<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 8, 1997.
REGISTRATION NO. 333-19091
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
NEW GRANCARE, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8051 95-4336136
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
ONE RAVINIA DRIVE
SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
EVRETT W. BENTON, ESQ.
ONE RAVINIA DRIVE
SUITE 1500
ATLANTA, GEORGIA 30346
(770) 393-0199
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPY TO:
RICHARD H. MILLER, ESQ.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
16TH FLOOR
191 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30303
(404) 572-6600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED JANUARY 8, 1997
NEW GRANCARE, INC.
COMMON STOCK
PAR VALUE $0.001 PER SHARE
This Prospectus covers up to 24,000,000 shares of the common stock, par value
$.001 per share ("New GranCare Common Stock), of New GranCare, Inc., a Delaware
corporation ("New GranCare"). This Prospectus is being furnished to the
shareholders of GranCare, Inc., a California corporation (the "Company"), the
sole stockholder of New GranCare, in connection with the proposed distribution
(the "Distribution") to the Company's shareholders of all the outstanding
shares of New GranCare Common Stock, pursuant to the terms of an Amended and
Restated Agreement and Plan of Distribution, dated as of September 3, 1996, by
and between the Company and New GranCare (the "Distribution Agreement"). The
Company is proposing to make the Distribution in connection with and as part of
a proposed reorganization that also involves the merger of the Company (the
"Merger") with and into Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), immediately following the Distribution, pursuant to
an Agreement and Plan of Merger by and between Vitalink and the Company dated
September 3, 1996, as amended through the date hereof (the "Merger Agreement"),
a copy of which is attached as Annex B to the Proxy Statement/Prospectus (the
"Proxy Statement/Prospectus") of the Company and Vitalink relating to the
solicitation of proxies in order to obtain shareholder approval of the
Distribution and Merger which accompanies this Prospectus. Immediately
following the Merger, New GranCare will change its name to "GranCare, Inc." The
Merger is conditioned upon the successful completion of the Distribution. The
completion of both the Merger and the Distribution is subject to the approval
of the shareholders of the Company.
One share of New GranCare Common Stock will be distributed for each share of
common stock of the Company (the "Distribution Ratio"), without par value
("Company Common Stock"), issued and outstanding on the date established by the
Board of Directors of GranCare for determining shareholders of record entitled
to receive New GranCare Common Stock in the Distribution (the "Distribution
Record Date").
At the time of the Distribution, New GranCare will own all of the Company's
businesses and assets other than the Company's institutional pharmacy business
(the "Institutional Pharmacy Business"), currently operated through the
Company's TeamCare, Inc. subsidiary ("TeamCare"). The businesses to be owned
and operated by New GranCare include the Company's skilled nursing facilities,
home health and assisted living operations and contract management businesses
(the "Skilled Nursing Business").
No consideration will be paid by the Company's shareholders for the shares of
New GranCare Common Stock to be received by them in the Distribution. There is
currently no public trading market for the shares of New GranCare Common Stock.
New GranCare intends to list the New GranCare Common Stock on the New York
Stock Exchange, Inc. ("NYSE").
The consummation of the Distribution is a condition to, among other things,
the Company's and Vitalink's respective obligations to consummate the Merger.
SHAREHOLDERS OF THE COMPANY AS OF THE DISTRIBUTION RECORD DATE SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS"
ON PAGE 12 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1997.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
NEW GRANCARE, INC. PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 5
RISK FACTORS.............................................................. 12
BUSINESS.................................................................. 17
General................................................................. 17
Long-Term Care Industry................................................. 17
Business Strategy....................................................... 18
Marketing and Development of Payor Sources.............................. 22
Competition............................................................. 22
Regulation.............................................................. 23
Employee Training and Development....................................... 27
Employees............................................................... 28
Insurance............................................................... 28
Legal Proceedings....................................................... 28
THE DISTRIBUTION.......................................................... 30
Reasons for the Distribution............................................ 30
Contribution of Skilled Nursing Business to New GranCare................ 30
Consummation of the Distribution; Treatment of Company Stock Options.... 31
Manner of Effecting the Distribution.................................... 32
Listing of New GranCare Common Stock; Restrictions on Resale............ 33
Interests of Certain Persons in the Distribution and Merger............. 33
Treatment of Certain Indebtedness....................................... 35
Expenses................................................................ 38
Conditions.............................................................. 39
Terms of the Distribution Agreement..................................... 39
Terms of Employee Benefits Agreement.................................... 41
Terms of the Non-competition Agreement.................................. 42
Terms of Shareholders Agreement......................................... 42
Terms of the Interim Services Agreement................................. 43
Terms of the Pharmaceutical Supply Agreements........................... 43
Terms of the Voting Agreement........................................... 44
Terms of the Tax Allocation Agreement................................... 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 46
Consequences of the Distribution........................................ 46
Consequences of the Merger to the Company, Vitalink and the Company
Shareholders........................................................... 46
Possible Future Legislation............................................. 47
Back-up Witholding Requirements......................................... 47
</TABLE>
3
<PAGE>
NEW GRANCARE, INC. PROSPECTUS
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPITALIZATION........................................................... 48
DIVIDEND POLICY.......................................................... 49
UNAUDITED PRO FORMA GRANCARE, INC. FINANCIAL STATEMENTS.................. 49
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 57
General................................................................ 57
Results of Operations.................................................. 58
Liquidity and Capital Resources........................................ 62
Impact of Inflation.................................................... 66
PROPERTIES............................................................... 67
Long-Term Health Care Facilities....................................... 67
Contract Management.................................................... 72
Home Health............................................................ 72
MANAGEMENT............................................................... 73
Executive Officers and Directors....................................... 73
Committees of the Board of Directors................................... 77
Compensation of Directors.............................................. 77
Compensation of Executive Officers..................................... 79
Stock Options.......................................................... 85
Long-Term Incentive Plans--Awards Since December 31, 1995.............. 87
Company Annual Incentive Plan.......................................... 87
Certain Relationships and Related Party Transactions................... 87
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 90
DESCRIPTION OF NEW GRANCARE CAPITAL STOCK................................ 93
New GranCare Common Stock.............................................. 93
Preferred Stock........................................................ 93
The Charters and Bylaws of the Company and New GranCare................ 93
Significant Differences Between the Corporation Laws of California and
Delaware.............................................................. 94
Application of the General Corporation Law of California to Delaware
Corporations.......................................................... 100
SHARES ELIGIBLE FOR FUTURE SALES......................................... 101
AVAILABLE INFORMATION.................................................... 101
LEGAL MATTERS............................................................ 102
EXPERTS.................................................................. 102
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
This Prospectus is furnished to shareholders of the Company together with the
Proxy Statement/Prospectus. The following summary is qualified in its entirety
by the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus and the Proxy
Statement/Prospectus. Except where otherwise indicated, the description of New
GranCare and its businesses contained herein assumes the completion of the
Distribution and the Merger.
NEW GRANCARE
New GranCare is currently a wholly-owned subsidiary of the Company
incorporated under the laws of the State of Delaware. In order to effect the
Distribution, all of the assets and businesses of the Company, other than those
used primarily in the conduct of its Institutional Pharmacy Business, will be
contributed to New GranCare prior to the Distribution. The mailing address of
the Company's principal executive offices is One Ravinia Drive, Suite 1500,
Atlanta, Georgia 30346, and the telephone number at such address is (770) 393-
0199. Following the Distribution, New GranCare's principal executive offices
and phone number will be the same as indicated above. In addition, immediately
following the Distribution and the Merger, New GranCare will change its name to
"GranCare, Inc.".
THE TRANSACTIONS
The Company has entered into the Merger Agreement whereby, upon the terms and
subject to the conditions set forth therein, the Company will be merged with
and into Vitalink, with Vitalink as the surviving corporation. As a condition
to and in order to facilitate the Merger, the Company has agreed to effect the
Distribution, pursuant to which all of the outstanding shares of New GranCare
Common Stock will be distributed to the Company's shareholders on the basis of
one share of New GranCare Common Stock for each share of Company Common Stock
held by a shareholder as of the Distribution Record Date. The Distribution is
intended to be tax-free to the Company's shareholders for federal income tax
purposes. See "Certain Federal Income Tax Consequences."
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time") each issued and outstanding share of Company Common Stock
(other than shares of Company Common Stock that are owned by the Company as
treasury stock and any shares of Company Common Stock that are owned by
Vitalink or any wholly-owned subsidiary of Vitalink, which will be cancelled)
shall be converted into the right to receive 0.478 (the "Exchange Ratio") of a
share of common stock, par value $0.01 per share, of Vitalink (the "Vitalink
Common Stock") as described under "Description of the Transactions--Merger
Terms" in the Proxy Statement/Prospectus. In addition, as a consequence of the
Merger, Vitalink's consolidated indebtedness will increase by approximately
$108.0 million (prior to an offsetting compensatory payment by the Company) due
to the assumption or funding of the discharge of the obligations of the Company
in respect of the $100.0 million principal amount of 9 3/8% Senior Subordinated
Notes due 2005 (the "9 3/8% Notes") issued by the Company. In order to obtain a
third party consent of Health and Retirement Properties Trust ("HRPT"), a
creditor and landlord the Company, required in connection with the Distribution
and Merger, Vitalink will pay a consent fee of $10.0 million, which will be
promptly reimbursed by New GranCare following the consummation of the
Distribution and Merger. Vitalink will also enter into a limited guaranty of
certain obligations of New GranCare to HRPT. To support Vitalink's limited
guaranty of New GranCare's obligations, New GranCare will provide an
irrevocable letter of credit in the amount of $15.0 million payable to Vitalink
in the event Vitalink makes any payments under the limited guaranty. See "The
Distribution--Treatment of Certain Indebtedness."
As a consequence of the Distribution and in accordance with the terms of the
Agreement Respecting Employee Benefit Matters by and between the Company and
New GranCare (the "Employee Benefits
5
<PAGE>
Agreement"), each holder of an option to purchase shares of Company Common
Stock (the "Company Options") will receive an option (the "New GranCare
Options") to purchase a number of shares of New GranCare Common Stock as is
equal to the number of shares of Company Common Stock subject to
Company Options held by such holder as of the Distribution Record Date. The
exercise price of all Company Options will be allocated between the New
GranCare Options issued in respect of such Company Options and the existing
Company Options pursuant to a formula. As a result of the application of such
formula, subsequent to the Distribution approximately 61.568% of the exercise
price of each Company Option will be allocated to, and shall become, the
exercise price of each existing Company Option (the "Adjusted Company Options")
and 38.432% of the exercise price of each Company Option will be allocated to
each New GranCare option. The terms and conditions of the New GranCare Options
will be the same as the terms of the Company Options prior to the Distribution.
As a result of the Merger, Vitalink will assume all of the Adjusted Company
Options. Each Adjusted Company Option will be exercisable upon the same terms
and conditions as under the applicable Company plan and the applicable option
agreement issued thereunder, except that (i) each such option shall be
exercisable for that number of shares of Vitalink Common Stock as is equal to
the number of shares of Company Common Stock that would have been acquired upon
exercise of such option as of the Effective Time of the Merger multiplied by
the Exchange Ratio. As a result of the Merger, the exercise price of each
Adjusted Company Option will be further adjusted by dividing such exercise
price by the Exchange Ratio. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
The terms of the Company Options provide that upon the occurrence of certain
events (a "Change of Control"), all unvested Company Options shall vest and
become fully and immediately exercisable. The Merger constitutes a Change of
Control for purposes of the Company Options. Furthermore, the consummation of
the Merger will not constitute a termination of employment and holders of
Adjusted Company Options will continue to be able to exercise such options
following the completion of the Merger even if such holder is not an employee
of Vitalink. As a result of the foregoing, approximately 2,355,250 shares of
New GranCare Common Stock will be issuable upon the exercise of New GranCare
Options and 1,125,809 shares of Vitalink Common Stock will be issuable upon the
exercise of Adjusted Company Options following the completion of the
Distribution and the Merger.
Pursuant to the Distribution Agreement, prior to the Distribution the Company
will transfer or cause to be transferred to New GranCare all of the Company's
assets and liabilities relating to the Skilled Nursing Business other than (i)
the capital stock of the Pharmacy Subsidiaries (as defined in the Distribution
Agreement), (ii) the assets and liabilities used or arising primarily in
connection with the conduct of the Institutional Pharmacy Business and (iii)
the payment obligations in respect of the Company's 9 3/8% Notes. In addition,
pursuant to the Distribution Agreement, the Company and its subsidiaries other
than the Pharmacy Subsidiaries, on the one hand, and the Pharmacy Subsidiaries,
on the other hand, will net out all intercompany accounts and the expected net
balance due from the Pharmacy Subsidiaries to the Company and the Company's
subsidiaries will be contributed by the Company or the appropriate subsidiary
of the Company to which such amount (or portion thereof) is owing, to the
appropriate Pharmacy Subsidiary as additional capital.
In accordance with the terms of the Distribution Agreement and the Tax
Allocation and Indemnification Agreement (the "Tax Allocation Agreement") by
and among the Company, New GranCare and certain subsidiaries of the Company,
the Company and New GranCare have agreed to indemnify one another after the
Distribution Date (as defined in the Distribution Agreement) with respect to
certain losses, damages, claims and liabilities arising from their respective
businesses or as a consequence of the occurrence of certain events following
the Distribution Date that result in the proposed transactions not being
accorded tax-free treatment. See "The Distribution--Terms of the Tax Allocation
Agreement."
The foregoing is a brief summary of certain terms of the Distribution and the
Merger. A more complete description of the Merger and the Merger Agreement may
be found in the Proxy Statement/Prospectus under "The Merger Agreement." The
Distribution and the Distribution Agreement are more fully described herein
under "The Distribution." The Merger Agreement and the Distribution Agreement
are attached as Annexes B and C to the Proxy Statement/Prospectus,
respectively. Copies of the Tax Allocation Agreement and the Employee Benefits
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
6
<PAGE>
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Corporation.......... The Company.
Distributed Corporation........... New GranCare, which, by the Distribution
Date, will hold all of the assets of, and
will have assumed all of the liabilities
associated with, the Skilled Nursing
Business.
Distribution Ratio................ One share of New GranCare Common Stock for
each share of Company Common Stock owned as
of the Distribution Record Date. See "The
Distribution--Manner of Effecting the
Distribution;" and "--Terms of the
Distribution Agreement."
Federal Income Tax Consequences... It is the opinion of Powell, Goldstein,
Frazer & Murphy LLP (the "Tax Opinion"),
that the Distribution will qualify as a
tax-free reorganization pursuant to Section
355 of the Internal Revenue Code of 1986,
as amended (the "Code"), the Merger will
qualify as a tax-free reorganization within
the meaning of Section 368(a) of the Code
and that no gain or loss will be recognized
by shareholders of the Company in
connection with their receipt of New
GranCare Common Stock and Vitalink Common
Stock in the Distribution and the Merger,
respectively, except with respect to cash
received in lieu of fractional shares of
Vitalink Common Stock. See "Certain Federal
Income Tax Consequences."
Trading Market and Symbol......... There is currently no public market for New
GranCare Common Stock. New GranCare intends
to apply for the listing of New GranCare
Common Stock on the NYSE under the Trading
Symbol "GC".
Indemnification Obligations After
the Distribution and Merger...... The Company and New GranCare (and Vitalink
as the successor to the Company following
the Merger) have agreed to indemnify each
other after the Distribution with respect
to certain losses, damages, claims and
liabilities arising primarily from their
respective businesses, including certain
tax liabilities. See "Risk Factors--
Relationship with Vitalink" and "The
Distribution--Terms of the Distribution
Agreement" and "--Terms of the Tax
Allocation Agreement."
Relationship With Vitalink After
the Distribution and the Merger.. As of the Effective Time of the Merger, New
GranCare, Vitalink and Manor Care, Inc., a
Delaware corporation ("Manor Care") and the
beneficial owner of approximately 82.3% of
the issued and outstanding shares of
Vitalink Common Stock prior to the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Effective Time of the Merger, will enter
into a Non-competition Agreement (the "Non-
competition Agreement") pursuant to which
New GranCare and Manor Care will agree not
to engage in the institutional pharmacy
business for a period of three years and
Vitalink will agree not to engage in the
skilled nursing business for a similar
period of time. See "The Distribution--
Terms of the Non-competition Agreement."
Following the Merger, Manor Care will own
approximately 45% of the issued and
outstanding Vitalink Common Stock. In
addition, as a consequence of the Merger,
Vitalink will succeed to the various
pharmaceutical supply agreements between
TeamCare and substantially all of New
GranCare's skilled nursing and other
facilities. New GranCare has agreed that
for so long as Vitalink's limited guaranty
of certain obligations of New GranCare to
HRPT is in effect, New GranCare will not
terminate any such agreements. As a result,
New GranCare anticipates that these
pharmaceutical supply agreements may extend
through December 31, 2010, depending on
certain circumstances. See "The
Distribution--Terms of the Pharmaceutical
Supply Agreements" and "--Treatment of
Certain Indebtedness--HRPT Obligations."
Distribution Record Date.......... It is expected that the Distribution Record
Date will be immediately prior to the
Effective Time of the Merger.
Distribution Agent, Transfer Agent
and Registrar.................... American Stock Transfer & Trust Company.
Risk Factors...................... Shareholders should carefully evaluate
certain considerations in evaluating the
securities offered hereby, including New
GranCare's debt and lease obligations, the
uncertainty associated with health care
reform and government regulations, the risk
associated with reimbursement by third
party payers, New GranCare dependence on
acquisitions for growth, competition in the
skilled nursing business and the absence of
a prior trading market in New GranCare
Common Stock. See "Risk Factors."
</TABLE>
8
<PAGE>
NEW GRANCARE STOCK OPTION PLANS
New GranCare will have various employee benefit plans pursuant to which
shares or options to purchase shares of New GranCare Common Stock will be
issued or issuable to or for the benefit of employees, former employees and
directors. It is expected that a total of 2,355,250 shares will be reserved and
issued under the Replacement Stock Option Plan (the "Replacement Plan")
pursuant to which current holders of Company Options will be granted New
GranCare Options in connection with the Distribution. See "The Distribution --
Consummation of the Distribution; Treatment of Company Stock Options." In
addition, New GranCare has adopted, and the Company as its sole shareholder has
approved, the 1996 Stock Incentive Plan (the "New GranCare Plan") pursuant to
which New GranCare will be able to make stock incentive awards to its officers,
directors and key employees on a going forward basis. See "Management--
Compensation of Executive Officers--1996 Stock Incentive Plan." New GranCare
has reserved 1,500,000 shares of New GranCare Common Stock for issuance under
the New GranCare Plan. The New GranCare Plan will be submitted for the approval
of the stockholders of New GranCare in connection with the Proxy/Statement
Prospectus. Approximately 500,000 shares are expected to be used for options
granted to officers and key employees shortly after the date of the
Distribution. New GranCare has also reserved up to 200,000 shares to cover
stock options to be granted to non-employee directors under a separate plan
(the "Directors Plan"), of which approximately 90,000 shares are expected to be
used for options granted to non-employee directors shortly after the date of
the Distribution. See "Management--Compensation of Directors--Directors Plan."
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
The following summary historical consolidated financial data of the Company
has been derived from the historical financial statements and should be read in
conjunction with such financial statements and notes thereto, which are
included elsewhere herein. The Company data for the nine months ended September
30, 1995 and 1996 have been derived from the unaudited consolidated financial
statements which are also included elsewhere herein. The pro forma adjusted
data gives retroactive effect to the Merger and reflects the recapitalization/
reorganization of the Company, the contribution to TeamCare's capital of the
Company's receivable from TeamCare, and the redemption or assumption of certain
indebtedness. The pro forma adjusted financial operating information gives
effect to the Merger as if the transaction had occurred on January 1, 1995. The
pro forma adjusted balance sheet data gives retroactive effect to the Merger as
if it had occurred on September 30, 1996. The pro forma adjusted data should be
read in conjunction with the pro forma balance sheet, pro forma statements of
income, and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -----------------
1991(4) 1992(5) 1993(5) 1994(5) 1995(5) 1995(5) 1996(5)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $290,958 $434,638 $611,689 $717,471 $816,462 $604,569 $745,653
Depreciation and
amortization.......... 5,064 6,922 12,349 16,440 21,611 14,785 19,400
Interest expense and
financing charges..... 7,256 7,908 19,601 21,481 27,054 19,557 26,228
Income from continuing
operations:
Before income taxes
and extraordinary
charge............... 12,297 25,507 26,178 37,814 35,329 23,571 38,971
Before extraordinary
charge(1)............ 8,347 16,806 16,089 24,290 20,564 13,274 24,162
Net income............. $ 11,275 $ 16,806 $ 14,804 $ 24,290 $ 20,564 $ 13,274 $ 24,162
======== ======== ======== ======== ======== ======== ========
Pro forma net
income(1)............. $ 9,994 $ 15,350 $ 14,019 $ N/A $ N/A $ N/A $ N/A
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED PRO FORMA, AS ADJUSTED
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
1995 (2)(3) 1996 (2)(3)
----------------------- -------------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $639,780 $577,165
Depreciation and
amortization.......... 16,906 14,420
Interest............... 19,275 20,104
Income from continuing
operations before
income taxes.......... 25,203 23,980
Net income............. 14,525 15,167
Earnings per share..... 0.61 0.63
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED
SEPTEMBER 30, 1996 (2)
----------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 34,882
Working capital......................................... 135,446
Total assets............................................ 584,988
Long-term debt, including current portion............... 298,148
Shareholders' equity.................................... 137,945
</TABLE>
(Footnotes appear on following page)
10
<PAGE>
(Footnotes from the previous page)
- --------
(1) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the pro forma net income
for the years 1991 through 1993 includes a pro forma provision for income
taxes as if Evergreen had been a taxable corporation for these periods.
Such pro forma calculations were based on the income tax laws and rates in
effect during those periods, and FASB Statement No. 109.
(2) Adjusted to reflect the redemption or assumption of the Company's
Convertible Debentures (defined hereafter) and 9 3/8% Notes as if such
amounts were redeemed or assumed as of January 1, 1995 for income statement
data and as of September 30, 1996 for balance sheet data.
(3) Does not reflect Merger related costs estimated at $30.0 million which are
expected to be recognized by the Company in the results of operations for
the fourth quarter of 1996.
(4) The ARA Living Centers--Pacific, Inc. ("ARA") acquisition occurred on
September 27, 1991 and, therefore, (i) the operating results of the ARA
facilities are included in the historical operating results of the Company
for the fourth quarter of 1991 and (ii) the assets and liabilities of the
ARA facilities, as adjusted for related financing transactions, are
included in the balance sheet of the Company as of December 31, 1991.
(5) All acquisitions which occurred in 1992, 1993, 1994, 1995 and 1996 except
for the CompuPharm, Inc. ("CompuPharm") acquisition and the merger with
Evergreen (defined below), are reflected from the date of each acquisition
in the historical operating results of the Company and the assets and
liabilities relating to these acquisitions are included in the balance
sheets of the Company since that time. All years presented includes
CompuPharm and Evergreen which were combined with the Company in pooling-
of-interests transactions.
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RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating New GranCare
before making any decisions with respect to the New GranCare Common Stock to
be received in the Distribution.
SIGNIFICANT DEBT AND LEASE OBLIGATIONS
New GranCare will have substantial indebtedness in relation to its
stockholder's equity. It is expected that immediately following the
Distribution and the Merger, New GranCare will have total consolidated long-
term indebtedness of approximately $300.3 million (net of current maturities),
accounting for 69.3% of its total capitalization. New GranCare will also have
significant lease obligations with respect to the facilities operated pursuant
to long-term non capitalized or operating leases. During the 12 months
following the Distribution and the Merger, New GranCare's rent and property
expenses are expected to be approximately $43.0 million and $9.8 million,
respectively. New GranCare's leverage, rent and property expenses could have
important consequences to holders of the New GranCare Common Stock, including
the following: (i) New GranCare's ability to obtain financing in the future
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired; (ii) a substantial portion of New GranCare's cash
flow from operations may be dedicated to the payment of principal and interest
on its indebtedness and rent and property expenses, thereby reducing the funds
available to New GranCare for its operations; (iii) certain of New GranCare's
borrowings are expected to bear variable rates of interest, which may expose
New GranCare to increases in interest rates; and (iv) certain of New
GranCare's indebtedness is expected to contain financial and other restrictive
covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends and sales of
assets and imposing minimum net worth requirements. Although the Company's
cash flows from its operations have been sufficient to meet its debt service
obligations and rent and property expenses in the past, and although the Pro
Forma Financial Information indicates that New GranCare's cash flows from
operations should be sufficient to meet such obligations going forward, there
can be no assurance that New GranCare's operating results will be sufficient
to make payments with respect to New GranCare's indebtedness and other
expenses in the future. See "Unaudited Pro Forma GranCare, Inc. Financial
Statements" and "The Distribution--Treatment of Certain Indebtedness."
UNCERTAINTY ASSOCIATED WITH HEALTH CARE REFORM.
In addition to extensive government health care regulation, there are
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals may have on New GranCare's future business. Aspects
of certain of these health care proposals such as cutbacks in Medicare and
Medicaid programs, containment of health care costs on an interim basis by
means that could include a short-term freeze on rates paid to health care
providers, and permitting greater flexibility to the states in the
administration of Medicaid could adversely affect New GranCare. See "--
Reimbursement by Third-Party Payors." There can be no assurance that currently
proposed or future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have an adverse effect on New GranCare. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in health care and related industries, including the
Company, and may similarly affect the price of the New GranCare Common Stock
in the future. See "Business--Regulation."
RISK INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS.
For the year ended December 31, 1995, the Company derived approximately
44.7% and 30.2%, of its net patient revenues from Medicare and Medicaid,
respectively, and New GranCare expects to derive a significant portion of its
revenue from such federal and state reimbursement programs. There can be no
assurance that New GranCare will achieve or improve this payor revenue mix.
Both governmental and private payor sources have instituted cost containment
measures designed to limit payments made to long-term care providers, and
there can be no assurance that future measures will not adversely affect both
the timing and amount of reimbursement to
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New GranCare. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which could materially
decrease the rates paid to New GranCare for its future services or the
services for which New GranCare is able to seek reimbursement. There have
been, and New GranCare expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term health care services. New
GranCare cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have
on New GranCare. There can be no assurance that payments under state or
federal governmental programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible
for reimbursement pursuant to such programs, particularly with respect to
individual, state-administered Medicaid programs, which generally provide
lower reimbursement rates than does the Medicare program. In addition, there
can be no assurance that the facilities to be operated by New GranCare and the
services and supplies to be provided by New GranCare will meet or continue to
meet the requirements for participation in such programs.
Federal law requires state Medicaid programs to reimburse nursing facilities
for the costs that are incurred by efficiently and economically operated
providers in order to meet quality and safety standards. Nursing facilities
may seek to enforce this requirement in the state or federal courts.
Nevertheless, there can be no assurance that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities or that litigation to prevent such reductions will be successful.
As a result, there can be no assurance that states in which New GranCare will
operate will continue to meet their Medicaid obligations on a timely basis.
Any failure by such states to meet their Medicaid obligations on a timely
basis could have a material adverse effect on New GranCare.
In addition, several states are considering various health care reforms,
including reforms through Medicaid managed care demonstration projects.
Several states in which the Company operates and in which New GranCare will
operate have applied for, or received, approval from the U.S. Department of
Health and Human Services for waivers from certain Medicaid requirements which
are generally required for managed care projects. Although these demonstration
projects generally exempt institutional care, including long-term care
facilities, no assurance can be given that these waiver projects ultimately
will not change the reimbursement system for long-term care from fee-for-
service to managed care negotiated or capitated rates. It is not possible to
predict which reforms of the health care system will be adopted and the
effect, if any, the reforms will have on New GranCare's business.
RISKS RELATED TO GROWTH STRATEGY.
New GranCare's growth strategy is to acquire long-term health care
facilities and related businesses in its existing markets and in other
targeted geographic areas in which regulatory and reimbursement policies are
favorable and where opportunities exist to improve operational efficiencies.
Due to possible rapid growth through acquisitions, New GranCare may be subject
to the uncertainties and risks associated with any expanding business such as
the continuing need of capital to fund acquisitions, the need to successfully
integrate the operations of acquired businesses in order to realize economies
of scale, the need to obtain synergies from the disparate operations and the
need to hire and incentivize competent, growth-oriented management. New
GranCare's expected growth may place significant demands on New GranCare's
financial resources and management. Most facilities to be operated by New
GranCare were acquired in groups, some of which have not met their expected
strategic or performance objectives.
GOVERNMENT REGULATION.
The federal government and all states in which New GranCare will operate
regulate various aspects of the Skilled Nursing Business to be operated by New
GranCare. In particular, the operation of long-term care facilities and the
provision of specialty medical services are subject to federal, state and
local laws relating to the adequacy of medical care, equipment, personnel,
operating policies, fire prevention, rate-setting and compliance with building
codes and environmental and other laws. The facilities to be operated by New
GranCare are subject to periodic inspection by governmental and other
regulatory authorities to assure continued compliance with various standards
and to provide for their continued licensing under state law and certification
under the
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Medicare and Medicaid programs. In the past, from time to time such facilities
have received statements of deficiencies from regulatory agencies. Should New
GranCare receive such statements of deficiency in the future, New GranCare
expects to implement plans of correction with respect to any such statement to
address any alleged deficiencies. While New GranCare will endeavor to comply
with federal, state and local regulatory requirements for the maintenance and
operation of its facilities, there can be no assurance that all facilities
will always be operated in full compliance. The failure to obtain or renew any
required regulatory approvals or licenses could adversely affect New
GranCare's operations.
New GranCare will also be subject to federal and state laws that govern
financial and other arrangements between health care providers. These laws
often prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the anti-
kickback provisions of the federal Medicare and Medicaid Patients and Program
Protection Act of 1987. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. In addition, many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. These laws vary from state to state and have seldom
been interpreted by the courts or regulatory agencies. Additionally, federal
enactments that expand the list of health care services subject to existing
federal referral prohibitions became effective on January 1, 1995. See
"Business--Regulation."
GEOGRAPHIC PAYOR CONCENTRATION.
A significant portion of New GranCare's total operating revenues are
expected to be derived from operations in California, Michigan and Wisconsin
and, in particular, from the California, Michigan and Wisconsin Medicaid
programs. Additionally, a significant portion of New GranCare's total revenues
will be attributable to New GranCare's operations in Indiana and Illinois. The
table below presents historical total operating revenues derived from the
Company's business in California, Illinois, Indiana, Michigan and Wisconsin as
a percentage of net patient revenues for the nine-month period ended September
30, 1996.
<TABLE>
<CAPTION>
PRIVATE PAY
MEDICAID MEDICARE AND OTHER TOTAL
-------- -------- ----------- -----
<S> <C> <C> <C> <C>
California........................... 6.9% 12.1% 5.6% 24.6%
Illinois............................. 2.8% 1.5% 1.7% 6.0%
Indiana.............................. 4.6% 3.3% 1.8% 9.7%
Michigan............................. 3.8% 6.9% 2.3% 13.0%
Wisconsin............................ 5.9% 4.1% 2.5% 12.5%
</TABLE>
Although New GranCare expects that geographic concentration will provide
operational advantages and efficiencies, the business prospects of New
GranCare will be significantly affected by general economic factors affecting
the California, Illinois, Indiana, Michigan and Wisconsin health care
industries and by the laws and regulatory environment in these states,
including Medicaid reimbursement rates. Medicaid reimbursement programs are
administered at the state level but subject to requirements imposed by the
federal government. Medicare is a federal program and reimbursement by private
pay and other payors is subject to market and/or negotiated rates.
COMPETITION.
The long-term care industry is highly competitive. New GranCare will compete
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a limited extent, price. New GranCare
will also compete with other providers in the acquisition and development of
additional facilities. New GranCare's long-term care competitors will include
national, regional and local operators of long-term care facilities, acute
care hospitals and rehabilitation hospitals, extended care centers, retirement
centers and community home health agencies, and similar institutions, many of
which have significantly greater financial and other resources than New
GranCare. In addition, New GranCare will compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital
expenditures on a tax-exempt basis or receive
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charitable contributions unavailable to New GranCare. There can be no
assurance that New GranCare will not encounter increased competition which
could adversely affect its business, results of operations or financial
condition.
ABSENCE OF PRIOR TRADING MARKET.
There is no existing trading market for the New GranCare Common Stock to be
received by the Company's shareholders in the Distribution and there can be no
assurance as to the establishment of an active trading market. New GranCare
expects to list its common stock on the NYSE. New GranCare's management
expects that approximately 23,401,992 shares of New GranCare Common Stock will
be outstanding after the Distribution. New GranCare Common Stock may
experience volatility following the Distribution until trading values become
established. As a result, it could be difficult to make purchases or sales of
New GranCare Common Stock in the market at any particular time. There can be
no assurance either as to the price at which New GranCare Common Stock will
trade following the consummation of the Distribution and the Merger or whether
such price will be significantly below the book value per share of New
GranCare Common Stock.
CERTAIN INDEMNIFICATION OBLIGATIONS.
Pursuant to the Distribution Agreement and Tax Allocation Agreement, New
GranCare has agreed to indemnify Vitalink with respect to certain losses,
damages, claims and liabilities which may arise from the consummation of the
transactions described herein, the conduct of the Skilled Nursing Business
prior to the Distribution Date and certain tax liabilities. Pursuant to the
Tax Allocation Agreement, New GranCare has agreed, upon the occurrence of
certain circumstances (all of which are under New GranCare's control), to
indemnify Vitalink from any losses in the event the proposed transactions are
not accorded tax-free treatment. See "The Distribution--Terms of the Tax
Allocation Agreement."
CERTAIN LEASE TERMS.
Eighteen of the facilities which New GranCare expects to operate in Indiana
and West Virginia are currently leased from an outside group of affiliated
entities. These leases are scheduled to expire in 1999, but negotiations are
currently under way with the lessors to extend the lease term for all 18
facilities. Unless concluded prior to the Distribution, New GranCare intends
to continue these negotiations. The leases for 14 of these facilities grant
the lessors the right, upon termination thereof, to purchase certain operating
assets which will be owned by New GranCare, at a price equal to the book value
of such assets. New GranCare does not anticipate that the lessors will
exercise this purchase right because Medicaid reimbursement available to those
facilities would be markedly reduced in the event of any such purchase.
Although New GranCare believes that the current leases will be extended or new
leases for such properties will be negotiated, in either case, upon acceptable
terms, there can be no assurance that either the Company or New GranCare will
be able to do so or that the lessors will not exercise their purchase rights.
RELATIONSHIP WITH VITALINK.
Following the Distribution and Merger, New GranCare will be prohibited from
competing with Vitalink in the institutional pharmacy business for a period of
three years. See "The Distribution--Terms of the Non-competition Agreement."
In the past, a significant portion of the Company's net income has been
derived from the Institutional Pharmacy Business. In 1995, the Company derived
approximately 51% of its net income from the Institutional Pharmacy Business.
The Non-competition Agreement will therefore restrict New GranCare's ability
to pursue a line of business that has historically contributed a significant
portion of the Company's net income.
Upon completion of the Merger, Vitalink will succeed to all of the Company's
existing pharmaceutical supply agreements with substantially all of the
Company's facilities, which facilities will be operated by New GranCare after
the Merger. These agreements are for five year terms. However, New GranCare
has agreed that for so long as Vitalink's limited guaranty of certain
obligations of New GranCare to HRPT is in effect, New
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<PAGE>
GranCare will not terminate any of such pharmaceutical supply agreements.
Accordingly, it is anticipated that such pharmaceutical supply agreements may
extend through December 31, 2010, the date when all present New GranCare
obligations to HRPT will be satisfied, subject to certain conditions. Gene E.
Burleson, Chairman of New GranCare, will become Chief Executive Officer of
Vitalink upon consummation of the Merger. Mr. Burleson and three other
directors of New GranCare will become directors of Vitalink upon the
consummation of the Merger. See "The Distribution--Terms of the Pharmaceutical
Supply Agreements" and "Management--Certain Relationships and Related Party
Transactions."
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BUSINESS
GENERAL
The Company is, and New GranCare expects to be, a leading provider of
comprehensive post-acute health care services, primarily skilled nursing care,
subacute and medically complex care, long-term acute hospital care,
inpatient/outpatient therapy, hospital contract management, assisted living,
hospice, home health care and adult day care. At present, New GranCare expects
to provide these services through 140 long-term care facilities (136 skilled
nursing facilities and four assisted living facilities), and twelve agencies
currently operated by the Company's home health division (home health, hospice
and private duty, each in the States of California, Indiana, Michigan and
Wisconsin). The Company continues to evaluate certain long-term care
facilities which are underperforming or do not fit within the Company's or New
GranCare's long-term strategic plans. All or a portion of these facilities may
be divested in the future. In addition, New GranCare will, through the
contract management business to be assumed by it, manage approximately 145
medical programs in acute care hospitals. In selected markets, the Company has
sought and New GranCare will continue to seek to operate these businesses as
an interrelated network of services to provide a continuum of cost-effective,
post-acute care. New GranCare's vision is to become the preeminent health care
provider in select markets by offering a full continuum of care to address the
needs of patients from the time of their discharge from acute care hospitals
until their recovery.
New GranCare's anticipated focus on the post-acute level of health care,
like the approach historically taken by the Company, will respond to general
demographic trends and health care cost containment initiatives of third-party
payors. As the number of people over the age of 65 continues to grow
significantly faster than the overall population, and advances in medicine and
technology continue to increase life expectancies, New GranCare anticipates
that the need for long-term care facilities and related services will continue
to increase. Additionally, the growing emphasis on cost containment measures
in the health care industry has caused third-party payors to seek lower cost
alternatives to hospital-based care. The subacute care and other post-acute
services to be provided by New GranCare respond to cost containment
initiatives of third-party payors by providing a lower cost alternative for
patients who continue to require a high level of medical and nursing care, but
whose medical condition permits discharge from the traditional acute care
hospital setting. Based on the Company's experience, New GranCare believes the
long-term care facilities that it plans to operate will have lower capital and
operating costs than acute care hospitals. New GranCare believes that it will
be able to offer complex subacute medical services to these patients generally
at a lower cost than acute care hospitals.
New GranCare's strategy will be to: (i) develop "cluster markets," comprised
of a significant concentration of skilled nursing and subacute beds and/or the
provision of diverse subacute services in selected markets, (ii) provide a
continuum of post-acute care comprised of medical and rehabilitative
treatments in a variety of alternative sites, (iii) establish collaborative
relationships with acute care hospitals and physicians in order to increase
referrals and provide a basis for the provision of higher margin services,
(iv) continue to shift to a higher acuity and higher quality mix patient
population, (v) grow through new construction of assisted living and skilled
nursing facilities in select clusters, and (vi) continue to grow through
selective acquisitions and (vii) expand specialty medical services, including
rehabilitation, respiratory, psychiatric, home health, hospice and adult day
care. Of particular importance to New GranCare's future growth will be (i) New
GranCare's ability to improve margins at existing facilities through portfolio
management, accelerated reserve enhancement through aggressive expansion of
the range of specialty medical services and programs offered by New GranCare
and the rollout of new systems and best operating practices, (ii) selective
acquisitions in targeted cluster markets and (iii) the de novo construction of
assisted living and skilled nursing facilities and acute care programs in
targeted cluster markets.
LONG-TERM CARE INDUSTRY
The demand for long-term health care is increasing because acute care
hospitals are driven by third-party payor cost containment initiatives to
discharge patients at earlier stages of recovery and because an increasing
number of patients have ailments that require extended recovery periods. This
is due not only to general demographic trends in the United States but also to
advances in medical technology. New technologies are
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<PAGE>
increasing the life expectancy of a growing number of patients who require a
high degree of care traditionally not available outside of acute care
hospitals. As life expectancies increase, the likelihood of contracting
diseases or ailments involving a protracted period of medical care and
recovery increases. As a result, individuals over the age of 65, particularly
those over 85, are the primary recipients of long-term post-acute care.
Although demand is increasing, industry data indicate that the total supply of
licensed skilled nursing beds available in the United States, currently
approximately 1.7 million, is growing substantially slower than the overall
population. Also, the addition of new beds in long-term care facilities is
presently restricted by regulation in many states, most of which require
entities that desire to enter the local long-term care market to apply for and
obtain Certificates of Need ("CON") or other approvals. The application and
approval process for a CON generally involves approval by a state regulatory
agency of the construction, acquisition or closure of a long-term care
facility, the addition or reduction of beds at a facility, or the addition of
services provided by a facility. The significant construction costs and start-
up expenses in some markets may further limit the number of new beds. Market
share data reflect that the industry is fragmented, with the 30 largest
operators accounting for approximately 25% of the total beds available.
According to the U.S. Bureau of the Census, approximately 1.4% of the people
65-74 years of age received care in long-term care facilities in 1990; this
percentage increased to 6% for people 75-84 years of age and to 25% for those
85 years of age and over. In addition, according to the U.S. Bureau of the
Census, the number of individuals over age 75 was approximately 11 million
(4.62% of the total population in the U.S.), in 1993. Additional increases are
expected in this segment of the population by the year 2000. Although there is
limited growth projected for the population of individuals over 65 years of
age between 1990 and 2000, a significant increase in the proportion of people
over age 85 is anticipated. The segment of the population over 85 years of
age, which comprises the largest percentage of residents at long-term care
facilities (53%), is the fastest-growing segment of the population, projected
to increase by more than 26%, from approximately 3.4 million, or 1.3% of the
total population in the U.S., in 1993, to more than 4.3 million, or 1.6% of
the total population, in the year 2000. By 2050, it is anticipated that the
nursing home population of those 85 years of age and older will be triple its
1990 level.
These demographic changes, coupled with increasing cost containment
initiatives by governmental and managed care payors have changed medical
practices, resulting in an increasing proportion of complex medical care being
delivered outside the acute care hospital setting. The health care industry
has responded by developing a range of post-acute care services, including
skilled nursing care and home health therapy to provide care following a
patient's hospital-based acute care treatment. The complex medical care and
intensive nursing care provided to patients with higher acuity disorders are
categorized as subacute care. This level of care is appropriately delivered in
a skilled nursing environment where New GranCare believes clinical outcomes
compare favorably to those achieved in acute care settings and where the cost
structure is significantly lower. New GranCare believes that subacute care
provided in a skilled nursing facility is often less expensive than hospital-
based care. Skilled nursing facilities are significantly less capital
intensive and do not require the specialized equipment used in acute care
hospitals. Labor costs are also lower than hospitals', which typically have a
higher physician to nursing staff ratio and significantly more administrative
personnel, including nursing staff not fully dedicated to providing care. As a
result of the ability of subacute care providers to achieve successful
outcomes at a significantly lower cost than acute care hospitals are generally
able to provide, hospital discharge planners, physicians and managed care and
insurance company case managers are referring an increasing number of patients
to long-term care facilities.
BUSINESS STRATEGY
New GranCare's principal objective will be to continue developing a
continuum of post-acute health care services in order to address market
demands created by ongoing changes in the health care delivery system, changes
in patient demographics, and pressures to contain the cost of delivering care.
In order to take advantage of the growth of the post-acute health care market,
New GranCare's strategy is to:
. Develop Cluster Markets. The Company has sought and New GranCare will
continue to seek to establish a significant presence in regional markets
by establishing clusters of skilled nursing facilities
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<PAGE>
and related specialty medical businesses that together form a continuum
of care. Each cluster will be developed where relationships with key
acute care hospitals and physicians provide a strong referral base and
where other favorable market characteristics exist. New GranCare will
evaluate the needs within each cluster and address these demands by
developing specialized programs in facilities most capable of serving a
particular market need. New GranCare believes, and the Company's
experience indicates, that local expertise coupled with a critical mass
of facilities will allow New GranCare to negotiate more effectively with
large contract payors (including managed care organizations), achieve
operating efficiencies, and gain access to critical referral sources.
Once a cluster market is developed with one or more services, additional
services can be introduced to further expand the continuum of care. New
GranCare intends to expand the eight cluster markets developed by the
Company located in Arizona, Colorado, Northern and Southern California,
Illinois, Wisconsin, Michigan, and South Carolina. New GranCare will
also operate concentrations of facilities in Indiana, Iowa and
Mississippi that will form the base for the expansion of services in
these areas.
. Provide a Continuum of Care. New GranCare's services will focus on the
needs of patients with medically complex conditions who do not require
acute care hospitalization. To serve these patients' needs fully, New
GranCare will aim to offer a full continuum of care whereby New GranCare
will provide medical and rehabilitative treatments in a variety of
alternative sites. These settings include skilled nursing and assisted
living facilities, subacute care and other specialty care units operated
in conjunction with acute care hospitals and home health. As patients
progress through stages of recovery, they may be served by different
elements of the continuum. Medical services provided include physical,
occupational, speech, respiratory and psychological therapies;
pharmaceutical treatments; and laboratory and radiology services. The
primary benefit of offering a full continuum of care is to provide
patients and payor sources with the most appropriate level of care in
the most cost-effective setting.
. Establish Collaborative Relationships. The Company has placed and New
GranCare will continue to place strategic emphasis on establishing
referral relationships with acute care hospitals and physicians. Based
on the Company's experience, New GranCare expects that a substantial
portion of its patients will be admitted upon discharge from acute care
hospitals. As part of its effort to strengthen the relationships
established with acute care hospitals by the Company, New GranCare
expects to continue a variety of collaborative programs originally
established by the Company. The most extensive of these programs are
contract management relationships whereby New GranCare will operate a
subacute medical unit in under-utilized space within an acute care
hospital. In this manner, New GranCare expects to work with, rather than
compete with, key referral sources. As such, New GranCare expects that
this contract business will strengthen its relationship with a given
hospital, while allowing the hospital or its physicians to place a
patient in a lower cost environment and expanding New GranCare's revenue
base. The acquisition of Cornerstone Health Management Company
("Cornerstone"), significantly increased the Company's presence in this
area and is expected to benefit New GranCare through the acquisition of
over 100 contracts to manage subacute, geriatric, psychiatric and
primary care programs for acute care hospitals in 17 states. Cornerstone
is a company that specializes in implementing and managing subacute and
other specialized medical programs.
. Improve Payor Mix. By expanding its subacute and home health care
services, New GranCare intends to shift its payor mix away from state-
reimbursed Medicaid programs toward a higher quality mix consisting of
Medicare, managed care and private-pay business. Generally, the
profitability of caring for private-pay and Medicare patients is higher
than that of Medicaid. Historically, the Company has been successful in
increasing the quality of its payor mix (Medicare, private, and other
pay) as a percent of total revenues from 48% in 1994 to 55% in 1995. New
GranCare believes that opportunities still exist to continue to improve
the quality of the Company's current payor mix.
. Grow through New Construction. In 1995 the Company expanded its capital
improvements program to include the development of newly constructed
facilities. With over $82.6 million in capital improvements since 1991,
the Company gained significant experience in facility development. In
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<PAGE>
September 1996 the Company opened SouthPointe HealthCare Center, its
first newly constructed facility in Milwaukee, Wisconsin. Several other
projects are under various stages of review. The Company and New
GranCare believe that an aggressive program to build new skilled nursing
and assisted living facilities as well as new programs such as long term
acute care wings in its existing facilities in selective cluster markets
will have a significant positive impact on New GranCare's operations.
New skilled nursing and assisted living facilities generally experience
a higher occupancy rate than older facilities and receive a greater
percentage of revenue from private pay sources. Additionally, the
Company and New GranCare believe that having a significant number of new
skilled nursing and assisted living facilities has the intangible
benefit of bettering the overall reputation of a company.
. Grow through Acquisitions. New GranCare intends to pursue a strategy of
growth through selected acquisitions in order to accelerate the
achievement of its objectives. During 1995, the Company completed two
significant transactions--the acquisition of Cornerstone and the merger
with Evergreen Healthcare, Inc. ("Evergreen"). New GranCare intends to
continue pursuing acquisitions in order to further develop its continuum
of care in existing markets and expand into new markets where
demographics, economic conditions, and regulatory and reimbursement
policies are considered favorable.
. Expand Specialty Medical Services. New GranCare intends to continue to
increase the specialty medical services currently provided by the
Company so as to further expand the continuum of care. The existing
specialty medical services currently provided by the Company include
providing home health care, laboratory, radiology, subacute care,
pharmacy and other specialized services. The Company is, and New
GranCare will continue, expanding subacute services by developing
innovative programs with managed care providers, acute care hospitals
and physician groups, which may include sharing the costs and benefits
of providing subacute services. New GranCare believes that providing a
higher level of care through the expansion of its specialty medical
services should improve New GranCare's payor mix, expand its customer
base and generate increased operating margins for its skilled nursing
divisions. While the Merger will have the effect of lowering New
GranCare's percentage of revenue derived from specialty medical services
from the level achieved by the Company in the past, New GranCare
believes that significant opportunities will exist to expand the
percentage of its revenue derived from specialty medical services other
than pharmacy. See "The Distribution--Terms of Non-competition
Agreement."
Skilled Nursing Services and Subacute Care
As of January 1, 1997, the Company operates 140 long-term care facilities,
including 136 skilled nursing and four assisted living facilities, with 17,597
licensed beds in 15 states, all of which are currently operated by the
Company. The Company continues to evaluate certain long-term care facilities
which are underperforming or do not fit within the Company's or New GranCare's
long-term strategic plans. All or a portion of these facilities may be
divested in the future. All of the long-term care facilities to be operated by
New GranCare are certified as "skilled nursing facilities" by appropriate
regulatory agencies, other than the four assisted living facilities, which are
located in states that do not require such certification. The facilities to be
operated by New GranCare focus on the care of medically dependent patients
with multiple medical or behavioral problems requiring continuing special care
and treatment. Skilled nursing care is rendered in such facilities 24 hours a
day by registered, licensed practical or vocational nurses and nurses' aides
administering prescribed medical services. Patients in the facilities to be
operated by New GranCare also receive assistance in matters such as bathing,
dressing, medication and diet. All patients in such facilities receive routine
care which includes basic nursing care, room and board, housekeeping and
laundry services and dispensing of medication. These basic services are a
platform for the delivery of more intensive medical rehabilitative and
subacute care. New GranCare expects to provide physical, occupational, speech,
respiratory and psychological therapy services in each of its long-term care
facilities, a majority of which will be outsourced. The Company currently
provides the aforementioned services on a similar basis. The four assisted
living facilities to be operated by New GranCare provide furnished
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rooms and suites designed for individuals who are either able to live
independently within a sheltered community or who require minimal nursing
attention. The ADL services (assistance with activities of daily life)
currently provided by the Company in the assisted living facilities include
protective oversight, food, shelter, bathing, dressing, eating,
transportation, toiletry and related services that enhance the quality of a
resident's life. New GranCare intends to continue providing these services.
The Company has implemented and New GranCare will continue certain specialty
medical programs in all of its skilled nursing facilities certified to provide
care to Medicare patients (including more extensive subacute programs) in
order to provide additional services and accelerate growth and profitability.
New GranCare also expects to operate 34 specialized units with 710 beds
located in certain long-term care facilities, currently being operated by the
Company, which provide higher acuity, subacute and other care to medically
complex patients. These units presently include transitional rehabilitation
programs and specialized units for cancer, HIV and wound care patients, as
well as Alzheimer's care, subacute rehabilitation and hospice care. These
specialized units will compete with acute care and rehabilitation hospitals
which New GranCare believes typically charge rates that are often twice the
rates historically charged by the Company for comparable services. New
GranCare intends to expand its capabilities in this area through collaborative
efforts with acute care specialists. After giving effect to the Distribution
and Merger, it is anticipated that New GranCare's skilled nursing facilities,
on a pro forma basis, accounted for 86.7% of its net revenues for the 6 months
ended June 30, 1996.
Contract Management
Through the acquisition of Cornerstone by the Company in April 1995, New
GranCare will benefit from a contract management business that specializes in
the implementation and management of geriatric specialty programs for acute
care hospitals. The Company's contract management business which will be
assumed by New GranCare includes approximately 145 programs in acute care
hospitals located in 20 states (with an additional approximately 10 contracts
pending) as of January 1, 1997. Programs managed on behalf of acute care
hospitals include subacute skilled nursing, geriatric mental health, specialty
acute hospitals and geriatric primary care networks and other ancillary
programs. Cornerstone is generally responsible for managing the clinical and
operational aspects, including quality control, of the programs it
administers. Cornerstone receives a monthly management fee, typically based on
the number of beds it manages under a contract. Program design and
implementation is handled by a team of clinical, financial and reimbursement
experts employed by Cornerstone. Following implementation, Cornerstone
provides a program administrator who is supported by a centralized staff of
experts, who are employed by Cornerstone, with care being provided primarily
by employees of the hospital. The number of experts provided by Cornerstone
depends on the type of program being administered, with routine subacute
skilled nursing generally requiring only a Cornerstone program administrator
who oversees the hospitals' employees, and geriatric mental health generally
requiring a Cornerstone program administrator as well as up to seven
Cornerstone experts who administer care.
Other Services
The home health care operation to be assumed by New GranCare was established
by the Company in 1992 to provide skilled nursing services, rehabilitation
therapy and home health aides. This operation is comprised of home health care
agencies located in California, Indiana, Michigan and Wisconsin encompassing
twelve agencies (home health, hospice and private duty in each of the
aforementioned states). Services include intermittent visits, hourly care,
infusion therapy and a specialty program for terminally ill patients. New
GranCare believes that following the Distribution and Merger, it will be well
positioned to expand these existing home health services as well as adult day
care operations in current and additional markets. The Company acquired one
home health care agency and one hospice in Michigan and one home health agency
in Indiana during 1996 and New GranCare intends to evaluate opportunities in
other states where it will have operations.
The Company is developing and New GranCare intends to continue developing a
variety of laboratory services at several facilities, including pathology and
gastrointestinal analysis. New GranCare will operate a wholly-owned subsidiary
that will provide such services in South Carolina. It will also have an equity
ownership
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interest in an X-ray provider which serves certain of the facilities to be
operated by it in Michigan. Further, New GranCare will provide a variety of
therapy services to patients at its facilities and to outpatients at certain
of its facilities. These services (which are currently being provided by the
Company) include physical, occupational, speech, respiratory and psychological
therapies.
MARKETING AND DEVELOPMENT OF PAYOR SOURCES
New GranCare's marketing strategy is to establish and maintain cooperative
relationships and networks with physicians, acute care hospitals and other
health care providers, with an emphasis on specialists who treat ailments
involving long-term care and rehabilitation. These referral networks will form
a strong basis for increasing occupancy levels at skilled nursing facilities
to be operated by New GranCare for improving the payor mix of such facilities.
New GranCare intends to continue the incentive program created by the Company
which motivates facility administrators to spend time in the community
developing relationships in order to increase awareness of facilities and
services to be offered by New GranCare. New GranCare will employ promotional
literature focusing on its philosophy of care, service capabilities, quality
of employees and family assistance programs to support local marketing
efforts.
Most of the facilities to be operated by New GranCare are currently operated
as part of a marketing cluster by the Company. The marketing program of each
cluster will be tailored to the health care needs, referral sources and
demographic and economic characteristics of the local market in which the
cluster is located. Each facility administrator will be expected to contribute
to the development of a detailed strategic plan and specific operating goals
for each cluster. Local managers of Cornerstone and home health operations to
be operated by New GranCare also will be expected to participate in the
strategic planning and marketing process to coordinate New GranCare's efforts
across the continuum of post-acute care. Moreover, each of the regional
service centers will be expected to coordinate the activities of the clusters
within the region, as well as manage key relationships with managed care
providers and promote New GranCare's expertise in rehabilitation and subacute
services. New GranCare's therapy providers will also be expected to promote
the capabilities of its facilities within their local market area, in addition
to promoting their individual therapy services.
New GranCare also plans to take advantage of other opportunities for
increased profitability, including joint ventures with health care providers
such as health maintenance organizations ("HMOs"). The Company is establishing
relationships with managed care providers which it believes will increase its
subacute care business, which are anticipated to benefit New GranCare. The
cluster market approach is expected to give New GranCare the enhanced ability
to serve large providers of managed care within its targeted markets.
Typically, patients referred by managed care providers (including HMOs and
preferred provider organizations) generate significantly higher revenues per
patient day. New GranCare's ability to provide subacute and specialty medical
services at a lower cost than acute care hospitals will be a competitive
advantage in becoming the provider of choice for these managed care providers.
Following the Distribution and Merger, New GranCare expects to derive an
increasing proportion of its business from managed care and similar sources.
COMPETITION
New GranCare will be one of the largest publicly traded nursing home
companies in the country in terms of the number of beds owned, managed or
leased. The long-term care facilities to be operated by New GranCare compete
in fifteen states on a local and regional basis with other long-term health
care providers. Some competing operators have greater financial resources than
New GranCare will have following the Distribution and Merger and some are non-
profit or charitable organizations. The management of New GranCare, based on
its experience with the Company, expects that significant competitive factors
will include the quality and spectrum of care and services provided, the
reputation of the medical personnel employed, the physical appearance of the
facilities and, in the case of private-pay patients, the level of charges for
services. The management of New GranCare also believes that New GranCare's
facilities will compete on a local and regional basis, rather than on a
national basis. As a result, New GranCare will seek to meet competition in
each locality or region, as the case may be, by improving the quality and type
of services provided in and the appearance of
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its facilities, by establishing a reputation within the local medical
communities for providing quality care, and by responding appropriately to
regional variations in demographics and preferences. Each facility to be
operated by New GranCare will have a Medical Director who will assess patient
needs, coordinate care plans, and, as a member of the local medical community
will be familiar with local health care concerns. Historically, regulations
such as building code requirements and CON requirements have often deterred
the construction of long-term care facilities. Recently, one state in which
the Company operates, Indiana, has eased its CON requirements to allow
construction based on a standard other than "need," which may result in
increased competition in the long-term care market. There is no price
competition with respect to Medicare and Medicaid patients since revenues for
services administered to such patients are based on strictly controlled fixed
rates and cost reimbursement principles.
Cornerstone is one of the nation's premier contract providers of specialty
healthcare services for the elderly. This division, which will be operated by
New GranCare, will manage approximately 145 programs (with approximately 10
additional contracts pending) with acute care hospitals in 20 states.
Cornerstone develops, manages and operates specialty geriatric programs which
include subacute skilled care, mental health, senior health centers, rural
health clinics and ancillary services. In addition, Cornerstone operates four
long-term acute care hospitals through lease or management arrangements.
Cornerstone is generally recognized as the only "full service" geriatric
provider within the industry. Although the Company and New GranCare are not
aware of any companies that compete with Cornerstone on a national basis or
which offer the same array of services provided by Cornerstone, other contract
management companies may compete with Cornerstone in some markets along
discrete product lines.
Home health currently has a market presence and operations in four states.
The competition among home health organizations is intense and is based on
quality and breadth of service and price. Competitors vary from large national
chains to regional and local agencies as well as hospital-based organizations.
New program development in infusion therapy with Vitalink and adult day care
will offer integrated services not currently being provided by New GranCare's
competitors in these states.
REGULATION
Licensing. All of the long-term care facilities and home health agencies to
be operated by New GranCare are required to be licensed on an annual basis by
state health care agencies and are subject to extensive federal, state, and
local regulatory and inspection requirements. License and certification
standards vary from jurisdiction to jurisdiction and undergo periodic
revision. These requirements relate to, among other things, the quality of the
professional care provided, the qualification of administrative personnel and
professional or licensed staff, the adequacy of the facility and its
equipment, and continuing compliance with laws and regulations relating to the
operation of the facilities. The failure to obtain, renew or maintain any of
the required regulatory approvals or licenses could adversely affect expansion
of New GranCare's business and could prevent the location involved from
offering services to patients. The Company believes it is currently in
substantial compliance with licensing requirements; however, there can be no
assurance that New GranCare will be able to maintain such licenses for its
facilities or that New GranCare will not be required to expend significant
funds in order to meet such requirements.
Medicare and Medicaid. New GranCare expects to derive a significant portion
of its revenues from federal and state reimbursement programs. Substantially
all of the skilled nursing facilities and home health agencies to be operated
by New GranCare are certified to receive benefits under Medicare and under
joint federal and state funded programs administered by the various states to
provide health care assistance to low income individuals, generally known as
"Medicaid." These programs are highly regulated and subject to periodic
change.
Medicare utilizes a cost-based reimbursement system for nursing facilities
and home health agencies which, subject to limits fixed for the particular
geographic area, reimburse nursing facilities and home health agencies for
reasonable direct and indirect allowable costs incurred in providing "routine
services" (as defined by the program) as well as capital costs and ancillary
costs. The Company is filing Routine Cost Limit Exception
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appeals for the facilities which exceed the limits and fit the criteria as
exception candidates. New GranCare may benefit from exceptions to the routine
cost limits. Allowed costs include nursing, administrative and general,
dietary, housekeeping, laundry, social services, activities, central supply,
maintenance and plant operations as well as ancillary and capital costs.
For federal fiscal years 1994 and 1995, the Omnibus Budget Reconciliation
Act of 1993 ("OBRA '93") froze the routine cost limits for nursing facilities
and the per visit limits on reasonable costs imposed on home health agencies.
In addition, OBRA '93 imposed new restrictions on the amount of relief which
can be realized through the Routine Cost Limit Exception appeal process. For
fiscal 1996, the 1993 imposed freeze on routine cost limits was lifted. In
addition, the inflation indexes were adjusted which lowered the routine cost
limits for 1996 and prior years.
Medicaid programs currently exist in all of the states in which the Company
has and New GranCare will have health care facilities. While these programs
differ in certain respects from state to state, they are all subject to
requirements imposed by the federal government, which provides approximately
50% of the funds available under these programs. California provides
reimbursement for skilled nursing services at a flat daily rate, as determined
by the responsible state agency. In all other states in which New GranCare
expects to operate, payments are based upon specific cost reimbursement
formulas established by that state, which formulas are generally based on
historical costs with adjustments for inflation.
For the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996 the Company derived approximately 24.7%, 30.2% and 38.6%,
respectively, of its net patient revenues from Medicare and approximately
51.6%, 44.7% and 38.6% of its net patient revenues from Medicaid, and New
GranCare expects to derive a significant portion of its revenue from such
federal and state reimbursement programs. Both governmental and private-payor
sources have instituted cost containment measures designed to limit payments
made to long-term health care providers, and there can be no assurance that
future measures will not adversely affect reimbursements to New GranCare.
Furthermore, government reimbursement programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which could materially decrease the
service covered or the rates paid to New GranCare for its services. There has
been, and New GranCare expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term care services and other
services to be provided by New GranCare. Proposals to reduce the growth in
Medicare and Medicaid expenditures are under active consideration in the
current session of Congress. New GranCare cannot predict at this time whether
any of these proposals will be adopted or, if adopted and implemented, what
effect such proposals would have on New GranCare. There can be no assurance
that payments under state or federal governmental programs will remain at
levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs,
particularly with respect to the Medicaid programs, which generally provide
lower reimbursement rates than the Medicare program. In addition, there can be
no assurance that facilities to be operated by, and the services and supplies
to be provided by, New GranCare will meet or continue to meet the requirements
for participation in such programs.
Although federal regulations do not recognize state budget deficiencies as a
legitimate ground to curtail funding of their Medicaid cost reimbursement
programs, states have nevertheless curtailed such funding in the past. No
assurance can be given that states will not do so in the future or that the
future funding of Medicaid programs will remain at levels comparable to
present levels. Federal law currently recognizes that Medicaid and Medicare
reimbursement rates for nursing facilities must be reasonable and adequate to
meet the costs that must be incurred by efficiently operated facilities in
order to provide care and services in conformity with applicable laws,
regulations and quality and safety standards. However, legislative proposals
in Congress which have been endorsed by the National Governors' Association
would eliminate that protection. Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings and interpretations,
determinations by reimbursement intermediaries, and governmental funding
restrictions, all of which may materially increase or decrease the rate of
program payments to long-term care facilities expected to be operated
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by New GranCare. In addition, there can be no assurance that facilities owned,
leased or managed by New GranCare, now or in the future, will initially meet
or continue to meet the requirements for participation in such programs.
New GranCare believes that the facilities to be operated by it are in
substantial compliance with the various Medicare and Medicaid regulatory
requirements currently applicable to them, including the requirements of the
Omnibus Budget Reconciliation Act of 1987 ("OBRA"). In the ordinary course of
its business, however, the Company has received and New GranCare may receive
notices of deficiencies for failure to comply with various regulatory
requirements. New GranCare will review such notices and take appropriate
corrective action. Historically, in most cases, the Company and the reviewing
agency have been able to agree upon the steps to be taken to bring a facility
into compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take a number of actions against a
facility. Effective October 1, 1990, OBRA increased the enforcement powers of
state and federal certification agencies. Additional sanctions have been
authorized to correct noncompliance with regulatory requirements, including
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicare or Medicaid programs and,
in extreme circumstances, revocation of a facility's license. In certain
circumstances, conviction of abusive or fraudulent behavior with respect to
one facility may subject other facilities under common control or ownership to
disqualification from participation in Medicare and Medicaid programs. In the
past, notices of deficiencies and citations have not had a material adverse
effect on the Company.
The Department of Health and Human Services ("DHS") has released new survey
and certification regulations under OBRA, which went into effect July 1, 1995.
These new regulations make significant changes in the process of surveying
skilled nursing facilities under Medicare and Medicaid and for certifying
these facilities to meet federal requirements for participation in the
Medicare and Medicaid programs and impose a graduated system of penalties to
match the severity of violations of laws passed by Congress and DHS which
implement health, safety and quality standards for residents of long-term care
facilities. These new regulations also set forth a number of alternative
remedies, in addition to those set forth above, which may be imposed by
surveying agencies on facilities that do not comply with the federal
requirements (instead of, or in addition to, termination of such facilities'
participation in Medicare and Medicaid) and specify remedies for state survey
agencies that do not meet surveying requirements. These regulations have not
had a material adverse effect on the Company's operations and New GranCare
does not believe that they will have a material adverse effect on New
GranCare's operations.
Certificate of Need. Of the states in which New GranCare expects to operate
skilled nursing facilities, Tennessee, Mississippi, West Virginia, Iowa, Ohio,
Michigan, Wisconsin, South Carolina, and Georgia have a CON statute. In states
that have such statutes, approval by the appropriate state health regulatory
agencies must be obtained and a CON or similar authorization issued prior to
certain changes in the management of a long-term care facility, the addition
of new beds or services or the making of certain capital expenditures. To the
extent CON approvals are required for expansion of New GranCare's operations,
such expansion may be delayed or otherwise affected. Furthermore, certain
states, including Mississippi, Ohio, West Virginia, and Wisconsin, have now or
in the past imposed moratoriums on the development of new nursing facility
beds. Some states require separate approval to obtain Medicare and Medicaid
reimbursement for facility costs. Some states also require approval of capital
expenditures under Section 1122 of the Social Security Act and provide
Medicare and Medicaid reimbursements of capital costs (depreciation, interest
and lease expense) for approved capital expenditures only.
Referral Restrictions. New GranCare will also be subject to federal and
state laws which govern financial and other arrangements between health care
providers. These laws often prohibit certain direct and indirect payments or
fee splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Such laws include the
anti-kickback provisions of the federal Medicare and Medicaid Patients and
Program Protection Act of 1987. These provisions prohibit, among other things,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. In addition, some states restrict
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certain business relationships between physicians and pharmacies, and many
states prohibit business corporations from providing, or holding themselves
out as a provider of, Medicaid care. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs as well as civil and criminal
penalties. These laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies. Additionally, OBRA '93
contains provisions that expand the list of health care services subject to
existing federal referral prohibitions. This expanded referral ban became
effective on January 1, 1995.
OBRA '93 also contains referral restrictions related to physician ownership
interests, and restricts referrals by a physician to an entity with which he
has a "compensation arrangement," which is broadly defined to include any
arrangement involving "remuneration." However, there are a number of
exceptions for certain type of compensation arrangements, including exceptions
for personal service arrangements, space and equipment leases, employment
relationships, certain prepaid health plans, isolated transactions and certain
other payment arrangements that are consistent with the fair market value, so
long as these arrangements meet certain specific criteria. With respect to
physician ownership interests, an exception exists for ownership of investment
securities that may be purchased on terms generally available to the public
and that are listed on a national exchange (including the NYSE) or any
regional exchange, provided that the corporation issuing such investment
securities has at the end of its most recent fiscal year, or on average for
its previous three fiscal years, shareholders' equity exceeding $75.0 million.
New GranCare anticipates that the New GranCare Common Stock will be traded on
the NYSE and that its shareholders' equity will exceed the minimum
shareholders' equity. Although it is possible that certain arrangements
between New GranCare and physicians will be affected by these referral
restrictions, New GranCare does not believe that the restrictions will have a
material adverse effect on revenues.
The Medicare program reimburses skilled nursing facility services, pharmacy
services and home health services based on reasonable costs of care, subject
to certain limitations. In determining allowable costs, the Medicare program
will not recognize as allowable the charge made for services provided to the
skilled nursing facility or home health agency by an entity that is related
through substantial ownership or substantial control, unless it qualifies for
an exception. Instead, Medicare will recognize as allowable only the
supplier's cost of (rather than its charge for) supplying the service.
Contract Management Regulation. Contract managers of geriatric mental health
centers, subacute care units, specialty acute hospitals and senior health
centers are not typically subject to direct regulation, although New GranCare
may be held responsible for violation of certain federal and state laws, such
as the referral restrictions described above. Further, the facilities to be
managed by New GranCare are subject to regulation. Management contracts with
these facilities may hold New GranCare accountable in certain instances to a
facility which is cited for non-compliance with regulatory requirements.
Further, there can be no assurance that the facilities to be managed by New
GranCare will not be subject to statutory or regulatory changes which might
adversely impact these facilities and, indirectly, New GranCare's contract
management business.
Home Health Regulation. Home health agencies must be certified by HCFA to
receive reimbursement for services and supplies from Medicare and Medicaid. As
a condition of participation in the Medicare and Medicaid home health care
program, HCFA requires compliance with certain standards with respect to
personnel, services and supervision; the preparation of annual budgets, cost
reports, and quarterly cost and visit analyses; and the establishment of a
professional advisory group that includes at least one practicing physician,
one registered nurse and other representatives from related disciplines or
consumer groups. Home health agencies are surveyed for compliance with these
requirements at least once every 15 months. Failure to comply may result in
termination of the agency's Medicare and Medicaid provider agreements. In
1989, Congress directed the Department of Health and Human Services ("DHS") to
develop and implement a range of intermediate, or alternative, sanctions for
home health agencies. DHS published proposed rules to implement this authority
in 1991; however, these rules have not been finalized and thus have not taken
effect. The proposed sanctions would include civil monetary penalties,
temporary management, suspension of payment for new admissions, and other
sanctions.
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Health Care Reform. While neither the present administration's health care
reform proposals nor alternative health care reform proposals introduced by
certain members of Congress were adopted in 1995, the Health Insurance
Portability and Accountability Act of 1996 (the "Accountability Act") was
passed by Congress and signed into law by President Clinton on August 21, 1996
and will generally take effect July 1, 1997. While the Accountability Act
contains provisions regarding health insurance or health plans, such as
portability and limitations on pre-existing condition exclusions, guaranteed
availability and renewability, it also contains several anti-fraud measures
that significantly change health care fraud and abuse provisions. Some of
those provisions include (i) creation of an anti-fraud and abuse trust fund
and coordination of fraud and abuse efforts by federal, state and local
authorities, (ii) extension of the criminal anti-kickback statute to all
federal health programs, (iii) expansion of and increase in the amount of
civil monetary penalties and establishment of a knowledge standard for
individuals or entities potentially subject to civil monetary penalties, and
(iv) revisions to current sanctions for fraud and abuse, including mandatory
and permissive exclusion from participation in the Medicare or Medicaid
programs. Additionally, the Accountability Act provides mechanisms for further
guidance to health care providers on health care fraud and abuse issues in the
form of additional safe harbors or modifications to existing safe harbors,
fraud alerts and the issuance of advisory opinions by DHS. New GranCare does
not believe that the Accountability Act will have a material adverse effect on
New GranCare's operations.
Health care reform remains an issue for health care providers. Many states
are currently evaluating various proposals to restructure the health care
delivery system within their jurisdictions. It is uncertain at this time what
legislation on health care reform will ultimately be implemented or whether
other changes in the administration or interpretation of governmental health
care programs will occur. New GranCare anticipates that federal and state
legislatures will continue to review and assess various health care reform
proposals and alternative health care systems and payment methodologies. New
GranCare is unable to predict the ultimate impact of any federal or state
restructuring of the health care system, but such changes could have a
material adverse impact on the operations, financial condition and prospects
of New GranCare.
EMPLOYEE TRAINING AND DEVELOPMENT
As a policy matter, New GranCare believes that nursing and professional
staff retention and development will be a critical factor in the success of
New GranCare. Accordingly, New GranCare's compensation program will provide
ongoing performance evaluations and salary reviews. Additionally, New GranCare
will provide financial incentives to its employees to encourage facility staff
motivation and productivity and to reduce turnover rates. New GranCare
believes that wage rates for professional nursing staff currently being used
by the Company are commensurate with market rates. New GranCare also intends
to provide employee benefit programs that New GranCare believes, as a package,
will exceed industry standards. In the past, the Company has not experienced
any significant difficulty in attracting or retaining qualified personnel, and
New GranCare does not anticipate any difficulty in this regard in the future.
In addition, New GranCare intends to continue the ongoing informal training
and education programs currently provided by the Company for its nursing
staff, both professional and non-professional, as well as its non-nursing
staff, both professional and non-professional. With respect to education and
training programs conducted by entities other than New GranCare, New GranCare
expects to provide tuition reimbursement to all levels of staff to encourage
continual learning in all aspects of facility operations.
Examples of training, development and education programs offered by the
Company, and which will be offered by New GranCare to its management employees
include the following: (i) communication skills, (ii) supervisory skills,
(iii) conflict-resolution skills, (iv) diversity training, (v) performance
management skills, and (vi) hiring skills.
The Company has been offering certification programs to its nursing
assistants for a considerable period of time. This three-week program,
conducted on site at the Company's facilities consists of two weeks of
classroom work and one week of clinical preparation. Upon completion,
graduates are generally hired into one of the Company's facilities located
near the facility where the certification course was offered. The program also
will be continued by New GranCare.
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EMPLOYEES
As of January 1, 1997, the Company had approximately 16,000 full-time and
part-time employees, with 300 full-time employees at its corporate and
regional offices. Following the Distribution and Merger, New GranCare will
have approximately 13,800 full-time and part-time employees, with 250 full-
time employees at its corporate and regional offices. New GranCare estimates
that approximately 20% of these employees will be physicians, nurses and
professional staff. In addition, New GranCare will have collective bargaining
agreements with unions representing employees at 21 facilities. Currently, the
Company is negotiating two collective bargaining contracts involving
facilities in two states. New GranCare cannot predict the effect continued
union representation or organizational activities will have on New GranCare's
future activities. However, the Company has never experienced any material
work stoppages and New GranCare believes that its relations with its employees
and the SEIU will continue to be good.
INSURANCE
The Company maintains, and New GranCare will continue to maintain, on behalf
of itself and its subsidiaries, annual Blanket Property Damange/Business
Interruption insurance in the amount of $750.0 million and annual
General/Professional Liability insurance in the amount of $100.0 million, both
of which policies are on an occurrence form. New GranCare will also require
that physicians practicing at its long-term care facilities carry medical
malpractice insurance to cover their individual practice. New GranCare expects
to maintain a captive insurance company for the purposes of paying worker's
compensation claims as well as reinsurance contracts to minimize its insurance
exposure.
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 New GranCare, except
as described below, there are currently no proceedings which, individually or
in the aggregate, after taking into account the insurance coverage maintained
by the Company (and to be maintained by New GranCare) would have a material
adverse effect on New GranCare's financial position or results of operations.
On September 9, 1996, a shareholder of the Company filed a civil complaint
in the Superior Court of the State of California, County of Los Angeles:
Howard Gunty Profit Sharing v. Gene E. Burleson, Charles M. Blalack,
Antoinette Hubenette, Joel S. Kanter, Ronald G. Kenny, Robert L. Parker,
William G. Petty, Jr., Edward V. Regan, Gary U. Rolle and GranCare, Inc., Case
No. DC156996. This complaint alleges, generally, that the defendants have
breached their fiduciary duties owed to the Company's shareholders by failing
to take all reasonable steps necessary to ensure that the Company's
shareholders receive maximum value for their shares of Company Common Stock in
connection with the proposed Distribution and Merger. The complaint further
alleges that the directors of the Company acted in concert as part of a scheme
to deprive the plaintiffs unfairly of their investment in the Company and to
unjustly enrich themselves. The plaintiffs are seeking (i) an injunction
prohibiting the consummation of the proposed Distribution and Merger or
(ii) alternatively, if the proposed Distribution and Merger are consummated,
to have such transactions rescinded and set aside and an order requiring the
defendants to account to the plaintiff for all profits realized as a result of
the proposed Distribution and Merger. In addition, the plaintiffs are seeking
unspecified compensatory damages, costs and to have the complaint certified as
a class action. The Company intends to vigorously defend this lawsuit.
On December 19, 1996, a Conditional Agreement and Stipulation of Settlement
(the "Settlement Agreement") was reached in the above referenced litigation.
Completion of the settlement is subject to notice to the proposed class and a
hearing, as outlined below, and final consideration by the court, among other
conditions and considerations.
Class counsel and counsel for the defendants intend to seek Final Approval
(as defined in the Settlement Agreement) of the proposed settlement and
dismissal of the claims that have been or could have been asserted in the
litigation by plaintiff and the Settlement Class (as defined below).
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Plaintiff's counsel investigated the facts and circumstances underlying the
issues raised in the Complaint and researched the law applicable thereto. The
investigation by plaintiff's counsel has included a review and analysis of the
Company's public disclosures, an analysis of its financial statements, a
review of other non-public information and a review of the draft Proxy
Statement/Prospectus submitted to the Securities and Exchange Commission in
anticipation of the Distribution and Merger. Plaintiff's counsel submitted
suggestions regarding the disclosure pertaining to the proposed Distribution
and Merger which have been considered in the context of the overall disclosure
contained in the Proxy Statement/Prospectus. As a result of comments received
from plaintiff's counsel and the Securities and Exchange Commission, a number
of disclosure enhancements have been made regarding the proposed Distribution
and Merger and related transactions. The Company and the plaintiff believe
that these disclosure enhancements will aid the shareholders in their
understanding and consideration of the proposed Distribution and Merger and
related transactions.
The Defendants have vigorously denied all liability and allegations of
wrongdoing, and the settlement is not to be construed for any purpose as an
inference or admission of liability or wrongdoing by them. The plaintiffs and
defendants have concluded that it is desirable to settle the action to avoid
the further expense, burden and uncertainty of this litigation, and to put to
rest all controversies which were or could have been asserted in connection
with any of the matters set forth in the Complaint.
In connection with the settlement the class shall be defined as set forth
below (the "Settlement Class"):
All persons and entities who owned at any time one or more shares of
Company Common Stock, from and including September 2, 1996 through and
including December 19, 1996, excluding the following: the defendants,
members of the families of the defendants; any entity in which any
defendant owns or holds a controlling interest; and the legal
representatives, heirs, successors or assigns of any such excluded parties.
The settlement also provides, in summary, that the plaintiff or his counsel
may submit an application, subject to court review and approval, seeking an
award of attorney's fees and expenses in an aggregate amount of no more than
$350,000. Defendants will not oppose such application to the extent the
application does not seek more than $350,000, and the Company will pay the
amount the court awards up to $350,000, which is the maximum possible payment
exposure of the Company under the Settlement Agreement.
The effect of the proposed settlement will be to extinguish the claims
contained in the action, along with granting of a general release from other
claims, whether asserted or not, as allowed by law.
Current shareholders of record will receive notice of a hearing to determine
whether the proposed settlement of this action is fair, reasonable and
adequate and should be approved by the court. As of this time, the hearing
date has not been set.
Under the proposed settlement agreement, class members will be given the
opportunity to be excluded from the Settlement Class, subject to certain
conditions. If the proposed Settlement Agreement is approved in final form by
the court, it will be binding on all class members who have not previously
been excluded from the Settlement Class.
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THE DISTRIBUTION
This section of the Prospectus describes certain aspects of the proposed
Distribution. For information describing certain aspects of the Merger, see
"Description of the Transactions" and "The Merger Agreement" in the Proxy
Statement/Prospectus. The descriptions of the various agreements contained
herein, including, without limitation, the Distribution Agreement, Employee
Benefits Agreement, Non-competition Agreement, Shareholders Agreement and the
Tax Allocation Agreement, do not purport to be complete and are qualified in
their entirety by reference to forms of such agreements which are attached
either as annexes to the Proxy Statement/Prospectus or filed as an exhibit to
the Registration Statement of which this Prospectus is a part, which annexes
and exhibits, as the case may be, are incorporated herein by reference. All
Company shareholders are urged to read such agreements in their entirety.
REASONS FOR THE DISTRIBUTION
Because the assets and liabilities relating to the Institutional Pharmacy
Business conducted by the Company are the only assets that Vitalink is willing
to acquire in the Merger, the Company determined to effect the Distribution.
Both the Distribution and the Merger are intended to be tax-free to the
Company's shareholders for federal income tax purposes, except to the extent
that cash payments are received for fractional shares.
For information concerning the background and reasons for the Distribution
and the Merger, see "Description of the Transactions--GranCare's Reasons for
the Merger; Recommendation of the Board of Directors of GranCare" and "--
Vitalink's Reasons for the Merger" in the Proxy Statement/Prospectus. As
indicated therein, the Company believes that the Distribution and the Merger
are fair to and in the best interests of the Company's shareholders for a
number of reasons including that Company shareholders will be able to
participate as equity owners in a significantly larger institutional pharmacy
business, which the Company believes will generate financial and operational
synergies and other financial benefits. At the same time, shareholders will
continue to participate as equity owners in the Skilled Nursing Business to be
conducted by New GranCare.
CONTRIBUTION OF SKILLED NURSING BUSINESS TO NEW GRANCARE
Prior to the Distribution Record Date, the Company will engage in an
internal reorganization pursuant to which all the assets and liabilities
relating to the Skilled Nursing Business will be reorganized in various tax-
free transactions such that upon completion of such reorganization, the
Skilled Nursing Business will be conducted by New GranCare, a direct
subsidiary of the Company, and various direct and indirect subsidiaries of New
GranCare. At the same time, the assets and liabilities relating primarily to
the Institutional Pharmacy Business will be reorganized so that upon
completion of the internal reorganization the Institutional Pharmacy Business
will be conducted by TeamCare, a direct subsidiary of the Company, and various
direct and indirect subsidiaries of TeamCare. In connection with the
consummation of the transactions contemplated by the Distribution Agreement
and the Merger Agreement, the Company, New GranCare and Vitalink will enter
into additional agreements and arrangements designed to further effect the
separation of the Company's Skilled Nursing Business from its Institutional
Pharmacy Business and to establish the parameters of certain intercompany
relationships subsequent to the completion of the Merger. Among these
agreements are (i) the Employee Benefits Agreement, (ii) the Tax Allocation
Agreement, (iii) the Non-competition Agreement, (iv) the Shareholders
Agreement (the "Shareholders Agreement") between Vitalink and Manor Care, (v)
the Interim Services Agreement (the "Interim Services Agreement") between New
GranCare and Vitalink, and (vi) the Voting Agreement (the "Voting Agreement")
between Manor Care and the Company.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, the Company will take certain actions as the sole stockholder of
New GranCare or will ratify actions taken by officers and directors of New
GranCare in connection with establishing New GranCare as an independent
company. These actions include (i) merging GCI Properties, Inc., a California
corporation ("GCI") and wholly-owned subsidiary of the Company, with and into
New GranCare, with New GranCare being the surviving entity (all of the assets
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pertaining to the Company's Skilled Nursing Business will then be contributed
to New GranCare following such merger), (ii) adopting the Certificate of
Incorporation and Bylaws of New GranCare in the form submitted herewith as
Exhibits 3.1 and 3.2, respectively, to be in effect at the Time of
Distribution (as defined in the Distribution Agreement), (iii) electing as
directors of New GranCare the individuals named in this Prospectus and causing
the appointment of officers of New GranCare to serve in such capacities
following the Distribution and (iv) adopting various incentive compensation
plans for the benefit of directors, officers and employees of New GranCare to
be in effect following the Distribution. For information concerning a
comparison of California and Delaware law and the Charter and Bylaws of New
GranCare, see "Description of New GranCare Capital Stock--The Charter and
Bylaws of the Company and New GranCare" and "Significant Differences Between
the Corporation Laws of California and Delaware." For information concerning
the individuals who may serve as directors and executive officers of New
GranCare following the Distribution and certain compensatory arrangements for
their benefit, including stock incentive plans, see "Management--Executive
Officers and Directors--Compensation of Directors" and "--Compensation of
Executive Officers."
Pursuant to the Distribution Agreement, New GranCare will acquire the right
to use the name "GranCare" in connection with continuing the conduct of the
Skilled Nursing Business. It is anticipated that immediately following the
Merger, New GranCare will change its name to "GranCare, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF COMPANY STOCK OPTIONS
The Distribution will be effected immediately prior to the Merger. Although
the Distribution will not be effected unless the Merger is approved by the
Company's shareholders and is about to occur, the Distribution is separate
from the Merger and the New GranCare Common Stock to be received by holders of
Company Common Stock in the Distribution does not constitute part of the
Merger Consideration. While the Company does not believe that shareholder
approval of the Distribution is required under California law, such approval
is being sought pursuant to the requirements of the Merger Agreement and to
ensure that the objectives of the Company's shareholders are consistent with
the objectives sought to be accomplished by the Company's Board of Directors
pursuant to the Distribution and the Merger. The Board of Directors of the
Company has not yet established the Distribution Record Date. It is
anticipated that the Distribution Date will be the date on which the
Distribution occurs and will be immediately prior to the Effective Time of the
Merger.
On the Distribution Date, the Company's Board of Directors will cause the
Company to pay a dividend to the Company's shareholders as of the Distribution
Record Date, which dividend will be payable in shares of New GranCare Common
Stock. Each shareholder of the Company as of the Distribution Record Date will
receive one share of New GranCare Common Stock for each share of Company
Common Stock held as of the Distribution Record Date. Immediately following
the completion of the Distribution, New GranCare will be a publicly-owned
corporation and it is contemplated that the shares of New GranCare Common
Stock will be listed on the NYSE. See "--Listing of New GranCare Common Stock;
Restrictions on Resale."
Following the completion of the Distribution, the Company will merge with
and into Vitalink with Vitalink being the surviving corporation in the Merger.
Each shareholder of the Company will receive 0.478 of a share of Vitalink
Common Stock in exchange for each share of Company Common Stock held by a
shareholder of the Company as of the Effective Time of the Merger. As a result
of the Merger, the Institutional Pharmacy Business will be conducted through
various direct and indirect subsidiaries of Vitalink.
As a consequence of the Distribution, each holder of Company Options will
receive options to purchase such number of shares of New GranCare Common Stock
as is equal to the number of shares of Company Common Stock subject to Company
Options held by such holder as of the Distribution Record Date. The exercise
price of a New GranCare Option will be equal to a percentage of the exercise
price of the existing Company Option, while the current exercise price of
existing Company Options will be correspondingly adjusted downward by the
amount allocated as the exercise price of the New GranCare Option. The
allocation of the exercise price between the existing Company Options and the
New GranCare Options will be determined pursuant to a formula which is
intended to apportion such exercise price in a manner that reflects the value
received by the Company's shareholders in respect of the Institutional
Pharmacy Business (in the case of the
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portion of the exercise price allocated to the existing Company Options) and
the remaining portion of the exercise price is intended to reflect the implied
value of the Company's Skilled Nursing Business (in the case of the portion of
the exercise price allocated to the New GranCare Options). The option exercise
price allocation formula is as follows: (i) multiply the Average Vitalink
Stock Price (as defined below) by the Exchange Ratio and (ii) divide the
product so obtained by the Average Company Stock Price (defined below) to
obtain the "Company Option Allocation Percentage". The percentage of the
exercise price of each existing Company Option that will be allocated to the
New GranCare Option issued with respect to such Company Option (the "New
GranCare Option Allocation Percentage") is equal to 1.00 minus the Company
Option Allocation Percentage. For purposes of the foregoing exercise price
allocation calculation, the "Average Vitalink Stock Price" and the "Average
Company Stock Price" were determined to be $23.03 and $17.88, respectively,
constituting the average closing price per share for Vitalink Common Stock and
Company Common Stock for the 120 consecutive trading day period ending on
August 29, 1996. As a result of the foregoing process, the Company Option
Allocation Percentage will be approximately 61.568% of the exercise price of
each existing Company Option and the New GranCare Option Allocation Percentage
will be approximately 38.432% of the exercise price of each existing Company
Option. As a result of the Merger, the exercise price of the Adjusted Company
Options (as defined below) will be adjusted to give effect to the 0.478
Exchange Ratio.
As a result of the foregoing, the exercise price of each existing Company
Option will be adjusted by multiplying the exercise price by the Company
Option Allocation Percentage (the "Adjusted Company Option"). As a consequence
of the Merger, each holder of an Adjusted Company Option as of the Effective
Time of the Merger will receive an option to purchase such number of shares of
Vitalink Common Stock as is equal to the number of shares of Company Common
Stock issuable upon exercise of the Adjusted Company Option multiplied by the
0.478 Exchange Ratio. The exercise price of each Adjusted Company Option will
be further adjusted by dividing such exercise price by the 0.478 Exchange
Ratio.
The terms and conditions of the New GranCare Options and the Adjusted
Company Options will be substantially the same as the terms of the Company
Options prior to the Distribution. Options to purchase 2,355,250 shares of
GranCare Common Stock were outstanding as of November 30, 1996 of which
options to purchase 930,227 shares of GranCare Common Stock were unvested and
not exercisable. However, all of such unvested Company Options contain change
of control provisions that provide that such options will become fully vested
and exercisable upon the occurrence of a change of control transaction such as
the Merger. The option agreements also provide that such Company Options do
not expire upon a termination of employment following a change of control.
Thus, even if the holder of a Company Option does not become an employee of
the Institutional Pharmacy Business following the Merger, such employee will
continue to have the right to exercise Adjusted Company Options following the
Merger until the expiration date of such option. Conversely, an employee of
the Institutional Pharmacy Business who does not become an employee of the
Skilled Nursing Business following the Merger will continue to have the right
to exercise New GranCare Stock Options following the Merger until the
expiration date of such options. The existing Company Options, which were
granted at fair market value at the time of grant, have exercise prices
ranging from $1.61 to $21.00 per share.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that upon the formal declaration by the Company's Board of
Directors of the Distribution that the Distribution will be made on the
Distribution Date to shareholders of record of the Company Common Stock as of
the Distribution Record Date. The Merger is expected to take place promptly
following the satisfaction of certain conditions set forth in the Merger
Agreement and is expected to occur on or about February 10, 1997. In order to
receive shares of Vitalink Common Stock pursuant to the Merger, holders of
Company Common Stock must surrender the certificates representing such stock
held by them. Following the Merger, all outstanding shares of Company Common
Stock will represent the right to receive shares of Vitalink Common Stock, in
accordance with the terms of the Merger Agreement. The Distribution will not
take place unless all of the conditions to effecting the Merger (other than
the completion of the Distribution) have been fulfilled, and there can be no
assurance as to the timing or consummation of the Distribution. The Company's
transfer agent, American Stock Transfer & Trust Company, will act as the
Distribution Agent for the Distribution and will deliver certificates for New
GranCare Common Stock as soon as practicable to holders of record of Company
Common Stock as of
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the close of business on the Distribution Record Date on the basis of one
share of New GranCare Common Stock for each share of Company Common Stock held
on the Distribution Record Date. All shares of New GranCare Common Stock will
be fully paid and non-assessable and the holders thereof will not be entitled
to preemptive rights. See "Description of Capital Stock." Following the
completion of the Distribution New GranCare will operate as an independent
public company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW GRANCARE COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR COMPANY COMMON STOCK CERTIFICATE IN ORDER TO RECEIVE
SHARES OF NEW GRANCARE COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION
AGENT WILL SEND YOU YOUR NEW GRANCARE STOCK CERTIFICATES FOLLOWING THE
CONSUMMATION OF THE DISTRIBUTION.
LISTING OF NEW GRANCARE COMMON STOCK; RESTRICTIONS ON RESALE
New GranCare will apply for listing the New GranCare Common Stock on the
NYSE. The New GranCare Common Stock received pursuant to the Distribution will
be freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), except for shares of New GranCare Common Stock received by
any persons who may be deemed to be an "affiliate" of New GranCare within the
meaning of Rule 144 under the Securities Act. Persons who may be deemed to be
affiliates of New GranCare after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with New GranCare, and may include the directors and executive
officers of New GranCare as well as any principal stockholders of New
GranCare. Persons who are affiliates of New GranCare will be permitted to sell
their New GranCare Common Stock received pursuant to the Distribution only
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from the registration requirements of such act. This
Registration Statement will not cover resales of New GranCare Common Stock by
affiliates of New GranCare. See "Shares Eligible for Future Sales."
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION AND MERGER
Certain members of the Company's management and the Company's Board of
Directors may be deemed to have interests in the Distribution and Merger in
addition to their interests as Company shareholders generally, which may cause
potential conflicts of interest. The Company's Board of Directors was aware of
these factors and considered them, among other factors, in approving the
Distribution Agreement and the transactions contemplated thereby. Among these
factors are (i) the acceleration of the vesting of currently unvested Company
Options as a result of the consummation of the Merger as described under "--
Consummation of the Distribution; Treatment of Company Stock Options," (ii)
the treatment of Company Options in the Distribution and the Merger as
described under "--Consummation of the Distribution; Treatment of Company
Stock Options," (iii) the indemnification provisions of the Distribution
Agreement as described under "--Terms of the Distribution Agreement" (iv) the
payment by Vitalink of a portion of the premiums for directors' and officers'
liability insurance for current Company directors and officers as described
under "--Terms of the Distribution Agreement" and (v) cash payments as a
result of the early termination of certain incentive compensation plans of the
Company and employment agreements. See also, "Description of the
Transactions--Interests of Certain Persons in the Transactions" in the Proxy
Statement/Prospectus. It is expected that substantially all of the directors
and executive officers of the Company will be directors and executive officers
of New GranCare following the Distribution except for Gene E. Burleson, who
will be Chief Executive Officer and a director of Vitalink as well as Chairman
of the Board and a director of New GranCare, and Arlen B. Reynolds, who will
be Executive Vice President of Vitalink. See "Management--Certain
Relationships and Related Party Transactions" herein and "Description of the
Transactions--Directors and Officers of Vitalink Following the Merger" in the
Proxy Statement/ Prospectus.
As of November 30, 1996, the 29 executive officers and directors of the
Company (as a group) beneficially owned an aggregate of 2,118,460 shares of
Company Common Stock (excluding shares subject to outstanding stock options).
All such shares will be treated in the Merger and the Distribution in the same
manner as shares of Company Common Stock held by other shareholders of the
Company.
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As of November 30, 1996, the executive officers of the Company (as a group)
also held options to purchase an aggregate of 1,622,871 shares of Company
Common Stock pursuant to the Company's stock option plans, of which 759,900
are not currently exercisable. In addition, as of November 30, 1996, the non-
employee directors of the Company (as a group) held options to purchase an
aggregate of 251,740 shares of Company Common Stock. Upon the consummation of
the Merger, all of the options held by such executive officers and non-
employee directors will immediately become exercisable in full. The treatment
of such options is described under "--Consummation of the Distribution;
Treatment of Company Stock Options."
The Company's executive officers participate in certain cash incentive plans
initiated by the Company that provide for annual cash bonuses (the "Annual
Incentive Plan") and long term cash bonuses (the "Shareholder Value Program")
based upon the performance of the Company. Both the Annual Incentive Plan and
Shareholder Value Program provide that the benefits under such plans vest upon
a change in control. In addition, each of the Company's executive officer's
employment agreements provides for the payment of benefits upon the occurrence
of a change in control. The Merger constitutes a change in control under the
Company's incentive plans as well as its employment agreements. The maximum
amount of payments that the Company may be required to make pursuant to such
incentive plans and employment agreements is approximately $11.5 million
(assuming every executive officer elects to exercise the change in control
provisions of his or her employment agreement). The Company's Board of
Directors has determined that upon consummation of the Distribution and the
Merger the Shareholder Value Program will be paid out at the "Superior" level.
In addition, shares of restricted Company Common Stock held by non-officers of
the Company which are unvested will vest as a consequence of the change of
control event that will occur upon completion of the Merger. Such restricted
stock has a value of approximately $2.5 million.
The Company has determined that no benefits will be payable under the Annual
Incentive Plan because costs associated with the Distribution and Merger will
not allow the participants to attain the required performance goals. Under the
Shareholder Value Program, however, as a result of the Merger, Messrs.
Burleson, Athans, Benton, Schneider and Finney (the individuals named in the
Summary Compensation Table on page 79) will receive cash payments of $852,000,
$420,000, $420,000, $330,000 and $234,000, respectively, upon the vesting of
benefits under this program. Other executive officers will receive in the
aggregate $2.25 million under this program for an aggregate payout under the
Shareholder Value Program of $4.5 million which is included in the $11.5
million referenced above.
Messrs. Burleson and Athans have agreed to waive their change in control
payments under their employment agreements in exchange for entering into new
employment agreements with Vitalink and New GranCare, respectively. Mr. Finney
has resigned from the Company effective January 1, 1997. Under the terms of
Mr. Finney's resignation, he will receive a payment of $240,000 (one year's
base salary) regardless of whether the Merger occurs. Assuming Messrs. Benton
and Schneider were to elect not to be employed by New GranCare, they would
receive $1,050,000 (three times base salary) and $825,000 (three times base
salary), respectively, under the change in control provisions of their
employment agreements.
To the extent an executive officer of the Company is not employed by New
GranCare or Vitalink following the consummation of the Distribution and
Merger, such individual will be entitled to the change of control payments
specified in such individual's employment agreement, which will be triggered
by the Merger (six month's base salary for Vice Presidents, one year's base
salary for Senior Vice Presidents and three year's base salary for Executive
Vice Presidents). Any executive officer who is a party to an employment
agreement will be required to waive his or her rights under such agreement as
a condition to obtaining a replacement employment agreement with New GranCare
following the Distribution. See "Management--Compensation of Executive
Officers--Employment Agreements."
Immediately following the consummation of the Merger, the Company's Chief
Executive Officer, Gene E. Burleson, will become Vitalink's Chief Executive
Officer and a member of Vitalink's Board of Directors. Mr. Burleson has an
employment agreement with the Company that became effective January 1, 1994,
which will be assumed by Vitalink. The employment agreement will be extended
for a five year term commencing at
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the Effective Time and provide for annual adjustments in base salary as
determined by a management compensation committee. Mr. Burleson's base salary
has been established at $430,000 for 1996. The agreement also provides for
severance compensation upon termination of employment by Vitalink for any
reason other than for "Cause," as defined in the agreement, consisting of a
minimum of three years' base salary and, in the event of a change-in-control,
as defined in the agreement, payment of a minimum of five year's base salary
and accelerated vesting of all options held by Mr. Burleson. In addition, Mr.
Burleson will be named Chairman of the Board of New GranCare and, in
connection therewith, it is anticipated that New GranCare will enter into a
consulting agreement with Mr. Burleson in the amount of $100,000 per year.
TREATMENT OF CERTAIN INDEBTEDNESS
9 3/8% Notes--As of November 30, 1996, there was $100 million aggregate
principal amount of 9 3/8% Notes outstanding. The 9 3/8% Notes bear interest
at the rate of 9 3/8% per annum, mature on September 15, 2005 and are not
redeemable prior to September 15, 2000. The 9 3/8% Notes are senior
subordinated obligations of the Company ranking subordinate in right of
payment to all senior indebtedness of the Company (including indebtedness
outstanding under the Existing Credit Facility (defined below)) and senior in
right of payment to all subordinated indebtedness (including the Convertible
Debentures). The Indenture dated as of September 15, 1995, between the Company
and Marine Midland Bank pertaining to the Notes (the "Note Indenture")
contains certain restrictive covenants including: (i) a limitation on
additional indebtedness; (ii) a limitation on other senior subordinated debt;
(iii) a limitation on liens; (iv) a limitation on the issuance of preferred
stock by the Company's subsidiaries; (v) a limitation on transactions with
affiliates; (vi) a limitation on restricted payments, (vii) a restriction on
the application of proceeds from certain asset sales; (viii) a limitation on
restrictions on subsidiary dividends; (ix) a restriction on mergers,
consolidations and the transfer of all or substantially all of the assets of
the Company to another person; (x) a limitation on investments and loans and
(xi) a limitation on lines of business. As certain of these covenants may be
breached by the Distribution, and in order to ensure greater operating
flexibility for Vitalink following the Merger, it is a condition to the Merger
that the tender offer be consummated and the Consent (defined below) be
obtained.
Tender offer materials describing the Company's tender offer for all of the
outstanding 9 3/8% Notes at a price of $1,090 per $1,000 principal amount of
the 9 3/8% Notes have been mailed previously to holders thereof. The materials
include a description of the consent (the "Consent"), which holders of the 9
3/8% Notes are required to sign as a condition to tendering their 9 3/8%
Notes, which provides for an amendment (the "Proposed Amendment") to the Note
Indenture which would delete the covenants described in the preceding
paragraph (other than those described in clauses (iii) and (vii)). The
Proposed Amendment requires the consent of holders of a majority in aggregate
principal amount of the 9 3/8% Notes then outstanding the Company believes
that the holders of a majority in aggregate principal amount of 9 3/8% Notes
will tender their 9 3/8% Notes and execute the consent. The Proposed Amendment
will become effective immediately prior to the consummation of the
Distribution and Merger. There can be no assurance that the holders of the 9
3/8% Notes will tender all of the outstanding 9 3/8% Notes.
Vitalink will refinance the indebtedness represented by the 9 3/8% Notes
tendered in the tender offer through borrowings under a credit facility
available to Vitalink. In connection with the assumption by Vitalink of any
untendered 9 3/8% Notes, New GranCare has agreed to pay Vitalink a fee with
respect to such 9 3/8% Notes representing the present value (discounted back
to the effective time of the Merger from the date the 9 3/8% Notes first
become redeemable) of the estimated interest rate differential between the 9
3/8% Notes and the borrowing cost that would be incurred by Vitalink in
connection with the issuance of similar securities. In addition, any premium
paid in connection with the tender offer of the 9 3/8% Notes (and all related
expenses) will be a Shared Transaction Expense.
Convertible Debentures. The Distribution Agreement and the Merger Agreement
also require that the Company take commercially reasonable efforts to call for
redemption prior to the Distribution Date all of the
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Company's outstanding 6 1/2% Convertible Subordinated Debentures due 2003 (the
"Convertible Debentures"). Under the Merger Agreement, the failure of the
Company to comply with requirement set forth in the previous sentence may give
rise to a right of Vitalink to terminate the Merger Agreement. At present, the
Company does not foresee any difficulty in completing the redemption of the
Convertible Debentures. The Convertible Debentures are issued pursuant to the
terms of an Indenture dated January 29, 1993 between the Company and First
Union National Bank (the "Debenture Indenture") and are presently redeemable
at a redemption price of 104.55% of the principal amount of the Convertible
Debentures plus accrued and unpaid interest to the date of redemption. There
are currently $60.0 million in aggregate principal amounts of Convertible
Debentures outstanding resulting in an aggregate redemption premium of
approximately $2.73 million which will also be a Shared Transaction Expense
(such premium shall be reduced by $390,000 in the event the redemption occurs
after January 15, 1997). See "--Expenses."
Existing Credit Facility. The Company currently has in place a revolving
credit facility which permits borrowings of up to $150.0 million (the
"Existing Credit Facility"). The Existing Credit Facility was established
pursuant to a Credit Agreement dated as of March 31, 1995 (as heretofore
amended, the "Existing Credit Agreement"), by and among the Company, as
borrower, First Union National Bank of North Carolina, as Agent (in such
capacity, the "Existing Agent") and letter of credit bank, and the financial
institutions signatory thereto as lenders. As of September 30, 1996,
approximately $88.9 million was outstanding under the Existing Credit
Facility. The Existing Credit Facility includes a $45.0 million subfacility
for working capital loans. Incorporated as part of the working capital line is
a $10.0 million subline for standby letters of credit and a $5.0 million
swingline from the Existing Agent.
The Existing Credit Agreement provides that all outstanding principal under
the Existing Credit Facility on June 30, 1998 (the "Term Conversion Date")
will be converted to term loans which mature four years after the Term
Conversion Date. Such term loans are to be amortized in sixteen equal
quarterly installments prior to maturity.
The obligations of the Company under the Existing Credit Facility are
guaranteed by the Company's direct and indirect subsidiaries other than GCI
Indemnity, Inc. (the "Existing Subsidiary Guaranty Obligations") and are
secured by a pledge of all of the capital stock of the Company's direct
subsidiaries and a security interest in all or substantially all of the
otherwise unencumbered assets of the Company. The Existing Subsidiary Guaranty
Obligations are secured by a pledge of all of the capital stock of the
Company's indirect subsidiaries (other than GCI Indemnity, Inc.) and a
security interest in all or substantially all of the otherwise unencumbered
assets of such indirect subsidiaries.
Loans outstanding from time to time under the Existing Credit Facility bear
interest at either the Base Rate or at the Eurodollar Rate (defined below) (at
the Company's option), in each case plus the applicable margin. The Base Rate
is defined as the higher of (i) the prime rate announced from time to time by
First Union National Bank of North Carolina or (ii) the effective Federal
Funds Rate, plus 0.50% per annum (the "Base Rate"). The Existing Credit
Agreement defines the Eurodollar Rate as the average London Interbank Offered
Rate ("Libor") of one, two, three or six-month Eurodollar deposits (the
"Eurodollar Rate"). Interest is payable in arrears.
The Existing Credit Facility contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include (but
are not limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, the Company is required to comply with certain
financial covenants governing, among other things, the ratio of debt to equity
and earnings to interest expense that must be maintained by the Company.
New Credit Facility. In order to effect the Distribution, the Company will
be required to replace its Existing Credit Facility and currently has a
commitment letter from First Union National Bank of North Carolina, as
Administrative Agent ("First Union"), and The Chase Manhattan Bank, as
Syndication Agent ("Chase"), and First Union Capital Markets Corp. and Chase
Securities Inc., as Arrangers, whereby each of such banks has agreed to
provide to the Company for the benefit of New GranCare a replacement credit
facility (the "New
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Credit Facility") in the aggregate amount of $300.0 million (with First Union
and Chase each committing $150.0 million). The New Credit Facility will
consist of two components: a $200.0 million five-year revolving credit
facility (which includes a $40.0 million sub-limit for the issuance of standby
letters of credit) and a $100.0 million five-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. It is anticipated that the initial use of
the New Credit Facility will be to redeem the Convertible Debentures, to repay
outstanding balances under the Existing Credit Facility and to pay for
expenses related to the Transactions.
The obligations of New GranCare under the New Credit Facility will be
guaranteed by New GranCare's present and future direct and indirect
subsidiaries other than GCI Indemnity, Inc. (the "New Subsidiary Guaranty
Obligations") and will be secured by a pledge of all of the capital stock of
New GranCare's present and future direct subsidiaries, a security interest in
all or substantially all of the otherwise unencumbered assets of New GranCare
and a pledge of all intercompany notes held by New GranCare. The New
Subsidiary Guaranty Obligations are to be secured by a pledge of all of the
capital stock of the indirect subsidiaries of New GranCare (other than GCI
Indemnity, Inc.), a security interest in all or substantially all of the
otherwise unencumbered assets of such indirect subsidiaries and a pledge of
all intercompany notes held by such subsidiaries.
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 $7.0 million each commencing two years after the
New Credit Facility closes, thereafter increasing to $10.0 million per
quarter. All remaining principal and accrued and unpaid interest shall be due
and payable in full on the last day of the calendar month during which the
fifth anniversary of the closing date of the New Credit Facility occurs.
Interest on outstanding borrowings shall accrue, at the option of New
GranCare, at the Base Rate or at the Eurodollar Rate plus, in each case, an
applicable margin. The Base Rate is defined as the higher of (i) First Union's
prime rate or (ii) the effective Federal Funds Rate, plus 0.50% per annum. The
Eurodollar Rate is defined as the published rate or the arithmetic mean of
rates at which Eurodollar deposits are offered for periods of one, two, three
or six-months. Interest is payable in arrears. The applicable margin varies in
accordance with a pricing matrix based upon New GranCare's ratio of
Consolidated Senior Debt to EBITDA and varies depending on the type of
interest rate selected by New GranCare. For Base Rate loans, the applicable
margin ranges from 0.000% (for a Consolidated Senior Debt to EBITDA ratio of
less than 2.5) to 0.500% (for a Consolidated Senior Debt to EBITDA ratio of
greater than 4.0). The applicable margin for Eurodollar loans ranges from
0.75% to 1.75% for the same Consolidated Senior Debt to EBITDA ratios set
forth above. In order to qualify for the lowest applicable margin for Base
Rate Loans or Eurodollar loans, New GranCare's Total Debt to EBITDA must also
be less than 3.0. Initially, the applicable margins will be 0.25% for Base
Rate loans and 1.50% for Eurodollar loans until New GranCare delivers its
financial statements for the quarter ended December 31, 1996. Thereafter, the
applicable margins will be adjusted in accordance with the pricing matrix
referred to above, except that the applicable margin for Eurodollar loans
cannot be adjusted to less than 1.25% until New GranCare delivers its
financial statements for the quarter ended March 31, 1997.
