENT ASSETS:
Cash and cash equivalents	$ 6,454	$ 6,692
Receivables, less allowance for doubtful accounts of $3,421 and $2,882, respectively	28,260	26,342
Other receivables	782	1,739
Prepaid expenses and other current assets	3,007	3,448
Income tax refundable	827	1,058
Deferred income taxes	6,261	6,041
Total current assets	45,591	45,320
PROPERTY AND EQUIPMENT, at cost	92,534	93,351
Less accumulated depreciation	(46,904)	(47,326)
Discontinued operations, net	1,053	1,053
Property and equipment, net (variable interest entity restricted - 2012: $7,374; 2011: $7,298)	46,683	47,078
OTHER ASSETS:
Deferred income taxes	10,374	10,352
Deferred financing and other costs, net	1,438	1,318
Other assets	3,264	3,680
Acquired leasehold interest, net	8,900	8,996
Total other assets	23,976	24,346
Total assets	116,250	116,744
CURRENT LIABILITIES:
Current portion of long-term debt and capitalized lease obligations (variable interest entity nonrecourse - 2012: $176; 2011: $173)	1,322	1,131
Trade accounts payable	3,927	3,928
Accrued expenses:
Payroll and employee benefits	13,172	13,589
Current portion of self-insurance reserves	8,720	8,470
Other current liabilities	3,517	2,767
Total current liabilities	30,658	29,885
NONCURRENT LIABILITIES:
Long-term debt and capitalized lease obligations, less current portion (variable interest entity nonrecourse - 2012: $5,646; 2011: $5,067)	28,882	28,768
Self-insurance reserves, less current portion	12,409	12,049
Other noncurrent liabilities	17,989	18,155
Total noncurrent liabilities	59,280	58,972
COMMITMENTS AND CONTINGENCIES
SERIES C REDEEMABLE PREFERRED STOCK $.10 par value, 5,000 shares authorized, issued and outstanding	4,918	4,918
SHAREHOLDERS' 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, 6,099,000 and 6,061,000 shares issued, and 5,867,000 and 5,829,000 shares outstanding, respectively	61	61
Treasury stock at cost, 232,000 shares of common stock	(2,500)	(2,500)
Paid-in capital	18,452	18,219
Retained earnings	4,614	6,480
Accumulated other comprehensive loss	(913)	(945)
Total shareholders' equity of Advocat Inc.	19,714	21,315
Noncontrolling interests	1,680	1,654
Total shareholders' equity	21,394	22,969
Total Liabilities and shareholder's equity	$ 116,250	$ 116,744

XML

Interim Consolidated Statements of Comprehensive Income (Loss) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Interim Consolidated Statements of Comprehensive Income (Loss) [Abstract]
NET INCOME (LOSS)	$ (1,376)	$ 438
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge	51	(299)
Income tax (provision) benefit	(19)	114
Total other comprehensive income (loss)	32	(185)
COMPREHENSIVE INCOME (LOSS)	(1,344)	253
Less: comprehensive income attributable to noncontrolling interest	(78)
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO ADVOCAT INC.	$ (1,422)	$ 253

