<PAGE> 1
FORM 10-K/A
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT
OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ______ TO _____.
COMMISSION FILE NUMBER 1-12996
ADVOCAT INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 62-1559667
-------- ----------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
277 MALLORY STATION ROAD, SUITE 130, FRANKLIN, TN 37067
------------------------------------------------- ----------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (615) 771-7575
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
COMMON STOCK, PAR VALUE $0.01 PER SHARE NASD OTC
TORONTO STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO THE
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF COMMON STOCK HELD BY NON-AFFILIATES ON MARCH 23,
2000 (BASED ON THE CLOSING PRICE OF SUCH SHARES ON THE NASD OTC MARKET) WAS
$1,176,309. FOR PURPOSES OF THE FOREGOING CALCULATION ONLY, ALL DIRECTORS, NAMED
EXECUTIVE OFFICERS AND PERSONS KNOWN TO THE REGISTRANT TO BE HOLDERS OF 5% OR
MORE OF THE REGISTRANT'S COMMON STOCK HAVE BEEN DEEMED AFFILIATES OF THE
REGISTRANT.
ON MARCH 23, 2000, 5,491,693 SHARES OF THE REGISTRANT'S $0.01 PAR VALUE COMMON
STOCK WERE OUTSTANDING.
DOCUMENTS INCORPORATED BY REFERENCE:
NONE.
<PAGE> 2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth, as of January 1, 2000, the Company's executive
officers and directors:
<TABLE>
<CAPTION>
NAME OF OFFICER AGE OFFICER SINCE POSITION WITH THE COMPANY
- --------------- --- ------------- -------------------------
<S> <C> <C> <C>
Dr. Charles W. Birkett 63 Inception Chief Executive 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 ("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.
Paul Richardson 51 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>
2
<PAGE> 3
<TABLE>
<S> <C> <C> <C>
Richard B. Vacek, Jr. 51 August 16, 1999 Executive Vice President, Chief Financial
Officer and Secretary since August 16,
1999. From 1989 to 1999, Mr. Vacek was
Director, Executive Vice President and
Chief Financial Officer for Horace Small
Apparel PLC. From 1984 to 1989 he was
Director, Senior Vice President and Chief
Financial Officer of Cambridge Group,
Inc. Mr. Vacek is a certified public
accountant. Mr. Vacek resigned from the
Company effective January 28, 2000.
Charles H. Rinne 52 June 28, 1999 President and Chief Operating Officer
since June 1999. From 1996 to 1999, Mr.
Rinne was Executive Vice President and
Chief Operational Officer for Britthaven
Inc. Mr. Rinne was Director of Operations
at Hillhaven Inc. from 1994 to 1996,
President at Senior Dynamics Inc. from
1991 to 1994, and Senior Vice President at
Sterling Care Inc. from 1989 to 1991.
James F. Mills, Jr. 53 January 1, 2000 Vice President, Corporate Controller and
Acting Chief Financial Officer since
January 1, 2000. Mr. Mills became Acting
Chief Financial Officer of the Company on
January 28, 2000. Mr. Mills was Vice
President and Corporate Controller for
Horace Small Apparel, PLC from 1995
through 1999. From 1985 through 1995
he was Vice President of Finance and
Senior Vice President of Operations for
Globe Business Furniture, Inc. Mr. Mills is
a certified public accountant.
Edward G. Nelson 68 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
Systems, Inc., an operator of parking
facilities ("Central Parking"); Director of
Berlitz International, Inc., a language
services company; Director of ClinTrials
Research, Inc. a contract research
organization ("ClinTrials"); Trustee of
Vanderbilt University.
</TABLE>
3
<PAGE> 4
<TABLE>
<S> <C> <C> <C>
William C. O'Neil, Jr. 65 Inception Member of the Board of Directors of the
Company; Chairman of ClinTrials from
1989 to 1998; President and Chief
Executive Officer of ClinTrials from
September 1989 to February 1, 1998;
Director of American HealthWays, a
specialty health care service company;
Director of Sigma Aldrich Corp., a
manufacturer of research chemicals; and
Director of Central Parking.
