<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Date of Report (Date of earliest event reported):
October 2, 1997
ADVOCAT INC.
(Exact name of registrant as specified in its charter)
Delaware 1-12996 62-1559667
- ---------------- ------------ ----------------
(State of other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification
incorporation) Number)
277 Mallory Station Road, Suite 130 Franklin, Tennessee 37067
-------------------------------------------------------------
(Address of principal executive offices)
(615) 771-7575
--------------
(Registrant's telephone number, including area code)
Not applicable
--------------
(Former name, former address and former fiscal year,
if changed since last report)
- --------------------------------------------------------------------------------
<PAGE> 2
Those portions of Item 7 (Financial Statements and Exhibits) of the Current
Report on Form 8-K filed on October 16, 1997, are amended and restated in their
entirety as follows:
<TABLE>
<CAPTION>
Page
Number:
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(b) Financial Statements of Business Acquired
<S> <C> <C> <C>
(i) Audited combined balance sheets of Pierce Management Group as of
September 30, 1995 and 1996, and the related audited combined
statements of operations and cash flows for the nine months ended
September 30, 1995 and the year ended September 30, 1996 5
(ii) Unaudited combined balance sheet of Pierce Management Group as of
June 30, 1997, and the related unaudited combined statements of
operations and cash flows for the nine months ended June 30, 1996
and 1997 5
(b) Pro Forma Financial Information
(i) Introductory information. 15
(ii) Unaudited pro forma selected statement of income data of Advocat Inc. for
the year ended December 31, 1996 and the six months ended June 30, 1997 16
(iii) Unaudited pro forma selected balance sheet data of Advocat Inc. as of June
30, 1997 18
</TABLE>
2
<PAGE> 3
Item 7. Financial Statements and Exhibits.
<TABLE>
<CAPTION>
Page
Number:
-------
<S> <C> <C>
(a) Financial Statements of Business Acquired
(i) Audited combined balance sheets of Pierce Management Group as of
September 30, 1996 and 1997, and the related audited combined
statements of operations and cash flows for the nine months ended
September 30, 1995 and the year ended September 30, 1996. 5
(ii) Unaudited combined balance sheet of Pierce Management Group as of
June 30, 1996, and the related unaudited combined statements of
operations and cash flows for the nine months ended June 30, 1996
and 1997. 5
(b) Pro Forma Financial Information
(i) Introductory information 15
(ii) Unaudited pro forma selected statement of income data of Advocat
Inc. for the year ended December 31, 1996 and the six months
ended June 30, 1997. 16
(iii) Unaudited pro forma selected balance sheet data of Advocat Inc. as
of June 30, 1997. 18
(c) Exhibits. The exhibits filed as a part of this Report are listed in the
Index to Exhibits immediately following the signature page.
</TABLE>
3
<PAGE> 4
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pierce Management Group:
We have audited the accompanying combined balance sheets of PIERCE
MANAGEMENT GROUP (See Note 1) as of September 30, 1995 and 1996, and the related
combined statements of operations and cash flows for the nine months ended
September 30, 1995 and the year ended September 30, 1996. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pierce Management Group as
of September 30, 1995 and 1996, and the results of their operations and their
cash flows for the nine months ended September 30, 1995 and the year ended
September 30, 1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Nashville, Tennessee
July 24, 1997
4
<PAGE> 5
PIERCE MANAGEMENT GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------- JUNE 30,
1995 1996 1997
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 925,649 $ 721,900 $ 588,903
Resident accounts receivable....................... 711,064 342,141 216,252
Other accounts receivable.......................... 9,800 9,000 9,400
Accounts receivable -- officers.................... 22,955 41,809 32,382
Inventory.......................................... 57,683 52,442 53,426
Prepaid expenses................................... 28,650 10,501 5,830
------------ ------------ ------------
