ADCARE HEALTH SYSTEMS INC - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations.

(Edgar Glimpses Via Acquire Media NewsEdge) Special Note Regarding Forward Looking Statements Certain statements in this Quarterly Report on Form 10-Q (this "Quarterly Report") constitute "forward-looking statements." These forward-looking statements involve known or unknown risks, uncertainties and other factors that may cause the actual results, performance, or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Specifically, the actions of our competitors and customers, our ability to execute our business plan and our ability to increase revenues is dependent upon our ability to continue to expand our current business and to expand into new markets, general economic conditions, and other factors. You can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "intends," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continues," or the negative of these terms or other comparable terminology.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we do not guarantee future results, levels of activity, performance or achievements. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. You should read this Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the financial statements and related notes included in this Quarterly Report and included in the Annual Report.

Overview We own and manage skilled nursing facilities and assisted living facilities. We deliver skilled nursing and assisted living services through wholly owned separate operating subsidiaries.

September 30, September 2012 June 30, 2012 December 31, 2011 30, 2011 December 31, 2010Cumulative number of facilities 51 48 42 40 27 Cumulative number of operational beds 4,791 4,427 3,737 3,579 2,428 25 -------------------------------------------------------------------------------- Table of Contents Number of Number of Facilities at September 30, 2012 Operational Managed for State Beds/Units Owned VIE Leased Third Parties Total Arkansas 1,041 10 - - - 10 Alabama 408 2 1 - - 3 Georgia 1,631 4 - 10 - 14 Missouri 80 - - 1 - 1 North Carolina 106 1 - - - 1 Ohio 981 10 - 1 4 15 Oklahoma 544 2 5 - - 7 Total 4,791 29 6 12 4 51 Facility Type Skilled Nursing 4,296 21 5 12 3 41 Assisted Living* 412 8 1 - - 9 Independent Living 83 - - - 1 1 Total 4,791 29 6 12 4 51 -------------------------------------------------------------------------------- *The above table includes six owned assisted living facilities in Ohio consisting of 196 beds. The Company has entered into an agreement of sale to sell these facilities by December 31, 2012. See Note 16 in the "Notes to Condensed Consolidated Financial Statements" section of Part I, Item 1 of this Quarterly Report.

Acquisitions We have embarked on a strategy to grow our business through acquisitions and leases of senior care facilities. During the first nine months of 2012, we acquired nine facilities (eight skilled nursing facilities and one assisted living facility), bringing our total bed count to 4,791 at September 30, 2012.

† On December 30, 2011, we acquired a skilled nursing facility and an assisted living facility both located in Springfield, Ohio, for an aggregate adjusted purchase price of approximately $12.4 million. We obtained effective control and commenced operating these facilities on January 1, 2012.

† On March 30, 2012, we acquired three skilled nursing facilities located in Little Rock, Arkansas. The total purchase price was approximately $27.2 million. We obtained effective control and operations commenced on April 1, 2012.

† On April 30, 2012, we acquired a skilled nursing facility located in Little Rock, Arkansas for an aggregate purchase price of approximately $3.6 million. We obtained effective control and operations commenced on June 1, 2012.

† On July 2, 2012 we acquired a skilled nursing facility in Glennville, Georgia for an aggregate purchase price of approximately $8.2 million. We obtained effective control and operations commenced on July 2, 2012.

† On July 2, 2012 we acquired a skilled nursing facility in Oklahoma City, Oklahoma for an aggregate purchase price of approximately $5.8 million.

We obtained effective control and operations commenced on July 3, 2012.

† On August 17, 2012, we acquired a skilled nursing facility in Tulsa, Oklahoma for an aggregate purchase price of approximately $5.8 million. We obtained effective control and operations commenced on August 17, 2012.

In addition, the following potential acquisitions have been announced during the nine months ended September 30, 2012: † On April 17, 2912, we amended a Purchase and Sale Agreement with First Commercial Bank to acquire five skilled nursing facilities located in Oklahoma.

On October 12, 2012, we assigned our rights to purchase two of these facilities to a related party. We expect closing to occur no later than December 31, 2012.

See Notes 14, 15 and 16 in the "Notes to Condensed Consolidated Financial Statements" section of Part I, Item 1 of this Quarterly Report.

† On April 27, 2012, we entered into a Purchase and Sale Agreement with 1761 Pinewood Holdings, LLC to acquire a 96-bed 26 -------------------------------------------------------------------------------- Table of Contents skilled nursing facility located in Sumter, South Carolina for an aggregate purchase price of approximately $5.5 million. We expect the closing of the acquisition to occur on December 31, 2012.

† On August 9, 2012, we entered into a Purchase and Sale Agreement with Winyah Nursing Home, Inc. to acquire an 84-bed skilled nursing facility located in Georgetown, South Carolina for an aggregate purchase price of approximately $4.2 million. We expect closing to occur on or before December 27, 2012.

† On September 25, 2012, we entered into a Purchase and Sale Agreement with John B. Montgomery and Michael Morton. to acquire all the issued and outstanding membership interests in LJL Properties, LLC for an aggregate purchase price of approximately $6.3 million. LJL Properties, LLC has applied for a Permit of Approval permitting construction of a 70-bed nursing facility in Cabot, Arkansas. We expect closing to occur no later than December 15, 2012.

The Company is currently evaluating potential acquisition opportunities in addition to those described above, and we continue to seek new opportunities to further our growth strategy. No assurance is made that any of these potential acquisition opportunities will be determined to be appropriate for us or that we will complete any of such acquisitions on terms acceptable to us, or at all.

