<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14D-9/A
(AMENDMENT NO. 1)
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(d)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
SUMMIT CARE CORPORATION
(NAME OF SUBJECT COMPANY)
SUMMIT CARE CORPORATION
(NAME OF PERSON FILING STATEMENT)
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COMMON STOCK, NO PAR VALUE PER SHARE
(TITLE OF CLASS OF SECURITIES)
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865910103
(CUSIP NUMBER OF CLASS OF SECURITIES)
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WILLIAM C. SCOTT
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
SUMMIT CARE CORPORATION
2600 W. MAGNOLIA ROAD
BURBANK, CALIFORNIA 91505-3031
(818) 841-8750
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICES AND COMMUNICATIONS ON BEHALF OF THE PERSON FILING THIS STATEMENT)
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Copies to:
BRADFORD P. WEIRICK, ESQ.
GIBSON DUNN & CRUTCHER LLP
333 SOUTH GRAND AVENUE
LOS ANGELES, CA 90071-3197
(213) 229-7000
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<PAGE>
ITEM 9. MATERIALS TO BE FILED AS EXHIBITS
<TABLE>
<C> <S>
(a)(1) Offer to Purchase, dated February 13, 1998.+
(a)(2) Letter of Transmittal (incorporated by reference to Exhibit (a)(2) to
Purchaser's Tender Offer Statement on Schedule 14D-1, dated February
13, 1998).*
(a)(3) Press release issued by the Company on February 9, 1998 (incorporated
by reference to Exhibit (a)(8) to Purchaser's Tender Offer Statement
on Schedule 14D-1, dated February 13, 1998).*
(a)(4) Opinion of Donaldson, Lufkin & Jenrette, dated February 6, 1998
(incorporated by reference to Annex A of the Offer to Purchase dated
February 13, 1998).*
(a)(5) Letter to Shareholders, dated February 13, 1998, from the Special
Committee of the Company's Board of Directors.*
(c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, among
Parent, Purchaser, the Company and Heritage Fund II, L.P.
(incorporated by reference to Exhibit (c)(1) to Purchaser's Tender
Offer Statement on Schedule 14D-1, dated February 13, 1998).*
</TABLE>
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* Filed with the Company's Schedule 14D-9 on February 13, 1998.
+ Filed herewith.
2
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SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete,
and correct.
SUMMIT CARE CORPORATION
/s/ Derwin L. Williams
By: _________________________________
Senior Vice President--Finance,
Chief Financial Officer and
Treasurer
Dated: February 27, 1998
3
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
(a)(1) Offer to Purchase, dated February 13, 1998.
(a)(2) Letter of Transmittal (incorporated by reference to Exhibit (a)(2) to
Purchaser's Tender Offer Statement on Schedule 14D-1, dated February
13, 1998).
(a)(3) Press release issued by the Company on February 9, 1998 (incorporated
by reference to Exhibit (a)(8) to Purchaser's Tender Offer Statement
on Schedule 14D-1, dated February 13, 1998).
(a)(4) Opinion of Donaldson, Lufkin & Jenrette, dated February 6, 1998
(incorporated by reference to Annex A of the Offer to Purchase dated
February 13, 1998).
(a)(5) Letter to Shareholders, dated February 13, 1998, from the Special
Committee of the Company's Board of Directors.
(c)(1) Agreement and Plan of Merger, dated as of February 6, 1998, among
Parent, Purchaser, the Company and Heritage Fund II, L.P.
(incorporated by reference to Exhibit (c)(1) to Purchaser's Tender
Offer Statement on Schedule 14D-1, dated February 13, 1998).
</TABLE>
<PAGE>
Exhibit (a)(1)
OFFER TO PURCHASE FOR CASH
ALL OUTSTANDING SHARES OF COMMON STOCK
OF
SUMMIT CARE CORPORATION
AT
$21.00 NET PER SHARE
BY
FV-SCC ACQUISITION CORP.
A WHOLLY OWNED SUBSIDIARY OF FOUNTAIN VIEW, INC.
THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT NEW YORK CITY
TIME, ON MARCH 13, 1998, UNLESS THE OFFER IS EXTENDED.
THE OFFER (AS DEFINED HEREIN) IS CONDITIONED UPON, AMONG OTHER THINGS, (I)
THERE BEING VALIDLY TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE
OFFER SUCH NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE PER SHARE (THE
"SHARES"), OF SUMMIT CARE CORPORATION (THE "COMPANY") WHICH, TOGETHER WITH THE
SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY FV-SCC ACQUISITION CORP. (THE
"PURCHASER"), WOULD CONSTITUTE NOT LESS THAN 90% OF THE SHARES THEN
OUTSTANDING (THE "MINIMUM CONDITION"), (II) ANY WAITING PERIOD UNDER THE HART-
SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976 APPLICABLE TO THE PURCHASE OF
THE SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED AND (III)
THE SATISFACTION OF THE OTHER CONDITIONS DESCRIBED IN "THE TENDER OFFER--
CERTAIN CONDITIONS OF THE OFFER." THE OFFER IS NOT SUBJECT TO ANY FINANCING
CONTINGENCY.
---------------
IN THE EVENT THE MINIMUM CONDITION IS NOT SATISFIED ON OR BEFORE THE TENTH
BUSINESS DAY AFTER ALL OTHER CONDITIONS TO THE OFFER HAVE BEEN SATISFIED (THE
"INITIAL EXPIRATION DATE"), (A) THE MINIMUM CONDITION SHALL BE AUTOMATICALLY
AMENDED TO MEAN THAT NUMBER OF SHARES (THE "REVISED MINIMUM NUMBER") WHICH,
TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD
EQUAL NOT LESS THAN 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE
INITIAL EXPIRATION DATE) SHALL HAVE BEEN VALIDLY TENDERED AND NOT WITHDRAWN
PRIOR TO THE EXPIRATION OF THE OFFER, AND (B) PURCHASER WILL AMEND THE OFFER
TO PROVIDE THAT PURCHASER WILL PURCHASE, ON A PRO RATA BASIS IN THE OFFER,
THAT NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR
INDIRECTLY BY PURCHASER, WOULD EQUAL 49.9% OF THE SHARES THEN OUTSTANDING
(CALCULATED AS OF THE INITIAL EXPIRATION DATE) (IT BEING UNDERSTOOD THAT
PURCHASER SHALL NOT IN ANY EVENT BE REQUIRED TO ACCEPT FOR PAYMENT, OR PAY
FOR, ANY SHARES IF LESS THAN THE REVISED MINIMUM NUMBER OF SHARES ARE TENDERED
PURSUANT TO THE OFFER AND NOT WITHDRAWN AT THE EXPIRATION OF THE OFFER).
---------------
THE BOARD OF DIRECTORS OF THE COMPANY, ACTING ON THE UNANIMOUS
RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS, BY THE
UNANIMOUS VOTE OF ALL DIRECTORS PRESENT (WITH WILLIAM C. SCOTT, WHO, UPON THE
CONSUMMATION OF THE MERGER, WILL BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE
OFFICER AND A SHAREHOLDER OF FOUNTAIN VIEW, INC. ("PARENT"), ABSENT DURING THE
VOTE), (A) HAS DETERMINED THAT THE MERGER AGREEMENT (AS DEFINED HEREIN) AND
THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (AS
DEFINED HEREIN), ARE FAIR TO AND IN THE BEST INTERESTS OF THE COMPANY AND THE
SHAREHOLDERS OF THE COMPANY, (B) HAS APPROVED AND ADOPTED THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER,
AND (C) RECOMMENDS ACCEPTANCE OF THE OFFER BY SHAREHOLDERS OF THE COMPANY.
---------------
<PAGE>
IMPORTANT
Any shareholder desiring to tender all or any portion of such shareholder's
Shares should either (a) complete and sign the Letter of Transmittal (or a
facsimile thereof) in accordance with the instructions set forth therein, have
such shareholder's signature thereon guaranteed if required by Instruction 1
thereto, mail or deliver the Letter of Transmittal (or such facsimile thereof)
and any other required documents to Harris Trust Company of New York, who is
acting as depositary in connection with the Offer ("the Depositary"), and
either deliver the Share Certificates (as defined herein) to the Depositary
along with the Letter of Transmittal (or a facsimile thereof) or deliver such
Shares pursuant to the procedure for book-entry transfer set forth in "THE
TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares" or (b)
request such shareholder's broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for such shareholder. A shareholder
having Shares registered in the name of a broker, dealer, commercial bank,
trust company or other nominee, must contact such broker, dealer, commercial
bank, trust company or other nominee if such shareholder desires to tender
such Shares.
Any shareholder who desires to tender Shares and whose Share Certificates
are not immediately available, or who cannot comply with the procedures for
book-entry transfer described in this Offer to Purchase on a timely basis, may
tender such Shares by following the procedures for guaranteed delivery set
forth in "THE TENDER OFFER--Procedures for Accepting the Offer and Tendering
Shares".
Questions and requests for assistance or for additional copies of this Offer
to Purchase, the Letter of Transmittal or other related materials may be
directed to the Information Agent or the Dealer-Manger at their respective
addresses and telephone numbers set forth on the back cover of this Offer to
Purchase.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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THE DEALER MANAGER FOR THE OFFER IS:
LOGO
FEBRUARY 13, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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INTRODUCTION............................................................ 1
SPECIAL FACTORS......................................................... 4
1. Background of the Offer and the Merger............................. 4
2. Recommendation of the Special Committee and the Company Board;
Fairness of the Offer and the Merger.............................. 16
3. Opinion of Financial Advisor to the Company........................ 18
4. Position of Purchaser and Parent Regarding Fairness of the Offer
and the Merger.................................................... 22
5. Purpose and Effects of the Offer and the Merger; Reasons for the
Offer and the Merger.............................................. 22
6. Plans for the Company after the Offer and the Merger............... 24
7. Rights of Shareholders in the Merger............................... 25
8. Interests of Certain Persons in the Offer and the Merger........... 25
9. The Merger Agreement and Related Agreements........................ 28
10. Certain U.S. Federal Income Tax Consequences....................... 42
THE TENDER OFFER........................................................ 44
1. Terms of the Offer; Expiration Date................................ 44
2. Acceptance for Payment and Payment for Shares...................... 46
3. Procedures for Accepting the Offer and Tendering Shares............ 47
4. Withdrawal Rights.................................................. 49
5. Price Range of Shares.............................................. 49
6. Effect of the Offer on the Market for the Shares; Exchange Listing
and Exchange Act Registration..................................... 50
7. Certain Information Concerning the Company......................... 51
8. Certain Information Concerning Purchaser and Parent................ 54
9. Source and Amount of Funds......................................... 55
10. Dividends and Distributions........................................ 58
11. Certain Conditions of the Offer.................................... 58
12. Certain Legal Matters; Regulatory Approvals........................ 59
13. Fees and Expenses.................................................. 62
14. Miscellaneous...................................................... 63
</TABLE>
<TABLE>
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SCHEDULE I DIRECTORS AND EXECUTIVE OFFICERS OF PARENT, PURCHASER AND HERITAGE
SCHEDULE II DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
</TABLE>
<TABLE>
<C> <S>
ANNEX A OPINION OF DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
ANNEX B TEXT OF CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
</TABLE>
i
<PAGE>
To the Holders of Shares of Common Stock of Summit Care Corporation:
INTRODUCTION
FV-SCC Acquisition Corp., a Delaware corporation ("Purchaser"), formed by
Fountain View, Inc., a Delaware corporation ("Parent"), hereby offers to
purchase all outstanding shares of common stock, no par value per share (the
"Shares"), of Summit Care Corporation, a California corporation (the
"Company"), at a price of $21.00 per Share, net to the seller in cash, without
interest (the "Offer Price"), upon the terms and subject to the conditions set
forth in this Offer to Purchase and in the related Letter of Transmittal
(which together constitute the "Offer").
Tendering shareholders will not be obligated to pay brokerage fees or
commissions, or, except as otherwise provided in Instruction 6 of the Letter
of Transmittal, stock transfer taxes with respect to the purchase of Shares by
Purchaser pursuant to the Offer. Purchaser will pay all charges and expenses
of Harris Trust Company of New York, who is acting as depositary in connection
with the Offer (the "Depositary"), Sutro & Co., who is acting as dealer-
manager in connection with the Offer (the "Dealer-Manager"), and Morrow & Co.,
Inc., who is serving as information agent in connection with the Offer (the
"Information Agent"), incurred in connection with the Offer. See "THE TENDER
OFFER--Fees and Expenses".
THE BOARD OF DIRECTORS OF THE COMPANY (THE "COMPANY BOARD"), ACTING ON THE
UNANIMOUS RECOMMENDATION OF A SPECIAL COMMITTEE OF INDEPENDENT DIRECTORS (THE
"SPECIAL COMMITTEE"), BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT (WITH
WILLIAM C. SCOTT ("MR. SCOTT"), WHO, UPON THE CONSUMMATION OF THE MERGER, WILL
BECOME CHAIRMAN OF THE BOARD, AN EXECUTIVE OFFICER AND A SHAREHOLDER OF
PARENT, ABSENT DURING THE VOTE), (A) HAS DETERMINED THAT THE MERGER AGREEMENT
(AS DEFINED HEREIN) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
OFFER AND THE MERGER (AS DEFINED HEREIN), ARE FAIR TO AND IN THE BEST
INTERESTS OF THE COMPANY AND THE SHAREHOLDERS OF THE COMPANY, (B) HAS APPROVED
AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY,
INCLUDING THE OFFER AND THE MERGER, AND (C) RECOMMENDS ACCEPTANCE OF THE OFFER
BY SHAREHOLDERS OF THE COMPANY.
The Company's financial advisor, Donaldson, Lufkin & Jenrette Securities
Corporation ("DLJ"), has delivered to the Company Board a written opinion,
dated February 6, 1998, to the effect that, as of such date and based upon and
subject to certain matters stated in such opinion, the $21.00 per Share cash
consideration to be received by the holders of Shares in the Offer and the
Merger was fair from a financial point of view to such holders. A copy of the
opinion of DLJ is set forth in Annex A hereto and is incorporated by reference
in the Solicitation/Recommendation Statement on Schedule 14D-9 filed by the
Company with the United States Securities and Exchange Commission (the
"Commission") in connection with the Offer (together with any exhibits,
annexes, amendments or supplements thereto, the "Schedule 14D-9"), which is
being mailed to Company shareholders herewith and should be read carefully in
its entirety. The opinion of DLJ is directed to the Company Board and relates
only to the fairness of the cash consideration to be received in the Offer and
the Merger by holders of Shares from a financial point of view, does not
address any other aspect of the Offer or the Merger or related transactions,
and is not intended to constitute, and does not constitute, a recommendation
to any shareholder as to whether such shareholder should tender Shares in the
Offer or how such shareholder should vote if a vote is held on the Merger. See
"SPECIAL FACTORS--Opinion of Financial Advisor to the Company".
THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (I) THERE BEING VALIDLY
TENDERED AND NOT WITHDRAWN PRIOR TO THE EXPIRATION OF THE OFFER SUCH NUMBER OF
SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY
PURCHASER, WOULD CONSTITUTE NOT LESS THAN 90% OF THE SHARES THEN OUTSTANDING
(THE "MINIMUM CONDITION"), (II) ANY WAITING PERIOD UNDER THE HART-SCOTT-RODINO
ANTITRUST IMPROVEMENTS ACT OF 1976 (THE "HSR ACT") APPLICABLE TO THE PURCHASE
OF
1
<PAGE>
THE SHARES PURSUANT TO THE OFFER HAVING EXPIRED OR BEEN TERMINATED, AND (III)
THE SATISFACTION OF THE OTHER CONDITIONS DESCRIBED IN "THE TENDER OFFER--
CERTAIN CONDITIONS OF THE OFFER". THE OFFER IS NOT SUBJECT TO ANY FINANCING
CONDITION.
IN THE EVENT THE MINIMUM CONDITION IS NOT SATISFIED ON OR BEFORE THE TENTH
BUSINESS DAY AFTER ALL OTHER CONDITIONS TO THE OFFER HAVE BEEN SATISFIED (THE
"INITIAL EXPIRATION DATE"), (A) THE MINIMUM CONDITION SHALL BE AUTOMATICALLY
AMENDED TO MEAN THAT A NUMBER OF SHARES (THE "REVISED MINIMUM NUMBER") WHICH,
TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR INDIRECTLY BY PURCHASER, WOULD
EQUAL NOT LESS THAN 49.9% OF THE SHARES THEN OUTSTANDING (CALCULATED AS OF THE
INITIAL EXPIRATION DATE) SHALL HAVE BEEN VALIDLY TENDERED AND NOT WITHDRAWN
PRIOR TO THE EXPIRATION OF THE OFFER, AND (B) PURCHASER WILL AMEND THE OFFER
TO PROVIDE THAT PURCHASER WILL PURCHASE, ON A PRO RATA BASIS IN THE OFFER,
THAT NUMBER OF SHARES WHICH, TOGETHER WITH THE SHARES THEN OWNED DIRECTLY OR
INDIRECTLY BY PURCHASER, WOULD EQUAL 49.9% OF THE SHARES THEN OUTSTANDING
(CALCULATED AS OF THE INITIAL EXPIRATION DATE) (IT BEING UNDERSTOOD THAT
PURCHASER SHALL NOT IN ANY EVENT BE REQUIRED TO ACCEPT FOR PAYMENT, OR PAY
FOR, ANY SHARES IF LESS THAN THE REVISED MINIMUM NUMBER OF SHARES ARE TENDERED
PURSUANT TO THE OFFER AND NOT WITHDRAWN AT THE EXPIRATION OF THE OFFER).
The Offer is being made pursuant to an Agreement and Plan of Merger dated as
of February 6, 1998 (the "Merger Agreement") among Parent, Purchaser, Heritage
Fund II, L.P., a Delaware limited partnership ("Heritage"), and the Company.
The Merger Agreement provides, among other things, for the making of the Offer
and further provides that, following the purchase of Shares pursuant to the
Offer, upon the terms and subject to the conditions set forth in the Merger
Agreement, and in accordance with the California General Corporation Law
("California Law") and the General Corporation Law of the State of Delaware
("Delaware Law"), Purchaser will be merged with and into the Company (the
"Merger"). Following consummation of the Merger, the separate corporate
existence of Purchaser will cease and the Company will continue as the
surviving corporation (the "Surviving Corporation") and will become a wholly-
owned subsidiary of Parent. At the effective time of the Merger (the
"Effective Time"), each Share issued and outstanding immediately prior to the
Effective Time (other than Shares owned by the Company or by any subsidiary of
the Company and each Share that is owned by Parent, Purchaser or any other
subsidiary of Parent, and other than Shares held by shareholders who have
demanded and perfected, and have not withdrawn or otherwise lost, appraisal
rights, if any, under California Law) will be canceled and converted
automatically into the right to receive $21.00 in cash, or any higher price
that may be paid per Share in the Offer, without interest (the "Merger
Consideration"). The Merger Agreement is more fully described in "SPECIAL
FACTORS--The Merger Agreement and Related Agreements". The consummation of the
Merger is subject to the satisfaction or waiver of certain conditions,
including the approval of the Merger Agreement by the requisite vote, if any,
of the shareholders of the Company.
Under California Law, if Purchaser acquires, pursuant to the Offer, the
Stock Option (as defined herein) or otherwise, at least 90% of the Shares then
outstanding, Purchaser will be able to approve the Merger Agreement and the
transactions contemplated thereby, including the Merger, without a vote of the
Company's shareholders. In such event, Parent, Purchaser and the Company have
agreed to take all necessary and appropriate action to cause the Merger to
become effective as soon as practicable after such acquisition, without a
meeting of the Company's shareholders.
Under California Law, the Merger may not be accomplished for cash paid to
the Company's shareholders if Purchaser or Parent owns directly or indirectly
more than 50% but less than 90% of the then outstanding shares unless either
all the shareholders consent or the Commissioner of Corporations of the State
of California approves, after a hearing, the terms and conditions of the
Merger and the fairness thereof. Accordingly, pursuant to the Merger
Agreement, the Company granted to Parent an irrevocable option (the "Stock
Option") to purchase up to 19.99% of the Shares outstanding immediately prior
to the exercise of the option at a purchase price of $21.00
2
<PAGE>
per Share. The Stock Option may be exercised by Parent only if, upon such
exercise, Purchaser and Parent would own directly or indirectly in the
aggregate 90% or more of the outstanding Shares. In that event, the Minimum
Condition would be satisfied and, following the purchase of Shares in the
Offer, Purchaser would be able to effect a short-form merger under California
Law, subject to the terms and conditions of the Merger Agreement. Purchaser
currently intends to effect a short-form merger if it is able to do so.
In the event the Minimum Condition is not satisfied on or before the tenth
business day after all other conditions to the Offer have been satisfied, (A)
the Minimum Condition shall be automatically amended to mean that number of
Shares which, together with the Shares then owned directly or indirectly by
Purchaser, would equal not less than 49.9% of the Shares then outstanding
(calculated as of the Initial Expiration Date) shall have been validly
tendered and not withdrawn prior to the expiration of the Offer, and (B)
Purchaser will amend the Offer to provide that Purchaser will purchase, on a
pro rata basis in the Offer, that number of Shares which, together with the
Shares then owned directly or indirectly by Purchaser, would equal 49.9% of
the Shares then outstanding (calculated as of the Initial Expiration Date) (it
being understood that Purchaser shall not in any event be required to accept
for payment, or pay for, any Shares if less than the Revised Minimum Number of
Shares are tendered pursuant to the Offer and not withdrawn at the expiration
of the Offer). If only the Revised Minimum Number of Shares are purchased by
Purchaser in the Offer, Purchaser would own upon consummation of the Offer
49.9% of the Shares then outstanding and would thereafter solicit the approval
of the Merger Agreement by a vote of the shareholders of the Company. Under
such circumstances, a significantly longer period of time will be required to
effect the Merger, although, as a practical matter, Parent may have the
ability to assure approval of the Merger. See "SPECIAL FACTORS--Purpose and
Effects of the Offer and the Merger; Reasons for the Offer and Merger".
The Merger Agreement provides that, promptly following the purchase of and
payment for Shares by Purchaser pursuant to the Offer, Purchaser shall be
entitled to designate up to such number of directors, rounded up to the next
whole number, on the Board as will give Purchaser representation on the Board
equal to the product of the total number of directors on the Board (giving
effect to any increase in the number of directors pursuant to the Merger
Agreement) and the percentage that the aggregate number of Shares so purchased
by Purchaser bears to the total number of Shares then outstanding (on a fully
diluted basis); provided, however, that notwithstanding the foregoing, until
the Effective Time of the Merger, Parent and Purchaser will not cause the
removal of John Brende, William Casey or Gary Massimino from the Board of
Directors of the Company and shall permit such persons to remain as members of
the Special Committee of the Board of Directors responsible for addressing on
behalf of the Company any issues that arise under the Merger Agreement between
the Company, on the one hand, and Parent and Purchaser, on the other hand. In
the Merger Agreement, the Company has agreed to use its reasonable best
efforts to cause Purchaser's designees to be so appointed or elected to the
Board.
The Company has advised Purchaser that as of the close of business on
February 11, 1998, 6,812,500 Shares were issued and outstanding and 909,500
Shares were reserved for issuance pursuant to outstanding stock options
granted by the Company to employees and directors ("Existing Stock Options").
As of the close of business on February 11, 1998, neither Parent nor Purchaser
owned any Shares. As a result, Parent believes that the Minimum Condition
would be satisfied if Purchaser acquired 6,131,250 Shares (assuming no
Existing Stock Options were exercised prior to the consummation of the Offer).
Except as otherwise set forth herein, the information concerning the Company
contained in this Offer to Purchase and in the attached Schedules and Annexes,
including financial information, has been furnished by the Company or has been
taken from or based upon publicly available documents and records on file with
the Commission and other public sources. The information contained in "SPECIAL
FACTORS--Opinion of Financial Advisor to the Company" has been furnished by
DLJ. Neither Purchaser nor Parent assumes any responsibility (i) for the
accuracy or completeness of the information concerning the Company furnished
by the Company or contained in such documents and records or for any failure
by the Company to disclose events which may have occurred or may affect the
significance or accuracy of any such information but which are unknown to
Purchaser nor Parent or (ii) for information furnished by DLJ.
THIS OFFER TO PURCHASE AND THE RELATED LETTER OF TRANSMITTAL CONTAIN
IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH
RESPECT TO THE OFFER.
3
<PAGE>
SPECIAL FACTORS
1. BACKGROUND OF THE OFFER AND THE MERGER.
At a meeting of the Board of Directors of the Company on June 4, 1997, the
Company Board examined a number of factors affecting the future value of the
Company and the strategic direction that the Company should take. Among the
factors considered were the consolidation trend in the long-term care
industry, the competitive conditions that exist in the states in which the
Company operates, the uncertainty concerning the effects of the federal
government's forthcoming Prospective Payment System and the Company's repeated
inability to meet its internal business plan.
The Company Board determined that it was in the best interest of the Company
and its shareholders to undertake a search for strategic alternatives to the
Company's then current strategy. The Company Board decided to engage an
investment banker to assist in the search for strategic alternatives and to
advise the Company Board. Following discussions conducted by management and
presentations to the Company Board, the investment banking firm of DLJ was
engaged on September 19, 1997.
Between September 29, 1997 and October 22, 1997, DLJ conducted extensive
interviews with senior management, engaged in customary due diligence
procedures, analyzed valuation parameters, prepared an information memorandum
describing the Company (the "Information Memorandum") and developed a list of
potential acquirors of the Company.
At the regular meeting of the Company Board on October 23, 1997, DLJ made a
presentation to the Company Board regarding DLJ's initial valuation estimate
for the Company and reviewed the strategic affiliation process. DLJ also
discussed with the Company Board other strategic and financial alternatives
available to the Company.
Between October 24, 1997 and November 17, 1997, DLJ contacted potential
acquirors, obtained confidentiality agreements from the potential acquirors
and distributed the Information Memorandum. On November 17, 1997, non-binding
indications of interest were due from potential acquirors. Between November 18
and December 12, 1997, conferences occurred between potential acquirors and
management of the Company, and due diligence investigations were undertaken
during such period by potential acquirors.
Of the 42 potential acquirors contacted by DLJ or who contacted DLJ with
regard to a potential transaction (of whom 23 were strategic acquirors and 19
were financial acquirors), the Information Memorandum and confidentiality
agreement were sent to 21 potential acquirors (including 11 strategic
acquirors and 10 financial acquirors). Non-binding indications of interest
were received from 5 potential acquirors (including 4 strategic acquirors and
one financial acquiror).
On October 24, 1997, Heritage submitted a letter to DLJ requesting
information regarding the Company, and signed a confidentiality agreement on
October 31. Heritage and Parent met with Mr. Scott and other members of the
Company's management in connection with the bid process on November 9, 1997.
On November 17, 1997, Heritage submitted a letter to DLJ expressing interest
in a transaction in which Parent, a company in which Heritage is a principal
stockholder, would acquire the Company for an approximate price per share in
the range of $17.50 to $19.00.
On December 15, 1997, DLJ delivered bid packages (containing guidelines and
a draft merger agreement) to the 5 remaining potential acquirors, with final
bids due on December 22, 1997. On or prior to December 22, 1997, three of the
potential acquirors indicated that they would not be making a final bid. One
of these three entities was Parent. On December 17, 1997, Parent had informed
DLJ that it was withdrawing its interest in the Company and would not be
submitting a final bid. Parent's and Heritage's decision to withdraw at that
time was based on the fact that a health concern had arisen with respect to
Mr. Robert Snukal ("Mr. Snukal") Parent's chief executive officer (which has
since been satisfactorily resolved), and Heritage and Parent did not feel that
it was in their best interests to proceed with a potential acquisition of the
Company with the uncertainty raised by this health issue.
4
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On November 5, 1997, Sutro & Co. ("Sutro") had signed a confidentiality
agreement. On November 10, following discussions between Sutro and a real
estate investment trust ("REIT"), Sutro had called Mr. Scott to explore his
interest in pursuing a potential leveraged recapitalization transaction around
existing management of the Company. Mr. Scott had expressed an interest in
discussing the matter further. Sutro and Mr. Scott did not submit an
indication of interest by the November 17, 1997 deadline and, at the time, did
not advise DLJ of Mr. Scott's discussions with Sutro. Although Sutro and Mr.
Scott were therefore not a part of the original group of 5 potential
acquirors, they continued to discuss a possible transaction. On December 12,
1997 Sutro and Mr. Scott called the Company's counsel, Gibson Dunn & Crutcher
LLP ("GD&C"), and the Company's accountants, Ernst & Young, to discuss the
concept of a recapitalization transaction. On December 19, 1997, the REIT
issued a commitment, subject to due diligence and certain other conditions,
for $162.5 million in financing for a leveraged recapitalization through a
sale/leaseback transaction. On December 22, 1997, Mr. Scott and Sutro met with
a Texas-based health care organization and received a letter expressing
interest in investing in a leveraged recapitalization of the Company, but
indicating that it would probably be unable to commence its due diligence
investigation until January 19, 1998. On or about December 22, 1997, Sutro and
Mr. Scott informed DLJ that they would not be submitting a bid for the
Company.
On December 23, 1997 at the regular meeting of the Company Board, DLJ made a
presentation to the Company Board concerning DLJ's activities on behalf of the
Company with regard to the strategic affiliation process. Mr. Scott informed
the Board at that meeting that he and Sutro would not be submitting a bid for
the Company. Representatives of GD&C made a lengthy presentation to the
Company Board regarding the fiduciary duties of directors in the strategic
affiliation process under California law. Representatives of DLJ described to
the Company Board the two final bids that had been received on December 22,
1997, copies of which were provided to the Company Board. One of the bids
contemplated a stock-for-stock merger in which shareholders would receive, for
each share of common stock of the Company, shares of stock of the acquiror
having a market value (based on recent trading) of approximately $22.57. The
other bid contemplated an all-cash tender offer/merger at a price of $22.00
per share. Extensive discussion and questioning of representatives of DLJ
ensued concerning the two bids, the methods used to value such bids and the
process employed with respect to the identification and consideration of
strategic alternatives. The Company Board directed that DLJ conduct further
discussions with the two final bidders in order to obtain further information
about the bidding entities, and to improve upon the price and terms offered by
each bidder. DLJ advised the Company Board that each bid was subject to the
completion of due diligence and each, by its terms, would remain outstanding
until the close of business on January 19, 1998. GD&C was directed to review
and comment on the amendments to the draft merger agreement that had been
included in the final bids by each entity. The Company Board was advised that,
because one of the final bidders had offered shares of its common stock,
rather than cash, substantial due diligence efforts would be required with
respect to that bidding entity; to that end, GD&C had prepared a list of
required due diligence information. DLJ advised the Company Board regarding
the bidder's financial condition (based on publicly available information),
its stock price trading history and its relative price volatility. Discussion
followed regarding the uncertainties surrounding any attempt to place a
valuation on the stock-for-stock proposal before having an opportunity to
perform diligence. The Company Board discussed the relative merits of a cash
transaction and a stock transaction and the prospects for further negotiating
the terms of each proposal.
Between December 23, 1997 and January 8, 1998, DLJ engaged in discussions
with the two bidders in order to improve the price and terms of their
respective bids. GD&C continued its legal evaluation of the two bids.
On January 9, 1998, the Company Board met and was advised that Company Board
member William Casey had indicated his interest in submitting a bid through
the strategic affiliation process. As a result, Mr. Casey was excused from all
Company Board discussions and information concerning the strategic affiliation
process. The Company Board was informed that DLJ had instructed Mr. Casey to
submit a bid by January 14, 1998, a date that balanced the Company's interest
in receiving as many valid bids as possible with the fact that final bids had
been due on December 22, 1997 and that the two bidders had been waiting for a
response since then. The Company Board was informed that Mr. Casey had been
advised regarding his duties concerning confidentiality of Company
information, bid information and Company Board strategy. Representatives of
GD&C discussed with the Company Board the appropriate process with respect to
the handling of a submission of a proposal from
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Mr. Casey. The Company Board was further informed of the state of negotiations
with the two existing bidders. The Company Board was informed that discussions
had been held on January 7, 1998 with the stock-for-stock bidder but that
substantial issues remained outstanding concerning price and price protection
mechanisms, and as a result, the bidder had decided not to allow the Company
to commence due diligence with respect to the bidder. Representatives of GD&C
presented to the Company Board GD&C's analysis, from a legal point of view, of
the two bids, with particular attention to the break-up fees proposed therein,
the proposed price protection mechanism in the stock-for-stock proposal and
the conditions under which the Company Board, in the exercise of its fiduciary
duties, could engage in discussions and negotiations with another bidder after
the signing of a definitive purchase agreement. The Company Board discussed
the likely timing of the two existing bids, and the Company Board adopted a
negotiating strategy with respect to each of the two bidders. With respect to
the bidder who had proposed an all-cash bid, the Company Board directed that
negotiations focus on increasing the price and accelerating the due diligence
process of the bidder. With respect to the bidder who had proposed a stock-
for-stock merger, the Company Board directed that negotiations focus on
increasing the exchange ratio of the number of shares of the bidder's stock to
be received for each share of Company stock, tightening the proposed purchase
price protection or "collar" mechanism, ensuring that substantial liquidated
damages would be paid to the Company if such bidder decided, as a result of
downward movement of its stock price, not to consummate the merger, reducing
the proposed break-up fee payable by the Company and permitting the Company
Board to consider and negotiate bids received after the signing of a
definitive merger agreement. The Company Board also expressed its continuing
concern that, given its inability to perform due diligence regarding the
stock-for-stock bidder, it had an insufficient basis upon which to judge the
value of the stock-for-stock proposal.
Between January 10, 1998 and January 16, 1998, such discussions were held
with each of the bidders. During this time, the bidder that had proposed an
all-cash transaction conducted extensive due diligence and indicated a
willingness to increase its bid to $22.25 per share. On or about January 15,
1998, the Company provided to the bidders its estimate of earnings for the
second fiscal quarter ended December 31, 1997. On January 16, 1998, the all-
cash bidder informed DLJ and GD&C that such bidder had determined to disengage
from its strategic partner in the bid, and to propose entering into a
relationship with Mr. Scott pursuant to which Mr. Scott would purchase an
equity position in the acquiring entity and serve as its chief executive
officer. In addition, the all-cash bidder informed DLJ that, principally as a
result of the Company's earnings estimate for the second quarter ended
December 31, 1997, such bidder was reducing its bid for the Company to $20.00
per share.