Total current assets....................... 1,755,801 1,177,793 906,193
------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Land............................................... 1,582,495 1,576,345 1,576,345
Buildings.......................................... 40,084,767 40,903,219 40,903,219
Equipment, furniture and fixtures.................. 4,774,422 5,042,221 5,049,986
Vehicles........................................... 1,128,120 1,241,923 1,241,923
Leasehold improvements............................. 483,546 483,546 483,546
------------ ------------ ------------
48,053,350 49,247,254 49,255,019
Less accumulated depreciation...................... (10,690,902) (13,307,056) (14,930,568)
------------ ------------ ------------
Net property and equipment................. 37,362,448 35,940,198 34,324,451
------------ ------------ ------------
OTHER ASSETS:
Deferred financing costs, net...................... 188,109 579,142 534,142
Other assets....................................... 47,328 24,946 46,353
------------ ------------ ------------
Total other assets......................... 235,437 604,088 580,495
------------ ------------ ------------
TOTAL ASSETS......................................... $ 39,353,686 $ 37,722,079 $ 35,811,139
============ ============ ============
LIABILITIES AND INVESTMENT
CURRENT LIABILITIES:
Notes payable...................................... $ -- $ 238,000 $ 338,135
Notes payable -- officers.......................... 36,319 90,567 90,567
Current maturities of long-term debt............... 3,753,751 1,085,307 1,465,374
Accounts payable................................... 1,200,415 526,706 639,639
Accrued payroll.................................... 551,110 629,943 592,076
Other accrued expenses............................. 566,777 665,258 461,863
------------ ------------ ------------
Total current liabilities.................. 6,108,372 3,235,781 3,587,654
------------ ------------ ------------
LONG-TERM DEBT:
Long-term debt, net of current maturities.......... 31,985,697 40,453,882 41,405,504
------------ ------------ ------------
INVESTMENT (DEFICIT) BY PIERCE MANAGEMENT GROUP...... 1,259,617 (5,967,584) (9,182,019)
------------ ------------ ------------
TOTAL LIABILITIES AND INVESTMENT BY PIERCE MANAGEMENT
GROUP.............................................. $ 39,353,686 $ 37,722,079 $ 35,811,139
============ ============ ============
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these balance sheets.
5
<PAGE> 6
PIERCE MANAGEMENT GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS ENDED
ENDED YEAR ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, -------------------------
1995 1996 1996 1997
------------- ------------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE:
Net resident revenue...................... $17,811,910 $25,752,879 $19,036,363 $18,996,830
Other revenue............................. 139,752 373,387 310,421 106,603
----------- ----------- ----------- -----------
Total revenue..................... 17,951,662 26,126,266 19,346,784 19,103,433
----------- ----------- ----------- -----------
EXPENSES:
Operating................................. 11,016,709 16,177,071 11,938,578 11,646,331
General and administrative................ 1,084,852 1,663,597 1,255,856 1,151,390
Rent...................................... 580,137 799,039 518,976 603,689
Depreciation and amortization............. 1,494,009 2,296,331 1,690,909 1,720,089
Interest.................................. 2,273,940 3,093,027 2,295,870 2,506,329
----------- ----------- ----------- -----------
Total expenses.................... 16,449,647 24,029,065 17,700,189 17,627,828
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES.................. $ 1,502,015 $ 2,097,201 $ 1,646,595 $ 1,475,605
=========== =========== =========== ===========
PRO FORMA NET INCOME
(UNAUDITED, See Note 1):
Income before income taxes................ $ 1,502,015 $ 2,097,201 $ 1,646,595 $ 1,475,605
Pro forma provision for income taxes ..... 600,806 838,880 658,638 590,242
----------- ----------- ----------- -----------
Pro forma net income...................... $ 901,209 $ 1,258,321 $ 987,957 $ 885,363
=========== =========== =========== ===========
</TABLE>
The accompanying notes to combined financial statements are an integral part of
these statements.
