8-K

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934

Date of Report (Date of earliest event reported)

March 1, 2007 (March 1, 2007)

ADVOCAT INC.

(Exact name of registrant as specified in its charter)

Delaware	001-12996	62-1559667
(State or other jurisdiction of	(Commission File	(Employer
incorporation)	Number)	Identification Number)

1621 Galleria Boulevard, Brentwood, TN 37027
(Address of principal executive offices)

(615) 771-7575
(Registrant’s telephone number, including area code)

Check the appropriate box below if the Form 8-K is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2 below):

o Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

o Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

o Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

o Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition.

On March 1, 2007, the Registrant announced its results of operations for the fourth quarter and year ended December 31, 2006. The Company also intends to make available supplemental information regarding the Company’s operations. The Company is attaching the press release as Exhibit 99.1 and the supplemental information as Exhibit 99.2 to this Current Report on Form 8-K.

The information furnished pursuant to Item 2.02 herein, including Exhibits 99.1 and 99.2, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933.

Item 9.01. Financial Statements and Exhibits.

     (d) Exhibits

Number		Exhibit
	99.1	Press Release dated March 1, 2007.
	99.2	Supplemental Information

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.
By:	/s/ L. Glynn Riddle, Jr.
	L. Glynn Riddle, Jr.
	Chief Financial Officer

Date: March 1, 2007

EXHIBIT INDEX

Number		Exhibit
	99.1	Press Release dated March 1, 2007.
	99.2	Supplemental Information

EX-99.1

Exhibit 99.1

Company Contact:	Investor Relations:
William R. Council, III	Rodney O’Connor
President and CEO	Cameron Associates
(615) 771-7575	(212) 554-5470

Advocat Announces 2006 Year End Results and Guidance for 2007

BRENTWOOD, Tenn., (March 1, 2007) — Advocat Inc. (NASDAQ: AVCA) today announced its results for the fourth quarter and year ended December 31, 2006 and presented 2007 financial guidance.

Highlights for the Year Ended December 31, 2006 Compared to 2005

Funds provided from operations were $14.5 million versus $13.2 million in 2005. Funds from operations is a non-GAAP measurement. A reconciliation of funds from operations to net income is included in the financial tables accompanying this press release .

Other Highlights for 2006 included:

• Revenue of $216.8 million, up 6.4% from $203.7.

• Average occupancy rates increased to 77.9% from 76.2%.

• Medicare days as a percent of total census increased to 13.8% from 13.0%.

• Medicare Part A average rate per day increased to $323.97 from $311.48.

• Medicaid average rate per day increased to $133.74 from $128.71.

• Income from continuing operations before income taxes was $12.4 million in 2006, after a non-cash expense of $5.2 million for stock based compensation, compared to $16.8 million in 2005.

• Net income from continuing operations was $21.9 million and $3.34 per diluted common share, compared to $30.6 million and $4.69 per diluted common share.

• Working capital increased to $8.2 million at December 31, 2006, compared to a working capital deficit of $40.0 million at December 31, 2005.

• Shareholders equity increased to a positive $3.8 million at December 31, 2006 from a deficit of $16.9 million at December 31, 2005.

Major non-revenue items affecting 2006 financial results compared to 2005 were:

• Reduced income tax benefit of $4.3 million.

• Employee wages included in operating expenses increased by $6.8 million, or 7.4%, and wages included in general and administrative expenses increased by $1.2 million, or 14.4%.

• Non-cash stock based compensation expense of $5.2 million.

• Health insurance expense included in operating expenses increased by $0.7 million, or 18.6%.

• Sarbanes Oxley Section 404 compliance increased costs by $0.7 million.

• Costs of workers compensation expense decreased by $1.4 million

As a result of the continuing improvement in financial results and the completion of the Company’s comprehensive refinancing in August 2006, the uncertainties surrounding the Company’s ability to continue as a going concern have been resolved. Accordingly, the report of the Company’s independent registered public accounting firm that will accompany the Company’s 2006 audited financial statements will not include the paragraph with regard to this uncertainty.

Highlights for the Fourth Quarter of 2006 Compared to Fourth Quarter 2005

• Revenue of $55.8 million, up 3.8% from $53.7 million in 2005 and up 3.5% from $53.9 million in the third quarter of 2006.

• Average occupancy rates increased to 78.4% from 77.6%.

• Medicare days as a percent of total census increased to 13.6%, compared to 13.0% in the fourth quarter of 2005 and 13.0% in the third quarter of 2006.

• Medicare Part A average rate per day increased to $331.81 from $320.53.

• Medicaid average rate per day increased to $136.51 from $131.86.

