-----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, V+BUgXkFAIcIzlqLAiC7gn96u2/Za89/FKNg7mvvLPVjPDkQS7oQFLDHyAlE32S6 NAtcbtciCBojZZjq/O3nAw== 0000950144-00-010586.txt : 20000922 0000950144-00-010586.hdr.sgml : 20000922 ACCESSION NUMBER: 0000950144-00-010586 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 DATE AS OF CHANGE: 20000906 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADVOCAT INC CENTRAL INDEX KEY: 0000919956 STANDARD INDUSTRIAL CLASSIFICATION: 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: 704475 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 e10-q.txt 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: JUNE 30, 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 AUGUST 11, 2000) 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ (UNAUDITED) CURRENT ASSETS: Cash and cash equivalents $ 3,595 $ 1,913 Receivables, less allowance for doubtful accounts of $5,178 and $4,958, respectively 11,546 11,719 Inventories 813 754 Prepaid expenses and other assets 1,818 813 -------- -------- Total current assets 17,772 15,199 -------- -------- PROPERTY AND EQUIPMENT, at cost 88,447 87,667 Less accumulated depreciation and amortization (21,284) (19,015) -------- -------- Net property and equipment 67,163 68,652 -------- -------- OTHER ASSETS: Deferred financing and other costs, net 790 939 Assets held for sale or redevelopment 1,476 1,476 Investments in and receivables from joint ventures 8,499 8,126 Other 1,827 1,793 -------- -------- Total other assets 12,592 12,334 -------- -------- $ 97,527 $ 96,185 ======== ========
(Continued) -2- 3 ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (CONTINUED)
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ (UNAUDITED) CURRENT LIABILITIES: Current portion of long-term debt $ 53,068 $ 53,098 Trade accounts payable 7,218 7,984 Accrued expenses: Payroll and employee benefits 4,080 4,001 Interest 115 221 Self-insurance reserves 3,381 3,508 Other 5,313 3,086 -------- -------- Total current liabilities 73,175 71,898 -------- -------- NONCURRENT LIABILITIES: Long-term debt, less current portion 7,578 7,827 Self-insurance reserves, less current portion 3,044 2,268 Deferred gains with respect to leases, net 2,924 3,047 Other 4,587 4,878 -------- -------- Total noncurrent liabilities 18,133 18,020 -------- -------- 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, 5,492,000 issued and outstanding at June 30, 2000 and December 31, 1999, respectively 55 55 Paid-in capital 15,907 15,907 Accumulated deficit (9,743) (9,695) -------- -------- Total shareholders' equity 6,219 6,267 -------- -------- $ 97,527 $ 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 JUNE 30, --------------------------- 2000 1999 ------ ------ REVENUES: Patient revenues $36,702 $ 34,352 Resident revenues 10,384 9,323 Management fees 1,125 877 Interest 51 38 ------- -------- Net revenues 48,262 44,590 ------- -------- EXPENSES: Operating 37,170 38,033 Lease 5,258 5,003 General and administrative 2,879 3,155 Interest 1,436 1,325 Depreciation and amortization 1,141 1,147 Non-recurring charges 263 -0- ------- -------- Total expenses 48,147 48,663 ------- -------- INCOME (LOSS) BEFORE INCOME TAXES 115 (4,073) PROVISION (BENEFIT) FOR INCOME TAXES 42 (1,466) ------- -------- NET INCOME (LOSS) $ 73 $ (2,607) ======= ======== BASIC EARNINGS (LOSS) PER SHARE: Net income (loss) $ .01 $ (.48) ======= ======== DILUTED EARNINGS (LOSS) PER SHARE Net income (loss) $ .01 $ (.48) ======= ======== 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 OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ------ ------ REVENUES: Patient revenues $72,674 $ 71,206 Resident revenues 20,810 18,227 Management fees 2,026 1,796 Interest 91 73 ------- -------- Net revenues 95,601 91,302 ------- -------- EXPENSES: Operating 73,596 75,756 Lease 10,534 9,904 General and administrative 5,696 5,890 Interest 2,890 2,632 Depreciation and amortization 2,375 2,295 Non-recurring charges 263 -0- ------- -------- Total expenses 95,354 96,477 ------- -------- INCOME (LOSS) BEFORE INCOME TAXES 247 (5,175) PROVISION (BENEFIT) FOR INCOME TAXES 89 (1,863) ------- -------- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 158 (3,312) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -0- (277) ------- -------- NET INCOME (LOSS) $ 158 $ (3,589) ======= ======== BASIC EARNINGS (LOSS) PER SHARE: Income (loss) before accounting change $ .03 $ (.61) Cumulative effect of change in accounting principle, net of tax -0- (.05) ------- -------- Net income (loss) $ .03 $ (.66) ======= ======== DILUTED EARNINGS (LOSS) PER SHARE Income (loss) before accounting change $ .03 $ (.61) Cumulative effect of change in accounting principle, net of tax -0- (.05) ------- -------- Net income (loss) $ .03 $ (.66) ======= ======== 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. -5- 6 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2000 1999 2000 1999 ----- ------- ----- ------- NET INCOME (LOSS) $ 115 $(2,607) $ 158 $(3,589) OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments (341) 223 (322) 297 Income tax (provision) benefit 123 (80) 116 (107) ----- ------- ----- ------- (218) 143 (206) 190 ----- ------- ----- ------- COMPREHENSIVE INCOME (LOSS) $(103) $(2,464) $ (48) $(3,399) ===== ======= ===== =======
