2018 Annual Report
Facility Locations
Alabama
Baron House of Hueytown
Brookshire Healthcare Center
Canterbury Healthcare Facility
Diversicare of Arab
Diversicare of Bessemer
Diversicare of Big Springs
Diversicare of Boaz
Diversicare of Foley
Diversicare of Lanett
Diversicare of Montgomery
Diversicare of Oneonta
Diversicare of Oxford
Diversicare of Pell City
Diversicare of Riverchase
Diversicare of Winfield
Hartford Health Care
Lynwood Nursing Center
Northside Healthcare
Park Place
Windsor House
Florida
Hardee Manor Healthcare Center
Indiana
Diversicare of Providence
Kansas
Diversicare of Chanute
Diversicare of Council Grove
Diversicare of Haysville
Diversicare of Hutchinson
Diversicare of Larned
Diversicare of Sedgwick
Kentucky
Boyd Nursing & Rehab Center
Carter Nursing & Rehab Center
Clinton Place*
Diversicare of Fulton*
Diversicare of Glasgow*
Diversicare of Greenville
Diversicare of Nicholasville
Diversicare of Seneca Place
Elliott Nursing & Rehab Center
Highlands Health & Rehab Center
South Shore Nursing & Rehab Center
West Liberty Nursing & Rehab Center
Wurtland Nursing & Rehab Center
Ohio
Best Care Nursing & Rehab Center
Diversicare of Bradford Place
Diversicare of Siena Woods
Diversicare of St. Theresa
Ontario Pointe**
Tennessee
Diversicare of Claiborne
Diversicare of Dover
Diversicare of Martin
Diversicare of Oak Ridge
Diversicare of Smyrna
Mississippi
Diversicare of Amory
Diversicare of Batesville
Diversicare of Brookhaven
Diversicare of Eupora
Diversicare of Meridian
Diversicare of Ripley
Diversicare of Southaven
Diversicare o Tupelo
Diversicare of Tylertown
Missouri
Diversicare of St. Joseph
Riverside Place
St. Joseph Chateau
*Sold 12/01/2018
Texas
Afton Oaks Nursing & Rehab Center
Ballinger Healthcare & Rehab Center
Brentwood Terrace Healthcare & Rehab Center
Chisolm Trail Nursing & Rehab Center
Diversicare of Lake Highlands
Diversicare of Luling
Estates Healthcare & Rehab Center
Lampasas Nursing & Rehab Center
Normandy Terrace Healthcare & Rehab Center
Oakmont Healthcare & Rehab Center of Humble
Oakmont Healthcare & Rehab Center of Katy
Treemont Healthcare & Rehab Center
Yorktown Nursing & Rehab Center
**Transferred operations and
terminated lease 10/01/2018
LETTER TO SHAREHOLDERS
Dear Shareholder:
Before we begin a discussion of our activities and results for 2018, we encourage you to review the disclosures
and risk factors in our SEC filings and this annual report. As we have noted before and as is the case with others
in our industry, we are subject to unresolved governmental investigations into our therapy practices, our
practices relating to the preadmission evaluation forms required by TennCare, and the PASRRs forms required
by the Medicare program. We also continue to have a substantial presence in certain jurisdictions that have
some of the highest professional liability costs per bed in the country. These factors and other challenges facing
our industry have been taken into consideration in developing our operating and strategic direction.
We reported annual revenue of $563.5 million for 2018. As disclosed in previous SEC filings, we adopted
Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”) at the beginning of
2018. Reported revenue for 2018 reflects the application of this new accounting standard, which had a minimal
impact on our bottom line but resulted in bad debt expense being recorded as a reduction of revenue rather
than being presented as a component of operating expenses. To provide an appropriate year over year
comparison of revenue, the following presents 2018 revenue under previous accounting guidance, referred to
as “legacy GAAP". Revenue for 2018 under legacy GAAP was $577.7 million, compared to $574.8 million for
2017. The growth in revenue resulted from an increase in same store revenue in addition to benefiting from a
full year of operations for our Park Place center in Selma, Alabama, which we acquired during the third quarter
of 2017. These favorable impacts were offset by decreased revenues resulting from divestitures, including the
sale of three centers in Kentucky during the fourth quarter of 2018, as detailed further below.
Operating expenses for 2018 as a percentage of revenue were near historical levels. For 2018, operating
expenses as a percentage of revenue were 80.0%, compared to 79.7% for 2017. Exclusive of executive
severance recorded in the second quarter, G&A expenses as a percentage of revenue decreased to 5.6% for
2018 from 5.8% for 2017. During the third quarter, we recorded a litigation contingency accrual of $6.4 million
related to the aforementioned open government investigations. Further, we recognized a gain of $4.8 million
on the divestiture of three centers in Kentucky. Exclusive of the aforementioned one-time items, EBITDAR for
2018 was $69.7 million, compared to $72.8 million for 2017.
Occupancy, Skilled Mix and Rates
We continue to experience the impact of headwinds facing our industry, which has resulted in a decline in our
census, specifically within our skilled mix. Consistent with the industry, we continue to experience pressure
on length of stay with our Medicare and Managed Care patients. This pressure is universal to the post-acute
space and is likely to continue. While these patients generally have a shorter length of stay, the intensive level
of nursing and rehabilitation required by these patients typically results in high levels of reimbursement.
As a result, our average occupancy rate as a percentage of available beds was 83.0% in 2018, compared to
84.3% in 2017. The comparable figures for 2016 and 2015 were 81.2% and 80.4%, respectively. Our skilled
mix for 2018 declined by 40 basis points to 14.7%.
Our quarterly Medicare rates decreased slightly year over year by $1.29, while Medicaid and Managed Care
rates increased by $2.43 and $24.14, respectively.
Quality Outcomes
The Quality Measures (“QM”) outcomes as measured under CMS’s 5 Star program are an important reflection
of our ability to provide quality care to our patients and residents. Our team has improved our overall QM
score from 3.95 to 4.08 year-over-year, and we continue to be a leader in our for-profit peer group. As we have
shared in the past, the centers acquired from Golden Living initially diluted our overall QM score, but we
continued to make significant progress in 2018 in improving this measure. The QM scores for the centers we
acquired from Golden Living have improved from 2.41 at the time of acquisition to 4.14 at the end of 2018.
1
LETTER TO SHAREHOLDERS
Another important metric that we routinely monitor through third party services is our customer service
results. These results are compiled and compared to national customer service outcome data that is specific to
the Skilled Nursing industry provider groups across the country. These summary measurements include
metrics on overall satisfaction and the percentage of those who would recommend our services to others. The
study also covers separate measurement on both our short term patients and long term residents. We are
pleased to report that the results of our outcomes exceed the national benchmarks in all areas of the summary
analysis.
4.08
4.4
4.2
4.0
3.8
3.6
3.4
3.2
3.0
Divestitures
Overall QM Rating
DVCR
Industry
For-Profit
Not-For-Profit
We routinely evaluate the performance of our existing centers and the conditions within the markets in which
we operate to ensure that continuing operations within those centers and markets align with our strategic
objectives. During the year, we made a strategic decision to sell the real estate and transferred the operations
of three of our centers in Kentucky - Diversicare of Fulton, LLC, Diversicare of Clinton, LLC and Diversicare of
Glasgow, LLC. We closed the sale in the fourth quarter of 2018 at a sales price of $18.7 million. The proceeds
from the sale were used to pay down debt, as required by our loan agreements. This transaction illustrates our
consistent evaluation of our portfolio of operating centers.
Effect of New Revenue Recognition and Lease Accounting Standards
On January 1, 2018, we adopted the new revenue recognition standard, ASC 606, which mostly relates to bad
debt expense being recorded as a reduction of revenue instead of as a component of operating expense. The
impact of the implementation to the financial statements is not material and resulted in additional $0.5 million
of revenue in 2018.
Effective January 1, 2019, we adopted the new lease accounting standard, ASC 842. The standard requires a
lessee to record a right-of-use asset and lease liability on the balance sheet for all leases with terms longer than
12 months. Therefore, all of our financing and operating leases will presented on the balance sheet beginning
with the first quarter of 2019. The implementation of this standard will have a material impact on the financial
statements, primarily from nursing center operating leases.
2
LETTER TO SHAREHOLDERS
Omega and Golden Living Master Leases
In accordance with the lease accounting standard, we are required to use straight-line accounting for
recognizing lease expense over the life of the lease. This method requires us to recognize more expense than
cash paid in the beginning of a lease term. The Company entered into a 12-year master lease agreement with
Omega in October 2018 to lease 34 nursing centers. We also have 20 leased nursing centers from Golden Living
under a 10-year master lease that commenced in November 2016. Since we are required to recognize more
expense than the cash paid for rent in the beginning of our facility leases, we are forecasting a straight-line
expense impact of $4.7 million in 2019.
Looking Ahead.
As we look forward, we are acutely aware of the challenges facing our industry and, more specifically, our
company. We will continue to evaluate our portfolio and service offerings to make strategic adjustments to
better prepare the company for the future and to ensure that we continue to offer the highest quality of care.
As we better understand the changes in reimbursement methodology over the coming quarters, we look
forward to sharing those expectations with you. We continue to believe that the change in demographics will
result in improvement for our industry in the coming years.
The impact of several events in the past two fiscal years have resulted in us having negative shareholders’
equity on our balance sheet. First, we were required to revalue our deferred tax assets after the passing of tax
reform in December 2017, which resulted in the recognition of a provisional net deferred income tax expense
of $5.5 million. The renewal of the Omega Master Lease triggered straight-line accounting changes that
increased recorded lease expense in the fourth quarter of 2018 by $1.3 million. In the third quarter of 2018,
we recorded an initial expense related to our open Department of Justice matter of $6.4 million. The result of
these events resulted in us having negative shareholders’ equity on our balance sheet, which required us to
suspend our quarterly dividend. At this time, we do not know when or if we will be able to reinstate a dividend
to shareholders.
In closing, we want to thank our thousands of team members who work tirelessly to provide high quality care
in our centers. Our team is committed to our mission To Improve Every Life We Touch, Provide Exceptional
Healthcare, and Exceed Expectations.
Thank you for your continued support and investment in Diversicare.
Chad A. McCurdy
Chairman of the Board
James R. McKnight, Jr.
President and Chief Executive Officer
3
Operating and Growth Strategy.
Our operating objective is to optimize market position in the delivery of health care and related services to the patients and residents
in need of post-acute care in the communities in which we operate. Our strategic operations development plan focuses on (i)
providing a broad range of high quality, cost-effective post-acute care services; (ii) improving skilled mix in our nursing centers via
enhanced capabilities for rehabilitation and transitional care; (iii) building clinical competencies and programs consistent with
marketplace needs; and (iv) clustering our operations on a regional basis. Interwoven into our objectives and operating strategy is
our mission:
• Improve Every Life We Touch
• Provide Exceptional Healthcare
• Exceed Expectations
• Increase Shareholder Value
Strategic operating initiatives. Our key strategic operating initiatives include improving skilled mix in our nursing centers by
enhancing our staffing complement to address the increased medical complexity of certain patients, increasing clinical
competencies, and adding clinical programs. Our investments in nursing and clinical care have been implemented in concert with
additional investments in nursing center-based sales representatives to cultivate referral and Managed Care relationships. These
investments have positioned us and are expected to continue to position us to be a destination for patients covered by Medicare and
Managed Care as well as certain private pay individuals. These enhancements and investments have positioned us to admit higher
acuity patients.
To achieve our objectives, we:
Provide a broad range of quality cost-effective services. Our objective is to provide a variety of services to meet the needs of the
increasing post-acute care population requiring skilled nursing and rehabilitation care. Our service offerings currently include
skilled nursing, comprehensive rehabilitation services, programming for Life Steps and Memory Care units (described below)
and other specialty programming. By addressing varying levels of acuity, we work to meet the needs of the population we serve.
We seek to establish a reputation as the provider of choice in each of our markets. Furthermore, we believe we are able to deliver
quality services cost-effectively, compared to other healthcare providers along the spectrum of care, thereby expanding the
population base that can benefit from our services.
Improve skilled mix in our nursing centers. By enhancing our registered nurse coverage and adding specialized clinical care, we
believe we can admit patients with more medically complex conditions, thereby improving skilled mix and reimbursement. The
investments in nursing and clinical care are being conducted in concert with additional investments in nursing center-based sales
representatives to develop referral and Managed Care relationships. These investments will better attract quality payor sources
for patients covered by Medicare, Managed Care and Medicare replacement payors as well as certain private pay individuals. We
will also continue our program for the renovation and improvement of our nursing centers to attract and retain patients and
residents.
Cluster operations on a regional basis. We have developed regional concentrations of operations in order to achieve operating
efficiencies, generate economies of scale and capitalize on marketing opportunities created by having multiple operations in a
regional market area.
Key elements of our strategy are to:
Increase revenues and profitability at existing nursing centers. Our strategy includes increasing center revenues and profitability
through improving payor mix, providing an increasing level of higher acuity care, obtaining appropriate reimbursement for the
care we provide, and providing high quality patient care. Ongoing investments are being made in expanded nursing and clinical
care. We continue to enhance center-based marketing initiatives to promote higher occupancy levels and improved skilled mix at
our nursing centers.
Development of additional specialty services. Our strategy includes the development of additional specialty units and
programming in nursing centers that could benefit from these services. The specialty programming will vary depending on the
needs of the specific market, and may include complex medical and rehabilitation services, as well as memory care units and
other specialty programming. These services allow our centers to meet market needs while improving census and payor mix. A
center specific assessment of the market and the current programming being offered is conducted related to specialty
programming to determine if unmet needs exist as a predictor of the success of particular niche offerings and services.
Strategic management of our portfolio of centers. We continue to pursue and investigate opportunities to acquire and lease new
centers, focusing primarily on opportunities that can leverage our existing infrastructure. We routinely evaluate the performance
of our existing centers within the markets in which we operate in order to determine whether continuing operations within
certain centers or markets aligns with our strategic objectives.
4
Nursing Centers and Services.
Diversicare provides a broad range of post-acute care services to patients and residents including skilled nursing, ancillary health
care services and assisted living. In addition to the nursing and social services usually provided in long-term care centers, we offer a
variety of rehabilitative, nutritional, respiratory, and other specialized ancillary services. As of December 31, 2018, our continuing
operations consist of 72 nursing centers with 8,214 licensed skilled nursing beds. Our nursing centers range in size from 48 to 320
licensed nursing beds. The licensed nursing bed count does not include 429 licensed assisted living beds. Our continuing operations
include centers in Alabama, Florida, Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.
5
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The following table summarizes certain information with respect to the nursing centers we own or lease as of December 31, 2018:
Operating Locations:
Alabama
Florida
Indiana
Kansas
Kentucky
Mississippi
Missouri
Ohio
Tennessee
Texas
Classification:
Owned
Leased
Total
Number of
Centers
Licensed Nursing
Beds (1)
Available Nursing
Beds (1)
20
1
1
6
10
9
3
4
5
13
72
15
57
72
2,385
79
158
464
885
1,039
339
403
617
1,845
8,214
1,365
6,849
8,214
2,318
79
158
464
881
1,004
339
393
551
1,662
7,849
1,250
6,599
7,849
____________
(1) The number of Licensed Nursing Beds is based on the regulatory licenses for the nursing center. The Company reports its
occupancy based on licensed nursing beds. The number of Available Nursing Beds represents Licensed Nursing Beds
reduced by beds removed from service. Available Nursing Beds is subject to change based upon the needs of the centers,
including configuration of patient rooms, common usage areas and offices, status of beds (private, semi-private, ward, etc.)
and renovations. The number of Licensed and Available Nursing Beds does not include 429 Licensed Assisted
Living/Residential Beds, all of which are also available. These beds are excluded from the bed counts as our operating
statistics such as occupancy are calculated using Nursing Beds only.
Our nursing centers provide skilled nursing health care services, including nutrition services, recreational therapy, social services,
housekeeping and laundry services. Skilled nursing care is provided for post-acute patients and residents with comorbidities. This
care includes assessment using evidence based tools; individualized care plan development based on identified areas of risk and care
needs; and skilled interventions such as IV services. We also provide for the delivery of ancillary medical services at the nursing
centers we operate. These specialty services include rehabilitation therapy services, such as audiology, speech, occupational and
physical therapies, which are provided through licensed therapists and registered nurses, and the provision of medical supplies,
nutritional support, infusion therapies and related clinical services. The majority of these services are provided using our internal
resources and clinicians.
Within the framework of a nursing center, we may provide other specialty care, including:
Transitional Care Unit. Many of our nursing centers have units designated as transitional care units, our designation for patients
requiring transitional care following an acute stay in the hospital. These units specialize in short-term nursing and rehabilitation
with the goal of returning the patient to their highest potential level of functionality. These units provide enhanced services with
emphasis on upgraded amenities. The design and programming of the units generally appeal to the clinical and hospitality needs
of individuals as they progress to the next appropriate level of care. Specialized therapeutic treatment regimens include
orthopedic rehabilitation, neurological rehabilitation and complex medical rehabilitation. While these patients generally have a
shorter length of stay, the intensive level of nursing and rehabilitation required by these patients typically results in higher levels
of reimbursement.
Memory Care Unit. Like our transitional care units, many of our nursing centers have memory care units, our designation for
advanced care for dementia-related disorders including Alzheimer's disease. The goal of the units is to provide a safe, homelike
and supportive environment for cognitively impaired patients, utilizing an interdisciplinary team approach. Family and
community involvement complement structured programming in the secure environment instrumental in fostering as much
resident independence and purposeful quality of life as long as possible despite diminished capacity.
6
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Enhanced Therapy Services. We have complemented our traditional therapy services with programs that provide electrotherapy,
vital stimulation, ultrasound and shortwave diathermy therapy treatments that promote pain management, wound healing, muscle
strengthening, and/or contractures management, improving outcomes for our patients and residents receiving therapy treatments.
Other Specialty Programming. We implement other specialty programming based on a center's specific needs. We have
developed two adult day care centers on nursing center campuses. We have developed specialty programming for bariatric
patients (generally, patients weighing more than 350 pounds) at one of these centers as these individuals have unique
psychosocial and equipment needs.
Quality Assurance and Performance Improvement. We have in place a Quality Assurance and Performance Improvement
(“QAPI”) program, which is focused on monitoring and improving all aspects of the care provided in a center by identifying
outcomes and acting on areas of improvement. The QAPI program in our centers addresses all systems of care and management
practices. Key quality indicators are determined and performance goals and benchmarks are established based on industry research
standards via a Balanced Scorecard. Gaps and opportunities in performance versus benchmarks are addressed with analysis and
performance improvement plans. Outcomes from each center in the areas of quality, employee workplace, customer satisfaction,
and stewardship are collected monthly and overseen by regional and company quality committees.
Utilization of Electronic Medical Records. Electronic Medical Records (“EMR”) improves our ability to accurately record the care
provided to our patients and quickly respond to areas of need. We now implement the use of EMR near the time of acquisition for
new centers. EMR improves customer and employee satisfaction, nursing center regulatory compliance and provides real-time
monitoring and scheduling of care delivery. We believe our EMR system supports our quality initiatives and positions us for higher
acuity service offerings. Our EMR system is comprehensive in its functionality, providing key components, such as:
• Tracking Activities of Daily Living (“ADLs”). ADLs are the functions that each person must perform on a daily basis
including, but not limited to, getting dressed, bathing, and eating. ADL tracking allows us to capture the provision of care
provided by our nursing, dietary and housekeeping staff in assisting with ADLs quickly, efficiently and electronically.
• Progress Notes. Progress notes are an important component of our medical records. Licensed nursing professionals
provide documentation reflecting assessment of each patient's condition and intervention of skilled care provided. The
EMR system provides means for a comprehensive chronological record resulting in improved capture, monitoring and
review of documentation of condition and care provided.
• Medications. Our patients receive a number of daily medications. This module assists with electronic tracking and
documenting of required medications and treatments. This provides a more accurate and efficient care system for our
nurses and patients.
• Wound Module. This allows for an evidence-based risk assessment to drive patient specific interventions to prevent skin
breakdown. When skin abnormalities are present, it provides for accurate depiction of anatomical location and description
which drives individualized care treatments.
Incident Module. Allows for capturing any event, such as a fall, and provides quality assurance steps for root cause and
patient-specific care plans.
•
For all modules, the EMR system provides a dashboard that can be reviewed at a number of kiosks throughout the nursing center,
allowing our staff to securely access a list of upcoming patient care tasks and providing supervisors a tool to help manage and
monitor staff performance. We believe the EMR system provides better support, efficiency, and improves the quality of care for our
patients.
