-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K6BX7IpNHHrAVSopLy64tC22z1X4RfnQhkX5TyGceouzj57A5K/r2AEkpvZqo5lt IRIk+cX/ss6RAdtsZYEj1w== 0000950144-96-008220.txt : 19961118 0000950144-96-008220.hdr.sgml : 19961118 ACCESSION NUMBER: 0000950144-96-008220 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961114 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVOCAT INC CENTRAL INDEX KEY: 0000919956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621559667 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-12996 FILM NUMBER: 96664025 BUSINESS ADDRESS: STREET 1: 277 MALLORY STATION RD STREET 2: STE 130 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 6157717575 MAIL ADDRESS: STREET 1: 227 MALLORY STATION ROAD STREET 2: SUITE 130 CITY: FRANKLIN STATE: TN ZIP: 37064 10-Q 1 ADVOCAT, INC. FORM 10-Q 09/30/96 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q CHECK ONE: [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM _________ TO _________. COMMISSION FILE NO.: 1-12996 ------- ADVOCAT INC. ------------ (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1559667 - ------------------------------- --------------------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067 ----------------------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (615) 771-7575 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NONE - -------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO --- --- 5,315,822 - -------------------------------------------------------------------------- (OUTSTANDING SHARES OF THE REGISTRANT'S COMMON STOCK AS OF OCTOBER 31, 1996) 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, UNAUDITED)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 2,172 $ 1,076 Accounts receivable, less allowance for contractual adjustments and doubtful accounts of $1,893 and $2,082, respectively 21,935 19,566 Income taxes receivable -0- 304 Inventories 557 508 Prepaid expenses and other 1,548 1,649 Deferred income taxes 899 974 -------- -------- Total current assets 27,111 24,077 -------- -------- PROPERTY AND EQUIPMENT, at cost 38,765 29,677 Less accumulated depreciation and amortization (9,154) (7,659) -------- -------- Net property and equipment 29,611 22,018 -------- -------- OTHER ASSETS: Deferred tax benefit 7,499 8,224 Deferred financing and other costs, net 883 855 Other 2,127 1,922 -------- -------- Total other assets 10,509 11,001 -------- -------- $ 67,231 $ 57,096 ======== ========
(Continued) 2 3 ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, UNAUDITED) (CONTINUED)
SEPTEMBER 30, DECEMBER 31, 1996 1995 ------------- ------------ CURRENT LIABILITIES: Current portion of long-term debt $ 3,926 $ 3,926 Trade accounts payable 6,459 6,881 Income taxes payable 385 -0- Accrued expenses: Payroll and related benefits 4,133 3,754 Worker's compensation 1,519 1,225 Other 1,690 1,565 -------- -------- Total current liabilities 18,112 17,351 -------- -------- NONCURRENT LIABILITIES: Long-term debt less current portion 18,446 11,063 Deferred gains with respect to leases, net 4,092 4,502 Other 707 1,743 -------- -------- Total noncurrent liabilities 23,245 17,308 -------- -------- COMMITMENTS, CONTINGENCIES, AND GUARANTEE SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, $.10 par value, none issued and outstanding -0- -0- Common stock, authorized 20,000,000 shares, $.01 par value 5,316,000, and 5,288,000 shares issued and outstanding at September 30, 1996 and December 31, 1995, respectively 53 53 Paid-in capital 15,083 14,875 Retained earnings 10,738 7,509 -------- -------- Total shareholders' equity 25,874 22,437 -------- -------- $ 67,231 $ 57,096 ======== ========
The accompanying notes to interim combined financial statements are an integral part of these interim consolidated balance sheets. 3 4 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS NINE MONTHS ENDED SEPTEMBER 30, ENDED SEPTEMBER 30, ---------------------- ---------------------- 1996 1995 1996 1995 -------- -------- -------- -------- REVENUES: Patient revenues $ 41,591 $ 35,705 $118,688 $ 99,808 Management fees 1,015 908 3,152 2,684 Interest 40 59 115 180 -------- -------- -------- -------- Net revenues 42,646 36,672 121,955 102,672 -------- -------- -------- -------- EXPENSES: Operating 33,823 28,606 97,101 79,514 Lease 3,659 3,442 10,733 10,170 General and administrative 2,104 1,904 6,314 5,765 Depreciation and amortization 585 391 1,617 1,087 Interest 489 174 1,156 523 -------- -------- -------- -------- Total expenses 40,660 34,517 116,921 97,059 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 1,986 2,155 5,034 5,613 PROVISION FOR INCOME TAXES 715 776 1,812 2,021 -------- -------- -------- -------- NET INCOME $ 1,271 $ 1,379 $ 3,222 $ 3,592 -------- -------- -------- -------- AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING (Note 3) 5,319 5,359 5,314 5,330 ======== ======== ======== ======== EARNINGS PER SHARE (Note 3) $ .24 $ .26 $ .61 $ .67 ======== ======== ======== ========
The accompanying notes to interim financial statements are an integral part of these interim consolidated financial statements. 4 5 ADVOCAT INC. INTERIM STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED)
Nine Months Ended September 30, ------------------------------- 1996 1995 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 3,222 $ 3,592 Adjustments to reconcile net income to net cash provided from operating activities: Depreciation and amortization 1,617 742 Provision for doubtful accounts 931 595 Equity earnings in joint ventures (35) (28) Amortization of deferred credits (844) (561) Deferred income taxes 800 400 Change in assets and liabilities: Receivables (2,976) (5,040) Inventories (48) (24) Prepaid expenses and other (32) (1,134) Trade accounts payable and accrued expenses 379 2,792 Current taxes 689 (211) Other (156) (103) ------- ------- Net cash provided from operating activities 3,547 1,020 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (1,802) (2,391) Issuance of mortgage receivable -0- (792) Acquisitions, net (5,381) -0- Pre-opening and other costs (193) (385) Proceeds from TDLP transaction 71 64 Investment in joint venture (2) (254) Distributions from joint ventures 22 10 ------- ------- Net cash used in investing activities (7,285) (3,748) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from debt obligations 6,044 137 Repayment of debt obligations (1,498) (329) Advances to TDLP (939) (425) Financing costs (36) -0- Net proceeds from bank line of credit 1,245 960 Proceeds from sale of common stock 208 309 Advances (to) from lessor, net (190) 90 ------- ------- Net cash provided from financing activities 4,834 742 ------- -------
(Continued) 5 6 ADVOCAT INC. INTERIM STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------------- 1996 1995 ---- ---- INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS $ 1,096 $(1,986) CASH AND CASH EQUIVALENTS, beginning of period 1,076 3,136 -------- ------- CASH AND CASH EQUIVALENTS, end of period $ 2,172 $ 1,150 ======= ======= SUPPLEMENTAL INFORMATION: Cash payments of interest $ 1,006 $ 573 ======= ======= Cash payments of income taxes $ 461 $ 1,978 ======= =======