6
<PAGE> 7
PIERCE MANAGEMENT GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED NINE MONTHS ENDED JUNE 30,
SEPTEMBER 30, SEPTEMBER 30, ---------------------------
1995 1996 1996 1997
------------- ------------- ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before income taxes................ $ 1,502,015 $ 2,097,201 $ 1,646,595 $ 1,475,605
Adjustments to reconcile income before
income taxes to cash provided by
operating activities:
Amortization and depreciation.......... 1,494,009 2,296,331 1,690,909 1,720,089
Changes in operating assets and
liabilities:
Accounts receivable.................. (859,877) 369,723 275,258 125,489
Accounts receivable -- officer....... (22,955) (18,854) (9,427) 9,427
Other assets......................... (86,326) 45,772 (524,358) (17,720)
Other liabilities.................... 1,323,392 (496,395) (597,963) (128,329)
----------- ----------- ----------- -----------
Total adjustments................. 1,848,243 2,196,577 834,419 1,708,956
----------- ----------- ----------- -----------
Net cash provided by operating
activities...................... 3,350,258 4,293,778 2,481,014 3,184,561
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....... (106,119) (781,123) (585,843) (7,765)
----------- ----------- ----------- -----------
Net cash used by investing
activities...................... (106,119) (781,123) (585,843) (7,765)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Financing costs........................... -- (483,991) -- (51,577)
Proceeds from issuance of long-term
debt................................... 4,705,672 7,726,178 7,726,178 2,121,115
Proceeds from loans from officers......... 36,319 54,248 27,124 --
Principal payments on long-term debt...... (4,616,246) (1,688,437) (1,266,329) (689,291)
Return of investment to Pierce Management
Group.................................. (2,621,364) (9,324,402) (8,482,368) (4,690,040)
----------- ----------- ----------- -----------
Net cash used by financing
activities...................... (2,495,619) (3,716,404) (1,995,395) (3,309,793)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 748,520 (203,749) (100,224) (132,997)
CASH AND CASH EQUIVALENTS, beginning of
year...................................... 177,129 925,649 925,649 721,900
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, end of year...... $ 925,649 $ 721,900 $ 825,425 $ 588,903
=========== =========== =========== ===========
SUPPLEMENTAL INFORMATION:
Cash payments of interest................. $ 2,246,288 $ 3,143,095 $ 2,328,397 $ 2,535,051
=========== =========== =========== ===========
</TABLE>
NON-CASH TRANSACTIONS:
The Group assumed debt of $361,962, $180,010, $180,010 (unaudited) and $0
(unaudited), respectively, in connection with the acquisition of furniture,
fixtures and vehicles in the nine months ended September 30, 1995, the year
ended September 30, 1996 and the nine months ended June 30, 1996 and 1997.
Certain assets with a net book value totaling $10,487,613 were contributed
to the Group to form a new partnership in 1995.
7
<PAGE> 8
The Group refinanced notes payable of $0, $31,912,940, $31,912,940
(unaudited), and $1,146,708 (unaudited), respectively, during the nine months
ended September 30, 1995, the year ended September 30, 1996 and the nine months
ended June 30, 1996 and 1997.
The Group has not made payments of income taxes because the entities were
not taxed at the corporate level and Pierce did not require the entity to pay
income taxes as if the Group were a separate entity. If the Group had been a
separate, tax paying entity, the current income taxes which would have been paid
to Pierce totaled $600,806, $838,880, $658,638 (unaudited) and $590,242
(unaudited), respectively, for the nine months ended September 30, 1995, the
year ended September 30, 1996 and the nine months ended June 30, 1996 and 1997.
The accompanying notes to combined financial statements are an integral
part of these statements.
8
<PAGE> 9
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995 AND 1996
1. ORGANIZATION AND BACKGROUND
The combined financial statements include the accounts of Pierce Management
Group (the "Group"). The Group has been operated by entities owned or controlled
by Mr. A. Steve Pierce and members of his family (collectively "Pierce"). The
Group includes Pierce operations that are subject to a transaction with Advocat
Inc. ("Advocat"), whereby Advocat will acquire certain assets and liabilities of
this business from Pierce pursuant to an asset purchase agreement and will lease
certain facilities pursuant to a master lease agreement. The accompanying
combined financial statements reflect the financial position and results of
operations and cash flows of the business to be acquired by Advocat. See Note
10.
The accompanying combined financial statements of the Group reflect the
operations on a historical cost basis under the Pierce ownership structure. The
historical ownership of the Group includes S corporations, limited liability
corporations and partnerships. The accompanying combined statements of
operations are presented before income taxes. On a supplemental basis, unaudited
pro forma net income has been presented using an assumed corporate tax rate of
40%.
The Group is engaged primarily in providing assisted living services to the
elderly in a number of assisted living centers operated in North Carolina. The
Group generally consists of operating entities that provide services to elderly
residents, ownership entities that own and lease assisted living centers to the
operating entities and a management company that provides management services to
the operating and ownership entities. In addition, the Group includes a company
that sells supplies and materials to the operating entities. The operating
entities are licensed by the state of North Carolina. Payment for the care of
elderly residents and others is received from third party payors (e.g,
State/County Special Assistance for adult programs, Medicaid, insurance
companies).
