Transcript of Advocat’s Second Quarter Conference Call

on Monday, August 10, 2006 at 10 A.M. Eastern

Operator: Good morning and welcome to the Advocat second quarter conference call.
Today’s call is being recorded. I would like to remind everyone that in addition to
historical information certain comments made during the conference call will be forward
looking statements within the meeting of the safe harbor provisions of the Private
Securities Litigation Reform Act 1995. Such statements may be identified by such words
as anticipate, believe, estimate, expect, intend, predict, hope, or similar expressions. Such
statements based on management’s expectations are subject to a number of factors and
uncertainties which will cause actual results to differ materially from those described in
forward looking statements including without limitation uncertainty regarding the
company’s ability to complete and describe transactions and restructure the remaining
debt and impact of insurer professional ability claims, practice assessing the long term
care industry in general, governmental reimbursement, governmental regulation, health
care reform, changing economic and market conditions, and the rise and uncertainties
described and reports filed be advocates with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 as amended including without limitation
cautionary statements in advocates 2005 annual report on form K10. We caution you do
not place undue reliance upon any forward looking statements which speak only as to
date such statements are made. Actual results could differ perhaps materially from those
anticipated or suggested by forward looking statements. We can not guarantee any future
operating results, activity, opportunity, or achievement. I would now like to turn the call
over to Wally Olsen, the chairman of the board. Please precede sir.

Wally Olsen: Thank you. This morning Will Council, our CEO, will begin the call with
the discussion of the company’s recent refinancing and Glenn Riddle, our CFO, will
discuss the financials and results from operations from the second quarter. Will and I will
then offer concluding comments that will open with the call for questions. Now I would
like to turn over the call to Will Council.

Will Council: Good morning and thank you, Wally. I would like to open the call with the
discussion of the comprehensive refinancing that we announced in the press release
yesterday. On August 7th the company entered into a $30.6 million comprehensive
refinancing with Capmark Finance which retired existing mortgage and bank debt and
provides funds for a $1.1 million renovation of the nursing center. The new debt includes
$22.5 million in mortgages with 25 year principle amortization and a five year term, and
an $8.1 million term note with a 4 year term. In addition, the company made a one time
principle payment of $2.5 million. The refinancing allowed Advocat to classify $24.5
million in debt that was refinanced in the transaction as long term at June 30th, 2006.
Advocat is now in compliance with all of it’s’ debt covenance. Capmark, formerly
GMAC commercial mortgage, has been our long term partner for the past several years.
They have stood by us during our difficult times, and we are proud to execute this
agreement with them. The agreement allowed us to report positive working capital and to
classify our debt at long term for the first time in many years. The completion of the
transaction is a significant and, in some ways, final step in accomplishing the company’s
restructuring following a period of difficult operation. The refinancing allows the
company to extend maturities with debt to 4 and 5 years, revises covenance such that the
company is in compliance, and provides financing for the $1.1 million renovation of one
the buildings owned by the company. This transaction allowed us to repay in full our
outstanding term notes with Am South. We continue to have a line of credit and
commercial relationship with Am South, and are thankful to the principles at Am South
that have demonstrated great patients in the last several years. At this time Glen Riddle,
Our CFO, is going to review the operations of the quarter and then I will return for some
concluding comments.

Glen Riddle: Thanks Will. We issued a press release and filed our 10Q yesterday,
providing our financial results for the second quarter and year to date periods of 2006.
Operating income for the second quarter was $3.6 million, compared to $2.5 million
dollars in 2005. It is important to note that the 2006 results include credit adjustments for
professional liability that was not present in the 2005 second quarter. Also, our 2006
results included a $5 million non cash charge for stock based compensation. Excluding
the variation in professional liability and stock based compensation, 2006 operating
income was $800 thousand better than 2005.

At this time I will review the operations for the 3 month period into June 30th, 2006. I
would like to point out that all results have been reclassified to present the North Carolina
living facilities as discontinued operations, consistent with the last 2 quarters. As a result,
the operating amount that we are discussing today, and that were reported in the 10Q and
press release, do not include any amounts related to these homes. I will focus on the some
of the significant fluctuations and revenue and expense from continuing operations as
compared to the 2nd quarter of last year. For a more detailed discussion of the company’s
results I refer you to the company’s quarterly report form 10Q. For the three months into
June 30th, 2006 the company had pre tax net income from continued operations of $3.1
million as compared to $1.8 million for the prior year. Net income from continuing
operations was $3.5 million as compared to $1.8 million in 2005. Deluded earnings per
share from continuing operation were 53 cents in 2006 compared to 27 cents in 2005.
These amounts include the net benefits from the professional liability adjustment as well
as the impact of the stock based compensation expense that we will discuss later in the
call. Net revenues increased to $53.9 million in 2006 from $49.6 million in 2005. This
increase is attributable to several factors that include Medicare rate increases in certain
states, Medicare rate increases, increased Medicare utilization in our nursing centers, and
increased census.

