<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 31, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------
VITALINK PHARMACY SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8099 37-0903482
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE NO.)
ORGANIZATION)
1250 EAST DIEHL ROAD
NAPERVILLE, ILLINOIS 60563
(630) 245-4800
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
--------------
JAMES H. REMPE, ESQ.
VITALINK PHARMACY SERVICES, INC.
11555 DARNESTOWN ROAD
GAITHERSBURG, MARYLAND 20878-3200
(301) 681-9400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
--------------
COPIES TO:
W. LESLIE DUFFY, ESQ. RICHARD H. MILLER, ESQ.
CAHILL GORDON & REINDEL POWELL, GOLDSTEIN, FRAZER & MURPHY
80 PINE STREET 16TH FLOOR
NEW YORK, NY 10005 191 PEACHTREE STREET, N.E.
(212) 701-3000 ATLANTA, GA 30303
(404) 572-6600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger (the "Merger") of GranCare, Inc. ("GranCare") with
and into the Registrant pursuant to the Merger Agreement described herein have
been satisfied or are waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE(3)
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 12,443,920 $23.38 $290,938,850 $88,163
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) The amount of common stock, par value $.01 per a share, of the Registrant
(the "Common Stock") to be registered has been determined by multiplying
the exchange ratio of 0.478 for such shares in the Merger by the maximum
number of shares of common stock, without par value, of GranCare to be
exchanged in the Merger, assuming the exercise prior to the effective time
of the Merger (the "Effective Time") of all GranCare stock options and
warrants (whether or not currently exercisable).
(2) Based on the average of the high and low sale prices of the Common Stock
as reported on the Nasdaq National Market System on December 24, 1996,
estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(c) under the Securities Act of 1933.
(3) In accordance with Rule 457(b), the total registration fee of $88,163 has
been reduced by $89,488, which was previously paid on October 11, 1996 at
the time of filing under the Securities Exchange Act of 1934, as amended,
of a preliminary copy of GranCare's proxy materials and the Registrant's
information statement included herein. Accordingly, a registration fee is
not payable upon the filing of this Registration Statement.
--------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
January , 1997
[LOGO OF GRANCARE APPEARS HERE]
Dear Shareholder:
A Special Meeting of Shareholders (the "Special Meeting") of GranCare, Inc.,
("GranCare") will be held on , January , 1997 at 11:00 a.m., local time,
at the offices of GranCare located at One Ravinia Drive, Suite 1500, Atlanta,
Georgia.
At the Special Meeting, holders of GranCare common stock, without par value
("GranCare Common Stock") as of December 10, 1996 (the "Special Meeting Record
Date") will be asked to consider and vote upon the following matters:
(1) The approval and adoption of an Amended and Restated Agreement and
Plan of Distribution (the "Distribution Agreement") by and between GranCare
and New GranCare, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare ("New GranCare"), dated as of September 3, 1996,
pursuant to which, among other things: (i) GranCare's skilled nursing, home
healthcare, assisted living and contract management businesses and related
assets (collectively, the "Skilled Nursing Business") shall 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 GranCare (the "Distribution") such that
each GranCare shareholder will receive one share of New GranCare Common
Stock for each share of GranCare Common Stock held by such shareholder as
of the record date set by the GranCare Board of Directors for the
determination of GranCare shareholders entitled to receive the Distribution
(the "Distribution Record Date").
(2) The approval and adoption of an Agreement and Plan of Merger, dated
as of September 3, 1996 (as amended through the date hereof, the "Merger
Agreement"), by and between GranCare and Vitalink Pharmacy Services, Inc.,
a Delaware corporation ("Vitalink") pursuant to which, among other things:
(i) following the Distribution, GranCare (whose sole remaining business
following the completion of the Distribution will consist of the
institutional pharmacy business (the "Institutional Pharmacy Business")
conducted through its wholly-owned subsidiary TeamCare, Inc., a Delaware
corporation ("TeamCare")) shall merge with and into Vitalink with Vitalink
as the surviving corporation; and (ii) each share of GranCare Common Stock,
shall be converted into the right to receive, and become exchangeable for,
0.478 (the "Exchange Ratio") of a share of the common stock of Vitalink,
$0.01 par value per share ("Vitalink Common Stock").
(3) The approval and adoption of the New GranCare 1996 Stock Incentive
Plan (the "1996 New GranCare Plan").
(4) The approval and adoption of the New GranCare Annual Incentive Plan
and Stockholder Value Program (the "Annual Incentive Plan and Stockholder
Value Program") to be administered under the 1996 New GranCare Plan.
(5) The approval of the possible adjournment of the Special Meeting for
the purpose of soliciting additional votes in favor of proposals (1)
through (4) above, if appropriate.
(6) Such other business as may properly come before the Special Meeting
or any adjournment or postponement thereof.
Shareholder approval of the Distribution is being sought in accordance with
the terms of the Merger Agreement and to ensure that the objectives of
GranCare's shareholders are consistent with the objectives sought to be
accomplished by the GranCare Board of Directors pursuant to the Distribution
and the Merger. The Distribution is being undertaken by GranCare in
contemplation of the Merger. Accordingly, the Distribution will not occur
unless both the Distribution and Merger are approved by GranCare's shareholders
and all of the conditions precedent to the Merger (other than the completion of
the Distribution) have been satisfied, including, without limitation the
approval of the Distribution and the Merger by GranCare's shareholders, the
receipt of all necessary consents and approvals required from any governmental
authorities and third parties including the
<PAGE>
expiration of the required waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended, the receipt of certain tax
opinions, the redemption, repurchase or modification of the terms of certain
outstanding GranCare indebtedness, the issuance of an irrevocable letter of
credit in favor of Vitalink by New GranCare (to support Vitalink's limited
guaranty of certain obligations of New GranCare) and the determination that
holders of less than 5% of the GranCare Common Stock issued and outstanding as
of the record date for the Special Meeting shall have asserted their rights as
dissenting shareholders pursuant to applicable California law. The Merger and
Distribution are structured to be tax-free reorganizations in which neither
GranCare, Vitalink nor their shareholders will recognize taxable gain except
to the extent cash is paid in lieu of fractional shares. The Merger Agreement
further requires GranCare and Vitalink to take all reasonable actions
necessary in order to cause the Merger to be treated as consummated as of
December 31, 1996 for financial reporting and tax purposes.
All options to purchase GranCare Common Stock outstanding as of the
Effective Time of the Merger ("GranCare Options") will become, following the
Merger, options to purchase such number of shares of Vitalink Common Stock as
is obtained by multiplying the number of shares of GranCare Common Stock
subject to such options by the Exchange Ratio. In addition, in connection with
the Distribution, all holders of options to purchase GranCare Common Stock
will receive an option to purchase such number of shares of New GranCare
Common Stock as is equal to the number of shares of GranCare Common Stock
subject to options (the "New GranCare Options") held by such option holders as
of the Distribution Record Date. Approximately 38.4% of the exercise price of
each GranCare Option will be allocated to and shall become the exercise price
of the New GranCare Option issued in respect thereof and the remaining
approximately 61.6% of such exercise price shall continue to be the exercise
price of the existing GranCare Options which, in connection with the Merger
will become options to purchase Vitalink Common Stock (the "Adjusted GranCare
Options"). Upon completion of the Merger, the exercise price of the Adjusted
GranCare Options will be further adjusted by dividing such exercise price by
the Exchange Ratio.
The GranCare Board of Directors has unanimously approved the Merger
Agreement, the Distribution Agreement, the 1996 New GranCare Plan and the
Annual Incentive Plan and the Stockholder Value Program described in the
attached material and the transactions contemplated thereby and has determined
that the Merger and Distribution are fair to and in the best interests of
GranCare and its shareholders. The Board of Directors of GranCare recommends
that the shareholders of GranCare vote in favor of the Merger Agreement, the
Distribution Agreement, the 1996 New GranCare Plan and the Annual Incentive
Plan and the Stockholder Value Program. You are urged to consider carefully
all aspects of the proposed Merger and Distribution discussed in the attached
Proxy Statement/Prospectus and the Prospectus of New GranCare (the "New
GranCare Prospectus") attached to the Proxy Statement/Prospectus as Annex A.
In the material accompanying this letter, you will find a Notice of Special
Meeting of Shareholders, a Proxy Statement/Prospectus relating to, among other
things, the actions to be taken by GranCare shareholders at the Special
Meeting, a proxy card and a Prospectus relating to the New GranCare Common
Stock to be issued in the Distribution. The Proxy Statement/Prospectus more
fully describes the proposed Merger and Distribution as well as the 1996 New
GranCare Plan and the Annual Incentive Plan and Stockholder Value Program and
includes information about TeamCare and Vitalink and also serves as a
Prospectus for Vitalink with respect to the shares of Vitalink Common Stock to
be issued upon the consummation of the Merger. The New Grancare Prospectus
more fully describes the Distribution and includes information about New
GranCare and the New GranCare Common Stock to be issued in the Distribution.
All GranCare shareholders as of the Special Meeting Record Date are
cordially invited to attend the Special Meeting in person. However, whether or
not you plan to attend the Special Meeting, please complete, sign, date and
return your proxy in the enclosed postage paid envelope. If you attend the
Special Meeting, you may vote in person if you wish, even though you have
previously returned your proxy. It is important that your shares be
represented and voted at the Special Meeting.
Sincerely,
/s/ Gene E. Burleson
Gene E. Burleson
Chairman of the Board,
President and Chief Executive
Officer
<PAGE>
GRANCARE, INC.
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY , 1997
NOTICE IS HEREBY GIVEN that a Special Meeting of Shareholders (the "Special
Meeting") of GranCare, Inc., a California corporation ("GranCare"), will be
held on January , 1997, at 11:00 a.m., local time, at the offices of GranCare
located at One Ravinia Drive, Suite 1500, Atlanta, Georgia to consider and
vote upon the following matters more fully described in the accompanying Proxy
Statement/Prospectus and Prospectus of New GranCare:
1. The approval and adoption of an Amended and Restated Agreement and Plan
of Distribution (the "Distribution Agreement") by and between GranCare
and New GranCare, Inc., a Delaware corporation and wholly-owned
subsidiary of GranCare ("New GranCare"), dated as of September 3, 1996,
pursuant to which, among other things: (i) all of GranCare's skilled
nursing, home healthcare, assisted living and contract management
businesses and related assets (collectively, the "Skilled Nursing
Business") shall 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 GranCare (the "Distribution") such that each GranCare shareholder
will receive one share of New GranCare Common Stock for each share of
GranCare common stock without par value ("GranCare Common Stock") held
by such shareholder as of the record date set by the GranCare Board of
Directors for the determination of GranCare shareholders entitled to
receive the Distribution (the "Distribution Record Date").
2. The approval and adoption of an Agreement and Plan of Merger, dated as
of September 3, 1996 (as amended through the date hereof, the "Merger
Agreement"), by and between GranCare and Vitalink Pharmacy Services,
Inc. ("Vitalink") pursuant to which, among other things: (i) following
the Distribution, GranCare (whose sole remaining business following the
completion of the Distribution will consist of the institutional
pharmacy business (the "Institutional Pharmacy Business") conducted
through its wholly-owned subsidiary TeamCare, Inc., a Delaware
corporation ("TeamCare")) shall merge with and into Vitalink with
Vitalink as the surviving corporation; and (ii) each share of GranCare
Common Stock, shall be converted into the right to receive, and become
exchangeable for, 0.478 (the "Exchange Ratio") of a share of the common
stock of Vitalink, $0.01 par value per share ("Vitalink Common Stock").
3. The approval and adoption of the New GranCare 1996 Stock Incentive Plan
(the "1996 New GranCare Plan").
4. The approval and adoption of the New GranCare Annual Incentive Plan and
Stockholder Value Program (the "Annual Incentive Plan and Stockholder
Value Program") to be administered under the 1996 New GranCare Plan.
5. The approval of the possible adjournment of the Special Meeting for the
purpose of soliciting additional votes in favor of proposals (1) through
(4) above.
6. The transaction of such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof.
The Distribution is being undertaken by GranCare in contemplation of the
Merger and will not occur unless both the Distribution and Merger
(collectively, the "Transactions") are approved by GranCare's shareholders and
until all of the conditions precedent to the Merger have been satisfied. The
Merger Agreement further requires GranCare and Vitalink to take all reasonable
actions necessary in order to cause the Merger to be treated as consummated as
of December 31, 1996 for financial reporting and tax purposes. Only GranCare
shareholders of record at the close of business on December 10, 1996 are
entitled to notice of, and to vote at, the Special Meeting, or at any
adjournment or postponement thereof.
<PAGE>
Shareholders of GranCare who object to the Transactions and follow the
procedures set forth in Chapter 13 of the California General Corporation Law
(the "CGCL") will have the right to dissent from the Transactions and to have
paid to them the "fair market value" of their shares in accordance with
Chapter 13 of the CGCL; provided however, that the Merger Agreement provides
that it is a condition to the Merger that shareholders holding less than 5% of
the GranCare Common Stock shall have demanded such payment. The Proxy
Statement/Prospectus contains a discussion of the rights of dissenting
shareholders and the complete text of Chapter 13 of the CGCL.
By order of the Board of Directors,
/s/ Everett W. Benton
Evrett W. Benton
Executive Vice President, General
Counsel and Secretary
THE DISTRIBUTION AND THE MERGER REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY
OF THE ISSUED AND OUTSTANDING SHARES OF GRANCARE COMMON STOCK. THE 1996 NEW
GRANCARE PLAN AND THE ANNUAL INCENTIVE PLAN AND STOCKHOLDER VALUE PROGRAM
REQUIRE THE AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES PRESENT AND ENTITLED
TO VOTE AT A MEETING WHERE A QUORUM IS PRESENT. THE DISTRIBUTION WILL NOT
OCCUR AND THE 1996 NEW GRANCARE PLAN AND THE ANNUAL INCENTIVE PLAN AND
STOCKHOLDER VALUE PROGRAM WILL NOT BE ADOPTED UNLESS BOTH THE MERGER AND THE
DISTRIBUTION ARE APPROVED.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN
AND DATE THE ENCLOSED PROXY CARD AND MAIL IT PROMPTLY IN THE ENCLOSED RETURN
ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. IF YOU
ATTEND THE SPECIAL MEETING, YOU MAY VOTE IN PERSON IF YOU WISH TO DO SO EVEN
IF YOU HAVE PREVIOUSLY SENT IN YOUR PROXY.