Organization. Our nursing centers are currently organized into eight regions, each of which is supervised by a regional vice
president. The regional vice president is generally supported by specialists in several functions, including clinical, human resources,
marketing, revenue cycle management and administration, all of whom are employed by us. The day-to-day operations of each of
our nursing centers are led by an on-site, licensed administrator. The administrator of each nursing center is supported by other
professional personnel, including a medical director, who assists in the medical management of the nursing center, and a director of
nursing, who supervises a team of registered nurses, licensed practical nurses and nurse aides. Other personnel include those
providing therapy, dietary, activities and social service, housekeeping, laundry, maintenance and office services. The majority of
personnel at our nursing centers, including the administrators, are our employees.
Market Information. Our common stock is traded on the Nasdaq Capital Market and began trading there on September 12, 2006.
The Company's Nasdaq ticker symbol is “DVCR.” As previously disclosed in December 2018, the Company received a MVLS
Notice regarding the continued listing of the Company's stock on Nasdaq.
Our common stock has been traded since May 10, 1994. On February 15, 2019, the closing price for our common stock was $3.68,
as reported by Nasdaq.com.
Holders. On February 15, 2019, there were approximately 264 holders of record. Most of our shareholders have their holdings in
the street name of their broker/dealer.
7
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The graph below compares the cumulative 5-year total return of holders of Diversicare Healthcare Services, Inc.’s common stock
with the cumulative total returns of the S & P Smallcap 600 index, and a customized peer group of four companies that includes
Ensign Group, Inc., Genesis Healthcare, Inc., Kindred Healthcare Inc and Regional Health Properties, Inc. The graph tracks the
performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends)
from 12/31/2013 to 12/31/2018.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Diversicare Healthcare Services, Inc., the S&P Smallcap 600 Index,
and a Peer Group
$300
$250
$200
$150
$100
$50
$0
12/13
12/14
12/15
12/16
12/17
12/18
Diversicare Healthcare Services, Inc.
S&P Smallcap 600
Peer Group
*$100 invested on 12/31/13 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Copyright© 2019 Standard & Poor's, a division of S&P Global. All rights reserved.
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
8
SELECTED CONSOLIDATION FINANCIAL DATA
2018
Year Ended December 31,
2016
2015
2017
2014
(in thousands, except per share amounts)
$ 563,462 $ 574,794 $ 426,063 $ 387,595 $ 344,192
Statement of Operations Data
REVENUES:
Patient revenues, net
EXPENSES:
Operating
Lease and rent expense
Professional liability
Litigation contingency expense
General and administrative
Depreciation and amortization
Gain on sale of assets
Lease termination costs (receipts)
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE):
Other income
Equity in net income (losses) of investment in
unconsolidated affiliate
Gain on bargain purchase
Gain on sale of investment in unconsolidated
affiliate
Hurricane costs
Interest expense, net
Debt retirement costs
INCOME (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES
BENEFIT (PROVISION) FOR INCOME TAXES
INCOME (LOSS) FROM CONTINUING
OPERATIONS
DISCONTINUED OPERATIONS, net of taxes
NET INCOME (LOSS)
INCOME (LOSS) PER COMMON SHARE:
Basic
Continuing operations
Discontinued operations
Net income (loss) per common share
Diluted
Continuing operations
Discontinued operations
Net income (loss) per common share
CASH DIVIDENDS DECLARED PER COMMON
SHARE
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
$
$
$
$
$
$
Basic
Diluted
450,686
57,073
11,796
6,400
32,791
11,201
(4,825)
—
565,122
(1,660)
168
—
—
308
—
(6,653)
(267)
(6,444)
(8,104)
750
458,122
54,988
10,764
—
33,311
10,902
—
(180)
567,907
6,887
—
—
925
733
(232)
(6,369)
—
(4,943)
1,944
(6,743)
342,932
33,364
8,456
—
30,271
8,292
—
2,008
425,323
740
—
273
—
1,366
—
(4,802)
(351)
(3,514)
(2,774)
1,030
311,035
28,690
8,122
—
24,793
7,524
—
—
380,164
7,431
—
339
—
—
—
(4,102)
—
(3,763)
3,668
(916)
(7,354)
(42)
(7,396) $
(4,799)
(28)
(4,827) $
(1,744)
(67)
(1,811) $
2,752
(1,128)
1,624 $
(1.15) $
(0.01)
(1.16) $
(1.15) $
(0.01)
(1.16) $
(0.76) $
(0.01)
(0.77) $
(0.76) $
(0.01)
(0.77) $
(0.28) $
(0.01)
(0.29) $
(0.28) $
(0.01)
(0.29) $
0.45 $
(0.18)
0.27 $
0.44 $
(0.18)
0.26 $
275,605
26,151
7,216
—
22,133
7,078
—
—
338,183
6,009
—
(5)
—
—
—
(3,697)
—
(3,702)
2,307
(857)
1,450
3,258
4,708
0.21
0.54
0.75
0.20
0.52
0.72
0.17 $
0.22 $
0.22
$
0.22
$
0.22
6,279
6,279
6,199
6,199
6,100
6,315
6,011
6,197
6,372
6,372
9
SELECTED CONSOLIDATION FINANCIAL DATA
2018
2017
December 31,
2016
(in thousands)
2015
2014
10,192 $
$
$ 159,244 $
8,391 $
8,797
167,569 $ 163,051 $ 137,084 $ 129,089
13,052 $
13,521 $
Balance Sheet Data
Working capital
Total assets
Long-term debt and capitalized lease obligations,
less current portion and deferred financing costs, net $
$
Total Equity (deficit)
74,558 $
(1,198) $
89,552 $
6,462 $
82,123
$
11,420 $
60,867 $
13,267 $
48,265
11,754
10
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Diversicare Healthcare Services, Inc. provides long-term care services to nursing center patients in ten states, primarily in the
Southeast, Midwest and Southwest. Our centers 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 centers, we offer a variety of comprehensive
rehabilitation services as well as nutritional support services. As of December 31, 2018, our continuing operations consist of 72
nursing centers with 8,214 licensed skilled nursing beds and 429 assisted-living and other residential beds. We own 15 and lease 57
of our nursing centers included in continuing operations. The Company's continuing operations include centers in Alabama, Florida,
Indiana, Kansas, Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas.
Key Performance Metrics
Skilled mix. Skilled mix represents the number of days our Medicare and Managed Care patients are receiving services at the skilled
nursing facilities divided by the total number of days (less days from assisted living patients).
Average rate per day. Average rate per day is the revenue by payor source for a period at the skilled nursing facility divided by
actual patient days for the revenue source for a given period.
Average daily skilled nursing census. Average daily skilled nursing census is the average number of patients who are receiving
skilled nursing care.
Strategic Operating Initiatives
We identified several key strategic objectives to increase shareholder value through improved operations and business development.
These strategic operating initiatives include: improving our facilities’ quality metrics, improving skilled mix in our nursing centers,
improving our average Medicare rate, maintaining Electronic Medical Records to improve Medicaid capture, and completing
strategic acquisitions and divestitures. We have experienced success in these initiatives and expect to continue to build on these
improvements. In light of challenges facing the industry and the Company specifically, including the unresolved governmental
investigation, we believe that now is not the time to attempt to engage in a company-wide strategic transaction.
Improving skilled mix and average Medicare rate:
One of our key performance indicators is skilled mix. Our strategic operating initiatives of improving our skilled mix and our
average Medicare rate required investing in nursing and clinical care to treat more acute patients along with nursing center-based
marketing representatives to attract these patients. These initiatives developed referral and Managed Care relationships that have
attracted and are expected to continue to attract payor sources for patients covered by Medicare and Managed Care. The Company's
skilled mix for the years ended December 31, 2018, 2017 and 2016 was 14.7%, 15.1% and 15.2%, respectively.
Utilizing Electronic Medical Records to improve Medicaid acuity capture:
As another part of our strategic operating initiatives, all of our nursing centers utilize EMR to improve Medicaid acuity capture,
primarily in our states where the Medicaid payments are acuity based. By using EMR, we have increased our average Medicaid rate
despite rate cuts in certain acuity based states by accurate and timely capture of care delivery.
Completing strategic transactions:
Our strategic operating initiatives include a renewed focus on completing strategic acquisitions and divestitures. We continue to
pursue and investigate opportunities to acquire or lease new centers, focusing primarily on opportunities within our existing
geographic areas of operation. As part of our strategic efforts, we have also performed thorough analysis on our existing centers in
order to determine whether continuing operations within certain markets or regions is in line with the short-term and long-term
strategy of the business.
On October 30, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and
Rehabilitation LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC,
Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the
operations of Diversicare of Fulton, Diversicare of Clinton and Diversicare of Glasgow (the "Properties"). The purchase price of the
Properties is $18.7 million and the sale was effective on December 1, 2018.
On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Lease") with Omega Healthcare Investors (the
"Lessor") to lease 34 centers currently owned by Omega and operated by Diversicare. The old Master Lease with Omega provided
for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and Ohio. Additionally, Diversicare
operates 11 centers owned by Omega under separate leases in Missouri, Kentucky, Indiana, and Ohio. The Lease entered into by
11
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Diversicare and Omega consolidates the leases for all 34 centers under one New Master Lease. The Lease has an initial term
of twelve years with two 10 year extensions, each at our option. The Lease has a common date of annual lease fixed escalators
of 2.15% beginning on October 1, 2019.
On July 8, 2018, the Company entered into a membership interest purchase agreement with ALS Ontario Operating, Inc. to transfer
all of the issued and outstanding membership units of Ontario Pointe, a stand-alone 50 bed assisted living facility in Ontario, OH.
The transfer of operations and termination of this lease was effective on October 1, 2018.
Effective July 1, 2017, the Company acquired a 103-bed skilled nursing center in Selma, Alabama, for an aggregate purchase price
of $8.8 million, pursuant to an Asset Purchase Agreement with Park Place Nursing and Rehabilitation Center, LLC, Dunn Nursing
Home, Inc., Wood Properties of Selma LLC, and Homewood of Selma, LLC. This transaction is further discussed in Note 2
"Business Development and Other Significant Transactions" to the consolidated financial statements.
In September 2017, we ceased operations at our Carthage, Mississippi, facility, thus terminating our lease with Trend Health and
Rehab of Carthage, LLC. This transaction was not reported as a discontinued operation as described in Note 2 "Business
Development and Other Significant Transactions" to the consolidated financial statements.
Basis of Financial Statements.
Our patient revenues consist of the fees charged for the care of patients in the nursing centers we own and lease. Our operating
expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing centers
we own and lease. Our general and administrative expenses consist of the costs of the corporate office and regional support
functions. Our interest, depreciation and amortization expenses include all such expenses across the range of our operations.
12
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Selected Financial and Operating Data
The following table summarizes the Diversicare statements of continuing operations for the years ended December 31, 2018, 2017
and 2016, and sets forth this data as a percentage of revenues for the same year:
Revenues:
Patient revenues, net
Expenses:
Operating
Lease and rent expense
Professional liability
Litigation contingency expense
General & administrative
Depreciation and amortization
Gain on sale of assets
Lease termination costs (receipts)
Operating income (loss)
Other income (expense):
Other income
Equity in net income of unconsolidated affiliate
Gain on bargain purchase
Gain on sale of investment in unconsolidated
affiliate
Hurricane costs
Interest expense, net
Debt retirement costs
Income (loss) from continuing operations before
income taxes
Benefit (provision) for income taxes
Loss from continuing operations
$
Year Ended December 31,
2018
(Dollars in thousands)
2017
2016
$ 563,462
100.0 % $ 574,794
100.0 % $ 426,063
100.0 %
450,686
57,073
11,796
6,400
32,791
11,201
(4,825)
—
565,122
(1,660)
168
—
—
308
—
(6,653)
(267)
(6,444)
(8,104)
750
(7,354)
80.0 % 458,122
10.1 % 54,988
2.1 % 10,764
1.1 %
—
33,311
5.8 %
2.0 % 10,902
(0.9)%
—
(180)
— %
100.2 % 567,907
6,887
(0.2)%
— %
— %
— %
0.1 %
— %
(1.2)%
— %
(1.1)%
—
—
925
733
(232)
(6,369)
—
(4,943)
79.7 %
9.6 %
1.9 %
— %
5.8 %
1.9 %
— %
— %
98.9 %
1.1 %
— %
— %
0.2 %
0.1 %
— %
(1.1)%
— %
(0.8)%
342,932
33,364
8,456
—
30,271
8,292
—
2,008
425,323
740
—
273
—
1,366
—
(4,802)
(351)
(3,514)
1,944
(1.3)%
0.1 %
(6,743)
(1.2)% $ (4,799)
0.3 %
(1.2)%
(0.9)% $
(2,774)
1,030
(1,744)
80.5 %
7.8 %
2.0 %
— %
7.1 %
1.9 %
— %
0.5 %
99.8 %
0.2 %
— %
0.1 %
— %
0.3 %
— %
(1.1)%
(0.1)%
(0.8)%
(0.6)%
0.2 %
(0.4)%
The following table presents data about the centers we operated as part of our continuing operations as of the dates:
Licensed Nursing Center Beds:
Owned
Leased
Total
Facilities:
Owned
Leased
Total
2018
December 31,
2017
2016
1,365
6,849
8,214
15
57
72
1,607
6,849
8,456
18
58
76
1,504
6,949
8,453
17
59
76
13
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Critical Accounting Policies and Judgments
A “critical accounting policy” is one which is both important to the understanding of our financial condition and results of
operations and requires management's most difficult, subjective or complex judgments, often of the need to make estimates about
the effect of matters that are inherently uncertain. Actual results could differ from those estimates and cause our reported net income
(loss) to vary significantly from period to period. Our accounting policies that fit this definition include the following:
Revenues
Patient Revenues, Net
The fees we charge patients in our nursing centers are recorded on an accrual basis. These rates are contractually adjusted with
respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Medicare
intermediaries make retroactive adjustments based on changes in allowed claims. In addition, certain of the states in which we
operate require complicated detailed cost reports which are subject to review and adjustments. In the opinion of management,
adequate provision has been made for adjustments that may result from such reviews. Retroactive adjustments, if any, are recorded
when objectively determinable, generally within three years of the close of a reimbursement year depending upon the timing of
appeals and third-party settlement reviews or audits.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable by reviewing current aging summaries of accounts receivable, historical
collections data and other factors. As a percentage of revenue, our provision for doubtful accounts was approximately 0.0%, 1.6%,
and 1.7% for 2018, 2017, and 2016, respectively. Subsequent to the adoption of ASC 606, the majority of what was previously
presented as allowance for doubtful account related to bad debt expense that has been incorporated as an implicit price concession
factored into new revenue and accounts receivable. Historical bad debts have generally resulted from uncollectible private pay
balances, some uncollectible coinsurance and deductibles and other factors. Receivables that are deemed to be uncollectible are
written off.
Professional Liability and Other Self-Insurance Reserves
Accrual for Professional and General Liability Claims
The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is
likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a
wholly-owned, consolidated offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), which has issued a
policy insuring claims made against all of the Company's nursing centers in Florida and Tennessee, and several of the Company’s
nursing centers in Alabama, Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy
include coverage limits of $1.0 million or $3.0 million per medical incident with a sublimit per center of $3.0 million and total
annual aggregate policy limits of $5.0 million. All other centers within the Company’s portfolio are covered through various
commercial insurance policies which provide coverage limits of $1.0 million per claim and have sublimits of $3.0 million per center,
with varying aggregate policy limits and deductibles. The deductibles for these policies are covered through the insurance
subsidiary.
Because our actual liability for existing and anticipated professional liability and general liability claims will exceed our limited
insurance coverage, we have recorded total liabilities for reported professional liability claims and estimates for incurred but
unreported claims of $27.2 million and $5.5 million of estimated insurance recovery receivables as of December 31, 2018, including
$1.5 million for settlements that are expected to be paid in 2019, estimates of liability for incurred but not reported claims, estimates
of liability for reported but unresolved claims, and estimates of related legal costs incurred and expected to be incurred. All losses
are projected on an undiscounted basis.
The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party
actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted
management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims
based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the
frequency and cost of the Company's past claims over a multi-year period, industry data and information regarding the number of
occupied beds to develop its estimates of the Company's ultimate professional liability cost for current periods.
On a quarterly basis, we obtain reports of asserted claims and lawsuits from our insurers and a third party claims administrator.
These reports contain information relevant to the liability actually incurred to date with that claim as well as the third-party
administrator's estimate of the anticipated total cost of the claim. This information is reviewed by us quarterly and provided to the
14
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
actuary semi-annually. We use this information to determine the timing of claims reporting and the development of reserves and
compare the information obtained to our previously recorded estimates of liability. Based on the actual claim information obtained,
on the semi-annual estimates received from the actuary and on estimates regarding the number and cost of additional claims
anticipated in the future, the reserve estimate for a particular period may be revised upward or downward on a quarterly basis. Final
determination of our actual liability for claims incurred in any given period is a process that takes years.
The Company's cash expenditures for self-insured professional liability costs from continuing operations were $6.5 million, $6.6
million and $4.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
Although we retain a third-party actuarial firm to assist us, professional and general liability claims are inherently uncertain, and the
liability associated with anticipated claims is very difficult to estimate. Professional liability cases have a long cycle from the date of
an incident to the date a case is resolved, and final determination of our actual liability for claims incurred in any given period is a
process that takes years. As a result, our actual liabilities may vary significantly from the accrual, and the amount of the accrual has
and may continue to fluctuate by a material amount in any given quarter due to the significance of judgments and estimates.
Professional liability costs are material to our financial position, and changes in estimates, as well as differences between estimates
and the ultimate amount of loss, may cause a material fluctuation in our reported results of operations. Our professional liability
expense was $11.8 million, $10.8 million and $8.5 million for the years ended December 31, 2018, 2017 and 2016, respectively.
These amounts are material in relation to our reported income (loss) from continuing operations for the related periods of $(7.4)
million, $(4.8) million and $(1.7) million, respectively. The total liability recorded at December 31, 2018 was $27.2 million,
compared to current assets of $80.5 million and total assets of $159.2 million.
Accrual for Other Self-Insured Claims
With respect to workers' compensation insurance, substantially all of our employees became covered under either a prefunded
deductible policy or state-sponsored programs. We have been and remain a non-subscriber to the Texas workers' compensation
system and are, therefore, completely self-insured for employee injuries with respect to our Texas operations. From June 30, 2003
until June 30, 2007, our workers' compensation insurance programs provided coverage for claims incurred with premium
adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company is completely insured
for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2018, we are covered by a prefunded
deductible policy. Under this policy, we are self-insured for the first $0.5 million per claim, subject to an aggregate maximum of
$3.0 million. We fund a loss fund account with the insurer to pay for claims below the deductible. We account for premium
expense under this policy based on its estimate of the level of claims subject to the policy deductibles expected to be incurred.
We are self-insured for health insurance benefits for certain employees and dependents for amounts up to $0.2 million per individual
annually. We provide reserves for the settlement of outstanding self-insured health claims at amounts believed to be adequate, based
on known claims and estimates of unknown claims based on historical information. The differences between actual settlements and
reserves are included in expense in the period finalized. Our reserves for health insurance benefits can fluctuate materially from one
year to the next depending on the number of significant health issues of our covered employees and their dependents.
Asset Impairment
We evaluate our property, equipment and other long-lived assets on a quarterly basis to determine if facts and circumstances suggest
that the assets may be impaired or that the estimated depreciable life of the asset may need to be changed for significant physical
changes in the property, or significant adverse changes in general economic conditions, and significant deteriorations of the
underlying cash flows or fair values of the property if impairment indicators exist. The need to recognize impairment is based on
estimated undiscounted future cash flows from a property compared to the carrying value of that property. If recognition of
impairment is necessary, it is measured as the amount by which the carrying amount of the property exceeds the fair value of the
property.
No impairment of long lived assets was recognized during 2018, 2017, or 2016. If our estimates or assumptions with respect to a
property change in the future, we may be required to record additional impairment charges for our assets.
Business Combinations
For business combination transactions, we recognize and measure the identifiable assets acquired, the liabilities assumed, any
noncontrolling interest in the acquiree, as well as the goodwill acquired or gain recognized in a bargain purchase, and we make
certain valuations to determine the acquisition date fair value of assets acquired and the liabilities assumed. These valuations are
subject to adjustments during the measurement period, not to exceed twelve-months from the acquisition date. Such valuations
require us to make significant estimates, judgments and assumptions, including projections of future events and operating
15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
performance. Accounting Standards Update ("ASU") No. 2017-01 provides the requirements needed for an integrated set of assets
and activities to be a business and also establish a practical way to determine when a set is not a business. The ASU provides a
screen to determine when an integrated set of assets and activities is not a business. The more robust framework helps entities to
narrow the definition of outputs created by the set and align it with how outputs are described in the new revenue recognition
standard.
