-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DSmkCE4/puUBNh1kmCTp+hDOwi1F23n5C9kDBSIRGHuOW3/5WuM3alEZfTjDLy/f FXVpKh9XdonmtblmTj6SOQ== 0000950144-00-006838.txt : 20000516 0000950144-00-006838.hdr.sgml : 20000516 ACCESSION NUMBER: 0000950144-00-006838 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVOCAT INC CENTRAL INDEX KEY: 0000919956 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-SKILLED NURSING CARE FACILITIES [8051] IRS NUMBER: 621559667 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12996 FILM NUMBER: 635579 BUSINESS ADDRESS: STREET 1: 277 MALLORY STATION RD STREET 2: STE 130 CITY: FRANKLIN STATE: TN ZIP: 37067 BUSINESS PHONE: 6157717575 MAIL ADDRESS: STREET 1: 227 MALLORY STATION ROAD STREET 2: SUITE 130 CITY: FRANKLIN STATE: TN ZIP: 37064 10-Q 1 ADVOCAT,INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q CHECK ONE: [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2000 -------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM _________ TO _________. COMMISSION FILE NO.: 1-12996 ------- ADVOCAT INC. - -------------------------------------------------------------------------------- (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 - -------------------------------------------------------------------------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NONE - -------------------------------------------------------------------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] 5,491,621 - -------------------------------------------------------------------------------- (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 8, 2000) 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED)
MARCH 31, DECEMBER 31, 2000 1999 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 2,878 $ 1,913 Receivables, less allowance for doubtful accounts of $5,400 and $4,958, respectively 11,936 11,719 Inventories 852 754 Prepaid expenses and other assets 1,832 813 -------- -------- Total current assets 17,498 15,199 -------- -------- PROPERTY AND EQUIPMENT, at cost 87,968 87,667 Less accumulated depreciation and amortization (20,160) (19,015) -------- -------- Net property and equipment 67,808 68,652 -------- -------- OTHER ASSETS: Deferred financing and other costs, net 852 939 Assets held for sale or redevelopment 1,476 1,476 Investments in and receivables from joint ventures 8,454 8,126 Other 1,734 1,793 -------- -------- Total other assets 12,516 12,334 -------- -------- $ 97,822 $ 96,185 ======== ========
(Continued) -2- 3 ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
MARCH 31, DECEMBER 31, 2000 1999 -------- -------- CURRENT LIABILITIES: Current portion of long-term debt $ 53,529 $ 53,098 Trade accounts payable 7,382 7,984 Accrued expenses: Payroll and employee benefits 4,143 4,001 Interest 221 221 Self-insurance reserves 3,380 3,508 Other 4,403 3,086 -------- -------- Total current liabilities 73,058 71,898 -------- -------- NONCURRENT LIABILITIES: Long-term debt, less current portion 7,762 7,827 Deferred gains with respect to leases, net 2,985 3,047 Self-insurance reserves, less current portion 2,783 2,268 Other 4,870 4,878 -------- -------- Total noncurrent liabilities 18,400 18,020 -------- -------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, $.10 par value, none issued and outstanding -- -- Common stock, authorized 20,000,000 shares, $.01 par value, 5,492,000 issued and outstanding at March 31, 2000 and December 31, 1999 55 55 Paid-in capital 15,907 15,907 Accumulated deficit (9,598) (9,695) -------- -------- Total shareholders' equity 6,364 6,267 -------- -------- $ 97,822 $ 96,185 ======== ========
The accompanying notes are an integral part of these interim consolidated balance sheets. -3- 4 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ------- -------- REVENUES: Patient revenues 35,972 $ 36,854 Resident revenues 10,425 8,905 Management fees 901 919 Interest 40 34 ------- -------- Net revenues 47,338 46,712 ------- -------- EXPENSES: Operating 36,425 37,723 Lease 5,276 4,901 General and administrative 2,817 2,735 Interest 1,454 1,307 Depreciation and amortization 1,234 1,148 ------- -------- Total expenses 47,206 47,814 ------- -------- INCOME (LOSS) BEFORE INCOME TAXES 132 (1,102) PROVISION (BENEFIT) FOR INCOME TAXES 47 (396) ------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 85 (706) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -0- (277) ------- -------- NET INCOME (LOSS) $ 85 $ (983) ======= ======== BASIC EARNINGS (LOSS) PER SHARE: Income (loss) before accounting change $ .02 $ (.13) Cumulative effect of change in accounting principle, net of tax -- (.05) ------- -------- Net income (loss) $ .02 $ (.18) ======= ======== DILUTED EARNINGS (LOSS) PER SHARE Income (loss) before accounting change $ .02 $ (.13) Cumulative effect of change in accounting principle, net of tax -- (.05) ------- -------- Net income (loss) $ .02 $ (.18) ======= ======== WEIGHTED AVERAGE SHARES: Basic 5,492 5,399 ======= ======== Diluted 5,492 5,399 ======= ========
The accompanying notes are an integral part of these interim consolidated financial statements. -4- 5 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, --------------- 2000 1999 ---- ----- NET INCOME (LOSS) $ 85 $(983) ---- ----- OTHER COMPREHENSIVE INCOME: Foreign currency translation adjustments 19 74 Income tax expense (7) (27) ---- ----- 12 47 ---- ----- COMPREHENSIVE INCOME (LOSS) $ 97 $(936) ==== =====
The accompanying notes are an integral part of these interim consolidated financial statements. -5- 6 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ------- ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 85 $ (983) Items not involving cash: Depreciation and amortization 1,234 1,148 Provision for doubtful accounts 819 729 Equity (earnings) loss in joint ventures (59) 32 Amortization of deferred balances (150) (4) Deferred income taxes -0- (149) Write off pursuant to change in accounting principle -0- 433 Changes in other assets and liabilities: Receivables (1,036) 1,778 Inventories (99) (108) Prepaid expenses and other assets (1,026) 489 Trade accounts payable and accrued expenses 1,181 756 Other 16 (29) ------- ------- Net cash provided by operating activities 965 4,092 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (368) (1,446) Investment in TDLP -0- (157) Mortgages receivable, net 273 137 Deposits, pre-opening costs and other (207) (361) Investment in and advances to joint ventures, net (322) (273) TDLP partnership distributions 53 72 ------- ------- Net cash used in investing activities (571) (2,028) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayment of) bank line of credit 750 (3,490) Proceeds from issuance of debt obligations -0- 636 Repayment of debt obligations (384) (187) Advances from (to) TDLP, net 182 (50) Increase in lease obligations 23 47 Financing costs -0- (85) ------- ------- Net cash provided by (used in) financing activities 571 (3,129) ------- -------
(Continued) -6- 7 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ 965 $(1,065) CASH AND CASH EQUIVALENTS, beginning of period 1,913 2,347 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 2,878 $ 1,282 ======= ======= SUPPLEMENTAL INFORMATION: Cash payments of interest $ 1,519 $ 1,598 ======= ======= Cash payments (refunds) of income taxes, net $ 18 $ (443) ======= =======