• Net income from continuing operations was $2.4 million and $0.37 per diluted common share, compared to $17.9 million and $2.75 per diluted common share. The benefit for income taxes decreased to $0.4 million compared to a benefit of $13.7 million.

For the fourth quarter of 2006, funds from operations were $3.1 million, compared to $5.1 million in the fourth quarter of 2005 and $2.7 million in the third quarter of 2006, The comparison of funds from operations was affected by changes in costs of group health insurance between quarters and costs of Sarbanes Oxley Section 404 compliance in 2006.

Facility Renovation Update

Four facilities were renovated during 2006, with three of those renovations completed before the start of the fourth quarter. Fourth quarter 2006 results for these facilities compared to the fourth quarter of 2005 results were:

• Average occupancy increased to 70.6% from 60.9%.

• Medicare census as a percent of total increased to 17.9% from 14.4%.

Two more renovations will be completed in the first quarter of 2007. The Company is also completing a partial renovation of its facility in Houston, Texas, which suffered water damage during a storm last summer. Management is currently reviewing plans for additional renovations, which are expected to be completed in the third and fourth quarters of 2007. The facilities selected for the initial projects were facilities with the most potential for improvement, and these results may not be indicative of results for future projects.

Included in this news release is a table of Selected Operating Statistics which provides information on our facilities.

2007 GUIDANCE

Advocat also announced that it is initiating guidance for 2007 based upon its 2006 results, 2007 budget and business planning process, and current business conditions. This guidance reflects only continuing operations, assumes no acquisitions or other new facilities, and assumes no future changes in Medicare or Medicaid reimbursement, other than regularly scheduled rate increases.

Revenues for 2007 are expected to increase to a range of $221 to $228 million. The Company expects to benefit from increased occupancy at its skilled nursing facilities due in part to the ongoing renovation program and from an increase in the number of Medicare days as a percentage of total patient days.

Net income (loss) from continuing operations is expected to range from a loss of $0.1 million to income of $0.4 million. Based on an estimated 5.9 million to 6.1 million average shares outstanding and taking into consideration preferred stock dividend requirements, diluted earnings (loss) per common share is expected to range from ($0.08) to $0.01 per share. Although we are projecting revenues to increase in 2007, net income is projected to be lower than in 2006 because the projected increases in reimbursement rates are insufficient to offset projected increases in rent expense (including cash and non-cash rent) and operating costs, including market-driven increases in employee salaries and benefits costs. The Company’s net income guidance for 2007 is also affected by the projected amount of professional liability expense, as discussed below.

The Company’s net income guidance for 2007 includes professional liability expense of approximately $9.3 million based on our actuarial assumptions for the current year, and does not attempt to forecast any potential reductions or increases of prior year accruals for professional liability claims which could result from favorable or unfavorable resolution of existing claims. In 2006, primarily as a result of favorable resolution of claims and corresponding adjustments to the accruals, the Company’s professional liability expense was a net benefit of $4.8 million, which is $14.1 million less expense than the amount included in the 2007 projections.

Funds from operations are expected to be approximately $13.3 to $14.0 million in 2007 compared to $14.5 million in 2006. Funds from operations for 2007 are expected to be negatively impacted by increases in employee compensation and benefits that exceed the rate of increase in Medicare and Medicaid reimbursement rates.

Management Outlook

Will Council, President and CEO of Advocat, commented, “The past year included a number of great accomplishments and it marks the culmination of several years of hard work to affect a turnaround of the Company’s financial situation. We and our industry, however, do face significant challenges in 2007. There is market pressure for increased salaries and wages. Employee healthcare costs are rising and there is uncertainty surrounding future Medicare and Medicaid reimbursement rates. It is also difficult to predict our net income because our professional liability expense is a significant

variable expense dependent on both current year events and the resolution of prior year events. As in the past, this number could change significantly as the year progresses.

We are very excited about the performance to date of our renovation projects and other growth opportunities, and believe this ongoing renovation program will continue to contribute to future operating results. As announced in October 2006, Omega Healthcare Investors from whom we lease 33 of our nursing centers agreed to provide an additional $5 million in financing for renovations which we are now planning to complete in 2007. In addition, we have entered into an option agreement to purchase certain assets of a skilled nursing facility in West Virginia. We recently made an application to state regulatory authorities to allow us to operate the facility, and if successful, we intend to arrange financing and construct a new replacement facility. We are optimistic about the future of Advocat as we build on the successes of 2006 and seek to create long term value for our shareholders.”

