<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
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, 1999
------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _________ TO _________.
COMMISSION FILE NO.: 1-12996
-------
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
----- -----
5,491,693
-----------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF JANUARY 3, 2000)
<PAGE> 2
In connection with reporting its results for the nine months ended September 30,
1999, Advocat Inc. recorded certain adjustments to its previously reported
interim results for 1999. The adjustments, all of which reduce pre-tax
operations, that affect the quarterly period ended March 31, 1999 total
$1,351,000 and are summarized as follows:
<TABLE>
<S> <C>
Increase in allowance for bad debts $538,000
Increase in self-insurance reserves for workers' compensation
claims 362,000
Write-off of certain assets 189,000
Recognition of costs in association with the termination of an
operating lease 135,000
Increase in depreciation expense 81,000
Increase in lease expense due to reallocation of expense over
the life of a long-term lease 46,000
</TABLE>
This Report on Form 10-Q/A reflects the effect of these adjustments and certain
other balance sheet reclassifications.
The following Items are amended hereby:
PART I -- FINANCIAL INFORMATION:
Item 1. Financial Statements.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
Item 6. Exhibits and Reports on Form 8-K.
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(As Restated;
See Note 3)
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,282 $ 2,347
Receivables, less allowance for doubtful
accounts of $2,343 and $2,650,
respectively 23,740 26,289
Income taxes receivable 760 800
Inventories 1,210 1,102
Prepaid expenses and other assets 1,065 1,528
Deferred income taxes 1,950 1,719
--------- ---------
Total current assets 30,007 33,785
--------- ---------
PROPERTY AND EQUIPMENT, at cost 83,375 82,140
Less accumulated depreciation
and amortization (16,295) (15,548)
--------- ---------
Net property and equipment 67,080 66,592
--------- ---------
OTHER ASSETS:
Deferred tax benefit 6,229 6,338
Deferred financing and other costs, net 775 1,150
Assets held for sale or redevelopment 3,465 3,465
Investments in and receivables from joint ventures 7,671 7,194
Other 3,023 2,770
--------- ---------
Total other assets 21,163 20,917
--------- ---------
$ 118,250 $ 121,294
========= =========
</TABLE>
(Continued)
-3-
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
--------- ------------
(As Restated;
See Note 3)
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 54,900 $ 30,126
Trade accounts payable 10,174 9,327
Accrued expenses:
Payroll and employee benefits 4,501 4,920
Interest 566 857
Self-insurance reserves 2,556 2,375
Other 2,700 2,413
--------- ---------
Total current liabilities 75,397 50,018
--------- ---------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 5,671 33,514
Deferred gains with respect to leases, net 3,231 3,293
Self-insurance reserves, less current portion 1,839 1,665
Other 5,486 5,243
--------- ---------
Total noncurrent liabilities 16,227 43,715
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,399,000 issued and outstanding at
March 31, 1999 and December 31, 1998, respectively 54 54
Paid-in capital 15,765 15,765
Retained earnings 10,807 11,742
--------- ---------
Total shareholders' equity 26,626 27,561
--------- ---------
$ 118,250 $ 121,294
========= =========
</TABLE>
The accompanying notes are an integral part of these interim
consolidated balance sheets.
-4-
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- -------
(As Restated;
See Note 3)
<S> <C> <C>
REVENUES:
Patient revenues $ 36,854 $41,839
Resident revenues 8,905 8,705
Management fees 919 906
Interest 34 43
-------- -------
Net revenues 46,712 51,493
-------- -------
EXPENSES:
Operating 37,723 41,252
Lease 4,901 4,754
General and administrative 2,735 2,726
Interest 1,307 1,245
Depreciation and amortization 1,148 962
-------- -------
Total expenses 47,814 50,939
-------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,102) 554
PROVISION (BENEFIT) FOR INCOME TAXES (396) 199
-------- -------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (706) 355
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (277) -0-
-------- -------
NET INCOME (LOSS) $ (983) $ 355
======== =======
BASIC EARNINGS PER SHARE:
Income (loss) before accounting change $ (.13) $ .07
Cumulative effect of change in accounting principle, net of tax (.05) -0-
-------- -------
Net income (loss) $ (.18) $ .07
======== =======
DILUTED EARNINGS PER SHARE
Income (loss) before accounting change $ (.13) $ .07
Cumulative effect of change in accounting principle, net of tax (.05) -0-
-------- -------
Net income (loss) $ (.18) $ .07
======== =======
WEIGHTED AVERAGE SHARES:
Basic 5,399 5,377
======== =======
Diluted 5,399 5,388
======== =======
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-5-
<PAGE> 6
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- -------
(As Restated;
See Note 3)
<S> <C> <C>
NET INCOME (LOSS) $ (983) $ 355
-------- -------
OTHER COMPREHENSIVE INCOME:
Foreign currency translation adjustments 74 37
Income tax expense (27) (13)
-------- -------
47 24
-------- -------
COMPREHENSIVE INCOME (LOSS) $ (936) $ 379
======== =======
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-6-
<PAGE> 7
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- -------
(As Restated;
See Note 3)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (983) $ 355
Items not involving cash:
Depreciation and amortization 1,148 962
Provision for doubtful accounts 729 446
Equity (earnings) loss in joint ventures 32 (21)
Amortization of deferred balances (4) (170)
