UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
CHECK ONE:
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: SEPTEMBER 30, 2001
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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
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(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
5,493,287
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(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF OCTOBER 31, 2001)
1
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $2,874 $ 4,496
Receivables, less allowance for doubtful
accounts of $5,956 and $5,035, respectively 15,264 15,111
Inventories 486 633
Prepaid expenses and other assets 2,167 2,100
------- --------
Total current assets 20,791 22,340
------- --------
PROPERTY AND EQUIPMENT, at cost 93,585 89,567
Less accumulated depreciation and amortization (28,491) (24,418)
------- --------
Net property and equipment 65,094 65,149
------- --------
OTHER ASSETS:
Deferred financing and other costs, net 700 572
Deferred lease costs, net 1,930 2,085
Assets held for sale or redevelopment 1,476 1,476
Investments in and receivables from joint ventures 2,514 8,333
Other 1,963 1,801
------- --------
Total other assets 8,583 14,267
------- --------
$94,468 $101,756
======= ========
(Continued)
2
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 58,882 $ 61,229
Trade accounts payable 7,507 6,875
Accrued expenses:
Payroll and employee benefits 5,275 5,241
Interest 221 232
Self-insurance reserves 4,419 4,445
Other 5,663 4,387
--------- ---------
Total current liabilities 81,967 82,409
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 4,682 5,016
Self-insurance reserves, less current portion 14,001 3,586
Other 2,242 5,245
--------- ---------
Total noncurrent liabilities 20,925 13,847
--------- ---------
COMMITMENTS AND CONTINGENCIES
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK
Authorized 600,000 shares, $.10 par value, 393,658 shares
Issued and outstanding at September 30, 2001 and
December 31, 2000, respectively, at redemption value 3,531 3,358
--------- ---------
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,
5,493,000 and 5,492,000 issued and outstanding at
September 30, 2001 and December 31, 2000, respectively 55 55
Paid-in capital 15,908 15,907
Accumulated deficit (27,918) (13,820)
--------- ---------
Total shareholders' equity (deficit) (11,955) 2,142
--------- ---------
$ 94,468 $ 101,756
========= =========
The accompanying notes are an integral part of these interim consolidated
balance sheets.
3
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
2001 2000
----------- -----------
REVENUES:
Patient revenues $ 41,882 $ 38,946
Resident revenues 10,138 10,368
Management fees 768 934
Interest 53 53
--------- ---------
Net revenues 52,841 50,301
--------- ---------
EXPENSES:
Operating 51,154 38,598
Lease 5,177 5,272
General and administrative 3,498 3,058
Interest 1,311 1,542
Depreciation and amortization 1,433 1,239
Non-recurring charges -0- 359
--------- ---------
Total expenses 62,573 50,068
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (9,732) 233
PROVISION FOR INCOME TAXES 118 84
--------- ---------
NET INCOME (LOSS) $ (9,850) $ 149
========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Basic $ (1.79) $ .03
========= =========
Diluted $ (1.79) $ .03
========= =========
WEIGHTED AVERAGE SHARES:
Basic 5,493 5,492
========= =========
Diluted 5,493 5,492
========= =========
The accompanying notes are an integral part of these interim consolidated
financial statements.
4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS AND UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
2001 2000
----------- -----------
REVENUES:
Patient revenues $ 119,741 $ 111,620
Resident revenues 30,745 31,177
Management fees 2,083 2,960
Interest 132 144
--------- ---------
Net revenues 152,701 145,901
--------- ---------
EXPENSES:
Operating 132,029 112,193
Lease 15,533 15,806
General and administrative 10,104 8,754
Interest 4,196 4,432
Depreciation and amortization 4,244 3,614
Non-recurring charges -0- 622
--------- ---------
Total expenses 166,106 145,421
--------- ---------
INCOME (LOSS) BEFORE INCOME TAXES (13,405) 480
PROVISION FOR INCOME TAXES 284 173
--------- ---------
NET INCOME (LOSS) $ (13,689) 307
========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
Basic $ (2.49) $ .06
========= =========
Diluted $ (2.49) $ .06
========= =========
WEIGHTED AVERAGE SHARES:
Basic 5,493 5,492
========= =========
Diluted 5,493 5,492
========= =========
The accompanying notes are an integral part of these interim consolidated
financial statements.
5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- --------------------------
2001 2000 2001 2000
-------- ------- -------- -------
NET INCOME (LOSS) $ (9,850) $ 149 $(13,689) $ 307
-------- ------- -------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (531) (138) (638) (459)
Income tax (provision) benefit 191 50 230 165
-------- ------- -------- -------
(340) (88) (408) (294)
-------- ------- -------- -------
COMPREHENSIVE INCOME (LOSS) $(10,190) $ 61 $(14,097) $ 13
======== ======== ======== =======
The accompanying notes are an integral part of these interim consolidated
financial statements.
6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
--------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(13,689) $ 307
Items not involving cash:
Depreciation and amortization 4,244 3,614
Provision for doubtful accounts 2,618 2,046
Provision for self insured professional liability 16,235 5,558
Equity earnings in joint ventures 27 27
Amortization of deferred balances 371 (228)
Amortization of discount on non-interest bearing
promissory note 200 -0-
Series B redeemable convertible preferred stock dividend 173 -0-
Provisions for leases in excess of cash payments 1,401 -0-
Changes in other assets and liabilities:
Receivables (1,963) (2,755)
Inventories 197 43
Prepaid expenses and other assets 63 (935)
Trade accounts payable and accrued expenses (4,955) (2,355)
-------- -------
Net cash provided by operating activities 4,922 5,352
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,190) (1,488)
Investment in TDLP (609) -0-
Exchange of assets TDLP 200 -0-
Mortgages receivable, net (56) 315
Deposits and other deferred balances -0- (336)
Investment in and advances (to) from joint ventures, net 304 (673)
TDLP partnership distributions 200 158
-------- -------
Net cash used in investing activities (2,151) (2,024)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations (1,921) (1,452)
Net repayment of bank line of credit (960) (223)
Advances to TDLP, net (1,063) (49)
Increase in lease obligations -0- 68
Financing costs (449) -0-
-------- -------
Net cash used in financing activities (4,393) (1,656)
-------- -------
(Continued)
7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2001 2000
--------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,622) $ 1,672
CASH AND CASH EQUIVALENTS, beginning of period 4,496 1,913
------- -------
CASH AND CASH EQUIVALENTS, end of period 2,874 $ 3,585
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 3,834 $ 4,618
======= =======
Cash payments (refunds) of income taxes, net $ 191 $ (100)
======= =======
NON CASH TRANSACTIONS:
The Company exchanged certain mortgage and other receivables for the assets and
liabilities of Texas Diversicare Limited Partnership. See Note 5.
The accompanying notes are an integral part of these interim consolidated
financial statements.