For the second quarter, the average rate of occupancy at our nursing centers was 77.7%
which is 230 bases points higher than the second quarter of 2005 and ten bases points
higher for the 1st quarter of 2006. Our Medicare revenue was 31.1% of total patient
revenues for the second quarter of 2006 which is 40 bases points higher the 2nd quarter of
2005. At the percentage of total census, Medicare days increased to 14.2 % in the 2nd
quarter of 2006 from 13.2% in 2005. The company’s average rate per day for Medicare
per day patients increased to $323 in the 2nd quarter 2006 from $308 in 2005, an increase
of 4.7%. Operating expense increased to $40.7 million in 2006 from $37.4 in 2005. This
increase is primarily attributable to cost increases related to wages and benefits that are
partially offset by a reduction in expense related to worker’s compensation insurance
expense. Our largest component of operating expense is wages, which increased to $24.3
million in 2006 from $22.3 million in 2005. This 9% increase is primarily attributable to
increased cost in nursing care associated with the higher Medicare and total census and
competitive labor market in most of the centers’ markets operated by the company.
Losses of workers’ compensation insurance were approximately $600 thousand lower in
2006 than the 2005. We had better than expected claims experience which was validated
with an actuarial review. We recorded an on cast charge for stock based compensation of
$5 million related to stock options approved by our shareholders in June 2006. The
options were granted in December 2005 subject to shareholder approval, which occurred
at our annual meeting of shareholders. The price of the company stock increased from
approximately $5.44 per share at the time of the option grant to $16.80 at the point of
shareholder approval, which significantly increased the non cash charge recorded for
stock based compensation. Professional liability resulted in a benefit of $3.9 million in
2006 compared to an expense of $1.5 million in 2005, a decrease in expense of $5.4
million dollars. The primary difference between these two periods is the adjustment of
historical actuarial reserves primarily related to the matters that arouse in earlier periods.
Our cash expenditures of professional liability totaled $600 thousand dollars in 2006
compared to $1.2 million in 2005. The company recorded a tax benefit of $400 thousand
primarily related to the reduction of the deferred tax evaluation allowance. Prior to last
year the company had recorded an evaluation allowance for 100% of its’ deferred assets.
An alternative to the analysis of the income statement is to focus on the funds proved
from operations or the cash flow, this is a valuable concept for following the company’s
performance. It shows cash from operations, it eliminates the effects from actuarial
assumptions, reflects the actual cash effect from the professional liability expense, and
excludes non cash charges related to stock based compensation. To summarize in our
press release for the quarter for the 3 months into June 30th 2006 funds from operations
totaled $4.7 million compared to $3.1 million in 2005. At this time I will turn the call
over to Will.

Will Council: Thanks Glen. I am going to provide updates on our facility improvement
projects, divestitures, and stock exchange listing application.

First, an update on our facility improvement project, as we announced last year Omega, a
large real estate investment trust and our largest partner, is providing additional financing
of up to $5 million for renovations to several nursing centers which we lease from
Omega. We completed our first project in early January and our second project late last
month. We continued to be impressed with the results of the first project and are
optimistic about the second project. We have two projects underway that we expect to be
completed in August and September respectfully. We recently started another project that
we expect to be completed by the end of the year. This project will most likely exhaust
the funding provided by Omega. Our plan to approach Omega and request a second
round of funding of facility renovations but there is no assurance that this will be
successful. In addition to the projects funded by Omega the just completed financing
agreement included funding for a $1.1 million renovation of one of our own facilities.
Renovation will commence immediately with completion scheduled in early 2007. As
noted in the first quarter, we have seen an increase in census and operating income and an
improvement in quality mix at the renovated facilities. Renovated facilities open for 3
months occupancy increased to almost 75% from 58% last year. Medicare utilization
increased to 21.3% from 12.7% last year. I hope that this simple presentation explains
why we are so excited about the renovation projects.

