<PAGE>
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 001-12100
GRANCARE, INC.
(Exact name of registrant as specified in its charter)
California 95-4299210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
(Address of principal executive offices) (Zip Code)
(770) 393-0199
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No
--------- --------
There were 23,677,925 shares outstanding of registrant's Common Stock, no par
value, as of November 12, 1996.
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<PAGE>
GRANCARE, INC.
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets-
September 30, 1996 and December 31, 1995.............. 3
Condensed Consolidated Statements of Income-
Three Months Ended September 30, 1996 and 1995 and
Nine Months Ended September 30, 1996 and 1995......... 5
Condensed Consolidated Statements of Cash Flows-
Nine Months Ended September 30, 1996 and 1995......... 6
Notes to Condensed Consolidated Financial Statements.. 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations for the
Three and Nine Months Ended September 30, 1996........ 10
PART II - OTHER INFORMATION
Item 1. Legal Proceedings...................................... 14
Item 2. Changes in Securities.................................. 14
Item 3. Defaults Upon Senior Securities........................ 14
Item 4. Submission of Matters to a Vote of Security Holders.... 14
Item 5. Other Information...................................... 14
Item 6. Exhibits and Reports on Form 8-K....................... 15
Signatures........................................................... 16
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 25,750 $ 17,738
Accounts receivable, less
allowance for doubtful accounts
(1996 - $13,848 and 1995 -
$10,856)............................. 218,529 173,068
Inventories............................ 17,833 13,527
Prepaid expenses and other current
assets............................... 41,034 16,498
Deferred income taxes.................. 11,599 10,933
-------- --------
Total current assets.................. 314,745 231,764
Property and equipment.................... 276,441 270,042
Less accumulated depreciation........... (67,111) (55,689)
-------- --------
209,330 214,353
Other assets:
Investments, at fair value.............. 36,359 30,305
Goodwill, less accumulated
amortization (1996 - $9,184 and
1995 - $5,535)........................ 129,863 120,946
Other intangibles, less
accumulated amortization
(1996 - $9,788 and 1995 - $8,051)..... 8,573 9,793
Other................................... 39,068 38,000
-------- --------
Total assets............................. $737,938 $645,161
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date.
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------------------------
(Unaudited) (Note)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses................................ $ 84,291 $ 72,935
Accrued wages and related
liabilities............................. 20,461 24,069
Interest payable
Income taxes payable..................... 5,137 6,793
Notes payable and current................ 7,059 -
maturities of long-term debt............ 4,219 4,937
-------- --------
Total current liabilities........... 121,167 108,734
Long-term debt................................ 384,905 334,668
Deferred income taxes......................... 15,628 16,735
Other......................................... 14,564 12,425
Shareholders' equity:
Common stock; no par value;
50,000,000 shares authorized
(shares issued:
1996-23,401,992 and
1995-23,948,728)................... 125,401 134,699
Treasury stock (1996-200,000
shares and 1995-915,000 shares)......... (5,030) (18,700)
Equity component of minimum
pension liability....................... (465) (465)
Unrealized gain on investments net
of income taxes (1996 - $3,963
and 1995 - $3,453).................. 5,747 5,206
Retained earnings........................ 76,021 51,859
-------- --------
201,674 172,599
-------- --------
Total liabilities and shareholders'
equity....................................... $737,938 $645,161
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated Financial
Statements.
4
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars And Shares In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ------------------
1996 1995 1996 1995
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Net patient revenues...... $247,820 $206,066 $722,074 $600,195
Investment and other
revenue.................. 20,551 2,396 23,579 4,374
-------- -------- -------- --------
Net revenues......... 268,371 208,462 745,653 604,569
Expenses:
Operating expenses........ 218,933 183,493 642,654 534,906
Depreciation and
amortization............. 6,728 5,109 19,400 14,785
Interest expense and
financing charges......... 9,161 6,807 26,228 19,557
Merger and other
one-time charges......... 18,400 11,750 18,400 11,750
-------- -------- -------- --------
Total expenses....... 253,222 207,159 706,682 580,998
-------- -------- -------- --------
Income before income taxes..... 15,149 1,303 38,971 23,571
Income taxes................... 5,757 1,821 14,809 10,297
-------- -------- -------- --------
Net income (loss).... $ 9,392 ($518) $ 24,162 $ 13,274
======== ======== ======== ========
Net income (loss) per common
and common equivalent share:
Primary.............. $0.39 ($0.02) $1.01 $0.55
======== ======== ======== ========
Fully diluted........ $0.38 ($0.02) $0.98 $0.55
======== ======== ======== ========
Weighted average number of
common and common
equivalent shares outstanding:
Primary.............. 24,202 23,258 24,021 24,226
======== ======== ======== ========
Fully diluted........ 26,608 23,258 26,653 24,267
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
--------------------------------
1996 1995
--------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................... $ 24,162 $ 13,274
Adjustments to reconcile net
income to net cash
(used in) provided by
operating activities:
Provision for doubtful accounts....... 5,132 4,321
Depreciation and amortization......... 19,400 14,785
Gain on sale of investments and
other assets........................ (19,077) (600)
Non-cash one-time charges............. 17,100 ---
Amortization of deferred financing
costs............................... 689 481
Changes in assets and liabilities
net of effect of acquisitions:
Accounts receivable................. (55,785) (24,073)
Other current assets................ (8,604) (3,571)
Other noncurrent assets............. (8,614) (11,901)
Accounts payable and accrued
expenses........................... (1,785) 15,933
Accrued wages and related
liabilities........................ (3,896) (1,587)
Interest payable.................... (1,656) 579
Income taxes payable................ 7,591 (487)
Other noncurrent liabilities........ 27 1,799
-------- ---------
Net cash (used in)
provided by operating activities. (25,316) 8,953
INVESTING ACTIVITIES
Acquisition of businesses................ (11,231) (54,287)
Purchases of property and equipment...... (24,014) (17,022)
Proceeds from disposition of
property and equipment.................. 994 4,155
Repayments of notes receivable........... --- 943
Net purchases and sales of
investments............................. (3,365) (5,077)
Proceeds from sale of investment
in unconsolidated affiliate............. 24,600 ---
Other.................................... (1,581) (435)
-------- ---------
Net cash used in investing
activities....................... (14,597) (71,723)
FINANCING ACTIVITIES
Proceeds from exercise of warrants
and options............................. 2,284 1,242
Purchase of treasury stock............... --- (13,670)
Long-term debt payments.................. (5,259) (176,303)
Proceeds from long-term debt
borrowings.............................. 51,150 256,350
Payment of debt issuance costs........... (250) (4,447)
-------- ---------
Net cash provided by
financing activities............. 47,925 63,172
-------- ---------
Net increase in cash and cash
equivalents............................. 8,012 402
Cash and cash equivalents at
beginning of period..................... 17,738 28,611
-------- ---------
Cash and cash equivalents at end
of period............................... $ 25,750 $ 29,013
======== =========
See Notes to Condensed Consolidated
Financial Statements
</TABLE>
6
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. ("RN Services"), a home health care business located in Detroit,
Michigan, for $2,350 in cash. In conjunction with the acquisition, the Company
advanced $2,500 to the former owners in the form of a short-term note secured by
RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc. ("Jennings"), a home health care business based in North
Vernon, Indiana, for $937 in cash and a promissory note for $250.
In July 1996, the Company completed the acquisition of Emery Pharmacy, Inc.
("Emery"), an institutional pharmacy located in Utica, New York, for $3,672 in
cash and a promissory note in the amount of $1,488.
In September 1996, the Company completed the acquisition of RX Corporation,
an institutional pharmacy located in southern California, for $1,800 in cash and
a promissory note for $925.
The above 1996 acquisitions had the following effect on cash:
Fair value of assets acquired ($14,531)
Fair value of liabilities assumed 3,300
--------
Net effect on cash ($11,231)
========
In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided purchase
money financing in the amount of $17,550 evidenced by an interest-bearing
promissory note, due and payable in 1997.
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note A - Basis of Presentation
- ------------------------------
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 1996 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1996. For further information, refer
to the consolidated financial statements and the footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1995.
Note B - Change in Accounting Principle
- ---------------------------------------
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets. During 1996,
events and circumstances indicated that $20 million of assets of the facilities
division might be impaired. The decision to sell or otherwise dispose of
assets/facilities in the third quarter (see Note E) reduced this amount to $10
million. The Company's estimate of undiscounted cash flows indicates that the
remaining $10 million in carrying amounts are expected to be recovered.
Nonetheless, it is reasonably possible that the estimate of undiscounted cash
flows may change in the near future resulting in the need to write-down those
assets to fair value. The Company's estimate of cash flows might change because
of the uncertainty surrounding the changes in the regulatory environment
including prospective payment, competition and labor issues.
Note C - Treasury Stock
- -----------------------
During the second quarter of 1996, the Company canceled 715,000 shares of
treasury stock which the Company had repurchased in July, 1995.
Note D - Contingent Earn-Out Provision
- --------------------------------------
The purchase agreement with respect to the 1994 acquisition of Long Term
Care Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC"), contains a contingent earnout
provision for the two year period ended June 30, 1996. An additional $5.5
million could be paid to LTC provided certain operating results were obtained
for this period. Management has completed its analysis of the amount payable
under this provision and believes that the amount owing to LTC is $2.1 million,
which amount has been disputed by LTC.
8
<PAGE>
Note E - Merger and Other One-Time Charges
- ------------------------------------------
In the third quarter of 1996, the Company recorded a one-time charge
totaling $18.4 million. The charge provides for the following: the planned
disposition of assets and leasehold improvements or closure of certain long-term
care facilities and write off of certain notes receivable related thereto;
amounts required to present TeamCare's separate financial statements on a stand-
alone basis in connection with the proposed TeamCare merger with Vitalink
Pharmacy Services, Inc. (see Note F); and other items as set forth in the
following table (dollars in thousands):
<TABLE>
<S> <C>
Disposition of assets/closure of facilities and
write off of notes receivable related thereto $13,600
TeamCare bad debt expense 2,900
Termination of frozen pension plan and other items 1,900
-------
$18,400
=======
</TABLE>
In the third quarter of 1995, the Company incurred certain costs
relating to the completion of pooling-of-interests with Evergreen Healthcare,
Inc. on July 20, 1995. The following is a summary of the merger and other one-
time charges (dollars in thousands):
<TABLE>
<S> <C>
Merger costs:
Investment banking fees $4,100
Legal and other fees 1,469
Executive severance 1,100
Planned divestitures of certain facilities 1,500
Other one-time costs:
Relocation 1,626
Integration 850
Other deferred acquisition costs 1,105
-------
$11,750
=======
</TABLE>
Note F - Proposed Transaction
- -----------------------------
The Company has entered into an Agreement and Plan of Merger between
Vitalink Pharmacy Services, Inc. ("Vitalink") and the Company dated as of
September 3, 1996. The form of the proposed transactions are (1) the Company's
skilled nursing facilities, along with its contract management and home health
businesses are to be reorganized into New GranCare, Inc., a wholly-owned
subsidiary of the Company ("New GranCare"), and all of the shares of common
stock of New GranCare are to be distributed to the Company's shareholders in a
tax-free spin-off; (2) the Company (then consisting solely of the institutional
pharmacy and related business known as TeamCare) would merge into and be
acquired by Vitalink through a tax-free exchange of shares of common stock of
Vitalink for shares of common stock of the Company; and (3) New GranCare would
become a public company upon the effectiveness of its initial registration
statement. Notwithstanding the legal structure of the proposed transactions,
for accounting/financial reporting purposes such transactions will be treated as
the spin-off of TeamCare and reorganization/recapitalization of the Company into
New GranCare as New GranCare will continue the majority of the Company's
businesses. New GranCare will change its name to "GranCare, Inc." and be
treated as the continuation of the Company. The closing under the Agreement and
Plan of Merger is subject to a number of conditions, including approval of the
transactions by the Company's shareholders.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
GENERAL
The Company was incorporated in September 1987. Since its inception, the
Company has grown rapidly through acquisitions of long-term care facilities and
specialty medical businesses such as institutional pharmacy operations. In this
regard, during 1996 the Company has acquired Jennings Visiting Nurse
Association, Inc., a home health agency in Indiana, RN Health Care Services,
Inc., a home health agency in Michigan, RX Corporation, a provider of
institutional pharmacy services in southern California, and Emery Pharmacy, a
provider of institutional pharmacy services in upstate New York, and acquired
leasehold interests in two skilled nursing facilities.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement rates,
increasing case management review and negotiating reduced contract pricing.
Government payors, such as state-administered Medicaid programs and, to a lesser
extent, the federal Medicare program, generally provide more restricted coverage
and lower reimbursement rates than private pay sources. For the nine months
ended September 30, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 38.6% and 38.6%, respectively,
of the Company's total revenues. For the year ended December 31, 1995, the
percentage of the Company's net patient revenues derived from Medicaid and
Medicare programs were 44.7% and 30.2%, respectively, of the Company's total
revenues.
The Company derives its revenues by providing skilled nursing, pharmacy,
therapy, subacute and other specialty medical services and contract management
of specialty medical programs for acute care hospitals. In general, the Company
generates higher revenues and profitability from the provision of specialty
medical services than from routine skilled nursing care, and the Company
believes that this trend will continue. Accordingly, the Company has in the
past sought to enhance its operating margins by increasing the proportion of its
revenues derived from specialty medical services. While the Company intends to
continue pursuing this course, on September 3, 1996, the Company entered into an
Agreement and Plan of Merger (the "Merger Agreement") with Vitalink Pharmacy
Services, Inc. ("Vitalink") pursuant to which Vitalink will acquire the
Company's institutional pharmacy business by merger (the "Merger"). See "Item
5-Other Information."
RESULTS OF OPERATIONS
The following tables set forth certain data for the periods indicated:
10
<PAGE>
<TABLE>
<CAPTION>
REVENUE COMPOSITION
PERCENTAGE OF PATIENT REVENUES
----------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Skilled Nursing and Subacute Care:
Routine services.......................... 44.2% 53.9% 44.7% 54.8%
Specialty Medical:
Therapy, Subacute and Home Health......... 26.8% 20.6% 25.9% 19.4%
Pharmacy (1).............................. 25.6% 21.9% 25.9% 23.3%
Contract Management (1)................... 3.4% 3.6% 3.5% 2.5%
------ ------ ------ ------
Subtotal................................ 55.8% 46.1% 55.3% 45.2%
------ ------ ------ ------
Total................................... 100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
REVENUE COMPOSITION
DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
----------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
-------- -------- --------- --------
<S> <C> <C> <C> <C>
Routine skilled nursing................. $ 89.85 $ 87.60 $ 89.35 $ 87.02
Specialty medical services (2).......... 61.59 36.85 58.89 34.05
------- ------- ------- -------
Total................................ $151.44 $124.45 $148.24 $121.07
======= ======= ======= =======
Average occupancy rate.................. 85% 87% 85% 87%
</TABLE>
(1) Before elimination of intercompany sales.
(2) Excludes revenue from patients outside GranCare facilities.
The Company's net revenues for the three and nine month periods ended
September 30, 1996, were $268.4 and $745.7 million, respectively, compared to
$208.5 and $604.6 million for the same periods in 1995, a net increase of $59.9
and $141.1 million, respectively, or 28.7% and 23.3%. Included in net revenues
and classified as investment and other revenue for the three and nine month
periods ended September 30, 1996, is the approximate $18 million gain on the
sale of the Company's investment in an unconsolidated affiliate which occurred
in the third quarter of 1996. For the three and nine month periods, $24.0 and
$106.2 million, respectively, resulted from acquisitions and an additional
amount was primarily attributable to same-store growth.
Operating expenses for the three and nine month periods ended September 30,
1996, were $218.9 and $642.7 million, respectively, compared to $183.5 and
$534.9 million for the same periods in 1995, a net increase of $35.4 and $107.8
million, respectively, or 19.3% and 20.2%. For the three and nine month
periods, $21.7 and $91.7 million, respectively, resulted from acquisitions and
an additional amount was primarily attributable to same-store growth increases
in expenses.
Depreciation and amortization expenses for the three and nine month periods
ended September 30, 1996, were $6.7 and $19.4 million, respectively, compared to
$5.1 and $14.8 million for the same periods in 1995, an increase of $1.6 and
$4.6 million, respectively, or 31.4% and 31.1%. This increase was primarily the
result of depreciation and amortization expenses attributable to businesses
acquired and additions to property and equipment.
Interest expense and financing charges for the three and nine month periods
ended September 30, 1996, were $9.2 and $26.2 million, respectively, compared to
$6.8 and $19.6 million for the same periods in 1995, an increase of $2.4 and
$6.6 million, respectively, or 35.3% and 33.7%. These increases were primarily
due to interest on additional indebtedness incurred in connection with
acquisitions, the September 1995 issuance of $100 million aggregate principal
amount of senior subordinated notes and, to a lesser extent, borrowings to fund
working capital.
11
<PAGE>
In the third quarter of 1996, the Company recorded a one-time charge
totaling $18.4 million. The charge provides for the following: the planned
disposition of assets and leasehold improvements or closure of certain long-term
care facilities and write off of certain notes receivable related thereto;
amounts required to present TeamCare's separate financial statements on a stand-
alone basis in connection with the proposed Merger and other items. In
the third quarter of 1995, the Company incurred certain costs relating to the
completion of the pooling-of-interests with Evergreen Healthcare, Inc. on July
20, 1995 and other one-time costs.
Income taxes for the three and nine month periods ended September 30, 1996,
were $5.8 million and $14.8 million, respectively, compared to $1.8 and $10.3
million for the same periods in 1995, an increase of $4.0 million and $4.5
million, respectively.
As a result of the foregoing, net income (loss) for the three and nine
month periods ended September 30, 1996, was $9.4 and $24.2 million,
respectively, compared to ($0.5) and $13.3 million for the same periods in 1995,
an increase of $9.9 and $10.9 million, respectively.
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets. During 1996,
events and circumstances indicated that $20 million of assets of the Facilities
division might be impaired. The decision to sell or otherwise dispose of
assets/facilities in the third quarter reduced this amount to $10 million. The
Company's estimate of undiscounted cash flows indicates that the remaining $10
million in carrying amounts are expected to be recovered. Nonetheless, it is
reasonably possible that the estimate of undiscounted cash flows may change in
the near future resulting in the need to write-down those assets to fair value.
The Company's estimate of cash flows might change because of the uncertainty
surrounding the changes in the regulatory environment including prospective
payment, competition and labor issues.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at September 30, 1996, was $25.8
million in cash and cash equivalents compared to $17.7 million at December 31,
1995, an increase of $8.1 million. On August 5, 1996, the Company sold its
entire interest in Alternative Living Services, Inc. ("ALS"), resulting in net
proceeds to the Company of approximately $24.6 million and an approximate $18.0
million gain on the sale. The increase in cash and cash equivalents was due
primarily to proceeds realized from the sale of ALS. Payments received by the
Company from the Medicaid and Medicare programs are the Company's largest source
of cash from operations.
Accounts receivable at September 30, 1996, were $218.5 million compared to
$173.1 million at December 31, 1995, an increase of $45.4 million. The
Company's accounts receivable includes receivables from third-party
reimbursement programs, primarily Medicaid and Medicare settlements. The
Company receives payment for skilled nursing services based on rates set by
individual state Medicaid programs. Although payment cycles for these programs
vary, payments generally are made within 30 to 60 days of services provided,
except in Illinois where the Medicaid program delays payments for 120 days. The
federal Medicare program, a cost-reimbursement system, pays interim rates, based
on estimated costs of services, on a 30 to 45 day basis. Final cost
settlements, based on the difference between audited costs and interim rates,
are paid following final cost report audits by Medicare fiscal intermediaries.
Because of the cost report and audit process, final settlement may not occur
until up to 24 months after services are provided. Specialty medical services
(including pharmacy and other ancillary services) provided to third parties are
billed on terms negotiated with individual customers, which often are tied to
their reimbursement cycles. If the expansion of specialty medical revenues
continues at historic rates, average days receivable likely will equal or exceed
current levels and may require additional working capital.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
12
<PAGE>
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.
In addition to principal and interest payments on its long-term
indebtedness, the Company has significant rent obligations relating to its
leased facilities as well as property expenses (principally property taxes and
insurance) relating to all of its facilities. The Company's anticipated
principal payments, cash interest payments, rent and property expense
obligations for 1996 are estimated at $100.0 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients, to accommodate the
addition of specialty medical services, and to improve the physical appearance
of its facilities for marketing purposes. Total capital expenditures for the
nine month period ended September 30, 1996, were $24.0 million. The Company
estimates that capital expenditures for the year ending December 31, 1996, will
be approximately $32.0 million.
The Company maintains a $150.0 million credit facility with First Union
National Bank of North Carolina ("First Union") and a syndicate of banks which
may be used for working capital, other general corporate purposes and
acquisitions (the "Credit Facility"). As of September 30, 1996, approximately
$88.9 million was outstanding under the Credit Facility. The Company will be
able to borrow under the Credit Facility through June 1998, at which time it
will convert to a term loan unless it is refinanced or extended. Upon
conversion, the amount then outstanding will be payable in equal quarterly
installments through June 2002.
In connection with the proposed Distribution (as defined in Item 5 below)
and Merger, the Company has received a commitment letter from First Union and
Chase Manhattan Bank with respect to a new $300 million credit facility (the
"New Credit Facility"). The New Credit Facility will be for the benefit of New
GranCare (as defined in Item 5 below) and will be used to pay off the existing
Credit Facility, redeem the Company's $60.0 million aggregate principal amount
of 6-1/2% Convertible Debentures, satisfy various expenses associated with the
Distribution and Merger, to fund New GranCare's acquisitions following the
Distribution and Merger and for New GranCare's general working capital
requirements.
The Company believes that its cash from operations, existing working
capital and available borrowings under the Credit Facility will be sufficient to
fund the fixed obligations, capital expenditures and other obligations referred
to above, as well as to repay certain indebtedness when due, and further expand
the Company's business. However, in the event that the Company continues to
grow through acquisitions, the Company may need to raise additional capital,
either through borrowings (including an increase in the Credit Facility), sale-
leaseback financings, or the sale of debt or equity securities to finance the
acquisition price and any additional working capital and capital expenditure
requirements related to such acquisitions.
The Company is a beneficial owner of 1,000,000 shares of stock of Health
and Retirement Properties Trust ("HRPT") which are held in trust and pledged as
collateral for the obligations of two of the Company's subsidiaries under
mortgage notes and lease obligations with HRPT. The pledge agreement strictly
limits GranCare's ability to sell the shares until its obligations to HRPT are
satisfied, which will not be until the year 2010. As a result, these shares
cannot be sold to meet other financial obligations. In addition, such mortgage
notes and lease obligations contain provisions that restrict, upon the
occurrence of an event of default thereunder, the ability of such subsidiaries
to make dividends, loans or advances to the Company. In accordance with FASB
Statement No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," the HRPT stock is carried at fair market value, with unrealized
gains and losses reported as a separate component of equity. The Credit
Facility and indenture pursuant to which the Notes were issued also contain
restrictions on the ability of the Company to pay dividends to its shareholders
upon the failure to satisfy certain financial covenants.
The Company maintains a captive insurance subsidiary to provide for its
obligations under workers compensation and general and professional liability
plans. These obligations are funded with long-term fixed income investments
which are not available to satisfy other obligations of the Company.
13
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
- ------- ------------------
On September 9, 1996, a shareholder of the Company filed a civil
complaint in the Superior Court of the State of California, County of Los
Angeles: Howard Gunty Profit Sharing v. Gene E. Burleson, Charles M. Blalack,
Antoinette Hubenette, Joel S. Kanter, Ronald G. Kenny, Robert L. Parker, William
G. Petty, Jr., Edward V. Regan, Gary U. Rolle and GranCare, Inc., Case No.
DC156996. This complaint alleges, generally, that the defendants have breached
their fiduciary duties owed to the Company's shareholders by failing to take all
reasonable steps necessary to ensure that the Company's shareholders receive
maximum value for their shares of common stock in connection with the proposed
Distribution (as defined in Item 5 below) and Merger. The complaint further
alleges that the directors of the Company acted in concert as part of a scheme
to deprive the plaintiffs unfairly of their investment in the Company and to
unjustly enrich themselves. The plaintiffs are seeking (i) an injunction
prohibiting the consummation of the proposed Distribution and Merger or (ii)
alternatively, if the proposed Distribution and Merger are consummated, to have
such transactions rescinded and set aside and an order requiring the defendants
to account to the plaintiff for all profits realized as a result of the proposed
Distribution and Merger. In addition, the plaintiffs are seeking unspecified
compensatory damages, costs and to have the complaint certified as a class
action. The Company believes that it is acting in accordance with all
applicable laws and that any claims to the contrary are unfounded and completely
without merit. The Company intends to vigorously defend this lawsuit.
ITEM 2. CHANGES IN SECURITIES.
- ------- ----------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
- ------- --------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- ------- ----------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
- -------- ------------------
On September 3, 1996, the Company entered into (1) an Agreement
and Plan of Distribution (the "Distribution Agreement") by and between the
Company and New GranCare, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("New GranCare"), dated as of September 3, 1996,
pursuant to which, among other things: (i) the Company's skilled nursing, home
healthcare, assisted living and contract management businesses and related
assets will be transferred to New GranCare or one or more direct or indirect
subsidiaries of New GranCare and (ii) all of the issued and outstanding capital
stock of New GranCare, par value $0.001 per share ("New GranCare Common Stock")
shall be distributed to the shareholders of the Company (the "Distribution")
such that each Company shareholder will receive one share of New GranCare Common
Stock for every share of Company common stock, without par value ("Company
Common Stock"), held by such shareholder and (2) the Merger Agreement pursuant
to which, among other things: (i) following the Distribution, the Company
(whose sole remaining business following the completion of the Distribution will
consist of the Company's institutional pharmacy business) shall merge with and
into Vitalink with Vitalink being the surviving corporation; and (ii) each share
of Company Common Stock, shall be converted into the right to receive, and
become exchangeable for, 0.478 of a share of the common stock of Vitalink, $0.01
par value per share.
The consummation of the Distribution and Merger are subject to
numerous conditions including, without limitation, the approval as such
transactions by the shareholders of the Company.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following exhibits are included herewith:
2.1 Agreement and Plan of Merger dated as of September 3,
1996, between the Registrant and Vitalink Pharmacy
Services, Inc. (The Registrant hereby undertakes to
supplementally provide any schedules or exhibits omitted
from this agreement to the Securities and Exchange
Commission (the "Commission") upon request.)
2.2 Agreement and Plan of Distribution dated as of September
3, 1996, between the Registrant and New GranCare, Inc.
(The Registrant hereby undertakes to supplementally
provide any schedule or exhibit omitted from this
agreement to the Commission upon request).
10.1 Voting Agreement dated September 3, 1996, between the
Registrant and Manor Care, Inc.
11 Computation of Net Income (Loss) Per Share.
27 Financial Data Schedule
(b) On September 5, 1996, the Company filed a Form 8-K with the
Commission with respect to the announcement of the execution of
an Agreement and Plan of Merger dated September 3, 1996 between
the Company and Vitalink Pharmacy Services, Inc.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 1996 GRANCARE, INC.
/s/ Jerry A. Schneider
---------------------------------------
Jerry A. Schneider
Executive Vice President and Chief
Financial Officer
(Duly Authorized Officer and Principal
Financial and Accounting Officer)
16
<PAGE>
EXHIBIT 2.1
AGREEMENT AND PLAN
OF MERGER
BY AND BETWEEN
VITALINK PHARMACY SERVICES, INC.
AND
GRANCARE, INC.
DATED AS OF SEPTEMBER 3, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I
THE MERGER
Section 1.01. The Merger............................................... 2
Section 1.02. Effective Time........................................... 3
Section 1.03. Certificate of Incorporation and
By-Laws of Surviving Corporation....................... 3
Section 1.04. Directors and Officers of Surviving
Corporation............................................ 4
Section 1.05. Stockholders' Meeting.................................... 4
Section 1.06. Filing of Certificate of Merger.......................... 5
Section 1.07. Further Assurances....................................... 5
ARTICLE II
CONVERSION OF SHARES
Section 2.01. Shares................................................... 6
Section 2.02. Exchange of Shares....................................... 7
Section 2.03. Effect on GranCare Options............................... 8
Section 2.04. Fractional Shares........................................ 8
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VITALINK
Section 3.01. Organization and Qualification.......................... 9
Section 3.02. Authority Relative to This Agreement.................... 10
Section 3.03. Consents, No Conflicts.................................. 10
Section 3.04. Board Recommendation.................................... 12
Section 3.05. State Antitakeover Statutes............................. 12
Section 3.06. No Existing Violation, Default, Etc..................... 12
Section 3.07. Licenses and Permits.................................... 13
Section 3.08. Registration Statement; Information
Statement............................................. 13
Section 3.09. Finders or Brokers...................................... 14
Section 3.10. SEC Filings............................................. 14
Section 3.11. Financial Statements.................................... 15
Section 3.12. Absence of Undisclosed Liabilities...................... 16
Section 3.13. Absence of Changes or Events............................ 16
Section 3.14. Capitalization.......................................... 17
Section 3.15. Capital Stock of Subsidiaries........................... 18
Section 3.16. Litigation.............................................. 18
Section 3.17. Insurance............................................... 19
Section 3.18. Title to and Condition of Properties.................... 19
Section 3.19. Leases.................................................. 21
-i-
<PAGE>
Page
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Section 3.20. Contracts and Commitments............................... 21
Section 3.21. Labor Matters........................................... 23
Section 3.22. No Change of Control Puts............................... 23
Section 3.23. Employment and Labor Contracts.......................... 23
Section 3.24. Intellectual Property Rights............................ 23
Section 3.25. Taxes................................................... 24
Section 3.26. Employee Benefit Plans; ERISA........................... 26
Section 3.27. Environmental Matters................................... 30
Section 3.28. Directors, Officers and Compensation
of Employees....................................... 34
Section 3.29. Banks................................................... 34
Section 3.30. Disclosure.............................................. 35
Section 3.31. Institutional Pharmacy Business......................... 35
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GRANCARE
Section 4.01. Organization and Qualification.......................... 36
Section 4.02. Authority Relative to This Agreement.................... 37
Section 4.03. Consents, No Conflicts.................................. 38
Section 4.04. Board Recommendation.................................... 39
Section 4.05. State Antitakeover Statutes............................. 39
Section 4.06. No Existing Violation, Default, Etc..................... 39
Section 4.07. Affiliates.............................................. 40
Section 4.08. Licenses and Permits.................................... 40
Section 4.09. Registration Statement; Proxy
Statement; SNFCo Registration
Documents.......................................... 41
Section 4.10. Finders or Brokers...................................... 42
Section 4.11. SEC Filings............................................. 42
Section 4.12. Financial Statements.................................... 43
Section 4.13. Absence of Undisclosed Liabilities...................... 43
Section 4.14. Absence of Changes or Events............................ 43
Section 4.15. Capitalization.......................................... 44
Section 4.16. Capital Stock of Subsidiaries........................... 46
Section 4.17. Litigation.............................................. 46
Section 4.18. Insurance............................................... 47
Section 4.19. Title to and Condition of Properties.................... 47
Section 4.20. Leases.................................................. 49
Section 4.21. Contracts and Commitments............................... 49
Section 4.22. Labor Matters........................................... 51
Section 4.23. No Change of Control Puts............................... 51
Section 4.24. Employment and Labor Contracts.......................... 51
Section 4.25. Intellectual Property Rights............................ 52
Section 4.26. Taxes................................................... 52
Section 4.27. Employee Benefit Plans; ERISA........................... 54
Section 4.28. Environmental Matters................................... 58
Section 4.29. Directors, Officers and Compensation
of Employees...................................... 61
-ii-
<PAGE>
Page
----
Section 4.30. Banks................................................... 61
Section 4.31. Disclosure.............................................. 61
Section 4.32. Institutional Pharmacy Business......................... 61
Section 4.33. Fairness Opinion........................................ 62
Section 4.34. Sufficiency of Assets................................... 63
ARTICLE V
COVENANTS
Section 5.01. Conduct of Business of GranCare......................... 63
Section 5.02. Conduct of Business of Vitalink......................... 67
Section 5.03. No Solicitation by GranCare............................. 70
Section 5.04. No Solicitation by Vitalink............................. 71
Section 5.05. Access to Information................................... 72
Section 5.06. Registration Statement and
Proxy Statement.................................... 73
Section 5.07. Commercially Reasonable Efforts;
Other Actions...................................... 73
Section 5.08. Public Announcements.................................... 74
Section 5.09. Notification of Certain Matters......................... 74
Section 5.10. Indemnification......................................... 74
Section 5.11. Expenses................................................ 75
Section 5.12. Stock Exchange Listings................................. 75
Section 5.13. GranCare and Subsidiary Actions......................... 76
Section 5.14. Vitalink and Subsidiary Actions......................... 76
Section 5.15. Environmental Matters................................... 76
Section 5.16. Actions Regarding Outstanding Debt...................... 77
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS
OF VITALINK AND GRANCARE
Section 6.01. Registration Statements................................. 77
Section 6.02. Stockholder Approval.................................... 77
Section 6.03. Listings................................................ 78
Section 6.04. Certain Proceedings..................................... 78
Section 6.05. Consents and Approvals.................................. 78
Section 6.06. Distribution............................................ 78
Section 6.07. Dissenting Shares....................................... 78
Section 6.08. Opinions................................................ 79
Section 6.09. Existing Indebtedness................................... 79
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF VITALINK
Section 7.01. Representations and Warranties True..................... 79
Section 7.02. Performance............................................. 80
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<PAGE>
Page
----
Section 7.03. Certificates............................................ 80
Section 7.04. Material Adverse Change................................. 80
Section 7.05. Pharmacy Financial Statements........................... 80
Section 7.06. Auditors' Letter........................................ 81
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
Section 8.01. Representations and Warranties True..................... 81
Section 8.02. Performance............................................. 81
Section 8.03. Certificates............................................ 81
Section 8.04. Material Adverse Change................................. 81
Section 8.05. Shareholders' Agreement................................. 82
Section 8.06. Auditors' Letter........................................ 82
ARTICLE IX
CLOSING
Section 9.01. Time and Place.......................................... 82
Section 9.02. Filings at the Closing.................................. 82
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.01. Termination............................................. 82
Section 10.02. Termination by Vitalink................................. 83
Section 10.03. Termination by GranCare................................. 84
Section 10.04. Procedure for Termination............................... 86
Section 10.05. Effect of Termination and Abandonment................... 86
ARTICLE XI
DEFINITIONS
Section 11.01. Terms Defined in This Agreement.......................... 89
ARTICLE XII
MISCELLANEOUS
Section 12.01. Amendment and Modification.............................. 91
Section 12.02. Waiver of Compliance; Consents.......................... 92
Section 12.03. Survivability; Investigations........................... 92
Section 12.04. Notices................................................. 92
Section 12.05. Assignment.............................................. 93
Section 12.06. Governing Law........................................... 94
Section 12.07. Counterparts............................................ 94
-iv-
<PAGE>
Page
----
Section 12.08. Severability........................................... 94
Section 12.09. Interpretation......................................... 94
Section 12.10. Entire Agreement....................................... 94
Signatures............................................................... S-1
EXHIBITS
Exhibit A Form of Distribution Agreement
Exhibit B Form of Voting Agreement
Exhibit C Form of Affiliate Letter
Exhibit D Shareholders Agreement
Exhibit E List of Directors
Exhibit F List of Officers
Exhibit G Opinions
-v-
<PAGE>
AGREEMENT AND PLAN OF MERGER
----------------------------
AGREEMENT AND PLAN OF MERGER, dated as of September 3, 1996 (the
"Agreement"), by and between Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), and GranCare, Inc., a California corporation
("GranCare"). Vitalink and GranCare are hereinafter sometimes collectively
referred to as the "Constituent Corporations."
