<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: JUNE 30, 2000
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSACTION PERIOD FROM _________ TO _________.
COMMISSION FILE NO.: 1-12996
-------
ADVOCAT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1559667
------------------------------ -------------------------------
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
-------------------------------------------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(615) 771-7575
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
NONE
---------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
5,491,621
---------------------------------------------------------------------
(OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF AUGUST 11, 2000)
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,595 $ 1,913
Receivables, less allowance for doubtful
accounts of $5,178 and $4,958, respectively 11,546 11,719
Inventories 813 754
Prepaid expenses and other assets 1,818 813
-------- --------
Total current assets 17,772 15,199
-------- --------
PROPERTY AND EQUIPMENT, at cost 88,447 87,667
Less accumulated depreciation
and amortization (21,284) (19,015)
-------- --------
Net property and equipment 67,163 68,652
-------- --------
OTHER ASSETS:
Deferred financing and other costs, net 790 939
Assets held for sale or redevelopment 1,476 1,476
Investments in and receivables from joint ventures 8,499 8,126
Other 1,827 1,793
-------- --------
Total other assets 12,592 12,334
-------- --------
$ 97,527 $ 96,185
======== ========
</TABLE>
(Continued)
-2-
<PAGE> 3
ADVOCAT INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(CONTINUED)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 53,068 $ 53,098
Trade accounts payable 7,218 7,984
Accrued expenses:
Payroll and employee benefits 4,080 4,001
Interest 115 221
Self-insurance reserves 3,381 3,508
Other 5,313 3,086
-------- --------
Total current liabilities 73,175 71,898
-------- --------
NONCURRENT LIABILITIES:
Long-term debt, less current portion 7,578 7,827
Self-insurance reserves, less current portion 3,044 2,268
Deferred gains with respect to leases, net 2,924 3,047
Other 4,587 4,878
-------- --------
Total noncurrent liabilities 18,133 18,020
-------- --------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, authorized 1,000,000 shares,
$.10 par value, none issued and outstanding -0- -0-
Common stock, authorized 20,000,000 shares,
$.01 par value, 5,492,000 issued and outstanding at
June 30, 2000 and December 31, 1999, respectively 55 55
Paid-in capital 15,907 15,907
Accumulated deficit (9,743) (9,695)
-------- --------
Total shareholders' equity 6,219 6,267
-------- --------
$ 97,527 $ 96,185
======== ========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
balance sheets.
-3-
<PAGE> 4
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------ ------
<S> <C> <C>
REVENUES:
Patient revenues $36,702 $ 34,352
Resident revenues 10,384 9,323
Management fees 1,125 877
Interest 51 38
------- --------
Net revenues 48,262 44,590
------- --------
EXPENSES:
Operating 37,170 38,033
Lease 5,258 5,003
General and administrative 2,879 3,155
Interest 1,436 1,325
Depreciation and amortization 1,141 1,147
Non-recurring charges 263 -0-
------- --------
Total expenses 48,147 48,663
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 115 (4,073)
PROVISION (BENEFIT) FOR INCOME TAXES 42 (1,466)
------- --------
NET INCOME (LOSS) $ 73 $ (2,607)
======= ========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) $ .01 $ (.48)
======= ========
DILUTED EARNINGS (LOSS) PER SHARE
Net income (loss) $ .01 $ (.48)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,492 5,399
======= ========
Diluted 5,492 5,399
======= ========
</TABLE>
The accompanying notes are an integral part of these interim consolidated
financial statements.
-4-
<PAGE> 5
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
REVENUES:
Patient revenues $72,674 $ 71,206
Resident revenues 20,810 18,227
Management fees 2,026 1,796
Interest 91 73
------- --------
Net revenues 95,601 91,302
------- --------
EXPENSES:
Operating 73,596 75,756
Lease 10,534 9,904
General and administrative 5,696 5,890
Interest 2,890 2,632
Depreciation and amortization 2,375 2,295
Non-recurring charges 263 -0-
------- --------
Total expenses 95,354 96,477
------- --------
INCOME (LOSS) BEFORE INCOME TAXES 247 (5,175)
PROVISION (BENEFIT) FOR INCOME TAXES 89 (1,863)
------- --------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE 158 (3,312)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX -0- (277)
------- --------
NET INCOME (LOSS) $ 158 $ (3,589)
======= ========
BASIC EARNINGS (LOSS) PER SHARE:
Income (loss) before accounting change $ .03 $ (.61)
Cumulative effect of change in accounting principle, net of tax -0- (.05)
------- --------
Net income (loss) $ .03 $ (.66)
======= ========
DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before accounting change $ .03 $ (.61)
Cumulative effect of change in accounting principle, net of tax -0- (.05)
------- --------
Net income (loss) $ .03 $ (.66)
======= ========
WEIGHTED AVERAGE SHARES:
Basic 5,492 5,399
======= ========
Diluted 5,492 5,399
======= ========
</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 JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
----- ------- ----- -------
<S> <C> <C> <C> <C>
NET INCOME (LOSS) $ 115 $(2,607) $ 158 $(3,589)
OTHER COMPREHENSIVE INCOME (LOSS):
Foreign currency translation adjustments (341) 223 (322) 297
Income tax (provision) benefit 123 (80) 116 (107)
----- ------- ----- -------
(218) 143 (206) 190
----- ------- ----- -------
COMPREHENSIVE INCOME (LOSS) $(103) $(2,464) $ (48) $(3,399)
===== ======= ===== =======
</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>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------ -----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 158 $ (3,589)
Items not involving cash:
Depreciation and amortization 2,375 2,295
Provision for doubtful accounts 1,419 3,307
Equity (earnings) loss in joint ventures (45) 28
Amortization of deferred balances (200) (62)
Deferred income taxes -0- (1,328)
Write-off pursuant to change in accounting principle -0- 433
Changes in other assets and liabilities:
Receivables (1,246) 3,504
Inventories (59) 87
Prepaid expenses and other assets (856) 425
Trade accounts payable and accrued expenses 2,157 (3,002)
Other 8 (10)
------- --------
Net cash provided by operating activities 3,711 2,088
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (780) (3,010)
Investment in TDLP -0- (160)
Mortgages receivable, net 301 152
Deposits, pre-opening costs and other (334) 674
Investment in and advances to joint ventures, net (433) (928)
TDLP partnership distributions 105 151
------- --------
Net cash used in investing activities (1,141) (3,121)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt obligations -0- 26,299
Repayment of debt obligations (888) (24,857)
Net proceeds from (repayment of) bank line of credit 609 (1,500)
Advances to TDLP, net (333) (138)
Increase in lease obligations 46 93
Financing costs -0- (510)
------- --------
Net cash provided by financing activities $ (566) $ (613)
------- --------
</TABLE>
(Continued)
-7-
<PAGE> 8
ADVOCAT INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS AND UNAUDITED)
(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999
------ ------
<S> <C> <C>
EFFECT OF EXCHANGE RATE CHANGES $ (322) $ 297
------- -------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,682 (1,349)
CASH AND CASH EQUIVALENTS, beginning of period 1,913 2,347
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 3,595 $ 998
======= =======
SUPPLEMENTAL INFORMATION:
Cash payments of interest $ 2,914 $ 3,106
======= =======
Cash payments (refunds) of income taxes, net $ (133) $ (623)
======= =======
</TABLE>
During the second quarter of 1999, the Company's executive benefit plan was
terminated. In connection therewith, Advocat distributed net benefit plan
deposits and relieved net benefit plan liabilities of $1,163,000 in the six
months ended June 30, 1999.