Advocat received benefit plan deposits and recorded benefit plan liabilities of $132,000 and $128,000 in the nine month periods ended September 30, 1996 and 1995, respectively. In the period ended September 30, 1996, Advocat assumed debt of $1,592,000 in connection with an acquisition. The accompanying notes to interim financial statements are an integral part of these interim consolidated financial statements. 6 7 ADVOCAT INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1996 AND 1995 1. ORGANIZATION AND BACKGROUND: Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") commenced operations with an initial public offering of its common stock on May 10, 1994. The Company is a provider of long-term care services operating nursing homes and retirement centers in the United States and Canada. Advocat's operational history can be traced to February 1980 through common senior management involved in different organizational structures. As of September 30, 1996, the Company operates 86 facilities comprised of 64 nursing homes containing 7,340 licensed beds and 22 retirement centers containing 2,520 units. The Company owns six nursing homes, acts as lessee with respect to 38 of the nursing homes it operates, and acts as manager with respect to the remaining 20 nursing homes. The Company owns one retirement center, acts as lessee with respect to seven of the retirement centers that it operates, and acts as manager of the remaining 14 retirement centers. Geographically, 53 of the Company's nursing homes are located in the United States and 11 are located in Canada, while 19 of the Company's 22 retirement centers are located in Canada. The Company's facilities provide a range of health care services to their residents. In addition to the nursing and social services usually provided in the long-term care facilities, the Company offers a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. The Company operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio, South Carolina, Tennessee, Texas, West Virginia, and the Canadian provinces of Ontario and British Columbia. 2. BASIS OF FINANCIAL STATEMENTS The interim financial statements for the three and nine month periods ended September 30, 1996 and 1995, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim combined financial statements reflect all adjustments (consisting of only normally recurring accruals) necessary to present fairly the financial position at September 30, 1996 and December 31, 1995 and the results of operations for the three and nine month periods ended September 30, 1996 and 1995, and the cash flows for the nine month periods ended September 30, 1996 and 1995. Certain items have been reclassified in the 1995 financial statements to conform to the 1996 presentation. 7 8 The results of operations for the three and nine month periods ended September 30, 1996 and 1995 are not necessarily indicative of the operating results for the entire respective years. These interim financial statements should be read in connection with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. 3. EARNINGS PER SHARE Earnings per share is based on the weighted average number of the Company's common and common equivalent shares outstanding that pertain to the respective operations included in each period and is calculated as follows:
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------ ------------------ 1996 1995 1996 1995 ---- ---- ---- ---- Weighted average shares: Average shares outstanding 5,316,000 5,288,000 5,299,000 5,265,000 Common stock equivalents -- Employee stock purchase plan 3,000 3,000 15,000 13,000 Options, conversion assumed under the treasury stock method -0- 68,000 -0- 52,000 ---------- ---------- ---------- ---------- Common and common equivalent shares outstanding 5,319,000 5,359,000 5,314,000 5,330,000 ========== ========== ========== ========== Net income $1,271,000 $1,379,000 $3,222,000 $3,592,000 ========== ========== ========== ========== Earnings per share $ .24 $ .26 $ .61 $ .67 ========== ========== ========== ==========
4. ACQUISITIONS During the nine months ended September 30, 1996, the Company completed the acquisition of three nursing facilities totaling 276 licensed beds. The aggregate purchase price of $7.0 million was financed with cash of approximately $400,000, debt issued in the amount of $5.0 million, and assumed indebtedness of $1.6 million. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") commenced operations with an initial public offering of its common stock on May 10, 1994. The Company is a provider of long-term care services operating nursing homes and retirement centers in the United States and Canada. Advocat's operational history can be traced to February 1980 through common senior management involved in different organizational structures. As of September 30, 1996, the Company operates 86 facilities comprised of 64 nursing homes containing 7,340 licensed beds and 22 retirement centers containing 2,520 units. The Company owns six nursing homes, acts as lessee with respect to 38 of the nursing homes it operates, and acts as manager with respect to the remaining 20 nursing homes. The Company owns one retirement center, acts as lessee with respect to seven of the retirement centers that it operates, and acts as manager of the remaining 14 retirement centers. Geographically, 53 of the Company's nursing homes are located in the United States and 11 are located in Canada, while 19 of the Company's 22 retirement centers are located in Canada. The Company's facilities provide a range of health care services to their residents. In addition to the nursing and social services usually provided in the long-term care facilities, the Company offers a variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. The Company operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio, South Carolina, Tennessee, Texas, West Virginia, and the Canadian provinces of Ontario and British Columbia. Basis of Financial Statements. The Company's patient revenues consist of the fees charged to the residents of the Company's leased and owned nursing homes and retirement centers. Management fee revenues consists of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms, which generally range from 3.5% to 6.0% of the net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the level of occupancy or rates per patient day of the managed facilities. Management fees also include consulting and development fee income. The Company's operating expenses include the costs incurred in the nursing homes and retirement centers leased and owned by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions, including the costs incurred in providing management services to the nursing homes and retirement centers managed by the Company. The Company's financial statements reflect the depreciation, amortization and interest expenses of the facilities owned by the Company, and the depreciation expense associated with equipment owned by the Company and used in its leased facilities. 9 10 RESULTS OF OPERATIONS The following tables present the unaudited interim statements of income data for the three and nine month periods ended September 30, 1996 and 1995, and set forth this data as a percentage of revenues for the same periods.
