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: JUNE 30, 1999
-------------
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
-------------------------------------------------------
(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 [ ]
5,398,710
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(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 13, 1999)
2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
1999 1998
--------- ------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 998 $ 2,347
Receivables, less allowance for doubtful
accounts of $1,360 and $2,650,
respectively 23,110 26,289
Income taxes receivable 1 800
Inventories 1,234 1,102
Prepaid expenses and other assets 1,224 1,528
Deferred income taxes 2,069 1,719
--------- ---------
Total current assets 28,636 33,785
--------- ---------
PROPERTY AND EQUIPMENT, at cost 83,741 82,140
Less accumulated depreciation
and amortization (16,253) (15,548)
--------- ---------
Net property and equipment 67,488 66,592
--------- ---------
OTHER ASSETS:
Deferred tax benefit 6,069 6,338
Deferred financing and other costs, net 1,131 1,150
Assets held for sale or redevelopment 3,465 3,465
Investments in and receivables from joint ventures 7,943 7,194
Other 1,977 2,770
--------- ---------
Total other assets 20,585 20,917
--------- ---------
$ 116,709 $ 121,294
========= =========
(Continued)
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ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
JUNE 30, DECEMBER 31,
1999 1998
-------- -----------
(UNAUDITED)
CURRENT LIABILITIES:
Current portion of long-term debt $ 29,478 $ 30,126
Trade accounts payable 6,344 9,327
Accrued expenses:
Payroll and employee benefits 4,734 4,920
Interest 382 857
Self-insurance reserves 2,259 2,375
Other 2,490 2,413
-------- --------
Total current liabilities 45,687 50,018
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 34,105 33,514
Deferred gains with respect to leases, net 3,170 3,293
Self-insurance reserves, less current portion 2,000 1,665
Other 4,016 5,243
-------- --------
Total noncurrent liabilities 43,291 43,715
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,399,000 issued and outstanding at
June 30, 1999 and December 31, 1998, respectively 54 54
Paid-in capital 15,765 15,765
Retained earnings 11,912 11,742
-------- --------
Total shareholders' equity 27,731 27,561
-------- --------
$116,709 $121,294
======== ========
The accompanying notes are an integral part of these
interim consolidated balance sheets.
-3-
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998
------- --------
REVENUES:
Patient revenues $35,022 $ 43,108
Resident revenues 9,323 8,629
Management fees 877 906
Interest 38 55
------- --------
Net revenues 45,260 52,698
------- --------
EXPENSES:
Operating 34,885 42,131
Lease 4,956 4,809
General and administrative 2,876 2,730
Interest 1,325 1,254
Depreciation and amortization 1,066 832
Non-recurring charges -0- 1,468
------- --------
Total expenses 45,108 53,224
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 152 (526)
PROVISION (BENEFIT) FOR INCOME TAXES 55 (189)
------- --------
NET INCOME (LOSS) $ 97 $ (337)
======= ========
BASIC EARNINGS PER SHARE:
Net income (loss) $ .02 $ (.06)
======= ========
DILUTED EARNINGS PER SHARE
Net income (loss) $ .02 $ (.06)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,399 5,377
======= ========
Diluted 5,484 5,377
======= ========
The accompanying notes are an integral part of these
interim consolidated financial statements.
-4-
5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
-------- ---------
REVENUES:
Patient revenues $ 71,876 $ 84,946
Resident revenues 18,227 17,334
Management fees 1,796 1,812
Interest 73 99
-------- ---------
Net revenues 91,972 104,191
-------- ---------
EXPENSES:
Operating 71,384 83,383
Lease 9,811 9,563
General and administrative 5,611 5,456
Interest 2,632 2,499
Depreciation and amortization 2,133 1,794
Non-recurring charges -0- 1,468
-------- ---------
Total expenses 91,571 104,163
-------- ---------
INCOME BEFORE INCOME TAXES 401 28
PROVISION FOR INCOME TAXES 145 10
-------- ---------
INCOME BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 256 18
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (277) -0-
-------- ---------
NET INCOME (LOSS) $ (21) $ 18
======== =========
BASIC EARNINGS PER SHARE:
Income before accounting change $ .05 $ .00
Cumulative effect of change in accounting principle, net of tax (.05) (.00)
-------- ---------
Net income (loss) $ (.00) $ (.00)
======== =========
DILUTED EARNINGS PER SHARE
Income before accounting change $ .05 $ .00
Cumulative effect of change in accounting principle, net of tax (.05) $ (.00)
-------- ---------
Net income (loss) $ (.00) $ (.00)
======== =========
WEIGHTED AVERAGE SHARES:
Basic 5,399 5,377
======== =========
Diluted 5,399 5,391
======== =========
The accompanying notes are an integral part of these
interim consolidated financial statements.
-5-
6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
NET INCOME (LOSS) $ 97 $(337) $ (21) $ 18
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 223 (162) 297 (125)
Income tax expense (80) 58 (107) 45
----- ----- ----- -----
143 (104) 190 (80)
----- ----- ----- -----
COMPREHENSIVE INCOME (LOSS) $ 240 $(441) $ 169 $ (62)
===== ===== ===== =====
The accompanying notes are an integral part of these
interim consolidated financial statements.