8
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001 AND 2000
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 September 30, 2001, the Company operates 120 facilities consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,453 units. The Company owns thirteen nursing homes, leases 36 others, and
manages 15 nursing homes. The Company owns 16 assisted living facilities, leases
25 others, and manages the remaining 15 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 13 nursing homes and 23 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 and nine month
periods ended September 30, 2001 and 2000, 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 September 30, 2001 and the
results of operations for the three and nine month periods ended September 30,
2001 and 2000, and the cash flows for the nine month periods ended September 30,
2001 and 2000.
9
The results of operations for the three and nine month periods ended September
30, 2001 and 2000 are not necessarily indicative of the operating results for
the entire respective years. These interim consolidated financial statements
should be read in connection with the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2000.
The accompanying consolidated financial statements have been prepared assuming
that Advocat will continue as a going concern. The Company has incurred
operating losses in the three and nine month periods ended September 30, 2001
and the years ended December 31, 2000, 1999 and 1998 and has limited resources
available to meet its operating, capital expenditure and debt service
requirements during 2001. The Company has a net working capital deficit of $61.2
million as of September 30, 2001. Effective March 9, 2001, the Company has also
obtained professional liability insurance coverage that, based on historical
claims experience, could be substantially less than the claims that may be
incurred during 2001. The Company would be obligated to pay any claim in excess
of insurance coverage. The Company has recorded total liabilities for reported
professional liability claims and estimates for incurred but unreported claims
in excess of insurance coverage of $17.4 million at September 30, 2001. This
amount includes additional, non-cash charges of approximately $8.7 million
recorded in the third quarter based on a current actuarial review, including the
recent effects of additional claims and higher settlements per claim. In
addition, the payment of professional liability claims by the Company's
insurance carriers is dependent upon the financial solvency of the individual
carriers. The Company is aware that one of its insurance carriers providing
coverage for prior years claims is currently under rehabilitation proceedings.
The ultimate payments by the Company of professional liability claims accrued as
of September 30, 2001 and claims that could be incurred during the remainder of
2001 and into the future, because such claims exceed the Company's insurance
coverage or because of the inability of an insurance carrier to pay such claims,
may require cash resources in the future that would be in excess of the
Company's available cash or other resources.
The Company is also not in compliance with certain debt covenants that allow the
holders of substantially all of the Company's debt to demand immediate
repayment. 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 consolidated
financial statements as of September 30, 2001 and December 31, 2000. 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. Such events of default under the Company's debt agreements
could lead to actions by the lenders that would result in an event of default
under the Company's lease agreements covering a majority of its United States
nursing facilities. Should such a default occur in the related lease agreements,
the lessor would have the right to terminate the lease agreements. At a minimum,
the Company's cash requirements during the next twelve months include funding
operations (including potential payments related to professional liability
claims), 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 during the period.
10
The Company is currently discussing potential waiver, amendment and refinancing
alternatives with its lenders. If the Company's lenders force immediate
repayment, the Company would not be able to repay the related debt outstanding.
The Company's management has implemented a plan to enhance revenues related to
the operations of the Company's nursing homes and assisted living facilities.
Management believes that revenues in future periods will increase as a result of
Medicare and certain state Medicaid rate increases. In addition, the Company has
emphasized attracting and retaining patients and residents. Management has
implemented a plan to attempt to minimize future expense increases through the
elimination of excess operating costs. Management will also attempt to minimize
professional liability claims in future periods by vigorously defending itself
against all such claims and through the additional supervision and training of
staff employees. 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 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
financings, asset dispositions, or relief under the United States Bankruptcy
code. 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. The
independent public accountant's report on the Company's financial statements at
December 31, 2000 included a paragraph with regards to the uncertainties of the
Company's ability to continue as a going concern.
3. INSURANCE MATTERS
The entire United States long-term care industry has seen a dramatic increase in
personal injury/wrongful death claims based on alleged negligence by nursing
homes and their employees in providing care to patients and residents. As a
result, the Company has numerous liability claims and disputes outstanding for
professional liability and other related issues. On June 22, 2001, a jury in
Mena, Arkansas issued a verdict in a professional liability lawsuit against the
Company totaling $78.425 million. Professional liability insurance up to certain
limits is carried by the Company and its subsidiaries for coverage of such
claims. However, due to the increasing number of claims against the Company and
throughout the long-term care industry, the Company's professional liability
insurance premiums and deductible amounts have increased substantially during
the last three years. For more information regarding the Mena, Arkansas verdict
and the Company's insurance coverage, see Note 7 "Liquidity and Capital
Resources" in "Management's Discussion and Analysis of Financial Condition" and
"Part II - Other Information, Item 2. Legal Proceedings."
As a result of the substantial premium increases for the 2002 policy year,
effective March 9, 2001 through March 9, 2002, the Company has obtained
professional liability insurance coverage for its United States nursing homes
that, based on historical claims experience, could be substantially less than
the claims to be incurred. For claims made after March 9, 2001, the Company
maintains general and professional liability insurance with coverage limits of
$2,000,000 per medical
11
incident and total aggregate policy coverage limits of $3,000,000 for its
long-term care services. The 2002 policy is on a claims made basis and the
Company is self-insured for the first $50,000 per occurrence.
For claims made during the period March 9, 2000 through March 9, 2001, the
Company is self-insured for the first $500,000 per occurrence with no aggregate
limit for the Company's United States nursing homes. The policy has coverage
limits of $1,000,000 per occurrence, $3,000,000 per location and $12,000,000 in
the aggregate. The Company also maintains umbrella coverage of $15,000,000 in
the aggregate for claims made during the period March 9, 2000 through March 9,
2001. The Company provides reserves on an actuarial basis for known and expected
claims incurred during the policy period. For all policy periods beginning on or
after March 9, 2000, all of the Company's professional liability policies are on
a claims made basis. Prior to March 9, 2000, all of these policies are on an
occurrence basis.
For the policy periods January 1, 1998 through February 1, 1999, the Company is
self-insured for the first $250,000 per occurrence and $2,500,000 in the
aggregate per year with respect to the majority of its United States nursing
homes. From February 1, 1999 until March 9, 2000, all United States nursing
homes became part of the $250,000/$2,500,000 deductible program.
For the policy years 2000 and 1999, the Company expects to ultimately incur the
full aggregate deductible amounts and has established reserves based on this
expectation.
The Company has recorded total liabilities for reported professional liability
claims and estimates for incurred but unreported claims of $17,427,000 and
$6,859,000 at September 30, 2001 and December 31, 2000, respectively. This
amount includes additional, non-cash charges of approximately $8.7 million
recorded in the third quarter based on a current actuarial review, including the
recent effects of additional claims and higher settlements per claim. The charge
arises primarily from an escalation in the number and size of claims anticipated
to affect the Company's self-insured professional liability retention. The
actuarial review included estimates of known claims and a prediction of claims
that may have occurred, but have not yet been reported to the Company. Based on
the actuary report, the Company expects to incur increased professional
liability costs in future periods, including the fourth quarter and in 2002.
