<PAGE> 1
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
ADVOCAT INC.
------------------------------------------------
(Name of Registrant as Specified In Its Charter)
---------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No Fee Required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transactions applies:
--------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
--------------------------------------------------------------
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined)
--------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
--------------------------------------------------------------
5) Total fee paid:
--------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
--------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
--------------------------------------------------------------
3) Filing Party:
--------------------------------------------------------------
4) Date Filed:
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<PAGE> 2
ADVOCAT INC.
277 MALLORY STATION ROAD, SUITE 130
FRANKLIN, TENNESSEE 37067
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 16, 1997
Notice is hereby given that the Annual Meeting of Stockholders of
Advocat Inc. (the "Company") will be held at 1800 First American Center,
Nashville, Tennessee on May 16, 1997, at 9:00 a.m. Central Daylight Time, for
the following purposes:
1. To elect three Class 3 directors to hold office for a three (3) year
term and until their successors are duly elected and qualified;
2. To amend the Company's 1994 Incentive and Nonqualified Stock Option
Plan for Key Personnel to increase the number of shares of Common
Stock reserved for issuance from 610,000 shares to 810,000 shares;
and,
3. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Stockholders of record at the close of business on March 18, 1997 will
be entitled to vote at the meeting.
The Company's Board of Directors urges all stockholders of record to
exercise their right to vote at the meeting personally or by proxy.
Accordingly, we are sending you the accompanying Proxy Statement and the
enclosed proxy card.
Your attention is directed to the Proxy Statement accompanying this
notice for a statement regarding matters to be acted upon at the meeting.
By Order of the Board of Directors,
/s/ Mary Margaret Hamlett
-------------------------
Mary Margaret Hamlett,
Secretary
Franklin, Tennessee
March 31, 1997
YOUR REPRESENTATION AT THE ANNUAL MEETING OF STOCKHOLDERS IS
IMPORTANT. TO ENSURE YOUR REPRESENTATION, WHETHER OR NOT YOU PLAN TO ATTEND
THE MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD.
SHOULD YOU DESIRE TO REVOKE YOUR PROXY, YOU MAY DO SO AT ANY TIME BEFORE IT IS
VOTED IN THE MANNER PROVIDED IN THE ACCOMPANYING PROXY STATEMENT.
<PAGE> 3
ADVOCAT INC.
PROXY STATEMENT
This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of Advocat Inc., a Delaware corporation,
with its principal offices at 277 Mallory Station Road, Suite 130, Franklin,
Tennessee 37067 (together with its subsidiaries, "Advocat" or the "Company"),
to be used at the Annual Meeting of Stockholders to be held on May 16, 1997,
and at any adjournment thereof, for the purposes set forth in the accompanying
Notice of Annual Meeting of Stockholders. This Proxy Statement and form of
proxy are being mailed to stockholders on or about March 31, 1997.
A stockholder who executes a proxy has the right to revoke the proxy
at any time before it is voted by giving written notice of revocation to the
Secretary of the Company, by executing a proxy bearing a later date, or by
attending the Annual Meeting of Stockholders and voting in person. Proxies will
be voted in accordance with instructions noted on the proxies. Unless otherwise
specifically instructed in the proxies, it is the intention of the persons
named in the proxy to vote all proxies received by them FOR THE ELECTION OF ALL
OF THE NOMINEES NAMED HEREIN WHO ARE STANDING FOR ELECTION AS CLASS 3 DIRECTORS
and FOR THE AMENDMENT TO THE 1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY PERSONNEL (THE "KEY PERSONNEL PLAN") TO INCREASE THE NUMBER OF SHARES
OF COMMON STOCK RESERVED FOR ISSUANCE FROM 610,000 SHARES TO 810,000 SHARES.
Management does not know of any other matters that will be presented for action
at the Annual Meeting of Stockholders. If any other matter does come before the
meeting, however, the persons appointed in the proxy will vote in accordance
with their best judgment on such matter.
The cost of this proxy solicitation will be borne by the Company. It
is contemplated that proxies will be solicited solely by mail. Banks, brokers
and other custodians will be requested to forward proxy soliciting materials to
their customers where appropriate, and the Company will reimburse such banks,
brokers, and custodians for their reasonable out-of-pocket expenses in sending
the proxy materials to beneficial owners of the Company's shares.
SUMMARY OF MATTERS TO BE CONSIDERED
At the Annual Meeting of Stockholders, the stockholders of the Company
will be asked to vote on (1) the election of three nominees to serve as Class 3
directors for a three-year term and until their successors are duly elected and
qualified (see "Proposal 1: Election of Directors") and (2) the amendment of
the Key Personnel Plan to increase the number of shares of Common Stock
reserved for issuance thereunder from 610,000 shares to 810,000 shares (see
"Proposal 2: Amendment to 1994 Incentive and Nonqualified Stock Option Plan for
Key Personnel Increasing Shares Available for Grant").
1
<PAGE> 4
VOTING
Stockholders of record as of March 18, 1997 will be entitled to vote
at the annual meeting. At the close of business on that day, there were
outstanding 5,313,858 shares of the Company's Common Stock, par value $.01 per
share (the "Common Stock"). Each share of Common Stock is entitled to one
vote, which may be given in person or by proxy authorized in writing. The
Company has no other classes of voting stock issued. The Company has the
authority to issue shares of preferred stock in one or more series, although no
series of preferred stock has been designated or issued.
To vote by proxy, a stockholder should complete, sign, date and return
the enclosed proxy to the Secretary of the Company. The Board of Directors
urges you to complete the proxy card whether or not you plan to attend the
meeting. If you attend the meeting in person, you may, if you wish, vote in
person on all matters brought before the meeting even if you have previously
delivered your proxy. Any stockholder who has given a proxy may revoke it any
time prior to its exercise by filing an instrument revoking it with the
Secretary of the Company, by duly executing a proxy bearing a later date, or by
attending the meeting and voting in person. The mere presence at the meeting
of a stockholder who has appointed a proxy will not revoke the appointment.
The director nominees will be elected by a plurality of the votes cast
by the holders of the Common Stock present or represented and entitled to vote
at the annual meeting. All other matters submitted to the stockholders will be
approved by the affirmative vote of a majority of the votes cast by the holders
of the Common Stock present or represented and entitled to vote at the Annual
Meeting of Stockholders. Abstentions and broker non-votes will not be counted
as affirmative votes, but will be counted for purposes of determining the
presence or absence of a quorum. Abstentions and broker non-votes have no
legal effect on the election of directors. On matters requiring majority vote
for approval, abstentions have the effect of negative votes.
2
<PAGE> 5
STOCK OWNERSHIP OF DIRECTORS,
EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The table below sets forth, as of March 18, 1997, the number and
percentage of outstanding shares of the Company's Common Stock owned by all
persons known to the Company to be holders of 5% or more of such securities, by
all directors, by each of the executive officers named in the Summary
Compensation Table herein, and by all directors and executive officers of the
Company as a group. Unless otherwise indicated, all holdings are of record and
beneficial.
