<PAGE> 1
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: SEPTEMBER 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _________ TO _________.
COMMISSION FILE NO.: 1-12996
-------
ADVOCAT INC.
------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1559667
- ------------------------------- ---------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
-----------------------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 771-7575
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
- --------------------------------------------------------------------------
(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
--- ---
5,315,822
- --------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK AS OF OCTOBER 31, 1996)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,172 $ 1,076
Accounts receivable, less
allowance for contractual
adjustments and doubtful
accounts of $1,893 and
$2,082, respectively 21,935 19,566
Income taxes receivable -0- 304
Inventories 557 508
Prepaid expenses and other 1,548 1,649
Deferred income taxes 899 974
-------- --------
Total current assets 27,111 24,077
-------- --------
PROPERTY AND EQUIPMENT, at cost 38,765 29,677
Less accumulated depreciation
and amortization (9,154) (7,659)
-------- --------
Net property and equipment 29,611 22,018
-------- --------
OTHER ASSETS:
Deferred tax benefit 7,499 8,224
Deferred financing and other costs, net 883 855
Other 2,127 1,922
-------- --------
Total other assets 10,509 11,001
-------- --------
$ 67,231 $ 57,096
======== ========
</TABLE>
(Continued)
2
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,926 $ 3,926
Trade accounts payable 6,459 6,881
Income taxes payable 385 -0-
Accrued expenses:
Payroll and related benefits 4,133 3,754
Worker's compensation 1,519 1,225
Other 1,690 1,565
-------- --------
Total current liabilities 18,112 17,351
-------- --------
NONCURRENT LIABILITIES:
Long-term debt less current portion 18,446 11,063
Deferred gains with respect to leases, net 4,092 4,502
Other 707 1,743
-------- --------
Total noncurrent liabilities 23,245 17,308
-------- --------
COMMITMENTS, CONTINGENCIES, AND
GUARANTEE
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value 5,316,000, and 5,288,000 shares
issued and outstanding at September 30, 1996
and December 31, 1995, respectively 53 53
Paid-in capital 15,083 14,875
Retained earnings 10,738 7,509
-------- --------
Total shareholders' equity 25,874 22,437
-------- --------
$ 67,231 $ 57,096
======== ========
</TABLE>
The accompanying notes to interim combined financial statements are an integral
part of these interim consolidated balance sheets.
3
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
---------------------- ----------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 41,591 $ 35,705 $118,688 $ 99,808
Management fees 1,015 908 3,152 2,684
Interest 40 59 115 180
-------- -------- -------- --------
Net revenues 42,646 36,672 121,955 102,672
-------- -------- -------- --------
EXPENSES:
Operating 33,823 28,606 97,101 79,514
Lease 3,659 3,442 10,733 10,170
General and administrative 2,104 1,904 6,314 5,765
Depreciation and amortization 585 391 1,617 1,087
Interest 489 174 1,156 523
-------- -------- -------- --------
Total expenses 40,660 34,517 116,921 97,059
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,986 2,155 5,034 5,613
PROVISION FOR INCOME TAXES 715 776 1,812 2,021
-------- -------- -------- --------
NET INCOME $ 1,271 $ 1,379 $ 3,222 $ 3,592
-------- -------- -------- --------
AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 3) 5,319 5,359 5,314 5,330
======== ======== ======== ========
EARNINGS PER SHARE (Note 3) $ .24 $ .26 $ .61 $ .67
======== ======== ======== ========
</TABLE>
The accompanying notes to interim financial statements are an integral
part of these interim consolidated financial statements.
4
<PAGE> 5
ADVOCAT INC.
INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 3,222 $ 3,592
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 1,617 742
Provision for doubtful accounts 931 595
Equity earnings in joint ventures (35) (28)
Amortization of deferred credits (844) (561)
Deferred income taxes 800 400
Change in assets and liabilities:
Receivables (2,976) (5,040)
Inventories (48) (24)
Prepaid expenses and other (32) (1,134)
Trade accounts payable and accrued expenses 379 2,792
Current taxes 689 (211)
Other (156) (103)
------- -------
Net cash provided from operating activities 3,547 1,020
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,802) (2,391)
Issuance of mortgage receivable -0- (792)
Acquisitions, net (5,381) -0-
Pre-opening and other costs (193) (385)
Proceeds from TDLP transaction 71 64
Investment in joint venture (2) (254)
Distributions from joint ventures 22 10
------- -------
Net cash used in investing activities (7,285) (3,748)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations 6,044 137
Repayment of debt obligations (1,498) (329)
Advances to TDLP (939) (425)
Financing costs (36) -0-
Net proceeds from bank line of credit 1,245 960
Proceeds from sale of common stock 208 309
Advances (to) from lessor, net (190) 90
------- -------
Net cash provided from financing activities 4,834 742
------- -------
</TABLE>
(Continued)
5
<PAGE> 6
ADVOCAT INC.
INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
---- ----
<S> <C> <C>
INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,096 $(1,986)
CASH AND CASH EQUIVALENTS, beginning of period 1,076 3,136
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,172 $ 1,150
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 1,006 $ 573
======= =======
Cash payments of income taxes $ 461 $ 1,978
======= =======
</TABLE>
Advocat received benefit plan deposits and recorded benefit plan
liabilities of $132,000 and $128,000 in the nine month periods ended September
30, 1996 and 1995, respectively.
In the period ended September 30, 1996, Advocat assumed debt of $1,592,000
in connection with an acquisition.
The accompanying notes to interim financial statements are an integral
part of these interim consolidated financial statements.
6
<PAGE> 7
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 AND 1995
1. ORGANIZATION AND BACKGROUND:
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
commenced operations with an initial public offering of its common stock
on May 10, 1994. The Company is a provider of long-term care services
operating nursing homes and retirement centers in the United States and
Canada.
