<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: JUNE 30, 1998
-------------
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
--- ---
5,398,710
- -------------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 12, 1998)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,649 $ 2,673
Receivables, less allowance for doubtful
accounts of $2,417 and $2,702,
respectively 27,414 26,010
Income taxes receivable 280 380
Inventories 1,063 1,097
Prepaid expenses and other assets 1,863 1,640
Deferred income taxes 1,330 830
--------- ---------
Total current assets 33,599 32,630
--------- ---------
PROPERTY AND EQUIPMENT, at cost 83,193 80,819
Less accumulated depreciation
and amortization (13,759) (12,149)
--------- ---------
Net property and equipment 69,434 68,670
--------- ---------
OTHER ASSETS:
Deferred tax benefit 5,366 5,460
Deferred financing and other costs, net 1,450 1,643
Other 9,073 6,558
--------- ---------
Total other assets 15,889 13,661
--------- ---------
$ 118,922 $ 114,961
========= =========
</TABLE>
(Continued)
-2-
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
--------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,069 $ 762
Trade accounts payable 10,580 9,365
Accrued expenses:
Payroll and employee benefits 5,470 5,576
Other 4,413 3,078
-------- --------
Total current liabilities 21,532 18,781
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 60,453 58,373
Deferred gains with respect to leases, net 3,416 3,562
Other 2,850 3,512
-------- --------
Total noncurrent liabilities 66,719 65,447
-------- --------
COMMITMENTS AND CONTINGENCIES
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, 5,377,000 issued and outstanding at
June 30, 1998 and December 31, 1997, respectively 54 54
Paid-in capital 15,638 15,638
Retained earnings 14,979 15,041
-------- --------
Total shareholders' equity 30,671 30,733
-------- --------
$118,922 $114,961
======== ========
</TABLE>
The accompanying notes 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 ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 43,108 $ 41,150 $ 84,946 $ 81,464
Resident revenues 8,629 2,093 17,334 4,267
Management fees 906 957 1,812 1,875
Interest 55 37 99 74
-------- -------- -------- --------
Net revenues 52,698 44,237 104,191 87,680
-------- -------- -------- --------
EXPENSES:
Operating 42,131 34,859 83,383 68,932
Lease 4,809 3,744 9,563 7,615
General and administrative 2,730 2,406 5,456 4,719
Depreciation and amortization 832 671 1,794 1,333
Interest 1,254 472 2,499 1,014
Non-recurring charges 1,468 -0- 1,468 -0-
-------- -------- -------- --------
Total expenses 53,224 42,152 104,163 83,613
-------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (526) 2,085 28 4,067
PROVISION (BENEFIT)FOR INCOME
TAXES (189) 751 10 1,464
-------- -------- -------- --------
NET INCOME (LOSS) $ (337) $ 1,334 $ 18 $ 2,603
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Basic $ (.06) $ .25 $ .00 $ .49
======== ======== ======== ========
Diluted $ (.06) $ .25 $ .00 $ .49
======== ======== ======== ========
WEIGHTED AVERAGE SHARES:
Basic 5,377 5,316 5,377 5,316
======== ======== ======== ========
Diluted 5,377 5,339 5,391 5,334
======== ======== ======== ========
</TABLE>
The accompanying notes to interim financial statements are an integral part of
these interim consolidated financial statements.
-4-
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ (337) $ 1,334 $ 18 $ 2,603
------- ------- ------- -------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments (162) 9 (125) (44)
Income tax (expense) benefit 58 (3) 45 16
------- ------- ------- -------
(104) 6 (80) (28)
------- ------- ------- -------
COMPREHENSIVE INCOME (LOSS) $ (441) $ 1,340 $ (62) $ 2,575
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-5-
<PAGE> 6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS (LOSS) FROM OPERATING ACTIVITIES:
Net income $ 18 $ 2,603
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 1,795 1,333
Provision for doubtful accounts 786 856
Equity earnings in joint ventures (42) (21)
Amortization of deferred credits (278) (532)
Deferred income taxes (360) 2,261
Non-recurring change write off 1,028 -0-
Change in assets and liabilities:
Receivables, net (2,332) (2,130)
Inventories 34 (292)
Prepaid expenses and other assets (478) (228)
Trade accounts payable and accrued expenses 2,446 (515)
Other 47 (62)
------ -------
Net cash provided from operating activities 2,664 3,273
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,737) (1,193)
Investment in TDLP (632) (655)
Mortgage receivable, net (305) (307)
Deposits, pre-opening and other costs (435) (40)
Investment in joint ventures, net (1,345) 20
TDLP partnership distributions 152 99
------- -------
Net cash used in investing activities (5,302) (2,076)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations (411) (335)
Net proceeds from bank line of credit 2,908 -0-
Advances to TDLP, net (815) (139)
Advances repaid by lessor, net -0- 442
Financing costs (68) (94)
------- -------
Net cash provided from (used in) financing
activities $ 1,614 $ (126)
------- -------
</TABLE>
(Continued)
-6-
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1998 1997
---- ----
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,024) $ 1,071
CASH AND CASH EQUIVALENTS, beginning of period 2,673 1,942
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,649 $ 3,013
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 2,362 $ 1,014
======= =======
Cash payments of income taxes $ 637 $ 957
======= =======
</TABLE>
The Company received net benefit plan deposits and earnings and recorded benefit
plan liabilities of $286,000 and $9,000 in the six month periods ended June 30,
1998 and 1997, respectively.
The accompanying notes to interim financial statements are an integral part of
these interim consolidated financial statements.
-7-
<PAGE> 8
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998 AND 1997
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
leading provider of long-term care services to the elderly. The Company operates
nursing homes and assisted living facilities in 11 states and in two Canadian
provinces.
As of June 30, 1998, the Company operates 116 facilities consisting of 64
nursing homes with 7,221 licensed beds and 52 assisted living facilities with
4,980 units. The Company owns seven nursing homes, leases 37 others and manages
20 nursing homes. The Company owns 18 assisted living facilities, leases 22
others and manages 12 assisted living facilities. The Company operates 52
nursing homes and 33 assisted living facilities in the United States and 12
nursing homes and 19 assisted living facilities in Canada. The Company's
facilities provide a range of health care services to their patients and
residents. In addition to the nursing and social services usually provided in
the long-term care facilities, the Company offers a variety of comprehensive
rehabilitative, nutritional, respiratory and other specialized ancillary
services. The Company operates facilities in Alabama, Arkansas, Florida,
Georgia, Kentucky, North Carolina, 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 six month periods ended June
30, 1998 and 1997, 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 consolidated financial statements reflect all adjustments (consisting of
only normally recurring accruals) necessary to present fairly the financial
position at June 30, 1998, the results of operations for the three and six month
periods ended June 30, 1998 and 1997, and the cash flows for the six month
periods ended June 30, 1998 and 1997.
The results of operations for the three and six month periods ended June 30,
1998 and 1997 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,
1997.
-8-
<PAGE> 9
3. EARNINGS PER SHARE
Information with respect to the calculation of basic and diluted earnings per
share data follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) (numerator) $ (337,000) $1,334,000 $ 18,000 $2,603,000
========== ========== ========== ==========
Basic average shares outstanding (denominator) 5,377,000 5,316,000 5,377,000 5,316,000
Employee stock purchase plan N/A(1) 15,000 13,000 14,000
Options N/A(1) 8,000 1,000 4,000
---------- ---------- ---------- ----------
Diluted average shares outstanding (denominator) 5,377,000 5,339,000 5,391,000 5,334,000
========== ========== ========== ==========
Basic earnings(loss) per share $ (.06) $ .25 $ .00 $ .49
========== ========== ========== ==========
Diluted earnings (loss) per share $ (.06) $ .25 $ .00 $ .49
========== ========== ========== ==========
</TABLE>
(1) Not applicable since inclusion would be anti-dilutive.