<TABLE>
<CAPTION>
Number of
Shares Percentage
Beneficially Shares of Total
Name Owned (1) Outstanding(2)
---- ------------ ---------------
<S> <C> <C>
Neuberger & Berman, LLC (3) 572,250 10.8%
605 Third Avenue
New York, New York 10158-3698
Merrill Lynch & Co., Inc. (4) 360,000 6.8%
World Financial Center, North Tower
250 Vesey Street
New York, New York 10281-1334
Scudder, Stevens & Clark, Inc. (5) 303,500 5.7%
345 Park Avenue
New York, New York 10154
Charles W. Birkett, M.D.(6) 176,065 3.2%
Paul Richardson (7) 152,553 2.8%
Mary Margaret Hamlett (8) 101,030 1.9%
Edward G. Nelson (9) 20,000 *
William C. O'Neil, Jr. (9) 17,000 *
J. Bransford Wallace (10) 5,000 *
All directors and executive officers as a group 471,648 8.3%
(6 persons)(11)
- -----------------
* less than 1%
</TABLE>
(1) Unless otherwise indicated, the persons or entities identified in this
table have sole voting and investment power with respect to all shares
shown as beneficially owned by them, subject to community property
laws, where applicable.
(2) The percentages shown are based on 5,313,858 shares of Common Stock
outstanding plus, as to each individual and group listed, the number
of shares of Common Stock deemed to be owned by such holder pursuant
to Rule 13d-3 under the Exchange Act, assuming exercise of options
held by such holder that are exercisable within 60 days of the date
hereof.
(3) Information provided pursuant to a Schedule 13G filed by Neuberger &
Berman, LLC on or about February 10, 1997, which schedule indicates
beneficial ownership of 572,250 shares of Common Stock. The schedule
further indicates sole voting power on 102,300 shares and shared
dispositive powers on all such shares.
(4) Information provided pursuant to a Schedule 13G/A filed by Merrill
Lynch & Co., Inc. on behalf of it and various of its subsidiaries on
or about February 14, 1997, which schedule indicates beneficial
ownership of 360,000 shares of Common Stock over all of which Merrill
Lynch & Co., Inc. has shared voting and dispositive powers. Merrill
Lynch & Co., Inc. and its various subsidiaries disclaim beneficial
ownership.
(5) Information provided pursuant to a Schedule 13G/A filed by Scudder,
Stevens & Clark, Inc. on or about February 10, 1997, which schedule
indicates beneficial ownership of 303,500 shares of Common Stock. The
schedule further indicates sole voting power on 149,000 shares, shared
voting power on 100,500 shares, and sole dispositive power on all such
shares.
(6) Includes 85,000 and 33,333 shares purchasable upon exercise of options
at an exercise price of $9.50 and $9.75 per share, respectively,
issued under the Key Personnel Plan and 15,000, 1,000, 667 and 333
shares purchasable upon exercises of options at exercise prices of
$9.50, $13.125, $11.125 and $7.125 per share, respectively issued
under the 1994 Nonqualified Stock Option Plan for Directors (the
"Director Plan").
3
<PAGE> 6
(7) Includes 85,000 and 20,000 shares purchasable upon exercise of options
at an exercise price of $9.50 and $9.75 per share, respectively,
issued under the Key Personnel Plan and 15,000, 1,000, 667 and 333
shares purchasable upon exercises of options at exercise prices of
$9.50, $13.125, $11.125, and $7.125 per share, respectively issued
under the Director Plan.
(8) Includes 65,000 and 13,333 shares purchasable upon exercise of options
at an exercise price of $9.50 and $9.75 per share, respectively,
issued under the Key Personnel Plan and 15,000, 1,000, 667 and 333
shares purchasable upon exercises of options at exercise prices of
$9.50, $13.125, $11.125, and $7.125 per share, respectively issued
under the Director Plan.
(9) Includes 15,000, 1,000, 667 and 333 shares purchasable upon exercise
of options at exercise prices of $9.50, $13.125, $11.125 and $7.125 per
share, respectively, issued under the Director Plan.
(10) Includes 5,000 shares purchasable upon exercise of options at an
exercise price of $9.25 per share issued under the Director Plan. Mr.
Wallace was elected to fill a vacancy on the Board of Directors on
February 24, 1997.
(11) Includes 301,666 and 90,000 shares purchasable upon exercise of
options issued under the Key Personnel Plan and the Director Plan,
respectively. On August 16, 1996, William H. Lomicka resigned from
the Board of Directors. On November 26, 1996, Allan C. Silber and
Edward Sonshine resigned from the Board of Directors. (See "Counsel
Corporation Relationship.")
4
<PAGE> 7
EXECUTIVE OFFICERS
The following table sets forth, as of December 31, 1996, the Company's
executive officers:
<TABLE>
<CAPTION>
Name of Officer Age Officer Since Position with the Company
- ---------------- --- ------------- -------------------------
<S> <C> <C> <C>
Dr. Charles W. Birkett 60 Inception Chairman of the Board of
Directors and Chief
Executive Officer of the
Company.
Paul Richardson 48 Inception President and Chief
Operating Officer and a
member of the Board of
Directors of the Company.
Mary Margaret Hamlett 46 Inception Executive Vice President,
Chief Financial Officer,
and Secretary and a member
of the Board of Directors
of the Company.
</TABLE>
Effective March 1, 1997, Mr. Richardson resigned as President and Chief
Operating Officer of the Company and was replaced in those capacities by Dr.
Birkett. Mr. Richardson will continue in the employ of the Company as
President and Chief Executive Officer of the Company's Canadian operating
subsidiary. It is anticipated that Mr. Richardson will continue serving as a
member of the Board of Directors (See "Proposal 1: Election of Directors").
EXECUTIVE COMPENSATION
The following table sets forth the compensation for the services in
all capacities to the Company for the three fiscal years ended December 31,
1996, of the individual who served as the Company's chief executive officer
during the 1996 fiscal year and of the other individuals who served the Company
as executive officers as of the end of the 1996 fiscal year:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term Compensation(1)
-------------------------------------------------------------
Annual Compensation(1) Awards Payouts
------------------------------------------------ ---------------------------- ------------------------------
Other Restricted Securities
Name and Principal Annual Stock Underlying LTIP All Other
Position Year(1) Salary($) Bonus($) Compensation($)(2) Awards($) Options/SARs(#) Payouts($) Compensation($)(3)
-------- ------- --------- -------- ------------------ ---------- --------------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Charles W. 1996 262,500 82,687 -- -- 51,000 -- 16,290
Birkett, 1995 250,000 -- -- -- 1,000 -- 15,432
Chairman of the 1994 166,667 87,500 -- -- 101,000 -- 10,360
Board
of Directors
and Chief
Executive
Officer
Paul Richardson 1996 183,750 51,450 -- -- 31,000 -- 5,351
President, 1995 175,000 -- -- -- 1,000 -- 5,374
Chief 1994 116,667 61,250 -- -- 101,000 -- 3,574
Operating
Officer
and Director
Mary Margaret 1996 157,500 44,100 -- -- 21,000 -- 9,790
Hamlett 1995 150,000 -- -- -- 1,000 -- 9,194
Executive Vice 1994 93,333 49,000 -- -- 81,000 -- 5,802
President,
Chief
Financial
Officer and
Secretary
- -------------
</TABLE>
(1) Compensation for the Company's officers commenced in May 1994.
(2) Perquisites for each executive officer are in amounts that do not
require disclosure.
(3) Includes matching contributions made by the
Company under its Supplemental Executive Retirement Plan, or in
the case of Paul Richardson, a Canadian citizen, a contribution
made to Mr. Richardson's Registered Retirement Savings Plan. The
remaining amount for each individual represents de minimis payments
for life insurance premiums.