As discussed in Note 7, in June 2001 the Company became subject to a $78.425
million jury verdict, which judgment the Company has appealed. This judgment and
other contingent claims could eventually exceed the Company's insurance coverage
and its recorded liabilities. The ultimate results of the Company's professional
liability claims and disputes are unknown at the present time. Any final
judgments or settlements above the Company's per occurrence, per location or
umbrella coverage could have a material adverse impact on the Company's
financial position, cash flows and results of operations.
Based on historical claims experience, the Company's professional liability
insurance coverage for the period beginning March 9, 2001 could be substantially
less than the claims to be incurred during 2001. The Company would be obligated
to pay any claims in excess of its insurance coverage. In addition, the payment
of professional liability claims by the Company's insurance carriers is
dependent upon the financial solvency of the individual carriers. The Company is
aware that one of its insurance carriers providing coverage for prior years
claims is currently under
12
rehabilitation proceedings. The ultimate payments by the Company of professional
liability claims accrued as of September 30, 2001 and claims that could be
incurred during the next twelve months, because such claims exceed the Company's
insurance coverage or because of the inability of an insurance carrier to pay
such claims, could require cash resources during the period that would be in
excess of the Company's available cash or other resources.
4. 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 (loss) in addition to net income
(loss) 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 (loss)
balance is presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Foreign currency items:
Beginning balance $(516,000) $(379,000) $(448,000) $(173,000)
Current period change, net of income tax (340,000) (88,000) (408,000) (294,000)
--------- --------- --------- ---------
Ending balance $(856,000) $(467,000) $(856,000) $(467,000)
========= ========= ========= =========
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
5. TEXAS DIVERSICARE LIMITED PARTNERSHIP
In 1991, the Company sold six of its Texas nursing homes to Texas Diversicare
Limited Partnership ("TDLP"). Included as consideration for the sale in 1991 was
a wrap mortgage receivable from TDLP. As a component of the sale transaction,
the Company guaranteed certain cash flow requirements of TDLP through August
2001. In addition, the Company was required to purchase up to 10.0% of the
partnership units per year, beginning in January 1997 (up to a maximum of 50.0%
of the total partnership units). Under this requirement, Advocat purchased 32.6%
of the partnership units.
The mortgage receivable matured in August 2001. The Company and TDLP agreed to
an exchange of assets, via a warranty deed and bill of sale, whereby the
Company's wrap mortgage and other receivables were extinguished in exchange for
the assets and liabilities of the partnership. The assets were recorded based on
the fair value of the respective assets, which approximate the net book value of
the Company's investments in TDLP.
6. SALE OF CANADIAN SUBSIDIARY
The Company signed a letter of intent to sell Diversicare Canada Management
Services Co., Inc. ("Diversicare Canada"), Advocat's Canadian subsidiary, to
Counsel Corporation ("Counsel"). Pursuant to the letter of intent, Counsel is to
acquire 100% of the outstanding stock of Diversicare Canada for $8 million. The
transaction is subject to receipt of applicable approvals and the approval of a
definitive purchase agreement. The letter of intent is subject to a variety of
13
conditions, including the negotiation of definitive agreements and approval by
the Company's primary bank lender. Although the letter of intent, by its terms,
expired July 31, 2001, the Company is continuing its efforts to seek consents to
allow the transaction to close as described. No assurances can be given that the
sale of Diversicare Canada will be consummated.
Diversicare Canada manages a number of nursing homes for Counsel and other
owners in Canada and, additionally, leases five assisted living complexes from
Counsel. The proposed sale will consist of all of Advocat's Canadian operations,
including 13 nursing homes and 23 assisted living facilities.
7. ARKANSAS JURY AWARD
On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional
liability lawsuit against the Company and certain of its subsidiaries totaling
$78.425 million. The Company filed motions with the court, asking the trial
judge to overturn or reduce the verdict. On August 3, 2001, the Company's
motions were denied. The Company has appealed the verdict. The Company's
insurers have posted the required bond on this judgment. The posting of this
bond stays execution of the judgment during the appeals process. The Company
plans to vigorously defend the judgment and has given notice of appeal to the
Supreme Court of Arkansas.
8. RECLASSIFICATIONS
Certain amounts in the 2000 interim financial statements have been reclassified
to conform with the 2001 presentation.
9. NON-RECURRING CHARGES
During 2000, the Company recorded non-recurring charges totaling $622,000 in
connection with the restructuring of the lease arrangements covering the
majority of its United States nursing facilities and the refinancing of certain
debt obligations. Information with respect to these charges is presented below:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 2000
Consulting fees $233,000 $391,000
Legal fees 125,000 215,000
Other 1,000 16,000
--------- --------
$ 359,000 $622,000
--------- --------
10. IMPLEMENTATION OF FINANCIAL ACCOUNTING STANDARDS
Statement of Financial Accounting Standards No. 133, as amended, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") has been issued
effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as
amended, requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. The Company adopted the provisions of
SFAS No. 133, as amended, effective January 1, 2001, as required; however, the
Company's adoption of SFAS No. 133, as amended, did not have a material effect
on the Company's financial position or results of operations.
14
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also specifies criteria which intangible
assets acquired in a purchase method business combination must meet to be
recognized and reported apart from goodwill. SFAS No. 142 addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination and the accounting for goodwill and other intangible assets
subsequent to their acquisition. SFAS No. 142 requires that intangible assets
with finite useful lives be amortized, and that goodwill and intangible assets
with indefinite lives no longer be amortized, but instead be tested for
impairment at least annually. SFAS No. 142 also requires that intangible assets
with definite useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of."
The Company is required to adopt the provisions of SFAS No. 141 immediately and
SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after June 30, 2001 will not be
amortized, but will continue to be evaluated for impairment in accordance with
the appropriate pre-SFAS No. 142 accounting literature. Goodwill and intangible
assets acquired in business combinations completed before July 1, 2001 will
continue to be amortized until the adoption of SFAS No. 142.
The Company has not determined the impact, if any, the adoption of SFAS No. 141
and SFAS No. 142 will have on its financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") effective
for fiscal years beginning after June 15, 2002. SFAS 143 requires that a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not expect the future adoption of SFAS 143 to have a material
effect on its financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") effective for fiscal years beginning after December 15, 2001. SFAS 144
establishes a single accounting model for long-lived assets to be disposed of by
sale, whether previously held and used or newly acquired, and broadens the
presentation of discontinued operations to include more disposal transactions.
The Company has not yet determined the impact of the January 2002 adoption of
SFAS 143 on its financial position or results of operations.
