<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1999
------------------
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 [ ]
5,491,693
-----------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF NOVEMBER 15, 1999)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,341 $ 2,347
Receivables, less allowance for doubtful
accounts of $5,265 and $2,650,
respectively 12,147 26,289
Income taxes receivable 760 800
Inventories 909 1,102
Prepaid expenses and other assets 1,242 1,528
Deferred income taxes 1,569 1,719
--------- ---------
Total current assets 17,968 33,785
--------- ---------
PROPERTY AND EQUIPMENT, at cost 84,506 82,140
Less accumulated depreciation
and amortization (17,446) (15,548)
--------- ---------
Net property and equipment 67,060 66,592
--------- ---------
OTHER ASSETS:
Deferred tax benefit 10,251 6,338
Deferred financing and other costs, net 1,001 1,150
Assets held for sale or redevelopment 3,465 3,465
Investments in and receivables from joint ventures 8,026 7,194
Other 1,937 2,770
--------- ---------
Total other assets 24,680 20,917
--------- ---------
$ 109,708 $ 121,294
========= =========
</TABLE>
(Continued)
-2-
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 55,604 $ 30,126
Trade accounts payable 5,257 9,327
Accrued expenses:
Payroll and employee benefits 4,910 4,920
Interest 124 857
Self-insurance reserves 3,364 2,375
Other 3,410 2,413
-------- --------
Total current liabilities 72,669 50,018
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 6,238 33,514
Deferred gains with respect to leases, net 3,108 3,293
Self-insurance reserves, less current portion 2,313 1,665
Other 5,322 5,243
-------- --------
Total noncurrent liabilities 16,981 43,715
-------- --------
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, 5,492,000 and 5,399,000 issued
and outstanding at September 30, 1999 and
December 31, 1998, respectively 54 54
Paid-in capital 15,908 15,765
Retained earnings 4,096 11,742
-------- --------
Total shareholders' equity 20,058 27,561
-------- --------
$109,708 $121,294
======== ========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
balance sheets.
-3-
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Patient revenues $ 105,071 $126,662
Resident revenues 27,962 25,983
Management fees 2,656 2,708
Interest 113 143
--------- --------
Net revenues 135,802 155,496
--------- --------
EXPENSES:
Operating 115,466 123,546
Lease 15,155 14,379
General and administrative 9,372 8,159
Interest 4,126 3,848
Depreciation and amortization 3,447 2,818
Non-recurring charges -0- 1,468
--------- --------
Total expenses 147,566 154,218
--------- --------
INCOME (LOSS) BEFORE INCOME TAXES (11,764) 1,278
PROVISION (BENEFIT) FOR INCOME TAXES (4,235) 460
--------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (7,529) 818
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (277) -0-
--------- --------
NET INCOME (LOSS) $ (7,806) $ 818
========= ========
BASIC EARNINGS PER SHARE:
Income (loss) before accounting change $ (1.39) $ .15
Cumulative effect of change in accounting principle, net of tax (.05) .00
--------- --------
Net income (loss) $ (1.44) $ .15
========= ========
DILUTED EARNINGS PER SHARE
Income (loss) before accounting change $ (1.39) $ .15
Cumulative effect of change in accounting principle, net of tax (.05) .00
--------- --------
Net income (loss) $ (1.44) $ .15
========= ========
WEIGHTED AVERAGE SHARES:
Basic 5,430 5,384
===== =====
Diluted 5,430 5,395
===== =====
</TABLE>
The accompanying notes 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>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
---- ----
<S> <C> <C>
NET INCOME (LOSS) $(7,806) $ 818
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 250 (341)
Income tax (expense) benefit (90) 123
------- -----
160 (218)
------- -----
COMPREHENSIVE INCOME (LOSS) $(7,646) $ 600
======= =====
</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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,806) $ 818
Items not involving cash:
Depreciation and amortization 3,447 2,818
Provision for doubtful accounts 5,466 993
Equity (earnings) loss in joint ventures 50 (50)
Amortization of deferred balances 814 (401)
Deferred income taxes (3,853) 553
Write off pursuant to change in accounting principle 433 -0-
Non-recurring charge write-off -0- 1,028
Increase in TDLP impairment reserve 500 -0-
Changes in other assets and liabilities:
Receivables, net 8,288 (3,678)
Inventories 194 52
Prepaid expenses and other assets 285 (959)
Trade accounts payable and accrued expenses (1,934) 2,168
Other (36) 45
-------- -------
Net cash provided from operating activities 5,848 3,387
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (3,426) (3,857)
Investment in TDLP (160) (632)
Mortgages receivable, net 162 (305)
Deposits, pre-opening costs and other (461) (505)
Investment in and advances to joint ventures, net (445) (1,683)
TDLP partnership distributions 257 229
-------- -------
Net cash used in investing activities (4,073) (6,753)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations 26,345 -0-
Repayment of debt obligations (25,419) (571)
Net proceeds from (repayment of) bank line of credit (2,950) 3,943
Proceeds from sale of common stock 144 127
Advances to TDLP, net (561) (867)
Increase in lease obligations 140 -0-
Financing costs (480) (68)
-------- -------
Net cash provided from financing activities $ (2,781) $ 2,564
-------- -------
</TABLE>
(Continued)
-6-
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
----- ----
<S> <C> <C>
DECREASE IN CASH AND CASH EQUIVALENTS $(1,006) $ (802)
CASH AND CASH EQUIVALENTS, beginning of period 2,347 2,673
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,341 $ 1,871
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 4,781 $ 4,000
======= =======
Cash payments (refunds) of income taxes, net $ (589) $ 827
======= =======
</TABLE>
During the second quarter of 1999, the Company's executive benefit plan was
terminated. In connection therewith, Advocat distributed net benefit plan
deposits and relieved net benefit plan liabilities of $1,124,000 in the nine
months ended September 30, 1999. Advocat received net benefit plan deposits and
earnings and recorded net benefit plan liabilities of $209,000 in the nine month
period ended September 30, 1998.
The accompanying notes are an integral part of these interim consolidated
financial statements.
-7-
<PAGE> 8
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND 1998
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
provider of long-term care services to the elderly. The Company operates nursing
homes and assisted living facilities in 12 states, primarily in the Southeast,
and three Canadian provinces. The Company operates facilities in Alabama,
Arkansas, Florida, Georgia, Kentucky, North Carolina, Ohio, South Carolina,
Tennessee, Texas, Virginia, West Virginia, and the Canadian provinces of
Ontario, British Columbia, and Alberta.
As of September 30, 1999, the Company operates 122 facilities consisting of 65
nursing homes with 7,307 licensed beds and 57 assisted living facilities with
5,320 units. The Company owns seven nursing homes, leases 36 others, and manages
22 nursing homes. The Company owns 17 assisted living facilities, leases 27
others, and manages 13 assisted living facilities. The Company holds a minority
equity interest in six of these managed assisted living facilities. The Company
operates 51 nursing homes and 36 assisted living facilities in the United States
and 14 nursing homes and 21 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.
2. BASIS OF FINANCIAL STATEMENTS
The Company is currently analyzing its results for the three months ended
September 30, 1999 and believes that certain charges recorded in this period may
apply to either or both of the three month periods ended March 31 or June 30,
1999. Upon completion of the analysis, quarterly data for the three quarters in
the period ended September 30, 1999 will be included in subsequent filings with
the Securities and Exchange Commission.
The interim consolidated financial statements for the nine month periods ended
September 30, 1999 and 1998, 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 necessary to
present fairly the financial position at September 30, 1999 and the results of
operations and cash flows for the nine month periods ended September 30, 1999
and 1998.