Segments The Company reports its operations in three segments: SNF, ALF and Corporate & Other. The Company delivers services through wholly owned separate operating subsidiaries. The SNF and ALF segments provide services to individuals needing long-term care in a nursing home or assisted living setting and management of those facilities. The Corporate & Other segment engages in the management of facilities and accounting and IT services. We evaluate financial performance and allocate resources primarily based on segment operating income (loss).

Segment operating results excludes interest expense and other non-operating income and expenses. See Note 4 in the "Notes to Condensed Consolidated Financial Statements" section of Part I, Item 1 of this Quarterly Report.

Skilled Nursing Facilities We focus on two primary indicators in evaluating the financial performance in this segment. Those indicators are facility occupancy and patient mix.

Facility occupancy is important because higher occupancy generally leads to higher revenues. In addition, concentrating on increasing the number of Medicare covered admissions (the "patient mix") helps in increasing revenues.

We continue our work towards maximizing the number of patients covered by Medicare where, typically, our operating margins are higher. We include commercial insurance covered admissions that are reimbursed at the same level as those covered by Medicare in our Medicare utilization percentages and analysis.

For the three and nine months ended September 30, 2012, revenue in our skilled nursing segment increased approximately $ 20.2 million and $58.4 million, respectively, compared to September 30, 2011, as a result of acquisition growth. For the three and nine months ended September 30, 2012, this segment had income from operations of $4.5 million and $13.0 million respectively, as a result of optimization of occupancy and quality mix as well as expense controls. We expect to continue to implement and refine strategies designed to sustain these goals. Total assets increased $63.9 million due to acquisitions made since September 30, 2011 and other building improvements.

Average Occupancy Three Months Ended September 30, 2012 2011 Same Facilities (1) 84.9 % 87.3 % All Facilities 77.2 % 85.4 % Nine Months Ended September 30, 2012 2011 Same Facilities (1) 85.1 % 87.0 % All Facilities 78.1 % 86.2 % -------------------------------------------------------------------------------- (1) "Same Facilities" results represent those owned and leased facilities we began operating on and prior to January 1, 2011.

27 -------------------------------------------------------------------------------- Table of Contents Patient Mix Three Months Ended September 30, Same Facilities All Facilities 2012 2011 2012 2011 Medicare 13.8 % 14.4 % 12.8 % 12.9 % Medicaid 74.8 % 74.5 % 74.2 % 76.3 % Other 11.4 % 11.1 % 13.0 % 10.8 % Total 100.0 % 100.0 % 100.0 % 100.0 % Nine Months Ended September 30 Same Facilities All Facilities 2012 2011 2012 2011 Medicare 14.7 % 15.0 % 13.6 % 14.2 % Medicaid 73.5 % 75.4 % 73.8 % 76.2 % Other 11.8 % 9.6 % 12.6 % 9.6 % Total 100.0 % 100.0 % 100.0 % 100.0 % For the Three Months Ended September 30, 2012: Operational Period's Medicare Beds at Average Occupancy Utilization 2012 QTD Medicare Period Operational (Operational (Skilled Total (Skilled) Medicaid Region (SNF Only) End(1) Beds Beds) %ADC)(2) Revenues $PPD(3) $PPD(3) Alabama 304 304 78.1 % 8.6 % $ 4,566 $ 402.10 $ 183.60 Arkansas 1,009 1,009 61.9 % 12.5 % $ 11,976 $ 395.18 $ 173.60 Georgia 1,631 1,631 86.7 % 13.3 % $ 27,942 $ 457.55 $ 166.86 Missouri 80 80 63.8 % 12.6 % $ 852 $ 444.90 $ 135.04 North Carolina 106 106 84.9 % 19.8 % $ 1,870 $ 446.67 $ 162.67 Ohio 293 293 85.7 % 14.9 % $ 5,409 $ 472.49 $ 167.02 Oklahoma 544 483 72.3 % 10.7 % $ 5,363 $ 403.65 $ 127.85 Total 3,967 3,906 77.2 % 12.8 % $ 57,978 $ 437.54 $ 164.42 For the Nine Months Ended September 30, 2012: Period's Medicare Average Occupancy Utilization 2012 YTD Medicare Operational (Operational (Skilled Total (Skilled) Medicaid Region (SNF Only) Beds Beds) %ADC)(2) Revenues $PPD(3) $PPD(3) Alabama 304 81.4 % 10.9 % $ 14,469 $ 390.53 $ 186.16 Arkansas 822 63.4 % 12.0 % $ 29,297 $ 385.94 $ 172.28 Georgia 1,542 86.3 % 14.4 % $ 76,053 $ 463.27 $ 154.03 Missouri 80 62.7 % 17.5 % $ 2,594 $ 413.79 $ 132.37 North Carolina 106 84.5 % 18.6 % $ 5,485 $ 454.37 $ 160.27 Ohio 293 84.4 % 16.2 % $ 16,024 $ 472.48 $ 161.70 Oklahoma 371 70.4 % 10.0 % $ 11,830 $ 412.55 $ 125.72 Total 3,518 78.1 % 13.6 % $ 155,752 $ 440.95 $ 158.09 -------------------------------------------------------------------------------- (1) Excludes managed beds which are not consolidated.

(2) ADC is the Average Daily Census 28 -------------------------------------------------------------------------------- Table of Contents (3) PPD is the Per Patient Day equivalent Assisted Living Facilities For the three and nine months ended September 30, 2012, revenue in our ALF segment increased approximately $ 0.9 million and $ 2.8 million, respectively, compared to September 30, 2011 as a result of increased revenue from acquisitions, an annual increase in rates charged to privately paying residents and increasing occupancy. For the three and nine months ended September 30, 2012, this segment had income from operations of approximately $0.7 million and $2.0 million, respectively. Total assets increased $ 7.7 million primarily due to acquisitions since September 30, 2011 and other building improvements made during the last twelve months.

