Exhibit 10.1
RESTRUCTURING STOCK ISSUANCE AND SUBSCRIPTION AGREEMENT
     This Restructuring Stock Issuance and Subscription Agreement (“Agreement”)
is entered into this 20th day of October, 2006 between Advocat Inc., a Delaware
corporation (“Advocat”), and Omega Healthcare Investors, Inc., a Maryland
corporation (“Omega”).
RECITALS
     A. Advocat and Omega and certain of their affiliates have entered into that
certain Settlement and Restructuring Agreement dated November 8, 2000 (the “2000
Agreement”) pursuant to which Advocat and Omega have agreed to restructure their
relationship.
     B. Pursuant to the 2000 Agreement, on November 8, 2000, Advocat issued to
Omega 393,658 shares of Series B Preferred Stock (the “Series B Preferred
Stock”) and delivered to Omega its Subordinated Note in the face amount of
$1,700,000 (the “2000 Note”).
     C. Also pursuant to the 2000 Agreement, STERLING ACQUISITION CORP., a
Kentucky corporation (“Lessor”), which is a wholly owned subsidiary of Omega,
and DIVERSICARE LEASING CORPORATION, a Tennessee corporation (“Lessee”), which
is a wholly owned subsidiary of Advocat, entered into that certain Consolidated
Amended and Restated Master Lease dated as of November 8, 2000, but effective as
of October 1, 2000, which has subsequently been amended by a First Amendment to
Consolidated Amended and Restated Master Lease dated as of September 30, 2001
and a Second Amendment to Consolidated Amended and Restated Master Lease dated
as of June 15, 2005 (as amended, the “Master Lease”).
     E. The parties desire to further restructure their relationship, including
(i) the surrender for cancellation by Omega of the Series B Preferred Stock and
the 2000 Note, (ii) the issuance to Omega by Advocat of shares of new Series C
Preferred Stock Stock having the powers, preferences and rights as provided in
the Certificate of Designation of Advocat (“Designation”) as attached hereto as
Exhibit A, (iii) the delivery to Omega by Advocat of a new subordinated
promissory note substantially in the form attached as Exhibit B (the “New
Note”), and (iv) the amendment of the Master Lease by Lessor and Lessee to
increase the rent payable under, and extend the term of, the Master Lease, all
as set forth in this Agreement.
     NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Advocat and Omega agree as
follows:
     1. Restructuring Transactions.
     1.1 Surrender of Series B Preferred Stock. Omega hereby surrenders to
Advocat for cancellation the Series B Preferred Stock. On or before the date of
this Agreement, Advocat shall pay accrued and unpaid dividends for the period of
July 1, 2006 thru September 30, 2006. Except as set forth in the preceding
sentence, upon the surrender of the Series B Preferred Stock, Omega releases
Advocat from any obligation

 

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to pay any accrued but unpaid dividends with respect to the Series B Preferred
Stock. Advocat shall promptly cancel the Series B Preferred Stock.
     1.2 Cancellation of 2000 Note. Omega hereby surrenders to Advocat for
cancellation the 2000 Note. On or before the date of this Agreement, Advocat
shall pay accrued and unpaid interest on the 2000 Note for the period of July 1,
2006 thru September 30, 2006. Except as set forth in the preceding sentence,
Omega hereby releases Advocat from any obligation to pay any outstanding
Principal or accrued interest with respect to the 2000 Note.
     1.3 Issuance of New Shares. Advocat hereby issues to Omega and Omega
accepts from Advocat, subject to the terms and conditions hereof, five thousand
(5,000) shares of Advocat Series C Preferred Stock (the “New Shares”). Advocat
shall deliver to Omega concurrently with the execution and delivery of this
Agreement a stock certificate evidencing its ownership of the New Shares and
bearing a restrictive legend stating substantially the following:
The shares represented by this certificate have not been registered under the
Securities Act of 1933, as amended. Such shares have been acquired for
investment and may not be offered for sale, sold, delivered after sale,
transferred, pledged or hypothecated in the absence of an effective registration
statement covering such shares under the Securities Act or an opinion of counsel
satisfactory to the company that such registration is not required.
     1.4 Delivery of New Note. Advocat hereby delivers to Omega the New Note.
     1.5 Amendment of Master Lease. Omega hereby agrees to cause Lessor, and
Advocat hereby agrees to cause Lessee, to deliver concurrently with the
execution of this Agreement the Third Amendment to Consolidated Amended and
Restated Master Lease substantially in the form of Exhibit C to this Agreement.
     2. Termination of Registration Rights Agreement. Omega and Advocat hereby
terminate the Registration Rights Agreement dated as of November 8, 2000.
     3. Representations and Warranties of Advocat. Advocat hereby represents and
warrants to Omega as of the date of this Agreement as follows:
     3.1 Advocat is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware, and has all requisite
corporate power and authority to own, lease and operate its properties and to
carry on its business as now being conducted.
     3.2 Advocat has the full right, power and authority to execute, deliver and
carry out the terms of this Agreement and all documents and agreements necessary
to