At this point I will summarize the progress of our previously announced divestiture. We
previously announced that our only remaining assisted living facility in North Carolina
was under contract to be sold. The buyer was attempting to change zoning for the
property in order to facilitate increased density for his planned development. The local
authority proved very resistant to the change and as a result the buyer informed us that he
is withdrawing his offer. We have placed the property on the market and are aggressively
seeking another buyer.

Finally, I will update you on the status of our stock exchange listing application. As you
all know, our stock is currently quoted on the NASD OTC bulletin board under the
symbol AVCA. As we announced in March we have filed an application seeking listing
of our shares on the NASDAQ capital market. Discussions with the NASDAQ at that
time indicated that an NASD listing is not likely as long as the auditor report included the
explanatory going concern paragraph. In managements view the completion of the
comprehensive refinancing transaction was the final step in reaching a conclusion that
Advocat could function as a going concern. As a result, we are currently working to
address these issues with our auditors and the NASDAQ stock market. Although we are
optimistic that these discussions will result in our stock being listed there are no
assurances that can be given that we will be able to resolve these issues or if we do that
we will be able to list our shares on the NASDAQ capital market.

At this time I will turn it back over to Wally for some concluding comments.

Wally Olsen: Thanks Will and Glen for the excellent report and an excellent quarter. I
would like to comment briefly on the second quarter charge for stock compensation
expense. The high level of expense is simply the product of the increased value of the
company share price to all share holders and is not reflective of high compensation by a
set. Absent the weigh of shareholder approval of the new option plan the expense would
have been much lower. The strategic purpose of the option grant was to better align the
interest of key management with those of the shareholders by putting 4% to 5% of
company stock in the hands of key management. The compensation committee of the
board of directors decided to vest the stock 100% at the time of grant for two basic
reasons. First, it was the compensation committees desire to reward management for
successfully bringing the company through several difficult years. Secondly, to avoid the
amortization of the expense over a longer period of earnings.

I think the real measure of the option grant is not the expense amount, but rather the fact
that existing management rewarded with less than 5% of the company after several years
without stock reward. I would like to thank the shareholders for their attention. At this
time I will ask the operator to open the call for questions.

Operator: Ladies and gentlemen, if you would like to ask a question please press *1 on
your touch tone phone. Please press *1 to begin.

Our first question comes from the line of Derik Dagnen of Avendale Partners. Please
proceed.

Derek Dagnen: Thank you for taking my call, congratulations for a really good quarter
from an operating stand point, and congratulations on the refinancing activity . I have a
couple of questions.. And thanks for the going over the renovation activity and what is
going on in North Carolina. I have a few more questions that I would like to ask on the
currency gain… I would like to get some color on that currency gain, on how long that
continues in light of refinancing?

Glen Riddle: Sure Derek, but the currency gain is related to the note that we took on the
sale of our Canadian operations in 2004. That note is denominated in Canadian dollars
and under generally excepted accounting principals we have to mark that note to mark
with the currency fluctuations for the quarter. I believe the note has a 5 year term for
2004, so we are two years into it and we have three years to go.

Derek Dagnen: OK, that’s good. I guess looking at the stock option expense a quarterly
run rate would be lower then what you saw this quarter. But can you give us a feel for
like what a normal stock option expense rate would be?

Glen Riddle: Derek, the notes to the 10Q include some detail on the option grant that we
made this time. Most of the options that we granted were granted fully vested. There are a
small number of options that will vest over the next several years, and those options
count for about $300 thousand of additional stock based compensation that will record
between now and the end of 2007. Because of the options vest that will work out to a rate
of about $100 thousand a quarter for the rest of this year and about $25 thousand a
quarter next year.

Derek Dagnen: Oh, great. I guess looking into the cash flow statement you have pretty
strong cash flow. I looked through the balance sheet and saw looking at the prepaid
expense line and the insurance receivable line the changing capital accounts, and is there
anything in that cash flow from operations numbers that made this quarter stronger than
you would have expected it to be and do you see anything that maybe changes in the third
quarter that would make it weaker given the strong performance this quarter?
Glen Riddle: Derek, the only thing that is really sort of unusual in the quarter is the
workers compensation insurance adjustment, and we had about $600 thousand less in the
works compensation expense in the second quarter this year compared to the second
quarter last year. And that relates to the policy that just ended, we had an actuarial review
of our claims experience and the claims experience came in a lot lower than we had
anticipated when we started that policy last year. That adjustment, which in all likelihood
relates to the last four quarters, is the only thing that comes to mind in terms of current
quarter activity.