Advocat's operational history can be traced to February 1980 through
common senior management involved in different organizational structures.
As of September 30, 1996, the Company operates 86 facilities comprised of
64 nursing homes containing 7,340 licensed beds and 22 retirement centers
containing 2,520 units. The Company owns six nursing homes, acts as
lessee with respect to 38 of the nursing homes it operates, and acts as
manager with respect to the remaining 20 nursing homes. The Company owns
one retirement center, acts as lessee with respect to seven of the
retirement centers that it operates, and acts as manager of the remaining
14 retirement centers. Geographically, 53 of the Company's nursing homes
are located in the United States and 11 are located in Canada, while 19 of
the Company's 22 retirement centers are located in Canada. The Company's
facilities provide a range of health care services to their residents. In
addition to the nursing and social services usually provided in the
long-term care facilities, the Company offers a variety of rehabilitative,
nutritional, respiratory, and other specialized ancillary services. The
Company operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio,
South Carolina, Tennessee, Texas, West Virginia, and the Canadian
provinces of Ontario and British Columbia.
2. BASIS OF FINANCIAL STATEMENTS
The interim financial statements for the three and nine month periods ended
September 30, 1996 and 1995, 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 generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. In the opinion
of management of the Company, the accompanying interim combined financial
statements reflect all adjustments (consisting of only normally recurring
accruals) necessary to present fairly the financial position at September
30, 1996 and December 31, 1995 and the results of operations for the three
and nine month periods ended September 30, 1996 and 1995, and the cash
flows for the nine month periods ended September 30, 1996 and 1995. Certain
items have been reclassified in the 1995 financial statements to conform to
the 1996 presentation.
7
<PAGE> 8
The results of operations for the three and nine month periods ended
September 30, 1996 and 1995 are not necessarily indicative of the
operating results for the entire respective years. These interim
financial statements should be read in connection with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
3. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of the
Company's common and common equivalent shares outstanding that pertain to
the respective operations included in each period and is calculated as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares:
Average shares outstanding 5,316,000 5,288,000 5,299,000 5,265,000
Common stock equivalents --
Employee stock purchase plan 3,000 3,000 15,000 13,000
Options, conversion assumed
under the treasury stock
method -0- 68,000 -0- 52,000
---------- ---------- ---------- ----------
Common and common equivalent
shares outstanding 5,319,000 5,359,000 5,314,000 5,330,000
========== ========== ========== ==========
Net income $1,271,000 $1,379,000 $3,222,000 $3,592,000
========== ========== ========== ==========
Earnings per share $ .24 $ .26 $ .61 $ .67
========== ========== ========== ==========
</TABLE>
4. ACQUISITIONS
During the nine months ended September 30, 1996, the Company completed the
acquisition of three nursing facilities totaling 276 licensed beds. The
aggregate purchase price of $7.0 million was financed with cash of
approximately $400,000, debt issued in the amount of $5.0 million, and
assumed indebtedness of $1.6 million.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
commenced operations with an initial public offering of its common stock on
May 10, 1994. The Company is a provider of long-term care services
operating nursing homes and retirement centers in the United States and
Canada.
Advocat's operational history can be traced to February 1980 through common
senior management involved in different organizational structures. As of
September 30, 1996, the Company operates 86 facilities comprised of 64
nursing homes containing 7,340 licensed beds and 22 retirement centers
containing 2,520 units. The Company owns six nursing homes, acts as lessee
with respect to 38 of the nursing homes it operates, and acts as manager
with respect to the remaining 20 nursing homes. The Company owns one
retirement center, acts as lessee with respect to seven of the retirement
centers that it operates, and acts as manager of the remaining 14
retirement centers. Geographically, 53 of the Company's nursing homes are
located in the United States and 11 are located in Canada, while 19 of the
Company's 22 retirement centers are located in Canada. The Company's
facilities provide a range of health care services to their residents. In
addition to the nursing and social services usually provided in the
long-term care facilities, the Company offers a variety of rehabilitative,
nutritional, respiratory, and other specialized ancillary services. The
Company operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio,
South Carolina, Tennessee, Texas, West Virginia, and the Canadian provinces
of Ontario and British Columbia.
Basis of Financial Statements. The Company's patient revenues consist of
the fees charged to the residents of the Company's leased and owned nursing
homes and retirement centers. Management fee revenues consists of the fees
charged to the owners of the facilities managed by the Company. The
management fee revenues are based on the respective contractual terms,
which generally range from 3.5% to 6.0% of the net revenues of the managed
facilities. As a result, the level of management fees is affected
positively or negatively by the increase or decrease in the level of
occupancy or rates per patient day of the managed facilities. Management
fees also include consulting and development fee income. The Company's
operating expenses include the costs incurred in the nursing homes and
retirement centers leased and owned by the Company. The Company's general
and administrative expenses consist of the costs of the corporate office
and regional support functions, including the costs incurred in providing
management services to the nursing homes and retirement centers managed by
the Company. The Company's financial statements reflect the depreciation,
amortization and interest expenses of the facilities owned by the Company,
and the depreciation expense associated with equipment owned by the Company
and used in its leased facilities.