XML

Interim Consolidated Statements of Cash Flows (Unaudited) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$ (1,376)	$ 438
Discontinued operations	(141)	(8)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS	(1,235)	446
Adjustments to reconcile net income (loss) from continuing operations to net cash provided by operating activities:
Depreciation and amortization	1,822	1,556
Provision for doubtful accounts	884	569
Deferred income tax provision (benefit)	(261)	109
Provision for self-insured professional liability, net of cash payments	829	66
Stock based compensation	164	201
Other	91	238
Changes in other assets and liabilities affecting operating activities:
Receivables, net	(1,684)	(3,732)
Prepaid expenses and other assets	28	177
Trade accounts payable and accrued expenses	319	1,306
Net cash provided by continuing operations	957	936
Discontinued operations	65	(12)
Net cash provided by operating activities	1,022	924
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(1,328)	(2,048)
Change in restricted cash	440	(1,828)
Deposits and other deferred balances	(69)	(28)
Net cash used in investing activities	(957)	(3,904)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations	(329)	(20,579)
Proceeds from issuance of debt and capital leases	634	23,430
Financing costs	(118)	(879)
Issuance/redemption of equity grants	106	199
Payment of common stock dividends	(319)	(318)
Payment of preferred stock dividends	(86)	(86)
Contributions from (distributions to) noncontrolling interests	(52)	27
Payment for preferred stock restructuring	(139)	(135)
Net cash provided by (used in) financing activities	(303)	1,659
NET DECREASE IN CASH AND CASH EQUIVALENTS	(238)	(1,321)
CASH AND CASH EQUIVALENTS, beginning of period	6,692	8,862
CASH AND CASH EQUIVALENTS, end of period	6,454	7,541
SUPPLEMENTAL INFORMATION:
Cash payments of interest, net of amounts capitalized	583	296
Cash payments of income taxes	$ 60	$ 25

XML

Interim Consolidated Balance Sheets (Parenthetical) (USD $) In Thousands, except Share data, unless otherwise specified	Mar. 31, 2012	Dec. 31, 2011
Interim Consolidated Balance Sheets [Abstract]
Allowance for doubtful accounts receivable	$ 3,421	$ 2,882
Property and equipment, net (variable interest entity restricted)	7,374	7,298
Current portion of long-term debt and capitalized lease obligations	176	173
Long-term debt and capitalized lease obligations, less current portion	$ 5,646	$ 5,067
Redeemable preferred stock, par value	$ 0.10	$ 0.10
Redeemable preferred stock, shares authorized	5,000	5,000
Redeemable preferred stock, shares issued	5,000	5,000
Redeemable preferred stock, shares outstanding	5,000
Preferred stock, par value	$ 0.10	$ 0.10
Preferred stock, shares authorized	200,000	200,000
Preferred stock, shares issued
Preferred stock, shares outstanding
Common stock, par value	$ 0.01	$ 0.01
Common stock, shares authorized	20,000,000	20,000,000
Common stock, shares issued	6,099,000	6,061,000
Common stock, shares outstanding	5,867,000	5,829,000
Treasury stock, shares	232,000	232,000

XML

Document and Entity Information	3 Months Ended
	Mar. 31, 2012	Apr. 30, 2012
Document and Entity Information [Abstract]
Entity Registrant Name	ADVOCAT INC
Entity Central Index Key	0000919956
Document Type	10-Q
Document Period End Date	Mar. 31, 2012
Amendment Flag	false
Document Fiscal Year Focus	2012
Document Fiscal Period Focus	Q1
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		5,882,367

XML

Interim Consolidated Statements of Operations (Unaudited) (USD $) In Thousands, except Per Share data, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Interim Consolidated Statements of Operations [Abstract]
PATIENT REVENUES, net	$ 77,098	$ 77,130
EXPENSES:
Operating	61,541	60,857
Lease	5,822	5,714
Professional liability	2,329	1,691
General and administrative	6,822	6,054
Depreciation and amortization	1,822	1,556
Total expenses	78,336	75,872
OPERATING INCOME (LOSS)	(1,238)	1,258
OTHER INCOME (EXPENSE):
Interest expense, net	(700)	(451)
Debt retirement costs		(112)
Total other income (expense)	(700)	(563)
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES	(1,938)	695
BENEFIT (PROVISION) FOR INCOME TAXES	703	(249)
NET INCOME (LOSS) FROM CONTINUING OPERATIONS	(1,235)	446
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS:
Operating income (loss), net of taxes of $(78) and $(4), respectively	(141)	(8)
NET INCOME (LOSS)	(1,376)	438
Less: comprehensive income attributable to noncontrolling interests	(78)
NET INCOME (LOSS) ATTRIBUTABLE TO ADVOCAT INC.	(1,454)	438
PREFERRED STOCK DIVIDENDS	(86)	(86)
NET INCOME (LOSS) FOR ADVOCAT INC. COMMON STOCKHOLDERS	$ (1,540)	$ 352
Per common share - basic
Continuing operations	$ (0.24)	$ 0.06
Discontinued operations	$ (0.03)
Total per common share - basic	$ (0.27)	$ 0.06
Per common share - diluted
Continuing operations	$ (0.24)	$ 0.06
Discontinued operations	$ (0.03)
Total per common share - diluted	$ (0.27)	$ 0.06
COMMON STOCK DIVIDENDS DECLARED PER SHARE OF COMMON STOCK	$ 0.055	$ 0.055
WEIGHTED AVERAGE COMMON SHARES:
Basic	5,795	5,752
Diluted	5,795	5,877