-8-
<PAGE> 9
The accompanying interim consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed further
in Note 3, the Company is currently not in compliance with certain debt
covenants that allow the holders of a majority of the Company's debt to demand
immediate principal repayment. Although it is not anticipated that such demand
will be made, the continued forbearance on the part of the Company's lenders
cannot be assured at this time. In addition, it is anticipated that, assuming
continuation of current conditions, the Company will not be in compliance at
December 31, 1999 with the financial covenants applicable to the lease
agreements covering a majority of its United States nursing facilities. Under
the agreements, the lessor has the right to terminate the lease agreements and
seek recovery of any related financial losses. At a minimum, the Company's cash
requirements over the next 12 months include funding operations, capital
expenditures, scheduled debt service, and other working capital requirements. No
assurance can be given that the Company will have sufficient cash to meet its
cash requirements for the next 12 months. The Company is currently discussing
potential restructuring and refinancing alternatives with its lenders and
primary lessor. If the Company's lenders force immediate repayment, the Company
would not be able to repay the total amount of debt outstanding. Further, no
assurance can be given that the Company will be successful in negotiating
waivers, amendments, or refinancings of outstanding debt or lease commitments,
or that the Company will be able to meet any amended financial covenants in the
future. If the Company is unable to generate sufficient cash flow from its
operations or successfully negotiate debt or lease amendments, it will explore a
variety of other options, including but not limited to other sources of
financings, asset dispositions, or relief under the United States Bankruptcy
code. The accompanying interim consolidated financial statements do not include
any adjustments relating to the recoverability and classification of recorded
asset carrying amounts or the amounts and classification of liabilities that
might result should the Company be unable to continue as a going concern.
The results of operations for the nine month periods ended September 30, 1999
and 1998 are not necessarily indicative of the operating results for the entire
respective years. These interim consolidated financial statements should be read
in connection with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998.
3. DEBT COVENANT COMPLIANCE
Certain of the Company's loan agreements 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 both September 30 and November 15, 1999, the Company was not in compliance
with the covenants. Cross-default or material adverse change provisions
contained in the agreements allow the holders of a majority of the Company's
debt to demand immediate repayment. Although the noncompliance and resulting
actions have not been formally or informally declared by the lenders, the
Company has not obtained waivers of the noncompliance. Based on regularly
scheduled debt service requirements, the Company has a total of $28.1 million of
debt that must be repaid or refinanced within the next 12 months. However, as a
result of the covenant noncompliance and other cross-default provisions, the
Company has classified a total of $55.6 million of debt as current liabilities
as of September 30, 1999. As discussed in Note 2, the Company would not be able
to repay the total amount of its outstanding indebtedness if the applicable
lenders forced immediate repayment.
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5, issued by the
Accounting Standards Executive
-9-
<PAGE> 10
Committee, requires that the cost of start-up activities be expensed as these
costs are incurred. Start-up activities include one-time activities and
organization costs. Upon adoption, the Company incurred a pre-tax charge to
income of $433,000 ($277,000 net of tax), representing the write off of all
previously deferred balances. This write off has been reported as the cumulative
effect of a change in accounting principle in the accompanying interim
consolidated statements of operations.
5. EARNINGS PER SHARE
Information with respect to the calculation of basic and diluted earnings per
share data follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
----- ----
<S> <C> <C>
NUMERATOR:
Income (loss) before cumulative effect
of change in accounting principle $ (7,529,000) $ 818,000
Cumulative effect of change in
accounting principle, net of tax (277,000) -0-
------------- -------------
Net income (loss) $ (7,806,000) $ 818,000
============= =============
DENOMINATOR:
Basic average shares outstanding 5,430,000 5,384,000
Employee stock purchase plan N/A(1) 10,000
Options N/A(1) 1,000
------------- -------------
Diluted average shares outstanding 5,430,000 5,395,000
============= =============
BASIC EARNINGS PER SHARE:
Income (loss) before accounting change $ (1.39) $ .15
Cumulative effect of change in
accounting principle, net of tax (.05) .00
------------- -------------
Net income (loss) $ (1.44) $ .15
============= =============
DILUTED EARNINGS PER SHARE:
Income (loss) before accounting change $ (1.39) $ .15
Cumulative effect of change in accounting
principle, net of tax (.05) .00
------------- -------------
Net income (loss) $ (1.44) $ .15
============= =============
</TABLE>
- -----------------
(1) Not applicable since inclusion would be anti-dilutive.
-10-
<PAGE> 11
6. OTHER COMPREHENSIVE INCOME
The Company follows the provisions of 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>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
Foreign currency items:
Beginning balance $ (412,000) $ (196,000)
Current period change, net of income tax 160,000 (218,000)
---------- ----------
Ending balance $ (252,000) $ (414,000)
========== ==========
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
7. 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 system
conversion with respect to its U.S. nursing homes. Pursuant to this conversion,
the Company abandoned much of its existing software and dismantled much of its
regional infrastructure in favor of a centralized accounting organization. This
restructuring charge represented 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. In addition to the restructuring charge, the Company also
recognized costs associated with the write-off of 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.
8. OPERATING SEGMENT INFORMATION
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information." The Company has three reportable
segments: U.S. nursing homes, U.S. assisted living facilities, and Canadian
operations, which consists of both nursing home and assisted living services.
Management evaluates each of these segments independently due to the geographic,
reimbursement, marketing, and regulatory differences between the segments.
Management evaluates performance based on profit or loss from operations before
income taxes not including nonrecurring gains and losses and foreign exchange
gains and losses. The following information is derived from the Company's
segments' internal financial statements and includes information related to the
Company's unallocated corporate revenues and expenses:
-11-
<PAGE> 12
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
(IN THOUSANDS) 1999 1998
---- ----
<S> <C> <C>
Net revenues:
U.S. nursing homes $ 103,707 $ 125,429
U.S. assisted living facilities 21,105 18,985
Canadian operations 11,050 11,077
Corporate 644 718
Eliminations (704) (713)
--------- ---------
Total $ 135,802 $ 155,496
========= =========
Depreciation and amortization:
U.S. nursing homes $ 1,780 $ 1,537
U.S. assisted living facilities 1,321 940
Canadian operations 274 260
Corporate 72 81
Eliminations -0- -0-
--------- ---------
Total $ 3,447 $ 2,818
========= =========
Operating income (loss):
U.S. nursing homes $ (11,261) $ 2,064
U.S. assisted living facilities (461) 449
Canadian operations 1,246 1,342
Corporate (1,288) (2,577)
Eliminations -0- -0-
--------- ---------
Total $ (11,764) $ 1,278
========= =========
SEPTEMBER 30, DECEMBER 31,
1999 1998
--------- ---------
Long-lived assets:
U.S. nursing homes $ 54,946 $ 56,396
U.S. assisted living facilities 34,483 33,987
Canadian operations 12,710 10,536
Corporate 24,066 21,725
Eliminations (34,465) (35,135)
--------- ---------
Total $ 91,740 $ 87,509
========= =========
Total assets:
U.S. nursing homes $ 75,284 $ 88,473
U.S. assisted living facilities 36,819 36,926
Canadian operations 15,870 13,718
Corporate 25,923 24,909
Eliminations (44,188) (42,732)
--------- ---------
Total $ 109,708 $ 121,294
========= =========
</TABLE>
-12-
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and three
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 offers a
variety of comprehensive rehabilitation services as well as medical supply and
nutritional support services.
As of September 30, 1999, Advocat's portfolio includes 122 facilities composed
of 65 nursing homes containing 7,307 licensed beds and 57 assisted living
facilities containing 5,320 units. In comparison, at September 30, 1998, the
Company operated 115 facilities composed of 63 nursing homes containing 7,182
licensed beds and 52 assisted living facilities containing 4,900 units. As of
September 30, 1999, the Company owns seven nursing homes, leases 36 others, and
manages the remaining 22 nursing homes. Additionally, the Company owns 17
assisted living facilities, leases 27 others, and manages the remaining 13
assisted living facilities. The Company holds a minority equity interest in six
of these managed assisted living facilities. In the United States, the Company
operates 51 nursing homes and 36 assisted living facilities, and in Canada, the
Company operates 14 nursing homes and 21 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.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
The Company is currently analyzing its results for the three months ended
September 30, 1999 and believes that certain charges recorded in this period may
apply to either or both of the three month periods ended March 31 or June 30,
1999. Upon completion of the analysis, quarterly data for the three quarters in
the period ended September 30, 1999 will be included in subsequent filings with
the Securities and Exchange Commission.