All of the net proceeds of (i) asset sales (subject to certain customary
exceptions) (ii) issuances of subordinated debt and (iii) certain equity
issuances must be applied to permanently reduce outstanding borrowings and
commitments under the New Credit Facility. However, if at least $100.0 million
of subordinated debt is issued, New GranCare will be permitted (though it will
not be obligated) to apply up to $35.0 million of the proceeds of such
issuance to the repurchase of New GranCare capital stock. The remaining
balance of such proceeds are to be applied pro rata to reduce the outstanding
balance on the term loan portion of the New Credit Facility, and thereafter to
the outstanding balance on the revolving loan portion of the New Credit
Facility. To the extent amounts prepaid on the revolving loan portion of the
New Credit Facility are not re-employed to fund permitted acquisitions within
six months, the revolving loan commitment will be permanently reduced.
The New Credit Facility will contain representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants will
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include (but not be limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, New GranCare will be required to comply with
certain financial covenants governing, among other things, the ratio of debt
to equity, earnings to interest expense and rent expense, and debt to earnings
which must be maintained by New GranCare, as well as maximum limits on rental
expense.
The funding of the New Credit Facility is subject, among other things, to
the satisfactory completion of due diligence, obtaining all necessary consents
and the execution of satisfactory loan documentation.
HRPT Obligations. HRPT is the holder of a mortgage loan to AMS Properties,
Inc., a wholly-owned Subsidiary of the Company, dated October 1, 1994, in the
original principal amount of $11.5 million (the "HRPT Loan"). The HRPT Loan is
secured, in part by mortgage and security agreements dated as of March 31,
1995 (collectively, the "Mortgages") in favor of HRPT and encumbering two
nursing facilities in Wisconsin owned by AMS Properties, Inc. The HRPT Loan
was incurred in connection with the acquisition and lease by AMS Properties,
Inc. of several nursing facilities in Wisconsin, California, Colorado and
Illinois pursuant to an Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 28, 1990 (as amended, the "HRPT
Acquisition Agreement"). The remaining balance under the HRPT Loan is due
December 31, 2010 and may be prepaid upon the payment of certain prepayment
penalties, which penalties essentially provide that HRPT will receive the
future value of the amounts owed. HRPT has also leased 7 nursing facilities
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc. ("GCIHCC") under a master lease agreement dated as of June 30, 1992 (the
"GCIHCC Lease"). Pursuant to Section 9.15A of the Acquisition Agreement, HRPT
the consent of HRPT is required in order to permit the Distribution, Merger
and related transactions (the "HRPT Consent"). As a condition to granting the
HRPT Consent and in consideration of HRPT releasing the Company and its
subsidiaries (other than New GranCare and its subsidiaries), which will become
subsidiaries of Vitalink following the Merger from all obligations to HRPT,
Vitalink will (a) pay a consent fee to HRPT in the amount of $10.0 million
(the "Consent Fee"), which will be reimbursed by New GranCare promptly
following the consummation of the Distribution and Merger and (b) enter into a
limited guaranty (not to exceed $15.0 million in the aggregate) which will
guaranty payment by New GranCare, AMS Properties and GCIHCC under the
Mortgages, the GCIHCC Lease, and the HRPT Loan (collectively, the "HRPT
Obligations") for so long as such obligations remain outstanding or until the
New GranCare Letter of Credit (as defined below) is drawn upon by Vitalink.
New GranCare, AMS Properties, Inc. and GCIHCC will retain primary liability
for the HRPT Obligations and will retain sole liability under the HRPT
Acquisition Agreement. To support Vitalink's limited guaranty of the foregoing
obligations, New GranCare will provide an irrevocable letter of credit in the
amount of $15.0 million payable to Vitalink in the event Vitalink makes any
payments under the limited guaranty (the "New GranCare Letter of Credit"). New
GranCare has also agreed that for so long as Vitalink's limited guaranty is in
effect, New GranCare will not terminate any of the Supply Agreements. As a
result, it is anticipated that the pharmaceutical supply agreements may extend
through December 31, 2010, the date when all present HRPT Obligations will be
satisfied, unless the New GranCare Letter of Credit is drawn upon earlier by
Vitalink or certain other conditions are satisfied. See "The Distribution--
Terms of the Pharmaceutical Supply Agreements."
EXPENSES
New GranCare (on behalf of itself and the Company) and Vitalink will each be
responsible for one-half of the total documented fees, expenses and other
items of cost (other than legal fees) which are incurred by New GranCare, the
Company and Vitalink in connection with the consummation of the various
transactions contemplated by the Distribution Agreement, the Merger Agreement
and the various other agreements contemplated thereby (the "Shared Transaction
Expenses"). The Shared Transaction Expenses include various commitment and
related fees incurred in connection with the New Credit Facility, the
redemption premium that will be incurred in connection with the redemption of
the Convertible Debentures and any premium that may be paid in connection with
a tender offer of, or consent solicitation pertaining to, the 9 3/8% Notes,
various consent fees incurred by New GranCare and the Company, financial
advisory and investment banking fees, accounting fees, the cost of maintaining
the Company's directors' and officers' liability insurance coverage for a
three year
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period following the Effective Time of the Merger and miscellaneous fees and
expenses such as printing fees and filing fees that will be payable to various
federal and state regulatory authorities. The Company estimates that the fees
and expenses constituting Shared Transaction Expenses will approximate $22.0
million. In addition to the Shared Transaction Expenses, the Company estimates
that the Transactions will result in an additional $19.0 million of expenses
which will be incurred by the Company.
CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, shareholder approval of the Distribution. The completion of the
Distribution is also a condition to the consummation of the Merger and the
Company does not presently intend to consummate the Distribution unless and
until all of the conditions to the consummation of the Merger (other than the
completion of the Distribution) have been satisfied. The consummation of the
Merger is subject to a number of conditions set forth in the Merger Agreement.
See "The Merger Agreement--Conditions" in the Proxy Statement/Prospectus.
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement between Vitalink
and the Company, New GranCare and the Company executed the Distribution
Agreement. Following the Merger of the Company into Vitalink, Vitalink will
succeed to the Company's obligations arising pursuant to the Distribution
Agreement by operation of law. The Distribution Agreement provides a general
framework for allocating the Company's assets and liabilities pursuant to the
Internal Restructuring Plan (attached as Exhibit A to the Distribution
Agreement) to segregate the Skilled Nursing Business from the Institutional
Pharmacy Business prior to the Distribution Date in preparation for the
Distribution and Merger. The Distribution Agreement also sets forth the
general terms on which the Company will conduct its business prior to the
Distribution Date as well as the terms regarding certain relationships between
Vitalink and New GranCare following the Distribution.
The Distribution Agreement provides that the Distribution will be effected
by distributing to each holder of Company Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
GranCare Common Stock for each share of Company Common Stock held by such
holder as of such time. See "--Manner of Effecting the Distribution."
The Distribution Agreement provides that prior to the Distribution Date all
intercompany accounts existing between the Company and any of its subsidiaries
(other than the Pharmacy Subsidiaries), on the one hand, and the Pharmacy
Subsidiaries, on the other hand, will be netted out, in each case in such
manner and amount as may be agreed to in writing by duly authorized
representatives of the Company, Vitalink and New GranCare. It is expected that
a resulting net balance will be due from the Pharmacy Subsidiaries to the
Company and certain of the Company's other subsidiaries. The amount of such
net balance due shall be contributed by the Company or the appropriate
subsidiaries of the Company to which such amount is owing, to the appropriate
Pharmacy Subsidiaries as additional capital.
The Distribution Agreement also provides for the payment by Vitalink of the
costs of purchasing the 9 3/8% Notes tendered in the tender offer undertaken
by the Company with respect to such notes and for the assumption by Vitalink
(as part of the Merger) of the Company's outstanding indebtedness associated
with the Institutional Pharmacy Business and the 9 3/8% Notes not tendered in
the tender offer. See "-- Treatment of Certain Indebtedness." In connection
therewith, the Company will make an offsetting payment to Vitalink. The
offsetting payment will be determined pursuant to a formula under which the
Company will make a payment to Vitalink in an amount based on the excess of
(i) the amount of indebtedness assumed or incurred by Vitalink by operation of
law in the Merger (currently estimated to be $118.0 million including the
Consent Fee) over (ii) the sum of $88.4 million plus the acquisition price of
any institutional pharmacy business acquired by the Company subsequent to June
1, 1996 (currently estimated to be $7.9 million) plus certain cash and cash
equivalents held by TeamCare. This payment will be further adjusted to ensure
that each party shares equally the Shared Transaction Expenses. This formula
is designed to ensure that Vitalink emerges from the Distribution and Merger
with a predetermined amount of net debt (assumed or incurred indebtedness
offset by cash, cash equivalents and new assets).
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The Distribution Agreement provides that from and after the Distribution
Date, Vitalink will indemnify, defend and hold harmless New GranCare and its
subsidiaries as well as the directors and officers of New GranCare and the
various New GranCare subsidiaries (collectively, the "New GranCare
Indemnitees") from and against all losses arising out of or relating to (i)
the Institutional Pharmacy Liabilities (as defined in the Distribution
Agreement), (ii) any breach, whether before or after the Distribution Date, by
the Company or the Pharmacy Subsidiaries of any provision of the Distribution
Agreement or any Ancillary Agreement (as defined in the Distribution
Agreement) and (iii) the Proxy Statement/Prospectus to the extent that any
such loss relates to or arises out of information contained in the Proxy
Statement/Prospectus that specifically relates to Vitalink.
Following the Distribution Date, New GranCare has agreed pursuant to the
Distribution Agreement to indemnify, defend and hold harmless, the Company,
each Pharmacy Subsidiary, and the directors and officers of the Company and
the Pharmacy Subsidiaries from and against losses arising out of or resulting
from (i) the Skilled Nursing Liabilities (as defined in the Distribution
Agreement), (ii) the breach, whether before or after the Distribution Date, by
New GranCare or any New GranCare subsidiary, of any provision of the
Distribution Agreement or any Ancillary Agreement, (iii) any claims arising
out of this Prospectus or the Registration Statement of which this Prospectus
is a part, and (iv) the Proxy Statement/Prospectus to the extent that such
loss relates to or arises out of information contained in the Proxy
Statement/Prospectus that specifically relates to New GranCare or the Company.
See "The Merger Agreement--Indemnification; Insurance" in the Proxy
Statement/Prospectus for information regarding Vitalink's indemnification
obligations arising pursuant to the Merger Agreement.
For a period of three years following the Effective Time of the Merger,
Vitalink will maintain in effect the Company's policies of directors' and
officers' liability insurance with respect to claims arising from facts or
events occurring prior to the Effective Time of the Merger. The cost of
maintaining such coverage in effect is a Shared Transaction Expense. See "--
Expenses." Notwithstanding the foregoing, if during such three year "tail"
period, premiums for such coverage increase by more than 150% of the annual
premiums paid as of the date of the Merger Agreement, Vitalink is only
required to obtain the maximum amount of directors' and officers' liability
insurance coverage as can then be purchased for an annual premium equal to
150% of the annual premium being paid by the Company as of the date of the
Merger Agreement.
The Company will maintain in effect through the Distribution Date all
insurance that was in force as of the date of execution of the Distribution
Agreement. Following the Distribution Date, Vitalink shall be responsible for
providing such insurance coverage as it may deem appropriate with respect to
the assets and business of the Institutional Pharmacy Business. Similarly, New
GranCare shall be responsible for maintaining such insurance coverage as it
deems appropriate with respect to the assets and business of the Skilled
Nursing Business. Following the Distribution Date, New GranCare shall retain
the responsibility for administering any and all insurance claims asserted
prior to the Distribution Date with respect to the Institutional Pharmacy
Business or the Skilled Nursing Business. In such capacity, New GranCare shall
also be responsible for any premiums, deductibles and retentions in respect of
such insurance policies and the cost of any such claims shall be the sole
responsibility and obligation of New GranCare. Any resulting actuarial gains
or losses relating to pre-Distribution Date claims shall inure solely to New
GranCare.
Following the Distribution Date, Vitalink shall file with New GranCare all
claims asserted subsequent to the Distribution Date that relate to occurrences
prior to the Distribution Date arising out of or in connection with the
Institutional Pharmacy Business and New GranCare shall be responsible for
notifying the appropriate insurance carrier and providing Vitalink with copies
of all correspondence relating to such notification. Thereafter, Vitalink
shall be responsible for administering all such claims wherein New GranCare is
not named as a co-defendant. To the extent that both New GranCare and Vitalink
are co-defendants in any such claim, each party will be entitled to direct its
own defense at its own cost. New GranCare shall be responsible for
administering all insurance proceeds received pursuant to insurance coverage
in effect prior to the Distribution Date and shall pay such proceeds, as
appropriate, to Vitalink with respect to Institutional Pharmacy Liabilities
and retain such proceeds that relate to Skilled Nursing Liabilities except
with respect to proceeds received in respect of claims asserted prior to the
Distribution Date, which shall be retained by New GranCare.
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Prior to the consummation of the Merger, the Distribution Agreement may only
be amended with the consent of the Company, New GranCare and Vitalink.
TERMS OF EMPLOYEE BENEFITS AGREEMENT
On the Distribution Date, the Company and New GranCare will execute and
deliver the Employee Benefits Agreement pursuant to which the responsibility
for the rights and claims of employees of the Skilled Nursing Business and the
Institutional Pharmacy Business will be allocated. The Employee Benefits
Agreement provides that New GranCare will assume all of the Company's tax
qualified plans which include a 401(k) plan as well as the AMS Pension Plan
(the termination of which was approved by the Board of Directors of the
Company at the September 17, 1996 meeting of the Board of Directors).
Following the Merger, the employees of the Institutional Pharmacy Business
will be able to participate in a separate 401(k) plan sponsored by Vitalink
into which New GranCare will transfer the assets relating to the accounts of
such employees. New GranCare will also assume the Company's self-funded health
and dental plans including all "run-out liability" attributable to the
Company's participants who are employees of the Institutional Pharmacy
Business. The Company will retain certain insured welfare plans relating
specifically to employees of the Institutional Pharmacy Business.
The Company will retain all existing non-qualified benefit plans and New
GranCare will adopt new non-qualified plans and assume the liability for all
employees of the Skilled Nursing Business who release the Company from
liability under existing plans. The Company will cause the existing rabbi
trust funding benefit entitlements under such plans to transfer to a new rabbi
trust established by New GranCare a proportionate part of the assets in the
existing trust to fund benefit entitlements of New GranCare employees. Rabbi
trusts are irrevocable with respect to assets contributed to the trust, except
in the case of bankruptcy, in which case assets contributed to the trust are
subject to and become a part of the bankruptcy estate of the settlor. New
GranCare will also adopt new flexible spending accounts as well as a
replacement executive life insurance plan.
The Company will amend its existing incentive equity plans to provide that
the Distribution will not cause a termination of employment with respect to
outstanding stock grants. New GranCare will adopt certain new incentive equity
plans and will grant to each holder of a Company Option as of the Distribution
Date an option to purchase an equivalent number of shares of New GranCare
Common Stock. The exercise price of each Company Option will be allocated
between the New GranCare Options and the Adjusted Company Options pursuant to
the formula described above. As a consequence of the Merger, all outstanding
Adjusted Company Options and the relevant exercise prices thereof will be
converted at the Exchange Ratio such that following the Merger such options
will be exercisable for shares of Vitalink Common Stock. See "--Consummation
of the Distribution; Treatment of Company Stock Options."
The annual performance goals under the Company's annual incentive bonus plan
will be adjusted to reflect the Distribution and the annual incentive bonus
plan will be amended to provide that the Distribution will not cause a
termination of employment for purposes of such plan. Similarly, the Company's
Shareholder Value Program (as defined hereafter) will be amended to provide
that the Distribution will not be deemed to cause a termination of employment.
However, the consummation of the Merger will constitute a change of control
which will cause an acceleration of the payouts under such plans. See
"Management--Long Term Incentive Plans; Awards in Last Fiscal Year."
The Employee Benefits Agreement provides that New GranCare will offer
employment agreements to each employee of the Company who is a party to an
employment agreement as of the Distribution Date other than those specified
employees who will become employees of Vitalink following the Merger. Any New
GranCare employee executing a new employment agreement will simultaneously
release the Company from any liability under such employee's prior agreement.
Any employee that does not execute an appropriate release and asserts a claim
for payment under his or her existing employment agreement will be paid such
amounts as are required to be paid under such agreement and such agreement
will not be replaced or superseded. It is anticipated that any employee of the
Skilled Nursing Business who asserts a claim for payment under his or her
existing employment agreement will not be offered employment with New GranCare
following the completion of the Distribution and the Merger. See "Management--
Compensation of Executive Officers--Employment Agreements."
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New GranCare employees will be given full credit for service with the
Company and its affiliates for purposes of determining benefit entitlements
under benefit plans sponsored by New GranCare. Any benefit plans not
specifically addressed in the Employee Benefits Agreement will be assumed by
New GranCare.
TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Manor Care, Vitalink and
New GranCare will enter into a Non-competition Agreement whereby Manor Care
and New GranCare will agree not to engage in the institutional pharmacy
business within the United States during the three year term of such agreement
except temporarily in connection with future acquisitions of skilled nursing
businesses that have an established pharmacy operation imbedded in the
acquired skilled nursing business. Similarly, Vitalink will agree not to
engage in the skilled nursing business during the three year term of such
agreement.
In the event that Manor Care or New GranCare shall, during the term of the
Non-competition Agreement, acquire a skilled nursing business that has as a
component, a pharmacy operation, the acquiror must offer to sell such pharmacy
operation to Vitalink at a purchase price not to exceed 120% of the product of
(i) EBITDA for such pharmacy component of the acquisition and (ii) a fraction,
the numerator of which is the aggregate purchase price for the proposed
acquisition and the denominator of which is the EBITDA for the proposed
acquisition taken as a whole. If the parties do not agree on a purchase price
for such pharmacy operations, then the acquiror (Manor Care or New GranCare,
as appropriate) may complete the proposed acquisition but must use its
commercially reasonable efforts to divest the pharmacy operations so acquired
within one year. Any sale of such pharmacy operations to a third party must be
at a purchase price that is equal to or greater than the formula purchase
price referenced above. If the proposed sale to a third party is at a price
less than the price derived pursuant to the formula purchase price discussed
above then Vitalink shall have a right of first refusal at such lesser price.
In the event Vitalink acquires a skilled nursing business in conjunction
with the acquisition of a pharmacy business, Vitalink must use its
commercially reasonable efforts to divest itself of such skilled nursing
business within one year.
TERMS OF SHAREHOLDERS AGREEMENT
As of the Effective Time of the Merger, Vitalink and Manor Care will execute
the Shareholders Agreement which provides for continuity in the composition of
the Vitalink Board of Directors during the three year term of such agreement.
Manor Care is currently the beneficial owner of approximately 82.3% of the
issued and outstanding Vitalink Common Stock. Following completion of the
Merger, Manor Care will be the beneficial owner of approximately 45% of the
issued and outstanding Vitalink Common Stock.
During the term of the Shareholders Agreement, Manor Care will vote all
shares of Vitalink Common Stock beneficially owned by Manor Care in favor of
four nominees designated by the Company prior to the Merger (the "Company
Nominees"). The Company has nominated Gene E. Burleson, Joel S. Kanter, Gary
U. Rolle and Robert L. Parker as the Company's Nominees. Following the
Effective Time of the Merger, Manor Care will vote its Vitalink Common Stock
in favor of any successor to any Company Nominee designated by a majority of
the then remaining Company Nominees. Any vacancy on the Vitalink Board of
Directors created by the departure of a Company Nominee will be filled by the
nominee selected by a majority of the then remaining Company Nominees.
Pursuant to the Shareholders Agreement, Manor Care has also agreed that it
will not vote its shares of Vitalink Common Stock in favor of the removal of a
Company Nominee unless requested to do so by a majority of the Company
Nominees. Furthermore, during the term of such agreement, Manor Care will vote
its shares of Vitalink Common Stock in favor of the removal of any director if
such removal is for cause and is recommended by a majority of Vitalink's
directors.
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The Shareholders Agreement also requires Manor Care to limit sales of its
Vitalink Common Stock to (i) sales complying with the volume limitations set
forth in Rule 144 under the Securities Act, (ii) sales pursuant to a
registered secondary offering, (iii) private sales in an amount not in excess
of 10% of the total number of shares of issued and outstanding Vitalink Common
Stock and (iv) private sales in an amount in excess of 10% of the total number
of shares of issued and outstanding Vitalink Common Stock if the purchaser
thereof becomes a party to the Shareholders Agreement.
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New GranCare and the Company will execute
the Interim Services Agreement which establishes a framework for New GranCare
to provide to Vitalink, as the successor to the Company following the
Effective Time of the Merger, certain services as may be requested by Vitalink
to ensure an orderly transition. The contemplated services are generally
expected to be those that were historically provided by the Company on a
centralized basis to the Institutional Pharmacy Business such as cash
management, compensation and benefits, management information systems and
legal. The term of the agreement is for one year unless earlier terminated by
mutual agreement. New GranCare shall be reimbursed for all direct and indirect
costs and expenses incurred in connection with providing any services as well
as the allocated portion of the base salaries of the New GranCare employees
actually providing services.
TERMS OF THE PHARMACEUTICAL SUPPLY AGREEMENTS
Substantially all of the New GranCare facilities existing prior to the
Effective Time of the Merger have entered into Pharmaceutical Supply
Agreements (the "Supply Agreements") with TeamCare. The terms of such
agreements are for five years and are automatically extended for an additional
year on each anniversary of the commencement date thereof unless written
notice to the contrary is given not more than 120 days and not less than 90
days prior to any such anniversary. The supplies and services to be provided
pursuant to such agreements include all pharmaceutical and related goods
required by each New GranCare facility and the residents thereof.
Pharmaceutical supplies include prescription and non-prescription medications.
Related goods include all nutritional supplements, intravenous solutions and
supplies, parenteral and enteral supplies and equipment, orthotic and
prosthetic devices, ostomy supplies, urological supplies, wound care supplies
and equipment, and personal care items. All goods and services are to be
provided in accordance with all applicable requirements of federal, state and
local laws and regulations.
Depending upon the payor source, either TeamCare will bill the payor source
directly or the skilled nursing facility will bill the payor source and then
pay TeamCare. In the event that TeamCare does not service at least 90% of the
residents of a skilled nursing facility during a given month, the skilled
nursing facility will pay to TeamCare an additional $10 per month for each
resident not serviced by TeamCare; provided, however, that if TeamCare has
elected not to furnish pharmaceutical goods or related goods for any resident,
such resident will be disregarded for purposes of this calculation.
New GranCare cannot transfer ownership or control of a skilled nursing
facility during the term of the Supply Agreement relating to such facility
unless and until the proposed transferee (i) agrees to accept and comply with
the Supply Agreement or (ii) an agreement is reached between TeamCare and New
GranCare for the payment of damages by New GranCare to TeamCare to compensate
TeamCare for losses over the remaining term of the subject Supply Agreement.
In the event of a material breach by TeamCare of its obligations under the
terms of the Supply Agreement, New GranCare must give TeamCare written notice
detailing such breach and TeamCare will have 30 days in which to cure any such
alleged breach. If TeamCare fails to cure the alleged breach within such time,
New GranCare may obtain services from another pharmacy provider; provided,
however, that TeamCare may, in its discretion, contest the allegation of
breach via arbitration as specified within the Supply Agreement. In the event
that it is determined that TeamCare has not committed a material breach of its
duties under the Supply Agreement, New GranCare shall
43
<PAGE>
be liable to TeamCare for the net revenue lost by TeamCare as a result of New
GranCare and/or New GranCare's residents having obtained goods and/or services
from another pharmacy provider.
Upon any subsequent acquisition by New GranCare of a skilled nursing
business, New GranCare shall have no obligation to contract with Vitalink or
TeamCare to provide pharmaceutical supplies and services at such facility and
New GranCare will not be required to terminate any then existing agreements
providing for the provision of pharmaceutical supplies and services to such
facility by an alternative supplier. See "--Non-competition Agreement" for a
description of New GranCare's obligations upon acquiring a skilled nursing
business that includes a pharmacy operation. Notwithstanding the foregoing, it
is New GranCare's intent to consolidate its requirements for pharmaceutical
supplies and services with Vitalink or TeamCare for so long as Vitalink and
TeamCare are viewed as superior providers based on prevailing industry
standards including, without limitation, pricing, service and quality. In
addition, New GranCare has agreed that for so long as Vitalink's limited
guaranty of certain obligations of the HRPT Obligations is in effect, New
GranCare will not terminate any of the Supply Agreements. It is anticipated
that the Supply Agreements may extend through December 31, 2010, the date when
all present HRPT Obligations will be satisfied, unless the New GranCare Letter
of Credit is drawn upon earlier by Vitalink or certain other conditions are
satisfied. See "The Distribution--Treatment of Certain Indebtedness--HRPT
Obligations."
TERMS OF THE VOTING AGREEMENT
The Company and Manor Care have entered into a Voting Agreement dated as of
September 3, 1996. The Voting Agreement requires Manor Care to vote its
approximate 82.3% of the issued and outstanding Vitalink Common Stock in favor
of the Merger.
TERMS OF THE TAX ALLOCATION AGREEMENT
In connection with the Distribution, the Company, New GranCare and their
respective subsidiaries will enter into the Tax Allocation Agreement, which
sets forth each party's rights and obligations with respect to the allocation
and payment of tax liabilities and entitlements to refunds, if any, for any
federal, state, local or foreign taxes for periods before and after the
Effective Time of the Merger. The Tax Allocation Agreement also provides for
related matters such as the allocation of responsibility and the provision for
cooperation in connection with the preparation and filing of any tax returns
and the conduct of proceedings related to taxes and certain other matters.
In general, the Tax Allocation Agreement provides for the allocation and
payment (or reimbursement) with respect to the following: (a) any and all
taxes resulting from the failure of the Distribution to qualify as a tax-free
reorganization and distribution within the meaning of Sections 368(a)(1)(D)
and 355 of the Code, as well as any claims resulting therefrom,
("Restructuring Taxes"); (b) the loss resulting from the disallowance of a tax
deduction for payments made to certain employees which are classified as
"excess parachute payments" under the provisions of Section 280G of the Code
("Lost Parachute Payment Tax Benefits"); (c) the tax benefit resulting from
the exercise of an Adjusted Company Option or a New GranCare Option, or the
disqualifying disposition of the stock received upon such exercise by an
employee ("Stock Option Tax Benefits"); and (d) all other taxes ("Other
Taxes"). The Tax Allocation Agreement also assigns to the parties to the
agreement responsibility for preparing tax returns (generally, with limited
exception, New GranCare will be responsible for preparing all consolidated or
combined tax returns which include the Company and/or any of its subsidiaries
for any period which ends on or before the Distribution Date), and defines the
parties' rights and responsibilities with respect to the carryback of losses
after the Distribution Date to taxable periods ending on or before the
Distribution Date (generally, New GranCare may carryback only those losses
which it is required to carryback by law and may carry back certain capital
losses to periods during which it was a member of a group of corporations that
filed a consolidated or combined return that included the Company or any of
its subsidiaries after the Distribution Date). The Tax Allocation Agreement
also provides that to the extent one of the parties to the Tax Allocation
Agreement is responsible (as set forth below) for any liability covered under
such agreement, that party shall indemnify and hold the other parties to the
Tax Allocation Agreement harmless from such liability.
Under the Tax Allocation Agreement, Vitalink, as the successor to the
Company following the Merger is responsible for (i) any and all liability
which might arise for Restructuring Taxes if Vitalink or any of the Company's
subsidiaries after the Distribution Date (the "Post Distribution Vitalink
Group") undertakes or fails
44
<PAGE>
to undertake one or more specified acts (a "Vitalink Tainting Act"), provided
that New GranCare or any of its subsidiaries after the Distribution (the "New
GranCare Group") has not previously undertaken or failed to undertake one or
more specified acts (a "New GranCare Tainting Act"), (ii) any and all
liability which might arise for Restructuring Taxes if the Post Distribution
Vitalink Group undertakes or fails to undertake an act (other than a Vitalink
Tainting Act) which gives rise to such liability for Restructuring Taxes,
provided that the New GranCare Group has neither committed a New GranCare
Tainting Act nor taken an act or failed to take an act (other than a New
GranCare Tainting Act) which gives rise to such liability for Restructuring
Taxes, (iii) one- half ( 1/2) of any and all liability for Restructuring Taxes
that arise due to a retroactive change in the law, provided that there is a
complete absence of Vitalink Tainting Acts and New GranCare Tainting Acts, and
a complete absence of any other acts or failures to act (other than Vitalink
Tainting Acts and New GranCare Tainting Acts) by both the Post Distribution
Vitalink Group and the New GranCare Group which give rise to such liability
for Restructuring Taxes, (iv) one-half ( 1/2) of any and all liability for
Restructuring Taxes, but not in excess of $10.0 million, if the liability for
Restructuring Taxes is the result of either multiple acts or failures to act
(other than Vitalink Tainting Acts and New GranCare Tainting Acts) by both the
Post Distribution Vitalink Group and the New GranCare Group which give rise to
such liability for Restructuring Taxes or there is a complete absence of any
acts or failures to act (including Vitalink Tainting Acts and New GranCare
Tainting Acts) and the liability for Restructuring Taxes is not the result of
a retroactive change in the law, (v) paying to New GranCare the Lost Parachute
Tax Benefits to the extent that such Lost Parachute Tax Benefits relate to
payments made to Gene E. Burleson or Arlen Reynolds if such payments would
have been deductible, but for the provisions of Code Section 280G, on or
before the closing, (vi) paying to New GranCare the Stock Option Tax Benefits
to the extent that such Stock Option Tax Benefits arise as a result of the
exercise of a stock option with respect to New GranCare Stock by an employee
of the Post Distribution Vitalink Group, or the disqualifying disposition by
such employee of such stock, and (vii) any and all liability for Other Taxes
of the Post Distribution Vitalink Group to the extent those Other Taxes are
allocable to any period or portion thereof beginning after the Distribution
Date.
Under the Tax Allocation Agreement, New GranCare is responsible for (i) any
and all liability which might arise for Restructuring Taxes if any member of
the New GranCare Group commits a New GranCare Tainting Act, provided that the
Post Distribution Vitalink Group has not previously committed a Vitalink
Tainting Act, (ii) any and all liability which might arise for Restructuring
Taxes if the New GranCare Group undertakes or fails to undertake an act (other
than a New GranCare Tainting Act) which gives rise to such liability for
Restructuring Taxes, provided that the Post Distribution Vitalink Group has
neither committed a Vitalink Tainting Act nor taken an act or failed to take
an act (other than a Vitalink Tainting Act) which gives rise to such liability
for Restructuring Taxes, (iii) one-half ( 1/2) of any and all liability for
Restructuring Taxes that arise due to a retroactive change in the law,
provided that there is a complete absence of Vitalink Tainting Acts and New
GranCare Tainting Acts, and a complete absence of any other acts or failures
to act (other than Vitalink Tainting Acts and New GranCare Tainting Acts) by
both the Post Distribution Vitalink Group and the New GranCare Group which
give rise to such liability for Restructuring Taxes, (iv) one-half ( 1/2) of
the first $20.0 million of any and all liability for Restructuring Taxes, plus
all liability for such Restructuring Taxes that are in excess of $20.0
million, if the liability for Restructuring Taxes is the result of either
multiple acts or failures to act (other than Vitalink Tainting Acts and New
GranCare Tainting Acts) by both the Vitalink Post Distribution Group and the
New GranCare Group which give rise to such liability for Restructuring Taxes
or there is a complete absence of any acts or failures to act (including
Vitalink Tainting Acts and New GranCare Tainting Acts) and the liability for
Restructuring Taxes is not the result of a retroactive change in the law,
(v) paying to Vitalink the Lost Parachute Tax Benefits to the extent that such
Lost Parachute Tax Benefits relate to payments made to employees of the post
Spin-Off post Distribution Vitalink or its subsidiaries, other than Gene E.
Burleson or Arlen Reynolds, if such payments would have been deductible, but
for the provisions of Code Section 280G, after the closing, (vi) paying to
Vitalink the Stock Option Tax Benefits to the extent that such Stock Option
Tax Benefits arise as a result of the exercise of a stock option with respect
to the Vitalink Common Stock by an employee of the New GranCare Group, or the
disqualifying disposition by such employee of such stock, (vii) any and all
liability for Other Taxes of the Company or any of its subsidiaries (prior to
the Distribution) to the extent those Other Taxes are allocable to any period
or portion thereof ending on or before
45
<PAGE>
the Distribution Date, and (viii) any and all liability for Other Taxes of the
New GranCare Group to the extent those Other Taxes are allocable to any period
or portion thereof beginning after the Distribution Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material federal income tax
consequences of the Distribution and the Merger to the holders of Company
Common Stock. The federal income tax discussion set forth below is for general
information only and may not apply to particular categories of holders of
Company Common Stock who are subject to special treatment under the Code,
including, without limitation, foreign holders and holders whose Company
securities were acquired pursuant to the exercise of any employee stock option
or otherwise as compensation. EACH HOLDER OF COMPANY COMMON STOCK IS URGED TO
CONSULT HIS TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE
DISTRIBUTION, AND THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
CONSEQUENCES OF THE DISTRIBUTION
GranCare has received an opinion from Powell, Goldstein, Frazer & Murphy LLP
("Counsel"), to the effect that, based upon certain assumptions, and upon the
representations of the management of GranCare and New GranCare, as to certain
facts, for federal income tax purposes:
1. The Distribution of New GranCare Common Stock will be tax-free for
federal income tax purposes to the Company under Section 355(c)(1) of the
Code and to Company shareholders under Section 355(a) of the Code.
2. The Restructuring will be tax-free for federal income tax purposes
under Sections 361(a)(1) and 368(a)(1)(D) of the Code.
Current Treasury Regulations require that each Company shareholder who
receives New GranCare Common Stock pursuant to the Distribution attach to his
or her federal income tax return for the year in which the Distribution occurs
a detailed statement setting forth such information as may be appropriate in
order to demonstrate the applicability of Section 355 of the Code to the
Distribution. The Company or its successor, Vitalink, will convey the
appropriate information to each Company shareholder of record as of the
Distribution Record Date.
CONSEQUENCES OF THE MERGER TO THE COMPANY, VITALINK AND THE COMPANY
SHAREHOLDERS
Immediately after the Distribution, the Company will merge with and into
Vitalink pursuant to the Merger Agreement, and the Company will, prior to the
Distribution and the Merger, receive an opinion from Counsel to the effect
that, based upon certain assumptions, and upon the representations of the
management of GranCare and Vitalink, as to certain facts, for federal income
tax purposes:
1. The Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
2. Vitalink and the Company will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to the
Merger.
Counsel's opinion is based upon certain representations and assumptions and
represents Counsels' best legal judgment, and is not binding upon the Internal
Revenue Service (the "IRS") or the courts. If any representation or assumption
relied upon in rendering Counsel's opinion with respect to the Distribution is
materially inaccurate, or if the IRS were to challenge successfully the
federal income tax treatment of the Distribution set forth in Counsel's
opinion, then, in general, although not entirely free from doubt, for federal
income tax
46
<PAGE>
purposes it is likely that (i) each Company shareholder would be required to
recognize income or gain on the receipt of the shares of New GranCare Common
Stock in the Distribution in an amount up to the fair market value of the
shares of New GranCare Common Stock received in the Distribution and (ii) the
Company would be required to recognize gain on the Distribution. If the IRS
were to challenge successfully the federal income tax treatment of the Merger
set forth in Counsel's opinion, although not entirely free from doubt, it is
likely that, for federal income tax purposes, (i) each Company shareholder
would be required to recognize gain or loss equal to the difference between
the fair market value of the Vitalink shares that are received in exchange for
the Company shares in the Merger and the basis in his or her Company Common
Stock, and (ii) the Company would recognize gain or loss as if it had sold its
assets, subject to its liabilities, to Vitalink in a taxable transaction.
POSSIBLE FUTURE LEGISLATION
The Clinton Administration's Budget Proposal issued March 19, 1996 contains
several revenue proposals, including a proposal (the "Anti-Morris Trust
Proposal") which would require a distributing corporation in a transaction
otherwise qualifying as a tax-free distribution under Section 355 of the Code
to recognize gain on the distribution of the stock of the controlled
corporation unless the direct and indirect shareholders of the distributing
corporation own more than 50 percent of the distributing corporation and
controlled corporation at all times during the four year period commencing two
years prior to the distribution. The Anti-Morris Trust Proposal would apply to
any distributions occurring after March 19, 1996, unless such distribution was
(i) pursuant to a binding contract on such date, (ii) described in a ruling
request submitted to the IRS on or before such date, or (iii) described in a
public announcement or SEC filing on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways & Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the
effect that should certain of the revenue proposals included in the
Administration's Budget Proposal, including the Anti-Morris Trust Proposal, be
enacted, the effective date of such proposals will be no earlier than the date
of "appropriate Congressional action." As of the date of this Prospectus, no
legislation has been introduced relating to the Anti-Morris Trust Proposal.
There can be no assurances that Congress will not adopt Anti-Morris Trust
legislation which would apply to the Distribution.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Company Common Stock,
unless the shareholder (i) is a corporation or comes within certain other
exempt categories, and, when required, demonstrates these facts, or (ii)
provides a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder who does not
supply the Company with his, her or its correct taxpayer identification number
may be subject to penalties imposed by the Internal Revenue Service ("IRS").
Any amount withheld under these rules will be refunded or credited against the
shareholder's federal income tax liability. Shareholders should consult their
tax advisers as to their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. If information reporting
requirements apply to a shareholder, the amount of dividends paid with respect
to such shares will be reported annually to the IRS and to such shareholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
47
<PAGE>
CAPITALIZATION
Following the Distribution and the Merger, New GranCare will change its name
to GranCare, Inc. and will be treated as the continuation of the Company for
financial reporting purposes. See "Unaudited Pro Forma GranCare, Inc.
Financial Statements" and the consolidated financial statements of the Company
and notes thereto included elsewhere herein. The following table sets forth
the Company's historical and pro forma capitalization as of September 30, 1996
and as adjusted to give effect to the Distribution and Merger:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt..................... $ 4,219 $ 2,550
-------- --------
Long-term debt, less current portion:
Credit Agreement(1)................................... $ 88,850 159,543
Mortgages............................................. 124,015 124,015
6 1/2% Convertible Subordinated Debentures due
2003(2).............................................. 60,000 --
9 3/8% Senior Subordinated Notes due 2005(3).......... 100,000 --
Other................................................. 12,040 12,040
-------- --------
Total long-term debt................................ $384,905 $295,598
-------- --------
Shareholder's equity:
Preferred Stock; 2,000,000 shares authorized as Series
A, B, C or D; no shares outstanding.................. -- --
Common Stock; 50,000,000 shares authorized;
23,401,992 shares issued and outstanding(4).......... 125,401 --
Common Stock; $0.001 par value; 50,000,000 shares
authorized; 23,401,992 shares issued and
outstanding(4)....................................... -- 23
Paid in capital(4).................................... -- 120,348
Treasury stock, (200,000 shares)(5)................... (5,030) --
Equity component of minimum pension liability......... (465) (465)
Unrealized gain on investment, net income taxes
($3,963)............................................. 5,747 5,747
Retained earnings..................................... 76,021 12,292
-------- --------
Total shareholders' equity............................ $201,674 $137,945
======== ========
Total capitalization.................................. $590,798 $433,543
======== ========
Long-term debt as a percentage of total capitaliza-
tion(6)................................................ 65.2% 69.3%
</TABLE>
- --------
(1) The current $150 million credit facility with First Union National Bank of
North Carolina, as agent will be repaid and replaced with a $300 million
credit facility with First Union National Bank of North Carolina and the
Chase Manhattan Bank which will fund required new borrowings.
(2) Will be redeemed at a redemption price of 104.55% of the principal amount
plus accrued and unpaid interest to the date of redemption.
(3) The Company has undertaken a tender offer for the 9 3/8% Senior
Subordinated Notes at a purchase price of 109% of the principal amount
plus accrued and unpaid interest to the date of purchase. As a result of
the Merger, Vitalink will succeed to the obligations of the Company with
respect to any 9 3/8% Senior Subordinated Notes not purchased in the
tender offer.
(4) One for one conversion of GranCare Common Stock for New GranCare Common
Stock.
(5) Cancellation and retirement of GranCare Common Stock held in treasury
immediately prior to the conversion for New GranCare Common Stock.
(6) See "Risk Factors--Significant Debt and Lease Obligations."
48
<PAGE>
DIVIDEND POLICY
New GranCare does not expect to pay any dividends for the foreseeable
future. Rather, New GranCare expects that it will reinvest any earnings into
funding future acquisitions and growth. Any future payments of dividends and
the amount thereof will be dependent upon New GranCare's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors of New GranCare from time to
time.
UNAUDITED PRO-FORMA GRANCARE, INC. FINANCIAL STATEMENTS
GranCare, Inc. ("GranCare") has entered into an Agreement and Plan of Merger
between Vitalink Pharmacy Services, Inc. ("Vitalink") and GranCare dated as of
September 3, 1996, as amended. The form of the proposed transactions are: (1)
GranCare's skilled nursing facilities, along with this contract management and
home health businesses are to be reorganized into New GranCare, Inc. ("New
GranCare") all of the shares of common stock of New GranCare distributed to
the GranCare shareholders in a tax-free spin-off; (2) GranCare (then
consisting solely of the institutional pharmacy and related business known as
TeamCare) would merge into and be acquired by Vitalink through a tax-free
exchange of shares of common stock of Vitalink for shares of common stock of
GranCare; and (3) New GranCare would become a public company upon the
effectiveness of its initial registration statement. Notwithstanding the legal
structure of the proposed transactions, for accounting/financial reporting
purposes such transactions will be treated as the spin-off of TeamCare in the
form of a dividend of the Vitalink Common Stock to be received and
reorganization/recapitalization of GranCare into New GranCare as New GranCare
will continue the majority of the GranCare businesses. New GranCare will
change its name to and be treated as the continuation of GranCare. No gain
will be 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 will continue to reflect the
historical cost basis of assets and liabilities of the Company. The closing
under the Merger Agreement is subject to a number of conditions, including
approval of GranCare's shareholders. The accompanying unaudited pro-forma
balance sheet at September 30, 1996 gives effect to the transactions as if
they occurred at that date. The accompanying unaudited income statements for
the year ended December 31, 1995 and for the nine months ended September 30,
1996 give effect to the transactions as if they occurred on January 1, 1995.
The unaudited pro forma financial statements are not necessarily indicative of
the operating results that would have been achieved had the spin-off and
reorganization/ recapitalization been consummated as of those dates, nor are
they necessarily indicative of future operating results. The unaudited pro-
forma financial statements should be read in conjunction with the consolidated
financial statements of GranCare and the related notes thereto.
49
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------
GRANCARE TEAMCARE OTHER PRO FORMA GRANCARE
HISTORICAL HISTORICAL(1) ADJUSTMENTS PRO FORMA
---------- ------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 25,750 $ (868) $ 88,628 (3) $ 34,882
84,772 (6a)
(160,000)(6b)
(3,400)(6b)
Accounts receivable,
less allowance for
doubtful accounts.... 218,529 (47,099) -- 171,430
Inventories........... 17,833 (15,573) -- 2,260
Prepaid expenses and
other current
assets............... 41,034 (2,749) -- 38,285
Deferred income
taxes................ 11,599 (3,338) 3,800 (7) 13,543
1,482 (8)
-------- --------- -------- --------
Total current assets.... 314,745 (69,627) 15,282 260,400
Property and equipment.. 276,441 (28,150) -- 248,291
Less accumulated
depreciation......... (67,111) 14,706 -- (52,405)
-------- --------- -------- --------
209,330 (13,444) -- 195,886
Other assets:
Investments, at fair
value................ 36,359 -- -- 36,359
Goodwill.............. 129,863 (75,621) -- 54,242
Other intangibles..... 8,573 (1,930) -- 6,643
Other................. 39,068 (3,711) 39,015 (2) 31,458
(88,628)(3)
84,725 (4)
(35,112)(5)
(3,899)(8)
-------- --------- -------- --------
Total assets............ $737,938 $(164,333) $ 11,383 $584,988
======== ========= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses..... $ 84,291 $ (19,921) $ -- $ 64,370
Merger costs payable.. -- -- 30,000 (7) 30,000
Accrued wages and
related liabilities.. 20,461 (4,362) -- 16,099
Interest payable...... 5,137 (261) -- 4,876
Income taxes payable.. 7,059 -- -- 7,059
Notes payable and
current maturities of
long-term debt....... 4,219 (1,669) -- 2,550
-------- --------- -------- --------
Total current
liabilities............ 121,167 (26,213) 30,000 124,954
Long-term debt.......... 384,905 (10,679) 84,772 (6a) 295,598
(160,000)(6b)
(3,400)(6b)
Due to/from parent...... -- (39,015) 39,015 (2) --
Deferred income taxes... 15,628 (3,171) 12,457
Other................... 14,564 (530) 14,034
Commitments and
contingencies
Shareholders' equity:
Common stock; no par
value................ 125,401 (46,379) 46,379 (4) --
(125,401)(9)
Common stock; $0.001
par value............ -- -- 23 (9) 23
Paid in capital....... -- -- 120,348 (9) 120,348
Treasury stock........ (5,030) -- 5,030 (9) --
Equity component of
minimum pension
liability............ (465) -- -- (465)
Unrealized gain on
investments, net of
income taxes......... 5,747 -- -- 5,747
Retained earnings..... 76,021 (38,346) 38,346 (4) 12,292
(35,112)(5)
(26,200)(7)
(2,417)(8)
-------- --------- -------- --------
201,674 (84,725) 20,996 137,945
-------- --------- -------- --------
Total liabilities and
shareholders' equity... $737,938 $(164,333) $ 11,383 $584,988
======== ========= ======== ========
</TABLE>
50
<PAGE>
Pro Forma Adjustments:
Adjustments affecting assets, liabilities and shareholders' equity to reflect
dividend of TeamCare assets and liabilities pursuant to Merger:
(1) Reflects elimination of historical stand-alone amounts of TeamCare,
Inc.
(2) Contribution of Teamcare due to Company amount to TeamCare capital
(3) Retirement of debt and reduction in investment in TeamCare in relation
to cash payment (reflecting incremental debt assumed/refinanced) received
from Vitalink upon consummation of Merger:
<TABLE>
<S> <C>
Cash received from Vitalink upon consummation of merger:
Agreed value of initial debt to be assumed by Vitalink........ $88,383
Additional debt assumed for TeamCare acquisitions subsequent
to
June 1, 1996................................................. 7,925
Shared transaction expense settlement amount.................. 400
TeamCare cash and cash equivalents at September 30, 1996...... 868
Retirement of Winyah debt prior to merger..................... 3,400
Less: Existing debt on TeamCare balance sheet at September 30,
1996......................................................... (12,348)
--------
Retirement of debt upon consummation of merger/decrease in
investment in TeamCare..................................... $88,628
========
</TABLE>
(4) Adjustment to investment in TeamCare to reflect net equity balance
(5) Elimination of net investment in TeamCare reflects: TeamCare historical
equity--$84,725; plus contribution to capital of due to GranCare balance--
$39,015; less cash payment (incremental debt assumed/refinanced by
Vitalink) received upon consummation of Merger--$88,628.
Other Merger related adjustments:
<TABLE>
<S> <C>
(6) Retirement of debt instruments and incremental borrowing under
line of credit:
(a) Incremental new borrowings under line of credit:
</TABLE>
<TABLE>
<S> <C>
Estimated Merger costs......................................... $30,000
Less: Amounts to be funded from current cash balances.......... (20,000)
-------
New borrowings under line of credit to fund Merger costs..... 10,000
New borrowings to fund retirement of debt:
$60 million Convertible Debentures........................... 60,000
$100 million Senior Subordinated Notes....................... 100,000
-------
160,000
Less: retirement of debt from Vitalink upon consummation of
Merger/decrease in investment in TeamCare................... (88,628)
-------
New borrowings under line of credit to fund subordinated debt
retirement.................................................. 71,372
New borrowings under line of credit to fund retirement of
Winyah debt................................................... 3,400
-------
Total new borrowings under line of credit.................. 84,772
-------
(a) Retirement of debt:
</TABLE>
<TABLE>
<S> <C>
Retirement of subordinated debt:
$60 million Convertible Debentures............................ 60,000
$100 million Senior Subordinated Notes........................ 100,000
-------
160,000
-------
Retirement of Winyah debt....................................... $ 3,400
-------
</TABLE>
51
<PAGE>
(7) Accrual of estimated Merger costs, net of income tax effect (assumes
$10,000 of total cost is deductible for tax purposes, 38% assumed tax
rate), components of estimated Merger charge consists of the following
(amounts to be recognized in operations of New GranCare upon consummation
of Merger):
<TABLE>
<S> <C>
Shared Transaction costs:
Redemption premium--$100 million Senior Subordinated Notes .... $ 9,000
Redemption premium--$60 million Convertible Subordinated
Debentures(a)................................................. 2,730
Investment banker fees......................................... 4,000
Other professional fees and merger related costs............... 6,270
-------
Total shared Merger costs....................................... 22,000
Less costs to be paid by Vitalink............................... (11,000)
-------
GranCare portion of shared Transaction costs.................... 11,000
Other Transaction related costs:
Consent fee paid to landlord................................... 10,000
Amounts payable under GranCare Shareholder Value Plan.......... 4,500
Amounts payable under Restricted Stock Plan.................... 2,500
Other employee severance and other related costs(b)............ 2,000
-------
30,000
Less: Income taxes............................................. (3,800)
-------
Total estimated Merger costs, net of income taxes(a)............ $26,200
=======
</TABLE>
--------
(a) The amount of the redemption premium shall be reduced by $.39
million in the event the redemption occurs after January 15, 1997.
(b) additional amounts of up to $5.0 million could be paid if
additional officers elect to exercise the change of control provision.
(8) Elimination of deferred financing fees related to the Convertible
Debentures and 9 3/8% Senior Subordinated Notes, net of income tax effect
at assumed 38% tax rate
(9) One to one conversion of Company Common Stock for New GranCare Common
Stock and cancellation and retirement of Company Common Stock held in
treasury immediately prior to the conversion for New GranCare Common Stock
52
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED, EXCEPT AS NOTED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
GRANCARE TEAMCARE OTHER PRO FORMA GRANCARE
HISTORICAL HISTORICAL (1) ADJUSTMENTS PRO FORMA
---------- -------------- --------------- ---------
(AUDITED)
<S> <C> <C> <C> <C>
Net revenues............ $816,462 $(194,898) $18,216 (2) $639,780
Expenses:
Operating expenses
(excluding items
shown below)......... 669,512 (168,173) 18,216 (3) 519,555
Rent and property
expenses............. 51,206 (4,115) -- 47,091
Depreciation and
amortization......... 21,611 (4,705) -- 16,906
Interest expense and
financing charges.... 27,054 (497) (7,282)(4) 19,275
Nonrecurring costs--
merger and other
costs................ 11,750 -- -- 11,750
-------- --------- ------- --------
Total expenses...... 781,133 (177,490) 10,934 614,577
-------- --------- ------- --------
Income before income
taxes.................. 35,329 (17,408) 7,282 25,203
Income taxes............ 14,765 (7,000) 2,913 (5) 10,678
-------- --------- ------- --------
Net income.............. $ 20,564 $ (10,408) $ 4,369 $ 14,525
======== ========= ======= ========
Net income per common
and common equivalent
share:
Primary............... $ 0.86 $ 0.61 (6)
======== ========
Fully diluted......... $ 0.86 N/A (6)
======== ========
Weighted average number
of common and common
equivalent
shares outstanding:
Primary............... 23,794 23,794 (6)
======== ========
Fully diluted......... 23,919 N/A (6)
======== ========
Pro Forma Adjustments:
(1)Reflects elimination of historical stand-alone amounts of
TeamCare, Inc.
(2)Revenues--pro forma adjustments for revenues are as follows:
Add back intercompany revenues of TeamCare which are eliminated
in GranCare historical amounts................................. $ 18,216
========
(3)Operating expenses--pro forma adjustments for operating
expenses are as follows:
Add back intercompany cost of sales of TeamCare which are
eliminated in GranCare historical amounts...................... $ 18,216
========
(4)Interest expense--pro forma adjustments for interest expense
are as follows:
Elimination of interest expense on $60 million 6.5% Convertible
Subordinated Debentures........................................ $ (3,900)
Elimination of interest expense on $100 million 9 3/8% Senior
Subordinated Notes............................................. (9,375)
Elimination of amortization of deferred financing fees related
to the Convertible Debentures and 9 3/8% Senior Subordinated
Notes.......................................................... (155)
Interest expense on incremental new borrowings under line of
credit (estimated at $86.0 million, reflects net impact of
redemption of $100 and $60 million subordinated debt
instruments less cash received/incremental debt assumed upon
consummation of Merger) at 7.25%--average interest rate under
existing credit facility....................................... 6,148
--------
$ (7,282)
========
</TABLE>
(5) Income taxes are adjusted to reflect tax provision for elimination of
pharmacy amounts and other pro forma adjustments.
(6) Income per share amounts are based on the combined weighted average shares
adjusted for retirement of the Company's 6.5% Convertible Debentures. Pro
forma fully diluted earnings per share are not presented as the difference
in primary and fully diluted amounts is less than 3% after the assumed
retirement of the $60 million Convertible Debentures.
53
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
OTHER
GRANCARE TEAMCARE PRO FORMA GRANCARE
HISTORICAL HISTORICAL (1) ADJUSTMENTS PRO FORMA
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues............... $745,653 $(194,624) $26,136 (2) $577,165
Expenses:
Operating expenses
(excluding items shown
below).................. 599,958 (164,615) 26,136 (3) 461,479
Rent and property
expenses................ 42,696 (3,914) -- 38,782
Depreciation and
amortization............ 19,400 (4,980) -- 14,420
Interest expense and
financing charges....... 26,228 (449) (5,675)(4) 20,104
One-time charges......... 18,400 -- -- 18,400
-------- --------- ------- --------
Total expenses......... 706,682 (173,958) 20,461 553,185
-------- --------- ------- --------
Income before income
taxes..................... 38,971 (20,666) 5,675 23,980
Income taxes............... 14,809 (8,266) 2,270 (5) 8,813
-------- --------- ------- --------
Net income................. $ 24,162 $ (12,400) $ 3,405 $ 15,167
======== ========= ======= ========
Net income per common and
common equivalent share:
Primary.................. $ 1.01 $ 0.63(6)
======== ========
Fully diluted............ $ 0.98 N/A(6)
======== ========
Weighted average number of
common and common
equivalent shares
outstanding:
Primary.................. 24,021 24,021(6)
======== ========
Fully diluted............ 26,653 N/A(6)
======== ========
Pro Forma Adjustments:
(1) Reflects elimination of historical stand-alone amounts of
TeamCare
(2) Revenues--pro forma adjustments for revenues are as follows:
Add back intercompany revenues of TeamCare which are eliminated
in GranCare historical amounts................................ $ 26,136
========
(3) Operating expenses--pro forma adjustments for operating
expenses are as follows:
Add back intercompany cost of sales of TeamCare which are
eliminated in GranCare historical amounts..................... $ 26,136
========
(4)Interest expense--pro forma adjustments for interest expense
are as follows:
Elimination of interest expense on $60 million 6.5% Convertible
Subordinated Debentures....................................... $ (2,925)
Elimination of interest expense on $100 million 9 3/8% Senior
Subordinated Notes............................................ (7,031)
Elimination of amortization of deferred financing fees related
to the Convertible Debentures and 9 3/8% Senior Subordinated
Notes......................................................... (330)
Interest expense on incremental new borrowings under line of
credit (estimated at $86.0 million, reflects net impact of
redemption of $100 and $60 million subordinated debt
instruments less cash received/incremental debt assumed upon
consummation of Merger) at 7.25%--average interest rate under
existing credit facility...................................... 4,611
--------
$ (5,675)
========
</TABLE>
(5) Income taxes are adjusted to reflect tax provision for elimination of
pharmacy amounts and other pro forma adjustments.
(6) Income per share amounts are based on the combined weighted average shares
adjusted for retirement of the Company's 6.5% Convertible Debentures. Pro
forma fully diluted earnings per share are not presented as the difference
in primary and fully diluted amounts is less than 3% after the assumed
retirement of the $60 million Convertible Debentures.
54
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The following selected historical consolidated financial data of GranCare
have been derived from the historical financial statements and should be read
in conjunction with the financial statements and notes included herein.
GranCare data for the nine months ended September 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements which are also
included herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------
1991 (7) 1992 (8) 1993 (8) 1994 (8) 1995 (8) 1995 (8) 1996 (8)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(9):
Net revenues........... $290,958 $434,638 $611,689 $717,471 $816,462 $604,569 $745,653
Expenses:
Operating expenses
(excluding items shown
below)................ 239,057 357,189 506,542 589,245 669,512 496,918 599,957
Rent and property...... 27,284 35,998 42,446 44,291 51,206 37,988 42,697
Depreciation and
amortization.......... 5,064 6,922 12,349 16,440 21,611 14,785 19,400
Interest expense and
financing charges..... 7,256 7,908 19,601 21,481 27,054 19,557 26,228
Nonrecurring costs--
other (1992 & 1996);
merger and other (1993
& 1995)(1)............ -- 1,114 4,573 -- 11,750 11,750 18,400
Restructuring
costs(2).............. -- -- -- 8,200 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses......... 278,661 409,131 585,511 679,657 781,133 580,998 706,682
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and
extraordinary charge.. 12,297 25,507 26,178 37,814 35,329 23,571 38,971
Income taxes........... 3,950 8,701 10,089 13,524 14,765 10,297 14,809
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary charge.. 8,347 16,806 16,089 24,290 20,564 13,274 24,162
Extraordinary charge--
gain on settlement of
debt (1991); loss on
extinguishment of debt
(1993)(3)............. (2,928) -- 1,285 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 11,275 $ 16,806 $ 14,804 $ 24,290 $ 20,564 $ 13,274 $ 24,162
======== ======== ======== ======== ======== ======== ========
Pro forma income tax
data(4):
Income before income
taxes and
extraordinary charge.. $ 12,297 $ 25,507 $ 26,178 n/a n/a n/a n/a
Income taxes........... 4,060 10,157 10,874 n/a n/a n/a n/a
-------- -------- --------
Income before
extraordinary
charge(5)............. 8,237 15,350 15,304 n/a n/a n/a n/a
Extraordinary
charge(5)............. (1,757) -- 1,285 n/a n/a n/a n/a
-------- -------- --------
Pro forma net income.... $ 9,994 $ 15,350 $ 14,019 n/a n/a n/a n/a
======== ======== ========
Net income per common
and common equivalent
share(4):
Primary:
Income before
extraordinary item... $0.59 $0.97 $0.84 $1.07 $0.86 $0.55 $1.01
Extraordinary item.... 0.24 -- (.07) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............ $0.83 $0.97 $0.77 $1.07 $0.86 $0.55 $1.01
======== ======== ======== ======== ======== ======== ========
Fully diluted:
Income before
extraordinary item... $0.53 $0.90 $0.80 $1.07 $0.86 $0.55 $0.98
Extraordinary item.... 0.22 -- (.07) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............ $0.75 $0.90 $0.73 $1.07 $0.86 $0.55 $0.98
======== ======== ======== ======== ======== ======== ========
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
---- ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA(9):
Average licensed beds.. -- (6) 11,358 15,103 16,112 16,148 16,263 16,097
Average occupancy...... -- (6) 86% 87% 88% 87% 87% 85%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1991 (7) 1992 (8) 1993 (8) 1994 (8) 1995 (8) SEPTEMBER 30, 1996 (8)
-------- -------- -------- -------- -------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(9):
Working capital........ $ 22,821 $31,483 $59,688 $89,626 $123,030 $193,578
Total assets........... 115,437 242,656 390,881 520,193 645,161 737,938
Long-term debt,
including current
portion............... 52,948 96,770 202,650 243,231 339,605 389,124
Shareholders' equity... 12,760 54,230 86,971 161,417 172,599 201,674
Partners equity........ 320 4,988 -- -- -- --
</TABLE>
(Footnotes from the preceding page)
- --------
(1) The $1.1 million non-recurring charge in 1992 consisted of expenses
related to a retirement agreement reached with an employee of CompuPharm
and terminated negotiations regarding the possible sale of CompuPharm.
Such expenses were incurred prior to the merger of GranCare and CompuPharm
in December 1993 (the "CompuPharm Merger"), after which CompuPharm became
a wholly owned subsidiary of GranCare. The $4.6 million merger costs in
1993 relate to the CompuPharm Merger. The $11.75 million charge in 1995
relates to the Evergreen Merger and other one time costs. The $18.4
million charge in 1996 relates to one-time charges for the planned
disposition of assets and leasehold improvements or closure of certain
long-term care facilities and write off of notes receivable related
thereto; amounts required to present TeamCare's separate financial
statements on a stand-alone basis in connection with the Vitalink merger
and other one-time costs.
(2) The $8.2 million restructuring charge in 1994 is related to the Company's
formal plan of restructuring announced in August 1994. See Note 12 of
Notes to the Consolidated Financial Statements for information on the 1994
restructuring.
(3) The $2.9 million extraordinary gain in 1991 resulted from an Evergreen
settlement of debt. The Company's extraordinary debt extinguishment charge
of $1.3 million in 1993 resulted from debt repayments associated with the
CompuPharm Merger.
(4) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the selected historical
consolidated financial data for the years 1991 through 1993 include a pro
forma presentation that includes a provision for income taxes as if
Evergreen had been a taxable corporation for these periods. Such pro forma
calculations were based on the income tax laws and rates in effect during
those periods, and FASB Statement No. 109. Earnings per share for 1991,
1992 and 1993 are based on pro forma net income.
(5) See note (3) above relating to the extraordinary items. The pro forma
reduction to the 1991 gain is due to an income tax provison adjustment
resulting from the fact that Evergreen was not a taxable entity during
1991.
(6) These numbers are not available from Evergreen for fiscal 1991 and,
accordingly, the Company is unable to report such numbers on a
consolidated basis.
(7) The ARA Living Centers-Pacific, Inc. ("ARA") acquisition occurred on
September 27, 1991 and, therefore, (i) the operating results of the ARA
facilities are included in the historical operating results of the Company
for the fourth quarter of 1991 and (ii) the assets and liabilities of the
ARA facilities, as adjusted for related financing transactions, are
included in the balance sheet of the Company as of December 31, 1991.
(8) All acquisitions which occurred in 1992, 1993, 1994, 1995 and 1996, except
for the CompuPharm, Inc. ("CompuPharm") acquisition and Evergreen merger,
are reflected from the date of each acquisition in the historical
operating results of the Company and the assets and liabilities relating
to these acquisitions are included in the balance sheets of the Company
since that time. See note (9) below and Note 3 to the consolidated
financial statements for a discussion of the CompuPharm and Evergreen
mergers.
(9) All years have been restated for the December 28, 1993 merger with
CompuPharm and for the July 20, 1995 merger with Evergreen. See Notes 1
and 3 to the consolidated financial statements for a description of these
combinations.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with the Selected Historical Consolidated Financial Data, Pro Forma Financial
Information and the historical consolidated financial statements of GranCare
and the notes thereto, included or incorporated elsewhere herein.
GENERAL
The Company was incorporated in September 1987. Since its inception, the
Company has grown rapidly through acquisitions of long-term care facilities
and specialty medical businesses such as institutional pharmacy operations. In
April 1995, the Company acquired Cornerstone, a contract management firm that
specializes in the implementation and management of subacute and other
specialized medical programs in acute care hospitals. In addition, on July 20,
1995, the Company acquired Evergreen Healthcare, Inc. ("Evergreen") by merger
in a transaction accounted for as a pooling-of-interests for financial
reporting purposes. During 1996 the Company acquired RN Health Care Services,
Inc., a home health agency in Michigan and Jennings Visiting Nurse
Association, Inc., a home health agency in Indiana. Also in 1996, the Company
acquired Emery Pharmacy, Inc., a provider of institutional pharmacy services
in upstate New York and RX Corporation, a provider of institutional pharmacy
services in southern California.
At the time of the merger with Evergreen the Company operated 78 long-term
care facilities and Evergreen operated 64 long-term care facilities. As a
result of the Cornerstone acquisition, the Company acquired 92 contracts with
acute care hospitals to manage subacute skilled nursing units, geriatric
mental health programs and geriatric primary care networks.
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 year ended December 31, 1995, the percentage of the Company's revenues
derived from Medicaid and Medicare programs were 44.7% and 30.2%,
respectively, of the Company's net revenues. For the nine-months ended
September 30, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 38.6% and 38.6%,
respectively, of the Company's total revenues.
Excluding the Institutional Pharmacy Business, for the year ended December
31, 1995, the percentage of the Company's revenues derived from the Medicaid
and Medicare programs were 44.8% and 31.5%, respectively, of the Company's net
revenues. Excluding the Institutional Pharmacy Business for the nine months
ended September 30, 1996, the percentage of the Company's revenues derived
from the Medicaid and Medicare programs were 37.4% and 40.7%, respectively, of
the Company's total revenues.
The Company derives its revenues by providing (i) skilled nursing, (ii)
pharmacy, 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.
While the initial results of the Merger will be a decrease in the percentage
of revenue from specialty medical services received by New GranCare from the
percentage of specialty medical services revenue received by the Company
because of the loss of the revenue from the Institutional Pharmacy Business,
the Company believes that opportunities exist for New GranCare to increase the
percentage of its revenue derived from specialty medical services from sources
other than the Institutional Pharmacy Business such as specialty medical
service revenue from therapy and subacute care.
57
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
revenue data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1995 1994(1) 1993 1996 1995
------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Skilled nursing and subacute
care:
Routine services.............. 53.8% 57.6% 60.2% 44.7% 54.8%
Therapy, subacute and other
ancillary services(2)........ 19.8 18.3 19.9 25.9 19.4
------- ------- ------- -------- --------
73.6% 75.9% 80.1% 70.6 74.2
------- ------- ------- -------- --------
Pharmacy(2).................... 23.5 23.8 19.6 25.9 23.3
Contract management............ 2.9 0.3 0.3 3.5 2.5
------- ------- ------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ========
</TABLE>
REVENUES PER PATIENT DAY DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1995 1994(1) 1993 1996 1995
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Routine skilled nursing............ $ 87.07 $ 79.52 $ 78.07 $ 89.35 $ 87.02
Specialty medical services(3)...... 35.65 27.69 27.59 58.89 34.05
------- ------- ------- --------- ---------
$122.72 $107.21 $105.66 $148.24 $121.07
======= ======= ======= ========= =========
</TABLE>
- --------
(1) Excludes results of operations from August 1 through December 31, 1994 for
facilities divested or to be divested as part of the restructuring plan.
(2) Before elimination of intercompany sales.
(3) Excludes pharmacy and other specialty medical revenue from beds not
operated by the Company.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
The Company's net revenues for the nine-month period ended September 30,
1996 were $745.7 million, compared to $604.6 million for the same period in
1995, a net increase of $141.1 million, or 23.3%. Included in net revenues and
classified as investment and other revenue for the nine month period ended
September 30, 1996 is the approximate $18 million gain on the sale of the
Company's investment in an unconsolidated affiliate which occurred in the
third quarter of 1996. Of the foregoing change, $75.5 million resulted from
acquisitions and $69.0 million was attributable to same-store growth. Those
increases were partially offset by loss of net revenue of $21.4 million from
facilities divested. Specialty medical revenues increased $123.6 million over
the same period in 1995. This was primarily the result of the growth in the
number of Medicare residents which utilize higher margin ancillary services
(physical, respiratory, occupational and speech therapy).
Excluding the Institutional Pharmacy Business, the Company's net revenues
for the nine-month period ended September 30, 1996 were $577.2 million,
compared to $474.2 million for the same period in 1995, a net increase of
$103.0 million, or 21.7%. Of the foregoing change, $18 million resulted from
the gain on sale of the Company's investment in an unconsolidated affiliate.
$44.3 million resulted from same store growth and $62.1 million resulted from
acquisitions. Those increases were partially offset by loss of net revenue of
$21.4 million from facilities divested. Specialty medical revenues increased
$71.7 million over the same period in 1995. This was primarily the result of
the growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
Operating expenses for the nine-month period ended September 30, 1996, were
$642.7 million compared to $534.9 million for the same period in 1995, a net
increase of $107.8 million, or 20.2%. Of the foregoing increase,
58
<PAGE>
$66.0 million resulted from acquisitions and $62.1 million was attributable to
same-store growth increases in expenses. These increases were partially offset
by a reduction of expenses of $20.3 million from facilities divested.
Specialty medical revenues generate additional costs from the higher staffing
levels required to care for the higher acuity Medicare residents. 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.
Excluding the Institutional Pharmacy Business, operating expenses for the
nine-month period ended September 30, 1996, were $500.3 million, compared to
$420.8 million for the same period in 1995, a net increase of $79.5 million,
or 18.9%. Of the foregoing increase, $47.2 was attributable to same store
increases in expenses and $52.6 million resulted from acquisitions. These
increases were partially offset by a reduction of expenses of $20.3 million
from facilities divested.
Depreciation and amortization expenses for the nine-month period ended
September 30, 1996 were $19.4 million compared to $14.8 million for the same
period in 1995, an increase of $4.6 million, or 31.1%. This increase was
primarily the result of depreciation and amortization expenses attributable to
businesses acquired and additions to property and equipment.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for the nine-month period ended September 30, 1996 were $14.4 million
compared to $11.4 million for the same period in 1995, an increase of $3.0
million, or 26.3%.
Interest expense and financing charges for the nine-month period ended
September 30, 1996, were $26.2 million compared to $19.6 million for the same
period in 1995, an increase of $6.6 million, or 33.7%. These increases were
primarily due to interest on additional indebtedness incurred in connection
with acquisitions, the issuance of $100 million of 9 3/8% Notes (the "9 3/8%
Notes") and to a lesser extent, borrowings to fund working capital.
Excluding the Institutional Pharmacy Business, interest expense and
financing charges for the nine-month period ended September 30, 1996, were
$25.8 million compared to $19.2 million for the same period in 1995, an
increase of $6.6 million, or 34.4%.
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
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. The revenues and net operating losses of these facilities
are not significant. 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 $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. These charges do not have a
negative effect on short-term cash flow. In the third quarter of 1995, the
Company incurred certain costs related to the completion of the pooling-of-
interests with Evergreen on July 20, 1995 and other one-time costs.
Income taxes for the nine month period ended September 30, 1996, were $14.8
million compared to $10.3 million for the same period in 1995, an increase of
$4.5 million.
Excluding the Institutional Pharmacy Business, income taxes for the nine-
month period ended September 30, 1996, were $6.5 million compared to $5.3
million for the same period in 1995, an increase of $1.2 million.
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As a result of the foregoing, net income for the nine-month period ended
September 30, 1996, was $24.2 million compared to $13.3 million for the same
period in 1995, an increase of $10.9 million.
Excluding the Institutional Pharmacy Business, net income for the nine-month
period ended September 30, 1996, was $11.8 million compared to $5.8 million
for the same period in 1995, an increase of $6.0 million.
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance
with Statement No. 121, the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets may be less than the carrying amounts of those assets. The
Company adopted Statement No. 121 and it had no effect on the financial
statements.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net revenues for 1995 were $816.5 million compared to $717.5
million for 1994, an increase of $99.0 million, or 13.8%. $112.0 million of
the increase is attributable to acquisitions completed. Same-store growth
increased $27.8 million from increases in specialty medical services provided
and an increase in average daily rates due to an improved payor mix, but was
adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased $88.6 million over the same period in 1994. This was the result of
growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
The overall increase was partially offset by a $40.8 million decrease in
revenues resulting from the divestiture of certain business units and the loss
of the pharmacy division's contract with the State of New Jersey. Included in
net revenues for 1995 and 1994 were $1.8 million and $0.8 million,
respectively, 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 1994 and 1995.
Excluding the Institutional Pharmacy Business, the Company's net revenues
for 1995 were $639.8 million compared to $559.0 million for 1994, an increase
of $80.8 million, or 14.5%. Of the foregoing change $33.4 million resulted
from same store growth and $67.1 million resulted from acquisitions. The
overall increase was partially offset by a $19.7 million decrease in revenues
resulting from the divestiture of certain business units. Specialty medical
revenues increased $64.9 million over the same period in 1994. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy).
Operating expenses (excluding rent and property expenses) for 1995 were
$669.5 million compared to $589.2 million for 1994, an increase of $80.3
million, or 13.6%. $92.6 million of the increase was attributable to
acquisitions, as well as costs associated with an increase of specialty
medical services provided, and the duplicate Evergreen overhead incurred prior
to the merger of the Company with Evergreen. On a same-store basis, operating
expenses increased $29.2 million. The increases were partially offset by
reduction of expenses of $41.5 million from facilities divested. Specialty
medical revenues generate additional costs from the higher staffing levels
required to care for the higher acuity Medicare residents. 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.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1995 were $519.5 million compared to $457.0
million for 1994, an increase of $62.5 million, or 13.7%. Of the foregoing
increase, $31.0 million was attributable to same-store increases in expenses
and $51.0 million was attributable to acquisitions completed. These increases
were partially offset by a reduction of expenses of $19.5 million from the
divestiture of certain business units.
Rent and property expenses for 1995 were $51.2 million compared to $44.3
million for 1994, an increase of $6.9 million, or 15.6%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
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Excluding the Institutional Pharmacy Business, rent and property expenses
for 1995 were $47.1 million compared to $41.5 million for 1994, an increase of
$5.6 million, or 13.5%.
Depreciation and amortization expenses for 1995 were $21.6 million compared
to $16.4 million for 1994, an increase of $5.2 million, or 31.7%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1995 were $16.9 million compared to $12.9 million for 1994, an
increase of $4.0 million, or 31.0%.
Interest expense and financing charges for 1995 were $27.1 million compared
to $21.5 million in 1994, an increase of $5.6 million, or 26.0%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions, the issuance of $100 million of Senior
Subordinated Notes and, to a lesser extent, borrowings to fund working
capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1995 were $26.6 million compared to $20.8 million for
1994, an increase of $5.8 million, or 27.9%.
In 1995, the Company recorded a merger and other one-time costs charge of
$11.8 million. Those costs include professional fees (legal, accounting and
investment bankers) of $5.1 million, personnel costs (severance and
relocation) of $3.2 million, a directors and officers policy of $0.5 million,
other deferred acquisition costs of $1.1 million, a divestiture charge of $1.5
million for certain Evergreen facilities which do not fit the Company's
strategy and another charge of $0.4 million relating to TeamCare converting
Evergreen's pharmacy to their system. In 1994, the Company recorded a
restructuring charge of $8.2 million in connection with a restructuring plan
adopted by the Board of Directors in August 1994. See "Liquidity and Capital
Resources."
Income taxes for 1995 were $14.8 million compared to $13.5 million for 1994.
Excluding the Institutional Pharmacy Business, income taxes for 1995 were
$7.8 million compared to $5.8 million for 1994.
As a result of the foregoing, net income for 1995 was $20.6 million compared
to $24.3 million for 1994, a decrease of $3.7 million, or 15.2%.
Excluding the Institutional Pharmacy Business, net income for 1995 was
$10.2 million compared to $12.8 million for 1994, a decrease of $2.6 million,
or 20.3%.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's net revenues for 1994 were $717.5 million compared to $611.7
million for 1993, an increase of $105.8 million, or 17.3%. This increase is
primarily attributable to acquisitions completed and, to a lesser extent,
same-store growth. On a same-store basis, net revenues increased 6.7%. Same-
store revenue growth resulted from increases in specialty medical services
provided and an increase in average daily rates due to an improved payor mix,
but was adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased to 42.4% compared to 39.8% for the same period in 1993. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy). The overall increase was partially offset by a decrease in revenues
resulting from the divestiture of certain business units. Included in net
revenues for 1994 and 1993 were $0.8 million and $1.9 million, respectively,
relating to routine cost limit exceptions.
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Operating expenses (excluding rent and property expenses) for 1994 were
$589.2 million compared to $506.5 million for 1993, an increase of $82.7
million, or 16.3%. This increase was primarily attributable to acquisitions,
as well as costs associated with an increase of specialty medical services
provided, and a $1.0 million charge in connection with the relocation of the
Company's corporate offices. Specialty medical revenues generate additional
costs from the higher staffing levels required to care for the higher acuity
Medicare residents. 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 the dispositions of certain
business units, 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 1994 were $44.3 million compared to $42.4
million for 1993, an increase of $1.9 million, or 4.5%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Depreciation and amortization expenses for 1994 were $16.4 million compared
to $12.3 million for 1993, an increase of $4.1 million, or 33.3%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Interest expense and financing charges for 1994 were $21.5 million compared
to $19.6 million in 1993, an increase of $1.9 million, or 9.7%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions and, to a lesser extent, borrowings to fund
working capital. Higher rates on floating rate debt also increased interest
expense.
In 1994 the Company recorded a restructuring charge of $8.2 million in
connection with a restructuring plan adopted by the Board of Directors in
August 1994. See "Liquidity and Capital Resources."
Income taxes for 1994 were $13.5 million compared to $10.1 million for 1993.
As a result of the foregoing, net income for 1994 was $24.3 million compared
to $14.8 million for 1993, an increase of $9.5 million, or 64.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at September 30, 1996 was $25.8
million in cash and cash equivalents compared to $17.7 million at December 31,
1995, an increase of $8.1 million. On August 5, 1996, the Company sold its
entire interest in Alternative Living Services, Inc. ("ALS"), resulting in net
proceeds to the Company of approximately $24.6 million and an approximate
$18.0 million gain on the sale. The increase in cash and cash equivalents was
due primarily to proceeds realized from the sale of ALS. Payments received by
the Company from the Medicaid and Medicare programs are the Company's largest
source of cash from operations.
Accounts receivable at September 30, 1996 were $218.5 million compared to
$173.1 million at December 31, 1995, an increase of $45.4 million or 26.2%.
The Company's accounts receivable include receivables from third-party
reimbursement programs, primarily Medicaid and Medicare settlements. 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. 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
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open cost reports by taking appropriate reserves to offset potential audit
adjustments. Management has no knowledge of any material pending claims or
unsettled matters pertaining to such cost reports. Specialty medical services
generally increase the amount of payments received on a delayed basis.
Excluding the Institutional Pharmacy Business, accounts receivable at
September 30, 1996 were $171.4 million compared to $135.3 million at December
31, 1995, an increase of $36.1 million.
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 1996 are approximately $100.0 million.
Excluding the Institutional Pharmacy Business, the Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1996 are approximately $87.0 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. Total capital
expenditures for the year ended December 31, 1995 were $23.5 million,
excluding $2.5 million of capital expenditures reimbursed by Health and
Retirement Properties Trust ("HRPT"). Total capital expenditures for the nine-
month period ended September 30, 1996, were $24.0 million. The Company
estimates that capital expenditures for the year ending December 31, 1996,
will be approximately $32.0 million.
Excluding the Institutional Pharmacy Business, total capital expenditures
for the year ended December 31, 1995 and the nine-month period ended September
30, 1996, were $21.2 million and $20.1 million, respectively.
The Company maintains a $150.0 million credit facility (the "Existing Credit
Facility") with a syndicate of banks for whom First Union National Bank of
North Carolina ("First Union") acts as lead bank, which may be used for
working capital, other general corporate purposes and acquisitions. As of
September 30, 1996, approximately $88.9 million was outstanding under the
Existing Credit Facility. The Company will be able to borrow under the
Existing Credit Facility through June 1998, at which time it will convert to a
term loan, unless it is refinanced or extended. Upon conversion, the amount
then outstanding will be payable in equal quarterly installments through June
2002. See "The Distribution--Treatment of Certain Indebtedness--Existing
Credit Facility." Shortly before the Distribution, the Company will contribute
the stock of its skilled nursing facility subsidiaries to New GranCare.
Immediately prior to the Distribution, New GranCare plans to enter into the
New Credit Facility with a syndicate of banks, certain proceeds from which
will be paid by New GranCare on behalf of its subsidiaries to the Company in
satisfaction of intercompany debt owed by New GranCare and its skilled nursing
facility subsidiaries to the Company and the TeamCare subsidiaries. Amounts so
paid by New GranCare to the Company will be applied to satisfy various third-
party debt of the Company (including the Existing Credit Facility and the
Convertible Debentures). See "The Distribution--Treatment of Certain
Indebtedness--New Credit Facility."
In September 1995, the Company completed an offering of $100.0 million
aggregate principal amount of its 9 3/8% Notes. The net proceeds from this
offering were used to repay outstanding amounts under the Existing Credit
Facility. The Distribution Agreement provides that Vitalink will assume such
Notes by operation of law. See "The Distribution--Treatment of Certain
Indebtedness--9 3/8% Notes."
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The Company believes that its cash from operations, existing working capital
and available borrowings under its line of credit 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. At this time the
Company believes that any additional required financing could be obtained at
market rates on terms that are acceptable to the Company, although no
assurance can be given regarding the terms or availability of additional
financing in the future.
In conjunction with a 1990 acquisition, the Company borrowed $15.0 million
under a promissory note agreement with 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 is 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, beginning 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 seven of the 24
facilities to unrelated parties. Following the Distribution and Merger, New
GranCare will succeed to the obligations of the Company to HRPT.
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 mortgage 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 Existing Credit Facility and
indenture pursuant to which the 9 3/8 Notes were issued also contain
restrictions on the ability of the Company to pay dividends to its
shareholders upon the failure to satisfy certain financial covenants.
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. It is expected that following the Distribution and Merger that New
GranCare will succeed to the aforementioned fixed income investments and
operate such captive insurance subsidiary.
As of December 31, 1995, the Company had recorded the following charges
against the $8.2 million restructuring reserve recognized in the third quarter
of 1994: (i) the write-off of certain unamortized financing fees; (ii)
operating gains and losses from the facilities to be divested for the period
of August 1, 1994 through December 31, 1995; (iii) gains and losses from the
sale of facilities and; (iv) severance and other personnel-related costs. The
net restructuring reserve balance at December 31, 1995 is $500,000. The
Company believes that the provisions for the restructuring continue to be
adequate and will not require material adjustment in future periods.
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The following transactions affecting the liquidity and capital resources of
both the Company and New GranCare have been entered into or contemplated in
connection with the proposed Distribution and Merger.
New Credit Facility. In order to affect the Distribution, the Company will
be required to replace its Existing Credit Facility and currently has a
commitment letter from First Union and Chase, whereby each of such banks has
agreed to provide the Company, for the benefit of New GranCare, a replacement
credit facility in the aggregate amount of $300.0 million (with First Union
and Chase each committing to $150.0 million). The New Credit Facility will
consist 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 $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. Following the consummation of the Distribution and
Merger, the Company anticipates that New GranCare will have approximately
$24.0 million outstanding 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 $7.0 million each commencing two years after the New
Credit Facility closes, thereafter increasing to $10.0 million per quarter.
All remaining principal and accrued, 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 borrowing shall accrue, at the option of New
GranCare, at the Base Rate or at the Eurodollar Rate plus, in each case, an
applicable margin. See "The Distribution--Treatment of Certain Indebtedness--
New Credit Facility."
9 3/8% Notes. The Company has commenced a consent solicitation to obtain the
approval of holders of the required principal amount of the Company's
outstanding 9 3/8% Notes to the transactions contemplated by the Distribution
Agreement and the Merger Agreement and to such modifications of certain
covenants contained in the Note Indenture as Vitalink, as the successor
obligor to the Company, may reasonably request. In connection with the
assumption by Vitalink of the Company's 9 3/8% Notes and related obligations
arising pursuant to the Note Indenture, the Company has agreed to pay Vitalink
a fee based on a formula described in "The Distribution--Terms of the
Distribution Agreement" (which fee is a Shared Transaction Expense). The
Company has also undertaken a tender offer for at least 50% of the outstanding
principal balance of the 9 3/8% Notes. A condition of the Company's obligation
to complete the tender offer is that every tendering noteholder must consent
to the requested covenant modifications referenced above. Any premium paid and
expenses incurred in connection with any such tender offer will be a Shared
Transaction Expense. See "The Distribution--Treatment of Certain
Indebtedness--9 3/8% Notes."
Convertible Debentures. The Distribution Agreement and the Merger Agreement
also require that the Company take commercially reasonable efforts to call for
redemption prior to the Distribution Record Date all of the Company's 6 1/2%
outstanding convertible debentures (the "Convertible Debentures"). The
Convertible Debentures are currently redeemable at a redemption price of
104.55% of the principal amount of the Convertible Debentures plus accrued and
unpaid interest to the date of redemption. There are currently $60.0 million
in aggregate principal amount of Convertible Debentures outstanding resulting
in an aggregate redemption premium of approximately $2.73 million which shall
be a Shared Transaction Expense (such premium shall be reduced by $390,000 in
the event the redemption occurs after January 15, 1997).
New GranCare Capital Resources. Following the Distribution and Merger, New
GranCare believes that its cash from operations, existing working capital and
available borrowings under the New Credit Facility will be sufficient to fund
the fixed obligations, capital expenditures and other obligations referred to
above, as well as to repay any required indebtedness when due, and further
expand New GranCare's business. Also in connection with the Distribution and
Merger, Vitalink has agreed to assume (as part of the Merger) certain items of
the Company's consolidated indebtedness aggregating approximately $108.0
million (which includes the Company's obligations in respect of the 9 3/8%
Notes). However, in the event that New GranCare continues to grow through
acquisitions, New GranCare may need to raise additional capital, either
through borrowings, sale-leaseback financings or the sale of debt or equity
securities, to finance the acquisition price and any additional working
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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 New GranCare,
although no assurance can be given regarding the terms that are available of
additional financing in the future.
IMPACT OF INFLATION
The health care industry is labor-intensive. Wages and other labor costs are
especially sensitive to inflation. In addition, the Company operates and New
GranCare intends to operate a majority of its facilities pursuant to operating
leases which contain provisions for increased rent, based upon inflation.
Increases in wages and other labor costs and rent expense as a result of
inflation, without a corresponding increase in Medicare and Medicaid
reimbursement rates, could adversely impact the Company or New GranCare.
Both the Medicare and Medicaid programs operate under routine cost limits or
targeted ceilings. These limits are usually adjusted on an annual basis
utilizing numerous inflation indexes. Each State can operate under a different
index resulting in the adjustments to the targeted ceilings being different in
each State. The Company cannot predict the level of the expected increase each
year and each of these programs is subject to changes in regulation,
retroactive rate adjustments and government funding which could adversely
affect the amounts paid to New GranCare. See "Risk Factors--Risk Involved with
Reimbursement by Third Party Payors."
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PROPERTIES
As of July 31, 1996, the Company operated 137 long-term care facilities (133
skilled nursing facilities and four assisted living facilities), which will be
operated by New GranCare. New GranCare believes the aforementioned physical
properties will be in good operating condition and suitable for the purposes
for which they are intended to be used when it assumes the operation of such
properties. New GranCare will operate 37 long-term care facilities, including
one assisted living facility and rehabilitation center, all of which will be
included in the collateral which secures certain financial obligations to
creditors and lessors to be assumed by New GranCare. Ninety-two other
facilities (including three assisted living facilities) will be operated by
New GranCare under long-term leases. New GranCare expects to pledge all of its
leasehold interests to certain creditors. See "The Distribution--Treatment of
Certain Indebtedness--New Credit Facility." Seven of the Company's long-term
care facilities will be managed by New GranCare.
LONG-TERM HEALTH CARE FACILITIES
The following chart shows the geographic distribution of the facilities to
be operated by New GranCare:
<TABLE>
<CAPTION>
PERCENTAGE
STATE FACILITIES(1) BEDS OF TOTAL BEDS
----- ------------- ------ -------------
<S> <C> <C> <C>
Arizona(1)................................... 7 982 5.7%
California(1)................................ 28 3,181 18.5
Colorado..................................... 4 661 3.8
Georgia...................................... 1 100 0.6
Illinois..................................... 20 2,089 12.1
Indiana...................................... 19 3,057 17.8
Iowa......................................... 7 547 3.2
Louisiana.................................... 3 240 1.4
Michigan..................................... 13 1,863 10.8
Mississippi.................................. 10 1,104 6.4
Ohio......................................... 1 100 0.6
South Carolina............................... 8 832 4.8
Tennessee.................................... 2 226 1.3
West Virginia................................ 1 164 1.1
Wisconsin.................................... 13 2,052 11.9
--- ------ -----
Total...................................... 137 17,198 100.0%
=== ====== =====
<CAPTION>
CLASSIFICATION
- --------------
<S> <C> <C> <C>
Owned........................................ 38 4,794 27.9%
Leased....................................... 91 11,067 64.3
Managed...................................... 8 1,337 7.8
--- ------ -----
Total...................................... 137 17,198 100.0%
=== ====== =====
</TABLE>
- --------
(1) Includes two assisted living facilities in the State of Arizona comprising
170 licensed beds and two assisted living facilities in the State of
California comprising 218 licensed beds.
67
<PAGE>
The following facilities are organized by state, and in California by region:
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ------------- -------- -------------
<S> <C> <C> <C>
ARIZONA
Colter Village Health Care and
Rehabilitation Center(2) Glendale 186 91.6%
Colter Village Retirement Center(4)(2) Glendale 105 72.5
GranCare Medical Center of Paradise
Valley Phoenix 200 93.1
East Valley Medical & Rehabilitation
Center Mesa 174 57.2
La Mesa Rehabilitation and Care Center Yuma 125 89.9
Sunquest Village of Yuma(4) Yuma 65 62.3
Village Green Care Center Phoenix 127 92.8
----- ----
TOTAL ARIZONA 982 81.7%
NORTHERN CALIFORNIA
Almaden HealthCare Center San Jose 77 91.2%
Driftwood HealthCare Center--Santa Cruz Santa Cruz 92 88.5
Driftwood HealthCare Center--Hayward Hayward 88 93.5
Excell Health Care Center(2) Oakland 99 91.6
Florin Health Care Center Sacramento 122 94.0
Fremont HealthCare Center Fremont 122 90.4
Fruitvale HealthCare Center Oakland 140 98.0
Hayward Hills Health Care Center Hayward 74 92.4
La Salette Rehabilitation and
Convalescent Hospital Stockton 120 89.5
Parkview Health Care Center Hayward 121 84.7
Skyline HealthCare Center -- San Jose San Jose 253 96.5
Vale HealthCare Center San Pablo 202 91.1
----- ----
TOTAL NORTHERN CALIFORNIA 1,510 92.3%
SOUTHERN CALIFORNIA
Autumn Hills Convalescent Hospital Glendale 99 97.2%
Driftwood Health Care Center Torrance 99 96.5
El Rancho Vista Health Care Center Pico Rivera 86 93.3
Flagship Health Care Center Newport Beach 167 95.2
Inglewood Health Care Center Inglewood 99 95.0
Lancaster Health Care Center Lancaster 99 91.4
Laurelwood HealthCare Center N. Hollywood 99 88.6
Monterey Palms Health Care Center(3) Palm Desert 99 88.0
Newport Villa(4) Newport Beach 109 83.8
Newport Villa West(4) Newport Beach 109 82.6
Santa Monica Health Care Center Santa Monica 59 91.2
Skyline Health Care Center Los Angeles 99 94.1
Tarzana Extended Care & Rehabilitation
Center Tarzana 173 92.9
Thousand Oaks Health Care Center Thousand Oaks 125 95.5
Van Nuys Health Care Center Van Nuys 58 95.1
Verdugo Vista Health Care Center La Crescenta 92 95.7
----- ----
TOTAL SOUTHERN CALIFORNIA 1,671 92.4
TOTAL CALIFORNIA OPERATIONS 3,181 92.3%
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ------------ -------- --------------
<S> <C> <C> <C>
COLORADO
Camelia HealthCare Center Aurora 150 87.7%
Cedars HealthCare Center Lakewood 175 95.0
Cherrelyn Manor HealthCare Center Littleton 236 88.8
Red Rocks HealthCare Center(2) Denver 100 87.7
----- ----
TOTAL COLORADO 661 90.0%
GEORGIA
Lafayette Health Care(2) Lafayette 100 91.6%
----- ----
TOTAL GEORGIA 100 91.6%
ILLINOIS
Birchwood HealthCare Center(2) Casey 75 91.7%
LaSalle HealthCare Center LaSalle 101 93.8
Litchfield HealthCare Center Litchfield 123 78.4
Charleston Manor(2) Charleston 62 78.3
Crestview HealthCare Center(2) Clinton 103 89.7
Dixon Health Care Center(2) Dixon 110 88.1
Fairview HealthCare Center(2) Belvidere 80 94.4
Flora HealthCare Center Flora 99 94.0
Good Samaritan HealthCare Center East Peoria 120 75.4
Havana Healthcare Center(2) Havana 98 83.8
Montebello HealthCare Center(2) Hamilton 139 81.9
Nature Trail HealthCare Center(2) Mount Vernon 74 98.8
Odin HealthCare Center(2) Odin 99 93.4
Parkway Healthcare Center(2) Wheaton 69 88.9
Rochelle Healthcare Center(2) Rochelle 50 95.7
Rochelle Healthcare Center--East(2) Rochelle 74 88.6
Rockford Healthcare Center(2) Rockford 81 92.3
Community HealthCare Center Naperville 153 76.5
Springfield Healthcare Center Springfield 170 93.6
Wynscape HealthCare Center(5) Wheaton 209 92.4
----- ----
TOTAL ILLINOIS 2,089 89.1%
INDIANA
Anderson HealthCare Center(5) Anderson 175 55.8%
Anthony Wayne HealthCare Center Fort Wayne 126 65.8
Beech Grove Healthcare Center Beech Grove 189 65.3
Central Healthcare Center Indianapolis 147 75.5
Chelsea Healthcare Center(5) Elkhart 157 45.9
Country Trace Healthcare Center Indianapolis 49 73.5
Eagle Valley Healthcare Center Indianapolis 120 85.3
Forest Park Healthcare Center Kokomo 188 92.5
Lafayette Healthcare Center(5) Lafayette 202 40.0
Monticello Healthcare Center Monticello 206 77.6
New Castle Healthcare Center(5) New Castle 171 77.9
Noblesville Healthcare and Alzheimer's
Special Care Center Noblesville 195 71.5
Pine Tree HealthCare Center Indianapolis 179 71.6
Universal HealthCare Center(5) Franklin 123 61.3
Southside HealthCare Center Indianapolis 155 49.2
Wabash Healthcare Center(5) Wabash 101 63.0
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ---------------- -------- --------------
<S> <C> <C> <C>
INDIANA (CONTINUED)
Washington HealthCare Center(5) Evansville 199 58.4%
Willowbrook HealthCare Center Clarkville 195 88.3
Willow Ridge HealthCare Center Fort Wayne 180 57.2
----- ----
TOTAL INDIANA 3,057 67.5%
IOWA
Altoona HealthCare Center Altoona 114 86.1%
Carroll HealthCare Center Carroll 51 91.9
Granger HealthCare Center Granger 71 85.2
Heritage HealthCare Center--Des
Moines(2) Des Moines 99 86.4
Jefferson HealthCare Center Jefferson 93 94.0
Norwalk HealthCare Center Norwalk 51 86.2
Polk City HealthCare Center Polk City 68 89.4
----- ----
TOTAL IOWA 547 92.8%
LOUISIANA
Alexandria HealthCare Center Alexandria 75 67.0%
Heritage HealthCare Center--Crowley Crowley 57 93.4
Heritage HealthCare Center--Hammond Hammond 108 85.1
----- ----
TOTAL LOUISIANA 240 82.0%
MICHIGAN
Bedford Villa HealthCare Center(2) Southfield 61 83.3%
Cambridge East HealthCare Center(2) Madison Heights 160 93.8
Cambridge North HealthCare Center(2) Clawson 120 95.8
Cambridge South HealthCare Center(2) Beverly Hills 102 95.7
Clinton-Aire HealthCare Center(2) Clinton Township 150 95.0
Crestmont HealthCare Center(2) Fenton 132 93.7
Frenchtown HealthCare Center(2) Monroe 229 76.9
Heritage Manor HealthCare Center(2) Flint 180 92.3
Hope HealthCare Center(2) Westland 142 94.3
Madonna HealthCare Center(2) Detroit 138 88.5
Middlebelt HealthCare Center(2) Livonia 162 95.1
Nightingale HealthCare Center(2) Warren 185 95.6
St. Anthony HealthCare Center(2) Warren 102 90.5
----- ----
TOTAL MICHIGAN 1,863 91.8%
MISSISSIPPI
Heritage HealthCare Center--Cleveland Cleveland 75 94.3%
Heritage HealthCare Center--Clinton Clinton 135 96.2
Heritage HealthCare Center--Columbia Columbia 119 95.6
Heritage HealthCare Center--Corinth Corinth 95 94.9
Heritage HealthCare Center--Greenwood Greenwood 110 94.9
Heritage HealthCare Center--Grenada Grenada 137 95.3
Heritage HealthCare Center--Holly
Springs Holly Springs 120 93.9
Heritage HealthCare Center--Indianola Indianola 75 98.0
Trace Haven HealthCare Center Natchez 58 93.4
Heritage HealthCare Center--Yazoo
City Yazoo City 180 95.3
----- ----
TOTAL MISSISSIPPI 1,104 95.2%
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ---------------- -------- --------------
<S> <C> <C> <C>
OHIO
Rosegate HealthCare Center West Worthington 100 84.7%
------ -----
TOTAL OHIO 100 84.7%
TENNESSEE
Heritage HealthCare Center--
Collierville Collierville 114 101.2%
Heritage HealthCare Center--Memphis Memphis 112 89.0
------ -----
TOTAL TENNESSEE 226 95.1%
SOUTH CAROLINA
Faith HealthCare Center Florence 124 93.0%
Hallmark HealthCare Center Summerville 88 98.3
Jolley Acres HealthCare Center Orangeberg 60 92.6
Lake City Scranton HealthCare Center Scranton 88 98.9
Oakbrook Health and Rehabilitation
Center Summerville 88 97.3
Prince George HealthCare Center Georgetown 148 83.6
St. George HealthCare Center St. George 88 97.1
Springdale HealthCare Center Camden 148 95.6
------ -----
TOTAL SOUTH CAROLINA 832 93.5%
WEST VIRGINIA
Parkview HealthCare Center Parkersburg 164 90.8%
------ -----
TOTAL WEST VIRGINIA 164 90.8%
WISCONSIN
Ashland Health and Rehabilitation
Center(2) Ashland 121 87.0%
Audubon Health Care Center(2) Bayside 282 96.6
Christopher East HealthCare Center Milwaukee 215 91.5
Greentree Health and Rehabilitation
Center Clintonville 78 76.3
Hillside Health Care Center(2) Milwaukee 39 94.0
Northwest Health Care Center(2) Milwaukee 102 88.0
Park Manor Health Care Center Milwaukee 118 87.1
Pine Manor Health Care Center Clintonville 109 82.2
River Hills West Health Care
Center(2) Pewaukee 237 92.9
Sunny Hill Health Care Center Madison 73 89.8
The Shores Transitional Care and
Rehabilitation Center(2) Glendale 347 84.5
The Virginia Health Care Center Waukesha 105 96.4
Woodland HealthCare Center Brookfield 226 96.4
------ -----
TOTAL WISCONSIN 2,052 90.2%
------ -----
TOTAL GRANCARE OPERATIONS 17,198 86.6%
====== =====
</TABLE>
- --------
(1) Average occupancy rate for the seven months ended July 1996, for all
facilities. See notes below.
(2) Facilities owned by the Company.
(3) Facility is managed by outside facility management company.
(4) Facilities operated as retirement living centers.
(5) Facilities managed by the Company.
71
<PAGE>
CONTRACT MANAGEMENT
Subject to the exceptions set forth below, the Company's contract management
business, which will be owned and operated by New GranCare after the
Distribution, enters into contracts with acute care hospitals for the
management of geriatric specialty programs, generally located inside such
hospitals. Such management contracts do not generally involve the lease or
purchase of any property. Cornerstone does, however, lease two properties in
connection with its operations. The two leased facilities are The Specialty
Hospital of Austin (Texas) and The Specialty Hospital of Houston (Texas),
which as of the end of fiscal 1995 had 104 beds and 45 beds, respectively, and
an average occupancy rate of 35.4% and 55%, respectively. Cornerstone's
corporate headquarters is located in Dallas, Texas.
HOME HEALTH
The Company owns and operates home health, private duty and hospice agencies
located in California, Michigan, Wisconsin and Indiana, which will be owned
and operated by New GranCare following the Distribution. The agencies are
operated by subsidiaries of the Company and lease the space for their
operations; all such leases are immaterial in amount.
72
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company, as well as their ages
as of January 1, 1997, are listed below, followed by brief accounts of their
business experience and certain other information. Although the contemplated
restructuring of the Company may result in the elimination of certain
management positions filled by persons listed below, it is expected that most,
if not all, of the officers listed below (other than Mr. Reynolds who will
become an executive officer of Vitalink following the Distribution and Merger)
will be asked to continue their employment with New GranCare in substantially
the same capacity as such individuals have served the Company. It is also
expected that the present directors of the Company will continue as directors
of New GranCare. Certain of the executive officers listed below have
employment agreements with the Company that provide for certain payments in
the event of a "change of control" of the Company (as such term is defined in
the relevant employment agreements). Executives entitled to payments in
connection with a change of control under their current Company employment
contracts will be asked to waive any change of control payments to which they
are entitled in consideration of grants of New GranCare Options and as a
condition to entering into a new employment contract with New GranCare. It is
contemplated that the employment agreements to be entered into between such
executives and New GranCare will provide for certain payments in the event of
a "change of control" (as such term will be defined in the relevant New
GranCare employment agreements) of New GranCare. The current directors of New
GranCare are Messrs. Athans, Benton and Schneider. Immediately following the
Distribution, Messrs. Benton and Schneider will resign from the Board of
Directors of New GranCare and will be replaced by the current directors of the
Company. Mr. Athans will continue to serve on the Board of Directors of New
GranCare. New GranCare will reevaluate the size and composition of its Board
of Directors at the next annual meeting of stockholders. Mr. Athans also will
become President and Chief Executive Officer of New GranCare following the
Distribution. Other than Mr. Athans, no assurance can be given that any of the
officers or directors listed below will accept any offered positions with New
GranCare or that the management team of New GranCare will remain substantially
the same as the Company's management team. Gene E. Burleson, currently the
Chairman, President and Chief Executive Officer of the Company, will become
Chief Executive Officer and a director of Vitalink following the Distribution
and the Merger, and will continue to act as Chairman of the Board and a
director of New GranCare. Arlen B. Reynolds, currently a Senior Vice President
of the Company and President of TeamCare, will become Executive Vice President
of Vitalink following the Distribution and the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gene E. Burleson.. 56 Chairman, President and Chief Executive Officer
Charles M.
Blalack.......... 69 Director
Antoinette
Hubenette, M.D... 48 Director
Joel S. Kanter.... 40 Director
Ronald G. Kenny... 41 Director
Robert L. Parker.. 62 Director
William G. Petty,
Jr............... 51 Director
Edward V. Regan... 66 Director
Gary U. Rolle..... 55 Director
M. Scott Athans... 50 Executive Vice President and Chief Operating Officer (present
director of New GranCare)
Evrett W. Benton.. 48 Executive Vice President, General Counsel and Secretary (present
director of New GranCare)
Jerry A.
Schneider........ 49 Executive Vice President and Chief Financial Officer (present
director of New GranCare)
Kay L. Brown...... 43 Senior Vice President and Director of Corporate Communications and
Investor Relations
Dennis J. Hansen.. 49 Senior Vice President, Chief Information Officer
Dennis G.
Johnston......... 49 Senior Vice President, President of Cornerstone Health Management
Company
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Aruna Poddatoori......... 42 Senior Vice President, Western Operations
Arlen B. Reynolds........ 55 Senior Vice President and President of TeamCare
Mark H. Rubenstein....... 51 Senior Vice President, Director of Human
Resources
Richard J. Spinello...... 50 Senior Vice President, Director of Risk
Management
R. Jeffrey Taylor........ 47 Senior Vice President, GCI Rehab
Dennis Wheeler........... 45 Senior Vice President, Eastern Operations
Frank E. Scott, D.O. .... 51 Senior Vice President, Corporate Medical
Director
Keith J. Yoder........... 44 Senior Vice President, Controller and Treasurer
Thomas J. Benes.......... 43 Vice President, Director of Materials
Management
David R. Borchers........ 45 Vice President, Director of Facility Management
James G. Burkhart........ 32 Vice President, Operational Finance
M. Henry Day, Jr......... 43 Vice President, Assistant General Counsel and
Assistant Secretary
Victoria A. Eberle....... 32 Vice President, Director of Tax
Clark D. Hettinga........ 31 Vice President, Assistant Controller
Helayne R. O'Keiff....... 42 Vice President, President of GranCare Home
Health Services
Sandra L. Long........... 45 Vice President, Sales and Marketing
Jeffrey L. Peterson...... 42 Vice President, Business Development
Michael H. Rosen......... 47 Vice President, Director of Business Compliance
and Controls
Robert E. Schmidt........ 38 Vice President, Operational Finance
</TABLE>
Gene E. Burleson has served as Chairman of the Board of the Company since
January 1994. Additionally, Mr. Burleson has served as President and Chief
Executive Officer of the Company since December 1990. Mr. Burleson will cease
acting as President and Chief Executive Officer upon completion of the
Distribution and the Merger. Mr. Burleson has served as President and a
Director of the Company since October 1989. From 1974 to September 1989, Mr.
Burleson was employed by American Medical International, Inc. ("AMI"), a
provider of health care services, where from early 1988 to March 1989 he
served as President while continuing his role as Chief Operating Officer, a
position he assumed in 1986. Prior to serving as President of AMI,
Mr. Burleson was President and Chief Executive Officer of American Medical
International--European Operations for nine years. Mr. Burleson currently
serves on the boards of directors of three other public companies: Alternative
Living Services, Inc. ("ALS"), a developer and manager of assisted living
facilities; Deckers Outdoor Corp., a footwear manufacturer; and Walnut
Financial Services, a provider of financial services.
Charles M. Blalack became a director of the Company in March 1989. From
March 1993 to the present, Mr. Blalack has been Chairman and Chief Executive
Officer of Blalack & Company, a member of the National Association of
Securities Dealers, Inc. ("NASD"). From September 1969 to March 1993, Mr.
Blalack was Chairman of the Board and Chief Executive Officer of Blalack-Loop,
Incorporated, a member of the NASD and a registered investment advisor. Mr.
Blalack was a director of Beverly Enterprises, Inc. ("Beverly Enterprises"),
the largest operator of long-term care facilities in the United States, from
1964 to 1975, and he currently serves on the board of directors of Advanced
Micro Devices, Inc., a publicly held company.
Antoinette Hubenette, M.D. became a director of the Company in April 1992.
Dr. Hubenette is a medical doctor who specializes in internal medicine and
geriatric care. Since 1982, Dr. Hubenette has been a partner with the Medical
Group of Beverly Hills, and recently became the President of the group. In
1968, Dr. Hubenette received her bachelor's degree from the University of
California, Berkeley, and in 1976 completed her M.D. at George Washington
University. Currently, Dr. Hubenette serves on the board of directors of
Cedars-Sinai Medical Care Foundation and is a member of several professional
organizations, including the American Medical Association.
Joel S. Kanter became a director of the Company in December 1990. From 1986
to the present, Mr. Kanter has been the President of Windy City, Inc., a
private investment company, and from 1988 to February 27, 1995 he served as a
consultant to Walnut Capital Corporation ("WCC"), a closely held investment
management and advisory firm. From February 27, 1995 to the present, Mr.
Kanter has served as the President of WCC and
74
<PAGE>
Walnut Financial Services. Prior to 1986, Mr. Kanter was Managing Director of
the Investors' Washington Service, an investment advisory company specializing
in providing advice to institutional clients about the impact of federal
legislative and regulatory decisions on debt and equity markets. Mr. Kanter
serves on the board of directors of five other publicly held companies, I-Flow
Corporation (a home infusion pump manufacturer), TransGlobal Services, Inc.
(an engineering personnel temporary firm), Walnut Financial Services, Inc. (a
provider of small business financial and consulting services), Healthcare
Acquisition Corp. (a corporation involved in acquiring healthcare related
companies) and Osteoimplant Technology, Inc. (a manufacturer of shoulder and
hip implant devices), and several privately held companies.
Ronald G. Kenny became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Mr. Kenny served as a director of
Evergreen from June 1993 up to the time of the Evergreen merger and currently
serves as Vice President--Finance of Huizenga Capital Management, a privately
held investment management company, since 1990. Mr. Kenny was a director of
National Heritage, Inc. ("NHI") from October 1992 to June 1993. Mr. Kenny
serves on the board of directors of Alternative Living Services, Inc. ("ALS"),
a public corporation that owns and manages assisted living facilities.
Robert L. Parker became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Mr. Parker served as Chairman of the
Board of Directors of Omega Healthcare Investors, Inc., a real estate
investment trust ("Omega") from March 1992 to July 1995 and was a Managing
Director of Omega Capital, Ltd., a private health care investment fund ("Omega
Capital"), from 1986 to 1992. From 1972 through 1983, Mr. Parker was a senior
officer of Beverly Enterprises. At the time of his retirement in 1983, Mr.
Parker was Executive Vice President of Beverly Enterprises. Mr. Parker is a
registered architect, licensed in California and Oklahoma. Mr. Parker
continues to serve as a director of Omega and also serves as a director of
First National Bank of Bethany, Oklahoma, a private commercial bank.
William G. Petty, Jr. became a director of the Company in July 1995 in
connection with the Company's merger with Evergreen. Since July 1, 1996, Mr.