Upon being so informed by the all-cash bidder and after soliciting from Mr.
Scott his explanation of his potential relationship with such bidder, it was
determined that Mr. Scott could no longer represent the Company in its
negotiations with such bidder or with any other bidder, and that a special
meeting of the Company Board should be called forthwith at which the Company
Board should consider the appointment of a Special Committee of independent
directors to control negotiations on behalf of the Company thenceforth. GD&C
suggested to Mr. Scott that he retain his own counsel. GD&C also reminded Mr.
Scott that he had obtained confidential information concerning the bidders,
their bids, and the Company Board's negotiating strategy and, as a director
and executive officer of the Company, was under a strict fiduciary duty of
confidentiality not to disclose, in any way whatsoever, such confidential
information to the all-cash bidder or to any other person or entity.
The all-cash bidder was informed that, as a result of such bidder's
potential entry into a relationship with Mr. Scott, the Company Board would
consider the appointment of a Special Committee at a meeting to be held on
January 20, 1998 and that, if a Special Committee were then appointed, the
members of the Special Committee would likely require several days in order to
become more familiar with the details of the proposals and negotiations then
underway.
On January 15, 1998, Heritage received a call from a senior lender that
indicated that it was considering participating in a bid to acquire the
Company organized by Sutro with the potential involvement of Mr. Scott.
Heritage discussed the proposal with management of Parent, and they agreed
that they should consider re-entering the process of seeking to acquire the
Company. On the next day, Heritage and Parent met with Sutro and the senior
lender to discuss a proposed bid for the Company. In anticipation of
proceeding to make an offer, Heritage and Parent arranged for a meeting
between Mr. Snukal, whose health issue had been resolved, and Mr. Scott to
discuss the manner in which they would work together if the Company were
acquired by Parent.
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On January 20, 1998, the Company Board met to consider the status of the
affiliation process and to consider the appointment of a Special Committee.
William Casey attended the Company Board meeting and informed the Company
Board that he was no longer pursuing any proposal in connection with the
strategic affiliation process and stated that he would not be involved in any
future proposal. A brief summary of the strategic affiliation process since
the January 9, 1998 Company Board meeting was presented to the Company Board
by DLJ. DLJ stated that, with Mr. Scott present, it would only describe
matters already known to Mr. Scott. Representatives of GD&C discussed at
length the standards of fiduciary duty as they applied to the strategic
affiliation process and discussed the question of forming an independent
Special Committee to assume responsibility for the strategic affiliation
process and the functions and responsibility of such a committee. The members
of the Board concluded that Mr. Scott was ineligible to serve on a Special
Committee. Owing to Donald Amaral's relationship with an affiliate of one of
the bidders, he stated that he could not properly serve as a member of the
Special Committee. The Company Board adopted a resolution creating a Special
Committee, comprising Messrs. John Brende, William Casey and Gary Massimino,
the remaining members of the Company Board, and empowered it to consider
strategic affiliation alternatives, to control the process of negotiation of
one or more strategic affiliation agreements, and to recommend to the Company
Board which strategic affiliation alternative, if any, was in the best
interests of the Company and its shareholders. At that meeting, Mr. Scott and
DLJ informed the Company Board for the first time that Heritage, which
previously had dropped out of the bidding, had now expressed an interest in
re-entering the bidding process.
A Special Committee meeting was thereupon commenced. The Special Committee,
upon discussion, decided to exclude from its deliberations Mr. Frank Osen,
long-time principal counsel to the Company and Mr. Derwin Williams, the
Company's Chief Financial Officer. The Special Committee elected Mr. Massimino
as its Chairman. DLJ made a detailed presentation to the Special Committee on
the present state of negotiations; and the Special Committee thoroughly
questioned DLJ and discussed the negotiations to date. DLJ stated to the
Special Committee that the all-cash bidder had been provided with internal
Company information concerning the second quarter ended December 31, 1997 and,
in particular, the fact that earnings before interest, taxes, depreciation and
amortization were estimated to be approximately 8% below the Company's budget
for such period. DLJ further informed the Special Committee that on January
19, 1998 DLJ had engaged in a conversation with the all-cash bidder pursuant
to which such bidder confirmed that it had reduced its bid to $20.00 per
share. DLJ also presented to the Special Committee the status of negotiations
with the stock-for-stock bidder and indicated that DLJ had been unable to make
further progress with the stock-for-stock bidder on price protection
mechanisms and that, in any event, the bidder had not allowed the Company to
commence any financial or legal due diligence with respect to the bidder.
At that same meeting, DLJ also informed the Special Committee, and described
in substantial detail, the fact that Heritage had expressed a desire to re-
enter the bidding process at a price per share, in cash, of $23.00, that
Heritage had done a substantial amount of due diligence prior to its earlier
departure from the bidding process, but that Heritage had not yet been
provided with the estimates for the second fiscal quarter ended December 31,
1998. The Special Committee extensively discussed the current bids, and
directed that DLJ use all efforts to speed Heritage's process of submitting an
all-cash bid. In addition, the Special Committee directed that DLJ attempt to
increase the price offered by the existing all-cash bidder and to determine
the level of interest of the stock-for-stock bidder after such bidder had an
opportunity to review the Company's revised second fiscal quarter estimated
results.
The Special Committee also addressed the severance arrangements proposed by
management. It was reported that the Compensation Committee had substantially
cut back management's proposal, which had been reviewed by outside
consultants.
The Special Committee extensively questioned DLJ concerning alternatives to
selling the Company and discussed the advantages and disadvantages of each of
these alternatives. DLJ stated that a key limitation on the ability of the
Company successfully to undertake other alternatives to the sale of the
Company was the Company's capacity to increase its leverage for acquisitions
or a recapitalization.
7
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The Special Committee then addressed the process to be employed from January
20, 1998 forward. The Special Committee directed that Mr. Scott be advised not
to take calls from Heritage or others in his capacity as Chairman and Chief
Executive Officer; the Special Committee determined that representatives of
the Special Committee should be a party to any discussions between Mr. Scott
and Heritage or others, except as to any compensation arrangements between
such parties and Mr. Scott following the sale of the Company.
The Special Committee then readmitted Messrs. Scott, Williams and Osen and
closely questioned Messrs. Scott and Williams concerning the financial results
for the first and second quarters of the present fiscal year and the
forecasted results for the third and fourth quarters of the present fiscal
year, the expected effect of rate increases in Texas and of the recent
acquisition of the McAllan, Texas property. The Special Committee also
examined the sources of the Company's problems in the second quarter ended
December 31, 1997. The Special Committee further inquired concerning the
expected effect of the federal government's forthcoming Prospective Payment
System and the specifics of the timing of its implementation and its proposed
contents. The Special Committee also discussed with Messrs. Scott and Williams
strategic alternatives to a sale of the Company, with particular focus on a
possible transaction involving a Texas-based health care organization.
Mr. Scott advised the Special Committee that he soon would be meeting with
one or more representatives of Heritage to discuss possible compensation
arrangements should they desire that he continue to manage the Company if
Heritage were to purchase the Company. The Special Committee directed Mr.
Scott not to discuss with Heritage any matters other than such compensation
arrangements and/or equity investment arrangements and reminded him, in
particular, that the confidential information he possessed concerning the
other bidders and the Company Board's negotiating position must be held in
confidence with respect to Heritage or any other bidder.
The Special Committee unanimously adopted the following two resolutions:
RESOLVED, that all contacts between prospective bidders and the Company
shall be made through Gary Massimino, Chairman of the Special Committee,
Donaldson, Lufkin & Jenrette or Gibson, Dunn & Crutcher LLP, and no officer
of the Company shall have any contact with any prospective bidder without
the prior consent of the Special Committee;
FURTHER RESOLVED, with respect to the request of Mr. Scott to speak with
representatives of Heritage, the Special Committee approves such request so
long as Mr. Scott limits the discussions to issues of management roles
within the Company if Heritage were to acquire the Company.
The meeting between Messrs. Scott and Snukal occurred on January 21, 1998,
and covered Mr. Snukal's and Mr. Scott's understanding of the allocation of
responsibility and authority in a combined enterprise if Parent's bid were to
be successful. As a result of this meeting, in which it was provisionally
agreed that after the acquisition Mr. Scott would become Chairman of Parent,
and Mr. Snukal would remain Chief Executive Officer, Heritage and Parent then
proceeded to discuss a possible bid with various financing sources, including
several banks and REITs. During that period and for the following week, Parent
and Heritage engaged in various discussions with Mr. Scott regarding the
compensation and equity ownership that he would receive as a shareholder and
member of the continuing management of Parent after any acquisition of the
Company. They eventually agreed on a package, which is described in "SPECIAL
FACTORS--The Merger Agreement and Related Agreements--Management Agreement".
In light of the fact that DLJ was retained by the Company under Mr. Scott's
leadership and that GD&C had performed legal work for the Company in the past,
the Special Committee decided to retain special counsel to advise the Special
Committee regarding the retention of DLJ and GD&C. At the request of the
Special Committee, GD&C reported to Mr. Massimino the total amount that GD&C
had billed to the Company on all prior projects. On January 21, 1998, the
Special Committee consulted with a representative of another law firm
concerning the retention by the Special Committee of DLJ and GD&C. The Special
Committee, determined that, taking into consideration the fact that DLJ's work
for the Company consisted solely of work on the present project and the fact
that GD&C's prior work for the Company primarily involved securities filings
at the billing amounts provided to the Special Committee by GD&C, the fact
that GD&C had drafted the contracts included in the bid package and had
carefully analyzed the two present bids, and the interest of the Company and
its shareholders in moving expeditiously through the process, that it was in
the best interest of the Company and its shareholders to retain DLJ and GD&C
as financial and legal advisors, respectively, to the Special Committee.
8
<PAGE>
On January 22, 1998, the Special Committee met with representatives of DLJ
and GD&C. The Special Committee conducted a telephone conference with
representatives of Heritage, was informed by Heritage that Parent was
considering making a cash offer in the range of $23 per share, explored the
ability of Parent to finance its proposal, the likely timing of the receipt of
firm commitment letters from financing sources and the importance to the
Special Committee of limiting, in breadth and time limit, diligence conditions
to an offer from Parent. During the telephone conference, Heritage described
to the Special Committee and GD&C the role that Parent would have in the
proposed acquisition, with attention to Parent earnings, unused debt capacity
and possibility of synergies with the Company. Heritage stated that Parent
would submit a formal bid for the acquisition of the Company by the close of
business on January 23, 1998.
Heritage explained to the Special Committee the nature of its relationship
with Parent. Heritage explained that, on August 1, 1997, it had closed a
recapitalization of Parent, as a result of which it had acquired approximately
50% of the outstanding capital stock of Parent and Mr. Snukal and his family,
the prior owners of Parent, acquired the other 50%. Heritage stated that it
held approximately 65% of the economic interest in Parent.
Immediately following such conversation with Heritage, GD&C described to the
Special Committee its past relationship with Parent and Mr. Snukal and his
family, and indicated that, prior to the conversation, it had not been aware
that Parent was involved in the transaction. GD&C urged the Special Committee
to speak again to the representative of another law firm to seek his counsel
on whether it would be advisable for the Special Committee to continue the
retention of GD&C in light of the past representation by GD&C of Parent and
the Snukal family in connection with the transactions by which Heritage
acquired its interest in Parent. Representatives of GD&C and DLJ were excused
while the Special Committee spoke with the representative of another law firm.
Following such conversation, the representatives of GD&C and DLJ were
readmitted to the meeting. The Special Committee asked a number of questions
of GD&C regarding obtaining waivers of any potential conflict and the
operation of an ethical screen to be erected within GD&C between personnel
working on the Company's strategic affiliation process, and personnel who had
represented Parent and the Snukal family in the prior transactions with
Heritage. The Special Committee then determined that it was in the best
interest of the Company and its shareholders to continue the retention of
GD&C, and to waive any potential conflict of interest subject to the receipt
of a waiver of any potential conflict of interest by Heritage, Parent and Mr.
Snukal. The Special Committee discussed the most recently amended bid by the
all-cash bidder, which the bidder had stated was fully-financed, and the
timing of that bid. The Special Committee discussed the best strategy for
responding to the all-cash bidder and determined to meet on January 23, 1998
to reach a decision whether to make a counter proposal to the all-cash bidder,
and if so, at what price and to review and consider the bid expected to be
received on that date from Parent. The Special Committee instructed DLJ to
state to the all-cash bidder that the Special Committee had been formed only
two days previously, and that the formation of the Special Committee was owing
to the all-cash bidder's potential entry into an arrangement with Mr. Scott,
that the Committee would require some additional time in collecting more
information and in analyzing the available alternatives and that, as a result,
the Special Committee would likely not be in a position to respond to the all-
cash bidder on January 23, 1998.
The Special Committee discussed at some length the stock-for-stock bid, the
risks and concerns regarding the bidder's stock price and volatility and the
length of time that would be involved in performing due diligence regarding
the financial information and legal data with respect to such bidder.
Representatives of GD&C discussed with the Special Committee the proposed
amendments to the form of purchase agreement contained in the bid packages
that had been proposed by the two bidders; and a comparison was presented of
the relative advantages and disadvantages to the Company and its shareholders
of such proposed amendments. The Special Committee questioned DLJ and GD&C
concerning the advisability of a tender offer by a bidder followed by a
merger, as opposed to a merger transaction contingent upon a shareholder vote
at a special meeting. The Special Committee questioned DLJ at some length
concerning its analysis of a potential leveraged recapitalization of the
Company. The Special Committee particularly questioned DLJ concerning its
numerical assumptions. DLJ advised the Special Committee that, on the basis of
the analysis it had performed to that date, that such a leveraged
recapitalization was not likely to be close in value to the proposals for the
purchase of the Company
9
<PAGE>
currently being considered by the Special Committee. The Special Committee
then discussed the alternative of remaining independent and not engaging in a
leveraged recapitalization transaction. The Special Committee discussed steps
that could be taken to improve the Company's earnings and the risks and
uncertainties with respect thereto. DLJ described its analysis of the
uncertainty as to whether such steps could materially increase earnings
sufficiently in a meaningful time frame to approximate the value for
shareholders that would be created in the proposed transactions under
consideration by the Special Committee. DLJ also advised the Special Committee
that, after the specific provisions of the Prospective Payment System were
announced by the federal government, potential buyers would take account of
such System in valuing the Company; the results of such valuation were
described as being unpredictable, in that the specifics of the new Prospective
Payment System were then unknown. DLJ also stated that the multiple of
earnings applicable to companies in this sector had been declining since DLJ's
engagement in October 1997 through the present time. DLJ further discussed the
discount rate appropriate in the calculation of a value for the Company based
upon a discounted cash flow analysis. The Special Committee extensively
questioned DLJ regarding each of these matters and, in particular, its
numerical assumptions. The Special Committee was reminded by DLJ that Parent
had been given a deadline of January 23, 1998 to submit its bid.
On January 23, 1998 the Special Committee met to receive the report of DLJ
concerning negotiations with the all-cash bidder and to receive the Parent
bid. DLJ stated to the Special Committee that DLJ had been in contact with the
stock-for-stock bidder, but that such bidder had expressed its view that it
was not ready, at such time, to put forward a bid that reflected the estimated
results for the second quarter ended December 31, 1997 and that it was not in
a position to proceed with negotiations. DLJ advised the Special Committee
that the all-cash bidder had indicated a willingness to increase its bid to
$20.50 per share. The Special Committee discussed the timing of the response
to the all-cash bidder and the necessity of gaining as much time as possible
in the negotiations with the all-cash bidder if an offer from Parent were
forthcoming at a price in cash higher than that offered by the all-cash
bidder. During the meeting of the Special Committee, Parent submitted its bid
to acquire the Company for $23.00 per share, subject to due diligence
(estimated to take approximately 30 days), the receipt of financing and
mutually acceptable documentation. Although the Parent bid was for cash at a
price in excess of that offered by the all-cash bidder, the Special Committee
noted with disapproval that the bid contained a long diligence period during
which Parent had the option not to sign the transaction documents and yet not
pay any fees or expenses to the Company. The Special Committee also noted with
some disapproval that the Parent bid did not contemplate a tender offer, but
proposed a merger transaction that would be voted upon at a special meeting of
shareholders, which the Special Committee understood could involve a
substantial increase in the amount of time between signing of a definitive
agreement and the payment of consideration to the Company's shareholders.
On January 24, 1998 the Special Committee met to review in detail the Parent
bid, and to receive the analysis of DLJ and GD&C concerning the same.
Following extensive discussion and questioning, the Special Committee directed
DLJ to inform Parent that the Special Committee did not believe it could
favorably recommend a transaction with Parent unless the diligence period were
greatly shortened. The Special Committee also instructed DLJ to inform Parent
that the Special Committee might reach the conclusion that the competing all-
cash, fully financed bid might be accepted by the Special Committee absent
evidence of a financing commitment for the Parent bid and a significant
acceleration of timing. The Special Committee indicated that it would require
either firm commitment letters from all of Parent's proposed financing sources
or evidence sufficient to convince the Special Committee that such firm
commitments would be forthcoming promptly. The Special Committee also
instructed DLJ to contact representatives of the all-cash bidder to state that
the all-cash bidder's most recent proposal was at a price that the Special
Committee could recommend to the Company Board, assuming all other issues
concerning the definitive Agreement and Plan of Merger could be resolved. DLJ
so informed the all-cash bidder on January 24, 1998.
Between January 26 and January 29, 1998, extensive negotiations occurred
between representatives of the Special Committee and representatives of the
all-cash bidder and between representatives of the Special Committee and
Parent. In addition, both such bidders engaged in extensive due diligence
during such period. On January 26, 1998, the Special Committee met to discuss
the status of the two cash bids, including the information requests from the
two bidders, the timing of the process and the discussions with Parent
concerning its proposed transaction structure.
10
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On January 28, 1998, the Special Committee conducted a conference call with
representatives of the all-cash bidder, discussing the proposed price of
$20.50 per share, the status of the all-cash bidder's due diligence efforts,
and the commitment of such bidder to continue such efforts throughout the
weekend of January 31 and February 1, 1998 if necessary. The all-cash bidder
stated to the Special Committee that it was no longer engaged in any
discussions with Mr. Scott with respect to management issues and that it was
in the process of seeking a strategic partner concerning the management of the
Company. The bidder reconfirmed that its proposal was fully financed and not
subject to any financing contingencies. The Special Committee discussed the
timing of contract negotiations with the representatives of the all-cash
bidder and the remaining outstanding issues.
On January 28, 1998, the Special Committee also conducted a meeting with
representatives of Heritage, Parent, Sutro and a bank that was in the process
of considering providing financing for the transaction. The representatives of
Heritage and Parent made a presentation concerning the time schedule for the
completion of their diligence effort and their obtaining of committed
financing. The representatives of Heritage and Parent also discussed in some
detail their current financing plan. The representatives stated that a
condition subsequent to the entry into a definitive agreement was the
settlement of all outstanding issues concerning equity holdings and management
among Heritage and Messrs. Scott and Snukal. The representatives also
addressed the preference of Heritage and Parent for a traditional cash merger
transaction rather than a cash tender offer followed by a merger. The Special
Committee closely questioned the representative of the bank concerning the
likelihood of obtaining a firm commitment letter, the timing of the delivery
of such a letter, and the structuring of the proposed financing. The
representatives of Heritage and Parent described to the Committee their view
of the future of the Company in combination with Parent. The Special Committee
questioned the representatives of Heritage and Parent concerning the content
and timing of their additional due diligence process. An extensive discussion
occurred concerning the request of Heritage and Parent for reimbursement of
their costs and expenses in case the Company entered into a definitive
agreement with another party.
After representatives of Heritage, Parent, Sutro and such bank were excused,
the Special Committee discussed in detail the best strategy for dealing with
Heritage and Parent and the all-cash bidder, timing issues and certain issues
raised in the discussions with Heritage and Parent. The Committee directed DLJ
to make plain to Heritage and Parent that the Committee was pleased that
Heritage and Parent had greatly accelerated their diligence schedule and that
the Committee was pleased that Heritage, Parent and the bank had stated that
they all expected that all diligence would be completed and a firm commitment
letter would be in place from financing sources by February 6, 1998. The
Special Committee, however, instructed DLJ to inform Heritage and Parent that
the Special Committee could not accept as a condition subsequent the entry
into an agreement among Heritage and Messrs. Scott and Snukal concerning their
relative equity ownership and management roles in the combined companies. In
addition, DLJ was instructed to inform Heritage and Parent that a cash tender
offer/merger structure was the strong preference of the Special Committee and
that Heritage and Parent, if it hoped to succeed with its bid, would need to
agree to a tender offer structure and would need to accelerate its diligence
process and the process for obtaining a firm financing commitment letter.
On January 29, 1998, the Special Committee met to discuss the current status
of due diligence efforts by the two cash bidders, to discuss the contents of
the bids and the best strategy for dealing with the two bidders. The Special
Committee weighed the potential gain from accepting the higher cash price
offered by Heritage and Parent as against the risk of losing the fully-
financed cash bid from the all-cash bidder. The Committee determined that it
need make no decision on this matter unless and until the all-cash bidder
completed its diligence and presented the Special Committee with a deadline
for approving or rejecting its bid.
On January 30, 1998, the Special Committee again convened to discuss the
status of the two cash offers and the stock-for-stock offer. DLJ informed the
Special Committee that the stock-for-stock bidder was not prepared to renew
its bid and/or engage in negotiations at the present time. DLJ also informed
the Special Committee that it had been advised on the evening of January 29,
1998 that the all-cash bidder had decided to reduce the price it was willing
to pay for the stock of the Company by a material amount below $20.50 per
share. The Special Committee discussed these most recent developments, with a
focus on the strategic implications for negotiations with Heritage and Parent.
DLJ also informed the Special Committee that Heritage
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and Parent had requested the Committee's assurance that it would not recommend
a transaction with another bidder until February 6, 1998, because Heritage and
Parent were unwilling to invest the resources to put forward a fully-financed
cash offer unless they had some assurance that their expenses would be
reimbursed by the Company if the Company entered into a transaction with
another bidder before February 6, 1998.
On January 30, 1998, the Special Committee held a second conference and
invited Mr. Amaral to participate in part of the meeting in order to obtain
his advice regarding the process and strategy. Mr. Amaral briefly described
his ongoing relationship with an affiliate of the stock-for-stock bidder. The
Special Committee determined, following discussions with representatives of
GD&C and DLJ that, as the stock-for-stock bidder had stated that it would not
put forward a renewed bid, and given Mr. Amaral's extensive experience and
knowledge, it would be in the best interests of the Company and its
shareholders to discuss certain matters relating to the bids with Mr. Amaral.
Mr. Amaral was reminded that the contents of his discussions with the
Committee needed to be kept in strictest confidence. The Special Committee
then discussed the best strategy for encouraging the speedy resolution of
Parent's bid at a price and on terms favorable to the Company's shareholders.
After lengthy discussions, the Special Committee instructed DLJ to inform
Heritage and Parent that, in light of the favorable price it had proposed, the
Special Committee would be prepared to consider signing a definitive merger
agreement with Parent on February 2, 1998 that would be subject to the receipt
of firm financing commitments and the completion of due diligence. The Special
Committee indicated that it would consider recommending such a transaction if
the contract were structured as a tender offer/merger, if the contract would
automatically expire by its terms on February 6, 1998 unless, by such time,
Heritage's and Parent's diligence efforts were complete and firm commitment
letters had been received sufficient to close the transaction, and if Heritage
and/or Parent agreed to pay a break-up fee to the Company if it were unable to
obtain financing.
Between January 30, 1998 and February 6, 1998, extensive negotiations
concerning the transaction documents were conducted between GD&C and Choate,
Hall & Stewart, counsel to Heritage and Parent. The principal items of
negotiation concerned timing, conditions to closing, termination rights,
break-up fees payable by Heritage and/or Parent and the Company, expense
payment obligations and representations and warranties.
On January 31, 1998, the Special Committee convened to discuss Heritage's
and Parent's response to the Company's proposal. Heritage and Parent proposed
to sign the definitive transaction documents on February 2, 1998 providing for
a tender offer/merger structure and subject to the receipt of a financing
commitment and the completion of diligence. Heritage offered to materially
increase the amount of equity it was investing in order to increase the
likelihood of receiving a firm commitment letter on an expedited basis from a
bank, but refused to entertain any break-up fee payable by Heritage and/or
Parent. The Special Committee reviewed Heritage's and Parent's proposal and
discussed Heritage's and Parent's request that the Company cover Heritage's
and Parent's expenses in the event the Company entered into an agreement with
another bidder before February 6, 1998 as opposed to afterwards.
On January 31, 1998, the Special Committee spoke by telephone with a senior
officer of one of the banking institutions considering providing financing for
the transaction. This officer informed the Special Committee that such bank
expected to be able to deliver a "highly confident" letter with respect to the
proposed financing on February 2, 1998, expected to be able to deliver a form
of firm commitment letter on February 2, 1998, and hoped to deliver a firm
commitment to Heritage and Parent on February 4 or February 5, 1998. Another
banking institution considering financing the transaction also stated to the
Special Committee its interest in funding the transaction, particularly in
light of the material increase in the amount of equity that Heritage was
prepared to invest in the transaction. The Special Committee engaged in an
extensive discussion concerning the best negotiating strategy for dealing with
Heritage and Parent and, at the conclusion of the discussion, instructed DLJ
to advise Heritage and Parent again that, if Heritage and Parent were to
present a highly confident letter and a form of commitment letter and were to
agree to a tender offer/merger structure, the Special Committee might be in a
position to recommend signing an agreement with Parent on February 2, 1998.
The Special Committee's position was presented to representatives of Heritage
and Parent on January 31, 1998.
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On February 2, 1998, members of the Special Committee met in person with
representatives of Heritage and Parent to discuss the current status of
Heritage's and Parent's diligence efforts and the timing for receiving firm
commitment letters from a financing source sufficient to close the
transaction. Heritage and Parent indicated that, although they had not
received a highly confident letter or an acceptable form of commitment letter,
they expected to complete their remaining due diligence by the close of
business on February 5, 1998 and that they expected to receive a firm
financing commitment on February 4 or 5, 1998 and in any event by no later
than February 6, 1998. The Special Committee indicated it was satisfied that
Heritage's Parent's due diligence efforts were on schedule, but expressed its
concern that it appeared to be unlikely that the Special Committee would
receive a highly confident letter or the form of firm commitment letter from a
banking institution on February 2, 1998. GD&C advised the Special Committee
with respect to the issues that remained outstanding in the negotiation of the
definitive Agreement and Plan of Merger. At the February 2, 1998 meeting, the
Special Committee advised Heritage and Parent that, in light of the fact that
they were unable to present a highly confident letter and form of commitment
letter and because they were unwilling to consider the payment of a break-up
fee to the Company if they were unable to obtain financing, the Special
Committee would no longer consider executing a merger agreement containing a
financing contingency and that it would negotiate with Heritage and Parent
with a view towards executing a definitive agreement, without financing or
diligence contingencies, as soon as possible during the week of February 2.
Mr. Massimino stated to Heritage and Parent that the Special Committee would
not recommend a transaction with any other bidder prior to February 6, 1998
without giving Heritage or Parent twelve hours advance oral notice.
On February 2, 1998, DLJ informed the Special Committee that DLJ had had a
discussion with representatives of the all-cash bidder, had discussed in some
detail the issues that the all-cash bidder had stated were its reasons for
reducing its bid price below $20.50 per share, and was told by the
representative of the all-cash bidder that, assuming such issues could be
resolved satisfactorily, the all-cash bidder would be prepared to entertain
resubmitting its bid at or near the same price as (but no higher than) before
its most recent price reduction. DLJ also stated to the Special Committee
that, as of February 1, 1998, DLJ had not yet completed the analysis and
review process necessary for it to render its fairness opinion to the Company
Board.
DLJ also informed the Special Committee that it had been contacted by a
financing source that had been involved in the bid by Parent. That financing
source stated to DLJ that it was no longer a part of the Parent bid and was
interested in contacting at least one other entity which it believed had been
a bidder for the Company. The financing source requested that the Special
Committee waive, as to such financing source and as to such other bidder, the
confidentiality provisions applicable to each so that they might conduct
discussions and negotiations among themselves. The Special Committee discussed
with GD&C and DLJ the appropriate response to such overture. The Special
Committee determined that it was in the best interests of the Company and its
shareholders to encourage as many valid bids as possible. Accordingly, the
Special Committee directed DLJ to inform such financing source and such other
bidder that the Company was waiving its rights under the confidentiality
agreements that had been entered into, to the extent of allowing discussions
and negotiations between such other financing source and such other bidder.
The Special Committee also directed DLJ to inform Parent forthwith of such
developments, in the interests of full disclosure and the maintenance of trust
and confidence between the Company and Parent. In a subsequent conversation
with Parent, the latter stated its view that such other financing source would
be acting in violation of a confidentiality arrangement with Parent if such
other financing source were to participate in another bid. Parent requested
the Special Committee not to grant the waivers requested by such other
financing source. The Special Committee refused this request by Parent, and so
informed such other financing source and such other bidder, and advised Parent
and the other financing source that the Special Committee's waiver was granted
with the explicit understanding that it was not encouraging the financing
source to breach any agreement with Parent and that any such agreement and/or
breach would be left to Parent and the financing source to discuss and
resolve.
On February 3 and February 4, 1998, Parent continued its due diligence
efforts, negotiations continued between the parties concerning the definitive
transaction documents, and the Special Committee convened several times on
both days to deliberate upon the status of the negotiations and the
negotiating position that the Special Committee determined was best.
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During this period and the following days, Parent continued to receive
information from its due diligence review of the Company that raised troubling
issues for it, and Parent continued to assess the costs and risks in
completing the acquisition. Various regulatory matters were considered by it,
and the status of certain unexpectedly high payables and other financial
issues were reviewed.
On February 5, 1998, the Special Committee met with representatives of
Heritage, Parent, Sutro and the Bank of Montreal. The representative of the
Bank of Montreal stated that his bank was prepared to deliver a firm
commitment letter, that there were no further approval processes required
within his bank, that the Bank of Montreal would be the agent on this credit
facility and that the Bank of Montreal was quite familiar with both the
Company and Parent.
At the February 5, 1998 meeting, the representatives of Heritage and Parent
then described to the Special Committee a number of issues that, in their
view, reduced the value of the Company below that which had been the basis of
Heritage's and Parent's original bid, that as a result, Parent was reducing
its bid to $20.75 per share, and that such offer would expire at noon, Pacific
Standard Time on February 6, 1997. Counsel for Heritage and Parent then
addressed the remaining issues concerning the definitive transaction
documents. In particular, such counsel stated that Heritage and Parent now
required that if the agreement were terminated because of a default by the
Company that did not trigger the obligation to pay break-up fees, then the
Company would fully reimburse Heritage and Parent for all of their expenses,
including commitment fees, without a cap. Such counsel also stated that
Heritage and Parent required that the Company make a representation and
warranty that none of the information that had been supplied to Heritage and
Parent, written or oral, contained any materially misleading statement and
that such information did not fail to include any information that was
necessary, in the context of the information that had been provided, to make
the totality of such information not materially misleading. Such counsel also
stated that Heritage and Parent insisted that a break-up fee would be payable
to Parent if the Company willfully breached any representation, warranty or
covenant and, within twelve months after the signing of definitive transaction
documents with Heritage and Parent, entered into a transaction with any party
with whom the Company had been in contact or to whom information had been
supplied by the Company or its representatives on or after October 1, 1997. In
addition, such counsel stated that Heritage and Parent required, as a
condition of closing, that the Company obtain the consent of any landlord
whose lease required consent to the transaction. Lastly, such counsel stated
that Heritage and Parent required as a condition of closing that all
regulatory approvals necessary to consummate the transactions and to continue
the present business of the Company be obtained. Representatives of Heritage
and Parent also indicated that if it were possible to negotiate an arrangement
satisfactory to Parent and the Bank of Montreal whereby the Company's Senior
Secured Notes would be amended and remain in place on a permanent basis, the
shareholders of the Company would be entitled to be paid the difference, if
any, between the "make-whole" payment provided for in the Company's Senior
Secured Notes and the cost of obtaining the consent of the noteholders and the
Bank of Montreal.
Following Heritage's and Parent's presentation of their revised proposal,
the representatives of the bidder were excused, but the Committee requested
that Mr. Scott remain in order to answer certain questions to be posed by the
members of the Special Committee. The Special Committee solicited Mr. Scott's
views on the specific issues that had been raised by Heritage and Parent and
the proposed price reduction that had been put forward by the representatives
of Heritage and Parent.
The Special Committee then excused Mr. Scott and discussed extensively the
modified offer and the Special Committee's appropriate response thereto. The
Special Committee directed DLJ to negotiate with Parent with a view to
obtaining the maximum price per share that Parent was willing to pay. DLJ was
also instructed to state the Special Committee's position with respect to each
of the issues that had been raised by counsel to Heritage. In particular, the
Special Committee instructed DLJ that the Special Committee was not prepared
to accept an expense reimbursement obligation without a cap; that a broad
"10b-5" representation and warranty was unacceptable and that the Special
Committee's view was that, upon consultation with Mr. Scott and discussion
with landlords on February 6, 1998, Parent ought to be able to accept
definitive transaction documents without landlord consents as a condition to
closing.
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DLJ engaged in extensive negotiations with a representative of Heritage and
Parent and reported back to the Special Committee that Parent was prepared to
raise its price to $21.00 per share and that, as to the other outstanding
issues, Heritage and Parent were prepared to accept a cap of $2 million on
their fees and expenses in case of a default by the Company on its
representations, warranties or covenants not triggering an obligation of the
Company to pay the break-up fee; that Parent was prepared to be flexible
concerning its desire for a "10b-5" representation and that Parent was willing
to be flexible, as well, with respect to the obtaining of landlord consents as
a condition of closing, assuming Parent obtained sufficient comfort with
respect to such matters prior to the execution and delivery of definitive
transaction documents on February 6, 1998.
