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: MARCH 31, 2000
--------------
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
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ADVOCAT INC.
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(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
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 771-7575
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE
LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
5,491,621
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(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 8, 2000)
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PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 2,878 $ 1,913
Receivables, less allowance for doubtful
accounts of $5,400 and $4,958,
respectively 11,936 11,719
Inventories 852 754
Prepaid expenses and other assets 1,832 813
-------- --------
Total current assets 17,498 15,199
-------- --------
PROPERTY AND EQUIPMENT, at cost 87,968 87,667
Less accumulated depreciation
and amortization (20,160) (19,015)
-------- --------
Net property and equipment 67,808 68,652
-------- --------
OTHER ASSETS:
Deferred financing and other costs, net 852 939
Assets held for sale or redevelopment 1,476 1,476
Investments in and receivables from joint ventures 8,454 8,126
Other 1,734 1,793
-------- --------
Total other assets 12,516 12,334
-------- --------
$ 97,822 $ 96,185
======== ========
(Continued)
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ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
CURRENT LIABILITIES:
Current portion of long-term debt $ 53,529 $ 53,098
Trade accounts payable 7,382 7,984
Accrued expenses:
Payroll and employee benefits 4,143 4,001
Interest 221 221
Self-insurance reserves 3,380 3,508
Other 4,403 3,086
-------- --------
Total current liabilities 73,058 71,898
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 7,762 7,827
Deferred gains with respect to leases, net 2,985 3,047
Self-insurance reserves, less current portion 2,783 2,268
Other 4,870 4,878
-------- --------
Total noncurrent liabilities 18,400 18,020
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -- --
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,492,000 issued and outstanding
at March 31, 2000 and December 31, 1999 55 55
Paid-in capital 15,907 15,907
Accumulated deficit (9,598) (9,695)
-------- --------
Total shareholders' equity 6,364 6,267
-------- --------
$ 97,822 $ 96,185
======== ========
The accompanying notes are an integral part of these interim consolidated
balance sheets.
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- --------
REVENUES:
Patient revenues 35,972 $ 36,854
Resident revenues 10,425 8,905
Management fees 901 919
Interest 40 34
------- --------
Net revenues 47,338 46,712
------- --------
EXPENSES:
Operating 36,425 37,723
Lease 5,276 4,901
General and administrative 2,817 2,735
Interest 1,454 1,307
Depreciation and amortization 1,234 1,148
------- --------
Total expenses 47,206 47,814
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 132 (1,102)
PROVISION (BENEFIT) FOR INCOME TAXES 47 (396)
------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 85 (706)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -0- (277)
------- --------
NET INCOME (LOSS) $ 85 $ (983)
======= ========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .02 $ (.13)
Cumulative effect of change in accounting principle, net of tax -- (.05)
------- --------
Net income (loss) $ .02 $ (.18)
======= ========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before accounting change $ .02 $ (.13)
Cumulative effect of change in accounting principle, net of tax -- (.05)
------- --------
Net income (loss) $ .02 $ (.18)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,492 5,399
======= ========
Diluted 5,492 5,399
======= ========
The accompanying notes are an integral part of these interim consolidated
financial statements.
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------
2000 1999
---- -----
NET INCOME (LOSS) $ 85 $(983)
---- -----
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 19 74
Income tax expense (7) (27)
---- -----
12 47
---- -----
COMPREHENSIVE INCOME (LOSS) $ 97 $(936)
==== =====
The accompanying notes are an integral part of these interim consolidated
financial statements.
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 85 $ (983)
Items not involving cash:
Depreciation and amortization 1,234 1,148
Provision for doubtful accounts 819 729
Equity (earnings) loss in joint ventures (59) 32
Amortization of deferred balances (150) (4)
Deferred income taxes -0- (149)
Write off pursuant to change in accounting principle -0- 433
Changes in other assets and liabilities:
Receivables (1,036) 1,778
Inventories (99) (108)
Prepaid expenses and other assets (1,026) 489
Trade accounts payable and accrued expenses 1,181 756
Other 16 (29)
------- -------
Net cash provided by operating activities 965 4,092
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (368) (1,446)
Investment in TDLP -0- (157)
Mortgages receivable, net 273 137
Deposits, pre-opening costs and other (207) (361)
Investment in and advances to joint ventures, net (322) (273)
TDLP partnership distributions 53 72
------- -------
Net cash used in investing activities (571) (2,028)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) bank line of credit 750 (3,490)
Proceeds from issuance of debt obligations -0- 636
Repayment of debt obligations (384) (187)
Advances from (to) TDLP, net 182 (50)
Increase in lease obligations 23 47
Financing costs -0- (85)
------- -------
Net cash provided by (used in) financing activities 571 (3,129)
------- -------
(Continued)
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 965 $(1,065)
CASH AND CASH EQUIVALENTS, beginning of period 1,913 2,347
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,878 $ 1,282
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 1,519 $ 1,598
======= =======
Cash payments (refunds) of income taxes, net $ 18 $ (443)
======= =======
Advocat received net benefit plan deposits and earnings and recorded net benefit
plan liabilities of $52,000 in the three month period ended March 31, 1999.
