<PAGE> 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, 1997
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
----- -----
5,315,822
------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 13, 1997)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,992 $ 1,942
Accounts receivable, less
allowance for doubtful
accounts of $2,501 and
$2,524, respectively 23,803 24,946
Income taxes receivable 1,194 -0-
Inventories 791 667
Prepaid expenses and other assets 1,652 1,470
Deferred income taxes 47 1,941
-------- --------
Total current assets 29,479 30,966
-------- --------
PROPERTY AND EQUIPMENT, at cost 41,936 41,445
Less accumulated depreciation
and amortization (10,290) (9,714)
-------- --------
Net property and equipment 31,646 31,731
-------- --------
OTHER ASSETS:
Deferred tax benefit 6,297 6,480
Deferred financing and other costs, net 988 1,021
Other 3,078 2,188
-------- --------
Total other assets 10,363 9,689
-------- --------
$ 71,488 $ 72,386
======== ========
</TABLE>
(Continued)
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<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 726 $ 713
Trade accounts payable 7,169 7,715
Income taxes payable -0- 906
Accrued expenses:
Payroll and employee benefits 4,066 4,670
Worker's compensation 1,818 1,678
Other 1,750 1,744
-------- --------
Total current liabilities 15,529 17,426
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 23,031 23,254
Deferred gains with respect to leases, net 3,857 3,956
Other 488 402
-------- --------
Total noncurrent liabilities 27,376 27,612
-------- --------
COMMITMENTS, CONTINGENCIES, AND
GUARANTEE
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, 5,316,000 shares
issued and outstanding 53 53
Paid-in capital 15,083 15,083
Retained earnings 13,447 12,212
-------- --------
Total shareholders' equity 28,583 27,348
-------- --------
$ 71,488 $ 72,386
======== ========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
balance sheets.
-3-
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
-------- --------
<S> <C> <C>
REVENUES:
Patient revenues $ 42,488 $ 38,324
Management fees 918 1,173
Interest 36 36
-------- --------
Net revenues 43,442 39,533
-------- --------
EXPENSES:
Operating 34,074 31,599
Lease 3,871 3,563
General and administrative 2,312 2,131
Depreciation and amortization 661 509
Interest 542 325
-------- --------
Total expenses 41,460 38,127
-------- --------
INCOME BEFORE INCOME TAXES 1,982 1,406
PROVISION FOR INCOME TAXES 713 506
-------- --------
NET INCOME $ 1,269 $ 900
======== ========
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 5,330 5,322
======== ========
EARNINGS PER SHARE $ .24 $ .17
======== ========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
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<PAGE> 5
ADVOCAT INC.
INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,269 $ 900
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 661 509
Provision for doubtful accounts 251 337
Equity earnings in joint ventures (6) (8)
Amortization of deferred credits (281) (329)
Deferred income taxes 2,077 273
Change in assets and liabilities:
Receivables, net (641) (1,188)
Inventories (124) (30)
Prepaid expenses and other assets (182) 63
Trade accounts payable and accrued expenses (1,910) 879
Other (46) (41)
------- --------
Net cash provided from operating activities 1,068 1,365
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (521) (307)
Acquisitions, net -0- (700)
Investment in TDLP (653) -0-
Proceeds from TDLP transactions 50 23
Issuance of mortgage receivable, net (219) -0-
Pre-opening and other costs (4) (216)
Distributions from joint ventures 11 1
------- --------
Net cash used in investing activities (1,336) (1,199)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from debt obligations -0- 700
Repayment of debt obligations (170) (126)
Net proceeds from bank line of credit -0- 610
Advances (to) from TDLP, net 167 (429)
Advances (to) from lessor, net 339 (244)
Proceeds from sale of common stock -0- 57
Financing costs (18) (5)
------- --------
Net cash provided from financing activities 318 563
------- --------
</TABLE>
(Continued)
-5-
<PAGE> 6
ADVOCAT INC.