Average Occupancy Three Months Ended September 30, 2012 2011 85.1 % 77.5 % Nine Months Ended September 30, 2012 2011 83.4 % 75.9 % Residents of our assisted living facilities rely on their personal investments and wealth to pay for their stay. Although many of the risks still remain, such as declines in market values of investments, depressed market for the sale of private homes, and adult children caring for their elderly at home, we have seen an increase in census.

In October 2012, the Company entered into a an Agreement of Sale pursuant to which the Company may sell ALFs in Ohio (the "Ohio ALFs"). Management expects the sale to close on or before December 31, 2012. We estimate the cash proceeds from the sale will be approximately $6.7 million. For the nine months ended September 30, 2012, the Ohio ALF's had revenues of approximately $6.8 million and operating income of approximately $1.7 million. At September 30, 2012, the Ohio ALFs had approximately $15.4 million in assets that will likely be sold and $12.6 million in debt that will likely be extinguished as a result of the sale.

Corporate & Other We manage three skilled nursing facilities and one independent living campus for third party owners under management agreements that either are for a fixed monthly fee or for a percentage of revenue generated by the managed facility.

Depending on the type of management agreement, our revenues increase annually according to inflationary adjustments stipulated in our management agreements or they increase as the facility's revenue increases for the management agreements that are based on a percentage of revenue. This segment includes our corporate overhead expenses, which are made up of salaries of our senior management team members and various other corporate expenses, including, but not limited to, corporate office operating expenses, audit fees, legal fees and board activities. Additionally, non-cash charges for compensation expense related to warrants, restricted stock and stock options are included in corporate overhead. We do not allocate these expenses to the divisions or separate them from the management business for management review purposes.

Results of Operations Total Patient Care Revenues (Amounts in 000s) Three Months Ended September 30, Nine Months Ended September 30, Skilled Nursing 2012 2011 2012 2011 Same Facilities $ 29,431 $ 29,657 $ 87,886 $ 87,020 Other Facilities 28,547 8,072 67,867 10,362 Total $ 57,978 $ 37,729 $ 155,753 $ 97,382 Total Patient Care Revenues (Amounts in 000s) Three Months Ended September 30, Nine Months Ended September 30, Assisted Living 2012 2011 2012 2011 Same Facilities $ 2,699 $ 2,463 $ 8,010 $ 7,214 Other Facilities 665 n/a 2,028 n/a Total $ 3,364 $ 2,463 $ 10,038 $ 7,214 29 -------------------------------------------------------------------------------- Table of Contents Comparison for the three months ended September 30, 2012 and 2011 Patient Care Revenues - For the periods presented, total patient care revenues increased $21.2 million, or 53%.

Revenue in our SNF segment increased approximately $20.2 million when compared to the three months ended September 30, 2011, primarily as a result of additional facilities acquired since September 2011. This segment had net income from operations of approximately $4.5 million which is $2.2 million higher compared to the three months ended September 30, 2011 as a result of higher revenue due to acquisitions and improved reimbursement. We are seeking to increase facility occupancy and to increase the number of patients covered by Medicare. We seek to continue to implement and refine strategies designed to achieve these goals.

Revenue in our ALF segment increased approximately $0.9 million when compared to the three months ended September 30, 2011, as a result of increased census and levels of care as well as the addition of one new facility in 2012 and one new facility in the fourth quarter of 2011. This segment had income from operations of $0.7 million which is $0.3 million more than the same period in 2011 from an annual increase in rates charged to residents of the facilities.

Management Revenue - For the periods presented, management revenues (net of eliminations) increased $0.1 million, or 30%, as a result of a net increase of one managed facility.

Cost of Services -For the periods presented, cost of services was approximately $49.2 million or 80% of patient care revenue compared to $32.6 million or 81% of patient care revenue for the same period a year ago. This increase in overall cost is the result of numerous acquisitions over the past 12 months.

General and Administrative - For the three months ended September 30, 2012, general and administrative expenses were approximately $4.3 million in 2012 compared to $3.3 million in 2011, an increase of $1.0 million, or 32 %. As a percent of total revenues, general and administration expenses were approximately 7.0% for the three months ended September 30, 2012 compared to 8.0% for the three months ended September 30, 2011. Our performance-based incentive expense increased by $0.5 million reflecting the improvement in the Company's financial results. Wage and other employee related costs increased $0.2 million as a result of additional staffing needed to support the growth in operations. Investor relations expenses increased by of approximately $0.1 million. Datacenter cost has increased by $0.2 million as a result of outsourcing our IT department.

Facility Rent Expense - For the periods presented, lease expenses increased $0.1 million due to annual increases and the addition of the one new leased facility in the fourth quarter of 2011.

Depreciation and Amortization - For the periods presented, depreciation and amortization increased $1.3 million. The depreciation increase is directly related to acquisition activity that was not included in the 2011 results as it occurred in later periods. In addition, the acquisitions resulted in intangibles that are being amortized during the period.

Interest Expense, net - For the periods presented, interest expense, net increased $1.8 million, or 80%. We have entered into numerous debt instruments in relation to our growth strategy for the acquisition of the facilities which began in the third quarter of 2010. In addition, several of the arrangements are short term in nature resulting in higher interest rates than previously experienced and an increase in the amortization of deferred loan costs associated with the new debt agreements.

Acquisition Costs, net of Gains - For the three months ended September 30, 2012, acquisition costs, net of gains was an expense of $0.3 million, compared to $1.1 million for the comparative period. For the three months ended September 30, 2012, the total acquisition costs were legal fees directly related to acquisitions and other costs incurred on potential future acquisitions.