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- REVENUES: Patient revenues $ 41,591 $ 35,705 $118,688 $ 99,808 Management fees 1,015 908 3,152 2,684 Interest 40 59 115 180 -------- -------- -------- -------- Net revenues 42,646 36,672 121,955 102,672 -------- -------- -------- -------- EXPENSES: Operating 33,823 28,606 97,101 79,514 Lease 3,659 3,442 10,733 10,170 General and administrative 2,104 1,904 6,314 5,765 Depreciation and amortization 585 391 1,617 1,087 Interest 489 174 1,156 523 -------- -------- -------- -------- Total expenses 40,660 34,517 116,921 97,059 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 1,986 2,155 5,034 5,613 PROVISION FOR INCOME TAXES 715 776 1,812 2,021 -------- -------- -------- -------- NET INCOME $ 1,271 $ 1,379 $ 3,222 $ 3,592 ======== ======== ======== ========
Percentage of Net Revenues
(IN THOUSANDS) THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------- ----------------- 1996 1995 1996 1995 ---- ---- ---- ---- Patient revenues 97.5% 97.4% 97.3% 97.2% Management fees 2.4 2.5 2.6 2.6 Interest 0.1 0.1 0.1 0.2 -------- -------- -------- -------- Net revenues 100.0% 100.0% 100.0% 100.0% -------- -------- -------- -------- EXPENSES: Operating 79.3 78.0 79.6 77.4 Lease 8.6 9.4 8.8 9.9 General and administrative 4.9 5.2 5.2 5.6 Depreciation and amortization 1.4 1.0 1.3 1.1 Interest 1.1 0.5 1.0 0.5 -------- -------- -------- -------- Total expenses 95.3 94.1 95.9 94.5 -------- -------- -------- -------- INCOME BEFORE INCOME TAXES 4.7 5.9 4.1 5.5 PROVISION FOR INCOME TAXES 1.7 2.1 1.5 2.0 -------- -------- -------- -------- NET INCOME 3.0% 3.8% 2.6% 3.5% ======== ======== ======== ========
10 11 RISK FACTORS In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, the Company hereby makes reference to items set forth under the heading "Risk Factors" in the Company's Registration Statement on Form S-1, as amended (Registration No. 33-76150). Such cautionary statements identify important facts that could cause the Company's actual results to differ materially from those projected in forward looking statements made by or on behalf of the Company. NEW HOMES As of September 30, 1996, the Company operates 86 facilities comprised of 64 nursing homes containing 7,340 licensed beds and 22 retirement centers containing 2,520 units. In comparison, as of September 30, 1995, the Company operated 65 nursing homes containing 7,303 licensed beds and 20 retirement centers containing 2,335 units. Since December 1, 1995, the Company has begun operating for its own account nine homes, three of which it previously managed, totaling 772 nursing home beds and 109 retirement center units. The operations of these facilities have a significant impact on the comparability of the 1996 and 1995 periods. In the following discussion, these homes are collectively referred to as the "New Homes." Of the New Homes, 387 beds/units were counted in the portfolio at September 30, 1995. THREE MONTHS ENDED SEPTEMBER 30 - 1996 COMPARED WITH 1995 Revenues. Net revenues increased to $42.6 million in 1996 from $36.6 million in 1995, an increase of $6.0 million, or 16.3%. Patient revenues increased to $41.6 million in 1996 from $35.7 million in 1995, an increase of $5.9 million, or 16.5%. Of this increase, $4.5 million is attributable to the New Homes. Ancillary service revenues, prior to contractual allowances, increased to $13.8 million in 1996 from $10.7 million in 1995, an increase of $3.1 million or 28.9%. The increase in patient revenues is also impacted by normal inflationary increases and a 2.3% decrease in patient days among the homes operating for at least one year. Management fee revenues increased by $107,000, or 11.8%. The increase is primarily due to $100,000 in consulting fees earned with respect to the development of one of the New Homes. The Company does not anticipate similar revenues beyond the third quarter. The increase in ancillary revenues and the completion in 1995 of the certification of all of the Company's nursing home beds for participation under the Medicare program have resulted in continued improvement in the quality mix of the Company's revenues year over year. As a percent of net patient revenues, Medicare improved to 24.2% in 1996 from 23.2% in 1995 while Medicaid increased slightly to 57.9% in 1996 from 57.7% in 1995. The increase in the Medicaid percentage was impacted in part by the acquisition at the end of the second quarter of a nursing facility that is not yet certified for participation under the Medicare program. Operating Expense. Operating expense increased to $33.0 million in 1996 from $28.6 million in 1995, an increase of $5.2 million, or 18.2%. As a percent of net revenues, operating expense increased to 79.3% in 1996 from 78.0% in 1995. Of this increase, $3.7 million is attributable 11 12 to the New Homes. The remaining increase is primarily attributable to an increase in the provision of ancillary services to Medicare patients. As ancillary services have increased, the supply costs related to the provision of such services have increased correspondingly. In addition, the Company's operating margin has declined due to reduced average census, cost containment measures in Medicaid programs, difficulty in achieving expense reductions as occupancy levels have declined in certain homes, an increase in the provision for bad debts, and growth in the Company's medical supply distribution business, which generates a lower operating margin. Wages increased to $15.5 million in 1996 from $13.4 million in 1995, an increase of $2.1 million, or 15.4%. Of this increase, $1.9 million is attributable to the New Homes. The Company's wage increases are generally in line with inflation. Among homes in operation for at least one year, the Company has experienced increased general and other insurance costs of approximately $270,000, which increases are expected to continue into 1997. While the Company's operating expense as a percentage of net revenues has increased year to year, there has been consistent improvement from the fourth quarter of 1995 (80.3%) through the third quarter of 1996 (79.3%). This is reflective of benefits realized from expense control programs implemented in the Company's various operating regions. Additionally, the Company has noted an improvement in occupancy in the latter part of the second quarter and continuing into the fourth quarter. The improvements are encouraging, but neither their continuance nor their positive impact to the Company's operations can be assured. Lease Expense. Lease expense increased to $3.6 million in 1996 