XML

Stock-Based Compensation

3 Months Ended

Mar. 31, 2012

Stock-Based Compensation [Abstract]

STOCK-BASEDCOMPENSATION

5. STOCK-BASED COMPENSATION

During 2012, the Compensation Committee of the Board of Directors approved a grant of approximately 39,000 shares of restricted common stock to certain employees and members of the Board of Directors. The restricted shares vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other common shares. Upon vesting, all restrictions are removed.

Stock-based compensation expense is non-cash and is included as a component of general and administrative expense or operating expense based upon the classification of cash compensation paid to the related employees. The Company recorded total stock-based compensation expense of $164,000 and $201,000 in the three month periods ended March 31, 2012 and 2011, respectively.

XML

Insurance Matters

3 Months Ended

Mar. 31, 2012

Insurance Matters [Abstract]

INSURANCE MATTERS

4. INSURANCE MATTERS

Professional Liability and Other Liability Insurance-

For claims made after March 9, 2001, the Company has purchased professional liability insurance coverage for its nursing centers that, based on historical claims experience, is likely to be substantially less than the claims that are expected to be incurred. The Company has essentially exhausted all general and professional liability insurance available for claims asserted prior to July 1, 2011.

Effective June 1, 2010, the Company’s nursing centers are covered by one of two professional liability insurance policies. The Company’s nursing centers in Arkansas and Tennessee, two centers in West Virginia and all but one facility in Kentucky are currently covered by an insurance policy with coverage limits of $250,000 per medical incident and total annual aggregate policy limits of $750,000. This policy provides the only commercially affordable insurance coverage available for claims made during this period against these nursing centers. The Company’s nursing centers in Alabama, Florida, Ohio, Texas and one center each in West Virginia and Kentucky are currently covered by an insurance policy with coverage limits of $1,000,000 per medical incident, subject to a deductible of $495,000 per claim, with a total annual aggregate policy limit of $15,000,000 and a sublimit per center of $3,000,000.

Reserve for Estimated Self-Insured Professional Liability Claims-

Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will exceed the Company’s limited insurance coverage, the Company has recorded total liabilities for reported and estimated future claims of $19,937,000 as of March 31, 2012. This accrual includes estimates of liability for incurred but not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including settlements to be paid over time, and estimates of legal costs related to these claims. All losses are projected on an undiscounted basis. Amounts are added to the accrual for estimates of anticipated liability for claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each period.

The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains the Actuarial Division of Willis of Tennessee, Inc. (“Willis”), a third-party actuarial firm, to provide an estimate of the accrual for incurred general and professional liability claims based on data furnished as of May 31 and November 30 of each year. Willis primarily uses historical data regarding the frequency and cost of the Company’s past claims over a multi-year period and information regarding the number of occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods. The actuary also estimates the Company’s professional liability accrual for past periods by using currently-known information to adjust the initial reserve that was created the period.

On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the Company’s insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim information obtained, the semi-annual estimates received from Willis, the amounts paid and committed for settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases results of operations in the period and any reduction in the accrual increases results of operations during the period.

The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $1,372,000 and $1,311,000 for the three months ended March 31, 2012 and 2011, respectively.

