<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-12621
GRANCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4336136
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
(770) 393-0199
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
---------- ----------
There were 24,106,947 shares outstanding of registrant's Common Stock, par value
$0.001 per share, as of August 11, 1997.
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<PAGE>
GRANCARE, INC.
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets-
June 30, 1997 and December 31, 1996............... 3
Condensed Consolidated Statements of Income-
Three Months Ended June 30, 1997 and 1996 and
Six Months Ended June 30, 1997 and 1996........... 5
Condensed Consolidated Statement of Shareholders'
Equity - Six Months Ended June 30, 1997........... 6
Condensed Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1997 and 1996........... 7
Notes to Condensed Consolidated Financial
Statements........................................ 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three and Six Months Ended June 30, 1997.......... 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................. 19
Item 2. Changes in Securities............................. 19
Item 3. Defaults Upon Senior Securities................... 19
Item 4. Submission of Matters to a Vote of Security
Holders........................................... 19
Item 5. Other Information................................. 20
Item 6. Exhibits and Reports on Form 8-K.................. 20
Signatures.................................................... 21
2
<PAGE>
PART I - FINANCIAL INFORMATION
For financial reporting purposes, the reporting entity is the successor to
GranCare, Inc., a California corporation (the "Predecessor"). Effective
February 12, 1997, Vitalink Pharmacy Services, Inc. ("Vitalink") acquired the
Predecessor's institutional pharmacy business ("TeamCare" or the "Institutional
Pharmacy Business") through the merger (the "Vitalink Merger") of the
Predecessor with and into Vitalink. Immediately prior to the Vitalink Merger,
all of the Predecessor's non-institutional pharmacy businesses, including its
skilled nursing, home health care, assisted living and contract management
businesses and related assets (collectively, the "Skilled Nursing Business"),
were transferred to GranCare, Inc., a Delaware corporation (the "Successor")
(then a wholly owned subsidiary of the Predecessor) and all of the then
outstanding stock of the Successor was distributed (the "Distribution") to the
shareholders of the Predecessor. While the Successor is not the successor to
the Predecessor for Securities and Exchange Commission reporting purposes, it is
the successor to the Predecessor for financial reporting purposes. Accordingly,
unless the context otherwise requires, "GranCare" and the "Company" refer to
GranCare, Inc., a California corporation, and its subsidiaries for periods on or
prior to February 12, 1997 and to GranCare, Inc., a Delaware corporation, and
its subsidiaries for periods subsequent to February 12, 1997.
ITEM 1. FINANCIAL STATEMENTS
--------------------
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 19,778 $ 14,512
Accounts receivable, less allowance for doubtful accounts
(1997 - $14,918 and 1996 - $11,209)............................... 234,435 233,335
Inventories........................................................ 1,838 17,312
Notes receivable................................................ 24,520 24,520
Prepaid expenses and other current assets.......................... 17,502 18,786
Deferred income taxes.............................................. 5,887 9,239
--------- --------
Total current assets.............................................. 303,960 317,704
Property and equipment.............................................. 254,773 271,536
Less accumulated depreciation...................................... (57,798) (64,387)
--------- --------
196,975 207,149
Other assets:
Investments, at fair value......................................... 38,175 38,933
Goodwill, less accumulated amortization
(1997 - $6,010 and 1996 - $10,332)................................ 59,550 133,152
Other intangibles, less accumulated amortization
(1997 - $5,378 and 1996 - $9,700)................................. 9,497 11,613
Other.............................................................. 29,752 39,488
--------- --------
Total assets........................................................ $637,909 $748,039
========= ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................................... $ 82,555 $ 79,824
Accrued wages and related liabilities..................................... 16,405 21,541
Interest payable.......................................................... 4,968 8,235
Notes payable and current maturities of long-term debt.................... 3,115 7,535
-------- --------
Total current liabilities................................................ 107,043 117,135
Long-term debt............................................................. 361,996 382,242
Deferred income taxes...................................................... 17,531 23,084
Other...................................................................... 10,889 11,278
Shareholders' equity:
Common stock; $0.001 par value; 50,000,000 shares authorized
(shares issued: 1997-24,088,697)......................................... 24 -
Paid in capital........................................................ 124,970 -
Common stock; no par value; 50,000,000 shares authorized
(shares issued: 1996-23,677,825)......................................... - 123,378
Equity component of minimum pension liability............................. (542) (542)
Unrealized gain on investments net of income taxes (1997 -
$4,554 and 1996 - $4,573)................................................ 6,831 6,885
Retained earnings......................................................... 9,167 84,579
-------- --------
140,450 214,300
-------- --------
Total liabilities and shareholders' equity................................. $637,909 $748,039
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated Financial
Statements.
4
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars And Shares In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net patient revenues............................ $197,925 $245,427 $420,851 $474,254
Investment and other revenue.................... 1,416 1,844 3,006 3,028
-------- -------- -------- --------
Net revenues................................. 199,341 247,271 423,857 477,282
Expenses:
Operating expenses.............................. 187,016 218,646 390,870 423,721
Depreciation and amortization................... 5,262 6,514 11,013 12,672
Interest expense and financing charges.......... 7,782 8,918 16,319 17,067
Nonrecurring costs-merger and other costs....... --- --- 28,300 ---
-------- -------- -------- --------
Total expenses............................... 200,060 234,078 446,502 453,460
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge...................... (719) 13,193 (22,645) 23,822
Income taxes...................................... (273) 5,013 (893) 9,052
-------- -------- -------- --------
Income (loss) before extraordinary charge......... (446) 8,180 (21,752) 14,770
Extraordinary charge - loss on early
extinguishment of debt, net of income tax benefit
of $2,961........................................ --- --- 4,831 ---
-------- -------- -------- --------
Net income (loss)........................... $ (446) $ 8,180 $(26,583) $ 14,770
========= ======== ======== ========
Net income (loss) per common and common
equivalent share:
Primary:
Income (loss) before extraordinary charge.. $ (0.02) $ 0.34 $ (0.71) $ 0.62
Extraordinary charge....................... --- --- (0.20) ---
-------- -------- -------- --------
Net income (loss).......................... $ (0.02) $ 0.34 $ (1.11) $ 0.62
========= ======== ======== ========
Fully diluted:
Income (loss) before extraordinary charge.. $ (0.02) $ 0.33 $ (0.71) $ 0.61
Extraordinary charge....................... --- --- (0.20) ---
-------- -------- -------- --------
Net income (loss).......................... $ (0.02) $ 0.33 $ (1.11) $ 0.61
========= ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding:
Primary.................................... 24,028 24,077 23,925 23,932
========= ======== ======== ========
Fully diluted.............................. 24,028 26,570 23,925 26,484
========= ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Dollars In Thousands)
<TABLE>
<CAPTION>
Equity
Component of
Common Minimum Unrealized
Common Stock, Stock, Paid in Pension Gain on Retained
No Par $0.001 Par Capital Liability Investments Earnings Total
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1, 1997........ $ 123,378 $-- $ -- ($542) $6,885 $ 84,579 $214,300
TeamCare Merger transactions:
Conversion of Common Stock....... (123,378) 24 123,354 -- -- -- --
Dividend of TeamCare............. -- -- -- -- -- (48,829) (48,829)
Issuance of 410,872 shares of
common -- -- 1,616 -- -- -- 1,616
stock on exercise of options.......
Unrealized loss on investments..... -- -- -- -- (54) -- (54)
Net income (loss).................. -- -- -- -- -- (26,583) (26,583)
-------------------------------------------------------------------------------------------------
Balances at June 30, 1997.......... $ -- $24 $124,970 ($542) $6,831 $ 9,167 $140,450
=================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
6
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------------------------------
1997 1996
--------------------- ----------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss)................................................. $ (26,583) $ 14,770
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for doubtful accounts.................................. 10,381 3,607
Depreciation and amortization.................................... 11,013 12,672
Gain on sale of assets........................................... (187) (114)
Non-cash one-time charges........................................ 5,916 ---
Amortization of deferred financing costs......................... 310 468
Changes in assets and liabilities net of
effect of acquisitions:
Accounts receivable............................................. (59,406) (44,728)
Other current assets............................................ (1,212) (4,096)
Other noncurrent assets......................................... (767) (3,641)
Accounts payable and accrued expenses........................... 17,830 1,682
Accrued wages and related liabilities........................... (987) (469)
Interest payable................................................ (3,133) 1,433
Income taxes payable............................................ --- 1,928
Other noncurrent liabilities.................................... 96 76
--------------------- ----------------------
Net cash used in operating activities......................... (46,729) (16,412)
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired................... 163 (5,929)
Purchases of property and equipment............................... (11,758) (16,364)
Net proceeds from disposition of TeamCare......................... 88,233 ---
Proceeds from disposition of property and equipment............... --- 994
Net purchases and sales of investments............................ 586 (5,119)
Other............................................................. (546) (1,400)
--------------------- ----------------------
Net cash provided by (used in) investing activities............. 76,678 (27,818)
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options.................... 1,616 1,992
Long-term debt payments........................................... (262,794) (4,571)
Proceeds from long-term debt borrowings........................... 239,000 42,250
Payment of debt issuance costs.................................... (2,505) (250)
--------------------- ----------------------
Net cash (used in) provided by financing activities............. (24,683) 39,421
--------------------- ----------------------
Net increase (decrease) in cash and cash equivalents.............. 5,266 (4,809)
Cash and cash equivalents at beginning of period.................. 14,512 17,738
--------------------- ----------------------
Cash and cash equivalents at end of period........................ $ 19,778 $ 12,929
===================== ======================
</TABLE>
See Notes to Condensed Consolidated Financial Statements
7
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with the instructions to Form 10-Q and Rule 10-
01 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and six month periods ended June
30, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. For further information, refer to the
consolidated financial statements and the footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1996.
Note B - Vitalink Merger
- ------------------------
GranCare entered into an Amended and Restated Agreement and Plan of
Merger with Vitalink Pharmacy Services, Inc. (Vitalink) dated as of September 3,
1996. The form of the transactions were: (1) GranCare's skilled nursing
facilities, along with its contract management and home health businesses were
reorganized into New GranCare, Inc. (New GranCare) and all of the shares of New
GranCare distributed to the GranCare shareholders in a tax-free spin off (the
Distribution); (2) GranCare (then consisting solely of the institutional
pharmacy and related business known as TeamCare) merged into and was acquired by
Vitalink (Vitalink Merger) through a tax-free exchange of shares of common stock
of Vitalink for shares of common stock of GranCare; and (3) New GranCare became
a public company upon consummation of the Distribution. Notwithstanding the
legal structure of the transactions, for accounting/financial reporting purposes
such transactions have been treated as the spin-off of TeamCare in the form of a
dividend and the reorganization/recapitalization of GranCare into New GranCare
as New GranCare has continued the majority of the GranCare businesses. No gain
has been recognized as a result of the distribution for the difference between
the market value of the Vitalink Common Stock received and the carrying value of
the net assets of TeamCare. New GranCare continued to reflect the historical
cost basis of assets and liabilities of GranCare. These transactions were
approved by the GranCare shareholders on February 8, 1997 and the transactions
closed on February 12, 1997 (the Closing Date); the spin-off of TeamCare was
reflected in the first quarter of 1997.
In addition, as a consequence of the Vitalink Merger, the Company
redeemed its 6 1/2% Convertible Subordinated Debentures (the Debentures) due
January 15, 2003 effective as of the Closing Date. GranCare deposited the
redemption price and accrued interest on each outstanding Debenture with the
trustee for the Debentures and interest ceased to accrue as of February 12,
1997. GranCare also completed a tender offer for its 9 3/8% Senior
Subordinated Notes (Senior Notes) due 2005. GranCare accepted $98 million
aggregate principal amount of Senior Notes (representing 98% of the outstanding
Senior Notes) for purchase pursuant to GranCare's cash tender offer at a
purchase price of $1,090 per $1,000 principal amount plus accrued and unpaid
interest up to, but not including, the payment date.
In February 1997, the Company recognized a merger charge and
extraordinary charge related to debt extinguishment in connection with the
aforementioned transactions. The components of the merger charge and
extraordinary charge recognized in New GranCare's operations in the first
quarter of 1997 consist of the following:
8
<PAGE>
DOLLARS IN THOUSANDS
--------------------
<TABLE>
<CAPTION>
Shared transaction costs:
<S> <C>
Redemption premium - $100 million Senior
Subordinated Notes.................................................... $ 9,000
Redemption premium - $60 million Convertible
Subordinated Debentures............................................... 2,430
Investment banker fees................................................ 4,200
Consent fee paid to HRPT.............................................. 5,500
Other professional fees and merger related costs...................... 5,470
--------
Total shared costs........................................................... 26,600
Less costs to be paid by Vitalink............................................ (13,300)
--------
GranCare portion of shared transaction costs................................. 13,300
Other transaction related costs:
Consent fee paid to HRPT.............................................. 4,500
Write-off to deferred financing fees.................................. 5,441
Amounts payable under GranCare Shareholder Value Program............
4,500
Amounts payable under Restricted Stock Plan........................... 2,200
Other employee severance and other related costs...................... 6,059
--------
36,000
Less: Income taxes......................................................... (6,000)
--------
Total costs, net of income taxes............................................. $ 30,000
========
</TABLE>
Excluding TeamCare, the Vitalink Merger and extraordinary charges, GranCare's
total net revenues, pre-tax income and primary earnings per share for the six
month periods ended June 30, 1997 and 1996, respectively, would have been
$403,060,000, $5,166,000 and $0.13 and $365,790,000, $6,333,000 and $0.26.
Note C - Contingent Earn-Out Provision
- --------------------------------------
The purchase agreement with respect to the 1994 acquisition of Long Term
Care Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC"), contained a contingent earnout
provision for the two year period ended June 30, 1996. In April 1997, the
Company paid the seller of LTC $5.4 million in settlement of the earnout
provision. Of this settlement, Vitalink is obligated to fund $2.5 million.
This settlement has been reflected in the accompanying financial statements as
an increase to GranCare's investment in TeamCare thereby increasing the amount
of the dividend recorded in connection with the TeamCare spin-off.
Note D - Non-Recurring Charge
- -----------------------------
During the third quarter of 1996, the Company recorded exit and other
one-time costs of $18.4 million as a charge to operations. Approximately $10.6
million of this charge relates to management's decision to close five Indiana
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The $10.6 million
reflects the remaining net book value of leasehold improvements at the dates of
closure and the remaining rent due to the landlord for periods after the dates
of closure. On March 6, 1997, the Company modified its plan from closing five
Indiana facilities to terminating most of its lease obligations and operations
in Indiana involving a total of 18 facilities. This modification did not
significantly impact the exit costs previously accrued in the third quarter of
1996. Management completed the lease terminations effective April 1, 1997.
Approximately $3 million of the charge relates to the write-off of notes
receivable for loans made by the Company to a sublease lessee to fund working
capital. Accounts receivable from the facility under lease serve as collateral
for the working capital loans. During the third quarter of 1996, the loans to
the lessee began to significantly exceed the collateral, indicating that the
loan would not be recoverable. Accordingly, the Company decided to terminate
the sublease arrangement and to write off the loans which it concluded would not
be recoverable. In addition, in the third quarter of 1996, the Company recorded
9
<PAGE>
$4.8 million of other charges which included $2.9 million of additional bad debt
expense related to TeamCare. The charge for bad debt expense was necessary to
provide for the increased risk of collection resulting from the deterioration in
the financial condition of certain customers in the third quarter of 1996.
Note E - Third Party Settlement Appeal
- --------------------------------------
During the fourth quarter of 1996, the Company received final settlement
on its 1994 cost reports for its California long-term health care facilities.
The final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs ($1.8
million) based on their interpretation of the Medicare prudent buyer concept.
In addition, the intermediary has reopened the 1993 cost reports for two
additional facilities ($0.7 million) for the same issue. The Company has
furnished therapy services to patients under arrangements with outside therapy
contractors. The contracts with the outside contractors contain indemnification
clauses regarding denial of payment for services provided. The intermediary
asserts that the Company did not act as a prudent buyer of therapy services as
the Company should have hired therapists instead of contracting for their
services. In the absence of prudent buyer documentation to the contrary, the
intermediary determined reasonable costs for therapy services based on
internally developed survey data and other factors. The Company, in conjunction
with a therapy company and another long-term care company, has filed an
expedited group appeal to the Provider Reimbursement Review Board regarding
these 1994 audit adjustments. A hearing took place during the Company's second
quarter. The Company is awaiting the outcome of this hearing. Management
(based on the advise of outside counsel) believes that it has a strong position
in this matter and will ultimately prevail; therefore no accrual for losses has
been made. It is possible that the intermediary will attempt to apply the same
interpretation for other Company facilities and for other periods. If the
hearing results in an unfavorable outcome to the Company and if the Company does
not ultimately prevail on this matter, it could have a material adverse impact
on net income of a particular future quarter or year.
Note F - Credit Facility
- ------------------------
In connection with the Vitalink Merger described in Note B, the Company
replaced its existing credit facility with a new credit facility in the
aggregate amount of $300,000,000 (the New Credit Facility). The New Credit
Facility consists of two components: a $200,000,000 5-year revolving credit
facility (which includes a $40,000,000 sub-limit for the issuance of standby
letters of credit) and a $100,000,000 5-year term loan. Borrowings for working
capital and general corporate purposes may not exceed $75,000,000. The first
$25,000,000 of exposure for letters of credit issued under the letter of credit
sub-facility will correspondingly reduce availability under the working capital
sub-facility. The revolving credit portion of the New Credit Facility will
mature in five years. The term loan portion of the New Credit Facility will be
amortized in ten quarterly installments of $7,000,000 each commencing February
12, 1999, thereafter increasing to $10,000,000 per quarter. All remaining
principal and accrued and unpaid interest shall be due and payable in full on
the fifth anniversary of the closing date of the New Credit Facility. Interest
on outstanding borrowings shall accrue, at the option of the Company, at the
base rate or at the Eurodollar rate plus, in each case, an applicable margin.
Note G - Taxes
- --------------
For the six-months ended June 30, 1997, the provision for income taxes is
affected by $19.0 million of merger expenses that are not tax deductible for
income tax purposes. Without the effect of such non-deductible expenses, the
effective tax rate for the 1997 period is approximately 39% compared to 38% for
the same period in 1996.
Note H - FASB Statement No. 128
- -------------------------------
During the first quarter of 1997, the FASB released FASB Statement No. 128
(Statement No. 128), Earnings Per Share. As required, the Company intends to
adopt Statement No. 128 in the fourth quarter of 1997 and will restate earnings
per share for prior periods in conformity with the new rules.
10
<PAGE>
Note I - Related Party Transaction
- ----------------------------------
Effective April 1, 1997, the Company acquired Connerwood Healthcare, Inc.