Advocat received net benefit plan deposits and earnings and recorded net benefit plan liabilities of $52,000 in the three month period ended March 31, 1999. During 1999, the Company's Supplemental Executive Retire Plan ("SERP") was terminated. In connection therewith, the Company distributed the net benefit plan deposits and relieved the net benefit plan liabilities. The accompanying notes are an integral part of these interim consolidated financial statements. -7- 8 ADVOCAT INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2000 AND 1999 1. BUSINESS Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. As of March 31, 2000, the Company operates 120 facilities consisting of 65 nursing homes with 7,307 licensed beds and 55 assisted living facilities with 5,412 units. The Company owns seven nursing homes, leases 36 others, and manages 22 nursing homes. The Company owns 16 assisted living facilities, leases 25 others, and manages the remaining 14 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 14 nursing homes and 22 assisted living facilities in Canada. The Company operates facilities in Alabama, Arkansas, Florida, Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia and Ontario. In recent periods, the long-term health care environment has undergone substantial change with regards to reimbursement and other payor sources, compliance regulations, competition among other health care providers and relevant patient liability issues. The Company continually monitors these industry developments as well as other factors that affect its business. See Item 2 for further discussion of recent changes in the long-term health care industry and the related impact on the operations of the Company. 2. BASIS OF FINANCIAL STATEMENTS The interim consolidated financial statements for the three month periods ended March 31, 2000 and 1999, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all adjustments necessary to present fairly the financial position at March 31, 2000 and the results of operations and the cash flows for the three month periods ended March 31, 2000 and 1999. -8- 9 The results of operations for the three month periods ended March 31, 2000 and 1999 are not necessarily indicative of the operating results for the entire respective years. These interim financial statements should be read in connection with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has a working capital deficit of $55.6 million as of March 31, 2000. The Company also has limited resources available to meet its operating, capital expenditure and debt service requirements during 2000. As of December 31, 1999, and through the date of the filing of this Form 10-Q, the Company is not in compliance with certain debt covenants which would allow the holders of substantially all of the Company's debt to demand immediate principal repayments. Although the Company does not anticipate that such demand will be made, the continued forbearance on the part of the Company's lenders cannot be assured at this time. Accordingly, the Company has classified the related debt principal amounts as current liabilities in the accompanying interim consolidated financial statements as of March 31, 2000, and December 31, 1999. Given that events of default exist under the Company's working capital line of credit, there can be no assurance that the lender will continue to provide working capital advances. The Company is also not in compliance with certain covenants applicable to the lease agreements covering a majority of its United States nursing facilities. Under the agreements, the lessor has the right to terminate the lease agreements and seek recovery of any related financial losses as well as other remedies. At a minimum, the Company's cash requirements over the next 12 months include funding operations, capital expenditures, scheduled debt service and working capital requirements. No assurance can be given that the Company will have sufficient cash to meet its requirements for the next 12 months. The Company is currently discussing potential restructuring and refinancing alternatives with its lenders and primary lessor. If the Company's lenders force immediate repayment, the Company would not be able to repay the related debt outstanding. The Company is unable to predict if it will be successful in reducing operating losses, in negotiating waivers, amendments, or refinancings of outstanding debt or lease commitments, or if the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flow from its operations or successfully negotiate debt or lease amendments, it will explore a variety of other options, including, but not limited to, other sources of equity or debt refinancings, asset dispositions, or relief under the United States bankruptcy code. These factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset carrying amounts or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern. -9- 10 3. CHANGE IN ACCOUNTING PRINCIPLE In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 127, "Deferral of the Effective Date of SFAS No. 133," is effective for fiscal quarters beginning after June 15, 2000. The impact of the adoption of SFAS No. 133 is not expected to have a material impact on the Company's results of operations or financial position. Effective January 1, 1999, the Company adopted Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5, issued by the Accounting Standards Executive Committee, requires that the cost of start-up activities be expensed as these costs are incurred. Start- up activities include one-time activities and organization costs. Upon adoption, the Company incurred a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the write off of all previously deferred balances. This write off has been reported as the cumulative effect of a change in accounting principle in the accompanying interim consolidated statement of operations. 4. RECLASSIFICATIONS Certain amounts in the 1999 interim financial statements have been reclassified to conform with the 2000 presentation. 5. OTHER COMPREHENSIVE INCOME The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Information with respect to the accumulated other comprehensive income balance is presented below:
THREE MONTHS ENDED MARCH 31, ------------------------ 2000 1999 --------- --------- Foreign currency items: Beginning balance $(173,000) $(412,000) Current-period change, net of income tax 12,000 47,000 --------- --------- Ending balance $(161,000) $(365,000) ========= =========
Positive amounts represent unrealized gains and negative amounts represent unrealized losses. -10- 11 6. OPERATING SEGMENT INFORMATION The Company has three reportable segments: U.S. nursing homes, U.S. assisted living facilities, and Canadian operations, which consists of both nursing home and assisted living services. Management evaluates each of these segments independently due to the geographic, reimbursement, marketing, and regulatory differences between the segments. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses and foreign exchange gains and losses. The following information is derived from the Company's segments' internal financial statements and includes information related to the Company's unallocated corporate revenues and expenses:
THREE MONTHS ENDED MARCH 31, ---------------------- (IN THOUSANDS) 2000 1999 -------- -------- Net revenues: U.S. nursing homes $ 35,376 $ 36,516 U.S. assisted living facilities 8,033 6,622 Canadian operations 3,930 3,627 Corporate (1) (53) -------- -------- Total $ 47,338 $ 46,712 ======== ======== Depreciation and amortization: U.S. nursing homes $ 696 $ 602 U.S. assisted living facilities 423 442 Canadian operations 98 85 Corporate 17 19 -------- -------- Total $ 1,234 $ 1,148 ======== ======== Operating income (loss): U.S. nursing homes $ 227 $ (1,035) U.S. assisted living facilities 104 53 Canadian operations 388 396 Corporate (587) (516) -------- -------- Total $ 132 $ (1,102) ======== ========
MARCH 31, DECEMBER 31, 2000 1999 -------- -------- Long-lived assets: U.S. nursing homes $ 32,362 $ 32,777 U.S. assisted living facilities 34,053 34,332 Canadian operations 12,775 12,933 Corporate 1,134 944 -------- -------- Total $ 80,324 $ 80,986 ======== ======== Total assets: U.S. nursing homes $ 54,805 $ 55,796 U.S. assisted living facilities 36,798 36,309 Canadian operations 16,195 16,737 Corporate 1,719 1,134 Eliminations (11,695) (13,791) -------- -------- Total $ 97,822 $ 96,185 ======== ========