4. OTHER COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No.
130, Reporting Comprehensive Income. SFAS No. 130 requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting methodology that includes
disclosure of certain financial information that historically has not been
recognized in the calculation of net income.
Information with respect to the accumulated other comprehensive income balance
is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Foreign currency items:
Beginning balance $(172) $ (47) $(196) $ (13)
Current-period change, net of income tax (104) 6 (80) (28)
----- ----- ----- -----
Ending balance $(276) $ (41) $(276) $ (41)
===== ===== ===== =====
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
5. NON-RECURRING CHARGES
During the quarter ended June 30, 1998, the Company recorded non-recurring
charges in the amount of $1.5 million. Of this amount, $1.0 million was a
restructuring charge related to the Company's management information systems
conversion with respect to its U.S. nursing homes. Pursuant to this conversion,
the Company will be abandoning much of its existing software and will be
dismantling much of its regional infrastructure in favor of a centralized
accounting organization. This charge represents the costs associated with the
closing of certain regional offices, severance packages for affected personnel,
the write-off of capitalized software costs, and other costs related to the
systems being replaced. This restructuring charge includes a provision for
approximately $380,000 of cash outlays expected to occur as the old systems are
phased out over the remainder of 1998. In addition to the restructuring charge,
the Company also recognized costs associated with prospective financing
arrangements or acquisitions, each of which had been abandoned during the
quarter, and costs related to legal issues that were settled during the quarter.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Advocat (together with its subsidiaries, "Advocat" or the "Company") provides
long-term care services to nursing home patients and residents of assisted
living facilities in 11 Southeastern states and two Canadian provinces. The
Company completed its initial public offering in May 1994; however, its
operational history can be traced to February 1980 through common senior
management who were involved in different organizational structures.
The Company's facilities provide a range of health care services to their
patients and residents. In addition to the nursing, personal care and social
services usually provided in long-term care facilities, the Company, through
arrangements with third parties, offers a variety of comprehensive
rehabilitation services as well as medical supply and nutritional support
services.
As of June 30, 1998, Advocat's portfolio includes 116 facilities composed of 64
nursing homes containing 7,221 licensed beds and 52 assisted living facilities
containing 4,980 units. In comparison, at June 30, 1997, the Company operated 87
facilities composed of 65 nursing homes containing 7,341 licensed beds and 22
assisted living facilities containing 2,470 units. As of June 30, 1998, the
Company owns seven nursing homes, leases 37 others and manages the remaining 20
nursing homes. Additionally, the Company owns 18 assisted living facilities,
leases 22 others and manages the remaining 12 assisted living facilities. In the
United States, the Company operates 52 nursing homes and 33 assisted living
facilities, and in Canada, the Company operates 12 nursing homes and 19 assisted
living facilities.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
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 of the Company's management agreements, which
generally provide for management fees ranging 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 average
occupancy level rates of the managed facilities. Management fees also include
consulting and development fee income. The Company's operating expenses include
the costs, other than lease, depreciation and amortization expenses, incurred in
the nursing homes and assisted living facilities owned and leased 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 other owners. The Company's
depreciation, amortization and interest expenses include all such expenses
across the range of the Company's operations.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of income and
related data for the three and six month periods ended June 30, 1998 and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
--------------------------------------------------
1998 1997 CHANGE %
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 43,108 $ 41,150 $ 1,958 4.8
Resident revenues 8,629 2,093 6,536 312.2
Management fees 906 957 (51) (5.4)
Interest 55 37 18 48.3
-------- -------- --------
Net revenues 52,698 44,237 8,461 19.1
-------- -------- --------
EXPENSES:
Operating 42,131 34,859 7,272 20.9
Lease 4,809 3,744 1,065 28.4
General and administrative 2,730 2,406 324 13.4
Depreciation and amortization 832 671 161 24.0
Interest 1,254 472 782 165.7
Non-recurring charges 1,468 -0- 1,468 N/A
-------- -------- --------
Total expenses 53,224 42,152 11,072 26.3
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (526) 2,085 (2,611) (125.2)
PROVISION (BENEFIT) FOR INCOME TAXES (189) 751 (940) (125.2)
-------- -------- --------
NET INCOME (LOSS) $ (337) $ 1,334 $ (1,671) (125.2)
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
--------------------------------------------------
1998 1997 CHANGE %
-------- -------- -------- -------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 84,946 $ 81,464 $ 3,482 4.3
Resident revenues 17,334 4,267 13,067 306.2
Management fees 1,812 1,875 (63) (3.4)
Interest 99 74 25 33.6
-------- -------- --------
Net revenues 104,191 87,680 16,511 18.8
-------- -------- --------
EXPENSES:
Operating 83,383 68,932 14,451 21.0
Lease 9,563 7,615 1,948 25.6
General and administrative 5,456 4,719 737 15.6
Depreciation and amortization 1,794 1,333 461 34.7
Interest 2,499 1,014 1,485 146.6
Non-recurring charges 1,468 -0- 1,468 N/A
-------- -------- --------
Total expenses 104,163 83,613 20,550 24.6
-------- -------- --------
INCOME BEFORE INCOME TAXES 28 4,067 (4,039) (99.3)
PROVISION FOR INCOME TAXES 10 1,464 (1,454) (99.3)
-------- -------- --------
NET INCOME $ 18 $ 2,603 $ (2,585) (99.3)
======== ======== ========
</TABLE>
-11-
<PAGE> 12
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues 81.8% 93.0% 81.5% 92.9%
Resident revenues 16.4 4.7 16.7 4.9
Management fees 1.7 2.2 1.7 2.1
Interest 0.1 0.1 0.1 0.1
------ ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
------ ----- ----- -----
OPERATING EXPENSES:
Operating 79.9 78.8 80.0 78.6
Lease 9.1 8.5 9.2 8.7
General and administrative 5.2 5.4 5.3 5.4
Depreciation and amortization 1.6 1.5 1.7 1.5
Interest 2.4 1.1 2.4 1.1
Non-recurring charges 2.8 0.0 1.4 0.0
------ ----- ----- -----
Total expenses 101.0 95.3 100.0 95.3
------ ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES (1.0) 4.7 0.0 4.7
PROVISION (BENEFIT) FOR INCOME TAXES (0.4) 1.7 0.0 1.7
------ ----- ----- -----
NET INCOME (LOSS) (0.6)% 3.0% 0.0% 3.0%
====== ===== ===== =====
</TABLE>
GENERAL
Non-Recurring Charges. During the quarter ended June 30, 1998, the Company
recorded non-recurring charges in the amount of $1.5 million. Of this amount,
$1.0 million was a restructuring charge related to the Company's management
information systems conversion with respect to its U.S. nursing homes. Pursuant
to this conversion, the Company will be abandoning much of its existing software
and will be dismantling much of its regional infrastructure in favor of a
centralized accounting organization. This charge represents the costs associated
with the closing of certain regional offices, severance packages for affected
personnel, the write-off of capitalized software costs, and other costs related
to the systems being replaced. This restructuring charge includes a provision
for approximately $380,000 of cash outlays expected to occur as the old systems
are phased out over the remainder of 1998. In addition to the restructuring
charge, the Company also recognized costs associated with prospective financing
arrangements or acquisitions, each of which had been abandoned during the
quarter, and costs related to legal issues that were settled during the quarter.
