charter)
SECURITIES AND EXCHANGE COMMISSION
(Rule 14a-101)
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
o Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o Definitive proxy statement
o Definitive Additional Materials
o Soliciting Material pursuant to § 240.14a-12
Advocat Inc.x Preliminary Proxy StatementoConfidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))o Definitive Proxy Statemento Definitive Additional Materialso Soliciting Material Under Rule 14a-12ADVOCAT INC.Charter)Proxy Statement,proxy statement, if other than the Registrant)
o Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.x No fee requiredo 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: o Fee paid previously with preliminary materials: o Fee paid previously with preliminary materials. o 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: |
NOTICE OF SPECIAL MEETING OF STOCKHOLDERSTO BE HELD ON NOVEMBER 3, 2003
Notice is hereby given that37027
To |
(2) To transact such other business as may properly come before the |
Stockholders
Franklin,
YOUR REPRESENTATION AT THE SPECIAL MEETING OF STOCKHOLDERS IS IMPORTANT. TO ENSURE YOUR REPRESENTATION, WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL 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.
TABLE OF CONTENTS
ADVOCAT INC.PROXY STATEMENT
SUMMARY TERM SHEET
This summary term sheet highlights selected information regarding the special meeting and terms of the transaction from the proxy statement and does not contain all the information that is important to you and is qualified in its entirety by reference to the more detailed information contained elsewhere in this proxy statement and in the annexes to this proxy statement. To understand the proposed transaction fully and for a more complete description of the terms of the transaction, you should read carefully this entire proxy statement, the Share Purchase Agreement and the other documents to which we have referred you. In this document, all comparisons of Canadian dollars to United States dollars are based on the exchange rate as of September 18, 2003, unless otherwise stated. In this document, “we,” “us,” “our,” and “Company” refer to Advocat Inc. and its affiliates and “you” refers to the Advocat Inc. stockholders.
The Special Meeting
The Companies (Page 14)
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The Transaction
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The Share Purchase Agreement
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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND VOTING
What is the purpose of the Special Meeting?
At our special meeting, the stockholders of the Company will be asked to vote on the proposed sale (the “Transaction”) of our indirect, wholly-owned Canadian subsidiary, Diversicare Canada Management Services Co., Inc.. (“Diversicare Canada”) to DCMS Holdings Inc. (“Holdings”) pursuant to the Share Purchase Agreement dated as of August 25, 2003.
When and where is the Special Meeting?
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 special meeting. The special meeting will be held on Monday, November 3, 2003, at 10:30 a.m. local time at the offices of Harwell Howard Hyne Gabbert & Manner, P.C., 315 Deaderick Street, Suite 1800, Nashville, Tennessee 37238.
Why are the Shareholders being asked to approve the transaction?
Under Section 271 of the Delaware General Corporation Law, the sale of “all or substantially all” of our assets requires approval by the affirmative vote of the holders of a majority of the voting power of all outstanding shares of our common stock on the record date. We, in consultation with our legal counsel, have determined that the sale of our Canadian operations might be deemed to constitute a sale of “all or substantially all” of our assets under Section 271 of the Delaware General Corporation Law, based on interpretations of that term. The Share Purchase Agreement provides that, as a condition to the closing of the Transaction, we must obtain the consent of our shareholders. Therefore, the affirmative vote of the holders of at least a
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majority
Why is our Company proposingshareholders. This proxy statement contains important information for you to sell its Canadian Subsidiary?
We have been in default of certain covenants of our credit facility and our accountants have issued a “going concern” opinion on our financial statements for each year since the year ended December 31, 1999. As a result, our lenders have put pressure on us to reduce the amount of our outstanding debt. The board of directors believes that the sale of our Canadian subsidiary will allow us to concentrate our efforts on our United States operations and reduce our outstanding debt. We also believe that selling our Canadian operations at this time will allow us to maximize the value of these operations over what these operations may be sold for in the future.
How much will the proceeds be from the proposed Transaction and what will they be used for?
We will receive (Cdn.) $16.5 million (approximately U.S. $12.1 million) from the sale of Diversicare Canada. The proceeds from the sale of Diversicare Canada will be paid as follows: (Cdn.) $8.5 million (approximately U.S. $6.2 million) paid upon closing and (Cdn.) $8.0 million (approximately U.S. $5.9 million) by promissory note over 5 years. The payments under the promissory note will be (Cdn.) $600,000 (approximately U.S. $440,000) on each of the 1st, 2nd, 3rd and 4th anniversary of the closing and (Cdn.) $5.6 million (approximately U.S. $4.1 million) on the 5th anniversary of the closing. The proceeds, net of the expenses of the Transaction, will be used primarily to reduce the outstanding debt owed by the Company.
Will any of the proceeds received from the Transaction be distributed to our stockholders?
No. We will be required to use the proceeds (net of the expenses of the Transaction) to pay down our outstanding debt. We have had operating losses in each of the last five years and as of June 30, 2003 we have a $57.3 million working capital deficit. Under Section 170 of the Delaware General Corporation Law, a corporation may only pay dividends on its outstanding stock either out of its surplus or out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Company does not have a surplus nor has it had net profits in either fiscal 2002 or 2003. As a result, we are not permitted under Delaware law to pay any dividends to our stockholders.
When do we expect to close the Transaction?
We expect that the Transaction will close as soon as practicable upon receipt of the approval of the Ministry of Health and Long Term Care. It is unclearconsider when deciding how long such approval will take, but it has been estimated to take 120 days or longer.
What will happen if the Transaction is not approved by our stockholders?
If the Transaction is not approved, we will not complete the proposed Transaction, we will continue to operate our Canadian operations and we will not have any proceeds to pay to our
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lenders. If we are unable to make a substantial payment to our lenders, there can be no assurance that the lenders will not take action with respect to remedies available to them as a result of our defaults under our various debt obligations, including but not limited to demanding payment in full and foreclosure on the assets securing such debt.
Following the sale of Diversicare Canada, what will the business of the Company consist of?
Following the sale of Diversicare Canada, we will continue to operate our United States nursing homes and assisted living facilities. Immediately following the Transaction, we will operate 48 nursing homes and 14 assisted living facilities located in nine states primarily in the southeast United States.
What are the income tax consequences of the Transaction to us?
The Transaction will be a taxable transaction for federal, state, local and foreign income tax purposes. In general, we will recognize gains or losses on the sale equal to the difference, if any, between the amount realized by us from the sale less our adjusted tax basis in the stock of Diversicare Canada. The sale will not be a taxable transaction to our stockholders. We are still evaluating the tax consequences of the transaction, but we presently expect to recognize a taxable gain for U.S. federal and state income tax purposes. We believe that any tax due on this transaction may be offset by taxable losses of US operations and available tax loss carry-forwards. However, the ultimate amount of tax due on this gain will depend on the financial position of Diversicare Canada at the time of closing, the amount of existing available tax losses and carry-forwards at the time of the transaction, foreign currency exchange rates, and other factors, including possible limitations of the use of tax loss carry-forwards imposed by the U.S. Internal Revenue Code.
For Canadian tax purposes, we anticipate a taxable gain on this transaction that may require tax payments of up to approximately (Cdn.) $1.2 million (approximately U.S. $0.9 million). We are still evaluating the amount of the tax that may be due, and the ultimate amount of any Canadian tax due will depend upon the financial position of Diversicare Canada at the time of closing and other factors. To the extent paid, any such Canadian tax will create deductions that may be used to offset U.S. taxable income from this transaction.
Do stockholders have appraisal rights in connection with the Transaction?
No. There are no appraisal rights under Delaware law in connection with the Transaction.
Can I still sell my shares of the Company?
The sale of Diversicare Canada by the Company will not affect your right to sell or otherwise transfer your shares of our common stock.
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Who is entitled to vote aton matters brought before the Special Meeting?
meeting. Please read it carefully.
As of On the record date 5,493,287there were 5,675,987 shares of ourAdvocat common stock were issued and outstanding and, therefore, eligible to vote at the special meeting.
What are my voting rights?
outstanding. Holders of ourthe Company’s common stock are entitled to one vote per share. Therefore, a totalshare owned of 5,493,287 votesrecord. Cumulative voting is not permitted. The Company has 5,000 shares of Series C Redeemable Preferred Stock outstanding, but such preferred stock is not entitled to vote at the annual meeting of shareholders. The Company has the authority to issue additional shares of preferred stock in one or more series, although no additional series of preferred stock has been issued.
How many Mr. Council and Mr. Riddle will vote your shares must be present to hold the Special Meeting?
In accordance with our bylaws, shares equal to a majority of the voting power of the outstanding shares of common stock as of the record date must be present at the special meeting as you have instructed on the proxy form. This way, your shares will be voted even if you cannot attend the meeting.
How do I vote my shares?
If you are a stockholder of record, you can give a proxy to be voted at the special meeting by completing, signing and mailingInternet voting instructions found on the enclosed proxy card.
card or complete, sign and date the enclosed proxy form and return it promptly.
What Since a beneficial owner is not the difference between a stockholderowner of record, and a “street name” holder?
If your shares are registered directly in your name, you are considered the stockholder of record with respect to those shares.
If your shares are held in a stock brokerage account or by a bank, trust or other nominee, then the broker, bank, trust or other nominee is considered to be the stockholder of record with respect to those shares. However, you still are considered the beneficial owner of those shares, and your shares are said to be held in “street name.” Street name holders generally cannotmay not vote their shares directly and must instead instruct the broker, bank, trust or other nominee how to vote their shares using the method described above under “How do I vote my shares?”
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What does it mean if I receive more than one proxy card?
If you receive more than one proxy card, it means that you hold shares registered in more than one account. To ensure that all of your shares are voted, sign and return each proxy card you receive.
Can I vote mythese shares in person at the Special Meeting?
If you are a stockholder of record, you may vote your shares in person at the special meeting by completing a ballot at the special meeting. Even if you currently plan to attend the special meeting, we recommend that you also submit your proxy as described above so that your vote will be counted if you later decide not to attend the special meeting.
If you are a street name holder, you may vote your shares in person at the special meeting only ifunless you obtain a signed letter“legal proxy” from the broker, trustee or other proxy fromnominee that holds your broker, bank, trust or other nomineeshares, giving you the right to vote the shares at the specialannual meeting. Your broker, trustee or nominee has enclosed or provided voting instructions for you to use in directing the broker, trustee or nominee how to vote your shares.
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What vote
Approvalengage D.F. King & Co., Inc. to assist in the solicitation of proxies on behalf of the Transaction requiresboard of directors. We expect to pay D.F. King a customary fee of approximately $to $for its assistance. We do not expect to pay any other compensation for the affirmative votesolicitation of a majorityproxies, except to brokers, nominees and similar recordholders for reasonable expenses in mailing proxy materials to beneficial owners of all outstanding shares ofAdvocat common stock.
How are votes counted?
You may vote “FOR” or “AGAINST” or “ABSTAIN” from voting on the proposal to sell Diversicare Canada at the special meeting.
Ifannual meeting you submit your proxy but abstain from voting on the proposal, your shares will be counted as present at the special meeting for the purpose of determining a quorum. Your shares also will be counted as present at the special meeting for the purpose of calculating the vote on the particular matter with respect to which you abstained from voting. Thus, if you abstain from voting on a proposal, your abstention has the same effect as a vote against that proposal.
If you hold your shares in street name and do not provide voting instructions to your broker, your shares will be considered to be “broker non-votes” and will not be voted on any proposal on which your broker does not have discretionary authority to vote. Shares that constitute broker non-votes will be counted as present at the special meeting for the purpose of determining a quorum, but will not be considered entitledasked to vote on the proposal in question.
election of two “Class 3 Directors” to serve a three year term on the Company’s Board of Directors.
The board of directors unanimously recommends a vote FOR the proposal to approve and adopt the Share Purchase Agreement pursuant to which the Company would sell its wholly-owned subsidiary, Diversicare Canada to Holdings.
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What if I do not specify how I want my shares voted?
If you submit a signed proxy card and do not specify how you want to
meeting, you may deliver your completed proxy in person. “Street name” shareholders, that is, those shareholders whose shares are held in the name of and through a broker or nominee, who wish to vote at the meeting will need to obtain a proxy form from the institution that holds their shares if they did not receive one directly. Shares held in street name may also be eligible for internet or telephone voting in certain circumstances if you did not receive a proxy form directly.
proxy form?
What if other matters come up at the Special Meeting?
The proposals describednominated Class 3 directors listed in this proxy statement areunder Proposal No. 1. If properly signed and returned in time for the only proposals we knowannual meeting, the enclosed proxy will be voted on atin accordance with the special meeting.choices specified thereon. If any other matters are properly presentedconsidered at the special meeting and you vote to authorize the proxyholders willproxies to vote your shares as they see fit.
Who pays for the cost of proxy preparation and solicitation?
The Company pays for the cost of proxy preparation and solicitation, including the reasonable charges and expenses of brokerage firms, banks or other nominees for forwarding proxy materials to street name holders. The Proxy Statement and form of proxy are being mailed to stockholders on or about September 30, 2003.
We are soliciting proxies primarily by mail. In addition, our directors, officers and regular employees may solicit proxies by telephone or facsimile or personally. These individuals will receive no additional compensation forin their services other than their regular salaries. We may engage a proxy solicitation firm to assist us in the proxy solicitation process. If we do, we will pay such firm a fee for such solicitation.
Whom should I call if I have any questions?
If you have any questions about the Transaction, you may call or write to:
William R.discretion, Mr. Council IIIPresident and Chief Executive OfficerAdvocat Inc.277 Mallory Station Road, Suite 130Franklin, TN 37067(615) 771-7575
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THE SPECIAL MEETING
We are furnishing thisMr. Riddle will vote as recommended by the Board of Directors on such matters, or if the Board does not give a recommendation, Mr. Council and Mr. Riddle will have discretion to vote as they think best on such matters, in each case to the extent permitted under the Federal Securities Laws. If you return a signed proxy, statementbut do not specify a choice, Mr. Council and Mr. Riddle, as the persons named as the proxy holder on the proxy form, will vote as recommended by the Board of Directors. If a broker submits a proxy that indicates that the broker does not have discretionary authority as to holders of our common stock in connection with the solicitation of proxies by our board of directors at the special meeting, and at any adjournments and postponements of the special meeting.
Time and Place
The special meeting will be held at the offices of Harwell Howard Hyne Gabbert & Manner, P.C., 315 Deaderick Street, Suite 1800, Nashville, Tennessee 37238, on Monday, November 3, 2003, at 10:30 a.m. local time.
Proposals
At our special meeting, the stockholders of the Company will be askedcertain shares to vote on the proposed sale of our indirect, wholly-owned Canadian subsidiary, Diversicare Canada Management Services Co., Inc. to DCMS Holdings Inc. pursuant to the Share Purchase Agreement dated as of August 25, 2003.