5
<PAGE> 8
EMPLOYMENT AGREEMENTS
On May 14, 1994, the Company entered into employment agreements with each
of Dr. Birkett, Mr. Richardson and Ms. Hamlett (individually, an "Employment
Agreement" and collectively, the "Employment Agreements"). Pursuant to the
Employment Agreements, Dr. Birkett serves as Chief Executive Officer and, since
March 1, 1997, as President and Chief Operating Officer of the Company; Mr.
Richardson, through February 28, 1997, served as President and Chief Operating
Officer of the Company and, since March 1, 1997, as President and Chief
Executive Officer of the Company's Canadian operating subsidiary; and, Ms.
Hamlett serves as Executive Vice President, Chief Financial Officer and
Secretary of the Company. The Employment Agreements for Dr. Birkett, Mr.
Richardson and Ms. Hamlett provide for a base annual salary of $250,000,
$175,000 and $150,000, respectively, which salaries are subject to change by
the Company's Compensation Committee. The base annual salaries of Dr. Birkett,
Mr. Richardson and Ms. Hamlett were increased to $275,625, $192,938 and
$165,375, respectively, effective January 1, 1997. Mr. Richardson's base annual
salary was further adjusted to $93,750 effective March 1, 1997. The initial
term of the Employment Agreement for Dr. Birkett expires on the third
anniversary of the date of execution thereof. The initial term of the
Employment Agreements for each of Ms. Hamlett and Mr. Richardson expired on the
second anniversary of the date of execution thereof. The Employment Agreements
renew automatically for one-year periods unless 30 days notice is given by
either the Company or the employee.
In addition, the Employment Agreements may be terminated by the Company
without cause at any time and by the employee as a result of "constructive
discharge" (e.g., a reduction in compensation or a material change in
responsibilities) or a "change in control" (e.g., certain tender offers,
mergers, sales of substantially all of the assets or sales of a majority of the
voting securities). In the event of a termination by the Company without
cause, at the election of the employee upon a constructive discharge or change
in control, or upon the Company giving notice of its intent not to renew his
Employment Agreement, Dr. Birkett shall be entitled to receive a lump sum
severance payment in an amount equal to 30 months of his monthly base salary.
In the event of a termination by the Company without cause, at the election of
the employee upon a constructive discharge or change in control or upon the
Company giving notice of its intent not to renew their respective Employment
Agreements, Mr. Richardson and Ms. Hamlett shall be entitled to receive a lump
sum severance payment in an amount equal to 24 months of his or her monthly
base salary. Furthermore, upon such termination, each employee may elect to
require the Company to repurchase options granted to him or her under the Key
Personnel Plan for a purchase price equal to the difference between the fair
market value of the Common Stock at the date of termination and the stated
option exercise price. In the event that an Employment Agreement is terminated
earlier by the Company for cause (as defined therein), or by the employee other
than upon a constructive discharge or a change in control, the employee shall
not be entitled to any compensation following the date of such termination
other than the pro rata amount of his or her then current base salary through
such date. Upon termination of employment, other than in the case of
termination by the Company without cause or at the election of the employee
upon a constructive discharge or upon a change in control, the terminated
employee is prohibited from competing with the Company for 12 months.
Following his resignation as President, it is anticipated that Mr.
Richardson will continue to be employed by the Company as an executive officer
of the Company's Canadian operating subsidiary pursuant to his Employment
Agreement. (See "Executive Officers.") Although not yet formalized, Mr.
Richardson and the Company have agreed to certain changes in the calculation of
the amount he would receive should he become eligible for a severance benefit:
for 1997, Mr. Richardson's severance benefit shall be 24 months of his monthly
base salary prior to his resignation as President (i.e., $385,875); for 1998,
18 months at his monthly base salary prior to his resignation as President
(i.e., $289,406); and, for 1999 and thereafter, 24 months at his then current
base salary.
6
<PAGE> 9
OPTION GRANTS
The table below provides information on grants of stock options
pursuant to the Key Personnel Plan and the Director Plan during the fiscal year
ended December 31, 1996, to the named executive officers reflected in the
Summary Compensation Table. The Company grants no stock appreciation rights.
<TABLE>
<CAPTION>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
-------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCKPRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS/SARS EXERCISE OR FOR OPTION TERM (1)
UNDERLYING OPTIONS/SARS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION -------------------
NAME GRANTED(#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
- --------------- ----------------------- ------------- ------ ---- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Dr. Charles W. Birkett 50,000(2) 45.25% 9.250 03/01/06 290,864 737,106
1,000(3) 0.90% 7.125 12/31/06 4,481 11,355
Paul Richardson 30,000(2) 27.15% 9.250 03/01/06 174,518 442,264
1,000(3) 0.90% 7.125 12/31/06 4,481 11,355
Mary Margaret Hamlett 20,000(2) 18.10% 9.250 03/01/06 116,346 294,842
1,000(3) 0.90% 7.125 12/31/06 4,481 11,355
</TABLE>
________________________
(1) The dollar amounts under these columns result from calculations assuming
the indicated growth rates in accordance with Securities and Exchange
Commission regulations and are not intended to forecast the actual
appreciation of the Common Stock.
(2) Granted by the Board of Directors under the Key Personnel Plan.
(3) Granted pursuant to automatic grants to directors under the Director
Plan.
7
<PAGE> 10
OPTION EXERCISES AND VALUES
The table below provides information as to exercises of options under
the Key Personnel Plan and the Director Plan by the named executive officers
reflected in the Summary Compensation Table and the year-end value of
unexercised options held by such officers. The Company grants no stock
appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Value of Unexercised
In-the-Money Options/
Shares Number of Securities Underlying Unexercised SARs at 1966 Fiscal
Acquired Value Options/SARs at 1996 Fiscal Year-End (#) Year End ($)(1)
on Exercise Realized ------------------------------------------- ---------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------- --------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Dr. Charles W. Birkett -0- -0- 118,667 / 34,333 42 / 83
Paul Richardson -0- -0- 112,000 / 21,000 42 / 83
Mary Margaret Hamlett -0- -0- 88,667 / 14,333 42 / 83
</TABLE>
__________________________
(1) Options are classified as "in-the-money" if the market value of the
underlying Common Stock exceeds the exercise price of the option. The
value of such in-the-money options is the difference between the
option exercise price and $7.25, the per-share market value of the
underlying Common Stock as of December 31, 1996. Such amounts may not
necessarily be realized. Actual values that may be realized, if any,
upon the exercise of options will be based on the per-share market
price of the Common Stock at the time of exercise and are thus
dependent upon future performance of the Common Stock.
8
<PAGE> 11
COMPENSATION COMMITTEE REPORT
Decisions on compensation of the Company's senior executives, except
for decisions related to awards under the Company's Directors Plan, are made by
the Compensation Committee of the Company's Board of Directors. Each member of
the Compensation Committee is a non-employee director. It is the
responsibility of the Compensation Committee to assure the Board that the
executive compensation programs are reasonable and appropriate, meet their
stated purpose and effectively serve the needs of the Company's stockholders
and the Company. Pursuant to rules adopted by the Securities and Exchange
Commission designed to enhance disclosure of corporate policies toward
executive compensation, set forth below is a report submitted by directors
Nelson and O'Neil in their capacity as the Board's Compensation Committee.