-6-
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ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
SIX MONTHS ENDED JUNE 30,
1999 1998
------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (21) $ 18
Items not involving cash:
Depreciation and amortization 2,133 1,795
Provision for doubtful accounts 510 786
Equity (earnings) loss in joint ventures 28 (42)
Amortization of deferred credits (248) (278)
Deferred income taxes (188) (360)
Write off pursuant to change in accounting principle 433 -0-
Non-recurring charge write-off -0- 1,028
Changes in other assets and liabilities:
Receivables, net 3,171 (2,332)
Inventories (132) 34
Prepaid expenses and other assets 274 (478)
Trade accounts payable and accrued expenses (3,081) 2,446
Other (77) 47
------- ------
Net cash provided from operating activities 2,802 2,664
------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (2,573) (2,737)
Investment in TDLP (160) (632)
Mortgages receivable, net 152 (305)
Deposits, pre-opening costs and other (360) (435)
Investment in and advances to joint ventures, net (449) (1,345)
TDLP partnership distributions 151 152
------- ------
Net cash used in investing activities (3,239) (5,302)
------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations 26,183 -0-
Repayment of debt obligations (24,972) (411)
Net proceeds from (repayment of) bank line of credit (1,497) 2,908
Advances to TDLP, net (138) (815)
Financing costs (488) (68)
------- ------
Net cash provided from financing activities (912) $1,614
------- ------
(Continued)
-7-
8
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 1998
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(1,349) $(1,024)
CASH AND CASH EQUIVALENTS, beginning of period 2,347 2,673
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 998 $ 1,649
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 3,106 $ 2,362
======= =======
Cash payments (refunds) of income taxes, net $ (623) $ 637
======= =======
During the second quarter of 1999, the Company's executive benefit plan was
terminated. In connection therewith, Advocat distributed net benefit plan
deposits and relieved net benefit plan liabilities of $1,163,000 in the six
months ended June 30, 1999. Advocat received net benefit plan deposits and
earnings and recorded net benefit plan liabilities of $286,000 in the six month
period ended June 30, 1998.
The accompanying notes are an integral part of these
interim consolidated financial statements.
-8-
9
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
leading provider of long-term care services to the elderly. The Company operates
nursing homes and assisted living facilities in 12 Southeastern states and three
Canadian provinces.
As of June 30, 1999, the Company operates 122 facilities consisting of 65
nursing homes with 7,307 licensed beds and 57 assisted living facilities with
5,295 units. The Company owns seven nursing homes, leases 36 others, and manages
22 nursing homes. The Company owns 17 assisted living facilities, leases 27
others, and manages 13 assisted living facilities. The Company holds a minority
equity interest in six of these managed assisted living facilities. The Company
operates 51 nursing homes and 36 assisted living facilities in the United States
and 14 nursing homes and 21 assisted living facilities in Canada. The Company's
facilities provide a range of health care services to their patients and
residents. In addition to the nursing and social services usually provided in
the long-term care facilities, the Company offers a variety of comprehensive
rehabilitative, nutritional, respiratory and other specialized ancillary
services. 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 Ontario, British Columbia,
and Alberta.
2. BASIS OF FINANCIAL STATEMENTS
The interim financial statements for the three and six month periods ended June
30, 1999 and 1998, 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 combined financial statements reflect all adjustments (consisting of
only normally recurring accruals) necessary to present fairly the financial
position at June 30, 1999 and the results of operations for the three and six
month periods ended June 30, 1999, and the cash flows for the six month periods
ended June 30, 1999 and 1998.
The results of operations for the three and six month periods ended June 30,
1999 and 1998 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,
1998.
-9-
10
3. 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 the accompanying
interim consolidated statements of operations.
4. EARNINGS PER SHARE
Information with respect to the calculation of basic and diluted earnings per
share data follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- -----------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
NUMERATOR:
Income (loss) before cumulative effect
of change in accounting principle $ 97,000 $ (337,000) $ 256,000 $ 18,000
Cumulative effect of change in
accounting principle, net of tax -0- -0- (277,000) -0-
------------- ------------- ------------- -------------
Net income (loss) $ 97,000 $ (337,000) $ (21,000) $ 18,000
============= ============= ============= =============
DENOMINATOR:
Basic average shares outstanding 5,399,000 5,377,000 5,399,000 5,377,000
Employee stock purchase plan 81,000 N/A(1) N/A(1) 13,000
Options 4,000 N/A(1) N/A(1) 1,000
------------- ------------- ------------- -------------
Diluted average shares outstanding 5,484,000 5,377,000 5,399,000 5,391,000
============= ============= ============= =============
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .02 $ (.06) $ .05 $ .00
Cumulative effect of change in
accounting principle, net of tax .00 .00 (.05) .00
------------- ------------- ------------- -------------
Net income (loss) $ .02 $ (.06) $ (.00) $ .00
============= ============= ============= =============
DILUTED EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .02 $ (.06) $ .05 $ .00
Cumulative effect of change in accounting
principle, net of tax .00 $ (.00) (.05) .00
------------- ------------- ------------- -------------
Net income (loss) $ .02 $ (.06) $ (.00) $ .00
============= ============= ============= =============
- -----------------
(1) Not applicable since inclusion would be anti-dilutive.