During 1999, the Company's Supplemental Executive Retire Plan ("SERP") was
terminated. In connection therewith, the Company distributed the net benefit
plan deposits and relieved the net benefit plan liabilities.
The accompanying notes are an integral part of these interim consolidated
financial statements.
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ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000 AND 1999
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services.
As of March 31, 2000, the Company operates 120 facilities consisting of 65
nursing homes with 7,307 licensed beds and 55 assisted living facilities with
5,412 units. The Company owns seven nursing homes, leases 36 others, and manages
22 nursing homes. The Company owns 16 assisted living facilities, leases 25
others, and manages the remaining 14 assisted living facilities. The Company
holds a minority interest in seven of these managed assisted living facilities.
The Company operates 51 nursing homes and 33 assisted living facilities in the
United States and 14 nursing homes and 22 assisted living facilities in Canada.
The Company operates facilities in Alabama, Arkansas, Florida, Georgia,
Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West
Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia
and Ontario.
In recent periods, the long-term health care environment has undergone
substantial change with regards to reimbursement and other payor sources,
compliance regulations, competition among other health care providers and
relevant patient liability issues. The Company continually monitors these
industry developments as well as other factors that affect its business. See
Item 2 for further discussion of recent changes in the long-term health care
industry and the related impact on the operations of the Company.
2. BASIS OF FINANCIAL STATEMENTS
The interim consolidated financial statements for the three month periods ended
March 31, 2000 and 1999, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
interim consolidated financial statements reflect all adjustments necessary to
present fairly the financial position at March 31, 2000 and the results of
operations and the cash flows for the three month periods ended March 31, 2000
and 1999.
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The results of operations for the three month periods ended March 31, 2000 and
1999 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,
1999.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a working
capital deficit of $55.6 million as of March 31, 2000. The Company also has
limited resources available to meet its operating, capital expenditure and debt
service requirements during 2000. As of December 31, 1999, and through the date
of the filing of this Form 10-Q, the Company is not in compliance with certain
debt covenants which would allow the holders of substantially all of the
Company's debt to demand immediate principal repayments. Although the Company
does not anticipate that such demand will be made, the continued forbearance on
the part of the Company's lenders cannot be assured at this time. Accordingly,
the Company has classified the related debt principal amounts as current
liabilities in the accompanying interim consolidated financial statements as of
March 31, 2000, and December 31, 1999. Given that events of default exist under
the Company's working capital line of credit, there can be no assurance that the
lender will continue to provide working capital advances. The Company is also
not in compliance with certain covenants applicable to the lease agreements
covering a majority of its United States nursing facilities. Under the
agreements, the lessor has the right to terminate the lease agreements and seek
recovery of any related financial losses as well as other remedies. At a
minimum, the Company's cash requirements over the next 12 months include funding
operations, capital expenditures, scheduled debt service and working capital
requirements. No assurance can be given that the Company will have sufficient
cash to meet its requirements for the next 12 months. The Company is currently
discussing potential restructuring and refinancing alternatives with its lenders
and primary lessor. If the Company's lenders force immediate repayment, the
Company would not be able to repay the related debt outstanding. The Company is
unable to predict if it will be successful in reducing operating losses, in
negotiating waivers, amendments, or refinancings of outstanding debt or lease
commitments, or if the Company will be able to meet any amended financial
covenants in the future. Any demands for repayment by lenders or the inability
to obtain waivers or refinance the related debt would have a material adverse
impact on the financial position, results of operations and cash flows of the
Company. If the Company is unable to generate sufficient cash flow from its
operations or successfully negotiate debt or lease amendments, it will explore a
variety of other options, including, but not limited to, other sources of equity
or debt refinancings, asset dispositions, or relief under the United States
bankruptcy code. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The accompanying consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset carrying amounts or the amounts and
classification of liabilities that might result should the Company be unable to
continue as a going concern.