The accompanying notes are an integral part of these interim consolidated financial statements. -6- 7 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ------ ----- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 158 $ (3,589) Items not involving cash: Depreciation and amortization 2,375 2,295 Provision for doubtful accounts 1,419 3,307 Equity (earnings) loss in joint ventures (45) 28 Amortization of deferred balances (200) (62) Deferred income taxes -0- (1,328) Write-off pursuant to change in accounting principle -0- 433 Changes in other assets and liabilities: Receivables (1,246) 3,504 Inventories (59) 87 Prepaid expenses and other assets (856) 425 Trade accounts payable and accrued expenses 2,157 (3,002) Other 8 (10) ------- -------- Net cash provided by operating activities 3,711 2,088 ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (780) (3,010) Investment in TDLP -0- (160) Mortgages receivable, net 301 152 Deposits, pre-opening costs and other (334) 674 Investment in and advances to joint ventures, net (433) (928) TDLP partnership distributions 105 151 ------- -------- Net cash used in investing activities (1,141) (3,121) ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of debt obligations -0- 26,299 Repayment of debt obligations (888) (24,857) Net proceeds from (repayment of) bank line of credit 609 (1,500) Advances to TDLP, net (333) (138) Increase in lease obligations 46 93 Financing costs -0- (510) ------- -------- Net cash provided by financing activities $ (566) $ (613) ------- --------
(Continued) -7- 8 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 ------ ------ EFFECT OF EXCHANGE RATE CHANGES $ (322) $ 297 ------- ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,682 (1,349) CASH AND CASH EQUIVALENTS, beginning of period 1,913 2,347 ------- ------- CASH AND CASH EQUIVALENTS, end of period $ 3,595 $ 998 ======= ======= SUPPLEMENTAL INFORMATION: Cash payments of interest $ 2,914 $ 3,106 ======= ======= Cash payments (refunds) of income taxes, net $ (133) $ (623) ======= =======
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. 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, 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 June 30, 2000, the Company operates 120 facilities consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,472 units. The Company owns seven nursing homes, leases 36 others, and manages 21 nursing homes. The Company owns 16 assisted living facilities, leases 25 others, and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. The Company operates facilities in Alabama, Arkansas, Florida, Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia and Ontario. In recent periods, the long-term health care environment has undergone substantial change with regards to reimbursement and other payor sources, compliance regulations, competition among other health care providers and relevant patient liability issues. The Company continually monitors these industry developments as well as other factors that affect its business. See Item 2 for further discussion of recent changes in the long-term health care industry and the related impact on the operations of the Company. 2. BASIS OF FINANCIAL STATEMENTS The interim consolidated financial statements for the three and six month periods ended June 30, 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 June 30, 2000 and the results of operations for the three and six month periods ended June 30, 2000 and 1999, and the cash flows for the six month periods ended June 30, 2000 and 1999. -9- 10 The results of operations for the three and six month periods ended June 30, 2000 and 1999 are not necessarily indicative of the operating results for the entire respective years. These interim consolidated financial statements should be read in connection with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 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 $55.4 million as of June 30, 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 consolidated financial statements as of June 30, 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 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. -10- 11 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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- Foreign currency items: Beginning balance $(161,000) $(365,000) $(173,000) $(412,000) Current period change, net of income tax (218,000) 143,000 (206,000) 190,000 --------- --------- --------- --------- Ending balance $(379,000) $(222,000) $(379,000) $(222,000) ========= ========= ========= =========
