<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the Commission
Only (as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
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)(1) and 0-11.
(1) Title of each class of securities to which transaction 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:
<PAGE> 2
ADVOCAT INC.
277 MALLORY STATION ROAD, SUITE 130
FRANKLIN, TENNESSEE 37067
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON MAY 15, 1998
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 15, 1998, at 9:00 a.m. Central Daylight Time, for
the following purposes:
1. To elect one Class 1 director to hold office for a three (3) year term
and until his successor is 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 810,000 shares to 1,060,000 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 23, 1998 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,
Mary Margaret Hamlett
Secretary
Franklin, Tennessee
March 30, 1998
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 15, 1998, at
9:00 a.m. Central Daylight Time and at any adjournment thereof, for the purposes
set forth in the accompanying Notice of Annual Meeting of Stockholders. The
Proxy Statement and form of proxy are being mailed to stockholders on or about
March 31, 1998.
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 THE
NOMINEE NAMED HEREIN WHO IS STANDING FOR ELECTION AS A CLASS 1 DIRECTOR 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 810,000 TO 1,060,000 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 one nominee to serve as a Class 1
director for a three-year term and until his successor is duly elected and
qualified (see "Proposal 1: Election of Director") and (2) the amendment of the
Key Personnel Plan to increase the number of shares of Common Stock reserved for
issuance thereunder from 810,000 shares to 1,060,000 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 23, 1998 will be entitled to vote at
the annual meeting. At the close of business on that day, there were outstanding
5,376,946 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 nominee 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 23, 1998, 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>
Heartland Advisors, Inc. (3)........................................... 814,800 15.2%
790 North Milwaukee Street
Milwaukee, WI 53202
The Goldman Sachs Group, L.P. (4)...................................... 814,000 15.1%
85 Broad Street
New York, NY 10004
Neuberger & Berman, LLC (5)............................................ 454,223 8.4%
605 Third Avenue
New York, NY 10158-3698
Merrill Lynch & Co., Inc. (6).......................................... 360,000 6.7%
World Financial Center, North Tower
250 Vesey Street
New York, NY 10281-1334
FMR Corp (7)........................................................... 281,200 5.2%
82 Devonshire Street
Boston, MA 02109
Charles W. Birkett, M.D. (8)........................................... 196,365 3.6%
Paul Richardson (9).................................................... 165,617 3.0%
Mary Margaret Hamlett (10)............................................. 110,646 2.0%
Edward G. Nelson (11).................................................. 21,000 *
William C. O'Neil, Jr. (11)............................................ 18,000 *
J. Bransford Wallace (12).............................................. 10,333 *
All directors and executive officers as a group (6 persons)(13)........ 521,961 9.0%
</TABLE>
- -----------------------
* less than 1%
3
<PAGE> 6
(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 5,376,946 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/A filed by Heartland
Advisors, Inc. on or about January 23, 1998, which schedule indicates
beneficial ownership of 814,800 shares of Common Stock. The schedule
further indicates sole voting power on 812,600 shares and sole
dispositive power on all such shares.
(4) Information provided pursuant to a Schedule 13G/A filed by Goldman
Sachs & Co. and Goldman Sachs Group, L.P. on or about February 14,
1998, which schedule indicates beneficial ownership of 814,000 shares
of Common Stock. The schedule further indicates shared voting power on
650,700 shares and shared dispositive power on all such shares.
(5) Information provided pursuant to a Schedule 13G/A filed by Neuberger &
Berman, LLC on or about February 19, 1998, which schedule indicates
beneficial ownership of 454,223 shares of Common Stock. The schedule
further indicates sole voting power on 292,159 shares and shared
dispositive powers on all such shares.
(6) 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 January 13, 1998, 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.
(7) Information provided pursuant to a Schedule 13G filed by FMR Corp. on
or about February 10, 1998, which schedule indicates beneficial
ownership of 281,200 shares of Common Stock. The schedule further
indicates sole dispositive power on all such shares.
(8) Includes 85,000 and 50,000 shares purchasable upon exercise of options
at exercise prices of $9.50 and $9.75 per share, respectively, issued
under the Key Personnel Plan and 15,000, 1,000, 1,000, 667 and 333
shares purchasable upon exercise of options at exercise prices of
$9.50, $13.125, $11.125, $7.125 and $8.38125 per share, respectively
issued under the 1994 Nonqualified Stock Option Plan for Directors (the
"Director Plan").