The following tables present the unaudited interim consolidated statements of
operations and related data for the nine months ended September 30, 1999 and
1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) NINE MONTHS ENDED SEPT. 30,
---------------------------
1999 1998 CHANGE %
---- ---- ------ -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $ 105,071 $126,662 $(21,591) (17.0)
Resident revenues 27,962 25,983 1,979 7.6
Management fees 2,656 2,708 (52) (1.9)
Interest 113 143 (30) (21.1)
--------- -------- --------
Net revenues 135,802 155,496 (19,694) (12.7)
--------- -------- --------
EXPENSES:
Operating 115,466 123,546 (8,080) (6.5)
Lease 15,155 14,379 775 5.4
General and administrative 9,372 8,159 1,213 14.9
Interest 4,126 3,848 278 7.2
Depreciation and amortization 3,447 2,818 629 22.3
Non-recurring charges -0- 1,468 (1,468) (100.0)
--------- -------- --------
Total expenses 147,566 154,218 (6,652) (4.3)
--------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (11,764) 1,278 (13,042) (1020.5)
PROVISION (BENEFIT) FOR INCOME TAXES (4,235) 460 (4,695) (1020.5)
--------- -------- --------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (7,529) 818 (8,347) (1020.5)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (277) -0- (277) N/A
--------- -------- --------
NET INCOME (LOSS) $ (7,806) $ 818 $ (8,624) (1,054.8)
========= ======== ========
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
<S> <C> <C>
REVENUES:
Patient revenues 77.4% 81.5%
Resident revenues 20.6 16.7
Management fees 1.9 1.7
Interest 0.1 0.1
----- -----
Net revenues 100.0% 100.0%
----- -----
OPERATING EXPENSES:
Operating 85.0 79.5
Lease 11.2 9.3
General and administrative 6.9 5.2
Interest 3.0 2.5
Depreciation and amortization 2.5 1.8
Non-recurring charges 0.0 0.9
----- -----
Total expenses 108.6 99.2
----- -----
INCOME (LOSS) BEFORE INCOME TAXES (8.6) 0.8
PROVISION (BENEFIT) FOR INCOME TAXES (3.1) 0.3
----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (5.5) 0.5
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (0.2) 0.0
----- -----
NET INCOME (LOSS) (5.7)% 0.5
===== =====
</TABLE>
GENERAL
Medicare and Other Reimbursement Changes. In 1999, the Company has continued to
experience the impact of Medicare payment limitations imposed by the Health Care
Finance Administration upon all providers of nursing home Medicare services,
including implementation of a prospective payment system ("PPS"). The four-year
phase-in of PPS began for all providers at some point during the year ending
June 30, 1999. In general, PPS provides a standard payment for Medicare Part A
services to all providers regardless of their current costs. PPS creates an
incentive for providers to reduce their costs, and management has reduced
operating expenses in 1999 in an effort to offset the revenue reductions
resulting from PPS. Management estimates that the ultimate impact of PPS on
Company revenues will be a reduction of $16.0 to $17.0 million per year. Since
the onset of PPS, management has reduced costs in response to PPS such that
there has been little direct impact on net operations. However, the Company's
Medicare census has declined significantly as an indirect result of PPS and
other reimbursement changes, which has resulted in a reduction in the amount of
the Company's overhead absorbed by the Company's Medicare operations. Since PPS
is still an evolving process, its ultimate impact cannot be known with certainty
at this time.
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<PAGE> 16
Cost restrictions placed on the provision of rehabilitation (ancillary) services
have been significant. Beginning in January 1998, the allowable costs for cost
reimbursement components of Medicare Part B services became subject to a
limitation factor of 90% of actual cost. In 1999, the cost reimbursement system
for rehabilitation services has been replaced by a system of fee screens that
effectively limit reimbursement and place caps on the maximum fees that may be
charged for therapy services. Historically, the Company subcontracted the
provision of these therapy services. However, in response to the deep cuts in
fees for service, the Company's therapy subcontractor exited the business. And
in June 1999, the Company began providing such services in house. The Company
anticipates that this will further negatively impact operations although the
ultimate effect cannot yet be reasonably estimated. These changes with respect
to Part B reimbursement have combined to cause a dramatic decrease in the
Company's ancillary revenues and expenses. In general, the Company has been
successful in reducing costs in tandem with the revenue reductions from the
provision of therapy services. However, the Company has assumed more operating
risk in electing to provide therapy services for its own account. The Company
also believes that it and the industry have experienced occupancy declines as
doctors have kept patients in hospitals rather than allowing their admittance to
nursing homes where therapy services are now limited.
These changes are endemic upon the industry. They have resulted pursuant to the
administrative implementation of the guidelines contained in the Balanced Budget
Act of 1997 (the "BBA"). Under the BBA, Medicare expenditures by the Federal
government have been cut approximately 20%. This has been a sudden, drastic blow
to the industry. Other providers who relied more heavily on the provision of
services to higher acuity patients have been impacted more severely than the
Company. There have already been several major bankruptcy filings. Without
remediation, the long-term effect on the industry is expected to be
catastrophic. As the impact of these changes upon both providers and
beneficiaries has become known, there has been growing political awareness of a
need to re-examine the drastic cuts that have been implemented. On November 19,
1999, the Senate passed compromise legislation already passed by the House of
Representatives that restores for two years $2.7 billion in Medicare cuts. The
measure is pending President Clinton's signature to become law. There is also
movement that may result in the institution of administrative changes that would
restore some revenues to the U.S. nursing home industry. While such activity is
positive, there is no expectation by management that the current round of
legislative and administrative relief under consideration is sufficient to
restore the economic viability the industry needs.
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<PAGE> 17
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED WITH NINE MONTHS
ENDED SEPTEMBER 30, 1998
Revenues. Net revenues decreased to $135.8 million in 1999 from $155.5 million
in 1998, a decrease of $19.7 million, or 12.7%. Resident revenues increased to
$28.0 million in 1999 from $26.0 million in 1998, an increase of $2.0 million,
or 7.6%. Of the increase in resident revenues, $864,000, or 3.3%, is
attributable to two facilities the Company began operating late in the second
quarter of 1999. Patient revenues decreased to $105.1 million in 1999 from
$126.6 million in 1998, a decrease of $21.6 million, or 17.0%. This decrease in
patient revenues is due primarily to the Medicare reimbursement changes and a
decline in Medicare census. In addition, effective April 1, 1999, the Company
ceased operating a facility it had previously leased; this facility provided
$3.2 million in comparable revenues that were not repeated in 1999. There was a
2.7% decline in patient and resident days, approximately 50,000 days, which was
primarily due to decreases in the nursing home segment. Approximately 12,000 of
this decline in days related to the terminated lease. There was a 32.1% decline
in Medicare days, approximately 29,000 days, and reductions of approximately
16,000 days and 12,000 days among private-pay and Medicaid patients,
respectively. This decline in Medicare days accounts for approximately $9.6
million of the overall revenue reduction. As a percent of patient and resident
revenues, Medicare decreased to 15.4% in 1999 from 24.0% in 1998 while Medicaid
and similar programs increased to 65.6% in 1999 from 57.0% in 1998.
Patient revenues also declined in 1999 compared to 1998 due to the recording of
negative revenue adjustments resulting from reimbursement issues with several
states. Two of the Company's Alabama facilities were decertified for a portion
of 1997. As a result of the decertifications, the state retroactively recouped
incentives that had previously been paid to these facilities with respect to
1996 and 1997. Although the Company believes that its efforts seeking
restitution through the judicial system may ultimately prove successful, since
success is not assured, the incentive revenue has been reversed in 1999.
Additionally, certain patient claims by the Company's West Virginia facilities
were denied in prior years by the third party intermediary. The Company has
exhausted efforts to get the claims approved, and so in 1999, the Company has
reversed these revenues. Finally, the Arkansas Medical system has refused to pay
to all nursing home operators a rate increase that had been both communicated to
the Company and provided for in the state budget that would have covered a
portion of both 1998 and 1999. Although the Company is not party to the action,
litigation is being pursued seeking to force the payment of the budgeted
increase. Because the prospects for collection are currently uncertain, the
Company has reversed this revenue that had been recognized over the last half of
1998 and the first half of 1999. Taken together, these reimbursement issues,
along with miscellaneous other matters, accounted for approximately $2.0 million
of the decline in patient revenues.