J. Bransford Wallace 68 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>
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 1 director will
expire at the 2001 Annual Meeting of Stockholders; the term of the Class 2
director will expire at the 2002 Annual Meeting of Stockholders; and the term of
the Class 3 directors will expire at the 2000 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.
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
1999, the Executive Committee held no separate meetings.
4
<PAGE> 5
The Audit Committee presently is composed of three directors: Wallace, Nelson
and O'Neil. Responsibilities of this committee include engagement of independent
auditors, review of audit fees, supervision of matters relating to audit
function, and review and setting of internal policies and procedures regarding
audits, accounts and financial controls. During 1999, the Audit committee held
three meetings.
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, 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 1999, the Compensation Committee held one meeting
and unanimously adopted one written consent action.
During the Company's fiscal year ended December 31, 1999, its Board of Directors
held four regular meetings and three special meetings and unanimously adopted
four written consent actions. Each director named above, during the period in
which he served in 1999, 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.
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 1999 fiscal year, its executive officers, directors
and greater than 10% stockholders complied with all applicable Section 16(a)
filing requirements.
5
<PAGE> 6
ITEM 11. 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, 1999, of
the individual who served as the Company's chief executive officer during the
1999 fiscal year and of the other individuals who served the Company as
executive officers as of the end of the 1999 fiscal year or during the 1999
fiscal year and met the reporting requirements.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------------
Other
Name and Principal Annual
Position Year (1) Salary($) Bonus($) Compensation($)(1)
-------- -------- --------- -------- ------------------
<S> <C> <C> <C> <C>
Dr. Charles W. Birkett(3)(4) 1999 325,000 -- --
Chairman of the Board 1998 325,000 -- --
of Directors, Chief 1997 275,625 -- --
Executive Officer,
President and Chief
Operating Officer
Paul Richardson(3) 1999 106,060 12,438 --
Executive Vice President, 1998 94,256 10,436 --
Director, and Chief 1997 105,847 11,012 --
Executive Officer of the
Company's Canadian
operating subsidiary
Mary Margaret Hamlett(5) 1999 90,000 -- --
Executive Vice President, 1998 180,000 -- --
Chief Financial Officer, 1997 165,375 -- --
Secretary, and Director
Charles H. Rinne(4) 1999 108,173 -- --
President and Chief
Operating Officer
<CAPTION>
Long-Term Compensation
----------------------------------------------------------------
Awards Payouts
---------------------------- --------------------------------
Restricted Securities
Name and Principal Stock Underlying LTIP All Other
Position Awards($) Options/SARs(#) Payouts($) Compensation($)(2)
-------- ----------- --------------- ---------- ------------------
<S> <C> <C> <C> <C>
Dr. Charles W. Birkett(3)(4) -- 76,000
Chairman of the Board -- 51,000 -- 22,308
of Directors, Chief -- 1,000 -- 19,697
Executive Officer,
President and Chief
Operating Officer
Paul Richardson(3) -- 21,000 -- 4,940
Executive Vice President, -- 26,000 -- 4,933
Director, and Chief -- 1,000 -- 5,236
Executive Officer of the
Company's Canadian
operating subsidiary
Mary Margaret Hamlett(5) -- -- -- 256,284
Executive Vice President, -- 26,000 -- 11,225
Chief Financial Officer, -- 1,000 -- 10,312
Secretary, and Director
Charles H. Rinne(4) -- 50,000 -- 242
President and Chief
Operating Officer
</TABLE>
(1) Perquisites for each executive officer are in amounts that do not require
disclosure.
(2) Includes matching contributions made under the Company's Supplemental
Executive Retirement Plan (at 6% of salary) for Dr. Birkett, $6,000,
$19,500 and $16,538 for 1999, 1998 and 1997, respectively, and for Ms.