Petty has been a principal of Beecken, Petty & Company LLC, which is the
general partner of Healthcare Equity Partners, a venture capital partnership.
Mr. Petty served as Chairman of the Board of Directors, President and Chief
Executive Officer of Evergreen from June 30, 1993 to July 1995. He served as
Chairman of the Board, Chief Executive Officer and President of NHI from
October 1992 to June 1993. From 1988 to 1992, he served as President and Chief
Executive Officer of Evergreen Healthcare Ltd., L.P. ("EHL"), an affiliate of
Evergreen, and has been a Managing Director of Omega Capital, Ltd., a private
health care investment fund since 1986. Mr. Petty has been the Chairman of the
Board of ALS since 1993. Mr. Petty also served as the Chief Executive Officer
of ALS from 1993 until February 1996.
Edward V. Regan became a director of the Company in January 1994. From 1979
to 1993, Mr. Regan served as New York State Comptroller. From 1992 to the
present, Mr. Regan has been associated with the Jerome Levy Economics
Institute, a non-partisan research center generating public policy
alternatives through the study of economics. Mr. Regan is a member of the U.S.
Competitiveness Policy Council. From 1988 to 1992, Mr. Regan was an adjunct
professor at New York University's Stern Graduate School of Business. Mr.
Regan currently serves on the board of directors of the Oppenheimer Funds,
Inc. and River Bank America, a publicly held company and Offitbank, a
professional money management firm and a publicly held company.
Gary U. Rolle became a director of the Company in February 1994. From 1983
to the present, Mr. Rolle has been the Executive Vice President and Chief
Investment Officer of Transamerica Investment Services, a subsidiary of
Transamerica Corp., a financial services company. Mr. Rolle is currently the
Chairman and President of Transamerica Income Shares, director of Transamerica
Investors, Transamerica Occidental Life Insurance Company, Transamerica Life
Insurance & Annuity, Transamerica Assurance Company, Transamerica Realty
Services and Arbor Life Insurance Company and Chairman of Separate Account
Funds B & C. Mr. Rolle is also a member of the Board of Trustees of Harvey
Mudd College.
M. Scott Athans joined the Company in November 1993 as Executive Vice
President and Chief Operating Officer. Prior to joining the Company, Mr.
Athans was the Chief Operating Officer of Healthfield Inc., a home
75
<PAGE>
health care business with operations in Georgia, Tennessee, Alabama,
Massachusetts and Florida. From March 1990 to July 1991, Mr. Athans served as
the Chief Executive Officer of the Georgia Baptist Medical Center. Prior to
that, Mr. Athans spent six years as Senior Vice President and Regional
Director of AMI.
Evrett W. Benton joined the Company in January 1992 and shortly thereafter
became Executive Vice President, General Counsel and Secretary. Prior to
joining the Company, he was with a national law firm, Andrews & Kurth L.L.P.,
where he began his legal career in Houston in 1975. In 1989, he moved to the
firm's Los Angeles office where he served as managing partner. His practice
specialized in business law, with an emphasis on finance, mergers and
acquisitions and general corporate law.
Jerry A. Schneider joined the Company in January 1995 as Executive Vice
President and Chief Financial Officer. Mr. Schneider served as President of
J&K Alan Company, Ltd., London, England, an investment management company,
from 1991 to 1994. From 1985 to 1991, Mr. Schneider was the Chief Financial
Officer and Legal Counsel to Eugene V. Klein, dba Del Rayo Racing Stables, a
major thoroughbred racing and breeding operation. Prior to 1985, he spent
seven years as the Vice President of Taxes and International Chief Financial
Officer of AMI.
Kay L. Brown, a Senior Vice President since February 1993, is Director of
Corporate Communications and Investor Relations of the Company. From June 1992
through February 1993, Ms. Brown was Vice President, Home Health of the
Company. Prior to joining the Company in 1992, from December 1988 to June 1992
Ms. Brown served as President and Chief Executive Officer of Visiting Nurse
Associations of America ("VNAA"), the organization representing visiting nurse
associations throughout the United States. From February 1987 to December
1988, Ms. Brown was VNAA's Vice President and Chief Operating Officer.
Dennis J. Hansen joined the Company in February 1993 as the Director of
Reimbursement and in August 1993 became the Director of Reimbursement and
Management Information Services. Currently, Mr. Hansen serves as Senior Vice
President and Chief Information Officer. In January 1994, Mr. Hansen was
promoted to Vice President and in January 1995 he became a Senior Vice
President of the Company. Prior to joining the Company, Mr. Hansen spent ten
years as the Corporate Vice President, Director of Reimbursement Services of
AMI.
Dennis G. Johnston joined the Company as President of Cornerstone in April
1995 and became Senior Vice President of the Company in July 1995.
Mr. Johnston was the co-founder of Cornerstone in 1990, and served as its
President and Chief Executive Officer from 1990 to 1995. From 1984 to 1989,
Mr. Johnston held various positions with the management subsidiary of Republic
Health Corporation, including that of Senior Development Officer.
Aruna Poddatoori became Senior Vice President, Western Operations, of the
Company in January 1997 after having served as Vice President, Western
Division Operations of the Company since October 1995. Ms. Poddatoori joined
the Company in 1991 when the Company acquired certain facilities from ARA
Living Centers where she served as Executive Director of Driftwood Health Care
Center in Torrence, California.
Arlen B. Reynolds joined the Company in September 1995 as Senior Vice
President and President of TeamCare. In connection with the Merger, Mr.
Reynolds will resign as an officer of the Company and become an Executive Vice
President of Vitalink. From 1993 to September 1995, Mr. Reynolds was the
administrator and Chief Operating Officer of Brookwood Medical Center in
Alabama. From 1988 to 1993, he served in several capacities with AMI,
including Chief Executive Officer and President of an acute care hospital.
Mark H. Rubenstein became a Senior Vice President of the Company in January
1997. Prior to that, Mr. Rubenstein was employed by AMS for eleven years and
joined the Company as Vice President, Director of Human Resources in
connection with the acquisition of AMS in December 1990.
Frank E. Scott, D.O. became a Senior Vice President of the Company in
January 1997. Prior to this, he served as the Company's Executive Vice
President of Clinical Affairs and National Medical Director since 1995.
76
<PAGE>
Since completing his fellowship in rheumatology and clinical immunology at
Walter Reed Army Medical Center in 1983, Dr. Scott has served as a clinical
professor at various medical universities and currently is on the teaching
staff as an Associate Professor at the College of Osteopathic Medicine of the
Pacific in Ponomo, California and at Kirksville College of Osteopathic
Medicine, Kirksville, Missouri. Since 1985, Dr. Scott has maintained a private
practice and served as President of the Southwest Arthritis Center in Phoenix,
Mesa and Chandler, Arizona.
Richard J. Spinello became a Senior Vice President in January 1996. Prior to
this, he served as Vice President and Director of Risk Management since
January 1993 and in various other capacities with the Company from the time he
joined the Company in 1991. Prior to joining the Company, Mr. Spinello was
Director of both Professional Liability Claims and Loss Control at AMI.
R. Jeffrey Taylor joined the Company in February 1996 as President of GCI
Renal Care, Inc., became President of the Company's ancillary services
division in November 1996 and was appointed Senior Vice President of the
Company in January 1997. Prior to joining the Company, Mr. Taylor was Chief
Executive Officer of American Outpatient Services Corporation, a dialysis
company, since July 1995. From January 1992 to June 1994 he was President of
Weisman, Taylor, Simpson & Sabatino, a health care merchant banking firm based
in California. From 1982 through 1992 Mr. Taylor served in several executive
capacities with AMI including General Counsel and Executive Vice President,
Chief Administrative Officer.
Dennis Wheeler joined the Company in 1992 when the Company acquired
International Health Care Management, Inc., where he was Director of
Operations. Following the acquisition, he was appointed as the Company's
director of operations for Georgia and South Carolina when the Company
expanded into those markets. Mr. Wheeler was elected Senior Vice President,
Eastern Operations, of the Company in January 1997.
Keith J. Yoder joined the Company in July 1995 as Senior Vice President,
Controller and Treasurer. He previously served as Vice President, Chief
Financial Officer of Evergreen since January 1992, Secretary of Evergreen
since June 1993 and as Treasurer of Evergreen since December 1993. He served
as Vice President of NHI from December 1992 to June 1993 and as the Chief
Financial Officer and Secretary of NHI from January 1993 to June 1993. Prior
to joining Evergreen, Mr. Yoder served as Area Controller for ARA from 1989 to
1992.
Thomas J. Benes joined the Company in March 1995 as Director of Materials
Management. In January 1996, Mr. Benes was promoted to Vice President. Prior
to joining the Company, Mr. Benes served in several capacities with Main Line
Health, Inc. from 1987 to 1994.
David R. Borchers joined the Company in November 1993, as Director of
Facility Management, and became Vice President in January 1995. Prior to
joining the Company, Mr. Borchers served as Vice President of Facilities
Development and Engineering for Dole Food Company since 1988.
James G. Burkhart joined the Company in May 1996 as Chief Financial Officer
of TeamCare and became Vice President in January 1997. Prior to joining the
Company, Mr. Burkhart served as Senior Vice President of Finance of Community
Care of America from 1995 to 1996. Prior to this, Mr. Burkhart served as
Executive Vice President and Chief Financial Officer of Nationwide Care from
1993 to 1995. Prior to 1993, Mr. Burkhart worked for the accounting firm of
Ernst & Young LLP for seven years.
M. Henry Day, Jr. became a Vice President of the Company in January 1996.
Prior to this, he served as Assistant General Counsel and Assistant Secretary
of the Company since September 1994. Before joining the Company, Mr. Day was
General Counsel of Life Care Centers of America, Inc., a privately-owned
Cleveland, Tennessee based long-term healthcare provider.
Victoria A. Eberle joined the Company in January 1992 as Corporate Tax
Manager and became Vice President in January 1994. Prior to joining the
Company, Ms. Eberle worked for the accounting firm of Deloitte & Touche LLP
for five years.
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Clark D. Hettinga was elected Vice President in January 1996. Previously, Mr.
Hettinga served as Director of Accounting, Assistant Controller, Director of
Financial Reporting and Corporate Reporting and SEC Compliance Supervisor for
the Company from 1992 to present. From 1989 to 1992, Mr. Hettinga was an
auditor with Ernst & Young LLP in Milwaukee, Wisconsin.
Sandra L. Long became Vice President, Sales and Marketing of the Company in
October 1995 after serving as Director of Operations--Midwest Region since
1993. Previously, Ms. Long served as the Executive Director of The Shores
Transitional Care and Rehabilitation Institute during 1992 and 1993.
Helayne R. O'Keiff joined the Company in April 1995 as the President of
GranCare Home Health Services. In January 1996, Ms. O'Keiff became a Vice
President of the Company. From 1992 to 1995 Ms. O'Keiff served as the Chief
Operating Officer of Home Technology Healthcare, Inc., a Nashville, Tennessee
based home care services provider. From 1987 to 1992, Ms. O'Keiff was Director
of Home Health Services at Barnes Hospital in St. Louis, Missouri.
Jeffery L. Petersen became a Vice President of the Company in January 1997.
Previously, Mr. Petersen served as Director of Acquisitions and Facility
Development since 1995. In 1994, Mr. Petersen served as a consultant to the
Acquisition Department of the Company. Prior to joining the Company, Mr.
Petersen served as the General Partner of RPR Partnership 1, a real estate
partnership, and was a medical practice management consultant for 15 years.
Michael H. Rosen joined the Company in October 1991 as Controller. In January
1994 he was promoted to Vice President of the Company. In 1995, Mr. Rosen
became Director of Business Compliance and Controls.
Robert E. Schmidt became a Vice President of the Company in January 1997.
Prior to this, he served as Vice President, Operational Finance of the
Company's facilities division since August 1995. Prior to this, he served as
Vice President--Corporate Controller for Transitional Health Services during
1995. Before joining Transitional Health Services, Mr. Schmidt served in
various capacities at MedRehab, Inc., the country's largest privately held
medical rehabilitation company, from 1990-1994.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company presently has a total of five standing committees of its Board of
Directors including an Audit Committee, a Finance Committee, a Management
Compensation Committee, a Nominating Committee and a Quality Committee. It is
anticipated that New GranCare will establish similar committees of its Board of
Directors. A brief description of the responsibilities of each of the standing
committees of the Company's Board of Directors and the members of each such
committee is set forth below.
Messrs. Kanter (Chairman), Regan and Kenny are the members of the Company's
Audit Committee. The Audit Committee is responsible for coordinating matters
with independent auditors, reviewing internal accounting controls and
recommending the engagement of independent accountants to the Board of
Directors.
The Finance Committee consists of Messrs. Petty (Chairman), Burleson, Kanter
and Rolle. The Finance Committee is responsible for evaluating financing
alternatives and advising management on financial strategies and major
financial transactions.
Messrs. Rolle (Chairman), Blalack, Parker and Dr. Hubenette are the members
of the Management Compensation Committee. The Management Compensation Committee
is charged with administering the Company's incentive programs and reviewing
and making recommendations to the Board of Directors with respect to the
compensation of all officers of the Company and all issuances of equity
securities of the Company to the Company's directors, officers, employees and
consultants.
The Nominating Committee consists of Messrs. Burleson (Chairman), Blalack and
Petty. The Nominating Committee is responsible for selecting and nominating
individuals to fill vacancies on the Board of Directors,
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and appointing officers. The Nominating Committee will consider nominees
recommended by shareholders pursuant to the notice and other provisions set
forth in the Company's Bylaws.
The Quality Committee is comprised of Dr. Hubenette (Chairperson) and
Messrs. Burleson and Blalack. The Quality Committee is responsible for
evaluating the quality of patient care and services provided at the Company's
facilities.
COMPENSATION OF DIRECTORS
The initial New GranCare Board of Directors (which consists of Messrs.
Athans, Benton and Schneider prior to the Distribution) has adopted, and the
Company, the sole stockholder of New GranCare prior to the Distribution, has
approved a compensation program for its outside directors (the "New GranCare
Directors Plan") that is identical to the program that is currently used by
the Company (the "GranCare Directors Plan"). As part of this program, New
GranCare has adopted, and the Company has approved, the Outside Directors
Stock Incentive Plan, pursuant to which New GranCare is authorized to issue up
to 200,000 shares of New GranCare Common Stock subject to options granted in
connection with the New GranCare Directors Plan. Of the shares authorized to
be issued under the New GranCare Directors Plan, options for 90,000 shares of
New GranCare Common Stock will be issued immediately after the Distribution to
replace options granted under the GranCare Directors Plan maintained by the
Company prior to the Distribution. As a result of the Distribution and the
Merger, outstanding options to purchase Company Common Stock awarded under the
program currently used by the Company will be treated in the same manner as
all other Company Options. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
Stock Awards
The New GranCare Directors Plan provides for the automatic annual grant of
shares of New GranCare Common Stock to each non-employee director. The number
of shares of New GranCare Common Stock issued to each non-employee director
will equal the result obtained by dividing 12,000 by the fair market value of
the shares of New GranCare Common Stock on the first trading day in April
1997, (the "Effective Date"). On the third anniversary of the Effective Date
of the Directors Plan and each third anniversary thereafter, the denominator
of the formula will be revised so that it equals the fair market value of the
New GranCare Common Stock on the first trading date in April of such year. The
terms of the stock awards discussed above are identical to the terms contained
in the GranCare Directors Plan.
Option Awards
Under the New GranCare Directors Plan, each non-employee director will also
receive options to purchase 10,000 shares of New GranCare Common Stock upon
his or her initial appointment as a director and will receive options to
purchase an additional 6,000 shares of New GranCare Common Stock at each of
the next two annual meetings of shareholders. After a non-employee director
has received options to purchase 22,000 shares of New GranCare Common Stock,
he or she will then receive options to purchase an additional 2,000 shares of
New GranCare Common Stock at each succeeding annual meeting of shareholders.
The exercise price of all of such options will be the fair market value of the
New GranCare Common Stock on the date of grant and such options will vest in
equal annual increments over a three year period.
In the event of the death or disability of a non-employee director while
serving as a member of the New GranCare Board of Directors, or upon the
occurrence of a "change in control" (as defined in the New GranCare Directors
Plan) of New GranCare, all outstanding options granted under the New GranCare
Directors Plan vest and become immediately exercisable. Each option expires
ten years from the date of grant, but expires earlier to the extent not vested
upon the cessation of a non-employee director's service on the New GranCare
Board of Directors for reasons other than death or disability. In the event
that a change in control of New GranCare occurs as a result of certain "tender
offers" (as defined in the New GranCare Directors Plan), all outstanding
options will be surrendered in exchange for a cash payment by New GranCare.
The terms of the stock awards discussed above are identical to the terms
contained in the GranCare Directors Plan.
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Tax Consequences
A New GranCare director will not be taxed on the receipt of an option. A
director will be taxed, however upon the exercise of an option in an amount
equal to the difference between the exercise price of the option and the fair
market value of the New GranCare Common Stock subject to the exercised option
on date of exercise, and New GranCare will then be entitled to a corresponding
deduction.
Cash Awards
The non-employee directors will also receive annual cash compensation of
$12,000 consisting of four payments of $3,000 each for each of the four
regularly scheduled Board Meetings attended. Each non-employee director will
also receive $1,000 per day for committee meetings attended on a date when a
regular board meeting or retreat is not also scheduled.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company on behalf of the Chief Executive
Officer and the four most highly compensated executive officers of the Company
other than the Chief Executive Officer for the fiscal years ended December 31,
1994, 1995 and 1996. Mr. Gene E. Burleson, currently the Chairman of the
Board, Chief Executive Officer and President of the Company, will become Chief
Executive Officer of Vitalink following the Merger and will not be an
executive officer of New GranCare. New GranCare presently intends to continue
the compensation policies and practices of the Company following the
Distribution although there can be no assurance that changes to or
modification of such practices and policies will not be implemented if deemed
appropriate by the New GranCare Board of Directors and management.
COMPANY SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
POSITION YEAR ($)(1) ($) ($) (#) ($)(2)
------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Gene E. Burleson 1996 $430,000 -- $ -- 56,760(3) $ 25,234(4)
Chairman of the Board, --
Chief 1995 385,000 -- -- 65,263
Executive Officer and --
President 1994 350,000 180,542(5) -- 66,933
M. Scott Athans 1996 $350,000 -- $ -- 28,000(3) $ 16,769(6)
Executive Vice --
President and 1995 330,000 -- -- 55,756
Chief Operating Officer 1994 300,000 -- -- -- 13,312
Evrett W. Benton 1996 $350,000 -- $ -- 28,000(3) $ 13,556(7)
Executive Vice --
President, 1995 330,000 --(8) -- 33,163
General Counsel and --
Secretary 1994 300,000 -- -- 32,657
Jerry A. Schneider 1996 $275,000 -- $ -- 22,000(3) $ 13,073(9)
Executive Vice --
President and 1995 239,583(10) 34,375(11) 125,000(12) 13,417
Chief Financial Officer 1994 -- -- -- -- --
Donald D. Finney(13) 1996 $240,000 -- $ -- 15,600(3) $293,989(14)
Senior Vice President
and President 1995 217,405(15) -- -- 25,000(16) 1,227
of Long Term Care
Division 1994 189,035(17) 119,843(17) -- 42,004(17) 1,169(17)
</TABLE>
- --------
(1) The Company has a deferred compensation program (the "Deferred
Compensation Program") that is applicable to compensation paid or payable
to eligible employees of the Company. Under such program the Company may
elect to match a portion of any compensation amounts deferred. Deferred
salary amounts are reported in this table under the Salary column and
matching amounts paid or accrued are reported in this table under the All
Other Compensation column.
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(2) The amounts shown in this column include the Company's contributions in
respect of the Company's profit sharing plan (the "Profit Sharing Plan");
all non-union employees who have completed two years of employment with
the Company can participate in the Profit Sharing Plan. The Company makes
an annual contribution to the Profit Sharing Plan in an amount equal to
2% of each participating employee's salary for the previous year, plus an
additional 2% of any portion of the employee's salary that exceeds one-
half of the social security wage base, subject to certain limitations.
Amounts shown also include the Company's payment in respect of the
Company's 401(k) Plan; all non-union employees who have completed one
year of employment with the Company can participate in the 401(k) Plan.
Eligible employees may contribute from 1% to 15% percent of their salary
to the 401(k) Plan, subject to certain limitations. The Company
contributes a matching amount each year to the 401(k) Plan equal to 25%
of the first 4% of each participant's contribution for that year. This
column also includes benefits to the Company's officers relating to
premiums paid by the Company with respect to the Executive Split Dollar
Life Insurance Plan and long-term disability insurance, for which only
the Company's officers are eligible and Group Life Term Insurance, which
is provided to all of the Company's employees ("Group Term Life
Insurance"). The Executive Split Dollar Life Insurance Plan became
effective in fiscal year 1993 and provides that premiums are returned to
the Company upon termination of each policy.
(3) Represents stock options granted on January 23, 1996 at an exercise price
of $14.75.
(4) Represents the Company's contribution of $1,215 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, $47 for Group Term Life Insurance and
$11,892 for long-term disability insurance. Also includes $6,692 under
the Executive Split Dollar Life Insurance Plan. The amount of benefit
received under the Executive Split Dollar Life Insurance Plan was
determined by subtracting the total premiums paid under the Plan during
1996 ($11,100) from the increase in the cash surrender value of the Plan
from December 31, 1995 to December 31, 1996 ($17,792).
(5) Represents $162,542 in relocation expense and $18,000 in car allowance.
(6) Represents the Company's contribution of $1,286 to the 401(k) Plan,
$1,823 pursuant to the Company's Deferred Compensation Program, $47 for
Group Term Life Insurance and $12,886 for long-term disability insurance.
Also includes $727 under the Executive Split Dollar Life Insurance Plan.
The amount of benefit received under the Executive Split Dollar Life
Insurance was determined by subtracting the total premiums paid under the
Plan during 1996 ($17,400) from the increase in the cash surrender value
of the Plan from December 31, 1995 to December 31, 1996 ($18,127).
(7) Represents the Company's contribution of $1,286 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, $47 for Group Term Life Insurance and
$6,845 for long-term disability insurance. Does not include any amounts
under the Executive Split Dollar Life Insurance Plan as the premiums paid
under the Plan during 1996 ($17,800) exceeded the increase in the cash
surrender value of the Plan from December 31, 1995 to December 31, 1996
($17,311).
(8) Mr. Benton received certain benefits in 1995 that are properly not
reflected in this table. For a description of these benefits, see
"Certain Relationships and Related Party Transactions."
(9) Represents the Company's contribution of $1,100.00 to the 401(k) Plan,
$47 for Group Term Life Insurance, $8,888 for long-term disability
insurance and the Company's contribution of $3,038 to the Company's
Deferred Compensation Program. Does not include any amounts under the
Executive Split Dollar Life Insurance Plan as the premiums paid under the
Plan during 1996 ($54,400) exceeded the increase in the cash surrender
value of the Plan from December 31, 1995 to December 31, 1996 ($37,474).
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(10) Mr. Schneider joined the Company in January 1995 and his salary for 1995
reflects a partial year of service.
(11) Represents $20,000 paid to Mr. Schneider in respect of relocation
expenses and $14,375 in respect of Mr. Schneider's car allowance.
(12) Represents stock options granted on January 27, 1995 at an exercise price
of $15.75 per share.
(13) Resigned effective January 1, 1997.
(14) Represents the Company's payment of premiums of $47 for Group Term Life
Insurance, $2,442 for long-term disability insurance and the Company's
contribution of $1,500 to the 401(k) Plan. Also includes $290,000 paid to
Mr. Finney in connection with the termination of his employment agreement
with Evergreen HealthCare, Inc. ("Evergreen") in July 1995. Mr. Finney
received this termination payment in 1996 upon his execution of an
employment agreement with the Company. Does not include any amounts under
the Executive Split Dollar Life Insurance Plan as the premiums paid under
the Plan during 1996 ($23,717) exceeded the increase in the cash
surrender value of the Plan from December 31, 1995 to December 31, 1996
($14,390).
(15) Mr. Finney became an employee of the Company on July 21, 1995 in
connection with the merger with Evergreen, which was treated as a pooling
of interests for financial reporting purposes. Represents $98,436
received from the Company after the merger with Evergreen and $118,969
received from Evergreen prior to such merger. The amounts shown for the
years 1993 and 1994 were paid entirely by Evergreen.
(16) Represents stock options granted on July 21, 1995 at an exercise price of
$17.25.
(17) Represents amounts and options paid by Evergreen, the acquisition of
which was treated as a pooling of interests for financial reporting
purposes.
Employment Agreements
Following the Distribution and the Merger, New GranCare intends to enter
into employment agreements with most of the executive officers who have
employment agreements with the Company as of the Distribution Date. As a
condition to any executive officer executing an employment agreement with New
GranCare or Vitalink, each executive officer must agree to waive his or her
rights to certain change of control payments granted under any existing
employment agreement with the Company which may be triggered by the
Distribution and the Merger. Although the specific terms of employment
agreements to be entered into between New GranCare and its executive officers
have not yet been determined, it is anticipated that such employment
agreements will be substantially similar to the existing agreements with the
Company and will provide for certain payments to executive officers in the
event of a "change of control" (as such term is defined in the relevant New
GranCare employment agreements) of New GranCare.
Mr. Burleson has a five-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Management Compensation Committee (the
"Committee"). The employment agreement provides for annual automatic
extensions of the term year for an additional year unless the Board or Mr.
Burleson elects not to have the term so extended. The Committee previously
established Mr. Burleson's base salary at $430,000 for 1996. The agreement
also provides for severance compensation upon termination of employment by the
Company for any reason other than for "Cause," as defined in agreement,
consisting of a minimum of three year's base salary and, in the event of a
change-in-control, as defined in the agreement, payment of a minimum of five
years base salary and accelerated vesting of all options held by Mr. Burleson.
Following the Merger, Mr. Burleson will become an employee of Vitalink. It is
anticipated that Vitalink will assume Mr. Burleson's existing employment
contract on substantially the same terms as those described above. In
addition, Mr. Burleson will be named Chairman of the Board of New GranCare
and, in connection therewith, it is anticipated that New GranCare will enter
into a consulting agreement with Mr. Burleson in the amount of $100,000 per
year.
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Mr. Athans has a three-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement provides for
annual automatic extensions of the term for an additional year unless the
Board or Mr. Athans elects not to have the term so extended. The Committee
previously established Mr. Athans' base salary at $350,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Athans.
Mr. Benton has a three-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement also provides
for annual automatic extensions of the term for an additional year unless the
Board or Mr. Benton elects not to have the term so extended. The Committee
previously established Mr. Benton's base salary at $350,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Benton.
Mr. Schneider has a three year employment agreement with the Company, which
became effective January 16, 1995 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement also provides
for annual automatic extensions of the term for an additional year unless the
Board or Mr. Schneider elects not to have the term so extended. The Committee
previously established Mr. Schneider's base salary at $275,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Schneider.
Mr. Finney has a two-year employment agreement with the Company which became
effective July 20, 1995 and provides for annual adjustments in base salary as
determined by the Committee. The employment agreement also provides for annual
automatic extensions of the term for an additional year unless the Board or
Mr. Finney elects not to have the term so extended. The agreement provided for
a minimum base salary of $240,000 for 1995 which is also Mr. Finney's base
salary for 1996. The agreement also provides for severance compensation upon
termination of employment by the Company for any reason other than for
"Cause," as defined in the agreement, consisting of a minimum of one year's
base salary and, in the event of a change-in-control, as defined in the
agreement, payment of a minimum of one years base salary and accelerated
vesting of all options held by Mr. Finney. Mr. Finney has resigned from his
position with the Company effective January 1, 1997. In connection therewith,
the Company has agreed to pay Mr. Finney $240,000 (one year's salary),
regardless of whether the Merger occurs.
New GranCare Replacement Stock Option Plan
The New GranCare Board has adopted, and the Company, as the sole stockholder
of New GranCare prior to the Distribution, has approved, the 1996 Replacement
Plan (the "Replacement Plan"). The Replacement Plan was adopted solely for the
purpose of granting options to executives of the Company in connection with
the Distribution. All options granted pursuant to the Replacement Plan will be
fully vested and exercisable on substantially the same terms, other than
price, as the related Company Options outstanding as of the Distribution
Record Date. Under the terms of the Replacement Plan, New GranCare Options
will be exercisable for a limited period following the termination of an
executive's employment with New GranCare.
1996 Stock Incentive Plan
The initial New GranCare Board of Directors has adopted, and the Company, as
the sole stockholder of New GranCare prior to the Distribution, has approved,
the 1996 Stock Incentive Plan (the "New GranCare
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Plan"). The purpose of the New GranCare Plan is to allow New GranCare to
attract and retain qualified officers, key employees and consultants and to
provide these individuals with additional incentive to devote themselves to
the future success of New GranCare. Additionally, New GranCare believes that
awards under the New GranCare Plan will more closely align the interests of
its personnel with those of its stockholders.
The New GranCare Plan replaces the incentive plans that were available for
the grant of incentive awards to officers, key employees and consultants of
the Company, pursuant to which awards were granted in the form of qualified
and non-qualified stock options, stock appreciation rights ("SARs") and shares
of restricted stock, all of which types of awards will continue to be
available under the New GranCare Plan. In addition, the New GranCare Plan
provides for several types of equity-based incentive compensation awards not
currently available under the Company's existing incentive plans, namely
performance units, performance shares, phantom stock, unrestricted bonus stock
and dividend equivalent rights.
The New GranCare Plan thus increases New GranCare's flexibility in
structuring equity-based incentive compensation by broadening the types of
incentive awards that may be made. The Board of Directors of New GranCare
believes that a flexible plan is needed to fashion equity-based incentives
consistent with New GranCare's philosophy of linking executive compensation to
total shareholder returns and the long-term financial performance of New
GranCare.
The New GranCare Plan will be administered by the Management Compensation
Committee of the Board of Directors of New GranCare (the "Committee"), and it
is intended that each member of the Committee will be "disinterested" within
the meaning of Rule 16b-3 under the Securities Exchange Act of 1934. As a
practical matter, directors who are employees of New GranCare are not eligible
to serve as members of the Committee. The Committee will determine the persons
to whom, and the times at which, awards will be granted, the type of awards to
be granted and all other related terms and conditions of the awards, subject
to the limitations described below and as set forth in the New GranCare Plan.
The terms and conditions of each award will be set forth in a written
agreement with a participant or a written program established by the
Committee. All officers and key employees of New GranCare and its affiliates
are eligible to participate in the New GranCare Plan. It is currently
estimated that approximately 33 individuals are eligible to participate.
A total of 1,500,000 shares of New GranCare Common Stock are reserved for
issuance pursuant to the New GranCare Plan, of which no more than 500,000
shares may be used for restricted stock and stock bonus grants. The number of
shares of New GranCare Common Stock reserved under the New GranCare Plan is
subject to adjustment in the event of stock dividends, stock splits,
recapitalizations and similar events.
The per share exercise price of any options may not be less than the fair
market value of a share of New GranCare Common Stock at the time of grant.
Once an option is granted, the exercise price may not be reduced by amendment
and an option may not be exchanged for a new option with a lower exercise
price. No incentive stock option may be granted on or after the tenth
anniversary of the date the New GranCare Plan was approved by the Board of
Directors of New GranCare.
The Committee shall determine whether stock appreciation rights, performance
unit awards, dividend equivalent rights, performance share awards and phantom
stock awards shall be settled in cash or in shares of New GranCare Common
Stock valued at fair market value on the date of payment. The Committee also
shall be authorized to accelerate the vesting, exercisability and settlement
of awards and to permit the exercise price of an option to be paid in cash or
by the delivery or withholding of shares.
The Board of Directors of New GranCare may amend or terminate the New
GranCare Plan without the approval of the shareholders, but may condition any
amendment on shareholder approval if the Board believes it is necessary or
advisable to comply with any applicable tax or regulatory requirement. No
termination or amendment of the New GranCare Plan without the consent of the
holder of an award shall adversely affect the rights of that participant.
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The Committee may provide with respect to any award that, in the event of a
Change in Control (as defined in the New GranCare Plan) of New GranCare, the
award shall be cashed out in an amount based on the fair market value of the
New GranCare Common Stock without regard to the exercisability of the award or
any other conditions or restrictions.
Federal Income Tax Consequences. A participant will not recognize income
upon the grant of an option or at any time prior to the exercise of an option.
At the time the participant exercises a non-qualified option, he or she will
recognize compensation taxable as ordinary income in an amount equal to the
excess of the fair market value of the New GranCare Common Stock on the date
the option is exercised over the price paid for the New GranCare Common Stock,
and New GranCare will then be entitled to a corresponding deduction.
A participant who exercises an incentive stock option will not be taxed at
the time he or she exercises his or her option or a portion thereof. Instead,
he or she will be taxed at the time he or she sells the New GranCare Common
Stock purchased pursuant to the option. The participant will be taxed on the
excess of the amount for which he or she sells the stock over the price he or
she had paid for the stock. If the participant does not sell the stock prior
to two years from the date of grant of the option and one year from the date
the stock is transferred to him or her, the gain will be capital gain and New
GranCare will not get a corresponding deduction. If the participant sells the
stock prior to that time, the difference between the amount the participant
paid for the stock and the lesser of the fair market value on the date of
exercise or the amount for which the stock is sold, will be taxed as ordinary
income and New GranCare will be entitled to a corresponding deduction. If the
participant sells the stock for less than the amount he or she paid for the
stock prior to the one or two year periods indicated, no amount will be taxed
as ordinary income and the loss will be taxed as a capital loss. Exercise of
an incentive option may subject a participant to, or increase a participant's
liability for, the federal alternative minimum income tax.
A participant generally will not recognize income upon the grant of any
stock appreciation right, dividend equivalent right, performance unit award,
performance share award or phantom share. At the time a participant receives
payment under any such award, he or she generally will recognize compensation
taxable as ordinary income in an amount equal to the cash or the fair market
value of the New GranCare Common Stock received, and New GranCare will then be
entitled to a corresponding deduction.
A participant will not be taxed upon the grant of a stock award if such
award is not transferable by the participant or is subject to a "substantial
risk of forfeiture," as defined in the Internal Revenue Code. However, when
the shares of New GranCare Common Stock that are subject to the stock award
are transferable by the participant and are no longer subject to a substantial
risk of forfeiture, the participant will recognize compensation taxable as
ordinary income in an amount equal to the fair market value of the stock
subject to the stock award, less any amount paid for such stock, and New
GranCare will then be entitled to a corresponding deduction.
The Plan is not qualified under Section 401(a) of the Internal Revenue Code
of 1986.
Annual Incentive Plan
The Board of Directors of New GranCare has adopted, and the Company as its
sole stockholder prior to the Distribution has approved, the Annual Incentive
Plan (the "Annual Incentive Plan"). The Annual Incentive Plan is a bonus plan
intended to link the amount of annual cash bonuses paid to New GranCare's
officers and key employees to corporate performance based on the relative
responsibility of the individual for whom the bonus is to be awarded. Awards
are based on predetermined performance goals established by the Committee
within the first ninety days of each fiscal year of New GranCare. The Annual
Incentive Plan replaces the annual incentive plan that is in effect for
officers and key employees of the Company prior to the Distribution and Merger
and the terms of the Annual Incentive Plan are similar in all material
respects to the terms of Company's annual incentive plan.
85
<PAGE>
The primary performance goal for most participants in the Annual Incentive
Plan will be based on New GranCare's earnings per share. Corporate earnings
per share targets are the sole performance standard by which bonuses will be
measured for the Chief Executive Officer, President and Executive Vice
Presidents. The annual bonus for Divisional Presidents will be based 50% on
the corporate earnings per share targets and 50% on the targeted improvement
for the applicable division in earnings before interest, taxes, depreciation,
amortization and rents ("EBITDAR").
Bonus awards will be payable based upon the attainment of one of three
different levels of performance: threshold, target and superior. No bonus
award will be payable with respect to a performance goal unless the threshold
level of performance is achieved. At the threshold, target and superior
performance levels, 50%, 100% and 150% of the targeted bonus amount allocated
to that performance goal is payable, respectively. The maximum yearly bonus
payable to any individual under the Annual Incentive Plan will be $600,000 per
year.
Payment of annual incentive awards will be made in cash unless the employee
elects, within the first ninety days of the fiscal year, to have payment of
the award made in shares of New GranCare Common Stock. In the event that an
employee makes such an election, he or she will receive New GranCare Common
Stock under the Plan having a fair market value equal to 125% of the value of
the cash award. These shares will be subject to
STOCK OPTIONS
The following tables provide information on options to purchase Company
Common Stock granted to the executive officers named in the Summary
Compensation Table above since December 31, 1995 and summarize the value of
Company Options held by the executive officers named in the Summary
Compensation Table as of September 30, 1996. As a result of the Distribution
and the Merger, all outstanding Company Options will be adjusted as described
under "The Distribution--Consummation of the Distribution; Treatment of
GranCare Stock Options."
AGGREGATED OPTION/SAR EXERCISES SINCE DECEMBER 31, 1995
AND VALUE OF OPTIONS AT DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(2) FISCAL YEAR-END($)(2)(3)
ACQUIRED ON VALUE ------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson........ 0 $ 0 158,000 136,760 $ 859,000 $547,375
Evrett W. Benton........ 0 0 190,000 88,000 1,216,250 365,000
M. Scott Athans......... 2,000 1,000 163,000 88,000 753,875 365,000
Jerry A. Schneider...... 0 0 59,895 87,105 127,277 207,098
Donald D. Finney(4)..... 0 0 59,715 31,746 358,562 58,841
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) All outstanding options become exercisable as a result of the
Distribution and Merger. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
(3) Calculated on the basis of the closing price of the underlying securities
on December 31, 1996 ($17.875 per share) minus the exercise price.
(4) Resigned effective January 1, 1997.
86
<PAGE>
OPTION/SAR GRANTS SINCE DECEMBER 31, 1993
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING % OF TOTAL EXERCISE APPRECIATION FOR
OPTIONS/SARS OPTIONS/SARS OR BASE OPTION TERM
GRANTED GRANTED IN PRICE EXPIRATION --------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson
1996................... 56,760(1) 14.1% $14.75 1/23/06 $526,732 $1,334,427
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
Evrett W. Benton
1996................... 28,000(1) 7.0 14.75 1/23/06 259,840 658,280
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
M. Scott Athans
1996................... 28,000(1) 7.0 14.75 1/23/06 259,840 658,280
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
Jerry A. Schneider
1996................... 22,000(1) 5.5 14.75 1/23/06 204,160 517,220
1995................... 125,000(2) 34 15.75 1/27/05 1,238,136 3,137,680
1994................... -- -- -- -- -- --
Donald D. Finney(3)
1996................... 15,600(1) 3.9 14.75 1/23/06 144,768 366,756
1995................... 25,000(4) 6.8 17.25 7/21/05 271,210 687,301
1994................... -- -- -- -- -- --
</TABLE>
- --------
(1) Represents options granted January 23, 1996.
(2) Represents options granted to Mr. Schneider on January 27, 1995 upon his
initial employment with the Company.
(3) Resigned effective January 1, 1997.
(4) Represents options granted to Mr. Finney on July 21, 1995 upon his
initial employment with the Company.
87
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS SINCE DECEMBER 31, 1995
The Senior Executive Shareholder Value Program for the Company's senior
level executive officers and the Shareholder Value Program for all other
executive officers and employees (collectively the "Shareholder Value
Program") were adopted by the Board of Directors in January 1996 and approved
by the shareholders at the 1996 annual meeting. The Shareholder Value Program
provides for the payment of cash incentives based upon the performance of the
Company over a three year performance period vis-a-vis a peer group and the
S&P 500. After the performance period, the value of each unit is determined by
comparing the Company's stock price to the stock prices of the companies
comprising the peer group and S&P 500. At the threshold level (50%), each unit
is worth $500. At the superior level (95%), each unit is worth $3,000. The
Shareholder Value Program vests upon a "Change of Control," which the Merger
constitutes.
The Board of Directors of the Company has determined that upon consummation
of the Merger, each of the above-named executives will receive payment under
the Senior Executive Shareholder Value Program at the superior level,
resulting in payments of $852,000, 420,000, 420,000, 330,000 and 234,000 to
Messrs. Burleson, Athans, Benton, Schneider and Finney, respectively, and all
other plan participants would receive, in the aggregate, approximately $2.2
million.
COMPANY ANNUAL INCENTIVE PLAN
The Company maintains an Annual Incentive Plan that provides for the payment
of annual cash bonuses to its officers and key employees upon the attainment
by the Company of certain pre-determined performance criteria. The criteria
utilized by the Company for the annual incentive plan is earnings per share.
The Company does not anticipate making any payments under the Annual Incentive
Plan as the Company believes that costs associated with the Distribution and
Merger that will be recognized in the fourth quarter will have a negative
effect on earnings per share, which is the standard by which awards under the
annual incentive plan are determined.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Upon completion of the Merger, Vitalink will succeed to all of the Company's
existing pharmaceutical supply agreements with the various facilities that
will be operated by New GranCare. These agreements are generally for a term of
five years and are automatically extended on an annual basis for an additional
one year unless timely notice of intent to terminate is given. Gene E.
Burleson, Chairman of New GranCare, will become Chief Executive Officer of
Vitalink upon consummation of the Merger. Mr. Burleson and three other
directors of New GranCare (Messrs. Parker, Kanter & Rolle) will become
directors of Vitalink upon the consummation of the Merger. See "The
Distribution--Terms of the Pharmaceutical Supply Agreements" herein, and
"Descriptions of the Transactions--Interests of Certain Persons" and
"Relationship between Vitalink and GranCare" in the Proxy
Statement/Prospectus. Following the Distribution and Merger, New GranCare will
not compete with Vitalink in the institutional pharmacy business for a period
of three years. See "The Distribution--Terms of the Non-competition
Agreement." In addition, Mr. Burleson will be named Chairman of the Board of
New GranCare and, in connection therewith, it is anticipated that New GranCare
will enter into a consulting agreement with Mr. Burleson in the amount of
$100,000 per year.
In connection with the consolidation of the Company's headquarters in
Atlanta, Georgia, the Company assisted certain of its senior level executive
officers with their relocations to Atlanta. The assistance was in the form of
loans to and, in certain instances, the purchase of residences from, the
affected senior level executive officers. New GranCare will be the obligee
under these loans following the Distribution and the Merger.
In connection with Mr. Benton's (the Company's Executive Vice President,
General Counsel and Secretary) relocation to Atlanta from the Company's former
corporate headquarters in Culver City, California, the Company purchased Mr.
Benton's California residence for $747,500 in lieu of paying Mr. Benton's
relocation expenses. Mr. Benton purchased this residence for $885,000 in
August 1989. The Company subsequently sold Mr. Benton's residence for
$584,777. Additionally, the Company loaned Mr. Benton $100,000. The loan is
evidenced by a promissory note that bears interest at the prime rate and is
due January 15, 1997. The loan is
88
<PAGE>
secured by the proceeds from the Executive Split Dollar Life Insurance policy
that the Company maintains on Mr. Benton's behalf.
In connection with Kay Brown's (the Company's Senior Vice President and
Director of Corporate Communications and Investor Relations) relocation to
Atlanta from the Company's former corporate headquarters in Culver City,
California, the Company purchased Ms. Brown's residence for $515,440 and
subsequently sold Ms. Brown's residence for $440,440. In connection with this
loss, Ms. Brown executed a $75,000 promissory note that bears interest at the
prime rate and is due January 15, 1997. The loan is secured by the proceeds
from the Executive Split Dollar Life Insurance policy that the Company
maintains on Ms. Brown's behalf.
Robert L. Parker was formerly Chairman of the Board of Directors of Omega
Healthcare Investors, Inc. ("Omega"), a creditor of the Company. In connection
with his appointment to the Board of Directors of the Company, Mr. Parker
resigned as Chairman of the Board of Directors of Omega but continues to serve
as a director of Omega. Omega is the mortgagee on the Company's facilities
located in the State of Michigan. The Company's indebtedness to Omega as of
December 31, 1995 was approximately $58.8 million. During the years ended
December 31, 1995, 1994, 1993 and for the last three months of 1992, the
Company made or accrued interest payments to Omega totaling approximately $8.2
million, $8.0 million, $7.0 million and $1.9 million, respectively. New
GranCare will be the obligee under this loan following the Distribution and
Merger and it is expected that Mr. Parker will be a member of New GranCare's
Board of Directors and the Vitalink Board of Directors.
Mr. Gene E. Burleson, the Company's Chairman of the Board, President and
Chief Executive Officer and, following the Distribution and the Merger,
Chairman of the Board and a director, of New GranCare, and Messrs. Ronald G.
Kenny and William G. Petty, Jr., both directors of the Company and, following
the Distribution and the Merger, directors of New GranCare, are also directors
of Alternative Living Services, Inc. ("ALS"). The Company previously owned a
19% equity interest in ALS, which the Company sold in August 1996 in
connection with the initial public offering of ALS's common stock. In
addition, Mr. Petty is Chairman of the Board and was formerly Chief Executive
Officer of ALS. ALS owns and manages assisted living facilities. The Company
has entered into discussions with ALS pursuant to which ALS will conduct
feasibility studies for the Company on the development of assisted living
facilities at various sites. If these feasibility studies render positive
results, it is contemplated that ALS will develop and manage such facilities
on behalf of the Company. The Company has not yet determined whether to
construct any such facilities. At the time of the ALS public offering, Mr.
Kenny owned .5% of a limited liability corporation that owned a 63% equity
interest in ALS and Mr. Kenny's employer, Huizenga Capital Management, owned
5.0% of such corporation.
In December 1993 the Company sold two of its long-term care facilities and
related accounts receivable to Charles H. Hargis, who was engaged by the
Company during 1993 to act as a consultant on various acquisitions and
divestitures. The Company financed $1,050,000 of the $1,250,000 purchase price
of the facilities, and the Company financed the entire $1,100,000 purchase
price of the accounts receivable. On October 1, 1996, the Company (i)
repurchased one of the long-term care facilities it sold to Charles H. Hargis
in December 1993 for $3,110,000 in cash, and (ii) purchased from an entity
owned or controlled by Mr. Hargis the management agreement for a long-term
care facility leased by the Company for $100,000 in cash. As part of the
aforesaid transaction, Mr. Hargis and entities owned or controlled by him
entered into a three year non-competition agreement with the Company, and the
Company entered into a three year consulting agreement with an entity owned or
controlled by Mr. Hargis providing for payments of $108,000 per year.
Subsequent to October 1, 1996, Mr. Hargis satisfied all obligations to the
Company.
On March 31, 1994, the Company subleased a facility to Joseph M. Higdon, a
former Vice President of the Company for $1,400,000, of which $210,000 was
paid in cash at closing and $1,190,000 of which was financed by the Company
over seven years at 6% per annum over the first two years and 7% per annum
over the remaining five years. In addition, Mr. Higdon purchased $450,000 of
the subject facility's accounts receivable, which purchase was financed by the
Company over three years at 7% per annum.
89
<PAGE>
On April 29, 1994, the Company subleased two facilities to Mr. Higdon for
$1,600,000, of which $240,000 was paid in cash at closing and $1,360,000 of
which was financed by the Company over seven years at 6% per annum over the
first two years and 7% per annum over the remaining five years. In addition,
Mr. Higdon purchased $450,000 of the subject facilities' accounts receivable,
which purchase was financed by the Company over three years at 7% per annum.
90
<PAGE>
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
New GranCare will be a wholly-owned subsidiary of the Company until the
consummation of the Distribution. Because all of the shares of New GranCare
Common Stock now held by the Company will be distributed to shareholders of
the Company in connection with the Distribution, the number of shares of New
GranCare Common Stock shown below to be owned beneficially by each director
and by all directors and officers as a group will depend upon the number of
shares held by such persons at the time of the Distribution. This table
assumes that each of the executive officers set forth below will (i) be
offered a position with New GranCare and (ii) accept such position if offered.
In order to present estimated beneficial ownership of the persons and entities
set forth below immediately following the Distribution, the following table
shows: (i) the number of shares of Company Common Stock beneficially owned by
such person or entities as of January 1, 1997 (including, if applicable,
shares underlying Company Options exercisable within 60 days of such date) and
(ii) the number of shares of New GranCare Common Stock that such persons or
entities would own immediately following the Distribution (including, if
applicable, shares underlying New GranCare Options exercisable within 60 days
of such date), assuming none of such persons or entities disposes of any
shares of Company Common Stock prior to the Distribution and Merger.
<TABLE>
<CAPTION>
POST DISTRIBUTION
BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF NEW GRANCARE
COMPANY COMMON STOCK COMMON STOCK
------------------------------- -------------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIAL OWNER OWNED(1) OWNED(1) OWNED(1) OWNED(1)
---------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Wellington Management
Company................ 1,615,776(2) 6.9% 1,615,776 6.9%
75 State Street
Boston, Massachusetts
02109
Gene E. Burleson........ 794,220(3) 3.3% 872,060(17) 3.6%
Chairman of the Board,
President and Chief
Executive Officer
Charles M. Blalack...... 59,347(4) * 61,014(18) *
Director
Antoinette Hubenette,
M.D. .................. 23,133(5) * 24,800(19) *
Director
Joel S. Kanter.......... 313,343(6) * 315,010(20) 1.3%
Director
Ronald G. Kenny......... 50,937(7) * 55,937(21) *
Director
Robert L. Parker........ 225,613(8) 1.0% 230,613(22) *
Director
William G. Petty, Jr. .. 728,011(9) 3.1% 733,011(23) 3.1%
Director
Edward V. Regan......... 17,800(10) * 22,800(24) *
Director
Gary U. Rolle........... 167,800(11) * 172,800(25) *
Director
M. Scott Athans......... 189,333(12) * 253,000(26) 1.1%
Executive Vice
President and Chief
Operating Officer
Evrett W. Benton........ 243,463(13) * 292,130(27) 1.2%
Executive Vice
President, General
Counsel and Secretary
Donald D. Finney........ 182,133(14) * 207,638(28) *
Senior Vice President
and President of
Long Term Care Division
Jerry A. Schneider...... 79,936(15) * 154,500(29) *
Executive Vice Presi-
dent and Chief Finan-
cial Officer
All directors and
executive officers as a
group (36 persons)..... 3,486,540(16) 13.9% 4,044,179(30) 15.8%
</TABLE>
91
<PAGE>
- --------
*Less than 1%.
(1) In determining the number of issued and outstanding shares of the Company
as of January 1, 1997, the Company Common Stock obtainable upon
conversion of the outstanding common stock of Evergreen and National
Heritage, Inc., a predecessor of Evergreen, have been assumed to be
shares of issued and outstanding Company Common Stock. In addition, the
number of shares of New GranCare Common Stock outstanding following the
Distribution include all Company Options, which vest upon a Change in
Control. Except as otherwise indicated, each of the persons included in
the table above has sole voting and investment power over the shares
owned except as to the rights of his or her spouse under applicable
community property laws.
(2) Wellington Management Company ("WMC") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. As of January 1, 1997, WMC, in its capacity as
investment adviser, may be deemed to have beneficial ownership of
1,615,776 shares that are owned by numerous investment advisory clients,
none of which is known to have such interest with respect to more than
five percent of the class. As of January 1, 1997, WMC had voting power
and investment power as follows:
<TABLE>
<S> <C>
Sole Voting Power: 0 shares
Shared Voting Power: 658,276 shares
Sole Investment Power: 0 shares
Shared Investment Power: 1,615,776 shares
</TABLE>
(3) Includes 216,920 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(4) Includes 22,333 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(5) Includes 22,333 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(6) Includes 22,333 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 47,400
shares owned by Windy City, Inc, 200,000 shares owned by Walnut Capital
Corporation and 40,110 shares owned by the Kanter Family Foundation. Mr.
Kanter serves as President and Director of such companies. In addition,
the number includes 400 shares held by the Ricki Kanter IRA, 1,050 shares
owned by 21 Club Trust I, 150 shares owned by 21 Club Trust II and 100
shares owned by 21 Club Trust III. The beneficiaries of such trusts are
Mr. Kanter's minor children. Mr. Kanter has shared voting and investment
powers in the shares held by such corporations, such foundation and such
trusts. Mr. Kanter disclaims beneficial ownership of such shares.
(7) Includes 11,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 4,560
shares held by trusts for the benefit of Mr. Kenny's children. Mr. Kenny
has no voting or investment power over such shares and disclaims
beneficial ownership of such shares. In addition, 387 shares are held by
the Ronald Kenny IRA over which Mr. Kenny has sole voting and investment
power.
(8) Includes 11,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 13,438
shares of Common Stock held by the Parker Charitable Trust of 1991. Mr.
Parker has shared voting and investment power with respect to such shares
and disclaims beneficial ownership of such shares.
(9) Includes 98,740 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 415,147
shares held by a trust of which Mr. Petty is a beneficiary. Also includes
150,894 shares owned by Mr. Petty's wife, over which Mr. Petty has shared
voting and investment power. Mr. Petty disclaims beneficial ownership of
shares. Also includes 62,430 shares held by trusts for the benefit of Mr.
Petty's children over which Mr. Petty has shared voting and investment
power. Mr. Petty disclaims beneficial ownership of such shares.
(10) Includes 17,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
92
<PAGE>
(11) Includes 17,000 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options. Also includes 150,000
shares of Common Stock owned by Transamerica Investment Services
("Transamerica"). Mr. Rolle is the Chief Investment Officer of
Transamerica and in such capacity, he has voting and management authority
over such shares.
(12) Includes 187,333 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(13) Includes 229,333 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(14) Includes 65,956 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(15) Includes 72,436 shares which may be acquired within 60 days after January
1, 1997, pursuant to the exercise of stock options.
(16) Includes 1,354,472 shares which may be acquired within 60 days after
January 1, 1997, pursuant to the exercise of stock options.
(17) Indicates the shares reflected in Note 3, plus an additional
77,840 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(18) Indicates the shares reflected in Note 4, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(19) Indicates the shares reflected in Note 5, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(20) Indicates the shares reflected in Note 6, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(21) Indicates the shares reflected in Note 7, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(22) Indicates the shares reflected in Note 8, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(23) Indicates the shares reflected in Note 9, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(24) Indicates the shares reflected in Note 10, plus an additional
5,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(25) Indicates the shares reflected in Note 11, plus an additional
5,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(26) Indicates the shares reflected in Note 12, plus an additional
63,667 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(27) Indicates the shares reflected in Note 13, plus an additional
48,667 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(28) Indicates the shares reflected in Note 14, plus an additional
25,505 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(29) Indicates the shares reflected in Note 15, plus an additional
74,564 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(30) Indicates the shares reflected in Note 16, plus an additional 557,639
shares obtainable pursuant to the exercise of options that will vest upon
the consummation of the Merger.
There are no arrangements known to the Company the operation of which may,
at a subsequent date, result in a change in control of New GranCare.
93
<PAGE>
DESCRIPTION OF NEW GRANCARE CAPITAL STOCK
The authorized capital stock of New GranCare will consist of 50,000,000
shares of New GranCare Common Stock, par value $0.001 per share, and 2,000,000
shares of Preferred Stock, par value $0.001 per share ("Preferred Stock").
Immediately following the Distribution there are expected to be approximately
23,401,992 shares of New GranCare Common Stock outstanding and held of record
by approximately 1,042 persons, and approximately 2,355,250 shares of New
GranCare Common Stock issuable upon the exercise of New GranCare Options based
upon the capitalization and record holders of the Company as of November 30,
1996. No shares of Preferred Stock have been issued by New GranCare.
NEW GRANCARE COMMON STOCK
Holders of New GranCare Common Stock will be entitled to one vote for each
share held of record on all matters on which stockholders may vote, including
the election of directors. The holders of New GranCare Common Stock will be
entitled to participate in cash dividends, when, as and if declared by the New
GranCare Board of Directors out of funds legally available therefor, subject
to any dividend preference which may be attributable to any series of
Preferred Stock which may be outstanding. Such holders will not have any
statutory preemptive or other rights to subscribe for additional shares.
Subject to the rights of holders of Preferred Stock of New GranCare, if any,
all holders of New GranCare Common Stock will be entitled to share ratably in
any assets available for distribution to stockholders upon the liquidation,
dissolution or winding up of New GranCare. There are no conversion, redemption
or sinking fund provisions applicable to New GranCare Common Stock.
PREFERRED STOCK
The New GranCare Certificate of Incorporation will permit the New GranCare
Board of Directors, without further action by the shareholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series and fix and
determine the relative rights, voting powers, preferences and limitations of
each series so authorized. The issuance of any shares of Preferred Stock could
adversely affect the voting power of the holders of New GranCare Common Stock
or could have the effect of discouraging or making more difficult any attempt
by a person or group to obtain control of New GranCare. As of the date of this
Prospectus, it is not expected that New GranCare will issue any shares of
Preferred Stock in the near future.
THE CHARTERS AND BYLAWS OF THE COMPANY AND NEW GRANCARE
The provisions of the New GranCare Certificate of Incorporation and Bylaws
are similar to those of the Company's Articles of Incorporation and Bylaws in
most respects. New GranCare is a Delaware corporation, and Delaware law
permits the implementation of certain provisions in a corporation's
certificate of incorporation or bylaws which would alter some of the rights of
shareholders and the powers of management that are different from those of a
California company. Although the Board of Directors of New GranCare has no
current plan to implement these changes, certain changes could be implemented
in the future by amendment of the Certificate of Incorporation of New GranCare
(following stockholder approval) and certain changes could be implemented by
amendment of the Bylaws of New GranCare without stockholder approval. For a
discussion of such changes, see "Significant Differences Between the
Corporation Laws of California and Delaware." This discussion of the
Certificate of Incorporation and Bylaws of New GranCare is qualified in its
entirety by reference to Exhibits 3.1 and 3.2 hereto, respectively.
Authorized Stock. The Articles of Incorporation of the Company authorize
fifty million shares of Common Stock without par value and two million shares
of undesignated Preferred Stock. The Certificate of Incorporation of New
GranCare authorizes New GranCare to issue fifty million shares of Common
Stock, $0.001 par value, as well as two million shares of undesignated
Preferred Stock, $0.001 par value.
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Number of Directors. The Bylaws of the Company authorize the directors to
fix the number of directors within a range from seven to 15, with the number
of directors currently set at nine. Delaware law permits a corporation to set
forth the means of determining the number of directors in the bylaws. In
contrast to the Bylaws of the Company, the Bylaws of New GranCare permit the
board of directors to fix the number of directors by resolution without
further stockholder approval. See "Significant Differences Between the
Corporation Laws of California and Delaware--Size of the Board of Directors."
Initially, the Board of Directors of New GranCare will consist of ten members.
Monetary Liability of Directors. The Articles of Incorporation of the
Company and the Certificate of Incorporation of New GranCare both provide for
the elimination of personal monetary liability of directors to the fullest
extent permissible under the laws of each corporation's respective state of
incorporation. The provision eliminating monetary liability of directors set
forth in the Certificate of Incorporation of New GranCare is potentially more
expansive in that it incorporates future amendments to Delaware law with
respect to the elimination of such liability.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND
DELAWARE
The General Corporation Laws of California and Delaware differ in many
respects. While not all of such differences are summarized in this Prospectus,
a number of the principal differences which could materially affect the rights
of shareholders are discussed below.
Size of the Board of Directors. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the Board of Directors may fix the exact number of
directors within a stated range set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. Delaware
law permits a board of directors alone to change the authorized number, or the
range, of directors by amendment to the bylaws, unless the directors are not
authorized to amend the bylaws or the number of directors is fixed in the
certificate of incorporation (in which case a change in the number of
directors may be made only by amendment to the certificate of incorporation
approved by the stockholders) or pursuant to the provisions of the certificate
of incorporation. The Certificate of Incorporation of New GranCare provides
that the number of directors shall be as specified in the Bylaws and
authorizes the Board of Directors to make, alter, amend or repeal the Bylaws.
The Board of Directors of New GranCare may therefore change the authorized
number of directors.
Cumulative Voting. Under California law, if any shareholder gives notice of
his or her intention to cumulate votes for the election of directors, any
other shareholder of the corporation is also entitled to cumulate his or her
votes at such election. Under Delaware law, cumulative voting in the election
of directors is not mandatory and may exist only if provided for in the
corporation's certificate of incorporation. The Certificate of Incorporation
of New GranCare does not provide for cumulative voting, and therefore
stockholders of New GranCare will have no cumulative voting rights. The
elimination of cumulative voting would limit the ability of minority
stockholders to obtain representation on the Board of Directors.
Classified Board of Directors. A classified board is one on which a certain
number of the directors, but not all, are elected on a rotating basis each
year. Under California law, directors must be elected annually, unless the
corporation is a listed corporation and such corporation's articles or bylaws
provide for a classified board. Neither the Company's articles nor bylaws
currently provide for a classified board. Delaware law permits, but does not
require, a classified board of directors, with staggered terms under which
one-third of the directors are elected for terms of three years. This method
of electing directors makes changes in the composition of the board of
directors, and thus a change in control of a corporation, a more difficult
process. The New GranCare Certificate of Incorporation and Bylaws do not
provide for a classified board of directors. The establishment of a classified
board following the Distribution would require the approval of the
stockholders of New GranCare.
Power to Call Special Shareholders' Meetings. Under California law, a
special meeting of shareholders may be called by the board of directors, the
chairman of the board, the president, the holders of shares entitled to cast
not less than ten percent of the votes at such meeting and such additional
persons as are authorized by the articles of incorporation or the bylaws.
Under Delaware law, a special meeting of stockholders may be called by
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the board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The Certificate of Incorporation
of New GranCare provides that special meetings of stockholders may be called
only by the board of directors or the chairman of the board pursuant to a
resolution adopted by a majority of the total number of directors.
Action by Written Consent. Both the Delaware and California law permit
stockholders, unless specifically prohibited by the certificate or articles of
incorporation, to take action without a meeting by the written consent of the
holders of at least the number of shares necessary to authorize or take such
action at a meeting at which all shares entitled to vote therein were present
and voted. Action by written consent may, in some circumstances, permit the
taking of stockholder action opposed by the Board of Directors more rapidly
than would be possible if a meeting of stockholders were required. Although
the Bylaws of the Company currently provide for shareholder action by written
consent, the Certificate of Incorporation of New GranCare includes a
prohibition on stockholder action by written consent without a meeting.
Stockholder Approval of Certain Business Combinations. In the last several
years, a number of states have adopted special laws designed to make certain
kinds of "unfriendly" corporate takeovers, or other transactions involving a
corporation and one or more of its significant shareholders, more difficult.
Under Section 203 of the Delaware General Corporation Law ("Section 203"),
certain "business combinations" with "interested stockholders" of Delaware
corporations are subject to a three-year moratorium unless specified
conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
time that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliated associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the interested stockholder (except for transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or any receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if (i) prior to the time when such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the time when such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66 2/3%) of the voting stock not
owned by the interested stockholder.
Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are quoted on
an interdealer quotation system such as NASDAQ or are held of record by more
than 2,000 stockholders. However, a Delaware corporation may elect not to be
governed by
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Section 203 by a provision in its original certificate of incorporation or an
amendment thereto or to the bylaws, which amendment must be approved by a
majority of the shares entitled to vote and, in the case of a bylaw amendment,
may not be further amended by the board of directors. New GranCare does not
intend to elect not to be governed by Section 203, therefore, Section 203 will
apply to New GranCare.
The Company believes that Section 203 will have the effect of encouraging
any potential acquiror to first negotiate with New GranCare's Board of
Directors in connection with contemplated "business combinations." Section 203
should also discourage certain potential acquirors unwilling to comply with
its provisions.
California law requires that in certain transactions involving tender offers
or acquisition proposals made to a target corporation's shareholders by a
person who either (a) controls the target corporation, (b) is an officer or
director of the target or is controlled by an officer or director, or (c) is
an entity in which a director or executive officer of the target has a
material financial interest, a written opinion of an independent expert be
provided as to the fairness of the consideration to the shareholders of the
target corporation. The statute also provides that if a competing proposal is
made at least ten (10) days before shareholders are to vote or shares are to
be purchased under the pending offer by the affiliated party, the latter offer
must be communicated to shareholders and they must be given a reasonable
opportunity to revoke their vote or withdraw their shares, as the case may be.
Removal of Directors. Under California law, any director or the entire board
of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director
under cumulative voting. Under Delaware law, a director of a corporation that
does not have a classified board of directors or cumulative voting may be
removed with or without cause. The Certificate of Incorporation of New
GranCare does not provide for a classified Board of Directors. Consequently
the entire Board of Directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares of capital stock entitled to
vote.
Filling Vacancies on the Board of Directors. Under California law, any
vacancy on the board of directors, other than one created by removal of a
director, may be filled by the board. If the number of directors is less than
a quorum, a vacancy may be filled by the unanimous written consent of the
remaining directors in office, or the affirmative vote of a majority of the
remaining directors at a meeting. A vacancy created by removal of a director
may be filled by the board only if so authorized by a corporation's articles
of incorporation or by a bylaw approved by the corporation's shareholders. The
Company's Bylaws do not permit directors to fill vacancies created by removal
of a director. Under Delaware law, vacancies and newly created directorships
may be filled by a majority of the directors then in office (even though less
than a quorum) unless otherwise provided in the certificate of incorporation
or bylaws. The Bylaws of New GranCare provide that any vacancy on New
GranCare's Board of Directors may be filled only by majority vote of the
directors then in office (even though less than a quorum) even if the vacancy
is created by the removal of a director by the stockholders.
Loans to Officers and Employees. Pursuant to California law and the Bylaws
of the Company, the Board of Directors of the Company is currently authorized
to approve loans or guaranties to or on behalf of officers (whether or not
such officers are directors) if the Board of Directors determines that such
loans or guaranties may reasonably be expected to benefit the corporation.
Under Delaware law, a corporation, its officers or other employees may make
loans to, guarantee the obligations of or otherwise assist its officers or
other employees of those or its subsidiaries (including directors who are also
officers or employees) when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation.
Indemnification and Limitation of Liability. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit a
corporation to adopt a provision in its articles of incorporation or
certificate of incorporation eliminating the liability of a director to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty in certain circumstances. There are nonetheless
certain differences between the laws of the two states respecting
indemnification and limitation of liability.
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The Articles of Incorporation of the Company eliminate the liability of
directors for monetary damages to the fullest extent permissible under
California law.
California law does not permit the elimination of monetary liability where
such liability is based on: (i) intentional misconduct or knowing and culpable
violation of law; (ii) acts or omissions that a director believes contrary to
the best interests of the corporation or its shareholders, or that involve the
absence of good faith on the part of the director; (iii) receipt of an
improper personal benefit; (iv) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (v)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (vi) interested transactions between the corporation and a
director in which a director has a material financial interest; or (vii)
liability for improper distributions, loans or guarantees.
The Certificate of Incorporation of New GranCare also eliminates the
liability of directors to the fullest extent permissible under Delaware law,
as such law exists currently or as it may be amended in the future. Under
Delaware law, such a provision may not eliminate or limit director monetary
liability for (i) breaches of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (iii) the
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(iv) transactions in which the director received an improper personal benefit.
Such a limitation of liability provision also may not limit a director's
liability for violation of, or otherwise relieve New GranCare or its directors
from the necessity of complying with, federal or state securities laws or
affect the availability of non-monetary remedies such as injunctive relief or
rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (i) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines that person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that the court so determines, and (ii) no indemnification
may be made without court approval in respect of amounts paid or expenses
incurred in settling or otherwise disposing of a threatened or pending action
or in respect of amounts incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of
the directors, independent legal counsel (if a quorum of independent directors
is not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law which requires
indemnification relating to any successful defense, whether on the merits or
otherwise).
Delaware law generally permits indemnification of expenses (including
attorneys' fees) incurred in the defense or settlement of a derivative or
third-party action, provided there is a determination by a majority vote of
the disinterested directors (even though less than a quorum), by independent
legal counsel or by stockholders that the person seeking indemnification acted
in good faith and in a manner reasonably believed to be in or (in contrast to
California law) not opposed to the best interests of the corporation. Without
court approval, however, no indemnification may be made in respect of any
derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Delaware
law also requires indemnification of expenses when the individual being
indemnified has successfully defended the action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements,
bylaws or other corporate action beyond that specifically authorized by
statute. The Articles of Incorporation of the Company include such a
provision.
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A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. As a
result, Delaware law permits indemnification agreements between a Company and
its officers and directors. At this time, New GranCare does not have any such
indemnification agreements in place, but may enter into them in the future.
The Certificate of incorporation of New GranCare provides for mandatory
indemnification of directors and officers to the fullest extent permitted by
law.
The indemnification and limitations of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of the Company taken prior to the Distribution and Merger.
Inspection of Shareholder's List. Both California and Delaware law allow any
shareholder to inspect a corporation's shareholders' list for a purpose
reasonably related to such person's interest as a shareholder. California law
provides, in addition, an absolute right to inspect and copy the corporation's
shareholders' list to persons holding an aggregate of 5% or more of a
corporation's voting shares, or shareholders holding an aggregate of 1% or
more of such shares who have filed a Schedule 14B with the Securities and
Exchange Commission relating to the election of directors. Delaware law does
not provide for any such absolute right of inspection, and no such right is
granted under the Certificate of Incorporation or Bylaws of New GranCare.
Dividends and Repurchases of Shares. California law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses
and deferred charges) would be at least equal to 1-1/4 times its liabilities
(not including deferred taxes, deferred income and other deferred credits),
and the corporation's current assets would be at least equal to its current
liabilities (or 1-1/4 times its current liabilities if the average pre-tax and
pre-interest expense earnings for the preceding two fiscal years were less
than the average expense for such years). Under California law, there are
exceptions to the foregoing rules for repurchases of shares in connection with
certain rescission actions or pursuant to certain employee stock plans.
Delaware law permits a corporation to declare and pay dividends out of
"surplus" or, if there is no surplus, out of net profits for the fiscal year
in which the dividend is declared and/or for the preceding fiscal year as long
as the amount of "capital" of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
To date, the Company has not paid cash dividends on its capital stock. Its
is the current policy of the Board of Directors to retain earnings for use in
the Company's business, and therefore, neither the Company nor New GranCare
anticipate paying cash dividends on their common stock in the foreseeable
future.
Shareholder Voting. Both California and Delaware law generally require that
the holders of a majority in voting power of the outstanding shares of stock
of both constituent corporations entitled to vote approve mergers. Delaware
law does not require a stockholder vote of the surviving corporation in a
merger (unless the corporation provides otherwise in its certificate of
incorporation) if (i) the merger agreement does not amend the existing
certificate of incorporation, (ii) each share of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger, and (iii) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to the merger. California law contains a similar exception
to its voting requirements for reorganizations where
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shareholders or the corporation itself, or both, immediately prior to the
reorganization will own immediately after the reorganization equity securities
constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. By contrast, Delaware
law generally does not require class voting (unless otherwise required by a
corporation's certificate of incorporation), except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class or series of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its
affiliate unless all of the holders of such common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Delaware law has no comparable provision.
California law also provides that except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is
made by an interested party (generally, a controlling or managing party of the
target corporation), an affirmative opinion in writing as to the fairness of
the consideration to be paid to the shareholders must be delivered to
shareholders. This fairness opinion requirement does not apply to a
corporation which does not have shares held of record by at least 100 persons,
or to a transaction which has been qualified under California state securities
laws. Furthermore, if a tender of shares or vote is sought pursuant to an
interested party's proposal and a later proposal is made by another party at
least ten days prior to the date of acceptance of the interested party
proposal, the shareholders must be informed of the later offer and be afforded
a reasonable opportunity to withdraw any vote, consent or proxy, or to
withdraw any tendered shares. Again, Delaware law has no comparable provision.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable solely because of such
interest provided that certain conditions, such as obtaining the required
approval and fulfilling the requirements of good faith and full disclosure,
are met. With certain exceptions, the conditions are similar under California
and Delaware law. Under California and Delaware law, either (a) the
shareholders or the board of directors must approve any such contract or
transaction after full disclosure of the material facts (and in the case of
board approval the contract or transaction must also be "just and reasonable"
in California), or (b) the contract or transaction must have been "just and
reasonable" (in California) or "fair" (in Delaware), as applicable, to the
corporation at the time it was approved. In the latter case, California law
explicitly places the burden of proof on the interested director. Under
California law, if shareholder approval is sought, the interested director is
not entitled too vote his shares at a shareholder meeting with respect to any
action regarding such contract or transaction. If board approval is sought,
the contract or transaction must be approved by a majority vote of a quorum of
the directors, without counting the vote of any interested directors (except
that interested directors may be counted for purposes of establishing a
quorum). Under Delaware law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors
(even though less than a majority of a quorum). Therefore, certain
transactions that the Board of Directors of the Company might not be able to
approve because of the number of interested directors, or the exclusion of
interested director shares, could be approved by a majority of the
disinterested directors of New GranCare, although less than a quorum, or by a
majority of all voting shares, which might not include the holder of a
majority of the disinterested shares. Neither the Company nor New GranCare is
aware of any plans to propose any transaction involving directors of the
Company which could not be so approved under California law but could be so
approved under Delaware law.
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Shareholder Derivative Suits. California law provides that, under certain
circumstances, a shareholder bringing a derivative action on behalf of a
corporation need not have been a shareholder at the time of the transaction in
question, provided that certain tests are met. Under Delaware law, a
stockholder may only bring a derivative action on behalf of the corporation if
the stockholder was a stockholder of the corporation at the time of the
transaction in question or his or her stock thereafter devolved upon him or
her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
Appraisal Rights. Under both California and Delaware law, a shareholder of a
corporation participating in certain corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair value of his or her
shares in lieu of the consideration he or she would otherwise receive in the
transaction. Under Delaware law unless the certificate of incorporation
otherwise provides, such appraisal rights are not available (i) with respect
to the sale, lease or exchange of all or substantially all of the assets of a
corporation, (ii) with respect to a merger or consolidation by a corporation
the shares of which are either listed on a national securities exchange (or
authorized for quotation on the Nasdaq National Market System) or are held of
record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange (or authorized for quotation on the
Nasdaq National Market System) or held of record by more than 2,000 holders,
plus cash in lieu of fractional shares, or any combination thereof, or (iii)
to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the
merger and if certain other conditions are met.
The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System generally do not have such appraisal rights unless the
holders of at least 5% of the class of outstanding shares perfect the right
pursuant to the provisions of the CGCL or unless the corporation or any law
restricts the transfer of such shares. Appraisal rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
In general, California law affords appraisal rights in sale of assets
reorganizations.
While shareholders of the Company have appraisal rights under California
law, the Certificate of Incorporation of New GranCare does not provide for
such rights and, accordingly, appraisal rights will not be available to
shareholders of New GranCare.
Dissolution. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors, and this right may not
be modified by the articles of incorporation. Under Delaware law, unless the
board of directors approves the proposal to dissolve, the dissolution must be
approved by stockholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation's stockholders. In
the event of such a board-initiated dissolution, a majority of shares
outstanding and entitled to vote would be required to approve a dissolution of
New GranCare which had previously been approved by its Board of Directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Laws ("CGCL") ,
certain foreign corporations (i.e. corporations not organized under California
law) are placed in a special category if they have characteristics
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of ownership and operation which indicate that they have significant contacts
with California. So long as a Delaware or other foreign corporation is in this
special category, and it does not qualify for one of the statutory exemptions,
it is subject to a number of key provisions of the CGCL applicable to
corporations incorporated in California. Among the more important provisions
are those relating to the election and removal of directors, cumulative
voting, standards of liability and indemnification of directors,
distributions, dividends and repurchases of shares, shareholder meetings,
approval of certain corporate transactions, dissenters' and appraisal rights
and inspection of corporate records. See "Significant Differences Between the
Corporation Laws of California and Delaware" above.
Exemptions from Section 2115 of the CGCL are provided for corporations whose
shares are listed on a major national securities exchange or are traded in the
NASDAQ National Market System and which have 800 or more shareholders of
record. Following the Distribution, the New GranCare Common Stock will
continue to be traded on the NYSE, and held beneficially by more than 800
stockholders as of the Distribution Date, and, accordingly, New GranCare will
be exempt from Section 2115 of the CGCL.
SHARES ELIGIBLE FOR FUTURE SALES
Upon completion of the Distribution, New GranCare will have an estimated
23,401,992 shares of New GranCare Common Stock outstanding, all of which will
be freely tradable without restriction or further registration under the
Securities Act, except to the extent such shares are held by "affiliates" of
New GranCare, which will be subject to the limitations of Rule 144 promulgated
under the Securities Act. In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this Prospectus, persons who may be deemed
affiliates of New GranCare, as that term is defined in the Securities Act
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of New
GranCare Common Stock (approximately 234,020 shares immediately after the
Distribution) or the average weekly trading volume during the four calendar
weeks preceding a sale by such person. Sales under Rule 144 are also subject
to certain provisions relating to the manner and notice of sale and
availability of current public information about New GranCare. Following the
Distribution, 2,355,250 shares of New GranCare Common Stock will be issuable
upon the exercise of options held by directors and employees of New GranCare
and former employees of the Company.
AVAILABLE INFORMATION
New GranCare has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of New GranCare Common Stock described in
this Prospectus. This Prospectus, which is a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto, certain portions
having been omitted pursuant to the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract or other
document are not necessarily complete with respect to each such contract or
other document filed with the Commission as an exhibit to the Registration
Statement. Reference is made to such exhibits for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto filed with
the Commission may be inspected and copied (at prescribed rates) at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York, 10048, and
the Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-
2511.
102
<PAGE>
New GranCare intends to list the New GranCare Common Stock on the NYSE.
Future reports of New GranCare filed pursuant to either the Securities Act or
the Securities Exchange Act of 1934, as amended (the "Exchange Act") may be
inspected at such exchange and may also be reviewed through the Commission's
Electronic Data Gathering Analysis and Retrieval System, which is publicly
available through the Commission's Web site (http://www.sec.gov).
New GranCare intends to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
LEGAL MATTERS
The validity of the shares of New GranCare Common Stock offered hereby and
the status of the Distribution and Merger as tax-free transactions will be
passed upon for New GranCare by Powell, Goldstein, Frazer & Murphy LLP,
Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of GranCare, Inc. at
December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, which, as to the
years 1994 and 1993, is based in part on the report of KPMG Peat Marwick LLP,
independent auditors. The financial statements and schedule referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
The balance sheet of New GranCare, Inc. at September 30, 1996, appearing in
this Prospectus and Registration Statement has been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
103
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GRANCARE, INC.
Reports of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994............. F-4
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993........................................................... F-5
Consolidated Statements of Shareholders' and Partners' Equity for the
years ended December 31, 1995, 1994 and 1993............................ F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993..................................................... F-7
Notes to Consolidated Financial Statements............................... F-9
Schedule II--Valuation and Qualifying Accounts........................... F-27
Unaudited Condensed Consolidated Balance Sheet as of September 30, 1996.. F-28
Unaudited Condensed Consolidated Statements of Income for the nine-month
periods ended September 30, 1996 and 1995............................... F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the nine-
month periods ended September 30, 1996 and 1995 ........................ F-31
Notes to Unaudited Condensed Consolidated Financial Statements........... F-33
NEW GRANCARE, INC.
Report of Independent Auditors........................................... F-35
Balance Sheet as of September 30, 1996................................... F-36
Note to Balance Sheet.................................................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
GranCare, Inc.
We have audited the consolidated balance sheets of GranCare, Inc. (the
Company) as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' and partners' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Evergreen Healthcare,
Inc., (Evergreen) which became a wholly-owned subsidiary in 1995, as of
December 31, 1994 and for the years ended December 31, 1994 and 1993. The
Evergreen amounts represent 21% of the consolidated total assets at December
31, 1994, and 38% and 26% of consolidated net income for the years ended
December 31, 1994 and 1993, respectively. The financial statements were
audited by other auditors, whose reports have been furnished to us, and our
opinion, with respect to the consolidated financial statements as of and for
the years ended December 31, 1994 and 1993, insofar as it relates to data
included for Evergreen, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of GranCare, Inc. at
December 31, 1995 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes. Also, as discussed in Note 2 to the consolidated financial statements,
effective December 31, 1993, the Company changed its method of accounting for
its marketable equity security investments.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Evergreen Healthcare, Inc.:
We have audited the consolidated balance sheet of Evergreen Healthcare, Inc.
and subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1994 and the six-month period ended December 31, 1993 and
the related combined statements of operations, partners' equity and cash flows
of Evergreen Healthcare LTD, L.P., Predecessor to Evergreen Healthcare, Inc.,
for the six month period ended June 30, 1993 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of
Evergreen Healthcare, Inc. and subsidiaries as of December 31, 1994 and the
results of operations and cash flows of Evergreen Healthcare, Inc. and
subsidiaries for the year ended December 31, 1994, and the six-month period
ended December 31, 1993 and the related combined statements of operations,
partners' equity and cash flows of Evergreen Healthcare LTD., L.P.,
predecessor to Evergreen Healthcare, Inc., for the six month period ended June
30, 1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
August 17, 1995
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 17,738 $ 28,611
Accounts receivable, less allowance for doubtful
accounts (1995--$10,856 and 1994--$9,892)........... 173,068 128,121
Inventories.......................................... 13,527 11,125
Prepaid expenses and other current assets............ 16,498 14,344
Deferred income taxes (Note 7)....................... 10,933 7,395
---------- ----------
Total current assets................................... 231,764 189,596
Property and equipment:
Land and improvements................................ 10,238 10,937
Buildings and improvements........................... 192,875 185,293
Equipment............................................ 66,929 53,662
---------- ----------
270,042 249,892
Less accumulated depreciation........................ (55,689) (42,042)
---------- ----------
214,353 207,850
Other assets:
Investments, at fair value (Notes 4 and 11).......... 30,305 20,353
Goodwill (accumulated amortization: 1995--$5,535;
1994--$1,959)....................................... 120,946 58,418
Other intangibles (accumulated amortization: 1995--
$8,051; 1994--$5,940)............................... 9,793 11,501
Other (Note 2)....................................... 38,000 32,475
---------- ----------
Total assets........................................... $ 645,161 $ 520,193
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 72,935 $ 59,411
Accrued wages and related liabilities................ 24,069 22,643
Interest payable..................................... 6,793 3,683
Income taxes payable (Note 7)........................ -- 2,667
Notes payable and current maturities of long-term
debt (Notes 3, 4 and 11)............................ 4,937 11,566
---------- ----------
Total current liabilities.............................. 108,734 99,970
Long-term debt (Notes 3, 4 and 11)..................... 334,668 231,665
Deferred income taxes (Note 7)......................... 16,735 15,496
Other.................................................. 12,425 11,645
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity (Notes 2 and 8):
Common stock; no par value; 50,000,000 shares
authorized (shares issued: 1995--23,948,728 and
1994--23,173,429)................................... 134,699 132,141
Treasury stock, at cost (1995--915,000 shares and
1994--200,000 shares)............................... (18,700) (5,030)
Equity component of minimum pension liability........ (465) (364)
Unrealized gain on investments (net of income taxes:
1995--$3,453; 1994--$2,250)......................... 5,206 3,375
Retained earnings.................................... 51,859 31,295
---------- ----------
172,599 161,417
---------- ----------
Total liabilities and shareholders' equity............. $ 645,161 $ 520,193
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
REVENUES
Net patient revenues......................... $ 811,402 $ 701,783 $ 609,250
Investment and other income.................. 5,060 15,688 2,439
---------- ---------- ----------
Total revenues............................... 816,462 717,471 611,689
EXPENSES
Operating expenses:
Salary and related......................... 360,530 322,471 289,276
Rent and property.......................... 51,206 44,291 42,446
Other operating............................ 308,982 266,774 217,266
---------- ---------- ----------
720,718 633,536 548,988
Depreciation and amortization................ 21,611 16,440 12,349
Interest expense and financing charges....... 27,054 21,481 19,601
Nonrecurring costs--merger and other costs... 11,750 -- 4,573
Restructuring costs (Note 12)................ -- 8,200 --
---------- ---------- ----------
Total expenses............................... 781,133 679,657 585,511
---------- ---------- ----------
Income before income taxes and extraordinary
charge...................................... 35,329 37,814 26,178
Income taxes................................. 14,765 13,524 10,089
---------- ---------- ----------
Income before extraordinary charge........... 20,564 24,290 16,089
Extraordinary charge--loss on early
extinguishment of debt, net of income tax
benefit of $856............................. -- -- 1,285
---------- ---------- ----------
Net income................................... $ 20,564 $ 24,290 $ 14,804
========== ========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE
Primary:
Income before extraordinary charge......... $ 0.86 $ 1.07 $ 0.88
Extraordinary charge....................... -- -- (.07)
---------- ---------- ----------
Net income................................. $ 0.86 $ 1.07 $ 0.81
Fully diluted:
Income before extraordinary charge......... $ 0.86 $ 1.07 $ 0.84
Extraordinary charge....................... -- -- (.07)
---------- ---------- ----------
Net income................................. $ 0.86 $ 1.07 $ 0.77
========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary.................................... 23,794 22,631 18,205
========== ========== ==========
Fully diluted.............................. 23,919 24,966 19,241
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
COMPUPHARM EQUITY
CONVERTIBLE COMPONENT UNREALIZED
COMMON PREFERRED TREASURY OF MINIMUM GAIN ON RETAINED PARTNERS'
STOCK STOCK STOCK PENSION LIABILITY INVESTMENTS EARNINGS EQUITY TOTAL
-------- ------------ -------- ------------------ ------------ --------- ---------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1993................... $ 65,039 $ 24 $ (6,221) $(294) $ -- $(4,318) $ 5,550 $ 59,780
Issuance of 170,284
shares of common stock
on exercise of
warrants and options
(Note 8).............. 884 -- -- -- -- -- -- 884
Issuance of 6,000
shares of common
stock................. 80 -- -- -- -- -- -- 80
Dividends on CompuPharm
convertible preferred
stock................. -- -- -- -- -- (182) -- (182)
GranCare and CompuPharm
pooling transactions
(Note 3):
Retirement of
CompuPharm treasury
stock................. (1,191) -- 1,191 -- -- -- -- --
Conversion of
CompuPharm convertible
preferred stock....... 24 (24) -- -- -- -- -- --
Conversion of
CompuPharm convertible
debt.................. 350 -- -- -- -- -- -- 350
Exercise of CompuPharm
warrants.............. 1,660 -- -- -- -- -- -- 1,660
Exercise of CompuPharm
non-compensatory
options............... 150 -- -- -- -- -- -- 150
Reverse acquisition
transaction (Note 3):
Issuance of common
stock for partnership
interest.............. 6,656 -- -- -- -- -- (6,656) --
Issuance of common
stock for assets of
affiliated
partnership........... 2,105 -- -- -- -- -- -- 2,105
Issuance of common
stock for acquisition
of minority interest
of NHI................ 5,693 -- -- -- -- -- -- 5,693
Final distribution to
former general and
limited partners...... (490) -- -- -- -- -- -- (490)
Distributions to
partners.............. -- -- -- -- -- -- (864) (864)
Unrealized gain on
investments, net of
income taxes of
$2,800................ -- -- -- -- 4,200 -- -- 4,200
Net income............. -- -- -- -- -- 12,834 1,970 14,804
Four months of
CompuPharm 1993 net
income included in
both 1992 and 1993
(Note 3).............. -- -- -- -- -- (1,329) -- (1,329)
Minimum pension
liability adjustment.. -- -- -- 130 -- -- -- 130
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1993................... 80,960 -- (5,030) (164) 4,200 7,005 -- 86,971
Issuance of 221,655
shares of common stock
on exercise of
warrants and options
(Note 8).............. 1,603 -- -- -- -- -- -- 1,603
Issuance of 1,000,000
shares of common stock
in connection with LTC
acquisition (Note 3).. 20,000 -- -- -- -- -- -- 20,000
Issuance of 5,048
shares of common stock
on conversion of debt
issued in connection
with Winyah
acquisition (Note 3).. 100 -- -- -- -- -- -- 100
Issuance of 2,421,875
shares of common stock
in public offering.... 28,478 -- -- -- -- -- -- 28,478
Issuance of 77,500
shares of common stock
in connection with HS
Healthcare acquisition
(Note 3).............. 1,000 -- -- -- -- -- -- 1,000
Unrealized loss on
investments, net of
income taxes of $550.. -- -- -- -- (825) -- -- (825)
Net income............. -- -- -- -- -- 24,290 -- 24,290
Minimum pension
liability adjustment.. -- -- -- (200) -- -- -- (200)
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1994................... 132,141 -- (5,030) (364) 3,375 31,295 -- 161,417
Issuance of 769,799
shares of common stock
on exercise warrants
and options (Note 8).. 2,476 -- -- -- -- -- -- 2,476
Issuance of 5,500
shares of common
stock................. 82 -- -- -- -- -- -- 82
Repurchase of 715,000
shares of common
stock................. -- -- (13,670) -- -- -- -- (13,670)
Unrealized gain on
investments, net of
income taxes of
$1,203................ -- -- -- -- 1,831 -- -- 1,831
Net income............. -- -- -- -- -- 20,564 -- 20,564
Minimum pension
liability adjustment.. -- -- -- (101) -- -- -- (101)
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1995................... $134,699 $ -- $(18,700) $(465) $5,206 $51,859 $ -- $172,599
======== ===== ======== ===== ====== ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
--------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 20,564 $ 24,290 $ 14,804
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts............... 6,281 7,918 3,592
Depreciation and amortization................. 21,611 16,440 12,349
Gain on sale of assets........................ (829) (12,518) (1,672)
Deferred income taxes......................... 1,171 (333) 922
Amortization of deferred financing costs...... 531 522 373
Restructuring costs........................... -- 8,200 --
Changes in operating assets and liabilities
net of effects of acquisitions (Note 3):
Accounts receivable......................... (49,018) (33,491) (29,548)
Prepaid expenses and other current assets... (3,215) 1,992 (4,270)
Accounts payable, accrued wages and other
accrued expenses........................... 15,388 2,145 6,461
Interest payable............................ 3,110 769 2,704
Income taxes payable........................ (3,199) (883) (5,870)
Other....................................... (3,400) (1,320) 714
--------- -------- --------
Net cash provided by operating activities....... 8,995 13,731 559
INVESTING ACTIVITIES
Acquisition of businesses (net of cash acquired
of $2,469 in 1994 and
$10 in 1993)................................... (68,467) (49,414) (19,273)
Purchases of property and equipment............. (23,495) (14,938) (20,918)
Proceeds from disposition of assets............. 4,155 13,726 374
Purchases of investments........................ (6,944) (6,978) (4)
Repayments (advances) of notes receivable....... 943 (1,610) 3,009
Other........................................... (1,972) (2,212) (1,251)
--------- -------- --------
Net cash used in investing activities........... (95,780) (61,426) (38,063)
FINANCING ACTIVITIES
Issuance of stock............................... 82 29,063 1,140
Payment of stock issuance costs................. -- (585) --
Proceeds from exercise of warrants and options.. 2,776 1,603 584
Purchase of treasury stock...................... (13,670) -- --
Long-term debt payments......................... (177,870) (23,207) (14,580)
Proceeds from long-term debt borrowings......... 270,018 44,787 66,900
Advances (repayments) of short-term notes
payable........................................ -- (600) 2,598
Payment of debt issuance costs.................. (5,424) (1,136) (3,763)
Payment of dividends on preferred stock......... -- -- (261)
Distributions to former general and limited
partners....................................... -- -- (1,354)
--------- -------- --------
Net cash provided by financing activities....... 75,912 49,925 51,264
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (10,873) 2,230 13,760
Less CompuPharm increase in cash for period
January 1, 1993 through
April 30, 1993 (Note 3)........................ -- -- (1,687)
Cash and cash equivalents at beginning of year.. 28,611 26,381 14,308
--------- -------- --------
Cash and cash equivalents at end of year........ $ 17,738 $ 28,611 $ 26,381
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................. $ 22,566 $ 20,712 $ 15,300
========= ======== ========
Income taxes paid............................. $ 17,964 $ 14,406 $ 12,035
========= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITIONS
The 1995, 1994 and 1993 acquisitions (see Note 3) had the following effects
on cash:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Fair values of assets acquired (net of cash
received)...................................... $(75,317) $(90,713) $(48,392)
Fair values of liabilities assumed.............. 6,850 20,299 29,119
-------- -------- --------
(68,467) (70,414) (19,273)
Issuance of stock............................... -- 21,000 --
-------- -------- --------
Net effect on cash.............................. $(68,467) $(49,414) $(19,273)
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS
In connection with the acquisition of Professional Health Care Management,
Inc. (PHCM) in October 1992, GranCare issued 45,000 shares of GranCare Series D
Exchangeable Preferred Stock (the Series D Preferred Stock), which had an
aggregate liquidation preference of $9,000,000. In January 1993, the Series D
Preferred Stock was converted into two promissory notes and, in April 1993,
GranCare prepaid the notes using proceeds from its 6.5% Subordinated Debenture
offering.
As part of the 1993 NHI reverse acquisition (see Note 3), approximately
7,200,000 common shares (GranCare equivalent), which is net of treasury shares
retired, were issued.
Plant and equipment acquired under financing notes and capital lease
arrangements aggregated approximately $1,021,000, $3,222,000, and $4,904,000 in
1995, 1994, and 1993 respectively.
See accompanying notes.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
GranCare, Inc. (GranCare or the Company) merged with Evergreen Healthcare,
Inc. (Evergreen) on July 20, 1995 (the Merger). On that date, GranCare issued
approximately 9,673,000 shares of its common stock in exchange for the
approximately 12,500,000 shares of Evergreen common stock then outstanding
based on an exchange ratio of its shares of GranCare common stock for each
share of Evergreen common stock.
The consolidated financial statements give retroactive effect to the Merger,
which has been accounted for using the pooling-of-interests method and, as a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The consolidated statements of shareholders' and partners' equity
also reflect retroactive combination of the accounts of GranCare and Evergreen
for all periods presented, with adjustments to outstanding shares based on the
exchange ratio.
Prior to the June 30, 1993 National Heritage, Inc. (NHI) reverse acquisition
transaction described in Note 3, the historical Evergreen entity included in
these consolidated financial statements consisted of: (a) Evergreen Healthcare
Ltd., L.P. (ELP), a limited partnership and; (b) Omega/Indiana Pharmacy, L.P.
(OLP), also a limited partnership. Prior to the June 30, 1993 transaction, ELP
had a September 30 fiscal year-end and OLP had a calendar year-end.
Evergreen amounts for the 1994 and 1993 consolidated financial statements
have been conformed to the Company's December 31 year-end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation The Company operates approximately 136 leased and
owned long-term health care facilities that provide skilled nursing and
residential care services in 15 states. In addition, the Company also owns and
operates or serves 30 institutional pharmacies, a specialty hospital geriatric
services company, which manages approximately 100 geriatric care units in
acute hospitals in 18 states, and home health operations in three states.
The facilities and pharmacy divisions represented approximately 72% and 23%,
respectively, of the total net revenues of the Company. Substantially all of
the facilities and pharmacies receive benefits under the Medicare and Medicaid
programs. These programs are highly regulated and subject to periodic change.
The consolidated financial statements include the accounts of GranCare and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliates in which the
Company has less than a 50% interest are accounted for by the equity method.
Use of Estimates The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
Inventories Inventories are stated at the lower of cost, using the first-in,
first-out method, or market value. Inventories consist primarily of purchased
pharmaceuticals and various medical equipment of the pharmacies and supplies
used in the care of residents in long-term care facilities.
Property and Equipment Property and equipment are recorded at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets as stated below. Leases and leasehold
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
improvements that have been capitalized are amortized over the lives of the
leases. Amortization of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings and improvements..................................... 8-35 years
Equipment...................................................... 5-7 years
</TABLE>
Investments In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115 (Statement No. 115), "Accounting for Certain Investments in
Debt and Equity Securities." As permitted under Statement No. 115, GranCare
elected the early adoption of provisions of the new standard as of December
31, 1993, and recognized the unrealized gain ($4,200,000, net of income taxes)
as a direct component of equity (see Note 11). Evergreen adopted the new
standard on July 1, 1994.
Goodwill and Other Intangibles In connection with the Company's
acquisitions, costs in excess of the amounts assigned to identifiable assets
acquired, less liabilities assumed, are recorded as goodwill. Goodwill is
amortized on a straight-line basis principally over a period of 35 years.
Goodwill recorded in the Cornerstone acquisition (unamortized balance of
$48,721,000 at December 31, 1995) is being amortized over 25 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows of the acquired
entity over the remaining amortization period, the Company's carrying value of
the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, which primarily were obtained in connection with the
Company's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
Other Assets The Company defers financing costs incurred to obtain long-term
debt and amortizes such costs using the straight-line method over the term of
the related obligation. An investment in an unconsolidated affiliate at
December 31, 1995 consists of a 28% owned interest in Alternative Living
Services, Inc. (ALS), which is recorded using the equity method. In 1994, the
Company's 53% interest in ALS was consolidated with the Company. The remaining
other assets are individually not significant in their impact to the Company.
Stock Based Compensation The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and intends to continue to do so.
Net Patient Revenues Patient revenues are reported in the period in which
services are provided. Net patient revenues reflect contractual discounts and
the results of other arrangements for providing services at less than
established rates. Contractual adjustments include differences between
established billing rates and amounts estimated by management as reimbursable
under various cost reimbursement formulas or service contracts.
The administrative procedures related to the Medicare and Medicaid cost
reimbursement programs, in effect, generally preclude final determination of
amounts due the Company until cost reimbursement reports, filed by the
Company, are audited or otherwise reviewed and settled with the applicable
administrative agencies. Normal estimation differences between final
settlements and amounts accrued in previous years are reported in current net
patient revenues. Actual results could differ from these estimates. Included
in accounts receivable are settlement amounts due from Medicare and Medicaid
programs totalling $45,764,000 and $20,204,000 at December 31, 1995 and 1994,
respectively. In the opinion of management, adequate provision has been made
for adjustments, if any, that might result from subsequent review. The
Medicare and Medicaid cost reimbursement programs approximated 75%, 76% and
77% of net patient revenues for the years ended December 31, 1995, 1994 and
1993, respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share Earnings per share are computed based on the weighted
average common and (if dilutive) common equivalent shares outstanding, which
include options and warrants, and in the case of fully diluted earnings per
share, convertible subordinated debentures. The earnings per share amounts are
based on the combined historical weighted average common and dilutive common
equivalent shares of GranCare and Evergreen pre-merger adjusted for the .775
exchange ratio. Also, Evergreen's pre-merger historical amounts for periods in
which it was a partnership are based on the equivalent shares of Evergreen
common stock using the terms of the Evergreen exchange transaction described
in Note 3.
Pro forma earnings per share for 1993 is computed by dividing pro forma net
income by the weighted average number of common and common equivalent shares
outstanding for the period.
Pro Forma Income Taxes As indicated in Note 1, prior to June 30, 1993, the
Evergreen predecessor entity consisted of two partnerships and, accordingly,
Evergreen was not subject to federal or state income taxes. The following
table presents unaudited pro forma financial information for the year ended
December 31, 1993, that includes a provision for income taxes as if Evergreen
had been a taxable corporation for the period. Such pro forma calculation was
based on the income tax laws and rates in effect during the period, and FASB
Statement No. 109.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
---------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
Pro Forma data (unaudited):
Income before income taxes and extraordinary
charge........................................... $26,178
Income taxes...................................... 10,874
Income before extraordinary charge................ 15,304
Extraordinary charge.............................. 1,285
-------
Net income........................................ $14,019
=======
Net income per common and common equivalent share:
Primary........................................... $ .77
-------
Fully diluted..................................... $ .73
=======
</TABLE>
Impact of Recently Issued Accounting Standards In March 1995, the FASB
issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
NOTE 3. ACQUISITIONS, DISPOSITIONS AND MERGERS
1993 Acquisitions and Dispositions Effective January 1, 1993, GranCare
acquired all of the capital stock of Coordinated Home Health, Inc., and the
operations of Coordinated Nursing Services, Inc. and Infusion Plus, Inc.
(collectively, Coordinated) for $1,600,000 in cash and a promissory note for
$485,000.
On January 28, 1993, GranCare completed the acquisition of Colter Village,
two health care facilities consisting of a skilled nursing facility and a
retirement living center for $6,750,000.
On March 31, 1993, GranCare acquired Bella Vita, a 126-bed skilled nursing
facility in Colorado, for $3,740,000.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1993, GranCare acquired all of the capital stock of Pacific
Therapies, Inc., and the operations of Pacific Therapies Co. (collectively,
Pacific Therapies), which provide physical, occupational and speech therapy
services, for $1,000,000 in cash and a promissory note for $384,000.
On April 19, 1993, GranCare acquired the operations of Patient Therapy
Systems, Inc., which provides therapy beds and therapy services to patients
directly and under agreements and arrangements with nursing facilities, for
$400,000 in cash.
On April 30, 1993, GranCare acquired four skilled nursing facilities located
in Wisconsin for $3,500,000 in cash and $13,000,000 in mortgage notes.
On June 23, 1993, GranCare acquired all of the capital stock of Brim Medical
Equipment and Supplies, Inc., an enteral and urological supply company, for
$1,400,000, payable in installments of various amounts, without interest
through July 1, 1998.
On June 30, 1993, GranCare acquired all of the capital stock of Winyah
Dispensary, LTC of North Carolina and Winyah Dispensary-Midlands, Inc., for
$2,500,000 in convertible promissory notes, and the operations of Winyah
Dispensary for $3,650,000 in cash and promissory notes in the aggregate sum of
$2,600,000 (collectively, Winyah). Winyah provides institutional pharmacy
services in North and South Carolina. In connection with these transactions,
GranCare recorded $8,218,000 in goodwill.
On September 30, 1993, CompuPharm acquired the operations of Medication
Delivery Systems, Inc. (MDS), an institutional pharmacy, for a purchase price
of $1,750,000 plus transaction costs.
NHI Reverse Acquisition Effective June 30, 1993, Evergreen became a public
company and acquired the remaining 90% common stock ownership of NHI, an
existing public company, in a reverse acquisition transaction. (Note:
Evergreen had previously acquired 10% of NHI in October 1992.) The following
transactions were part of the reverse acquisition:
. The partners of the Evergreen partnerships (i.e., ELP and OLP as referred
to in Note 1) and an affiliated partnership under common control (ERP)
received 5,032,108 common shares (restated to GranCare equivalent
shares), which was net of 1,240,000 shares held in treasury that were
retired, in exchange for their partnership interests in the three
partnerships.
. The ERP partnership, which previously was not part of the historical
Evergreen entity, transferred its assets to Evergreen as part of the
exchange. Such assets consisted of: (i) a limited partnership interest in
the Evergreen partnerships, and (ii) a 48% ownership in NHI. (Note: ERP
had also acquired its interest in NHI in October 1992.)
. The remaining 42% owners of NHI received 2,141,325 common shares
(restated to GranCare equivalent shares), excluding shares held in
treasury by NHI.
The exchange of common stock for partnership interests in predecessor
partnerships (i.e., ELP and OLP) was recorded at book value, because it was
merely a legal restructuring. The receipt of ERP assets for common stock also
was recorded at book value, because this was a transfer among entities under
common control. ERP's book value included $2,100,000 in goodwill recorded in
connection with its purchase of a 48% interest in NHI.
The acquisition of the NHI 42% minority stockholders' interests was
accounted for as a purchase and, in connection therewith, $2,691,000 in
goodwill was recorded. The operations of NHI have been included in the
consolidated results of Evergreen from June 30, 1993 forward.
The 1993 acquisitions described above were all accounted for as purchases
and, accordingly, the consolidated financial statements of the Company include
the operations of such acquired entities since the respective dates of their
acquisition.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, GranCare also divested nine facilities.
1994 Acquisitions and Dispositions On March 1, 1994, GranCare acquired the
operations of PPCP, Inc. (PPCP), which provides institutional pharmacy
services, for $3,800,000 in cash and adjustable subordinated promissory notes
in the aggregate sum of $1,449,000. In connection with this transaction,
$4,518,000 was recorded as goodwill.
On April 1, 1994, GranCare acquired the operations of Merit Pharmacy, Inc.
(Merit), which provides institutional pharmacy services, for $600,000 in cash
and a subordinated promissory note for $1,184,000. In connection with this
transaction, GranCare recorded $1,817,000 in goodwill.
On June 7, 1994, Evergreen acquired substantially all of the assets of two
Illinois limited partnerships, Health Care Fund Limited Partnership and Health
Care Fund II Limited Partnership, as well as two related companies, H.S.
Healthcare, Inc. and H.S. Systems, Inc. (collectively referred to as HS
Healthcare). Evergreen paid approximately $22,571,000 cash (of which
$7,687,000 was financed through revolving credit borrowings) in exchange for
the assets acquired and liabilities assumed. The Company also paid $3,000,000
in cash and issued 77,500 shares (restated) of common stock valued at
$1,000,000 to the general partners of the partnerships and sole shareholders
of the related companies in consideration for their agreement not to compete
with the Company for a period of ten years.
Effective July 1, 1994, GranCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, LTC), an institutional pharmacy business based in Indiana, for
$16,000,000 cash and 1,000,000 shares of GranCare common stock valued at $20
per share, or $20,000,000. In the event the market price of the common stock
was not at least equal to $20 per share at a specified date in 1995, the
Company was obligated to issue additional consideration to bring the value of
the common stock to $20,000,000. The purchase agreement also contains a
contingent earnout provision, in the form of a subordinated promissory note,
under which an additional $5,500,000 could be paid-provided certain future
operating results are attained. In connection with this transaction, GranCare
recorded $27,402,000 goodwill.
Also effective July 1, 1994, GranCare acquired the operations of Ricketts
Drug, Inc., an institutional pharmacy based in Virginia, for $4,111,000 in
cash. In connection with this transaction, GranCare recorded $2,355,000 in
goodwill.
Effective July 25, 1994, GranCare acquired leasehold interests in two long-
term health care facilities in South Carolina for $38,000.
Effective September 30, 1994, GranCare acquired leasehold interests in five
additional long-term health care facilities in South Carolina for $150,000.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1994, GranCare also divested three facilities (exclusive of the
restructuring described in Note 12) and Pacific Therapies, acquired in 1993.
The sale of Pacific Therapies to an unrelated entity for approximately
$11,700,000 in cash and assumption of approximately $1,100,000 in debt and
certain other liabilities resulted in a gain of approximately $8,800,000. The
gain is reported in investment and other income in the Consolidated Statements
of Income.
1995 Acquisitions and Dispositions In January 1995, GranCare acquired a
leasehold interest in a long-term facility in Arizona for $150,000.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1995, GranCare acquired Cornerstone Health Management Company
(Cornerstone), a management company specializing in the implementation and
management of geriatric specialty programs for acute care hospitals, for
$53,213,000.
In November 1995, GranCare acquired Innovative Pharmacy Services, Inc., an
institutional pharmacy based in Wisconsin, for $10,000,000 in cash and stock.
In December 1995, GranCare acquired the operations of both Pharmcare, Inc.
and American Pharmaceutical Inc., two institutional pharmacies based in
Northern California, for $4,700,000 and $1,200,000, respectively.
During 1995, GranCare also divested one facility (exclusive of the
restructuring described in Note 12).
In July 1995, in accordance with contractual obligation to the former owners
of LTC, the Company repurchased 715,000 shares of its common stock.
Summarized below are the unaudited pro forma consolidated results of
operations for GranCare had the 1995 Cornerstone acquisition occurred as of
January 1, 1994, and the 1994 LTC and HS Healthcare acquisitions and the June
30, 1993 NHI reverse acquisition occurred as of January 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C>
Total revenues................................... $ 786,846 $ 711,622
Income before extraordinary charge............... 26,738 19,926
Net income....................................... 26,738 18,641
Net income per share:
Primary........................................ 1.15 .91
Fully diluted.................................. 1.15 .87
</TABLE>
Pro forma information for other 1995, 1994 and 1993 acquisitions and
divestitures is not presented because their operating results, either
individually or in the aggregate, do not have a material effect on the pro
forma operating results presented above.
The above results are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit which might be
achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
MERGERS
CompuPharm Merger On December 28, 1993, GranCare acquired, through merger,
all of the outstanding common stock of CompuPharm, Inc. ("CompuPharm") in
exchange for 2,462,795 shares of GranCare's common stock. CompuPharm is a
provider of institutional pharmacy services.
GranCare's merger with CompuPharm was accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements for all periods prior to the merger have been restated to include
the historical balances of GranCare and CompuPharm as if the two companies had
always been combined. For purposes of restating the December 31, 1992
financial statements to reflect the merger, CompuPharm's annual financial
statements for the fiscal year ended April 30, 1993 were used. The 1993
consolidated financial statements, however, include CompuPharm balances as of,
and for the year ended, December 31, 1993. As such, both the 1993 and 1992
consolidated financial statements include operating results
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and cash flows relating to CompuPharm for the four months ended April 30,
1993, (consisting of revenues and net income of $24,200,000 and $1,300,000,
respectively) which are adjusted through a separate line item in the
consolidated statements of shareholders' equity and cash flows.
A reconciliation of consolidated total revenues, income before extraordinary
charge and net income to amounts applicable to the separate companies prior to
the date of combination (effectively, December 31, 1993) is presented together
with the Evergreen merger table included below.
Evergreen Merger On July 20, 1995, GranCare acquired, through merger,
substantially all of the outstanding common stock of Evergreen in exchange for
approximately 9,673,000 shares of GranCare common stock based on a .775
exchange ratio. The Evergreen merger is accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements of all periods prior to the merger have been restated to include
the historical balances of GranCare and Evergreen as if the two companies had
always been combined.
The Company incurred certain costs relating to completion of the Merger and
other one-time costs and recognized an $11.8 million charge in the third
quarter of 1995, as required under the pooling-of-interests accounting method.