-11- 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. The Company completed its initial public offering in May 1994; however, its operational history can be traced to February 1980 through common senior management who were involved in different organizational structures. As of March 31, 2000, the Company operates 120 facilities, consisting of 65 nursing homes with 7,307 licensed beds and 55 assisted living facilities with 5,412 units. In comparison, at March 31, 1999, the Company operated 119 facilities composed of 66 nursing homes containing 7,458 licensed beds and 53 assisted living facilities containing 4,793 units. As of March 31, 2000, the Company owns seven nursing homes, leases 36 others and manages the remaining 22 nursing homes. Additionally, the Company owns 16 assisted living facilities, leases 25 others and manages the remaining 14 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 14 nursing homes and 22 assisted living facilities in Canada. Basis of Financial Statements. The Company's patient and resident revenues consist of the fees charged for the care of patients in the nursing homes and residents of the assisted living facilities owned and leased by the Company. Management fee revenues consist of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms of the Company's management agreements, which generally provide for management fees ranging from 3.5% to 6.0% of the net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the average occupancy level rates of the managed facilities. The Company's operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing homes and assisted living facilities owned and leased by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions, including the costs incurred in providing management services to other owners. The Company's depreciation, amortization and interest expenses include all such expenses across the range of the Company's operations. -12- 13 RESULTS OF OPERATIONS The following tables present the unaudited interim statements of operations and related data for the three months ended March 31, 2000 and 1999.
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 CHANGE % ------- -------- ------- ------ REVENUES: Patient revenues $35,972 $ 36,854 (882) (2.4) Resident revenues 10,425 8,905 1,520 17.1 Management fees 901 919 (18) (2.0) Interest 40 34 6 17.6 ------- -------- ------ Net revenues 47,338 46,712 626 1.3 ------- -------- ------ EXPENSES: Operating 36,425 37,723 (1,298) (3.4) Lease 5,276 4,901 375 7.7 General and administrative 2,817 2,735 82 3.0 Interest 1,454 1,307 147 11.2 Depreciation and amortization 1,234 1,148 86 7.5 ------- -------- ------ Total expenses 47,206 47,814 (608) (1.3) ------- -------- ------ INCOME (LOSS) BEFORE INCOME TAXES 132 (1,102) 1,234 N/A PROVISION (BENEFIT) FOR INCOME TAXES 47 (396) 443 N/A ------- -------- ------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 85 (706) 791 N/A CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -0- (277) 277 N/A ------- -------- ------ NET INCOME (LOSS) $ 85 $ (983) 1,068 N/A ======= ======== ======
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED MARCH 31, -------------------- 2000 1999 ------ ------ REVENUES: Patient revenues 76.0% 78.9% Resident revenues 22.0 19.0 Management fees 1.9 2.0 Interest 0.1 0.1 ------ ------ Net revenues 100.0% 100.0% ------ ------ OPERATING EXPENSES: Operating 76.9 80.8 Lease 11.1 10.5 General and administrative 6.0 5.8 Interest 3.1 2.8 Depreciation and amortization 2.6 2.5 ------ ------ Total expenses 99.7 102.4 ------ ------ INCOME (LOSS) BEFORE INCOME TAXES .3 (2.4) PROVISION (BENEFIT) FOR INCOME TAXES .1 (0.9) ------ ------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE .2 (1.5) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -- (0.6) ------ ------ NET INCOME (LOSS) .2% (2.1)% ====== ======
-13- 14 THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31, 1999 Medicare Reimbursement Changes. During 1997, the Federal government enacted the Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The BBA requires that nursing homes transition to a prospective payment system ("PPS") under the Medicare program during a three-year "transition period," which began for most of the Company's facilities on January 1, 1999. In general, PPS provides a standard payment for Medicare Part A services to all providers regardless of their current costs. PPS creates an incentive for providers to reduce their costs, and management has reduced operating expenses in an effort to offset the revenue reductions resulting from PPS. Revenues and expenses have been reduced significantly from the levels prior to PPS. Cost restrictions placed on the provision of rehabilitation (ancillary) services as a result of the BBA have also been significant. Beginning in January 1998, the allowable costs for cost reimbursement components of Medicare Part B services became subject to a limitation factor of 90.0% of actual cost. In 1999, the cost reimbursement system for rehabilitation services has been replaced by a system of fee screens that effectively limit reimbursement and place caps on the maximum fees that may be charged for therapy services. Historically, the Company subcontracted the provision of these therapy services. However, in response to the deep cuts in fees for service, the Company's therapy subcontractor exited the business. In June 1999, the Company began providing such services in-house. The Company anticipates that this will further negatively impact operations, although the ultimate effect cannot yet be reasonably estimated. These changes with respect to Part B reimbursement have combined to cause a dramatic decrease in the Company's ancillary services revenues and expenses. To date, one of the major impacts on the Company from PPS and other BBA reimbursement changes has been the indirect impact of Medicare occupancy declines, which have reduced the amount of overhead absorbed under the Company's Medicare operations. With respect to Medicare therapy allowable cost and fee reductions, the Company estimates that net operations have been negatively impacted in both 2000 and 1999 and will continue to be negatively impacted beyond 2000 as a result of the changes brought about under BBA. However, since PPS and other changes brought about by the BBA are still an evolving process, the ultimate impact of the BBA cannot be known with certainty at this time. These changes that have occurred as a result of the administrative implementation of the guidelines contained in the BBA have affected the entire long-term care industry. Under the BBA, Medicare expenditures by the Federal government have been cut approximately 20.0%. This has been a sudden, drastic blow to the industry. Other providers who relied more heavily on the provision of services to higher acuity patients have been impacted more severely than the Company. There have already been several major bankruptcy filings. Without remediation, the long-term effect on the industry is expected to be catastrophic. As the impact of these changes upon both providers and beneficiaries has become known, there has been growing political awareness of a need to re-examine the drastic cuts that have been implemented. On November 29, 1999 President Clinton signed into law a budget agreement that restores $2.7 billion in Medicare funding over three years. The bill contains several components -14- 15 that become effective at various times over the three year period. As a result of the legislation, individual nursing facilities will have the option, for cost reporting years beginning after December 29, 1999, of continuing under the current PPS transition formula or adopting the full federal PPS per diem. During 2000, the Company has elected to adopt the full federal PPS per diem on several facilities. In addition, the bill provides a two-year moratorium on the Part B therapy caps beginning January 1, 2000 , and it also provides increases in the per diems for the care of certain groups of patients. The Company is continuing to evaluate the impact of the legislation on its operations. However, there is no expectation by management that the relief will be sufficient to restore the economic viability the industry needs. While federal regulations do not provide states with grounds to curtail funding of their Medicaid cost reimbursement programs due to state budget deficiencies, states have nevertheless curtailed funding in such circumstances in the past. The United States Supreme Court ruled in 1990 that healthcare providers could use the Boren Amendment to require states to comply with their legal obligation to adequately fund Medicaid programs. The BBA repeals the Boren Amendment and authorizes states to develop their own standards for setting payment rates. It requires