INTERIM STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------- --------
<S> <C> <C>
INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS $ 50 $ 729
CASH AND CASH EQUIVALENTS, beginning of period 1,942 1,076
------- --------
CASH AND CASH EQUIVALENTS, end of period $ 1,992 $ 1,805
======= ========
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 551 $ 320
======= ========
Cash payments of income taxes $ 889 $ 340
======= ========
</TABLE>
Advocat received benefit plan deposits and recorded benefit plan liabilities of
$45,000 and $63,000 in the three month periods ended March 31, 1997 and
March 31, 1996, respectively.
The accompanying notes are an integral part of these interim consolidated
financial statements.
-6-
<PAGE> 7
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997 AND 1996
1. ORGANIZATION AND BACKGROUND:
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
commenced operations with an initial public offering of its common stock on
May 10, 1994. The Company is a provider of long-term care services operating
nursing homes and assisted living centers in the United States and Canada.
Advocat's operational history can be traced to February 1980 through common
senior management involved in different organizational structures. As of
March 31, 1997, the Company operated 87 facilities composed of 65 nursing homes
containing 7,449 licensed beds and 22 assisted living centers containing 2,516
units. The Company owns seven nursing homes, acts as lessee with respect to 38
of the nursing homes it operates, and acts as manager with respect to the
remaining 20 nursing homes. The Company owns one assisted living center, acts as
lessee with respect to seven of the assisted living centers that it operates and
acts as manager of the remaining 14 assisted living centers. Geographically, 53
of the Company's nursing homes are located in the United States and 12 are
located in Canada, while 19 of the Company's 22 assisted living centers are
located in Canada. The Company's facilities provide a range of health care
services to their residents. In addition to the nursing and social services
usually provided in the long-term care facilities, the Company offers a variety
of rehabilitative, nutritional, respiratory and other specialized ancillary
services. The Company operates facilities in Alabama, Arkansas, Florida,
Kentucky, Ohio, South Carolina, Tennessee, Texas, West Virginia and the Canadian
provinces of Ontario and British Columbia.
2. BASIS OF FINANCIAL STATEMENTS
The interim financial statements for the three month periods ended March 31,
1997 and 1996, included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of management of the Company, the accompanying interim combined
financial statements reflect all adjustments (consisting of only normally
recurring accruals) necessary to present fairly the financial position at
March 31, 1997 and the results of operations and the cash flows for the three
month periods ended March 31, 1997 and 1996. Certain items have been
reclassified in the 1996 financial statements to conform to the 1997
presentation.
-7-
<PAGE> 8
The results of operations for the three month periods ended March 31, 1997 and
1996 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,
1996.
3. EARNINGS PER SHARE
Earnings per share is based on the weighted average number of the Company's
common and common equivalent shares outstanding that pertain to the respective
operations included in each period and is calculated as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
---------- ----------
<S> <C> <C>
Weighted average shares:
Average shares outstanding 5,316,000 5,291,000
Common stock equivalents --
Employee stock purchase plan 13,000 14,000
Options, conversion assumed under
the treasury stock method 1,000 17,000
---------- ----------
Common and common equivalent shares outstanding 5,330,000 5,322,000
========== ==========
Net income $1,269,000 $ 900,000
========== ==========
Earnings per share $ .24 $ .17
========== ==========
</TABLE>
The Company is required to adopt the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128 for financial statements with respect to
all periods ending after December 15, 1997. Once adopted, all periods presented
will be subject to the provisions of SFAS No. 128. Under the Company's present
capital structure, the Company does not expect a material impact on its reported
earnings per share. Two levels of earnings per share will be reported: (1) basic
earnings per share (generally, average shares outstanding) and (2) diluted
earnings per share (generally, inclusive of common stock equivalents). On a
pro forma basis, both basic and diluted earnings per share for the periods
currently presented equal earnings per share as reported.
-8-
<PAGE> 9
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")
commenced operations with an initial public offering of its common stock on
May 10, 1994. The Company is a provider of long-term care services operating
nursing homes and assisted living centers in the United States and Canada.