The following is a summary of the Merger and other one-time costs:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
DOLLARS IN
THOUSANDS
<S> <C>
Merger costs:
Investment banking fees.................................... $ 4,100
Legal and other fees....................................... 1,469
Executive severance........................................ 1,100
Planned divestitures of certain facilities................. 1,500
Other one-time costs:
Relocation................................................. 1,626
Integration................................................ 850
Other deferred acquisition costs........................... 1,105
-------
Total........................................................ $11,750
=======
</TABLE>
As of December 31, 1995, the remaining reserve balance relating to the
Merger and other one-time costs was $2.4 million.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of consolidated total revenues, income before extraordinary
charge, and net income to amounts applicable to the separate pooled companies
prior to the dates of combination (including both the December 1993 CompuPharm
and July 1995 Evergreen mergers) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C>
TOTAL REVENUES
GranCare............................................. $ 549,220 $ 434,117
CompuPharm........................................... -- 73,853
----------- -----------
GranCare, pre-Evergreen merger....................... 549,220 507,970
Evergreen............................................ 168,251 103,719
----------- -----------
$ 717,471 $ 611,689
=========== ===========
INCOME BEFORE EXTRAORDINARY CHARGE(1)
GranCare............................................. $ 15,179 $ 10,697
CompuPharm........................................... -- 1,472
----------- -----------
GranCare, pre-Evergreen merger....................... 15,179 12,169
Evergreen(2)......................................... 9,111 3,920
----------- -----------
$ 24,290 $ 16,089
=========== ===========
NET INCOME
GranCare............................................. $ 15,179 $ 10,697
CompuPharm........................................... -- 187
----------- -----------
GranCare, pre-Evergreen merger....................... 15,179 10,884
Evergreen(2)......................................... 9,111 3,920
----------- -----------
$ 24,290 $ 14,804
=========== ===========
NET INCOME PER SHARE (FULLY-DILUTED BASIS)
GranCare............................................. $ 1.08 $ 1.03
CompuPharm(3)........................................ n/a n/a
GranCare, pre-Evergreen merger....................... 1.08 .83
Evergreen(4)......................................... .82 n/a
----------- -----------
$ 1.07 $ .77
=========== ===========
</TABLE>
- --------
(1) After non-recurring merger costs of $2,149,000 for GranCare and $2,424,000
for CompuPharm in 1993.
(2) Evergreen's income before extraordinary charge and net income exclude
Merger and other costs of approximately $11,750,000. This charge was
recorded by the Company in the third quarter of 1995.
(3) Earnings per share for CompuPharm prior to the merger was not applicable
because it was not a public company.
(4) Earnings per share for Evergreen prior to June 30, 1993 was not applicable
because it was not a public company.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
SENIOR DEBT
Mortgage notes payable:
Omega.............................................. $ 58,800 $ 58,800
Other (principally HRPT and FINOVA) in installments
which include interest ranging from 8% to 11.5%... 32,376 31,477
Revolving loan under bank credit facility bearing
interest based on LIBOR or prime rate............... 37,700 45,900
Evergreen Credit Facility............................ -- 12,686
Evergreen revenue bonds.............................. 13,445 13,850
Notes payable in installments which include interest
ranging from 6.9% to 13.75%; final maturities in
1996 through 2010................................... 28,991 10,788
Capitalized lease obligations (less imputed interest
of $570 in 1995 and $421 in 1994)................... 4,622 4,964
Other................................................ 2,400 3,385
----------- -----------
Total senior debt.................................. 178,334 181,850
SUBORDINATED DEBT
Senior subordinated notes; interest due semi-annually
at 9 3/8%, principal due September 15, 2005......... 100,000 --
Convertible subordinated debentures; interest due
semi-annually at 6.5%, principal due January 15,
2003................................................ 60,000 60,000
Other notes payable.................................. 1,271 1,381
----------- -----------
Total subordinated debt................................ 161,271 61,381
----------- -----------
Total debt............................................. 339,605 243,231
Less short-term notes payable and current maturities of
long-term debt........................................ 4,937 11,566
----------- -----------
$ 334,668 $ 231,665
=========== ===========
</TABLE>
On August 14, 1992, PHCM entered into a $58,800,000 loan agreement with
Omega Healthcare Investors, Inc. (Omega). The loan is secured by mortgages on
certain health care facilities, and by the personal property used in
connection with the operation of those facilities, as well as certain other
intangibles, including the licenses for these facilities, to the extent
permitted by Michigan law, and accounts receivable in excess of $1,000,000.
The minimum interest rate on the loan is 13% per year, of which 12% is payable
monthly in cash and 1% is deferred. The cash interest rate will increase in
each subsequent year based upon a specified formula tied to either; (i) the
percentage change in the Consumer Price Index published by the United States
Department of Labor, or; (ii) the change in Gross Revenues (as defined in the
loan agreement); however, the increase cannot be more than the interest for
the prior fiscal year multiplied by 1.05. The 1% of deferred interest will
accrue on an annual basis and will be cumulative on an annual basis as long as
the loan remains outstanding. Quarterly principal payments of $1,470,000 are
required beginning October 1, 2002, with the remaining balance plus the
deferred interest due in August 2007. The loan agreement also contains certain
restrictive covenants, including, but not limited to, restrictions on PHCM
incurring additional debt, prepayment and minimum net worth requirements. As
of December 31, 1995, the interest rate was 13.9%, including the 1% deferred
interest.
In conjunction with a 1990 acquisition, GranCare borrowed $15,000,000 under
a promissory note agreement with HRPT. The note is secured by mortgages on two
facilities and 1,000,000 shares of HRPT common stock
F-17
<PAGE>
owned by GranCare. The HRPT note had a balance of $8,750,000, with an interest
rate of 13.75% at December 31, 1994.
During 1995, GranCare renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11,500,000, resulting in
additional proceeds to GranCare. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is 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.
On January 29, 1993, GranCare completed a public offering of $60,000,000
aggregate principal amount of its 6.5% Convertible Subordinated Debentures due
2003 (the Debentures). The Debentures are convertible into common stock of
GranCare at any time prior to redemption or final maturity, at a conversion
price of $27.145 per share, subject to adjustment upon the occurrence of
certain events. Interest on the Debentures is payable semi-annually on January
and July 15th. Approximately $15,600,000 of the net proceeds of $57,700,000
was used to repay certain indebtedness, and the remaining $42,100,000 was used
for general corporate purposes, including the further expansion of specialty
medical services and acquisitions.
In conjunction with the 1993 acquisition of four skilled nursing facilities
in Wisconsin, as described in Note 3, GranCare entered into an $11,000,000
mortgage loan agreement with FINOVA. Interest accrues on the mortgage note at
an adjustable rate of 2% over prime, with installments of principal and
interest due monthly through April 2001, with final payment due May 2001. The
mortgage note cannot be prepaid until 90 days prior to the end of the term
without a prepayment penalty.
At the end of 1993, a subsidiary of GranCare, GranCare Health Services, Inc.
entered into a $50,000,000 revolving credit agreement with a syndicate of
banks. In 1994, the agreement was amended to increase the line of credit to
$80,000,000. This credit agreement terminated on March 29, 1995.
On March 29, 1995, the Company entered into an agreement with First Union
National Bank of North Carolina (First Union) pursuant to which First Union
provided the Company with a $175 million revolving line of credit (the Credit
Facility). The Company has used the proceeds from the Credit Facility to pay
off its previous line of credit, fund the acquisition of Cornerstone and for
general working capital purposes. In September 1995, concurrent with the High
Yield Debt offering the Credit Facility was reduced to $150 million. Amounts
outstanding under the Credit Facility bear interest based on LIBOR or prime
rates (7.6% and 8.85%, respectively, at December 31, 1995). Amounts
outstanding as of June 30, 1998 may convert to a term loan with equal
quarterly installments due through the final maturity date of June 30, 2002.
No principal payments are required under the Credit Facility prior to the June
30, 1998 conversion date.
Evergreen maintained a revolving credit facility and a working capital
facility (the Evergreen Credit Facility) in the aggregate maximum amount of
$55,000,000 from a syndicate of banks, $45,000,000 of which was to be used for
acquisitions and $10,000,000 of which was to be used for working capital
purposes. The Evergreen Credit facility was terminated at the merger. Six
nursing home facilities were refinanced via mortgage debt in March 1995 for
$16,500,000, including the facilities held as collateral under the revolving
credit facility. Therefore, the Company has classified the borrowings under
the revolving credit facility as long-term debt in the Company's consolidated
balance sheet at December 31, 1994. The Evergreen Credit Facility described
above was entered into on June 7, 1994, as a refinancing of an existing
$6,000,000 revolving credit facility with the same bank.
On September 29, 1995, the Company closed the sale of $100 million aggregate
principal amount of its 9 3/8% Senior Subordinated Notes due 2005 (Notes) in
an underwritten public offering (Notes Offering). After paying underwriter
fees and commissions, the approximately $96 million realized by the Company
from the sale of the Notes was used to pay outstanding indebtedness under its'
Credit Facility.
The Evergreen revenue bonds include a $9,100,000 Series 1993A taxable
adjustable demand issue that requires semiannual interest payments at a
variable rate (5.95% at December 31, 1995) and annual principal
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payments through August 15, 2013. The remaining revenue bonds bear interest at
fixed rates ranging from 7.75% to 9.5% through 2001--2002, and which are
subject to change after such dates. These bonds mature in 2015; however, they
may be redeemed by the bondholders on various dates in the years 2001, 2002,
2011 and 2012.
Certain of these notes payable and related agreements contain covenant
restrictions on additional debt, intercompany loans, dividends and the
maintenance of certain financial ratios. The Company has pledged certain
accounts receivable, leasehold interests and substantially all property and
equipment as collateral under the various debt agreements.
Maturities of debt and obligations under capital leases at December 31,
1995, are summarized as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES TOTAL
-------- -------------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Year ending December 31,
1996..................................... $ 3,331 $2,053 $ 5,384
1997..................................... 2,477 1,302 3,779
1998..................................... 6,443 1,140 7,583
1999..................................... 1,785 659 2,444
2000..................................... 8,959 38 8,997
Thereafter................................. 311,988 -- 311,988
-------- ------ --------
Total minimum payments..................... 334,983 5,192 340,175
Less amounts representing interest......... -- 570 570
-------- ------ --------
Total obligations.......................... $334,983 $4,622 $339,605
======== ====== ========
</TABLE>
NOTE 5. OPERATING LEASES
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, beginning 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 seven of the 24
facilities to unrelated parties.
The Company leases additional health care facilities, certain other
facilities, office space, and equipment from other unrelated parties.
Substantially all the leases are operating leases which expire at various
dates and generally contain options to renew for various terms. Certain leases
also contain purchase options. Rents generally are subject to increase based
on the Consumer Price Index, occupancy rates, Medicaid reimbursement rates or
at stated amounts specified in the lease agreements.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of GranCare's minimum commitments under operating leases at
December 31, 1995, follows:
<TABLE>
<CAPTION>
YEAR ENDING DOLLARS IN
DECEMBER 31, THOUSANDS
------------ ----------
<S> <C>
1996........................................................... $ 43,310
1997........................................................... 43,069
1998........................................................... 42,331
1999........................................................... 37,510
2000........................................................... 26,175
Thereafter...................................................... 179,066
--------
Total minimum lease payments.................................... $371,461
========
</TABLE>
Aggregate future minimum lease payments to be received under noncancelable
subleases are $5,263,000 for the year ended December 31, 1996 and $43,675,000
thereafter.
Total rent expense for all operating leases, net of sublease income,
aggregated $41,058,000, $35,632,000 and $34,872,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company is currently having discussions with the landlord of 18 of its'
skilled nursing facilities. The Company expects to receive a favorable
adjustment to current lease commitments in return for an additional capital
investment and extension of the lease term.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company, through its wholly-owned subsidiary, GCI Indemnity, Inc.,
maintains a captive insurance company for the purpose of paying worker's
compensation claims. The Company maintains reinsurance contracts to minimize
its insurance exposure.The Company accepts the first $350,000 of loss and loss
adjustment expense liability per occurrence for worker's compensation risks.
The Company estimates this liability on case-basis estimates of losses
reported prior to the date of the balance sheets and includes estimates of
losses for claims incurred but not reported. The Company's estimated liability
for worker's compensation claims is reported in the accompanying balance
sheets as other long term liabilities. Investments held by the captive
insurance company are reported in other assets section of the accompanying
balance sheets.
NOTE 7. INCOME TAXES
Effective January 1, 1993, the Company, except for CompuPharm and Evergreen,
prospectively adopted FASB Statement of Financial Accounting Standards No. 109
(Statement No. 109), "Accounting for Income Taxes." CompuPharm and Evergreen
adopted Statement No. 109 on May 1, 1991 and July 1, 1993, respectively. The
Company (excluding CompuPharm and Evergreen) previously accounted for income
taxes under FASB Statement No. 96. There was no cumulative effect of adopting
Statement No. 109.
As described in Note 1, prior to June 30, 1993, the predecessor Evergreen
entities were partnerships and as such were not subject to corporate income
taxes. Accordingly, the accompanying 1993 Consolidated Statement of Income
does not include any income tax expense relating to $1,970,000 of pre-tax
income earned by these partnerships.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal........................................... $11,880 $11,025 $ 7,388
State............................................. 1,714 2,832 1,779
------- ------- -------
13,594 13,857 9,167
DEFERRED
Federal........................................... 1,133 (317) 778
State............................................. 38 (16) 144
------- ------- -------
1,171 (333) 922
------- ------- -------
$14,765 $13,524 $10,089
======= ======= =======
</TABLE>
At December 31, 1995, the Company and its subsidiaries have approximately
$19,900,000 of federal net operating loss carryforwards (including the
remaining $970,000 NHI NOL acquired by Evergreen) and various state income tax
net operating loss carryforwards expiring at various dates through 2008.
Approximately $11,340,000 of such amount represents acquired federal net
operating loss carryforwards, the use of which is subject to both annual
dollar limitations and the general requirements that such carryforwards be
offset only against the taxable income of the acquired operations. The portion
of the net operating loss carryforwards not relating to acquired operations is
also subject to various limitations because of previous ownership changes. The
valuation allowance at December 31, 1995, pertains to nonacquired net
operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
DEFERRED INCOME TAX LIABILITIES
Fixed asset basis differences.................. $ 17,318 $ 16,687
Workers' compensation insurance................ -- 359
Deferred rent.................................. -- 349
Investments.................................... 3,276 2,250
Intangible asset basis differences............. 1,648 --
Deferred gain on sale of assets................ 1,263 --
Other.......................................... 266 690
----------- -----------
Total deferred income tax liabilities............ 23,771 20,335
DEFERRED INCOME TAX ASSETS
Vacation and compensation accruals............. 4,103 2,630
Deferred gain on sale of assets................ -- 1,382
Accounts receivable reserves................... 5,981 1,351
Deferred rent.................................. 426 587
Voluntary employees' benefit association....... 507 190
Net operating loss carryforwards............... 7,367 8,124
Intangible asset basis differences............. -- 117
Accrued merger costs........................... 886 --
Workers' compensation and other insurance...... 2,088 --
Other.......................................... -- 1,567
----------- -----------
Total deferred income tax assets................. 21,358 15,948
Valuation allowance for deferred income tax
assets.......................................... (3,389) (3,714)
----------- -----------
Net deferred income tax assets................... 17,969 12,234
----------- -----------
Net deferred income tax liabilities.............. $ 5,802 $ 8,101
=========== ===========
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance decreased as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Recognition of NOL carryforwards as a reduction in
income tax expense................................. $ 325 $ 325 $ 1,370
Initial recognition of deductible temporary
differences as a reduction in income tax expense... -- 665 --
Recognition of acquired NOLs and deductible
temporary differences as a reduction to goodwill... -- 2,548 1,200
------- -------- --------
$ 325 $ 3,538 $ 2,570
======= ======== ========
</TABLE>
Differences between GranCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT 1993 AMOUNT PERCENT
- ----------------------- ----------- ------- ----------- ------- ----------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
rate................... $12,365 35.0% $13,236 35.0% $ 9,163 35.0%
State tax, net of
federal benefit........ 1,135 3.2 1,958 5.2 1,384 5.2
Nontaxable partnership
income................. -- -- -- -- (690) (2.6)
Merger costs............ 1,435 4.1 -- -- 1,600 6.1
Federal NOL--current.... (277) (.8) (277) (.7) (681) (2.6)
Federal NOL--deferred... -- -- -- -- (689) (2.6)
Reduction in valuation
allowance.............. -- -- (665) (1.8) -- --
State NOL, net of
federal benefit........ (48) (.1) (48) (.1) (131) (.5)
Federal tax credits..... (88) (.3) (458) (1.2) (290) (1.1)
Other................... 243 .7 (222) (.6) 423 1.6
------- ---- ------- ---- ------- ----
$14,765 41.8% $13,524 35.8% $10,089 38.5%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
The 2,462,795 shares of GranCare's common stock issued upon completion of
the December 28, 1993, merger with CompuPharm consisted of the following:
<TABLE>
<S> <C>
Outstanding shares of CompuPharm prior to merger................. 601,885
Convertible CompuPharm debt converted to stock simultaneously
with the merger................................................. 736,648
Convertible CompuPharm preferred stock converted to stock
simultaneously with the merger.................................. 283,816
CompuPharm common stock options exercised simultaneously with the
merger.......................................................... 195,891
CompuPharm common stock warrants exercised simultaneously with
the merger...................................................... 644,555
---------
2,462,795
=========
</TABLE>
In connection with the Evergreen merger, 9,672,806 shares of GranCare common
stock were issued in the exchange.
Also in connection with the CompuPharm and Evergreen mergers, CompuPharm and
Evergreen stock options that remained outstanding were exchanged for options
to purchase GranCare stock with the same terms, except as adjusted for the
common stock exchange ratio. The GranCare options issued in connection with
the CompuPharm and Evergreen exchanges totaled approximately 587,200 and
214,000, respectively, and are included in the option table presented below,
based on their original issuance date by CompuPharm and Evergreen.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The warrants and options exercised at the time of the CompuPharm merger are
also shown in the accompanying warrant and option tables presented below based
on their converted share values.
On June 30, 1993, in connection with Evergreen's NHI acquisition, warrants
to purchase 46,500 common shares at $6.45 per share were issued to a former
NHI executive. These warrants are exercisable at any time prior to June 30,
1996. Through December 31, 1995, all had been exercised.
During 1989, 1990 and 1991, GranCare issued warrants to purchase shares of
common stock exercisable over periods from four to ten years after date of
issuance. The exercise prices are to be adjusted automatically upon the
occurrence of certain dilutive events. The following summarizes the warrants'
activity for the three years ended December 31, 1995 (including the CompuPharm
and NHI warrants described above):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Warrants outstanding at
beginning of year......... 765,033 890,016 1,549,355
Warrant price.............. $.001 to $10.00 $.001 to $10.00 $.001 to $10.00
Warrant issued............. -- -- 46,500
Warrant price.............. -- -- $6.45
Warrants exercised......... (413,161) (124,983) (705,839)
Warrant price.............. $.10 to $10.00 $.10 to $6.77 $1.00 to $6.77
Warrants outstanding at end
of year................... 351,872 765,033 890,016
Warrant price.............. $.001 to $6.77 $.001 to $10.00 $.001 to $10.00
Warrants exercisable at end
of year................... 351,872 765,033 890,016
</TABLE>
GranCare has a Stock Incentive Plan, adopted in 1991 and amended in 1992
(the 1991 Plan), which provides for the direct sale of shares, the granting of
stock options and the granting of limited stock appreciation rights to
selected employees, officers, directors and consultants of GranCare. The total
number of common shares that may be issued under the 1991 Plan is 2,500,000.
The direct sale of common shares under the 1991 Plan shall be at a price not
less than 85% of the fair market value of the common stock on the date the
right to purchase shares is granted.
Under the 1991 Plan, options are granted at an exercise price of not less
than 100% of fair market value at the date of grant, except for nonstatutory
options which are granted at an exercise price of not less than 85% of the
fair market value on the date of the grant.
Certain options are exercisable immediately, while others are subject to
vesting provisions whereby the options will be fully vested three to four
years after the date of grant. All options are non-transferable and expire
five to 10 years from the date of the grant. The Board of Directors, or a
committee appointed by the Board of Directors, may grant limited stock
appreciation rights in tandem with any stock options granted under the 1991
Plan. Limited stock appreciation rights are only exercisable with the consent
of the Board of Directors on and for the 60-day period following certain
events as defined in the 1991 Plan, and are payable in cash. No limited stock
appreciation rights have been issued under the 1991 Plan.
On May 3, 1994, GranCare adopted a Stock Option/Stock Issuance Plan (the
1994 Plan) which provides for the granting of incentive stock options, the
granting of limited stock appreciation rights, a salary reduction grant
program, and a stock issuance program for selected employees of GranCare. The
1994 Plan has an automatic grant program for the granting of options to non-
employee directors. The total number of common shares issuable under the 1994
Plan is 1,135,623 shares. The 1994 Plan contains a provision that provides
that each year, commencing with the 1995 calendar year, the common stock
available for grant under the 1994 Plan will automatically increase by an
amount equal to 1% of the shares of common stock outstanding on December 31st
of the immediately preceding calendar year.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The exercise price per share for incentive stock options cannot be less than
100% of the fair market value per share of GranCare's common stock on the
grant date. For non-statutory options, the exercise price per share may not be
less than 85% of such fair market value. No option shall have a maximum term
in excess of ten years from the grant date. The Plan Administrator, as
designated by the Board of Directors, will have complete discretion to grant
incentive stock options and limited stock appreciation rights, and to choose
individuals to participate in the salary reduction grant program. The Plan
Administrator may, at its discretion, sell shares of GranCare's common stock
at a price per share not less than 85% of fair market value in accordance with
the stock issuance program. Shares may also be issued solely as a bonus for
past services.
The Plan Administrator may, at its discretion, grant an employee with
incentive stock options the right to surrender all or part of an unexercised
option in exchange for a distribution from GranCare, or "limited stock
appreciation rights." The distribution will be an amount equal to the excess
of the fair market value of the number of shares on the surrender date, over
the aggregate price payable for such vested shares. No limited stock
appreciation rights have been issued under the 1994 Plan.
A summary of the activity under the plans (including the exchanged
CompuPharm and Evergreen options mentioned above) for the three years ended
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
<S> <C> <C> <C>
Options outstanding at
beginning of year....... 2,267,618 1,808,742 1,172,092
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $12.50
Options granted.......... 387,000 583,681 957,541
Exercise price........... $13.00 to $17.33 $12.90 to $20.50 $1.61 to $21.00
Options cancelled........ (155,605) (28,133) (16,000)
Exercise price........... $9.875 to $21.00 $9.875 to $13.25 $9.875
Options exercised........ (356,638) (96,672) (304,891)
Exercise price........... $ 1.53 to $16.50 $ 1.53 to $16.50 $0.76 to $9.875
Options outstanding at
end of year............. 2,142,375 2,267,618 1,808,742
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $21.00
Options exercisable...... 1,185,709 1,116,869 700,769
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $21.00
</TABLE>
At December 31, 1995, an aggregate of 1,097,921 shares was available for
future grant under GranCare's stock incentive plans. Together with the
2,142,375 stock options and 351,872 warrants outstanding on that date, and the
2,210,351 issuable upon the conversion of GranCare's 6.5% convertible
subordinated debentures (see Note 4), approximately 5,800,000 shares of common
stock were reserved for future issuance.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company currently has two separate benefit plans covering employees of
GranCare. The defined benefit plan, which was amended as of December 31, 1986
to freeze benefits for all but certain unionized employees, covers certain
employees after reaching age 21 and completion of one year of service. During
1990, the accrual of benefits was suspended for the employees who continued to
accrue benefits after December 31, 1986.
At December 31, 1995 and 1994, the projected benefit obligations were
$588,000 and $497,000 respectively. Adjustments to recognize minimum pension
liability have been reflected in the Consolidated Statements of Shareholders'
and Partners' Equity.
Other employees of the Company are covered by various defined contribution
plans. Company contributions are based on a certain percentage of wages, a
matching percentage of the participants' voluntary contributions,
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or at the Company's discretion. During 1995, 1994 and 1993, the Company
recognized $1,645,000, $1,145,000 and $914,000, respectively, of expense
related to these plans.
NOTE 10. RELATED-PARTY TRANSACTIONS
In connection with various acquisitions, GranCare has incurred debt payable
to former owners who are now employees of GranCare. Such debt totaled
$3,779,000 and $3,856,000 at December 31, 1995 and 1994, respectively.
In 1994, GranCare sold three of its long-term care facilities to a former
employee of GranCare at an aggregate sales price of $3,000,000. GranCare
provided financing of $2,550,000 on these sales and recognized a total gain of
$2,373,000. In 1993, GranCare sold two of its long-term care facilities to an
individual previously engaged by GranCare as a consultant on various
acquisitions and divestitures. The sales price of the facilities sold in 1993
was $1,250,000, for which GranCare provided financing of $1,050,000 and
recognized a gain of $841,000.
Included in other assets in the accompanying Consolidated Balance Sheets at
December 31, 1995 and 1994, is a $2,850,000 and $1,500,000 note receivable,
respectively, resulting from working capital advances made to the owner of
certain facilities currently managed by the Company. The Company can advance
up to $3,000,000 under the agreement. The loan bears interest payable monthly
at 1% above the prime rate and is secured by the accounts receivable,
inventory and equipment of the managed facilities.
Evergreen had a management contract with NHI for the period from October 14,
1992 to June 30, 1993. Total amounts received from NHI under this management
contract approximated $1,000,000 for the six months ended June 30, 1993 and
are included in the 1993 Consolidated Statement of Income. This agreement
terminated upon consummation of the reverse acquisition on June 30, 1993, as
discussed in Note 3.
NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value. Cash equivalents at
December 31, 1994 include $1,200,000 in commercial paper securities. There
were no commercial paper securities at December 31, 1995.
Investments The carrying amount reported in the balance sheet for
investments approximates fair value. The investments in municipal bonds are
held by GranCare's captive insurance subsidiary and are restricted to use by
only that subsidiary, and are not available for general corporate purposes.
All investments are classified as "available for sale" for accounting purposes
and, therefore, are carried at fair value with unrealized gains and losses
recorded directly in equity.
In 1994, a gain of $1,561,000 was realized on the sale of an Evergreen
equity security that had no carrying value. There were no significant realized
gains or losses on sales of investments during 1995 and 1993. The investments
in municipal bonds generally mature within six years (e.g., 2000 to 2001).
Notes Payable and Long-Term Debt The carrying amounts of GranCare's
borrowing under the revolving loan and various mortgages and notes payable
approximate fair value. The fair value of GranCare's convertible subordinated
debentures and senior subordinated notes is based on their quoted market
price.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost basis and estimated fair values of GranCare's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT 1995 COST BASIS ESTIMATED FAIR VALUE 1994 COST BASIS ESTIMATED FAIR VALUE
-------------------- --------------- -------------------- --------------- --------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 17,738 $17,738 $ 28,611 $ 28,611
Investments:
Marketable equity
securities........... 9,506 17,695 7,750 13,375
Municipal bonds....... 12,166 12,610 6,978 6,978
-------- ------- -------- --------
21,672 30,305 14,728 20,353
Notes payable and long-
term debt:
Revolving loan and
other debt........... 179,605 179,605 183,231 183,231
Convertible
subordinated
debentures........... 60,000 52,200 60,000 50,400
Senior Subordinated
Notes................ 100,000 103,000 -- --
</TABLE>
- --------
Note: The cost basis is the carrying amount for all financial instruments
except for investments, as noted above.
NOTE 12. RESTRUCTURING
In August 1994, GranCare adopted and publicly announced a formal plan of
restructuring which includes the reorganization of GranCare's operations and
the sale of certain under-performing and non-strategic long-term health care
facilities. In connection with its commitment to this formal plan, GranCare
recognized an $8,200,000 restructuring charge in the third quarter of 1994,
consisting of the following components:
<TABLE>
<S> <C>
Actual and projected net operating losses of the facilities to be
sold, from the commitment date to their anticipated disposal
dates........................................................... $2,620,000
Less: Estimated gains from the sale of the facilities............ 2,250,000
----------
370,000
Personnel costs--termination and severance....................... 3,700,000
Professional fees--legal, accounting and appraisals--and other
exit costs...................................................... 1,100,000
Write-off of unamortized financing fees resulting from
restructuring................................................... 2,400,000
Other............................................................ 630,000
----------
Total restructuring costs........................................ $8,200,000
==========
</TABLE>
The termination and severance benefits cover approximately 50 employees who
work or worked in the facilities to be divested or GranCare's corporate or
regional offices. As of the end of 1995, substantially all termination and
severance benefits have been paid to those employees.
Charges against the restructuring reserve in 1995 and 1994 included the
write-off of unamortized financing fees and operating gains and losses of the
facilities sold.
At December 31, 1995, the Company believes that the provisions for the
restructuring continue to be adequate and will not require material adjustment
in future periods.
NOTE 13. SUBSEQUENT EVENTS
In January 1996, the Company completed the acquisition of RN Services for
$2,350,000 in cash. RN Services provides home health services in the metro
Detroit area.
In February 1996, the Company, through its pharmacy divisions, regained a
major contract with the state of New Jersey to provide pharmaceuticals to
7,800 beds.
F-26
<PAGE>
GRANCARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ------------ ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1993:
Allowance for doubtful
accounts.............. 2,404 4,254 2,830(2) 2,429(1) 7,059
Year ended December 31,
1994:
Allowance for doubtful
accounts.............. 7,059 8,290 1,182(2) 6,639(1) 9,892
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ -- 8,200 -- 3,658(3) 4,542
Year ended December 31,
1995:
Allowance for doubtful
accounts.............. 9,892 6,281 572(2) 5,889(1) 10,856
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ 4,542 -- -- 4,042(3) 500
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances recorded at date of acquisition.
(3) Writeoff of deferred loan and other related costs, operating results of the
facilities to be divested and gain or loss on the sale of those facilities.
F-27
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 25,750
Accounts receivable, less allowance for doubtful accounts
(1996--$13,848)................................................. 218,529
Inventories...................................................... 17,833
Prepaid expenses and other current assets........................ 41,034
Deferred income taxes............................................ 11,599
--------
Total current assets............................................ 314,745
Property and equipment............................................ 276,441
Less accumulated depreciation.................................... (67,111)
--------
209,330
Other assets:
Investments, at fair value....................................... 36,359
Goodwill, less accumulated amortization
(1996--$9,184).................................................. 129,863
Other intangibles, less accumulated amortization
(1996--$9,788).................................................. 8,573
Other............................................................ 39,068
--------
Total assets.................................................... $737,938
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-28
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 84,291
Accrued wages and related liabilities........................... 20,461
Interest payable................................................ 5,137
Income taxes payable............................................ 7,059
Notes payable and current maturities of long-term debt.......... 4,219
--------
Total current liabilities...................................... 121,167
Long-term debt................................................... 384,905
Deferred income taxes............................................ 15,628
Other............................................................ 14,564
Shareholders' equity:
Common stock; no par value; 50,000,000 shares authorized
(shares issued: 1996--23,401,992).............................. 125,401
Treasury stock (1996--200,000 shares)........................... (5,030)
Equity component of minimum pension liability................... (465)
Unrealized gain on investments net of income taxes (1996--
$3,963)........................................................ 5,747
Retained earnings............................................... 76,021
--------
201,674
--------
Total liabilities and shareholders' equity....................... $737,938
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-29
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars And Shares In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Net patient revenues....................................... $722,074 $600,195
Investment and other revenue............................... 23,579 4,374
-------- --------
Net revenues.............................................. 745,653 604,569
Expenses:
Operating expenses......................................... 642,654 534,906
Depreciation and amortization.............................. 19,400 14,785
Interest expense and financing charges..................... 26,228 19,557
Merger and other one-time charges.......................... 18,400 11,750
-------- --------
Total expenses............................................ 706,682 580,998
-------- --------
Income before income taxes.................................. 38,971 23,571
Income taxes................................................ 14,809 10,297
-------- --------
Net income................................................ $ 24,162 $ 13,274
======== ========
Net income per common and common equivalent share:
Primary.................................................... $ 1.01 $ 0.55
======== ========
Fully diluted.............................................. $ 0.98 $ 0.55
======== ========
Weighted average number of common and common equivalent
shares outstanding:
Primary.................................................... 24,021 24,226
======== ========
Fully diluted.............................................. 26,653 24,267
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-30
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 24,162 $ 13,274
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts........................ 5,132 4,321
Depreciation and amortization.......................... 19,400 14,785
Gain on sale of investments and other assets........... (19,077) (600)
Non-cash one-time charges.............................. 17,100 --
Amortization of deferred financing costs............... 689 481
Changes in assets and liabilities net of effect of
acquisitions:
Accounts receivable................................... (55,785) (24,073)
Other current assets.................................. (8,604) (3,571)
Other noncurrent assets............................... (8,614) (11,901)
Accounts payable and accrued expenses................. (1,785) 15,933
Accrued wages and related liabilities................. (3,896) (1,587)
Interest payable...................................... (1,656) 579
Income taxes payable.................................. 7,591 (487)
Other noncurrent liabilities.......................... 27 1,799
--------- ---------
Net cash (used in) provided by operating activities.. (25,316) 8,953
INVESTING ACTIVITIES
Acquisition of businesses............................... (11,231) (54,287)
Purchases of property and equipment..................... (24,014) (17,022)
Proceeds from disposition of property and equipment..... 994 4,155
Repayments of notes receivable.......................... -- 943
Net purchases and sales of investments.................. (3,365) (5,077)
Proceeds from sale of investment in unconsolidated
affiliate.............................................. 24,600 --
Other................................................... (1,581) (435)
--------- ---------
Net cash used in investing activities................ (14,597) (71,723)
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options.......... 2,284 1,242
Purchase of treasury stock.............................. -- (13,670)
Long-term debt payments................................. (5,259) (176,303)
Proceeds from long-term debt borrowings................. 51,150 256,350
Payment of debt issuance costs.......................... (250) (4,447)
--------- ---------
Net cash provided by financing activities............ 47,925 63,172
--------- ---------
Net increase in cash and cash equivalents............... 8,012 402
Cash and cash equivalents at beginning of period........ 17,738 28,611
--------- ---------
Cash and cash equivalents at end of period.............. $ 25,750 $ 29,013
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-31
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. ("RN Services"), a home health care business located in
Detroit, Michigan, for $2,350 in cash. In conjunction with the acquisition,
the Company advanced $2,500 to the former owners in the form of a short-term
note secured by RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc. ("Jennings"), a home health care business based in
North Vernon, Indiana, for $937 in cash and a promissory note for $250.
In July 1996, the Company completed the acquisition of Emery Pharmacy, Inc.
("Emery"), an institutional pharmacy located in Utica, New York, for $3,672 in
cash and a promissory note in the amount of $1,488.
In September 1996, the Company completed the acquisition of RX Corporation,
an institutional pharmacy located in southern California, for $1,800 in cash
and a promissory note for $925.
The above 1996 acquisitions had the following effect on cash:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $(14,531)
Fair value of liabilities assumed 3,300
--------
Net effect on cash $(11,231)
========
</TABLE>
In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided
purchase money financing in the amount of $17,550 evidenced by an interest-
bearing promissory note, due and payable in 1997.
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine month period
ended September 30, 1996 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1996. 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, 1995.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance
with Statement No. 121, the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets may be less than the carrying amounts of those assets. This new
standard had no effect on the financial statements.
NOTE C - TREASURY STOCK
During the second quarter of 1996, the Company cancelled 715,000 shares of
treasury stock which the Company had repurchased in July, 1995.
NOTE D - 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"), contains a contingent earnout
provision for the two year period ended June 30, 1996. An additional $5.5
million could be paid to LTC provided certain operating results were obtained
for this period. Management has completed its analysis of the amount payable
under this provision and believes that the amount owing to LTC is $2.1
million, which amount has been disputed by LTC.
NOTE E - EXIT, MERGER AND OTHER ONE-TIME CHARGES
During the third quarter of 1996, management decided to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The plan to exit
these activities, including providing appropriate notice as required by
regulations to residents, employees and authorities has commenced. The
facilities will be closed and operating activities will cease. 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 have
been charged to operations. Management expects to complete these closings in
the first quarter of 1997. The revenues and net operating losses of these
facilities are not significant. In addition, in the third quarter of 1996, the
Company recorded other charges as set forth in the following table, including
a charge for additional bad debt expense related to TeamCare. The charge for
bad debt expense is attributable to the increased risk of collection resulting
from the deterioration in the financial condition of certain customers. The
notes receivable written off are 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,
F-33
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
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. The write-off of leasehold
improvements, notes receivable and bad debt expense are reflected in the
accompanying balance sheet as a direct reduction of the related asset. Rent
expense and costs related to the termination of the frozen pension plan and
other items has been reflected in accrued expenses as the accompanying balance
sheet. The following is a summary of the exit and other one-time charges
(dollars in thousands):
<TABLE>
<S> <C>
Exit costs:
Rent expense for periods subsequent to closing.................. $ 9,400
Book value of leasehold improvements at date of closing......... 1,200
Other:
TeamCare bad debt expense....................................... 2,900
Write-off of notes receivable................................... 3,000
Termination of frozen pension plan and other items.............. 1,900
-------
$18,400
=======
</TABLE>
NOTE F - PROPOSED TRANSACTION
The Company has entered into an Agreement and Plan of Merger between
Vitalink and the Company dated as of September 3, 1996. The form of the
proposed transactions are (1) the Company's skilled nursing facilities, along
with its contract management and home health businesses are to be reorganized
into New GranCare, Inc., a wholly-owned subsidiary of the Company ("New
GranCare"), and all of the shares of common stock of New GranCare are to be
distributed to the Company's shareholders in a tax-free spin-off; (2) the
Company (then consisting solely of the institutional pharmacy and related
business known as TeamCare) would merge into and be acquired by Vitalink
through a tax-free exchange of shares of common stock of Vitalink for shares
of common stock of the Company; and (3) New GranCare would become a public
company upon the effectiveness of its initial registration statement.
Notwithstanding the legal structure of the proposed transactions, for
accounting/financial reporting purposes such transactions will be treated as
the spin-off of TeamCare and reorganization/recapitalization of the Company
into New GranCare as New GranCare will continue the majority of the Company's
businesses. New GranCare will change its name to "GranCare, Inc." and be
treated as the continuation of the Company. The closing under the Agreement
and Plan of Merger is subject to a number of conditions, including approval of
the transactions by the Company's shareholders.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
New GranCare, Inc.
We have audited the accompanying balance sheet of New GranCare, Inc. (a
wholly-owned subsidiary of GranCare, Inc., the "Company") as of September 30,
1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of New GranCare, Inc. as of September 30,
1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
October 7, 1996
F-35
<PAGE>
NEW GRANCARE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF GRANCARE, INC.)
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.................................................................. $1,000
------
Total assets.......................................................... $1,000
======
STOCKHOLDER'S EQUITY
Stockholder's Equity:
Common stock--$0.001 par value; issued and outstanding, 1,000 shares
(Note 1)............................................................. $1,000
------
Total stockholder's equity............................................ $1,000
======
</TABLE>
See Note to Balance Sheet.
F-36
<PAGE>
NOTE TO BALANCE SHEET
SEPTEMBER 30, 1996
1. New GranCare, Inc. ("New GranCare") was incorporated in September 1996, as
a wholly-owned subsidiary of GranCare, Inc. ("GranCare"). New GranCare was
formed in connection with the execution of an Agreement and Plan of
Distribution (the "Distribution Agreement") by and between New GranCare and
GranCare dated as of September 3, 1996. The form of the proposed
transactions contemplated by the Distribution Agreement are: (1) the
skilled nursing facilities, along with the contract management; assisted
living and home health services businesses of GranCare are to be
reorganized into New GranCare and shares of New GranCare distributed to the
GranCare shareholders in a tax-free spin-off; (2) GranCare (then consisting
solely of the institutional pharmacy and related business known as
TeamCare) would merge into and be acquired by Vitalink Pharmacy Services,
Inc. ("Vitalink") through a tax-free exchange of shares of common stock of
Vitalink for GranCare shares of common stock, all as contemplated by an
Agreement and Plan of Merger by and between GranCare and Vitalink dated as
of September 3, 1996 (the "Merger Agreement"); and (3) New GranCare would
become a public company upon the effectiveness of this registration
statement. Notwithstanding the legal structure of the proposed
transactions, for accounting/financial reporting purposes such transactions
will be treated as the spin-off of TeamCare and a
reorganization/recapitalization of GranCare into New GranCare as New
GranCare will continue the majority of the GranCare businesses. No gain
will be recognized as a result of the spin-off for the difference between
the market value of the Vitalink shares received and the carrying value of
the net assets of TeamCare. New GranCare will continue to reflect the
historical cost basis of assets and liabilities of GranCare. New GranCare
will then change its name to, and be treated as the continuation of,
GranCare. The closing under the Merger Agreement is subject to a number of
conditions, including approval of GranCare's shareholders.
F-37
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
The expenses in connection with the issuance and distribution of the New
GranCare Common Stock are set forth in the following table. All amounts except
the Securities and Exchange Commission registration fee are estimated.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........... $ 100,000
Printing and Engraving Expenses............................... 250,000
Accountants' Fees and Expenses................................ 500,000
Legal Fees and Expenses....................................... 500,000
HRPT Consent.................................................. 10,000,000
Fee to Painewebber............................................ 4,000,000
Miscellaneous................................................. 14,650,000
-----------
Total....................................................... $30,000,000
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
New Grancare will be incorporated as a Delaware corporation. Reference is
made to Section 145 of the Delaware General Corporation Law (the "DGCL") which
provides that a corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed
action or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation), by reason of
the fact that such person is or was a director, officer, employee or agent of
the corporation, or is or was serving at its request in such capacity of
another corporation or business organization against expenses (including
attorney's fees), judgments, fine and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interest of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe that such person's conduct was unlawful. A
Delaware corporation may indemnify officers, directors, employees and agents
in an action by or in the right of a corporation under the same conditions,
except that no indemnification is permitted without judicial approval if the
officer or director is adjudged to be liable to the corporation. Where an
officer, director, employee or agent is successful on the merits or otherwise
in the defense of any action referred to above, the corporation must indemnify
him against the expenses that such officer, director, employee or agent
actually and reasonably incurred.
Reference is also made to Section 102(b)(7) of the DGCL, which permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for a breach of the director's fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Articles VII and V of New GranCare's Certificate of Incorporation provide for
the elimination of personal liability of a director for breach of fiduciary
duty as permitted by Section 102(b)(7) of the DGCL, and provide that GranCare
shall indemnify its directors and officers to the full extent not prohibited
by Section 145 of the DGCL.
New GranCare will maintain at its expense, a policy of insurance which
insures its directors and officers, subject to certain exclusions and
deductions as are usual in such insurance policies, against certain
liabilities which may be incurred in those capacities.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
N/A
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
+ 2.1 Amended and Restated Agreement and Plan of Distribution dated as
of September 3, 1996 (the "Distribution Agreement") between New
GranCare and the Company (The Registrant hereby undertakes to
provide all schedules omitted from the Distribution Agreement to
the Commission upon request)
3.1 Amended and Restated Certificate of Incorporation*
3.2 Bylaws*
4.1 Specimen of Common Stock Certificate*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding
validity of securities*
8.1 Tax Matters Opinion of Powell, Goldstein, Frazer & Murphy LLP*
10.1 Acquisition Agreement, Agreement to Lease and Mortgage Loan
Agreement, dated December 28, 1990 by and among Health and
Rehabilitation Properties Trust ("HRPT") and HostMasters, Inc.,
AMS Holding Co., American Medical Services, Inc. and AMS
Properties, Inc. ("AMS"), as amended through December 29, 1993
(Note 1)
10.2 Master Lease Document, dated December 28, 1990, between HRPT and
AMS (Note 1)
10.3 Form of Guaranty, dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT
(Note 1)
10.4 1996 Stock Incentive Plan (Note 3)
10.5 Form of Indemnity Agreement for directors and officers (Note 2)
10.6 Deed of Trust and Security Agreement, dated as of January 28,
1993, from GCI Colter Village, Inc. in favor of Bell Atlantic
TriCon Leasing Corporation ("Bell Atlantic"), with respect to the
Colter Village complex (Note 5)
10.7 Deed of Trust and Security Agreement, dated April 7, 1993 from GCI
Bella Vita, Inc. in favor of Bell Atlantic with respect to the
Bella Vita skilled nursing facility (Note 5)
10.8 Mortgage and Security Agreement and Fixture Financing Statement,
dated as of May 7, 1993, from GCI-Wisconsin Properties, Inc. in
favor of Bell Atlantic (Note 5)
10.9 Mortgage and Security Agreement and Fixture Financing Statement,
dated as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in
favor of Bell Atlantic (Note 5)
10.10 Amendment to Acquisition Agreement, Agreement to Lease and
Mortgage Loan Agreement among Health and Rehabilitation
Properties Trust, GranCare, Inc., (AMS) and GCI Health Care
Centers, Inc., dated as of December 29, 1993 (Note 7)
10.11 Amendment to Master Lease between (HRPT) and AMS, dated as of
December 29, 1993 (Note 7)
10.12 Asset Purchase Agreement among GranCare, Inc., Long Term Care
Pharmaceutical Services Corporation, Long Term Care
Pharmaceutical Services Corporation III, CompuPharm LTC, Inc.,
Lawrence H. Garatoni, individually and as trustee, and Anthony
Wright and Edward Spartz, individuals, dated as of June 30, 1994,
with Exhibits (Note 9)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.13 Agreement of Purchase and Sale, effective as of July 1, 1994, by
and among Pacific Therapies, Inc., P.T. Therapies Company, GCI
Rehab, Inc., GranCare, Inc. and NovaCare, Inc. (Note 5)
10.14 Agreement of Purchase and Sale, dated July 1, 1994, by and among
Pacific Therapies, Inc., P.T. Therapies Company, GCI Rehab, Inc.,
GranCare, Inc. and NovaCare, Inc., as amended by First Amendment
to Agreement of Purchase and Sale, dated October 27, 1994, by and
among GCI Therapies, Inc., fka Pacific Therapies, Inc., GCI Cal
Therapies Company, fka P.T. Therapies, GCI Rehab, Inc. GranCare,
Inc. and NovaCare, Inc. (Note 3,6)
10.15 First Amendment to Lease and Security Agreement dated October 28,
1994, by and among Nationwide Health Properties, Inc. and
Landlord and GCI Palm Court, Inc. and GranCare, Inc. as Tenant
(Note 7)
10.16 Agreement and Plan of Merger among GranCare, Inc., GW Acquisition
Corp. and Evergreen Healthcare, Inc., dated as of May 2, 1995
(Note 8)
10.17 Plan and Agreement of Merger by and among GranCare, Inc,
Healthtrust, Inc.--The Hospital Company and Coralstone
Management, Inc. with respect to Cornerstone Health Management
Company Inc. (Note 9)
10.18 Credit Agreement between GranCare and First Union National Bank of
North Carolina, as Agent and LC Bank, dated as of March 31, 1995
(the "Credit Agreement")
(Note 10)
10.19 First Amendment to Credit Agreement, dated as of July 18, 1995
(Note 11)
10.20 Second Amendment to Credit Agreement, dated as of September 8,
1995 (Note 12)
+10.21 New GranCare, Inc. 1996 Annual Incentive Plan, Long Term Incentive
Plan and Stockholder Value Program
+10.22 New GranCare, Inc. Outside Directors Stock Incentive Plan
+10.23 New GranCare, Inc. 1996 Replacement Stock Option Plan
+10.24 Executive Split Dollar Life Insurance Plan
+10.25 Executive Deferred Compensation Plan
10.26 401(k) Savings Plan and Trust (Note 12)
+10.27 Form of Assignment, Assumption and Amendment of the GranCare, Inc.
401(k) Savings Plan
+10.28 New GranCare, Inc. 1996 Stock Incentive Plan
10.29 Amendment to Master Lease Document and Facility Lease between GHI
Health Care Centers, Inc. and HRPT, dated as of October 1, 1994
(Note 12)
10.30 Amendment to Master Lease Document and Facility Lease between AMS
and HRPT, dated as of October 1, 1994 (Note 12)
10.31 Promissory Note from AMS to HRPT in the principal amount of $11.5
million, dated October 1, 1994 (Note 12)
10.32 Mortgage and Security Agreement from AMS to HRPT for the Northwest
and River Hills West Health Care Centers, dated as of March 31,
1995 (Note 12)
10.33 Master Agreement in respect of leases for 20 health care
facilities located in the State of Indiana dated as of March 10,
1988 by and between Omega/Turtle Creek L.P., Turtle Creek
Convalescent Centre, Jackson Leasing Co. and Turtle Creek
Investments Corp. (collectively, the "Lessor Group") and Omega
Health Care Ltd., as Lessee (the "Master Agreement") (Note 12)
10.34 Amendment to Master Agreement dated as of August 4, 1988 between
Lessor Group and Omega (Note 12)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.35 Amendment to Master Agreement dated as of August 4, 1988 between
Lessor Group and Evergreen Health Care, Ltd. (Note 12)
10.36 Master Settlement Agreement between GranCare, Inc. and the Service
Employees International Union ("SEIU"), dated as of November 6,
1995 (Note 12)
10.37 Settlement Agreement between GranCare and the SEIU with respect to
four of GranCare's facilities located in the State of Michigan,
dated as of January 29, 1996 (Note 12)
10.38 Settlement Agreement between GranCare Inc. and the SEIU with
respect to three of GranCare's facilities located in the State of
Wisconsin (Note 12)
10.39 Settlement Agreement between GranCare, Inc. and the SEIU with
respect to seven of GranCare's facilities located in the State of
California (Note 12)
10.40 Form of Mortgage and Security Agreement with respect to five of
GranCare, Inc.'s facilities located in the State of Illinois to
secure a loan in the aggregate principal amount of $16.5 million
from Health Care Capital Finance, Inc. (the "Health Care Capital
Loan"), each agreement dated as of March 23, 1995 (Note 12)
10.41 Deed to Secure Debt and Security Agreement with respect to
GranCare, Inc.'s facility located in Georgia to secure the Health
Care Capital Loan, dated as of March 23, 1995 (Note 12)
10.42 Bond Trust Indenture between Health Care Fund II, Ltd., and
LaSalle National Trust, N.A., as bond Trustee, dated as of June
1, 1993 (Note 12)
10.43 Form of Direct Note Obligation, Series 1993 (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.44 Form of Direct Note Obligation, Series 1993A (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.45 Bond Trust Indenture between Health Care Fund II, Ltd., and
LaSalle National Trust, N.A., as Bond Trustee, dated as of August
1, 1993 (Note 12)
10.46 Direct Note Obligation, Series 1993B-1 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.47 Direct Note Obligation, Series 1993B-2 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.48 Form of Tax Allocation and Indemnification Agreement by and among
New GranCare, the Company and certain subsidiaries of the
Company.*
10.49 Form of Agreement Respecting Employee Benefit Matters between New
GranCare and the Company*
10.50 Form of Non-Competition Agreement between New GranCare, Vitalink
Pharmacy Services, Inc. and Manor Care, Inc.*
10.51 Form of Interim Services Agreement between New GranCare and the
Company*
10.52 Form of Employment Agreement between New GranCare and M. Scott
Athans*
10.53 Form of Employment Agreement for Executive Vice Presidents*
+10.54 Consent and Amendment to Transaction Documents dated as of
December 31, 1996 (the "Consent and Amendment") among GCI Health
Care Centers, Inc., the Company, New GranCare, Health and
Retirement Properties Trust ("HRPT") and AMS Properties, Inc.
(the Registrant hereby undertakes to provide all exhibits omitted
from the Consent and Amendment to the Commission upon request)
+10.55 Form of Limited Guaranty between Vitalink and HRPT
+10.56 Assumption Agreement (the "Assumption Agreement") by New GranCare
in favor of HRPT (the Registrant hereby undertakes to provide all
exhibits omitted from the Assumption Agreement to the Commission
upon request)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
11.1 Computation of Earnings Per Share*
21.1 Subsidiaries of Registrant*
+23.1 Consent and Report of Ernst & Young LLP, independent auditors
+23.2 Consent of KPMG Peat Marwick LLP, independent auditors
23.3 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in
Exhibits 5.1 and 8.1).*
24.1 Power of Attorney*
+99.1 Agreement and Plan of Merger ("Merger Agreement") dated as of
September 3, 1996, as amended between Vitalink Pharmacy Services,
Inc., a Delaware corporation, and GranCare, Inc., a California
corporation (The Registrant hereby undertakes to provide all
exhibits omitted from this Agreement and Plan of Merger to the
Commission upon request)
</TABLE>
- --------
* Previously filed
+ Filed herewith
<TABLE>
<C> <S>
(1) Incorporated by reference to GranCare, Inc.'s registration statement on
Form S-1 (File No. 33-42595), as amended, which was filed with the
Commission on September 11, 1991 and declared effective on October 31,
1991.
(2) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991.
(3) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1993.
(4) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on January 13, 1994.
(5) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on July 15, 1994.
(6) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
(7) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994.
(8) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1994.
(9) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995.
(10) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on April 19, 1995.
(11) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
(12) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995.
</TABLE>
(b) Financial Statement Schedule
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
(h) Insofar as indemnification for liabilities arising under the Securities
Act of 1993 may be permitted to directors, officers and controlling persons of
the registrant pursuant to Item 14 above, or otherwise, the registrant has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by
II-5
<PAGE>
a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel that
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) of
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offer of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO ITS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF
ATLANTA, AND STATE OF GEORGIA ON JANUARY 8, 1997.
New GranCare, Inc.
/s/ M. Scott Athans
By: _________________________________
M. SCOTT ATHANS
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS
IN THE CAPACITIES INDICATED ON JANUARY 8, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ M. Scott Athans Chief Executive Officer January 8, 1997
_______________________________ (Principal Executive
M. SCOTT ATHANS Officer)
/s/ Jerry A. Schneider Executive Vice President January 8, 1997
_______________________________ and Chief Financial
JERRY A. SCHNEIDER Officer (Principal
Financial and Accounting
Officer)
/s/ M. Scott Athans Director January 8, 1997
_______________________________
M. SCOTT ATHANS
/s/ Evrett W. Benton Director January 8, 1997
_______________________________
EVRETT W. BENTON
/s/ Jerry A. Schneider Director January 8, 1997
_______________________________
JERRY A. SCHNEIDER
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
+ 2.1 Amended and Restated Agreement and Plan of Distribution dated as of
September 3, 1996 (the "Distribution Agreement") between New GranCare
and the Company (The Registrant hereby undertakes to provide all
schedules omitted from the Distribution Agreement to the Commission
upon request)
3.1 Amended and Restated Certificate of Incorporation*
3.2 Bylaws*
4.1 Specimen of Common Stock Certificate*
5.1 Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding validity
of securities*
8.1 Tax Matters Opinion of Powell, Goldstein, Frazer & Murphy LLP*
10.1 Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement,
dated December 28, 1990 by and among Health and Rehabilitation
Properties Trust ("HRPT") and HostMasters, Inc., AMS Holding Co.,
American Medical Services, Inc. and AMS Properties, Inc. ("AMS"), as
amended through December 29, 1993 (Note 1)
10.2 Master Lease Document, dated December 28, 1990, between HRPT and AMS
(Note 1)
10.3 Form of Guaranty, dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT (Note 1)
10.4 1996 Stock Incentive Plan (Note 3)
10.5 Form of Indemnity Agreement for directors and officers (Note 2)
10.6 Deed of Trust and Security Agreement, dated as of January 28, 1993,
from GCI Colter Village, Inc. in favor of Bell Atlantic TriCon
Leasing Corporation ("Bell Atlantic"), with respect to the Colter
Village complex (Note 5)
10.7 Deed of Trust and Security Agreement, dated April 7, 1993 from GCI
Bella Vita, Inc. in favor of Bell Atlantic with respect to the Bella
Vita skilled nursing facility (Note 5)
10.8 Mortgage and Security Agreement and Fixture Financing Statement, dated
as of May 7, 1993, from GCI-Wisconsin Properties, Inc. in favor of
Bell Atlantic (Note 5)
10.9 Mortgage and Security Agreement and Fixture Financing Statement, dated
as of May 7, 1993 from GCI-Wisconsin Properties, Inc. in favor of
Bell Atlantic (Note 5)
10.10 Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement among Health and Rehabilitation Properties Trust,
GranCare, Inc., (AMS) and GCI Health Care Centers, Inc., dated as of
December 29, 1993 (Note 7)
10.11 Amendment to Master Lease between (HRPT) and AMS, dated as of December
29, 1993 (Note 7)
10.12 Asset Purchase Agreement among GranCare, Inc., Long Term Care
Pharmaceutical Services Corporation, Long Term Care Pharmaceutical
Services Corporation III, CompuPharm LTC, Inc., Lawrence H. Garatoni,
individually and as trustee, and Anthony Wright and Edward Spartz,
individuals, dated as of June 30, 1994, with Exhibits (Note 9)
10.13 Agreement of Purchase and Sale, effective as of July 1, 1994, by and
among Pacific Therapies, Inc., P.T. Therapies Company, GCI Rehab,
Inc., GranCare, Inc. and NovaCare, Inc. (Note 5)
10.14 Agreement of Purchase and Sale, dated July 1, 1994, by and among
Pacific Therapies, Inc., P.T. Therapies Company, GCI Rehab, Inc.,
GranCare, Inc. and NovaCare, Inc., as amended by First Amendment to
Agreement of Purchase and Sale, dated October 27, 1994, by and among
GCI Therapies, Inc., fka Pacific Therapies, Inc., GCI Cal Therapies
Company, fka P.T. Therapies, GCI Rehab, Inc. GranCare, Inc. and
NovaCare, Inc. (Note 3,6)
10.15 First Amendment to Lease and Security Agreement dated October 28,
1994, by and among Nationwide Health Properties, Inc. and Landlord
and GCI Palm Court, Inc. and GranCare, Inc. as Tenant (Note 7)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.16 Agreement and Plan of Merger among GranCare, Inc., GW Acquisition
Corp. and Evergreen Healthcare, Inc., dated as of May 2, 1995 (Note
8)
10.17 Plan and Agreement of Merger by and among GranCare, Inc, Healthtrust,
Inc.--The Hospital Company and Coralstone Management, Inc. with
respect to Cornerstone Health Management Company Inc. (Note 9)
10.18 Credit Agreement between GranCare and First Union National Bank of
North Carolina, as Agent and LC Bank, dated as of March 31, 1995 (the
"Credit Agreement")
(Note 10)
10.19 First Amendment to Credit Agreement, dated as of July 18, 1995 (Note
11)
10.20 Second Amendment to Credit Agreement, dated as of September 8, 1995
(Note 12)
+10.21 New GranCare, Inc. 1996 Annual Incentive Plan, Long Term Incentive
Plan and Stockholder Value Program
+10.22 New GranCare, Inc. Outside Directors Stock Incentive Plan
+10.23 New GranCare, Inc. 1996 Replacement Stock Option Plan
+10.24 Executive Split Dollar Life Insurance Plan
+10.25 Executive Deferred Compensation Plan
10.26 401(k) Savings Plan and Trust (Note 12)
+10.27 Form of Assignment, Assumption and Amendment of the GranCare, Inc.
401(k) Savings Plan
+10.28 New GranCare, Inc. 1996 Stock Incentive Plan
10.29 Amendment to Master Lease Document and Facility Lease between GHI
Health Care Centers, Inc. and HRPT, dated as of October 1, 1994 (Note
12)
10.30 Amendment to Master Lease Document and Facility Lease between AMS and
HRPT, dated as of October 1, 1994 (Note 12)
10.31 Promissory Note from AMS to HRPT in the principal amount of $11.5
million, dated October 1, 1994 (Note 12)
10.32 Mortgage and Security Agreement from AMS to HRPT for the Northwest and
River Hills West Health Care Centers, dated as of March 31, 1995
(Note 12)
10.33 Master Agreement in respect of leases for 20 health care facilities
located in the State of Indiana dated as of March 10, 1988 by and
between Omega/Turtle Creek L.P., Turtle Creek Convalescent Centre,
Jackson Leasing Co. and Turtle Creek Investments Corp. (collectively,
the "Lessor Group") and Omega Health Care Ltd., as Lessee (the
"Master Agreement") (Note 12)
10.34 Amendment to Master Agreement dated as of August 4, 1988 between
Lessor Group and Omega (Note 12)
10.35 Amendment to Master Agreement dated as of August 4, 1988 between
Lessor Group and Evergreen Health Care, Ltd. (Note 12)
10.36 Master Settlement Agreement between GranCare, Inc. and the Service
Employees International Union ("SEIU"), dated as of November 6, 1995
(Note 12)
10.37 Settlement Agreement between GranCare and the SEIU with respect to
four of GranCare's facilities located in the State of Michigan, dated
as of January 29, 1996 (Note 12)
10.38 Settlement Agreement between GranCare Inc. and the SEIU with respect
to three of GranCare's facilities located in the State of Wisconsin
(Note 12)
10.39 Settlement Agreement between GranCare, Inc. and the SEIU with respect
to seven of GranCare's facilities located in the State of California
(Note 12)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.40 Form of Mortgage and Security Agreement with respect to five of
GranCare, Inc.'s facilities located in the State of Illinois to
secure a loan in the aggregate principal amount of $16.5 million from
Health Care Capital Finance, Inc. (the "Health Care Capital Loan"),
each agreement dated as of March 23, 1995 (Note 12)
10.41 Deed to Secure Debt and Security Agreement with respect to GranCare,
Inc.'s facility located in Georgia to secure the Health Care Capital
Loan, dated as of March 23, 1995 (Note 12)
10.42 Bond Trust Indenture between Health Care Fund II, Ltd., and LaSalle
National Trust, N.A., as bond Trustee, dated as of June 1, 1993 (Note
12)
10.43 Form of Direct Note Obligation, Series 1993 (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.44 Form of Direct Note Obligation, Series 1993A (Health Care Fund II,
Ltd.) dated June 23, 1993 (Note 12)
10.45 Bond Trust Indenture between Health Care Fund II, Ltd., and LaSalle
National Trust, N.A., as Bond Trustee, dated as of August 1, 1993
(Note 12)
10.46 Direct Note Obligation, Series 1993B-1 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.47 Direct Note Obligation, Series 1993B-2 (Health Care Fund II, Ltd.)
dated June 23, 1993 (Note 12)
10.48 Form of Tax Allocation and Indemnification Agreement by and among New
GranCare, the Company and certain subsidiaries of the Company.*
10.49 Form of Agreement Respecting Employee Benefit Matters between New
GranCare and the Company*
10.50 Form of Non-Competition Agreement between New GranCare, Vitalink
Pharmacy Services, Inc. and Manor Care, Inc.*
10.51 Form of Interim Services Agreement between New GranCare and the
Company*
10.52 Form of Employment Agreement between New GranCare and M. Scott Athans*
10.53 Form of Employment Agreement for Executive Vice Presidents*
+10.54 Consent and Amendment to Transaction Documents dated as of December
31, 1996 (the "Consent and Amendment") among GCI Health Care Centers,
Inc., the Company, New GranCare, Health and Retirement Properties
Trust ("HRPT") and AMS Properties, Inc. (the Registrant hereby
undertakes to provide all exhibits omitted from the Consent and
Amendment to the Commission upon request)
+10.55 Form of Limited Guaranty between Vitalink and HRPT
+10.56 Assumption Agreement (the "Assumption Agreement") by New GranCare in
favor of HRPT (the Registrant hereby undertakes to provide all
exhibits omitted from the Assumption Agreement to the Commission upon
request)
11.1 Computation of Earnings Per Share*
21.1 Subsidiaries of Registrant*
+23.1 Consent and Report of Ernst & Young LLP, independent auditors
+23.2 Consent of KPMG Peat Marwick LLP, independent auditors
23.3 Consent of Powell, Goldstein, Frazer & Murphy LLP (included in
Exhibits 5.1 and 8.1).*
24.1 Power of Attorney*
+99.1 Agreement and Plan of Merger ("Merger Agreement") dated as of
September 3, 1996, as amended between Vitalink Pharmacy Services,
Inc., a Delaware corporation, and GranCare, Inc., a California
corporation (The Registrant hereby undertakes to provide all exhibits
omitted from this Agreement and Plan of Merger to the Commission upon
request)
</TABLE>
<PAGE>
- --------
* Previously filed
+ Filed herewith
<TABLE>
<C> <S>
(1) Incorporated by reference to GranCare, Inc.'s registration statement on
Form S-1 (File No. 33-42595), as amended, which was filed with the
Commission on September 11, 1991 and declared effective on October 31,
1991.
(2) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1991.
(3) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1993.
(4) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on January 13, 1994.
(5) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on July 15, 1994.
(6) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended June 30, 1994.
(7) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1994.
(8) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1994.
(9) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended March 31, 1995.
(10) Incorporated by reference to GranCare, Inc.'s Current Report on Form 8-K
which was filed with the Commission on April 19, 1995.
(11) Incorporated by reference to GranCare, Inc.'s Quarterly Report on Form
10-Q for the quarterly period ended September 30, 1995.
(12) Incorporated by reference to GranCare, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1995.
</TABLE>
<PAGE>
ANNEX C
AMENDED AND RESTATED
AGREEMENT AND PLAN OF DISTRIBUTION
BY AND BETWEEN
GRANCARE, INC.
AND
NEW GRANCARE, INC.
DATED AS OF
SEPTEMBER 3, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I. Definitions.................................................... 1
Section 1.1. General................................................. 1
Section 1.2. Incorporation of Merger Agreement Definitions........... 6
Section 1.3. References; Interpretation.............................. 6
ARTICLE II. Distribution and Other Transactions; Certain Covenants........ 6
Section 2.1. Transfer of Assets and Liabilities...................... 6
(a)Certain Transactions................................. 6
(b)Stock Dividend to GranCare........................... 6
(c)Charters; Bylaws..................................... 6
(d)Directors; Officers.................................. 6
(e)Certain Licenses and Permits......................... 6
(f)Transfer of Agreements............................... 10
(g)Services Agreement................................... 10
(h)Delivery of Shares to Transfer Agent................. 10
(i)Other Transactions................................... 10
Section 2.2. Certain Financial and Other Arrangements................ 8
(a)Intercompany Accounts................................ 8
(b)Operations in Ordinary Course........................ 8
Section 2.3. Assumption of Indebtedness; Allocation of Expenses...... 8
Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations,
Rights and Assets Relating to Shared Liabilities....... 9
Section 2.5. Resignations............................................ 10
Section 2.6. Further Assurances...................................... 10
Section 2.7. No Representations or Warranties........................ 11
Section 2.8. Guarantees.............................................. 11
Section 2.9. Witness Services........................................ 11
Section 2.10. Certain Post-Distribution Transactions.................. 12
Section 2.11. Directors and Officers Liability Insurance.............. 12
Section 2.12. Insurance............................................... 12
Section 2.13. Ancillary Agreements.................................... 12
ARTICLE III. Indemnification.............................................. 12
Section 3.1. Indemnification by GranCare............................. 12
Section 3.2. Indemnification by SNFCo................................ 12
Section 3.3. Limitations on Indemnification Obligations.............. 13
Section 3.4. Procedures for Indemnification.......................... 13
Section 3.5. Indemnification Payments................................ 14
Section 3.6. Other Adjustments....................................... 14
Section 3.7. Survival of Indemnities................................. 14
ARTICLE IV. Access to Information......................................... 15
Section 4.1. Provision of Corporate Records.......................... 15
Section 4.2. Access to Information................................... 15
Section 4.3. Reimbursement; Other Matters............................ 15
Section 4.4. Confidentiality......................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE V. Insurance..................................................... 16
Section 5.1. Policies and Rights Included Within Assets............. 16
Section 5.2. Post-Time of Distribution Claims Against SNFCo......... 16
Section 5.3. Administration; Other Matters.......................... 17
(b)Allocation of Insurance Proceeds.................... 17
Section 5.4. Agreement for Waiver of Conflict and Shared Defense.... 18
Section 5.5. Cooperation............................................ 18
ARTICLE VI. Dispute Resolution........................................... 18
ARTICLE VII. Miscellaneous............................................... 19
Section 7.1. Complete Agreement; Construction....................... 19
Section 7.2. Counterparts........................................... 19
Section 7.3. Survival of Agreements................................. 19
Section 7.4. Notices................................................ 19
Section 7.5. Waivers................................................ 19
Section 7.6. Amendments............................................. 19
Section 7.7. Assignment............................................. 20
Section 7.8. Successors and Assigns................................. 20
Section 7.9. Termination............................................ 20
Section 7.10. Subsidiaries........................................... 20
Section 7.11. Third Party Beneficiaries.............................. 20
Section 7.12. Attorney Fees.......................................... 20
Section 7.13. Title and Headings..................................... 20
Section 7.14. Schedules.............................................. 20
Section 7.15. Specific Performance................................... 20
Section 7.16. Governing Law.......................................... 21
Section 7.17. Severability........................................... 21
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF DISTRIBUTION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF DISTRIBUTION (the
"Distribution Agreement"), dated as of September 3, 1996, by and between
GranCare, Inc., a California corporation (the "Company" or "GranCare"), and
New GranCare, Inc., a Delaware corporation ("SNFCo"), successor by reason of a
merger of GCI Properties, Inc., a California corporation, with and into SNFCo.
WITNESSETH:
WHEREAS, the Company and Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), previously entered into an Agreement and Plan of
Merger, dated as of September 3, 1996 as amended, (the "Merger Agreement"),
providing for the merger (the "Merger") of the Company's Institutional
Pharmacy Business with Vitalink;
WHEREAS, prior to the Effective Time (as defined in the Merger Agreement) of
the Merger the Company intends to transfer its Skilled Nursing Business (as
hereinafter defined) to SNFCo in exchange for the issuance of shares of SNFCo
Common Stock;
WHEREAS, immediately prior to the Effective Time of the Merger, the
Company's Board of Directors, subject to the approval of the Company's
shareholders, expects to complete the Distribution (as hereinafter defined);
and
WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the Skilled Nursing Business, with which Vitalink is
unwilling to merge, and this Distribution Agreement sets forth the various
agreements between GranCare and SNFCo relating to the separation of the
Institutional Pharmacy Business from the Skilled Nursing Business.
NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, and intending to be
legally bound (subject to shareholder approval), the parties hereto hereby
agree as follows:
ARTICLE I.
Definitions
Section 1.1. General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both
the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, claim, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
the Person specified.
"Ancillary Agreements" shall mean all of the written agreements,
instruments, understandings, assignments or other arrangements (other than
this Distribution Agreement and the Merger Agreement) entered into in
connection with the transactions contemplated hereby, including, without
limitation, the Transfer and Assumption Instruments, the Employee Benefits
Matters Agreement, the Tax Allocation Agreement, the Interim Services
Agreement and the Non-competition Agreement; provided, however, that in no
event shall any agreement constitute an Ancillary Agreement unless consented
to by each of GranCare, SNFCo and Vitalink.
C-1
<PAGE>
"Assignee" shall have the meaning as defined in Section 2.1(f)(ii).
"Claims Administration" shall mean the processing of claims made under the
Company Policies, including, without limitation, the reporting of claims to
the insurance carriers, as well as the management and defense of claims and
providing for appropriate releases upon settlement of claims.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
"Commission" shall mean the Securities and Exchange Commission.
"Company Policies" shall mean all Policies which are or at any time were
maintained by or on behalf of or for the benefit or protection of GranCare or
SNFCo or any of their respective predecessors or Subsidiaries which relate to
any Shared Liability, the Skilled Nursing Business or the Institutional
Pharmacy Business, or current or past directors, officers, employees or agents
of any of the foregoing businesses.
"D&O Insurance Policies" shall have the meaning as defined in Section 2.11.
"Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of GranCare Common Stock as of the Distribution
Record Date of the SNFCo Common Stock owned by GranCare on the basis of one
share of SNFCo Common Stock for each outstanding share of GranCare Common
Stock.
"Distribution Agreement Dispute" shall have the meaning as defined in
Article VI.
"Distribution Date" shall mean such date as may hereafter be determined by
GranCare's Board of Directors as the date of which the Distribution shall be
effected.
"Distribution Record Date" shall mean such date as may hereafter be
determined by GranCare's Board of Directors as the record date for determining
the shareholders of GranCare entitled to receive the Distribution.
"Employee Benefits Matters Agreement" shall mean the Agreement Respecting
Employee Benefit Matters dated as of the Time of Distribution among GranCare
and SNFCo setting forth the manner in which various employee benefit
entitlements will be treated in connection with the Distribution.
"GranCare Common Stock" shall mean the common stock, without par value per
share, of GranCare.
"GranCare Disclosure Statement" shall mean the Disclosure Statement
delivered by GranCare to Vitalink contemporaneously with GranCare's execution
and delivery of the Merger Agreement.
"GranCare Indemnitees" shall mean GranCare, each Pharmacy Subsidiary, the
directors and officers of GranCare and the Pharmacy Subsidiaries and each of
the heirs, executors, successors and assigns of any of the foregoing.
"HRPT" shall mean Health and Retirement Properties Trust
"HRPT Consent" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"Indemnifiable Losses" shall mean any and all losses, liabilities, claims,
damages, demands, reasonable costs or expenses (including, without limitation,
attorneys' fees and any and all out-of-pocket expenses) whatsoever reasonably
incurred in investigating, preparing for or defending against any Actions or
potential Actions.
C-2
<PAGE>
"Indemnifying Party" shall have the meaning as defined in Section 3.3.
"Indemnitee" shall have the meaning as defined in Section 3.3.
"Institutional Pharmacy Business" shall mean the business of providing
pharmaceutical supplies and services primarily to health care institutions
such as the Skilled Nursing Business conducted by GranCare and its Pharmacy
Subsidiaries.
"Institutional Pharmacy Assets" shall mean, collectively, all the rights and
assets of GranCare and its Subsidiaries that are used primarily in the conduct
of the Institutional Pharmacy Business, including, without limitation, (i) the
assets included on the balance sheet of GranCare as of May 31, 1996, prepared
on a pro forma basis giving effect to the Distribution and included in the
GranCare Disclosure Statement attached to the Merger Agreement, and not
disposed of in the ordinary course of business prior to the Time of
Distribution, (ii) any assets acquired by GranCare or any of its Subsidiaries
that are used primarily in the conduct of the Institutional Pharmacy Business
from May 31, 1996, to the Time of Distribution and not disposed of in the
ordinary course of business, (iii) all the outstanding capital stock or other
interests of GranCare in the Subsidiaries listed on Schedule 1.1(b), (iv)
rights arising pursuant to the Company Policies to the extent set forth in
Article V hereof and (v) the cash proceeds received upon exercise prior to the
Time of Distribution of any stock options to acquire GranCare Common Stock.
Notwithstanding the foregoing, the Institutional Pharmacy Assets shall not
include any assets retained by SNFCo or any of the SNFCo Subsidiaries pursuant
to the terms of any Ancillary Agreement.
"Institutional Pharmacy Liabilities" shall mean, collectively, (i) the
Liabilities included on the balance sheet of GranCare as of May 31, 1996,
prepared on a pro forma basis giving affect to the Distribution and included
in the GranCare Disclosure Statement attached to the Merger Agreement, and any
Liabilities of the same kind or nature incurred by GranCare or any of its
Subsidiaries relating primarily to or arising primarily in connection with the
conduct of the Institutional Pharmacy Business from May 31, 1996, to the Time
of Distribution other than indebtedness for borrowed money except as may
otherwise be provided for elsewhere herein, (ii) up to $10.0 million payable
to HRPT in order to obtain HRPT's consent with respect to the transactions
contemplated by this Agreement and the Merger Agreement (the "HRPT Consent"),
(iii) all the Liabilities of GranCare and the Pharmacy Subsidiaries, if any,
under this Distribution Agreement and any of the Ancillary Agreements, (iv)
all the Liabilities of GranCare or its Subsidiaries (whenever arising whether
prior to, at or following the Time of Distribution) to the extent the
Liabilities arise out of or in connection with or otherwise relate primarily
to (a) the management or conduct before or after the Time of Distribution of
the Institutional Pharmacy Business or (b) any properties owned, leased,
operated or otherwise used primarily in the conduct of the Institutional
Pharmacy Business, (v) the obligation of GranCare to promptly pay for any
Senior Subordinated Notes tendered pursuant to the Tender Offer (including any
premium related thereto) and to discharge the obligation arising in connection
with any Senior Subordinated Notes not so tendered, (vi) the indebtedness
outstanding at the Time of Distribution that is listed on Schedule 2.3 (the
Liabilities listed in clauses (i) through (vi) above being collectively
referred to as the "True GranCare Liabilities"), (vii) one-half ( 1/2) of the
amount of all Shared Liabilities unless otherwise allocated in this
Distribution Agreement and (viii) Liabilities as a result of the breach of
Vitalink's representations and warranties set forth in Section 3.08 of the
Merger Agreement. Notwithstanding the foregoing, Institutional Pharmacy
Liabilities shall not include any Liabilities arising in connection with
amounts payable to Long Term Care Pharmaceutical Services Corporation I and
Long Term Care Pharmaceutical Services Corporation III (collectively, "LTC")
by GranCare in excess of $2.5 million, ("LTC Liabilities") pursuant to the
terms of an agreement between LTC and GranCare (the "LTC Agreement").
"Insurance Administration" shall mean, with respect to each Company Policy,
the accounting for Insurance Proceeds, premiums, defense costs, indemnity
payments, deductibles and retentions, as appropriate, under the terms and
conditions of each of the Company Policies; and the report to excess insurance
carriers of any losses or claims which may cause the per-occurrence, per claim
or aggregate limits of any Company Policy to be exceeded, and the distribution
of Insurance Proceeds as contemplated by this Distribution Agreement.
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"Insurance Proceeds" shall mean those monies (i) received by an insured from
an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured.
"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Company
Policies, whether or not subject to deductibles, co-insurance,
uncollectability or premium adjustments, but only to the extent that such
Liabilities are within applicable Company Policy limits, including aggregates.
"Liabilities" shall mean any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including, without
limitation, those debts, liabilities and obligations arising under any law,
rule, regulation, Action, order or consent decree of any court, any
governmental or other regulatory or administrative agency or commission or any
award of any arbitration tribunal, and those arising under any contract,
guarantee, commitment or undertaking.
"LTC Agreement" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"LTC Liabilities" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"Non-competition Agreement" shall mean the agreement dated as of the Time of
Distribution between Parent (as defined in the Merger Agreement), Vitalink and
SNFCo setting forth the basis for the intercompany relationships that shall
exist between and among the parties during the term of such agreement.
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Pharmacy Subsidiaries" shall mean those subsidiaries of GranCare listed on
Schedule 1.1(b) hereto.
"Policies" shall mean insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including, without
limitation, primary, excess and umbrella policies, comprehensive general
liability, fiduciary liability, automobile, aircraft, property and casualty,
environmental, workers' compensation and employee dishonesty insurance
policies and bonds and captive insurance company arrangements, together with
the rights, benefits and privileges thereunder.
"Proxy Statement/Prospectus" shall mean the Proxy Statement/Prospectus
contained in the Registration Statement on Form S-4 relating to the shares of
Vitalink Common Stock to be issued in connection with the Merger sent to the
holders of shares of GranCare Common Stock in connection with obtaining
shareholder approval of, inter alia, the Distribution and the Merger,
including any amendment or supplement thereto.
"Records" shall have the meaning as defined in Section 4.1(a).
"Services Agreement" shall mean the Interim Services Agreement dated as of
the Time of Distribution by and between SNFCo and GranCare pursuant to which
SNFCo shall provide, for the benefit of Vitalink (as the successor to
GranCare), such services as may be requested from time to time by Vitalink as
were provided on a centralized basis by GranCare for the benefit of GranCare
and its Subsidiaries prior to the Distribution.
"Senior Subordinated Notes" shall have the meaning as defined in the Merger
Agreement.
"Settling Party" shall have the meaning as defined in Section 2.4(b).
"Shared Liability" means any Liability of the parties hereto or their
respective Subsidiaries (whether arising prior to, at or following the Time of
Distribution) (i) which is not a True GranCare Liability or True
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SNFCo Liability or (ii) the responsibility for which is allocated between
GranCare and SNFCo in this Distribution Agreement or the Ancillary Agreements.
Shared Liability includes, without limitation, the Shared Liabilities listed
on Schedule 1.1(c) hereto.
"Shared Transaction Expenses" shall have the meaning as defined in Section
2.3(d).
"Shared Transaction Expense Settlement Amount" shall have the meaning as
defined in Section 2.3(d).
"Skilled Nursing Assets" shall mean, collectively, all the rights and assets
of GranCare and its Subsidiaries immediately prior to the Time of Distribution
that are not Institutional Pharmacy Assets, including, without limitation, (i)
all outstanding capital stock or other interests of SNFCo in the SNFCo
Subsidiaries listed on Schedule 1.1(a), (ii) the right to the name "GranCare"
and the other trademarks, trade names, logos, symbols and similar marks listed
in Schedule 1.1(d) and (iii) rights arising pursuant to the Company Policies
to the extent set forth in Article V hereof. Notwithstanding the foregoing,
the Skilled Nursing Assets shall not include any assets retained by GranCare
or any of the Pharmacy Subsidiaries pursuant to the terms of any Ancillary
Agreement.
"Skilled Nursing Business" shall mean the skilled nursing, contract
management, home health and assisted living business conducted by GranCare,
SNFCo and their respective Subsidiaries and successors.
"Skilled Nursing Liabilities" shall mean, collectively, (i) all of the
Liabilities of GranCare and its Subsidiaries immediately prior to the Time of
Distribution (which shall include any LTC Liabilities and any Liabilities to
HRPT (other than the fees associated with obtaining the HRPT Consent) other
than the Institutional Pharmacy Liabilities, (ii) all the Liabilities of SNFCo
and the SNFCo Subsidiaries, if any, under this Distribution Agreement and any
of the Ancillary Agreements (the Liabilities listed in clauses (i) through
(ii) above being collectively referred to as the "True SNFCo Liabilities"),
(iii) one-half (1/2) of the amount of all Shared Liabilities, unless otherwise
allocated in this Distribution Agreement and (iv) Liabilities as a result of
the breach of GranCare's representations and warranties set forth in Section
4.09 of the Merger Agreement.
"SNFCo Common Stock" shall mean the common stock of SNFCo.
"SNFCo Indemnitees" shall mean SNFCo, each SNFCo Subsidiary, the directors
and officers of SNFCo and the SNFCo Subsidiaries and each of the heirs,
executors, successors and assigns of any of the foregoing.
"SNFCo Subsidiaries" shall mean all of the subsidiaries of GranCare other
than SNFCo and the Pharmacy Subsidiaries, including, without limitation, those
Subsidiaries listed on Schedule 1.1(a) hereto.
"Solicitation" shall have the meaning set forth in Section 2.3(b).
"Subsidiary" shall mean any Person of which another Person (i) owns,
directly or indirectly, ownership interests sufficient to elect a majority of
the Board of Directors (or persons performing similar functions (irrespective
of whether at the time any other class or classes of ownership interests of
such Person shall or might have such voting power upon the occurrence of any
contingency)) or (ii) is a general partner or an entity performing similar
functions (e.g., a trustee).
"Tax" shall mean all Federal, state, local and foreign taxes and assessments
of any kind, including all interest, penalties and additions imposed with
respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation and Indemnification
Agreement dated as of the Time of Distribution among GranCare and SNFCo and
the other Subsidiaries of GranCare named therein.
"Tender Offer" shall have the meaning set forth in Section 2.3(b).
"Third Party Claim" shall have the meaning as set forth in Section 3.4.
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"Time of Distribution" shall mean the time on the Distribution Date as of
which the Distribution is effective, and unless otherwise agreed between the
parties, shall be immediately prior to the Effective Time.
"Transfer Agent" shall mean American Stock Transfer & Trust Company.
"Transfer and Assumption Instruments" shall mean, collectively, the various
agreements, instruments and other documents to be entered into among or
between any of GranCare, SNFCo, the Pharmacy Subsidiaries and the SNFCo
Subsidiaries and approved by Vitalink (which approval shall not be
unreasonably withheld) to effect the transfer of assets and the assumption of
Liabilities relating to the Skilled Nursing Business and the Institutional
Pharmacy Business in the manner contemplated by this Distribution Agreement,
including, without limitation, real estate transfer documents and leases and
all other instruments, documents and agreements delivered in accordance with
Section 2.6 hereof.
"True GranCare Liabilities" shall have the meaning as set forth under
"Institutional Pharmacy Liabilities."
"True SNFCo Liabilities" shall have the meaning as set forth under "Skilled
Nursing Liabilities."
"Vitalink Common Stock" shall mean the common stock, $.01 par value per
share, of Vitalink.
Section 1.2. Incorporation of Merger Agreement Definitions. Except to the
extent set forth herein, capitalized terms used herein shall have the same
definitions as such terms have in the Merger Agreement.
Section 1.3. References; Interpretation. References to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to one of the Schedules or Exhibits
attached to this Distribution Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Distribution
Agreement.
ARTICLE II.
Distribution and Other Transactions; Certain Covenants
Section 2.1. Transfer of Assets and Liabilities.
(a) Certain Transactions. On or prior to the Distribution Date GranCare
shall, on behalf of itself and its Subsidiaries, transfer to SNFCo all of
GranCare's and its Subsidiaries' right, title and interest in the Skilled
Nursing Assets in the manner contemplated by the internal restructuring plan
attached hereto as Exhibit A and incorporated herein by reference and SNFCo
shall assume the Skilled Nursing Liabilities.
(b) Stock Dividend to GranCare. On or prior to the Distribution Date SNFCo
shall issue to GranCare as a stock dividend such number of shares of SNFCo
Common Stock as shall be required to effect the Distribution, as certified by
the Transfer Agent. In connection therewith GranCare shall deliver to SNFCo
for cancellation the share certificate currently held by GranCare representing
shares of SNFCo Common Stock.
(c) Charters; Bylaws. On or prior to the Distribution Date all necessary
actions shall have been taken to provide for the adoption of the form of
Articles of Incorporation and Bylaws to be filed by SNFCo with the Commission.
(d) Directors; Officers. On or prior to the Distribution Date, GranCare, as
the sole shareholder of SNFCo, (i) shall have taken all necessary action by
written consent to elect to the Board of Directors of SNFCo, the individuals
to be identified in the Proxy Statement/Prospectus as directors of SNFCo,
effective upon the Distribution, and (ii) shall have caused the directors of
SNFCo to elect as officers of SNFCo the individuals to be identified in the
Proxy Statement/Prospectus as the officers of SNFCo, effective upon the
Distribution.
(e) Certain Licenses and Permits. On or prior to the Distribution Date or as
soon as reasonably practicable thereafter, all transferrable licenses, permits
and authorizations issued by governmental or regulatory entities
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which relate to the Skilled Nursing Business but which are held in the name of
GranCare or any of the Pharmacy Subsidiaries which licenses, permits and
authorizations are listed on Schedule 2.1(e), shall be duly and validly
transferred by GranCare (or such Pharmacy Subsidiaries) to SNFCo or such SNFCo
Subsidiary as SNFCo may designate.
(f) Transfer of Agreements.
(i) On or prior to the Distribution Date or as soon as reasonably
practicable thereafter, subject to the limitations set forth in this
Section 2.1(f), GranCare will, and it will cause the Pharmacy Subsidiaries
to, assign, transfer and convey to SNFCo or such SNFCo Subsidiary as SNFCo
may designate, all of GranCare's or such Pharmacy Subsidiary's respective
right, title and interest in and to any and all agreements that do not
relate primarily to the Institutional Pharmacy Business, to the extent such
agreements were not previously so transferred in connection with the
transactions contemplated by Section 2.1(a) hereof.
(ii) The assignee of any agreement assigned, in whole or in part,
hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
discharge all obligations of the assignor under such agreement and shall
indemnify the assignor against any and all liabilities in connection
therewith.
(iii) Notwithstanding anything in this Distribution Agreement to the
contrary, this Distribution Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or any attempted assignment, without the consent of a
third party, would constitute a breach thereof or in any way adversely
affect the rights of the Assignee thereof; provided, however, that the
provisions of Section 2.6 shall be applicable thereto.
(g) Services Agreement. On or before the Distribution Date, GranCare and
SNFCo will execute and deliver the Services Agreement setting forth the terms
upon which SNFCo shall, subsequent to the Time of Distribution, provide such
centralized back office support services to GranCare (and Vitalink as the
successor to GranCare) as may be determined by the parties to be appropriate
and as may be requested by Vitalink from time to time until such time (not to
exceed the term established in such agreement) as Vitalink (as the successor
to GranCare) shall no longer require such services.
(h) Delivery of Shares to Transfer Agent. GranCare shall deliver to the
Transfer Agent the share certificates representing the shares of SNFCo Common
Stock issued to GranCare by SNFCo pursuant to Section 2.1(b) and shall
instruct the Transfer Agent to distribute, on or as soon as practicable
following the Time of Distribution, such SNFCo Common Stock to holders of
record of shares of GranCare Common Stock on the Distribution Record Date as
further contemplated by the Proxy Statement/Prospectus and herein. SNFCo shall
provide all share certificates that the Transfer Agent shall require in order
to effect the Distribution.
(i) Other Transactions.
(i) On or prior to the Distribution Date, or as soon thereafter as is
reasonably practical, GranCare will, and it will cause the Pharmacy
Subsidiaries (other than SNFCo or any of the SNFCo Subsidiaries) to,
assign, transfer and convey to SNFCo (or such SNFCo Subsidiary as SNFCo may
direct) all of GranCare's right, title and interest in and to (a) all items
of GranCare's intellectual property except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare, (b) all of the
various assets listed on GranCare's General Ledger Account Number 1.01
except for those specific assets listed on Schedule 2.1(i), which shall be
retained by GranCare, and (c) all real estate leases, utility accounts,
trade organization memberships, vendor service contracts, warranty
contracts and items of a similar nature except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare.
(ii) On or prior to the Distribution Date, GranCare and the Pharmacy
Subsidiaries shall take or cause to be taken such action as shall be
necessary to assign and transfer all pending litigation, arbitration,
mediation and matters of a similar nature ("Pending Litigation Matters") to
SNFCo or such SNFCo Subsidiary as SNFCo may designate, including, without
limitation, instructing counsel of record to enter appropriate motions or
pleadings to accomplish the foregoing, except for such Pending Litigation
Matters
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as are listed on Schedule 2.1(i), which shall be retained by GranCare.
SNFCo and GranCare will each indemnify the other against any and all
liabilities, costs and expenses incurred in connection with any of the
Pending Litigation Matters for which it is responsible pursuant to this
Section 2.1(ii) following the Time of Distribution and each of GranCare and
SNFCo shall, subsequent to the Time of Distribution, be solely responsible
for the prosecution, defense, settlement or other conduct of Pending
Litigation Matters as are to be retained by each of them pursuant to this
Section 2.1(ii).
Section 2.2. Certain Financial and Other Arrangements.
(a) Intercompany Accounts. At the Time of Distribution, all intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder), including, without limitation, in respect of any cash balances,
any cash balances representing deposited checks or drafts for which only a
provisional credit has been allowed or any cash held in any centralized cash
management system, between GranCare and any of its Subsidiaries (other than
the Pharmacy Subsidiaries), on the one hand, and the Pharmacy Subsidiaries, on
the other hand, shall be netted out, in each case in such manner and amount as
may be agreed in writing by duly authorized representatives of GranCare,
Vitalink and SNFCo and the resulting net balance due from the Pharmacy
Subsidiaries to GranCare and any of its Subsidiaries (other than the Pharmacy
Subsidiaries) shall be contributed to the appropriate Pharmacy Subsidiaries as
additional capital.
(b) Operations in Ordinary Course. Each of GranCare and SNFCo covenants and
agrees that, except as otherwise provided in any Ancillary Agreement, during
the period from the date of this Distribution Agreement through the Time of
Distribution, it will, and will cause any entity that is a Subsidiary of such
party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment
and administration of accounts payable and the collection and administration
of accounts receivable, the purchase of capital assets and equipment, the
management of inventories, cash management practices, the allocation of
interest, corporate overhead, costs of legal, insurance and other centralized
functions and shall, at all times prior to the Time of Distribution, conduct
its business in a manner consistent with the provisions of Section 5.01 of the
Merger Agreement.
Section 2.3. Assumption of Indebtedness; Allocation of Expenses.
(a) GranCare and SNFCo shall take such action as shall be necessary or
appropriate to cause SNFCo to assume all of the items of GranCare's
consolidated indebtedness other than those items listed on Schedule 2.3(a).
(b) Prior to the Time of Distribution, GranCare shall undertake an offer to
purchase (the "Tender Offer") all of its outstanding Senior Subordinated Notes
at a price not to exceed $1,090.00 for each $1,000 principal amount of such
Senior Subordinated Notes and, in connection therewith, to solicit (the
"Solicitation") consents to obtain the approval of the holders of the required
principal amount of such Senior Subordinated Notes to the transactions
contemplated by this Distribution Agreement and the Merger Agreement and to
such modifications in the covenants contained in the Note Indenture (as
defined in the Merger Agreement) as may be reasonably requested by Vitalink.
All of the fees, expenses and costs incurred in connection with the Tender
Offer and the Solicitation (including the premium payable upon repurchase of
the Senior Subordinated Notes repurchased in the Tender Offer) will constitute
Shared Transaction Expenses.
(c) On or prior to the Distribution Date, GranCare shall take such action as
shall be necessary to redeem the Debentures (as defined in the Merger
Agreement) at a redemption price not to exceed 104.55% of the outstanding
principal amount thereof as of the date of this Distribution Agreement plus
accrued and unpaid interest thereon to the date of redemption. The redemption
premium incurred by GranCare in connection with accomplishing such redemption
shall be shared equally by GranCare and SNFCo (and Vitalink as the successor
to GranCare) but SNFCo shall be solely responsible for the payment of any
accrued interest to the date of redemption.
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(d) In connection with accomplishing the various transactions contemplated
by the Merger Agreement, this Distribution Agreement and the Ancillary
Agreements, SNFCo (on behalf of itself and GranCare) and Vitalink each shall
be responsible for one-half of the total documented fees, expenses and other
items of cost of SNFCo, GranCare and Vitalink set forth on Schedule 2.3(d)
(the "Shared Transaction Expenses"). As soon as reasonably practical following
the Effective Time of the Merger, representatives of SNFCo and Vitalink each
shall submit to the other appropriate documentation substantiating the nature
and amount of all Shared Transaction Expenses actually incurred and paid by
SNFCo (on behalf of itself and GranCare) and Vitalink, respectively. The
amounts of Shared Transaction Expenses actually paid by each of SNFCo and
Vitalink shall be netted out in the manner hereinafter described and SNFCo or
Vitalink, whichever shall have paid the least amount of Shared Transaction
Expenses, shall reimburse the other pursuant to the provisions of Section
2.3(e) hereof in an amount (the "Shared Transaction Expense Settlement
Amount") equal to one-half of the difference between (i) the amount of Shared
Transaction Expenses paid by SNFCo minus (ii) the amount of Shared Transaction
Expenses paid by Vitalink. If the result obtained from the foregoing
calculation is a negative number, then SNFCo shall reimburse Vitalink pursuant
to the provisions of Section 2.3(e) hereof in an amount equal to one-half of
the aggregate difference so determined. All Shared Transaction Expenses
actually paid by GranCare prior to the Time of Distribution shall be deemed to
have been paid by SNFCo for purposes of this Section 2.3(d). Except as set
forth in Schedule 2.3(d) or as otherwise contemplated by Section 5.11 of the
Merger Agreement, GranCare and SNFCo, on the one hand, and Vitalink, in its
individual capacity and not as the successor to GranCare, will each be solely
responsible for their respective fees and expenses incurred in connection with
the transactions contemplated by the Merger Agreement, this Distribution
Agreement and the Ancillary Agreements.
(e) Immediately following the determination of the Shared Transaction
Expense Settlement Amount, representatives of Vitalink and SNFCo also shall
determine jointly the total outstanding indebtedness (determined in accordance
with generally accepted accounting principles consistently applied) of the
Institutional Pharmacy Business as of the Effective Time of the Merger being
assumed by Vitalink (which shall be deemed to include, without duplication,
$100.0 million representing the Senior Subordinated Notes tendered in the
Tender Offer or assumed in the Merger and up to $10.0 million in fees paid to
obtain the HRPT Consent), an amount equal to the amount of GranCare's
indebtedness incurred in connection with the acquisition of Institutional
Pharmacy Businesses during the period commencing on June 1, 1996 and ending at
the Time of Distribution (all of the foregoing amounts hereinafter referred to
collectively as "Closing Debt") and the amount of GranCare's cash and cash
equivalents as of the Effective Time of the Merger (excluding cash
attributable to the exercise of GranCare Options and warrants to purchase
GranCare Common Stock occurring after the date hereof and prior to the
Effective Time and excluding any cash attributable to checks or similar
instruments outstanding and subject to collection) ("Cash"). As soon as
practicable after the Effective Time of the Merger, Vitalink shall pay to
SNFCo an amount equal to the difference between (i) the sum of (A) $88,383,000
plus (B) the total purchase price paid by SNFCo in connection with the
acquisition of Institutional Pharmacy Businesses approved by Vitalink during
the period commencing on June 1, 1996 and ending at the Time of Distribution,
including, without limitation, the total purchase price paid in connection
with the acquisition of Emery Pharmacy, Inc., plus (C) the Shared Transaction
Expense Settlement Amount (or less such amount if such amount is a negative
number) plus (D) an amount equal to GranCare's Cash minus (ii) the amount of
Closing Debt. If the result obtained by subtracting the sum determined
pursuant to subclause 2.3(e)(ii) from the sum determined pursuant to subclause
2.3(e)(i) is a negative amount, then such amount shall be paid by SNFCo to
Vitalink and used by Vitalink to pay liabilities to creditors of GranCare
assumed by Vitalink in the Merger. All payments to be made pursuant to this
Section 2.3(e) shall be made by wire transfer of immediately available funds
to an account designated by the recipient of such payment.
Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations, Rights and Assets Relating
to Shared Liabilities.
(a) Except as otherwise specifically set forth in any Ancillary Agreement,
from and after the Time of Distribution, (i) GranCare shall, and shall cause
the Pharmacy Subsidiaries and any and all successors and assigns to assume,
pay, perform and discharge all Institutional Pharmacy Liabilities as and when
due, and
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(ii) SNFCo shall, and shall cause the SNFCo Subsidiaries and any and all
successors and assigns to assume, pay, perform and discharge all Skilled
Nursing Liabilities as and when due.
(b) GranCare and SNFCo (and Vitalink as successor to GranCare) shall each
direct its own defense of any Shared Liability at its own expense; provided,
however, that (i) each party shall provide the other with copies of all
pleading, motions, items of correspondence and other documentation pertaining
to any Shared Liability contemporaneously with the first release of any such
material and (ii) no party hereto (or its successor) will admit any liability
with respect to, or settle, compromise or discharge, any Shared Liability
without the other party's prior written consent (which consent shall not be
unreasonably withheld) except as hereinafter provided. Any party seeking to
settle, compromise or discharge a Shared Liability (a "Settling Party") shall
have the right to settle, compromise or discharge a Shared Liability without
the other party's consent if the Settling Party releases the non-settling
party from any obligation in respect of such Shared Liability and indemnifies
the non-settling party against any and all liabilities in connection therewith
and such settlement, compromise or discharge would not otherwise adversely
affect the non-settling party.
(c) Upon the compromise, settlement or other resolution of any Shared
Liability, SNFCo and GranCare (and Vitalink as the successor to GranCare)
shall share in any obligation or liability arising as a result thereof in the
same proportion in which the Shared Liability is shared. The parties hereto
shall share in any rights and assets (including, without limitation,
recoveries, claims, rights of subrogation and proceeds of asset sales) that
relate to Shared Liabilities in the same proportions in which the related
Shared Liability is shared.
Section 2.5. Resignations. GranCare shall cause all its officers who shall
not continue as employees of SNFCo subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of SNFCo or as officers or directors of any SNFCo
Subsidiary in which they serve. SNFCo shall cause all its officers who shall
not continue as employees of GranCare subsequent to the Time of Distribution
to resign, effective as of the Time of Distribution, from all positions as
directors or officers of GranCare or as officers or directors of any Pharmacy
Subsidiary in which they serve.
Section 2.6. Further Assurances.
(a) In case at any time after the Time of Distribution any further action is
reasonably necessary or desirable to carry out the purposes of this
Distribution Agreement and the Ancillary Agreements, the proper officers of
each party to this Distribution Agreement shall take, or cause the proper
officers of their respective Subsidiaries to take, all such necessary action.
Without limiting the foregoing, GranCare and SNFCo shall use their
commercially reasonable efforts to obtain all required consents and approvals
of third parties, to enter into all amendatory agreements and to make all
filings and applications that may be required for the consummation of the
transactions contemplated by this Distribution Agreement, the Merger Agreement
and the Ancillary Agreements, including, without limitation, all applicable
governmental and regulatory filings.
(b) In the event that subsequent to the Time of Distribution, GranCare or
any Pharmacy Subsidiaries shall either (i) receive written notice from SNFCo
that certain specified assets or Liabilities of GranCare or any Pharmacy
Subsidiaries which properly constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution or (ii) determine that certain assets or Liabilities of GranCare
or any Pharmacy Subsidiaries which constitute Skilled Nursing Assets or
Skilled Nursing Liabilities were not transferred to SNFCo on or prior to the
Time of Distribution, then as promptly as practical thereafter, GranCare
shall, and shall cause the Pharmacy Subsidiaries to, take all steps reasonably
necessary to (A) transfer and deliver any and all of such assets to SNFCo
without the payment by SNFCo of any consideration therefor or (B) assign and
transfer any and all such Liabilities to SNFCo which shall assume and
discharge the same without payment to or by GranCare of any consideration in
respect thereof. In the event that, subsequent to the Time of Distribution,
SNFCo or any SNFCo Subsidiaries shall either (i) receive written notice from
GranCare or any of the Pharmacy Subsidiaries that certain specified assets or
Liabilities were transferred to SNFCo which properly constitute Institutional
Pharmacy Assets or Institutional Pharmacy Liabilities or (ii) determine that
certain assets or Liabilities of SNFCo which constitute Institutional Pharmacy
Assets or Institutional Pharmacy Liabilities were
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transferred to SNFCo, then as promptly as practicable thereafter, SNFCO shall,
and shall cause the SNFCo Subsidiaries to, take all steps reasonably necessary
to (A) transfer and deliver any and all such assets to GranCare or the
Pharmacy Subsidiaries without the payment by GranCare of any consideration
therefor or (B) assign and transfer any and all such liabilities to GranCare
which shall assume and discharge the same without payment to or by SNFCo of
any consideration in respect thereof.
(c) Nothing in this Distribution Agreement shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of law cannot be transferred; provided, however, that the
parties hereto and their respective Subsidiaries shall cooperate to seek to
obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this Article II. In the
event that any such transfer of assets or Liabilities has not been consummated
as of the Time of Distribution, from and after the Time of Distribution the
party retaining such asset shall hold such asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) or retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and take such
other action as may be reasonably requested by the party to whom such asset is
to be transferred, or by whom such Liability is to be assumed, as the case may
be, in order to place such party, insofar as is reasonably possible, in the
same position as would have existed had such asset or Liability been
transferred as contemplated hereby. As and when any such asset or Liability
becomes transferable, such transfer shall be effected forthwith. As of the
Time of Distribution, each party hereto shall be deemed to have acquired
complete and sole beneficial ownership over all of the assets held by it,
together with all rights, powers and privileges incident thereto, and shall be
deemed to have assumed in accordance with the terms of this Distribution
Agreement all of the Liabilities, and all duties, obligations and
responsibilities incident thereto, which such party is entitled to acquire or
required to assume pursuant to the terms of this Distribution Agreement.
Section 2.7. No Representations or Warranties. Each of the parties hereto
understands and agrees that, except as otherwise expressly provided in the
Merger Agreement, no party hereto is, in this Distribution Agreement or in any
other agreement or document contemplated by this Distribution Agreement or
otherwise, making any representation or warranty whatsoever, including,
without limitation, as to title, value or legal sufficiency. It is also agreed
and understood that all assets either transferred to or retained by the
parties, as the case may be, shall be "as is, where is" and that (subject to
Section 2.6) the party to which such assets are to be transferred hereunder
shall bear economic and legal risk that any conveyances of such assets shall
prove to be insufficient or that such party's or any Subsidiary's title to any
such assets shall be other than good and marketable and free from
encumbrances.
Section 2.8. Guarantees. Except as otherwise specified in any Ancillary
Agreement, each of GranCare and SNFCo shall use its commercially reasonable
efforts to have, on or prior to the Time of Distribution, or as soon as
practicable thereafter, (a) GranCare and any of the Pharmacy Subsidiaries
removed as guarantor of or obligor for any True SNFCo Liability and (b) SNFCo
and any of the SNFCo Subsidiaries removed as a guarantor of or obligor for any
True GranCare Liability, in each case, without the requirement that it pay any
additional consideration in connection with obtaining the same.
Section 2.9. Witness Services. At all times from and after the Distribution
Date, each of GranCare and SNFCo shall use their commercially reasonable
efforts to make available to the other, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses
to the extent that (a) such persons may reasonably be required in connection
with the prosecution or defense of any Action in which the requesting party
may from time to time be involved and (b) there is no conflict of interest in
the Action between the requesting party and GranCare or SNFCo, as applicable.
A party providing witness services to the other party under this Section shall
be entitled to receive from the recipient of such services, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses and direct costs of
employees who are witnesses, as may be reasonably incurred in providing such
witness services.
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Section 2.10. Certain Post-Distribution Transactions.
(a) GranCare shall comply with and otherwise not take any action
inconsistent with each representation, covenant and statement made, or to be
made, to GranCare's tax counsel in connection with such firm's rendering of an
opinion to GranCare and SNFCo as to certain tax aspects of the Distribution.
(b) SNFCo shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
SNFCo's tax counsel in connection with such firm's rendering of an opinion to
GranCare and SNFCo as to certain tax aspects of the Distribution.
Section 2.11. Directors and Officers Liability Insurance. From and after the
Time of Distribution to the third anniversary of the Distribution Date,
GranCare and SNFCo (and Vitalink as the successor to GranCare) will maintain
in full force and effect in such manner as is contemplated by Section 5.10 of
the Merger Agreement, all Company Policies providing directors and officers
liability insurance ("D&O Insurance Policies") (or, through the purchase of an
alternative policy, the full benefits and coverage of such D&O Insurance
Policies) and shall not consent to any amendment of the terms of such policies
that may be adverse to any persons covered by such insurance except as may
otherwise be permitted by Section 5.10 of the Merger Agreement. The provisions
of this Section 2.11 are intended for the benefit of, and shall be enforced
by, each of the persons covered by the D&O Insurance Policies.
Section 2.12. Insurance. Except as contemplated by Article V and Section
2.11 hereof, any and all omnibus coverage of GranCare and the Pharmacy
Subsidiaries under Company Policies will terminate (and will not be replaced)
as of the Time of Distribution and from and after the Time of Distribution
GranCare and SNFCo shall each obtain such continuing coverage as may be deemed
necessary or appropriate.
Section 2.13. Ancillary Agreements. Effective as of the Time of
Distribution, each of GranCare and SNFCo shall enter into, and/or (where
applicable) shall cause their respective Subsidiaries to enter into, the
Ancillary Agreements and, subject to Vitalink's prior approval, which shall
not be unreasonably withheld, any other agreements in respect of the
Distribution reasonably necessary or appropriate in connection with the
transactions contemplated hereby and thereby.
ARTICLE III.
Indemnification
Section 3.1. Indemnification by GranCare. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, GranCare (and
Vitalink as the successor to GranCare) shall indemnify, defend and hold
harmless the SNFCo Indemnitees from and against any and all Indemnifiable
Losses of the SNFCo Indemnitees arising out of, by reason of or otherwise in
connection with (a) the Institutional Pharmacy Liabilities, (b) the breach,
whether before or after the Time of Distribution, by GranCare or the Pharmacy
Subsidiaries of any provision of this Distribution Agreement or any Ancillary
Agreement or (c) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to Vitalink.
Section 3.2. Indemnification by SNFCo. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, SNFCo shall
indemnify, defend and hold harmless the GranCare Indemnitees from and against
any and all Indemnifiable Losses of the GranCare Indemnitees arising out of,
by reason of or otherwise in connection with (a) the Skilled Nursing
Liabilities, (b) the breach, whether before or after the Time of Distribution,
by SNFCo or the SNFCo Subsidiaries of any provision of this Distribution
Agreement or any Ancillary Agreement, (c) the Spin Registration Document (as
defined in the Merger Agreement) that shall be prepared by SNFCo and filed
with the Commission pertaining to the registration of the SNFCo Common Stock
to be issued in the Distribution or (d) the Proxy Statement/Prospectus to the
extent that such Indemnifiable Loss relates to or arises out of information
contained in the Proxy Statement/Prospectus that specifically relates to SNFCo
or GranCare.
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Section 3.3. Limitations on Indemnification Obligations.
(a) The amount that any party (an "Indemnifying Party") is or may be
required to pay to any other person (an "Indemnitee") pursuant to Section 3.1
or Section 3.2, as applicable, shall be reduced (retroactively or
prospectively) by any Insurance Proceeds or other amounts actually recovered
by or on behalf of such Indemnitee in respect of the related Indemnifiable
Loss. If an Indemnitee shall have received the payment required by this
Distribution Agreement from an Indemnifying Party in respect of an
Indemnifiable Loss and shall subsequently receive Insurance Proceeds or other
amounts in respect of such Indemnifiable Loss, then such Indemnitee shall pay
to such Indemnifying Party a sum equal to the amount of such Insurance
Proceeds or other amounts actually received, up to the aggregate amount of any
payments received from such Indemnifying Party pursuant to this Distribution
Agreement in respect of such Indemnifiable Loss.