9
<PAGE> 10
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of income
data for the three and nine month periods ended September 30, 1996 and
1995, and set forth this data as a percentage of revenues for the same
periods.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 41,591 $ 35,705 $118,688 $ 99,808
Management fees 1,015 908 3,152 2,684
Interest 40 59 115 180
-------- -------- -------- --------
Net revenues 42,646 36,672 121,955 102,672
-------- -------- -------- --------
EXPENSES:
Operating 33,823 28,606 97,101 79,514
Lease 3,659 3,442 10,733 10,170
General and administrative 2,104 1,904 6,314 5,765
Depreciation and amortization 585 391 1,617 1,087
Interest 489 174 1,156 523
-------- -------- -------- --------
Total expenses 40,660 34,517 116,921 97,059
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 1,986 2,155 5,034 5,613
PROVISION FOR INCOME TAXES 715 776 1,812 2,021
-------- -------- -------- --------
NET INCOME $ 1,271 $ 1,379 $ 3,222 $ 3,592
======== ======== ======== ========
</TABLE>
Percentage of Net Revenues
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------- -----------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Patient revenues 97.5% 97.4% 97.3% 97.2%
Management fees 2.4 2.5 2.6 2.6
Interest 0.1 0.1 0.1 0.2
-------- -------- -------- --------
Net revenues 100.0% 100.0% 100.0% 100.0%
-------- -------- -------- --------
EXPENSES:
Operating 79.3 78.0 79.6 77.4
Lease 8.6 9.4 8.8 9.9
General and administrative 4.9 5.2 5.2 5.6
Depreciation and amortization 1.4 1.0 1.3 1.1
Interest 1.1 0.5 1.0 0.5
-------- -------- -------- --------
Total expenses 95.3 94.1 95.9 94.5
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4.7 5.9 4.1 5.5
PROVISION FOR INCOME TAXES 1.7 2.1 1.5 2.0
-------- -------- -------- --------
NET INCOME 3.0% 3.8% 2.6% 3.5%
======== ======== ======== ========
</TABLE>
10
<PAGE> 11
RISK FACTORS
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company hereby makes reference to items
set forth under the heading "Risk Factors" in the Company's Registration
Statement on Form S-1, as amended (Registration No. 33-76150). Such
cautionary statements identify important facts that could cause the
Company's actual results to differ materially from those projected in
forward looking statements made by or on behalf of the Company.
NEW HOMES
As of September 30, 1996, the Company operates 86 facilities comprised of
64 nursing homes containing 7,340 licensed beds and 22 retirement centers
containing 2,520 units. In comparison, as of September 30, 1995, the
Company operated 65 nursing homes containing 7,303 licensed beds and 20
retirement centers containing 2,335 units. Since December 1, 1995, the
Company has begun operating for its own account nine homes, three of which
it previously managed, totaling 772 nursing home beds and 109 retirement
center units. The operations of these facilities have a significant impact
on the comparability of the 1996 and 1995 periods. In the following
discussion, these homes are collectively referred to as the "New Homes." Of
the New Homes, 387 beds/units were counted in the portfolio at September
30, 1995.
THREE MONTHS ENDED SEPTEMBER 30 - 1996 COMPARED WITH 1995
Revenues. Net revenues increased to $42.6 million in 1996 from $36.6
million in 1995, an increase of $6.0 million, or 16.3%. Patient revenues
increased to $41.6 million in 1996 from $35.7 million in 1995, an increase
of $5.9 million, or 16.5%. Of this increase, $4.5 million is attributable
to the New Homes. Ancillary service revenues, prior to contractual
allowances, increased to $13.8 million in 1996 from $10.7 million in 1995,
an increase of $3.1 million or 28.9%. The increase in patient revenues is
also impacted by normal inflationary increases and a 2.3% decrease in
patient days among the homes operating for at least one year. Management
fee revenues increased by $107,000, or 11.8%. The increase is primarily due
to $100,000 in consulting fees earned with respect to the development of
one of the New Homes. The Company does not anticipate similar revenues
beyond the third quarter. The increase in ancillary revenues and the
completion in 1995 of the certification of all of the Company's nursing
home beds for participation under the Medicare program have resulted in
continued improvement in the quality mix of the Company's revenues year
over year. As a percent of net patient revenues, Medicare improved to 24.2%
in 1996 from 23.2% in 1995 while Medicaid increased slightly to 57.9% in
1996 from 57.7% in 1995. The increase in the Medicaid percentage was
impacted in part by the acquisition at the end of the second quarter of a
nursing facility that is not yet certified for participation under the
Medicare program.
Operating Expense. Operating expense increased to $33.0 million in 1996
from $28.6 million in 1995, an increase of $5.2 million, or 18.2%. As a
percent of net revenues, operating expense increased to 79.3% in 1996 from
78.0% in 1995. Of this increase, $3.7 million is attributable
11
<PAGE> 12
to the New Homes. The remaining increase is primarily attributable to an
increase in the provision of ancillary services to Medicare patients. As
ancillary services have increased, the supply costs related to the
provision of such services have increased correspondingly. In addition, the
Company's operating margin has declined due to reduced average census, cost
containment measures in Medicaid programs, difficulty in achieving expense
reductions as occupancy levels have declined in certain homes, an increase
in the provision for bad debts, and growth in the Company's medical supply
distribution business, which generates a lower operating margin. Wages
increased to $15.5 million in 1996 from $13.4 million in 1995, an increase
of $2.1 million, or 15.4%. Of this increase, $1.9 million is attributable
to the New Homes. The Company's wage increases are generally in line with
inflation. Among homes in operation for at least one year, the Company has
experienced increased general and other insurance costs of approximately
$270,000, which increases are expected to continue into 1997. While the
Company's operating expense as a percentage of net revenues has increased
year to year, there has been consistent improvement from the fourth quarter
of 1995 (80.3%) through the third quarter of 1996 (79.3%). This is
reflective of benefits realized from expense control programs implemented
in the Company's various operating regions. Additionally, the Company has
noted an improvement in occupancy in the latter part of the second quarter
and continuing into the fourth quarter. The improvements are encouraging,
but neither their continuance nor their positive impact to the Company's
operations can be assured.
Lease Expense. Lease expense increased to $3.6 million in 1996 from $3.4
million in 1995, an increase of $217,000, or 6.3%. Of this increase,
$203,000 is attributable to the New Homes, and the remainder is primarily
attributable to inflationary increases included in the terms of a majority
of the Company's operating leases.