-10-
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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 JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
--------- --------- --------- ---------
Foreign currency items:
Beginning balance $(365,000) $(172,000) $(412,000) $(196,000)
Current period change, net of income tax 143,000 (104,000) 190,000 (80,000)
--------- --------- --------- ---------
Ending balance $(222,000) $(276,000) $(222,000) $(276,000)
========= ========= ========= =========
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
6. NON-RECURRING CHARGES
During the quarter ended June 30, 1998, the Company recorded non-recurring
charges in the amount of $1.5 million. Of this amount, $1.0 million was a
restructuring charge related to the Company's management information system
conversion with respect to its U.S. nursing homes. Pursuant to this conversion,
the Company abandoned much of its existing software and dismantled much of its
regional infrastructure in favor of a centralized accounting organization. This
restructuring charge represented the costs associated with the closing of
certain regional offices, severance packages for affected personnel, the
write-off of capitalized software costs, and other costs related to the systems
being replaced. In addition to the restructuring charge, the Company also
recognized costs associated with the write-off of prospective financing
arrangements or acquisitions, each of which had been abandoned during the
quarter, and costs related to legal issues that were settled during the quarter.
7. OPERATING SEGMENT INFORMATION
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about Segments
of an Enterprise and Related 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:
-11-
12
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
(IN THOUSANDS) 1999 1998 1999 1998
-------- --------- ------ -------
Net revenues:
U.S. nursing homes $ 34,490 $ 42,690 $ 71,006 $ 84,137
U.S. assisted living facilities 7,057 6,248 13,679 12,554
Canadian operations 3,710 3,759 7,337 7,497
Corporate 237 239 420 479
Eliminations (235) (238) (470) (476)
-------- -------- -------- --------
Total $ 45,259 $ 52,698 $ 91,972 $104,191
======== ======== ======== ========
Depreciation and amortization:
U.S. nursing homes $ 595 $ 405 $ 1,192 $ 946
U.S. assisted living facilities 362 312 723 618
Canadian operations 90 89 175 177
Corporate 19 27 43 54
Eliminations -0- -0- -0- -0-
-------- -------- -------- --------
Total $ 1,066 $ 833 $ 2,133 $ 1,795
======== ======== ======== ========
Operating income (loss):
U.S. nursing homes $ 20 $ 265 $ (80) $ 589
U.S. assisted living facilities (100) 154 143 254
Canadian operations 414 517 810 990
Corporate (182) (1,462) (472) (1,805)
Eliminations -0- -0- -0- -0-
-------- -------- -------- --------
Total $ 152 $ (5,26) $ 401 $ 28
======== ======== ======== ========
JUNE 30, DECEMBER 31
1999 1998
------ --------
Long-lived assets:
U.S. nursing homes $ 55,347 $ 56,396
U.S. assisted living facilities 34,272 33,987
Canadian operations 9,988 10,536
Corporate 22,574 21,725
Eliminations (36,858) (35,135)
-------- --------
Total $ 85,323 $ 87,509
======== ========
Total assets:
U.S. nursing homes $ 87,870 $ 88,473
U.S. assisted living facilities 36,740 36,926
Canadian operations 15,133 13,718
Corporate 23,584 24,909
Eliminations (44,405) (42,732)
-------- --------
Total $118,922 $121,294
======== ========
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat (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 Southeastern states and three Canadian provinces. 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.
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, through
arrangements with third parties, offers a variety of comprehensive
rehabilitation services as well as medical supply and nutritional support
services.
As of June 30, 1999, Advocat's portfolio includes 122 facilities composed of 65
nursing homes containing 7,307 licensed beds and 57 assisted living facilities
containing 5,295 units. In comparison, at June 30, 1998, the Company operated
116 facilities composed of 64 nursing homes containing 7,221 licensed beds and
52 assisted living facilities containing 4,980 units. As of June 30, 1999, the
Company owns seven nursing homes, leases 36 others, and manages the remaining 22
nursing homes. Additionally, the Company owns 17 assisted living facilities,
leases 27 others, and manages the remaining 13 assisted living facilities. The
Company holds a minority equity interest in six of these managed assisted living
facilities. In the United States, the Company operates 51 nursing homes and 36
assisted living facilities, and in Canada, the Company operates 14 nursing homes
and 21 assisted living facilities.
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 consists 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. Management fees also include
consulting and development fee income. The Company's operating expenses include
the costs, other than lease, depreciation and amortization expenses, incurred in
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.
-13-
14
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three months ended June 30, 1999 and 1998.