each state to use a public process for establishing proposed rates whereby the methodologies and justifications used for setting such rates are available for public review and comment. This requires facilities to become more involved in the rate setting process since failure to do so may interfere with a facility's ability to challenge rates later. As a result, the Company expects states to continue to attempt to reduce spending under the Medicaid programs. The Company will attempt to maximize the revenues available to it from governmental sources within the changes that have occurred and will continue to occur under the BBA. In addition, the Company will attempt to increase revenues from non-governmental sources, including expansion of its assisted living and Canadian operations to the extent capital is available to do so, if at all. However, current levels of, or further reductions in, government spending for long-term health care are expected to continue to have an adverse effect on the operating results and cash flows of the Company. Revenues. Net revenues increased to $47.3 million in 2000 from $46.7 million in 1999, an increase of $626,000, or 1.3%. Patient revenues decreased to $36.0 million in 2000 from $36.9 million in 1999, a decrease of $882,000, or 2.4%. The decrease in patient revenues is due primarily to a 3.4% decline in occupancy in 2000 as compared to 1999. Resident revenues increased to $10.4 million in 2000 from $8.9 million in 1999, an increase of $1.5 million, or 17.1%. The increase in resident revenues is due primarily to the addition of three assisted living facilities in North Carolina. There was a 1.0% decline in patient and resident days. A decrease of approximately 23,000 patient days was partially offset by an increase of approximately 18,000 resident days. As to payor types, there were decreases of approximately 5,000 and 1,500 days for Medicaid and private pay patients, respectively, representing a decrease of 1.0% from 1999. There was an increase of 1,500 Medicare patient days, or 7.0%, from 1999. As a percent of patient and resident revenues, Medicare decreased to 15.7% in 2000 from 15.8% in 1999 while Medicaid and similar programs increased to 66.2% from 65.4% in 1999. Ancillary service revenues, prior to contractual allowances, decreased to $5.8 million in 2000 from $7.7 million in 1999, a decrease of $1.9 million or 24.7%. The decrease is primarily attributable to reductions in revenue availability under Medicare and is consistent with the Company's -15- 16 expectations. Although the $1,500 per patient annual ceiling has now been lifted for a two year period on physical, speech and occupational therapy services, the impact of the relief is not expected to be sufficient to offset the substantial losses that have been incurred by the Company and the long-term care industry from the provision of therapy services. The ultimate effect on the Company's operations cannot be predicted at this time because the extent and composition of the ancillary cost limitations are subject to change. Operating Expense. Operating expense decreased to $36.4 million in 2000 from $37.7 million in 1999, a decrease of $1.3 million, or 3.4%. As a percent of patient and resident revenues, operating expense decreased to 78.5% in 2000 from 82.4% in 1999. The decrease is primarily attributable to cost reductions implemented in response to the Medicare reimbursement changes (that is, reduced provision of therapy services and in the costs to provide them). In 1999, the Company also recorded lease termination costs and the write-off of miscellaneous assets of $135,000 and $189,000, respectively. The largest component of operating expenses is wages, which increased to $19.9 million in 2000 from $18.6 million in 1999, an increase of $1.3 million, or 7.0%. Savings from staff reductions have been offset by increased wage levels due to higher labor markets in most of the areas in which the Company operates. The increase in wages is generally in line with inflation. The Company's provision for doubtful accounts increased to $892,000 in 2000 from $780,000 in 1999, an increase of $112,000, or 14.3%. Lease Expense. Lease expense increased to $5.3 million in 2000 from $4.9 million in 1999, an increase of $375,000, or 7.7%. Of this increase, $235,000 is attributable to three new assisted living centers which became operational beginning May 1999. Adjustments in the Company's lease agreements are generally tied to inflation. General and Administrative Expense. General and administrative expense increased to $2.8 million in 2000 from $2.7 million in 1999, an increase of $82,000, or 3.0%. As a percent of total net revenues, general and administrative expense increased to 6.0% in 2000 compared with 5.8% in 1999. Interest Expense. Interest expense increased to $1.4 million in 2000 from $1.3 million in 1999, an increase of $147,000, or 11.2%. Depreciation and Amortization. Depreciation and amortization expenses increased to $1.2 million in 2000 from $1.1 million in 1999, an increase of $86,000, or 7.5%. Change in Accounting Principle. Effective January 1, 1999, the Company adopted Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5, issued by the Accounting Standards Executive Committee, requires that the cost of start-up activities be expensed as these costs are incurred. Start-up activities include one-time activities and organization costs. Upon adoption, the Company incurred a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the write off of all previously deferred balances. This write off has been reported as the cumulative effect of a change in accounting principle in accordance with the provisions of SOP 98-5. -16- 17 Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a result of the above, the income before income taxes and the cumulative effect of the change in accounting principle was $132,000 in 2000 as compared with loss of $1.1 million in 1999, an increase of $1.2 million. The effective combined federal, state and provincial income tax rate was 36.0% in 2000 and 1999. The net income after taxes and the cumulative effect of the change in accounting principle was $85,000 in 2000 as compared with net loss of $1.0 million in 1999, an increase of $1.1 million. The basic and diluted earnings (loss) per share were each $.02 in 2000 as compared with $(.18) per share in 1999. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2000, the Company had negative working capital of $55.6 million compared with negative working capital of $56.7 million at December 31, 1999, and a current ratio of 0.2 at March 31, 2000 and December 31, 1999. The negative working capital results primarily from the classification of a majority of the Company's debt as current liabilities. The classification of a majority of the Company's debt as current maturities is due to the Company's non-compliance with debt covenants in various debt agreements, including net worth, cash flow and debt-to-equity ratio requirements. Cross-default or material adverse change provisions contained in the agreements allow the holders of substantially all of the Company's debt to demand immediate repayment. As of March 31, 2000, and through the date of the filing of this Report on Form 10-Q, the Company had not obtained waivers of the non-compliance. Based on regularly scheduled debt service requirements, the Company has a total of $27.8 million of debt that must be repaid or refinanced within the next 12 months. However, as a result of the covenant non-compliance and other cross-default provisions, the Company has classified a total of $53.5 million of debt as current liabilities as of March 31, 2000. The Company would not be able to repay this portion of its indebtedness if the applicable lenders demanded repayment. Of the Company's 61 leased facilities, 30 are covered by a Master Lease and other leases with Omega Healthcare Investors, Inc. ("Omega"). Under the terms of the Master Lease, the Company must comply with certain covenants based on total shareholders' equity of the Company as defined in the Master Lease. The Company was not in compliance with these covenants as of March 31, 2000 and through the date of the