CONFERENCE CALL INFORMATION

A conference call has been scheduled for Friday, March 2, 2007 at 8:00 A.M. Central time (9:00 A.M. Eastern time) to discuss 2006 results and the initiation of guidance for 2007.

The conference call information is as follows:

Date:	Friday, March 2, 2007
Time:	8:00 A.M. Central, 9:00 A.M. Eastern
Webcast Links:	www.streetevents.com
	www.earnings.com
	www.irinfo.com/avc
Dial in numbers:	(866) 356-3095 (domestic) or (617) 597-5391 (international)
Passcode:	44422018

A replay of the conference call will be accessible two hours after its completion through March 9, 2007 by dialing (888) 286-8010 (domestic) or (617) 801-6888 (international) and entering passcode 77861624.

The Company will publish a supplemental financial information package which will be available at www.irinfo.com/avc/2006data.pdf in the news release section. It will also be furnished to the SEC as part of a Current Report on Form 8-K.

FORWARD-LOOKING STATEMENTS

The 2006 financial results contained in this news release are subject to finalization in connection with the preparation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. This release also contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as “may,” “will,” “should,” “expect,” “believe,” “estimate,” “intend,” and similar words indicating possible future expectations,

events or actions. These forward-looking statements reflect our current views with respect to future events and present our estimates and assumptions only as of the date of this report. Actual results could differ materially from those contemplated by the forward-looking statements made in this release. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors could cause our actual results to differ materially from the results expressed or implied in any forward looking statements, including but not limited to, changes in governmental reimbursement, government regulation and health care reforms, the increased cost of borrowing under our credit agreements, ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, our ability to control costs, changes to our valuation allowance for deferred tax assets, changes in occupancy rates in our facilities, the impact of future licensing surveys, the outcome of regulatory proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations applicable to our business, the effects of changing economic and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations of the Company, the effect of changes in accounting policies, as well as other risk factors detailed in the Company’s Securities and Exchange Commission filings. The Company has provided additional information in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as well as in other filings with the Securities and Exchange Commission, which readers are encouraged to review for further disclosure of other factors. 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. Advocat Inc. is not responsible for updating the information contained in this press release beyond the published date, or for changes made to this document by wire services or Internet services.

Advocat provides long term care services to patients in 43 skilled nursing centers, primarily in the Southeast. For additional information about the Company, visit Advocat’s web site: http://www.irinfo.com/avc

-Financial Tables to Follow-

ADVOCAT INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

	December 31,		December 31,
	2006		2005
ASSETS:
Current Assets
Cash and cash equivalents	$	12,344	$	7,070
Restricted cash		25		625
Receivables, net		16,902		18,147
Deferred income taxes		1,785		1,004
Other current assets		6,739		5,180
Total current assets		37,795		32,026
Property and equipment, net		28,768		39,421
Deferred income taxes		21,849		12,856
Note receivable, net		4,758		5,198
Other assets, net		3,731		4,261
TOTAL ASSETS	$	96,901	$	93,762
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT):
Current Liabilities
Short-term debt and current portion of long-term debt and settlement promissory notes	$	7,249	$	47,419
Trade accounts payable		4,566		4,415
Accrued expenses:
Payroll and employee benefits		9,363		8,495
Current portion of self-insurance reserves		4,838		5,952
Other current liabilities		3,600		5,715
Total current liabilities		29,616		71,996
Noncurrent Liabilities
Long-term debt and settlement promissory notes, less current portion		24,267		128
Self-insurance reserves, less current portion		22,159		29,041
Other noncurrent liabilities		5,733		4,717
Total noncurrent liabilities		52,159		33,886
PREFERRED STOCK		11,289		4,750
SHAREHOLDERS’ EQUITY (DEFICIT)		3,837		(16,870	)
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)	$	96,901	$	93,762

ADVOCAT INC.
CONSOLIDATED INCOME STATEMENTS
(In thousands, except per share data)