RECITALS
WHEREAS, Vitalink and GranCare desire to combine their respective
pharmacy businesses, and Vitalink does not want to own the Skilled Nursing
Businesses (as hereinafter defined) of GranCare;
WHEREAS, prior to the Merger (as hereinafter defined), GranCare and
its Subsidiaries (as hereinafter defined) will transfer on the terms and subject
to the conditions set forth in the Distribution Agreement between GranCare and a
previously existing corporation ("SNFCo") in the form attached hereto as Exhibit
A (including the Ancillary Agreements as defined therein, the "Distribution
Agreement"), all of the Skilled Nursing Assets and Skilled Nursing Liabilities
of GranCare and its Subsidiaries (each as defined in the Distribution Agreement)
to SNFCo (the "Restructuring"); following which all of the capital stock of
SNFCo (the "SNFCo Stock") will be distributed (the "Distribution") immediately
prior to the Merger to the shareholders of GranCare.
WHEREAS, after the Distribution GranCare will own only the
Institutional Pharmacy Assets, and be subject only to the Institutional Pharmacy
Liabilities (each as defined in the Distribution Agreement);
WHEREAS, the Board of Directors of GranCare has determined that the
Merger and the Distribution are advisable on the terms and conditions contained
in this Agreement and the Distribution Agreement, and that each of the other
transactions contemplated herein or in the Distribution Agreement is consistent
with and in furtherance of the long-term business strategy of GranCare and is
fair to, and in the best interests of, GranCare and GranCare's shareholders, and
has approved and adopted this Agreement and the Distribution Agreement and each
of the other transactions contemplated herein and intends to recommend the
approval and adoption of this Agreement and the Distribution Agreement by the
shareholders of GranCare;
<PAGE>
-2-
WHEREAS, the Board of Directors of Vitalink has determined that the
Merger is advisable on the terms and conditions contained in this Agreement and
that each of the other transactions contemplated herein is consistent with and
in furtherance of the long-term business strategy of Vitalink and is fair to,
and in the best interests of, Vitalink and Vitalink's shareholders, and has
approved and adopted this Agreement and each of the other transactions
contemplated herein and intends to recommend the approval and adoption of this
Agreement by the shareholders of Vitalink;
WHEREAS, Manor Care, Inc., a Delaware corporation, and Vitalink's
majority stockholder ("Parent"), has committed to vote in favor of approving
this Agreement and the transactions contemplated hereby and has agreed not to
approve or support any competing transaction, all as provided in the form
attached hereto as Exhibit B (the "Voting Agreement");
WHEREAS, Vitalink and GranCare intend that at the Effective Time (as
hereinafter defined) the Board of Directors of Vitalink shall consist equally of
individuals designated by Vitalink and by GranCare and that the Chief Executive
Officer of GranCare shall become the Chief Executive Officer of Vitalink; and
WHEREAS, Vitalink and GranCare desire to make certain representations,
warranties, covenants and agreements in connection with the merger of Vitalink
and GranCare and the Distribution by GranCare.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
ARTICLE I.
THE MERGER
Section 1.01 The Merger. (a) In accordance with the provisions of
----------
this Agreement, the General Corporation Law of the State of Delaware (the
"Delaware Act") and the General Corporation Law of the State of California (the
"California Act"), at the Effective Time, GranCare shall be merged (the
"Merger") with and into Vitalink, and Vitalink shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation") and shall
continue its corporate existence under the laws of the State of Delaware. At
the Effective Time the separate existence of GranCare shall cease.
<PAGE>
-3-
(b) The Merger shall have the effects on Vitalink and GranCare as
constituent corporations of the Merger as provided under the Delaware Act and
the California Act.
Section 1.02 Effective Time. Following filing of the certificate of
--------------
satisfaction with the Franchise Tax Board in accordance with the provisions of
(S) 1103 of the California Act and the Bank and Corporation Tax Law, the filing
of a certified copy of this Agreement, in the form required by and executed in
accordance with the California Act, with the Secretary of State of the State of
California in accordance with the provisions of (S) 1108 of the California Act
(the "Certified Agreement"), the Merger shall become effective at the time of
filing of, or at such later time specified in, a certificate of merger, in the
form required by and executed in accordance with the Delaware Act, with the
Secretary of State of the State of Delaware in accordance with the provisions of
(S) 252 of the Delaware Act (the "Certificate of Merger"). The date and time
when the Merger shall become effective is herein referred to as the "Effective
Time."
Section 1.03 Certificate of Incorporation and By-Laws of Surviving
-----------------------------------------------------
Corporation. (a) The Certificate of Incorporation of Vitalink, as in effect
- -----------
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as provided
by law; provided, however, that if prior to the Effective Time the stockholders
-------- -------
of Vitalink shall have approved an increase in the number of authorized shares
of Common Stock from 30,000,000 to 80,000,000, then Article 4 of the Certificate
of Incorporation shall read as follows: "4. The total number of shares which
this corporation shall have authority to issue is 90,000,000 shares, consisting
of 10,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock") and 80,000,000 shares of Common Stock, par value $.01 per
share (the "Common Stock")" (the "Amendment").
(b) The By-Laws of Vitalink, as in effect immediately prior to the
Effective Time, shall be the By-Laws of the Surviving Corporation until
thereafter amended as provided by law.
Section 1.04 Directors and Officers of Surviving Corporation. The
-----------------------------------------------
individuals identified on Exhibit E shall comprise all of the members of the
Board of Directors of the Surviving Corporation at the Effective Time. The
individuals identified on Exhibit F shall comprise all of the senior officers of
the Surviving Corporation at the Effective Time and shall hold the positions set
forth opposite their names.
<PAGE>
-4-
Section 1.05 Stockholders' Meeting. (a) GranCare will take all
---------------------
action necessary in accordance with applicable law and its Restated Articles of
Incorporation and By-Laws to convene a special meeting of its stockholders (the
"Special Meeting") as soon as practicable to consider and vote upon the approval
of this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement. GranCare,
through its Board of Directors, shall recommend to its stockholders approval of
this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement (which
recommendation shall be contained in the Proxy Statement (as hereinafter
defined)) and shall use all commercially reasonable efforts to solicit from its
stockholders proxies in favor of approval and adoption of this Agreement, the
Distribution Agreement and the other transactions contemplated by this Agreement
and the Distribution Agreement. GranCare's Board of Directors shall not
withdraw, change, modify in any manner or take action inconsistent with its
recommendation of the Distribution, the Distribution Agreement, the Merger, this
Agreement or the other transactions contemplated hereby or thereby and shall not
resolve to do any of the foregoing and publicly disclose such resolution;
provided, however, that GranCare's Board of Directors may withdraw, change,
- -------- -------
modify in any manner or take action inconsistent with such recommendation or
resolve to do any of the foregoing and publicly disclose such resolution in the
event that there is an unsolicited written proposal for a GranCare Acquisition
Transaction from a bona fide financially capable third party only if (i) three
business days' written notice shall have been given to Vitalink; (ii) GranCare's
Board of Directors shall have been advised (A) in writing by its investment
banker that such third party is financially capable of consummating a GranCare
Acquisition Transaction that would yield a higher value to GranCare's
stockholders than will the Merger and (B) by the written opinion of outside
counsel to GranCare that recommending this Agreement to the stockholders of
GranCare or failing to take the action proposed would be inconsistent with
GranCare's Board of Directors' fiduciary duties to such stockholders (in
providing such opinion GranCare's counsel may assume that California law is not
materially different from Delaware law); and (iii) after weighing such advice,
GranCare's Board of Directors shall determine that failure to take the proposed
action would be inconsistent with such Board of Directors' fiduciary duties.
(b) Vitalink will take all action necessary in accordance with
applicable law and its Certificate of Incorporation and By-Laws to obtain as
soon as practicable the approval of its stockholders of this Agreement and the
transactions contemplated hereby through, at the election of Vitalink, written
consents or a
<PAGE>
-5-
stockholders meeting (the "Stockholder Approval"). Vitalink, through its Board
of Directors, shall recommend to its stockholders approval of this Agreement
(which recommendation shall be contained in the Vitalink Information Statement
(as hereinafter defined)) and the transactions contemplated hereby, including
the Amendment.
Section 1.06 Filing of Certificate of Merger. At the Closing (as
-------------------------------
hereinafter defined), Vitalink and GranCare shall cause a Certificate of Merger
to be executed and filed with the Secretary of State of the State of Delaware as
provided in (S) 252 of the Delaware Act and the Certified Agreement to be
executed and filed with the Secretary of State of the State of California as
provided in (S) 1108 of the California Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.
Section 1.07 Further Assurances. If, at any time after the Effective
------------------
Time, the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments, assurances or any other actions or things are
necessary or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations acquired
or to be acquired by the Surviving Corporation as a result of, or in connection
with, the Merger or otherwise to carry out this Agreement, the officers and
directors of the Surviving Corporation shall be authorized to execute and
deliver, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such deeds, bills of sale, assignments and assurances and to take
and do, in the name and on behalf of each of the Constituent Corporations or
otherwise, all such other actions and things as may be necessary or desirable to
vest, perfect or confirm any and all right, title and interest in, to and under
such rights, properties or assets in the Surviving Corporation or otherwise to
carry out this Agreement.
ARTICLE II.
CONVERSION OF SHARES
Section 2.01 Shares. (a) Each share of common stock, without par
------
value, of GranCare (the "GranCare Common Stock") issued and outstanding
immediately prior to the Effective Time (except for Dissenting Shares (as
hereinafter defined), shares owned by GranCare as treasury stock or shares owned
by any Subsidiary of GranCare) shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into the right to receive
.478 of one share (the "Exchange Ratio") of common stock,
<PAGE>
-6-
par value $.01 per share, of Vitalink ("Vitalink Common Stock"). The shares of
Vitalink Common Stock delivered in exchange for shares of GranCare Common Stock
pursuant to this Section 2.01(a) are hereinafter sometimes called the "Closing
Consideration." In the event of any change in Vitalink Common Stock or GranCare
Common Stock by reason of any stock split, readjustment, stock dividend,
exchange of shares, reclassification, recapitalization or otherwise (other than
the Distribution), the Exchange Ratio shall be correspondingly adjusted.
(b) All shares of GranCare Common Stock, by virtue of the Merger and
without any action on the part of the holders thereof, shall no longer be
outstanding and shall be cancelled and retired and shall cease to exist, and
each holder of a certificate representing any such shares of GranCare Common
Stock shall thereafter cease to have any rights with respect to such shares of
GranCare Common Stock, except the right to receive the Closing Consideration for
such shares of GranCare Common Stock as specified in the foregoing clause (a)
upon the surrender of such certificate in accordance with Section 2.02 and the
right to receive the SNFCo capital stock distributed with respect to such shares
of GranCare Common Stock in accordance with the terms of the Distribution
Agreement.
(c) Notwithstanding anything in this Agreement to the contrary,
shares of GranCare Common Stock which are outstanding immediately prior to the
Effective Time and which are held by stockholders who (i) shall not have voted
such shares in favor of the Merger and (ii) shall have delivered the
certificates representing such shares marked to indicate such shares are
dissenting shares or a written demand for appraisal of such shares in the
manner provided in Sections 1300 and 1302 of the California Act (the "Dissenting
Shares") shall not be converted as described in Section 2.01(a), but instead the
holders thereof shall be entitled to payment of the appraised value of such
shares in accordance with the provisions of such Section 1300.
Section 2.02 Exchange of Shares. (a) Promptly after the Effective
------------------
Time, Vitalink shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the Effective
Time represented shares of GranCare Common Stock (the "Certificates") a form
letter of transmittal (which shall specify that delivery shall be effected, and
risk of loss and title to the Certificates shall pass, only upon proper delivery
of the Certificates to Vitalink) and instructions for use in effecting the
surrender of the Certificates for exchange thereof. Upon surrender to Vitalink
of a Certificate, together with such letter of transmittal duly
<PAGE>
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executed, the holder of such Certificate shall be entitled to receive in
exchange therefor that number of shares of Vitalink Common Stock which such
holder has the right to receive under this Article II, and such Certificate
shall forthwith be cancelled. If any shares of Vitalink Common Stock are to be
issued to a person other than the person in whose name the Certificate
surrendered is registered, it shall be a condition of exchange that the
Certificate so surrendered shall be properly endorsed or otherwise in proper
form for transfer and that the person requesting such exchange shall pay any
transfer or other taxes required by reason of the exchange of the Certificate
surrendered to a person other than the registered holder or such person shall
establish to the satisfaction of the Surviving Corporation that such tax has
been paid or is not applicable. Until surrendered in accordance with the
provisions of this Section 2.02, each Certificate shall represent, for all
purposes, the right to receive the Closing Consideration in respect of the
number of shares of GranCare Common Stock evidenced by such Certificate, without
any interest thereon.
(b) From and after the Effective Time there shall be no transfers on
the stock transfer books of the Surviving Corporation of the shares of
GranCare Common Stock which were outstanding immediately prior to the Effective
Time. If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
II.
(c) The Surviving Corporation shall not be liable to any holder of
shares of GranCare Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
Section 2.03 Effect on GranCare Options. (a) As of the Effective
--------------------------
Time, by virtue of the Merger and without any action on the part of the holders
thereof, each option to purchase shares of GranCare Common Stock that is
outstanding under the GranCare Plans (as hereinafter defined) immediately prior
to the Effective Time, whether or not exercisable, shall be assumed by Vitalink
and each such option shall be exercisable upon the same terms and conditions as
under the applicable GranCare Plan and the applicable option agreement issued
thereunder, except that (i) each such option shall be exercisable for that
number of shares of Vitalink Common Stock (rounded in accordance with
established mathematical convention to the nearest whole share) into which the
number of shares of GranCare Common Stock subject to such option immediately
prior to the Effective Time determined after giving effect to the adjustments
set forth in the Employee Benefit Agreement (as defined
<PAGE>
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in the Distribution Agreement), would be converted under Section 2.01(a) if such
option were exercised prior to the Effective Time, and (ii) the option price per
share of Vitalink Common Stock determined after giving effect to the adjustments
set forth in the Employee Benefit Matters Agreement (as defined in the
Distribution Agreement), shall be an amount equal to such adjusted option price
per share of GranCare Common Stock subject to such option in effect immediately
prior to the Effective Time divided by the Exchange Ratio (rounded in accordance
with established mathematical convention to the nearest whole cent).
(b) Prior to the Effective Time, GranCare shall (i) obtain any
consents from holders of outstanding options to purchase GranCare Common Stock
granted under the GranCare Plans and (ii) make any amendments to the terms of
the GranCare Plans or any award granted thereunder that are necessary to give
effect to the transactions contemplated by this Section 2.03 and the Employee
Benefits Matters Agreement referred to in clause (a) above.
Section 2.04 Fractional Shares. Notwithstanding any other provision
-----------------
of this Agreement, each holder of shares of GranCare Common Stock who upon
surrender of Certificates would be entitled to receive a fraction of a share of
Vitalink Common Stock shall not be entitled to receive any dividends on or vote
such fractional share and shall receive, in lieu of such fractional share, cash
in an amount equal to such fraction multiplied by the Average Market Value.
"Average Market Value" shall mean the arithmetic average of the last reported
sale price per share of Vitalink Common Stock as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ) ("Nasdaq")
for the fifteen (15) consecutive trading days ending with the last trading day
prior to the scheduled date of the Special Meeting specified in the Proxy
Statement. The fractional share interests of each GranCare stockholder will be
aggregated, and no GranCare stockholder will receive cash in an amount equal to
or greater than the value of one full share of Vitalink Common Stock. All
references in this Agreement to shares of Vitalink Common Stock to be issued as
Closing Consideration shall be deemed to include any cash in lieu of fractional
shares payable pursuant to this Section 2.04.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF VITALINK
Except as set forth in the Vitalink Disclosure Statement delivered by
Vitalink to GranCare at or prior to the execution of this Agreement (the
"Vitalink Disclosure Statement") (each section
<PAGE>
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of which qualifies the correspondingly numbered representation and warranty and
covenant), Vitalink represents and warrants to GranCare as follows:
Section 3.01 Organization and Qualification. Each of Vitalink and
------------------------------
its Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Vitalink SEC Reports (as hereinafter
defined). Each of Vitalink and its Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the conduct of its business or the ownership, leasing or operation of
its property requires such qualification, except for failures to be so qualified
or in good standing which would not, singly or in the aggregate with all such
other failures, have an Vitalink Material Adverse Effect. "Vitalink Material
Adverse Effect" means, (i) with respect to any event, occurrence, failure of
event or occurrence, change, effect, state of affairs, breach, default,
violation, fine, penalty or failure to comply (each, a "circumstance"),
individually or taken together with all other circumstances contemplated by or
in connection with any or all of the representations and warranties made in this
Agreement, a material adverse effect on the business, properties, assets,
condition (financial or otherwise), results of operations or prospects of
Vitalink and its Subsidiaries, taken as a whole or (ii) circumstances resulting
in the impairment of Vitalink's ability to perform its obligations under this
Agreement and to consummate the transactions contemplated hereby. Neither
Vitalink nor any of its Subsidiaries is in violation of any of the provisions of
its certificate of incorporation (or other applicable charter document) or By-
Laws. True and complete copies of the Certificate of Incorporation and By-Laws,
as currently in effect, of Vitalink and of each Subsidiary of Vitalink have been
previously delivered or made available to GranCare. No amendments to the
articles of incorporation (or other similar charter documents) and By-Laws of
Vitalink have been authorized since December 31, 1995.
Section 3.02 Authority Relative to This Agreement. Vitalink has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and, upon
obtaining the approval of a majority of the outstanding shares of Vitalink
Common Stock through the Stockholder Approval to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Vitalink and no other corporate proceedings on the part of Vitalink
are necessary to
<PAGE>
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authorize this Agreement or to consummate the Merger and the other transactions
contemplated hereby (other than, with respect to the Merger, the Amendment and
the issuance of the additional Vitalink Common Stock at the Effective Time, the
approval of a majority of the outstanding shares of Vitalink Common Stock).
This Agreement has been duly and validly executed and delivered by Vitalink and,
assuming the due authorization, execution and delivery hereof by GranCare,
constitutes a valid and binding agreement of Vitalink, enforceable against
Vitalink in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
Section 3.03 Consents, No Conflicts. (a) Except for the filings of
----------------------
the Certificate of Merger, the Certified Agreement and the Vitalink Information
Statement (as hereinafter defined), the filing and effectiveness of the
Registration Statement (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by Vitalink of the Merger, the
adoption of the Amendment or the other transactions contemplated hereby except
such as are set forth in Section 3.03(a) of the Vitalink Disclosure Statement,
which will have been obtained or made prior to the Effective Time and will then
be in full force and effect or which would not, singly or in the aggregate with
all other such consents which have not been obtained, have an Vitalink Material
Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
consummation of the Merger, the adoption of the Amendment and the other
transactions contemplated hereby and compliance by Vitalink with any of the
provisions hereof do not and will not (i) subject to obtaining the approval of a
majority of the outstanding shares of Vitalink Common Stock, conflict with or
result in any breach or violation of any provision of the Certificate of
Incorporation (or other comparable charter documents) or By-Laws of Vitalink or
any of its Subsidiaries, (ii) result in (1) a breach or violation of, a default
under or an event triggering any payment or other obligation pursuant to any of
Vitalink's existing pension plans, welfare plans, multiemployer plans, employee
benefit plans, benefit arrangements or similar
<PAGE>
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plans, arrangements or policies including bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right, health or
group insurance, severance pay, retirement or other benefit plans, and all
similar arrangements or policies of Vitalink and its Subsidiaries (the "Vitalink
Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (2) a breach, violation or event triggering a right of termination
of, a default under, or the acceleration of any obligation or the creation of a
lien, pledge, security interest or other encumbrance on assets (with or without
the giving of notice or the lapse of time or both) pursuant to any provision of,
any agreement, lease of real or personal property, marketing agreement,
contract, note, mortgage, indenture, arrangement or other obligation of
Vitalink or any of its Subsidiaries ("Vitalink Contracts") or any law, rule,
ordinance or regulation or judgment, decree, order or award to which Vitalink or
any of its Subsidiaries is subject or any governmental or non-governmental
authorization, consent, approval, registration, franchise, license or permit
under which Vitalink or any of its Subsidiaries conducts any of its business, or
(3) any other change in the rights or obligations of any party under any of the
Vitalink Contracts.
Section 3.04 Board Recommendation. The Board of Directors of
--------------------
Vitalink has, by a unanimous vote at a meeting of such Board duly held on
September 3, 1996, approved and adopted this Agreement, the Merger, the
Amendment and the other transactions contemplated hereby. At such meeting, the
Board of Directors of Vitalink determined that the consideration to be paid by
Vitalink pursuant to the Merger is fair to the holders of shares of Vitalink
Common Stock and recommended that the holders of such shares approve and adopt
this Agreement, the Merger, the Amendment and the other transactions
contemplated hereby.
Section 3.05 State Antitakeover Statutes. Vitalink has granted all
---------------------------
approvals and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of (S) 203
of the Delaware Act and any other state antitakeover statute or regulation such
that none of the other provisions of such "business combination," "moratorium,"
"control share" or other state antitakeover statute or regulation (x) prohibits
or restricts either Vitalink's ability to perform its obligations under this
Agreement or its ability to consummate the Merger and the other transactions
contemplated hereby, (y) would have the effect of invalidating or voiding this
Agreement or any provision hereof, or (z) would subject GranCare to any material
impediment or condition in connection with the exercise of any of its rights
under this Agreement.
<PAGE>
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Section 3.06 No Existing Violation, Default, Etc. None of Vitalink
-----------------------------------
or its Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have an Vitalink
Material Adverse Effect) of (A) any applicable law, ordinance, administrative or
governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over Vitalink or any of
its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default
exists under any Vitalink Contract or any lease, permit, license or other
agreement or instrument to which Vitalink or any of its Subsidiaries is a party
or by which any of them is bound or to which any of the properties, assets or
operations of Vitalink or any of its Subsidiaries is subject (except for any
events of default or other defaults which would not, singly or in the aggregate
with all such other defaults, have an Vitalink Material Adverse Effect).
Section 3.07 Licenses and Permits. Each of Vitalink and its
--------------------
Subsidiaries has such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate governmental
agencies and bodies ("Vitalink Licenses") as are necessary to own, lease or
operate its properties and to conduct its business in the manner described in
the Vitalink SEC Reports and as presently conducted and all such Vitalink
Licenses are valid and in full force and effect, other than any failure to have
any such Vitalink License or any failure of any such Vitalink License to be
valid and in full force and effect as would not, singly or in the aggregate with
all such other failures, have an Vitalink Material Adverse Effect. Each of
Vitalink and its Subsidiaries is and, within the period of all applicable
statutes of limitation, has been in compliance with its obligations under such
Vitalink Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such Vitalink Licenses,
other than any such failure to be in compliance with such obligations or any
such revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have an Vitalink Material
Adverse Effect. Vitalink has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of Vitalink or any of its
Subsidiaries to renew any Vitalink License. Neither the execution and delivery
by Vitalink of this Agreement nor the consummation of any of the transactions
contemplated herein will result in any revocation or termination of any Vitalink
License. Set forth in Section 3.07 of the Vitalink Disclosure Statement is a
true and complete list of all Vitalink Licenses which are necessary for the
conduct of the business presently conducted by Vitalink and its Subsidiaries.
<PAGE>
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Section 3.08 Registration Statement; Information Statement. None of
---------------------------------------------
the information supplied by Vitalink for inclusion or incorporation by reference
in (i) the registration statement registering under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder (the
"Securities Act") the Vitalink Common Stock to be issued at the Effective Time
(such registration statement as amended by any amendments thereto being referred
to herein as the "Registration Statement") or (ii) the information statement or
proxy statement to be sent to the stockholders of Vitalink in connection with
the Stockholder Approval, including all amendments and supplements thereto (the
"Vitalink Information Statement"), shall, in the case of the Registration
Statement, at (i) the time the Registration Statement becomes effective and (ii)
the Effective Time, and in the case of the Vitalink Information Statement, on
the date the Vitalink Information Statement is first mailed to stockholders, at
the date of the Stockholder Approval and at the Effective Time, contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary in order to make the statements therein not
misleading. If at any time prior to the Effective Time any event with respect
to Vitalink or any of its Subsidiaries shall occur which is required to be
described in the Registration Statement, the Vitalink Information Statement or
the Proxy Statement (as hereinafter defined), such event shall be so described,
and an amendment or supplement shall be promptly filed with the Securities and
Exchange Commission (the "SEC") and, as required by law, disseminated to the
stockholders of Vitalink and GranCare. The Registration Statement and the
Vitalink Information Statement will (with respect to Vitalink) comply as to form
in all material respects with the applicable provisions of the Securities Act
and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), as the case may be.
Section 3.09 Finders or Brokers. Neither Vitalink nor any Subsidiary
------------------
of Vitalink has employed any investment banker, broker, finder or intermediary
in connection with the transactions contemplated hereby who might be entitled to
a fee or any commission the receipt of which is conditioned upon consummation of
the Merger.
Section 3.10 SEC Filings. (a) Vitalink has filed with the SEC all
-----------
required forms, reports and documents required to be filed by it with the SEC
since May 31, 1992 (collectively, the "Vitalink SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be. As
of their respective dates the Vitalink SEC Reports (including
<PAGE>
-14-
documents incorporated by reference therein) did not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
(b) Vitalink will deliver to GranCare as soon as they become
available true and complete copies of any report or statement mailed by Vitalink
to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by GranCare, as to which Vitalink makes no representation) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Vitalink and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a consistent
basis throughout the periods involved and will fairly present the consolidated
financial position of Vitalink and its Subsidiaries as of the dates thereof and
the consolidated results of operations and consolidated cash flow for the
periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements).
Section 3.11 Financial Statements. The audited consolidated
--------------------
financial statements and unaudited consolidated interim financial statements of
Vitalink and its Subsidiaries included or incorporated by reference in the
Vitalink SEC Reports have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis during the periods involved,
and fairly presented the consolidated financial position of Vitalink and its
Subsidiaries as of the dates thereof and the consolidated results of operations
and consolidated cash flows for the periods then ended (subject, in the case of
any unaudited interim financial statements, to normal year-end adjustments and
to the extent they may not include footnotes or may be condensed or summary
statements) and such audited financial statements have been certified as such
(without exception) by Vitalink's independent accountants.
<PAGE>
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Section 3.12 Absence of Undisclosed Liabilities. Neither Vitalink
----------------------------------
nor any of its Subsidiaries has any liabilities or obligations of any nature,
whether absolute, accrued, unmatured, contingent or otherwise, or any
unsatisfied judgments or any leases of personalty or realty or unusual or
extraordinary commitments, except the liabilities recorded on the Vitalink
Balance Sheet (as hereinafter defined) and the notes thereto, and except for
liabilities or obligations incurred in the ordinary course of business and
consistent with past practice since May 31, 1996 that would not, singly or in
the aggregate, be reasonably expected to have an Vitalink Material Adverse
Effect.
Section 3.13 Absence of Changes or Events. (a) Since May 31, 1996
----------------------------
(i) Vitalink and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement or
other transaction that is not in the ordinary course of business (other than the
Voting Agreement, the Shareholders Agreement (as hereinafter defined) and this
Agreement) or that could reasonably be expected to result in any Vitalink
Material Adverse Effect; (ii) neither Vitalink nor its Subsidiaries have
sustained any material loss or interference with their business or properties
from fire, flood, windstorm, accident, strike or other calamity (whether or not
covered by insurance); (iii) there has been no material change in the
indebtedness of Vitalink and its Subsidiaries, no change in the capital stock of
Vitalink and no dividend or distribution of any kind declared, paid or made by
Vitalink on any class of its capital stock; (iv) there has been no event or
condition which has caused an Vitalink Material Adverse Effect, nor any
development, occurrence or state of facts or circumstances that could, singly or
in the aggregate, reasonably be expected to result in an Vitalink Material
Adverse Effect; (v) there has been no amendment, modification or supplement to
any material term of any Vitalink Contract required to be identified in Section
3.20 of the Vitalink Disclosure Statement or any equity security; and (vi) there
has been no material change by Vitalink in its accounting principles, practices
or methods.
(b) Since May 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Vitalink, to its officers or key employees, or any amendment of any of the
Vitalink Compensation and Benefit Plans.
Section 3.14 Capitalization. (a) The authorized capital stock of
--------------
Vitalink consists of 30,000,000 shares of Vitalink
<PAGE>
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Common Stock and 10,000,000 shares of Preferred Stock (the "Vitalink Preferred
Stock"). As of August 26, 1996, there were 13,979,700 shares of Vitalink Common
Stock and no shares of Vitalink Preferred Stock outstanding and no shares of
Vitalink Common Stock were held in Vitalink's treasury; and except for shares
which were reserved for issuance and which may have been issued pursuant to the
following sentence there have been no issuances of capital stock of Vitalink
since August 26, 1996. As of August 26, 1996, 1,070,300 shares of Vitalink
Common Stock were reserved for issuance upon the exercise of outstanding options
and options (the "Vitalink Options") which may be granted under the stock option
plans of Vitalink (the "Vitalink Option Plans"), 100,000 shares of Vitalink
Common Stock were reserved for issuance to four former shareholders of an
acquired business, and no other shares of Vitalink Common Stock are reserved for
any purpose. Except for the Vitalink Common Stock reserved for issuance upon
exercise of the Vitalink Options and as contemplated by this Agreement, there
are not any existing options, warrants, calls, subscriptions, or other rights or
other agreements or commitments obligating Vitalink to issue, transfer or sell
any shares of capital stock of Vitalink or any of its Subsidiaries or any other
securities convertible into or evidencing the right to subscribe for any such
shares. There are no outstanding stock appreciation rights with respect to the
capital stock of Vitalink or any of its Subsidiaries. All issued and
outstanding shares of Vitalink Common Stock are duly authorized and validly
issued, fully paid and nonassessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, Vitalink subject to) any preemptive or similar rights created by
statute, the Certificate of Incorporation or By-Laws of Vitalink or any
agreement to which Vitalink is a party or bound. The Vitalink Common Stock to
be issued in accordance with Section 2.01 of this Agreement, when so issued,
will be duly authorized and validly issued, fully paid and nonassessable.
(b) There are no obligations, contingent or otherwise, of Vitalink to
(i) repurchase, redeem or otherwise acquire any shares of Vitalink Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise), or provide any guarantee with respect to the
obligations of, any other person. There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of Vitalink. Except for the
Voting Agreement and the Shareholders Agreement (as hereinafter defined), there
are no voting trusts, proxies or other agreements or understandings to which
Vitalink is a party or by which Vitalink
<PAGE>
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is bound with respect to the voting of any shares of capital stock of Vitalink.
(c) Vitalink has delivered or made available to GranCare complete and
correct copies of each of the Vitalink Option Plans, including all amendments
thereto. Section 3.14(c) of the Vitalink Disclosure Statement sets forth a
complete and correct list of all outstanding options, setting forth (i) the
exercise price of each outstanding Vitalink Option, (ii) the number of Vitalink
Options, (iii) the date of grant of each such Vitalink Option. Section 3.14(c)
of the Vitalink Disclosure Statement sets forth a complete and correct list of
all restricted stock awards including the recipients and the number of shares of
Vitalink Common Stock received or to be received by each.
Section 3.15 Capital Stock of Subsidiaries. The only direct or
-----------------------------
indirect Subsidiaries of Vitalink are those listed in Section 3.15 of the
Vitalink Disclosure Statement. Vitalink is directly or indirectly the record
(except for directors' qualifying shares as reflected in such Section 3.15) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Subsidiaries, there are no
proxies with respect to such shares, and there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Vitalink or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares. All
of such shares beneficially owned by Vitalink are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by Vitalink free and clear of any claim, lien or
encumbrance of any kind with respect thereto. Vitalink does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
Section 3.16 Litigation. There are no pending actions, suits,
----------
proceedings or, to the best knowledge of Vitalink after due inquiry,
investigations by, against or affecting Vitalink, any of its Subsidiaries or any
of their properties, assets or operations, or with respect to which Vitalink or
any of its Subsidiaries is responsible by way of indemnity or otherwise. No
pending or, to the knowledge of Vitalink, threatened actions, suits, proceedings
or investigations by, against or affecting Vitalink, any of its Subsidiaries or
any of their properties, assets or operations, or with respect to which they are
responsible by way of indemnity or otherwise, whether or not disclosed in such
Vitalink SEC Reports, would, singly or in the aggregate with all such other
actions,
<PAGE>
-18-
suits, investigations or proceedings, reasonably be expected to have an Vitalink
Material Adverse Effect; and, to the best knowledge of Vitalink after due
inquiry, no such actions, suits, proceedings or investigations which would
reasonably be expected to have an Vitalink Material Adverse Effect are
threatened or contemplated and there is no reasonable basis, to the best
knowledge of Vitalink after due inquiry, for any such action, suit, proceeding
or investigation whether or not threatened or contemplated.