<PAGE>
[LOGO OF VITALINK PHARMACY APPEARS HERE]
JANUARY , 1997
Dear Stockholder:
I enclose an Information Statement concerning the proposed merger (the
"Merger") of GranCare, Inc., a California corporation ("GranCare") with and
into Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink").
Subject to the approval of GranCare's shareholders and the satisfaction or
waiver of certain other conditions, GranCare's skilled nursing, home
healthcare, assisted living and contract management businesses and related
assets will be transferred to a wholly-owned subsidiary of GranCare and all of
the outstanding capital stock of that subsidiary will be distributed to the
GranCare shareholders. Following this distribution GranCare's only remaining
business will be its institutional pharmacy business which will be merged with
and into Vitalink.
In the Merger, each outstanding share of common stock of GranCare ("GranCare
Common Stock") will be exchanged for 0.478 of a share (the "Exchange Ratio")
of Vitalink common stock, par value $.01 (the "Vitalink Common Stock").
Vitalink will incur or assume approximately $118.0 million of indebtedness
(including an approximately $10 million consent fee) in connection with the
Merger (before giving effect to an offsetting cash payment from GranCare), and
will also assume options to purchase GranCare Common Stock which will become
options to purchase Vitalink Common Stock at an exercise price determined as
set forth in the Information Statement. The Merger is structured to be a tax-
free reorganization in which neither GranCare, Vitalink nor their shareholders
will recognize taxable gain except to the extent cash is paid in lieu of any
fractional shares. Manor Care, Inc., a Delaware corporation owns approximately
82.3% of the voting power of the Vitalink Common Stock and will approve (i)
the Merger and (ii) an increase in the number of authorized shares of Vitalink
Common Stock from 30,000,000 to 80,000,000, by written consent on January ,
1997. The General Corporation Law of the State of Delaware requires no further
action by the stockholders of Vitalink to approve or consummate the Merger and
no such approval will be sought. Vitalink will not hold a meeting of its
stockholders in connection with the merger.
The Board of Directors of Vitalink has carefully reviewed and considered the
terms and conditions of the Merger. In addition, it has received the opinion
of Chase Securities Inc. to the effect that the Exchange Ratio is fair, from a
financial point of view, to Vitalink. After considering the merits of the
Merger and the opinion of Chase Securities, your Board of Directors has
determined that the Merger is in the best interests of, and is fair to,
Vitalink's public stockholders.
Details of the Merger and other information concerning it and certain
related transactions are set forth in the accompanying Information Statement.
I urge you to read it carefully.
Sincerely,
/s/ Donald C. Tomasso
Donald C. Tomasso
Chairman and Chief Executive Officer
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 31, 1996
PROXY STATEMENT/PROSPECTUS
----------
GRANCARE, INC.
PROXY STATEMENT FOR SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JANUARY , 1997.
----------
VITALINK PHARMACY SERVICES, INC.
PROSPECTUS/INFORMATION STATEMENT
UP TO 12,443,920 SHARES OF COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF VITALINK
PHARMACY SERVICES, INC.
This Proxy Statement/Prospectus/Information Statement ("Proxy
Statement/Prospectus") is being furnished to shareholders of GranCare, Inc., a
California corporation ("GranCare"), in connection with the solicitation of
proxies by the Board of Directors of GranCare for use at the Special Meeting of
Shareholders (including any adjournment or postponement thereof) to be held on
January , 1997 (the "Special Meeting"). The Special Meeting has been called to
consider the proposal to merge GranCare's institutional pharmacy business into
Vitalink Pharmacy Services, Inc. ("Vitalink") in exchange for Vitalink common
stock, par value $0.01 per share ("Vitalink Common Stock").
At a Special Meeting, shareholders of GranCare will be asked to consider and
vote upon, and this Proxy Statement/Prospectus relates to, the following
proposals: (1) the approval and adoption of an Amended and Restated Agreement
and Plan of Distribution (the "Distribution Agreement") by and between GranCare
and New GranCare, Inc., a Delaware corporation and wholly-owned subsidiary of
GranCare ("New GranCare"), dated as of September 3, 1996, pursuant to which,
among other things: (i) GranCare's skilled nursing, home healthcare, assisted
living and contract management businesses and related assets (collectively, the
"Skilled Nursing Business") 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 common stock of New GranCare, par value $0.001 per share ("New
GranCare Common Stock") shall be distributed to the shareholders of GranCare
(the "Distribution"; and, together with the Merger, the "Transactions") such
that each GranCare shareholder will receive one share of New GranCare Common
Stock for each share of GranCare common stock, without par value ("GranCare
Common Stock") held by such shareholder as of the date set by the GranCare
Board of Directors for the determination of shareholders entitled to receive
the Distribution (the "Distribution Record Date"); (2) the approval and
adoption of an Agreement and Plan of Merger, dated as of September 3, 1996, (as
amended through the date hereof, the "Merger Agreement"), by and between
GranCare and Vitalink pursuant to which, among other things: (i) following the
Distribution, GranCare (whose sole remaining business following the completion
of the Distribution will consist of the institutional pharmacy business (the
"Institutional Pharmacy Business") conducted through its wholly-owned
subsidiary TeamCare, Inc., a Delaware corporation ("TeamCare")) shall merge
with and into Vitalink with Vitalink as the surviving corporation (the
"Merger"); and (ii) each share of GranCare Common Stock, shall be converted
into the right to receive, and become exchangeable for, 0.478 (the "Exchange
Ratio") of a share of Vitalink Common Stock; (3)
(Continued on next page)
SEE "RISK FACTORS" ON PAGE 24 OF THIS PROXY STATEMENT/PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT GRANCARE SHAREHOLDERS SHOULD CONSIDER WITH
RESPECT TO THE DISTRIBUTION AND THE MERGER AND THE SECURITIES BEING OFFERED
HEREBY.
----------
This Proxy Statement/Prospectus is accompanied by a copy of Vitalink's Annual
Report on Form 10-K for the year ended May 31, 1996 and Quarterly Report on
Form 10-Q for the three month period ended August 31, 1996.
----------
THE SECURITIES ISSUABLE IN THE MERGER HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE NEW GRANCARE COMMON STOCK IS BEING ISSUED PURSUANT TO A SEPARATE PROSPECTUS
AND NOT PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS. A COPY OF THE PROSPECTUS
RELATING TO THE SHARES OF NEW GRANCARE COMMON STOCK TO BE ISSUED IN THE
DISTRIBUTION IS ATTACHED TO THIS PROXY STATEMENT/ PROSPECTUS AS ANNEX A.
----------
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS DECEMBER , 1996
<PAGE>
the approval and adoption of the New GranCare 1996 Stock Incentive Plan (the
"1996 New GranCare Plan"); (4) the approval and adoption of the New GranCare
Annual Incentive Plan and Stockholder Value Program to be administered under
the 1996 New GranCare Plan (the "Annual Incentive Plan and Stockholder Value
Program"); (5) the approval of the possible adjournment of the Special Meeting
for the purpose of soliciting additional votes in favor of proposals (1)
through (4) above; and (6) such other business as may properly come before the
Special Meeting or any adjournment or postponement thereof. In connection with
the Merger, Vitalink will issue up to 11.6 million shares of Vitalink Common
Stock which together with the debt incurred or assumed in connection with the
Merger and the allocated costs and expenses represent an estimated transaction
value of approximately $355 million. As of December 24, 1996, the last
reported bid price for the Vitalink Common Stock on the Nasdaq National Market
System ("Nasdaq") was $23 and the last reported sales price for the GranCare
Common Stock on the New York Stock Exchange Composite Tape ("NYSE") was $17
3/4. The Merger Agreement and Distribution Agreement are attached as Annex B
and Annex C, respectively to this Proxy Statement/Prospectus.
The purpose of the Transactions is to merge the Institutional Pharmacy
Business of GranCare with Vitalink while leaving the Skilled Nursing Business
of GranCare in a separate publicly held company owned by existing GranCare
shareholders. Immediately following the Distribution the name of New GranCare
will be changed to "GranCare, Inc." The Merger is expected to be consummated
immediately following the Distribution.
The Board of Directors of GranCare unanimously recommends that shareholders
of GranCare vote FOR all of the foregoing proposals.
VOTE REQUIRED FOR APPROVAL
The approval of proposals 1 and 2 above requires the affirmative vote of a
majority of the issued and outstanding shares of GranCare Common Stock. The
approval of proposals 3 and 4 above requires the affirmative vote of a
majority of shares of GranCare Common Stock represented and entitled to vote
at the Special Meeting. Each share of GranCare Common Stock will entitle the
holder thereof to one vote on each matter that may properly come before the
Special Meeting. Approval of the Distribution and the Merger will be
considered and voted upon separately by GranCare shareholders, but neither the
Merger nor the Distribution will be effected unless both transactions are
first approved by the GranCare shareholders. Only GranCare shareholders of
record at the close of business on December 10, 1996 (the "Special Meeting
Record Date") are entitled to notice of, and to vote at, the Special Meeting,
or any adjournment or postponement thereof. If the Merger and Distribution are
not effected, proposals 3 and 4 will not be implemented.
VITALINK INFORMATION STATEMENT
This Proxy Statement/Prospectus is also being mailed on , 1996 as an
Information Statement (the "Vitalink Information Statement") to stockholders
of Vitalink on the Vitalink Record Date, (as hereinafter defined) and
constitutes the notice of corporate action without meeting required by Section
228(d) of the DGCL. The record date for stockholders entitled to notice of the
Merger was November 15, 1996 (the "Vitalink Record Date"). As of the Vitalink
Record Date there were 13,979,700 shares of issued and outstanding Vitalink
Common Stock. On the Vitalink Record Date, Manor Care, Inc., a Delaware
corporation ("Manor Care"), owned approximately 82.3% of the voting power of
the Vitalink Common Stock. Manor Care, as the owner of more than 50% of the
voting power of Vitalink Common Stock, will approve the Merger and approve an
increase in the number of authorized shares of Vitalink Common Stock from
30,000,000 to 80,000,000 by written consent on January , 1997. Pursuant to
the General Corporation Law of the State of Delaware ("DGCL"), other than such
written consent, no further action by the stockholders of Vitalink is
necessary to approve or consummate the Merger and no such approval will be
sought. Vitalink will not hold a meeting of its stockholders in connection
with the Merger.
YEAR END TREATMENT OF TRANSACTIONS FOR TAX AND FINANCIAL REPORTING PURPOSES
Under the terms of the Merger Agreement, GranCare and Vitalink are required
to take all reasonable actions necessary in order to cause the Merger to be
treated as consummated as of December 31, 1996, for financial reporting and
tax purposes.
<PAGE>
WE ARE NOT ASKING THE STOCKHOLDERS OF VITALINK FOR A PROXY AND SUCH
STOCKHOLDERS ARE REQUESTED NOT TO SEND US A PROXY.
This Proxy Statement/Prospectus also constitutes the prospectus of Vitalink
filed with the Securities and Exchange Commission (the "Commission") as a part
of a Registration Statement on Form S-4 (the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), relating to the
Vitalink Common Stock to be issued to shareholders of GranCare upon the
consummation of the Merger.
All information concerning GranCare contained or incorporated by reference
in this Proxy Statement/Prospectus has been furnished by GranCare, and all
information concerning Vitalink prior to the consummation of the Merger
contained or incorporated by reference in this Proxy Statement/Prospectus has
been furnished by Vitalink.
Shareholders are urged to read and carefully consider the information
contained in this Proxy Statement/Prospectus. This Proxy Statement/Prospectus,
the letter to GranCare shareholders, the notice to GranCare shareholders and
the related form of proxy are first being mailed or delivered to GranCare
shareholders on or about December , 1996. Any GranCare shareholder who has
given his, her or its proxy may revoke it at any time prior to its use. See
"The Special Meeting--Voting of Proxies."