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give effect to the provisions of this Agreement and to consummate the
transactions contemplated hereby.
     3.3 The execution, delivery and consummation of this Agreement have been
duly and properly authorized by all necessary action on the part of Advocat. The
Board of Directors of Advocat has duly and validly approved and taken all
corporate action required to be taken by the Board of Directors for the
consummation of the transactions contemplated by this Agreement including, but
not limited to, all actions required to render the provisions of Section 203 of
the Delaware General Corporation Act restricting business combinations with
“interested shareholders” inapplicable to such transactions and to provide that
none of Omega or any of its affiliates shall become an “interested shareholder”
upon the execution and delivery of this Agreement or the acquisition of New
Shares pursuant to this Agreement.
     3.4 This Agreement, upon due execution and delivery thereof, will
constitute the valid and binding obligation of Advocat, enforceable in
accordance with its terms.
     3.5 Upon the issuance of the New Shares, such New Shares will be duly
authorized, validly issued, fully paid and nonassessable.
     3.6 The execution and delivery of this Agreement, the consummation of the
transactions contemplated by this Agreement and the compliance with the terms of
this Agreement do not and will not:
     (a) conflict with or result in any breach of any provision of any agreement
or other instrument to which Advocat is a party or by which it or any of its
property may be bound, or conflict with or result in any breach of any provision
of Advocat’s Charter, as amended by the attached Designation, Bylaws or the
Amended and Restated Rights Agreement dated as of December 7, 1998 by and
between Advocat and SunTrust Bank, as amended (the “Rights Plan”);
     (b) conflict with, result in a breach of any provision of, constitute (with
or without due notice or lapse of time or both) a default under, result in the
modification or cancellation of, result in any increase in the obligations of
Advocat or any of its subsidiaries under, or give rise to any right of
termination or acceleration in respect of, any contract, agreement, commitment,
understanding, arrangement or restriction of any kind to which Advocat is a
party or to which Advocat or any of its property is subject;
     (c) result in the creation of any Lien (as defined in Section 10.7 below)
upon, or any Person (as defined in Section 10.7 below) obtaining the right to
acquire, any of the New Shares, any equity interest in Advocat or any of
Advocat’s assets;
     (d) violate or conflict with any law, ordinance, code, rule, regulation,
decree, order or ruling of any court or Governmental Entity (as defined in
Section 10.7 below), to which Advocat or any of its assets is subject;

