<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, 1998
--------------
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
----- -----
5,376,946
- --------------------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 13, 1998)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,375 $ 2,673
Receivables, less allowance for doubtful
accounts of $2,266 and $2,702,
respectively 25,829 26,010
Income taxes receivable 80 380
Inventories 1,110 1,097
Prepaid expenses and other assets 1,979 1,640
Deferred income taxes 1,105 830
-------- --------
Total current assets 33,478 32,630
-------- --------
PROPERTY AND EQUIPMENT, at cost 82,051 80,819
Less accumulated depreciation
and amortization (13,032) (12,149)
-------- --------
Net property and equipment 69,019 68,670
-------- --------
OTHER ASSETS:
Deferred tax benefit 5,367 5,460
Deferred financing and other costs, net 1,555 1,643
Other 8,338 6,558
-------- --------
Total other assets 15,259 13,661
-------- --------
$117,756 $114,961
======== ========
</TABLE>
(Continued)
-2-
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
-------- --------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 764 $ 762
Trade accounts payable 11,020 9,365
Accrued expenses:
Payroll and employee benefits 5,309 5,576
Worker's compensation 828 978
Other 2,408 2,100
-------- --------
Total current liabilities 20,329 18,781
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 60,054 58,373
Deferred gains with respect to leases, net 3,478 3,562
Other 2,784 3,512
-------- --------
Total noncurrent liabilities 66,316 65,447
-------- --------
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, 5,377,000 issued and outstanding at
March 31, 1998 and December 31, 1997, respectively 54 54
Paid-in capital 15,638 15,638
Retained earnings 15,419 15,041
-------- --------
Total shareholders' equity 31,111 30,733
-------- --------
$117,756 $114,961
======== ========
</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,
----------------------------
1998 1997
------- -------
<S> <C> <C>
REVENUES:
Patient revenues $41,839 $40,314
Resident revenues 8,705 2,174
Management fees 906 918
Interest 43 36
------- -------
Net revenues 51,493 43,442
------- -------
EXPENSES:
Operating 41,252 34,074
Lease 4,754 3,871
General and administrative 2,726 2,312
Depreciation and amortization 962 661
Interest 1,245 542
------- -------
Total expenses 50,939 41,460
------- -------
INCOME BEFORE INCOME TAXES 554 1,982
PROVISION FOR INCOME TAXES 199 713
------- -------
NET INCOME $ 355 $ 1,269
======= =======
EARNINGS PER SHARE:
Basic $ .07 $ .24
======= =======
Diluted $ .07 $ .24
======= =======
WEIGHTED AVERAGE SHARES:
Basic 5,377 5,316
======= =======
Diluted 5,388 5,328
======= =======
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-4-
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
----- -------
<S> <C> <C>
NET INCOME $ 355 $ 1,269
----- -------
OTHER COMPREHENSIVE INCOME
Foreign currency translation adjustments 37 (53)
Income tax (expense) benefit (13) 19
----- -------
24 (34)
----- -------
COMPREHENSIVE INCOME $ 379 $ 1,235
===== =======
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-5-
<PAGE> 6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 355 $ 1,269
Items not involving cash:
Depreciation and amortization 962 661
Provision for doubtful accounts 446 251
Equity earnings in joint ventures (21) (6)
Amortization of deferred credits (170) (281)
Deferred income taxes (195) 2,077
Change in assets and liabilities:
Receivables, net 264 (641)
Inventories (13) (124)
Prepaid expenses and other assets (301) (182)
Trade accounts payable and accrued expenses 1,582 (1,910)
Other (4) (46)
------ -------
Net cash provided from operating activities 2,905 1,068
------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,098) (521)
Investment in TDLP (625) (653)
Mortgage receivable, net (305) (219)
Deposits, pre-opening costs and other (350) (4)
Investment in joint ventures, net (764) 11
TDLP partnership distributions 75 50
------ -------
Net cash used in investing activities (3,067) (1,336)
------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from bank line of credit 1,830 -0-
Repayment of debt obligations (211) (170)
Advances (to) from TDLP, net (746) 167
Advances repaid from lessor, net -0- 339
Financing costs (9) (18)
------ -------
Net cash provided from financing activities 864 318
------ -------
</TABLE>
(Continued)
-6-
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1998 1997
-------- -------
<S> <C> <C>
INCREASE/DECREASE IN CASH AND CASH EQUIVALENTS $ 702 $ 50
CASH AND CASH EQUIVALENTS, beginning of period 2,673 1,942
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 3,375 $ 1,992
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 1,365 $ 551
======= =======
Cash payments of income taxes $ 278 $ 889
======= =======
</TABLE>
Advocat received net benefit plan deposits and earnings and recorded benefit
plan liabilities of $37,000 and $45,000 in the three month periods ended March
31, 1998 and 1997, respectively.