from $3.4 million in 1995, an increase of $217,000, or 6.3%. Of this increase, $203,000 is attributable to the New Homes, and the remainder is primarily attributable to inflationary increases included in the terms of a majority of the Company's operating leases. General and Administrative Expense. General and administrative expense increased to $2.1 million in 1996 from $1.9 million in 1995, an increase of $201,000, or 10.5%. The increase is primarily attributable to the expense of new positions added to service the Company's expanded operations. As a percent of total net revenues, general and administrative expenses declined from 5.2% in 1995 to 4.9% in 1996, reflective of spreading the Company's overhead costs over a wider base of operations. Depreciation and Amortization. Depreciation and amortization expenses increased to $585,000 in 1996 from $391,000 in 1995, an increase of $194,000, or 50.0%. Approximately $171,000 of the increase is associated with the New Homes. Interest Expense. Interest expense increased to $489,000 in 1996 from $174,000 in 1995, an increase of $315,000, or 180.6%. Approximately $261,000 of the increase is attributable to indebtedness related to the New Homes with the remainder of the increase primarily attributable to increased borrowings under the Company's working capital line of credit. Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the above, income before income taxes was $2.0 million in 1996 as compared with $2.2 million in 1995, a decrease of $170,000, or 7.9%. The effective combined federal, state and provincial income tax rate was 12 13 36% in both 1996 and 1995. Net income was $1.3 million in 1996 as compared with $1.4 million in 1995, a decrease of $109,000, and earnings per share was $.24 was compared with $.26. NINE MONTHS ENDED SEPTEMBER 30 - 1996 COMPARED WITH 1995 Revenues. Net revenues increased to $122.0 million in 1996 from $102.7 million in 1995, an increase of $19.3 million, or 18.8%. Patient revenues increased to $118.7 million in 1996 from $99.8 million in 1995, an increase of $18.9 million, or 18.9%. Of this increase, $10.0 million is attributable to the New Homes. Ancillary service revenues, prior to contractual allowances, increased to $43.0 million in 1996 from $26.5 million in 1995, an increase of $16.5 million or 62.1%. The increase in patient revenues is also impacted by normal inflationary increases and a 2.0% decrease in patient days among the homes operating for at least one year. Management fee revenues increased by $468,000, or 17.4%. The increase is primarily due to $500,000 in consulting fees earned with respect to the development of three of the New Homes. The Company does not anticipate similar revenues beyond the third quarter. The increase in ancillary revenues and the completion in 1995 of the certification of all of the Company's nursing home beds for participation under the Medicare program have resulted in continued improvement in the quality mix of the Company's revenues. As a percent of net patient revenues, Medicare improved to 25.7% in 1996 from 20.1% in 1995 while Medicaid decreased to 56.2% in 1996 from 59.5% in 1995. Operating Expense. Operating expense increased to $97.1 million in 1996 from $79.5 million in 1995, an increase of $17.6 million, or 22.1%. As a percent of net revenues, operating expense increased to 79.6% in 1996 from 77.4% in 1995. Of this increase, $8.3 million is attributable to the New Homes. The remaining increase is primarily attributable to an increase in the provision of ancillary services to Medicare patients. As ancillary services have increased, the supply costs related to the provision of such services have increased correspondingly. In addition, the Company's operating margin has declined due to reduced average census, cost containment measures in Medicaid programs, difficulty in achieving expense reductions as occupancy levels have declined in certain homes, an increase in the provision for bad debts, and growth in the Company's medical supply distribution business, which generates a lower operating margin. Wages increased to $43.6 million in 1996 from $37.7 million in 1995, an increase of $5.9 million, or 15.8%. Of this increase, $3.9 million is attributable to the New Homes. A portion of the remaining increase in wages is offset by reduced costs associated with less utilization of temporary nursing services and reduced contracted housekeeping and laundry services. The Company's wage increases are generally in line with inflation. Among homes in operation for at least one year, the Company has experienced increased general and other insurance costs of approximately $865,000, which increases are expected to continue into 1997. Lease Expense. Lease expense increased to $10.7 million in 1996 from $10.2 million in 1995, an increase of $563,000, or 5.5%. Of this increase, $471,000 is attributable to the New Homes, and the remainder is primarily attributable to inflationary adjustments required under the terms of a majority of the Company's operating leases. 13 14 General and Administrative Expense. General and administrative expense increased to $6.3 million in 1996 from $5.8 million in 1995, an increase of $549,000, or 9.5%. The increase is primarily attributable to the expense of new positions added to service the Company's expanded operations. As a percent of total net revenues, general and administrative expenses declined from 5.6% in 1995 to 5.2% in 1996, reflective of spreading the Company's overhead costs over a wider base of operations. Depreciation and Amortization. Depreciation and amortization expenses increased to $1.6 million in 1996 from $1.1 million in 1995, an increase of $530,000, or 48.7%. Approximately $379,000 of the increase is associated with the New Homes. Interest Expense. Interest expense increased to $1.1 million in 1996 from $523,000 in 1995, an increase of $633,000, or 121.0%. Approximately $512,000 of the increase is attributable to indebtedness related to the New Homes with the remainder of the increase primarily attributable to increased borrowings under the Company's working capital line of credit. Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the above, income before income taxes was $5.0 million in 1996 as compared with $5.6 million in 1995, a decrease of $579,000, or 20.3%. The effective combined federal, state and provincial income tax rate was 36% in both 1996 and 1995. Net income was $3.2 million in 1996 as compared with $3.6 million in 1995, a decrease of $411,000, and earnings per share was $.61 as compared with $.67. LIQUIDITY AND CAPITAL RESOURCES At September 30, 1996, the Company's working capital was $9.0 million with a current ratio of 1.5 as compared with $6.7 million with a current ratio of 1.4 at December 31, 1995. Net cash provided from operating activities totaled $3.5 million and $1.0 million in 1996 and 1995, respectively. These amounts primarily represent the cash flows from income plus depreciation and amortization along with the changes in working capital components. Net cash used in investing activities totaled $7.3 million and $3.7 million in 1996 and 1995, respectively. These amounts primarily represent capital expenditures for equipment for and improvements to the Company's existing facilities, acquisitions in 1996, and, in 1995, a loan to a Canadian partnership managed by the Company. The Company and its predecessor business have used between $1.7 million and $3.0 million for capital expenditures for facility improvements and equipment in each of the last three calendar years. Such expenditures were financed through working capital. The Company anticipates that such expenditures for its existing facility operations will be approximately $2.4 million for the year ended December 31, 1996. Net cash provided from financing activities totaled $4.8 million and $742,000 in 1996 and 1995, respectively. The net cash used in financing activities primarily represents proceeds from and repayment of long-term debt, advances to TDLP, net proceeds under the Company's bank line of credit, and proceeds from issuance of common stock. 14 15 At September 30, 1996, the Company had total debt outstanding of $22.4 million of which $13.0 million was principally mortgage debt bearing interest at rates currently ranging from 8.0% to 11.0%. The Company's remaining debt was drawn under its $17.5 million credit line. The credit line had an initial term through May 1, 1996 and has been extended through December 1, 1996. The credit line includes $10.0 million designated for use in making acquisitions of long-term care facilities and $7.5 million for working capital purposes. Through September 30, 1996, the Company had drawn $6.0 million under its acquisition credit line. Amounts drawn under the acquisition credit line may be converted to a three-year term loan effective with the end of the initial term. At September 30, 1996, the Company had drawn $2.4 million and had $5.1 million in letters of credit outstanding under this working capital credit line. Amounts drawn under the credit line bear interest, at the Company's option, at either the lead bank's prime rate or 2% above the London Interbank Offered Rate ("LIBOR"). Amounts drawn under the credit line are secured generally by certain accounts receivable and substantially all other assets of the Company as well as by any assets acquired with funds drawn under the acquisition credit line. The Company has agreed to comply with certain covenants, including financial covenants with respect to maintaining current ratio, net working capital, coverage of fixed charges, tangible net worth, and earnings levels as defined in the line of credit agreement. Additionally, the Company may not declare dividends during the term of the agreement. In December 1995, the Company received a temporary increase (the "Overline") in the maximum amount available to be drawn under the line of credit facility. The Company has the ability to draw additional working capital up to $2.6 million through December 1, 1996. As of September 30, 1996, the Company had drawn $0.9 million under the Overline. The amount drawn under the Over- line was reduced by approximately $500,000 through November 12, 1996. The Company has secured a commitment for a new credit facility and plans to exercise its privileges thereunder to restructure and consolidate its indebtedness during the fourth quarter. The new credit facility, which will have a term of three years, will be for a total of $50 million and will be divided into two components: a $10 million revolving credit facility and a $40 million acquisition line of credit. Funds drawn under the revolving credit facility will be subject to a defined borrowing base and will bear interest (at the Company's option) of either prime or LIBOR plus 2.5%. Funds drawn under the acquisition line will have defined limits in relation to the appraised values (generally 85%) and debt service ratios of the facilities financed thereunder. These components will also determine the applicable interest rate, which will vary (at the Company's option) in relation to either the prime rate or LIBOR. Amounts drawn under the $50 million credit facility will be secured generally by certain accounts receivable and substantially all other assets of the Company as well as by any assets acquired with funds drawn under the acquisition credit line. The Company will agree to comply with certain covenants, including financial covenants with respect to maintaining current ratio, net working capital, coverage of fixed charges, tangible net worth, and earnings levels as defined in the credit facility agreements. During the quarter, the Company closed on replacement financing with respect to a Canadian retirement facility purchased in December 1995. The proceeds were approximately $1.1 million bearing interest of 7.89% repayable over a thirty-year amortization with a balloon maturity in 2006. 15 16 Based upon the operations of the Company, management believes that available cash and funds generated from operations, as well as amounts available through its banking relationships, will be sufficient for the Company to satisfy its capital expenditures, working capital, and debt requirements for the next 12 months. The Company intends to satisfy the capital requirements for its acquisition activities from among various means, including borrowings from commercial lenders, seller-financed debt, issuance of additional debt, financing obtained from sale and leaseback transaction with real estate investment trusts and, to the extent available, internally generated cash from operations. On a longer-term basis, management believes the Company will be able to satisfy the principal repayment requirements on its indebtedness with a combination of funds generated from operations and from refinancings with existing or new commercial lenders. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare and other third-party revenue sources. The Company's future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expense). In that regard, accounts receivable can have a significant impact on the Company's liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, increasing medical review of bills for services or negotiating reduced contract rates, as well as any significant increase in the Company's proportion of Medicare and Medicaid patients, could adversely affect the Company's liquidity and results of operations. Accounts receivable attributable to the provision of patient and resident services at September 30, 1996 and December 31, 1995, totaled $22.5 million and $20.2 million, respectively, representing approximately 50 and 51 days, respectively, in accounts receivable. Accounts receivable from the provision of management services at September 30, 1996 and December 31, 1995, totaled $0.6 million and $0.7 million, respectively, representing approximately 54 and 69 days, respectively, in accounts receivable. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, agings of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. The Company has implemented additional procedures to strengthen its collection efforts and reduce the incidence of uncollectible accounts. FOREIGN CURRENCY TRANSLATION The Company has obtained its financing primarily in U.S. dollars; however, it will incur revenues and expenses in Canadian dollars with respect to Canadian management activities and operations of the Company's Canadian facilities. Therefore, if the currency exchange rate fluctuates, the Company may experience currency translation gains and losses with respect to the operations of these activities and the capital resources dedicated to their support. While such currency exchange rate fluctuations have not been material to the Company in the past, there can be no assurance that the Company will not be adversely affected by shifts in the currency exchange rates in the future. 16 17 In 1995, the exchange rate has averaged 73.1% (United States equivalent of Canadian dollars), and it has recently improved to 75.2% (as of November 8, 1996). MINIMUM WAGE The Federal minimum wage increased by 50c. effective October 1, 1996; an additional 40c. increase is scheduled for September 1, 1997. The Company has evaluated the impact of these increases and expects no material increase in its costs. INFLATION Management does not believe that the operations of the Company have been materially affected by inflation. The Company expects salary and wage increases for its skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry. To date, these increases as well as normal inflationary increases in other operating expenses have been adequately covered by revenue increases. However, it is likely that states will continue to seek ways to control the growth in Medicaid program rates. RECENT ACCOUNTING PRONOUNCEMENTS In 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The Company adopted SFAS No. 121 in the first quarter of 1996 and the adoption did not have a material effect on the Company's financial position. Three facilities noted as receiving special attention in the Company's Annual Report on Form 10-K showed improvement in operations in the nine months ended September 30, 1996 as compared to the three months ended December 31, 1995. The FASB also issued SFAS No. 123, "Accounting for Stock-Based Compensation" in 1995. This statement requires new disclosures in the notes to the financial statements about stock-based compensation plans based on the fair value of equity instruments granted. Companies may also base the recognition of compensation cost for instruments issued under stock-based compensation plans on these fair values. The Company will adopt the disclosure requirements of SFAS No. 123 in 1996. PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. The Registrant has not filed any reports on Form 8-K during the quarter for which this report is filed. The exhibits filed as part of this report on Form 10-Q are listed in the Exhibit Index immediately following the signature page. 17 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVOCAT INC. November 13, 1996 By: /s/Mary Margaret Hamlett ---------------------------------------------- Mary Margaret Hamlett Principal Financial Officer and Chief Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant 18 19 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------- ----------------------- 3.1 Certificate of Incorporation of the Registrant (incorporated by reference of Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.3 Amendment to Articles of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to Form 8-A filed March 30, 1995). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1). 4.2 Rights Agreement dated March 13, 1995, between the Company and Third National Bank in Nashville (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 13, 1995). 4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995). 4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1 to Form 8-A filed March 30, 1995). 10.1 Seventh Amendment to Credit and Security Agreement dated September 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined). 10.2 Eighth Amendment to Credit and Security Agreement dated November 1, 1996, between NationsBank of Tennessee, N.A., Advocat Inc. and the Subsidiaries (as defined). 21 Subsidiaries of the Registrant (incorporated by reference to Exhibit 21 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1994). 27 Financial Data Schedule (for SEC use only). EX-10.1 2 SEVENTH AMENDMENT 1 SEVENTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Seventh Amendment to Credit and Security Agreement, made and entered into as of the 1st day of September, 1996, by and between NationsBank of Tennessee, N.A., a national banking association (the "Bank"), Advocat Inc., a Delaware corporation ("Borrower"), and the Subsidiaries, as defined in the Credit and Security Agreement by and between the Bank, the Borrower and the Subsidiaries, dated as of October 12, 1994, as amended from time to time (the "Loan Agreement"). Capitalized terms not otherwise described herein shall have the meanings ascribed to such terms in the Loan Agreement. W I T N E S S E T H: WHEREAS, pursuant to the terms of the Loan Agreement, the Bank committed to loan to the Borrower and the Subsidiaries amounts not to exceed $17,500,000, including the $7,500,000 Line, which matures on September 1, 1996, and the $10,000,000 Line which converts to a term facility on September 1, 1996; and, WHEREAS, by Sixth Amendment to Credit and Security Agreement dated as of June 28, 1996 (the "Sixth Amendment"), Bank agreed to permit Borrower to continue to request and receive funds under Credit Facility in excess of the amount available under the