Positive amounts represent unrealized gains and negative amounts represent unrealized losses. -11- 12 6. NON-RECURRING CHARGES During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Information with respect to these charges is presented below: Consulting fees $158,000 Legal fees 90,000 Other 15,000 7. 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 JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- (IN THOUSANDS) 2000 1999 2000 1999 -------- -------- -------- -------- Net revenues: U.S. nursing homes $ 36,302 $ 33,820 $ 71,678 $ 70,336 U.S. assisted living facilities 8,062 7,058 16,096 13,679 Canadian operations 3,898 3,710 7,828 7,337 Corporate -0- 2 (1) (50) -------- -------- -------- -------- Total $ 48,262 $ 44,590 $ 95,601 $ 91,302 ======== ======== ======== ======== Depreciation and amortization: U.S. nursing homes $ 601 $ 599 $ 1,298 $ 1,201 U.S. assisted living facilities 423 439 845 881 Canadian operations 98 90 196 175 Corporate 19 19 36 38 -------- -------- -------- -------- Total $ 1,141 $ 1,147 $ 2,375 $ 2,295 ======== ======== ======== ======== Operating income (loss): U.S. nursing homes $ 583 $ (3,574) $ 810 $ (4,609) U.S. assisted living facilities (99) (223) 5 (171) Canadian operations 457 413 845 810 Corporate (826) (689) (1,413) (1,205) -------- -------- -------- -------- Total $ 115 $ (4,073) $ 247 $ (5,175) ======== ======== ======== ========
-12- 13
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Long-lived assets: U.S. nursing homes $ 32,311 $ 32,777 U.S. assisted living facilities 33,836 34,332 Canadian operations 12,488 12,933 Corporate 1,120 9,321 Eliminations -0- (8,377) -------- -------- Total $ 79,755 $ 80,986 ======== ======== Total assets: U.S. nursing homes $ 55,973 $ 55,796 U.S. assisted living facilities 36,215 36,568 Canadian operations 16,168 16,737 Corporate 1,902 18,712 Eliminations (12,731) (31,628) -------- -------- Total $ 97,527 $ 96,185 ======== ========
8. SUBSEQUENT EVENT - FACILITY DECERTIFICATION On July 6, 2000, the Company received notification that its South Park facility located in Corpus Christi, Texas, had been decertified for regulatory purposes. As a result of the notification, the Company closed the facility on July 28, 2000. A portion of the facility's residents have been re-located to other Company facilities. In connection with the closing of the facility, the Company will evaluate the carrying value of the recorded assets for recoverability and the need for any closing accruals and expect to record these charges, if any, in the third quarter. 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 June 30, 2000, the Company operates 120 facilities, consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,472 units. In comparison, at June 30, 1999, the Company operated 122 facilities composed of 65 nursing homes containing 7,307 licensed beds and 57 assisted living facilities containing 5,295 units. As of June 30, 2000, the Company owns seven nursing homes, leases 36 others and manages the remaining 21 nursing homes. Additionally, the -13- 14 Company owns 16 assisted living facilities, leases 25 others and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. Basis of Financial Statements. The Company's patient and resident revenues consist of the fees charged for the care of patients in the nursing homes and residents of the assisted living facilities owned and leased by the Company. Management fee revenues consist of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms of the Company's management agreements, which generally provide for management fees ranging from 3.5% to 6.0% of the net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the average occupancy level rates of the managed facilities. The Company's operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing homes and assisted living facilities owned and leased by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions, including the costs incurred in providing management services to other owners. The Company's depreciation, amortization and interest expenses include all such expenses across the range of the Company's operations. RESULTS OF OPERATIONS The following tables present the unaudited interim statements of operations and related data for the three and six months ended June 30, 2000 and 1999.