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3. CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 127,
"Deferral of the Effective Date of SFAS No. 133," is effective for fiscal
quarters beginning after June 15, 2000. The impact of the adoption of SFAS No.
133 is not expected to have a material impact on the Company's results of
operations or financial position.
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5, issued by the
Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start- up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting principle in the accompanying
interim consolidated statement of operations.
4. RECLASSIFICATIONS
Certain amounts in the 1999 interim financial statements have been reclassified
to conform with the 2000 presentation.
5. OTHER COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
Information with respect to the accumulated other comprehensive income balance
is presented below:
THREE MONTHS
ENDED MARCH 31,
------------------------
2000 1999
--------- ---------
Foreign currency items:
Beginning balance $(173,000) $(412,000)
Current-period change, net of income tax 12,000 47,000
--------- ---------
Ending balance $(161,000) $(365,000)
========= =========
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
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6. OPERATING SEGMENT INFORMATION
The Company has three reportable segments: U.S. nursing homes, U.S. assisted
living facilities, and Canadian operations, which consists of both nursing home
and assisted living services. Management evaluates each of these segments
independently due to the geographic, reimbursement, marketing, and regulatory
differences between the segments. Management evaluates performance based on
profit or loss from operations before income taxes not including nonrecurring
gains and losses and foreign exchange gains and losses. The following
information is derived from the Company's segments' internal financial
statements and includes information related to the Company's unallocated
corporate revenues and expenses:
THREE MONTHS
ENDED MARCH 31,
----------------------
(IN THOUSANDS) 2000 1999
-------- --------
Net revenues:
U.S. nursing homes $ 35,376 $ 36,516
U.S. assisted living facilities 8,033 6,622
Canadian operations 3,930 3,627
Corporate (1) (53)
-------- --------
Total $ 47,338 $ 46,712
======== ========
Depreciation and amortization:
U.S. nursing homes $ 696 $ 602
U.S. assisted living facilities 423 442
Canadian operations 98 85
Corporate 17 19
-------- --------
Total $ 1,234 $ 1,148
======== ========
Operating income (loss):
U.S. nursing homes $ 227 $ (1,035)
U.S. assisted living facilities 104 53
Canadian operations 388 396
Corporate (587) (516)
-------- --------
Total $ 132 $ (1,102)
======== ========
MARCH 31, DECEMBER 31,
2000 1999
-------- --------
Long-lived assets:
U.S. nursing homes $ 32,362 $ 32,777
U.S. assisted living facilities 34,053 34,332
Canadian operations 12,775 12,933
Corporate 1,134 944
-------- --------
Total $ 80,324 $ 80,986
======== ========
Total assets:
U.S. nursing homes $ 54,805 $ 55,796
U.S. assisted living facilities 36,798 36,309
Canadian operations 16,195 16,737
Corporate 1,719 1,134
Eliminations (11,695) (13,791)
-------- --------
Total $ 97,822 $ 96,185
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services. The Company completed its
initial public offering in May 1994; however, its operational history can be
traced to February 1980 through common senior management who were involved in
different organizational structures.
As of March 31, 2000, the Company operates 120 facilities, consisting of 65
nursing homes with 7,307 licensed beds and 55 assisted living facilities with
5,412 units. In comparison, at March 31, 1999, the Company operated 119
facilities composed of 66 nursing homes containing 7,458 licensed beds and 53
assisted living facilities containing 4,793 units. As of March 31, 2000, the
Company owns seven nursing homes, leases 36 others and manages the remaining 22
nursing homes. Additionally, the Company owns 16 assisted living facilities,
leases 25 others and manages the remaining 14 assisted living facilities. The
Company holds a minority interest in seven of these managed assisted living
facilities. The Company operates 51 nursing homes and 33 assisted living
facilities in the United States and 14 nursing homes and 22 assisted living
facilities in Canada.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
Management fee revenues consist of the fees charged to the owners of the
facilities managed by the Company. The management fee revenues are based on the
respective contractual terms of the Company's management agreements, which
generally provide for management fees ranging from 3.5% to 6.0% of the net
revenues of the managed facilities. As a result, the level of management fees is
affected positively or negatively by the increase or decrease in the average
occupancy level rates of the managed facilities. The Company's operating
expenses include the costs, other than lease, depreciation and amortization
expenses, incurred in the operation of the nursing homes and assisted living
facilities owned and leased by the Company. The Company's general and
administrative expenses consist of the costs of the corporate office and
regional support functions, including the costs incurred in providing management
services to other owners. The Company's depreciation, amortization and interest
expenses include all such expenses across the range of the Company's operations.