Credit Facility, calculated in accordance with the Borrowing Base, pending the closing of the refinancing of the TDLP First Mortgage Indebtedness; and, WHEREAS, Bank agreed to permit such overadvances under the Credit Facility through September 1, 1996, subject to the terms and conditions contained in the Sixth Amendment; and, WHEREAS, Borrower has represented to Bank that Borrower intends to close on or before November 1, 1996, (i) the refinancing of the TDLP First Mortgage Indebtedness with Bank, and (ii) a credit facility with First American National Bank and GMAC - Health Care which will pay off the Credit Facility (the "First American Financing"); and, WHEREAS, the Borrower has requested (i) that the maturity date of the $7,500,000 Line be extended from September 1, 1996, to November 1, 1996 (ii) that the date on which the right of Borrower to request funds under the $10,000,000 Line be extended from September 1, 1996, to November 1, 1996, and (iii) that the Termination Date, as defined in Section 2 of the Third Amendment to Credit and Security Agreement dated of December 1, 1995 (the "Third Amendment") be extended through November 1, 1996; and, WHEREAS, based on the representations of Borrower regarding the refinancing of the TDLP First Mortgage Indebtedness, and the First American Financing, Bank has agreed to extend the Credit Facility through November 1, 1996; and, -1- 2 WHEREAS, the parties desire to execute this Seventh Amendment to extend the maturity date of the $7,500,000 Line and the Termination Date through November 1, 1996, and to set forth certain other agreements between the parties, as more particularly described herein, NOW, THEREFORE, in consideration of the foregoing premises, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the Bank, the Borrower and the Subsidiaries hereby agree as follows: 1. Extension of Maturity Date - $7,500,000 Line. The maturity date of the $7,500,000 Line is hereby extended from September 1, 1996, to November 1, 1996. Borrower agrees to execute a renewal note and such other documents as Bank may reasonably request to evidence such extension of the maturity date. 2. Extension of Revolving Period - $10,000,000 Line. The date through which the Borrower may request funds under the $10,000,000 Line, as set forth in Section 2.1(b) of the Loan Agreement, is hereby extended from September 1, 1996, to November 1, 1996. In addition, the date on which the monthly amortization payments due under the $10,000,000 Line commence is hereby extended from October 1, 1996, to December 1, 1996. 3. Extension of Termination Date. Section 2 of the Third Amendment (as amended) is hereby modified to delete the reference to September 1, 1996, and substitute in its place, November 1, 1996, it being the intent of the parties that the Termination Date shall be the earlier of (i) the date on which the refinancing of the TDLP First Mortgage Indebtedness is completed, or (ii) November 1, 1996. Overadvances, if any, shall continue to be available under the $10,000,000 Line, subject to the provisions of Section 2 of the Third Amendment. 4. First American Financing. Borrower represents to Bank that Borrower has received a commitment from First American for the First American Financing and anticipates closing the facility on or before November 1, 1996. 5. Joinder of Guarantors. The Guarantors, by executing this Amendment, hereby confirm that the terms and conditions of the Guaranty Agreements executed by each of the Guarantors dated as of October 12, 1994, continue in full force and effect, and the Obligations (as defined in the Guaranty Agreements) shall include any amounts advanced as an Overadvance, pursuant to the terms of the Loan Agreement. This Amendment shall be deemed to be an amendment to the Guaranty Agreements, to the extent required, to confirm that the Guarantors' obligations under the Guaranty Agreements include, without limitation, any Overadvance funded pursuant to the terms of the Loan Agreement. 6. No Default. The Borrower and the Subsidiaries hereby confirm that no Event of Default currently exists, and, to the best of the Borrower's and the Subsidiaries' knowledge, no condition presently exists or is anticipated which, with the passage of time, the giving of notice, or both, would constitute an Event of Default. -2- 3 7. Ratification. The Borrower and the Subsidiaries hereby restate and ratify the terms and conditions of the Loan Agreement as of the date hereof, and each acknowledge that the terms and conditions of the Loan Agreement, as amended hereby, remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Seventh Amendment as of the day and date first above written. NATIONSBANK OF TENNESSEE, ADVOCAT INC., A DELAWARE CORPORATION N.A. By: /s/Roy Haisley By: /s/Mary Margaret Hamlett - ------------------------- ------------------------------------ Roy Haisley Vice President Title: Executive Vice President ------------------------------------ "BANK" "BORROWER" DIVERSICARE LEASING CORP., A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DIVERSICARE MANAGEMENT SERVICES CO., A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ ADVOCAT ANCILLARY SERVICES, A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ -3- 4 DIVERSICARE CANADA MANAGEMENT SERVICES CO., A CANADA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DIVERSICARE GENERAL PARTNER, INC., A TEXAS CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ FIRST AMERICAN HEALTH CARE, INC., AN ALABAMA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DAUPHIN HEALTH CARE FACILITY, INC., AN ALABAMA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ -4- EX-10.2 3 EIGHTH AMENDMENT 1 EIGHTH AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Eighth Amendment to Credit and Security Agreement, made and entered into as of the 1st day of November, 1996, by and between NationsBank of Tennessee, N.A., a national banking association (the "Bank"), Advocat Inc., a Delaware corporation ("Borrower"), and the Subsidiaries, as defined in the Credit and Security Agreement by and between the Bank, the Borrower and the Subsidiaries, dated as of October 12, 1994, as amended from time to time (the "Loan Agreement"). Capitalized terms not otherwise described herein shall have the meanings ascribed to such terms in the Loan Agreement. W I T N E S S E T H: WHEREAS, pursuant to the terms of the Loan Agreement, the Bank committed to loan to the Borrower and the Subsidiaries amounts not to exceed $17,500,000, including the $7,500,000 Line, which matures on November 1, 1996, and the $10,000,000 Line which converts to a term