Will Council: I think there is one other thing that needs to be considered, and that is the
cash out lay for professional liability came in $500 or $600 thousand for the quarter. That
is the second quarter that we have been in that level. Prior to that we have been at $1.1 or
$1.2 million per a quarter. So that is certainly to be characterized as unusual, and I
certainly do not expect that we are going to hold cash out lay for PL at the $500 or $600
thousand level every quarter.

Derek Dagnen: Right, and the reason it is lower is because the actuarial review is seeing
fewer claims and the severity of claims is lower. Is that correct?

Glen Riddle: Well, the actuarial review doesn’t really affect the cash out lay. The cash
out lay is simply what we spent for attorneys’ fees, settlements, and other costs related to
managing our professional liability. So, what is really driving that number are a couple
of things. One, the company settled a number of cases with a structure in the last 18 to 24
months that required us to make payments over a continuing period, some as long as 12
and some longer than that. Some are 24 months. We are reaching the end of the tail on
the sum of those settlement claims. So that cashed out lay is going away, and we also just
had a good 6 months so far in terms of the cash settlements that had to make with our
professional liability.

Derek Dagnen: Ok, I guess a bigger picture question on the rate that a Medicare/
Medicaid… You got a good rate update on the final rule at a CMS on skilled nursing with
a 3.1% increase, and basically no real changes. That was my take away. But on the
Medicaid front is there anything to update there? Have you heard anything on the
provider tax issue? Or any other issues with Medicaid?

Will Council: Yeah, certainly the provider tax is getting a lot of attention right now. The
current level of Medicaid reimbursement for our company is dependant on a provider tax
with more than 3% in the states of Alabama, Arkansas, Kentucky, Ohio, West Virginia,
and Tennessee. As you can see that is a large part of our portfolio. What is under
discussion is CMS is giving signals that they are going to publish a rule that would
reduce the level of provider taxes that the maximum level allows from 6%, were it
currently is, to 3%. Now there is some discussion that could be phased in over a couple of
years, but in any event thought knowing what the CMS rule change is going to employ
and without knowing how the various states are going to react to that CMS rules change
it’s really impossible to determine what that change is going to do for the company.
Certainly if the provider tax is reduced to 3% and the states involved don’t find another
funding source to take care of that short fall then the effect could be significant and
material to the company. At this point in time the company and the profession is actively
engaged in lobbying grass roots, grass tops, and any number of ways to get to our elected
officials to let them know how troubling this is and how much of an impact this will have
on sector. We are working on the federal front, but also on the state front. We really feel
like if the state governments don’t raise enough of a stink about this then we have little
chance to prevail if the states aren’t causing trouble about this. So that is something that
is concerning, but it is also something that there isn’t any way to quantify the effect now
except to say that if tax is reduced and if the states don’t fund it with another source the
impact would be significant. I would also like to comment on the market basket
adjustment that you referred to. The Medicare adjustment of 3.1%. We are still trying to
work through the details of that and figure out what increases apply to our facilities. The
amount suggested by CMS is a combined amount for all the facilities in the country.
However their rate process takes into account a number of factors, including wage rates
for different parts of the country. In general we have seen the CMS market basket tend to
be friendlier to urban facilities than it is to rural facilities. As a result we see our portfolio
may not be 3.1% that was announced by CMS.

Derek Dagnen: Right. Ok, thank you very much. I will hop back in the queue. Good
Quarter.

Will Council: Thank you Derek.

Operator: Our next question comes from the line of Andrew Collin of Trudaka. Please
proceed.

Andrew Collin: Hey guys. Great quarter.

Will Council: Thanks Andrew. How are you?

Andrew Collin: I’m good. Just one quick question or maybe two. I hope you don’t mind.
Your new debt facility, I noticed obviously interest costs went down, but what do you
anticipate your interest costs to be for the third quarter?

Glen Riddle: We don’t make forward looking statements on interest costs, Andrew.

Andrew Collin: OK. How about what restrictions on what you can do, how you can
work that facility? You are borrowing money from Omega. Do you have to pay that
money back first, or are you allowed to pay that money back first before you pay back
facility with Capmark? Or in terms of prepayment how quickly can you pay that down or
is there any penalty for doing that?