On February 6, 1998, extensive negotiations occurred between counsel for the
Company and counsel for Heritage and Parent with respect to the issues
identified in the meeting of February 5, 1998. The Special Committee convened
at 9:00 a.m. and was in continuous session until approximately 7:00 p.m. In
addition to the members of the Special Committee, Mr. Amaral was invited to
participate. During such meeting, representatives of GD&C described, at
several points during the day, the state of negotiation concerning the open
issues and reviewed with the Special Committee the specific terms of the
transaction as summarized in materials sent to the Special Committee and Mr.
Amaral on February 5, 1998. The Special Committee discussed in detail Mr.
Scott's proposed ongoing role with Parent and his proposed investment in
Parent. DLJ described to the Company Board its view of the unlikelihood of the
Company's shareholders receiving a substantial portion or any of the "make-
whole" payment. DLJ presented an extensive analysis of the transaction from a
financial point of view. DLJ described the methods and analytical techniques
it had used in conducting its work and concluded by informing the Special
Committee that it was prepared to issue a fairness opinion to the Company
Board with respect to the proposed transaction. The Special Committee
conducted a detailed questioning of DLJ's analysis, with particular focus on
DLJ's assumptions underlying its analysis.
The Special Committee reconvened at 9:00 p.m. and received the report of
GD&C concerning changes in the language of the transaction documents that had
been negotiated since the Committee adjourned at 7:00 p.m. GD&C informed the
Special Committee that negotiations had concluded on the merger agreement on
terms that the Special Committee had previously stated that day to be
acceptable to the Special Committee. Following further discussion, the Special
Committee adopted a resolution recommending that the Company Board approve the
transactions with Heritage and Parent on the terms contained in the definitive
transaction documents, subject to receipt by the Company Board of DLJ's
fairness opinion. The Special Committee then adjourned.
Following the completion of the Special Committee meeting, the Company Board
then convened, with Mr. Scott excluded from the meeting because of his
interest in the transaction. The Special Committee reported to the Company
Board its conclusions with respect to the transaction and stated its belief
that the transaction represented the highest price and the best value
reasonably obtainable and that, in its view, the transaction was in the best
interest of the Company and its shareholders. The Special Committee discussed
in detail the basis of its belief. DLJ stated that at $21.00 per share, and
under the terms and conditions contained in the definitive transaction
documents, it was the opinion of DLJ that the transaction was fair from a
financial point of view to the Company's shareholders. DLJ noted that a full
presentation of the underlying analysis supporting its fairness opinion had
been presented beginning at approximately 2:00 p.m. to the Special Committee
with Mr. Amaral present and that discussion and questioning by the Special
Committee and Mr. Amaral had continued for several hours after such
presentation by DLJ. DLJ noted that the proposed transaction was fully
financed by the Bank of Montreal and that bridge financing was in place to
cover the funds necessary to consummate the Offer. The Company Board
questioned GD&C concerning the likely timing until closing of the transaction
and other material terms of the transaction.
The Company Board (with Mr. Scott absent) unanimously adopted resolutions
approving the entry by the Company into the transactions and favorably
recommended the transaction to the Company's shareholders. Mr. Scott was
invited to join the meeting; a discussion occurred concerning an appropriate
press release and Mr. Scott was informed that the Company Board had authorized
and directed him to execute and deliver the definitive transaction agreements
on behalf of the Company.
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The Merger Agreement was executed and delivered at approximately 11:00 p.m.
on February 6, 1998. The Company and Parent issued a joint press release
before the opening of the U.S. stock markets on February 9, 1998 announcing
such execution and delivery. On February 13, 1998, Purchaser commenced the
Offer.
2. RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE COMPANY BOARD; FAIRNESS OF
THE OFFER AND THE MERGER.
The Company Board has, by the unanimous vote of all directors present (with
Mr. Scott, who upon consummation of the Merger will become Chairman of the
Board, an executive officer and a shareholder of Parent, absent during the
vote), determined that the Merger Agreement and the transactions contemplated
thereby, including the Offer and the Merger, are fair to and in the best
interests of the Company and the holders of Shares, has approved and adopted
the Merger Agreement and the transactions contemplated thereby, including the
Offer and the Merger, and recommends that the Company shareholders accept the
Offer and tender their Shares. Mr. Scott was not present at the meeting at
which the vote on the Merger and the Merger Agreement was taken. As set forth
in the Merger Agreement, subject to the terms and conditions thereof,
Purchaser will purchase any and all (or, in certain circumstances, the Revised
Minimum Number of) outstanding Shares tendered prior to the expiration of the
Offer if the conditions to the Offer have been satisfied (or waived).
Recommendation of the Special Committee and the Company Board
On February 6, 1998, the Special Committee unanimously recommended and
approved the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger.
On February 6, 1998, the Company Board (with Mr. Scott not present or
participating in discussion or voting because of his agreement with Parent to
become chairman, an executive officer and a shareholder of Parent if the Offer
is consummated) based upon, among other things, the unanimous recommendation
and approval of the Special Committee and the fairness opinion received from
DLJ, approved the Merger Agreement and the transactions contemplated thereby,
including the Offer and the Merger, and it determined that each of the Offer
and the Merger is fair to, in the best interests of, and produces the highest
value reasonably obtainable to, the shareholders of the Company and
recommended that the shareholders of the Company accept the Offer and tender
their Shares in the Offer.
SPECIAL COMMITTEE
In reaching its determination referred to above, the Special Committee
considered the following factors, each of which, in the view of the Special
Committee, supported such determinations:
(a) The historical market prices and recent trading activity of the
Shares, including (i) that the Offer Price of $21.00 per Share represents a
premium of approximately 29% over the $16.25 per Share closing price on
January 30, 1998, which was seven days prior to the February 6, 1998 public
announcement of the fact that the Company was near to concluding a
definitive agreement for the sale of the Company at or about $21.00 per
Share in cash, a premium of approximately 24% over the $16.88 per Share
closing price on January 7, 1998, which was 30 days prior to such public
announcement, a premium of approximately 33% over the $15.81 per Share
closing price on December 8, 1997, which was 60 days prior to such public
announcement, and a premium of approximately 29% and 31% over the average
closing price for the one-month and three-month periods, respectively,
preceding such date, (ii) that the Shares never traded on the Nasdaq Stock
Market above $21.00 per share following such announcement, (iii) that the
Shares have not traded on the Nasdaq Stock Market higher than $21.00 per
share since October 21, 1996 and (iv) that the $21.00 price per share is
payable in cash, thus eliminating any uncertainties in valuing the
consideration to be received by the Company's shareholders;
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(b) The history of the negotiations between the Special Committee and its
representatives and Parent and its representatives, including (i) the
Special Committee's belief that Parent would not further increase the Offer
Price, and, accordingly, $21.00 per Share was, in the opinion of the
Special Committee the highest price that could be obtained from Parent and
(ii) the Special Committee's belief that further negotiations concerning
price with Parent could cause Parent to abandon the Offer;
(c) The opinion of DLJ that, based upon and subject to the various
assumptions and limitations set forth therein, as of the date thereof, the
$21.00 per Share to be received by the shareholders of the Company in the
Offer and the Merger pursuant to the Merger Agreement was fair to the
shareholders from a financial point of view, and the analyses presented to
the Special Committee in connection therewith (See "SPECIAL FACTORS--
Opinion of Financial Advisor to the Company") (a copy of DLJ's opinion is
attached hereto as Annex A, and shareholders are urged to read this opinion
in its entirety);
(d) The history of the negotiations with the stock-for-stock bidder and
the all-cash bidder, and the absence of other bidders despite a substantial
effort by DLJ to contact a large number of potential bidders;
(e) The possibility that, because of: the lower than expected Company
earnings for the second fiscal quarter ended December 31, 1997 and the six-
month period ended December 31, 1997; the substantial uncertainty
concerning whether the Company would be able to improve its performance in
the six-months ended June 30, 1998; the frequency with which the Company
had, in the past, not met its projected results; and the critical
uncertainty regarding the contents of the federal government's forthcoming
Prospective Payment System and its effect on future Company earnings, the
consideration the Company's shareholders might obtain in a future
transaction was likely to be less advantageous than the consideration they
would receive pursuant to the Offer and the Merger;
(f) The effect of the Minimum Condition that, without the consent of the
Company, no change in the Offer may be made by Parent which decreases the
$21.00 per Share payable in the Offer, which changes the form of
consideration to be paid in the Offer, which reduces the maximum number of
Shares to be purchased in the Offer, which imposes conditions to the Offer
in addition to those set forth in "THE TENDER OFFER--Certain Conditions of
the Offer" or which broadens the scope of such conditions except as
expressly provided in the Merger Agreement;
(g) The review by the Special Committee of alternatives to the
transaction with Parent, including remaining independent and remaining
independent in connection with a leveraged recapitalization, in light of
the fact that each of Messrs. Scott and Casey were unable to obtain viable
proposals for a leveraged recapitalization of the Company involving REITs,
and in light of the advice of DLJ that it was unlikely that any such
transaction could be structured that would produce value to the Company's
shareholders at levels similar to $21.00 per share;
(h) The fact that Heritage was a signatory to the Merger Agreement, and
had promised therein to provide up to $82 million in cash equity, together
with the Company's receipt of a copy of an executed firm financing
commitment letter from the Bank of Montreal in an amount which, in
combination with the Heritage commitment, was sufficient to close the
transaction, all of which affected the likelihood that the proposed
acquisition would be consummated;
(i) The terms and conditions of the Merger Agreement;
(j) The fact that pursuant to the Merger Agreement, the Company is not
prohibited from responding to any unsolicited requests for information, and
may participate in discussions and negotiate with the entity or group
making such request concerning any merger, sale of assets, sale of shares
of capital stock or similar transaction involving the Company or any of its
subsidiaries or divisions, if such entity or group has submitted a written
proposal to the Board relating to any such transaction and the Board by a
majority vote determines in its good faith judgment, based on the advice of
counsel, that it is required to do so in the exercise of its fiduciary
duties under California Law, in which event, after giving notice to
Purchaser, the Company may elect to terminate the Merger Agreement and pay
the break-up fee provided for in the Merger Agreement; and
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(k) The structure of the transaction, which is designed, among other
things, to result in receipt by the shareholders of the Company at the
earliest practicable time of the consideration to be paid in the Offer and
the fact that the per Share consideration to be paid in the Offer and the
Merger is the same.
Additional Considerations of the Board
The members of the Board evaluated the various factors listed above in light
of their knowledge of the business, financial condition and prospects of the
Company and based upon the advice of financial and legal advisors. In light of
the number and variety of factors that the Board considered in connection with
its evaluation of the Offer and the Merger, the Board did not find it
practicable to assign relative weights to the foregoing factors and,
accordingly, the Board did not do so. In addition to the factors listed above,
the Board considered the fact that while consummation of the Offer and the
Merger would result in the shareholders of the Company receiving a premium for
their Shares over the trading prices of the Shares prior to the public
announcement of the fact that the Company was close to entering into a
definitive agreement for the sale of the Company at a price at or about $21.00
per share, consummation of the Offer and the Merger would eliminate any
opportunity for shareholders of the Company to participate in the potential
future growth prospects, if any, of the Company. The Board determined,
however, that (a) the loss of opportunity is reflected in the price of $21.00
per Share, and (b) there are continued substantial business risks associated
with independent operations and the healthcare regulatory and compensation
environment that could materially negatively impact the Company's long-term
financial prospects.
In addition, the Board determined that the Offer and the Merger were the
result of a process that was fair to the shareholders of the Company because,
among other things, (a) a Special Committee was formed consisting of members
of the Board of Directors who are neither employees of the Company nor were
affiliated with any of the bidders, (b) the Special Committee conducted
approximately 90 hours of meetings and conference calls during the 18 day
period between the formation of the Special Committee and the execution and
delivery of the definitive transaction documents, during which meetings the
Special Committee evaluated and analyzed the bids, determined the negotiating
strategy and reached informed conclusions based, in part, on the advice of its
independent financial and legal advisors, (c) the Special Committee
deliberated with respect both to the Offer and the Merger and a variety of
alternative strategies, and (d) the $21.00 per share price and the other terms
and conditions of the Merger Agreement resulted from active arm's-length
bargaining between the Special Committee and its representatives, on the one
hand, and Parent on the other.
IN LIGHT OF ALL THE FACTORS SET FORTH ABOVE, THE COMPANY BOARD HAS
DETERMINED BY THE UNANIMOUS VOTE OF ALL DIRECTORS PRESENT, (WITH MR. SCOTT,
WHO UPON CONSUMMATION OF THE MERGER WILL BECOME CHAIRMAN OF THE BOARD, AN
EXECUTIVE OFFICER AND A SHAREHOLDER OF PARENT, ABSENT DURING THE VOTE), THAT
THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE
OFFER AND THE MERGER, ARE FAIR TO AND IN THE BEST INTERESTS OF THE HOLDERS OF
THE SHARES, HAS APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, AND RECOMMENDS THAT
THE HOLDERS OF THE SHARES ACCEPT THE OFFER AND TENDER THEIR SHARES THEREUNDER.
NONE OF THE MEMBERS OF THE BOARD WHO VOTED TO APPROVE THE MERGER AGREEMENT
AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING ANY OF THE MEMBERS OF THE
SPECIAL COMMITTEE, WERE EMPLOYEES OF THE COMPANY OR ITS SUBSIDIARIES.
3. OPINION OF FINANCIAL ADVISOR TO THE COMPANY.
DLJ has acted as financial advisor to the Company in connection with the
Offer and the Merger and delivered its oral opinion to the Company Board dated
February 6, 1998, which was confirmed in writing on the
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same date (the "DLJ Opinion"), to the effect that, as of the date of such
opinion and based upon and subject to the assumptions, limitations and
qualifications set forth therein, the Merger Consideration to be received by
the holders of Shares in the Offer and the Merger is fair to such shareholders
from a financial point of view.
THE FULL TEXT OF THE DLJ OPINION IS SET FORTH AS ANNEX A TO THIS OFFER TO
PURCHASE AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY FOR ASSUMPTIONS MADE,
PROCEDURES FOLLOWED, OTHER MATTERS CONSIDERED AND LIMITS OF THE REVIEW BY DLJ.
The DLJ Opinion was prepared for the Company Board and addresses only the
fairness of the Merger Consideration to be received by the holders of the
Shares from a financial point of view. The DLJ Opinion does not constitute a
recommendation to any shareholder of the Company as to whether such
shareholder should tender in the Offer or how such shareholder should vote if
a vote is taken on the Merger.
DLJ was not requested by the Company Board to make, nor did DLJ make, any
recommendation as to the amount or type of consideration to be received by the
Company shareholders, which determination was reached through negotiations
between the Company and Parent, in which negotiations DLJ advised the Company.
No restrictions were imposed upon DLJ with respect to the investigations made
or procedures followed by DLJ in rendering its opinion.
In arriving at the DLJ Opinion, DLJ reviewed the draft Merger Agreement
dated February 5, 1998, including the exhibits thereto, as well as financial
and other information that was publicly available or furnished to it by the
Company, including information provided during discussions with management.
Included in the information provided during discussions with management were
certain financial projections for the Company for the period beginning June
30, 1997 and ending June 30, 2002 prepared by the management of the Company.
In addition, DLJ compared certain financial and securities data of the Company
with that of various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the
Company's Common Stock, reviewed prices and premiums paid in certain other
business combinations and conducted such other financial studies, analyses and
investigations as DLJ deemed appropriate for purposes of rendering its
opinion.
In rendering its opinion, DLJ relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to it from public sources or that was provided to it by the Company or its
representatives, or that was otherwise reviewed by DLJ. DLJ assumed that the
financial projections regarding the Company supplied by its management to DLJ
were reasonably prepared on a basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. DLJ assumed no
responsibility for making an independent evaluation of any assets or
liabilities or for making any independent verification of any of the
information reviewed by DLJ. DLJ relied as to certain legal matters on advice
of counsel to the Company.
The DLJ Opinion is necessarily based on economic, market, financial and
other conditions as they existed on, and on information made available to DLJ
as of the date of its opinion. DLJ does not have any obligations to update,
revise or reaffirm the DLJ Opinion. The DLJ Opinion does not address the
relative merits of the proposed transaction and the other business strategies
being considered by the Company Board, nor does it address the Board's
decision to proceed with the Offer and the Merger.
The following is a summary of the analyses undertaken by DLJ in preparing
the DLJ Opinion.
Common Stock Performance Analysis. DLJ's analysis of the performance of the
Shares consisted of a historical analysis of closing prices and trading
volumes since its initial public offering. Over the 52 weeks through January
30, 1998, the Shares traded between $10.63 and $17.88 (with a mean of $14.42)
per share. Over the 90 days prior to January 30, 1998, the Shares traded
between $15.00 and $17.00 (with a mean of $15.95) per share. Over the 30 days
prior to January 30, 1998, the Shares traded between $15.25 and $17.00 (with a
mean of $16.21) per share.
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Premium Analysis. DLJ evaluated the transaction contemplated by the Merger
Agreement based on an analysis of premiums offered in comparable merger and
acquisition transactions. DLJ's analysis indicated that for the transactions
reviewed, the average premiums offered to the market price of the acquired
company one day, one week and one month prior to announcement were: 19.8%,
25.3% and 34.0%, respectively, for comparable health care services
transactions, and 22.4%, 29.3% and 38.3%, respectively for comparable long-
term care transactions. The premiums implied in the Merger Agreement over the
market price of the Shares one day, one week and one month prior to the
announcement on October 22, 1997 that the Company had hired DLJ to evaluate
strategic alternatives for the Company, are 26.3%, 30.8% and 47.4%,
respectively. The purchase price offered by Parent of $21.00 for the Shares
represents a premium of 29.2%, 31.3% and 25.8%, one day, one week and one
month prior to February 2, 1998, respectively.
Comparable Public Company Analysis. To provide contextual data on
comparative market information, DLJ analyzed the operating performance of the
Company relative to a group of selected companies comprised of eleven long-
term care companies whose securities are publicly traded and that are deemed
by DLJ to be reasonably similar to the Company: Advocat Incorporated, Beverly
Enterprises, Centennial Healthcare, Harborside Healthcare, Health Care &
Retirement, Manor Care Inc., Mariner Health Group, National Healthcare LP,
Paragon Health Network, Sun Healthcare Group and Vencor Inc. (the "DLJ
Comparable Companies"). Historical financial information used in connection
with the ratios provided below with respect to the Company and the DLJ
Comparable Companies utilizes the most recent financial statements publicly
available for each company as of September 30, 1997.
DLJ performed a valuation analysis of the Company, by applying certain
market trading statistics for the DLJ Comparable Companies to the Company's
historical and estimated financial results. DLJ examined certain publicly
available financial data of the DLJ Comparable Companies, including (i)
enterprise value (defined as market value of common equity plus book value of
total debt and preferred stock less cash) as a multiple of latest 12 months
("LTM") revenues as of September 30, 1997, EBITDA and EBIT; and (ii) price to
earnings ratios based on: (a) LTM earnings per share ("EPS") as of September
30, 1997, and (b) estimated fiscal year 1998 EPS. DLJ noted that as of
September 30, 1997, the DLJ Comparable Companies were trading at implied
multiples of enterprise value and earnings, as the case may be, in (i) a range
of 0.4x to 2.5x (with a mean, excluding the high and low (the "Mean") of 1.2x)
LTM revenues; (ii) a range of 5.5x to 14.8x (with a Mean of 9.7x) LTM EBITDA;
(iii) a range of 7.2x to 19.6x (with a Mean of 13.4x) LTM EBIT; (iv) a range
of 9.6x to 37.4x (with a Mean of 21.9x) LTM EPS; and (v) a range of 7.0x to
23.5x (with a Mean of 15.9x) estimated fiscal year 1998 EPS. The acquisition
price multiples for the Company exceed the Mean values of the DLJ Comparable
Companies on an LTM and projected 1998 basis with multiples of: (i) 1.3x LTM
revenue, (ii) 10.7x LTM EBITDA, (iii) 15.6x LTM EBIT, (iv) 27.9x LTM EPS and
(v) 20.6x analyst estimated fiscal year 1998 EPS or 22.2x adjusted management
estimated fiscal year 1998 EPS.
No company utilized in the comparable company analysis is identical to the
Company. Accordingly, an analysis of the results of the foregoing necessarily
involves complex considerations and judgments concerning differences in
financial and operating characteristics of the DLJ Comparable Companies and
the Company and other factors that could affect the public trading value of
the DLJ Comparable Companies. Mathematical analysis such as determining the
mean is not in itself a meaningful method of using comparable company data.
Comparable Transaction Analysis. DLJ performed an analysis of selected
merger and acquisition transactions (the "DLJ Comparable Transactions") in the
long-term care industry. Multiples reviewed in the DLJ Comparable Transactions
consisted of (i) aggregate transaction value (defined as the equity value of
the offer) as a multiple of (where available) LTM revenues, LTM EBITDA, and
LTM EBIT, and (ii) aggregate purchase price (defined as the equity value of
the offer plus book value of total debt and preferred stock less cash) as a
multiple of (where available) LTM net income. The DLJ Comparable Transactions
were comprised of 21 transactions announced during the period 1994 to 1997.
DLJ noted that the implied multiples of aggregate transaction value and
aggregate purchase price, as the case may be, for these transactions were in
(i) a range of 0.9x to 2.4x (with a Mean of 1.5x) LTM revenue; (ii) a range of
8.7x to 14.1x (with a Mean of 10.8x) LTM EBITDA; (iii) a range of 11.1x to
22.9x (with a Mean of 14.8x) LTM EBIT; and (iv) a range of 17.8x to 40.8x
(with a Mean of 25.3x)
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LTM net income. The acquisition price multiples for the Company compare
favorably with those of the DLJ Comparable Transactions with values of (i)
1.3x LTM revenue, (ii) 10.7x LTM EBITDA, (iii) 15.6x LTM EBIT and (iv) 28.5
LTM net income.
No transaction utilized in the comparable transaction analysis is identical
to the Offer and the Merger. Accordingly, an analysis of the results of the
foregoing necessarily involves complex considerations and judgments concerning
differences in financial and operating characteristics of the Company and the
companies included in the DLJ Comparable Transactions and other factors that
could affect the acquisition value of the companies to which it is being
compared. Mathematical analysis such as determining the mean is not in itself
a meaningful method of using comparable transactions data.
Discounted Cash Flow Analysis. DLJ performed a discounted cash flow analysis
for the five-year period commencing January 1, 1998 and ending June 30, 2002
based on the stand-alone unlevered free cash flows of the Company. Unlevered
free cash flows were calculated as the after-tax operating earnings of the
Company, plus depreciation and amortization and other non-cash items, plus (or
minus) net changes in working capital minus projected capital expenditures.
This analysis was performed after DLJ adjusted the financial data presented by
management to account for the McAllen acquisition and the impact of actual
second quarter fiscal 1998 results whereby the Company's fiscal 1998 EBITDA
may underperform projections by approximately $2.5 million. DLJ calculated
terminal values by applying a range of estimated EBITDA multiples of 8.0x to
11.0x to the projected EBITDA of the Company in fiscal 2002. The unlevered
free cash flows and terminal values were then discounted to the present using
a range of discount rates of 10.0% to 20.0%, representing an estimated range
of the weighted average cost of capital of the Company and further adjusting
for a higher level of risk. Based on this analysis, DLJ derived a summary
enterprise valuation range for the Company of $183.8 million to $339.4
million. Based on this same analysis, DLJ calculated per share equity values
of the Company ranging from $7.90 to $29.95.
The summary set forth above does not purport to be a complete description of
the analyses performed by DLJ, but describes, in summary form, the principal
elements of the analyses undertaken by DLJ in rendering its opinion. The
preparation of a fairness opinion involves various determinations as to the
most appropriate and relevant methods of financial analysis and the
application of these methods to the particular circumstances and therefore,
such an opinion is not readily susceptible to summary description. Each of the
analyses conducted by DLJ was carried out in order to provide a different
perspective on the transaction and add to the total mix of information
available. DLJ did not form a conclusion as to whether any individual
analysis, considered in isolation, supported or failed to support an opinion
as to fairness from a financial point of view. Rather, in reaching its
conclusion, DLJ considered the results of the analyses in light of each other
and ultimately reached its opinion based on the results of the analyses taken
as a whole. DLJ did not place particular reliance or weight on any individual
factor, but instead concluded that its analyses, taken as a whole, supported
its determination. Accordingly, notwithstanding the separate facts summarized
above, DLJ believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it, without
considering all analyses and factors, could create an incomplete or misleading
view of the evaluation process underlying its opinion. The analyses performed
by DLJ are not necessarily indicative of actual values or future results,
which may be significantly more or less favorable than suggested by such
analysis.
DLJ was selected to render an opinion in connection with the Offer and the
Merger based upon DLJ's qualifications, expertise and reputation, including
the fact that DLJ, as part of its investment banking business, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placement and valuations for corporate and other
purposes.
Pursuant to a letter agreement between the Company and DLJ dated September
19, 1997 (the "DLJ Engagement Letter"), DLJ is entitled (i) a fee of $500,000
payable at the time DLJ notifies the Company that it was prepared to deliver
an opinion with respect to the Offer and the Merger, irrespective of the
conclusion reached therein, (ii) a fee of $50,000 for the delivery of each
updating opinion after the first update delivered by DLJ, and (iii) a fee of
approximately $2.25 million less the amount previously paid pursuant to (i)
and (ii) above,
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based on an acquisition price for the Shares of $21.00 per share payable upon
consummation of the Merger. In addition, the Company has agreed to reimburse
DLJ for all out-of-pocket expenses (including the reasonable fees and expenses
of its counsel), which shall not exceed $100,000 without the Company's written
consent, incurred by DLJ in connection with its engagement thereunder, whether
or not the Offer or the Merger is consummated, and to indemnify DLJ for
certain liabilities and expenses arising out of the Offer and the Merger or
the transactions in connection therewith, including liabilities under federal
securities laws. The terms of the fee arrangement with DLJ, which DLJ and the
Company believe are customary in transactions of this nature, were negotiated
at arm's length between the Company and DLJ and the Company Board was aware of
such arrangement.
DLJ provides a full range of financial advisory and brokerage services and
in the course of its normal trading activities may from time to time effect
transactions and hold positions in the securities or options on the securities
of the Company and/or Heritage for its own account and for the accounts of
customers. An affiliate of DLJ, DLJ Fund Investment Partners, L.P., currently
holds a limited partnership interest in Heritage with a committed capital of
$1.0 million, representing less than one-third of one percent of Heritage's
aggregate committed capital.
4. POSITION OF PURCHASER AND PARENT REGARDING FAIRNESS OF THE OFFER AND THE
MERGER.
Purchaser and Parent believe that the Offer Price is fair to the Company's
shareholders. Purchaser and Parent base their belief on: (a) the fact that the
Special Committee, consisting solely of independent directors, was appointed
in connection with the Merger Agreement to represent the interests of
shareholders, (b) the fact that the Special Committee was advised by
independent financial and legal advisors, (c) the fact that the Company Board
(with Mr. Scott absent during the vote), acting upon the unanimous
recommendation of the Special Committee, and the Special Committee, based on
the factors considered by the Special Committee set forth above, concluded
that the Offer and Merger are fair to and in the best interests of the Company
and the Company's shareholders, (d) the fact that Parent, Purchaser and the
Company Board (through the Special Committee), with their respective financial
and legal advisors, negotiated the terms of the Merger and the Merger
Agreement with the Special Committee on an arm's-length basis over a period of
time and (e) the fact that the consideration to be paid in the Offer and the
Merger represents a premium of approximately 28.6% over the average reported
closing price for the Shares on the 20 trading days prior to the public
announcement of the Merger Agreement. Parent and Purchaser have reviewed the
factors considered by the Special Committee and the Company Board in support
of its decision described above and had no basis to question its consideration
of or reliance on those factors. In reaching their conclusions, Parent and
Purchaser also considered generally the current and historical market price
for the Shares. Parent and Purchaser did not find it practicable to, and did
not, assign relative weights to the individual factors discussed above in
reaching their conclusion as to fairness. In light of the nature of the
Company's business, Parent and Purchaser did not deem net book value or
liquidation value to be relevant indicators of the value of the Shares.
5. PURPOSE AND EFFECTS OF THE OFFER AND THE MERGER; REASONS FOR THE OFFER AND
THE MERGER.
The purpose of the Offer and the Merger is for Parent indirectly to acquire
control of, and the entire equity interest in, the Company. The purpose of the
Merger is for Parent to acquire all Shares not purchased pursuant to the
Offer. Upon consummation of the Merger, the Company will become an indirect
wholly-owned subsidiary of Parent. The Offer is being made pursuant to the
Merger Agreement. The acquisition of the entire equity interest in the Company
has been structured as a cash tender offer followed by a cash merger in order
to provide a prompt and orderly transfer of ownership of the equity interest
in the Company held by shareholders of the Company from such shareholders to
Parent and to provide the shareholders of the Company with cash for all their
Shares.
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Under California Law and the Company's Articles of Incorporation, the
approval of the Board and, unless the Merger is consummated pursuant to the
short-form merger provisions under California Law described below, the
affirmative vote of the holders of a majority of the outstanding Shares is
required to approve the Merger Agreement. The Board (with Mr. Scott absent
during the vote) has unanimously approved the Merger Agreement.
Under California Law, the Merger may not be accomplished for cash paid to
the Company's shareholders if Purchaser or Parent owns directly or indirectly
more than 50% but less than 90% of the then outstanding Shares unless either
all the shareholders consent or the Commissioner of Corporations of the State
of California approves, after a hearing, the terms and conditions of the
Merger and the fairness thereof. Accordingly, pursuant to the Merger
Agreement, the Company granted to Parent the Stock Option, which entitles
Purchaser to purchase up to 19.99% of the Shares outstanding immediately prior
to the exercise of the option at a purchase price of $21.00 per Share. The
Stock Option may be exercised by Parent only if, upon such exercise, Purchaser
and Parent would own directly or indirectly in the aggregate 90% or more of
the outstanding Shares. In that event, the Minimum Condition would be
satisfied and, following the purchase of Shares in the Offer, Purchaser would
be able to effect a short-form merger under California Law, subject to the
terms and conditions of the Merger Agreement. Purchaser currently intends to
effect a short-form merger if it is able to do so.
In the event the Minimum Condition is not satisfied on or before the tenth
business day after all other conditions to the Offer have been satisfied, (A)
the Minimum Condition shall be automatically amended to mean that number of
Shares which, together with the Shares then owned directly or indirectly by
Purchaser, would equal not less than 49.9% of the Shares then outstanding
(calculated as of the Initial Expiration Date) shall have been validly
tendered and not withdrawn prior to the expiration of the Offer, and (B)
Purchaser will amend the Offer to provide that Purchaser will purchase, on a
pro rata basis in the Offer, that number of Shares which, together with the
Shares then owned directly or indirectly by Purchaser, would equal 49.9% of
the Shares then outstanding (calculated as of the Initial Expiration Date) (it
being understood that Purchaser shall not in any event be required to accept
for payment, or pay for, any Shares if less than the Revised Minimum Number of
Shares are tendered pursuant to the Offer and not withdrawn at the expiration
of the Offer). If only the Revised Minimum Number of Shares are purchased by
Purchaser in the Offer, Purchaser would own upon consummation of the Offer
49.9% of the Shares then outstanding and would thereafter solicit the approval
of the Merger Agreement by a vote of the shareholders of the Company. Under
such circumstances, a significantly longer period of time will be required to
effect the Merger, although, as a practical matter, Parent may have the
ability to assure approval of the Merger. See "SPECIAL FACTORS--Purpose and
Effects of the Offer and the Merger; Reasons for the Offer and Merger".
The Merger Agreement provides that, promptly following the purchase of and
payment for Shares by Purchaser pursuant to the Offer, Purchaser shall be
entitled to designate up to such number of directors, rounded up to the next
whole number, on the Board as will give Purchaser representation on the Board
equal to the product of the total number of directors on the Board (giving
effect to any increase in the number of directors pursuant to the Merger
Agreement) and the percentage that the aggregate number of Shares so purchased
by Purchaser bears to the total number of Shares then outstanding (on a fully
diluted basis); provided, however, that notwithstanding the foregoing, until
the Effective Time of the Merger, Parent and Purchaser will not cause the
removal of John Brende, William Casey or Gary Massimino from the Board of
Directors of the Company and shall permit such persons to remain as members of
the Special Committee of the Board of Directors responsible for addressing on
behalf of the Company any issues that arise under the Merger Agreement between
the Company, on the one hand, and Parent and Purchaser, on the other hand. In
the Merger Agreement, the Company has agreed to use its reasonable best
efforts to cause Purchaser's designees to be so appointed or elected to the
Board.
In the Merger Agreement, the Company has agreed to take all action necessary
to convene a meeting of its shareholders as soon as practicable after the
consummation of the Offer for the purpose of considering and taking action on
the Merger Agreement and the transactions contemplated thereby, if a
shareholder vote is required by California Law.
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If Purchaser purchases Shares pursuant to the Offer, the Merger Agreement
provides that Purchaser will be entitled to designate representatives to serve
on the Board in proportion to Purchaser's ownership of Shares following such
purchase. Purchaser expects that such representation would permit Purchaser to
exert substantial influence over the Company's conduct of its business and
operations.
6. PLANS FOR THE COMPANY AFTER THE OFFER AND THE MERGER.
It is expected that, initially following the Merger, the business and
operations of the Company will, except as set forth in this Offer to Purchase,
be continued by the Company substantially as they are currently being
conducted. Parent will continue to evaluate the business and operations of the
Company during the pendency of the Offer and after the consummation of the
Offer and the Merger, and will take such actions as it deems appropriate under
the circumstances then existing. Parent intends to seek additional information
about the Company during this period. Thereafter, Parent intends to review
such information as part of a comprehensive review of the Company's business,
operations, capitalization and management with a view to optimizing
exploitation of the Company's potential in conjunction with Parent's
businesses. It is expected that the business and operations of the Company
would form an important part of Parent's future business plans.