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     (e) require any authorization, consent, order, permit or approval of, or
notice to, or filing, registration or qualification with, any governmental,
administrative or judicial authority (“Consent”), other than (1) the filing of
the Designation with the Delaware Secretary of State and (2) the filing of a
Form D with the Securities and Exchange Commission; or
     (f) require any Consent of any Person to the execution, delivery or
performance of this Agreement or to the consummation of the transactions
contemplated hereby, including (but not limited to) Consents from parties to
leases or other agreements or commitments, other than Consents obtained by
Advocat.
     3.7 The authorized capital stock of Advocat consists of 20,000,000 shares
of common stock, $0.01 par value, and 1,000,000 shares of preferred stock, $0.10
par value of which 200,000 shares have been designated Series A Junior
Participating Preferred Stock of which none are issued and outstanding, 600,000
shares have been designated Series B Convertible Preferred Stock, 393,658 shares
of which were held prior to the date of this Agreement by Omega, and five
thousand (5,000) shares have been designated Series C Preferred Stock of which
none are issued and outstanding immediately prior to the issuance of the New
Shares. After giving effect to the consummation of the transactions (i.e., the
Closing) contemplated by this Agreement, the only shares of capital stock issued
and outstanding, reserved for issuance or committed to be issued will be:
     (a) 5,835,287 fully paid and non-assessable shares of Common Stock, duly
issued and outstanding;
     (b) 200,000 shares of Series A Junior Preferred Stock reserved for issuance
pursuant to the Rights Plan;
     (c) Five thousand (5,000) shares of Series C Preferred Stock, duly issued
and outstanding and owned of record and beneficially by Omega;
     (d) 405,500 shares of Common Stock reserved for issuance upon the exercise
of outstanding options; and
     (e) 368,100 shares of Common Stock reserved for issuance pursuant to the
Advocat Inc. 2005 Long-Term Incentive Plan.
There are no declared but unpaid dividends or undeclared dividend arrearages on
any shares of capital stock of Advocat other than undeclared dividend arrearages
with respect to the Series B Preferred Stock, which obligation shall terminate
upon the surrender of the Series B Preferred Stock. Except for the Series B
Preferred Stock which is cancelled pursuant to this Agreement and the securities
for which shares of Common Stock have been reserved under (d) and (e) above,
there are no outstanding convertible securities of Advocat.
     4. Representations and Warranties of Omega. Omega hereby represents and
warrants to Advocat as follows:

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     4.1 Omega is an “accredited investor” as defined in the Securities Act of
1933, as amended (the “Securities Act”), and rules and regulations promulgated
thereunder.
     4.2 The New Shares are being acquired by Omega solely for its own account
for investment, with no present intention of making or participating in a
distribution thereof within the meaning of the Securities Act. None of the New
Shares will be sold or transferred by Omega in violation of the Securities Act,
any state securities law or any other applicable securities legislation and the
financial condition of Omega is such that Omega can bear the risk of this
investment indefinitely.
     4.3 Omega is aware that the New Shares have not been registered under the
Securities Act or any state securities law or any other applicable securities
legislation, that the New Shares must be held indefinitely unless they are
subsequently registered or an exemption from such registration is available and
that Advocat is under no obligation to register the New Shares under the
Securities Act, any state securities law, or any other applicable securities
legislation. Omega is aware that an exemption from the registration requirements
of the Securities Act pursuant to Rule 144 thereunder is not presently
available; that Advocat has not covenanted to make available an exemption from
the registration requirements pursuant to such Rule 144 or any successor rule
for resale of the New Shares; and that even if an exemption under Rule 144 were
available, the Rule generally permits only routine public market sales of
securities in limited amounts in accordance with the terms and conditions of
such Rule.
     4.4 Omega confirms that Advocat has made available to Omega, or its
representatives, the opportunity to ask questions of Advocat’s officers and
directors and to acquire such additional information about the business and
financial condition of Advocat as Omega has requested, which additional
information has been received.
     4.5 Omega confirms that no representations or warranties have been made by
Advocat other than as set forth or confirmed in this Agreement, and in the
documents and agreements which evidence or secure the transactions contemplated
by the Transaction Documents (as defined in Section 10.7 below).
     5. Indemnification.
     5.1 Advocat agrees to indemnify and hold Omega, and its successors and
assigns, harmless from and against any and all liabilities, losses, damages,
injuries, liabilities, claims, deficiencies, judgments, fines, costs and
expenses, including reasonable counsel fees (“Losses”), suffered, incurred or
sustained by Omega or its successors or assigns that result from, relate to, or
arise out of:
     (a) any breach of any representation or warranty or nonfulfillment of any
agreement or covenant on the part of Advocat under this Agreement; or
     (b) any action, suit, claim or proceeding incident to any of the foregoing
or to the enforcement of this Section 5.