(9) Includes 85,000 and 30,000 shares purchasable upon exercise of options
at exercise prices of $9.50 and $9.75 per share, respectively, issued
under the Key Personnel Plan and 15,000, 1,000, 1,000, 667 and 333
shares purchasable upon exercise of options at exercise prices of
$9.50, $13.125, $11.125, $7.125 and $8.38125 per share, respectively,
issued under the Director Plan.
(10) Includes 65,000 and 20,000 shares purchasable upon exercise of options
at exercise prices of $9.50 and $9.75 per share, respectively, issued
under the Key Personnel Plan and 15,000, 1,000, 1,000, 667 and 333
shares purchasable upon exercise of options at exercise prices of
$9.50, $13.125, $11.125, $7.125 and $8.38125 per share, respectively,
issued under the Director Plan.
(11) Includes 15,000, 1,000, 1,000, 667 and 333 shares purchasable upon
exercise of options at exercise prices of $9.50, $13.125, $11.125,
$7.125 and $8.38125 per share, respectively, issued under the Director
Plan.
(12) Includes 10,000 and 333 shares purchasable upon exercise of options at
an exercise price of $9.25 and $8.38125 per share issued under the
Director Plan. Mr. Wallace was elected to fill a vacancy on the Board
of Directors on February 24, 1997.
(13) Includes 301,666 and 90,000 shares purchasable upon exercise of options
issued under the Key Personnel Plan and the Director Plan,
respectively.
4
<PAGE> 7
EXECUTIVE OFFICERS
The following table sets forth, as of December 31, 1997, 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 61 Inception Chairman of the Board of Directors, Chief
Executive Officer, President and Chief
Operating Officer of the Company.
Paul Richardson 49 Inception Executive Vice President and a member of
the Board of Directors of the Company;
President and Chief Executive Officer of
the Company's Canadian operating
subsidiary.
Mary Margaret Hamlett 47 Inception Executive Vice President, Chief Financial
Officer, 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 continues in the employ of the Company as President and
Chief Executive Officer of the Company's Canadian operating subsidiary, and he
continues serving as a member of the Board 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, 1997, of
the individual who served as the Company's chief executive officer during the
1997 fiscal year and of the other individuals who served the Company as
executive officers as of the end of the 1997 fiscal year.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------------- ------------------------------------------------------
Awards Payouts
---------------------- ------------------------------
Other Securities
Annual Restricted Underlying
Name and Principal Compensation Stock Options/ LTIP All Other
Position Year (1) Salary($) Bonus($) ($)(1) Awards($) SARs(#) Payouts($) Compensation($)(2)
-------- -------- --------- -------- ------------ ---------- ---------- ---------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dr. Charles W. Birkett 1997 275,625 -- -- -- 1,000 -- 19,697
Chairman of the Board 1996 262,500 82,687 -- -- 51,000 -- 16,290
of Directors, Chief 1995 250,000 -- -- -- 1,000 -- 15,432
Executive Officer,
President and Chief
Operating Officer
Paul Richardson 1997 105,847 11,012 -- -- 1,000 -- 5,236
Executive Vice President, 1996 183,750 51,450 -- -- 31,000 -- 5,351
Director and Chief 1995 175,000 -- -- -- 1,000 -- 5,374
Executive Officer of the
Company's Canadian
operating subsidiary
Mary Margaret Hamlett 1997 165,375 -- -- -- 1,000 -- 10,312
Executive Vice President, 1996 157,500 44,100 -- -- 21,000 -- 9,790
Chief Financial Officer, 1995 150,000 -- -- -- 1,000 -- 9,194
Secretary and Director
</TABLE>
(1) Perquisites for each executive officer are in amounts that do not
require disclosure.
(2) Includes matching contributions made by the Company under its
Supplemental Executive Retirement Plan (6% of salary), 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 payments for life insurance premiums.
5
<PAGE> 8
EMPLOYMENT AGREEMENTS
On May 14, 1994, the Company entered into employment agreements with each
Dr. Birkett, Mr. Richardson and Ms. Hamlett (individually, an "Employment
Agreement" and collectively, 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 Executive Vice President of the Company and 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
reduced to $93,750 concurrent with the effective date of his new
responsibilities, March 1, 1997. The initial term of the Employment Agreement
for Dr. Birkett expired 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.