Hamlett, $4,154, $10,773 and $9,910 for 1999, 1998 and 1997, respectively.
The 1999 amounts also include 10% matching contributions of $1,000 each for
Dr. Birkett and Ms. Hamlett under the Company's 401K plan. In the case of
Mr. Richardson, a Canadian citizen, the amounts include contributions to
Mr. Richardson's Registered Retirement Savings Plan of $4,543, $4,545 and
$4,874 for 1999, 1998 and 1997, respectively. The amount for Ms. Hamlett
also includes $249,737 in severance benefits of which $104,912 was accrued
but unpaid as of December 31, 1999. The remaining amounts for each
individual include payments for life insurance benefits as well as other
miscellaneous benefits.
(3) 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.
(4) Effective June 28, 1999, Dr. Birkett resigned as President and Chief
Operating Officer of the Company and was replaced in these capacities by
Mr. Rinne.
(5) Ms. Hamlett resigned her positions with the Company and as a Director
effective June 30, 1999.
6
<PAGE> 7
EMPLOYMENT AGREEMENTS
On May 14, 1994, the Company entered into employment agreements with each of Dr.
Birkett and Mr. Richardson. Dr. Birkett serves as Chief Executive Officer of the
Company and Mr. Richardson serves as Executive Vice President of the Company and
as President and Chief Executive Officer of the Company's Canadian operating
subsidiary. The Employment Agreements for Dr. Birkett and Mr. Richardson provide
for a base annual salary of $250,000 and $175,000, respectively, which salaries
are subject to change by the Company's Compensation Committee. For the year
2000, Dr. Birkett's salary remained at $325,000. Effective January 1, 2000, Mr.
Richardson's base annual salary was increased to $158,620 Canadian ($103,653
U.S. at the December 31, 1999 exchange rate). 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 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.
On June 28, 1999, the Company entered into an employment agreement with Mr.
Rinne (the "Rinne Employment Agreement") to serve as President of the Company.
The Rinne Employment Agreement has an initial term that ends on June 28, 2000
and renews automatically for one-year periods unless 30 days notice is given by
either the Company or the employee. The Rinne Employment Agreement provides for
a base salary of $225,000 which is subject to change by the Company's
Compensation Committee.
In addition, each of 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 Mr. Rinne shall be entitled to receive a lump sum severance
payment in an amount equal to 24 months of his monthly base salary. Furthermore,
upon such termination, each employee may elect to require the Company to
repurchase options granted to him 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, provided that
such fair market value is above the stated option 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
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.
7
<PAGE> 8
On June 30, 1999, the Company entered into a Separation Agreement with Ms.
Hamlett. Pursuant to the Separation Agreement, Ms. Hamlett resigned her position
as Director, Chief Financial Officer, Executive Vice President and Secretary of
the Company. The Company agreed (i) to pay Ms. Hamlett a sum equal to one
hundred percent (100%) of her annual base salary, including monthly auto
allowance, as in effect on the Effective Date, in twelve (12) equal monthly
installments, less the usual and customary withholdings; (ii) that all Options
issued to Ms. Hamlett under the Option Agreements are fully vested as of the
Effective Date, and Ms. Hamlett would have eighteen (18) months to exercise such
options; (iii) to pay Ms. Hamlett accrued but unpaid salary, including accrued
but unpaid vacation pay, due from the Company through the Effective Date; (iv)
to continue providing Ms. Hamlett employee benefits and perquisites to which she
is entitled on the Effective Date for twelve (12) months; or until Ms. Hamlett
begins receiving similar benefits and perquisites from another employer,
whichever is earlier; and (v) to provide continuing coverage under the Company's
directors and officers insurance plan.