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998 CHANGE %
-------- --------- -------- ------
REVENUES:
Patient revenues $ 35,022 $ 43,108 $ (8,086) (18.8)
Resident revenues 9,323 8,629 694 8.0
Management fees 877 906 (29) (3.2)
Interest 38 55 (17) (30.9)
-------- --------- --------
Net revenues 45,260 52,698 (7,438) (14.1)
-------- --------- --------
EXPENSES:
Operating 34,885 42,131 (7,246) (17.2)
Lease 4,956 4,809 147 3.1
General and administrative 2,876 2,730 146 5.4
Interest 1,325 1,254 71 5.6
Depreciation and amortization 1,066 832 234 28.1
Non-recurring charges -0- 1,468 (1,468) (100.0)
-------- --------- --------
Total expenses 45,108 53,224 (8,116) (15.2)
-------- --------- --------
INCOME (LOSS) BEFORE INCOME TAXES 152 (526) 678 128.9
PROVISION (BENEFIT) FOR INCOME TAXES 55 (189) 244 128.9
-------- --------- --------
NET INCOME (LOSS) $ 97 $ (337) $ 434 128.9
======== ========= ========
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
---------------------------
1999 1998 CHANGE %
-------- --------- -------- ------
REVENUES:
Patient revenues $ 71,876 $ 84,946 $(13,070) (15.4)
Resident revenues 18,227 17,334 893 5.2
Management fees 1,796 1,812 (16) (0.8)
Interest 73 99 (26) (26.6)
-------- --------- --------
Net revenues 91,972 104,191 (12,219) (11.7)
-------- --------- --------
EXPENSES:
Operating 71,384 83,383 (11,999) (14.4)
Lease 9,811 9,563 248 2.6
General and administrative 5,611 5,456 155 2.9
Interest 2,632 2,499 133 5.3
Depreciation and amortization 2,133 1,794 339 18.9
Non-recurring charges -0- 1,468 (1,468) (100.0)
-------- --------- --------
Total expenses 91,571 104,163 (12,592) (12.1)
-------- --------- --------
INCOME BEFORE INCOME TAXES 401 28 373 1,348.3
PROVISION FOR INCOME TAXES 145 10 135 1,348.3
-------- --------- --------
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 256 18 238 1,348.3
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (277) -0- (277) N/A
-------- --------- --------
NET INCOME (LOSS) $ (21) $ 18 $ (39) (216.3)
======== ========= ========
-14-
15
PERCENTAGE OF NET REVENUES Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------
1999 1998 1999 1998
----- ----- ----- -----
REVENUES:
Patient revenues 77.4% 81.8% 78.1% 81.5%
Resident revenues 20.6 16.4 19.8 16.7
Management fees 1.9 1.7 2.0 1.7
Interest 0.1 0.1 0.1 0.1
----- ----- ----- -----
Net revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
OPERATING EXPENSES:
Operating 77.1 79.9 77.6 80.0
Lease 10.9 9.1 10.7 9.2
General and administrative 6.4 5.2 6.1 5.3
Interest 2.9 2.4 2.9 1.7
Depreciation and amortization 2.4 1.6 2.3 2.4
Non-recurring charges 0.0 2.8 0.0 1.4
----- ----- ----- -----
Total expenses 99.7 101.0 99.6 100.0
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 0.3 (1.0) 0.4 0.0
PROVISION (BENEFIT) FOR INCOME TAXES 0.1 (0.4) 0.1 0.0
----- ----- ----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0.2 (0.6) 0.3 0.0
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX 0.0 0.0 (0.3) 0.0
----- ----- ----- -----
NET INCOME (LOSS) 0.2% 0.6% (0.0)% 0.0
===== ===== ===== =====
GENERAL
Medicare and Other Reimbursement Changes. In 1999, the Company has continued to
experience the impact of Medicare cost limitations imposed by the Health Care
Finance Administration upon all providers of nursing home Medicare services.
Beginning in July 1998, a portion of the Company's facilities began the
three-year transition from the cost reimbursement system to the prospective
payment system ("PPS"). In general, PPS provides a standard payment for Medicare
Part A services to all providers regardless of their costs. PPS creates an
incentive for providers to reduce their costs, and management has responded
accordingly. The phase-in of PPS began for all providers at some point during
the twelve-month period ending June 30, 1999. Management estimates that the
ultimate impact of PPS on its revenues will be a reduction of $16.0 to $17.0
million per year. Since PPS is still an evolving process, the ultimate impact
cannot be known with certainty. However, Management presently believes that it
can reduce its costs in response to PPS, as it is currently structured, such
that there will be little or no impact on net income.
Beginning in January 1998, the allowable costs for cost reimbursement components
of Medicare Part B services became subject to a limitation factor of 90% of
actual cost. For the Company, such revenues are primarily derived from
reimbursement of subcontracted therapy costs. In 1999, cost reimbursement of
Part B services has been replaced by a system of fee screens that effectively
limit the maximum fees that may be charged for therapy services. The Company is
certain that this will further negatively impact operations although the
ultimate effect cannot yet be reasonably estimated.
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These changes have combined to cause a dramatic decrease in the Company's
ancillary revenues and expenses. In general, the Company has been successful in
reducing costs in tandem with the revenue reductions from the provision of
therapy services. The Company also believes that it and the industry have
experienced occupancy declines as doctors have kept patients in hospitals
rather than allowing their admittance to nursing homes where therapy services
are now limited.
These changes are endemic upon the industry. As the impact of these changes upon
both providers and beneficiaries has become known, there has been growing
political awareness of a need to reexamine the drastic cuts that have been
implemented. There are currently bills scheduled for consideration by Congress
this fall as well as movement to institute administrative changes that would
restore some revenues to the U.S. nursing home industry. While such activity is
positive, there is no assurance that it will result in increased revenues to the
industry or the Company.
Non-Recurring Charges. During the quarter ended June 30, 1998, the Company
recorded non-recurring charges in the amount of $1.5 million. Of this amount,
$1.0 million was a restructuring charge related to the Company's management
information system conversion with respect to its U.S. nursing homes. Pursuant
to this conversion, the Company abandoned much of its existing software and
dismantled much of its regional infrastructure in favor of a centralized
accounting organization. This restructuring charge represented the costs
associated with the closing of certain regional offices, severance packages for
affected personnel, the write-off of capitalized software costs, and other costs
related to the systems being replaced. In addition to the restructuring charge,
the Company also recognized costs associated with the write-off of prospective
financing arrangements or acquisitions, each of which had been abandoned during
the quarter, and costs related to legal issues that were settled during the
quarter.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998
Revenues. Net revenues decreased to $45.3 million in 1999 from $52.7 million in
1998, a decrease of $7.4 million, or 14.1%. Resident revenues increased to $9.3
million in 1999 from $8.6 million in 1998, an increase of $694,000, or 8.0%.