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     5.2 (a) If any third party shall notify Omega with respect to any matter (a
“Third Party Claim”) which may give rise to a claim for indemnification against
Advocat (the “Indemnifying Party”) under this Section, then Omega shall promptly
notify Advocat of such Third Party Claim in writing; provided, however, that no
delay on the part of Omega in notifying Advocat shall relieve Advocat from any
obligation under this Section unless (and then solely to the extent) Advocat is
prejudiced by such delay.
     (b) Advocat will have the right to assume the defense of the Third Party
Claim with counsel reasonably acceptable to Omega at any time within fifteen
(15) days after Omega has given notice of the Third Party Claim; provided,
however, that Advocat must conduct the defense of the Third Party Claim actively
and diligently to preserve its rights to assume the defense of the Third Party
Claim; and provided further that Omega may retain separate co-counsel at its
sole cost and expense and participate in the defense of the Third Party Claim.
     (c) So long as Advocat has assumed and is conducting the defense of the
Third Party Claim in accordance with Section 5.2(b) above, Advocat will not
consent to the entry of any judgment or enter into any settlement with respect
to the Third Party Claim without the prior written consent of Omega (not to be
withheld unreasonably) unless the judgment or proposed settlement involves only
the payment of money damages by Advocat and does not impose an injunction or
other equitable relief upon Omega.
     (d) If Advocat does not assume or conduct the defense of the Third Party
Claim in accordance with Section 5.2(b) above, however, (i) Omega may defend
against, and consent to the entry of any judgment or enter into any settlement
with respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and Omega need not consult with, or obtain any consent from,
Advocat in connection with any such defense, consent or settlement), and
(ii) Advocat will remain responsible for any Losses Omega may suffer resulting
from, arising out of, relating to, in the nature of, or caused by the Third
Party Claim to the fullest extent provided in this Section 5.
     6. Financial Statements and Other Information. If, at any time while Omega
holds any of the New Shares, Advocat ceases to have registered any of its
securities pursuant to Section 12 of the Securities Exchange Act of 1934, as
amended (the “34 Act”), or to timely file all reports required to be filed by
Advocat under the 34 Act, Advocat will deliver to Omega, as applicable:
     (a) Audited Annual Financial Statements. As soon as practicable after the
end of each fiscal year of Advocat, and in any event within ninety (90) days
thereafter, a consolidated audited balance sheet of Advocat and its subsidiaries
(if any), as of the end of such year, and consolidated audited statements of
income, changes in retained earnings and changes in cash flows of Advocat and
its subsidiaries (if any), for such fiscal year, prepared in accordance with
GAAP and setting forth in each case in comparative form the figures for the
previous fiscal year, all in reasonable detail and, in the case of the
consolidated statements, certified by independent public accountants selected by
Advocat and reasonably acceptable to Omega; and