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF COMBINATION
Transactions between entities or operations included in the Group have been
eliminated. See Note 6 for transactions between the Group and other Pierce
entities.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash on deposit with banks and all highly
liquid investments with maturities of three months or less.
NET RESIDENT REVENUE
Net resident revenue represents the net realizable amounts from patients,
third-party payors and others for services rendered.
RESIDENT ACCOUNTS RECEIVABLE
Resident accounts receivable represent amounts due from state agencies.
Amounts due are fixed and have historically been paid in full by the agencies.
INVENTORIES
Inventories consist primarily of food and kitchen supplies and are stated
at the lower of cost or net realizable value, with cost being determined
principally on the first-in, first-out basis.
9
<PAGE> 10
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
INCOME TAXES
The Group is comprised of several different legal entities. The Group
operations are owned by entities that are not taxed at the corporate level
(e.g., the owners, (shareholders, members, partners) are taxed instead of the
entity). The accompanying combined statements of operations are presented before
income taxes. On a supplemental basis, unaudited pro forma net income has been
presented using an assumed corporate tax rate of 40%.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and are depreciated over the
estimated useful lives of the related assets utilizing the straight-line method
for financial reporting purposes. Estimated useful lives are as follows:
<TABLE>
<S> <C>
Buildings................................................... 18-39 years
Equipment, furniture and fixtures........................... 7 years
Vehicles.................................................... 5 years
Leasehold improvements...................................... 31-39 years
</TABLE>
Interest incurred during construction periods is capitalized as part of the
building cost. Maintenance and repairs are charged against income as incurred,
and major betterments and improvements are capitalized. Property and equipment
obtained through purchase acquisitions are stated at their fair value determined
on the respective dates of acquisition.
The Group has adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." In accordance with SFAS No. 121, the Group evaluates
the carrying value of its properties in light of each property's operational
profitability.
DEFERRED FINANCING COSTS
Financing costs are amortized over the term of the related debt.
DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents approximate fair value
because of the short-term nature of these accounts and because they are invested
in accounts earning market rates of interest. The carrying amount of the Group's
debt approximates fair value because the interest rates approximate the current
rates available to the Group and its individual facilities.
10
<PAGE> 11
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable consist of credit lines obtained to finance short-term
funding needs of certain properties. Notes payable consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------
1995 1996
----------- --------
<S> <C> <C>
Bank, line of credit of $300,000, unsecured, interest
payable monthly at 30 day LIBOR plus 1.95% adjusted
monthly, principal due on demand. ........................ $ -- $ 71,500
Bank, line of credit of $500,000, unsecured, interest
payable monthly at 8.25%, principal due on demand......... -- 166,500
----------- --------
$ -- $238,000
=========== ========
</TABLE>
Long-term debt includes notes payable that are secured by assets of the
Group. Long-term debt consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Real estate obligations, principal and interest due
monthly, interest at 30 day LIBOR rate plus 1.95%,
secured by first deeds of trust and first liens on some
properties and second deeds of trust and second liens on
other properties, guaranteed 50% by Steve and Mary L.
Pierce, 12.8% by others. Balloon principal maturity due
March 1, 2001. ......................................... $ -- $16,127,583
Real estate obligations, principal and interest due
monthly, interest at a fixed rate of 7.8%, secured by
deeds of trust on certain real property owned by the
Group and personal property pledged under promissory
notes, guaranteed 50% by Steve and Mary L. Pierce and
1.5% by others. Balloon principal maturity due November
30, 2000. .............................................. -- 21,912,056
Real estate obligations, principal and interest due
monthly, interest at rates ranging from 7.6% to 12%,
refinanced in November 1995, February 1996 and March
1996. .................................................. 32,851,387 --
Real estate obligation, principal and interest due
monthly, interest at a fixed rate of 7.5%, secured by
deeds of trust on real property and liens on personal
property, guaranteed 50% by Steve and Mary L. Pierce.