Ancillary service revenues, prior to contractual allowances, decreased to $17.4
million in 1999 from $42.9 million in 1998, a decrease of $25.5 million, or
59.5%. The decrease is primarily attributable to reductions in revenue
availability under Medicare and is consistent with the Company's expectation.
Although there are currently some prospects for legislative and administrative
relief, cost limits and revenue caps are continuing to be placed on ancillary
services, primarily rehabilitation therapy. The Company anticipates that
ancillary service revenues will remain flat or trend up marginally during the
next 12 months. The ultimate effect on the Company's operations cannot be
predicted at this time because the extent and composition of the cost
limitations are subject to change.
Operating Expenses. Operating expenses decreased to $115.5 million in 1999 from
$123.6 million in 1998, a decrease of $8.1 million, or 6.5%. The decrease is
primarily attributable to cost reductions implemented in response to the
Medicare reimbursement changes (that is, reduced provision of therapy services
and in the costs to provide them). Several significant expense increases,
however, combined to offset the general decrease. The provision for doubtful
accounts was $5.5 million in 1999 as compared with $1.0 million in 1998, an
increase of $4.5 million, or 450.2%. The Company has substantially completed in
the third quarter of 1999 an intensive examination of its accounts receivable
and determined that the probability of ultimately collecting a substantial
amount of its older accounts receivable is not as likely as
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<PAGE> 18
concluded in previous quarterly evaluations. The Company is self-insured for
workers' compensation claims prior to May 1997. In connection therewith, the
Company recognized a charge of $650,000 in 1999 to provide for the expected
costs on claims related to this period that remain open. The expected costs have
grown as the open cases continued to adversely develop in 1999. The Company also
recognized a charge of $493,000 in 1999 to provide additional reserves for the
self-insured portion of liability claims incurred prior to 1998, which claims
have developed adversely in 1999 compared to previous evaluations. Finally it is
generally recognized that the regulatory environment in which nursing homes
operate has become more restrictive. In 1999, the Company incurred approximately
$400,000 in fines and penalties compared to approximately $50,000 in the 1998
period. The largest component of operating expense is wages, which increased to
$57.6 million in 1999 from $57.0 million in 1998, an increase of $565,000, or
1.0%. Savings from staff reductions in response to census declines have been
offset by inflationary increases and staff increases related to the provision of
rehabilitation therapy. The Company's wage increases are generally in line with
inflation. As a percent of patient and resident revenues, operating expenses
increased to 86.8% in 1999 from 80.9% in 1998.
Lease Expense. Lease expense increased to $15.2 million in 1999 from $14.4
million in 1998, an increase of $775,000, or 5.4%. Of this increase, $206,000,
or 1.4%, is attributable to the two new facilities. The increase was offset by
$241,000 not repeated in 1999 due to the facility whose lease term expired April
1, 1999. Adjustments in the majority of the Company's lease agreements are
generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $9.4 million in 1999 from $8.2 million in 1998, an increase of $1.2 million,
or 14.9%. As a percent of total net revenues, general and administrative expense
increased to 6.9% in 1999 compared with 5.2% in 1998. In 1999, the Company
recognized a charge of $500,000 due to further impairment of its investment in
TDLP. The 1999 period also includes a provision for $275,000 of severance
benefits for Mary Margaret Hamlett, former Chief Financial Officer of the
Company.
Interest Expense. Interest expense increased to $4.1 million in 1999 from $3.8
million in 1998, an increase of $278,000, or 7.2%. The increase is primarily
attributable to increased borrowings in the first half of 1999.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $3.4 million in 1999 from $2.8 million in 1998, an increase of $629,000, or
22.3%. The increase is primarily attributable to additional depreciable property
placed in service during 1999 and 1998.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
Non-Recurring Charges. The Company incurred $1.5 million in charges in 1998
that were not repeated in 1999. These charges were primarily restructuring
charges associated with the Company's conversion of its management information
systems.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, the loss before income taxes and the cumulative effect
of the change in accounting principle was $(11.8) million in 1999 as compared
with income of $1.3 million in 1998, a decrease of $13.1 million. The effective
combined federal, state and provincial income tax rate was 36.0% in both 1999
and 1998. The net loss after taxes and the cumulative effect of the change in
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<PAGE> 19
accounting principle was $(7.8) million in 1999 as compared with net income of
$818,000 in 1998, a decrease of $8.6 million, and basic and diluted earnings per
share were each a loss of $(1.44) in 1999 as compared with each being income of
$.15 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's loan agreements 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 both September 30 and November 15, 1999, the Company was not in compliance
with the covenants. Cross-default or material adverse change provisions
contained in the agreements allow the holders of substantially all of the
Company's debt to demand immediate repayment. Although the noncompliance and
resulting actions have not been formally or informally declared by the lenders,
the Company has not obtained waivers of the noncompliance. Based on regularly
scheduled debt service requirements, the Company has a total of $28.1 million of
debt that must be repaid or refinanced within the next 12 months. However, as a
result of the covenant noncompliance and other cross-default provisions, the
Company has classified a total of $55.6 million of debt as current liabilities
as of September 30, 1999. The Company would not be able to repay the total
amount of its indebtedness outstanding if the applicable lenders forced
immediate repayment.
At September 30, 1999 and December 31, 1998, the Company had negative working
capital of $(54.7) million and $(16.2) million, respectively, and the current
ratio was 0.2 and 0.7, respectively. The negative working capital results
primarily from the Company's classification of a majority of its debt as current
liabilities as of September 30, 1999 and the current maturities of long-term
debt as of December 31, 1998.
Net cash provided by operating activities totaled $5.8 million and $3.4 million
in the nine month periods ended September 30, 1999 and 1998, 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 by investing activities totaled $4.1 million and $6.8 million in
the nine month periods ended September 30, 1999 and 1998, respectively. These
amounts primarily represent purchases of property plant and equipment,
investments in and advances to Canadian 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 $5.2 million for capital
expenditures in each of the last three calendar years ending December 31, 1998.
Substantially all such expenditures were for facility improvements and
equipment, which were financed principally through working capital. For the year
ended December 31, 1999, the Company anticipates that capital expenditures for
improvements and equipment for its existing facility operations will be
approximately $4.2 million, including $1.6 million for non-routine projects.
Net cash provided (used) by financing activities totaled $(2.8 million) and $2.6
million in the nine month periods ended September 30, 1999 and 1998,
respectively. The net cash provided from financing activities primarily
represents net proceeds from issuance and repayment of debt and advances to
TDLP.
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<PAGE> 20
At September 30, 1999, the Company had total debt outstanding of $61.8 million,
of which $36.2 million was principally mortgage debt bearing interest, generally
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 $9.4 million. The Company's
remaining debt of $16.2 million was drawn under the Company's lines of credit,
consisting of a working capital line of credit and an acquisition line of
credit. Most of the Company's debt is at floating interest rates, generally at a
spread above the London Interbank Offered Rate ("LIBOR").
On June 4, 1999, the Company closed two loans totaling $25.25 million (the "NC
Loans"). The NC Loans are secured by the 13 owned assisted living facilities the
Company operates in the state of North Carolina. The NC Loans mature in June
2002, bear interest at LIBOR plus 2.35%, and provide for principal amortization
under a 25-year amortization schedule. The net proceeds available at closing,
$24.7 million, were applied against the Company's indebtedness under the Bridge
Loan. As of both September 30 and November 15, 1999, the outstanding
indebtedness under the NC Loans was approximately $25.1 million and the interest
rate was 7.7% and 7.8%, respectively.
The Bridge Loan had an original indebtedness of $34.1 million. It was used to
fund the purchase of the Company's North Carolina assisted living operations,
which closed on September 30, 1997. With the application of the net proceeds
from the NC Loans, the balance of the Bridge Loan was reduced to $9.4 million.
Prior to the principal reduction, the Bridge Loan had a maturity date of July 1,
1999, carried interest at LIBOR plus 3.0%, and had a restriction against
pledging the North Carolina assets as collateral with any other lender. With the
reduction in the principal balance, the Company and its lenders agreed to modify
the terms of the Bridge Loan by extending the stated maturity date to October 1,
1999 (since extended to December 1, 1999), increasing the interest rate to 12.0%
fixed, and providing certain security interests to the lenders. These security
interests include two non-operating properties in North Carolina and the
Company's limited partnership interests in TDLP. No further principal reductions
have been made or are scheduled at this time, but the Company has agreed to
apply against the Bridge Loan indebtedness any net proceeds realized from the
sale of the collateral comprising the additional security interests.