Compensation Philosophy and Policies for Executive Officers
The Company believes that the executive compensation program should
align the interests of stockholders and executives. The Company's primary
objective is to provide high quality patient care while maximizing stockholder
value. The Compensation Committee seeks to forge a strong link between the
Company's strategic business goals and its compensation goals.
The Company's executive compensation program is consistent with the
Company's overall philosophy for all management levels. The Company believes
that the more employees are aligned with the Company's strategic objectives, as
stated below, the greater the Company's success on both a short-term and
long-term basis.
The Company's executive compensation program has been designed to
support the overall Company strategy and objective of creating stockholder
value by:
-- Emphasizing pay for performance by having a significant portion
of executive compensation "at risk."
-- Directly aligning the interest of executives with the long-term
interest of stockholders by awarding stock options at current
market prices, which have value to the executives only through
stock appreciation over the long run.
-- Providing compensation opportunities that attract and retain
talented and committed executives on a long- term basis.
-- Appropriately balancing the Company's short-term and long-term
business, financial and strategic goals.
The Company's strategic goals are:
-- Profitability: To maximize financial returns to its stockholders,
in the context of providing high quality service.
-- Quality: To achieve leadership in the provision of relevant and
high quality health services.
-- Growth: To expand the operations of the Company in such a manner
as not to imperil the achievement of other objectives.
-- Stability: To be seen as a desirable employer and a responsible
corporate citizen.
9
<PAGE> 12
Currently, the Company's executive compensation program is composed of
three components: base salary, annual cash incentive (bonus) and long-term
incentive opportunity through nonqualified stock options. The annual executive
pay targets (base salary plus incentive) are intended to be market competitive
with similar U.S. public health care companies having similar revenues when the
Company or the individual business units meet or exceed their respective annual
operating goals.
Base Salary
The base salaries of the Company's executives are listed in the
Summary Compensation Table in this Proxy Statement and are evaluated annually.
In evaluating appropriate pay levels and salary increases for Company
executives, the Compensation Committee considers achievement of the Company's
strategic goals, level of responsibility, individual performance, internal
equity and external pay practices. Regarding external pay practices, the
Compensation Committee seeks to confirm base salaries for all executive
officers at the market rate, as determined from information gathered by the
Company from an independent compensation consulting firm and other outside
sources.
Annual Incentives
Annual incentive (bonus) awards are designed to focus management
attention on key operational goals for the current fiscal year. The key
operational goals are specific to each executive's area of responsibility.
Specific weighting is assigned for identified financial, strategic and
management practices goals. At least 80% of the available bonus percentage for
each executive is tied to Company profitability, generally defined by
achievement of the annual budget as approved by the Board of Directors.
Company executives may earn a bonus of up to 35% of their annual base
salaries based upon achievement of their specific operational goals and
achievement by the Company or business unit of its financial targets. At the
end of the year, performance against these goals is determined on an arithmetic
scale with the pre-established weighting.
In February 1997, the Compensation Committee awarded 1996 bonuses of
$82,687, $51,450 and $44,100 to Dr. Birkett, Mr. Richardson and Ms Hamlett,
respectively. These awards represented 31.5%, 28.0% and 28.0% of the
respective 1996 base annual salary of each executive.
Long-Term Incentives
The Company's long-term incentive compensation program consists of
nonqualified stock options which are related to improvement in long-term
stockholder value. Stock option grants provide an incentive that focuses the
executive's attention on managing the Company from the perspective of an owner
with an equity stake in the business. These grants also focus operating
decisions on long-term results that benefit the Company and long-term
stockholders.
The option grants to executive officers offer the right to purchase
shares of Common Stock at their fair market value on the date of the grant.
These options will have value only if the Company's stock price increases. The
number of shares covered by each grant is intended to reflect the executive's
level of responsibility and past and anticipated contributions to the Company.
In 1996, the Compensation Committee awarded grants under the Key
Personnel Plan of 50,000, 30,000 and 20,000 to Dr. Birkett, Mr. Richardson and
Ms. Hamlett, respectively.
10
<PAGE> 13
Chief Executive Officer Compensation
Securities and Exchange Commission regulations require corporate
compensation committees to disclose the bases for the compensation of a
corporation's chief executive officer relative to such corporation's
performance.
Dr. Birkett, the Company's Chief Executive Officer, is eligible to
participate in the same executive compensation plans that are available to the
other senior executive officers and that are described above. The Compensation
Committee's general approach in setting Dr. Birkett's annual compensation is
derived from the same considerations described above; that is, to be
competitive with other U.S. public health care corporations of similar size,
but also to have a large percentage of his annual incentive compensation based
upon specific corporate-wide operating performance criteria.
Tax Regulation as to Limited Deductibility of Compensation
Section 162(m) of the Internal Revenue Code of 1986, as amended,
generally disallows a tax deduction to public companies for executive
compensation in excess of $1 million. It is not anticipated that the Company
will pay any of its executive officers compensation in excess of $1 million in
1997 and, accordingly, to date the Company has not adopted a policy in this
regard.
THE FOREGOING REPORT IS SUBMITTED BY ALL OF THE MEMBERS OF THE
COMPENSATION COMMITTEE OF THE COMPANY'S BOARD OF DIRECTORS, WHOSE MEMBERS ARE
AS FOLLOWS: EDWARD G. NELSON AND WILLIAM C. O'NEIL, JR.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on the Company's review of the copies of Forms 3, 4 and 5
furnished to it and any amendments thereto, or written representations from
certain reporting persons that no Forms 5 were required for such persons, the
Company believes that, during the 1996 fiscal year, its executive officers,
directors and greater than 10% stockholders complied with all applicable
Section 16(a) filing requirements.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee consists of directors Nelson and
O'Neil. Former director Morris A. Perlis, an affiliate of Counsel Corporation
(together with various of its subsidiaries, "Counsel"), served on the
Compensation Committee through May 1995. Former directors Silber and Sonshine
are officers and directors of Counsel and certain of its subsidiaries. Mr.
Silber and Mr. Sonshine resigned as Directors of the Company on November 26,
1996, at which time the size of the Board of Directors was reduced from eight
to six members.
COUNSEL CORPORATION RELATIONSHIP
Advocat was organized in 1994 with the transfer of the long-term care
business of Counsel and Diversicare Inc. ("Diversicare") to the Company. In
an initial public offering on May 10, 1994 (the "Offering"), 100% of the
Company's Common Stock was sold to the public. Following the Offering, neither
Counsel nor Diversicare retained any ownership interest in the Company.
Various agreements among the parties (the "Transfer Agreements") governed the
transfer of assets and the subsequent Offering.
11
<PAGE> 14
Pursuant to the Transfer Agreements, the Company received the
outstanding capital stock of a Counsel subsidiary that held the general
partnership interest in a nursing home partnership managed by Advocat and
leasehold interests in all of the nursing homes and retirement centers then
owned or leased by Counsel. Eleven facilities owned by Counsel are now leased
by the Company under three separate leases as follows:
<TABLE>
<CAPTION>
Approximate
Number of Initial Base Rental
Facilities Location Lease Term Payment
---------- -------- ---------- -------
<S> <C> <C> <C>
3 Florida through August 2002 $916,000/year*
3 Texas through May 2004 $205,000/year
5 Canada through May 1999 $987,000/year
</TABLE>
___________________________________
* Subject to yearly increases not to exceed 5% of the prior year's rent.