Balloon principal maturity due March 12, 2001. ......... -- 1,748,128
Real estate obligations, payable monthly at $15,921
including interest at rates of 7.5% and prime +.25%,
secured by deeds of trust on real property and
guaranteed by Steve and Mary L. Pierce. Balloon
principal maturity due June 10, 1998 and May 10,
1999. .................................................. $ 1,263,809 $ 1,176,676
</TABLE>
11
<PAGE> 12
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Notes payable on purchases of furniture, equipment,
automobiles and other items, requiring monthly payments
including principal and interest at rates from 6% to
12%, generally secured by liens on the property. ....... 1,624,252 574,746
----------- -----------
Total........................................... 35,739,448 41,539,189
Less current portion............................ (3,753,751) (1,085,307)
----------- -----------
Long-term portion............................... $31,985,697 $40,453,882
=========== ===========
</TABLE>
The note payable amounts included above reflect the portion of the Pierce
notes payable which relate to the facilities subject to the transaction with
Advocat.
The promissory notes contain certain restrictive covenants as defined in
the note agreements. At September 30, 1996, the Company was in compliance with
such covenants.
Principal payments for the Group on long-term debt for the next five years
and thereafter beginning October 1, 1996 are as follows:
<TABLE>
<S> <C>
1997........................................................ $ 1,085,307
1998........................................................ 1,592,063
1999........................................................ 905,595
2000........................................................ 2,761,234
2001........................................................ 35,177,887
Thereafter.................................................. 17,103
-----------
$41,539,189
===========
</TABLE>
4. INVESTMENT (DEFICIT) BY PIERCE MANAGEMENT GROUP
This investment (deficit) represents the equity investments in the Group by
Pierce, the return of investment to Pierce, the historical accumulated earnings
of the Group's operations, the effect of unpaid tax allocations and charges to
Pierce, and advances of cash to and from Pierce for working capital
requirements. The nature of the investment activity since inception includes
cash transfers from the Group to Pierce or from Pierce to the Group. Those
amounts fluctuated daily based on the cash receipts and cash requirements of the
Group as the Group participated in the Pierce cash management programs.
Pierce did not charge (pay) the Group interest for intercompany loans or
investments. Generally, the equity varies day-to-day due to the differences
between cash requirements and cash deposits on receipts from customers and
third-party payors. The average investment (deficit) balance was $1,639,886 and
($1,990,730) in 1995 and 1996, respectively.
12
<PAGE> 13
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. RENT EXPENSE UNDER OPERATING LEASES
The Group leases two assisted living centers under operating leases. The
leases expire at various dates through 2001. Both leases have option renewal
periods. Following is a schedule by years of minimum rentals under the lease
agreements at September 30, 1996.
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30:
- -------------------------
<S> <C>
1997........................................................ $750,170
1998........................................................ 750,170
1999........................................................ 750,170
2000........................................................ 750,170
2001........................................................ 630,890
</TABLE>
6. RELATED PARTY TRANSACTIONS
The Group leases an office building on a month-to-month basis from the
stockholders of a corporation in the Group. The rent expense totaled $38,250 and
$51,000 for the periods ending September 30, 1995 and 1996, respectively.
The Group pays consulting fees to certain Pierce family members under
consulting agreements. Consulting fees totaled $303,918 and $389,274 for the
periods ending September 30, 1995 and 1996, respectively.
The Group had receivables from officers of $22,955 and $41,809 as of
September 30, 1995 and 1996, respectively.
The Group had notes payable to officers of $36,319 and $90,567 as of
September 30, 1995 and 1996, respectively. The notes payable to officers are
unsecured advances with no interest charges or maturity dates.
7. COMMITMENTS AND CONTINGENCIES
HEALTHCARE REGULATIONS
The healthcare industry is subject to numerous laws and regulations of
Federal, state and local governments. These laws and regulations include, but
are not necessarily limited to, matters such as licensure, accreditation,
government healthcare program participation requirements, reimbursement for
patient services, and Medicare and Medicaid fraud and abuse. Recently,
government activity has increased with respect to investigations and/or
allegations concerning possible violations of fraud and abuse statutes and/or
regulations by healthcare providers. Violations of these laws and regulations
could result in expulsion from government healthcare programs together with the
imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is
in compliance with fraud and abuse statutes, as well as other applicable
government laws and regulations. Compliance with such laws and regulations can
be subject to future government review and interpretations as well as regulatory
actions unknown or unasserted at this time.
LITIGATION
There is certain litigation incidental to the Group's business, none of
which, in management's opinion, would be material to the financial condition or
results of operations of the Group.