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30, --------------------------- 2000 1999 CHANGE % ------- -------- ------- ----- REVENUES: Patient revenues $36,702 $ 34,352 $ 2,350 6.8% Resident revenues 10,384 9,323 1,061 11.4 Management fees 1,125 877 248 28.3 Interest 51 38 13 34.2 ------- -------- ------- Net revenues 48,262 44,590 3,672 8.2 ------- -------- ------- EXPENSES: Operating 37,170 38,033 (863) (2.3) Lease 5,258 5,003 255 5.1 General and administrative 2,879 3,155 (276) (8.7) Interest 1,436 1,325 111 8.4 Depreciation and amortization 1,141 1,147 (6) (0.1) Non-recurring charges 263 -0- 263 N/A ------- -------- ------- Total expenses 48,147 48,663 (516) (1.1) ------- -------- ------- LOSS BEFORE INCOME TAXES 115 (4,073) 4,188 (102.8) INCOME TAX BENEFIT 42 (1,466) 1,508 (102.9) ------- -------- ------- NET INCOME (LOSS) $ 73 $ (2,607) $ 2,680 (102.8) ======= ======== =======
-14- 15
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 CHANGE % ------- -------- ------ ----- REVENUES: Patient revenues $72,674 $ 71,206 1,468 2.1% Resident revenues 20,810 18,227 2,583 14.2 Management fees 2,026 1,796 230 12.8 Interest 91 73 18 24.7 ------- -------- ------ Net revenues 95,601 91,302 4,299 4.7 ------- -------- ------ EXPENSES: Operating 73,596 75,756 (2,160) (2.9) Lease 10,534 9,904 630 6.4 General and administrative 5,696 5,890 (194) (3.3) Interest 2,890 2,632 258 9.8 Depreciation and amortization 2,375 2,295 80 3.5 Non-recurring charges 263 -0- 263 N/A ------- -------- ------ Total expenses 95,354 96,477 (1,123) (1.2) ------- -------- ------ INCOME (LOSS) BEFORE INCOME TAXES 247 (5,175) 5,422 (104.8) PROVISION (BENEFIT) FOR INCOME TAXES 89 (1,863) 1,952 (104.8) ------- -------- ------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 158 (3,312) 3,470 (104.8) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX -0- (277) 277 (100.0) ------- -------- ------ NET INCOME (LOSS) $ 158 $ (3,589) 3,747 (104.4) ------- -------- ------
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, --------------------------- ------------------------- 2000 1999 2000 1999 ----- ----- ----- ----- REVENUES: Patient revenues 76.1% 77.0% 76.0% 78.0% Resident revenues 21.5 20.9 21.8 19.9 Management fees 2.3 2.0 2.1 2.0 Interest 0.1 0.1 0.1 0.1 ----- ----- ----- ----- Net revenues 100.0 100.0 100.0 100.0 ----- ----- ----- ----- OPERATING EXPENSES: Operating 77.0 85.3 77.0 83.0 Lease 10.9 11.2 11.0 10.9 General and administrative 6.0 7.1 6.0 6.4 Interest 3.0 3.0 3.0 2.9 Depreciation and amortization 2.4 2.5 2.5 2.5 Non-recurring charges .5 0.0 0.2 0.0 ----- ----- ----- ----- Total expenses 99.8 109.1 99.7 105.7 ----- ----- ----- ----- INCOME (LOSS) BEFORE INCOME TAXES 0.2 (9.1) 0.3 (5.6) PROVISION (BENEFIT) FOR INCOME TAXES 0.1 (3.3) 0.1 (2.0) ----- ----- ----- ----- INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE 0.1 (5.8) 0.2 (3.6) CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE, NET OF TAX 0.0 0.0 0.0 (0.3) ----- ----- ----- ----- NET INCOME (LOSS) 0.1% (5.8)% 0.2% (3.9)% ===== ===== ===== =====
-15- 16 GENERAL 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 costs. 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. 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 the 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 more than 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 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. -16- 17 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. THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999 Revenues. Net revenues increased to $48.3 million in 2000 from $44.6 million in 1999, an increase of $3.7 million, or 8.2%. Patient revenues increased to $36.7 million in 2000 from $34.4 million in 1999, an increase of $2.4 million, or 6.8%. The increase in patient revenues can be primarily attributed to increased Medicare utilization and PPS rate increases at several facilities which became effective April 2000. In 1999, the Company recorded $670,000 in negative revenue adjustments in connection with its West Virginia operations. Certain claims had been denied in prior years by the third party intermediary. In 1999, the Company abandoned its efforts to get these claims approved. Resident revenues increased to $10.4 million in 2000 from $9.3 million in 1999, an increase of $1.1 million, or 11.4%. The increase in resident revenues is due primarily to the addition of three assisted living facilities in North Carolina during the second quarter of 1999, and an increase in the number of private pay resident days in 2000. There was a decrease of approximately 7,000 patient days, or 1.9%, and an increase of approximately 22,000 resident days, or 9.9%. As to payor types, there was an