Upon the consummation of the Merger, or shortly thereafter, Parent intends
to refinance the Company's existing bank and other indebtedness with funds
obtained under the credit arrangements contemplated by the Commitment Letter
described in "THE TENDER OFFER--Source and Amount of Funds". Parent also
expects to refinance the Bridge Loan contemplated by the Commitment Letter
shortly after the Merger.
It is also anticipated that, upon the consummation of the Merger, Mr. Scott,
who is currently the Chief Executive Officer and a director of the Company,
will become the Chairman of the Board, a senior executive officer and a
shareholder of Parent. See "SPECIAL FACTORS--Interests of Certain Persons in
the Offer and the Merger" and "SPECIAL FACTORS--The Merger Agreement and
Related Agreements".
At the Effective Time, the officers and directors of Purchaser shall become
the officers and directors of the Surviving Corporation.
Except as indicated in this Offer to Purchase, Parent does not have any
present plans or proposals which relate to or would result in an extraordinary
corporate transaction, such as a merger, reorganization or liquidation,
involving the Company or any of its subsidiaries, a sale or transfer of a
material amount of assets of the Company or any of its subsidiaries or any
material change in the Company's capitalization or dividend policy or any
other material changes in the Company's corporate structure or business, or
the composition of the Board or the Company's management.
As a result of the Offer, the interest of Parent in the Company's net book
value and net earnings will increase in proportion to the number of Shares
acquired in the Offer. If the Merger is consummated, Parent's interest in such
items and in the Company's equity generally will increase to 100% and Parent
will be entitled to all benefits resulting from that interest, including all
income generated by the Company's operations and any future increase in the
Company's value. Similarly, Parent will also bear the risk of losses generated
by the Company's operations and any decrease in the value of the Company after
the Merger. Subsequent to the Merger, current shareholders of the Company will
cease to have any equity interest in the Company, will not have the
opportunity to participate in the earnings and growth of the Company after the
Merger and will not have any right to vote on corporate matters. Similarly,
shareholders will not face the risk of losses generated by the Company's
operations or decline in the value of the Company after the Merger.
The Shares are currently traded on The Nasdaq Stock Market, Inc.'s National
Market (the "Nasdaq National Market"). See "THE TENDER OFFER--Price Range of
Shares; Dividends and Distribution". Following the consummation of the Merger,
the Shares will no longer be quoted on the Nasdaq National Market and the
registration of the Shares under the Exchange Act of 1934, as amended (the
"Exchange Act") will be terminated. Accordingly, after the Merger there will
be no publicly traded equity securities of the Company outstanding and
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the Company will no longer be required to file periodic reports with the
Commission. See "THE TENDER OFFER--Effect of the Offer on the Market for the
Shares; Exchange Listing and Exchange Act". It is expected that if Shares are
not accepted for payment by Purchaser pursuant to the Offer and the Merger is
not consummated, the Company's current management, under the general direction
of the Company Board, will continue to manage the Company as an ongoing
business.
7. RIGHTS OF SHAREHOLDERS IN THE MERGER.
Holders of Shares do not have dissenters' rights as a result of the Offer.
However, in connection with the Merger, holders of Shares, by complying with
the provisions of Chapter 13 of California Law, may have certain rights to
dissent and to require the Company to purchase their Shares for cash at fair
market value. In general, holders of Shares will be entitled to exercise
"dissenters' rights" under California Law only if the holders of five percent
or more of the outstanding Shares properly file demands for payment or if the
Shares held by such holders are subject to any restriction on transfer imposed
by the Company or any law or regulation ("Restricted Shares"). Accordingly,
any holder of Restricted Shares and, if the holders of five percent or more of
the Shares properly file demands for payment, all other such holders who fully
comply with all other applicable provisions of Chapter 13 of California Law
will be entitled to require the Company to purchase their Shares for cash at
their fair market value if the Merger is consummated. In addition, if
immediately prior to the Effective Time, the Shares are not listed on a
national securities exchange or on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"), holders of Shares may likewise exercise their dissenters' rights as
to any or all of their Shares entitled to such rights. If the statutory
procedures under California Law relating to dissenters' rights were complied
with, such rights could lead to a judicial determination of the fair market
value of the Shares. The "fair market value" would be determined as of the day
before the first announcement of the terms of the proposed Merger, excluding
any appreciation or depreciation in consequence of the Merger. The value so
determined could be more or less than the Merger Consideration. The foregoing
summary of dissenters' rights does not purport to be complete and is qualified
in its entirety by reference to the full text of Chapter 13 of California law
included herewith as Annex B.
8. INTERESTS OF CERTAIN PERSONS IN THE OFFER AND THE MERGER.
In considering the recommendations of the Company Board and the Special
Committee with respect to the Offer and the Merger and the fairness of the
consideration to be paid under the Offer and in the Merger, shareholders of
the Company should be aware that certain officers and directors of the Company
have interests in the Offer and the Merger, including those referred to below,
that present them with potential conflicts of interest. The Special Committee
and the Company Board were aware of these potential conflicts prior to the
approval and execution of the Merger Agreement.
The following are the material contracts, agreements, arrangements or
understandings, and actual or potential conflicts of interest, between the
Company or its affiliates and (i) certain of the Company's executive officers,
directors or affiliates or (ii) Parent and Purchaser and their respective
executive officers, directors or affiliates:
Executive Investment Plan for Mr. Scott.
Mr. Scott is the beneficiary of an Executive Investment Plan (the "Scott
Pension Plan") with the Company. Under the terms of the Scott Pension Plan,
Mr. Scott was entitled to a vested benefit of $834,386 as of December 18,
1997. On December 19, 1997, the Company Board, in anticipation of a sale of
the Company, voted to fully vest the remaining portion of the Scott Pension
Plan and to cause the full pension benefit to be paid to Mr. Scott, in each
case effective upon consummation of a sale of the Company. This action by the
Company Board will result in an estimated additional $440,367 being available
to Mr. Scott under the Scott Pension Plan assuming that the Effective Time of
the Merger is March 31, 1998. The full benefit available under the Scott
Pension Plan, estimated to be approximately $1,274,753, will be paid to Mr.
Scott at the Effective Time.
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Stock Option Plan.
Under the Company's Stock Option Plan, the Merger will result in each holder
of an Existing Stock Option which is not then vested having the right, during
the 10-day period immediately preceding the Effective Time, to exercise the
option whether or not the option is then otherwise exercisable, but contingent
on the actual consummation of the Merger. Under the Merger Agreement, the
Company has agreed to amend the Company's Stock Option Plan to provide that
all Existing Stock Options, whether vested or unvested, shall be converted
into and become the right to receive a cash payment per Share for which the
option is exercisable equal to the excess of $21.00 over the applicable
exercise price of such option (less any applicable tax withholding
requirements). As of February 11, 1998, the following principal executive
officers and directors of the Company held options to acquire Shares as
follows: Mr. Scott held options to purchase 300,000 Shares, of which 139,000
were unvested; David G. Schumacher held options to purchase 65,000 Shares, of
which 42,000 were unvested; Derwin L. Williams held options to purchase 60,000
Shares, of which 30,000 were unvested; Michael H. Martel held options to
purchase 45,000 Shares, of which 29,000 were unvested; Donald J. Amaral held
options to purchase 20,000 Shares, of which 13,500 were unvested; John A.
Brende held options to purchase 20,000 Shares, of which 12,500 were unvested;
William J. Casey held options to purchase 20,000 Shares, of which 12,500 were
unvested; and Gary J. Massimino held options to purchase 20,000 Shares, of
which 14,500 were unvested. As of February 11, 1998, (i) the aggregate number
of Existing Stock Options held by all of the foregoing directors and executive
officers as a group was 540,000, of which 293,000 were unvested, (ii) the
aggregate number of Existing Stock Options outstanding was 909,500, of which
490,300 were unvested and (iii) the average exercise price of the Company's
Existing Stock Options was $18.30 per share ($17.50 for the vested options and
$18.98 for the unvested options).
A table showing beneficial ownership of Shares by Directors and Executive
Officers of the Company is set forth in Schedule II to this Offer to Purchase.
Special Severance Plan.
The Company has established a Special Severance Pay Plan (the "Special
Severance Plan") which will become effective upon the consummation of the
Offer. The Special Severance Plan provides for the payment of severance
benefits to participants whose employment is terminated as provided in the
Special Severance Plan and supersedes all other severance pay practices or
plans of the Company or any of its subsidiaries.
Only those individuals who are both listed in the Special Severance Plan and
who are employed by the Company or one of its subsidiaries as of the day prior
to the purchase of Shares in the Offer will be a "Participant" in the Special
Severance Plan. If a Participant's employment is terminated on or prior to the
second anniversary of the purchase of Shares in the Offer either (i) by the
Parent, the Company or a subsidiary other than for "Cause" or (ii) by such
Participant for "Good Reason", such Participant will be entitled to receive
the greater of (x) the applicable cash severance benefits provided in the
Special Severance Plan and (y) the severance benefits to which such
Participant would be entitled under a then effective severance program of the
Parent, but in each case only if the Participant provides a standard form of
general release as required in the Special Severance Plan. The Special
Severance Plan defines "Cause" for termination of a Participant's employment
as such Participant's dishonesty, fraud, willful misconduct, self-dealing,
breach of fiduciary duty, failure, neglect or refusal to perform such
Participant's duties in any material respect or conviction of a crime
involving moral turpitude. The Special Severance Plan defines "Good Reason"
for termination of a Participant's employment as a material diminution in such
Participant's title, authority or responsibilities, a reduction in such
Participant's base pay (except for across the board reductions affecting
similarly situated employees), the relocation of such Participant's principal
office to a location that increases his commute by more than 30 miles and the
failure to continue to provide benefits substantially similar in value to
those enjoyed at the purchase of Shares in the Offer (unless such Participant
participates in other comparable benefits generally available to employees).
The Special Severance Plan provides that a Participant who is entitled to
severance pay under the plan shall receive, as a lump sum cash payment, an
amount determined by taking the maximum number of months of
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severance pay to which such Participant is entitled under the Special
Severance Plan (which varies from between two and twenty-four months depending
upon the Participant) and, subtracting the number of whole months elapsed
between the purchase of Shares in the Offer and the termination of employment
of such Participant, and multiplying the result by such Participant's Base Pay
(as defined in the Special Severance Plan).
Under the Special Severance Plan, the following Participants who are
executive officers of the Company would be entitled to a severance pay benefit
of the amount indicated in the table below if such Participant's employment
were terminated other than for Cause or by such Participant for Good Reason at
the Effective Time:
<TABLE>
<CAPTION>
NUMBER OF TOTAL
MONTHS OF MONTHLY SEVERANCE
PARTICIPANT SEVERANCE PAY BASE PAY BENEFIT
----------- ------------- -------- ---------
<S> <C> <C> <C>
William C. Scott............................ 24 $33,333 $800,000
Chairman and Chief Executive Officer
David G. Schumacher......................... 12 $17,917 $215,000
President
Derwin L. Williams.......................... 12 $15,167 $182,000
Senior Vice President Finance
Michael H. Martel........................... 12 $12,917 $155,000
Senior Vice President Marketing
</TABLE>
The aggregate maximum severance benefit payable under the Special Severance
Plan to the four executive officers listed above is $1,352,000. The aggregate
maximum severance benefit payable under the Special Severance Plan to the
Company's twelve Vice Presidents, Regional Vice Presidents and Pharmacy
Presidents is $1,322,722. The aggregate maximum severance benefit payable
under the Special Severance Plan to the Company's Center Administrators and
Executive Director and Corporate Main Office Department Heads is $3,050,126.
The aggregate maximum severance benefit payable under the Special Severance
Plan to all employees of the Company is $7,710,748. The aggregate annual
salary of all such persons is $8,788,164.
Remuneration of Special Committee Members.
In consideration of the substantial efforts of the Special Committee, on
February 6, 1998, the Company Board (with Messrs. Massimino, Brande, Casey and
Scott not participating) authorized payments to be made to Messrs. Massimino,
Brende and Casey in amounts equal to $50,000, $40,000 and $40,000,
respectively.
Payment of Bonus to Mr. Scott.
At a meeting of the Company's Board of Directors held on December 19, 1997,
the Company's Board of Directors approved the payment of a special bonus in
the amount of $100,000 (the "Bonus") to Mr. Scott upon the successful
completion of a sale of the Company. The Bonus will become payable upon the
consummation of the Merger.
Agreement With Mr. Scott, Parent and Others.
In connection with the transactions contemplated by the Merger Agreement,
Mr. Scott entered into an agreement with Parent, Heritage and certain other
persons providing for, among other things, Mr. Scott's equity ownership in,
employment by and representation on the Board of Directors of Parent. See
"SPECIAL FACTORS--The Merger Agreement and Related Agreements--Management
Agreement".
Indemnification.
As allowed by the California Law, the Company's Articles of Incorporation
provide that the liability of the directors of the Company for monetary
damages shall be eliminated to the fullest extent permissible under
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California Law. This is intended to eliminate the personal liability of a
director for monetary damages in an action brought by or in the right of the
Company for breach of a director's duties to the Company or its shareholders
except for liability: (i) for acts or omissions that involve intentional
misconduct or a knowing and culpable violation of law; (ii) for acts or
omissions that a director believes to be contrary to the best interests of the
Company or its shareholders or that involve the absence of good faith on the
part of the director; (iii) for any transaction from which a director derived
an improper personal benefit; (iv) for acts or omissions that show a reckless
disregard for the director's duty to the Company or its shareholders in
circumstances in which the director was aware, or should have been aware, in
the ordinary course of performing a director's duties, of a risk of serious
injury to the Company or its shareholders; (v) for acts or omissions that
constitute an unexcused pattern of inattention that amounts to an abdication
of the director's duty to the Company or its shareholders; (vi) with respect
to certain transactions or the approval of transactions in which a director
has a material financial interest; and (vii) expressly imposed by statute, for
approval of certain improper distributions to shareholders or certain loans or
guarantees. This provision does not limit or eliminate the rights of the
Company or any shareholder to seek non-monetary relief such as an injunction
or rescission in the event of a breach of a director's duty of care.
The Company's Bylaws permit it to indemnify its directors and officers to
the full extent permitted by law. In addition, the Company's Articles of
Incorporation expressly authorize the use of indemnification agreements, and
the Company has entered into separate indemnification agreements with each of
its directors and its executive officers. These agreements require the Company
to indemnify its officers and directors to the full extent permitted by law,
including circumstances in which indemnification would otherwise be
discretionary. Among other things, the agreements require the Company to
indemnify directors and officers against certain liabilities that may arise by
reason of their status or service as directors and officers and to advance
their expenses incurred as a result of any proceeding against them as to which
they could be indemnified.
Pursuant to the Merger Agreement, all rights to indemnification and
exculpation from liabilities for acts or omissions occurring at or prior to
the Effective Time existing in favor or the current or former directors or
officers of the Company (and its subsidiaries) will be assumed by the
Surviving Corporation and Parent shall cause the Surviving Corporation to
maintain, for a period of not less than three years after the Effective Time,
the current policies of directors' and officers' liability insurance
maintained by the Company (or comparable policies with terms not less
advantageous to such directors and officers), but is not required to expend in
any given year more than 150% of the current annualized payments paid by the
Company for such insurance.
Related Party Transactions.
During the past four years, the Company and Parent have purchased various
health-related services from each other on an arms-length basis. The Company
has provided pharmacy services to certain of Parent's skilled nursing
facilities since July 1994. The approximate annual revenues from Parent's
facilities to the Company were $1,900,000 in 1995, $2,500,000 in 1996 and
$2,700,000 in 1997. Parent has provided physical, speech and occupational
therapy services to certain of the Company's nursing centers. The approximate
annual revenue from the Company to Parent from these services was $7,500,000
in 1995, $9,800,000 in 1996 and $10,300,000 in 1997. In 1998, Parent has
purchased approximately $260,000 in pharmacy services from the Company, and
the Company has purchased no services from Parent.
Mr. Scott, the Chairman and Chief Executive Officer of the Company, and Mr.
Snukal, the Chairman and Chief Executive Officer of Parent, have known each
other for more than ten years. On numerous occasions during that time they
have met socially or to discuss the business relations between their
companies.
9. THE MERGER AGREEMENT AND RELATED AGREEMENTS.
The Merger Agreement.
The following is a summary of the material terms of the Merger Agreement, a
copy of which is filed as an exhibit to the Tender Offer Statement on Schedule
14D-1 filed by Parent and Purchaser pursuant to Rule 14d-3
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<PAGE>
of the Exchange Act and the Transaction Statement on Schedule 13E-3 filed by
Purchaser and Parent pursuant to Rule 13e-3 of the Exchange Act with the
Commission in connection with the Offer (together with any amendments,
supplements, schedules, annexes and exhibits thereto, the "Schedule 14D-1" and
the "Schedule 13E-3", respectively). Such summary is qualified in its entirety
by reference to the Merger Agreement.
The Offer. The Merger Agreement provides that if none of the events or
conditions set forth in "THE TENDER OFFER--Certain Conditions to the Offer"
(the "Conditions") shall have occurred and be existing, as promptly as
practicable after, but in no event later then five (5) Business Days after,
the public announcement of the execution of the Merger Agreement by the
parties thereto, Purchaser is required to commence the Offer for all the
outstanding Shares, at the Offer Price. Purchaser is required to use all
commercially reasonable efforts to consummate the Offer. Purchaser shall
accept for payment all outstanding Shares which have been validly tendered and
not withdrawn pursuant to the Offer at the earliest time following the
expiration of the Offer provided that all conditions to the Offer shall have
been satisfied or waived by Purchaser. The obligation of Purchaser to accept
for payment, purchase and pay for Shares tendered pursuant to the Offer is
subject only to the Conditions and to the Minimum Condition. Purchaser has
expressly reserved the right to increase the Offer Price or to make any other
changes in the terms and conditions of the Offer (provided that, unless
previously approved by the Company in writing, no change may be made which
decreases the Offer Price, which changes the form of consideration to be paid
in the Offer, which reduces the maximum number of Shares to be purchased in
the Offer, which imposes conditions to the Offer in addition to the Conditions
or which broadens the scope of such Conditions except as provided below).
The Merger Agreement provides that the Offer Price is to be paid net to the
sellers of Shares in cash, less any required withholding of taxes, upon the
terms and subject to the Conditions of the Offer. No Shares held by the
Company or any of its subsidiaries will be tendered in the Offer.
The Merger Agreement provides that the Offer will expire at midnight, New
York City time, on the date that is twenty Business Days (which means any day
other than Saturday, Sunday or a federal holiday) after the Offer is
commenced; provided, however, that without the consent of the Company Board,
Purchaser may (i) extend the Offer, if at the scheduled expiration date of the
Offer any of the conditions to the Offer shall not have been satisfied or
waived, until such time as such conditions are satisfied or waived, (ii)
extend the Offer for any period required for any rule, regulation,
interpretation or position of the Commission or the staff thereof applicable
to the Offer or (iii) extend the Offer for any reason on one or more occasions
for an aggregate period of not more than ten Business Days beyond the latest
expiration date that would otherwise be permitted under clause (i) or (ii) of
this sentence if on such expiration date there shall not have been tendered
that number of Shares which, together with Shares then owned directly or
indirectly by Purchaser, would equal at least ninety percent (90%) of the
Shares. If all of the Conditions to the Offer are not satisfied on any
scheduled expiration date of the Offer then, provided that all such Conditions
are reasonably capable of being satisfied prior to July 31, 1998, Purchaser is
required to extend the Offer from time to time until such Conditions are
satisfied or waived, provided that Purchaser will not be required to extend
the Offer beyond July 31, 1998. Subject to the terms and conditions of the
Offer and the Merger Agreement, Purchaser has agreed to accept for payment,
and pay for, all Shares validly tendered and not withdrawn pursuant to the
Offer that Purchaser becomes obligated to accept for payment and pay for
pursuant to the Offer, as promptly as practicable after the expiration of the
Offer.
Pursuant to the Merger Agreement, in the event that the Minimum Condition is
not satisfied on or before the tenth Business Day after all other Conditions
have been satisfied, Purchaser has agreed that (i) the Minimum Condition will
be automatically amended to mean that a number of Shares which, together with
Shares then owned directly or indirectly by Purchaser, would equal not less
than 49.9% of the outstanding Shares (calculated as of the Initial Expiration
Date) shall have been validly tendered and not withdrawn prior to the
expiration date of the Offer, as extended as provided in clause (ii)(B) below,
and (ii) Purchaser will forthwith amend the Offer (A) to provide that
Purchaser will purchase, on a pro rata basis in the Offer, that number of
Shares which, together with Shares then owned directly or indirectly by
Purchaser, would equal 49.9% of the outstanding Shares (calculated as of the
Initial Expiration Date) and (B) to extend the Offer for a period of not less
than ten Business Days following the public announcement of such amendment of
the Offer.
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<PAGE>
Company Action. The Company has approved of and consented to the Offer. The
Company Board, at a meeting duly called and held, has, subject to the terms
and conditions set forth in the Merger Agreement, (i) determined that the
Merger Agreement and the transactions contemplated thereby, including the
Offer and the Merger, are fair to, and in the best interests of, the
shareholders of the Company, (ii) approved the Merger Agreement and the
transactions contemplated thereby, including the Offer and the Merger, in all
respects, such approval constituting approval of the Offer, the Merger
Agreement and the Merger for purposes of Section 1201 of California Law, and
similar provisions of any other similar state statutes that might be deemed
applicable to the transactions contemplated by the Merger Agreement, and (iii)
resolved to recommend that the shareholders of the Company accept the Offer,
tender their Shares to Purchaser and approve and adopt the Merger Agreement
and the Merger; provided, however, that such recommendation may be withdrawn,
modified or amended to the extent that the Company Board by a majority vote
determines in its good faith judgment, based on the advice of counsel, that it
is required to do so in the exercise of its fiduciary duties under California
Law.
The Merger Agreement provides that the Company will file with the Commission
a Solicitation/ Recommendation Statement on Schedule 14D-9 pertaining to the
Offer (together with any amendments or supplements thereto, the "Schedule 14D-
9") containing the recommendation described above, and promptly mail the
Schedule 14D-9 to the shareholders of the Company. Notwithstanding anything to
the contrary in the Merger Agreement, if the Company Board by majority vote
determines in its good faith judgment, based on the advice of counsel, that it
is required in the exercise of its fiduciary duties to withdraw, modify or
amend the recommendation of the Board, such withdrawal, modification or
amendment shall not constitute a breach of the Merger Agreement.
Boards of Directors and Committees. The Merger Agreement provides that,
promptly upon the purchase by Purchaser of Shares pursuant to the Offer and
from time to time thereafter, Purchaser shall be entitled to designate up to
such number of directors, rounded up to the next whole number, on the Company
Board as will give Purchaser representation on the Company Board equal to the
product of the number of directors on the Board (giving effect to any increase
in the number of directors as provided in the Merger Agreement) and the
percentage that such number of Shares so purchased bears to the total number
of outstanding Shares on a fully diluted basis, and the Company shall use its
reasonable best efforts to, upon request by Purchaser, promptly, at the
Company's election, either increase the size of the Board or secure the
resignation of such number of directors as is necessary to enable Purchaser's
designees to be elected to the Company Board and to cause Purchaser's
designees to be so elected. At such times, the Company will use its reasonable
best efforts to cause persons designated by Purchaser to constitute the same
percentage as is on the Company Board to be represented on (i) each committee
of the Company Board (other than any committee of the Company Board
established to take action under the Merger Agreement), (ii) each board of
directors of each subsidiary of the Company and (iii) each committee of each
such board. Notwithstanding the foregoing, Parent and Purchaser have agreed
that, until the consummation of the Merger, Parent and Purchaser will not
cause the removal of Messrs. Brende, Casey or Massimino from the Board of
Directors of the Company and shall permit such persons to remain as members of
the Special Committee of the Board of Directors responsible for addressing on
behalf of the Company any issues that arise under the Merger Agreement between
the Company, on the one hand, and Parent and Purchaser, on the other hand.
The Merger. The Merger Agreement provides that, upon the terms and subject
to the conditions set forth in the Merger Agreement, and in accordance with
Delaware Law and California Law, at the Effective Time, Purchaser will be
merged with and into the Company. The Merger Agreement provides that the
Merger will become effective upon the later to occur of the filing of the
Merger Agreement with the Secretary of State of the State of California or the
filing of a certificate of merger with the Secretary of State of the State of
Delaware (the "Effective Time"). As a result of the Merger, the separate
corporate existence of Purchaser will cease, and the Company will continue as
the Surviving Corporation.
Pursuant to the Merger Agreement, each Share issued and outstanding
immediately prior to the Effective Time (other than Shares held by the
Company, its subsidiaries or by Parent, Purchaser or any other subsidiaries of
Parent, which will be canceled and extinguished without consideration, or
Shares as to which appraisal rights
30
<PAGE>
are exercised) shall be converted into the right to receive an amount in cash
equal to the Offer Price, without interest (the "Merger Consideration"). In
addition, each share of common stock of Purchaser issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
share of a class of capital stock of the Surviving Corporation with the same
rights, powers and privileges as the share of capital stock so converted, and
shall constitute the only outstanding shares of capital stock of the Surviving
Corporation. Each Share or Option held by the Company as treasury stock or its
subsidiary, as Parent, Purchaser or any subsidiary of Parent or Purchaser will
be canceled and extinguished without consideration. Notwithstanding any other
provision of the Merger Agreement to the contrary, Shares outstanding
immediately prior to the Effective Time and held by shareholders who shall
have not voted in favor of the Merger or consented thereto in writing and who
shall be entitled to and shall have demanded properly in writing payment for
such Shares in accordance with Chapter 13 of California Law and who shall not
have withdrawn such demand or otherwise have forfeited appraisal rights shall
not be converted into or represent the right to receive cash pursuant to the
Merger Agreement.
The Merger Agreement provides that the directors of Purchaser at the
Effective Time will be the directors of the Surviving Corporation and that the
officers of the Purchaser at the Effective Time will be the officers of the
Surviving Corporation, in each case, until successors are duly elected or
appointed and qualified in accordance with applicable law. The Merger
Agreement also provides that the Articles of Incorporation of the Company in
effect at the Effective Time will be the Articles of Incorporation of the
Surviving Corporation, and that the bylaws of the Company will be the bylaws
of the Surviving Corporation, in each case, until amended in accordance with
applicable law.
Shares of Dissenting Holders. The Merger Agreement provides that
notwithstanding anything to the contrary contained in the Merger Agreement,
any holder of Shares with respect to which dissenters' rights, if any, are
granted by reason of the Merger under California Law and who does not vote in
favor of the Merger and who otherwise complies with Chapter 13 of California
Law ("Company Dissenting Shares") shall not be entitled to receive any Merger
Consideration pursuant to the terms of the Merger Agreement, unless such
holder fails to perfect, effectively withdraws or loses his or her right to
dissent from the Merger under California Law. Such holder shall be entitled to
receive only the payment provided for by Chapter 13 of California Law. If any
such holder so fails to perfect, effectively withdraws or loses his or her
dissenters' rights under California Law, each Company Dissenting Share of such
holder shall thereupon be deemed to have been converted, as of the Effective
Time, into the right to receive the Offer Price.
Any payments relating to Company Dissenting Shares shall be made solely by
the Surviving Corporation and no funds or other property have been or will be
provided by Purchaser, Parent or any of Parent's other direct or indirect
subsidiaries for such payment, nor shall the Company make any payment with
respect to, or settle or offer to settle, any such demands.
Exchange of Certificates. The Merger Agreement provides that a bank or trust
company designated by Parent and reasonably acceptable to the Company, shall
act as the exchange agent (in such capacity, the "Exchange Agent"), for the
benefit of the holders of Shares, for the exchange of a certificate or
certificates which immediately prior to the Effective Time represented Shares
(the "Certificates") that were converted into the right to receive the Offer
Price. The Merger Agreement provides that Parent will make available to the
Exchange Agent from time to time the Merger Consideration to be paid in
respect of the Shares.
Pursuant to the Merger Agreement, as soon as reasonably practicable after
the Effective Time, the Exchange Agent shall mail to each holder of record of
Certificates: (i) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon delivery of the Certificates to the Exchange Agent and shall be in
such form and have such other provisions as Parent and the Company may
reasonably specify) and (ii) instructions for use in effecting the surrender
of the Certificates in exchange for a cash payment of the proper Merger
Consideration. Upon surrender of a Certificate for cancellation to the
Exchange Agent or to such other agent or agents as may be appointed by Parent
and Purchaser, together with such letter of transmittal, duly executed, the
holder of such Certificate shall be entitled to receive in
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<PAGE>
exchange therefor by check an amount equal to (A) the Offer Price, multiplied
by (B) the number of Shares represented by such Certificate, which such holder
has the right to receive, and the Certificate so surrendered shall forthwith
be canceled. No interest shall be paid or accrued on any Merger Consideration
upon the surrender of any Certificates. In the event of a transfer of
ownership of Shares which is not registered in the transfer records of the
Company, payment of the proper Merger Consideration may be paid to a
transferee if the Certificate representing such Shares is presented to the
Exchange Agent, accompanied by all documents required to evidence and effect
such transfer and by evidence that any applicable stock transfer or other
taxes required as a result of such payment to a Person other than the
registered holder of such shares have been paid. Until surrendered and
exchanged, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive upon such surrender an amount
equal to (A) the Offer Price, multiplied by (B) the number of Shares
represented by such Certificate. In the event that any Certificate shall have
been lost, stolen or destroyed, the Exchange Agent shall pay, upon the making
of an affidavit of that fact by the holder thereof, the proper Merger
Consideration, provided, however, that Parent may, in its discretion, require
the delivery of a suitable bond and/or indemnity.
The Merger Agreement further provides that the Merger Consideration paid
upon the surrender for exchange of Shares shall be deemed to have been paid in
full satisfaction of all rights pertaining to such Shares, subject, however,
to the Surviving Corporation's obligation to pay any dividends or make any
other distributions with a record date prior to the Effective Time which may
have been declared or made by the Company on such Shares in accordance with
the terms of the Merger Agreement or prior to the date thereof and which
remain unpaid at the Effective Time, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the Shares which were outstanding immediately prior to the
Effective Time. If, after the Effective Time, Certificates are presented to
the Surviving Corporation for any reason, they shall be canceled and
exchanged.
Pursuant to the Merger Agreement, any portion of the Merger Consideration
which remains undistributed to the shareholders of the Company for six months
after the Effective Time shall be delivered to Parent, upon demand, and any
shareholders of the Company who have not theretofore complied with the terms
of the Merger Agreement shall thereafter look only to Parent for payment of
their claim for any Merger Consideration.
Company Stock Options. The Merger Agreement provides that at the Effective
Time, each Existing Stock Option issued pursuant to the Summit Care
Corporation Stock Option Plan, as amended, of the Company (the "Company
Plan"), whether vested or unvested, shall be converted into and shall become
the right to receive a cash payment per Existing Stock Option, without
interest, determined by multiplying (i) the excess, if any, of the Offer Price
over the applicable per share exercise price of such Existing Stock Option
(without taking into account whether such Existing Stock Option was in fact
exercisable at such time), by (ii) the number of Shares into which such
Existing Stock Option was exercisable immediately prior to the Effective Time
(less any amounts required to be deducted pursuant to any applicable income
and employment tax withholding requirements). At the Effective Time, all
Existing Stock Options (including those options with an exercise price equal
to or in excess of the Offer Price) shall be canceled and be of no further
force or effect except for the right to receive cash to the extent provided in
the Merger Agreement.