REGULATORY MATTERS
The Group at any one time is involved in appeal of penalties assessed in
connection with alleged violation of regulatory rules. Those appeals are heard
by the North Carolina Office of Administrative Hearings. It is the
13
<PAGE> 14
PIERCE MANAGEMENT GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
opinion of legal counsel and management that penalties in the aggregate, if
assessed, would not be material to the Group's financial position.
8. PROFESSIONAL LIABILITY INSURANCE
The Group maintains general and professional liability insurance with per
claim coverage of $1,000,000 and aggregate coverage limits of up to $3,000,000.
The Company is self-insured for the first $5,000 per occurrence and $25,000 in
the aggregate for such claims. In addition, the Company maintains a $10,000,000
aggregate umbrella liability policy for claims in excess of the above limit.
9. FINANCIAL STATEMENTS AT JUNE 30, 1996 AND 1997 (UNAUDITED)
The financial statements of the Group for the nine months ended June 30,
1996 and 1997 included herein have been prepared by the Group's management,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the accompanying unaudited
financial statements reflect all adjustments (consisting of only normally
recurring accruals) necessary to present fairly the combined balance sheet at
June 30, 1997 and the combined statements of operations and cash flows for the
nine months ended June 30, 1996 and 1997.
10. EVENTS SUBSEQUENT TO JUNE 30, 1997 (UNAUDITED)
On July 23, 1997, Pierce entered into an agreement whereby Advocat agreed
to purchase certain assets of the Group and Advocat agreed to lease certain
facilities owned by the Group. The sales price is approximately $32 million. The
transaction comprises the sale of 15 facilities and the leasing of an additional
14 facilities. The leases, with an initial term of 15 years, incorporate an
option to purchase at fair market value after the first five years. The
transaction closed effective October 1, 1997.
14
<PAGE> 15
ADVOCAT INC.
PRO FORMA SELECTED FINANCIAL DATA
(UNAUDITED)
Pursuant to an Asset Purchase Agreement dated July 23, 1997, as amended
September 30, 1997, by and among the Registrant, and Pierce Management Group
First Partnership, Pierce Management Group Third Partnership, Pierce Management
Group Fourth Partnership, Pierce, Pierce & Hall Partnership, Pierce Management
Group Fifth Partnership, Health Care Investments Partnership, Guy Pierce and
Vann Pierce Partnership, Sentry Services LLC, GVC Sentry Services LLC, SCP
Sentry Services LLC, SGP Sentry Services LLC, SVP Sentry Services LLC, VCP
Sentry Services LLC, SVCP Sentry Services LLC, Sentry Care of Newport, Inc.,
Tri-City Haven, Inc., Glen Haven Center of Care, Inc., Kannapolis Village Rest
Home, Pierce Hall Partnership, Health Care Investment, Inc., Midstate
Properties, Inc., Commercial Inspection and Maintenance, Tarheel Institutional
Brokerage, (collectively "Sellers") and A. Steve Pierce, Mary Lou Pierce, Guy S.
Pierce, Jodi Pierce, C. Vann Pierce, Jacqueline W. Pierce, Candace Pierce
Hammonds, William R. Hammonds, (collectively "Owners"), as assigned to a
wholly-owned subsidiary of the Registrant, the Registrant acquired certain of
the assets of the Sellers consisting of 15 assisted living facilities in North
Carolina and entered into leases for an additional 14 assisted living facilities
in North Carolina. The consideration for the acquisition totaled approximately
$32,225,000 cash and assumed liabilities of approximately $220,000. The
Registrant funded substantially all of the consideration by a bridge loan with
banks.
The unaudited pro forma statement of income data for the year ended
December 31, 1996, and for the six months ended June 30, 1997 have been prepared
based on the historical income statements of the Company, as adjusted to reflect
the acquisition of the operations of the Group and the bridge financing, as if
the acquisition had occurred and the bridge financing had been issued on January
1 of each respective year. The unaudited pro forma balance sheet data as of June
30, 1997 has been prepared based on the historical balance sheet of the Company,
as adjusted to reflect the purchase of assets by the Company in connection with
the transaction and the issuance of the bridge financing. The pro forma
statement of income data may not be indicative of the future results of
operations and what the actual results of operations would have been had the
acquisition described above been effective January 1 of each respective year.