	For the Three Months						For the Twelve Months
	Ended December 31,						Ended December 31,
	2006			2005			2006			2005
	(Unaudited)			(Unaudited)
PATIENT REVENUES, NET	$	55,790		$	53,744		$	216,763		$	203,658
EXPENSES:
Operating		42,195			39,652			165,300			155,512
Lease		4,569			3,911			16,082			15,836
Professional liability		250			851			(4,840	)		(3,962	)
General and administrative		4,872			3,424			15,975			13,311
Stock-based compensation		80			—			5,184			—
Depreciation		873			922			3,650			3,493
		52,839			48,760			201,351			184,190
OPERATING INCOME		2,951			4,984			15,412			19,468
OTHER INCOME (EXPENSE):
Foreign currency transaction gain (loss)		(248	)		25			21			161
Other income		—			—			207			—
Interest income		185			133			679			534
Interest expense		(939	)		(965	)		(3,707	)		(3,382	)
Debt retirement costs		—			—			(194	)		—
		(1,002	)		(807	)		(2,994	)		(2,687	)
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES		1,949			4,177			12,418			16,781
BENEFIT FOR INCOME TAXES		(408	)		(13,705	)		(9,496	)		(13,820	)
NET INCOME FROM CONTINUING OPERATIONS		2,357			17,882			21,914			30,601
DISCONTINUED OPERATIONS:
Operating income (loss), net of tax provision (benefit) of $0, $394, $0 and $359, respectively		(2	)		(4,957	)		144			(5,698	)
Gain (loss) on sale, net of tax provision of $0, $12, $0 and $436, respectively		8			8			(114	)		399
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS		6			(4,949	)		30			(5,299	)
NET INCOME		2,363			12,933			21,944			25,302
PREFERRED STOCK DIVIDENDS		86			81			340			318
NET INCOME FOR COMMON STOCK	$	2,277		$	12,852		$	21,604		$	24,984
NET INCOME (LOSS) PER COMMON SHARE:
Per common share — basic
Income from continuing operations	$	0.39		$	3.11		$	3.73		$	5.29
Income (loss) from discontinued operations		—			(0.87	)		.01			(0.93	)
	$	0.39		$	2.24		$	3.74		$	4.36
Per common share — diluted
Income from continuing operations	$	0.37		$	2.75		$	3.34		$	4.69
Income (loss) from discontinued operations		—			(0.76	)		.01			(0.81	)
	$	0.37		$	1.99		$	3.35		$	3.88
WEIGHTED AVERAGE COMMON SHARES:
Basic		5,847			5,725			5,784			5,725
Diluted		6,250			6,499			6,507			6,498

ADVOCAT INC.
FUNDS PROVIDED BY OPERATIONS
(In thousands)

	Three Months Ended						Twelve Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
	(Unaudited)			(Unaudited)
NET INCOME	$	2,363		$	12,933		$	21,944		$	25,302
Income (loss) from discontinued operations		6			(4,949	)		30			(5,299	)
Net income from continuing operations		2,357			17,882			21,914			30,601
Adjustments to reconcile net income from continuing operations to funds provided by operations:
Depreciation		873			922			3,650			3,493
Provision for doubtful accounts		383			342			1,631			1,560
Deferred income tax benefit		(456	)		(13,860	)		(9,719	)		(13,860	)
Benefit from self-insured professional liability, net of cash payments		(1,079	)		(216	)		(8,809	)		(8,680	)
Stock-based compensation		80			—			5,184			—
Amortization of deferred balances		104			80			289			342
Provision for leases in excess of cash payments		592			(10	)		606			158
Other		214			(88	)		(218	)		(425	)
FUNDS PROVIDED BY OPERATIONS	$	3,068		$	5,052		$	14,528		$	13,189
Reconciliation of funds provided by operations to cash flow from operating activities:
Fund provided by Operations	$	3,068		$	5,052		$	14,528		$	13,189
Changes in other assets and liabilities affecting operating activities:
Receivables, net		1,388			(1,950	)		(393	)		(3,798	)
Prepaid expenses and other assets		1,331			(588	)		583			(2,516	)
Trade accounts payable and accrued expenses		1,973			1,608			425			2,745
Net cash provided by operating activities of continuing operations	$	7,760		$	4,122		$	15,143		$	9,620

Advocat provides financial measures using accounting principles generally accepted in the United States (GAAP) and using adjustments to GAAP (non-GAAP). These non-GAAP measures are not measurements under GAAP. These measurements should be considered in addition to, but not as a substitute for, the information contained in our financial statements prepared in accordance with GAAP. Funds from Operations is defined as cash flow from operating activities before changes in other assets and liabilities affecting operating activities. Management believes that funds from operations is an important measurement of the Company’s performance because it eliminates the effect of actuarial assumptions on our professional liability reserves, includes the cash effect of professional liability payments, and does not include the effects of deferred tax benefit and other non-cash charges. Since the definition of Funds from Operations may vary among companies and industries, it should not be used as a measure of performance among companies.