Record Date; Voting at the Special Meeting
voted. If your shares are held in 3 Only stockholders of record holding common stock as of the close of business on September 22, 2003one or more matters, those shares will be counted as shares that are present for purposes of determining the presence of a quorum but will not be considered as present and entitled to receive noticevote with respect to such matters. Abstentions will be counted as shares that are present for purposes of determining the presence of a quorum and are counted in the tabulations of votes cast on proposals presented to vote at the special meetingshareholders. Each proposal is tabulated separately.anyreturn my proxy form?all postponements and adjournments of the special meeting. On the record date, there were 5,493,287 shares of outstanding common stock entitled to vote. Each holder of record of common stock on the record date is entitled to cast one vote per share. A stockholder mayyou do not return your proxy form or do not vote in person or by a properly executed proxy on each proposal put forth at the special meeting.Quorum; Vote Required for Approval The presence in person or by properly executed proxy of the holders of a majority of our outstanding common stock entitled to vote at the specialannual meeting, is necessary to constitute a quorum. If a quorum isyour shares will not present, the special meeting may be adjourned from time to time until a quorum is obtained. The approval of the Transaction requires the affirmative vote of the holders of a majority of the outstanding shares of our common stock. Our officers and directors will be present at the special meeting and available to respond to questions.thestreet name of your broker, a bank, or other nominee, and you do not tell the nominee howsubmit voting instructions to your broker, your broker may vote your shares for the nominee can vote themelection of directors as it sees fit only on matters determinedthey think best.routine,present at the annual meeting in order to hold the meeting and not on any other proposal. These so-called “broker non-votes” will beconduct business. Shares are counted as present to determineat the meeting if: (a) a shareholder is present and votes in person at the meeting; (b) a shareholder has properly submitted a proxy form, even if the shareholder marks abstentions on the proxy form; or (c) a broker or nominee has properly submitted a proxy form, even if the broker does not vote because the beneficial owner of the shares has not given the broker or nominee specific voting instructions and the broker or nominee does not have voting discretion (a “broker non-vote”). A share, once represented for any purpose at the meeting, is deemed present for purposes of determining a quorum exists, butfor the meeting (unless the meeting is adjourned and a new record date is set for the adjourned meeting), even if the holder of the share abstains from voting with respect to any matter brought before the meeting.counted as present and entitledconsidered at the meeting?anyother matters will be voted as recommended by the Board of Directors to the proposals in this proxy statement.extent permitted under the Federal Securities Laws. If proxies do not grant12
4VotingRevocation of Proxies All stockholders should complete, sign and return the enclosed form of proxy. Allprincipal shareholders own?represented atand 1,000,000 shares of preferred stock. As of April 15, 2009, there were 5,675,987 shares of common stock and 5,000 shares of Series C Preferred Stock outstanding. The following table shows, as of April 15, 2009, the special meeting by properly executed proxies received before or at the special meeting, unless those proxies have been revoked, will be voted at the special meeting, including any postponement or adjournment of the special meeting. If no instructions are indicated on a properly executed proxy, the proxies will be deemed to be FOR the approval of the Transaction. Any proxy given pursuant to this solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by either:filing, including by facsimile, with the Secretaryamount of Advocat beforecommon stock beneficially owned (unless otherwise indicated) by (a) each director and director nominee; (b) the vote at the special meeting is taken, a written notice of revocation bearing a later date than the date of the proxy or a later-dated proxy relating to the same shares; orattending the special meeting and votingNamed Executive Officers (as defined in person. In order to vote in person at the special meeting, stockholders must attend the special meeting and cast their vote in accordance with the voting procedures established for the special meeting. Attendance at the special meeting will not in and of itself constitute a revocation of a proxy. Any written notice of revocation or subsequent proxy must be sent so as to be received at or before the day of the taking of the vote at the special meeting to Advocat Inc. 277 Mallory Station Road, Suite 130 Franklin, TN 37067, facsimile No. (615) 771-7409, Attention: Secretary.Solicitation of Proxies Proxies are being solicited by and on behalf of the Company. Brokerage houses, nominees, fiduciaries and other custodians will be requested to forward solicitation materials to beneficial owners and will be reimbursed for their reasonable expenses incurred in so doing. We may request by telephone, facsimile, mail or electronic mail the return of the proxy cards. We may engage a proxy solicitation firm to assist us in the proxy solicitation process. If we do, we will pay such firm a fee for such solicitation.No Dissenters’ Right of Appraisal There is no dissenters’ right of appraisal under Delaware law in connection with the Transaction.Other Matters As of the date of this proxy statement, our board of directors knows of no matters that will be presented for consideration at the special meeting, other than as described in this proxy statement. If any other matters shall properly come before the special meeting or any adjournments or postponements of the special meeting and shall be voted on, the enclosed13proxies will be deemed to confer discretionary authority on the individuals named as proxies therein to vote the shares represented by such proxies as to any of those matters. The persons named as proxies intend to vote in accordance with the recommendation of our board of directors.PROPOSAL NO. 1APPROVAL OF THE SALE OF OUR INDIRECT WHOLLY-OWNEDCANADIAN SUBSIDIARYThe CompaniesAdvocat Inc. Advocat provides long-term care services to nursing home patients and residents of assisted living facilities in nine states, primarily in the Southeast, and three Canadian provinces. Advocat’s facilities provide a range of health care services to our patients and residents. In addition to the nursing, personal care and social services usually provided in long-term care facilities, Advocat offers a variety of comprehensive rehabilitation services as well as medical supply and nutritional support services. As of August 31, 2003, the Company, including Diversicare Canada operates 96 facilities, consisting of 48 nursing homes and 14 assisted living facilities in the United States and 14 nursing homes and 20 assisted living facilities in Canada. The Company owns 12 nursing homes, leases 38 others, and manages 12 nursing homes. The Company owns 15 assisted living facilities, leases seven others, and manages the remaining 12 assisted living facilities. The Company holds a minority interest in six of these managed assisted living facilities. The Company operates facilities in Alabama, Arkansas, Florida, Kentucky, North Carolina, Ohio, Tennessee, Texas, West Virginia and the Canadian provinces of Alberta, British Columbia and Ontario.Diversicare Canada Management Services Co.“Executive Compensation”, Inc. Diversicare Canada is an indirect wholly-owned subsidiary of Advocat which operatesbelow); (c) all of Advocat’s Canadian operations. Diversicare Canada operates the 14 nursing homes and 20 assisted living facilities located in Canada. These facilities are located in the Canadian provinces of Alberta, British Columbia and Ontario. Two of the nursing homes are owned and twelve are managed. Three of the assisted living facilities are owned, five are leased and twelve are managed. Diversicare Canada holds a minority interest in six of its managed assisting living facilities.DCMS Holdings Inc. Holdings is a newly formed privately held company which was incorporated on July 18, 2003 under the laws of the Province of Ontario Canada. Holdings operates out of the City of Toronto and is actively seeking the acquisition, development and growth of nursing homes and14related businesses and services in Canada. The acquisition of Diversicare Canada will be the first acquisition by Holdings. Holdings currently has minimal capitalization, but has received investor commitment to allow it to meet its closing purchase price payment obligations. The main investors of Holdings are known for their activities in real property and related business development and have a solid understanding of the retirement and nursing home market and related businesses as well as the healthcare sector and regulatory aspects relating thereto in Canada.Background of the Transaction The Company has incurred operating losses during each year ended December 31, 1998 through 2002 and during the first 6 months of 2003 and has limited resources available to meet its operating, capital expenditure and debt service requirements. The Company had a net working capital deficit of $57.3 million as of June 30, 2003. Our debt obligations as of June 30, 2003, require payments of approximately U.S. $2.3 million on November 2, 2003, U.S. $14.7 million on January 9, 2004 and U.S. $23.3 million on June 30, 2004. In addition, certain of the Company’s debt agreements contain various financial covenants, the most restrictive of which relate to current ratio requirements, tangible net worth, cash flow, net income (loss), required insurance coveragedirectors and limits on the payment of dividends to shareholders. As of June 30, the Company was not in compliance with certain of these financial covenants. The Company has not been able to obtain waivers of the non-compliance. In October 2000, the Company completedNamed Executive Officers as a restructuring of its master lease agreement with Omega Health Investors, Inc. (“Omega”)group and made certain amendments to several of its debt facilities. Since that time, the Company has been required to amended various debt obligations to extend the maturity dates because of its inability to meet those payment obligations. The Company’s primary credit facility with AmSouth Bank was originally due January 15, 2001. The Company has been required to amend this facility three times to extend the maturity date to its current maturity date of January 9, 2004. Similarly, the Company’s debt obligations with GMAC Commercial Mortgage Corporation on Texas properties was originally due on December 1, 1999. The Company has been required to amend this obligation seven times to extend the maturity date to its current maturity date of March 31, 2004. Another obligation to GMAC Commercial Mortgage Corporation on North Carolina properties was originally due July 1, 2002 and has been amended six times to its current maturity date of June 30, 2004. While(d) all shareholders known by the Company to date has been able to amend these obligations, each amendment has causedbe the beneficial owners of more than 5% of the outstanding shares of Advocat common stock. Based on information furnished by the owners and except as otherwise noted, the Company to incur expensesbelieves that the beneficial owners of the shares listed below, have, or share with a spouse, voting and has caused increased costsinvestment power with respect to the debt that was extended in order to get the lender to agree to the extension. No assurances can be given that either lender will be willing to extend the current maturity dates any further. As a resultshares. The address for all of the history of operating losses and non-compliance with debt covenants,persons listed below is 1621 Galleria Boulevard, Brentwood, Tennessee 37027, except as otherwise listed in the spring of 2001, our lead bank approached us and suggested that we sell our Canadian operations in order to make a significant reduction in our outstanding debt by paying the proceeds to the bank. We explored the market at that time and entered into a letter of intent on May 16, 2001. We then met with our lead bank and began to negotiate our debt agreement and how much of the proceeds would be used to pay down debt. In the course of negotiations, it became apparent that the bank group expected 100% of the proceeds to be used to pay down the outstanding bank debt.table below.15
At the time, we were fully drawn on available credit with the bank. In our struggle to meet cash obligations, we were also drawing funds from Diversicare Canada to support our United States operations. Since the bank was not willing to allow the Company to retain some of the net proceeds and our United States operations needed the Canadian operations to help support cash flow needs, we discontinued negotiations to sell our Canadian operations. This decision was based primarily on our belief that the Company needed the cash flow from our Canadian operations more than we needed the benefits of bank repayment.
In the spring of 2002, however, the Company’s situation had changed. Cash flows from our United States operations had improved to the point that they were supporting the United States cash flow obligations. In addition, we had paid down on the bank working capital line of credit to the point that we had almost full borrowing availability under the working capital line of credit. The working capital line of credit had been fully drawn with no remaining borrowing capacity available in the prior year. We evaluated the strengths and weaknesses of our Canadian operations. In particular, we focused on a key exposure to the financial success of Diversicare Canada.
Diversicare Canada has profitable management contracts and leases that expire in 2004 and 2005. These contracts make up a significant portion of the revenue and account for a significant portion of the net income and cash flow of Diversicare Canada. Given the instability of our United States operations (due primarily to professional liability and reimbursement obligations), we had reasonable questions about our ability to renew or extend these contracts. As a result, there was a risk to the Company that the value of Diversicare Canada could be significantly impaired if these contracts were not renewed.
As a result of this evaluation in the spring of 2002, the Company’s board of directors concluded that it was in the best interest of the Company to consider a sale of Diversicare Canada, with the net proceeds being used to repay outstanding debt.
In April 2002, we retained the services of Ashbourne Financial Group, Ltd. In connection with these services, Ashbourne will receive a fee of $75,000 upon the completion of the Transaction. Ashbourne was responsible for the following:
Throughout the course of the summer and fall of 2002, the solicitation efforts continued. A total of twelve potential bidders were contacted and two competing bidders emerged. After receiving both bids, we negotiated independently with each of the bidders a final bid package.
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Shares Beneficially Owned (1) | ||||||||
Name | Number (1) | Percent(2) | ||||||
Chad A. McCurdy(3) | 632,300 | 11.1 | % | |||||
1621 Galleria Blvd. Brentwood, TN 37027 | ||||||||
Wallace E. Olson(4) | 555,199 | 9.8 | % | |||||
1621 Galleria Blvd. Brentwood, TN 37027 | ||||||||
Ameriprise Financial, Inc.(5) | 491,400 | 8.7 | % | |||||
RiverSource Investments, LLC c/o Ameriprise Financial, Inc. 145 Ameriprise Financial Center Minneapolis, MN 55474 | ||||||||
Altrinsic Global Advisors, LLC(6) | 435,000 | 7.7 | % | |||||
100 First Stamford Place, 6th Floor Stamford, CT 06902 | ||||||||
Bristol Investment Fund, LTD(7) | 393,450 | 6.9 | % | |||||
c/o Bristol Capital Advisors, LLC 10990 Wilshire Blvd., Suite 1410 Los Angeles, CA 90024 | ||||||||
FMR LLC(8) | 345,254 | 6.1 | % | |||||
82 Devonshire St. Boston, MA 02109 | ||||||||
Wellington Management Company, LLP(9) | 315,248 | 5.6 | % | |||||
75 State Street Boston, MA 02109 | ||||||||
William R. Council, III(10) | 180,219 | 3.1 | % | |||||
William C. O’Neil, Jr.(11) | 26,999 | * | ||||||
Richard M. Brame(12) | 29,999 | * | ||||||
Robert Z. Hensley(13) | 21,999 | * | ||||||
Raymond L. Tyler, Jr.(14) | 68,230 | 1.2 | % | |||||
L. Glynn Riddle, Jr.(15) | 74,949 | 1.3 | % | |||||
All directors and executive officers as a group (8 persons)(16) | 1,589,894 | 26.5 | % | |||||
* less than 1% | ||||||||
Summary of Competing Offers
In the fall of 2002, the Company received two separate offers for the sale of Diversicare Canada. The offers are summarized as follows:
Offer 1
A large Canadian pension fund bid (Cdn.) $10,800,000 (approximately U.S. $7,900,000). The offer was to be secured by deposits totaling (Cdn.) $1,000,000 ((Cdn.) $500,000 upon execution of a letter of intent and (Cdn.) $500,000 upon the execution of definitive agreement). The balance of (Cdn.) $9,800,000 (approximately U.S. $7,200,000) was to be paid at closing, in cash.
Though a firm offer letter was received, we experienced increasing difficulty in the negotiation process with this company. The difficulties were to the point that the board of directors determined that there was an increased risk that this company would be unable to complete the transaction.
In summary, this offer constituted cash with a net present value of (Cdn.) $10,800,000 (approximately U.S. $7,900,000), but Advocat had some concerns about the likelihood of closing this transaction.
Offer 2
A group of investors joined together to form the buying group for Offer 2. Their offer was to purchase Diversicare Canada for (Cdn.) $16,500,000 (approximately U.S. $12,100,000). Their offer was to be secured with deposits totaling (Cdn.) $1,000,000 ((Cdn.) $250,000 upon execution of letter of intent and (Cdn.) $750,000 prior to the special meeting). Offer 2 provided for the payment of (Cdn.) $8,500,000 (approximately U.S. $6,200,000) at closing with the remaining (Cdn.) $8,000,000 (approximately U.S. $5,900,000) payable over 5 years.
In summary, this offer constituted cash with a net present value of (Cdn.) $15,100,000 (approximately U.S. $11,100,000).
On April 1, 2003, the board of directors voted to accept the offer of Holdings (Offer 2 above), a privately-owned Ontario corporation, and authorized the letter of intent dated March 31, 2003. Management was authorized to negotiate a definitive agreement, which occurred over the next several months. The Share Purchase Agreement was signed on August 29, 2003, effective as of August 25, 2003. Offer 2 was selected because the net present value was higher and the board of directors believed that it was more likely that this Transaction would close.
Reasons for the Transaction: Our Board of Directors Recommends the Transaction
Our board of directors unanimously determined that the sale of Diversicare Canada pursuant to the Share Purchase Agreement is in the best interest of the Company and its
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stockholders and unanimously recommend that the stockholders approve the sale of Diversicare Canada pursuant to the Share Purchase Agreement.
Our board of directors believes that the sale of Diversicare Canada will be beneficial to the Company and its stockholders and considered a number of positive factors in reaching this conclusion, including the following:
Our board of directors also considered a number of potentially negative factors in its deliberations concerning the sale of Diversicare Canada, including:
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Our board of directors believes that, overall, the risks associated with the sale of Diversicare Canada to Holdings are outweighed by the potential benefit of the sale of Diversicare Canada to Holdings.
In view of the wide variety of factors considered, our board of directors did not find it practicable to quantify or otherwise assign relative weight to the specific factors considered. However, our board of directors did consider the most significant factors to be (1) the Company’s obligations under its debt maturities, (2) the possible reduction in the value of Diversicare Canada because of potential loss of profitable contracts and leases, as well as (3) the loss of our most profitable segment. After taking into account all of the factors set forth above, our board of directors unanimously determined that the sale of Diversicare Canada to Holdings is in the best interest of the Company and its stockholders and that we should proceed with the sale of Diversicare Canada to Holdings upon the terms offered.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTEFORTHE TRANSACTION.
Effect of the Transaction on Our Stockholders
If the Transaction is approved and consummated, our stockholders will continue to retain their ownership in the Company. No distribution of cash or securities will be made to our stockholders. We have had operating losses in each of the last five years and as of June 30, 2003 we have a $57.3 million working capital deficit. Under Section 170 of the Delaware General Corporation Law, a corporation may only pay dividends on its outstanding stock either out of its surplus or out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The Company does not have a surplus nor has it had net profits in either fiscal 2002 or 2003. As a result, we are not permitted under Delaware law to pay any dividends to our stockholders.
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Use of Net Cash Proceeds
The proceeds (after payment of expenses of the Transaction, including taxes) from the Transaction will be used to reduce the outstanding debt of the Company. Currently it is expected that payments received under the promissory note will also be required to be paid to the bank.
Accounting Treatment of the Sale
The Transaction will be reflected on our consolidated balance sheet as a sale of all of the stock of our Canadian subsidiary. We will recognize a gain or loss to the extent the Transaction price differs from the book value of the subsidiary’s stock. Based on the financial position of Diversicare Canada as of June 30, 2003, we anticipate a pre-tax gain of approximately U.S. $0.3 million on the Transaction. However, the final amount of any gain or loss we report in our consolidated financial statements will depend on the financial position of Diversicare Canada at the time of closing, foreign currency exchange rates at the time of closing, and other factors.
Material Income Tax Consequences to Us of the Sale
The following is a summary of material income tax consequences to us and our stockholders of the Transaction. This discussion is for general information only and is based on the provisions of the Internal Revenue Code of 1986, as amended, Treasury Department Regulations issued pursuant thereto and published rulings and court decisions in effect as of the date hereof, all of which are subject to change, possibly with retroactive effect.
The Transaction will be a taxable transaction to us for federal, state, local and foreign income tax purposes. In general, we will recognize gains or losses on the Transaction equal to the difference, if any, between the amount realized by us from the sale of the stock of the Canadian subsidiary, less our adjusted tax basis in the stock of the Canadian subsidiary. The sale will not be a taxable transaction for our stockholders. We are still evaluating the tax consequences of the transaction, but we presently expect to recognize a taxable gain for U.S. federal and state income tax purposes. We believe that any tax due on this transaction may be offset by taxable losses of US operations and available tax loss carry-forwards. However, the ultimate amount of tax due on this gain will depend on the financial position of Diversicare Canada at the time of closing, the amount of existing available tax losses and carry-forwards at the time of the transaction, foreign currency exchange rates, and other factors, including possible limitations of the use of tax loss carry-forwards imposed by the U.S. Internal Revenue Code.
For Canadian tax purposes, we anticipate a taxable gain on this transaction that may require tax payments of up to approximately (Cdn.) $1.2 million (approximately U.S. $0.9 million). We are still evaluating the amount of the tax that may be due, and the ultimate amount of any Canadian tax due will depend upon the financial position of Diversicare Canada at the time of closing and other factors. To the extent paid, any such Canadian tax will create deductions that may be used to offset U.S. taxable income from this transaction.
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Plans after the Sale of our Canadian Operations
If our stockholders approve the Transaction and we consummate the sale of Diversicare Canada, we will continue our operations of nursing homes and assisted living facilities in the United States. Immediately following the Transaction, it is expected that we will operate 48 nursing homes and 14 assisted living facilities located in nine states primarily in the southeast United States.
Our United States operations have had a history of substantial losses. Our United States operations, at various times in the past, have been able to rely on the profits and cash flow generated by our Canadian operations in order to support the United States operations. Although we believe that the United States operations have improved cash flow over the recent periods and that with the estimated pay-down of U.S. $4.6 million of our debt obligations, we should be in an improved financial position, we can give you no assurances that following the sale of Diversicare Canada we will be able to fund our obligations or even to continue as a going concern. Notwithstanding the completion of the Transaction and the reduction of our outstanding debt, we may require additional capital to repay the remaining outstanding indebtedness and fund ongoing operations, including professional liability claims.
There have been a number of circumstances that have occurred in the United States long term care market that have significantly affected the Company. Among these are dramatic increases in claims related to alleged negligence in providing care to patients, changes in governmental reimbursement, and government regulation and health care reforms. In addition, the Company has faced issues which include our poor financial condition and operating losses, scheduled debt maturities, defaults under debt and lease agreements, and professional liability insurance coverage that could be substantially less than claims incurred. There can be no assurances that we will be able to overcome these issues. The Company will continue to be subject to all of the risks it is currently subject to, several of which are identified in the Company’s annual report on Form 10-K for the year ended December 31, 2002. If we are unable to generate enough cash flow to meet the ongoing obligations of our United States operations, it will have a material adverse impact on our liquidity and capital resources. In the event we are unable to generate sufficient cash flow to meet our obligations (including debt maturities and professional liability obligations) additional capital may be required. If we are unable to acquire additional capital, such inability would have a material adverse effect on our operations and our ability to continue as a going concern.
Interest of Certain Persons in the Sale of Diversicare Canada
The executive officers and directors of Advocat do not have interests in the sale of Diversicare Canada that are different from or in addition to their interest as stockholders generally, except for Paul Richardson. Mr. Richardson is the President of Diversicare Canada and as such, his employment agreement is with Diversicare Canada. Mr. Richardson is not an officer of Advocat. Upon the closing of the Transaction, Mr. Richardson will remain an employee of Diversicare Canada and certain provisions of his employment agreement may be triggered by the change of control of Diversicare Canada. Any obligations under Mr. Richardson’s employment agreement will remain the obligations of Diversicare Canada and are
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not obligations of Advocat. Holdings may be involved in negotiations with Mr. Richardson regarding the terms of his employment agreement; however, Advocat has not been involved in any such negotiations and does not have any knowledge of such negotiations.
Regulatory Matters
The Transaction must be approved by the Ministry of Health and Long Term Care under the Nursing Home Act (Ontario). Holdings and Diversicare Canada are in the process of obtaining such approval,however, the approval has not yet been received. We do not know of any reason why The Minister of Health and Long Term Care would not approve the Transaction, but we cannot be certain when or if Holdings will receive such approval.
DESCRIPTION OF THE SHARE PURCHASE AGREEMENT
The following is a summary of the material terms of the Share Purchase Agreement, a copy of which is attached as Annex A to this document and is incorporated herein by reference. This summary is qualified in its entirety by reference to the Share Purchase Agreement. You should carefully read the Share Purchase Agreement in its entirety because it, and not this document, is the legal document that governs the Transaction. A vote in favor of the Transaction will constitute your approval of the Share Purchase Agreement. All capitalized terms not defined herein have the same meanings as used in the Share Purchase Agreement.
Closing
The closing of the Transaction will take place on the first business day fifteen (15) days following the day on which all approvals necessary to complete the Transaction have been received from the Ministry of Health and Long Term Care pursuant to the Nursing Homes Act (Ontario), but will terminate, unless otherwise agreed by the parties, if the Transaction has not closed by February 28, 2004.