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RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three months ended March 31, 2000 and 1999.
(IN THOUSANDS) THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999 CHANGE %
------- -------- ------- ------
REVENUES:
Patient revenues $35,972 $ 36,854 (882) (2.4)
Resident revenues 10,425 8,905 1,520 17.1
Management fees 901 919 (18) (2.0)
Interest 40 34 6 17.6
------- -------- ------
Net revenues 47,338 46,712 626 1.3
------- -------- ------
EXPENSES:
Operating 36,425 37,723 (1,298) (3.4)
Lease 5,276 4,901 375 7.7
General and administrative 2,817 2,735 82 3.0
Interest 1,454 1,307 147 11.2
Depreciation and amortization 1,234 1,148 86 7.5
------- -------- ------
Total expenses 47,206 47,814 (608) (1.3)
------- -------- ------
INCOME (LOSS) BEFORE INCOME TAXES 132 (1,102) 1,234 N/A
PROVISION (BENEFIT) FOR INCOME TAXES 47 (396) 443 N/A
------- -------- ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 85 (706) 791 N/A
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX -0- (277) 277 N/A
------- -------- ------
NET INCOME (LOSS) $ 85 $ (983) 1,068 N/A
======= ======== ======
PERCENTAGE OF NET REVENUES THREE MONTHS
ENDED MARCH 31,
--------------------
2000 1999
------ ------
REVENUES:
Patient revenues 76.0% 78.9%
Resident revenues 22.0 19.0
Management fees 1.9 2.0
Interest 0.1 0.1
------ ------
Net revenues 100.0% 100.0%
------ ------
OPERATING EXPENSES:
Operating 76.9 80.8
Lease 11.1 10.5
General and administrative 6.0 5.8
Interest 3.1 2.8
Depreciation and amortization 2.6 2.5
------ ------
Total expenses 99.7 102.4
------ ------
INCOME (LOSS) BEFORE INCOME TAXES .3 (2.4)
PROVISION (BENEFIT) FOR INCOME TAXES .1 (0.9)
------ ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE .2 (1.5)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX -- (0.6)
------ ------
NET INCOME (LOSS) .2% (2.1)%
====== ======
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THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999
Medicare Reimbursement Changes. During 1997, the Federal government enacted the
Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and
Medicaid cost-saving measures. The BBA requires that nursing homes transition to
a prospective payment system ("PPS") under the Medicare program during a
three-year "transition period," which began for most of the Company's facilities
on January 1, 1999. In general, PPS provides a standard payment for Medicare
Part A services to all providers regardless of their current costs. PPS creates
an incentive for providers to reduce their costs, and management has reduced
operating expenses in an effort to offset the revenue reductions resulting from
PPS. Revenues and expenses have been reduced significantly from the levels prior
to PPS.
Cost restrictions placed on the provision of rehabilitation (ancillary) services
as a result of the BBA have also been significant. Beginning in January 1998,
the allowable costs for cost reimbursement components of Medicare Part B
services became subject to a limitation factor of 90.0% of actual cost. In 1999,
the cost reimbursement system for rehabilitation services has been replaced by a
system of fee screens that effectively limit reimbursement and place caps on the
maximum fees that may be charged for therapy services. Historically, the Company
subcontracted the provision of these therapy services. However, in response to
the deep cuts in fees for service, the Company's therapy subcontractor exited
the business. In June 1999, the Company began providing such services in-house.
The Company anticipates that this will further negatively impact operations,
although the ultimate effect cannot yet be reasonably estimated. These changes
with respect to Part B reimbursement have combined to cause a dramatic decrease
in the Company's ancillary services revenues and expenses.
To date, one of the major impacts on the Company from PPS and other BBA
reimbursement changes has been the indirect impact of Medicare occupancy
declines, which have reduced the amount of overhead absorbed under the Company's
Medicare operations. With respect to Medicare therapy allowable cost and fee
reductions, the Company estimates that net operations have been negatively
impacted in both 2000 and 1999 and will continue to be negatively impacted
beyond 2000 as a result of the changes brought about under BBA. However, since
PPS and other changes brought about by the BBA are still an evolving process,
the ultimate impact of the BBA cannot be known with certainty at this time.