As of September 30, 1999, the Company had drawn $1.4 million, had $5.5 million
of letters of credit outstanding, and had $1.9 million remaining borrowing
capability under its working capital line of credit. As of November 15, 1999,
the Company had drawn $2.6 million, had $5.5 million of letters of credit
outstanding, and had $325,000 remaining borrowing capability under its working
capital line of credit. The interest rate applicable at both September 30 and
November 15, 1999, was 7.9%. The working capital line of credit matures December
1, 1999. An extension of the existing agreement or a replacement working capital
line of credit is currently being negotiated with the existing bank lender.
Over the past year, the Company's bank lender has provided additional line of
credit availability (the "Overline"). Availability under the Overline began at
$4.0 million, was reduced to $3.75 million in the third quarter of 1999, and has
since been reduced further to its current level of $3.5 million. Since April 14,
1999, the Overline has carried interest at 14.0% but was otherwise subject to
the same terms and conditions as the Company's working capital line of credit.
The Overline carried an original maturity of July 1, 1999. Coincident with the
changes with respect to the Bridge Loan,
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<PAGE> 21
the lender agreed to revised terms with respect to the Overline. These
revisions, including availability reduction, extended the maturity date to
December 1, 1999, and provided for increased reporting responsibility to the
lender and cooperation with the lender in the completion of an audit of the
Company's accounts receivable. In addition, the Company has agreed to formalize
by November 15, 1999, with respect to certain available assets, first and second
collateral positions in favor of the lender. Amounts drawn under the Overline
totaled $3.75 million and $3.5 million as of September 30, 1999 and November 15,
1999, respectively.
The acquisition line of credit of $40.0 million, less outstanding borrowings,
was 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 September 30, 1999, and November 15, 1999,
the Company has $11.1 million outstanding under the acquisition line, which
amount was secured by four nursing homes. No further draws are available under
the acquisition line of credit. Amounts outstanding under the acquisition line
of credit mature on December 1, 1999, however, the Company has signed an
agreement with the existing lender and is proceeding along a course that is
expected to result in an extension of the maturity date to April 30, 2000 and,
ultimately, replacement long-term financing with such lender.
Based on regularly scheduled debt service requirements (i.e., excluding any
potential acceleration due to formal declaration of default by one or more of
the Company's lenders), at September 30, 1999, $28.1 million of the Company's
total debt of $61.8 million must be repaid or refinanced during the next 12
months. These scheduled maturities are as follows: $11.1 million under the
acquisition line, secured by four nursing homes, due December 1, 1999; $1.2
million mortgage payable to a Canadian bank, secured by one nursing home, due
December 1, 1999; $1.4 million under the working capital line of credit, due
December 1, 1999; $3.75 million under the Overline, due December 1, 1999; $9.4
million under the Bridge Loan due December 1, 1999; and miscellaneous scheduled
maturities over the next 12 months of $1.2 million. With respect to the $11.1
million borrowed under the acquisition line, the Company has signed an agreement
to extend the maturity to April 30, 2000 and expects to refinance this debt with
long-term fixed-rate debt with the same lender in early 2000. The Company
expects to extend the $1.2 million Canadian mortgage with long-term fixed-rate
debt with the existing mortgage holder before the December 1, 1999 maturity.
With respect to the Bridge Loan, the working capital line of credit, and the
Overline, the Company is currently negotiating with the existing lender to
further restructure the terms, including extension of their maturity dates,
beyond December 1, 1999. The Company expects to repay a portion of this debt
through various means such as the sale of certain assets, refinancing mortgage
debt, and through cash generated from operations. The Company expects to repay
the miscellaneous current maturities of $1.2 million with cash generated from
operations. Management is hopeful that it will be successful in restructuring
the Company's debt as described. However, there can be no assurance that the
Company's restructuring efforts will be successful.
In addition, it is anticipated that, assuming continuation of current
conditions, the Company will not be in compliance at December 31, 1999 with the
financial covenants applicable to the lease agreements covering a majority of
its United States nursing facilities. Under the agreements, the lessor has the
right to terminate the lease agreements and seek recovery of any related
financial losses.
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<PAGE> 22
At a minimum, the Company's cash requirements over the next 12 months include
funding operations, capital expenditures, scheduled debt service, and other
working capital requirements. No assurance can be given that the Company will
have sufficient cash to meet its requirements for the next 12 months. As
previously described, the Company is currently discussing potential
restructuring and refinancing alternatives with its current lenders as well as
with its primary lessor. If the Company's lenders forced immediate repayment,
the Company would not be able to repay the total amount of its indebtedness
outstanding. Further, no assurance can be given that the Company will be
successful in negotiating waivers, amendments, or refinancings of outstanding
debt or lease commitments, or that the Company will be able to meet any amended
financial covenants in the future. If the Company is unable to generate
sufficient cash flow from its operations or successfully negotiate debt or lease
amendments, it will explore a variety of other options, including but not
limited to other sources of financing, asset dispositions, or relief under the
United States Bankruptcy code. The Company's interim consolidated financial
statements as of and for the nine months ended September 30, 1999 do not include
any adjustments relating to the recoverability and classification of recorded
asset carrying amounts or the amounts and classification of liabilities that
might result should the Company be unable to continue as a going concern.
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 September 30, 1999 and December 31, 1998, totaled $16.6 million and
$28.3 million, respectively, representing approximately 35 and 53 days in
accounts receivable, respectively. Accounts receivable from the provision of
management services was $487,000 and $387,000 at September 30, 1999 and December
31, 1998, respectively, representing approximately 52 and 39 days in accounts
receivable, respectively.
The Company is subject to accounting losses from uncollectible receivables in
excess of its reserves. 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.
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,
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<PAGE> 23
reimbursement for patient services, and Medicare and Medicaid fraud and abuse.
Changes in these laws and regulations, such as reimbursement policies of
Medicare and Medicaid programs as a result of budget cuts by federal and state
governments or other legislative and regulatory actions, could have a material
adverse effect on the Company's consolidated financial position, results of
operations, and cash flows. Future federal budget legislation and federal and
state regulatory changes may negatively impact the Company.
All of the Company's facilities are required to obtain annual licensure renewal
and are subject to annual surveys and inspections in order to be certified for
participation in the Medicare and Medicaid programs. In order to maintain their
operator's license and their certification for participation in Medicare and
Medicaid programs, the nursing facilities must meet certain statutory and
administrative requirements. These requirements relate to the condition of the
facilities, the adequacy and condition of the equipment used therein, the
quality and adequacy of personnel, and the quality of medical care. Such
requirements are subject to change. There can be no assurance that, in the
future, the Company will be able to maintain such licenses for its facilities or
that the Company will not be required to expend significant sums in order to do
so.
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
("BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The
BBA requires that nursing homes transition to a prospective payment system
("PPS") under the Medicare program during a four-year "transition period,"
commencing with the first cost reporting period beginning on or after July 1,
1998. As of September 30, 1999, all of the Company's facilities had begun the
PPS transition. The BBA also contains certain measures that have and could lead
to further future reductions in Medicare therapy reimbursement and Medicaid
payment rates. To date, the major impact on the Company from PPS and other
reimbursement changes, has been systemic occupancy declines, which have reduced
the amount of overhead absorbed under the Company's Medicare operations.
Definitely, both revenues and expenses have been reduced significantly from the
levels prior to PPS. With respect to Medicare therapy allowable cost and fee
reductions, the Company estimates that net operations was negatively impacted in
both 1998 and 1999 and will continue to be negatively impacted beyond 1999 as a
result of the changes brought about under the BBA. However, the ultimate
negative impact on the Company's operations cannot be reasonably estimated. Any
reductions in government spending for long-term health care could have an
adverse effect on the operating results and cash flows 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 revenues from nongovernmental sources,
including expansion of its assisted living and Canadian operations to the extent
capital is available to do so, if at all.