Regulatory Issues. The Company's operating results have been profoundly affected
by regulatory issues in the State of Alabama beginning in the third quarter of
1997. During the summer of 1997, the Company received notifications from the
Alabama Department of Public Health that, as a result of certain deficiencies
noted upon periodic surveys of its two facilities in Mobile, the facilities
would be decertified from participation in the Medicare and Medicaid programs
and that licensure revocation could be pursued. The Company appealed the
proceedings, noting that none of the deficiencies were life-threatening, that
the deficiencies noted did not warrant the penalty imposed and that in the case
of one of the facilities, it was JCAHO accredited. The appeals were denied by
the State agency, and as a result,
-12-
<PAGE> 13
the facilities were decertified in 1997 for 69 and 91 days, respectively, before
resurveys found them to be in compliance. Both of the facilities have been
recertified for participation in Medicare and Medicaid programs and the State
has stayed its license revocation proceedings with respect to the two Alabama
facilities, agreeing that the Company responded favorably toward the resolution
of all issues. The Company has aggressively pursued improved communications with
the State and has reached agreement with the State addressing its concerns. The
Company's remaining five Alabama facilities have successfully passed their most
recent annual licensure surveys.
The Company, in response to the regulatory problems at the two Mobile
facilities, entered into a reorganization of its regional and facility
management, conducted in-depth reviews of all seven of the Company's Alabama
facilities, engaged nationally recognized consultants to assist in achieving
compliance and engaged local legal counsel familiar with the Alabama regulatory
environment. Many of the costs associated with the decertifications were
non-recurring and limited to the latter half of 1997. However, the Company's
operations have continued to be impacted in 1998 on two broad fronts: census
declines and permanent cost increases. Through June 30, 1998, the decertified
facilities had recovered approximately 2/3 of the occupancy decline experienced
at the lowest point of the decertification periods. The Company's response to
the decertifications included permanent staffing increases affecting all Alabama
facilities. Due to the nature of the Alabama reimbursement system, the Company
will not begin to realize an improved Medicaid reimbursement rate relative to
its higher staffing cost levels until July 1, 1998. The Company expects the
Alabama operations to return to normal levels during the latter half of 1998.
However, there can be no assurance that either of the facilities will return to
the census and profitability levels experienced prior to the decertification.
As a result of the lost revenues from census declines, the permanent cost
increases incurred in response to the survey issues and miscellaneous other
costs, the Company experienced an estimated negative impact on earnings for the
six months ended June 30, 1998 of approximately $1.3 million after income taxes,
or approximately $0.24 per share. Of this amount, approximately $400,000 after
income taxes, or approximately $.07 per share, was attributable to the three
months ended June 30, 1998.
New Facilities. Since its inception as a public company in 1994, Advocat has
sought to expand its operations through the acquisition of attractive properties
via either purchase or lease. Management has conscientiously evaluated the
acquisition opportunities that have been available to the Company in light of
criteria that were established to help insure the long-term value of the
acquisitions that have been completed.
There have been no acquisitions in 1998, and all of the Company's acquisition
activity in 1997 was consummated in the fourth quarter. The Company acquired 17
assisted living facilities through purchase and acquired leases with respect to
an additional 15 assisted living facilities. These acquisitions added 2,483
units to the Company. The substantial portion of these were acquired in the
Pierce Group Acquisition: 29 assisted living facilities, all located in North
Carolina, with a total of 2,302 units. In the Pierce Group Acquisition, the
Company purchased 15 facilities and leased 14 others. The Company holds the
option to purchase 12 of the leased facilities for market value beginning at the
fifth anniversary. With the Pierce Group Acquisition, the Company, which has
long been involved in the provision of assisted living services in its Canadian
operations, established a foundation from which it hopes to expand its presence
in the growing assisted living market in the United States.
-13-
<PAGE> 14
The acquired facilities are hereafter referred to collectively or in part as the
"New Facilities." The contribution of the New Facilities to selected components
of operations is noted separately where such contribution is significant within
their first year of operations. With the completion of the first year of
operations following acquisition or opening, a facility becomes part of same
store operations.
THREE MONTHS ENDED JUNE 30, 1998 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1997
Revenues. Net revenues increased to $52.7 million in 1998 from $44.2 million in
1997, an increase of $8.5 million, or 19.1%. Patient revenues increased to $43.1
million in 1998 from $41.1 million in 1997, an increase of $2.0 million, or
4.8%. Resident revenues increased to $8.6 million in 1998 from $2.1 million in
1997, an increase of $6.5 million, or 312.2%. This increase is entirely
attributable to the New Facilities. Revenue increases among nursing facilities
operated at least one year were primarily due to inflationary increases rather
than from expanded services. These increases were offset by foregone revenues
with respect to occupancy declines in the facilities that had been decertified.
Excluding these facilities, there was a 2.3% decline in patient and resident
days (approximately 10,000 days) among facilities in operation for at least one
year. While the recent increases in reimbursement rates received by the Company
have met or exceeded expectations, the Company anticipates it is likely that
state and federal governments will continue to seek ways to retard the rate of
growth in Medicaid program rates. As a percent of patient and resident revenues,
Medicare decreased to 25.8% in 1998 from 27.9% in 1997 while Medicaid and
similar programs increased to 55.1% in 1998 from 54.3% in 1997.
Ancillary service revenues, prior to contractual allowances, increased to $17.2
million in 1998 from $14.9 million in 1997, an increase of $2.3 million or
15.6%. The Company has emphasized expansion of ancillary services since its
inception in 1994. However, the rate of growth began to decline in 1996.
Management believes that the opportunities available for the expansion of
ancillary services in its existing operations were essentially fully realized by
the beginning of 1997. The 1998 increase is primarily due to benefits realized
from the transition to a single therapy provider in a majority of its nursing
homes and from an increase in sales to third parties. Because cost limits are
expected to be placed on ancillary services as part of the transition to the
Medicare prospective payment system and because of other cost limitation
provisions that have been announced or could occur, the Company anticipates that
ancillary service revenues with respect to its existing operations will begin
trending down during the latter half of 1998. The ultimate effect on the
Company's operations cannot be predicted at this time because the extent and
composition of the cost limitations are not yet certain.
Operating Expense. Operating expense increased to $42.1 million in 1998 from
$34.8 million in 1997, an increase of $7.3 million, or 20.9%. Of this increase,
$4.1 million is attributable to the New Facilities. As a percent of patient and
resident revenues, operating expense increased to 81.4% in 1998 from 80.6% in
1997. This increase is attributable to increased costs relative to revenues in
the nursing home segment. These increases include the costs associated with the
structural changes made pursuant to the Alabama decertifications and increased
liability insurance costs. With respect to facilities operated at least one year
and excluding the Alabama region, the operating expense percentage was 83.5%. As
a percent of resident revenues, operating expense of the New Facilities was
62.3%. All of the New Facilities are assisted living locations, which typically
have lower operating costs than do nursing homes. The largest component of
operating expense is wages, which increased to $18.9 million in 1998 from $15.7
million in 1997, an increase of $3.2 million, or 20.2%. Of this increase, $2.5
million is attributable to the New Facilities. Wages with respect to facilities
in operation for at least one year increased $632,000, or 4.0%. The
-14-
<PAGE> 15
Company's wage increases are generally in line with inflation, however, the
larger increase with respect to the same facility operations is due primarily to
a 13.2% increase in Alabama that arose principally from staffing responses to
the decertifications.
Lease Expense. Lease expense increased to $4.8 million in 1998 from $3.7 million
in 1997, an increase of $1.1 million, or 28.4%, which is primarily attributable
to the New Facilities.
General and Administrative Expense. General and administrative expense increased
to $2.7 million in 1998 from $2.4 million in 1997, an increase of $324,000, or
13.4%. The increase in excess of inflation is primarily attributable to the
expense of managing the New Facilities and structural costs added in response to
the Alabama decertifications. As a percent of total net revenues, general and
administrative expense decreased to 5.2% in 1998 from 5.4% in 1997.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $832,000 in 1998 from $671,000 in 1997, an increase of $161,000, or 24.0%.
This increase is primarily attributable to the New Facilities.
