10-Q 1 g69141e10-q.txt ADVOCAT INC. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q CHECK ONE: [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSACTION PERIOD FROM _________ TO _________. COMMISSION FILE NO.: 1-12996 ADVOCAT INC. ---------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 62-1559667 ------------------------------- --------------------------------- (STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) 277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067 ------------------------------------------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (615) 771-7575 -------------- (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) NONE -------------------- (FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT.) INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO 5,491,621 ---------------- (OUTSTANDING SHARES OF THE ISSUER'S COMMON STOCK AS OF MAY 9, 2001) 1 2 PART I. FINANCIAL INFORMATION ITEM 1 - FINANCIAL STATEMENTS ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED)
MARCH 31, DECEMBER 31, 2001 2001 ---- ---- CURRENT ASSETS: Cash and cash equivalents $ 1,492 $ 4,496 Receivables, less allowance for doubtful accounts of $5,037 and $5,035, respectively 15,021 15,111 Inventories 547 633 Prepaid expenses and other assets 1,748 2,100 ----- ----- Total current assets 18,808 22,340 ------ ------ PROPERTY AND EQUIPMENT, at cost 89,665 89,567 Less accumulated depreciation and amortization (25,693) (24,418) ------ ------ Net property and equipment 63,972 65,149 ------ ------ OTHER ASSETS: Deferred financing and other costs, net 593 572 Deferred lease costs, net 2,031 2,085 Assets held for sale or redevelopment 1,476 1,476 Investments in and receivables from joint ventures 8,724 8,333 Other 1,888 1,801 ----- ----- Total other assets 14,712 14,267 ------ ------ $ 97,492 $ 101,756 ======= =======
(Continued) 2 3 ADVOCAT INC. INTERIM CONSOLIDATED BALANCE SHEETS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- CURRENT LIABILITIES: Current portion of long-term debt $ 57,234 $ 61,229 Trade accounts payable 8,047 6,875 Accrued expenses: Payroll and employee benefits 4,714 5,241 Interest 229 232 Self-insurance reserves 4,674 4,445 Other 4,879 4,387 --------- --------- Total current liabilities 79,777 82,409 --------- --------- NONCURRENT LIABILITIES: Long-term debt, less current portion 4,846 5,016 Self-insurance reserves, less current portion 3,975 3,586 Other 5,236 5,245 --------- --------- Total noncurrent liabilities 14,057 13,847 --------- --------- COMMITMENTS AND CONTINGENCIES SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK authorized 600,000 shares, $.10 par value, 393,658 shares issued and outstanding at March 31, 2001 and December 31, 2000, respectively, at redemption value 3,416 3,358 --------- --------- SHAREHOLDERS' EQUITY: Preferred stock, authorized 1,000,000 shares, $.10 par value, none issued and outstanding -- -- Common stock, authorized 20,000,000 shares, $.01 par value, 5,492,000 issued and outstanding at March 31, 2001 and December 31, 2000, respectively 55 55 Paid-in capital 15,907 15,907 Accumulated deficit (15,720) (13,820) --------- --------- Total shareholders' equity 242 2,142 --------- --------- $ 97,492 $ 101,756 ========= =========
The accompanying notes are an integral part of these interim consolidated balance sheets. 3 4 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS, AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, 2001 2000 ---- ---- REVENUES: Patient revenues $ 38,312 $35,972 Resident revenues 10,420 10,425 Management fees 911 901 Interest 46 40 -------- ------- Net revenues 49,689 47,338 -------- ------- EXPENSES: Operating 39,735 36,425 Lease 5,175 5,276 General and administrative 3,235 2,817 Interest 1,516 1,454 Depreciation and amortization 1,411 1,234 -------- ------- Total expenses 51,072 47,206 -------- ------- INCOME (LOSS) BEFORE INCOME TAXES (1,383) 132 PROVISION FOR INCOME TAXES 90 47 -------- ------- NET INCOME (LOSS) $ (1,473) $ 85 ======== ======= BASIC AND DILUTED EARNINGS (LOSS) PER SHARE: Basic $ (.27) $ .02 ======== ======= Diluted $ (.27) $ .02 ======== ======= WEIGHTED AVERAGE SHARES: Basic 5,492 5,492 ======== ======= Diluted 5,492 5,492 ======== =======
The accompanying notes are an integral part of these interim consolidated financial statements. 4 5 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ---- ---- NET INCOME (LOSS) $(1,473) $ 85 OTHER COMPREHENSIVE INCOME (LOSS): Foreign currency translation adjustments (676) 19 Income tax benefit (expense) 249 (7) ------- ---- (427) 12 ------- ---- COMPREHENSIVE INCOME (LOSS) $(1,900) $ 97 ======= ====
The accompanying notes are an integral part of these interim consolidated financial statements. 5 6 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(1,473) $ 85 Items not involving cash: Depreciation and amortization 1,411 1,234 Provision for doubtful accounts 760 819 Provision for self-insured professional liability 2,330 1,437 Equity earnings in joint ventures (33) (59) Amortization of deferred balances 258 (150) Amortization of discount on non-interest bearing promissory note 67 -0- Series B redeemable convertible preferred stock dividends 58 -0- Provision for leases in excess of cash payments 406 -0- Changes in other assets and liabilities: Receivables (933) (1,036) Inventories 86 (99) Prepaid expenses and other assets 354 (1,026) Trade accounts payable and accrued expenses (911) (240) ------- ------- Net cash provided by operating activities 2,380 965 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment, net (727) (368) Investment in TDLP (609) -0- Mortgages receivable, net 155 273 Deposits and other deferred balances -0- (207) Investment in and advances (to) from joint ventures, net 269 (322) TDLP partnership distributions 136 53 ------- ------- Net cash used in investing activities (776) (571) ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from (repayment of) bank line of credit (2,804) 750 Repayment of debt obligations (1,180) (384) Advances from (to) TDLP, net (515) 182 Increase in lease obligations -0- 23 Financing costs (109) -0- ------- ------- Net cash provided by (used in) financing activities (4,608) 571 ------- -------
(Continued) 6 7 ADVOCAT INC. INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS AND UNAUDITED) (CONTINUED)
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ---- ---- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(3,004) $ 965 CASH AND CASH EQUIVALENTS, beginning of period 4,496 1,913 ------- ------ CASH AND CASH EQUIVALENTS, end of period $ 1,492 $2,878 ======= ====== SUPPLEMENTAL INFORMATION: Cash payments of interest $ 1,388 $1,519 ======= ====== Cash payments (refunds) of income taxes, net $ 0 $ 18 ======= ======