increase of approximately 3,000 Medicare days, or 13.5%, and an increase (decrease) of 21,000, or 14.5%, and (8,000), or 2.0%, among private-pay and Medicaid patients, respectively. As a percentage of patient and resident revenues, Medicare increased to 16.0% in 2000 from 13.5% in 1999 while Medicaid and similar programs decreased to 64.1% in 2000 from 67.8% in 1999. -17- 18 Operating Expense. Operating expense decreased to $37.2 million in 2000 from $38.0 million in 1999, a decrease of $863,000, or 2.3%. The Company continues to implement cost reductions in response to Medicare reimbursement changes. As a percent of patient and resident revenues, operating expense decreased to 78.9% in 2000 from 87.1% in 1999. The largest component of operating expenses is wages, which increased to $20.4 million in 2000 from $19.0 million in 1999, an increase of $1.4 million, or 7.4%. Of this increase, $598,000, or 3.2%, can be attributed to the assisted living facilities in North Carolina which added three facilities during the second quarter of 1999. 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 Company's wage increases are generally in line with inflation. The Company's provision for doubtful accounts decreased to $634,000 in 2000 from $2.6 million in 1999, a decrease of $2.0 million, or 76.9%. In 1999, the Company determined a substantial portion of its older patient receivables should be reserved. It is generally recognized that the regulatory environment in which nursing homes operate has become more restrictive. In 2000, the Company incurred $43,000 in new fines and penalties as compared to approximately $350,000 in the prior period. The Company is self-insured for certain workers' compensation claims incurred prior to May 1997. In 1999, the Company recognized a charge of $158,000 to provide sufficient reserve to cover the expected liability for these claims. The Company also established a $200,000 reserve in 1999 related to the valuation of its inventory balances. Lease Expense. Lease expense increased to $5.3 million in 2000 from $5.0 million in 1999, an increase of $255,000, or 5.1%. Of this increase, $200,000, or 4.0%, can be attributed to the assisted living facilities in North Carolina which added three facilities during the second quarter of 1999. Adjustments in the Company's lease agreements are generally tied to inflation. General and Administrative Expense. General and administrative expense decreased to $2.9 million in 2000 from $3.2 million in 1999, a decrease of $276,000, or 8.7%. As a percentage of total net revenues, general and administrative expense decreased to 6.0% in 2000 compared with 7.1% in 1999. The percentage decrease is primarily attributable to the higher revenue base, however, the 1999 period also includes a provision of $275,000 for severance benefits for a former Chief Financial Officer. Interest Expense. Interest expense increased to $1.4 million in 2000 from $1.3 million in 1999, an increase of $111,000, or 8.4%. Depreciation and Amortization. Depreciation and amortization expense remained flat at $1.1 million in 2000 and 1999. Non-Recurring Charges. During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Of this amount, $158,000 and $90,000 related to consulting and legal fees incurred, respectively. -18- 19 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. Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a result of the above, income before income taxes was $115,000 in 2000 as compared with a loss of $4.1 million in 1999, an increase of $4.2 million. The effective combined federal, state and provincial income tax rate was 36.0% in both 2000 and 1999. Net income was $73,000 in 2000 as compared with a net loss of $2.6 million in 1999, an increase of $2.7 million, and basic and diluted earnings (loss) per share was $.01 in 2000 as compared with ($.48) per share in 1999. SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998 Revenues. Net revenues increased to $95.6 million in 2000 from $91.3 million in 1999, an increase of $4.3 million, or 4.7%. Patient revenues increased to $72.7 million in 2000 from $71.2 million in 1999, an increase of $1.5 million, or 2.1%. The increase in patient revenues can be attributed to increased Medicare utilization and PPS rate increases at several facilities which became effective April 2000. In 1999, the Company recorded $670,000 in negative revenue adjustments in connection with its West Virginia operations. Certain claims had been denied in prior years by the third party intermediary and the Company abandoned its efforts to get these claims approved. Resident revenues increased to $20.8 million in 2000 from $18.2 million in 1999, an increase of $2.6 million, or 14.2%. The increase in