Sale of the equity of Diversicare Canada Management Services Co., Inc.
Pursuant to the terms and conditions of the Share Purchase Agreement, Diversicare Leasing Corp, a Tennessee corporation (“Vendor”) and indirect wholly-owned subsidiary of Advocat will sell to DCMS Holdings, Inc., an Ontario corporation 1,000 shares of Diversicare Canada Management Services Co., Inc., an Ontario corporation and indirect wholly-owned subsidiary of Advocat, which represents all of the issued and outstanding shares of Diversicare Canada (the “Purchased Shares”). The Share Purchase Agreement is governed by the laws of the province of Ontario, Canada and the laws of Canada applicable therein without regard to the conflicts of law principles of such province.
Purchase Price
Holdings has agreed to acquire the Purchased Shares for Canadian Sixteen Million Five Hundred Thousand dollars ($16,500,000), subject to certain adjustments as set forth in the Share
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Purchase Agreement. Canadian One Million dollars ($1,000,000) of the purchase price will be paid as a deposit in two portions according to the following schedule: (Cdn.) $250,000 has already been received and (Cdn.) $750,000 will be delivered no later than ten (10) days before the date that Advocat sets for its special meeting to approve the sale of the Purchased Shares. At the closing, the deposited amount plus (Cdn.) $7,500,000 will be paid to Advocat. If the closing does not occur by reason of Holdings’ default alone, the deposited funds will be retained by Advocat as a pre-estimate of liquidated damages. If the closing does not occur for any other reason, the deposited funds will be returned to Holdings, including accrued interest, without set-off or deduction.
The remaining Canadian Eight Million dollars ($8,000,000) of the purchase price will be paid in the form of seller financing, evidenced by a promissory note, in accordance with the following schedule:
Anniversary of the | Principal Amount of the Seller Financing | |||||||
Closing Date | (Canadian) | |||||||
1 | $ | 600,000 | ||||||
2 | 600,000 | |||||||
3 | 600,000 | |||||||
4 | 600,000 | |||||||
5 | 5,600,000 | |||||||
TOTAL: | $ | 8,000,000 | ||||||
Interest shall not accrue during the first and second years following closing, but in each of the third, fourth and fifth years following closing, principal shall accrue interest at five percent (5%) per year, payable semi-annually and compounded monthly.
In the event any portion of principal or interest of the seller financing that is not paid when due and notice is given, then the entire unpaid balance shall accrue interest at the lesser of (i) the rate of ten percent (10%) per annum and (ii) the maximum rate permitted by applicable law, and Vendor may, at its option, declare the entire unpaid balance due and payable in full. The seller financing may be prepaid in whole or in part at any time without notice, bonus or penalty. The seller financing may from time to time be accelerated and due by Holdings upon the occurrence of certain events related to the renewal or extension of various Diversicare Canada agreements. The promissory note is secured by a pledge of all of the stock of Diversicare Canada.
Adjustments to Purchase Price
Not later than sixty (60) days following the closing date, Vendor will deliver to Holdings closing financial statements of Diversicare Canada. Holdings will have thirty (30) days to review the closing financial statements and advise Vendor as to their acceptability or as to any specific objections. If Holdings reports any specific objections that are not resolved between the parties within a further period of 15 days, an independent major chartered accounting firm, mutually chosen by the parties or by the Chair of the Institute of Chartered Accountants of
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Ontario if the parties cannot agree on an accounting firm within 7 days, will resolve such unresolved objections. Any upward or downward adjustment to the purchase price pursuant to this procedure will be due and payable in full within 20 days of the final determination.
The purchase price shall be adjusted and reduced on a dollar for dollar basis in the event the closing financial statements confirm that (i) current assets of Diversicare Canada do not exceed all liabilities of Diversicare Canada, excluding Mortgage Debt as defined in the Share Purchase Agreement, by (Cdn.) $3,600,000; (ii) Diversicare Canada is in arrears under any of its obligations pertaining to certain specified leased real property; and (iii) standard real estate closing adjustments, including those pertaining to taxes, municipal obligations, maintenance, operating costs and/or leases, confirm that Diversicare Canada is in arrears with respect to certain owned real property.
The adjustments related to obligations pertaining to certain specified leased real property and the standard real estate closing adjustments set forth above will only be made to the extent that they are not included in the Net Working Capital Calculation and will be reduced on a dollar-for-dollar basis up to the amount by which the Net Working Capital Calculation exceeds (Cdn.) $3,600,000. In the event the closing financial statements confirm that the Net Working Capital Calculation, minus these adjustments is greater than (Cdn.) $3,600,000, such amount (net of any tax required to be paid) shall be paid to Vendor by Holdings within 30 days.
Representations and Warranties
The Share Purchase Agreement contains extensive representations and warranties made by each party that are the usual and customary representations and warranties made in connection to the sale of a subsidiary. See “Representations and Warranties of the Vendor and Advocat Regarding the Vendor, Advocat and the Purchased Shares,” “Representations and Warranties of the Vendor and Advocat Regarding Diversicare Canada, the Subsidiary and the Affiliates” and Representations and Warranties Regarding the Purchaser” in the Share Purchase Agreement.
“Representations and Warranties of the Vendor and Advocat Regarding the Vendor, Advocat and the Purchased Shares” — Vendor and Advocat make specific representations and warranties related to, among other things:
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“Representations and Warranties of the Vendor and Advocat Regarding the Corporation, the Subsidiary and the Affiliates” — Vendor and Advocat make specific representations and warranties about Diversicare Canada related to, among other things:
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“Representations and Warranties Regarding Holdings” — Holdings makes specific representations and warranties related to, among other things:
Covenants of Vendor, Advocat and Diversicare Canada Prior to Closing
Vendor, Advocat and Diversicare Canada have undertaken several covenants in the Share Purchase Agreement, including those related to access to information and the provision of documents and information to Holdings. The following summarizes the more significant of these covenants.
Operations of Diversicare Canada. Diversicare Canada will carry on its business in substantially the same manner as it had heretofore, including the following:
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Diversicare Canada has also agreed to limitations, prohibitions and other provisions related to the conduct of Diversicare Canada’s business from the date of the Share Purchase Agreement to the closing with respect to:
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Certain Covenants and Additional Understandings
Vendor, Advocat, Diversicare Canada and Holdings have made certain additional covenants and have agreed to certain additional understandings, the more significant of which are described as follows:
Confidentiality. Holdings agrees to hold in confidence all documents and information concerning Vendor and Diversicare Canada furnished to Holdings in connection with the transactions contemplated by the Share Purchase Agreement and will not release or disclose any such confidential information to any other person, except its representatives retained by it in connection with the Share Purchase Agreement and bound by the Share Purchase Agreement’s confidentiality terms.
Noncompetition Covenants of Vendor and Advocat. Vendor and Advocat will neither disclose nor use nor permit to use in any way that is potentially harmful to or competitive with Diversicare Canada’s business any confidential information relating to any financial information, marketing strategies, pricing policies or characteristics, customers, suppliers and customer and supplier information, customer and supplier lists, product or product specifications, designs, costs, costs of materials, business or business prospects, plans, proposals, codes, trade secrets, marketing studies, research, reports, investigations, or other information of similar character which relate to Diversicare Canada’s business.
Non-Interference with Customer and Supplier Relationships. Vendor and Advocat will not, from the date of the closing and for a period of five (5) years thereafter, directly or indirectly, on their own behalf or on behalf of any other person, solicit or do business with any customer or supplier of Diversicare Canada or its subsidiary in all of the Provinces of Canada for the purpose of selling or marketing any product or service which is competitive with any product or service which constitutes, or is part of, Diversicare Canada’s business as of the closing date.
Non-Competition. Vendor and Advocat will not, from the date of the closing and for a period of five (5) years thereafter, directly or indirectly own an interest in, operate or participate in any way in or with any person or other entity producing, providing, selling, distributing, consulting or providing services to, or marketing or re-marketing products, goods, equipment, or services directly competitive with or in the same line of business as the business carried on by Diversicare Canada as of the closing date. This prohibition applies in all of the provinces of Canada, but does not prohibit the ownership of less than two percent (2%) of the outstanding stock of any publicly-traded corporation, partnership or other legal entity as long as Vendor or Advocat is not otherwise in violation of the Share Purchase Agreement. The covenant also does not prohibit the acquisition (whether through asset purchase, stock purchase or merger with or into the acquirer or a subsidiary thereof) of Vendor or Advocat or their Affiliates by an entity then doing business within any of the restricted areas.
Non-Recruitment by Vendor and Advocat. Vendor and Advocat will not for a period five years hire away, or cause any other person to hire away, any employee of Diversicare Canada or any affiliate of Diversicare Canada as of the closing unless and until such person has not been employed by Diversicare Canada for a period of at least one (1) year, or directly or indirectly
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entice or solicit or seek to induce or influence any individuals employed by Diversicare Canada as of the closing to leave their employment.
Post Closing Access to Information. Holdings will for five years from the closing give, or cause to be given, to Vendor’s representatives, access to the books and records which relate to Diversicare Canada’s business that relate to periods prior to the closing, and will permit such persons to examine and copy such records to the extent reasonably requested by the Vendor in connection with the preparation of the closing financial statements, tax and financial reporting matters, audits, legal proceedings, governmental investigations and other legitimate purposes, so long as such access does not unreasonably disrupt Diversicare Canada’s business operations, violate the terms of any contract to which Diversicare Canada is a party. The Vendor or its representatives will agree to enter into an appropriate confidentiality agreement when gaining access to any of Diversicare Canada’s proprietary, confidential or classified information.
Notice to Authorities. The parties have agreed that if required by law and/or requested by the other party, each will give, as promptly as practicable, notice to applicable authorities advising them of the transactions contemplated by the Share Purchase Agreement and each will use its commercially reasonable efforts to ensure that as of the closing, all approvals have been taken and obtained.
Conditions Precedent to Holdings’ Obligations
All obligations of Holdings under the Share Purchase Agreement are, at Holdings’ option, subject to satisfaction or waiver of each of the following conditions, prior to or at the closing:
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Conditions Precedent to the Vendor’s Obligations
All obligations of Vendor under the Share Purchase Agreement are, at Vendor’s option, subject to satisfaction or waiver of each of the following conditions, prior to or at the closing:
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Satisfaction of Conditions
The Parties will use their respective best efforts to cause those conditions of closing under their reasonable control to have been satisfied on or prior to the closing. However, if any of the conditions to closing have not been fulfilled or waived at or before the time of closing, Holdings or Vendor, as the case may be, may terminate the Share Purchase Agreement by notice in writing to the other. Each party may waive compliance with any such condition without prejudicing any other rights under the Share Purchase Agreement.
Survival of Representations and Warranties, Indemnification
Vendor and Advocat. The warranties and covenants made by Vendor and Advocat in the Share Purchase Agreement will survive the closing and will continue in full force and effect for the benefit of Holdings, subject to the following:
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Holdings. The representations, warranties and covenants made by Holdings will survive the closing and will continue in full force and effect for the benefit of the Vendor, except that:
Indemnity by Vendor and Advocat. The Vendor and Advocat will, jointly and severally, in the case of representations, warranties and covenants provided by each, indemnify and save harmless Holdings from and against any claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees on a solicitor and own client basis, which may be made or brought against Holdings or which Holdings may suffer or incur as a result of, in respect of or arising out of the following:
Limitations on Vendor’s Indemnification Covenants. Holdings will not be entitled to make any Warranty Claim until the aggregate of all damages, losses, liabilities and expenses incurred by Holdings as a result of all such Warranty Claim(s) is equal to an aggregate of not less than (Cdn.) $50,000 and then only with respect to individual Warranty Claims of not less than (Cdn.) $5,000. Thereafter, Holdings will be able (subject to the survival of representations, warranties and covenants by Vendor and Advocat) to make Warranty Claims to the extent of all
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of its damages, losses, liabilities and expenses, but any such amount cannot exceed the amount of the purchase price actually paid by Holdings.
Indemnity by Holdings. Holdings will indemnify Vendor and Advocat and save them harmless from and against any and all claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees, which may be made or brought against Vendor or Advocat or which Vendor or Advocat may suffer or incur in respect of or arising out of the following:
Limitation on Holdings’ Indemnification Covenants. Neither Vendor nor Advocat may make any Warranty Claim until the aggregate of all damages, losses, liabilities and expenses incurred by Vendor as a result of all Warranty Claim(s), is equal to an aggregate of not less than (Cdn.) $50,000 and only with respect to individual Warranty Claims of not less than (Cdn.) $5,000. After the amount of such damages, losses, liabilities and expenses incurred exceeds these thresholds, Vendor and Advocat shall be entitled to make Warranty Claims to the extent of all of their damages, losses, liabilities and expenses.
Amendments and Waivers
The Share Purchase Agreement may not be amended, modified or supplemented except by written agreement of the Parties. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant under the Share Purchase Agreement, whether intentional or not, will be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant under the Share Purchase Agreement or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.
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STOCK OWNERSHIP OF DIRECTORS,EXECUTIVE OFFICERS AND PRINCIPAL HOLDERS
The table below sets forth, as of September 22, 2003, 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 three most highly compensated executive officers, and by all directors and executive officers of the Company as a group. Unless otherwise indicated, all holdings are of record and beneficial.
Number of | |||||||||||||||||
Shares | Percentage | ||||||||||||||||
Beneficially | Shares of Total | ||||||||||||||||
Name | Owned (1) | Outstanding (2) | |||||||||||||||
Wallace E. Olson (3) | |||||||||||||||||
Suite 604, 736 Georgia Avenue | |||||||||||||||||
Chattanooga, TN 37402 | 828,900 | 15.0 | % | ||||||||||||||
Joseph Zadeh (4) | |||||||||||||||||
1411 McDavid Drive | |||||||||||||||||
Aledo, TX 76008 | 743,800 | 13.5 | % | ||||||||||||||
Five Course Partners (3) | |||||||||||||||||
Suite 604, 736 Georgia Avenue | |||||||||||||||||
Chattanooga, TN 37402 | 387,400 | 7.1 | % | ||||||||||||||
Chaim Kohanchi (5)(6) | |||||||||||||||||
8941 Forest View Road | |||||||||||||||||
Evanston, IL 60203 | 327,800 | 6.0 | % | ||||||||||||||
Eugene and Joellen Nowell (6) | |||||||||||||||||
72 North Crest Road | |||||||||||||||||
Chattanooga, TN 37404 | 310,000 | 5.6 | % | ||||||||||||||
Alan Hopkins (6) | |||||||||||||||||
54 Mill Street | |||||||||||||||||
Stewartstown, PA 17363 | 277,100 | 5.0 | % | ||||||||||||||
Paul Richardson (7) | 248,454 | 4.4 | % | ||||||||||||||
William R. Council, III (8) | 50,000 | * | |||||||||||||||
William C. O’Neil, Jr. (9) | 35,600 | * | |||||||||||||||
Raymond L. Tyler (10) | 25,000 | * | |||||||||||||||
Richard M. Brame (11) | 5,000 | * | |||||||||||||||
All directors and executive officers as a group (7 persons)(12) | 1,189,204 | 20.4 | % |
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(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 | |
(3) | Mr. | |
(4) | Mr. Olson’s shares | |
Includes | ||
(6) | Based solely on a Schedule 13G/A filed by Altrinsic Global Advisors, LLC on February 10, 2009. | |
(7) | Based solely on a Preliminary Proxy statement filed by Bristol Investment Fund, LTD on April 10, 2009. | |
(8) | Based solely on a Schedule 13G filed by FMR LLC on February 17, 2009. | |
(9) | Based solely on a Schedule 13G filed by Wellington Management Company, LLP on February 17, 2009. | |
(10) | Includes | |
Includes | ||
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ADVOCAT INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated financial statements illustrate the effect of the disposition of the Canadian operations, under the terms of the proposed transaction, on the historical financial position and results of the Company. The unaudited pro forma consolidated statement of operations for the six months ended June 30, 2003 gives effect to the disposition as if it occurred on January 1, 2003. The unaudited pro forma consolidated statements of operations for the year ended December 31, 2002 gives effect to the disposition as if it occurred on January 1, 2002. The unaudited pro forma consolidated balance sheet as of June 30, 2003 gives effect to the disposition as if it occurred on June 30, 2003.
We based this pro forma financial information on our historical consolidated financial statements, removing the assets and liabilities to be acquired and assumed by the purchaser and the revenues and expenses associated with the business activities to be transferred to the purchaser. The pro forma adjustments are based on preliminary estimates of currently available information and assumptions that are believed to be reasonable. The unaudited pro forma consolidated financial statements are presented for informational purposes only and are not intended to be indicative of either future results of operations or results that might have been achieved if the transactions occurred on the dates specified.
The unaudited pro forma consolidated financial statements should be read in conjunction with the historical consolidated financial statements and the related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002 and the Quarterly Report on Form 10-Q for the period ended June 30, 2003, incorporated by reference herein. See “Where You Can Find More Information.”
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ADVOCAT INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONSFor the Six Months Ended June 30, 2003(In thousands, except per share data)
Advocat | |||||||||||||||||||
Historical | Canadian | Pro Forma | Advocat | ||||||||||||||||
Consolidated | Operations (a) | Adjustments | Pro Forma | ||||||||||||||||
REVENUES: | |||||||||||||||||||
Patient revenues, net | $ | 88,162 | $ | (2,651 | ) | $ | 85,511 | ||||||||||||
Resident revenues | 11,823 | (5,188 | ) | 6,635 | |||||||||||||||
Management fees | 1,523 | (1,442 | ) | 81 | |||||||||||||||
Equity in joint venture income | 108 | (108 | ) | — | |||||||||||||||
Interest | 134 | (104 | ) | $ | 171 | (b) | 201 | ||||||||||||
Net revenues | 101,750 | (9,493 | ) | 171 | 92,428 | ||||||||||||||
EXPENSES: | |||||||||||||||||||
Operating | 93,115 | (6,071 | ) | 87,044 | |||||||||||||||
Lease | 8,002 | (572 | ) | 7,430 | |||||||||||||||
General and administrative | 6,436 | (1,163 | ) | 5,273 | |||||||||||||||
Interest | 1,728 | (210 | ) | (140 | ) (c) | 1,378 | |||||||||||||
Depreciation and amortization | 2,740 | (301 | ) | 2,439 | |||||||||||||||
Asset impairment and non-recurring charges | 364 | 364 | |||||||||||||||||
Total expenses | 112,385 | (8,317 | ) | (140 | ) | 103,928 | |||||||||||||
LOSS BEFORE INCOME TAXES | (10,635 | ) | (1,176 | ) | 311 | (11,500 | ) | ||||||||||||
PROVISION FOR INCOME TAXES | 275 | (260 | ) | 15 | (d) | 30 | |||||||||||||
LOSS FROM CONTINUING OPERATIONS | $ | (10,910 | ) | $ | (916 | ) | $ | 296 | $ | (11,530 | ) | ||||||||
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE: | |||||||||||||||||||
Basic | $ | (2.01 | ) | $ | (2.12 | ) | |||||||||||||
Diluted | $ | (2.01 | ) | $ | (2.12 | ) | |||||||||||||
WEIGHTED AVERAGE SHARES: | |||||||||||||||||||
Basic | 5,493 | 5,493 | |||||||||||||||||
Diluted | 5,493 | 5,493 |
See accompanying introductory comments and notes to the Unaudited Pro Forma Consolidated Financial Statements.