15
11. 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 NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net revenues:
U.S. nursing homes $ 41,102 $ 38,390 $ 117,270 $ 110,068
U.S. assisted living facilities 7,751 7,972 23,694 24,068
Canadian operation 3,981 3,947 11,727 11,775
Corporate 7 (8) 10 (10)
--------- --------- --------- ---------
Total $ 52,841 $ 50,301 $ 152,701 $ 145,901
========= ========= ========= =========
Depreciation and amortization:
U.S. nursing homes $ 889 $ 698 $ 2,621 $ 1,995
U.S. assisted living facilities 432 425 1,285 1,271
Canadian operation 94 97 284 293
Corporate 18 19 54 55
--------- --------- --------- ---------
Total $ 1,433 $ 1,239 $ 4,244 $ 3,614
========= ========= ========= =========
Operating income (loss):
U.S. nursing homes $ (8,427) $ 893 $ (10,544) $ 1,718
U.S. assisted living facilities (1,085) (132) (1,951) (127)
Canadian operation 553 483 1,331 1,328
Corporate (773) (652) (2,241) (1,817)
--------- --------- --------- ---------
Total $ (9,732) $ 592 $ (13,405) $ 1,102
========= ========= ========= =========
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------- -----------
Long-lived assets:
U.S. nursing homes $ 28,730 $ 33,178
U.S. assisted living facilities 32,353 33,216
Canadian operation 11,768 12,164
Corporate 826 858
--------- ---------
Total $ 73,677 $ 79,416
========= =========
Total assets:
U.S. nursing homes $ 54,249 $ 56,387
U.S. assisted living facilities 34,031 36,075
Canadian operation 16,603 17,154
Corporate 1,882 2,860
Eliminations (12,297) (10,720)
--------- ---------
Total $ 94,468 $ 101,756
========= =========
16
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 1980 through common senior management who were involved in different
organizational structures.
As of September 30, 2001, the Company operates 120 facilities, consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,453 units. In comparison, at September 30, 2000, the Company operated 120
facilities composed of 64 nursing homes containing 7,230 licensed beds and 56
assisted living facilities containing 5,472 units. As of September 30, 2001, the
Company owns thirteen nursing homes, leases 36 others and manages the remaining
15 nursing homes. Additionally, the Company owns 16 assisted living facilities,
leases 25 others and manages the remaining 15 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 13 nursing homes and 23 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.
17
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three and nine months ended September 30, 2001 and 2000.
(IN THOUSANDS) THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2001 2000 CHANGE %
-------- -------- -------- -------
REVENUES:
Patient revenues $ 41,882 $ 38,946 $ 2,936 7.5
Resident revenues 10,138 10,368 (230) (2.2)
Management fees 768 934 (166) (17.8)
Interest 53 53 -0- 0.0
-------- -------- -------- -------
Net revenues 52,841 50,301 2,540 5.0
-------- -------- -------- ---
EXPENSES:
Operating 51,154 38,598 12,556 32.5
Lease 5,177 5,272 (95) (1.8)
General and administrative 3,498 3,058 440 14.4
Interest 1,311 1,542 (231) (15.0)
Depreciation and amortization 1,433 1,239 194 15.7
Non-recurring charges -0- 359 (359) (100.0)
-------- -------- -------- -------
Total expenses 62,573 50,068 12,505 25.0
-------- -------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (9,732) 233 (9,965)
INCOME TAX PROVISION 118 84 34
-------- -------- --------
NET INCOME (LOSS) $ (9,850) $ 149 $ (9,999)
======== ======== ========
(IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------
2001 2000 CHANGE %
-------- -------- -------- -------
REVENUES:
Patient revenues $119,741 $111,620 $ 8,121 7.3
Resident revenues 30,745 31,177 (432) (1.4)
Management fees 2,083 2,960 (877) (29.6)
Interest 132 144 (12) (8.3)
-------- -------- -------- -------
Net revenues 152,701 145,901 6,800 4.7
-------- -------- -------- -------
EXPENSES:
Operating 132,029 112,193 19,836 17.7
Lease 15,533 15,806 (273) (1.7)
General and administrative 10,104 8,754 1,350 15.4
Interest 4,196 4,432 (236) (5.3)
Depreciation and amortization 4,244 3,614 630 17.4
Non-recurring charges -0- 622 (622) (100.0)
-------- -------- -------- -------
Total expenses 166,106 145,421 20,685 14.2
-------- -------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES (13,405) 480 (13,885)
PROVISION FOR INCOME TAXES 284 173 111
-------- -------- --------
NET INCOME (LOSS) $(13,689) $ 307 $(13,996)
======== ======== =======
18
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED NINE MONTHS ENDED
---------------------- ----------------------
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2001 2000 2001 2000
------ ------ ------ ------
REVENUES:
Patient revenues 79.2% 77.4% 78.4% 76.5%
Resident revenues 19.2 20.6 20.1 21.4
Management fees 1.5 1.9 1.4 2.0
Interest 0.1 0.1 0.1 0.1
------ ------ ------ ------
Net revenues 100.0 100.0 100.0 100.0
------ ------ ------ ------
OPERATING EXPENSES:
Operating 96.8 76.7 86.5 76.9
Lease 9.8 10.5 10.2 10.8
General and administrative 6.6 6.1 6.6 6.0
Interest 2.5 3.1 2.7 3.1
Depreciation and amortization 2.7 2.5 2.8 2.5
Non-recurring charges 0.0 0.6 0.0 0.4
------ ------ ------ ------
Total expenses 118.4 99.5 108.8 99.7
------ ------ ------ ------
INCOME (LOSS) BEFORE INCOME TAXES (18.4) 0.5 (8.8) 0.3
PROVISION FOR INCOME TAXES 0.2 0.2 0.2 0.1
------ ------ ------ ------
NET INCOME (LOSS) (18.6)% 0.3 (9.0)% 0.2
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Net revenues increased to $52.8 million in 2001 from $50.3 million in
2000, an increase of $2.5 million, or 5.0%. Patient revenues increased to $41.9
million in 2001 from $38.9 million in 2000, an increase of $3.0 million, or
7.5%. The increase in patient revenues is due to increased Medicaid rates in
Arkansas and other states, increased Medicare utilization and Medicare rate
increases and a 0.2% increase in occupancy in 2001 as compared to 2000.
Partially offsetting these increases, the Company closed a facility in August
2000. As a percent of patient revenues, Medicare increased to 20.8% in 2001 from
19.5% in 2000 while Medicaid and similar programs increased to 67.3% from 67.0%
in 2000. Resident revenues decreased to $10.1 million in 2001 from $10.4 million
in 2000, a decrease of $230,000, or 2.2%. The Company experienced an 8.3%
decline in resident days, partially offset by an increase in rates.
Ancillary service revenues, prior to contractual allowances, increased to $6.0
million in 2001 from $5.4 million in 2000, an increase of $607,000 or 11.3%. The
increase is primarily attributable to increased Medicare census, partially
offset by reductions in revenue availability under Medicare. 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.
19
Management fee revenue decreased to $768,000 in 2001 from $934,000 in 2000, a
decrease of $166,000, or 17.8%. A management contract covering four nursing
facilities includes a defined calculation of the "priority of distribution,"
which determines the amount of management fees which may be earned by the
Company. The Company's management fee is the lesser of 6% of facility revenues
or the amount determined by the priority of distribution calculation. The
reduction of management fees is a result of increased operating costs of these
facilities, including primarily professional liability and provisions for cost
report settlements.