Advocat's operational history can be traced to February 1980 through common
senior management involved in different organizational structures. As of
March 31, 1997, the Company operated 87 facilities composed of 65 nursing homes
containing 7,449 licensed beds and 22 assisted living centers containing 2,516
units. The Company owns seven nursing homes, acts as lessee with respect to 38
of the nursing homes it operates, and acts as manager with respect to the
remaining 20 nursing homes. The Company owns one assisted living center, acts as
lessee with respect to seven of the assisted living centers that it operates and
acts as manager of the remaining 14 assisted living centers. Geographically, 53
of the Company's nursing homes are located in the United States and 12 are
located in Canada, while 19 of the Company's 22 assisted living centers are
located in Canada. In comparison, at March 31, 1996, the Company operated 85
facilities composed of 63 nursing homes containing 7,237 licensed beds and 22
assisted living centers containing 2,462 units.
The Company's facilities provide a range of health care services to their
residents. In addition to the nursing and social services usually provided in
the long-term care facilities, the Company offers a variety of rehabilitative,
nutritional, respiratory and other specialized ancillary services. The Company
operates facilities in Alabama, Arkansas, Florida, Kentucky, Ohio, South
Carolina, Tennessee, Texas, West Virginia and the Canadian provinces of Ontario
and British Columbia.
Basis of Financial Statements. The Company's patient revenues consist of the
fees charged to the residents of the Company's leased and owned nursing homes
and assisted living centers. Management fee revenues consists of the fees
charged to the owners of the facilities managed by the Company. The management
fee revenues are based on the respective contractual terms, which generally
range 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 level of occupancy or rates per patient day of the
managed facilities. Management fees also include consulting and development fee
income. The Company's operating expenses include the costs incurred in the
nursing homes and assisted living centers leased and owned 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 the nursing homes and assisted living centers
managed by the Company. The Company's financial statements reflect the
depreciation, amortization and interest expenses of the facilities owned by the
Company as well as the depreciation expense associated with equipment owned by
the Company and used in its leased facilities.
-9-
<PAGE> 10
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of income and
related data for the three months ended March 31, 1997 and 1996.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
1997 1996 CHANGE %
------- ------- ------- ----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $42,488 $38,324 $ 4,164 10.9
Management fees 918 1,173 (255) (21.7)
Interest 36 36 0 2.2
------- ------- -------
Net revenues 43,442 39,533 3,909 9.9
------- ------- -------
EXPENSES:
Operating 34,074 31,599 2,475 7.8
Lease 3,871 3,563 308 8.7
General and administrative 2,312 2,131 181 8.5
Depreciation and amortization 661 509 152 29.9
Interest 542 325 217 66.4
------- ------- -------
Total expenses 41,460 38,127 3,333 8.7
------- ------- -------
INCOME BEFORE INCOME TAXES 1,982 1,406 576 41.0
PROVISION FOR INCOME TAXES 713 506 207 41.0
------- ------- -------
NET INCOME $ 1,269 $ 900 $ 369 41.0
======= ======= =======
Operating Margin (as defined herein) $ 7,056 $ 5,803 $ 1,253 21.6
======= ======= =======
PERCENTAGE OF NET REVENUES
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1997 1996
------- -------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues 97.8% 96.9%
Management fees 2.1 3.0
Interest 0.1 0.1
------- -------
Net revenues 100.0% 100.0%
------- -------
EXPENSES:
Operating 78.4 79.9
General and administrative 5.3 5.4
Lease 8.9 9.0
Depreciation and amortization 1.5 1.3
Interest 1.3 0.8
------- -------
Total expenses 95.4 96.4
------- -------
INCOME BEFORE INCOME TAXES 4.6 3.6
PROVISION FOR INCOME TAXES 1.7 1.3
------ -------
NET INCOME 2.9% 2.3%
====== =======
Operating Margin (as defined herein) 16.3% 14.7%
====== =======
</TABLE>
-10-
<PAGE> 11
THREE MONTHS ENDED MARCH 31, 1997 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1996
In keeping with its goal to add attractive long-term care operations to its
portfolio, during 1996 the Company completed several acquisitions. Four
facilities were added via purchase and one via lease for a combined total of 410
beds. These facilities are hereafter referred to as the "New Homes." The
acquisition of the New Homes has added significantly to the Company's volume of
business since 1996, and the comparison of results between 1997 and 1996 is
materially impacted by them. In an effort to highlight this impact, the
contribution to operations by facilities operated by the Company for less than
one year are attributed in the following discussion to the New Homes.