Stock-Based Compensation
We recognize compensation cost for all share-based payments granted on a straight-line basis over the vesting period. We calculated
the recognized and unrecognized stock-based compensation for options and stock-only stock appreciation rights ("SOSARs") using
the Black-Scholes-Merton option valuation method, which requires us to use certain key assumptions to develop the fair value
estimates. These key assumptions include expected volatility, risk-free interest rate, expected dividends and expected term. For
restricted shares, we utilize the market price at the grant date in order to calculate the stock-based compensation expense to be
recognized during the vesting period. During the years ended December 31, 2018, 2017, and 2016, we recorded charges of
approximately $1.1 million, $1.0 million and $1.0 million in stock-based compensation, respectively. Stock-based compensation
expense is a non-cash expense and such amounts are included as a component of general and administrative expense or operating
expense based upon the classification of cash compensation paid to the related employees.
Income Taxes
Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of
our assets and liabilities at tax rates in effect when such temporary differences are expected to reverse. We generally expect to fully
utilize our deferred tax assets; however, when necessary, we record a valuation allowance to reduce our net deferred tax assets to the
amount that is more likely than not to be realized.
In determining the need for a valuation allowance or the need for and magnitude of liabilities for uncertain tax positions, we make
certain estimates and assumptions. These estimates and assumptions are based on, among other things, knowledge of operations,
markets, historical trends and likely future changes and, when appropriate, the opinions of advisors with knowledge and expertise in
certain fields. Due to certain risks associated with our estimates and assumptions, actual results could differ.
Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-
05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows
the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as
an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31,
2017, the company recognized a provisional net deferred income tax expense of $5.5 million to reflect the revaluation of the
Company’s net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related
income tax effects that were initially reported as provisional estimates were refined as additional analysis was performed.
16
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Contractual Obligations and Commercial Commitments
We have certain contractual obligations of continuing operations as of December 31, 2018, summarized by the period in which
payment is due, as follows (dollar amounts in thousands):
Contractual Obligations
Long-term debt obligations (1)
Settlement obligations (2)
Operating leases (3)
Required capital expenditures under
operating leases (4)
Total
$
Total
84,866 $
1,504
624,927
Less than
1 year
17,408 $
1,504
58,291
1 to 3
Years
67,327 $
—
119,966
3 to 5
Years
131 $
—
124,873
After
5 Years
—
—
321,797
26,566
737,863 $
$
2,610
79,813 $
5,221
192,514 $
5,221
130,225 $
13,514
335,311
(1) Long-term debt obligations include scheduled future payments of principal and interest of long-term debt and amounts
outstanding on our capital lease obligations. Our long-term debt obligations decreased $18.6 million between December 31,
2017 and December 31, 2018, which is related to the sale of three Kentucky centers. The proceeds were used to reduce our
debt. See Note 2, "Business Developments and Other Significant Transactions" and Note 5, "Long-Term Debt, Interest Rate
Swap and Capitalized Lease Obligations" to the consolidated financial statements included in this report for additional
information. Included in the $17.4 million of long-term obligations for amounts due in less than one year is $5 million
related to the Revolver and $5 million related to the Acquisition Line, which is due on February 26, 2021. These amounts are
classified as current because it is management's intent to pay within the next 12 months.
(2) Settlement obligations relate to professional liability cases that are expected to be paid within the next twelve months. The
professional liabilities are included in our current portion of self-insurance reserves.
(3) Represents minimum annual lease payments (exclusive of taxes, insurance, and maintenance costs) under our operating lease
agreements, which does not include renewals. Our operating lease obligations increased $440.7 million between
December 31, 2017 and December 31, 2018. The increase in operating lease obligations is due to the renewal of our Omega
Master Lease. See Note 9, "Commitments and Contingencies," to the consolidated financial statements.
Includes annual expenditure requirements under operating leases. Our required capital expenditures increased $14.7 million
between December 31, 2017 and December 31, 2018. The increase is due to the renewal of our Omega Master Lease. See
Note 9, "Commitments and Contingencies," to the consolidated financial statements.
(4)
We have employment agreements with certain members of management that provide for the payment to these members of amounts
up to two times their annual salary in the event of a termination without cause, a constructive discharge (as defined), or upon a
change of control of the Company (as defined). The maximum contingent liability under these agreements is approximately $1.7
million as of December 31, 2018. The terms of such agreements are for one year and automatically renew for one year if not
terminated by us or the employee.
Results of Operations
As discussed in the overview at the beginning of Management's Discussion and Analysis of Financial Condition and Results of
Operations, we have completed certain divestitures, acquisitions and entered several new lease agreements. We have reclassified our
Consolidated Financial Statements to present certain divestitures as discontinued operations for all periods presented. The following
discussion only relates to our continuing operations.
17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
PATIENT REVENUES, net
EXPENSES:
Operating
Lease and rent expense
Professional liability
Litigation contingency expense
General and administrative
Depreciation and amortization
Gain on sale of assets
Lease termination receipts
Total expenses
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE):
Other income
Gain on bargain purchase
Gain on sale of investment in unconsolidated affiliate
Hurricane costs
Interest expense, net
Debt retirement costs
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
BENEFIT (PROVISION) FOR INCOME TAXES
LOSS FROM CONTINUING OPERATIONS
NET LOSS PER COMMON SHARE:
Year Ended December 31,
2018
2017
Change
%
$ 563,462 $ 574,794
$ (11,332)
(2.0)%
450,686
57,073
11,796
6,400
32,791
11,201
(4,825)
—
565,122
(1,660)
168
—
308
—
(6,653)
(267)
(6,444)
458,122
54,988
10,764
—
33,311
10,902
—
(180)
567,907
6,887
—
925
733
(232)
(6,369)
—
(4,943)
(7,436)
2,085
1,032
6,400
(520)
299
(4,825)
180
(2,785)
(8,547)
168
(925)
(425)
232
(284)
(267)
(1,501)
(1.6)%
3.8 %
9.6 %
100.0 %
(1.6)%
2.7 %
100.0 %
100.0 %
(0.5)%
(124.1)%
100.0 %
(100.0)%
(58.0)%
100.0 %
(4.5)%
(100.0)%
30.4 %
(8,104)
1,944
(10,048)
(516.9)%
750
(6,743)
$
(7,354) $ (4,799) $
7,493
(2,555)
111.1 %
(53.2)%
Continuing operations per common share - basic
Continuing operations per common share - dilutive
$
$
(1.15) $
(1.15) $
(0.76) $
(0.76) $
(0.39)
(0.39)
(51.3)%
(51.3)%
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
Dilutive
6,372
6,372
6,279
6,279
18
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in thousands)
PATIENT REVENUES, net
EXPENSES:
Operating
Lease and rent expense
Professional liability
General and administrative
Depreciation and amortization
Lease termination costs (receipts)
Total expenses
OPERATING INCOME
OTHER INCOME (EXPENSE):
Equity in net income of investment in unconsolidated affiliate
Gain on bargain purchase
Gain on sale of investment in unconsolidated affiliate
Hurricane costs
Interest expense, net
Debt retirement costs
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
BENEFIT (PROVISION) FOR INCOME TAXES
LOSS FROM CONTINUING OPERATIONS
NET LOSS PER COMMON SHARE:
Continuing operations per common share - basic
Continuing operations per common share - dilutive
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
Dilutive
Year Ended December 31,
2017
2016
Change
%
$ 574,794 $ 426,063
$ 148,731
34.9 %
458,122
54,988
10,764
33,311
10,902
(180)
567,907
6,887
—
925
733
(232)
(6,369)
—
(4,943)
342,932
33,364
8,456
30,271
8,292
2,008
425,323
740
273
—
1,366
—
(4,802)
(351)
(3,514)
1,944
(6,743)
(4,799) $
(2,774)
1,030
(1,744) $
115,190
21,624
2,308
3,040
2,610
(2,188)
142,584
6,147
(273)
925
(633)
(232)
(1,567)
351
(1,429)
4,718
(7,773)
(3,055)
33.6 %
64.8 %
27.3 %
10.0 %
31.5 %
(100.0)%
33.5 %
830.7 %
(100.0)%
100.0 %
(46.3)%
(100.0)%
(32.6)%
100.0 %
(40.7)%
170.1 %
(754.7)%
(175.2)%
(0.76) $
(0.76) $
(0.28) $
(0.28) $
(0.48)
(0.48)
(171.4)%
(171.4)%
$
$
$
6,279
6,279
6,199
6,199
Year Ended December 31, 2018 Compared With Year Ended December 31, 2017
Patient Revenues
Patient revenues were $563.5 million in 2018 and $574.8 million in 2017, a decrease of $11.3 million or 2.0%. The difference
between patient revenues for 2018 is primarily due to the implementation of ASC 606. Refer to Note 3, "Revenue Recognition and
Receivables" to the consolidated financial statements. The following table summarizes the revenue fluctuations attributable to our
portfolio growth (in thousands):
2018
As reported
Year Ended
December 31,
2017
As adjusted to
Legacy GAAP
As reported
Change
Same-store revenue
2017 acquisition revenue
2017 disposition revenue
2018 disposition revenue
Total revenue
$
$
$
537,762
9,296
—
16,404
563,462
$
$
$
19
551,228 $
9,289
—
17,140 $
577,657 $
546,489 $
4,553
5,348
18,404
574,794
$
$
4,739
4,736
(5,348)
(1,264)
2,863
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Under legacy GAAP, revenue increased by $2.9 million, which is primarily attributable to revenue contributions from the acquisition
of Park Place during the third quarter of 2017 of $4.7 million. The increase from the acquisition activity was offset by a decrease in
revenues attributable to the 2017 disposition of Carthage and the 2018 dispositions of Fulton, Clinton and Glasgow of $5.3 million
and $1.3 million, respectively. Refer to Note 2, "Business Developments" to the consolidated financial statements. The increase in
same store revenue of $4.7 million is explained in more detail below.
The following table summarizes key revenue and census statistics for continuing operations for each period:
Skilled nursing occupancy
As a percent of total census:
Medicaid census
Medicare census
Managed Care census
As a percent of total revenues:
Medicaid revenues
Medicare revenues
Managed Care revenues
Average rate per day:
Medicare
Medicaid
Managed Care
Year Ended
December 31,
2018
2017
As adjusted to
Legacy GAAP
79.4%
69.2%
10.6%
4.1%
52.5%
24.8%
8.1%
As reported
79.7%
69.1%
11.2%
3.9%
52.4%
25.9%
7.4%
$
$
$
454.75
178.96
394.19
$
$
$
454.22
175.58
381.46
The average Medicaid rate per patient day for same-store nursing centers in 2018 increased 2.1% compared to 2017, resulting in an
increase in revenue of $5.9 million. This average rate per day for Medicaid patients is the result of rate increases in certain states and
increasing patient acuity levels. The average Managed Care and Hospice rate per patient day for same-store nursing centers in 2018
increased 3.3% and 4.4%, respectively, compared to 2017, resulting in an increase in revenue of $1.2 million and $1.1 million,
respectively.
Our total average daily census decreased by approximately 1.2% for the full portfolio compared to 2017 on a consolidated basis. On
a same-store basis, our Medicare, Medicaid and Private average daily census for 2018 decreased compared to 2017, resulting in
decreases in revenue of $7.1 million, $1.2 million and $4.0 million, respectively. Conversely, our Managed Care and Hospice
average daily census increased in 2018 compared to 2017 by $1.5 million and $4.1 million, respectively. Additionally, our ancillary
revenue increased by $3.2 million in 2018 compared to 2017.
Operating Expense
Operating expense decreased to $450.7 million in 2018 from $458.1 million in 2017. Operating expense increased to 80.0% of
revenue in 2018, compared to 79.7% of revenue in 2017. The following table summarizes the revenue fluctuations attributable to our
portfolio growth (in thousands):
Same-store operating expenses
2017 acquisition operating expenses
2017 disposition operating expenses
2018 disposition operating expenses
Total operating expenses
$
$
$
Year Ended
December 31,
2017
As adjusted to
Legacy GAAP
As reported
Change
445,004 $
6,814
—
13,550 $
465,368 $
436,926 $
3,640
4,142
13,414
458,122
$
$
8,078
3,174
(4,142)
136
7,246
2018
As reported
431,049
6,822
$
—
12,815
$
450,686 $
20
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The largest component of operating expenses is wages, which increased to $272.9 million in 2018 from $268.4 million in 2017, an
increase of $4.6 million, or 1.7%.
Under a legacy GAAP comparison and same-store center basis, operating expenses increased $8.1 million, which is primarily
attributable to an increase in our same-store operating salaries and related taxes by $4.4 million. Our same-store provider taxes, legal
fees and maintenance expenses increased by $2.3 million, $1.2 million and $0.6 million, respectively.
Lease Expense
Lease expense increased to $57.1 million in 2018 from $55.0 million in 2017, an increase of $2.1 million, or 3.8%. The increase in
lease expense was due to rent increases resulting from the New Master Lease Agreement with Omega Healthcare Investors and the
impact of straight line rent expense. See Note 9, "Commitments and Contingencies" to the consolidated financial statements for
further discussion of the New Master Lease Agreement.
Professional Liability
Professional liability expense was $11.8 million in 2018 compared to $10.8 million in 2017, an increase of $1.0 million, or 9.6%.
We were engaged in 78 professional liability lawsuits as of December 31, 2018, compared to 72 as of December 31, 2017. Our cash
expenditures for professional liability costs of continuing operations were $6.5 million and $6.6 million for 2018 and 2017,
respectively. Professional liability expense and cash expenditures fluctuate from year to year based respectively on the results of our
third-party professional liability actuarial studies, the premium costs of purchased insurance, and on the costs incurred in defending
and settling existing claims. See “Liquidity and Capital Resources” for further discussion of the accrual for professional liability.
Litigation Contingency Expense
The Company recorded a contingent liability related to the DOJ investigation for $6.4 million in 2018. The Company denies any
wrong doing and is prepared to vigorously defend its actions. The Company's ultimate ability to settle this investigation will depend
on several factors, including whether the amount and terms of an acceptable settlement can be reached with the DOJ. Refer to Note
9, "Commitments and Contingencies" to the consolidated financial statements for further discussion of the investigation.
General and Administrative Expense
General and administrative expenses were approximately $32.8 million in 2018 compared to $33.3 million in 2017, a decrease of
$0.5 million, or 1.6%. The overall decrease in general and administrative expenses was attributable to a $0.5 million decrease in
salaries and related expenses.
Depreciation and Amortization
Depreciation and amortization expense was approximately $11.2 million in 2018 and $10.9 million in 2017, an increase of $0.3
million, or 2.7%. The increase in depreciation and amortization expense relates to capital expenditures.
Gain on sale of assets
The Company completed the sale of the assets and transfer of the operations of Diversicare of Fulton, LLC, Diversicare of Clinton,
LLC and Diversicare of Glasgow, LLC (the "Kentucky Properties") on December 1, 2018 which resulted in a gain of $4.8 million.
See Note 2, "Business Developments and Other Significant Transactions" to the consolidated financial statements.
Gain on sale of investment in unconsolidated affiliate
Gain on the sale of investment in unconsolidated affiliate was $0.3 million and $0.7 million for 2018 and 2017, respectively. The
additional gains recognized in 2018 and 2017 are related to the final liquidation of remaining net assets affiliated with the
partnership.
Interest Expense, Net
Interest expense has increased to $6.7 million in 2018 compared to $6.4 million in 2017, an increase of $0.3 million. The increase
was primarily attributable to outstanding borrowings on our loan facilities.
Debt retirement costs
Debt retirement costs were $0.3 million in 2018 as a result of a reduction of the debt balances for the Mortgage Loan and
Revolver in connection with the latest amendments to our financing agreements. See Note 5, "Long-Term Debt, Interest Rate
Swap and Capitalized Lease Obligations" to the consolidated financial statements for further discussion on the amended debt
agreement.
21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Income (loss) from Continuing Operations before Income Taxes; Income (loss) from Continuing Operations per Common Share
As a result of the above, continuing operations reported a loss before taxes of $8.1 million in 2018, as compared to income before
taxes of $1.9 million in 2017. The benefit for income taxes was $0.8 million in 2018, resulting in an effective rate of 9.3%. The
provision for income taxes was $6.7 million in 2017, resulting in an effective rate of 346.9%. The higher effective tax rate in 2017
reflects the impact of a revaluation of our net deferred tax assets of $5.5 million as a result of the Tax Act. The basic and diluted loss
per common share from continuing operations were $1.15 and $1.15 in 2018, respectively, compared to a basic and diluted loss per
common share from continuing operations of $0.76 and $0.76 in 2017, respectively.
Year Ended December 31, 2017 Compared With Year Ended December 31, 2016
Patient Revenues
Patient revenues were $574.8 million in 2017 and $426.1 million in 2016, an increase of $148.7 million or 34.9%. This increase is
primarily attributable to the acquisition of Golden Living operations in Alabama and Mississippi during the fourth quarter of 2016.
The following table summarizes the revenue increases attributable to our portfolio growth (in thousands):
Same-store revenue
2016 acquisition revenue
2017 acquisition revenue
Total revenue
2017
386,576 $
183,665
4,553
574,794 $
$
$
Year Ended
December 31,
2016
388,890 $
37,173
—
426,063
$
Change
(2,314)
146,492
4,553
148,731
The overall increase in revenue of $148.7 million is primarily attributable to revenue contributions from the acquisition of Golden
Living operations in Alabama and Mississippi during the fourth quarter of 2016 of $146.5 million and Park Place during the third
quarter of 2017 of $4.6 million. The increase from the acquisition activity was partially offset by a decrease in same-store revenue of
$2.3 million which is explained in more detail below.
The following table summarizes key revenue and census statistics for continuing operations for each period:
Skilled nursing occupancy
As a percent of total census:
Medicaid census
Medicare census
Managed Care census
As a percent of total revenues:
Medicaid revenues
Medicare revenues
Managed Care revenues
Average rate per day:
Medicare
Medicaid
Managed Care
Year Ended
December 31,
2017
79.7%
2016
78.1%
69.1%
11.2%
3.9%
52.4%
25.9%
7.4%
68.1%
11.7%
3.5%
50.6%
27.5%
6.8%
$
$
$
454.22
175.58
381.46
$
$
$
456.30
169.91
385.71
The average Medicaid rate per patient day for same-store nursing centers in 2017 increased 1.7% compared to 2016, resulting in an
increase in revenue of $3.3 million. This average rate per day for Medicaid patients is the result of rate increases in certain states and
increasing patient acuity levels. The average Medicare rate per patient day for same-store nursing centers in 2017 increased 1.6%
compared to 2016, resulting in an increase in revenue of $1.5 million also related to our ability to attract and provide care for
patients with increased acuity levels.
Our total average daily census increased by approximately 33.9% for the full portfolio compared to 2016 on a consolidated basis,
but was primarily attributable to the aforementioned acquisition activity. On a same-store basis, our Medicare, Medicaid and Private
22
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
average daily census for 2017 decreased compared to 2016, resulting in decreases in revenue of $5.0 million, $1.4 million and $2.2
million, respectively. Conversely, our Managed Care average daily census increased in 2017 compared to 2016 by $2.0 million.
Our same-store centers for 2017 experienced one less day of operations compared to 2016, resulting in a decrease in revenue of $1.0
million or 2.7%.
Operating Expense
Operating expense increased to $458.1 million in 2017 from $342.9 million in 2016, driven primarily by the $115.9 million in
operating costs from the Golden Living nursing centers added in 2016, and $3.6 million from the center acquired in 2017. Operating
expense decreased to 79.7% of revenue in 2017, compared to 80.5% of revenue in 2016.
Same-store operating expenses
2016 acquisition operating expenses
2017 acquisition operating expenses
Total operating expenses
2017
310,571 $
143,911
3,640
458,122 $
$
$
Year Ended
December 31,
2016
314,944 $
27,988
—
342,932
$
Change
(4,373)
115,923
3,640
115,190
The largest component of operating expenses is wages, which increased to $268.4 million in 2017 from $199.6 million in 2016, an
increase of $68.8 million, or 34.4%.
On a same-store center basis, operating expenses decreased $4.4 million, which is primarily attributable to a decrease in our bad debt
expense by $1.1 million and a provider tax refund of $2.8 million from the state of Kentucky. Our same-store nursing and ancillary
and dietary expenses decreased by $0.1 million and $0.3 million, respectively. Conversely, these positive variances were slightly
offset by an increase in salaries and related taxes of $1.0 million in 2017. However, due to one less day of operations in 2017, we
experienced $0.5 million less in salaries and related taxes.
Lease Expense
Lease expense increased to $55.0 million in 2017 from $33.4 million in 2016, an increase of $21.6 million, or 64.8%. The increase
in lease expense was driven by $22.1 million from the assumption of the Golden Living centers in the fourth quarter of 2016. This
was slightly offset from the termination of the Carthage, Mississippi lease in September 2017.