The accompanying notes are an integral part of these interim consolidated
financial statements.
-8-
<PAGE> 9
ADVOCAT INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000 AND 1999
1. BUSINESS
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services.
As of June 30, 2000, the Company operates 120 facilities consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,472 units. The Company owns seven nursing homes, leases 36 others, and manages
21 nursing homes. The Company owns 16 assisted living facilities, leases 25
others, and manages the remaining 15 assisted living facilities. The Company
holds a minority interest in seven of these managed assisted living facilities.
The Company operates 51 nursing homes and 33 assisted living facilities in the
United States and 13 nursing homes and 23 assisted living facilities in Canada.
The Company operates facilities in Alabama, Arkansas, Florida, Georgia,
Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West
Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia
and Ontario.
In recent periods, the long-term health care environment has undergone
substantial change with regards to reimbursement and other payor sources,
compliance regulations, competition among other health care providers and
relevant patient liability issues. The Company continually monitors these
industry developments as well as other factors that affect its business. See
Item 2 for further discussion of recent changes in the long-term health care
industry and the related impact on the operations of the Company.
2. BASIS OF FINANCIAL STATEMENTS
The interim consolidated financial statements for the three and six month
periods ended June 30, 2000 and 1999, included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management of the Company, the accompanying
interim consolidated financial statements reflect all adjustments necessary to
present fairly the financial position at June 30, 2000 and the results of
operations for the three and six month periods ended June 30, 2000 and 1999, and
the cash flows for the six month periods ended June 30, 2000 and 1999.
-9-
<PAGE> 10
The results of operations for the three and six month periods ended June 30,
2000 and 1999 are not necessarily indicative of the operating results for the
entire respective years. These interim consolidated financial statements should
be read in connection with the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. The Company has a working
capital deficit of $55.4 million as of June 30, 2000. The Company also has
limited resources available to meet its operating, capital expenditure and debt
service requirements during 2000. As of December 31, 1999, and through the date
of the filing of this Form 10-Q, the Company is not in compliance with certain
debt covenants which would allow the holders of substantially all of the
Company's debt to demand immediate principal repayments. Although the Company
does not anticipate that such demand will be made, the continued forbearance on
the part of the Company's lenders cannot be assured at this time. Accordingly,
the Company has classified the related debt principal amounts as current
liabilities in the accompanying consolidated financial statements as of June 30,
2000 and December 31, 1999. Given that events of default exist under the
Company's working capital line of credit, there can be no assurance that the
lender will continue to provide working capital advances. The Company is also
not in compliance with certain covenants applicable to the lease agreements
covering a majority of its United States nursing facilities. Under the
agreements, the lessor has the right to terminate the lease agreements and seek
recovery of any related financial losses as well as other remedies. At a
minimum, the Company's cash requirements over the next 12 months include funding
operations, capital expenditures, scheduled debt service and working capital
requirements. No assurance can be given that the Company will have sufficient
cash to meet its requirements for the next 12 months. The Company is currently
discussing potential restructuring and refinancing alternatives with its lenders
and primary lessor. If the Company's lenders force immediate repayment, the
Company would not be able to repay the related debt outstanding. The Company is
unable to predict if it will be successful in negotiating waivers, amendments,
or refinancings of outstanding debt or lease commitments, or if the Company will
be able to meet any amended financial covenants in the future. Any demands for
repayment by lenders or the inability to obtain waivers or refinance the related
debt would have a material adverse impact on the financial position, results of
operations and cash flows of the Company. If the Company is unable to generate
sufficient cash flow from its operations or successfully negotiate debt or lease
amendments, it will explore a variety of other options, including, but not
limited to, other sources of equity or debt refinancings, asset dispositions, or
relief under the United States bankruptcy code. These factors raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset carrying
amounts or the amounts and classification of liabilities that might result
should the Company be unable to continue as a going concern.
-10-
<PAGE> 11
3. CHANGE IN ACCOUNTING PRINCIPLE
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. SFAS No. 133 requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 127,
"Deferral of the Effective Date of SFAS No. 133," is effective for fiscal
quarters beginning after June 15, 2000. The impact of the adoption of SFAS No.
133 is not expected to have a material impact on the Company's results of
operations or financial position.
Effective January 1, 1999, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5, issued by the
Accounting Standards Executive Committee, requires that the cost of start-up
activities be expensed as these costs are incurred. Start-up activities include
one-time activities and organization costs. Upon adoption, the Company incurred
a pre-tax charge to income of $433,000 ($277,000 net of tax), representing the
write off of all previously deferred balances. This write off has been reported
as the cumulative effect of a change in accounting principle in the accompanying
interim consolidated statement of operations.
4. RECLASSIFICATIONS
Certain amounts in the 1999 interim financial statements have been reclassified
to conform with the 2000 presentation.
5. OTHER COMPREHENSIVE INCOME
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income". SFAS No. 130
requires the reporting of comprehensive income in addition to net income from
operations. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net income.
Information with respect to the accumulated other comprehensive income balance
is presented below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Foreign currency items:
Beginning balance $(161,000) $(365,000) $(173,000) $(412,000)
Current period change, net of income tax (218,000) 143,000 (206,000) 190,000
--------- --------- --------- ---------
Ending balance $(379,000) $(222,000) $(379,000) $(222,000)
========= ========= ========= =========
</TABLE>
Positive amounts represent unrealized gains and negative amounts represent
unrealized losses.