37
ADVOCAT INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONSFor the Twelve Months Ended December 31, 2002(In thousands, except per share data)
Advocat | |||||||||||||||||||
Historical | Canadian | Pro Forma | Advocat | ||||||||||||||||
Consolidated | Operations (a) | Adjustments | Pro Forma | ||||||||||||||||
REVENUES: | |||||||||||||||||||
Patient revenues, net | $ | 166,470 | $ | (4,644 | ) | $ | 161,826 | ||||||||||||
Resident revenues | 29,437 | (9,295 | ) | 20,142 | |||||||||||||||
Management fees | 2,856 | (2,856 | ) | — | |||||||||||||||
Equity in joint venture income | 163 | (163 | ) | — | |||||||||||||||
Interest | 142 | (131 | ) | $ | 325 | (b) | 336 | ||||||||||||
Net revenues | 199,068 | (17,089 | ) | 325 | 182,304 | ||||||||||||||
EXPENSES: | |||||||||||||||||||
Operating | 167,522 | (10,804 | ) | 156,718 | |||||||||||||||
Lease | 17,194 | (1,082 | ) | 16,112 | |||||||||||||||
General and administrative | 14,274 | (2,137 | ) | 12,137 | |||||||||||||||
Interest | 4,093 | (376 | ) | (300 | )(c) | 3,417 | |||||||||||||
Depreciation and amortization | 5,549 | (524 | ) | 5,025 | |||||||||||||||
Asset impairment and non-recurring charges | 3,370 | 3,370 | |||||||||||||||||
Total expenses | 212,002 | (14,923 | ) | (300 | ) | 196,779 | |||||||||||||
LOSS BEFORE INCOME TAXES | (12,934 | ) | (2,166 | ) | 625 | (14,475 | ) | ||||||||||||
PROVISION (BENEFIT) FOR INCOME TAXES | 69 | (456 | ) | 30 | (d) | (357 | ) | ||||||||||||
LOSS FROM CONTINUING OPERATIONS | $ | (13,003 | ) | $ | (1,710 | ) | $ | 595 | $ | (14,118 | ) | ||||||||
BASIC AND DILUTED LOSS FROM CONTINUING OPERATIONS PER COMMON SHARE: | |||||||||||||||||||
Basic | $ | (2.42 | ) | $ | (2.62 | ) | |||||||||||||
Diluted | $ | (2.42 | ) | $ | (2.62 | ) | |||||||||||||
WEIGHTED AVERAGE SHARES: | |||||||||||||||||||
Basic | 5,493 | 5,493 | |||||||||||||||||
Diluted | 5,493 | 5,493 |
See accompanying introductory comments and notes to the Unaudited Pro Forma Consolidated Financial Statements.
38
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEETJune 30, 2003(In thousands)
Advocat | ||||||||||||||||||
Historical | Canadian | Pro Forma | Advocat | |||||||||||||||
Consolidated | Operations (a) | Adjustments | Pro Forma | |||||||||||||||
CURRENT ASSETS: | ||||||||||||||||||
Cash and cash equivalents | $ | 10,873 | $ | (5,684 | ) | $ | 5,189 | |||||||||||
Restricted cash | 1,252 | 1,252 | ||||||||||||||||
Receivables, net | 13,992 | (636 | ) | $ | 415 | (b) | 13,771 | |||||||||||
Inventories | 555 | (37 | ) | 518 | ||||||||||||||
Prepaid expenses and other current assets | 1,405 | (134 | ) | 1,271 | ||||||||||||||
Total current assets | 28,077 | (6,491 | ) | 415 | 22,001 | |||||||||||||
PROPERTY AND EQUIPMENT, at cost | 96,286 | (14,339 | ) | 81,947 | ||||||||||||||
Less accumulated depreciation | (36,223 | ) | 2,726 | (33,497 | ) | |||||||||||||
Property and equipment, net | 60,063 | (11,613 | ) | 48,450 | ||||||||||||||
OTHER ASSETS: | ||||||||||||||||||
Deferred financing and other costs, net | 271 | (88 | ) | 183 | ||||||||||||||
Deferred lease costs, net | 1,703 | 1,703 | ||||||||||||||||
Investments in and receivables from joint ventures | 1,943 | (1,943 | ) | |||||||||||||||
Notes receivable | 4,743 | (b) | 4,743 | |||||||||||||||
Other assets | 1,165 | (270 | ) | 895 | ||||||||||||||
Total other assets | 5,082 | (2,301 | ) | 4,743 | 7,524 | |||||||||||||
$ | 93,222 | $ | (20,405 | ) | $ | 5,158 | $ | 77,975 | ||||||||||
CURRENT LIABILITIES | ||||||||||||||||||
Current portion of long-term debt | $ | 9,183 | $ | (172 | ) | $ | 9,011 | |||||||||||
Short-term debt | 43,641 | $ | (4,645 | )(c) | 38,996 | |||||||||||||
Trade accounts payable | 7,942 | (1,099 | ) | 6,843 | ||||||||||||||
Accrued expenses: | ||||||||||||||||||
Payroll and employee benefits | 8,005 | (1,014 | ) | 6,991 | ||||||||||||||
Interest | 170 | (34 | ) | 136 | ||||||||||||||
Current portion of self-insurance reserves | 11,866 | (34 | ) | 11,832 | ||||||||||||||
Other accrued liabilities | 4,520 | (436 | ) | 4,084 | ||||||||||||||
Total current liabilities | 85,327 | (2,789 | ) | (4,645 | ) | 77,893 | ||||||||||||
NONCURRENT LIABILITIES | ||||||||||||||||||
Long-term debt, less current portion | 6,575 | (6,170 | ) | 405 | ||||||||||||||
Self-insurance reserves, less current portion | 36,125 | 36,125 | ||||||||||||||||
Other noncurrent liabilities | 4,127 | (28 | ) | 4,099 | ||||||||||||||
Total noncurrent liabilities | 46,827 | (6,198 | ) | 40,629 | ||||||||||||||
COMMITMENTS AND CONTINGENCIES | ||||||||||||||||||
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK | ||||||||||||||||||
Authorized 600,000 shares, $.10 par value, 393,658 shares issued and outstanding at redemption value | 3,994 | 3,994 | ||||||||||||||||
SHAREHOLDERS’ EQUITY (DEFICIT): | ||||||||||||||||||
Preferred stock, authorized 400,000 shares, $.10 par value, none issued and outstanding | — | |||||||||||||||||
Common stock, authorized 20,000 shares, $.01 par value, 5,493,000 issued and outstanding | 55 | 55 | ||||||||||||||||
Paid-in capital | 15,908 | 15,908 | ||||||||||||||||
Accumulated deficit | (59,966 | ) | (538 | )(d) | (60,504 | ) | ||||||||||||
Cumulative translation adjustment | 1,077 | (1,077 | ) | — | ||||||||||||||
Total shareholders’ deficit | (42,926 | ) | (1,077 | ) | (538 | ) | (44,541 | ) | ||||||||||
$ | 93,222 | $ | (10,064 | ) | $ | (5,183 | ) | $ | 77,975 | |||||||||
See accompanying introductory comments and notes to the Unaudited Pro Forma Consolidated Financial Statements.
39
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
Cash portion of purchase price, in US Dollars at June 30, 2003 exchange rate | $ | 6,313 | ||
Less: Financial advisory, legal and other professional fees | (785 | ) | ||
Estimated income tax payments | (883 | ) | ||
Net cash proceeds available for debt retirement | $ | 4,645 | ||
6
40
Cash proceeds from sale of Canadian operations | $ | 6,313 | |||
Note receivable, net of discount | 5,158 | ||||
Total proceeds | 11,471 | ||||
Less: net assets of the Canadian operations | (10,341 | ) | |||
Transaction expenses | (785 | ) | |||
Gain on sale of Canadian operations | 345 | ||||
Estimated income tax expense | (883 | ) | |||
Increase in Accumulated deficit | $ | (538 | ) | ||
The actual change in Accumulated deficit will depend on the financial position of the Canadian operations at the closing, future exchange rates, and the final determination of income and other taxes due on the sale, and may vary from the pro forma amounts shown above.
WHERE YOU CAN FIND MORE INFORMATION
Upon the written request of any record holder or beneficial owner of the common stock entitled to vote at the special meeting, the Company will provide without charge, a copy of its Annual Report on Form 10-K for the year ending December 31, 2002, including financial statements and financial statement schedules, and each of its Quarterly reports on Form 10-Q for the quarters ending March 31, 2003 and June 30, 2003, as filed with the Securities and Exchange Commission (“SEC”). 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.
Additionally, as required by law, we file reports, proxy statements and other information with the SEC (SEC file number: 001-12966). These reports, proxy statements and other information contain additional information about us. You can inspect and copy these materials at the SEC’s public reference facilities at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, 233 Broadway, New York, New York 10007 and 175 West Jackson Boulevard, Chicago, Illinois 60604. You can obtain information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet web site that contains reports, proxy and information statements and other information regarding companies that file electronically with the SEC. A copy of each of the Company’s filings is retrievable free of charge through the EDGAR system maintained by the SEC at the SEC’s website: www.sec.gov. The Company’s SEC filings, including the Annual Report on Form 10-K, can also be accessed through the Company’s website: http://www.irinfo.com/avc.
41
OTHER MATTERS
The management of the Company is not aware of any other matters to be brought before the special 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.
DEADLINE FOR SUBMITTING STOCKHOLDERS PROPOSALS
Any proposal by a stockholder for consideration at the 2004 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 January 1, 2004, if any such proposal is to be eligible for inclusion in the Company’s proxy materials for its 2004 annual meeting. Stockholders who intend to present a proposal at the 2004 annual meeting without inclusion of such proposal in the Company’s proxy materials are required to provide such proposals to the Company no later than March 1, 2004.
EACH STOCKHOLDER IS URGED TO EXECUTE AND RETURN THE ENCLOSED PROXY PROMPTLY.IN THE EVENT A STOCKHOLDER DECIDES TO ATTEND THE SPECIAL MEETING, HE MAY, IF HEWISHES, REVOKE HIS PROXY AND VOTE HIS SHARES IN PERSON. IN ADDITION, ASTOCKHOLDER MAY REVOKE HIS PROXY AT ANY TIME BEFORE SUCH PROXY IS VOTED.
42
Annex A
SHARE PURCHASE AGREEMENT
Dated as of August 25, 2003
TABLE OF CONTENTS
Director Since | Principal Occupation Last Five Years | |||||||
William R. Council, III | ||||||||
Member of the Board of Directors of the Company since 2002; President and Chief Executive Officer from March 2003 to present; Interim Chief Executive Officer from October 2002 to March 2003; Executive Vice President, Chief Financial Officer and Secretary of the Company from March 2001 to December 2002. Mr. Council is a Certified Public Accountant. |
7
Richard M. Brame | 55 | December 2002 | Member of the Board of Directors of the Company since December 2002; Chief Financial Officer of Covington Senior Living, LLC, Atlanta, GA. President of Regency Health Management, LLC from July 1999 to March 2008; President of Regency Healthcare, LLC from 2006 to March 2008; President of Ooltewah Investments, Inc. from 1992 to 2006. President of the General Partner of San Angelo Nursing Center, LP from October 2001 to March 2005. |
Name of Directors | Age | Director Since | Principal Occupation Last Five Years | |||||
William C. O’Neil, Jr. | 74 | Inception | Member of the Board of Directors of the Company since 1994; Private Investor; director of HealthWays, a specialty health care service company; director of American HomePatient, Inc. a provider of home health care products and services. | |||||
Robert Z. Hensley | 51 | July 2005 | Member of the Board of Directors of the Company since July 2005; director, Capella Healthcare Inc. from January 2009 to present; Senior Advisor to Alvarez & Marsal Transaction Advisory Group from June 2008 to present; A Founder of Life’s A Beach Publications LLC, a private publishing company, from 2003 to present; Managing member and principal owner of two real estate and rental property development companies from 2001 to present; Currently a director of HealthSpring, Inc., Spheris, Inc. and Comsys IT Partners, Inc.; Audit Partner at Ernst & Young, LLP from July 2002 to September 2003; Audit Partner at Arthur Andersen, LLP from 1990 to 2002; Managing Partner at Arthur Andersen, LLP from 1997 to 2002. Mr. Hensley holds a Master of Accountancy degree, a BS in Accounting and is a Certified Public Accountant. |
8
Name of Director | Age | Director Since | Principal Occupation Last Five Years | |||||
Wallace E. Olson | 62 | March 2002 | Chairman of the Board of Directors of the Company from October 2002 to present; Member of the Board of Directors of the Company since March 2002. He has been a private investor, managing his personal finances, since May 1996. | |||||
Chad A. McCurdy | 40 | March 2008 | Member of the Board of Directors of the Company since March 2008; Managing Partner of Marlin Capital Partners, LLC from 2004 to present; Broker with First Dallas Securities from 2003 through 2004. Graduate of Southern Methodist University, Cox School of Business. |
9
10
Non-Employee Director Compensation | ||||||||||||||||||||
For the Year Ended December 31, 2008 | ||||||||||||||||||||
Fees Earned or Paid in Cash | ||||||||||||||||||||
Regular | Supplemental | Option | All Other | |||||||||||||||||
Director | Fees ($)(1) | Fees ($)(2) | Awards ($)(7) | Compensation ($)(8) | Total ($) | |||||||||||||||
Wallace E. Olson | 33,000 | 44,000 | (3) | 7,790 | 12,103 | 96,893 | ||||||||||||||
William C. O’Neil, Jr. | 33,000 | 42,500 | (4) | 7,790 | - | 83,290 | ||||||||||||||
Richard M. Brame | 33,000 | 36,250 | (5) | 7,790 | - | 77,040 | ||||||||||||||
Robert Z. Hensley | 33,000 | 36,750 | (6) | 7,790 | - | 77,540 | ||||||||||||||
Chad A. McCurdy(9) | 24,000 | 27,500 | - | - | 51,500 |
(1) | “Regular fees” represent an annual directors fee of $36,000 paid to directors who are not officers, employees, or consultants of the Company for the period from January 1 through June 30, 2008. Effective July 1, 2008 the Board restructured the compensation fee schedule and this amount change to $30,000 annually. | |
(2) | “Supplemental fees” are paid to directors for attendance at board meetings and committee meetings. | |
(3) | Mr. Olson received $15,000 for serving as Chair of the Board meetings. | |
(4) | Mr. O’Neil received $12,500 for serving as Chair of the audit committee meetings. |
11
(5) | Mr. Brame received $6,250 for serving as Chair of the compensation committee meetings. | |
(6) | Mr. Hensley received $6,250 for serving as Chair of the nominating and corporate governance committee meetings. | |
(7) | The expense related to equity awards is based on equity grants valued under the assumptions contained in Note 9 to our Consolidated Financial Statements and is non-cash in nature. Such expense is recognized over the vesting period of the equity awards. | |
(8) | Includes insurance premiums paid by the Company for non-employee directors. | |
(9) | Mr. McCurdy became a board member effective March 12, 2008 and, therefore, did not receive the full year compensation for the annual directors fee. |
Name of Officer | Age | Officer Since | Position with the Company | |||||
William R. Council, III | 47 | March 5, 2001 | President and Chief Executive Officer from March 2003 to present; Interim Chief Executive Officer from October 2002 to March 2003; Executive Vice President, Chief Financial Officer and Secretary of the Company from March 5, 2001 to December 2002. Mr. Council is a Certified Public Accountant. | |||||
Raymond L. Tyler, Jr. | 58 | October 18, 2002 | Senior Vice President of Nursing Home Operations of the Company from March 2009 to present; Executive Vice President and Chief Operating Officer of the Company from December 2003 to March 2009; Senior Vice President of Operations of the Company from October 2002 to December 2003; Vice President of Operations of the Company from January 2001 to October 2002. | |||||
L. Glynn Riddle, Jr. | 49 | December 9, 2002 | Executive Vice President, Chief Financial Officer and Secretary of the Company since December 2002. Mr. Riddle is a Certified Public Accountant. |
12
• | Performance based. Emphasizing pay for performance by having a significant portion of executive compensation “at risk.” | ||
• | Retention. Providing compensation opportunities that attract and retain talented and committed executives on a long-term basis. | ||
• | Balance. Appropriately balancing the Company’s short-term and long-term business, financial and strategic goals. |
• | Profitability. To maximize financial returns to its shareholders, in the context of providing high quality service. | ||
• | Quality. To achieve leadership in the provision of relevant and high quality health services. | ||
• | Stability. To be a desirable employer and a responsible corporate citizen. |
13
Almost Family, Inc. | Healthways, Inc. | |
Amedisys, Inc. | LCA-Vision Inc. | |
Amsurg Corp. | LHC Group, Inc. | |
Assisted Living Concepts, Inc. | National HealthCare Corporation | |
Capital Senior Living Corporation | Odyssey HealthCare Inc. | |
Continucare Corporation | RehabCare Group, Inc. | |
Emeritus Corporation | Skilled Healthcare Group, Inc. | |
Ensign Group, Inc. | U.S. Physical Therapy, Inc. | |
Hanger Orthopedic Group, Inc. |
14
2008 Salary | ||||
William R. Council, III | Chief Executive Officer | $442,000 | ||
Raymond L. Tyler, Jr. | Chief Operating Officer | $308,000 | ||
L. Glynn Riddle, Jr. | Chief Financial Officer | $229,000 |
Position | Bonus Target | |
Chief Executive Officer | 50% of | |
Chief Operating Officer | 40% of base salary | |
Chief Financial Officer | 35% of base salary |
% | |||||||
% | |||||||
% |
• | 80% or less of budget, executive earns 0% of the target bonus for this category; | ||
• | |||
• | 101% to 125% of budget, 15% of the incremental earned net operating income is placed into a pool to be shared among the participants. Sharing of the pool may be discretionary and/or pro rata. | ||
• | Above 125% - additional amounts may be awarded at the discretion of the Board of Directors. |
Discretionary: 30% of the bonus was based on subjective matters of performance at the discretion of the Board, including quality of care measures. |
15
Percent of | ||||||||||
Name | Position | 2008 Bonus | Base Salary | |||||||
William R. Council, III | Chief Executive Officer | $ | 53,000 | 12.0 | % | |||||
Raymond L. Tyler, Jr. | Chief Operating Officer | $ | 20,000 | 6.5 | % | |||||
L. Glynn Riddle, Jr. | Chief Financial Officer | $ | 25,000 | 10.9 | % |
16
17
Amount of 2008 Bonus | Number of RSUs | |||||||
Name | Used to Purchase RSUs | Purchased | ||||||
William R. Council, III | $ | 26,500 | 12,801.93 | |||||
Raymond L. Tyler, Jr. | $ | 10,000 | 4,830.92 | |||||
L. Glynn Riddle, Jr. | $ | 12,500 | 6,038.65 |
18
Bonus Target | ||||||
William R. Council, III | Chief Executive Officer | 50% of base salary | ||||
Raymond L. Tyler, Jr. | Senior Vice President of Nursing Home Ops | 35% of base salary | ||||
L. Glynn Riddle, Jr. | Chief Financial | 35% of base salary |
Net operating income (as defined) | ||||||
Discretionary/quality measures/individual performance | 30% | |||||
Total | 100% |
• | 80% (or less) of budget – executive would earn 0% of the target bonus for this category | |
• | 81% to 100% of budget – executive would earn 5% of the target bonus for this category for each 1% of budget achieved above 80%. | |
• | 101% to 125% - 15% of the incremental earned net operating income would be placed into a pool, to be shared among the participants. Sharing of the pool can be discretionary and/or pro rata. | |
• | Above 125% - additional amounts may be awarded at the discretion of the Board of Directors. |
19
Name | Position | 2009 Salary | ||
William R. Council, III | Chief Executive Officer | $442,000 | ||