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AVAILABLE INFORMATION.................................................... 1
INCORPORATION OF DOCUMENTS BY REFERENCE.................................. 2
SUMMARY.................................................................. 3
RISK FACTORS............................................................. 24
THE COMPANIES............................................................ 29
Vitalink's Business.................................................... 29
GranCare's Institutional Pharmacy Business............................. 34
SELECTED HISTORICAL COMBINED FINANCIAL DATA OF TEAMCARE, INC............. 41
TEAMCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................... 42
General................................................................ 42
Results of Operations.................................................. 42
Liquidity and Capital Resources........................................ 45
Impact of Inflation.................................................... 46
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS.............. 47
THE SPECIAL MEETING...................................................... 53
Date, Time and Place................................................... 53
Purpose of Special Meeting............................................. 53
Special Meeting Record Date; Voting Rights; Proxies.................... 54
Voting of Proxies...................................................... 54
Required Vote.......................................................... 54
Proxy Solicitation..................................................... 55
DESCRIPTION OF THE TRANSACTIONS.......................................... 56
Background of the Transactions......................................... 56
The Distribution and the Merger........................................ 58
GranCare's Reasons for the Merger; Recommendation of the Board of
Directors of GranCare................................................. 58
Opinion of GranCare's Financial Advisor................................ 61
Vitalink's Reasons for the Merger...................................... 66
Opinion of Vitalink's Financial Advisor................................ 67
Directors and Officers of Vitalink Following the Merger................ 72
Interests of Certain Persons in the Transactions....................... 74
Accounting Treatment................................................... 76
Expenses............................................................... 76
Dissenters' Rights..................................................... 76
THE MERGER AGREEMENT..................................................... 79
General................................................................ 79
No Fractional Vitalink Common Stock.................................... 79
Effect of Merger on GranCare Adjusted Options.......................... 80
Representations and Warranties......................................... 80
Covenants.............................................................. 81
No Solicitation........................................................ 81
Outstanding GranCare Debt.............................................. 82
Conditions............................................................. 82
Termination............................................................ 83
Termination Fees and Expenses.......................................... 85
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Indemnification; Insurance............................................. 86
Amendment.............................................................. 87
Waivers; Consents...................................................... 87
Year End Treatment of the Transactions for Tax and Accounting
Purposes.............................................................. 87
THE DISTRIBUTION AGREEMENT............................................... 88
Contribution of Skilled Nursing Business to New GranCare............... 88
Consummation of the Distribution; Treatment of GranCare Stock Options.. 89
Manner of Effecting the Distribution................................... 90
Listing of New GranCare Common Stock; Restrictions on Resale........... 91
Treatment of Certain Indebtedness...................................... 91
Expenses............................................................... 95
Conditions............................................................. 95
Terms of the Distribution Agreement.................................... 95
Terms of the Employee Benefits Agreement............................... 97
Terms of the Non-competition Agreement................................. 98
Terms of the Shareholders Agreement.................................... 98
Terms of the Interim Services Agreement................................ 99
Terms of the Voting Agreement.......................................... 99
Terms of the Tax Allocation Agreement.................................. 99
CERTAIN FEDERAL INCOME TAX CONSEQUENCES.................................. 102
Tax Opinions........................................................... 102
The Distribution....................................................... 103
The Merger............................................................. 103
Possible Future Legislation............................................ 104
Back-up Withholding Requirements....................................... 104
RELATIONSHIP BETWEEN VITALINK AND MANOR CARE............................. 105
General................................................................ 105
Administrative Services Agreement...................................... 105
Tax Agreements......................................................... 106
Intercompany Debt and Credit Agreement................................. 106
Manor Care Pharmacy, Infusion Therapy and Consulting Services
Agreements............................................................ 106
Master Agreement for Pharmacy Services................................. 106
Master Agreement for Infusion Therapy Services......................... 107
Master Pharmacy Consulting Agreement................................... 107
Pharmacy Services Consultant Agreement................................. 107
Anticipated Changes in the Relationship Between Vitalink and Manor
Care.................................................................. 108
EXISTING CONTRACTUAL ARRANGEMENTS BETWEEN TEAMCARE AND NEW GRANCARE...... 108
Terms of the Pharmaceutical Supply Agreements.......................... 108
DESCRIPTION OF THE VITALINK CREDIT FACILITY.............................. 109
CONFLICTS OF INTEREST.................................................... 110
RESTRICTIONS ON RESALE OF VITALINK COMMON STOCK.......................... 110
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
VITALINK................................................................ 111
DESCRIPTION OF VITALINK CAPITAL STOCK.................................... 112
COMPARATIVE RIGHTS OF STOCKHOLDERS....................................... 113
General................................................................ 113
Size of the Board of Directors......................................... 113
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Cumulative Voting...................................................... 113
Change in Number of Directors.......................................... 114
Removal of Directors................................................... 114
Filling Vacancies on the Board of Directors............................ 114
Amendment of Certificate............................................... 115
Amendment of the Bylaws................................................ 115
Action by Written Consent.............................................. 116
Indemnification and Elimination of Directors' Monetary Liability for
Breach of Duty of Care................................................ 116
Shareholder Vote for Mergers and Other Reorganizations................. 117
Stockholder Approval of Certain Business Combinations.................. 118
Interested Director Transactions....................................... 119
Shareholder Derivative Suits........................................... 120
Appraisal Rights....................................................... 120
Dissolution............................................................ 120
Inspection of Shareholder Lists........................................ 121
Anti-Takeover Measures................................................. 121
Classified Board of Directors.......................................... 121
Special Meetings of Stockholders....................................... 121
Application of General Corporation Law of California to Delaware
Corporations.......................................................... 122
Dividends and Repurchases of Shares; Par Value; Capital and Surplus.... 122
ADOPTION AND APPROVAL OF NEW GRANCARE 1996 STOCK INCENTIVE PLAN.......... 122
General................................................................ 122
Federal Income Tax Consequences of the 1996 New GranCare Plan.......... 124
ADOPTION AND APPROVAL OF THE NEW GRANCARE ANNUAL INCENTIVE PLAN AND
STOCKHOLDER VALUE PROGRAM............................................... 125
Annual Incentive Plan.................................................. 125
Federal Income Tax Consequences of the Annual Incentive Plan........... 125
Stockholder Value Program.............................................. 126
Federal Income Tax Consequences of the Stockholder Value Program....... 127
SHAREHOLDER PROPOSALS.................................................... 127
LEGAL MATTERS............................................................ 128
EXPERTS.................................................................. 128
INDEX TO FINANCIAL STATEMENTS............................................ F-1
Annex A--Prospectus Relating to New GranCare Common Stock to be Issued in
the Distribution........................................................ A-1
Annex B--Merger Agreement (As Amended)................................... B-1
Annex C--Amended and Restated Distribution Agreement..................... C-1
Annex D--Form of Fairness Opinion of PaineWebber Incorporated............ D-1
Annex E--Form of Fairness Opinion of Chase Securities Inc................ E-1
Annex F--Chapter 13 of the General Corporation Law of the State of
California.............................................................. F-1
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
Vitalink and GranCare are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and other information with the Securities
and Exchange Commission (the "Commission") relating to their business,
financial position, results of operations and other matters. Such reports,
proxy statements and other information can be inspected and copied at the
Public Reference Section maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549 and at its Regional Offices located
at The Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and 7 World Trade Center, New York, New York 10048. Copies of such
material also can be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Vitalink Common Stock is quoted on the Nasdaq. The GranCare Common
Stock is listed on the NYSE. Such reports, proxy statements and other
materials can also be inspected at the offices of the New York Stock Exchange,
20 Broad Street, New York, New York 10005 (with respect to GranCare) and the
Nasdaq Stock Market, 1735 K Street, N.W., Washington, D.C. 20006 (with respect
to Vitalink). Such reports, proxy statements and other information can be
reviewed through the Commission's Electronic Data Gathering Analysis and
Retrieval System, which is publicly available through the Commission's Web
site (http://www.sec.gov).
Vitalink has filed with the Commission the Registration Statement under the
Securities Act with respect to the Vitalink Common Stock offered hereby. This
Proxy Statement/Prospectus does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Reference is made to the
Registration Statement and to the exhibits relating thereto for further
information with respect to Vitalink, GranCare and the Vitalink Common Stock
offered hereby.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY VITALINK, GRANCARE OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF THE SECURITIES MADE UNDER THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF GRANCARE OR VITALINK SINCE THE DATE OF THIS PROXY
STATEMENT/PROSPECTUS.
1
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by Vitalink (File No. 1-0-
19820) and GranCare (File No. 1-1-19571) pursuant to the Exchange Act are
incorporated by reference in this Proxy Statement/Prospectus:
1. Vitalink's Annual Report on Form 10-K for the year ended May 31, 1996
and Forms 10-K/A filed with the Commission on December 23, 1996;
2. Vitalink's Quarterly Report on Form 10-Q for the quarter ended August
31, 1996;
3. GranCare's Annual Report on Form 10-K for the year ended December 31,
1995 and Forms 10-K/A filed with the Commission on December 23, 1996
and December 31, 1996;
4. GranCare's Quarterly Reports on Form 10-Q for the quarters ended March
31, 1996, June 30, 1996 and September 30, 1996 each as amended on
Forms 10-Q/A filed with the Commission on December 23, 1996 and
December 31, 1996; and
5. GranCare's Current Report on Form 8-K dated September 5, 1996.
All documents and reports filed by GranCare pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act after the date of this Proxy
Statement/Prospectus and prior to the date of the Special Meeting shall be
deemed to be incorporated by reference in this Proxy Statement/Prospectus and
to be a part hereof from the dates of filing of such documents or reports. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement/Prospectus to the extent that a statement contained
herein or in any other subsequently filed document which also is or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE WHICH
ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON, INCLUDING ANY
BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON
WRITTEN OR ORAL REQUEST, IN THE CASE OF DOCUMENTS RELATING TO VITALINK, TO
VITALINK PHARMACY SERVICES, INC., 11555 DARNESTOWN ROAD, GAITHERSBURG, MD
20878-3200 (TELEPHONE NUMBER (301) 979-3000), ATTN: SECRETARY, OR, IN THE CASE
OF DOCUMENTS RELATING TO GRANCARE, TO GRANCARE, INC., ONE RAVINIA DRIVE, SUITE
1500, ATLANTA, GA 30346 (TELEPHONE NUMBER (770) 393-0199), ATTN: ASSISTANT
SECRETARY. IN ORDER TO ENSURE TIMELY DELIVERY OF THE INCORPORATED DOCUMENTS,
REQUESTS SHOULD BE RECEIVED PRIOR TO JANUARY , 1997.
2
<PAGE>
SUMMARY
The following is a summary of certain information contained in this Proxy
Statement/Prospectus. This summary does not contain a complete statement of all
material information relating to Vitalink, GranCare, New GranCare, TeamCare,
the Distribution, the Distribution Agreement, the Merger or the Merger
Agreement and is qualified in all respects by reference to the more detailed
information and financial statements contained elsewhere or incorporated by
reference in this Proxy Statement/Prospectus and the Annexes hereto.
Shareholders are urged to read this Proxy Statement/Prospectus and the Annexes
hereto in their entirety. For information regarding New GranCare, GranCare
shareholders should review the prospectus of New GranCare attached hereto as
Annex A.
GENERAL
THE COMPANIES
Vitalink Pharmacy Services,
Inc. 1250 East Diehl Road
Naperville, Illinois 60563
(630) 245-4800............. Vitalink provides institutional pharmacy services
to nursing facilities and other institutions.
Vitalink presently operates 23 institutional
pharmacies and four regional infusion pharmacies,
which specialize in pharmaceutical dispensing of
individual medications, pharmacy consulting (drug
regimen review of potential medication
interaction as well as regulatory compliance with
medication and administration guidelines) and
infusion therapy products. Vitalink, through its
subsidiary, Vitalink Infusion Services, Inc.,
provides parenteral and enteral nutrition
products to patients who qualify under Medicare
Part B and bills Medicare directly for these
products. Manor Care presently owns approximately
82.3% of the outstanding Vitalink Common Stock.
Subsequent to the consummation of the Merger,
Manor Care will own on a fully-diluted basis,
approximately 45% of the outstanding Vitalink
Common Stock.
GranCare, Inc. One Ravinia
Drive Suite 1500 Atlanta,
GA 30346 (770) 393-0199.... GranCare is a leading provider of comprehensive
post-acute health care services, primarily
skilled nursing and subacute care, pharmacy
services, contract management, assisted living
and home health care. GranCare provides these
services through 140 long-term care facilities
(136 skilled nursing facilities and four assisted
living facilities), and 12 programs operated by
GranCare's home health division (home health,
hospice and private duty, each in the States of
California, Indiana, Michigan and Wisconsin) and,
through its contract management business,
GranCare manages approximately 145 medical
programs in acute care hospitals. GranCare
provides institutional pharmacy services
primarily through its TeamCare subsidiary, which
operates 25 institutional pharmacies with eight
3
<PAGE>
satellite locations and six related pharmacy
businesses all of which will be acquired by
Vitalink in connection with the Merger.
Operations of Combined
Companies.................. Following the Merger, Vitalink will provide
institutional pharmacy services and operate 48
institutional pharmacies with eight satellite
locations, six related pharmacy businesses and
four regional infusion pharmacies.
THE SPECIAL MEETING
Date, Place and Time........ The Special Meeting will be held on January ,
1997 at 11:00 a.m., local time, at the offices of
GranCare located at One Ravinia Drive, Suite
1500, Atlanta, Georgia.
Purpose of the Special
Meeting.................... At the Special Meeting, the holders of shares of
GranCare Common Stock will consider and vote upon
(i) the approval and adoption of the Distribution
Agreement and the other transactions as are
contemplated thereby as a result of which the
GranCare shareholders will retain their equity
ownership interest in the Skilled Nursing
Business of GranCare (the "Distribution
Proposal"); (ii) the approval and adoption of the
Merger Agreement and the other transactions
contemplated thereby as a result of which the
Institutional Pharmacy Business of GranCare will
be merged with and into Vitalink (the "Merger
Proposal"); (iii) the approval and adoption of
the 1996 New GranCare Plan (the "Plan Proposal");
(iv) the approval and adoption of the Annual
Incentive Plan and Stockholder Value Program (the
"Incentive Plan Proposal"); (v) the approval of
the possible adjournment of the Special Meeting
for the purpose of soliciting additional votes in
favor of proposals (i) through (iv) above, if
deemed appropriate (the "Adjournment Proposal");
and (vi) such other business as may properly come
before the Special Meeting. See "The
Transactions."
Required Vote............... Under the California General Corporation Law
("CGCL"), the affirmative vote of a majority of
the issued and outstanding shares of GranCare
Common Stock will be required to approve the
Merger Proposal. Although the Distribution
Proposal and the Merger Proposal will be voted on
separately, the Merger Agreement provides that
the Merger will not be consummated unless the
Distribution Proposal is approved by GranCare
shareholders. The Distribution Proposal will be
adopted if approved by the affirmative vote of a
majority of the issued and outstanding shares of
GranCare Common Stock. The affirmative vote of a
majority of the shares of GranCare Common Stock
represented and entitled to vote at the Special
Meeting will be required to separately approve
the 1996 New GranCare Plan and the Annual
Incentive Plan and Stockholder Value Program
(collectively, the "Incentive Plan Proposal").