Section 3.17 Insurance. Vitalink has insurance policies and fidelity
---------
bonds covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of Vitalink
and such Subsidiaries. All premiums due and payable under all such policies and
bonds have been paid, and Vitalink is otherwise in full compliance with the
terms and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance would not, singularly or in the
aggregate with all such other failures, have an Vitalink Material Adverse
Effect. The reserves established by Vitalink in respect of all matters as to
which Vitalink self-insures or carries retention and/or deductibles, including
for workers' medical coverage and workers' compensation, are adequate and
appropriate in light of Vitalink's experience since May 31, 1992 with respect
thereto and Vitalink is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate. Section 3.17 of the
Vitalink Disclosure Statement sets forth a true and complete list of all
insurance policies, including retention and/or deductible programs, and fidelity
bonds of Vitalink.
Section 3.18 Title to and Condition of Properties. Vitalink and its
------------------------------------
Subsidiaries have good title to all of the real property and personal property
reflected on Vitalink's May 31, 1996 audited consolidated balance sheet
contained in Vitalink's Form 10-K for the fiscal year ended May 31, 1996 filed
with the SEC (the "Vitalink Balance Sheet") except for property since sold or
otherwise disposed of in the ordinary course of business and consistent with
past practice. Set forth in Section 3.18(a) of the Vitalink Disclosure
Statement is a true and complete list of all real properties owned by Vitalink
and its Subsidiaries, all of which real properties are reflected on the Vitalink
Balance Sheet. No such real or personal property is subject to claims, liens or
other encumbrances of any kind or character, including, without limitation,
mortgages, pledges, liens, conditional sale agreements, charges, security
interests, easements, restrictive covenants,
<PAGE>
-19-
rights of way or options, except for (i) liens for taxes not yet delinquent or
which are being contested in good faith by appropriate proceedings and in
respect of which Vitalink or its appropriate Subsidiary has set aside on its
books adequate reserves in accordance with generally accepted accounting
principles; (ii) mechanics', carriers', workers', repairers', materialmen's and
other similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which is being contested in
good faith by appropriate proceedings and in respect of which Vitalink or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of Vitalink or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of Vitalink and its Subsidiaries or impair Vitalink's
ability to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (the encumbrances described in clauses (i)
through (iv) of this sentence, collectively, the "Vitalink Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to
Vitalink's knowledge, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably be
expected to have a material adverse effect on the value or use of such property
as currently used in the operation of the business of Vitalink or its
Subsidiaries. To the knowledge of Vitalink, (i) the real properties and the
improvements located thereon (including the roof and structural portions of each
building) are in good operating order and condition, subject to ordinary wear
and tear, (ii) there are no structural, mechanical or other defects of a
material nature in any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material respects
in good condition and working order, subject to ordinary wear and tear, and (iv)
the real properties are served by all utilities required or necessary for the
present use thereof. Vitalink has made available to GranCare true and correct
copies of all title insurance commitments, title insurance policies and surveys
in the possession of Vitalink or its Subsidiaries relating to its real
properties set forth in Section 3.18(a) of the Vitalink Disclosure Statement.
Section 3.19 Leases. There have been delivered or made available to
------
GranCare true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected to
be, at least $100,000
<PAGE>
-20-
per annum pursuant to which real or personal property is held under lease by
Vitalink or any of its Subsidiaries, and true and complete copies of each lease
pursuant to which Vitalink or any of its Subsidiaries leases real or personal
property to others. Section 3.19 of the Vitalink Disclosure Statement sets
forth a true and complete list of all such leases and such leases are the only
leases that are material to the business conducted by Vitalink and its
Subsidiaries. All of the leases so listed are valid and subsisting and in full
force and effect with respect to Vitalink and its Subsidiaries, as the case may
be, and, to Vitalink's knowledge, with respect to any other party thereto and
Vitalink or its Subsidiaries, as the case may be, have valid leasehold interests
in all properties leased thereunder free and clear of all liens created by,
through or under Vitalink or its Subsidiaries other than Vitalink Permitted
Encumbrances. The leased real properties are in good operating order and
condition, subject to ordinary wear and tear.
Section 3.20 Contracts and Commitments. Neither Vitalink nor any of
-------------------------
its Subsidiaries is a party to any existing contract, obligation or commitment
of any type in any of the following categories:
(a) contracts for the purchase by Vitalink or any of its Subsidiaries
of medicines, materials, supplies or equipment which are not cancellable
upon 30 days' or less notice and which either (i) have not been entered
into in the ordinary course of business and consistent with past practice
or (ii) provide for purchase prices substantially greater than those
presently prevailing for such materials, supplies or equipment, or (iii)
contracts obligating Vitalink or its Subsidiaries to make capital
expenditures in excess of $200,000;
(b) contracts under which Vitalink has, except by way of endorsement
of negotiable instruments for collection in the ordinary course of business
and consistent with past practice, become absolutely or contingently or
otherwise liable for (i) the performance of any other person, firm or
corporation under a contract, or (ii) the whole or any part of the
indebtedness or liabilities of any other person, firm or corporation;
(c) powers of attorney outstanding from Vitalink other than as issued
in the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
<PAGE>
-21-
(d) contracts under which any amount payable by Vitalink is dependent
upon, or calculated in accordance with, the revenues or profits of Vitalink
or any of its Subsidiaries;
(e) contracts with any director, officer or employee of Vitalink
other than in such person's capacity as a director, officer or employee of
Vitalink;
(f) contracts which limit or restrict where Vitalink or any of its
Subsidiaries may conduct its business or the type or line of business which
Vitalink or any of its Subsidiaries may engage in;
(g) contracts with any party for the loan of money or availability of
credit to or from Vitalink or any of its Subsidiaries (except credit
extended by Vitalink or any of its Subsidiaries to its customers in the
ordinary course of business and consistent with past practice); or
(h) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments listed in
Section 3.20 of the Vitalink Disclosure Statement have been delivered or made
available to GranCare. All such contracts are in full force and effect. None
of Vitalink or its Subsidiaries or, to the best of Vitalink's knowledge, any
other party is in breach of or default under any such contracts (and no facts
or circumstances exist which could reasonably support the assertion of any such
breach or default) except for breaches and defaults by parties other than
Vitalink and its Subsidiaries which would not, singly or in the aggregate with
all other such breaches, have an Vitalink Material Adverse Effect.
Section 3.21 Labor Matters. None of Vitalink or its Subsidiaries is
-------------
a party to any union contract or other collective bargaining agreement. Each of
Vitalink and its Subsidiaries is in compliance in all material respects with all
applicable laws respecting employment and employment practices, terms and
conditions of employment, safety, wages and hours, and neither Vitalink nor any
of its Subsidiaries is engaged in any unfair labor practice. There is no labor
strike, slowdown or stoppage pending (or, to the best knowledge of Vitalink, any
labor strike or stoppage threatened) against or affecting Vitalink or any of its
Subsidiaries. To the best of Vitalink's knowledge, no union organizing
activities with respect to any of its or its Subsidiaries' employees are
occurring or threatened.
<PAGE>
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Section 3.22 No Change of Control Puts. Neither the execution and
-------------------------
delivery by Vitalink of this Agreement nor the consummation of any of the
transactions contemplated hereby gives rise to any obligation of Vitalink or any
of its Subsidiaries to, or any right of any holder of any security of Vitalink
or any of its Subsidiaries to, require Vitalink to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
Section 3.23 Employment and Labor Contracts. Neither Vitalink nor
------------------------------
any of its Subsidiaries is a party to any employment, management services,
consultation or other contract or agreement with any past or present officer,
director or employee or, to the best of Vitalink's knowledge, any entity
affiliated with any past or present officer, director or employee, other than
the agreements executed by employees generally, the forms of which have been
provided to GranCare.
Section 3.24 Intellectual Property Rights. Vitalink or its
----------------------------
Subsidiaries own or have the right to use all Intellectual Property Rights (as
hereinafter defined) necessary to the conduct of their respective businesses.
Section 3.24 of the Vitalink Disclosure Statement contains a worldwide list of
all patents, trade names, registered and unregistered copyrights, trademarks
and service marks, mask works and applications for the foregoing owned by
Vitalink or its Subsidiaries. Vitalink and/or its Subsidiaries have clear and
unencumbered title to the Intellectual Property Rights set forth in such Section
3.24 and such title has not been challenged (pending or threatened) by others
except for the encumbrances listed therein. Such Section 3.24 also contains a
list of unpatented inventions used or planned for use by Vitalink or its
Subsidiaries. No rights or licenses to use Intellectual Property Rights have
been granted or acquired by Vitalink or its Subsidiaries. There have been no
claims or assertions made by others that Vitalink has infringed any Intellectual
Property Rights of others by the sale of products or any other activity in the
preceding six-year period and, to the knowledge of Vitalink, there has been no
such infringement by Vitalink or any of its Subsidiaries during this period.
Vitalink has no knowledge of any infringement of Intellectual Property Rights of
Vitalink or any of its Subsidiaries by others. All such patents, registered
trademarks, service marks and copyrights owned by Vitalink or its Subsidiaries
are in good standing, and are recorded on the public record in the name of
Vitalink or its Subsidiaries. True and complete copies of all material listed
in Section 3.24 of the Vitalink Disclosure Statement have been delivered or made
available to GranCare.
<PAGE>
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"Intellectual Property Rights" shall mean and include rights relating
to patents, trademarks, service marks, trade names, copyrights, mask works,
inventions, processes, trade secrets, know-how, confidentiality agreements,
consulting agreements, software and any documentation relating to the
manufacture, marketing and maintenance of products.
Section 3.25 Taxes. (i) Vitalink and its Subsidiaries have prepared
-----
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax (as hereinafter defined) returns and
reports (Tax returns and reports are hereinafter collectively referred to as
"Tax Returns") required to be filed by them on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Vitalink and/or its Subsidiaries (copies of which for the past three
fiscal years have been delivered or made available to GranCare); (ii) all Taxes
of Vitalink and its Subsidiaries have been paid in full to the proper
authorities or fully accrued for with respect to fiscal periods for which there
are publicly available financial statements and otherwise on the books of
Vitalink, other than such Taxes as are being contested in good faith by
appropriate proceedings and are adequately reserved for in accordance with
generally accepted accounting principles; (iii) all deficiencies asserted in
writing as a result of Tax examinations of federal, state and foreign income,
sales and franchise and all other Tax Returns filed by Vitalink and its
Subsidiaries have either been paid or adequately reserved for in accordance with
generally accepted accounting principles; (iv) to the best knowledge of
Vitalink, no unpaid deficiency has been asserted or assessed against Vitalink or
any of its Subsidiaries, and no examination of Vitalink or any of its
Subsidiaries is pending or threatened for any material amount of Tax by any
taxing authority (with respect to any such action, Section 3.25 of the Vitalink
Disclosure Statement sets forth the periods at issue and the category of Tax,
and the examining authority's and any corresponding revenue agents' reports
relating to the issue have been delivered or made available to GranCare); (v) no
extension of the period for assessment or collection of any Tax of Vitalink or
any of its Subsidiaries is currently in effect and no extension of time within
which to file any Tax Return of Vitalink or any of its Subsidiaries has been
requested, which Tax Return has not since been filed; (vi) no Tax liens have
been filed with respect to any Taxes of Vitalink or any of its Subsidiaries
except for property taxes which have accrued but with respect to which penalty
for nonpayment has not occurred; (vii) neither Vitalink nor any of its
Subsidiaries has agreed to make any adjustment by reason of a change in its
accounting methods that would affect the taxable income or deductions of
Vitalink or any of its Subsidiaries for any
<PAGE>
-24-
period ending after the Effective Time; (viii) Vitalink and its Subsidiaries
have made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which Vitalink or any Subsidiary will have any obligation or
liability on or after the Effective Time; (x) Vitalink and its Subsidiaries have
no foreign losses as defined in Section 904(f)(2) of the Internal Revenue Code
of 1986, as amended (the "Code"); (xi) to the best knowledge of Vitalink, there
are no transfer pricing agreements made by or on behalf of Vitalink or any of
its Subsidiaries with any taxation authority; (xii) no asset of Vitalink or any
of its Subsidiaries is held in an arrangement for which partnership Tax Returns
are being filed and neither Vitalink nor any of its Subsidiaries is a partner in
any partnership; (xiii) neither Vitalink nor any of its Subsidiaries owns any
interest in any "controlled foreign corporation" (within the meaning of Section
957 of the Code), "passive foreign investment company" (within the meaning of
Section 1296 of the Code) or other entity the income of which is required to be
included in the income of Vitalink or such Subsidiary; (xiv) neither Vitalink
nor any of its Subsidiaries has made an election under Section 341(f) of the
Code; and (xv) neither Vitalink nor any of its Subsidiaries is obligated to make
any payments that would constitute excess parachute payments within the meaning
of Section 280G of the Code.
"Tax" or "Taxes" shall mean all federal, state, local and foreign
taxes, duties, levies, charges and assessments of any nature, including social
security payments and deductibles relating to wages, salaries and benefits and
payments to subcontractors (to the extent required under applicable Tax law),
and also including all interest, penalties and additions imposed with respect to
such amounts.
Section 3.26 Employee Benefit Plans; ERISA. (a) There are no
-----------------------------
"employee pension benefit plans" as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), covering employees
(or former employees) employed in the United States, maintained or contributed
to by Vitalink or any of its Subsidiaries or any of their ERISA Affiliates (as
hereinafter defined), or to which Vitalink or any of its Subsidiaries or any of
their ERISA Affiliates contributes or is obligated to make payments thereunder
or otherwise may have any liability ("Vitalink Pension Benefit Plans"). For
purposes of this Agreement, "ERISA Affiliate" shall mean any person (as defined
in Section 3(9) of ERISA) that is a member of any group of persons described in
Section 414(b), (c), (m) or (o) of the Code which includes the referent person
or its Subsidiaries.
<PAGE>
-25-
(b) Vitalink has delivered or made available to GranCare true and
complete copies of all "welfare benefit plans" (as defined in Section 3(1) of
ERISA) covering employees (or former employees) employed in the United States,
maintained or contributed to by Vitalink or any of its Subsidiaries ("Vitalink
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of ERISA)
covering employees (or former employees) employed in the United States to which
Vitalink or any of its Subsidiaries or any of their ERISA Affiliates is required
to make contributions or otherwise may have any liability, and, to the extent
covering employees (or former employees) employed in the United States, all
stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by Vitalink or a Subsidiary of Vitalink.
(c) Vitalink and each of its Subsidiaries, and each of the Vitalink
Pension Benefit Plans and Vitalink Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect.
(d) All contributions to, and payments from, the Vitalink Pension
Benefit Plans which are required to have been made in accordance with the
Vitalink Pension Benefit Plans and, when applicable, Section 302 of ERISA or
Section 412 of the Code have been timely made except where the failure to make
such contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(e) The Vitalink Pension Benefit Plans intended to qualify under
Section 401 of the Code have been determined by the Internal Revenue Service
("IRS") to be so qualified and nothing has occurred with respect to the
operation of such Vitalink Pension Benefit Plans which would cause the loss of
such qualification or exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code. Such plans have been or will be amended
on a timely basis to comply with changes to the Code made by the Tax Reform Act
of 1986 and other applicable legislative, regulatory or administrative
requirements.
(f) There are (i) no investigations pending, to the best knowledge of
Vitalink, by any governmental entity involving the Vitalink Pension Benefit
Plans or Vitalink Welfare Plans, (ii) no termination proceedings involving the
Vitalink Pension Benefit Plans and (iii) no pending or, to the best of
Vitalink's knowledge,
<PAGE>
-26-
threatened claims (other than routine claims for benefits), suits or proceedings
against any Vitalink Pension Benefit Plan or Vitalink Welfare Plan, against the
assets of any of the trusts under any Vitalink Pension Benefit Plan or Vitalink
Welfare Plan or against any fiduciary of any Vitalink Pension Benefit or
Vitalink Welfare Plan with respect to the operation of such plan or asserting
any rights or claims to benefits under any Vitalink Pension Benefit Plan or
against the assets of any trust under such plan, except for those which would
not, singly or in the aggregate, give rise to any liability which would
reasonably be expected to have an Vitalink Material Adverse Effect, nor, to the
best of Vitalink's knowledge, are there any facts which would give rise to any
liability except for those which would not, singly or in the aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect in the event
of any such investigation, claim, suit or proceeding.
(g) None of Vitalink, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Vitalink Pension
Benefit Plans or Vitalink Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
Vitalink or any of its Subsidiaries under Section 4975 of the Code or Section
502(i) of ERISA, except any such event which would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(h) Neither the Vitalink Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect nor has there been any event with respect to any
Vitalink Pension Benefit Plan requiring disclosure under Section 4063(a) of
ERISA or any event with respect to any Vitalink Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have an
Vitalink Material Adverse Effect.
(i) Neither Vitalink nor any Subsidiary of Vitalink nor any ERISA
Affiliate has incurred any currently outstanding liability to the Pension
Benefit Guaranty Corporation (the "PBGC") or to a trustee appointed under
Section 4042(b) or (c) of ERISA other than for the payment of premiums, all of
which have been paid
<PAGE>
-27-
when due. No Vitalink Pension Benefit Plan has applied for, or received, a
waiver of the minimum funding standards imposed by Section 412 of the Code. The
information supplied to the actuary by Vitalink or any of its Subsidiaries for
use in preparing the most recent actuarial report for the Vitalink Pension
Benefit Plans is complete and accurate in all material respects.
(j) Neither Vitalink, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in the
United States.
(k) With respect to each of the Vitalink Pension Benefit Plans and
Vitalink Welfare Plans, true, correct and complete copies of the following
documents have been delivered or made available to GranCare: (i) the current
plans and related trust documents, including amendments thereto, (ii) any
current summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither Vitalink, any of its Subsidiaries, any organization to
which Vitalink is a successor or parent corporation, within the meaning of
Section 4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect.
(m) None of the Vitalink Welfare Plans maintained by Vitalink or any
of its Subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under the Consolidated Omnibus Budget Reconciliation Act of 1985, as
amended ("COBRA"), or except at the expense of the participant or the
participant's beneficiary. Vitalink and each of its Subsidiaries which maintain
a "group health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
<PAGE>
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(n) No liability under any Vitalink Pension Benefit Plan or Vitalink
Welfare Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which Vitalink or any of
its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation or
benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of Vitalink or any of its
Subsidiaries.
(p) Vitalink has disclosed to GranCare in Section 3.26 of the
Vitalink Disclosure Statement each of Vitalink's material Foreign Plans (as
hereinafter defined) to the extent the benefits provided thereunder are not
mandated by the laws of the applicable foreign jurisdiction. Vitalink and each
of its Subsidiaries and each of such Foreign Plans are in compliance with
applicable laws and all required contributions have been made to the Foreign
Plans, except where the failure to comply or make contributions would not,
singly or in the aggregate, reasonably be expected to have an Vitalink Material
Adverse Effect. For purposes of this Agreement, the term "Foreign Plan" shall
mean any plan, program, policy, arrangement or agreement maintained or
contributed to by, or entered into with, a person or any of its Subsidiaries
with respect to employees (or former employees) employed outside the United
States.
Section 3.27 Environmental Matters. (a) Except as would not, singly
---------------------
or in the aggregate with all other such non-compliances, have an Vitalink
Material Adverse Effect, Vitalink and its Subsidiaries are, and within the
period of all applicable statutes of limitation have been, in compliance with
all applicable Environmental Laws (as hereinafter defined), which compliance
includes, without limitation, the possession of all licenses, permits,
registrations and other governmental authorizations (collectively,
"Environmental Authorizations") required under applicable Environmental Laws,
and compliance with the terms and conditions thereof, and there are no
circumstances of which Vitalink is aware which may materially prevent or
interfere with compliance in the future. To Vitalink's knowledge, all
Environmental Authorizations currently held by Vitalink and its Subsidiaries
pursuant to Environmental Laws are identified in Section 3.27(a)(1) of the
Vitalink Disclosure Statement and represent all Environmental Authorizations
necessary for the conduct of the businesses of Vitalink and its Subsidiaries as
currently conducted. Neither Vitalink nor any of its Subsidiaries
<PAGE>
-29-
has been notified, or has any reasonable basis to believe, that any such
Environmental Authorizations will be modified, suspended or revoked or cannot be
renewed or otherwise maintained in the ordinary course of business. To
Vitalink's knowledge after due inquiry, the execution and delivery of this
Agreement and the consummation by Vitalink of the transactions contemplated
hereby will not affect the validity or require the transfer of any Environmental
Authorizations, and will not require any notification, registration, reporting,
filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices (as hereinafter defined) that,
singularly or in the aggregate, reasonably could be expected to have an Vitalink
Material Adverse Effect (i) pending or, to the best knowledge of Vitalink,
threatened against Vitalink or any of its Subsidiaries, (ii) to Vitalink's
knowledge pending or threatened against any person or entity whose liability for
such Environmental Notice may have been retained or assumed by or could
reasonably be imputed or attributed by law or contract to Vitalink or any of its
Subsidiaries, (iii) that to Vitalink's knowledge could subject Vitalink to any
material risk of liability, loss or damages, or (iv) that to Vitalink's
knowledge could reasonably be expected to require investigation, removal or
remedial or corrective action by Vitalink or any of its Subsidiaries. Since May
31, 1996, neither Vitalink nor any of its Subsidiaries has received any
Environmental Notice alleging that Vitalink or any of its Subsidiaries is
subject to liability under any Environmental Law or that Vitalink or any of its
Subsidiaries is not in full compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, notice or demand letter or request
for information or, to the best knowledge of Vitalink, investigation pending or
threatened under any Environmental Law (i) against Vitalink or any of its
Subsidiaries, or (ii) to the knowledge of Vitalink against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to Vitalink or any of its Subsidiaries, except with respect to
each of clause (i) and (ii) for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a GranCare Material Adverse
Effect.
(d) No property or facility presently or to the knowledge of Vitalink
formerly owned, operated or leased by Vitalink or any of its present
Subsidiaries, or to the knowledge of Vitalink any of its former Subsidiaries, or
any of their respective
<PAGE>
-30-
predecessors in interest, is listed or proposed for listing on the National
Priorities List or the Comprehensive Environmental Response, Compensation and
Liability Information System, both promulgated under the Comprehensive
Environmental Response, Compensation and Liability Act, as amended ("CERCLA"),
or on any comparable list established under any Environmental Law, nor has
Vitalink or any of its Subsidiaries received any written notification of
potential or actual liability or any request for information under CERCLA or any
comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any
Hazardous Materials (as hereinafter defined) generated, used, owned, stored or
controlled by Vitalink, or to Vitalink's knowledge any of its Subsidiaries or
any of their respective predecessors in interest, on, at or under any property
presently or formerly owned, leased or operated by Vitalink, or to Vitalink's
knowledge its Subsidiaries, or any predecessors in interest, and to Vitalink's
knowledge there are no Hazardous Materials located in, at, on or under, or in
the vicinity of, any such facility or property, or at any other location, that
(i) could reasonably be expected to subject Vitalink to a material risk of
liability, loss or damages, or result in the incurrence by Vitalink of costs
under Environmental Laws, (ii) could reasonably be expected to form the basis of
any Environmental Notice against or with respect to Vitalink or any of its
Subsidiaries, or against any person or entity whose liability for any
Environmental Notice may have been retained or assumed by or could be imputed or
attributed by law or contract to Vitalink or any of its Subsidiaries or (iii)
could reasonably be expected to require investigation, removal or remedial or
corrective action by Vitalink or any of its Subsidiaries, that in any case
singularly or in the aggregate, reasonably could be expected to have an Vitalink
Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
Vitalink's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other disposal
areas containing Hazardous Materials, located on, at or under property owned,
operated or leased by Vitalink, any of its Subsidiaries or any of their
respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
Vitalink or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned, operated or leased by Vitalink or any of its Subsidiaries.
<PAGE>
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(g) To Vitalink's knowledge no lien has been recorded under
Environmental Laws with respect to any properties, assets or facilities owned,
operated or leased by Vitalink or any of its Subsidiaries.
(h) In accordance with Section 5.05, Vitalink has given GranCare and
its authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
Vitalink or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by Vitalink or any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
For purposes of this Agreement:
(i) "Environment" shall mean any surface water, groundwater or
drinking water supply, land surface or subsurface strata or ambient air
and includes, without limitation, any indoor location.
(ii) "Environmental Laws" shall mean CERCLA, the Resource
Conservation and Recovery Act of 1976, as amended, and any other federal,
state, local or foreign statute, rule, regulation, order, judgment,
directive, decree or common law, as now or previously in effect and
regulating, relating to or imposing liability or standards of conduct
concerning air emissions, water discharges, noise emissions, the release
or threatened release or discharge of any Hazardous Material into the
environment, the generation, handling, treatment, storage, transport or
disposal of any Hazardous Material or otherwise concerning pollution or
the protection of the outdoor or indoor environment, or employee health
or safety. The term shall also include laws governing the transfer of
real property that require notification, registration, reporting, filing,
investigation or remediation prior to, concurrent with or following sale
or transfer of control of any property, facility or establishment in
connection with the actual or threatened presence or release of
Hazardous Materials at such property, facility or establishment.
(iii) "Environmental Notice" shall mean any written communication,
notice or claim by any Governmental Authority
<PAGE>
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or other third party alleging civil or criminal liability (including,
without limitation, liability for investigatory costs, cleanup costs,
governmental costs, compliance costs or harm, injuries or damages to any
person, property, natural resources, or any fines or penalties) or
alleging noncompliance arising out of, based upon, resulting from or
relating to any Environmental Law.
(iv) "Hazardous Material" shall mean any pollutant, contaminant or
hazardous, toxic or dangerous waste, substance, constituent or material
defined or regulated as such in, or for purposes of, any Environmental
Law, including, without limitation, any medical waste, any biochemical
waste, any asbestos, radon, any petroleum, oil (including crude oil or
any fraction thereof), any radioactive substance, any polychlorinated
biphenyls, any toxin, chemical, virus, infectious disease agent and any
other substance that can give rise to liability under any Environmental
Law.
Section 3.28 Directors, Officers and Compensation of Employees.
-------------------------------------------------
There is set forth in Section 3.28 of the Vitalink Disclosure Statement a true
and complete list showing (a) the names and addresses of all directors and
officers of Vitalink and its Subsidiaries and (b) the names of all salaried
persons whose aggregate compensation for purposes of federal income tax
reporting from Vitalink and its Subsidiaries in the fiscal year ended May 31,
1996 was, or in the fiscal year ending May 31, 1997 is expected to be, U.S.
$100,000 or more per year, together with a statement of the full amount expected
to be paid to such person for services in all capacities to be rendered in the
fiscal year ending May 31, 1997, and the basis thereof, separately including the
amounts paid or payable, or expected to be paid or payable during such fiscal
years, under bonus or incentive arrangements, if any.
Section 3.29 Banks. There is set forth in Section 3.29 of the
-----
Vitalink Disclosure Statement a true and complete list showing the account
numbers and name of each bank in which Vitalink or any of its Subsidiaries has
an account or safe deposit box and the names of all persons authorized to draw
thereon or to have access thereto.
Section 3.30 Disclosure. No representation or warranty by Vitalink
----------
and no statement or information relating to Vitalink or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Vitalink to
GranCare in connection herewith contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact
<PAGE>
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necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 3.31 Institutional Pharmacy Business. (a) Section 3.31 of
-------------------------------
the Vitalink Disclosure Statement lists each Pharmacy utilized by Vitalink in
connection with its pharmacy business and indicates (i) the location of each
such Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest. No other person or entity has any beneficial ownership or
interest in or to any such Pharmacy nor does any other person or entity have any
right or option to acquire any beneficial ownership or interest in or to any
such Pharmacy.
(b) Section 3.31 of the Vitalink Disclosure Statement lists all of
the customers to which Vitalink and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts. Vitalink has not been informed and has
no reason to believe that any Vitalink Pharmacy Contract will be terminated for
or without cause.
(c) Vitalink has not violated, and is not now in violation of, the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act, the
Civil Monetary Penalties Law of the Social Security Act, or any other federal or
state law, statute, rule or regulation relating to Vitalink and its
Subsidiaries.
(d) Vitalink is duly licensed to provide pharmacy services in all
states in which it does business, and is also a participant in the Medicare
program and the Medicaid programs of the states listed in Section 3.07 of the
Vitalink Disclosure Statement. Vitalink is in compliance with all laws, rules
and regulations affecting or in connection with the Pharmacies, Vitalink and
their licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) Vitalink has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To the
best of Vitalink's knowledge all such billings were for goods actually provided,
and at appropriate charges or costs, and Vitalink has appropriate documentation
to support such billing requests.
<PAGE>
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ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF GRANCARE
Except as set forth in the GranCare Disclosure Statement delivered by
GranCare to Vitalink at or prior to the execution of this Agreement (the
"GranCare Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), GranCare
represents and warrants to Vitalink as follows:
Section 4.01 Organization and Qualification. Each of GranCare and
------------------------------
its Pharmacy Subsidiaries (as defined in the Distribution Agreement) is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its incorporation and has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the GranCare SEC Reports (as hereinafter defined). Each of
GranCare and its Pharmacy Subsidiaries is duly qualified to transact business as
a foreign corporation and is in good standing in each jurisdiction in which the
conduct of its business or the ownership, leasing or operation of its property
requires such qualification, except for failures to be so qualified or in good
standing which would not, singly or in the aggregate with all such other
failures, have a GranCare Material Adverse Effect. "GranCare Material Adverse
Effect" means (i) with respect to any event, occurrence, failure of event or
occurrence, change, effect, state of affairs, breach, default, violation, fine,
penalty or failure to comply (each, a "circumstance"), individually or taken
together with all other circumstances contemplated by or in connection with any
or all of the representations and warranties made in this Agreement, (a) a
material adverse effect on the business, properties, assets, condition
(financial or otherwise), results of operations or prospects of the
Institutional Pharmacy Business, taken as a whole, or (b) an impairment on the
ability of SNFCo to conduct as a going concern the Skilled Nursing Business (as
defined in the Distribution Agreement) subsequent to the Distribution or (ii)
circumstances resulting in the impairment of GranCare's ability to perform its
obligations under this Agreement or the Distribution Agreement and to consummate
the transactions contemplated hereby and thereby. Neither GranCare nor any of
its Pharmacy Subsidiaries is in violation of any of the provisions of its
articles of incorporation (or other applicable charter document) or by-laws.
True and complete copies of the Restated Articles of Incorporation and By-Laws,
as currently in effect, of GranCare and of each Pharmacy Subsidiary of GranCare
have been previously delivered or made available to Vitalink. No amendments to
the articles of incorporation (or other similar charter doc-
<PAGE>
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uments) and By-Laws of GranCare have been authorized since December 31, 1995.
Section 4.02 Authority Relative to This Agreement. GranCare has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and the
Distribution Agreement and, upon obtaining the approval of a majority of the
outstanding shares of GranCare Common Stock at the Special Meeting or or
adjournment thereof, as may be required by the California Act to consummate the
Merger, the Distribution and complete the other transactions contemplated
hereby. The execution and delivery of this Agreement and the Distribution
Agreement and the consummation of the Merger, the Distribution and the other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of GranCare and no other corporate proceedings on the part of
GranCare are necessary to authorize this Agreement and the Distribution
Agreement or to consummate the Merger, the Distribution and the other
transactions contemplated hereby (other than, with respect to the Merger and the
Distribution, the approval of a majority of the outstanding shares of GranCare
Common Stock at the Special Meeting or any adjournment thereof as required by
the California Act and, with respect to the Distribution, the declaration by the
GranCare Board of Directors of the Distribution). This Agreement and the
Distribution Agreement have been duly and validly executed and delivered by
GranCare and, assuming, in the case of this Agreement and the Distribution
Agreement, the due authorization, execution and delivery of each such agreement
by Vitalink, constitute valid and binding agreements of GranCare, enforceable
against GranCare in accordance with their terms, except to the extent that their
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws affecting the enforcement of creditors'
rights generally or by general equitable principles.
Section 4.03 Consents, No Conflicts. (a) Except for the filings of
----------------------
the Certificate of Merger, the Certified Agreement and the Proxy Statement, the
filing and effectiveness of the Registration Statement and the SNFCo
Registration Document (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the HSR Act, and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by GranCare of the Merger, the
Distribution or the other transactions contemplated hereby or by the
Distribution Agreement except such as are set forth in Section 4.03(a) of the
GranCare Disclosure Statement, which will have been
<PAGE>
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obtained or made prior to the Effective Time and will then be in full force and
effect or which would not, singly or in the aggregate with all other such
consents which have not been obtained, have a GranCare Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
Distribution Agreement, the consummation of the Distribution, the Merger and the
other transactions contemplated hereby (or thereby) and compliance by GranCare
with any of the provisions hereof (or thereof) do not and will not (i) subject
to obtaining the approval of a majority of the outstanding shares of GranCare
Common Stock at the Special Meeting or any adjournment thereof as required by
the California Act, conflict with or result in any breach or violation of any
provision of the Restated Articles of Incorporation (or other comparable charter
documents) or By-Laws of GranCare or any of its Pharmacy Subsidiaries, (ii)
result in (1) a breach or violation of, a default under or an event triggering
any payment or other obligation pursuant to any of GranCare's existing pension
plans, welfare plans, multiemployer plans, employee benefit plans, benefit
arrangements or similar plans, arrangements or policies, including bonus,
incentive, deferred compensation, stock purchase, stock option, stock
appreciation right, health or group insurance, severance pay, retirement or
other benefit plans, and all similar arrangements or policies of GranCare and
its Subsidiaries (the "GranCare Compensation and Benefit Plans") or any grant or
award made under any of the foregoing in any case for which GranCare or any of
the Pharmacy Subsidiaries would be responsible after the Distribution, (2) a
breach, violation or event triggering a right of termination of, a default
under, the acceleration of any obligation, or the creation of a lien, pledge,
security interest or other encumbrance on assets (with or without the giving of
notice or the lapse of time or both) pursuant to any provision of any agreement,
lease of real or personal property, marketing agreement, contract, note,
mortgage, indenture, arrangement or other obligation of GranCare or any of its
Pharmacy Subsidiaries ("GranCare Contracts") or any law, rule, ordinance or
regulation or judgment, decree, order or award to which GranCare or any of its
Pharmacy Subsidiaries is subject or any governmental or non-governmental
authorization, consent, approval, registration, franchise, license or permit
under which GranCare or any of its Pharmacy Subsidiaries conducts the
Institutional Pharmacy Business, or (3) any other change in the rights or
obligations of any party under any of the GranCare Contracts.
Section 4.04 Board Recommendation. The Board of Directors of
--------------------
GranCare has, by a unanimous vote at a meeting of such Board duly held on
September 3, 1996, approved and adopted this
<PAGE>
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Agreement, the Distribution Agreement, the Merger and the other transactions
contemplated hereby or by the Distribution Agreement, determined that the
consideration to be received by the holders of shares of GranCare Common Stock
pursuant to the Merger is fair to the holders of such shares and recommended
that the holders of such shares approve and adopt this Agreement, the
Distribution Agreement, the Merger and the other transactions contemplated
hereby.