The accompanying notes are an integral part of these interim consolidated financial statements. 7 8 ADVOCAT INC. NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2001 AND 2000 1. BUSINESS Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. As of March 31, 2001, the Company operates 120 facilities consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,245 units. The Company owns 7 nursing homes, leases 36 others, and manages 21 nursing homes. The Company owns 16 assisted living facilities, leases 25 others, and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. The Company operates facilities in Alabama, Arkansas, Florida, Georgia, Kentucky, North Carolina, Ohio, South Carolina, Tennessee, Texas, Virginia, West Virginia and the Canadian provinces of Alberta, British Columbia, Nova Scotia and Ontario. In recent periods, the long-term health care environment has undergone substantial change with regards to reimbursement and other payor sources, compliance regulations, competition among other health care providers and relevant patient liability issues. The Company continually monitors these industry developments as well as other factors that affect its business. See Item 2 for further discussion of recent changes in the long-term health care industry and the related impact on the operations of the Company. 2. BASIS OF FINANCIAL STATEMENTS The interim consolidated financial statements for the three month periods ended March 31, 2001 and 2000, included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management of the Company, the accompanying interim consolidated financial statements reflect all adjustments necessary to present fairly the financial position at March 31, 2001 and the results of operations and the cash flows for the three month periods ended March 31, 2001 and 2000. 8 9 The results of operations for the three month periods ended March 31, 2001 and 2000 are not necessarily indicative of the operating results for the entire respective years. These interim financial statements should be read in connection with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000. The accompanying consolidated financial statements have been prepared assuming that Advocat will continue as a going concern. The Company has incurred operating losses in the three months ended March 31, 2001 and the years ended December 31, 2000, 1999 and 1998 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2001. The Company has a net working capital deficit of $61.0 million as of March 31, 2001. Effective March 9, 2001, the Company has also obtained professional liability insurance coverage that, based on historical claims experience, could be substantially less than the claims to be incurred during 2001. The ultimate payments on professional liability claims accrued as of March 31, 2001 and claims that could be incurred during 2001 could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. The Company is also not in compliance with certain debt covenants that allow the holders of substantially all of the Company's debt to demand immediate repayment. Although the Company does not anticipate that such demand will be made, the continued forbearance on the part of the Company's lenders cannot be assured at this time. Accordingly, the Company has classified the related debt principal amounts as current liabilities in the accompanying consolidated financial statements as of March 31, 2001 and December 31, 2000. Given that events of default exist under the Company's working capital line of credit, there can be no assurance that the lender will continue to provide working capital advances. An event of default under the Company's debt agreements could lead to actions by the lenders that could result in an event of default under the Company's lease agreements covering a majority of its United States nursing facilities. Should such a default occur in the related lease agreements, the lessor would have the right to terminate the lease agreements. At a minimum, the Company's cash requirements during 2001 include funding operations (including potential payments related to professional liability claims), capital expenditures, scheduled debt service, and working capital requirements. No assurance can be given that the Company will have sufficient cash to meet its requirements during 2001. The Company is currently discussing potential waiver, amendment and refinancing alternatives with its lenders. If the Company's lenders force immediate repayment, the Company would not be able to repay the related debt outstanding. The Company's management has implemented a plan to enhance revenues related to the operations of the Company's nursing homes and assisted living facilities. Management believes that revenues in future periods will increase as a result of increased occupancy rates resulting from an increased emphasis on attracting and retaining patients and residents. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology has the effect of increasing the daily reimbursement in Arkansas by approximately 24.7%, resulting in additional revenue to the Company of approximately $755,000 in the first quarter. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses $114,000 for the quality assurance fee in the first quarter. 9 10 Management has implemented a plan to attempt to minimize future expense increases through the elimination of excess operating costs. Management will also attempt to minimize professional liability claims in future periods by vigorously defending itself against all such claims and through the additional supervision and training of staff employees. The Company is unable to predict if it will be successful in reducing operating losses, in negotiating waivers, amendments, or refinancings of outstanding debt, or if the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flow from its operations or successfully negotiate debt or lease amendments, it will explore a variety of other options, including but not limited to other sources of equity or debt financings, asset dispositions, or relief under the United States Bankruptcy code. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset carrying amounts or the amounts and classification of liabilities that might result should the Company be unable to continue as a going concern. 3. INSURANCE MATTERS The entire United States long-term care industry has seen a dramatic increase in personal injury/wrongful death claims based on alleged negligence by nursing homes and their employees in providing care to patients and residents. As a result, the Company has numerous liability claims and disputes outstanding for professional liability and other related issues. Professional liability insurance up to certain limits is carried by the Company and its subsidiaries for coverage of such claims. However, due to the increasing number of claims against the Company and throughout the long-term care industry, the Company's professional liability insurance premiums and deductible amounts have increased substantially during 1999, 2000 and 2001. As a result of the substantial premium increases for the 2001 policy year, effective March 9, 2001, the Company has obtained professional liability insurance coverage for its United States nursing homes that, based on historical claims experience, could be substantially less than the claims to be incurred. For claims made after March 9, 2001, the Company maintains general and professional liability insurance with coverage limits of $2,000,000 per medical incident and total aggregate policy coverage limits of $3,000,000 for its long-term care services. The 2001 policy is on a claims made basis and the Company is self-insured for the first $50,000 per occurrence. For claims made during the period March 9, 2000 through March 9, 2001, the Company is self-insured for the first $500,000 per occurrence with no aggregate limit for the Company's United States nursing homes. The policy has coverage limits of $1,000,000 per occurrence, $3,000,000 per location and $12,000,000 in the aggregate. The Company also maintains umbrella coverage of $15,000,000 in the aggregate for claims made during the period March 9, 2000 through March 9, 2001. The Company provides reserves on an actuarial basis for known and expected claims incurred during the policy period. For all policy periods beginning on or after March 9, 2000, all of the Company's professional liability policies are on a claims made basis. Prior to March 9, 2000, all of these policies are on an occurrence basis. 