-11-
<PAGE> 12
6. NON-RECURRING CHARGES
During the second quarter of 2000, the Company recorded non-recurring charges
totaling $263,000 in connection with the proposed restructuring of the lease
arrangements covering the majority of its United States nursing facilities and
the proposed refinancing of certain debt obligations.
Information with respect to these charges is presented below:
Consulting fees $158,000
Legal fees 90,000
Other 15,000
7. OPERATING SEGMENT INFORMATION
The Company has three reportable segments: U.S. nursing homes, U.S. assisted
living facilities, and Canadian operations, which consists of both nursing home
and assisted living services. Management evaluates each of these segments
independently due to the geographic, reimbursement, marketing, and regulatory
differences between the segments. Management evaluates performance based on
profit or loss from operations before income taxes not including nonrecurring
gains and losses and foreign exchange gains and losses. The following
information is derived from the Company's segments' internal financial
statements and includes information related to the Company's unallocated
corporate revenues and expenses:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
(IN THOUSANDS) 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net revenues:
U.S. nursing homes $ 36,302 $ 33,820 $ 71,678 $ 70,336
U.S. assisted living facilities 8,062 7,058 16,096 13,679
Canadian operations 3,898 3,710 7,828 7,337
Corporate -0- 2 (1) (50)
-------- -------- -------- --------
Total $ 48,262 $ 44,590 $ 95,601 $ 91,302
======== ======== ======== ========
Depreciation and amortization:
U.S. nursing homes $ 601 $ 599 $ 1,298 $ 1,201
U.S. assisted living facilities 423 439 845 881
Canadian operations 98 90 196 175
Corporate 19 19 36 38
-------- -------- -------- --------
Total $ 1,141 $ 1,147 $ 2,375 $ 2,295
======== ======== ======== ========
Operating income (loss):
U.S. nursing homes $ 583 $ (3,574) $ 810 $ (4,609)
U.S. assisted living facilities (99) (223) 5 (171)
Canadian operations 457 413 845 810
Corporate (826) (689) (1,413) (1,205)
-------- -------- -------- --------
Total $ 115 $ (4,073) $ 247 $ (5,175)
======== ======== ======== ========
</TABLE>
-12-
<PAGE> 13
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
2000 1999
-------- ------------
<S> <C> <C>
Long-lived assets:
U.S. nursing homes $ 32,311 $ 32,777
U.S. assisted living facilities 33,836 34,332
Canadian operations 12,488 12,933
Corporate 1,120 9,321
Eliminations -0- (8,377)
-------- --------
Total $ 79,755 $ 80,986
======== ========
Total assets:
U.S. nursing homes $ 55,973 $ 55,796
U.S. assisted living facilities 36,215 36,568
Canadian operations 16,168 16,737
Corporate 1,902 18,712
Eliminations (12,731) (31,628)
-------- --------
Total $ 97,527 $ 96,185
======== ========
</TABLE>
8. SUBSEQUENT EVENT - FACILITY DECERTIFICATION
On July 6, 2000, the Company received notification that its South Park facility
located in Corpus Christi, Texas, had been decertified for regulatory purposes.
As a result of the notification, the Company closed the facility on July 28,
2000. A portion of the facility's residents have been re-located to other
Company facilities. In connection with the closing of the facility, the Company
will evaluate the carrying value of the recorded assets for recoverability and
the need for any closing accruals and expect to record these charges, if any, in
the third quarter.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company")
provides long-term care services to nursing home patients and residents of
assisted living facilities in 12 states, primarily in the Southeast, and four
Canadian provinces. The Company's facilities provide a range of health care
services to their patients and residents. In addition to the nursing, personal
care and social services usually provided in long-term care facilities, the
Company offers a variety of comprehensive rehabilitation services as well as
medical supply and nutritional support services. The Company completed its
initial public offering in May 1994; however, its operational history can be
traced to February 1980 through common senior management who were involved in
different organizational structures.
As of June 30, 2000, the Company operates 120 facilities, consisting of 64
nursing homes with 7,230 licensed beds and 56 assisted living facilities with
5,472 units. In comparison, at June 30, 1999, the Company operated 122
facilities composed of 65 nursing homes containing 7,307 licensed beds and 57
assisted living facilities containing 5,295 units. As of June 30, 2000, the
Company owns seven nursing homes, leases 36 others and manages the remaining 21
nursing homes. Additionally, the
-13-
<PAGE> 14
Company owns 16 assisted living facilities, leases 25 others and manages the
remaining 15 assisted living facilities. The Company holds a minority interest
in seven of these managed assisted living facilities. The Company operates 51
nursing homes and 33 assisted living facilities in the United States and 13
nursing homes and 23 assisted living facilities in Canada.
Basis of Financial Statements. The Company's patient and resident revenues
consist of the fees charged for the care of patients in the nursing homes and
residents of the assisted living facilities owned and leased by the Company.
Management fee revenues consist of the fees charged to the owners of the
facilities managed by the Company. The management fee revenues are based on the
respective contractual terms of the Company's management agreements, which
generally provide for management fees ranging from 3.5% to 6.0% of the net
revenues of the managed facilities. As a result, the level of management fees is
affected positively or negatively by the increase or decrease in the average
occupancy level rates of the managed facilities. The Company's operating
expenses include the costs, other than lease, depreciation and amortization
expenses, incurred in the operation of the nursing homes and assisted living
facilities owned and leased by the Company. The Company's general and
administrative expenses consist of the costs of the corporate office and
regional support functions, including the costs incurred in providing management
services to other owners. The Company's depreciation, amortization and interest
expenses include all such expenses across the range of the Company's operations.