Raymond L. Tyler, Jr. | Senior Vice President of Nursing Home Operations | $250,000 | ||
L. Glynn Riddle, Jr. | Chief Financial Officer | $229,000 |
Compensation Committee: | Richard M. Brame, Chair William C. O’Neil, Jr. Wallace E. Olson |
20
Summary Compensation Table | ||||||||||||||||||||||||||||
Name and Principal | Option | Other Annual | All Other | |||||||||||||||||||||||||
Position | Year | Salary($) | Bonus($)(1) | Awards(2) | Compensation($)(3) | Compensation($)(4) | Total ($) | |||||||||||||||||||||
(a) | (b) | (c) | (d) | (e) | (f) | (g) | ||||||||||||||||||||||
William R. Council, III | 2008 | 442,000 | 53,000 | 194,752 | 35,360 | 1,839 | 726,951 | |||||||||||||||||||||
President and | 2007 | 425,000 | 298,835 | 126,192 | 34,000 | 1,647 | 885,674 | |||||||||||||||||||||
Chief Executive Officer | 2006 | 389,000 | 264,041 | 1,191,000 | (5) | 31,098 | 1,555 | 1,876,694 | ||||||||||||||||||||
Raymond L. Tyler, Jr. | 2008 | 308,000 | 20,000 | 116,851 | 24,652 | 1,784 | 471,287 | |||||||||||||||||||||
Executive Vice President and | 2007 | 296,000 | 156,923 | 75,715 | 23,704 | 2,616 | 554.958 | |||||||||||||||||||||
Chief Operating Officer(6) | 2006 | 285,000 | 150,628 | 397,000 | (5) | 22,805 | 2,834 | 858,267 | ||||||||||||||||||||
L. Glynn Riddle, Jr. | 2008 | 229,000 | 25,000 | 77,901 | 18,288 | 1,716 | 351,905 | |||||||||||||||||||||
Executive Vice President and | 2007 | 220,000 | 111,792 | 50,477 | 17,854 | 1,858 | 401,981 | |||||||||||||||||||||
Chief Financial Officer | 2006 | 211,000 | 100,547 | 794,000 | (5) | 16,917 | 1,516 | 1,123,980 |
(1) | Includes annual incentive bonus amounts which were expensed during 2008 and paid in March 2009. Each Named Executive Officer elected to receive 50% of this bonus in Restricted Share Units. | ||
(2) | Expense related to equity awards is valued under the assumptions contained in Note 9 to our Consolidated Financial Statements. Such expense is recognized over the vesting period of the equity awards. The expense is calculated in accordance with generally accepted accounting principles in the United States of America and does not necessarily reflect the actual value received by the executive, which may be more or less than the amount shown or zero. As discussed below, the Named Executive Officers were granted SOSARs in March 2009 which were related to performance by the Named Executive Officers in 2008. | ||
(3) | Includes contributions under the Company’s Executive Incentive Retirement Plan. | ||
(4) | Includes matching contributions under the Company’s 401(k) plan as well as a holiday bonus of $816, $816 and $748 paid in December 2008 to Mr. Council, Mr. Tyler and Mr. Riddle, respectively. | ||
(5) | Option award expense is significantly higher than other years due to special one time grant of 332,400 options during 2005. The options were subject to shareholder approval and resulted in the compensation expense being recorded in 2006. The increase in the Company’s stock price from December 2005 to June 2006 resulted in the large non-cash compensation charge. | ||
(6) | Mr. Tyler served as Chief Operating Office until March 2009 and presently serves as Senior Vice President of Nursing Home Operations. |
Grants of Plan-Based Awards | ||||||||||||||||||||||||||||||||||||||||||||
All Other | ||||||||||||||||||||||||||||||||||||||||||||
Option | ||||||||||||||||||||||||||||||||||||||||||||
All Other | Awards: | |||||||||||||||||||||||||||||||||||||||||||
Stock | Number of | |||||||||||||||||||||||||||||||||||||||||||
Awards: | Securities | Exercise or | Grant Date | |||||||||||||||||||||||||||||||||||||||||
Estimated Future Payouts Under Non- | Estimated Future Payouts Under | Number | Underlying | Base Price | Fair Value | |||||||||||||||||||||||||||||||||||||||
Equity Incentive Plan Awards(1) | Equity Incentive Plan Awards | of Shares | Option | of Option | of Stock | |||||||||||||||||||||||||||||||||||||||
Grant | Threshold | Target | Maximum | Threshold | Target | Maximum | of Stock | Grants (#) | Awards | and Option | ||||||||||||||||||||||||||||||||||
Name | Date | ($) | ($) | ($) | ($) | ($) | ($) | (#) | (2)(3) | ($/sh)(4) | Awards | |||||||||||||||||||||||||||||||||
William R. Council III | N/A | - | 221,000 | N/A | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | N/A | - | 154,000 | N/A | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
L. Glynn Riddle, Jr. | N/A | - | 115,000 | N/A | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||
William R. Council III | 03/14/08 | - | - | - | - | - | - | - | 25,000 | $ | 10.88 | $ | 235,000 | |||||||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | 03/14/08 | - | - | - | - | - | - | - | 15,000 | $ | 10.88 | $ | 141,000 | |||||||||||||||||||||||||||||||
L. Glynn Riddle, Jr. | 03/14/08 | - | - | - | - | - | - | - | 10,000 | $ | 10.88 | $ | 94,000 |
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(1) | Amounts represent target bonus percentages for 2008 and are based upon the salaries of the executive officers as of December 31, 2008. The target amount is based on the Company achieving 100% of budget. The amount actually paid under this non-equity incentive plan is included in the Summary Compensation Table (column d). | ||
(2) | These SOSARs were granted in March 2008 and the expense is recognized for financial statement purposes over the vesting period beginning in 2008 although the grant of the SOSAR related to performance for 2007. This table does not include the SOSARs granted in March 2009 which related to performance for 2008 as discussed below. | ||
(3) | These awards are also included in the Summary Compensation Table (column e) and the Outstanding Equity Awards at Year End table. | ||
(4) | Base price of SOSAR awards is based on the average of the high and low price on the date of grant |
Outstanding Equity Awards at Year End December 31, 2008 | ||||||||||||||||||||||||||||||||||||
SOSAR and Option Awards | Stock Awards | |||||||||||||||||||||||||||||||||||
Equity | ||||||||||||||||||||||||||||||||||||
Equity | Incentive | |||||||||||||||||||||||||||||||||||
Equity | Incentive | Plan Awards: | ||||||||||||||||||||||||||||||||||
Incentive Plan | Market | Plan Awards: | Market or | |||||||||||||||||||||||||||||||||
Awards: | Number | Value of | Number of | Payout Value | ||||||||||||||||||||||||||||||||
Number of | Number of | Number of | of Shares | Shares or | Unearned | of Unearned | ||||||||||||||||||||||||||||||
Securities | Securities | Securities | or Units | Units of | Shares, Units | Shares Units | ||||||||||||||||||||||||||||||
Underlying | Underlying | Underlying | of Stock | Stock | or Other | or Other | ||||||||||||||||||||||||||||||
Unexercised | Unexercised | Unexercised | Option | Option | That | That Have | Rights That | Rights That | ||||||||||||||||||||||||||||
Options (#) | Options (#) | Unearned | Exercise | Expiration | Have Not | Not | Have Not | Have Not | ||||||||||||||||||||||||||||
Name | Exercisable(1) | Unexercisable(1) | Options (#) | Price ($) | Date | Vested | Vested (#) | Vested (#) | Vested (#) | |||||||||||||||||||||||||||
William R. Council III | 50,000 | - | - | $0.35 | 04/09/2011 | - | - | - | - | |||||||||||||||||||||||||||
William R. Council III | 75,000 | - | - | $5.44 | 12/13/2015 | - | - | - | - | |||||||||||||||||||||||||||
William R. Council III | 8,333 | 16,667 | - | $11.59 | 03/07/2017 | - | - | - | - | |||||||||||||||||||||||||||
William R. Council III | - | 25,000 | - | $10.88 | 03/14/2018 | - | - | - | - | |||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | 25,000 | - | - | $0.35 | 04/09/2011 | - | - | - | - | |||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | 25,000 | - | - | $5.44 | 12/13/2015 | - | - | - | - | |||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | 5,000 | 10,000 | - | $11.59 | 03/07/2017 | - | - | - | - | |||||||||||||||||||||||||||
Raymond L. Tyler, Jr. | - | 15,000 | - | $10.88 | 03/14/2018 | - | - | - | - | |||||||||||||||||||||||||||
L. Glynn Riddle, Jr. | 50,000 | - | - | $5.44 | 12/13/2015 | - | - | - | - | |||||||||||||||||||||||||||
L. Glynn Riddle, Jr. | 3,333 | 6,667 | - | $11.59 | 03/07/2017 | - | - | - | - | |||||||||||||||||||||||||||
L. Glynn Riddle, Jr. | - | 10,000 | - | $10.88 | 03/14/2018 | - | - | - | - |
(1) | Each option and SOSAR grant vests one-third on each of the first, second and third anniversary of the date of grant. |
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Termination | Change in | |||||||||||||||||||||||||||
without | Control | Change in | ||||||||||||||||||||||||||
Cause or | Resulting in | Control Not | ||||||||||||||||||||||||||
Voluntary | Termination | Constructive | Termination or | Resulting in | ||||||||||||||||||||||||
Estimated Payments | Termination | for Cause | Discharge | Resignation | Termination | Death | Disability | |||||||||||||||||||||
Severance—Salary | — | — | $ | 1,105,000 | $ | 1,105,000 | — | — | — | |||||||||||||||||||
Severance—Bonus | — | — | $ | 53,000 | (1) | $ | 53,000 | (1) | — | — | — | |||||||||||||||||
Vesting of unvested equity awards | — | — | — | (2) | — | (2) | — | (2) | — | — | ||||||||||||||||||
Repurchase of outstanding options | — | — | $ | 132,000 | (3) | $ | 132,000 | (3) | — | — | ||||||||||||||||||
Benefits/Perquisites | — | — | $ | 63,202 | (4) | $ | 63,202 | (4) | — | — | — | |||||||||||||||||
TOTAL | — | — | $ | 1,353,202 | $ | 1,353,202 | — | — | — | |||||||||||||||||||
(1) | Based on the annual incentive earned by Mr. Council during 2008 which was not paid as of December 31, 2008. | |
(2) | As of December 31, 2008, Mr. Council had 41,667 SOSAR equity awards which were not already fully vested. The exercise price of these SOSARs was greater than the closing share price of Advocat’s stock at December 31, 2008; therefore, no amounts would be paid for those SOSARs upon termination. In March 2009, Mr. Council received SOSARs which vest over a 3 year period. | |
(3) | Based on options to purchase 50,000 shares of common stock held by Mr. Council times $2.99, the closing price of Advocat’s stock on the last trading date of the year, less the exercise price of the options. The exercise price of 75,000 vested options and 8,333 vested SOSARs was greater than the closing share price of Advocat’s stock at December 31, 2008. | |
(4) | Based on estimated cost of continued health insurance, disability insurance, 401(k) Company match and EIRP amounts for 18 months following termination. |
Termination | Change in | |||||||||||||||||||||||||||
without | Control | Change in | ||||||||||||||||||||||||||
Cause or | Resulting in | Control Not | ||||||||||||||||||||||||||
Voluntary | Termination | Constructive | Termination or | Resulting in | ||||||||||||||||||||||||
Estimated Payments | Termination | for Cause | Discharge | Resignation | Termination | Death | Disability | |||||||||||||||||||||
Severance—Salary | — | — | $ | 308,148 | $ | 308,148 | — | — | — | |||||||||||||||||||
Severance—Bonus | — | — | $ | 20,000 | (1) | $ | 20,000 | (1) | — | — | — | |||||||||||||||||
Vesting of unvested equity awards | — | — | — | (2) | — | (2) | — | (2) | — | — | ||||||||||||||||||
Repurchase of outstanding options | — | — | $ | 66,000 | (3) | $ | 66,000 | (3) | — | — | ||||||||||||||||||
Benefits/Perquisites | — | — | $ | 53,264 | (4) | $ | 53,264 | (4) | — | — | — | |||||||||||||||||
TOTAL | — | — | $ | 447,412 | $ | 447,412 | — | — | — | |||||||||||||||||||
(1) | Based on the annual incentive earned by Mr. Tyler during 2008 which was not paid as of December 31, 2008. | |
(2) | As of December 31, 2008, Mr. Tyler had 25,000 SOSAR equity awards which were not already fully vested. The exercise price of these SOSARs was greater than the closing share price of Advocat’s stock at December 31, 2008; therefore, no amounts would be paid for these SOSARs upon termination. In March 2009, Mr. Tyler received SOSARs which vest over a 3 year period. | |
(3) | Based on options to purchase 25,000 shares of common stock held by Mr. Tyler times $2.99, the closing price of Advocat’s stock on the last trading date of the year, less the exercise price of the options. The exercise price of 25,000 options and 5,000 vested SOSARs was greater than the closing share price of Advocat’s stock at December 31, 2008. | |
(4) | Based on estimated cost of continued health insurance, disability insurance, 401(k) Company match and EIRP amounts for 18 months following termination. |
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Termination | Change in | |||||||||||||||||||||||||||
without | Control | Change in | ||||||||||||||||||||||||||
Cause or | Resulting in | Control Not | ||||||||||||||||||||||||||
Voluntary | Termination | Constructive | Termination or | Resulting in | ||||||||||||||||||||||||
Estimated Payments | Termination | for Cause | Discharge | Resignation | Termination | Death | Disability | |||||||||||||||||||||
Severance—Salary | — | — | $ | 228,596 | $ | 228,596 | — | — | — | |||||||||||||||||||
Severance—Bonus | — | — | $ | 25,000 | (1) | $ | 25,000 | (1) | — | — | — | |||||||||||||||||
Vesting of unvested equity awards | — | — | — | (2) | — | (2) | — | (2) | — | — | ||||||||||||||||||
Repurchase of outstanding options | — | — | — | (3) | — | (3) | — | — | ||||||||||||||||||||
Benefits/Perquisites | — | — | $ | 51,590 | (4) | $ | 51,590 | (4) | — | — | — | |||||||||||||||||
TOTAL | — | — | $ | 305,186 | $ | 305,186 | — | — | — | |||||||||||||||||||
(1) | Based on the annual incentive earned by Mr. Riddle during 2008 which was not paid as of December 31, 2008. | |
(2) | As of December 31, 2008, Mr. Riddle had 16,667 SOSAR equity awards which were not already fully vested. The exercise price of these SOSARs was greater than the closing share price of Advocat’s stock at December 31, 2008; therefore, no amounts would be paid for these SOSARs upon termination. In March 2009, Mr. Riddle received SOSARs which vest over a 3 year period. | |
(3) | Based on options to purchase 50,000 shares of common stock and 3,333 vested SOSARs held by Mr. Riddle all of which had a greater exercise price than the closing price of Advocat’s stock on the last trading date of the year. | |
(4) | Based on estimated cost of continued health insurance, disability insurance, 401(k) Company match and EIRP amounts for 18 months following termination. |
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Audit Committee: | William C. O’Neil, Jr., Chair Richard M. Brame Robert Z. Hensley Chad A. McCurdy |
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2008 | 2007 | |||||||
Audit Fees(1) | $ | 637,000 | $ | 610,000 | ||||
Audit-Related Fees(2) | 10,000 | 11,000 | ||||||
Tax Fees(3) | 100,000 | 113,000 | ||||||
Total Fees for Services Provided | $ | 747,000 | $ | 734,000 | ||||
(1) | Audit Fees include fees billed for professional services rendered in connection with the audit of the Company’s financial statements, audit of internal control over financial reporting (pursuant to Section 404 of Sarbanes-Oxley) and fees charged for the review of the Company’s quarterly financial statements. These fees also include assistance with the review of documents filed with the SEC. | |
(2) | Audit Related Fees consist of audits of the Company’s savings plan and trust. | |
(3) | Tax Fees include those charged for tax advice, planning and compliance. |
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• | Call toll freewithin the United States, Canada & Puerto Rico any time on a touch tone telephone. There isNO CHARGEto you for the call. |
Using ablack inkpen, mark your votes with anXas shown in this example. Please do not write outside the designated areas. | x |
1. | Proposal to elect as directors of the Company the following persons to hold office until the annual meeting of stockholders to be held in 2012 or until their successors have been duly qualified and elected. | |||||||||||
For | Withhold | |||||||||||
01 – William R. Council, III | o | o | ||||||||||
02 – Richard M. Brame | ||||||||||||
the | ||||||||||||
meeting. |
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Abstain | |||||||
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Schedules
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Execution Draft
SHARE PURCHASE AGREEMENT
THIS SHARE PURCHASE AGREEMENTdated as of the 25th day of August, 2003.
B E T W E E N:
WHEREASthe authorized share capital of the Corporation consists of an unlimited number of common shares, of which 1,000 common shares are issued and outstanding;
AND WHEREASthe Vendor owns and controls, legally and beneficially, 1,000 shares, being all of the issued and outstanding shares in the capital of the Corporation;
AND WHEREASAdvocat is the ultimate parent corporation of Vendor and the Corporation and indirectly owns and controls, legally and beneficially, all of the issued and outstanding shares in the capital of the Vendor;
AND WHEREASthe Corporation carries on,inter alia, the business of owning, managing and operating retirement homes, seniors’ residences, assisted living residences and nursing homes in Canada, all as described in the Information Memorandum and the Financial Statements (the “Business”);
AND WHEREASthe Purchaser desires to purchase from the Vendor and the Vendor desires to sell to the Purchaser the Purchased Shares, upon the terms and conditions set forth in this Agreement.
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NOW, THEREFORE, for and in consideration of the promises and mutual covenants hereinafter set forth, the Parties hereby mutually agree as follows:
ARTICLE ONE
DEFINITIONS
Section 1.01 Defined Terms
The following definitions apply for purposes of this Agreement:
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ARTICLE TWO
TRANSFER OF SHARES AND PURCHASE PRICE
Section 2.01 Transfer of Shares
Subject to the terms and conditions of this Agreement, and in consideration of the payment by the Purchaser to the Vendor of the Purchase Price as hereinafter provided, the Vendor agrees to sell and transfer, and deliver or cause to be delivered, to Purchaser on the Closing Date the Purchased Shares.
Section 2.02 Purchase Price
Subject to the terms and conditions contained in this Agreement, and in reliance upon the representations and warranties of the Vendor and Advocat herein contained, and in consideration
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of the transfer of the Purchased Shares to the Purchaser on the Closing Date, the Purchaser shall pay Cdn. Sixteen Million Five Hundred Thousand dollars ($16,500,000.00) (the “Purchase Price”), subject to adjustments as set out in this Agreement.
Any payments to be made pursuant to this Agreement shall be made by wire transfer or as directed by the recipient of such payment.