The accompanying notes are an integral part of these interim consolidated
financial statements.
-7-
<PAGE> 8
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
leading provider of long-term care services to the elderly. The Company operates
nursing homes and assisted living facilities in 11 states and in two Canadian
provinces.
As of March 31, 1998, the Company operates 115 facilities consisting of 64
nursing homes with 7,221 licensed beds and 51 assisted living facilities with
4,880 units. The Company owns seven nursing homes, leases 37 others and manages
20 nursing homes. The Company owns 18 assisted living facilities, leases 22
others and manages 11 assisted living facilities. The Company operates 52
nursing homes and 33 assisted living facilities in the United States and 12
nursing homes and 18 assisted living facilities in Canada. The Company's
facilities provide a range of health care services to their patients and
residents. In addition to the nursing and social services usually provided in
the long-term care facilities, the Company offers a variety of comprehensive
rehabilitative, nutritional, respiratory and other specialized ancillary
services. The Company operates facilities in Alabama, Arkansas, Florida,
Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, 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,
1998 and 1997, 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, 1998 and the results of operations and the cash flows for the three month
periods ended March 31, 1998 and 1997.
The results of operations for the three month periods ended March 31, 1998 and
1997 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,
1997.
-8-
<PAGE> 9
3. EARNINGS PER SHARE
Information with respect to the calculation of basic and diluted earnings per
share data follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Net income (numerator) $ 355,000 $1,269,000
========== ==========
Basic average shares outstanding (denominator) 5,377,000 5,316,000
Employee stock purchase plan 10,000 11,000
Options 1,000 1,000
---------- ----------
Diluted average shares outstanding (denominator) 5,388,000 5,328,000
========== ==========
Basic earnings per share $ .07 $ .24
========== ==========
Diluted earnings per share $ .07 $ .24
========== ==========
</TABLE>
4. OTHER COMPREHENSIVE INCOME
The Company has adopted 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 comprehensive income balance is
presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Foreign currency items:
Beginning balance $ (196) $ (13)
Current-period change, net of income tax 24 (34)
---------- ----------
Ending balance $ (172) $ (47)
========== ==========
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
-9-
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Advocat (together with its subsidiaries, "Advocat" or the "Company") provides
long-term care services to nursing home patients and residents of assisted
living facilities in 11 Southeastern states and two Canadian provinces. The
Company completed its initial public offering in May 1994; however, its
operational history can be traced to February 1980 through common senior
management who were involved in different organizational structures.
The Company's facilities provide a range of health care services to their
patients and residents. In addition to the nursing, personal care and social
services usually provided in long-term care facilities, the Company, through
arrangements with third parties, offers a variety of comprehensive
rehabilitation services as well as medical supply and nutritional support
services.