Deferred income taxes (149) (195)
Write off pursuant to change in accounting principle 433 -0-
Changes in other assets and liabilities:
Receivables, net 1,778 264
Inventories (108) (13)
Prepaid expenses and other assets 489 (301)
Trade accounts payable and accrued expenses 756 1,582
Other (29) (4)
------- -------
Net cash provided from operating activities 4,092 2,905
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (1,446) (1,098)
Investment in TDLP (157) (625)
Mortgages receivable, net 137 (305)
Deposits, pre-opening costs and other (361) (350)
Investment in and advances to joint ventures, net (273) (764)
TDLP partnership distributions 72 75
------- -------
Net cash used in investing activities (2,028) (3,067)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayment of) bank line of credit (3,490) 1,830
Proceeds from issuance of debt obligations 636 -0-
Repayment of debt obligations (187) (211)
Advances to TDLP, net (50) (746)
Increase in lease obligations 47 -0-
Financing costs (85) (9)
------- -------
Net cash provided from financing activities (3,129) 864
------- -------
</TABLE>
(Continued)
-7-
<PAGE> 8
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
-------- -------
(As Restated;
See Note 3)
<S> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $ (1,065) $ 702
CASH AND CASH EQUIVALENTS, beginning of period 2,347 2,673
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,282 $ 3,365
======== =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 1,598 $ 1,365
======== =======
Cash payments (refunds) of income taxes, net $ (443) $ 278
======== =======
</TABLE>
Advocat received net benefit plan deposits and earnings and recorded net benefit
plan liabilities of $52,000 and $37,000 in the three month periods ended March
31, 1999 and 1998, respectively.
The accompanying notes are an integral part of these interim consolidated
financial statements.
-8-
<PAGE> 9
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999 AND 1998
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") is a
provider of long-term care services to the elderly. The Company operates nursing
homes and assisted living facilities in 11 Southeastern states and two Canadian
provinces.
As of March 31, 1999, the Company operates 119 facilities consisting of 66
nursing homes with 7,458 licensed beds and 53 assisted living facilities with
4,793 units. The Company owns seven nursing homes, leases 37 others, and manages
22 nursing homes. The Company owns 17 assisted living facilities, leases 24
others, and manages 12 assisted living facilities. The Company holds a minority
equity interest in six of these managed assisted living facilities. The Company
operates 52 nursing homes and 33 assisted living facilities in the United States
and 14 nursing homes and 20 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 consolidated financial statements for the three month periods ended
March 31, 1999 and 1998, included herein have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
interim consolidated financial statements reflect all adjustments necessary to
present fairly the financial position at March 31, 1999 and the results of
operations and the cash flows for the three month periods ended March 31, 1999
and 1998.
The results of operations for the three month periods ended March 31, 1999 and
1998 are not necessarily indicative of the operating results for the entire
respective years. These interim financial statements should be read in
connection with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31,
1998 as well as those included in the Company's Report on Form 10-Q/A for the
three and nine months ended September 30, 1999.
-9-
<PAGE> 10
3. RESTATEMENT
In connection with reporting its results for the nine months ended September 30,
1999, the Company recorded certain adjustments to its previously reported
interim results for 1999. The adjustments, all of which reduce pre-tax
operations, that affect the quarterly period ended March 31, 1999 total
$1,351,000. Certain financial information, both before and after the effect of
the adjustments and certain reclassifications, is summarized as follows:
<TABLE>
Three Months Ended
March 31, 1999
--------------
<S> <C>
Income before income taxes and cumulative effect of change
in accounting principle (as previously reported) $ 249,000
Adjustments:
Increase in allowance for bad debts (538,000)
Increase in self-insurance reserves for workers'
compensation claims (362,000)
Write-off of certain assets (189,000)
Recognition of costs in association with the termination
of an operating lease (135,000)
Increase in depreciation expense (81,000)
Increase in lease expense due to reallocation of expense
over the life of a long-term lease (46,000)
----------
Loss before income taxes and cumulative effect of change in
accounting principle (as restated) ($1,102,000)
==========
Net loss (as previously reported) ($ 118,000)
==========
Net loss (as restated) ($ 983,000)
==========
Loss per common share (as previously reported) ($ .02)
=====
Loss per common share (as restated) ($ .18)
=====
March 31, 1999
--------------
Total shareholders' equity (as previously reported) $ 27,491,000
============
Total shareholders' equity (as restated) $ 26,626,000
============
Total assets (as previously reported) $118,608,000
============
Total assets (as restated) $118,250,000
============
</TABLE>
-10-
<PAGE> 11
4. CHANGE IN ACCOUNTING PRINCIPLE
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, Reporting on the Costs of Start-Up Activities. SOP 98-5, issued by the
Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start-up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting principle in the accompanying
interim consolidated statement of operations.