10 11 For the policy periods January 1, 1998 through February 1, 1999, the Company is self-insured for the first $250,000 per occurrence and $2,500,000 in the aggregate per year with respect to the majority of its United States nursing homes. Effective February 1, 1999, all United States nursing homes became part of the $250,000/$2,500,000 deductible program. The Company has recorded total liabilities for reported professional liability claims and estimates for incurred but unreported claims of $7,515,000 and $6,859,000 at March 31, 2001 and December 31, 2000, respectively. Based on its assessment of claims currently outstanding against the Company and estimates for claims incurred but not reported, management currently believes that there have been no incurred claims that are in excess of established reserves and related insurance coverage. However, the ultimate results of the Company's professional liability claims and disputes are unknown at the present time. Any future judgments or settlements above the Company's per occurrence, per location or umbrella coverage could have a material adverse impact on the Company's financial position, cash flows and results of operations. Based on historical claims experience, the Company's professional liability insurance coverage for the period beginning March 9, 2001 could be substantially less than the claims to be incurred during 2001. The ultimate payments on professional liability claims accrued as of March 31, 2001 and claims that could be incurred during 2001 could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. In addition, the ultimate payment of professional liability claims accrued as of March 31, 2001 and claims that could be incurred during 2001 could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. These potential future payments could have a material adverse impact on the Company's financial position and cash flows. 4. OTHER COMPREHENSIVE INCOME The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting Comprehensive Income. SFAS No. 130 requires the reporting of comprehensive income in addition to net income from operations. Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income. Information with respect to the accumulated other comprehensive income balance is presented below:
THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ---- ---- Foreign currency items: Beginning balance $(448,000) $(173,000) Current-period change, net of income tax (427,000) 12,000 --------- --------- Ending balance $(875,000) $(161,000) ========= =========
Positive amounts represent unrealized gains and negative amounts represent unrealized losses. 11 12 5. OPERATING SEGMENT INFORMATION The Company has three reportable segments: U.S. nursing homes, U.S. assisted living facilities, and Canadian operations, which consists of both nursing home and assisted living services. Management evaluates each of these segments independently due to the geographic, reimbursement, marketing, and regulatory differences between the segments. Management evaluates performance based on profit or loss from operations before income taxes not including nonrecurring gains and losses and foreign exchange gains and losses. The following information is derived from the Company's segments' internal financial statements and includes information related to the Company's unallocated corporate revenues and expenses:
THREE MONTHS ENDED MARCH 31, ---------------------------- (IN THOUSANDS) 2001 2000 ---- ---- Net revenues: U.S. nursing homes $ 37,658 $ 35,376 U.S. assisted living facilities 8,099 8,033 Canadian operations 3,929 3,930 Corporate 3 (1) -------- -------- Total $ 49,689 $ 47,338 ======== ======== Depreciation and amortization: U.S. nursing homes $ 874 $ 696 U.S. assisted living facilities 424 423 Canadian operations 95 98 Corporate 18 17 -------- -------- Total $ 1,411 $ 1,234 ======== ======== Operating income (loss): U.S. nursing homes $ (997) $ 227 U.S. assisted living facilities 4 104 Canadian operations 422 388 Corporate (812) (587) -------- -------- Total $ (1,383) $ 132 ======== ========
MARCH 31, DECEMBER 31, 2001 2000 ---- ---- Long-lived assets: U.S. nursing homes $ 33,586 $ 33,178 U.S. assisted living facilities 32,837 33,216 Canadian operations 11,423 12,164 Corporate 838 858 -------- --------- Total $ 78,684 $ 79,416 ======== ========= Total assets: U.S. nursing homes $ 55,206 $ 56,387 U.S. assisted living facilities 35,510 36,075 Canadian operations 15,778 17,154 Corporate 1,137 2,860 Eliminations (10,139) (10,720) -------- --------- Total $ 97,492 $ 101,756 ======== =========
12 13 6. RECLASSIFICATIONS Certain amounts in the 2000 interim financial statements have been reclassified to conform with the 2001 presentation. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW Advocat Inc. (together with its subsidiaries, "Advocat" or the "Company") provides long-term care services to nursing home patients and residents of assisted living facilities in 12 states, primarily in the Southeast, and four Canadian provinces. The Company's facilities provide a range of health care services to their patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, the Company offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. The Company completed its initial public offering in May 1994; however, its operational history can be traced to February 1980 through common senior management who were involved in different organizational structures. As of March 31, 2001, the Company operates 120 facilities, consisting of 64 nursing homes with 7,230 licensed beds and 56 assisted living facilities with 5,245 units. In comparison, at March 31, 2000, the Company operated 120 facilities composed of 65 nursing homes containing 7,307 licensed beds and 55 assisted living facilities containing 5,412 units. As of March 31, 2001, the Company owns 16 nursing homes, leases 36 others and manages the remaining 21 nursing homes. Additionally, the Company owns 16 assisted living facilities, leases 25 others and manages the remaining 15 assisted living facilities. The Company holds a minority interest in seven of these managed assisted living facilities. The Company operates 51 nursing homes and 33 assisted living facilities in the United States and 13 nursing homes and 23 assisted living facilities in Canada. Basis of Financial Statements. The Company's patient and resident revenues consist of the fees charged for the care of patients in the nursing homes and residents of the assisted living facilities owned and leased by the Company. Management fee revenues consist of the fees charged to the owners of the facilities managed by the Company. The management fee revenues are based on the respective contractual terms of the Company's management agreements, which generally provide for management fees ranging from 3.5% to 6.0% of the net revenues of the managed facilities. As a result, the level of management fees is affected positively or negatively by the increase or decrease in the average occupancy level rates of the managed facilities. The Company's operating expenses include the costs, other than lease, depreciation and amortization expenses, incurred in the operation of the nursing homes and assisted living facilities owned and leased by the Company. The Company's general and administrative expenses consist of the costs of the corporate office and regional support functions, including the costs incurred in providing management services to other owners. The Company's depreciation, amortization and interest expenses include all such expenses across the range of the Company's operations. 13 14 RESULTS OF OPERATIONS The following tables present the unaudited interim statements of operations and related data for the three months ended March 31, 2001 and 2000.