Patient revenues decreased to $35.0 million in 1999 from $43.1 million in 1998,
a decrease of $8.1 million, or 18.8%. This decrease in patient revenues is due
primarily to the Medicare reimbursement changes and a decline in Medicare
census. In addition, effective April 1, 1999, the Company stopped operating a
facility it had previously leased; this facility provided $1.7 million in
comparable revenues that were not repeated in 1999. There was a 6.2% decline in
patient and resident days, approximately 38,000 days, which was primarily due to
decreases in the nursing home segment. Approximately 12,000 of this decline in
days related to the terminated lease. There was a 34.0% decline in Medicare
days, approximately 11,000 days, and reductions of approximately 10,000 days
each among Medicaid and private-pay patients. This decline in Medicare days
accounts for approximately $3.7 million of the overall revenue reduction. As a
percent of patient and resident revenues, Medicare decreased to 14.8% in 1999
from 25.8% in 1998 while Medicaid and similar programs increased to 66.7% in
1999 from 55.1% in 1998.
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Ancillary service revenues, prior to contractual allowances, decreased to $5.9
million in 1999 from $17.3 million in 1998, a decrease of $11.4 million or
65.9%. The decrease is primarily attributable to reductions in revenue
availability under Medicare and is consistent with the Company's expectation.
Cost limits are continuing to be placed on ancillary services as part of the
transition to PPS; additionally, other cost limitation provisions could occur.
Therefore, the Company anticipates that ancillary service revenues will remain
flat or continue trending down during 1999. The ultimate effect on the Company's
operations cannot be predicted at this time because the extent and composition
of the cost limitations are subject to change.
Operating Expense. Operating expense decreased to $34.9 million in 1999 from
$42.1 million in 1998, a decrease of $7.2 million, or 17.2%. 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 contracted costs to provide them). As a percent of patient and
resident revenues, operating expense decreased to 78.7% in 1999 from 81.4% in
1998. The largest component of operating expense is wages, which remained flat
at about $18.9 million in both the 1999 and 1998 periods. The Company's wage
increases are generally in line with inflation. The Company has been able to
reduce staffing at certain facilities that have experienced occupancy declines.
Lease Expense. Lease expense increased to $5.0 million in 1999 from $4.8 million
in 1998, an increase of $147,000, or 3.1%. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $2.9 million in 1999 from $2.7 million in 1998, an increase of $146,000, or
5.4%. As a percent of total net revenues, general and administrative expense
increased to 6.4% in 1999 compared with 5.2% in 1998. The percentage increase is
attributable to the lower revenue base.
Interest Expense. Interest expense increased to $1.3 million in 1999 from $1.2
million in 1998, an increase of $71,000, or 5.6%.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.1 million in 1999 from $832,000 in 1998, an increase of $234,000, or
28.1%.
Non-Recurring Charges. The Company incurred $1.5 million in charges in 1998 that
were not repeated in 1999.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes was $152,000 in 1999 as
compared with a loss of $(526,000) in 1998, an increase of $678,000, or 128.9%.
The effective combined federal, state and provincial income tax rate was 36.0%
in both 1999 and 1998. Net income was $97,000 in 1999 as compared with a net
loss of $(337,000) in 1998, an increase of $434,000, and basic and diluted
earnings per share were each $.02 in 1999 as compared with a loss of $(.06) per
share in 1998.
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SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues. Net revenues decreased to $92.0 million in 1999 from $104.2 million in
1998, a decrease of $12.2 million, or 11.7%. Resident revenues increased to
$18.2 million in 1999 from $17.3 million in 1998, an increase of $893,000, or
5.2%. Patient revenues decreased to $71.9 million in 1999 from $85.0 million in
1998, a decrease of $13.1 million, or 15.4%. This decrease in patient revenues
is due primarily to the Medicare reimbursement changes and a decline in Medicare
census. In addition, effective April 1, 1999, the Company stopped operating a
facility it had previously leased; this facility provided $1.7 million in
comparable revenues that were not repeated in 1999. There was a 4.3% decline in
patient and resident days, approximately 52,000 days, which was primarily due to
decreases in the nursing home segment. Approximately 12,000 of this decline in
days related to the terminated lease. There was a 35.6% decline in Medicare
days, approximately 23,000 days, and reductions of approximately 10,000 and
6,000 among private-pay and Medicaid patients, respectively. This decline in
Medicare days accounts for approximately $7.6 million of the overall revenue
reduction. As a percent of patient and resident revenues, Medicare decreased to
15.3% in 1999 from 25.8% in 1998 while Medicaid and similar programs increased
to 66.1% in 1999 from 55.3% in 1998.
Ancillary service revenues, prior to contractual allowances, decreased to $13.6
million in 1999 from $34.0 million in 1998, a decrease of $20.4 million or
60.0%. The decrease is primarily attributable to reductions in revenue
availability under Medicare and is consistent with the Company's expectation.
Cost limits are continuing to be placed on ancillary services as part of the
transition to PPS; additionally, other cost limitation provisions could occur.