General and Administrative Expense. General and administrative expense
increased to $2.1 million in 1996 from $1.9 million in 1995, an increase of
$201,000, or 10.5%. The increase is primarily attributable to the expense
of new positions added to service the Company's expanded operations. As a
percent of total net revenues, general and administrative expenses declined
from 5.2% in 1995 to 4.9% in 1996, reflective of spreading the Company's
overhead costs over a wider base of operations.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $585,000 in 1996 from $391,000 in 1995, an increase of
$194,000, or 50.0%. Approximately $171,000 of the increase is associated
with the New Homes.
Interest Expense. Interest expense increased to $489,000 in 1996 from
$174,000 in 1995, an increase of $315,000, or 180.6%. Approximately
$261,000 of the increase is attributable to indebtedness related to the New
Homes with the remainder of the increase primarily attributable to
increased borrowings under the Company's working capital line of credit.
Income Before Income Taxes; Net Income; Earnings Per Share. As a result of
the above, income before income taxes was $2.0 million in 1996 as compared
with $2.2 million in 1995, a decrease of $170,000, or 7.9%. The effective
combined federal, state and provincial income tax rate was
12
<PAGE> 13
36% in both 1996 and 1995. Net income was $1.3 million in 1996 as compared
with $1.4 million in 1995, a decrease of $109,000, and earnings per share
was $.24 was compared with $.26.
NINE MONTHS ENDED SEPTEMBER 30 - 1996 COMPARED WITH 1995
Revenues. Net revenues increased to $122.0 million in 1996 from $102.7
million in 1995, an increase of $19.3 million, or 18.8%. Patient revenues
increased to $118.7 million in 1996 from $99.8 million in 1995, an increase
of $18.9 million, or 18.9%. Of this increase, $10.0 million is attributable
to the New Homes. Ancillary service revenues, prior to contractual
allowances, increased to $43.0 million in 1996 from $26.5 million in 1995,
an increase of $16.5 million or 62.1%. The increase in patient revenues is
also impacted by normal inflationary increases and a 2.0% decrease in
patient days among the homes operating for at least one year. Management
fee revenues increased by $468,000, or 17.4%. The increase is primarily due
to $500,000 in consulting fees earned with respect to the development of
three of the New Homes. The Company does not anticipate similar revenues
beyond the third quarter. The increase in ancillary revenues and the
completion in 1995 of the certification of all of the Company's nursing
home beds for participation under the Medicare program have resulted in
continued improvement in the quality mix of the Company's revenues. As a
percent of net patient revenues, Medicare improved to 25.7% in 1996 from
20.1% in 1995 while Medicaid decreased to 56.2% in 1996 from 59.5% in 1995.
Operating Expense. Operating expense increased to $97.1 million in 1996
from $79.5 million in 1995, an increase of $17.6 million, or 22.1%. As a
percent of net revenues, operating expense increased to 79.6% in 1996 from
77.4% in 1995. Of this increase, $8.3 million is attributable to the New
Homes. The remaining increase is primarily attributable to an increase in
the provision of ancillary services to Medicare patients. As ancillary
services have increased, the supply costs related to the provision of such
services have increased correspondingly. In addition, the Company's
operating margin has declined due to reduced average census, cost
containment measures in Medicaid programs, difficulty in achieving expense
reductions as occupancy levels have declined in certain homes, an increase
in the provision for bad debts, and growth in the Company's medical supply
distribution business, which generates a lower operating margin. Wages
increased to $43.6 million in 1996 from $37.7 million in 1995, an increase
of $5.9 million, or 15.8%. Of this increase, $3.9 million is attributable
to the New Homes. A portion of the remaining increase in wages is offset by
reduced costs associated with less utilization of temporary nursing
services and reduced contracted housekeeping and laundry services. The
Company's wage increases are generally in line with inflation. Among homes
in operation for at least one year, the Company has experienced increased
general and other insurance costs of approximately $865,000, which
increases are expected to continue into 1997.
Lease Expense. Lease expense increased to $10.7 million in 1996 from $10.2
million in 1995, an increase of $563,000, or 5.5%. Of this increase,
$471,000 is attributable to the New Homes, and the remainder is primarily
attributable to inflationary adjustments required under the terms of a
majority of the Company's operating leases.
13
<PAGE> 14
General and Administrative Expense. General and administrative expense
increased to $6.3 million in 1996 from $5.8 million in 1995, an increase of
$549,000, or 9.5%. The increase is primarily attributable to the expense of
new positions added to service the Company's expanded operations. As a
percent of total net revenues, general and administrative expenses declined
from 5.6% in 1995 to 5.2% in 1996, reflective of spreading the Company's
overhead costs over a wider base of operations.
Depreciation and Amortization. Depreciation and amortization expenses
increased to $1.6 million in 1996 from $1.1 million in 1995, an increase of
$530,000, or 48.7%. Approximately $379,000 of the increase is associated
with the New Homes.
Interest Expense. Interest expense increased to $1.1 million in 1996 from
$523,000 in 1995, an increase of $633,000, or 121.0%. Approximately
$512,000 of the increase is attributable to indebtedness related to the New
Homes with the remainder of the increase primarily attributable to
increased borrowings under the Company's working capital line of credit.
Income Before Income Taxes; Net Income; Earnings Per Share. As a result of
the above, income before income taxes was $5.0 million in 1996 as compared
with $5.6 million in 1995, a decrease of $579,000, or 20.3%. The effective
combined federal, state and provincial income tax rate was 36% in both 1996
and 1995. Net income was $3.2 million in 1996 as compared with $3.6 million
in 1995, a decrease of $411,000, and earnings per share was $.61 as
compared with $.67.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company's working capital was $9.0 million with
a current ratio of 1.5 as compared with $6.7 million with a current ratio
of 1.4 at December 31, 1995.
Net cash provided from operating activities totaled $3.5 million and $1.0
million in 1996 and 1995, respectively. These amounts primarily represent
the cash flows from income plus depreciation and amortization along with
the changes in working capital components.