(IN THOUSANDS) THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 CHANGE % ---- ---- ------ --- REVENUES: Patient revenues $ 38,312 $35,972 $ 2,340 6.5 Resident revenues 10,420 10,425 (5) 0.0 Management fees 911 901 10 1.1 Interest 46 40 6 15.0 -------- ------- ------- ---- Net revenues 49,689 47,338 2,351 5.0 -------- ------- ------- ---- EXPENSES: Operating 39,735 36,425 3,310 9.1 Lease 5,175 5,276 (101) (1.9) General and administrative 3,235 2,817 418 14.8 Interest 1,516 1,454 62 4.3 Depreciation and amortization 1,411 1,234 177 14.3 -------- ------- ------- ---- Total expenses 51,072 47,206 3,866 8.2 -------- ------- ------- ---- INCOME (LOSS) BEFORE INCOME TAXES (1,383) 132 (1,515) PROVISION FOR INCOME TAXES 90 47 43 -------- ------- ------- NET INCOME (LOSS) $ (1,473) $ 85 $(1,558) ======== ======= =======
PERCENTAGE OF NET REVENUES THREE MONTHS ENDED MARCH 31, ---------------------------- 2001 2000 ---- ---- REVENUES: Patient revenues 77.1% 76.0% Resident revenues 21.0 22.0 Management fees 1.8 1.9 Interest 0.1 0.1 ------ ------ Net revenues 100.0% 100.0% ------ ------ OPERATING EXPENSES: Operating 80.0 76.9 Lease 10.4 11.1 General and administrative 6.5 6.0 Interest 3.1 3.1 Depreciation and amortization 2.8 2.6 ------ ------ Total expenses 102.8 99.7 ------ ------ INCOME (LOSS) BEFORE INCOME TAXES (2.8) 0.3 PROVISION FOR INCOME TAXES 0.2 0.1 ------ ------ NET INCOME (LOSS) (3.0)% 0.2% ====== ======
14 15 THREE MONTHS ENDED MARCH 31, 2001 COMPARED WITH THREE MONTHS ENDED MARCH 31, 2000 Revenues. Net revenues increased to $49.7 million in 2001 from $47.3 million in 2000, an increase of $2,351,000, or 5.0%. Patient revenues increased to $38.3 million in 2001 from $36.0 million in 2000, an increase of $2,340,000, or 6.5%. The increase in patient revenues is due to increased Medicare utilization and PPS rate increases at several facilities which became effective in April 2000 and increased Medicaid rates in Arkansas, partially offset by a 2.7% decline in occupancy in 2001 as compared to 2000. In addition, the Company closed a facility in August 2000. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology has the effect of increasing the daily reimbursement in Arkansas by approximately 24.7%, resulting in additional revenue to the Company of approximately $755,000 in the first quarter. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses $114,000 for the quality assurance fee in the first quarter. As a percent of patient revenues, Medicare increased to 21.5% in 2001 from 20.4% in 2000 while Medicaid and similar programs decreased to 65.1% from 66.8% in 2000. Resident revenues total $10.4 million in both 2001 and 2000. The Company experienced increased revenue rates, offset by a 5.7% decline in resident days. Ancillary service revenues, prior to contractual allowances, decreased to $5.4 million in 2001 from $5.8 million in 2000, a decrease of $460,000 or 7.9%. The decrease is primarily attributable to reductions in revenue availability under Medicare and is consistent with the Company's expectations. Although the $1,500 per patient annual ceiling has now been lifted for a two year period on physical, speech and occupational therapy services, the impact of the relief is not expected to be sufficient to offset the substantial losses that have been incurred by the Company and the long-term care industry from the provision of therapy services. The ultimate effect on the Company's operations cannot be predicted at this time because the extent and composition of the ancillary cost limitations are subject to change. Operating Expense. Operating expense increased to $39.7 million in 2001 from $36.4 million in 2000, an increase of $3.3 million, or 9.1%. As a percent of patient and resident revenues, operating expense increased to 81.5% in 2001 from 78.5% in 2000. The increase as a percent of patient and resident revenues is primarily attributable to cost increases related to wages, professional liability and utilities. The largest component of operating expenses is wages, which increased to $21.1 million in 2001 from $19.9 million in 2000, an increase of $1.2 million, or 6.1%. The increase in wages is due to tighter labor markets in most of the areas in which the Company operates. The Company's professional liability costs for United States nursing homes, including insurance premiums and reserves for self-insured claims, increased to $2,494,000 in 2001 from $1,431,000 in 2000, an increase of $1,063,000 or 74.3%. Lease Expense. Lease expense decreased to $5.2 million in 2001 from $5.3 million in 2000, a decrease of $101,000, or 1.9%. Effective October 1, 2000, the Company entered into an amended lease agreement with the primary lessor of the Company's United States nursing homes, which resulted in reduced lease costs. Partially offsetting this decrease, the majority of the Company's lease agreements include annual adjustments generally tied to inflation. 15 16 General and Administrative Expense. General and administrative expense increased to $3.2 million in 2001 from $2.8 million in 2000, an increase of $418,000, or 14.8%. As a percent of total net revenues, general and administrative expense increased to 6.5% in 2001 from 6.0% in 2000. This increase is attributable to various corporate expenses, including employee recruitment and relocation, legal and accounting costs. Interest Expense. Interest expense increased to $1.5 million in 2001 from $1.4 million in 2000, an increase of $62,000, or 4.3%. The Company's average outstanding debt balance increased in 2001 as compared to 2000. Depreciation and Amortization. Depreciation and amortization expenses increased to $1.4 million in 2001 from $1.2 million in 2000, an increase of $177,000, or 14.3%. This increase includes depreciation on future capital expenditures required as a result of certain provisions of the lease covering the majority of the Company's United States nursing homes. Income Before Income Taxes; Net Income (Loss); Earnings (Loss) Per Share. As a result of the above, the income before income taxes and the cumulative effect of the change in accounting principle was a loss of $1.4 million in 2001 as compared to income of $132,000 in 2000, a decrease of $1.5 million. The income tax provision in 2000 relates to provincial taxes in Canada. The effective combined federal, state and provincial income tax rate was 36.0% in 2000. Net income was a loss of $1.5 million in 2001 as compared to income of $85,000 in 2000, a decrease of $1.6 million. The basic and diluted earnings (loss) per share were $(.27) each in 2001 as compared to $.02 each in 2000. LIQUIDITY AND CAPITAL