Section 4.05 State Antitakeover Statutes. GranCare has granted all
---------------------------
approvals and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of any
state antitakeover statute or regulation such that none of the provisions of
such "business combination," "moratorium," "control share," or other state
antitakeover statute or regulation (x) prohibits or restricts GranCare's ability
to perform its obligations under this Agreement or its ability to consummate the
Merger and the other transactions contemplated hereby, (y) would have the effect
of invalidating or voiding this Agreement or any provision hereof, or (z) would
subject Vitalink to any material impediment or condition in connection with the
exercise of any of their respective rights under this Agreement.
Section 4.06 No Existing Violation, Default, Etc. None of GranCare
-----------------------------------
or any of its Subsidiaries is in violation (except for any violations which
would not, singly or in the aggregate with all such other violations, have a
GranCare Material Adverse Effect) of (A) any applicable law, ordinance,
administrative or governmental rule or regulation or (B) any order, decree or
judgment of any court or governmental agency or body having jurisdiction over
GranCare or any of its Subsidiaries. No event of default or event that, but for
the giving of notice or the lapse of time or both, would constitute an event of
default exists under any GranCare Contract or any lease, permit, license or
other agreement or instrument to which GranCare or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties, assets
or operations of GranCare or any of its Subsidiaries is subject (except for any
events of default or other defaults which would not, singly or in the aggregate
with all such other defaults, have a GranCare Material Adverse Effect).
Section 4.07 Affiliates. GranCare has delivered to Vitalink a letter
----------
identifying all persons who, as of the date hereof, may be deemed to be
"affiliates" of GranCare for purposes of Rule 145 under the Securities Act
("Affiliates") and the written agreement of each such person, substantially in
the form of Exhibit C hereto.
<PAGE>
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Section 4.08 Licenses and Permits. Each of GranCare and its
--------------------
Subsidiaries has such certificates, permits, licenses, franchises, consents,
approvals, orders, authorizations and clearances from appropriate governmental
agencies and bodies ("GranCare Licenses") as are necessary to own, lease or
operate its properties and to conduct its business in the manner described in
the GranCare SEC Reports and as presently conducted and all such GranCare
Licenses are valid and in full force and effect, other than any failure to have
any such GranCare License or any failure of any such GranCare License to be
valid and in full force and effect as would not, singly or in the aggregate with
all such other failures, have a GranCare Material Adverse Effect. Each of
GranCare and its Subsidiaries is, and within the period of all applicable
statutes of limitation has been, in compliance with its obligations under such
GranCare Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such GranCare Licenses,
other than any such failure to be in compliance with such obligations or any
such revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have a GranCare Material
Adverse Effect. GranCare has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of GranCare or any of its
Pharmacy Subsidiaries to renew any GranCare License. Neither the execution and
delivery by GranCare of this Agreement or the Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated herein will result in any revocation or termination of any GranCare
License or any requirement that the Surviving Corporation be licensed in respect
of any of the GranCare Licenses. Set forth in Section 4.08 of the GranCare
Disclosure Statement is a true and complete list of all GranCare Licenses which
are necessary for the conduct of the Institutional Pharmacy Business as
presently conducted by GranCare and its Subsidiaries and which are, or will
subsequent to the Reorganization be, held by GranCare and the Pharmacy
Subsidiaries.
Section 4.09 Registration Statement; Proxy Statement; SNFCo
----------------------------------------------
Registration Documents. (a) None of the information supplied by GranCare for
- ----------------------
inclusion or incorporation by reference in (i) the Registration Statement, (ii)
the proxy statement/prospectus to be sent to the shareholders of GranCare in
connection with the Special Meeting, including all amendments and supplements
thereto (the "Proxy Statement"), or (iii) the Vitalink Information Statement,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at (i) the time the Registration Statement becomes
effective and (ii) the Effective Time and, in the case of the Proxy Statement or
the Vitalink Information Statement, on the date the Proxy Statement or the
<PAGE>
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Vitalink Information Statement is first mailed to stockholders, at the time of
the Special Meeting and at the Effective Time, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein not misleading. If at any
time prior to the Effective Time any event with respect to GranCare or any of
its Subsidiaries shall occur which is required to be described in the
Registration Statement, the Proxy Statement or the Vitalink Information
Statement, such event shall be so described, and an amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of GranCare and Vitalink. The Registration Statement and Proxy
Statement will (with respect to GranCare and its Subsidiaries) comply as to form
in all material respects with the applicable provisions of the Exchange Act.
(b) The Form S-1 or 10 or other appropriate filing to be made to
register the SNFCo Common Stock under the Securities Act or the Exchange Act, as
appropriate, as such filing may be, amended or supplemented (the "SNFCo
Registration Document"), will not, at the date the SNFCo Registration Document
(or any amendment or supplement thereto), at the time that the SNFCo
Registration Document becomes effective, at the time of the Special Meeting and
at the Effective Time, contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary in order
to make the statements made therein not misleading. The SNFCo Registration
Document will comply as to form in all material respects with the applicable
provisions of the Securities Act or the Exchange Act, as the case may be.
Section 4.10 Finders or Brokers. Except for PaineWebber
------------------
Incorporated, neither GranCare nor any Subsidiary of GranCare has employed any
investment banker, broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to a fee or any
commission the receipt of which is conditioned upon consummation of the Merger
or the Distribution.
Section 4.11 SEC Filings. (a) GranCare has filed with the SEC all
-----------
required forms, reports and documents required to be filed by it with the SEC
since December 31, 1992 (collectively, the "GranCare SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be. As
of their respective dates the GranCare SEC Reports (including documents
incorporated by reference therein) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the
<PAGE>
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statements therein, in light of the circumstances under which they were made,
not misleading.
(b) GranCare will deliver to Vitalink as soon as they become
available true and complete copies of any report or statement mailed by GranCare
to its securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time. As of their
respective dates, such reports and statements (excluding any information therein
provided by Vitalink, as to which GranCare makes no representation) will not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of GranCare and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of GranCare and its Subsidiaries as of the dates
thereof and the consolidated results of operations and consolidated cash flow
for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they may
not include footnotes or may be condensed or summary statements).
Section 4.12 Financial Statements. The audited consolidated
--------------------
financial statements and unaudited consolidated interim financial statements of
GranCare and its Subsidiaries included or incorporated by reference in the
GranCare SEC Reports and the unaudited Institutional Pharmacy Business Financial
Statements as set forth in Section 4.12 of the GranCare Disclosure Schedule have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis during the periods involved, and fairly presented
the consolidated financial position of GranCare and its Subsidiaries and the
Institutional Pharmacy Business, respectively, as of the dates thereof and the
consolidated results of operations and consolidated cash flows for the periods
then ended (subject, in the case of any unaudited interim financial statements,
to normal year-end adjustments and to the extent they may not include footnotes
or may be condensed or summary statements) and such audited financial statements
have been certified as such (without exception) by GranCare's independent
accountants.
<PAGE>
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Section 4.13 Absence of Undisclosed Liabilities. Neither GranCare
----------------------------------
nor its Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the GranCare Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with past
practice since December 31, 1995 that would not, singly or in the aggregate, be
reasonably expected to have a GranCare Material Adverse Effect.
Section 4.14 Absence of Changes or Events. (a) Since December 31,
----------------------------
1995 (i) GranCare and its Subsidiaries have conducted their business in the
ordinary course and have not incurred any material liability or obligation
(indirect, direct or contingent) or entered into any material oral or written
agreement or other transaction that is not in the ordinary course of business
(other than the Distribution Agreement and this Agreement) or that could
reasonably be expected to result in any GranCare Material Adverse Effect; (ii)
neither GranCare nor its Pharmacy Subsidiaries have sustained any material loss
or interference with their business or properties from fire, flood, windstorm,
accident, strike or other calamity (whether or not covered by insurance); (iii)
there has been no material change in the indebtedness of GranCare and its
Pharmacy Subsidiaries, no change in the authorized capital stock of GranCare and
no dividend or distribution of any kind declared, paid or made by GranCare on
any class of its capital stock other than the Distribution; (iv) there has been
no event or condition which has caused a GranCare Material Adverse Effect, nor
any development, occurrence or state of facts or circumstances that could,
singly or in the aggregate, reasonably be expected to result in a GranCare
Material Adverse Effect; (v) there has been no amendment, modification or
supplement to any material term of any GranCare Contract to which a Pharmacy
Subsidiary is a party required to be identified in Section 4.21 of the GranCare
Disclosure Statement or any equity security; and (vi) there has been no material
change by GranCare in its accounting principles, practices or methods.
(b) Since December 31, 1995, other than in the ordinary course of
business consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
GranCare, to its officers or key employees, or any amendment of any of the
GranCare Compensation and Benefit Plans.
Section 4.15 Capitalization. (a) The authorized capital stock of
--------------
GranCare consists of 50,000,000 shares of GranCare
<PAGE>
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Common Stock and 2,000,000 shares of Preferred Stock (the "GranCare Preferred
Stock"), of which (i) 390,000 shares have been authorized as Series A
Convertible Preferred, (ii) 175,000 shares have been authorized as Series B
Mandatorily Redeemable Preferred Stock, (iii) 665,000 shares have been
authorized as Series C Convertible Preferred Stock and (iv) 4,500 shares have
been authorized as Series D Exchangeable Preferred Stock. As of August 26,
1996, there are 23,370,693 shares of GranCare Common Stock (including shares in
respect of Evergreen Healthcare, Inc. common stock and National Heritage, Inc.
common stock for which certificates have not been tendered for exchange), no
shares of GranCare Preferred Stock outstanding and 200,100 shares of GranCare
Common Stock owned by a wholly-owned subsidiary of GranCare; and except for
shares which were reserved for issuance and which may have been issued pursuant
to the following sentence there have been no issuances of capital stock of
GranCare since August 26, 1996. As of August 26, 1996, 2,355,250 shares of
GranCare Common Stock were reserved for issuance upon the exercise of
outstanding options (the "GranCare Options") granted under the stock option
plans of GranCare (the "GranCare Option Plans"), 2,210,351 shares were reserved
for issuance upon conversion of GranCare's 6-1/2% Convertible Subordinated
Debentures due 2003 (the "Convertible Debentures"), 2,500 shares were committed
to be issued to employees of GranCare and its subsidiaries in recognition of 25
years of service, 304,803 shares were reserved for issuance upon the exercise of
GranCare's Series D, E and F warrants and no other shares of GranCare Common
Stock are reserved for any purpose. Except for the foregoing, there are not any
existing options, warrants, calls, subscriptions, or other rights or other
agreements or commitments obligating GranCare to issue, transfer or sell any
shares of capital stock of GranCare or any of its Subsidiaries or any other
securities convertible into or evidencing the right to subscribe for any such
shares. There are no outstanding stock appreciation rights with respect to the
capital stock of GranCare or any of its Subsidiaries. All issued and
outstanding shares of GranCare Common Stock are duly authorized and validly
issued, fully paid and non-assessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, GranCare subject to) any preemptive or similar rights created by
statute, the Restated Articles of Incorporation or By-Laws of GranCare or any
agreement to which GranCare is a party or bound.
(b) There are no obligations, contingent or otherwise, of GranCare to
(i) repurchase, redeem or otherwise acquire any shares of GranCare Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise except for transactions described in Exhibit A
to the
<PAGE>
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Distribution Agreement), or provide any guarantee with respect to the
obligations of, any other person. There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of GranCare. There are no
voting trusts, proxies or other agreements or understandings to which GranCare
is a party or by which GranCare is bound with respect to the voting of any
shares of capital stock of GranCare.
(c) GranCare has delivered or made available to Vitalink complete and
correct copies of each of the GranCare Option Plans, including all amendments
thereto. Section 4.15(c) of the GranCare Disclosure Statement sets forth a
complete and correct list of all outstanding options setting forth (i) the
exercise price of each outstanding GranCare Option, (ii) the number of GranCare
Options, (iii) the date of grant of each such GranCare Option. Section 4.15(c)
of the GranCare Disclosure Statement sets forth a complete and correct list of
all restricted stock awards including the recipients and the number of shares of
GranCare Common Stock received or to be received by each.
Section 4.16 Capital Stock of Subsidiaries. The only direct or
-----------------------------
indirect Subsidiaries of GranCare are those listed in Section 4.16 of the
GranCare Disclosure Statement, which Section 4.16 separately sets forth the
Pharmacy Subsidiaries. GranCare is directly or indirectly the record (except
for directors' qualifying shares as reflected in such Section 4.16) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Pharmacy Subsidiaries, there
are no proxies with respect to such shares, and there are not any existing
options, warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating GranCare or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares. All
of such shares beneficially owned by GranCare are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by GranCare free and clear of any claim, lien or
encumbrance of any kind with respect thereto. GranCare does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
Section 4.17 Litigation. There are no pending actions, suits,
----------
proceedings or, to the best knowledge of GranCare after due inquiry,
investigations by, against or affecting GranCare, any of its Pharmacy
Subsidiaries or any of their properties, assets or
<PAGE>
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operations, or with respect to which GranCare or any of its Pharmacy
Subsidiaries is responsible by way of indemnity or otherwise. No pending or, to
the knowledge of GranCare, threatened actions, suits, proceedings or
investigations by, against or affecting GranCare, any of its Subsidiaries or any
of their properties, assets or operations, or with respect to which they are
responsible by way of indemnity or otherwise, whether or not disclosed in such
GranCare SEC Reports, would, singly or in the aggregate with all such other
actions, suits, investigations or proceedings, reasonably be expected to have a
GranCare Material Adverse Effect; and, to the best knowledge of GranCare after
due inquiry, no actions, suits, proceedings or investigations which would
reasonably be expected to have a GranCare Material Adverse Effect are threatened
or contemplated and there is no reasonable basis, to the best knowledge of
GranCare after due inquiry, for any such action, suit, proceeding or
investigation, whether or not threatened or contemplated.
Section 4.18 Insurance. GranCare has insurance policies and fidelity
---------
bonds covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of GranCare
and such Subsidiaries. All premiums due and payable under all such policies and
bonds have been paid, and GranCare is otherwise in full compliance with the
terms and conditions of all such policies and bonds, except where the failure to
have made payment or to be in full compliance would not, singly or in the
aggregate with all such other failures, have a GranCare Material Adverse Effect.
The reserves established by GranCare in respect of all matters as to which
GranCare self-insures or carries retentions and/or deductibles, including for
workers' medical coverage and workers' compensation, are adequate and
appropriate in light of GranCare's experience since December 31, 1992 with
respect thereto and GranCare is not aware, after due inquiry, of any facts or
circumstances existing as of the date hereof that could reasonably be expected
to cause such reserves to be inadequate or inappropriate. Section 4.18 of the
GranCare Disclosure Statement sets forth a true and complete list of all
insurance policies including retention and/or deductible programs, and fidelity
bonds of GranCare.
Section 4.19 Title to and Condition of Properties. GranCare and its
------------------------------------
Pharmacy Subsidiaries have good title to all of the real property and personal
property which is reflected on GranCare's December 31, 1995 audited consolidated
balance sheet contained in GranCare's Form 10-K for the fiscal year ended
December 31, 1995 filed with the SEC (the "GranCare Balance Sheet")
<PAGE>
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except for property since sold or otherwise disposed of in the ordinary course
of business and consistent with past practice. Set forth in Section 4.19(a) of
the GranCare Disclosure Statement is a true and complete list of all real
properties owned by GranCare and its Pharmacy Subsidiaries and used in
connection with the Institutional Pharmacy Business, all of which real
properties are reflected on the GranCare Balance Sheet. No such real or
personal property is subject to claims, liens or other encumbrances of any kind
or character, including, without limitation, mortgages, pledges, liens,
conditional sale agreements, charges, security interests, easements, restrictive
covenants, rights of way or options, except for (i) liens for taxes not yet
delinquent or which are being contested in good faith by appropriate proceedings
and in respect of which GranCare or its appropriate Subsidiary has set aside on
its books adequate reserves in accordance with generally accepted accounting
principles; (ii) mechanics', carriers', workers', repairers', materialmen's and
other similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which are being contested in
good faith by appropriate proceedings and in respect of which GranCare or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of GranCare or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of GranCare and its Pharmacy Subsidiaries or impair
GranCare's ability to perform its obligations under this Agreement and to
consummate the transactions contemplated hereby (the encumbrances described in
clauses (i) through (iv) of this sentence, collectively, the "GranCare Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to the
knowledge of GranCare, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably be
expected to have a material adverse effect on the value or use of such property
as currently used in the operation of the pharmacy business of GranCare or its
Subsidiaries. To the knowledge of GranCare, (i) the real properties and the
improvements located thereon (including the roof and structural portions of each
building) are in good operating order and condition, subject to ordinary wear
and tear, (ii) there are no structural, mechanical or other defects of a
material nature in any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material respects
in good condition and working order, subject to ordinary wear and tear, and (iv)
the real properties are served
<PAGE>
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by all utilities required or necessary for the present use thereof. GranCare
has made available to Vitalink true and correct copies of all title insurance
commitments, title insurance policies and surveys in the possession of GranCare
or its Subsidiaries relating to the real properties set forth in Section 4.19(a)
of the GranCare Disclosure Statement.
Section 4.20 Leases. There have been delivered or made available to
------
Vitalink true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected to
be, at least $100,000 per annum pursuant to which real or personal property is
held under lease by GranCare (other than those properties held by GranCare and
utilized solely with respect to the Skilled Nursing Business) or any of its
Pharmacy Subsidiaries, and true and complete copies of each lease pursuant to
which GranCare or any of its Pharmacy Subsidiaries leases real or personal
property to others for use in a pharmacy related business. Section 4.20 of the
GranCare Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the current
operations of the Institutional Pharmacy Business. All of the leases so listed
are valid and subsisting and in full force and effect with respect to GranCare
and the Pharmacy Subsidiaries, as the case may be, and, to GranCare's knowledge,
with respect to any other party thereto and GranCare or its Pharmacy
Subsidiaries, as the case may be, have valid leasehold interests in all
properties leased thereunder free and clear of all liens created by, through or
under GranCare or its Pharmacy Subsidiaries other than GranCare Permitted
Encumbrances. The leased real properties are in good operating order and
condition, subject to ordinary wear and tear.
Section 4.21 Contracts and Commitments. Neither GranCare nor the
-------------------------
Pharmacy Subsidiaries are a party to any existing contract, obligation or
commitment of any type in any of the following categories:
(a) contracts for the purchase by GranCare or any of its Pharmacy
Subsidiaries of medicine, materials, supplies or equipment which are not
cancellable upon 30 days' or less notice and which either (i) have not
been entered into in the ordinary course of business and consistent with
past practice or (ii) provide for purchase prices substantially greater
than those presently prevailing for such materials, supplies or
equipment, or (iii) contracts obligating GranCare or any of its Pharmacy
Subsidiaries to make capital expenditures in excess of $200,000;
<PAGE>
-47-
(b) contracts under which GranCare or any Pharmacy Subsidiary has,
except by way of endorsement of negotiable instruments for collection in
the ordinary course of business and consistent with past practice, become
absolutely or contingently or otherwise liable for (i) the performance of
any other person, firm or corporation under a contract, or (ii) the whole
or any part of the indebtedness or liabilities of any other person, firm
or corporation, except in either case for any such contracts for which
GranCare and its Pharmacy Subsidiaries would not be responsible after the
Distribution;
(c) powers of attorney outstanding from GranCare other than as issued
in the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
(d) contracts under which any amount payable by GranCare is dependent
upon, or calculated in accordance with, the revenues or profits of
GranCare, any of its Subsidiaries or SNFCo;
(e) contracts with any director, officer or employee of GranCare
other than in such person's capacity as a director, officer or employee
of GranCare;
(f) contracts which limit or restrict where GranCare or any of its
Pharmacy Subsidiaries may conduct its or their business or the type or
line of business which GranCare or any of its Subsidiaries may engage in;
(g) other than attached as exhibits to the Distribution Agreement,
any contracts, obligations or commitments which will exist following the
Distribution between GranCare or the Pharmacy Subsidiaries on the one
hand, and the Non-Institutional Pharmacy Business on the other;
(h) contracts with any party for the loan of money or availability of
credit to or from GranCare or any of its Pharmacy Subsidiaries (except
credit extended by GranCare or any of its Pharmacy Subsidiaries to its or
their customers in the ordinary course of business and consistent with
past practice); or
(i) any hedging, option, derivative or other similar transaction.
<PAGE>
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True and complete copies of all contracts, obligations and commitments listed in
Section 4.21 of the GranCare Disclosure Statement have been delivered or made
available to Vitalink. All such contracts are in full force and effect. None
of GranCare or its Pharmacy Subsidiaries or, to the best of GranCare's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than GranCare and its Pharmacy Subsidiaries which would not,
singly or in the aggregate with all other such breaches, have a GranCare
Material Adverse Effect.
Section 4.22 Labor Matters. None of GranCare or any of its Pharmacy
-------------
Subsidiaries is a party to any union contract or other collective bargaining
agreement, true and complete copies of which contracts have been delivered to
Vitalink. Each of GranCare and its Pharmacy Subsidiaries is in compliance in
all material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, safety, wages and
hours, and neither GranCare nor any of its Pharmacy Subsidiaries is engaged in
any unfair labor practice. There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of GranCare, any labor strike or stoppage
threatened) against or affecting GranCare or any of its Pharmacy Subsidiaries.
To the best of GranCare's knowledge, no union organizing activities with respect
to any of its or its Pharmacy Subsidiaries' employees are occurring or
threatened.
Section 4.23 No Change of Control Puts. Neither the execution and
-------------------------
delivery by GranCare of this Agreement or the Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated hereby gives rise to any obligation of GranCare or any of its
Subsidiaries to, or any right of any holder of any security of GranCare or any
of its Subsidiaries to, require GranCare to purchase, offer to purchase, redeem
or otherwise prepay or repay any such security, or deposit any funds to effect
the same.
Section 4.24 Employment and Labor Contracts. Neither GranCare nor
------------------------------
any of its Pharmacy Subsidiaries is a party to any employment, management
services, consultation or other contract or agreement (except for any such
contracts or agreements for which GranCare would not be responsible after the
Distribution) with any past or present officer, director or employee or, to the
best of GranCare's knowledge, any entity affiliated with any past or present
officer, director or employee, in each case true and complete copies of which
contracts have been delivered to Vitalink,
<PAGE>
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and other than the agreements executed by employees generally, the forms of
which have been provided to Vitalink.
Section 4.25 Intellectual Property Rights. GranCare or its Pharmacy
----------------------------
Subsidiaries own or have the right to use all Intellectual Property Rights
necessary to the conduct of their respective businesses. Section 4.25 of the
GranCare Disclosure Statement contains a worldwide list of all patents, trade
names, registered and unregistered copyrights, trademarks and service marks,
mask works and applications for the foregoing owned by GranCare or its Pharmacy
Subsidiaries. GranCare and/or its Pharmacy Subsidiaries have clear and
unencumbered title to the Intellectual Property Rights set forth in such Section
4.25 and such title has not been challenged (pending or threatened) by others
except for the encumbrances listed therein. Such Section 4.25 also contains a
list of unpatented inventions used or planned for use by GranCare or its
Pharmacy Subsidiaries. No rights or licenses to use Intellectual Property
Rights have been granted or acquired by GranCare or its Pharmacy Subsidiaries.
There have been no claims or assertions made by others that GranCare has
infringed any Intellectual Property Rights of others by the sale of products or
any other activity in the preceding six year period and, to the knowledge of
GranCare, there has been no such infringement by GranCare or any of its Pharmacy
Subsidiaries during this period. GranCare has no knowledge of any infringement
of Intellectual Property Rights of GranCare or any of its Pharmacy Subsidiaries
by others. All such patents, registered trademarks, service marks, and
copyrights owned by GranCare or its Pharmacy Subsidiaries are in good standing,
and are recorded on the public record in the name of GranCare or its Pharmacy
Subsidiaries. True and complete copies of all material listed in Section 4.25
of the GranCare Disclosure Statement have been delivered or made available to
Vitalink.
Section 4.26 Taxes. (i) GranCare and its Subsidiaries have prepared
-----
and timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax Returns required to be filed by them on
or before the Effective Time, taking into account any extension of time to file
granted to or obtained on behalf of GranCare and/or its Subsidiaries (copies of
which for the past three fiscal years have been delivered or made available to
Vitalink); (ii) all Taxes of GranCare and its Subsidiaries have been paid in
full to the proper authorities or fully accrued for with respect to fiscal
periods for which there are publicly available financial statements and
otherwise on the books of GranCare, other than such Taxes as are being contested
in good faith by appropriate proceedings and are adequately reserved for in
accordance with generally accepted accounting principles; (iii) all deficiencies
asserted in writing
<PAGE>
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as a result of Tax examinations of federal, state and foreign income, sales and
franchise and all other Tax Returns filed by GranCare and its Subsidiaries have
either been paid or adequately reserved for in accordance with generally
accepted accounting principles; (iv) to the best knowledge of GranCare, no
unpaid deficiency has been asserted or assessed against GranCare or any of its
Subsidiaries, and no examination of GranCare or any of its Subsidiaries is
pending or threatened for any material amount of Tax by any taxing authority
(with respect to any such action, Section 4.26 of the GranCare Disclosure
Statement sets forth the periods at issue and the category of Tax, and the
examining authority's and any corresponding revenue agents' reports relating to
the issue have been delivered or made available to Vitalink); (v) no extension
of the period for assessment or collection of any Tax of GranCare or any of its
Subsidiaries is currently in effect and no extension of time within which to
file any Tax Return of GranCare or any of its Subsidiaries has been requested,
which Tax Return has not since been filed; (vi) no Tax liens have been filed
with respect to any Taxes of GranCare or any of its Subsidiaries except for
property taxes which have accrued but with respect to which penalty for non-
payment has not occurred; (vii) neither GranCare nor any of its Subsidiaries has
agreed to make any adjustment by reason of a change in their accounting methods
that would affect the taxable income or deductions of GranCare or any of its
Subsidiaries for any period ending after the Effective Time; (viii) GranCare and
its Subsidiaries have made timely payments of the Taxes required to be deducted
and withheld from the wages paid to their employees; (ix) there are no Tax
sharing agreements or arrangements under which GranCare or any Subsidiary will
have any obligation or liability on or after the Effective Time; (x) GranCare
and its Subsidiaries have no foreign losses as defined in Section 904(f)(2) of
the Code; (xi) to the best knowledge of GranCare, there are no transfer pricing
agreements made by or on behalf of GranCare or any of its Subsidiaries with any
taxation authority; (xii) no assets of GranCare or any of its Subsidiaries is
held in an arrangement for which partnership Tax Returns are being filed and
neither GranCare nor any of its Subsidiaries is a partner in any partnership;
(xiii) neither GranCare nor any of its Subsidiaries owns any interest in any
"controlled foreign corporation" (within the meaning of Section 957 of the
Code), "passive foreign investment company" (within the meaning of Section 1296
of the Code) or other entity the income of which is required to be included in
the income of GranCare or such Subsidiary; (xiv) neither GranCare nor any of its
Subsidiaries has made an election under Section 341(f) of the Code; and (xv)
neither GranCare nor any of its Subsidiaries is obligated to make any payments
that would constitute excess parachute payments within the meaning of Section
280G of the Code.
<PAGE>
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Section 4.27 Employee Benefit Plans; ERISA. (a) There are no
-----------------------------
"employee pension benefit plans" as defined in Section 3(2) of ERISA covering
employees (or former employees) employed in the United States, maintained or
contributed to by GranCare or any of its Subsidiaries or any of their ERISA
Affiliates, or to which GranCare or any of its Subsidiaries or any of their
ERISA Affiliates contributes or is obligated to make payments thereunder or
otherwise may have any liability ("GranCare Pension Benefit Plans").
(b) GranCare has delivered or made available to Vitalink true and
complete copies of all "welfare benefit plans" (as defined in Section 3(1) of
ERISA) covering employees (or former employees) employed in the United States,
maintained or contributed to by GranCare or any of its Subsidiaries (other than
fully insured welfare benefit plans that will be assumed by SNFCo) ("GranCare
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of ERISA)
covering employees (or former employees) employed in the United States to which
GranCare or any of its Subsidiaries or any of their ERISA Affiliates is required
to make contributions or otherwise may have any liability, and, to the extent
covering employees (or former employees) employed in the United States, all
stock bonus, stock option, restricted stock, stock appreciation right, stock
purchase, bonus, incentive, deferred compensation, severance and vacation plans
maintained or contributed to by GranCare or a Subsidiary of GranCare.
(c) GranCare and each of its Subsidiaries, and each of the GranCare
Pension Benefit Plans and GranCare Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect.
(d) All contributions to, and payments from, the GranCare Pension
Benefit Plans which are required to have been made in accordance with the
GranCare Pension Benefit Plans and, when applicable, Section 302 of ERISA or
Section 412 of the Code have been timely made except where the failure to make
such contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(e) The GranCare Pension Benefit Plans intended to qualify under
Section 401 of the Code have been determined by the IRS to be so qualified and
nothing has occurred with respect to the operation of such GranCare Pension
Benefit Plans which would cause the loss of such qualification or exemption or
the imposition of
<PAGE>
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any material liability, penalty or tax under ERISA or the Code. Such plans have
been or will be amended on a timely basis to comply with changes to the Code
made by the Tax Reform Act of 1986 and other applicable legislative, regulatory
or administrative requirements.
(f) There are (i) no investigations pending, to the best knowledge of
GranCare, by any governmental entity involving the GranCare Pension Benefit
Plans or GranCare Welfare Plans, (ii) no termination proceedings involving the
GranCare Pension Benefit Plans and (iii) no pending or, to the best of
GranCare's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any GranCare Pension Benefit Plan or
GranCare Welfare Plan, against the assets of any of the trusts under any
GranCare Pension Benefit Plan or GranCare Welfare Plan or against any fiduciary
of any GranCare Pension Benefit Plan or GranCare Welfare Plan with respect to
the operation of such plan or asserting any rights or claims to benefits under
any GranCare Pension Benefit Plan or against the assets of any trust under such
plan, except for those which would not, singly or in the aggregate, give rise to
any liability which would reasonably be expected to have a GranCare Material
Adverse Effect, nor, to the best of GranCare's knowledge, are there any facts
which would give rise to any liability except for those which would not, singly
or in the aggregate, reasonably be expected to have a GranCare Material Adverse
Effect in the event of any such investigation, claim, suit or proceeding.
(g) None of GranCare, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the GranCare Pension
Benefit Plans or GranCare Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section 406
of ERISA) which would be reasonably likely to result in a tax or penalty on
GranCare or any of its Subsidiaries under Section 4975 of the Code or Section
502(i) of ERISA, except any such event which would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(h) Neither the GranCare Pension Benefit Plans subject to Title IV of
ERISA nor any trust created thereunder has been terminated nor have there been
any "reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have a GranCare
Material Adverse Effect nor has there been any event with respect to any
GranCare Pension Benefit Plan requiring disclosure
<PAGE>
-53-
under Section 4063(a) of ERISA or any event with respect to any GranCare Pension
Benefit Plan requiring disclosure under Section 4041(c)(3)(C) of ERISA, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(i) Neither GranCare nor any Subsidiary of GranCare nor any ERISA
Affiliate has incurred any currently outstanding liability to the PBGC or to a
trustee appointed under Section 4042(b) or (c) of ERISA other than for the
payment of premiums, all of which have been paid when due. No GranCare Pension
Benefit Plan has applied for, or received, a waiver of the minimum funding
standards imposed by Section 412 of the Code. The information supplied to the
actuary by GranCare or any of its Subsidiaries for use in preparing the most
recent actuarial report for the GranCare Pension Benefit Plans is complete and
accurate in all material respects.
(j) Neither GranCare, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in the
United States.
(k) With respect to each of the GranCare Pension Benefit Plans and
GranCare Welfare Plans, true, correct and complete copies of the following
documents have been delivered or made available to Vitalink: (i) the current
plans and related trust documents, including amendments thereto, (ii) any
current summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither GranCare, any of its Subsidiaries, any organization to
which GranCare is a successor or parent corporation, within the meaning of
Section 4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability for which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(m) None of the GranCare Welfare Plans maintained by GranCare or any
of its Subsidiaries are retiree life or retiree health insurance plans which
provide for continuing benefits or coverage for any participant or any
beneficiary of a participant following termination of employment, except as may
be required under COBRA or except at the expense of the participant or the
<PAGE>
-54-
participant's beneficiary. GranCare and each of its Subsidiaries which maintain
a "group health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(n) No liability under any GranCare Pension Benefit Plan or GranCare
Welfare Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which GranCare or any of
its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this
Agreement will not result in an increase in the amount of compensation or
benefits or accelerate the vesting or timing of payment of any benefits or
compensation payable to or in respect of any employee of GranCare or any of its
Subsidiaries.
(p) GranCare has disclosed to Vitalink in Section 4.27 of the
GranCare Disclosure Statement each of GranCare's material Foreign Plans to the
extent the benefits provided thereunder are not mandated by the laws of the
applicable foreign jurisdiction. GranCare and each of its Subsidiaries and each
of such Foreign Plans are in compliance with applicable laws and all required
contributions have been made to such Foreign Plans, except where the failure to
comply or make contributions would not, singly or in the aggregate, reasonably
be expected to have a GranCare Material Adverse Effect.
Section 4.28 Environmental Matters. (a) Except as would not, singly
---------------------
or in the aggregate with all other such non-compliances, have a GranCare
Material Adverse Effect, GranCare and its Subsidiaries are, and within the
period of all applicable statutes of limitation have been, in compliance with
all applicable Environmental Laws, which compliance includes, without
limitation, the possession of all Environmental Authorizations required under
applicable Environmental Laws, and compliance with the terms and conditions
thereof, and there are no circumstances of which GranCare is aware which may
materially prevent or interfere with compliance in the future. To GranCare's
knowledge GranCare and its Subsidiaries have all Environmental Authorizations
necessary for the conduct of the businesses of GranCare and its Subsidiaries as
currently conducted. Neither GranCare nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any
<PAGE>
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such Environmental Authorizations will be modified, suspended or revoked or
cannot be renewed or otherwise maintained in the ordinary course of business.
To GranCare's knowledge after due inquiry, the execution and delivery of this
Agreement and the consummation by GranCare of the Merger, the Distribution and
the other transactions contemplated hereby will not affect the validity or
require the transfer of any Environmental Authorizations associated with the
Institutional Pharmacy Business, and will not require any notification,
registration, reporting, filing, investigation or remediation under any
Environmental Law.