While federal regulations do not provide states with grounds to curtail funding
of their Medicaid cost reimbursement programs due to state budget deficiencies,
states have nevertheless curtailed funding in such circumstances in the past. No
assurance can be given that states will not do so in the future or that the
future funding of Medicaid programs will remain at levels comparable to the
present levels. The United States Supreme Court ruled in 1990 that healthcare
providers could use the Boren Amendment to require states to comply with their
legal obligation to adequately fund Medicaid programs. The BBA repeals the Boren
Amendment and authorizes states to develop their own standards for setting
payment rates. It requires each state to use a public process for establishing
proposed rates whereby the methodoligies and justifications used for setting
such rates are available for public review and comment. This requires facilities
to become more involved in the rate setting process since failure to do so may
interfere with a facility's ability to challenge rates later.
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 six Canadian retirement
facilities (one of which is owned) and two owned Canadian nursing homes.
Although not material to the Company as a whole, 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.
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<PAGE> 24
EXECUTIVE MANAGEMENT CHANGES
Effective June 30, 1999, Mary Margaret Hamlett resigned as Executive Vice
President, Chief Financial Officer and Secretary of the Company. Mr. Richard B.
Vacek, Jr. replaced Ms. Hamlett in those capacities effective August 16, 1999.
Ms. Hamlett also resigned as a Director of the Company coincident with her
resignation as an employee of the Company.
In addition, Mr. Charles H. Rinne joined the Company effective June 28, 1999.
Mr. Rinne is President and Chief Operating Officer of the Company.
STOCK EXCHANGE
On November 10, 1999, the Company's stock began being quoted on the NASD's OTC
Bulletin Board under the symbol AVCA. Previously, the Company's common stock was
traded on the New York Stock Exchange under the symbol AVC. The Company's common
stock is also traded on the Toronto Stock Exchange under the symbol AVCU.
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.
IMPACT OF THE YEAR 2000
The Company has established a Year 2000 ("Y2K") compliance committee. The
committee is charged with identifying potential problems faced by the Company as
a result of Y2K and develop remedial or contingency plans in anticipation of
them. Working closely with the Company's insurance carrier, the Committee has
developed a formal, documented plan to address potential Y2K problems, which is
both being implemented and challenged for adequacy and completeness at this
time. The plan has required assessment and preparatory activity at the Company's
facilities. During the Y2K transition period from late 1999 into early 2000,
vacations have been prohibited for personnel deemed to be critical to the
provision of safe care to the Company's patients and residents.
Management has completed the management information systems conversion with
respect to its United States nursing home operations. Additionally, the
conversion of the management information systems of the United States assisted
living operations is substantially complete. Included in the process of
selecting hardware and software, assurances were received from the various
vendors that their products are or will be Y2K compliant. The Company continues
to evaluate other information technology areas that may be affected including
existing hardware systems. 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.
-24-
<PAGE> 25
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with Y2K problems
that the Company does not control. The Company has received assurances from its
major vendors that they will not be adversely impacted by this issue. 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 Y2K compliance. Congress' General
Accounting Office ("GAO") has recently concluded that it is highly unlikely that
all Medicare systems will be compliant on time to ensure the delivery of
uninterrupted benefits and services into the year 2000. While the Company does
not receive payments directly from Medicare, the GAO statement could be
interpreted as applying to intermediaries from whom the Company does receive
payment. The Company intends to actively confirm the Y2K readiness status for
each of its intermediaries and other payors. However, the failure of the Company
or third parties to be fully Y2K compliant for essential systems and equipment
by January 1, 2000 could result in interruptions of normal business
transactions.
Paying agencies are only one example of the Company's dependence on the Y2K
preparedness of other entities and vendors. Other examples include the normal
flow of patient care and nutritional supplies, utilities, communications,
banking services and therapy subcontractors. Just as with the Company's own
systems, the failure of third parties to remedy Y2K problems or the failure to
address unanticipated Y2K problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
Management has reported to the Board of Directors on the Company's ability to
deal with Y2K issues. Management is mandated by the Board of Directors to
continue its evaluations of Y2K preparedness and to make periodic reports of its
assessments and plans. Contingency plans for the Company's Y2K related issues
continue to be developed, including identification of alternate suppliers and
vendors, alternate technologies, and manual systems. Management believes that
the Company is well-positioned to experience Y2K successfully. Costs of the
Company's Y2K preparedness programs through November 15, 1999, have not been
material, and management does not expect costs to be material in future periods.
The Company is fortunate in that the service it provides is generally custodial
in nature and lacking in a heavy dependence on highly technical biomedical
equipment. However, the worst case result of assumed non-compliance in any of
several critical areas would likely have a catastrophic impact on the Company's
ability to deliver its services to patients and residents in a safe manner and,
consequently, on the Company's results of operations. Should catastrophic events
occur that are out of the Company's control, such as those described above, the
magnitude of that problem will affect not only the Company, but society as a
whole.
The foregoing Y2K disclosure is intended to be a "Year 2000 statement" as the
term is defined in the Year 2000 Information and Readiness Disclosure Act of
1998 (the "Year 2000 Act"), and, to the extent such disclosure relates to Y2K
processing of the Company or to products or services offered by the Company, it
is also intended to be the "Year 2000 readiness disclosure," as that term is
defined in the Year 2000 Act.
-25-
<PAGE> 26
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, 1998. 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 increased cost of borrowing under the Company's credit
agreements, covenant waivers from the Company's lenders, possible amendments to
the Company's credit agreements, the impact of future licensing surveys, 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. Investors also should refer to the risks identified in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as risks identified in the Company's Form 10-K for the year
ended December 31, 1998 for a discussion of various risk factors of the Company
and that are inherent in the healthcare industry. Given these risks and
uncertainties, the Company can give no assurances that these forward-looking
statements will, in fact, transpire and, therefore, cautions investors not to
place undue reliance on them. Actual results may differ materially from those
described in such forward-looking statements. 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.
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The Company is not currently in compliance with certain covenants of
its loan agreements and certain other indebtedness. See "Managements
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
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.
-26-
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
November 22, 1999
By: /s/ Richard B. Vacek, Jr.
---------------------------------------------------
Richard B. Vacek, Jr.
Executive Vice president, Chief Financial Officer,
Principal Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to Sign
on Behalf of the Registrant
-27-
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION OF EXHIBITS
NUMBER
<S> <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- Form of Fifth Amendment to Master Credit and Security Agreement between
Diversicare Management Services Co. and First American National Bank.
10.2- Fourth Amendment to Loan and Negative Pledge Agreement dated October 1,
1999 between Diversicare Assisted Living Services NC, LLC. and First
American National Bank along with AmSouth Bank.
10.3- Line of Credit Note (Overline Facility) dated October 1, 1999 between
Diversicare Management Services Co. and First American National Bank.
27- Financial Data Schedule (for SEC use only).
</TABLE>
<PAGE> 1
EXHIBIT 10.1
FIFTH AMENDMENT TO MASTER CREDIT
AND SECURITY AGREEMENT
This Fifth Amendment to Master Credit and Security Agreement is made and
entered into as of June __, 1999, by and between First American National Bank, a
national banking association, with its principal place of business at First
American Center, Nashville, Tennessee, 37237 (hereinafter referred to as "First
American"), in its capacity as the lender under the Working Capital Line and as
Administrative Agent, GMAC Commercial Mortgage Corporation, with offices for
purposes of this Agreement at 2200 Woodcrest Place, Suite 305, Birmingham,
Alabama, 35209 (hereinafter referred to as "GMAC"), in its capacity as the
lender under the Acquisition Line (First American and GMAC are sometimes
referred to individually herein as "Lender", and collectively herein as the
"Lenders"), Advocat Inc., a Delaware corporation (hereinafter referred to as
"Advocat"), Diversicare Management Services Co. (the "Borrower"), a Tennessee
corporation and wholly-owned subsidiary of Advocat, Advocat Finance, Inc.
("AFI"), a Delaware corporation and wholly-owned subsidiary of the Borrower,
Diversicare Leasing Corp. ("DLC"), a Tennessee corporation and wholly-owned
subsidiary of AFI, Advocat Ancillary Services, Inc. ("AAS"), a Tennessee
corporation and wholly-owned subsidiary of the Borrower, Diversicare Canada
Management Services Co., Inc. ("DCMS"), a corporation organized under the laws
of Canada and wholly-owned subsidiary of DLC, Diversicare General Partner, Inc.