These changes that have occurred as a result of the administrative
implementation of the guidelines contained in the BBA have affected the entire
long-term care industry. Under the BBA, Medicare expenditures by the Federal
government have been cut approximately 20.0%. This has been a sudden, drastic
blow to the industry. Other providers who relied more heavily on the provision
of services to higher acuity patients have been impacted more severely than the
Company. There have already been several major bankruptcy filings. Without
remediation, the long-term effect on the industry is expected to be
catastrophic.
As the impact of these changes upon both providers and beneficiaries has become
known, there has been growing political awareness of a need to re-examine the
drastic cuts that have been implemented. On November 29, 1999 President Clinton
signed into law a budget agreement that restores $2.7 billion in Medicare
funding over three years. The bill contains several components
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that become effective at various times over the three year period. As a result
of the legislation, individual nursing facilities will have the option, for cost
reporting years beginning after December 29, 1999, of continuing under the
current PPS transition formula or adopting the full federal PPS per diem. During
2000, the Company has elected to adopt the full federal PPS per diem on several
facilities. In addition, the bill provides a two-year moratorium on the Part B
therapy caps beginning January 1, 2000 , and it also provides increases in the
per diems for the care of certain groups of patients. The Company is continuing
to evaluate the impact of the legislation on its operations. However, there is
no expectation by management that the relief will be sufficient to restore the
economic viability the industry needs.
While federal regulations do not provide states with grounds to curtail funding
of their Medicaid cost reimbursement programs due to state budget deficiencies,
states have nevertheless curtailed funding in such circumstances in the past.
The United States Supreme Court ruled in 1990 that healthcare providers could
use the Boren Amendment to require states to comply with their legal obligation
to adequately fund Medicaid programs. The BBA repeals the Boren Amendment and
authorizes states to develop their own standards for setting payment rates. It
requires each state to use a public process for establishing proposed rates
whereby the methodologies and justifications used for setting such rates are
available for public review and comment. This requires facilities to become more
involved in the rate setting process since failure to do so may interfere with a
facility's ability to challenge rates later. As a result, the Company expects
states to continue to attempt to reduce spending under the Medicaid programs.
The Company will attempt to maximize the revenues available to it from
governmental sources within the changes that have occurred and will continue to
occur under the BBA. In addition, the Company will attempt to increase revenues
from non-governmental sources, including expansion of its assisted living and
Canadian operations to the extent capital is available to do so, if at all.
However, current levels of, or further reductions in, government spending for
long-term health care are expected to continue to have an adverse effect on the
operating results and cash flows of the Company.
Revenues. Net revenues increased to $47.3 million in 2000 from $46.7 million in
1999, an increase of $626,000, or 1.3%. Patient revenues decreased to $36.0
million in 2000 from $36.9 million in 1999, a decrease of $882,000, or 2.4%. The
decrease in patient revenues is due primarily to a 3.4% decline in occupancy in
2000 as compared to 1999. Resident revenues increased to $10.4 million in 2000
from $8.9 million in 1999, an increase of $1.5 million, or 17.1%. The increase
in resident revenues is due primarily to the addition of three assisted living
facilities in North Carolina. There was a 1.0% decline in patient and resident
days. A decrease of approximately 23,000 patient days was partially offset by an
increase of approximately 18,000 resident days. As to payor types, there were
decreases of approximately 5,000 and 1,500 days for Medicaid and private pay
patients, respectively, representing a decrease of 1.0% from 1999. There was an
increase of 1,500 Medicare patient days, or 7.0%, from 1999. As a percent of
patient and resident revenues, Medicare decreased to 15.7% in 2000 from 15.8% in
1999 while Medicaid and similar programs increased to 66.2% from 65.4% in 1999.
Ancillary service revenues, prior to contractual allowances, decreased to $5.8
million in 2000 from $7.7 million in 1999, a decrease of $1.9 million or 24.7%.
The decrease is primarily attributable to reductions in revenue availability
under Medicare and is consistent with the Company's
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expectations. Although the $1,500 per patient annual ceiling has now been lifted
for a two year period on physical, speech and occupational therapy services, the
impact of the relief is not expected to be sufficient to offset the substantial
losses that have been incurred by the Company and the long-term care industry
from the provision of therapy services. The ultimate effect on the Company's
operations cannot be predicted at this time because the extent and composition
of the ancillary cost limitations are subject to change.