The Company follows the FASB Accounting Standards Update, “Presentation of Insurance Claims and Related Insurance Recoveries,” that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the Company has assets and equal liabilities of $500,000 at March 31, 2012 and $750,000 at December 31, 2011, respectively.

Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains Willis semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in which the change in accrual is made.

Other Insurance-

With respect to workers’ compensation insurance, substantially all of the Company’s employees became covered under either an indemnity insurance plan or state-sponsored programs in May 1997. The Company is completely self-insured for workers’ compensation exposures prior to May 1997. The Company has been and remains a non-subscriber to the Texas workers’ compensation system and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium adjustments depending on incurred losses. For the period from July 1, 2008 through June 30, 2012, the Company is covered by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500,000 per claim, subject to an aggregate maximum of $3,000,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred. The liability for workers’ compensation claims is $330,000 at March 31, 2012. The Company has a non-current receivable for workers’ compensation policy’s covering previous years of $669,000 as of March 31, 2012. The non-current receivable is a function of payments paid to the Company’s insurance carrier in excess of the estimated level of claims expected to be incurred.

As of March 31, 2012, the Company is self-insured for health insurance benefits for certain employees and dependents for amounts up to $175,000 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is $862,000 at March 31, 2012. The differences between actual settlements and reserves are included in expense in the period finalized.

XML

West Virginia Facility

3 Months Ended

Mar. 31, 2012

West Virginia Facility [Abstract]

WEST VIRGINIA FACILITY

8. WEST VIRGINIA FACILITY

On December 28, 2011, the Company completed construction of Rose Terrace Health and Rehabilitation Center (“Rose Terrace”), its third health care center in West Virginia. The state of the art 90-bed skilled nursing center is located in Culloden, West Virginia, along the Huntington-Charleston corridor, and offers 24-hour skilled nursing care designed to meet the care needs of both short and long term nursing patients. The Rose Terrace nursing center utilizes a Certificate of Need the Company obtained in June 2009, when the Company completed the acquisition of certain assets of a skilled nursing center in West Virginia. The new nursing center is licensed to operate by the state of West Virginia and expects to obtain its full Medicare and Medicaid certifications in the first half of 2012.

The Company has a lease agreement with the real estate developer that constructed, furnished, and equipped Rose Terrace that provides an initial lease term of 20 years and the option to renew the lease for two additional five-year periods. The agreement provides the Company the right to purchase the center beginning at the end of the first year of the initial term of the lease and continuing through the fifth year for a purchase price ranging from 110% to 120% of the total project cost.

The Company has no equity interest in the entity that constructed the new facility and does not guarantee any debt obligations of the entity. The owners of the facility have provided guarantees of the debt of the entity and, based on those guarantees, the entity is considered to be a variable interest entity (“VIE”). The Company owns the underlying Certificate of Need that is required for operation as a skilled nursing center. During 2011, the Company determined it is the primary beneficiary of the VIE based primarily on the ownership of the Certificate of Need, the fixed price purchase option described above, the Company’s ability to direct the activities that most significantly impact the economic performance of the VIE and the right to receive potentially significant benefits from the VIE. Accordingly, as the primary beneficiary, the Company consolidates the balance sheet and results of operations of the VIE.

The following table summarizes the accounts and amounts included in the Company’s Consolidated Balance Sheet that are associated with the real estate developer’s interests in the VIE. These assets can be used only to settle obligations of the VIE and none of these liabilities provide creditors with recourse to the general assets of the Company.

