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ADVOCAT ANNOUNCES RESTRUCTURING OF CONVERTIBLE PREFERRED STOCK AND AMENDMENT AND RENEWAL OF MASTER LEASE AGREEMENT
Lessor to Provide $5 million in Additional Capital to Fund Renovations
BRENTWOOD, Tenn. (October 24, 2006) — Advocat (NASDAQ: AVCA), which provides long term care services to nursing home patients, today announced that it has
entered into an agreement to restructure its Series B Redeemable Convertible Preferred Stock held by Omega Healthcare Investors (together with its subsidiaries, “Omega”), a publicly owned REIT,
eliminating the option of Omega to convert the Preferred Stock into shares of Advocat common stock. Advocat and Omega also agreed to extend the term of its lease covering 29 nursing centers it currently leases from
Sterling Acquisition Corp., a wholly-owned subsidiary of Omega.
In addition, Omega agreed to provide up to $5 million to fund capital improvements made to certain nursing centers by June 30, 2008. The annual
base rent related to these nursing centers will be increased to reflect the amount of capital improvements made to the facilities. The Company is currently reviewing its portfolio of nursing centers to select the
centers for renovation.
Preferred Stock Restructuring
The Convertible Series B Preferred Stock held by Omega will be exchanged for a new Series C Preferred Stock that is not convertible. The new
Series C Preferred Stock has a stated value of approximately $4.9 million and an annual dividend rate of 7% of its stated value (similar to the terms of the Series B Preferred Stock). The Series C Preferred Stock
will pay dividends in cash quarterly. The Series C Preferred Stock is redeemable at stated value at Omega’s option after September 30, 2010, and is redeemable at stated value at Advocat’s option, subject
to certain limitations. On October 20, 2006, Advocat declared and paid the quarterly dividend on the Series B Preferred Stock for the quarter ended September 30, 2006.
The Series B Preferred Stock was
convertible, under certain circumstances, into approximately 800,000 common shares of Advocat (or approximately 14% of the common shares outstanding prior to conversion). Advocat and Omega agreed to value this
conversion feature at a discount of approximately 22.3% to the underlying market value (approximately $15 million) of the common stock. As consideration for eliminating this conversion feature, the Company will
increase its rental payments to Omega by approximately $687,000 per year, beginning January 2007.
Avondale Partners LLC advised Advocat in relation to the Preferred Stock Restructuring.
Master Lease Amendment
Advocat and Omega also agreed to amend and renew the master lease covering 29 nursing centers. The initial term of the lease was set to expire in September 2010, with a ten year
renewal option. The amended master lease commences on October 1, 2006, and extends to September 30, 2018. The amendment also provides for a renewal option of an additional twelve years. Consistent with prior terms,
the lease provides for annual increases in lease payments equal to the lesser of two times the increase in the consumer price index or 3.0%. Under generally accepted accounting principles, the Company is required to
record these scheduled rent increases on a straight line basis over the 12 year term of the renewal period. As a result of recording these increases, the Company’s annual rent expense will increase by
approximately $2.7 million, although this increase has no effect on cash rent payments other than the payments associated with the restructuring of the preferred stock described above.
CEO Remarks
“We are pleased to reach these agreements with Omega,” commented William R. Council, CEO of Advocat. “The elimination of the conversion feature removes a significant dilution to our current
shareholders, and provides a greater degree of stability in our capital structure. We are pleased that Omega agreed to discount the value of the underlying shares, capturing that value for Advocat’s current
shareholders.
“The early renewal of the lease provides more stability and long term certainty for our nursing center operations, particularly in light of the contemplated facility renovations. We are
pleased that Omega is showing its continued support for this important strategic initiative by agreeing to provide up to $5 million in financing for these facility renovations. The renovation funding is in addition
to the previous $5 million funding for renovations which we are completing in 2006. We appreciate the support we receive from Omega.
“The deal is accretive on a pro forma basis for 2005, and flat on a
pro forma basis for the six months ended June 30, 2006. We have illustrated the effects of these transactions in pro forma financial statements included below, and will hold a conference call Wednesday, October 25,
at 7:30 A.M. Central, 8:30 A.M. Eastern, to discuss this transaction.”
CONFERENCE CALL INFORMATION
The conference call information is as follows:
Date: Wednesday, October 25, 2006
Time: 7:30 A.M. Central, 8:30 A.M. Eastern
Webcast Links: http://phx.corporate-ir.net/playerlink.zhtml?c=77083&s=wm&e=1406596
www.irinfo.com/avc
www.streetevents.com
Dial in numbers: (866) 383-8008 (domestic) or (617) 597-5341(international)
Passcode: 74178378
A replay of the conference call
will be accessible two hours after its completion through November 1, 2006 by dialing (888) 286-8010 (domestic) or (617) 801-6888 (international) and entering passcode 60673267.
About Advocat
Advocat provides long-term care services to nursing home patients in eight states, primarily in the southeast. The Company has 43 centers containing 4,505 licensed nursing beds.
Forward-Looking Statements
Forward-looking statements made in this release involve a number of risks and uncertainties, including but not limited to, changes in governmental reimbursement, government
regulation and health care reforms, the increased cost of borrowing under our credit agreements, ability to control ultimate professional liability costs, the accuracy of our estimate of our anticipated professional
liability expense, the impact of future licensing surveys, the outcome of regulatory proceedings alleging violations of laws and regulations governing quality of care or violations of other laws and regulations
applicable to our business, changing economic conditions as well as other risk factors detailed in the Company's Securities and Exchange Commission filings. The Company has provided additional information in its
Annual Report on Form 10-K for the fiscal year ended December 31, 2005, as well as in other filings with the Securities and Exchange Commission, which readers are encouraged to review for further disclosure of other
factors that could cause actual results to differ materially from those indicated in the forward-looking statements. Advocat Inc. is not responsible for updating the information contained in this press release
beyond the published date, or for changes made to this document by wire services or Internet services.
Press release with financial tables in pdf format
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