("Connerwood"), a long-term care company operating seven skilled nursing
facilities in Indiana. These facilities were subleased to Connerwood in 1993
and have been managed by the Company since that date. Four of the seven
facilities acquired were subsequently divested in conjunction with the Indiana
lease termination described in Note D.
Note J - Change in Accounting Estimate
- --------------------------------------
Since December 31, 1996, and to a greater extent in the second quarter of
1997, the Company has experienced delays in its collection of certain third
party and other accounts receivable. In recognition of these delays, the Company
has increased its allowance for doubtful accounts. The effect of this change in
accounting estimate for the three and six months ended June 30, 1997 was to
increase operating expenses by $8.0 million and net loss by $4.9 million, or
$0.20 per share.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RECENT DEVELOPMENTS
On May 8, 1997, the Company announced the execution of an agreement and plan
of merger pursuant to which the Company would be merged (the "LCA Merger") into
a wholly-owned subsidiary of Living Centers of America, Inc. ("LCA") immediately
following a leveraged recapitalization of LCA by Apollo Management, L.P.
("Apollo") and certain other related transactions (collectively, the
"Transactions"). The Company believes that the post-merger company and its
subsidiaries (the "Companies") would be one of the largest long term care
providers in the country in terms of the number of licensed beds, operating over
330 facilities with more than 38,000 licensed beds in 21 states. In addition to
operating skilled nursing facilities, the Companies would provide pharmacy and
rehabilitation services, assisted living, contract management and geriatric
specialty healthcare services nationwide. Vitalink and Manor Care, Inc.
("ManorCare") have obtained a preliminary injunction prohibiting the Company
from consummating the LCA Merger. The Company remains committed to consummating
the LCA Merger on the terms set forth in the merger agreement; however, due to
the uncertainties of litigation, no assurance can be given that the Company will
prevail in having the injunction lifted on appeal or in the ultimate disposition
of this matter. See "Part II - Item 1. Legal Proceedings". Consummation of the
LCA Merger is subject to numerous conditions including obtaining certain
regulatory approvals and approval of the Transactions by the shareholders of LCA
and the Company.
GENERAL
On February 12, 1997, the Company completed the Vitalink Merger, the practical
effect of which was to transfer on a tax advantaged basis the Company's
Institutional Pharmacy Business to Vitalink and distribute the consideration for
such transfer to the Company's shareholders. For financial reporting purposes,
the Company is the successor to GranCare, Inc., a California corporation.
The Company was incorporated in September 1987. Since inception, the Company
has grown rapidly through acquisitions of long-term care facilities and
specialty medical businesses such as institutional pharmacy operations. During
1996 the Company acquired RN Health Care Services, Inc., a home health agency in
Michigan, Jennings Visiting Nurse Association, Inc., a home health agency in
Indiana, Emery Pharmacy, a provider of institutional pharmacy services in
upstate New York and RX Corporation, a provider of institutional pharmacy
services in southern California.
11
<PAGE>
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing.
Government payors, such as state-administered Medicaid programs and, to a lesser
extent, the federal Medicare program, generally provide more restricted coverage
and lower reimbursement rates than private pay sources. For the three-month
period ended June 30, 1997, the percentage of the Company's total gross patient
revenues derived from Medicaid and Medicare programs were 34% and 46%,
respectively.
The Company derives its revenues by providing (i) skilled nursing, (ii)
pharmacy (through January 31, 1997), therapy, subacute and other specialty
medical services and (iii) contract management of specialty medical programs for
acute care hospitals. In general, the Company generates higher revenues and
profitability from the provision of specialty medical services than from routine
skilled nursing care, and the Company believes that this trend will continue.
The Company seeks to enhance its operating margins by increasing the proportion
of its revenues derived from specialty medical services.
In April 1997, the Company disposed of 18 underperforming facilities that no
longer fit within the Company's strategic focus. The Company continues to
evaluate certain long-term care facilities which are underperforming or do not
fit within the Company's long-term strategic plans. All or a portion of these
facilities may be divested in the future whether or not the Transactions are
consummated.
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
income data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ----------------------------
1997 1996 1997 1996
------------- ----------- -------------- ----------
<S> <C> <C> <C> <C>
Skilled Nursing and Subacute Care:
Routine services.......................................... 56.2% 59.6% 56.3% 60.8%
Specialty Medical:
Therapy, subacute and other ancillary services............. 39.4 35.6 39.4 34.5
Contract Management........................................ 4.4 4.8 4.3 4.7
-------------- ----------- ------------ -------------
Subtotal.................................................. 43.8% 40.4% 43.7% 39.2%
-------------- ----------- ------------ -------------
Total...................................................... 100.0% 100.0% 100.0% 100.0%
============== =========== ============ =============
</TABLE>
Revenues Per Patient Day Derived from Skilled Nursing and Subacute Care (1)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Routine skilled nursing $ 94.49 $ 90.05 $ 93.24 $ 89.09
Specialty medical services (2) 66.15 53.75 65.32 50.51
--------- --------- --------- ---------
Total $160.64 $143.80 $158.56 $139.60
========= ========= ========= =========
</TABLE>
(1) Excluding TeamCare for all periods presented.
(2) Excludes other specialty medical revenue from beds not operated by the
Company.
The Company's net revenues for the three and six month periods ended June 30,
1997 were $199.3 and $423.9 million, respectively, compared to $247.3 and $477.3
million for the same periods in 1996, a decrease of $48.0 and $53.4 million,
respectively, or 19.4% and 11.2%.
12
<PAGE>
Excluding the Institutional Pharmacy Business, the Company's net revenues for
the three and six month periods ended June 30, 1997 were $199.3 and $403.0
million, respectively, compared to $188.2 and $365.7 million for the same
periods in 1996, an increase of $11.1 and $37.3 million, respectively, or 5.9%
and 10.2% These increases are partially offset by April 1997 divestiture of
certain underperforming businesses. Same-store growth increased,
$10.7 and $23.8 million for the three and six month periods ended June
30, 1997, from increases in specialty medical services provided and an increase
in average daily rates due to an improved payor mix. Specialty medical revenues
increased $11.3 and $32.8 million over the same periods in 1996. This was the
result of growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
Included in net revenues for the three and six month periods ended June 30, 1997
and 1996 were $1.5 million and $2.4 million, respectively, compared to $2.0 and
$2.4 for the same periods in 1996, relating to routine cost limit exceptions.
While the Company has applied for these exceptions, and has only recognized a
portion of the estimated recovery, there can be no assurance that the actual
revenues from routine cost limit exceptions will equal those amounts recognized
by the Company in the three and six month periods ended June 30, 1997 and 1996.
Operating expenses (excluding rent and property expenses) for the three and
six month periods ended June 30, 1997 were $175.2 and $365.3 million,
respectively, compared to $204.4 and $396.0 million for the same periods in
1996, a decrease of $29.2 and $53.7 million, respectively.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for the three and six month periods ended June 30,
1997 were $175.2 and $347.1 million, respectively, compared to $155.7 and $304.1
million for the same periods in 1996, an increase of $19.5 and $43.0 million,
respectively, or 12.6% and 14.1%. $11.5 and $21.5 million of the increase for
the three and six month periods ended June 30, 1997, respectively, was
attributable to acquisitions, as well as costs associated with an increase of
specialty medical services provided. On a same-store basis, operating expenses
increased $10.6 and $22.1 million for the three and six month periods ended June
30, 1997, respectively, over the same periods in 1996. $8.0 million of the
increase for the three and six months ended June 30, 1997 was attributable to
the Company's change in accounting estimate in the second quarter of 1997
related to its estimation of allowances for doubtful accounts. These increases
are partially offset by the divestiture of certain businesses in 1997.
Specialty medical services result in the incurrence of additional costs from the
higher staffing levels required to provide the higher acuity care. The
additional ancillary services (physical, respiratory, occupational and speech
therapy) utilized generate additional costs in line with the growth realized in
the specialty medical revenues. This increase was partially offset by a
reduction in costs from more appropriate staffing given patient acuity levels at
skilled nursing facilities and an increased use of third-party vendors for
therapy services.
Rent and property expenses for the three and six month periods ended June 30,
1997 were $11.8 and $25.6 million, respectively, compared to $14.2 and $27.7
million for the same periods in 1996, a decrease of $2.4 and $2.1 million,
respectively, or 16.9% and 7.6%.
Excluding the Institutional Pharmacy Business, rent and property expenses for
the three and six month periods ended June 30, 1997 were $11.8 and $25.1
million, respectively, compared to $12.9 and $25.2 million for the same periods
in 1996, a decrease of $1.1 and $0.1 million, respectively. This decrease was
primarily the result of rent and property expenses attributable to businesses
divested in 1997 offset in part by scheduled increases in rental expense.
Depreciation and amortization expenses for the three and six month periods
ended June 30, 1997 were $5.3 and $11.0 million, respectively, compared to $6.5
and $12.7 million for the same periods in 1996, a decrease of $1.2 and $1.7
million, respectively, or 18.5% and 13.4%.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for the three and six month periods ended June 30, 1997 were $5.3 and
$10.5 million, respectively, compared to $4.8 and $9.5 million for the same
periods in 1996, a decrease of $0.5 and $1.0 million, respectively, or 10.4%
and 10.5%. This decrease was primarily the result of depreciation and
amortization expenses attributable to businesses divested in 1997 offset by
additions to property and equipment.
13
<PAGE>
Interest expense and financing charges for the three and six month periods
ended June 30, 1997 were $7.8 and $16.3 million, respectively, compared to $8.9
and $17.1 million for the same periods in 1996, a decrease of $1.1 and $0.8
million, respectively, or 12.4% and 4.7%.
Excluding the Institutional Pharmacy Business, interest expense and financing
charges for the three and six month periods ended June 30, 1997 were $7.8 and
$15.3 million, respectively, compared to $8.8 and $16.8 million for the same
periods in 1996, a decrease of $1.0 and $1.5 million, respectively, or 11.4% and
8.9%. This decrease was due primarily from a reduction in indebtedness related
to debt extinguished in the Vitalink Merger offset in part by interest on
additional indebtedness to fund working capital.
During the first quarter of 1997, in conjunction with the Vitalink Merger, the
Company recorded merger and other one-time costs of $36.0 million (See Note B of
Notes to Condensed Consolidated Financial Statements). Of this aggregate
charge, $28.3 million is reflected as a charge to operations with the remaining
$7.7 million pertaining to costs associated with the early extinguishment of
debt being reflected as an extraordinary charge. The components of the merger
charge and extraordinary charge recognized in the first quarter of 1997 consist
of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
Shared transaction costs:
<S> <C>
Redemption premium - $100 million Senior
Subordinated Notes.................................................... $ 9,000
Redemption premium - $60 million Convertible
Subordinated Debentures............................................... 2,430
Investment banker fees................................................ 4,200
Consent fee paid to HRPT.............................................. 5,500
Other professional fees and merger related costs...................... 5,470
--------
Total shared costs........................................................... 26,600
Less costs to be paid by Vitalink............................................ (13,300)
--------
GranCare portion of shared transaction costs................................. 13,300
Other transaction related costs:
Consent fee paid to HRPT.............................................. 4,500
Write-off to deferred financing fees.................................. 5,441
Amounts payable under GranCare Shareholder Value Program............
4,500
Amounts payable under Restricted Stock Plan........................... 2,200
Other employee severance and other related costs 6,059
--------
36,000
Less: Income taxes......................................................... (6,000)
--------
Total costs, net of income taxes............................................. $ 30,000
========
</TABLE>
Income taxes for the three and six month periods ended June 30, 1997 were
$(0.3) and $(3.9) million compared to $5.0 and $9.1 million for the same periods
in 1996. Income taxes in 1997 are affected by approximately $19.0 million in
non-deductible merger expenses.
Excluding the Institutional Pharmacy Business, income taxes for the three
and six month periods ended June 30, 1997 were $(0.3) and $(4.0) million,
respectively, compared to $2.2 and $3.9 million for the same periods in 1996.
As a result of the foregoing, net income (loss) for the three and six
month periods ended June 30, 1997 was $(0.4) and $(26.6) million compared to
$8.2 and $14.8 million for the same periods in 1996. Excluding the
Institutional Pharmacy Business, net income (loss) for the three and six month
periods ended June 30, 1997 was $(0.4) and $(26.8) million compared to $3.8 and
$6.3 million for the same periods in 1996.
14
<PAGE>
During the fourth quarter of 1996, the Company received final settlement
on its 1994 cost reports for its California long-term health care facilities.
The final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs ($1.8
million) based on their interpretation of the Medicare prudent buyer concept.
In addition, the intermediary has reopened the 1993 cost reports for two
additional facilities ($0.7 million) for the same issue. The Company has
furnished therapy services to patients under arrangements with outside therapy
contractors. The contracts with the outside contractors contain indemnification
clauses regarding denial of payment for services provided. The intermediary
asserts that the Company did not act as a prudent buyer of therapy services as
the Company should have hired therapists instead of contracting for their
services. In the absence of prudent buyer documentation to the contrary, the
intermediary determined reasonable costs for therapy services based on
internally developed survey data and other factors. The Company, in conjunction
with a therapy company and another long-term care company, has filed an
expedited group appeal to the Provider Reimbursement Review Board regarding
these 1994 audit adjustments. A hearing took place during the Company's second
quarter. The Company is awaiting the outcome of this hearing. Management
(based on the advise of outside counsel) believes that it has a strong position
in this matter and will ultimately prevail; therefore no accrual for losses has
been made. It is possible that the intermediary will attempt to apply the same
interpretation for other Company facilities and for other periods. If the
hearing results in an unfavorable outcome to the Company and if the Company does
not ultimately prevail on this matter, it could have a material adverse impact
on net income of a particular future quarter or year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at June 30, 1997 was $19.8
million in cash and cash equivalents compared to $14.5 million at December 31,
1996, an increase of $5.3 million. The increase in cash and cash equivalents
was due primarily to proceeds from the disposition of TeamCare and long-term
debt borrowings offset by an increase in accounts receivable. Payments received
by the Company from the Medicaid and Medicare programs are the Company's largest
source of cash from operations.
Accounts receivable at June 30, 1997 were $234.4 million compared to
$233.3 million at December 31, 1996, an increase of $1.1 million.
Excluding the Institutional Pharmacy Business, accounts receivable at
June 30, 1997 were $234.4 million compared to $184.3 million at December 31,
1996, an increase of $50.1 million or 27.2%. Since December 31, 1996, and to a
greater extent in the second quarter of 1997, the Company experienced delays in
its payments for services rendered under the Medicare program. In the State of
Michigan the Medicare fiscal intermediary placed a number of facilities under
focus review. This delays the payment cycle because under focus review each
claim must receive a medical review. The Company has not received a material
number of denials for services rendered, only a delay in payment which is in the
60-90 day range. In addition, as a consequence of the Vitalink Merger,
terminating Medicare cost reports were required to be filed for all of the
Company facilities and certain other businesses. Normally, cost reports are
filed based on the fiscal year end, but as a result of the Vitalink Merger, they
were filed for a thirteen month period ended January 31, 1997, which has delayed
the cost settlements, the difference between audited costs and interim rates, by
30-60 days. In addition, as a consequence of filing thirteen month cost
reports, the Company has not received 1997 Medicare rate increases, and as such,
differences between interim and expected rates have continued to increase
settlement balances. Finally, the Company has continued to experience
significant growth in Medicare business (41% for 1996 to 46% six months ended
June 30, 1997). Final cost settlements, based on the difference between audited
costs and interim rates, are paid following final cost report audits by Medicare
fiscal intermediaries. Because of the cost report and audit process, final
settlement may not occur until up to 24 months after services are provided. The
Company accounts for such open cost reports by recording appropriate reserves to
offset potential audit adjustments. Specialty medical services generally
increase the amount of payments received on a delayed basis. The Company
receives payment for skilled nursing services based on rates set by individual
state Medicaid programs. Although payment cycles for these programs vary,
payments generally are made within 30 to 60 days of services provided, except in
Illinois, where the Medicaid program delays payments for 120 days. The federal
Medicare program, a cost-reimbursement system, pays interim rates, based on
estimated costs of services, on a 30 to 45-day basis. The Company has
implemented certain policies and procedures to assist in the collection of
accounts receivable and to help mitigate the impact of the delays noted above.
However, in recognition of the delays, the Company has increased its allowance
for doubtful accounts to provide for potential losses. This change in accounting
15
<PAGE>
estimate resulted in an $8.0 million increase in the allowance for doubtful
accounts at June 30, 1997, and a corresponding charge to operations in the
second quarter of 1997.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.
In addition to principal and interest payments on its long-term
indebtedness, the Company has significant rent obligations relating to its
leased facilities, as well as property expenses (principally property taxes and
insurance) relating to all of its facilities. The Company's estimated principal
payments, cash interest payments, rent and property expense obligations for 1997
are approximately $83.2 million.
Excluding the Institutional Pharmacy Business, the Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for calendar year 1997 are approximately $81.7 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate the
addition of specialty medical services, and to improve the physical appearance
of its facilities for marketing purposes. The Company estimates that capital
expenditures for the year ending December 31, 1997, will be approximately $35.0
million.
The Company maintained a $150.0 million credit facility (the "Predecessor
Credit Facility") with a syndicate of banks for whom First Union acted as lead
bank, which was used for working capital, other general corporate purposes and
acquisitions. In order to complete the Vitalink Merger and related
transactions, the Company replaced the Predecessor Credit Facility with a new
credit facility in the aggregate amount of $300.0 million, with First Union and
The Chase Manhattan Bank each committing to $150.0 million (the "Credit
Facility"). The Credit Facility consists of two components: a $200.0 million
5-year revolving credit facility (which includes a $40.0 million sub-limit for
the issuance of standby letters of credit and a $5.0 million swing-line
commitment from First Union) and a $100.0 million 5-year term loan. Borrowings
for working capital and general corporate purposes may not exceed $75.0 million.
The first $25.0 million of exposure for letters of credit issued under the
letter of credit sub-facility will correspondingly reduce availability under the
working capital sub-facility. As of June 30, 1997, the Company had
approximately $50.0 million outstanding under the working-capital sub-facility
and $25.0 million in letters of credit. While the Company currently has no
availability under the working capital sub facility, the Company believes that
its cash from operations will be sufficient to meet the Company's working
capital requirements in the future. The revolving credit portion of the Credit
Facility matures in February 2002. The term loan portion of the Credit Facility
will be amortized in ten quarterly installments of $7.0 million each commencing
in February 1999, thereafter increasing to $10.0 million per quarter. All
remaining principal and accrued and unpaid interest shall be due and payable in
full in February 2002. Interest on outstanding borrowing shall accrue, at the
option of the Company, at the base rate or at the Eurodollar rate plus, in each
case, an applicable margin. As of June 30, 1997, approximately $236.0 million
was outstanding under the Credit Facility. On April 18, 1997, the Company
amended the Credit Facility in order to provide the Company with greater
flexibility to pursue potential acquisitions. The Credit Facility contains
restrictions on the ability of the Company to pay dividends to its stockholders
upon the failure to satisfy certain financial covenants.