The pro forma selected financial data 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, 1996 and in connection with
the historical financial information included in the Company's Report on Form
10-Q for the period ended June 30, 1997.
15
<PAGE> 16
ADVOCAT INC.
PRO FORMA STATEMENT OF INCOME DATA
FOR THE YEAR ENDED DECEMBER 31, 1996
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PIERCE
MANAGEMENT
ADVOCAT INC. GROUP(a) ADJUSTMENTS PRO FORMA
------------ ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Patient and resident revenues.......... $161,929 $26,126 $ -- $188,055
Management fees........................ 4,152 -- -- 4,152
Interest income........................ 156 -- -- 156
-------- ------- -------- --------
Net revenues................... 166,237 26,126 -- 192,363
-------- ------- -------- --------
EXPENSES:
Operating.............................. 131,966 16,177 (266)(b) 147,877
Lease.................................. 14,441 799 3,164 (c) 18,404
General and administrative............. 8,578 1,664 (421)(b) 9,821
Depreciation and amortization.......... 2,285 2,296 (850)(d) 3,731
Interest............................... 1,591 3,093 (430)(e) 4,254
-------- ------- -------- --------
Total expenses................. 158,861 24,029 1,197 184,087
-------- ------- -------- --------
INCOME BEFORE INCOME TAXES............... 7,376 2,097 (1,197) 8,276
PROVISION FOR INCOME TAXES............... 2,655 839 (479)(f) 3,015
-------- ------- -------- --------
NET INCOME............................... $ 4,721 $ 1,258 $ (718) $ 5,261
======== ======= ======== ========
Average number of common and common
equivalent shares outstanding.......... 5,315 5,315
======== ========
EARNINGS PER SHARE....................... $ .89 $ .99
======== ========
</TABLE>
The accompanying notes are an integral part of this statement.
16
<PAGE> 17
ADVOCAT INC.
PRO FORMA STATEMENT OF INCOME DATA
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PIERCE
MANAGEMENT
ADVOCAT INC. GROUP ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES:
Patient and resident revenues................. $85,731 $12,663 $ -- $ 98,394
Management fees............................... 1,875 -- -- 1,875
Interest...................................... 74 -- -- 74
------- ------- ------- --------
Net revenues.......................... 87,680 12,663 -- 100,343
------- ------- ------- --------
EXPENSES:
Operating..................................... 68,932 7,711 (133)(b) 76,510
Lease......................................... 7,615 430 1,552 (c) 9,597
General and administrative.................... 4,719 788 (204)(b) 5,303
Depreciation and amortization................. 1,333 1,147 (424)(d) 2,056
Interest...................................... 1,014 1,646 (295)(e) 2,365
------- ------- ------- --------
Total expenses........................ 83,613 11,722 496 95,831
------- ------- ------- --------
INCOME BEFORE INCOME TAXES...................... 4,067 941 (496) 4,512
PROVISION FOR INCOME TAXES...................... 1,464 377 (199)(f) 1,642
------- ------- ------- --------
NET INCOME............................ $ 2,603 $ 564 $ (297) $ 2,870
======= ======= ======= ========
Average number of common and common equivalent
shares outstanding............................ 5,330 5,330
======= ========
EARNINGS PER SHARE.............................. $ .49 $ .54
======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
17
<PAGE> 18
ADVOCAT INC.