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     (b) Unaudited Quarterly Financial Statements. As soon as practicable after
the end of each fiscal quarter of each fiscal year and, in any event within
forty-five (45) days thereafter, consolidated unaudited balance sheets of
Advocat and its subsidiaries (if any) as of the end of such period, and
consolidated unaudited statements of income and changes in cash flows of Advocat
and its subsidiaries (if any) for such period and for the current fiscal year to
date, prepared in accordance with GAAP and setting forth in comparative form the
figures for the corresponding periods of the previous fiscal year, subject to
changes resulting from normal year-end audit adjustments and the absence of
footnotes, all in reasonable detail and certified by the principal financial
officer of the Company.
     7. Redemption Right upon Default. Upon the occurrence of an Event of
Default (as defined in Section 10.7 below) and while it continues, Omega shall
have the option, in addition to all other rights and remedies available to it,
to cause Advocat to redeem all or any part of the New Shares pursuant to
Section 11 of the Designation.
     8. AmSouth Consent. Omega hereby acknowledges the AmSouth Consent, a copy
of which is attached hereto, and hereby agrees that Omega will not deem it to be
an Event of Default (as defined in Section 10.7 below) if Advocat does not pay
dividends on the Series C Preferred Stock because Advocat is prohibited from
paying such dividends as provided in the AmSouth Consent; provided such failure
to pay dividends does not continue for more than two consecutive quarters.
     9. Further Assurances and Information.
     9.1 If, subsequent to the date of this Agreement, the Federal government
issues or passes rules, regulations or laws which would cause Omega to lose, or
be at a material risk of losing, its status as a Real Estate Investment Trust
under the Internal Revenue Code of 1986, as amended, as a result of Omega
holding the New Shares, and if Omega’s attorneys or accountants recommend a
restructuring of the relationship between Omega and Advocat as set forth in this
Agreement, then so long as the proposed restructuring does not place Advocat in
a materially worse position relative to its position under the current structure
of the relationship, Advocat shall use its commercially reasonable efforts to
promptly take, or promptly cause to be taken, all actions and to execute all
documents that are reasonably requested by Omega to restructure the
relationship.
     9.2 Within ten (10) days of the receipt of a written request from Omega,
Advocat shall provide to Omega reasonable access to Advocat’s books and records
for the purpose of estimating the aggregate fair market value of Advocat’s
outstanding “securities” (as that term is defined in Investment Company Act of
1940) as of the date of the request.

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     10. Miscellaneous.
     10.1 The representations, warranties and agreements contained herein shall
survive the execution and delivery of this Agreement and the purchase of the New
Shares.
     10.2 This Agreement shall be binding upon and shall inure to the benefit of
the parties and their respective permitted successors and assigns. This
Agreement may not be assigned, by operation of law or otherwise, without the
prior written consent of the non-assigning party; provided, however, that Omega
and any subsequent holder of the New Shares may assign the rights granted
pursuant to Sections 5 and 6 of this Agreement to any subsequent holder of the
New Shares.
     10.3 This Agreement and the documents which evidence or secure the
transactions contemplated by this Agreement constitute the entire agreement of
the parties relating to the subject matter hereof and there are no terms other
than those contained herein. This Agreement may not be modified or amended
except in a writing signed by the parties hereto.
     10.4 This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without giving effect to its conflicts of law
provisions.
     10.5 This Agreement may be executed in counterparts, which together shall
constitute one and the same agreement.
     10.6 Notices. Any notice, request or other communication to be given by any
party hereunder shall be in writing and shall be sent by registered or certified
mail, postage prepaid, by overnight delivery with a commercial overnight
carrier, with written verification of receipt or by hand delivery or facsimile
transmission to the following address:

         
 
  To Advocat:   Advocat, Inc.
 
      1621 Galleria Boulevard
 
      Brentwood, TN 37027
 
      Attn: Chief Financial Officer
 
      Telephone No.: (615) 771-7575
 
      Facsimile No.: (615) 771-7409
 
       
 
  With copy to   Harwell Howard Hyne Gabbert & Manner, P.C.
 
  (which shall not   315 Deaderick Street, Suite 1800
 
  constitute notice):   Nashville, TN 37238
 
      Attn: John N. Popham, IV
 
      Telephone No.: (615) 256-0500
 
      Facsimile No.: (615) 251-1057
 
       
 
  To Omega:   Omega Healthcare Investors, Inc.
 