5. 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,
1999 1998
---------- ----------
(As Restated;
See Note 3)
<S> <C> <C>
NUMERATOR:
Income (loss) before cumulative effect
of change in accounting principle $ (706,000) $ 355,000
Cumulative effect of change in accounting
principle, net of tax (277,000) -0-
---------- ----------
Net income (loss) $ (983,000) $ 355,000
========== ==========
DENOMINATOR:
Basic average shares outstanding 5,399,000 5,377,000
Employee stock purchase plan N/A(1) 10,000
Options -0- 1,000
---------- ----------
Diluted average shares outstanding 5,399,000 5,388,000
========== ==========
BASIC EARNINGS PER SHARE:
Income (loss) before accounting change $ (.13) $ .07
Cumulative effect of change in accounting
principle, net of tax (.05) -0-
---------- ----------
Net income (loss) $ (.18) $ .07
========== ==========
DILUTED EARNINGS PER SHARE:
Income (loss) before accounting change $ (.13) $ .07
Cumulative effect of change in accounting
principle, net of tax (.05) -0-
---------- ----------
Net income (loss) $ (.18) $ .07
========== ==========
</TABLE>
- -----------
(1) Not applicable since inclusion would be anti-dilutive
-11-
<PAGE> 12
6. 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:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
---------- ----------
<S> <C> <C>
Foreign currency items:
Beginning balance $ (412,000) $ (196,000)
Current-period change, net of income tax 47,000 24,000
---------- ----------
Ending balance $ (365,000) $ (172,000)
========== ==========
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
7. OPERATING SEGMENT INFORMATION
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information." The Company has three
reportable segments: U.S. nursing homes, U.S. assisted living facilities,
and Canadian operations, which consists of both nursing home and assisted
living services. Management evaluates each of these segments independently
due to the geographic, reimbursement, marketing, and regulatory differences
between the segments. Management evaluates performance based on profit or
loss from operations before income taxes not including nonrecurring gains
and losses and foreign exchange gains and losses. The following information
is derived from the Company's segments' internal financial statements and
includes information related to the Company's unallocated corporate
revenues and expenses:
-12-
<PAGE> 13
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
(IN THOUSANDS) 1999 1998
-------- --------
(As Restated;
See Note 3)
<S> <C> <C>
Net revenues:
U.S. nursing homes $ 36,516 $ 41,447
U.S. assisted living facilities 6,622 6,306
Canadian operations 3,627 3,738
Corporate 183 241
Eliminations (236) (239)
-------- --------
Total $ 46,712 $ 51,493
======== ========
Depreciation and amortization:
U.S. nursing homes $ 597 $ 541
U.S. assisted living facilities 442 306
Canadian operations 85 87
Corporate 24 28
Eliminations -0- -0-
-------- --------
Total $ 1,148 $ 962
======== ========
Operating income (loss):
U.S. nursing homes $ (1,261) $ 324
U.S. assisted living facilities 53 100
Canadian operations 396 473
Corporate (290) (343)
Eliminations -0- -0-
-------- --------
Total $ (1,102) $ 554
======== ========
<CAPTION>
MARCH 31, DECEMBER 31,
1999 1998
-------- --------
(As Restated;
See Note 3)
<S> <C> <C>
Long-lived assets:
U.S. nursing homes $ 56,013 $ 56,396
U.S. assisted living facilities 33,640 33,987
Canadian operations 11,540 10,536
Corporate 22,074 21,725
Eliminations (35,024) (35,135)
-------- --------
Total $ 88,243 $ 87,509
======== ========
Total assets:
U.S. nursing homes $ 82,891 $ 88,473
U.S. assisted living facilities 36,651 36,926
Canadian operations 14,671 13,718
Corporate 25,089 24,909
Eliminations (41,052) (42,732)
-------- --------
Total $118,250 $121,294
======== ========
</TABLE>
-13-
<PAGE> 14
8. SUBSEQUENT EVENT - DEBT COVENANT COMPLIANCE
Certain of the Company's loan agreements contain various financial covenants,
the most restrictive of which relate to net worth, cash flow, debt to equity
ratio requirements, and limits on the payment of dividends to shareholders. As
of both March 31 and September 30, 1999, the Company was not in compliance with
these covenants, but has received formal waivers from its lenders. However, as
of both December 31, 1999 and through the date of the filing of this Report on
Form 10-Q/A, the Company was not in compliance with the covenants. Cross-default
or material adverse change provisions contained in the agreements allow the
holders of a majority of the Company's debt to demand immediate repayment.
Although the noncompliance and resulting actions have not been formally or
informally declared by the lenders, the Company has not obtained waivers of the
noncompliance. Based on regularly scheduled debt service requirements and
reflective of certain refinancings and extensions that have taken place
subsequent to March 31, 1999, the Company has a total of $15.2 million of debt
that must be repaid or refinanced in the next 12 months from March 31, 1999.
However, as a result of the covenant noncompliance and other cross-default
provisions, the Company has classified a total of $54.9 million of debt as
current liabilities as of March 31, 1999. The Company would not be able to repay
the total amount of its outstanding indebtedness if the applicable lenders
forced immediate repayment.