RESULTS OF OPERATIONS
The following tables present the unaudited interim statements of operations and
related data for the three and six months ended June 30, 2000 and 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS) THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999 CHANGE %
------- -------- ------- -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $36,702 $ 34,352 $ 2,350 6.8%
Resident revenues 10,384 9,323 1,061 11.4
Management fees 1,125 877 248 28.3
Interest 51 38 13 34.2
------- -------- -------
Net revenues 48,262 44,590 3,672 8.2
------- -------- -------
EXPENSES:
Operating 37,170 38,033 (863) (2.3)
Lease 5,258 5,003 255 5.1
General and administrative 2,879 3,155 (276) (8.7)
Interest 1,436 1,325 111 8.4
Depreciation and amortization 1,141 1,147 (6) (0.1)
Non-recurring charges 263 -0- 263 N/A
------- -------- -------
Total expenses 48,147 48,663 (516) (1.1)
------- -------- -------
LOSS BEFORE INCOME TAXES 115 (4,073) 4,188 (102.8)
INCOME TAX BENEFIT 42 (1,466) 1,508 (102.9)
------- -------- -------
NET INCOME (LOSS) $ 73 $ (2,607) $ 2,680 (102.8)
======= ======== =======
</TABLE>
-14-
<PAGE> 15
<TABLE>
<CAPTION>
(IN THOUSANDS) SIX MONTHS ENDED JUNE 30,
-------------------------
2000 1999 CHANGE %
------- -------- ------ -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues $72,674 $ 71,206 1,468 2.1%
Resident revenues 20,810 18,227 2,583 14.2
Management fees 2,026 1,796 230 12.8
Interest 91 73 18 24.7
------- -------- ------
Net revenues 95,601 91,302 4,299 4.7
------- -------- ------
EXPENSES:
Operating 73,596 75,756 (2,160) (2.9)
Lease 10,534 9,904 630 6.4
General and administrative 5,696 5,890 (194) (3.3)
Interest 2,890 2,632 258 9.8
Depreciation and amortization 2,375 2,295 80 3.5
Non-recurring charges 263 -0- 263 N/A
------- -------- ------
Total expenses 95,354 96,477 (1,123) (1.2)
------- -------- ------
INCOME (LOSS) BEFORE INCOME TAXES 247 (5,175) 5,422 (104.8)
PROVISION (BENEFIT) FOR INCOME TAXES 89 (1,863) 1,952 (104.8)
------- -------- ------
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 158 (3,312) 3,470 (104.8)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX -0- (277) 277 (100.0)
------- -------- ------
NET INCOME (LOSS) $ 158 $ (3,589) 3,747 (104.4)
------- -------- ------
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
REVENUES:
Patient revenues 76.1% 77.0% 76.0% 78.0%
Resident revenues 21.5 20.9 21.8 19.9
Management fees 2.3 2.0 2.1 2.0
Interest 0.1 0.1 0.1 0.1
----- ----- ----- -----
Net revenues 100.0 100.0 100.0 100.0
----- ----- ----- -----
OPERATING EXPENSES:
Operating 77.0 85.3 77.0 83.0
Lease 10.9 11.2 11.0 10.9
General and administrative 6.0 7.1 6.0 6.4
Interest 3.0 3.0 3.0 2.9
Depreciation and amortization 2.4 2.5 2.5 2.5
Non-recurring charges .5 0.0 0.2 0.0
----- ----- ----- -----
Total expenses 99.8 109.1 99.7 105.7
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 0.2 (9.1) 0.3 (5.6)
PROVISION (BENEFIT) FOR INCOME TAXES 0.1 (3.3) 0.1 (2.0)
----- ----- ----- -----
INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 0.1 (5.8) 0.2 (3.6)
CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE,
NET OF TAX 0.0 0.0 0.0 (0.3)
----- ----- ----- -----
NET INCOME (LOSS) 0.1% (5.8)% 0.2% (3.9)%
===== ===== ===== =====
</TABLE>
-15-
<PAGE> 16
GENERAL
Medicare Reimbursement Changes. During 1997, the Federal government enacted the
Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and
Medicaid cost-saving measures. The BBA requires that nursing homes transition to
a prospective payment system ("PPS") under the Medicare program during a
three-year "transition period," which began for most of the Company's facilities
on January 1, 1999. In general, PPS provides a standard payment for Medicare
Part A services to all providers regardless of their current costs. PPS creates
an incentive for providers to reduce their costs, and management has reduced
operating expenses in an effort to offset the revenue reductions resulting from
PPS. Revenues and expenses have been reduced significantly from the levels prior
to PPS.
Cost restrictions placed on the provision of rehabilitation (ancillary) services
as a result of the BBA have also been significant. Beginning in January 1998,
the allowable costs for cost reimbursement components of Medicare Part B
services became subject to a limitation factor of 90.0% of actual costs. In
1999, the cost reimbursement system for rehabilitation services has been
replaced by a system of fee screens that effectively limit reimbursement and
place caps on the maximum fees that may be charged for therapy services.
Historically, the Company subcontracted the provision of these therapy services.
However, in response to the deep cuts in fees for service, the Company's therapy
subcontractor exited the business. In June 1999, the Company began providing
such services in-house. These changes with respect to Part B reimbursement have
combined to cause a dramatic decrease in the Company's ancillary services
revenues and expenses.
To date, one of the major impacts on the Company from PPS and other BBA
reimbursement changes has been the indirect impact of Medicare occupancy
declines, which have reduced the amount of overhead absorbed under the Company's
Medicare operations. With respect to Medicare therapy allowable cost and fee
reductions, the Company estimates that net operations have been negatively
impacted in both 2000 and 1999 and will continue to be negatively impacted
beyond 2000 as a result of the changes brought about under the BBA. However,
since PPS and other changes brought about by the BBA are still an evolving
process, the ultimate impact of the BBA cannot be known with certainty at this
time.
These changes that have occurred as a result of the administrative
implementation of the guidelines contained in the BBA have affected the entire
long-term care industry. Under the BBA, Medicare expenditures by the Federal
government have been cut more than 20.0%. This has been a sudden, drastic blow
to the industry. Other providers who relied more heavily on the provision of
services to higher acuity patients have been impacted more severely than the
Company. There have already been several major bankruptcy filings. Without
remediation, the long-term effect on the industry is expected to be
catastrophic.
As the impact of these changes upon both providers and beneficiaries has become
known, there has been growing political awareness of a need to re-examine the
drastic cuts that have been implemented. On November 29, 1999 President Clinton
signed into law a budget agreement that restores $2.7 billion in Medicare
funding over three years. The bill contains several components that become
effective at various times over the three-year period. As a result of the
legislation, individual nursing facilities will have the option, for cost
reporting years beginning after December 29, 1999, of continuing under the
current PPS transition formula or adopting the full federal PPS per diem.
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<PAGE> 17
During 2000, the Company has elected to adopt the full federal PPS per diem on
several facilities. In addition, the bill provides a two-year moratorium on the
Part B therapy caps beginning January 1, 2000, and it also provides increases in
the per diems for the care of certain groups of patients. The Company is
continuing to evaluate the impact of the legislation on its operations. However,
there is no expectation by management that the relief will be sufficient to
restore the economic viability the industry needs.