Operating Expense. Operating expense decreased to $36.4 million in 2000 from
$37.7 million in 1999, a decrease of $1.3 million, or 3.4%. As a percent of
patient and resident revenues, operating expense decreased to 78.5% in 2000 from
82.4% in 1999. The decrease is primarily attributable to cost reductions
implemented in response to the Medicare reimbursement changes (that is, reduced
provision of therapy services and in the costs to provide them). In 1999, the
Company also recorded lease termination costs and the write-off of miscellaneous
assets of $135,000 and $189,000, respectively. The largest component of
operating expenses is wages, which increased to $19.9 million in 2000 from $18.6
million in 1999, an increase of $1.3 million, or 7.0%. Savings from staff
reductions have been offset by increased wage levels due to higher labor markets
in most of the areas in which the Company operates. The increase in wages is
generally in line with inflation. The Company's provision for doubtful accounts
increased to $892,000 in 2000 from $780,000 in 1999, an increase of $112,000, or
14.3%.
Lease Expense. Lease expense increased to $5.3 million in 2000 from $4.9 million
in 1999, an increase of $375,000, or 7.7%. Of this increase, $235,000 is
attributable to three new assisted living centers which became operational
beginning May 1999. Adjustments in the Company's lease agreements are generally
tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $2.8 million in 2000 from $2.7 million in 1999, an increase of $82,000, or
3.0%. As a percent of total net revenues, general and administrative expense
increased to 6.0% in 2000 compared with 5.8% in 1999.
Interest Expense. Interest expense increased to $1.4 million in 2000 from $1.3
million in 1999, an increase of $147,000, or 11.2%.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.2 million in 2000 from $1.1 million in 1999, an increase of $86,000, or
7.5%.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
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Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, the income before income taxes and the cumulative effect of
the change in accounting principle was $132,000 in 2000 as compared with loss of
$1.1 million in 1999, an increase of $1.2 million. The effective combined
federal, state and provincial income tax rate was 36.0% in 2000 and 1999. The
net income after taxes and the cumulative effect of the change in accounting
principle was $85,000 in 2000 as compared with net loss of $1.0 million in 1999,
an increase of $1.1 million. The basic and diluted earnings (loss) per share
were each $.02 in 2000 as compared with $(.18) per share in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, the Company had negative working capital of $55.6 million
compared with negative working capital of $56.7 million at December 31, 1999,
and a current ratio of 0.2 at March 31, 2000 and December 31, 1999. The negative
working capital results primarily from the classification of a majority of the
Company's debt as current liabilities. The classification of a majority of the
Company's debt as current maturities is due to the Company's non-compliance with
debt covenants in various debt agreements, including net worth, cash flow and
debt-to-equity ratio requirements. Cross-default or material adverse change
provisions contained in the agreements allow the holders of substantially all of
the Company's debt to demand immediate repayment. As of March 31, 2000, and
through the date of the filing of this Report on Form 10-Q, the Company had not
obtained waivers of the non-compliance. Based on regularly scheduled debt
service requirements, the Company has a total of $27.8 million of debt that must
be repaid or refinanced within the next 12 months. However, as a result of the
covenant non-compliance and other cross-default provisions, the Company has
classified a total of $53.5 million of debt as current liabilities as of March
31, 2000. The Company would not be able to repay this portion of its
indebtedness if the applicable lenders demanded repayment. Of the Company's 61
leased facilities, 30 are covered by a Master Lease and other leases with Omega
Healthcare Investors, Inc. ("Omega"). Under the terms of the Master Lease, the
Company must comply with certain covenants based on total shareholders' equity
of the Company as defined in the Master Lease. The Company was not in compliance
with these covenants as of March 31, 2000 and through the date of the filing of
this Report on Form 10-Q. As a result of the non-compliance, Omega has the right
to terminate all of its leases with the Company and seek recovery of any related
financial losses, as well as other miscellaneous remedies. The Company has not
obtained waivers of non-compliance. The Company and Omega are currently in
negotiations with respect to modification of the existing lease agreements. No
assurance can be given that the Company will be able to renegotiate the terms of
the Master Lease. In addition, no assurance can be given that the Company will
achieve profitable operations in the near term or that the Company can increase
growth in net revenues. The Company cannot assure that internally generated cash
flows from earnings and existing cash balanced will be sufficient to fund
existing debt obligations on future capital and working capital requirements
through fiscal year 2000. The Company is currently discussing potential
restructuring, modification and refinancing alternatives with its lenders and
primary lessor. If the Company's lenders force immediate repayment, the Company
would not be able to repay the related debt outstanding. The Company is unable
to predict if it will be successful in reducing operating losses, in negotiation
waivers, amendments, or refinancings of outstanding debt or lease commitments,
or that the Company will be able to meet any amended financial covenants in the
future. Any demands for repayment by lenders or the inability to obtain waivers
or refinance the
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related debt would have a material adverse impact on the financial position,
results of operations and cash flows of the Company. If the Company is unable to
generate sufficient cash flow from its operations or successfully negotiate debt
or lease amendments, it will explore a variety of other options, including, but
not limited to, equity financing from outside investors, asset dispositions or
relief under the United States bankruptcy code.