ADVOCAT INC.
SELECTED OPERATING STATISTICS
DECEMBER 31, 2006
(Unaudited)

					For the Year Ended December 31, 2006
																		Medicare		Medicaid
	As of				Skilled		Occupancy											Room and		Room and
	December 31, 2006				Nursing		(Note 1)									2006		Board		Board
					Average											Revenue		Revenue		Revenue
	Licensed		Available		Daily		Licensed			Available			Medicare			($ in millions)		PPD — 2006		PPD — 2006
Region	Beds		Beds		Census		Beds			Beds			Utilization			(Note 4)		(Note 2)		(Note 2)
Alabama		711		699		618		86.9	%		88.4	%		13.8	%	$	39.2	$	305.44	$	141.69
Arkansas		1,411		1,241		902		63.9	%		72.7	%		14.1	%		50.6		300.78		124.56
Florida		502		460		420		83.6	%		91.2	%		10.3	%		28.4		354.29		153.20
Kentucky (Note 3)		775		742		682		88.0	%		91.9	%		14.7	%		47.4		348.15		149.70
Tennessee		617		586		513		83.1	%		87.5	%		16.8	%		31.3		333.91		123.56
Texas		489		442		375		76.6	%		84.8	%		11.5	%		18.0		325.24		101.13
Total		4,505		4,170		3,509		77.9	%		84.2	%		13.8	%	$	214.9	$	323.97	$	133.74

Note 1:	The number of “Licensed beds” is based on the licensed capacity of the facility. The Company has historically reported its occupancy based on licensed beds. The number of “Available Beds” represents “licensed beds” less beds removed from service. “Available beds” is subject to change based upon the needs of the facilities, including configuration of patient rooms and offices, status of beds (private, semi-private, ward, etc.) and renovations.
Note 2:	These Medicare and Medicaid revenue rates include room and board revenues but do not include any ancillary revenues related to these patients.
Note 3:	The Kentucky region includes nursing centers in Kentucky, West Virginia and Ohio.
Note 4:	Total revenue for regions excludes approximately $1.9 million of ancillary services revenue.

ADVOCAT INC.
FUNDS PROVIDED BY OPERATIONS
(Unaudited)
(In millions)

	2007 Estimated Range
	Low			High
NET INCOME (LOSS)	$	(0.1	)	$	0.4
Income (loss) from discontinued operations		—			—
Net income (loss) from continuing operations		(0.1	)		0.4
Adjustments to reconcile net income (loss) from continuing operations to funds provided by operations
Depreciation		3.9			3.9
Provision for doubtful accounts		1.7			1.5
Provision for self-insured professional liability, net of cash payments		4.7			4.7
Provision for leases in excess of cash payments		2.2			2.2
Other		0.9			1.3
FUNDS PROVIDED BY OPERATIONS	$	13.3		$	14.0

The Company’s income guidance for 2007 includes an expense for self-insured professional liability that is based on actuarial estimates of accruals required for claims to be incurred in 2007. The Company does not attempt to forecast any potential reductions or increases of prior year accruals for professional liability claims which could result from favorable or unfavorable resolution of existing claims.

###

EX-99.2

Exhibit 99.2

Supplemental Information

Advocat Inc. maintains an internet site at www.irinfo.com/avc. This supplemental information is available through the Company’s internet site. This information is presented to supplement audited and unaudited regulatory filings of the Company and should be read in conjunction with those filings. The financial data herein is unaudited and is provided from the prospective of timeliness to assist readers of quarterly and annual financial filings. As such, data otherwise contained in future regulatory filings covering the same period may be restated from the data presented herein.

The significant events completed by Advocat Inc. in 2006 included:

• The sale of our North Carolina assisted living operations

• Comprehensive refinancing agreement with our primary lenders

• Began trading on the Nasdaq in September

• Executed an extended master lease on 29 of our facilities

• Restructured our preferred stock such that it is no longer convertible into common stock

• Completed the major renovation of four of our facilities and began renovation on two others

• Secured additional renovation financing of $5 million

• Completed our assessment of the effectiveness of our internal controls over financial reporting in compliance with SOX without identifying any material weaknesses

Year Ended December 31, 2006 compared to Year Ended December 31, 2005

• Operating income for 2006 was $15.4 million, compared to $19.5 million in 2005.

• 2006 results included additional expenses of $5.9 million for stock based compensation and SOX compliance. Excluding these charges, 2006 operating income was approximately $21.3 million, or $1.8 million better than 2005.

• Net income from continuing operations in 2006 was $21.9 million, compared to $30.6 million in 2005.

• 2006 net income included a tax benefit of $9.5 million to reduce valuation allowances on deferred tax assets, compared to a similar tax benefit of $13.8 million in 2005.

• For the year ended December 31, 2006, revenues increased to $216.8 million in 2006 from $203.7 million in 2005. This increase is attributable to several factors, including Medicaid rate increases in certain states, Medicare rate increases, increased Medicare utilization in our nursing centers and increased census.