Interest Expense. Interest expense increased to $1.3 million in 1998 from
$547,000 in 1997, an increase of $782,000, or 65.7%. This increase is primarily
attributable to financing associated with the New Facilities.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, as well as the non-recurring charges of $1.5 million,
the Company lost $(526,000) before income taxes in 1998 as compared with a
profit of $2.1 million in 1997, a decrease of $2.6 million, or (125.2)%. The
effective combined federal, state and provincial income tax rate was 36.0% in
both 1998 and 1997. The net loss was $(337,000) in 1998 as compared with net
income of $1.3 million in 1997, a decrease of $1.5 million, and basic and
diluted earnings (loss) per share were each $(.06) as compared with $.25.
SIX MONTHS ENDED JUNE 30, 1998 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1997
Revenues. Net revenues increased to $104.2 million in 1998 from $87.7 million in
1997, an increase of $16.5 million, or 18.8%. Patient revenues increased to
$84.9 million in 1998 from $81.4 million in 1997, an increase of $3.5 million,
or 4.3%. Resident revenues increased to $17.3 million in 1998 from $4.3 million
in 1997, an increase of $13.1 million, or 306.2%. This increase is entirely
attributable to the New Facilities. Revenue increases among nursing facilities
operated at least one year were primarily due to inflationary increases rather
than from expanded services. These increases were offset by foregone revenues
with respect to occupancy declines in the facilities that had been decertified
and to one facility that was closed in April 1997. Excluding these facilities,
there was a 3.4% decline in patient and resident days (approximately 29,000
days) among facilities in operation for at least one year. While the recent
increases in reimbursement rates received by the Company have met or exceeded
expectations, the Company anticipates it is likely that state and federal
governments will continue to seek ways to retard the rate of growth in Medicaid
program rates. As a percent of patient and resident revenues, Medicare decreased
to 25.8% in 1998 from 27.0% in 1997 while Medicaid and similar programs
increased to 55.3% in 1998 from 54.7% in 1997.
Ancillary service revenues, prior to contractual allowances, increased to $34.0
million in 1998 from $28.7 million in 1997, an increase of $5.3 million or
18.3%. The Company has emphasized expansion
-15-
<PAGE> 16
of ancillary services since its inception in 1994. However, the rate of growth
began to decline in 1996. Management believes that the opportunities available
for the expansion of ancillary services in its existing operations were
essentially fully realized by the beginning of 1997. The 1998 increase is
primarily due to benefits realized from the transition to a single therapy
provider in a majority of its nursing homes and from an increase in sales to
third parties. Because cost limits are expected to be placed on ancillary
services as part of the transition to the Medicare prospective payment system
and because of other cost limitation provisions that have been announced or
could occur, the Company anticipates that ancillary service revenues with
respect to its existing operations will begin trending down during the latter
half of 1998. The ultimate effect on the Company's operations cannot be
predicted at this time because the extent and composition of the cost
limitations are not yet certain.
Operating Expense. Operating expense increased to $83.4 million in 1998 from
$68.9 million in 1997, an increase of $14.5 million, or 21.0%. Of this increase,
$8.2 million is attributable to the New Facilities. As a percent of patient and
resident revenues, operating expense increased to 81.5% in 1998 from 80.4% in
1997. This increase is attributable to increased costs relative to revenues in
the nursing home segment. These increases include the costs associated with the
Alabama decertifications and increased liability insurance costs. With respect
to facilities operated at least one year and excluding the Alabama region, the
operating expense percentage was 83.5%. As a percent of resident revenues,
operating expense of the New Facilities was 62.1%. All of the New Facilities are
assisted living locations, which typically have lower operating costs than do
nursing homes. The largest component of operating expense is wages, which
increased to $37.4 million in 1998 from $31.2 million in 1997, an increase of
$6.2 million, or 20.0%. Of this increase, $4.9 million is attributable to the
New Facilities. Wages with respect to facilities in operation for at least one
year increased $1.3 million, or 4.1%. The Company's wage increases are generally
in line with inflation, however, the larger increase with respect to the same
facility operations is due primarily to a 16.5% increase in Alabama that arose
principally from staffing responses to the decertifications.
Lease Expense. Lease expense increased to $9.6 million in 1998 from $7.6 million
in 1997, an increase of $2.0 million, or 25.6%, which is primarily attributable
to the New Facilities.
General and Administrative Expense. General and administrative expense increased
to $5.4 million in 1998 from $4.7 million in 1997, an increase of $737,000, or
15.6%. The increase in excess of inflation is primarily attributable to the
expense of managing the New Facilities and structural costs added in response to
the Alabama decertifications. As a percent of total net revenues, general and
administrative expense decreased to 5.3% in 1998 from 5.4% in 1997.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.8 million in 1998 from $1.3 million in 1997, an increase of $462,000, or
34.7%. This increase is primarily attributable to the New Facilities.
Interest Expense. Interest expense increased to $2.5 million in 1998 from $1.0
million in 1997, an increase of $1.5 million, or 146.6%. This increase is
primarily attributable to financing associated with the New Facilities.
Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the
above, as well as the non-recurring charges of $1.5 million, income before
income taxes was $28,000 in 1998 as compared with $4.1 million in 1997, a
decrease of $4.0 million, or (99.3)%. The effective combined federal, state and
provincial income tax rate was 36.0% in both 1998 and 1997. Net income was
$18,000 in 1998 as compared with
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<PAGE> 17
$2.6 million in 1997, a decrease of $2.6 million, and basic and diluted earnings
per share were each $.00 as compared with $.49.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998 and December 31, 1997, the Company's working capital was $12.1
million and $13.8 million, respectively, and the current ratio was 1.6 and 1.7,
respectively.
Net cash provided from (used in) operating activities totaled $2.7 million and
$3.3 million in the six month periods ended June 30, 1998 and 1997,
respectively. These amounts primarily represent the cash flows from net income
plus changes in non-cash components of operations and by working capital
changes.
Net cash used in investing activities totaled $5.3 million and $2.1 million the
six month periods ended June 30, 1998 and 1997, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
joint ventures and additional investment in TDLP, a limited partnership for
which the Company serves as the general partner. The Company has used between
$2.4 million and $3.0 million for capital expenditures in each of the last three
calendar years ending December 31, 1997. Substantially all such expenditures
were for facility improvements and equipment, which were financed principally
through working capital. For the year ended December 31, 1998, the Company
anticipates that capital expenditures for improvements and equipment for its
existing facility operations will be approximately $7.0 million, including $2.9
million for non-routine projects and $1.5 million for management information
systems. The Company has announced its participation in several joint ventures.
The Company will be a minority partner in four assisted living facilities to be
developed in Canada. In addition, the Company has entered into an institutional
pharmacy joint venture with NCS HealthCare Inc. For the six months ended June
30, 1998, the Company had net expenditures of $1.3 million relative to its joint
venture activities. Management anticipates additional investments of up to $1.2
million will be required under its current joint venture commitments over the
next 12 months.
Net cash provided from (used in) financing activities totaled $1.6 million and
$(126,000) for the six month periods ended June 30, 1998 and 1997, respectively.
The net cash provided from or used in financing activities primarily represents
net proceeds from issuance and repayment of debt and advances to or repayments
from related parties.
The Company has begun implementation of an integrated information management
system that will provide enhanced monitoring and tracking of all its operations.
Real-time information will be available to managers at all levels with respect
to clinical care planning, reimbursement and financial control management. The
changes are under the direction of the Company's new Vice President and Chief
Information Officer. The conversion of all of the Company's U.S. nursing homes
to this sophisticated information platform should be completed by November 1998.
Along with the implementation of the new information system, Advocat will be
centralizing the accounting function for its U.S. nursing home operations. The
Company anticipates expenditures over the remainder of 1998 of up to $1.5
million related to this effort.