The accompanying interim consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. Although it is not
anticipated that the Company's lenders will demand immediate repayment, the
continued forbearance on the part of the Company's lenders cannot be assured at
this time. In addition, the Company is not in compliance at December 31, 1999
with the financial 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. At a minimum, the Company's cash requirements over the
next 12 months include funding operations, capital expenditures, scheduled debt
service, and other working capital requirements. No assurance can be given that
the Company will have sufficient cash to meet its cash requirements for the next
12 months. The Company is currently discussing potential restructuring and
refinancing alternatives with its lenders and primary lessor. No assurance can
be given that the Company 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. 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 financings, asset
dispositions, or relief under the United States Bankruptcy code. The
accompanying interim 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.
-14-
<PAGE> 15
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 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 offers a
variety of comprehensive rehabilitation services as well as medical supply and
nutritional support services.
As of March 31, 1999, Advocat's portfolio includes 119 facilities composed of 66
nursing homes containing 7,458 licensed beds and 53 assisted living facilities
containing 4,793 units. In comparison, at March 31, 1998, the Company operated
115 facilities composed of 64 nursing homes containing 7,221 licensed beds and
51 assisted living facilities containing 4,880 units. As of March 31, 1999, the
Company owns seven nursing homes, leases 37 others, and manages the remaining 22
nursing homes. Additionally, the Company owns 17 assisted living facilities,
leases 24 others, and manages the remaining 12 assisted living facilities. The
Company holds a minority equity interest in six of these managed assisted living
facilities. In the United States, the Company operates 52 nursing homes and 33
assisted living facilities, and in Canada, the Company operates 14 nursing homes
and 20 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.
-15-
<PAGE> 16
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three months ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998 CHANGE %
------- ------- ------- ------
(As Restated)
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $36,854 $41,839 $(4,985) (11.9)
Resident revenues 8,905 8,705 200 2.3
Management fees 919 906 13 1.5
Interest 34 43 (9) (21.1)
------- ------- -------
Net revenues 46,712 51,493 (4,781) (9.3)
------- ------- -------
EXPENSES:
Operating 37,723 41,252 (3,529) (8.6)
Lease 4,901 4,754 147 3.1
General and administrative 2,735 2,726 9 0.3
Interest 1,307 1,245 62 5.0
Depreciation and amortization 1,148 962 186 19.3
------- ------- -------
Total expenses 47,814 50,939 (3,125) (6.1)
------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES (1,102) 554 (1,656) (298.9)
PROVISION (BENEFIT) FOR INCOME TAXES (396) 199 (595) (298.9)
------- ------- -------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (706) 355 (1,061) (298.9)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (277) -0- (277) N/A
------- ------- -------
NET INCOME (LOSS) $ (983) $ 355 $ (1,338) (377.1)
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------- -------
(As Restated)
<S> <C> <C>
REVENUES:
Patient revenues 78.9% 81.2%
Resident revenues 19.0 16.9
Management fees 2.0 1.8
Interest 0.1 0.1
----- -----
Net revenues 100.0% 100.0%
----- -----
OPERATING EXPENSES:
Operating 80.8 80.1
Lease 10.5 9.2
General and administrative 5.8 5.3
Interest 2.8 2.4
Depreciation and amortization 2.5 1.9
----- -----
Total expenses 102.4 98.9
----- -----
INCOME (LOSS) BEFORE INCOME TAXES (2.4) 1.1
PROVISION (BENEFIT) FOR INCOME TAXES (0.9) 0.4
----- -----
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (1.5) 0.7
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX (0.6) -0-
----- -----
NET INCOME (LOSS) (2.1)% 0.7%
===== =====
</TABLE>
-16-
<PAGE> 17
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1998
Medicare Reimbursement Changes. In 1999, the Company has continued to experience
the impact of Medicare cost limitations imposed by the Health Care Finance
Administration upon all providers of nursing home Medicare services. Beginning
in July 1998, a portion of the Company's facilities began the four-year phase-in
from the cost reimbursement system to the prospective payment system ("PPS"). In
general, PPS provides a standard payment for Medicare Part A services to all
providers regardless of their costs. PPS creates an incentive for providers to
reduce their costs, and management has reduced operating expenses in 1999 in an
effort to offset the revenue reductions resulting from PPS. The phase-in of PPS
began for all providers at some point during the 12 month period ending June 30,
1999. Management estimates that the ultimate impact of PPS on Company revenues
will be a reduction of $16.0 to $17.0 million per year. Since the onset of PPS,
management has reduced costs in response to PPS such that there has been little
direct impact on net operations. However, the Company's Medicare census has
declined significantly as an indirect result of PPS and other reimbursement
changes, which has resulted in a reduction in the amount of the Company's
overhead absorbed by the Company's Medicare operations. Since PPS is still an
evolving process, the ultimate impact cannot be known with certainty at this
time.
Cost restrictions placed on the provision of rehabilitation (ancillary) services
have 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% of actual cost. In 1999, the cost reimbursement system
for rehabilitation services has been replaced by a system of fee screens that
effectively limit reimbursement and place caps on the maximum fees that may be
charged for therapy services. Historically, the Company subcontracted the
provision of these therapy services. However, in response to the deep cuts in
fees for service, the Company's therapy subcontractor exited the business. And
in June 1999, the Company began providing such services in house. The Company
anticipates that this will further negatively impact operations, although the
ultimate effect cannot yet be reasonably estimated. These changes with respect
to Part B reimbursement have combined to cause a dramatic decrease in the
Company's ancillary revenues and expenses. In general, the Company has been
successful in reducing costs in tandem with the revenue reductions from the
provision of therapy services. However, the Company has assumed more operating
risk in electing to provide therapy services for its own account. The Company
also believes that it and the industry have experienced occupancy declines as
doctors have kept patients in hospitals rather than allowing their admittance to
nursing homes where therapy services are now limited.