Derivative Gain/Loss - For the three months ended September 30, 2012, the derivative loss was $2.1 million, compared to a gain of $4.7 million for the same period in 2011. The derivative results from the subordinated notes issued in the third quarter of 2010. The expense associated with the derivative increases as the stock price climbs, and conversely decreases as the stock price declines. The price of the common stock increased during the three-month period ended September 30, 2012, from June 30, 2012 to September 30, 2012.

Comparison for the nine months ended September 30, 2012 and 2011 Patient Care Revenues - For the periods presented, total patient care revenues increased $61.2 million, or 59%.

Revenue in our SNF segment increased approximately $58.4 million when compared to the nine months ended September 30, 2011, primarily as a result of additional facilities acquired since September, 2011. This segment had net income from operations of $13.0 million which is $8.5 million higher compared to the nine months ended September 30, 2011 as a result of higher revenue due to acquisitions and improved reimbursement. We are seeking to increase facility occupancy and to increase the number of patients covered by Medicare. We seek to continue to implement and refine strategies designed to achieve these goals.

30 -------------------------------------------------------------------------------- Table of Contents Revenue in our ALF segment increased approximately $2.8 million when compared to the nine months ended September 30, 2011, as a result one new facility in 2012 and one new facility in the fourth quarter of 2011. This segment had income from operations of $2.0 million which is $1.0 million more than the same period in 2011.

Management Revenue - For the periods presented, management revenues (net of eliminations) decreased $0.2 million, or 12%, as a result of fewer managed facilities.

Cost of Services -For the periods presented, cost of services was approximately $131.5 million or 79% of patient care revenue compared to $84.9 million or 81% of patient care revenue for the same period a year ago. This increase in overall cost is the result of numerous acquisitions over the past 12 months. The improvement as a percent of patient care revenue reflects the implementation of consolidated purchasing programs and other cost reduction efforts. In 2012, the Company eliminated the ability for employees to accumulate earned but unused vacation beyond the current calendar year. As a result, vacation time previously accumulated must be used by the employee by December 31, 2012 or it will be forfeited. Management has estimated the potential forfeitures and has adjusted the vacation accrual accordingly.

General and Administrative - For the nine month period ended September 30, 2012, general and administrative expenses were approximately $13.2 million in 2012 compared to $9.4 million in 2011, an increase of $3.8 million, or 41%. As a percent of total revenues, general and administration expenses were approximately 7.9% for the nine months ended September 30, 2012 compared to 8.8% for the nine months ended September 30, 2011Our performance-based incentive expense increased by $1.5 million reflecting the improvement in the Company's financial results. Wage and other employee related costs increased $0.6 million as a result of additional staffing needed to support the growth in operations.

Travel costs have increased approximately $0.3 million as a result of acquisitions and more geographically dispersed operations. Investor relations expenses increased by approximately $0.2 million. Non-employee Board compensation increased approximately $0.2 million. This increase is to align Board compensation with the Company's peer group and to provide appropriate remuneration for their services. Datacenter cost has increased by $0.2 million as a result of outsourcing our IT department.

Facility Rent Expense - For the periods presented, lease expenses increased $0.5 million due to annual increases and the addition of the one new leased facility in the fourth quarter of 2011.

Depreciation and Amortization - For the periods presented, depreciation and amortization increased $3.2 million. The depreciation increase is directly related to acquisition activity that was not included in the 2011 results as it occurred in later periods. In addition, the acquisitions resulted in intangibles that are being amortized during the period.

Interest Expense, net - For the periods presented, interest expense, net increased $4.8 million or 87%. We have entered into numerous debt instruments in relation to our growth strategy for the acquisition of the facilities which began in the third quarter of 2010. In addition, several of the arrangements are short term in nature resulting in higher interest rates than previously experienced and an increase in the amortization of deferred loan costs associated with the new debt agreements.

Acquisition Costs, net of Gains - For the nine months ended September 30, 2012, acquisition costs, net of gains was an expense of $1.2 million, compared to an expense of $0.8 million for the comparative period. For the nine months ended September 30, 2012, the total acquisition costs were legal fees directly related to acquisitions during the nine months ended September 30, 2012 and other costs incurred on potential future acquisitions.

Derivative Gain/Loss - For the nine months ended September 30, 2012, the derivative loss was $1.3 million, compared to a gain of $0.8 million for the same period in 2011. The derivative results from the subordinated convertible notes issued during the third quarter of 2010. The expense associated with the derivative increases as the stock price climbs, and conversely decreases as the stock price declines. The price of the common stock of the Company increased during the nine-month period ended September 30, 2012 from December 31, 2011 to September 30, 2012.

Other Income/(Expense) - For the periods presented, other income decreased $0.3 million. There was a recovery of receivables recorded in the prior year. In the nine months ended September 30, 2012, there was a $0.4 million non-cash settlement gain as a result of the litigation settlement partially offset by other expenses.

Critical Accounting Policies and Use of Estimates There have been no significant changes during the nine months ended September 30, 2012 to the items that we disclosed as our critical accounting policies and use of estimates in our discussion and analysis of financial condition and results of operation contained in the Annual Report.

31 -------------------------------------------------------------------------------- Table of Contents Liquidity and Capital Resources Overview Liquidity is the measure of the Company's ability to have adequate cash or access to cash at all times in order to meet financial obligations when due, as well as to fund corporate expansion and other activities. Historically, the Company has met its liquidity requirements through a combination of net cash flow from operations, debt from third party lenders and issuances of other debt and equity securities.