Net cash used in investing activities totaled $7.3 million and $3.7 million
in 1996 and 1995, respectively. These amounts primarily represent capital
expenditures for equipment for and improvements to the Company's existing
facilities, acquisitions in 1996, and, in 1995, a loan to a Canadian
partnership managed by the Company. The Company and its predecessor
business have used between $1.7 million and $3.0 million for capital
expenditures for facility improvements and equipment in each of the last
three calendar years. Such expenditures were financed through working
capital. The Company anticipates that such expenditures for its existing
facility operations will be approximately $2.4 million for the year ended
December 31, 1996.
Net cash provided from financing activities totaled $4.8 million and
$742,000 in 1996 and 1995, respectively. The net cash used in financing
activities primarily represents proceeds from and repayment of long-term
debt, advances to TDLP, net proceeds under the Company's bank line of
credit, and proceeds from issuance of common stock.
14
<PAGE> 15
At September 30, 1996, the Company had total debt outstanding of $22.4
million of which $13.0 million was principally mortgage debt bearing
interest at rates currently ranging from 8.0% to 11.0%. The Company's
remaining debt was drawn under its $17.5 million credit line. The credit
line had an initial term through May 1, 1996 and has been extended through
December 1, 1996. The credit line includes $10.0 million designated for use
in making acquisitions of long-term care facilities and $7.5 million for
working capital purposes. Through September 30, 1996, the Company had drawn
$6.0 million under its acquisition credit line. Amounts drawn under the
acquisition credit line may be converted to a three-year term loan
effective with the end of the initial term. At September 30, 1996, the
Company had drawn $2.4 million and had $5.1 million in letters of credit
outstanding under this working capital credit line. Amounts drawn under the
credit line bear interest, at the Company's option, at either the lead
bank's prime rate or 2% above the London Interbank Offered Rate ("LIBOR").
Amounts drawn under the credit line are secured generally by certain
accounts receivable and substantially all other assets of the Company as
well as by any assets acquired with funds drawn under the acquisition
credit line. The Company has agreed to comply with certain covenants,
including financial covenants with respect to maintaining current ratio,
net working capital, coverage of fixed charges, tangible net worth, and
earnings levels as defined in the line of credit agreement. Additionally,
the Company may not declare dividends during the term of the agreement.
In December 1995, the Company received a temporary increase (the
"Overline") in the maximum amount available to be drawn under the line of
credit facility. The Company has the ability to draw additional working
capital up to $2.6 million through December 1, 1996. As of September 30,
1996, the Company had drawn $0.9 million under the Overline. The amount
drawn under the Over- line was reduced by approximately $500,000 through
November 12, 1996.
The Company has secured a commitment for a new credit facility and plans to
exercise its privileges thereunder to restructure and consolidate its
indebtedness during the fourth quarter. The new credit facility, which will
have a term of three years, will be for a total of $50 million and will be
divided into two components: a $10 million revolving credit facility and a
$40 million acquisition line of credit. Funds drawn under the revolving
credit facility will be subject to a defined borrowing base and will bear
interest (at the Company's option) of either prime or LIBOR plus 2.5%.
Funds drawn under the acquisition line will have defined limits in relation
to the appraised values (generally 85%) and debt service ratios of the
facilities financed thereunder. These components will also determine the
applicable interest rate, which will vary (at the Company's option) in
relation to either the prime rate or LIBOR. Amounts drawn under the $50
million credit facility will be secured generally by certain accounts
receivable and substantially all other assets of the Company as well as by
any assets acquired with funds drawn under the acquisition credit line. The
Company will agree to comply with certain covenants, including financial
covenants with respect to maintaining current ratio, net working capital,
coverage of fixed charges, tangible net worth, and earnings levels as
defined in the credit facility agreements.
During the quarter, the Company closed on replacement financing with
respect to a Canadian retirement facility purchased in December 1995. The
proceeds were approximately $1.1 million bearing interest of 7.89%
repayable over a thirty-year amortization with a balloon maturity in 2006.
15
<PAGE> 16
Based upon the operations of the Company, management believes that
available cash and funds generated from operations, as well as amounts
available through its banking relationships, will be sufficient for the
Company to satisfy its capital expenditures, working capital, and debt
requirements for the next 12 months. The Company intends to satisfy the
capital requirements for its acquisition activities from among various
means, including borrowings from commercial lenders, seller-financed debt,
issuance of additional debt, financing obtained from sale and leaseback
transaction with real estate investment trusts and, to the extent
available, internally generated cash from operations. On a longer-term
basis, management believes the Company will be able to satisfy the
principal repayment requirements on its indebtedness with a combination of
funds generated from operations and from refinancings with existing or new
commercial lenders.
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from
Medicare and other third-party revenue sources. The Company's 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 expense). In
that regard, accounts receivable can have a significant impact on the
Company's liquidity. Continued efforts by governmental and third-party
payors to contain or reduce the acceleration of costs by monitoring
reimbursement rates, increasing medical review of bills for services or
negotiating reduced contract rates, as well as any significant increase in
the Company's proportion of Medicare and Medicaid patients, could adversely
affect the Company's liquidity and results of operations.
Accounts receivable attributable to the provision of patient and resident
services at September 30, 1996 and December 31, 1995, totaled $22.5 million
and $20.2 million, respectively, representing approximately 50 and 51 days,
respectively, in accounts receivable. Accounts receivable from the
provision of management services at September 30, 1996 and December 31,
1995, totaled $0.6 million and $0.7 million, respectively, representing
approximately 54 and 69 days, respectively, in accounts receivable.
The Company continually evaluates the adequacy of its bad debt reserves
based on patient mix trends, agings of older balances, payment terms and
delays with regard to third-party payors, collateral and deposit resources,
as well as other factors. The Company has implemented additional procedures
to strengthen its collection efforts and reduce the incidence of
uncollectible accounts.