These changes are endemic upon the industry. They have resulted pursuant to the
administrative implementation of the guidelines contained in the Balanced Budget
Act of 1997 (the "BBA"). Under the BBA, Medicare expenditures by the Federal
government have been cut approximately 20%. 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 over
three years $2.7 billion in Medicare funding. 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. In
addition, the measure 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. There is also movement that may
result in the institution of administrative changes that would restore
additional revenues to the U.S. nursing home industry. While such activity is
positive, there is no expectation by management that the current round of
legislative and administrative relief under consideration is sufficient to
restore the economic viability the industry needs.
Revenues. Net revenues decreased to $46.7 million in 1999 from $51.5 million in
1998, a decrease of $4.8 million, or 9.3%. Resident revenues increased to $8.9
million in 1999 from $8.7 million in 1998, an increase of $200,000, or 2.3%.
Patient revenues decreased to $36.8 million in 1999 from $41.8 million in 1998,
a decrease of $5.0 million, or 11.9%. This decrease in patient revenues is due
primarily to the Medicare reimbursement changes and a decline in Medicare
census. In addition, recent increases in reimbursement rates received by the
Company have been disappointing and below expectations in certain states in
which the Company operates. The Company anticipates it is likely that federal
and state governments will continue to seek ways to retard the rate of growth in
Medicare and Medicaid program rates. There was a 2.4% decline in patient and
resident days, approximately 15,000 days, which was primarily due to a 35.1%
decline in Medicare days, approximately 12,000 days. This decline in Medicare
days accounts for approximately $3.9 million of the overall revenue reduction.
As a percent of patient and resident revenues, Medicare decreased to 15.8% in
1999 from 25.8% in 1998 while Medicaid and similar programs increased to 65.4%
in 1999 from 55.4% in 1998.
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<PAGE> 18
Ancillary service revenues, prior to contractual allowances, decreased to $7.7
million in 1999 from $16.7 million in 1998, a decrease of $9.0 million or 53.9%.
The decrease is primarily attributable to reductions in revenue availability
under Medicare and is consistent with the Company's expectation. Cost limits are
continuing to be placed on ancillary services as part of the transition to PPS;
additionally, other cost limitation provisions could occur. Therefore, the
Company anticipates that ancillary service revenues will remain flat or continue
trending down during 1999. The ultimate effect on the Company's operations
cannot be predicted at this time because the extent and composition of the cost
limitations are subject to change.
Operating Expense. Operating expense decreased to $37.7 million in 1999 from
$41.2 million in 1998, a decrease of $3.5 million, or 8.6%. The decrease is
primarily attributable to cost reductions implemented in response to the
Medicare reimbursement changes (that is, reduced provision of therapy services
and in the contracted costs to provide them). As a percent of patient and
resident revenues, operating expense increased to 82.4% in 1999 from 81.6% in
1998. The largest component of operating expense is wages, which increased to
$18.6 million in 1999 from $18.5 million in 1998, an increase of $115,000, or
0.6%. The Company's wage increases are generally in line with inflation. The
Company has been able to cut staffing at certain facilities that have
experienced occupancy declines. The Company recognized higher general insurance
expense in 1999 due to fully reserving the self-insurance portion of its general
liability insurance program with respect to its U.S. nursing homes operation.
The Company's provision for bad debts increased to $780,000 in 1999 from
$452,000 in 1998, an increase of $328,000, or 72.6%. The Company is self-insured
for certain workers' compensation claims incurred prior to May 1997. Due to the
continued development of open claims beyond previous evaluations, the Company
recognized a charge of $362,000 to provide sufficient reserve to cover the
expected liability for these claims. In connection with the termination of an
operating lease to occur in the second quarter, the Company recognized a charge
of $135,000 to provide additional reserve for anticipated costs in association
with the termination. The Company also wrote off $189,000 of miscellaneous
assets.
Lease Expense. Lease expense increased to $4.9 million in 1999 from $4.8 million
in 1998, an increase of $147,000, or 3.1%. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense remained
flat at $2.7 million in both 1999 and 1998. As a percent of total net revenues,
general and administrative expense increased to 5.8% in 1999 compared with 5.3%
in 1998. The percentage increase is attributable to the lower revenue base.
Interest Expense. Interest expense increased to $1.3 million in 1999 from $1.2
million in 1998, an increase of $62,000, or 5.0%.