Although he resigned as President and Chief Operating Officer of the
Company effective March 1, 1997, Mr. Richardson continues to be employed by the
Company as Executive Vice President and as President and Chief Executive Officer
of the Company's Canadian operating subsidiary pursuant to his Employment
Agreement. (See "Executive Officers.") 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 1998, Mr. Richardson's
severance benefit shall be 18 months at his monthly base salary prior to his
resignation as President and Chief Operating Officer (i.e., $275,625); and, for
1999 and thereafter, 24 months at his then current base salary.
6
<PAGE> 9
OPTION GRANTS
The table below provides information on grants of stock options pursuant to
the Key Personnel Plan and the Director Plan during the fiscal year ended
December 31, 1997, to the named executive officers reflected in the Summary
Compensation Table. The Company grants no stock appreciation rights.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS/SARS EXERCISE OR FOR OPTION TERM (1)
UNDERLYING OPTIONS/SARS GRANTED TO EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---------------- ----------------------- -------------------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Dr. Charles W. Birkett 1,000(2) 2.41% 8.3125 12/31/07 5,228 13,248
Paul Richardson 1,000(2) 2.41% 8.3125 12/31/07 5,228 13,248
Mary Margaret Hamlett 1,000(2) 2.41% 8.3125 12/31/07 5,228 13,248
</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 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 OPTIONS/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 1997 Fiscal
Acquired Value Options/SARs at 1997 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- 136,333 / 17,667 957 / 537
Paul Richardson -0- -0- 123,000 / 11,000 957 / 537
Mary Margaret Hamlett -0- -0- 96,333 / 7,667 957 / 537
</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 $8.50, the per-share market value of the underlying
Common Stock as of December 31, 1997. 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 Director 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 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 (i.e., bonus) and long-term
incentive opportunity through nonqualified stock options. When the Company or
the individual business units meet or exceed their respective annual operating
goals, the annual executive pay targets (i.e., base salary plus incentive) are
intended to be market competitive with similar U.S. public health care companies
having similar revenues .
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 1997, the Compensation Committee did not award any grants under the
Key Personnel Plan to Dr. Birkett, Mr. Richardson or Ms. Hamlett.
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, which plans are described above. The
Compensation Committee's general approach in setting Dr. Birkett's annual
compensation is derived from the same considerations described above: to be
competitive with the compensation plans of other U.S. public health care
corporations of similar size while having 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
1998 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 Form 5's were required for such persons, the
Company believes that, during the 1997 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 PARTICIPATIONS
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 Offering and the
transfer of certain assets of Counsel and Diversicare to the Company. The
Transfer Agreements and certain subsequent agreements and amendments continue to
govern various other matters between the Company and Counsel.
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 $918,000/year*
3 Texas through May 2004 $205,000/year
5 Canada through May 1999 $970,000/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
agreement covering seven Canadian facilities affiliated with Counsel. The
management agreement is for a term of 10 years through April 2004, with base
management fees equal to approximately $700,000 per year (at the December 31,
1997 exchange rate) and an additional incentive management fee equal to 11.8% of
net operating income as defined. Management fees generated under this contract
in 1997 were approximately $1.3 million.
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 assisted living facilities 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 Company owns all of the outstanding stock of Diversicare General
Partner, Inc. ("DGPI"), the corporate General partner of Texas Diversicare
Limited Partnership, a Texas limited partnership ("TDLP"), which owns six
nursing homes. At the time of the Offering, Counsel and various affiliates owned
approximately 31% of the limited partnership interests of TDLP. The Company also
received a mortgage on the TDLP properties of approximately $7.3 million, which
mortgage calls for monthly principal and interest payments of $73,500. The
mortgage balance at December 31, 1997 was $6,981,000.