While federal regulations do not provide states with grounds to curtail funding
of their Medicaid cost reimbursement programs due to state budget deficiencies,
states have nevertheless curtailed funding in such circumstances in the past.
The United States Supreme Court ruled in 1990 that healthcare providers could
use the Boren Amendment to require states to comply with their legal obligation
to adequately fund Medicaid programs. The BBA repeals the Boren Amendment and
authorizes states to develop their own standards for setting payment rates. It
requires each state to use a public process for establishing proposed rates
whereby the methodologies and justifications used for setting such rates are
available for public review and comment. This requires facilities to become more
involved in the rate setting process since failure to do so may interfere with a
facility's ability to challenge rates later. As a result, the Company expects
states to continue to attempt to reduce spending under the Medicaid programs.
The Company will attempt to maximize the revenues available to it from
governmental sources within the changes that have occurred and will continue to
occur under the BBA. In addition, the Company will attempt to increase revenues
from non-governmental sources, including expansion of its assisted living and
Canadian operations to the extent capital is available to do so, if at all.
However, current levels of, or further reductions in, government spending for
long-term health care are expected to continue to have an adverse effect on the
operating results and cash flows of the Company.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Revenues. Net revenues increased to $48.3 million in 2000 from $44.6 million in
1999, an increase of $3.7 million, or 8.2%. Patient revenues increased to $36.7
million in 2000 from $34.4 million in 1999, an increase of $2.4 million, or
6.8%. The increase in patient revenues can be primarily attributed to increased
Medicare utilization and PPS rate increases at several facilities which became
effective April 2000. In 1999, the Company recorded $670,000 in negative revenue
adjustments in connection with its West Virginia operations. Certain claims had
been denied in prior years by the third party intermediary. In 1999, the Company
abandoned its efforts to get these claims approved. Resident revenues increased
to $10.4 million in 2000 from $9.3 million in 1999, an increase of $1.1 million,
or 11.4%. The increase in resident revenues is due primarily to the addition of
three assisted living facilities in North Carolina during the second quarter of
1999, and an increase in the number of private pay resident days in 2000. There
was a decrease of approximately 7,000 patient days, or 1.9%, and an increase of
approximately 22,000 resident days, or 9.9%. As to payor types, there was an
increase of approximately 3,000 Medicare days, or 13.5%, and an increase
(decrease) of 21,000, or 14.5%, and (8,000), or 2.0%, among private-pay and
Medicaid patients, respectively. As a percentage of patient and resident
revenues, Medicare increased to 16.0% in 2000 from 13.5% in 1999 while Medicaid
and similar programs decreased to 64.1% in 2000 from 67.8% in 1999.
-17-
<PAGE> 18
Operating Expense. Operating expense decreased to $37.2 million in 2000 from
$38.0 million in 1999, a decrease of $863,000, or 2.3%. The Company continues to
implement cost reductions in response to Medicare reimbursement changes. As a
percent of patient and resident revenues, operating expense decreased to 78.9%
in 2000 from 87.1% in 1999. The largest component of operating expenses is
wages, which increased to $20.4 million in 2000 from $19.0 million in 1999, an
increase of $1.4 million, or 7.4%. Of this increase, $598,000, or 3.2%, can be
attributed to the assisted living facilities in North Carolina which added three
facilities during the second quarter of 1999. Savings from staff reductions have
been offset by increased wage levels due to higher labor markets in most of the
areas in which the Company operates. The Company's wage increases are generally
in line with inflation. The Company's provision for doubtful accounts decreased
to $634,000 in 2000 from $2.6 million in 1999, a decrease of $2.0 million, or
76.9%. In 1999, the Company determined a substantial portion of its older
patient receivables should be reserved. It is generally recognized that the
regulatory environment in which nursing homes operate has become more
restrictive. In 2000, the Company incurred $43,000 in new fines and penalties as
compared to approximately $350,000 in the prior period. The Company is
self-insured for certain workers' compensation claims incurred prior to May
1997. In 1999, the Company recognized a charge of $158,000 to provide sufficient
reserve to cover the expected liability for these claims. The Company also
established a $200,000 reserve in 1999 related to the valuation of its inventory
balances.
Lease Expense. Lease expense increased to $5.3 million in 2000 from $5.0 million
in 1999, an increase of $255,000, or 5.1%. Of this increase, $200,000, or 4.0%,
can be attributed to the assisted living facilities in North Carolina which
added three facilities during the second quarter of 1999. Adjustments in the
Company's lease agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense decreased
to $2.9 million in 2000 from $3.2 million in 1999, a decrease of $276,000, or
8.7%. As a percentage of total net revenues, general and administrative expense
decreased to 6.0% in 2000 compared with 7.1% in 1999. The percentage decrease is
primarily attributable to the higher revenue base, however, the 1999 period also
includes a provision of $275,000 for severance benefits for a former Chief
Financial Officer.
Interest Expense. Interest expense increased to $1.4 million in 2000 from $1.3
million in 1999, an increase of $111,000, or 8.4%.
Depreciation and Amortization. Depreciation and amortization expense remained
flat at $1.1 million in 2000 and 1999.
Non-Recurring Charges. During the second quarter of 2000, the Company recorded
non-recurring charges totaling $263,000 in connection with the proposed
restructuring of the lease arrangements covering the majority of its United
States nursing facilities and the proposed refinancing of certain debt
obligations. Of this amount, $158,000 and $90,000 related to consulting and
legal fees incurred, respectively.