Depreciation and Amortization. Depreciation and amortization expenses increased
to $1.2 million in 1999 from $1.0 million in 1998, an increase of $186,000, or
9.3%.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, Reporting on the Costs of Start-Up
Activities. SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
-18-
<PAGE> 19
Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a
result of the above, the loss before income taxes and the cumulative effect of
the change in accounting principle was $(1.1) million in 1999 as compared with
income of $554,000 in 1998, a decrease of $1.6 million, or (298.9)%. The
effective combined federal, state and provincial income tax rate was 36.0% in
both 1999 and 1998. The net loss after taxes and the cumulative effect of the
change in accounting principle was $(1.0) million in 1999 as compared with net
income of $355,000 in 1998, a decrease of $1.3 million, and basic and diluted
earnings per share were each a loss of $(.18) in 1999 as compared with income of
$.07 per share in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Certain of the Company's loan agreements contain various financial covenants,
the most restrictive of which relate to net worth, cash flow, debt to equity
ratio requirements, and limits on the payment of dividends to shareholders. As
of both March 31 and September 30, 1999, the Company was not in compliance with
these covenants but has received formal waivers from its lenders. However, as of
both December 31, 1999 and through the date of the filing of this Report on Form
10-Q/A, the Company was not in compliance with the covenants. Cross-default or
material adverse change provisions contained in the agreements allow the holders
of a majority of the Company's debt to demand immediate repayment. Although the
noncompliance and resulting actions have not been formally or informally
declared by the lenders, the Company has not obtained waivers of the
noncompliance. Based on regularly scheduled debt service requirements and
reflective of certain refinancings and extensions that have taken place
subsequent to March 31, 1999, the Company has a total of $15.2 million of debt
that must be repaid or refinanced in the next 12 months from March 31, 1999.
However, as a result of the covenant noncompliance and other cross-default
provisions, the Company has classified a total of $54.9 million of debt as
current liabilities as of March 31, 1999. The Company would not be able to repay
the total amount of its outstanding indebtedness if the applicable lenders
forced immediate repayment.
At March 31, 1999 and December 31, 1998, the Company had negative working
capital of $(45.4) million and $(16.2) million, respectively, and the current
ratio was 0.4 and 0.7, respectively. The negative working capital results
primarily from the Company's classification of a majority of its debt as current
liabilities as of March 31, 1999 and the Company's current maturities of
long-term debt at December 31, 1998.
Net cash provided by operating activities totaled $4.0 million and $2.9 million
in the three month periods ended March 31, 1999 and 1998, 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 by investing activities totaled $2.0 million and $3.1 million the
three months periods ended March 31, 1999 and 1998, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
and advances to joint ventures and additional investment in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.4 million and $5.2 million for capital expenditures in each of
the last three calendar years ending December 31, 1998. Substantially all such
expenditures were for facility improvements and equipment, which were financed
principally through working capital. For the year ended December 31, 1999, the
Company anticipates that capital expenditures for improvements and equipment for
its existing facility operations will be approximately $5.4 million, including
$2.8 million for non-routine projects.
Net cash provided (used) by financing activities totaled $(3.1) million and
$864,000 the three month periods ended March 31, 1999 and 1998, respectively.
The net cash provided from financing activities primarily represents net
proceeds from issuance and repayment of debt and advances to or repayments from
related parties.
At March 31, 1999, the Company had total debt outstanding of $60.6 million, of
which $10.8 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
a 1997 acquisition. The Company's remaining debt of $15.7 million was drawn
under the Company's lines of credit. Most of the Company's debt is at floating
interest rates, generally at a spread above the London Interbank Offered Rate
("LIBOR").
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<PAGE> 20
The Bridge Loan represented an original indebtedness of $34.1 million. It was
used to fund the purchase of the Company's North Carolina assisted living
operations, which purchase closed on September 30, 1997. On June 4, 1999, the
Company closed two loans totaling $25.25 million (the "NC Loans"). The NC Loans
are secured by the 13 owned assisted living facilities the Company operates in
the state of North Carolina. The NC Loans mature in June 2002, bear interest at
LIBOR plus 2.35%, and provide for principal amortization under a 25-year
amortization schedule. The net proceeds available at closing, $24.7 million,
were applied against the Company's indebtedness under the Bridge Loan. With the
application of the net proceeds from the NC Loans, the balance of the Bridge
Loan was reduced to $9.4 million. Prior to the principal reduction, the Bridge
Loan had a maturity date of July 1, 1999, carried interest at LIBOR plus 3.0%,
and had a restriction against pledging the North Carolina assets as collateral
with any other lender. With the reduction in the principal balance, the Company
and its lenders agreed to modify the terms of the Bridge Loan by extending the
stated maturity date to October 1, 1999 (since extended to February 28, 2000),
increasing the interest rate to 12.0% fixed, and providing certain security
interests to the lenders. These security interests include two non-operating
properties in North Carolina and the Company's limited partnership interests in
TDLP. No further principal reductions have been made or are scheduled at this
time, but the Company has agreed to apply against the Bridge Loan indebtedness
any net proceeds realized from the sale of the collateral comprising the
additional security interests.
As of March 31, 1999, the Company had drawn $4.35 million, had $5.65 million of
letters of credit outstanding, and had no remaining borrowing capability under
its working capital line of credit. As of January 3, 2000, the Company had drawn
$1.0 million, had $5.5 million of letters of credit outstanding, and had $1.8
million remaining borrowing capability under its working capital line of credit.
The interest rates applicable at March 31, 1999 and January 3, 2000, were 7.4%
and 9.0%, respectively. The working capital line of credit matured December 1,
1999, but was not called, having eventually been extended to February 28, 2000
by the lender. A further extension of the existing agreement or a replacement
working capital line of credit is currently being negotiated with the existing
bank lender.