(b) There are no Environmental Notices that, singularly or in the
aggregate, could reasonably be expected to have a GranCare Material Adverse
Effect (i) pending or, to the best knowledge of GranCare, threatened against
GranCare or any of its Subsidiaries, (ii) to GranCare's knowledge pending or
threatened against any person or entity whose liability for such Environmental
Notice may have been retained or assumed by or could reasonably be imputed or
attributed by law or contract to GranCare or any of its Subsidiaries, (iii) that
to GranCare's knowledge could subject GranCare to any material risk of
liability, loss or damages, or (iv) that to GranCare's knowledge could
reasonably be expected to require investigation, removal or remedial or
corrective action by GranCare or any of its Subsidiaries. Since May 31, 1996,
neither GranCare nor any of its Subsidiaries has received any Environmental
Notice alleging that GranCare or any of its Subsidiaries is subject to liability
under any Environmental Law or that GranCare or any of its Subsidiaries is not
in full compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit,
demand, claim, hearing, notice of violation, notice or demand letter or request
for information or to the best knowledge of GranCare, investigation pending or
threatened under any Environmental Law (i) against GranCare or any of its
Subsidiaries, or (ii) to the knowledge of GranCare, against any person or entity
in connection with which liability could reasonably be imputed or attributed by
law or contract to GranCare or any of its Subsidiaries except with respect to
each of clause (i) and (ii) for such demands, claims, notices of violation,
notice or demand letters or requests for information which singly or in the
aggregate could not reasonably be expected to have a GranCare Material Adverse
Effect.
(d) No property or facility presently or to the knowledge of GranCare
formerly owned, operated or leased by GranCare or any of its present
Subsidiaries, or to the knowledge of GranCare any of its former Subsidiaries, or
any of their respective predecessors in interest, is listed or proposed for
listing on the
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National Priorities List or the Comprehensive Environmental Response,
Compensation and Liability Information System, both promulgated under CERCLA, or
on any comparable list established under any Environmental Law, nor has GranCare
or any of its Subsidiaries received any written notification of potential or
actual liability or any request for information under CERCLA or any comparable
foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any
Hazardous Materials generated, used, owned, stored or controlled by GranCare, or
to GranCare's knowledge any of its Subsidiaries, or any of their respective
predecessors in interest, on, at or under any property presently or formerly
owned, leased or operated by GranCare, or to GranCare's knowledge its
Subsidiaries, or any predecessors in interest, and to GranCare's knowledge there
are no Hazardous Materials located in, at, on or under, or in the vicinity of,
any such facility or property, or at any other location, that (i) could
reasonably be expected to subject GranCare to a material risk of liability, loss
or damages, or result in the incurrence by GranCare of costs under Environmental
Laws, (ii) could reasonably be expected to form the basis of any Environmental
Notice against or with respect to GranCare or any of its Subsidiaries, or
against any person or entity whose liability for any Environmental Notice may
have been retained or assumed by or could be imputed or attributed by law or
contract to GranCare or any of its Subsidiaries or (iii) could reasonably be
expected to require investigation, removal or remedial or corrective action by
GranCare or any of its Subsidiaries, that in any case singularly or in the
aggregate reasonably could be expected to have a GranCare Material Adverse
Effect.
(f) Without in any way limiting the generality of the foregoing, to
GranCare's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other disposal
areas containing Hazardous Materials, located on, at or under property owned,
operated or leased by GranCare, any of its Subsidiaries or any of their
respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased by
GranCare or any of its Subsidiaries, and (iii) there is no asbestos contained in
or forming part of any building, building component, structure or office space
owned, operated or leased by GranCare or any of its Subsidiaries.
(g) To GranCare's knowledge no lien has been recorded under
Environmental Laws with respect to any properties, assets or facilities owned,
operated or leased by GranCare or any of its Subsidiaries.
<PAGE>
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(h) In accordance with Section 5.05, GranCare has given Vitalink and
its authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
GranCare or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by GranCare any of its Subsidiaries, or otherwise concerning
compliance with or liability under Environmental Laws.
Section 4.29 Directors, Officers and Compensation of Employees.
-------------------------------------------------
There is set forth in Section 4.29 of the GranCare Disclosure Statement a true
and complete list showing, to the extent they are expected to become directors,
officers or employees of Vitalink subsequent to the Effective Date, (a) the
names and addresses of all such directors and officers of GranCare and its
Pharmacy Subsidiaries and (b) the names of all salaried persons whose aggregate
compensation for purposes of Federal income tax reporting from GranCare and its
Pharmacy Subsidiaries in the fiscal year ended December 31, 1995 was, or in the
fiscal year ending December 31, 1996 is expected to be, U.S. $100,000 or more
per year, together with a statement of the full amount expected to be paid to
such person for services in all capacities to be rendered in the fiscal year
ending December 31, 1996, and the basis thereof, separately including the
amounts paid or payable during such fiscal years, or expected to be paid or
payable, under bonus or incentive arrangements, if any.
Section 4.30 Banks. There is set forth in Section 4.30 of the
-----
GranCare Disclosure Statement a true and complete list showing the account
numbers and name of each bank in which any of the Pharmacy Subsidiaries has an
account or safe deposit box and the names of all persons authorized to draw
thereon or to have access thereto.
Section 4.31 Disclosure. No representation or warranty by GranCare
----------
and no statement or information relating to GranCare or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of GranCare to
Vitalink in connection herewith contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements herein or therein, in light of the circumstances
under which they were made, not misleading.
<PAGE>
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Section 4.32 Institutional Pharmacy Business. (a) Section 4.32 of
-------------------------------
the GranCare Disclosure Statement lists each Pharmacy utilized by GranCare in
connection with its pharmacy business and indicates (i) the location of such
Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a leasehold
interest. No other person or entity has any beneficial ownership or interest in
or to any such Pharmacy nor does any other person or entity have any right or
option to acquire any beneficial ownership or interest in or to any such
Pharmacy.
(b) Section 4.32 of the GranCare Disclosure Statement lists all of
the customers to which GranCare and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts ("GranCare Pharmacy Contracts"). GranCare
has not been informed and has no reason to believe that any GranCare Pharmacy
Contract will be terminated for or without cause. Each of the Subsidiaries of
GranCare involved in the Skilled Nursing Business listed on Schedule 4.16 of the
GranCare Disclosure Schedule has agreements for the provision of institutional
pharmacy services in form and substance equivalent to the form of agreement set
forth in Section 4.32 of the GranCare Disclosure Schedule (each a "Pharmacy
Agreement").
(c) GranCare has not violated, and is not now in violation of, the
Medicare and Medicaid fraud and abuse provisions of the Social Security Act, the
Civil Monetary Penalties Law of the Social Security Act, or any other Federal or
State law, statute, rule or regulation relating to GranCare and its
Subsidiaries.
(d) GranCare is duly licensed to provide pharmacy services in all
states in which it does business, and is also a participant in the Medicare
program and the Medicaid programs of the states listed in Section 4.08 of the
GranCare Disclosure Statement. GranCare is in compliance with all laws, rules
and regulations affecting or in connection with the Pharmacies, GranCare and
their licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) GranCare has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To the
best of GranCare's knowledge all such billings were for goods actually provided,
and at appropriate charges or costs, and GranCare has appropriate documentation
to support such billing requests.
<PAGE>
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Section 4.33 Fairness Opinion. GranCare has received the opinion of
----------------
PaineWebber Incorporated to the effect that as of the date hereof the financial
terms of the Merger are fair to GranCare's stockholders from a financial point
of view.
Section 4.34 Sufficiency of Assets. Subsequent to the Restructuring,
---------------------
GranCare and its Pharmacy Subsidiaries will own, lease, hold or otherwise have
the right to use all of the assets, properties, Intellectual Property Rights and
GranCare Licenses which are material to the conduct of the Institutional
Pharmacy Business as presently conducted by GranCare and its Subsidiaries.
ARTICLE V.
COVENANTS
Section 5.01 Conduct of Business of GranCare. Except as contemplated
-------------------------------
by this Agreement, the Distribution Agreement and the GranCare Disclosure
Statement or as expressly agreed to in writing by Vitalink, during the period
from the date of this Agreement to the Effective Time, GranCare will and will
cause its Subsidiaries each to conduct its operations according to its ordinary
and usual course of business consistent with past practice, and will use all
commercially reasonable efforts to preserve intact its business organization, to
keep available the services of its officers and employees and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will take no action which would
adversely affect its ability to consummate the Merger, the Distribution or the
other transactions contemplated hereby. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement, the
Distribution Agreement or the GranCare Disclosure Statement, prior to the
Effective Time, neither GranCare nor any of its Subsidiaries will, without the
prior written consent of Vitalink which shall not be unreasonably withheld:
(a) amend its Restated Articles of Incorporation (or other applicable
charter document) or By-Laws, other than the charter and by-laws of
SNFCo;
(b) authorize for issuance, issue, sell, deliver, grant any options
for, or otherwise agree or commit to issue, sell or deliver any shares of
any class of capital stock of GranCare or its Subsidiaries or any
securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of GranCare or its Subsidiaries, other than
(i) pursuant to and in accordance with the terms of GranCare
<PAGE>
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Options outstanding on the date hereof under the GranCare Option Plans
listed in Section 4.15 of the GranCare Disclosure Statement or (ii)
except as set forth in Schedule 5.01(b) of the GranCare Disclosure
Schedule;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries except as may be
necessary to consummate the Restructuring or the Distribution;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person except wholly owned
Pharmacy Subsidiaries in the ordinary course of business and consistent
with past practices; or (iii) make any loans, advances or capital
contributions to, or investments in, any other person, other than
indebtedness, obligations, loans, advances or investments in any other
person that are to be assigned to and assumed by SNFCo prior to the
Effective Time and as to which GranCare will be relieved of liability
with respect thereto prior to the Effective Time;
(e) with respect to GranCare and its Pharmacy Subsidiaries, (i)
increase in any manner the compensation of any of its directors or
officers, except in the ordinary course of business and consistent with
past practice or increase in any manner the compensation of any of its
other employees; (ii) pay or agree to pay any pension, retirement
allowance or other employee benefit not required, or enter into or agree
to enter into any agreement or arrangement with any of its past or
present employees relating to any such pension, retirement allowance or
other employee benefit, except as required under currently existing
agreements, plans or arrangements; (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement
with, any of its past or present employees; (iv) except to the extent
permitted by the foregoing clause (i), enter into any contract, agreement
or understanding with any of its past or present directors or
<PAGE>
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officers; or (v) except in the ordinary course of business and consistent
with past practice or as may be required to comply with applicable law,
become obligated (other than pursuant to any new or renewed collective
bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or
similar plan, arrangement or policy which was not in existence on the
date hereof, including any bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, health or group
insurance, severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the
benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof other than as contemplated by
the Employee Benefits Matters Agreement (as defined in the Distribution
Agreement);
(f) except in the ordinary course of business and consistent with past
practice, as disclosed in Section 5.01(f) of the GranCare Disclosure
Statement or as otherwise expressly contemplated hereby or the
Distribution Agreement, with respect to GranCare and its Pharmacy
Subsidiaries sell, transfer, lease, license, pledge, mortgage, or
otherwise dispose of, or encumber, or agree to sell, transfer, lease,
license, pledge, mortgage or otherwise dispose of or encumber, any
material properties, real, personal or mixed;
(g) except as otherwise expressly contemplated hereby, with respect to
GranCare and its Pharmacy Subsidiaries enter into any other agreements,
commitments or contracts, except agreements, commitments or contracts for
the purchase, sale or lease of goods or services in the ordinary course
of business and consistent with past practice and having a term of no
more than one year;
(h) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle
or an agreement with respect to, any plan of liquidation or dissolution,
any acquisition of a material amount of assets or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or
any amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary
course of business and consistent with past practice except as expressly
<PAGE>
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contemplated by this Agreement or the Distribution Agreement;
(i) except as previously approved by GranCare prior to the date hereof
and as identified to Vitalink prior to the date hereof, authorize or
commit to make capital expenditures in excess of $200,000 for which
GranCare or any of its Pharmacy Subsidiaries would be responsible
subsequent to the Merger;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and
following written notice to Vitalink;
(k) maintain its books and records in a manner not in the ordinary
course of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any
bad debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business;
(o) make any changes in their prior practices of allocating interest,
corporate overhead, cost of legal, insurance and other staff functions or
other inter-company charges; (p) make any changes in their current cash
management practices; (q) cancel, compromise, settle or reduce any inter-
company accounts except by the payment of cash for the full amount
thereof; (r) permit any cash paid as the exercise price of outstanding
GranCare Options to be retained by SNFCo or any of its Subsidiaries;
(p) cancel any Pharmacy Agreement or amend, alter, waive or otherwise
modify the terms thereof; and
<PAGE>
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(q) agree to do any of the foregoing.
Section 5.02 Conduct of Business of Vitalink. Except as contemplated
-------------------------------
by this Agreement, the Voting Agreement, the Shareholder Agreement (as
hereinafter defined) or the Vitalink Disclosure Statement or as expressly agreed
to in writing by GranCare, during the period from the date of this Agreement to
the Effective Time, Vitalink and its Subsidiaries will each conduct its
operations according to its ordinary and usual course of business consistent
with past practice, and will use all commercially reasonable efforts to preserve
intact its business organization, to keep available the services of its officers
and employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would adversely affect its ability to consummate the
Merger or the other transactions contemplated hereby. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or the Vitalink Disclosure Statement, prior to the Effective
Time, neither Vitalink nor any of its Subsidiaries will, without the prior
written consent of GranCare which shall not be unreasonably withheld:
(a) amend its Certificate of Incorporation (or other applicable
charter document) or By-Laws;
(b) authorize for issuance, issue, sell, deliver, grant any options
for, or otherwise agree or commit to issue, sell or deliver any shares of
any class of capital stock of Vitalink or its Subsidiaries or any
securities convertible into or exchangeable or exercisable for shares of
any class of capital stock of Vitalink or its Subsidiaries, other than
pursuant to and in accordance with the terms of the Vitalink Option Plans
listed in Section 3.14 of the Vitalink Disclosure Statement;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or
<PAGE>
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otherwise become liable or responsible (whether directly, contingently or
otherwise) for the obligations of any other person except wholly owned
Subsidiaries of Vitalink in the ordinary course of business and
consistent with past practices; or (iii) make any loans, advances or
capital contributions to, or investments in, any other person;
(e) (i) increase in any manner the compensation of any of its
directors or officers, except in the ordinary course of business and
consistent with past practice or increase in any manner the compensation
of any of its other employees; (ii) pay or agree to pay any pension,
retirement allowance or other employee benefit not required, or enter
into or agree to enter into any agreement or arrangement with any of its
past or present employees relating to any such pension, retirement
allowance or other employee benefit, except as required under currently
existing agreements, plans or arrangements; (iii) grant any severance or
termination pay to, or enter into any employment or severance agreement
with, any of its past or present employees; (iv) except to the extent
permitted by the foregoing clause (i), enter into any contract, agreement
or understanding with any of its past or present directors or officers;
or (v) except in the ordinary course of business and consistent with past
practice or as may be required to comply with applicable law, become
obligated (other than pursuant to any new or renewed collective
bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or
similar plan, arrangement or policy which was not in existence on the
date hereof, including any bonus, incentive, deferred compensation, stock
purchase, stock option, stock appreciation right, health or group
insurance, severance pay, retirement or other benefit plan, agreement or
arrangement, or employment or consulting agreement with or for the
benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof;
(f) except in the ordinary course of business and consistent with past
practice or as otherwise expressly contemplated hereby, sell, transfer,
lease, license, pledge, mortgage, or otherwise dispose of, or encumber,
or agree to sell, transfer, lease, license, pledge, mortgage or otherwise
dispose of or encumber, any material properties, real, personal or mixed;
(g) except as otherwise expressly contemplated hereby, enter into any
other agreements, commitments or contracts,
<PAGE>
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except agreements, commitments or contracts for the purchase, sale or
lease of goods or services in the ordinary course of business and
consistent with past practice and having a term of no more than one year;
(h) authorize, recommend, propose or announce an intention to
authorize, recommend or propose, or enter into any agreement in principle
or an agreement with respect to, any plan of liquidation or dissolution,
any acquisition of a material amount of assets or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or
any amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary course
of business and consistent with past practice except as expressly
contemplated by this Agreement;
(i) except as previously approved by the Board of Directors of
Vitalink prior to the date hereof and as identified to GranCare prior to
the date hereof, authorize or commit to make capital expenditures in
excess of $200,000;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and
following written notice to Vitalink;
(k) maintain its books and records in a manner not in the ordinary
course of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any
bad debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed
<PAGE>
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(including accounts receivable) other than the collection in the ordinary
course of business; or
(o) agree to do any of the foregoing.
Section 5.03 No Solicitation by GranCare. (a) GranCare agrees that,
---------------------------
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
information) any merger, consolidation, other business combination involving
GranCare or its Subsidiaries (except to the extent such merger, consolidation or
other business combination relates exclusively to GranCare's Skilled Nursing
Business), acquisition of all or a substantial portion of the assets or capital
stock of GranCare and its Subsidiaries (except to the extent such acquisition
relates exclusively to GranCare's Skilled Nursing Business) or inquiries or
proposals concerning or which may reasonably be expected to lead to, any of the
foregoing (a "GranCare Acquisition Transaction") or negotiate, explore or
otherwise communicate in any way with any third party (other than Vitalink or
its affiliates) with respect to any GranCare Acquisition Transaction or enter
into any agreement, arrangement or understanding requiring it to abandon,
terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement. GranCare shall immediately advise Vitalink of
any inquiries or proposals relating to a GranCare Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for a GranCare Acquisition Transaction from a bona
fide financially capable third party, GranCare may furnish non-public
information to, and negotiate with, such third party only if (i) three business
days' written notice shall have been given to Vitalink; and (ii)(A) GranCare's
Board of Directors shall have been advised in writing by its investment banker
that such third party is financially capable of consummating a GranCare
Acquisition Transaction that would yield a higher value to GranCare's
stockholders than will the Merger, (B) GranCare's Board of Directors shall have
been advised, by the written opinion of outside counsel to GranCare, that any
failure to provide such non-public information to, or negotiate with, such party
would be inconsistent with GranCare's Board of Directors' fiduciary duties to
the stockholders of GranCare (in providing such opinion GranCare's counsel may
assume that California law is not materially different from Delaware law) and
(C) GranCare's Board of Directors in good faith, after weighing such advice,
determines that taking
<PAGE>
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such action is more likely than not to lead to a GranCare Acquisition
Transaction with such third party that would yield a higher value to GranCare's
stockholders than will the Merger and that failing to furnish such information,
or to commence negotiations would be inconsistent with the Board's fiduciary
duties.
Section 5.04 No Solicitation by Vitalink. (a) Vitalink agrees that,
---------------------------
prior to the Effective Time, it shall not, and shall not authorize or permit any
of its Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or disclosing
information) any merger, consolidation, other business combination involving
Vitalink or its Subsidiaries, acquisition of all or any substantial portion of
the assets or capital stock of Vitalink and its Subsidiaries taken as a whole,
or inquiries or proposals concerning or which may reasonably be expected to lead
to, any of the foregoing (an "Vitalink Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
GranCare or its affiliates) with respect to any Vitalink Acquisition Transaction
or enter into any agreement, arrangement or understanding requiring it to
abandon, terminate or fail to consummate the Merger or any other transactions
contemplated by this Agreement. Vitalink shall immediately advise GranCare of
any inquiries or proposals relating to an Vitalink Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an
unsolicited written proposal for an Vitalink Acquisition Transaction from a bona
fide financially capable third party, Vitalink may furnish non-public
information to, and negotiate with, such third party only if (i) three business
days' written notice shall have been given to GranCare; and (ii)(A) Vitalink's
Board of Directors shall have been advised in writing by its investment banker
that such third party is financially capable of consummating an Vitalink
Acquisition Transaction that would yield a higher value to Vitalink's
stockholders than will the Merger, (B) Vitalink's Board of Directors shall have
been advised, by the written opinion of outside counsel to Vitalink, that any
failure to provide such non-public information to, or negotiate with, such party
would be inconsistent with GranCare's Board of Directors' fiduciary duties to
the stockholders of Vitalink and (C) Vitalink's Board of Directors in good
faith, after weighing such advice, determines that taking such action is more
likely than not to lead to an Vitalink Acquisition Transaction with such third
party that would yield a higher value to Vitalink's stockholders than will the
<PAGE>
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Merger and that failing to furnish such information, or to commence negotiations
would be inconsistent with the Board's fiduciary duties.
Section 5.05 Access to Information. (a) From the date of this
---------------------
Agreement until the Effective Time, GranCare will give Vitalink and its
authorized representatives (including counsel, environmental and other
consultants, accountants, auditors, and intellectual property counsel and
agents) reasonable access in light of the terms of this Agreement during normal
business hours to all facilities, personnel and operations and to all books and
records of GranCare and its Subsidiaries, will permit Vitalink to make such
inspections as it may reasonably require (including without limitation any air,
water or soil testing or sampling deemed necessary by it) and will cause its
officers and those of its Subsidiaries to furnish Vitalink with such financial
and operating data and other information with respect to the businesses and
properties of GranCare and its Subsidiaries as Vitalink may from time to time
reasonably request.
(b) From the date of this Agreement until the Effective Time, Vitalink
will give GranCare and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Vitalink and its Subsidiaries, will
permit GranCare to make such inspections as it may reasonably require (including
without limitation any air, water or soil testing or sampling deemed necessary
by them) and will cause its officers and those of its Subsidiaries to furnish
GranCare with such financial and operating data and other information with
respect to the businesses and properties of Vitalink and its Subsidiaries as
GranCare may from time to time reasonably request.
Section 5.06 Registration Statement and Proxy Statement. GranCare
------------------------------------------
shall file with the SEC as soon as is reasonably practicable after the date
hereof the SNFCo Registration Document and the Proxy Statement and Vitalink
shall file with the SEC the Vitalink Information Statement and the Registration
Statement in which the Proxy Statement shall be included. Vitalink and GranCare
shall use all commercially reasonable efforts to have the Registration Statement
declared effective by the SEC and the Proxy Statement and the Vitalink
Information Statement cleared by the staff of the SEC as promptly as
practicable. GranCare shall use all commercially reasonable efforts to have the
SNFCo Registration Document declared effective by the SEC. Vitalink shall also
take
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any action required to be taken under applicable state blue sky or securities
laws in connection with shares of Vitalink Common Stock to be issued as Closing
Consideration. Vitalink and GranCare shall promptly furnish to each other all
information, and take such other actions (including without limitation using all
commercially reasonable efforts to provide any required consents of their
respective independent auditors and investment banking advisors), as may
reasonably be requested in connection with any action by any of them in
connection with the preceding sentences of this Section 5.06.
Section 5.07 Commercially Reasonable Efforts; Other Actions. (a)
----------------------------------------------
Subject to the terms and conditions provided in this Agreement and the
Distribution Agreement, Vitalink and GranCare shall use all commercially
reasonable efforts to take, or cause to be taken, all other actions and do, or
cause to be done, all other things necessary, proper or appropriate under
applicable laws and regulations to consummate and make effective the
transactions contemplated by this Agreement and the Distribution Agreement,
including, without limitation, (i) the filing of Notification and Report Forms
under the HSR Act with the Federal Trade Commission (the "FTC") and the
Antitrust Division of the Department of Justice (the "Antitrust Division") and
using all commercially reasonable efforts to respond as promptly as practicable
to all inquiries received from the FTC or the Antitrust Division for additional
information or documentation, (ii) the obtaining of all necessary consents,
approvals or waivers, and (iii) the lifting of any legal bar to the Merger or
the Distribution. Vitalink shall not take any action which would cause GranCare
to fail to perform its obligations hereunder or under the Distribution
Agreement. GranCare shall not take any action which would cause Vitalink to
fail to perform its obligations hereunder or under the Distribution Agreement.
(b) GranCare shall use all commercially reasonable efforts to cause to
be delivered to Vitalink a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to Vitalink and customary in scope
and substance for such letters in connection with similar registration
statements.
(c) Vitalink shall use all commercially reasonable efforts to cause to
be delivered to GranCare a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to GranCare and customary in scope
and
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substance for such letters in connection with similar registration statements.
Section 5.08 Public Announcements. Before issuing any press release
--------------------
or otherwise making any public statement with respect to the Merger, the
Distribution or any of the other transactions contemplated hereby, Vitalink and
GranCare will consult with, and obtain the consent of, each other as to its form
and substance and shall not issue any such press release or make any such public
statement prior to obtaining such consent, except as may be required by law or
pursuant to any order of any court or governmental agency, tribunal or
regulatory authority.
Section 5.09 Notification of Certain Matters. Each of GranCare and
-------------------------------
Vitalink shall give prompt notice to the other party of any notice of, or other
communication relating to, a default or event which, with notice or lapse of
time or both, would become a default, received by GranCare, Vitalink or any of
their respective Subsidiaries subsequent to the date of this Agreement and prior
to the Effective Time, which could be reasonably expected to have a GranCare
Material Adverse Effect or Vitalink Material Adverse Effect. Each of GranCare
and Vitalink shall give prompt notice to the other party of (a) any notice or
other communication from any third party alleging that the consent of such third
party is or may be required in connection with the Merger, the Distribution or
any other transactions contemplated by this Agreement or the Distribution
Agreement, or (b) any GranCare Material Adverse Effect or Vitalink Material
Adverse Effect.
Section 5.10 Indemnification. (a) Vitalink shall cause the
---------------
Surviving Corporation to indemnify, defend and hold harmless the present and
former directors and officers of GranCare against all losses, claims, damages,
expenses or liabilities arising out of actions or omissions or alleged actions
or omissions occurring at or prior to the Effective Time to the same extent and
on the same terms and conditions (including with respect to advancement of
expenses) permitted or required under applicable law and GranCare's Restated
Articles of Incorporation and By-Laws in effect at the date hereof.
(b) For a period of three years after the Effective Time, the
Surviving Corporation shall cause to be maintained in effect the current
policies of directors' and officers' liability insurance maintained by GranCare
(provided that the Surviving Corporation may substitute therefor policies of at
least the same coverage and amounts containing terms and conditions which are no
less advantageous) with respect to claims arising from facts or events which
occurred before the Effective Time; provided, however,
-------- -------
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that if the premiums with respect to such insurance exceed 150% of the annual
premiums paid as of the date hereof by GranCare for such insurance, the
Surviving Corporation shall be obligated to purchase directors' and officers'
liability insurance with the maximum coverage as can be obtained at an annual
premium equal to 150% of the annual premiums paid by GranCare as of the date
hereof.
Section 5.11 Expenses. Except as set forth in Section 10.05,
--------
Vitalink, on the one hand, and GranCare, on the other hand, shall bear their
respective expenses incurred in connection with the Merger and the Distribution,
including, without limitation, the preparation, execution and performance of
this Agreement, the Distribution Agreement and the transactions contemplated
hereby and all fees and expenses of investment bankers, finders, brokers,
agents, representatives, counsel and accountants, except that expenses incurred
in printing, mailing and filing (including without limitation, SEC filing fees,
fees related to any state securities or "blue sky" laws and stock exchange
listing application fees) the Proxy Statement, the Vitalink Information
Statement, the SNFCo Reorganization Document and the Registration Statement
shall be shared equally by GranCare and Vitalink; provided, however, that SNFCo
-------- -------
will bear one half of the premiums associated with the directors' and officers'
insurance referred to in Section 5.10(b) hereof and all of GranCare's legal fees
and expenses and the fees and expenses associated with obtaining the fairness
opinion referred to in Section 4.33 hereof.
Section 5.12 Stock Exchange Listings. Vitalink shall use all
-----------------------
commercially reasonable efforts to have the Vitalink Common Stock to be issued
in connection with the Merger authorized for quotation on NASDAQ or listed on
the New York Stock Exchange subject to notice of issuance.
Section 5.13 GranCare and Subsidiary Actions. (a) GranCare shall
-------------------------------
not take or omit to take, and shall not cause or permit any of its subsidiaries
to take or omit to take, any action which would cause a breach of any
representation or warranty of GranCare contained in this Agreement or the
Distribution Agreement such that the Closing condition set forth in Section 7.01
would not be satisfied.
(b) GranCare shall not and shall not authorize or permit any of its
Subsidiaries or any of its Subsidiaries' directors, officers, employees, agents
or representatives to amend, modify, waive or withdraw any term of, the
Distribution Agreement prior to the Effective Time which amendment,
modification, waiver or withdrawal could, directly or indirectly, reasonably be
expected to have an adverse effect on the business, operations, assets,
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condition (financial or otherwise) or prospects of the Surviving Corporation
following the Merger without the prior written consent of Vitalink.
Section 5.14 Vitalink and Subsidiary Actions. Vitalink shall not
-------------------------------
take or omit to take, and shall not cause or permit any of its subsidiaries to
take or omit to take, any action which would cause a breach of any
representation or warranty of Vitalink contained in this Agreement such that the
Closing condition set forth in Section 8.01 would not be satisfied.
Section 5.15 Environmental Matters. (a) GranCare shall promptly
---------------------
provide Vitalink with any Environmental Notices it receives and shall make all
filings and take all actions necessary to materially comply with all
Environmental Laws, including but not limited to those applicable to the Merger
and other non-routine transactions contemplated hereby. GranCare shall keep
Vitalink informed of all actions taken in connection with the foregoing and all
such actions shall be on terms and conditions satisfactory to Vitalink whose
consent to such actions shall not be unreasonably withheld.
(b) Vitalink shall promptly provide GranCare with any Environmental
Notices it receives and shall make all filings and take all actions necessary to
materially comply with all Environmental Laws, including but not limited to
those applicable to the Merger and other transactions contemplated hereby.
Vitalink shall keep GranCare informed of all non-routine actions taken in
connection with the foregoing and all such actions shall be on terms and
conditions satisfactory to GranCare whose consent to such actions shall not be
unreasonably withheld.
Section 5.16 Actions Regarding Outstanding Debt. Prior to the
----------------------------------
Effective Time, GranCare agrees to use all commercially reasonable efforts to
(i) call for redemption all of the outstanding 6 1/2% Convertible Subordinated
Debentures due 2003 (the "Debentures") that are issued and outstanding
immediately prior to the Effective Time in accordance with the terms of the
Indenture dated January 29, 1993 between GranCare and First Fidelity Trust
Company, New York (the "Indenture"), (ii) obtain the consent (the "Consent") of
the holders of GranCare's outstanding 9 3/8% Senior Subordinated Notes due 2005
(the "Notes") to the Restructuring and the Merger (including the assumption by
the Surviving Corporation of GranCare's obligations under the Notes and under
the Indenture, dated as of September 15, 1995, between GranCare and Marine
Midland Bank, governing the Notes (the "Note Indenture")) as well as the other
transactions contemplated hereby which Consent shall be in form and substance
reasonably
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satisfactory to Vitalink, and (iii) obtain all necessary consents, approvals,
waivers or other agreements by the holders of other indebtedness of GranCare to
the assignment to and the assumption by SNFCo of such indebtedness at the time
of the Distribution.
ARTICLE VI.
CONDITIONS TO THE OBLIGATIONS OF VITALINK AND GRANCARE
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 6.01 Registration Statements. The Registration Statement and
-----------------------
the SNFCo Registration Statement shall have become effective in accordance with
the provisions of the Securities Act. No stop order suspending the effectiveness
of the Registration Statement and the SNFCo Registration Statement shall have
been issued by the SEC and remain in effect. All necessary state securities or
blue sky authorizations for the Merger and the Distribution shall have been
received.
Section 6.02 Stockholder Approval. The approval of the Merger and
--------------------
the Distribution, including the execution and performance of this Agreement,
the Distribution Agreement and all of the transactions contemplated hereby or
thereby shall be approved by a majority of the outstanding shares of GranCare
Common Stock cast at the Special Meeting or any adjournment thereof shall have
been obtained.
Section 6.03 Listings. The Vitalink Common Stock issuable in the
--------
Merger shall have been authorized for quotation on NASDAQ or listed on the New
York Stock Exchange subject to official notice of issuance.
Section 6.04 Certain Proceedings. No writ, order, decree or
-------------------
injunction of a court of competent jurisdiction or governmental entity shall
have been entered against Vitalink or GranCare which, and no proceedings
therefor shall have been threatened or commenced by any governmental entity
which seek to, prohibit or restrict the consummation of the Merger or the
Distribution or would otherwise restrict Vitalink's or the Surviving
Corporation's exercise of full rights to own and operate the Institutional
Pharmacy Business of GranCare.
Section 6.05 Consents and Approvals. All necessary consents and
----------------------
approvals of, and notifications and disclosures to, and filings and
registrations with, any United States or any other
<PAGE>
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governmental authority or any other third party required for the consummation of
the Merger and the other transactions contemplated hereby (including without
limitation any consents, approvals, notifications, disclosures, filings and
registrations required under any Environmental Law) shall have been obtained
except where failure to obtain such consents or approvals would not, singly or
in the aggregate with all such other failures, have an Vitalink Material Adverse
Effect, and any waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
Section 6.06 Distribution. (i) The Distribution Agreement shall have
------------
been approved by a majority of GranCare's shareholders at the Special Meeting;
(ii) the Distribution Agreement shall have been executed and shall be in full
force and effect on and as of the Effective Time; and (iii) the Distribution
shall have been completed.
Section 6.07 Dissenting Shares. Holders of not more than 5% of the
-----------------
GranCare Common Stock issued and outstanding as of the record date for the
Special Meeting shall have demanded payment pursuant to the provisions of
Section 1300 of the California Act.
Section 6.08 Opinions. (a)GranCare and Vitalink shall have received
--------
opinions of Powell, Goldstein, Frazer & Murphy and Cahill Gordon & Reindel,
reasonably acceptable to GranCare and Vitalink, to the effect that:
(i) the distribution of the SNFCo Common Stock will be tax-free for
federal income tax purposes to GranCare under Section 355(c)(1)
of the Code and to the stockholders of GranCare under Section
355(a) of the Code;
(ii) the Restructuring will be tax-free for federal income tax
purposes under Sections 361(a)l and 368(a)(1)(D) of the Code;
(iii) the Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code; and
(iv) Vitalink and GranCare will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to
the Merger.
(b) The respective counsels of GranCare and Vitalink shall have
each delivered an opinion covering the matters set forth on Exhibit G hereto.
<PAGE>
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Section 6.09 Existing Indebtedness. The Debentures shall have been
---------------------
called for redemption in accordance with the Indenture and GranCare shall have
obtained the Consent in form and substance reasonably satisfactory to GranCare
and Vitalink.