Each director and executive officer of GranCare
has advised GranCare that he or she intends to
vote or direct the vote of all shares of GranCare
Common Stock over which he or she has voting
control (a total of 2,118,460 or approximately
9%, of the outstanding shares
4
<PAGE>
of GranCare Common Stock as of December 10, 1996)
in favor of approval of each of the various
proposals to be considered and voted on at the
Special Meeting. The directors and executive
officers of Vitalink do not beneficially own any
shares of GranCare Common Stock. See "The Special
Meeting--Required Vote."
Recommendation of the Board
of Directors of GranCare... On September 3, 1996, the Board of Directors of
GranCare determined that the Transactions consti-
tute a significant strategic opportunity for
GranCare's Institutional Pharmacy Business as
well as the Skilled Nursing Business and that the
terms of the Transactions are fair to and in the
best interests of GranCare and its shareholders.
As a result, the GranCare Board of Directors
unanimously approved the Transactions (including
the Distribution Agreement and the Merger Agree-
ment) and unanimously adopted a resolution recom-
mending that GranCare shareholders vote in favor
of approval of the Transactions. See "Description
of the Transactions--GranCare's Reasons for the
Merger; Recommendation of the Board of Directors
of GranCare."
Revocability of Proxies..... Any proxy given pursuant to this solicitation may
be revoked with respect to any proposal at any
time prior to the vote on such proposal. Proxies
may be revoked by attending the Special Meeting
and giving notice of revocation in open meeting
or voting in person. Alternatively, proxies may
be revoked by executing a written notice of
revocation bearing a later date than the date of
the proxy or executing a later dated proxy
relating to the same shares of GranCare Common
Stock and, in either case, delivering such notice
or proxy to the Secretary of GranCare before the
taking of any vote at the Special Meeting. See
"The Special Meeting--Voting of Proxies."
Record Date................. Only holders of GranCare Common Stock on December
10, 1996 (the "Special Meeting Record Date") will
be entitled to notice of and to vote at the
Special Meeting. On the Special Meeting Record
Date, there were 23,677,925 shares of GranCare
Common Stock held by approximately 1,035 holders
of record.
Action Taken by the Board
of Directors of Vitalink... At a meeting held on September 3, 1996 the Board
of Directors of Vitalink unanimously approved the
Merger Agreement, an increase in the number of
authorized shares of Vitalink Common Stock from
30,000,000 to 80,000,000 and the other
transactions contemplated by the Merger Agreement
as they believe that the terms of the Merger
Agreement are consistent with and in furtherance
of the long-term business strategy of Vitalink
and are fair to and in the best interests of
Vitalink and its stockholders. See "Description
of the Transactions--Vitalink's Reasons for the
Merger."
Action Taken by Manor
Care....................... Manor Care, a holder of approximately 82.3% of
the outstanding Vitalink Common Stock, will
approve (i) the Merger Agreement and
5
<PAGE>
(ii) an increase in the number of authorized
shares of Vitalink Common Stock from 30,000,000
to 80,000,000 by written consent on January ,
1997.
THE TRANSACTIONS
The Transactions............ Subject to the approval of GranCare's
shareholders and the satisfaction or waiver of
certain other conditions, (i) GranCare's Skilled
Nursing Business shall be transferred to New
GranCare, a wholly-owned subsidiary of GranCare,
and all of the New GranCare Common Stock shall be
distributed to the shareholders of GranCare and
(ii) GranCare's only remaining business will be
the Institutional Pharmacy Business, which shall
be acquired by Vitalink upon the Merger of
GranCare into Vitalink. Vitalink shall be the
surviving corporation in the Merger and shall
continue its corporate existence under the laws
of the State of Delaware and the separate
existence of GranCare shall cease. As a result of
the Distribution, New GranCare shall become an
independent company owned by the shareholders of
GranCare as of the Distribution Record Date.
Immediately following the Distribution the name
of New GranCare shall be changed to "GranCare,
Inc."
Vitalink Board and CEO...... The Vitalink Board of Directors will consist of
eight members immediately following the
consummation of the Merger, four designated by
GranCare (the "GranCare Nominees") and four
designated by Manor Care. See "Description of the
Transactions--Directors and Officers of Vitalink
Following the Merger." Immediately following the
consummation of the Merger, GranCare's Chief
Executive Officer, Gene E. Burleson, will become
Vitalink's Chief Executive Officer and a member
of Vitalink's Board of Directors. In addition,
pursuant to a Shareholders Agreement to be
entered into by Manor Care and Vitalink as of the
Effective Time of the Merger (the "Shareholders
Agreement"), Manor Care has agreed, for a period
of three years from the Effective Time of the
Merger, to vote all shares of Vitalink Common
Stock beneficially owned by Manor Care in favor
of the election of the GranCare Nominees (or any
successor to any such nominee designated by a
majority of the then remaining GranCare Nominees)
as Vitalink directors.
Result of the Distribution
and the Merger............. Each shareholder of GranCare shall receive, as a
consequence of the Distribution, one share of New
GranCare Common Stock for each share of GranCare
Common Stock owned as of the Distribution Record
Date. As a consequence of the Merger, each
GranCare shareholder will receive 0.478 of a
share of Vitalink Common Stock for each share of
GranCare Common Stock owned as of the Effective
Time of the Merger (subject to adjustment for
stock splits, reclassifications,
recapitalizations or otherwise). Holders of
GranCare Common Stock shall not be entitled to
receive fractional
6
<PAGE>
shares of Vitalink Common Stock and shall not be
entitled to receive dividends on or vote such
fractional shares of Vitalink Common Stock and
shall receive, in lieu of such fractional shares,
cash in an amount equal to such fraction
multiplied by the Average Market Value (as
hereinafter defined). No GranCare shareholder
will receive cash in an amount equal to or
greater than the value of one full share of
Vitalink Common Stock. See "The Merger
Agreement--General."
As a consequence of the Merger, Vitalink will
also assume certain items of GranCare's
consolidated indebtedness including existing
long-term indebtedness of GranCare associated
with the operation of the Institutional Pharmacy
Business (approximately $11.4 million at August
31, 1996 which will be reduced by the retirement
of $3.4 million of TeamCare debt by GranCare
prior to the Merger) and will become liable for a
$10.0 million consent fee (the "Consent Fee") to
be paid to Health and Retirement Properties Trust
("HRPT") which will be promptly reimbursed to
Vitalink by New GranCare following the completion
of Merger. In addition, Vitalink will incur
indebtedness under a $200 million revolving
credit facility to be executed prior to the
Effective Time of the Merger between Vitalink,
certain of its subsidiaries and The Chase
Manhattan Bank, as agent, and the lenders party
thereto (the "Vitalink Credit Facility") to
refinance GranCare's $100.0 million aggregate
principal amount of 9 3/8% Senior Subordinated
Notes due 2005 (the "Senior Subordinated Notes"),
which are expected to be tendered pursuant to a
tender offer which was commenced December 18,
1996 (the "Tender Offer") for all such Senior
Subordinated Notes and Vitalink will assume any
Senior Subordinated Notes not so tendered. It is
estimated that Vitalink will incur or assume
approximately $118.0 million of indebtedness
(including the Consent Fee) prior to an
offsetting payment by New GranCare pursuant to a
formula set forth in the Distribution Agreement
currently estimated to be approximately $20.9
million. See "The Distribution Agreement--
Treatment of Certain Indebtedness."
As a consequence of the Distribution, each holder
of options (the "GranCare Options") to purchase
shares of GranCare Common Stock will receive
options (the "New GranCare Options") to purchase
such number of shares of New GranCare Common
Stock as is equal to the number of shares of
GranCare Common Stock subject to GranCare Options
held by such holder as of the Distribution Record
Date. The exercise prices of all GranCare Options
will be allocated between the New GranCare
Options issued in respect of such GranCare
Options and the existing GranCare Options
pursuant to a formula. As a result of the
application of such formula, approximately 38.4%
of the exercise price of each GranCare Option
will be allocated to and shall become the
exercise price of the New GranCare Option and
approximately 61.6% of such
7
<PAGE>
exercise price shall be allocated to and shall
become the exercise price of the existing
GranCare Options (the "Adjusted GranCare
Options"). The terms and conditions of the New
GranCare Options will be the same as the terms of
the GranCare Options prior to the Distribution.
As a result of the Merger, Vitalink will assume
all of the Adjusted GranCare Options. Each
Adjusted GranCare Option will 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 as
is equal to the number of shares of GranCare
Common Stock that would have been acquired upon
exercise of such option as of the Effective Time
of the Merger multiplied by the Exchange Ratio.
As a result of the Merger, the exercise price of
each Adjusted GranCare Option will be further
adjusted to give effect to the Exchange Ratio.
See "The Distribution Agreement--Consummation of
the Distribution; Treatment of GranCare Stock
Options."
GranCare's Reasons for the
Transactions............... After considering the benefits and possible
detriments of each of the factors described
below, the GranCare Board of Directors determined
that the terms of the Transactions are fair to
and in the best interests of GranCare and its
shareholders. The conclusion of the Board of
Directors of GranCare with respect the
Transactions is based upon a number of factors.
In reaching its decision, the GranCare Board of
Directors considered the economic terms of the
Transactions and the advantages it affords
GranCare's shareholders, including the fact that
GranCare shareholders will have a continuing
interest in the Institutional Pharmacy Business
through ownership of Vitalink Common Stock. In
addition, the Distribution will allow GranCare
shareholders to retain a continuing interest in
the Skilled Nursing Business. GranCare
shareholders will receive, on what is intended to
be a tax-free basis, the shares of New GranCare
Common Stock and Vitalink Common Stock. The
GranCare Board of Directors also considered the
opinion of PaineWebber Incorporated
("PaineWebber"), GranCare's financial advisor,
that the consideration to be received by GranCare
shareholders pursuant to the Distribution and the
Merger, taken together, is fair to such
shareholders from a financial point of view. The
GranCare Board of Directors also considered a
number of potentially negative factors, including
the dilutive impact on Vitalink's earnings per
share of goodwill created by the Merger, control
by Manor Care, the potential interests of certain
persons in the Merger, and risks associated with
operating the Skilled Nursing Business as a
separate company.
THE BOARD OF DIRECTORS OF GRANCARE UNANIMOUSLY
RECOMMENDS TO THE HOLDERS OF GRANCARE COMMON
STOCK THAT THE DISTRIBUTION AND MERGER AND THE
TRANSACTIONS CON-
8
<PAGE>
TEMPLATED THEREBY BE APPROVED. See "Description
of the Transactions--GranCare's Reasons for the
Merger; Recommendation of the Board of Directors
of GranCare" and "--Opinion of GranCare's Finan-
cial Advisor."
Opinion of GranCare's
Financial Advisor.......... PaineWebber delivered its written opinion on
September 3, 1996 to the GranCare Board of
Directors to the effect that, as of the date of
such opinion, the consideration to be received by
the shareholders of GranCare pursuant to the
Distribution and the Merger, taken together, is
fair to such holders from a financial point of
view. The full text of PaineWebber's written
opinion, which sets forth the assumptions made,
matters considered, limitations on and scope of
its review, is attached hereto as Annex D.
GRANCARE'S SHAREHOLDERS SHOULD READ SUCH OPINION
IN ITS ENTIRETY. See "Description of the
Transactions--Opinion of GranCare's Financial
Advisor."
Vitalink's Reasons for the
Merger..................... In recommending the Merger to the Vitalink
shareholders, the Vitalink Board of Directors
evaluated the following factors: (i) the
business, operating results, financial condition,
share price, strategic objectives and prospects
of Vitalink and GranCare and of GranCare's
Institutional Pharmacy Business; (ii) the
Vitalink Board of Directors' belief that the
institutional pharmacy business is consolidating
and that the Merger will increase Vitalink's
market share and geographic reach in addition to
creating operational synergies; (iii) that each
of GranCare and Vitalink could be required to pay
or entitled to receive a termination fee under
certain circumstances; (iv) the Vitalink Board of
Directors' belief that the Merger will give
Vitalink greater resources and distribution
capacity to more effectively service its
customers; (v) the proposed structure of the
Transactions as a Merger of equals; and (vi) the
Vitalink Board of Directors' belief that the
Merger will give Vitalink greater appeal in the
capital markets and that the liquidity of
Vitalink Common Stock will be enhanced. The
Vitalink Board of Directors also considered the
importance of (a) being able to complete the
Transactions on a tax-free basis; (b) achieving
overhead savings on a timely basis subsequent to
the Merger to avoid earnings dilution; and (c)
the importance of GranCare's contract to service
approximately 8,000 beds for the State of New
Jersey. In addition, the Board of Directors also
considered the possible adverse effect on
Vitalink due to the Merger, including the failure
to integrate TeamCare, increased leverage, loss
of arrangements with Manor Care, failure to
realize certain anticipated benefits and possible
adverse tax consequences. After considering the
benefits and possible detriments of each of the
above-mentioned factors, the Board of Directors
determined the Merger was in the best interest of
its stockholders. See "Description of the
Transactions--Vitalink's Reasons for the Merger."
9
<PAGE>
Opinion of Vitalink's
Financial Advisor.......... Chase Securities Inc. ("Chase") delivered its
written opinion on October 2, 1996 to the
Vitalink Board of Directors to the effect that,
as of the date of such opinion, the Exchange
Ratio was fair, from a financial point of view,
to Vitalink (the "Chase Opinion"). The full text
of the Chase Opinion, which sets forth the
assumptions made, general procedures followed,
factors considered and limitations on the review
undertaken by Chase, is attached hereto as Annex
E, HOLDERS OF VITALINK COMMON STOCK ARE URGED TO
READ THE CHASE OPINION CAREFULLY AND IN ITS
ENTIRETY. See "Description of the Transactions--
Opinion of Vitalink's Financial Advisor."
Interests of Certain
Persons in the
Transactions............... In considering the recommendation of the Board of
Directors of GranCare with respect to the
Transactions, GranCare's shareholders should be
aware of, and should carefully consider that, the
GranCare Board of Directors and certain members
of GranCare's management may be deemed to have
interests in the Transactions that are in
addition to their interests as shareholders of
GranCare generally and which may create potential
conflicts of interest.