Section 2.03 Endorsement of Shares
On the Closing Date, subject to the terms and conditions hereof, the Vendor shall deliver the certificates representing the Purchased Shares, free and clear of all Liens other than any Liens pursuant to the Pledge Agreement, and duly endorsed in blank by the Vendor, or accompanied by stock powers duly executed in blank. The Vendor agrees to cure any deficiencies with respect to the endorsement of the certificates or other documents of conveyance with respect to the Purchased Shares or with respect to the stock powers accompanying any of the Purchased Shares.
Section 2.04 Deposit
The Purchaser shall deliver to either of the Vendor’s Solicitors, in trust, Cdn. One Million Dollars ($1,000,000.00) (the “Deposit”). The first Cdn. $250,000.00 of the Deposit will be delivered to Vendor’s Solicitors no later than five (5) business days following the execution of this Agreement by all Parties. The remaining Cdn. $750,000.00 of the Deposit will be delivered no later than ten (10) days before the date that Advocat sets for its shareholder meeting called to approve the sale of the Purchased Shares; provided that Advocat shall notify Purchaser promptly in writing when such date has been set. The Deposit will be held by the Vendor’s Solicitors (or either of them) with a nationally recognized Canadian financial institution in such accounts or investments and for such durations as the Vendor and the Purchaser may direct from time to time (and, failing written direction from the Vendor and Purchaser, in a daily interest-bearing account or term deposit receipt selected by the Vendors’ Solicitors (or either of them) in its or their sole discretion). If the Closing occurs, the Deposit and interest thereon will be credited against the Purchase Price payable by the Purchaser. If the Closing does not occur by reason of:
Section 2.05 Closing Payment
Subject to adjustments on Closing and a credit for any interest accrued on the Deposit and applied to the Purchase Agreement, the Purchaser shall pay to the Vendor Cdn. Seven Million Five Hundred Thousand dollars ($7,500,000.00) (the “Closing Payment”) and such
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amount, in addition to the Deposit paid to the Vendor at Closing, will be credited against the Purchase Price payable by the Purchaser.
Section 2.06 Vendor-Take-Back Financing
Following Closing, subject to the terms and conditions of this Agreement, the Purchaser shall pay the sum of Cdn. Eight Million dollars ($8,000,000.00) (the “Vendor-Take-Back Financing”) in accordance with the following schedule:
Anniversary of the | Principal Amount of the Vendor-Take-Back Financing | |||
Closing Date | (Cdn.) | |||
1 | $ | 600,000.00 | ||
2 | $ | 600,000.00 | ||
3 | $ | 600,000.00 | ||
4 | $ | 600,000.00 | ||
5 | $ | 5,600,000.00 | ||
TOTAL: | $ | 8,000,000.00 | ||
All payments made in accordance with the foregoing table shall be credited against the Purchase Price payable by the Purchaser.
The Vendor-Take-Back Financing, which shall be evidenced by a promissory note in form mutually acceptable to Vendor and Purchaser (the “Note”), shall not accrue interest during the first and second years following Closing. In each of the third, fourth and fifth years following Closing, the Vendor-Take-Back Financing shall accrue interest at five percent (5%) per year, payable semi-annually and compounded monthly.
In the event any portion of principal or interest with respect to the Vendor-Take-Back Financing which is due and payable pursuant to this Agreement is not paid within ten (10) days following notice in writing by the Vendor to the Purchaser of such non-payment, then the entire unpaid balance shall accrue interest at the lesser of (i) the rate of ten percent (10%) per annum and (ii) the maximum rate permitted by applicable law, and Vendor may, at its option, declare the entire unpaid balance due and payable in full. The Vendor-Take-Back Financing may be prepaid in whole or in part at any time without notice, bonus or penalty.
The portion of the Vendor-Take-Back Financing outstanding from time-to-time shall be accelerated and due by the Purchaser in accordance with and upon occurrence of any of the following events:
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In the event that any of (i) or (ii) above should occur, or (iii) above should occur and no distribution of DVI Net Sales Proceeds is made prior to Closing, the amount of any such accelerated payment shall be credited first against the principal amount of the Vendor-Take-Back Financing due on the fifth anniversary of the Closing Date (plus any applicable interest then due and payable), with any amount remaining to then be credited against the principal amount of the Vendor-Take-Back Financing due on the fourth anniversary of the Closing Date (plus any applicable interest then due and payable), and so on; provided that such accelerated payment(s), in aggregate, together with any amounts previously received by the Vendor as payment on account of the principal amount of the Vendor-Take-Back Financing shall not exceed the principal amount thereof at Closing. As security for the Vendor-Take-Back Financing, Purchaser shall deliver to Vendor at Closing a pledge of all of the Purchased Shares in the form of the agreement annexed hereto in Schedule 19 (the “Pledge Agreement”). The Pledge Agreement shall also prohibit the further encumbrance or transfer of the Assets after Closing
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without the prior written consent of Vendor unless the proceeds of said encumbrance or transfer are retained by the Corporation.
Section 2.07 Closing Financial Statements and Purchase Price Adjustments
The Vendor shall deliver to the Purchaser the draft Closing Financial Statements of the Corporation as at the Effective Date by no later than sixty (60) days following the Closing Date. Such financial statements shall be prepared by BDO Seidman, LLP (the “Accountants”) in a manner consistent with GAAP consistent with the past practice of the Corporation. The Vendor shall authorize the Accountants to provide access to all of the working papers relating to the Corporation to the Purchaser’s accountants by executing and delivering at Closing the form annexed hereto as Schedule 15. Not later than thirty (30) days after receipt of the draft Closing Financial Statements, the Purchaser shall advise the Vendor in writing as to the acceptability of such financial statements, or alternatively as to any specific objections. In the event that the Purchaser does not so advise the Vendor within such period, such financial statements shall be deemed to be acceptable to the Purchaser and shall be the Closing Financial Statements for the purposes of this Agreement. In the event that any specific objections are made within such period and not resolved between the parties within a further period of 15 days, the Purchaser and the Vendor shall engage an independent major chartered accountant firm selected by mutual agreement or, in the event that a mutual agreement cannot be reached within 7 days, by the Chair of the Institute of Chartered Accountants of Ontario, to resolve such unresolved objections, whose written determination with respect to such matters shall be conclusive and binding as against the Parties. Purchaser and Vendor shall use their best efforts to have any such written determination fully completed by not later than 30 days after the appointment of such independent firm. Any upward or downward adjustment to the Purchase Price pursuant to this Section 2.07 will be due and payable in full within 20 days of said final determination.
The Purchase Price and the principal amount of the Closing Payment shall be adjusted and reduced on a dollar for dollar basis in the event the Closing Financial Statements confirm:
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provided that the adjustments set forth in subparagraphs (b) and (c) above (i) shall only be made to the extent that they are not included in the Net Working Capital Calculation and (ii) shall be reduced on a dollar-for-dollar basis up to the amount by which the Net Working Capital Calculation exceeds $3,600,000.00. In the event the Closing Financial Statements confirm that the Net Working Capital Calculation, minus any adjustments set forth in (b) and (c) above, is greater than $3,600,000.00, such amount (net of any tax exigible) shall be distributed to Vendor.
Section 2.08 Proceeds of Asset Dispositions or Financings Prior to Closing
In the event that the Corporation sells, finances, transfers or disposes of Assets prior to Closing (and the Vendor acknowledges the requirement for the consent of the Purchaser pursuant to Section 7.04), other than as specifically provided in this Agreement the proceeds of sale or financing of such Assets shall remain in the Corporation on the Closing Date, notwithstanding Section 2.07. Any consent of the Purchaser to a sale, transfer, distribution or financing of Assets pursuant to Section 7.04 in advance of the Closing Date shall require as a condition that the net proceeds of such transaction remain in the Corporation on the Closing Date and shall be excluded from the Net Working Capital Calculation; provided that notwithstanding the foregoing, any portion of such proceeds attributed to an Asset that would otherwise have been included in the Net Working Capital Calculation shall be included in the Net Working Capital Calculation. By way of example, Purchaser and Vendor acknowledge that the Affiliate, White Cliffe Terrace Ltd., has recently completed a refinancing and cash distribution to the Corporation, as described in Schedule 4, which cash distribution shall remain in the Corporation on the Closing Date and shall be excluded from the Net Working Capital Calculation.
ARTICLE THREE
CLOSING
Section 3.01 Closing
The transfer of the Purchased Shares and payments required pursuant to Article Two hereof shall take place at Suite 5800, 40 King Street West, Toronto, Ontario or such other place as Vendor and Purchaser may mutually agree.
Unless otherwise agreed, Closing shall take place at 11:00 a.m. on the date (the “Closing Date”) that is the first Business Day fifteen (15) days following the date on which all approvals necessary in order to complete the transactions contemplated by this Agreement have been received from the Ministry of Health and Long Term Care pursuant to theNursing Homes Act (Ontario). Unless the Vendor and Purchaser mutually agree, the Closing Date shall not occur later than February 28, 2004. Conditional upon completion of Closing, the effective date for the Closing shall be the close of business on the last Business Day of the month prior to the Closing Date (the “Effective Date”).
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ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES OF THE VENDOR AND ADVOCATREGARDING THE VENDOR, ADVOCAT AND THE PURCHASED SHARES
Each of the Vendor and Advocat jointly and severally represent and warrant to the Purchaser, as follows:
Section 4.01 Authority
The Vendor and Advocat have all necessary authority to enter into and deliver this Agreement and each of the other agreements, certificates, instruments and documents given in order to give effect to the transactions contemplated hereby (collectively, the “Ancillary Documents”) to which they are a party, to carry out their respective obligations hereunder and thereunder, and to consummate the transactions contemplated hereby and thereby.
Section 4.02 Execution and Delivery
This Agreement and, once executed by Vendor and Advocat, each Ancillary Document to which the Vendor and Advocat are a party have been duly executed and delivered by them, and constitute the legal, valid and binding obligations of each, enforceable against them in accordance with their respective terms and conditions, except as enforceability hereof and thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other similar Laws now or hereinafter in effect affecting creditors’ rights generally or by general principles of equity.
Section 4.03 No Conflicts
The execution, delivery and performance by the Vendor and Advocat of this Agreement and each Ancillary Document to which they are a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not at Closing violate, conflict with or result in a breach of any term, condition or provision of, or require the consent to or notification of any Person under, or result in the creation of or right to create any Lien upon the Purchased Shares held by the Vendor under, (a) any Laws to which the Vendor, Advocat or the Purchased Shares is subject, (b) any judgment, order, writ, injunction, decree or award of any Governmental Authority to which the Vendor, Advocat or the Purchased Shares is subject, (c) except as set forth in Schedule 16, any license, agreement, commitment or other instrument or document (excluding purchase orders not material to the operations of the Business) to which the Vendor or Advocat is a party or by which the Vendor or Advocat is otherwise bound, or (d) except for the approvals as are obtained prior to Closing, any of the governing documents of the Corporation, Advocat or the Vendor. No authorization, approval or consent of, and no registration or filing with, or notice to any Governmental Authority or any other Person is required in connection with the execution, delivery or performance of this Agreement or any Ancillary Document by the Vendor or Advocat other than (i) consents required in connection with a change of control of the Corporation as set forth in Schedule 16, (ii) routine filings after closing to reflect the completion of the Closing, and (iii) any consents required with respect to any license, agreement, commitment, instrument or document which, if not obtained, would not have a Material Adverse Effect.
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Section 4.04 Ownership of Stock
As of the date hereof and as at Closing, the Vendor owns, beneficially and of record, the Purchased Shares. The Vendor’s secured lenders have confirmed their consent to the transactions described in this Agreement, and that they shall release and discharge any lien or security interest held by them on the Purchased Shares as of the Closing. Such secured lenders have further confirmed that they shall release the guarantee issued by the Corporation in favour of the obligations of Advocat to such secured lenders as of the Closing. As of the Closing, the Purchased Shares shall be free and clear of any Liens or any other encumbrances or restrictions created in the articles (except any private company restrictions therein contained) or by-laws of the Corporation. Upon delivery of and payment for the Purchased Shares as provided in Article Two of this Agreement, at the Closing, all of the Purchased Shares will be transferred to the Purchaser, and the Purchaser will have good and valid title to the Purchased Shares free and clear of any and all Liens or any other encumbrances or restrictions created in the articles (except any private company restrictions therein contained) or by-laws of the Corporation, other than liens in the Pledge Agreement.
Section 4.05 Insolvency
There are no cases or proceedings existing under any applicable bankruptcy, insolvency, reorganization or similar Laws in any jurisdiction concerning the Vendor or Advocat, and no circumstances exist which, under applicable Laws, would reasonably justify any of the cases or proceedings. No receiver or bankruptcy trustee has been appointed with respect to all or any portion of any business or assets of the Vendor or Advocat.
Section 4.06 Shareholders’ Agreements
There are no shareholders’ agreements, voting trust agreements or other similar agreements to which the Vendor or Advocat is a party which would preclude the completion of the transactions described in this Agreement relating to any of the Corporation, the Affiliates or the Subsidiary.
Section 4.07 Broker’s Fees
Other than Ashbourne Financial Group, Ltd. (“Ashbourne”) (which has been retained by Vendor at Vendor’s and Advocat’s expense), neither Advocat, the Vendor nor the Corporation has any liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the sale of the Purchased Shares as contemplated by this Agreement for which the Purchaser or the Corporation could become liable or obligated. Advocat previously engaged Houlihan Lokey Howard & Zukin (“HLHZ”) to provide similar services with respect to the Corporation, but believes that no fees are owed to HLHZ. Vendor and Advocat shall jointly and severally hold the Purchaser harmless for all such fees or commissions, including Ashbourne.
Section 4.08 Organization, Standing and Qualification of the Corporation
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ARTICLE FIVE
REPRESENTATIONS AND WARRANTIES OF THE VENDOR AND ADVOCATREGARDING THE CORPORATION, THE SUBSIDIARY AND THE AFFILIATES
Each of the Vendor and Advocat jointly and severally represent and warrant to the Purchaser, as follows:
Section 5.01 Capitalization of the Corporation
At the date hereof, the authorized and issued capital stock of the Corporation is as registered on the books of the Corporation. All of the issued and outstanding shares of capital stock of the Corporation are duly authorized, validly issued, fully-paid and non-assessable. The Purchased Shares are the only shares in the capital of the Corporation. There are no outstanding subscriptions, options or warrants for unissued shares of the Corporation and the Corporation has not entered into or granted, or agreed to do so, any calls, contracts, demands, commitments, profits interests, pre-emptive rights, rights of first refusal or other rights, agreements, arrangements or commitments of any nature whatsoever under which the Corporation is or may become obligated to issue, redeem, assign or transfer any shares of capital stock of the Corporation or purchase or make payment in respect of any shares of the Corporation capital stock now or previously outstanding, and there are no outstanding or authorized stock appreciation, phantom stock or similar rights with respect to the Corporation or any shares of its capital stock.
Section 5.02 Subsidiaries and Affiliates
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Section 5.03 Financial Statements
Attached as Schedule 2 are true and correct copies of the unaudited consolidated balance sheet of the Corporation for the fiscal years ended December 31, 2001 and 2002, and the related unaudited statements of earnings and retained earnings and cash flows for the fiscal years ended December 31, 2001 and 2002 and notes thereto, and, upon their preparation and approval in accordance with Section 2.07, the management prepared and accountant reviewed balance sheet as at the Closing Date (collectively, the “Financial Statements”). The Financial Statements include, on a consolidated basis, all relevant financial information for the Subsidiary for the relevant period. To the extent available to Vendor, Vendor shall provide to Purchaser a summary of financial operations for each Owned Real Property and Leased Real Property for the fiscal years ending December 31, 2001 and 2002. Also attached as part of Schedule 2 are true and correct copies of such segregated operating financial statements of the Managed Affiliates as are listed on said (the “Managed Affiliate Financial Statements”) Except as set forth on Schedule 2, the Financial Statements, and, to Vendor’s knowledge, the Managed Affiliate Financial Statements, have been prepared from and are consistent with the books, records and accounts of the Corporation and the Managed Affiliates and have been prepared in accordance with GAAP. As of the date of such Financial Statements, the Corporation and the Subsidiary had no Liabilities which were not disclosed by the said Financial Statements. As of the date of the Managed Affiliate Financial Statements, to Vendor’s knowledge, the Managed Affiliates had no Liabilities that were not disclosed by said Managed Affiliate Financial Statements. The said Financial Statements, and, to Vendor’s knowledge, the Managed Affiliate Financial Statements, are true, correct and complete in all material respects, and fairly present the financial position of the Corporation, the Subsidiary and, as applicable, the Managed Affiliates, for the relevant periods. All gross revenues, costs and expenses of operating the Business are included and properly reflected in the Financial Statements. The Corporation
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has made available to the Purchaser true, accurate and complete copies of the Corporation’s 1999 through 2002 federal and provincial income tax returns together with the applicable Notices of Assessment, including, if applicable, amended returns, carry-back returns and revenue agent’s reports and tax depreciation schedules used to prepare the returns.
Section 5.04 Corporate Records
The corporate records of the Corporation and the Subsidiary, including minutes of meetings of incorporators, directors and stockholders and stock issuance and transfer records, have been or will prior to Closing be made available to the Purchaser, and are complete, accurate and in all material respects and reflect all issues and transfers of stock to date and, in the case of the financial records, have been kept in accordance with GAAP applied on a consistent basis, and are complete, accurate, correct in all material respects and fully and fairly reflect all material transactions of the Corporation and the Subsidiary. Any corporate records of the Affiliates in the Corporation’s possession or control have been or will prior to Closing be made available to the Purchaser not later than 15 days after the date of this Agreement.
Section 5.05 Absence of Undisclosed Liabilities
Except to the extent reflected on or reserved against in the Financial Statements, the Managed Affiliate Financial Statements or disclosed on Schedule 3, as of the Closing Date the Corporation, the Subsidiary and, to Vendor’s knowledge, the Managed Affiliates had no Liabilities as at such date or arising out of transactions entered into or any set of facts existing prior thereto. Since December 31, 2002, except as disclosed in Schedule 3, the Corporation and the Subsidiary have not incurred any Liabilities except in the ordinary course of business.
Section 5.06 Ordinary Course
Since December 31, 2002, and except as otherwise disclosed on Schedule 4 or as specifically contemplated by this Agreement or approved by Purchaser pursuant to Section 7.04, the Corporation has operated its business in the ordinary course and has not made or instituted, or agreed to make or institute, any material change in its methods of accounting, investment of funds or general business operations.
Section 5.07 Title to Assets
Except as disclosed on Schedule 5, and in the Financial Statements, the Corporation has good and marketable title to all of its respective tangible and intangible Assets, free and clear of any Liens other than Permitted Encumbrances. The Corporation owns, leases or otherwise has the contractual right to use all of the Assets used in the conduct of the Business as currently conducted.