In connection with the Vitalink Merger, the Company completed a tender
offer for its Senior Subordinated Notes due 2005 (the "Notes"), substantially
all of which were purchased in the tender offer with funds provided by Vitalink.
The remaining Notes became obligations of Vitalink in connection with the
Merger. Also in connection with the Vitalink Merger, the Company redeemed all
of its outstanding 6 1/2% Convertible Debentures due 2003 (the "Convertible
Debentures"). Accordingly, neither the Notes nor the Convertible Debentures
remain obligations of the Company following the Vitalink Merger.
In April 1997, the Company paid the seller of Long Term Care
Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical Services
Corporation III (collectively, "LTC") $5.4 million in settlement of a contingent
earnout provision in the purchase agreement relating to the Company's 1994
16
<PAGE>
acquisition of LTC. Pursuant to the documents entered into in connection with
the Vitalink Merger, Vitalink is obligated to fund $2.5 million of this payment.
The Company previously announced a pending acquisition with respect to
the purchase of 18 nursing facilities and ancillary businesses from an
affiliated group in the State of Alabama. The Company now believes that such
acquisition will not be consummated.
In conjunction with a 1990 acquisition, the Company borrowed $15.0
million under a promissory note agreement with Health and Retirement Properties
Trust ("HRPT"). The note is secured by mortgages on two facilities and
1,000,000 shares of HRPT common stock owned by the Company. The HRPT note had a
balance of $8.7 million, with an interest rate of 13.75% at December 31, 1994.
During 1995, the Company renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11.5 million, resulting in
additional proceeds to the Company. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest became payable commencing
on January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments will
begin two years after the date of the note on a 30-year direct reduction basis,
with the remaining balance due December 31, 2010.
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents. Subsequent
to December 31, 1994, the existing Master Lease Documents were amended. Under
the amended lease arrangements, minimum rent for the aggregate facilities is the
annual sum of $11,550,000, payable in equal monthly installments. In addition,
commencing January 1, 1996, the amended lease agreement provides for additional
rent to be paid monthly, in advance, based on 75% of the increase in the
Consumer Price Index multiplied by the minimum rent due, provided, however, that
the maximum rent (minimum rent plus additional rent) each January shall be
limited to a 2% increase over the total monthly rent paid in the prior December.
The operating leases for 17 facilities expire on December 28, 2010, and there
are two 10 year renewal options. The leases for seven facilities expire in June
2006 and there are two 10 1/2 year renewal options. The Company has subleased
six of the 24 facilities to unrelated parties.
The Company is a beneficial owner of 1,000,000 shares of stock of HRPT,
which are held in trust and pledged as collateral for the obligations of two of
the Company's subsidiaries under mortgages notes and lease obligations with
HRPT. The pledge agreement strictly limits the Company's ability to sell the
shares until its obligations to HRPT are satisfied, which will not be until the
year 2010. As a result, these shares cannot be sold to meet other financial
obligations. In addition, such mortgage notes and lease obligations contain
provisions that restrict, upon the occurrence of an event of default thereunder,
the ability of such subsidiaries to make dividends, loans or advances to the
Company. In accordance with FASB Statement No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," the HRPT stock is carried at fair
market value, with unrealized gains and losses reported as a separate component
of equity.
The Company maintains a captive insurance subsidiary to provide
reinsurance for its obligations under workers' compensation and general and
professional liability plans. These obligations are funded with long-term fixed
income investments, which are not available to satisfy other obligations of the
Company.
A wholly-owned subsidiary of the Company, Professional Health Care
Management, Inc. ("PHCMI"), is the borrower under a $58.8 million mortgage note
(the "Omega Loan") executed on August 14, 1992, in favor of Omega Healthcare
Investors, Inc. ("Omega"), and under the related Michigan loan agreement dated
as of June 7, 1992. All $58.8 million is outstanding at the present time.
Proceeds of the Omega Loan were used by PHCMI to acquire 17 skilled nursing
facilities in the State of Michigan ("the "PHCMI Facilities"). With the
exception of four PHCMI Facilities since divested, PHCMI owns and leases the
PHCMI Facilities to various of its wholly-owned subsidiaries under separate
lease agreements (the "PHCMI Subsidiary Leases"). The Omega Loan is secured by
a mortgage and security agreement executed by PHCMI with respect to the PHCMI
Facilities. PHCMI has assigned its interest in the PHCMI Subsidiary Leases to
Omega as additional security for the Omega Loan. In addition, in February 1997,
the PHCMI subsidiaries executed and delivered guarantees of the Omega Loan and
pledged their personal property assets to Omega as security for such guarantees.
17
<PAGE>
The Omega Loan bears interest at a rate which is adjusted based on either
(a) changes in the Consumer Price Index, or (b) a percentage of the change in
gross revenues of PHCMI and its subsidiaries from year to year, divided by $58.8
million, whichever produces the higher interest rate, but in any event subject
to a maximum rate not to exceed 10.5% of the interest rate in effect for the
Omega Loan for the prior calendar year. The current interest rate is 14.5% per
annum. The Omega Loan currently requires monthly, interest-only payments. The
Omega Loan may be prepaid within the first 180-days following August 14, 2002,
upon 30 days' notice. Prepayment at any other time will result in a prepayment
penalty in the nature of a "make whole" premium. Beginning October 1, 2002,
quarterly amortizing installments of principal in the amount of $1,470,000 each
will also become due and payable on the first day of each calendar quarter. The
entire outstanding principal amount of the Omega Loan is due and payable on
August 13, 2007.
In addition to the interest on the Omega Loan described in the preceding
paragraph, as a condition to obtaining Omega's consent to the Vitalink Merger,
the Credit Facility and other transactions related thereto, PHCMI agreed to pay
additional interest to Omega in the amount of $20,500 per month, through and
including July 1, 2002. If the principal balance of the Omega Loan for any
reason becomes due and payable prior to that date, there will be added to the
indebtedness owed by PHCMI (i) the sum of $1,000,000, plus (ii) interest thereon
at 11% per annum to the prepayment date, less (iii) the amount of such
additional interest paid to Omega prior to the prepayment date.
As substitute collateral for the four divested PHCMI Facilities, and as
consideration for granting its consent to such divestiture, Omega required
GranCare to cause First Union to issue its letter of credit in favor of Omega in
the amount of $9.0 million pursuant to the Credit Facility (the "Omega Letter of
Credit"). The Omega Letter of Credit can be drawn upon following the occurrence
of any event of default under the Omega loan documents, if the Omega Letter of
Credit is not renewed or extended at least 30 days prior to its scheduled
expiration date (currently March 22, 1998), or if certain representations,
warranties or covenants of PHCMI under the Omega loan documents are breached and
such breaches are not cured within the prescribed time after notice.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain
a minimum tangible net worth of at least $10.0 million, increased or decreased
by 25% of PHCMI's net income (but in no event less than $10.0 million). The
Company has agreed to contribute additional equity to PHCMI if, as and when
necessary to assure that such minimum tangible net worth test is met. As of
December 31, 1996, PHCMI's tangible net worth exceeded the current minimum
adjusted tangible net worth requirement.
Capital Resources. The Company believes that its existing working
capital and available borrowings under the Credit Facility will be sufficient to
fund the fixed obligations, capital expenditures and other obligations referred
to above, as well as to repay certain indebtedness when due, and further expand
GranCare's business (other than the LCA Merger). Additionally, in connection
with the Vitalink Merger, Vitalink assumed (as part of the Vitalink Merger)
certain items of GranCare's consolidated indebtedness aggregating approximately
$108.0 million (which included GranCare's obligations in respect of the Notes).
However, in the event that the Company continues to grow through acquisitions,
the Company may need to raise additional capital, either through borrowings,
sale-leaseback financings or the sale of debt or equity, to finance the
acquisition price and any additional working capital and capital expenditure
requirements related to such acquisitions. At this time, the Company believes
that any additional required financing may be obtained at market rates on terms
that are acceptable to the Company, although no assurance can be given regarding
the terms that are available of additional financing in the future.
18
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
From time to time, the Company has been a party to various legal
proceedings in the ordinary course of its business. In the opinion of the
Company, except as set forth below, there are no proceedings which, individually
or in the aggregate, after taking into account the insurance coverage maintained
by the Company, are reasonably likely to have a material adverse effect on the
Company's financial position or results of operations.
On June 10, 1997, a Company stockholder filed a civil complaint in state
district court in Harris County, Texas: Howard Gunty, Inc. Profit Sharing Plan
v. Gene E. Burleson, Charles M. Blalock, Antoinette Hubenette, Joel S. Kanter,
Ronald G. Kenny, Robert L. Parker, William G. Petty, Jr., Edward V. Regan, Gary
U. Rolle and GranCare, Inc. This complaint alleges, generally, that the
defendants have breached their fiduciary duties owed to the Company's
stockholders by failing to take all reasonable steps necessary to ensure that
the Company' stockholders receive maximum value for their shares of common stock
in connection the LCA Merger. The plaintiffs are seeking (i) an injunction
prohibiting the consummation of the LCA Merger or (ii) alternatively, if the LCA
Merger is consummated, to have such transaction rescinded and set aside. In
addition, the plaintiffs are seeking unspecified compensatory damages, costs and
to have the complaint certified as a class action. The Company believes that is
has a meritorious defense to this action.
On June 17, 1997, Vitalink and its controlling stockholder, Manor Care,
filed a civil complaint in the Court of Chancery of the State of Delaware in and
for New Castle County (the "Court"): Vitalink Pharmacy Services Inc., a Delaware
Corporation, and Manor Care, Inc., a Delaware corporation v. GranCare, Inc., a
Delaware corporation, Civil Action No. 15744. This complaint alleges that the
consummation of the LCA Merger will violate certain provisions of the non-
competition agreement between Vitalink, the Company and Manor Care (the "Non-
Competition Agreement") and will cause Vitalink to suffer irreparable harm. The
plaintiffs are seeking (i) an injunction prohibiting the Company from completing
the Merger, (ii) specific performance of the Non-Competition Agreement, and
(iii) a declaration by the Court setting forth the parties' rights under the
Non-Competition Agreement and a determination that the LCA Merger violates such
Agreement. In addition, plaintiffs are seeking to recover their costs and
attorneys' fees incurred in connection with pursuing this action. The Company
denied the plaintiffs' allegations and moved for summary judgment. The
plaintiffs moved for a preliminary injunction to enjoin the LCA Merger. A
hearing on the motions was held on July 25, 1997. On August 8, 1997, the Court
entered an order granting the plaintiffs' request for a preliminary injunction
and denying the Company's motion for summary judgment. On August 8, 1997, the
Court also granted the Company's request that the Court's decision be certified
for appeal to the Delaware Supreme Court and on August 11, 1997, the Company
filed a notice of appeal with the Delaware Supreme Court requesting that the
Delaware Supreme Court accept its appeal of the preliminary injunction. The
parties are presently awaiting the outcome of this request. The Company remains
committed to the consummation of the transaction upon the terms set forth in the
merger agreements. The Company believes that it has a meritorious defense to
this action. Nevertheless, due to the uncertainties of litigation, there can be
no assurance that the Company will prevail.
The absence of any injunctions against the consummation of the LCA
Merger is a condition to the closing of the Transactions. Thus, if the
injunction remains in effect, or if any other injunction is issued, there is a
likelihood that the Transactions may not be consummated.
ITEM 2. CHANGES IN SECURITIES.
- ------- ----------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ------- --------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Not applicable.
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ITEM 5. OTHER INFORMATION.
- -------- ------------------
On May 8, 1997, the Company announced the execution of agreements for a
business combination of Living Centers of America, Inc. ("LCA") with the Company
immediately following a leveraged recapitalization of LCA by Apollo Management,
L.P.
The consummation of the LCA Merger is subject to numerous conditions
including, without limitation, the approval of the transactions by the
stockholders of the Company and LCA.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following exhibits are included herewith:
10 Amended and Restated Agreement and Plan of Merger dated as of May 7, 1997
and amended and restated as of June 12, 1997.
11 Computation of Net Income (Loss) Per Share
27 Financial Data Schedule
(b) On May 9, 1997, the Company filed a current report on Form 8-K
announcing the execution of an agreement and plan of merger dated
as of May 7, 1997, between the Company and Living Centers of
America, Inc.
20
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1997 GRANCARE, INC.
/s/ Keith J. Yoder
------------------
Keith J. Yoder
Chief Financial Officer
(Duly Authorized Officer and Principal Financial
and Accounting Officer)
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EXHIBIT 10
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of May 7, 1997 and amended and restated as of June 12, 1997 (the "Amended
and Restated Agreement") among Living Centers of America, Inc., a Delaware
corporation (the "Parent"), GranCare, Inc., a Delaware corporation (the
"Company") and Apollo Management, L.P., a Delaware limited partnership, on
behalf of one or more funds under management (collectively, "Apollo"), and,
upon its subsequent execution and delivery to the other parties of a
counterpart hereof, a newly formed Delaware corporation wholly owned by Parent
(the "Sub").
RECITALS
WHEREAS, the Parent, the Company and Apollo entered into that certain
Agreement and Plan of Merger dated as of May 7, 1997 (the "Original Merger
Agreement");
WHEREAS, subsequent to the date of the Original Merger Agreement, the Board
of Directors of the Parent, the Company and Apollo has each determined that it
is in the best interests of each of the foregoing entities to enter into this
Agreement which amends and restates the Original Merger Agreement;
WHEREAS, the Board of Directors of the Parent, the Board of Directors of the
Company and Apollo have determined that it is in the best interests of their
respective stockholders for the Company to merge with and into the Sub (the
"Merger") pursuant to Section 251 of the Delaware General Corporation Law
("DGCL") upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of each of the Parent and the Company has
adopted resolutions approving the Merger of the Company with and into the Sub,
in accordance with applicable Delaware law upon the terms and subject to the
conditions set forth herein, and the Parent's Board of Directors has agreed to
recommend that the Parent's stockholders approve the issuance of the Parent
Common Stock pursuant to the this Agreement and the Company's Board of
Directors has agreed to recommend that the Company's stockholders approve the
Merger and this Agreement;
WHEREAS, the Parent and the Company have agreed (subject to the terms and
conditions of this Agreement), as soon as practicable following the approval
by the stockholders of the Company and the Parent, to effect the Merger as
more fully described herein;
WHEREAS, a condition of the Merger is the successful completion of the
recapitalization of Parent pursuant to the merger of Parent with a subsidiary
of Apollo (the "Recapitalization Merger");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Parent, the Sub (upon its becoming a party hereto) and the
Company desire to make certain representations, warranties, covenants and
agreements in connection with this Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
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ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Certain Definitions.
For purposes of this Agreement:
"Business Day" means any day that is not a Saturday, Sunday or other day on
which banking institutions in New York, New York are authorized or required by
law or executive order to close;
"Environmental Law" means any law, regulation, decree, judgment, permit or
authorization relating to worker or public safety and the indoor and outdoor
environment, including, without limitation, pollution, contamination, cleanup,
regulation and protection of the air, water or soils in the indoor or outdoor
environment;
"Environmental Liabilities and Costs" means all damages, penalties,
obligations or clean-up costs assessed or levied pursuant to any Environmental
Law;
"Material Adverse Effect" means, with respect to the Parent or the Company,
as the case may be, any adverse change in the respective business, prospects,
financial condition or results of operations of the Parent or the Company and
their respective subsidiaries that is material to the Parent or the Company
and their respective subsidiaries taken as a whole, excluding any such adverse
change that is due to events, occurrences, facts, conditions, changes,
developments or effects which affect the economy generally;
"Securities Act" means the Securities Act of 1933, as amended and in effect
from time to time; and
"Subsidiary" means, when used with reference to an entity, any other entity
of which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions, or a majority of the outstanding voting securities of
which, are owned directly or indirectly by such entity.
ARTICLE II
THE MERGER
Section 2.01 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the DGCL, the
Company shall be merged with and into the Sub as soon as practicable following
the satisfaction or waiver, if permissible, of the conditions set forth in
Article VI hereof. The Sub shall be the surviving corporation in the Merger
(the "Surviving Corporation") under the name GranCare, Inc. (or such other
name as the parties shall agree) and shall continue its existence under the
laws of Delaware. The separate corporate existence of the Company shall cease.
Section 2.02 Consummation of the Merger. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by
filing with the Secretary of State of the State of Delaware a duly executed
and verified certificate of merger, as required by the DGCL, and shall take
all such other and further actions as may be required by law to make the
Merger effective as promptly as practicable. Prior to the filing referred to
in this Section, a closing (the "Closing") will be held at the offices of
Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York (or
such other place as the parties may agree) for the purpose of confirming all
the foregoing. The time the Merger becomes effective in accordance with
applicable law is referred to as the "Effective Time."
Section 2.03 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL and set forth herein.
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Section 2.04 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and the Bylaws of the Sub, in each case as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation and
Bylaws of the Surviving Corporation; provided, however, that Article I of the
Certificate of Incorporation of the Surviving Corporation shall be amended to
read in its entirety as follows: "ARTICLE I. The name of the Corporation is
GranCare, Inc." (or such other name as the parties shall agree).
Section 2.05 Directors and Officers. The directors of the Sub immediately
prior to the Effective Time and the officers of the Company immediately prior
to the Effective Time shall be the directors and officers, respectively, of
the Surviving Corporation until their respective successors are duly elected
and qualified.
Section 2.06 Conversion of Shares.
(a) Except as otherwise provided herein and subject to Section 2.06(b), each
share of Common Stock, par value $.001 per share, of the Company ("Company
Common Stock") issued and outstanding prior to the Effective Time (other than
the shares of Company Common Stock owned by the Parent, the Sub or any of
their Subsidiaries or held in the treasury of the Company, all of which shall
be cancelled and cease to exist, without consideration being payable therefore
and Dissenting Shares (as defined in Section 2.13)) shall, by virtue of the
Merger, be converted into, exchanged for and represent the right to receive
(without interest), subject to the election and proration procedures described
below, either (i) $10.00 in cash (the "Cash Election Amount") or (ii) 0.2469
(the "Exchange Ratio") of a share of common stock, par value $.01 per share,
of the Parent (the "Parent Common Stock") (the "Stock Consideration"), in
accordance with Section 2.13 (collectively, the "Merger Consideration").
(b) Notwithstanding anything in this Agreement to the contrary, the number
of shares of Company Common Stock (the "Cash Election Number") to be converted
into the right to receive the Cash Election Amount in the Merger shall be
equal to 10% of the issued and outstanding shares of GranCare Common Stock
immediately prior to the Effective Time.