The Company has a working capital line of credit and a bridge loan which had
combined amounts outstanding of $14.6 million at March 31, 2000. All of the
amounts outstanding with this lender had a maturity date of February 28, 2000,
which had been previously extended. The lender has continued to fund current
operations under the working capital line of credit and on May 15, 2000, the
maturity date of these loans was extended to June 30, 2000. The Company and
lender are currently negotiating a restructuring of this financing.
The Company has an acquisition line of credit which had amounts outstanding of
$11.1 million at March 31, 2000. No further draws are available under the
acquisition line of credit. Amounts outstanding under the acquisition line of
credit had a scheduled maturity date of December 1, 1999, which the lender
extended to April 30, 2000. On May 2, 2000, the lender again extended the
maturity date to June 30, 2000. The Company and the lender are negotiating
replacement long-term financing.
Net cash provided by operating activities totaled $1.0 million and $4.1 million
in the three month periods ended March 31, 2000 and 1999, respectively. These
amounts primarily represent the cash flows from net operations plus changes in
non-cash components of operations and by working capital changes.
Net cash used in investing activities totaled $571,000 and $2.0 million the
three months periods ended March 31, 2000 and 1999, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
and advances to joint ventures and additional investments in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.7 million and $5.2 million for capital expenditures in the three
calendar years ending December 31, 1999. Substantially all such expenditures
were for facility improvements and equipment, which were financed principally
through working capital. For the year ended December 31, 2000, the Company
anticipates that capital expenditures for improvements and equipment for its
existing facility operations will be approximately $3.2 million, including
$800,000 for non-routine projects.
Net cash provided by (used in) financing activities totaled $571,000 and $(3.1)
million the three month periods ended March 31, 2000 and 1999, respectively. The
net cash provided from financing activities primarily represents net proceeds
from issuance and repayment of debt.
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare,
Medicaid and other third-party revenue sources. The Company's future liquidity
will continue to be dependent upon the relative amounts of current assets
(principally cash, accounts receivable and inventories) and current liabilities
(principally accounts payable and accrued expenses). In that regard, accounts
receivable can have a significant impact on the Company's liquidity. Continued
efforts by governmental and third-
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party payors to contain or reduce the acceleration of costs by monitoring
reimbursement rates, by increasing medical review of bills for services, or by
negotiating reduced contract rates, as well as any delay by the Company in the
processing of its invoices, could adversely affect the Company's liquidity and
results of operations.
Net accounts receivable attributable to the provision of patient and resident
services at March 31, 2000 and December 31, 1999, totaled $16.6 million and
$15.8 million, respectively, representing approximately 33 and 31 days in
accounts receivable, respectively. Accounts receivable from the provision of
management services were $207,000 and $412,000 at March 31, 2000 and December
31, 1999, respectively representing approximately 21 and 42 days in accounts
receivable, respectively. The allowance for bad debt was $5.4 million and $5.0
million at March 31, 2000 and December 31, 1999, respectively.
The Company continually evaluates the adequacy of its bad debt reserves based on
patient mix trends, agings of older balances, payment terms and delays with
regard to third-party payors, collateral and deposit resources, as well as other
factors. The Company continues to evaluate and implement additional procedures
to strengthen its collection efforts and reduce the incidence of uncollectible
accounts.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud abuse. Changes in these laws and
regulations, such as reimbursement policies of Medicare and Medicaid programs as
a result of budget cuts by federal and state governments or other legislative
and regulatory actions, could have a material adverse effect on the Company's
consolidated financial position, results of operations, and cash flows. Future
federal budget legislation and federal and state regulatory changes may
negatively impact the Company.
All of the Company's facilities are required to obtain annual licensure renewal
and are subject to annual surveys and inspections in order to be certified for
participation in the Medicare and Medicaid programs. In order to maintain their
operator's license and their certification for participation in Medicare and
Medicaid programs, the nursing facilities must meet certain statutory and
administrative requirements. These requirements relate to the condition of the
facilities, the adequacy and condition of the equipment used therein, the
quality and adequacy of personnel, and the quality of medical care. Such
requirements are subject to change. There can be no assurance that, in the
future, the Company will be able to maintain such licenses for its facilities or
that the Company will not be required to expend significant sums in order to do
so.