	March 31, 2012		December 31, 2011
Land	$	787,000	$	787,000
Building and improvements		6,014,000		5,938,000
Furniture, fixtures and equipment		573,000		573,000
Other assets		128,000		46,000
	$	7,502,000	$	7,344,000
Current accruals	$	—	$	450,000
Notes payable, including current portion		5,822,000		5,240,000
Non-controlling interests equity		1,680,000		1,654,000
	$	7,502,000	$	7,344,000

XML

Recent Accounting Guidance

3 Months Ended

Mar. 31, 2012

Recent Accounting Guidance [Abstract]

RECENT ACCOUNTING GUIDANCE

6. RECENT ACCOUNTING GUIDANCE

In June 2011, the FASB issued updated guidance in the form of a FASB Accounting Standards Update on “Comprehensive Income - Presentation of Comprehensive Income,” to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The update eliminates the option to present the components of other comprehensive income as part of the statement of equity. The Company adopted this guidance effective January 1, 2012 and has applied it retrospectively. There was no significant impact to the Company’s interim consolidated financial statements.

In July 2011, the FASB issued updated guidance in the form of a FASB Accounting Standards Update on “Health Care Entities: Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.” This guidance impacts health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though they do not assess the patient’s ability to pay. This updated guidance requires an impacted health care entity to present its provision for doubtful accounts as a deduction from revenue, similar to contractual discounts. Accordingly, patient service revenue for entities subject to this updated guidance will be required to be reported net of both contractual discounts and provision for doubtful accounts. The updated guidance also requires certain qualitative disclosures about the entity’s policy for recognizing revenue and bad debt expense for patient service transactions. The guidance was effective for the Company starting January 1, 2012. Based on the Company’s assessment of its admission procedures, the Company is not an impacted health care entity under this guidance since it assesses each patient’s ability or the patient’s payor source’s ability to pay. As a result of this assessment, the Company will continue to record bad debt expense as a component of operating expense, and adoption will not have an impact on the Company’s consolidated financial statements.

XML

Earnings (Loss) Per Common Share

3 Months Ended

Mar. 31, 2012

Earnings (Loss) Per Common Share [Abstract]

EARNINGS (LOSS) PER COMMON SHARE

7. EARNINGS (LOSS) PER COMMON SHARE

Information with respect to basic and diluted net income (loss) per common share is presented below:

		0000000000			0000000000
	Three Months Ended March  31,
	2012			2011
Numerator: Income (loss) amounts attributable to Advocat Inc. shareholders:
Net income (loss) from continuing operations	$	(1,235	)	$	446
Less: comprehensive income attributable to noncontrolling interests		(78	)		—
Income (loss) from continuing operations attributable to Advocat Inc.		(1,313	)		446
Preferred stock dividends		(86	)		(86	)
Income (loss) from continuing operations attributable to Advocat Inc. shareholders		(1,399	)		360
Income (loss) from discontinued operations, net of income taxes		(141	)		(8	)
Net income (loss) attributable to Advocat Inc. shareholders	$	(1,540	)	$	352

		0000000000			0000000000
	Three Months Ended March  31,
	2012			2011
Net income (loss) per common share:
Per common share – basic
Income (loss) from continuing operations	$	(0.24	)	$	0.06
Income (loss) from discontinued operations
Operating income (loss), net of taxes		(0.03	)		—
Discontinued operations, net of taxes		(0.03	)		—
Net income (loss)	$	(0.27	)	$	0.06
Per common share – diluted
Income (loss) from continuing operations	$	(0.24	)	$	0.06
Income (loss) from discontinued operations
Operating income (loss), net of taxes		(0.03	)		—
Discontinued operations, net of taxes		(0.03	)		—
Net income (loss)	$	(0.27	)	$	0.06

The effects of 151,000 and 320,000 SOSARs and options outstanding were excluded from the computation of diluted earnings per common share in 2012 and 2011, respectively, because these securities would have been anti-dilutive. The weighted average common shares for basic and diluted earnings for common shares were the same due to the quarterly loss in 2012.