Conduct of Business Prior to Consummation of the Merger. Pursuant to the
Merger Agreement, the Company Board has agreed not to permit the Company or
its subsidiaries to conduct its business in any manner other than in the
ordinary course of business and in a manner consistent with past practice. The
Company has agreed that, among other things and subject to certain exceptions,
between the date of the Merger Agreement and the Effective Time, other than
with Parent's or Purchaser's prior written consent, the Company and its
subsidiaries shall not, voluntarily or involuntarily, take any of the
following actions:
(i) amend its Articles of Incorporation and Bylaws;
(ii) amend or modify (except as contemplated by the Merger Agreement) the
terms of the Company Plan or authorize for issuance, issue, sell, deliver
or agree or commit to issue, sell or deliver (whether through the issuance
or granting of options, warrants, commitments, subscriptions, rights to
purchase or
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<PAGE>
otherwise) any stock of any class or any other securities or equity
equivalents (including, without limitation, any stock options or stock
appreciation rights), except for the issuance or sale of shares of Company
common stock pursuant to the exercise of Existing Stock Options;
(iii) 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 redeem or otherwise acquire any securities of the Company
or of its subsidiaries;
(iv) except in connection with the exercise or purchase options under
existing leases, (A) incur or assume any long-term or short-term debt or
issue any debt securities, except for borrowings under existing lines of
credit in the ordinary course of business and in amounts not material to
the Company and its subsidiaries taken as a whole and except for
indebtedness not exceeding $250,000 in the aggregate; (B) except as
described in the Merger Agreement, assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently otherwise) for
the obligations of any other person, except in the ordinary course of
business consistent with past practice and in amounts not material to the
Company and its subsidiaries taken as a whole and except for obligations of
its subsidiaries; (C) except for investments not exceeding $500,000 in the
aggregate, make any loans, advances or capital contributions to, or
investments in, any other person (other than to subsidiaries of the Company
or customary loans or advances to employees in the ordinary course of
business consistent with past practice and in amounts not material to the
maker of such loan or advance); (D) except as described in the Merger
Agreement, pledge or otherwise encumber shares of capital stock of the
Company or its subsidiaries; or (E) except as described in the Merger
Agreement, mortgage or pledge any of its material assets, tangible or
intangible, or create or suffer to exist any material lien thereupon except
for liens securing indebtedness not exceeding $250,000 in the aggregate;
(v) except as may be required by law or as contemplated by the Merger
Agreement and except in connection with the hiring of officers (to replace
any officer who retires or is terminated for any reason) or employees in
the ordinary course of business, enter into, adopt or amend or terminate
any bonus, profit sharing, compensation, severance, termination, stock
option, stock appreciation right, restricted stock, performance unit, stock
equivalent, stock purchase agreement, pension, retirement, deferred
compensation, employment, severance or other employee benefit agreement,
trust, plan, fund or other arrangement for the benefit or welfare of any
director, officer or employee in any manner, or (except for normal
increases in the ordinary course of business consistent with past practice
that, in the aggregate, do not result in a material increase in benefits or
compensation expense to the Company, except as required under existing
agreements and except for the payment of bonuses and severance payments in
the ordinary course of business generally consistent with past practice)
increase in any manner the compensation or fringe benefits of any director,
officer or employee or pay any benefit not required by any plan and
arrangement as in effect as of the date of the Merger Agreement (including,
without limitation, the granting of stock appreciation rights or
performance units);
(vi) except as described in the Merger Agreement or with the consent of
Parent or Purchaser, which consent will not be unreasonably withheld,
acquire, sell, lease or dispose of any assets outside the ordinary course
of business or any assets which have a value in excess of $5 million;
(vii) except as may be required as a result of a change in law or in
generally accepted accounting principles, change any of the accounting
principles or practices used by it;
(viii) except in connection with the exercise of purchase options under
existing leases, (A) acquire (by merger, consolidation, or acquisition of
stock or assets) any corporation, partnership or other business
organization or division thereof or any equity interest therein (except for
transactions having an aggregate value not exceeding $500,000 in the
aggregate); (B) authorize or make any new capital expenditure or
expenditures which, individually, is in excess of $250,000 or, in the
aggregate, are in excess of $1.0 million; provided, however, that none of
the foregoing shall limit any capital expenditure already included in the
Company's 1998 capital expenditure budget; or (C) enter into or amend any
contract, agreement, commitment or arrangement providing for the taking of
any action that would be prohibited by clauses (A) or (B) of this
paragraph;
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(ix) make any tax election or settle or compromise any income tax
liability material to the Company and its subsidiaries taken as a whole;
(x) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, asserted or unasserted, contingent or otherwise), other
than the payment, discharge or satisfaction in the ordinary course of
business of liabilities reflected or reserved against, in, or contemplated
by, the consolidated financial statements (or the notes thereto) of the
Company and its subsidiaries at September 30, 1997 or incurred in the
ordinary course of business consistent with past practice;
(xi) settle or compromise any pending or threatened suit, action or claim
relating to the transactions contemplated by the Merger Agreement; or
(xii) take, or agree in writing or otherwise to take, any of the actions
which would make any of the representations or warranties of the Company
contained in the Merger Agreement untrue or incorrect as of the date when
made.
Other Potential Acquirors. The Merger Agreement provides that the Company,
its affiliates and their respective officers, directors, employees,
representatives and agents shall immediately cease any existing discussions or
negotiations, if any, with any parties (other than the parties to the Merger
Agreement) conducted with respect to any offer or proposal for a merger or
other business combination involving the Company or any of its subsidiaries or
the acquisition of all or any material portion of the assets of, or any equity
interest in, the Company or its subsidiaries or any business combination with
the Company or its Subsidiaries (each an "Acquisition Proposal"). The Company
may, directly or indirectly, furnish information and access, in each case only
in response to unsolicited requests therefor, to any corporation, partnership,
limited liability company or other entity or group pursuant to confidentiality
agreements on terms no less favorable to the Company than the confidentiality
agreement that has been entered into by and between the Company and Parent,
and may participate in discussions and negotiate with such entity or group
concerning any merger, sale of assets, sale of shares of capital stock or
similar transaction involving the Company or any Subsidiary or division
thereof, if such entity or group has submitted a written proposal to the
Company Board relating to any such transaction and the Company Board by a
majority vote determines in its good faith judgment, based on the advise of
counsel, that it is required to do so in the exercise of its fiduciary duties
under California Law. The Company Board shall promptly (and in no event later
than 24 hours after receipt of the relevant Acquisition Proposal) notify
(which notice shall be provided orally and in writing and shall identify the
person making the relevant Acquisition Proposal and set forth material terms
thereof) Purchaser after (i) the Company has received any Acquisition Proposal
or (ii) one of Messrs. Brende, Casey or Massimino has actual knowledge that
any person has taken concrete steps that could reasonably be expected to
result in an Acquisition Proposal, and thereafter shall keep Parent and
Purchaser promptly advised of any development with respect thereto. Except as
set forth above, neither the Company or any of its affiliates; nor any of its
or their respective officers, director, employees, representatives or agents,
shall, directly or indirectly, encourage, solicit, participate in or initiate
discussions or negotiations with, or provide any information to, any
corporation, partnership, limited liability company or other entity or group
(other than Parent and Purchaser, any affiliate or associate of Parent and
Purchaser or any designees of Parent and Purchaser) concerning any merger,
sale of assets, sale of shares of capital stock or similar transaction
involving the Company, any subsidiary or any division of the Company or any
subsidiary; provided, however, that nothing shall prevent the Company Board
from taking, and disclosing to the Company's shareholders, a position
contemplated by Rules 14d-9 and 14e-2 promulgated under the Exchange Act with
regard to any tender offer; and provided further, however, that nothing shall
prevent the Board from making such disclosure to the Company's shareholders
as, in the good faith judgment of the Company Board, is required in the
exercise of its fiduciaries duties under California Law, provided that the
Company complies with the termination provisions of the Merger Agreement.
Access to Information. The Merger Agreement provides that until the
Effective Time, the Company will provide to Parent and Purchaser and their
authorized representatives reasonable access to all employees, plants,
offices, warehouses and other facilities and to all books and records of the
Company and its subsidiaries, will permit Parent and Purchaser to make such
inspections as Parent and Purchaser may reasonably require and will
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cause the Company's officers and those of its subsidiaries to furnish Parent
and Purchaser with such financial and operating data and other information with
respect to the business and properties of the Company and its Subsidiaries as
Parent or Purchaser may from time to time reasonably request.
Pursuant to the Merger Agreement, each of Parent and Purchaser has agreed
that it will hold and will cause its consultants and advisors to hold in
confidence all documents and information concerning the Company and its
subsidiaries furnished to Parent or Purchaser in connection with the
transactions contemplated by the Merger Agreement pursuant to the terms of that
certain Confidentiality Agreement entered into between the Company and Heritage
dated October 31, 1997.
Shareholders Meeting. The Merger Agreement provides that, if a vote of the
Company's shareholders is required by law, the Company will, as promptly as
practicable following the acceptance for payment of Shares by Purchaser
pursuant to the Offer, take, in accordance with applicable law and its articles
of incorporation and by-laws, all action necessary to convene a meeting of
holders of Shares (the "Shareholders Meeting") to consider and vote upon the
approval of the Merger Agreement. The Company shall, promptly following the
acceptance for payment of Shares by Parent pursuant to the Offer, prepare and
file with the Commission a proxy statement for the solicitation of a vote of
holders of Shares approving the Merger (the "Proxy Statement"), which shall
include the recommendation of the Company Board that shareholders of the
Company vote in favor of the approval and adoption of the Merger Agreement and
the written opinion of DLJ that the cash consideration to be received by the
shareholders of the Company pursuant to the Merger is fair to such shareholders
from a financial point of view. The Company shall use all reasonable efforts to
have the Proxy Statement cleared by the Commission as promptly as practicable
after such filing, and promptly thereafter mail the Proxy Statement to the
shareholders of the Company. The Company shall also use its best efforts to
obtain all necessary state securities law or "blue sky" permits and approvals
required in connection with the Merger and to consummate the other transactions
contemplated by the Merger Agreement and will pay all expenses incident
thereto. Notwithstanding the foregoing, the Merger Agreement provides that if
Parent, Purchaser and/or any other subsidiary of Parent shall acquire at least
90% of the outstanding Shares, the parties shall take all necessary and
appropriate action to cause the Merger to become effective as soon as
practicable after the expiration of the Offer without a Shareholders Meeting in
accordance with Section 1110 of the California Law.
Parent and Purchaser have agreed to cause all Shares purchased pursuant to
the Offer and all other Shares owned by Parent, Purchaser or any subsidiary of
Parent to be voted in favor of the Merger.
Additional Agreements; Reasonable Efforts. Subject to the terms and
conditions in the Merger Agreement, Parent, Purchaser and the Company agree to
use all commercially reasonable efforts to take, or cause to be taken, all
action, and to do, or cause to be done, all things reasonably necessary, proper
or advisable under applicable laws and regulations to consummate and make
effective the transactions contemplated by the Merger Agreement, including,
without limitation, (a) cooperation in the preparation and filing of the
Schedule 14D-1, the Schedule 14D-9, the Schedule 13E-3, the Proxy Statement,
any filings that may be required under the HSR Act and any amendments thereto;
(b) the taking of all action reasonably necessary, property or advisable to
secure any necessary consents under existing debt obligations of the Company
and its subsidiaries or to amend the notes, indentures or agreements relating
thereto the extent required by such notes, indentures or agreements or redeem
or repurchase such debt obligations; (c) contesting any legal proceeding
relating to the Offer or the Merger and (d) the execution of any additional
instruments, including the Merger Agreement, necessary to consummate the
transactions contemplated thereby. Subject to the terms and conditions of the
Merger Agreement, Parent and Purchaser agree to use all reasonable efforts to
cause the Effective Time to occur as soon as practicable after the shareholder
vote, if any, with respect to the Merger. In case at any time after the
Effective Time any further action is necessary to carry out the purposes of the
Merger Agreement, the proper officers and directors of each party shall take
all such necessary action.
Consents. The Merger Agreement provides that Parent, Purchaser and the
Company each will use all commercially reasonable efforts to obtain consents of
all third parties and governmental entities necessary, proper or advisable for
the consummation of the transactions contemplated by the Merger Agreement.
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Public Announcements. The Merger Agreement provides that Parent, Purchaser
and the Company, as the case may be, will consult with one another before
issuing any press release or otherwise making any public statements with
respect to the transactions contemplated by the Merger Agreement, including,
without limitation, the Offer or the Merger, and shall not issue any such
press release or make any such public statement prior to such consultation,
except as may be required by applicable law or by obligations pursuant to any
listing agreement with the New York Stock Exchange, Inc. or the NASDAQ Stock
Market, as determined by Parent, Purchaser or the Company, as the case may be.
Guarantee of Performance. Pursuant to the Merger Agreement, Parent has
agreed to guarantee performance by Purchaser of its obligations under the
Merger Agreement and the indemnification obligations of the Surviving
Corporation (as described below).
Financing Commitments. Subject only to the satisfaction of Parent's and
Purchaser's conditions to consummation of the Offer, Heritage agreed in the
Merger Agreement to provide to Parent and Purchaser not later than the
purchase under the Offer $82 million of the funds necessary to purchase Shares
in the Offer and/or the Merger.
Parent and Purchaser represent in the Merger Agreement that Parent has also
received a commitment letter from Bank of Montreal (the "Commitment"), to
provide funds necessary to purchase the Shares, to refinance existing Company
and subsidiary indebtedness and to pay any and all of the costs and expenses
incurred and to be incurred by Parent and Purchaser in connection with the
transactions contemplated by the Merger Agreement. See "THE TENDER OFFER--
Source and Amount of Funds".
Other Financing Commitment. Pursuant to the Merger Agreement, Parent,
Purchaser and Heritage have agreed to use their commercially reasonable
efforts to consummate the transactions contemplated by the Commitment and to
obtain the funding contemplated thereunder and, if the Commitment is
terminated for any reason, then promptly to obtain another commitment letter
or letters or similar documents covering at least the same amount of funds and
for the same purpose, containing certain conditions excusing funding that are
at least as restrictive on the issuer of such commitment letter or letters as
those contained in the Commitment.
Conditions to the Merger. Under the Merger Agreement, the respective
obligations of the parties to effect the Merger are subject to the
satisfaction or waiver of the following conditions prior to the Effective
Time: (a) if required by California Law, the Merger Agreement and the Merger
shall have been approved and adopted by the requisite vote of the shareholders
of the Company; (b) no statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or enforced
by any United States court or United States governmental authority which
prohibits, restrains, enjoins or restricts the consummation of the Merger; (c)
any waiting period applicable to the Merger under the HSR Act shall have
terminated or expired, and any other governmental or regulatory notices or
approvals required with respect to the transactions contemplated by the Merger
Agreement shall have been either filed or received; (d) Purchaser shall have
purchased the Shares pursuant to the Offer.
Representations and Warranties. The Merger Agreement contains various
customary representations and warranties of the parties thereto including
representations by the Company as to the Company's corporate organization and
qualification, the Company's subsidiaries, capitalization, authority, filings
with the Commission and other governmental authorities, financial statements,
the absence of certain changes or events concerning the Company's corporate
organization and qualification, the absence of undisclosed liabilities, the
truth of information supplied by the Company, litigation, labor matters,
employee benefit matters and ERISA, taxes, compliance with applicable laws,
environmental matters, real property, intellectual property, insurance, state
takeover statutes and related party transactions.
Indemnification; Directors' and Officers' Insurance. Pursuant to the Merger
Agreement, Parent and Purchaser have agreed that all rights to indemnification
or exculpation now existing in favor of the directors, officers, employees and
agents of the Company and its Subsidiaries as provided in their respective
charters or
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bylaws (or other similar governing instruments) or otherwise in effect as of
the date hereof with respect to matters occurring prior to the Effective Time
shall survive the Merger and shall continue in full force and effect. To the
maximum extent permitted by the CGCL, such indemnification shall be mandatory
rather than permissive and the Surviving Corporation shall advance expenses in
connection with such indemnification (subject to the Surviving Corporation's
receipt of an undertaking by the indemnified party to return such advanced
expenses to the Surviving Corporation if it is determined by a final, non-
appealable order of a court of competent jurisdiction that such indemnified
party is not entitled to retain such advanced expenses).
The Merger Agreement further provides that Parent shall cause the Surviving
Corporation to maintain in effect for not less than three years from the
Effective Time the policies of the directors' and officers' liability and
fiduciary insurance most recently maintained by the Company (provided that the
Surviving Corporation may substitute policies of at least the same coverage
containing terms and conditions which are no less advantageous to the
beneficiaries thereof so long as such substitution does not result in gaps or
lapses in coverage) with respect to matters occurring prior to the Effective
Time; provided, however, that in satisfying its obligation, the Surviving
Corporation shall not be obligated to pay premiums in excess of 150% of the
amount per annum incurred by the Company in the twelve months ended December
31, 1997 with respect to such insurance.
In the event the Surviving Corporation or its successor (i) is consolidated
with or merges into another person and is not the continuing or surviving
corporation or entity of such consolidation or merger or (ii) transfers all or
substantially all of its properties and assets to any other person in a single
transaction or a series of related transactions, Parent has agreed that it
will make or cause to be made proper provision so that the successor or
transferee of the Surviving Corporation shall comply in all material respect
with these terms.
Employee Matters. Under the Merger Agreement, employees of the Company and
its subsidiaries shall be treated after the Merger no less favorably under
Parent's ERISA plans, to the extent applicable, than other similarly situated
employees of Parent and its subsidiaries.
For a period of one year following the Merger, Parent has agreed to, and to
cause its subsidiaries to, maintain with respect to their employees who had
been employed by the Company or any of its subsidiaries prior to the Effective
Time and who remain employed following the Effective Time (i) base salary or
regular hourly wage rates for each such employee at not less than the rate
applicable immediately prior to the Merger to such employee, and (ii) employee
benefits (as defined for purposes of Section 3(3) of ERISA), other than stock
option plans) which are substantially comparable in the aggregate to such
employee benefits provided by the Company and its subsidiaries immediately
prior to the Merger.
To the extent they participate under such plans, Parent and its subsidiaries
have agreed to credit employees of the Company and its Subsidiaries for
purposes of determining eligibility to participate or vesting under Parent's
ERISA Plans with their service prior to the Merger with the Company and its
subsidiaries to the same extent such service was counted under similar benefit
plans of the Company prior to the Merger.
Parent and Purchaser have also agreed to, and to cause the Surviving
Corporation to, honor the Company's obligations to employees under the
Employee Severance Plan.
Neither Parent nor the Surviving Corporation is required to continue any
specific plans or to continue the employment of any specific person.
Parent Stock Option; Exercise; Adjustments. Subject to the terms and
conditions set forth in the Merger Agreement, the Company has granted to
Parent an irrevocable option (the "Parent Option") to purchase up to that
number of authorized and unissued Shares equal to 19.99% of the Shares
outstanding immediately prior to the exercise of the Parent Option (the
"Option Shares") at a purchase price of $21.00 per Option Share (the "Option
Price"). Subject to the conditions set forth below, the Parent Option may be
exercised by Parent, in whole or in part, at any time or from time to time
after the date on which Parent has accepted for payment the Shares tendered
pursuant to the Offer and prior to the termination of the Merger Agreement.
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In the event of any change in the number of issued and outstanding Shares
outstanding by reason of any stock dividend, stock split, split-up,
recapitalization, merger or other change in the corporate or capital structure
of the Company, the number of Option Shares and the Option Price shall be
appropriately adjusted to restore Parent to its rights.
The Merger Agreement provides that Company's obligation to issue and deliver
the Option Shares upon exercise of the Parent Option is subject only to the
following conditions:
(i) No preliminary or permanent injunction or other order issued by any
federal or state court of competent jurisdiction in the United States
prohibiting the delivery of the Option Shares shall be in effect;
(ii) Any applicable waiting periods under the HSR Act, or other
applicable United States or foreign Laws shall have expired or been
terminated; and
(iii) The number of Option Shares plus the number of Shares accepted for
payment by Parent pursuant to the Offer will, upon issuance of the Option
Shares, constitute at least ninety percent (90%) of the issued and
outstanding Shares (provided, however, that, if the Offer has been
consummated for the Revised Minimum Number, the condition contained in this
clause (iii) will be deemed satisfied if, after the Offer has been
consummated and prior to the consummation of the Merger, any Existing Stock
Options have been exercised and, upon exercise of the Parent Option, the
number of Option Shares to be purchased plus the number of Shares purchased
by Parent pursuant to the Offer and the number of Shares then owned
directly or indirectly by Parent will, upon issuance of the Option Shares,
constitute 49.9% of the issued and outstanding Shares).
Termination; Fees and Expenses.
Termination. The Merger Agreement may be terminated and the Offer and the
Merger may be abandoned at any time prior to the Effective Time:
(a) by mutual written consent of Parent, Purchaser and the Company;
(b) by Parent or Purchaser or the Company if any court of competent
jurisdiction in the United States or other United States governmental
authority shall have issued a final order, decree or ruling or taken any
other final action restraining, enjoining or otherwise prohibiting the
Offer or the Merger and such order, decree, ruling or other action is or
shall have become nonappealable;
(c) by Parent and Purchaser if, on or prior to July 31, 1998, due to an
occurrence or circumstance which would result in a failure to satisfy any
of the Conditions, Purchaser shall have (i) terminated the Offer or (ii)
failed to pay for Shares pursuant to the Offer; provided, however, that the
right to terminate the Merger Agreement pursuant to this clause shall not
be available to Parent or Purchaser if either of them has breached in any
material respect its obligations under the Merger Agreement in any manner
that shall have proximately contributed to the failure referenced in this
clause;
(d) by the Company if, by July 31, 1998, Purchaser shall have failed to
pay for the Shares properly tendered and not withdrawn pursuant to the
Offer; provided, however, that the right to terminate the Merger Agreement
pursuant to this clause shall not be available to the Company if it has
breached in any material respect its obligations under the Merger Agreement
that in any manner shall have proximately contributed to the failure
referenced in this clause;
(e) by the Company if (i) there shall have been a breach of any
representation or warranty on the part of Parent or Purchaser set forth in
the Merger Agreement, or if any representation or warranty of Parent or
Purchaser shall have become untrue, in either case which materially
adversely affects (or materially delays) the consummation of the Offer,
(ii) there shall have been a breach on the part of Parent or Purchaser of
any of their respective covenants or agreements set forth in the Merger
Agreement having a Material Adverse Effect (as defined below) on Parent or
materially adversely affecting (or materially delaying) the consummation of
the Offer, and Parent or Purchaser, as the case may be, has not cured such
breach prior to the earlier of (A) ten days following notice by the Company
thereof and (B) two Business Days prior to the
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date on which the Offer expires, provided that the Company has not breached
any of its obligations in a manner that proximately contributed to such
breach by Parent or Purchaser, or (iii) prior to the purchase of Shares
pursuant to the Offer, the Company Board by a majority vote shall have
determined in its good faith judgment, based on the advice of counsel, that
it is required to do so in the exercise of its fiduciary duties under the
CGCL, provided that such termination under this clause shall not be
effective until payment of the required termination fee (see below), or
(f) by Parent or Purchaser prior to the purchase of Shares pursuant to
the Offer if (i) the Company Board withdraws or modifies in a manner
materially adverse to Parent or Purchaser its favorable recommendation of
the Offer or the approval or recommendation of the Merger or shall have
recommended a Third Party Acquisition (as defined below), (ii) a Third
Party Acquisition occurs, (iii) there shall have been a breach of any
representation or warranty on the part of Company set forth in the Merger
Agreement, or any representation or warranty of Company shall have become
untrue, in either case if the respects in which the representations and
warranties made by the Company are inaccurate would in the aggregate have a
Material Adverse Effect on the Company or materially adversely affect (or
delay) the consummation of the Offer or the Merger, (iv) there shall have
been a breach on the part of the Company of its covenants or agreements set
forth in the Merger Agreement having, individually or in the aggregate, a
Material Adverse Effect on the Company or materially adversely affecting
(or materially delaying) the consummation of the Merger, and, with respect
to clauses (iii) and (iv) above, the Company has not cured such breach
prior to the earlier of (A) ten days following notice by the Parent or
Purchaser thereof and (B) two Business Days prior to the date on which the
Offer expires, provided that, with respect to clauses (iii) and (iv) above,
neither Parent or Purchaser has breached any of their respective
obligations in a manner that proximately contributed to such breach by the
Company or (v) Parent or Purchaser shall have discovered that any
information supplied to Parent or Purchaser by the Company (excluding, for
such purposes, any projections or forecasts or other forward looking
information supplied by the Company), at the time provided to Parent or
Purchaser, contained any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading and such
misstatement or omission would have a Material Adverse Effect on the
Company.
As used in the Merger Agreement, "Material Adverse Effect" means any change
or effect that is or is reasonably likely to be materially adverse to the
business, assets, results of operations or condition (financial or otherwise)
of the Company and its subsidiaries taken as whole, on the one hand, or Parent
and its subsidiaries on the other hand, other than any change or effect
arising out of general economic conditions unrelated to any businesses in
which the Company or any of its subsidiaries, or the Parent and its
subsidiaries, is engaged.
In the event of the termination and abandonment of the Merger Agreement, the
Merger Agreement shall become void and have no effect, without any liability
on the part of any party or its affiliates, directors, officers or
shareholders, other than the provisions concerning fees and expenses
(discussed below) and confidentiality. Nothing shall relieve any party from
liability for any breach of the Merger Agreement.
Fees and Expenses.
In the event that the Merger Agreement shall be terminated pursuant to:
(i) paragraph (e)(iii), above;
(ii) paragraph (f)(i) or (ii) above; or
(iii) paragraph (f)(iii) or (iv), above, as a result of a willful breach
of any representation, warranty, covenant or agreement of the Company and,
within twelve months thereafter, the Company enters into an agreement with
respect to a Third Party Acquisition (as defined below), or a Third Party
Acquisition occurs, involving any party (or any affiliate thereof) (x) with
whom the Company (or its agents) had discussions with a view to a Third
Party Acquisition, (y) to whom the Company (or its agents) furnished
information with a view to a Third Party Acquisition or (z) who had
submitted a proposal or expressed an interest in a Third Party Acquisition,
in the case of each of clauses (x), (y) and (z) during the period
commencing on October 1, 1997 and continuing until such termination;
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The Company has agreed to pay to Parent the amount of $7.0 million as
liquidated damages (the "Break-Up Fee").
"Third Party Acquisition" means the occurrence of any of the following
events: (i) the acquisition of the Company by merger or otherwise by any
person (which includes a "person" as such term is defined in Section 13(d)(3)
of the Exchange Act) or entity other than Parent, Purchaser or any affiliate
thereof (a "Third Party"); (ii) the acquisition by a Third Party of 30% or
more of the total assets of the Company and its subsidiaries, taken as a
whole; or (iii) the acquisition by a Third Party of Shares resulting in such
person holding at least 30% or more of the outstanding Shares.
Upon the termination of the Merger Agreement prior to the purchase of Shares
by Purchaser pursuant to the Offer pursuant to paragraph (f) above (unless
such termination results in payment of the Break-Up Fee), the Company shall
reimburse Parent, Purchaser and their affiliates (not later than ten Business
Days after submission of statements therefor) for all actual documented out-
of-pocket fees and expenses, not to exceed $2.0 million, actually and
reasonably incurred by any of them or on their behalf in connection with the
Merger and the consummation of all transactions contemplated by the Merger
Agreement (including, without limitation, filing fees, printing and mailing
costs, fees payable to investment bankers, counsel to any of the foregoing,
and accountants). Parent and Purchaser have provided the Company with an
estimate of the amount of such fees and expenses and, if Parent or Purchaser
shall have submitted a request for reimbursement, will provide the Company in
due course with invoices or other reasonable evidence of such expenses upon
request. The Company shall in any event pay the amount requested (not to
exceed $2.0 million) within ten Business Days of such request, subject to the
Company's right to demand a return of any portion as to which invoices are not
received in due course.
Upon the termination of the Merger Agreement pursuant to paragraph (e)(i) or
(ii) above, Parent shall reimburse the Company and their affiliates (not later
than ten Business Days after submission of statements therefor) for all actual
documented out-of-pocket fees and expenses, not to exceed $1.0 million,
actually and reasonably incurred by any of them or on their behalf in
connection with the Merger and the consummation of all transactions
contemplated by the Merger Agreement (including, without limitation, filing
fees, printing and mailing costs, fees payable to investment bankers, counsel
to any of the foregoing, and accountants). The Company has provided Parent
with an estimate of the amount of such fees and expenses and, if the Company
shall have submitted a request for reimbursement, will provide Parent in due
course with invoices or other reasonable evidence of such expenses upon
request. Parent shall in any event pay the amount requested (not to exceed
$1.0 million) within ten Business Days of such request, subject to Parent's
right to demand a return of any portion as to which invoices are not received
in due course.
Except as specifically provided in the Merger Agreement, each party has
agreed to bear its own expenses in connection with the Merger Agreement and
the transactions contemplated thereby.
Amendment. The Merger Agreement may be amended by action taken by the
Company, Parent and Purchaser at any time before or after approval of the
Merger by the shareholders of the Company (if required by applicable law) but,
after any such approval, no amendment shall be made which requires the
approval of such shareholders under applicable law without such approval. The
Merger Agreement may not be amended except by an instrument in writing signed
on behalf of the parties.
Extension. The Merger Agreement provides that at any time prior to the
Effective Time, each party may (a) extend the time for the performance of any
of the obligations or other acts of the other party or parties, (b) waive any
inaccuracies in the representations and warranties of the other parties
contained herein or in any document, certificate or writing delivered pursuant
hereto or (c) waive compliance by the other parties with any of the agreements
or conditions contained herein. Any agreement on the part of any party to any
such extension or waiver shall be valid only if set forth in an instrument in
writing signed on behalf of such party. The failure of any party to assert any
of its rights shall not constitute a waiver of such rights.
Management Agreement.
On February 6, 1998, Parent, Robert Snukal ("Mr. Snukal"), Sheila Snukal
("Mrs. Snukal"), Mr. Scott and Heritage entered into an Agreement (the
"Management Agreement") with respect to certain aspects of the
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ownership and management of Parent. The Management Agreement provides, among
other things, that the parties will execute definitive documents prior to the
consummation of the Offer, or in certain cases at the effective time of the
Merger, reflecting the terms set forth in the Management Agreement. The
following summary is qualified in its entirety by reference to the Management
Agreement, a copy of which has been filed with the Commission as an exhibit to
the Schedule 14D-1 and the Schedule 13E-3. While the parties have agreed to
execute final definitive agreements consistent with the Management Agreement,
such final agreements may differ in certain respects from the terms of the
Management Agreement, to the favor or disfavor of any of the parties.
Capitalization of Parent. The Management Agreement provides that immediately
prior to the consummation of the Offer, Heritage will invest $74,500,000 in
cash in Parent, and the Snukals will invest $5,000,000 in cash in Parent in
order to provide a portion of the capital needed to fund Purchaser's purchase
of shares in the Offer. Promptly after the Effective Time of the Merger, Mr.
Scott will invest approximately $2,500,000 in cash in Parent representing the
full amount of the after-tax proceeds he will receive from the cash out in the
Merger of all options to purchase shares of the Company's common stock held by
him and the full after-tax proceeds from payments under the Scott Pension Plan
received by him from the Company (see "SPECIAL FACTORS--Interests of Certain
Persons in the Offer and the Merger"), which proceeds he expects to receive on
or about the date of the Merger. Mr. Scott will receive a cash bonus from
Parent to cover any tax cost relating to the cash out of his Company stock
options to the extent that such bonus and related deductions are tax neutral
to Parent. If, for any reason, the Snukals or Mr. Scott do not make these
investments in Parent, Heritage has committed to increase its investment in
Parent to cover any shortfall, up to an amount which would cause its aggregate
investment in Parent in connection with the Offer and the Merger to equal
$82,000,000.
Effective immediately prior to the consummation of the Offer, the existing
outstanding stock of Parent will be reorganized into, and the new cash
invested in Parent will purchase, shares of Series A Common Stock (the "Series
A Stock") of Parent at an effective purchase price of $1,265 per share. At the
same time, the Snukals and Mr. Scott will purchase shares of Series B Non-
Voting Common Stock (the "Series B Stock") for a nominal price per share.
There will be no other equity securities of Parent outstanding. The Series A
Stock and the Series B Stock will have the following general characteristics.
Each share of Series A Stock will be entitled to aggregate distributions of
$1,265 per share plus a 22% internal rate of return thereon from the date the
Offer is consummated before any distributions are made on the Series B Stock.
After the foregoing amounts have been distributed in respect of the Series A
Stock, each share of Series B Stock will be entitled to a distribution of the
same amount as was distributed in respect of each share of Series A Stock.
After all of the foregoing distributions, the Series A Stock and Series B
Stock will share any remaining proceeds on a pro rata basis.
As of immediately prior to the consummation of the Offer, the Series A Stock
will be owned as follows: Heritage will own 78,240 shares, the Snukals and
certain other current stockholders of Parent will own 17,780 shares, and Mr.
Scott will own 1,980 shares and will have an option to acquire 2,000
additional shares for a nominal price. As of the consummation of the Offer,
the Series B Stock will be owned as follows: the Snukals will own 6,125 shares
and Mr. Scott will own 4,649 shares.
The Series B Stock will be subject to repurchase at cost by Parent upon a
change of control of Parent, an initial public offering of its shares or other
similar events (each, a "Trigger Event"), with the precise number of shares
repurchased to be determined on a sliding scale based on the value of Parent's
common equity at the Trigger Event in relation to certain value targets at
various dates in the future. Under this arrangement, the holders of the Series
B Stock will retain more shares of Series B Stock at the time of the Trigger
Event the higher the value of Parent is at that time.
Corporate Governance. The Management Agreement provides that the Board of
Directors of Parent will, immediately prior to the consummation of the Offer,
include one director designated by Mr. Scott (expected to be Mr. Scott) and
two directors (but not less than 25% of the total number of directors)
designated by Mr. Snukal. All other directors of Parent will be designated by
Heritage.
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Stock Transfer Restrictions and Rights. The Management Agreement provides
for stock transfer restrictions on shares of stock of Parent. The non-Heritage
stockholders of Parent may not transfer their shares for four years after the
consummation of the Offer except for certain estate planning transfers or, in
the case of Mr. Snukal, until such time as he is terminated without cause by
Parent. After the expiration of any such applicable period, Parent and the
other stockholders of Parent will have a right of first refusal on transfers
by the non-Heritage stockholders, except for estate planning transfers. If
Heritage transfers its shares of Parent Stock in a transaction constituting a
Trigger Event (other than an initial public offering of Parent), the other
stockholders will have the right to participate on a pro rata basis with
Heritage in such transfers. Heritage will also have the right to require all
other stockholders to transfer their shares in a transaction constituting a
Trigger Event.
Registration Rights. The Management Agreement also provides that Heritage
will have the right to require Parent on two occasions to effect the
registration of Parent shares held by it under the Securities Act. The Snukals
will have the right to cause Parent to effect one demand registration, in
which Mr. Scott will have the right, at his election, to share on a pro rata
basis.
Employment Agreements for Key Management. The Management Agreement provides
that immediately prior to the consummation of the Offer (or, in the case of
Mr. Scott, at the effective time of the Merger), Parent will enter into new
five year Employment Agreements with each of the Snukals and with Mr. Scott.
In the case of Mr. Scott, the new Employment Agreement will not trigger any
payment under the Company's Special Severance Pay Plan.
Under the Employment Agreements with Parent, Mr. Snukal will serve as Chief
Executive Officer of Parent, Mr. Scott will serve as Chairman of Parent, Mrs.
Snukal will serve as Executive Vice President of Parent, and each will have
duties consistent with such titles as specified by Parent's Board. Mr. Snukal
will be entitled to a base salary at an annual rate of $500,000, and will be
eligible for an annual bonus of up to $500,000 based upon the achievement of
certain financial targets. Mrs. Snukal will be entitled to a base salary at an
annual rate of $225,000, and will be eligible for an annual bonus of up to
$125,000, based upon the achievement of certain financial targets. Mr. Scott
will be entitled to a base salary at an annual rate of $450,000, and will be
eligible for an annual bonus of up to $350,000 based upon the achievement of
certain financial targets. All of the foregoing base salaries will be subject
to annual consumer price index adjustments.
The employment of each of Mr. Snukal, Mrs. Snukal and Mr. Scott may be
terminated at any time by Parent's Board of Directors with or without cause.