filing of this Report on Form 10-Q. As a result of the non-compliance, Omega has the right to terminate all of its leases with the Company and seek recovery of any related financial losses, as well as other miscellaneous remedies. The Company has not obtained waivers of non-compliance. The Company and Omega are currently in negotiations with respect to modification of the existing lease agreements. No assurance can be given that the Company will be able to renegotiate the terms of the Master Lease. In addition, no assurance can be given that the Company will achieve profitable operations in the near term or that the Company can increase growth in net revenues. The Company cannot assure that internally generated cash flows from earnings and existing cash balanced will be sufficient to fund existing debt obligations on future capital and working capital requirements through fiscal year 2000. The Company is currently discussing potential restructuring, modification and refinancing alternatives with its lenders and primary lessor. If the Company's lenders force immediate repayment, the Company would not be able to repay the related debt outstanding. The Company is unable to predict if it will be successful in reducing operating losses, in negotiation waivers, amendments, or refinancings of outstanding debt or lease commitments, or that the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the -17- 18 related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flow from its operations or successfully negotiate debt or lease amendments, it will explore a variety of other options, including, but not limited to, equity financing from outside investors, asset dispositions or relief under the United States bankruptcy code. The Company has a working capital line of credit and a bridge loan which had combined amounts outstanding of $14.6 million at March 31, 2000. All of the amounts outstanding with this lender had a maturity date of February 28, 2000, which had been previously extended. The lender has continued to fund current operations under the working capital line of credit and on May 15, 2000, the maturity date of these loans was extended to June 30, 2000. The Company and lender are currently negotiating a restructuring of this financing. The Company has an acquisition line of credit which had amounts outstanding of $11.1 million at March 31, 2000. No further draws are available under the acquisition line of credit. Amounts outstanding under the acquisition line of credit had a scheduled maturity date of December 1, 1999, which the lender extended to April 30, 2000. On May 2, 2000, the lender again extended the maturity date to June 30, 2000. The Company and the lender are negotiating replacement long-term financing. Net cash provided by operating activities totaled $1.0 million and $4.1 million in the three month periods ended March 31, 2000 and 1999, respectively. These amounts primarily represent the cash flows from net operations plus changes in non-cash components of operations and by working capital changes. Net cash used in investing activities totaled $571,000 and $2.0 million the three months periods ended March 31, 2000 and 1999, respectively. These amounts primarily represent purchases of property plant and equipment, investments in and advances to joint ventures and additional investments in TDLP, a limited partnership for which the Company serves as the general partner. The Company has used between $2.7 million and $5.2 million for capital expenditures in the three calendar years ending December 31, 1999. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ended December 31, 2000, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $3.2 million, including $800,000 for non-routine projects. Net cash provided by (used in) financing activities totaled $571,000 and $(3.1) million the three month periods ended March 31, 2000 and 1999, respectively. The net cash provided from financing activities primarily represents net proceeds from issuance and repayment of debt. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare, Medicaid and other third-party revenue sources. The Company's future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company's liquidity. Continued efforts by governmental and third- -18- 19 party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the Company in the processing of its invoices, could adversely affect the Company's liquidity and results of operations. Net accounts receivable attributable to the provision of patient and resident services at March 31, 2000 and December 31, 1999, totaled $16.6 million and $15.8 million, respectively, representing approximately 33 and 31 days in accounts receivable, respectively. Accounts receivable from the provision of management services were $207,000 and $412,000 at March 31, 2000 and December 31, 1999, respectively representing approximately 21 and 42 days in accounts receivable, respectively. The allowance for bad debt was $5.4 million and $5.0 million at March 31, 2000 and December 31, 1999, respectively. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, agings of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. The Company continues to evaluate and implement additional procedures to strengthen its collection efforts and reduce the incidence of uncollectible accounts. HEALTH CARE INDUSTRY The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, and Medicare and Medicaid fraud abuse. Changes in these laws and regulations, such as reimbursement policies of Medicare and Medicaid programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions, could have a material adverse effect on the Company's consolidated financial position, results of operations, and cash flows. Future federal budget legislation and federal and state regulatory changes may negatively impact the Company. All of the Company's facilities are required to obtain annual licensure renewal and are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's license and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities, the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of medical care. Such requirements are subject to change. There can be no assurance that, in the future, the Company will be able to maintain such licenses for its facilities or that the Company will not be required to expend significant sums in order to do so. Recently, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations. Violations of these laws and regulations could result in expulsion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes that the Company is in -19- 20 compliance with fraud and abuse laws and regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. In 1999 and 2000, the Company did experience the increased regulatory scrutiny that has been exerted on the industry in the form of increased fine and penalties. FOREIGN CURRENCY TRANSLATION The Company has obtained its financing primarily in U.S. dollars; however, it incurs revenues and expenses in Canadian dollars with respect to Canadian management activities and operations of the Company's eight Canadian retirement facilities (three of which are owned) and two owned Canadian nursing homes. Although not material to the Company as a whole, if the currency exchange rate fluctuates, the Company may experience currency translation gains and losses with respect to the operations of these activities and the capital resources dedicated to their support. While such currency exchange rate fluctuations have not been material to the Company in the past, there can be no assurance that the Company will not be adversely affected by shifts in the currency exchange rates in the future. EXECUTIVE MANAGEMENT CHANGES Effective January 28, 2000, Mr. Richard B. Vacek, Jr., resigned his position as Executive Vice President, Chief Financial Officer and Secretary of the Company. Mr. James F. Mills, Jr., Vice President and Controller, replaced Mr. Vacek as Secretary and Acting Chief Financial Officer. STOCK EXCHANGE On November 10, 1999, the Company's stock began being quoted on the NASD's OTC Bulletin Board under the symbol AVCA. Previously, the Company's common stock was traded on the New York Stock