(b) Any loss, liability, claim, damage, demand, cost or expense relating to
or arising out of information contained in the Proxy Statement/Prospectus that
does not specifically relate to either Vitalink, on the one hand, or SNFCo or
GranCare, on the other hand, shall constitute a Shared Liability for purposes
of this Distribution Agreement and no party hereto or their successor shall be
entitled to indemnification in respect thereof.
Section 3.4. Procedures for Indemnification. If a claim or demand is made
against an Indemnitee by any person who is not a party to this Distribution
Agreement (a "Third Party Claim") as to which such Indemnitee is entitled to
indemnification pursuant to this Distribution Agreement, such Indemnitee shall
notify the Indemnifying Party in writing, and in reasonable detail, of the
Third Party Claim promptly (and in any event within 20 business days) after
receipt by such Indemnitee of written notice of the Third Party Claim;
provided, however, that failure to give such notification within such 20
business day period shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure (except that the Indemnifying Party
shall not be liable for any expenses incurred during the period in which the
Indemnitee failed to give such notice). Thereafter, the Indemnitee shall
deliver to the Indemnifying Party, promptly (and in any event within 20
business days) after the Indemnitee's receipt thereof, copies of all notices
and documents (including court papers) received by the Indemnitee relating to
the Third Party Claim.
If a Third Party Claim is made against an Indemnitee, the Indemnifying Party
shall be entitled to participate in the defense thereof and, if it so chooses
and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to
by the Indemnitee. Should the Indemnifying Party so elect to assume the
defense of a Third Party Claim, the Indemnifying Party shall not be liable to
the Indemnitee for legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof except as otherwise
expressly provided for in Section 2.9 of this Distribution Agreement. If the
Indemnifying Party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it
being understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the fees and expenses of counsel
employed by the Indemnitee (i) for any period during which the Indemnifying
Party has failed to assume the defense thereof (other than during the 20
business day period prior to the time the Indemnitee shall have given notice
of the Third Party Claim as provided above) or (ii) in the event the
Indemnitee reasonably determines, based on the advice of its counsel that
there shall exist a conflict of interest between the Indemnitee and the
Indemnifying Party or that there are defenses available to the Indemnitee that
are not available to the Indemnifying Party, the effect of which shall be to
make it impractical for the Indemnitee and the Indemnifying Party to be
jointly represented by the same counsel, in which case the Indemnifying Party
shall be liable for the fees and expenses of one counsel for all Indemnitees
in any single or series of related Actions. If the Indemnifying Party so
elects to assume the defense of any Third Party Claim, the Indemnitee shall
cooperate with the Indemnifying Party in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability for
indemnification of a Third Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third
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Party Claim without the Indemnifying Party's prior written consent; provided,
however, that the Indemnitee shall have the right to settle, compromise or
discharge such Third Party Claim without the consent of the Indemnifying Party
if the Indemnitee releases the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise adversely affect the
Indemnifying Party. If the Indemnifying Party acknowledges in writing
liability for indemnification of a Third Party Claim, the Indemnitee will
agree to any settlement, compromise or discharge of a Third Party Claim that
the Indemnifying Party may recommend that by its terms (i) obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, (ii) releases the Indemnitee completely in connection
with such Third Party Claim and (iii) would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge and may assume the defense of such
Third Party Claim if the Indemnitee agrees (A) that the Indemnifying Party's
indemnification obligation with respect to such Third Party Claim shall not
exceed the amount that would have been required to be paid by or on behalf of
the Indemnifying Party in connection with such settlement, compromise or
discharge and (B) to assume all costs and expenses thereafter incurred in
connection with the defense of such Third Party Claim (other than those
contemplated by subclause (A) herein above).
Notwithstanding the foregoing, the Indemnifying Party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
fees and expenses of counsel incurred by the Indemnitee in defending such
Third Party Claim) if the Third Party Claim seeks an order, injunction or
other equitable relief or relief other than money damages against the
Indemnitee which the Indemnitee reasonably determines, based on the advice of
its counsel, cannot be separated from any related claim for money damages. If
such equitable or other relief portion of the Third Party Claim can be so
separated from the claim for money damages, the Indemnifying Party shall be
entitled to assume the defense of the portion relating to money damages.
Section 3.5. Indemnification Payments. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred.
Section 3.6. Other Adjustments.
(a) The amount of any Indemnifiable Loss shall be (i) increased to take into
account any net Tax cost actually incurred by the Indemnitee arising from any
payments received from the Indemnifying Party (grossed up for such increase)
and (ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such
Indemnifiable Loss. In computing the amount of such Tax cost or Tax benefit,
the Indemnitee shall be deemed to recognize all other items of income, gain,
loss, deduction or credit before recognizing any item arising from the receipt
of any payment with respect to an Indemnifiable Loss or the incurrence or
payment of any Indemnifiable Loss.
(b) In addition to any adjustments required pursuant to Section 3.3 hereof
or clause (a) of this Section 3.6, if the amount of any Indemnifiable Loss
shall, at any time subsequent to the payment required by this Distribution
Agreement, be reduced by recovery, settlement or otherwise, the amount of such
reduction, less any expenses incurred in connection therewith, shall promptly
be repaid by the Indemnitee to the Indemnifying Party, up to the aggregate
amount of any payments received from such Indemnifying Party pursuant to this
Distribution Agreement in respect of such Indemnifiable Loss.
Section 3.7. Survival of Indemnities. The obligations of GranCare and SNFCo
under this Article III shall survive the sale or other transfer by either of
them of any assets or businesses or the assignment by either of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related
to such assets, businesses or Liabilities and shall be binding on the
successors and assigns of all, or substantially all, of their respective
assets and business.
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ARTICLE IV.
Access to Information
Section 4.1. Provision of Corporate Records.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
SNFCo for specific and identified agreements, documents, books, records or
files (collectively, "Records") relating to or affecting SNFCo, GranCare shall
arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if SNFCo has a reasonable need for such originals) in the
possession of GranCare or any of its Subsidiaries, but only to the extent such
items are not already in the possession SNFCo.
(b) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
GranCare for specific and identified Records relating to or affecting
GranCare, SNFCo shall arrange, as soon as reasonably practicable following the
receipt of such request, for the provision of appropriate copies of such
Records (or the originals thereof if GranCare has a reasonable need for such
originals) in the possession of SNFCo or any of its Subsidiaries, but only to
the extent such items are not already in the possession of GranCare.
Section 4.2. Access to Information.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, from and after the Distribution Date, each of GranCare and
SNFCo shall afford to the other and its authorized accountants, counsel and
other designated representatives reasonable access during normal business
hours, subject to appropriate restrictions for classified, privileged or
confidential information, to the personnel, properties, books and records of
such party and its Subsidiaries insofar as such access is reasonably required
by the other party.
(b) For a period of five years following the Distribution Date, each of
GranCare and SNFCo shall provide to the other, promptly upon request, all
documents that shall be publicly filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim
reporting requirements of the Exchange Act, and the rules and regulations of
the Commission promulgated thereunder.
(c) Each of GranCare and SNFCo shall afford to the other access during
normal business hours to their respective properties, subject to appropriate
restrictions and limitations, and will consult and cooperate with each other
for the purpose of conducting air, water or soil testing reasonably necessary
in connection with the determination and fulfillment of indemnification
obligations or in connection with Shared Liabilities under this Distribution
Agreement.
Section 4.3. Reimbursement; Other Matters.
(a) Except to the extent otherwise contemplated by any Ancillary Agreement
and except as limited by any indemnification obligation set forth in this
Distribution Agreement, a party providing Records or access to information or
properties under this Article IV shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Records or access to
information or properties.
(b) The parties hereto shall comply with those document retention policies
as shall be set forth in Schedule 4.3(b) hereto.
Section 4.4. Confidentiality. Each of (a) GranCare and the Pharmacy
Subsidiaries and (b) SNFCo and the SNFCo Subsidiaries shall not use or permit
the use of (without the prior written consent of the other) and shall hold,
and shall cause its consultants and advisors to hold, in strict confidence,
all information concerning
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the other party in its possession, its custody or under its control (except to
the extent that (i) such information has been in the public domain through no
fault of such party or (ii) such information has been later lawfully acquired
from other sources by such party or (iii) this Distribution Agreement or any
other Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (A) relates to the period up to the Time of Distribution, (B)
relates to any Ancillary Agreement or (C) is obtained in the course of
performing pursuant to any Ancillary Agreement, and each party shall not
(without the prior written consent of the other) otherwise release or disclose
such information to any other person, except such party's auditors,
consultant's or attorneys, unless compelled to disclose such information by
judicial or administrative process or unless such disclosure is required by
law and such party has used commercially reasonable efforts to consult with
the other affected party prior to such disclosure. To the extent that a party
hereto is compelled by judicial or administrative process to disclose such
information under circumstances in which any evidentiary privilege would be
available, such party agrees to assert (or permit the other party a
commercially reasonable opportunity to assert) such privilege in good faith
prior to making such disclosure. Each of the parties hereto agrees to consult
with the other party in connection with any such judicial or administrative
process, including, without limitation, in determining whether any privilege
is available, and further agrees to allow such other party and its counsel to
participate in any hearing or other proceeding (including, without limitation,
any appeal of an initial order to disclose) in respect of such disclosure and
assertion of privilege.
ARTICLE V.
Insurance
Section 5.1. Policies and Rights Included Within Assets Maintenance of
Coverage.
(a) The Skilled Nursing Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of SNFCo contemplated by
this Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the Skilled
Nursing Business which claims are asserted subsequent to the Distribution
Date.
(b) The Institutional Pharmacy Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of GranCare contemplated
by this Article V, specifically including rights of indemnity and the right to
be defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the
Institutional Pharmacy Business which claims are asserted subsequent to the
Distribution Date.
(c) Except as otherwise agreed to in writing between GranCare and SNFCo
(which agreement shall be acknowledged and consented to by Vitalink), GranCare
shall maintain in effect until the Time of Distribution all Company Policies
in effect as of the date hereof and the insurance coverages and limits will be
maintained at substantially the same levels as are reflected on the schedule
of Company Policies attached hereto as Schedule 5.1(c). Subsequent to the
Distribution Date, the parties hereto will be responsible for maintaining
their respective risk management programs.
Section 5.2. Post-Time of Distribution Claims Against SNFCo. If, subsequent
to the Time of Distribution, any person shall assert a claim against SNFCo or
any of the SNFCo Subsidiaries (including, without limitation, where SNFCo or
the SNFCo Subsidiaries are joint defendants with other persons) with respect
to any claim, suit, action, proceeding, injury, loss, liability, damage or
expense incurred or claimed to have been
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incurred prior to the Time of Distribution in or in connection with the
conduct of the Skilled Nursing Business, and which claim, suit, action,
proceeding, injury, loss, liability, damage or expense may arise out of an
insured or insurable occurrence under one or more of the Company Policies,
GranCare shall, at the time such claim is asserted, to the extent any such
Company Policy may require that Insurance Proceeds thereunder be collected
directly by the party against whom the Insured Claim is asserted, be deemed to
designate, without need of further documentation, SNFCo as the agent and
attorney-in-fact to assert and to collect any related Insurance Proceeds under
such Company Policy, and shall further be deemed to assign, without need of
further documentation, to SNFCo any and all rights of an insured party under
such Company Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the
expense of the insurer and the right to any applicable Insurance Proceeds
thereunder.
Section 5.3. Administration; Other Matters.
(a) From and after the Time of Distribution, SNFCo shall be responsible for
(i) Insurance Administration of the Company Policies and (ii) Claims
Administration under such Company Policies with respect to Institutional
Pharmacy Liabilities and Skilled Nursing Liabilities that relate to claims
asserted prior to the Distribution Date and SNFCo shall be responsible for any
premiums, deductibles and retentions in respect of such Company Policies and
the cost of any such claims shall be the sole responsibility and obligation of
SNFCo including, without limitation, claims (and related costs and expenses)
that exceed the limits of the applicable Company Policy or where the limits of
the applicable Company Policy have been exhausted, and any resulting actuarial
gains or losses shall inure solely to SNFCo. From and after the Time of
Distribution, GranCare shall file with SNFCo all claims asserted subsequent to
the Time of Distribution that relate to occurrences prior to the Time of
Distribution arising out of or in connection with the Institutional Pharmacy
Business and SNFCo shall be responsible for notifying the appropriate
insurance carrier and providing GranCare with copies of all correspondence
relating to such notification. Thereafter, GranCare shall be responsible for
Claims Administration relating to all such claims wherein SNFCo shall not be
named as a co-defendant and GranCare shall provide SNFCo with copies of all
correspondence, documents and other materials that may be material to an
understanding by SNFCo of the status of such claims; it being expressly
acknowledged and agreed that SNFCo's retention of the administrative
responsibilities for submitting notices of claims under the appropriate
Company Policies shall not relieve GranCare of the primary responsibility for
reporting such Insured Claim accurately, completely and in a timely manner.
Subject to the indemnification provisions of Article III, each of the parties
hereto shall administer and pay any costs relating to defending its respective
Insured Claims under Company Policies to the extent such defense costs are not
covered under such Company Policies and shall be responsible for obtaining or
reviewing the appropriateness of releases upon settlement of its respective
Insured Claims under Company Policies.
(b) Allocation of Insurance Proceeds. Except as otherwise provided in
Sections 5.2 and 5.3(a), Insurance Proceeds received with respect to claims,
costs and expenses under the Company Policies shall be paid to SNFCo, which
shall thereafter administer the Company Policies by paying the Insurance
Proceeds, as appropriate, to GranCare with respect to Institutional Pharmacy
Liabilities and retaining such proceeds that relate to Skilled Nursing
Liabilities (except for Insurance Proceeds that are received in respect of
Insured Claims asserted prior to the Time of Distribution relating to
occurrences arising prior to the Time of Distribution which Insurance Proceeds
will be retained by SNFCo). Payment of the allocable portions of indemnity
costs of Insurance Proceeds resulting from such Policies will be made by SNFCo
to GranCare where appropriate upon receipt from the insurance carrier. In the
event that the aggregate limits on any Company Policies are exceeded by the
aggregate outstanding Insured Claims by both of the parties hereto, such
parties shall agree on an equitable allocation of Insurance Proceeds based
upon their respective bona fide claims. The parties agree to use commercially
reasonable efforts to maximize available coverage under those Company Policies
applicable to it, and to take all commercially reasonable steps to recover
from all other responsible parties in respect of an Insured Claim to the
extent coverage limits under a Company Policy have been exceeded or would be
exceeded as a result of such Insured Claim.
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Section 5.4. Agreement for Waiver of Conflict and Shared Defense. With
respect to any claims asserted subsequent to the Time of Distribution that
relate to occurrences prior to the Time of Distribution arising out of or in
connection with the Institutional Pharmacy Business as to which GranCare shall
have, in accordance with Section 5.3(a), filed such claim with SNFCo for
purposes of giving notice to the appropriate insurance carrier, if GranCare
and SNFCo are named as co-defendants in respect of such claim then the Claims
Administration relating thereto will be shared equally by GranCare and SNFCo
and any conflict of interest necessary to the conduct of the joint defense
shall be deemed waived. Nothing in this Section 5.4 shall be construed to
limit or otherwise alter in any way the obligations of the parties to this
Distribution Agreement, including those created by this Distribution
Agreement, by operation of law or otherwise.
Section 5.5. Cooperation. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
ARTICLE VI.
Dispute Resolution
In the event of a controversy, dispute or claim arising out of, in
connection with, or in relation to the interpretation, performance,
nonperformance, validity or breach of this Distribution Agreement or otherwise
arising out of, or in any way related to this Distribution Agreement,
including, without limitation, any claim based on contract, tort, statute or
constitution (collectively, "Distribution Agreement Disputes"), the party
asserting the Distribution Agreement Dispute shall give written notice to the
other party of the existence and nature of such Distribution Agreement
Dispute. Thereafter, the general counsels of the respective parties shall
negotiate in good faith for a period no less than 60 days after the date of
the notice in an attempt to settle such Distribution Agreement Dispute. If
after such 60 calendar day period such general counsels are unable to settle
such Distribution Agreement Dispute, any party hereto may commence arbitration
by giving written notice to all other party that such Distribution Agreement
Dispute has been referred to the American Arbitration Association for
arbitration in accordance with the provisions of this Article.
All Distribution Agreement Disputes shall be settled by arbitration in
Atlanta, Georgia, before a single arbitrator in accordance with the rules of
the American Arbitration Association (the "Rules"). The arbitrator shall be
selected by the mutual agreement of all parties, but if they do not so agree
within twenty (20) days after the date of the notice of arbitration referred
to above, the selection shall be made pursuant to the Rules from the panels of
arbitrators maintained by the American Arbitration Association. The arbitrator
shall be an individual with substantial professional experience with regard to
resolving or settling sophisticated commercial disputes.
Any award rendered by the arbitrator shall be conclusive and binding upon
the parties hereto; provided, however, that any such award shall be
accompanied by a written opinion of the arbitrator giving the reasons for the
award. This provision for arbitration shall be specifically enforceable by the
parties and the decision of the arbitrator in accordance therewith shall be
final and binding and there shall be no right of appeal therefrom. The parties
agree to comply with any award made in any such arbitration proceedings that
has become final in accordance with the Rules, and agree to the entry of a
judgment in any jurisdiction upon any award rendered in such proceedings
becoming final under the Rules.
In the award the arbitrator shall allocate, in his or her discretion, among
the parties to the arbitration all costs of the arbitration, including,
without limitation, the fees and expenses of the arbitrator and reasonable
attorneys' fees, costs and expert witness expenses of the parties. Absent such
an allocation by the arbitrator, each party shall pay its own expenses of
arbitration, and the expenses of the arbitrator shall be equally shared.
Nothing contained in this Article shall prevent the parties from settling
any Distribution Agreement Dispute by mutual agreement at any time.
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<PAGE>
ARTICLE VII.
Miscellaneous
Section 7.1. Complete Agreement; Construction. This Distribution Agreement,
including the Schedules and the Ancillary Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous negotiations, commitments and writings with respect to
such subject matter. In the event of any inconsistency between this
Distribution Agreement and any Schedule hereto, the Schedule shall prevail. In
the event and to the extent that there shall be a conflict between the
provisions of this Distribution Agreement and the Schedules and the provisions
of (i) the Merger Agreement, the Merger Agreement shall control and (ii) an
Ancillary Agreement, such Ancillary Agreement shall control; provided,
however, that the provisions of this Distribution Agreement shall govern in
the event of and to the extent of any conflict between the provisions of this
Distribution Agreement and the provisions of the Transfer and Assumption
Instruments.
Section 7.2. Counterparts. This Distribution Agreement may be executed in
one or more counterparts, each of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
Section 7.3. Survival of Agreements. Except as otherwise contemplated by
this Distribution Agreement, all covenants and agreements of the parties
contained in this Distribution Agreement shall survive the Distribution Date.
Section 7.4. Notices. All notices and other communications hereunder shall
be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or automatic machine generated
confirmation) to the parties at the following address (or at such other
addresses for a party as shall be specified by like notice) and will be deemed
given on the date on which such notice is received:
To GranCare:
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
To SNFCo:
GCI Properties, Inc.
c/o GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
Section 7.5. Waivers. The failure of either party to require strict
performance by the other party of any provision in this Distribution Agreement
will not waive or diminish that party's right to demand strict performance
thereafter of that or any other provision hereof.
Section 7.6. Amendments. Subject to the terms of Section 7.9 hereof, this
Distribution Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties and, for so
long as the Merger Agreement shall be in effect, approved by Vitalink.
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<PAGE>
Section 7.7. Assignment. This Distribution Agreement shall be assignable in
whole in connection with a merger or consolidation or the sale of all or
substantially all the assets of a party hereto. Otherwise this Distribution
Agreement shall not be assignable, in whole or in part, directly or
indirectly, by any party hereto without the prior written consent of the other
party, and any attempt to assign any rights or obligations arising under this
Distribution Agreement without such consent shall be void.
Section 7.8. Successors and Assigns. The provisions of this Distribution
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns, including,
without limitation, Vitalink.
Section 7.9. Termination. This Agreement (including, without limitation,
Section 2.11 and Article III hereof) may be terminated and the Distribution
may be amended, modified or abandoned at any time prior to the Distribution by
and in the sole discretion of GranCare without the approval of SNFCo or the
shareholders of GranCare. In the event of such termination, no party shall
have any liability of any kind to any other party or any other person. After
the Distribution, this Distribution Agreement may not be terminated except by
an agreement in writing signed by the parties; provided, however, that Section
2.11 shall not be terminated or amended after the Distribution in respect of
the third party beneficiaries thereto without the consent of such persons.
Section 7.10. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party or by any entity that is contemplated to be a Subsidiary of such party
on and after the Distribution Date.
Section 7.11. Third Party Beneficiaries. The parties expressly acknowledge
that at the Effective Time GranCare will be merged with and into Vitalink, all
obligations of GranCare hereunder shall become obligations of Vitalink, and
actions of GranCare hereunder to be taken after the Time of Distribution shall
be taken by Vitalink. Except as provided in Section 2.11 relating to directors
and officers liability insurance, this Distribution Agreement is solely for
the benefit of the parties hereto and their respective Subsidiaries and
Affiliates and permitted successors and assigns and shall not be deemed to
confer upon third parties any remedy, claim, liability, reimbursement, claim
of action or other right in excess of those existing without reference to this
Distribution Agreement.
Section 7.12. Attorney Fees. Except as contemplated by an arbitrator's
decision pursuant to Article VI hereof, a party in breach of this Distribution
Agreement shall, on demand, indemnify and hold harmless the other party hereto
for and against all reasonable out-of-pocket expenses, including, without
limitation, reasonable legal fees, incurred by such other party by reason of
the enforcement and protection of its rights under this Distribution
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled hereunder or otherwise.
Section 7.13. Title and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Distribution
Agreement.
Section 7.14. Schedules. The Schedules shall be construed with and as an
integral part of this Distribution Agreement to the same extent as if the same
had been set forth verbatim herein.
Section 7.15. Specific Performance. Each of the parties hereto acknowledges
that there is no adequate remedy at law for failure by such parties to comply
with the provisions of this Distribution Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that their agreements contained herein may be specifically
enforced without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Distribution Agreement.
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<PAGE>
Section 7.16. Governing Law. This Distribution Agreement shall be governed
by and construed in accordance with the laws of the state of Georgia
applicable to contracts executed in and to be performed in that state.
Section 7.17. Severability. In the event any one or more of the provisions
contained in this Distribution Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which shall, to the greatest extent
possible, approximate that of the invalid, illegal or unenforceable
provisions.
IN WITNESS WHEREOF, the parties have caused this Distribution Agreement to
be duly executed as of the day and year first written above.
GranCare, Inc.
By: /s/ Gene E. Burleson
---------------------------------
Name: Gene E. Burleson
Title: Chairman, President and
Chief Executive Officer
New GranCare, Inc.
By: /s/ M. Scott Athans
---------------------------------
Name: M. Scott Athans
Title: President and Chief
Executive Officer
C-21
<PAGE>
EXHIBIT A
INTERNAL SCOUT RESTRUCTURING PLAN
The following is an outline of the steps that will be taken prior to
undertaking the Distribution and the Merger.
1. GCI Properties, Inc., a California corporation ("GCI Properties"), a
first-tier subsidiary of GranCare Health Services, Inc., a California
corporation ("GCHS") and a second-tier subsidiary of GranCare, Inc., a
California corporation ("GCI"), and which will be the subsidiary whose stock
is distributed to the shareholders of GCI, will be reincorporated as New
GranCare, Inc., a Delaware corporation ("New GranCare") through the merger of
GCI Properties with and into New GranCare.
2. TeamCare, Inc., a Delaware corporation, will change its name to TCI, Inc.
("TCI").
3. GCHS will reincorporate as a Delaware corporation under the name
"TeamCare, Inc." ("TeamCare").
4. TCI, which is a first-tier subsidiary of TeamCare and a second-tier
subsidiary of GCI, will be merged with and into TeamCare, with TeamCare as the
survivor, so that the following corporations will become first-tier, wholly-
owned subsidiaries of TeamCare:
CompuPharm of Northern California, Inc., a California corporation
("CompuPharm NC")
CompuPharm of Southern California, Inc., a California corporation
("CompuPharm SC")
GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")
TeamCare of Indiana, Inc., an Indiana corporation ("TeamCare Indiana")
Drug Systems, Inc., a Colorado corporation ("DSI")
TeamCare of Virginia, Inc., a Virginia corporation ("TeamCare-VA")
TeamCare of Wisconsin, Inc., a Wisconsin corporation ("TeamCare of
Wisconsin")
CapCare Health Services, Inc., an Illinois corporation ("CapCare")
Renaissance Mental Health Center, Inc., a Wisconsin corporation
("Renaissance")
CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm-Ohio")
TeamCare Clinical Services, Inc. a New Jersey corporation ("TeamCare
Clinical Services")
5. TeamCare of New Jersey, Inc., a New Jersey corporation ("TeamCare of New
Jersey"), which is a first-tier subsidiary of TeamCare and a second-tier
subsidiary of GCI, will be merged with and into TeamCare, with TeamCare as the
survivor.
6. CompuPharm SC, DSI, TeamCare of Wisconsin and CapCare will be merged with
and into TeamCare.
7. TeamCare will transfer all the stock of the following corporations to New
GranCare:
AMS Green Tree, Inc., a Wisconsin corporation ("AMS-GT")
American-Cal Medical Services, Inc., a California corporation ("Am-Cal")
HMI Convalescent Care, Inc., a California corporation ("HMI")
GranCare South Carolina, Inc., a South Carolina corporation ("GC-SC")
GCI Palm Court, Inc., a California corporation ("GCI-PC")
GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona
corporation ("GCI-EV")
GCI Realty, Inc., a Delaware corporation ("GCI Realty")
GCI Jolley Acres, Inc., a South Carolina corporation ("GCI-JA")
GCI Prince George, Inc., a South Carolina corporation ("GCI-PG")
GCI Springdale Village., Inc., a South Carolina corporation ("GCI-SV")
GCI Village Green, Inc., a South Carolina corporation ("GCI-VG")
GCI Faith Nursing Home, Inc., a South Carolina corporation ("GCI-FN")
GCI Rehab, Inc., a California corporation ("GCI Rehab")
GCI-Cal Health Care Centers, Inc., a California corporation ("GCI-Cal
HCC")
GranCare Home Health Services, Inc., a California corporation ("GCI-Cal
HH")
Renaissance Mental Health Center, Inc., a Wisconsin corporation
8. TeamCare will distribute all of the stock of New GranCare to GCI.
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<PAGE>
9. Winyah Dispensary, LTC of North Carolina, Inc., a North Carolina
corporation ("Winyah-NC"), and TeamCare of South Carolina, Inc., a South
Carolina corporation ("TeamCare South Carolina"), which are wholly owned by
GCI, will merge with and into TeamCare, with TeamCare as the survivor.
10. The pharmacy assets held by Omega/Indiana Pharmacy, L.P., a Delaware
limited partnership in which Omega/Indiana Care Corporation ("O/I Care"), a
wholly owned subsidiary of Evergreen Health Care, Inc., a Georgia corporation
("Evergreen") is the sole general partner and Evergreen is the sole limited
partner, will be sold at fair market value to TeamCare Indiana. Evergreen is a
wholly owned subsidiary of GCI.
11. The pharmacy assets held by Evergreen Healthcare Ltd., L.P., an Indiana
limited partnership in which O/I Care is the sole general partner and
Evergreen is the sole limited partner will be sold at fair market value to
TeamCare.
12. Any institutional pharmacy assets owned by GCI or any of its
subsidiaries engaged in the skilled nursing facility business which are used
or useful in the conduct of the institutional pharmacy business will be sold
to TeamCare at a specified price determined to be fair market value and will
be delivered to TeamCare as they are identified.
13. GCI will transfer to New GranCare all the stock of the following
corporations along with any other assets that are owned by GCI or its then
existing pharmacy subsidiaries (TeamCare, CompuPharm-NC, GCI-Innovative,
TeamCare Indiana, TeamCare-VA, Renaissance, CompuPharm-Ohio, TeamCare Clinical
Services, Inc. and S.P.A.N. Purchasing, Inc.) that are not used or useful in
the conduct of the institutional pharmacy business.
AMS Properties, Inc., a Delaware corporation ("AMS-Properties")
Evergreen Healthcare, Inc., a Georgia corporation ("Evergreen")
GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC")
GC Services, Inc., a California corporation ("GC-Services")
GCI Valley Manor Health Care Center, Inc., a Colorado corporation ("GCI
Valley Manor")
GCI Camelia Care Center, Inc., a Colorado corporation ("GCI-Camelia")
Cornerstone Health Management Company, a Delaware corporation
("Cornerstone")
HostMasters, Inc., a California corporation ("HostMasters")
GCI-Colter Village, Inc., an Arizona corporation ("GCI-Colter")
GCI Indemnity, Inc., a Hawaii corporation ("GCI-Indemnity")
GCI-Bella Vita, Inc., a Colorado corporation ("GCI Bella Vita")
GCI-Wisconsin Properties, Inc., a Wisconsin corporation ("GCI-Wisconsin")
GranCare GPO Services, Inc., a Georgia corporation
GranCare Trading, Inc., a Georgia corporation
GCI Simi Valley Healthcare Center, Inc., a California corporation
Professional Health Care Management, Inc., a Michigan corporation
("PHCM")
[STEPS 1 THROUGH 12 WILL BE TAKEN AS SOON AS
PRACTICABLE ONCE THE MERGER AGREEMENT HAS BEEN SIGNED.]
14. Simultaneously with the approval of the transaction by GCI's
shareholders, it is estimated that New GranCare will borrow approximately $165
million from an unrelated third party. New GranCare will use the $165 million
to pay off any intercompany indebtedness owed to GCI, TeamCare, and/or any
TeamCare subsidiaries. Any cash in excess of the intercompany indebtedness
will be distributed as a dividend to GCI. The dividend will be eliminated from
GCI's taxable income under the provisions of the consolidated return
regulations.
15. GCI will use all of the cash distributed to GCI by New GranCare which is
not used to pay down intercompany indebtedness to pay down third party
indebtedness (i.e., the convertible notes and the revolving credit agreement).
In order to ensure (for tax purposes) that the cash is in fact used to pay
down third party debt, an escrow or some other arrangement should be
implemented with respect to the receipt and disbursement of the cash in order
to establish that the cash was so used.
16. GCI will distribute all of the stock of New GranCare to GCI's
shareholders pro rata.
17. GCI will merge with and into Vitalink, with Vitalink as the survivor.
18. New GranCare will change its name to GranCare, Inc.
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<PAGE>
EXHIBIT 10.21
NEW GRANCARE, INC.
Annual Incentive Plan,
Long Term Incentive Plan and
Stockholder Value Program
I. Introduction
1.1. Purpose. The purpose of this Plan is to recruit and retain
-------
highly qualified executives and other employees, to incentivize such individuals
to attain the goals of the Company and its Subsidiaries and to provide the
employees of the Company and its Subsidiaries with incentive compensation based
on the performance of the Company in order to enhance shareholder value.
1.2. Description. This Plan is the means by which the Committee (or
-----------
the committee which administers the 1996 Stock Incentive Plan with respect to
grants under that plan) shall determine annual incentive bonuses and effect and
implement awards under the 1996 Stock Incentive Plan for each participating
employee hereunder.
1.3. Definitions. As used in this Plan, capitalized terms shall have
-----------
the same meaning as that ascribed to them under the 1996 Stock Incentive Plan.
In addition, the following terms shall have the following meanings:
"Affiliate" means (a) an entity that directly or through one or more
---------
intermediaries is controlled by the Company, and (b) any entity in which the
Company has a significant equity interest, as determined by the Company.
"Annual Incentive Bonus" means the bonus payable with respect to a
----------------------
fiscal year of the Company, determined in accordance with Article III hereof.
"Base Compensation" means the base rate of salary payable to a
-----------------
Participant as most recently reflected on the books and records of the Company
or a Subsidiary, exclusive of bonus, commission, fringe benefits, employee
benefits, expense allowances and other nonrecurring forms of remuneration.
"1996 Stock Incentive Plan" means the New GranCare, Inc. 1996 Stock
-------------------------
Incentive Plan, as in effect and as amended from time to time.
"Participant" means an employee of the Company or any Subsidiary
-----------
meeting the requirements of Section 2.2 hereof, who is selected to participate
in the Plan by the Committee.
"Performance Unit" means an award under the Plan, the value of which
----------------
is measured by the performance of the Company on Total Shareholder Return over a
three fiscal year period (a "Performance Period"), which award shall not be
transferable by the Participant other than in accordance with the laws of
descent and distribution and which shall remain subject to forfeiture until
vested in accordance with Article V.
<PAGE>
"Plan" means the New GranCare, Inc. Annual Incentive Plan, Long Term
----
Incentive Plan and Stockholder Value Program, as in effect and as amended from
time to time.
"Restricted Stock" means shares of Stock awarded to a Participant in
----------------
conjunction with the Plan which shall not be transferable by the Participant
other than in accordance with the laws of descent and distribution and which
shall remain subject to forfeiture until vested in accordance with Article III
or Article V, as applicable.
"Stock Option" means an option to acquire shares of Stock awarded to a
------------
Participant in conjunction with the Plan which shall not be transferable by the
Participant other than in accordance with the laws of descent and distribution
and which shall remain subject to forfeiture until vested in accordance with
Article IV.
"Subsidiary" means any corporation of which the Company owns, directly
----------
or indirectly, more than 50% of the voting power of all classes of voting
securities of such corporation.
"Total Shareholder Return" (or "TSR") means the return on a $1
------------------------
investment as of the beginning of the Performance Period, including the
reinvestment of dividends and other distributions. For this purpose any
distribution or dividend in a form other than cash shall be valued at its fair
market value as of the date of distribution.
1.4. Administration. The administration and operation of the Plan
--------------
shall be supervised by the Committee with respect to all matters. The Committee
may delegate responsibility for the day to day administration and operation of
the Plan to such employees of the Company as it shall designate from time to
time. The Committee shall interpret and construe any and all provisions of the
Plan and any determination made by the Committee under the Plan shall be final
and conclusive. Neither the Board of Directors nor the Committee, nor any
member of the Board of Directors, nor any employee of the Company shall be
liable for any act, omission, interpretation, construction or determination made
in connection with the Plan (other than acts of willful misconduct) and the
members of the Board of Directors and the Committee and the employees of the
Company shall be entitled to indemnification and reimbursement by the Company to
the maximum extent permitted at law in respect of any claim, loss, damage or
expense (including counsel's fees) arising from their acts, omissions and
conduct in their official capacity with respect to the Plan.
II. Participation
Each employee of the Company or its Subsidiaries holding a position of
Chief Executive Officer, President, Executive Vice President, Divisional
President, Corporate Senior Vice President, Corporate Vice President, Senior
Division Staff, Division Operation Vice President or any other employee of the
Company or its Subsidiaries who the Committee selects for participation in the
Plan, shall be eligible to receive awards under the Plan.
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<PAGE>
III. Annual Incentive Program
3.1. Establishment of Performance Goals. Within the first ninety
----------------------------------
(90) days of each fiscal year of the Company, the Committee shall establish
earnings per share ("EPS") goals for the Company and goals for earnings before
interest, taxes, depreciation, amortization and rents ("EBITDAR") for each
division, region and facility of the Company and its Subsidiaries. The
Committee shall establish goals for each such performance criteria for threshold
performance, target performance and superior performance.
3.2. Annual Incentive Bonus. The Committee may established
----------------------
percentages of each eligible Participant's Base Compensation to be paid as an
Annual Incentive Bonus under this Article III upon the attainment of the target
level of performance determined by the Committee in accordance with the
provisions of Section 3.1 hereof. The Committee may allocate percentages of
each Participant's Annual Incentive Bonus to EPS goals and/or EBITDAR goals for
a division or region, or any combination thereof as the Committee determines is
appropriate for the Participant. In the case of Divisional Presidents, 50% of
the targeted Annual Incentive Bonus shall be based on the Company's earnings per
share performance goal and 50% of the targeted Annual Incentive Bonus on the
EBITDAR performance goal attributable to the division of the Company and its
subsidiary of the Company for which the Divisional President has responsibility.
In the case of the Chief Executive Officer, Presidents, and Executive Vice
Presidents, the Annual Incentive Bonus shall be based solely on EPS goals. The
portion of the Annual Incentive Bonus payable with respect to the attainment of
a performance goal is based on the following schedule:
Percentage of Target
Annual Incentive Bonus
Actual Performance (or portion thereof) Payable
------------------ ----------------------------
Threshold, but less than Target 50%
Target, but less than Superior 100%
Superior or better 150%
The Committee may reduce, but not increase, the Annual Incentive Bonus payable
to a Participant based upon the Committee's determination of the individual
performance of such Participant. In no event shall the amount of the Annual
Incentive Bonus payable to any Participant attributable to a fiscal year exceed
$600,000.
3.3. Determination of Achievement of Performance Goals. The
-------------------------------------------------
Committee shall certify the level of achievement of the performance goals as
soon as practical after the end of the fiscal year for which the determination
is being made.
3.4. Payment of Annual Incentive Bonus.
---------------------------------
(a) As soon as practical after the expiration of each fiscal
year of the Company, Participants who remained employed until the last day
of the fiscal year or who died, became disabled or were terminated without
Cause during such period, shall
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<PAGE>
be entitled to receive the Annual Incentive Bonus determined in accordance
with this Article III. Unless a Participant makes an election in
accordance with Subsection (b) hereof, payment of Annual Incentive Bonus
shall be made in cash. As used herein, "Cause" shall include
(i) misconduct (including, but not limited to, any act of dishonesty,
willful misconduct, fraud or embezzlement) or (ii) the making of any
unauthorized use or disclosure of confidential information or trade secrets
of the corporation or its parent or subsidiary corporations.
(b) Within the first ninety (90) days of each fiscal year of the
Company, a Participant may elect to have payment of his or her Annual
Incentive Bonus made in shares of Stock having a Fair Market Value equal to
125% of the value of the Annual Incentive Bonus otherwise payable to the
Participant. Any payment in shares of Stock shall be in the form of a
Restricted Stock award under Section 4 of the 1996 Stock Incentive Plan.
Such Restricted Stock award will be subject to forfeiture in the event that
the Participant terminates Service with the Company and its Subsidiaries
prior to the third anniversary of the end of the fiscal year for which the
Annual Incentive Bonus was otherwise payable, for any reason other than
death, disability (within the meaning of the 1996 Stock Incentive Plan) or
without Cause. As used herein, "Cause" shall have the same meaning
ascribed to it in Section 3.4(a).
(c) Notwithstanding anything contained herein to the contrary,
in the event of a Change of Control, the Annual Incentive Bonus will be
settled in cash, regardless of any election to the contrary made by the
Participant pursuant to Subsection (b). In addition, in the event of the
occurrence of a Change of Control, all shares of Stock issued pursuant to
this Section III shall, notwithstanding the provisions of Section 3.4(b),
be and become fully vested and nonforfeitable.
(d) All Restricted Stock Awards made under the Plan shall
contain such other terms and conditions not inconsistent with the terms of
the 1996 Stock Incentive Plan, as the Committee shall from time to time
determine. In the event of any inconsistency between the Plan and the 1996
Stock Incentive Plan, the 1996 Stock Incentive Plan shall control.
IV. Stock Option Program
4.1. Number of Shares Subject to Stock Option Awards.
-----------------------------------------------
(a) The Committee shall establish target percentages of Base
Compensation for each position eligible for a nonqualified Stock Option
Award under the Plan. The Committee may modify such target percentages
from time to time as it, in its sole discretion, determines. As of the
effective date of the Plan and as of the first day of each fiscal year
during which this Plan is in effect, an eligible Participant shall receive
a non-qualified Stock Option under Section 3 of the 1996 Stock Incentive
Plan, as the Committee may determine, for that number of shares of Stock
(rounded to the nearest whole share) equal to the result obtained by
multiplying the applicable target percentage
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<PAGE>
for the Participant's position by the Participant's Base Salary and
dividing that result by the then current Factor, as determined in
accordance with Subsection (b) hereof.
(b) For purposes of this Section 4.1, the Factor used to determine the
number of shares of Stock subject to a Stock Option shall initially be
determined in 1997 and shall equal one third of the lowest quoted closing
price of the Stock as of the date prior to the date grants of Stock Options
are made under the Plan in 1997. Such Factor shall be utilized for all
succeeding fiscal years until redetermined in accordance with the
succeeding sentence. The Factor shall be redetermined as of the third
fiscal year beginning after the effective date of the Plan and each third
fiscal year thereafter and shall equal one-third of the lowest quoted
closing price of the Stock as of the date prior to the date grants of Stock
Options are made under the Plan in the year of redetermination.
4.2. Basic Terms of Stock Option Awards. All Stock Option awards made
----------------------------------
under the Plan shall contain such terms and conditions not inconsistent with the
terms of the 1996 Stock Incentive Plan, as the Committee shall from time to time
determine. In the event of any inconsistency between the Plan and the 1996
Stock Incentive Plan, the 1996 Stock Incentive Plan shall control.
Notwithstanding the foregoing, all Stock Option awards under the Plan shall
provide that:
(a) the exercise price for each share of Stock shall be its Fair
Market Value as of the date of grant;
(b) the Stock Option awards shall become vested and exercisable to the
extent of one-third of the number of shares of Stock subject to the award
after each anniversary date of the award, provided, that the optionee is
still an employee of the Company as of that date; and
(c) notwithstanding Subsection (b) hereof, in the event of a
Participant's termination of Service with the Company and Subsidiaries due
to his or her death, disability (within the meaning of the applicable stock
plan) or termination of employment without Cause, or in the event of the
occurrence of a Change of Control, the Stock Option shall become fully
vested and immediately exercisable. As used herein, "Cause" shall have the
same meaning ascribed to it in Section 3.4(a).
V. Stockholder Value Program
5.1. Number of Performance Unit Awards. As of the commencement of each
---------------------------------
performance period designated by the Committee, each eligible Participant shall
be granted a Performance Unit Award for that number of Performance Units as the
Committee shall determine. In no event shall an Participant receive more than
4,000 Performance Units with respect to any particular performance period.
-5-
<PAGE>
5.2. Value of Performance Units.
--------------------------
(a) Each Performance Unit subject to a Performance Unit Award shall
have a value that is determined based upon the percentile ranking of the
Company, as of the end of the performance period for which the award was
granted, on Total Shareholder Return relative to the peer group selected by
the Committee. Each performance period shall have a duration of three
fiscal years. The first performance period shall commence as of the
effective date of this Plan and subsequent performance periods shall
commence as of the first day of each fiscal year of the Company while this
Plan is in force. The Committee shall select the identity of the peer
group within the first ninety (90) days of each performance period. The
value of a Performance Unit will be based on the following schedule:
<TABLE>
<CAPTION>
TSR Percentile Performance Unit Value
-------------- ----------------------
<S> <C>
Less than 50 0
50 $ 500
55 $ 750
60 $1,000
65 $1,300
70 $1,600
75 $1,950
80 $2,300
85 $2,650
90 or more $3,000
</TABLE>
Unit values will be interpolated for percentile ranks falling between those
listed.
5.3. Determination of Achievement of Performance Goals. The Committee
-------------------------------------------------
shall certify the TSR Percentile as soon as practical after the end of the
performance period for which the determination is being made.
5.4. Payment of Performance Units.
----------------------------
(a) As soon as practical after the expiration of a performance period,
Participants who remained employed until the last day of the performance
period for which the Performance Unit Award was granted or who died, became
disabled or were terminated without Cause during such period, shall be
entitled to receive the value as of the last day of the performance period
of the Performance Units subject to such award, as determined in accordance
with Section 4.2 hereof. Unless a Participant makes an election in
accordance with Subsection (b) hereof, payment of the value of a
Performance Unit Award shall be made in cash. As used herein, "Cause"
shall have the same meaning ascribed to it in Section 3.4(a).
(b) Within the first ninety (90) days of each performance period, a
Participant may elect to have payment of the value of any Performance Unit
Award made in shares
-6-
<PAGE>
of the Stock having a Fair Market Value equal to 125% of the value of the
Performance Units for which payment is to be made. Any payment in shares
of Stock shall be in the form of a Restricted Stock award under Section 4
of the 1996 Stock Incentive Plan. Such Restricted Stock Award will be
subject to forfeiture in the event that the Participant terminates Service
with the Company and its Subsidiaries prior to the third anniversary of the
end of the performance period for which payment under this Article V was to
be made, for any reason other than death, disability (within the meaning of
the 1996 Stock Incentive Plan) or without Cause. As used herein, "Cause"
shall have the same meaning ascribed to it in Section 3.4(a).
(c) Notwithstanding anything contained herein to the contrary, in the
event of a Change of Control all Performance Units will become vested and
nonforfeitable. The performance period will be deemed to have ended on the
date of the Change of Control and Performance Unit Awards will be settled
in cash, regardless of any election to the contrary made by the Participant
pursuant to Subsection (b). The value of the Performance Unit Award
payable to each Participant shall be equal to the value determined in
accordance with Section 5.2 hereof, calculated as of the date of the Change
of Control based on the Total Shareholder Return as of that date, times a
fraction, the numerator of which shall be the number of full and fractional
months elapsed from the commencement of the performance period until the
Change of Control, and the denominator of which shall be 36 months. In
addition, in the event of the occurrence of a Change of Control, all shares
of Stock issued pursuant to this Section V shall, notwithstanding the
provisions of Section 5.3(b), be and become fully vested and
nonforfeitable.
(d) All Restricted Stock Awards made under the Plan shall contain such
other terms and conditions not inconsistent with the terms of the 1996
Stock Incentive Plan, as the Committee shall from time to time determine.
In the event of any inconsistency between the Plan and the 1996 Stock
Incentive Plan, the 1996 Stock Incentive Plan shall control.
VI. General Provisions
6.1. Amendment and Termination. The Committee may at any time amend,
-------------------------
suspend, discontinue or terminate the Plan; provided, however, that no such
amendment, suspension, discontinuance or termination shall adversely affect the
rights of any Participant with respect to any Stock Option, Performance Unit or
Restricted Stock award without his consent. All determinations concerning the
interpretation and application of this Section 5.1 shall be made by the
Committee.
6.2. Designation of Beneficiary. Each Participant who receives Restricted
--------------------------
Stock may designate a beneficiary or beneficiaries (which beneficiary may be an
entity other than a natural person) to receive any payments to be made following
the Participant's death. Such designation may be changed or cancelled at any
time without the consent of any such beneficiary. Any such designation, change
or cancellation must be made on a form provided for that purpose by the plan
administrator and shall not be effective until received by the plan
administrator. If no
-7-
<PAGE>
beneficiary has been named, or the designated beneficiary or beneficiaries shall
have predeceased the Participant, the beneficiary shall be the Participant's
spouse or, if no such spouse shall survive the Participant, the Participant's
estate. If a Participant designates more than one beneficiary, the rights of
such beneficiaries shall be made in equal shares, unless the Participant has
designated otherwise.
6.3. Miscellaneous.
-------------
(a) No Right of Continued Employment. Nothing in this Plan shall be
--------------------------------
construed as conferring upon any employee any right to continue in the
employment of the Company or any of its subsidiaries or Affiliates.
(b) No Limitation on Corporate Actions. Nothing contained in the Plan
----------------------------------
shall be construed to prevent the Company or any subsidiary or Affiliate
from taking any corporate action which is deemed by it to be appropriate or
in its best interest, whether or not such action would have an adverse
effect on the Plan or any awards made under the Plan. No employee,
beneficiary or other person shall have any claim against the Company or any
of its subsidiaries or Affiliates as a result of any such action.
(c) Nonalienation of Benefits. Except as expressly provided herein,
-------------------------
no employee or his beneficiaries shall have the power or right to transfer,
anticipate, or otherwise encumber the employee's interest under the Plan.
The Company's obligations under this Plan are not assignable or
transferable except to a corporation which acquires all or substantially
all of the assets of the Company or any corporation into which the Company
may be merged or consolidated. The provisions of the Plan shall inure to
the benefit of each employee and his beneficiaries, heirs, executors,
administrators or successors in interest.
(d) Severability. If any provision of this Plan is held
------------
unenforceable, the remainder of the Plan shall continue in full force and
effect without regard to such unenforceable provision and shall be applied
as though the unenforceable provision were not contained in the Plan.
(e) Governing Law. The Plan shall be construed in accordance with and
-------------
governed by the laws of the State of Delaware, without reference to the
principles of conflict of laws.
(f) Headings. Headings are inserted in this Plan for convenience of
--------
reference only and are to be ignored in a construction of the provisions of
the Plan.
-8-
<PAGE>
NEW GRANCARE, INC.
Dated: By: /s/ Evrett W. Benton
-------------------------- ------------------------------
Title: Vice President
---------------------------
Attest: /s/ M. Henry Day, Jr.
-------------------------
Title: Assistant Secretary
--------------------------
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<PAGE>
EXHIBIT 10.22
NEW GRANCARE, INC.
OUTSIDE DIRECTORS STOCK INCENTIVE PLAN
THIS PLAN is made effective as of ____________ __, 199__ by New GranCare,
Inc., a Delaware corporation (hereinafter called the "Company");
INTRODUCTION
The Company is adopting the New GranCare, Inc. Outside Directors Stock
Incentive Plan (the "Plan") to provide non-employee directors with Common Stock
of the Company and an opportunity to acquire a greater interest in the Company
through the issuance of stock options. The Board of Directors of the Company
believes this Plan will promote personal interest in the welfare of the Company
by, and provide incentive to, the individuals who are primarily responsible both
for the regular operations of and for shaping and carrying out the long term
plans of the Company, thus facilitating the continued growth and financial
success of the Company.
<PAGE>
NEW GRANCARE, INC.
OUTSIDE DIRECTORS STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1 DEFINITIONS................................. 1
SECTION 2 ADMINISTRATION.............................. 3
SECTION 3 ELIGIBILITY................................. 4
SECTION 4 SHARES SUBJECT TO PLAN...................... 4
SECTION 5 STOCK AWARDS................................ 4
SECTION 6 STOCK OPTION AWARDS......................... 5
SECTION 7 TERM OF PLAN................................ 7
SECTION 8 INDEMNIFICATION OF COMMITTEE................ 7
SECTION 9 AMENDMENT AND TERMINATION OF THE PLAN....... 8
SECTION 10 ADJUSTMENT IN SHARES OF COMMON STOCK....... 8
SECTION 11 RIGHTS AS A STOCKHOLDER.................... 8
SECTION 12 GOVERNING LAW.............................. 9
</TABLE>
-i-
<PAGE>
SECTION 1 DEFINITIONS
Wherever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise, and the following words and phrases shall, when used
herein, have the meanings set forth below:
1.1 "Affiliate" means (a) an entity that directly or through one or more
----------
intermediaries is controlled by the Company, and (b) any entity in which the
Company has a significant equity interest, as determined by the Company.
1.2 "Board of Directors" means the Board of Directors of the Company.
------------------
1.3 "Change of Control" means the first to occur of the following events:
-----------------
(a) any person (as defined in Section 3(a)(9) of the Exchange Act and
as used in Sections 13(d) and 14(d) thereof), excluding the Company, any
Subsidiary and any employee benefit plan sponsored or maintained by the
Company or any Subsidiary (including any trustee of such plan acting as
trustee) (the Company, all Subsidiaries, and such employee benefit plans
(and trustees acting as trustees) being hereafter referred to as the
"Company Group"), but including a `group' as defined in Section 13(d)(3) of
the Exchange Act (a "Person"), becomes the beneficial owner of shares of
the Company having at least thirty percent (30%) of the total number of
votes that may be cast for the election of directors of the Company (the
"Voting Shares"); provided that no Change of Control will occur as a result
of an acquisition of stock by the Company Group which increases,
proportionately, the stock representing the voting power of the Company
beneficially owned by such person or group above thirty percent (30%) of
the voting power of the Company, and provided further that if such person
or group acquires beneficial ownership of stock representing more than
thirty percent (30%) of the voting power of the Company by reason of share
purchases by the Company Group, and after such share purchases by the
Company Group acquires any additional shares representing voting power of
the Company, then a Change of Control shall occur;
(b) the shareholders of the Company shall approve any merger or other
business combination of the Company, sale of the Company's assets or
combination of the foregoing transactions (a "Transaction") other than a
Transaction involving only the Company and one or more of its Subsidiaries,
or a Transaction immediately following which the shareholders of the
Company immediately prior to the Transaction continue to have a majority of
the voting power in the resulting entity excluding for this purpose any
shareholder owning directly or indirectly more than ten percent (10%) of
the shares of the other company involved in the merger; or
(c) within any 24-month period, the persons who were directors of the
Company immediately before the beginning of such period (the "Incumbent
Directors") shall cease (for any reason other than death) to constitute at
least a majority of the Board of Directors or the board of directors of any
successor to the Company, provided that any director who was not
-1-
<PAGE>
a director as of the effective date of this Plan shall be deemed to be an
Incumbent Director if such director was elected to the Board of Directors
by, or on the recommendation of or with the approval of, at least two-
thirds of the directors who then qualified as Incumbent Directors either
actually or by prior operation of this Subsection (c); and provided further
that any director elected to the Board of Directors to avoid or settle a
threatened or actual proxy contest shall in no event be deemed to be an
Incumbent Director.
1.4 "Code" means the Internal Revenue Code of 1986, as amended.
----
1.5 "Committee" means the Management Compensation Committee of the Board
---------
of Directors.
1.6 "Common Stock" means common stock of the Company.
------------
1.7 "Director" means a member of the Board of Directors.
--------
1.8 "Disability" means a condition described in Code Section 22(e)(3), as
----------
amended from time to time. In the event of a dispute, the determination of
Disability shall be made by the Committee and shall be supported by advice of a
physician competent in the area to which such Disability relates.
1.9 "Eligible Director" means a Director who is not an Employee.
-----------------
1.10 "Employee" means any person who is employed by the Company or an
--------
Affiliate for purposes of the Federal Insurance Contributions Act and any
consultant retained to provide services (other than in the capacity of a
director) to the Company or an Affiliate.
1.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time.
1.12 "Fair Market Value" means, with respect to a share of Common Stock,
-----------------
(a) if the Common Stock is not at the time listed or admitted to
trading on any national securities exchange but is traded on the Nasdaq
Stock Market, the closing selling price per share on the date in question,
as such price is reported by the National Association of Securities Dealers
through the Nasdaq Stock Market or any successor system. If there is no
reported closing selling price for the Common Stock on the date in
question, then the closing selling price on the last preceding date for
which such quotation exists shall be determinative of Fair Market Value.
(b) if the Common Stock is at the time listed or admitted to trading
on any national securities exchange , the closing selling price per share
on the date in question on the securities exchange determined by the
Committee to be the primary market for the Common Stock, as such price is
officially quoted in the composite tape of transactions on such exchange.
If there is no reported sale of Common Stock on such exchange on the date
-2-
<PAGE>
in question, the Fair Market Value shall be the closing selling price on
the exchange on the last preceding date for which such quotation exists.
1.13 "Plan" means this New GranCare, Inc. Outside Directors Stock Incentive
----
Plan.
1.14 "Stock Award" means a grant of shares of Common Stock pursuant to the
-----------
provisions of Section 5 of the Plan.
1.15 "Stock Incentives" means, collectively, Stock Options and Stock
----------------
Awards.
1.16 "Stock Option" means a non-qualified stock option issued under the
------------
Plan.
1.17 "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company if, with respect to
Incentive Stock Options, at the time of the granting of the Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
1.18 "Tender Offer" means a Change of Control of the Company effected
------------
through the following transaction:
(a) the occurrence of the event described in Section 1.3(a) hereof
pursuant to a tender or exchange offer made directly to the Company's
shareholders which the Board of Directors does not recommend such
shareholders to accept; and
(b) more than fifty percent (50%) of the acquired securities are
accepted from holders other than the officers and Directors of the Company
subject to the short-swing profit restrictions of Section 16 of the
Exchange Act.
1.19 "Tender Offer Price" means the greater of (a) the Fair Market Value
------------------
per share of Common Stock on the date the Stock Option is surrendered to the
Company in connection with the Tender Offer or (b) the highest reported price
per share of Common Stock paid in effecting such Tender Offer.
1.20 "Valuation Date" means the first date in April on which the New York
--------------
Stock Exchange is open for trading.
SECTION 2 ADMINISTRATION
2.1 The Plan shall be administered by the Committee.
2.2 The Committee shall select one of its members as chairman, and shall
hold meetings at such times and places as it may determine. Acts approved by
the majority of the Committee in a meeting at which a quorum is present or acts
reduced to or approved in writing by a majority of
-3-
<PAGE>
the members of the Committee shall be the valid acts of the Committee. A quorum
shall be present at any meeting of the Committee that a majority of the
Committee members attend.
2.3 The Committee shall have the authority in its sole discretion to
interpret the Plan, to make all other determinations and to take all other
actions it deems necessary or advisable for the implementation and
administration of the Plan, except to the extent such powers are herein reserved
by the Board of Directors. Notwithstanding the foregoing, neither the Committee
nor the Board of Directors shall exercise any discretionary functions with
respect to grants under the Plan. All actions of the Board of Directors and the
Committee shall be final, conclusive, and binding. No member of the Board of
Directors or the Committee shall be liable for any action taken or decision made
in good faith relating to the Plan.
SECTION 3 ELIGIBILITY
Directors who are not Employees shall be eligible to receive Common Stock
under the Plan on the terms and subject to the restrictions hereinafter set
forth.
SECTION 4 SHARES SUBJECT TO PLAN
Subject to adjustment in accordance with Section 10, 200,000 shares of
Common Stock (the "Maximum Plan Shares") are hereby reserved exclusively for
issuance pursuant to Stock Incentives. At no time shall the Company have
outstanding Stock Options subject to Section 16 of the Exchange Act and shares
of Common Stock issued in respect of Stock Incentives in excess of the Maximum
Plan Shares. The shares of Common Stock attributable to the nonvested, unpaid,
unexercised, unconverted or otherwise unsettled portion of any Stock Option that
is forfeited or canceled or expires or terminates for any reason without
becoming vested, paid, exercised, converted or otherwise settled in full shall
again be available for purposes of the Plan.
SECTION 5 STOCK AWARDS
5.1 Effective as of the annual meeting of the Board of Directors occurring
in the Most Recent Year of Determination, and as of each annual meeting
thereafter, each Eligible Director shall be issued a Stock Award for a number of
shares of Common Stock equal to the result, rounded up to the nearest whole
number, obtained by dividing $12,000 by the Fair Market Value of a share of
Common Stock as of the Valuation Date occurring during the Most Recent Year of
Determination. For purposes of the immediately preceding sentence, the term
"Most Recent Year of Determination" means the year 1997 and each third year
thereafter.
-4-
<PAGE>
SECTION 6 STOCK OPTION AWARDS
6.1 As of the date of the initial election or appointment of an
individual as an Eligible Director, such Director shall be granted a Stock
Option to purchase 10,000 shares of Common Stock upon the terms and conditions
of this Section 6.
6.2 On the date of each annual meeting of the shareholders of the
Company, beginning with the 1997 annual meeting, each individual who is at that
time serving as an Eligible Director, whether or not such individual is standing
for re-election as a member of the Board of Directors at that particular
meeting, shall be granted a Stock Option to purchase 6,000 shares of Common
Stock upon the terms and conditions of this Section 6, provided such individual
has served as a member of the Board of Directors for at least six (6) months
(service as a member of the Board of Directors shall include service as a
director of GranCare, Inc. prior to the Distribution of New GranCare, Inc.),
until the Director has received grants of Stock Options under this Plan,
covering a total of 22,000 shares of Common Stock.
6.3 On the date of each annual meeting of the shareholders of the
Company, beginning with the annual meeting following the annual meeting on which
an Eligible Director has received grants for the maximum number of shares of
Common Stock pursuant to Section 6.2 hereof, each such individual who is at that
time serving as an Eligible Director, whether or not such individual is standing
for re-election as a member of the Board of Directors at that particular
meeting, shall be granted a Stock Option to purchase 2,000 shares of Common
Stock upon the terms and conditions of this Section 6, provided such individual
has served as a member of the Board of Directors for at least six (6) months.
6.4 The exercise price per share of Common Stock of each Stock Option
grant made under this Section 6 shall be equal to one hundred percent (100%) of
the Fair Market Value per share of Common Stock on the grant date.
6.5 Each Stock Option grant under this Section 6 shall have a maximum term
of ten (10) years measured from the grant date.
6.6 Each Stock Option granted under this Section 6 shall be
exercisable to the extent vested. Each Stock Option shall vest 33 1/3% each
year over the Director's period of continued service as a member of the Board of
Directors, and shall be fully vested upon three years of service as a member of
the Board of Directors from the date of grant of such Stock Option.
6.7 The exercise price shall become immediately due upon exercise of
a Stock Option and shall be payable in one of the alternative forms specified
below:
(a) full payment in cash or check made payable to the Company's
order,
(b) full payment in shares of Common Stock held for the requisite
period necessary to avoid a charge to the Company's earnings for financial
reporting purposes and valued at Fair Market Value on the date on which the
Stock Option is exercised,
-5-
<PAGE>
(c) full payment in a combination of the alternatives set forth in
Subsection (a) and (b) hereof,
(d) full payment through a broker-dealer sale and remittance
procedure pursuant to which the optionee shall provide concurrent
irrevocable written instructions (i) to a Company-designated brokerage firm
to effect the immediate sale of the purchased shares and remit to the
Company, out of the sale proceeds available on the settlement date,
sufficient funds to cover the aggregate exercise price payable for the
purchased shares and (ii) to the Company to deliver the certificates for
the purchased shares directly to such brokerage firm in order to complete
the sale transaction.
6.8 During the lifetime of the optionee, the Stock Option grant, together
with the limited stock appreciation right pertaining to such option described in
Section 6.11 below, shall be exercisable only by the optionee and shall not be
assignable or transferable other than a transfer of the Stock Option effected by
will or be the laws of descent and distribution following the optionee's death.
6.9 (a) Upon the date a Director ceases to serve as a member of the Board
of Directors for any reason (other than death or Disability), any
outstanding Stock Options granted pursuant to this Section 6 shall to the
extent that such Stock Options are not then vested, expire and become
unexercisable. Each such Director shall have a six (6)-month period
following the date of such cessation of service as a member of the Board of
Directors in which to exercise each such Stock Option for any or all of the
shares of Common Stock subject thereto in which the optionee is vested at
the time of such cessation of service as a member of the Board of
Directors. Upon the expiration of such six (6)-month period, the Stock
Options held by such individual shall expire and become unexercisable.
(b) Upon the death of an optionee within the six (6)-month period
described in Subsection (a) hereof, any Stock Options then held by the
optionee may be exercised, to the extent that the optionee could have
exercised such Stock Options immediately before death, by the personal
representative of the optionee's estate or by the person or persons to whom
the option is transferred pursuant to the optionee's will or in accordance
with the laws of descent and distribution. The right to exercise each such
Stock Option shall lapse upon the expiration of the twelve (12)-month
period measured from the date of the optionee's death, whereupon such Stock
Options shall expire and become unexercisable.
(c) Upon the death or Disability of a Director while serving as a
member of the Board of Directors, all Stock Options held by such Director
shall immediately vest in full and the Director (or the representative of
the Director's estate or the person or persons to whom the Stock Option is
transferred upon the Director's death) shall have a twelve (12)-month
period following the date of the Director's cessation of service as a
member of the Board of Directors in which to exercise such Stock Options
for any or all of the shares of Common Stock then subject thereto. Upon
the expiration of such twelve (12)-month period, such Stock Options shall
expire and become unexercisable.
-6-
<PAGE>
(d) In no event shall any grant under this Section 6 remain
exercisable after the expiration date of the ten (10)-year option term.
Upon the expiration of the applicable post-service exercise period under
Subsections (a) through (c) of this Section or (if earlier) upon the
expiration of the ten (10)-year option term, the Stock Options granted
under this Section 6 shall expire and become unexercisable.
6.10 Each Stock Option shall be represented by a Stock Option Agreement
specifying the date of grant, the number of shares of Common Stock covered
thereby, the exercise price and the applicable provisions of this Section 6.
6.11 Upon the occurrence of a Change of Control, all Stock Options granted
under this Section 6 then held by Directors shall be and become fully vested and
exercisable, notwithstanding the provisions of Section 6.6 to the contrary.
6.12 In the event a Change of Control is effected pursuant to a Tender
Offer, each outstanding Stock Option shall be cancelled and the Company shall
pay to each optionee an amount equal to the excess of (1) the Tender Offer Price
multiplied by the number of shares of Common Stock for which the Stock Option
has not yet been exercised over (2) the aggregate exercise price payable for
such shares of Common Stock. Such cash distribution shall be paid within five
(5) days following the cancellation of the Stock Option. Neither the approval
of the Committee nor the consent of the Board of Directors shall be required in
connection with such Stock Option cancellation and cash distribution. The
shares of Common Stock subject to each Stock Option surrendered in connection
with the Tender Offer shall not be available for subsequent issuance under the
Plan.
6.13 The Stock Options granted under this Section 6 shall in no way affect
the right of the Company to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
SECTION 7 TERM OF PLAN
The Plan shall be effective on the date hereof and shall continue to be
effective until ten (10) years following the earlier of the effective date of
the Plan, unless sooner terminated by the Board of Directors pursuant to Section
9 hereof.
SECTION 8 INDEMNIFICATION OF COMMITTEE
In addition to such other rights of indemnification that the members of the
Committee may have, each member of the Committee shall be indemnified by the
Company against the reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which it may be a party
by reason of any action taken or failure to act under or in connection with the
Plan or any Option granted thereunder, and against all amounts paid by it in
settlement thereof (provided the settlement has received the prior approval of
the Company) or paid by it in satisfaction of a judgment
-7-
<PAGE>
in any such action, suit or proceeding, except in relation to matters as to
which it shall be adjudged in the action, suit or proceeding that the Committee
member is liable for negligence or misconduct in the performance of his or her
duties; provided that promptly after institution of the action, suit or
proceeding the Committee member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend such matter. Upon the
delivery to the Committee member of written notice of assumption by the Company
of the defense of such matter, the Company will not be responsible to the
Committee member for any further fees and disbursements relating to the defense
of such matter, including fees and disbursements of counsel.
SECTION 9 AMENDMENT AND TERMINATION OF THE PLAN
The Board of Directors at any time may amend or terminate the Plan without
shareholder approval; provided, however, that the Board of Directors may
condition any amendment on the approval of the shareholders of the Company if
such approval is necessary or advisable with respect to tax, securities or other
applicable laws to which the Company, this Plan, or Directors are subject. No
amendment or termination of the Plan shall adversely affect the rights of an
optionee without his consent with respect to Common Stock previously acquired or
Stock Options previously granted under the Plan.
SECTION 10 ADJUSTMENT IN SHARES OF COMMON STOCK
If (i) the number of shares of Common Stock shall be increased or reduced
by a change in par value, split-up, stock split, reverse stock split,
reclassification, merger, consolidation, distribution of stock dividends or
similar capital adjustments, or (ii) the Company engages in a transaction for
which the Committee determines an adjustment is appropriate, then the Committee
may make an adjustment in the number and kind of shares of Common Stock
available under the Plan, the number (including any maximum number of shares)
and kind of shares for which grants are to be subsequently made to each Eligible
Director, the number and kind of shares subject to outstanding Stock Options,
the exercise price of outstanding Stock Options and the number and kind of
shares of Common Stock issuable pursuant to the provisions of the Plan,
consistent with the effect of the change on existing shareholders of the
Company. Such adjustments to the outstanding Stock Options are to be effected in
a manner which shall preclude the enlargement or dilution of rights and benefits
under such Stock Options. The adjustments determined by the Committee shall be
final, binding and conclusive.
SECTION 11 RIGHTS AS A STOCKHOLDER
An optionee shall have no rights as a stockholder with respect to any
shares of Common Stock issuable under the Plan until the date of the issuance of
a stock certificate to him for the Common Stock. No adjustment shall be made for
dividends (ordinary or extraordinary, whether in cash, securities or other
property) or distributions or other rights for which the record date is prior to
the date the stock certificate is issued, except as otherwise provided in the
Plan.
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<PAGE>
SECTION 12 GOVERNING LAW
The laws of the State of Delaware shall govern this Plan.
IN WITNESS WHEREOF, the Company has caused the Plan to be executed as of
the day and year first above written.
NEW GRANCARE, INC.
By: /s/ Evrett W. Benton
------------------------------
Title: Vice President
---------------------------
ATTEST:
/s/ M. Henry Day, Jr.
- -----------------------------
Title: Assistant Secretary
-----------------------
[CORPORATE SEAL]
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<PAGE>
EXHIBIT 10.23
NEW GRANCARE, INC.
1996 REPLACEMENT STOCK OPTION PLAN
<PAGE>
NEW GRANCARE, INC.
1996 REPLACEMENT STOCK OPTION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS....................................................... 1
1.1 Definitions....................................................... 1
SECTION 2 THE REPLACEMENT PLAN.............................................. 4
2.1 Purpose of the Plan............................................... 4
2.2 Stock Subject to the Plan......................................... 4
2.3 Administration of the Plan........................................ 4
2.4 Eligibility and Limits............................................ 4
SECTION 3 TERMS OF SUPPLEMENTAL OPTIONS..................................... 4
3.1 Number of Shares.................................................. 4
3.2 Option Price...................................................... 5
3.3 Option Term....................................................... 5
3.4 Payment........................................................... 5
3.5 Conditions to the Exercise of an Option........................... 5
3.6 Termination of Supplemental Employee Option....................... 6
3.7 Effect of Termination for Misconduct on Option
Supplemental Employee............................................. 6
3.8 Effect of Cessation of Board Service on
Supplemental Director Option...................................... 6
3.9 Special Provisions for Certain Substitute Options................. 7
3.10 Tender Offer...................................................... 7
SECTION 4 GENERAL PROVISIONS................................................ 7
4.1 Withholding....................................................... 7
4.2 Changes in Capitalization; Merger; Liquidation.................... 8
4.3 Right to Terminate Employment..................................... 9
4.4 Non-alienation of Benefits........................................ 9
4.5 Listing and Legal Compliance...................................... 9
4.6 Termination and Amendment of the Plan............................. 9
4.7 Choice of Law..................................................... 9
</TABLE>
<PAGE>
NEW GRANCARE, INC.
1996 REPLACEMENT STOCK OPTION PLAN
SECTION 1 DEFINITIONS
1.1 Definitions. Whenever used herein, the masculine pronoun shall be
-----------
deemed to include the feminine, and the singular to include the plural, unless
the context clearly indicates otherwise, and the following capitalized words and
phrases are used herein with the meaning thereafter ascribed:
(a) "Affiliate" means (a) an entity that directly or through one or
---------
more intermediaries is controlled by the Company, and (b) any entity in which
the Company has a significant equity interest, as determined by the Company.
(b) "Board of Directors" means the board of directors of the Company.
------------------
(c) "Board Member Participant" means a Participant who received
------------------------
Director Options in his or her capacity as a director of GranCare, Inc.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Management Compensation Committee appointed
---------
by the Board of Directors to administer the Plan. The Committee shall consist
of at least two members of the Board of Directors each of whom shall be an
"outside director," as defined in Treas. Reg. (S) 1.162-27(e)(3) as promulgated
by the Internal Revenue Service.
(f) "Company" means New GranCare, Inc., a Delaware corporation.
-------
(g) "Company Stock" means the New GranCare, Inc. common stock, par
-------------
value $0.001 per share.
(h) "Director Options" means options to purchase GranCare Common Stock
----------------
issued to non-employee directors of GranCare, Inc. in connection with them
serving as non-employee directors of GranCare, Inc. and outstanding as of the
Distribution Record Date.
(i) "Disability" has the same meaning as provided in the long-term
----------
disability plan or policy maintained or, if applicable, most recently
maintained, by the Company or, if applicable, any Affiliate of the Company for
the Participant. If no long-term disability plan or policy was ever maintained
on behalf of the Participant or, if the determination of Disability relates to a
Supplemental Option, Disability shall mean that condition described in Code
Section 22(e)(3), as amended from time to time. In the event of a dispute, the
determination of Disability shall be made by the Committee and shall be
supported by advice of a physician competent in the area to which such
Disability relates.
-1-
<PAGE>
(j) "Distribution" means the distribution by GranCare, Inc. to its
------------
shareholders of all the issued and outstanding shares of the Company.
(k) "Distribution Record Date" means the date established by the board
------------------------
of directors of GranCare, Inc. for determining shareholders of record entitled
to receive Company Stock in connection with the Distribution.
(l) "Employee Options" means options granted to employees of GranCare,
----------------
Inc. and its Affiliates (other than non-employee directors) issued and
outstanding as of the Distribution Record Date.
(m) "Employee Participant" means a Participant who received grants of
--------------------
Employee Options as an employee of GranCare, Inc. or one of its subsidiaries.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended from time to time.
(o) "Fair Market Value" is determined in accordance with the
-----------------
following provisions:
(i) If the Company Stock is not at the time listed or admitted
to trading on any national securities exchange but is traded on the Nasdaq
National Market, the Fair Market Value shall be the closing selling price
per share on the date in question, as such price is reported by the
National Association of Securities Dealers through the Nasdaq National
Market or any successor system. If there is no reported closing selling
price for the Company Stock on the date in question, then the closing
selling price on the last preceding date for which such quotation exists
shall be determinative of Fair Market Value.
(ii) If the Company Stock is at the time listed or admitted to
trading on any national securities exchange, then the Fair Market Value
shall be the closing selling price per share on the date in question on the
securities exchange determined by the Plan Administrator to be the primary
market for the Company Stock, as such price is officially quoted in the
composite tape of transactions on such exchange. If there is no reported
sale of Company Stock on such exchange on the date in question, then the
Fair Market Value shall be the closing selling price on the exchange on the
last preceding date for which such quotation exists.
(p) "GranCare, Inc." means GranCare, Inc., a California corporation
--------------
and predecessor parent of the Company.
(q) "GranCare Common Stock" means the common stock of GranCare, Inc.,
---------------------
without par value, issued and outstanding on the Distribution Record Date.
-2-
<PAGE>
(r) "Participant" means an individual who receives a Supplemental
-----------
Option hereunder.
(s) "Plan" means the New GranCare, Inc. 1996 Replacement Stock Option
----
Plan.
(t) "Stock Option Agreement" means an agreement between the Company
----------------------
and a Participant or other documentation evidencing an award of a Supplemental
Option.
(u) "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company if, with respect to
Supplemental Options, at the time of the granting of the Supplemental Option,
each of the corporations other than the last corporation in the unbroken chain
owns stock possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in the chain.
(v) "Supplemental Option" means collectively, Supplemental Employee
-------------------
Options and Supplemental Director Options.
(w) "Supplemental Director Option" means a Supplemental Option granted
----------------------------
to a Board Member Participant in the Plan in connection with a Director Option.
(x) "Supplemental Employee Option" means a Supplemental Option granted
----------------------------
to an Employee Participant in the Plan in connection with an Employee Option.
(y) "Tender Offer" means a change in control of the Company effected
------------
through the following transaction:
- any "person" (as such term is used in Section 13 (d) and 14 (d) of
the Exchange Act), other than (i) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or (ii) a
corporation owned, directly or indirectly, by the shareholders of the
Company in substantially the same proportions as their ownership of stock
of the Company, becomes the "beneficial owner" (as defined in Rule 13d-3
under the Exchange Act), directly or indirectly, of securities of the
Company possessing thirty percent (30%) or more of the combined voting
power of the Company's outstanding securities pursuant to a tender or
exchange offer made directly to the Company's shareholders which the Board
of Directors does not recommend such shareholders to accept; and
---
- more than fifty percent (50 %) of the acquired securities are
accepted from holders other than the officers and directors of the Company
subject to the short-swing profit restrictions of Section 16 of the
Exchange Act.
(z) "Tender Offer Price" means the greater of (i) the Fair Market
------------------
Value per share of Company Stock on the date the option is surrendered to the
Company in connection
-3-
<PAGE>
with the Tender Offer or (ii) the highest reported price per share of Company
Stock paid in effecting such Tender Offer. However, if the surrendered option
was issued to supplement an incentive stock option, as defined in Code Section
422(b), the Tender Offer Price shall not exceed the clause (i) price per share.
SECTION 2 THE REPLACEMENT PLAN
2.1 Purpose of the Plan. The Plan is intended to provide Supplemental
-------------------
Options to individuals who held options for GranCare, Inc. Common Stock,
including options issued under the GranCare, Inc. 1994 Stock Option/Stock
Issuance Plan (as amended and restated effective January 1, 1996), the GranCare,
Inc. 1991 Amended and Restated Stock Incentive Plan (amended and restated as of
April 28, 1992), the CompuPharm Non-Qualified Plan, the National Heritage Inc.
1993 Incentive Compensation Plan and the GranCare, Inc. 1996 Outside Directors
Stock Incentive Plan to maintain the optionholders relative economic position
following the Distribution.
2.2 Stock Subject to the Plan. Subject to adjustment in accordance with
-------------------------
Section 4.2, 2,355,250 shares of Company Stock (the "Maximum Plan Shares") are
hereby reserved exclusively for issuance pursuant to Supplemental Options. At
no time shall the Company have outstanding Supplemental Options subject to
Section 16 of the Exchange Act and shares of Company Stock issued in respect of
Supplemental Options in excess of the Maximum Plan Shares.
2.3 Administration of the Plan. The Plan shall be administered by the
--------------------------
Committee. Subject to the provisions of the Plan, the Committee shall have full
and conclusive authority to interpret the Plan; to prescribe, amend and rescind
rules and regulations relating to the Plan; to determine the terms and
provisions of the respective Stock Option Agreements and to make all other
determinations necessary or advisable for the proper administration of the Plan.
The Committee's determinations under the Plan need not be uniform and may be
made by it selectively among persons who receive, or are eligible to receive,
awards under the Plan (whether or not such persons are similarly situated). The
Committee's decisions shall be final and binding on all Participants.
2.4 Eligibility and Limits. Supplemental Employee Options shall be
----------------------
granted only to those employees or former employees of GranCare, Inc. or its
subsidiaries who hold Employee Options on the Distribution Record Date.
Supplemental Director Options shall be granted only to those members or former
members of the Board of Directors of GranCare, Inc. who hold Director Options on
the Distribution Record Date.
SECTION 3 TERMS OF SUPPLEMENTAL OPTIONS
3.1 Number of Shares. Each Supplemental Option granted under the Plan
----------------
shall be evidenced by a Stock Option Agreement. All Supplemental Options shall
be non-qualified stock
-4-
<PAGE>
options. As a consequence of the Distribution, each holder of a Director Option
or an Employee Option will receive a Supplemental Director Option or a
Supplemental Employee Option, as the case may be, to purchase an equal number of
shares of Company Stock as the number of shares of GranCare, Inc. Common Stock
that were subject to the Director Option or the Employee Option for which it was
granted and as to which the Director Option or Employee Option had not been
exercised or had not expired.
3.2 Option Price. Subject to adjustment in accordance with Section 4.2
------------
and the other provisions of this Section 3, the exercise price (the "Exercise
Price") per share will be equal to 38.9% of the exercise price of the Director
Option or Employee Option for which it is granted.
3.3 Option Term. A Supplemental Option granted to a Participant shall not
-----------
be exercisable after the expiration of ten (10) years after the date the
corresponding Director Option or Employee Option was granted, unless such
Supplemental Director Option or Supplemental Employee Option expires sooner in
accordance with Sections 3.6, 3.7 or 3.8 herein.
3.4 Payment. Payment for all shares of Company Stock purchased pursuant
-------
to exercise of a Supplemental Option shall be made:
(i) in cash or check made payable to the Company;
(ii) by delivery to the Company of a number of shares of Company
Stock which have been owned by the holder for at least six (6) months prior
to the date of exercise having an aggregate Fair Market Value of not less
than the product of the Exercise Price multiplied by the number of shares
the Participant intends to purchase upon exercise of the Supplemental
Option on the date of delivery;
(iii) in a combination of a number of shares of Company Stock which
have been owned by the holder for at least six (6) months prior to the date
of exercise having an aggregate Fair Market Value of not less than the
product of the Exercise Price multiplied by the number of shares the
Participant intends to purchase upon exercise of the Supplemental Option on
the date of delivery and cash or check made payable to the Company;
(iv) in a cashless exercise through a broker.
Payment shall be made at the time that the Supplemental Option or any part
thereof is exercised, and no shares shall be issued or delivered upon exercise
of an option until full payment has been made by the Participant. The holder of
a Supplemental Option, as such, shall have none of the rights of a stockholder.
3.5 Conditions to the Exercise of an Option. All Supplemental Options are
---------------------------------------
fully vested and exercisable during their term. During the lifetime of the
Participant, the Supplemental Option shall be exercisable only by the
Participant and shall not be assignable or
-5-
<PAGE>
transferable other than a transfer of a Supplemental Option effected by will or
by laws of descent and distribution following the Participant's death.
3.6 Termination of Supplemental Employee Option. In the event of
-------------------------------------------
termination of employment of an Employee Participant, the Supplemental Employee
Option or portion thereof held by the Employee Participant which is unexercised
shall expire, terminate, and become unexercisable no later than the expiration
of three (3) months after the date of termination of employment; provided,
however, that in the case of a holder whose termination of employment is due to
death or Disability, one (1) year shall be substituted for such three (3) month
period. For purposes of this Section 3.6, termination of employment of the
Participant shall not be deemed to have occurred if the Employee Participant is
employed by another corporation (or a parent or subsidiary corporation of such
other corporation) which has assumed the stock option of the Employee
Participant. Under the Plan, employment by GranCare, Inc. or its successor or
their Subsidiaries shall be deemed employment by the Company for purposes of
determining whether an Employee Participant has terminated employment. In the
event an Employee Participant terminates employment with GranCare, Inc. prior to
the Distribution Record Date yet still holds valid Employee Options, the date of
termination of employment with GranCare, Inc. by the Employee Participant shall
be deemed the date of termination for purposes of this Plan.
3.7 Effect of Termination for Misconduct on Supplemental Employee Options.
---------------------------------------------------------------------
Should (i) the Employee Participant's service be terminated for misconduct
(including, but not limited to, any act of dishonesty, willful misconduct, fraud
or embezzlement) or (ii) the Employee Participant make any unauthorized use or
disclosure of information or trade secrets of the Company or its Subsidiaries,
then in any event all outstanding Supplemental Employee Options held by the
Employee Participant under this Plan shall terminate immediately and cease to
remain outstanding.
3.8 Effect of Cessation of Board Service on Supplemental Director Options.
---------------------------------------------------------------------
Should a Board Member Participant who holds Supplemental Director Options under
the Plan:
(a) cease to serve as a member of the Board of Directors for any reason
(other than death or disability) while holding Supplemental Director Options,
the Board Member Participant shall have a six (6) month period following the
date of cessation from service as a member of the Board of Directors in which to
exercise each such option from any and all of the Supplemental Director Options,
(b) die within six (6) months of cessation of service as a member of the
Board of Directors, then any Supplemental Director Option held at the time of
death may subsequently be exercised, before the expiration of the twelve (12)
month period measured from the time of the Board Member Participant's death, by
the personal representative of the Board Member Participant's estate or to whom
the Supplemental Director Option is transferred pursuant to the Board Member
Participant's will or in accordance with the laws of descent, and distribution,
or
-6-
<PAGE>
(c) die or become Disabled while serving as a member of the Board of
Directors, then the representative of the Board Member Participant's estate or
the person or persons to whom the Supplemental Employee Option is transferred
shall have a twelve (12) month period following the date of the Board Member
Participant's cessation of service as a member of the Board of Directors in
which to exercise such Supplemental Director Option.
Under the Plan, service as a member of the board of directors of GranCare, Inc.
or its successor shall be deemed service as a Member of the Board of Directors.
In the event a Board Member Participant ceased to serve as a member of the board
of directors of GranCare, Inc. prior to the Distribution Record Date yet still
holds outstanding Director Options, the date the Board Member Participant ceased
to serve as a member of the board of directors of GranCare, Inc. shall be deemed
the date of cessation of service as a member of the Board of Directors for
purposes of this Plan.
3.9 Special Provisions for Certain Substitute Options. Notwithstanding
-------------------------------------------------
anything to the contrary in Section 3, any Supplemental Option issued in
substitution for an option previously issued by another entity, which
substitution occurs in connection with a transaction to which Code Section
424(a) is applicable, may provide for an exercise price computed in accordance
with such Code Section and the regulations thereunder and may contain such other
terms and conditions as the Committee may prescribe to cause such substitute
Supplemental Option to contain as nearly as possible the same terms and
conditions (including the applicable vesting and termination provisions) as
those contained in the previously issued option being replaced thereby.
3.10 Tender Offer. Upon the occurrence of a Tender Offer, a Board Member
------------
Participant who holds Supplemental Director Options shall have a thirty (30) day
period in which to surrender to the Company each Supplemental Director Option
held by him or her for a period of a least six (6) months. The Board Member
Participant shall in return he entitled to a cash distribution from the Company
in an amount equal to the excess of (i) Tender Offer Price of the shares of
Company Stock at the time subject to the surrendered Supplemental Director
Option over (ii) the aggregate exercise price payable for such shares. Such
cash distribution shall be paid within five (5) days following the surrender of
the Supplemental Director Option to the Company. Neither the approval of the
Committee nor the consent of the Board of Directors shall be required in
connection with such Supplemental Director Option surrender and cash
distribution. The shares of Company Stock subject to each option surrendered in
connection with the Tender Offer shall not be available for subsequent issuance
under the Plan.
SECTION 4 GENERAL PROVISIONS
4.1 Withholding. The Company shall deduct from all cash distributions
-----------
under the Plan any taxes required to be withheld by federal, state or local
government. Whenever the Company proposes or is required to issue or transfer
shares of Company Stock under the Plan, the Company shall have the right to
require the recipient to remit to the Company an amount sufficient to satisfy
any federal, state and local withholding tax requirements prior to the delivery
-7-
<PAGE>
of any certificate or certificates for such shares. A Participant may pay the
withholding tax in cash, or, if the applicable Stock Option Agreement provides,
a Participant may elect to have the number of shares of Company Stock he is to
receive reduced by the smallest number of whole shares of Company Stock which,
when multiplied by the Fair Market Value of the shares of Company Stock
determined as of the Tax Date (defined below), is sufficient to satisfy federal,
state and local, if any, withholding taxes arising from exercise or payment of a
Supplemental Option (a "Withholding Election"). A Participant may make a
Withholding Election only if both of the following conditions are met:
(a) The Withholding Election must be made on or prior to the date on
which the amount of tax required to be withheld is determined (the "Tax Date")
by executing and delivering to the Company a properly completed notice of
Withholding Election as prescribed by the Committee; and
(b) Any Withholding Election made will be irrevocable except on six
(6) months advance written notice delivered to the Company; however, the
Committee may in its sole discretion disapprove and give no effect to the
Withholding Election.
4.2 Changes in Capitalization; Merger; Liquidation.
----------------------------------------------
(a) The number of shares of Company Stock reserved for the grant of
Supplemental Options; the number of shares of Company Stock reserved for
issuance upon the exercise or payment, as applicable, of each outstanding
Supplemental Option; the Exercise Price of each outstanding Supplemental Option
shall be proportionately adjusted for any increase or decrease in the number of
issued shares of Company Stock resulting from a subdivision or combination of
shares or the payment of a stock dividend in shares of Company Stock to holders
of outstanding shares of Company Stock or any other increase or decrease in the
number of shares of Company Stock outstanding effected without receipt of
consideration by the Company.
(b) In the event of a merger, consolidation or other reorganization
of the Company or tender offer for shares of Company Stock, the Committee may
make such adjustments with respect to awards and take such other action as it
deems necessary or appropriate to reflect such merger, consolidation,
reorganization or tender offer, including, without limitation, the substitution
of new awards, or the adjustment of outstanding awards, the acceleration of
awards or the removal of restrictions on outstanding awards.
(c) The existence of the Plan and the Supplemental Options granted
pursuant to the Plan shall not affect in any way the right or power of the
Company to make or authorize any adjustment, reclassification, reorganization or
other change in its capital or business structure, any merger or consolidation
of the Company, any issue of debt or equity securities having preferences or
priorities as to the Company Stock or the rights thereof, the dissolution or
liquidation of the Company, any sale or transfer of all or any part of its
business or assets, or any other corporate act or proceeding.
-8-
<PAGE>
4.3 Right to Terminate Employment. Nothing in the Plan or in any
-----------------------------
Supplemental Option shall confer upon any Participant the right to continue as
an employee or officer of the Company or any of its Affiliates or affect the
right of the Company or any of its Affiliates to terminate the Participant's
employment at any time.
4.4 Non-alienation of Benefits. Other than as specifically provided with
--------------------------
regard to the death of a Participant, no benefit under the Plan shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge; and any attempt to do so shall be void. No such benefit
shall, prior to receipt by the Participant, be in any manner liable for or
subject to the debts, contracts, liabilities, engagements or torts of the
Participant.
4.5 Listing and Legal Compliance. The Committee may suspend the exercise
----------------------------
or payment of any Supplemental Option so long as it determines that securities
exchange listing or registration or qualification under any securities laws is
required in connection therewith and has not been completed on terms acceptable
to the Committee.
4.6 Termination and Amendment of the Plan. The Board of Directors at any
-------------------------------------
time may amend or terminate the Plan without stockholder approval; provided,
however, that the Board of Directors may condition any amendment on the approval
of stockholders of the Company if such approval is necessary or advisable with
respect to tax, securities or other applicable laws. No such termination or
amendment without the consent of the holder of a Supplemental Option shall
adversely affect the rights of the Participant under such Supplemental Option.
4.7 Choice of Law. The laws of the State of Delaware shall govern the
-------------
Plan, to the extent not preempted by federal law, without reference to the
principles of conflict of laws.
NEW GRANCARE, INC.
By: /s/ Evrett W. Benton
-------------------------------
Title: Vice President
----------------------------
ATTEST:
/s/ M. Henry Day, Jr.
- -------------------------------
Title: Assistant Secretary
------------------------
[CORPORATE SEAL]
-9-
<PAGE>
EXHIBIT 10.24
GRANCARE, INC.
EXECUTIVE LIFE INSURANCE PLAN
-----------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
A. PURPOSE.................................................................. 1
B. DEFINITIONS.............................................................. 1
C. PARTICIPATION............................................................ 2
1. Approval............................................................. 2
2. Insurability......................................................... 2
3. Election not to Participate.......................................... 3
D. ASSIGNMENT............................................................... 3
E. PREMIUMS................................................................. 3
F. INVESTMENT EARNINGS...................................................... 3
G. OWNERSHIP................................................................ 3
H. COLLATERAL ASSIGNMENT OF SECURITY INTEREST............................... 3
I. INSURANCE BENEFITS PRIOR TO TERMINATION OF EMPLOYMENT.................... 4
J. INSURANCE BENEFITS AFTER TERMINATION OF EMPLOYMENT....................... 4
1. Qualifying Termination............................................... 4
2. Non-Qualifying Termination........................................... 4
K. TAX LIABILITY AND WITHHOLDING............................................ 4
L. ADMINISTRATION OF THE PLAN............................................... 5
1. Administration and Interpretation.................................... 5
2. Plan Supervisor...................................................... 5
3. Elections and Notices................................................ 5
M. AMENDMENT OR TERMINATION OF THE PLAN..................................... 6
N. BENEFICIARY DESIGNATION.................................................. 6
O. ERISA PLAN............................................................... 6
</TABLE>
i
<PAGE>
P. CLAIMS PROCEDURE............................................. 6
1. Claims.................................................. 6
2. Appeal.................................................. 7
3. Limitation Period....................................... 7
Q. MISCELLANEOUS................................................ 7
1. Employment Not Guaranteed............................... 7
2. Protective Provisions................................... 7
3. Gender, Singular & Plural............................... 8
4. Captions................................................ 8
5. Validity................................................ 8
6. Applicable Law.......................................... 8
7. Notice to Insurer....................................... 8
8. Notice Under Agreement.................................. 9
9. Binding Agreement....................................... 9
ii
<PAGE>
GRANCARE, INC.
EXECUTIVE LIFE INSURANCE PLAN
-----------------------------
A. PURPOSE
This Plan provides life insurance coverage for certain employees of
GranCare, Inc. ("GranCare").
B. DEFINITIONS
For the purposes of the Plan, the following terms shall have the
meanings indicated:
1. "Beneficiary" means the person or persons designated as such in
accordance with Section N.
2. "Committee" means the Board of Directors of GranCare or its
delegate, if any.
3. "Annual Salary" means with respect to an Employee, such
Employee's annual base salary before any salary deferrals or
salary reduction elections.
4. "Employee" means, except as provided in Section D, an officer or
other employee of GranCare designated by GranCare as a Plan
participant.
5. "ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
6. "GranCare" means GranCare, Inc., a Delaware corporation, its
subsidiaries and successors.
7. "Initial Annual Premium Contribution" means the first premium
installment paid by GranCare to the Insurer under the Split
Dollar Policy.
8. "Insurer" means the insurance company chosen to issue a Policy
on the life of the Employee.
9. "Old GranCare" means GranCare, Inc., a California corporation.
10. "Old Plan" means the GranCare, Inc. Executive Life Insurance
Plan, as maintained by Old GranCare.
11. "Plan" means the GranCare, Inc. Executive Life Insurance Plan.
12. "Plan Supervisor" means GranCare's Vice President, Director of
Human Resources.
<PAGE>
13. "Plan Year" means the calendar year.
14. "Policy" means the life insurance policy which GranCare will cause to
be issued by the Insurer on the life of an Employee pursuant to the
Plan. In the event that an Employee was a participant in the Old Plan
and agreed to the assignment of the collateral assignment entered into
by the Employee in favor of Old GranCare with respect to the policy
issued on the life of the Employee under the Old Plan, such policy
shall be the Policy hereunder.
15. "Qualifying Termination" means the termination of employment which
constitutes a Qualifying Termination under the Split Dollar Life
Insurance Agreement.
16. "Retirement" means the termination of employment following attainment
of at least age 65.
17. "Split Dollar Life Insurance Agreement" means the agreement entered
into between GranCare and an Employee which defines GranCare's
contingent rights in the Split Dollar Policy.
18. "Split Dollar Policy" means the Policy controlled by the applicable
Split Dollar Life Insurance Agreement.
C. PARTICIPATION
1. Approval
--------
An Employee shall become a participant of the Plan as of the date the
Employee is notified in writing by the Committee that participation is
approved. Notwithstanding the foregoing, if an Employee was a
participant in the Old Plan and agreed to the assignment of the
collateral assignment entered into by the Employee in favor of Old
GranCare with respect to the policy issued on the life of the Employee
under the Old Plan, such Employee shall be a Participant in the Plan
as of the date of the assignment of such collateral assignment to
GranCare.
2. Insurability
------------
An Employee is not automatically entitled to the insurance benefits
provided under the Plan. The Employee must satisfy the requirements
for obtaining insurance before the Employee becomes covered under the
Plan. In the event Employee is uninsurable, the Committee may, but
need not, elect to obtain insurance on the life of Employee's spouse
in order to enable Employee to participate in the Plan.
2
<PAGE>
3. Election not to Participate
---------------------------
An Employee may elect not to participate in the Plan at any time. Such
election shall be in writing, and shall become effective upon its
receipt by the Plan Supervisor. No compensation or benefits in lieu of
participation in the Plan shall be paid to an Employee who elects not
to participate in the Plan.
D. ASSIGNMENT
An Employee may not assign (other than through a Collateral Assignment in
favor of GranCare in accordance with the Split Dollar Life Insurance
Agreement and Section H of the Plan) to any individual or trustee all or
any part of the Employee's right, title, claim, interest, benefit and all
other incidents of ownership which the Employee may have in any life
insurance under the Plan.
E. PREMIUMS
All premiums due on an Employee's Policy while the Employee is employed by
GranCare shall be paid by GranCare directly to the Insurer. GranCare may
satisfy its obligation to pay premiums with funds borrowed against the
Split Dollar Policy, on a nonrecourse basis. GranCare will cease making
premium payments due after the date on which Employee's employment with
GranCare terminates for any reason.
F. INVESTMENT EARNINGS
All investment earnings on an Employee's Policy while such Employee is a
participant in this Plan will be reinvested in the Policy and will not be
distributed to the Employee.
G. OWNERSHIP
The Employee shall be the owner of the Policy and shall hold the right to
exercise all ownership rights granted by the terms of the Policy, including
the right to change the Beneficiary of that portion of the proceeds of the
Policy to which the Employee is entitled under Section I or J of the Plan,
and the right to exercise settlement options, except to the extent such
rights are specifically limited by the terms of the Plan. While an Employee
is a participant in the Plan, the Employee will have no right to borrow
against the Split Dollar Policy or obtain any part of the cash surrender
value of the Split Dollar Policy.
H. COLLATERAL ASSIGNMENT OF SECURITY INTEREST
An Employee will be required to assign certain rights of the Employee in
the Split Dollar Policy to GranCare to secure GranCare's right to recover
the premiums it pays with respect to the Split Dollar Policy. This
assignment will be made by the Employee's
3
<PAGE>
execution of a Split Dollar Life Insurance Agreement in substantially
the form attached hereto as Exhibit "A" at the time the Employee
becomes a participant of the Plan, GranCare will not assign its
security interest in the Split Dollar Policy to anyone other than the
Employee. In the event that the Employee was a participant in the Old
Plan and agreed to the assignment of the collateral assignment entered
into by the Employee in favor of Old GranCare with respect to the
policy issued on the life of the Employee under the Old Plan, the
Split Dollar Life Insurance Agreement will also secure GranCare's
right to recover the premiums paid by Old GranCare with respect to the
Split Dollar Policy.
I. INSURANCE BENEFITS PRIOR TO TERMINATION OF EMPLOYMENT
If the Employee dies prior to the termination of employment, the
Employee's Beneficiary will be entitled to receive as a death benefit
under the Split Dollar Policy, an amount equal to three times the
Employee's most recent Annual Salary. To the extent the death benefit
under the Split Dollar Policy exceeds this amount, the balance of the
death benefit will be paid to GranCare. Upon the death of the
Employee, GranCare shall promptly take all action necessary to obtain
the death benefit provided under the Split Dollar Policy.
J. INSURANCE BENEFITS AFTER TERMINATION OF EMPLOYMENT
1. Qualifying Termination. Upon a Qualifying Termination, GranCare
----------------------
shall release its assignment of the cash surrender value in the
Split Dollar Policy and the Employee shall receive cash surrender
value of the policy as of the date of termination of employment.
The Employee may maintain the Split Dollar Policy by making the
premium payments after the date of termination of employment.
2. Non-Qualifying Termination. Upon a termination of employment
--------------------------
which does not constitute a Qualifying Termination, Employee
shall forfeit the cash surrender value of the Split Dollar
Policy. Immediately upon such termination of employment, GranCare
shall withdraw from or borrow against the Split Dollar Policy, an
amount equal to the maximum amount which may be withdrawn or
borrowed, as the case may be, under the Split Dollar Policy. The
Employee may maintain the Split Dollar Policy by making the
premium payments after the date of termination of employment.
K. TAX LIABILITY AND WITHHOLDING
The rights of an Employee in the Split Dollar Policy may cause the
Employee to be treated as having gross income for federal, state or
local income tax purposes. These circumstances may also impose upon
GranCare an obligation to deduct and collect federal, state or local
withholding taxes. Unless the Employee otherwise provides GranCare the
amounts it is required to withhold, GranCare may satisfy its
withholding
4
<PAGE>
obligations by borrowing, on a nonrecourse basis, against the Split Dollar
Policy, an amount equal to its withholding tax liability.
L. ADMINISTRATION OF THE PLAN
1. Administration and Interpretation
---------------------------------
The Plan shall be administered and interpreted by the Committee. The
Committee shall have the power and authority in its sole, absolute and
uncontrolled discretion to control and manage the operation and
administration of the Plan and shall have all powers necessary to
accomplish these purposes. The responsibility and authority of the
Committee shall include but shall not be limited to the following:
a. determining all questions relating to the eligibility of an
Employee to participate;
b. determining the amount and kind of benefits payable to any Employee
or Beneficiary;
c. establishing and reducing to writing and distributing to any
Employee or Beneficiary a claims procedure; and
d. interpreting the provisions of the Plan including the publication
of rules for the regulation of the Plan as in its sole, absolute
and uncontrolled discretion are deemed necessary or advisable and
which are not inconsistent with the express terms hereof or ERISA.
2. Plan Supervisor
---------------
The Committee has appointed the Plan Supervisor to act on the
Committee's behalf. Any action taken by the Plan Supervisor, shall be
considered to be action of the Committee when the Plan Supervisor is
acting within the scope of the authority delegated to it by the
Committee, and the committee shall be responsible for all such actions.
All reasonable expenses incurred in administering the Plan shall be
paid by GranCare upon authorization by the Committee.
3. Elections and Notices
---------------------
All elections made and notices given by any Employee under the Plan
shall be in writing and filed with the Plan Supervisor.
5
<PAGE>
M. AMENDMENT OR TERMINATION OF THE PLAN
GranCare may at any time amend, alter, modify or terminate the Plan;
provided, however, that no such action shall affect the rights of any
Employee existing before such action or accelerate GranCare's rights to
recover the premiums paid on the Split Dollar Policy. In no event,
however, shall GranCare be obligated to continue to pay for any benefit,
any insurance or any insurance policy after such action.
N. BENEFICIARY DESIGNATION
The Employee shall have the right, at any time, to designate any person
or persons as the Beneficiary to whom payment under the Plan shall be
made in the event of the Employee's death. Each Beneficiary designation
shall become effective only when filed in writing with the Insurer
during the Employee's lifetime on a form prescribed by the Insurer. The
filing of a new Beneficiary designation form will cancel any Beneficiary
designation previously filed.
If an Employee fails to designate a Beneficiary as provided above, or if
all designated Beneficiaries predecease the Employee or die prior to the
complete distribution of the Employee's death benefits, the Employee's
death benefits shall be paid to the Employee's then surviving spouse,
or, if none, to the Employee's estate, unless directed otherwise by the
court that has jurisdiction over the assets belonging to the Employee's
probate estate.
O. ERISA PLAN
This Plan is covered by Title I of ERISA as a welfare benefit plan.
GranCare is the "named fiduciary" of the Plan.
P. CLAIMS PROCEDURE
1. Claims
------
a. In the event that a benefit has not been paid under the Plan
in whole or in part, the person claiming such payment may
apply for payment either individually or through a
representative by writing to the Plan Supervisor.
b. The claim will be reviewed and ruled upon within 45 days of
the filing of the claim. If the claim is wholly or partially
denied the person claiming payment will receive in writing:
(i) specific reasons for denial;
6
<PAGE>
(ii) specific reference to Plan provisions on which the
denial is based;
(iii) description of additional information needed before the
claim can be processed;
(iv) list of steps to be taken if the denial of claim is to
be reviewed.
2. Appeal
------
If the claim has been denied, (or if no response from the Vice
President, Director of Human Resources is received within 45 days) the
person claiming payment has the right to request a review of the denied
claim, to review pertinent documents and to submit any comments in
writing. The request for review of the denied claim shall be submitted
to the Vice President, Director of Human Resources at the above
address. The request for review of the denied claim will be considered
and ruled upon within 45 days of the filing of such request.
3. Limitation Period
-----------------
Any claim for payment or such other action under the Plan must be made
as set forth in this Section P, and must be made within one year after
the occurrence of the event for which the claim is made. Failure to
file the claim within such one year period shall completely discharge
the Plan and GranCare of any liability and shall bar any and all
actions in connection with such claim for payment or other action.
Q. MISCELLANEOUS
1. Employment Not Guaranteed
-------------------------
Nothing contained in the Plan nor any action taken hereunder shall be
construed as a contract of employment or as giving an Employee any
right to be retained in the employ of GranCare. Accordingly, subject to
the terms of any written employment agreement to the contrary, GranCare
shall have the right to terminate or change the terms of employment of
an Employee at any time and for any reason whatsoever, with or without
cause.
2. Protective Provisions
---------------------
Each Employee shall cooperate with GranCare by furnishing any and all
information requested by GranCare in order to facilitate the payment of
benefits hereunder, taking such physical examinations as GranCare may
deem necessary
7
<PAGE>
and taking such other relevant action as may be requested by GranCare.
If an Employee refuses to so cooperate, GranCare shall have no further
obligation to the Employee under the Plan. If an Employee commits
suicide during the first two years following his participation in the
Plan, or if an Employee makes any material misstatement of information
or nondisclosure of medical history, then no benefits will be payable
hereunder to such Employee or the Employee's Beneficiary, provided, that
in GranCare's sole discretion, benefits may be payable in an amount
reduced to compensate GranCare for any loss, cost, damage or expense
suffered or incurred by GranCare as a result in any way of such
misstatement or nondisclosure.
3. Gender, Singular & Plural
-------------------------
All pronouns and any variations thereof shall be deemed to refer to the
masculine or feminine as the identity of the person or persons may
require. As the context may require, the singular may be read as the
plural and the plural as the singular.
4. Captions
--------
The captions of the sections and paragraphs of the Plan are for
convenience only and shall not control or affect the meaning or
construction of any of its provisions.
5. Validity
--------
In the event any provision of the Plan is held invalid, void, or
unenforceable, the same shall not affect, in any respect whatsoever, the
validity of any other provision of the Plan.
6. Applicable Law
--------------
Except to the extent governed by federal law, the Plan shall be governed
and construed in accordance with the laws of the State of Delaware.
7. Notice to Insurer
-----------------
GranCare shall be responsible for notifying the Insurer of any changes
in the ownership rights and interests of the Employee and GranCare and
of any changes in the Beneficiaries to receive death benefits under the
Plan, and the Insurer shall be entitled to rely upon such notification
received from GranCare.
8
<PAGE>
8. Notice Under Agreement
----------------------
Any notice, consent or demand required or permitted to be given under
the provisions of this Plan by one party to another shall be in
writing, signed by the party giving or making it, and may be given
either by delivering it to such other party personally or by mailing
it, by United States Certified mail, postage prepaid, to such party,
addressed to its last known address as shown on the records of
GranCare. The date of such mailing shall be deemed the date of such
mailed notice, consent or demand.
9. Binding Agreement
-----------------
This Plan shall bind the parties hereto and their respective
successors, heirs, executors, administrators and transferees, and
any Split Dollar Policy Beneficiary.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
_____ day of ___________________, 1996.
GRANCARE, INC.
By: /s/ Evrett W. Benton
------------------------------------
Title: Executive Vice President
---------------------------------
ATTEST:
/s/ M. Henry Day, Jr.
- ---------------------------------
Title: Assistant Secretary
---------------------------
[CORPORATE SEAL]
9
<PAGE>
GRANCARE, INC.
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
This Agreement is entered into as of the ____ day of __________, 199_, by
and between GRANCARE, INC., a Delaware corporation ("GranCare") and ____________
___________________________ ("Employee").
WHEREAS, Employee is a participant in the GranCare, Inc. Executive Life
Insurance Plan (the "Plan").
WHEREAS, GranCare and the Employee have agreed that policy number ________,
issued by ________________ Life Insurance Company (the "Split Dollar Policy"),
is the insurance policy covered by the Plan.
WHEREAS, Employee is the owner of the Split Dollar Policy and GranCare has
made its first premium installment payment (the "Initial Annual Premium
Contribution") to the Insurer with respect to the policy.
NOW, THEREFORE, in consideration of the facts set forth above and the
various promises and covenants set forth below, the parties to this Agreement
agree as follows:
1. OWNERSHIP OF POLICY.
-------------------
GranCare acknowledges that Employee is the owner of the Split Dollar
Policy and that Employee is entitled to exercise all ownership rights granted by
the terms of the Split Dollar Policy, except to the extent the rights of
Employee are specifically limited by the Plan or by this Agreement. Except as
so limited, it is the expressed intention of the parties to reserve to Employee
all rights in and to the Split Dollar Policy granted to its owner by the terms
thereof, including, but not limited to, the right to change the beneficiary and
the right to exercise settlement options.
2. GRANCARE'S CONTINGENT RIGHTS.
----------------------------
GranCare's rights are contingent upon its satisfactorily performing
all of the covenants under this Agreement. GranCare shall not have nor exercise
any right in and to the Split Dollar Policy which could, in any way, endanger,
defeat, or impair any of the rights of Employee in the Split Dollar Policy,
including by way of illustration any right to collect the proceeds of the Split
Dollar Policy in excess of the amount due GranCare as provided in this Agreement
and in the Split Dollar Policy. The only rights in and to the Split Dollar
Policy granted to GranCare in this Agreement shall be limited to GranCare's
security interest in and to the cash value of the Split Dollar Policy, a portion
of the death benefit of the Split Dollar Policy as hereinafter provided, and the
right to designate investments. GranCare shall not assign any of its security
interests in the Split Dollar Policy to anyone other than Employee.
<PAGE>
3. PREMIUM PAYMENTS.
----------------
So long as Employee is a participant in the Plan, GranCare agrees to
pay, on each date on which premiums are due on the Split Dollar Policy or before
the expiration of the grace period for the payment of such premium, the premium
required under Section E of the Plan. The premium payment shall be transmitted
directly by GranCare to the Insurer. GranCare may satisfy its obligation to pay
premiums with funds borrowed against the Split Dollar Policy. GranCare shall
not be required to make a premium payment for any year with respect to which the
Employee was not employed by GranCare, for whatever reason, on the day
immediately preceding the date on which the premium installment was due,
4. INVESTMENT EARNINGS.
-------------------
During the period of time that this Agreement is in effect, Employee
irrevocably agrees that all investment earnings on the Split Dollar Policy shall
be reinvested in the Policy and shall not be distributed to the Employee.