Professional Liability
Professional liability expense was $10.8 million in 2017 compared to $8.5 million in 2016, an increase of $2.3 million, or 27.3%.
As centers have been acquired in 2016 and 2017, the Company has accessed commercial insurance markets, which accounts for a
significant portion of the growth in professional liability expense in the current year. We were engaged in 72 professional liability
lawsuits as of December 31, 2017, compared to 67 as of December 31, 2016. Our cash expenditures for professional liability costs of
continuing operations were $6.6 million and $4.5 million for 2017 and 2016, respectively. Professional liability expense and cash
expenditures fluctuate from year to year based respectively on the results of our third-party professional liability actuarial studies,
the premium costs of purchased insurance, and on the costs incurred in defending and settling existing claims. See “Liquidity and
Capital Resources” for further discussion of the accrual for professional liability.
General and Administrative Expense
General and administrative expenses were approximately $33.3 million in 2017 compared to $30.3 million in 2016, an increase of
$3.0 million, or 10.0%. The overall increase in general and administrative expenses were attributable to a $3.7 million increase in
salaries and related expenses associated with continued growth at the regional level, as well as additional corporate infrastructure to
support the on-going growth of the portfolio. Legal expenses decreased by $0.7 million in 2017 compared to 2016, which is
attributable to the 2016 acquisitions.
Depreciation and Amortization
Depreciation and amortization expense was approximately $10.9 million in 2017 and $8.3 million in 2016. The Company incurred
an increase of $2.1 million in depreciation and amortization expenses related to capital expenditures for the assumed Golden Living
operations in the fourth quarter of 2016.
23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Lease termination costs
The Company ceased operations at our Carthage, Mississippi, center in September 2017, which resulted in a $0.2 million cash
termination receipt, net of legal costs. Lease termination costs were $2.0 million in 2016 due to the termination of the Avon, Ohio
operating lease in May 2016.
Gain on bargain purchase
The Company acquired the operations and assets of a center in Selma, Alabama in July 2017. In connection with the business
combination, we recognized a $0.9 million gain on bargain purchase.
Gain on sale of investment in unconsolidated affiliate
The sale of the pharmacy joint venture resulted in a $1.4 million gain in the fourth quarter of 2016. Subsequently, we recognized an
additional gain of $0.7 million in the first quarter of 2017, related to the continuing liquidation of remaining net assets affiliated with
the partnership.
Interest Expense, Net
Interest expense has increased to $6.4 million in 2017 compared to $4.8 million in 2016, an increase of $1.6 million. The increase
was primarily attributable to higher debt balances in 2017 as a result of additional borrowings made during the change in ownership
processes for the newly acquired centers in Alabama and Mississippi, and the amendment of the term loan facility that occurred in
June 2017.
Debt retirement costs
Debt retirement costs were $0.4 million in 2016, which relates to the write off of our term loan deferred financing costs, as a
result of our debt refinance that took place in February 2016.
Income (loss) from Continuing Operations before Income Taxes; Income (loss) from Continuing Operations per Common Share
As a result of the above, continuing operations reported income before taxes of $1.9 million in 2017, as compared to loss before
taxes of $2.8 million in 2016. The provision for income taxes was $6.7 million in 2017, an effective rate of 346.9% and the
provision for income taxes was $1.0 million in 2016, an effective rate of 37.1%. The higher effective tax rate reflects the impact of
our revaluation of our net deferred tax assets of $5.5 million as a result of the Tax Act. The basic and diluted loss per common share
from continuing operations were $0.76 and $0.76 in 2017, respectively, compared to a basic and diluted loss per common share from
continuing operations of $0.28 and $0.28 in 2016, respectively.
Liquidity and Capital Resources
Liquidity
Our primary source of liquidity is the net cash flows provided by the operating activities of our centers. These internally generated
cash flows are used to service existing debt obligations, fund required capital expenditures as well as provide cash flows for
investing opportunities. In determining priorities for our cash flow, we evaluate alternatives available to us and select the ones that
we believe will most benefit us over the long term. Options for our cash include, but are not limited to, capital improvements,
repurchase of additional shares of our common stock, acquisitions, and payment of existing debt obligations, as well as initiatives to
improve nursing center performance. We review these potential uses and align them to our cash flows with a goal of achieving long-
term success.
Net cash provided by operating activities of continuing operations totaled $6.4 million in 2018, compared to net cash provided by
operating activities of continuing operations of $13.4 million in 2017 and net cash used in operating activities of continuing
operations of $2.1 million in 2016. The decrease in cash provided by operating activities between 2018 and 2017 is due to an
increase in net loss of $2.6 million and an increase in income tax benefit valuation of $5.3 million. The increase in cash provided by
operating activities from continuing operations between 2017 and 2016 was related to the Company completing the Change in
Ownership ("CHOW") process for the nursing centers acquired in the fourth quarter of 2016, which increased the cash inflows from
these centers. Operating activities of centers we no longer operate used cash of $0.7 million, $1.3 million and $3.5 million in 2018,
2017 and 2016, respectively.
Our cash expenditures related to professional liability claims of continuing operations were $6.5 million, $6.6 million and $4.5
million for 2018, 2017 and 2016, respectively. We also continue to experience cash expenditures related to professional liability
claims of discontinued operations. Our cash expenditures related to professional liability claims of centers we no longer operate
were $0.7 million, $1.3 million, and $3.6 million for 2018, 2017 and 2016, respectively. The Company will continue to defend, and
24
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
make cash payments when required related to, professional liability claims asserted against centers we no longer operate. Although
we work diligently to limit the cash required to settle and defend professional liability claims, a significant judgment entered against
us in one or more legal actions could have a material adverse impact on our cash flows and could result in our being unable to meet
all of our cash needs as they become due.
Investing activities of continuing operations provided cash of $10.4 million in 2018 and used cash of $17.4 million and $9.8 million
in 2017 and 2016, respectively. The increase in cash provided by investing activities is due to the sale of Diversicare of Fulton, LLC,
Diversicare of Clinton, LLC and Diversicare of Glasgow, LLC (the "Kentucky Properties") on December 1, 2018 for $18.7 million.
The proceeds from the sale were immediately applied to our outstanding borrowings on our mortgage and revolver facilities, which
is in accordance with our debt agreements. The remaining change in our cash from investing activities between 2018 and 2017 is
attributable to the asset purchase of Park Place in Selma, Alabama in July 2017 for $8.8 million. The cash used in 2016 was the
result of the purchase of Hutchinson and Clinton for $4.3 million and $3.3 million, respectively, and cash used to assume the
operations of the twenty-two Golden Living centers in the fourth quarter of 2016. We have used $8.6 million, $9.7 million, and $6.0
million in 2018, 2017 and 2016, respectively, for capital expenditures of continuing operations. See Note 2, "Business Developments
and Other Significant Transactions" of the consolidated financial statements for discussion on the sale of the "Kentucky Properties."
Net cash used in financing activities of continuing operations was $16.9 million in 2018, compared to net cash provided by
financing activities of continuing operations of $4.6 million and $15.1 million in 2017 and 2016, respectively. The decrease in cash
from financing activities between 2018 and 2017 is due to the decrease in borrowings of $15.4 million and increased repayments of
$6.5 million. The significant decrease in borrowings is due to the proceeds received from the sale of three Kentucky centers of $18.7
million, less closing costs, which was immediately used to relieve debt on our mortgage and revolver facilities. See Note 5, "Long-
Term Debt, Interest Rate Swap and Capitalized Lease Obligations" to the consolidated financial statements for further discussion on
the amended debt agreement related to the sale of the Kentucky centers. Cash provided by financing activities in 2017 is primarily
due to draws on the Company's revolving credit facility of $21.0 million, acquisition revolver of $8.5 million and amending our
credit facility resulting in proceeds of $7.5 million. The proceeds received were offset by repayments of $30.2 million. Cash
provided by financing activities in 2016 is primarily attributable to draws on the Company's revolving credit facility of $21.0
million, acquisition revolver of $8.5 million and amending our credit facility resulting in proceeds of $7.5 million. The proceeds
received were offset by repayments of $73.4 million. Financing activities reflect common stock of $1.1 million 2018, $1.4 million in
2017, and $1.4 million in 2016.
Professional Liability
The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is
likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a
wholly-owned, consolidated offshore limited purpose insurance subsidiary, SHC, which has issued a policy insuring claims made
against all of the Company's nursing centers in Florida and Tennessee, and several of the Company’s nursing centers in Alabama,
Kentucky, Ohio, and Texas. The insurance coverage provided for these centers under the SHC policy include coverage limits of $1.0
million or $3.0 million per medical incident with a sublimit per center of $3.0 million and total annual aggregate policy limits of
$5.0 million. All other centers within the Company’s portfolio are covered through various commercial insurance policies which
provide coverage limits of $1.0 million per claim and have sublimits of $3.0 million per center, with varying aggregate policy limits
and deductibles. The deductibles for these policies are covered through the insurance subsidiary.
As of December 31, 2018, we have recorded total liabilities for reported professional liability claims and estimates for incurred, but
unreported claims of $27.2 million. Our calculation of this estimated liability is based on the Company's best estimates of the
likelihood of adverse judgments with respect to any asserted claim; however, a significant judgment could be entered against us in
one or more of these legal actions, and such a judgment could have a material adverse impact on our financial position and cash
flows.
Capital Resources
As of December 31, 2018, we had $74.6 million of outstanding long-term debt and capital lease obligations. The $74.6 million total
includes $0.9 million in capital lease obligations. The balance of the long-term debt is comprised of $51.7 million owed on our
collateralized mortgage debt, $15.0 million currently outstanding on the revolving credit facility, and $6.9 million on the acquisition
loan facility.
Under the terms of the agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance of $72.5
million with a five year maturity through February 26, 2021, consisting of $60.0 million term and $12.5 million acquisition loan
facilities, and a $42.3 million Amended Revolver through February 26, 2021. The Amended Mortgage Loan has a term of five years,
with principal and interest payable monthly based on a 25 year amortization. Interest on the term and acquisition loan facilities are
25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79%
pursuant to an interest rate swap with an initial notional amount of $30.0 million. The Amended Mortgage Loan balance was $58.6
million as of December 31, 2018, consisting of $51.7 million on the term loan facility with an interest rate of 6.5% and $6.9 million
on the acquisition loan facility with an interest rate of 7.25%. The Amended Mortgage Loan is secured by 15 owned nursing centers,
related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver
are cross-collateralized and cross-defaulted. The Company's Amended Revolver has an interest rate of LIBOR plus 4.0% and is
secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver
based on borrowing base restrictions. Eligible accounts receivable are calculated as defined and consider 80% of certain net
receivables while excluding receivables from private pay patients, those pending approval by Medicaid and receivables greater than
120 days.
As of December 31, 2018, the Company had $15.0 million borrowings outstanding under the Amended Revolver compared to $16.0
million outstanding as of December 31, 2017. The interest rate related to the Amended Revolver was 6.5% as of December 31,
2018. The outstanding borrowings on the revolver primarily reflect the Company's approach to accumulated Medicaid and Medicare
receivables at recently acquired centers as these centers proceed through the change in ownership process with CMS. Annual fees for
letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has letters of credit of $6.9
million and $6.4 million to serve as a security deposit for our Omega and Golden Living leases, respectively. Finally, we have two
other letters of credit, totaling $0.3 million, to serve as security deposits at certain centers. Considering the balance of eligible
accounts receivable at December 31, 2018, the letters of credit, the amounts outstanding under the revolving credit facility and the
maximum loan amount of $36.6 million, the balance available for borrowing under the Amended Revolver is $8.1 million at
December 31, 2018.
Our lending agreements contain various financial covenants, the most restrictive of which relate to debt service coverage ratios. We
are in compliance with all such covenants at December 31, 2018.
Our calculated compliance with financial covenants is presented below:
Minimum fixed charge coverage ratio
Minimum adjusted EBITDA
EBITDAR (mortgaged centers)
Current ratio (as defined in agreement)
Requirement
1.01:1.00
$13.0 million
$10.0 million
1.00:1.00
Level at
December 31, 2018
1.02:1.00
$20.8 million
$15.4 million
1.23:1.00
As part of the debt agreements entered into in February 2016, the Company entered into an interest rate swap agreement with a
member of the bank syndicate as the counterparty. The interest rate swap agreement has the same effective date and maturity date as
the Amended Mortgage Loan, and carries an initial notional amount of $30.0 million. The interest rate swap agreement requires the
Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79%
while the bank is obligated to make payments to us based on LIBOR on the same notional amounts. We entered into the interest rate
swap agreement to mitigate the variable interest rate risk on our outstanding mortgage borrowings.
Nasdaq Notification
On December 19, 2018, we received an initial notification letter from the Nasdaq Listing Qualifications Department indicating that
the MVLS of our common stock had been below $35 million for the last 30 consecutive business days. In accordance with Nasdaq
Listing Rules 5810(c)(3)(C), the Company has been provided a period of 180 calendar days, or until June 17, 2019, in which to
regain compliance with the requirement. In order to regain compliance with the MVLS requirement, the Company must maintain a
MVLS of at least $35 million for a minimum of ten consecutive business days during this 180-day period. If the Company does not
regain compliance with this requirement by June 17, 2019, the Company will receive written notification that its securities are
subject to delisting. At that time, the Company may appeal the delisting determination to a Hearing Panel. There can be no assurance
that the Company will be successful in maintaining its listing of the Common Stock on the Nasdaq Capital Market. If our stock is
delisted, it could have a negative impact on our liquidity and ability to issue new equity.
Capitalized Lease Obligations
Upon acquisition of certain centers, we assume certain leases, primarily related to equipment, that constitute capital leases.
Additionally, the Company leases certain technology equipment that supports the clinical systems, including electronic medical
records, at our nursing centers that constitute capital leases.
26
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
As a result of the lease agreements above, we have recorded the underlying lease assets and capitalized lease obligations of $0.9
million, $1.4 million, and $2.1 million as of December 31, 2018, 2017, and 2016, respectively. These lease agreements provide
terms of three to five years.
Receivables
Our operations could be adversely affected if we experience significant delays in reimbursement from Medicare, Medicaid and other
third-party revenue sources. Our 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 our 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 us in the processing of our invoices, could adversely affect
our liquidity and financial position.
Net accounts receivable attributable to patient services of continuing operations totaled $66.3 million at December 31, 2018
compared to $64.9 million at December 31, 2017, representing approximately 50 days and 49 days revenue in accounts receivable,
respectively. We continue to evaluate and implement additional procedures to strengthen our collection efforts and reduce the
incidence of uncollectible accounts.
Inflation
Based on contract pricing for food and other supplies and recent market conditions, we expect cost increases in 2019 to be relatively
the same or slightly lower than the increases in 2018. We expect salary and wage increases for our skilled health care providers to
continue to be higher than average salary and wage increases, as is common in the healthcare industry.
Off-Balance Sheet Arrangements
We have four letters of credit outstanding totaling approximately $13.6 million as of December 31, 2018. The letters of credit
serve as security deposits for certain center leases. The letters of credit were issued under our revolving credit facility. Our
accounts receivable serve as the collateral for this revolving credit facility.
27
FORWARD-LOOKING STATEMENT AND QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Forward-Looking Statements
The foregoing discussion and analysis provides information deemed by management to be relevant to an assessment and
understanding of our consolidated results of operations and financial condition. This discussion and analysis should be read in
conjunction with our consolidated financial statements included herein. Certain statements made by or on behalf of us, including
those contained in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere,
are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results could differ
materially from those contemplated by the forward-looking statements made herein. Forward-looking statements are predictive in
nature and are frequently identified by the use of terms such as "may," "will," "should," "expect," "believe," "estimate," "intend," and
similar words indicating possible future expectations, events or actions. In addition to any assumptions and other factors referred to
specifically in connection with such statements, other factors, many of which are beyond our ability to control or predict, could
cause our actual results to differ materially from the results expressed or implied in any forward-looking statements including, but
not limited to:
• our ability to successfully integrate the operations of our new nursing center in Alabama, as well as successfully operate all
of our centers,
changes in governmental reimbursement,
• our ability to increase census and occupancy rates at our centers,
•
• government regulation,
•
the impact of the Affordable Care Act, efforts to repeal or significantly modify the Affordable Care Act, and other health
care reform initiatives,
any increases in the cost of borrowing under our credit agreements,
•
• our ability to comply with covenants contained in those credit agreements,
• our ability to comply with the terms of our master lease agreements,
• our ability to renew or extend our leases at or prior to the end of the existing lease terms,
•
the outcome of professional liability lawsuits and claims,
• our ability to control ultimate professional liability costs,
•
•
•
•
the accuracy of our estimate of our anticipated professional liability expense,
the impact of future licensing surveys,
the outcome of proceedings alleging violations of state or federal False Claims Acts,
laws and regulations governing quality of care or other laws and regulations applicable to our business including HIPAA
and laws governing reimbursement from government payors,
the costs of investing in our business initiatives and development,
•
• our ability to control costs,
• our ability to attract and retain qualified healthcare professionals,
•
•
•
• our ability to regain compliance with the Nasdaq continued listing requirements,
•
•
changes to our valuation of deferred tax assets,
changing economic and competitive conditions,
changes in anticipated revenue and cost growth,
changes in the anticipated results of operations,
the effect of changes in accounting policies 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 “Part I. Item 1A. Risk Factors” for a discussion of various risk factors of the Company
and that are inherent in the health care industry. Given these risks and uncertainties, we can give no assurances that these forward-
looking statements will, in fact, transpire and, therefore, caution investors not to place undue reliance on them. These assumptions
may not materialize to the extent assumed, and risks and uncertainties may cause actual results to be different from anticipated
results. These risks and uncertainties also may result in changes to the Company’s business plans and prospects. Such cautionary
statements identify important factors that could cause our actual results to materially differ from those projected in forward-looking
statements. In addition, we disclaim any intent or obligation to update these forward-looking statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The chief market risk factor affecting our financial condition and operating results is interest rate risk. As of December 31, 2018, we
had outstanding borrowings of approximately $73.6 million, $45.9 million of which were subject to variable interest rates. In
connection with February 2016 financing agreement, we entered into an interest rate swap with respect to one half of the Amended
Mortgage Loan to mitigate the floating interest rate risk of such borrowing. In the event that interest rates were to change 1%, the
impact on future pre-tax cash flows would be approximately $0.5 million annually, representing the impact of increased or decreased
interest expense on variable rate debt.
28
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
CONTROLS AND PROCEDURES
Diversicare, with the participation of our principal executive and financial officers, has evaluated the effectiveness of our disclosure
controls and procedures, as such term is defined under Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934, as amended, as of December 31, 2018. Based on this evaluation, the principal executive and financial officers have
determined that such disclosure controls and procedures are effective to ensure that information required to be disclosed in our
filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified
in the Securities Exchange Commission's rules and forms.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Our management conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this
evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2018.
Management reviewed the results of its assessment with our Audit Committee.
Changes in Internal Control over Financial Reporting
There has been no change (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal
control over financial reporting that has occurred during our fiscal quarter ended December 31, 2018 that has materially affected, or
is reasonably likely to materially affect, our internal control over financial reporting.
Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all
fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource
constraints, and the benefit of controls must be considered relative to their costs. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all
control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in
decision making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design
of any system of controls is based in part on certain assumptions about the likelihood of future events and there can be no assurance
that any design will succeed in achieving its stated goals under all potential future conditions.
29
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Diversicare Healthcare Services, Inc.
Brentwood, Tennessee
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Diversicare Healthcare Services, Inc. (the "Company") and
subsidiaries as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive loss, shareholders’
equity, and cash flows for each of the three years in the period ended December 31, 2018, and the related notes (collectively referred
to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material
respects, the financial position of the Company and subsidiaries at December 31, 2018 and 2017, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles
generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the
Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange
Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test
basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating
the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2002.