(c) In the event that the aggregate number of shares in respect of which
Cash Elections (as defined in Section 2.13(a)) have been made (the "Cash
Election Shares") exceeds the Cash Election Number, each share of Company
Common Stock in respect of which a Cash Election has not been made shall be
converted into the right to receive the Stock Consideration, and each of the
Cash Election Shares shall be converted into the right to receive the Stock
Consideration or the Cash Election Amount in the following manner:
(i) A proration factor (the "Proration Factor") shall be determined by
dividing the Cash Election Number by the total number of Cash Election
Shares.
(ii) The number of Cash Election Shares as to which each stockholder who
made a Cash Election shall be converted into the right to receive the Cash
Election Amount (on a consistent basis among stockholders who made a Cash
Election pro rata to the number of shares as to which they made such
elections) shall be equal to the product of the Proration Factor multiplied
by the total number of Cash Election Shares beneficially owned by such
stockholder.
(iii) Subject to Section 2.11(e), each Cash Election Share other than
those shares that shall receive the Cash Election Amount in accordance with
Section 2.06(c)(ii), shall be converted into the right to receive the Stock
Consideration.
(d) Subject to Section 2.11(e), if the number of Cash Election Shares is
less than the Cash Election Number, then:
(i) Each Cash Election Share shall be converted into the right to receive
the Cash Election Amount; and
(ii) Each share of Company Common Stock issued and outstanding
immediately prior to the Effective Time other than Cash Election Shares
(the "Eligible Shares"), shall be converted into the right to receive the
Cash Election Amount or the Stock Consideration in the following manner:
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(A) The number of Eligible Shares to be converted into the right to
receive the Cash Election Amount shall be equal to the excess of the
Cash Election Number over the number of Cash Election Shares (which
shall be allocated on a basis consistent among all stockholders who
beneficially own Eligible Shares pro rata to the number of Eligible
Shares beneficially owned by each such stockholder).
(B) Each other Eligible Share shall be converted into the right to
receive the Stock Consideration.
(e) Each share of Company Common Stock held in the treasury of the Company
and each share owned by Sub, Parent or any direct or indirect wholly owned
subsidiary of Parent or the Company immediately prior to the Effective Time
shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto.
Section 2.07 Conversion of Common Stock of the Sub. Each share of common
stock of the Sub issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and become at the Effective Time one share
of common stock of the Surviving Corporation.
Section 2.08 Company Actions. The Company hereby represents and warrants
that (a) its Board of Directors (at a meeting duly called and held), has (i)
determined that the Merger is fair to and in the best interests of the
stockholders of the Company, (ii) resolved to approve the Merger and recommend
(subject to its fiduciary duties as advised by legal counsel) approval and
adoption of this Agreement by such stockholders of the Company, (iii) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
Merger, and (iv) resolved to elect not to be subject, to the extent permitted
by law, to any state takeover law other than Section 203 of the DGCL that may
purport to be applicable to the Merger, or the transactions contemplated by
this Agreement, and (b) Chase Securities, Inc. and Smith Barney Inc., the
Company's financial advisors, have rendered their respective opinions to the
Company's Board of Directors to the effect that, as of the date of this
Amended and Restated Agreement, the Merger Consideration is fair from a
financial point of view, to the holders of Company Common Stock.
Section 2.09 Stockholders' Meetings. Subject to applicable law, each of the
Parent and the Company, acting through its respective Board of Directors,
shall, in accordance with applicable law, duly call, give notice of, convene
and hold a special meeting (which, as may be duly adjourned, shall be referred
to as the "Special Meetings" or "Stockholders Meetings") of its respective
stockholders as soon as practicable for the purpose (in the case of the
Company) of approving and adopting the agreement of merger (within the meaning
of Section 251 of the DGCL) set forth in this Agreement and approving the
Merger (the "Company Stockholder Approval") or (in the case of the Parent) the
issuance of the shares of Parent Common Stock to the stockholders of the
Company in the Merger (the "Parent Stockholder Approval" and together with the
Company Stockholder Approval, the "Stockholder Approvals"), and, subject to
the fiduciary duties of their respective Boards of Directors under applicable
law as determined by such directors in good faith after consultation with and
based upon the advice of outside counsel, include in the Proxy Statement (as
defined in Section 5.07) of each of the Company and the Parent for use in
connection with the Special Meeting of each of the Company and the Parent, the
recommendation of their Boards of Directors that stockholders vote in favor of
the Company Stockholder Approval or the Parent Stockholder Approval, as the
case may be. The Parent, the Sub and the Company agree to use commercially
reasonable efforts to cause the Special Meetings to occur within forty-five
(45) days after the Parent and the Company have responded to all SEC comments
with respect to the preliminary Proxy Statement.
Section 2.10 Rights Under Stock Plans.
(a) Each option to purchase shares of Company Common Stock ("Company
Options") issued pursuant to the Company's 1996 Replacement Stock Option Plan,
1996 Stock Incentive Plan or Outside Directors Stock
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Incentive Plan (the "Company Plans"), all of which issued and outstanding
Company Options are set forth on Section 3.02(a) of the Company Disclosure
Letter, shall, at the Effective Time, be assumed by Parent and shall
constitute an option to acquire, on the same terms and conditions as were
applicable under such assumed Company Option, a number of shares of Parent
Common Stock equal to the product of the Exchange Ratio and the number of
shares of Company Common Stock subject to such Company Option, at a price per
share equal to the amount obtained by dividing the exercise price of such
Company Option by the Exchange Ratio. As soon as practicable following the
Effective Time, but in no event later than 15 days following the Effective
Time, Parent shall deliver to holders of Company Options appropriate option
agreements representing the right to acquire shares of Parent Common Stock on
the same terms and conditions as contained in the outstanding Company Options.
(b) Parent shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of its common stock for delivery upon exercise
of the Company Options assumed in accordance with this Section 2.10. Parent
shall file and cause to be effective as of the Effective Time a registration
statement on Form S-8 or other appropriate form, with respect to shares of
Parent Common Stock that will be subject to the Company Options and use
commercially reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
contained therein) for so long as such Company Options remain outstanding.
(c) Certain non-officer employees have been granted awards of restricted
shares under the 1996 Stock Incentive Plan that have not yet been issued, all
of which awards of restricted stock are set forth on Section 3.02(a) of the
Company Disclosure Letter (the "Restricted Shares," together with the Company
Options, the "Rights"). All of such Restricted Shares will be issued prior to
the Effective Time pursuant to the Company's standard Restricted Stock Award
Agreement, which provides for acceleration of vesting in the event of a
"Change in Control" (as defined therein), which the Merger constitutes.
Section 2.11 Exchange of Certificates.
(a) As of or promptly after the Effective Time, Parent shall invest in or
lend to the Surviving Corporation sufficient funds to permit the Surviving
Corporation to, and the Surviving Corporation shall deposit with the Paying
Agent (as defined in Section 2.13) for the benefit of the holders of shares of
Company Common Stock, for exchange in accordance with this Article II, the
cash portion of the Merger Consideration.
(b) As soon as practicable after the Effective Time, each holder of an
outstanding certificate or certificates which prior thereto represented shares
of Company Common Stock shall, upon surrender to the Paying Agent of such
certificate or certificates and acceptances thereof by the Paying Agent, be
entitled to a certificate or certificates representing the number of full
shares of Parent Common Stock, if any, received and the amount of cash, if
any, into which the number of shares of Company Common Stock previously
represented by such certificate or certificates surrendered shall have been
converted pursuant to this Agreement. The Paying Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as the
Paying Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. After the Effective Time, there shall be no
further transfer on the records of the Company or its transfer agent of
certificates representing shares of Company Common Stock, and if such
certificates are presented to the Surviving Corporation for transfer, they
shall be cancelled against delivery of cash and/or certificates for shares of
Parent Common Stock in accordance with this Agreement. If any certificate for
such shares of Parent Common Stock is to be used in, or if cash is to be
remitted to, a name other than that in which the certificate for shares of
Company Common Stock surrendered for exchange is registered, it shall be a
condition of such exchange that the certificate so surrendered shall be
properly endorsed, with signature guaranteed or otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the
Surviving Corporation or its transfer agent any transfer or other taxes
required by reason of the issuance of certificates for such shares of Parent
Common Stock in a name other than that of the registered holder of the
certificate surrendered, or establish to
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the satisfaction of the Surviving Corporation or its transfer agent that such
tax has been paid or is not applicable. Until surrendered as contemplated by
this Section 2.11(b), each certificate for shares of Company Common Stock
shall be deemed at any time after the Effective Time of the Merger to
represent only the right to receive upon such surrender the Merger
Consideration as contemplated by Section 2.06.
(c) No dividends or other distributions with respect to shares of Parent
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered certificate for shares of Company Common Stock
with respect to the shares of Parent Common Stock represented thereby and no
cash payment in lieu of fractional shares of Parent Common Stock shall be paid
to any such holder pursuant to Section 2.11(e) until the surrender of the
certificate for shares of Company Common Stock with respect to the shares of
Parent Common Stock represented thereby in accordance with this Article II.
Subject to the effect of applicable laws, following surrender of any such
certificates, these shall be paid to the holder of the certificate
representing whole shares of Parent Common Stock issued in connection
therewith, without interest (i) at the time of such surrender the amount of
any cash payable in lieu of a fractional retained share to which such holder
is entitled pursuant to Section 2.11(e) and the proportionate amount of
dividends or other distributions with a record date after the Effective Time
theretofor paid with respect to such shares of Parent Common Stock, and (ii)
at the appropriate payment date, the proportionate amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such whole shares of Parent Common Stock.
(d) All cash paid upon the surrender for exchange of certificates
representing shares of Company Common Stock in accordance with the terms of
this Article II (including any cash paid pursuant to Section 2.11(e)) shall be
deemed to have been issued (and paid) in full satisfaction of all rights
pertaining to the shares of Company Common Stock exchanged for cash
theretofore represented by such certificates.
(e) Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock retained pursuant to the Merger who would
otherwise have been entitled to retain a fraction of a share of Parent Common
Stock (after taking into account all shares of Company Common Stock delivered
by such holder) shall receive, in lieu thereof, a cash payment (without
interest) equal to such fraction multiplied by the Cash Consideration Amount.
(f) Any portion of the Merger Consideration deposited with the Paying Agent
pursuant to this Section 2.11 (the "Exchange Fund") which remains
undistributed to the holders of the certificates representing shares of
Company Common Stock for six months after the Effective Time shall be
delivered to New LCA and any holders of shares of Company Common Stock prior
to the Effective Time who have not theretofore complied with this Article II
shall thereafter look only to New LCA and only as general creditors thereof
for payment of their claim for cash or shares of Parent Common Stock, if any.
(g) None of the Sub or the Company or the Parent or the Paying Agent shall
be liable to any person in respect of any cash or Parent Common Stock from the
Exchange Fund delivered to a public office pursuant to any applicable
abandoned property, escheat or similar law. If any certificates representing
Shares shall not have been surrendered prior to one year after the Effective
Time (or immediately prior to such earlier date on which any cash in respect
of such certificate would otherwise escheat to or become the property of any
Government Authority), any such cash or Parent Common Stock in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or
interest of any person previously entitled thereto.
(h) The Paying Agent shall invest any cash included in the Exchange Fund, as
directed by the Company, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Company. To the extent
that there are losses with respect to such investments, or the Exchange Fund
diminishes for other reasons below the level required to make prompt payments
of the Merger Consideration as contemplated hereby, the Parent shall promptly
replace or restore the portion of the Exchange Fund lost through investments
or other events so as to ensure that the Exchange Fund is, at all times,
maintained at a level sufficient to make such payments.
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(i) The Company shall pay all charges and expenses of the Paying Agent.
Section 2.12 Formation of Sub. Promptly after the date of this Amended and
Restated Agreement, Parent shall cause Sub to be formed and to become a party
to this Agreement.
Section 2.13 Elections.
(a) Each person who, on or prior to the Election Date referred to in
paragraph (c) below, is a record holder of shares of Company Common Stock will
be entitled, with respect to all or any portion of his Shares, to make an
unconditional election (a "Cash Election") on or prior to such Election Date
to receive the Cash Consideration (subject to Section 2.06), on the basis
hereinafter set forth.
(b) Prior to the mailing of the Proxy Statement, the Sub shall appoint a
bank or trust company to act as paying agent (the "Paying Agent") for the
payment of the Merger Consideration.
(c) The Company shall prepare and mail a form of election, which form shall
be subject to the reasonable approval of the Sub (the "Form of Election"),
with the Proxy Statement to the record holders of shares of Company Common
Stock as of the record date for the Stockholders Meeting, which Form of
Election shall be used by each record holder of shares of Company Common Stock
who wishes to make a Cash Election for any or all shares of Company Common
Stock held, subject to the provisions of Section 2.06 hereof, by such holder.
The Company will use commercially reasonable efforts to make the Form of
Election and the Proxy Statement available to all persons who become holders
of shares of Company Common Stock during the period between such record date
and the Election Date referred to below. Any such holder's Cash Election shall
have been properly made only if the Paying Agent shall have received at its
designated office, by 5:00 p.m., New York City time on the Business Day (the
"Election Date") next preceding the day on which the vote is taken at the
Stockholders Meeting (or any adjournment thereof) a Form of Election properly
completed and signed and accompanied by certificates for the shares of Company
Common Stock to which such Form of Election relates (or by an appropriate
guarantee of delivery of such certificates as set forth in such Form of
Election from a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States, provided such certificates are in fact delivered to the Paying
Agent within three (3) NYSE trading days after the date of execution of such
guarantee of delivery).
(d) Any Form of Election may be revoked by the stockholder submitting it to
the Paying Agent only by written notice received by the Paying Agent (i) prior
to 5:00 p.m., New York City time, on the Election Date or (ii) after the date
of the Stockholders Meeting, if (and to the extent that) the Paying Agent is
legally required to permit revocations and the Effective Time shall not have
occurred prior to such date. In addition, all Forms of Election shall
automatically be revoked if the Paying Agent is notified in writing by the Sub
and the Company that the Merger has been abandoned. If a Form of Election is
revoked, the certificate or certificates (or guarantees of delivery, as
appropriate) for the shares of Company Common Stock to which such form of
Election relates shall be promptly returned to the stockholder submitting the
same to the Paying Agent.
(e) The determination of the Paying Agent shall be binding whether or not
elections to receive the Cash Consideration have been properly made or revoked
pursuant to this Section 2.13 with respect to shares of Company Common Stock
and when elections and revocations were received by it. If the Paying Agent
determines that any Cash Election was not properly made with respect to shares
of Company Common Stock, such shares of Company Common Stock shall be treated
by the Paying Agent as shares of Company Common Stock which were not Cash
Election Shares at the Effective Time, and such shares of Company Common Stock
shall be exchanged in the Merger for Stock Consideration pursuant to Section
2.06. The Paying Agent shall also make all computations as to the allocation
and the proration contemplated by Section 2.06, and any such computation shall
be conclusive and binding on the holders of shares of Company Common Stock.
The Paying Agent may, with the mutual agreement of the Sub and the Company,
make such rules as are consistent with this Section 2.13 for the
implementation of the elections provided for herein as shall be necessary or
desirable fully to effect such elections.
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Section 2.14 Dissenting Shares.
Notwithstanding anything in this Agreement to the contrary, shares of
Company Common Stock which are issued and outstanding immediately prior to the
Effective Time and which are held by stockholders who did not vote in favor of
the Merger and who comply with all of the relevant provisions of Section 262
of the DGCL (the "Dissenting Shares") shall not be converted into or be
exchangeable for the right to receive the Merger Consideration (but instead
shall be converted into the right to receive payment from the Surviving
Corporation with respect to such Dissenting Shares in accordance with the
DGCL), unless and until such holders shall have failed to perfect or shall
have effectively withdrawn or lost their rights to appraisal under the DGCL.
If any such holder shall have failed to perfect or shall have effectively
withdrawn or lost such right, such holder's shares of Company Common Stock
shall be treated at the Company's and Apollo's sole discretion as either (i) a
share of Company Common Stock (other than a Cash Election Share) that had been
converted as of the Effective Time of the Merger into the right to receive
Merger Consideration in accordance with Section 2.06 or (ii) a Cash Election
Share. The Company shall give prompt notice to the Sub of any demands received
by the Company for appraisal of shares of Company Common Stock, and the Sub
and Apollo shall have the right to participate in and direct all negotiations
and proceedings with respect to such demands. The Company shall not, except
with the prior written consent of the Sub and Apollo, make any payment with
respect to, or settle or offer to settle, any such demands. Parent agrees to
invest in, or lend to, the Surviving Corporation sufficient funds to permit
any payment with respect to Dissenting Shares.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as of the date of this Agreement (or
such other date as shall be expressly specified) to the Parent, the Sub and
Apollo as follows:
Section 3.01 Organization and Qualification. Each of the Company and its
subsidiaries is a duly organized and validly existing corporation in good
standing under the laws of its jurisdiction of incorporation, with all
requisite corporate power and other authority to own its properties and
conduct its business as it is being conducted on the date hereof and is duly
qualified and in good standing as a foreign corporation authorized to do
business in each of the jurisdictions in which the character of the properties
owned or held under lease by it or the nature of the business transacted by it
makes such qualification necessary. The Company has heretofore made available
to the Sub accurate and complete copies of the Certificates of Incorporation
and Bylaws as currently in effect of the Company and its subsidiaries.
Section 3.02 Capitalization. (a) The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock and 2,000,000 shares of
preferred stock, par value $0.001 per share. As of the close of business on
May 5, 1997 (the "Capitalization Date"): 23,815,695 shares of Company Common
Stock were issued and outstanding; no shares of Preferred Stock were issued
and outstanding; no shares of Company Common Stock were held in the Company's
treasury; and there were outstanding Rights with respect to 2,929,408 shares
of Company Common Stock as set forth in Section 3.02(a) of the disclosure
letter dated the date hereof and delivered by the Company to the Parent on May
7, 1997 setting forth certain matters referred to in this Agreement (the
"Company Disclosure Letter"). Since the Capitalization Date, except as set
forth in Section 3.02(a) of the Company Disclosure Letter or in the Company
SEC Reports (as defined in Section 3.05), the Company (i) has not issued any
Company Common Stock other than upon the exercise or vesting of Rights
outstanding on such date, (ii) has not granted any options or rights to
purchase or acquire Company Common Stock (under the Company's Stock Plans or
otherwise) and (iii) has not split, combined or reclassified any of its shares
of capital stock. All of the outstanding shares of Company Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable
and are free of preemptive rights. Except as set forth in this Section 3.02 or
in Section 3.02(a) of the Company Disclosure Letter or in the Company SEC
Reports, there are outstanding (i) no shares of capital stock or other voting
securities of the Company, (ii) no securities of the
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Company convertible into or exchangeable for shares of capital stock or voting
securities of the Company and (iii) no options, warrants, rights, or other
agreements or commitments to acquire from the Company, and no obligation of
the Company to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company, and no obligation of the Company to grant, extend or enter into any
subscription, warrant, option, right, convertible or exchangeable security or
other similar agreement or commitment (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Company Securities"). Except as
set forth in Section 3.02(a) of the Company Disclosure Letter, there are no
outstanding obligations of the Company or any Subsidiary to repurchase, redeem
or otherwise acquire any Company Securities. There are no voting trusts or
other agreements or understandings to which the Company or any of its
subsidiaries is a party with respect to the voting of capital stock of the
Company or any of its subsidiaries.