These interests also include the assumption by
GranCare and New GranCare of employment and
severance obligations of GranCare and the
acceleration of the vesting of certain stock
options. Gene E. Burleson will become Vitalink's
Chief Executive Officer and his present
employment agreement will be assumed by Vitalink.
It is expected that substantially all of the
officers who are parties to employment agreements
will execute new agreements with New GranCare or
Vitalink, as appropriate, and release any rights
to change of control payments under their
existing agreements.
The Merger Agreement also includes certain
provisions relating to the indemnification of
officers and directors of GranCare and New
GranCare and provides for the continuation of
current directors' and officers' liability
insurance for such officers and directors, in
each case with respect to events or circumstances
occurring prior to the Effective Time of the
Merger. See "The Merger Agreement--
Indemnification; Insurance."
As of November 30, 1996, 29 executive officers
and directors of GranCare (as a group) owned an
aggregate of 2,118,460 shares of GranCare Common
Stock (excluding shares subject to outstanding
stock options) representing approximately 9% of
the outstanding GranCare Common Stock. All such
shares will be treated in the Merger and the
Distribution in the same manner as shares of
GranCare Common Stock held by other shareholders
of GranCare.
As of November 30, 1996, the executive officers
of GranCare (as a group) also held options to
purchase an aggregate of 1,622,871 shares of
GranCare Common Stock pursuant to GranCare's
stock
10
<PAGE>
option plans, 759,990 of which are not currently
exercisable. In addition, as of November 30,
1996, the non-employee directors of GranCare (as
a group) held options to purchase an aggregate of
251,740 shares of GranCare Common Stock. Upon the
consummation of the Merger, all of the options
held by such executive officers and non-employee
directors will immediately become fully vested
and exercisable. The treatment of such options is
described under "The Merger Agreement--Effect on
GranCare Adjusted Options" and "The Distribution
Agreement--Consummation of the Distribution;
Treatment of GranCare Stock Options."
In addition, GranCare officers will receive cash
payments pursuant to certain incentive plans
sponsored by GranCare as a result of the early
termination thereof upon the occurrence of a
change of control (as defined in such plans). The
Merger will constitute a change of control for
purposes of such plans as well as GranCare's
existing employment agreements. GranCare's
executive officers will receive an aggregate
amount of $4.5 million upon the acceleration of
its Senior Executive Shareholder Value Program
(for the Company's senior level executive
officers) and Shareholder Value Program (for all
other executive officers and employees),
collectively with the Senior Executive
Shareholder Value Program (the "Shareholder Value
Program"). The maximum amount of payments that
GranCare may be required to make pursuant to such
incentive plans and employment agreements is
approximately $14.0 million assuming GranCare's
long-term incentive plans are paid out at the
maximum level and assuming every executive
officer of GranCare exercises the change in
control provision in his or her employment
agreement. GranCare believes that the maximum
amount of change in control payments to its
executive officers that could be triggered by the
Merger will approximate $7.0 million, however,
any officer who accepts employment with New
GranCare or Vitalink following the consummation
of the Transactions will be required to waive his
or her rights to any such payments. For a more
detailed description of the change in control
payments see "Description of the Transactions--
Interests of Certain Persons in the
Transactions."
The GranCare Board of Directors was aware of
these interests and considered them, among other
matters, in approving the Transactions. See
"Description of the Transactions--Interests of
Certain Persons in the Transactions."
As of August 5, 1996 the executive officers and
directors of Vitalink (as a group) beneficially
owned an aggregate of 74,733 shares of Vitalink
Common Stock representing approximately .5% of
the outstanding Vitalink Common Stock. Because
Manor Care will approve the Merger and the
increase in authorized shares of Vitalink Common
Stock by written consent, no action on the part
of such executive officers and directors is
necessary to approve or consummate the Merger.
11
<PAGE>
THE MERGER AGREEMENT
Effective Time of the
Merger..................... If the Transactions are approved and adopted by
GranCare's shareholders, GranCare will distribute
as a dividend all of the issued and outstanding
shares of New GranCare Common Stock to GranCare
shareholders as of the Distribution Record Date,
which is intended to be immediately prior to the
Effective Time of the Merger. The Distribution
shall take place as soon as practicable following
approval by the GranCare shareholders of the
Distribution Proposal and the Merger Proposal and
the fulfillment of all other conditions to the
Merger (other than the completion of the
Distribution). Assuming all other conditions of
the Merger are satisfied or waived, the Merger is
expected to become effective immediately
following the Distribution.
Year End Treatment of
Transactions For Tax and
Financial Reporting
Purposes................... Under the terms of the Merger Agreement, GranCare
and Vitalink are required to take all reasonable
actions necessary in order to cause the Merger to
be treated as consummated as of December 31, 1996
for financial reporting and tax purposes.
Conditions to the Merger.... The obligations of Vitalink and GranCare to
effect the Merger are subject to the satisfaction
or waiver of certain conditions set forth in the
Merger Agreement, including, among other things,
(i) the approval of the Distribution Agreement by
GranCare's shareholders at the Special Meeting;
(ii) the completion of the Distribution; (iii)
holders of less than 5% of the shares of GranCare
Common Stock issued and outstanding as of the
Special Meeting Record Date demanding payment
pursuant to Chapter 13 of the CGCL; (iv) receipt
by Vitalink and GranCare of opinions of counsel
to the effect that the Restructuring (as defined
in the Merger Agreement), the Distribution and
the Merger will all be treated as tax-free
transactions for federal income tax purposes
(except for cash received in lieu of any
fractional share interests); (v) the Vitalink
Common Stock to be issued in the Merger shall
have been authorized for quotation on the Nasdaq;
(vi) GranCare's 6 1/2% Convertible Subordinated
Debentures due 2003 (the "Convertible
Debentures") shall have been called for
redemption; (vii) the consummation of a Tender
Offer for, and the consent to certain amendments
to the indenture governing the Senior
Subordinated Notes by the holders of, not less
than a majority of GranCare's Senior Subordinated
Notes; (viii) the issuance of an irrevocable
letter of credit in favor of Vitalink by New
GranCare (to support a limited guaranty of
certain obligations of New GranCare to HRPT to be
issued by Vitalink); and (ix) no writ, order or
injunction of a court of competent jurisdiction
or governmental entity shall have been entered
against Vitalink or GranCare that would prohibit
or restrict the consummation of the Transactions.
See "The Merger Agreement--Conditions."
12
<PAGE>
Termination................. The Merger Agreement may be terminated either (i)
by mutual consent of Vitalink and GranCare; (ii)
by either party if the Merger is not consummated
on or before December 31, 1996 (provided,
however, that this date may be automatically
extended upon the occurrence of certain
circumstances for a period of two months, but in
no event later than three months from December
31, 1996); (iii) by either party 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; (iv) by either
party if the approval of the Distribution
Proposal and the Merger Proposal by GranCare
shareholders has not been obtained at the Special
Meeting; or (v) in certain other situations.
Vitalink may terminate the Merger Agreement if
any of the following occurs: (i) GranCare fails
to comply in any material respects with certain
covenants set forth in the Merger Agreement; (ii)
GranCare breaches any representation or warranty
contained in the Merger Agreement or the
Distribution Agreement (and such breaches have
not been cured within the applicable time
period); (iii) GranCare furnishes or discloses
non-public information to, or commences
negotiations with, a third party with respect to
a GranCare Acquisition Transaction (as
hereinafter defined) or resolves to do so and
publicly discloses such resolution; (iv) the
GranCare Board of Directors withdraws, changes or
modifies its recommendation of the Transactions
or resolves to do any of the foregoing and
publicly discloses such resolution; or (v) to the
extent permitted by the Merger Agreement, the
Board of Directors of Vitalink negotiates a
definitive agreement with respect to a Vitalink
Business Combination (as hereinafter defined)
and, prior to terminating the Merger Agreement,
Vitalink shall have made all of the Vitalink
Payments (as hereinafter defined). In addition,
GranCare may terminate the Merger Agreement if
Vitalink engages in conduct equivalent to
GranCare in clauses (i)-(iv) above or in the
event the GranCare Board of Directors negotiates
a definitive agreement regarding a GranCare
Business Combination (as hereinafter defined)
and, prior to terminating the Merger Agreement,
GranCare shall have made all of the GranCare
Payments (as hereinafter defined). See "The
Merger Agreement--Termination."
Effect of Termination....... If the Merger Agreement is terminated by either
party as a result of certain actions by the non-
terminating party, the terminating party will be
entitled to receive from the non-terminating
party a cash payment of up to $2.5 million for
documented fees and expenses relating to the
Transactions. In addition, in the event one party
provides information or negotiates with a third
party for a business combination or enters into
such a business combination, the other party may
be entitled to receive a termination fee of up to
$17.5 million. See "The Merger Agreement--
Termination Fees and Expenses."
13
<PAGE>
Certain Voting
Arrangements............... Manor Care and GranCare have entered into a
Voting Agreement (as hereinafter defined)
pursuant to which Manor Care has agreed to vote
all of its Vitalink Common Stock in favor of the
Merger. Manor Care currently owns beneficially
approximately 82.3% of the issued and outstanding
Vitalink Common Stock. Pursuant to the DGCL, a
majority of the outstanding shares of Vitalink
Common Stock must vote in favor of the Merger.
The Voting Agreement will therefore ensure that
the requisite amount of Vitalink Common Stock has
voted to approve the Merger.
At the Effective Time of the Merger, Manor Care
will enter into the Shareholders Agreement (as
hereinafter defined) pursuant to which Manor Care
will agree, for a period of three years after the
Effective Time, to vote its shares of Vitalink
Common Stock in favor of the election of the
GranCare Nominees as directors of Vitalink (and
to fill any vacancies created by the departure of
a GranCare Nominee with a nominee selected by a
majority of the then remaining GranCare
Nominees). The Shareholders Agreement will also
limit Manor Care's ability to sell its Vitalink
Common Stock during the three-year term of the
Shareholders Agreement to (i) sales complying
with the volume limitations set forth in Rule 144
promulgated under the Securities Act, (ii) sales
pursuant to a secondary offering registered
pursuant to the Securities Act and (iii) private
sales. See "The Distribution Agreement--Terms of
the Shareholders Agreement."
THE DISTRIBUTION AGREEMENT
Distribution................ The Distribution Agreement provides a general
framework for allocating GranCare's assets and
liabilities pursuant to the Internal
Restructuring Plan (as defined in the
Distribution Agreement) which will segregate the
Skilled Nursing Business from the Institutional
Pharmacy Business prior to the Distribution Date
in preparation for the Distribution and Merger.
See Annex C, Exhibit A for the terms of such
Internal Restructuring Plan. The Distribution
Agreement also sets forth the general terms on
which GranCare will conduct its business prior to
the Distribution Date, as well as the terms
regarding certain relationships between Vitalink
and New GranCare following the Distribution. The
Distribution Agreement provides that the
Distribution will be effected by distributing to
each holder of GranCare Common Stock as of the
close of business on the Distribution Record Date
one share of New GranCare Common Stock for each
share of GranCare Common Stock held by such
holder as of such time.
Treatment of Certain
Indebtedness............... The Distribution Agreement provides for the
assumption by Vitalink (as part of the Merger) of
GranCare's issued and outstanding Senior
Subordinated Notes to the extent such Senior
Subordinated Notes are not tendered in the Tender
Offer. Indebtedness represented by
14
<PAGE>
the Senior Subordinated Notes tendered in the
Tender Offer will be refinanced through
borrowings by Vitalink under the Vitalink Credit
Facility. Tender offer materials were mailed to
holders of the Senior Subordinated Notes on
December 18, 1996. GranCare will comply with the
requirements of the Federal securities laws in
connection with the Tender Offer, including Rule
14e-1 promulgated under the Exchange Act. See
"The Distribution Agreement--Treatment of Certain
Indebtedness." The Distribution Agreement and the
Merger Agreement also require that GranCare take
commercially reasonably efforts to call for
redemption, prior to the Distribution Date, all
of the outstanding Convertible Debentures. The
Convertible Debentures are presently redeemable
at a redemption price of 104.55% of the principal
amount thereof plus accrued and unpaid interest
to the date of redemption. There are currently
$60.0 million in aggregate principal amount of
Convertible Debentures outstanding, which will
result in an aggregate redemption premium of
approximately $2.7 million which will be a Shared
Transaction Expense (as hereinafter defined),
which premium will be reduced by $390,000 if the
redemption occurs after January 15, 1997. In
addition, the Distribution Agreement provides
that Vitalink will assume (as part of the Merger)
certain items of GranCare's consolidated
indebtedness aggregating approximately $11.4
million associated with GranCare's Institutional
Pharmacy Business at August 31, 1996 (such amount
will be reduced by the retirement of $3.4 million
of TeamCare debt by GranCare prior to the Merger
pursuant to the terms of the Distribution
Agreement) before giving effect to an offsetting
payment (currently estimated to be approximately
$20.9 million). In order to obtain the consent of
HRPT to the consummation of the Transactions,
Vitalink will pay the Consent Fee of $10.0
million and will be reimbursed by New GranCare
immediately following the consummation of the
Transactions (such reimbursement is included as
part of the $20.9 million offsetting payment).
Vitalink will also enter into a limited guaranty
(not to exceed $15.0 million) which will guaranty
payment of certain obligations of New GranCare to
HRPT. New GranCare will support the
aforementioned guaranty by issuing an irrevocable
letter of credit in favor of Vitalink. See "The
Distribution Agreement--Treatment of Certain
Indebtedness--HRPT Obligations."