Nashville, Tennessee
February 28, 2019
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T
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
PATIENT REVENUES, net
EXPENSES:
Operating
Lease and rent expense
Professional liability
Litigation contingency expense
General and administrative
Depreciation and amortization
Gain on sale of assets
Lease termination costs (receipts)
Total expenses
OPERATING INCOME (LOSS)
OTHER INCOME (EXPENSE):
Other income
Equity in net income of investment in unconsolidated affiliate
Gain on bargain purchase
Gain on sale of investment in unconsolidated affiliate
Hurricane costs
Interest expense, net
Debt retirement costs
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
INCOME TAXES
BENEFIT (PROVISION) FOR INCOME TAXES
LOSS FROM CONTINUING OPERATIONS
LOSS FROM DISCONTINUED OPERATIONS:
Operating loss, net of income tax benefit of $5, $43 and $41,
respectively
LOSS FROM DISCONTINUED OPERATIONS
NET LOSS
NET LOSS PER COMMON SHARE:
Per common share – basic
Continuing operations
Discontinued operations
Per common share – diluted
Continuing operations
Discontinued operations
DIVIDENDS DECLARED PER SHARE OF COMMON STOCK
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic
Diluted
Years Ended December 31,
2018
563,462 $
2017
574,794 $
2016
426,063
$
450,686
57,073
11,796
6,400
32,791
11,201
(4,825)
—
565,122
(1,660)
168
—
—
308
—
(6,653)
(267)
(6,444)
(8,104)
750
(7,354)
458,122
54,988
10,764
—
33,311
10,902
—
(180)
567,907
6,887
—
—
925
733
(232)
(6,369)
—
(4,943)
1,944
(6,743)
(4,799)
$
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$
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(42)
(42)
(7,396) $
(28)
(28)
(4,827) $
(1.15) $
(0.01)
(1.16) $
(1.15) $
(0.01)
(1.16) $
0.17 $
6,372
6,372
(0.76) $
(0.01)
(0.77) $
(0.76) $
(0.01)
(0.77) $
0.22 $
6,279
6,279
342,932
33,364
8,456
—
30,271
8,292
—
2,008
425,323
740
—
273
—
1,366
—
(4,802)
(351)
(3,514)
(2,774)
1,030
(1,744)
(67)
(67)
(1,811)
(0.28)
(0.01)
(0.29)
(0.28)
(0.01)
(0.29)
0.22
6,199
6,199
The accompanying notes are an integral part of these consolidated financial statements.
32
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
NET LOSS
OTHER COMPREHENSIVE INCOME (LOSS):
Change in fair value of cash flow hedge, net of tax
Less: reclassification adjustment for amounts recognized in net loss
Total other comprehensive income
COMPREHENSIVE LOSS
Years Ended December 31,
2018
2017
2016
$
(7,396) $
(4,827) $
(1,811)
279
(151)
128
(7,268) $
976
(462)
514
(4,313) $
1,082
(500)
582
(1,229)
$
The accompanying notes are an integral part of these consolidated financial statements.
33
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T
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Years Ended December 31,
2018
2017
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Loss from discontinued operations
Loss from continuing operations
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization
Provision for doubtful accounts
Deferred income tax provision (benefit)
Provision for self-insured professional liability, net of cash payments
Stock based and deferred compensation
Debt retirement costs
Provision for leases, net of cash payments
Lease termination costs, net of cash payments
Equity in net income of investment in unconsolidated affiliate
Litigation contingency expense
Gain on sale of assets and unconsolidated affiliate
Gain on bargain purchase
Deferred bonus
Other
Changes in other assets and liabilities affecting operating activities:
Receivables
Prepaid expenses and other assets
Trade accounts payable and accrued expenses
Net cash provided by (used in) continuing operations
Net cash used in discontinued operations
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Nursing center acquisitions
Acquisition of property and equipment through business combination
Proceeds from sale of assets and unconsolidated affiliate
Change in restricted cash
Net cash provide by (used in) continuing operations
Net cash used in discontinued operations
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of debt obligations
Proceeds from issuance of debt
Financing costs
Issuance and redemption of employee equity awards
Payment of common stock dividends
Payment for preferred stock restructuring
Net cash provided by (used in) continuing operations
Net cash used in discontinued operations
Net cash provided by (used in) financing activities
$
(7,396) $
(42)
(7,354)
(4,827) $
(28)
(4,799)
11,201
—
(615)
2,325
1,127
267
(106)
—
—
6,400
(5,133)
—
—
415
(2,289)
(5,857)
6,010
6,391
(740)
5,651
(8,578)
—
—
19,008
—
10,430
—
10,430
(36,683)
21,689
(146)
(217)
(1,055)
(508)
(16,920)
—
(16,920)
10,902
8,958
5,997
1,342
1,027
—
(936)
—
—
—
(733)
(925)
761
523
(10,721)
385
1,589
13,370
(1,310)
12,060
(9,730)
—
(8,750)
1,100
—
(17,380)
—
(17,380)
(30,154)
37,067
(195)
(94)
(1,384)
(659)
4,581
—
4,581
(1,811)
(67)
(1,744)
8,292
7,163
(1,569)
1,968
1,012
351
(1,773)
1,863
(271)
—
(1,366)
—
350
576
(25,551)
(1,620)
10,224
(2,095)
(3,523)
(5,618)
(6,022)
(7,550)
—
2,068
1,658
(9,846)
—
(9,846)
(73,374)
92,789
(2,162)
(105)
(1,366)
(640)
15,142
—
15,142
(Continued)
35
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
NET DECREASE IN CASH AND RESTRICTED CASH
CASH AND RESTRICTED CASH, beginning of period
CASH AND RESTRICTED CASH, end of period
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash payments of interest, net of amounts capitalized
Cash payments of income taxes
SUPPLEMENTAL INFORMATION ON NON-CASH INVESTING AND
FINANCING TRANSACTIONS:
Acquisition of equipment through capital lease
$
$
$
$
$
Years Ended December 31,
2018
2017
2016
(839) $
3,524
2,685 $
6,074 $
498 $
(739) $
4,263
3,524 $
5,404 $
847 $
(322)
4,585
4,263
3,965
549
689 $
507 $
1,851
The table below reconciles cash and restricted cash as reported in the consolidated balance sheets to the total of the same
amounts shown in the consolidated statements of cash flows:
Cash
Restricted cash
Total cash and restricted cash shown in the consolidated statements of cash
flows
$
$
2,685 $
—
3,524 $
— $
2,605
1,658
2,685
$
3,524 $
4,263
The accompanying notes are an integral part of these consolidated financial statements.
36
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
(Dollars and shares in thousands, except per share data)
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Diversicare Healthcare Services, Inc. ("Diversicare" or the "Company") provides a broad range of post-acute care services to
patients and residents including skilled nursing, ancillary health care services and assisted living. In addition to the nursing and
social services usually provided in long-term care centers, we offer a variety of rehabilitative, nutritional, respiratory, and other
specialized ancillary services.
As of December 31, 2018, our continuing operations consist of 72 nursing centers with 8,214 licensed skilled nursing beds. Our
nursing centers range in size from 48 to 320 licensed nursing beds. The licensed nursing bed count does not include 429 licensed
assisted living and other residential beds. Our continuing operations include centers in Alabama, Florida, Indiana, Kansas,
Kentucky, Mississippi, Missouri, Ohio, Tennessee, and Texas. The number of centers and beds denoted in these consolidated
financial statements are unaudited.
Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the financial position, operations and accounts of Diversicare and its subsidiaries, all
wholly-owned. All significant intercompany accounts and transactions have been eliminated in consolidation.
Any joint ventures are accounted for using the equity method, which is an investment in an entity over which the Company lacks
control, but otherwise has the ability to exercise significant influence over operating and financial policies. The Company had one
equity method investee through the fourth quarter of 2016. The Company’s share of the profits and losses from this investment are
reported in equity in net income of investment in unconsolidated affiliate and the proceeds received from the sale are reported in
gain on sale of investment in unconsolidated affiliate in the accompanying consolidated statement of operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
The fees charged by the Company to patients in its nursing centers are recorded on an accrual basis. These rates are contractually
adjusted with respect to individuals receiving benefits under federal and state-funded programs and other third-party payors. Rates
under federal and state-funded programs are determined prospectively for each center and may be based on the acuity of the care
and services provided. These rates may be based on a center's actual costs subject to program ceilings and other limitations or on
established rates based on acuity and services provided as determined by the federal and state-funded programs. Amounts earned
under federal and state programs with respect to nursing home patients are subject to review by the third-party payors which may
result in retroactive adjustments. In the opinion of management, adequate provision has been made for any adjustments that may
result from such reviews. Retroactive adjustments, if any, are recorded when objectively determinable, generally within three years
of the close of a reimbursement year depending upon the timing of appeals and third-party settlement reviews or audits.
Allowance for Doubtful Accounts
The Company's allowance for doubtful accounts is estimated utilizing current agings of accounts receivable, historical collections
data and other factors. Management monitors these factors and determines the estimated provision for doubtful accounts. Historical
bad debts have generally resulted from uncollectible private balances, some uncollectible coinsurance and deductibles and other
factors. Receivables that are deemed to be uncollectible are written off. The allowance for doubtful accounts balance is assessed on
a quarterly basis, with changes in estimated losses being recorded in the Consolidated Statements of Operations in the period
identified. Refer to Note 3, "Revenue Recognition and Receivables" for more information.
Lease Expense
As of December 31, 2018, the Company operates 57 nursing centers under operating leases, including 34 owned by Omega, 20
owned by Golden Living and three owned by other parties. The Company's operating leases generally require the Company to pay
stated rent, subject to increases based on changes in the Consumer Price Index, a minimum percentage increase, or increases in the
37
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
net revenues of the leased properties. The Company's Omega and Golden Living leases require the Company to pay certain
scheduled rent increases. Such scheduled rent increases are recorded as additional lease expense on a straight-line basis recognized
over the term of the related leases and the difference between the amounts recorded for rent expense as compared to rent payments
as an accrued liability.
See Note 2, "Business Development and Other Significant Transactions" and Note 9, "Commitments and Contingencies" for a
discussion regarding the Company's Master Leases with Omega and Golden Living and the addition of certain leased centers.
Classification of Expenses
The Company classifies all expenses (except lease, interest, depreciation and amortization expenses) that are associated with its
corporate and regional management support functions as general and administrative expenses. All other expenses (except lease,
professional liability, interest, depreciation and amortization expenses) incurred by the Company at the center level are classified as
operating expenses. Operating expenses for the year ended December 31, 2017 are net of approximately $2.2 million received
during 2017 related to a settlement of provider taxes appealed by the Company.
Property and Equipment
Property and equipment are recorded at cost or at fair value determined on the respective dates of acquisition for assets obtained in a
business combination, with depreciation and amortization being provided over the shorter of the remaining lease term (where
applicable) or the assets' estimated useful lives on the straight-line basis as follows:
Buildings and improvements
Leasehold improvements
Furniture, fixtures and equipment
- 5 to 40 years
- 2 to 10 years
- 2 to 15 years
Interest incurred during construction periods for qualifying expenditures is capitalized as part of the building cost. Maintenance and
repairs are expensed as incurred, and major betterments and improvements are capitalized.
The Company routinely evaluates the recoverability of the carrying value of its long-lived assets, including when significant adverse
changes in the general economic conditions and significant deteriorations of the underlying undiscounted cash flows or fair values
of the property indicate that the carrying amount of the property may not be recoverable. If circumstances suggest that the recorded
amounts are not recoverable based upon estimated future undiscounted cash flows, the carrying values of such assets are reduced to
fair value.
Cash
Cash and cash equivalents include cash on deposit with banks and all highly liquid investments with original maturities of three
months or less when purchased. Our cash on deposit with banks was subject to the Federal Deposit Insurance Corporation ("FDIC")
minimum insurance levels. Effective January 1, 2013, the coverage provided by the FDIC that had been unlimited under the Dodd-
Frank Deposit Insurance Provision is limited to the legal maximum, which is generally $250,000 per ownership category.
Deferred Financing and Other Costs
The Company records deferred financing and lease costs for direct and incremental expenditures related to entering into or
amending debt and lease agreements. These expenditures include lenders and attorneys fees. Financing costs are amortized using
the effective interest method over the term of the related debt. The amortization is reflected as interest expense in the accompanying
consolidated statements of operations. Deferred lease costs are amortized on a straight-line basis over the term of the related leases.
See Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for further discussion.
Acquired Leasehold Interest
The Company has recorded an acquired leasehold interest intangible asset related to an acquisition completed during 2007. The
intangible asset is accounted for in accordance with the Financial Accounting Standards Board's ("FASB") guidance on goodwill and
other intangible assets, and is amortized on a straight-line basis over the remaining life of the acquired lease. As discussed in Note
2, "Business Developments and Other Significant Transactions," the Company entered into a new Master Lease agreement with
Omega on October 1, 2018. The new Master Lease includes the seven centers to which the intangible asset relates. As such, the
intangible asset is now being amortized over an adjusted remaining life, consistent with the term of the new Master Lease, which
goes through September 30, 2030. Amortization expense of approximately $384 related to this intangible asset was recorded during
each of the years ended December 31, 2018, 2017 and 2016, respectively.
38
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
The carrying value of the acquired leasehold interest intangible and the accumulated amortization are as follows:
Intangible assets
Accumulated amortization
Net intangible assets
December 31,
2018
2017
$
$
10,652 $
(4,345)
6,307 $
10,652
(3,961)
6,691
The Company evaluates the recoverability of the carrying value of the acquired leasehold intangible in accordance with the FASB's
guidance on accounting for the impairment or disposal of long-lived assets. Included in this evaluation is whether significant
adverse changes in general economic conditions, and significant deteriorations of the underlying cash flows or fair values of the
intangible asset, indicate that the carrying amount of the intangible asset may not be recoverable. The need to recognize an
impairment charge is based on estimated future undiscounted cash flows from the asset compared to the carrying value of that asset.
If recognition of an impairment charge is necessary, it is measured as the amount by which the carrying amount of the intangible
asset exceeds the fair value of the intangible asset.
The expected amortization expense for the acquired leasehold interest intangible asset is as follows:
2019
2020
2021
2022
2023
Thereafter
$
$
534
534
534
534
534
3,637
6,307
Self-Insurance
Self-insurance liabilities primarily represent the unfunded accrual for self-insured risks associated with general and professional
liability claims, employee health insurance and workers' compensation. The Company's health insurance liability is based on known
claims incurred and an estimate of incurred but unreported claims determined by an analysis of historical claims paid. The
Company's workers' compensation liability relates primarily to periods of self insurance and consists of an estimate of the future
costs to be incurred for the known claims.
Final determination of the Company's actual liability for incurred general and professional liability claims is a process that takes
years. The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party
actuarial firm to assist in the evaluation of this unfunded accrual. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has
assisted management in the preparation of the appropriate accrual for incurred but not reported general and professional liability
claims based on data furnished by the Company. Merlinos primarily utilizes historical data regarding the frequency and cost of the
Company's past claims over a multi-year period, industry data and information regarding the number of occupied beds to develop its
estimates of the Company's ultimate professional liability cost for current periods.
On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the
Company's insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with
each claim as well as the third-party administrator's estimate of the anticipated total cost of the claim. This information is reviewed
by the Company quarterly and provided to the actuary semi-annually. Based on the Company's evaluation of the actual claim
information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for
settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve
estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual has an
unfavorable impact on results of operations in the period and any reduction in the accrual increases results of operations during the
period.
All losses are projected on an undiscounted basis. The self-insurance liabilities include estimates of liability for incurred but not
reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including
settlements to be paid over time, and estimates of related legal costs incurred and expected to be incurred.
39
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
One of the key assumptions in the actuarial analysis is that historical losses provide an accurate forecast of future losses. Changes in
legislation such as tort reform, changes in our financial condition, changes in our risk management practices and other factors may
affect the severity and frequency of claims incurred in future periods as compared to historical claims.
The facts and circumstances of each claim vary significantly, and the amount of ultimate liability for an individual claim may vary
due to many factors, including whether the case can be settled by agreement, the quality of legal representation, the individual
jurisdiction in which the claim is pending, and the views of the particular judge or jury deciding the case.
Although the Company adjusts its unfunded accrual for professional and general liability claims on a quarterly basis and retains a
third-party actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability
claims are inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability
cases have a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company's actual
liability for claims incurred in any given period is a process that takes years. As a result, the Company's actual liabilities may vary
significantly from the unfunded accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in
any given period. Each change in the amount of this accrual will directly affect the Company's results of operations and financial
position for the period in which the change in accrual is made.
Income Taxes
Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-
05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows
the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as
an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31,
2017, the company recognized a provisional net deferred income tax expense of $5,476 to reflect the revaluation of the Company’s
net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects
that were initially reported as provisional estimates were refined as additional analysis was performed.
The Company follows the FASB's guidance on Accounting for Income Taxes, which requires the asset and liability method of
accounting for income taxes whereby deferred income taxes are recorded for the future tax consequences attributable to differences
between the financial statement and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or
settled. Valuation allowances are provided against any estimated non-realizable deferred tax assets where necessary.
Where the Company believes that a tax position is supportable for income tax purposes, the item is included in its income tax
returns. Where treatment of a position is uncertain, liabilities are recorded based upon the Company’s evaluation of the “more likely
than not” outcome considering the technical merits of the position. While the judgments and estimates made by the Company are
based on management’s evaluation of the technical merits of a matter, historical experience and other assumptions that management
believes are appropriate and reasonable under current circumstances, actual resolution of these matters may differ from recorded
estimated amounts, resulting in charges or credits that could materially affect future financial statements. See Note 8, "Income
Taxes" for additional information related to the provision for income taxes.
Disclosure of Fair Value of Financial Instruments
Fair value is defined as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction
between market participants. In calculating fair value, a company must maximize the use of observable market inputs, minimize the
use of unobservable market inputs and disclose in the form of an outlined hierarchy the details of such fair value measurements. The
carrying amounts of cash, receivables, trade accounts payable and accrued expenses approximate fair value because of the short-
term nature of these accounts. The Company's self-insurance liabilities are reported on an undiscounted basis as the timing of
estimated settlements cannot be determined.
The Company follows the FASB's guidance on Fair Value Measurements and Disclosures which provides rules for using fair value
to measure assets and liabilities as well as a fair value hierarchy that prioritizes the information used to develop the measurements.
It applies whenever other guidance requires (or permits) assets or liabilities to be measured at fair value and gives the highest
priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest
priority to unobservable inputs (Level 3 measurements).
40
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
A summary of the fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three
broad levels is described below:
Level 1: Quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical assets or
liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2: Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
Level 3: Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest
priority to Level 3 inputs.
As further discussed in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", in conjunction with the
debt agreements entered into in February 2016, the Company entered into an interest rate swap agreement with a member of the
bank syndicate as the counterparty. The applicable guidance requires companies to recognize all derivative instruments as either
assets or liabilities at fair value in a company's balance sheets.
As the Company's interest rate swap, a cash flow hedge, is not traded on a market exchange, the fair value is determined using a
valuation model based on a discounted cash flow analysis. This analysis reflects the contractual terms of the interest rate swap
agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The fair value of the
Company's interest rate swap is the net difference in the discounted future fixed cash payments and the discounted expected variable
cash receipts. The variable cash receipts are based on the expectation of future interest rates and are observable inputs available to a
market participant. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy. The debt balances as
presented in the consolidated balance sheets approximate the fair value of the respective instruments as the debt is at a variable rate,
the estimates of which are considered Level 2 fair value calculations within the fair value hierarchy.
The following table presents by level, within the fair value hierarchy, assets and liabilities measured at fair value on a recurring basis
as of December 31, 2018 and 2017:
December 31, 2018
Fair Value Measurements - Assets (Liabilities)
Interest rate swap
$
384 $
— $
384
$
—
Total
Level 1
Level 2
Level 3
December 31, 2017
Fair Value Measurements - Assets (Liabilities)
Interest rate swap
$
211 $
— $
211
$
—
Total
Level 1
Level 2
Level 3
The change in fair value of the Company's cash flow hedge is detailed in the Company's Consolidated Statements of Comprehensive
Loss.
Net Loss per Common Share
The Company follows the FASB's guidance on Earnings Per Share for the financial reporting of net loss per common share. Basic
earnings per common share excludes dilution and restricted shares and is computed by dividing income available to common
shareholders by the weighted-average number of common shares, excluding restricted shares, outstanding for the period. Diluted
earnings per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or otherwise resulted in the issuance of common stock that then shared in the
earnings of the Company. See Note 7, "Net Loss per Common Share" for additional disclosures about the Company's Net Loss per
Common Share.
Stock Based Compensation
The Company follows the FASB's guidance on Stock Compensation to account for share-based payments granted to team members
and recorded non-cash stock based compensation expense of $1,127, $1,027 and $1,012 during the years ended December 31, 2018,
2017 and 2016, respectively. Such amounts are included as components of general and administrative expense or operating expense
based upon the classification of cash compensation paid to the related employees. See Note 6, "Shareholders' Equity, Stock Plans
and Preferred Stock" for additional disclosures about the Company's stock based compensation plans.
41
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Accumulated Other Comprehensive Income
Accumulated other comprehensive income consists of other comprehensive income (loss). Comprehensive income (loss) is a more
inclusive financial reporting method that includes disclosure of financial information that historically has not been recognized in the
calculation of net income (loss). The Company has chosen to present the components of other comprehensive income (loss) in a
separate statement of comprehensive income (loss). Currently, the Company's other comprehensive income (loss) consists of the
change in fair value of the Company's interest rate swap transaction accounted for as a cash flow hedge.