Therefore, the Company anticipates that ancillary service revenues will remain
flat or continue trending down during 1999. The ultimate effect on the Company's
operations cannot be predicted at this time because the extent and composition
of the cost limitations are subject to change.
Operating Expense. Operating expense decreased to $71.4 million in 1999 from
$83.4 million in 1998, a decrease of $12.0 million, or 14.4%. 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 contracted costs to provide them). As a percent of patient and
resident revenues, operating expense decreased to 79.2% in 1999 from 81.5% in
1998. The largest component of operating expense is wages, which increased to
$37.6 million in 1999 from $37.4 million in 1998, an increase of $156,000, or
0.4%. The Company's wage increases are generally in line with inflation. The
Company has been able to reduce staffing at certain facilities that have
experienced occupancy declines.
Lease Expense. Lease expense increased to $9.8 million in 1999 from $9.6 million
in 1998, an increase of $248,000, or 2.6%. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense increased
to $5.6 million in 1999 from $5.5 million in 1998, an increase of $155,000, or
2.9%. As a percent of total net revenues, general and administrative expense
increased to 6.1% in 1999 compared with 5.3% in 1998. The percentage increase is
attributable to the lower revenue base.
Interest Expense. Interest expense increased to $2.6 million in 1999 from $2.5
million in 1998, an increase of $133,000, or 5.3%.
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Depreciation and Amortization. Depreciation and amortization expenses increased
to $2.1 million in 1999 from $1.8 million in 1998, an increase of $339,000, or
18.9%.
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.
Non-Recurring Charges. The Company incurred $1.5 million in charges in 1998 that
were not repeated in 1999.
Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, income before income taxes and the cumulative effect of the
change in accounting principle was $401,000 in 1999 as compared with $28,000 in
1998, an increase of $373,000, or 1,348.3%. The effective combined federal,
state and provincial income tax rate was 36.0% in both 1999 and 1998. The net
loss after the cumulative effect of the change in accounting principle was
$(21,000) in 1999 as compared with net income of $18,000 in 1998, a decrease of
$39,000, and basic and diluted earnings (loss) per share were all $0.00 in both
years.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999 and December 31, 1998, the Company had negative working capital
of $(17.0) million and $(16.2) million, respectively, and the current ratio was
0.6 and 0.7, respectively. The negative working capital results primarily from
the Company's current maturities of long-term debt.
Net cash provided by operating activities totaled $2.8 million and $2.7 million
in the six month periods ended June 30, 1999 and 1998, respectively. These
amounts primarily represent the cash flows from net income plus changes in
non-cash components of operations and by working capital changes.
Net cash used by investing activities totaled $3.2 million and $5.3 million in
the six months periods ended June 30, 1999 and 1998, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
and advances to joint ventures and additional investment in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.4 million and $5.2 million for capital expenditures in each of
the last three calendar years ending December 31, 1998. Substantially all such
expenditures were for facility improvements and equipment, which were financed
principally through working capital. For the year ended December 31, 1999, the
Company anticipates that capital expenditures for improvements and equipment for
its existing facility operations will be approximately $5.4 million, including
$2.8 million for non-routine projects.
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Net cash provided (used) by financing activities totaled $(912,000) and $1.6
million in the six month periods ended June 30, 1999 and 1998, respectively. The
net cash provided from financing activities primarily represents net proceeds
from issuance and repayment of debt and advances to or repayments from related
parties.
At June 30, 1999, the Company had total debt outstanding of $63.6 million, of
which $36.5 million was principally mortgage debt bearing interest, generally at
floating rates ranging from 6.3% to 10.0%. The Company also had outstanding a
promissory note (the "Bridge Loan") in the amount of $9.4 million. The Company's
remaining debt of $17.7 million was drawn under the Company's lines of credit.
Most of the Company's debt is at floating interest rates, generally at a spread
above the London Interbank Offered Rate ("LIBOR").
On June 4, 1999, the Company closed two loans totaling $25.25 million (the "NC
Loans"). The NC Loans are secured by the owned assisted living facilities the
Company operates in the state of North Carolina. The NC Loans mature in July
2001, bear interest at LIBOR plus 2.35%, and provide for principal amortization
under a 25-year amortization schedule. The net proceeds available at closing,
$24.7 million, were applied against the Company's indebtedness under the Bridge
Loan. As of both June 30 and August 13, 1999, the outstanding indebtedness
under the NC Loans was approximately $25.2 million and the interest rate was
7.3% and 7.5%, respectively.
The Bridge Loan had an original indebtedness of $34.1 million. It was used to
fund the purchase of the Company's North Carolina assisted living operations in
1997. With the application of the net proceeds from the NC Loans, the balance of
the Bridge Loan was reduced to $9.4 million. Prior to the principal reduction,
the Bridge Loan had a maturity date of July 1, 1999, carried interest at LIBOR
plus 3.0%, and had a restriction against pledging the North Carolina assets as
collateral with any other lender. With the reduction in the principal balance,
the Company and its lenders have agreed to modify the terms of the Bridge Loan
by extending the stated maturity date to October 1, 1999, increasing the
interest rate to 12.0% fixed, and providing certain security interests to the
lenders. These security interests include two non-operating properties in North
Carolina and the Company's interests in the assets of TDLP. No further principal
reductions are scheduled at this time, but the Company has agreed to apply
against the Bridge Loan indebtedness any net proceeds received from the sale of
the additional security interests.