Revenues. Net revenues increased to $43.4 million in 1997 from $39.5 million in
1996, an increase of $3.9 million, or 10%. Patient revenues increased to $42.5
million in 1997 from $38.3 million in 1996, an increase of $4.2 million, or 11%.
Of this increase, $2.6 million is attributable to the New Homes. Compared to the
prior year period, the Company's average patient per diem increased 5%, which
accounted for an increase of approximately $2.1 million in patient revenues.
These increases were offset by a decrease of 1.7% in patient days (most of which
relates to the 1996 leap year) among homes in operation for at least one year.
While the recent increases in reimbursement rates received by the Company have
met or exceeded expectations, the Company anticipates that it is likely states
will continue to seek ways to depress the rate of growth in Medicaid program
rates. The Company's quality mix remained essentially unchanged compared to the
prior period. As a percent of net patient revenues, Medicare increased to 26.1%
in 1997 from 26.0% in 1996 while Medicaid decreased to 55.1% in 1997 from 55.3%
in 1996.
Ancillary service revenues, prior to contractual allowances, decreased to $13.8
million in 1997 from $14.7 million in 1996, a decrease of $842,000 or 6%. Since
1994, the Company has emphasized the expansion of its ancillary service
revenues. Substantial increases in ancillary revenues were realized throughout
1995 and 1996. However, as noted in the Company's Annual Report on Form 10-K for
the year ended December 31, 1996, the trend of substantial increases diminished
throughout 1996. In the 1997 period, ancillary revenues were retarded due to the
transition from multiple therapy providers to one primary therapy provider in a
majority of the Company's nursing homes. The Company continues to emphasize the
expansion of its ancillary revenues. Management's expectation is that ancillary
service revenues will trend flat or result in modest increases over the
foreseeable future.
Management fee revenues decreased by $255,000, or 22%. The decrease is primarily
due to $300,000 in consulting fees earned in 1996 with respect to the
development of two homes opened in January 1996. Management fees, exclusive of
the non-repeating consulting fees, increased 5% in 1997 over 1996 levels.
The Company's operating margin (net revenues less operating and general and
administrative expenses) improved to 16.2% in 1997 from 14.7% in 1996. This
marked the fifth consecutive quarter of improvement. The Company's operating
margin is primarily impacted by its ability to control operating expense in
relation to occupancy levels.
Operating Expense. Operating expense increased to $34.0 million in 1997 from
$31.6 million in 1996, an increase of $2.4 million, or 8%. Of this increase,
$2.3 million is attributable to the New
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<PAGE> 12
Homes. As a percent of net patient revenues, operating expense declined from
82.5% in 1996 to 80.2% in 1997 (79.7% among homes in operation for at least one
year). The improvement is reflective of the Company's emphasis on controlling
costs and, in particular, in more timely response to occupancy fluctuations.
Wages increased to $15.5 million in 1997 from $14.0 million in 1996, an increase
of $1.5 million, or 11%. Of this increase, $1.1 million is attributable to the
New Homes. Salaries and wages with respect to facilities in operation for at
least one year increased $360,000, or 3%. The Company's wage increases are
generally in line with inflation. Among homes in operation for at least one
year, the Company experienced increased general insurance costs of $148,000,
which were partially offset by a decrease in bad debt expense of $71,000.
Lease Expense. Lease expense increased to $3.9 million in 1997 from $3.6 million
in 1996, an increase of $309,000, or 9%. Of this increase, $128,000 is
attributable to the New Homes and increased rent associated with the addition of
42 beds among four existing nursing homes. The remainder is primarily
attributable to inflationary increases included in the terms of a majority of
the Company's operating leases.
General and Administrative Expense. General and administrative expense increased
to $2.3 million in 1997 from $2.1 million in 1996, an increase of $182,000, or
9%. The increase is primarily attributable to the expense of new positions added
to service the Company's expanded operations. As a percent of total net
revenues, general and administrative expenses declined from 5.4% in 1996 to 5.3%
in 1997.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $661,000 in 1997 from $509,000 in 1996, an increase of $152,000, or 30%. Of
this increase, $95,000 is attributable to the New Homes.
Interest Expense. Interest expense increased to $541,000 in 1997 from $325,000
in 1996, an increase of $216,000, or 66%. Of this increase, $168,000 is
attributable to indebtedness related to the New Homes with the remainder of the
increase primarily attributable to increased borrowings under the Company's
working capital line of credit.
Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the
above, income before income taxes was $2.0 million in 1997 as compared with $1.4
million in 1996, an increase of $577,000, or 41%. The effective combined
federal, state and provincial income tax rate was 36% in both 1997 and 1996. Net
income was $1.3 million in 1997 as compared with $900,000 in 1996, an increase
of $369,000, and earnings per share was $.24 as compared with $.17.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company's working capital was $14.0 million with a
current ratio of 1.9 as compared with $13.5 million with a current ratio of 1.8
at December 31, 1996.
Net cash provided from operating activities totaled $1.1 million and $1.4
million in 1997 and 1996, respectively. These amounts primarily represent the
cash flows from income plus depreciation and amortization along with the
changes in working capital components.
-12-
<PAGE> 13
Net cash used in investing activities totaled $1.3 million and $1.2 million in
1997 and 1996, respectively. These amounts primarily represent capital
expenditures for equipment for and improvements to the Company's existing
facilities, additional investment in TDLP in 1997 and an acquisition in 1996.
The Company and its predecessor business have used between $1.7 million and
$3.0 million for capital expenditures for facility improvements and equipment
in each of the last three calendar years. Such expenditures were financed
through working capital resources. For the year ended December 31, 1997, the
Company anticipates that such expenditures for its existing facility operations
will be approximately $3.6 million including approximately $1.6 million for
non-routine projects.
Net cash provided from financing activities totaled $318,000 and $563,000 in
1997 and 1996, respectively. In 1997, net cash from financing activities was
provided primarily by repayment of advances from both TDLP and a lessor offset
by debt repayments. For 1996, net cash provided from financing activities
primarily represents proceeds from and repayment of long-term debt, advances to
TDLP and net proceeds under the Company's bank line.
At March 31, 1997, the Company had total debt outstanding of $23.8 million of
which $10.2 million was principally mortgage debt bearing interest at rates
currently ranging from 7.0% to 10.0%. The Company's remaining debt was drawn
under its credit lines. On December 31, 1996, the Company entered into two new
lines of credit including a $10.0 million working capital line and a $40.0
million acquisition line. The Company immediately drew sufficient funds under
both lines to repay its then-existing working capital indebtedness and to
refinance its mortgage indebtedness with respect to four nursing facilities. The
working capital line of credit provides for working capital loans and letters of
credit aggregating up to the lesser of $10.0 million or the borrowing base, as
defined. The Company's obligations under the working capital line are secured by
certain accounts receivable and substantially all other Company assets. Advances
under the working capital line bear interest payable monthly at either the
London Interbank Offered Rate ("LIBOR") plus 2.50 % or the lending bank's Index
rate with the choice of rate being at the Company's option (8.0% LIBOR at
March 31, 1997). The working capital line terminates and all outstanding
borrowings are due in December 1999. As of March 31, 1997, the Company had
drawn $2.4 million, had $5.5 million of letters of credit outstanding, and had
$2.1 million remaining borrowing capability under the working capital line. As
of May 13, 1997, the amount drawn under the working capital line of credit had
increased to $3.0 million leaving approximately $1.5 million borrowing capacity
available as of that date. The acquisition line of credit of $40.0 million,
less outstanding borrowings, is available to fund approved acquisitions through
October 1999. The Company's obligations under the acquisition line are secured
by the assets acquired with the draws under the acquisition line. Advances
under the acquisition line bear interest, payable monthly, at LIBOR plus a
defined spread with respect to each facility based upon its loan-to-value ratio
and debt service coverage (8.2% to 8.9% at March 31, 1997). Individual advances
made under the acquisition line are due three years from the date of initial
funding. As of both March 31, 1997, and May 13, 1997, the Company had drawn
$11.1 million under the acquisition line, which amount was secured by four
nursing homes, and had $28.9 million available for future acquisitions.
During the quarter, the Company paid approximately $900,000 in income taxes
related to 1996. With respect to 1997, the Company has adopted a tax election
that is anticipated to eliminate a significant portion of the current income
tax payments that would otherwise be due.