Since early 1998, the Company's bank lender has provided additional line of
credit availability (the "Overline"). Availability under the Overline began at
$1.25 million and was increased over time to its maximum level of $4.0 million.
Subsequently, it was reduced to $3.75 million in the third quarter of 1999, and
has since been reduced to its current level of $3.5 million. Since April 14,
1999, the Overline has carried interest at 14.0% but was otherwise subject to
the same terms and conditions as the Company's working capital line of credit.
Maturity of the Overline had been scheduled for July 1, 1999. However,
coincident with the changes with respect to the Bridge Loan, the lender agreed
to revised terms with respect to the Overline. These revisions, including
availability reduction, extended the maturity date to December 1, 1999, (which
has since been extended to February 28, 2000) and provided for increased
reporting responsibility to the lender and cooperation with the lender in the
completion of an audit of the Company's accounts receivable. In addition, the
Company has provided, with respect to certain available assets, first and second
collateral positions in favor of the lender. Amounts drawn under the Overline
totaled $273,000 and $3.5 million as of March 31, 1999 and January 3, 2000,
respectively, and carried interest rates of 7.4% and 14.0%, respectively.
The acquisition line of credit of $40.0 million, less outstanding borrowings,
was 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. As of
both March 31, 1999, and January 3, 2000, the Company has $11.1 million
outstanding under the acquisition line, which amount was secured by four nursing
homes. No further draws are available under the acquisition line of credit.
Amounts outstanding under the acquisition line of credit had a scheduled
maturity on December 1, 1999, however, the Company has signed an agreement with
the existing lender that both extended the maturity to April 30, 2000 and is
expected to result in replacement long-term financing with such lender.
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<PAGE> 21
Based on regularly scheduled debt service requirements (i.e., excluding any
potential acceleration due to formal declaration of default by one or more of
the Company's lenders), at March 31, 1999, $15.2 million of the Company's total
debt of $60.6 million must be repaid or refinanced during the next 12 months.
These scheduled current maturities reflect certain refinancings or extensions
identified in the foregoing discussion that have occurred subsequent to March
31, 1999. These scheduled maturities are as follows: $4.6 million, combined,
under the working capital line of credit and the Overline, both currently
extended to February 28, 2000; $9.4 million under the Bridge Loan currently
extended to February 28, 2000; and miscellaneous scheduled maturities over the
next 12 months of $1.2 million. With respect to the Bridge Loan, the working
capital line of credit, and the Overline, the Company is currently negotiating
with the existing lender to further restructure the terms, including further
extension of their maturity dates. The Company expects to repay a portion of
this debt through various means such as the sale of certain assets, refinancing
mortgage debt, and through cash generated from operations. The Company expects
to repay the miscellaneous current maturities of $1.2 million with cash
generated from operations. Management is hopeful that it will be successful in
restructuring the Company's debt as described. However, there can be no
assurance that the Company's restructuring efforts will be successful.
In addition, the Company is not in compliance at December 31, 1999 with the
financial 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.
At a minimum, the Company's cash requirements over the next 12 months include
funding operations, capital expenditures, scheduled debt service, and other
working capital requirements. No assurance can be given that the Company will
have sufficient cash to meet its requirements for the next 12 months. As
previously described, the Company is currently discussing potential
restructuring and refinancing alternatives with its current lenders as well as
with its primary lessor. If the Company's lenders forced immediate repayment,
the Company would not be able to repay the total amount of its indebtedness
outstanding. Further, no assurance can be given that the Company 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. 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 financing, asset dispositions, or relief under the
United States Bankruptcy code. The Company's interim consolidated financial
statements as of and for the three months ended March 31, 1999 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.
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
-21-
<PAGE> 22
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, 1999 and December 31, 1998, totaled $25.8 million and
$28.3 million, respectively, representing approximately 51 and 53 days in
accounts receivable, respectively. Accounts receivable from the provision of
management services was $509,000 and $387,000 respectively, at March 31, 1999
and December 31, 1998 representing approximately 50 and 39 days in accounts
receivable, respectively.
The Company is subject to accounting losses from uncollectible receivables in
excess of its reserves. The Company continually evaluates the adequacy of its
bad debt reserves based on patient mix trends, agings of older balances, payment
terms and delays with regard to third-party payors, collateral and deposit
resources, as well as other factors. The Company continues to evaluate and
implement additional procedures to strengthen its collection efforts and reduce
the incidence of uncollectible accounts.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud 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.
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 four-year "transition period,"
commencing with the first cost reporting period beginning on or after July 1,
1998. Through March 31, 1999, all but nine of the Company's facilities had begun
the PPS transition. The BBA also contains certain measures that have and could
lead to further reductions in Medicare therapy cost reimbursement and Medicaid
payment rates. To date, the major impact on the Company from PPS and other
reimbursement changes has been systemic occupancy declines, which have reduced
the amount of overhead absorbed under the Company's Medicare operations.