ARTICLE VII.
CONDITIONS TO THE OBLIGATIONS OF VITALINK
The obligation of Vitalink to effect the Merger and to perform its
other obligations to be performed at or subsequent to the Closing shall be
subject to the fulfillment at or prior to the Closing of the following
additional conditions, any one or more of which may be waived by Vitalink:
Section 7.01 Representations and Warranties True. The
-----------------------------------
representations and warranties of GranCare contained herein and in the
Distribution Agreement (without regard to any materiality exceptions or provisos
contained in this Agreement or the Distribution Agreement) shall be true and
correct in all respects on the date of this Agreement, the date of the
Distribution Agreement and the Closing Date as though such representations and
warranties were made at and on such date, except (i) for those untruths or
inaccuracies which would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect and (ii) for changes expressly
permitted or contemplated by this Agreement or the Distribution Agreement.
Section 7.02 Performance. GranCare shall have performed and complied
-----------
in all material respects with all agreements, obligations and conditions
required by this Agreement and the Distribution Agreement to be performed or
complied with by it on or prior to the Closing Date except for those failures to
so perform or comply which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
Section 7.03 Certificates. GranCare shall furnish such certificates
------------
of its officers to evidence compliance with the conditions set forth in Sections
7.01, 7.02 and 7.04 as may be reasonably requested by Vitalink.
Section 7.04 Material Adverse Change. There shall not have occurred
-----------------------
since December 31, 1995 any event, condition, change, occurrence or circumstance
which has had or is reasonably likely to have, singly or in the aggregate, a
GranCare Material Adverse Effect.
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Section 7.05 Pharmacy Financial Statements. GranCare shall have
-----------------------------
delivered audited financial statements of the Institutional Pharmacy Business
audited by GranCares existing independent auditors which financial statements do
not reflect (i) reductions in the carrying values of assets, or increases in the
carrying values of the liabilities, as at May 31, 1996, of the Institutional
Pharmacy Business on a pro forma basis, in the aggregate of more than $2,000,000
as compared to such carrying values as shown on the balance sheet of the
Institutional Pharmacy Business as at May 31, 1996 included in the GranCare
Disclosure Statement, (ii) a decrease of more than $500,000 in earnings before
interest, taxes, depreciation and amortization (as such terms are defined in
generally accepted accounting principles consistently applied by GranCare,
"EBITDA") for the twelve-month period ending December 31, 1995, or a decrease of
more than $250,000 in the EBITDA for the five-month period ending May 31, 1996,
on a pro forma basis as compared to the EBITDAs for the same periods shown on
the unaudited statements of income included in the GranCare Disclosure
Statement.
Section 7.06 Auditors' Letter. Vitalink shall have received from
----------------
GranCare's independent auditors a letter dated the Closing Date confirming the
matters set forth in the letter contemplated by Section 5.07(b).
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
The obligations of GranCare under this Agreement to effect the Merger
shall be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by
GranCare:
Section 8.01 Representations and Warranties True. The
-----------------------------------
representations and warranties of Vitalink contained herein (without regard to
any materiality exceptions or provisos therein) shall be true and correct in all
material respects on the date of this Agreement and the Closing Date as though
such representations and warranties were made at and on such date, except (i)
for those untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect and (ii) for
changes permitted or contemplated by this Agreement.
Section 8.02 Performance. Vitalink shall have performed and complied
-----------
in all material respects with all agreements, obligations and conditions
required by this Agreement to be
<PAGE>
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performed or complied with by it on or prior to the Closing Date except for
those failures to so perform or comply which would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
Section 8.03 Certificates. Vitalink shall furnish such certificates
------------
of its officers to evidence compliance with the conditions set forth in Sections
8.01, 8.02 and 8.04 as may be reasonably requested by GranCare.
Section 8.04 Material Adverse Change. There shall not have occurred
-----------------------
since May 31, 1996 any event, condition, change, occurrence or circumstance
which has had or is reasonably likely to have, singly or in the aggregate, an
Vitalink Material Adverse Effect.
Section 8.05 Shareholders Agreement. Parent and Vitalink shall have
----------------------
executed the Shareholder's Agreement in the form attached hereto as Exhibit D
and each such party shall have performed and complied with its obligations under
the Shareholders Agreement.
Section 8.06 Auditors' Letter. GranCare shall have received from
----------------
Vitalink's independent auditors a letter dated the Closing Date confirming the
matters set forth in the letter contemplated by Section 5.07(c).
ARTICLE IX.
CLOSING
Section 9.01 Time And Place. Subject to the provisions of Articles
--------------
VI, VII, VIII and X, the closing of the Merger (the "Closing") shall take place
at the offices of Cahill Gordon & Reindel, as soon as practicable but in no
event later than 9:30 A.M., local time, on the first business day after the date
on which each of the conditions set forth in Articles VI, VII and VIII have been
satisfied or waived by the party or parties entitled to the benefit of such
conditions; or at such other place, at such other time, or on such other date as
Vitalink and GranCare may mutually agree. The date on which the Closing
actually occurs is herein referred to as the "Closing Date."
Section 9.02 Filings at the Closing. Subject to the provisions of
----------------------
Articles VI, VII, VIII and X hereof, GranCare, and Vitalink shall cause to be
executed at the Closing the Certificate of Merger and the Certified Agreement
and shall cause the Certificate of Merger to be filed and recorded in accordance
with
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the applicable provisions of the Delaware Act and shall cause the Certified
Agreement to be filed in accordance with the applicable provisions of the
California Act and shall take any and all other lawful actions and do any and
all other lawful things necessary to cause the Merger to become effective.
ARTICLE X.
TERMINATION AND ABANDONMENT
Section 10.01 Termination. This Agreement may be terminated and the
-----------
Merger may be abandoned any time prior to the Effective Time, whether before or
after approval by the stockholders of GranCare:
(a) by mutual consent of the Boards of Directors of Vitalink and
GranCare;
(b) by either Vitalink or GranCare if, without fault of such
terminating party, the Merger shall not have been consummated on or before
December 31, 1996, which date may be extended by mutual consent of the
parties hereto;
(c) by either Vitalink or GranCare, if any court of competent
jurisdiction in the United States or other governmental body in the United
States shall have issued an order (other than a temporary restraining
order), decree or ruling or taken any other action restraining, enjoining
or otherwise prohibiting the Merger or the Distribution, and such order,
decree, ruling or other action shall have become final and nonappealable;
or
(d) by either Vitalink or GranCare, if the approval of a majority of
the outstanding shares of GranCare Common Stock cast at the Special Meeting
or any adjournment thereof is not obtained with respect to each of the
Merger and the Distribution.
Notwithstanding anything contained in clause (b) of this Section 10.01, in the
event the Registration Statement or the SNFCo Registration Document has not been
declared effective by the SEC by November 1, 1996, then the date referred to in
clause (b) of this Section shall be automatically extended for a period of two
months from the later of the declaration of effectiveness by the SEC of the
Registration Statement or SNFCo Registration Document but in no event shall such
date be extended to a date later than three months from the date referenced in
clause (b) of this section.
<PAGE>
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Section 10.02 Termination by Vitalink. This Agreement may be
-----------------------
terminated and the Merger may be abandoned by action of the Board of Directors
of Vitalink, at any time prior to the Effective Time, before or after the
approval by the stockholders of Vitalink, if (a) GranCare shall have failed to
comply in any material respect with any of the covenants or agreements contained
in Articles I and V of this Agreement to be complied with or performed by
GranCare at or prior to such date of termination, (b) there exists a breach or
breaches of any representation or warranty of GranCare contained in this
Agreement or the Distribution Agreement such that the Closing condition set
forth in Section 7.01 would not be satisfied; provided, however, that if such
-------- -------
breach or breaches are capable of being cured prior to the Effective Time, such
breaches shall not have been cured within 15 calendar days of delivery to
GranCare of written notice of such breach or breaches, (c) GranCare shall have
furnished or disclosed non-public information to, or commenced negotiations
with, a third party with respect to a GranCare Acquisition Transaction or shall
have resolved to do either of the foregoing and publicly disclosed such
resolution, (d) the Board of Directors of GranCare shall have withdrawn,
changed, modified in any manner or taken action inconsistent with its
recommendation of the Distribution Agreement, the Distribution, this Agreement,
the Merger or the other transactions contemplated hereby or thereby or shall
have resolved to do any of the foregoing and publicly disclosed such resolution;
or (e) a definitive agreement with respect to an Vitalink Business Combination
Transaction (as hereinafter defined) shall have been negotiated and Vitalink's
Board of Directors (i) shall have been advised (A) in writing by its investment
banker that such Vitalink Business Combination Transaction (as hereinafter
defined) would yield a higher value to Vitalink's stockholders than would the
Merger and the other party to such agreement is financially capable of
consummating such Vitalink Business Combination Transaction (as hereinafter
defined) and (B) by the written opinion of outside counsel to Vitalink that
failure to terminate this Agreement would be inconsistent with such Board's
fiduciary duties to the stockholders of Vitalink, and (ii) after weighing such
advice, shall determine in good faith that failure to terminate this Agreement
would be inconsistent with such Board's fiduciary duties; provided, however,
-------- -------
that five business days prior written notice shall have been given to GranCare
(which notice shall include the material terms and conditions and financing
arrangements of, and the identity of the third party proposing, the Vitalink
Business Combination Transaction (as hereinafter defined)) and that prior to
terminating this Agreement Vitalink shall have made all the Vitalink Payments
required by the terms of Section 10.05(c) hereof.
<PAGE>
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Section 10.03 Termination by GranCare. This Agreement may be
-----------------------
terminated and the Merger may be abandoned at any time prior to the Effective
Time, before or after the approval by the stockholders of GranCare, by action of
the Board of the Directors of GranCare, if (a) Vitalink shall have failed to
comply in any material respect with any of the covenants or agreements contained
in Articles I and V of this Agreement to be complied with or performed by
Vitalink at or prior to such date of termination, (b) there exists a breach or
breaches of any representation or warranty of Vitalink contained in this
Agreement such that the Closing condition set forth in Section 8.01 would not be
satisfied; provided, however, that if such breach or breaches are capable of
-------- -------
being cured prior to the Effective Time, such breaches shall not be cured within
15 calendar days of delivery to Vitalink of written notice of such breach or
breaches, (c) Vitalink shall have furnished or disclosed non-public information
to, or commenced negotiations with, a third party with respect to an Vitalink
Acquisition Transaction or shall have resolved to do either of the foregoing and
publicly disclosed such resolution or (d) the Board of Directors of Vitalink
shall have withdrawn, changed, modified in any manner or taken action
inconsistent with its recommendation of the Distribution Agreement, the
Distribution, this Agreement, the Merger or the other transactions contemplated
hereby or thereby or shall have resolved to do any of the foregoing and publicly
disclosed such resolution, (e) a definitive agreement with respect to a GranCare
Business Combination Transaction (as hereinafter defined) shall have been
negotiated and GranCare's Board of Directors (i) shall have been advised (A) in
writing by its investment banker that such GranCare Business Combination
Transaction (as hereinafter defined) could yield a higher value to GranCare's
stockholders than will the Merger and the other party to such agreement is
financially capable of consummating such GranCare Business Combination
Transaction (as hereinafter defined) and (B) by the written opinion of outside
counsel to GranCare that failure to terminate this agreement would be
inconsistent with the Board's fiduciary duties to the stockholders of GranCare
(in providing such opinion outside counsel to GranCare may assume that
California law is not materially different from Delaware law), and (ii) after
weighing such advice, shall determine in good faith that failure to terminate
this Agreement would be inconsistent with the Board's fiduciary duties;
provided, however, that five business days prior written notice shall have been
- -------- -------
given to Vitalink (which notice shall include the material terms and conditions,
and financing arrangements of, and the identity of the third party proposing,
the GranCare Business Combination Transaction (as hereinafter defined)) and that
prior to terminating this Agreement GranCare shall have made all the GranCare
Payments required by the
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terms of Section 10.05(b) hereof, or (f) Parent shall have breached its
obligations pursuant to Section 1.2 of the Voting Agreement.
Section 10.04 Procedure for Termination. In the event of termination
-------------------------
and abandonment of the Merger by Vitalink or GranCare pursuant to this Article
X, written notice thereof shall forthwith be given to the other.
Section 10.05 Effect of Termination and Abandonment. (a) In the
-------------------------------------
event of termination of this Agreement and abandonment of the Merger pursuant to
this Article X, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement, except
as provided in Section 5.11 and this Section 10.05 and except that nothing
herein shall relieve any party from liability for any breach of this Agreement.
(b) In the event of (i) a termination of this Agreement pursuant to
Section 10.01(b), (c) or (d) and if prior thereto any person shall have made a
bona fide proposal concerning a GranCare Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by Vitalink
pursuant to Section 10.02(a), (b), (c) or (d) or any termination of this
Agreement by GranCare pursuant to Section 10.03(e), then GranCare shall promptly
pay Vitalink by wire transfer of immediately available funds to an account
specified by Vitalink up to $2.5 million for all documented fees and expenses
incurred by Vitalink (including the fees and expenses of counsel, accountants,
consultants and advisors) in connection with this Agreement and the transactions
contemplated hereby. In the event of a termination of this Agreement pursuant
to Section 10.03(e), GranCare shall be obligated to pay Vitalink an additional
fee of $17.5 million (the "GranCare Termination Payment") payable prior to and
as a condition of such termination as follows: (i) $7.5 million promptly by
wire transfer of immediately available funds to an account specified by Vitalink
and (ii) $10 million by either, at GranCare's discretion, (x) delivery to
Vitalink of an irrevocable letter of credit for $10 million or (y) deposit of
$10 million in immediately available funds to an escrow, in the case of each of
clause (x) and (y) on terms satisfactory to Vitalink with payment of such $10
million to be made to Vitalink in immediately available funds immediately prior
to and as a condition of effecting the GranCare Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "GranCare Payments"). To
the extent a GranCare Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c) or
(d) or 10.02(a), (b), (c) or (d), any person shall
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have submitted a bona fide proposal concerning a GranCare Business Combination
Transaction and within eighteen months after the termination of this Agreement,
GranCare or any of its Subsidiaries proposes to enter into a definitive
agreement with a third party with respect to a GranCare Business Combination
Transaction or a GranCare Business Combination Transaction is proposed to be
effected, then GranCare, prior to entering into any such definitive agreement or
any such GranCare Business Combination Transaction being effected, shall be
obligated to pay Vitalink an additional fee of $17.5 million payable as follows:
(i) in the case of the proposed execution of a definitive agreement for a
GranCare Business Combination Transaction, prior to and as a condition of
entering into such definitive agreement, GranCare shall have made all the
GranCare Payments and (ii) in the case of a GranCare Business Combination
Transaction proposed to be effected without any agreement, prior to and as a
condition of effecting such GranCare Business Combination Transaction, GranCare
shall promptly pay Vitalink $17.5 million by wire transfer of immediately
available funds to an account specified by Vitalink. As used in this Section
10.05, the term "GranCare Business Combination Transaction" shall mean any of
the following involving GranCare or any Pharmacy Subsidiary that is material to
the business, results of operation, prospects or financial condition of the
Institutional Pharmacy Business taken as a whole: (1) any merger,
consolidation, share exchange, business combination or other similar transaction
(other than the Merger) including the Skilled Nursing Business; (2) any sale,
lease, exchange, transfer or other disposition of 25% or more of the assets of
GranCare (other than assets related to the Skilled Nursing Business) and its
Pharmacy Subsidiaries, taken as a whole, in a single transaction or series of
transactions; or (3) the acquisition by a person or entity, or any "group" (as
such term is defined under Section 13(d) of the Exchange Act and the rules and
regulations thereunder) of beneficial ownership of 33 1/3% or more of GranCare
Common Stock, whether by tender offer, exchange offer or otherwise.
(c) In the event of (i) a termination of this Agreement pursuant to
Section 10.01(b), (c) or (d) and if prior thereto any person shall have made a
bona fide proposal concerning an Vitalink Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by GranCare
pursuant to Section 10.03(a), (b), (c), (d) or (f) or any termination of this
Agreement by Vitalink pursuant to Section 10.02(e), then Vitalink shall promptly
pay GranCare by wire transfer of immediately available funds to an account
specified by GranCare up to $2.5 million for all documented fees and expenses
incurred by GranCare (including the fees and expenses of counsel, accountants,
consultants and advisors) in connection with this Agreement, the
<PAGE>
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Distribution Agreement and the transactions contemplated hereby or thereby. In
the event of a termination of this Agreement pursuant to Section 10.02(e)
Vitalink shall be obligated to pay GranCare an additional fee of $17.5 million
(the "Vitalink Termination Payment") payable prior to and as a condition of such
termination as follows: (i) $7.5 million promptly by wire transfer of
immediately available funds to an account specified by GranCare, (ii) $10
million by either, at Vitalink's discretion, (x) delivery to GranCare of an
irrevocable letter of credit for $10 million or (y) deposit of $10 million in
immediately available funds to an escrow, in the case of each of clause (x) and
(y) on terms satisfactory to GranCare with payment of such $10 million to be
made to GranCare in immediately available funds immediately prior to and as a
condition of effecting the Vitalink Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "Vitalink Payments"). To
the extent an Vitalink Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c) or
(d) or 10.03(a), (b), (c), (d) or (f), any person shall have submitted a bona
fide proposal concerning an Vitalink Business Combination Transaction and within
eighteen months after the termination of this Agreement, Vitalink or any of its
Subsidiaries proposes to enter into a definitive agreement with a third party
with respect to a Vitalink Business Combination Transaction or a Vitalink
Business Combination Transaction is proposed to be effected, then Vitalink,
prior to entering into any such definitive agreement or any such Vitalink
Business Combination Transaction being effected, shall be obligated to pay
GranCare an additional fee of $17.5 million payable as follows: (i) in the case
of the proposed execution of a definitive agreement for an Vitalink Business
Combination Transaction, prior to and as a condition of entering into such
definitive agreement, Vitalink shall have made all the Vitalink Payments and
(ii) in the case of an Vitalink Business Combination Transaction proposed to be
effected without any agreement, prior to and as a condition of effecting such
Vitalink Business Combination Transaction, Vitalink shall promptly pay GranCare
$17.5 million by wire transfer of immediately available funds to an account
specified by GranCare. As used in this Section 10.05, the term "Vitalink
Business Combination Transaction" shall mean any of the following involving
Vitalink or any Subsidiary that is material to the business, results of
operation, prospects or financial condition of Vitalink and its Subsidiaries
taken as a whole: (1) any merger, consolidation, share exchange, business
combination or other similar transaction (other than the Merger); (2) any sale,
lease, exchange, transfer or other disposition of 25% or more of the assets of
Vitalink and its Subsidiaries, taken as a whole, in a single transaction or
series
<PAGE>
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of transactions; or (3) the acquisition by a person or entity, or any "group"
(as such term is defined under Section 13(d) of the Exchange Act and the rules
and regulations thereunder) of beneficial ownership of 33 1/3% or more of
Vitalink Common Stock, whether by tender offer, exchange offer or otherwise.
ARTICLE XI.
DEFINITIONS
Section 11.01 Terms Defined in This Agreement. The following
-------------------------------
capitalized terms used herein shall have the meanings ascribed in the indicated
sections.
<TABLE>
<CAPTION>
<S> <C>
Affiliates................................. 4.07
Agreement.................................. First Paragraph
Amendment.................................. 1.03
Antitrust Division......................... 5.07
Average Market Value....................... 2.04
California Act............................. 1.01
CERCLA..................................... 3.27
Certificate of Merger...................... 1.02
Certificates............................... 2.02
Certified Agreement........................ 1.02
Closing.................................... 9.01
Closing Consideration...................... 2.01
Closing Date............................... 9.01
COBRA...................................... 3.26
Code....................................... 3.25
Consent.................................... 5.16
Constituent Corporations................... First Paragraph
Debenture.................................. 5.16
Delaware Act............................... 1.01
Dissenting Shares.......................... 2.01
Distribution............................... Recitals
Distribution Agreement..................... Recitals
Effective Time............................. 1.02
Environment................................ 3.27
Environmental Authorizations............... 3.27
Environmental Laws......................... 3.27
Environmental Notice....................... 3.27
ERISA...................................... 3.26
ERISA Affiliate............................ 3.26
Exchange Act............................... 3.08
Exchange Ratio............................. 2.01
Vitalink................................... First Paragraph
Vitalink Acquisition Transaction........... 5.04
Vitalink Balance Sheet..................... 3.18
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
Vitalink Business Combination Transaction.. 10.05
Vitalink Common Stock...................... 2.01
Vitalink Compensation and Benefit Plans.... 3.03
Vitalink Contracts......................... 3.03
Vitalink Disclosure Statement.............. Article III
Vitalink Information Statement............. 3.08
Vitalink Licenses.......................... 3.07
Vitalink Material Adverse Effect........... 3.01
Vitalink Option Plans...................... 3.14
Vitalink Options........................... 3.14
Vitalink Payments.......................... 10.05
Vitalink Pension Benefit Plans............. 3.26
Vitalink Permitted Encumbrance............. 3.18
Vitalink Pharmacy Contracts................ 3.31
Vitalink Preferred Stock................... 3.14
Vitalink SEC Reports....................... 3.10
Vitalink Termination Payment............... 10.05
Vitalink Welfare Plans..................... 3.26
Foreign Plan............................... 3.26
FTC........................................ 5.07
Hazardous Material......................... 3.27
HSR Act.................................... 3.03
Indenture.................................. 5.16
Institutional Pharmacy Business............ Recitals
Intellectual Property Rights............... 3.24
IRS........................................ 3.26
Merger..................................... 1.01
Multiemployer Plan......................... 3.26
NASDAQ..................................... 2.02
Note Indenture............................. 5.16
Parent..................................... Recitals
PBGC....................................... 3.26
Pharmacy Agreement......................... 4.32
Pharmacy Subsidiaries...................... 4.01
Proxy Statement............................ 4.09
Registration Statement..................... 3.08
Restructuring.............................. Recitals
GranCare................................... First Paragraph
GranCare Acquisition Transaction........... 5.03
GranCare Balance Sheet..................... 4.19
GranCare Business Combination
Transaction.............................. 10.05
GranCare Common Stock...................... 2.01
GranCare Compensation and Benefit Plans.... 4.03
GranCare Contract.......................... 4.03
GranCare Disclosure Statement.............. Article IV
GranCare Licenses.......................... 4.08
GranCare Material Adverse Effect........... 4.01
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
GranCare Option Plans...................... 4.15
GranCare Options........................... 4.15
GranCare Payments.......................... 10.05
GranCare Pension Benefit Plans............. 4.27
GranCare Permitted Encumbrance............. 4.19
GranCare Pharmacy Contracts................ 4.32
GranCare Preferred Stock................... 4.15
GranCare SEC Reports....................... 4.11
GranCare Termination Payment............... 10.05
GranCare Welfare Plans..................... 4.27
SEC........................................ 3.08
Securities Act............................. 3.08
Shareholders Agreement..................... 8.02
Skilled Nursing Assets..................... Recitals
Skilled Nursing Business................... 4.01
Skilled Nursing Liabilities................ Recitals
Special Meeting............................ 1.05
SNFCo...................................... Recitals
SNFCo Registration Document................ 4.09
SNFCo Stock................................ Recitals
Stockholder Approval....................... 1.05
Subsidiary................................. 12.09
Surviving Corporation...................... 1.01
Tax Returns................................ 3.25
Taxes...................................... 3.25
Voting Agreement........................... Recitals
</TABLE>
ARTICLE XII.
MISCELLANEOUS
Section 12.01 Amendment and Modification. Subject to applicable law,
--------------------------
this Agreement may be amended, modified or supplemented only by written
agreement of Vitalink and GranCare at any time prior to the Effective Time with
respect to any of the terms contained herein; provided, however, that after
-------- -------
this Agreement is adopted by the stockholders of GranCare, no such amendment or
modification shall change the amount or form of the Closing Consideration.
Section 12.02 Waiver of Compliance; Consents. Any failure of Vitalink,
------------------------------
on the one hand, or GranCare, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by GranCare or Vitalink,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any
<PAGE>
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subsequent or other failure. Whenever this Agreement requires or permits
consent by or on behalf of any party hereto, such consent shall be given in
writing in a manner consistent with the requirements for a waiver of compliance
as set forth in this Section 12.02.
Section 12.03 Survivability; Investigations. The respective
-----------------------------
representations and warranties of Vitalink and GranCare contained herein or in
any certificates or other documents delivered prior to or at the Closing shall
not be deemed waived or otherwise affected by any investigation made by any
party hereto and shall not survive the Closing.
Section 12.04 Notices. All notices and other communications hereunder
-------
shall be in writing and shall be delivered personally, by next-day courier or
mailed by registered or certified mail (return receipt requested) with first
class postage prepaid, or telecopied with written machine generated confirmation
of receipt, to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice; provided, that notices
of a change of address shall be effective only upon receipt thereof). Any such
notice shall be effective upon receipt, if personally delivered or telecopied,
one day after delivery to a courier for next-day delivery, or three days after
mailing, if deposited in the U.S. mail, first class postage prepaid.
(a) if to GranCare, to
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Telecopy: (770) 698-8199
Attention: Evrett W. Benton, Esq.
with a copy to
Powell, Goldstein, Frazer & Murphy
16th floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy: (404) 572-5958
Attention: Richard H. Miller, Esq.
<PAGE>
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(b) if to Vitalink, to
Vitalink Pharmacy Services, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Telecopy: (301) 905-4007
Attention: James H. Rempe, Esq.
with a copy to
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Telecopy: (212) 269-5420
Attention: W. Leslie Duffy, Esq.
Section 12.05 Assignment. This Agreement and all of the provisions
----------
hereof shall be binding upon and inure to the benefit of the parties hereto and
their respective successors and permitted assigns, but neither this Agreement
nor any of the rights, interests or obligations hereunder shall be assigned by
any of the parties hereto without the prior written consent of the other
parties, nor is this Agreement intended to confer any rights or remedies
hereunder upon any other person except the parties hereto and, with respect to
Section 5.10, the officers and directors of GranCare.
Section 12.06 Governing Law. Except as the laws of the State of
-------------
California are by their terms applicable, this Agreement shall be governed by
the laws of the State of Delaware (regardless of the laws that might otherwise
govern under applicable Delaware principles of conflicts of law) as to all
matters, including but not limited to matters of validity, construction, effect,
performance and remedies.
Section 12.07 Counterparts. This Agreement may be executed in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12.08 Severability. In case any one or more of the provisions
------------
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall
<PAGE>
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only apply as to such party in the specific jurisdiction where such judgment
shall be made.
Section 12.09 Interpretation. The article and section headings
--------------
contained in this Agreement are solely for the purpose of reference, are not
part of the agreement of the parties and shall not in any way affect the meaning
or interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; and (ii) the term "Subsidiary" of any specified
corporation shall mean any corporation of which a majority of the outstanding
securities having ordinary voting power to elect a majority of the board of
directors is directly or indirectly beneficially owned by such specified
corporation or any other person of which a majority of the equity interests
therein is, directly or indirectly, owned by such specified corporation.
Section 12.10 Entire Agreement. This Agreement, including the exhibits
----------------
hereto and the documents and instruments referred to herein (including the
Confidentiality Agreement dated May 26, 1996 between Vitalink and GranCare),
embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter. There are no representations, promises, warranties, covenants,
or undertakings, other than those expressly set forth or referred to herein and
therein.
<PAGE>
S-1
IN WITNESS WHEREOF, Vitalink and GranCare have caused this Agreement to
be signed by their respective duly authorized officers as of the date first
above written.
VITALINK PHARMACY SERVICES, INC.
By:
------------------------------
Name:
Title:
GRANCARE, INC.
By:
------------------------------
Name:
Title:
<PAGE>
EXHIBIT 2.2
AGREEMENT AND PLAN OF DISTRIBUTION
BY AND BETWEEN
GRANCARE, INC.
AND
GCI PROPERTIES, INC.
DATED AS OF
SEPTEMBER 3, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<C> <S> <C>
ARTICLE I. DEFINITIONS.............................................. 1
Section 1.1. General.................................................. 1
Section 1.2. Incorporation of Merger Agreement Definitions............ 5
Section 1.3. References; Interpretation............................... 5
ARTICLE II. DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS... 6
Section 2.1. Transfer of Assets and Liabilities....................... 6
(a) Certain Transactions..................................... 6
(b) Stock Dividend to GranCare............................... 6
(c) Charters; Bylaws......................................... 6
(d) Directors; Officers...................................... 6
(e) Certain Licenses and Permits............................. 6
(f) Transfer of Agreements................................... 6
(g) Services Agreement....................................... 6
(h) Delivery of Shares to Transfer Agent..................... 6
(i) Other Transactions....................................... 8
Section 2.2. Certain Financial and Other Arrangements................. 8
(a) Intercompany Accounts.................................... 8
(b) Operations in Ordinary Course............................ 8
Section 2.3. Assumption of Indebtedness; Allocation of Expenses....... 8
Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations,
Rights and Assets Relating to Shared Liabilities......... 9
Section 2.5. Resignations............................................. 9
Section 2.6. Further Assurances....................................... 10
Section 2.7. No Representations or Warranties......................... 10
Section 2.8. Guarantees............................................... 11
Section 2.9. Witness Services......................................... 11
Section 2.10. Certain Post-Distribution Transactions................... 11
Section 2.11. Directors and Officers Liability Insurance............... 11
Section 2.12. Insurance................................................ 11
Section 2.13. Ancillary Agreements..................................... 11
ARTICLE III. INDEMNIFICATION.......................................... 12
Section 3.1. Indemnification by GranCare.............................. 12
Section 3.2. Indemnification by SNFCo................................. 12
Section 3.3. Limitations on Indemnification Obligations............... 12
Section 3.4. Procedures for Indemnification........................... 12
Section 3.5. Indemnification Payments................................. 13
Section 3.6. Other Adjustments........................................ 14
Section 3.7. Survival of Indemnities.................................. 14
ARTICLE IV. ACCESS TO INFORMATION.................................... 14
Section 4.1. Provision of Corporate Records........................... 14
Section 4.2. Access to Information.................................... 14
Section 4.3. Reimbursement; Other Matters............................. 15
Section 4.4. Confidentiality.......................................... 15
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE V. INSURANCE..................................................
Section 5.1. Policies and Rights Included Within Assets................. 16
Section 5.2. Post-Time of Distribution Claims Against SNFCo............. 16
Section 5.3. Administration; Other Matters.............................. 16
(b) Allocation of Insurance Proceeds........................... 17
Section 5.4. Agreement for Waiver of Conflict and Shared Defense........ 17
Section 5.5. Cooperation................................................ 17
ARTICLE VI. DISPUTE RESOLUTION......................................... 18
ARTICLE VII. MISCELLANEOUS.............................................. 18
Section 7.1. Complete Agreement; Construction........................... 18
Section 7.2. Counterparts............................................... 19
Section 7.3. Survival of Agreements..................................... 19
Section 7.4. Notices.................................................... 19
Section 7.5. Waivers.................................................... 19
Section 7.6. Amendments................................................. 19
Section 7.7. Assignment................................................. 19
Section 7.8. Successors and Assigns..................................... 19
Section 7.9. Termination................................................ 19
Section 7.10. Subsidiaries............................................... 20
Section 7.11. Third Party Beneficiaries.................................. 20
Section 7.12. Attorney Fees.............................................. 20
Section 7.13. Title and Headings......................................... 20
Section 7.14. Schedules.................................................. 20
Section 7.15. Specific Performance....................................... 20
Section 7.16. Governing Law.............................................. 20
Section 7.17. Severability............................................... 20
</TABLE>
ii
<PAGE>
AGREEMENT AND PLAN OF DISTRIBUTION
THIS AGREEMENT AND PLAN OF DISTRIBUTION (the "Distribution Agreement"), dated
as of September 3, 1996, by and between GranCare, Inc., a California
corporation (the "Company"), and GCI Properties, Inc., a California corporation
("SNFCo").
WITNESSETH:
WHEREAS, the Company and Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), contemporaneously herewith are entering into an
Agreement and Plan of Merger, dated as of September 3, 1996 (the "Merger
Agreement"), providing for the merger (the "Merger") of the Company's
Institutional Pharmacy Business with Vitalink;
WHEREAS, prior to the Effective Time (as defined in the Merger Agreement) of
the Merger the Company intends to transfer its Skilled Nursing Business (as
hereinafter defined) to SNFCo in exchange for the issuance of shares of SNFCo
Common Stock;
WHEREAS, immediately prior to the Effective Time of the Merger, the Company's
Board of Directors, subject to the approval of the Company's shareholders,
expects to complete the Distribution (as hereinafter defined); and
WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the Skilled Nursing Business, with which Vitalink is
unwilling to merge, and this Distribution Agreement sets forth the various
agreements between GranCare and SNFCo relating to the separation of the
Institutional Pharmacy Business from the Skilled Nursing Business.
NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, and intending to be
legally bound (subject to shareholder approval), the parties hereto hereby
agree as follows:
ARTICLE I.
DEFINITIONS
Section l.1. General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined):
"Action" shall mean any action, suit, claim, arbitration, inquiry, proceeding
or investigation by or before any court, any governmental or other regulatory
or administrative agency, body or commission or any arbitration tribunal.
"Affiliate" shall mean, when used with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with the Person
specified.
"Ancillary Agreements" shall mean all of the written agreements, instruments,
understandings, assignments or other arrangements (other than this Distribution
Agreement and the Merger Agreement) entered into in connection with the
transactions contemplated hereby, including, without limitation, the Transfer
and Assumption Instruments, the Employee Benefits Matters Agreement, the Tax
Allocation Agreement, the Interim Services Agreement and the Non-competition
Agreement; provided, however, that in no event shall any agreement constitute
an Ancillary Agreement unless consented to by each of GranCare, SNFCo and
Vitalink.
"Assignee" shall have the meaning as defined in Section 2.1(f)(ii).
1
<PAGE>
"Claims Administration" shall mean the processing of claims made under the
Company Policies, including, without limitation, the reporting of claims to the
insurance carriers, as well as the management and defense of claims and
providing for appropriate releases upon settlement of claims.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
"Commission" shall mean the Securities and Exchange Commission.
"Company Policies" shall mean all Policies which are or at any time were
maintained by or on behalf of or for the benefit or protection of GranCare or
SNFCo or any of their respective predecessors or Subsidiaries which relate to
any Shared Liability, the Skilled Nursing Business or the Institutional
Pharmacy Business, or current or past directors, officers, employees or agents
of any of the foregoing businesses.