At June 30, 1998, the Company had total debt outstanding of $61.5 million, of
which $11.1 million was principally mortgage debt bearing interest at floating
rates ranging from 6.3% to 10.0%. The Company also had outstanding a promissory
note (the "Bridge Loan") in the amount of $34.1 million, which was used to fund
the Pierce Group Acquisition. The Company's remaining debt of $16.3 million was
drawn
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<PAGE> 18
under the Company's lines of credit. Most of the Company's debt is at floating
interest rates, generally at a spread above the London Interbank Offered Rate
("LIBOR"). At June 30, 1998, the Company's average interest rate on its
indebtedness was 8.2%.
The Company has a working capital line of credit and an acquisition line of
credit. The working capital line of credit provides for working capital loans
and letters of credit aggregating up to the lesser of $10.0 million or the
borrowing base, as defined. The Company's obligations under the working capital
line are secured by certain accounts receivable and substantially all other
Company assets. Advances under the working capital line bear interest payable
monthly at the Company's option of either LIBOR plus 2.50% or the bank's Index
rate. The working capital line terminates and all outstanding borrowings are due
in December 1999. As of both June 30, and August 12, 1998, the Company had drawn
$4.35 million, had $5.65 million of letters of credit outstanding, and had no
remaining borrowing capability under the working capital line of credit. The
Company has received an increase from its lenders in the working capital line of
credit availability of $1.25 million (the "Overline"), which has been increased
to $4.0 million effective August 14, 1998. The Overline is subject to the same
terms and conditions as the $10.0 million working capital line of credit. The
Overline terminates and all outstanding borrowings are due January 15, 1999. As
of June 30, 1998, the balance drawn under the Overline totaled $310,000. As of
August 12, the Company had drawn the entire balance then available under the
Overline, $1.25 million.
The acquisition line of credit of $40.0 million, less outstanding borrowings, is
available to fund approved acquisitions through October 1999. The Company's
obligations under the acquisition line are secured by the assets acquired with
the draws under the acquisition line. Advances under the acquisition line bear
interest, payable monthly, at LIBOR plus a defined spread with respect to each
facility based upon its loan-to-value ratio and debt service coverage.
Individual advances made under the acquisition line are due three years from the
date of initial funding. As of both June 30, 1998, and August 12, 1998, the
Company has drawn $11.1 million under the acquisition line, which amount was
secured by four nursing homes, and had $28.9 million available for future
acquisitions.
The Bridge Loan is unsecured. However, the Company has agreed not to pledge or
otherwise encumber the assets acquired in the Pierce Group Acquisition or issue
other debt without the banks' approval. As of both June 30, 1998 and August 12,
1998, the outstanding balance of the Bridge Loan was $34.1 million and the
interest rate was 8.0%. The Bridge Loan, as amended, bears floating interest in
relation to LIBOR and has a balloon maturity in July 1999.
Prior to funding the Bridge Loan, the Company was required to obtain a
commitment for replacement financing. The Company satisfied this requirement by
obtaining a commitment for up to $30.0 million of long-term financing under
which the Company may borrow and pledge the assets acquired in the Pierce Group
Acquisition as collateral. Loans are available at up to 80.0% of the value of
the pledged assets. Interest, which would be at LIBOR plus a defined spread,
would be determined based upon the length of term selected (3, 10, or 20 years)
and the loan-to-value ratio. This commitment is available through November 1999.
However, the Company may not draw upon this commitment so long as the Bridge
Loan remains outstanding. In addition to this commitment, the Company is
exploring other alternatives for refinancing of the Bridge Loan.
The Company's lines of credit and the Bridge Loan contain various financial
covenants, the most restrictive of which relate to net worth, cash flow, debt to
equity ratio requirements, and limits on the payment of dividends to
shareholders. As of June 30, 1998, the Company was in compliance with the
covenants or had received waivers in the event of non-compliance.
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<PAGE> 19
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 twelve
months. The Company intends to satisfy the capital requirements for its
acquisition activities primarily through its acquisition line of credit
complemented as appropriate by various other possible means such as borrowings
from commercial lenders, seller-financed debt, issuance of additional debt,
financing obtained from sale and leaseback transactions and internally-
generated cash from operations. On a long-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 the existing or new commercial lenders or by accessing capital
markets.
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare,
Medicaid 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 expenses). 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, by increasing medical
review of bills for services or by negotiating reduced contract rates, as well
as any delay by the Company in the processing of its invoices, could adversely
affect the Company's liquidity and results of operations.
Gross accounts receivable attributable to the provision of patient and resident
services at June 30, 1998 and December 31, 1997, totaled $28.8 million and $27.2
million, respectively, representing approximately 51 and 50 days in accounts
receivable, respectively. Accounts receivable from the provision of management
services was $320,000 and $716,000 respectively, at June 30, 1998 and December
31, 1997 representing approximately 32 and 62 days in accounts receivable,
respectively.
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 continues to evaluate and implement additional procedures
to strengthen its collection efforts and reduce the incidence of uncollectible
accounts.
Since 1991, the Company and its predecessor have included in their consolidated
operations the operations of the six facilities of TDLP. The Company serves as
the general partner of TDLP and has several continuing obligations to TDLP, one
of which includes certain cash flow support through August 2001. As of June 30,
1998, the Company has provided advances for working capital funding and
requirements under the cash flow guarantee to TDLP totaling $4.1 million.
However, the Company is actively pursuing alternatives that could enhance its
prospects with respect to the realization of the TDLP advances in the long term.
As of June 30, 1998, the Company's recorded net assets and amounts available
from TDLP exceed the combined value of its interests in TDLP. In the event these
alternatives are not successful, the ultimate realization of existing or future
advances to TDLP may require reserves to be recorded by the Company to offset
future increases in the advances during the remainder of 1998.
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<PAGE> 20
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations by health care providers of fraud and abuse statutes and
regulations. Violations of these laws and regulations could result in expulsion
from government health care 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 laws and regulations as well as other applicable government laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as regulatory actions
unknown or unasserted at this time.
During 1997, the Federal government enacted the Balanced Budget Act of 1997 (the
"BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The
BBA requires that nursing homes transition to a prospective payment system under
the Medicare program during a three year "transition period," commencing with
the first cost reporting period beginning on or after July 1, 1998. The BBA also
contains certain measures that could lead to future reductions in Medicare
therapy cost reimbursement and Medicaid payment rates. Given the recent
enactment of the BBA, the Company is unable to predict the ultimate impact of
the BBA on its future operations. However, any reductions in government spending
for long-term health care could have an adverse effect on the revenues and
results of operation of the Company. The Company will attempt to maximize the
revenues available to it from governmental sources within the changes that will
occur under the BBA. In addition, the Company will attempt to increase
non-governmental revenues, including expansion of its assisted living
operations, in order to offset the loss of governmental revenues as a result of
the enactment of the BBA.
FOREIGN CURRENCY TRANSLATION
The Company has obtained its financing primarily in U.S. dollars; however, it
incurs revenues and expenses in Canadian dollars with respect to Canadian
management activities and operations of the Company's owned and leased
facilities located in Canada. 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.
INFLATION
Management does not believe that the Company's operations 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.
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<PAGE> 21
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 is effective for financial
statement periods beginning after December 15, 1997. It establishes standards
for the way public companies report information about operating segments in
annual financial statements. SFAS No. 131 also requires that public companies
report selected information about operating segments in interim financial
reports issued to shareholders, although application to interim periods is not
required in the first year of adoption. The Company will adopt the provision of
this statement in association with its 1998 year-end financial statements. The
Company does not expect the adoption of this standard to have a material effect
on the Company's results of operations.
The Accounting Standards Executive Committee has issued Statement of Position
(SOP) 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5 requires
that the cost of start-up activities be expensed as they are incurred. Start-up
activities include one-time activities and organization costs. The Company
anticipates adoption of the provisions of SOP 98-5 effective January 1, 1999.
Upon adoption, the Company anticipates a pre-tax charge to income of
approximately $300,000, which will be reported as the cumulative effect of a
change in accounting principal.