The Company has provided a cash flow guarantee to TDLP in a Partnership
Services Agreement dated November 2, 1990 (the "TDLP Services Agreement"),
obligating the Company to provide monthly, interest-free loans to TDLP (the
"Cash Flow Loans") to the extent that 99% of Distributable Cash (as defined in
the TDLP Services Agreement) is less than the Guaranteed Monthly Return (as
defined in the TDLP Services Agreement). Any Cash Flow Loans made to TDLP will
be repaid to the extent that 99% of Distributable Cash exceeds the Guaranteed
Monthly Return. The obligation of the Company to TDLP under the cash flow
guarantee terminates on August 31, 2001 and any remaining amounts outstanding
under the Cash Flow Loans will be forgiven on that date. As of December 31,
1997, the outstanding amount of Cash Flow Loans was $3,242,000. Over the life of
TDLP through December 31, 1997, the Company and its predecessors have earned
management fees in the amount of approximately $3.1 million and have recognized
principal amounts under the mortgage in the amount of $519,000. These amounts
have been recorded as paid, and there have been corresponding increases to the
recorded advances to TDLP as a result. The Company considers such amounts
reversible to the extent they have been funded with advances to TDLP.
12
<PAGE> 15
Under TDLP's Amended and Restated Partnership Agreement dated August 30,
1991 (the "TDLP Partnership Agreement"), the limited partners of TDLP have the
right to cause DGPI to repurchase up to 10% of their partnership units annually
for five years (up to a maximum of 50% of the total partnership units
outstanding) beginning in January 1997 (the "Put Option"). The 10% maximum per
year is not cumulative. The purchase price for the partnership units is based on
the "Adjusted Net Unit Price" (as defined in the TDLP Partnership Agreement)
plus DGPI's assumption of a pro rata portion of the Cash Flow Loans and the
mortgage receivable. Units purchased by DGPI under the Put Option do not have
voting rights with respect to any matters coming before TDLP's limited partners.
Pursuant to its repurchase obligation under the Put Option, the Company
purchased 10% of the TDLP's partnershp units in both January 1998 and January
1997 for approximately $625,000 and $650,000 in cash, respectively, plus
assumption of pro rata portions of the Cash Flow Loans of $320,000 and $270,000,
respectively, and the mortgage receivable of approximately $700,000 and
$710,000, respectively. Because the total partnership units put to the Company
at each date were in excess of the 10% annual maximum, a pro rata reduction was
applied to the amount of units redeemed from each holder in accordance with the
terms of the Put Option. It is likely that the Company will be required to
repurchase additional partnership units annually over the next three years (and
assume additional amounts under the Cash Flow Loans and mortgage receivable) and
to made additional Cash Flow Loans.
Diversicare Canada Management Services Co., Inc., an indirect
wholly-owned subsidiary of the Company ("DCMS"), manages two facilities owned by
Diversicare VI, an affiliate of Diversicare, pursuant to a Management and
Guaranteed Return Loan Agreement dated as of November 30, 1985, as amended (the
"Guaranteed Return Loan Agreement"), which expires on December 31, 2005. In
connection with the Guaranteed Return Loan Agreement, DCMS loaned Diversicare VI
approximately $800,000 to repay indebtedness to Counsel and, additionally,
$750,000 to make expansions and improvements upon the two managed facilities.
These loans are secured by second, third and fourth mortgage security interests
in the assets of Diversicare VI. Each loan bears interest at 8% and is being
repaid over the life of the Guaranteed Return Loan Agreement. The balance due
from Diversicare VI with respect to these loans totaled approximately $1.4
million at December 31, 1997.
In addition, DCMS has guaranteed certain cash flow deficiencies and
quarterly return obligations of Diversicare VI through a guarantee period, which
expires on December 31, 2005 (the "Guaranteed Period"). Pursuant to its
guarantees, DCMS is obligated to make interest-free loans to Diversicare VI (the
"Cash Flow Deficiency Loans" and the "Guaranteed Return Loans") recoverable
during the Guaranteed Period. Any amounts outstanding under the Cash Flow
Deficiency Loans and the Guaranteed Return Loans remaining unpaid at the end of
the Guaranteed Period will be forgiven by DCMS. Through December 31, 1997, there
was no outstanding balance under either the Cash Flow Deficiency Loans or the
Guaranteed Return Loans. DCMS holds a security interest in certain distributable
cash in Diversicare VI to secure repayment of the Cash Flow Deficiency Loans and
Guaranteed Return Loans during the Guarantee Period.