8
<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, 1999, 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 75,000 34.88% 1.8125 05/14/09 85,490 216,649
1,000(2) 0.47% 5.5625 12/31/08 3,498 8,865
Charles H. Rinne 50,000 23.26% 1.8750 06/28/09 58,959 149,413
Mary Margaret Hamlett -0- N/A N/A N/A N/A N/A
Paul Richardson 20,000 9.30% 1.8125 05/14/09 22,797 57,773
1,000(2) 0.47% 5.5625 12/31/08 3,498 8,865
</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.
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<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 has granted no stock
appreciation rights.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SECURITIES OPTIONS/SARS /SARS
UNDERLYING AT FISCAL YEAR-END AT FISCAL YEAR-END($)(1)
OPTIONS VALUE ----------------------------- -----------------------------
NAME EXERCISED(#) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dr. Charles W. Birkett -0- -0- 213,333 67,667 -0- -0-
PAUL RICHARDSON -0- -0- 158,334 22,666 -0- -0-
MARY MARGARET HAMLETT(2) -0- -0- 130,800 -0- -0- -0-
CHARLES H. RINNE -0- -0- 16,667 33,333 -0- -0-
</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 $.14, the per-share market value of the underlying Common Stock as
of December 31, 1999. 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.
(2) Ms. Hamlett resigned effective June 30, 1999. Upon her resignation, Ms.
Hamlett's options became fully vested and may be exercised through December
31, 2000.
DIRECTOR COMPENSATION
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.
10
<PAGE> 11
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth, as of March 31, 2000, 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 each director, 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>
Charles W. Birkett, M.D. (3).......................... 344,882 6.0%
Mary Margaret Hamlett (4)............................. 240,715 4.3%
Paul Richardson (5) ............................... 225,620 4.1%
Edward G. Nelson (6).................................. 23,000 *
William C. O'Neil, Jr. (6)............................ 20,000 *
J. Bransford Wallace (7).............................. 17,000 *
Charles H. Rinne (8).................................. 16,667 *
All directors and executive officers as a group
(7 persons) (10)..................................... 887,884 16.2%
</TABLE>
- -----------------------
* less than 1%
(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 5,491,693 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 March 31, 2000.
(3) Includes 85,000, 50,000, 50,000 and 50,000 shares purchasable upon
exercise of options at exercise prices of $9.50, $9.75, $10.0625 and
$1.8125 per share, respectively, issued under the Key Personnel Plan and
15,000, 1,000, 1,000, 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,
$8.3125, $5.5625 and $.15 per share, respectively, issued under the 1994
Nonqualified Stock Option Plan for Directors (the "Director Plan").
(4) Includes 65,000, 20,000, and 25,000 shares purchasable upon exercise of
options at exercise prices of $9.50, $9.75, and $10.0625 per share,
respectively, issued under the Key Personnel Plan and 15,000, 1,000,
1,000, 1,000, 1,000, and 1,000 shares purchasable upon exercise of options
at exercise prices of $9.50, $13.125, $11.125, $7.125, $8.3125, and
$5.5625 per share, respectively, issued under the Director Plan. Ms.
Hamlett resigned as Director, Executive Vice President, Secretary and
Chief Financial Officer effective June 30, 1999.
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<PAGE> 12
(5) Includes 85,000, 30,000, 25,000 and 13,333 shares purchasable upon
exercise of options at exercise prices of $9.50, $9.75, $10.0625 and
$1.8125 per share, respectively, issued under the Key Personnel Plan and
15,000, 1,000, 1,000, 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,
$8.3125, $5.5625 and $.15 per share, respectively, issued under the
Director Plan.
(6) Includes 15,000, 1,000, 1,000, 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, $8.3125, $5.5625 and $.15 per share, respectively, issued
under the Director Plan.
(7) Includes 15,000, 1,000, 667 and 333 shares purchasable upon exercise of
options at an exercise price of $9.25, $8.3125, $5.5625, and $.15 per
share issued under the Director Plan. Mr. Wallace was elected to fill a
vacancy on the Board of Directors on February 24, 1997.
(8) Includes 16,667 shares purchasable upon exercise of options at an exercise
price of $1.875 issued under the Key Personnel Plan.