Will Council: Sure. Well, first of all the funding from Omega, we are not actually
borrowing money from Omega. What is happening there Andrew is Omega is making
additional investments in the facilities that we rent, and we are paying them a cost of
capital return on their investment in the facility. But there is no debt to be repaid there.
We simply have increased rent load going forward. With respect to the new credit facility
the mortgages are pretty straight forward they require principal payments on a 25 year
amortization schedule, and there is a 5 year maturity of that. So we pay based on a 25
year am for 5 years, and then there is a maturity at which time presumably refinance it or
do something different with it. There are no, I don’t think, any requirements prepay the
mortgages unless we were selling one of the facilities subject to the mortgage. With
respect to the term note, the term note has also a 25 year amortization, but has a further
requirement that we make a $1 million per six month period additional principal
payments. But it also requires that the proceeds realized from the security of that
agreement be applied to the term note first. So for example, security for that agreement
includes our receivable relating to the sell of the Canadian operations. So as we collect
that it goes to pay down the term note. It also includes the workers’ compensation
receivables that we are generating. So as we start to collect on those receivables, which
we anticipate doing in the next 6 to 12 months, those amounts also go to the term note.
And the final thing I will point out is that any extra amount that goes to the term note
goes to satisfy the $1 million a 6 month requirement. If that makes sense on a penalties
bases. So we have to accelerate payments as we collect on the security, but it ultimately
works to our favor to make those payments, and our projections indicate that term note
will probably be satisfied well before the 4 year term just based on the proceeds from the
security coming in.

Andrew Collin: What about cash that you generate based on normal operating bases? It
looks like you are generating quite a bit, so you could see yourselves getting up to $25
million in cash on the balance sheet and still have that note outstanding?

Will Council: Yes. Theoretically yes. However I think we got some alternative uses for
the cash that we will not simply accumulate it on the balance sheet.

Andrew Collin: Thanks again. Great quarter guys.

Will Council: Thanks Andrew.

Operator: Our next question comes from the line of Jeff Johnson. Please precede, sir.

Jeff Johnson: Hi, guys. Another fantastic quarter. And just to reassure you as a long time
shareholder that I am totally in favor of the stock options that were granted. I think that
they were well deserved. I think that you guys have done such a wonderful job. Most of
my questions were taken by previous callers. But when I calculated out the cash flow this
quarter it comes in at 70% higher than the cash flow was last year. I know that some of
that is from the workers’ compensation liability changes, but can you tell us what else is
accounting for that large difference in the cash flow?

Glen Riddle: Certainly, work men’s comp does affect it. That is a chunk of that. Also, I
don’t know exactly what you are looking at but I am looking at the funds provided from
operations schedule that shows $3.1 million generated in ’05 and $4.7 million in ’06.
There are some operation improvements that are affecting that in a positive way, which is
generated primarily by the increase in census. I think it was 230 bases points increase in
census. And also the improvement in Medicare utilization, which a fair bit of that drops
to the line and certainly to cash flow. Then the final factor. There is really kind of three
things: operationally, work men’s comp, and the cash out lay for professional liability.

Jeff Johnson: I actually have one more question. On getting the listing, you said that you
are working with your auditors. If we were to see an announcement come out would it be
a step wise announcement? Would we see something about the auditors lifting this
restriction and then maybe the NASDAQ restriction would be lifted? Would that be the
order that is would come out?

Will Council: Well, that is one possible way that is could come out, but we are actively
involved with the process and we can’t provide any commentary on what is going on
except to say that we are working on it and as soon as we have anything to announce
relative to this process then we will certainly put it out there.

Jeff Johnson: Thank you. One last question. Obviously you are doing so well and you
are mostly in rural markets. Are you seeing competition coming into those markets? Are
you seeing an issue with that? Or are all the uncertainties that you mentioned about
reimbursement keeping them out do you think?

Will Council: Well, the majority of the areas that we operate, the majority of the states
that we operate have a certificate of need process that really limits the new entrants to the
market place. So no, we really have not seen a lot of new entrants to the market place.
But what we are starting to see and hope that we are on the leading edge of is seeing
people renovating their facilities, and in some very rare cases completely rebuild their
facilities. So we are hoping that we are on the leading edge of that, and certainly in the
markets that we are in we are on the leading edge of getting the renovations done.
Obviously when we talk about the dramatic improvement in occupancy and Medicare
utilization at the one facility that we have done those are not necessarily new patients in
the market place. They are patients that would have otherwise gone to other buildings in
the market place. So, to the extent that we are on the leading edge of that we will capture
that improvement. And hopefully we will be able to sustain it even after other buildings
renovate in the market place.

Jeff Johnson: Yes, that is exciting. OK, thank you very much.