Pursuant to the Transfer Agreements, Advocat received a management
contract covering seven facilities affiliated with Counsel. The management
agreement is for a term of 10 years through April 2004, with base management
fees equal to approximately $733,000 per year and an additional incentive
management fee equal to 11.8% of net operating income as defined. Annualized
management fees generated under this contract are approximately $1.15 million.
In February 1996, Counsel made certain claims with respect to the
leases and management contracts to which it and the Company are a party. The
Company's Board of Directors created a special committee of Directors not
affiliated with management of the Company or Counsel to review such claims.
During the year, the special committee reviewed various documentation and met
with representatives from both the Company and Counsel. As a result of the
work of the special committee, Counsel voluntarily withdrew one of the two
claims made against the Company. In November 1996, Mr. Silber and Mr.
Sonshine resigned from the Board of Directors of the Company, and subsequently,
the special committee concluded its review of these matters. In February 1997,
the remaining claim by Counsel was submitted to the American Arbitration
Association under the alternative resolution dispute provisions of the original
management contract.
Pursuant to the Transfer Agreements, the Company received the leases
and all leasehold rights and obligations thereunder previously held by Counsel
with respect to 19 nursing homes and two retirement centers leased from Omega
Healthcare Investors, Inc. ("Omega") under a master lease. In connection
therewith, Advocat provided a replacement security deposit letter of credit in
the amount of $3.8 million in favor of Omega, assumed all future obligations
with respect to the master lease and agreed to indemnify Counsel and its
affiliates with respect to any obligations related to the master lease. The
Company also leases from Counsel three Florida facilities encumbered by a
participating mortgage in favor of Omega.
The assets of the Company include all of the outstanding stock of
Diversicare General Partner, Inc., the corporate general partner of a Texas
limited partnership owning six nursing homes. At the time of the Offering,
Counsel and various affiliates owned approximately 31% of the limited
partnership interests of this partnership. Pursuant to the Transfer
Agreements, the Company acquired management agreements to manage these six
facilities and provided a replacement letter of credit in the amount of
$500,000, which was formerly an obligation of a Counsel subsidiary. Annualized
management fees with respect to these management contracts are approximately
$586,000. Pursuant to a cash flow guarantee between the Company and the
limited partnership,
12
<PAGE> 15
the Company assumed loans to the limited partnership of $703,000 and, through
December 31, 1996, has advanced to the limited partnership an additional
$2,036,000. In connection with the foregoing, the Company received a mortgage
on the managed properties of $7.3 million, which mortgage calls for monthly
principal and interest payments of $73,500. The nominal mortgage balance at
December 31, 1996 was $7.1 million, however, the Company considers the nominal
payments of $412,000 reversible since the principle payments have been funded
with the loans made to the partnership.
Under a 1991 repurchase agreement, the limited partners have the right
to cause the Company, as general partner, to repurchase up to 10% of
partnership units annually for five years beginning in January 1997 (the "Put
Option"). The purchase price for 10% ownership interest will consist of
approximately $650,000 cash (decreasing annually) plus absorption of the pro
rata portions of the cash flow loan and mortgage described above. Pursuant to
its repurchase obligation under the Put Option, the Company purchased 10% of
the partnership units in January 1997 for approximately $650,000 in cash plus
absorption of the pro rata portions of the cash flow loan and the mortgage
receivable of approximately $270,000 and $710,000, respectively. Included in
the partnership interests put to the Company was Counsel's direct 6.9%
interest. As the total units put to the Company were in excess of the 10%
maximum, a pro rata reduction was applied to the individual interests in
accordance with the terms of the Put Option. Accordingly, included in the
units purchased by the Company in January 1997 was approximately 2/3 of
Counsel's interest.
Pursuant to the Transfer Agreements, the Company also received
agreements to manage two facilities in which Counsel held an ownership
interest. Annualized management fees earned under these agreements were
approximately $300,000. During 1995, Counsel sold its interest in each of
these facilities. One of these facilities was sold effective March 31, 1995.
The Company's management services terminated effective with the closing. With
respect to the other of these facilities, Counsel held an approximate 30%
interest in a partnership that owned the facility. Effective March 1, 1995,
Counsel sold its interest in the facility to various unrelated parties, and to
the Company, at a price negotiated by Counsel and the unrelated third party
purchasers. As a result, the Company purchased an approximate 13% interest in
this facility for approximately $263,000.
Pursuant to the Transfer Agreements, the Company also received
agreements to manage two additional facilities affiliated with Counsel. The
management with respect to these facilities contract was to expire December 31,
1995. The Company, Counsel and the partnership that owns such facilities
reached an agreement in March 1995 with respect to a contract extension.
Pursuant to these negotiations, the term of the management agreement was
extended through December 31, 2005. In connection therewith, Advocat loaned
the partnership approximately $800,000 used to discharge certain indebtedness
to Counsel. Pursuant to agreements, the Company has loaned the partnership
approximately $650,000 additional, which has been used to make expansions and
improvements upon the facilities. The Company has received second, third and
fourth mortgage security interests in the partnership assets. The notes
receivable bear interest at 8% and will be repaid over the life of the extended
management contract. In addition, Counsel guarantees the first mortgage
indebtedness of this partnership. In light thereof, Advocat and Counsel agreed
that Counsel shall be entitled to participate in 50% of incentive management
fees in excess of $107,000 Canadian (approximately $78,000 U.S.) per year.
Additionally, if the partnership is sold or refinanced, the excess
distributable cash (as defined by the parties) generated thereby shall be split
equally between Advocat and Counsel. This management contract currently
generates revenues of approximately $480,000 per year including incentive fees
that fall below the level of Counsel's participation.
Pursuant to the Transfer Agreements, the Company has been granted the
right to offset against payments owed from the Company to Counsel and Counsel
has been granted the right to offset against payments owed from Counsel to the
Company, up to $1.0 million Canadian (approximately $730,000 U.S.) per year to
the extent that
13
<PAGE> 16
either party does not receive the payment of the obligations owed by either
party to the other. The terms of the offset agreement provide that the party
exercising offset rights will not be in default with respect to its obligations
to the other party to the extent such obligations are not paid pursuant to the
provisions of the offset. The obligations of the Company to Counsel under the
leases and management contracts between the Company and Counsel provide that a
default under one agreement constitutes a default under each of the leases and
management contracts.
CERTAIN TRANSACTIONS
For a discussion of the relationships between the Company and its
affiliates, directors, officers and principal stockholders, please see "Stock
Ownership of Directors, Executive Officers and Principal Holders," "Executive
Officers," "Proposal 1: Election of Directors,""Compensation Committee
Interlocks and Insider Participation" and "Counsel Corporation Relationship."
14
<PAGE> 17
STOCK PERFORMANCE GRAPH
The graph below compares the cumulative total return of the Company
with that of the S&P Smallcap 600 Index and a peer group index. Cumulative
return assumes $100 invested in the Company or respective index on May 10, 1994
with dividend reinvestment through December 31, 1996. The peer group index is
composed of five long-term care companies, including Beverly Enterprises, Inc.,
Manor Care, Inc., Living Centers of America, Inc., National Healthcare, L.P.,
and Arbor Health Care Co. The peer group utilized in the prior year was the
S&P Health Care Miscellaneous Index. The peer group was changed in 1996
because the index with respect to the former peer group is no longer tabulated.