Recent Accounting Standards Adopted by the Company
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-
09, Revenue from Contracts with Customers (Topic 606), which outlines a single comprehensive model for recognizing revenue and
supersedes most existing revenue recognition guidance, including guidance specific to the healthcare industry. For public
companies, Topic 606 is effective for annual and interim reporting periods beginning after December 15, 2017. The Company
adopted the requirements of this standard effective January 1, 2018. The Company elected to apply the modified retrospective
approach with the cumulative transition effect recognized in beginning retained earnings as of the date of adoption. The impact of
the implementation to the consolidated financial statements for periods subsequent to the adoption is not material. See Note 3,
"Revenue Recognition and Receivables" for a discussion regarding revenue recognition under the new standard.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. The ASU was issued as part of the FASB Simplification Initiative and involves several aspects of
accounting for share-based payment transactions, including the income tax consequences and classification on the statement of cash
flows. We adopted this standard as of January 1, 2017. The adoption did not have a material impact on our financial position, results
of operations or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230). The ASU provides clarification
regarding how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance
addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The ASU is effective for
annual and interim periods beginning after December 15, 2017, which required the Company to adopt these provisions in the first
quarter of fiscal 2018 using a retrospective approach. The adoption did not have a material impact on our financial position, results
of operations or cash flows.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires that
the Statement of Cash Flows explain the changes during the period of cash and cash equivalents inclusive of amounts categorized as
Restricted Cash. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with
cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. The standard is effective for periods beginning after December 15, 2017, which required the Company to adopt these
provisions in the first quarter of fiscal 2018. The adoption did not have a material impact on our financial position, results of
operation or cash flows.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805) - Clarifying the Definition of a Business,
which provides guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The adoption is effective for annual and interim periods beginning after December 15, 2017, with early
adoption permitted in certain circumstances. The Company will evaluate future acquisitions and dispositions under this guidance,
which may result in future acquisitions being accounted for as asset acquisitions.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification
Accounting. The amended standard specifies the modification accounting applicable to any entity which changes the terms or
conditions of a share-based payment award. The new guidance is effective for all entities after December 15, 2017. The adoption did
not have a material impact on our financial position, results of operations or cash flows.
In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs pursuant to SEC
Staff Accounting Bulletin No. 118 ("SAB No. 118"), which allowed SEC registrants to record provisional amounts in earnings for
the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act.
The Company recognized the estimated income tax effects of the Tax Cuts and Jobs Act in its 2017 Consolidated Financial
Statements in accordance with SAB No. 118.
42
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Accounting Standards Recently Issued But Not Yet Adopted by the Company
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard establishes a right-of-use ("ROU") model
that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.
Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income
statement. The standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements, which allows lessees and lessors to recognize
and measure existing leases at the beginning of the period of adoption without modifying the comparative period financial
statements (which therefore will remain under prior GAAP, Topic 840, Leases). The Company will adopt the requirements of this
standard effective January 1, 2019. The Company elected to use the optional expedient to recognize existing leases in the period of
adoption, January 1, 2019, rather than the earliest period presented. For periods presented under Topic 842, extensive quantitative
and qualitative disclosures will be required to meet the objective of enabling users of financial statements to assess the amount,
timing, and uncertainty of cash flows arising from leases. The Company has organized an implementation group of cross-functional
departmental management to ensure the completeness of the lease information (specifically for new contracts entered into after the
adoption date), analyze the appropriate classification of leases under the new standard, and develop new processes to execute,
approve and classify new leases on an ongoing basis. The Company has also implemented software tools and processes to maintain
lease information critical to applying the standard, including implemented changes to the systems, related processes and controls
around leases. The Company elected to use the package of practical expedients upon transition, which includes retaining the lease
classification for any leases that exist prior to adoption of the standard. The Company is currently in the process of evaluating the
appropriate incremental borrowing rate under Topic 842. The implementation of this standard will have a material impact on the
consolidated financial position, primarily from nursing center operating leases.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Loses
on Financial Instruments. This update is intended to improve financial reporting by requiring timelier recognition of credit losses on
loans and other financial instruments that are not accounted for at fair value through net income, including loans held for
investment, held-to-maturity debt securities, trade and other receivables, net investment in leases and other such commitments. This
update requires that financial statement assets measured at an amortized cost be presented at the net amount expected to be
collected, through an allowance for credit losses that is deducted from the amortized cost basis. This standard is effective for the
fiscal year beginning after December 15, 2019 with early adoption permitted. The Company is in the initial stages of evaluating the
impact from the adoption of this new standard on the consolidated financial statements and related notes.
In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting
for Hedging Activities, which is intended to simplify and amend the application of hedge accounting to more clearly portray the
economics of an entity’s risk management strategies in its financial statements. The new guidance will make more financial and
nonfinancial hedging strategies eligible for hedge accounting and reduce complexity in fair value hedges of interest rate risk. The
new guidance also changes how companies assess effectiveness and amends the presentation and disclosure requirements. The new
guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally the entire change in the
fair value of a hedging instrument will be required to be presented in the same income statement line as the hedged item. The new
guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from
the assessment of hedge effectiveness. The new guidance is effective for public entities for fiscal years beginning after December
15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the
effective date. The implementation is complete and the Company will adopt the new standard on January 1, 2019. The standard has
an immaterial impact on our consolidated financial statements and related disclosures.
In February 2018, the FASB issued ASU No. 2018-02, Income Statement- Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The new guidance allows entities the
option to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act from accumulated other comprehensive income
(OCI) to retained earnings. The new guidance allows the option to apply the guidance retrospectively or in the period of adoption.
The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and
related disclosures.
In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting, which modifies the accounting for share-based payment awards issued to nonemployees to
largely align it with the accounting for share-based payment awards issued to employees. The standard is effective for fiscal years
beginning after December 15, 2018. The Company is evaluating the effect of this guidance will have on our consolidated financial
statements and related disclosures.
43
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework — Changes to
the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on
fair value measurements in Topic 820. The standard is effective for fiscal years beginning after December 15, 2019. Early adoption
is permitted. The Company is evaluating the effect of this guidance will have on our consolidated financial statements and related
disclosures.
In October 2018, FASB issued ASU No. 2018-16, Derivatives and Hedging (Topic 805): Inclusion of the Secured Overnight
Financing Rate ("SOFR") Overnight Index Swap ("OIS") Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. The
ASU amends ASC 815 to add the OIS rate based on the SOFR as a fifth US benchmark interest rate. The Company is evaluating the
effect of this guidance will have on our consolidated financial statements and related disclosures.
2. BUSINESS DEVELOPMENTS AND OTHER SIGNIFICANT TRANSACTIONS
2017 Acquisition
On June 8, 2017, the Company entered into an Asset Purchase Agreement (the "Purchase Agreement") with Park Place Nursing and
Rehabilitation Center, LLC, Dunn Nursing Home, Inc., Wood Properties of Selma LLC, and Homewood of Selma, LLC to acquire
a 103-bed skilled nursing center in Selma, Alabama, for an aggregate purchase price of $8,750. In connection with the funding of the
acquisition, on June 30, 2017, the Company amended the terms of its Second Amended and Restated Term Loan Agreement to
increase the facility by $7,500, which is described in Note 5, "Long-Term Debt, Interest Rate Swap and Capitalized Lease
Obligations." The acquisition of the business closed on July 1, 2017. In accordance with ASC 805, this transaction was accounted
for as a business combination, which resulted in the expensing of $140 of acquisition costs and a $925 recorded gain on bargain
purchase for the Company for the year ended December 31, 2017. The operating results of the acquired center have been included in
the Company's consolidated statement of operations since the acquisition date. Supplemental pro forma information regarding the
acquisition is not material to the consolidated financial statements. The allocation of the purchase price to the net assets acquired is
as follows:
Purchase Price
Gain on bargain purchase
Allocation:
Building
Land
Land Improvements
Furniture, Fixtures and Equipment
Park Place
8,750
925
9,675
8,435
760
145
335
9,675
$
$
$
$
2018 Assets Sold
On October 30, 2018, the Company entered into an Asset Purchase Agreement (the "Agreement") with Fulton Nursing and
Rehabilitation LLC, Holiday Fulton Propco LLC, Birchwood Nursing and Rehabilitation LLC, Padgett Clinton Propco LLC,
Westwood Nursing and Rehabilitation LLC, and Westwood Glasgow Propco (the "Buyers") to sell the assets and transfer the
operations of Diversicare of Fulton, LLC, Diversicare of Clinton, LLC and Diversicare of Glasgow, LLC (the "Kentucky
Properties"). On December 1, 2018, the Company completed the sale of the Properties with the Buyers for a purchase price of
$18,700. This transaction did not meet the accounting criteria to be reported as a discontinued operation. The carrying value of these
centers' assets were $13,331, resulting in a gain of $4,825, with remaining proceeds for miscellaneous closing costs. The proceeds
were used to relieve debt, which is required under the terms of the Company's Amended Mortgage Loan and Amended Revolver.
Refer to Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations" for more information on this transaction.
2017 Lease Termination
On September 30, 2017, the Company entered into an Agreement with Trend Health and Rehab of Carthage, LLC ("Trend Health")
to terminate the lease and the Company's right of possession of the center in Carthage, Mississippi. In consideration of the early
termination of the lease, Trend Health provided the Company with a $250 cash termination payment which is included in lease
termination receipts in the accompanying consolidated statements of operations for the year ended December 31, 2017, net of costs
44
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
to terminate. For accounting purposes, this transaction was not reported as a discontinued operation as this disposal did not represent
a strategic shift that has (or will have) a major effect on the Company's operations and financial results.
2016 Sale of Investment in Unconsolidated Affiliate
On October 28, 2016, the Company and its partners entered into an asset purchase agreement to sell the pharmacy joint venture.
The sale resulted in a $1,366 gain in the fourth quarter of 2016. Subsequently, we recognized additional gains of $308 and $733 for
the years ended December 31, 2018 and 2017, respectively, related to the continuing liquidation of remaining net assets affiliated
with the partnership.
3. REVENUE RECOGNITION AND RECEIVABLES
On January 1, 2018, the Company adopted Accounting Standards Codification ("ASC") 606 using the modified retrospective
method for all contracts as of the date of adoption. The reported results for 2018 reflect the application of ASC 606 guidance while
the reported results for 2017 were prepared under the guidance of ASC 605, Revenue Recognition (ASC 605), which is also referred
to herein as "legacy GAAP". The adoption of ASC 606 represents a change in accounting principle that more closely aligns revenue
recognition with the delivery of the Company's services. The amount of revenue recognized reflects the consideration to which the
Company expects to be entitled to receive in exchange for these services. ASC 606 requires companies to exercise more judgment
and recognize revenue in accordance with the standard's core principle by applying the following five steps:
Step 1: Identify the contract with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
Performance obligations are promises made in a contract to transfer a distinct good or service to the customer. A contract's
transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance
obligation is satisfied. The Company has concluded that the contracts with patients and residents represent a bundle of distinct
services that are substantially the same, with the same pattern of transfer to the customer. Accordingly, the promise to provide
quality care is accounted for as a single performance obligation.
The Company performed analyses using the application of the portfolio approach as a practical expedient to group patient contracts
with similar characteristics, such that revenue for a given portfolio would not be materially different than if it were evaluated on a
contract-by-contract basis. These analyses incorporated consideration of reimbursements at varying rates from Medicaid, Medicare,
Managed Care, Private Pay, Assisted Living, Hospice, and Veterans for services provided in each corresponding state. It was
determined that the contracts are not materially different for the following groups: Medicaid, Medicare, Managed Care and Private
Pay and other (Assisted Living, Hospice and Veterans).
In order to determine the transaction price, the Company estimates the amount of variable consideration at the beginning of the
contract using the expected value method. The estimates consider (i) payor type, (ii) historical payment trends, (iii) the maturity of
the portfolio, and (iv) geographic payment trends throughout a class of similar payors. The Company typically enters into
agreements with third-party payors that provide for payments at amounts different from the established charges. These arrangement
terms provide for subsequent settlement and cash flows that may occur well after the service is provided. The Company constrains
(reduces) the estimates of variable consideration such that it is probable that a significant reversal of previously recognized revenue
will not occur throughout the life of the contract. Changes in the Company's expectation of the amount it will receive from the
patient or third-party payors will be recorded in revenue unless there is a specific event that suggests the patient or third-party payor
no longer has the ability and intent to pay the amount due and, therefore, the changes in its estimate of variable consideration better
represent an impairment, or bad debt. These estimates are re-assessed each reporting period, and any amounts allocated to a satisfied
performance obligation are recognized as revenue or a reduction of revenue in the period in which the transaction price changes.
The Company satisfies its performance obligation by providing quality of care services to its patients and residents on a daily basis
until termination of the contract. The performance obligation is recognized on a time elapsed basis, by day, for which the services
are provided. For these contracts, the Company has the right to consideration from the customer in an amount that directly
corresponds with the value to the customer of the Company's performance to date. Therefore, the Company recognizes revenue
based on the amount billable to the customer in accordance with the practical expedient in ASC 606-10-55-18. Additionally, because
the Company applied ASC 606 using certain practical expedients, the Company elected not to disclose the aggregate amount of the
transaction price for unsatisfied, or partially unsatisfied, performance obligations for all contracts with an original expected length of
one year or less.
45
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
The Company incurs costs related to patient/resident contracts, such as legal and advertising expenses. The contract costs are
expensed as incurred. They are not expected to be recovered and are not chargeable to the patient/resident regardless of whether the
contract is executed.
Financial Statement Impact of Adopting ASC 606
The Company adopted ASC 606 using the modified retrospective method. The cumulative effect of applying the new guidance to all
contracts with customers as of January 1, 2018 was not material to the consolidated financial statements. As a result of applying the
modified retrospective method to adopt ASC 606, the following adjustments were made to our operating results:
Patient Revenues, net
Operating Expenses
Total Expenses
Twelve Months Ended December 31, 2018
As Reported
Increase
(Decrease)
Balances as if the
previous accounting
guidance was in effect
$563,462
$450,686
$565,122
14,682
(487)
14,195
14,682
14,682
(a)
(b)
(a)
(a)
$577,657
$465,368
$579,804
(a) Adjusts for the implicit price concession of bad debt expense.
(b) Adjusts for the implementation of ASC 606.
Accounts Receivable
As Reported
$66,257
Accumulated Deficit
$(23,016)
As of December 31, 2018
Increase
(Decrease)
Balances as if the
previous accounting
guidance was in effect
(487)
17,261
16,774
487
(46)
441
(a)
(b)
(a)
(c)
$83,031
$(22,575)
(a) Adjusts for the implementation of ASC 606.
(b) Adjusts for a direct reduction of accounts receivable that would have been reflected as allowance for doubtful accounts in
the consolidated balance sheet prior to the adoption of ASC 606.
(c) Reflects the tax impact of $46 for the ASC 606 adjustment of $487.
46
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Disaggregation of Revenue and Accounts Receivable
The following table summarizes revenue from contracts with customers by payor source for the periods presented (dollar amounts in
thousands):
2018
As reported
Twelve Months Ended December 31,
2018
As Adjusted to Legacy GAAP
2017(1)
As reported
Medicaid
Medicare
Managed Care
Private Pay and other
Total
$
$
267,015
110,794
53,242
132,411
563,462
47.4% $
19.7%
9.4%
23.5%
100.0% $
303,412
143,104
46,988
84,153
577,657
52.5% $
24.8%
8.1%
14.6%
100.0% $
300,926
149,020
42,673
82,175
574,794
52.4%
25.9%
7.4%
14.3%
100.0%
(1) As noted above, prior period amounts have not been adjusted under the application of the modified retrospective method.
Accounts receivable as of December 31, 2018 and 2017 is summarized in the following table:
Medicaid
Medicare
Managed Care
Private Pay and other
Less: allowance for doubtful accounts
Accounts receivable, net
4. PROPERTY AND EQUIPMENT
2018
December 31,
As Adjusted to
Legacy GAAP
2017
$
8,126
15,706
27,532
14,893
66,257
—
—
66,257
$
10,229 $
17,592
30,105
25,592
83,518
(17,261)
66,257
$
9,356
20,007
29,453
20,348
79,164
(14,235)
64,929
$
$
Property and equipment, at cost, consists of the following:
Land
Buildings and leasehold improvements
Furniture, fixtures and equipment
Less: accumulated depreciation
Net property and equipment
December 31,
2018
2017
$
$
5,283
87,995
45,182
138,460
(85,361)
53,099
$
$
6,521
98,140
42,888
147,549
(78,345)
69,204
As discussed further in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations", the property and
equipment of certain skilled nursing centers are pledged as collateral for mortgage debt obligations. In addition, the Company has
assets recorded as capital leased assets purchased through capitalized lease obligations. The Company capitalizes leasehold
improvements which will revert back to the lessor of the property at the expiration or termination of the lease, and depreciates
these improvements over the shorter of the remaining lease term or the assets' estimated useful lives.
47
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
5. LONG-TERM DEBT, INTEREST RATE SWAP AND CAPITALIZED LEASE OBLIGATIONS
Long-term debt consists of the following:
Mortgage loan with a syndicate of banks; payable monthly, interest at 4.0%
above LIBOR, a portion of which is fixed at 5.79% based on the interest rate
swap described below.
Acquisition loan with Canadian Imperial Bank of Commerce, interest at 4.75%
above LIBOR.
Revolving credit facility borrowings payable to a bank; secured by receivables of
the Company; interest at 4.0% above LIBOR.
Loan to finance equipment
Less current portion
Less deferred financing costs, net
Plus capitalized lease obligations
Long-term debt and capital lease obligation
$
December 31,
2018
2017
$
51,730
$
64,567
6,900
15,000
—
73,630
(12,449)
61,181
(1,125)
928
60,984 $
7,500
16,000
40
88,107
(13,065)
75,042
(1,884)
1,445
74,603
Included in the current portion of long-term debt is $5 million related to the Revolver and $5 million related to the Acquisition Line,
which are both due on February 26, 2021. It is classified as a current liability because it is management's intent to pay within the
next 12 months.
As of December 31, 2018, the Company's weighted average interest rate on long-term debt, including the impact of the interest rate
swap, was approximately 6.31%.
The Company has agreements with a syndicate of banks for a mortgage term loan ("Original Mortgage Loan") and the Company’s
revolving credit agreement ("Original Revolver"). On February 26, 2016, the Company executed an Amended and Restated Credit
Agreement (the "Credit Agreement") which modified the terms of the Original Mortgage Loan and the Original Revolver
Agreements dated April 30, 2013. The Credit Agreement increases the Company's borrowing capacity to $100,000 allocated
between a $72,500 Mortgage Loan ("Amended Mortgage Loan") and a $27,500 Revolver ("Amended Revolver"). The Amended
Mortgage Loan consists of $60,000 term and $12,500 acquisition loan facilities. As of December 31, 2018, financing costs
associated with the Amended Mortgage Loan and the Amended Revolver in the amount of $146 are netted against the related debt
and are being amortized over the five-year term of the agreements, which are included in debt.
Under the terms of the amended agreements, the syndicate of banks provided the Amended Mortgage Loan with an original balance
of $72,500 with a five-year maturity through February 26, 2021, and a $27,500 Amended Revolver through February 26, 2021. The
Amended Mortgage Loan has a term of five years, with principal and interest payable monthly based on a 25-year amortization.
Interest on the term and acquisition loan facilities are based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the
Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000.
The Amended Mortgage Loan balance was $58,630 as of December 31, 2018, consisting of $51,730 on the term loan facility with an
interest rate of 6.5% and $6,900 on the acquisition loan facility with an interest rate of 7.25%. The Amended Mortgage Loan is
secured by 15 owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended
Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The Company’s Amended Revolver has an
interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans
that can be outstanding under the revolver based on borrowing base restrictions.
Effective October 3, 2016, the Company entered into the Second Amendment ("Second Revolver Amendment") to amend the
Amended Revolver. The Second Amendment increased the Amended Revolver capacity from the $27,500 in the Amended Revolver
to $52,250; provided that the maximum revolving facility be reduced to $42,250 on August 1, 2017. Subsequently, on June 30, 2017,
the Company executed a Fourth Amendment (the "Fourth Revolver Amendment") to amend the Amended Revolver, which modifies
the capacity of the revolver to remain at $52,250.
48
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
On December 29, 2016, the Company executed a Third Amendment ("Third Revolver Amendment") to amend the Amended
Revolver. The Third Amendment modifies the terms of the Amended Mortgage Loan by increasing the Company’s letter of credit
sublimit from $10,000 to $15,000.
Effective June 30, 2017, the Company entered into a Second Amendment (the "Second Term Amendment") to amend the Amended
Mortgage Loan. The Second Term Amendment amends the terms of the Amended Mortgage Loan by increasing the Company's term
loan facility by $7,500.