(b) Except as set forth in Section 3.02(b) of the Company Disclosure Letter
or in the Company SEC Reports, the Company is, directly or indirectly, the
record and beneficial owner of all the outstanding shares of capital stock of
each of its subsidiaries, free and clear of any lien, mortgage, pledge,
charge, security interest or encumbrance of any kind, and there are no
irrevocable proxies with respect to any such shares. Except as set forth in
Section 3.02(b) of the Company Disclosure Letter or in the Company SEC
Reports, there are no outstanding (i) securities of the Company or any
Subsidiary convertible into or exchangeable for shares of capital stock or
other voting securities or ownership interests in any Subsidiary, or (ii)
options or other rights to acquire from the Company or any of its
subsidiaries, and no other obligation of the Company or any of its
subsidiaries to issue, any capital stock, voting securities or other ownership
interests in, or any securities convertible into or exchangeable for any
capital stock, voting securities or ownership interests in, any of its
subsidiaries, or any other obligation of the Company or any of its
subsidiaries to grant, extend or enter into any subscription, warrant, right,
convertible or exchangeable security or other similar agreement or commitment
(the items in clauses (i) and (ii) being referred to collectively as the
"Subsidiary Securities"). There are no outstanding obligations of the Company
or any of its subsidiaries to repurchase, redeem or otherwise acquire any
outstanding Subsidiary Securities.
Section 3.03 Authority for this Agreement. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions so contemplated, other than the approval and adoption of the
agreement of merger (as such term is used in Section 251 of the DGCL)
contained in this Agreement and the approval of the Merger by the holders of a
majority of the outstanding shares of Company Common Stock. This Agreement has
been duly and validly executed and delivered by the Company and, assuming this
Agreement constitutes a valid and binding obligation of each of the Parent and
the Sub, constitutes a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally and to general principles of equity
(whether considered in a proceeding in equity or at law).
Section 3.04 Absence of Certain Changes. Except as disclosed in the Company
SEC Reports (as defined in Section 3.05) or in Section 3.04 of the Company
Disclosure Letter, from December 31, 1996 through the date hereof, (i) the
Company and its subsidiaries have not suffered any Material Adverse Effect,
(ii) the Company and its subsidiaries have, in all material respects,
conducted their respective businesses only in the ordinary course consistent
with past practice, except in connection with the negotiation and execution
and delivery of this Agreement and the solicitation or receipt of other offers
to acquire the Company, and (iii) there has not been (a) any declaration,
setting aside or payment of any dividend or other distribution in respect of
the shares of Company Common Stock or any repurchase, redemption or other
acquisition by the Company or any of its subsidiaries of any Company
Securities or Subsidiary Securities; or (b) any action by the Company which if
taken after the date hereof would constitute a breach of Section 5.01(a)
hereof. Except as disclosed in the Company SEC Reports or in Section 3.04 of
the Company Disclosure Letter, since December 31, 1996, there
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has not been any change by the Company in accounting methods, principles or
practices except as permitted by United States generally accepted accounting
principles.
Section 3.05 Reports.
(a) Except as disclosed in Section 3.05 of the Company Disclosure Letter,
the Company has timely filed with the SEC all forms, reports and documents
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder, all of which (the "Company SEC Reports")
have complied in form as of their respective filing dates in all material
respects with all applicable requirements of the Exchange Act and the rules
promulgated thereunder applicable thereto. None of the Company SEC Reports, at
the time filed, contained any untrue statement of a material fact or omitted
to state a material fact required to be stated or incorporated by reference
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) As of their respective dates, the audited and unaudited consolidated
financial statements of the Company included (or incorporated by reference) in
the Company SEC Reports were prepared in all material respects in accordance
with United States generally accepted accounting principles applied on a
consistent basis during the periods therein indicated (except as may be
indicated in the notes thereto) and presented fairly the consolidated
financial position of the Company, and the consolidated results of operations
and changes in consolidated financial position or cash flows for the periods
presented therein, subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments and any other adjustments
described therein which were not expected to have a Material Adverse Effect.
(c) As of December 31, 1996, to the best of Company's knowledge, neither the
Company or any of its subsidiaries had any liabilities of any nature, whether
accrued, absolute, contingent or otherwise, whether due or to become due that
are required to be recorded or reflected on a balance sheet under United
States generally accepted accounting principles, except as reflected or
reserved against or disclosed in the financial statements of the Company
included in the Company SEC Reports or as otherwise disclosed in the Company
SEC Reports or as set forth in the Company Disclosure Letter.
Section 3.06 Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
and as contemplated by Section 2.06 (the "S-4") will, at the time the S-4
becomes effective under the Securities Act or at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and none of the information supplied or to be supplied by the
Company and included or incorporated by reference in the Proxy Statement, as
supplemented if necessary, will, at the date mailed to stockholders of the
Company, or at the time of the meeting of such stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the time of such
meeting, any event with respect to the Company or any of its Subsidiaries, or
with respect to other information supplied by the Company for inclusion in the
Proxy Statement or S-4, shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, such event
shall be so described, and such amendment or supplement shall be promptly
filed with the SEC. The Proxy Statement, insofar as it relates to other
information supplied by the Company for inclusion therein, will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
Section 3.07 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by the Company nor the consummation of the
transactions contemplated hereby will conflict with or result in any breach of
any provision of the respective Certificates of Incorporation or Bylaws (or
other similar governing documents) of the Company or any of its subsidiaries,
and except as disclosed in Section 3.07 of the Company Disclosure Letter and
except for filings, permits, authorizations, notices, consents and approvals
as
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may be required under, and other applicable requirements of, the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), the
Securities Act, the Exchange Act, the DGCL, and the "takeover" or blue sky
laws of various states and consents, approvals, authorizations or filings
under laws of jurisdictions outside the United States, and filings, notices,
consents, authorizations and approvals as may be required by local, state, and
federal regulatory agencies, commissions, boards, or public authorities with
jurisdiction over health care facilities and providers, (i) require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, except where the failure to
obtain such consent, approval, authorization or permit, or to make such filing
or notification, would not in the aggregate have a Material Adverse Effect or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby; (ii) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, license, agreement or other
instrument or obligation to which the Company is a party or by which the
Company or any of its assets or subsidiaries may be bound, except for such
defaults (or rights of termination, cancellation or acceleration) which would
not in the aggregate have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby; (iii) result in the creation or imposition of any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
on any asset of the Company or any of its subsidiaries which, in the
aggregate, would have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby; or (iv) violate any order, writ, injunction, agreement,
contract, decree, statute, rule or regulation applicable to the Company, any
of its subsidiaries or by which any of their respective assets are bound.
Section 3.08 Brokers. No broker, finder or investment banker (except as
disclosed to Parent and Apollo) is entitled to receive any brokerage, finder's
or other fee or commission in connection with this Agreement or the
transactions contemplated hereby based upon agreements made by or on behalf of
the Company.
Section 3.09 Employee Benefit Matters.
(a) For purposes of this Agreement, the term "Plan" shall refer to the
following maintained by the Company, any of its subsidiaries or any of their
respective ERISA Affiliates (as defined below), or with respect to which the
Company or any of its subsidiaries or any of their respective ERISA Affiliates
contributes or has any obligation to contribute or has any liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar agreement): any plan, program,
arrangement, agreement or commitment, whether written or oral, which is an
employment, consulting, deferred compensation or change-in-control agreement,
or an executive compensation, incentive bonus or other bonus, employee
pension, profit-sharing, savings, retirement, stock option, stock purchase,
severance pay, change-in-control, life, health, disability or accident
insurance plan, or other employee benefit plan, program, arrangement,
agreement or commitment, written or oral, including, without limitation, any
material "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Section 3.09(a)
of the Company Disclosure Letter sets forth each employment agreement with a
person who is entitled to receive at least $100,000 per year from the Company
or any of its subsidiaries (other than an employment agreement terminable
without material liability (not otherwise disclosed) on no more than sixty
(60) days' notice).
(b) Except as set forth in Section 3.09(b) of the Company Disclosure Letter,
none of the Company, its subsidiaries nor any of their respective ERISA
Affiliates maintains or contributes to, nor have they maintained or
contributed to any:
(A) defined benefit plan subject to Title IV of ERISA; or
(B) "Multiemployer plan" as defined in Section 4001 of ERISA.
(c) No event has occurred and no condition or circumstance currently exists
in connection with which the Company, any of its subsidiaries, their
respective ERISA Affiliates or any Plan, directly or indirectly, are likely to
be subject to any liability under ERISA, the Code or any other law, regulation
or governmental order applicable to any Plan which would be reasonably likely
to have a Material Adverse Effect.
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(d) With respect to each Plan, (A) all material payments due from the
Company or any of its subsidiaries to date have been made and all material
amounts properly accrued to date or as of the Effective Time as liabilities of
the Company or any of its subsidiaries which have not been paid have been
properly recorded on the books of the Company; (B) each such Plan which is an
"employee pension benefit plan" (as defined in Section 3(2) of ERISA) and
intended to qualify under Section 401 of the Code has either received a
favorable determination letter from the Internal Revenue Service with respect
to such qualification as of the date specified in Section 3.09(d) of the
Disclosure Letter or has filed for such a determination letter with the
Internal Revenue Service within the time permitted under Rev. Proc. 95-12
(December 29, 1994), 1995-3 IRB 24, and nothing has occurred since the date of
such letter that has resulted in or is likely to result in a tax qualification
defect which would have a Material Adverse Effect; and (C) there are no
material actions, suits or claims pending (other than routine claims for
benefits) or, to the best of Company's knowledge, threatened with respect to
such Plan or against the assets of such Plan.
(e) The Company has made available to the Parent, with respect to each Plan
for which the following exists:
(A) a copy of the most recent annual report on Form 5500, with respect to
such Plan including any Schedule B thereto;
(B) a copy of the Summary Plan Description, together with each Summary of
Material Modifications with respect to such Plan and, unless the Plan is
embodied entirely in an insurance policy to which the Company or any of its
subsidiaries is a Party, a true and complete copy of such Plan; and
(C) if the Plan is funded through a trust or any third party funding
vehicle (other than an insurance policy), a copy of the trust or other
funding agreement and the latest financial statements thereof.
(f) Except as disclosed in Section 3.09(f) of the Company Disclosure Letter
or in the Company SEC Reports, neither the Company nor any of its subsidiaries
has any announced plan or legally binding commitment to create any additional
material Plans or to make any material amendment or modification to any
existing Plan, except in the ordinary course of business in accordance with
its customary practices or as required by law or as necessary to maintain tax-
qualified status.
(g) For purposes of this Section 3.09, ERISA Affiliates include each
corporation that is a member of the same controlled group as the Company or
any of its subsidiaries within the meaning of Section 414(b) of the Code, any
trade or business, whether or not incorporated, under common control with the
Company or any of its subsidiaries within the meaning of Section 414(c) of the
Code and any member of any affiliated service group that includes the Company,
any of its subsidiaries and any of the corporations, trades or businesses
described above, within the meaning of Section 414(m) of the Code.
Section 3.10 Litigation, etc. Except as set forth in Section 3.10 of the
Company Disclosure Letter or as disclosed in the Company SEC Reports, as of
the date hereof there is no pending audit, claim, action, proceeding,
citizen's suit and, to the knowledge of the Company, no audit, claim, action,
proceeding, citizen's suit or governmental investigation has been threatened
against the Company or any of its subsidiaries before any court or
governmental or regulatory authority which, in the aggregate, (i) would have a
Material Adverse Effect or (ii) would have a material adverse effect on the
ability of the Company to consummate the transactions contemplated by this
Agreement. Except as set forth in Section 3.10 of the Company Disclosure
Letter or as disclosed in the Company SEC Reports, neither the Company nor any
Subsidiary of the Company is subject to any outstanding judicial,
administrative or arbitration order, writ, injunction or decree that (i) has
had a Material Adverse Effect or (ii) would have a material adverse effect on
the ability of the Company to consummate the transactions contemplated by this
Agreement.
Section 3.11 Tax Matters. The Company and each of its subsidiaries has duly
filed all tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and granted
and have not expired, except to the extent that such failures to file, in the
aggregate, would not have a Material Adverse Effect and such returns and
reports are true, correct and complete in all material respects.
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The Company and each of its subsidiaries has duly paid in full (or the Company
has paid on its behalf) or made adequate provision in the Company's accounting
records for all taxes for all past and current periods for which the Company
or any of its subsidiaries is liable. The most recent financial statements
contained in the Company SEC Reports reflect adequate reserves for all taxes
payable by the Company and its subsidiaries for all taxable periods and
portions thereof accrued through the date of such financial statements, and no
deficiencies for any taxes have been proposed, asserted or assessed against
the Company or any of its subsidiaries that are not adequately reserved for,
except for inadequately reserved taxes and inadequately reserved deficiencies
that would not, in the aggregate, have a Material Adverse Effect. No requests
for waivers of the time to assess any taxes against the Company or any of its
subsidiaries have been granted or are pending, except for requests with
respect to such taxes that have been adequately reserved for in the most
recent financial statements contained in the Company SEC Reports, or, to the
extent not adequately reserved, the assessment of which would not, in the
aggregate, have a Material Adverse Effect. Except as set forth in Section 3.11
of the Company Disclosure Letter, neither the Company nor any of its
subsidiaries has made any payments, is obligated to make any payments, or is a
party to any agreement that under certain circumstances could obligate it to
make any payments that will not be deductible under Section 280G of the Code.
Neither the Company nor any of its subsidiaries has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the
Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the
Code. As used in this Agreement the term "taxes" includes all federal, state,
local and foreign income, franchise, property, sales, use, excise and other
taxes, including without limitation obligations for withholding taxes from
payments due or made to any other person and any interest, penalties or
additions to tax.
Section 3.12 Compliance with Law. Except as set forth in Section 3.12 of the
Company Disclosure Letter or in the Company SEC Reports, neither the Company
nor any of its subsidiaries is in conflict with, or in default or violation
of, any law, rule, regulation, order, judgment or decree applicable to the
Company or any Subsidiary or by which any property or asset of the Company or
any Subsidiary is bound or affected, except for any such conflicts, defaults
or violations that would not in the aggregate have a Material Adverse Effect.
Except as set forth in Section 3.12 of the Company Disclosure Letter or in the
Company SEC Reports, the Company and its subsidiaries have all permits,
licenses, authorizations, consents, approvals and franchises from governmental
agencies required to conduct their businesses as now being conducted (the
"Company Permits"), except for such permits, licenses, authorizations,
consents, approvals and franchises the absence of which would not in the
aggregate have a Material Adverse Effect. Except as set forth in Section 3.12
of the Company Disclosure Letter or in the Company SEC Reports, the Company
and its subsidiaries are in compliance with the terms of the Company Permits,
except where the failure so to comply would not in the aggregate have a
Material Adverse Effect.
Section 3.13 Environmental Compliance. Except as set forth in Section 3.13
of the Company Disclosure Letter or in the Company SEC Reports, (i) the
assets, properties, businesses and operations of the Company and its
subsidiaries are in compliance with applicable Environmental Laws (as defined
in Section 1.01 hereof), except for such non-compliance which has not had and
will not have a Material Adverse Effect; (ii) the Company and its subsidiaries
have obtained and, as currently operating, are in compliance with all Company
Permits necessary under any Environmental Law for the conduct of the business
and operations of the Company and its subsidiaries in the manner now conducted
except for such non-compliance which has not had and will not have a Material
Adverse Effect; and (iii) neither the Company nor any of its subsidiaries nor
any of their respective assets, properties, businesses or operations has
received or is subject to any outstanding order, decree, judgment, complaint,
agreement, claim, citation, notice, or proceeding indicating that the Company
or any of its subsidiaries is or may be (a) liable for a violation of any
Environmental Law or (b) liable for any Environmental Liabilities and Costs,
where in each case such liability would have a Material Adverse Effect.
Section 3.14 Insurance. Except as set forth in the Company SEC Reports, the
Company and each of its Subsidiaries maintains, and through the Closing Date
will maintain, insurance with reputable insurers (or pursuant to prudent self-
insurance programs) in such amounts and covering such risks as are in
accordance with normal industry practice for companies engaged in businesses
similar to those of the Company and each of its
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Subsidiaries and owning property in the same general areas in which the
Company and each of its Subsidiaries conducts their businesses. The Company
and each of its Subsidiaries may terminate each of its insurance policies or
binders at or after the Closing and will incur no material penalties or other
material costs in doing so. None of such policies or binders was obtained
through the use of false or misleading information or the failure to provide
the insurer with all information requested in order to evaluate the
liabilities and risks insured. There is no material default with respect to
any provision contained in any such policy or binder, nor has the Company or
any of its subsidiaries failed to give any material notice or present any
material claim under any such policy or binders in due and timely fashion.
There are no billed but unpaid premiums past due under any such policy or
binder, the failure of which to be paid would result in the cancellation of
such policy or binder. Except as otherwise set forth in the Company SEC
Reports or in the Company Disclosure Letter, (a) there are no outstanding
claims in excess of normal retentions that are not covered under any such
policies or binders and, to the best knowledge of the Company, there has not
occurred any event that might reasonably form the basis of any claim in excess
of normal retentions that are not covered against or relating to the Company
or any of its subsidiaries that is not covered by any of such policies or
binders; (b) no notice of cancellation or non-renewal of any such policies or
binders has been received; and (c) there are no performance bonds outstanding
with respect to the Company or any of its subsidiaries.
Section 3.15 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of the Company Common Stock is the only
vote of the holders of any class or series of the Company's capital stock or
other voting securities necessary to approve this Agreement, the Merger and
the transactions contemplated hereby.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUB
The Parent and the Sub (effective upon its becoming a party hereto), jointly
and severally, represent and warrant as of the date of this Agreement (or such
other date as shall be expressly specified) to the Company and Apollo as
follows:
Section 4.01 Organization and Qualification. Each of the Parent and the Sub
is a duly organized and validly existing corporation in good standing under
the laws of its jurisdiction of organization, with all requisite corporate
power and other authority to own its properties and conduct its business as it
is being conducted on the date hereof and is duly qualified and in good
standing as a foreign corporation authorized to do business in each of the
jurisdictions in which the character of the properties owned or held under
lease by it or the nature of the business transacted by it makes such
qualification necessary. The Parent has heretofore made available to the
Company accurate and complete copies of the Certificates of Incorporation and
Bylaws as currently in effect of the Parent and its subsidiaries. All of the
issued and outstanding capital stock of the Sub is owned directly by the
Parent, free and clear of any lien, mortgage, pledge, charge, security
interest or encumbrance of any kind.