With respect to available periods, the former peer group index values are 100,
110 and 174 as of May 1994, December 1994 and December 1995, respectively.
Normally, the graph would cover five years; however, information is
presented only since the Company's initial public offering date, May 10, 1994.
To date, the Company has not tied executive compensation to stock performance.
The future impact of stock performance on executive compensation, if any, will
be determined by the Compensation Committee and management.
The Stock Performance Graph is omitted from the electronically filed
version of this Proxy Statement. The index values included in the graph are
represented in the following table.
<TABLE>
<CAPTION>
INDEX VALUES 05/10/94 12/31/94 12/31/95 12/31/95
<S> <C> <C> <C> <C>
ADVOCAT INC. 100 136 117 76
PEER GROUP 100 106 114 131
S&P SMALLCAP 600 100 99 129 156
$100 INVESTED ON 5/10/94 IN STOCK OR 4/30/94
IN INDEX INCLUDING REINVESTMENT OF DIVIDENDSS
FISCAL YEAR ENDING DECEMBER 31. Index values produced by RESEARCH
</TABLE>
15
<PAGE> 18
PROPOSAL 1:
ELECTION OF DIRECTORS
All directors generally hold office for three-year terms and then
until their successors have been duly elected and qualified. The Board of
Directors of the Company is divided into three classes, as nearly equal in
number as possible. The term of the Class 1 directors will expire at the 1998
Annual Meeting of Stockholders; the term of the Class 2 directors will expire
at the 1999 Annual Meeting of Stockholders; and the term of the Class 3
directors will expire at this Annual Meeting of Stockholders (and in all cases
when their respective successors are duly elected and qualified). At each
annual meeting, successors to the class of directors whose term expires at such
meeting will be elected to serve for a three-year term and until their
successors are duly elected and qualified.
Directors who are not officers, employees or consultants of the
Company (currently directors Nelson, O'Neil and Wallace) receive a director's
fee of $10,000 annually, $1,000 per board meeting attended and $500 per
committee meeting attended (except when held on the same day as board
meetings). Directors who are officers or employees of the Company or its
affiliates have not been compensated separately for services as a director.
The Board of Directors proposes that the three nominees indicated
below be elected as Class 3 directors to serve for a three-year term and until
their successors are duly elected and qualified. Dr. Birkett, Mr. Nelson and
Mr. Richardson are currently Class 3 directors. Should any nominee for the
office of director become unable to accept nomination or election, which is not
anticipated, it is the intention of the persons named in the proxy, unless
otherwise specifically instructed in the proxy, to vote for the election of
such other person as the Board of Directors may recommend.
16
<PAGE> 19
NOMINEES FOR ELECTION AS CLASS 3 DIRECTORS
<TABLE>
<CAPTION>
Director Principal Occupation
Name of Nominee Age Since Last Five Years
--------------- --- --------- ---------------
<S> <C> <C> <C>
Charles W. Birkett, M.D. 60 Inception Chief Executive Officer, President, Chief Operating
Officer and Chairman of the Board of Directors of the
Company; President, Chief Executive Officer and a
director of Diversicare Inc. ("DVCR") from September
1991 to May 1994; Director of Counsel Corporation from
1983 to May 1994; Chairman of the Board of Directors
and Chief Executive Officer of Diversicare Management
Services Co. ("DMS") from September 1991 to present;
Chairman of the Board of Directors and Chief Executive
Officer of Diversicare Leasing Corp. ("DLC") from May
1994 to present; and President of Diversicare
Incorporated ("DINC") from February 1980 to May 1994.
Edward G. Nelson 65 Inception Member of the Board of Directors of the Company; Chief
Executive Officer and President of Nelson Capital
Corp., a merchant banking firm, from January 1985 to
present; Director of Central Parking System, Inc., an
operator of parking facilities; Director of Berlitz
International, Inc., a language services company;
Director of ClinTrials Research Inc., a contract
research organization ("ClinTrials"); Director of
Osborn Communications Company, an owner and operator
of radio and television stations; Trustee of
Vanderbilt University.
Paul Richardson 48 Inception Member of the Board of Directors of the Company;
President and Chief Executive Officer of the Company's
Canadian Operating Subsidiary; President and Chief
Operating Officer of the Company from May 1994 through
February 1997; Executive Vice President of DVCR from
September 1991 to May 1994; President of DMS from
November 1991 to present; President of DLC from May
1994 to present; Executive Vice President of DINC from
March 1991 to May 1994; and Vice President of DINC
from February 1980 to March 1991.
</TABLE>
17
<PAGE> 20
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
Director Principal Occupation
Name of Nominee Age Since Last Five Years
--------------- --- --------- ---------------
<S> <C> <C> <C>
Mary Margaret Hamlett 46 Inception Executive Vice President, Chief Financial Officer,
and Secretary and a member of the Board of Directors
of the Company; Vice President, Chief Financial and
Accounting Officer, and Secretary of DVCR from
September 1991 to May 1994; Vice President and
Secretary of DMS from May 1994 to present; Vice
President and Secretary of DLC from May 1994 to
present; and Vice President and Assistant Secretary
of Diversicare Corporation of America from June 1988
to May 1994.
William C. O'Neil, Jr. 62 Inception Member of the Board of Directors of the Company;
Chairman, President and Chief Executive Officer of
ClinTrials from September 1989 to present; Director
of ATRIX Laboratories, Inc., a drug delivery company;
Director of American HealthCorp, a specialty health
care service company; Director of Sigma Aldrich
Corp., a manufacturer of research chemicals; and
Director of Central Parking Systems, Inc.
J. Bransford Wallace 65 February 1997 Member of the Board of Directors of the Company;
Chairman Emeritus of Willis Corroon Corporation, an
international provider of insurance services, from
April 1994 to present; Chairman of Global Retail
operations and Director of Willis Corroon Group, PLC
from October 1990 to January 1994; Director of
NationsBank of Tennessee; founding Chairman of the
Quality Insurance Congress, an organization
emphasizing quality in the insurance industry; and,
Member of the Board of ESC Strategic Funds, an
investment strategy organization.
</TABLE>
The Board of Directors currently has standing Audit, Executive and
Compensation Committees. The Board of Directors does not have a nominating
committee.
The Executive Committee presently is composed of three directors:
Birkett, Richardson and Nelson. The Delaware General Corporation Law and the
Company's Bylaws provide that the Board may designate such a committee from
their number to carry out the functions of the Board as permitted by law.
Between meetings of the Board, the Executive Committee may exercise all powers
of the Board. During fiscal year 1996, the Executive Committee held two
meetings and unanimously adopted three written consent actions.
The Audit Committee presently is composed of two directors: Wallace
and O'Neil. Responsibilities of this committee include engagement of
independent auditors, review of audit fees, supervision of matters relating to
audit functions, and review and setting of internal polices and procedures
regarding audits, accounts and financial controls. During fiscal year 1996,
the Audit Committee held two meetings. Mr. Lomicka, formerly a member of the
Audit Committee, resigned from the Board of Directors on August 16, 1996. Mr.
Nelson served on the Audit Committee from the time Mr. Lomicka resigned until
Mr. Wallace became a Director.