Effective February 27, 2018, the Company executed a Fifth Amendment to the Amended Revolver and a Third Amendment to the
Amended Mortgage Loan. Under the terms of the Amendments, the minimum fixed charge coverage ratio shall not be less than 1.01
to 1.00 as of March 31, 2018 and for each quarter thereafter.
Effective December 1, 2018, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the
Amended Revolver. The Sixth Amendment decreased the Amended Revolver capacity from $52,250 to $42,250. The Company also
applied $4,947 of net proceeds from the sale of the Kentucky centers to the outstanding borrowings under the Amended Revolver.
Effective December 1, 2018, the Company executed a Fourth Amendment (the "Fourth Term Amendment") to amend the Amended
Mortgage Loan. The Company applied $11,100 and $2,100 of net proceeds from the sale of the Kentucky centers to the Term Loan
and Acquisition Loan, respectively. Additionally, we amended the Acquisition Loan availability to include a reserve of $2,100, and
therefore, our borrowing capacity is $10,400. For further discussion of the sale of the Kentucky centers, refer to Note 2, "Business
Development and Other Significant Transactions."
As of December 31, 2018, the Company had $15,000 in borrowings outstanding under the Amended Revolver compared to $16,000
outstanding as of December 31, 2017. The interest rate related to the Amended Revolver was 6.50% as of December 31, 2018. The
outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of
credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has 4 letters of credit with a total
value of $13,593 outstanding as of December 31, 2018. Considering the balance of eligible accounts receivable, the letter of credit,
the amounts outstanding under the Amended Revolver and the maximum loan amount of $36,648, the balance available for
borrowing under the Amended Revolver was $8,055 at December 31, 2018.
The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage
ratios. The Company is in compliance with all such covenants at December 31, 2018.
In connection with the Company's 2018 and 2017 financing agreements, the Company recorded the following amounts related to
deferred loan costs, with such costs classified as a reduction of the debt balances discussed above:
Write-off of deferred financing costs
Deferred financing costs capitalized
2018
2017
$
$
267
146
$
$
—
195
The deferred financing costs included in the current and long-term debt balances were $1,125 at December 31, 2018 and $1,884 at
December 31, 2017.
Scheduled principal payments of long-term debt are as follows:
2019
2020
2021
Total
Interest Rate Swap Cash Flow Hedge
$
$
11,995
8,993
52,642
73,630
As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member
of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable
interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and
the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction
with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously
agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company
redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has the same effective date and maturity
49
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
date as the Amended Mortgage Loan, and has an amortizing notional amount that was $27,695 as of December 31, 2018. The
interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional
amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the
same notional amounts. The applicable guidance requires companies to recognize all derivative instruments as either assets or
liabilities at fair value in a company's balance sheets.
The Company assesses the effectiveness of its interest rate swap on a quarterly basis and at December 31, 2018, the Company
determined that the interest rate swap was effective. The interest rate swap valuation model indicated a net asset of $384 at
December 31, 2018. The fair value of the interest rate swap is included in “other noncurrent liabilities” on the Company's
consolidated balance sheets. The asset related to the change in the interest rate swap included in accumulated other comprehensive
income at December 31, 2018 is $234, net of income tax benefit of $150. As the Company's interest rate swap is not traded on a
market exchange, the fair value is determined using a valuation model based on a discounted cash flow analysis. This analysis
reflects the contractual terms of the interest rate swap agreement and uses observable market-based inputs, including estimated
future LIBOR interest rates. The fair value of the Company's interest rate swap is the net difference in the discounted future fixed
cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on the expectation of future
interest rates and are observable inputs available to a market participant. The interest rate swap valuation is classified in Level 2 of
the fair value hierarchy, in accordance with the FASB's guidance on Fair Value Measurements and Disclosures.
Capitalized Lease Obligations
Upon acquisition of some centers, we assumed certain leases, primarily related to equipment, that constitute capital leases. As a
result, we have recorded the underlying lease liabilities and capitalized lease obligations of $928 and $1,445 as of December 31,
2018 and 2017, respectively. These lease agreements provide three to five year terms.
Scheduled payments of the capitalized lease obligations are as follows:
2019
2020
2021
2022
Total
Amounts related to interest
Principal payments on capitalized lease obligation
$
$
500
202
189
131
1,022
(94)
928
6. SHAREHOLDERS' EQUITY, STOCK PLANS AND PREFERRED STOCK
Stock Based Compensation Plans
The Company follows the FASB's guidance on Stock Compensation to account for stock-based payments granted to employees and
non-employee directors.
Overview of Plans
In June 2008, the Company adopted the Advocat Inc. 2008 Stock Purchase Plan for Key Personnel (“Stock Purchase Plan”). The
Stock Purchase Plan provides for the granting of rights to purchase shares of the Company's common stock to directors and officers
and 150 shares of the Company's common stock has been reserved for issuance under the Stock Purchase Plan. The Stock Purchase
Plan allows participants to elect to utilize a specified portion of base salary, annual cash bonus, or director compensation to purchase
restricted shares or restricted share units (“RSU's”) at 85% of the quoted market price of a share of the Company's common stock on
the date of purchase. The restriction period under the Stock Purchase Plan is generally two years from the date of purchase and
during which the shares will have the rights to receive dividends, however, the restricted share certificates will not be delivered to
the shareholder and the shares cannot be sold, assigned or disposed of during the restriction period and are subject to forfeiture. In
June 2016, our shareholders approved an amendment to the Stock Purchase Plan to increase the number of shares of our common
stock authorized under the Plan from 150 shares to 350 shares. No grants can be made under the Stock Purchase Plan after April 25,
2028.
In April 2010, the Compensation Committee of the Board of Directors adopted the 2010 Long-Term Incentive Plan (“2010 Plan”),
followed by approval by the Company's shareholders in June 2010. The 2010 Plan allows the Company to issue stock appreciation
rights, stock options and other share and cash based awards. In June 2017, our shareholders approved an amendment to the Long-
50
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Term Incentive Plan to increase the number of shares of our common stock authorized under the Plan from 380 shares to 680 shares.
No grants can be made under the 2010 Plan after May 31, 2027.
Equity Grants and Valuations
During 2018 and 2017, the Compensation Committee of the Board of Directors approved grants totaling approximately 90 and 88,
respectively, shares of restricted common stock to certain employees and members of the Board of Directors. These restricted shares
vest one-third on the first, second and third anniversaries of the grant date. Unvested shares may not be sold or transferred. During
the vesting period, dividends accrue on the restricted shares, but are paid in additional shares of common stock upon vesting, subject
to the vesting provisions of the underlying restricted shares. The restricted shares are entitled to the same voting rights as other
common shares. Upon vesting, all restrictions are removed. Our policy is to account for forfeitures of share-based compensation
awards as they occur.
The Company recorded non-cash stock-based compensation expense from continuing operations for equity grants and RSU's issued
under the Plans of $1,127, $1,027, and $1,012 during the years ended December 31, 2018, 2017, and 2016, respectively. Such
amounts are included as components of general and administrative expense or operating expense based upon the classification of
cash compensation paid to the related employees. As of December 31, 2018, there was $384 in unrecognized compensation costs
related to stock-based compensation to be recognized over the applicable remaining vesting periods. The Company estimated the
total recognized and unrecognized compensation for all options and SOSARs using the Black-Scholes-Merton equity grant valuation
model. Restricted stock awards are valued using the market price on the grant date.
The table below shows the weighted average assumptions the Company used to develop the fair value estimates under its option
valuation model:
Expected volatility (range)
Risk free interest rate (range)
Expected dividends
Weighted average expected term (years)
2018
47%-49%
2.68%-2.75%
2.70%
6
Year Ended December 31,
2017
N/A(1)
N/A(1)
N/A(1)
N/A(1)
2016
N/A(1)
N/A(1)
N/A(1)
N/A(1)
___________
(1) The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton
equity grant valuation model during the years ended December 31, 2017 and 2016. All equity grants during these periods
were restricted common shares which are valued using an intrinsic valuation method based on market price.
In computing the fair value estimates using the Black-Scholes-Merton valuation model, the Company took into consideration the
exercise price of the equity grants and the market price of the Company's stock on the date of grant. The Company used an expected
volatility that equals the historical volatility over the most recent period equal to the expected life of the equity grants. The risk free
interest rate is based on the U.S. treasury yield curve in effect at the time of grant. The Company used the expected dividend yield at
the date of grant, reflecting the level of annual cash dividends currently being paid on its common stock.
In computing the fair value of these equity grants, the Company estimated the equity grants' expected term based on the average of
the vesting term and the original contractual terms of the grants.
The table below describes the resulting weighted average grant date fair values calculated as well as the intrinsic value of options
exercised under the Company's equity awards during each of the following years:
Year Ended December 31,
2018
2017(1)
2016(1)
Weighted average grant date fair value $
$
Total intrinsic value of exercises
3.05 $
115 $
— $
2 $
—
3
___________
(1) The Company did not issue any options or other equity grants that would require application of the Black-Scholes-Merton
equity grant valuation model during the years ended December 31, 2017 and 2016. All equity grants during this period
were restricted common shares which are valued using an intrinsic valuation method based on market price.
51
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
The following table summarizes information regarding stock options and SOSAR grants outstanding as of December 31, 2018:
Weighted
Average
Exercise
Prices
Range of
Exercise Prices
Grants
Outstanding
$8.14 to $10.21 $
$2.37 to $5.86 $
9.32
5.32
60 $
62 $
122
Intrinsic
Value-Grants
Outstanding
—
—
Grants
Exercisable
Intrinsic
Value-Grants
Exercisable
—
—
60 $
62 $
122
As of December 31, 2018, the outstanding equity grants have a weighted average remaining life of 2.26 years and those outstanding
equity grants that are exercisable have a weighted average remaining life of 2.7 years. During the year ended December 31, 2018,
approximately 100 stock option and SOSAR grants were exercised under these plans. All of the equity grants exercised were net
settled. The net payments from equity grants exercised in 2018 was $(217).
Summarized activity of the equity compensation plans is presented below:
Outstanding, December 31, 2017
Granted
Exercised
Expired or cancelled
Outstanding, December 31, 2018
Exercisable, December 31, 2018
Outstanding, December 31, 2017
Granted
Dividend Equivalents
Vested
Cancelled
Outstanding December 31, 2018
SOSARs/
Options
Weighted
Average
Exercise Price
211
30
(100)
(19)
122
102
Restricted
Shares
164
90
4
(131)
(7)
120
$
$
$
$
$
6.64
8.14
5.79
9.17
7.29
7.13
Weighted
Average
Grant Date
Fair Value
9.95
8.14
6.95
9.71
9.62
8.77
Summarized activity of the Restricted Share Units for the Stock Purchase Plan is as follows:
Outstanding, December 31, 2017
Granted
Dividend Equivalents
Vested
Cancelled
Outstanding December 31, 2018
Restricted
Share Units
Weighted
Average
Grant Date
Fair Value
44
17
1
(19)
—
43
$
$
9.59
8.14
6.89
8.92
—
9.26
52
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Series A Preferred Stock
The Company is authorized to issue up to 200 shares of Series A Preferred Stock. The Company's Board of Directors is authorized
to establish the terms and rights of each series, including the voting powers, designations, preferences, and other special rights,
qualifications, limitations, or restrictions thereof.
7. NET LOSS PER COMMON SHARE
Information with respect to the calculation of basic and diluted net income (loss) per common share is presented below:
Numerator: Loss:
Loss from continuing operations
Loss from discontinued operations, net of income taxes
Net loss
Denominator: Basic Weighted Average Common Shares Outstanding:
Basic net loss per common share
Loss from continuing operations
Loss from discontinued operations
Operating loss, net of taxes
Discontinued operations, net of taxes
Basic net loss per common share
Numerator: Loss from continuing operations
Loss from discontinued operations, net of income taxes
Net loss
Basic weighted average common shares outstanding
Incremental shares from assumed exercise of options, SOSARS and
Restricted Stock Units
Denominator: Diluted Weighted Average Common Shares Outstanding:
Diluted net loss per common share
Loss from continuing operations
Loss from discontinued operations
Operating loss, net of taxes
Discontinued operations, net of taxes
Diluted net loss per common share
Years Ended December 31,
2018
2017
2016
(7,354) $
(42)
(7,396) $
6,372
(4,799) $
(28)
(4,827) $
6,279
(1,744)
(67)
(1,811)
6,199
(1.15) $
(0.76) $
(0.28)
(0.01)
(0.01)
(1.16) $
(0.01)
(0.01)
(0.77) $
(0.01)
(0.01)
(0.29)
2018
2017
2016
(7,354) $
(42)
(7,396) $
(4,799 ) $
(28)
(4,827 ) $
6,372
—
6,372
6,279
—
6,279
(1,744)
(67)
(1,811)
6,199
—
6,199
(1.15) $
(0.76 ) $
(0.28)
(0.01)
(0.01)
(1.16) $
(0.01)
(0.01)
(0.77 ) $
(0.01)
(0.01)
(0.29)
$
$
$
$
$
$
$
$
The dilutive effects of the Company's stock options, SOSARs, Restricted Shares and Restricted Share Units are included in the
computation of diluted income per common share during the periods they are considered dilutive.
The following table reflects the weighted average outstanding SOSARs and Options that were excluded from the computation of
diluted earnings per share, as they would have been anti-dilutive:
SOSARs/Options Excluded
2018
114,000
2017
45,000
2016
31,000
The weighted average common shares for basic and diluted earnings for common shares was the same due to the losses in 2018,
2017 and 2016.
53
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
8. INCOME TAXES
Overview
Effective January 1, 2018, the Tax Act reduced the corporate rate from 35% to 21%. The Company has adopted ASU No. 2018-
05, Income Taxes (Topic 740): Amendments to SEC Paragraph Pursuant to SEC Staff Accounting Bulletin No. 118, which allows
the company to record provisional amounts during the period of enactment. Any change to the provisional amounts are recorded as
an adjustment to the provision for income taxes in the period the amounts are determined. During the year ended December 31,
2017, the company recognized a provisional net deferred income tax expense of $5,476 to reflect the revaluation of the Company’s
net deferred tax assets based on the U.S. federal tax rate of 21%. In accordance with SAB 118, the Tax Act related income tax effects
that were initially reported as provisional estimates were refined as additional analysis was performed.
The provision (benefit) for income taxes on continuing operations for the years ended December 31, 2018, 2017 and 2016 is
summarized as follows:
Year Ended December 31,
2017
2016
2018
Current provision (benefit) :
Federal
State
Deferred provision (benefit):
Federal
State
Provision (benefit) for income taxes of continuing operations
$
$
(49) $
(86)
(135)
50
(665)
(615)
(750) $
274 $
472
746
6,585
(588)
5,997
6,743 $
17
522
539
(1,284)
(285)
(1,569)
(1,030)
A reconciliation of taxes computed at statutory income tax rates on income (loss) from continuing operations is as follows:
Year Ended December 31,
2017
2016
2018
Provision (benefit) for federal income taxes at statutory rates
Provision for state income taxes, net of federal benefit
Valuation allowance changes affecting the provision for income taxes
Employment tax credits
Nondeductible expenses
Stock based compensation expense
Effect of Tax Cuts and Jobs Creation Act
Other
Provision (benefit) for income taxes of continuing operations
$
$
(1,672) $
(479)
(146)
(64)
1,919
15
—
(323)
(750) $
711 $
421
(372)
(217)
496
(35)
5,476
263
6,743 $
(889)
120
(45)
(529)
453
(62)
—
(78)
(1,030)
54
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Deferred Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets are reduced by a valuation
allowance if, based upon the weight of available evidence, it is more likely than not that we will realize only some portion of the
deferred tax assets. The net deferred tax assets and liabilities, at the respective income tax rates, are as follows:
Deferred tax assets (liabilities):
Net operating loss and other carryforwards
Credit carryforwards
Allowance for doubtful accounts
Prepaid expenses
Interest rate limitation
Deferred lease costs
Depreciation
Tax goodwill and intangibles
Stock-based compensation
Accrued liabilities
Accrued rent
Kentucky and Kansas acquisition costs
Impairment of long-lived assets
Interest rate swap
Hedge Ineffectiveness
Noncurrent self-insurance liabilities
Other
Less valuation allowance
Deferred Tax Valuation Allowance
December 31,
2018
2017
324 $
2,878
4,570
(1,022)
148
—
1,318
(1,079)
197
896
1,914
3
191
(152)
(168)
5,997
64
16,079
(228)
15,851 $
495
3,237
3,626
(731)
—
32
1,190
(972)
476
773
1,892
4
186
(14)
(106)
5,443
—
15,531
(377)
15,154
$
$
The assessment of the amount of value assigned to our deferred tax assets under the applicable accounting standards is highly
judgmental. We are required to consider all available positive and negative evidence in evaluating the likelihood that we will be
able to realize the benefit of our deferred tax assets in the future. Such evidence includes scheduled reversals of deferred tax assets
and liabilities, projected future taxable income, tax-planning strategies, and the results of recent operations. Since this evaluation
requires consideration of historical and future events, there is significant judgment involved, and our conclusion could be materially
different should certain of our expectations not transpire.
When assessing all available evidence, we consider the weight of the evidence, both positive and negative, based on the objectivity
of the underlying evidence and the extent to which it can be verified. For the three-year period ended December 31, 2018, the
Company has a cumulative pre-tax loss from continuing operations of $8,934, which includes $8,104 of loss attributable to the year
ended December 31, 2018. Additionally, the Company recognized governmental and regulatory changes have put downward
revenue pressure on the long-term care industry as a piece of negative evidence in our analysis. As a result of this negative
evidence, the Company performed a thorough assessment of the available positive and negative evidence in order to ascertain
whether it is more-likely-than-not that in future periods the Company will generate sufficient pre-tax income to utilize all of our
federal deferred tax assets and our net operating loss and other carryforwards and credits. State deferred tax assets are considered
for valuation separately and on a state-by-state basis.
The Company also identified several pieces of objective positive evidence which were considered and weighed in the analysis
performed regarding the valuation of deferred tax assets, including, but not limited to the expected accretive strategic acquisitions
completed by us during the three-year period, corporate and regional restructuring expected to reduce costs while maintaining
revenue levels, the long-term expiration dates of a majority of the net operating losses and credits, our history of not having
carryforwards or credits expire unutilized, and the completed divestiture of the centers in Mississippi in 2017 and Ohio in 2016.
55
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
In performing the analysis, the Company contemplated utilization of the deferred tax assets under multiple scenarios. After
consideration of these factors, the Company determined that it was more likely than not that future taxable income would be
sufficient to realize substantially all of the recorded value of the Company's deferred tax assets for federal income tax purposes.
Realization of the deferred tax assets is not assured and future events could result in a change in judgment. If future events result in
a conclusion that realization is no longer more likely than not to occur, the Company would be required to establish a valuation
allowance on the deferred tax assets at that time, which would result in a charge to income tax expense and a potentially material
decrease in net income in the period in which the factors change our judgment.
At December 31, 2018, the Company had $6,028 of net operating losses, which expire at various dates beginning in 2019 and
continue through 2021. The use of a portion of these loss carryforwards is limited by change in ownership provisions of the Federal
tax code to a maximum of approximately $1,162. The Company has reduced the deferred tax asset and the corresponding valuation
allowances for net operating loss deductions permanently lost as a result of the change in ownership provisions.
With respect to state deferred tax assets, the Company reduced the valuation allowance by approximately $147 in 2018, primarily
related to the expectation that deferred tax assets for which valuation allowances had previously been applied would more-likely-
than-not be utilized as a result of the increase in taxable income during the year ended December 31, 2018. In 2017 and 2016, the
Company recorded a deferred tax provision to adjust approximately $357 and $47, respectively, of the valuation allowance on state
deferred tax assets. The changes in valuation allowance were based on the Company's assessment of the realization of certain
individual tax assets. The Company did not record a valuation allowance as of December 31, 2018.
Under the Work Opportunity Tax Credit ("WOTC") program, the Company recorded $64, $210 and $550 in Work Opportunity Tax
Credits during 2018, 2017 and 2016, respectively.
The Company received a notice of an audit by the Internal Revenue Service related to the 2012 tax year, which was closed in 2017.
As of December 31, 2018, the Company’s tax years for 2014 forward are subject to examination by tax authorities.
9. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company is committed under long-term operating leases with various expiration dates and varying renewal options. Minimum
annual rentals (exclusive of taxes, insurance, and maintenance costs) under these leases beginning January 1, 2019, are as follows:
2018
2019
2020
2021
2022
Thereafter
$
$
58,291
59,391
60,575
61,808
63,065
321,797
624,927
Under these lease agreements, the Company's lease payments are subject to periodic annual escalations as described below and in
Note 1, "Business and Summary of Significant Accounting Policies". Total lease expense for continuing operations was $57,073,
$54,988 and $33,364 for 2018, 2017 and 2016, respectively. The accrued liability related to straight line rent was $6,877 and $6,983
at December 31, 2018 and 2017, respectively, and is included in “Other noncurrent liabilities” on the accompanying consolidated
balance sheets.