RESOURCES At March 31, 2001, the Company had negative working capital of $61.0 million and a current ratio of 0.24, compared with negative working capital of $60.1 million and a current ratio of 0.27 at December 31, 2000. The Company has incurred losses during 2001, 2000, and 1999 and has limited resources available to meet its operating, capital expenditure and debt service requirements during 2001. Certain of the Company's debt agreements contain various financial covenants, the most restrictive of which relate to current ratio requirements, tangible net worth, cash flow, net income (loss), and limits on the payment of dividends to shareholders. As of December 31, 2000 and March 31, 2001, the Company was not in compliance with certain of these financial covenants. The Company has not obtained waivers of the non-compliance. Cross-default or material adverse change provisions contained in the debt agreements allow the holders of substantially all of the Company's debt to demand immediate repayment. The Company would not be able to repay this indebtedness if the applicable lenders demanded repayment. Although the Company does not anticipate that such demand will be made, the continued forbearance on the part of the Company's lenders cannot be assured at this time. Given that events of default exist under the Company's working capital line of credit, there can be no assurance that the lender will continue to provide working capital advances. 16 17 Based on regularly scheduled debt service requirements, the Company has a total of $5.1 million of debt that must be repaid or refinanced during 2001 and an additional $6.7 million that must be repaid or refinanced in January 2002. As a result of the covenant non-compliance and other cross-default provisions, the Company has classified a total of $57.2 million of debt as current liabilities as of March 31, 2001. An event of default under the Company's debt agreements could lead to actions by the lenders that could result in an event of default under the Company's lease agreements covering a majority of its United States nursing facilities. Should such a default occur in the related lease agreements, the lessor would have the right to terminate the lease agreements. The Company is currently discussing potential waiver, amendment and refinancing alternatives with its lenders. Of the total $5.1 million of scheduled debt maturities during 2001, the Company plans to repay $2.1 million from cash generated from operations and intends to refinance the remaining $3 million. The Company's management has implemented a plan to enhance revenues related to the operations of the Company's nursing homes and assisted living facilities. Management believes that revenues in future periods will increase as a result of increased occupancy rates resulting from an increased emphasis on attracting and retaining patients and residents. On May 9, 2001, the Company received confirmation that the Arkansas Department of Human Services was implementing a new reimbursement methodology, with an effective date of January 12, 2001. This new methodology has the effect of increasing the daily reimbursement in Arkansas by approximately 24.7%, resulting in additional revenue to the Company of approximately $755,000 in the first quarter. The Arkansas Department of Human Services is partially funding this revenue increase by assessing a quality assurance fee to all the Arkansas facilities, with an effective date of March 9, 2001. As a result, the Company recorded as additional operating expenses $114,000 for the quality assurance fee in the first quarter. Management has implemented a plan to attempt to minimize future expense increases through the elimination of excess operating costs. The Company is unable to predict if it will be successful in reducing operating losses, in negotiating waivers, amendments, or refinancings of outstanding debt, or if the Company will be able to meet any amended financial covenants in the future. Any demands for repayment by lenders or the inability to obtain waivers or refinance the related debt would have a material adverse impact on the financial position, results of operations and cash flows of the Company. As of March 31, 2001, the Company had drawn $762,000 under its working capital line of credit. The total maximum outstanding balance of the working capital line of credit, including letters of credit outstanding, is $4,500,000. Of the total $4,500,000 of maximum availability, $1,000,000 is limited to certain maximum time period restrictions. There are certain additional restrictions based on certain borrowing base restrictions. As of March 31, 2001, the Company had $587,000 of letters of credit outstanding with the same bank lender, which further reduce the maximum available amount outstanding under the working capital line of credit. As of March 31, 2001, the Company had total additional borrowing availability of $3,158,000 under its working capital line of credit. In conjunction with the Company's execution of the Settlement and Restructuring Agreement with Omega Healthcare Investors, Inc., the Company amended the terms of the working capital line of credit, extending the maturity through January 2004 and modifying the interest rate from LIBOR plus 2.50% to the bank's prime rate plus .50% (up to a maximum of 9.50%) effective October 1, 2000. 17 18 Effective March 9, 2001, the Company has obtained professional liability insurance coverage that, based on historical claims experience, could be substantially less than the claims that could be incurred during 2001. The ultimate payments on professional liability claims accrued as of December 31, 2000 and claims that could be incurred during 2001 could require cash resources during 2001 that would be in excess of the Company's available cash or other resources. Any future operating losses, demands for repayment by lenders, failure to refinance debt maturing during 2001 or payments of professional liability claims judgments in excess of insurance coverage would have a material adverse impact on the financial position, results of operations and cash flows of the Company. If the Company is unable to generate sufficient cash flows from its operations, unable to refinance or repay debt maturities during 2001, or unable to minimize the amount of future professional liability claims payments, it will explore a variety of other options, including but not limited to other sources of equity or debt financing, asset dispositions, or relief under the United States Bankruptcy code. Net cash provided by operating activities totaled $2.4 million and $1.0 