Under the Guaranteed Return Loan Agreement, DCMS is entitled to receive
a management incentive fee through the Guarantee Period based on Diversicare
VI's distributable cash and proceeds of sales or refinancings, net of various
expenses and distributions. Pursuant to an Agreement with DCMS dated February 6,
1995, Counsel is entitled to receive 50% of DCMS's incentive management fees
payable under the Guaranteed Return Loan Agreement after payment to DCMS of
$107,000 Canadian (approximately $75,000 U.S.) per year. The Guaranteed Return
Loan Agreement generated revenues to DCMS for the year ended December 31, 1997
of approximately $517,000, including management incentive fees. During the
Guarantee Period, DCMS may not distribute to its shareholder (Diversicare
Leasing Corp., a wholly-owned subsidiary of Advocat) more than 25% of DCMS's
pre-tax profits.
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 owned from Counsel to the
Company, up to $1.0 million Canadian (approximately $700,000 U.S.) per year to
the extent that either party does not receive the payment of the obligations
owned by either party to the other. The terms of the offset agreement provide
13
<PAGE> 16
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.
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.
In connection with an acquisition, effective October 1, 1997, the
Company entered into leases with or obtained subleases from the former principal
owners of Pierce Management Group with respect to 14 assisted living facilities,
an office building and a manager's home. These leases provide for annual
payments of approximately $4.0 million. Guy Pierce and A. Steve Pierce have
entered into a two-year employment agreement and a three-year consulting
agreement, respectively, with the Company.
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 Director," "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, a new peer group index and an old peer group
index. Cumulative return assumes $100 invested in the Company or respective
index on May 10, 1994 with dividend reinvestment through December 31, 1997. The
old peer group index is composed of four long-term care companies, including
Beverly Enterprises, Inc., Manor Care, Inc., National Healthcare, L.P., and
Paragon Health Network Inc. (the amalgamation of Living Centers of America, Inc.
and Arbor Health Care Co.). Because two of the members of the old peer group
combined in 1997, the Company deemed it appropriate to broaden the membership of
its peer group. The new peer group includes the four members of the old peer
group in addition to Health Care and Retirement Corporation, Integrated Health
Services, Inc., Mariner Health Group, Inc. and Sun Healthcare Group, Inc.
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.
<TABLE>
<CAPTION>
INDEX VALUES*
05/10/94 12/31/94 12/31/95 12/31/96 12/31/97
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
ADVOCAT INC. 100 138 117 76 89
S & P SMALLCAP 600 100 99 129 156 196
OLD PEER GROUP 100 106 115 132 175
NEW PEER GROUP 100 111 103 113 155
</TABLE>
* $100 INVESTED ON 05/10/94 IN STOCK OR ON 04/30/94 IN INDEX INCLUDING
REINVESTMENT OF DIVIDENDS. FISCAL YEAR ENDING DECEMBER 31. INDEX VALUES
PRODUCED BY RESEARCH DATA GROUP.
15
<PAGE> 18
PROPOSAL 1:
ELECTION OF DIRECTOR
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. The term of the Class 2 directors
will expire at the 1999 Annual Meeting of Stockholders; the term of the Class 3
directors will expire at the 2000 Annual Meeting of Stockholders; and the term
of the Class 1 director 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 one nominee indicated below be
elected as a Class 1 director to serve for a three-year term and until his
successor is duly elected and qualified. Mr. O'Neil is currently a Class 1
director. 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
NOMINEE FOR ELECTION OF CLASS 1 DIRECTOR
<TABLE>
<CAPTION>
Director Principal Occupation
Name of Nominee Age Since Last Five Years
--------------- --- ----- ---------------
<S> <C> <C> <C>
William C. O'Neil, Jr. 63 Inception Member of the Board of Directors of the
Company; Chairman of ClinTrials Research
Inc., a contract research organization
("ClinTrials") from September 1989 to
present; President and Chief Executive Officer
of ClinTrials from September 1989 to
February 1, 1998; 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., an operator of parking
facilities ("Central Parking").
</TABLE>
17
<PAGE> 20
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
Director Principal Occupation
Name of Nominee Age Since Last Five Years
--------------- --- ----- ---------------
<S> <C> <C> <C>
CLASS 3 DIRECTORS:
Charles W. Birkett, M.D. 61 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
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 66 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; Director of Berlitz
Interna-tional, Inc., a language services
company; Director of ClinTrials;
Trustee of Vanderbilt University.