5. DEATH OF EMPLOYEE WHILE EMPLOYED.
--------------------------------
If Employee (or, if the person whose life is insured by the Split
Dollar Policy is someone other than Employee, such other person) dies prior to
termination of employment, Employee's designated Beneficiary shall be entitled
to receive as a death benefit under the Split Dollar Policy an amount equal to
three times the amount of Employee's Annual Salary. To the extent that the
death benefit under the Split Dollar Policy exceeds the amount distributable to
the Employee, the balance of the death benefit shall be payable to GranCare.
The designation of the Beneficiary under the Split Dollar Policy shall be in
accordance with Section N of the Plan and is made subject to the terms of this
Agreement.
6. TERMINATION OF EMPLOYEES EMPLOYMENT ON ACCOUNT OF A QUALIFYING
--------------------------------------------------------------
TERMINATION.
-----------
(a) By making payment of the premiums described in Section 3 of this
Agreement, GranCare renews its contingent rights in the Split Dollar Policy for
the period commencing with the due date of such payment until the later of (1)
the due date of the next payment described in Section 3 or (2) the date that
Employee terminates employment on account of a Qualifying Termination as defined
in Section 8. GranCare may not extend its contingent rights hereunder in the
Split Dollar Policy and under the Collateral Assignment Agreement, attached as
Exhibit A, after the occurrence of a Qualifying Termination. After a Qualifying
Termination, Employee shall be entitled to exercise all ownership rights in the
Split Dollar Policy without any limitation. This Agreement and its accompanying
Collateral Assignment Agreement shall thereafter no longer constitute a
restriction on Employee's rights.
2
<PAGE>
(b) Notwithstanding paragraph (a), GranCare shall continue to have
rights in the Split Dollar Policy, to the extent required to satisfy its
withholding obligations as described in Section 13.
(c) Notwithstanding paragraph (a), GranCare shall not release its
rights under the Collateral Assignment Agreement unless and until (i) Employee
releases, in a writing acceptable to the Committee, all claims of whatever
nature against GranCare, and (ii) Employee executes a Confidentiality Agreement
form prepared by GranCare.
7. TERMINATION OF AN EMPLOYEE FOR A REASON OTHER THAN A QUALIFYING
---------------------------------------------------------------
TERMINATION.
-----------
If the employment of Employee is terminated for a reason other than a
Qualifying Termination (including a voluntary resignation), GranCare may
withdraw from or borrow against the Split Dollar Policy, an amount equal to the
maximum amount that may then be obtained under the Split Dollar Policy.
8. DEFINITION OF A QUALIFYING TERMINATION.
--------------------------------------
A Qualifying Termination is any of the following four events:
(a) Employee's attaining his Retirement Date, as defined in Section
9;
(b) the termination of Employee's employment with GranCare after a
Change in Control as defined in Section 10;
(c) involuntary termination without cause as determined in Section 9;
and
(d) termination as a result of Employee's disability. For purposes
of this Subsection, disability shall mean a disability which would entitle the
Employee to receive full long-term disability benefits under GranCare's long-
term disability plan.
9. TERMINATION FOR A REASON OTHER THAN "CAUSE".
-------------------------------------------
Employee shall have been considered to have been terminated with Cause
if he is discharged for a reason specified as cause for discharge in Employee's
employment agreement then in effect. In the absence of an effective employment
agreement, Employee shall have been considered to have been terminated with
Cause if the Employee is discharged on account of an act or omission
constituting a felony and resulting, or intended to result, directly or
indirectly in gain or personal enrichment at the expense of GranCare. If
Employee is terminated for any reason other than one or more of the reasons
referred to above, Employee shall have been considered to have been terminated
without Cause.
3
<PAGE>
10. QUALIFYING TERMINATION ON ACCOUNT OF TERMINATION AFTER A CHANGE OF
------------------------------------------------------------------
CONTROL.
-------
(a) A Qualifying Termination shall be treated as occurring after a
"Change of Control" if there is first a "Change of Control" and then within
thirty-six (36) months after such Change of Control either (1) Employee's
employment is terminated without Cause; or (2) Employee terminates employment
for "Good Reason" as defined in paragraph (c). For purposes of this Section, a
"Change of Control" means the first to occur of the following events:
(1) any person (as defined in Section 3(a)(9) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and as used in
Sections 13(d) and 14(d) thereof), excluding GranCare, any direct or
indirect majority-owned subsidiary of GranCare (a "Subsidiary") and any
employee benefit plan sponsored or maintained by GranCare or any Subsidiary
(including any trustee of such plan acting as trustee) (GranCare, all
Subsidiaries, and such employee benefit plans and trustees acting as
trustees being hereafter referred to as the "Company Group"), but including
a `group' as defined in Section 13(d)(3) of the Exchange Act (a "Person"),
becomes the beneficial owner of shares of GranCare having at least thirty
percent (30%) of the total number of votes that may be cast for the
election of directors of GranCare (the "Voting Shares"); provided that no
Change of Control will occur as a result of an acquisition of stock by the
Company Group which increases, proportionately, the stock representing the
voting power of GranCare beneficially owned by such Person above thirty
percent (30%) of the voting power of GranCare, and provided further that if
such Person acquires beneficial ownership of stock representing more than
thirty percent (30%) of the voting power of GranCare by reason of share
purchases by the Company Group, and after such share purchases by the
Company Group acquires any additional shares representing voting power of
GranCare, then a Change of Control shall occur;
(2) the shareholders of GranCare shall approve any merger or
other business combination of GranCare, sale of the GranCare's assets or
combination of the foregoing transactions (a "Transaction") other than a
Transaction involving only GranCare and one or more of its Subsidiaries, or
a Transaction immediately following which the shareholders of GranCare
immediately prior to the Transaction continue to have a majority of the
voting power in the resulting entity excluding for this purpose any
shareholder owning directly or indirectly more than ten percent (10%) of
the shares of the other company involved in the merger; or
(3) within any 24-month period, the persons who were directors
of GranCare immediately before the beginning of such period (the "Incumbent
Directors") shall cease (for any reason other than death) to constitute at
least a majority of the Board of Directors or the board of directors of any
successor to GranCare, provided that any director who was not a director as
of the date of this Agreement shall be deemed to be an Incumbent Director
if such director was elected to the Board of Directors by, or on the
recommendation of or with the approval of, at least two-thirds of the
directors who
4
<PAGE>
then qualified as Incumbent Directors either actually or by prior operation
of this clause (3); and provided further that any director elected to the
Board of Directors to avoid or settle a threatened or actual proxy contest
shall in no event be deemed to be an Incumbent Director.
Notwithstanding the foregoing, no Change of Control shall be deemed to have
occurred for purposes of this Agreement by reason of any actions or events in
which the Employee participates in a capacity other than in his capacity as
Employee (or as a director of GranCare or a Subsidiary, where applicable).
(b) For purposes of this Section, termination by an Employee of
employment for "Good Reason" shall mean termination for reason of:
(1) Reduction in Base Salary.
(2) Reduction in annual target bonus opportunity (excluding
annual reductions of up to 10% that apply to all officers of GranCare).
(3) A change of more than twenty-five (25) miles in the office
or location where the Employee is based.
(4) Unless with the express written consent of the Employee, (A)
the assignment to the Employee of any duties inconsistent in any
substantial respect with the Employee's position, authority or
responsibilities, or (B) any other substantial change in such position,
including titles, authority or responsibilities from those previously held
by the Employee prior to the Change of Control. The Employee's position,
authority and responsibilities shall not be regard as not commensurate with
previous position, authority and responsibilities merely by virtue of the
fact that a successor shall have acquired all or substantially all of the
business and/or assets of GranCare.
(5) Any failure by GranCare to comply with any of the provisions
of any Employment Agreement between the Employee and GranCare other than an
insubstantial or inadvertent failure remedied by GranCare promptly after
receipt of notice thereof given by the Employee.
(c) A termination of employment by Employee within the 36-month
period following a Change in Control shall be for Good Reason if one of the
occurrences specified in paragraph (c) shall have occurred, notwithstanding that
Employee may have other reasons for terminating employment, including employment
by another employer which Employee desires to accept.
5
<PAGE>
11. EMPLOYEE RETIREMENT DATE.
------------------------
(a) Subject to paragraph (b), Employee's "Retirement Date" shall mean
the date on which Employee terminates employment on account of Retirement (as
defined in Section B.14. of the Plan).
(b) GranCare's rights in the Policy are contingent upon the payment
of premiums under Section 3. Each period covered by any individual premium
payment shall be considered an independent extension of GranCare's rights to the
Policy. In the event that GranCare waives its rights by reason of failure to
make payments under Section 3, Employee shall be deemed to have attained his
Retirement Date.
12. LIMITATION ON EMPLOYEE'S RIGHTS PRIOR TO A QUALIFYING TERMINATION.
-----------------------------------------------------------------
Notwithstanding any other provisions in this Agreement, prior to a
Qualifying Termination, Employee shall have no rights to borrow against the
Split Dollar Policy, assign the Split Dollar Policy except as provided in
Exhibit A hereto, or obtain any portion of the cash surrender value of the Split
Dollar Policy. Notwithstanding the preceding sentence, if Section 7 applies to
a termination, Employee shall have the right to borrow from the Split Dollar
Policy so long as the borrowing request is submitted to the Insurer along with a
directive that the borrowed amount be transferred directly to GranCare.
13. TAX WITHHOLDING.
---------------
It is recognized by the parties that the rights of Employee in the
Split Dollar Policy (as modified by this Agreement) may cause Employee to be
treated under certain circumstances as in receipt of gross income. These
circumstances may also impose an obligation to deduct and collect federal or
state withholding taxes. Unless Employee otherwise provides the amounts that are
required to be withheld, GranCare may satisfy such obligations by borrowing, on
a nonrecourse basis, against the Split Dollar Policy, an amount equal to any
required withholding taxes.
14. ADMINISTRATION.
--------------
The Committee (as defined in Section B.2. of the Plan) shall
administer this Agreement. The Committee (either directly or through its
designees) will have power and authority to interpret, construe, and administer
this Agreement and Exhibit A hereto.
15. CLAIMS.
------
Any claim under this Agreement and Exhibit A thereto shall be
administered in accordance with Section L of the Plan.
6
<PAGE>
16. COLLATERAL ASSIGNMENT OF CERTAIN RIGHTS IN THE SPLIT DOLLAR POLICY TO
---------------------------------------------------------------------
GRANCARE.
--------
In consideration of the promises contained herein, the Employee has
contemporaneously herewith assigned certain rights in the Split Dollar Policy to
GranCare as collateral, under the form of Collateral Assignment attached hereto
as Exhibit A, which Assignment gives GranCare the limited power to enforce its
rights to-recover all or a portion of the cash value of the Split Dollar Policy
under the circumstances set forth herein, or a portion of the death benefit
thereof. GranCare's interest in and to the Split Dollar Policy shall be
specifically limited to the rights set forth above in this Agreement.
17. AMENDMENT OF AGREEMENT.
----------------------
This Agreement may only be amended, altered or modified to the extent
set forth in Section M of the Plan.
18. NOTICE UNDER AGREEMENT.
----------------------
Any notice, consent or demand required or permitted to be given under
the provisions of this Agreement by one party to another shall be in writing,
signed by the party giving or making it, and may be given either by delivering
it to such other party personally or by mailing it, by United States Certified
mail, postage prepaid, to such party, addressed to its last known address as
shown on the records of GranCare. The date of such mailing shall be deemed the
date of such mailed notice, consent or demand.
19. BINDING AGREEMENT.
-----------------
This Agreement shall bind the parties hereto and their respective
successors, heirs, executors, administrators and transferees, and any Split
Dollar Policy Beneficiary.
[Remainder of Page Left Intentionally Blank]
7
<PAGE>
20. CONTROLLING LAW.
---------------
To the extent not governed by federal law, this Agreement and the
rights of the parties hereunder shall be controlled by the laws of the State of
Delaware.
GRANCARE, INC.
By: ___________________________________
Mark H. Rubenstein
Vice President, Director of Human
Resources
EMPLOYEE
________________________________________
8
<PAGE>
ACKNOWLEDGEMENT OF RECEIPT BY INSURER
-------------------------------------
The Insurer's Home Office hereby acknowledges receipt of a duplicate
original of the Collateral Assignment Agreement between
______________________________ and GranCare, Inc., which document concerns
Policy Number ____________________ issued by the Insurer. Insurer agrees to
comply with the terms of the Agreement to the extent permitted by law, but
assumes no responsibility for the validity or sufficiency of the document and
does not pass upon its legality, and reserves the right to demand proof of
interest in case of claim.
Dated at _______________________ on ___________________.
INSURANCE COMPANY
By: ___________________________________
(Title)
9
<PAGE>
EXHIBIT 10.25
GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN
EFFECTIVE AS OF JANUARY 1, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1. DEFINITIONS................................................................. 1
SECTION 2. PARTICIPATION............................................................... 5
2.1. Date of Participation..................................................... 5
2.2. Commencement of Deferral Period........................................... 6
2.3. Termination of Participation.............................................. 6
2.4. Benefit Agreement......................................................... 6
2.5. Leave of Absence.......................................................... 6
2.6. Executive and Leadership Group Deferred Compensation Plans................ 7
SECTION 3. DEFERRAL ELECTIONS.......................................................... 7
3.1. Election of Deferral...................................................... 7
3.2. Company Matching Contribution............................................. 7
SECTION 4. ESTABLISHMENT OF AND CREDITING OF ACCOUNTS.................................. 7
4.1. Establishment of Accounts................................................. 7
4.2. Crediting of Deferrals.................................................... 8
4.3. Crediting of Contributions................................................ 8
SECTION 5. INVESTMENT OF ALLOCATED ACCOUNTS............................................ 8
5.1. Investment Direction...................................................... 8
5.2. Investment Experience..................................................... 8
SECTION 6. HARDSHIP LOANS.............................................................. 8
6.1. Financial Hardship........................................................ 8
6.2. Payment for Hardship...................................................... 9
6.3. Suspension of Deferrals................................................... 9
SECTION 7. RETIREMENT INCOME BENEFITS.................................................. 9
7.1. Normal Retirement Benefit................................................. 9
7.2. Termination Benefit....................................................... 9
7.3. Disability................................................................ 9
7.4. Change in Control Benefit................................................. 10
7.5. Alternative Forms of Benefit.............................................. 10
7.6 Scheduled Withdrawal...................................................... 10
SECTION 8. DEATH BENEFITS.............................................................. 10
8.1. Pre-Retirement Death Benefit.............................................. 10
8.2. Post-Retirement Death Benefit............................................. 10
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
SECTION 9. ADMINISTRATION OF PLAN...................................................... 11
9.1. Operation of the Committee................................................ 11
9.2. Duties of the Committee................................................... 11
9.3. Action by Company or a Plan Sponsor....................................... 11
SECTION 10. CLAIMS REVIEW PROCEDURE..................................................... 12
10.1. Denial of Claims.......................................................... 12
10.2. Appeal of Denial.......................................................... 12
10.3. Written Notice for Review................................................. 12
10.4. Hearing................................................................... 12
10.5. Counsel................................................................... 13
10.6. Decision on Appeal........................................................ 13
SECTION 11. LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS.............................. 13
11.1. No Alienation............................................................. 13
11.2. Attempts to Transfer...................................................... 13
11.3. Minors or Incompetents.................................................... 13
11.4. Missing Persons........................................................... 13
SECTION 12. LIMITATION OF RIGHTS........................................................ 14
SECTION 13. AMENDMENT OR TERMINATION OF PLAN............................................ 14
13.1. Amendment and Termination................................................. 14
13.2. Termination by Plan Sponsor............................................... 14
13.3. Termination by Company.................................................... 14
SECTION 14. ADOPTION OF PLAN BY AFFILIATES.............................................. 14
SECTION 15. MISCELLANEOUS............................................................... 15
15.1. Unfunded Plan............................................................. 15
15.2 Withholding............................................................... 15
15.3 Governing Law............................................................. 15
</TABLE>
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<PAGE>
GRANCARE, INC. EXECUTIVE DEFERRED COMPENSATION PLAN
SECTION 1. DEFINITIONS
Whenever used herein, the masculine pronoun shall be deemed to include the
feminine, and the singular to include the plural, unless the context clearly
indicates otherwise, and the following words and phrases shall, when used
herein, have the meanings set forth below:
1.1. "Account" means the bookkeeping accounts established and maintained
-------
by the Committee to reflect the interest of a Participant under the Plan and
shall include the following:
(a) "Employee Deferred Account" which shall reflect deferrals by a
-------------------------
Participant pursuant to Plan Sections 3.1 and 4.1 and, if the Participant
maintained Accounts under the Executive Deferred Compensation Plan and/or
the Leadership Group Deferred Compensation Plan, the balance of such
Accounts, as adjusted to reflect other credits or charges.
(b) "Company Matching Account" which shall reflect credits to a
------------------------
Participant's Account made on his behalf pursuant to Plan Sections 3.2 and
4.1, as adjusted to reflect other credits or charges.
A sub-account shall be maintained to reflect any Deferrals made by the
Participant under a Benefit Agreement to be received as a lump-sum payment on a
Scheduled Distribution Date.
1.2. "Act" means the Employee Retirement Income Security Act of 1974
---
(ERISA), as amended from time to time.
1.3. "Affiliate" means (a) any corporation which is a member of the same
---------
controlled group of corporations (within the meaning of Code Section 414(b)) as
is the Company and (b) any other trade or business (whether or not incorporated)
under common control (within the meaning of Code Section 414(c)) with a Plan
Sponsor.
1.4. "Anniversary Date" means any January 1 after the Effective Date.
----------------
1.5. "Base Salary" means the amount paid to an Employee by the Company
-----------
during the portion of the Plan Year during which he is a Participant as
compensation that would be subject to income tax withholding under Code Section
3401(a), excluding bonuses, expense reimbursements and other non-recurring forms
of remuneration, but increased by salary deferrals or other pre-tax
contributions under this Plan or any plan maintained by the Company.
1.6. "Beneficiary" means the person or entity designated in writing by
-----------
the Participant on forms provided by the Committee to receive distribution of
certain death benefits under the Plan in the event of the Participant's death.
A Participant may change the designated Beneficiary from time to time by filing
a new written designation with the Committee, and such designation shall be
effective upon receipt by the Committee. The designation of a Beneficiary other
than the Participant's spouse must be consented to in writing by the spouse. If
a
<PAGE>
Participant has not designated a Beneficiary, or if a designated Beneficiary is
not living or in existence at the time of a Participant's death, the term
Beneficiary means (a) the Participant's spouse, or (b) if no spouse is alive,
the Participant's surviving children, or (c) if no children are alive, the
Participant's parent or parents, or (d) if no parents are alive, the legal
representative of the Participant's estate.
1.7. "Benefit Agreement" means the form of agreement described in
-----------------
Sections 2.4 and 3.1 on which a Participant records his Deferral election
attributable to a specific Plan Year.
1.8. "Board of Directors" means the Board of Directors of the Company.
------------------
1.9. "Change in Control" means, the first to occur of the following
-----------------
events:
(a) any person (as defined in Section 3(a)(9) of the Exchange Act
and as used in Sections 13(d) and 14(d) thereof), excluding the Company,
any Subsidiary and any employee benefit plan sponsored or maintained by the
Company or any Subsidiary (including any trustee of such plan acting as
trustee) (the Company, all Subsidiaries, and such employee benefit plans
and trustees acting as trustees being hereafter referred to as the "Company
-------
Group"), but including a `group' as defined in Section 13(d)(3) of the
-----
Exchange Act (a "Person"), becomes the beneficial owner of shares of the
------
Company having at least thirty percent (30%) of the total number of votes
that may be cast for the election of directors of the Company (the "Voting
------
Shares"); provided that no Change of Control will occur as a result of an
------
acquisition of stock by the Company Group which increases, proportionately,
the stock representing the voting power of the Company beneficially owned
by such person or group above thirty percent (30%) of the voting power of
the Company, and provided further that if such person or group acquires
beneficial ownership of stock representing more than thirty percent (30%)
of the voting power of the Company by reason of share purchases by the
Company Group, and after such share purchases by the Company Group acquires
any additional shares representing voting power of the Company, then a
Change of Control shall occur;
(b) the shareholders of the Company shall approve any merger or
other business combination of the Company, sale of the Company's assets or
combination of the foregoing transactions (a "Transaction") other than a
-----------
Transaction involving only the Company and one or more of its Subsidiaries,
or a Transaction immediately following which the shareholders of the
Company immediately prior to the Transaction continue to have a majority of
the voting power in the resulting entity excluding for this purpose any
shareholder owning directly or indirectly more than ten percent (10%) of
the shares of the other company involved in the merger; or
(c) within any 24-month period, the persons who were directors of
the Company immediately before the beginning of such period (the "Incumbent
---------
Directors") shall cease (for any reason other than death) to constitute at
---------
least a majority of the Board
-2-
<PAGE>
of Directors or the board of directors of any successor to the Company,
provided that any director who was not a director as of the effective date
of this Plan shall be deemed to be an Incumbent Director if such director
was elected to the Board of Directors by, or on the recommendation of or
with the approval of, at least two-thirds of the directors who then
qualified as Incumbent Directors either actually or by prior operation of
this clause (c); and provided further that any director elected to the
Board of Directors to avoid or settle a threatened or actual proxy contest
shall in no event be deemed to be an Incumbent Director.
1.10. "Claims Coordinator" means the individual(s) designated by the
------------------
Committee to receive applications for benefits by Participants or their
Beneficiaries.
1.11. "Code" means the Internal Revenue Code of 1986, as amended.
----
1.12. "Committee" means the Committee appointed by the Board of Directors
---------
which is responsible for administration of the Plan.
1.13. "Company" means GranCare, Inc., a Delaware corporation, its
-------
successors and assigns.
1.14. "Covered Bonus" means any incentive compensation payable to an
-------------
Eligible Employee in a Plan Year.
1.15. "Covered Salary" means the excess of an Eligible Employee's annual
--------------
Base Salary, excluding any bonus or other form of remuneration, payable in a
Plan Year, over the Social Security Taxable Wage Base for such Plan Year.
1.16. "Deferral" means the portion of a Participant's Covered Salary
--------
and/or Covered Bonus that has been deferred to the Participant's Employee
Deferred Account at the election of a Participant pursuant to Section 3.1. The
Company contributes Deferral amounts to the Trust.
1.17. "Deferral Period" means the first Plan Year with respect to which a
---------------
Participant executed a Benefit Agreement and the three consecutive Plan Years
thereafter.
1.18. "Disability" has the same meaning provided in the long-term
----------
disability plan or policy maintained or, if applicable, most recently
maintained, by the Company or, if applicable, any affiliate of the Company for
the Participant. If no long-term disability policy was ever maintained on
behalf of the Participant, Disability shall mean that condition described in
Code Section 72(m)(7), as amended from time to time, to the extent that the
Participant is entitled to disability retirement benefits under the federal
Social Security Act. In the event of a dispute, the determination of Disability
shall be made by the Committee and shall be so supported by the advice of a
physician competent in the area to which such Disability relates.
-3-
<PAGE>
1.19. "Distribution" means the distribution by GranCare, Inc., a
------------
California corporation, to its subsidiaries of all the issued and outstanding
shares of the Company.
1.20. "Distribution Record Date" means the date established by the board
------------------------
of directors of GranCare, Inc., a California corporation, for determining
shareholders of record for purposes of the Distribution.
1.21. "Effective Date" means January 1, 1997, the effective date of the
--------------
adoption of the Plan.
1.22. "Eligible Employee" means any Employee of the Company (a) who is
-----------------
considered to be a "management" or "highly compensated" employee of the Company
within the meaning of Section 201(2) of the Act; (b) who is a member of the
GranCare, Inc., a Delaware corporation, Leadership Group; and (c) who has been
specifically designated by the Board of Directors as eligible to become a Plan
Participant, such designation not having been revoked.
1.23. "Employee" means any person who is employed by a Plan Sponsor or an
--------
Affiliate for purposes of the Federal Insurance Contribution Act.
1.24. "Executive Deferred Compensation Plan" means the GranCare, Inc.
------------------------------------
Executive Deferred Compensation Plan, as maintained by GranCare, Inc., a
California corporation, effective as of October 1, 1993.
1.25. "Leadership Group Deferred Compensation Plan" means the GranCare
-------------------------------------------
Leadership Group Deferred Compensation Plan, as maintained by GranCare, Inc., a
California corporation, effective as of January 1, 1992.
1.26. "Leave" means any period during which an Eligible Employee who is
-----
employed by the Company immediately prior to the commencement thereof is absent
from the Company pursuant to a leave of absence granted by the Company.
1.27. "Minimum Annual Deferral" means the minimum amount of Deferral that
-----------------------
a Participant may make in any Plan Year under Section 3.1.
1.28. "Normal Retirement Date" means the first day of the month coinciding
----------------------
with or next following the Participant's attainment of age 65.
1.29. "Participant" means an Eligible Employee who has made a written
-----------
election to participate in the Plan in accordance with Section 2.1.
1.30. "Plan" means the GranCare, Inc. Executive Deferred Compensation
----
Plan, as maintained by GranCare, Inc., a Delaware corporation, as described
herein and as hereafter amended.
-4-
<PAGE>
1.31. "Plan Sponsor" means individually the Company or any other affiliate
------------
or other entity which has adopted the Plan with the consent of the Company.
1.32. "Plan Year" means the calendar year.
---------
1.33. "Post-Retirement Death Benefit" means the benefit payable to the
-----------------------------
Beneficiary of a Participant who dies after the commencement of his Retirement
Income Benefit, as described in Section 8.2.
1.34. "Pre-Retirement Death Benefit" means the benefit payable to the
----------------------------
Beneficiary of a Participant who dies prior to the commencement of his
Retirement Income Benefit, as described in Section 8.1.
1.35. "Retirement Income Benefit" means the retirement benefit described
-------------------------
in Section 7.
1.36. "Scheduled Distribution Date" means January of the year selected by
---------------------------
the Participant on the Benefit Agreement, prior to the date the Participant
would otherwise be entitled to receive a distribution under Section 7 or Section
8 of the Plan, on which he shall receive a lump-sum payment of the portion of
the Participant's sub-account attributable to Deferrals in the Plan Year for
which the Benefit Agreement applies.
1.37. "Trust Agreement" means the GranCare, Inc. Executive Deferred
---------------
Compensation Plan Trust Agreement entered into between the Company and the
Trustee as of January 1, 1997.
1.38. "Trustee" means United Missouri Bank of Kansas City, N.A.
-------
1.39. "Unforeseen Emergency" means a severe financial hardship to a
--------------------
Participant resulting from a sudden and unexpected illness or accident of a
Participant or of a dependent (as defined in Code Section 152) of the
Participant, loss of the Participant's property due to casualty or other similar
extraordinary and unforeseeable circumstances arising as a result of events
beyond the control of the Participant. The circumstances that shall constitute
an Unforeseen Emergency shall depend upon the facts of each case, but, in any
case, payment may not be made to the extent Unforeseen Emergency is or may be
relieved (a) through reimbursement or compensation by insurance or otherwise, or
(b) by liquidation of the Participant's assets, to the extent the liquidation of
such assets would not itself cause severe financial hardship. Examples of what
would not be considered as an Unforeseen Emergency include the need to send a
Participant's child to college or the desire to purchase a home. Any
determination of the existence of an Unforeseen Emergency and the amount to be
distributed on account thereof shall be made by the Committee (or such other
person as may be required to make such decisions) in accordance with rules
applied in a uniform and nondiscriminatory manner.
-5-
<PAGE>
1.40. "Year of Service" means a 12-consecutive month period during which
---------------
the Participant has been in the continuous employ of the Company, commencing on
or after the October 1, 1993 and shall include a period during which the
Participant had been in the continuous employ of GranCare, Inc., a California
corporation.
SECTION 2. PARTICIPATION
2.1. Date of Participation. An Eligible Employee shall become a
---------------------
Participant hereunder upon execution by the Eligible Employee and the Committee
of a Benefit Agreement. Eligible Employees who were participants in the
Executive Deferred Compensation Plan and/or the Leadership Group Deferred
Compensation Plan prior to the Distribution Record Date shall be given the
opportunity for immediate participation in the Plan; provided that, the Eligible
Employee delivers to the Committee within ninety (90) days of the Distribution
Record Date, a signed release form releasing GranCare, Inc., a California
corporation, its subsidiaries, affiliates and their successors from liability
for any benefits under the Executive Deferred Compensation Plan and/or the
Leadership Group Deferred Compensation Plan.
2.2. Commencement of Deferral Period. For the Plan Year commencing
-------------------------------
January 1, 1997, the Benefit Agreement may be executed by the parties on or
before January 31, 1997; for all subsequent Plan Years, the Benefit Agreement
must be executed by the parties on or before December 1 of the year immediately
preceding the Plan Year to which such Benefit Agreement shall relate.
2.3. Termination of Participation. The participation of any Participant
----------------------------
(other than a disabled Participant described in Section 7.3) may be terminated
prospectively at any time upon written notice from the Chairman of the Board of
Directors. Any provision of the Plan to the contrary notwithstanding, effective
upon such termination, the Participant shall no longer be entitled to make any
further Deferrals or to be credited with any further Company Matching
contributions, and such Participant may continue to direct the investment of his
Accounts until they are distributed in accordance with Section 7 or Section 8.
2.4. Benefit Agreement. The Committee shall provide to each Eligible
-----------------
Employee a form of Benefit Agreement with respect to each Plan Year for which
the Committee will permit the Eligible Employee to make Deferrals, which shall
set forth the Eligible Employee's acceptance of the benefits provided hereunder,
his agreement to be bound by the terms of the Plan, any Scheduled Distribution
Date with respect to Deferrals to be made during that Plan Year and such other
matters as are set forth in this Plan or deemed advisable by the Committee.
2.5. Leave of Absence. An Eligible Employee who is on Leave, with or
----------------
without salary, for a period of not more than six months, shall be deemed to be
an Eligible Employee employed by the Employer during such Leave. An Eligible
Employee who is on Leave without
-6-
<PAGE>
salary for a period in excess of six months shall be deemed to have voluntarily
terminated his employment as of the end of such six-month period.
2.6. Executive and Leadership Group Deferred Compensation Plans. If an
----------------------------------------------------------
Eligible Employee, prior to the Distribution Record Date, maintained account
balances in the Executive Deferred Compensation Plan and/or the Leadership Group
Deferred Compensation Plan and the Eligible Employee elects immediate
participation in the Plan and provides the appropriate release as described in
Section 2.1, the account balances maintained under the Executive Deferred
Compensation Plan and/or the Leadership Group Deferred Compensation Plan shall
be credited to the Employee Deferred Account as of the Distribution Record Date.
SECTION 3. DEFERRAL ELECTIONS
3.1. Election of Deferral. Each Participant shall complete a Benefit
--------------------
Agreement form in which he elects the Deferral that he will make, and in which
he indicates the amount of the Deferral which relates to covered Bonus and the
amount of the Deferral which relates to covered Salary. Such Deferral shall not
exceed 100% of the Participant's Covered Bonus and shall not exceed 50% of the
Participant's Covered Salary. The minimum Deferral shall be $5,000 for each
year of the Deferral Period. Each Benefit Agreement shall indicate whether the
Participant wishes to receive distribution of benefits in a lump sum, or in
reasonably level payments over a five, ten or fifteen year period. Subject to
Section 2.3, the elections made in a Benefit Agreement shall be irrevocable.
3.2. Company Matching Contribution. Each year the Company will decide
-----------------------------
whether it will match a portion or all of the Deferrals of Participants for that
year.
SECTION 4. ESTABLISHMENT OF AND CREDITING OF ACCOUNTS
4.1. Establishment of Accounts.
-------------------------
(a) The Committee shall establish an Employee Deferred Account for
each Participant to which the Participant's Deferrals shall be credited,
hypothetical earnings in accordance with Section 5.2 shall be credited, and
distributions shall be debited. A Participant shall be 100% vested in his
Employee Deferred Account at all times.
(b) The Committee shall establish a Company Matching Account for
each Participant to which the Participant's Company Matching contributions
shall be credited, hypothetical earnings in accordance with Section 5.2
shall be credited, and distributions shall be debited. A Participant shall
be 100% vested in his Company Matching Account upon the completion of three
(3) Years of Service with the Company, or upon the occurrence of a Change
in Control.
-7-
<PAGE>
4.2. Crediting of Deferrals. Deferrals for a Plan Year shall be credited
----------------------
to Participants' Employee Deferred Account as of the end of the month in which
the Deferral is withheld from the Participant's Covered Bonus or Covered Salary.
4.3. Crediting of Contributions. If the Company chooses to provide a
--------------------------
Company Matching Contribution, each affected Participant's Company Matching
Account will be credited with the amount of the Company Matching Contribution
properly allocable to such Participant, as of the last day of the Plan Year to
which the matching contribution relates.
SECTION 5. INVESTMENT OF ALLOCATED ACCOUNTS
5.1. Investment Direction. Each Participant shall be permitted, as of
--------------------
each calendar quarter, to direct the Committee in writing, utilizing a form to
be furnished by the Committee, to credit or debit the Participant's Accounts as
though the Account assets were actually invested in one or more of the following
types of investment funds in multiples of 10% of the Participant's Accounts:
Emerging Growth Equity, Common Stock, Real Estate Securities, Balanced Assets,
Capital Growth Bond and Money Market. The Committee will select, from time to
time, a publicly traded mutual fund or separate accounts under a specified group
insurance contract having the requisite investment characteristics for the
purpose of determining the appropriate rates of return to credit Participant's
Accounts. Earnings and losses will be credited or debited to the Participant's
Accounts as if such Accounts were actually invested as directed by the
Participant. Under no circumstance will the Committee be required to instruct
the Trustee to invest any portion of the Plan assets in accordance with the
elections submitted by the Participants. The Committee may, however, instruct
the Trustee to do so in order to minimize its risk of loss.
5.2. Investment Experience. Investment earnings or losses determined with
---------------------
reference to a Participant's investment elections shall be credited or debited
to such Participant's Accounts as of the last day of each month. The Company
may, in its sole discretion, make interim debits or credits in the event of a
substantial shift in the investment marketplace, provided that such debits and
credits are made uniformly to all similarly situated Participants.
SECTION 6. HARDSHIP WITHDRAWALS
6.1. Financial Hardship. The Committee may pay all or a portion of a
------------------
Participant's Account prior to the Normal Retirement Date; provided, however,
that any such distribution shall be made only if the Participant is an Employee
and demonstrates that he will suffer a financial hardship if he does not receive
a distribution due to an Unforeseen Emergency determined to constitute a
hardship by the Committee. The Committee shall have the sole and absolute
discretion to determine if a Unforeseen Emergency exists with respect to a
Participant.
-8-
<PAGE>
6.2. Payments for Hardship. Hardship payments shall be made to a
---------------------
Participant only in accordance with such rules, policies, procedures,
restrictions, and conditions as the Committee may from time to time adopt. Any
determination of the amount to be distributed on account of an Unforeseen
Emergency shall be made by the Committee. A payment under this Plan Section
shall be made in a lump sum in cash to the Participant and shall be charged
against the Participant's Deferral Account as of the day coinciding with or
immediately preceding the date on which payment is made.
6.3. Suspension of Deferrals. Notwithstanding the foregoing, a
-----------------------
Participant who receives a payment of all or any portion of his Employee
Deferred Account pursuant to this Section 6 shall be suspended from making
deferrals under Plan Section 3 for a period of 12 months immediately following
the date the Participant receives a payment under this Section 6.
SECTION 7. RETIREMENT INCOME BENEFITS
7.1. Normal Retirement Benefit. Each Participant who retires, or
-------------------------
voluntarily or involuntarily terminates employment, at his Normal Retirement
Date shall be entitled to a Retirement Income Benefit commencing at Normal
Retirement Date. The Participant's Retirement Income Benefit shall be paid, in
accordance with the Participant's selection in his Benefit Agreement, either in
a single lump sum distribution of the Participant's Accounts, or in equal annual
installments of 5, 10, or 15 years. Payment of the Participant's Retirement
Income Benefit in equal installments shall only be made if the entire balance in
the Participant's Accounts is equal to or greater than $25,000. The amount of
the annual payments shall be calculated to pay out over the specified period the
entire balance in the Participant's Accounts as of his Normal Retirement Date
with earnings. The Participant's Accounts shall continue to be credited with
earnings until they are fully distributed to the Participant. Payment of
benefits hereunder shall be made or shall commence as soon as possible after the
first day of the month following the end of the calendar quarter following the
quarter in which the Participant terminates employment or dies.
7.2. Termination Benefit. A Participant who voluntarily terminates
-------------------
employment or who is discharged from employment prior to his Normal Retirement
Date shall be entitled to a termination benefit. The termination benefit shall
be a lump-sum payment made within ninety (90) days after the Participant
terminates his employment, equal to the value of his Accounts as vested as of
the date of distribution including earnings. A Participant who is discharged for
cause will receive the sum of his Deferrals without earnings thereon. After a
Participant has received a termination benefit under the Plan, neither the
Participant nor his spouse or other Beneficiary shall be entitled to any further
benefit hereunder.
7.3. Disability. A Participant who has suffered a Disability shall be
----------
deemed to be an Eligible Employee during such period and shall continue to be
eligible for Retirement Income Benefits under Section 7.1 without reduction and
Pre-Retirement and Post-Retirement Death
-9-
<PAGE>
Benefits under Sections 8.1 and 8.2. If the period of Disability occurs within a
Deferral Period, he shall be excused from making the required minimum Deferral
set forth in Section 3.1 for each Plan Year of Disability, but no amounts shall
be credited to his Accounts with respect to such excused Deferral(s). However,
if he returns to employment within the Deferral Period, he may elect, upon his
return, to make the required minimum Deferrals that were previously excused to
the extent that the amount of such Deferrals does not exceed the amount of
compensation which the Participant expects to receive but has not yet been paid
during the remainder of the Plan Year.
7.4. Right to Accelerate. The Board of Directors in its sole discretion
-------------------
may accelerate all vested benefits upon termination of the Plan, and pay such
benefits in a single, actuarially equivalent lump-sum.
7.5. Alternative Forms of Benefit. The Committee in its sole discretion,
----------------------------
but with the consent of the recipient, may elect to pay the Participant, Spouse
or Beneficiary an actuarially equivalent lump-sum or other form of benefit that
it deems appropriate in lieu of the form of benefit otherwise provided.
7.6. Scheduled Withdrawal. A Participant may elect, on a Benefit
--------------------
Agreement form, to receive or commence receiving distributions on a Scheduled
Distribution Date. If a Scheduled Distribution Date is selected, the
Participant shall receive on the Scheduled Distribution Date a single lump-sum
distribution from the Participant's Accounts. The lump sum distribution will be
from the sub-account of the Participant's Accounts attributable to Deferrals in
the Plan Year for which the Benefit Agreement applies. The initial election
must be for a Scheduled Distribution Date that is four (4) years or more from
the date of the Benefit Agreement. If the initial election is for a Scheduled
Distribution Date, then a Participant may delay receipt of the scheduled
distribution provided that his subsequent election is filed with the Committee
at least one year (365 days) prior to his Scheduled Distribution Date.
Notwithstanding this Section 7.6, in no event shall a Scheduled Distribution
Date remain in effect beyond the date the Participant would otherwise be
entitled to receive a distribution under Section 7 or Section 8 of this Plan.
SECTION 8. DEATH BENEFITS
8.1. Pre-Retirement Death Benefit. If a Participant dies while employed
----------------------------
by the Company, or if a Participant dies after termination of employment, but
prior to the commencement of his Retirement Income Benefit, his Beneficiary
shall be entitled to receive the balance in the Participant's Accounts as of the
Participant's date of death. This amount will be paid to the Beneficiary in a
lump-sum as soon as possible after the first day of the month following the end
of the calendar quarter following the calendar quarter in which the Participant
died.
8.2. Post-Retirement Death Benefit. The Beneficiary of a Participant who
-----------------------------
dies after commencement of his Retirement Income Benefit shall be entitled to
continue to receive the
-10-
<PAGE>
Retirement Income Benefit payments being made to the Participant under Section
7.1 for the remainder of the period specified in that section.
SECTION 9. ADMINISTRATION OF THE PLAN
9.1. Operation of the Committee. The Board of Directors shall have the
--------------------------
right to remove any member of the Committee at any time by notice in writing.
Any member of the Committee may resign at any time by written notice of
resignation to the Board of Directors. Upon removal or resignation of a member
of the Committee, the Board of Directors shall appoint a successor.
9.2. Duties of the Committee.
-----------------------
(a) The Committee shall make all payments under the terms of the
Plan.
(b) The Committee shall from time to time establish rules, not
contrary to the provisions of the Plan, for the administration of the Plan
and the transaction of its business. All elections and designations under
the Plan by a Participant or Beneficiary shall be made on forms prescribed
by the Committee. The Committee shall have discretionary authority to
construe the terms of the Plan and shall determine all questions arising in
the administration, interpretation and application of the Plan, including,
but not limited to, those concerning eligibility for benefits and it shall
not act so as to discriminate in favor of any person. All determinations
of the Committee shall be conclusive and binding on all Employees,
Participants, and Beneficiaries, subject to the provisions of the Plan and
subject to applicable law.
(c) The Committee shall furnish Participants and Beneficiaries with
all disclosures now or hereafter required by the Act. The Committee shall
file, as required, the various reports and disclosures concerning the Plan
and its operations as required by the Act and by the Code, and shall be
solely responsible for establishing and maintaining all records of the
Plan.
(d) The statement of specific duties for a Committee in this Plan
Section is not in derogation of any other duties which a Committee has
under the provisions of the Plan or under applicable law.
9.3. Action by the Company or a Plan Sponsor. Any action to be taken by
---------------------------------------
the Company or a Plan Sponsor shall be taken by resolution or written direction
duly adopted by its board of directors or appropriate governing body, as the
case may be; provided, however, that by such resolution or written direction,
the board of directors or appropriate governing body, as the case may be, may
delegate to any officer or other appropriate person of a Plan Sponsor the
authority to take any such actions as may be specified in such resolution or
written
-11-
<PAGE>
direction, other than the power to amend, modify or terminate the Plan or to
determine the basis of any Plan Sponsor contributions.
SECTION 10. CLAIM REVIEW PROCEDURE
10.1. Denial of Claims. In the event that a Participant or Beneficiary is
----------------
denied a claim for benefits under a Plan, the Committee shall provide to such
claimant written notice of the denial which shall set forth:
(a) the specific reasons for the denial;
(b) specific references to the pertinent provisions of the Plan on
which the denial is based;
(c) a description of any additional material or information
necessary for the claimant to perfect the claim and an explanation of why
such material or information is necessary; and
(d) an explanation of the Plan's claim review procedure.
10.2. Appeal of Denial. After receiving written notice of the denial of a
----------------
claim, a claimant or his representative may:
(a) request a full and fair review of such denial by written
application to the Committee;
(b) review pertinent documents; and
(c) submit issues and comments in writing to the Committee.
10.3. Written Notice for Review. If the claimant wishes such a review of
-------------------------
the decision denying his claim to benefits under the Plan, he must submit such
written applications to the Committee within sixty (60) days after receiving
written notice of the denial.
10.4. Hearing. Upon receiving such written application for review, the
-------
Committee may schedule a hearing for purposes of reviewing the claimant's claim,
which hearing shall take place not more than thirty (30) days from the date on
which the Committee received such written application for review. At least ten
(10) days prior to the scheduled hearing, the claimant and his representative
designated in writing by him, if any, shall receive written notice of the date,
time, and place of such scheduled hearing. The claimant or his representative,
if any, may request that the hearing be rescheduled, for his convenience, on
another reasonable date or at another reasonable time or place.
-12-
<PAGE>
10.5. Counsel. All claimants requesting a review of the decision denying
-------
their claim for benefits may employ counsel for purposes of the hearing.
10.6. Decision on Appeal. No later than sixty (60) days following the
------------------
receipt of the written application for review, the Committee shall submit its
decision on the review in writing to the claimant involved and to his
representative, if any; provided, however, a decision on the written application
for review may be extended, in the event special circumstances such as the need
to hold a hearing require an extension of time, to a day no later than one
hundred twenty (120) days after the date of receipt of the written application
for review. The decision shall include specific reasons for the decision and
specific references to the pertinent provisions of the Plan on which the
decision is based.
SECTION 11. LIMITATION OF ASSIGNMENT, PAYMENTS TO LEGALLY
INCOMPETENT DISTRIBUTEE AND UNCLAIMED PAYMENTS
11.1. No Alienation. No benefit which shall be payable under the Plan to
-------------
any person shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge, and any attempt to
anticipate, alienate, sell, transfer, assign, pledge, encumber or charge the
same shall be void; and no such benefit shall in any manner be liable for, or
subject to, the debts, contracts, liabilities, engagements or torts of any
person, nor shall it be subject to attachment or legal process for, or against,
such person, and the same shall not be recognized under the Plan, except to such
extent as may be required by law.
11.2. Attempt To Transfer. If any person who shall be entitled to any
-------------------
benefit under the Plan shall become bankrupt or shall attempt to anticipate,
alienate, sell, transfer, assign, pledge, encumber or charge such benefit under
the Plan, then the payment of any such benefit in the event a Participant or
Beneficiary is entitled to payment shall, in the discretion of the Committee,
cease and terminate and in that event the Committee shall apply the same for the
benefit of such person, his spouse, children, other dependents or any of them in
such manner and in such proportion as the Committee shall determine.
11.3. Minors or Incompetents. Whenever any benefit which shall be payable
----------------------
under the Plan is to be paid to or for the benefit of any person who is then a
minor or determined to be incompetent by qualified medical advice, the Committee
need not require the appointment of a guardian or custodian, but shall be
authorized to cause the same to be paid over to the person having custody of
such minor or incompetent, or to cause the same to be paid to such minor or
incompetent without the intervention of a guardian or custodian, or to cause the
same to be paid to a legal guardian or custodian of such minor or incompetent if
one has been appointed or to cause the same to be used for the benefit of such
minor or incompetent.
11.4. Missing Persons. Whenever the Committee cannot, within a reasonable
---------------
time after payments are to commence, locate any person to or for the benefit of
whom such payments
-13-
<PAGE>
are to be made, after making a reasonable effort to locate such person, the
Committee may direct that the payment and any remaining payments otherwise due
to the Participant be cancelled on the records of the Plan, except that in the
event the Participant later notifies the Committee of his whereabouts and
requests the payments due to him under the Plan, the Plan Sponsor shall re-
credit the Participant's account and provide for payment of the re-credited
amount to the Participant as soon as administratively feasible.
SECTION 12. LIMITATION OF RIGHTS
Participation in the Plan shall not give any Employee any right or claim
except to the extent that such right is specifically fixed under the terms of
the Plan. The adoption of the Plan by any Plan Sponsor shall not be construed
to give any Employee a right to be continued in the employ of a Plan Sponsor or
as interfering with the right of a Plan Sponsor to terminate the employment of
any Employee at any time.
SECTION 13. AMENDMENT TO OR TERMINATION OF THE PLAN
13.1. Amendment and Termination. The Company or any successor thereto
-------------------------
reserves the right by action of its Board of Directors or its delegatee at any
time to modify or amend or terminate the Plan. No such modifications or
amendments shall have the effect of retroactively changing or depriving
Participants or Beneficiaries of benefits already accrued under the Plan.
Notwithstanding anything contained in the Plan to the contrary, upon termination
of the Plan each Participant's Account shall be payable to the Participant as
soon thereafter as is reasonably practicable. No Plan Sponsor other than the
Company shall have the right to so modify, amend or terminate the Plan.
Notwithstanding the foregoing, each Plan Sponsor may terminate its own
participation in the Plan.
13.2. Termination by Plan Sponsor. Each Plan Sponsor other than the
---------------------------
Company shall have the right to terminate its participation in the Plan by
resolution of its board of directors or other appropriate governing body and
notice in writing to the Company. Any termination by a Plan Sponsor, shall not
be a termination as to any other Plan Sponsor.
13.3. Termination by Company. If the Plan is terminated by the Company it
----------------------
shall terminate as to all Plan Sponsors.
SECTION 14. ADOPTION OF PLAN BY AFFILIATES
Any corporation or other business entity related to the Company by function
or operation and any Affiliate, if the corporation, business entity or Affiliate
is authorized to do so by written
-14-
<PAGE>
direction adopted by the Board of Directors, may adopt the Plan by action of the
board of directors or other appropriate governing body of such corporation,
business entity or Affiliate. Any adoption shall be evidenced by certified
copies of the resolutions of the foregoing board of directors or governing body
indicating the adoption by the adopting corporation, or business entity or
Affiliate. The resolution shall state and define the effective date of the
adoption of the Plan by the Plan Sponsor.
SECTION 15. MISCELLANEOUS
15.1. Unfunded Plan. All payments provided under the Plan shall be paid
-------------
from the general assets of the applicable Plan Sponsor and no separate fund
shall be established to secure payment. Notwithstanding the foregoing, the
Company may establish a grantor trust to assist it in funding its obligations
under the Plan, and any payments made to a Participant or Beneficiary from such
trust shall relieve the Plan Sponsor from any further obligations under the Plan
only to the extent of such payment.
15.2. Withholding. Each Plan Sponsor shall withhold from any benefits
-----------
payable under the Plan all federal, state and local income taxes or other taxes
required to be withheld pursuant to applicable law.
15.3. Governing Law. To the extent not preempted by applicable federal
-------------
law, the Plan shall be governed by and construed in accordance with the laws of
the State of Delaware.
IN WITNESS WHEREOF, the Company has caused this Plan to be executed this
_____ day of _______________, 1996.
GRANCARE, INC., a Delaware company
By /s/ Evrett W. Benton
-----------------------------
Title Executive Vice President
--------------------------
ATTEST
By /s/ M. Henry Day, Jr.
---------------------------
Title Assistant Secretary
------------------------
[CORPORATE SEAL]
-15-
<PAGE>
EXHIBIT 10.27
ASSIGNMENT, ASSUMPTION AND AMENDMENT OF THE
GRANCARE, INC. 401(k) SAVINGS PLAN
THIS ASSIGNMENT AND ASSUMPTION AGREEMENT (the "Assignment") is made and
entered into as of January , 1997, by and between GRANCARE, INC., a California
--
corporation (the "Assignor") and NEW GRANCARE, INC., a Delaware corporation (the
"Assignee").
W I T N E S S E T H:
-------------------
WHEREAS, the Assignor maintains the GranCare, Inc. 401(k) Savings Plan (the
"401(k) Plan") and its accompanying Trust Agreement;
WHEREAS, the Assignor and Assignee have entered into a distribution
agreement, dated as of September 3, 1996, whereby the Assignor will distribute
on a certain date (the "Distribution Date") to its shareholders all of the
outstanding shares of common stock of its wholly owned subsidiary, the Assignee
(the "Distribution");
WHEREAS, upon the Distribution Date, the Assignor wishes to assign all
duties and obligations as the Primary Sponsor under the 401(k) Plan and the
Assignee wishes to accept and assume such duties and obligations as Primary
Sponsor of the 401(k) Plan; and
WHEREAS, in connection with the Distribution, the Assignee wishes to
clarify certain provisions of the 401(k) Plan.
NOW, THEREFORE, in consideration of the premises and for other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Assignment of 401(k) Plan. FOR VALUE RECEIVED, and in accordance with
-------------------------
the terms of the 401(k) Plan, the Assignor assigns, grants, conveys, transfers
and sets over to the Assignee, effective upon the Distribution Date, all rights
and obligations of the Assignor under the 401(k) Plan, including any rights as
policyholder of any insurance policies funding benefits under the 401(k) and the
rights as Settlor of any trust established in connection with the Plan. The
Assignor covenants, warrants and represents to the Assignee that (i) all
representations and warranties made or deemed to be made on behalf of the
Assignor under the 401(k) Plan are true and correct on and as of the
Distribution Date, except as affected by the transactions contemplated in the
401(k) Plan, and (ii) the Assignor is not otherwise in default under the terms
of the 401(k) Plan. This assignment is given for good and valuable
consideration paid to the Assignor, the receipt and sufficiency of which
consideration is hereby acknowledged, and is coupled with an interest, and
therefore irrevocable.
2. Assumption of 401(k) Plan by Assignee. FOR VALUE RECEIVED, the
-------------------------------------
Assignee hereby accepts the foregoing assignment of the Assignor's rights and
obligations under the 401(k) Plan. The Assignee agrees from and after the
Distribution Date to timely pay, perform and discharge all obligations,
covenants, stipulations and agreements of the Assignor under the
<PAGE>
401(k) Plan and hereby agrees to indemnify and save harmless the Assignor from
any and all losses, damages, claims and expenses from liabilities arising out of
any breach or default under the 401(k) Plan from and after the Distribution Date
resulting from the failure of the Assignee to abide by and perform the same.
3. Amendment of Plan. On the Distribution Date, all references to the
-----------------
term "Employer" within the 401(k) Plan shall be references to the Assignee. For
the purposes of vesting and the payment of benefits solely, the Distribution
shall not constitute a termination of employment, as defined in Section 2.93 of
the 401(k) Plan, so long as the participant remains continuously in the employ
of the Assignee or its affiliates, and after the Distribution Date,
contributions shall not be made by or on behalf of those participants who do not
continue in the employ of the Assignee and its affiliates.
4. Governing Law. This Assignment shall be governed and construed in
-------------
accordance with the laws of the State of Delaware.
IN WITNESS WHEREOF, the parties hereto have duly executed and sealed this
Assignment as of the day and year first written above.
GRANCARE, INC., a California Company
By: /s/ Evrett W. Benton
----------------------------------
Print Name: Evrett W. Benton
-----------------------
Title: Executive Vice President
----------------------------
NEW GRANCARE, INC., a Delaware Company
By: /s/ Evrett W. Benton
----------------------------------
Print Name: Evrett W. Benton
-----------------------
Title: Vice President
----------------------------
<PAGE>
EXHIBIT 10.28
NEW GRANCARE, INC.
1996 STOCK INCENTIVE PLAN
<PAGE>
NEW GRANCARE, INC.
1996 STOCK INCENTIVE PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SECTION 1 DEFINITIONS................................................... 1
1.1 Definitions.................................................. 1
SECTION 2 THE STOCK INCENTIVE PLAN...................................... 3
2.1 Purpose of the Plan.......................................... 3
2.2 Stock Subject to the Plan.................................... 4
2.3 Administration of the Plan................................... 4
2.4 Eligibility and Limits....................................... 4
SECTION 3 TERMS OF STOCK INCENTIVES..................................... 5
3.1 Terms and Conditions of All Stock Incentives................. 5
3.2 Terms and Conditions of Options.............................. 6
(a) Option Price.......................................... 6
(b) Option Term........................................... 6
(c) Payment............................................... 7
(d) Conditions to the Exercise of an Option............... 7
(e) Termination of Incentive Stock Option................. 7
(f) Special Provisions for Certain Substitute Options..... 7
3.3 Terms and Conditions of Stock Appreciation Rights............ 8
(a) Settlement............................................ 8
(b) Conditions to Exercise................................ 8
3.4 Terms and Conditions of Stock Awards......................... 8
3.5 Terms and Conditions of Dividend Equivalent Rights........... 9
(a) Payment................................................ 9
(b) Conditions to Payment.................................. 9
3.6 Terms and Conditions of Phantom Shares................. 9
(a) Payment................................................ 9
(b) Conditions to Payment.................................. 9
3.7 Treatment of Awards Upon Termination of Employment..... 9
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
SECTION 4 RESTRICTIONS ON STOCK....................................... 10
4.1 Escrow of Shares............................................ 10
4.2 Forfeiture of Shares........................................ 10
4.3 Restrictions on Transfer.................................... 10
SECTION 5 GENERAL PROVISIONS.......................................... 11
5.1 Withholding................................................. 11
5.2 Changes in Capitalization; Merger; Liquidation.............. 11
5.3 Cash Awards................................................. 12
5.4 Compliance with Code........................................ 12
5.5 Right to Terminate Employment............................... 12
5.6 Non-alienation of Benefits.................................. 12
5.7 Listing and Legal Compliance................................ 13
5.8 Termination and Amendment of the Plan....................... 13
5.9 Stockholder Approval........................................ 13
5.10 Choice of Law............................................... 13
5.11 Effective Date of Plan...................................... 13
</TABLE>
-ii-
<PAGE>
NEW GRANCARE, INC.
1996 STOCK INCENTIVE PLAN
SECTION 1 DEFINITIONS
1.1 Definitions. Whenever used herein, the masculine pronoun shall be
-----------
deemed to include the feminine, and the singular to include the plural, unless
the context clearly indicates otherwise, and the following capitalized words
and phrases are used herein with the meaning thereafter ascribed:
(a) "Affiliate" means (a) an entity that directly or through one or
---------
more intermediaries is controlled by the Company, and (b) any entity in which
the Company has a significant equity interest, as determined by the Company.
(b) "Board of Directors" means the board of directors of the Company.
------------------
(c) "Change in Control" means the first to occur of the following
-----------------
events:
(i) any person (as defined in Section 3(a)(9) of the Exchange
Act and as used in Sections 13(d) and 14(d) thereof), excluding the Company, any
Subsidiary and any employee benefit plan sponsored or maintained by the Company
or any Subsidiary (including any trustee of such plan acting as trustee) (the
Company, all Subsidiaries, and such employee benefit plans and trustees acting
as trustees being hereafter referred to as the "Company Group"), but including a
`group' as defined in Section 13(d)(3) of the Exchange Act (a "Person"), becomes
the beneficial owner of shares of the Company having at least thirty percent
(30%) of the total number of votes that may be cast for the election of
directors of the Company (the "Voting Shares"); provided that no Change of
Control will occur as a result of an acquisition of stock by the Company Group
which increases, proportionately, the stock representing the voting power of the
Company beneficially owned by such Person above thirty percent (30%) of the
voting power of the Company, and provided further that if such Person acquires
beneficial ownership of stock representing more than thirty percent (30%) of the
voting power of the Company by reason of share purchases by the Company Group,
and after such share purchases by the Company Group acquires any additional
shares representing voting power of the Company, then a Change of Control shall
occur;
(ii) the shareholders of the Company shall approve any merger or
other business combination of the Company, sale of the Company's assets or
combination of the foregoing transactions (a "Transaction") other than a
Transaction involving only the Company and one or more of its Subsidiaries, or a
Transaction immediately following which the shareholders of the Company
immediately prior to the Transaction continue to have a majority of the voting
power in the resulting entity excluding for this purpose any shareholder owning
directly or indirectly more than ten percent (10%) of the shares of the other
company involved in the merger; or
(iii) within any 24-month period, the persons who were
directors of the Company immediately before the beginning of such period (the
"Incumbent Directors") shall cease
<PAGE>
(for any reason other than death) to constitute at least a majority of the Board
of Directors or the board of directors of any successor to the Company, provided
that any director who was not a director as of the effective date of this Plan
shall be deemed to be an Incumbent Director if such director was elected to the
Board of Directors by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent Directors
either actually or by prior operation of this clause (iii); and provided further
that any director elected to the Board of Directors to avoid or settle a
threatened or actual proxy contest shall in no event be deemed to be an
Incumbent Director.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means the Management Compensation Committee appointed
---------
by the Board of Directors to administer the Plan. The Board of Directors shall
consider the advisability of whether the members of the Committee shall consist
solely of at least two members of the Board of Directors who are both "outside
directors" as defined in Treas. Reg. (S) 1.162-27(e) as promulgated by the
Internal Revenue Service and "non-employee directors" as defined in
Rule 16b-3(b)(3) as promulgated under the Exchange Act.
(f) "Company" means New GranCare, Inc., a Delaware corporation.
-------
(g) "Disability" has the same meaning as provided in the long-term
----------
disability plan or policy maintained or, if applicable, most recently
maintained, by the Company or, if applicable, any Affiliate of the Company for
the Participant. If no long-term disability plan or policy was ever maintained
on behalf of the Participant or, if the determination of Disability relates to
an Incentive Stock Option, Disability shall mean that condition described in
Code Section 22(e)(3), as amended from time to time. In the event of a dispute,
the determination of Disability shall be made by the Committee and shall be
supported by advice of a physician competent in the area to which such
Disability relates.
(h) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended from time to time.
(i) "Fair Market Value" with regard to a date means the closing price
-----------------
at which Stock shall have been sold on the last trading date prior to that date
as reported by the National Association of Securities Dealers Automated
Quotation System (or, if applicable, as reported by a national securities
exchange selected by the Committee on which the shares of Stock are then
actively traded) and published in The Wall Street Journal; provided that, for
purposes of granting awards other than Incentive Stock Options, Fair Market
Value of the shares of Stock may be determined by the Committee by reference to
the average market value determined over a period certain or as of specified
dates, to a tender offer price for the shares of Stock (if settlement of an
award is triggered by such an event) or to any other reasonable measure of fair
market value.
-2-
<PAGE>
(j) "Option" means a non-qualified stock option or an incentive stock
------
option.
(k) "Over 10% Owner" means an individual who at the time an Incentive
--------------
Stock Option is granted owns Stock possessing more than 10% of the total
combined voting power of the Company or one of its Subsidiaries, determined by
applying the attribution rules of Code Section 424(d).
(l) "Participant" means an individual who receives a Stock Incentive
-----------
hereunder.
(m) "Plan" means the New GranCare, Inc. 1996 Stock Incentive Plan.
----
(n) "Stock" means the Company's common stock.
-----
(o) "Stock Incentive Agreement" means an agreement between the
-------------------------
Company and a Participant or other documentation evidencing an award of a Stock
Incentive.
(p) "Stock Incentive Program" means a written program established by
-----------------------
the Committee, pursuant to which Stock Incentives are awarded under the Plan
under uniform terms, conditions and restrictions set forth in such written
program.
(q) "Stock Incentives" means, collectively, Dividend Equivalent
----------------
Rights, Incentive Stock Options, Non-Qualified Stock Options, Phantom Shares,
Stock Appreciation Rights and Stock Awards.
(r) "Subsidiary" means any corporation (other than the Company) in an
----------
unbroken chain of corporations beginning with the Company if, with respect to
Incentive Stock Options, at the time of the granting of the Option, each of the
corporations other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in the chain.
SECTION 2 THE STOCK INCENTIVE PLAN
2.1 Purpose of the Plan. The Plan is intended to (a) provide incentive to
-------------------
officers and key employees of the Company and its Affiliates to stimulate their
efforts toward the continued success of the Company and to operate and manage
the business in a manner that will provide for the long-term growth and
profitability of the Company; (b) encourage stock ownership by officers and key
employees by providing them with a means to acquire a proprietary interest in
the Company, acquire shares of Stock, or to receive compensation which is based
upon appreciation in the value of Stock; and (c) provide a means of obtaining,
rewarding and retaining key personnel and consultants.
-3-
<PAGE>
2.2 Stock Subject to the Plan. Subject to adjustment in accordance with
-------------------------
Section 5.2, 1,500,000 shares of Stock (the "Maximum Plan Shares") are hereby
reserved exclusively for issuance pursuant to Stock Incentives. At no time shall
the Company have outstanding under the Plan, Stock Incentives subject to Section
16 of the Exchange Act and shares of Stock issued in respect of Stock Incentives
under the Plan in excess of the Maximum Plan Shares. The shares of Stock
attributable to the nonvested, unpaid, unexercised, unconverted or otherwise
unsettled portion of any Stock Incentive that is forfeited or cancelled or
expires or terminates for any reason without becoming vested, paid, exercised,
converted or otherwise settled in full shall again be available for purposes of
the Plan.
2.3 Administration of the Plan. The Plan shall be administered by the
--------------------------
Committee. The Committee shall have full authority in its discretion to
determine the officers and key employees of the Company or its Affiliates to
whom Stock Incentives shall be granted and the terms and provisions of Stock
Incentives, subject to the Plan; provided, however, that any award of a Stock
Incentive to any employee who is also a member of the Board of Directors shall
be approved by the majority of the "disinterested persons," as defined in Rule
16b-3 as promulgated under the Exchange Act, then serving as members of the
Board of Directors, upon the recommendation of the Committee. Subject to the
provisions of the Plan, the Committee shall have full and conclusive authority
to interpret the Plan; to prescribe, amend and rescind rules and regulations
relating to the Plan; to determine the terms and provisions of the respective
Stock Incentive Agreements and to make all other determinations necessary or
advisable for the proper administration of the Plan. The Committee's
determinations under the Plan need not be uniform and may be made by it
selectively among persons who receive, or are eligible to receive, awards under
the Plan (whether or not such persons are similarly situated). The Committee's
decisions shall be final and binding on all Participants.
2.4 Eligibility and Limits. Stock Incentives may be granted only to
----------------------
officers, and key employees and consultants of the Company, or any Affiliate of
the Company; provided, however, that an incentive stock option may only be
granted to an employee of the Company or any Subsidiary. In the case of
incentive stock options, the aggregate Fair Market Value (determined as at the
date an incentive stock option is granted) of stock with respect to which stock
options intended to meet the requirements of Code Section 422 become exercisable
for the first time by an individual during any calendar year under all plans of
the Company and its Subsidiaries shall not exceed $100,000; provided further,
that if the limitation is exceeded, the incentive stock option(s) which cause
the limitation to be exceeded shall be treated as non-qualified stock option(s).
In no event shall any person be entitled to grants under the Plan in any
calendar year in excess of 150,000 shares.
-4-
<PAGE>
SECTION 3 TERMS OF STOCK INCENTIVES
3.1 Terms and Conditions of All Stock Incentives.
--------------------------------------------
(a) The number of shares of Stock as to which a Stock Incentive shall
be granted shall be determined by the Committee in its sole discretion, subject
to the provisions of Section 2.2 as to the total number of shares available for
grants under the Plan.
(b) Each Stock Incentive shall either be evidenced by a Stock
Incentive Agreement in such form and containing such terms, conditions and
restrictions as the Committee may determine to be appropriate, or be made
subject to the terms of a Stock Incentive Program, containing such terms,
conditions and restrictions as the Committee may determine to be appropriate.
Each Stock Incentive Agreement or Stock Incentive Program shall be subject to
the terms of the Plan and any provisions contained in the Stock Incentive
Agreement or Stock Incentive Program that are inconsistent with the Plan shall
be null and void.
(c) The date a Stock Incentive is granted shall be the date on which
the Committee has approved the terms and conditions of the Stock Incentive and
has determined the recipient of the Stock Incentive and the number of shares
covered by the Stock Incentive.
(d) Each Stock Incentive Agreement or Stock Incentive Program may
provide that, in the event of a Change in Control, the Stock Incentive shall be
cashed out on the basis of any price not greater than the highest price paid for
a share of Stock in any transaction reported by the National Association of
Securities Dealers Automated Quotation System or any national securities
exchange selected by the Committee on which the shares of Stock are then
actively traded during a specified period immediately preceding or ending on the
date of the Change in Control or offered for a share of Stock in any tender
offer occurring during a specified period immediately preceding or ending on the
date the tender offer commences; provided that, in no case shall any such
specified period exceed one (1) year (the "Change in Control Price"). For
purposes of this Subsection, the cash-out of a Stock Incentive shall be
determined as follows:
(i) Options shall be cashed out on the basis of the excess,
if any, of the Change in Control Price (but not more than the Fair Market Value
of the Stock on the date of the cash-out in the case of Incentive Stock Options)
over the Exercise Price with or without regard to whether the Option may
otherwise be exercisable only in part;
(ii) Stock Awards and Phantom Shares shall be cashed out in
an amount equal to the Change in Control Price with or without regard to any
conditions or restrictions otherwise applicable to any such Stock Incentive; and
-5-
<PAGE>
(iii) Stock Appreciation Rights, Dividend Equivalent Rights
and Performance Unit Awards shall be cashed out with or without regard to any
conditions or restrictions otherwise applicable to any such Stock Incentive and
the amount of the cash out shall be determined by reference to the number of
shares of Stock that would be required to pay the Participant in kind for the
value of the Stock Incentive as of the date of the Change in Control multiplied
by the Change in Control Price.
(e) Any Stock Incentive may be granted in connection with all or any
portion of a previously or contemporaneously granted Stock Incentive. Exercise
or vesting of a Stock Incentive granted in connection with another Stock
Incentive may result in a pro rata surrender or cancellation of any related
Stock Incentive, as specified in the applicable Stock Incentive Agreement or
Stock Incentive Program.
(f) Stock Incentives shall not be transferable or assignable except by
will or by the laws of descent and distribution and shall be exercisable, during
the Participant's lifetime, only by the Participant, or in the event of the
Disability of the Participant, by the legal representative of the Participant.
3.2 Terms and Conditions of Options. Each Option granted under the
-------------------------------
Plan shall be evidenced by a Stock Incentive Agreement. At the time any Option
is granted, the Committee shall determine whether the Option is to be an
incentive stock option described in Code Section 422 or a non-qualified stock
option, and the Option shall be clearly identified as to its status as an
incentive stock option or a non-qualified stock option. An incentive stock
option may only be granted within ten (10) years from the earlier of the date
the Plan is adopted or approved by the Company's stockholders.
(a) Option Price. Subject to adjustment in accordance with Section
------------
5.2 and the other provisions of this Section 3.2, the exercise price (the
"Exercise Price") per share of Stock purchasable under any Option shall be as
set forth in the applicable Stock Incentive Agreement, but in no event shall it
be less than the Fair Market Value on the date the Option is granted. With
respect to each grant of an incentive stock option to a Participant who is an
Over 10% Owner, the Exercise Price shall not be less than 110% of the Fair
Market Value on the date the Option is granted. The Exercise Price of an Option
may not be amended or modified after the grant of the Option, and an Option may
not be surrendered in consideration of or exchanged for a grant of a new Option
having an Exercise Price below that of the Option which was surrendered or
exchanged.
(b) Option Term. Any incentive stock option granted to a Participant
-----------
who is not an Over 10% Owner shall not be exercisable after the expiration of
ten (10) years after the date the Option is granted. Any incentive stock option
granted to an Over 10% Owner shall not be exercisable after the expiration of
five (5) years after the date the Option is granted. The term of any Non-
Qualified Stock Option shall be as specified in the applicable Stock Incentive
Agreement.
-6-
<PAGE>
(c) Payment. Payment for all shares of Stock purchased pursuant to
-------
exercise of an Option shall be made in any form or manner authorized by the
Committee in the Stock Incentive Agreement or by amendment thereto, including,
but not limited to, cash or, if the Stock Incentive Agreement provides, (i) by
delivery to the Company of a number of shares of Stock which have been owned by
the holder for at least six (6) months prior to the date of exercise having an
aggregate Fair Market Value of not less than the product of the Exercise Price
multiplied by the number of shares the Participant intends to purchase upon
exercise of the Option on the date of delivery; (ii) in a cashless exercise
through a broker; or (iii) by having a number of shares of Stock withheld, the
Fair Market Value of which as of the date of exercise is sufficient to satisfy
the Exercise Price. In its discretion, the Committee also may authorize (at the
time an Option is granted or thereafter) Company financing to assist the
Participant as to payment of the Exercise Price on such terms as may be offered
by the Committee in its discretion. Any such financing shall require the
payment by the Participant of interest on the amount financed at a rate not less
than the "applicable federal rate" under the Code. Payment shall be made at the
time that the Option or any part thereof is exercised, and no shares shall be
issued or delivered upon exercise of an option until full payment has been made
by the Participant. The holder of an Option, as such, shall have none of the
rights of a stockholder.
(d) Conditions to the Exercise of an Option. Each Option granted
---------------------------------------
under the Plan shall be exercisable by whom, at such time or times, or upon the
occurrence of such event or events, and in such amounts, as the Committee shall
specify in the Stock Incentive Agreement; provided, however, that subsequent to
the grant of an Option, the Committee, at any time before complete termination
of such Option, may accelerate the time or times at which such Option may be
exercised in whole or in part, including, without limitation, upon a Change in
Control and may permit the Participant or any other designated person to
exercise the Option, or any portion thereof, for all or part of the remaining
Option term, notwithstanding any provision of the Stock Incentive Agreement to
the contrary.
(e) Termination of Incentive Stock Option. With respect to an
-------------------------------------
incentive stock option, in the event of termination of employment of a
Participant, the Option or portion thereof held by the Participant which is
unexercised shall expire, terminate, and become unexercisable no later than the
expiration of three (3) months after the date of termination of employment;
provided, however, that in the case of a holder whose termination of employment
is due to death or Disability, one (1) year shall be substituted for such three
(3) month period. For purposes of this Subsection (e), termination of
employment of the Participant shall not be deemed to have occurred if the
Participant is employed by another corporation (or a parent or subsidiary
corporation of such other corporation) which has assumed the incentive stock
option of the Participant in a transaction to which Code Section 424(a) is
applicable.
(f) Special Provisions for Certain Substitute Options.
-------------------------------------------------
Notwithstanding anything to the contrary in this Section 3.2, any Option issued
in substitution for an option previously issued by another entity, which
substitution occurs in connection with a transaction to which Code Section
424(a) is applicable, may provide for an exercise price computed in accordance
with such
-7-
<PAGE>
Code Section and the regulations thereunder and may contain such other terms and
conditions as the Committee may prescribe to cause such substitute Option to
contain as nearly as possible the same terms and conditions (including the
applicable vesting and termination provisions) as those contained in the
previously issued option being replaced thereby.
3.3 Terms and Conditions of Stock Appreciation Rights. Each Stock
-------------------------------------------------
Appreciation Right granted under the Plan shall be evidenced by a Stock
Incentive Agreement. A Stock Appreciation Right shall entitle the Participant
to receive the excess of (1) the Fair Market Value of a specified or
determinable number of shares of the Stock at the time of payment or exercise
over (2) a specified or determinable price which, in the case of a Stock
Appreciation Right granted in connection with an Option, shall be not less than
the Exercise Price for that number of shares subject to that Option. A Stock
Appreciation Right granted in connection with a Stock Incentive may only be
exercised to the extent that the related Stock Incentive has not been exercised,
paid or otherwise settled.
(a) Settlement. Upon settlement of a Stock Appreciation Right, the
----------
Company shall pay to the Participant the appreciation in cash or shares of Stock
(valued at the aggregate Fair Market Value on the date of payment or exercise)
as provided in the Stock Incentive Agreement or, in the absence of such
provision, as the Committee may determine.
(b) Conditions to Exercise. Each Stock Appreciation Right granted
----------------------
under the Plan shall be exercisable or payable at such time or times, or upon
the occurrence of such event or events, and in such amounts, as the Committee
shall specify in the Stock Incentive Agreement; provided, however, that
subsequent to the grant of a Stock Appreciation Right, the Committee, at any
time before complete termination of such Stock Appreciation Right, may
accelerate the time or times at which such Stock Appreciation Right may be
exercised or paid in whole or in part.
3.4 Terms and Conditions of Stock Awards. The number of shares of
------------------------------------
Stock subject to a Stock Award and restrictions or conditions on such shares, if
any, shall be as the Committee determines, and the certificate for such shares
shall bear evidence of any restrictions or conditions. Subsequent to the date
of the grant of the Stock Award, the Committee shall have the power to permit,
in its discretion, an acceleration of the expiration of an applicable
restriction period with respect to any part or all of the shares awarded to a
Participant. The Committee may require a cash payment from the Participant in
an amount no greater than the aggregate Fair Market Value of the shares of Stock
awarded determined at the date of grant in exchange for the grant of a Stock
Award or may grant a Stock Award without the requirement of a cash payment. In
no event shall Stock Awards made under the Plan exceed 300,000 shares of Stock,
provided, however, that in the event that shares of Stock subject to Stock
Awards are forfeited by a Participant such shares of Stock may again be subject
to a new Stock Award under the Plan.
3.5 Terms and Conditions of Dividend Equivalent Rights. A Dividend
--------------------------------------------------
Equivalent Right shall entitle the Participant to receive payments from the
Company in an amount determined by reference to any cash dividends paid on a
specified number of shares of Stock to Company
-8-
<PAGE>
stockholders of record during the period such rights are effective. The
Committee may impose such restrictions and conditions on any Dividend Equivalent
Right as the Committee in its discretion shall determine, including the date any
such right shall terminate and may reserve the right to terminate, amend or
suspend any such right at any time.
(a) Payment. Payment in respect of a Dividend Equivalent Right may be
-------
made by the Company in cash or shares of Stock (valued at Fair Market Value on
the date of payment) as provided in the Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine.
(b) Conditions to Payment. Each Dividend Equivalent Right granted
---------------------
under the Plan shall be payable at such time or times, or upon the occurrence of
such event or events, and in such amounts, as the Committee shall specify in the
applicable Stock Incentive Agreement or Stock Incentive Program; provided,
however, that subsequent to the grant of a Dividend Equivalent Right, the
Committee, at any time before complete termination of such Dividend Equivalent
Right, may accelerate the time or times at which such Dividend Equivalent Right
may be paid in whole or in part.
3.6 Terms and Conditions of Phantom Shares. Phantom Shares shall entitle
--------------------------------------
the Participant to receive, at a specified future date, payment of an amount
equal to all or a portion of the Fair Market Value of a specified number of
shares of Stock at the end of a specified period. At the time of the grant, the
Committee shall determine the factors which will govern the portion of the
rights so payable, including, at the discretion of the Committee, any
performance criteria that must be satisfied as a condition to payment. Phantom
Share awards containing performance criteria may be designated as Performance
Share Awards.
(a) Payment. Payment in respect of Phantom Shares may be made by the
-------
Company in cash or shares of Stock (valued at Fair Market Value on the date of
payment) as provided in the applicable Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine.
(b) Conditions to Payment. Each Phantom Share granted under the Plan
---------------------
shall be payable at such time or times, or upon the occurrence of such event or
events, and in such amounts, as the Committee shall specify in the applicable
Stock Incentive Agreement or Stock Incentive Program; provided, however, that
subsequent to the grant of a Phantom Share, the Committee, at any time before
complete termination of such Phantom Share, may accelerate the time or times at
which such Phantom Share may be paid in whole or in part.
3.7 Treatment of Awards Upon Termination of Employment. Except as
--------------------------------------------------
otherwise provided by Plan Section 3.2(e), any award under this Plan to a
Participant who has terminated employment may be cancelled, accelerated, paid
or continued, as provided in the applicable Stock Incentive Agreement or Stock
Incentive Program, or, in the absence of such provision, as the Committee may
determine. The portion of any award exercisable in the event of continuation or
the
-9-
<PAGE>
amount of any payment due under a continued award may be adjusted by the
Committee to reflect the Participant's period of service from the date of grant
through the date of the Participant's termination of employment or such other
factors as the Committee determines are relevant to its decision to continue the
award.
SECTION 4 RESTRICTIONS ON STOCK
4.1 Escrow of Shares. Any certificates representing the shares of Stock
----------------
issued under the Plan shall be issued in the Participant's name, but, if the
applicable Stock Incentive Agreement or Stock Incentive Program so provides, the
shares of Stock shall be held by a custodian designated by the Committee (the
"Custodian"). Each applicable Stock Incentive Agreement or Stock Incentive
Program providing for transfer of shares of Stock to the Custodian shall appoint
the Custodian as the attorney-in-fact for the Participant for the term specified
in the applicable Stock Incentive Agreement or Stock Incentive Program, with
full power and authority in the Participant's name, place and stead to transfer,
assign and convey to the Company any shares of Stock held by the Custodian for
such Participant, if the Participant forfeits the shares under the terms of the
applicable Stock Incentive Agreement or Stock Incentive Program. During the
period that the Custodian holds the shares subject to this Section, the
Participant shall be entitled to all rights, except as provided in the
applicable Stock Incentive Agreement or Stock Incentive Program, applicable to
shares of Stock not so held. Any dividends declared on shares of Stock held by
the Custodian shall, as the Committee may provide in the applicable Stock
Incentive Agreement or Stock Incentive Program, be paid directly to the
Participant or, in the alternative, be retained by the Custodian or by the
Company until the expiration of the term specified in the applicable Stock
Incentive Agreement or Stock Incentive Program and shall then be delivered,
together with any proceeds, with the shares of Stock to the Participant or to
the Company, as applicable.
4.2 Forfeiture of Shares. Notwithstanding any vesting schedule set forth
--------------------
in any Stock Incentive Agreement or Stock Incentive Program, in the event that
the Committee determines that a Participant violated a noncompetition agreement
as set forth in the Stock Incentive Agreement or Stock Incentive Program, all
Stock Incentives and shares of Stock issued to the holder pursuant to the Plan
shall be forfeited; provided, however, that the Company shall return to the
holder the lesser of any consideration paid by the Participant in exchange for
Stock issued to the Participant pursuant to the Plan or the then Fair Market
Value of the Stock forfeited hereunder.
4.3 Restrictions on Transfer. The Participant shall not have the right
------------------------
to make or permit to exist any disposition of the shares of Stock issued
pursuant to the Plan except as provided in the Plan or the applicable Stock
Incentive Agreement or Stock Incentive Program. Any disposition of the shares of
Stock issued under the Plan by the Participant not made in accordance with the
Plan or the applicable Stock Incentive Agreement or Stock Incentive Program
shall be void. The Company shall not recognize, or have the duty to recognize,
any disposition not made in accordance with the Plan and the applicable Stock
Incentive Agreement or Stock Incentive Program, and the shares so
-10-
<PAGE>
transferred shall continue to be bound by the Plan and the applicable Stock
Incentive Agreement or Stock Incentive Program.
SECTION 5 GENERAL PROVISIONS
5.1 Withholding. The Company shall deduct from all cash distributions
-----------
under the Plan any taxes required to be withheld by federal, state or local
government. Whenever the Company proposes or is required to issue or transfer
shares of Stock under the Plan or upon the vesting of any Stock Award, the
Company shall have the right to require the recipient to remit to the Company an
amount sufficient to satisfy any federal, state and local withholding tax
requirements prior to the delivery of any certificate or certificates for such
shares or the vesting of such Stock Award. A Participant may pay the withholding
tax in cash, or, if the applicable Stock Incentive Agreement or Stock Incentive
Program provides, a Participant may elect to have the number of shares of Stock
he is to receive reduced by, or with respect to a Stock Award, tender back to
the Company, the smallest number of whole shares of Stock which, when multiplied
by the Fair Market Value of the shares of Stock determined as of the Tax Date
(defined below), is sufficient to satisfy federal, state and local, if any,
withholding taxes arising from exercise or payment of a Stock Incentive (a
"Withholding Election"). A Participant may make a Withholding Election only if
both of the following conditions are met:
(a) The Withholding Election must be made on or prior to the date on
which the amount of tax required to be withheld is determined (the "Tax Date")
by executing and delivering to the Company a properly completed notice of
Withholding Election as prescribed by the Committee; and
(b) Any Withholding Election made will be irrevocable except on six
months advance written notice delivered to the Company; however, the Committee
may in its sole discretion disapprove and give no effect to the Withholding
Election.
5.2 Changes in Capitalization; Merger; Liquidation.
---------------------------------------------
(a) The number of shares of Stock reserved for the grant of Options,
Dividend Equivalent Rights, Performance Unit Awards, Phantom Shares, Stock
Appreciation Rights and Stock Awards; the number of shares of Stock reserved for
issuance upon the exercise or payment, as applicable, of each outstanding
Option, Dividend Equivalent Right, Performance Unit Award, Phantom Share and
Stock Appreciation Right and upon vesting or grant, as applicable, of each Stock
Award; the Exercise Price of each outstanding Option and the specified number of
shares of Stock to which each outstanding Dividend Equivalent Right, Phantom
Share and Stock Appreciation Right pertains shall be proportionately adjusted
for any increase or decrease in the number of issued shares of Stock resulting
from a subdivision or combination of shares or the payment of a stock dividend
in shares of Stock to holders of outstanding shares of Stock or any other
increase or decrease in the number of shares of Stock outstanding effected
without receipt of consideration by the Company.
-11-
<PAGE>
(b) In the event of a merger, consolidation or other reorganization of
the Company or tender offer for shares of Stock, the Committee may make such
adjustments with respect to awards and take such other action as it deems
necessary or appropriate to reflect such merger, consolidation, reorganization
or tender offer, including, without limitation, the substitution of new awards,
or the adjustment of outstanding awards, the acceleration of awards or the
removal of restrictions on outstanding awards. Any adjustment pursuant to this
Section 5.2 may provide, in the Committee's discretion, for the elimination
without payment therefor of any fractional shares that might otherwise become
subject to any Stock Incentive, but shall not otherwise diminish the then value
of the Stock Incentive.
(c) The existence of the Plan and the Stock Incentives granted
pursuant to the Plan shall not affect in any way the right or power of the
Company to make or authorize any adjustment, reclassification, reorganization or
other change in its capital or business structure, any merger or consolidation
of the Company, any issue of debt or equity securities having preferences or
priorities as to the Stock or the rights thereof, the dissolution or liquidation
of the Company, any sale or transfer of all or any part of its business or
assets, or any other corporate act or proceeding.
5.3 Cash Awards. The Committee may, at any time and in its discretion,
-----------
grant to any holder of a Stock Incentive the right to receive, at such times and
in such amounts as determined by the Committee in its discretion, a cash amount
which is intended to reimburse such person for all or a portion of the federal,
state and local income taxes imposed upon such person as a consequence of the
receipt of the Stock Incentive or the exercise of rights thereunder.
5.4 Compliance with Code. All incentive stock options to be granted
--------------------
hereunder are intended to comply with Code Section 422, and all provisions of
the Plan and all incentive stock options granted hereunder shall be construed in
such manner as to effectuate that intent.
5.5 Right to Terminate Employment. Nothing in the Plan or in any Stock
-----------------------------
Incentive shall confer upon any Participant the right to continue as an employee
or officer of the Company or any of its Affiliates or affect the right of the
Company or any of its Affiliates to terminate the Participant's employment at
any time.
5.6 Non-alienation of Benefits. Other than as specifically provided with
--------------------------
regard to the death of a Participant, no benefit under the Plan shall be subject
in any manner to anticipation, alienation, sale, transfer, assignment, pledge,
encumbrance or charge; and any attempt to do so shall be void. No such benefit
shall, prior to receipt by the Participant, be in any manner liable for or
subject to the debts, contracts, liabilities, engagements or torts of the
Participant.
5.7 Listing and Legal Compliance. The Committee may suspend the exercise
----------------------------
or payment of any Stock Incentive so long as it determines that securities
exchange listing or registration or qualification under any securities laws is
required in connection therewith and has not been completed on terms acceptable
to the Committee.
-12-
<PAGE>
5.8 Termination and Amendment of the Plan. The Board of Directors at any
-------------------------------------
time may amend or terminate the Plan without stockholder approval; provided,
however, that the Board of Directors may condition any amendment on the approval
of stockholders of the Company if such approval is necessary or advisable with
respect to tax, securities or other applicable laws. No such termination or
amendment without the consent of the holder of a Stock Incentive shall adversely
affect the rights of the Participant under such Stock Incentive.
5.9 Stockholder Approval. The Plan shall be submitted to the stockholders
--------------------
of the Company for their approval within twelve (12) months before or after the
adoption of the Plan by the Board of Directors of the Company. If such approval
is not obtained, any Stock Incentive granted hereunder shall be void.
5.10 Choice of Law. The laws of the State of Delaware shall govern the
-------------
Plan, to the extent not preempted by federal law, without reference to the
principles of conflict of laws.
5.11 Effective Date of Plan. The Plan shall become effective upon the
----------------------
date the Plan is approved by the stockholders of the Company.
NEW GRANCARE, INC.
By: /s/ Evrett W. Benton
-------------------------------------
Title: Vice President
----------------------------------
ATTEST:
/s/ M. Henry Day, Jr.
- ---------------------------------------
Title: Assistant Secretary
--------------------------------
[CORPORATE SEAL]
-13-
<PAGE>
EXHIBIT 10.54
CONSENT AND AMENDMENT
TO TRANSACTION DOCUMENTS
CONSENT AND AMENDMENT TO TRANSACTION DOCUMENTS dated as of December 31,
1996 among HEALTH AND RETIREMENT PROPERTIES TRUST (f/k/a "Health and
Rehabilitation Properties Trust") (known in Wisconsin as "Health and Retirement
Properties REIT"), a real estate investment trust formed under the laws of the
State of Maryland ("HRP"), GRANCARE, INC. (f/k/a AMS Holding Co.), a California
---
corporation ("GranCare"), AMS PROPERTIES, INC., a Delaware corporation ("AMS
-------- ---
Properties"), GCI HEALTH CARE CENTERS, INC., a Delaware corporation ("GCIHCC"),
- ---------- ------
and NEW GRANCARE, INC., a Delaware corporation and wholly-owned subsidiary of
GranCare ("New GranCare").
------------
W I T N E S S E T H
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, American Medical Services, Inc., a Wisconsin corporation ("AMS") and
---
AMS Properties have entered into an Acquisition Agreement, Agreement to Lease
and Mortgage Loan Agreement dated as of December 28, 1990, as amended (as so
amended, the "Acquisition Agreement"), under which, inter alia, (A) HRP has
--------------------- ----- ----
leased 18 nursing properties located in Wisconsin, California, Colorado and
Illinois to AMS Properties pursuant to the several Facility Leases (as amended,
the "AMS Properties Facility Leases"), each incorporating a Master Lease
------------------------------
Document General Terms and Conditions dated as of December 28, 1990 (as amended,
the "AMS Properties Master Lease") between HRP, as landlord, and AMS Properties,
---------------------------
as tenant, and (B) HRP has made a mortgage loan to AMS Properties in the
original principal amount of $11,500,000, the payment of which is currently
evidenced by a Promissory Note dated as of October 1, 1994 by AMS Properties to
HRP (the "Mortgage Note") and is secured, inter alia by Mortgage and Security
------------- ----------
Agreements dated as of March 31, 1995 (collectively, the "Mortgages") by AMS
---------
Properties in favor of HRP encumbering the two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMS; and (b) in
December 1993, AMS, which previously had owned all the outstanding common stock
of AMS Properties, and AMS Rehab, Inc., a Delaware corporation and a wholly-
owned subsidiary of GranCare, each merged into AMS Properties, with AMS
Properties as the surviving corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCIHCC pursuant to the
several Facility Leases (as amended, the "GCIHCC Facility Leases"), each
----------------------
<PAGE>
incorporating a Master Lease Document General Terms and Conditions dated as of
June 30, 1992 (as amended, the "GCIHCC Master Lease") between HRP, as landlord,
-------------------
and GCIHCC, as tenant;
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS Properties and GCIHCC, proposes to transfer all
of its skilled nursing, home health care, assisted living and contract
management business (including, without limitation, such capital stock), and
related assets, to New GranCare, with GranCare thereafter distributing New
GranCare common stock to GranCare shareholders (collectively, the
"Distribution"), pursuant to an Agreement and Plan of Distribution dated as of
------------
September 3, 1996 between GranCare and New GranCare (the "Distribution
------------
Agreement");
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"),
--------
with Vitalink as the surviving corporation (the "Merger"), pursuant to a Merger
------
Agreement dated as of September 3, 1996 between Vitalink and GranCare (the
"Merger Agreement"); and
- -----------------
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release Vitalink and its subsidiaries (including any remaining
Subsidiary of GranCare that becomes a subsidiary of Vitalink as a result of the
Merger) and their respective successors and assigns from and against any and all
claims, liabilities and obligations, as successor by merger to GranCare, under
(A) the Acquisition Agreement, (B) the Representation Letter and Indemnification
Agreement dated June 30, 1992 by GCIHCC, AMS Properties and GranCare to HRP (the
"GCIHCC Indemnity Agreement"), (C) the Guaranty, dated as of December 28, 1990,
--------------------------
as amended, by GranCare in favor of HRP in respect of the obligations of AMS
Properties (the "AMS Properties Guaranty"), (D) the Guaranty dated as of June
-----------------------
30, 1992, as amended, by GranCare in favor of HRP in respect of the obligations
of GCIHCC (the "GCIHCC Guaranty"), (E) the Pledge Agreement, dated as of
---------------
December 28, 1990, as amended, by GranCare in favor of HRP (the "AMS Properties
--------------
Pledge Agreement"), (F) the Pledge Agreement, dated as of June 30, 1992 as
- ----------------
amended, by GranCare in favor of HRP (the "GCIHCC Pledge Agreement"), (G) the
-----------------------
Subordination Agreement, dated as of December 28, 1990, as amended, among
GranCare, as subordinate creditor, AMS Properties, as debtor and HRP, as senior
creditor (the "AMS Properties Subordination Agreement"), (H) the Subordination
--------------------------------------
Agreement, dated as of June 30, 1992, as amended, among GranCare, as subordinate
creditor, GCIHCC, as debtor and HRP, as senior creditor (the "GCIHCC
------
Subordination Agreement"), and (I) any other agreements, instruments or
- -----------------------
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions hereof, willing to so agree;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
-2-
<PAGE>
SECTION 1. CONSENT TO DISTRIBUTION AND MERGER; RELEASE OF VITALINK.
-------------------------------------------------------
Effective as of the Effective Time (as defined in Section 3 hereof), HRP
---------
hereby:
(a) consents to the terms of the Distribution Agreement and Merger
Agreement, and the consummation of the transactions contemplated thereby;
(b) releases Vitalink and its successors and assigns from and against any
and all claims, liabilities and obligations, as successor by merger to GranCare,
under (i) the Acquisition Agreement, (ii) the GCIHCC Indemnity Agreement, (iii)
the AMS Properties Guaranty, (iv) the GCIHCC Guaranty, (v) the AMS Properties
Pledge Agreement, (vi) the GCIHCC Pledge Agreement, (vii) the AMS Properties
Subordination Agreement, (viii) the GCIHCC Subordination Agreement and (ix) any
other agreements, instruments or understandings, written or oral, of GranCare
with HRP or any of its affiliates relating to or arising out of the transactions
contemplated by the agreements described in clauses (i) through (viii) above;
(c) agrees to execute and deliver to Vitalink, at the sole cost and expense
of Vitalink, such instruments and documents, including UCC-3 financing
statements and other instruments of termination or release as may be reasonably
requested by Vitalink in order to effectuate the agreement in paragraph (b)
above; and
(d) agrees that it will, at the request of New GranCare, and without the
payment of any additional consideration by New GranCare (except for the out of
pocket cost and expense of HRP in connection therewith, which shall be at the
sole expense of New GranCare), to enter into a consent, waiver and estoppel
agreement and an intercreditor agreement in connection with New Credit Facility
(as that term is defined in the Preliminary Prospectus for New GranCare, Inc.
included in the Schedule 14A filed with the Securities Exchange Commission on
November , 1996 (the "Schedule 14A")), in each case in substantially the form
-- ------------
of the Consent, Waiver and Estoppel Agreement and an Intercreditor Agreement,
each dated March 31, 1995, executed by HRP in connection with the Credit
Agreement dated as of March 31, 1995 among GranCare, certain lenders and First
Union National Bank of North Carolina, as agent.
SECTION 2. AMENDMENT OF TRANSACTION DOCUMENTS
----------------------------------
The parties hereto hereby agree, effective as of the Effective Time (as
defined in Section 3 hereof), that:
---------
(a) The Acquisition Agreement, each other "Transaction Document", as such
term is defined in Section 1.1 of the Acquisition Agreement (hereinafter the
"AMS Transaction Documents") and each "Transaction Document" as such term is
- --------------------------
defined in Article 1 of the GCIHCC Master Lease (hereinafter the "GCI
---
Transaction Documents", and with the AMS Transaction Documents, the "Transaction
- --------------------- -----------
Documents") shall be amended such that each reference therein to "GranCare,
- ---------
Inc.," "GranCare," "AMS Holding Co.," "AMSHC" or words of like import referring
to GranCare, Inc. shall mean and be a reference to New GranCare.
-3-
<PAGE>
(b) HRP shall send Vitalink (at its address set forth in the Vitalink
Guaranty, as hereinafter defined) copies of any notice of default sent to New
GranCare, AMS Properties or GCIHCC under any Transaction Document at the time
that such notice is sent to New GranCare, AMS Properties or GCIHCC.
(c) The Acquisition Agreement shall be amended in the following respects:
(A) Section 1.1 is amended to add the following new definitions
thereto:
New GranCare - New GranCare, Inc., a Delaware corporation,
------------
together with its permitted successors and assigns.
Old GranCare - GranCare, Inc., a California corporation,
------------
together with its permitted successors and assigns.
Supply Contracts - agreements or arrangements between Vitalink
----------------
and AMS Properties providing for pharmaceuticals or other supplies or
services to be furnished to any facility operated by AMS Properties;
provided that each such agreement or arrangement shall provide that it
shall be terminated and of no further force and effect, and all
obligations and liabilities thereunder released and terminated (other
than obligations to pay for services or supplies previously rendered
or furnished), at any time upon notice to Vitalink by HRP after either
(i) HRP terminates any lease of such facility with AMS Properties,
accelerates the maturity of any promissory note of AMS Properties or
GCIHCC, or forecloses upon or exercises remedies of like effect in
respect of the stock of GCIHCC or AMS Properties pledged to HRP, or
(ii) the occurrence of an Event of Default hereunder or under any
other Transaction Document involving the bankruptcy or insolvency of
AMS Properties, GCIHCC, New GranCare or Vitalink.
Vitalink - Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
(B) Section 1.1 is further amended by amending the definitions
"Security Documents" and "Transaction Documents" in full to read as
follows:
Security Documents - each of the mortgages, leasehold mortgages
------------------
or deeds of trust, security agreements, pledge agreements, voting trust
agreements, collateral assignments of contracts and permits, stock
powers and Uniform Commercial Code financing statements listed on
Schedule 1.1 hereto, as each of the same has been or may be amended,
amended and restated, modified or supplemented from time to time.
-4-
<PAGE>
Transaction Documents - means, collectively, (a) those documents
---------------------
listed on Schedule 1.1 hereto, in each case as such documents have
been or may be amended, amended and restated, modified or supplemented
from time to time, together with any and all other documents executed
in connection with, relating to, evidencing, or creating or perfecting
collateral or security for, any such document and (b) all GCIHCC
Transaction Documents.
(C) Section 9.17 is amended by amending paragraphs (b), (c) and (e)
thereof in full to read as follows:
(b) unsecured Indebtedness consisting of accounts payable, accruals
and similar items incurred in the ordinary course of business in
accordance with reasonable and customary trade practices, that are
neither owed to any Affiliate nor constitute Indebtedness for money
borrowed or a Guarantee thereof;
(c) Indebtedness for taxes, assessments, governmental charges or
levies to the extent that payment thereof shall not at the time be
required to be made in accordance with the provisions of Section 9.5
-----------
hereof or of the other applicable provisions of the Transaction
Documents;
(e) unsecured Indebtedness (including without limitation, accrued
and unpaid management fees) of AMS Properties (i) owed to GranCare or
any wholly-owned Subsidiary of GranCare (provided that the payment of
such Indebtedness shall be subject to the terms of a subordination
agreement in form and substance satisfactory to HRP among AMS
Properties as debtor, GranCare or such wholly-owned Subsidiary as
subordinate creditor and HRP as senior creditor) or (ii) owed to
Vitalink under any Supply Contract.
(D) The Acquisition Agreement is further amended by adding a new
Schedule 1.1 thereto to read as set forth in Exhibit E hereto.
---------
(d) The AMS Properties Master Lease shall be amended in the following
respects:
(A) Article I is amended by amending the definitions "Guarantor" and
"Transaction Documents" in full to read as follows:
Guarantor shall mean any guarantor of Tenant's obligations under
---------
the applicable Lease, including, without limitation, New GranCare,
Inc., a Delaware corporation and GCI Health Care Centers, Inc., a
Delaware corporation (but excluding in any event, Vitalink), in each
case together with their respective successors and assigns.
Transaction Documents shall mean those documents listed on
---------------------
Schedule I hereto, and shall also include all documents constituting
Transaction Documents as such term is defined in the Acquisition
-5-
<PAGE>
Agreement, in each case as such documents may be modified, amended or
supplemented from time to time, together with any and all other
documents executed in connection with, relating to, evidencing, or
creating collateral or security for, any Lease.
(B) Section 1.1 is further amended to add the following new
definitions thereto:
Vitalink shall mean Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
Vitalink Guaranty shall mean the Limited Guaranty delivered by
-----------------
Vitalink in favor of Landlord pursuant to Consent and Amendment to
Transaction Documents dated as of December 31, 1996 among Tenant,
Landlord, GranCare, Inc., New GranCare, Inc. and GCI Health Care
Centers, Inc., as such Limited Guaranty may be amended, modified or
supplemented from time to time.
(C) Section 12.1 is amended by adding the word "or" immediately after
the semicolon at the end of paragraph (o) thereof, and by adding a new
paragraph (p) thereto to read as follows:
(p) the occurrence of a Guarantor Event of Default (as such term
is defined in the Vitalink Guaranty) at any time prior to the Release
Date (as such term is defined in the Vitalink Guaranty);
(e) The GCIHCC Master Lease shall be amended in the following respects:
(A) Article I is further amended by amending the definition
"Guarantor" and "Transaction Documents" in full to read as follows:
Guarantor shall mean any guarantor of Tenant's obligations under
---------
the applicable Lease, including, without limitation, New GranCare,
Inc., a Delaware corporation, and AMS Properties, Inc., a Delaware
corporation (but excluding in any event, Vitalink), in each case
together with their respective successors and assigns.
Transaction Documents shall mean those documents listed on
---------------------
Schedule I hereto, and shall also include all documents constituting
Transaction Documents as such term is defined in the Acquisition
Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended, among Landlord, HostMasters, Inc.,
a California corporation, GranCare, Inc., American Medical Services,
Inc., a Wisconsin corporation and AMS Properties, Inc., a Delaware
corporation, in each case as such documents may be modified, amended
-6-
<PAGE>
or supplemented from time to time, together with any and all other
documents executed in connection with, relating to, evidencing, or
creating collateral or security for, any Lease.
(B) Section 1.1 is further amended to add the following new
definitions thereto:
Supply Contracts - agreements or arrangements between Vitalink and
----------------
Tenant providing for pharmaceuticals or other supplies or services to
be furnished to any facility operated by Tenant; provided that each
such agreement or arrangement shall provide that it shall be
terminated and of no further force and effect, and all obligations and
liabilities thereunder released and terminated (other than obligations
to pay for services or supplies previously rendered or furnished), at
any time upon notice to Vitalink by Landlord after either (i) Landlord
terminates any Lease of such facility with Tenant, accelerates the
maturity of any promissory note of AMS Properties, Inc. or Tenant, or
forecloses upon or exercises remedies of like effect in respect of the
stock of Tenant or AMS Properties, Inc. pledged to Landlord, or (ii)
the occurrence of an Event of Default hereunder or under any other
Transaction Document involving the bankruptcy or insolvency of Tenant,
AMS Properties, Inc., GranCare or Vitalink.
Vitalink - shall mean Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
Vitalink Guaranty shall mean the Limited Guaranty delivered by
-----------------
Vitalink in favor of Landlord pursuant to the Consent and Amendment to
Transaction Documents dated as of December 31, 1996 among Tenant,
Landlord, GranCare, Inc., New GranCare, Inc. and AMS Properties, Inc.,
as such Limited Guaranty may be amended, modified or supplemented from
time to time.
(C) Section 12.1 is amended by adding the word "or" immediately after
the semicolon at the end of paragraph (o) thereof, and by adding a new
paragraph (p) thereto to read as follows:
(p) the occurrence of a Guarantor Event of Default (as such term
is defined in the Vitalink Guaranty) at any time prior to the Release
Date (as such term is defined in the Vitalink Guaranty);
(D) Section 23.7 is amended by deleting paragraph (e) thereof in its
entirety and by amending paragraphs (b) and (f) thereof in full read as
follows:
(b) unsecured Indebtedness consisting of accounts payable,
accruals and similar items incurred in the ordinary course of business
in accordance with reasonable and customary trade practices, that are
neither owed to any Affiliate nor constitute Indebtedness for money
borrowed or a Guarantee thereof;
-7-
<PAGE>
(f) unsecured Indebtedness (including without limitation, accrued
and unpaid management fees) of Tenant (i) owed to GranCare or any
wholly-owned Subsidiary of GranCare (provided that the payment of such
Indebtedness shall be subject to the terms of a subordination
agreement in form and substance satisfactory to Landlord among Tenant
as debtor, GranCare or such wholly-owned Subsidiary as subordinate
creditor and Landlord as senior creditor) or (ii) owed to Vitalink
under any Supply Contract;
(E) The GCIHCC Master Lease is further amended by amending Schedule 1
thereto in full to read as set forth in Exhibit F hereto.
---------
(f) Each of the Transaction Documents remain in full force and effect and
is hereby ratified and confirmed in all respects, except as specifically
modified hereby or by the other Vitalink Documents (as hereinafter defined). The
amendments set forth herein (i) do not constitute an amendment, waiver or
modification of any term, condition or covenant of any Transaction Document, or
any of the instruments or documents referred to therein, other than as
specifically set forth herein, and (ii) shall not prejudice any rights which HRP
or its successors and assigns may now or hereafter have under or in connection
with any Transaction Document, as amended hereby, or any of the instruments or
documents referred to therein.
SECTION 3. EFFECTIVENESS
-------------
Sections 1 and 2 of this Agreement shall become effective on the date and
---------- -
time (the "Effective Time") that a counterpart to this Agreement shall have been
--------------
executed by each of the parties hereto and each of the following conditions
shall have been satisfied (provided that the Effective Time may not be later
than March 31, 1997):
(a) Vitalink shall have paid HRP a non-refundable $10,000,000 lease
modification fee in immediately available funds to reflect the change in
guarantors;
(b) Vitalink shall have executed and delivered to HRP a Guaranty in the
form attached hereto as Exhibit A (the "Vitalink Guaranty");
--------- -----------------
(c) New GranCare shall have executed and delivered to HRP an Assumption
Agreement in the form attached hereto as Exhibit B (the "Assumption Agreement,"
--------- --------------------
and together with this Agreement, the Vitalink Guaranty and each other
agreement, instrument or other document delivered by any party pursuant to this
Section 3, collectively, the "Vitalink Documents"; the Vitalink Documents and
- --------- ------------------
the Transaction Documents, as amended hereby, are collectively referred to
herein as the "Documents"), which Assumption Agreement shall have been accepted
---------
by GranCare for the limited purpose specified therein;
(d) the Distribution and the Merger shall have occurred substantially
concurrently with the Effective Time, in accordance with the description of the
Distribution and Merger in the Schedule 14A;
-8-
<PAGE>
(e) giving effect to the Distribution and the Merger, and occurrence of the
Effective Time, no Event of Default, or event or condition that with the giving
of notice or the lapse of time or both would become an Event of Default, shall
have occurred and be continuing under any Document, and all warranties and
representations contained in each Vitalink Document shall be true and correct at
the Effective Time as if made at such time;
(f) HRP shall have received a certificate of a senior executive officer of
New GranCare and Vitalink confirming satisfaction of the conditions described in
paragraphs (d) and (e) above;
- -------------- ---
(g) HRP shall have received opinions addressed to it, each dated the
Effective Time, from counsel to GranCare and New GranCare, and from Cahill
Gordon & Reindel, counsel to Vitalink, covering the matters set forth in
Exhibits C and D respectively, and otherwise in form and substance reasonably
- ---------- -
satisfactory to HRP; and
(h) New GranCare or Vitalink shall have paid all costs, expenses and taxes
provided for in Section 4 hereof, as well as all fees and expenses currently
---------
payable by New GranCare, Vitalink, GranCare, AMS Properties and GCIHCC under any
Document.
SECTION 5. COSTS, EXPENSES AND TAXES
-------------------------
New GranCare, AMS Properties and GCIHCC hereby jointly and severally agrees
to pay all costs and expenses of HRP in connection with the preparation,
reproduction, execution and delivery, and administration, of this Agreement,
including the reasonable fees and expenses of Sullivan & Worcester LLP, special
counsel to HRP with respect thereto and the payment of all recording fees, real
estate transfer taxes, title insurance premiums and other expenses related to
the satisfaction of the conditions in Section 3 hereof.
---------
SECTION 5. AMENDMENTS
----------
No provision of this Agreement may be amended or modified without the
written consent of the Person entitled to the benefits thereof.
SECTION 6. GOVERNING LAW
-------------
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
SECTION 7. NO LIABILITY OF TRUSTEES
------------------------
THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH,
TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE
-9-
<PAGE>
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
-10-
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
HEALTH AND RETIREMENT
PROPERTIES TRUST (f/k/a "Health and
Rehabilitation Properties Trust") (known in
Wisconsin as "Health and
Retirement Properties REIT")
By:
-------------------------------------
Its:
GRANCARE, INC.
(f/k/a AMS Holding Co.)
By:
-------------------------------------
Its:
AMS PROPERTIES, INC.
By:
-------------------------------------
Its:
GCI HEALTH CARE CENTERS, INC.
By:
-------------------------------------
Its:
NEW GRANCARE, INC.
By:
-------------------------------------
Its:
-11-
<PAGE>
EXHIBIT 10.55
EXHIBIT A TO CONSENT AND AMENDMENT TO TRANSACTION DOCUMENTS
LIMITED GUARANTY
----------------
LIMITED GUARANTY (this "Guaranty") dated as of , 1997, made by
-------- --------- --
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Guarantor"), in
---------
favor of HEALTH AND RETIREMENT PROPERTIES TRUST, a real estate investment trust
formed under the laws of the State of Maryland (together with its successors and
assigns, "HRP").