• The Company had pre-tax net income from continuing operations of $12.4 million in 2006, as compared to $16.8 million for the prior year.

• Diluted earnings per share from continuing operations were $3.34 in 2006 compared to $4.69 in 2005.

• For 2006, the average rate of occupancy at our nursing centers was 77.9%, compared to 76.2% in 2005, an increase of 170 basis points.

• Our Medicare revenue was 30.5% of total patient revenues for the 2006, compared to 30.0% in 2005, an increase of 50 basis points.

• As a percent of total census, Medicare days increased to 13.8% in 2006 from 13.0% in 2005.

• The Company’s average rate per day for Medicare Part A patients increased to $323.97 in 2006 from $311.48 in 2005, an increase of 4.0%.

• The average rate per day for Medicaid patients increased to $133.74 in 2006, compared to $128.71 in 2005, an increase of 3.9%.

• Operating expense increased to $165.3 million in 2006 from $155.5 million in 2005.

• The largest component of Operating Expense is wages, which increased to $98.8 million in 2006 from $92.0 million in 2005. This 7.4% increase is primarily attributable to increased costs of nursing care associated with the higher Medicare and total census and competitive labor markets in most of the centers operated by the Company.

• Costs of health insurance included in Operating Expenses were approximately $0.7 million higher or 18.6% higher in 2006 compared to 2005. Employee health insurance costs can vary significantly from period to period.

• The higher costs of wages and benefits were partially offset by reductions in costs of workers compensation insurance, which were approximately $1.4 million lower in 2006 compared to 2005. We had better than expected claims experience, which was validated with an actuarial review.

• Professional liability expense was a net benefit of $4.8 million in 2006 compared to a net benefit of $4.0 million in 2005, an increase in net benefit of $800,000.

• Our cash expenditures for professional liability totaled $3.4 million in 2006 and $4.1 million in 2005.

• General and administrative expenses increased to $16.0 million in 2006, compared to $13.3 million in 2005. Compensation costs were approximately $1.2 million higher in 2006 than in 2005, an increase of 14.4%. Salary costs increased approximately $0.3 million (or about 4%) due to normal merit and inflationary increases and approximately $0.4 million due to new positions added to improve operating and financial controls. Incentive compensation costs were approximately $0.5 million higher in 2006 compared to 2005 as a result of operating performance.

• General and administrative expenses also included an increase of approximately $0.7 million related to SOX compliance costs, as we were required to report under SOX requirements for the first time in 2006.

• There was a non-cash charge in 2006 for stock-based compensation of $5.2 million, related to stock options approved by our shareholders in June 2006.

• 2006 results include a tax benefit of $9.5 million, compared to a tax benefit of $13.8 million in 2005. These benefits were primarily related to reductions of the deferred tax valuation allowance. Prior to 2005, the Company had recorded a valuation allowance for 100% of its deferred tax assets. We reduced these valuation allowances in for the first time in 2005 as a result of our improved financial performance. The completion of the comprehensive refinancing in August further improved our financial position and, as a result, we were able to reduce our tax asset valuation allowances to levels that are normal for a going concern.

Quarter Ended December 31, 2006 compared to Quarter Ended December 31, 2005

• For the quarter ended December 31, 2006, revenues increased to $55.8 million, compared to $53.7 million in the fourth quarter of 2005 and $53.9 million in the third quarter of 2006. This increase is attributable to several factors, including Medicare rate increases,

increased Medicare utilization in our nursing centers, increased Medicaid rates in certain states and an increase of 80 basis points in total census in the fourth quarter of 2006, as compared to the same period in 2005.

• The Company had pre-tax net income from continuing operations of $1.9 million in the fourth quarter of 2006, as compared to $4.2 million for 2005.

• Net income from continuing operations, including the deferred tax benefit, was $2.4 million, compared to $17.9 million in 2005.

• For the quarter, diluted earnings per share from continuing operations were $0.37 in 2006 compared to $2.75 in 2005.

• As a percent of total census, Medicare days increased to 13.6% in the fourth quarter of 2006, compared to 13.0% in the fourth quarter of 2005 and 13.0% in the third quarter of 2006.

• Operating expense increased to $42.2 million in the fourth quarter of 2006 from $39.7 million in 2005. This increase is primarily attributable to cost increases related to wages and benefits, including an increase of $1.0 million in the cost of employee health insurance. The 2005 results reflect unusual positive experience. The Company is self insured for the first $150,000 in claims per employee each year and experienced fewer large claims in 2005. 2006 reflects a more normal employee health insurance cost. These increases were partially offset by a decrease of $0.4 million in workers compensation insurance costs.