-18-
<PAGE> 19
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes was $115,000 in 2000 as
compared with a loss of $4.1 million in 1999, an increase of $4.2 million. The
effective combined federal, state and provincial income tax rate was 36.0% in
both 2000 and 1999. Net income was $73,000 in 2000 as compared with a net loss
of $2.6 million in 1999, an increase of $2.7 million, and basic and diluted
earnings (loss) per share was $.01 in 2000 as compared with ($.48) per share in
1999.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
Revenues. Net revenues increased to $95.6 million in 2000 from $91.3 million in
1999, an increase of $4.3 million, or 4.7%. Patient revenues increased to $72.7
million in 2000 from $71.2 million in 1999, an increase of $1.5 million, or
2.1%. The increase in patient revenues can be attributed to increased Medicare
utilization and PPS rate increases at several facilities which became effective
April 2000. In 1999, the Company recorded $670,000 in negative revenue
adjustments in connection with its West Virginia operations. Certain claims had
been denied in prior years by the third party intermediary and the Company
abandoned its efforts to get these claims approved. Resident revenues increased
to $20.8 million in 2000 from $18.2 million in 1999, an increase of $2.6
million, or 14.2%. The increase in resident revenues is due primarily to the
addition of three assisted living facilities in North Carolina during the second
quarter of 1999, and an increase in the number of private pay resident days in
2000. There was a decrease of approximately 30,000 patient days, or 4.1%, and an
increase of approximately 40,000 resident days, or 8.9%. As to payor types,
there was an increase of approximately 4,000 Medicare days, or 10.1%, an
increase of approximately 19,000 private-pay days, or 6.6%, and a decrease of
13,000 Medicaid days, or 1.5%. As a percentage of patient and resident revenues,
Medicare increased to 15.8% in 2000 from 14.7% in 1999 while Medicaid and
similar programs decreased to 65.1% in 2000 from 66.6% in 1999.
Operating Expense. Operating expense decreased to $73.6 million in 2000 from
$75.8 million in 1999, a decrease of $2.2 million, or 2.9%. The Company
continues to implement cost reductions in response to the Medicare reimbursement
changes. As a percent of patient and resident revenues, operating expense
decreased to 78.7% in 2000 from 84.7% in 1999. The largest component of
operating expense is wages, which increased to $40.3 million in 2000 from $37.6
million in 1999, an increase of $2.7 million, or 7.2%. Of this increase, $1.3
million, or 3.5%, can be attributed to the three assisted living facilities in
North Carolina which were added during the second quarter of 1999. Savings from
staff reductions have been offset by increased wage levels due to higher labor
markets in most of the areas in which the Company operates. The Company's wage
increases are generally in line with inflation. The Company's provision for bad
debts decreased to $1.5 million
-19-
<PAGE> 20
in 2000 from $3.4 million in 1999, a decrease of $1.9 million, or 55.9%. In
1999, the Company determined a substantial portion of its older patient
receivables should be reserved. It is generally recognized that the regulatory
environment in which nursing homes operate has become more restrictive. In 2000,
the Company incurred approximately $173,000 in new fines and penalties as
compared to approximately $350,000 in the prior period. The Company is
self-insured for certain workers' compensation claims incurred prior to May
1997. In 1999, the Company recognized a charge of $520,000 to provide sufficient
reserve to cover the expected liability for these claims. The Company also wrote
off $192,000 of miscellaneous assets and established a $200,000 reserve related
to the valuation of its inventory balances.
Lease Expense. Lease expense increased to $10.5 million in 2000 from $9.9
million in 1999, an increase of $630,000, or 6.4%. Of this increase, $477,000,
or 4.8%, can be attributed to the three assisted living facilities in North
Carolina which were added during 1999. Adjustments in the Company's lease
agreements are generally tied to inflation.
General and Administrative Expense. General and administrative expense decreased
to $5.7 million in 2000 from $5.9 million in 1999, a decrease of $194,000, or
3.3%. As a percentage of total net revenues, general and administrative expense
decreased to 6.0% in 2000 compared with 6.4% in 1999. The 1999 period includes a
provision of $275,000 for severance benefits for a former Chief Financial
Officer.
Interest Expense. Interest expense increased to $2.9 million in 2000 from $2.6
million in 1999, an increase of $258,000, or 9.8%.
Depreciation and Amortization. Depreciation and amortization expense increased
to $2.4 million in 2000 from $2.3 million in 1999, an increase of $80,000, or
3.5%.
Non-Recurring Charges. During the second quarter of 2000, the Company recorded
non-recurring charges totaling $263,000 in connection with the proposed
restructuring of the lease arrangements covering the majority of its United
States nursing facilities and the proposed refinancing of certain debt
obligations. Of this amount, $158,000 and $90,000 related to consulting and
legal fees incurred, respectively.
Change in Accounting Principle. Effective January 1, 1999, the Company adopted
Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities". SOP 98-5, issued by the Accounting Standards Executive Committee,
requires that the cost of start-up activities be expensed as these costs are
incurred. Start-up activities include one-time activities and organization
costs. Upon adoption, the Company incurred a pre-tax charge to income of
$433,000 ($277,000 net of tax), representing the write off of all previously
deferred balances. This write off has been reported as the cumulative effect of
a change in accounting principle in accordance with the provisions of SOP 98-5.
Income (Loss) Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share.
As a result of the above, income before income taxes and the cumulative effect
of the change in accounting principle was $247,000 in 2000 as compared with a
loss of $5.2 million in 1999, an increase of $5.4 million. The effective
combined federal, state and provincial income tax rate was 36.0% in both
-20-
<PAGE> 21
2000 and 1999. Net income after taxes and the cumulative effect of the change in
accounting principle was $158,000 in 2000 as compared with a net loss of $3.6
million in 1999, an increase of $3.8 million, and basic and diluted earnings
(loss) per share was $.03 in 2000 compared to ($.66) in 1999.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had negative working capital of $55.4 million
compared with negative working capital of $56.7 million at December 31, 1999,
and a current ratio of .2 at both June 30, 2000 and December 31, 1999. The
negative working capital results primarily from the classification of a majority
of the Company's debt as current liabilities. The classification of a majority
of the Company's debt as current maturities is due to the Company's
non-compliance with debt covenants in various debt agreements, including net
worth, cash flow and debt-to-equity ratio requirements. Cross-default or
material adverse change provisions contained in the agreements allow the holders
of substantially all of the Company's debt to demand immediate repayment. As of
June 30, 2000, and through the date of the filing of this Report on Form 10-Q,
the Company had not obtained waivers of the non-compliance. Based on regularly
scheduled debt service requirements, the Company has a total of $27.1 million of
debt that must be repaid or refinanced within the next 12 months. However, as a
result of the covenant non-compliance and other cross-default provisions, the
Company has classified a total of $53.1 million of debt as current liabilities
as of June 30, 2000. The Company would not be able to repay this portion of its
indebtedness if the applicable lenders demanded repayment. Of the Company's 61
leased facilities, 30 are covered by a Master Lease and other leases with Omega
Healthcare Investors, Inc. ("Omega"). Under the terms of the Master Lease, the
Company must comply with certain covenants based on total shareholders' equity
of the Company as defined in the Master Lease. The Company was not in compliance
with these covenants as of June 30, 2000 and through the date of the filing of
this Report on Form 10-Q. As a result of the non-compliance, Omega has the right
to terminate all of its leases with the Company and seek recovery of any related
financial losses, as well as other miscellaneous remedies. The Company has not
obtained waivers of non-compliance. The Company and Omega are currently in
negotiations with respect to modification of the existing lease agreements. No
assurance can be given that the Company will achieve profitable operations in
the near term or that the Company can increase growth in net revenues. The
Company cannot assure that internally generated cash flows from earnings and
existing cash balances will be sufficient to fund existing debt obligations on
future capital and working capital requirements through fiscal year 2000. The
Company is currently discussing potential restructuring, modification and
refinancing alternatives with its lenders and primary lessor. If the Company's
lenders force immediate repayment, the Company would not be able to repay the
related debt outstanding. The Company is unable to predict if it will be
successful in negotiating waivers, amendments, or refinancings of outstanding
debt or lease commitments, or that the Company will be able to meet any amended
financial covenants in the future. Any demands for repayment by lenders or the
inability to obtain waivers or refinance the related debt would have a material
adverse impact on the financial position, results of operations and cash flows
of the Company. If the Company is unable to generate sufficient cash flow from
its operations or successfully negotiate debt or lease amendments, it will
explore a variety of other options, including, but not limited to, equity
financing from outside investors, asset dispositions or relief under the United
States bankruptcy code.