We have negative working capital of approximately $2.3 million at September 30, 2012. Our ability to sustain profitable operations is dependent on continued growth in revenues and controlling costs. Approximately $3.0 million of the negative working capital ratio is related to short term debt under a VIE which the Company does not guarantee. (See Note 12 in the "Notes to Condensed Consolidated Financial Statements" section of Part I, Item 1 of this Quarterly Report).

During the next twelve months, the Company believes it will require additional financing to satisfy its financial obligations and implement its expansion strategy. The Company is currently exploring several financing alternatives and may seek to raise additional capital through the sale of additional debt or equity securities, although there is no assurance that the Company will be able to raise additional capital through the issuance of debt or equity securities on terms acceptable to it, or at all. If the Company is unable to secure such additional financing, then the Company may be required to restructure its outstanding indebtedness and delay or modify its expansion plans.

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization from continuing operations ("Adjusted EBITDA from continuing operations") and adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Rent from continuing operations ("Adjusted EBITDAR from continuing operations") are measures of operating performance that are not calculated in accordance with U.S. generally accepted accounting principles ("GAAP"). The Company believes these non-GAAP measures reflect an additional way of viewing aspects of our operations that, when viewed with our GAAP results and the accompanying quantitative reconciliations to net income (loss) (the most directly comparable GAAP financial measures), provide a more complete understanding of factors or trends affecting our business.

Three Months Ended Nine Months Ended September 30, September 30, (Amounts in 000s) 2012 2011 2012 2011 Condensed Consolidated Statement of Operations Data: Net income (loss) $ (2,440 ) $ 2,780 $ (2,620 ) $ (2,724 ) Impact of discontinued operations 202 158 472 285 Net income (loss) from continuing operations (2,238 ) 2,938 (2.148 ) (2,439 ) Interest expense (net) 3,992 2,223 10,312 5,511 Income tax (benefit) expense 118 204 217 414 Amortization of stock based compensation 269 184 616 741 Depreciation and amortization 2,112 836 5,370 2,188 Acquisition costs, net of gain 342 1,147 1,160 789 Loss on extinguishment of debt - 58 - 136 Derivative (gain) loss 2,105 (4,745 ) 1,342 (807 ) Other non-routine adjustments (282 ) - (282 ) (632 ) Salary retirement and continuation costs 38 - 38 622 Adjusted EBITDA from continuing operations 6,456 2,845 16,625 6,523 Facility rent expense 2,080 1,937 6,196 5,787 Adjusted EBITDAR from continuing operations $ 8,536 $ 4,782 $ 22,821 $ 12,310 The Company defines: (i) "Adjusted EBITDA from continuing operations " as net income (loss) from continuing operations before interest expense, income tax expense; depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on extinguishment of debt, derivative loss or gain, other non-routine adjustments (primarily a recovery of a receivable and a non-cash settlement gain) , and retirement and salary continuation costs; and (ii) "Adjusted EBITDAR from continuing operations" as net income (loss) from continuing operations before interest expense; income tax expense, depreciation and amortization (including amortization of non-cash stock-based compensation), acquisition costs (net of gains), loss on extinguishment of debt, derivative loss; other non-routine adjustments (primarily a recovery of a receivable and a non-cash settlement gain), retirement and salary continuation costs and rent cost.

Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations should not be considered in isolation or as a substitute for net income, income from operations or cash flows provided by, or used in, operations as determined in accordance with GAAP. Adjusted EBITDA from continuing operations and Adjusted EBITDAR from continuing operations are used by management to focus on operating performance and management without mixing in items of income and expense that relate to the financing and capitalization of the business, fixed rent or lease payments of facilities, derivative loss or gain, and certain 32 -------------------------------------------------------------------------------- Table of Contents acquisition related charges.

The Company believes these measures are useful to investors in evaluating the Company's performance, results of operations and financial position for the following reasons: † They are helpful in identifying trends in the Company's day-to-day performance because the items excluded have little or no significance to the Company's day-to-day operations; † They provide an assessment of controllable expenses and afford management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieve optimal financial performance; and † They are an indication to determine whether or not adjustments to current spending decisions are needed.

AdCare believes that the use of the measures provides a meaningful and consistent comparison of the Company's underlying business between periods by eliminating certain items required by GAAP, which have little or no significance in the Company's day-to-day operations.

Woodland Manor Financing In connection with the Company's January 2012 acquisition of the skilled nursing facility located in Springfield, Ohio, known as Woodland Manor, a wholly owned subsidiary of the Company entered into a loan agreement for $4.8 million. The loan matures in December 2016 with a required final payment of approximately $4.3 million and accrues interest at the LIBOR rate plus 4% with a minimum rate of 6% per annum. The loan requires monthly payments of principal and interest.

Deferred financing costs incurred on the loan amounted to approximately $0.1 million and are being amortized to interest expense over the life of the loan.

The loan has a prepayment penalty of 5% through 2012 declining by 1% each year through 2015. The loan is secured by the Woodland Manor facility and guaranteed by AdCare.

Eaglewood Village Financings In April 2012, a wholly owned subsidiary of AdCare entered into a loan agreement with the City of Springfield in the State of Ohio ("City of Springfield") pursuant to which City of Springfield lent to such subsidiary the proceeds from the sale of City of Springfield's Series 2012 Bonds. The Series 2012 Bonds consist of $6.6 million in Series 2012A First Mortgage Revenue Bonds and $0.6 million in Taxable Series 2012B First Mortgage Revenue Bonds. The Series 2012 Bonds were issued pursuant to an April 2012 Indenture of Trust between the City of Springfield and the Bank of Oklahoma. The Series 2012A Bonds mature in May 2042 and accrue interest at a fixed rate of 7.65% per annum. The Series 2012B Bonds mature in May 2021 and accrue interest at a fixed rate of 8.5% per annum. Deferred financing costs incurred on the loan amounted to approximately $0.6 million and are being amortized to interest expense over the life of the loan. The loan is secured by the Company's assisted living facility located in Springfield, Ohio known as Eaglewood Village and guaranteed by AdCare. There is an original issue discount of approximately $0.3 million and restricted assets of $0.3 million related to this loan.