Section 4.02 Capitalization. (a) The authorized capital stock of the Parent
consists of 75,000,000 shares of Parent Common Stock and 5,000,000 shares of
preferred stock, par value $.01 (the "Preferred Stock"), of which 350,000
shares have been designated as Series A Junior Participating Preferred Stock
(the "Junior Preferred Stock"). As of the Capitalization Date, 19,547,616
shares of Parent Common Stock were issued and outstanding; no shares of
Preferred Stock were issued and outstanding; 720,304 shares of Parent Common
Stock were held in the Company's treasury; and there were outstanding Rights
with respect to 1,635,447 shares of Parent Common Stock as set forth in
Section 3.02(a) of the disclosure letter, dated May 7, 1997, delivered by the
Parent to the Company prior to the execution of this Agreement setting forth
certain matters referred to in this Agreement (the "Parent Disclosure
Letter"); and there were outstanding rights (the "Rights Agreement Rights")
under the Rights Agreement dated November 17, 1994 between the Company and
Chemical Bank, as amended by an amendment dated July 31, 1995 (the "Rights
Agreement"). Since the Capitalization Date, except as set forth in Section
3.02(a) of the Parent Disclosure Letter or in the Parent SEC Reports (as
defined in Section 4.05), the Company (i) has not issued any shares of Parent
Common Stock other than upon the exercise or vesting of Rights outstanding on
such date, (ii) has not granted any options or rights to purchase or acquire
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shares of Parent Common stock (under the Parent's Stock Plans or otherwise)
and (iii) has not split, combined or reclassified any of its shares of capital
stock. All of the outstanding shares of Parent Common Stock have been duly
authorized and validly issued and are fully paid and nonassessable and are
free of preemptive rights. Except as set forth in this Section 4.02 or in
Section 3.02(a) of the Parent Disclosure Letter or in the Parent SEC Reports,
there are outstanding (i) no shares of capital stock or other voting
securities of the Parent, (ii) no securities of the Parent convertible into or
exchangeable for shares of capital stock or voting securities of the Parent
and (iii) no options, warrants, rights, or other agreements or commitments to
acquire from the Parent, and except as contemplated by the Recapitalization
Merger, (A) no obligation of the Parent to issue, any capital stock, voting
securities or securities convertible into or exchangeable for capital stock or
voting securities of the Parent, and (B) no obligation of the Parent to grant,
extend or enter into any subscription, warrant, option, right, convertible or
exchangeable security or other similar agreement or commitment (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "Parent
Securities"). Except as set forth in Section 3.02(a) of the Parent Disclosure
Letter, there are no outstanding obligations of the Parent or any Subsidiary
to repurchase, redeem or otherwise acquire any Parent Securities. There are no
voting trusts or other agreements or understandings to which the Parent or any
of its subsidiaries is a party with respect to the voting of capital stock of
the Parent or any of its subsidiaries. Notwithstanding the foregoing, the
Parent has concurrently entered into the agreement and plan of merger setting
forth the terms of the Recapitalization Merger, including the issuance of
shares of Parent Common Stock in connection therewith.
(b) Except as set forth in Section 3.02(b) of the Parent Disclosure Letter
or in the Parent SEC Reports, the Parent is, directly or indirectly, the
record and beneficial owner of all the outstanding shares of capital stock of
each of its subsidiaries, free and clear of any lien, mortgage, pledge,
charge, security interest or encumbrance of any kind, and there are no
irrevocable proxies with respect to any such shares. Except as set forth in
Section 3.02(b) of the Parent Disclosure Letter or in the Parent SEC Reports,
there are no outstanding (i) securities of the Parent or any Subsidiary
convertible into or exchangeable for shares of capital stock or other voting
securities or ownership interests in any Subsidiary, or (ii) options or other
rights to acquire from the Parent or any of its subsidiaries, and no other
obligation of the Parent or any of its subsidiaries to issue, any capital
stock, voting securities or other ownership interests in, or any securities
convertible into or exchangeable for any capital stock, voting securities or
ownership interests in, any of its subsidiaries, or any other obligation of
the Parent or any of its subsidiaries to grant, extend or enter into any
subscription, warrant, right, convertible or exchangeable security or other
similar agreement or commitment (the items in clauses (i) and (ii) being
referred to collectively as the "Parent Subsidiary Securities"). There are no
outstanding obligations of the Parent or any of its subsidiaries to
repurchase, redeem or otherwise acquire any outstanding Parent Subsidiary
Securities.
Section 4.03 Authority Relative to this Agreement. Each of the Parent and
the Sub has requisite corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by the Parent and the Sub and the
consummation by the Parent and the Sub of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of the Parent
and the Sub and no other corporate proceedings on the part of the Parent and
the Sub are necessary to authorize this Agreement or consummate the
transactions so contemplated, other than the Company Stockholder Approvals and
Parent Stockholder Approvals. This Agreement has been duly and validly
executed and delivered by the Parent and the Sub and, assuming this Agreement
constitutes the valid and binding obligation of the Company, this Agreement
constitutes a valid and binding agreement of each of the Parent and the Sub,
enforceable against each of the Parent and the Sub in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and to
general principles of equity (whether considered in a proceeding in equity or
at law).
Section 4.04 Absence of Certain Changes. Except as disclosed in the Parent
SEC Reports (as defined in Section 4.05) or in Section 3.04 of the Parent
Disclosure Letter, from September 30, 1996 through the date hereof, (i) the
Parent and its subsidiaries have not, to the best of the Parent's knowledge,
suffered any Material Adverse Effect, (ii) the Parent and its subsidiaries
have, in all material respects, conducted their respective businesses only in
the ordinary course consistent with past practice, except in connection with
the negotiation
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and execution and delivery of this Agreement, and (iii) there has not been (a)
any declaration, setting aside or payment of any dividend or other
distribution in respect of the Shares or any repurchase, redemption or other
acquisition by the Parent or any of its subsidiaries of any Parent Securities;
or (b) any action by the Parent which if taken after the date hereof would
constitute a breach of Section 5.01(b) hereof. Except as disclosed in the
Parent SEC Reports or in Section 3.04 of the Parent Disclosure Letter, since
September 30, 1996, there has not been any change by the Parent in accounting
methods, principles or practices except as permitted by United States
generally accepted accounting principles.
Section 4.05 Reports.
(a) The Parent has filed with the SEC all forms, reports and documents
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder on and after September 30, 1995, all of which
(the "Parent SEC Reports") have complied in form as of their respective filing
dates in all material respects with all applicable requirements of the
Exchange Act and the rules promulgated thereunder applicable thereto. None of
the Parent SEC Reports, at the time filed, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) As of their respective dates, the audited and unaudited consolidated
financial statements of the Parent included (or incorporated by reference) in
the Parent SEC Reports were prepared in all material respects in accordance
with United States generally accepted accounting principles applied on a
consistent basis during the periods therein indicated (except as may be
indicated in the notes thereto) and presented fairly the consolidated
financial position of the Parent, and the consolidated results of operations
and changes in consolidated financial position or cash flows for the periods
presented therein, subject, in the case of the unaudited interim financial
statements, to normal year-end audit adjustments and any other adjustments
described therein which were not expected to have a Material Adverse Effect.
(c) As of March 31, 1997, neither the Parent nor any of its subsidiaries had
any liabilities of any nature, whether accrued, absolute, contingent or
otherwise, whether due or to become due that are required to be recorded or
reflected on a balance sheet under United States generally accepted accounting
principles, except as reflected or reserved against or disclosed in the
financial statements of the Parent included in the Parent SEC Reports or the
Parent Disclosure Letter or as otherwise disclosed in the Parent SEC Reports
or the Parent Disclosure Letter.
Section 4.06 Information Supplied. None of the information supplied or to be
supplied by the Parent for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC jointly by Parent
and Company in connection with the issuance of shares of Parent Common Stock
in the Merger and as contemplated by Section 2.06 will, at the time the S-4
becomes effective under the Securities Act or at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and none of the information supplied or to be supplied by the
Parent and included or incorporated by reference in the Proxy Statement, as
supplemented if necessary, will, at the date mailed to stockholders of the
Parent, or at the time of the meeting of such stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the time of such
meeting, any event with respect to the Parent or any of its Subsidiaries, or
with respect to other information supplied by the Parent for inclusion in the
Proxy Statement or S-4, shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, such event
shall be so described, and such amendment or supplement shall be promptly
filed with the SEC. The Proxy Statement, insofar as it relates to other
information supplied by the Parent for inclusion therein, will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
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Section 4.07 Consents and Approvals; No Violation. The execution and
delivery of this Agreement by each of the Parent or the Sub and the
consummation of the transactions contemplated hereby will not (i) conflict
with or result in any breach of any provision of the respective Certificates
of Incorporation or Bylaws (or other similar governing documents) of the
Parent, the Sub or any of their subsidiaries; (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (A) in connection with the HSR
Act, (B) pursuant to the Securities Act, the Exchange Act, (C) the filing of a
certificate of merger pursuant to the DGCL, (D) any applicable filings under
state securities, blue sky or "takeover" laws, (E) consents, approvals,
authorizations or filings under laws of jurisdictions outside the United
States, (F) consents, approvals, authorizations, permits, filings or
notifications required by local, state and federal regulatory agencies,
commissions, boards or public authorities with jurisdiction over health care
facilities and providers or (G) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification,
would not in the aggregate have a Material Adverse Effect on the Parent or the
Sub or has a material adverse effect on the ability of the Parent or the Sub
to consummate the transactions contemplated hereby, (iii) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, license, agreement or
other instrument or obligation to which the Parent or the Sub or any of their
subsidiaries is a party or by which any of its subsidiaries or any of their
respective assets may be bound, except for such defaults (or rights of
termination, cancellation or acceleration) as to which requisite waivers or
consents have been obtained or which would not have a Material Adverse Effect
on the Parent or the Sub or has a material adverse effect on the ability of
the Parent or the Sub to consummate the transactions contemplated hereby; (iv)
result in the creation or imposition of any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind on any asset of the Parent or the
Sub or any of their subsidiaries which, individually or in the aggregate,
would have a material adverse effect on the ability of the Parent or the Sub
to consummate the transactions contemplated hereby; or (v) violate any order,
writ, injunction, decree, statute, rule or regulation applicable to the
Parent, the Sub or any of their subsidiaries or any of their respective
assets, except for violations which would not in the aggregate have a Material
Adverse Effect on the Parent or the Sub or have a material adverse effect on
the ability of the Parent or the Sub to consummate the transactions
contemplated hereby.
Section 4.08 Brokers. No broker, finder or other investment banker (other
than Credit Suisse First Boston Corporation and NationsBanc Capital Markets,
Inc.) is entitled to receive any brokerage, finder's or other fee or
commission in connection with this Agreement or the transactions contemplated
hereby based upon agreements made by or on behalf of the Parent or the Sub.
Section 4.09 Litigation, etc. As of the date hereof there is no claim,
action, proceeding or governmental investigation pending or, to the best
knowledge of the Parent or the Sub, threatened against the Parent or any of
its subsidiaries, including the Sub, before any court or governmental or
regulatory authority which, in the aggregate would have a material adverse
effect on the ability of the Parent or the Sub to consummate the transactions
contemplated by this Agreement. Neither the Parent nor any of its
subsidiaries, including the Sub, is subject to any outstanding order, writ,
injunction or decree that would have a material adverse effect on the ability
of the Parent or the Sub to consummate the transactions contemplated by this
Agreement.
Section 4.10 Ownership of Shares. As of the date hereof, neither the Parent
nor any of its Subsidiaries beneficially owns (within the meaning of Rule l3d-
3 under the Exchange Act) any Company Common Stock.
Section 4.11 Tax Matters. The Parent and each of its Subsidiaries has duly
filed all tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and granted
and have not expired, except to the extent that such failures to file, in the
aggregate, would not have a Material Adverse Effect and such returns and
reports are true, correct and complete in all material respects. The Parent
and each of its Subsidiaries has duly paid in full (or the Parent has paid on
its behalf) or made adequate provision in the Company's accounting records for
all taxes for all past and current periods for which the Parent or any of its
Subsidiaries is liable. The most recent financial statements contained in the
Parent SEC Reports reflect adequate reserves for all taxes payable by the
Parent and its Subsidiaries for all taxable periods and portions thereof
accrued through the date of such financial statements, and no deficiencies for
any taxes have
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been proposed, asserted or assessed against the Parent or any of its
Subsidiaries that are not adequately reserved for, except for inadequately
reserved taxes and inadequately reserved deficiencies that would not, in the
aggregate, have a Material Adverse Effect. No requests for waivers of the time
to assess any taxes against the Parent or any of its Subsidiaries have been
granted or are pending, except for requests with respect to such taxes that
have been adequately reserved for in the most recent financial statements
contained in the Parent SEC Reports, or, to the extent not adequately
reserved, the assessment of which would not, in the aggregate, have a Material
Adverse Effect. Except as set forth in Section 3.11 of the Parent Disclosure
Letter, neither the Parent nor any of its Subsidiaries has made any payments,
is obligated to make any payments, or is a party to any agreement that under
certain circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code. Neither the Parent nor any of its
Subsidiaries has been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business.
(a) Except as contemplated by this Agreement and in the Company Disclosure
Letter, during the period from the date of this Agreement to the Effective
Date, the Company and its subsidiaries will each conduct its operations
according to its ordinary and usual course of business and consistent with
past practice and will use all commercially reasonable efforts consistent with
prudent business practice to preserve intact the business organization of the
Company and each of its Subsidiaries, to keep available the services of its
and their current officers and key employees and to maintain existing
relationships with those having significant business relationships with the
Company and its Subsidiaries, in each case in all material respects. Without
limiting the generality of the foregoing, except as set forth in the Company
Disclosure Letter and except as otherwise expressly provided in or
contemplated by this Agreement or the Company Disclosure Letter, prior to the
time specified in the preceding sentence, neither the Company nor any of its
Subsidiaries, as the case may be, will, without the prior written consent of
the Parent (not to be unreasonably withheld), (i) except for issuances of
capital stock of the Company's Subsidiaries to the Company or a wholly owned
subsidiary of the Company, issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) Company Securities or Subsidiary Securities,
in each case, other than Company Common Stock issuable upon exercise or
vesting of the Rights or allocations or issuances pursuant to the Stock Plans
or the exercise of rights under any Plan or any agreement referred to in
Section 3.02 of the Company Disclosure Letter, or (B) any other securities in
respect of, in lieu of or in substitution for Company Common Stock outstanding
on the date hereof, (ii) otherwise acquire or redeem, directly or indirectly,
any Company Securities or Subsidiary Securities (including the Company Common
Stock); (iii) split, combine or reclassify its capital stock or declare, set
aside, make or pay any dividend or distribution (whether in cash, stock or
property) on any shares of capital stock of the Company or any of its
Subsidiaries (other than cash dividends paid to the Company by its wholly
owned subsidiaries with regard to their capital stock); (iv) (1) make any
acquisition, by means of a merger or otherwise, of assets or securities, or
any sale, lease, encumbrance or other disposition of assets or securities, in
each case involving the payment or receipt of consideration of $10,000,000 or
more outside the ordinary and usual course of business consistent with past
practice in all material respects, or (2) other than in the ordinary course of
business, enter into a material contract or grant any release or
relinquishment of any material contract rights; (v) incur or assume any long-
term debt for borrowed money except for debt incurred in the ordinary course
of business consistent in all material respects with past practice; (vi)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
except wholly owned subsidiaries of the Company, except in the ordinary course
of business consistent in all material respects with past practice;
(vii) except in connection with transactions permitted by (iv) above, make any
loans, advances or capital contributions to, or investments in, any other
person (other than wholly owned subsidiaries of the Company) in the aggregate
in excess of $10,000,000; (viii) change any of the accounting principles or
practices used by it or
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any of its Subsidiaries, except as required by the SEC or required by United
States generally accepted accounting principles; (ix) adopt any amendments to
the Restated Certificate of Incorporation or Bylaws (or similar documents) of
the Company or any Subsidiary; (x) except as, may be required under any
previously existing agreement or Plan, grant any stock related awards; (xi)
enter into any new, or amend any existing, employee benefit, pension or other
plan (whether or not subject to ERISA) or employment, severance, consulting or
salary continuation agreements with any officers, directors or key employees,
or grant any increases in the compensation or benefits to officers, directors
and key employees; (xii) enter into, amend, or extend any material collective
bargaining or other labor agreement, except as required by law and except in
the ordinary course of business consistent in all material respects with past
practice; (xiii) adopt, make any material amendment to or terminate any
material employee benefit plan, as required by law or to maintain tax
qualified status or as requested by the Internal Revenue Service in order to
receive a determination letter for such employee benefit plan; (xiv) merge or
consolidate with or transfer all or substantially all of its assets to another
corporation or other business entity or individual; (xv) liquidate, wind-up or
dissolve (or suffer any liquidation or dissolution); or (xvi) agree in writing
or otherwise to take any of the foregoing actions.