Definitely, both revenues and expenses have been reduced significantly from the
levels prior to PPS. With respect to Medicare therapy allowable cost and fee
reductions, the Company estimates that net operations was negatively impacted in
both 1998 and 1999 and will be negatively impacted beyond 1999 as a result of
the changes brought about under the BBA. However, the ultimate negative impact
on the Company's operations cannot be reasonably estimated. Any reductions in
government spending for long-term health care could have an adverse effect on
the operating results and cash flows of the Company. The
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<PAGE> 23
Company will attempt to maximize the revenues available to it from governmental
sources within the changes that will occur under the BBA. In addition, the
Company will attempt to increase revenues from nongovernmental sources,
including expansion of its assisted living and Canadian operations to the
extent capital is available to do so, if at all.
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. No
assurance can be given that states will not do so in the future or that the
future funding of Medicaid programs will remain at levels comparable to the
present levels. The United States Supreme Court ruled in 1990 that health care
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.
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 June 30, 1999, Mary Margaret Hamlett resigned as Executive Vice
President, Chief Financial Officer and Secretary of the Company. Mr. Richard B.
Vacek, Jr. replaced Ms. Hamlett in those capacities effective August 16, 1999.
Ms. Hamlett also resigned as a Director of the Company coincident with her
resignation as an employee of the Company.
In addition, Mr. Charles H. Rinne joined the Company effective June 28, 1999.
Mr. Rinne is President and Chief Operating Officer of the Company.
STOCK EXCHANGE
On November 10, 1999, the Company's stock began being quoted on the NASD's OTC
Bulletin Board under the symbol AVCA. Previously, the Company's common stock was
traded on the New York Stock Exchange under the symbol AVC. The Company's common
stock is also traded on the Toronto Stock Exchange under the symbol AVCU.
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.
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<PAGE> 24
IMPACT OF THE YEAR 2000
The Company experienced the changeover to the year 2000 ("Y2K") without
difficulty. In preparation for the potential of Y2K related problems, the
Company established a Y2K compliance committee, which was responsible for
identifying such problems and developing remedial or contingency plans to
address them. Working closely with the Company's insurance carrier, the
committee developed a formal, documented plan that was put into place. The
costs of the Company's Y2K compliance program were not material.
Although the Company experienced no catastrophic interruptions in its business
in the changeover to the year 2000, it remains on alert for potential Y2K
problems. To date, no problems have been noted with any of the Company's
vendors. The greatest potential risk that remains is a delay in the liquidation
of receivables from intermediaries or other payors for services provided to
patients and residents. Such delays are not expected, but they could yet occur.
The foregoing Y2K disclosure is intended to be a "Year 2000 statement" as the
term is defined in the Year 2000 Information and Readiness Disclosure Act of
1998 (the "Year 2000 Act"), and, to the extent such disclosure relates to Y2K
processing of the Company or to products or services offered by the Company, it
is also intended to be the "Year 2000 readiness disclosure," as that term is
defined in the Year 2000 Act.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1998 as well as the Report on Form 10-Q/A for the quarterly period
ended September 30, 1999. Certain statements made by or on behalf of the
Company, including those contained in this "Management's Discussion and Analysis
of Financial
-24-
<PAGE> 25
Condition and Results of Operations" and elsewhere, are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.
These statements involve risks and uncertainties including, but not limited to,
changes in governmental reimbursement or regulation, health care reforms, the
increased cost of borrowing under the Company's credit agreements, covenant
waivers from the Company's lenders, possible amendments to the Company's credit
agreements, the impact of future licensing surveys, the ability to execute on
the Company's acquisition program, both in obtaining suitable acquisitions and
financing therefor, changing economic conditions as well as others. Investors
also should refer to the risks identified in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as risks
identified in the Company's Form 10-K for the year ended December 31, 1998 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.
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
The Company is not currently in compliance with certain covenants of its
loan agreements and certain other indebtedness. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in the
Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
-25-
<PAGE> 26
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.
January 11, 2000
By: /s/ Richard B. Vacek, Jr.
------------------------------------------------
Richard B. Vacek, Jr.
Principal Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to Sign
on Behalf of the Registrant
-26-
<PAGE> 27
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).
27.1 - Financial Data Schedule (for SEC use only)
(incorporated by reference to Exhibit 27 to Report on
Form 10-Q dated March 31, 1999).
27.2 - Restated 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/A FOR THE QUARTERLY
PERIOD ENDED MARCH 31, 1999
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,282
<SECURITIES> 0
<RECEIVABLES> 26,083
<ALLOWANCES> 2,343
<INVENTORY> 1,210
<CURRENT-ASSETS> 30,007
<PP&E> 83,375
<DEPRECIATION> 16,295
<TOTAL-ASSETS> 118,250
<CURRENT-LIABILITIES> 75,397
<BONDS> 0
0
0
<COMMON> 54
<OTHER-SE> 26,572
<TOTAL-LIABILITY-AND-EQUITY> 118,250
<SALES> 0
<TOTAL-REVENUES> 46,712
<CGS> 0
<TOTAL-COSTS> 47,814
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 729
<INTEREST-EXPENSE> 1,307
<INCOME-PRETAX> (1,102)
<INCOME-TAX> (396)
<INCOME-CONTINUING> (706)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (277)
<NET-INCOME> (983)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