In the case of termination without cause (other than on death or disability),
Parent will continue to pay their base salary (plus an additional $25,000 in
the aggregate, in the case of such termination of both Mr. and Mrs. Snukal)
for the duration of their scheduled term of employment. If Mr. Snukal is
terminated without cause, Mrs. Snukal may, at her option, deem her employment
to have been terminated without cause and receive the severance referred to in
the preceding sentence. In the case of Mr. Scott, his severance will be
reduced by the amount, if any, he is then due under the Company's Special
Severance Pay Plan.
The Employment Agreements will contain customary definitions of cause,
confidentiality provisions and a three-year noncompetition covenant.
10. CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES.
The receipt of cash for Shares pursuant to the Offer or the Merger will be a
taxable transaction for United States federal income tax purposes. In general,
a shareholder will recognize gain or loss for United States federal income tax
purposes equal to the difference between the amount of cash received in
exchange for the Shares sold and such shareholder's adjusted tax basis in such
Shares. Such gain or loss will be capital gain or loss if the Shares
constitute capital assets in the hands of the shareholder. Pursuant to
recently enacted legislation, in the case of an individual holder of Shares,
any such capital gain generally will be subject to a maximum United States
federal income tax rate of (a) 20% if the holder's holding period in such
shares was more than 18 months at the Effective Time, and (b) 28% if the
holder's holding period was more than one year but not more than 18 months at
the Effective Time or at the time of consummation of the Offer. Any such
capital loss will be subject to certain limitations on deductibility for
United States federal income tax purposes.
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THE FOREGOING DISCUSSION MAY NOT BE APPLICABLE TO CERTAIN TYPES OF
SHAREHOLDERS, SUCH AS FINANCIAL INSTITUTIONS, BROKER-DEALERS, SHAREHOLDERS WHO
ACQUIRED SHARES PURSUANT TO THE EXERCISE OF OPTIONS OR OTHERWISE AS
COMPENSATION, INDIVIDUALS WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED
STATES, FOREIGN CORPORATIONS AND PERSONS WHO RECEIVED PAYMENTS IN RESPECT OF
OPTIONS OR WARRANTS TO ACQUIRE SHARES.
THE UNITED STATES FEDERAL INCOME TAX DISCUSSION SET FORTH ABOVE IS INCLUDED
FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. SHAREHOLDERS ARE
URGED TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE SPECIFIC TAX
CONSEQUENCES OF THE OFFER AND THE MERGER TO THEM, INCLUDING THE APPLICATION
AND EFFECT OF THE UNITED STATES ALTERNATIVE MINIMUM TAX, STATE AND LOCAL, AND
FOREIGN TAX LAWS.
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THE TENDER OFFER
1. TERMS OF THE OFFER; EXPIRATION DATE.
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of such extension or
amendment), Purchaser will accept for payment and pay for all (or in certain
circumstances, the Revised Minimum Number of) Shares validly tendered prior to
the Expiration Date (as defined herein) and not withdrawn, as described under
"THE TENDER OFFER--Withdrawal Rights". The term "Expiration Date" means 12:00
Midnight, New York City time, on March 13, 1998, unless and until Purchaser,
in its reasonable judgment (but subject to the terms and conditions of the
Merger Agreement), shall have extended the period during which the Offer is
open, in which event the term "Expiration Date" shall mean the latest time and
date at which the Offer, as so extended by Purchaser, shall expire. The Offer
is subject to the Minimum Condition and to certain other conditions. See "THE
TENDER OFFER--Certain Conditions of the Offer".
Consummation of the Merger is subject to the satisfaction or waiver of
certain conditions, including the approval and adoption of the Merger and the
Merger Agreement by the affirmative vote of the holders of the outstanding
Shares, if required.
Purchaser expressly reserves the right, in its sole discretion (but subject
to the terms and conditions of the Merger Agreement), at any time and from
time to time, to extend for any reason the period of time during which the
Offer is open, including the failure of any of the conditions specified in
"THE TENDER OFFER--Certain Conditions of the Offer" to be satisfied, by giving
oral or written notice of such extension to the Depositary. During any such
extension, all Shares previously tendered and not withdrawn will remain
subject to the Offer, subject to the rights of a tendering shareholder to
withdraw his Shares. See "THE TENDER OFFER--Withdrawal Rights".
Subject to the applicable regulations of the Commission, Purchaser also
expressly reserves the right, in its sole discretion (but subject to the terms
and conditions of the Merger Agreement), at any time and from time to time,
(a) to delay acceptance for payment of, or, regardless of whether such Shares
were theretofore accepted for payment, payment for, any Shares in order to
comply with any applicable laws, (b) to terminate the Offer and not accept for
payment any Shares upon the failure of any of the conditions specified in "THE
TENDER OFFER--Certain Conditions of the Offer" to be satisfied and (c) to
waive any condition or otherwise amend the Offer in any respect, by giving
oral or written notice of such delay, termination, waiver or amendment to the
Depositary and by making a public announcement thereof.
If Purchaser extends the Offer, if Purchaser (whether before or after its
acceptance for payment of the Shares) is delayed in its acceptance for payment
of or payment for any Shares validly tendered and not withdrawn in the Offer
or if Purchaser is unable to accept for payment or pay for such Shares
pursuant to the Offer for any reason, then, without prejudice to Purchaser's
rights under the Offer, the Depositary may retain tendered Shares on behalf of
Purchaser, and such Shares may not be withdrawn except to the extent tendering
shareholders are entitled to withdrawal rights as described in "THE TENDER
OFFER--Withdrawal Rights". Purchaser acknowledges that (a) Rule 14e-1(c) under
the Exchange Act requires Purchaser to pay the consideration offered or to
return the Shares tendered promptly after the termination or withdrawal of the
Offer and (b) Purchaser may not delay acceptance for payment of, or payment
for (except as provided in clause (a) above), any Shares upon the occurrence
of any of the conditions specified in "THE TENDER OFFER--Certain Conditions of
the Offer" without extending the period of time during which the Offer is
open.
The Merger Agreement provides that Purchaser shall not, without the prior
written consent of the Company, make any change in the terms or conditions of
the Offer which would change the form of consideration to be paid, decrease
the Offer Price or the number of Shares sought in the Offer, or impose
additional or broadened conditions to the Offer other than those set forth in
the Merger Agreement (it being agreed that a waiver by Purchaser of any
condition, in its discretion, shall not be deemed to be adverse to the holders
of Shares).
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The Merger Agreement provides that if on any scheduled expiration date of
the Offer all conditions to the Offer shall not have been satisfied or waived,
the Offer may be extended by Purchaser from time to time without the consent
of the Company (i) if at the scheduled expiration date of the Offer any of the
conditions to the Offer shall not have been satisfied or waived, until such
time as such conditions are satisfied or waived, (ii) for any period required
by any rule, regulation, interpretation or position of the Commission or the
staff thereof applicable to the Offer or (iii) for any other reason for not
more than ten days beyond the latest expiration date applicable under the
preceding clauses (i) or (ii) if on such expiration date there shall not have
been tendered that number of Shares which, together with Shares then owned
directly or indirectly by Purchaser, would equal at least 90% of the
outstanding Shares. Purchaser has also agreed in the Merger Agreement to
extend the time of the Offer to no later than July 31, 1998 if the conditions
to the Offer are not satisfied at the expiration date thereof but are
reasonably capable of being satisfied by such date.
Purchaser has also agreed in the Merger Agreement that, in the event the
Minimum Condition is not satisfied on or before the tenth business day after
all other conditions to the offer have been satisfied, (A) the Minimum
Condition shall be automatically amended to mean that a number of Shares
which, together with the Shares then owned directly or indirectly by
Purchaser, would equal not less than 49.9% of the Shares, shall have been
validly tendered and not withdrawn prior to the expiration of the Offer, and
(B) Purchaser will amend the Offer to provide that Purchaser will purchase, on
a pro rata basis in the Offer, that number of Shares which, together with the
Shares then owned directly or indirectly by Purchaser, would equal 49.9% of
the Shares (it being understood that Purchaser shall not in any event be
required to accept for payment, or pay for, any Shares if less than 49.9% of
the Shares are tendered pursuant to the Offer and not withdrawn at the
expiration of the Offer).
Any extension, delay, termination, waiver or amendment will be followed as
promptly as practicable by public announcement thereof, such announcement, in
the case of an extension to be made no later than 9:00 a.m., New York City
time, on the next business day (as defined herein) after the previously
scheduled Expiration Date. Subject to applicable law (including Rules 14d-4(c)
and 14d-6(d) under the Exchange Act, which require that material changes be
promptly disseminated to shareholders in a manner reasonably designed to
inform them of such changes) and without limiting the manner in which
Purchaser may choose to make any public announcement, Purchaser shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement other than by issuing a press release to the Dow Jones News
Service.
If (subject to the terms and conditions of the Merger Agreement) Purchaser
makes a material change in the terms of the Offer or the information
concerning the Offer, or if Purchaser waives a material condition of the
Offer, Purchaser will extend the Offer to the extent required by Rules 14d-
4(c) and 14d-6(d) under the Exchange Act. The minimum period during which the
Offer must remain open following material changes in the terms of the Offer or
information concerning the Offer, other than a change in price or a change in
percentage of securities sought, will depend upon the facts and circumstances,
including the relative materiality of the changed terms or information. In the
Commission's view, an offer should generally remain open for a minimum of five
business days from the date a material change is first published, sent or
given to shareholders. With respect to a change in price or a change in
percentage of securities sought (other than an increase in the number of
Shares sought not in excess of 2% of the outstanding Shares), a minimum 10-
business-day period is required to allow for adequate dissemination to
shareholders and investor response. As used in this Offer to Purchase,
"business day" has the meaning set forth in Rule 14d-1 under the Exchange Act.
Accordingly, if, prior to the Expiration Date, Purchaser decreases the number
of Shares being sought, or increases or decreases the consideration offered
pursuant to the Offer, and if the Offer is scheduled to expire at any time
earlier than the period ending on the 10th business day from the date that
notice of such increase or decrease is first published, sent or given to
holders of Shares, the Offer will be extended at least until the expiration of
such 10-business-day period.
Subject to the terms of the Merger Agreement, if, prior to the Expiration
Date, Purchaser should decide to increase the Offer Price, such increase in
the Offer Price will be applicable to all shareholders whose Shares are
accepted for payment pursuant to the Offer, whether or not such Shares were
tendered prior to the date of such increase, and, if at the time notice of
such increase in the Offer Price is first published, sent or given to holders
of such Shares, the Offer is scheduled to expire at any time earlier than the
period ending on the 10th business
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day from and including the date that such notice is first so published, sent
or given, the Offer will be extended at least until the expiration of such 10-
business-day period.
The Company has provided Purchaser with the Company's shareholder list and
security position listings for the purpose of disseminating the Offer to
holders of Shares. This Offer to Purchase and the related Letter of
Transmittal will be mailed to record holders of Shares whose names appear on
the Company's shareholder list, and will be furnished, for subsequent
transmittal to beneficial owners of Shares, to brokers, dealers, commercial
banks, trust companies and similar persons whose names, or the names of whose
nominees, appear on the shareholder list or, if applicable, who are listed as
participants in a clearing agency's security position listing.
2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES.
Upon the terms and subject to the conditions of the Offer (including, if the
Offer is extended or amended, the terms and conditions of any such extension
or amendment), Purchaser will purchase, by accepting for payment, and will pay
for, any and all (or in certain circumstances, the Revised Minimum Number of)
Shares which are validly tendered prior to the Expiration Date (and not
properly withdrawn in accordance with "THE TENDER OFFER--Withdrawal Rights")
promptly after the later to occur of (a) the Expiration Date and (b) the
satisfaction or waiver of the conditions set forth in "THE TENDER OFFER--
Certain Conditions of the Offer". Purchaser expressly reserves the right, in
its discretion, to delay acceptance for payment of, or, subject to applicable
rules of the Commission, payment for, Shares in order to comply, in whole or
in part, with any applicable law.
In all cases, payment for Shares purchased pursuant to the Offer will be
made only after timely receipt by the Depositary of (a) the Share Certificates
or timely confirmation of a book-entry transfer (a "Book-Entry Confirmation")
of such Shares, if such procedure is available, into the Depositary's account
at a "Book-Entry Transfer Facility" pursuant to the procedures set forth in
"THE TENDER OFFER--Procedures for Accepting the Offer and Tendering Shares",
(b) the Letter of Transmittal (or facsimile thereof), properly completed and
duly executed, or, in the case of a book-entry transfer, an Agent's Message
(as defined herein) and (c) any other documents required by the Letter of
Transmittal.
The term "Agent's Message" means a message, transmitted by a Book-Entry
Transfer Facility to, and received by, the Depositary and forming a part of a
Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering the Shares, that such participant has received and
agrees to be bound by the terms of the Letter of Transmittal and that
Purchaser may enforce such agreement against the participant.
For purposes of the Offer, Purchaser will be deemed to have accepted for
payment, and thereby purchased, Shares validly tendered and not properly
withdrawn if, as and when Purchaser gives oral or written notice to the
Depositary of Purchaser's acceptance of such Shares for payment. Payment for
Shares accepted pursuant to the Offer will be made by deposit of the purchase
price therefor with the Depositary, which will act as agent for tendering
shareholders for the purpose of receiving payments from Purchaser and
transmitting payments to such tendering shareholders. Under no circumstances
will interest on the purchase price for Shares be paid by Purchaser,
regardless of any delay in making such payment. Upon the deposit of funds with
the Depositary for the purpose of making payments to tendering shareholders,
Purchaser's obligation to make such payment shall be satisfied and tendering
shareholders must thereafter look solely to the Depositary for payment of
amounts owed to them by reason of the acceptance for payment of Shares
pursuant to the Offer. Purchaser will pay any stock transfer taxes incident to
the transfer to it of validly tendered Shares, except as otherwise provided in
Instruction 6 of the Letter of Transmittal, as well as any charges and
expenses of the Depositary and the Information Agent.
If any tendered Shares are not accepted for payment for any reason pursuant
to the terms and conditions of the Offer, or if Share Certificates are
submitted evidencing more Shares than are tendered, Share Certificates
evidencing unpurchased Shares will be returned, without expense to the
tendering shareholder (or, in the case of Shares tendered by book-entry
transfer into the Depositary's account at a Book-Entry Transfer Facility
pursuant to the procedure set forth in "THE TENDER OFFER--Procedures for
Accepting the Offer and
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Tendering Shares", such Shares will be credited to an account maintained at
such Book-Entry Transfer Facility), as promptly as practicable following the
expiration or termination of the Offer.
3. PROCEDURES FOR ACCEPTING THE OFFER AND TENDERING SHARES.
Valid Tender of Shares. In order for Shares to be validly tendered pursuant
to the Offer, the Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees, or an
Agent's Message (in the case of any book-entry transfer) and any other
required documents, must be received by the Depositary at its address set
forth on the back cover of this Offer to Purchase prior to the Expiration
Date, and either (a) the Share Certificates evidencing tendered Shares must be
received by the Depositary at one of such addresses or Shares must be tendered
pursuant to the procedure for book-entry transfer described below and a Book-
Entry Confirmation must be received by the Depositary, in each case, prior to
the Expiration Date, or (b) the tendering shareholder must comply with the
guaranteed delivery procedures described below.
THE METHOD OF DELIVERY OF SHARE CERTIFICATES AND ALL OTHER REQUIRED
DOCUMENTS, INCLUDING DELIVERY THROUGH ANY BOOK-ENTRY TRANSFER FACILITY, IS AT
THE OPTION AND RISK OF THE TENDERING SHAREHOLDER, AND THE DELIVERY WILL BE
DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY
MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS
RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Book-Entry Transfer. The Depositary will establish an account with respect
to the Shares at a Book-Entry Transfer Facility for purposes of the Offer
within two business days after the date of this Offer to Purchase, and any
financial institution that is a participant in either of the Book-Entry
Transfer Facilities' systems may make book-entry delivery of Shares by causing
the Book-Entry Transfer Facility to transfer such Shares into the Depositary's
account at a Book-Entry Transfer Facility in accordance with a Book-Entry
Transfer Facility's procedures for transfer. However, although delivery of
Shares may be effected through book-entry transfer at a Book-Entry Transfer
Facility, the Letter of Transmittal (or facsimile thereof), properly completed
and duly executed, with any required signature guarantees, or an Agent's
Message in connection with a book-entry delivery of Shares, and any other
required documents must, in any case, be transmitted to and received by the
Depositary at one of its addresses set forth on the back cover of this Offer
to Purchase prior to the Expiration Date or the tendering shareholder must
comply with the guaranteed delivery procedures described below. DELIVERY OF
DOCUMENTS TO A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY
TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY.
Signature Guarantee. Signatures on all Letters of Transmittal must be
guaranteed by a firm which is a bank, broker, dealer, credit union, savings
association or other entity that is a member in good standing of the
Securities Transfer Agents Medallion Program (each, an "Eligible
Institution"), unless the Shares tendered thereby are tendered (a) by a
registered holder of Shares who has not completed either the box entitled
"Special Delivery Instructions" or the box entitled "Special Payment
Instructions" on the Letter of Transmittal or (b) for the account of an
Eligible Institution. See Instruction 1 of the Letter of Transmittal.
If a Share Certificate is registered in the name of a person other than the
signer of the Letter of Transmittal, or if payment is to be made, or a Share
Certificate not accepted for payment or not tendered is to be returned, to a
person other than the registered holder(s), then the Share Certificate must be
endorsed or accompanied by appropriate stock powers, in either case, signed
exactly as the name(s) of the registered holder(s) appear on the Share
Certificate, with the signature(s) on such Share Certificate or stock powers
guaranteed as described above. See Instructions 1 and 5 of the Letter of
Transmittal.
Guaranteed Delivery. If a shareholder desires to tender Shares pursuant to
the Offer and such shareholder's Share Certificates are not immediately
available or time will not permit all required documents to
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reach the Depositary prior to the Expiration Date or the procedure for book-
entry transfer cannot be completed on a timely basis, such Shares may
nevertheless be tendered if all the following conditions are satisfied:
(a) the tender is made by or through an Eligible Institution;
(b) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form provided by Purchaser herewith, is received by
the Depositary as provided below prior to the Expiration Date; and
(c) in the case of a guaranteed delivery of Shares, the Share
Certificates for all tendered Shares, in proper form for transfer, or a
Book-Entry Confirmation, together with a properly completed and duly
executed Letter of Transmittal (or manually signed facsimile thereof) with
any required signature guarantee (or, in the case of a book-entry transfer,
an Agent's Message) and any other documents required by such Letter of
Transmittal, are received by the Depositary within three Nasdaq Stock
Market, Inc. trading days after the date of execution of the Notice of
Guaranteed Delivery.
Any Notice of Guaranteed Delivery may be delivered by hand or transmitted by
telegram, facsimile transmission or mail to the Depositary and must include a
guarantee by an Eligible Institution in the form set forth in the Notice of
Guaranteed Delivery.
Notwithstanding any other provision hereof, payment for Shares purchased
pursuant to the Offer will, in all cases, be made only after timely receipt by
the Depositary of (a) the Share Certificates evidencing such Shares, or a
Book-Entry Confirmation of the delivery of such Shares, if available, (b) a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) or, in the case of a book-entry transfer, an Agent's
Message and (c) any other documents required by the Letter of Transmittal.
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance for payment of any
tendered Shares pursuant to any of the procedures described above will be
determined by Purchaser, in its sole discretion, whose determination will be
final and binding on all parties, and which discretion may be delegated to the
Depositary or other persons. In addition, Purchaser's or Purchaser's
designees, interpretation of the terms and conditions of the Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding. None of Parent, Purchaser, the Company, the Depositary, the
Information Agent or any other person will be under any duty to give
notification of any defects or irregularities in tenders or will incur any
liability for failure to give any such notification. Purchaser reserves the
absolute right to reject any or all tenders of any Shares determined by it not
to be in proper form or if the acceptance for payment of, or payment for, such
Shares may, in the opinion of Purchaser's counsel, be unlawful. Purchaser also
reserves the absolute right, in its sole discretion, to waive any of the
conditions of the Offer or any defect or irregularity in any tender with
respect to Shares of any particular shareholder, whether or not similar
defects or irregularities are waived in the case of other shareholders. No
tender of Shares will be deemed to have been validly made until all defects
and irregularities have been cured or waived.
Appointment as Proxy. By executing a Letter of Transmittal, as set forth
above, a tendering shareholder irrevocably appoints designees of Purchaser as
such shareholder's proxies, each with full power of substitution, to the full
extent of such shareholder's rights with respect to the Shares tendered by
such shareholder and accepted for payment by Purchaser (and any and all
noncash dividends, distributions, rights, other Shares, or other securities
issued or issuable in respect of such Shares on or after February 6, 1998).
All such proxies shall be considered coupled with an interest in the tendered
Shares. This appointment will be effective if, when and only to the extent
that Purchaser accepts such Shares for payment pursuant to the Offer. Upon
such acceptance for payment, all prior proxies given by such shareholder with
respect to such Shares and other securities will, without further action, be
revoked, and no subsequent proxies may be given. The designees of Purchaser
will, with respect to the Shares and other securities for which the
appointment is effective, be empowered to exercise all voting and other rights
of such shareholder as they, in their sole discretion, may deem proper at any
annual, special, adjourned or postponed meeting of the Company's shareholders,
by written consent or otherwise, and Purchaser reserves the right to require
that, in order for Shares or other securities to be deemed validly tendered,
immediately upon Purchaser's acceptance for payment of such Shares, Purchaser
must be able to exercise full voting rights with respect to such Shares.
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Purchaser's acceptance for payment of Shares tendered pursuant to the Offer
will constitute a binding agreement between the tendering shareholder and
Purchaser upon the terms and subject to the conditions of the Offer.
4. WITHDRAWAL RIGHTS.
Tenders of Shares made pursuant to the Offer are irrevocable except that
such Shares may be withdrawn at any time prior to the Expiration Date, and,
unless theretofore accepted for payment by Purchaser pursuant to the Offer,
may also be withdrawn at any time after April 13, 1998. If Purchaser extends
the Offer, is delayed in its acceptance for payment of Shares or is unable to
accept Shares for payment pursuant to the Offer for any reason, then, without
prejudice to Purchaser's rights under the Offer, the Depositary may,
nevertheless, on behalf of Purchaser, retain tendered Shares, and such Shares
may not be withdrawn except to the extent that tendering shareholders are
entitled to withdrawal rights as described in the paragraph below. Any such
delay will be by an extension of the Offer to the extent required by law.
For a withdrawal to be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must be timely received by the Depositary at
one of its addresses set forth on the back cover page of this Offer to
Purchase. Any such notice of withdrawal must specify the name of the person
who tendered the Shares to be withdrawn, the number of Shares to be withdrawn,
and the name of the registered holder of such Shares if different from that of
the person who tendered such Shares. If Share Certificates evidencing Shares
to be withdrawn have been delivered or otherwise identified to the Depositary,
then, prior to the physical release of such Share Certificates, the serial
numbers shown on such Share Certificates must be submitted to the Depositary
and the signature(s) on the notice of withdrawal must be guaranteed by an
Eligible Institution, unless such Shares have been tendered for the account of
an Eligible Institution. If Shares have been tendered pursuant to the
procedure for book-entry transfer as set forth in "THE TENDER OFFER--
Procedures for Accepting the Offer and Tendering Shares", any notice of
withdrawal must specify the name and number of the account at the Book-Entry
Transfer Facility to be credited with the withdrawn Shares.
Any Shares properly withdrawn will thereafter be deemed not to have been
validly tendered for purposes of the Offer. However, withdrawn Shares may be
re-tendered at any time prior to the Expiration Date by following one of the
procedures described in "THE TENDER OFFER--Procedures for Accepting the Offer
and Tendering Shares".
5. PRICE RANGE OF SHARES.
The Shares are listed and principally traded on the Nasdaq National Market
under the symbol "SUMC". The following table sets forth, for the quarters
indicated, the high and low sales prices per Share on the Nasdaq National
Market.
<TABLE>
<CAPTION>
DATE HIGH LOW
---- ------- -------
<S> <C> <C>
FISCAL 1996:
First Quarter............................................. $25.500 $16.750
Second Quarter............................................ 24.500 19.375
Third Quarter............................................. 24.000 16.500
Fourth Quarter............................................ 25.750 19.250
FISCAL 1997:
First Quarter............................................. $24.500 $18.250
Second Quarter............................................ 22.000 12.250
Third Quarter............................................. 16.500 10.500
Fourth Quarter............................................ 16.000 12.000
FISCAL 1998:
First Quarter............................................. $16.125 $13.000
Second Quarter............................................ 18.250 14.000
Third Quarter (through February 10, 1998)................. 20.375 14.500
</TABLE>
49
<PAGE>
On February 6, 1998, the last trading day prior to the announcement of the
signing of the Merger Agreement, the closing price per Share as reported on
the Nasdaq National Market was $18 3/8. The average sale price of the Shares
for the 20 days prior to the public announcement of the proposed transaction
was $16.33. As of February 12, 1998, no cash dividends were paid by the
Company on the Shares or declared as payable on a future date. As of February
12, 1998, there were approximately 36 holders of record of the Shares.
SHAREHOLDERS ARE URGED TO OBTAIN A CURRENT MARKET QUOTATION FOR THE SHARES.
6. EFFECT OF THE OFFER ON THE MARKET FOR THE SHARES; EXCHANGE LISTING AND
EXCHANGE ACT REGISTRATION.
The purchase of Shares pursuant to the Offer will reduce the number of
Shares that might otherwise trade publicly and could reduce the number of
holders of Shares, which could adversely affect the liquidity and market value
of any remaining Shares held by the public. It is expected that, following the
Offer, a large percentage of the outstanding Shares will be owned by
Purchaser.
Possible Effects of the Offer on the Market for the Shares. The purchase of
Shares pursuant to the Offer will reduce the number of Shares that might
otherwise trade publicly and could adversely affect the liquidity and market
value of the remaining Shares held by the public. The purchase of Shares
pursuant to the Offer can also be expected to reduce the number of holders of
Shares. Purchaser cannot predict whether the reduction in the number of Shares
that might otherwise trade publicly would have an adverse or beneficial effect
on the market price for or marketability of the Shares or whether it would
cause future market prices to be greater or less than the Offer Price
therefor.
Stock Quotation. Depending upon the number of Shares purchased pursuant to
the Offer, the Shares may no longer meet the requirements of the National
Association of Securities Dealers, Inc. (the "NASD") for continued inclusion
in the Nasdaq National Market, which require that an issuer have at least
200,000 publicly held shares, held by at least 400 stockholders or 300
stockholders of round lots, with a market value of at least $1,000,000, and
have net tangible assets of at least $1,000,000 or $4,000,000, depending on
profitability levels during the issuer's four most recent fiscal years. If
these standards are not met, the Shares might nevertheless continue to be
included in The Nasdaq Stock Market, with quotations published in the NASD
Automatic Quotation System ("NASDAQ") "additional list" or in one of the
"local lists". However, if the number of holders of the Shares were to fall
below 300, or if the number of publicly held Shares were to fall below 100,000
or there were not at least two registered and active market makers for the
Shares, the NASD's rules provide that the Shares would no longer be
"qualified" for the Nasdaq Stock Market reporting, and The Nasdaq Stock Market
would cease to provide any quotations. Shares held directly or indirectly by
directors, officers or beneficial owners of more than 10% of the Shares are
not considered as being publicly held for this purpose. If, as a result of the
purchase of Shares pursuant to the Offer or otherwise, the Shares no longer
meet the requirements of the NASD for continued inclusion in the Nasdaq
National Market or in any other tier of The Nasdaq Stock Market and the Shares
are no longer included in the Nasdaq National Market or in any other tier of
The Nasdaq Stock Market, as the case may be, the market for Shares could be
adversely affected.
In the event that the Shares no longer meet the requirements of the NASD for
continued inclusion in any tier of The Nasdaq Stock Market, it is possible
that the Shares would continue to trade in the over-the-counter market and
that price quotations would be reported by other sources. The extent of the
public market for the Shares and the availability of such quotations would,
however, depend upon the number of holders of Shares remaining at such time,
the interests in maintaining a market in Shares on the part of securities
firms, the possible termination of registration of the Shares under the
Exchange Act, as described below, and other factors.
Margin Regulations. The Shares may currently be "margin securities" under
the regulations of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"), which would have the effect, among other things, of
allowing brokers to extend credit on the collateral of such Shares for the
purpose of buying, carrying or trading in securities ("Purpose Loans").
Depending upon factors, such as the number of
50
<PAGE>
record holders of the Shares and the number and market value of publicly held
Shares, following the purchase of Shares pursuant to the Offer, the Shares
might no longer constitute "margin securities" for purposes of the Federal
Reserve Board's margin regulations and, therefore, could no longer be used as
collateral for Purpose Loans made by brokers. In addition and in any event, if
registration of the Shares under the Exchange Act were terminated, the Shares
would no longer constitute "margin securities".
Exchange Act Registration. The Shares are currently registered under the
Exchange Act. The purchase of the Shares pursuant to the Offer may result in
the Shares becoming eligible for de-registration under the Exchange Act. Such
registration may be terminated upon application by the Company to the
Commission if the Shares are not listed on a national securities exchange and
there are fewer than 300 record holders of the Shares. The termination of
registration of the Shares under the Exchange Act would substantially reduce
the information required to be furnished by the Company to holders of Shares
and to the Commission, and would make certain provisions of the Exchange Act,
such as the short-swing profit recovery provisions of Section 16(b) of the
Exchange Act, the requirement of furnishing a proxy statement in connection
with meetings of shareholders meetings pursuant to Section 14(a) of the
Exchange Act, and the requirements of Rule 13e-3 under the Exchange Act with
respect to "going private" transactions, no longer applicable to the Shares.
In addition, "affiliates" of the Company and persons holding "restricted
securities" of the Company may be deprived of the ability to dispose of such
securities pursuant to Rule 144 promulgated under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the
"Securities Act").
If registration of the Shares under the Exchange Act were terminated, the
Shares would no longer be eligible for reporting on The Nasdaq National
Market.
7. CERTAIN INFORMATION CONCERNING THE COMPANY.
Except as otherwise set forth herein, the information concerning the Company
contained in this Offer to Purchase, including financial information and
projections, has been furnished by the Company or has been taken from or based
upon publicly available documents and records on file with the Commission and
other public sources. Neither Purchaser nor Parent assumes any responsibility
for the accuracy or completeness of the information concerning the Company
furnished by the Company or contained in such documents and records, or for
any failure by the Company to disclose events which may have occurred or may
affect the significance or accuracy of any such information but which are
unknown to Purchaser or Parent.
General. The Company is a California corporation with its principal
executive offices located at 2600 West Magnolia Blvd., Burbank, CA 91505.
The Company principally operates skilled nursing care centers and assisted
living centers located in California, Texas and Arizona. The skilled nursing
care centers provide subacute, rehabilitative, specialty medical and skilled
nursing care. The assisted living centers provide room and board, social and
minor medical services in a secure environment and, in selected situations,
provide care to early stage Alzheimer's residents. The Company also operates
pharmacies which service skilled nursing care centers, assisted living centers
and acute hospitals, both affiliated and non-affiliated in Southern California
and Texas. In addition, the Company manages subacute care units in acute
hospitals. The Company is incorporated under the laws of the State of
California.
At December 31, 1997, the Company operated 36 skilled nursing care centers
with 4,872 beds. Twenty-nine centers are in California with 1,515 beds; 22
centers are in Texas with 3,207 beds and one center is in Arizona with 150
beds. Within its skilled nursing care centers, the Company has established
separate units for specialty medical care and subacute: 15 units are dedicated
to Alzheimer's and 36 units are for patients requiring services for such
complex medical needs as oncology, pulmonary cardiac complications, wounds,
respiratory therapy and intensive physical, speech and occupational therapies.
At December 31, 1997, the Company operated five assisted living centers with
475 beds in California. Included in three of the centers are units dedicated
to the needs of early stage Alzheimer's residents.
51
<PAGE>
At December 31, 1997, the Company operated two pharmacies in Southern
California and through a joint venture, operates one in Texas. The pharmacies
provide pharmaceutical products and services to 87 non-affiliated skilled
nursing care centers, assisted living centers and acute hospitals located in
Southern California and Texas. The pharmacies also provide products and
services to the Company's skilled nursing care and assisted living centers.
The Company manages subacute units in three acute hospitals.
Directors and Officers. The name, address, principal occupation or
employment, five-year employment history, and citizenship of each director and
executive officer of the Company is set forth in Schedule II hereto.
Financial Information. Set forth below is certain selected summary
consolidated financial information relating to the Company and its
subsidiaries which has been excerpted or derived from the audited financial
statements contained in the Company's Annual Report on Form 10-K for the year
ended June 30, 1997 (the "Company's 10-K") and the unaudited financial
statements contained in the Company's Quarterly Report on Form 10-Q, as
amended, for the quarter ended December 31, 1997 (the "Company's 10-Q"). More
comprehensive financial information is included in the Company's 10-K, the
Company's 10-Q and other documents filed by the Company with the Commission.
The financial information that follows is qualified in its entirety by
reference to such reports and other documents, including the financial
statements and related notes contained therein. Such reports and other
documents may be examined and copies may be obtained from the offices of the
Commission in the manner set forth below.
SELECTED CONSOLIDATED FINANCIAL
DATA OF THE COMPANY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
JUNE 30, DECEMBER 31,
----------------- -----------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
CONSOLIDATED INCOME STATEMENT DATA
Net revenues.............................. $197,927 $176,062 $108,507 $ 95,088
Income before provision for income taxes.. 188 11,761 4,681 853
Net income................................ 69 7,309 2,832 516
Earnings per share
basic................................... 0.01 1.08 0.42 0.08
diluted................................. 0.01 1.06 0.41 0.08
CONSOLIDATED BALANCE SHEET
Total assets.............................. $250,516 $223,052 $267,420 $239,014
Working capital........................... 12,648 13,906 11,384 15,118
Property and Equipment (less accumulated
depreciation and amortization)........... 181,193 164,923 194,553 173,489
Long-term debt (including current
portion)................................. 121,452 110,374 129,754 120,939
Shareholder's equity...................... 81,412 81,286 84,721 81,802
</TABLE>
- --------
Ratio Earnings to Fixed Charges; Book Value Per Share. The Company's ratio
of earnings to fixed charges for the fiscal year ended June 30, 1997 was 1.74.