Expenses.................... New GranCare (on behalf of itself and GranCare)
and Vitalink will each be responsible for one-
half of the total documented fees, expenses and
all other costs (other than legal fees and
certain expenses related to the acceleration of
benefits under various GranCare incentive plans
and programs) incurred by New GranCare, GranCare
and Vitalink in connection with the consummation
of the Transactions ("Shared Transaction
Expenses"). GranCare and Vitalink estimate that
the fees and expenses constituting Shared
Transaction Expenses will approximate $22.0
million.
15
<PAGE>
Certain Arrangements
between GranCare and New
GranCare................... Pursuant to the Distribution Agreement, GranCare
and New GranCare will enter into the Ancillary
Agreements (as defined in the Distribution
Agreement) designed to effectuate the separation
of GranCare's Skilled Nursing Business from its
Institutional Pharmacy Business, and to establish
certain intercompany relationships subsequent to
the completion of the Distribution and Merger.
The Ancillary Agreements address matters related
to employee benefits, tax allocation, non-
competition and interim services. See "The
Distribution Agreement--Terms of the Employee
Benefits Agreement," "--Terms of the Non-
competition Agreement," "--Terms of the Interim
Services Agreement" and "--Terms of the Tax
Allocation Agreement." Substantially all of the
New GranCare facilities existing prior to the
consummation of the Merger have entered into
various pharmaceutical supply agreements (the
"Pharmaceutical Supply Agreements") with
TeamCare. Pursuant to the Merger, Vitalink will
succeed to all of GranCare's rights and
obligations under such Ancillary Agreements and
Pharmaceutical Supply Agreements. New GranCare
has agreed that for so long as Vitalink's limited
guaranty of certain obligations owed to HRPT is
in effect, New GranCare will not terminate any of
the Pharmaceutical Supply Agreements. As a
result, New GranCare anticipates that the
Pharmaceutical Supply Agreements may extend
through December 31, 2010, depending on certain
circumstances. See "Existing Contractual
Arrangements between TeamCare and New GranCare--
Terms of the Pharmaceutical Supply Agreements"
and "The Distribution Agreement--Treatment of
Certain Indebtedness--HRPT Obligations."
OTHER MATTERS
Governmental and Regulatory
Matters.................... The Merger is subject to the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), and the rules and regulations
thereunder, which provide that certain
transactions may not be consummated until
required information and material have been
furnished to the Antitrust Division of the
Department of Justice (the "Justice Department")
and the Federal Trade Commission (the "FTC") and
certain waiting periods have expired or been
terminated. Vitalink and GranCare filings of the
required information and material with the
Justice Department and the FTC were completed on
October 24, 1996 and the waiting period
terminated on November 23, 1996. See "The
Companies--Vitalink's Business."
Accounting Treatment of
Merger..................... Vitalink intends to account for the Merger using
the purchase method of accounting under generally
accepted accounting principles. Under the
purchase method of accounting Vitalink will be
treated as the acquiror of GranCare and, as a
result, the assets and liabilities of GranCare
will be recorded on Vitalink's books at their
estimated fair values.
16
<PAGE>
Dissenter's Rights.......... Holders of shares of GranCare Common Stock who
comply with the specific legal requirements of
Chapter 13 of the CGCL are entitled to rights of
appraisal with respect to the Transactions;
provided, however, that the Merger Agreement
provides that it is a condition to the Merger
that shareholders holding less than 5% of
GranCare Common Stock shall have demanded such
payment. See "Description of The Transactions--
Dissenters' Rights."
Litigation.................. On September 9, 1996, a shareholder of GranCare
filed a civil complaint in the Superior Court of
California, County of Los Angeles, alleging
generally that the members of the Board of
Directors of GranCare breached their fiduciary
duties in connection with the Transactions. The
plaintiffs are seeking an injunction prohibiting
consummation of the Transactions or, if the
Transactions are consummated, rescission of the
Transactions. On December 19, 1996, a Conditional
Agreement and Stipulation of Settlement (the
"Settlement Agreement") was reached in the above
referenced litigation. Completion of the
settlement is subject to notice to the proposed
class, a hearing and final consideration by the
court, among other conditions and considerations.
The settlement was reached in consideration of
the following, among other things: (i) enhanced
disclosure included in this Proxy
Statement/Prospectus made in response to comments
provided by plaintiff's counsel and the
Commission and (ii) the agreement by GranCare to
pay up to $350,000 in court awarded attorney's
fees. The defendants have vigorously denied all
liability or allegations of wrongdoing and the
settlement should not be construed as an
inference or admission of liability or wrong
doing by them. See "The Companies--GranCare's
Institutional Pharmacy Business Insurance; Legal
Proceedings."
Certain Federal Income Tax
Consequences............... In the opinion of Powell, Goldstein, Frazer &
Murphy and Cahill Gordon & Reindel, (i) the
Restructuring (as defined in the Merger
Agreement) will be a tax-free transaction to
GranCare such that no gain or loss will be
recognized by GranCare as a result of the
Restructuring; (ii) the Distribution will qualify
as a tax-free distribution such that GranCare
shareholders will not recognize any income, gain
or loss as a result of the Distribution except
that the receipt of cash in lieu of a fractional
interest in Vitalink Common Stock will be
taxable; and (iii) the Merger will qualify as a
tax-free reorganization and no income, gain or
loss should be recognized by holders of GranCare
Common Stock upon receipt of shares of Vitalink
Common Stock in the Merger in exchange for such
GranCare Common Stock except that the receipt of
cash in lieu of a fractional interest in Vitalink
Common Stock will be taxable. See "Certain
Federal Income Tax Consequences." GranCare
shareholders are urged to consult their own tax
advisors as to the specific tax consequences to
them of the Distribution and the Merger.
17
<PAGE>
Comparative Rights of
Stockholders............... Delaware and California law, and/or the
respective certificates of incorporation and by-
laws of each of Vitalink and GranCare, differ
materially with respect to: (i) the size and
classification of the board of directors; (ii)
cumulative voting; (iii) changes in the number of
directors; (iv) the removal of directors; (v)
filling vacancies on the board of directors; (vi)
amendments to the certificate of incorporation
and by-laws; (vii) indemnification of officers
and directors; (viii) stockholder votes with
respect to mergers, reorganizations and business
combinations; (ix) interested director
transactions; (x) appraisal rights and rights to
inspect shareholder lists; (xi) anti-takeover
measures; (xii) special meetings of shareholders;
(xiii) the right to dividends and repurchases of
shares; and (xiv) the concepts of par value,
capital and surplus. For a comparison of (i)
Delaware and California law and (ii) the
respective certificates of incorporation and by-
laws of each of Vitalink and GranCare, see
"Comparative Rights of Stockholders."
Listing of Vitalink Common
Stock...................... The Vitalink Common Stock is authorized for
quotation on Nasdaq under the symbol VTLK.
Risk Factors................ GranCare shareholders should carefully evaluate
certain considerations in determining whether to
vote for approval of the Transactions, including
Vitalink's dependence on key customers, the
significant continued ownership of Vitalink
Common Stock by Manor Care, the interests of
certain persons in the Transactions, the fixed
exchange ratio, the number of shares of Vitalink
Common Stock eligible for future sale by Manor
Care, the uncertainty associated with government
regulation, reimbursement and health care reform,
competition in the institutional pharmacy
business, the lack of assurance of successful
integration of acquisitions (including the
acquisition of TeamCare), Vitalink's dependence
on acquisitions for growth, Vitalink's dependence
on reimbursement by third-party payors, risks
associated with the increasing role of managed
care, the assumption of indebtedness by Vitalink
and the restrictions imposed by terms of
indebtedness, and risks relating to the
Distribution. See "Risk Factors."
18
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED
FINANCIAL DATA OF VITALINK
The following summary financial information of Vitalink for each of the
fiscal years ended May 31, 1996, 1995, 1994, 1993 and 1992 has been derived
from Vitalink's audited financial statements contained in its Annual Reports on
Form 10-K for the years then ended and is qualified in its entirety by such
documents. The summary financial information of Vitalink for the three months
ended August 31, 1996 and 1995 has been derived from unaudited consolidated
financial statements contained in the Quarterly Reports on Form 10-Q for the
period ending August 31, 1996 and is qualified in its entirety by such document
which, in the opinion of Vitalink's management, includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of such information for the unaudited interim periods. The
operating results for the three months ended August 31, 1996 are not
necessarily indicative of results for the full fiscal year. This information
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations of Vitalink and the Consolidated
Financial Statements and the Notes thereto of Vitalink incorporated by
reference into this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
THREE MONTH THREE MONTH YEAR ENDED MAY 31,
PERIOD ENDED PERIOD ENDED -----------------------------------------
AUGUST 31, 1996 AUGUST 31, 1995 1996 1995 1994 1993 1992
--------------- --------------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 39,373 $31,822 $141,115 $112,257 $98,569 $65,714 $40,164
Income from operations.. 5,965 5,070 22,301 18,726 14,995 11,305 8,643
Net income.............. 3,712 3,191 13,870 11,680 9,204 7,341 5,497
Earnings per share...... 0.27 0.23 0.99 0.84 0.66 0.53 0.46
Total assets............ 102,720 84,358 95,923 80,713 69,587 57,425 47,027
Working capital......... 24,211 17,615 22,830 15,202 14,103 9,938 3,803
Due from parent......... 14,761 15,546 16,910 16,888 8,167 10,276 37,196
Stockholders' equity.... 90,011 75,570 86,299 72,379 60,699 51,495 44,154
Average shares
outstanding............ 13,980 13,975 13,976 13,975 13,975 13,975 12,056
</TABLE>
On December 23, 1996, Vitalink announced its second quarter operating
results. For the three months ended November 30, 1996, net income increased 15%
to $3.9 million from $3.4 million reported for the second quarter a year ago.
Earnings per share were $0.28 versus $0.24 last year. Income from operations
increased 16% to $6.3 million from $5.4 million. Net revenues for the second
quarter were $43.3 million representing a 27% increase over the same period
last year.
For the six month period, net income increased over 16% to $7.6 million from
$6.6 million reported for the same period last year. Earnings per share were
$0.54 versus $0.47 for the year ago period. Income from operations for the six
months increased 17% from the same period last year. Net revenues for the six
months were $82.7 million representing a 26% increase over the comparable
period last year.
19
<PAGE>
SUMMARY HISTORICAL COMBINED FINANCIAL DATA
OF TEAMCARE
The following summary financial information of TeamCare (the wholly-owned
subsidiary of GranCare through which GranCare conducts the Institutional
Pharmacy Business) for the fiscal years ended December 31, 1995, 1994 and 1993
have been derived from the audited financial statements of TeamCare included
elsewhere herein. The summary financial information of TeamCare for the nine
months ended September 30, 1996 and 1995 has been derived from the unaudited
combined financial statements, which, in the opinion of TeamCare's management,
include all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of such information for the unaudited interim
periods. The operating results for the nine months ended September 30, 1996 are
not necessarily indicative of the results for the full year. This information
should be read in conjunction with "TeamCare Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Combined
Financial Statements of TeamCare and the Notes thereto included elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------------
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net revenues...................... $194,624 $142,768 $194,898 $171,195 $122,238
Income from operations............ 21,115 12,855 17,905 19,897 14,159
Net income........................ 12,400 7,499 10,408 11,533 3,873
Total assets...................... 164,333 -- 139,773 115,191 56,001
Working capital................... 43,414 -- 40,319 34,269 26,729
Due to parent..................... 39,015 -- 41,873 31,827 27,909
Shareholder's equity.............. 84,725 -- 72,325 61,917 12,923
</TABLE>
20
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
The following summary unaudited pro forma consolidated statements of income
for the year ended May 31, 1996 and the three month period ended August 31,
1996 are based on the respective historical financial statements of Vitalink
and TeamCare adjusted to give effect to (i) the Merger and (ii) all of the
acquisitions made by Vitalink since June 1, 1995 (the "Acquisitions") as though
they occurred on June 1, 1995. The summary unaudited pro forma consolidated
balance sheet at August 31, 1996 gives effect to the Merger as if it occurred
at that date. Anticipated synergies and efficiencies from the combined
businesses are not fully determinable and therefore have been excluded in the
pro forma financial data. The summary unaudited pro forma financial data are
not necessarily indicative of the operating results that would have been
achieved had the Merger and the Acquisitions been consummated as of June 1,
1995, nor are they necessarily indicative of future operating results. The
summary unaudited pro forma financial data should be read in conjunction with
the historical financial statements of the companies and the related notes
thereto.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
AUGUST 31, 1996 MAY 31, 1996
------------------ ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Net revenues...................... $108,924 $373,477
Income from operations............ 10,908 37,363
Net income........................ 5,030 16,322
Earnings per share................ 0.20 0.64
Total assets...................... 504,398 --
Shareholders' equity.............. 337,961 --
Average shares outstanding........ 25,580 --
</TABLE>
21
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma combined per
share data giving effect to the Distribution and Merger on a purchase
accounting basis as described more fully in the notes to the "Unaudited
Combined Condensed Pro Forma Financial Statements." The data should be read in
conjunction with the selected historical consolidated financial statements of
Vitalink, GranCare and TeamCare and notes thereto included or incorporated by
reference in this Proxy Statement/Prospectus, as well as the information set
forth under "Selected Unaudited Pro Forma Financial Data." The unaudited
combined condensed pro forma financial data is not necessarily indicative of
the operating results that would have been achieved had the Transactions been
in effect at the beginning of the periods presented and should not be
considered indicative of future operations.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA(A)
------------------------- ------------------------
FISCAL YEAR THREE MONTHS FISCAL YEAR THREE MONTHS
ENDED ENDED ENDED ENDED
MAY 31, AUGUST 31, MAY 31, AUGUST 31,
1996 1996 1996 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
VITALINK PER SHARE DATA
Net Income from continuing
operations................ $ 0.99 $ 0.27 $ 0.64 $ 0.20
Book value at period end... $ 6.17 $ 6.44 $12.91 $13.21
<CAPTION>
HISTORICAL PRO FORMA
------------------------- ------------------------
FISCAL YEAR NINE MONTHS FISCAL YEAR NINE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER DECEMBER SEPTEMBER
1995 30, 1996 31, 1995 30, 1996
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
GRANCARE PER SHARE DATA (B)
Net Income from continuing
operations................ $ 0.86 $ 0.98 $ 0.85 $ 0.92
Book value at period end... $ 7.49 $ 8.69 $11.17 $12.30
TEAMCARE PER SHARE DATA (C)
Net Income from continuing
operations................ $ 0.44 $ 0.46 -- --
Book value at period end... -- -- -- --
</TABLE>
Neither Vitalink nor GranCare declared any cash dividends on the Vitalink
Common Stock or the GranCare Common Stock, respectively, for the periods
presented.