As of June 30, 1999, the Company had drawn $2.6 million, had $5.65 million of
letters of credit outstanding, and had $1.7 million remaining borrowing
capability under its working capital line of credit. As of August 13, 1999, the
Company had drawn $1.0 million, had $5.65 million of letters of credit
outstanding, and had $3.3 million remaining borrowing capability under its
working capital line of credit. The interest rates applicable at June 30 and
August 13 were 7.6% and 7.7%, respectively.
Over the past several months, the Company's bank lender has provided additional
line of credit availabilty of $4.0 million (the "Overline"). Since April 14,
1999, the Overline has carried interest at 14.0% but was otherwise subject to
the same terms and conditions as the Company's working capital line of credit,
and it matured July 1, 1999. Coincident with the changes with respect to the
Bridge Loan, the Company and its lender have agreed to revised terms with
respect to the Overline. These revisions include reduction in the availability
to $3.75 million, extension of the maturity date to October 1, 1999, and
completion of an accounts receivable audit by October 1, 1999.
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The acquisition line of credit of $40.0 million, less outstanding borrowings, is
available to fund approved acquisitions through October 1999. The Company's
obligations under the acquisition line are secured by the assets acquired with
the draws under the acquisition line. Advances under the acquisition line bear
interest, payable monthly, at LIBOR plus a defined spread with respect to each
facility based upon its loan-to-value ratio and debt service coverage.
Individual advances made under the acquisition line are due three years from the
date of initial funding. As of both June 30, 1999, and August 13, 1999, the
Company has drawn $11.1 million under the acquisition line, which amount was
secured by four nursing homes, and had $28.9 million available for future
acquisitions, though additional draws are unlikely at this time.
The Company's loan agreements contain various financial covenants, the most
restrictive of which relate to net worth, cash flow, debt to equity ratio
requirements, and limits on the payment of dividends to shareholders. As of June
30, 1999, the Company was in compliance with the covenants or was negotiating
with its lenders for a waiver in the event of non-compliance.
At June 30, 1999, $29.5 million of the Company's total debt of $63.6 million was
current, meaning that it must be repaid or refinanced during the next 12 months.
These current maturities are as follows: $11.1 million under the acquisition
line, secured by four nursing homes, due in December 1999; $1.2 million mortgage
payable to a Canadian bank, secured by one nursing home, due in December 1999;
$2.6 million under the working capital line of credit, due in December 1999 and
$4.0 million under the Overline, due in October 1999; $9.4 million under the
Bridge Loan due in October 1999; and miscellaneous current maturities of $1.1
million. The Company expects to refinance the $11.1 million drawn under the
acquisition line and the $1.2 million Canadian mortgage with long-term
fixed-rate debt with the existing mortgage holders during the fall of 1999. The
Company is currently negotiating with the existing lenders to further
restructure the terms with respect to the Bridge Loan and the Overline,
including extension of their maturity dates beyond October 1, 1999. The Company
expects to repay a portion of this debt through various means such as the sale
of certain assets, refinancing mortgage debt, and through cash generated from
operations. The Company expects to repay the miscellaneous current maturities of
$1.1 million with cash generated from operations. The Company believes that it
will be successful in restructuring its debt in 1999 as described. However,
there can be no assurance that the Company's restructuring efforts will be
successful. If unsuccessful, the Company would be required to seek other equity
or debt sources that may or may not be available.
Based upon the operations of the Company, management believes that available
cash and funds generated from operations, as well as amounts available through
its banking relationships, will be sufficient for the Company to satisfy its
capital expenditures, working capital, and debt requirements for the next twelve
months. The Company has no immediate plans to acquire additional operations
other than as opportunities arise to do so through leases or other arrangements
that do not require significant, up-front cash outlays. On a longer-term basis,
management believes the Company will be able to satisfy the principal repayment
requirements on its indebtedness with a combination of funds generated from
operations and from refinancings with the existing or new commercial lenders or
by accessing capital markets.
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
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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.
Gross accounts receivable attributable to the provision of patient and resident
services at June 30, 1999 and December 31, 1998, totaled $24.5 million and $28.3
million, respectively, representing approximately 51 and 53 days in accounts
receivable, respectively. Accounts receivable from the provision of management
services was $400,000 and $387,000 at June 30, 1999 and December 31, 1998,
respectively, representing approximately 42 and 39 days in accounts receivable,
respectively.
The Company is subject to accounting losses from uncollectible receivables in
excess of its reserves. 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 and abuse. 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 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.
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,"
commencing with the first cost reporting period beginning on or after July 1,
1998. As of June 30, 1999, all of the Company's facilities had begun the PPS
transition. The BBA also contains certain measures that have and could lead to
further future reductions in Medicare therapy cost reimbursement and Medicaid
payment rates. As facts are now known, other than systemic occupancy declines,
management believes there will be little or no impact on net operations from
PPS, although
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both revenues and expenses are expected to be reduced from the levels prior to
PPS. With respect to Medicare therapy allowable cost and fee reductions, the
Company estimates that net operations was negatively impacted in 1998 and will
be further negatively impacted in 1999, but the ultimate negative impact on the
Company's operations cannot be reasonably estimated. Given the recent enactment
of the BBA, the Company is unable to predict the ultimate impact of the BBA on
its future operations. However, any reductions in government spending for
long-term health care could have an adverse effect on the operating results and
cash flows of the Company. The Company will attempt to maximize the revenues
available to it from governmental sources within the changes that will occur
under the BBA. In addition, the Company will attempt to increase revenues from
nongovernmental sources, including expansion of its assisted living and Canadian
operations.