-21-
<PAGE> 22
The Company has a working capital line of credit and a bridge loan which had
combined amounts outstanding of $14.4 million at June 30, 2000. All of the
amounts outstanding with this lender had a maturity date of February 28, 2000,
which had been previously extended. The lender has continued to fund current
operations under the working capital line of credit and on June 30, 2000, the
maturity date of these loans was extended to August 31, 2000. The Company and
lender are currently negotiating a restructuring of this financing.
The Company has an acquisition line of credit which had amounts outstanding of
$11.1 million at June 30, 2000. No further draws are available under the
acquisition line of credit. Amounts outstanding under the acquisition line of
credit had a maturity date of April 30, 2000, which had been previously
extended. On June 30, 2000, the lender again extended the maturity date to
August 31, 2000. The Company and the lender are negotiating replacement
long-term financing.
Net cash provided by operating activities totaled $3.7 million and $2.1 million
in the six month periods ended June 30, 2000 and 1999, respectively. These
amounts primarily represent the cash flows from net operations plus changes in
non-cash components of operations and by working capital changes.
Net cash used in investing activities totaled $1.1 million and $3.1 million in
the six month periods ended June 30, 2000 and 1999, respectively. These amounts
primarily represent purchases of property plant and equipment, investments in
and advances to joint ventures and additional investments in TDLP, a limited
partnership for which the Company serves as the general partner. The Company has
used between $2.7 million and $5.2 million for capital expenditures in the three
calendar years ending December 31, 1999. Substantially all such expenditures
were for facility improvements and equipment, which were financed principally
through working capital. For the year ended December 31, 2000, the Company
anticipates that capital expenditures for improvements and equipment for its
existing facility operations will be approximately $3.2 million, including
$800,000 for non-routine projects.
Net cash used in financing activities totaled $566,000 and $613,000 in the six
month periods ended June 30, 2000 and 1999, respectively. The net cash used in
financing activities primarily represents net repayments of debt and advances to
TDLP.
RECEIVABLES
The Company's operations could be adversely affected if it experiences
significant delays in reimbursement of its labor and other costs from Medicare,
Medicaid and other third party revenue sources. The Company's future liquidity
will continue to be dependent upon the relative amounts of current assets
(principally cash, accounts receivable and inventories) and current liabilities
(principally accounts payable and accrued expenses). In that regard, accounts
receivable can have a significant impact on the Company's liquidity. Continued
efforts by governmental and third-party payors to contain or reduce the
acceleration of costs by monitoring reimbursement rates, by increasing medical
review of bills for services, or by negotiating reduced contract rates, as well
as any delay by the Company in the processing of its invoices, could adversely
affect the Company's liquidity and results of operations.
-22-
<PAGE> 23
Accounts receivable attributable to the provision of patient and resident
services at June 30, 2000 and December 31, 1999, totaled $15.7 million and $15.8
million, respectively, representing approximately 30 and 31 days in accounts
receivable, respectively. Accounts receivable from the provision of management
services were $530,000 and $412,000 at June 30, 2000 and December 31, 1999,
respectively, representing approximately 47 and 42 days in accounts receivable,
respectively. The allowance for bad debt was $5.2 million and $5.0 million at
June 30, 2000 and December 31, 1999, respectively.
The Company continually evaluates the adequacy of its bad debt reserves based on
patient mix trends, agings of older balances, payment terms and delays with
regard to third party payors, collateral and deposit resources, as well as other
factors. The Company continues to evaluate and implement additional procedures
to strengthen its collection efforts and reduce the incidence of uncollectible
accounts.
HEALTH CARE INDUSTRY
The health care industry is subject to numerous laws and regulations of federal,
state and local governments. These laws and regulations include, but are not
necessarily limited to, matters such as licensure, accreditation, government
health care program participation requirements, reimbursement for patient
services, and Medicare and Medicaid fraud abuse. Changes in these laws and
regulations, such as reimbursement policies of Medicare and Medicaid programs as
a result of budget cuts by federal and state governments or other legislative
and regulatory actions, could have a material adverse effect on the Company's
consolidated financial position, results of operations, and cash flows. Future
federal budget legislation and federal and state regulatory changes may
negatively impact the Company.
All of the Company's facilities are required to obtain annual licensure renewal
and are subject to annual surveys and inspections in order to be certified for
participation in the Medicare and Medicaid programs. In order to maintain their
operator's license and their certification for participation in Medicare and
Medicaid programs, the nursing facilities must meet certain statutory and
administrative requirements. These requirements relate to the condition of the
facilities, the adequacy and condition of the equipment used therein, the
quality and adequacy of personnel, and the quality of medical care. Such
requirements are subject to change. There can be no assurance that, in the
future, the Company will be able to maintain such licenses for its facilities or
that the Company will not be required to expend significant sums in order to do
so.