Omega Master Lease
On October 1, 2018, the Company entered into a New Master Lease Agreement (the "Omega Master Lease") with Omega
Healthcare Investors (the "Lessor") to lease 34 centers currently owned by Omega and operated by Diversicare. The old Master
Lease with Omega provided for its operation of 23 skilled nursing centers in Texas, Kentucky, Alabama, Tennessee, Florida, and
Ohio. Additionally, Diversicare operates 11 centers owned by Omega, previously under separate leases in Missouri, Kentucky,
Indiana, and Ohio. The Omega Master Lease entered into by Diversicare and Omega consolidated the leases for all 34 centers under
one New Master Lease. The Omega Master Lease has an initial term of twelve years with the option of two ten year extensions at
the Company's election. The Omega Master Lease has annual rent escalators of 2.15% beginning on October 1, 2019.
56
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
Under generally accepted accounting principles, the Company is required to report these scheduled rent increases on a straight line
basis over the term of the lease. These scheduled increases had no effect on cash rent payments at the start of the lease term and
only result in additional cash outlay as the annual increases take effect each year.
The Omega Master Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount
currently equal to four-hundred dollars per licensed bed. These amounts are subject to adjustment for increases in the Consumer
Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital expenditures during
the remaining lease term are $18,611. These capital expenditures are being depreciated on a straight-line basis over the shorter of
the asset life or the appropriate lease term.
Upon expiration of the Omega Master Lease or in the event of a default under the Omega Master Lease, the Company is required to
transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Omega. The assets to be
transferred to Omega are being amortized on a straight-line basis over the shorter of the remaining lease term, excluding the renewal
options, or estimated useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and
other related assets of the centers leased pursuant to the Omega Master Lease have been pledged as security under the Omega
Master Lease. In addition, the Company has a letter of credit of $6,909 as a security deposit for the Company's leases with Omega,
as described in Note 5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".
Renovation Funding
In January 2013, we entered into an amendment to the former master lease with Omega under which Omega agreed to provide an
additional $5,000 to fund renovations to two nursing centers located in Texas that are leased from Omega. The annual base rent
related to these centers is increased to reflect the amount of capital improvements to the respective centers as the related
expenditures are made. The increase is based on a rate of 10.25% per year of the amount financed under this amendment.
The Company completed an expansion to one of its centers by making use of fifteen licensed beds it acquired in 2005. This
expansion project was funded by Omega with the renovation funding previously described. Accordingly, the costs incurred to
expand the center were recorded as a leasehold improvement asset with the amounts reimbursed by Omega for this project included
as a long-term liability and were amortized to rent expense over the remaining term of the lease. The capitalized leasehold
improvements and lessor reimbursed costs were amortized over the initial lease term that ended in September 2018. The leasehold
improvement asset and accumulated amortization are as follows:
Leasehold improvement
Accumulated Amortization
Net
Golden Living Master Lease
December 31,
2018
2017
$
$
921 $
(921)
— $
921
(842)
79
The Company leases 20 nursing centers from Golden Living. On October 1, 2016, the Company and Golden Living entered into a
Master Lease ("Golden Living Lease") agreement to lease eight centers located in Mississippi. On November 1, 2016, the Company
and Golden Living entered into an Amended and Restated Master Lease ("Amended Lease") to extend the term of its centers leased
from Golden Living and lease an additional twelve centers located in Alabama. The Amended Lease is triple net and has an initial
term of ten years with two separate five year options to extend the term. Base rent for the amended lease is $24,675 for the first year
and escalates 2% annually thereafter. Under generally accepted accounting principles, the Company is required to report these
scheduled rent increases on a straight line basis over the term of the lease including the 10 year term of the renewal period. These
scheduled increases had no effect on cash rent payments at the start of the lease term and only result in additional cash outlay as the
annual increases take effect each year.
The Golden Living Lease requires the Company to fund annual capital expenditures related to the leased centers at an amount
currently equal to five hundred and ten dollars per licensed bed. These amounts are subject to adjustment for increases in the
Consumer Price Index. The Company is in compliance with the capital expenditure requirements. Total required capital
expenditures during the remaining lease term and renewal options are $7,955. These capital expenditures are being depreciated on a
straight-line basis over the shorter of the asset life or the appropriate lease term.
Upon expiration of the Golden Living Lease or in the event of a default under the Golden Living Lease, the Company is required to
transfer all of the leasehold improvements, equipment, furniture and fixtures of the leased centers to Golden Living. The assets to be
transferred to Golden Living are being amortized on a straight-line basis over the shorter of the remaining lease term or estimated
57
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
useful life, and will be fully depreciated upon the expiration of the lease. All of the equipment, inventory and other related assets of
the center leased pursuant to the Golden Living Lease have been pledged as security under the Golden Living Lease. In addition,
the Company has a letter of credit of $6,354 as a security deposit for the Company's leases with Golden Living, as described in Note
5, "Long-term Debt, Interest Rate Swap and Capitalized Lease Obligations".
Insurance Matters
Professional Liability and Other Liability Insurance
The Company has professional liability insurance coverage for its nursing centers that, based on historical claims experience, is
likely to be substantially less than the claims that are expected to be incurred. Effective July 1, 2013, the Company established a
wholly-owned, offshore limited purpose insurance subsidiary, SHC Risk Carriers, Inc. (“SHC”), to replace some of the expiring
commercial policies. SHC covers losses up to specified limits per occurrence. All of the Company's nursing centers in Florida and
Tennessee are now covered under the captive insurance policies along with most of the nursing centers in Alabama, Kentucky, and
Texas. The insurance coverage provided for these centers under the SHC policy includes coverage limits of at least $1,000 per
medical incident with a sublimit per center of $3,000 and total annual aggregate policy limits of $5,000. All other centers within the
Company’s portfolio are covered through various commercial insurance policies which provide similar coverage limits per medical
incident, per location, and on an aggregate basis for covered centers. The deductibles for these policies are covered through the
insurance subsidiary.
The Company follows the FASB Accounting Standards Update, “Presentation of Insurance Claims and Related Insurance
Recoveries,” that clarifies that a health care entity should not net insurance recoveries against a related professional liability claim
and that the amount of the claim liability should be determined without consideration of insurance recoveries. Accordingly, the
estimated insurance recovery receivables are included within "Other Current Assets" on the Consolidated Balance Sheet. As of
December 31, 2018 and 2017, there are $5,478 and $1,579, respectively, estimated insurance recovery receivables.
Reserve for Estimated Self-Insured Professional Liability Claims
Because the Company’s actual liability for existing and anticipated professional liability and general liability claims will exceed the
Company’s limited insurance coverage, the Company has recorded total liabilities for reported and incurred but not reported claims
of $27,201 and $20,057 as of December 31, 2018 and 2017, respectively. This accrual includes estimates of liability for incurred but
not reported claims, estimates of liability for reported but unresolved claims, actual liabilities related to settlements, including
settlements to be paid over time, estimates of insurance settlements over the deductible, and estimates of legal costs related to these
claims. All losses are projected on an undiscounted basis. Amounts are added to the accrual for estimates of anticipated liability for
claims incurred during each period, and amounts are deducted from the accrual for settlements paid on existing claims during each
period.
The Company evaluates the adequacy of this liability on a quarterly basis. Semi-annually, the Company retains a third-party
actuarial firm to assist in the evaluation of this reserve. Since May 2012, Merlinos & Associates, Inc. (“Merlinos”) has assisted
management in the preparation of the appropriate accrual for incurred but not reported general and professional liability claims
based on data furnished as of May 31 and November 30 of each year. Merlinos primarily utilizes historical data regarding the
frequency and cost of the Company’s past claims over a multi-year period, industry data and information regarding the number of
occupied beds to develop its estimates of the Company’s ultimate professional liability cost for current periods.
On a quarterly basis, the Company obtains reports of asserted claims and lawsuits incurred. These reports, which are provided by the
Company’s insurers and a third party claims administrator, contain information relevant to the actual expense already incurred with
each claim as well as the third-party administrator’s estimate of the anticipated total cost of the claim. This information is reviewed
by the Company quarterly and provided to the actuary semi-annually. Based on the Company’s evaluation of the actual claim
information obtained, the semi-annual estimates received from the third-party actuary, the amounts paid and committed for
settlements of claims and on estimates regarding the number and cost of additional claims anticipated in the future, the reserve
estimate for a particular period may be revised upward or downward on a quarterly basis. Any increase in the accrual decreases
results of operations in the period and any reduction in the accrual increases results of operations during the period.
The Company’s cash expenditures for self-insured professional liability costs from continuing operations were $6,540, $6,593, and
$4,456 for the years ended December 31, 2018, 2017 and 2016, respectively.
Although the Company adjusts its accrual for professional and general liability claims on a quarterly basis and retains a third-party
actuarial firm semi-annually to assist management in estimating the appropriate accrual, professional and general liability claims are
inherently uncertain, and the liability associated with anticipated claims is very difficult to estimate. Professional liability cases have
a long cycle from the date of an incident to the date a case is resolved, and final determination of the Company’s actual liability for
58
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
claims incurred in any given period is a process that takes years. As a result, the Company’s actual liabilities may vary significantly
from the accrual, and the amount of the accrual has and may continue to fluctuate by a material amount in any given period. Each
change in the amount of this accrual will directly affect the Company’s reported earnings and financial position for the period in
which the change in accrual is made.
Other Insurance
With respect to workers' compensation insurance, substantially all of our employees are covered under either a prefunded deductible
policy or state-sponsored program. The Company has been and remains a non-subscriber to the Texas workers’ compensation system
and is, therefore, completely self-insured for employee injuries with respect to its Texas operations. From June 30, 2003 until
June 30, 2007, the Company’s workers’ compensation insurance programs provided coverage for claims incurred with premium
adjustments depending on incurred losses. For the period from July 1, 2007 until June 30, 2008, the Company was completely
insured for workers' compensation exposure. For the period from July 1, 2008 through December 31, 2017, the Company is covered
by a prefunded deductible policy. Under this policy, the Company is self-insured for the first $500 per claim, subject to an aggregate
maximum of $3,000. The Company funds a loss fund account with the insurer to pay for claims below the deductible. The Company
accounts for premium expense under this policy based on its estimate of the level of claims subject to the policy deductibles
expected to be incurred. The liability for workers’ compensation claims is $618 and $867 at December 31, 2018 and 2017,
respectively. The Company has a non-current receivable for workers’ compensation policies covering previous years of $1,258 and
$1,113 as of December 31, 2018 and 2017, respectively. The non-current receivable is a function of payments paid to the Company’s
insurance carrier in excess of the estimated level of claims expected to be incurred.
As of December 31, 2018, the Company is self-insured for health insurance benefits for certain employees and dependents for
amounts up to $200 per individual annually. The Company provides reserves for the settlement of outstanding self-insured health
claims at amounts believed to be adequate. The liability for reported claims and estimates for incurred but unreported claims is
$1,396 and $1,326 at December 31, 2018 and 2017, respectively. The differences between actual settlements and reserves are
included in expense in the period finalized.
Employment Agreements
The Company has employment agreements with certain members of management that provide for the payment to these members of
amounts up to 2.0 times their annual salary in the event of a termination without cause, a constructive discharge (as defined in each
employee agreement), or upon a change in control of the Company (as defined in each employee agreement). The maximum
contingent liability under these agreements is $1,692 as of December 31, 2018. The terms of such agreements are from 1 to 3 years
and automatically renew for 1 year if not terminated by the employee or the Company.
No amounts have been accrued for these contingent liabilities for members of management the Company currently employs.
Health Care Industry and Legal Proceedings
The provision of health care services entails an inherent risk of liability. Participants in the health care industry are subject to
lawsuits alleging malpractice, violations of false claims acts, product liability, or related legal theories, many of which involve large
claims and significant defense costs. Like many other companies engaged in the long-term care profession in the United States, we
have numerous pending liability claims, disputes and legal actions for professional liability and other related issues. It is expected
that we will continue to be subject to such suits as a result of the nature of our business. Further, as with all health care providers, we
are periodically subject to regulatory actions seeking fines and penalties for alleged violations of health care laws and are potentially
subject to the increased scrutiny of regulators for issues related to compliance with health care fraud and abuse laws and with respect
to the quality of care provided to residents of our center. Like other health care providers, in the ordinary course of our business, we
are also subject to claims made by employees and other disputes and litigation arising from the conduct of our business.
As of December 31, 2018, we are engaged in 78 professional liability lawsuits, which are reserved for as discussed above. Eighteen
lawsuits are currently scheduled for trial or arbitration during the next twelve months, and it is expected that additional cases will be
set for trial or hearing. The ultimate results of any of our professional liability claims and disputes cannot be predicted. We have
limited, and sometimes no, professional liability insurance with regard to most of these claims. A significant judgment entered
against us in one or more of these legal actions could have a material adverse impact on our financial position and cash flows.
In July 2013, the Company learned that the United States Attorney for the Middle District of Tennessee ("DOJ") had commenced a
civil investigation of potential violations of the False Claims Act ("FCA").
In October 2014, the Company learned that the investigation was started by the filing under seal of a false claims action against the
two centers that were the subject of the original civil investigative demand ("CID"). In connection with this matter, between July
59
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
2013 and early February 2016, the Company has received three civil investigative demands (a form of subpoena) for documents.
The Company has responded to those demands and also provided voluntarily additional information requested by the DOJ. The DOJ
has also taken testimony from current and former employees of the Company. In May 2018, the Company learned that a second
FCA complaint had been filed in late 2016 relating to the Company’s practices and policies for rehabilitation therapy at some of its
facilities. The government’s investigation relates to the Company’s practices and policies for rehabilitation and other services at all
of its facilities, for preadmission evaluation forms ("PAEs") required by TennCare and for Pre-Admission Screening and Resident
Reviews ("PASRRs") required by the Medicare program.
The Company is engaged in preliminary discussions with the DOJ regarding settlement of this investigation. The Company denies
any wrong doing and is prepared to vigorously defend its actions. However, based upon preliminary settlement discussions, the
Company believes that it is probable a loss will result from this contingency and has accrued $6,400 as a contingent liability in
connection with this matter during the year ended December 31, 2018. The Company cannot predict whether a settlement can be
achieved, the outcome of the litigation if there is no settlement or the length of time necessary to conclude this matter. Accordingly,
the contingent liability has been classified as a noncurrent liability in the accompanying interim consolidated balance sheets. The
Company’s ultimate ability to settle this investigation will depend on several factors, including whether the amount and terms of an
acceptable settlement can be reached with the DOJ, the Company’s assessment of the risks of litigating this case and the effect of
protracted litigation or settlement terms on the Company’s business plans. Because the outcome of this investigation and related
settlement discussions remain uncertain, there is a reasonable possibility that the amount ultimately incurred in connection with the
resolution of this matter could differ materially from the current accrual, as the Company cannot, at this time, estimate the possible
range of loss that may result from either a settlement or litigation of this matter. The ultimate outcome of this litigation could have a
materially adverse effect on the Company, including the imposition of treble damages, criminal charges, fines, penalties and/or a
corporate integrity agreement.
In June 2016, the Company received an authorized investigative demand (a form of subpoena) for documents in connection with a
criminal investigation by the DOJ related to the practices of some of its employees with respect to PAEs and PASRRs, and the
Company provided documents responsive to this subpoena and coordinated examinations of certain employees of the Company.
The Company understands that this criminal investigation has been closed, subject to re-opening at the discretion of the government.
In January 2009, a purported class action complaint was filed in the Circuit Court of Garland County, Arkansas against the Company
and certain of its subsidiaries and Garland Nursing & Rehabilitation Center (the “Center”). The complaint alleges that the
defendants breached their statutory and contractual obligations to the patients of the Center over the five-year period prior to the
filing of the complaints. The lawsuit remains in its early stages and has not yet been certified by the court as a class action. The
Company intends to defend the lawsuit vigorously.
We cannot currently predict with certainty the ultimate impact of any of the above cases on our financial condition, cash flows or
results of operations. Our reserve for professional liability expenses does not include any amounts for the pending DOJ investigation
or the purported class action against the Arkansas centers. An unfavorable outcome in any of these lawsuits or any of our
professional liability actions, any regulatory action, any investigation or lawsuit alleging violations of fraud and abuse laws or of
elderly abuse laws or any state or Federal False Claims Act case could subject us to fines, penalties and damages, including
exclusion from the Medicare or Medicaid programs, and could have a material adverse impact on our financial condition, cash flows
or results of operations.
60
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
10. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Selected quarterly financial information for each of the quarters in the years ended December 31, 2018 and 2017 is as follows:
2018
First
Second
Third
Fourth
Quarter
Patient revenues, net
$
141,285 $
141,082 $
141,431
$
139,664
Professional liability expense (1)
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss)
Basic net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss) per common share
Diluted net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss) per common share
2,775
(81)
(22)
3,182
(307)
(4)
2,933
(7,389)
(8)
(103) $
(311) $
(7,397) $
(0.01) $
—
(0.01) $
(0.01) $
—
(0.01) $
(0.05) $
—
(0.05) $
(0.05) $
—
(0.05) $
(1.15) $
—
(1.15) $
(1.15) $
—
(1.15) $
2,906
423
(8)
415
0.07
—
0.07
0.07
—
0.07
$
$
$
$
$
(1)
The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed
further in Note 9, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of
2018 is set forth in the table above.
61
DIVERSICARE HEALTHCARE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2018, 2017, and 2016
2017
First
Second
Third
Fourth
Quarter
Patient revenues, net
$
141,500 $
142,550 $
Professional liability expense (1)
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Basic net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss) per common share
Diluted net income (loss) per common share:
Income (loss) from continuing operations
Loss from discontinued operations
Net income (loss) per common share
$
$
$
$
$
2,670
1,348
(15)
1,333 $
2,724
381
(28)
353 $
146,377 $
2,617
(581)
1
(580) $
144,367
2,753
(5,947)
14
(5,933)
0.22 $
—
0.22 $
0.21 $
—
0.21 $
0.06 $
—
0.06 $
(0.09) $
—
(0.09) $
0.06 $
—
0.06 $
(0.09) $
—
(0.09) $
(0.94)
—
(0.94)
(0.94)
—
(0.94)
(1)
The Company's quarterly results are significantly affected by the amounts recorded for professional liability expense, as discussed
further in Note 9, "Commitments and Contingencies". The amount of expense recorded for professional liability in each quarter of
2017 is set forth in the table above.
62
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Corporate Data
Corporate Offices
Diversicare Healthcare Services, Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
615.771.7575
615.771.7409 (fax)
Registrar and Transfer Agent
Computershare Trust Company, N.A.
250 Royall Street
Canton, MA 02021
800.962.4284
Inquiries regarding stock transfers, lost certificates,
or address changes should be directed to the Stock
Transfer Department at the above address.
Independent Registered Public Accounting Firm
BDO USA, LLP
Nashville, Tennessee
Stockholder Inquiries and Availability
of 10-K Report
The Company has filed its Annual Report on Form
10-K with the Securities and Exchange Commission
(“SEC”) for the year ended December 31, 2018.
A copy of the report is available to stockholders
free of charge from the following:
Corporate Secretary
Diversicare Healthcare Services, Inc.
1621 Galleria Boulevard
Brentwood, Tennessee 37027
Additionally, a copy is retrievable free of charge
through the EDGAR system maintained by the
SEC. The Company’s SEC filings can be accessed
through the Company’s website.
Website: http://www.dvcr.com
Executive Officers and Directors
Executive Officers
James R. McKnight, Jr.
Chief Executive Officer, President and Director
Leslie D. Campbell
Chief Operating Officer and
Executive Vice President
Kerry D. Massey
Chief Financial Officer and
Executive Vice President
Directors
Chad A. McCurdy
Chairman of the Board
Managing Partner of Marlin Capital Partners, LLC
James R. McKnight, Jr.
Chief Executive Officer, President and Director
Diversicare Healthcare Services, Inc.
Richard M. Brame
Chairman, Risk Management Committee
Private Investor
Robert Z. Hensley
Chairman, Audit Committee
Private Investor
Ben R. Leedle, Jr.
Chairman, Compensation Committee
Chief Executive Officer of Blue Zones, LLC
Robert A. McCabe, Jr.
Chairman, Governance and Nominating Committee
Chairman of the Board of Pinnacle Financial Partners
Leslie K. Morgan
Private Investor
1621 Galleria Blvd.
Brentwood, TN 37027
615.771.7575