The ratio of earnings to fixed charges for the fiscal year ended June 30, 1996
was 2.99. The ratio of earnings to fixed charges for the six months ended
December 31, 1997 was 2.14. The Company's book value per Share was $11.29 as
of June 30, 1997, $11.18 as of June 30, 1996 and $11.73 as of December 31,
1997.
Certain Company Projections. In connection with Parent's and Purchaser's due
diligence review of the Company and in the course of the negotiations between
the Company, Parent and Purchaser described in "SPECIAL FACTORS--Background of
the Offer, and the Merger" which led to the execution of the Merger Agreement,
the Company provided Parent and Purchaser with certain projections of future
operating performance of the Company which Parent and Purchaser believe are
not publicly available. Such projections, which were prepared in the course of
the Company's normal budget and planning process in June 1997, cover the five-
year
52
<PAGE>
period beginning with 1998. Such information included, among other things, the
Company's projection of net revenues, earning before interest, taxes,
depreciation and amortization ("EBITDA") and net income as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total net revenues.............. $236,100 $255,300 $269,600 $282,700 $296,000
EBITDA(1)....................... 30,400 34,000 36,200 37,900 38,700
Net income(1)................... 7,600 10,200 11,800 13,100 13,900
</TABLE>
- --------
(1) During the time negotiations with Parent were underway, the Company
revised downward its EBITDA and net income projections for fiscal 1998 to
$29,600 and $6,400, respectively, to reflect the Company's actual results
of operations for the quarter ended December 31, 1997.
THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 PROVIDES A "SAFE
HARBOR" EXEMPTION FOR FORWARD-LOOKING STATEMENTS TO ENCOURAGE COMPANIES TO
PROVIDE PROSPECTIVE INFORMATION ABOUT THEIR BUSINESSES, PROVIDED THAT SUCH
STATEMENTS ARE IDENTIFIED AS FORWARD-LOOKING AND ACCOMPANIED BY MEANINGFUL
CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE DISCUSSED IN SUCH FORWARD-LOOKING
STATEMENTS. THE INFORMATION SET FORTH ABOVE IS FORWARD-LOOKING AND IS MADE
PURSUANT TO THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995.
THE COMPANY DOES NOT AS A MATTER OF COURSE MAKE PUBLIC ANY PROJECTIONS AS TO
FUTURE PERFORMANCE OR EARNINGS, AND THE PROJECTIONS SET FORTH ABOVE ARE
INCLUDED IN THIS OFFER TO PURCHASE ONLY BECAUSE THE INFORMATION WAS MADE
AVAILABLE TO PARENT AND PURCHASER BY THE COMPANY. THE COMPANY HAS INFORMED
PARENT AND PURCHASER THAT THESE PROJECTIONS WERE NOT PREPARED WITH A VIEW TO
PUBLIC DISCLOSURE OR COMPLIANCE WITH THE PUBLISHED GUIDELINES OF THE
COMMISSION OR THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF
CERTIFIED PUBLIC ACCOUNTS REGARDING PROJECTIONS AND FORECASTS. THE COMPANY HAS
ALSO INFORMED PARENT AND PURCHASER THAT ITS INTERNAL FINANCIAL FORECASTS (UPON
WHICH THE PROJECTIONS PROVIDED TO THE PARENT AND THE PURCHASER WERE BASED IN
PART) ARE, IN GENERAL, PREPARED SOLELY FOR INTERNAL USE AND ARE SUBJECTIVE IN
MANY RESPECTS AND THUS SUSCEPTIBLE TO VARIOUS INTERPRETATIONS AND PERIODIC
REVISION BASED ON ACTUAL EXPERIENCE AND BUSINESS DEVELOPMENTS. PROJECTED
INFORMATION OF THIS TYPE IS BASED ON ESTIMATES AND ASSUMPTIONS WHICH
THEMSELVES ARE BASED ON EVENTS AND CIRCUMSTANCES THAT HAVE NOT TAKEN PLACE AND
ARE INHERENTLY SUBJECT TO SIGNIFICANT FINANCIAL, MARKET, ECONOMIC AND
COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, ALL OF WHICH ARE DIFFICULT TO
PREDICT AND MANY OF WHICH ARE BEYOND THE CONTROL OF THE COMPANY, PURCHASER OR
PARENT. THE PROJECTIONS WERE PREPARED IN JUNE 1997, AND, ACCORDINGLY DUE TO
THE PASSAGE OF TIME AND CHANGES IN CIRCUMSTANCES, MANY OF THE ASSUMPTIONS ON
WHICH THEY WERE BASED MAY NO LONGER BE VALID. MANY OF THE ASSUMPTIONS UPON
WHICH THE FOREGOING PROJECTIONS WERE BASED, NONE OF WHICH WERE APPROVED BY
PARENT OR PURCHASER, ARE DEPENDENT UPON ECONOMIC FORECASTING (BOTH GENERAL AND
SPECIFIC TO THE COMPANY'S BUSINESS), WHICH IS INHERENTLY UNCERTAIN AND
SUBJECTIVE. AMONG OTHER THINGS, THE COMPANY'S FUTURE RESULTS OF OPERATIONS MAY
BE IMPACTED BY CHANGES IN MEDICARE RATE REIMBURSEMENT RULES, THE IMPACT OF THE
PROSPECTIVE PAYMENT SYSTEM, CHANGES IN CENSUS AND QUALITY MIX AT THE COMPANY'S
FACILITIES, CHANGES IN STATE HEALTH CARE REGULATORY REQUIREMENTS AND OTHER
MATTERS. THEREFORE, IT IS EXPECTED THAT THERE WILL BE DIFFERENCES BETWEEN THE
ACTUAL AND PROJECTED RESULTS AND THAT THE ACTUAL RESULTS MAY BE
53
<PAGE>
MATERIALLY HIGHER OR LOWER THAN THOSE PROJECTED. NONE OF PARENT, PURCHASER OR
THE COMPANY ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR VALIDITY OF ANY OF
SUCH PROJECTIONS. INCLUSION OF THE FOREGOING PROJECTIONS SHOULD NOT BE
REGARDED AS AN INDICATION THAT PARENT, PURCHASER, THE COMPANY OR ANY OTHER
PERSON WHO RECEIVED SUCH INFORMATION CONSIDERS IT AN ACCURATE PREDICTION OF
FUTURE EVENTS, AND NEITHER PURCHASER NOR PARENT HAS RELIED ON THEM AS SUCH.
NONE OF PARENT, PURCHASER OR THE COMPANY INTENDS TO PUBLICLY UPDATE OR
OTHERWISE PUBLICLY REVISE THE PROJECTIONS SET FORTH ABOVE. THE INDEPENDENT
ACCOUNTANTS FOR THE COMPANY, PARENT AND PURCHASER HAVE NOT EXAMINED, REVIEWED
OR COMPILED THESE PROJECTIONS AND ACCORDINGLY DO NOT EXPRESS AN OPINION OR ANY
OTHER FORM OF ASSURANCE WITH RESPECT TO THEM.
Additional Information. The Company is subject to the informational filing
requirements of the Exchange Act, and, in accordance therewith, is required to
file periodic reports, proxy statements and other information with the
Commission relating to its business, financial condition and other matters.
Information as of particular dates concerning the Company's directors and
officers, their remuneration, Options granted to them, the principal holders
of the Company's securities and any material interest of such persons in
transactions with the Company is required to be disclosed in proxy statements
distributed to the Company's shareholders and filed with the Commission. Such
reports, proxy statements and other information should be available for
inspection at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and also should be
available for inspection at the Commission's regional offices located at Seven
World Trade Center, 13th floor, New York, New York 10048 and the Citicorp
Center, 500 West Madison Street, Suite 400, Chicago, Illinois 60661-2511.
Copies of such materials may also be obtained by mail, upon payment of the
Commission's prescribed rates, by writing to its principal office at 450 Fifth
Street, N.W., Washington, D.C. 20549. Such material may also be accessed
electronically by means of the Commission's World Wide Web site on the
internet at http://www.sec.gov.
8. CERTAIN INFORMATION CONCERNING PURCHASER AND PARENT.
Purchaser. Purchaser is a newly formed Delaware corporation organized in
connection with the Offer and the Merger and has not carried on any activities
other than in connection with the Offer and the Merger. The principal offices
of Purchaser are located at 11900 W. Olympic Boulevard, Suite 680, Los
Angeles, CA 90064. All interests in Purchaser are or will be owned by Parent.
Until immediately prior to the time that Purchaser purchases Shares pursuant
to the Offer, it is not anticipated that Purchaser will have any significant
assets or liabilities or engage in activities other than those incident to its
formation and capitalization and the transactions contemplated by the Offer
and the Merger. Purchaser has been organized by Parent as a Delaware
corporation and has minimal assets and capitalization.
Parent. Parent is a Delaware corporation with its principal executive
offices located at 11900 W. Olympic Boulevard, Suite 680, Los Angeles, CA
90064.
Parent, through its subsidiaries, is engaged in the Business of operating
skilled nursing facilities and therapy businesses. Currently, Parent operates
a total of nine facilities, with an aggregate of 1,227 beds. All of Parent's
skilled nursing facilities are located in the Los Angeles, California area.
Parent's therapy businesses serve facilities throughout California.
The name, citizenship, business address, principal occupation or employment
and five-year employment history for each of the directors and executive
officers of Parent, Purchaser and Heritage are set forth in Schedule I hereto.
Except as set forth in this Offer to Purchase, neither Parent nor Purchaser
nor, to the best knowledge of Parent and Purchaser, any of the persons listed
in Schedule I hereto, or any associate or majority owned
54
<PAGE>
subsidiary of such persons, beneficially owns any equity security of the
Company, and none of Parent nor Purchaser, nor, to the best knowledge of
Parent and Purchaser, any of the other persons referred to above, or any of
the respective directors, executive officers or subsidiaries of any of the
foregoing, has effected any transaction in any equity security of the Company
during the past 60 days.
Except as set forth in this Offer to Purchase, neither Parent nor Purchaser,
nor, to the best knowledge of Parent and Purchaser, any of the persons listed
in Schedule I hereto, has any contract, arrangement, understanding or
relationship with any other person with respect to any securities of the
Company, including, without limitation, any contract, arrangement,
understanding or relationship concerning the transfer or the voting of any
securities of the Company, joint ventures, loan or option arrangements, puts
or calls, guaranties of loans, guaranties against loss, or the giving or
withholding of proxies. Except as set forth in this Offer to Purchase, neither
Parent nor Purchaser, nor, to the best knowledge of Parent and Purchaser, any
of the persons listed in Schedule I hereto has had any transactions with the
Company, or any of its executive officers, directors or affiliates that would
require reporting under the rules of the Commission.
Except as set forth in this Offer to Purchase, there have been no contacts,
negotiations or transactions between Parent or Purchaser, or their respective
subsidiaries, or, to the best knowledge of Parent or Purchaser, any of the
persons listed in Schedule I hereto, on the one hand, and the Company or its
executive officers, directors or affiliates, on the other hand, concerning a
merger, consolidation or acquisition, tender offer or other acquisition of
securities, election of directors, or a sale or other transfer of a material
amount of assets.
9. SOURCE AND AMOUNT OF FUNDS.
The total amount of funds required by the Purchaser to consummate the Offer
and the Merger, to refinance certain outstanding indebtedness of the Company
and of the Parent, to pay related fees and expenses, and to provide for the
working capital needs of the Parent and its subsidiaries, is estimated to be
approximately $332 million. The Offer and the Merger are not conditioned on
obtaining financing. The Purchaser expects that it will obtain such funds from
capital contributions to Purchaser by the Parent.
An aggregate of $82 million of the funds required to consummate the Offer
and the Merger will be obtained from equity investments in Parent by its
current and future stockholders. It is expected that $74.5 million of these
funds will be provided by Heritage, $5 million of these funds will be provided
by the Snukals and $2.5 million of these funds will be provided by Mr. Scott.
If, for any reason, the Snukals or Mr. Scott do not make these investments in
Parent, Heritage has committed to increase its investment in Parent to cover
any shortfall, up to an amount which would cause the aggregate equity
investment in Parent in connection with the Offer and the Merger to equal $82
million. See "SPECIAL FACTORS--The Merger and Related Agreements".
The Parent has received a letter (together with the related Summary of
Terms, the "Commitment Letter") dated February 6, 1998 from Bank of Montreal
("BMO"), pursuant to which BMO has committed to provide the Purchaser and the
Parent with financing in the aggregate amount of up to $250 million, which
shall be the exclusive financing for the transactions except as expressly
provided in the Commitment Letter. A copy of the Commitment Letter is filed as
an exhibit to the Schedule 14D-1 and incorporated herein by reference, and the
following summary of the Commitment Letter (including the Summary of Terms,
which forms a part thereof) is qualified in its entirety by reference thereto.
BMO has committed to fund the entire amount of the credit facilities
described in the Commitment Letter, subject to the conditions described
therein. Although not a condition to funding, BMO proposes to form one or more
syndicates of financial institutions and other investors (collectively with
BMO, the "Lenders"), who shall be reasonably acceptable to the Parent, to join
with BMO in providing the financing. BMO will act as agent for the Lenders
(the "Agent"). The commitment of the Lenders, which, after syndication will be
several and not joint, will be allocated among the following facilities: (i) a
non-revolving stock acquisition facility to be extended to the Purchaser in an
amount equal to the lesser of $80 million and 50% of the fair market value of
the shares of Company stock pledged as security ("Facility A"), for the sole
purpose of acquiring the capital stock of the
55
<PAGE>
Company; (ii) a $30 million term loan to be extended to the Parent for the
purpose of refinancing existing indebtedness of the Parent ("Facility B"); and
(iii) Facility C to be extended to the Parent in an aggregate amount of up to
$250 million ("Facility C"). Facility C will consist of (i) a $30 million
revolving credit/term loan facility (the "Revolving Credit Tranche"), with a
$4 million sublimit for letters of credit (with BMO as the issuing bank), (ii)
a $50 million 6 year term loan facility ("Term Loan Tranche One"), (iii) a $90
million 8 year term loan facility ("Term Loan Tranche Two"), and (iv) an $80
million 6 month bridge loan facility (the "Bridge Loan Tranche"). The proceeds
of Facility C will be used to refinance the Facility A and Facility B
indebtedness, to refinance certain indebtedness of the Company, to pay fees
and expenses not to exceed $28 million and to fund working capital and capital
expenditure needs of the Parent and its subsidiaries and for other general
corporate purposes.
Facility A and Facility B will each mature on the earlier of August 7, 1998
and the effective date of the Merger. The Revolving Credit Tranche will mature
6 years after closing of Facility C. Term Loan Tranche One and Term Loan
Tranche Two will be payable in installments as set forth in the Commitment
Letter with a final maturity of 6 years from the Facility C closing for Term
Loan Tranche One and 8 years from the Facility C closing for Term Loan Tranche
Two. The Bridge Loan Tranche will mature 6 months from the Facility C closing,
subject to extension for an additional 8 years upon payment of an extension
fee equal to 3% of the principal amount so extended and provided there is not
then any default. Extension of the Bridge Loan Tranche is also subject to the
issuance of warrants (with customary antidilution protection, registration
rights and certain so-called tag-along rights) on each 6 month anniversary
that the Bridge Loan Tranche remains outstanding beyond its original 6 month
term, which warrants shall be exercisable for nominal consideration for
percentages of the fully diluted common equity of the Parent of between 1% and
3.5% on each such 6 month anniversary date (not to exceed 20% in the
aggregate). Facility C is also subject to mandatory prepayment out of the net
cash proceeds of certain asset sales, issuance of equity, subordinated debt or
senior debt securities, as well as out of 85% of excess cash flow if a
specified leverage ratio is exceeded. Term Loan Tranche two is subject to
optional prepayment with a premium of 2% in the first year after closing, a
premium of 1% in the second year after closing and at par thereafter. There is
no premium applicable to prepayment of Term Loan Tranche One. The Bridge Loan
Tranche shall be subordinate in right of payment to the other Facility C
Tranches and will be issued pursuant to a separate credit agreement. Net cash
proceeds of the issuance of subordinated debt will be applied first to the
reduction of the Bridge Loan Tranche, with any excess applied to the Term Loan
Tranche One and Term Loan Tranche Two in accordance with the Commitment
Letter.
The credit documents relating to the respective Facilities will contain
customary representations, warranties, covenants (including covenants which
may limit the ability of the Parent to pay dividends), events of default,
remedies and provisions for changes in capital adequacy and capital
requirements, reserves, indemnification rights and provisions for the payment
of expenses.
The closing of Facility A and Facility B will be subject to the satisfaction
of the following conditions (as well as other customary conditions to
closing): (i) the Purchaser shall have had tendered to it that percentage of
the capital stock of the Company as shall be required to approve a merger
under applicable law and shall have accepted the tender of not less than 49.9%
of the capital stock of the Company, (ii) the Purchaser shall have received a
cash equity contribution of not less than $82 million, (iii) the negotiation,
execution and delivery of loan, security and guarantee documentation
reasonably satisfactory to the Agent and the Purchaser, (iv) the perfection of
a first lien on the collateral securing the applicable facility, (v) receipt
of acceptable resolutions, opinions and other closing documents, (vi) there
shall have been no amendments to the Merger Agreement, all conditions
precedent to the Purchaser's obligations thereunder shall have been satisfied
and none of such conditions shall have been waived without BMO's consent, and
(vii) Facility A shall have closed not later than March 6, 1998, although no
borrowing is required to have been made by that date.
The closing of Facility C will be subject to the satisfaction of the
following conditions (as well as other customary conditions to closing): (i)
the negotiation, execution and delivery of definitive loan, security and
guarantee documentation reasonably satisfactory to the Agent and the Parent,
(ii) all conditions to the Merger set forth in the Merger Agreement shall have
been satisfied without waiver and the Merger shall have been
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consummated with the survivor being a wholly-owned subsidiary of the Parent,
(iii) the corporate, capital and ownership structure of the Parent and its
subsidiaries shall be as previously described to the Agent, (iv) the Lenders
shall have received satisfactory certification from officers of the Parent as
to the financial condition and solvency of the Parent and its subsidiaries;
(v) receipt by the Agent of satisfactory opinions of counsel, corporate
resolutions, certificates and other documents as the Agent may reasonably
require, and evidence of the perfection of the first priority liens on the
collateral securing Facility C, other than owned real property, leaseholds and
certain assets subject to third party consents, all as more particularly
described in the Commitment Letter, and (vi) closing shall have occurred not
later than August 7, 1998.
The Commitment Letter provides that BMO shall be paid the following non-
refundable fees (subject to certain adjustments as set forth in the Commitment
Letter) in consideration of the issuance of the commitment: (i) $150,000 paid
upon acceptance of the Commitment Letter by the Parent, (ii) $150,000 payable
upon execution of the documentation for Facility A and Facility B, (iii)
$900,000 payable upon the initial funding of Facility A, (iv) $450,000 payable
upon the initial funding of Facility B, (v) $900,000 payable upon the initial
funding of Facility C, which fee shall be increased to $1,350,000 if there has
been no funding of Facility B, (vi) $500,000 less any amounts paid under
clauses (i) and (ii) above upon the termination of the Merger Agreement
pursuant to any of the sections referred to in Section 7.3(a) thereof, such
fee to be payable upon (but only upon) receipt by the Parent of compensation
pursuant to such Section 7.3(a) in at least the amount of such fee, and (vii)
$1,600,000 upon the funding of the Bridge Loan Tranche (as defined below).
The interest rates on Facility A and Facility B loans will be, at the
borrower's election, either the Alternate Base Rate (defined as the higher of
BMO's base rate and the Federal Funds rate plus 1/2% per annum) plus 175 bp.s
or the applicable LIBOR (for one, two, three or six month LIBOR loans, as
selected by the Borrower, subject to availability) plus 275 bp.s. By the terms
of Facility C, the Parent may elect to have the interest rate on loans
outstanding under the Revolving Credit Tranche and Term Loan Tranche One be
the Alternate Base Rate or the applicable LIBOR, in each case plus an
applicable margin which will vary between 175 bp.s and 275 bp.s for LIBOR
loans and between 75 bp.s and 175 bp.s for Alternate Base Rate loans,
depending upon the ratio of the sum of the Parent's total funded debt plus 8
times its operating rents to EBITDAR (the "Modified Leverage Ratio"). The
interest rate on Term Loan Tranche Two loans will be the applicable LIBOR rate
plus a margin of either 275 bp.s or 300 bp.s depending upon the Modified
Leverage Ratio. The interest rate on the Bridge Loan Tranche loans will be, at
the Parent's election, either the applicable LIBOR plus 550 bp.s for the first
three months and 650 bp.s thereafter or the Alternate Base Rate plus the
margin which would be applicable to Term Loan Tranche One loans less 100 bp.s.
The Purchaser and the Parent, as the case may be, will pay a commitment fee of
50 bp.s on the unused portion of the Revolving Credit Tranche, payable
quarterly in arrears. During the continuance of an event of default, a default
interest rate shall apply equal to 2% above the rate otherwise in effect.
Facility A will be secured by a first lien on all shares of capital stock of
the Company acquired by the Purchaser and will be guaranteed by the Parent.
Facility B, if drawn, will be secured by a first lien on all equity securities
owned by the Parent in its subsidiaries. The lien on the subsidiaries' equity
will also cross collateralize Facility A if, but only if, Facility B is drawn.
Facility C (other than the Bridge Loan Tranche) will be secured by a first
lien on all of the assets, tangible and intangible (subject to perfecting
liens on real property owned and leased, and obtaining third party consents,
on a post-closing basis), of the Parent and its subsidiaries, including all
equity interests in subsidiaries, and will be guaranteed by all subsidiaries
of the Parent. The Bridge Loan Tranche will be unsecured.
The Purchaser and the Parent anticipate that Facility A and Facility B will
be repaid with the proceeds of Facility C. The Parent anticipates that its
obligations under Facility C will be repaid from a variety of sources,
including, without limitation, internally generated funds, bank refinancing,
proceeds from the potential disposition of assets and the public or private
sale of debt or equity securities. The source and allocation of various
methods of repayment will be determined and may be modified by the Parent
based on market conditions and such other factors as the Parent may deem
appropriate at the time.
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10. DIVIDENDS AND DISTRIBUTIONS.
As of the date hereof, the Company has not declared or paid any cash
dividends or made any cash distributions.
Pursuant to the Merger Agreement, the Company will not prior to the Merger,
without the prior written consent of Parent or Purchaser, 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 redeem or otherwise
acquire any shares of capital stock of, securities convertible into or
exercisable for, or options to acquire equity securities of, the Company or
any securities of any of its subsidiaries.
Payment of dividends and distributions by the Company is subject to certain
restrictions contained in agreements in respect of the Company's credit
arrangements.
11. CERTAIN CONDITIONS OF THE OFFER.
Purchaser is not required to accept for payment or pay for, and shall delay
the acceptance for payment of, or the payment for, any Shares and, if required
pursuant to the terms of the Merger Agreement, shall extend the Offer by one
or more extensions until July 31, 1998, and may terminate the Offer at any
time after July 31, 1998, if (i) immediately prior to the expiration of the
Offer (as extended in accordance with the Offer), the Minimum Condition shall
not have been satisfied, (ii) any applicable waiting period under the HSR Act
shall not have expired or been terminated or (iii) prior to the acceptance for
payment of Shares, Purchaser makes a determination (which shall be made in
good faith) that any of the following conditions exist:
(a) there shall have been any action taken, or any statute, rule,
regulation, judgment, order or injunction promulgated, enacted, entered,
enforced or deemed applicable to the Offer, or any other action shall have
been taken, by any state or federal government or governmental authority or
by any U. S. court, other than the routine application to the Offer or the
Merger of waiting periods under the HSR Act, that (i) restrains, prohibits,
or makes illegal the acceptance for payment of, or the payment for, some or
all of the Shares or otherwise prohibits consummation of the Offer or the
Merger, (ii) restrains, prohibits, or imposes material limitations on, the
ability of Purchaser to acquire or hold or to exercise effectively all
rights of ownership of the Shares, including, without limitation, the right
to vote any Shares purchased by Purchaser on all matters properly presented
to the shareholders of the Company, or effectively to control in any
material respect the business, assets or operations of the Company, its
subsidiaries, Purchaser or any of their respective affiliates, or (iii)
otherwise has a Material Adverse Effect on the Company, Parent or
Purchaser; or there shall be any litigation or suit pending by any person
or governmental authority seeking to do any of the foregoing; or
(b) (i) the representations and warranties of the Company set forth in
the Merger Agreement (without giving effect to any "materially" limitations
or references to "Material Adverse Effect" set forth therein) shall not be
true and correct in any material respect as of the date of the Merger
Agreement and as of consummation of the Offer as though made on or as of
such date, but only if the respects in which the representations and
warranties made by the Company are inaccurate and would in the aggregate
have a Material Adverse Effect on the Company, (ii) the Company shall have
breached or failed to comply in any material respect with any of its
obligations under the Merger Agreement or (iii) any material adverse
changes shall have occurred that have had a Material Adverse Effect on the
Company; or
(c) it shall have been publicly disclosed that any person (which includes
a "person" as such term is defined in Section 13(d)(3) of the Exchange Act)
other than Parent, Purchaser, any of their affiliates, or any group of
which any of them is a member, shall have acquired beneficial ownership of
more than 30% of the outstanding Shares or shall have entered into a
definitive agreement or an agreement in principle with the Company with
respect to a tender offer or exchange offer for any Shares or a merger
consolidation or other business combination with or involving the Company,
any of its subsidiaries or any of their material assets; or
(d) the Merger Agreement shall have been terminated in accordance with
its terms;
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(e) prior to the purchase of Shares pursuant to the Offer, the Company
Board shall have withdrawn or modified (including by amendment of the
Schedule 14D-9) in a manner adverse to Purchaser its approval or
recommendation of the Offer, the Merger Agreement or the Merger or shall
have recommended another offer, or shall have adopted any resolution to
effect any of the foregoing which, in the good faith judgment of Purchaser
in any such case, and regardless of the circumstances (including any action
or omission by Purchaser) giving rise to any such condition, makes it
inadvisable to proceed with such acceptance for payment; or
(f) any authorizations, consents, orders or approvals of, or declarations
or filings with, or expirations of waiting periods imposed by, any
governmental entity, required in order to consummate the Offer or the
Merger or to permit the Company and its subsidiaries to conduct their
businesses after the Offer and the Merger as currently conducted, shall not
have been filed, granted, given, occurred or satisfied.
12. CERTAIN LEGAL MATTERS; REGULATORY APPROVALS.
General. Based upon its examination of publicly available information with
respect to the Company and the review of certain information furnished by the
Company to Parent and discussions of representatives of Parent with
representatives of the Company during Parent's investigation of the Company,
neither Purchaser nor Parent is aware of any license or other regulatory
permit that appears to be material to the business of the Company and its
subsidiaries, taken as a whole, which might be adversely affected by the
acquisition of Shares by Purchaser pursuant to the Offer or, except as set
forth below, of any approval or other action by any domestic (federal or
state) or foreign governmental, administrative or regulatory authority or
agency which would be required prior to the acquisition of Shares by Purchaser
pursuant to the Offer. Should any such approval or other action be required,
it is Purchaser's present intention to seek such approval or action. Except as
described under "THE TENDER OFFER--Certain Conditions to the Offer", Purchaser
does not currently intend to delay the purchase of Shares tendered pursuant to
the Offer pending the outcome of any such action or the receipt of any such
approval (subject to Purchaser's right to decline to purchase Shares if any of
the conditions described under "THE TENDER OFFER--Certain Conditions to the
Offer" shall have occurred). There can be no assurance that any such approval
or other action, if needed, would be obtained without substantial conditions
or that adverse consequences might not result to the business of the Company,
Purchaser or Parent or that certain parts of the businesses of the Company,
Purchaser or Parent might not have to be disposed of or held separate or other
substantial conditions complied with in order to obtain such approval or other
action or in the event that such approval was not obtained or such other
action was not taken. Purchaser's obligation under the Offer to accept for
payment and pay for Shares is subject to certain conditions, including
conditions relating to the legal matters discussed herein. See Section 11.
State Takeover Laws. The Company's principal executive offices are located
in, and the Company is incorporated under the laws of, the State of
California, which currently has no takeover statute that would apply to the
Offer or to the Merger. However, there can be no assurances that California
will not, prior to the completion of the Offer, adopt such a statute. Under
California Law, the Merger may not be accomplished for cash paid to the
Company's shareholders if Purchaser or Parent owns directly or indirectly more
than 50% but less than 90% of the then outstanding Shares unless either all
the shareholders consent or the Commissioner of Corporations of the State of
California approves, after a hearing, the terms and conditions of the Merger
and the fairness thereof. The purpose of the Offer is to obtain 90% or more of
the Shares and to enable Parent and Purchaser to acquire control of the
Company.
In the event the Minimum Condition is not satisfied on or before the tenth
business day after all other conditions to the Offer have been satisfied,
Purchaser has agreed that (A) the Minimum Condition shall be automatically
amended to mean that a number of Shares which, together with the Shares then
owned directly or indirectly by Purchaser, would equal not less than 49.9% of
the Shares, shall have been validly tendered and not withdrawn prior to the
expiration of the Offer, and (B) Purchaser will amend the Offer to provide
that Purchaser will purchase, on a pro rata basis in the Offer, that number of
Shares which, together with the Shares then owned directly or indirectly by
Purchaser, would equal 49.9% of the Shares (it being understood that Purchaser
shall
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not in any event be required to accept for payment, or pay for, any Shares if
less than 49.9% of the Shares are tendered pursuant to the Offer and not
withdrawn at the expiration of the Offer). In the event that Purchaser
acquires the Revised Minimum Number of Shares, it may have, as a practical
matter the ability to ensure approval of the Merger by the Company's
shareholders.
A number of other states have adopted laws and regulations applicable to
attempts to acquire securities of corporations which are incorporated, or have
substantial assets, shareholders, principal executive offices or principal
places of business, or whose business operations otherwise have substantial
economic effects, in such states. In Edgar v. MITE Corp., the Supreme Court of
the United States invalidated on constitutional grounds the Illinois Business
Takeover Statute, which, as a matter of state securities law, made takeovers
of corporations meeting certain requirements more difficult. However, in 1987,
in CTS Corp. v. Dynamics Corp. of America, the Supreme Court held that the
State of Indiana may, as a matter of corporate law and, in particular, with
respect to those aspects of corporate law concerning corporate governance,
constitutionally disqualify a potential acquiror from voting on the affairs of
a target corporation without the prior approval of the remaining shareholders.
The state law before the Supreme Court was by its terms applicable only to
corporations that had a substantial number of shareholders in the state and
were incorporated there.
Purchaser does not know whether any of these laws will, by their terms,
apply to the Offer or the Merger and has not complied with any such laws.
Should any person seek to apply any state takeover law, Purchaser will take
such action as then appears desirable, which may include challenging the
validity or applicability of any such statute in appropriate court
proceedings. In the event it is asserted that one or more state takeover laws
are applicable to the Offer or the Merger, and an appropriate court does not
determine that it is inapplicable or invalid as applied to the Offer,
Purchaser might be required to file certain information with, or receive
approvals from, the relevant state authorities. In addition, if enjoined,
Purchaser might be unable to accept for payment any Shares tendered pursuant
to the Offer, or be delayed in continuing or consummating the Offer and the
Merger. In such case, Purchaser may not be obligated to accept for payment any
Shares tendered. See "THE TENDER OFFER--Certain Conditions of the Offer."
Antitrust. Under the HSR Act and the rules that have been promulgated
thereunder by the Federal Trade Commission (the "FTC"), certain acquisition
transactions may not be consummated unless certain information has been
furnished to the Antitrust Division of the Department of Justice (the
"Antitrust Division") and the FTC and certain waiting period requirements have
been satisfied. The acquisition of Shares by Purchaser pursuant to the Offer
are subject to such requirements.
Pursuant to the HSR Act, Heritage, as ultimate parent of Purchaser and the
Company intend to file Premerger Notification and Report Forms in connection
with the purchase of Shares pursuant to the Offer with the Antitrust Division
and the FTC on or about February 13, 1998. Under the provisions of the HSR Act
applicable to the Offer, the purchase of Shares pursuant to the Offer may not
be consummated until the expiration of a 15-calendar day waiting period
following the filing by Heritage. Assuming such filing is made on such date,
the waiting period under the HSR Act applicable to the purchase of Shares
pursuant to the Offer will expire at 11:59 p.m., New York City time, on
February 28, 1998, unless such waiting period is earlier terminated by the FTC
and the Antitrust Division or extended by a request from the FTC or the
Antitrust Division for additional information or documentary material prior to
the expiration of the waiting period. Pursuant to the HSR Act, Heritage
intends to request early termination of the waiting period applicable to the
Offer. There can be no assurance, however, that the 15-day HSR Act waiting
period will be terminated early. If either the FTC or the Antitrust Division
were to request additional information or documentary material from Heritage
or the Company with respect to the Offer, the waiting period with respect to
the Offer would expire at 11:59 p.m., New York City time, on the tenth
calendar day after the date of substantial compliance by Heritage or the
Company with such request. Thereafter, the FTC or the Antitrust Division must
obtain a court order to prevent Purchaser from consummating the acquisition of
Shares pursuant to the Offer. If the acquisition of Shares is delayed pursuant
to a request by the FTC or the Antitrust Division for additional information
or documentary material pursuant to the HSR Act, the Offer will be extended if
at such time the conditions to the Offer described under "THE
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TENDER OFFER--Certain Conditions to the Offer" and reasonably capable of being
satisfied by July 31, 1998, and, in any event, the purchase of and payment for
Shares will be deferred until 10 days after the request is substantially
complied with, unless the extended period expires on or before the date when
the initial 15-day period would otherwise have expired, or unless the waiting
period is sooner terminated by the FTC and the Antitrust Division. Only one
extension of such waiting period pursuant to a request for additional
information is authorized by the HSR Act and the rules promulgated thereunder,
except by court order. Any such extension of the waiting period will not give
rise to any withdrawal rights not otherwise provided for by applicable law. It
is a condition to the Offer that the waiting period applicable under the HSR
Act to the Offer expire or be terminated. See "THE TENDER OFFER--Certain
Conditions to the Offer."