In January 2012, two wholly owned subsidiaries of AdCare issued a promissory seller note in the amount of $0.5 million in connection with the January 2012 acquisition of the assisted living facility located in Springfield, Ohio. The note matures in January 2014 and requires a final payment of approximately $0.5 million. The note bears interest at 6.5% per annum payable monthly beginning February 2012. The note requires monthly principal and interest payment. The note may be prepaid without penalty at any time.

Vandalia HUD Financing In connection with the Company's January 2012 refinance of the assisted living facility located in Vandalia, Ohio known as Hearth and Home of Vandalia, a wholly owned subsidiary of AdCare obtained a term loan insured by U.S.

Department of Housing and Urban Development ("HUD") with a financial institution for a total amount of $3.7 million that matures in 2041. The HUD term loan requires monthly principal and interest payments with a fixed interest rate of 3.74%. Deferred financing costs incurred on the term loan amounted to approximately $0.2 million and are being amortized to interest expense over the life of the loan. The HUD term loan has a prepayment penalty of 8% starting in 2014 declining by 1% each year through 2022.

Cantone Promissory Notes In March 2012, AdCare issued an unsecured promissory note to Cantone Asset Management LLC in the amount of $3.5 million. In April 2012, AdCare issued another promissory note to Cantone Asset Management LLC in the amount of $1.5 million. In July 2012, these two promissory notes were refinanced through the issuance to Cantone Asset Management LLC in July 2012 of an 8% subordinated convertible note in principal amount of $5.0 million.

Convertible Debt Issued in July 2012 AdCare entered into a Securities Purchase Agreement, dated as of June 28, 2012, with certain accredited investors pursuant to which the Company issued and sold such investors on July 2, 2012 an aggregate of $7.5 million in principal amount of the Company's 8.0% subordinated convertible notes. The notes bear interest at 8% per annum and such interest is payable quarterly in cash in arrears beginning on September 30, 2012. The notes mature on July 31, 2015. The notes are unsecured and subordinated in right of payment to existing and future senior indebtedness of the Company. The $7.5 million principal amount of the notes includes a refinance of 33 -------------------------------------------------------------------------------- Table of Contents existing indebtedness of $5.0 million of promissory notes issued to Cantone Asset Management LLC.

At any time on or after the six-month anniversary of the date of issuance of the notes, the notes are convertible at the option of the holder into shares of the Company's common stock at an initial conversion price equal to $3.97 per share (adjusted for a 5% stock dividend paid on October 22, 2012 as further discussed in Note 10) and subject to adjustment for stock dividends, stock splits, combination of shares, recapitalization and other similar events.

If at any time on or after the six-month anniversary date, the weighted average price of the common stock for any 20 trading days within a period of 30 consecutive trading days equals or exceeds 200% of the conversion price and the average daily trading volume of the common stock during such 20 days exceeds 50,000 shares, then the Company may, subject to the satisfaction of certain other conditions, redeem the notes in cash at a redemption price equal to the sum of 100% of the principal amount being redeemed plus any accrued and unpaid interest on such principal.

In addition, the holders of a majority of the aggregate principal amount of notes then outstanding may require the Company to redeem all or any portion of the notes upon a change of control transaction, as described in the notes, at a redemption price in cash equal to 110% of the redemption amount.

Little Rock, Northridge and Woodland Hills Financings In connection with the Company's April 2012 acquisition of three skilled nursing facilities located in Arkansas known as Little Rock, Northridge and Woodland Hills, certain wholly owned subsidiaries of AdCare entered into a loan agreement for $21.8 million with PrivateBank. The loan originally matured in March 2017 with a required final payment of approximately $19.7 million and accrues interest at the LIBOR rate plus 4% with a minimum rate of 6% per annum. The loan requires monthly principal payments plus interest for total current monthly payments of approximately $0.2 million. Deferred financing costs incurred on the loan amounted to approximately $0.4 million and are being amortized to interest expense over the life of the loan. The loan has a prepayment penalty of 5% through 2012 declining by 1% each year through 2015. The loan is secured by the three facilities and guaranteed by AdCare. The Company has approximately $1.8 million of restricted assets related to this loan.

On June 15, 2012, certain wholly owned subsidiaries of AdCare entered into a modification agreement with PrivateBank to modify the terms of the loan agreement. The loan modification agreement, among other things, amended the loan agreement to reflect a maturity date of March 30, 2013. The Company intends on refinancing the loan to long-term. PrivateBank has informed us in writing that, in the event the loan was not refinanced through the U.S. Small Business Administration ("SBA"), it would be the intent of PrivateBank to reinstate the March 30, 2017 maturity date.

Abington Place Financing In connection with the Company's June 2012 acquisition of the skilled nursing facility located in Little Rock, Arkansas known as Abington Place, a wholly owned subsidiary of AdCare entered into a short-term loan agreement for $3.4 million with Metro City Bank. In August 2012, the maturity date was amended from September 2012 to December 2014. The note accrues interest at the prime rate plus 2.25% with a minimum rate of 6.25% per annum. Deferred financing costs incurred on the loan amounted to approximately $0.1 million and are being amortized to interest expense over the life of the loan. The loan may be prepaid at any time without penalty. The loan was secured by the Abington Place facility and guaranteed by AdCare.