PRO FORMA BALANCE SHEET DATA
JUNE 30, 1997
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
PIERCE
ADVOCAT MANAGEMENT
INC. GROUP ADJUSTMENTS(g) PRO FORMA
------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 3,013 $ 589 $ (661) $ 2,941
Accounts receivable, net of allowance for
doubtful accounts............................ 25,295 258 (258) 25,295
Inventories..................................... 960 53 (53) 960
Prepaid expenses and other...................... 2,226 6 (6) 2,226
------- ------- ------- --------
Total current assets.................... 31,494 906 (978) 31,422
PROPERTY AND EQUIPMENT, NET....................... 31,770 34,325 (695) 65,400
Deferred tax benefit.............................. 6,114 -- -- 6,114
Other assets...................................... 4,198 580 370 5,148
------- ------- ------- --------
$73,576 $35,811 $(1,303) $108,084
======= ======= ======= ========
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt............... $ 740 $ 1,894 $(1,894) $ 740
Trade accounts payable.......................... 8,418 640 (420) 8,638
Accrued expenses................................ 7,780 1,054 (1,054) 7,780
------- ------- ------- --------
Total current liabilities............... 16,938 3,588 (3,368) 17,158
------- ------- ------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion............ 22,863 41,405 (7,117) 57,151
Other noncurrent liabilities.................... 3,852 -- -- 3,852
------- ------- ------- --------
Total noncurrent liabilities............ 26,715 41,405 (7,117) 61,003
------- ------- ------- --------
COMMITMENTS, CONTINGENCIES AND GUARANTEES
SHAREHOLDERS' EQUITY
Preferred stock................................. -- -- -- --
Common stock.................................... 53 -- -- 53
Paid-in capital................................. 15,083 -- -- 15,083
Pierce Investment (deficit)..................... -- (9,182) 9,182 --
Retained earnings............................... 14,787 -- -- 14,787
------- ------- ------- --------
Total shareholders' equity.............. 29,923 (9,182) 9,182 29,923
------- ------- ------- --------
$73,576 $35,811 $(1,303) $108,084
======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of this statement.
18
<PAGE> 19
ADVOCAT INC.
NOTES TO PRO FORMA SELECTED FINANCIAL DATA
DECEMBER 31, 1996 AND JUNE 30, 1997
(a) Includes the statement of income for the Pierce Management Group for the
year ended September 30, 1996.
(b) Reflects the elimination of certain expenses associated with the owners of
Pierce Management Group that will not be incurred by Advocat.
(c) Reflects the elimination of historical lease expense of the Pierce
Management Group and the expected lease expense under the leases executed
by Advocat.
(d) Reflects the adjustment of depreciation in connection with the projected
purchase price allocation.
(e) Reflects additional interest expense as a result of the issuance of the
bridge financing.
(f) Reflects adjustments to the income tax provision at statutory rates due to
the change in pro forma income before taxes.
(g) Reflects the acquisition of the assets by Advocat along with the bridge
financing incurred to fund the acquisition and the elimination of the
assets, liabilities and equity not acquired or assumed by Advocat. The
allocation of the purchase price is under review and subject to later
adjustment. The bridge financing matures December 30, 1997. However, the
Company expects to refinance the bridge note with long-term debt. As a
result, the bridge financing has been classified as a long-term liability.
The Company expects the long-term financing to be issued at an interest
rate up to 1/2 percentage point higher than the bridge financing plus
amortization of associated deferred financing costs.
19
<PAGE> 20
SIGNATURE
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/Mary Margaret Hamlett
------------------------------
Name: Mary Margaret Hamlett
Title: Executive Vice President, Chief
Financial Officer and Secretary
Date: November 13, 1997
20
<PAGE> 21
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No.
- -----------
<S> <C>
2.1 Asset Purchase Agreement dated July 23, 1997, by and among
Pierce Management Group First Partnership, Pierce Management
Group Third Partnership, Pierce Management Group Fourth
Partnership, Pierce, Pierce & Hall Partnership, Pierce
Management Group Fifth Partnership, Health Care Investments
Partnership, Guy Pierce And Vann Pierce Partnership, Sentry
Services LLC, GVP Sentry Services LLC, SCP Sentry Services
LLC, SGP Sentry Services LLC, SVP Sentry Services LLC, VCP
Sentry Services LLC, SVCP Sentry Services LLC, Sentry Care of
Newport, Inc., Tri-city Haven, Inc., Glen Haven Center of
Care, Inc., Kannapolis Village Rest Home, Pierce Hall
Partnership, Health Care Investments, Inc., Midstate
Properties, Inc., Commercial Inspection And Maintenance,
Tarheel Institutional Brokerage, (Collectively "Sellers") and
A. Steve Pierce, Mary Lou Pierce, Guy S. Pierce, Jodi Pierce,
C. Vann Pierce, Jacqueline W. Pierce, Candace Pierce Hammonds,
William R. Hammonds, (Collectively "Owners"), and Advocat
Inc., a Delaware corporation ("Buyer"), (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q
for quarter ended June 30, 1997).
2.2 Amendment No. 1 to Asset Purchase Agreement dated September
30, 1997 (incorporated by reference to Exhibit 2.2 to the
Company's Current Report on Form 8-K filed October 16, 1997).
</TABLE>
21