The FTC and the Antitrust Division frequently scrutinize the legality under
the antitrust laws of transactions such as the proposed acquisition of Shares
by Purchaser pursuant to the Offer. At any time before or after the purchase
of Shares pursuant to the Offer by Purchaser, the FTC or the Antitrust
Division could take such action under the antitrust laws as it deems necessary
or desirable in the public interest, including seeking to enjoin the purchase
of Shares pursuant to the Offer or seeking the divestiture of Shares purchased
by Purchaser or the divestiture of substantial assets of Purchaser, Parent,
the Company or their respective subsidiaries. Private parties and state
attorneys general may also bring legal action under federal or state antitrust
laws under certain circumstances. Based upon an examination of information
available to Purchaser and Parent relating to the businesses in which Parent
and the Company and their respective subsidiaries are engaged, the Company,
Parent and Purchaser believe that the Offer will not violate the antitrust
laws. Nevertheless, there can be no assurance that a challenge to the Offer on
antitrust grounds will not be made or, if such a challenge is made, what the
result would be.
Federal and State Healthcare Regulatory Authorities. The Company owns,
operates and/or manages skilled nursing facilities, assisted living facilities
and pharmacies. These facilities are operated in Arizona, California and
Texas. The regulatory requirements of these jurisdictions require certain
notices of or approvals prior to certain changes of ownership or control of
management of any facilities or services. These regulatory requirements
include, without limitation, those providing for licensure, participation in
the Medicaid program, as well as federal laws regarding participation in the
Medicare and Medicaid programs. To the extent that the consummation of the
Offer or the Merger is determined to constitute any such change in ownership,
control or management of the facilities under the applicable regulatory
requirements, consummation of the Offer and the Merger would be subject to
compliance with the regulatory requirements of the applicable state, as well
as any applicable federal laws, and receipt, to the extent applicable, of any
required approvals or other authorization. The state and federal requirements
are subject to interpretation by the various agencies.
Medicare. Pursuant to Federal Medicare Program Standards, the providers must
notify the Medicare program as promptly as possible upon initiating
negotiations for a change of ownership, but in no event later than 15 working
days after the transaction causing the change in ownership occurs. When a
provider undergoes a change in ownership, the provider must also file a final
cost report no later than 45 days following the change in ownership. According
to Medicare Program Standards, a transfer of corporate stock or a merger of
another corporation into the provider or into the parent corporation of a
provider does not constitute a change in ownership, and accordingly no
Medicare filing requirement is anticipated with respect to the Offer or the
Merger.
Arizona. Under applicable Arizona law, neither the consummation of the
Offer, the Merger nor the change of officers or directors of the Company or
its subsidiaries requires any preapproval or reporting.
California. Under applicable California laws, because the facilities and
businesses of the Company are licensed through its wholly-owned subsidiaries,
the Company is not required to obtain any approval of the Offer or the Merger,
or make any report to any applicable California governmental agencies prior to
the consummation of the Offer or the Merger. However, each subsidiary of the
Company holding a California skilled nursing facility license will be required
to submit a written application to the California Department of Health
Services ("DHS") for any anticipated change of the officers or directors of
the subsidiary at least thirty days prior to the anticipated date of change of
officers or directors. California statutory law provides that DHS, upon
receipt, shall approve or
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disapprove the application for change of officers or directors within thirty
days, unless with just cause DHS extends the application review process.
However, according to DHS, despite the statutory requirement, if the entity
submitting an application for change of officers or directors is not informed
by DHS within 30 days of the application that the application is either
approved or disapproved, the application is deemed by DHS to be approved.
Disapproval by DHS of any subsidiary's request to permit an individual to
serve as a new officer or director of a skilled nursing facility will require
the subsidiary to submit a new application until DHS approval (or deemed
approval) is secured. Each subsidiary of the Company holding a pharmacy
license will be required to give notice to the applicable regulatory
authorities prior to a change of officers or directors.
Texas. Under applicable Texas law, the consummation of the Offer, the Merger
and the change of officers or directors of Summit or its subsidiaries will not
require any approval of or notification to any state governmental agencies in
charge of licensing prior to the consummation of the Offer or the Merger with
respect to any facility licensed in Texas by a subsidiary of the Company. Such
approval will, however, be required with respect to any facilities licensed by
the Company. Currently, the Company holds licenses for three of its skilled
nursing facilities in Texas which, if they continue to be held by the Company
at the consummation of the Offer or Merger may require change of ownership
approval by the state to the Offer or the Merger. The Company has previously
sought approval to change ownership of these three facilities to its
subsidiaries. In one case, the change of ownership application was approved
and is expected to proceed pending completion of routine paper work. The
application for change of ownership of the other facilities was not approved
pending correction of certain deficiencies that were found by the state
agency. It is not possible now to predict whether one or more change of
ownership applications will be approved or completed before the consummation
of the Offer or the Merger. If one or more are not approved, the consummation
of the Offer or the Merger could ultimately result in the loss of license for
one or more of those facilities, and it is expected that under conditions to
the Offer described in "THE TENDER OFFER--Certain Conditions of the Offer",
the consummation of the Offer and the Merger may not occur until such approval
was obtained. The need for such approval could result in substantial delay in
the consummation of the Offer or could result in the conditions to the Offer
not being satisfied. See "THE TENDER OFFER--Certain Conditions of the Offer."
13. FEES AND EXPENSES.
Except as set forth below, Purchaser will not pay any fees or commissions to
any broker, dealer or other person for soliciting tenders of Shares pursuant
to the Offer.
The Merger Agreement provides, except in certain cases in which the Merger
is not consummated, as summarized under "SPECIAL FACTORS--The Merger Agreement
and Related Agreements", that all fees, costs and expenses incurred in
connection with the Merger Agreement and the transactions contemplated thereby
shall be paid by the party incurring such fees, costs and expenses, whether or
not the transactions contemplated by the Merger Agreement are consummated.
Sutro is acting as Dealer Manager in connection with the Offer and has
provided certain financial advisory services in connection with the
acquisition of the Company. Parent has agreed to pay Sutro a fee of $150,000
for its services as Dealer Manager and a fee of approximately $3,545,000 for
financial advisory services. If the Merger Agreement is terminated under
circumstances requiring the Company to pay a Termination Fee to Parent, Parent
has agreed to pay Sutro an amount equal to $1,000,000. Parent has also agreed
to reimburse Sutro for all out-of-pocket expenses incurred by Sutro, including
the reasonable fees and disbursements of legal counsel, and to indemnify Sutro
against certain liabilities and expenses in connection with its engagement.
Purchaser and Parent have retained Morrow & Co., Inc., as the Information
Agent, and Harris Trust Company of New York, as the Depositary, in connection
with the Offer. The Information Agent may contact holders of Shares by mail,
telephone, telex, telecopy, telegraph and personal interview, and may request
banks, brokers, dealers and other nominee shareholders to forward materials
relating to the Offer to beneficial owners.
As compensation for acting as Information Agent, Purchaser will pay Morrow &
Co., Inc. a reasonable and customary fee and Morrow & Co., Inc. will also be
reimbursed for certain out-of-pocket expenses and may be
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indemnified against certain liabilities and expenses in connection with the
Offer, including certain liabilities under the United States federal
securities laws. Purchaser will pay the Depositary reasonable and customary
compensation for its services, plus reimbursement for out-of-pocket expenses,
and will indemnify the Depositary against certain liabilities and expenses in
connection therewith, including under United States federal securities laws.
Brokers, dealers, commercial banks and trust companies will be reimbursed by
Purchaser for customary handling and mailing expenses incurred by them in
forwarding material to their customers.
The following is an estimate of expenses to be incurred in connection with
the Offer and the Merger:
<TABLE>
<S> <C>
EXPENSES TO BE PAID BY PURCHASER AND ITS AFFILIATES:
Printing and Mailing................................................ $ 125,000
Advertising......................................................... $ 75,000
Filing Fees......................................................... $ 28,600
Financial Advisor................................................... $3,545,000
Dealer-Manager Fees................................................. $ 150,000
Depositary Fees..................................................... $ 25,000
Information Agent Fees.............................................. $ 10,000
Legal Fees.......................................................... $ 900,000
----------
Total............................................................. $4,858,600
==========
EXPENSES TO BE PAID BY THE COMPANY:
Financial Advisor................................................... $2,300,000
Legal Fees.......................................................... $ 510,000
Miscellaneous....................................................... $ 31,000
----------
Total............................................................. $2,841,000
==========
</TABLE>
14. MISCELLANEOUS.
Purchaser is not aware of any jurisdiction where the making of the Offer is
prohibited by any administrative or judicial action pursuant to any valid
United States state statute. If Purchaser becomes aware of any such valid
United States state statute prohibiting the making of the Offer or the
acceptance of Shares pursuant thereto, Purchaser will make a good faith effort
to comply with any such United States state statute. If, after such good faith
effort, Purchaser cannot comply with any such United States state statute, the
Offer will not be made to (nor will tenders be accepted from or on behalf of)
the holders of Shares in such state. In any jurisdiction where the securities,
blue sky or other laws require the Offer to be made by a licensed broker or
dealer, the Offer shall be deemed to be made on behalf of Purchaser by one or
more registered brokers or dealers licensed under the laws of such
jurisdiction.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF PARENT, PURCHASER OR THE COMPANY NOT CONTAINED IN
THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL, AND IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED.
Parent and Purchaser have filed the Schedule 14D-1 and the Schedule 13E-3,
and the Company has filed the Schedule 14D-9. The Company's recommendation
with respect to the Offer and other information required to be disseminated to
shareholders of the Company pursuant to Rule 14d-9 under the Exchange Act is
contained in this Offer to Purchase. Such statements, which furnish certain
additional information with respect to the Offer, may be examined and copies
may be obtained at the same places and in the same manner set forth in "THE
TENDER OFFER--Certain Information Concerning the Company" (except that they
will not be available at
63
<PAGE>
regional offices of the Commission). The Schedule 14D-1 and the Schedule 13E-
3, including exhibits, may be inspected at, and copies may be obtained from,
the same places and in the same manner as set forth in "THE TENDER OFFER--
Certain Information Concerning the Company" (except that they will not be
available at the regional offices of the Commission).
FV-SCC ACQUISITION CORP.
February 13, 1998
64
<PAGE>
SCHEDULE I
DIRECTORS AND EXECUTIVE OFFICERS
OF PURCHASER, PARENT AND HERITAGE
1. Directors and Executive Officers of Purchaser. The following table sets
forth the name, current business address, citizenship and present principal
occupation or employment, and material occupations, positions, offices or
employments, and business addresses thereof for the past five years of each
person currently expected to be a director or executive officer of Purchaser.
Each such individual is a citizen of the United States and has held the
positions as set forth below for the past five years. Unless otherwise
indicated, each occupation set forth opposite an individual's name refers to
employment with Purchaser.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT, MATERIAL POSITIONS HELD
NAME AND ADDRESS DURING THE PAST FIVE YEARS
---------------- -----------------------------------
<C> <S> <C>
1. Robert M. Snukal Mr. Snukal has served as Chairman, Chief Executive
Fountain View, Inc. Officer, President and a Director of Parent and its
11900 W. Olympic Blvd. subsidiaries for the past five years. Mr. Snukal is
Suite 680 President, Treasurer and a Director of Purchaser.
Los Angeles, CA 90049
2. Michel Reichert Mr. Reichert has served as General Partner, President and
Heritage Partners, Inc. Director of Heritage Partners Management Company, Inc.
30 Rowes Wharf since December 1993. Mr. Reichert is a Member and Manager
Suite 300 of HF Partners II, L.L.C. which is the General Partner of
Boston, MA 02110 Heritage. He is also a Director of Parent and Purchaser.
From 1988 to December 1993, Mr. Reichert served as
Managing Director of BancBoston Capital.
3. Mark J. Jrolf Mr. Jrolf has served as Partner and Vice President of
Heritage Partners, Inc. Heritage Partners Management Company, Inc. since February
30 Rowes Wharf 1997, and as a Vice President from September 1996 to
Suite 300 January 1997. Mr. Jrolf is a Member of HF Partners II,
Boston, MA 02110 L.L.C. which is the General Partner of Heritage. He is
also a Director of Parent and Purchaser. From September
1993 to September 1996, Mr. Jrolf served as an Engagement
Manager at McKinsey & Co.
</TABLE>
I-1
<PAGE>
2. Directors and Executive Officers of Parent. The following table sets
forth the name, current business address, citizenship and present principal
occupation or employment, and material occupations, positions, offices or
employments, and business addresses thereof for the past five years of each
director and executive officer of Parent. Unless otherwise indicated, each
such individual is a citizen of the United States and has held his or her
present position as set forth below for the past five years. Unless otherwise
indicated, each occupation set forth opposite an individual's name refers to
employment with Parent. Effective immediately prior to the consummation of the
Offer, Mr. Abrahams will resign as a director of Parent, Mr. Scott will become
a director of Parent (see Schedule II), and Peter Z. Hermann and Michael F.
Gilligan will become directors of Parent (see Part 3 of this Schedule I).
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT, MATERIAL POSITIONS HELD
NAME AND ADDRESS DURING THE PAST FIVE YEARS
---------------- -----------------------------------
<C> <S> <C>
1. Robert M. Snukal See Part 1 of this Schedule I.
2. Sheila S. Snukal Mrs. Snukal has served as Vice President/Director of
Fountain View, Inc. Operations and a Director of Parent and its subsidiaries
11900 W. Olympic Blvd. for the past five years.
Suite 680
Los Angeles, CA 90049
3. Michel Reichert See Part 1 of this Schedule I.
Heritage Partners, Inc.
30 Rowes Wharf
Suite 300
Boston, MA 02110
4. Mark J. Jrolf See Part 1 of this Schedule I.
Heritage Partners, Inc.
30 Rowes Wharf
Suite 300
Boston, MA 02110
5. Keith Abrahams Mr. Abrahams has served for the past three years as Chief
Fountain View, Inc. Financial Officer and currently as President of
11900 W. Olympic Blvd. Locomotion Therapy, Inc., a subsidiary of Parent. Before
Suite 680 that, he was a partner of Wilshire Economic Services, a
Los Angeles, CA 90049 litigation support firm. He is currently a Director of
Parent.
</TABLE>
I-2
<PAGE>
3. Directors and Executive Officers of Heritage. The following table sets
forth the name, current business address, citizenship and present principal
occupation or employment, and material occupations, positions, offices or
employments, and business addresses thereof for the past five years of each
director and executive officer of Heritage. The current business address of
each individual is Heritage Partners, Inc. 30 Rowes Wharf, Suite 300, Boston,
MA 02110. Unless otherwise indicated, each such individual is a citizen of the
United States and has held his or her present position as set forth below for
the past five years. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to employment with Heritage.
<TABLE>
<CAPTION>
PRESENT PRINCIPAL OCCUPATION OR
EMPLOYMENT, MATERIAL POSITIONS HELD
NAME AND ADDRESS DURING THE PAST FIVE YEARS
---------------- -----------------------------------
<C> <S> <C>
1. Michel Reichert See Part 1 of this Schedule I.
2. Peter Z. Hermann Mr. Hermann has served as General Partner, Vice President
and Director of Heritage Partners Management Company,
Inc. since December 1993. Mr. Hermann is a Member and a
Manager of HF Partners II, L.L.C. which is the General
Partner of Heritage. From September 1979 to December
1993, Mr. Hermann served as a Director of BancBoston
Capital.
3. Michael F. Gilligan Mr. Gilligan has served as General Partner, Vice
President and Director of Heritage Partners Management
Company, Inc. since December 1993. Mr. Gilligan is a
Member and a Manager of HF Partners II, L.L.C. which is
the General Partner of Heritage. Prior to December 1993,
Mr. Gilligan was with BancBoston Capital.
4. Mark J. Jrolf See Part 1 of this Schedule I.
5. T. Brook Parker Mr. Parker has served as Partner of Heritage Partners
Management Company, Inc. since February 1997, and a Vice
President from January 1994 to January 1997. Mr. Parker
is a Member of HF Partners II, L.L.C. which is the
General Partner of Heritage. From June 1992 to December
1993, Mr. Parker served as an Assistant Vice President of
BancBoston Capital.
</TABLE>
I-3
<PAGE>
SCHEDULE II
DIRECTORS AND EXECUTIVE OFFICERS
OF THE COMPANY
Directors and Executive Officers of the Company. The following table, which
contains information taken from the Company's Proxy Statement dated January
12, 1998 filed with the Commission, sets forth the name, current business
address, citizenship and present principal occupation or employment, and
material occupations, positions, offices or employments and business addresses
thereof for the past five years of each director and executive officer of the
Company. The current business address of each person is 2600 W. Magnolia
Boulevard, Burbank, California, 91505. Each such person is a citizen of the
United States and has held his or her present position as set forth below for
the past five years. Unless otherwise indicated, each occupation set forth
opposite an individual's name refers to employment with the Company.
The following table gives certain information as to each person who is a
director:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE
---- --- --------
<S> <C> <C>
William C. Scott............................................... 60 1986
Donald J. Amaral............................................... 45 1991
William J. Casey............................................... 52 1993
John A. Brende................................................. 50 1993
Gary L. Massimino.............................................. 61 1995
</TABLE>
Mr. Scott became Chief Executive Officer of the Company in May 1994 and
Chairman of the Board in December 1995. Mr. Scott served as President of the
Company from December 1985 until January 1996 and held the office of Chief
Operating Officer from December 1985 until May 1994. Mr. Scott served as
Senior Vice President of Summit Health Ltd. ("SHL"), the Company's former
parent company, from December 1985 until its acquisition by OrNda Health Corp.
("OrNda") in April 1994. Mr. Scott is a director of Fairfield Communities,
Inc.
Mr. Amaral has been President and Chief Executive Officer of Coram
Healthcare Corp since October of 1995. From April 1994 until August 31, 1995,
Mr. Amaral served as President and Chief Operating Officer of OrNda. Mr.
Amaral served as President and Chief Executive Officer of SHL from October
1989 and Chief Executive Officer of SHL from October 1991 until April 1994,
when OrNda acquired SHL. Mr. Amaral served as Chairman of the Board of the
Company from May 1994 until December 1995 and as the Company's Chief Executive
Officer from May 1991 to May 1994.
Mr. Casey is Chief Executive Officer of William J. Casey, Inc., and has
served as a consultant in the healthcare industry, specializing in hospital
management evaluation, hospital planning, managed care contracting and
turnaround services. From 1986 to the present, Mr. Casey has also served as
Contract Administrator for Emergency Department Physicians' Medical Group,
Inc. and affiliated medical groups, which provide physician services to non-
governmental facilities. From 1988 to the present, Mr. Casey has served as
Contract Administrator for NP Medical Group, Inc., which provides physician
services to governmental facilities. Mr. Casey also serves as a director of
Coram Healthcare Corp. and TriCo Bancshares.
Mr. Brende is Chairman, President and Chief Executive Officer of J.A.B.
Industries, Inc., a real estate development and construction company, which is
wholly-owned by him, as well as managing partner in various real estate
partnerships.
Mr. Massimino is a financial consultant. He served as Executive Vice
President and Chief Financial Officer of Regency Health Services, Inc. from
April 1994 until December 31, 1995. He was Executive Vice President and Chief
Financial Officer of Care Enterprises, Inc. from February 1990 until April
1994.
II-1
<PAGE>
The executive officers, who are not also directors are:
<TABLE>
<CAPTION>
NAME POSITION AGE
---- -------- ---
<S> <C> <C>
David G. Schumacher, President and Chief Operating Officer 41
Jr. .....................
Derwin L. Williams........ Sr. Vice President-Finance, Chief Financial 60
Officer and Treasurer
Michael H. Martel......... Sr. Vice President-Marketing 35
John L. Farber............ Vice President-Controller, Chief Accounting 47
Officer and Secretary
</TABLE>
David G. Schumacher, Jr., has been President and Chief Operating Officer of
Summit Care Corporation since January 1, 1997 and previously served as Sr.
Vice President-Operations and Chief Operating Officer from January 1, 1996.
Prior to joining the Company, Mr. Schumacher was the Vice President of
Operations at Arbor Health Care Company. He also spent ten years in various
operations capacities at Manor Care.
Derwin L. Williams was appointed Vice President-Finance and Chief Financial
Officer of the Company on July 1, 1993, Treasurer on May 10, 1994 and Senior
Vice President-Finance on December 8, 1995. Previously he has served in the
same position at three other nursing home companies: Hallmark Health Service,
Inc. from November 1989 to February 1992; Care Enterprises from April 1980 to
August 1987; and Flagg Industries, Inc. from June 1978 to March 1980. Mr.
Williams has also served in various capacities specializing in Medicare
reimbursement for the Company in 1992 and 1993 and for Beverly Enterprises in
1988 and 1989. He is also a certified public accountant.
Michael H. Martel was appointed Senior Vice President-Marketing in March
1995. Prior to joining the Company, Mr. Martel was Vice President-Marketing
for Arbor Health Care Company from August 1992 to March 1995. Mr. Martel
served as Regional Director of Marketing for the acute care rehabilitation
division of National Medical Enterprises from April 1988 to August 1992.
John L. Farber was appointed Vice President-Controller, Chief Accounting
Officer and Secretary on June 2, 1997. Prior to joining the Company, Mr.
Farber was Vice President of Finance at FHP Insurance Company and Director of
Finance at FHP International Corporation from September 1990 to May 1997. Mr.
Farber also served in financial executive positions in two other companies
from September 1979 to August 1990. He is also a certified public accountant.
II-2
<PAGE>
BENEFICIAL OWNERSHIP OF COMMON STOCK. The following table, which contains
information taken from the Company's Proxy Statement dated January 12, 1998
filed with the Commission, sets forth certain information regarding the
ownership of the Shares by each person known by the Company to be the
beneficial owner of more than 5% of the outstanding Shares, each director of
the Company, the Chief Executive Officer of the Company, the four most highly
compensated officers of the Company and all executive officers and directors
of the Company as a group. All such persons, other than Purchaser and Parent
may receive cash in the Offer or the Merger as shareholders.
<TABLE>
<CAPTION>
PERCENT
NAME OF BENEFICIAL OWNER OR NUMBER OF OF
IDENTITY OF GROUP(1) SHARES CLASS
--------------------------- --------- -------
<S> <C> <C>
J. P. Morgan & Co., Incorporated(2)........................ 1,218,900 17.9
60 Wall Street
New York, NY 10260
Franklin Resources, Inc.(3)................................ 1,050,800 15.4
777 Mariners Island Boulevard
San Mateo, CA 94403
Baron Capital Group, Inc.(4)............................... 714,925 10.5
BAMCO, Inc.
Baron Capital Management, Inc.
Baron Capital, Inc.
767 Fifth Avenue--24th Floor
New York, NY 10153
William C. Scott(5)........................................ 171,000 2.5
David G. Schumacher, Jr.(5)................................ 23,000 *
Derwin L. Williams(5)...................................... 36,500 *
Michael H. Martel(5)....................................... 21,000 *
Donald J. Amaral(5)........................................ 7,500 *
John A. Brende(5).......................................... 9,500 *
William J. Casey(5)........................................ 10,500 *
Gary L. Massimino.......................................... 7,000 *
All directors and executive officers as a group(5)......... 286,000 4.2
</TABLE>
- --------
* Less than 1%.
(1) Except where otherwise indicated, each person has sole voting and
investment power over the Common Stock shown as beneficially owned,
subject to community property laws where applicable. Except where
otherwise indicated, each person's address is c/o Summit Care Corporation,
2600 West Magnolia Boulevard, Burbank, California 91505-3031.
(2) Based on an amendment to a report on Schedule 13G filed by J.P. Morgan &
Co., Incorporated ("J.P. Morgan") with the Commission on December 31,
1996. J.P. Morgan or its subsidiaries have sole power to dispose of all of
the shares shown as beneficially owned by them and sole power to vote
888,800 of the shares.
(3) Based on an amendment to a report on Schedule 13G filed by Franklin
Resources, Inc. ("Franklin") with the Commission on December 10, 1997.
Franklin or its subsidiaries have sole power to vote and to dispose of all
of the shares shown as beneficially owned by them.
(4) Based on an amendment to a report on Schedule 13G filed by Baron Capital
Group, Inc. ("Baron") with the Commission on July 9, 1997. Baron or its
subsidiaries have sole power to vote and dispose of all of the shares
shown as beneficially owned by them.
II-3
<PAGE>
(5) Includes shares which such persons have the right to acquire within 60 days
of the date of this Proxy Statement pursuant to the exercise of outstanding
stock options, of which 10,000 shares are attributable to each of Messrs.
Scott and Schumacher, 4,000 shares are attributable to Mr. Williams, 5,000
shares are attributable to Mr. Martel, 1,000 shares are attributable to
each of Messrs. Amaral, Brende and Casey, and 32,000 shares are
attributable to all directors and executive officers as a group. As
described in "SPECIAL FACTORS--Interests of Certain Persons in the Offer
and the Merger", all Existing Stock Options will vest as of the Effective
Time of the Merger, and will be cashed-out for their net value in the
Merger. If all Existing Stock Options were treated as outstanding in the
foregoing table, the beneficial ownership of certain of the persons listed
on that table would be greater.
II-4
<PAGE>
ANNEX A
OPINION OF DLJ
DONALDSON, LUFKIN & JENRETTE
Donaldson, Lufkin & Jenrette Securities Corporation
2121 Avenue of the Stars, Suite 3000 . Los Angeles, CA 00067-5014 . (310) 282-
6161
February 6, 1998
Board of Directors
Summit Care Corporation
2600 West Magnolia
Burbank, CA 91505-3031
Dear Sirs:
You have requested our opinion as to the fairness from a financial point of
view to the stockholders of Summit Care Corporation (the "Company") of the
consideration to be received by such stockholders pursuant to the terms of the
Agreement and Plan of Merger, dated as of February 6, 1998 (the "Agreement"),
by and among Fountain View, Inc., Heritage Fund II, LP, the Company and Target
Acquisition Corp. ("Acquisition"), a wholly owned subsidiary of Fountain View,
Inc.
Pursuant to the Agreement, Acquisition will commence a tender offer for any
and all outstanding shares of the Company's common stock at a price of $21.00
per share. The tender offer is to be followed by a merger of Acquisition with
and into the Company in which the shares of all stockholders who did not
tender would be converted into the right to receive an amount in cash equal to
the price per share paid in the tender offer.
In arriving at our opinion, we have reviewed the draft dated February 5,
1998 of the Agreement and the exhibits thereto. We also have reviewed
financial and other information that was publicly available or furnished to us
by the Company including information provided during discussions with
management. Included in the information provided during discussions with
management were certain financial projections of the Company for the period
beginning June 30, 1997 and ending June 30, 2002 prepared by the management of
the Company. In addition, we have compared certain financial and securities
data of the Company with various other companies whose securities are traded
in public markets, reviewed the historical stock prices and trading volumes of
the common stock of the Company, reviewed prices and premiums paid in certain
other business combinations and conducted such other financial studies,
analyses and investigations as we deemed appropriate for purposes of this
opinion.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available
to us from public sources, that was provided to us by the Company or its
representatives, or that was otherwise reviewed by us. With respect to the
financial projections supplied to us, we have assumed that they have been
reasonably prepared on the basis reflecting the best currently available
estimates and judgments of the management of the Company as to the future
operating and financial performance of the Company. We have not assumed any
responsibility for making an independent evaluation any assets or liabilities
or for making any independent verification of any of the information reviewed
by us. We have relied as to certain legal matters on advice of counsel to the
Company.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. Our opinion does not address the relative
merits of the proposed transaction and the other business strategies being
considered by the Company's Board of Directors, nor does it address the
Board's decision to proceed with the proposed transaction. Our opinion does
not constitute a recommendation to any stockholder as to whether such
stockholder should tender in the tender offer or how such stockholder should
vote on the proposed transaction.
A-1
<PAGE>
Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as part of its
investment banking services, is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes.
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the consideration to be received by the stockholders of
the Company pursuant to the Agreement is fair to such stockholders from a
financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: _________________________________
David Dennis
Managing Director
A-2
<PAGE>
ANNEX B
CALIFORNIA BUSINESS CORPORATION LAW
1300. (a) If the approval of the outstanding shares (Section 152) of a
corporation is required for a reorganization under subdivisions (a) and (b) or
subdivision (e) or (f) of Section 1201, each shareholder of the corporation
entitled to vote on the transaction and each shareholder of a subsidiary
corporation in a short-form merger may, by complying with this chapter,
require the corporation in which the shareholder holds shares to purchase for
cash at their fair market value the shares owned by the shareholder which are
dissenting shares as defined in subdivision (b). The fair market value shall
be determined as of the day before the first announcement of the terms of the
proposed reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
1301. (a) If, in the case of a reorganization, any shareholders of a
corporation have a right under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation
to purchase their shares for cash, such corporation shall mail to each such
shareholder a notice of the approval of the reorganization by its outstanding
shares (Section 152) within 10 days after the date of such approval,
accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a
statement of the price determined by the corporation to represent the fair
market value of the dissenting shares, and a brief description of the
procedure to be followed if the shareholder desires to exercise the
shareholder's right under such sections. The statement of price constitutes an
offer by the corporation to purchase at the price stated any dissenting shares
as defined in subdivision (b) of Section 1300, unless they lose their status
as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any
B-1
<PAGE>
purpose unless it is received by the corporation or any transfer agent thereof
(1) in the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
1302. Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110
was mailed to the shareholder, the shareholder shall submit to the corporation
at its principal office or at the office of any transfer agent thereof, (a) if
the shares are certificated securities, the shareholder's certificates
representing any shares which the shareholder demands that the corporation
purchase, to be stamped or endorsed with a statement that the shares are
dissenting shares or to be exchanged for certificates of appropriate
denomination so stamped or endorsed or (b) if the shares are uncertificated
securities, written notice of the number of shares which the shareholder
demands that the corporation purchase. Upon subsequent transfers of the
dissenting shares on the books of the corporation, the new certificates,
initial transaction statement, and other written statements issued therefor
shall bear a like statement, together with the name of the original dissenting
holder of the shares.
1303. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304. (a) If the corporation denies that the shares are dissenting shares,
or the corporation and the shareholder fail to agree upon the fair market
value of the shares, then the shareholder demanding purchase of such shares as
dissenting shares or any interested corporation, within six months after the
date on which notice of the approval by the outstanding shares (Section 152)
or notice pursuant to subdivision (i) of Section 1110 was mailed to the
shareholder, but not thereafter, may file a complaint in the superior court of
the proper county praying the court to determine whether the shares are
dissenting shares or the fair market value of the dissenting shares or both or
may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
1305. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per share. Within the
time fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and considered
on such evidence as the court considers relevant. If the court finds the
report reasonable, the court may confirm it.
B-2
<PAGE>
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
1306. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307. Cash dividends declared and paid by the corporation upon the
dissenting shares after the date of approval of the reorganization by the
outstanding shares (Section 152) and prior to payment for the shares by the
corporation shall be credited against the total amount to be paid by the
corporation therefor.
1308. Except as expressly limited in this chapter, holders of dissenting
shares continue to have all the rights and privileges incident to their
shares, until the fair market value of their shares is agreed upon or
determined. A dissenting shareholder may not withdraw a demand for payment
unless the corporation consents thereto.
1309. Dissenting shares lose their status as dissenting shares and the
holders thereof cease to be dissenting shareholders and cease to be entitled
to require the corporation to purchase their shares upon the happening of any
of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys'
fees.
(b) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i)
of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
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<PAGE>
1310. If litigation is instituted to test the sufficiency or regularity of
the votes of the shareholders in authorizing a reorganization, any proceedings
under Sections 1304 and 1305 shall be suspended until final determination of
such litigation.
1311. This chapter, except Section 1312, does not apply to classes of shares
whose terms and provisions specifically set forth the amount to be paid in
respect to such shares in the event of a reorganization or merger.
1312. (a) No shareholder of a corporation who has a right under this chapter
to demand payment of cash for the shares held by the shareholder shall have
any right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set
aside or rescinded, except in an action to test whether the number of shares
required to authorize or approve the reorganization have been legally voted in
favor thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event
of a reorganization or short-form merger is entitled to payment in accordance
with those terms and provisions or, if the principal terms of the
reorganization are approved pursuant to subdivision (b) of Section 1202, is
entitled to payment in accordance with the terms and provisions of the
approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days' prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
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<PAGE>
Manually signed facsimile copies of the Letter of Transmittal will be
accepted. The Letter of Transmittal, certificates for Shares and any other
required documents should be sent or delivered by each shareholder of the
Company or such shareholder's broker, dealer, bank, trust company or other
nominee to the Depositary at one of its addresses set forth below.
The Depositary for the Offer is:
HARRIS TRUST COMPANY OF NEW YORK
By Mail: By Facsimile: By Hand and Overnight
Courier:
Harris Trust Company of Harris Trust Company of
New York New York Harris Trust Company of
Wall Street Station By Facsimile: New York
P.O. Box 1023 (212) 701-7636 88 Pine Street
New York, NY 10268-1023 or (212) 701-7637 19th Floor
New York, NY 10005
Confirm Receipt of
Facsimile by Telephone:
(212) 701-7624
Questions and requests for assistance or for additional copies of this Offer
to Purchase, the Letter of Transmittal and the Notice of Guaranteed Delivery
may be directed to the Information Agent at its telephone numbers and location
listed below. You may also contact your broker, dealer, bank, trust company or
other nominee for assistance concerning the Offer.
The Information Agent for the Offer is:
MORROW & CO., INC.
909 Third Avenue
20th Floor
New York, NY 10022
(212) 754-8000
Toll Free (800) 566-9061
Banks and Brokerage Firms
please call:
(800) 662-5200
The Dealer Manager for the Offer is:
LOGO
11150 Santa Monica Boulevard
Suite 1500
Los Angeles, CA 90025
(415) 445-8323
