As part of its bid to stave off bankruptcy, Care Enterprises, one of the nation's largest nursing-home operators, is trying to persuade owners of $68 million worth of its notes and bonds to swap them for notes and bonds with less stringent controls, so the company can refinance $35 million in bank loans and obtain an extended line of credit.
Mark B. Kristof, treasurer of the Laguna Hills firm, said Care Enterprises cannot make a $5-million loan payment due Dec. 31 and is involved in "difficult negotiations" with its lenders, Wells Fargo Bank and Citibank, in hope of refinancing the debt.
"There is a risk of the company entering bankruptcy because of the failure to meet the payment with the banks," Kristof said.
A major barrier to the talks, he said, is a provision governing a $52-million issue of subordinated convertible debentures and a $16-million issue of subordinated notes that prevents Care Enterprises from refinancing its debt unless it shows a specified level of earnings.
Kristof said Care Enterprises, which posted a $10-million loss in 1986 and had net earnings of $1.6 million for the first half of 1987, cannot meet the earnings test of the bond provisions and wants to eliminate the requirement.
A formal offering circular released Friday by the Securities and Exchange Commission and mailed to Care's debt holders the same day says that the offer "will reduce the likelihood of a payment default . . . that could force the company to seek protection under the federal bankruptcy laws. However (a successful exchange of notes and bonds) will not, itself, assure that the company will be able to meet its debt service requirements."
According to the circular, Care's loan agreement with its banks requires it to pay $5 million on Dec. 31, $9.9 million on Feb. 29 and an additional $19.69 million in installments by the end of 1988.
But Kristof said Care Enterprises has no money available for debt repayment. "What amount of money we do have is necessary to operate the business," he said.
He added that in the last two years, the company has sold 20 of its convalescent homes to help cut its debt. While the sales have reduced the debt by $5 million, he said, they have also cut the company's revenue and hurt its profitability.
So, Kristof said, the bond covenant that restricts Care's debt refinancing is "something we have to fix." He said that for two months, the company has been working with the Securities and Exchange Commission to clarify the terms of the requested changes.
Kristof said the company mailed on Friday an explanation of the proposed "fix" to the 500 owners of debentures and 15 owners of notes. Most of the debt is held by large institutional investors. Debt holders have until Dec. 15 to make up their minds.
The changes will go into effect if holders of 51% of the notes and debentures agree, Kristof said.
Under the proposal filed with the SEC, holders of the debentures and notes are being asked to exchange existing securities for an equal dollar value of securities that do not have the financing restriction but offer a higher interest rate and shorter maturity period. The interest rate on the new debenture issue would be 9.25%, contrasted with 9% on the existing debentures, while the interest rate on the new notes would be 16.375%, up from 16%. The maturity period would be cut by 31 days for the notes and by 3 years for the debentures.
The new terms being offered would enable the company to pay interest on the debt with Class A common stock--which carries a one-tenth vote per share--instead of cash.
Also, Kristof said, under the proposed modifications, holders of the new debentures would lose the existing option of converting $4 million of the debentures to Class B common stock, which carries one vote per share.
Kristof said that two years ago, the company, as a matter of policy, decided against issuing any more "Class B" stock. The three founders of Care Enterprises--Lee and Dee Bangerter and their half-brother, Ted D. Nelson--control 67% of the Class B shares, enough to discourage hostile takeovers.
If Care Enterprises can renegotiate its loan with the banks, Kristof said, the banks will agree to enlarge it from $35 million to $40 million, providing an extra $5 million in working capital, and to increase the company's credit line from $7 million to $10 million.
He said the company's management hopes that the banks will agree to the refinancing by early December, subject to modification of the bond agreements. CARE ENTERPRISES AT A GLANCE
Based in Laguna Hills, Care Enterprises has grown from a small family business founded in 1964 to one of the largest publicly owned providers of long-term care in the United States. The company operates 106 skilled and intermediate nursing facilities and retirement homes in California, New Mexico, Utah, Arizona, Ohio, West Virginia and Florida.
(in millions) 1986 1985 1984 1983 1982 Revenue $264.8 $238.5 $151.6 $102.3 $55.2 Income (loss) (9.9) 3.6 3.3 0.95 1.7
Employees approximately 1,500
Shares outstanding Class A, 5.6 million; Class B, 11.2 million
52-week price range $5.125-$1.75 Friday's close (AMEX) $1.875