Will Council: You are welcome. Thank you, Jeff.

Operator: Again ladies and gentlemen, if you would like to ask a question please press
*1 on your touch tone phone.

Our next question comes from the line of Mike Laconey of Bishop Rosen. Please
proceed.
Mike Laconey: Yeah, guys. At the annual meeting we talked about the property facility
improvement program and you provided some information today that is very helpful. I
wanted to put in perspective if possible that according to what I heard you have 6
facilities that have been renovated or you are working on. Does that sound right?

Will Council: That is correct, yes.

Mike Laconey: OK. The question that I asked at the annual meeting was pretty
interesting to me. You have 43 facilities, according to my information. What facilities are
good targets for upgrades? I guess what the background is on this is that it is well known
in the industry that you guys had some deferred maintenance problems in your facilities
and you are addressing it. How many of those 43 are targets and make excellent
opportunities to upgrade.

Will Council: Well, I think that ultimately all of them will make targets for upgrade.

Mike Laconey: I am sorry. Economically appropriate.

Will Council: I think for varying reasons. The average age of our facilities is 30 years.
So that tells you we have some rather aging physical plants that need to have some tender
loving care and major renovation applied to them. So, all of our facilities can benefit
from the renovation project although the degrees of benefit will vary depending on the
facility. Another words, some of the states in which we operate actually provide a return
to us on the additional capital invested in the facility. So our Medicare rate goes up
simply because we made an investment. So that is a return. Not all of our states do that
though, so some of the states we are out 100% of the proceeds were some of the states
we are getting some of the proceeds covered even before we admit new patients. Some of
the facilities will benefit from increases census and increased Medicare utilization. Some
of the buildings may only benefit by increased Medicare utilization. Another words, we
take a building that is 97% or 98% occupied, really functionally full, and instead of
having a quality mix of maybe 25% or 30% maybe we could grow the quality mix to
35% or 40% simply by the renovation. There is a class of buildings and I really don’t
want to comment on how many of those are in our portfolio, but not that many of them
were there is likely benefit in only to improve the plant, improve employee moral, and
improve your presence in the market place. But economically is not going to do a whole
lot for the company. Although I think there is significant value to the renovation even
though it doesn’t necessarily justify it in a tangible economical analysis format.

Mike Laconey: Well, let me jump in here. You are working on six of these facilities or
you have completed. You are obviously selecting them for a reason. How many are in
that general category?

Will Council: I think at this time all the building that we have selected for the project are
in the category of the projects that will benefit significantly from the renovation. Or we
hope they will.
Mike Laconey: I am sorry. I did not understand the answer. How many?

Will Council: All of the ones we are currently working on.

Mike Laconey: I understand that, but in addition to the six how many?

Will Council: Michael, I am not going to answer that question today. I am sorry.

Mike Laconey: Well, give us a rough idea. Give us a general idea. 10… 2… or another
50…

Will Council: Well, we don’t have 50.

Mike Laconey: Well, 43 then.

Will Council: I am sorry Michael. I am just not going to provide feedback on that at this
time.

Mike Laconey: You don’t know?

Will Council: I think I answered the question. Do you have another question?

Mike Laconey: I have one more question for Wally.

Wally Olsen: Yeah, Mike.

Mike Laconey: Yeah, Wallace. We have come along way here in the last 2 ½ years. In
the special shareholders meeting you cleaned up a big chunk of this company. What is…
Give us some strategic overview in the future.

Wally Olsen: Well, Mike. The main thing that we are looking to do right now is to keep
renovating our properties. That is going to take quite a long time into the future I think.
Further we hope to continue improving and changing our patient mix. Basically we look
to continue in the future much as we are for the 1st or 2nd quarter of this year. Basically
running the company I think very well, renovating the properties, and doing what we
need to do. Let me get Will to jump into this too.