IMPACT OF THE YEAR 2000
The Company is currently reengineering its accounting and information systems.
Management anticipates that the systems conversion of the United States nursing
home operations will be completed by November 30, 1998. Included in the process
of selecting hardware and software, assurances have been sought and received
from the various vendors that their products are Year 2000 compliant. The
Company continues to evaluate other areas that may be affected. To date, no
issues of a material nature have been identified, and the costs of ensuring
compliance are not expected to have a material impact on the Company's results
of operations.
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with Year 2000
problems that the Company does not control. There can be no assurance that the
fiscal intermediaries and governmental agencies with which the Company
transacts business and who are responsible for payment to the Company under the
Medicare and Medicaid programs, as well as other payors, will not experience
significant problems with Year 2000 compliance. According to testimony before a
U.S. House of Representatives subcommittee, the Department of Health and Human
Services is far behind in remedying Year 2000 problems, which could delay
payment of claims to providers. The failure of third parties to remedy Year
2000 problems could have a material adverse effect on the Company's business,
financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. Certain statements made by or on behalf of the Company,
including those contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties including,
but not limited to, changes in governmental reimbursement or regulation, health
care reforms, the ability to execute on the Company's acquisition program, both
in obtaining suitable acquisitions and financing therefor, changing economic
conditions as well as others. Actual results may differ materially from those
expressed or implied in forward-looking statements. 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 factors that could cause the Company's
actual results to materially differ from those projected in forward-looking
statements. In addition, the Company disclaims any intent or obligation to
update these forward-looking statements.
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<PAGE> 22
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on May 15, 1998.
(c) Matters voted upon at the meeting:
- Election of Director:
<TABLE>
<CAPTION>
William C. O'Neil, Jr.
----------------------
<S> <C>
FOR 3,889,220
AGAINST -0-
WITHHELD 329,427
ABSTENTIONS -0-
NON-VOTING(1) 1,158,299
---------
ELIGIBLE SHARES 5,376,946
=========
</TABLE>
(Continuing directors include Charles W. Birkett, M.D., Paul Richardson,
Mary Margaret Hamlett, Edward G. Nelson, and J. Bransford Wallace)
------------------
(1) Including broker non-votes.
- Proposal to amend the Company's 1994 Incentive and Nonqualified
Stock Option Plan for Key Personnel to increase the number of
shares of Common Stock reserved for issuance from 810,000 shares
to 1,060,000 shares.
FOR 2,386,926
AGAINST 1,819,607
WITHHELD -0-
ABSTENTIONS 12,114
NON-VOTING(1) 1,158,299
---------
ELIGIBLE SHARES 5,376,946
------------------
(1) Including broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in
the Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
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<PAGE> 23
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.
August 14, 1998
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
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<PAGE> 24
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
3.1 - Certificate of Incorporation of the Registrant
(incorporated by reference to Exhibit 3.1 to the
Company's Registration Statement No.33-76150 on Form
S-1).
3.2 - 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 Certificate 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 - Renewal and Modification Promissory Note dated March
31, 1998, between the Company and AmSouth Bank.
10.2 - Renewal and Modification Promissory Note dated March
31, 1998, between the Company and First American
National Bank.
10.3 - Second Amendment to Loan and Negative Pledge
Agreement dated March 31, 1998, between Diversicare
Assisted Living Services NC, LLC and First American
National Bank, both individually and as Agent for
AmSouth Bank.
27 - Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 1
RENEWAL AND MODIFICATION PROMISSORY NOTE
(Nonrevolving)
$17,050,000.00 Nashville, Tennessee
As of March 31, 1998
FOR VALUE RECEIVED, the undersigned, Diversicare Assisted Living
Services NC, LLC, a Tennessee limited liability company (the "Borrower")
promises to pay to the order of AmSouth Bank (the "Bank"), the sum of Seventeen
Million Fifty Thousand and 00/100 Dollars ($17,050,000.00), to be advanced
hereunder in accordance with the terms of a Loan and Negative Pledge Agreement
dated as of October 1, 1997, as amended from time to time (the "Loan
Agreement"), between Bank, First American National Bank, the undersigned, and
the Guarantors (as defined in the Loan Agreement). Capitalized terms not
otherwise defined herein shall have the meanings ascribed to such terms in the
Loan Agreement. Interest shall accrue on the principal balance outstanding from
time to time at a floating rate, as set forth in Section 2.2 of the Loan
Agreement. In no event shall the interest rate charged herein exceed the Maximum
Rate.
Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days. Interest shall be due and payable on the
principal balance outstanding hereunder from time to time in accordance with
Section 2.1 of the Loan Agreement. The outstanding principal balance, together
with all accrued and unpaid interest, shall be due and payable in full on April
1, 1999 (the "Maturity Date").
Both principal and interest due on this Note are payable in Nashville,
Tennessee, at par in lawful money of the United States of America, in the Main
Office of Bank, or at such other place as Bank may designate in writing from
time to time. Interest shall continue to accrue when payments are submitted by
instruments representing funds not immediately available and until such funds
are, in fact, collected.
This Note is a further renewal and modification of a Promissory Note
dated as of October 1, 1997, in the principal amount of $17,050,000, executed by
the Borrower in favor of Bank, and, as such, is secured by the Guaranty
Agreements, the Collateral Assignment, and the covenants and conditions in the
Loan Agreement, as the same may be amended from time to time.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event of an Event of Default (which is not cured within the notice and
cure period set forth in the Loan Agreement); then, in such case, the entire
unpaid principal sum evidenced by this Note, together with all accrued interest,
shall, at the option of any holder, without further notice, become due and
payable forthwith, regardless of the stipulated Maturity Date. Upon the
occurrence of any Default, at the option of holder and without further notice to
obligor, all accrued and unpaid interest, if any, shall be added to the
outstanding principal balance hereof, and the entire outstanding principal
balance, as so adjusted, shall bear interest thereafter until paid at an annual
rate equal to Maximum Rate, regardless of whether or not there has been an
acceleration of the payment of principal as set forth herein. All such interest
shall be paid at the time of and as a condition precedent to the curing of any
such Default. Failure of the holder to exercise this right of accelerating the
maturity of the debt, or indulgence granted from time to time, shall in no event
be considered as a waiver of said right of acceleration or stop the holder from
exercising said right.
PAGE 1 OF A 3 PAGE NOTE
<PAGE> 2
To the extent permitted by applicable law, in addition to all
other rights and remedies available to Bank, obligor shall pay to Bank a late
charge equal to four percent (4%) of any payment hereunder that is more than
fifteen (15) days past due, in order to cover the additional expenses incident
to the handling and processing of delinquent payments.
All persons or corporations now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby evidenced,
for themselves, their heirs, legal representatives and assigns, waive demand,
presentment for payment, notice of dishonor, protest, notice of protest, and
diligence in collection and all other notices or demands whatsoever with respect
to this Note or the enforcement hereof, and consent that the time of said
payments or any part thereof may be extended by the holder hereof and assent to
any substitution, exchange, or release of collateral permitted by the holder
hereof, all without in any wise modifying, altering, releasing, affecting or
limiting their respective liability. This Note may not be changed orally, but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification or discharge is sought.
The term obligor, as used in this Note, shall mean all
parties, and each of them, directly or indirectly obligated for the indebtedness
that this Note evidences, whether as principal, maker, endorser, surety,
guarantor or otherwise.
It is expressly understood and agreed by all parties hereto,
including obligors, that if it is necessary to enforce payment of this Note
through an attorney or by suit, undersigned or any obligors shall pay reasonable
attorney's fees, court costs and all costs of collection.