(9) Includes 8,333 shares purchasable upon exercise of options at an exercise
price of $1.75 per share issued under the Key Personnel Plan.
(10) Includes 405,000 and 97,000 shares purchasable upon exercise of options
issued under the Key Personnel Plan and the Director Plan, respectively.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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.
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 OR CURRENT BASE RENTAL
FACILITIES LOCATION LEASE TERM PAYMENT
---------- -------- ---------- -------
<S> <C> <C> <C>
3 Florida through August 2002 $963,000/year*
3 Texas through May 2004 $205,000/year
5 Canada through May 2004 $935,000/year
</TABLE>
- ----------------
* Subject to yearly increases not to exceed 5% of the prior year's rent.
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<PAGE> 13
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 $692,000 per year (at the December 31, 1999 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 1999 were
approximately $1.2 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, 1999 was approximately $6.7 million.
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, 1999, the outstanding amount
of Cash Flow Loans was approximately $5.6 million. In addition, approximately
$1.1 million of management fees due the Company were unpaid at December 31,
1998. Reflecting payment of these management fees would result in a
corresponding increase in the Cash Flow Loans. Over the life of TDLP through
December 31, 1999, the Company and its predecessors have earned additional
management fees in the amount of approximately $3.0 million and have recognized
principal amounts under the mortgage in the amount of $774,000. 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.
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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 2.6% of the TDLP's partnership units in January 1999 and 10% in both
January 1998 and January 1997 for approximately $160,000, $625,000, and $650,000
in cash, respectively, plus assumption of pro rata portions of the Cash Flow
Loans of $110,000, $320,000, and $270,000, respectively, and the mortgage
receivable of approximately $180,000, $700,000, and $710,000, respectively. No
partnership units were put to the Company for repurchase in January 2000. It is
uncertain whether the Company will be required to repurchase additional
partnership units in January 2001 (and assume additional amounts under the Cash
Flow Loans and mortgage receivable) and to make 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 $929,000 at December 31, 1999.
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, 1999, 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 $74,000 U.S.) per year. The Guaranteed Return
Loan Agreement generated revenues to DCMS for the
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year ended December 31, 1999 of approximately $557,000, 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 $692,000 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 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, which claim
was settled in the Company's favor during 1998.
CERTAIN TRANSACTIONS
Mr. Wallace, a director of the Company is Chairman Emeritus of Willis
Corporation ("Willis"). Beginning in early 2000, Willis provides the Company
with substantially all of its liability insurance and provides the Company with
certain bonds required in the operation of the Company's business. The Company
believes the cost of these products and services are consistent with the cost
from an independent third-party. Mr. Wallace abstains from voting with respect
to all transactions between the Company and Willis.
Dr. Birkett and Mr. Richardson each own a 4% interest in The Concorde Joint
Venture ("Concorde") a retirement home located in Penticton, British Columbia.
The Company has approximately 32% equity interest in Concorde. The Company also
manages Concorde pursuant to a 5 year management agreement which provides for
management fees of 3% of gross revenues plus 5% of operating income. During
1999, the Concorde paid $60,000 (Canadian) in management fees to the Company.
The Company believes the terms of the management agreement are consistent with
similar management agreements between unrelated parties.
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. Effective with the acquisition, Guy Pierce and A.
Steve Pierce
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entered into a two-year employment agreement and a three-year consulting
agreement, respectively, with the Company. Although his employment agreement has
expired, Guy Pierce continues in the employ of the Company overseeing the
Company's assisted living operations in the United States.
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.
Ms. Hamlett resigned as Director of the Company effective June 30, 1999, at
which time the size of the Board of Directors was reduced from six to five
members.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ADVOCAT INC.
/s/James F. Mills, Jr.
- -------------------------------------------------------------
James F. Mills, Jr.
Vice President and Controller, Acting Chief Financial Officer
(Principal Financial and Accounting Officer)
May 1, 2000
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