(b) Except as contemplated by this Agreement and in the Parent Disclosure
Letter, during the period from the date of this Agreement to the Effective
Date, the Parent and its subsidiaries will each conduct its operations
according to its ordinary and usual course of business and consistent with
past practice and will use all commercially reasonable efforts consistent with
prudent business practice to preserve intact the business organization of the
Parent and each of its subsidiaries, to keep available the services of its and
their current officers and key employees and to maintain existing
relationships with those having significant business relationships with the
Parent and its subsidiaries, in each case in all material respects. Without
limiting the generality of the foregoing, except as set forth in the Parent
Disclosure Letter and except as otherwise expressly provided in or
contemplated by this Agreement or the Parent Disclosure Letter, prior to the
time specified in the preceding sentence, neither the Parent nor any of its
subsidiaries, as the case may be, will, without the prior written consent of
the Company (not to be unreasonably withheld), (i) except for issuances of
capital stock of the Parent's subsidiaries to the Parent or a wholly owned
subsidiary of the Parent, issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) Parent Securities or Subsidiary Securities, in
each case, other than Parent Common Stock issuable upon exercise or vesting of
the Rights or allocations or issuances pursuant to the Stock Plans or the
exercise of rights under any Plan or any agreement referred to in Section 3.02
of the Parent Disclosure Letter, or (B) any other securities in respect of, in
lieu of or in substitution for Parent Common Stock outstanding on the date
hereof, (ii) otherwise acquire or redeem, directly or indirectly, any Parent
Securities or Subsidiary Securities (including the Parent Common Stock); (iii)
split, combine or reclassify its capital stock or declare, set aside, make or
pay any dividend or distribution (whether in cash, stock or property) on any
shares of capital stock of the Parent or any of its subsidiaries (other than
cash dividends paid to the Parent by its wholly owned subsidiaries with regard
to their capital stock); (iv) (1) make any acquisition, by means of a merger
or otherwise, of assets or securities, or any sale, lease, encumbrance or
other disposition of assets or securities, in each case involving the payment
or receipt of consideration of $10,000,000 or more outside the ordinary and
usual course of business consistent with past practice in all material
respects, or (2) other than in the ordinary course of business, enter into a
material contract or grant any release or relinquishment of any material
contract rights; (v) incur or assume any long-term debt for borrowed money
except for debt incurred in the ordinary course of business consistent in all
material respects with past practice; (vi) assume, guarantee, endorse or
otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person except wholly owned
subsidiaries of the Parent, except in the ordinary course of business
consistent in all material respects with past practice; (vii) except in
connection with transactions permitted by (iv) above, make any loans, advances
or capital contributions to, or investments in, any other person (other than
wholly owned subsidiaries of the Parent) in the aggregate in excess of
$10,000,000; (viii) change any of the accounting principles or practices used
by it or any of its Subsidiaries, except as required by the SEC or required by
United States generally accepted accounting principles; (ix) adopt any
amendments to the Restated Certificate of Incorporation or Bylaws (or similar
documents) of the Parent or any Subsidiary; (x) except as, may be required
under any previously existing agreement or Plan, grant any stock related
awards; (xi) enter into any new, or amend any existing, employee benefit,
pension or other plan (whether or not subject to ERISA) or
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employment, severance, consulting or salary continuation agreements with any
officers, directors or key employees, or grant any increases in the
compensation or benefits to officers, directors and key employees; (xii) enter
into, amend, or extend any material collective bargaining or other labor
agreement, except as required by law and except in the ordinary course of
business consistent in all material respects with past practice; (xiii) adopt,
make any material amendment to or terminate any material employee benefit
plan, as required by law or to maintain tax qualified status or as requested
by the Internal Revenue Service in order to receive a determination letter for
such employee benefit plan; (xiv) merge or consolidate with or transfer all or
substantially all of its assets to another corporation or other business
entity or individual; (xv) liquidate, wind-up or dissolve (or suffer any
liquidation or dissolution); or (xvi) agree in writing or otherwise to take
any of the foregoing actions.
Section 5.02 No Solicitation.
(a) Immediately following the execution of this Agreement, the Company will
terminate any and all existing activities, discussions and negotiations with
third parties (other than the Parent) with respect to any possible Acquisition
Transaction (as defined below). The Company and its subsidiaries and their
respective officers, directors and employees shall not, and the Company and
its subsidiaries will use all reasonable efforts to cause their
representatives, agents or affiliates not to, directly or indirectly,
knowingly encourage, solicit, or initiate any discussions or negotiations
with, any corporation, partnership, person or other entity or group (other
than the Parent or the Sub or any affiliate or associate of the Parent or the
Sub or any of their respective directors, officers, employees, representatives
or agents) concerning any merger, consolidation, business combination,
liquidation, reorganization, sale of substantial assets, sale of shares of
capital stock or similar transactions involving the Company or any material
Subsidiary of the Company (each an "Acquisition Transaction"); provided,
however, that if Company's Board of Directors determines after consultation
with counsel, that it is required to do so in the exercise of the fiduciary
duties of the Company's directors to the Company or its stockholders, the
Board of Directors may respond to, or engage in discussions with respect to, a
written offer for an Acquisition Transaction; and provided further that
nothing contained in this Section 5.02(a) shall prohibit the Company or its
Board of Directors from taking and disclosing to the Company's stockholders a
position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or from making such
other disclosure to the Company's stockholders which, as advised by outside
counsel, is required under applicable law. The Company will promptly
communicate to Parent the terms and conditions of any proposal for an
Acquisition Transaction that it may receive and will keep Parent informed as
to the status of any action, including any discussions, taken pursuant to such
proposed or contemplated Acquisition Transaction.
(b) Immediately following the execution of this Agreement, the Parent will
terminate any and all existing activities, discussions and negotiations with
third parties (other than the Company and Apollo) with respect to any possible
Acquisition Transaction. The Parent and its subsidiaries and their respective
officers, directors and employees shall not, and the Parent and its
subsidiaries will use all reasonable efforts to cause their representatives,
agents or affiliates not to, directly or indirectly, knowingly encourage,
solicit, or initiate any discussions or negotiations with, any corporation,
partnership, person or other entity or group (other than the Company and
Apollo or any affiliate or associate of the Company and Apollo or any of their
respective directors, officers, employees, representatives or agents)
concerning any Acquisition Transaction; provided, however, that if during the
45 days following the date of this Agreement the Parent's Board of Directors
determines, after consultation with counsel, that it is required to do so in
the exercise of the fiduciary duties of the Parent's directors to the Parent
or its stockholders, the Board of Directors may respond to, or engage in
discussions with respect to, a written offer for an Acquisition Transaction
during such 45 day period; and provided further that nothing contained in this
Section 5.02(b) shall prohibit the Parent or its Board of Directors from
taking and disclosing to the Parent's stockholders a position with respect to
a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or from making such other disclosure to the
Parent's stockholders which, as advised by outside counsel, is required under
applicable law. The Parent will promptly communicate to the Company the terms
and conditions of any proposal for an Acquisition Transaction
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that it may receive and will keep the Company informed as to the status of any
action, including any discussions, taken pursuant to such proposed or
contemplated Acquisition Transaction.
Section 5.03 Access to Information.
(a) Between the date of this Agreement and the Effective Time, the Company
will, upon reasonable notice to an executive officer of the Company, (i) give
the Parent, the Sub and Apollo and their respective authorized representatives
access (during regular business hours), in a manner so as not to interfere
with the normal operations of the Company and its subsidiaries and subject to
reasonable restrictions imposed by an executive officer of the Company, to all
key employees, plants, offices, warehouses and other facilities and to all
books and records of the Company and its subsidiaries and cause the Company's
and its subsidiaries' independent public accountants to provide access to
their work papers and such other information as the Parent, the Sub or Apollo
may reasonably request, (ii) permit the Parent, the Sub and Apollo to make
such inspections as they may reasonably require and (iii) cause its officers
and those of its subsidiaries to furnish the Parent, the Sub or Apollo with
such financial and operating data and other information with respect to the
business, properties and personnel of the Company and its subsidiaries as the
Parent, the Sub or Apollo may from time to time reasonably request.
(b) Information obtained by the Parent or the Sub or their respective
representatives pursuant to this Section 5.03 shall be subject to the
provisions of the letter agreement between the Parent and the Company (the
"Confidentiality Agreement") the terms of which are incorporated herein by
reference.
Section 5.04 Reasonable Efforts, Filings. Subject to the terms and
conditions herein provided for and to the fiduciary duties of the Board of
Directors of each of the Company and the Parent under applicable law as
advised by legal counsel, each of the parties hereto agrees to use
commercially reasonable efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective, as soon as practicable, the transactions contemplated by this
Agreement. In connection with and without limiting the foregoing, (a) (i) the
Company, the Parent and the Sub shall use all reasonable efforts to make
promptly any required submissions under the HSR Act which the Company and the
Parent or the Sub determine should be made, in each case, with respect to the
Merger, and the transactions contemplated by this Agreement, (ii) the Company,
the Parent and the Sub shall use all reasonable efforts to respond as promptly
as practicable to all inquiries received from the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division") for additional information or documentation and to
respond as promptly as practicable to all inquiries and requests received from
any State Attorney General or other governmental authority in connection with
antitrust matters, and (iii) if required by the FTC, the Antitrust Division,
any State Attorney General or any other governmental authority, or if
otherwise necessary or required in order to consummate the Merger, Parent
agrees promptly to take all commercially reasonable steps (including executing
agreements and submitting to judicial or administrative orders) to effect the
sale or other disposition of, or to hold separate assets or businesses of
Parent or the Company or any of their respective subsidiaries or affiliates
(including, without limitation, pursuant to arrangements which limit or
prohibit access to such assets or businesses), unless such sale or other
disposition would have a Material Adverse Effect on the Company, (b) the
Parent, the Sub and the Company will take all such action as may be necessary
under federal and state securities laws applicable or necessary for, and will
file and, if appropriate, use all reasonable efforts to have declared
effective or approved all documents and notifications with the SEC and other
governmental or regulating bodies which the Parent, the Sub and the Company
determines, in each case, is necessary for the consummation of the Merger and
the transactions contemplated hereby and each party shall give the other
information requested by it which is reasonably necessary to enable it to take
such action, (c) the Parent, the Sub and the Company will, and will cause each
of their respective subsidiaries to, use commercially reasonable efforts to
obtain consents of all third parties and governmental bodies (other than with
respect to healthcare regulatory licenses, certifications or permits or
provider agreements) necessary or, in the reasonable opinion of the Parent or
the Company, advisable to consummate the Merger and the transactions
contemplated by this Agreement and (d) prior to the Effective Time,
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the Parent, Sub and the Company will take, and cause their respective
subsidiaries to take, such actions to apply for such governmental approvals or
consents, or make filings with governmental bodies, with respect to healthcare
regulatory licenses, certifications, or permits or provider agreements as may
be required by applicable law. In case at any time after the Effective Time
any further action is necessary or desirable to carry out the purposes of this
Agreement, the Parent shall cause the proper officers and directors of the
Surviving Corporation, the Parent or the Sub, as the case may be to take all
such necessary action.
Section 5.05 Indemnification and Insurance.
(a) The Parent and the Sub agree that all rights to indemnification existing
in favor of the present or former directors, officers and employees of the
Company (as such) or any of its subsidiaries or present or former directors of
the Company or any of its subsidiaries serving or who served at the Company's
or any of its subsidiaries' request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, as provided in the Company's Certificate of
Incorporation or Bylaws, or the articles of incorporation, bylaws or similar
documents of any of the Company's subsidiaries and the indemnification
agreements with such present and former directors, officers and employees as
in effect as of the date hereof with respect to matters occurring at or prior
to the Effective Time shall survive the Merger and shall continue in full
force and effect and without modification (other than modifications which
would enlarge the indemnification rights) for a period of not less than the
statutes of limitations applicable to such matters, and the Surviving
Corporation shall comply fully with its obligations hereunder and thereunder.
Without limiting the foregoing, the Company shall, and after the Effective
Time, the Surviving Corporation shall periodically advance expenses as
incurred with respect to the foregoing (including with respect to any action
to enforce rights to indemnification or the advancement of expenses) to the
fullest extent permitted under applicable law; provided, however, that the
person to whom the expenses are advanced provides an undertaking (without
delivering a bond or other security) to repay such advance if it is ultimately
determined that such person is not entitled to indemnification.
(b) For a period of six (6) years after the Effective Time, the Surviving
Corporation shall maintain officers' and directors' liability insurance and
fiduciary liability insurance covering the persons described in paragraph (a)
of this Section 5.05 (whether or not they are entitled to indemnification
thereunder) who are currently covered by the Company's existing officers' and
directors' or fiduciary liability insurance policies on terms no less
advantageous to such indemnified parties than such existing insurance.
(c) The Surviving Corporation shall indemnify and hold harmless (and shall
advance expenses to), to the fullest extent permitted under applicable law,
each director, officer, employee, fiduciary and agent of the Company or any
Subsidiary of the Company including, without limitation, officers and
directors, serving as such on the date hereof against any costs and expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation relating to any of the
transactions contemplated hereby, and in the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) the Surviving Corporation shall pay the reasonable fees
and expenses of counsel selected by the indemnified parties, promptly as
statements therefor are received and (ii) the parties hereto will cooperate in
the defense of any such matter, provided, however, that the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent, which consent shall not unreasonably be withheld.
(d) The Surviving Corporation shall pay all reasonable costs and expenses,
including attorneys' fees, that may be incurred by any indemnified parties in
enforcing the indemnity and other obligations provided for in this Section
5.05.
(e) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
person, proper provisions shall be made
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so that the successors and assigns of the Surviving Corporation assume the
obligations set forth in this Section 5.05.
(f) This Section 5.05, which shall survive the consummation of the Merger at
the Effective Time and shall continue for the periods specified herein, is
intended to benefit the Company, the Surviving Corporation, and any person or
entity referenced in this Section 5.05 or indemnified hereunder each of whom
may enforce the provisions of this Section 5.05 (whether or not parties to
this Agreement).
Section 5.06 Employee Plans and Benefits and Employment Contracts.
(a) From and after the Effective Time, the Surviving Corporation and its
subsidiaries will honor in accordance with their terms all existing
employment, severance, consulting and salary continuation agreements between
the Company or any of its subsidiaries and any current or former officer,
director, employee or consultant of the Company or any of its subsidiaries or
group of such officers, directors, employees or consultants described in
Section 5.06(a) of the Company Disclosure Letter.
(b) In addition to honoring the agreements referred to in Section 5.06(a),
until the first anniversary of the Effective Time, the Surviving Corporation
and its subsidiaries will provide or will cause to be provided to each current
or former employee (presently entitled to benefits) of the Company or its
subsidiaries (excluding employees covered by collective bargaining agreements)
(i) employee compensation, benefit plans, programs, policies and arrangements,
that are in the aggregate no less favorable than those currently provided by
the Company and its subsidiaries to each such employee and former employee;
and (ii) severance benefits that are in the aggregate no less favorable to any
employee of the Company or any of its subsidiaries than those currently
provided to each such employee. Nothing in this Section 5.06(b) shall be
deemed to prevent the Surviving Corporation or any of its subsidiaries from
making any change required by law.
(c) To the extent permitted under applicable law, each employee of the
Company or its subsidiaries shall be given credit for all service with the
Company or its Subsidiaries (or service credited by the Company or its
subsidiaries) under all employee benefit plans, programs, policies and
arrangements maintained by the Surviving Corporation in which they participate
or in which they become participants for purposes of eligibility, vesting and
benefit accrual including, without limitation, for purposes of determining (i)
short-term and long-term disability benefits, (ii) severance benefits, (iii)
vacation benefits and (iv) benefits under any retirement plan.
(d) This Section 5.06, which shall survive the consummation of the Merger at
the Effective Time and shall continue without limit, is intended to benefit
and bind the Company, the Surviving Corporation and any person or entity
referenced in this Section 5.06, each of whom may enforce the provisions of
this Section 5.06 (whether or not parties to this Agreement). Except as
provided in clause (a) above, nothing contained in this Section 5.06 shall
create any beneficiary rights in any employee or former employee (including
any dependent thereof) of the Company, any of its subsidiaries or the
Surviving Corporation in respect of continued employment for any specified
period of any nature or kind whatsoever.
Section 5.07 Proxy Statement and S-4. The Company and the Parent shall
promptly prepare and file with the SEC, as soon as practicable, a preliminary
joint proxy statement (the "Proxy Statement") and S-4 relating to the
Recapitalization Merger and the Merger as required by the Exchange Act and the
rules and regulations thereunder. Each of the Parent and the Company shall use
commercially reasonable efforts to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. The Company, the
Parent and the Sub will cooperate with each other in the preparation of the
Proxy Statement. The Company and the Parent shall use all reasonable efforts
to respond promptly to any comments made by the SEC with respect to the Proxy
Statement, and to cause the Proxy Statement to be mailed to the Company's and
the Parent's stockholders at the earliest practicable date.
Section 5.08 Notification of Certain Matters. The Company shall give prompt
notice to the Parent and the Sub, and the Parent or the Sub, as the case may
be, shall give prompt notice to the Company, of (i) the
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occurrence, or non-occurrence, of any event the effect of which is likely to
cause any representation or warranty of such party contained in this Agreement
to be untrue or inaccurate in any material respect at or prior to the
Effective Time and (ii) any material failure of such party to comply with or
satisfy any covenant, condition or agreement to be complied with or satisfied
by it hereunder; provided, however, that the delivery of any notice pursuant
to this Section 5.08 shall not limit or otherwise affect the remedies
available hereunder to any of the parties receiving such notice.
Section 5.09 Rights Agreement Amendment. Subject to the terms and conditions
of this Agreement, the Parent shall promptly enter into an amendment to the
Rights Agreement (the "Rights Agreement Amendment") pursuant to which the
Rights Agreement and the Rights Agreement Rights will not be applicable to the
Merger, shall not result in a "Distribution Date" under the Rights Agreement
and consummation of the Merger shall not result in the Company or its
affiliates being an "Acquiring Person" or result in the occurrence of a "Flip-
In Event" or a "Flip-Over Event" thereunder.
Section 5.10 Agreements of Rule 145 Affiliates. Prior to the Effective Time,
the Company shall cause to be prepared and delivered to Parent a list
identifying all persons who, at the time of the Company stockholder meeting,
may be deemed to be "affiliates" of the Company, as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Rule 145
Affiliates"). The Company shall use its commercially reasonable efforts to
cause each person who is identified as a Rule 145 Affiliate in such list to
deliver to Parent, at or prior to the Effective Time, a written agreement, in
the form to be approved by the parties hereto, that such Rule 145 Affiliate
will not sell, pledge, transfer or otherwise dispose of any shares of Parent
Common Stock issued to such Rule 145 Affiliate pursuant to the Merger, except
pursuant to an effective registration statement or in compliance with Rule 145
or an exemption from the registration requirements of the Securities Act.
Section 5.11 New York Stock Exchange Listing. Each party agrees to use
commercially reasonable efforts to retain the listing of the shares of Parent
Common Stock issued in connection with the Merger on the New York Stock
Exchange following the Effective Time.
Section 5.12 Election to the Parent's Board of Directors. At the Effective
Time of the Merger, the Parent shall cause its board of directors to be
constituted as contemplated by Section 5.12 of the Recapitalization Merger
Agreement.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 6.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where permissible, by each party hereto prior to the
proposed Effective Time, of the following conditions:
(a) the agreement of merger (as such term is used in Section 251 of the
DGCL) contained in this Agreement and the Merger, and the issuance of the
Parent Common Stock pursuant to the Merger, shall have been approved and
adopted by the affirmative vote of the stockholders of each of the Company
and the Parent, respectively, required by and in accordance with applicable
law and the Restated Certificates of Incorporation and Bylaws thereof (if
applicable);
(b) the Recapitalization Merger and the related agreement of merger (as
such term is used in section 251 of the DGCL) contained in the agreement
and plan of merger setting forth the terms of the Recapitalization Merger
and the issuance of the Parent Common Stock pursuant to the Merger shall
have been approved by the affirmative vote of the stockholders of the
Parent required by and in accordance with applicable law and the Parent's
Restated Certificate of Incorporation, and the Recapitalization Merger
shall have been consummated;
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(c) no statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
governmental authority against the Parent, the Sub or the Company and be in
effect that prohibits or restricts the consummation of the Merger or makes
such consummation illegal (each party agreeing to use all reasonable
efforts to have any such prohibition lifted);
(d) the S-4 shall have become effective, and any required post-effective
amendment shall have become effective, under the Securities Act, and shall
not be the subject of any stop order or proceedings seeking a stop order,
and any material "blue sky" and other state securities laws applicable to
the registration of the Parent Common Stock shall have been complied with;
(e) the conditions to each party's obligations to effect the
Recapitalization Merger other than the consummation of the Merger shall
have been satisfied or waived; and
(f) the waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated and all filings required
to be made prior to the Effective Time with, and all consents, approvals,
authorizations and permits required to be obtained prior to the Effective
Time from, any governmental authority in connection with the consummation
of the Merger shall have been made or obtained (as the case may be), except
where the failure to obtain such consents, approvals, authorizations and
permits would not be reasonably likely to result in a Material Adverse
Effect on the Company or to materially adversely affect the consummation of
the Merger.