Exchange under the symbol AVC. The Company's common stock is also traded on the Toronto Stock Exchange ("TSE") under the symbol AVCU. However, the Company no longer meets the listing requirements of the TSE and, therefore, effective May 30, 2000, will no longer trade on the TSE. -20- 21 INFLATION Management does not believe that the Company's operations have been materially affected by inflation. The Company expects salary and wage increases for its skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry. To date, these increases as well as normal inflationary increases in other operating expenses have been adequately covered by revenue increases. FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis provides information deemed by Management to be relevant to an assessment and understanding of the Company's consolidated results of operations and its financial condition. It should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 1999. Certain statements made by or on behalf of the Company, including those contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties including, but not limited to, changes in governmental reimbursement or regulation, health care reforms, the increased cost of borrowing under the Company's credit agreements, covenant waivers from the Company's lenders, possible amendments to the Company's credit agreements, the impact of future licensing surveys, the ability to execute on the Company's acquisition program, both in obtaining suitable acquisitions and financing therefor, changing economic conditions as well as others. Investors also should refer to the risks identified in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as risks identified in the Company's Form 10-K for the year ended December 31, 1999 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, the Company can give no assurances that these forward- looking statements will, in fact, transpire and, therefore, cautions investors not to place undue reliance on them. Actual results may differ materially from those described in such forward-looking statements. Such cautionary statements identify important factors that could cause the Company's actual results to materially differ from those projected in forward-looking statements. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. -21- 22 PART II -- OTHER INFORMATION Item 3. Defaults Upon Senior Securities. The Company is not currently in compliance with certain covenants of its loan agreements and certain other indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits filed as part of the report on Form 10-Q are listed in the Exhibit Index immediately following the signature page. (b) Reports on Form 8-K: None. -22- 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVOCAT INC. May 15, 2000 By: /s/James F. Mills, Jr. ----------------------------------------------- James F. Mills, Jr. Principal Financial Officer and Chief Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant -23- 24
Exhibit Number Description of Exhibits - ------- ----------------------- 3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.3 Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form 8-A filed March 30, 1995). 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1). 4.2 Rights Agreement dated March 13, 1995, between the Company and Third National Bank in Nashville (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 13, 1995). 4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995). 4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1 to Form 8-A filed March 30, 1995). 4.5 Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998). 10.1 Employment Agreement dated January 1, 2000 by and between the Company and James F. Mills, Jr. 27 Financial Data Schedule (for SEC use only).
EX-10.1 2 EMPLOYMENT AGREEMENT DATED 1/1/2000 1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Agreement made effective as of January 1, 2000 by and between ADVOCAT INC., a Delaware corporation (the "Company"), and James F. Mills, Jr. (the "Employee"). In consideration of the mutual covenants contained in this Agreement, the parties hereby agree as follows: SECTION I EMPLOYMENT The Company agrees to employ the Employee and the Employee agrees to be employed by the Company for the Period of Employment as provided in Section III.A. below and upon the terms and conditions provided in the Agreement. SECTION II POSITION AND RESPONSIBILITIES During the Period of Employment, the Employee agrees to serve as Corporate Comptroller of the Company and to be responsible for the typical management responsibilities related to such a position and such other responsibilities as may be assigned to Employee from time to time by the Chief Executive Officer, Chief Financial Officer or the Board of Directors of the Company. SECTION III TERMS AND DUTIES A. Period of Employment The period of Employee's employment under this Agreement will commence as of the date hereof and shall continue through December 31, 2000, subject to extension or termination as provided in this Agreement ("Period of Employment"). On each anniversary of the commencement of the Period of Employment, the period of Employee's employment shall be extended for additional one (1) year periods, unless either party gives notice thirty (30) days in advance of the expiration of the then current period of employment of such party's intent not to extend the Period of Employment. B. Duties During the Period of Employment, the Employee shall devote all of his business time, attention and skill to the business and affairs of the Company and its subsidiaries. The 2 Employee will perform faithfully the duties which may be assigned to him from time to time by the Chief Executive Officer, the Chief Financial Officer or the Board of Directors. SECTION IV COMPENSATION AND BENEFITS A. Compensation For all services rendered by the Employee in any capacity during the Period of Employment, the Employee shall be compensated as follows: 1. Base Salary The Company shall pay the Employee a base salary ("Base Salary") as follows: One Hundred Thousand Dollars ($100,000) per annum. Base Salary shall be payable according to the customary payroll practices of the Company but in no event less frequently than twice each month. The base salary shall be reviewed annually and shall be subject to increase according to Employee's individual performance, the Company's financial results, prevailing market conditions and other policies and practices adopted by the Company from time to time. B. Annual Incentive Awards The Company will, in its discretion, pay the Employee annual incentive compensation awards as may be granted by the Board or a Compensation Committee to the Employee up to 25% of Base Salary, conditional upon achievement of pre-agreed performance goals and objectives. C. Additional Benefits The Employee will be entitled to participate in all compensation or employee benefit plans or programs and receive all benefits and perquisites for which any salaried employees of the Company at an equivalent level to Employee are eligible under any existing or future plan or program established by the Company for such employees. The Employee will participate to the extent permissible under the terms and provisions of such plans or programs in accordance with program provisions. These may include group hospitalization, health, dental care, life or other insurance, tax qualified pension, car allowance, savings, thrift and profit sharing plans, termination pay programs, sick leave plans, travel or accident insurance, disability insurance, and contingent compensation plans including capital accumulation programs, stock purchase programs and stock option plans. Nothing in this Agreement will preclude the Company from amending or terminating any such plans or programs. The Employee will be entitled to an annual three-week paid vacation. 