- -------
(a) The unaudited pro forma per share data of Vitalink for the fiscal year
ended May 31, 1996 and the three month period ended August 31, 1996 gives
effect to the Merger and the Acquisitions. The unaudited Vitalink per share
net income from continuing operations is presented as if the Merger and
Acquisitions occurred on June 1, 1995 and as if they occurred on May 31,
1996 and August 31, 1996 for purposes of calculating the book value per
share of Vitalink Common Stock.
(b) The unaudited pro forma per share data of GranCare represents the pro forma
per share data of New GranCare plus the pro forma equivalent per share data
of Vitalink. The pro forma equivalent per share data of Vitalink is
calculated by multiplying the pro forma per share data of Vitalink by the
Exchange Ratio of .478. The Vitalink pro forma per share data used to
calculate the pro forma equivalent per share data of Vitalink differs from
the pro forma per share data of Vitalink presented herein due to the
differing pro forma periods for GranCare and Vitalink. The pro forma per
share data used is based on the results of TeamCare for the respective
period and Vitalink for the equivalent period ending one month earlier
(twelve months ended November 30, 1995 and nine months ended August 31,
1996, respectively) and after the Vitalink pro forma adjustments which give
effect to the Transactions. The calculation of GranCare pro forma per share
data follows.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1995 SEPTEMBER 30, 1996
----------------- ------------------
<S> <C> <C>
New GranCare pro forma earnings per
share.............................. $ 0.61 $ 0.63
Vitalink pro forma equivalent
earnings per share
(.478 times $0.50 and $0.61,
respectively)...................... 0.24 0.29
------ ------
GranCare pro forma earnings per
share............................ $ 0.85 $ 0.92
====== ======
New GranCare pro forma book value
per share.......................... $ 5.26 $ 5.95
Vitalink pro forma equivalent book
value per share
(.478 times $12.36 and $13.28,
respectively)...................... 5.91 6.35
------ ------
GranCare pro forma book value per
share............................ $11.17 $12.30
====== ======
</TABLE>
(c) TeamCare is a wholly-owned subsidiary of GranCare and, accordingly,
comparative per share data for TeamCare would not be indicative of the
results that would have been obtained from an independent corporation.
However, the historical per share data has been calculated utilizing the
weighted average shares outstanding of GranCare Common Stock on those
dates. TeamCare pro forma earnings per share form a part of Vitalink's pro
forma earnings per share.
22
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
VITALINK AND GRANCARE COMMON STOCK PRICE RANGE AND DIVIDENDS
The Vitalink Common Stock is listed for trading on the Nasdaq under the
symbol "VTLK". The GranCare Common Stock is quoted on the NYSE under the symbol
"GC". The following table sets forth the high and low bid prices of the
Vitalink Common Stock as reported on the Nasdaq and the high and low sale
prices of the GranCare Common Stock as reported on NYSE Composite Tape for the
periods indicated.
<TABLE>
<CAPTION>
PRO FORMA(1)
VITALINK GRANCARE GRANCARE
------------ ------------ ---------------
HIGH LOW HIGH LOW HIGH LOW
---- ---- ---- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED:
1994
March 31................... $12 1/2 $ 9 1/2 $22 1/2 $16 3/8 $10 3/4 $ 7 7/8
June 30.................... 11 8 1/2 21 5/8 17 3/8 10 3/8 8 3/8
September 30............... 14 3/4 8 3/4 22 1/4 18 10 5/8 8 5/8
December 31................ 15 1/2 10 3/4 18 5/8 14 3/4 8 7/8 7
1995
March 31................... $14 1/2 $11 3/4 $18 5/8 $14 7/8 $8 7/8 $7 1/8
June 30.................... 16 3/4 13 3/4 17 3/8 15 1/4 8 3/8 7 1/4
September 30............... 18 1/8 14 3/4 19 1/8 15 1/2 9 1/8 7 3/8
December 31................ 22 1/2 15 1/2 17 3/8 12 3/4 8 3/8 6
1996
March 31................... $23 3/8 $16 $19 1/4 $13 $9 1/4 $6 1/4
June 30.................... 22 3/4 21 1/2 19 7/8 16 5/8 9 1/2 8
September 30............... 23 3/4 20 1/2 21 5/8 16 10 3/8 7 5/8
October 1 through December
24, 1996.................. 24 21 1/2 19 1/4 17 1/8 9 1/4 8 1/4
</TABLE>
- --------
(1) Based on the exchange ratio of .478 per share. However, GranCare is not the
acquired company. TeamCare is the company being acquired.
On September 3, 1996, the last full day of trading prior to the announcement
of the Merger and the Distribution, the last reported bid price for the
Vitalink Common Stock on Nasdaq was $22 1/4 and the last reported sale price
for the GranCare Common Stock on the NYSE Composite Tape was $18 3/4.
On December 24, 1996, the last reported bid price for the Vitalink Common
Stock on Nasdaq was $23 and the last reported sale price for the GranCare
Common Stock on the NYSE Composite Tape was $17 3/4.
Since Vitalink's initial public offering in March 1992, Vitalink has not paid
cash dividends on the shares of Vitalink Common Stock. Although Vitalink has no
present intention of paying dividends in the foreseeable future, the timing and
amount of any future dividends will be (i) dependent upon results of
operations, financial condition, cash requirements and other relevant factors,
(ii) subject to the discretion of Board of Directors of Vitalink and (iii)
payable only out of Vitalink's surplus or current net profits in accordance
with the DGCL. GranCare has not paid cash dividends on the GranCare Common
Stock in the past and New GranCare does not anticipate paying any dividends in
the foreseeable future. New GranCare intends to utilize its cash from
operations to fund working capital requirements, expand its existing businesses
and fund acquisitions.
23
<PAGE>
RISK FACTORS
Shareholders of GranCare should carefully consider the following matters,
together with the other information contained in this Proxy
Statement/Prospectus, in evaluating the Transactions before making an
investment decision with respect to the shares of Vitalink Common Stock
offered hereby.
DEPENDENCE ON KEY CUSTOMERS
Net revenues from Manor Care and its patients (including revenues pursuant
to government reimbursement programs) accounted for approximately 48%, 49% and
47% of total net revenues of Vitalink in fiscal 1996, 1995 and 1994,
respectively. On a pro forma basis, after giving effect to the Transactions,
net revenues from Manor Care and from New GranCare would have accounted for
approximately 31% of total combined revenues of Vitalink and TeamCare for the
year ended May 31, 1996. Under various master agreements with Manor Care,
Vitalink may at its option provide pharmaceutical, consulting and infusion
therapy products and services to any and all nursing facilities owned or
licensed by Manor Care through May 2001 in accordance with the terms of the
agreements and subject to each individual patient's right to designate his own
pharmacy or infusion therapy provider (the "Master Agreements"). Each
individual pharmacy service agreement entered into pursuant to the Master
Agreements, however, may be limited or terminated under certain circumstances,
including the disposition of any nursing facilities by Manor Care. See
"Relationship Between Vitalink and Manor Care--Master Agreement for Pharmacy
Services."
Under the Pharmaceutical Supply Agreements, GranCare has agreed to purchase
for use at substantially all of its facilities all of its pharmaceutical
supplies and related goods from TeamCare. The terms of the Pharmaceutical
Supply Agreements are for five years. Such agreements are terminable only upon
a material breach by TeamCare and a failure to cure such breach within 30 days
of receipt of notice. However, New GranCare has agreed that for so long as
Vitalink's limited guaranty of certain obligations of New GranCare to HRPT is
in effect, New GranCare will not terminate any of the Pharmaceutical Supply
Agreements. Accordingly, it is anticipated that the Pharmaceutical Supply
Agreements may extend through December 31, 2010, the date when all present New
GranCare obligations to HRPT will be satisfied. However, there can be no
assurance that the Pharmaceutical Supply Agreement will not be earlier
terminated following an early termination of Vitalink's limited guaranty or
otherwise. See "Existing Contractual Arrangements Between TeamCare and New
GranCare--Terms of the Pharmaceutical Supply Agreements" and "The Distribution
Agreement--Treatment of Certain Indebtedness--HRPT Obligations." New GranCare
will succeed to GranCare's rights and obligations under the Pharmaceutical
Supply Agreements. Any material loss of business from Manor Care or New
GranCare would have a material adverse effect on Vitalink.
ASSUMPTION OF INDEBTEDNESS BY VITALINK AND RESTRICTIONS IMPOSED BY TERMS OF
INDEBTEDNESS
Prior to the Merger, Vitalink's cash requirements have been provided by
operating activities and proceeds from the initial public offering in March
1992 and as a result, Vitalink has effectively had no third party
indebtedness. Upon the consummation of the Merger, Vitalink will assume
approximately $8.0 million of GranCare's debt (consisting of approximately
$11.4 million of long-term debt plus current maturities at August 31, 1996
less approximately $3.4 million of TeamCare debt to be retired by GranCare
prior to the Merger pursuant to the terms of the Distribution Agreement) and
will refinance or assume $100 million of the indebtedness represented by the
Senior Subordinated Notes with proceeds from the new $200 million Vitalink
Credit Facility. At August 31, 1996, on a pro forma basis after giving effect
to the Merger, the assumption of GranCare debt and borrowings under the
Vitalink Credit Facility, Vitalink would have approximately $108 million of
total indebtedness outstanding. The Vitalink Credit Facility will contain
certain covenants that restrict, among other things, Vitalink's ability to
incur additional indebtedness, incur liens, make investments, pay dividends or
make certain other restricted payments, and consummate mergers, acquisitions
and asset sales. In addition, the Vitalink Credit Facility also requires
Vitalink to comply with certain financial ratios and tests, under which
Vitalink is required to achieve certain financial and operating results.
Vitalink's ability to meet these financial ratios and tests may be affected by
events beyond its control, and there can be no assurance that they will be
met. In addition, Vitalink's increased leverage could have important
consequences to holders of Vitalink Common Stock including (i) the cost of
obtaining future financing may be increased and the ability to obtain such
financing may be impaired, (ii) a significant portion of Vitalink's earnings
may be dedicated to paying
24
<PAGE>
interest on its indebtedness thereby decreasing Vitalink's operational
flexibility, (iii) Vitalink will be exposed to interest rate fluctuations and
(iv) the covenants may limit Vitalink's financial flexibility, including its
ability to consummate acquisitions. Also, in order to obtain a third party
consent of HRPT a creditor and landlord of GranCare required in connection with
the Distribution and the Merger, Vitalink will pay the Consent Fee of $10.0
million, which will be reimbursed by New GranCare immediately following the
consummation of the Distribution and the Merger. Vitalink will also enter into
a limited guaranty of obligations of New GranCare to HRPT. To support
Vitalink's guaranty of New GranCare's obligations, New GranCare will provide an
irrevocable letter of credit payable to Vitalink in the event Vitalink makes
any payments under the limited guaranty. The $10.0 million Consent Fee to be
paid to HRPT is not a Shared Transaction Expense. See "Unaudited Pro Forma
Combined Condensed Financial Statements," "The Distribution Agreement--
Treatment of Certain Indebtedness--HRPT Obligations" and "Description of The
Vitalink Credit Facility."
SIGNIFICANT MANOR CARE OWNERSHIP
Following the completion of the Transactions, it is anticipated that Manor
Care will beneficially own approximately 45% of the outstanding Vitalink Common
Stock and will be able to exert substantial control over Vitalink. The Board of
Directors of Vitalink is currently composed of nine directors, six of whom are
affiliated with Manor Care. Upon the consummation of the Merger, the Merger
Agreement requires that Manor Care enter into the Shareholders Agreement with
Vitalink pursuant to which Manor Care will agree, among other things, that (i)
for a period of three years from the date of consummation of the Merger the
Board will consist of eight directors and (ii) Manor Care for a three year
period will vote its shares of Vitalink Common Stock in favor of the election
of the four GranCare Nominees. Prior to the Effective Time, GranCare has
nominated Gene E. Burleson, Joel S. Kanter, Robert L. Parker and Gary U. Rolle.
See "Description of the Transactions--Directors and Officers of Vitalink
Following the Merger." All of the directors nominated by Manor Care will be
affiliated with Manor Care.
In addition, Vitalink has entered into certain agreements with Manor Care
including an Administrative Services Agreement (as defined below) pursuant to
which Manor Care provides Vitalink with certain administrative services and the
Master Agreements referred to above pursuant to which Vitalink provides
institutional pharmacy services to Manor Care. Under the terms of the
Administrative Services Agreement, Manor Care charges Vitalink on a favorable
marginal cost basis for the services it provides. It is anticipated that the
Administrative Services Agreement will be terminated within one year following
the Effective Time of the Merger and there can be no assurance that Vitalink
will be able to replace such services, either internally or from third parties,
on an equally favorable basis. The Master Agreements are of a significantly
longer term and have higher consulting fees than comparable agreements Vitalink
has with non-affiliated third parties. Although Vitalink intends to continue to
operate under the Master Agreements, future agreements for the provision of
pharmacy services to Manor Care may contain terms comparable to those that
Vitalink could obtain from third parties in an arms-length transaction. There
can be no assurance that termination of the existing Master Agreements or the
terms of such future agreements would not have an adverse effect on Vitalink's
results of operations. For a description of the terms of significant agreements
between Vitalink and Manor Care, see "Relationship Between Vitalink and Manor
Care."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain members of GranCare's management and the GranCare Board of Directors
may be deemed to have interests in the Transactions in addition to their
interests as GranCare shareholders generally, which may cause potential
conflicts of interest. The GranCare Board of Directors was aware of these
factors and considered them, among other factors, in approving the
Transactions. Among these factors are (i) the acceleration of the vesting of
currently unvested GranCare Options as a result of the consummation of the
Merger, (ii) the treatment of GranCare Options in the Distribution and the
Merger, (iii) the indemnification provisions of the Distribution Agreement,
(iv) the payment by Vitalink of a portion of the premiums for directors' and
officers' liability insurance for current GranCare directors and officers, (v)
the designation of certain directors and executive officers of GranCare as
directors or executive officers of New GranCare and/or Vitalink, and (vi) cash
payments as a result of the early termination of certain incentive compensation
plans of GranCare. See "Description of the Transactions--Interests of Certain
Persons in the Transactions."