Operating Expense. Operating expense, excluding the one-time, $8.7 million
charge for professional liability costs, increased to $42.5 million in 2001 from
$38.6 million in 2000, an increase of $3.9 million, or 10.0%. As a percent of
patient and resident revenues, operating expense, excluding the one-time charge,
increased to 81.7% in 2001 from 78.3% in 2000. Including the one-time charge,
operating expense increased to $51.2 million in 2001 from $38.6 million in 2000,
an increase of $12.6 million, or 32.5%. As a percent of patient and resident
revenues, operating expense, including the one-time charge, increased to 98.3%
in 2001 from 78.3% in 2000. The increase in operating expenses is primarily
attributable to cost increases related to professional liability, wages, bed
taxes and utilities. The Company's professional liability costs for United
States nursing homes and assisted living facilities, including insurance
premiums and reserves for self-insured claims and including the one-time charge,
increased to $11.1 million in 2001 from $2.0 million in 2000, an increase of
$9.1 million or 451.2%. The 2001 professional liability cost includes
additional, non-cash charges of approximately $8.7 million recorded in the third
quarter based on a current actuarial review, including the recent effects of
additional claims and higher settlements per claim. The charge arises primarily
from an escalation in the number and size of claims anticipated to affect the
Company's self-insured professional liability retention. The actuarial review
included estimates of known claims and a prediction of claims that may have
occurred, but have not yet been reported to the Company. Based on the actuary
report, the Company expects to incur increased professional liability costs in
future periods, including the fourth quarter of 2001 and during 2002. The
largest component of operating expenses is wages, which increased to $23.0
million in 2001 from $21.2 million in 2000, an increase of $1.8 million, or
8.6%. The increase in wages is due to increased costs associated with increased
Medicare census and tighter labor markets in most of the areas in which the
Company operates, partially offset by reduced costs associated with reduced
Medicaid census.
Lease Expense. Lease expense decreased to $5.2 million in 2001 from $5.3 million
in 2000, a decrease of $95,000, or 1.8%. Effective October 1, 2000, the Company
entered into an amended lease agreement with the primary lessor of the Company's
United States nursing homes, which resulted in reduced lease costs. Partially
offsetting this decrease, the majority of the Company's lease agreements include
annual adjustments generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $3.5 million in 2001 from $3.1 million in 2000, an increase of $440,000, or
14.4%. As a percent of total net revenues, general and administrative expense
increased to 6.6% in 2001 from 6.1% in 2000. This increase is attributable to
various corporate expenses, including salaries and wages, workers compensation,
health insurance, employee recruitment and relocation, legal and accounting
costs.
20
Interest Expense. Interest expense decreased to $1.3 million in 2001 from $1.5
million in 2000, a decrease of $231,000 or 15.0%. Interest rate reductions on
the Company's variable rate debt were partially offset by an increase in 2001 in
the Company's average outstanding debt balance and Series B Redeemable
Convertible Preferred Stock as compared to 2000.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.4 million in 2001 from $1.2 million in 2000, an increase of $194,000, or
15.7%. This increase includes depreciation on future capital expenditures
required as a result of certain provisions of the lease covering the majority of
the Company's United States nursing homes.
Non-Recurring Charges. During the third quarter of 2000, the Company recorded
non-recurring charges totaling $359,000 in connection with the proposed
restructuring of the lease arrangements covering the majority of its United
States nursing facilities and the proposed refinancing of certain debt
obligations. Of this amount, $233,000 and $125,000 related to consulting and
legal fees incurred, respectively.
Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, the income before income taxes was a loss of $9.7 million
in 2001 as compared to income of $233,000 in 2000, a decrease of $9.9 million.
Excluding the one-time charge, income before income taxes was a loss of $1.1
million in 2001. The income tax provision in 2001 relates to provincial taxes in
Canada. The effective combined federal, state and provincial income tax rate was
36.0% in 2000. Net income was a loss of $9.9 million in 2001 as compared to
income of $149,000 in 2000, a decrease of $10.0 million. The basic and diluted
earnings (loss) per share were $(1.79) each in 2001 as compared to $.03 each in
2000. Excluding the one-time charge, in 2001 the Company incurred a net loss of
$1.2 million (basic and diluted loss of $0.21 per share).
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED WITH NINE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Net revenues increased to $152.7 million in 2001 from $145.9 million
in 2000, an increase of $6.8 million, or 4.7%. Patient revenues increased to
$119.7 million in 2001 from $111.6 million in 2000, an increase of $8.1 million,
or 7.3%. The increase in patient revenues is due to increased Medicaid rates in
Arkansas, increased Medicare utilization and Medicare rate increases and a 0.7%
increase in occupancy in 2001 as compared to 2000. Partially offsetting these
increases, the Company closed a facility in August 2000. As a percent of patient
revenues, Medicare increased to 21.7% in 2001 from 20.1% in 2000 while Medicaid
and similar programs decreased to 65.5% from 66.1% in 2000. Resident revenues
decreased to $30.7 million in 2001 from $31.2 million in 2000, a decrease of
$432,000, or 1.4%. The Company experienced a 7.5% decline in resident days,
partially offset by an increase in rates.
Ancillary service revenues, prior to contractual allowances, decreased to $16.8
million in 2001 from $16.9 million in 2000, a decrease of $81,000 or 0.5%. The
decrease is primarily attributable to reductions in revenue availability under
Medicare. 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
21
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.
Management fee revenue decreased to $2.1 million in 2001 from $3.0 million, a
decrease of $877,000, or 29.6%. A management contract covering four nursing
facilities includes a defined calculation of the "priority of distribution",
which determines the amount of management fees which may be earned by the
Company. The Company's management fee is the lesser of 6% of facility revenues
or the amount determined by the priority of distribution calculation. The
reduction in management fee revenue is a result of increased operating costs of
these facilities, including primarily professional liability and provisions for
cost report settlements.
Operating Expense. Operating expense, excluding the one-time, $8.7 million
charge for professional liability costs, increased to $123.4 million in 2001
from $112.2 million in 2000, an increase of $11.2 million, or 9.9%. As a percent
of patient and resident revenues, operating expense, excluding the one-time
charge, increased to 82.0% in 2001 from 78.6% in 2000. Including the one-time
charge, operating expense increased to $132.0 million in 2001 from $112.2
million in 2000, an increase of $19.8 million, or 17.7%. As a percent of patient
and resident revenues, operating expense increased to 87.7% in 2001 from 78.6%
in 2000. The increase in operating expenses is primarily attributable to cost
increases related to professional liability, wages, bed taxes, utilities,
workers compensation and health insurance. The Company's professional liability
costs for United States nursing homes and assisted living facilities, including
insurance premiums and reserves for self-insured claims and including the
one-time charge, increased to $16.2 million in 2001 from $5.6 million in 2000,
an increase of $10.6 million or 192.1%. The 2001 professional liability cost
includes additional, non-cash charges of approximately $8.7 million recorded in
the third quarter based on a current actuarial review, including the recent
effects of additional claims and higher settlements per claim. The charge arises
primarily from an escalation in the number and size of claims anticipated to
affect the Company's self-insured professional liability retention. The
actuarial review included estimates of known claims and a prediction of claims
that may have occurred, but have not yet been reported to the Company. Based on
the actuary report, the Company expects to incur increased professional
liability costs in future periods, including the fourth quarter of 2001 and
during 2002. The largest component of operating expenses is wages, which
increased to $65.8 million in 2001 from $61.5 million in 2000, an increase of
$4.3 million, or 7.1%. The increase in wages is due to tighter labor markets in
most of the areas in which the Company operates.