FOREIGN CURRENCY TRANSLATION
The Company has obtained its financing primarily in U.S. dollars; however,
it will incur revenues and expenses in Canadian dollars with respect to
Canadian management activities and operations of the Company's Canadian
facilities. Therefore, if the currency exchange rate fluctuates, the
Company may experience currency translation gains and losses with respect
to the operations of these activities and the capital resources dedicated
to their support. While such currency exchange rate fluctuations have not
been material to the Company in the past, there can be no assurance that
the Company will not be adversely affected by shifts in the currency
exchange rates in the future.
16
<PAGE> 17
In 1995, the exchange rate has averaged 73.1% (United States equivalent of
Canadian dollars), and it has recently improved to 75.2% (as of November 8,
1996).
MINIMUM WAGE
The Federal minimum wage increased by 50c. effective October 1, 1996; an
additional 40c. increase is scheduled for September 1, 1997. The Company
has evaluated the impact of these increases and expects no material
increase in its costs.
INFLATION
Management does not believe that the operations of the Company have been
materially affected by inflation. The Company expects salary and wage
increases for its skilled staff to continue to be higher than average
salary and wage increases, as is common in the health care industry. To
date, these increases as well as normal inflationary increases in other
operating expenses have been adequately covered by revenue increases.
However, it is likely that states will continue to seek ways to control the
growth in Medicaid program rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." The Company adopted SFAS No. 121 in the first quarter of 1996 and the
adoption did not have a material effect on the Company's financial
position. Three facilities noted as receiving special attention in the
Company's Annual Report on Form 10-K showed improvement in operations in
the nine months ended September 30, 1996 as compared to the three months
ended December 31, 1995.
The FASB also issued SFAS No. 123, "Accounting for Stock-Based
Compensation" in 1995. This statement requires new disclosures in the notes
to the financial statements about stock-based compensation plans based on
the fair value of equity instruments granted. Companies may also base the
recognition of compensation cost for instruments issued under stock-based
compensation plans on these fair values. The Company will adopt the
disclosure requirements of SFAS No. 123 in 1996.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
The Registrant has not filed any reports on Form 8-K during the quarter for
which this report is filed.
The exhibits filed as part of this report on Form 10-Q are listed in the
Exhibit Index immediately following the signature page.
17
<PAGE> 18
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.
November 13, 1996
By: /s/Mary Margaret Hamlett
----------------------------------------------
Mary Margaret Hamlett
Principal Financial Officer and Chief
Accounting Officer and An Officer Duly
Authorized to Sign on Behalf of the Registrant
18
<PAGE> 19
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference of Exhibit 3.1 to the Company's Registration Statement No.
33-76150 on Form S-1).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No. 33-76150 on Form S-1).
3.3 Amendment to Articles of Incorporation dated March 23, 1995
(incorporated by reference to Exhibit A of Exhibit 1 to Form 8-A
filed March 30, 1995).
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 Rights Agreement dated March 13, 1995, between the Company and Third
National Bank in Nashville (incorporated by reference to Exhibit 1
to the Company's Current Report on Form 8-K dated March 13, 1995).
4.3 Summary of Shareholder Rights Plan adopted March 13, 1995
(incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A
filed March 30, 1995).
4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated
by reference to Exhibit 1 to Form 8-A filed March 30, 1995).
10.1 Seventh Amendment to Credit and Security Agreement dated September
1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and
the Subsidiaries (as defined).
10.2 Eighth Amendment to Credit and Security Agreement dated November 1,
1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the
Subsidiaries (as defined).
21 Subsidiaries of the Registrant (incorporated by reference to Exhibit
21 to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994).
27 Financial Data Schedule (for SEC use only).
<PAGE> 1
SEVENTH AMENDMENT TO CREDIT
AND SECURITY AGREEMENT
This Seventh Amendment to Credit and Security Agreement, made and entered
into as of the 1st day of September, 1996, by and between NationsBank of
Tennessee, N.A., a national banking association (the "Bank"), Advocat Inc., a
Delaware corporation ("Borrower"), and the Subsidiaries, as defined in the
Credit and Security Agreement by and between the Bank, the Borrower and the
Subsidiaries, dated as of October 12, 1994, as amended from time to time (the
"Loan Agreement"). Capitalized terms not otherwise described herein shall have
the meanings ascribed to such terms in the Loan Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Loan Agreement, the Bank committed
to loan to the Borrower and the Subsidiaries amounts not to exceed $17,500,000,
including the $7,500,000 Line, which matures on September 1, 1996, and the
$10,000,000 Line which converts to a term facility on September 1, 1996; and,
WHEREAS, by Sixth Amendment to Credit and Security Agreement dated as of
June 28, 1996 (the "Sixth Amendment"), Bank agreed to permit Borrower to
continue to request and receive funds under Credit Facility in excess of the
amount available under the Credit Facility, calculated in accordance with the
Borrowing Base, pending the closing of the refinancing of the TDLP First
Mortgage Indebtedness; and,
WHEREAS, Bank agreed to permit such overadvances under the Credit Facility
through September 1, 1996, subject to the terms and conditions contained in the
Sixth Amendment; and,
WHEREAS, Borrower has represented to Bank that Borrower intends to close
on or before November 1, 1996, (i) the refinancing of the TDLP First Mortgage
Indebtedness with Bank, and (ii) a credit facility with First American National
Bank and GMAC - Health Care which will pay off the Credit Facility (the "First
American Financing"); and,
WHEREAS, the Borrower has requested (i) that the maturity date of the
$7,500,000 Line be extended from September 1, 1996, to November 1, 1996 (ii)
that the date on which the right of Borrower to request funds under the
$10,000,000 Line be extended from September 1, 1996, to November 1, 1996, and
(iii) that the Termination Date, as defined in Section 2 of the Third Amendment
to Credit and Security Agreement dated of December 1, 1995 (the "Third
Amendment") be extended through November 1, 1996; and,
WHEREAS, based on the representations of Borrower regarding the
refinancing of the TDLP First Mortgage Indebtedness, and the First American
Financing, Bank has agreed to extend the Credit Facility through November 1,
1996; and,
-1-
<PAGE> 2
WHEREAS, the parties desire to execute this Seventh Amendment to extend
the maturity date of the $7,500,000 Line and the Termination Date through
November 1, 1996, and to set forth certain other agreements between the
parties, as more particularly described herein,
NOW, THEREFORE, in consideration of the foregoing premises, and other good
and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the Bank, the Borrower and the Subsidiaries hereby agree
as follows:
1. Extension of Maturity Date - $7,500,000 Line. The maturity date of
the $7,500,000 Line is hereby extended from September 1, 1996, to November 1,
1996. Borrower agrees to execute a renewal note and such other documents as
Bank may reasonably request to evidence such extension of the maturity date.