XML

Event Subsequent To The Balance Sheet

3 Months Ended

Mar. 31, 2012

Event Subsequent To The Balance Sheet [Abstract]

EVENT SUBEQUENT TO THE BALANCE SHEET

9. EVENT SUBSEQUENT TO THE BALANCE SHEET

Lease Agreement

In April 2012, the Company entered into a lease agreement to operate an 88-bed skilled nursing center in Clinton, Kentucky. The center is subject to a mortgage insured through the United States Department of Housing and Urban Development. The current annual lease payments are approximately $360,000. The lease has an initial ten year term with two five year renewal options and contains an option to purchase the property for $3.3 million during the first five years. The center has not had residents since April 2011 after being de-certified by Medicare and Medicaid. The lease may be terminated if the center does not obtain certifications under the Medicare and Kentucky Medicaid programs by October 15, 2012.

XML

Interim Consolidated Statements of Operations (Unaudited) (Parenthetical) (USD $) In Thousands, unless otherwise specified	3 Months Ended
	Mar. 31, 2012	Mar. 31, 2011
Interim Consolidated Statements of Operations [Abstract]
Tax effect on operating income	$ (78)	$ (4)

XML

Long-Term Debt and Interest Rate Swap

3 Months Ended

Mar. 31, 2012

Long-Term Debt and Interest Rate Swap [Abstract]

LONG-TERM DEBT AND INTEREST RATE SWAP

3. LONG-TERM DEBT AND INTEREST RATE SWAP

The Company has agreements with a syndicate of banks for a mortgage loan and the Company’s revolving credit facility. Under the terms of the agreements, the syndicate of banks provided mortgage debt (“Mortgage Loan”) with an original balance of $23 million with a five year maturity through March 2016 and the Company’s $15 million revolving credit facility (“Revolver”) through March 2016. The Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25 year amortization. Interest is based on LIBOR plus 4.5% but is fixed at 7.07% based on the interest rate swap described below. The Mortgage Loan is secured by four owned nursing centers, related equipment and a lien on the accounts receivable of these facilities. The Mortgage Loan and the Revolver are cross-collateralized. The Company’s Revolver has an interest rate of LIBOR plus 4.5%.

The Revolver is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions. As of March 31, 2012, the Company had no borrowings outstanding under the revolving credit facility. Annual fees for letters of credit issued under this revolver are 3.00% of the amount outstanding. The Company has a letter of credit of $4,551,000 to serve as a security deposit for a lease. Considering the balance of eligible accounts receivable at March 31, 2012, the letter of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $15,000,000, the balance available for borrowing under the revolving credit facility is $10,449,000.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relate to minimum cash deposits, cash flow and debt service coverage ratios. The Company is in compliance with all such covenants at March 31, 2012.

On March 13, 2012, the Company entered into amendments to its Mortgage Loan and Revolver with the syndicate of banks. The amendments allow for the exclusion of certain expenses when calculating the debt covenants and lowers the requirements for the minimum fixed charge coverage ratio from 1.05 times fixed charges to 1.0 times for each of the covenant measurement periods ending June 30, 2012 and September 30, 2012. The Company paid the syndicate of banks an amendment fee of $30,000 in connection with this amendment.

The Company has consolidated $5,822,000 in debt that was added by the variable interest entity that owns the West Virginia nursing center. The borrower is subject to covenants concerning total liabilities to tangible net worth as well as current assets compared to current liabilities. The borrower is in compliance with all such covenants at March 31, 2012. The borrower’s liabilities do not provide creditors with recourse to the general assets of the Company.

Interest Rate Swap transaction-

As part of the debt agreements entered into in March 2011, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date, maturity date and notional amounts as the Mortgage Loan. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 7.07% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amounts. The Company designated its interest rate swap as a cash flow hedge and the earnings component of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss).

The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at March 31, 2012, the Company determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net liability of $1,473,000 at March 31, 2012. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company’s interim consolidated balance sheet. The balance of accumulated other comprehensive loss at March 31, 2012 is $913,000 and reflects the liability related to the interest rate swap, net of the income tax benefit of $560,000. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis consistent with the measurement at December 31, 2011. This analysis reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the Financial Accounting Standards Board’s (“FASB’s”) guidance on Fair Value Measurements and Disclosures.