facility on November 1, 1996; and, WHEREAS, by Seventh Amendment to Credit and Security Agreement dated as of June 28, 1996 (the "Seventh Amendment"), Bank agreed to permit Borrower to continue to request and receive funds under Credit Facility in excess of the amount available under the Credit Facility, calculated in accordance with the Borrowing Base, pending the closing of the refinancing of the TDLP First Mortgage Indebtedness; and, WHEREAS, Bank agreed to permit such overadvances under the Credit Facility through November 1, 1996, subject to the terms and conditions contained in the Sixth Amendment; and, WHEREAS, Borrower has represented to Bank that Borrower intends to close on or before December 1, 1996, (i) the refinancing of the TDLP First Mortgage Indebtedness with Bank, and (ii) a credit facility with First American National Bank and GMAC - Health Care which will pay off the Credit Facility (the "First American Financing"); and, WHEREAS, the Borrower has requested (i) that the maturity date of the $7,500,000 Line be extended from November 1, 1996, to December 1, 1996 (ii) that the date on which the right of Borrower to request funds under the $10,000,000 Line be extended from November 1, 1996, to December 1, 1996, and (iii) that the Termination Date, as defined in Section 2 of the Third Amendment to Credit and Security Agreement dated of December 1, 1995 (the "Third Amendment") be extended through December 1, 1996; and, WHEREAS, based on the representations of Borrower regarding the refinancing of the TDLP First Mortgage Indebtedness, and the First American Financing, Bank has agreed to extend the Credit Facility through December 1, 1996; and, -1- 2 WHEREAS, the parties desire to execute this Eighth Amendment to extend the maturity date of the $7,500,000 Line and the Termination Date through December 1, 1996, and to set forth certain other agreements between the parties, as more particularly described herein, NOW, THEREFORE, in consideration of the foregoing premises, and other good and valuable consideration, the receipt and legal sufficiency of which is hereby acknowledged, the Bank, the Borrower and the Subsidiaries hereby agree as follows: 1. Extension of Maturity Date - $7,500,000 Line. The maturity date of the $7,500,000 Line is hereby extended from November 1, 1996, to December 1, 1996. Borrower agrees to execute a renewal note and such other documents as Bank may reasonably request to evidence such extension of the maturity date. 2. Extension of Revolving Period - $10,000,000 Line. The date through which the Borrower may request funds under the $10,000,000 Line, as set forth in Section 2.1(b) of the Loan Agreement, is hereby extended from November 1, 1996, to December 1, 1996. In addition, the date on which the monthly amortization payments due under the $10,000,000 Line commence is hereby extended from December 1, 1996, to January 1, 1997. 3. Extension of Termination Date. Section 2 of the Third Amendment (as amended) is hereby modified to delete the reference to November 1, 1996, and substitute in its place, December 1, 1996, it being the intent of the parties that the Termination Date shall be the earlier of (i) the date on which the refinancing of the TDLP First Mortgage Indebtedness is completed, or (ii) December 1, 1996. Overadvances, if any, shall continue to be available under the $10,000,000 Line, subject to the provisions of Section 2 of the Third Amendment. 4. First American Financing. Borrower represents to Bank that Borrower has received a commitment from First American for the First American Financing and anticipates closing the facility on or before November 15, 1996. 5. Joinder of Guarantors. The Guarantors, by executing this Amendment, hereby confirm that the terms and conditions of the Guaranty Agreements executed by each of the Guarantors dated as of October 12, 1994, continue in full force and effect, and the Obligations (as defined in the Guaranty Agreements) shall include any amounts advanced as an Overadvance, pursuant to the terms of the Loan Agreement. This Amendment shall be deemed to be an amendment to the Guaranty Agreements, to the extent required, to confirm that the Guarantors' obligations under the Guaranty Agreements include, without limitation, any Overadvance funded pursuant to the terms of the Loan Agreement. 6. No Default. The Borrower and the Subsidiaries hereby confirm that no Event of Default currently exists, and, to the best of the Borrower's and the Subsidiaries' knowledge, no condition presently exists or is anticipated which, with the passage of time, the giving of notice, or both, would constitute an Event of Default. -2- 3 7. Ratification. The Borrower and the Subsidiaries hereby restate and ratify the terms and conditions of the Loan Agreement as of the date hereof, and each acknowledge that the terms and conditions of the Loan Agreement, as amended hereby, remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have executed this Seventh Amendment as of the day and date first above written. NATIONSBANK OF TENNESSEE, ADVOCAT INC., A DELAWARE CORPORATION N.A. By: /s/Anne Jenkins By: /s/Mary Margaret Hamlett - -------------------------------- ------------------------------------ Anne Jenkins, Banking Officer Vice President Title: Executive Vice President ------------------------------------ "BANK" "BORROWER" DIVERSICARE LEASING CORP., A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DIVERSICARE MANAGEMENT SERVICES CO., A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ ADVOCAT ANCILLARY SERVICES, A TENNESSEE CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ -3- 4 DIVERSICARE CANADA MANAGEMENT SERVICES CO., A CANADA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DIVERSICARE GENERAL PARTNER, INC., A TEXAS CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ FIRST AMERICAN HEALTH CARE, INC., AN ALABAMA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ DAUPHIN HEALTH CARE FACILITY, INC., AN ALABAMA CORPORATION By: /s/Mary Margaret Hamlett ------------------------------------ Title: Executive Vice President ------------------------------------ -4- EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF ADVOCAT INC., FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN THE FORM 10-Q OF ADVOCAT INC., FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996. US DOLLARS 9-MOS DEC-31-1996 SEP-30-1996 1,000 2,172 0 23,828 1,893 557 27,111 38,765 (9,154) 0 18,112 0 0 0 53 25,821 67,231 0 121,955 0 116,921 0 931 1,156 5,034 1,812 3,222 0 0 0 3,222 .61 .61
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