million for the three month periods ended March 31, 2001 and 2000, respectively. These amounts primarily represent the cash flows from net operations plus changes in non-cash components of operations and by working capital changes. Net cash used in investing activities totaled $776,000 and $571,000 for the three months periods ended March 31, 2001 and 2000, respectively. These amounts primarily represent purchases of property plant and equipment, investments in and advances to joint ventures and additional investments in TDLP, a limited partnership for which the Company serves as the general partner. The Company has used between $2.7 million and $5.2 million for capital expenditures in the three calendar years ending December 31, 2000. Substantially all such expenditures were for facility improvements and equipment, which were financed principally through working capital. For the year ended December 31, 2001, the Company anticipates that capital expenditures for improvements and equipment for its existing facility operations will be approximately $4.2 million, including $1.0 million for non-routine projects. Net cash provided by (used in) financing activities totaled $(4,608,000) and $571,000 for the three month periods ended March 31, 2001 and 2000, respectively. The net cash provided from (used in) financing activities primarily represents net proceeds from issuance and repayment of debt. RECEIVABLES The Company's operations could be adversely affected if it experiences significant delays in reimbursement of its labor and other costs from Medicare, Medicaid and other third-party revenue sources. The Company's future liquidity will continue to be dependent upon the relative amounts of current assets (principally cash, accounts receivable and inventories) and current liabilities (principally accounts payable and accrued expenses). In that regard, accounts receivable can have a significant impact on the Company's liquidity. Continued efforts by governmental and third-party payors to contain or reduce the acceleration of costs by monitoring reimbursement rates, by increasing medical review of bills for services, or by 18 19 negotiating reduced contract rates, as well as any delay by the Company in the processing of its invoices, could adversely affect the Company's liquidity and results of operations. Net accounts receivable attributable to the provision of patient and resident services at March 31, 2001 and December 31, 2000, totaled $19.2 million and $18.1 million, respectively, representing approximately 35 and 34 days in accounts receivable, respectively. Included in receivables as of March 31, 2001 is $755,000 related to the increase in Arkansas reimbursement. This amount is expected to be collected in the second quarter of 2001. Accounts receivable from the provision of management services were $856,000 and $721,000 at March 31, 2001 and December 31, 2000, respectively representing approximately 85 and 67 days in accounts receivable, respectively. The allowance for bad debt was $5.0 million at both March 31, 2001 and December 31, 2000. The Company continually evaluates the adequacy of its bad debt reserves based on patient mix trends, agings of older balances, payment terms and delays with regard to third-party payors, collateral and deposit resources, as well as other factors. The Company continues to evaluate and implement additional procedures to strengthen its collection efforts and reduce the incidence of uncollectible accounts. HEALTH CARE INDUSTRY The health care industry is subject to numerous laws and regulations of federal, state and local governments. These laws and regulations include, but are not necessarily limited to, matters such as licensure, accreditation, government health care program participation requirements, reimbursement for patient services, quality of resident care and Medicare and Medicaid fraud and abuse. Changes in these laws and regulations, such as reimbursement policies of Medicare and Medicaid programs as a result of budget cuts by federal and state governments or other legislative and regulatory actions, could have a material adverse effect on the Company's financial position, results of operations, and cash flows. Future federal budget legislation and federal and state regulatory changes may negatively impact the Company. All of the Company's facilities are required to obtain annual licensure renewal and are subject to annual surveys and inspections in order to be certified for participation in the Medicare and Medicaid programs. In order to maintain their operator's license and their certification for participation in Medicare and Medicaid programs, the nursing facilities must meet certain statutory and administrative requirements. These requirements relate to the condition of the facilities, the adequacy and condition of the equipment used therein, the quality and adequacy of personnel, and the quality of resident care. Such requirements are subjective and subject to change. There can be no assurance that, in the future, the Company will be able to maintain such licenses for its facilities or that the Company will not be required to expend significant sums in order to do so. Recently, government activity has increased with respect to investigations and allegations concerning possible violations by health care providers of fraud and abuse statutes and regulations. Violations of these laws and regulations could result in exclusion from government health care programs together with the imposition of significant fines and penalties, as well as significant repayments for patient services previously billed. Management believes 19 20 that the Company is in compliance with fraud and abuse laws and regulations as well as other applicable government laws and regulations. Compliance with such laws and regulations can be subject to future government review and interpretation as well as regulatory actions unknown or unasserted at this time. The Company is currently a defendant in two pending false claims actions as described below. On October 17, 2000, the Company was served with a civil complaint by the Florida Attorney General's office, in the case of State of Florida ex rel. Mindy Myers v. R. Brent Maggio, et al. In this case, the State of Florida has accused multiple defendants of violating Florida's False Claims Act. The Company, in its capacity as the manager of four nursing homes owned by Emerald Coast Healthcare, Inc. ("Emerald"), is named in the complaint, which accuses the Company of making illegal kickback payments to R. Brent Maggio, Emerald's sole shareholder, and fraudulently concealing