Paul Richardson 49 Inception Executive Vice President and a 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 Diversicare from September
1991 to May 1994; President of DMS from
November 1991 through February 1997;
President of DLC from May 1994 through
February 1997; Executive Vice President of
DINC from March 1991 to May 1994.
</TABLE>
18
<PAGE> 21
CONTINUING DIRECTORS
<TABLE>
<CAPTION>
Director Principal Occupation
Name of Nominee Age Since Last Five Years
--------------- --- ----- ---------------
<S> <C> <C> <C>
CLASS 2 DIRECTORS:
Mary Margaret Hamlett 47 Inception Executive Vice President, Chief Financial
Officer, and Secretary and a member of the
Board of Directors of the Company; Vice
President, Chief Financial Officer and
Accounting Officer, and Secretary of
Diversicare 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.
J. Bransford Wallace 66 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 1997, the Executive Committee held no meetings and
unanimously adopted one 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 policies and procedures regarding
audits, accounts and financial controls. During 1997, the Audit committee held
two meetings.
19
<PAGE> 22
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 to
executive officers and directors, including benefits under the Company's
compensation plans, and general review of the Company's employee compensation
policies. During 1997, the Compensation Committee held one meeting and
unanimously adopted no written consent actions.
During the Company's fiscal year ended December 31, 1997, its Board of
Directors held four regular meetings and one special meeting and unanimously
adopted one written consent action. Each director named above, during the period
in which he or she served in 1997, 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 nominee. THE BOARD OF DIRECTORS RECOMMENDS THAT ALL STOCKHOLDERS VOTE
"FOR" THE NOMINEE LISTED ABOVE.
20
<PAGE> 23
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 1997, options to purchase 23,500 and 15,000 shares at exercise
prices of $9.25 and $12.125 per share, respectively, were granted under the Key
Personnel Plan to employees of the Company. Since December 31, 1997, through the
date of this proxy statement, no options were granted under the Key Personnel
Plan to employees of the Company. As of March 23, 1998, there were outstanding
under the Key Personnel Plan options to purchase 483,167 shares of Common Stock
with an aggregate market value of approximately $4,741,000 (based on the March
23, 1998 closing price of $9.8125 for the Company's Common Stock). The
outstanding options have expiration dates ranging from May 10, 2004 to October
1, 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 non-transferable, 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 defined in the Key Personnel
21
<PAGE> 24
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 1997
to allow for the purchase price of up to 810,000 shares of common stock. As of
March 23, 1998, 55,666 options have been exercised and options to purchase
483,167 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 810,000
to 1,060,000 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 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.
22
<PAGE> 25
Through March 23, 1998, the following vested and unvested options have
been granted and are outstanding 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 named executive officers as a group (including Mr. Richardson). In
addition, 149,167 options have been granted and are outstanding with respect to
all other employees, including officers who are not named 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
TO 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, 1997. 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 1999 Annual
Meeting of Stockholders must be received by the Company's principal offices at
277 Mallory Station Road, Suite 130, Franklin, Tennessee 37067 no later than
November 29, 1998, if any such proposal is to be eligible for inclusion in the
Company's proxy materials for its 1999 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, 1997, 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.
23
<PAGE> 26
EXHIBIT A
AMENDMENT NO. 3 TO
ADVOCAT INC.
1994 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY PERSONNEL
Amendment No. 3 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 15, 1998. Capitalized terms used in the Amendment No. 3,
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 1,060,000 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 -
<PAGE> 27
Appendix A
PROXY ADVOCAT INC. PROXY
ANNUAL MEETING OF STOCKHOLDERS, MAY 15, 1998
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 15, 1998, 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:
(1) Election of Class 1 director -- William C. O'Neil
<TABLE>
<S> <C> <C>
[ ] FOR the nominee listed [ ] WITHHOLD AUTHORITY to vote for the nominee
</TABLE>
(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 810,000 to 1,060,000.
(3) In their discretion, or such other matters as may properly come before the
meeting.
[ ] FOR DISCRETION [ ] AGAINST DISCRETION [ ] ABSTAIN
(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 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: , 1998
-------------------------
--------------------------------
Dated: , 1998
-------------------------
--------------------------------
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.