---
WITNESSETH
----------
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, Inc. (f/k/a AMS Holding Co.), a California corporation ("GranCare") ,
--------
American Medical Services, Inc., a Wisconsin corporation ("AMSI") and AMS
----
Properties, Inc., a Delaware corporation ("AMS") have entered into an
---
Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended (as so amended, the "Acquisition Agreement"),
---------------------
under which, inter alia, (A) HRP has leased 18 nursing properties located in
----- ----
Wisconsin, California, Colorado and Illinois to AMS pursuant to the several
Facility Leases (as amended, the "AMS Facility Leases"), each incorporating a
-------------------
Master Lease Document General Terms and Conditions dated as of December 28, 1990
(as amended, the "AMS Master Lease") between HRP, as landlord, and AMS, as
----------------
tenant, and (B) HRP has made a mortgage loan to AMS in the original principal
amount of $11,500,000, the payment of which is currently evidenced by a
Promissory Note dated as of October 1, 1994 by AMS to HRP (the "AMS Note") and
--------
is secured, inter alia by Mortgage and Security Agreements dated as of March 31,
----------
1995 (collectively, the "AMS Mortgages") by AMS in favor of HRP encumbering the
-------------
two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMSI; and (b) in
December 1993, AMSI, which previously had owned all the outstanding common stock
of AMS, and AMS Rehab, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare, each merged into AMS, with AMS as the surviving
corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc., a Delaware corporation ("GCI") pursuant to the several Facility Leases (as
---
amended, the "GCI Facility Leases"), each incorporating a Master Lease Document
-------------------
General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCI
---
Master Lease") between HRP, as landlord, and GCI, as tenant;
- ------------
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS and GCI, proposes to transfer all of its
skilled nursing, home health care, assisted living and contract management
business (including, without limitation, such capital stock), and related
<PAGE>
assets, to New GranCare, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare ("New GranCare"), with GranCare thereafter distributing
------------
New GranCare common stock to GranCare shareholders (collectively, the
"Distribution");
- -------------
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into the Guarantor, with the Guarantor as the surviving corporation (the
"Merger");
- -------
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release the Guarantor and its subsidiaries (including any
remaining Subsidiary of GranCare that becomes a subsidiary of the Guarantor as a
result of the Merger) and their respective successors and assigns from and
against any and all claims, liabilities and obligations, as successor by merger
to GranCare, under (A) the Acquisition Agreement, (B) the Representation Letter
and Indemnification Agreement dated June 30, 1992 by GCI, AMS and GranCare to
HRP (the "GCI Indemnity Agreement"), (C) the Guaranty, dated as of December 28,
-----------------------
1990, as amended, by GranCare in favor of HRP in respect of the obligations of
AMS (the "AMS Guaranty"), (D) the Guaranty dated as of June 30, 1992, as
------------
amended, by GranCare in favor of HRP in respect of the obligations of GCI (the
"GCI Guaranty"), (E) the Pledge Agreement, dated as of December 28, 1990, as
- -------------
amended, by GranCare in favor of HRP (the "AMS Pledge Agreement"), (F) the
Pledge Agreement, dated as of June 30, 1992 as amended, by GranCare in favor of
HRP (the "GCI Pledge Agreement"), (G) the Subordination Agreement, dated as of
--------------------
December 28, 1990, as amended, among GranCare, as subordinate creditor, AMS, as
debtor and HRP, as senior creditor (the "AMS Subordination Agreement"), (H) the
---------------------------
Subordination Agreement, dated as of June 30, 1992, as amended, among GranCare,
as subordinate creditor, GCI, as debtor and HRP, as senior creditor (the "GCI
---
Subordination Agreement"), and (I) any other agreements, instruments or
- -----------------------
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions of the Consent and Amendment to Transaction Documents dated as of
December 31, 1996 among GranCare, New GranCare, AMS, GCI and HRP (the
"Amendment"), willing to so agree, subject to, inter alia, the execution and
--------- ----- ----
delivery of this Guaranty by the Guarantor;
NOW, THEREFORE, in consideration of the premises contained herein and to
induce HRP to consent to the Distribution and Merger, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are defined
-------------
in the AMS Master Lease and used herein are so used as so defined. In addition,
the following terms shall have the meanings set forth below:
"Applicable Law" shall mean shall mean any law of any governmental
--------------
authority, whether domestic or foreign, including without limitation all
federal and state laws, to which the Person in question is subject or by
which it or any of its property is bound, and including without limitation
any: (a) administrative, executive, judicial, legislative or other action,
code, consent decree, constitution, decree, directive, enactment, finding,
guideline, injunction, interpretation, judgment, law, order, ordinance,
-2-
<PAGE>
policy statement, proclamation, promulgation, regulation, requirement,
rule, rule of law, rule of public policy, settlement agreement, statute, or
writ, of any governmental authority, domestic or foreign, whether or not
having the force of law; (b) common law or other legal or quasi-legal
precedent; or (c) arbitrator's, mediator's or referee's award, decision,
finding or recommendation, or, in any case, any particular section, part or
provision thereof.
"Assumption Agreement" shall mean the Assumption Agreement dated as of
--------------------
even date herewith by New GranCare in favor of HRP, as the same may be
amended, amended and restated, supplemented or modified from time to time,
pursuant to which New GranCare has agreed to assume the obligations of
GranCare under, inter alia, the Acquisition Agreement, the GCI Indemnity
----- ----
Agreement, the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement.
the GCI Pledge Agreement, the AMS Subordination Agreement and the GCI
Subordination Agreement.
"Bankruptcy Code" means Title 11 of the United States Code.
---------------
"Consolidated Net Worth" of any Person shall mean, at any date as of
----------------------
which the amount thereof shall be determined, the consolidated total assets
of such Person and its Subsidiaries, minus all obligations that should, in
accordance with GAAP, be classified as liabilities on the consolidated
balance sheet of such Person and its Subsidiaries, including in any event
all Indebtedness.
"Contingent Obligation" shall mean, as applied to any Person, any
---------------------
direct or indirect liability, contingent or otherwise, of that Person (i)
with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring
the Contingent Obligation is to provide assurance to the obligee of such
obligation of another that such obligation of another will be paid or
discharged, or that any agreements relating thereto will be complied with,
or that the holders of such obligation will be protected (in whole or in
part) against loss in respect thereof, or (ii) with respect to any letter
of credit issued for the account of that Person or as to which that Person
is otherwise liable for reimbursement of drawings. Contingent Obligations
shall include, without limitation (a) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to
make take-or-pay or similar payments if required regardless of non-
performance by any other party or parties to an agreement and (c) any
liability of such Person for the obligation of another through any
agreement (contingent or otherwise) (X) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise) or
(Y) to maintain the solvency or any balance sheet item, level of income or
financial condition of another if, in the case of any agreement described
under subclauses (X) or (Y) of this sentence, the primary purpose or intent
thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the amount of the obligation so
guaranteed or otherwise supported or, if less, the amount to which such
Contingent Obligation is specifically limited.
-3-
<PAGE>
"Default Amount" shall mean $15,000,000 or such lesser amount to which
--------------
the Guarantor's maximum liability hereunder has been reduced pursuant to
the second paragraph of Section 2 hereof.
---------
"Default Rate" shall mean 18% per annum.
------------
"GAAP" shall mean generally accepted accounting principles, consistently
----
applied.
"GranCare Companies" shall mean, collectively, New GranCare, AMS, GCI
------------------
and all Subsidiaries of any thereof (after giving effect to the Merger and
the Distribution), whether now existing or hereafter created, and any
successors of any thereof (individually, a "GranCare Company").
----------------
"GranCare Default" shall mean any GranCare Event of Default and any
----------------
event or condition which with the passage of time or giving of notice, or
both, would become a GranCare Event of Default.
"GranCare Documents" shall mean, collectively,
------------------
(i) the Acquisition Agreement, the GCI Indemnity Agreement, the AMS
Leases, the AMS Master Lease, the AMS Note, the GCI Leases, the GCI
Master Lease, all Security Documents (as such term is defined in
the Acquisition Agreement, and including, without limitation, the
AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement and the
GCI Pledge Agreement, in each case as modified by the Assumption
Agreement) and the Assumption Agreement, in each case as from time
to time in effect; and
(ii) any other present or future undertaking, agreement or instrument of
any kind whatsoever from time to time entered into by one or more
GranCare Companies with HRP (and any applicable third parties), or
to or for the benefit of HRP (and any applicable third parties),
each as from time to time in effect (and, in each case, whether or
not related to any transaction contemplated by any documents,
instruments or agreements listed in subparagraph (i) above).
"GranCare Event of Default" shall mean an "Event of Default" under and
-------------------------
as defined in any GranCare Document.
"Guarantor Default" shall mean any Guarantor Event of Default and any
-----------------
event or condition which with the passage of time or giving of notice, or
both, would become a Guarantor Event of Default.
"Guarantor Event of Default" shall mean an Event of Default under and as
--------------------------
defined in Section 15 hereof.
----------
-4-
<PAGE>
"Indebtedness" of any Person at any date shall mean, (a) all
------------
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (excluding current trade liabilities incurred
in the ordinary course of business and payable in accordance with customary
practices, but including any class of capital stock of such Person with
fixed payment obligations or with redemption at the option of the holder),
or which is evidenced by a note, bond, debenture or similar instrument, (b)
all obligations of such Person under leases that should be treated as
capitalized leases in accordance with GAAP, (c) all obligations of such
Person in respect of acceptances issued or created for the account of such
Person, and all reimbursement obligations (contingent or otherwise) of such
Person in respect of any letters of credit issued for the account of such
Person, and (d) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Lien" means any lien, mortgage, pledge, assignment, security interest,
----
charge or encumbrance of any kind (including any conditional sale or other
title retention agreement, any lease in the nature thereof, and any
agreement to give any security interest) and any option, trust or other
preferential arrangement having the practical effect of any of the
foregoing.
"Material Adverse Effect" means a material adverse effect on (a) the
-----------------------
business, operations, property, condition (financial or otherwise) or
prospects of the Guarantor, or of the Guarantor and its Subsidiaries taken
as a whole, (b) the ability of the Guarantor to perform its obligations
under this Guaranty, or (c) the validity or enforceability of this
Guaranty, or the rights of HRP hereunder.
"Obligations" shall mean the payment and performance of each and every
-----------
obligation and liability of any GranCare Company to HRP under any GranCare
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, payment
of the principal, premium or prepayment fee and interest (including,
without limitation, Minimum Interest and Additional Interest, as such terms
are defined in the AMS Note) under any promissory note payable to HRP, and
the payment of rent under any lease with HRP as landlord (including,
without limitation, any Minimum Rent, Additional Rent and Additional
Charges, as such terms are defined in the AMS Leases or the GCI Leases).
"Person" shall mean any individual, corporation, firm, unincorporated
------
organization, association, partnership, trust, business trust, joint stock
company, joint venture or other organization, entity or business, or any
governmental organization or authority.
"Subsidiary" shall mean any Person of which any specified Person shall
----------
at the time, directly or indirectly through one or more of its
Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold
-5-
<PAGE>
at least 50% of the partnership, joint venture or similar interests or (c)
be a general partner or joint venturer.
2. Guaranty. The Guarantor hereby unconditionally and irrevocably
--------
guarantees to HRP the prompt and complete payment and performance by the
GranCare Companies (and each of them), when due (whether at stated maturity, by
acceleration or otherwise), of the Obligations. The Guarantor further agrees to
pay any and all expenses (including, without limitation, all reasonable fees and
disbursements of counsel to HRP) which may be paid or incurred by HRP in
enforcing, or obtaining advice of counsel in respect of, any of its rights under
this Guaranty. This Guaranty is a guaranty of payment and not of collectibility
and is absolute and in no way conditional or contingent. The Guarantor's
liability hereunder is direct and unconditional and may be enforced after
nonpayment or nonperformance by any GranCare Company of any Obligation without
requiring HRP to resort to any other Person (including without limitation such
GranCare Company) or any other right, remedy or collateral. This Guaranty shall
remain in full force and effect until the Obligations are paid in full.
Notwithstanding the aggregate amount of the Obligations at any time or from
time to time payable or to be payable by the GranCare Companies to HRP, the
liability of the Guarantor to HRP under this Section 2 shall not exceed the
---------
principal sum of Fifteen Million Dollars ($15,000,000) in the aggregate less
amounts paid by the Guarantor hereunder in respect of such principal sum;
provided that whenever, at any time, or from time to time, Guarantor shall make
any payment to HRP on account of its liability hereunder, it will notify HRP in
writing that such payment is made under this Guaranty for such purpose. The
Guarantor agrees that the Obligations may at any time and from time to time
exceed the amount of the liability of the Guarantor hereunder without impairing
this Guaranty or affecting the rights and remedies of HRP hereunder. No payment
or payments made by any GranCare Company or any other Person or received or
collected by HRP from any GranCare Company or any other Person by virtue of any
action or proceeding or any set-off or appropriation or application, at any time
or from time to time, in reduction of or in payment of the Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of the
Guarantor hereunder which shall, notwithstanding any such payment or payments,
remain liable for the amount of the Obligations until the Obligations are paid
in full (but subject as provided in this paragraph).
3. Costs and Expenses of Collection. The Guarantor agrees, as principal
--------------------------------
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all fees and disbursements of counsel to HRP)
incurred or expended by HRP in connection with the enforcement of this Guaranty,
together with interest on amounts recoverable under this Guaranty from the time
such amounts become due until payment at the Default Rate. The Guarantor's
covenants and agreements set forth in this Section 3 shall survive the
---------
termination of this Guaranty.
4. Right of Setoff. Regardless of the adequacy of any collateral or other
---------------
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the Guarantor or compliance with any other condition precedent
now or hereafter imposed by Applicable Law (all of which are hereby expressly
waived to the extent permitted by Applicable Law) and to the fullest extent
permitted by Applicable Law, to set off and apply the Deposit Balance (as
hereinafter defined), interest thereon, and any other monies, securities,
-6-
<PAGE>
deposits or other property now or hereafter delivered to HRP as collateral
pursuant hereto, and all proceeds of any thereof, against the obligations of the
Guarantor under this Guaranty, whether or not HRP shall have made any demand
under this Guaranty, at any time and from time to time after the occurrence of a
Guarantor Event of Default, in such manner as HRP in its sole discretion may
determine, and the Guarantor hereby grants HRP a continuing security interest in
such Deposit Balance, interest, monies, securities, deposits and property as
collateral for the payment and performance of such obligations.
5. Subrogation and Contribution. Until the Obligations shall have been
----------------------------
paid and performed in full, the Guarantor irrevocably and unconditionally waives
any and all rights to which it may be entitled, by operation of law or
otherwise, to be subrogated, with respect to any payment made by the Guarantor
hereunder, to the rights of HRP against any GranCare Company, or otherwise to be
reimbursed, indemnified or exonerated by any GranCare Company in respect thereof
or to receive any payment, in the nature of contribution or for any other
reason, from any other guarantor of the Obligations with respect to any payment
made by the Guarantor hereunder (provided that the foregoing shall not prevent
the Guarantor from drawing (and retaining any amounts so drawn) under any letter
of credit issued by a bank for the account of any Person). Until the Obligations
shall have been paid and performed in full, the Guarantor waives any defense it
may have based upon any election of remedies by HRP which impairs the
Guarantor's subrogation rights or the Guarantor's rights to proceed against any
GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such GranCare Company in connection with any anti-deficiency laws or any other
laws limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full, the Guarantor
further waives any right to enforce any remedy which HRP now has or may in the
future have against any GranCare Company, any other guarantor or any other
Person and any benefit of, or any right to participate in, any security
whatsoever now or in the future held by HRP.
6. Effect of Bankruptcy Stay. If acceleration of the time for payment or
-------------------------
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.
7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents
----------------------------------
and warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies, has read the contents
thereof and reviewed the same with legal counsel of its choice; (ii) no
representations or agreements of any kind have been made to the Guarantor which
would limit or qualify in any way the terms of this Guaranty; (iii) HRP has made
no representation to the Guarantor as to the creditworthiness of any GranCare
Company; and (iv) the Guarantor has established adequate means of obtaining from
each GranCare Company on a continuing basis information regarding such GranCare
Company's financial condition. The Guarantor agrees to keep adequately informed
from such means of any facts, events, or circumstances which might in any way
affect the Guarantor's risks under this Guaranty, and the Guarantor further
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<PAGE>
agrees that HRP shall have no obligation to disclose to the Guarantor any
information or documents acquired by HRP in the course of its relationship with
the GranCare Companies.
8. Amendments, etc. with Respect to the Obligations. The obligations of
------------------------------------------------
the Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or consolidation of any
GranCare Company with or into any other Person or of any other Person with or
into any GranCare Company; (g) the voluntary or involuntary sale or other
disposition of all or substantially all the assets of any GranCare Company or
any other Person; (h) the voluntary or involuntary liquidation, dissolution or
termination of any GranCare Company or any other Person; (i) any invalidity or
unenforceability, in whole or in part, of any term hereof or of any GranCare
Document, or any obligation, duty or agreement of any GranCare Company or any
other Person thereunder or in respect thereof; (j) any provision of any
applicable law or regulation purporting to prohibit the payment or performance
by any GranCare Company or any other Person of any Obligation; (k) any failure
on the part of any GranCare Company or any other Person for any reason to
perform or comply with any term of any GranCare Document or any other agreement;
or (l) any other act, omission or occurrence whatsoever, whether similar or
dissimilar to the foregoing. The Guarantor authorizes each GranCare Company,
each other guarantor in respect of the Obligations and HRP at any time in its
discretion, as the case may be, to alter any of the terms of any of the
Obligations.
9. Guarantor as Principal. If for any reason the GranCare Companies, or
----------------------
any of them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other Person or any limitation on the
method or terms of payment under any Obligation, or of any GranCare Document,
which may now or hereafter be caused or imposed in any manner whatsoever
(whether consensual or arising by operation of law or otherwise), this Guaranty
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<PAGE>
shall nevertheless remain in full force and effect and shall be binding upon the
Guarantor to the same extent as if the Guarantor at all times had been the
principal obligor on all Obligations (subject as provided in Section 2 hereof).
---------
10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the
------------------------------
extent not prohibited by applicable law, all presentments, demands for
performance, notice of nonperformance, protests, notices of protests and notices
of dishonor in connection with the Obligations or any GranCare Document,
including but not limited to (a) notice of the existence, creation or incurring
of any new or additional obligation or of any action or failure to act on the
part of any GranCare Company, HRP, any endorser or creditor of any GranCare
Company or any other Person; (b) any notice of any indulgence, extensions or
renewals granted to any obligor with respect to the Obligations; (c) any
requirement of diligence or promptness in the enforcement of rights under any
GranCare Document, or any other agreement or instrument directly or indirectly
relating thereto or to the Obligations; (d) any enforcement of any present or
future agreement or instrument relating directly or indirectly thereto or to the
Obligations; (e) notice of any of the matters referred to in Section 9 above;
---------
(f) any defense of any kind which the Guarantor may now have with respect to his
liability under this Guaranty; (g) any right to require HRP, as a condition of
enforcement of this Guaranty, to proceed against any GranCare Company or any
other Person or to proceed against or exhaust any security held by HRP at any
time or to pursue any other right or remedy in HRP's power before proceeding
against the Guarantor; (h) any defense that may arise by reason of the
incapacity, lack of authority, death or disability of any other Person or
Persons or the failure of HRP to file or enforce a claim against the estate (in
administration, bankruptcy, or any other proceeding) of any other Person or
Persons; (i) any defense based upon an election of remedies by HRP; (j) any
defense arising by reason of any "one action" or "anti-deficiency" law or any
other law which may prevent HRP from bringing any action, including a claim for
deficiency, against the Guarantor, before or after HRP's commencement of
completion of any foreclosure action, either judicially or by exercise of a
power of sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose to the
Guarantor any facts HRP may now or hereafter know about any GranCare Company or
any other obligor in respect of Obligations; (m) any defense arising because of
an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code;
(n) any defense based on any borrowing or grant of a security interest under
Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or
arising out of any defense which any GranCare Company or any other Person may
have to the payment or performance of the Obligations (including but not limited
to failure of consideration, breach of warranty, fraud, payment, accord and
satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy,
statute of limitations, lender liability and usury). Guarantor acknowledges and
agrees that each of the waivers set forth herein on the part of the Guarantor is
made with Guarantor's full knowledge of the significance and consequences
thereof and that, under the circumstances, the waivers are reasonable. If any
such waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent not prohibited by such Applicable Law.
11. Reinstatement. This Guaranty shall continue to be effective, or be
-------------
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations or the payment of the Deposit Amount (as hereinafter
defined) is rescinded or must otherwise be restored or returned by HRP upon the
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<PAGE>
insolvency, bankruptcy, dissolution, liquidation or reorganization of any
GranCare Company or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any GranCare
Company or any substantial part of its property, or otherwise, all as though
such payments had not been made.
12. Payments. The Guarantor hereby agrees that the Obligations, and all
--------
amounts payable hereunder, will be paid to HRP without set-off or counterclaim
in U.S. Dollars at the office of HRP located at 400 Centre Street, Newton,
Massachusetts 02158, or to such other location as HRP shall notify the
Guarantor.
13. Representations and Warranties. The Guarantor represents and warrants
------------------------------
that:
(A) Corporate Existence. The Guarantor is a corporation duly
-------------------
incorporated and validly existing under the laws of the jurisdiction of its
incorporation, and is duly licensed or qualified as a foreign corporation in
all states wherein the nature of its property owned or business transacted
by it makes such licensing or qualification necessary, except where the
failure to be licensed or to so qualify could not have a Material Adverse
Effect.
(B) No Violation. The execution, delivery and performance of this
------------
Guaranty will not contravene any provision of law, statute, rule or
regulation to which the Guarantor or any of its Subsidiaries is subject or
any judgment, decree, franchise, order or permit applicable to the Guarantor
or any of its Subsidiaries, or conflict or be inconsistent with or result in
any breach of, any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or
the obligation to create or impose) any Lien upon any of the property or
assets of the Guarantor or any of its Subsidiaries pursuant to the terms of
any agreement or instrument to which the Guarantor or any of its
Subsidiaries is party, or violate any provision of the respective corporate
charters or bylaws of the Guarantor or any of its Subsidiaries.
(C) Corporate Authority and Power. The execution, delivery and
-----------------------------
performance of this Guaranty is within the corporate powers of the Guarantor
and has been duly authorized by all necessary corporate action.
(D) Enforceability. This Guaranty has been duly executed and
--------------
delivered by the Guarantor, and this Guaranty constitutes the valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and except as
enforceability may be subject to general principles of equity, whether such
principles are applied in a court of equity or at law.
(E) Governmental Approvals. No order, permission, consent, approval,
----------------------
license, authorization, registration or validation of, or filing with, or
exemption by, any governmental authority is required to authorize, or is
required in connection with, the execution, delivery and performance of this
Guaranty, or the taking of any action contemplated hereby or thereby.
-10-
<PAGE>
(F) Financial Statements. The financial statements of the Guarantor
--------------------
contained in the Guarantor's Registration Statement on Form S-4 filed in
connection with the Merger, fairly present the consolidated financial
condition of the Guarantor and its Subsidiaries as of their date of
presentation, and the consolidated results of their operations and their
consolidated cash flows for the respective fiscal period then ended. The
Financial Statements (including in each case the related schedules and
notes) (i) have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as disclosed therein), (ii) are
true, complete and correct, and (iii) do not omit any material fact
necessary to make them not misleading.
(G) No Adverse Change. Other than as set forth in or contemplated by
-----------------
the Guarantor's Registration Statement on Form S-4 filed in connection with
the Merger, since May 31, 1996, there has been no change in the business
operations, management or properties, or in the condition, financial or
other, of the Guarantor and its Subsidiaries taken as a whole that has had
or could have a Material Adverse Effect.
(H) Litigation. The Guarantor has no notice or knowledge of any action,
----------
suit or proceeding pending or threatened against or affecting it at law or
in equity or before or by any governmental department, court, commission,
board, bureau, agency or instrumentality, domestic or foreign, or before any
arbitrator of any kind that would, to the best of its knowledge, information
or belief, materially and adversely affect its ability to perform its
obligations under this Guaranty.
(I) No Restrictions. Neither the Guarantor nor any of its Subsidiaries
---------------
has entered into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that either now or in the future would
have the effect of restricting the ability of any GranCare Company, or would
conflict with the right of any GranCare Company, to (a) enter into any new
or additional mortgage or lease financing, or any other transaction, with
HRP (including, without limitation, any transaction contemplated by Section
9.27 of the Acquisition Agreement), (b) extend or renew the term of any
mortgage or lease financing with HRP, (c) exercise any option to purchase
property from HRP or (d) take any other action permitted or required to be
taken by any GranCare Company pursuant to the terms of any GranCare
Document.
14. Covenants. The Guarantor hereby covenants and agrees with HRP that,
---------
from and after the date of this Guaranty until the Obligations are paid in full
or until the Release Date (as defined in Section 16 hereof):
----------
(a) the Guarantor shall not enter into any transaction of merger or
consolidation, or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or
otherwise dispose of in one transaction or a series of transactions, all or
substantially all of its business, property or fixed assets, whether now owned
or hereafter acquired, except that the Guarantor may merge or consolidate with
any Person, or convey, transfer or lease substantially all of its assets so long
as
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<PAGE>
(A) no condition or event shall exist, either before or immediately
after giving effect to such merger or consolidation, or such conveyance,
transfer or lease, that constitutes a Guarantor Default;
(B) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of nationally recognized
independent counsel, or other independent counsel reasonably satisfactory to
HRP, to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof; and
(i) if the survivor of any such merger is the Guarantor, the
Consolidated Net Worth of the Guarantor giving effect to such
merger shall not be less than $100,000,000; or
(ii) if the successor formed by such consolidation or the survivor of
such merger, if other than the Guarantor, or the Person that
acquires by conveyance, transfer or lease substantially all of the
assets of the Guarantor as an entirety, as the case may be, giving
effect to such consolidation or merger, or such conveyance,
transfer or lease, has either (x) a Consolidated Net Worth of not
less than $100,000,000 or (y) (A) paid HRP an amount in immediately
available funds equal to the Default Amount, free and clear of
claims of third parties, to be held by HRP as cash collateral for
the payment of the Guarantor's obligations hereunder (such amounts
to be applied by HRP to the payment and performance of the
obligations of the Guarantor (and its successors) hereunder as and
when the same become due and payable in accordance with the
provisions of this Guaranty) and (B) executed and delivered a cash
collateral pledge agreement in favor of HRP in respect of such cash
collateral (together with UCC-1 financing statements or similar
instruments if requested by HRP, and in form satisfactory to HRP),
which cash collateral pledge agreement shall be in form and
substance satisfactory to HRP in its sole discretion.
(b) The Guarantor shall not, and shall not permit any of its Subsidiaries
to, enter into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that would have the effect of restricting
the ability of any GranCare Company, or would conflict with the right of any
GranCare Company, to (a) enter into any new or additional mortgage or lease
financing, or any other transaction, with HRP (including, without limitation,
any transaction contemplated by Section 9.27 of the Acquisition Agreement), (b)
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<PAGE>
extend or renew the term of any mortgage or lease financing with HRP, (c)
exercise any option to purchase property from HRP or (d) take any other action
permitted or required to be taken by any GranCare Company pursuant to the terms
of any GranCare Document.
15. Guarantor Events of Default. If one or more of the following events (a
---------------------------
"Guarantor Event of Default") shall have occurred:
--------------------------
(A) the Guarantor shall fail to make punctual payment of any amount
payable hereunder as the same shall become due and payable; or
(B) any representation or warranty of the Guarantor contained in this
Guaranty, or any statement or certificate furnished pursuant to any
provision of this Guaranty or the Amendment, shall have been false,
incorrect or misleading in any material respect when made or so certified
to; or
(C) the Guarantor shall breach any of the provisions of, or fail duly to
observe or perform any covenant, agreement or provision contained in, this
Guaranty; or
(D) any obligation of the Guarantor in respect of any Indebtedness or
any Contingent Obligation with an aggregate amount of principal outstanding
(whether or not due) exceeding $10,000,000 (but excluding, in any event, the
obligations of the Guarantor hereunder) shall be declared to be or shall
become due and payable prior to the stated maturity thereof, or such
Indebtedness or Contingent Obligation shall not be paid as and when the same
becomes due and payable, or there shall occur and be continuing any default
under any instrument, agreement or evidence of indebtedness relating to any
such Indebtedness the effect of which is to permit the holder or holders of
such instrument, agreement or evidence of indebtedness, or a trustee, agent
or other representative on behalf of such holder or holders, to cause such
Indebtedness to become due prior to its stated maturity; or
(E) the Guarantor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator of
itself or of all or a substantial part of its property, make a general
assignment for the benefit of its creditors, commence a voluntary case under
the Bankruptcy Code, file a petition seeking to take advantage of any other
law relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or readjustment of debts, fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against
it in an involuntary case under the Bankruptcy Code, or take any corporate
action for the purpose of effecting any of the foregoing; or
(F) a proceeding or case shall be commenced, without the application or
consent of the Guarantor thereof in any court of competent jurisdiction,
seeking its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, the appointment of a trustee,
receiver, custodian, liquidator or the like of the Guarantor or of all or
any substantial part of its assets, or similar relief in respect of the
Guarantor under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or
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<PAGE>
case shall continue undismissed, or an order, judgment or decree approving
or ordering any of the foregoing shall be entered and continue unstayed and
in effect, for a period of 60 days; or an order for relief against the
Guarantor shall be entered in an involuntary case under the Bankruptcy Code;
or
(G) A judgment or judgments for the payment of money in excess of
$[10,000,000] (net of insurance proceeds) in the aggregate shall be rendered
against the Guarantor and any such judgment or judgments shall not have been
vacated, discharged, stayed or bonded pending appeal within thirty (30) days
from the entry thereof;
THEN, notwithstanding that no GranCare Event of Default may then have occurred
- ----
and be continuing, (a) in the event of a Guarantor Event of Default described in
paragraph (E) or (F) above, there shall become due and payable to HRP, and the
- ------------- ---
Guarantor shall immediately pay HRP, without notice or demand of any kind
whatsoever, an amount in immediately available funds equal to the Default
Amount, and (b) in the event of any other Guarantor Event of Default, upon
notice from HRP specifying such Guarantor Event of Default, there shall become
due and payable to HRP, and the Guarantor shall immediately pay HRP, an amount
in immediately available funds equal to Default Amount. The amounts so paid to
HRP shall be held as collateral for the payment of the Guarantor's obligations
hereunder. Such amounts shall be applied by HRP to the payment and performance
of the obligations of the Guarantor hereunder as and when the same become due
and payable in accordance with the provisions of this Guaranty.
16. Payment of Default Amount. Notwithstanding anything herein to the
-------------------------
contrary, upon the Guarantor's (i) payment to HRP of an amount in immediately
available funds equal to the Default Amount, free and clear of claims of third
parties, to be held by HRP as cash collateral for the payment of the Guarantor's
obligations hereunder (such amounts to be applied by HRP to the payment and
performance of the obligations of the Guarantor (and its successors) hereunder
as and when the same become due and payable in accordance with the provisions of
this Guaranty) and (ii) execution and delivery of a cash collateral pledge
agreement in favor of HRP in respect of such cash collateral (together with
executed UCC-1 financing statements or similar instruments if requested by HRP,
and in form satisfactory to HRP), which cash collateral pledge agreement shall
be in form and substance satisfactory to HRP in its sole discretion (the date
upon which the conditions in clauses (i) and (ii) have been satisfied, the
"Release Date"), Sections 14 and 15 hereof shall have no further force and
- ------------- ----------- --
effect, and (subject to Section 11 hereof) HRP shall look solely to such cash
----------
collateral for payment of the Guarantor's obligations hereunder (so long as such
cash collateral shall not thereafter become subject to any Lien or other claim
of any Person, other than the rights of the Guarantor hereunder). Without
limiting the foregoing, such cash collateral pledge agreement shall provide that
(A) the amount paid to HRP pursuant to this Section 16 , less amounts applied by
----------
HRP from time to time to the payment of the Obligations (the "Deposit Balance"),
---------------
shall bear interest at a per annum rate equal to the lesser of eight percent
(8%) per annum or the T-Bill Rate (as hereinafter defined), which interest shall
be payable to the Guarantor or to its order on each anniversary of the date of
the payment of such amount to HRP (the "Deposit Payment Date") so long as no
--------------------
GranCare Event of Default shall have occurred and be continuing on such interest
payment date, (B) the Deposit Balance, together with accrued but unpaid interest
thereon, shall be released to the Guarantor or to its order upon the payment in
full of the Obligations, and (C) the Deposit Balance and accrued interest
thereon may be commingled with the general assets of HRP. The term "T-Bill
Rate" means, with respect to the Deposit Balance, the yield to maturity implied
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<PAGE>
by (i) the yields reported as of 10:00 A.M. (New York City time) on the Deposit
Payment Date on the display designated as "Page 678" on the Telerate Access
Service (or such other display as may replace Page 678 on Telerate Access
Service) for 30-year U.S. Treasury securities, or (ii) if such yields are not
reported as of such time or the yields reported as of such time are not
ascertainable, the Treasury Constant Maturity Series Yields reported, for the
latest day for which such yields have been so reported as of the Deposit Payment
Date in Federal Reserve Statistical Release H.15 (519) (or any comparable
successor publication) for 30-year U.S. Treasury securities. Such implied yield
will be determined, if necessary, by converting U.S. Treasury bill quotations to
per annum bond-equivalent yields in accordance with accepted financial practice.
17. Supply Contracts. The Guarantor agrees that all agreements or
----------------
arrangements between the Guarantor and its Subsidiaries or representative or
agents on the one hand, and AMS or GCI on the other, providing for
pharmaceuticals or other supplies or services to be furnished to any facility
operated by AMS or GCI, shall provide that each such agreement or arrangement
shall be terminated and of no further force and effect, and all obligations and
liabilities thereunder released and terminated (other than obligations to pay
for services or supplies previously rendered or furnished), at any time upon
notice to the Guarantor by HRP after either (i) HRP terminates such lease with
AMS or GCI, accelerates the maturity of any promissory note of AMS or GCI, or
forecloses upon or exercises remedies of like effect in respect of the stock of
GCI or AMS pledged to HRP or (ii) the occurrence of an Event of Default
hereunder or under any other GranCare Document involving the bankruptcy or
insolvency of New GranCare, AMS, GCI or the Guarantor.
18. Severability. Any provision of this Guaranty which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
19. Additional Guaranties. This Guaranty shall be in addition to any other
---------------------
guaranty or other security for the Obligations, and it shall not be prejudiced
or rendered unenforceable by the invalidity of any such other guaranty or
security.
20. Paragraph Headings. The paragraph headings used in this Guaranty are
------------------
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
21. No Waiver, Cumulative Remedies. HRP shall not by any act (except by a
------------------------------
written instrument pursuant to Paragraph 22 hereof), delay, indulgence, omission
------------
or otherwise, be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or in any breach of any of the terms and conditions
hereof. No failure to exercise, nor any delay in exercising, on the part of
HRP, any right, power or privilege hereunder shall operate as a waiver thereof.
No single or partial exercise of any right, power or privilege hereunder shall
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. A waiver by HRP of any right or remedy hereunder on
any one occasion shall not be construed as a bar to any right or remedy which
-15-
<PAGE>
HRP would otherwise have on any future occasion. The rights and remedies herein
provided are cumulative, may be exercised singly or concurrently and are not
exclusive of any rights or remedies provided by law.
22. Waivers and Amendments; Successors and Assigns. None of the terms or
-----------------------------------------------
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.
23. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE
------------------------------------------------------------
GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A
JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF
THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY
ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE
BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
-16-
<PAGE>
24. Notices. All notices under this Guaranty shall be in writing, and shall
-------
be delivered by hand, by a nationally recognized commercial overnight delivery
service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Alexander A. Notopoulos, Esq. (telecopy no. 617-338-2880), and if to the
Guarantor, at its address or telecopy number set out below its signature in this
Guaranty. Such notices shall be effective: in the case of hand deliveries,
when received; in the case of an overnight delivery service, on the next
business day after being placed in the possession of such delivery service, with
delivery charges prepaid; in the case of mail, three days after deposit in the
postal system, first class postage prepaid; and in the case of telecopy notices,
when electronic indication of receipt is received. Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be duly
executed and delivered as of the date first above written.
VITALINK PHARMACY SERVICES, INC.
By:
-------------------------------------
Title:
Address for Notices:
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60563
Attention: President
Telecopy: (630) 245-4800
-17-
<PAGE>
EXHIBIT 10.56
EXHIBIT B
---------
ASSUMPTION AGREEMENT
--------------------
ASSUMPTION AGREEMENT, dated as of _____________, 1997 by NEW GRANCARE,
INC., a Delaware corporation ("New GranCare"), in favor of HEALTH AND
------------
RETIREMENT PROPERTIES TRUST (f/k/a "Health and Rehabilitation Properties Trust")
(known in Wisconsin as "Health and Retirement Properties REIT"), a real estate
investment trust
formed under the laws of the State of Maryland ("HRP").
---
W I T N E S S E T H
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, Inc. (f/k/a AMS Holding Co.), a California corporation ("GranCare"),
--------
American Medical Services, Inc., a Wisconsin corporation ("AMSI") and AMS
----
Properties, Inc., a Delaware corporation ("AMS") have entered into an
---
Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended (as so amended, the "Acquisition Agreement"),
---------------------
under which, inter alia, (A) HRP has leased 18 nursing properties located in
----- ----
Wisconsin, California, Colorado and Illinois to AMS pursuant to the several
Facility Leases (as amended, the "AMS Facility Leases"), each incorporating a
-------------------
Master Lease Document General Terms and Conditions dated as of December 28, 1990
(as amended, the "AMS Master Lease") between HRP, as landlord, and AMS, as
----------------
tenant, and (B) HRP has made a mortgage loan to AMS in the original principal
amount of $11,500,000, the payment of which is currently evidenced by a
Promissory Note dated as of October 1, 1994 by AMS to HRP (the "Mortgage Note")
-------------
and is secured, inter alia by Mortgage and Security Agreements dated as of March
----------
31, 1995 (collectively, the "Mortgages") by AMS in favor of HRP encumbering the
---------
two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMSI; and (b) in
December 1993, AMSI, which previously had owned all the outstanding common stock
of AMS, and AMS Rehab, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare, each merged into AMS, with AMS as the surviving
corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc., a Delaware corporation ("GCI") pursuant to the several Facility Leases (as
---
amended, the "GCI Facility Leases"), each incorporating a Master Lease Document
-------------------
General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCI
---
Master Lease") between HRP, as landlord, and GCI, as tenant;
- ------------
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS and GCI, proposes to transfer all of its
skilled nursing, home health care, assisted living and contract management
business (including, without limitation, such capital stock), and related
<PAGE>
assets, to New GranCare, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare ("New GranCare"), with GranCare thereafter distributing
------------
New GranCare common stock to GranCare shareholders (collectively, the
"Distribution"), pursuant to an Agreement and Plan of Distribution dated as of
- -------------
September 3, 1996 between GranCare and New GranCare (the "Distribution
------------
Agreement");
- ---------
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into Vitalink Pharmacy Services Inc., a Delaware corporation ("Vitalink"),
--------
with Vitalink as the surviving corporation (the "Merger"), pursuant to a Merger
------
Agreement dated as of September 3, 1996 between Vitalink and GranCare (the
"Merger Agreement"); and
- -----------------
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release Vitalink and its subsidiaries (including any remaining
Subsidiary of GranCare that becomes a subsidiary of Vitalink as a result of the
Merger) and their respective successors and assigns from and against any and all
claims, liabilities and obligations, as successor by merger to GranCare, under
(A) the Acquisition Agreement, (B) the Representation Letter and Indemnification
Agreement dated June 30, 1992 by GCI, AMS and GranCare to HRP (the "GCI
---
Indemnity Agreement"), (C) the Guaranty, dated as of December 28, 1990, as
- -------------------
amended, by GranCare in favor of HRP in respect of the obligations of AMS (the
"AMS Guaranty"), (D) the Guaranty dated as of June 30, 1992, as amended, by
- -------------
GranCare in favor of HRP in respect of the obligations of GCI (the "GCI
---
Guaranty"), (E) the Pledge Agreement, dated as of December 28, 1990, as amended,
by GranCare in favor of HRP (the "AMS Pledge Agreement"); (F) the Pledge
--------------------
Agreement, dated as of June 30, 1992 as amended, by GranCare in favor of HRP
(the "GCI Pledge Agreement"); (G) the Subordination Agreement, dated as of
--------------------
December 28, 1990, as amended, among GranCare, as subordinate creditor, AMS, as
debtor and HRP, as senior creditor (the "AMS Subordination Agreement"); (H) the
---------------------------
Subordination Agreement, dated as of June 30, 1992, as amended, among GranCare,
as subordinate creditor, GCI, as debtor and HRP, as senior creditor (the "GCI
---
Subordination Agreement"); and (I) any other agreements, instruments or
- -----------------------
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of transactions contemplated by the agreements
described in clauses (A) through (H) above (the agreements, instruments and
understandings referred in clauses (A) through (I) hereof, collectively, the
"GranCare Documents"); and HRP is, subject to the terms and provisions of the
- -------------------
Consent and Amendment to Transaction Documents dated as of December 31, 1996
among GranCare, New GranCare, AMS, GCI and HRP (the "Amendment") willing to so
---------
agree, subject to, inter alia, the execution and delivery of this Assumption
----- ----
Agreement by New GranCare and GranCare;
NOW, THEREFORE, New GranCare hereby agrees with HRP as follows:
1. Defined Terms. All capitalized terms defined in the Acquisition Agreement
-------------
(as amended by the Amendment) shall have such defined meaning when used herein.
2. Assumption. New GranCare hereby expressly assumes and confirms, and agrees
----------
to perform and observe, all and singular covenants, agreements, terms,
conditions, obligations, appointments, duties and liabilities of GranCare under
the GranCare Documents. New GranCare is and shall be bound by, and shall enjoy
-2-
<PAGE>
the benefits of, each GranCare Document as if it had been a party thereto in
lieu of GranCare from the original execution and delivery thereof. New GranCare
hereby accepts and assumes any liability of GranCare related to any
representation or warranty made by GranCare therein. All references in each
GranCare Document to "GranCare, Inc.," "the Company" or words of like import
directly or indirectly referring to GranCare, Inc. shall mean and be a reference
to New GranCare.
3. Representation and Warranties.
-----------------------------
In order to induce HRP to consent to the terms of the Distribution
Agreement and the Merger Agreement and the transactions contemplated thereby,
and to release GranCare from its obligations as contemplated in the Amendment,
New GranCare and GranCare each jointly and severally represent and warrant that,
immediately following the Distribution and the Merger:
3.1 Representations and Warranties in Transaction Documents; No Event of
--------------------------------------------------------------------
Default. Each of the representations and warranties of GranCare, AMS and GCI
- -------
contained or incorporated by reference in any Transaction Document are true and
correct on and as of the date hereof as if made on such date (except as to any
representation or warranty which refers to a specific earlier date); and no
Event of Default, or event or condition that with the giving of notice or the
lapse of time or both would become an Event of Default, shall have occurred and
be continuing under any Transaction Document.
3.2 Status and Authority of New GranCare. New GranCare is a corporation
------------------------------------
duly organized and validly existing and in good standing under the laws of the
State of Delaware, and has all requisite power and authority under the laws of
such State and under its charter and by-laws to enter into and perform its
obligations under this Assumption Agreement and each GranCare Document, and to
transact the business in which it is engaged or proposes to engage and to
consummate the transactions contemplated hereby. New GranCare has duly
qualified and is in good standing as a foreign corporation in each jurisdiction
in which the nature of the business conducted or to be conducted by it requires
such qualification.
3.3 Corporate Action, Etc. of New GranCare. New GranCare has taken all
--------------------------------------
necessary corporate or other action under its charter and by-laws to authorize
the execution, delivery and performance of this Assumption Agreement and the
Amendment, and to authorize the performance of each GranCare Document. This
Assumption Agreement, the Amendment and each GranCare Document each constitute
the valid and binding obligation and agreement of New GranCare, enforceable in
accordance with its terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium or similar laws of general
application affecting the rights and remedies of creditors.
3.4 No Violations of Agreements, Etc. Neither the execution of, delivery
--------------------------------
and performance by New GranCare of this Assumption Agreement, the Amendment or
any GranCare Document, nor compliance with any terms and provisions of any
thereof, nor the consummation of the Distribution or the Merger (collectively,
the "Transaction"), will result in any breach of the terms, conditions or
-----------
provisions of, or conflict with or constitute a default under, or result in the
creation of any lien, charge or encumbrance upon any property or asset of New
GranCare or any Subsidiary thereof (including without limitation, AMS and GCI)
pursuant to the terms of any indenture, mortgage, deed of trust, note, evidence
-3-
<PAGE>
of indebtedness or any other agreement or instrument (including, without
limitation, any agreements, instruments and documents necessary for the conduct
of the business or operations of AMS or GCI as conducted immediately prior to
the date hereof, including, but not limited to, the operation as a nursing
facility of each Facility owned or leased by AMS or GCI) to which New GranCare
or any Subsidiary thereof may be a party or by which it or any of its property
may be bound (collectively, "Contractual Obligations"), or its charter and by-
-----------------------
laws, or violate any provisions of law or any order or regulation of any
governmental commission, bureau or administrative agency or any applicable
order, writ, injunction, judgment or decree of any court (collectively, "Legal
-----
Restrictions").
- ------------
3.5 Governmental and Other Approvals. No order, permission, consent,
--------------------------------
approval, license, authorization, registration or validation of, or filing with,
or exemption by, any governmental agency, commission, board or public authority
is required to authorize, or is required in connection with the execution,
delivery and performance of this Assumption Agreement, the Amendment or any
GranCare Document, or the consummation of the Transaction, which has not been
duly obtained or made on or prior to the date hereof.
3.6 Compliance With Agreements, Etc.
-------------------------------
(a) New GranCare and each of its Subsidiaries is in compliance in all
material respects with the terms and provisions of each Contractual
Obligation to which it is a party or by which it or its respective
properties is bound that is material to the operations, business,
prospects, property or assets of, liabilities (including, without
limitation, tax, ERISA, healthcare regulatory and environmental
liabilities) or the condition (financial or otherwise) of New GranCare, AMS
or GCI, and is not in default under or with respect to any such Contractual
Obligation;
(b) New GranCare and each of its Subsidiaries is in compliance in all
material respects with, and no default shall have occurred under, any Legal
Restriction applicable to it or its respective properties that is material
to the operations, business, prospects, property or assets of, liabilities
(including, without limitation, tax, ERISA, healthcare regulatory and
environmental liabilities) or the condition (financial or otherwise) of New
GranCare, AMS or GCI; and
(c) New GranCare, AMS and GCI are each in compliance with the
provisions of its charter and by-laws.
3.7 Judgments; Litigation.
----------------------
(a) There are no judgments outstanding and unsatisfied against New
GranCare or any of its Subsidiaries or their respective properties, and
neither New GranCare or any of its Subsidiaries or their respective
properties is involved in any litigation at law or in equity, or in any
proceeding before any court, or by or before any governmental or
administrative agency, which litigation or proceeding (if adversely
determined) could have a materially adverse effect on the operations,
business, prospects, property or assets of, liabilities (including, without
limitation, tax, ERISA, health care regulatory and environmental
liabilities), or the condition (financial or otherwise) of New GranCare,
AMS or GCI, or the ownership or operation by New GranCare, AMS, GCI or HRP
-4-
<PAGE>
of, or any security interest or lien in HRP's favor in, any properties
which are or purport to be the subject of any of the Transaction Documents
(collectively, the "Subject Properties"), and no such material litigation
------------------
or proceeding is, to the knowledge of New GranCare, threatened against New
GranCare or any of its Subsidiaries or against its properties (including
the Subject Properties) and to New GranCare's knowledge, no investigation
looking toward such a proceeding has begun or is contemplated.
(b) There is no litigation or proceeding pending, or, to the knowledge
of New GranCare, threatened, by any governmental authority seeking the
condemnation or taking of all or any portion of any Subject Property.
3.8 Financial Condition. The financial statements of GranCare and New
-------------------
GranCare contained in the Proxy Statement pursuant to Schedule 14A as filed with
the Securities and Exchange Commission on November __, 1996 fairly present the
financial condition and operations of GranCare and its Subsidiaries and New
GranCare as at the end of and for the reporting periods covered thereby. AMS
and GCI have no Indebtedness or other material liabilities, debts or
obligations, whether accrued, absolute, contingent or otherwise, and whether due
or to become due, including, but not limited to, liabilities or obligations on
account of taxes or other governmental charges, other than Indebtedness
permitted to be incurred or created under the Transaction Documents.
3.9 Title. New GranCare has good and marketable title to all outstanding
-----
shares of common stock of AMS and GCI, free and clear of any Lien or interest of
any kind, except for the pledge created by the AMS Pledge Agreement and the GCI
Pledge Agreement. AMS and GCI each have good and marketable title to their
respective properties, in each case free and clear of all Liens, except for
Liens permitted under Section 9.18 of the Acquisition Agreement or under Section
------------ -------
7.1 of the GCI Master Lease, as the case may be.
- ---
3.10 Priority of Liens. The mortgage, security interests and liens granted
------------------
or purported to be granted to HRP in the assets and properties of AMS and GCI
(including subsequently acquired personal property, accounts receivable,
contract rights and general intangibles upon acquisition thereof, to the extent
assignable under applicable law) (the "Collateral") pursuant to the Security
----------
Documents (i) constitute valid, perfected and enforceable first liens and
security interests under the Uniform Commercial Code (the "UCC") (with respect
---
to Collateral in which a security interest may be perfected under Article 9 of
the UCC as in effect in each relevant State) or, with respect to such property
constituting real property or fixtures or otherwise subject to laws governing
liens in real estate, under the real estate recording acts of the State (the
"Recording Acts") where such property is located, subject only to Liens
- ---------------
permitted by Section 9.18 of the Acquisition Agreement or under Section 7.1 of
------------ -----------
the GCI Master Lease, as the case may be, (ii) will be entitled to all of the
rights, benefits and priorities provided by the UCC or the Recording Acts, as
applicable, and (iii) will be superior and prior to the rights of all third
persons now existing or hereafter arising whether by way of any Lien or
otherwise, subject only to Liens permitted by Section 9.18 of the Acquisition
------------
Agreement or under Section 7.1 of the GCI Master Lease, as the case may be. All
-----------
filings have been accomplished with respect to the Security Documents in each
jurisdiction as may be required by law to establish and perfect HRP's rights in
and to the Collateral, and any giving of notice or any other action to such end
required by law has been given or taken.
-5-
<PAGE>
3.11 Licenses, Permits, Etc. All licenses, permits, consents, permissions,
----------------------
certifications and other approvals from all federal, state and local
governmental agencies necessary to provide the services and the number of
available beds provided by the Facilities owned and/or operated by AMS or GCI
immediately before the Transaction, shall continue to be in full force and
effect, and shall not be subject to revocation as a result of the Transaction.
3.12 Disclosure. Neither this Assumption Agreement, the Amendment nor any
----------
other document, certificate or statement furnished to HRP by or on behalf of
GranCare, New GranCare or any Affiliate thereof in connection with this
Assumption Agreement or the Transaction contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
required to be stated herein or therein or necessary in order to make the
statements contained herein or therein not misleading. There is no fact or
condition which materially and adversely affects the operations, business,
prospects, property or assets of, liabilities (including, without limitation,
tax, ERISA, health care regulatory and environmental liabilities), or the
condition (financial or otherwise) of New GranCare, AMS or GCI or the Subject
Properties which has not been set forth herein.
4. SUCCESSORS AND ASSIGNS. THIS ASSUMPTION AGREEMENT SHALL BE BINDING UPON NEW
----------------------
GRANCARE AND GRANCARE AND THEIR RESPECTIVE SUCCESSORS AND ASSIGNS AND SHALL
INURE TO THE BENEFIT OF HRP AND ITS SUCCESSORS AND ASSIGNS.
5. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
-------------
ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF
MASSACHUSETTS.
6. NO LIABILITY OF TRUSTEES. THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9,
------------------------
1986, A COPY OF WHICH, TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"),
IS DULY FILED IN THE OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE
STATE OF MARYLAND, PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES
TRUST" REFERS TO THE TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES,
BUT NOT INDIVIDUALLY OR PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER,
EMPLOYEE OR AGENT OF HRP SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR
SEVERALLY, FOR ANY OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING
WITH HRP, IN ANY WAY, SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF
ANY SUM OR THE PERFORMANCE OF ANY OBLIGATION.
-6-
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Agreement to be
executed by its duly authorized officer as of the date first above indicated.
NEW GRANCARE, INC.,
a Delaware corporation
By:
-----------------------------------
Name:
Title:
Section 3 of this Assumption Agreement
is hereby confirmed and agreed:
GRANCARE, INC.,
a California corporation
By:
-----------------------------------
Name:
Title:
ACCEPTED AND AGREED:
HEALTH AND RETIREMENT PROPERTIES TRUST,
a real estate investment trust formed under the laws of
the State of Maryland
By:
--------------------------------
Name:
Title:
-7-
<PAGE>
Exhibit 23.1
CONSENT AND REPORT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts"
and to the use of our reports (a) dated Feburary 27, 1996, with respect to the
consolidated financial statements of GranCare, Inc. as of December 31, 1995 and
1994 and for each of the three years ended December 31, 1995, and (b) dated
October 7, 1996, with respect to the balance sheet of New GranCare, Inc. as of
September 30, 1996, in the Registration Statement on Form S-1 and related
Prospectus of New GranCare, Inc. for the registration of shares of its common
stock.
Our audits of the consolidated financial statements of GranCare, Inc.
referred to above also included the financial statement schedule of GranCare,
Inc. listed in Item 16(b). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, as of the date of our report referred to in the
preceding paragraph, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Atlanta, Georgia
January 8, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Evergreen Healthcare, Inc.:
We consent to the use of our reports included herein, and to the reference to
our Firm under the heading "Experts" in the prospectus.
KPMG Peat Marwick LLP
Indianapolis, Indiana
January 8, 1997
<PAGE>
ANNEX B
AGREEMENT AND PLAN
OF MERGER
BY AND BETWEEN
VITALINK PHARMACY SERVICES, INC.
AND
GRANCARE, INC.
DATED AS OF SEPTEMBER 3, 1996 (AS AMENDED)
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
THE MERGER
<C> <S> <C>
Section 1.01. The Merger.............................................. B-7
Section 1.02. Effective Time.......................................... B-7
Certificate of Incorporation and By-Laws of Surviving
Section 1.03. Corporation............................................ B-7
Section 1.04. Directors and Officers of Surviving Corporation......... B-7
Section 1.05. Stockholders' Meeting................................... B-7
Section 1.06. Filing of Certificate of Merger......................... B-8
Section 1.07. Further Assurances...................................... B-8
ARTICLE II
CONVERSION OF SHARES
Section 2.01. Shares.................................................. B-8
Section 2.02. Exchange of Shares...................................... B-9
Section 2.03. Effect on GranCare Options.............................. B-9
Section 2.04. Fractional Shares....................................... B-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VITALINK
Section 3.01. Organization and Qualification.......................... B-10
Section 3.02. Authority Relative to This Agreement.................... B-11
Section 3.03. Consents, No Conflicts.................................. B-11
Section 3.04. Board Recommendation.................................... B-12
Section 3.05. State Antitakeover Statutes............................. B-12
Section 3.06. No Existing Violation, Default, Etc..................... B-12
Section 3.07. Licenses and Permits.................................... B-12
Section 3.08. Registration Statement; Information Statement........... B-12
Section 3.09. Finders or Brokers...................................... B-13
Section 3.10. SEC Filings............................................. B-13
Section 3.11. Financial Statements.................................... B-13
Section 3.12. Absence of Undisclosed Liabilities...................... B-14
Section 3.13. Absence of Changes or Events............................ B-14
Section 3.14. Capitalization.......................................... B-14
Section 3.15. Capital Stock of Subsidiaries........................... B-15
Section 3.16. Litigation.............................................. B-15
Section 3.17. Insurance............................................... B-15
Section 3.18. Title to and Condition of Properties.................... B-16
Section 3.19. Leases.................................................. B-16
Section 3.20. Contracts and Commitments............................... B-16
Section 3.21. Labor Matters........................................... B-17
Section 3.22. No Change of Control Puts............................... B-17
Section 3.23. Employment and Labor Contracts.......................... B-17
Section 3.24. Intellectual Property Rights............................ B-18
Section 3.25. Taxes................................................... B-18
Section 3.26. Employee Benefit Plans; ERISA........................... B-19
Section 3.27. Environmental Matters................................... B-21
Section 3.28. Directors, Officers and Compensation of Employees....... B-23
Section 3.29. Banks................................................... B-23
Section 3.30. Disclosure.............................................. B-23
Section 3.31. Institutional Pharmacy Business......................... B-23
</TABLE>
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<TABLE>
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GRANCARE
<C> <S> <C>
Section 4.01. Organization and Qualification.......................... B-24
Section 4.02. Authority Relative to This Agreement.................... B-25
Section 4.03. Consents, No Conflicts.................................. B-25
Section 4.04. Board Recommendation.................................... B-26
Section 4.05. State Antitakeover Statutes............................. B-26
Section 4.06. No Existing Violation, Default, Etc..................... B-26
Section 4.07. Affiliates.............................................. B-26
Section 4.08. Licenses and Permits.................................... B-26
Section 4.09. Registration Statement; Proxy Statement; SNFCo
Registration Documents................................. B-27
Section 4.10. Finders or Brokers...................................... B-27
Section 4.11. SEC Filings............................................. B-27
Section 4.12. Financial Statements.................................... B-28
Section 4.13. Absence of Undisclosed Liabilities...................... B-28
Section 4.14. Absence of Changes or Events............................ B-28
Section 4.15. Capitalization.......................................... B-28
Section 4.16. Capital Stock of Subsidiaries........................... B-29
Section 4.17. Litigation.............................................. B-30
Section 4.18. Insurance............................................... B-30
Section 4.19. Title to and Condition of Properties.................... B-30
Section 4.20. Leases.................................................. B-31
Section 4.21. Contracts and Commitments............................... B-31
Section 4.22. Labor Matters........................................... B-32
Section 4.23. No Change of Control Puts............................... B-32
Section 4.24. Employment and Labor Contracts.......................... B-32
Section 4.25. Intellectual Property Rights............................ B-32
Section 4.26. Taxes................................................... B-33
Section 4.27. Employee Benefit Plans; ERISA........................... B-33
Section 4.28. Environmental Matters................................... B-36
Section 4.29. Directors, Officers and Compensation of Employees....... B-37
Section 4.30. Banks................................................... B-37
Section 4.31. Disclosure.............................................. B-37
Section 4.32. Institutional Pharmacy Business......................... B-37
Section 4.33. Fairness Opinion........................................ B-38
Section 4.34. Sufficiency of Assets................................... B-38
ARTICLE V
COVENANTS
Section 5.01. Conduct of Business of GranCare......................... B-38
Section 5.02. Conduct of Business of Vitalink......................... B-40
Section 5.03. No Solicitation by GranCare............................. B-42
Section 5.04. No Solicitation by Vitalink............................. B-42
Section 5.05. Access to Information................................... B-43
Section 5.06. Registration Statement and Proxy Statement.............. B-43
Section 5.07. Commercially Reasonable Efforts; Other Actions.......... B-43
Section 5.08. Public Announcements.................................... B-44
Section 5.09. Notification of Certain Matters......................... B-44
Section 5.10. Indemnification......................................... B-44
</TABLE>
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<CAPTION>
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<C> <S> <C>
Section 5.11. Expenses.................................................. B-45
Section 5.12. Stock Exchange Listings................................... B-45
Section 5.13. GranCare and Subsidiary Actions........................... B-45
Section 5.14. Vitalink and Subsidiary Actions........................... B-45
Section 5.15. Environmental Matters..................................... B-45
Section 5.16. Actions Regarding Outstanding Debt........................ B-46
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS
OF VITALINK AND GRANCARE
Section 6.01. Registration Statements................................... B-46
Section 6.02. Stockholder Approval...................................... B-46
Section 6.03. Listings.................................................. B-46
Section 6.04. Certain Proceedings....................................... B-46
Section 6.05. Consents and Approvals.................................... B-46
Section 6.06. Distribution.............................................. B-47
Section 6.07. Dissenting Shares......................................... B-47
Section 6.08. Opinions.................................................. B-47
Section 6.09. Existing Indebtedness..................................... B-47
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF VITALINK
Section 7.01. Representations and Warranties True....................... B-47
Section 7.02. Performance............................................... B-48
Section 7.03. Certificates.............................................. B-48
Section 7.04. Material Adverse Change................................... B-48
Section 7.05. Pharmacy Financial Statements............................. B-48
Section 7.06. Auditors' Letter.......................................... B-48
Section 7.07. Letter of Credit.......................................... B-48
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
Section 8.01. Representations and Warranties True....................... B-48
Section 8.02. Performance............................................... B-48
Section 8.03. Certificates.............................................. B-49
Section 8.04. Material Adverse Change................................... B-49
Section 8.05. Shareholders' Agreement................................... B-49
Section 8.06. Auditors' Letter.......................................... B-49
ARTICLE IX
CLOSING
Section 9.01. Time and Place............................................ B-49
Section 9.02. Filings at the Closing.................................... B-49
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.01. Termination............................................... B-49
Section 10.02. Termination by Vitalink................................... B-50
</TABLE>
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<TABLE>
<CAPTION>
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<C> <S> <C>
Section 10.03. Termination by GranCare................................... B-50
Section 10.04. Procedure for Termination................................. B-51
Section 10.05. Effect of Termination and Abandonment..................... B-51
ARTICLE XI
DEFINITIONS
Section 11.01. Terms Defined in This Agreement........................... B-53
ARTICLE XII
MISCELLANEOUS
Section 12.01. Amendment and Modification................................ B-55
Section 12.02. Waiver of Compliance; Consents............................ B-55
Section 12.03. Survivability; Investigations............................. B-55
Section 12.04. Notices................................................... B-55
Section 12.05. Assignment................................................ B-56
Section 12.06. Governing Law............................................. B-56
Section 12.07. Counterparts.............................................. B-56
Section 12.08. Severability.............................................. B-56
Section 12.09. Interpretation............................................ B-57
Section 12.10. Entire Agreement.......................................... B-57
Signatures................................................................ B-57
</TABLE>
EXHIBITS
Exhibit A Form of Distribution Agreement
Exhibit B Form of Voting Agreement
Exhibit C Form of Affiliate Letter
Exhibit D Shareholders Agreement
Exhibit E List of Directors
Exhibit F List of Officers
Exhibit G Opinions
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<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 3, 1996 (the
"Agreement"), by and between Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), and GranCare, Inc., a California corporation
("GranCare"). Vitalink and GranCare are hereinafter sometimes collectively
referred to as the "Constituent Corporations."
RECITALS
WHEREAS, Vitalink and GranCare desire to combine their respective pharmacy
businesses, and Vitalink does not want to own the Skilled Nursing Businesses
(as hereinafter defined) of GranCare;
WHEREAS, prior to the Merger (as hereinafter defined), GranCare and its
Subsidiaries (as hereinafter defined) will transfer on the terms and subject
to the conditions set forth in the Distribution Agreement between GranCare and
a previously existing corporation ("SNFCo") in the form attached hereto as
Exhibit A (including the Ancillary Agreements as defined therein, the
"Distribution Agreement"), all of the Skilled Nursing Assets and Skilled
Nursing Liabilities of GranCare and its Subsidiaries (each as defined in the
Distribution Agreement) to SNFCo (the "Restructuring"); following which all of
the capital stock of SNFCo (the "SNFCo Stock") will be distributed (the
"Distribution") immediately prior to the Merger to the shareholders of
GranCare.
WHEREAS, after the Distribution GranCare will own only the Institutional
Pharmacy Assets, and be subject only to the Institutional Pharmacy Liabilities
(each as defined in the Distribution Agreement);
WHEREAS, the Board of Directors of GranCare has determined that the Merger
and the Distribution are advisable on the terms and conditions contained in
this Agreement and the Distribution Agreement, and that each of the other
transactions contemplated herein or in the Distribution Agreement is
consistent with and in furtherance of the long-term business strategy of
GranCare and is fair to, and in the best interests of, GranCare and GranCare's
shareholders, and has approved and adopted this Agreement and the Distribution
Agreement and each of the other transactions contemplated herein and intends
to recommend the approval and adoption of this Agreement and the Distribution
Agreement by the shareholders of GranCare;
WHEREAS, the Board of Directors of Vitalink has determined that the Merger
is advisable on the terms and conditions contained in this Agreement and that
each of the other transactions contemplated herein is consistent with and in
furtherance of the long-term business strategy of Vitalink and is fair to, and
in the best interests of, Vitalink and Vitalink's shareholders, and has
approved and adopted this Agreement and each of the other transactions
contemplated herein and intends to recommend the approval and adoption of this
Agreement by the shareholders of Vitalink;
WHEREAS, Manor Care, Inc., a Delaware corporation, and Vitalink's majority
stockholder ("Parent"), has committed to vote in favor of approving this
Agreement and the transactions contemplated hereby and has agreed not to
approve or support any competing transaction, all as provided in the form
attached hereto as Exhibit B (the "Voting Agreement");
WHEREAS, Vitalink and GranCare intend that at the Effective Time (as
hereinafter defined) the Board of Directors of Vitalink shall consist equally
of individuals designated by Vitalink and by GranCare and that the Chief
Executive Officer of GranCare shall become the Chief Executive Officer of
Vitalink; and
WHEREAS, Vitalink and GranCare desire to make certain representations,
warranties, covenants and agreements in connection with the merger of Vitalink
and GranCare and the Distribution by GranCare.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
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<PAGE>
ARTICLE I.
THE MERGER
Section 1.01 The Merger. (a) In accordance with the provisions of this
Agreement, the General Corporation Law of the State of Delaware (the "Delaware
Act") and the General Corporation Law of the State of California (the
"California Act"), at the Effective Time, GranCare shall be merged (the
"Merger") with and into Vitalink, and Vitalink shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation") and
shall continue its corporate existence under the laws of the State of
Delaware. At the Effective Time, the separate existence of GranCare shall
cease.
(b) The Merger shall have the effects on Vitalink and GranCare as
constituent corporations of the Merger as provided under the Delaware Act and
the California Act.
Section 1.02 Effective Time. Following filing of the certificate of
satisfaction with the Franchise Tax Board in accordance with the provisions of
(S) 1103 of the California Act and the Bank and Corporation Tax Law, the
filing of a certified copy of this Agreement, in the form required by and
executed in accordance with the California Act, with the Secretary of State of
the State of California in accordance with the provisions of (S) 1108 of the
California Act (the "Certified Agreement"), the Merger shall become effective
at the time of filing of, or at such later time specified in, a certificate of
merger, in the form required by and executed in accordance with the Delaware
Act, with the Secretary of State of the State of Delaware in accordance with
the provisions of (S) 252 of the Delaware Act (the "Certificate of Merger").
The date and time when the Merger shall become effective is herein referred to
as the "Effective Time."
Section 1.03 Certificate of Incorporation and By-Laws of Surviving
Corporation. (a) The Certificate of Incorporation of Vitalink, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as
provided by law; provided, however, that if prior to the Effective Time the
stockholders of Vitalink shall have approved an increase in the number of
authorized shares of Common Stock from 30,000,000 to 80,000,000, then Article
4 of the Certificate of Incorporation shall read as follows: "4. The total
number of shares which this corporation shall have authority to issue is
90,000,000 shares, consisting of 10,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock") and 80,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock")" (the "Amendment").
(b) The By-Laws of Vitalink, as in effect immediately prior to the Effective
Time, shall be the By-Laws of the Surviving Corporation until thereafter
amended as provided by law.
Section 1.04 Directors and Officers of Surviving Corporation. The
individuals identified on Exhibit E shall comprise all of the members of the
Board of Directors of the Surviving Corporation at the Effective Time. The
individuals identified on Exhibit F shall comprise all of the senior officers
of the Surviving Corporation at the Effective Time and shall hold the
positions set forth opposite their names.
Section 1.05 Stockholders' Meeting. (a) GranCare will take all action
necessary in accordance with applicable law and its Restated Articles of
Incorporation and By-Laws to convene a special meeting of its stockholders
(the "Special Meeting") as soon as practicable to consider and vote upon the
approval of this Agreement, the Distribution Agreement and the other
transactions contemplated by this Agreement and the Distribution Agreement.
GranCare, through its Board of Directors, shall recommend to its stockholders
approval of this Agreement, the Distribution Agreement and the other
transactions contemplated by this Agreement and the Distribution Agreement
(which recommendation shall be contained in the Proxy Statement (as
hereinafter defined)) and shall use all commercially reasonable efforts to
solicit from its stockholders proxies in favor of approval and adoption of
this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement. GranCare's
Board of Directors shall not withdraw, change, modify in any manner or take
action inconsistent with its recommendation of the Distribution, the
Distribution
B-7
<PAGE>
Agreement, the Merger, this Agreement or the other transactions contemplated
hereby or thereby and shall not resolve to do any of the foregoing and
publicly disclose such resolution; provided, however, that GranCare's Board of
Directors may withdraw, change, modify in any manner or take action
inconsistent with such recommendation or resolve to do any of the foregoing
and publicly disclose such resolution in the event that there is an
unsolicited written proposal for a GranCare Acquisition Transaction from a
bona fide financially capable third party only if (i) three business days'
written notice shall have been given to Vitalink; (ii) GranCare's Board of
Directors shall have been advised (A) in writing by its investment banker that
such third party is financially capable of consummating a GranCare Acquisition
Transaction that would yield a higher value to GranCare's stockholders than
will the Merger and (B) by the written opinion of outside counsel to GranCare
that recommending this Agreement to the stockholders of GranCare or failing to
take the action proposed would be inconsistent with GranCare's Board of
Directors' fiduciary duties to such stockholders (in providing such opinion
GranCare's counsel may assume that California law is not materially different
from Delaware law); and (iii) after weighing such advice, GranCare's Board of
Directors shall determine that failure to take the proposed action would be
inconsistent with such Board of Directors' fiduciary duties.
(b) Vitalink will take all action necessary in accordance with applicable
law and its Certificate of Incorporation and By-Laws to obtain as soon as
practicable the approval of its stockholders of this Agreement and the
transactions contemplated hereby through, at the election of Vitalink, written
consents or a stockholders meeting (the "Stockholder Approval"). Vitalink,
through its Board of Directors, shall recommend to its stockholders approval
of this Agreement (which recommendation shall be contained in the Vitalink
Information Statement (as hereinafter defined)) and the transactions
contemplated hereby, including the Amendment.
Section 1.06 Filing of Certificate of Merger. At the Closing (as hereinafter
defined), Vitalink and GranCare shall cause a Certificate of Merger to be
executed and filed with the Secretary of State of the State of Delaware as
provided in (S) 252 of the Delaware Act and the Certified Agreement to be
executed and filed with the Secretary of State of the State of California as
provided in (S) 1108 of the California Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.
Section 1.07 Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger or otherwise to carry out this Agreement, the
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the Constituent
Corporations or otherwise, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the
Constituent Corporations or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II.
CONVERSION OF SHARES
Section 2.01 Shares. (a) Each share of common stock, without par value, of
GranCare (the "GranCare Common Stock") issued and outstanding immediately
prior to the Effective Time (except for Dissenting Shares (as hereinafter
defined), shares owned by GranCare as treasury stock or shares owned by any
Subsidiary of GranCare) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive .478
of one share (the "Exchange Ratio") of common stock, par value $.01 per share,
of Vitalink ("Vitalink Common Stock"). The shares of Vitalink Common Stock
delivered in exchange for shares of GranCare Common Stock pursuant to this
Section 2.01(a) are hereinafter sometimes called the "Closing
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<PAGE>
Consideration." In the event of any change in Vitalink Common Stock or
GranCare Common Stock by reason of any stock split, readjustment, stock
dividend, exchange of shares, reclassification, recapitalization or otherwise
(other than the Distribution), the Exchange Ratio shall be correspondingly
adjusted.
(b) All shares of GranCare Common Stock, by virtue of the Merger and without
any action on the part of the holders thereof, shall no longer be outstanding
and shall be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such shares of GranCare Common Stock shall
thereafter cease to have any rights with respect to such shares of GranCare
Common Stock, except the right to receive the Closing Consideration for such
shares of GranCare Common Stock as specified in the foregoing clause (a) upon
the surrender of such certificate in accordance with Section 2.02 and the
right to receive the SNFCo capital stock distributed with respect to such
shares of GranCare Common Stock in accordance with the terms of the
Distribution Agreement.
(c) Notwithstanding anything in this Agreement to the contrary, shares of
GranCare Common Stock which are outstanding immediately prior to the Effective
Time and which are held by stockholders who (i) shall not have voted such
shares in favor of the Merger and the Distribution and (ii) shall have
delivered the certificates representing such shares marked to indicate such
shares are dissenting shares or a written demand for appraisal of such shares
in the manner provided in Sections 1300 and 1302 of the California Act (the
"Dissenting Shares") shall not be converted as described in Section 2.01(a),
but instead the holders thereof shall be entitled to payment of the appraised
value of such shares in accordance with the provisions of such Section 1300.
Section 2.02 Exchange of Shares. (a) Promptly after the Effective Time,
Vitalink shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the
Effective Time represented shares of GranCare Common Stock (the
"Certificates") a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to Vitalink) and
instructions for use in effecting the surrender of the Certificates for
exchange thereof. Upon surrender to Vitalink of a Certificate, together with
such letter of transmittal duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor that number of shares of Vitalink
Common Stock which such holder has the right to receive under this Article II,
and such Certificate shall forthwith be cancelled. If any shares of Vitalink
Common Stock are to be issued to a person other than the person in whose name
the Certificate surrendered is registered, it shall be a condition of exchange
that the Certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such exchange shall
pay any transfer or other taxes required by reason of the exchange of the
Certificate surrendered to a person other than the registered holder or such
person shall establish to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable. Until surrendered in accordance
with the provisions of this Section 2.02, each Certificate shall represent,
for all purposes, the right to receive the Closing Consideration in respect of
the number of shares of GranCare Common Stock evidenced by such Certificate,
without any interest thereon.
(b) From and after the Effective Time there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of GranCare
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
II.
(c) The Surviving Corporation shall not be liable to any holder of shares of
GranCare Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
Section 2.03 Effect on GranCare Options. (a) As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders
thereof, each option to purchase shares of GranCare Common Stock that is
outstanding under the GranCare Plans (as hereinafter defined) immediately
prior to the Effective Time, whether or not exercisable, shall be assumed by
Vitalink and each such option shall be exercisable upon the same terms and
conditions as under the applicable GranCare Plan and the applicable option
agreement issued thereunder, except that (i) each such option shall be
exercisable for that number of shares of Vitalink Common
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<PAGE>
Stock (rounded in accordance with established mathematical convention to the
nearest whole share) into which the number of shares of GranCare Common Stock
subject to such option immediately prior to the Effective Time determined
after giving effect to the adjustments set forth in the Employee Benefit
Agreement (as defined in the Distribution Agreement), would be converted under
Section 2.01(a) if such option were exercised prior to the Effective Time, and
(ii) the option price per share of Vitalink Common Stock determined after
giving effect to the adjustments set forth in the Employee Benefit Matters
Agreement (as defined in the Distribution Agreement), shall be an amount equal
to such adjusted option price per share of GranCare Common Stock subject to
such option in effect immediately prior to the Effective Time divided by the
Exchange Ratio (rounded in accordance with established mathematical convention
to the nearest whole cent).
(b) Prior to the Effective Time, GranCare shall (i) obtain any consents from
holders of outstanding options to purchase GranCare Common Stock granted under
the GranCare Plans and (ii) make any amendments to the terms of the GranCare
Plans or any award granted thereunder that are necessary to give effect to the
transactions contemplated by this Section 2.03 and the Employee Benefits
Matters Agreement referred to in clause (a) above.
Section 2.04 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of GranCare Common Stock who upon surrender
of Certificates would be entitled to receive a fraction of a share of Vitalink
Common Stock shall not be entitled to receive any dividends on or vote such
fractional share and shall receive, in lieu of such fractional share, cash in
an amount equal to such fraction multiplied by the Average Market Value.
"Average Market Value" shall mean the arithmetic average of the last reported
sale price per share of Vitalink Common Stock as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ)
("Nasdaq") for the fifteen (15) consecutive trading days ending with the last
trading day prior to the scheduled date of the Special Meeting specified in
the Proxy Statement. The fractional share interests of each GranCare
stockholder will be aggregated, and no GranCare stockholder will receive cash
in an amount equal to or greater than the value of one full share of Vitalink
Common Stock. All references in this Agreement to shares of Vitalink Common
Stock to be issued as Closing Consideration shall be deemed to include any
cash in lieu of fractional shares payable pursuant to this Section 2.04.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF VITALINK
Except as set forth in the Vitalink Disclosure Statement delivered by
Vitalink to GranCare at or prior to the execution of this Agreement (the
"Vitalink Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), Vitalink
represents and warrants to GranCare as follows:
Section 3.01 Organization and Qualification. Each of Vitalink and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Vitalink SEC Reports (as hereinafter
defined). Each of Vitalink and its Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the conduct of its business or the ownership, leasing or operation of
its property requires such qualification, except for failures to be so
qualified or in good standing which would not, singly or in the aggregate with
all such other failures, have an Vitalink Material Adverse Effect. "Vitalink
Material Adverse Effect" means, (i) with respect to any event, occurrence,
failure of event or occurrence, change, effect, state of affairs, breach,
default, violation, fine, penalty or failure to comply (each, a
"circumstance"), individually or taken together with all other circumstances
contemplated by or in connection with any or all of the representations and
warranties made in this Agreement, a material adverse effect on the business,
properties, assets, condition (financial or otherwise), results of operations
or prospects of Vitalink and its Subsidiaries, taken as a whole or (ii)
circumstances resulting in the impairment of Vitalink's ability to perform its
obligations under this Agreement and to consummate the
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<PAGE>
transactions contemplated hereby. Neither Vitalink nor any of its Subsidiaries
is in violation of any of the provisions of its certificate of incorporation
(or other applicable charter document) or By-Laws. True and complete copies of
the Certificate of Incorporation and By-Laws, as currently in effect, of
Vitalink and of each Subsidiary of Vitalink have been previously delivered or
made available to GranCare. No amendments to the articles of incorporation (or
other similar charter documents) and By-Laws of Vitalink have been authorized
since December 31, 1995.
Section 3.02 Authority Relative to This Agreement. Vitalink has full
corporate power and authority to execute and deliver this Agreement and, upon
obtaining the approval of a majority of the outstanding shares of Vitalink
Common Stock through the Stockholder Approval to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Vitalink and no other corporate proceedings on the part of
Vitalink are necessary to authorize this Agreement or to consummate the Merger
and the other transactions contemplated hereby (other than, with respect to
the Merger, the Amendment and the issuance of the additional Vitalink Common
Stock at the Effective Time, the approval of a majority of the outstanding
shares of Vitalink Common Stock). This Agreement has been duly and validly
executed and delivered by Vitalink and, assuming the due authorization,
execution and delivery hereof by GranCare, constitutes a valid and binding
agreement of Vitalink, enforceable against Vitalink in accordance with its
terms, except to the extent that its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.
Section 3.03 Consents, No Conflicts. (a) Except for the filings of the
Certificate of Merger, the Certified Agreement and the Vitalink Information
Statement (as hereinafter defined), the filing and effectiveness of the
Registration Statement (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by Vitalink of the Merger, the
adoption of the Amendment or the other transactions contemplated hereby except
such as are set forth in Section 3.03(a) of the Vitalink Disclosure Statement,
which will have been obtained or made prior to the Effective Time and will
then be in full force and effect or which would not, singly or in the
aggregate with all other such consents which have not been obtained, have an
Vitalink Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
consummation of the Merger, the adoption of the Amendment and the other
transactions contemplated hereby and compliance by Vitalink with any of the
provisions hereof do not and will not (i) subject to obtaining the approval of
a majority of the outstanding shares of Vitalink Common Stock, conflict with
or result in any breach or violation of any provision of the Certificate of
Incorporation (or other comparable charter documents) or By-Laws of Vitalink
or any of its Subsidiaries, (ii) result in (1) a breach or violation of, a
default under or an event triggering any payment or other obligation pursuant
to any of Vitalink's existing pension plans, welfare plans, multiemployer
plans, employee benefit plans, benefit arrangements or similar plans,
arrangements or policies including bonus, incentive, deferred compensation,
stock purchase, stock option, stock appreciation right, health or group
insurance, severance pay, retirement or other benefit plans, and all similar
arrangements or policies of Vitalink and its Subsidiaries (the "Vitalink
Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (2) a breach, violation or event triggering a right of termination
of, a default under, or the acceleration of any obligation or the creation of
a lien, pledge, security interest or other encumbrance on assets (with or
without the giving of notice or the lapse of time or both) pursuant to any
provision of, any agreement, lease of real or personal property, marketing
agreement, contract, note, mortgage, indenture, arrangement or other
obligation of Vitalink or any of its Subsidiaries ("Vitalink Contracts") or
any law, rule, ordinance or regulation or judgment, decree, order or award to
which Vitalink or any of its Subsidiaries is subject or any governmental
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or non-governmental authorization, consent, approval, registration, franchise,
license or permit under which Vitalink or any of its Subsidiaries conducts any
of its business, or (3) any other change in the rights or obligations of any
party under any of the Vitalink Contracts.
Section 3.04 Board Recommendation. The Board of Directors of Vitalink has,
by a unanimous vote at a meeting of such Board duly held on September 3, 1996,
approved and adopted this Agreement, the Merger, the Amendment and the other
transactions contemplated hereby. At such meeting, the Board of Directors of
Vitalink determined that the consideration to be paid by Vitalink pursuant to
the Merger is fair to the holders of shares of Vitalink Common Stock and
recommended that the holders of such shares approve and adopt this Agreement,
the Merger, the Amendment and the other transactions contemplated hereby.
Section 3.05 State Antitakeover Statutes. Vitalink has granted all approvals
and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of (S)
203 of the Delaware Act and any other state antitakeover statute or regulation
such that none of the other provisions of such "business combination,"
"moratorium," "control share" or other state antitakeover statute or
regulation (x) prohibits or restricts either Vitalink's ability to perform its
obligations under this Agreement or its ability to consummate the Merger and
the other transactions contemplated hereby, (y) would have the effect of
invalidating or voiding this Agreement or any provision hereof, or (z) would
subject GranCare to any material impediment or condition in connection with
the exercise of any of its rights under this Agreement.
Section 3.06 No Existing Violation, Default, Etc. None of Vitalink or its
Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have an Vitalink
Material Adverse Effect) of (A) any applicable law, ordinance, administrative
or governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over Vitalink or any
of its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default
exists under any Vitalink Contract or any lease, permit, license or other
agreement or instrument to which Vitalink or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties,
assets or operations of Vitalink or any of its Subsidiaries is subject (except
for any events of default or other defaults which would not, singly or in the
aggregate with all such other defaults, have an Vitalink Material Adverse
Effect).
Section 3.07 Licenses and Permits. Each of Vitalink and its Subsidiaries has
such certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations and clearances from appropriate governmental agencies and
bodies ("Vitalink Licenses") as are necessary to own, lease or operate its
properties and to conduct its business in the manner described in the Vitalink
SEC Reports and as presently conducted and all such Vitalink Licenses are
valid and in full force and effect, other than any failure to have any such
Vitalink License or any failure of any such Vitalink License to be valid and
in full force and effect as would not, singly or in the aggregate with all
such other failures, have an Vitalink Material Adverse Effect. Each of
Vitalink and its Subsidiaries is and, within the period of all applicable
statutes of limitation, has been in compliance with its obligations under such
Vitalink Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such Vitalink
Licenses, other than any such failure to be in compliance with such
obligations or any such revocation or termination as would not, singly or in
the aggregate with all such other failures, revocations or terminations, have
an Vitalink Material Adverse Effect. Vitalink has no knowledge of any facts or
circumstances that could reasonably be expected to result in an inability of
Vitalink or any of its Subsidiaries to renew any Vitalink License. Neither the
execution and delivery by Vitalink of this Agreement nor the consummation of
any of the transactions contemplated herein will result in any revocation or
termination of any Vitalink License. Set forth in Section 3.07 of the Vitalink
Disclosure Statement is a true and complete list of all Vitalink Licenses
which are necessary for the conduct of the business presently conducted by
Vitalink and its Subsidiaries.
Section 3.08 Registration Statement; Information Statement. None of the
information supplied by Vitalink for inclusion or incorporation by reference
in (i) the registration statement registering under the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act") the Vitalink Common Stock to be issued at the Effective Time
(such registration statement as amended by any
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amendments thereto being referred to herein as the "Registration Statement")
or (ii) the information statement or proxy statement to be sent to the
stockholders of Vitalink in connection with the Stockholder Approval,
including all amendments and supplements thereto (the "Vitalink Information
Statement"), shall, in the case of the Registration Statement, at (i) the time
the Registration Statement becomes effective and (ii) the Effective Time, and
in the case of the Vitalink Information Statement, on the date the Vitalink
Information Statement is first mailed to stockholders, at the date of the
Stockholder Approval and at the Effective Time, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
If at any time prior to the Effective Time any event with respect to Vitalink
or any of its Subsidiaries shall occur which is required to be described in
the Registration Statement, the Vitalink Information Statement or the Proxy
Statement (as hereinafter defined), such event shall be so described, and an
amendment or supplement shall be promptly filed with the Securities and
Exchange Commission (the "SEC") and, as required by law, disseminated to the
stockholders of Vitalink and GranCare. The Registration Statement and the
Vitalink Information Statement will (with respect to Vitalink) comply as to
form in all material respects with the applicable provisions of the Securities
Act and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), as the case may be.
Section 3.09 Finders or Brokers. Neither Vitalink nor any Subsidiary of
Vitalink has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to
a fee or any commission the receipt of which is conditioned upon consummation
of the Merger.
Section 3.10 SEC Filings. (a) Vitalink has filed with the SEC all required
forms, reports and documents required to be filed by it with the SEC since May
31, 1992 (collectively, the "Vitalink SEC Reports"), all of which complied as
to form when filed in all material respects with the applicable provisions of
the Securities Act and the Exchange Act, as the case may be. As of their
respective dates the Vitalink SEC Reports (including documents incorporated by
reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(b) Vitalink will deliver to GranCare as soon as they become available true
and complete copies of any report or statement mailed by Vitalink to its
securityholders generally or filed by it with the SEC, in each case subsequent
to the date hereof and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by GranCare, as to which Vitalink makes no representation) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Vitalink and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of Vitalink and its Subsidiaries as of the
dates thereof and the consolidated results of operations and consolidated cash
flow for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they
may not include footnotes or may be condensed or summary statements).
Section 3.11 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Vitalink
and its Subsidiaries included or incorporated by reference in the Vitalink SEC
Reports have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and
fairly presented the consolidated financial position of Vitalink and its
Subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flows for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be
condensed or summary statements) and such audited financial statements have
been certified as such (without exception) by Vitalink's independent
accountants.
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Section 3.12 Absence of Undisclosed Liabilities. Neither Vitalink nor any of
its Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the Vitalink Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with
past practice since May 31, 1996 that would not, singly or in the aggregate,
be reasonably expected to have an Vitalink Material Adverse Effect.
Section 3.13 Absence of Changes or Events. (a) Since May 31, 1996 (i)
Vitalink and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement
or other transaction that is not in the ordinary course of business (other
than the Voting Agreement, the Shareholders Agreement (as hereinafter defined)
and this Agreement) or that could reasonably be expected to result in any
Vitalink Material Adverse Effect; (ii) neither Vitalink nor its Subsidiaries
have sustained any material loss or interference with their business or
properties from fire, flood, windstorm, accident, strike or other calamity
(whether or not covered by insurance); (iii) there has been no material change
in the indebtedness of Vitalink and its Subsidiaries, no change in the capital
stock of Vitalink and no dividend or distribution of any kind declared, paid
or made by Vitalink on any class of its capital stock; (iv) there has been no
event or condition which has caused an Vitalink Material Adverse Effect, nor
any development, occurrence or state of facts or circumstances that could,
singly or in the aggregate, reasonably be expected to result in an Vitalink
Material Adverse Effect; (v) there has been no amendment, modification or
supplement to any material term of any Vitalink Contract required to be
identified in Section 3.20 of the Vitalink Disclosure Statement or any equity
security; and (vi) there has been no material change by Vitalink in its
accounting principles, practices or methods.
(b) Since May 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Vitalink, to its officers or key employees, or any amendment of any of the
Vitalink Compensation and Benefit Plans.
Section 3.14 Capitalization. (a) The authorized capital stock of Vitalink
consists of 30,000,000 shares of Vitalink Common Stock and 10,000,000 shares
of Preferred Stock (the "Vitalink Preferred Stock"). As of August 26, 1996,
there were 13,979,700 shares of Vitalink Common Stock and no shares of
Vitalink Preferred Stock outstanding and no shares of Vitalink Common Stock
were held in Vitalink's treasury; and except for shares which were reserved
for issuance and which may have been issued pursuant to the following sentence
there have been no issuances of capital stock of Vitalink since August 26,
1996. As of August 26, 1996, 1,070,300 shares of Vitalink Common Stock were
reserved for issuance upon the exercise of outstanding options and options
(the "Vitalink Options") which may be granted under the stock option plans of
Vitalink (the "Vitalink Option Plans"), 100,000 shares of Vitalink Common
Stock were reserved for issuance to four former shareholders of an acquired
business, and no other shares of Vitalink Common Stock are reserved for any
purpose. Except for the Vitalink Common Stock reserved for issuance upon
exercise of the Vitalink Options and as contemplated by this Agreement, there
are not any existing options, warrants, calls, subscriptions, or other rights
or other agreements or commitments obligating Vitalink to issue, transfer or
sell any shares of capital stock of Vitalink or any of its Subsidiaries or any
other securities convertible into or evidencing the right to subscribe for any
such shares. There are no outstanding stock appreciation rights with respect
to the capital stock of Vitalink or any of its Subsidiaries. All issued and
outstanding shares of Vitalink Common Stock are duly authorized and validly
issued, fully paid and nonassessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, Vitalink subject to) any preemptive or similar rights created by
statute, the Certificate of Incorporation or By-Laws of Vitalink or any
agreement to which Vitalink is a party or bound. The Vitalink Common Stock to
be issued in accordance with Section 2.01 of this Agreement, when so issued,
will be duly authorized and validly issued, fully paid and nonassessable.
(b) There are no obligations, contingent or otherwise, of Vitalink to (i)
repurchase, redeem or otherwise acquire any shares of Vitalink Common Stock;
or (ii) provide funds to, or make any investment in (in the form
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of a loan, capital contribution or otherwise), or provide any guarantee with
respect to the obligations of, any other person. There are no agreements,
arrangements or commitments of any character (contingent or otherwise)
pursuant to which any person is or may be entitled to receive any payment
based on the revenues or earnings, or calculated in accordance therewith, of
Vitalink. Except for the Voting Agreement and the Shareholders Agreement (as
hereinafter defined), there are no voting trusts, proxies or other agreements
or understandings to which Vitalink is a party or by which Vitalink is bound
with respect to the voting of any shares of capital stock of Vitalink.
(c) Vitalink has delivered or made available to GranCare complete and
correct copies of each of the Vitalink Option Plans, including all amendments
thereto. Section 3.14(c) of the Vitalink Disclosure Statement sets forth a
complete and correct list of all outstanding options, setting forth (i) the
exercise price of each outstanding Vitalink Option, (ii) the number of
Vitalink Options, (iii) the date of grant of each such Vitalink Option.
Section 3.14(c) of the Vitalink Disclosure Statement sets forth a complete and
correct list of all restricted stock awards including the recipients and the
number of shares of Vitalink Common Stock received or to be received by each.
Section 3.15 Capital Stock of Subsidiaries. The only direct or indirect
Subsidiaries of Vitalink are those listed in Section 3.15 of the Vitalink
Disclosure Statement. Vitalink is directly or indirectly the record (except
for directors' qualifying shares as reflected in such Section 3.15) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Subsidiaries, there are no
proxies with respect to such shares, and there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Vitalink or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares. All
of such shares beneficially owned by Vitalink are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by Vitalink free and clear of any claim, lien or
encumbrance of any kind with respect thereto. Vitalink does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
Section 3.16 Litigation. There are no pending actions, suits, proceedings
or, to the best knowledge of Vitalink after due inquiry, investigations by,
against or affecting Vitalink, any of its Subsidiaries or any of their
properties, assets or operations, or with respect to which Vitalink or any of
its Subsidiaries is responsible by way of indemnity or otherwise. No pending
or, to the knowledge of Vitalink, threatened actions, suits, proceedings or
investigations by, against or affecting Vitalink, any of its Subsidiaries or
any of their properties, assets or operations, or with respect to which they
are responsible by way of indemnity or otherwise, whether or not disclosed in
such Vitalink SEC Reports, would, singly or in the aggregate with all such
other actions, suits, investigations or proceedings, reasonably be expected to
have an Vitalink Material Adverse Effect; and, to the best knowledge of
Vitalink after due inquiry, no such actions, suits, proceedings or
investigations which would reasonably be expected to have an Vitalink Material
Adverse Effect are threatened or contemplated and there is no reasonable
basis, to the best knowledge of Vitalink after due inquiry, for any such
action, suit, proceeding or investigation whether or not threatened or
contemplated.
Section 3.17 Insurance. Vitalink has insurance policies and fidelity bonds
covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of Vitalink
and such Subsidiaries. All premiums due and payable under all such policies
and bonds have been paid, and Vitalink is otherwise in full compliance with
the terms and conditions of all such policies and bonds, except where the
failure to have made payment or to be in full compliance would not, singularly
or in the aggregate with all such other failures, have an Vitalink Material
Adverse Effect. The reserves established by Vitalink in respect of all matters
as to which Vitalink self-insures or carries retention and/or deductibles,
including for workers' medical coverage and workers' compensation, are
adequate and appropriate in light of Vitalink's experience since May 31, 1992
with respect thereto and Vitalink is not aware, after due inquiry, of any
facts or circumstances existing as of the date hereof that could reasonably be
expected to cause such reserves to be inadequate or inappropriate. Section
3.17 of the Vitalink Disclosure Statement sets forth a true and complete list
of all insurance policies, including retention and/or deductible programs, and
fidelity bonds of Vitalink.
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Section 3.18 Title to and Condition of Properties. Vitalink and its
Subsidiaries have good title to all of the real property and personal property
reflected on Vitalink's May 31, 1996 audited consolidated balance sheet
contained in Vitalink's Form 10-K for the fiscal year ended May 31, 1996 filed
with the SEC (the "Vitalink Balance Sheet") except for property since sold or
otherwise disposed of in the ordinary course of business and consistent with
past practice. Set forth in Section 3.18(a) of the Vitalink Disclosure
Statement is a true and complete list of all real properties owned by Vitalink
and its Subsidiaries, all of which real properties are reflected on the
Vitalink Balance Sheet. No such real or personal property is subject to
claims, liens or other encumbrances of any kind or character, including,
without limitation, mortgages, pledges, liens, conditional sale agreements,
charges, security interests, easements, restrictive covenants, rights of way
or options, except for (i) liens for taxes not yet delinquent or which are
being contested in good faith by appropriate proceedings and in respect of
which Vitalink or its appropriate Subsidiary has set aside on its books
adequate reserves in accordance with generally accepted accounting principles;
(ii) mechanics', carriers', workers', repairers', materialmen's and other
similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which is being contested in
good faith by appropriate proceedings and in respect of which Vitalink or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of Vitalink or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of Vitalink and its Subsidiaries or impair Vitalink's
ability to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (the encumbrances described in clauses (i)
through (iv) of this sentence, collectively, the "Vitalink Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to
Vitalink's knowledge, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably
be expected to have a material adverse effect on the value or use of such
property as currently used in the operation of the business of Vitalink or its
Subsidiaries. To the knowledge of Vitalink, (i) the real properties and the
improvements located thereon (including the roof and structural portions of
each building) are in good operating order and condition, subject to ordinary
wear and tear, (ii) there are no structural, mechanical or other defects of a
material nature in any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material
respects in good condition and working order, subject to ordinary wear and
tear, and (iv) the real properties are served by all utilities required or
necessary for the present use thereof. Vitalink has made available to GranCare
true and correct copies of all title insurance commitments, title insurance
policies and surveys in the possession of Vitalink or its Subsidiaries
relating to its real properties set forth in Section 3.18(a) of the Vitalink
Disclosure Statement.
Section 3.19 Leases. There have been delivered or made available to GranCare
true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected
to be, at least $100,000 per annum pursuant to which real or personal property
is held under lease by Vitalink or any of its Subsidiaries, and true and
complete copies of each lease pursuant to which Vitalink or any of its
Subsidiaries leases real or personal property to others. Section 3.19 of the
Vitalink Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the business
conducted by Vitalink and its Subsidiaries. All of the leases so listed are
valid and subsisting and in full force and effect with respect to Vitalink and
its Subsidiaries, as the case may be, and, to Vitalink's knowledge, with
respect to any other party thereto and Vitalink or its Subsidiaries, as the
case may be, have valid leasehold interests in all properties leased
thereunder free and clear of all liens created by, through or under Vitalink
or its Subsidiaries other than Vitalink Permitted Encumbrances. The leased
real properties are in good operating order and condition, subject to ordinary
wear and tear.
Section 3.20 Contracts and Commitments. Neither Vitalink nor any of its
Subsidiaries is a party to any existing contract, obligation or commitment of
any type in any of the following categories:
(a) contracts for the purchase by Vitalink or any of its Subsidiaries of
medicines, materials, supplies or equipment which are not cancellable upon
30 days' or less notice and which either (i) have not been
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entered into in the ordinary course of business and consistent with past
practice or (ii) provide for purchase prices substantially greater than
those presently prevailing for such materials, supplies or equipment, or
(iii) contracts obligating Vitalink or its Subsidiaries to make capital
expenditures in excess of $200,000;
(b) contracts under which Vitalink has, except by way of endorsement of
negotiable instruments for collection in the ordinary course of business
and consistent with past practice, become absolutely or contingently or
otherwise liable for (i) the performance of any other person, firm or
corporation under a contract, or (ii) the whole or any part of the
indebtedness or liabilities of any other person, firm or corporation;
(c) powers of attorney outstanding from Vitalink other than as issued in
the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
(d) contracts under which any amount payable by Vitalink is dependent
upon, or calculated in accordance with, the revenues or profits of Vitalink
or any of its Subsidiaries;
(e) contracts with any director, officer or employee of Vitalink other
than in such person's capacity as a director, officer or employee of
Vitalink;
(f) contracts which limit or restrict where Vitalink or any of its
Subsidiaries may conduct its business or the type or line of business which
Vitalink or any of its Subsidiaries may engage in;
(g) contracts with any party for the loan of money or availability of
credit to or from Vitalink or any of its Subsidiaries (except credit
extended by Vitalink or any of its Subsidiaries to its customers in the
ordinary course of business and consistent with past practice); or
(h) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments
listed in Section 3.20 of the Vitalink Disclosure Statement have been
delivered or made available to GranCare. All such contracts are in full force
and effect. None of Vitalink or its Subsidiaries or, to the best of Vitalink's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than Vitalink and its Subsidiaries which would not, singly or in
the aggregate with all other such breaches, have an Vitalink Material Adverse
Effect.
Section 3.21 Labor Matters. None of Vitalink or its Subsidiaries is a party
to any union contract or other collective bargaining agreement. Each of
Vitalink and its Subsidiaries is in compliance in all material respects with
all applicable laws respecting employment and employment practices, terms and
conditions of employment, safety, wages and hours, and neither Vitalink nor
any of its Subsidiaries is engaged in any unfair labor practice. There is no
labor strike, slowdown or stoppage pending (or, to the best knowledge of
Vitalink, any labor strike or stoppage threatened) against or affecting
Vitalink or any of its Subsidiaries. To the best of Vitalink's knowledge, no
union organizing activities with respect to any of its or its Subsidiaries'
employees are occurring or threatened.
Section 3.22 No Change of Control Puts. Neither the execution and delivery
by Vitalink of this Agreement nor the consummation of any of the transactions
contemplated hereby gives rise to any obligation of Vitalink or any of its
Subsidiaries to, or any right of any holder of any security of Vitalink or any
of its Subsidiaries to, require Vitalink to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
Section 3.23 Employment and Labor Contracts. Neither Vitalink nor any of its
Subsidiaries is a party to any employment, management services, consultation
or other contract or agreement with any past or present officer, director or
employee or, to the best of Vitalink's knowledge, any entity affiliated with
any past or present officer, director or employee, other than the agreements
executed by employees generally, the forms of which have been provided to
GranCare.
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Section 3.24 Intellectual Property Rights. Vitalink or its Subsidiaries own
or have the right to use all Intellectual Property Rights (as hereinafter
defined) necessary to the conduct of their respective businesses. Section 3.24
of the Vitalink Disclosure Statement contains a worldwide list of all patents,
trade names, registered and unregistered copyrights, trademarks and service
marks, mask works and applications for the foregoing owned by Vitalink or its
Subsidiaries. Vitalink and/or its Subsidiaries have clear and unencumbered
title to the Intellectual Property Rights set forth in such Section 3.24 and
such title has not been challenged (pending or threatened) by others except
for the encumbrances listed therein. Such Section 3.24 also contains a list of
unpatented inventions used or planned for use by Vitalink or its Subsidiaries.
No rights or licenses to use Intellectual Property Rights have been granted or
acquired by Vitalink or its Subsidiaries. There have been no claims or
assertions made by others that Vitalink has infringed any Intellectual
Property Rights of others by the sale of products or any other activity in the
preceding six-year period and, to the knowledge of Vitalink, there has been no
such infringement by Vitalink or any of its Subsidiaries during this period.
Vitalink has no knowledge of any infringement of Intellectual Property Rights
of Vitalink or any of its Subsidiaries by others. All such patents, registered
trademarks, service marks and copyrights owned by Vitalink or its Subsidiaries
are in good standing, and are recorded on the public record in the name of
Vitalink or its Subsidiaries. True and complete copies of all material listed
in Section 3.24 of the Vitalink Disclosure Statement have been delivered or
made available to GranCare.
"Intellectual Property Rights" shall mean and include rights relating to
patents, trademarks, service marks, trade names, copyrights, mask works,
inventions, processes, trade secrets, know-how, confidentiality agreements,
consulting agreements, software and any documentation relating to the
manufacture, marketing and maintenance of products.
Section 3.25 Taxes. (i) Vitalink and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax (as hereinafter defined) returns and
reports (Tax returns and reports are hereinafter collectively referred to as
"Tax Returns") required to be filed by them on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Vitalink and/or its Subsidiaries (copies of which for the past three
fiscal years have been delivered or made available to GranCare); (ii) all
Taxes of Vitalink and its Subsidiaries have been paid in full to the proper
authorities or fully accrued for with respect to fiscal periods for which
there are publicly available financial statements and otherwise on the books
of Vitalink, other than such Taxes as are being contested in good faith by
appropriate proceedings and are adequately reserved for in accordance with
generally accepted accounting principles; (iii) all deficiencies asserted in
writing as a result of Tax examinations of federal, state and foreign income,
sales and franchise and all other Tax Returns filed by Vitalink and its
Subsidiaries have either been paid or adequately reserved for in accordance
with generally accepted accounting principles; (iv) to the best knowledge of
Vitalink, no unpaid deficiency has been asserted or assessed against Vitalink
or any of its Subsidiaries, and no examination of Vitalink or any of its
Subsidiaries is pending or threatened for any material amount of Tax by any
taxing authority (with respect to any such action, Section 3.25 of the
Vitalink Disclosure Statement sets forth the periods at issue and the category
of Tax, and the examining authority's and any corresponding revenue agents'
reports relating to the issue have been delivered or made available to
GranCare); (v) no extension of the period for assessment or collection of any
Tax of Vitalink or any of its Subsidiaries is currently in effect and no
extension of time within which to file any Tax Return of Vitalink or any of
its Subsidiaries has been requested, which Tax Return has not since been
filed; (vi) no Tax liens have been filed with respect to any Taxes of Vitalink
or any of its Subsidiaries except for property taxes which have accrued but
with respect to which penalty for nonpayment has not occurred; (vii) neither
Vitalink nor any of its Subsidiaries has agreed to make any adjustment by
reason of a change in its accounting methods that would affect the taxable
income or deductions of Vitalink or any of its Subsidiaries for any period
ending after the Effective Time; (viii) Vitalink and its Subsidiaries have
made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which Vitalink or any Subsidiary will have any obligation
or liability on or after the Effective Time; (x) Vitalink and its Subsidiaries
have no foreign losses as defined in Section 904(f)(2) of the Internal Revenue
Code of 1986, as amended (the "Code"); (xi) to the best knowledge of Vitalink,
there are no
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transfer pricing agreements made by or on behalf of Vitalink or any of its
Subsidiaries with any taxation authority; (xii) no asset of Vitalink or any of
its Subsidiaries is held in an arrangement for which partnership Tax Returns
are being filed and neither Vitalink nor any of its Subsidiaries is a partner
in any partnership; (xiii) neither Vitalink nor any of its Subsidiaries owns
any interest in any "controlled foreign corporation" (within the meaning of
Section 957 of the Code), "passive foreign investment company" (within the
meaning of Section 1296 of the Code) or other entity the income of which is
required to be included in the income of Vitalink or such Subsidiary; (xiv)
neither Vitalink nor any of its Subsidiaries has made an election under
Section 341(f) of the Code; and (xv) neither Vitalink nor any of its
Subsidiaries is obligated to make any payments that would constitute excess
parachute payments within the meaning of Section 280G of the Code.
"Tax" or "Taxes" shall mean all federal, state, local and foreign taxes,
duties, levies, charges and assessments of any nature, including social
security payments and deductibles relating to wages, salaries and benefits and
payments to subcontractors (to the extent required under applicable Tax law),
and also including all interest, penalties and additions imposed with respect
to such amounts.
Section 3.26 Employee Benefit Plans; ERISA. (a) There are no "employee
pension benefit plans" as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), covering employees (or
former employees) employed in the United States, maintained or contributed to
by Vitalink or any of its Subsidiaries or any of their ERISA Affiliates (as
hereinafter defined), or to which Vitalink or any of its Subsidiaries or any
of their ERISA Affiliates contributes or is obligated to make payments
thereunder or otherwise may have any liability ("Vitalink Pension Benefit
Plans"). For purposes of this Agreement, "ERISA Affiliate" shall mean any
person (as defined in Section 3(9) of ERISA) that is a member of any group of
persons described in Section 414(b), (c), (m) or (o) of the Code which
includes the referent person or its Subsidiaries.
(b) Vitalink has delivered or made available to GranCare true and complete
copies of all "welfare benefit plans" (as defined in Section 3(1) of ERISA)
covering employees (or former employees) employed in the United States,
maintained or contributed to by Vitalink or any of its Subsidiaries ("Vitalink
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of
ERISA) covering employees (or former employees) employed in the United States
to which Vitalink or any of its Subsidiaries or any of their ERISA Affiliates
is required to make contributions or otherwise may have any liability, and, to
the extent covering employees (or former employees) employed in the United
States, all stock bonus, stock option, restricted stock, stock appreciation
right, stock purchase, bonus, incentive, deferred compensation, severance and
vacation plans maintained or contributed to by Vitalink or a Subsidiary of
Vitalink.
(c) Vitalink and each of its Subsidiaries, and each of the Vitalink Pension
Benefit Plans and Vitalink Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be
expected to have an Vitalink Material Adverse Effect.
(d) All contributions to, and payments from, the Vitalink Pension Benefit
Plans which are required to have been made in accordance with the Vitalink
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section
412 of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(e) The Vitalink Pension Benefit Plans intended to qualify under Section 401
of the Code have been determined by the Internal Revenue Service ("IRS") to be
so qualified and nothing has occurred with respect to the operation of such
Vitalink Pension Benefit Plans which would cause the loss of such
qualification or exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code. Such plans have been or will be
amended on a timely basis to comply with changes to the Code made by the Tax
Reform Act of 1986 and other applicable legislative, regulatory or
administrative requirements.
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(f) There are (i) no investigations pending, to the best knowledge of
Vitalink, by any governmental entity involving the Vitalink Pension Benefit
Plans or Vitalink Welfare Plans, (ii) no termination proceedings involving the
Vitalink Pension Benefit Plans and (iii) no pending or, to the best of
Vitalink's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any Vitalink Pension Benefit Plan or
Vitalink Welfare Plan, against the assets of any of the trusts under any
Vitalink Pension Benefit Plan or Vitalink Welfare Plan or against any
fiduciary of any Vitalink Pension Benefit or Vitalink Welfare Plan with
respect to the operation of such plan or asserting any rights or claims to
benefits under any Vitalink Pension Benefit Plan or against the assets of any
trust under such plan, except for those which would not, singly or in the
aggregate, give rise to any liability which would reasonably be expected to
have an Vitalink Material Adverse Effect, nor, to the best of Vitalink's
knowledge, are there any facts which would give rise to any liability except
for those which would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect in the event of any such
investigation, claim, suit or proceeding.
(g) None of Vitalink, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Vitalink Pension
Benefit Plans or Vitalink Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA) which would be reasonably likely to result in a tax or penalty
on Vitalink or any of its Subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA, except any such event which would not, singly or in
the aggregate, reasonably be expected to have an Vitalink Material Adverse
Effect.
(h) Neither the Vitalink Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect nor has there been any event with respect to any
Vitalink Pension Benefit Plan requiring disclosure under Section 4063(a) of
ERISA or any event with respect to any Vitalink Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have an
Vitalink Material Adverse Effect.