("DGP"), a Texas corporation and wholly-owned subsidiary of DLC, First American
Health Care, Inc. ("FAHC"), an Alabama corporation and wholly-owned subsidiary
of DLC, Diversicare Leasing Corp. of Alabama ("DLCA"), an Alabama corporation
and wholly-owned subsidiary of DLC, and Advocat Distribution Services, Inc.
("ADS"), a Tennessee corporation and wholly-owned subsidiary of the Borrower
(DLC, AAS, DCMS, DGP, FAHC, ADS, DLCA and AFI, together with any other
subsidiaries of Advocat (or any Subsidiary) formed or acquired after the date
hereof, are sometimes hereinafter referred to collectively as the
"Subsidiaries"),
W I T N E S S E T H:
WHEREAS, pursuant to the terms of a Master Credit and Security Agreement
dated as of December 27, 1996 (the "Loan Agreement"), by and between the
Lenders, Advocat, the Borrower and the Subsidiaries, the Lenders agreed to loan
to the Borrower, Advocat and the Subsidiaries sums not to exceed $50,000,000,
including a $10,000,000 Working Capital Line to be funded by First American
(capitalized terms not otherwise defined herein shall have meanings ascribed to
such terms in the Loan Agreement); and,
WHEREAS, at Borrower's request, First American has provided a temporary
increase in the Working Capital Line in the amount of $4,000,000 (the "Overline
Facility"); and,
WHEREAS, Diversicare Assisted Living Services, Inc. is a Tennessee
corporation ("DALS"), and a wholly-owned subsidiary of AFI, and together with
the Borrower formed Diversicare Assisted Living Services NC, LLC ("DALSNC"), a
Tennessee limited liability company, which owns or leases certain assisted
living facilities in North Carolina as described in Exhibit A attached hereto
(the "North Carolina Facilities"); and
1
<PAGE> 2
WHEREAS, GMAC has committed to finance the portion of the North Carolina
Facilities owned by DALSNC, provided GMAC has requested that DALSNC convey the
facilities to Diversicare Assisted Living Services NC I, LLC ("DALSNC I") and
Diversicare Assisted Living Services NC II, LLC ("DALSNC II"), which will in
turn pledge such facilities to GMAC as collateral for the GMAC loan; and
WHEREAS, pursuant to the Loan Agreement, DALS, DALSNC, DALSNC I and DALNC
II will join in the Loan Agreement as subsidiaries and will pledge to First
American, as collateral security for the Working Capital Line, certain assets
of such entities; and
WHEREAS, Lenders have agreed to modify certain formal covenants contained
in the Loan Agreement,
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 agree as follows:
1. Joinder of Entities. DALS, DALSNC, DALSNC I and DALSNC II hereby join
in the Loan Agreement as Subsidiaries and Guarantors of the Working Capital
Line. As part of the Collateral securing the Working Capital Line, DALS, DALSNC,
DALSNC I and DALSNC II hereby join in Section 4.1 of the Loan Agreement as
Pledgors, and hereby, jointly and severally, collaterally assign and grant to
First American, as collateral security for the Working Capital Line, a security
interest in all items of Collateral described in Section 4.1(a), including
without limitation all accounts receivable, equipment, furnishings and
furniture, general intangibles, inventory, and all proceeds thereof, as more
specifically set forth in Section 4.1(a)(i) through (v). In addition, such
entities agree to execute Guaranty Agreements as required by the Lenders, to
evidence such entities' guaranty obligations under the Loan Agreement. Such
entities shall also execute such additional documents and instruments, including
without limitation UCC-1 Financing Statements, in order to perfect the security
interest of the Lenders and the Collateral as described herein.
2. Financial Covenants. Section 5.6 of the Loan Agreement is hereby
deleted and the following is substituted as a new Section 5.6:
5.6 Financial Covenants. The Borrower, Advocat and the other
Guarantors shall comply with the following financial covenants, on a
consolidated basis:
A. Maintain a Current Ratio of not less than 1.25 to 1 at all times. For
purposes of calculating the Current Ratio the following debt will be
excluded from Current Maturities of Long Term Debt:
(a) the principal balance outstanding under the Acquisition
Line;
(b) Principal balance outstanding under the Working Capital
Line or the Overline Facility;
2
<PAGE> 3
(c) Principal balance outstanding under the Bridge Loan
Facility made available by First American and AmSouth Bank,
which remains outstanding following the closing of the new
GMAC financing of the North Carolina Facilities.
In addition, Current Liabilities will include assumed amortization of five
percent (5%) of the outstanding principal balance under the Acquisition
Line.
B. Maintain a ratio of Adjusted Funded Debt to EBITDAR of not more than
8.00 to 1 through December 30, 1999, and 7.50 to 1 on December 31,
1999 and thereafter. In addition, for purposes of calculating
EBITDAR, to the extent taken in a quarter included in the calculation
of the ratio, EBITDAR will include (i) non-recurring charges as
quantified in the December 31, 1998 audited statement of operations
and defined in Note 16 of the December 31, 1998 audit report, and (ii)
a non-recurring charge of $433,440 taken in the first quarter of
fiscal year 1999 related to an accounting change (SOP98-5).
C. Maintain a Fixed Charge Coverage Ratio of not less than 1.00 to 1.00
through December 30, 1999, and 1.05 to 1.00 on December 31, 1999, and
thereafter. For purposes of calculating this ratio, the following
debt will be excluded from Current Maturities of Long Term Debt:
(a) The principal balance outstanding under the
Acquisition Line;
(b) Principal balance outstanding under the Working
Capital Line or the Overline Facility;
(c) Principal balance outstanding under the Bridge Loan
Facility made available by First American and AmSouth Bank,
which remains outstanding following the closing of the new
GMAC financing of the North Carolina Facilities.
In addition, Current Maturities of Long Term Debt will include assumed
amortization of five percent (5%) of the outstanding principal balance
under the Acquisition Line.
D. Maintain a Tangible Net Worth of not less than $24,000,000 as of the
date hereof. Such minimum Tangible Net Worth shall increase (but
shall not decrease) thereafter on a quarterly basis by a minimum of
75% of quarterly net income (beginning with fiscal quarter ended June
30, 1999), plus 100% of any addition to Borrowers' Stockholders
Equity.
3. Waiver of Defaults. Borrower acknowledges that Borrower is in Default
due to noncompliance with Sections 5.6(a), (b), and (c) as of March 31, 1999.
Subject to the terms of this Amendment, Lenders hereby waive the existing
Defaults described above. The foregoing waiver by
3
<PAGE> 4
the Lenders is limited to the specific Defaults described in this Section, and
shall not be deemed to be a waiver of any other Default under the Loan
Agreement.
4. Fees and Expenses. In consideration for the agreements of First
American and GMAC hereunder, and the consent of AmSouth Bank, N.A. to the new
GMAC loan to be secured by the North Carolina Facilities, Borrower shall pay to
First American, GMAC and AmSouth Bank, N.A. a fee of $3,500.00 each, which
shall be due and payable upon execution of this Agreement. Borrower shall also
pay all reasonable costs and expenses incurred by First American in connection
with the transactions contemplated herein.
5. Guarantors. The Guarantors have joined in this Agreement for purposes
of consenting to this Amendment.
6. Consent of GMAC. To the extent required by the Loan Agreement, GMAC
has executed this Agreement for purposes of consenting to the terms of this
Fifth Amendment.
7. Restatement and Ratification. The Borrower, Advocat and the
subsidiaries hereby restate and ratify all of the representations and
warranties contained in the Loan Agreement, as of the date hereof, and each
hereby acknowledge and confirm that the terms and conditions of the Loan
Agreement, as amended hereby, remain in full force and effect.
(Remainder of Page Intentionally Left Blank)
4
<PAGE> 1
EXHIBIT 10.2
FOURTH AMENDMENT TO
LOAN AND NEGATIVE PLEDGE AGREEMENT
This fourth Amendment to Loan and Negative Pledge Agreement, made and
entered into as of the 1st day of October, 1999, 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, as
amended from time to time (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, the balance outstanding under the Credit Facility is
$9,412,383.87; and,
WHEREAS, Borrower has requested, and the Banks have agreed, to extend the
Maturity Date of the Credit Facility to December 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 foregoing,
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 December 1, 1999.