As of March 31, 1998, Advocat's portfolio includes 115 facilities composed of 64
nursing homes containing 7,221 licensed beds and 51 assisted living facilities
containing 4,880 units. In comparison, at March 31, 1997, the Company operated
87 facilities composed of 65 nursing homes containing 7,449 licensed beds and 22
assisted living facilities containing 2,516 units. As of March 31, 1998, the
Company owns seven nursing homes, leases 37 others and manages the remaining 20
nursing homes. Additionally, the Company owns 18 assisted living facilities,
leases 22 others and manages the remaining 11 assisted living facilities. In the
United States, the Company operates 52 nursing homes and 33 assisted living
facilities, and in Canada, the Company operates 12 nursing homes and 18 assisted
living facilities.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
Management fee revenues consists of the fees charged to the owners of the
facilities managed by the Company. The management fee revenues are based on the
respective contractual terms of the Company's management agreements, which
generally provide for management fees ranging from 3.5% to 6.0% of the net
revenues of the managed facilities. As a result, the level of management fees is
affected positively or negatively by the increase or decrease in the average
occupancy level rates of the managed facilities. Management fees also include
consulting and development fee income. The Company's operating expenses include
the costs, other than lease, depreciation and amortization expenses, incurred in
the nursing homes and assisted living facilities owned and leased by the
Company. The Company's general and administrative expenses consist of the costs
of the corporate office and regional support functions, including the costs
incurred in providing management services to other owners. The Company's
depreciation, amortization and interest expenses include all such expenses
across the range of the Company's operations.
-10-
<PAGE> 11
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of income and
related data for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1998 1997 CHANGE %
------- ------- ------- ------
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $41,839 $40,314 $ 1,525 3.8
Resident revenues 8,705 2,174 6,531 300.4
Management fees 906 918 (12) (1.3)
Interest 43 36 7 18.6
------- ------- -------
Net revenues 51,493 43,442 8,051 18.5
------- ------- -------
EXPENSES:
Operating 41,252 34,074 7,178 21.1
Lease 4,754 3,871 883 22.8
General and administrative 2,726 2,312 414 17.9
Depreciation and amortization 962 661 301 45.4
Interest 1,245 542 703 129.9
------- ------- -------
Total expenses 50,939 41,460 9,479 22.9
------- ------- -------
INCOME BEFORE INCOME TAXES 554 1,982 (1,428) (72.0)
PROVISION FOR INCOME TAXES 199 713 (514) (72.0)
------- ------- -------
NET INCOME $ 355 $ 1,269 $ (914) (72.0)
======= ======= =======
</TABLE>
PERCENTAGE OF NET REVENUES
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
------ ------
<S> <C> <C>
REVENUES:
Patient revenues 81.2% 92.8%
Resident revenues 16.9 5.0
Management fees 1.8 2.1
Interest 0.1 0.1
------ ------
Net revenues 100.0% 100.0%
------ ------
OPERATING EXPENSES:
Operating 80.1 78.4
Lease 9.2 8.9
General and administrative 5.3 5.3
Depreciation and amortization 1.9 1.5
Interest 2.4 1.3
------ ------
Total expenses 98.9 95.4
------ ------
INCOME BEFORE INCOME TAXES 1.1 4.6
PROVISION FOR INCOME TAXES 0.4 1.7
------ ------
NET INCOME 0.7% 2.9%
====== ======
</TABLE>
-11-
<PAGE> 12
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1997
Regulatory Issues. The Company's operating results have been profoundly affected
by regulatory issues in the State of Alabama beginning in the third quarter of
1997. During the summer of 1997, the Company received notifications from the
Alabama Department of Public Health that, as a result of certain deficiencies
noted upon periodic surveys of its two facilities in Mobile, the facilities
would be decertified from participation in the Medicare and Medicaid programs
and that licensure revocation could be pursued. The Company appealed the
proceedings, noting that none of the deficiencies were life-threatening, that
the deficiencies noted did not warrant the penalty imposed and that in the case
of one of the facilities, it was JCAHO accredited. The appeals were denied by
the State agency, and as a result, the facilities were decertified for 69 and 91
days, respectively, before resurveys found them to be in compliance. Both of the
facilities have been recertified for participation in Medicare and Medicaid
programs and the State has stayed its license revocation proceedings with
respect to the two Alabama facilities, agreeing that the Company responded
favorably toward the resolution of all issues. The Company has aggressively
pursued improved communications with the State and has reached agreement with
the State on methods of improved operations. The Company's remaining five
Alabama facilities have successfully passed their most recent annual licensure
surveys.