Section 5.08 Real Property
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Section 5.09 Material Agreements of the Corporation, the Subsidiary and Managed Affiliates
Schedule 8 sets forth a true and complete list, and the Corporation has provided to the Purchaser access to true and complete copies (including all amendments and extensions thereof and all waivers thereunder) or, if oral, an accurate and complete description, of each of the following, whether written or oral (each, a “Material Agreement”):
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Except as disclosed on Schedule 8, neither the Corporation nor, to the Corporation’s knowledge, any other party is in default under any Material Agreement and no event has occurred or is reasonably expected to occur which (after notice or lapse of time or both) would become a breach or default by the Corporation, or to the Corporation’s knowledge, any other party thereto under, or would otherwise permit modification, cancellation, acceleration or termination of, any Material Agreement or would result in the creation of or right to obtain any Lien upon any Assets. Except as disclosed on Schedule 8 or Schedule 16, (i) each Material Agreement is in full force and effect and is valid and legally binding against the Corporation or the Subsidiary, and each of the other parties thereto, subject to usual qualifications as to enforcement of creditors’ rights generally and equitable remedies; (ii) there are no unresolved disputes with respect to any Material Agreement; (iii) to the Corporation’s knowledge, no party to a Material Agreement intends either to modify, cancel or terminate a Material Agreement; and (iv) complete and accurate copies of the Affiliate Guarantees issued by the Corporation, whether with respect to mortgages owing by Affiliates of the Corporation or otherwise, are included in Schedule 8 or Schedule 23; such guarantees relate solely and exclusively to the Affiliates described in Schedule 22; and the Affiliate Guarantees do not exceed the aggregate amount of Cdn.$8,000,000.00.
Section 5.10 Litigation
Except as described in Schedule 9 (which, with respect to each claim, action, suit, arbitration, inquiry, proceeding, dispute or investigation by or before any Governmental Authority (each, an “Action”) disclosed therein, sets forth: the parties, nature of the proceeding, date and method commenced, amount of damages or other relief sought and, if applicable, paid or granted), there are no Actions by or against the Corporation, the Subsidiary or, to Vendor’s knowledge, the Managed Affiliate (or their respective directors, officers, managers, employees or agents), or affecting any of the Assets or the Business, in existence or, to the Vendor’s knowledge, threatened. None of the matters disclosed on Schedule 9 has affected or could reasonably be expected to affect the legality, validity or enforceability of this Agreement or the consummation of the transactions contemplated hereby. For greater certainty, to the Vendor’s knowledge, no events nor facts have occurred or are existing which, to Vendor’s knowledge, will give rise to a meritorious Action by any Person against the Corporation or the Subsidiary in excess of the amount reserved for such claims in the Financial Statements.
Section 5.11 Compliance with Laws
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The Corporation, the Subsidiary and, to Vendor’s knowledge, the Managed Affiliates have obtained all licenses, permits and other authorizations from all applicable Governmental Authorities necessary for the conduct of respective Business as currently conducted which, if not obtained, would have a Material Adverse Effect. Each of the Corporation, the Subsidiary and, to Vendor’s knowledge, the Managed Affiliates is in compliance, and has complied, in all material respects with all Laws applicable to it and has not received any notice of any violation thereof.
Section 5.12 Environmental, Health and Safety Matters
Except as disclosed on Schedule 10:
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Section 5.13 Taxes
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Section 5.14 Employee Benefit Plans
The texts of all Employee Benefit Plans which have been made available for review by the Purchaser are true and complete copies thereof, and:
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Section 5.15 Employee Matters
The letter provided by the Corporation to the Purchaser dated July 17, 2003, as supplemented by a second letter dated July 18, 2003 and a memorandum from the Corporation dated June 20, 2003, contains a complete and accurate list of all officers and directors of the Corporation and the Subsidiary, any administrator or other key employee employed by the Corporation at any facility owned, leased or managed by the Corporation and all employees of the Corporation based at the Corporation’s corporate offices, any other employee of the Corporation or the Subsidiary with an employment agreement, and their years of service and their respective rates of compensation (including the portions thereof attributable to bonuses), including any other salary, bonus or other payment or benefit arrangements made with each of them. The Corporation and the Subsidiary are current with respect to the payments to such employees of all salary or bonuses or other payments or benefits, except vacation pay for which an accrual, up to the Closing Date, shall be included on the Closing Financial Statements. Except as set out in Schedule 12, neither the Corporation nor the Subsidiary has any contractual arrangements whatsoever with any person not at arm’s length (as defined in the Tax Act).
Section 5.16 CollectiveAgreements
Schedule 13 hereto sets out a complete and accurate list and description of all Collective Agreements affecting the Corporation, the Subsidiary or, to Vendor’s knowledge, any Managed Affiliate, including:
Section 5.17 Material Adverse Changes
Since December 31, 2002, there has been no condition, event or occurrence that, either individually or in the aggregate, has had or is reasonably likely to have, a Material Adverse Effect.
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Section 5.18 Not a Reporting Issuer
The Corporation is not now and never has been a “reporting issuer,” as such term is defined in theSecurities Act(Ontario).
Section 5.19 Receivables
Attached hereto as part of Schedule 1 is a list as of March 31, 2003 of the accounts receivable (in the form of an aged account balance) and notes receivable of the Corporation, excluding the Excluded Assets. Except to the extent of the reserve for bad debts reflected thereon, such accounts and notes are owing in the amounts shown on Schedule 1.
Section 5.20 Permits, Licenses, Software and Intellectual Property
Attached hereto as part of Schedule 1 is a list, as of the date hereof, of all permits, licenses, software and software programs developed by or at the request of the Corporation, franchises, site assignments, certificates, trademarks, trade names, patents, patent applications and copyrights owned or held by the Corporation or the Subsidiary. Copies have been made available to Purchaser. The rights of the Corporation and the Vendor in the name “Diversicare” shall be set forth in the Shared Trade Name Agreement entered into at Closing pursuant to Section 9.17 below. Except as set forth on Schedule 1, all of the permits, licenses, software and software programs developed by or at the request of the Corporation, applications, franchises and other items set forth therein that are materially necessary for the operation of the Business are adequate for the operation of the Business and are valid and in full force and effect.
Section 5.21 Trademarks, Name and Logos
To the best of Vendor’s knowledge, neither the Corporation nor the Business infringe upon any patents, trademarks, trade names, copyrights or intellectual property of any kind of other persons. The Vendor and Advocat have not been informed, and are not aware of any third party’s rights or requirements in respect of the foregoing sentence. The Corporation has not assigned or licensed any of its right, title or interest in respect of the property set forth in this Section 5.21 or any of its proprietary rights to a third party and has not received any notice of conflict with the asserted rights of others. To the Vendor’s knowledge, no employee owns, directly or indirectly, in whole or in part, any patent, trademark, trade name, copyright, brand name, invention, process, formula, trade secret or intellectual property of any kind which the Corporation is currently using has used or the use of which is necessary for the Business.
Section 5.22 Accident History and Workers Compensation
The Corporation does not now have nor for the past three years has it had any accident history which has resulted or which is likely to result in an increased assessment under any workers compensation or similar type legislation or which would give rise to any claim against the Corporation in respect thereto. All levies under any workplace safety and insurance legislation to which the Corporation is subject have been paid by the Corporation.
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Section 5.23 Fixed Assets
The Corporation has made available to Purchaser all lists or summary descriptions of the Corporation’s vehicles, furniture, fixtures, machinery and equipment (the “Fixed Assets”) in the Corporation’s possession and control. The Corporation disclaims all representations regarding the completeness or accuracy of such lists and summaries. The Corporation owns or leases all Fixed Assets currently used in the operations of the Business.
Section 5.24 Insurance
The Corporation currently carries such insurance policies as are listed in Schedule 14 attached hereto and such insurance policies are in full force and effect.
Section 5.25 Diversicare VI Limited Partnership Participation Right
The Corporation’s Management and Guaranteed Return Loan Agreement, as amended, with Diversicare VI entitles the Corporation to 12.5% of all net sale proceeds from the sale of Diversicare VI’s facilities after Mortgage Debt and Limited Partner’s net equity. True and accurate copies of the Management and Guaranteed Return Loan Agreement, as amended, for Diversicare VI have been provided to Purchaser.
With respect to such right to a share of net sales proceeds, the Corporation has been advised that the retirement home and the nursing home owned by Diversicare VI are being sold to Société en Commandite Maestro pursuant to a purchase and sale agreement dated June 18, 2003, with closing presently scheduled to be completed on or before December 31, 2003.
Section 5.26 2003 Budgets
True and accurate copies of the Corporation’s Capital and Operating Budgets for 2003, prepared by the Corporation in its budgeting process completed in the fourth quarter of 2002, are attached hereto as Schedule 21.
Section 5.27 Net Assets
Subject to calculations and adjustments in accordance with Section 2.07, the Net Working Capital Calculation at Closing shall be Three Million Six Hundred Thousand Dollars ($3,600,000.00).
Section 5.28 Advocat Overhead Allocation Expense
The overhead allocation expense charged to the Corporation by Advocat of Six Hundred Thousand Dollars ($600,000.00) per annum shall be released by Advocat and not be continuing after Closing.
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ARTICLE SIX
REPRESENTATIONS AND WARRANTIES REGARDING THE PURCHASER
The Purchaser represents and warrants to the Vendor as follows:
Section 6.01 Organization
The Purchaser is a corporation, duly incorporated, and validly existing and in good standing under the laws of Ontario.
Section 6.02 Authority
The Purchaser has all necessary power and authority to enter into this Agreement and each of the Ancillary Documents to which the Purchaser is a party, to carry out the transactions contemplated hereby and thereby, and to carry out its obligations hereunder and thereunder. The Purchaser has properly taken all action required to be taken by the Purchaser with respect to the execution, delivery and performance of this Agreement and each of the Ancillary Documents to which the Purchaser is a party, and the consummation of the transactions contemplated hereby and thereby.
Section 6.03 Execution and Delivery
This Agreement and each of the Ancillary Documents to which the Purchaser is a party have been duly executed and delivered by the Purchaser and constitute legal, valid and binding obligations of the Purchaser enforceable against it in accordance with its terms and conditions, except as enforceability thereof may be limited by any applicable bankruptcy, reorganization, insolvency or other similar Laws affecting creditors’ rights generally or by general principles of equity.
Section 6.04 No Conflicts
The execution, delivery and performance by the Purchaser of this Agreement and each of the Ancillary Documents to which the Purchaser is a party, and the consummation of the transactions contemplated hereby and thereby, do not and will not violate, conflict with or result in a breach of any term, condition or provision of, or require the consent of or notification to any Governmental Authority or any other Person under, (a) any Law to which the Purchaser is subject, (b) any judgment, order, writ, injunction, decree or award of any Governmental Authority to which the Purchaser is subject, (c) any of the Purchaser’s organizational or governing documents or (d) any license, agreement, commitment or other instrument or document to which the Purchaser is a party or by which the Purchaser is otherwise bound. No authorization, approval or consent of, and no registration or filing with, or notice to any Governmental Authority or any other Person is required in connection with the execution, delivery or performance of this Agreement or any Ancillary Document by the Purchaser.
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Section 6.05 Insolvency
There are no cases or proceedings existing under any applicable bankruptcy, insolvency, reorganization or similar Laws in any jurisdiction concerning the Purchaser and no circumstances exist which, under applicable Laws, would reasonably justify any such cases or proceedings. No receiver or bankruptcy trustee has been appointed with respect to all or any portion of any business or assets of the Purchaser.
Section 6.06 Litigation
There is no claim, legal action, suit, arbitration or other proceeding pending or, to the Purchaser’s knowledge, threatened, against or relating to the Purchaser which, if adversely determined, would have a material adverse effect on the ability of the Purchaser to perform its obligations under this Agreement or any of the Ancillary Documents to which the Purchaser is a party, or would otherwise prevent, hinder or delay consummation of the transactions contemplated herein or therein.
Section 6.07 Broker’s Fees
The Purchaser has no liability or obligation to pay any fees or commissions to any broker, finder, or agent with respect to the transactions contemplated by this Agreement for which the Vendor or Advocat could become liable or obligated. In the event the Purchaser has liability for any fees or commissions to any broker, finder, or agent, the Purchaser shall hold the Vendor and Advocat harmless for all of such fees or commissions.
Section 6.08 Investment Canada Act
The Purchaser is not a “non-Canadian” within the meaning of such term in theInvestment Canada Act(Canada).
Section 6.09 Competition Act
No approval or consent for the transactions contemplated herein is required pursuant to theCompetition Act(Canada).
ARTICLE SEVEN
COVENANTS OF VENDOR, ADVOCAT AND THE CORPORATIONPRIOR TO CLOSING
Section 7.01 Access, Confidential Information
From the date of the Agreement up to the Closing Date, Advocat and the Vendor will arrange for the Corporation to afford reasonable access at reasonable times and without undue interference to the operation of the Business to the officers and authorized representatives of the Purchaser, the facilities (including both Owned Real Property and Leased Real Property), properties, books and records of the Corporation, and will furnish the Purchaser with such additional financial and operating data and other information as to the Business and Assets as the
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Purchaser may from time to time reasonably request. The Vendor and Advocat will, and will cause the Corporation to, cooperate with the Purchaser, its representatives and counsel in the preparation of any documents or other material which may be required by any Governmental Authority in connection with the transactions contemplated by this Agreement. The Purchaser will cause all information obtained from the Vendor and the Corporation in connection with the negotiation and performance of this Agreement to be treated as confidential (except such information as the Purchaser may be required to disclose to any Governmental Authority (which shall, however, to the extent permitted by applicable Laws, be disclosed on a confidential basis)) and will not use, and will not knowingly permit others to use, any such information in a manner detrimental to the Corporation or the Vendor or otherwise. The Purchaser will be entitled to use such information solely for the purposes of verifying the accuracy of the representations and warranties made by the Vendor and Advocat herein and consummating the transactions contemplated herein.
Section 7.02 Operations
From the date of this Agreement up to the Closing Date, the Corporation shall:
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Section 7.03 Real Property
The Vendor shall deliver or make available to the Purchaser, any of the following documents in the possession or control of the Vendor or the Corporation relating to the Real Property:
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Section 7.04 No Change
From the date of this Agreement to the Closing Date, the Corporation shall not, and Advocat and Vendor will not permit the Corporation, without the prior written consent of the Purchaser, to:
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ARTICLE EIGHT
CERTAIN COVENANTS AND ADDITIONAL UNDERSTANDINGS
Section 8.01 Confidentiality
The Purchaser agrees to hold in confidence all documents and information (whether in written, oral, electronic or other form) concerning the Vendor and the Corporation furnished to the Purchaser in connection with the transactions contemplated by this Agreement (or prepared by the Purchaser or its respective Advisors (as hereinafter defined) using such confidential documents or information) and not otherwise lawfully available to the Purchaser (for the purpose of this Section 8.01, the “Confidential Information”). The Purchaser will not release or disclose any Confidential Information to any other Person, except to its attorneys, accountants and other outside consultants retained by it in connection with this Agreement and bound by the confidentiality terms hereof (the “Advisors”) and for the sole purpose of satisfying such retainer, and except to the extent that such information was previously known by the Purchaser or their Advisors, such information entered the public domain through no fault of the Purchaser or their Advisors, or was disclosed to the Purchaser by a third party having no confidentiality obligation to any of the Vendor or the Corporation, or as otherwise required by Law to be disclosed (and in the latter case will, to the extent permitted by applicable Laws, make such disclosure on a confidential basis).
Section 8.02 Publicity
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Without limiting Section 8.01, the Parties shall issue a mutually agreeable press release forthwith upon execution of this Agreement. Thereafter, each Party will consult with the others prior to issuing any further press release or otherwise making any public statement or statement to any other Person with respect to the transactions contemplated by this Agreement, and will not issue any such release or make any such statement over the reasonable objection of the other Party, except as required by Law. Any necessary filing for regulatory approval or notification shall not be deemed a breach of this Section 8.02 provided that reasonable steps are taken, if permitted by applicable Laws to preserve the confidentiality of such disclosure. This Section 8.02 shall survive any termination of this Agreement without the Closing occurring.
Section 8.03 Closing Costs; Fees and Expenses
The Vendor on the one hand and the Purchaser, on the other, will bear their own costs and expenses, including, without limitation, the fees and expenses of their respective attorneys, accountants, advisors, environmental assessments, appraisers’ and lenders’ finance fees and out-of-pocket expenses incurred in connection with this Agreement and the transactions contemplated herein (“Transaction Costs”). This Section 8.03 shall survive any termination of this Agreement without the Closing occurring.
Section 8.04 Noncompetition Covenants of Vendor and Advocat
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Section 8.05 Post Closing Access
For a period of five (5) years from the Closing Date and upon reasonable notice, the Purchaser will give, or cause to be given, to the representatives, employees, counsel and accountants of the Vendor, access, during normal business hours, to the books and records which relate to the Corporation and the Business and which relate to periods prior to the Closing, and will permit such persons to examine and copy such records to the extent reasonably requested by the Vendor in connection with the preparation of the Closing Financial Statements, tax and financial reporting matters, audits, legal proceedings, governmental investigations and other legitimate purposes. However, the Purchaser shall not be obligated to take any action pursuant to this Section that would unreasonably disrupt the Corporation or the Business, violate the terms of any contract to which the Corporation are a party or to which the Corporation or any of their assets are subject or grant access to any of the Corporation’s proprietary, confidential or classified information unless in the latter case an appropriate confidentiality agreement is executed, reasonable in the circumstances. The Vendor and the Purchaser will cooperate, and
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the Purchaser will cause the Corporation to cooperate, with each other in the conduct of any tax audit or similar proceedings involving or otherwise relating to any of the Corporation, the Purchased Shares, the Assets or the Business (or the income therefrom or assets thereof) and each will execute and deliver such powers of attorney and other documents as are necessary to carry out the intent of this Section.
Section 8.06 Notice to Authorities
If required under applicable Laws and/or requested by the Purchaser, the Vendor shall forthwith give or cause to be given, as promptly as practicable, notice in writing to applicable authorities advising them of the transactions contemplated hereby and confirming that the Vendor surrenders all right, title and interest of the Vendor in and to the Corporation and shall use its commercially reasonable efforts to ensure that as of the Closing Date, all Approvals have been taken and obtained. Similarly, if required under applicable Laws and/or requested by the Vendor, the Purchaser shall forthwith give, or cause to be given, as promptly as practicable, notice in writing to applicable Authorities advising them of the transactions contemplated hereby and confirming its intention to acquire the Purchased Shares. The Purchaser shall use its commercially reasonable efforts to ensure that as of the Closing Date, all Approvals have been taken and obtained.
ARTICLE NINE
CONDITIONS PRECEDENT TO THE PURCHASER’S OBLIGATIONS
All obligations of the Purchaser under this Agreement are, at the Purchaser’s option, subject to satisfaction or waiver of each of the following conditions, prior to or at the Closing:
Section 9.01 Litigation
There shall exist no injunction, decree or order by a court or Governmental Authority having jurisdiction over any of the Parties which prohibits or materially restricts or materially hinders the Closing or the performance by any Person of any of its material obligations in this Agreement or any Ancillary Documents or that would materially adversely affect the operation of the Business by the Purchaser after Closing and no application shall have been filed with, or investigation or proceeding commenced or threatened by a court or Governmental Authority, which, if successful or, in the case of an investigation or proceeding once completed, would reasonably be expected to result in any of the foregoing.
Section 9.02 Bringdown Certificates
The representations and warranties of the Vendor and Advocat contained herein shall be accurate at the time of Closing on the Closing Date as if then made except for such changes as are contemplated by this Agreement, and the Vendor and Advocat shall have performed their covenants required herein to be performed by the Closing and each of the Vendor and Advocat will have executed and delivered to the Purchaser a certificate confirming such accuracy and performance.