2 3 SECTION V BUSINESS EXPENSES The Company will reimburse the Employee for all reasonable travel and other expenses incurred by the Employee in connection with the performance of his duties and obligations under this Agreement. SECTION VI DISABILITY A. In the event of disability of the Employee during the Period of Employment, the Company will continue to pay the Employee according to the compensation provisions of this Agreement during the period of his disability, until such time as Employee's long term disability insurance benefits are available. However, in the event the Employee is disabled for a continuous period of six (6) months after the Employee first becomes disabled, the Company may terminate the employment of the Employee. In this case, normal compensation will cease except for earned but unpaid Base Salary and Incentive Compensation Awards which would be payable on a pro-rated basis for the year in which the disability occurred. In the event of such termination, all unvested stock options held by Employee shall be deemed fully vested on the date of such termination. B. During the period the Employee is receiving payments of either regular compensation or disability insurance described in this Agreement and as long as he is physically and mentally able to do so, the Employee will furnish information and assistance to the Company and from time to time will make herself available to the Company to undertake assignments consistent with his prior position with the Company and his physical and mental health. If the Company fails to make a payment or provide a benefit required as part of the Agreement, the Employee's obligation to fulfill information and assistance will end. C. The term "disability" will have the same meaning as under any disability insurance provided pursuant to this Agreement or otherwise. SECTION VII DEATH In the event of the death of the Employee during the Period of Employment, the Company's obligation to make payments under this Agreement shall cease as of the date of death, except for earned but unpaid Base Salary and Incentive Compensation Awards which will be paid on a prorated basis for that year. The Employee's designated beneficiary will be entitled to receive the proceeds of any life or other insurance or other death benefit programs provided in this Agreement. 3 4 SECTION VIII EFFECT OF TERMINATION OF EMPLOYMENT A. If the Employee's employment terminates due to either a Without Cause Termination or a Constructive Discharge, as defined later in this Agreement, the Company will continue to pay the Employee his Base Salary in effect at such time for a six month period following such Termination or Constructive Discharge. Earned but unpaid Base Salary and Incentive Compensation Awards will be paid in a lump sum at such time. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will be continued for six (6) months. If the Employee's employment terminates due to either a Without Cause Termination or a Constructive Discharge, or pursuant to Section XI, all stock options ("Options"), if any, granted to the Employee under the Company's 1991 Non-Qualified Stock Option Plan or other stock option program or plan (the "Plan") shall be deemed vested, and the Company shall cause the Options, if any, to remain exercisable for six (6) months from the date of termination. B. If the Employee's employment terminates due to a Termination for Cause, earned but unpaid Base Salary will be paid on a pro-rated basis for the year in which the termination occurs. No other payments will be made or benefits provided by the Company. C. Upon termination of the Employee's employment other than for reasons due to death, disability, or pursuant to Paragraph A of this Section or Section XI, the Period of Employment and the Company's obligation to make payments under this Agreement will cease as of the date of the termination except as expressly defined in this Agreement. In the event that the Employee desires to terminate this Agreement, except as otherwise expressly stated herein, the Employee shall be required to give the Company at least thirty (30) days' prior written notice prior to the effective date of such termination. D. For this Agreement, the following terms have the following meanings: 1. "Termination for Cause" means termination of the Employee's employment by the Company's Board of Directors acting in good faith by the Company by written notice to the Employee specifying the event relied upon for such termination, due to the Employee's serious, willful misconduct with respect to his duties under this Agreement, including but not limited to conviction for a felony or perpetration of a common law fraud, which has resulted or is likely to result in material economic damage to the Company. 2. "Constructive Discharge" means termination of the Employee's employment by the Employee due to a failure of the Company to fulfill its obligations under this Agreement in any material respect including any reduction of the Employee's Base Salary or other compensation other than reductions applicable to all employees of the Company or failure to appoint or reappoint the Employee to the position specified in Section II hereof, or other material change by the Company in the functions, duties or responsibilities of the position which would reduce the ranking or level, responsibility, importance or scope of the position. The Employee will provide the Company a 4 5 written notice which describes the circumstances being relied on for the termination with respect to the Agreement within ninety (90) days after the event giving rise to the notice. The Company will have thirty (30) days to remedy the situation prior to the Termination for Constructive Dismissal. 3. "Without Cause Termination" means termination of the Employee's employment by the Company (a) other than due to death, disability, Termination for Cause or pursuant to Section XI; or (b) upon expiration of the Period of Employment as a result of the giving of notice by the Company the of its intent not to extend the Period of Employment as provided in Section III.A. In the event of a Without Cause Termination, the shall be required to give the Employee at least thirty (30) days' notice prior to the effective date of such termination. SECTION IX OTHER DUTIES OF THE EMPLOYEE DURING AND AFTER THE PERIOD OF EMPLOYMENT A. The Employee will, with reasonable notice during or after the Period of Employment, furnish information as may be in his possession and cooperate with the Company as may reasonably be requested in connection with any claims or legal actions in which the Company is or may become a party. B. The Employee recognizes and acknowledges that all information pertaining to the affairs, business, clients, customers or other relationships of the Company, as hereinafter defined, is confidential and is a unique and valuable asset of the Company. Access to and knowledge of this information are essential to the performance of the Employee's duties under this Agreement. The Employee will not during the Period of Employment or after except to the extent reasonably necessary in performance of the duties under this Agreement, give to any person, firm, association, corporation or governmental agency any information concerning the affairs, business, clients, customers or other relationships of the Company except as required by law. The Employee will not make use of this type of information for his own purposes or for the benefit of any person or organization other than the Company. The Employee will also use his best efforts to prevent the disclosure of this information by others. All records, memoranda, etc. relating to the business of the Company whether made by the Employee or otherwise coming into his possession are confidential and will remain the property of the Company. C. During the Period of Employment and for a twelve (12) month period thereafter, the Employee will not use his status with the Company to obtain loans, goods or services from another organization on terms that would not be available to him in the absence of his relationship to the Company. During the Period of Employment and for a twelve (12) month period following termination of the Period of Employment, other than termination due to a Without Cause Termination, a Constructive Discharge or termination pursuant to Section XI: the Employee will not make any statements or perform any acts intended to advance the interest of any existing or prospective competitors of the Company