      9690 Deereco Road, Suite 100
 
      Timonium, MD 21093

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      Attn.: Daniel J. Booth
 
      Telephone No.: (410) 427-1700
 
      Facsimile No.: (410) 427-8800
 
       
 
  And with copy to   Doran Derwent, PLLC
 
  (which shall not   125 Ottawa Ave., N.W., Suite 420
 
  constitute notice):   Grand Rapids, Michigan 49503
 
      Attn: Mark E. Derwent
 
      Telephone No.: (616) 233-9720
 
      Facsimile No.: (616) 451-8697

or to such other address as either party may hereafter designate. Notice shall
be deemed to have been given on the date of delivery if such delivery is made on
a business day, or if not, on the first business day after delivery. If delivery
is refused, notice shall be deemed to have been given on the date delivery was
first attempted. Notice sent by facsimile transmission shall be deemed given
upon confirmation that such notice was received at the number specified above or
in a notice to the sender.
     10.7 As used in this Agreement, the following terms shall have the
following meanings:
     “Event of Default” means (i) if Advocat fails to observe or perform or
cause to be observed or performed any term, covenant or condition of this
Agreement and such failure is not cured within a period of thirty (30) days
after notice thereof from Omega, (ii) a representation or warranty of Advocat
made in this Agreement is untrue when made in any material respect, Omega is
materially and adversely affected thereby, and Advocat fails within thirty
(30) days after Notice from Omega thereof to cure such condition by terminating
such adverse effect and making Omega whole for any damages suffered therefrom,
or, if with due diligence such cure cannot be effected within thirty (30) days,
if Advocat has failed to commence to cure the same within the thirty (30) days
or failed thereafter to proceed promptly and with due diligence to cure such
condition and complete such cure, (iii) an Event of Default under any of the
Transaction Documents which is not cured within the applicable cure period,
(iv) if Advocat fails to observe or perform any term, covenant or condition of
the New Shares other than the payment of a dividend as provided in the following
item and such failure is not cured within a period of thirty (30) days after
notice thereof from Omega; and (v) if Advocat fails to pay when due any dividend
on the New Shares and such failure is not cured within a period of five (5) days
after notice thereof from Omega provided that Advocat shall be entitled to such
notice and may avail itself of such cure period no more than two (2) times in
any calendar year.
     “Governmental Entity” means any Federal, state, local or foreign government
or any court of competent jurisdiction, administrative agency or commission or
other governmental authority or instrumentality, domestic or foreign.

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     “Lien” or “Liens” means any pledge, lien (including, without limitation,
any tax lien), charge, claim, community property interest, condition, equitable
interest, encumbrance, security interest, mortgage, option, restriction on
transfer (including without limitation any buy-sell agreement or right of first
refusal or offer), forfeiture, penalty, equity or other right of another Person
of every nature and description whatsoever.
     “Person” means any individual, legal entity, business enterprise, or
government, governmental body or unit, including any corporation, partnership,
limited partnership, or limited liability company.
     “Transaction Documents” means this Agreement, the Master Lease, the New
Note, the New Shares, all documents which evidence or secure the transactions
contemplated by this Agreement, the Master Lease, the New Note, the New Shares
and all guaranties, security agreements, cross default agreements and other
documents granted concurrently herewith, and granted previously or from time to
time hereafter by Advocat to Omega, or any of Omega’s affiliates.
Signatures on following page.

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     In witness whereof the parties have executed this Restructuring Stock
Issuance and Subscription Agreement as of the date first set forth above.

                  ADVOCAT INC.    
 
           
 
  By:   /s/ William R. Council, III    
 
  Name:  
 
William R. Council, III    
 
  Title:   President and CEO    
 
                OMEGA HEALTHCARE INVESTORS, INC.    
 
           
 
  By:   /s/ Taylor Picket    
 
           
 
  Name:   Taylor Picket    
 
  Title:   Chief Executive Officer    

Exhibits and Schedules:

     
Exhibit A
  Designation
Exhibit B
  New Note
Exhibit C
  Third Amendment to Consolidated Amended and Restated Master Lease

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