Will Council: Thanks, Wally. Certainly our focus is tightly focused on two or three key
areas. Number one, we are looking to grow Medicare utilization, improve our quality
mix, and grow our occupancy. We are engaged in that process from the stand point of the
facility renovation project, but also in facilities were we are not necessarily planning an
immediate renovation. We are working through a number of programs and initiatives to
try to improve the economic viability of those properties. We are also engaged in and
have been in this mode frankly in the last 5 years given were we have come from. But we
work very hard to control the expenses of the company. We are also engaged in a
constant process of trying to improve our patient care, improve the quality of the care that
we provide. We think that provides a better experience for our patients, and generates a
return for us when people walk away from our building satisfied that there is
improvement there. There is also tangible return by creating that environment which
includes safety for the employees. There is a direct return that there is a reduction for the
cash out lay for professional liability and reduction in our cost for worker’s
compensation. So there is a direct connection between quality of care and economic
performance in the building. So those are kind of our focal points. We are also from time
to time looking at acquisition opportunities. The truth of the matter is that we would be
interested in growing the company with an acquisition or two. The problem that we have
seen so far is one we fixed, and that is we didn’t have the balance sheet to generate a lot
of interest to help us finance an acquisition. We do today, and I think we have become a
much more interesting play for people to look at financing acquisitions for us. But
second, the market place is very expensive out there today. The facilities that we have
looked at, the price that we would have had to pay would have resulted in the acquisitions
we have looked at being deluded. We didn’t feel like in the place that Advocat was in its’
life cycle that we could be very aggressive at chasing deluded acquisitions. These are
acquisitions that would have been deluded day one and with a lot of hard work and effort
we could have got to be credence to the company, but we would have been in a dilution
position coming out of the shoot.

Mike Laconey: All done? Yes?

Will Council: Yes.

Wally Olsen: Yes.

Mike Laconey: Thanks.

Will Council: Thanks, Mike.

Wally Olsen: Thanks, Mike.

Operator: Our next question comes from the line of David Slacker of Mau Partners.
Please proceed.

Will Council: Hi, David.

David Slacker: Hi, guys. Great quarter. Very encouraging results. Unfortunately, all of
my questions have been asked by other people so I am going to refrain this time, but
thank you.

Will Council: You are welcome. Sorry.

David Slacker: No problem.

Will Council: OK, it was good talking to you.

Operator: Our next question comes from the line of Gary Amsterdam of Financial
Northeastern. Please proceed.

Gary Amsterdam: Hi, guys. You did a great quarter.

Will Council: Thanks Gary.

Gary Amsterdam: If and when the auditors removing the going concern issue will that
allow you to classify the carry forward as an asset.

Will Council: I am going to ask Glen to respond to that.

Glen Riddle: That change would not in and of itself have an impact on tax loss carry
forward. We started evaluating those reserves based on our last couple of years
generating taxable income at the end of 2005 and I think that process is already started,
so I would not envision having… What is going to drive that process is continued
profitability more than anything else.

Gary Amsterdam: Gotcha, thank you.

Will Council: You bet. Thank you.

Operator: Our next question comes from the line of Raymond Arks of Brooks Street
Securities. Please proceed.

Raymond Arks: Hi, guys. You did a fantastic job here. What a great quarter. Thank you
so much for being clear about it too. But I just wanted to elaborate a little on question
about the reserves. The self insurance reserves total about $28 million I guess, that is
including the parent portion of it. Presumable those… We are talking about the friends..
Has developed much more favorably in terms of the law suites etc. So that could come
down over time to under $10 million. Is that a reasonable assumption that it will continue
to move forward in a maybe $5 or $10 million a year rate over the next couple of years?

Will Council: Ray, it is a great question. Unfortunately, it remains the $64 thousand
question for our company of what is the normalized level of that insurance reserve. I
think it will take us a while to flesh that out. I think if we continue to settle case and in
incur claims as we have for the last couple of years. Then I would say that the reserve
would continue to come down. Where is will stabilize I don’t know. I think all I can
really say right now is that I do think it will continue to come down if we continue to
have the same success that we have had.

Raymond Arks: OK, also you discussed that you have looked at acquisitions and you
couldn’t justify them due to credence to earnings. But now that your stock is moving up I
would hope that the stock should go up 25 to 30 in the next few months. That is my
personal opinion. I am not asking you to elaborate on that, but as your stock moves up
does that change the picture? Because I know there are a lot of mom and pop
organizations or good operations that also perhaps need updating as you have talked
about. Now when you not only have your stock price up but also have a good looking
balance sheet, you could make acquisitions. And make acquisitions that would be
creative if you could issue stock for a part of it. Or even cash…

Will Council: Yeah, I think Ray that it’s fabulous to look at the balance sheet that we
published for June 30th because it just shows a relatively clean company that has a lot of
opportunity and given that what is going on with our stock, assuming that we can get it
listed as we are optimistic that we can. It creates… It opens a lot of doors that frankly
have been closed to us for the past 3 to 5 years as we have been working this company
out. And so there is opportunity for that and we are… The word giddy has been used in
reference to management and the board in terms of excitement that we have for where
this company is going.