"D&O Insurance Policies" shall have the meaning as defined in Section 2.11.
"Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of GranCare Common Stock as of the Distribution
Record Date of the SNFCo Common Stock owned by GranCare on the basis of one
share of SNFCo Common Stock for each outstanding share of GranCare Common
Stock.
"Distribution Agreement Dispute" shall have the meaning as defined in Article
VI.
"Distribution Date" shall mean such date as may hereafter be determined by
GranCare's Board of Directors as the date of which the Distribution shall be
effected.
"Distribution Record Date" shall mean such date as may hereafter be
determined by GranCare's Board of Directors as the record date for determining
the shareholders of GranCare entitled to receive the Distribution.
"Employee Benefits Matters Agreement" shall mean the Agreement Respecting
Employee Benefit Matters dated as of the Time of Distribution among GranCare
and SNFCo setting forth the manner in which various employee benefit
entitlements will be treated in connection with the Distribution.
"GranCare Common Stock" shall mean the common stock, without par value per
share, of GranCare.
"GranCare Disclosure Statement" shall mean the Disclosure Statement delivered
by GranCare to Vitalink contemporaneously with GranCare's execution and
delivery of the Merger Agreement.
"GranCare Indemnitees" shall mean GranCare, each Pharmacy Subsidiary, the
directors and officers of GranCare and the Pharmacy Subsidiaries and each of
the heirs, executors, successors and assigns of any of the foregoing.
"Indemnifiable Losses" shall mean any and all losses, liabilities, claims,
damages, demands, reasonable costs or expenses (including, without limitation,
attorneys' fees and any and all out-of-pocket expenses) whatsoever reasonably
incurred in investigating, preparing for or defending against any Actions or
potential Actions.
"Indemnifying Party" shall have the meaning as defined in Section 3.3.
"Indemnitee" shall have the meaning as defined in Section 3.3.
"Institutional Pharmacy Business" shall mean the business of providing
pharmaceutical supplies and services primarily to health care institutions such
as the Skilled Nursing Business conducted by GranCare and its Pharmacy
Subsidiaries.
2
<PAGE>
"Institutional Pharmacy Assets" shall mean, collectively, all the rights and
assets of GranCare and its Subsidiaries that are used primarily in the conduct
of the Institutional Pharmacy Business, including, without limitation, (i) the
assets included on the balance sheet of GranCare as of May 31, 1996, prepared
on a pro forma basis giving effect to the Distribution and included in the
GranCare Disclosure Statement attached to the Merger Agreement, and not
disposed of in the ordinary course of business prior to the Time of
Distribution, (ii) any assets acquired by GranCare or any of its Subsidiaries
that are used primarily in the conduct of the Institutional Pharmacy Business
from May 31, 1996, to the Time of Distribution and not disposed of in the
ordinary course of business, (iii) all the outstanding capital stock or other
interests of GranCare in the Subsidiaries listed on Schedule 1.1(b), (iv)
rights arising pursuant to the Company Policies to the extent set forth in
Article V hereof and (v) the cash proceeds received upon exercise prior to the
Time of Distribution of any stock options to acquire GranCare Common Stock.
Notwithstanding the foregoing, the Institutional Pharmacy Assets shall not
include any assets retained by SNFCo or any of the SNFCo Subsidiaries pursuant
to the terms of any Ancillary Agreement.
"Institutional Pharmacy Liabilities" shall mean, collectively, (i) the
Liabilities included on the balance sheet of GranCare as of May 31, 1996,
prepared on a pro forma basis giving affect to the Distribution and included in
the GranCare Disclosure Statement attached to the Merger Agreement, and any
Liabilities of the same kind or nature incurred by GranCare or any of its
Subsidiaries relating primarily to or arising primarily in connection with the
conduct of the Institutional Pharmacy Business from May 31, 1996, to the Time
of Distribution other than indebtedness for borrowed money except as may
otherwise be provided for elsewhere herein, (ii) all the Liabilities of
GranCare and the Pharmacy Subsidiaries, if any, under this Distribution
Agreement and any of the Ancillary Agreements, (iii) all the Liabilities of
GranCare or its Subsidiaries (whenever arising whether prior to, at or
following the Time of Distribution) to the extent the Liabilities arise out of
or in connection with or otherwise relate primarily to (a) the management or
conduct before or after the Time of Distribution of the Institutional Pharmacy
Business or (b) any properties owned, leased, operated or otherwise used
primarily in the conduct of the Institutional Pharmacy Business, (iv) the
indebtedness outstanding at the Time of Distribution that is listed on Schedule
2.3 (the Liabilities listed in clauses (i) through (iv) above being
collectively referred to as the "True GranCare Liabilities") and (v) one-half (
1/2) of the amount of all other Shared Liabilities.
"Insurance Administration" shall mean, with respect to each Company Policy,
the accounting for Insurance Proceeds, premiums, defense costs, indemnity
payments, deductibles and retentions, as appropriate, under the terms and
conditions of each of the Company Policies; and the report to excess insurance
carriers of any losses or claims which may cause the per-occurrence, per claim
or aggregate limits of any Company Policy to be exceeded, and the distribution
of Insurance Proceeds as contemplated by this Distribution Agreement.
"Insurance Proceeds" shall mean those monies (i) received by an insured from
an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured.
"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Company
Policies, whether or not subject to deductibles, co-insurance, uncollectability
or premium adjustments, but only to the extent that such Liabilities are within
applicable Company Policy limits, including aggregates.
"Liabilities" shall mean any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including, without
limitation, those debts, liabilities and obligations arising under any law,
rule, regulation, Action, order or consent decree of any court, any
governmental or other regulatory or administrative agency or commission or any
award of any arbitration tribunal, and those arising under any contract,
guarantee, commitment or undertaking.
"Non-competition Agreement" shall mean the agreement dated as of the Time of
Distribution between Parent (as defined in the Merger Agreement), Vitalink and
SNFCo setting forth the basis for the intercompany relationships that shall
exist between and among the parties during the term of such agreement.
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"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Pharmacy Subsidiaries" shall mean those subsidiaries of GranCare listed on
Schedule 1.1(b) hereto.
"Policies" shall mean insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including, without
limitation, primary, excess and umbrella policies, comprehensive general
liability, fiduciary liability, automobile, aircraft, property and casualty,
environmental, workers' compensation and employee dishonesty insurance policies
and bonds and captive insurance company arrangements, together with the rights,
benefits and privileges thereunder.
"Proxy Statement/Prospectus" shall mean the Proxy Statement/Prospectus
contained in the Registration Statement on Form S-4 relating to the shares of
Vitalink Common Stock to be issued in connection with the Merger sent to the
holders of shares of GranCare Common Stock in connection with obtaining
shareholder approval of, inter alia, the Distribution and the Merger, including
any amendment or supplement thereto.
"Records" shall have the meaning as defined in Section 4.1(a).
"Services Agreement" shall mean the Interim Services Agreement dated as of
the Time of Distribution by and between SNFCo and GranCare pursuant to which
SNFCo shall provide, for the benefit of Vitalink (as the successor to
GranCare), such services as may be requested from time to time by Vitalink as
were provided on a centralized basis by GranCare for the benefit of GranCare
and its Subsidiaries prior to the Distribution.
"Settling Party" shall have the meaning as defined in Section 2.4(b).
"Shared Liability" means any Liability of the parties hereto or their
respective Subsidiaries (whether arising prior to, at or following the Time of
Distribution) (i) which is not a True GranCare Liability or True SNFCo
Liability or (ii) the responsibility for which is allocated between GranCare
and SNFCo in this Distribution Agreement or the Ancillary Agreements. Shared
Liability includes, without limitation, the Shared Liabilities listed on
Schedule 1.1(c) hereto.
"Shared Transaction Expenses" shall have the meaning as defined in Section
2.3(d).
"Shared Transaction Expense Settlement Amount" shall have the meaning as
defined in Section 2.3(d).
"Skilled Nursing Assets" shall mean, collectively, all the rights and assets
of GranCare and its Subsidiaries immediately prior to the Time of Distribution
that are not Institutional Pharmacy Assets, including, without limitation, (i)
all outstanding capital stock or other interests of SNFCo in the SNFCo
Subsidiaries listed on Schedule 1.1(a), (ii) the right to the name "GranCare"
and the other trademarks, trade names, logos, symbols and similar marks listed
in Schedule 1.1(d) and (iii) rights arising pursuant to the Company Policies to
the extent set forth in Article V hereof. Notwithstanding the foregoing, the
Skilled Nursing Assets shall not include any assets retained by GranCare or any
of the Pharmacy Subsidiaries pursuant to the terms of any Ancillary Agreement.
"Skilled Nursing Business" shall mean the skilled nursing, contract
management, home health and assisted living business conducted by GranCare,
SNFCo and their respective Subsidiaries and successors.
"Skilled Nursing Liabilities" shall mean, collectively, (i) all of the
Liabilities of GranCare and its Subsidiaries immediately prior to the Time of
Distribution other than the Institutional Pharmacy Liabilities and (ii) all the
Liabilities of SNFCo and the SNFCo Subsidiaries, if any, under this
Distribution Agreement and any of the Ancillary Agreements (the Liabilities
listed in clauses (i) through (ii) above being collectively referred to as the
"True SNFCo Liabilities") and (iii) one-half ( 1/2) of the amount of all Shared
Liabilities, unless otherwise allocated in this Distribution Agreement.
"SNFCo Common Stock" shall mean the common stock of SNFCo.
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"SNFCo Indemnitees" shall mean SNFCo, each SNFCo Subsidiary, the directors
and officers of SNFCo and the SNFCo Subsidiaries and each of the heirs,
executors, successors and assigns of any of the foregoing.
"SNFCo Subsidiaries" shall mean all of the subsidiaries of GranCare other
than SNFCo and the Pharmacy Subsidiaries, including, without limitation, those
Subsidiaries listed on Schedule 1.1(a) hereto.
"Subsidiary" shall mean any Person of which another Person (i) owns, directly
or indirectly, ownership interests sufficient to elect a majority of the Board
of Directors (or persons performing similar functions (irrespective of whether
at the time any other class or classes of ownership interests of such Person
shall or might have such voting power upon the occurrence of any contingency))
or (ii) is a general partner or an entity performing similar functions (e.g., a
trustee).
"Tax" shall mean all Federal, state, local and foreign taxes and assessments
of any kind, including all interest, penalties and additions imposed with
respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation and Indemnification
Agreement dated as of the Time of Distribution among GranCare and SNFCo and the
other Subsidiaries of GranCare named therein.
"Third Party Claim" shall have the meaning as set forth in Section 3.4.
"Time of Distribution" shall mean the time on the Distribution Date as of
which the Distribution is effective, and unless otherwise agreed between the
parties, shall be immediately prior to the Effective Time.
"Transfer Agent" shall mean First Union National Bank, Two First Union
Center, 230 South Tryon Street, Charlotte, North Carolina, the transfer agent
for GranCare Common Stock.
"Transfer and Assumption Instruments" shall mean, collectively, the various
agreements, instruments and other documents to be entered into among or between
any of GranCare, SNFCo, the Pharmacy Subsidiaries and the SNFCo Subsidiaries
and approved by Vitalink (which approval shall not be unreasonably withheld) to
effect the transfer of assets and the assumption of Liabilities relating to the
Skilled Nursing Business and the Institutional Pharmacy Business in the manner
contemplated by this Distribution Agreement, including, without limitation,
real estate transfer documents and leases and all other instruments, documents
and agreements delivered in accordance with Section 2.6 hereof.
"True GranCare Liabilities" shall have the meaning as set forth under
"Institutional Pharmacy Liabilities."
"True SNFCo Liabilities" shall have the meaning as set forth under "Skilled
Nursing Liabilities."
"Vitalink Common Stock" shall mean the common stock, $.01 par value per
share, of Vitalink.
Section 1.2. Incorporation of Merger Agreement Definitions. Except to the
extent set forth herein, capitalized terms used herein shall have the same
definitions as such terms have in the Merger Agreement.
Section 1.3. References; Interpretation. References to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to one of the Schedules or Exhibits
attached to this Distribution Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Distribution
Agreement.
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ARTICLE II.
DISTRIBUTION AND OTHER TRANSACTIONS; CERTAIN COVENANTS
Section 2.1. Transfer of Assets and Liabilities.
(a) Certain Transactions. On or prior to the Distribution Date GranCare
shall, on behalf of itself and its Subsidiaries, transfer to SNFCo all of
GranCare's and its Subsidiaries' right, title and interest in the Skilled
Nursing Assets in the manner contemplated by the internal restructuring plan
attached hereto as Exhibit A and incorporated herein by reference and SNFCo
shall assume the Skilled Nursing Liabilities.
(b) Stock Dividend to GranCare. On or prior to the Distribution Date SNFCo
shall issue to GranCare as a stock dividend such number of shares of SNFCo
Common Stock as shall be required to effect the Distribution, as certified by
the Transfer Agent. In connection therewith GranCare shall deliver to SNFCo for
cancellation the share certificate currently held by GranCare representing
shares of SNFCo Common Stock.
(c) Charters; Bylaws. On or prior to the Distribution Date all necessary
actions shall have been taken to provide for the adoption of the form of
Articles of Incorporation and Bylaws to be filed by SNFCo with the Commission.
(d) Directors; Officers. On or prior to the Distribution Date, GranCare, as
the sole shareholder of SNFCo, (i) shall have taken all necessary action by
written consent to elect to the Board of Directors of SNFCo, the individuals to
be identified in the Proxy Statement/Prospectus as directors of SNFCo,
effective upon the Distribution, and (ii) shall have caused the directors of
SNFCo to elect as officers of SNFCo the individuals to be identified in the
Proxy Statement/Prospectus as the officers of SNFCo, effective upon the
Distribution.
(e) Certain Licenses and Permits. On or prior to the Distribution Date or as
soon as reasonably practicable thereafter, all transferrable licenses, permits
and authorizations issued by governmental or regulatory entities which relate
to the Skilled Nursing Business but which are held in the name of GranCare or
any of the Pharmacy Subsidiaries which licenses, permits and authorizations are
listed on Schedule 2.1(e), shall be duly and validly transferred by GranCare
(or such Pharmacy Subsidiaries) to SNFCo or such SNFCo Subsidiary as SNFCo may
designate.
(f) Transfer of Agreements.
(i) On or prior to the Distribution Date or as soon as reasonably
practicable thereafter, subject to the limitations set forth in this
Section 2.1(f), GranCare will, and it will cause the Pharmacy Subsidiaries
to, assign, transfer and convey to SNFCo or such SNFCo Subsidiary as SNFCo
may designate, all of GranCare's or such Pharmacy Subsidiary's respective
right, title and interest in and to any and all agreements that do not
relate primarily to the Institutional Pharmacy Business, to the extent such
agreements were not previously so transferred in connection with the
transactions contemplated by Section 2.1(a) hereof.
(ii) The assignee of any agreement assigned, in whole or in part,
hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
discharge all obligations of the assignor under such agreement and shall
indemnify the assignor against any and all liabilities in connection
therewith.
(iii) Notwithstanding anything in this Distribution Agreement to the
contrary, this Distribution Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or any attempted assignment, without the consent of a
third party, would constitute a breach thereof or in any way adversely
affect the rights of the Assignee thereof; provided, however, that the
provisions of Section 2.6 shall be applicable thereto.
(g) Services Agreement. On or before the Distribution Date, GranCare and
SNFCo will execute and deliver the Services Agreement setting forth the terms
upon which SNFCo shall, subsequent to the Time of Distribution, provide such
centralized back office support services to GranCare (and Vitalink as the
successor to GranCare) as
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may be determined by the parties to be appropriate and as may be requested by
Vitalink from time to time until such time (not to exceed the term established
in such agreement) as Vitalink (as the successor to GranCare) shall no longer
require such services.
(h) Delivery of Shares to Transfer Agent. GranCare shall deliver to the
Transfer Agent the share certificates representing the shares of SNFCo Common
Stock issued to GranCare by SNFCo pursuant to Section 2.1(b) and shall instruct
the Transfer Agent to distribute, on or as soon as practicable following the
Time of Distribution, such SNFCo Common Stock to holders of record of shares of
GranCare Common Stock on the Distribution Record Date as further contemplated
by the Proxy Statement/Prospectus and herein. SNFCo shall provide all share
certificates that the Transfer Agent shall require in order to effect the
Distribution.
(i) Other Transactions.
(i) On or prior to the Distribution Date, or as soon thereafter as is
reasonably practical, GranCare will, and it will cause the Pharmacy
Subsidiaries (other than SNFCo or any of the SNFCo Subsidiaries) to,
assign, transfer and convey to SNFCo (or such SNFCo Subsidiary as SNFCo may
direct) all of GranCare's right, title and interest in and to (a) all items
of GranCare's intellectual property except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare, (b) all of the
various assets listed on GranCare's General Ledger Account Number 1.01
except for those specific assets listed on Schedule 2.1(i), which shall be
retained by GranCare, and (c) all real estate leases, utility accounts,
trade organization memberships, vendor service contracts, warranty
contracts and items of a similar nature except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare.
(ii) On or prior to the Distribution Date, GranCare and the Pharmacy
Subsidiaries shall take or cause to be taken such action as shall be
necessary to assign and transfer all pending litigation, arbitration,
mediation and matters of a similar nature ("Pending Litigation Matters") to
SNFCo or such SNFCo Subsidiary as SNFCo may designate, including, without
limitation, instructing counsel of record to enter appropriate motions or
pleadings to accomplish the foregoing, except for such Pending Litigation
Matters as are listed on Schedule 2.1(i), which shall be retained by
GranCare. SNFCo and GranCare will each indemnify the other against any and
all liabilities, costs and expenses incurred in connection with any of the
Pending Litigation Matters for which it is responsible pursuant to this
Section 2.1(ii) following the Time of Distribution and each of GranCare and
SNFCo shall, subsequent to the Time of Distribution, be solely responsible
for the prosecution, defense, settlement or other conduct of Pending
Litigation Matters as are to be retained by each of them pursuant to this
Section 2.1(ii).
Section 2.2. Certain Financial and Other Arrangements.
(a) Intercompany Accounts. At the Time of Distribution, all intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder), including, without limitation, in respect of any cash balances, any
cash balances representing deposited checks or drafts for which only a
provisional credit has been allowed or any cash held in any centralized cash
management system, between GranCare and any of its Subsidiaries (other than the
Pharmacy Subsidiaries), on the one hand, and the Pharmacy Subsidiaries, on the
other hand, shall be netted out, in each case in such manner and amount as may
be agreed in writing by duly authorized representatives of GranCare, Vitalink
and SNFCo and the resulting net balance due from the Pharmacy Subsidiaries to
GranCare and any of its Subsidiaries (other than the Pharmacy Subsidiaries)
shall be contributed to the appropriate Pharmacy Subsidiaries as additional
capital.
(b) Operations in Ordinary Course. Each of GranCare and SNFCo covenants and
agrees that, except as otherwise provided in any Ancillary Agreement, during
the period from the date of this Distribution Agreement through the Time of
Distribution, it will, and will cause any entity that is a Subsidiary of such
party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment and
administration of accounts payable and the collection and administration of
accounts receivable, the purchase of capital assets
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and equipment, the management of inventories, cash management practices, the
allocation of interest, corporate overhead, costs of legal, insurance and other
centralized functions and shall, at all times prior to the Time of
Distribution, conduct its business in a manner consistent with the provisions
of Section 5.01 of the Merger Agreement.
Section 2.3. Assumption of Indebtedness; Allocation of Expenses.
(a) GranCare and SNFCo shall take such action as shall be necessary or
appropriate to cause SNFCo to assume all of the items of GranCare's
consolidated indebtedness other than those items listed on Schedule 2.3(a).
(b) In connection with the retention by GranCare of the Senior Subordinated
Notes (as defined in the Merger Agreement), SNFCo shall, prior to the Time of
Distribution, conduct a consent solicitation to obtain the approval of the
holders of the required principal amount of such Notes of the transactions
contemplated by this Distribution Agreement and the Merger Agreement and to
such modifications in the covenants contained in the Note Indenture (as defined
in the Merger Agreement) as may be reasonably requested by Vitalink in exchange
for the payment to such holders of a consent fee in such amount as is approved
by GranCare, SNFCo and Vitalink, which fee shall be paid equally by GranCare
and SNFCo (and Vitalink as the successor to GranCare).
(c) On or prior to the Distribution Date, GranCare shall take such action as
shall be necessary to redeem the Debentures (as defined in the Merger
Agreement) at a redemption price not to exceed 104.55% of the outstanding
principal amount thereof as of the date of this Distribution Agreement plus
accrued and unpaid interest thereon to the date of redemption. The redemption
premium incurred by GranCare in connection with accomplishing such redemption
shall be shared equally by GranCare and SNFCo (and Vitalink as the successor to
GranCare) but SNFCo shall be solely responsible for the payment of any accrued
interest to the date of redemption.
(d) In connection with accomplishing the various transactions contemplated by
the Merger Agreement, this Distribution Agreement and the Ancillary Agreements,
SNFCo (on behalf of itself and GranCare) and Vitalink each shall be responsible
for one-half of the total documented fees, expenses and other items of cost of
SNFCo, GranCare and Vitalink set forth on Schedule 2.3(d) (the "Shared
Transaction Expenses"). As soon as reasonably practical following the Effective
Time of the Merger, representatives of SNFCo and Vitalink each shall submit to
the other appropriate documentation substantiating the nature and amount of all
Shared Transaction Expenses actually incurred and paid by SNFCo (on behalf of
itself and GranCare) and Vitalink, respectively. The amounts of Shared
Transaction Expenses actually paid by each of SNFCo and Vitalink shall be
netted out in the manner hereinafter described and SNFCo or Vitalink, whichever
shall have paid the least amount of Shared Transaction Expenses, shall
reimburse the other pursuant to the provisions of Section 2.3(e) hereof in an
amount (the "Shared Transaction Expense Settlement Amount") equal to one-half
of the difference between (i) the amount of Shared Transaction Expenses paid by
SNFCo minus (ii) the amount of Shared Transaction Expenses paid by Vitalink. If
the result obtained from the foregoing calculation is a negative number, then
SNFCo shall reimburse Vitalink pursuant to the provisions of Section 2.3(e)
hereof in an amount equal to one-half of the aggregate difference so
determined. All Shared Transaction Expenses actually paid by GranCare prior to
the Time of Distribution shall be deemed to have been paid by SNFCo for
purposes of this Section 2.3(d). Except as set forth in Schedule 2.3(d) or as
otherwise contemplated by Section 5.11 of the Merger Agreement, GranCare and
SNFCo, on the one hand, and Vitalink, in its individual capacity and not as the
successor to GranCare, will each be solely responsible for their respective
fees and expenses incurred in connection with the transactions contemplated by
the Merger Agreement, this Distribution Agreement and the Ancillary Agreements.
(e) Immediately following the determination of the Shared Transaction Expense
Settlement Amount, representatives of Vitalink and SNFCo also shall determine
jointly the total outstanding indebtedness (determined in accordance with
generally accepted accounting principles consistently applied) of the
Institutional Pharmacy Business as of the Effective Time of the Merger being
assumed by Vitalink which shall include, but not be limited to, $100.0 million
attributable to the Senior Subordinated Notes and an amount equal to the amount
of GranCare's indebtedness incurred in connection with the acquisition of
Institutional Pharmacy Businesses during
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the period commencing on June 1, 1996 and ending at the Time of Distribution
("Closing Debt") and the amount of GranCare's cash and cash equivalents as of
the Effective Time of the Merger (excluding cash attributable to the exercise
of GranCare Options and warrants to purchase GranCare Common Stock occurring
after the date hereof and prior to the Effective Time and excluding any cash
attributable to checks or similar instruments outstanding and subject to
collection) ("Cash"). As soon as practicable after the Effective Time of the
Merger, Vitalink shall pay to SNFCo an amount equal to the difference between
(i) the sum of (A) $88,383,000 plus (B) the total purchase price paid by SNFCo
in connection with the acquisition of Institutional Pharmacy Businesses
approved by Vitalink during the period commencing on June 1, 1996 and ending at
the Time of Distribution, including, without limitation, the total purchase
price paid in connection with the acquisition of Emery Pharmacy, Inc., plus (C)
the Shared Transaction Expense Settlement Amount (or less such amount if such
amount is a negative number) plus (D) an amount equal to GranCare's Cash minus
(ii) the sum of (A) the amount of Closing Debt plus (B) $6.0 million. If the
result obtained by subtracting the sum determined pursuant to subclause
2.3(e)(ii) from the sum determined pursuant to subclause 2.3(e)(i) is a
negative amount, then such amount shall be paid by SNFCo to Vitalink and used
by Vitalink to pay liabilities to creditors of GranCare assumed by Vitalink in
the Merger. All payments to be made pursuant to this Section 2.3(e) shall be
made by wire transfer of immediately available funds to an account designated
by the recipient of such payment.
Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations, Rights and Assets Relating
to Shared Liabilities.
(a) Except as otherwise specifically set forth in any Ancillary Agreement,
from and after the Time of Distribution, (i) GranCare shall, and shall cause
the Pharmacy Subsidiaries and any and all successors and assigns to assume,
pay, perform and discharge all Institutional Pharmacy Liabilities as and when
due, and (ii) SNFCo shall, and shall cause the SNFCo Subsidiaries and any and
all successors and assigns to assume, pay, perform and discharge all Skilled
Nursing Liabilities as and when due.
(b) GranCare and SNFCo (and Vitalink as successor to GranCare) shall each
direct its own defense of any Shared Liability at its own expense; provided,
however, that (i) each party shall provide the other with copies of all
pleading, motions, items of correspondence and other documentation pertaining
to any Shared Liability contemporaneously with the first release of any such
material and (ii) no party hereto (or its successor) will admit any liability
with respect to, or settle, compromise or discharge, any Shared Liability
without the other party's prior written consent (which consent shall not be
unreasonably withheld) except as hereinafter provided. Any party seeking to
settle, compromise or discharge a Shared Liability (a "Settling Party") shall
have the right to settle, compromise or discharge a Shared Liability without
the other party's consent if the Settling Party releases the non-settling party
from any obligation in respect of such Shared Liability and indemnifies the
non-settling party against any and all liabilities in connection therewith and
such settlement, compromise or discharge would not otherwise adversely affect
the non-settling party.
(c) Upon the compromise, settlement or other resolution of any Shared
Liability, SNFCo and GranCare (and Vitalink as the successor to GranCare) shall
share in any obligation or liability arising as a result thereof in the same
proportion in which the Shared Liability is shared. The parties hereto shall
share in any rights and assets (including, without limitation, recoveries,
claims, rights of subrogation and proceeds of asset sales) that relate to
Shared Liabilities in the same proportions in which the related Shared
Liability is shared.
Section 2.5. Resignations. GranCare shall cause all its officers who shall
not continue as employees of SNFCo subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of SNFCo or as officers or directors of any SNFCo
Subsidiary in which they serve. SNFCo shall cause all its officers who shall
not continue as employees of GranCare subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of GranCare or as officers or directors of any Pharmacy
Subsidiary in which they serve.
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Section 2.6. Further Assurances.
(a) In case at any time after the Time of Distribution any further action is
reasonably necessary or desirable to carry out the purposes of this
Distribution Agreement and the Ancillary Agreements, the proper officers of
each party to this Distribution Agreement shall take, or cause the proper
officers of their respective Subsidiaries to take, all such necessary action.
Without limiting the foregoing, GranCare and SNFCo shall use their commercially
reasonable efforts to obtain all required consents and approvals of third
parties, to enter into all amendatory agreements and to make all filings and
applications that may be required for the consummation of the transactions
contemplated by this Distribution Agreement, the Merger Agreement and the
Ancillary Agreements, including, without limitation, all applicable
governmental and regulatory filings.
(b) In the event that subsequent to the Time of Distribution, GranCare or any
Pharmacy Subsidiaries shall either (i) receive written notice from SNFCo that
certain specified assets or Liabilities of GranCare or any Pharmacy
Subsidiaries which properly constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution or (ii) determine that certain assets or Liabilities of GranCare
or any Pharmacy Subsidiaries which constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution, then as promptly as practical thereafter, GranCare shall, and
shall cause the Pharmacy Subsidiaries to, take all steps reasonably necessary
to (A) transfer and deliver any and all of such assets to SNFCo without the
payment by SNFCo of any consideration therefor or (B) assign and transfer any
and all such Liabilities to SNFCo which shall assume and discharge the same
without payment to or by GranCare of any consideration in respect thereof. In
the event that, subsequent to the Time of Distribution, SNFCo or any SNFCo
Subsidiaries shall either (i) receive written notice from GranCare or any of
the Pharmacy Subsidiaries that certain specified assets or Liabilities were
transferred to SNFCo which properly constitute Institutional Pharmacy Assets or
Institutional Pharmacy Liabilities or (ii) determine that certain assets or
Liabilities of SNFCo which constitute Institutional Pharmacy Assets or
Institutional Pharmacy Liabilities were transferred to SNFCo, then as promptly
as practicable thereafter, SNFCO shall, and shall cause the SNFCo Subsidiaries
to, take all steps reasonably necessary to (A) transfer and deliver any and all
such assets to GranCare or the Pharmacy Subsidiaries without the payment by
GranCare of any consideration therefor or (B) assign and transfer any and all
such liabilities to GranCare which shall assume and discharge the same without
payment to or by SNFCo of any consideration in respect thereof.
(c) Nothing in this Distribution Agreement shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of law cannot be transferred; provided, however, that the
parties hereto and their respective Subsidiaries shall cooperate to seek to
obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this Article II. In the
event that any such transfer of assets or Liabilities has not been consummated
as of the Time of Distribution, from and after the Time of Distribution the
party retaining such asset shall hold such asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) or retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and take such
other action as may be reasonably requested by the party to whom such asset is
to be transferred, or by whom such Liability is to be assumed, as the case may
be, in order to place such party, insofar as is reasonably possible, in the
same position as would have existed had such asset or Liability been
transferred as contemplated hereby. As and when any such asset or Liability
becomes transferable, such transfer shall be effected forthwith. As of the Time
of Distribution, each party hereto shall be deemed to have acquired complete
and sole beneficial ownership over all of the assets held by it, together with
all rights, powers and privileges incident thereto, and shall be deemed to have
assumed in accordance with the terms of this Distribution Agreement all of the
Liabilities, and all duties, obligations and responsibilities incident thereto,
which such party is entitled to acquire or required to assume pursuant to the
terms of this Distribution Agreement.
Section 2.7. No Representations or Warranties. Each of the parties hereto
understands and agrees that, except as otherwise expressly provided in the
Merger Agreement, no party hereto is, in this Distribution Agreement or in any
other agreement or document contemplated by this Distribution Agreement or
otherwise, making any representation or warranty whatsoever, including, without
limitation, as to title, value or legal
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sufficiency. It is also agreed and understood that all assets either
transferred to or retained by the parties, as the case may be, shall be "as is,
where is" and that (subject to Section 2.6) the party to which such assets are
to be transferred hereunder shall bear economic and legal risk that any
conveyances of such assets shall prove to be insufficient or that such party's
or any Subsidiary's title to any such assets shall be other than good and
marketable and free from encumbrances.
Section 2.8. Guarantees. Except as otherwise specified in any Ancillary
Agreement, each of GranCare and SNFCo shall use its commercially reasonable
efforts to have, on or prior to the Time of Distribution, or as soon as
practicable thereafter, (a) GranCare and any of the Pharmacy Subsidiaries
removed as guarantor of or obligor for any True SNFCo Liability and (b) SNFCo
and any of the SNFCo Subsidiaries removed as a guarantor of or obligor for any
True GranCare Liability, in each case, without the requirement that it pay any
additional consideration in connection with obtaining the same.
Section 2.9. Witness Services. At all times from and after the Distribution
Date, each of GranCare and SNFCo shall use their commercially reasonable
efforts to make available to the other, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses to
the extent that (a) such persons may reasonably be required in connection with
the prosecution or defense of any Action in which the requesting party may from
time to time be involved and (b) there is no conflict of interest in the Action
between the requesting party and GranCare or SNFCo, as applicable. A party
providing witness services to the other party under this Section shall be
entitled to receive from the recipient of such services, upon the presentation
of invoices therefor, payments for such amounts, relating to supplies,
disbursements and other out-of-pocket expenses and direct costs of employees
who are witnesses, as may be reasonably incurred in providing such witness
services.
Section 2.10. Certain Post-Distribution Transactions.
(a) GranCare shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
GranCare's tax counsel in connection with such firm's rendering of an opinion
to GranCare and SNFCo as to certain tax aspects of the Distribution.
(b) SNFCo shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
SNFCo's tax counsel in connection with such firm's rendering of an opinion to
GranCare and SNFCo as to certain tax aspects of the Distribution.
Section 2.11. Directors and Officers Liability Insurance. From and after the
Time of Distribution to the third anniversary of the Distribution Date,
GranCare and SNFCo (and Vitalink as the successor to GranCare) will maintain in
full force and effect in such manner as is contemplated by Section 5.10 of the
Merger Agreement, all Company Policies providing directors and officers
liability insurance ("D&O Insurance Policies") (or, through the purchase of an
alternative policy, the full benefits and coverage of such D&O Insurance
Policies) and shall not consent to any amendment of the terms of such policies
that may be adverse to any persons covered by such insurance except as may
otherwise be permitted by Section 5.10 of the Merger Agreement. The provisions
of this Section 2.11 are intended for the benefit of, and shall be enforced by,
each of the persons covered by the D&O Insurance Policies.
Section 2.12. Insurance. Except as contemplated by Article V and Section 2.11
hereof, any and all omnibus coverage of GranCare and the Pharmacy Subsidiaries
under Company Policies will terminate (and will not be replaced) as of the Time
of Distribution and from and after the Time of Distribution GranCare and SNFCo
shall each obtain such continuing coverage as may be deemed necessary or
appropriate.
Section 2.13. Ancillary Agreements. Effective as of the Time of Distribution,
each of GranCare and SNFCo shall enter into, and/or (where applicable) shall
cause their respective Subsidiaries to enter into, the Ancillary Agreements
and, subject to Vitalink's prior approval, which shall not be unreasonably
withheld, any other agreements in respect of the Distribution reasonably
necessary or appropriate in connection with the transactions contemplated
hereby and thereby.
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ARTICLE III.