Recently, government activity has increased with respect to investigations and
allegations concerning possible violations by health care providers of fraud and
abuse statutes and regulations. Violations of these laws and regulations could
result in expulsion from government health care programs together with the
imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is
in
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compliance with fraud and abuse laws and regulations as well as other applicable
government laws and regulations. Compliance with such laws and regulations can
be subject to future government review and interpretation as well as regulatory
actions unknown or unasserted at this time. In 1999 and 2000, the Company did
experience the increased regulatory scrutiny that has been exerted on the
industry in the form of increased fine and penalties.
FOREIGN CURRENCY TRANSLATION
The Company has obtained its financing primarily in U.S. dollars; however, it
incurs revenues and expenses in Canadian dollars with respect to Canadian
management activities and operations of the Company's eight Canadian retirement
facilities (three of which are owned) and two owned Canadian nursing homes.
Although not material to the Company as a whole, if the currency exchange rate
fluctuates, the Company may experience currency translation gains and losses
with respect to the operations of these activities and the capital resources
dedicated to their support. While such currency exchange rate fluctuations have
not been material to the Company in the past, there can be no assurance that the
Company will not be adversely affected by shifts in the currency exchange rates
in the future.
EXECUTIVE MANAGEMENT CHANGES
Effective January 28, 2000, Mr. Richard B. Vacek, Jr., resigned his position as
Executive Vice President, Chief Financial Officer and Secretary of the Company.
Mr. James F. Mills, Jr., Vice President and Controller, replaced Mr. Vacek as
Secretary and Acting Chief Financial Officer.
STOCK EXCHANGE
On November 10, 1999, the Company's stock began being quoted on the NASD's OTC
Bulletin Board under the symbol AVCA. Previously, the Company's common stock was
traded on the New York Stock Exchange under the symbol AVC. The Company's common
stock is also traded on the Toronto Stock Exchange ("TSE") under the symbol
AVCU. However, the Company no longer meets the listing requirements of the TSE
and, therefore, effective May 30, 2000, will no longer trade on the TSE.
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INFLATION
Management does not believe that the Company's operations have been materially
affected by inflation. The Company expects salary and wage increases for its
skilled staff to continue to be higher than average salary and wage increases,
as is common in the health care industry. To date, these increases as well as
normal inflationary increases in other operating expenses have been adequately
covered by revenue increases.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Certain statements made by or on behalf of the Company,
including those contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, are
forward-looking statements as defined in the Private Securities Litigation
Reform Act of 1995. These statements involve risks and uncertainties including,
but not limited to, changes in governmental reimbursement or regulation, health
care reforms, the increased cost of borrowing under the Company's credit
agreements, covenant waivers from the Company's lenders, possible amendments to
the Company's credit agreements, the impact of future licensing surveys, the
ability to execute on the Company's acquisition program, both in obtaining
suitable acquisitions and financing therefor, changing economic conditions as
well as others. Investors also should refer to the risks identified in this
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" as well as risks identified in the Company's Form 10-K for the year
ended December 31, 1999 for a discussion of various risk factors of the Company
and that are inherent in the health care industry. Given these risks and
uncertainties, the Company can give no assurances that these forward- looking
statements will, in fact, transpire and, therefore, cautions investors not to
place undue reliance on them. Actual results may differ materially from those
described in such forward-looking statements. Such cautionary statements
identify important factors that could cause the Company's actual results to
materially differ from those projected in forward-looking statements. In
addition, the Company disclaims any intent or obligation to update these
forward-looking statements.
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PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
The Company is not currently in compliance with certain covenants of its loan
agreements and certain other indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in the
Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
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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.
May 15, 2000
By: /s/James F. Mills, Jr.
-----------------------------------------------
James F. Mills, Jr.
Principal Financial Officer and Chief
Accounting Officer and An Officer Duly
Authorized to Sign on Behalf of the Registrant
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Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Incorporation of the Registrant (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on
Form S-1).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-76150 on Form S-1).
3.3 Amendment to Certificate of Incorporation dated March 23, 1995
(incorporated by reference to Exhibit A of Exhibit 1 to the Company's 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).
4.5 Amended and Restated Rights Agreement dated as of December 7, 1998
(incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7,
1998).
10.1 Employment Agreement dated January 1, 2000 by and between the
Company and James F. Mills, Jr.
27 Financial Data Schedule (for SEC use only).