Based upon the operations of the Company, management believes that available
cash and funds generated from operations, as well as amounts available through
its banking relationships, will be sufficient for the
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<PAGE> 14
Company to satisfy its capital expenditures, working capital, and debt
requirements for the next twelve months. The Company intends to satisfy the
capital requirements for its acquisition activities primarily through its
acquisition line of credit complemented as appropriate by various other possible
means including borrowings from commercial lenders, seller-financed debt,
issuance of additional debt, financing obtained from sale and leaseback
transactions and internally generated cash from operations. On a longer-term
basis, management believes the Company will be able to satisfy the principal
repayment requirements on its indebtedness with a combination of funds generated
from operations and from refinancings with the existing or new commercial
lenders or by accessing capital markets.
Receivables
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare
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 expense). 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, increasing medical
review of bills for services or negotiating reduced contract rates, any delay by
the Company in the processing of its invoices, as well as any significant
increase in the Company's proportion of Medicare and Medicaid patients, 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, 1997 and December 31, 1996, totaled $24.7 million and
$25.5 million, respectively, representing approximately 53 and 54 days,
respectively, in accounts receivable. The decrease in patient accounts
receivable is due primarily to the collection of third-party receivables.
Accounts receivable from the provision of management services was $693,000 and
$713,000, respectively, at March 31, 1997 and December 31, 1996, representing
approximately 70 and 66 days in accounts receivable, 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 has implemented additional procedures to strengthen its
collection efforts and reduce the incidence of uncollectible accounts.
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 the operation of the Company's Canadian facilities.
Therefore, 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.
-14-
<PAGE> 15
Inflation
Management does not believe that the operations of the Company 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. However, it is likely that states will
continue to seek ways to control the growth in Medicaid program rates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share," and SFAS No. 129,
"Disclosure of Information About Capital Structure." Each is effective for
financial statement periods ending after December 15, 1997. SFAS No. 128
establishes standards for computing and presenting earnings per share. SFAS No.
129 establishes standards with respect to disclosure of information about an
entity's capital structure. The Company will adopt the provisions of these
statements in association with its financial statements issued for periods
ending December 31, 1997 and thereafter. The Company does not expect the
adoption of these standards to have a material effect on the Company's results
of operations.
Forward-Looking Statements
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1996. 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 ability to execute on the Company's acquisition program, both
in obtaining suitable acquisitions and financing therefor, changing economic
conditions as well as others. Actual results may differ materially from those
expressed or implied in forward-looking statements. The Company hereby makes
reference to items set forth under the heading "Risk Factors" in the Company's
Registration Statement on Form S-1, as amended (Registration No. 33-76150). Such
cautionary statements identify important factors that could cause the Company's
actual results to materially differ from those projected in forward-looking
statements. In addition, the Company disclaims any intent or obligation to
update these forward-looking statements.
-15-
<PAGE> 16
PART II -- OTHER INFORMATION
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.
-16-
<PAGE> 17
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 13, 1997
By: /s/ Mary Margaret Hamlett
-------------------------------------------------
Mary Margaret Hamlett
Principal Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to Sign on
Behalf of the Registrant
-17-
<PAGE> 18
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
<S> <C> <C>
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 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).
27 - Financial Data Schedule (for SEC use only).
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF ADVOCAT, INC. FOR THE THREE MONTHS ENDED MARCH 31, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INLCUDED IN THE FORM 10-Q OF ADVOCAT, INC. FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,992
<SECURITIES> 0
<RECEIVABLES> 26,304
<ALLOWANCES> 2,501
<INVENTORY> 791
<CURRENT-ASSETS> 29,479
<PP&E> 41,936
<DEPRECIATION> 10,290
<TOTAL-ASSETS> 71,488
<CURRENT-LIABILITIES> 15,529
<BONDS> 0
0
0
<COMMON> 53
<OTHER-SE> 28,530
<TOTAL-LIABILITY-AND-EQUITY> 71,488
<SALES> 0
<TOTAL-REVENUES> 43,442
<CGS> 0
<TOTAL-COSTS> 41,460
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 251
<INTEREST-EXPENSE> 542
<INCOME-PRETAX> 1,982
<INCOME-TAX> 713
<INCOME-CONTINUING> 1,269
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,269
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