INDEMNIFICATION
Section 3.1. Indemnification by GranCare. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, GranCare (and
Vitalink as the successor to GranCare) shall indemnify, defend and hold
harmless the SNFCo Indemnitees from and against any and all Indemnifiable
Losses of the SNFCo Indemnitees arising out of, by reason of or otherwise in
connection with (a) the Institutional Pharmacy Liabilities, (b) the breach,
whether before or after the Time of Distribution, by GranCare or the Pharmacy
Subsidiaries of any provision of this Distribution Agreement or any Ancillary
Agreement or (c) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to Vitalink.
Section 3.2. Indemnification by SNFCo. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, SNFCo shall
indemnify, defend and hold harmless the GranCare Indemnitees from and against
any and all Indemnifiable Losses of the GranCare Indemnitees arising out of, by
reason of or otherwise in connection with (a) the Skilled Nursing Liabilities,
(b) the breach, whether before or after the Time of Distribution, by SNFCo or
the SNFCo Subsidiaries of any provision of this Distribution Agreement or any
Ancillary Agreement, (c) the Spin Registration Document (as defined in the
Merger Agreement) that shall be prepared by SNFCo and filed with the Commission
pertaining to the registration of the SNFCo Common Stock to be issued in the
Distribution or (d) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to SNFCo or GranCare.
Section 3.3. Limitations on Indemnification Obligations.
(a) The amount that any party (an "Indemnifying Party") is or may be required
to pay to any other person (an "Indemnitee") pursuant to Section 3.1 or Section
3.2, as applicable, shall be reduced (retroactively or prospectively) by any
Insurance Proceeds or other amounts actually recovered by or on behalf of such
Indemnitee in respect of the related Indemnifiable Loss. If an Indemnitee shall
have received the payment required by this Distribution Agreement from an
Indemnifying Party in respect of an Indemnifiable Loss and shall subsequently
receive Insurance Proceeds or other amounts in respect of such Indemnifiable
Loss, then such Indemnitee shall pay to such Indemnifying Party a sum equal to
the amount of such Insurance Proceeds or other amounts actually received, up to
the aggregate amount of any payments received from such Indemnifying Party
pursuant to this Distribution Agreement in respect of such Indemnifiable Loss.
(b) Any loss, liability, claim, damage, demand, cost or expense relating to
or arising out of information contained in the Proxy Statement/Prospectus that
does not specifically relate to either Vitalink, on the one hand, or SNFCo or
GranCare, on the other hand, shall constitute a Shared Liability for purposes
of this Distribution Agreement and no party hereto or their successor shall be
entitled to indemnification in respect thereof.
Section 3.4. Procedures for Indemnification. If a claim or demand is made
against an Indemnitee by any person who is not a party to this Distribution
Agreement (a "Third Party Claim") as to which such Indemnitee is entitled to
indemnification pursuant to this Distribution Agreement, such Indemnitee shall
notify the Indemnifying Party in writing, and in reasonable detail, of the
Third Party Claim promptly (and in any event within 20 business days) after
receipt by such Indemnitee of written notice of the Third Party Claim;
provided, however, that failure to give such notification within such 20
business day period shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually prejudiced
as a result of such failure (except that the Indemnifying Party shall not be
liable for any expenses incurred during the period in which the Indemnitee
failed to give such notice). Thereafter, the Indemnitee shall deliver to the
Indemnifying Party, promptly (and in any event within 20 business days) after
the Indemnitee's receipt thereof, copies of all notices and documents
(including court papers) received by the Indemnitee relating to the Third Party
Claim.
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If a Third Party Claim is made against an Indemnitee, the Indemnifying Party
shall be entitled to participate in the defense thereof and, if it so chooses
and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to by
the Indemnitee. Should the Indemnifying Party so elect to assume the defense of
a Third Party Claim, the Indemnifying Party shall not be liable to the
Indemnitee for legal or other expenses subsequently incurred by the Indemnitee
in connection with the defense thereof except as otherwise expressly provided
for in Section 2.9 of this Distribution Agreement. If the Indemnifying Party
assumes such defense, the Indemnitee shall have the right to participate in the
defense thereof and to employ counsel, at its own expense, separate from the
counsel employed by the Indemnifying Party, it being understood that the
Indemnifying Party shall control such defense. The Indemnifying Party shall be
liable for the fees and expenses of counsel employed by the Indemnitee (i) for
any period during which the Indemnifying Party has failed to assume the defense
thereof (other than during the 20 business day period prior to the time the
Indemnitee shall have given notice of the Third Party Claim as provided above)
or (ii) in the event the Indemnitee reasonably determines, based on the advice
of its counsel that there shall exist a conflict of interest between the
Indemnitee and the Indemnifying Party or that there are defenses available to
the Indemnitee that are not available to the Indemnifying Party, the effect of
which shall be to make it impractical for the Indemnitee and the Indemnifying
Party to be jointly represented by the same counsel, in which case the
Indemnifying Party shall be liable for the fees and expenses of one counsel for
all Indemnitees in any single or series of related Actions. If the Indemnifying
Party so elects to assume the defense of any Third Party Claim, the Indemnitee
shall cooperate with the Indemnifying Party in the defense or prosecution
thereof.
If the Indemnifying Party acknowledges in writing liability for
indemnification of a Third Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third Party Claim without the Indemnifying Party's prior written consent;
provided, however, that the Indemnitee shall have the right to settle,
compromise or discharge such Third Party Claim without the consent of the
Indemnifying Party if the Indemnitee releases the Indemnifying Party from its
indemnification obligation hereunder with respect to such Third Party Claim and
such settlement, compromise or discharge would not otherwise adversely affect
the Indemnifying Party. If the Indemnifying Party acknowledges in writing
liability for indemnification of a Third Party Claim, the Indemnitee will agree
to any settlement, compromise or discharge of a Third Party Claim that the
Indemnifying Party may recommend that by its terms (i) obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, (ii) releases the Indemnitee completely in connection
with such Third Party Claim and (iii) would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge and may assume the defense of such
Third Party Claim if the Indemnitee agrees (A) that the Indemnifying Party's
indemnification obligation with respect to such Third Party Claim shall not
exceed the amount that would have been required to be paid by or on behalf of
the Indemnifying Party in connection with such settlement, compromise or
discharge and (B) to assume all costs and expenses thereafter incurred in
connection with the defense of such Third Party Claim (other than those
contemplated by subclause (A) herein above).
Notwithstanding the foregoing, the Indemnifying Party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
fees and expenses of counsel incurred by the Indemnitee in defending such Third
Party Claim) if the Third Party Claim seeks an order, injunction or other
equitable relief or relief other than money damages against the Indemnitee
which the Indemnitee reasonably determines, based on the advice of its counsel,
cannot be separated from any related claim for money damages. If such equitable
or other relief portion of the Third Party Claim can be so separated from the
claim for money damages, the Indemnifying Party shall be entitled to assume the
defense of the portion relating to money damages.
Section 3.5. Indemnification Payments. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during the
course of the investigation or defense, as and when bills are received or loss,
liability, claim, damage or expense is incurred.
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Section 3.6. Other Adjustments.
(a) The amount of any Indemnifiable Loss shall be (i) increased to take into
account any net Tax cost actually incurred by the Indemnitee arising from any
payments received from the Indemnifying Party (grossed up for such increase)
and (ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such Indemnifiable
Loss. In computing the amount of such Tax cost or Tax benefit, the Indemnitee
shall be deemed to recognize all other items of income, gain, loss, deduction
or credit before recognizing any item arising from the receipt of any payment
with respect to an Indemnifiable Loss or the incurrence or payment of any
Indemnifiable Loss.
(b) In addition to any adjustments required pursuant to Section 3.3 hereof or
clause (a) of this Section 3.6, if the amount of any Indemnifiable Loss shall,
at any time subsequent to the payment required by this Distribution Agreement,
be reduced by recovery, settlement or otherwise, the amount of such reduction,
less any expenses incurred in connection therewith, shall promptly be repaid by
the Indemnitee to the Indemnifying Party, up to the aggregate amount of any
payments received from such Indemnifying Party pursuant to this Distribution
Agreement in respect of such Indemnifiable Loss.
Section 3.7. Survival of Indemnities. The obligations of GranCare and SNFCo
under this Article III shall survive the sale or other transfer by either of
them of any assets or businesses or the assignment by either of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related
to such assets, businesses or Liabilities and shall be binding on the
successors and assigns of all, or substantially all, of their respective assets
and business.
ARTICLE IV.
ACCESS TO INFORMATION
Section 4.1. Provision of Corporate Records.
(a) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, after the Distribution Date, upon the prior written request by SNFCo
for specific and identified agreements, documents, books, records or files
(collectively, "Records") relating to or affecting SNFCo, GranCare shall
arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if SNFCo has a reasonable need for such originals) in the
possession of GranCare or any of its Subsidiaries, but only to the extent such
items are not already in the possession SNFCo.
(b) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, after the Distribution Date, upon the prior written request by GranCare
for specific and identified Records relating to or affecting GranCare, SNFCo
shall arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if GranCare has a reasonable need for such originals) in the
possession of SNFCo or any of its Subsidiaries, but only to the extent such
items are not already in the possession of GranCare.
Section 4.2. Access to Information.
(a) Unless otherwise specified in the procedures set forth in Schedule 4.3(b)
hereto, from and after the Distribution Date, each of GranCare and SNFCo shall
afford to the other and its authorized accountants, counsel and other
designated representatives reasonable access during normal business hours,
subject to appropriate restrictions for classified, privileged or confidential
information, to the personnel, properties, books and records of such party and
its Subsidiaries insofar as such access is reasonably required by the other
party.
(b) For a period of five years following the Distribution Date, each of
GranCare and SNFCo shall provide to the other, promptly upon request, all
documents that shall be publicly filed by it and by any of its respective
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Subsidiaries with the Commission pursuant to the periodic and interim reporting
requirements of the Exchange Act, and the rules and regulations of the
Commission promulgated thereunder.
(c) Each of GranCare and SNFCo shall afford to the other access during normal
business hours to their respective properties, subject to appropriate
restrictions and limitations, and will consult and cooperate with each other
for the purpose of conducting air, water or soil testing reasonably necessary
in connection with the determination and fulfillment of indemnification
obligations or in connection with Shared Liabilities under this Distribution
Agreement.
Section 4.3. Reimbursement; Other Matters.
(a) Except to the extent otherwise contemplated by any Ancillary Agreement
and except as limited by any indemnification obligation set forth in this
Distribution Agreement, a party providing Records or access to information or
properties under this Article IV shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Records or access to
information or properties.
(b) The parties hereto shall comply with those document retention policies as
shall be set forth in Schedule 4.3(b) hereto.
Section 4.4. Confidentiality. Each of (a) GranCare and the Pharmacy
Subsidiaries and (b) SNFCo and the SNFCo Subsidiaries shall not use or permit
the use of (without the prior written consent of the other) and shall hold, and
shall cause its consultants and advisors to hold, in strict confidence, all
information concerning the other party in its possession, its custody or under
its control (except to the extent that (i) such information has been in the
public domain through no fault of such party or (ii) such information has been
later lawfully acquired from other sources by such party or (iii) this
Distribution Agreement or any other Ancillary Agreement or any other agreement
entered into pursuant hereto permits the use or disclosure of such information)
to the extent such information (A) relates to the period up to the Time of
Distribution, (B) relates to any Ancillary Agreement or (C) is obtained in the
course of performing pursuant to any Ancillary Agreement, and each party shall
not (without the prior written consent of the other) otherwise release or
disclose such information to any other person, except such party's auditors,
consultant's or attorneys, unless compelled to disclose such information by
judicial or administrative process or unless such disclosure is required by law
and such party has used commercially reasonable efforts to consult with the
other affected party prior to such disclosure. To the extent that a party
hereto is compelled by judicial or administrative process to disclose such
information under circumstances in which any evidentiary privilege would be
available, such party agrees to assert (or permit the other party a
commercially reasonable opportunity to assert) such privilege in good faith
prior to making such disclosure. Each of the parties hereto agrees to consult
with the other party in connection with any such judicial or administrative
process, including, without limitation, in determining whether any privilege is
available, and further agrees to allow such other party and its counsel to
participate in any hearing or other proceeding (including, without limitation,
any appeal of an initial order to disclose) in respect of such disclosure and
assertion of privilege.
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ARTICLE V.
INSURANCE
Section 5.1. Policies and Rights Included Within Assets Maintenance of
Coverage.
(a) The Skilled Nursing Assets shall include any and all rights of an insured
party under each of the Company Policies, subject to the terms of such Company
Policies and any limitations or obligations of SNFCo contemplated by this
Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the Skilled
Nursing Business which claims are asserted subsequent to the Distribution Date.
(b) The Institutional Pharmacy Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of GranCare contemplated by
this Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the
Institutional Pharmacy Business which claims are asserted subsequent to the
Distribution Date.
(c) Except as otherwise agreed to in writing between GranCare and SNFCo
(which agreement shall be acknowledged and consented to by Vitalink), GranCare
shall maintain in effect until the Time of Distribution all Company Policies in
effect as of the date hereof and the insurance coverages and limits will be
maintained at substantially the same levels as are reflected on the schedule of
Company Policies attached hereto as Schedule 5.1(c). Subsequent to the
Distribution Date, the parties hereto will be responsible for maintaining their
respective risk management programs.
Section 5.2. Post-Time of Distribution Claims Against SNFCo. If, subsequent
to the Time of Distribution, any person shall assert a claim against SNFCo or
any of the SNFCo Subsidiaries (including, without limitation, where SNFCo or
the SNFCo Subsidiaries are joint defendants with other persons) with respect to
any claim, suit, action, proceeding, injury, loss, liability, damage or expense
incurred or claimed to have been incurred prior to the Time of Distribution in
or in connection with the conduct of the Skilled Nursing Business, and which
claim, suit, action, proceeding, injury, loss, liability, damage or expense may
arise out of an insured or insurable occurrence under one or more of the
Company Policies, GranCare shall, at the time such claim is asserted, to the
extent any such Company Policy may require that Insurance Proceeds thereunder
be collected directly by the party against whom the Insured Claim is asserted,
be deemed to designate, without need of further documentation, SNFCo as the
agent and attorney-in-fact to assert and to collect any related Insurance
Proceeds under such Company Policy, and shall further be deemed to assign,
without need of further documentation, to SNFCo any and all rights of an
insured party under such Company Policy with respect to such asserted claim,
specifically including rights of indemnity and the right to be defended by or
at the expense of the insurer and the right to any applicable Insurance
Proceeds thereunder.
Section 5.3. Administration; Other Matters.
(a) From and after the Time of Distribution, SNFCo shall be responsible for
(i) Insurance Administration of the Company Policies and (ii) Claims
Administration under such Company Policies with respect to Institutional
Pharmacy Liabilities and Skilled Nursing Liabilities that relate to claims
asserted prior to the Distribution Date and SNFCo shall be responsible for any
premiums, deductibles and retentions in respect of such Company Policies and
the cost of any such claims shall be the sole responsibility and obligation of
SNFCo including, without limitation, claims (and related costs and expenses)
that exceed the limits of the applicable Company Policy or where the limits of
the applicable Company Policy have been exhausted, and any resulting
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actuarial gains or losses shall inure solely to SNFCo. From and after the Time
of Distribution, GranCare shall file with SNFCo all claims asserted subsequent
to the Time of Distribution that relate to occurrences prior to the Time of
Distribution arising out of or in connection with the Institutional Pharmacy
Business and SNFCo shall be responsible for notifying the appropriate insurance
carrier and providing GranCare with copies of all correspondence relating to
such notification. Thereafter, GranCare shall be responsible for Claims
Administration relating to all such claims wherein SNFCo shall not be named as
a co-defendant and GranCare shall provide SNFCo with copies of all
correspondence, documents and other materials that may be material to an
understanding by SNFCo of the status of such claims; it being expressly
acknowledged and agreed that SNFCo's retention of the administrative
responsibilities for submitting notices of claims under the appropriate Company
Policies shall not relieve GranCare of the primary responsibility for reporting
such Insured Claim accurately, completely and in a timely manner. Subject to
the indemnification provisions of Article III, each of the parties hereto shall
administer and pay any costs relating to defending its respective Insured
Claims under Company Policies to the extent such defense costs are not covered
under such Company Policies and shall be responsible for obtaining or reviewing
the appropriateness of releases upon settlement of its respective Insured
Claims under Company Policies.
(b) Allocation of Insurance Proceeds. Except as otherwise provided in
Sections 5.2 and 5.3(a), Insurance Proceeds received with respect to claims,
costs and expenses under the Company Policies shall be paid to SNFCo, which
shall thereafter administer the Company Policies by paying the Insurance
Proceeds, as appropriate, to GranCare with respect to Institutional Pharmacy
Liabilities and retaining such proceeds that relate to Skilled Nursing
Liabilities (except for Insurance Proceeds that are received in respect of
Insured Claims asserted prior to the Time of Distribution relating to
occurrences arising prior to the Time of Distribution which Insurance Proceeds
will be retained by SNFCo). Payment of the allocable portions of indemnity
costs of Insurance Proceeds resulting from such Policies will be made by SNFCo
to GranCare where appropriate upon receipt from the insurance carrier. In the
event that the aggregate limits on any Company Policies are exceeded by the
aggregate outstanding Insured Claims by both of the parties hereto, such
parties shall agree on an equitable allocation of Insurance Proceeds based upon
their respective bona fide claims. The parties agree to use commercially
reasonable efforts to maximize available coverage under those Company Policies
applicable to it, and to take all commercially reasonable steps to recover from
all other responsible parties in respect of an Insured Claim to the extent
coverage limits under a Company Policy have been exceeded or would be exceeded
as a result of such Insured Claim.
Section 5.4. Agreement for Waiver of Conflict and Shared Defense. With
respect to any claims asserted subsequent to the Time of Distribution that
relate to occurrences prior to the Time of Distribution arising out of or in
connection with the Institutional Pharmacy Business as to which GranCare shall
have, in accordance with Section 5.3(a), filed such claim with SNFCo for
purposes of giving notice to the appropriate insurance carrier, if GranCare and
SNFCo are named as co-defendants in respect of such claim then the Claims
Administration relating thereto will be shared equally by GranCare and SNFCo
and any conflict of interest necessary to the conduct of the joint defense
shall be deemed waived. Nothing in this Section 5.4 shall be construed to limit
or otherwise alter in any way the obligations of the parties to this
Distribution Agreement, including those created by this Distribution Agreement,
by operation of law or otherwise.
Section 5.5. Cooperation. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
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ARTICLE VI.
DISPUTE RESOLUTION
In the event of a controversy, dispute or claim arising out of, in connection
with, or in relation to the interpretation, performance, nonperformance,
validity or breach of this Distribution Agreement or otherwise arising out of,
or in any way related to this Distribution Agreement, including, without
limitation, any claim based on contract, tort, statute or constitution
(collectively, "Distribution Agreement Disputes"), the party asserting the
Distribution Agreement Dispute shall give written notice to the other party of
the existence and nature of such Distribution Agreement Dispute. Thereafter,
the general counsels of the respective parties shall negotiate in good faith
for a period no less than 60 days after the date of the notice in an attempt to
settle such Distribution Agreement Dispute. If after such 60 calendar day
period such general counsels are unable to settle such Distribution Agreement
Dispute, any party hereto may commence arbitration by giving written notice to
all other party that such Distribution Agreement Dispute has been referred to
the American Arbitration Association for arbitration in accordance with the
provisions of this Article.
All Distribution Agreement Disputes shall be settled by arbitration in
Atlanta, Georgia, before a single arbitrator in accordance with the rules of
the American Arbitration Association (the "Rules"). The arbitrator shall be
selected by the mutual agreement of all parties, but if they do not so agree
within twenty (20) days after the date of the notice of arbitration referred to
above, the selection shall be made pursuant to the Rules from the panels of
arbitrators maintained by the American Arbitration Association. The arbitrator
shall be an individual with substantial professional experience with regard to
resolving or settling sophisticated commercial disputes.
Any award rendered by the arbitrator shall be conclusive and binding upon the
parties hereto; provided, however, that any such award shall be accompanied by
a written opinion of the arbitrator giving the reasons for the award. This
provision for arbitration shall be specifically enforceable by the parties and
the decision of the arbitrator in accordance therewith shall be final and
binding and there shall be no right of appeal therefrom. The parties agree to
comply with any award made in any such arbitration proceedings that has become
final in accordance with the Rules, and agree to the entry of a judgment in any
jurisdiction upon any award rendered in such proceedings becoming final under
the Rules.
In the award the arbitrator shall allocate, in his or her discretion, among
the parties to the arbitration all costs of the arbitration, including, without
limitation, the fees and expenses of the arbitrator and reasonable attorneys'
fees, costs and expert witness expenses of the parties. Absent such an
allocation by the arbitrator, each party shall pay its own expenses of
arbitration, and the expenses of the arbitrator shall be equally shared.
Nothing contained in this Article shall prevent the parties from settling any
Distribution Agreement Dispute by mutual agreement at any time.
ARTICLE VII.
MISCELLANEOUS
Section 7.1. Complete Agreement; Construction. This Distribution Agreement,
including the Schedules and the Ancillary Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous negotiations, commitments and writings with respect to
such subject matter. In the event of any inconsistency between this
Distribution Agreement and any Schedule hereto, the Schedule shall prevail. In
the event and to the extent that there shall be a conflict between the
provisions of this Distribution Agreement and the Schedules and the provisions
of (i) the Merger Agreement, the Merger Agreement shall control and (ii) an
Ancillary Agreement, such Ancillary Agreement shall control; provided, however,
that the provisions of this Distribution Agreement shall govern in the event of
and to the extent of any conflict between the provisions of this Distribution
Agreement and the provisions of the Transfer and Assumption Instruments.
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Section 7.2. Counterparts. This Distribution Agreement may be executed in one
or more counterparts, each of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
Section 7.3. Survival of Agreements. Except as otherwise contemplated by this
Distribution Agreement, all covenants and agreements of the parties contained
in this Distribution Agreement shall survive the Distribution Date.
Section 7.4. Notices. All notices and other communications hereunder shall be
in writing and hand delivered or mailed by registered or certified mail (return
receipt requested) or sent by any means of electronic message transmission with
delivery confirmed (by voice or automatic machine generated confirmation) to
the parties at the following address (or at such other addresses for a party as
shall be specified by like notice) and will be deemed given on the date on
which such notice is received:
To GranCare:
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
To SNFCo:
GCI Properties, Inc.
c/o GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
Section 7.5. Waivers. The failure of either party to require strict
performance by the other party of any provision in this Distribution Agreement
will not waive or diminish that party's right to demand strict performance
thereafter of that or any other provision hereof.
Section 7.6. Amendments. Subject to the terms of Section 7.9 hereof, this
Distribution Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties and, for so
long as the Merger Agreement shall be in effect, approved by Vitalink.
Section 7.7. Assignment. This Distribution Agreement shall be assignable in
whole in connection with a merger or consolidation or the sale of all or
substantially all the assets of a party hereto. Otherwise this Distribution
Agreement shall not be assignable, in whole or in part, directly or indirectly,
by any party hereto without the prior written consent of the other party, and
any attempt to assign any rights or obligations arising under this Distribution
Agreement without such consent shall be void.
Section 7.8. Successors and Assigns. The provisions of this Distribution
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns, including,
without limitation, Vitalink.
Section 7.9. Termination. This Agreement (including, without limitation,
Section 2.11 and Article III hereof) may be terminated and the Distribution may
be amended, modified or abandoned at any time prior to the Distribution by and
in the sole discretion of GranCare without the approval of SNFCo or the
shareholders of
19
<PAGE>
GranCare. In the event of such termination, no party shall have any liability
of any kind to any other party or any other person. After the Distribution,
this Distribution Agreement may not be terminated except by an agreement in
writing signed by the parties; provided, however, that Section 2.11 shall not
be terminated or amended after the Distribution in respect of the third party
beneficiaries thereto without the consent of such persons.
Section 7.10. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party or by any entity that is contemplated to be a Subsidiary of such party on
and after the Distribution Date.
Section 7.11. Third Party Beneficiaries. The parties expressly acknowledge
that at the Effective Time GranCare will be merged with and into Vitalink, all
obligations of GranCare hereunder shall become obligations of Vitalink, and
actions of GranCare hereunder to be taken after the Time of Distribution shall
be taken by Vitalink. Except as provided in Section 2.11 relating to directors
and officers liability insurance, this Distribution Agreement is solely for the
benefit of the parties hereto and their respective Subsidiaries and Affiliates
and permitted successors and assigns and shall not be deemed to confer upon
third parties any remedy, claim, liability, reimbursement, claim of action or
other right in excess of those existing without reference to this Distribution
Agreement.
Section 7.12. Attorney Fees. Except as contemplated by an arbitrator's
decision pursuant to Article VI hereof, a party in breach of this Distribution
Agreement shall, on demand, indemnify and hold harmless the other party hereto
for and against all reasonable out-of-pocket expenses, including, without
limitation, reasonable legal fees, incurred by such other party by reason of
the enforcement and protection of its rights under this Distribution Agreement.
The payment of such expenses is in addition to any other relief to which such
other party may be entitled hereunder or otherwise.
Section 7.13. Title and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Distribution
Agreement.
Section 7.14. Schedules. The Schedules shall be construed with and as an
integral part of this Distribution Agreement to the same extent as if the same
had been set forth verbatim herein.
Section 7.15. Specific Performance. Each of the parties hereto acknowledges
that there is no adequate remedy at law for failure by such parties to comply
with the provisions of this Distribution Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that their agreements contained herein may be specifically
enforced without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Distribution Agreement.
Section 7.16. Governing Law. This Distribution Agreement shall be governed by
and construed in accordance with the laws of the state of Georgia applicable to
contracts executed in and to be performed in that state.
Section 7.17. Severability. In the event any one or more of the provisions
contained in this Distribution Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which shall, to the greatest extent
possible, approximate that of the invalid, illegal or unenforceable provisions.
20
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Distribution Agreement to be
duly executed as of the day and year first written above.
GRANCARE, INC.
By:
----------------------------------
Name:
----------------------------
Title: President and Chief
Executive Officer
GCI PROPERTIES, INC.
By:
----------------------------------
Name:
----------------------------
Title: President and Chief
Executive Officer
21
<PAGE>
SCHEDULES
---------
1.1(a) SNFCo Subsidiaries
1.1(b) Pharmacy Subsidiaries
1.1(c) Shared Liabilities
2.1(e) Licenses, Permits and Authorizations Relating to the
Skilled Nursing Business to be Transferred by GranCare
to SNFCo
2.1(i) Intellectual Property, General Ledger 1.01 Assets, Other
Common Assets and Litigation Matters Retained by GranCare
2.3(a) Indebtedness Retained by GranCare
2.3(d) Shared Transaction Expenses
4.3(b) Document Retention Policies
5.1(c) Company Policies to be Maintained to the Time of
Distribution
EXHIBITS
--------
A Internal Restructuring Plan
<PAGE>
EXHIBIT 10.1
VOTING AGREEMENT
----------------
This is an agreement dated September 3, 1996 (the "Agreement") by and
between Manor Care, Inc., a Delaware corporation ("Parent"), and GranCare, Inc.,
a California corporation ("GranCare").
Background
----------
A. Simultaneously with the execution of this Agreement, GranCare is
entering into an Agreement and Plan of Merger dated the date hereof (the "Merger
Agreement") with Vitalink Pharmacy Services, Inc., a Delaware corporation
("Vitalink") pursuant to which GranCare will merge with and into Vitalink, with
Vitalink as the surviving corporation on the terms specified or referred to
therein (the "Merger"). The Merger is structured to be a tax-free
reorganization under (S) 368 of the Internal Revenue Code. Capitalized terms
used herein and not otherwise defined shall have the meaning set forth in the
Merger Agreement.
B. Parent currently owns beneficially 11,500,000 shares of Vitalink Common
Stock, par value $.01 per share (collectively with any Vitalink Common Stock
acquired hereafter, the "Shares").
C. To induce GranCare to enter into the Merger Agreement, Parent and
GranCare wish to set forth certain understandings regarding their relationship
prior to the Merger.
Terms
-----
Therefore, in consideration of the mutual covenants and agreements
hereinafter set forth, and intending to be legally bound, the parties hereto
agree as follows:
1. Agreements of Parent.
--------------------
1.1. The Merger. Parent agrees to vote the Shares in favor of the
----------
Merger.
1.2. No Solicitation. (a) Until the earlier of the Effective Time or
---------------
the termination of the Merger Agreement in accordance with its terms, Parent
shall not, directly or indirectly, solicit or respond to any inquiries or the
making of any proposal by any person or entity (other than GranCare) with
respect to any sale, transfer, disposition of Parent's Shares, and Parent shall
not sell, transfer or dispose of the Shares.
<PAGE>
-2-
(b) Until the earlier of the Effective Time or the
termination of the Merger Agreement in accordance with its terms, Parent shall
not, directly or indirectly, solicit or respond to any inquiries or the making
of any proposal by any person or entity (other than GranCare) with respect to
any acquisition or purchase of a substantial amount of assets of Vitalink or any
merger, consolidation, business combination or similar transaction involving
Vitalink.
(c) Parent shall not vote in favor of, propose, endorse or
solicit proxies with respect to, any matter to be proposed to the stockholders
of Vitalink, the approval of which would restrict, hinder or otherwise be
inconsistent with the consummation of the Merger.
1.3. Reasonable Efforts. Parent agrees, from and after the date
------------------
hereof, to use all commercially reasonable efforts to assist in the Merger
becoming effective as contemplated by the Merger Agreement.
2. Agreements of GranCare. The obligations of Parent and GranCare under
----------------------
this Agreement shall be subject to the condition that the Merger, the Merger
Agreement and this Agreement shall have been approved by the Board of Directors
of Vitalink with the effect that GranCare will not be subject to the
restrictions of Section 203 of the Delaware General Corporation Law.
3. Representations and Warranties.
------------------------------
3.1. Parent is duly organized, validly existing in good standing under
the laws of the State of Delaware and has the requisite corporate power and
authority to enter into this Agreement and consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by Parent and constitutes a valid and binding obligation of Parent
enforceable against it in accordance with its terms.
3.2. GranCare is duly organized, validly existing and in good standing
under the laws of the State of California and has the requisite corporate power
and authority to enter into this Agreement and consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by GranCare and constitutes a valid and binding obligation of
GranCare, enforceable against it in accordance with its terms.
4. Termination. This Agreement shall terminate upon the earlier of (a)
-----------
termination of the Merger Agreement in accordance with its terms, and (b) the
date of any amendment to,
<PAGE>
-3-
or modification or waiver of, the Merger Agreement in a manner adverse to
Vitalink not approved in writing by Parent or by the Board of Directors of
Vitalink.
5. Governing Law. All questions concerning the validity or meaning of
-------------
this Agreement or relating to the rights and obligations of the parties with
respect to performance under this Agreement shall be construed and resolved
under the laws of the State of Delaware (regardless of the laws that might
otherwise govern under applicable Delaware principles of conflicts of law).
6. Complete Agreement. This Agreement contains the entire agreement among
------------------
the parties and supersedes all prior or contemporaneous discussions,
negotiations, representations, or agreements relating to the subject matter of
this Agreement. No changes to this Agreement shall be made or be binding on any
party unless made in writing and signed by each party.
7. Successors. No party may assign this agreement or any of its rights or
----------
obligations hereunder without the prior written consent of the other parties.
Subject to the preceding sentence, this Agreement shall be binding upon, inure
to the benefit of, and be enforceable by and against the respective successors
and assigns of each party.
8. Injunctive Relief. Each of the parties hereto recognizes and
-----------------
acknowledges that a breach by it of any covenants or agreements contained in
this Agreement will cause the other party to sustain damages for which it would
not have an adequate remedy at law for money damages, and therefore each of the
parties hereto agrees that in the event of any such breach the aggrieved party
shall be entitled to the remedy of specific performance of such covenants and
agreements and injunctive and other equitable relief in addition to any other
remedy to which it may be entitled, at law or in equity.
9. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
<PAGE>
-4-
IN WITNESS WHEREOF, the parties hereto have executed this agreement as of
the date above written.
MANOR CARE, INC.
By:
---------------------------
Name:
Title:
GranCare, INC.
By:
---------------------------
Name:
Title:
<PAGE>
EXHIBIT 11
GRANCARE, INC.
COMPUTATION OF NET INCOME (LOSS) PER SHARE
(UNAUDITED)
(Dollars and Shares in Thousands, Except Per Share Amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Primary
Average shares outstanding.... 23,350 23,258 23,250 23,235
Net effect of conversion of
stock options (a)............ 633 - 546 556
Net effect of conversion of
warrants (a)................. 219 - 225 435
------- ------- ------- -------
Total............... 24,202 23,258 24,021 24,226
======= ======= ======= =======
Net income (loss)............. $ 9,392 $ (518) $24,162 $13,274
======= ======= ======= =======
Net income (loss) per
common share................. $ 0.39 $ (0.02) $ 1.01 $ 0.55
======= ======= ======= =======
Fully diluted
Average shares outstanding.... 23,350 23,258 23,296 23,235
Net effect of conversion of
stock options (a)............ 705 - 750 594
Net effect of conversion of
warrants (a)................. 223 - 277 438
Net effect of conversion of
convertible securities (b)... 2,330 - 2,330 -
------- ------- ------- -------
Total............... 26,608 23,258 26,653 24,267
======= ======= ======= =======
Net income (loss).................. $ 9,392 $ (518) $24,162 $13,274
Interest on convertible
securities - net of tax........... 643 - 1,916 -
------- ------- ------- -------
$10,035 $ (518) $26,078 $13,274
======= ======= ======= =======
Net income (loss) per common
share............................. $ 0.38 $ (0.02) $ 0.98 $ 0.55
======= ======= ======= =======
(a) Computed using the treasury stock method
(b) Computed using the "if-converted" method
=================================================================================
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,750
<SECURITIES> 36,359
<RECEIVABLES> 218,529
<ALLOWANCES> (13,848)
<INVENTORY> 17,833
<CURRENT-ASSETS> 314,745
<PP&E> 276,441
<DEPRECIATION> (67,111)
<TOTAL-ASSETS> 737,938
<CURRENT-LIABILITIES> 121,167
<BONDS> 384,905
0
0
<COMMON> 120,371
<OTHER-SE> 81,303
<TOTAL-LIABILITY-AND-EQUITY> 737,938
<SALES> 745,653
<TOTAL-REVENUES> 745,653
<CGS> 0
<TOTAL-COSTS> 642,654
<OTHER-EXPENSES> 19,400
<LOSS-PROVISION> 5,132
<INTEREST-EXPENSE> 26,228
<INCOME-PRETAX> 38,971
<INCOME-TAX> 14,809
<INCOME-CONTINUING> 24,162
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,162
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0.98
</TABLE>