The Company, in response to the regulatory problems at the two Mobile
facilities, entered into a reorganization of its regional and facility
management, conducted in-depth reviews of all seven of the Company's Alabama
facilities, engaged nationally recognized consultants to assist in achieving
compliance and engaged local legal counsel familiar with the Alabama regulatory
environment. Many of the costs associated with the decertifications were
non-recurring and limited to the latter half of 1997. However, the Company's
operations have continued to be impacted in 1998 on two broad fronts: census
declines and permanent cost increases. For the three months ended March 31,
1998, the decertified facilities had recovered approximately 15 percentage
points above the occupancy lows experienced during the decertification periods,
which is approximately half-way toward a full recovery of historical levels. It
is estimated that the revenue loss associated with the census decline in the
1998 period is approximately $522,000. The Company's response to the
decertifications included permanent staffing increases affecting all Alabama
facilities amounting to an increase of approximately $586,000 in 1998 over the
1997 period. Due to the nature of the Alabama reimbursement system, the Company
will not begin to realize an improved reimbursement rate relative to its higher
cost levels until July 1, 1998. The Company expects the Alabama operations to
return to normal levels during the latter half of 1998. However, there can be no
assurance that either of the facilities will return to the census and
profitability levels experienced prior to the decertification.
As a result of the lost revenues from the census declines, the permanent cost
increases incurred in response to the survey issues and miscellaneous other
costs, the Company experienced an estimated negative impact on 1998 earnings of
approximately $900,000 after income taxes, or approximately $0.17 per share.
-12-
<PAGE> 13
New Facilities. Since its inception as a public company in 1994, Advocat has
sought to expand its operations through the acquisition of attractive properties
via either purchase or lease. Management has conscientiously evaluated the
acquisition opportunities that have been available to the Company in light of
criteria that were established to help insure the long-term value of the
acquisitions that have been completed.
All of the Company's acquisition activity in 1997 was consummated in the fourth
quarter. The Company acquired 17 assisted living facilities through purchase and
acquired leases with respect to an additional 15 assisted living facilities.
These acquisitions added 2,483 units to the Company. The substantial portion of
these were acquired in the Pierce Group Acquisition: 29 assisted living
facilities, all located in North Carolina, with a total of 2,302 units. In the
Pierce Group Acquisition, the Company purchased 15 facilities and leased 14
others. The Company holds the option to purchase 12 of the leased facilities for
market value beginning at the fifth anniversary. With the Pierce Group
Acquisition, the Company, which has long been involved in the provision of
assisted living services in its Canadian operations, established a foundation
from which it hopes to expand its presence in the growing assisted living market
in the United States.
The acquired facilities are hereafter referred to collectively or in part as the
"New Facilities." The contribution of the New Facilities to selected components
of operations is noted separately where such contribution is significant within
their first year of operations. With the completion of the first year of
operations following acquisition or opening, a facility becomes part of same
store operations.
Revenues. Net revenues increased to $51.5 million in 1998 from $43.4 million in
1997, an increase of $8.1 million, or 18.5%. Patient revenues increased to $41.8
million in 1998 from $40.3 million in 1997, an increase of $1.5 million, or
3.8%. Resident revenues increased to $8.7 million in 1998 from $2.2 million in
1997, an increase of $6.5 million, or 300.4%. This increase is entirely
attributable to the New Facilities. Revenue increases among facilities operated
at least one year were primarily due to inflationary increases rather than from
expanded services. These increases were offset by foregone revenues with respect
to the decertified facilities and to one facility that was closed in April 1997.
Excluding these facilities, there was a 5.3% decline in patient and resident
days (approximately 24,000 days) among facilities 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 it is likely that
state and federal governments will continue to seek ways to retard the rate of
growth in Medicaid program rates. As a percent of patient and resident revenues,
Medicare decreased to 25.8% in 1998 from 26.1% in 1997 while Medicaid and
similar programs increased to 55.4% in 1998 from 55.1% in 1997.