• Professional liability expense was $0.3 million in the fourth quarter of 2006 compared to $0.9 million in 2005, a decrease in expense of $600,000.

• Cash expenditures for professional liability totaled $1.2 million in the fourth quarter of 2006 compared to $0.9 million in 2005.

• General and administrative expenses increased to $4.9 million in the fourth quarter of 2006, compared to $3.4 million in 2005. Compensation costs were approximately $0.7 million higher in the 2006 fourth quarter than in 2005. Salary costs increased due to normal merit and inflationary increases, new positions added to improve operating and financial controls and incentive compensation costs.

• General and administrative expenses also included an increase of approximately $0.6 million related to SOX compliance costs.

• The Company recorded a tax benefit of $0.4 million in the fourth quarter of 2006, compared to a tax benefit of $13.7 million in the 2005 fourth quarter. The Company made its initial reduction in deferred tax asset valuation allowances in the fourth quarter of 2005, and had another reduction in the third quarter of 2006 following the completion of the comprehensive refinancing.

2007 GUIDANCE

	2007 Estimate
	Low			High
Estimated Revenues	$221 million			$228 million
Estimated Net Income (Loss) from Continuing Operations		$(100,000	)		$400,000
Estimated Diluted EPS from Continuing Operations		$(0.08	)		$0.01
Estimated Diluted Shares	5.9 million			6.1million
Estimated Funds from Operations	$13.3 million			$14.0 million
Estimated Capital Expenditures (which includes renovation at two owned facilities)	$4.3 million			$4.7 million

Revenues are estimated to increase approximately 1.9% to 5.1%. The key assumptions in this estimate include the following:

• Skilled nursing occupancy is estimated to range from approximately 78% to 80% in 2007 (based on licensed beds), compared to approximately 77.9% for 2006.

• Medicare days are estimated to range from approximately 14.0% to 14.5% of total patient days in 2007, compared to approximately 13.8% in 2006.

• A key assumption underlying occupancy and Medicare utilization are the results of the Company’s facility renovation program. The forecast for 2007 takes into consideration projected improvements in occupancy and Medicare utilization for completed facility renovation projects and projects expected to be completed during the year.

• All census growth is based on the Company’s current facilities, and includes no additional census from potential acquisitions or new facilities.

• Medicaid rates — Medicaid room and board rates are expected to increase approximately 2.4% for 2007 compared to 2006. Certain state Medicaid programs, including Arkansas, Alabama, Florida and Tennessee, have a fixed cost component of reimbursement that decreases rates on a per patient basis as census increases. Due to increases in census among other factors, certain of our facilities in these states are experiencing lower than normal rate increases. Further, our guidance projects no rate increase in Texas. Absent those facilities, Medicaid rate increases at other facilities are 3.8%. No reductions in rates for the possible impact of changes in provider tax legislation have been included in forecasted Medicaid rates.

• Medicare rates — 2007 Medicare revenues are projected based on an estimated average increase in Medicare room and board rates of approximately 2.4% for 2007, based on a market basket adjustment that is approximately consistent with the adjustment done October 1, 2006.

• Medicare ancillary revenues have been reduced approximately $1.2 million in 2007 compared to 2006 for the effects of changes in reimbursement for blood glucose monitoring.

Key assumptions related to forecasted expenses include the following:

• Operating salaries are estimated to increase approximately 5.5% to 7.1% based on census growth and normal inflationary and merit increases. Inflationary increases are expected to fall in the range of 4% to 6% annually, driven primarily by increases for professional nursing and therapy staff.

• Costs of employee health insurance are estimated to increase approximately 10% based on general medical inflation.

• Lease expense is estimated to increase approximately $2.5 million. The Company amended a master lease covering 29 nursing centers in October 2006, and is recording scheduled rent increases under that master lease on a straight line basis.

• Professional liability expense has been estimated as $9.3 million for 2007 based on current actuarial estimates, and no consideration has been given to possible reductions in the accrual for professional liability claims for prior periods.

• Federal and state income taxes are estimated at an average effective rate of 38.4%.

Renovations

During 2006, we completed renovation projects at 4 facilities. Three of these projects were completed before the beginning of the fourth quarter. We just completed our fifth renovation project last week and have a sixth project slated for completion at the end of the first quarter. We are also completing a partial renovation of our facility in Houston Texas. This facility suffered water damage during a storm last summer and we are making the repairs covered by insurance and also spending approximately $500,000 in additional facility enhancements. We expect this project to be complete early in the third quarter.