All parties to the Loan Documents intend to comply with
applicable usury law. All existing and future agreements evidencing or securing
the Credit Facility are hereby limited and controlled by this provision. In no
event (including but not limited to prepayment, default, demand for payment, or
acceleration of maturity) shall the interest taken, reserved, contracted for,
charged or received in connection with the Credit Facility under the Loan
Documents or otherwise, exceed the maximum nonusurious amount permitted by
applicable law. If, from any possible construction of any document, interest
would otherwise be payable in excess of the Maximum Amount, then ipso facto,
such document shall be reformed and the interest payable reduced to the Maximum
Amount, without necessity of execution of any amendment or new document. If Bank
ever receives interest in an amount which apart from this provision would exceed
the Maximum Amount, the excess shall, without penalty, be applied to the unpaid
principal balance of the Loan Obligations in inverse order of maturity of
installments and not to the payment of interest, or be refunded to the Borrower,
at the election of the Bank in its sole discretion or as required by applicable
law. The Bank does not intend to charge or receive unearned interest on
acceleration. All interest paid or agreed to be paid to the Bank in connection
with the Credit Facility, or any portion thereof, shall be spread throughout the
full term (including any renewal or extension) of the Loan so that the amount of
interest paid does not exceed the Maximum Amount.
This obligation is made and intended as a Tennessee contract
and is to be so construed.
(Remainder of page left intentionally blank)
PAGE 2 OF A 3 PAGE NOTE
<PAGE> 3
IN WITNESS WHEREOF, this Note has been duly executed by the
undersigned the day and year first above written.
DIVERSICARE ASSISTED LIVING SERVICES
NC, LLC, a Tennessee limited liability company
BY: /s/Mary Margaret Hamlett
-----------------------------------------
TITLE: Executive Vice President
---------------------------------------
RECEIVED AND ACKNOWLEDGED:
AMSOUTH BANK
BY: /s/Cathy Wind
-----------------------------
TITLE: Vice President
-------------------------
PAGE 3 OF A 3 PAGE NOTE
<PAGE> 1
EXHIBIT 2
RENEWAL AND MODIFICATION PROMISSORY NOTE
(NONREVOLVING)
$17,050,000.00 Nashville, Tennessee
As of March 31, 1998
FOR VALUE RECEIVED, the undersigned, Diversicare Assisted Living
Services NC, LLC, a Tennessee limited liability company (the "Borrower")
promises to pay to the order of First American National Bank (the "Bank"), the
sum of Seventeen Million Fifty Thousand and 00/100 Dollars ($17,050,000.00), to
be advanced hereunder in accordance with the terms of a Loan and Negative Pledge
Agreement dated as of October 1, 1997, as amended from time to time (the "Loan
Agreement"), between Bank, AmSouth Bank, the undersigned, and the Guarantors (as
defined in the Loan Agreement). Capitalized terms not otherwise defined herein
shall have the meanings ascribed to such terms in the Loan Agreement. Interest
shall accrue on the principal balance outstanding from time to time at a
floating rate, as set forth in Section 2.2 of the Loan Agreement. In no event
shall the interest rate charged herein exceed the Maximum Rate.
Interest shall be computed for the actual number of days elapsed on the
basis of a year consisting of 360 days. Interest shall be due and payable on the
principal balance outstanding hereunder from time to time in accordance with
Section 2.1 of the Loan Agreement. The outstanding principal balance, together
with all accrued and unpaid interest, shall be due and payable in full on April
1, 1999 (the "Maturity Date").
Both principal and interest due on this Note are payable in Nashville,
Tennessee, at par in lawful money of the United States of America, in the Main
Office of Bank, or at such other place as Bank may designate in writing from
time to time. Interest shall continue to accrue when payments are submitted by
instruments representing funds not immediately available and until such funds
are, in fact, collected.
This Note is a further renewal and modification of a Promissory Note
dated as of October 1, 1997, in the principal amount of $17,050,000, executed by
the Borrower in favor of Bank, and, as such, is secured by the Guaranty
Agreements, the Collateral Assignment, and the covenants and conditions in the
Loan Agreement, as the same may be amended from time to time.
Time is of the essence of this Note. It is hereby expressly agreed that
in the event of an Event of Default (which is not cured within the notice and
cure period set forth in the Loan Agreement); then, in such case, the entire
unpaid principal sum evidenced by this Note, together with all accrued interest,
shall, at the option of any holder, without further notice, become due and
payable forthwith, regardless of the stipulated Maturity Date. Upon the
occurrence of any Default, at the option of holder and without further notice to
obligor, all accrued and unpaid interest, if any, shall be added to the
outstanding principal balance hereof, and the entire outstanding principal
balance, as so adjusted, shall bear interest thereafter until paid at an annual
rate equal to Maximum Rate, regardless of whether or not there has been an
acceleration of the payment of principal as set forth herein. All such interest
shall be paid at the time of and as a condition precedent to the curing of any
such Default. Failure of the holder to exercise this right of accelerating the
maturity of the debt, or indulgence granted from time to time, shall in no event
be considered as a waiver of said right of acceleration or stop the holder from
exercising said right.
PAGE 1 OF A 3 PAGE NOTE
<PAGE> 2
To the extent permitted by applicable law, in addition to all
other rights and remedies available to Bank, obligor shall pay to Bank a late
charge equal to four percent (4%) of any payment hereunder that is more than
fifteen (15) days past due, in order to cover the additional expenses incident
to the handling and processing of delinquent payments.
All persons or corporations now or at any time liable, whether
primarily or secondarily, for the payment of the indebtedness hereby evidenced,
for themselves, their heirs, legal representatives and assigns, waive demand,
presentment for payment, notice of dishonor, protest, notice of protest, and
diligence in collection and all other notices or demands whatsoever with respect
to this Note or the enforcement hereof, and consent that the time of said
payments or any part thereof may be extended by the holder hereof and assent to
any substitution, exchange, or release of collateral permitted by the holder
hereof, all without in any wise modifying, altering, releasing, affecting or
limiting their respective liability. This Note may not be changed orally, but
only by an agreement in writing signed by the party against whom enforcement of
any waiver, change, modification or discharge is sought.
The term obligor, as used in this Note, shall mean all
parties, and each of them, directly or indirectly obligated for the indebtedness
that this Note evidences, whether as principal, maker, endorser, surety,
guarantor or otherwise.
It is expressly understood and agreed by all parties hereto,
including obligors, that if it is necessary to enforce payment of this Note
through an attorney or by suit, undersigned or any obligors shall pay reasonable
attorney's fees, court costs and all costs of collection.
All parties to the Loan Documents intend to comply with
applicable usury law. All existing and future agreements evidencing or securing
the Credit Facility are hereby limited and controlled by this provision. In no
event (including but not limited to prepayment, default, demand for payment, or
acceleration of maturity) shall the interest taken, reserved, contracted for,
charged or received in connection with the Credit Facility under the Loan
Documents or otherwise, exceed the maximum nonusurious amount permitted by
applicable law. If, from any possible construction of any document, interest
would otherwise be payable in excess of the Maximum Amount, then ipso facto,
such document shall be reformed and the interest payable reduced to the Maximum
Amount, without necessity of execution of any amendment or new document. If Bank
ever receives interest in an amount which apart from this provision would exceed
the Maximum Amount, the excess shall, without penalty, be applied to the unpaid
principal balance of the Loan Obligations in inverse order of maturity of
installments and not to the payment of interest, or be refunded to the Borrower,
at the election of the Bank in its sole discretion or as required by applicable
law. The Bank does not intend to charge or receive unearned interest on
acceleration. All interest paid or agreed to be paid to the Bank in connection
with the Credit Facility, or any portion thereof, shall be spread throughout the
full term (including any renewal or extension) of the Loan so that the amount of
interest paid does not exceed the Maximum Amount.
This obligation is made and intended as a Tennessee contract
and is to be so construed.
(Remainder of page left intentionally blank)
PAGE 2 OF A 3 PAGE NOTE
<PAGE> 3
IN WITNESS WHEREOF, this Note has been duly executed by the
undersigned the day and year first above written.