The Compensation Committee presently is composed of two directors:
Nelson and O'Neil. Responsibilities of this committee include approval of
remuneration arrangements for executive officers of the Company, administration
of the Supplemental Executive Retirement Plan, review of compensation plans
relating
18
<PAGE> 21
to executive officers and directors, including benefits under the Company's
compensation plans, and general review of the Company's employee compensation
policies. During fiscal 1996, the Compensation Committee unanimously adopted
one written consent action. Mr. Lomicka, formerly a member of the Compensation
Committee, resigned from the Board of Directors on August 16, 1996.
During the Company's fiscal year ended December 31, 1996, its Board of
Directors held four regular meetings, held two telephonic meetings and
unanimously adopted four written consent actions. Each director named above,
during the period in which he or she served in fiscal year 1996, attended
meetings or executed written consent actions with respect to at least 75% of
the meetings and consent actions of the Board of Directors and of the
committees on which he or she served.
A plurality of the shares of Common Stock present or represented by
proxy at the Annual Meeting of Stockholders and entitled to be voted is
required to elect the two nominees. THE BOARD OF DIRECTORS RECOMMENDS THAT ALL
STOCKHOLDERS VOTE "FOR" THE NOMINEES LISTED ABOVE.
19
<PAGE> 22
PROPOSAL 2:
AMENDMENT TO 1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY PERSONNEL INCREASING SHARES AVAILABLE FOR GRANT
On March 3, 1994, the Company's Board of Directors and stockholders
approved the adoption of the 1994 Incentive and Nonqualified Stock Option Plan
for Key Personnel (the "Key Personnel Plan"), under which options to purchase
shares of the Company's Common Stock are available for grant to consultants,
advisors, directors and employees of the Company, providing an equity interest
in the Company and additional compensation based on appreciation of the value
of such stock.
During fiscal year 1996, options to purchase 112,000 shares at the
exercise price of $9.75 per share were granted under the Key Personnel Plan to
employees of the Company. Since January 1, 1997, options to purchase 23,500
shares at the exercise price of $9.25 per share were granted under the Key
Personnel Plan to employees of the Company, none of which are contingent upon
approval by the Company's stockholders of the proposed amendment to the Key
Personnel Plan. As of March 18, 1997, there were outstanding under the Key
Personnel Plan options to purchase 535,334 shares of Common Stock with an
aggregate market value of approximately $4,900,000 (based on the March 18, 1997
closing price of $9.125 for the Company's Common Stock). The outstanding
options have expiration dates ranging from May 10, 2004 to February 24, 2007.
The Key Personnel Plan provides that the exercise price of an option
must not be less than the fair market value of the Common Stock on the trading
day next preceding the date of grant. Payment for shares of Common Stock to be
issued upon exercise of an option may be made either in cash, Common Stock or
any combination thereof, at the discretion of the option holder.
The maximum term of any option granted pursuant to the Key Personnel
Plan is 10 years. Options are nontransferable, other than by will, the laws of
descent and distribution or pursuant to certain domestic relations orders.
Shares subject to options granted under the Key Personnel Plan that expire,
terminate or are canceled without having been exercised in full become
available again for option grants.
The Key Personnel Plan is administered by the Board of Directors. The
Compensation Committee of the Board currently administers the plan. Subject to
certain limitations, the Board and its committee have the authority to
determine the recipients, as well as the exercise prices, exercise periods,
length and other terms of stock options granted pursuant to the Key Personnel
Plan. In making such determinations, the Board may take into account the
nature of the services rendered or to be rendered by option recipients, and
their past, present or potential contributions to the Company.
The number of shares of Common Stock that may be granted under the Key
Personnel Plan or under any outstanding options granted thereunder will be
proportionately adjusted, to the nearest whole share, in the event of any stock
dividend, stock split, share combination or similar recapitalization involving
the Common Stock or any spin-off, spin- out or other significant distribution
of the Company's assets to its stockholders for which the Company receives no
consideration.
Generally, no option may be exercised until the holder has been
employed by the Company or one of its subsidiaries continuously for at least
three months from the date of grant. In the event the option holder is
terminated as an employee by reason of disability or death, the holder or his
or her representative may exercise the option for a period of 12 months
following such termination unless the Board of Directors elects, in its sole
discretion, to extend the exercise period. If the employment of an option
holder is terminated for "cause," as
20
<PAGE> 23
defined in the Key Personnel Plan, the unexercised options expire. In the
event the option holder is terminated as an employee for any reason other than
disability, death or cause, the holder may exercise his or her option for a
period of three months following termination, unless extended by agreement of
the Company.
In the event of a dissolution or sale of all or substantially all of
the assets of the Company, or a merger or consolidation in which the Company is
not the surviving corporation, each outstanding option will terminate, unless
there is an express assumption of the option by the surviving corporation.
However, as to any option which is to so terminate, each holder will have the
right, immediately prior to the dissolution, sale, merger or consolidation, to
exercise his or her options, in whole or in part.
Either nonqualified or incentive stock options may be granted under
the Key Personnel Plan. No federal income tax consequences occur to either the
Company or the optionee upon the Company's grant or issuance of a nonqualified
stock option. Upon an optionee's exercise of a nonqualified stock option, the
optionee will recognize ordinary income in an amount equal to the difference
between the fair market value of the Common Stock purchased pursuant to the
exercise of the option and the exercise price of the option. However, if the
Common Stock purchased upon exercise of the option is not transferable or is
subject to a substantial risk of forfeiture, then the optionee will not
recognize income until the stock becomes transferable or is no longer subject
to such a risk of forfeiture (unless the optionee makes an election under
Internal Revenue Code Section 83(b) to recognize the income in the year of
exercise, which election must be made within 30 days of the option exercise).
The Company will be entitled to a deduction in an amount equal to the ordinary
income recognized by the optionee in the year in which such income is
recognized by the optionee. Upon a subsequent disposition of the shares of
Common Stock, the optionee will recognize a capital gain to the extent the
sales proceeds exceed the optionee's cost of the shares plus the previously
recognized ordinary income.
Incentive stock options granted under the Key Personnel Plan are
intended to qualify for favorable tax treatment under Internal Revenue Code
Section 422. No individual may be granted incentive stock options under the
Key Personnel Plan exercisable for the first time during any calendar year and
having an aggregate fair market value in excess of $100,000. If the recipient
of an incentive stock option disposes of the underlying shares before the end
of certain holding periods (essentially the later of one year after the
exercise date or two years after the grant date), he or she will generally
recognize ordinary income in the year of disposition in an amount equal to the
difference between his or her purchase price and the fair market value of the
Common Stock on the exercise date. If a disposition does not occur until after
the expiration of the holding periods, the recipient will generally recognize a
capital gain equal to the excess of the disposition price over the price paid
by the recipient on the exercise date. The Company generally will not be
entitled to deduction if a participant disposes of stock received upon exercise
of an incentive stock option under the Key Personnel Plan prior to the
expiration of the holding periods.
As originally adopted, the Key Personnel Plan allowed for the purchase
of up to 460,000 shares of Common Stock; the Key Personnel Plan was amended in
1996 to allow for the purchase of up to 610,000 shares of Common Stock. As of
March 18, 1997, 11,666 options have been exercised and options to purchase
535,834 shares of Common Stock remain outstanding. The Board of Directors
unanimously adopted a proposed amendment to the Company's Key Personnel Plan to
increase the number of shares of Common Stock reserved for issuance from
610,000 shares to 810,000 shares. The purpose of the amendment is to allow for
grants of options under the Key Personnel Plan to acquire additional shares. A
copy of the proposed amendment is attached hereto as Exhibit A.