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 six Canadian retirement
facilities (one of which is 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 June 30, 1999, Mary Margaret Hamlett resigned as Executive Vice
President, Chief Financial Officer and Secretary of the Company. Mr. Richard B.
Vacek, Jr. replaced Ms. Hamlett in those capacities effective August 16, 1999.
Ms. Hamlett also resigned as a Director of the Company coincident with her
resignation as an employee of the Company.
In addition, Mr. Charles H. Rinne joined the Company effective June 28, 1999.
Mr. Rinne is President and Chief Operating Officer of the Company.
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.
IMPACT OF THE YEAR 2000
The Company has established a Year 2000 ("Y2K") compliance committee. The
committee is charged with identifying potential problems faced by the Company as
a result of Y2K and develop
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remedial or contingency plans in anticipation of them. Working closely with the
Company's insurance carrier, the Committee has developed a formal, documented
plan to address potential Y2K problems, which is being implemented at this time.
The plan requires assessment and preparatory activity that is being addressed at
the Company's facilities.
Management has completed the management information systems conversion with
respect to its United States nursing home operations. Included in the process of
selecting hardware and software, assurances were received from the various
vendors that their products are or will be Y2K compliant. The Company continues
to evaluate other information technology areas that may be affected including
existing hardware systems. To date, no issues of a material nature have been
identified, and the costs of ensuring compliance are not expected to have a
material impact on the Company's results of operations.
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with Y2K problems
that the Company does not control. The Company has received assurances from its
major vendors that they will not be adversely impacted by this issue. There can
be no assurance that the fiscal intermediaries and governmental agencies with
which the Company transacts business and who are responsible for payment to the
Company under the Medicare and Medicaid programs, as well as other payors, will
not experience significant problems with Y2K compliance. Congress' General
Accounting Office ("GAO") has recently concluded that it is highly unlikely that
all Medicare systems will be compliant on time to ensure the delivery of
uninterrupted benefits and services into the year 2000. While the Company does
not receive payments directly from Medicare, the GAO statement could be
interpreted as applying to intermediaries from whom the Company does receive
payment. The Company intends to actively confirm the Y2K readiness status for
each of its intermediaries and other payors. However, the failure of the Company
or third parties to be fully Y2K compliant for essential systems and equipment
by January 1, 2000 could result in interruptions of normal business
transactions.
Paying agencies are only one example of dependence of the Company on the Y2K
preparedness of other entities and vendors. Other examples include the normal
flow of patient care and nutritional supplies, utilities, communications,
banking services and therapy subcontractors. Just as with the Company's own
systems, the failure of third parties to remedy Y2K problems or the failure to
address unanticipated Y2K problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
Management has reported to the Board of Directors on the Company's ability to
deal with Y2K issues. Management is mandated by the Board of Directors to
continue its evaluations of Y2K preparedness and to make periodic reports of its
assessments and plans. Contingency plans for the Company's Y2K related issues
continue to be developed, including identification of alternate suppliers and
vendors, alternate technologies, and manual systems. Management believes that it
is well-positioned to experience Y2K successfully. Costs of the Company's Y2K
preparedness programs through June 30, 1999 have not been material, and
management does not expect costs to be material in future periods. The Company
is fortunate in that the service it provides is generally custodial in nature
and lacking in a heavy dependance on highly technical biomedical equipment.
However, the worst case result of assumed non-compliance in any of several
critical areas would likely have a catastrophic impact on the Company's ability
to deliver
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its services to patients and residents in a safe manner and, consequently, on
the Company's results of operations. Should catastrophic events occur that are
out of the Company's control such as those described above, the magnitude of
that problem will affect not only the Company, but society as a whole.
The foregoing Y2K disclosure is intended to be a "Year 2000 statement" as the
term is defined in the Year 2000 Information and Readiness Disclosure Act of
1998 (the "Year 2000 Act"), and, to the extent such disclosure relates to Y2K
processing of the Company or to products or services offered by the Company, it
is also intended to be the "Year 2000 readiness disclosure," as that term is
defined in the Year 2000 Act.
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, 1998. 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. Actual results may differ materially from those set forth under
the heading "Risk Factors" in the Company's Registration Statement on Form S-1,
as amended (Registration No. 33-76150). 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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26
PART II -- OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of shareholders was held on May 14, 1999.
(c) Matters voted upon at the meeting:
- Election of Directors:
Mary Margaret Hamlett
---------------------
FOR 4,297,926
AGAINST -0-
WITHHELD 130,108
ABSTENTIONS -0-
NON-VOTING(1) 970,676
---------
ELIGIBLE SHARES 5,398,710
=========
J. Bransford Wallace
--------------------
FOR 4,296,676
AGAINST -0-
WITHHELD 131,358
ABSTENTIONS -0-
NON-VOTING(1) 970,676
---------
ELIGIBLE SHARES 5,398,710
=========
(Continuing directors include Charles W. Birkett, M.D.,
Paul Richardson, and Edward G. Nelson)
-----------
(1) Including broker non-votes.
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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27
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.
August 16, 1999
By: /s/ Charles W. Birkett
-----------------------------------------
Charles W. Birkett, M.D.
Chief Executive Officer, Interim Principal
Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to
Sign on Behalf of the Registrant
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