Ancillary service revenues, prior to contractual allowances, increased to $16.7
million in 1998 from $13.8 million in 1997, an increase of $2.9 million or
21.2%. The Company has emphasized expansion of ancillary services since its
inception in 1994. However, the rate of growth began to decline in 1996.
Management believes that the opportunities available for the expansion of
ancillary services in its existing operations were essentially fully realized by
the beginning of 1997. The 1998 increase is primarily due to benefits realized
from the transition to a single therapy provider in a majority of its nursing
homes and from an increase in sales to third parties. Because cost limits are
expected to be placed on ancillary services as part of the transition to the
-13-
<PAGE> 14
Medicare prospective payment system and because of other cost limitation
provisions that have been announced or could occur, the Company anticipates that
ancillary service revenues with respect to its existing operations will begin
trending down during 1998. The ultimate effect on the Company's operations
cannot be predicted at this time because the extent and composition of the cost
limitations are not yet certain.
Operating Expense. Operating expense increased to $41.3 million in 1998 from
$34.1 million in 1997, an increase of $7.2 million, or 21.1%. Of this increase,
$4.1 million is attributable to the New Facilities. As a percent of patient and
resident revenues, operating expense increased to 81.6% in 1998 from 80.2% in
1997. This increase is attributable to increased costs relative to revenues in
the nursing home segment. These increases include the costs associated with the
Alabama decertifications, increased provision for bad debts and increased
liability insurance costs. With respect to facilities operated at least one year
and excluding the Alabama region, the operating expense percentage was 83.4%. As
a percent of resident revenues, operating expense of the New Facilities was
61.9%. All of the New Facilities are assisted living locations, which typically
have lower operating costs than do nursing homes. The largest component of
operating expense is wages, which increased to $18.5 million in 1998 from $15.5
million in 1997, an increase of $3.0 million, or 19.7%. Of this increase, $2.4
million is attributable to the New Facilities. Wages with respect to facilities
in operation for at least one year increased $635,000, or 4.1%. The Company's
wage increases are generally in line with inflation, however, the larger
increase with respect to the same facility operations is due primarily to a
20.1% increase in Alabama that arose principally from staffing responses to the
decertifications.
Lease Expense. Lease expense increased to $4.8 million in 1998 from $3.9 million
in 1997, an increase of $883,000, or 22.8%, which is primarily attributable to
the New Facilities.
General and Administrative Expense. General and administrative expense increased
to $2.7 million in 1998 from $2.3 million in 1997, an increase of $414,000, or
17.9%. The increase in excess of inflation is primarily attributable to the
expense of managing the New Facilities and structural costs associated with the
Alabama decertifications. As a percent of total net revenues, general and
administrative expense was 5.3% in both 1998 and 1997.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $962,000 in 1998 from $661,000 in 1997, an increase of $301,000, or 45.4%.
This increase is primarily attributable to the New Facilities.
Interest Expense. Interest expense increased to $1.2 million in 1998 from
$542,000 in 1997, an increase of $703,000, or 129.9%. This increase is primarily
attributable to financing associated with the New Facilities.
-14-
<PAGE> 15
Income Before Income Taxes; Net Income; Earnings Per Share. As a result of the
above, income before income taxes was $554,000 in 1998 as compared with $2.0
million in 1997, a decrease of $1.4 million, or 72.0%. The effective combined
federal, state and provincial income tax rate was 36.0% in both 1998 and 1997.
Net income was $355,000 in 1998 as compared with $1.3 million in 1997, a
decrease of $914,000, and basic and diluted earnings per share were each $.07 as
compared with $.24.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1998 and December 31, 1997, the Company's working capital was
$13.1 million and $13.8 million, respectively, and the current ratio was 1.6 and
1.7, respectively.