Lease Expense. Lease expense decreased to $15.5 million in 2001 from $15.8
million in 2000, a decrease of $273,000, or 1.7%. Effective October 1, 2000, the
Company entered into an amended lease agreement with the primary lessor of the
Company's United States nursing homes, which resulted in reduced lease costs.
Partially offsetting this decrease, the majority of the Company's lease
agreements include annual adjustments generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $10.1 million in 2001 from $8.8 million in 2000, an increase of $1.4 million,
or 15.4%. As a percent of total net revenues, general and administrative expense
increased to 6.6% in 2001 from 6.0% in
22
2000. This increase is attributable to various corporate expenses, including
salaries and wages, workers compensation, health insurance, employee recruitment
and relocation, legal and accounting costs.
Interest Expense. Interest expense decreased to $4.2 million in 2001 from $4.4
million in 2000, a decrease of $236,000, or 5.3%. Interest rate reductions on
the Company's variable rate debt were partially offset by an increase in 2001 in
the Company's average outstanding debt balance and Series B Redeemable
Convertible Preferred Stock as compared to 2000.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $4.2 million in 2001 from $3.6 million in 2000, an increase of $630,000, or
17.4%. This increase includes depreciation on future capital expenditures
required as a result of certain provisions of the lease covering the majority of
the Company's United States nursing homes.
Non-Recurring Charges. During the second quarter of 2000, the Company recorded
non-recurring charges totaling $622,000 in connection with the proposed
restructuring of the lease arrangements covering the majority of its United
States nursing facilities and the proposed refinancing of certain debt
obligations. Of this amount, $391,000 and $215,000 related to consulting and
legal fees incurred, respectively.
Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, the income before income taxes was a loss of $13.4 million
in 2001 as compared to income of $480,000 in 2000, a decrease of $13.9 million.
Excluding the one-time charge, income before income taxes was a loss of $4.7
million in 2001. The income tax provision in 2001 relates to provincial taxes in
Canada. The effective combined federal, state and provincial income tax rate was
36.0% in 2000. Net income was a loss of $13.7 million in 2001 as compared to
income of $307,000 in 2000, a decrease of $14.0 million. The basic and diluted
earnings (loss) per share were $(2.49) each in 2001 as compared to $.06 each in
2000. Excluding the one-time charge, in 2001 the Company incurred a net loss of
$5.0 million (basic and diluted loss of $0.97 per share).
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had negative working capital of $61.2 million
and a current ratio of 0.25, compared with negative working capital of $60.1
million and a current ratio of 0.27 at December 31, 2000. The Company has
incurred losses during 2001, 2000, and 1999 and has limited resources available
to meet its operating, capital expenditure and debt service requirements during
2001.
Certain of the Company's debt agreements contain various financial covenants,
the most restrictive of which relate to current ratio requirements, tangible net
worth, cash flow, net income (loss), and limits on the payment of dividends to
shareholders. As of December 31, 2000 and September 30, 2001, the Company was
not in compliance with certain of these financial covenants. The Company has not
obtained waivers of the non-compliance. Cross-default or material adverse change
provisions contained in the debt agreements allow the holders of substantially
all of the Company's debt to demand immediate repayment. The Company would not
be able to repay this indebtedness if the applicable lenders demanded repayment.
Although the Company does not anticipate that
23
such demand will be made, the continued forbearance on the part of the Company's
lenders cannot be assured at this time. 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.
Based on regularly scheduled debt service requirements, the Company has a total
of $6.7 million that must be repaid or refinanced in January 2002. During the
third quarter, the Company entered into an extension agreement for mortgage
notes payable totaling $2.4 million. The agreement extended the maturity dates
of these notes payable to August 2002. As a result of the covenant
non-compliance and other cross-default provisions, the Company has classified a
total of $58.9 million of debt as current liabilities as of September 30, 2001.
An event of default under the Company's debt agreements could lead to actions by
the lenders that would result in an event of default under the Company's lease
agreements covering a majority of its United States nursing facilities. Should
such a default occur in the related lease agreements, the lessor would have the
right to terminate the lease agreements.
The Company is currently discussing potential waiver, amendment and refinancing
alternatives with its lenders. The Company's management has implemented a plan
to enhance revenues related to the operations of the Company's nursing homes and
assisted living facilities.
Management believes that revenues in future periods will increase as a result of
Medicare and certain state Medicaid rate increases. In addition, the Company has
emphasized attracting and retaining patients and residents. Management has
implemented a plan to attempt to minimize future expense increases through the
elimination of excess operating costs. However, it is anticipated that the
Company will continue to experience significant professional liability costs.
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 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. The
independent public accountant's report on the Company's financial statements at
December 31, 2000 included a paragraph with regards to the uncertainties of the
Company's ability to continue as a going concern.
As of September 30, 2001, the Company had drawn $2.6 million under its working
capital line of credit. The total maximum outstanding balance of the working
capital line of credit, including letters of credit outstanding, is $4.5
million. Of the total $4.5 million of maximum availability, $1.0 million is
limited to certain maximum time period restrictions. There are certain
additional restrictions based on certain borrowing base restrictions. As of
September 30, 2001, the Company had $350,000 of letters of credit outstanding
with the same bank lender, which further reduce the maximum available amount
outstanding under the working capital line of credit. As of September 30, 2001,
the Company had total additional borrowing availability of $1.9 million under
its working capital line of credit. In conjunction with the Company's execution
of the Settlement and Restructuring Agreement with Omega Healthcare Investors,
Inc., the Company amended the terms of the working capital line of credit,
extending the maturity through January 2004 and modifying the interest rate from
LIBOR plus 2.50% to the bank's prime rate plus .50% (up to a maximum of 9.50%)
effective October 1, 2000.
24
The Company has signed a letter of intent to sell Diversicare Canada Management
Services Co., Inc. ("Diversicare Canada"), Advocat's Canadian subsidiary to
Counsel Corporation ("Counsel"). Pursuant to the letter of intent, Counsel is to
acquire 100% of the outstanding stock of Diversicare Canada for $8 million. The
transaction is subject to receipt of applicable approvals and the approval of a
definitive purchase agreement. The letter of intent is subject to a variety of
conditions, including the negotiation of definitive agreements and approval by
the Company's primary bank lender. Although the letter of intent, by its terms,
expired July 31, 2001, the Company is continuing its efforts to seek consents to
allow the transaction to close as described. No assurance can be given that the
Company will be able to complete the sale of Diversicare Canada.