Stone County Financing In June 2012, a wholly owned subsidiary of AdCare, entered into each of: (i) a Loan Agreement with Metro City Bank ("Metro") in the amount of $1.3 million; (ii) a Loan Agreement with Metro in the amount of $1.8 million; and (iii) a Loan Agreement with the Economic Development Corporation of Fulton County (the "CDC"), an economic development corporation working with the SBA. The purpose of these agreements was to refinance existing debt in the original principal amount of $3.1 million used to acquire select assets of a 97-bed skilled nursing facility located in Arkansas known as the Stone County Nursing and Rehabilitation Facility.

The funding of the Metro loans for $1.3 million and $1.8 million occurred on June 8, 2012. The funding of the SBA loan for $1.3 million occurred in July 2012, and the proceeds were used to satisfy the $1.3 million Metro loan.

The $1.8 million Metro loan matures in June 2022 and accrues interest an annual variable rate equal to the published Wall Street Journal prime rate plus 2.25% (with a minimum rate of 6.25% per annum). Deferred financing costs incurred on this loan amounted to approximately $0.1 million and are being amortized to interest expense over the life of the loan. The Metro loan has a prepayment penalty of 10% for any prepayment through June 2013. The penalty is reduced by 1% each year thereafter until the tenth anniversary, after which there is no prepayment penalty. The Metro loan is secured by the Stone County Nursing and Rehabilitation Facility and is guaranteed by AdCare.

The SBA loan matures in July 2032 and accrues interest at a rate of 2.42% per annum. The SBA Loan is payable in equal monthly installments of principal and interest based on a twenty (20) year amortization schedule. The SBA loan may be prepaid, subject to prepayment premiums during the first 10 years. There are also annual fees associated with the SBA loan, including an SBA guarantee fee.

The SBA Loan is secured by a second in priority security deed on the Stone County Nursing and Rehabilitation Facility and guarantees from AdCare, the SBA and a wholly owned subsidiary of AdCare.

34 -------------------------------------------------------------------------------- Table of Contents 2012 Public Common Stock Offering In March 2012, the Company closed a firm commitment underwritten public offering of 1.1 million shares of common stock at an offering price to the public of $3.75 per share. The Company also granted the underwriter in the offering an option for 45 days to purchase up to an additional 165,000 shares of common stock to cover over-allotments, if any. In connection with the underwriter's partial exercise of this option, the Company issued an additional 65,000 shares of common stock at an offering price to the public of $3.75 per share on May 22, 2012. The Company received net proceeds of approximately $3.8 million after deducting underwriting discounts and other offering-related expenses of approximately $0.6 million. This transaction occurred prior to the 2012 stock dividend and the share amounts, as disclosed, have not been restated as a result.

Gemino Credit Agreement At December 31, 2011, the outstanding balance of approximately $7.3 million for the revolving credit agreement was classified as current as a result of the required lockbox arrangement and subjective acceleration clauses.

On September 20, 2012, AdCare terminated and paid off all amounts outstanding under that certain Credit Agreement, dated October 29, 2010, between Gemino Healthcare Finance, LLC ("Gemino") and AdCare (the "Gemino credit facility").

The Gemino credit facility was a secured credit facility for borrowings up to $7.5 million, which was to mature on October 29, 2013. As of September 20, 2012, the amount outstanding in principal balance was approximately $4.2 million which was paid from funds made available to AdCare from a new credit facility entered into with the PrivateBank and Trust Company ("PrivateBank"). Interest accrued on the principal balance outstanding of the Gemino credit facility at an annual rate equal to LIBOR rate plus the applicable margin of 4.75% to 5.00%, depending on the principal amount outstanding. The Gemino credit facility contained various financial covenants and other restrictions, including a fixed charge cover ratio and maximum loan turn days, as well as borrowing base restrictions. No material early termination penalties were incurred by AdCare as a result of the termination.

Gemino-Bonterra Amendment On September 20, 2012, ADK Bonterra/Parkview, LLC, a wholly owned subsidiary of AdCare ("Bonterra"), entered into a Second Amendment to the Credit Agreement with Gemino, which amended that certain Credit Agreement, dated April 27, 2011, between Bonterra and Gemino (the "Gemino-Bonterra credit facility"). The Gemino-Bonterra credit facility is a secured credit facility for borrowings up to $2.0 million. The amendment extends the term of theGemino-Bonterra credit facility from October 29, 2013 to January 31, 2014 and amends certain financial covenants regarding Bonterra's fixed charge coverage ratio, maximum loan turn days and applicable margin. Interest accrues on the principal balance outstanding at an annual rate equal to LIBOR plus the applicable margin of 4.75% to 5.00%, depending upon the principal amount outstanding. As of September 30, 2012, approximately $1.4 million was outstanding under the Gemino-Bonterra credit facility.

PrivateBank Credit Facility On September 20, 2012, in connection with the payoff of the Gemino credit facility, AdCare entered into a Loan and Security Agreement with PrivateBank.

The PrivateBank credit facility provides for a three-year $10.6 million principal amount senior secured revolving credit facility limited to certain borrowing base restrictions and offset by a $0.1 million letter of credit.