resident revenues is due primarily to the addition of three assisted living facilities in North Carolina during the second quarter of 1999, and an increase in the number of private pay resident days in 2000. There was a decrease of approximately 30,000 patient days, or 4.1%, and an increase of approximately 40,000 resident days, or 8.9%. As to payor types, there was an increase of approximately 4,000 Medicare days, or 10.1%, an increase of approximately 19,000 private-pay days, or 6.6%, and a decrease of 13,000 Medicaid days, or 1.5%. As a percentage of patient and resident revenues, Medicare increased to 15.8% in 2000 from 14.7% in 1999 while Medicaid and similar programs decreased to 65.1% in 2000 from 66.6% in 1999. Operating Expense. Operating expense decreased to $73.6 million in 2000 from $75.8 million in 1999, a decrease of $2.2 million, or 2.9%. The Company continues to implement cost reductions in response to the Medicare reimbursement changes. As a percent of patient and resident revenues, operating expense decreased to 78.7% in 2000 from 84.7% in 1999. The largest component of operating expense is wages, which increased to $40.3 million in 2000 from $37.6 million in 1999, an increase of $2.7 million, or 7.2%. Of this increase, $1.3 million, or 3.5%, can be attributed to the three assisted living facilities in North Carolina which were added during the second quarter of 1999. 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 Company's wage increases are generally in line with inflation. The Company's provision for bad debts decreased to $1.5 million -19- 20 in 2000 from $3.4 million in 1999, a decrease of $1.9 million, or 55.9%. In 1999, the Company determined a substantial portion of its older patient receivables should be reserved. It is generally recognized that the regulatory environment in which nursing homes operate has become more restrictive. In 2000, the Company incurred approximately $173,000 in new fines and penalties as compared to approximately $350,000 in the prior period. The Company is self-insured for certain workers' compensation claims incurred prior to May 1997. In 1999, the Company recognized a charge of $520,000 to provide sufficient reserve to cover the expected liability for these claims. The Company also wrote off $192,000 of miscellaneous assets and established a $200,000 reserve related to the valuation of its inventory balances. Lease Expense. Lease expense increased to $10.5 million in 2000 from $9.9 million in 1999, an increase of $630,000, or 6.4%. Of this increase, $477,000, or 4.8%, can be attributed to the three assisted living facilities in North Carolina which were added during 1999. Adjustments in the Company's lease agreements are generally tied to inflation. General and Administrative Expense. General and administrative expense decreased to $5.7 million in 2000 from $5.9 million in 1999, a decrease of $194,000, or 3.3%. As a percentage of total net revenues, general and administrative expense decreased to 6.0% in 2000 compared with 6.4% in 1999. The 1999 period includes a provision of $275,000 for severance benefits for a former Chief Financial Officer. Interest Expense. Interest expense increased to $2.9 million in 2000 from $2.6 million in 1999, an increase of $258,000, or 9.8%. Depreciation and Amortization. Depreciation and amortization expense increased to $2.4 million in 2000 from $2.3 million in 1999, an increase of $80,000, or 3.5%. Non-Recurring Charges. During the second quarter of 2000, the Company recorded non-recurring charges totaling $263,000 in connection with the proposed restructuring of the lease arrangements covering the majority of its United States nursing facilities and the proposed refinancing of certain debt obligations. Of this amount, $158,000 and $90,000 related to consulting and legal fees incurred, respectively. 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. Income (Loss) 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 $247,000 in 2000 as compared with a loss of $5.2 million in 1999, an increase of $5.4 million. The effective combined federal, state and provincial income tax rate was 36.0% in both -20- 21 2000 and 1999. Net income after taxes and the cumulative effect of the change in accounting principle was $158,000 in 2000 as compared with a net loss of $3.6 million in 1999, an increase of $3.8 million, and basic and diluted earnings (loss) per share was $.03 in 2000 compared to ($.66) in 1999. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company had negative working capital of $55.4 million compared with negative working capital of $56.7 million at December 31, 1999, and a current ratio of .2 at both June 30, 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 June 30, 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 $27.1 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 $53.1 million of debt as current liabilities as of June 30, 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 June 30, 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 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 balances 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 negotiating 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 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. -21- 22 The Company has a working capital line of credit and a bridge loan which had combined amounts outstanding of $14.4 million at June 30, 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 June 30, 2000, the maturity date of these loans was extended to August 31, 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 June 30, 2000. No further draws are available under the acquisition line of credit. Amounts outstanding under the acquisition line of credit had a maturity date of April 30, 2000, which had been previously extended. On June 30, 2000, the lender again extended the maturity date to August 31, 2000. The Company and the lender are negotiating replacement long-term financing. Net cash provided by operating activities totaled $3.7 million and $2.1 million in the six month periods ended June 30, 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 $1.1 million and $3.1 million in the six month periods ended June 30, 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 used in financing activities totaled $566,000 and $613,000 in the six month periods ended June 30, 2000 and 1999, respectively. The net cash used in financing activities primarily represents net repayments of debt and advances to TDLP. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare, Medicaid and other third party revenue sources. The Company's future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company's liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by negotiating reduced contract rates, as well as any delay by the Company in the processing of its invoices, could adversely affect the Company's liquidity and results of operations. -22- 23 Accounts receivable attributable to the provision of patient and resident services at June 30, 2000 and December 31, 1999, totaled $15.7 million and $15.8 million, respectively, representing approximately 30 and 31 days in accounts receivable, respectively. Accounts receivable from the provision of management services were $530,000 and $412,000 at June 30, 2000 and December 31, 1999, respectively, representing approximately 47 and 42 days in accounts receivable, respectively. The allowance for bad debt was $5.2 million and $5.0 million at June 30, 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 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 fines and penalties. -23- 24 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. On May 12, 2000, Mr. Mills was elected to the position of Senior Vice President and 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 was 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, no longer trades on the TSE. 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 -24- 25 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 therefore, 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. -25- 26 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 4. Submission of Matters to a Vote of Security Holders. (a) The annual meeting of shareholders was held on July 27, 2000. (b) Matters voted upon at the meeting: - Election of Directors: Charles W. Birkett, M.D. FOR 4,446,150 AGAINST -0- WITHHELD 293,943 ABSTENTIONS -0- NON-VOTING(1) 751,528 --------- ELIGIBLE SHARES 5,491,621 --------- Edward G. Nelson FOR 4,447,150 AGAINST -0- WITHHELD 292,943 ABSTENTIONS -0- NON-VOTING(1) 751,528 --------- ELIGIBLE SHARES 5,491,621 --------- Paul Richardson FOR 4,489,800 AGAINST -0- WITHHELD 250,293 ABSTENTIONS -0- NON-VOTING(1) 751,528 --------- ELIGIBLE SHARES 5,491,621 --------- (Continuing directors include William C. O'Neil, Jr. and J. Bransford Wallace) ------------- (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. -26- 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 14, 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 -27- 28 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). 27 Financial Data Schedule (for SEC use only). EX-27 2 ex27.txt 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 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 3,595 0 16,724 5,178 813 17,772 88,447 21,284 97,527 73,175 0 0 0 55 6,164 97,527 0 48,262 0 48,147 0 0 1,436 115 42 73 0 0 0 73 .01 .01
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