Recently, government activity has increased with respect to investigations and
allegations concerning possible violations by health care providers of fraud and
abuse statutes and regulations. Violations of these laws and regulations could
result in expulsion from government health care programs together with the
imposition of significant fines and penalties, as well as significant repayments
for patient services previously billed. Management believes that the Company is
in compliance with fraud and abuse laws and regulations as well as other
applicable government laws and regulations. Compliance with such laws and
regulations can be subject to future government review and interpretation as
well as regulatory actions unknown or unasserted at this time. In 1999 and 2000,
the Company did experience the increased regulatory scrutiny that has been
exerted on the industry in the form of increased fines and penalties.
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<PAGE> 24
FOREIGN CURRENCY TRANSLATION
The Company has obtained its financing primarily in U.S. dollars; however, it
incurs revenues and expenses in Canadian dollars with respect to Canadian
management activities and operations of the Company's eight Canadian retirement
facilities (three of which are owned) and two owned Canadian nursing homes.
Although not material to the Company as a whole, if the currency exchange rate
fluctuates, the Company may experience currency translation gains and losses
with respect to the operations of these activities and the capital resources
dedicated to their support. While such currency exchange rate fluctuations have
not been material to the Company in the past, there can be no assurance that the
Company will not be adversely affected by shifts in the currency exchange rates
in the future.
EXECUTIVE MANAGEMENT CHANGES
Effective January 28, 2000, Mr. Richard B. Vacek, Jr., resigned his position as
Executive Vice President, Chief Financial Officer and Secretary of the Company.
Mr. James F. Mills, Jr., Vice President and Controller, replaced Mr. Vacek as
Secretary and Acting Chief Financial Officer. On May 12, 2000, Mr. Mills was
elected to the position of Senior Vice President and Chief Financial Officer.
STOCK EXCHANGE
On November 10, 1999, the Company's stock began being quoted on the NASD's OTC
Bulletin Board under the symbol AVCA. Previously, the Company's common stock was
traded on the New York Stock Exchange under the symbol AVC. The Company's common
stock was also traded on the Toronto Stock Exchange ("TSE") under the symbol
AVCU. However, the Company no longer meets the listing requirements of the TSE
and, therefore, effective May 30, 2000, no longer trades on the TSE.
INFLATION
Management does not believe that the Company's operations have been materially
affected by inflation. The Company expects salary and wage increases for its
skilled staff to continue to be higher than average salary and wage increases,
as is common in the health care industry. To date, these increases as well as
normal inflationary increases in other operating expenses have been adequately
covered by revenue increases.
FORWARD-LOOKING STATEMENTS
The foregoing discussion and analysis provides information deemed by Management
to be relevant to an assessment and understanding of the Company's consolidated
results of operations and its financial condition. It should be read in
conjunction with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Certain statements made by or on behalf of the Company,
including those contained in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere, are
forward-looking statements as defined in
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<PAGE> 25
the Private Securities Litigation Reform Act of 1995. These statements involve
risks and uncertainties including, but not limited to, changes in governmental
reimbursement or regulation, health care reforms, the increased cost of
borrowing under the Company's credit agreements, covenant waivers from the
Company's lenders, possible amendments to the Company's credit agreements, the
impact of future licensing surveys, the ability to execute on the Company's
acquisition program, both in obtaining suitable acquisitions and financing
therefore, changing economic conditions as well as others. Investors also should
refer to the risks identified in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" as well as risks identified in
the Company's Form 10-K for the year ended December 31, 1999 for a discussion of
various risk factors of the Company and that are inherent in the health care
industry. Given these risks and uncertainties, the Company can give no
assurances that these forward-looking statements will, in fact, transpire and,
therefore, cautions investors not to place undue reliance on them. Actual
results may differ materially from those described in such forward-looking
statements. Such cautionary statements identify important factors that could
cause the Company's actual results to materially differ from those projected in
forward-looking statements. In addition, the Company disclaims any intent or
obligation to update these forward-looking statements.
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<PAGE> 26
PART II -- OTHER INFORMATION
Item 3. Defaults Upon Senior Securities.
The Company is not currently in compliance with certain covenants of its loan
agreements and certain other indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of shareholders was held on July 27, 2000.
(b) Matters voted upon at the meeting:
- Election of Directors:
Charles W. Birkett, M.D.
FOR 4,446,150
AGAINST -0-
WITHHELD 293,943
ABSTENTIONS -0-
NON-VOTING(1) 751,528
---------
ELIGIBLE SHARES 5,491,621
---------
Edward G. Nelson
FOR 4,447,150
AGAINST -0-
WITHHELD 292,943
ABSTENTIONS -0-
NON-VOTING(1) 751,528
---------
ELIGIBLE SHARES 5,491,621
---------
Paul Richardson
FOR 4,489,800
AGAINST -0-
WITHHELD 250,293
ABSTENTIONS -0-
NON-VOTING(1) 751,528
---------
ELIGIBLE SHARES 5,491,621
---------
(Continuing directors include William C. O'Neil, Jr.
and J. Bransford Wallace)
-------------
(1) Including broker non-votes.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits filed as part of the report on Form 10-Q are listed in the
Exhibit Index immediately following the signature page.
(b) Reports on Form 8-K: None.
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<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADVOCAT INC.
August 14, 2000
By: /s/ James F. Mills, Jr.
------------------------------------------------
James F. Mills, Jr.
Principal Financial Officer and Chief Accounting
Officer and An Officer Duly Authorized to Sign
on Behalf of the Registrant
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<PAGE> 28
Exhibit
Number Description of Exhibits
------ -----------------------
3.1 Certificate of Incorporation of the Registrant (incorporated by
reference to Exhibit 3.1 to the Company's Registration Statement No.
33-76150 on Form S-1).
3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement No. 33-76150 on Form S-1).
3.3 Amendment to Certificate of Incorporation dated March 23, 1995
(incorporated by reference to Exhibit A of Exhibit 1 to the Company's
Form 8-A filed March 30, 1995).
4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit
4 to the Company's Registration Statement No. 33-76150 on Form S-1).
4.2 Rights Agreement dated March 13, 1995, between the Company and Third
National Bank in Nashville (incorporated by reference to Exhibit 1 to
the Company's Current Report on Form 8-K dated March 13, 1995).
4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated
by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30,
1995).
4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by
reference to Exhibit 1 to Form 8-A filed March 30, 1995).
4.5 Amended and Restated Rights Agreement dated as of December 7, 1998
(incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7,
1998).
27 Financial Data Schedule (for SEC use only).