in any way that will injure the interest of the Company; the 5 6 Employee without prior express written approval by the Board of Directors of the Company will not directly or indirectly own or hold any proprietary interest in or be employed by or receive compensation from any party engaged in the same or any similar business in the same geographic areas the Company does business; and the Employee without express prior written approval from the Board of Directors, will not solicit any members of the then current clients of the Company or discuss with any employee of the Company information or operation of any business intended to compete with the Company. For the purposes of the Agreement, proprietary interest means legal or equitable ownership, whether through stock holdings or otherwise, of a debt or equity interest (including options, warrants, rights and convertible interests) in a business firm or entity, or ownership of more than 5% of any class of equity interest in a publicly-held company. The Employee acknowledges that the covenants contained herein are reasonable as to geographic and temporal scope. For a twelve (12) month period after termination of the Period of Employment for any reason, the Employee will not directly or indirectly hire any employee of the Company or solicit or encourage any such employee to leave the employ of the Company. D. The Employee acknowledges that his breach or threatened or attempted breach of any provision of Section IX would cause irreparable harm to the Company not compensable in monetary damages and that the Company shall be entitled, in addition to all other applicable remedies, to a temporary and permanent injunction and a decree for specific performance of the terms of Section IX without being required to prove damages or furnish any bond or other security. E. The Employee shall not be bound by the provisions of Section IX in the event of the default by the Company in its obligations under this Agreement which are to be performed upon or after termination of this Agreement. SECTION X INDEMNIFICATION, LITIGATION The Company will indemnify the Employee to the fullest extent permitted by the laws of the state of incorporation in effect at that time, or certificate of incorporation and by-laws of the Company whichever affords the greater protection to the Employee. The Employee will be entitled to any insurance proceeds related to any award, or any fees or expenses incurred in connection with any action, suit or proceeding to which he may be made a party by reason of being an officer of the Company. SECTION XI CHANGE IN CONTROL In the event there is a Change in Control of the ownership of the Company, the Employee may at any time immediately resign upon written notice to the Company. In this event, the Company shall continue to pay the Employee his Base Salary as in effect at the time of such 6 7 resignation for a six month period following such resignation. In addition, earned but unpaid Base Salary and Incentive Compensation Awards will be paid on a pro-rated basis for the year in which resignation occurs. Any Options granted to the Employee prior to termination pursuant to the Plan, but subject to vesting restrictions, will be fully vested upon a Change in Control whether or not the Employee resigns. The benefits and perquisites described in this Agreement as in effect at the date of termination of employment will also be continued for six (6) months from the effective date of termination pursuant to Change of Control. A "Change in Control" shall be deemed to have occurred if (i) a tender offer shall be made and consummated for the ownership of more than 50% of the outstanding voting securities of the Company, (ii) the Company shall be merged or consolidated with another corporation and as a result of such merger or consolidation less than 75% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the former shareholders of the Company, as the same shall have existed immediately prior to such merger or consolidation, (iii) the Company shall sell all or substantially all of its assets to another corporation which is not a wholly-owned subsidiary, or (iv) a person, within the meaning of Section 3(a)(9) or of Section 13(d)(3) (as in effect on the date hereof) of the Securities and Exchange Act of 1934 ("Exchange "Act")), shall acquire more than 50% of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record). For purposes hereof, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(1)(i) (as in effect on the date hereof) pursuant to the Exchange Act. SECTION XII WITHHOLDING TAXES The Company may directly or indirectly withhold from any payments under this Agreement all federal, state, city or other taxes that shall be required pursuant to any law or governmental regulation. SECTION XIII EFFECTIVE PRIOR AGREEMENTS This Agreement contains the entire understanding between the Company and the Employee with respect to the subject matter and supersedes any prior employment or severance agreements between the Company and its affiliates, and the Employee. 7 8 SECTION XIV CONSOLIDATION, MERGER OR SALE OF ASSETS Nothing in this Agreement shall preclude the Company from consolidating or merging into or with, or transferring all or substantially all of its assets to, another corporation which assumes this Agreement and all obligations and undertakings of the Company hereunder. Upon such a Consolidation, Merger or Sale of Assets, the term "the Company" as used will mean the other corporation and this Agreement shall continue in full force and effect. This Section XIV is not intended to modify or limit the rights of the Employee hereunder, including without limitation, the rights of Employee under Section XI. SECTION XV MODIFICATION This Agreement may not be modified or amended except in writing signed by the parties. No term or condition of this Agreement will be deemed to have been waived except in writing by the party charged with waiver. A waiver shall operate only as to the specific term or condition waived and will not constitute a waiver for the future or act on anything other than that which is specifically waived. SECTION XVI GOVERNING LAW; ARBITRATION This Agreement has been executed and delivered in the State of Tennessee and its validity, interpretation, performance and enforcement shall be governed by the laws of that state. Any dispute among the parties hereto shall be settled by arbitration in Nashville, Tennessee, in accordance with the rules then obtaining of the American Arbitration Association and judgment upon the award rendered may be entered in any court having jurisdiction thereof. SECTION XVII NOTICES All notices, requests, consents and other communications hereunder shall be in writing and shall be deemed to have been made when delivered or mailed first-class postage prepaid by registered mail, return receipt requested, or if delivered by hand, overnight delivery service or confirmed facsimile transmission, to the following: 8 9 (a) If to the Company, at 277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067, Attention: President or Chief Executive Officer, or at such other address as may have been furnished to the Employee by the Company in writing; or (b) If to the Employee, at 210 Deer Park Lane, Franklin, Tennessee 37069, or such other address as may have been furnished to the Company by the Employee in writing. SECTION XVIII BINDING AGREEMENT This Agreement shall be binding on the parties' successors, heirs and assigns. IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the date first above written. ADVOCAT INC. By:_________________________________ Title: _____________________________ EMPLOYEE: _____________________________________ James F. Mills, Jr. 9 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE INTERIM CONSOLIDATED FINANCIAL STATEMENTS OF ADVOCAT INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q FROM THE THREE MONTH PERIOD ENDED MARCH 31, 2000. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 2,878 0 17,336 5,400 852 17,498 87,968 20,160 97,822 73,058 0 0 0 55 6,309 97,822 0 47,338 0 47,206 0 0 1,454 132 47 85 0 0 0 85 .02 .02
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