DIVERSICARE ASSISTED LIVING SERVICES
NC, LLC, a Tennessee limited liability company
BY: /s/Mary Margaret Hamlett
------------------------------------------
TITLE: Executive Vice President
---------------------------------------
RECEIVED AND ACKNOWLEDGED:
FIRST AMERICAN NATIONAL BANK
BY: /s/Sandy Hamrick
------------------------
TITLE: Senior Vice President
---------------------
PAGE 3 OF A 3 PAGE NOTE
<PAGE> 1
EXHIBIT 3
SECOND AMENDMENT TO
LOAN AND NEGATIVE PLEDGE AGREEMENT
This Second Amendment to Loan and Negative Pledge Agreement, made and
entered into as of the 31st day of March, 1998, between First American National
Bank, a national banking association, as Agent for AmSouth Bank, an Alabama
banking corporation ("AmSouth"), First American National Bank ("FANB")
(individually, a "Bank" and, collectively, the "Banks"), and Diversicare
Assisted Living Services NC, LLC, a Tennessee limited liability company (the
"Borrower"),
W I T N E S S E T H:
WHEREAS, pursuant to the terms of a Loan and Negative Pledge Agreement
dated as of October 1, 1997, by and between FANB, AmSouth and Borrower (the
"Loan Agreement"), the Banks agreed to make available to the Borrower, on a
nonrevolving basis, up to $34,100,000, to finance the acquisition of the
Facilities (capitalized terms not otherwise defined herein shall have the
meaning ascribed to such terms in the Loan Agreement); and,
WHEREAS, Borrower has requested, and the Banks have agreed, to extend
the Maturity Date of the Credit Facility to April 1, 1999, subject to the terms
and conditions contained herein; and,
WHEREAS, the Banks, the Borrower and the Guarantors desire to amend the
Loan Agreement to reflect the extension of the Maturity Date, as set forth
herein,
NOW, THEREFORE, in consideration of the foregoing premises, and other
good and valuable consideration, the receipt and legal sufficiency of which are
hereby acknowledged, the parties hereto hereby amend the Loan Agreement as
follows:
1. Definitions. The following definitions set forth in Section 1 of the
Loan Agreement are amended to read as follows:
"Maturity Date" means April 1, 1999.
"Notes" means the Renewal and Modification Promissory Notes of
even date herewith, executed by the Borrower in favor of the Banks, together
with all renewals, amendments and extensions thereof.
2. Credit Facility. The references to the monthly interest payment
dates in Section 2.1 of the Loan Agreement are hereby modified to refer to April
20, 1998, as the first payment date. The Maturity Date referred to in Section
2.1 of the Loan Agreement is hereby modified to refer to April 1, 1999.
3. Section 2.5 of the Loan Agreement is hereby deleted, and the
following is substituted as new Section 2.5:
1
<PAGE> 2
2.5 Fees. In consideration for the Bank's agreements to extend
the Maturity Date and to fund monies under the Loan in accordance with
the Loan Agreement, Borrower shall pay the Agent a closing fee of 0.5%
of the face amount of the Loan, to be distributed fifty percent (50%)
to AmSouth and fifty percent (50%) to FANB.
4. Guarantors. The Guarantors have joined in the execution of this
Second Amendment to acknowledge the renewal and extension of the Loan and to
confirm to the Banks that the terms and provisions of the Guaranty Agreements
remain in full force and effect and to confirm that that the Guaranty Agreements
continue to secure the obligations under the Loan Agreement, in accordance with
the terms of the Guaranty Agreements.
5. Collateral Assignment of Membership Interests. The undersigned,
Diversicare Management Services Co. ("DMS") and Diversicare Assisted Living
Services, Inc. ("DALS"), have joined in this Second Amendment for purposes of
acknowledging the renewal and extension of the Loan and to further acknowledge
that the terms and conditions of the Collateral Assignment of Membership
Interests dated as of October 1, 1997, by and among the Banks, DMS and DALS (the
"Collateral Assignment"), remain in full force and effect and to confirm that
the Collateral Assignment continues to secure the Borrower's obligations under
the Loan Agreement, in accordance with the terms of the Collateral Assignment.
6. Closing Expenses. In consideration for the extension of the Maturity
Date and the other agreements of the Banks set forth herein, Borrower agrees to
pay all out-of-pocket expenses incurred by the Banks in connection with the
renewal and extension of the Loan, including, without limitation, reasonable
attorneys fees.
7. Ratification. The Borrower hereby restates and ratifies all of the
terms and conditions contained in the Loan Agreement as of the date hereof, and
confirms that the Loan Agreement, as amended hereby, remains in full force and
effect.
(Remainder of Page Intentionally Left Blank)
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have executed this Second
Amendment as of the day and date first above written.
FIRST AMERICAN NATIONAL BANK DIVERSICARE ASSISTED LIVING
SERVICES NC, LLC
BY: /s/Wallace Carter, III BY: /s/Mary Margaret Hamlett
----------------------------- ------------------------------
TITLE: Senior Vice President TITLE: Executive Vice President
-------------------------- ---------------------------
First American Center Chief Executive Office:
Nashville, TN 37237 277 Mallory Station Road, Suite 130
Franklin, TN 37067
BANKS:
FIRST AMERICAN NATIONAL BANK
BY: /s/Wallace Carter, III
-----------------------------------
TITLE: Senior Vice President
--------------------------------
AMSOUTH BANK
BY: /s/Cathy Wind
-----------------------------------
TITLE: Vice President
--------------------------------
GUARANTORS:
ADVOCAT, INC., a Delaware corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
3
<PAGE> 4
DIVERSICARE MANAGEMENT SERVICES
CO., a Tennessee corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
DIVERSICARE LEASING CORP.,
a Tennessee corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
ADVOCAT ANCILLARY SERVICES,
INC., a Tennessee corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
DIVERSICARE CANADA
MANAGEMENT SERVICES CO.,
INC., an Ontario, 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
--------------------------------
4
<PAGE> 5
FIRST AMERICAN HEALTH CARE,
INC., an Alabama corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
ADVOCAT DISTRIBUTION SERVICES,
INC., a Tennessee corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
ADVOCAT FINANCE, INC., a
Delaware corporation
BY: /s/Mary Margaret Hamlett
-----------------------------------
TITLE: Executive Vice President
--------------------------------
DIVERSICARE LEASING CORP. OF
ALABAMA, INC., an
Alabama corporation
BY: /s/Mary Margaret Hamlett
----------------------------------
TITLE: Executive Vice President
--------------------------------
DIVERSICARE ASSISTED LIVING
SERVICES, INC., a Tennessee
corporation
BY: /s/Mary Margaret Hamlett
----------------------------------
TITLE: Executive Vice President
--------------------------------
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM
CONSOLIDATED FINANCIAL STATEMENTS OF ADVOCAT INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q DATED FOR THE
QUARTERLY PERIOD ENDED JUNE 30, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,649
<SECURITIES> 0
<RECEIVABLES> 29,831
<ALLOWANCES> 2,417
<INVENTORY> 1,063
<CURRENT-ASSETS> 33,599
<PP&E> 83,193
<DEPRECIATION> 13,759
<TOTAL-ASSETS> 118,922
<CURRENT-LIABILITIES> 21,532
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 30,671
<TOTAL-LIABILITY-AND-EQUITY> 118,922
<SALES> 0
<TOTAL-REVENUES> 104,191
<CGS> 0
<TOTAL-COSTS> 104,163
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 786
<INTEREST-EXPENSE> 2,499
<INCOME-PRETAX> 28
<INCOME-TAX> 10
<INCOME-CONTINUING> 18
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18
<EPS-PRIMARY> .00
<EPS-DILUTED> .00
</TABLE>