"Notes" means the Renewal and Modification Promissory Notes of even
date herewith in the amount of $4,706,191.94 each, 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 October
20, 1999, as the first payment date. The Maturity Date referred to in Section
2.1 of the Loan Agreement is hereby modified to refer to December 1, 1999.
3. Reporting. In addition to the reporting requirements in the Loan
Agreement, Borrower shall provide to Banks:
1
<PAGE> 2
a. monthly balance sheet and income statement, in form and substance
acceptable to Bank, such statement to be supplied within forty-five (45) days of
month end;
b. weekly cash flow report, in form and substance acceptable to Bank,
to be supplied each Friday;
c. a fourth quarter budget forecast;
d. a budget for fiscal year 2000 in form and substance acceptable to
Bank;
e. cooperate with Bank in completing a field audit of the Borrower's
and affiliates' accounts receivable, at Borrower's expense.
4. Conditions. As a condition to the Banks' extension of the Maturity
Date, Borrower and the Guarantors agree to execute and deliver to the Banks, on
or before November 15, 1999, any and all documents which the Banks deem
necessary to effectuate granting liens on the following properties:
a. a first priority lien on the property located in North Carolina
known as Carteret Care.
b. subject to the approval of GMAC, a second priority lien on the
so-called "Pool B" facilities.
c. subject to the consent of the partners of Texas Diversicare
Limited Partnership and Bank of America, a second priority lien on the six (6)
properties located in Texas and commonly referred to as the "TDLP Properties"
and consisting of (i) Chisolm Trail Nursing & Rehab, (ii) Goliad Nursing &
Rehab, (iii) Hillcrest Nursing & Rehab, (iv) Lampasas Nursing & Rehab, (v)
Refugio Nursing & Rehab, and (vi) Yorktown Nursing & Rehab.
d. subject to the approval of Bank of America, a second priority
security interest in the "Wrap Note" related to the TDLP Properties.
e. subject to the consents required in the TDLP Partnership
Agreement, if any, a pledge by Diversicare General Partner, Inc. of its limited
partner interest in TDLP.
Borrower will cause Banks to be furnished with such due diligence as Banks
may request in connection with such liens, including current title reports
and/or title policies, surveys and environmental site assessments. Subject to
the conditions set forth above, including the inability of Borrower to obtain
the consent of the partners of TDLP, failure of Borrower to execute the
documents necessary to grant the liens and security interests described above on
or before November 15, 1999, shall be deemed to be a default under the Loan
Agreement.
5. Fees. Section 2.5 of the Loan Agreement is hereby deleted, and the
following is substituted as new Section 2.5:
2.5 Fees. In consideration for the Bank's agreements to extend the
Maturity Date, Borrower shall pay the Agent a closing fee of $5,000.00, to
be distributed fifty percent (50%) to AmSouth and fifty percent (50%) to
FANB.
2
<PAGE> 3
6. Guarantors. The guarantors have joined in the execution of this
Fourth 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.
7. 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.
8. 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)
3
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have executed this Fourth
Amendment as of the day and date first above written.
FIRST AMERICAN NATIONAL BANK DIVERSICARE ASSISTED LIVING
SERVICES NC, LLC
BY: /s/ Jeffrey E. Lawrence BY: /s/ Richard B. Vacek, Jr.
------------------------------ --------------------------------
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/ Jeffrey E. Lawrence
------------------------------
TITLE: Senior Vice President
---------------------------
AMSOUTH BANK:
BY: /s/ Samuel M. Ballesteros
------------------------------
TITLE: Senior Vice President
---------------------------
GUARANTORS:
ADVOCAT, INC., a Delaware
corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
4
<PAGE> 5
DIVERSICARE MANAGEMENT SERVICES
CO., a Tennessee corporation
BY: /s/ Richard B. Vacek, Jr.
----------------------------------
TITLE: Executive Vice President
------------------------------
DIVERSICARE LEASING CORP.,
a Tennessee corporation
BY: /s/ Richard B. Vacek, Jr.
----------------------------------
TITLE: Executive Vice President
------------------------------
ADVOCAT ANCILLARY SERVICES,
INC., a Tennessee corporation
BY: /s/ Richard B. Vacek, Jr.
----------------------------------
TITLE: Executive Vice President
------------------------------
DIVERSICARE CANADA
MANAGEMENT SERVICES CO.,
INC., an Ontario, Canada corporation
BY: /s/ Richard B. Vacek, Jr.
----------------------------------
TITLE: Executive Vice President
------------------------------
DIVERSICARE GENERAL
PARTNER, INC., a Texas corporation
BY: /s/ Richard B. Vacek, Jr.
----------------------------------
TITLE: Executive Vice President
------------------------------
5
<PAGE> 6
FIRST AMERICAN HEALTH CARE,
INC., an Alabama corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
ADVOCAT DISTRIBUTION SERVICES,
INC., a Tennessee corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
ADVOCAT FINANCE, INC., a
Delaware corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
DIVERSICARE LEASING CORP. OF
ALABAMA, INC., an
Alabama corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
DIVERSICARE ASSISTED LIVING
SERVICES, INC., a Tennessee
corporation
BY: /s/ Richard B. Vacek, Jr.
------------------------------
TITLE: Executive Vice President
---------------------------
6
<PAGE> 1
EXHIBIT 10.3
LINE OF CREDIT NOTE
(Overline Facility)
$3,500,000.00 Nashville, Tennessee
As of October 1, 1999
FOR VALUE RECEIVED, the undersigned, Diversicare Management Services Co.,
a Tennessee corporation (the "Borrower") promises to pay to the order of First
American National Bank (the "Bank"), the sum of Three Million Five Hundred
Thousand and 00/100 Dollars ($3,500,000.00), or so much thereof as may be
advanced hereunder in accordance with the terms of a Master Credit and Security
Agreement dated as of December 27, 1996, as amended from time to time (the "Loan
Agreement"), between Bank, GMAC-CM Commercial Mortgage Corporation, 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 fixed rate of fourteen percent 14% per annum.
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 2.5 of the Loan Agreement. The outstanding principal balance, together
with all accrued and unpaid interest, shall be due and payable in full on
December 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 represents a temporary increase in the Working Capital Line and,
as such (i) shall be advanced in accordance with the provisions of the Loan
Agreement for advances under the Working Capital Line, and (ii) is secured by
the Collateral described or referred to in the Loan Agreement and the other Loan
Documents, 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 the 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
PAGE 1 OF A 3 PAGE NOTE
<PAGE> 2
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.
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 (the "Maximum Amount"). 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 Obligations so that the amount of interest
paid does not exceed the Maximum Amount.
The obligation is made and intended as a Tennessee contract and is to be
so construed.
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 MANAGEMENT SERVICES
CO., a Tennessee corporation
BY: /s/ Richard B. Vacek, Jr.
-----------------------------------
TITLE: Executive Vice President
--------------------------------
RECEIVED AND ACKNOWLEDGED:
FIRST AMERICAN NATIONAL BANK
BY: /s/ Jeffrey E. Lawrence
--------------------------------
TITLE: Senior Vice President
-----------------------------
PAGE 3 OF A 3 PAGE NOTE
<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 FROM THE NINE-MONTH
PERIOD ENDED SEPTEMBER 30, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,341
<SECURITIES> 0
<RECEIVABLES> 17,412
<ALLOWANCES> 5,265
<INVENTORY> 909
<CURRENT-ASSETS> 17,968
<PP&E> 84,506
<DEPRECIATION> 17,446
<TOTAL-ASSETS> 109,708
<CURRENT-LIABILITIES> 72,669
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 20,004
<TOTAL-LIABILITY-AND-EQUITY> 109,708
<SALES> 0
<TOTAL-REVENUES> 135,802
<CGS> 0
<TOTAL-COSTS> 147,566
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,126
<INCOME-PRETAX> (11,764)
<INCOME-TAX> (4,235)
<INCOME-CONTINUING> (7,529)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (277)
<NET-INCOME> (7,806)
<EPS-BASIC> (1.44)
<EPS-DILUTED> (1.44)
</TABLE>