The total number of shares issued and subject to issuance upon the
exercise of stock options granted pursuant to the Key Personnel Plan is less
than the current maximum number of shares available under the Key
21
<PAGE> 24
Personnel Plan. No option grants are subject to stockholder approval of the
proposed amendment. Therefore, the benefits or amounts that will be received
by the Company's Directors, executive officers and other employees as a result
of the proposed amendment are not determinable.
The following vested and unvested options have been granted under the
Key Personnel Plan: 135,000 to Dr. Birkett; 115,000 to Mr. Richardson; 85,000
to Ms. Hamlett; or, 335,000 to all current executive officers as a group
(including Mr. Richardson). In addition, 211,500 to all other employees,
including officers who are not executive officers, as a group.
A majority of the shares of Common Stock present or represented by
proxy at the Annual Meeting of Stockholders and entitled to be voted is
required to amend the Key Personnel Plan. THE BOARD OF DIRECTORS HAS APPROVED
THE AMENDMENT OT THE KEY PERSONNEL PLAN AND RECOMMENDS THAT ALL STOCKHOLDERS
VOTE IN FAVOR OF THE AMENDMENT.
INDEPENDENT PUBLIC ACCOUNTANTS
The accounting firm of Arthur Andersen LLP was appointed by the Board
of Directors to serve as the Company's Independent Public Accountants for the
fiscal year ended December 31, 1996. It is expected that Arthur Andersen LLP
will be appointed to serve as the Company's auditor for the current fiscal
year. A representative of that firm will be present at the meeting with the
opportunity to make a statement if he so desires and to respond to questions.
DEADLINE FOR SUBMITTING STOCKHOLDERS PROPOSALS
Any proposal by a stockholder for consideration at the 1998 Annual
Meeting of Stockholders must be received by the Company's executive offices at
277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 no later than
December 22, 1997, if any such proposal is to be eligible for inclusion in the
Company's proxy materials for its 1998 annual meeting.
AVAILABILITY OF 10-K
Upon the written request of any record holder or beneficial owner of
the Common Stock entitled to vote at the annual meeting, the Company will
provide without charge, a copy of its Annual Report on Form 10-K for the year
ending December 31, 1996, including financial statements and financial
statement schedules, as filed with the Securities and Exchange Commission. The
request should be mailed to: Secretary, Advocat Inc., 277 Mallory Station
Road, Suite 130, Franklin, Tennessee 37067. A request via facsimile may be
submitted to (615) 771-7409.
OTHER MATTERS
The management of the Company is not aware of any other matters to be
brought before the Annual Meeting of Stockholders. If other matters are duly
presented for action, it is the intention of the persons named in the enclosed
proxy to vote on such matters in accordance with their judgment.
EACH STOCKHOLDER IS URGED TO EXECUTE AND RETURN THE ENCLOSED PROXY
PROMPTLY. IN THE EVENT A STOCKHOLDER DECIDES TO ATTEND THE MEETING, HE MAY, IF
HE WISHES, REVOKE HIS PROXY AND VOTE HIS SHARES IN PERSON. IN ADDITION, A
STOCKHOLDER MAY REVOKE HIS PROXY AT ANY TIME BEFORE SUCH PROXY IS VOTED.
22
<PAGE> 25
EXHIBIT A
AMENDMENT NO. 2 TO
ADVOCAT INC.
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY PERSONNEL
Amendment No. 2 to Advocat Inc. (the "Corporation") 1994 Incentive and
Nonqualified Stock Option Plan for Key Personnel reflecting the increase of the
maximum number of shares reserved for issuance under the Plan as approved by
the Stockholders of the Corporation by Stockholder vote at the Annual Meeting
of Stockholders held May 16, 1997. Capitalized terms used in the Amendment No.
2, if not otherwise defined herein, shall have the respective meanings
attributed to such terms in the Plan.
The 1994 Incentive and Nonqualified Stock Option Plan for Key
Personnel is hereby amended by striking Paragraph 3 in its entirety and
inserting the following in lieu thereof:
3. Stock Subject to the Plan. There will be reserved for
issuance upon the exercise of Options 810,000 shares of Common Stock, which
will be authorized and unissued Common Stock. If an Option expires or
terminates for any reason without being exercised in full, the shares subject
thereto which have not been purchased will again be available for purposes of
the Plan. The number of shares as to which Options may be granted under the
Plan will be proportionately adjusted, to the nearest whole share, in the event
of any stock dividend, stock split, reorganization, merger, consolidation,
share combination or similar recapitalization involving the Common Stock or any
spin-off, spin- out or other significant distribution of assets of stockholders
for which the Corporation receives no consideration. In the event that there
is an insufficient number of authorized shares of Common Stock available to
allow exercise of the Options on the date of any grant hereunder, such Options
will not be exercisable until there are sufficient shares of Common Stock
authorized for issuance.
- End of Amendment -
23
<PAGE> 26
APPENDIX A
PROXY ADVOCAT INC. PROXY
ANNUAL MEETING OF STOCKHOLDERS, MAY 16, 1997
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Dr. Charles W. Birkett and Ms. Mary Margaret
Hamlett, or either of them, as proxies, with power of substitution, to vote all
shares of the undersigned at the Annual Meeting of Stockholders of Advocat
Inc., to be held on May 16, 1997, at 9:00 a.m. Central Daylight Time, at 1800
First American Center, 315 Deaderick Street, Nashville, Tennessee, and at any
adjournments or postponements thereof, in accordance with the following
instructions:
<TABLE>
<CAPTION>
<S> <C>
(1) Election of Class 3 directors (INSTRUCTION: TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE
[ ] FOR all nominees listed below CHECK THE BOX TO VOTE "FOR" ALL NOMINEES AND STRIKE A LINE
(except as marked to contrary at right) THROUGH THE NOMINEE'S NAME IN THE LIST BELOW.)
[ ] WITHHOLD AUTHORITY to vote Charles W. Birkett, M.D. Paul Richardson Edward Nelson
for all nominees at right
(2) To approve an amendment to the Company's 1994 Incentive and Nonqualified Stock Option Plan for Key Personnel to increase the
number of shares of Common Stock reserved for issuance from 610,000 shares to 810,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(3) In their discretion, on such other matters as may properly come before the meeting.
[ ] FOR DISCRETION [ ] AGAINST DISCRETION [ ] ABSTAIN
</TABLE>
(CONTINUED ON REVERSE SIDE)
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS SPECIFIED. IF NO SPECIFICATION
IS MADE, THE SHARES WILL BE VOTED FOR THE NOMINEES IN THE ELECTION OF
DIRECTORS, FOR THE AMENDMENT TO THE 1994 INCENTIVE AND NONQUALIFIED STOCK
OPTION PLAN FOR KEY PERSONNEL, AND IN THE DISCRETION OF THE PROXIES ON SUCH
OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING.
PLEASE SIGN AND DATE BELOW AND RETURN PROMPTLY.
Dated: , 1997
-----------------------------
-------------------------------------------
Dated: , 1997
-----------------------------
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Signature(s) of shareholder(s) should
correspond exactly with the name(s) printed
hereon. Joint owners should each sign
personally. Executors, administrators,
trustees, etc., should give full title
and authority.