Diversicare Canada manages a number of nursing homes for Counsel and other
owners in Canada and, additionally, leases five assisted living complexes from
Counsel. The proposed sale will include all of Advocat's Canadian operations,
including 13 nursing homes and 23 assisted living facilities.
Effective March 9, 2001, the Company has obtained professional liability
insurance coverage that, based on historical claims experience, could be
substantially less than the claims that could be incurred during 2001. The
Company would be obligated to pay any claims in excess of its insurance
coverage. The Company has recorded total liabilities for reported professional
liability claims and estimates for incurred but unreported claims in excess of
insurance coverage of $17.4 million at September 30, 2001. This amount includes
a one-time, non-cash charge of approximately $8.7 million recorded in the third
quarter based on an actuarial review. In addition, the payment of professional
liability claims by the Company's insurance carriers is dependent upon the
financial solvency of the individual carriers. The Company is aware that one of
its insurance carriers providing coverage for prior years claims is currently
under rehabilitation proceedings. The ultimate payments by the Company of
professional liability claims accrued as of December 31, 2000 and claims that
could be incurred during 2001 because such claims exceed the Company's insurance
coverage or because of the inability of an insurance carrier to pay such claims
could require cash resources during 2001 that would be in excess of the
Company's available cash or other resources.
On June 22, 2001, a jury in Mena, Arkansas issued a verdict in a professional
liability lawsuit against the Company and certain of its subsidiaries totaling
$78.425 million. The Company filed motions with the court, asking the trial
judge to overturn or reduce the verdict. On August 3, 2001, the Company's
motions were denied. The Company has appealed the verdict. The Company's
insurers have posted the required bond on this judgment. The posting of this
bond stays execution of the judgment during the appeal process. The Company
plans to vigorously defend the judgment and has given notice of appeal to the
Supreme Court of Arkansas.
Any future operating losses, demands for repayment by lenders, failure to
refinance debt maturing during 2001 or payments of professional liability claims
judgments in excess of insurance coverage 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 flows from its operations,
unable to refinance or repay debt maturities during 2001, or unable to minimize
the amount of
25
future professional liability claims payments, it will explore a variety of
other options, including but not limited to other sources of equity or debt
financing, asset dispositions, or relief under the United States Bankruptcy
code.
Net cash provided by operating activities totaled $4.9 million and $5.4
million for the nine month periods ended September 30, 2001 and 2000,
respectively. These amounts primarily represent the cash flows from net
operations plus changes in non-cash components of operations and by working
capital changes. No assurance can be given that future cash flow will be
sufficient to meet the working capital, debt service or capital expenditure
requirements of the Company for the next twelve months.
Net cash used in investing activities totaled $2.2 million and $2.0 million for
the nine months periods ended September 30, 2001 and 2000, 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 served 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, 2000. Substantially
all such expenditures were for facility improvements and equipment, which were
financed principally through working capital. For the year ended December 31,
2001, the Company anticipates that capital expenditures for improvements and
equipment for its existing facility operations will be approximately $4.2
million, including $1.0 million for non-routine projects.
Net cash used in financing activities totaled $4.4 million and $1.7 for the
nine month periods ended September 30, 2001 and 2000, respectively. The net cash
used in financing activities primarily represents net proceeds from issuance and
repayment of debt and advances to TDLP.
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-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.
Accounts receivable attributable to the provision of patient and resident
services at September 30, 2001 and December 31, 2000, totaled $20.7 million and
$18.1 million, respectively, representing approximately 38 and 34 days in
accounts receivable, respectively. Accounts receivable from the provision of
management services were $299,000 and $721,000 at September 30, 2001 and
December 31, 2000, respectively representing approximately 39 and 67 days in
accounts receivable, respectively. The allowance for bad debt was $6.0 million
and $5.0 million at September 30, 2001 and December 31, 2000, respectively.
26
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, quality of resident care and Medicare and Medicaid fraud and abuse
(collectively, the "Health Care Laws"). 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 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 resident care. Such
requirements are subjective and 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 exclusion from government health care programs together with the
imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Compliance with the Health Care Laws can
be subject to both future and retrospective government review and
interpretation, as well as regulatory actions unknown or unasserted at this
time. The Company is currently a defendant in two pending false claims actions
as described under Item 1. Legal Proceedings.
During 1999, 2000 and 2001, the Company also experienced the increased
regulatory scrutiny that has been exerted on the industry in the form of
increased fines and penalties. During 2000, one of the Company's facilities in
Texas was decertified from the Medicaid and Medicare programs and, as a result,
ceased operations. The Company is actively engaged in the application and appeal
process for the recertification and licensure of this facility.
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
27
("PPS") under the Medicare program during a three-year "transition period,"
commencing with the first cost reporting period beginning on or after July 1,
1998. The BBA also contains certain measures that have and could lead to further
future reductions in Medicare therapy reimbursement and Medicaid payment rates.
Revenues and expenses have both been reduced significantly from the levels prior
to PPS. The BBA has negatively impacted the entire long-term health care
industry.
During 1999 and 2000, certain amendments to the BBA have been enacted, including
the Balanced Budget Reform Act of 1999 ("BBRA") and the Benefits Improvement and
Protection Act of 2000 ("BIPA"). The BBRA has provided legislative relief in the
form of increases in certain Medicare payment rates during 2000. The BIPA is
expected to continue to provide additional increases in certain Medicare payment
rates during 2001.
Although refinements resulting from the BBRA and the BIPA have been well
received by the United States nursing home industry, it is the Company's belief
that the resulting revenue enhancements are still significantly less than the
losses sustained by the industry due to the BBA. Current levels of or further
reductions in government spending for long-term health care would continue to
have an adverse effect on the operating results and cash flows of the Company.
The Company will attempt to maximize the revenues available 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 operations,
to the extent capital is available to do so, if at all.
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.
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.
28
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.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards No. 133, as amended, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133") has been issued
effective for fiscal years beginning after June 15, 2000. SFAS No. 133, as
amended, requires companies to record derivatives on the balance sheet as assets
or liabilities, measured at fair value. The Company adopted the provisions of
SFAS No. 133, as amended, effective January 1, 2001, as required; however, the
Company's adoption of SFAS No. 133, as amended, did not have a material effect
on the Company's financial position or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No. 141")
and Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that the purchase
method of accounting be used for all business combinations initiated after
September 30, 2001. SFAS No. 141 also specifies criteria which intangible assets
acquired in a purchase method business combination must meet to be recognized
and reported apart from goodwill. SFAS No. 142 addresses the initial recognition
and measurement of intangible assets acquired outside of a business combination
and the accounting for goodwill and other intangible assets subsequent to their
acquisition. SFAS No. 142 requires that intangible assets with finite useful
lives be amortized, and that goodwill and intangible assets with indefinite
lives no longer be amortized, but instead tested for impairment at least
annually. SFAS No. 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company is required to adopt the provisions of SFAS No. 141 immediately and
SFAS No. 142 effective January 1, 2002. Furthermore, any goodwill and any
intangible asset determined to have an indefinite useful life that are acquired
in a purchase business combination completed after September 30, 2001 will not
be amortized, but will continue to be evaluated for impairment in
29
accordance with the appropriate pre-SFAS No. 142 accounting literature. Goodwill
and intangible assets acquired in business combinations completed before July 1,
2001 will continue to be amortized until the adoption of SFAS No. 142.