(i) Neither Vitalink nor any Subsidiary of Vitalink nor any ERISA Affiliate
has incurred any currently outstanding liability to the Pension Benefit
Guaranty Corporation (the "PBGC") or to a trustee appointed under Section
4042(b) or (c) of ERISA other than for the payment of premiums, all of which
have been paid when due. No Vitalink Pension Benefit Plan has applied for, or
received, a waiver of the minimum funding standards imposed by Section 412 of
the Code. The information supplied to the actuary by Vitalink or any of its
Subsidiaries for use in preparing the most recent actuarial report for the
Vitalink Pension Benefit Plans is complete and accurate in all material
respects.
(j) Neither Vitalink, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in
the United States.
(k) With respect to each of the Vitalink Pension Benefit Plans and Vitalink
Welfare Plans, true, correct and complete copies of the following documents
have been delivered or made available to GranCare: (i) the current plans and
related trust documents, including amendments thereto, (ii) any current
summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither Vitalink, any of its Subsidiaries, any organization to which
Vitalink is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be
expected to have an Vitalink Material Adverse Effect.
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(m) None of the Vitalink Welfare Plans maintained by Vitalink or any of its
Subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of
a participant following termination of employment, except as may be required
under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), or except at the expense of the participant or the participant's
beneficiary. Vitalink and each of its Subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(n) No liability under any Vitalink Pension Benefit Plan or Vitalink Welfare
Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which Vitalink or any
of its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this Agreement will
not result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee of Vitalink or any of its
Subsidiaries.
(p) Vitalink has disclosed to GranCare in Section 3.26 of the Vitalink
Disclosure Statement each of Vitalink's material Foreign Plans (as hereinafter
defined) to the extent the benefits provided thereunder are not mandated by
the laws of the applicable foreign jurisdiction. Vitalink and each of its
Subsidiaries and each of such Foreign Plans are in compliance with applicable
laws and all required contributions have been made to the Foreign Plans,
except where the failure to comply or make contributions would not, singly or
in the aggregate, reasonably be expected to have an Vitalink Material Adverse
Effect. For purposes of this Agreement, the term "Foreign Plan" shall mean any
plan, program, policy, arrangement or agreement maintained or contributed to
by, or entered into with, a person or any of its Subsidiaries with respect to
employees (or former employees) employed outside the United States.
Section 3.27 Environmental Matters. (a) Except as would not, singly or in
the aggregate with all other such non-compliances, have an Vitalink Material
Adverse Effect, Vitalink and its Subsidiaries are, and within the period of
all applicable statutes of limitation have been, in compliance with all
applicable Environmental Laws (as hereinafter defined), which compliance
includes, without limitation, the possession of all licenses, permits,
registrations and other governmental authorizations (collectively,
"Environmental Authorizations") required under applicable Environmental Laws,
and compliance with the terms and conditions thereof, and there are no
circumstances of which Vitalink is aware which may materially prevent or
interfere with compliance in the future. To Vitalink's knowledge, all
Environmental Authorizations currently held by Vitalink and its Subsidiaries
pursuant to Environmental Laws are identified in Section 3.27(a)(1) of the
Vitalink Disclosure Statement and represent all Environmental Authorizations
necessary for the conduct of the businesses of Vitalink and its Subsidiaries
as currently conducted. Neither Vitalink nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any such Environmental
Authorizations will be modified, suspended or revoked or cannot be renewed or
otherwise maintained in the ordinary course of business. To Vitalink's
knowledge after due inquiry, the execution and delivery of this Agreement and
the consummation by Vitalink of the transactions contemplated hereby will not
affect the validity or require the transfer of any Environmental
Authorizations, and will not require any notification, registration,
reporting, filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices (as hereinafter defined) that,
singularly or in the aggregate, reasonably could be expected to have an
Vitalink Material Adverse Effect (i) pending or, to the best knowledge of
Vitalink, threatened against Vitalink or any of its Subsidiaries, (ii) to
Vitalink's knowledge pending or threatened against any person or entity whose
liability for such Environmental Notice may have been retained or assumed by
or could reasonably be imputed or attributed by law or contract to Vitalink or
any of its Subsidiaries, (iii) that to Vitalink's knowledge could subject
Vitalink to any material risk of liability, loss or damages, or (iv) that to
Vitalink's knowledge could reasonably be expected to require investigation,
removal or remedial or
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corrective action by Vitalink or any of its Subsidiaries. Since May 31, 1996,
neither Vitalink nor any of its Subsidiaries has received any Environmental
Notice alleging that Vitalink or any of its Subsidiaries is subject to
liability under any Environmental Law or that Vitalink or any of its
Subsidiaries is not in full compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or, to the best knowledge of Vitalink, investigation pending or
threatened under any Environmental Law (i) against Vitalink or any of its
Subsidiaries, or (ii) to the knowledge of Vitalink against any person or
entity in connection with which liability could reasonably be imputed or
attributed by law or contract to Vitalink or any of its Subsidiaries, except
with respect to each of clause (i) and (ii) for such demands, claims, notices
of violation, notice or demand letters or requests for information which
singly or in the aggregate could not reasonably be expected to have a GranCare
Material Adverse Effect.
(d) No property or facility presently or to the knowledge of Vitalink
formerly owned, operated or leased by Vitalink or any of its present
Subsidiaries, or to the knowledge of Vitalink any of its former Subsidiaries,
or any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated
under the Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), or on any comparable list established under any
Environmental Law, nor has Vitalink or any of its Subsidiaries received any
written notification of potential or actual liability or any request for
information under CERCLA or any comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any Hazardous
Materials (as hereinafter defined) generated, used, owned, stored or
controlled by Vitalink, or to Vitalink's knowledge any of its Subsidiaries or
any of their respective predecessors in interest, on, at or under any property
presently or formerly owned, leased or operated by Vitalink, or to Vitalink's
knowledge its Subsidiaries, or any predecessors in interest, and to Vitalink's
knowledge there are no Hazardous Materials located in, at, on or under, or in
the vicinity of, any such facility or property, or at any other location, that
(i) could reasonably be expected to subject Vitalink to a material risk of
liability, loss or damages, or result in the incurrence by Vitalink of costs
under Environmental Laws, (ii) could reasonably be expected to form the basis
of any Environmental Notice against or with respect to Vitalink or any of its
Subsidiaries, or against any person or entity whose liability for any
Environmental Notice may have been retained or assumed by or could be imputed
or attributed by law or contract to Vitalink or any of its Subsidiaries or
(iii) could reasonably be expected to require investigation, removal or
remedial or corrective action by Vitalink or any of its Subsidiaries, that in
any case singularly or in the aggregate, reasonably could be expected to have
an Vitalink Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
Vitalink's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other
disposal areas containing Hazardous Materials, located on, at or under
property owned, operated or leased by Vitalink, any of its Subsidiaries or any
of their respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased
by Vitalink or any of its Subsidiaries, and (iii) there is no asbestos
contained in or forming part of any building, building component, structure or
office space owned, operated or leased by Vitalink or any of its Subsidiaries.
(g) To Vitalink's knowledge no lien has been recorded under Environmental
Laws with respect to any properties, assets or facilities owned, operated or
leased by Vitalink or any of its Subsidiaries.
(h) In accordance with Section 5.05, Vitalink has given GranCare and its
authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
Vitalink or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by Vitalink or any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
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For purposes of this Agreement:
(i) "Environment" shall mean any surface water, groundwater or drinking
water supply, land surface or subsurface strata or ambient air and
includes, without limitation, any indoor location.
(ii) "Environmental Laws" shall mean CERCLA, the Resource Conservation
and Recovery Act of 1976, as amended, and any other federal, state, local
or foreign statute, rule, regulation, order, judgment, directive, decree or
common law, as now or previously in effect and regulating, relating to or
imposing liability or standards of conduct concerning air emissions, water
discharges, noise emissions, the release or threatened release or discharge
of any Hazardous Material into the environment, the generation, handling,
treatment, storage, transport or disposal of any Hazardous Material or
otherwise concerning pollution or the protection of the outdoor or indoor
environment, or employee health or safety. The term shall also include laws
governing the transfer of real property that require notification,
registration, reporting, filing, investigation or remediation prior to,
concurrent with or following sale or transfer of control of any property,
facility or establishment in connection with the actual or threatened
presence or release of Hazardous Materials at such property, facility or
establishment.
(iii) "Environmental Notice" shall mean any written communication, notice
or claim by any Governmental Authority or other third party alleging civil
or criminal liability (including, without limitation, liability for
investigatory costs, cleanup costs, governmental costs, compliance costs or
harm, injuries or damages to any person, property, natural resources, or
any fines or penalties) or alleging noncompliance arising out of, based
upon, resulting from or relating to any Environmental Law.
(iv) "Hazardous Material" shall mean any pollutant, contaminant or
hazardous, toxic or dangerous waste, substance, constituent or material
defined or regulated as such in, or for purposes of, any Environmental Law,
including, without limitation, any medical waste, any biochemical waste,
any asbestos, radon, any petroleum, oil (including crude oil or any
fraction thereof), any radioactive substance, any polychlorinated
biphenyls, any toxin, chemical, virus, infectious disease agent and any
other substance that can give rise to liability under any Environmental
Law.
Section 3.28 Directors, Officers and Compensation of Employees. There is set
forth in Section 3.28 of the Vitalink Disclosure Statement a true and complete
list showing (a) the names and addresses of all directors and officers of
Vitalink and its Subsidiaries and (b) the names of all salaried persons whose
aggregate compensation for purposes of federal income tax reporting from
Vitalink and its Subsidiaries in the fiscal year ended May 31, 1996 was, or in
the fiscal year ending May 31, 1997 is expected to be, U.S. $100,000 or more
per year, together with a statement of the full amount expected to be paid to
such person for services in all capacities to be rendered in the fiscal year
ending May 31, 1997, and the basis thereof, separately including the amounts
paid or payable, or expected to be paid or payable during such fiscal years,
under bonus or incentive arrangements, if any.
Section 3.29 Banks. There is set forth in Section 3.29 of the Vitalink
Disclosure Statement a true and complete list showing the account numbers and
name of each bank in which Vitalink or any of its Subsidiaries has an account
or safe deposit box and the names of all persons authorized to draw thereon or
to have access thereto.
Section 3.30 Disclosure. No representation or warranty by Vitalink and no
statement or information relating to Vitalink or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Vitalink
to GranCare in connection herewith contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 3.31 Institutional Pharmacy Business. (a) Section 3.31 of the
Vitalink Disclosure Statement lists each Pharmacy utilized by Vitalink in
connection with its pharmacy business and indicates (i) the location of each
such Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest. No other
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person or entity has any beneficial ownership or interest in or to any such
Pharmacy nor does any other person or entity have any right or option to
acquire any beneficial ownership or interest in or to any such Pharmacy.
(b) Section 3.31 of the Vitalink Disclosure Statement lists all of the
customers to which Vitalink and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts. Vitalink has not been informed and has
no reason to believe that any Vitalink Pharmacy Contract will be terminated
for or without cause.
(c) Vitalink has not violated, and is not now in violation of, the Medicare
and Medicaid fraud and abuse provisions of the Social Security Act, the Civil
Monetary Penalties Law of the Social Security Act, or any other federal or
state law, statute, rule or regulation relating to Vitalink and its
Subsidiaries.
(d) Vitalink is duly licensed to provide pharmacy services in all states in
which it does business, and is also a participant in the Medicare program and
the Medicaid programs of the states listed in Section 3.07 of the Vitalink
Disclosure Statement. Vitalink is in compliance with all laws, rules and
regulations affecting or in connection with the Pharmacies, Vitalink and their
licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) Vitalink has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To
the best of Vitalink's knowledge all such billings were for goods actually
provided, and at appropriate charges or costs, and Vitalink has appropriate
documentation to support such billing requests.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF GRANCARE
Except as set forth in the GranCare Disclosure Statement delivered by
GranCare to Vitalink at or prior to the execution of this Agreement (the
"GranCare Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), GranCare
represents and warrants to Vitalink as follows:
Section 4.01 Organization and Qualification. Each of GranCare and its
Pharmacy Subsidiaries (as defined in the Distribution Agreement) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the GranCare SEC Reports (as hereinafter defined). Each of
GranCare and its Pharmacy Subsidiaries is duly qualified to transact business
as a foreign corporation and is in good standing in each jurisdiction in which
the conduct of its business or the ownership, leasing or operation of its
property requires such qualification, except for failures to be so qualified
or in good standing which would not, singly or in the aggregate with all such
other failures, have a GranCare Material Adverse Effect. "GranCare Material
Adverse Effect" means (i) with respect to any event, occurrence, failure of
event or occurrence, change, effect, state of affairs, breach, default,
violation, fine, penalty or failure to comply (each, a "circumstance"),
individually or taken together with all other circumstances contemplated by or
in connection with any or all of the representations and warranties made in
this Agreement, (a) a material adverse effect on the business, properties,
assets, condition (financial or otherwise), results of operations or prospects
of the Institutional Pharmacy Business, taken as a whole, or (b) an impairment
on the ability of SNFCo to conduct as a going concern the Skilled Nursing
Business (as defined in the Distribution Agreement) subsequent to the
Distribution or (ii) circumstances resulting in the impairment of GranCare's
ability to perform its obligations under this Agreement or the Distribution
Agreement and to consummate the transactions contemplated hereby and thereby.
Neither GranCare nor any of its Pharmacy Subsidiaries is in violation of any
of the provisions of its articles of incorporation (or other applicable
charter document) or by-laws. True and complete copies of the Restated
Articles of Incorporation and By-Laws, as currently in effect, of GranCare and
of each Pharmacy
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Subsidiary of GranCare have been previously delivered or made available to
Vitalink. No amendments to the articles of incorporation (or other similar
charter documents) and By-Laws of GranCare have been authorized since December
31, 1995.
Section 4.02 Authority Relative to This Agreement. GranCare has full
corporate power and authority to execute and deliver this Agreement and the
Distribution Agreement and, upon obtaining the approval of a majority of the
outstanding shares of GranCare Common Stock at the Special Meeting or
adjournment thereof, as may be required by the California Act to consummate
the Merger, the Distribution and complete the other transactions contemplated
hereby. The execution and delivery of this Agreement and the Distribution
Agreement and the consummation of the Merger, the Distribution and the other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of GranCare and no other corporate proceedings on the part
of GranCare are necessary to authorize this Agreement and the Distribution
Agreement or to consummate the Merger, the Distribution and the other
transactions contemplated hereby (other than, with respect to the Merger and
the Distribution, the approval of a majority of the outstanding shares of
GranCare Common Stock at the Special Meeting or any adjournment thereof as
required by the California Act and, with respect to the Distribution, the
declaration by the GranCare Board of Directors of the Distribution). This
Agreement and the Distribution Agreement have been duly and validly executed
and delivered by GranCare and, assuming, in the case of this Agreement and the
Distribution Agreement, the due authorization, execution and delivery of each
such agreement by Vitalink, constitute valid and binding agreements of
GranCare, enforceable against GranCare in accordance with their terms, except
to the extent that their enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable principles.
Section 4.03 Consents, No Conflicts. (a) Except for the filings of the
Certificate of Merger, the Certified Agreement and the Proxy Statement, the
filing and effectiveness of the Registration Statement and the SNFCo
Registration Document (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the HSR Act, and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by GranCare of the Merger, the
Distribution or the other transactions contemplated hereby or by the
Distribution Agreement except such as are set forth in Section 4.03(a) of the
GranCare Disclosure Statement, which will have been obtained or made prior to
the Effective Time and will then be in full force and effect or which would
not, singly or in the aggregate with all other such consents which have not
been obtained, have a GranCare Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
Distribution Agreement, the consummation of the Distribution, the Merger and
the other transactions contemplated hereby (or thereby) and compliance by
GranCare with any of the provisions hereof (or thereof) do not and will not
(i) subject to obtaining the approval of a majority of the outstanding shares
of GranCare Common Stock at the Special Meeting or any adjournment thereof as
required by the California Act, conflict with or result in any breach or
violation of any provision of the Restated Articles of Incorporation (or other
comparable charter documents) or By-Laws of GranCare or any of its Pharmacy
Subsidiaries, (ii) result in (1) a breach or violation of, a default under or
an event triggering any payment or other obligation pursuant to any of
GranCare's existing pension plans, welfare plans, multiemployer plans,
employee benefit plans, benefit arrangements or similar plans, arrangements or
policies, including bonus, incentive, deferred compensation, stock purchase,
stock option, stock appreciation right, health or group insurance, severance
pay, retirement or other benefit plans, and all similar arrangements or
policies of GranCare and its Subsidiaries (the "GranCare Compensation and
Benefit Plans") or any grant or award made under any of the foregoing in any
case for which GranCare or any of the Pharmacy Subsidiaries would be
responsible after the Distribution, (2) a breach, violation or event
triggering a right of termination of, a default under, the acceleration of any
obligation, or the creation of a lien, pledge, security interest or other
encumbrance on assets (with or without the giving of notice or the lapse of
time or both) pursuant to any provision of any agreement, lease of real or
personal property, marketing agreement, contract, note, mortgage,
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indenture, arrangement or other obligation of GranCare or any of its Pharmacy
Subsidiaries ("GranCare Contracts") or any law, rule, ordinance or regulation
or judgment, decree, order or award to which GranCare or any of its Pharmacy
Subsidiaries is subject or any governmental or non-governmental authorization,
consent, approval, registration, franchise, license or permit under which
GranCare or any of its Pharmacy Subsidiaries conducts the Institutional
Pharmacy Business, or (3) any other change in the rights or obligations of any
party under any of the GranCare Contracts.
Section 4.04 Board Recommendation. The Board of Directors of GranCare has,
by a unanimous vote at a meeting of such Board duly held on September 3, 1996,
approved and adopted this Agreement, the Distribution Agreement, the Merger
and the other transactions contemplated hereby or by the Distribution
Agreement, determined that the consideration to be received by the holders of
shares of GranCare Common Stock pursuant to the Merger is fair to the holders
of such shares and recommended that the holders of such shares approve and
adopt this Agreement, the Distribution Agreement, the Merger and the other
transactions contemplated hereby.
Section 4.05 State Antitakeover Statutes. GranCare has granted all approvals
and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of any
state antitakeover statute or regulation such that none of the provisions of
such "business combination," "moratorium," "control share," or other state
antitakeover statute or regulation (x) prohibits or restricts GranCare's
ability to perform its obligations under this Agreement or its ability to
consummate the Merger and the other transactions contemplated hereby, (y)
would have the effect of invalidating or voiding this Agreement or any
provision hereof, or (z) would subject Vitalink to any material impediment or
condition in connection with the exercise of any of their respective rights
under this Agreement.
Section 4.06 No Existing Violation, Default, Etc. None of GranCare or any of
its Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have a GranCare
Material Adverse Effect) of (A) any applicable law, ordinance, administrative
or governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over GranCare or any
of its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default
exists under any GranCare Contract or any lease, permit, license or other
agreement or instrument to which GranCare or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties,
assets or operations of GranCare or any of its Subsidiaries is subject (except
for any events of default or other defaults which would not, singly or in the
aggregate with all such other defaults, have a GranCare Material Adverse
Effect).
Section 4.07 Affiliates. GranCare has delivered to Vitalink a letter
identifying all persons who, as of the date hereof, may be deemed to be
"affiliates" of GranCare for purposes of Rule 145 under the Securities Act
("Affiliates") and the written agreement of each such person, substantially in
the form of Exhibit C hereto.
Section 4.08 Licenses and Permits. Each of GranCare and its Subsidiaries has
such certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations and clearances from appropriate governmental agencies and
bodies ("GranCare Licenses") as are necessary to own, lease or operate its
properties and to conduct its business in the manner described in the GranCare
SEC Reports and as presently conducted and all such GranCare Licenses are
valid and in full force and effect, other than any failure to have any such
GranCare License or any failure of any such GranCare License to be valid and
in full force and effect as would not, singly or in the aggregate with all
such other failures, have a GranCare Material Adverse Effect. Each of GranCare
and its Subsidiaries is, and within the period of all applicable statutes of
limitation has been, in compliance with its obligations under such GranCare
Licenses and no event has occurred that allows, or after notice or lapse of
time would allow, revocation or termination of such GranCare Licenses, other
than any such failure to be in compliance with such obligations or any such
revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have a GranCare Material
Adverse Effect. GranCare has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of GranCare or any of
its Pharmacy Subsidiaries to renew any GranCare License. Neither the execution
and delivery by GranCare of this Agreement or the Distribution Agreement nor
the consummation of the Distribution, the
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Merger or any of the other transactions contemplated herein will result in any
revocation or termination of any GranCare License or any requirement that the
Surviving Corporation be licensed in respect of any of the GranCare Licenses.
Set forth in Section 4.08 of the GranCare Disclosure Statement is a true and
complete list of all GranCare Licenses which are necessary for the conduct of
the Institutional Pharmacy Business as presently conducted by GranCare and its
Subsidiaries and which are, or will subsequent to the Reorganization be, held
by GranCare and the Pharmacy Subsidiaries.
Section 4.09 Registration Statement; Proxy Statement; SNFCo Registration
Documents. (a) None of the information supplied by GranCare for inclusion or
incorporation by reference in (i) the Registration Statement, (ii) the proxy
statement/prospectus to be sent to the shareholders of GranCare in connection
with the Special Meeting, including all amendments and supplements thereto
(the "Proxy Statement"), or (iii) the Vitalink Information Statement,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at (i) the time the Registration Statement becomes
effective and (ii) the Effective Time and, in the case of the Proxy Statement
or the Vitalink Information Statement, on the date the Proxy Statement or the
Vitalink Information Statement is first mailed to stockholders, at the time of
the Special Meeting and 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 in order to make the statements therein not misleading.
If at any time prior to the Effective Time any event with respect to GranCare
or any of its Subsidiaries shall occur which is required to be described in
the Registration Statement, the Proxy Statement or the Vitalink Information
Statement, such event shall be so described, and an amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of GranCare and Vitalink. The Registration Statement and
Proxy Statement will (with respect to GranCare and its Subsidiaries) comply as
to form in all material respects with the applicable provisions of the
Exchange Act.
(b) The Form S-1 or 10 or other appropriate filing to be made to register
the SNFCo Common Stock under the Securities Act or the Exchange Act, as
appropriate, as such filing may be, amended or supplemented (the "SNFCo
Registration Document"), will not, at the date the SNFCo Registration Document
(or any amendment or supplement thereto), at the time that the SNFCo
Registration Document becomes effective, at the time of the Special Meeting
and 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 in
order to make the statements made therein not misleading. The SNFCo
Registration Document will comply as to form in all material respects with the
applicable provisions of the Securities Act or the Exchange Act, as the case
may be.
Section 4.10 Finders or Brokers. Except for PaineWebber Incorporated,
neither GranCare nor any Subsidiary of GranCare has employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to a fee or any commission the
receipt of which is conditioned upon consummation of the Merger or the
Distribution.
Section 4.11 SEC Filings. (a) GranCare has filed with the SEC all required
forms, reports and documents required to be filed by it with the SEC since
December 31, 1992 (collectively, the "GranCare SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be. As
of their respective dates the GranCare SEC Reports (including documents
incorporated by reference therein) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(b) GranCare will deliver to Vitalink as soon as they become available true
and complete copies of any report or statement mailed by GranCare to its
securityholders generally or filed by it with the SEC, in each case subsequent
to the date hereof and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by Vitalink, as to which GranCare makes no representation) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
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audited consolidated financial statements and unaudited consolidated interim
financial statements of GranCare and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of GranCare and its Subsidiaries as of the
dates thereof and the consolidated results of operations and consolidated cash
flow for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they
may not include footnotes or may be condensed or summary statements).
Section 4.12 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of GranCare
and its Subsidiaries included or incorporated by reference in the GranCare SEC
Reports and the unaudited Institutional Pharmacy Business Financial Statements
as set forth in Section 4.12 of the GranCare Disclosure Schedule have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis during the periods involved, and fairly presented the
consolidated financial position of GranCare and its Subsidiaries and the
Institutional Pharmacy Business, respectively, as of the dates thereof and the
consolidated results of operations and consolidated cash flows for the periods
then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements) and such audited
financial statements have been certified as such (without exception) by
GranCare's independent accountants.
Section 4.13 Absence of Undisclosed Liabilities. Neither GranCare nor its
Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the GranCare Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with
past practice since December 31, 1995 that would not, singly or in the
aggregate, be reasonably expected to have a GranCare Material Adverse Effect.
Section 4.14 Absence of Changes or Events. (a) Since December 31, 1995 (i)
GranCare and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement
or other transaction that is not in the ordinary course of business (other
than the Distribution Agreement and this Agreement) or that could reasonably
be expected to result in any GranCare Material Adverse Effect; (ii) neither
GranCare nor its Pharmacy Subsidiaries have sustained any material loss or
interference with their business or properties from fire, flood, windstorm,
accident, strike or other calamity (whether or not covered by insurance);
(iii) there has been no material change in the indebtedness of GranCare and
its Pharmacy Subsidiaries, no change in the authorized capital stock of
GranCare and no dividend or distribution of any kind declared, paid or made by
GranCare on any class of its capital stock other than the Distribution; (iv)
there has been no event or condition which has caused a GranCare Material
Adverse Effect, nor any development, occurrence or state of facts or
circumstances that could, singly or in the aggregate, reasonably be expected
to result in a GranCare Material Adverse Effect; (v) there has been no
amendment, modification or supplement to any material term of any GranCare
Contract to which a Pharmacy Subsidiary is a party required to be identified
in Section 4.21 of the GranCare Disclosure Statement or any equity security;
and (vi) there has been no material change by GranCare in its accounting
principles, practices or methods.
(b) Since December 31, 1995, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
GranCare, to its officers or key employees, or any amendment of any of the
GranCare Compensation and Benefit Plans.
Section 4.15 Capitalization. (a) The authorized capital stock of GranCare
consists of 50,000,000 shares of GranCare Common Stock and 2,000,000 shares of
Preferred Stock (the "GranCare Preferred Stock"), of which (i) 390,000 shares
have been authorized as Series A Convertible Preferred, (ii) 175,000 shares
have been
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authorized as Series B Mandatorily Redeemable Preferred Stock, (iii) 665,000
shares have been authorized as Series C Convertible Preferred Stock and (iv)
4,500 shares have been authorized as Series D Exchangeable Preferred Stock. As
of August 26, 1996, there are 23,370,693 shares of GranCare Common Stock
(including shares in respect of Evergreen Healthcare, Inc. common stock and
National Heritage, Inc. common stock for which certificates have not been
tendered for exchange), no shares of GranCare Preferred Stock outstanding and
200,100 shares of GranCare Common Stock owned by a wholly-owned subsidiary of
GranCare; and except for shares which were reserved for issuance and which may
have been issued pursuant to the following sentence there have been no
issuances of capital stock of GranCare since August 26, 1996. As of August 26,
1996, 2,355,250 shares of GranCare Common Stock were reserved for issuance
upon the exercise of outstanding options (the "GranCare Options") granted
under the stock option plans of GranCare (the "GranCare Option Plans"),
2,210,351 shares were reserved for issuance upon conversion of GranCare's 6-
1/2% Convertible Subordinated Debentures due 2003 (the "Convertible
Debentures"), 2,500 shares were committed to be issued to employees of
GranCare and its subsidiaries in recognition of 25 years of service, 304,803
shares were reserved for issuance upon the exercise of GranCare's Series D, E
and F warrants and no other shares of GranCare Common Stock are reserved for
any purpose. Except for the foregoing, there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating GranCare to issue, transfer or sell any shares of
capital stock of GranCare or any of its Subsidiaries or any other securities
convertible into or evidencing the right to subscribe for any such shares.
There are no outstanding stock appreciation rights with respect to the capital
stock of GranCare or any of its Subsidiaries. All issued and outstanding
shares of GranCare Common Stock are duly authorized and validly issued, fully
paid and non-assessable and have not been issued in violation of (nor are any
of the authorized shares of capital stock of, or other equity interests in,
GranCare subject to) any preemptive or similar rights created by statute, the
Restated Articles of Incorporation or By-Laws of GranCare or any agreement to
which GranCare is a party or bound.
(b) There are no obligations, contingent or otherwise, of GranCare to (i)
repurchase, redeem or otherwise acquire any shares of GranCare Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise except for transactions described in Exhibit
A to the Distribution Agreement), or provide any guarantee with respect to the
obligations of, any other person. There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of GranCare. There are no
voting trusts, proxies or other agreements or understandings to which GranCare
is a party or by which GranCare is bound with respect to the voting of any
shares of capital stock of GranCare.
(c) GranCare has delivered or made available to Vitalink complete and
correct copies of each of the GranCare Option Plans, including all amendments
thereto. Section 4.15(c) of the GranCare Disclosure Statement sets forth a
complete and correct list of all outstanding options setting forth (i) the
exercise price of each outstanding GranCare Option, (ii) the number of
GranCare Options, (iii) the date of grant of each such GranCare Option.
Section 4.15(c) of the GranCare Disclosure Statement sets forth a complete and
correct list of all restricted stock awards including the recipients and the
number of shares of GranCare Common Stock received or to be received by each.
Section 4.16 Capital Stock of Subsidiaries. The only direct or indirect
Subsidiaries of GranCare are those listed in Section 4.16 of the GranCare
Disclosure Statement, which Section 4.16 separately sets forth the Pharmacy
Subsidiaries. GranCare is directly or indirectly the record (except for
directors' qualifying shares as reflected in such Section 4.16) and beneficial
owner (including all such qualifying shares) of all of the outstanding shares
of capital stock of each of its Pharmacy Subsidiaries, there are no proxies
with respect to such shares, and there are not any existing options, warrants,
calls, subscriptions, or other rights or other agreements or commitments
obligating GranCare or any of such Subsidiaries to issue, transfer or sell any
shares of capital stock of such Subsidiary or any other securities convertible
into or evidencing the right to subscribe for any such shares. All of such
shares beneficially owned by GranCare are duly authorized and validly issued,
fully paid, nonassessable and free of preemptive rights with respect thereto
and are owned by GranCare free and
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clear of any claim, lien or encumbrance of any kind with respect thereto.
GranCare does not directly or indirectly own any interest in any corporation,
partnership, joint venture or other business association or entity.
Section 4.17 Litigation. There are no pending actions, suits, proceedings
or, to the best knowledge of GranCare after due inquiry, investigations by,
against or affecting GranCare, any of its Pharmacy Subsidiaries or any of
their properties, assets or operations, or with respect to which GranCare or
any of its Pharmacy Subsidiaries is responsible by way of indemnity or
otherwise. No pending or, to the knowledge of GranCare, threatened actions,
suits, proceedings or investigations by, against or affecting GranCare, any of
its Subsidiaries or any of their properties, assets or operations, or with
respect to which they are responsible by way of indemnity or otherwise,
whether or not disclosed in such GranCare SEC Reports, would, singly or in the
aggregate with all such other actions, suits, investigations or proceedings,
reasonably be expected to have a GranCare Material Adverse Effect; and, to the
best knowledge of GranCare after due inquiry, no actions, suits, proceedings
or investigations which would reasonably be expected to have a GranCare
Material Adverse Effect are threatened or contemplated and there is no
reasonable basis, to the best knowledge of GranCare after due inquiry, for any
such action, suit, proceeding or investigation, whether or not threatened or
contemplated.
Section 4.18 Insurance. GranCare has insurance policies and fidelity bonds
covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of GranCare
and such Subsidiaries. All premiums due and payable under all such policies
and bonds have been paid, and GranCare is otherwise in full compliance with
the terms and conditions of all such policies and bonds, except where the
failure to have made payment or to be in full compliance would not, singly or
in the aggregate with all such other failures, have a GranCare Material
Adverse Effect. The reserves established by GranCare in respect of all matters
as to which GranCare self-insures or carries retentions and/or deductibles,
including for workers' medical coverage and workers' compensation, are
adequate and appropriate in light of GranCare's experience since December 31,
1992 with respect thereto and GranCare is not aware, after due inquiry, of any
facts or circumstances existing as of the date hereof that could reasonably be
expected to cause such reserves to be inadequate or inappropriate. Section
4.18 of the GranCare Disclosure Statement sets forth a true and complete list
of all insurance policies including retention and/or deductible programs, and
fidelity bonds of GranCare.
Section 4.19 Title to and Condition of Properties. GranCare and its Pharmacy
Subsidiaries have good title to all of the real property and personal property
which is reflected on GranCare's December 31, 1995 audited consolidated
balance sheet contained in GranCare's Form 10-K for the fiscal year ended
December 31, 1995 filed with the SEC (the "GranCare Balance Sheet") except for
property since sold or otherwise disposed of in the ordinary course of
business and consistent with past practice. Set forth in Section 4.19(a) of
the GranCare Disclosure Statement is a true and complete list of all real
properties owned by GranCare and its Pharmacy Subsidiaries and used in
connection with the Institutional Pharmacy Business, all of which real
properties are reflected on the GranCare Balance Sheet. No such real or
personal property is subject to claims, liens or other encumbrances of any
kind or character, including, without limitation, mortgages, pledges, liens,
conditional sale agreements, charges, security interests, easements,
restrictive covenants, rights of way or options, except for (i) liens for
taxes not yet delinquent or which are being contested in good faith by
appropriate proceedings and in respect of which GranCare or its appropriate
Subsidiary has set aside on its books adequate reserves in accordance with
generally accepted accounting principles; (ii) mechanics', carriers',
workers', repairers', materialmen's and other similar statutory liens incurred
in the ordinary course of business for obligations not yet delinquent or the
validity of which are being contested in good faith by appropriate proceedings
and in respect of which GranCare or its appropriate Subsidiary has set aside
on its books adequate reserves in accordance with generally accepted
accounting principles; (iii) in the case of real property, easements, rights
of way, restrictions, minor defects or irregularities in title that do not
individually or in the aggregate have a material adverse effect on the value
or use of the real property encumbered thereby as currently used in the
operation of the business of GranCare or its Subsidiaries; or (iv) those which
would not materially interfere with the conduct of the business of GranCare
and its Pharmacy Subsidiaries or impair GranCare's ability to perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby (the encumbrances described in clauses (i)
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through (iv) of this sentence, collectively, the "GranCare Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to the
knowledge of GranCare, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably
be expected to have a material adverse effect on the value or use of such
property as currently used in the operation of the pharmacy business of
GranCare or its Subsidiaries. To the knowledge of GranCare, (i) the real
properties and the improvements located thereon (including the roof and
structural portions of each building) are in good operating order and
condition, subject to ordinary wear and tear, (ii) there are no structural,
mechanical or other defects of a material nature in any improvements located
on the real properties, (iii) all building systems in respect of the real
properties are in all material respects in good condition and working order,
subject to ordinary wear and tear, and (iv) the real properties are served by
all utilities required or necessary for the present use thereof. GranCare has
made available to Vitalink true and correct copies of all title insurance
commitments, title insurance policies and surveys in the possession of
GranCare or its Subsidiaries relating to the real properties set forth in
Section 4.19(a) of the GranCare Disclosure Statement.
Section 4.20 Leases. There have been delivered or made available to Vitalink
true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected
to be, at least $100,000 per annum pursuant to which real or personal property
is held under lease by GranCare (other than those properties held by GranCare
and utilized solely with respect to the Skilled Nursing Business) or any of
its Pharmacy Subsidiaries, and true and complete copies of each lease pursuant
to which GranCare or any of its Pharmacy Subsidiaries leases real or personal
property to others for use in a pharmacy related business. Section 4.20 of the
GranCare Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the current
operations of the Institutional Pharmacy Business. All of the leases so listed
are valid and subsisting and in full force and effect with respect to GranCare
and the Pharmacy Subsidiaries, as the case may be, and, to GranCare's
knowledge, with respect to any other party thereto and GranCare or its
Pharmacy Subsidiaries, as the case may be, have valid leasehold interests in
all properties leased thereunder free and clear of all liens created by,
through or under GranCare or its Pharmacy Subsidiaries other than GranCare
Permitted Encumbrances. The leased real properties are in good operating order
and condition, subject to ordinary wear and tear.
Section 4.21 Contracts and Commitments. Neither GranCare nor the Pharmacy
Subsidiaries are a party to any existing contract, obligation or commitment of
any type in any of the following categories:
(a) contracts for the purchase by GranCare or any of its Pharmacy
Subsidiaries of medicine, materials, supplies or equipment which are not
cancellable upon 30 days' or less notice and which either (i) have not been
entered into in the ordinary course of business and consistent with past
practice or (ii) provide for purchase prices substantially greater than
those presently prevailing for such materials, supplies or equipment, or
(iii) contracts obligating GranCare or any of its Pharmacy Subsidiaries to
make capital expenditures in excess of $200,000;
(b) contracts under which GranCare or any Pharmacy Subsidiary has, except
by way of endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past practice, become
absolutely or contingently or otherwise liable for (i) the performance of
any other person, firm or corporation under a contract, or (ii) the whole
or any part of the indebtedness or liabilities of any other person, firm or
corporation, except in either case for any such contracts for which
GranCare and its Pharmacy Subsidiaries would not be responsible after the
Distribution;
(c) powers of attorney outstanding from GranCare other than as issued in
the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
(d) contracts under which any amount payable by GranCare is dependent
upon, or calculated in accordance with, the revenues or profits of
GranCare, any of its Subsidiaries or SNFCo;
(e) contracts with any director, officer or employee of GranCare other
than in such person's capacity as a director, officer or employee of
GranCare;
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(f) contracts which limit or restrict where GranCare or any of its
Pharmacy Subsidiaries may conduct its or their business or the type or line
of business which GranCare or any of its Subsidiaries may engage in;
(g) other than attached as exhibits to the Distribution Agreement, any
contracts, obligations or commitments which will exist following the
Distribution between GranCare or the Pharmacy Subsidiaries on the one hand,
and the Non-Institutional Pharmacy Business on the other;
(h) contracts with any party for the loan of money or availability of
credit to or from GranCare or any of its Pharmacy Subsidiaries (except
credit extended by GranCare or any of its Pharmacy Subsidiaries to its or
their customers in the ordinary course of business and consistent with past
practice); or
(i) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments listed
in Section 4.21 of the GranCare Disclosure Statement have been delivered or
made available to Vitalink. All such contracts are in full force and effect.
None of GranCare or its Pharmacy Subsidiaries or, to the best of GranCare's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than GranCare and its Pharmacy Subsidiaries which would not,
singly or in the aggregate with all other such breaches, have a GranCare
Material Adverse Effect.
Section 4.22 Labor Matters. None of GranCare or any of its Pharmacy
Subsidiaries is a party to any union contract or other collective bargaining
agreement, true and complete copies of which contracts have been delivered to
Vitalink. Each of GranCare and its Pharmacy Subsidiaries is in compliance in
all material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, safety, wages and
hours, and neither GranCare nor any of its Pharmacy Subsidiaries is engaged in
any unfair labor practice. There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of GranCare, any labor strike or stoppage
threatened) against or affecting GranCare or any of its Pharmacy Subsidiaries.
To the best of GranCare's knowledge, no union organizing activities with
respect to any of its or its Pharmacy Subsidiaries' employees are occurring or
threatened.
Section 4.23 No Change of Control Puts. Neither the execution and delivery
by GranCare of this Agreement or the Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated hereby gives rise to any obligation of GranCare or any of its
Subsidiaries to, or any right of any holder of any security of GranCare or any
of its Subsidiaries to, require GranCare to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
Section 4.24 Employment and Labor Contracts. Neither GranCare nor any of its
Pharmacy Subsidiaries is a party to any employment, management services,
consultation or other contract or agreement (except for any such contracts or
agreements for which GranCare would not be responsible after the Distribution)
with any past or present officer, director or employee or, to the best of
GranCare's knowledge, any entity affiliated with any past or present officer,
director or employee, in each case true and complete copies of which contracts
have been delivered to Vitalink, and other than the agreements executed by
employees generally, the forms of which have been provided to Vitalink.
Section 4.25 Intellectual Property Rights. GranCare or its Pharmacy
Subsidiaries own or have the right to use all Intellectual Property Rights
necessary to the conduct of their respective businesses. Section 4.25 of the
GranCare Disclosure Statement contains a worldwide list of all patents, trade
names, registered and unregistered copyrights, trademarks and service marks,
mask works and applications for the foregoing owned by GranCare or its
Pharmacy Subsidiaries. GranCare and/or its Pharmacy Subsidiaries have clear
and unencumbered title to the Intellectual Property Rights set forth in such
Section 4.25 and such title has not been challenged (pending or threatened) by
others except for the encumbrances listed therein. Such Section 4.25 also
contains a list of unpatented inventions used or planned for use by GranCare
or its Pharmacy Subsidiaries. No rights or licenses
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to use Intellectual Property Rights have been granted or acquired by GranCare
or its Pharmacy Subsidiaries. There have been no claims or assertions made by
others that GranCare has infringed any Intellectual Property Rights of others
by the sale of products or any other activity in the preceding six year period
and, to the knowledge of GranCare, there has been no such infringement by
GranCare or any of its Pharmacy Subsidiaries during this period. GranCare has
no knowledge of any infringement of Intellectual Property Rights of GranCare
or any of its Pharmacy Subsidiaries by others. All such patents, registered
trademarks, service marks, and copyrights owned by GranCare or its Pharmacy
Subsidiaries are in good standing, and are recorded on the public record in
the name of GranCare or its Pharmacy Subsidiaries. True and complete copies of
all material listed in Section 4.25 of the GranCare Disclosure Statement have
been delivered or made available to Vitalink.
Section 4.26 Taxes. (i) GranCare and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax Returns required to be filed by them
on or before the Effective Time, taking into account any extension of time to
file granted to or obtained on behalf of GranCare and/or its Subsidiaries
(copies of which for the past three fiscal years have been delivered or made
available to Vitalink); (ii) all Taxes of GranCare and its Subsidiaries have
been paid in full to the proper authorities or fully accrued for with respect
to fiscal periods for which there are publicly available financial statements
and otherwise on the books of GranCare, other than such Taxes as are being
contested in good faith by appropriate proceedings and are adequately reserved
for in accordance with generally accepted accounting principles; (iii) all
deficiencies asserted in writing as a result of Tax examinations of federal,
state and foreign income, sales and franchise and all other Tax Returns filed
by GranCare and its Subsidiaries have either been paid or adequately reserved
for in accordance with generally accepted accounting principles; (iv) to the
best knowledge of GranCare, no unpaid deficiency has been asserted or assessed
against GranCare or any of its Subsidiaries, and no examination of GranCare or
any of its Subsidiaries is pending or threatened for any material amount of
Tax by any taxing authority (with respect to any such action, Section 4.26 of
the GranCare Disclosure Statement sets forth the periods at issue and the
category of Tax, and the examining authority's and any corresponding revenue
agents' reports relating to the issue have been delivered or made available to
Vitalink); (v) no extension of the period for assessment or collection of any
Tax of GranCare or any of its Subsidiaries is currently in effect and no
extension of time within which to file any Tax Return of GranCare or any of
its Subsidiaries has been requested, which Tax Return has not since been
filed; (vi) no Tax liens have been filed with respect to any Taxes of GranCare
or any of its Subsidiaries except for property taxes which have accrued but
with respect to which penalty for non-payment has not occurred; (vii) neither
GranCare nor any of its Subsidiaries has agreed to make any adjustment by
reason of a change in their accounting methods that would affect the taxable
income or deductions of GranCare or any of its Subsidiaries for any period
ending after the Effective Time; (viii) GranCare and its Subsidiaries have
made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which GranCare or any Subsidiary will have any obligation
or liability on or after the Effective Time; (x) GranCare and its Subsidiaries
have no foreign losses as defined in Section 904(f)(2) of the Code; (xi) to
the best knowledge of GranCare, there are no transfer pricing agreements made
by or on behalf of GranCare or any of its Subsidiaries with any taxation
authority; (xii) no assets of GranCare or any of its Subsidiaries is held in
an arrangement for which partnership Tax Returns are being filed and neither
GranCare nor any of its Subsidiaries is a partner in any partnership; (xiii)
neither GranCare nor any of its Subsidiaries owns any interest in any
"controlled foreign corporation" (within the meaning of Section 957 of the
Code), "passive foreign investment company" (within the meaning of Section
1296 of the Code) or other entity the income of which is required to be
included in the income of GranCare or such Subsidiary; (xiv) neither GranCare
nor any of its Subsidiaries has made an election under Section 341(f) of the
Code; and (xv) neither GranCare nor any of its Subsidiaries is obligated to
make any payments that would constitute excess parachute payments within the
meaning of Section 280G of the Code.
Section 4.27 Employee Benefit Plans; ERISA. (a) There are no "employee
pension benefit plans" as defined in Section 3(2) of ERISA covering employees
(or former employees) employed in the United States, maintained or contributed
to by GranCare or any of its Subsidiaries or any of their ERISA Affiliates, or
to which GranCare or any of its Subsidiaries or any of their ERISA Affiliates
contributes or is obligated to make payments thereunder or otherwise may have
any liability ("GranCare Pension Benefit Plans").
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(b) GranCare has delivered or made available to Vitalink true and complete
copies of all "welfare benefit plans" (as defined in Section 3(1) of ERISA)
covering employees (or former employees) employed in the United States,
maintained or contributed to by GranCare or any of its Subsidiaries (other
than fully insured welfare benefit plans that will be assumed by SNFCo)
("GranCare Welfare Plans"), all multiemployer plans (as defined in Section
3(37) of ERISA) covering employees (or former employees) employed in the
United States to which GranCare or any of its Subsidiaries or any of their
ERISA Affiliates is required to make contributions or otherwise may have any
liability, and, to the extent covering employees (or former employees)
employed in the United States, all stock bonus, stock option, restricted
stock, stock appreciation right, stock purchase, bonus, incentive, deferred
compensation, severance and vacation plans maintained or contributed to by
GranCare or a Subsidiary of GranCare.
(c) GranCare and each of its Subsidiaries, and each of the GranCare Pension
Benefit Plans and GranCare Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(d) All contributions to, and payments from, the GranCare Pension Benefit
Plans which are required to have been made in accordance with the GranCare
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section
412 of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(e) The GranCare Pension Benefit Plans intended to qualify under Section 401
of the Code have been determined by the IRS to be so qualified and nothing has
occurred with respect to the operation of such GranCare Pension Benefit Plans
which would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
Such plans have been or will be amended on a timely basis to comply with
changes to the Code made by the Tax Reform Act of 1986 and other applicable
legislative, regulatory or administrative requirements.
(f) There are (i) no investigations pending, to the best knowledge of
GranCare, by any governmental entity involving the GranCare Pension Benefit
Plans or GranCare Welfare Plans, (ii) no termination proceedings involving the
GranCare Pension Benefit Plans and (iii) no pending or, to the best of
GranCare's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any GranCare Pension Benefit Plan or
GranCare Welfare Plan, against the assets of any of the trusts under any
GranCare Pension Benefit Plan or GranCare Welfare Plan or against any
fiduciary of any GranCare Pension Benefit Plan or GranCare Welfare Plan with
respect to the operation of such plan or asserting any rights or claims to
benefits under any GranCare Pension Benefit Plan or against the assets of any
trust under such plan, except for those which would not, singly or in the
aggregate, give rise to any liability which would reasonably be expected to
have a GranCare Material Adverse Effect, nor, to the best of GranCare's
knowledge, are there any facts which would give rise to any liability except
for those which would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect in the event of any such
investigation, claim, suit or proceeding.
(g) None of GranCare, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the GranCare Pension
Benefit Plans or GranCare Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA) which would be reasonably likely to result in a tax or penalty
on GranCare or any of its Subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA, except any such event which would not, singly or in
the aggregate, reasonably be expected to have a GranCare Material Adverse
Effect.
(h) Neither the GranCare Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of
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ERISA and the regulations thereunder) with respect to either thereof, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect nor has there been any
event with respect to any GranCare Pension Benefit Plan requiring disclosure
under Section 4063(a) of ERISA or any event with respect to any GranCare
Pension Benefit Plan requiring disclosure under Section 4041(c)(3)(C) of
ERISA, except any such event which would not, singly or in the aggregate,
reasonably be expected to have a GranCare Material Adverse Effect.
(i) Neither GranCare nor any Subsidiary of GranCare nor any ERISA Affiliate
has incurred any currently outstanding liability to the PBGC or to a trustee
appointed under Section 4042(b) or (c) of ERISA other than for the payment of
premiums, all of which have been paid when due. No GranCare Pension Benefit
Plan has applied for, or received, a waiver of the minimum funding standards
imposed by Section 412 of the Code. The information supplied to the actuary by
GranCare or any of its Subsidiaries for use in preparing the most recent
actuarial report for the GranCare Pension Benefit Plans is complete and
accurate in all material respects.
(j) Neither GranCare, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in
the United States.
(k) With respect to each of the GranCare Pension Benefit Plans and GranCare
Welfare Plans, true, correct and complete copies of the following documents
have been delivered or made available to Vitalink: (i) the current plans and
related trust documents, including amendments thereto, (ii) any current
summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither GranCare, any of its Subsidiaries, any organization to which
GranCare is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability for which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(m) None of the GranCare Welfare Plans maintained by GranCare or any of its
Subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of
a participant following termination of employment, except as may be required
under COBRA or except at the expense of the participant or the participant's
beneficiary. GranCare and each of its Subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(n) No liability under any GranCare Pension Benefit Plan or GranCare Welfare
Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which GranCare or any
of its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this Agreement will
not result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee of GranCare or any of its
Subsidiaries.
(p) GranCare has disclosed to Vitalink in Section 4.27 of the GranCare
Disclosure Statement each of GranCare's material Foreign Plans to the extent
the benefits provided thereunder are not mandated by the laws of the
applicable foreign jurisdiction. GranCare and each of its Subsidiaries and
each of such Foreign Plans are in compliance with applicable laws and all
required contributions have been made to such Foreign Plans, except where the
failure to comply or make contributions would not, singly or in the aggregate,
reasonably be expected to have a GranCare Material Adverse Effect.
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Section 4.28 Environmental Matters. (a) Except as would not, singly or in
the aggregate with all other such non-compliances, have a GranCare Material
Adverse Effect, GranCare and its Subsidiaries are, and within the period of
all applicable statutes of limitation have been, in compliance with all
applicable Environmental Laws, which compliance includes, without limitation,
the possession of all Environmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof, and
there are no circumstances of which GranCare is aware which may materially
prevent or interfere with compliance in the future. To GranCare's knowledge
GranCare and its Subsidiaries have all Environmental Authorizations necessary
for the conduct of the businesses of GranCare and its Subsidiaries as
currently conducted. Neither GranCare nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any such Environmental
Authorizations will be modified, suspended or revoked or cannot be renewed or
otherwise maintained in the ordinary course of business. To GranCare's
knowledge after due inquiry, the execution and delivery of this Agreement and
the consummation by GranCare of the Merger, the Distribution and the other
transactions contemplated hereby will not affect the validity or require the
transfer of any Environmental Authorizations associated with the Institutional
Pharmacy Business, and will not require any notification, registration,
reporting, filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices that, singularly or in the aggregate,
could reasonably be expected to have a GranCare Material Adverse Effect (i)
pending or, to the best knowledge of GranCare, threatened against GranCare or
any of its Subsidiaries, (ii) to GranCare's knowledge pending or threatened
against any person or entity whose liability for such Environmental Notice may
have been retained or assumed by or could reasonably be imputed or attributed
by law or contract to GranCare or any of its Subsidiaries, (iii) that to
GranCare's knowledge could subject GranCare to any material risk of liability,
loss or damages, or (iv) that to GranCare's knowledge could reasonably be
expected to require investigation, removal or remedial or corrective action by
GranCare or any of its Subsidiaries. Since May 31, 1996, neither GranCare nor
any of its Subsidiaries has received any Environmental Notice alleging that
GranCare or any of its Subsidiaries is subject to liability under any
Environmental Law or that GranCare or any of its Subsidiaries is not in full
compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or to the best knowledge of GranCare, investigation pending or
threatened under any Environmental Law (i) against GranCare or any of its
Subsidiaries, or (ii) to the knowledge of GranCare, against any person or
entity in connection with which liability could reasonably be imputed or
attributed by law or contract to GranCare or any of its Subsidiaries except
with respect to each of clause (i) and (ii) for such demands, claims, notices
of violation, notice or demand letters or requests for information which
singly or in the aggregate could not reasonably be expected to have a GranCare
Material Adverse Effect.
(d) No property or facility presently or to the knowledge of GranCare
formerly owned, operated or leased by GranCare or any of its present
Subsidiaries, or to the knowledge of GranCare any of its former Subsidiaries,
or any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated
under CERCLA, or on any comparable list established under any Environmental
Law, nor has GranCare or any of its Subsidiaries received any written
notification of potential or actual liability or any request for information
under CERCLA or any comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any Hazardous
Materials generated, used, owned, stored or controlled by GranCare, or to
GranCare's knowledge any of its Subsidiaries, or any of their respective
predecessors in interest, on, at or under any property presently or formerly
owned, leased or operated by GranCare, or to GranCare's knowledge its
Subsidiaries, or any predecessors in interest, and to GranCare's knowledge
there are no Hazardous Materials located in, at, on or under, or in the
vicinity of, any such facility or property, or at any other location, that (i)
could reasonably be expected to subject GranCare to a material risk of
liability, loss or damages, or result in the incurrence by GranCare of costs
under Environmental Laws, (ii) could
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reasonably be expected to form the basis of any Environmental Notice against
or with respect to GranCare or any of its Subsidiaries, or against any person
or entity whose liability for any Environmental Notice may have been retained
or assumed by or could be imputed or attributed by law or contract to GranCare
or any of its Subsidiaries or (iii) could reasonably be expected to require
investigation, removal or remedial or corrective action by GranCare or any of
its Subsidiaries, that in any case singularly or in the aggregate reasonably
could be expected to have a GranCare Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
GranCare's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other
disposal areas containing Hazardous Materials, located on, at or under
property owned, operated or leased by GranCare, any of its Subsidiaries or any
of their respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased
by GranCare or any of its Subsidiaries, and (iii) there is no asbestos
contained in or forming part of any building, building component, structure or
office space owned, operated or leased by GranCare or any of its Subsidiaries.
(g) To GranCare's knowledge no lien has been recorded under Environmental
Laws with respect to any properties, assets or facilities owned, operated or
leased by GranCare or any of its Subsidiaries.
(h) In accordance with Section 5.05, GranCare has given Vitalink and its
authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
GranCare or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by GranCare any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
Section 4.29 Directors, Officers and Compensation of Employees. There is set
forth in Section 4.29 of the GranCare Disclosure Statement a true and complete
list showing, to the extent they are expected to become directors, officers or
employees of Vitalink subsequent to the Effective Date, (a) the names and
addresses of all such directors and officers of GranCare and its Pharmacy
Subsidiaries and (b) the names of all salaried persons whose aggregate
compensation for purposes of Federal income tax reporting from GranCare and
its Pharmacy Subsidiaries in the fiscal year ended December 31, 1995 was, or
in the fiscal year ending December 31, 1996 is expected to be, U.S. $100,000
or more per year, together with a statement of the full amount expected to be
paid to such person for services in all capacities to be rendered in the
fiscal year ending December 31, 1996, and the basis thereof, separately
including the amounts paid or payable during such fiscal years, or expected to
be paid or payable, under bonus or incentive arrangements, if any.
Section 4.30 Banks. There is set forth in Section 4.30 of the GranCare
Disclosure Statement a true and complete list showing the account numbers and
name of each bank in which any of the Pharmacy Subsidiaries has an account or
safe deposit box and the names of all persons authorized to draw thereon or to
have access thereto.
Section 4.31 Disclosure. No representation or warranty by GranCare and no
statement or information relating to GranCare or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of GranCare
to Vitalink in connection herewith contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 4.32 Institutional Pharmacy Business. (a) Section 4.32 of the
GranCare Disclosure Statement lists each Pharmacy utilized by GranCare in
connection with its pharmacy business and indicates (i) the location of such
Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest. No other person or entity has any beneficial ownership or
interest in or to any such Pharmacy nor does any other person or entity have
any right or option to acquire any beneficial ownership or interest in or to
any such Pharmacy.
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(b) Section 4.32 of the GranCare Disclosure Statement lists all of the
customers to which GranCare and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts ("GranCare Pharmacy Contracts").
GranCare has not been informed and has no reason to believe that any GranCare
Pharmacy Contract will be terminated for or without cause. Each of the
Subsidiaries of GranCare involved in the Skilled Nursing Business listed on
Schedule 4.16 of the GranCare Disclosure Schedule has agreements for the
provision of institutional pharmacy services in form and substance equivalent
to the form of agreement set forth in Section 4.32 of the GranCare Disclosure
Schedule (each a "Pharmacy Agreement").
(c) GranCare has not violated, and is not now in violation of, the Medicare
and Medicaid fraud and abuse provisions of the Social Security Act, the Civil
Monetary Penalties Law of the Social Security Act, or any other Federal or
State law, statute, rule or regulation relating to GranCare and its
Subsidiaries.
(d) GranCare is duly licensed to provide pharmacy services in all states in
which it does business, and is also a participant in the Medicare program and
the Medicaid programs of the states listed in Section 4.08 of the GranCare
Disclosure Statement. GranCare is in compliance with all laws, rules and
regulations affecting or in connection with the Pharmacies, GranCare and their
licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) GranCare has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To
the best of GranCare's knowledge all such billings were for goods actually
provided, and at appropriate charges or costs, and GranCare has appropriate
documentation to support such billing requests.
Section 4.33 Fairness Opinion. GranCare has received the opinion of
PaineWebber Incorporated to the effect that as of the date hereof the
financial terms of the Merger are fair to GranCare's stockholders from a
financial point of view.
Section 4.34 Sufficiency of Assets. Subsequent to the Restructuring,
GranCare and its Pharmacy Subsidiaries will own, lease, hold or otherwise have
the right to use all of the assets, properties, Intellectual Property Rights
and GranCare Licenses which are material to the conduct of the Institutional
Pharmacy Business as presently conducted by GranCare and its Subsidiaries.
ARTICLE V.
COVENANTS
Section 5.01 Conduct of Business of GranCare. Except as contemplated by this
Agreement, the Distribution Agreement and the GranCare Disclosure Statement or
as expressly agreed to in writing by Vitalink, during the period from the date
of this Agreement to the Effective Time, GranCare will and will cause its
Subsidiaries each to conduct its operations according to its ordinary and
usual course of business consistent with past practice, and will use all
commercially reasonable efforts to preserve intact its business organization,
to keep available the services of its officers and employees and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will take no action which would
adversely affect its ability to consummate the Merger, the Distribution or the
other transactions contemplated hereby. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement,
the Distribution Agreement or the GranCare Disclosure Statement, prior to the
Effective Time, neither GranCare nor any of its Subsidiaries will, without the
prior written consent of Vitalink which shall not be unreasonably withheld:
(a) amend its Restated Articles of Incorporation (or other applicable
charter document) or By-Laws, other than the charter and by-laws of SNFCo;
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(b) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of GranCare or its Subsidiaries or any securities
convertible into or exchangeable or exercisable for shares of any class of
capital stock of GranCare or its Subsidiaries, other than (i) pursuant to
and in accordance with the terms of GranCare Options outstanding on the
date hereof under the GranCare Option Plans listed in Section 4.15 of the
GranCare Disclosure Statement or (ii) except as set forth in Schedule
5.01(b) of the GranCare Disclosure Schedule;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries except as may be
necessary to consummate the Restructuring or the Distribution;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person except wholly owned Pharmacy
Subsidiaries in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person, other than indebtedness, obligations,
loans, advances or investments in any other person that are to be assigned
to and assumed by SNFCo prior to the Effective Time and as to which
GranCare will be relieved of liability with respect thereto prior to the
Effective Time;
(e) with respect to GranCare and its Pharmacy Subsidiaries, (i) increase
in any manner the compensation of any of its directors or officers, except
in the ordinary course of business and consistent with past practice or
increase in any manner the compensation of any of its other employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required, or enter into or agree to enter into any agreement or
arrangement with any of its past or present employees relating to any such
pension, retirement allowance or other employee benefit, except as required
under currently existing agreements, plans or arrangements; (iii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any of its past or present employees; (iv) except to the
extent permitted by the foregoing clause (i), enter into any contract,
agreement or understanding with any of its past or present directors or
officers; or (v) except in the ordinary course of business and consistent
with past practice or as may be required to comply with applicable law,
become obligated (other than pursuant to any new or renewed collective
bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or similar
plan, arrangement or policy which was not in existence on the date hereof,
including any bonus, incentive, deferred compensation, stock purchase,
stock option, stock appreciation right, health or group insurance,
severance pay, retirement or other benefit plan, agreement or arrangement,
or employment or consulting agreement with or for the benefit of any
person, or amend any of such plans or any of such agreements in existence
on the date hereof other than as contemplated by the Employee Benefits
Matters Agreement (as defined in the Distribution Agreement);
(f) except in the ordinary course of business and consistent with past
practice, as disclosed in Section 5.01(f) of the GranCare Disclosure
Statement or as otherwise expressly contemplated hereby or the Distribution
Agreement, with respect to GranCare and its Pharmacy Subsidiaries sell,
transfer, lease, license, pledge, mortgage, or otherwise dispose of, or
encumber, or agree to sell, transfer, lease, license, pledge, mortgage or
otherwise dispose of or encumber, any material properties, real, personal
or mixed;
(g) except as otherwise expressly contemplated hereby, with respect to
GranCare and its Pharmacy Subsidiaries enter into any other agreements,
commitments or contracts, except agreements, commitments or contracts for
the purchase, sale or lease of goods or services in the ordinary course of
business and consistent with past practice and having a term of no more
than one year;
(h) authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution,
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any acquisition of a material amount of assets or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or any
amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary course
of business and consistent with past practice except as expressly
contemplated by this Agreement or the Distribution Agreement;
(i) except as previously approved by GranCare prior to the date hereof
and as identified to Vitalink prior to the date hereof, authorize or commit
to make capital expenditures in excess of $200,000 for which GranCare or
any of its Pharmacy Subsidiaries would be responsible subsequent to the
Merger;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and following
written notice to Vitalink;
(k) maintain its books and records in a manner not in the ordinary course
of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any bad
debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business;
(o) make any changes in their prior practices of allocating interest,
corporate overhead, cost of legal, insurance and other staff functions or
other inter-company charges; (p) make any changes in their current cash
management practices; (q) cancel, compromise, settle or reduce any inter-
company accounts except by the payment of cash for the full amount thereof;
(r) permit any cash paid as the exercise price of outstanding GranCare
Options to be retained by SNFCo or any of its Subsidiaries;
(p) cancel any Pharmacy Agreement or amend, alter, waive or otherwise
modify the terms thereof; and
(q) agree to do any of the foregoing.
Section 5.02 Conduct of Business of Vitalink. Except as contemplated by this
Agreement, the Voting Agreement, the Shareholder Agreement (as hereinafter
defined) or the Vitalink Disclosure Statement or as expressly agreed to in
writing by GranCare, during the period from the date of this Agreement to the
Effective Time, Vitalink and its Subsidiaries will each conduct its operations
according to its ordinary and usual course of business consistent with past
practice, and will use all commercially reasonable efforts to preserve intact
its business organization, to keep available the services of its officers and
employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would adversely affect its ability to consummate the
Merger or the other transactions contemplated hereby. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or the Vitalink Disclosure Statement, prior to the Effective
Time, neither Vitalink nor any of its Subsidiaries will, without the prior
written consent of GranCare which shall not be unreasonably withheld:
(a) amend its Certificate of Incorporation (or other applicable charter
document) or By-Laws;
(b) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of Vitalink or its Subsidiaries or any securities
convertible into or exchangeable or exercisable for shares of any class of
capital stock of Vitalink or its Subsidiaries, other than pursuant to and
in accordance with the terms of the Vitalink Option Plans listed in Section
3.14 of the Vitalink Disclosure Statement;
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(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) 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
Vitalink in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person;
(e) (i) increase in any manner the compensation of any of its directors
or officers, except in the ordinary course of business and consistent with
past practice or increase in any manner the compensation of any of its
other employees; (ii) pay or agree to pay any pension, retirement allowance
or other employee benefit not required, or enter into or agree to enter
into any agreement or arrangement with any of its past or present employees
relating to any such pension, retirement allowance or other employee
benefit, except as required under currently existing agreements, plans or
arrangements; (iii) grant any severance or termination pay to, or enter
into any employment or severance agreement with, any of its past or present
employees; (iv) except to the extent permitted by the foregoing clause (i),
enter into any contract, agreement or understanding with any of its past or
present directors or officers; or (v) except in the ordinary course of
business and consistent with past practice or as may be required to comply
with applicable law, become obligated (other than pursuant to any new or
renewed collective bargaining agreement) under any new pension plan,
welfare plan, multiemployer plan, employee benefit plan, benefit
arrangement, or similar plan, arrangement or policy which was not in
existence on the date hereof, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right,
health or group insurance, severance pay, retirement or other benefit plan,
agreement or arrangement, or employment or consulting agreement with or for
the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof;
(f) except in the ordinary course of business and consistent with past
practice or as otherwise expressly contemplated hereby, sell, transfer,
lease, license, pledge, mortgage, or otherwise dispose of, or encumber, or
agree to sell, transfer, lease, license, pledge, mortgage or otherwise
dispose of or encumber, any material properties, real, personal or mixed;
(g) except as otherwise expressly contemplated hereby, enter into any
other agreements, commitments or contracts, except agreements, commitments
or contracts for the purchase, sale or lease of goods or services in the
ordinary course of business and consistent with past practice and having a
term of no more than one year;
(h) authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution, any
acquisition of a material amount of assets or securities, any disposition
of a material amount of assets or securities or any material change in its
capitalization, or any entry into a material contract or any amendment or
modification of any material contract or any release or relinquishment of
any material contract rights not in the ordinary course of business and
consistent with past practice except as expressly contemplated by this
Agreement;
(i) except as previously approved by the Board of Directors of Vitalink
prior to the date hereof and as identified to GranCare prior to the date
hereof, authorize or commit to make capital expenditures in excess of
$200,000;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and following
written notice to Vitalink;
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(k) maintain its books and records in a manner not in the ordinary course
of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any bad
debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business; or
(o) agree to do any of the foregoing.
Section 5.03 No Solicitation by GranCare. (a) GranCare agrees that, prior to
the Effective Time, it shall not, and shall not authorize or permit any of its
Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or
disclosing information) any merger, consolidation, other business combination
involving GranCare or its Subsidiaries (except to the extent such merger,
consolidation or other business combination relates exclusively to GranCare's
Skilled Nursing Business), acquisition of all or a substantial portion of the
assets or capital stock of GranCare and its Subsidiaries (except to the extent
such acquisition relates exclusively to GranCare's Skilled Nursing Business)
or inquiries or proposals concerning or which may reasonably be expected to
lead to, any of the foregoing (a "GranCare Acquisition Transaction") or
negotiate, explore or otherwise communicate in any way with any third party
(other than Vitalink or its affiliates) with respect to any GranCare
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. GranCare
shall immediately advise Vitalink of any inquiries or proposals relating to a
GranCare Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an unsolicited
written proposal for a GranCare Acquisition Transaction from a bona fide
financially capable third party, GranCare may furnish non-public information
to, and negotiate with, such third party only if (i) three business days'
written notice shall have been given to Vitalink; and (ii)(A) GranCare's Board
of Directors shall have been advised in writing by its investment banker that
such third party is financially capable of consummating a GranCare Acquisition
Transaction that would yield a higher value to GranCare's stockholders than
will the Merger, (B) GranCare's Board of Directors shall have been advised, by
the written opinion of outside counsel to GranCare, that any failure to
provide such non-public information to, or negotiate with, such party would be
inconsistent with GranCare's Board of Directors' fiduciary duties to the
stockholders of GranCare (in providing such opinion GranCare's counsel may
assume that California law is not materially different from Delaware law) and
(C) GranCare's Board of Directors in good faith, after weighing such advice,
determines that taking such action is more likely than not to lead to a
GranCare Acquisition Transaction with such third party that would yield a
higher value to GranCare's stockholders than will the Merger and that failing
to furnish such information, or to commence negotiations would be inconsistent
with the Board's fiduciary duties.
Section 5.04 No Solicitation by Vitalink. (a) Vitalink agrees that, prior to
the Effective Time, it shall not, and shall not authorize or permit any of its
Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or
disclosing information) any merger, consolidation, other business combination
involving Vitalink or its Subsidiaries, acquisition of all or any substantial
portion of the assets or capital stock of Vitalink and its Subsidiaries taken
as a whole, or inquiries or proposals concerning or which may reasonably be
expected to lead to, any of the foregoing (a "Vitalink Acquisition
Transaction") or negotiate, explore or otherwise communicate in any way with
any third party (other than GranCare or its affiliates) with respect to any
Vitalink
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Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. Vitalink
shall immediately advise GranCare of any inquiries or proposals relating to a
Vitalink Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an unsolicited
written proposal for a Vitalink Acquisition Transaction from a bona fide
financially capable third party, Vitalink may furnish non-public information
to, and negotiate with, such third party only if (i) three business days'
written notice shall have been given to GranCare; and (ii)(A) Vitalink's Board
of Directors shall have been advised in writing by its investment banker that
such third party is financially capable of consummating a Vitalink Acquisition
Transaction that would yield a higher value to Vitalink's stockholders than
will the Merger, (B) Vitalink's Board of Directors shall have been advised, by
the written opinion of outside counsel to Vitalink, that any failure to
provide such non-public information to, or negotiate with, such party would be
inconsistent with GranCare's Board of Directors' fiduciary duties to the
stockholders of Vitalink and (C) Vitalink's Board of Directors in good faith,
after weighing such advice, determines that taking such action is more likely
than not to lead to an Vitalink Acquisition Transaction with such third party
that would yield a higher value to Vitalink's stockholders than will the
Merger and that failing to furnish such information, or to commence
negotiations would be inconsistent with the Board's fiduciary duties.
Section 5.05 Access to Information. (a) From the date of this Agreement
until the Effective Time, GranCare will give Vitalink and its authorized
representatives (including counsel, environmental and other consultants,
accountants, auditors, and intellectual property counsel and agents)
reasonable access in light of the terms of this Agreement during normal
business hours to all facilities, personnel and operations and to all books
and records of GranCare and its Subsidiaries, will permit Vitalink to make
such inspections as it may reasonably require (including without limitation
any air, water or soil testing or sampling deemed necessary by it) and will
cause its officers and those of its Subsidiaries to furnish Vitalink with such
financial and operating data and other information with respect to the
businesses and properties of GranCare and its Subsidiaries as Vitalink may
from time to time reasonably request.
(b) From the date of this Agreement until the Effective Time, Vitalink will
give GranCare and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Vitalink and its Subsidiaries, will
permit GranCare to make such inspections as it may reasonably require
(including without limitation any air, water or soil testing or sampling
deemed necessary by them) and will cause its officers and those of its
Subsidiaries to furnish GranCare with such financial and operating data and
other information with respect to the businesses and properties of Vitalink
and its Subsidiaries as GranCare may from time to time reasonably request.
Section 5.06 Registration Statement and Proxy Statement. GranCare shall file
with the SEC as soon as is reasonably practicable after the date hereof the
SNFCo Registration Document and the Proxy Statement and Vitalink shall file
with the SEC the Vitalink Information Statement and the Registration Statement
in which the Proxy Statement shall be included. Vitalink and GranCare shall
use all commercially reasonable efforts to have the Registration Statement
declared effective by the SEC and the Proxy Statement and the Vitalink
Information Statement cleared by the staff of the SEC as promptly as
practicable. GranCare shall use all commercially reasonable efforts to have
the SNFCo Registration Document declared effective by the SEC. Vitalink shall
also take any action required to be taken under applicable state blue sky or
securities laws in connection with shares of Vitalink Common Stock to be
issued as Closing Consideration. Vitalink and GranCare shall promptly furnish
to each other all information, and take such other actions (including without
limitation using all commercially reasonable efforts to provide any required
consents of their respective independent auditors and investment banking
advisors), as may reasonably be requested in connection with any action by any
of them in connection with the preceding sentences of this Section 5.06.
Section 5.07 Commercially Reasonable Efforts; Other Actions. (a) Subject to
the terms and conditions provided in this Agreement and the Distribution
Agreement, Vitalink and GranCare shall use all commercially reasonable efforts
to take, or cause to be taken, all other actions and do, or cause to be done,
all other things
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necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Distribution Agreement, including, without limitation, (i) the filing
of Notification and Report Forms under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and using all commercially reasonable efforts to
respond as promptly as practicable to all inquiries received from the FTC or
the Antitrust Division for additional information or documentation, (ii) the
obtaining of all necessary consents, approvals or waivers, and (iii) the
lifting of any legal bar to the Merger or the Distribution. Vitalink shall not
take any action which would cause GranCare to fail to perform its obligations
hereunder or under the Distribution Agreement. GranCare shall not take any
action which would cause Vitalink to fail to perform its obligations hereunder
or under the Distribution Agreement.
(b) GranCare shall use all commercially reasonable efforts to cause to be
delivered to Vitalink a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to Vitalink and customary in scope
and substance for such letters in connection with similar registration
statements.
(c) Vitalink shall use all commercially reasonable efforts to cause to be
delivered to GranCare a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to GranCare and customary in scope
and substance for such letters in connection with similar registration
statements.
Section 5.08 Public Announcements. Before issuing any press release or
otherwise making any public statement with respect to the Merger, the
Distribution or any of the other transactions contemplated hereby, Vitalink
and GranCare will consult with, and obtain the consent of, each other as to
its form and substance and shall not issue any such press release or make any
such public statement prior to obtaining such consent, except as may be
required by law or pursuant to any order of any court or governmental agency,
tribunal or regulatory authority.
Section 5.09 Notification of Certain Matters. Each of GranCare and Vitalink
shall give prompt notice to the other party of any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by GranCare, Vitalink or any of
their respective Subsidiaries subsequent to the date of this Agreement and
prior to the Effective Time, which could be reasonably expected to have a
GranCare Material Adverse Effect or Vitalink Material Adverse Effect. Each of
GranCare and Vitalink shall give prompt notice to the other party of (a) any
notice or other communication from any third party alleging that the consent
of such third party is or may be required in connection with the Merger, the
Distribution or any other transactions contemplated by this Agreement or the
Distribution Agreement, or (b) any GranCare Material Adverse Effect or
Vitalink Material Adverse Effect.
Section 5.10 Indemnification. (a) Vitalink shall cause the Surviving
Corporation to indemnify, defend and hold harmless the present and former
directors and officers of GranCare against all losses, claims, damages,
expenses or liabilities arising out of actions or omissions or alleged actions
or omissions occurring at or prior to the Effective Time to the same extent
and on the same terms and conditions (including with respect to advancement of
expenses) permitted or required under applicable law and GranCare's Restated
Articles of Incorporation and By-Laws in effect at the date hereof.
(b) For a period of three years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by GranCare (provided
that the Surviving Corporation may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no
less advantageous) with respect to claims arising from facts or events which
occurred before the Effective Time; provided, however, that if the premiums
with respect to such insurance exceed 150% of the annual premiums paid as of
the date hereof by GranCare for such insurance, the Surviving Corporation
shall be obligated to purchase directors' and officers' liability insurance
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with the maximum coverage as can be obtained at an annual premium equal to
150% of the annual premiums paid by GranCare as of the date hereof.
Section 5.11 Expenses. Except as set forth in Section 10.05, Vitalink, on
the one hand, and GranCare, on the other hand, shall bear their respective
expenses incurred in connection with the Merger and the Distribution,
including, without limitation, the preparation, execution and performance of
this Agreement, the Distribution Agreement and the transactions contemplated
hereby and all fees and expenses of investment bankers, finders, brokers,
agents, representatives, counsel and accountants, except that expenses
incurred in printing, mailing and filing (including without limitation, SEC
filing fees, fees related to any state securities or "blue sky" laws and stock
exchange listing application fees) the Proxy Statement, the Vitalink
Information Statement, the SNFCo Reorganization Document and the Registration
Statement shall be shared equally by GranCare and Vitalink; provided, however,
that SNFCo will bear one half of the premiums associated with the directors'
and officers' insurance referred to in Section 5.10(b) hereof and all of
GranCare's legal fees and expenses and the fees and expenses associated with
obtaining the fairness opinion referred to in Section 4.33 hereof.
Section 5.12 Stock Exchange Listings. Vitalink shall use all commercially
reasonable efforts to have the Vitalink Common Stock to be issued in
connection with the Merger authorized for quotation on NASDAQ or listed on the
New York Stock Exchange subject to notice of issuance.
Section 5.13 GranCare and Subsidiary Actions. (a) GranCare shall not take or
omit to take, and shall not cause or permit any of its subsidiaries to take or
omit to take, any action which would cause a breach of any representation or
warranty of GranCare contained in this Agreement or the Distribution Agreement
such that the Closing condition set forth in Section 7.01 would not be
satisfied.
(b) GranCare shall not and shall not authorize or permit any of its
Subsidiaries or any of its Subsidiaries' directors, officers, employees,
agents or representatives to amend, modify, waive or withdraw any term of, the
Distribution Agreement prior to the Effective Time which amendment,
modification, waiver or withdrawal could, directly or indirectly, reasonably
be expected to have an adverse effect on the business, operations, assets,
condition (financial or otherwise) or prospects of the Surviving Corporation
following the Merger without the prior written consent of Vitalink.
Section 5.14 Vitalink and Subsidiary Actions. Vitalink shall not take or
omit to take, and shall not cause or permit any of its subsidiaries to take or
omit to take, any action which would cause a breach of any representation or
warranty of Vitalink contained in this Agreement such that the Closing
condition set forth in Section 8.01 would not be satisfied.
Section 5.15 Environmental Matters. (a) GranCare shall promptly provide
Vitalink with any Environmental Notices it receives and shall make all filings
and take all actions necessary to materially comply with all Environmental
Laws, including but not limited to those applicable to the Merger and other
non-routine transactions contemplated hereby. GranCare shall keep Vitalink
informed of all actions taken in connection with the foregoing and all such
actions shall be on terms and conditions satisfactory to Vitalink whose
consent to such actions shall not be unreasonably withheld.
(b) Vitalink shall promptly provide GranCare with any Environmental Notices
it receives and shall make all filings and take all actions necessary to
materially comply with all Environmental Laws, including but not limited to
those applicable to the Merger and other transactions contemplated hereby.
Vitalink shall keep GranCare informed of all non-routine actions taken in
connection with the foregoing and all such actions shall be on terms and
conditions satisfactory to GranCare whose consent to such actions shall not be
unreasonably withheld.
Section 5.16 Actions Regarding Outstanding Debt. Prior to the Effective
Time, GranCare agrees to use all commercially reasonable efforts to (i) call
for redemption all of the outstanding 6 1/2% Convertible
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Subordinated Debentures due 2003 (the "Debentures") that are issued and
outstanding immediately prior to the Effective Time in accordance with the
terms of the Indenture dated January 29, 1993 between GranCare and First
Fidelity Trust Company, New York (the "Indenture"), (ii) consummate a tender
offer (the "Tender Offer") for GranCare's outstanding 9 3/8% Senior
Subordinated Notes due 2005 (the "Notes") which Tender Offer shall include a
consent (the "Consent") to certain amendments to the Indenture, dated as of
September 15, 1995, between GranCare and Marine Midland Bank, governing the
Notes (the "Note Indenture") including a deletion of certain covenants and a
consent to the Restructuring and the Merger (including the assumption by the
Surviving Corporation of GranCare's obligations under the Notes and the Note
Indenture) as well as the other transactions contemplated hereby, which Tender
Offer and Consent shall be in form and substance reasonably satisfactory to
Vitalink, and (iii) obtain all necessary consents, approvals, waivers or other
agreements by the holders of other indebtedness of GranCare to the assignment
to and the assumption by SNFCo of such indebtedness at the time of the
Distribution.
ARTICLE VI.
CONDITIONS TO THE OBLIGATIONS OF VITALINK AND GRANCARE
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 6.01 Registration Statements. The Registration Statement and the
SNFCo Registration Statement shall have become effective in accordance with
the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement and the SNFCo Registration
Statement shall have been issued by the SEC and remain in effect. All
necessary state securities or blue sky authorizations for the Merger and the
Distribution shall have been received.
Section 6.02 Stockholder Approval. The approval of the Merger and the
Distribution, including the execution and performance of this Agreement, the
Distribution Agreement and all of the transactions contemplated hereby or
thereby shall be approved by a majority of the outstanding shares of GranCare
Common Stock cast at the Special Meeting or any adjournment thereof shall have
been obtained.
Section 6.03 Listings. The Vitalink Common Stock issuable in the Merger
shall have been authorized for quotation on NASDAQ or listed on the New York
Stock Exchange subject to official notice of issuance.
Section 6.04 Certain Proceedings. No writ, order, decree or injunction of a
court of competent jurisdiction or governmental entity shall have been entered
against Vitalink or GranCare which, and no proceedings therefor shall have
been threatened or commenced by any governmental entity which seek to,
prohibit or restrict the consummation of the Merger or the Distribution or
would otherwise restrict Vitalink's or the Surviving Corporation's exercise of
full rights to own and operate the Institutional Pharmacy Business of
GranCare.
Section 6.05 Consents and Approvals. All necessary consents and approvals
of, and notifications and disclosures to, and filings and registrations with,
any United States or any other governmental authority or any other third party
required for the consummation of the Merger and the other transactions
contemplated hereby (including without limitation any consents, approvals,
notifications, disclosures, filings and registrations required under any
Environmental Law) shall have been obtained except where failure to obtain
such consents or approvals would not, singly or in the aggregate with all such
other failures, have an Vitalink Material Adverse Effect, and any waiting
period applicable to the consummation of the Merger under the HSR Act shall
have expired or been terminated.
Section 6.06 Distribution. (i) The Distribution Agreement shall have been
approved by a majority of GranCare's shareholders at the Special Meeting; (ii)
the Distribution Agreement shall have been executed and
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shall be in full force and effect on and as of the Effective Time; and (iii)
the Distribution shall have been completed.
Section 6.07 Dissenting Shares. Holders of not more than 5% of the GranCare
Common Stock issued and outstanding as of the record date for the Special
Meeting shall have demanded payment pursuant to the provisions of Section 1300
of the California Act.
Section 6.08 Opinions. (a) GranCare and Vitalink shall have received
opinions of Powell, Goldstein, Frazer & Murphy and Cahill Gordon & Reindel,
reasonably acceptable to GranCare and Vitalink, to the effect that:
(i) the distribution of the SNFCo Common Stock will be tax-free for
federal income tax purposes to GranCare under Section 355(c)(1) of the Code
and to the stockholders of GranCare under Section 355(a) of the Code;
(ii) the Restructuring will be tax-free for federal income tax purposes
under Sections 361(a)l and 368(a)(1)(D) of the Code;
(iii) the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code; and
(iv) Vitalink and GranCare will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to the
Merger.
(b) The respective counsels of GranCare and Vitalink shall have each
delivered an opinion covering the matters set forth on Exhibit G hereto.
Section 6.09 Existing Indebtedness. The Debentures shall have been called
for redemption in accordance with the Indenture, GranCare shall have obtained
the Consent in form and substance reasonably satisfactory to GranCare and
Vitalink and GranCare shall have obtained the Consent and consummated the
Tender Offer at a price not in excess of $1,090 per $1,000 principal amount of
Notes.
ARTICLE VII.
CONDITIONS TO THE OBLIGATIONS OF VITALINK
The obligation of Vitalink to effect the Merger and to perform its other
obligations to be performed at or subsequent to the Closing shall be subject
to the fulfillment at or prior to the Closing of the following additional
conditions, any one or more of which may be waived by Vitalink:
Section 7.01 Representations and Warranties True. The representations and
warranties of GranCare contained herein and in the Distribution Agreement
(without regard to any materiality exceptions or provisos contained in this
Agreement or the Distribution Agreement) shall be true and correct in all
respects on the date of this Agreement, the date of the Distribution Agreement
and the Closing Date as though such representations and warranties were made
at and on such date, except (i) for those untruths or inaccuracies which would
not, singly or in the aggregate, reasonably be expected to have a GranCare
Material Adverse Effect and (ii) for changes expressly permitted or
contemplated by this Agreement or the Distribution Agreement.
Section 7.02 Performance. GranCare shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement and the Distribution Agreement to be performed or complied with
by it on or prior to the Closing Date except for those failures to so perform
or comply which would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect.
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Section 7.03 Certificates. GranCare shall furnish such certificates of its
officers to evidence compliance with the conditions set forth in Sections
7.01, 7.02 and 7.04 as may be reasonably requested by Vitalink.
Section 7.04 Material Adverse Change. There shall not have occurred since
December 31, 1995 any event, condition, change, occurrence or circumstance
which has had or is reasonably likely to have, singly or in the aggregate, a
GranCare Material Adverse Effect.
Section 7.05 Pharmacy Financial Statements. GranCare shall have delivered
audited financial statements of the Institutional Pharmacy Business audited by
GranCares existing independent auditors which financial statements do not
reflect (i) reductions in the carrying values of assets, or increases in the
carrying values of the liabilities, as at May 31, 1996, of the Institutional
Pharmacy Business on a pro forma basis, in the aggregate of more than
$2,000,000 as compared to such carrying values as shown on the balance sheet
of the Institutional Pharmacy Business as at May 31, 1996 included in the
GranCare Disclosure Statement, (ii) a decrease of more than $500,000 in
earnings before interest, taxes, depreciation and amortization (as such terms
are defined in generally accepted accounting principles consistently applied
by GranCare, "EBITDA") for the twelve-month period ending December 31, 1995,
or a decrease of more than $250,000 in the EBITDA for the five-month period
ending May 31, 1996, on a pro forma basis as compared to the EBITDAs for the
same periods shown on the unaudited statements of income included in the
GranCare Disclosure Statement.
Section 7.06 Auditors' Letter. Vitalink shall have received from GranCare's
independent auditors a letter dated the Closing Date confirming the matters
set forth in the letter contemplated by Section 5.07(b).
Section 7.07 Letter of Credit. Vitalink shall have received an irrevocable
standby letter of credit issued by a bank reasonably satisfactory to Vitalink
as support for Vitalink entering into a guarantee arrangement concerning
Health and Rehabilitation Properties Trust in an amount of not less than
$15,000,000 which letter of credit shall be in form and substance satisfactory
to Vitalink.
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
The obligations of GranCare under this Agreement to effect the Merger shall
be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by
GranCare:
Section 8.01 Representations and Warranties True. The representations and
warranties of Vitalink contained herein (without regard to any materiality
exceptions or provisos therein) shall be true and correct in all material
respects on the date of this Agreement and the Closing Date as though such
representations and warranties were made at and on such date, except (i) for
those untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect and (ii)
for changes permitted or contemplated by this Agreement.
Section 8.02 Performance. Vitalink shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be performed or complied with by it on or prior to the
Closing Date except for those failures to so perform or comply which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect.
Section 8.03 Certificates. Vitalink shall furnish such certificates of its
officers to evidence compliance with the conditions set forth in Sections
8.01, 8.02 and 8.04 as may be reasonably requested by GranCare.
Section 8.04 Material Adverse Change. There shall not have occurred since
May 31, 1996 any event, condition, change, occurrence or circumstance which
has had or is reasonably likely to have, singly or in the aggregate, an
Vitalink Material Adverse Effect.
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Section 8.05 Shareholders Agreement. Parent and Vitalink shall have executed
the Shareholder's Agreement in the form attached hereto as Exhibit D and each
such party shall have performed and complied with its obligations under the
Shareholders Agreement.
Section 8.06 Auditors' Letter. GranCare shall have received from Vitalink's
independent auditors a letter dated the Closing Date confirming the matters
set forth in the letter contemplated by Section 5.07(c).
ARTICLE IX.
CLOSING
Section 9.01 Time And Place. Subject to the provisions of Articles VI, VII,
VIII and X, the closing of the Merger (the "Closing") shall take place at the
offices of Cahill Gordon & Reindel, as soon as practicable but in no event
later than 9:30 A.M., local time, on the first business day after the date on
which each of the conditions set forth in Articles VI, VII and VIII have been
satisfied or waived by the party or parties entitled to the benefit of such
conditions; or at such other place, at such other time, or on such other date
as Vitalink and GranCare may mutually agree. The date on which the Closing
actually occurs is herein referred to as the "Closing Date."
Section 9.02 Filings at the Closing. Subject to the provisions of Articles
VI, VII, VIII and X hereof, GranCare, and Vitalink shall cause to be executed
at the Closing the Certificate of Merger and the Certified Agreement and shall
cause the Certificate of Merger to be filed and recorded in accordance with
the applicable provisions of the Delaware Act and shall cause the Certified
Agreement to be filed in accordance with the applicable provisions of the
California Act and shall take any and all other lawful actions and do any and
all other lawful things necessary to cause the Merger to become effective.
ARTICLE X.
TERMINATION AND ABANDONMENT
Section 10.01 Termination. This Agreement may be terminated and the Merger
may be abandoned any time prior to the Effective Time, whether before or after
approval by the stockholders of GranCare:
(a) by mutual consent of the Boards of Directors of Vitalink and
GranCare;
(b) by either Vitalink or GranCare if, without fault of such terminating
party, the Merger shall not have been consummated on or before December 31,
1996, which date may be extended by mutual consent of the parties hereto;
(c) by either Vitalink or GranCare, if any court of competent
jurisdiction in the United States or other governmental body in the United
States shall have issued an order (other than a temporary restraining
order), decree or ruling or taken any other action restraining, enjoining
or otherwise prohibiting the Merger or the Distribution, and such order,
decree, ruling or other action shall have become final and nonappealable;
or
(d) by either Vitalink or GranCare, if the approval of a majority of the
outstanding shares of GranCare Common Stock cast at the Special Meeting or
any adjournment thereof is not obtained with respect to each of the Merger
and the Distribution.
Notwithstanding anything contained in clause (b) of this Section 10.01, in
the event the Registration Statement or the SNFCo Registration Document has
not been declared effective by the SEC by November 1, 1996, then the date
referred to in clause (b) of this Section shall be automatically extended for
a period of two months from the later of the declaration of effectiveness by
the SEC of the Registration Statement or SNFCo Registration Document but in no
event shall such date be extended to a date later than three months from the
date referenced in clause (b) of this section.
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Section 10.02 Termination by Vitalink. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of Vitalink,
at any time prior to the Effective Time, before or after the approval by the
stockholders of Vitalink, if (a) GranCare shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles
I and V of this Agreement to be complied with or performed by GranCare at or
prior to such date of termination, (b) there exists a breach or breaches of
any representation or warranty of GranCare contained in this Agreement or the
Distribution Agreement such that the Closing condition set forth in Section
7.01 would not be satisfied; provided, however, that if such breach or
breaches are capable of being cured prior to the Effective Time, such breaches
shall not have been cured within 15 calendar days of delivery to GranCare of
written notice of such breach or breaches, (c) GranCare shall have furnished
or disclosed non-public information to, or commenced negotiations with, a
third party with respect to a GranCare Acquisition Transaction or shall have
resolved to do either of the foregoing and publicly disclosed such resolution,
(d) the Board of Directors of GranCare shall have withdrawn, changed, modified
in any manner or taken action inconsistent with its recommendation of the
Distribution Agreement, the Distribution, this Agreement, the Merger or the
other transactions contemplated hereby or thereby or shall have resolved to do
any of the foregoing and publicly disclosed such resolution; or (e) a
definitive agreement with respect to an Vitalink Business Combination
Transaction (as hereinafter defined) shall have been negotiated and Vitalink's
Board of Directors (i) shall have been advised (A) in writing by its
investment banker that such Vitalink Business Combination Transaction (as
hereinafter defined) would yield a higher value to Vitalink's stockholders
than would the Merger and the other party to such agreement is financially
capable of consummating such Vitalink Business Combination Transaction (as
hereinafter defined) and (B) by the written opinion of outside counsel to
Vitalink that failure to terminate this Agreement would be inconsistent with
such Board's fiduciary duties to the stockholders of Vitalink, and (ii) after
weighing such advice, shall determine in good faith that failure to terminate
this Agreement would be inconsistent with such Board's fiduciary duties;
provided, however, that five business days prior written notice shall have
been given to GranCare (which notice shall include the material terms and
conditions and financing arrangements of, and the identity of the third party
proposing, the Vitalink Business Combination Transaction (as hereinafter
defined)) and that prior to terminating this Agreement Vitalink shall have
made all the Vitalink Payments required by the terms of Section 10.05(c)
hereof.
Section 10.03 Termination by GranCare. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of GranCare, by action of the Board of
the Directors of GranCare, if (a) Vitalink shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles
I and V of this Agreement to be complied with or performed by Vitalink at or
prior to such date of termination, (b) there exists a breach or breaches of
any representation or warranty of Vitalink contained in this Agreement such
that the Closing condition set forth in Section 8.01 would not be satisfied;
provided, however, that if such breach or breaches are capable of being cured
prior to the Effective Time, such breaches shall not be cured within 15
calendar days of delivery to Vitalink of written notice of such breach or
breaches, (c) Vitalink shall have furnished or disclosed non-public
information to, or commenced negotiations with, a third party with respect to
a Vitalink Acquisition Transaction or shall have resolved to do either of the
foregoing and publicly disclosed such resolution or (d) the Board of Directors
of Vitalink shall have withdrawn, changed, modified in any manner or taken
action inconsistent with its recommendation of the Distribution Agreement, the
Distribution, this Agreement, the Merger or the other transactions
contemplated hereby or thereby or shall have resolved to do any of the
foregoing and publicly disclosed such resolution, (e) a definitive agreement
with respect to a GranCare Business Combination Transaction (as hereinafter
defined) shall have been negotiated and GranCare's Board of Directors (i)
shall have been advised (A) in writing by its investment banker that such
GranCare Business Combination Transaction (as hereinafter defined) could yield
a higher value to GranCare's stockholders than will the Merger and the other
party to such agreement is financially capable of consummating such GranCare
Business Combination Transaction (as hereinafter defined) and (B) by the
written opinion of outside counsel to GranCare that failure to terminate this
agreement would be inconsistent with the Board's fiduciary duties to the
stockholders of GranCare (in providing such opinion outside counsel to
GranCare may assume that California law is not materially different from
Delaware law), and (ii) after weighing such advice, shall determine in good
faith that failure to terminate this Agreement would be inconsistent with the
Board's fiduciary duties; provided, however, that five business
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days prior written notice shall have been given to Vitalink (which notice
shall include the material terms and conditions, and financing arrangements
of, and the identity of the third party proposing, the GranCare Business
Combination Transaction (as hereinafter defined)) and that prior to
terminating this Agreement GranCare shall have made all the GranCare Payments
required by the terms of Section 10.05(b) hereof, or (f) Parent shall have
breached its obligations pursuant to Section 1.2 of the Voting Agreement.
Section 10.04 Procedure for Termination. In the event of termination and
abandonment of the Merger by Vitalink or GranCare pursuant to this Article X,
written notice thereof shall forthwith be given to the other.
Section 10.05 Effect of Termination and Abandonment. (a) In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement,
except as provided in Section 5.11 and this Section 10.05 and except that
nothing herein shall relieve any party from liability for any breach of this
Agreement.
(b) In the event of (i) a termination of this Agreement pursuant to Section
10.01(b), (c) or (d) and if prior thereto any person shall have made a bona
fide proposal concerning a GranCare Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by Vitalink
pursuant to Section 10.02(a), (b), (c) or (d) or any termination of this
Agreement by GranCare pursuant to Section 10.03(e), then GranCare shall
promptly pay Vitalink by wire transfer of immediately available funds to an
account specified by Vitalink up to $2.5 million for all documented fees and
expenses incurred by Vitalink (including the fees and expenses of counsel,
accountants, consultants and advisors) in connection with this Agreement and
the transactions contemplated hereby. In the event of a termination of this
Agreement pursuant to Section 10.03(e), GranCare shall be obligated to pay
Vitalink an additional fee of $17.5 million (the "GranCare Termination
Payment") payable prior to and as a condition of such termination as follows:
(i) $7.5 million promptly by wire transfer of immediately available funds to
an account specified by Vitalink and (ii) $10 million by either, at GranCare's
discretion, (x) delivery to Vitalink of an irrevocable letter of credit for
$10 million or (y) deposit of $10 million in immediately available funds to an
escrow, in the case of each of clause (x) and (y) on terms satisfactory to
Vitalink with payment of such $10 million to be made to Vitalink in
immediately available funds immediately prior to and as a condition of
effecting the GranCare Business Combination Transaction contemplated by such
definitive agreement (the amount of such payments and the manner specified
herein for making such payments, the "GranCare Payments"). To the extent a
GranCare Termination Payment has not already become payable and been paid and
if, prior to any termination pursuant to Section 10.01(b), (c) or (d) or
10.02(a), (b), (c) or (d), any person shall have submitted a bona fide
proposal concerning a GranCare Business Combination Transaction and within
eighteen months after the termination of this Agreement, GranCare or any of
its Subsidiaries proposes to enter into a definitive agreement with a third
party with respect to a GranCare Business Combination Transaction or a
GranCare Business Combination Transaction is proposed to be effected, then
GranCare, prior to entering into any such definitive agreement or any such
GranCare Business Combination Transaction being effected, shall be obligated
to pay Vitalink an additional fee of $17.5 million payable as follows: (i) in
the case of the proposed execution of a definitive agreement for a GranCare
Business Combination Transaction, prior to and as a condition of entering into
such definitive agreement, GranCare shall have made all the GranCare Payments
and (ii) in the case of a GranCare Business Combination Transaction proposed
to be effected without any agreement, prior to and as a condition of effecting
such GranCare Business Combination Transaction, GranCare shall promptly pay
Vitalink $17.5 million by wire transfer of immediately available funds to an
account specified by Vitalink. As used in this Section 10.05, the term
"GranCare Business Combination Transaction" shall mean any of the following
involving GranCare or any Pharmacy Subsidiary that is material to the
business, results of operation, prospects or financial condition of the
Institutional Pharmacy Business taken as a whole: (1) any merger,
consolidation, share exchange, business combination or other similar
transaction (other than the Merger) including the Skilled Nursing Business;
(2) any sale, lease, exchange, transfer or other disposition of 25% or more of
the assets of GranCare (other than assets related to the Skilled Nursing
Business) and its Pharmacy Subsidiaries, taken as a whole, in a single
transaction or series of transactions; or (3) the acquisition by a person or
entity, or any "group" (as such term is defined under Section 13(d) of the
Exchange
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Act and the rules and regulations thereunder) of beneficial ownership of 33
1/3% or more of GranCare Common Stock, whether by tender offer, exchange offer
or otherwise.
(c) In the event of (i) a termination of this Agreement pursuant to Section
10.01(b), (c) or (d) and if prior thereto any person shall have made a bona
fide proposal concerning an Vitalink Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by GranCare
pursuant to Section 10.03(a), (b), (c), (d) or (f) or any termination of this
Agreement by Vitalink pursuant to Section 10.02(e), then Vitalink shall
promptly pay GranCare by wire transfer of immediately available funds to an
account specified by GranCare up to $2.5 million for all documented fees and
expenses incurred by GranCare (including the fees and expenses of counsel,
accountants, consultants and advisors) in connection with this Agreement, the
Distribution Agreement and the transactions contemplated hereby or thereby. In
the event of a termination of this Agreement pursuant to Section 10.02(e)
Vitalink shall be obligated to pay GranCare an additional fee of $17.5 million
(the "Vitalink Termination Payment") payable prior to and as a condition of
such termination as follows: (i) $7.5 million promptly by wire transfer of
immediately available funds to an account specified by GranCare, (ii) $10
million by either, at Vitalink's discretion, (x) delivery to GranCare of an
irrevocable letter of credit for $10 million or (y) deposit of $10 million in
immediately available funds to an escrow, in the case of each of clause (x)
and (y) on terms satisfactory to GranCare with payment of such $10 million to
be made to GranCare in immediately available funds immediately prior to and as
a condition of effecting the Vitalink Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "Vitalink Payments"). To
the extent an Vitalink Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c)
or (d) or 10.03(a), (b), (c), (d) or (f), any person shall have submitted a
bona fide proposal concerning an Vitalink Business Combination Transaction and
within eighteen months after the termination of this Agreement, Vitalink or
any of its Subsidiaries proposes to enter into a definitive agreement with a
third party with respect to a Vitalink Business Combination Transaction or a
Vitalink Business Combination Transaction is proposed to be effected, then
Vitalink, prior to entering into any such definitive agreement or any such
Vitalink Business Combination Transaction being effected, shall be obligated
to pay GranCare an additional fee of $17.5 million payable as follows: (i) in
the case of the proposed execution of a definitive agreement for an Vitalink
Business Combination Transaction, prior to and as a condition of entering into
such definitive agreement, Vitalink shall have made all the Vitalink Payments
and (ii) in the case of an Vitalink Business Combination Transaction proposed
to be effected without any agreement, prior to and as a condition of effecting
such Vitalink Business Combination Transaction, Vitalink shall promptly pay
GranCare $17.5 million by wire transfer of immediately available funds to an
account specified by GranCare. As used in this Section 10.05, the term
"Vitalink Business Combination Transaction" shall mean any of the following
involving Vitalink or any Subsidiary that is material to the business, results
of operation, prospects or financial condition of Vitalink and its
Subsidiaries taken as a whole: (1) any merger, consolidation, share exchange,
business combination or other similar transaction (other than the Merger); (2)
any sale, lease, exchange, transfer or other disposition of 25% or more of the
assets of Vitalink and its Subsidiaries, taken as a whole, in a single
transaction or series of transactions; or (3) the acquisition by a person or
entity, or any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) of beneficial ownership
of 33 1/3% or more of Vitalink Common Stock, whether by tender offer, exchange
offer or otherwise.
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ARTICLE XI.
DEFINITIONS
Section 11.01 Terms Defined in This Agreement. The following capitalized
terms used herein shall have the meanings ascribed in the indicated sections.
<TABLE>
<S> <C>
Affiliates................................................. 4.07
Agreement.................................................. First Paragraph
Amendment.................................................. 1.03
Antitrust Division......................................... 5.07
Average Market Value....................................... 2.04
California Act............................................. 1.01
CERCLA..................................................... 3.27
Certificate of Merger...................................... 1.02
Certificates............................................... 2.02
Certified Agreement........................................ 1.02
Closing.................................................... 9.01
Closing Consideration...................................... 2.01
Closing Date............................................... 9.01
COBRA...................................................... 3.26
Code....................................................... 3.25
Consent.................................................... 5.16
Constituent Corporations................................... First Paragraph
Debenture.................................................. 5.16
Delaware Act............................................... 1.01
Dissenting Shares.......................................... 2.01
Distribution............................................... Recitals
Distribution Agreement..................................... Recitals
Effective Time............................................. 1.02
Environment................................................ 3.27
Environmental Authorizations............................... 3.27
Environmental Laws......................................... 3.27
Environmental Notice....................................... 3.27
ERISA...................................................... 3.26
ERISA Affiliate............................................ 3.26
Exchange Act............................................... 3.08
Exchange Ratio............................................. 2.01
Foreign Plan............................................... 3.26
FTC........................................................ 5.07
GranCare................................................... First Paragraph
GranCare Acquisition Transaction........................... 5.03
GranCare Balance Sheet..................................... 4.19
GranCare Business Combination Transaction.................. 10.05
GranCare Common Stock...................................... 2.01
GranCare Compensation and Benefit Plans.................... 4.03
GranCare Contract.......................................... 4.03
GranCare Disclosure Statement.............................. Article IV
GranCare Licenses.......................................... 4.08
GranCare Material Adverse Effect........................... 4.01
GranCare Option Plans...................................... 4.15
GranCare Options........................................... 4.15
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
GranCare Payments.......................................... 10.05
GranCare Pension Benefit Plans............................. 4.27
GranCare Permitted Encumbrance............................. 4.19
GranCare Pharmacy Contracts................................ 4.32
GranCare Preferred Stock................................... 4.15
GranCare SEC Reports....................................... 4.11
GranCare Termination Payment............................... 10.05
GranCare Welfare Plans..................................... 4.27
Hazardous Material......................................... 3.27
HSR Act.................................................... 3.03
Indenture.................................................. 5.16
Institutional Pharmacy Business............................ Recitals
Intellectual Property Rights............................... 3.24
IRS........................................................ 3.26
Merger..................................................... 1.01
Multiemployer Plan......................................... 3.26
NASDAQ..................................................... 2.02
Note Indenture............................................. 5.16
Parent..................................................... Recitals
PBGC....................................................... 3.26
Pharmacy Agreement......................................... 4.32
Pharmacy Subsidiaries...................................... 4.01
Proxy Statement............................................ 4.09
Registration Statement..................................... 3.08
Restructuring.............................................. Recitals
SEC........................................................ 3.08
Securities Act............................................. 3.08
Shareholders Agreement..................................... 8.02
Skilled Nursing Assets..................................... Recitals
Skilled Nursing Business................................... 4.01
Skilled Nursing Liabilities................................ Recitals
Special Meeting............................................ 1.05
SNFCo...................................................... Recitals
SNFCo Registration Document................................ 4.09
SNFCo Stock................................................ Recitals
Stockholder Approval....................................... 1.05
Subsidiary................................................. 12.09
Surviving Corporation...................................... 1.01
Tax Returns................................................ 3.25
Taxes...................................................... 3.25
Tender Offer............................................... 5.16
Vitalink................................................... First Paragraph
Vitalink Acquisition Transaction........................... 5.04
Vitalink Balance Sheet..................................... 3.18
Vitalink Business Combination Transaction.................. 10.05
Vitalink Common Stock...................................... 2.01
Vitalink Compensation and Benefit Plans.................... 3.03
Vitalink Contracts......................................... 3.03
Vitalink Disclosure Statement.............................. Article III
Vitalink Information Statement............................. 3.08
Vitalink Licenses.......................................... 3.07
Vitalink Material Adverse Effect........................... 3.01
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
Vitalink Option Plans............................................. 3.14
Vitalink Options.................................................. 3.14
Vitalink Payments................................................. 10.05
Vitalink Pension Benefit Plans.................................... 3.26
Vitalink Permitted Encumbrance.................................... 3.18
Vitalink Pharmacy Contracts....................................... 3.31
Vitalink Preferred Stock.......................................... 3.14
Vitalink SEC Reports.............................................. 3.10
Vitalink Termination Payment...................................... 10.05
Vitalink Welfare Plans............................................ 3.26
Voting Agreement.................................................. Recitals
</TABLE>
ARTICLE XII.
MISCELLANEOUS
Section 12.01 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified or supplemented only by written agreement
of Vitalink and GranCare at any time prior to the Effective Time with respect
to any of the terms contained herein; provided, however, that after this
Agreement is adopted by the stockholders of GranCare, no such amendment or
modification shall change the amount or form of the Closing Consideration.
Section 12.02 Waiver of Compliance; Consents. Any failure of Vitalink, on
the one hand, or GranCare, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by GranCare or Vitalink,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto,
such consent shall be given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section 12.02.
Section 12.03 Survivability; Investigations. The respective representations
and warranties of Vitalink and GranCare contained herein or in any
certificates or other documents delivered prior to or at the Closing shall not
be deemed waived or otherwise affected by any investigation made by any party
hereto and shall not survive the Closing.
Section 12.04 Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally, by next-day courier or mailed
by registered or certified mail (return receipt requested) with first class
postage prepaid, or telecopied with written machine generated confirmation of
receipt, to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice; provided, that
notices of a change of address shall be effective only upon receipt thereof).
Any such notice shall be effective upon receipt, if personally delivered or
telecopied, one day after delivery to a courier for next-day delivery, or
three days after mailing, if deposited in the U.S. mail, first class postage
prepaid.
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(a) if to GranCare, to
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Telecopy: (770) 698-8199
Attention: Evrett W. Benton, Esq.
with a copy to
Powell, Goldstein, Frazer & Murphy
16th floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy: (409) 572-5958
Attention: Richard H. Miller, Esq.
(b) if to Vitalink, to
Vitalink Pharmacy Services, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Telecopy: (301) 905-4007
Attention: James H. Rempe, Esq.
with a copy to
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Telecopy: (212) 269-5420
Attention: W. Leslie Duffy, Esq.
Section 12.05 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto without the prior written consent of the other parties,
nor is this Agreement intended to confer any rights or remedies hereunder upon
any other person except the parties hereto and, with respect to Section 5.10,
the officers and directors of GranCare.
Section 12.06 Governing Law. Except as the laws of the State of California
are by their terms applicable, this Agreement shall be governed by the laws of
the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
Section 12.07 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12.08 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall
only apply as to such party in the specific jurisdiction where such judgment
shall be made.
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Section 12.09 Interpretation. The article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; and (ii) the term "Subsidiary" of any specified
corporation shall mean any corporation of which a majority of the outstanding
securities having ordinary voting power to elect a majority of the board of
directors is directly or indirectly beneficially owned by such specified
corporation or any other person of which a majority of the equity interests
therein is, directly or indirectly, owned by such specified corporation.
Section 12.10 Entire Agreement. This Agreement, including the exhibits
hereto and the documents and instruments referred to herein (including the
Confidentiality Agreement dated May 26, 1996 between Vitalink and GranCare),
embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter. There are no representations, promises, warranties, covenants,
or undertakings, other than those expressly set forth or referred to herein
and therein.
IN WITNESS WHEREOF, Vitalink and GranCare have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
VITALINK PHARMACY SERVICES, INC.
By: /s/ Donald C. Tomasso
----------------------------------
Name: Donald C. Tomasso
Title: Chairman and Chief
Executive Officer
GRANCARE, INC.
By: /s/ Gene E. Burleson
----------------------------------
Name: Gene E. Burleson
Title: President
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