(g) the Company and Parent shall have received an opinion from the
Company's counsel, reasonably acceptable to the Company and the Parent, to
the effect that (i) the Merger will qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code; and (ii) the Company, the
Parent and the Sub will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code with respect to the Merger.
Section 6.02 Additional Conditions to the Company's Obligation to Effect the
Merger. The obligations of the Company to effect the Merger shall be subject
to the satisfaction or waiver by each of the Company and Apollo, except that
with respect to the conditions set forth in Section 6.02(f), such conditions
shall be subject to satisfaction or waiver by Apollo only) prior to the
proposed Effective Time, of the following conditions:
(a) no action shall have been taken and be continuing, and no statute,
rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted, promulgated, entered, enforced or
deemed applicable to the Merger, which would (i) make illegal or prohibit
the consummation of the Merger or (ii) render the Company unable to effect
the Merger;
(b) no action or proceeding brought by any governmental, regulatory or
administrative agency, authority or commission shall have been instituted
and be pending that would be reasonably likely to result in any of the
consequences referred to in clauses (i) or (ii) of Section 6.02(a) above;
and there shall be no proceeding or other action (including without
limitation, relating to health care, regulatory, environmental and pension
matters) pending or threatened against the Parent or its Subsidiaries which
is reasonably likely to have a Material Adverse Effect;
(c) during the 30 day period ending on the date of the Closing, there
shall not have occurred and be continuing (i) any general suspension of
trading in, or limitation on prices for, securities on any national
securities exchange or in the over-the-counter market in the United States,
(ii) the declaration of any banking moratorium or any suspension of
payments in respect of banks or any material limitation (whether or not
mandatory) on the extension of credit by lending institutions in the United
States, (iii) the commencement of a war, material armed hostilities or any
other material international or national calamity involving the United
States having a significant adverse effect on the functioning of the
financial markets in the United States, or (iv) in the case of any of the
foregoing existing at the time of the execution of the Merger Agreement, a
material acceleration or worsening thereof;
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(d) the representations and warranties of the Parent and the Sub set
forth in Article IV shall be true and correct in all material respects as
of the Effective Time as though made on and as of that time, and the Parent
and the Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under this Agreement at or
prior to the Effective Time;
(e) since September 30, 1996, no change shall have occurred or been
threatened in the business, operations, prospects, properties or condition
(financial or other) of the Parent or any of its Subsidiaries that would
have or would be reasonably expected to have a Material Adverse Effect;
provided, that the transactions contemplated by the Recapitalization
Agreement and this Agreement shall not be deemed to have caused Material
Adverse Effect; and
(f) the maximum number of Dissenting Shares shall not exceed 10% of the
shares of Company Common Stock which are issued and outstanding immediately
prior to the Effective Time.
Section 6.03 Additional Conditions to the Parent's and the Sub's Obligations
to Effect the Merger. The obligations of the Parent and the Sub to effect the
Merger shall be subject to the satisfaction or waiver by the Parent, the Sub
and Apollo, prior to the proposed Effective Time, of the following conditions:
(a) no action shall have been taken and be continuing, and no statute,
rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted, promulgated, entered, enforced or
deemed applicable to the Merger, which would (i) make illegal or prohibit
the consummation of the Merger or (ii) render Parent unable to effect the
Merger;
(b) no action or proceeding brought by any governmental, regulatory or
administrative agency, authority or commission shall have been instituted
and be pending that would be reasonably likely to result in any of the
consequences referred to in clauses (i) or (ii) of Section 6.02(a) above;
and there shall be no proceeding or other action (including, without
limitation, relating to health care, regulatory, environmental and pension
matters) pending or threatened against the Company or its Subsidiaries
which is reasonably likely to have a Material Adverse Effect;
(c) during the 30 day period ending on the date of the Closing, there
shall not have occurred (i) any general suspension of trading in, or
limitation on prices for, securities on any national securities exchange or
in the over-the-counter market in the United States, (ii) the declaration
of any banking moratorium or any suspension of payments in respect of banks
or any material limitation (whether or not mandatory) on the extension of
credit by lending institutions in the United States, (iii) the commencement
of a war, material armed hostilities or any other material international or
national calamity involving the United States having a significant adverse
effect on the functioning of the financial markets in the United States, or
(iv) in the case of any of the foregoing existing at the time of the
execution of the Merger Agreement, a material acceleration or worsening
thereof;
(d) since December 31, 1996, no change shall have occurred or have been
threatened in the business, operations, prospects, properties or condition
(financial or other) of GranCare or any of its Subsidiaries that would have
or would be reasonably expected to have a Material Adverse Effect;
provided, that the transactions contemplated by the Recapitalization
Agreement and the Merger Agreement shall not be deemed to be such a
materially adverse change;
(e) the agreements of Rule 145 Affiliates required to be delivered to
Parent pursuant to Section 5.10 shall have been furnished as required by
Section 5.10; and
(f) the representations and warranties of the Company set forth in
Article III shall be true and correct in all material respects as of the
Effective Time as though made on and as of that time, and the Company shall
have performed in all material respects all covenants and agreements
required to be performed by it under this Agreement at or prior to the
Effective Time.
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ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.01 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time notwithstanding approval thereof by the
stockholders of each of the Company and the Parent, but prior to the Effective
Time:
(a) by mutual written consent of the Boards of Directors of the Company
and the Parent;
(b) by the Parent or the Company if the Effective Time shall not have
occurred on or before November 3, 1997 (provided that the right to
terminate this Agreement under this Section 7.01(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of or resulted in the failure of the Effective Time to
occur on or before such date);
(c) by the Parent or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have
issued an order, decree or ruling, or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
(d) by the Company if (i) any of the representations and warranties of
the Parent or the Sub contained in this Agreement were untrue in any
material respect when made or have since become, and at the time of
termination remain, untrue in any material respect, or (ii) the Parent or
the Sub shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement and, with respect to a
representation or warranty, such breach shall continue unremedied for ten
(10) days after the Parent or the Sub has received written notice from the
Company of the occurrence of such breach of failure;
(e) prior to Stockholder Approval by the Parent if the Board of Directors
of the Company withdraws or modifies in a manner adverse to the Parent or
the Sub its favorable recommendation of the Merger or shall have
recommended an Acquisition Transaction with a party other than the Parent
or any of its affiliates;
(f) prior to Stockholder Approval by the Company if the Company receives
a written offer with respect to any Acquisition Transaction with a party
other than the Parent or its affiliates or such other party has commenced a
tender offer which, in either case, the Board of Directors of the Company
believes in good faith is more favorable to the Company's stockholders than
the transactions contemplated by this Agreement;
(g) by the Parent, if (i) any of the representations and warranties of
the Company contained in this Agreement shall fail to be true and correct
in any material respect, in each case when made or have since become, and
of the time of termination remain, untrue in any material respect, (ii) the
Company shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement (other than as a result of
a breach by the Parent or the Sub of any of their obligations under this
Agreement) and, with respect to a representation or warranty, such breach
shall continue unremedied for ten (10) days after the Company has received
written notice from the Parent or the Sub of the occurrence of such breach
or failure;
(h) by the Parent or the Company if the Recapitalization Merger Agreement
is terminated;
(i)(x) by the Parent if the Company fails to obtain its stockholders'
approval of the Merger at the meeting held for such purpose (or any
adjournment thereof) or (y) by the Company if the Parent fails to obtain
its stockholders' approval of the issuance of Parent Common Stock to be
issued as part of the Merger at the meeting held for such purpose (or any
adjournment thereof); or
(j) by Apollo, if, as of the holding of the vote of the Company's
stockholders, the maximum number of Dissenting Shares exceeds 10% of the
outstanding shares of Company Common Stock.
Section 7.02 Effect of Termination. If this Agreement is terminated and the
Merger is abandoned pursuant to Section 7.01 hereof, this Agreement, except
for the provisions of Section 5.03(b), this Section 7.02 and Section 8.10
hereof, shall forthwith become void and have no effect, without any liability
on the part of any party or its directors, officers or stockholders. The
Confidentiality Agreement shall remain in full force and effect following any
termination of this Agreement. If this Agreement is terminated pursuant to
Section 7.01(e) or (f), the
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Company promptly, but in no event later than one business day after
termination of this Agreement will pay to the Parent a fee (the "Termination
Fee") equal to $20 million in same day funds, plus interest on such amount
from the date payable until paid at a rate equal to 9% per annum. If this
Agreement is terminated pursuant to Section 7.01(i)(x) or Section 7.01(j) and,
at the time of the stockholder vote referred to therein, any person has made
(or publicly disclosed an intention to make) a proposal to effect an
Acquisition Transaction with respect to the Company (and shall not have
irrevocably withdrawn such proposal), or, if this Agreement is terminated
pursuant to Section 7.01(b) and, as of November 3, 1997, the Company shall not
have held a stockholder vote and a proposal to effect an Acquisition
Transaction with respect to the Company shall have been in effect at any time
between October 15 and November 3, 1997 (a "No Vote Termination") and, in
either case, within 180 days after such termination an Acquisition Transaction
shall be consummated with respect to the Company, the Company shall promptly
(but in no event later than one business day) after such consummation, pay the
Termination Fee. If this Agreement is terminated pursuant to Section 7.01(e),
(f), (g), (i)(x) or (j) or in a No Vote Termination, the Company shall also
pay the out-of-pocket fees and expenses reasonably incurred by the Parent and
the Sub in connection with this Agreement. Nothing in this Section 7.02 shall
relieve any party to this Agreement of liability for breach of this Agreement.
Section 7.03 Amendment. To the extent permitted by applicable law, this
Agreement may be amended by action taken by or on behalf of the Boards of
Directors of the Company, the Parent, the Sub and Apollo, at any time before
or after adoption of this Agreement by the stockholders of each of the
Company, the Parent and Apollo but, after any such stockholder approval, no
amendment shall be made which decreases the Exchange Ratio or which adversely
affects the rights of the Company's stockholders hereunder without the
approval of the stockholders of the Company. This Agreement may not be amended
except by an instrument in writing signed on behalf of all of the parties.
Section 7.04 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken by or on behalf of the respective Boards of
Directors of the Company, the Parent and the Sub may (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein by any other applicable party or in any document, certificate
or writing delivered pursuant hereto by any other applicable party or (iii)
waive compliance with any of the agreements or conditions contained herein.
Any agreement on the part of any party to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of
such party.
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Survival of Representations and Warranties. The representations
and warranties made in Articles III and IV shall not survive beyond the
Effective Time. This Section 8.01 shall not limit any covenant or agreement of
the parties hereto which by its terms contemplates performance after the
Effective Time.
Section 8.02 Entire Agreement; Assignment. Except for the Confidentiality
Agreement and the Disclosure Letter, this Agreement (a) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof and (b)
shall not be assigned by operation of law or otherwise; provided, however,
that the Parent or the Sub may assign any of its rights and obligations to any
wholly-owned subsidiary of the Parent or the Sub incorporated in Delaware, but
no such assignment shall relieve the Parent or the Sub, as the case may be, of
its obligations hereunder.
Section 8.03 Enforcement of the Agreement; Jurisdiction. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any federal or state court located in the State of Delaware, this being in
addition to any other remedy to which they are entitled at law or in equity.
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The parties hereto consent and agree that the state or federal courts
located in Delaware shall have exclusive jurisdiction to hear and determine
any claims or disputes pertaining to this Agreement or to any matter arising
out of or related to this Agreement and each party hereto waives any objection
that it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens and hereby consents to the granting of such legal or
equitable relief as is deemed appropriate by such court.
Section 8.04 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
Section 8.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by facsimile transmission with
confirmation of receipt, or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties as follows:
if to the Parent or the Sub:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attention: Susan Thomas Whittle, Esq., General Counsel
Sydney K. Boone, Jr., Esq., Associate General Counsel
with copies to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Mayor, Day, Caldwell & Keeton L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002
Attention: Jeff C. Dodd, Esq.
if to the Company:
GranCare, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Attention: Evrett Benton, Executive Vice President
with a copy to:
Andrews & Kurth L.L.P.
600 Travis, Suite 4200
Houston, Texas 77002
Attention: Robert V. Jewell, Esq.
if to Apollo:
Apollo Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
with a copy to:
Sidley & Austin
555 W. Fifth Street, Suite 4000
Los Angeles, California 90013
Attention: Robert W. Kadlec, Esq.
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or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 8.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of
the laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
Section 8.07 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.
Section 8.08 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement except for Sections 2.13, 5.05 and 5.06 (which are intended to be
for the benefit of the persons referred to therein, and may be enforced by any
such persons).
Section 8.09 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
Section 8.10 Fees and Expenses. Whether or not the Offer or the Merger is
consummated, all costs and expenses incurred in connection with the
transactions contemplated by this Agreement shall be paid by the party
incurring such expenses, except as provided expressly to the contrary herein.
Section 8.11 Disclosure Letter. Any disclosure under one section of the
Disclosure Letter shall be deemed disclosure under all sections of the
Disclosure Letter. Disclosure of any matter in the Disclosure Letter shall not
constitute an expression of a view that such matter is material or is required
to be disclosed pursuant to this Agreement.
Section 8.12 Press Releases. Subject to the proviso to this sentence, the
Parent, the Sub and the Company will consult with each other before issuing
any press release or otherwise making any public statements with respect to
the transactions contemplated hereby and shall not issue any such press
release or make any such public statement prior to such consultation, except
as may be required by law or by obligations pursuant to the rules of The New
York Stock Exchange, Inc. and any other appropriate exchange.
Section 8.13 Obligation of the Parent. Whenever this Agreement requires Sub
to take any action, such requirement shall be deemed to include an undertaking
on the part of Parent to cause Sub to take such action.
Section 8.14. Reference; No Waiver. Any reference in this Agreement to the
"date hereof," the "date of this Agreement" or the "date of execution of this
Agreement" shall be deemed to refer to May 7, 1997, the date of the Original
Merger Agreement, but any reference to the "date of this Amended and Restated
Agreement" or the "date of execution of this Amended and Restated Agreement"
shall refer to June 13, 1997. The parties' execution and delivery of this
Amended and Restated Agreement shall not constitute a waiver of any rights
that any of the parties hereto may have by reason of any event, condition,
misrepresentation or breach of covenant of the Original Merger Agreement
having occurred prior to the date of such execution and delivery of this
Amended and Restated Agreement whether or not known to any or all of the
parties hereto. No representation or warranty of any party in this Agreement
shall be affected or limited by reason of the knowledge of any other party at
any time that such representation or warranty is not, or may not be, true and
correct.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized.
LIVING CENTERS OF AMERICA, INC.
By:
___________________________________
Name:
Title:
GRANCARE, INC.
By:
___________________________________
Name: Evrett W. Benton
Title: Executive Vice President
APOLLO MANAGEMENT, L.P.
By: AIF III Management, Inc.
Its General Partner
By:
___________________________________
Name:
Title:
II-31
<PAGE>
EXHIBIT 11
GRANCARE, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(Dollars and Shares in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, June 30,
1997 1996 1997 1996
--------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Primary
<S>
Average shares outstanding........................... 24,028 23,252 23,925 23,201
Net effect of conversion of stock options (a)........ --- 600 --- 503
Net effect of conversion of warrants (a)............. --- 225 --- 228
--------------- ---------------- --------------- ---------------
Total.................................. 24,028 24,077 23,925 23,932
=============== ================ =============== ===============
Net income (loss).................................... $ (446) $ 8,180 $(26,583) $14,770
=============== ================ =============== ===============
Net income (loss) per common share................... $ (0.02) $0.34 $ (1.11) $0.62
=============== ================ =============== ===============
Fully diluted
Average shares outstanding........................... 24,028 23,252 23,925 23,201
Net effect of conversion of stock options (a)........ --- 755 --- 711
Net effect of conversion of warrants (a)............. --- 233 --- 242
Net effect of conversion of convertible securities... --- 2,330 --- 2,330
(b)
--------------- ---------------- --------------- ---------------
Total.................................. 24,028 26,570 23,925 26,484
=============== ================ =============== ===============
Net income (loss)..................................... $ (446) $ 8,180 $(26,583) $14,770
Interest on convertible securities - net of tax....... --- 636 --- 1,272
--------------- ---------------- --------------- ---------------
$ (446) $ 8,816 $(26,583) $16,042
=============== ================ =============== ===============
Net income (loss) per common share.................... $ (0.02) $0.33 $ (1.11) $0.61
=============== ================ =============== ===============
(a) Computed using the treasury stock method
(b) Computed using the "if-converted" method
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JUL-01-1997 JUL-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 19,778 14,512
<SECURITIES> 38,175 38,933
<RECEIVABLES> 258,955 257,855
<ALLOWANCES> (14,918) (11,209)
<INVENTORY> 1,838 17,312
<CURRENT-ASSETS> 303,960 317,704
<PP&E> 254,773 271,536
<DEPRECIATION> (57,798) (64,387)
<TOTAL-ASSETS> 637,909 748,039
<CURRENT-LIABILITIES> 107,043 117,135
<BONDS> 361,996 382,242
0 0
0 0
<COMMON> 24 123,378
<OTHER-SE> 140,426 90,922
<TOTAL-LIABILITY-AND-EQUITY> 637,909 748,039
<SALES> 197,925 245,427
<TOTAL-REVENUES> 199,341 247,271
<CGS> 0 0
<TOTAL-COSTS> 200,060 234,078
<OTHER-EXPENSES> 13,044 15,432
<LOSS-PROVISION> 8,930 2,088
<INTEREST-EXPENSE> 7,782 8,918
<INCOME-PRETAX> (719) 13,193
<INCOME-TAX> (273) 5,013
<INCOME-CONTINUING> (446) 8,180
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (446) 8,180
<EPS-PRIMARY> (0.02) 0.34
<EPS-DILUTED> (0.02) 0.33
</TABLE>