2. Extension of Revolving Period - $10,000,000 Line. The date through
which the Borrower may request funds under the $10,000,000 Line, as set forth
in Section 2.1(b) of the Loan Agreement, is hereby extended from September 1,
1996, to November 1, 1996. In addition, the date on which the monthly
amortization payments due under the $10,000,000 Line commence is hereby
extended from October 1, 1996, to December 1, 1996.
3. Extension of Termination Date. Section 2 of the Third Amendment (as
amended) is hereby modified to delete the reference to September 1, 1996, and
substitute in its place, November 1, 1996, it being the intent of the parties
that the Termination Date shall be the earlier of (i) the date on which the
refinancing of the TDLP First Mortgage Indebtedness is completed, or (ii)
November 1, 1996. Overadvances, if any, shall continue to be available under
the $10,000,000 Line, subject to the provisions of Section 2 of the Third
Amendment.
4. First American Financing. Borrower represents to Bank that Borrower
has received a commitment from First American for the First American Financing
and anticipates closing the facility on or before November 1, 1996.
5. Joinder of Guarantors. The Guarantors, by executing this Amendment,
hereby confirm that the terms and conditions of the Guaranty Agreements
executed by each of the Guarantors dated as of October 12, 1994, continue in
full force and effect, and the Obligations (as defined in the Guaranty
Agreements) shall include any amounts advanced as an Overadvance, pursuant to
the terms of the Loan Agreement. This Amendment shall be deemed to be an
amendment to the Guaranty Agreements, to the extent required, to confirm that
the Guarantors' obligations under the Guaranty Agreements include, without
limitation, any Overadvance funded pursuant to the terms of the Loan Agreement.
6. No Default. The Borrower and the Subsidiaries hereby confirm that no
Event of Default currently exists, and, to the best of the Borrower's and the
Subsidiaries' knowledge, no condition presently exists or is anticipated which,
with the passage of time, the giving of notice, or both, would constitute an
Event of Default.
-2-
<PAGE> 3
7. Ratification. The Borrower and the Subsidiaries hereby restate and
ratify the terms and conditions of the Loan Agreement as of the date hereof, and
each acknowledge that the terms and conditions of the Loan Agreement, as amended
hereby, remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Seventh
Amendment as of the day and date first above written.
NATIONSBANK OF TENNESSEE, ADVOCAT INC., A DELAWARE CORPORATION
N.A.
By: /s/Roy Haisley By: /s/Mary Margaret Hamlett
- ------------------------- ------------------------------------
Roy Haisley
Vice President Title: Executive Vice President
------------------------------------
"BANK" "BORROWER"
DIVERSICARE LEASING CORP., A
TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DIVERSICARE MANAGEMENT SERVICES
CO., A TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
ADVOCAT ANCILLARY SERVICES, A
TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
-3-
<PAGE> 4
DIVERSICARE CANADA
MANAGEMENT SERVICES CO.,
A CANADA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DIVERSICARE GENERAL PARTNER, INC.,
A TEXAS CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
FIRST AMERICAN HEALTH CARE, INC.,
AN ALABAMA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DAUPHIN HEALTH CARE FACILITY,
INC., AN ALABAMA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
-4-
<PAGE> 1
EIGHTH AMENDMENT TO CREDIT
AND SECURITY AGREEMENT
This Eighth Amendment to Credit and Security Agreement, made and entered
into as of the 1st day of November, 1996, by and between NationsBank of
Tennessee, N.A., a national banking association (the "Bank"), Advocat Inc., a
Delaware corporation ("Borrower"), and the Subsidiaries, as defined in the
Credit and Security Agreement by and between the Bank, the Borrower and the
Subsidiaries, dated as of October 12, 1994, as amended from time to time (the
"Loan Agreement"). Capitalized terms not otherwise described herein shall have
the meanings ascribed to such terms in the Loan Agreement.