Section 9.03 No Payment of Bonuses, Compensation or Loans
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The Corporation shall not have paid any bonus or compensation or made any loan to the Vendor, Advocat or any person not at arm’s length (as defined in the Tax Act).
Section 9.04 Delivery of the Stock Certificates
The Vendor will have delivered to the Purchaser the certificates representing ownership of the Purchased Shares which shall be properly endorsed to the Purchaser or in blank and otherwise acceptable to the Purchaser’s counsel, acting reasonably, subject to the Pledge Agreement.
Section 9.05 Resignations
The Vendor shall have caused each director or officer of the Corporation, the Subsidiary and the Affiliates not remaining in office, as determined by the Purchaser, to have executed and delivered such a written resignation and release as a director and/or officer, effective the close of business on the Closing Date.
Section 9.06 Opinion of Legal Counsel
Purchaser shall have received an opinion from the Vendor’s Solicitor dated the Closing Date, as set out in Schedule 17.
Section 9.07 Consents; Assignments
All of the consents described in Schedule 16 required for the consummation of the transactions hereby contemplated shall have been obtained at or prior to the Closing Date on terms and conditions acceptable to the Purchaser, including without limitation, the approval of the Ministry of Health and Long Term Care to the transfer of the Purchased Shares pursuant to theNursing Homes Act(Ontario).
Section 9.08 No Material Adverse Change
No circumstance, event or change shall have occurred which is inconsistent with past practices that has or could reasonably be expected to have a Material Adverse Effect on the Corporation, as determined by the Purchaser in the Purchaser’s reasonable discretion.
Section 9.09 Employment
Purchaser shall have access to the senior employment personnel of the Corporation with a view to entering into new employment contracts with such senior employment personnel and the Corporation, conditional upon completion of Closing.
Section 9.10 Corporate Approvals
The corporate approvals required in accordance with the articles of the Corporation and Law, and referred to in Section 4.08(b), in order to complete the transactions set out in this Agreement shall have been delivered to the Purchaser.
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Section 9.11 Assets of the Corporation
The Assets of the Corporation shall include all tangible property and assets described in the Information Memorandum, the Financial Statements and Schedule 1 hereto other than the Excluded Assets and any items transferred or disposed of with the consent of the Purchaser pursuant to Section 7.04. Vendor shall deliver a certificate of the Corporation’s accounts receivable aged trial balance as at the Effective Date.
Section 9.12 Current Assets
At Closing, the Net Working Capital Calculation shall be Three Million Six Hundred Thousand Dollars ($3,600,000.00). The Vendor shall deliver at Closing a certified estimate of such amount as at the Effective Date. Purchaser acknowledges that prior to Closing if Vendor and Purchaser reasonably determine that the Net Working Capital Calculation will exceed Three Million Six Hundred Thousand Dollars ($3,600,000.00) at Closing, the Corporation may distribute to Vendor the amount of such excess from the Corporation’s cash provided that there is no adverse tax effect to the Corporation.
Section 9.13 Diversicare VI Limited Partnership Participation Right
The DVI Transaction shall have closed, or, in the alternative, Purchaser is satisfied, acting reasonably, that the Corporation’s twelve and one-half percent (12.5%) participation right in the retirement home and the nursing home which are owned by Diversicare VI is as described in the Information Memorandum, and that such participation right cannot be terminated for any reason whatsoever, even if the management contract in respect of such homes are terminated.
Section 9.14 Guarantees
There shall exist no guarantees or covenants given by the Corporation whatsoever to secure the obligations of any other party, including the Vendor, except for the Affiliate Guarantees. For greater certainty, all other guarantees including the guarantee by the Corporation of the Vendor for US Eighteen Million Six Hundred and Forty-Six Thousand Dollars (US$18,646,000.00) shall have been fully discharged and released at Closing to the satisfaction of the Purchaser.
Section 9.15 Advocat Overhead Allocation Expense
The Purchaser shall have received evidence satisfactory to it that the annual overhead allocation expense charged to the Corporation by Advocat of Six Hundred Thousand Dollars ($600,000.00), as described in the Financial Statements, has been fully and finally released, that it shall not be continuing after Closing.
Section 9.16 S. 116 Tax Act
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Section 9.17 Shared Trade Name Agreement
Vendor and the Corporation shall have executed and delivered an agreement outlining their respective rights in the name “Diversicare” (Vendor’s being exclusive to the U.S. and the Corporation’s being exclusive to Canada) in the form annexed as Schedule 25.
ARTICLE TEN
CONDITIONS PRECEDENT TO THE VENDOR’S OBLIGATIONS
All obligations of the Vendor under this Agreement are, at the Vendor’s option, subject to satisfaction or waiver of each of the following conditions, prior to or at the Closing:
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Section 10.01 Purchaser’s Certificate
The Purchaser’s representations and warranties contained herein shall be accurate as of the time of Closing on the Closing Date and the Purchaser shall have performed its covenants required herein to be performed by the Closing and the Purchaser will have executed and delivered to the Vendor a certificate confirming such accuracy and performance.
Section 10.02 Purchase Price
The Purchaser will have paid the Closing Payment in the amount and in the manner contemplated by Article Two.
Section 10.03 Additional Documents
The Purchaser shall have executed and delivered to the Vendor all other instruments and documents required by this Agreement to be delivered by the Purchaser to the Vendor, and such other instruments and documents which the Vendor or their counsel may reasonably request not inconsistent with the provisions hereof.
Section 10.04 Litigation
There shall exist no injunction, decree or order by a court or Governmental Authority having jurisdiction over any of the Parties which prohibits or materially restricts or materially hinders the Closing or the performance by any person of any of its material obligations in this Agreement or any Ancillary Documents or that would materially adversely affect the operation of the Business by the Purchaser after Closing and no application shall have been filed with, or investigation or proceeding commenced or threatened by a court or Governmental Authority, which, if successful or, in the case of an investigation or proceeding, once completed, would reasonably be expected to result in any of the foregoing.
Section 10.05 Pledge Agreement
The Purchaser shall have executed and delivered to the Vendor the Pledge Agreement.
Section 10.06 Opinion of Legal Counsel
Vendor shall have received an opinion from Purchaser’s Solicitor dated the Closing Dated as set out in Schedule 18.
Section 10.07 Consents; Assignments
All consents described in Schedule 16 required for the consummation of the transactions hereby contemplated shall have been obtained at or prior to the Closing Date on terms and conditions acceptable to the Purchaser.
Section 10.08 Excluded Assets
All Excluded Assets shall have been transferred by the Corporation to Vendor.
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ARTICLE ELEVEN
SATISFACTION OF CONDITIONS
Section 11.01 Non-Satisfaction of Conditions
If any of the conditions set forth in Article Nine have not been fulfilled at or before the time of Closing on the Closing Date, the Purchaser and, if any of the conditions set forth in Article Ten have not been fulfilled at or before the time of Closing on the Closing Date, the Vendor, as the case may be, may terminate this Agreement by notice in writing to the other. The Purchaser, in the case of the conditions set forth in Article Nine, and the Vendor, in the case of the conditions set forth in Article Ten, may waive compliance with any such condition in whole or in part if it sees fit to do so, without prejudice to their respective rights of termination in the event of non-fulfilment of any other condition for their benefit contained in such Article in whole or in part or to their respective rights to recover damages or to receive other adjustments for the breach of any representation, warranty, covenant or condition contained in this Agreement. Any termination pursuant to this Article Eleven shall not in any way limit or affect any right or remedy which one Party may have against another in respect of the non-satisfaction of any such condition or in respect of the failure of any party to have complied with any of their covenants and obligations hereunder, unless such other Party can show that, despite having used all reasonable efforts, the non-performance of such condition, covenant or obligation resulted from circumstances beyond its control.
Section 11.02 Satisfaction of Conditions
The Parties shall use their respective best efforts to cause those conditions of Closing under their reasonable control to have been satisfied on or prior to the Closing.
ARTICLE TWELVE
SURVIVAL OF REPRESENTATIONS AND WARRANTIES, INDEMNIFICATION
Section 12.01 Survival of Representations, Warranties and Covenants by Vendor and Advocat
The representations, warranties and covenants made by the Vendor and Advocat and contained in this Agreement or contained in any Ancillary Document given in order to carry out the transactions contemplated hereby, will survive the Closing and, notwithstanding such Closing, shall continue in full force and effect for the benefit of the Purchaser, subject to the following provisions in this Section.
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At the expiration of the periods of time referred to above, the Vendor and Advocat will be released from all obligations and liabilities in respect of the representations and warranties made by each contained in this Agreement or in any Ancillary Documents, except with respect to any Warranty Claim made by the Purchaser in writing prior to the expiration of such periods.
Section 12.02 Survival of Representations, Warranties and Covenants by Purchaser
The representations, warranties and covenants made by the Purchaser and contained in this Agreement or contained in any Ancillary Documents will survive the Closing and, notwithstanding such Closing shall continue in full force and effect for the benefit of the Vendor, except that:
Section 12.03 Limitation on Vendor’s Indemnification Covenants
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Section 12.04 Indemnity by Vendor and Advocat
Subject to the terms and provisions of this Article Twelve, the Vendor and Advocat will, jointly and severally, in the case of representations, warranties and covenants provided by each herein or in the Ancillary Documents, indemnify and save harmless the Purchaser from and against any claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees on a solicitor and own client basis, which may be made or brought against the Purchaser or which Purchaser may suffer or incur as a result of, in respect of or arising out of:
Section 12.05 Purchaser’s Indemnification Covenants
Subject to the terms and provisions of this Article Twelve, the Purchaser will indemnify the Vendor and Advocat and save them harmless from and against any and all claims, demands, actions, causes of action, damages, loss, liability and reasonable expenses, including solicitors’ fees, which may be made or brought against the Vendor or Advocat or which the Vendor or Advocat may suffer or incur in respect of or arising out of:
Section 12.06 Limitation on Purchaser’s Indemnification Covenants
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Section 12.07 Procedure for Claims
The obligations and liabilities of the parties pursuant to this Article Twelve will be subject to the following terms and conditions:
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ARTICLE THIRTEEN
MISCELLANEOUS
Section 13.01 Notices
All notices and other communications hereunder will be in writing and will be deemed to have been duly given if delivered personally (including delivery by nationally or internationally-recognized courier service), transmitted by telecopier, as follows:
(a) If to the Purchaser:
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(b) If to the Vendor and Advocat:
or to such other address as the Person to whom notice is to be given may have previously furnished to the other parties in writing in accordance herewith. Such Notice shall be deemed to have been received on the day on which it is delivered (if such day is a Business Day) or, if personally delivered, or on the day on which the telecopy is sent if it is received prior to 4:00 p.m. (local time) on a Business Day and if not, on the next following Business Day.
Section 13.02 Amendments and Waivers
This Agreement may not be amended, modified or supplemented except by written agreement of the Parties. No waiver by any Party of any default, misrepresentation or breach of warranty or covenant hereunder, whether intentional or not, will be deemed to extend to any prior or subsequent default, misrepresentation or breach of warranty or covenant hereunder or affect in any way any rights arising by virtue of any prior or subsequent such occurrence.
Section 13.03 No Presumption Against Drafter
Each of the Parties has jointly participated in the negotiation and drafting of this Agreement and will have so participated in the negotiations and drafting of each of the Ancillary Documents. In the event of any ambiguity or if a question of intent or interpretation arises, this Agreement and each of the Ancillary Documents will be construed as if drafted jointly by all of the Parties and no presumptions or burdens of proof will arise favouring any Party by virtue of the authorship of any of the provisions of this Agreement or any of the Ancillary Documents.
Section 13.04 Interpretation
The headings preceding the text of Articles and Sections included in this Agreement and the headings to Exhibits and Schedules attached to this Agreement are for convenience only and
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will not be deemed part of this Agreement or be given any effect in interpreting this Agreement. The use of the masculine, feminine or neuter gender herein will not limit any provision of this Agreement. The use of the terms “including” or “include” will in all cases herein mean “including, without limitation” or “include, without limitation,” respectively. References to any “Article”, “Section”, “Exhibit” or “Schedule” will refer to an Article or Section of, or an Exhibit or Schedule to, this Agreement. In any case where the concept of materiality is applied more than once to qualify any provision of this Agreement (whether by cross-referencing or incorporation or otherwise), such provision will be interpreted as if only one, but the broadest one, of such materiality qualification applied to it. Any due diligence review, audit or other investigation or inquiry undertaken or performed by or on behalf of a Party will not limit, qualify, modify or amend the representations, warranties or covenants of, or indemnities made by, any other Party pursuant to this Agreement, irrespective of the knowledge and information received (or which should have been received) therefrom by the investigating Party, except as set forth in this Agreement or any Ancillary Documents and consummation of the transactions contemplated herein by a Party will not be deemed a waiver of a breach of or inaccuracy in any representation, warranty or covenant or of any Party’s rights and remedies with regard thereto; provided, that the Party discovering such inaccuracy or breach promptly so advises the other Parties. In the event of any inconsistencies or ambiguities between the wording of this Agreement and the Schedules, the wording of this Agreement shall have priority and take precedence over that of the Schedules.
Section 13.05 Non-Assignability
This Agreement may not be assigned by any Party, by operation of law or otherwise, provided that Vendor acknowledges that Purchaser may desire to restructure the business of the Corporation immediately following Closing. Should Purchaser proceed with such a restructuring, the Vendor will cooperate with all reasonable requests; provided that (i) such restructuring has no adverse effect on the Pledge Agreement, and (ii) any expenses incurred by Vendor in complying with such request shall be reimbursed by Purchaser.
Section 13.06 Parties in Interest
This Agreement will be binding upon and inure solely to the benefit of the Parties and their respective successors, permitted assigns and legal representatives, as the case may be, and nothing in this Agreement, express or implied, is intended to confer upon any other Person any rights or remedies of any nature.
Section 13.07 Governing Law and Arbitration
All questions concerning the construction, validity and interpretation of this Agreement will be governed by and construed and enforced in accordance with the Laws of the province of Ontario, Canada and the laws of Canada applicable therein without regard to the conflicts of law principles of such province. Each Party agrees that any action, dispute or proceeding relating to this Agreement or the Ancillary Documents shall be arbitrable in accordance with the procedures set out in Schedule 6 hereto, and now irrevocably and unconditionally attorns and submits to such arbitration process as binding and determinative and non-appealable.
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Section 13.08 Severability
If any term or provision of this Agreement will, to any extent, be held, to be invalid or unenforceable, the remainder of this Agreement or the application of such term or provision to Persons or circumstances other than those as to which it has been held invalid or unenforceable, will not be affected thereby and this Agreement will be deemed severable and will be enforced otherwise to the full extent permitted by law; provided, however, that such enforcement does not deprive any Party of the benefit of the bargain.
Section 13.09 Entire Agreement
This Agreement and the Ancillary Documents (including the Schedules referred to herein and therein and which form a part hereof and thereof) constitute the entire agreement among the parties hereto and supersede all prior agreements and understandings, oral and written, among the parties hereto with respect to the subject matter hereof (including, without limitation, that certain Letter of Intent, dated March 31, 2003, among certain of the Parties) and the Term Sheet dated February 13, 2003.
Section 13.10 Counterparts
This Agreement may be executed in one or more counterparts and by facsimile (followed by the delivery of the originally executed counterpart thereof), each of which will be deemed to constitute an original and will become effective when one or more counterparts have been signed by each Party (whether originally or by telecopied signature) and delivered to the other parties.
Section 13.11 Set Off
Any monies or amounts due and owing by any Party hereto to any other Party shall be subject to a right of set off. In order to assert such a right to set off, either Party must comply with the procedures for Warranty Claims prescribed in Article Twelve.
Section 13.12 Further Assurances
Each Party shall do such acts and shall execute such further documents, conveyances, assignments, transfers and the like, and will cause the doing of such acts and will cause the execution of such further documents as are within his or its power as any other Party may in writing at any time and from time to time reasonably request be done or executed, in order to give full effect to the provisions of this Agreement and the Ancillary Documents.
Section 13.13 Currency
All references to currency in this Agreement are, unless otherwise indicated, to Canadian dollars.
Section 13.14 “Knowledge”
Whenever in this Agreement the terms “to the Corporation’s knowledge”, “to the Vendor’s knowledge” or any similar expressions are used, the Corporation and the Vendor shall
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be deemed to have the knowledge of each of the individuals listed on Schedule 24 attached hereto, and the Corporation and the Vendor shall be under a duty of due inquiry of such individuals.
Section 13.15 Schedule Update
After the date of this Agreement, Vendor may supplement any of the Schedules or the letter referred to in Section 5.15 with respect to matters of which it becomes aware after the most recent accepted version of such Schedule or letter by written notice (including all appropriate supporting documentation). Submission of Schedules (including any supplements) or letter update shall be in writing delivered via overnight courier to the Purchaser in accordance with Section 13.01. The submitted Schedules or letter update shall be deemed accepted and thereby become a Schedule to this Agreement or an accepted modification to the letter referred to in Section 5.15 unless within twenty (20) business days after receipt of such proposed Schedule or letter update, the Purchaser provides written notice to the Vendor reasonably detailing the objection thereof. Should the parties not be able to resolve written objections within ten (10) business days thereafter, then during a further period of ten (10) business days, the parties shall in good faith negotiate resolution to the objections and an amendment to this Agreement evidencing such resolution. If no such resolution is reached, then either party may submit the dispute for resolution under the arbitration procedures set forth in Schedule 6.
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IN WITNESS WHEREOF, the parties have duly executed this Agreement the date and year first above written.
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ADVOCAT INC.
Special Meeting of Stockholders to be held November 3, 2003
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS ANDMAY BE REVOKED PRIOR TO ITS EXERCISE
The undersigned hereby appoints William R. Council III and L. Glynn Riddle, or either of them, as proxies, with power of substitution, to vote all shares of the undersigned at the Special Meeting of Stockholders of Advocat Inc. (“Company”), to be held on Monday, November 3, 2003, at 10:30 a.m. local time, at the offices of Harwell Howard Hyne Gabbert & Manner, P.C., 315 Deaderick Street, Suite 1800, Nashville, Tennessee 37238, upon the matters described in the accompanying Notice of Special Meeting of Stockholders and the accompanying Proxy Statement, receipt of which is acknowledged by the undersigned, and upon any other business that may properly come before the meeting or any adjournment thereof in accordance with the following instructions:
/ / | ||||||||||||||
(Continued on reverse side)
of Shareholders, you can be sure your shares are represented
at the meeting by promptly returning your proxy in the
enclosed envelope.
BOTTOM PORTION IN THE ENCLOSED ENVELOPE.THE APPROVAL OF THE SALE OF ALL OF THE STOCK OF DIVERSICARE CANADA MANAGEMENT SERVICES CO., INC.PROPOSALS 1 AND IN THE DISCRETION OF THE PROXIES, ON SUCH OTHER MATTERS AS MAY PROPERLY COME BEFORE THE MEETING2..BELOWON THE REVERSE SIDE AND RETURN PROMPTLY.PROMPTLYDated: , 2003
Instructions: When shares are held by joint tenants, both should sign. If you are signing as attorney, executor, administrator, trustee, or guardian, you must give your full title as such. If you are signing on behalf of a corporation or limited liability company, you must sign in full corporate name by the president, chief manager or other authorized officer. If you are signing on behalf of a partnership, you must sign in partnership name as an authorized person.
ADVOCAT INC.277 Mallory Station Road, Suite 130Franklin, TN 37067