such payments in the Medicaid cost reports filed by the nursing homes. At a hearing held April 25, 2001 in the Circuit Court of Leon County, Florida, the Court dismissed the State of Florida's complaint in its entirety based on the State's failure to plead false claims violations with sufficient particularity as required by law. The State was, however, granted 60 days to file an amended complaint. To date, the State of Florida has not filed an amended complaint, nor has it indicated whether the Company will be named as a defendant in any amended complaint that may be filed subsequently. Under the Federal False Claims Act, health care companies may be named as a defendant in an action which is filed under court seal, without being informed of this fact until the government has substantially completed its investigation. In such cases, there sometimes occurs a provision for "partial lifting of the seal," in which the trial court orders that the seal may be lifted for purposes of giving the named defendant the opportunity to informally present its defenses and discuss settlement prospects with the government. In cases in which the judge orders such a "partial lifting of the seal," the defendant becomes aware of the case but is precluded from discussing it publicly. Management is aware of one such case being filed in federal court against the Company regarding billing practices at one of its nursing homes. The Company has retained counsel to defend it in the case and, while cooperating with the government in its investigation of the matter, intends to vigorously pursue its defense of the case. Based on all information currently known, the Company currently does not believe that the claims being made in this case are material to the Company's financial condition, cash flows or results of operations. While the Company cannot currently predict with certainty the ultimate impact of either of the above cases on the Company's financial condition, cash flows or results of operations, an unfavorable outcome in any state or federal False Claims Act case could subject the Company to fines, penalties and damages. Moreover, the Company could be excluded from the Medicare, Medicaid or other federally-funded health care programs, which could have a material adverse impact on the Company's financial condition, cash flows or results of operations. During 1999, 2000 and 2001, the Company also experienced the increased regulatory scrutiny that has been exerted on the industry in the form of increased fines and penalties. During 2000, one of the Company's facilities in Texas was decertified from the Medicaid and Medicare programs. The Company is actively engaged in the application and appeal process for the recertification of this facility. 20 21 Medicare Reimbursement Changes. During 1997, the federal government enacted the Balanced Budget Act of 1997 ("BBA"), which contains numerous Medicare and Medicaid cost-saving measures. The BBA requires that nursing homes transition to a prospective payment system ("PPS") under the Medicare program during a three-year "transition period," commencing with the first cost reporting period beginning on or after July 1, 1998. The BBA also contains certain measures that have and could lead to further future reductions in Medicare therapy reimbursement and Medicaid payment rates. Revenues and expenses have both been reduced significantly from the levels prior to PPS. The BBA has negatively impacted the entire long-term health care industry. During 1999 and 2000, certain amendments to the BBA have been enacted, including the Balanced Budget Reform Act of 1999 ("BBRA") and the Benefits Improvement and Protection Act of 2000 ("BIPA"). The BBRA has provided legislative relief in the form of increases in certain Medicare payment rates during 2000. The BIPA is expected to continue to provide additional increases in certain Medicare payment rates during 2001. Although refinements resulting from the BBRA and the BIPA have been well received by the United States nursing home industry, it is the Company's belief that the resulting revenue enhancements are still significantly less than the losses sustained by the industry due to the BBA. Current levels of or further reductions in government spending for long-term health care would continue to have an adverse effect on the operating results and cash flows of the Company. The Company will attempt to maximize the revenues available from governmental sources within the changes that have occurred and will continue to occur under the BBA. In addition, the Company will attempt to increase revenues from non-governmental sources, including expansion of its assisted living and Canadian operations to the extent capital is available to do so, if at all. FOREIGN CURRENCY TRANSLATION The Company has obtained its financing primarily in U.S. dollars; however, it incurs revenues and expenses in Canadian dollars with respect to Canadian management activities and operations of the Company's eight Canadian retirement facilities (three of which are owned) and two owned Canadian nursing homes. Although not material to the Company as a whole, if the currency exchange rate fluctuates, the Company may experience currency translation gains and losses with respect to the operations of these activities and the capital resources dedicated to their support. While such currency exchange rate fluctuations have not been material to the Company in the past, there can be no assurance that the Company will not be adversely affected by shifts in the currency exchange rates in the future. EXECUTIVE MANAGEMENT CHANGES William R. Council, III, joined the Company effective March 5, 2001 as Executive Vice President, Chief Financial Officer and Secretary. James F. Mills, Jr., the former Senior Vice President, Chief Financial Officer and Assistant Secretary left the Company effective March 31, 2001. 