Net cash provided by operating activities totaled $2.9 million and $1.1 million
in the three month periods ended March 31, 1998 and 1997, respectively. These
amounts primarily represent the cash flows from net income plus changes in
non-cash components of operations and by working capital changes.
Net cash used by investing activities totaled $3.1 million and $1.3 million
for the three month periods ended March 31, 1998 and 1997, respectively. These
amounts primarily represent purchases of property, plant and equipment,
investments in joint ventures and additional investment in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.4 million and $3.0 million for capital expenditures in each of
the last three calendar years ending December 31, 1997. Substantially all such
expenditures were for facility improvements and equipment, which were financed
principally through working capital. For the year ended December 31, 1998, the
Company anticipates that capital expenditures for improvements and equipment for
its existing facility operations will be approximately $5.5 million, including
$2.9 million for non-routine projects. The Company has announced its
participation in several joint ventures. The Company will be a minority partner
in four assisted living facilities to be developed in Canada. In addition, the
Company will participate in an institutional pharmacy joint venture with NCS
HealthCare, Inc. For the three months ended March 31, 1998, the Company had net
expenditures of $764,000 relative to its joint venture activities. Management
anticipates additional investments of up to $1.8 million will be required under
its current joint venture commitments over the next 12 months.
Net cash provided by financing activities totaled $864,000 and $318,000 for the
three month periods ended March 31, 1998 and 1997, respectively. The net cash
provided from financing activities primarily represents net proceeds from
issuance and repayment of debt and advances to or repayments from related
parties.
The Company has begun implementation of an integrated information management
system that will provide enhanced monitoring and tracking of all its operations.
Real-time information will be available to managers at all levels with respect
to clinical care planning, reimbursement, and financial control management. The
changes are under the direction of the Company's new Vice President and Chief
Information Officer. The conversion of all of the Company's nursing homes to
this sophisticated new information platform should be completed by November
1998. Along with the implementation of the new information system, Advocat will
be centralizing the accounting function for its nursing home operations. The
Company anticipates recording a one-time pre-tax accounting charge in the second
quarter of 1998 of approximately $1.0 to $1.5 million, representing the costs
associated with the closing of certain regional offices, the reduction of
accounting personnel, the write-off of certain capitalized software development
costs and other related costs.
At March 31, 1998, the Company had total debt outstanding of $60.8 million, of
which $11.3 million was principally mortgage debt bearing interest at floating
rates ranging from 6.3% to 10.0%. The Company also had outstanding a promissory
note (the "Bridge Loan") in the amount of $34.1 million, which was used to fund
the Pierce Group Acquisition. The Company's remaining debt of $15.4 million was
drawn under the Company's lines of credit. Most of the Company's debt is at
-15-
<PAGE> 16
floating interest rates, generally at a spread above the London Interbank
Offered Rate ("LIBOR"). At March 31, 1998, the Company's average interest rate
on its indebtedness was 8.1%.
The Company has a working capital line of credit and an acquisition line of
credit. 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 the Company's option of either LIBOR plus 2.50% or the bank's Index
rate. The working capital line terminates and all outstanding borrowings are due
in December 1999. As of March 31, 1998, the Company had drawn $4.27 million, had
$5.65 million of letters of credit outstanding, and had $81,000 remaining
borrowing capability under the working capital line of credit. As of May 13,
1998, the draws totaled $4.35 million and the Company had no remaining borrowing
capability under the original working capital line of credit. The Company has
received a temporary increase from its lenders in the working capital line of
credit availability of $1.25 million (the "Overline"). The Overline is subject
to the same terms and conditions as the $10.0 million working capital line of
credit. The Overline terminates and all outstanding borrowings are due on June
26, 1998. In April 1998, the Company borrowed and repaid $887,000 under the
Overline. As of May 13, 1998, the balance drawn under the Overline totaled
$597,000.
The acquisition line of credit of $40.0 million, less outstanding borrowings, is
available to fund approved acquisitions through October 1999. The Company's
obligations under the acquisition line are secured by the assets acquired with
the draws under the acquisition line. Advances under the acquisition line bear
interest, payable monthly, at LIBOR plus a defined spread with respect to each
facility based upon its loan-to-value ratio and debt service coverage.