Raymond Arks: Right. What acquisitions would probably be better in your opinion?
Mostly where you are currently located in or new territory?

Will Council: I think that it fundamental part of our focus to cluster our operations were
we can provide some regional oversight, and to really improve the process. So I think that
you continue to be a fundamental part of our strategic objectives certainly things in our
footprint are going to be attractive to us originally, but also to the extent that we could
expand our footprint in states that make sense for reimbursement and tort stand point. I
think we would be interested in looking into that particularly if we had an opportunity to
establish enough of a presence to justify adding another region to our company.

Raymond Arks: That’s great. Thank you very much. That is all the question I have
today.

Will Council: Thank you, Ray.

Operator: Our next question comes from the line of Joe Torvely of Dartmoor. Please
proceed.

Joe Torvely: Good morning guys. It is nice to see the trend continuing. I just have a
couple of questions pertaining to the capital program on the facilities. With insulary
businesses increased ASPs throughout the industry, is that also a focus just besides that
cosmetic improvements of these existing facilities to look at in the future?

Will Council: Well, Joe that is a good question. Our company has stumbled a couple of
times in its’ distant past and now it is trying to add insulary service lines to our business,
and so we are cautious about it. It is something that other folks do, and it is something
that can generate a return. Particularly, I think the focus is on hospice, home care, and
pharmaceuticals. That is something that we are going to look at. It is frankly something
that we have not been able to put our attention to. It is an area that brings it’s own
separate risks that we will have to look at, but certainly especially to the degree that
acquisitions of additional nursing centers are expensive we would look to insulary
services as a way that perhaps we could grow our business.

Joe Torvely: Right, and I agree. I am not really clear. You are generating a significant
amount of cash per a quarter, but Omega is renovating their facilities with a $5 million
limit cap. But outside of that could we expect a step up on our own facilities using our
own cash flow to address the facilities that need to be improved?

Will Council: Certainly, I think the first step to that was the commitment that we got
from Capmark to renovate one of the facilities that is in the mortgage package that they
put together. So, I think that we are very interested in looking at doing the major
renovations to all of the properties, whether they are owned by Omega or we own them.

Joe Torvely: And my last question is that I would assume that we will have positive
shareholder equity by year end, which with hopefully with a new listing of our symbol
will allow the company and management to speak to potentially a new group of
shareholders. Would that also lead to a commit to meet shareholders and market yourself
as the balance sheet and the company are showing some trends that will allow you to get
out in front and talk about what you are doing in the future?

Will Council: Yes. As a matter of fact, we are coming to New York next week. We have
a few meetings setup, and certainly if you are or anyone else is interested in attending any
of the meetings we are working on filling the schedule out. Rod O’Connor at Cameron
and Associates, our investor relations firm, is handling that and his number is included on
the press release. Anyone wanting to talk to Rod and schedule one of our meetings next
week or in the future is welcome to do so. I think that we have communicated in the past
that we were sort of holding off on much meetings of that sort until we got to a certain
point, and with the refinancing we really feel like we got to that point. So we wanted to
get to the folks that have wanted to see us for 18 or 24 months, but eventually get to just
about anyone that is interested in talking to us.

Joe Torvely: Right. Well, it is a nice thought to have Avondale to be representation of

your company on the sell side, and with the cash flows that you are having I am hoping
that more people start to realize what kind of company you guys are running. I appreciate
your work. Thank you.

Will Council: Thanks.

Operator: Our next question comes from the line of Philip Groshay, private investor.
Please proceed.

Philip Groshay: Hi, guys. Absolutely fabulous quarter. I believe we even exceeded
Avondale’s estimate, and I just wanted to congratulate you. Also I would like to mention
that it seems to me that there are not a lot of people that could buy your stock if it were
listed and prohibited from doing so right now. I am just hoping that NASDAQ will see
their way to finally list the company, but again a terrific quarter.
Will Council: Thank you Philip.

Operator: Ladies and gentlemen this concludes question / answer portion of today’s
conference. I will turn the call back to management for any closing remarks.

Will Council: Thank you very much. I appreciate everyone’s attention today. As we said
earlier, we are just thrilled to have gotten the company where it is today, and we are very
excited about the future. We appreciate the opportunity to communicate to our
shareholders and look forward to reporting the progress of the company in the future.
Thank you.

Operator: Thank you for your participation ladies and gentlemen. Have a great day.