Financial information for the three renovated facilities that were completed before the start of the fourth quarter of 2006 compared to the fourth quarter of 2005 is as follows:

• Occupancy increased to 70.6%, compared to 60.9% in the prior year

• Medicare census as a percent of total census increased to 17.9%, compared to 14.4% in the prior year

• Our first facility renovation opened in January 2006. Occupancy for the fourth quarter increased to 82.7%, compared to 61.4% and Medicare increased to 21.8%, compared to 15.1%.

• Our second facility renovation opened in July 2006. Occupancy for the fourth quarter increased to 80.7%, compared to 71.0% and Medicare increased to 16.6%, compared to 15.0%.

• Our third facility renovation opened in August 2006. Occupancy for the fourth quarter decreased to 45.0%, compared to 46.8% and Medicare increased to 13.8%, compared to 12.0%.

It should be noted that this information is for one quarter only and that the three facilities were at different stages in the renovation life cycle.

Acquisitions

We have entered into an option agreement to purchase certain assets of a skilled nursing facility in West Virginia. We recently made an application to state regulatory authorities to allow us to operate the facility, and if successful, we intend to arrange financing and construct a new replacement facility with 90 beds. Our application is pending state review and is subject to state regulations regarding public hearings and opportunities for members of the community to object to our plans. The process can be somewhat indefinite, but can usually be resolved within a range of three to 12 months. We will provide additional information when available on this exciting opportunity.

Reconciliation of Funds From Operations to Net Income

Advocat provides financial measures using accounting principles generally accepted in the United States (GAAP) and using adjustments to GAAP (non-GAAP). These non-GAAP measures are not measurements under GAAP. These measurements should be considered in addition to, but not as a substitute for, the information contained in our financial statements prepared in accordance with GAAP. Funds from Operations is defined as cash flow from operating activities before changes in other assets and liabilities affecting operating activities. Management believes that funds from operations is an important measurement of the Company’s performance because it eliminates the effect of actuarial assumptions on our professional liability reserves, includes the cash effect of professional liability payments, and does not include the effects of deferred tax benefit and other non-cash charges. Since the definition of Funds from Operations may vary among companies and industries, it should not be used as a measure of performance among companies.

	2007 Estimated Range
	(In millions)
	Low			High
NET INCOME (LOSS)	$	(0.1	)	$	0.4
Income (loss) from discontinued operations		—			-
Net income (loss) from continuing operations		(0.1	)		0.4
Adjustments to reconcile net income (loss) from continuing operations to funds provided by operations
Depreciation		3.9			3.9
Provision for doubtful accounts		1.7			1.5
Provision for self-insured professional liability, net of cash payments		4.7			4.7
Provision for leases in excess of cash payments		2.2			2.2
Other		0.9			1.3
FUNDS PROVIDED BY OPERATIONS	$	13.3		$	14.0

The Company’s income guidance for 2007 includes an expense for self-insured professional liability that is based on actuarial estimates of accruals required for claims to be incurred in 2007. The Company does not attempt to forecast any potential reductions or increases of prior year accruals for professional liability claims which could result from favorable or unfavorable resolution of existing claims.

Forward-Looking Statements

The 2006 financial results contained in this supplemental information are subject to finalization in connection with the preparation of the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. This supplemental information also contains “forward-looking statements” made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are predictive in nature and are frequently identified by the use of terms such as “may,” “will,” “should,” “expect,” “believe,” “estimate,” “intend,” and similar words indicating possible future expectations, events or actions. These forward-looking statements reflect our current views with respect to future events and present our estimates and assumptions only as of the date of this supplemental information. Actual results could differ materially from those contemplated by the forward-looking statements made in this supplemental information. In addition to any assumptions and other factors referred to specifically in connection with such statements, other factors could cause our actual results to differ materially from the results expressed or implied in any forward looking statements, including but not limited to, changes in governmental reimbursement, government regulation and health care reforms, the increased cost of borrowing under our credit agreements, ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional liability expense, our ability to control costs, changes to our valuation allowance for deferred tax assets, changes in occupancy rates in our facilities, the impact of future licensing surveys, the outcome of regulatory proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations applicable to our business, the effects of changing economic and competitive conditions, changes in anticipated revenue and cost growth, changes in the anticipated results of operations of the Company, the effect of changes in accounting policies, as well as other risk factors detailed in the Company’s Securities and Exchange Commission filings. The Company has provided additional information in its Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as well as in other filings with the Securities and Exchange Commission, which readers are encouraged to review for further disclosure of other factors. 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. Advocat Inc. is not responsible for updating the information contained in this supplemental information beyond the published date.