Individual advances made under the acquisition line are due three years from the
date of initial funding. As of both March 31, 1998, and May 13, 1998, the
Company has drawn $11.1 million under the acquisition line, which amount was
secured by four nursing homes, and had $28.9 million available for future
acquisitions.
The Bridge Loan is unsecured. However, the Company has agreed not to pledge or
otherwise encumber the assets acquired in the Pierce Group Acquisition or issue
other debt without the banks' approval. As of both March 31, 1998 and May 13,
1998, the outstanding balance of the Bridge Loan was $34.1 million and the
interest rate was 8.0%. The Bridge Loan bears floating interest in relation to
LIBOR and has a balloon maturity in April 1999.
Prior to funding the Bridge Loan, the Company was required to obtain a
commitment for replacement financing. The Company satisfied this requirement by
obtaining a commitment for up to $30.0 million of long-term financing under
which the Company may borrow and pledge the assets acquired in the Pierce Group
Acquisition as collateral. Loans are available at up to 80.0% of the value of
the pledged assets. Interest, which would be at LIBOR plus a defined spread,
would be determined based upon the length of term selected (3, 10, or 20 years)
and the loan-to-value ratio. This commitment is available through November 1999.
However, the Company may not draw upon this commitment so long as the Bridge
Loan remains outstanding. In addition to this commitment, the Company is
exploring other alternatives for refinancing of the Bridge Loan.
-16-
<PAGE> 17
The Company's lines of credit and the Bridge Loan contain various financial
covenants, the most restrictive of which relate to net worth, cash flow, debt
to equity ratio requirements, and limits on the payment of dividends to
shareholders. As of March 31, 1998, the Company was in compliance with the
covenants.
Based upon the operations of the Company, management believes that available
cash and funds generated from operations, as well as amounts available through
its banking relationships, will be sufficient for the Company to satisfy its
capital expenditures, working capital, and debt requirements for the next twelve
months. The Company 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 such as 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 long-term basis, management believes the Company will
be able to satisfy the principal repayment requirements on its indebtedness with
a combination of funds generated from operations and from refinancings with the
existing or new commercial lenders or by accessing capital markets.
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare,
Medicaid and other third-party revenue sources. The Company's future liquidity
will continue to be dependent upon the relative amounts of current assets
(principally cash, accounts receivable and inventories) and current liabilities
(principally accounts payable and accrued expenses). In that regard, accounts
receivable can have a significant impact on the Company's liquidity. Continued
efforts by governmental and third-party payors to contain or reduce the
acceleration of costs by monitoring reimbursement rates, by increasing medical
review of bills for services or by negotiating reduced contract rates, as well
as any delay by the Company in the processing of its invoices, could adversely
affect the Company's liquidity and results of operations.
Gross accounts receivable attributable to the provision of patient and resident
services at March 31, 1998 and December 31, 1997, totaled $26.7 million and
$27.2 million, respectively, representing approximately 49 and 50 days in
accounts receivable, respectively. Accounts receivable from the provision of
management services was $330,000 and $716,000 respectively, at March 31, 1998
and December 31, 1997 representing approximately 34 and 62 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 continues to evaluate and implement additional procedures
to strengthen its collection efforts and reduce the incidence of uncollectible
accounts.