21 22 STOCK EXCHANGE On November 10, 1999, the Company's stock began being quoted on the NASD's OTC Bulletin Board under the symbol AVCA. Previously, the Company's common stock was traded on the New York Stock Exchange under the symbol AVC. INFLATION Management does not believe that the Company's operations have been materially affected by inflation. The Company expects salary and wage increases for its skilled staff to continue to be higher than average salary and wage increases, as is common in the health care industry. To date, these increases as well as normal inflationary increases in other operating expenses have been adequately covered by revenue increases. RECENT ACCOUNTING PRONOUNCEMENTS From June 1998 through June 2000, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") and various amendments and interpretations. SFAS 133, as amended, establishes accounting and reporting standards requiring that any derivative instrument be recorded in the balance sheet as either in an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company has adopted SFAS 133, as amended, effective January 1, 2001. The impact of the adoption of SFAS 133 had no impact on the Company's financial position, results of operations or cash flows. FORWARD-LOOKING STATEMENTS The foregoing discussion and analysis provides information deemed by Management to be relevant to an assessment and understanding of the Company's consolidated results of operations and its financial condition. It should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2000. Certain statements made by or on behalf of the Company, including those contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere, are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties including, but not limited to, changes in governmental reimbursement, government regulation and health care reforms, the increased cost of borrowing under the Company's credit agreements, covenant waivers from the Company's lenders, possible amendments to the Company's credit agreements, ability to control ultimate professional liability costs, the impact of future licensing surveys, the ability to execute on the Company's acquisition program, both in obtaining suitable acquisitions and financing therefor, changing economic conditions as well as others. Investors also should refer to the risks identified in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" as well as risks identified in the Company's Form 10-K for the year ended December 31, 2000 for a discussion of various risk factors of the Company and that are inherent in the health care industry. Given these risks and uncertainties, the Company can give no assurances that these forward-looking statements will, in fact, transpire and, therefore, 22 23 cautions investors not to place undue reliance on them. Actual results may differ materially from those described in such forward-looking statements. Such cautionary statements identify important factors that could cause the Company's actual results to materially differ from those projected in forward-looking statements. In addition, the Company disclaims any intent or obligation to update these forward-looking statements. PART II -- OTHER INFORMATION Item 3. Defaults Upon Senior Securities. The Company is not currently in compliance with certain covenants of its loan agreements and certain other indebtedness. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." Item 6. Exhibits and Reports on Form 8-K. (a) The exhibits filed as part of the report on Form 10-Q are listed in the Exhibit Index immediately following the signature page. (b) Reports on Form 8-K: None. 23 24 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADVOCAT INC. May 15, 2001 By: /s/ William R. Council, III ----------------------------------------- William R. Council, III Executive Vice-President, Secretary, Principal Financial Officer and Chief Accounting Officer and An Officer Duly Authorized to Sign on Behalf of the Registrant 24 25
Exhibit Number Description of Exhibits ------- ----------------------- 3.1 Certificate of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.2 Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the Company's Registration Statement No. 33-76150 on Form S-1). 3.3 Amendment to Certificate of Incorporation dated March 23, 1995 (incorporated by reference to Exhibit A of Exhibit 1 to the Company's Form 8-A filed March 30, 1995). 3.4 Certificate of Designation of Registrant. 4.1 Form of Common Stock Certificate (incorporated by reference to Exhibit 4 to the Company's Registration Statement No. 33-76150 on Form S-1). 4.2 Rights Agreement dated March 13, 1995, between the Company and Third National Bank in Nashville (incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated March 13, 1995). 4.3 Summary of Shareholder Rights Plan adopted March 13, 1995 (incorporated by reference to Exhibit B of Exhibit 1 to Form 8-A filed March 30, 1995). 4.4 Rights Agreement of Advocat Inc. dated March 23, 1995 (incorporated by reference to Exhibit 1 to Form 8-A filed March 30, 1995). 4.5 Amended and Restated Rights Agreement dated as of December 7, 1998 (incorporated by reference to Exhibit 1 to Form 8-A/A filed December 7, 1998). 10.1 Settlement and Restructuring Agreement dated as of October 1, 2000 among Registrant, Diversicare Leasing Corp., Sterling Health Care Management, Inc., Diversicare Management Services Co., Advocat Finance, Inc., Omega Healthcare Investors, Inc. and Sterling Acquisition Corp. 10.2 Consolidated Amended and Restated Master Lease dated November 8, 2000, effective October 1, 2000, between Sterling Acquisition Corp. (as Lessor) and Diversicare Leasing Corp. (as Lessee) 10.3 Management Agreement effective October 1, 2000, between Diversicare Leasing Corp. and Diversicare Management Services Co.
26 10.4 Amended and Restated Security Agreement dated as of November 8, 2000 between Diversicare Leasing Corp and Sterling Acquisition Corp. 10.5 Security Agreement dated as of November 8, 2000 between Sterling Health Care Management, Inc. and Sterling Acquisition Corp. 10.6 Guaranty given as of November 8, 2000 by Registrant, Advocat Finance, Inc., Diversicare Management Services Co., in favor of Sterling Acquisition Corp. 10.7 Reaffirmation of Obligations (Florida Managed Facilities) by Registrant and Diversicare Management Services Co. to and for the benefit of Omega Healthcare Investors. 10.8 Subordinated Note dated as of November 8, 2000 in the amount of $1,700,000 to Omega Healthcare Investors, Inc. from Registrant. 10.9 Master Amendment to Loan Documents and Agreement dated as of November 8, 2000, effective October 1, 2000, among Registrant, its subsidiaries and AmSouth Bank. 10.10 Reimbursement Promissory Note dated October 1, 2000 in the amount of $3,000,000 to AmSouth Bank from Registrant. 10.11 Second Amendment to Intercreditor Agreement among GMAC, AmSouth, Registrant and its subsidiaries. 10.12 Renewal Promissory Note dated October 1, 2000 in the amount of $3,500,000 to AmSouth Bank from Diversicare Management Services Co. 10.13 Renewal Promissory Note dated October 1, 2000 in the amount of $9,412,383.87 to AmSouth Bank from Diversicare Assisted Living Services NC, LLC. 10.14 Renewal Promissory Note dated October 1, 2000 in the amount of $4,500,000 made payable to AmSouth Bank from Diversicare Management Services Co.