W I T N E S S E T H:
WHEREAS, pursuant to the terms of the Loan Agreement, the Bank committed
to loan to the Borrower and the Subsidiaries amounts not to exceed $17,500,000,
including the $7,500,000 Line, which matures on November 1, 1996, and the
$10,000,000 Line which converts to a term facility on November 1, 1996; and,
WHEREAS, by Seventh Amendment to Credit and Security Agreement dated as of
June 28, 1996 (the "Seventh Amendment"), Bank agreed to permit Borrower to
continue to request and receive funds under Credit Facility in excess of the
amount available under the Credit Facility, calculated in accordance with the
Borrowing Base, pending the closing of the refinancing of the TDLP First
Mortgage Indebtedness; and,
WHEREAS, Bank agreed to permit such overadvances under the Credit Facility
through November 1, 1996, subject to the terms and conditions contained in the
Sixth Amendment; and,
WHEREAS, Borrower has represented to Bank that Borrower intends to close
on or before December 1, 1996, (i) the refinancing of the TDLP First Mortgage
Indebtedness with Bank, and (ii) a credit facility with First American National
Bank and GMAC - Health Care which will pay off the Credit Facility (the "First
American Financing"); and,
WHEREAS, the Borrower has requested (i) that the maturity date of the
$7,500,000 Line be extended from November 1, 1996, to December 1, 1996 (ii)
that the date on which the right of Borrower to request funds under the
$10,000,000 Line be extended from November 1, 1996, to December 1, 1996, and
(iii) that the Termination Date, as defined in Section 2 of the Third Amendment
to Credit and Security Agreement dated of December 1, 1995 (the "Third
Amendment") be extended through December 1, 1996; and,
WHEREAS, based on the representations of Borrower regarding the
refinancing of the TDLP First Mortgage Indebtedness, and the First American
Financing, Bank has agreed to extend the Credit Facility through December 1,
1996; and,
-1-
<PAGE> 2
WHEREAS, the parties desire to execute this Eighth Amendment to extend the
maturity date of the $7,500,000 Line and the Termination Date through December
1, 1996, and to set forth certain other agreements between the parties, as more
particularly described herein,
NOW, THEREFORE, in consideration of the foregoing premises, and other good
and valuable consideration, the receipt and legal sufficiency of which is
hereby acknowledged, the Bank, the Borrower and the Subsidiaries hereby agree
as follows:
1. Extension of Maturity Date - $7,500,000 Line. The maturity date of
the $7,500,000 Line is hereby extended from November 1, 1996, to December 1,
1996. Borrower agrees to execute a renewal note and such other documents as
Bank may reasonably request to evidence such extension of the maturity date.
2. Extension of Revolving Period - $10,000,000 Line. The date through
which the Borrower may request funds under the $10,000,000 Line, as set forth
in Section 2.1(b) of the Loan Agreement, is hereby extended from November 1,
1996, to December 1, 1996. In addition, the date on which the monthly
amortization payments due under the $10,000,000 Line commence is hereby
extended from December 1, 1996, to January 1, 1997.
3. Extension of Termination Date. Section 2 of the Third Amendment (as
amended) is hereby modified to delete the reference to November 1, 1996, and
substitute in its place, December 1, 1996, it being the intent of the parties
that the Termination Date shall be the earlier of (i) the date on which the
refinancing of the TDLP First Mortgage Indebtedness is completed, or (ii)
December 1, 1996. Overadvances, if any, shall continue to be available under
the $10,000,000 Line, subject to the provisions of Section 2 of the Third
Amendment.
4. First American Financing. Borrower represents to Bank that Borrower
has received a commitment from First American for the First American Financing
and anticipates closing the facility on or before November 15, 1996.
5. Joinder of Guarantors. The Guarantors, by executing this Amendment,
hereby confirm that the terms and conditions of the Guaranty Agreements
executed by each of the Guarantors dated as of October 12, 1994, continue in
full force and effect, and the Obligations (as defined in the Guaranty
Agreements) shall include any amounts advanced as an Overadvance, pursuant to
the terms of the Loan Agreement. This Amendment shall be deemed to be an
amendment to the Guaranty Agreements, to the extent required, to confirm that
the Guarantors' obligations under the Guaranty Agreements include, without
limitation, any Overadvance funded pursuant to the terms of the Loan Agreement.
6. No Default. The Borrower and the Subsidiaries hereby confirm that no
Event of Default currently exists, and, to the best of the Borrower's and the
Subsidiaries' knowledge, no condition presently exists or is anticipated which,
with the passage of time, the giving of notice, or both, would constitute an
Event of Default.
-2-
<PAGE> 3
7. Ratification. The Borrower and the Subsidiaries hereby restate and
ratify the terms and conditions of the Loan Agreement as of the date hereof, and
each acknowledge that the terms and conditions of the Loan Agreement, as amended
hereby, remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Seventh
Amendment as of the day and date first above written.
NATIONSBANK OF TENNESSEE, ADVOCAT INC., A DELAWARE CORPORATION
N.A.
By: /s/Anne Jenkins By: /s/Mary Margaret Hamlett
- -------------------------------- ------------------------------------
Anne Jenkins, Banking Officer
Vice President Title: Executive Vice President
------------------------------------
"BANK" "BORROWER"
DIVERSICARE LEASING CORP., A
TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DIVERSICARE MANAGEMENT SERVICES
CO., A TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
ADVOCAT ANCILLARY SERVICES, A
TENNESSEE CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
-3-
<PAGE> 4
DIVERSICARE CANADA
MANAGEMENT SERVICES CO.,
A CANADA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DIVERSICARE GENERAL PARTNER, INC.,
A TEXAS CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
FIRST AMERICAN HEALTH CARE, INC.,
AN ALABAMA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
DAUPHIN HEALTH CARE FACILITY,
INC., AN ALABAMA CORPORATION
By: /s/Mary Margaret Hamlett
------------------------------------
Title: Executive Vice President
------------------------------------
-4-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ADVOCAT INC., FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN THE FORM 10-Q OF ADVOCAT INC., FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 1996.
</LEGEND>
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1,000
<CASH> 2,172
<SECURITIES> 0
<RECEIVABLES> 23,828
<ALLOWANCES> 1,893
<INVENTORY> 557
<CURRENT-ASSETS> 27,111
<PP&E> 38,765
<DEPRECIATION> (9,154)
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 18,112
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 25,821
<TOTAL-LIABILITY-AND-EQUITY> 67,231
<SALES> 0
<TOTAL-REVENUES> 121,955
<CGS> 0
<TOTAL-COSTS> 116,921
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 931
<INTEREST-EXPENSE> 1,156
<INCOME-PRETAX> 5,034
<INCOME-TAX> 1,812
<INCOME-CONTINUING> 3,222
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,222
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
</TABLE>