-17-
<PAGE> 18
Since 1991, the Company and its predecessor have included in their consolidated
operations the operations of the six facilities of TDLP. The Company serves as
the general partner of TDLP and has several continuing obligations to TDLP, one
of which includes cash flow support through August 2001. As of March 31, 1998,
the Company has provided advances for working capital funding and requirements
under the cash flow guarantee to TDLP totaling $4.0 million. The Company will
recognize the advances receivable from TDLP as long as the total of the
Company's recorded net assets in TDLP are less than the estimated fair value of
the Company's interests in TDLP. As of March 31, 1998, the Company's recorded
net assets and amounts available from TDLP approximate the combined value of its
interests in TDLP. As a result, the ultimate realization of future advances to
TDLP may require reserves to be recorded by the Company to offset future
increases in the advances.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud and abuse. Recently, government
activity has increased with respect to investigations and allegations concerning
possible violations by health care providers of fraud and abuse statutes and
regulations. Violations of these laws and regulations could result in expulsion
from government health care programs together with the imposition of significant
fines and penalties as well as significant repayments for patient services
previously billed. Management believes that the Company is in compliance with
fraud and abuse laws and regulations as well as other applicable government laws
and regulations. Compliance with such laws and regulations can be subject to
future government review and interpretation as well as regulatory actions
unknown or unasserted at this time.
During 1997, the Federal government enacted the Balanced Budget Act of 1997 (the
"BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The
BBA requires that nursing homes transition to a prospective payment system under
the Medicare program during a three year "transition period," commencing with
the first cost reporting period beginning on or after July 1, 1998. The BBA also
contains certain measures that could lead to future reductions in Medicare
therapy cost reimbursement and Medicaid payment rates. Given the recent
enactment of the BBA, the Company is unable to predict the ultimate impact of
the BBA on its future operations. However, any reductions in government spending
for long-term health care could have an adverse effect on the revenues and
results of operation of the Company. The Company will attempt to maximize the
revenues available to it from governmental sources within the changes that will
occur under the BBA. In addition, the Company will attempt to increase
non-governmental revenues, including expansion of its assisted living
operations, in order to offset the loss of governmental revenues as a result of
the enactment of the BBA.
-18-
<PAGE> 19
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 owned and leased
facilities located in Canada. 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.
INFLATION
Management does not believe that the Company's operations have been materially
affected by inflation. The Company expects salary and wage increases for its
skilled staff to continue to be higher than average salary and wage increases,
as is common in the health care industry. To date, these increases as well as
normal inflationary increases in other operating expenses have been adequately
covered by revenue increases.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 is effective for financial
statement periods beginning after December 15, 1997. It establishes standards
for the way public companies report information about operating segments in
annual financial statements. SFAS No. 131 also requires that public companies
report selected information about operating segments in interim financial
reports issued to shareholders, although application to interim periods is not
required in the first year of adoption. The Company will adopt the provision of
this statement in association with its 1998 year-end financial statements. The
Company does not expect the adoption of this standard to have a material effect
on the Company's results of operations.
IMPACT OF THE YEAR 2000
The Company is currently reengineering its accounting and information systems.
Management anticipates that the systems conversion of the United States nursing
home operations will be completed by November 30, 1998. Included in the process
of selecting hardware and software, assurances have been sought and received
from the various vendors that their products are Year 2000 compliant. The
Company continues to evaluate other areas that may be affected. To date, no
issues of a material nature have been identified, and the costs of ensuring
compliance are not expected to have a material impact on the Company's results
of operations.
-19-
<PAGE> 20
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, 1997. 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.
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.
-20-
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
May 15, 1998
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
-21-
<PAGE> 22
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 INTERIM
CONSOLIDATED FINANCIAL STATEMENTS OF ADVOCAT INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q DATED FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,375
<SECURITIES> 0
<RECEIVABLES> 28,095
<ALLOWANCES> 2,266
<INVENTORY> 1,110
<CURRENT-ASSETS> 33,478
<PP&E> 82,051
<DEPRECIATION> 13,032
<TOTAL-ASSETS> 117,756
<CURRENT-LIABILITIES> 20,329
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 31,057
<TOTAL-LIABILITY-AND-EQUITY> 117,756
<SALES> 0
<TOTAL-REVENUES> 51,493
<CGS> 0
<TOTAL-COSTS> 50,939
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 446
<INTEREST-EXPENSE> 1,245
<INCOME-PRETAX> 554
<INCOME-TAX> 199
<INCOME-CONTINUING> 355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 355
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