The Company has not determined the impact, if any, of the adoption of SFAS No.
141 and SFAS No. 142 on its financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") effective
for fiscal years beginning after June 15, 2002. SFAS 143 requires that a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not expect the future adoption of SFAS 143 to have a material
effect on its financial position or results of operations.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
No. 144") effective for fiscal years beginning after December 15, 2001. SFAS
144 establishes a single accounting model for long-lived assets to be disposed
of by sale, whether previously held and used or newly acquired, and broadens
the presentation of discontinued operations to include more disposal
transactions. The Company has not yet determined the impact of the January 2002
adoption of SFAS 144 on its financial position or results of operations.
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, 2000. 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, government regulation
and 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, ability to control ultimate
professional liability costs, the impact of future licensing surveys, 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, 2000 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.
30
PART II -- OTHER INFORMATION
Item 2. Legal Proceedings.
On October 17, 2000, the Company was served with a civil complaint by the
Florida Attorney General's office, in the case of State of Florida ex rel. Mindy
Myers v. R. Brent Maggio, et al. In this case, the State of Florida has accused
multiple defendants of violating Florida's False Claims Act. At a hearing held
April 25, 2001 in the Circuit Court of Leon County, Florida, the Court dismissed
the State of Florida's complaint in its entirety based on the State's failure to
plead false claims violations with sufficient particularity as required by law.
On October 15, 2001, the State of Florida filed a second amended complaint
against the same defendants. The Company, in its capacity as the manager of four
nursing homes owned by Emerald Coast Healthcare, Inc. ("Emerald"), is named in
the amended complaint, which accuses the Company of making illegal kickback
payments to R. Brent Maggio, Emerald's sole shareholder, and fraudulently
concealing such payments in the Medicaid cost reports filed by the nursing
homes. The second amended complaint also accuses the Company of (i) receiving
payment by mistake of fact, (ii) unjust enrichment and (iii) civil theft. The
Company believes that the claims are without merit and the Company intends to
vigorously pursue its defense in this amended complaint.
Under the Federal False Claims Act, health care companies may be named as a
defendant in an action which is filed under court seal, without being informed
of this fact until the government has substantially completed its investigation.
In such cases, there sometimes occurs a provision for "partial lifting of the
seal," in which the trial court orders that the seal may be lifted for purposes
of giving the named defendant the opportunity to informally present its defenses
and discuss settlement prospects with the government. In cases in which the
judge orders such a "partial lifting of the seal," the defendant becomes aware
of the case but is precluded from discussing it publicly. The one case to which
the Company had referred in previous filings was U.S.A ex rel. Susan Elaine
Connor and Cathy L. Johnson v. Cambridge Medical Center a/k/a Mayfield
Rehabilitation & Special Care Center a/k/a Diversicare Leasing Corp. USDC,
Middle District of Tennessee, No. 3:98-0605. In November 2001, the court entered
an order indicating that the department of justice had chosen not to intervene
in this case. The Company does not know whether the individual relators will
pursue this action, but the Company plans to vigorously defend the case if it
does proceed.
While the Company cannot currently predict with certainty the ultimate impact of
either of the above cases on the Company's financial condition, cash flows or
results of operations, an unfavorable outcome in any state or federal False
Claims Act case could subject the Company to fines, penalties and damages.
Moreover, the Company could be excluded from the Medicare, Medicaid or other
federally-funded health care programs, which could have a material adverse
impact on the Company's financial condition, cash flows or results of
operations.
The entire United States long-term care industry has seen a dramatic increase in
personal injury/wrongful death claims based on alleged negligence by nursing
homes and their employees in providing care to patients and residents. As a
result, the Company has numerous liability claims and disputes outstanding for
professional liability and other related issues. On June 22, 2001, a
31
jury in Mena, Arkansas issued a verdict in a professional liability lawsuit
against the Company totaling $78.425 million. Professional liability insurance
up to certain limits is carried by the Company and its subsidiaries for coverage
of such claims. However, due to the increasing number of claims against the
Company and throughout the long-term care industry, the Company's professional
liability insurance premiums and deductible amounts have increased substantially
during 1999, 2000 and 2001. For more information regarding the Mena, Arkansas
verdict and the Company's insurance coverage, see Notes 3 and 7 in "Notes to
Interim Consolidated Financial Statements".
In addition to the pending false claims actions described above, the Company has
also received notices from the Centers for Medicare and Medicaid Services
("CMMS") concerning post-payment medical reviews of claims for several of the
Company's Texas facilities. The reviews have resulted in the denial of
previously paid claims for infusion therapy and certain other therapy services
rendered by outside providers to patients at the Company's facilities for the
years 1997 - 1999. The government has already recovered, and will continue to
recover, some of the alleged overpayment amounts by offset against current
amounts due the facilities. The Company believes that the medical reviews were
imposed as the result of a governmental investigation of Infusion Management
Services ("IMS"), an unrelated company that provided infusion therapy services
to residents at the Company's facilities and which some time ago entered into a
settlement agreement with the government regarding allegations of violations of
applicable laws. The Company is in the process of appealing the denied claims.
The Company also contends that the government has already recovered the payments
in question through its settlement with IMS. The Company cannot at this time
predict whether its efforts to recover the recouped money and obtain payment of
the denied claims will be successful, and the denial of these claims could have
a material adverse impact on the Company's financial condition, cash flows or
results of operations.
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
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
November 14, 2001
By: /s/ William R. Council, III
-------------------------------------------
William R. Council, III
Executive Vice-President, Secretary,
Principal Financial Officer and Chief
Accounting Officer and An Officer Duly
Authorized to Sign on Behalf of the
Registrant
33
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).
3.4 Certificate of Designation of Registrant (incorporated by reference
to Exhibit 3.4 to the Company's quarterly report on Form 10-Q for the
quarter ended March 31, 2001).
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 Termination, Assignment And Release Agreement is dated as of the 30th
day of September, 2001 and is by and among (I) Counsel Nursing
Properties, Inc., a Delaware corporation and Counsel Corporation
[US], a Delaware corporation and the successor by name change to
Diversicare Corporation of America, (ii) Diversicare Leasing Corp., a
Tennessee corporation and Advocat Inc., a Delaware corporation, and
(iii) Omega Healthcare Investors, Inc., a Maryland corporation, OHI
Sunshine, Inc., a Florida corporation, and Sterling Acquisition
Corp., a Kentucky corporation.
10.2 Settlement and Release Agreement entered into and effective as of
11:30, CST, on August 31, 2001 by and between Texas Diversicare
Limited Partnership, a Texas limited partnership and Diversicare
Leasing Corp., a Tennessee corporation.