The PrivateBank credit facility matures on September 20, 2015. Interest accrues on the principal balance thereof at an annual rate of the greater of 1% plus the prime interest rate per annum, or 5% per annum, and payments for the interest are payable monthly, commencing on October 1, 2012. In addition, there is a non-utilization fee of 0.%% of the unused portion of the available credit. The PrivateBank credit facility may be prepaid at any time without premium or penalty, provided that such prepayment is accompanied by a simultaneous payment of all accrued but unpaid interest through the date of prepayment. The PrivateBank credit facility is secured by a first priority security interest in the real property and improvements constituting nursing facilities owned and operated by AdCare. AdCare has unconditionally guaranteed all amounts owing under the PrivateBank credit facility.

Proceeds from the PrivateBank credit facility were used to pay off all amounts outstanding under (i) a separate $2.0 million credit facility with PrivateBank under which certain subsidiaries of AdCare were borrowers and (ii) $ the Gemino credit facility.

35 -------------------------------------------------------------------------------- Table of Contents The PrivateBank credit facility was modified in October 2012. See Note 16 in the "Notes to the Condensed Consolidated Financial Statements" section of Part 1, Item 1 of this Quarterly Report.

Glenvue In July 2012, a wholly owned subsidiary of AdCare financed the skilled nursing facility located in Glennville, Georgia known as Glenvue Health & Rehabilitation by entering into a loan agreement for $6.6 million with PrivateBank . The loan matures in July 2014 with a required final payment of approximately $6.4 million and accrues interest at an annual rate of the greater of 6.0% per annum; or the LIBOR rate plus 4.0% per annum. The loan requires monthly principal payments and interest. Deferred financing costs incurred on the loan amounted to approximately $0.1 million and are being amortized to interest expense over the life of the loan. The loan is secured by the Glenvue facility and guaranteed by AdCare.

Companions Specialized Care In August 2012, a wholly owned subsidiary of AdCare financed the skilled nursing facility located in Tulsa, Oklahoma known as Companions Specialized Care Center by entering into a loan agreement for $5.0 million with Contemporary Healthcare Capital. The loan matures in August 2015 with a required final payment of $5.0 million and accrues interest at a fixed rate of 8.5% per annum. Deferred financing costs incurred on the loan amounted to approximately $0.2 million and are being amortized to interest expense over the life of the loan. The loan has a prepayment penalty of 5% during the first year of the term and 1% during the second year of the term. The loan is secured by the Companions Specialized Care facility and guaranteed by AdCare.

Quail Creek In July 2012, a wholly owned subsidiary of AdCare financed the skilled nursing facility located in Oklahoma City, Oklahoma known as Quail Creek Nursing by the assumption of existing indebtedness under that certain Loan Agreement and Indenture of First Mortgage with The Bank of New York Mellon Global Corporate Trust, as assignee of The Liberty National Bank and Trust of that certain Bond Indenture, dated September 1, 1986, as amended by that certain First Amendment to the Loan Agreement and Indenture of First Mortgage dated as of September 1, 2001. The indebtedness under the Loan Agreement and Indenture consists of a principal amount if $2.8 million. The loan matures in August 2016, accrues interest at a fixed rate of 10.25% per annum. The loan is secured by the Quail Creek facility.

For information on financings that have been entered into subsequent to September 30, 2012, see Note 16 in the "Notes to Condensed Consolidated Financial Statements" section of Part I, Item 1 of this Quarterly Report.

The following table presents selected data from our consolidated statement of cash flows for the periods presented: Nine Months Ended September 30 2012 2011Net cash provided by operating activities - continuing operations $ 5,771 $ 1,126 Net cash used in operating activities - discontinued operations (648 ) (96 ) Net cash used in investing activities - continuing operations (16,931 ) (13,236 ) Net cash provided by financing activities - continuing operations 14,475 18,479 Net cash used in financing activities - discontinued operations (147 ) (134 ) Net change in cash and cash equivalents 2,520 6,139 Cash and cash equivalents at beginning of period 7,364 3,911 Cash and cash equivalents at end of period $ 9,884 $ 10,050 Nine months ended September 30, 2012 Net cash provided by operating activities for the nine months ended September 30, 2012, was approximately $5.1 million consisting primarily of our net income from operations, changes in working capital, and noncash charges (primarily depreciation and amortization, share-based compensation, difference between straight-line rent and rent paid ,provision for bad debt and amortization of debt discounts and related deferred financing costs); all primarily the result of routine operating activities.

Net cash used in investing activities for the nine months ended September 30, 2012, was approximately $16.9 million. This is primarily the result of funding our acquisitions, including making escrow deposits and investments in equipment and other facility improvements.

Net cash provided by financing activities was approximately $14.3 million for the nine months ended September 30, 2012. This is primarily the result of cash proceeds received from public stock offering, and proceeds from debt financings to primarily to fund our 36 -------------------------------------------------------------------------------- Table of Contents acquisitions and to increase borrowings in our revolving credit facilitis, partially offset by repayments of existing debt obligations.

Nine months ended September 30, 2011 Net cash provided by operating activities for the nine months ended September 30, 2011 was approximately $1.0 million consisting primarily of our income from operations less the noncash gain on acquisitions, and changes in working capital, and noncash charges (primarily depreciation and amortization, the derivative loss, share-based compensation, difference between straight-line rent and rent paid, provisions for bad debts and amortization of debt discounts and related deferred financing costs); all primarily the result of routine operating activities.

Net cash used in investing activities for the nine months ended September 30, 2011, was approximately $13.2 million. This is primarily the result of funding our acquisitions, including making escrow deposits and investments in equipment and other facility improvements.

Net cash provided by financing activities was approximately $18.3 million for the nine months ended September 30, 2011. This is primarily the result of increases in borrowings on the line of credit, proceeds from debt financings primarily to fund our acquisitions and proceeds from exercises of warrants and options, partially offset by repayments of existing debt obligations.

[ Back To Technology News's Homepage ]