25
<PAGE>
FIXED EXCHANGE RATIO
The Merger Agreement provides that upon consummation of the Merger, each
share of GranCare Common Stock will be exchanged for 0.478 of a share of
Vitalink Common Stock. Since the price of GranCare Common Stock or Vitalink
Common Stock at the Effective Time may vary from the price as of the date on
which the Merger Agreement was executed due to changes in the business,
operations and prospects of GranCare, general market and economic conditions,
and other factors, the market value of the shares of Vitalink Common Stock
which holders of the GranCare Common Stock will receive in the Merger may be
greater or less than the market value of such GranCare or Vitalink Common
Stock as of the date of the Special Meeting.
SHARES OF VITALINK COMMON STOCK ELIGIBLE FOR SALE BY MANOR CARE
Although Manor Care has no present intent to dispose of any of its shares of
Vitalink Common Stock, Manor Care in the future may, subject to the
Shareholders Agreement, seek to effect such a disposition through a public
offering or a private sale to a third party or otherwise. If Manor Care should
dispose of all or a substantial amount of its Vitalink Common Stock, the
prevailing market price of the Vitalink Common Stock could be adversely
affected. Under the Shareholders Agreement, Manor Care and Vitalink will agree
that for a period of three years from the Effective Time of the Merger, Manor
Care will not, directly or indirectly, offer, sell or otherwise dispose of any
shares of Vitalink Common Stock in a public offering, without the prior
written consent of a majority of the GranCare Nominees. The Shareholders
Agreement also provides that Manor Care will not for a period of three years,
transfer an amount of shares of Vitalink Common Stock that equals more than
10% of the outstanding Vitalink Common Stock, to any "person or group" (as
such terms are defined in Section 13(d) and the relevant rules promulgated
under the Exchange Act or any successor provision) (a "Transferee") unless
immediately prior to such transfer such Transferee shall have agreed to be
bound by the terms of the Shareholders Agreement. Private sales by Manor Care
to a Transferee of a number of shares of Vitalink Common Stock that is less
than 10% of the then total amount of outstanding shares of Vitalink Common
Stock will not result in the Transferee being required to be bound by the
terms of the Shareholders Agreement. Additionally, during such three-year
period, Manor Care may sell Vitalink Common Stock in the public market to the
extent permitted by the volume and manner of sale provisions of Rule 144. See
"The Distribution Agreement--Terms of the Shareholders Agreement" and
"Relationship Between Vitalink and Manor Care."
UNCERTAINTY ASSOCIATED WITH GOVERNMENT REGULATION AND REIMBURSEMENT
Vitalink is subject to extensive federal, state and local regulations and
its pharmacies are required to be licensed by the states in which they are
located. The failure to obtain or renew any required regulatory approvals or
licenses could adversely affect the continued expansion of Vitalink's business
and could prevent it from offering its existing services to patients. Vitalink
cannot predict the extent to which it may be affected by legislative and other
regulatory developments concerning its pharmacies and the health care field
generally. In addition, the long-term care facilities that contract for
services with Vitalink and TeamCare are also subject to Federal, state and
local regulations and are required to be licensed by the states in which they
are located. The failure of these institutions to comply with such regulations
or to obtain or renew any required licenses could result in the loss of
Vitalink's ability to provide pharmacy services to their residents.
In addition, the products and services provided by Vitalink are reimbursed
in part by third parties such as Medicare and Medicaid. For the year ended May
31, 1996, approximately 35% of Vitalink's pharmacy service billings were paid
by Medicare Part B and Medicaid and 65% were paid by private individuals,
long-term care facilities which were in part reimbursed by Medicare, and other
third-party payors. Reimbursements for Vitalink's products and services from
Medicare and Medicaid are regulated and in some cases limited, including with
respect to reimbursements for services and products provided to affiliates of
Vitalink, such as Manor Care. See "The Companies--Vitalink's Business--
Reimbursement and Billing." Changes in the Medicare and Medicaid programs,
regulations, reimbursement procedures or interpretations of existing programs,
regulations or reimbursement procedures, including changes intended to limit
or decrease the growth of Medicare and Medicaid expenditures, or a failure by
Vitalink and/or its employees to comply with applicable reimbursement
regulations, could adversely affect Vitalink's business.
26
<PAGE>
Various federal and state laws provide nursing facility patients with the
freedom to choose their own pharmacy provider. Vitalink markets its services
primarily to nursing facilities and acts as the pharmacy provider to the
patients in such facilities that do not otherwise choose their own provider,
currently an aggregate of over 90% of the patients in the facilities with
which Vitalink contracts. There can be no assurance that increases in the
percentage of patients choosing their own provider or changes in laws
permitting patients to choose their own pharmacy provider will not adversely
affect Vitalink's business.
UNCERTAINTY ASSOCIATED WITH HEALTH CARE REFORM
Health care system reform and concerns over rising Medicare and Medicaid
costs continue to be high priorities for the federal and certain state
governments. Although no comprehensive health care reform legislation
(including legislation that would impact Medicare or Medicaid) has not yet
been implemented, pressures to contain costs and initiatives by the Clinton
Administration, Congress and various other groups have impacted the health
care delivery system and may continue to do so for the foreseeable future. In
November 1995, Congress passed the 1995 Balanced Budget Act providing for,
among other things, the reshaping of the Medicare and Medicaid programs. In
December 1995, President Clinton vetoed the 1995 Balanced Budget Act and
proposed alternative Medicare and Medicaid legislation. Each of the
legislative proposals offered by President Clinton and Congress provide for
significant reductions in the overall growth rate of Medicare and Medicaid
spending. There is active debate concerning this proposed legislation and the
form of any final legislation signed into law could differ significantly from
current proposals. The impact of currently proposed legislation on Vitalink is
not readily determinable. However, in their currently proposed form, such
legislation could have a material adverse effect on Vitalink's future
financial position, results of operations and cash flows.
In addition, several states are considering various health care reforms,
including reforms through Medicaid managed care demonstration projects.
Several states in which Vitalink or TeamCare operates have applied for, or
received, approval from the U.S. Department of Health and Human Services for
waivers from certain Medicaid requirements which are generally required for
such managed care projects. Although these demonstration projects generally
exempt institutional care, including long-term care facilities and
institutional pharmacy services, no assurance can be given that these waiver
projects ultimately will not change the reimbursement system for long-term
care, including pharmacy services, from fee-for-service to managed care
negotiated or capitated rates. It is not possible to predict which reforms of
the health care system will be adopted and the effect, if any, the reforms
will have on Vitalink's business.
COMPETITION
The long-term care industry is highly competitive. Vitalink's competitive
position varies from facility to facility, from community to community and
from state to state. Vitalink's operations compete with services provided by
numerous local, regional and national institutional pharmacies, as well as the
pharmacy operations owned by long-term care providers other than Manor Care. A
number of these competitors are larger or have greater financial resources
than Vitalink. Vitalink also competes with other institutional pharmacies in
the acquisition and development of additional pharmacies. There can be no
assurance that Vitalink will not encounter increased competition which could
adversely affect its business, results of operations or financial condition.
NO ASSURANCE OF SUCCESSFUL INTEGRATION OF ACQUISITIONS
In the past five years, Vitalink has made eight acquisitions of
institutional pharmacy businesses. The successful integration of all of such
acquisitions into Vitalink's operations is critical to Vitalink's future
performance. Potential obstacles to successful integration include, but are
not limited to: (i) cost containment measures; (ii) elimination of
redundancies at the corporate and field level; (iii) consolidation of
financial and managerial reporting functions; (iv) coordination of field
managerial activities with corporate management; (v) achievement of purchasing
efficiencies; (vi) retention and expansion of the customer base so acquired;
(vii) roll-out-of new products and services to new customers; and (viii) the
addition and integration of key personnel. There can be no assurance that
TeamCare or any other past or future acquisitions will be integrated
successfully
27
<PAGE>
into Vitalink's operations or will not have a material adverse effect upon
Vitalink's results of operations, financial condition or prospects. Although
Vitalink conducts due diligence in connection with potential acquisitions and
attempts to identify and reject those acquisitions that do not meet Vitalink's
operational objectives, there can be no assurance that the Merger or any other
acquisition will result in net sales or earnings levels that would justify
Vitalink's investment therein or the expenses related thereto or that
operational synergies will develop as projected.
DEPENDENCE ON ACQUISITIONS FOR GROWTH
A significant component of Vitalink's historical growth has come through
acquisitions of institutional pharmacy companies, and the success of
Vitalink's growth strategy is dependent on its ability to consummate
additional acquisitions. Vitalink will compete for acquisition candidates with
buyers who may have greater financial and other resources than Vitalink and
may be able to pay higher acquisition prices than Vitalink. No assurance can
be given that Vitalink will be able to identify suitable acquisition
candidates or to consummate desired acquisitions on terms acceptable to
Vitalink. To the extent that Vitalink is unable to acquire institutional
pharmacy companies, or to integrate such acquisitions successfully, its
ability to expand its business may be impaired.
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
Vitalink derives, directly or indirectly, a majority of its net sales from
government-sponsored reimbursement programs. Vitalink's net sales and
profitability are, and will continue to be, affected by the efforts of all
payors to contain or reduce the cost of health care by lowering reimbursement
rates, narrowing the scope of covered services, increasing case management
review of service, and negotiating reduced contract pricing. Any changes in
reimbursement levels under Medicare, Medicaid, or private pay programs,
including managed care contracts, could have a material adverse affect on
Vitalink's results of operations, financial condition and prospects. Changes
in the mix of patients among Medicare, Medicaid and various private pay
sources may also adversely affect Vitalink's results of operations.
RISKS ASSOCIATED WITH INCREASING ROLE OF MANAGED CARE
Although managed care has not been a significant source of revenue for
Vitalink in the past, as managed care assumes an increasingly significant role
in the health care industry, Vitalink's future success will, in part, be
dependent on obtaining and retaining managed care contracts. Competition for
such contracts is intense and, in most cases, will require Vitalink to compete
based on, among other factors, breadth of services offered, pricing, ability
to track and report patient outcomes, cost data and its ability to provide
value-added pharmacy consulting services. In addition, reimbursement rates
under managed care contracts typically are significantly lower than those paid
by other private third-party payors. Although Vitalink has been successful in
the past in obtaining terms that are favorable to Vitalink, there can be no
assurance that Vitalink will retain or obtain such managed care contracts in
the future.
RISKS RELATING TO THE DISTRIBUTION
GranCare shareholders should also consider certain risks relating to New
GranCare and the Distribution, including the significant debt and lease
obligations of New GranCare, risks relating to growth strategy, absence of
prior trading market, and New GranCare's relationship with Vitalink following
the Distribution and the Merger. See "Risk Factors" in the prospectus of New
GranCare attached hereto as Annex A.
28
<PAGE>
THE COMPANIES
VITALINK'S BUSINESS
General
Vitalink provides institutional pharmacy services to nursing facilities and
other institutions. Vitalink presently operates 23 institutional pharmacies
and four regional infusion pharmacies. Institutional pharmacies specialize in
pharmaceutical dispensing of individual medications and pharmacy consulting
(drug regimen review of potential medication interaction, as well as
regulatory compliance with medication and administration guidelines) to
nursing facilities and other institutions around the country. Regional
infusion pharmacies specialize in infusion therapy products and services
within their regions. Vitalink, through its subsidiary Vitalink Infusion
Services, Inc., provides parenteral and enteral nutrition products to patients
who qualify under Medicare Part B and bills Medicare directly for these
products.
In 1981, Vitalink was acquired by a subsidiary of Manor Care as part of the
acquisition of Americana Healthcare Corporation, which had incorporated the
predecessor of Vitalink in 1967. Vitalink changed its name to "Vitalink" from
"TotalCare Pharmacy Services, Inc." in January 1992. Vitalink became a public
company in 1992 as a result of an initial public offering.
Institutional Pharmacy Industry
Institutional pharmacies purchase and distribute prescription and non-
prescription medications for residents in institutional settings, including
nursing facilities, correctional facilities and retirement centers.
Institutional pharmacies also provide consulting services, including
evaluation of individual patient drug therapy and monitoring of nursing
facility drug administration, storage and control practices to help ensure a
sound pharmaceutical delivery system and compliance with state and federal
regulations.
A number of factors are expected to contribute to the continuing expansion
of the nursing facility segment, including the growth in, and the greater
affluence of, the U.S. elderly population, the trend toward delivery of cost-
efficient health care in non-hospital settings and the increasing practice of
early patient discharge from hospitals due to cost-containment measures.
Pharmacy Operations
Vitalink provided institutional pharmacy services to approximately 52,900
beds from 23 institutional pharmacies as of August 31, 1996. Vitalink services
each market in which it operates through a hub pharmacy or, in cases where
markets are geographically close, a satellite pharmacy. A market generally
consists of nursing facilities within a radius of up to 150 miles, depending
on demographics and travel times.
Vitalink has expanded from three pharmacies in 1981 to 23 institutional
pharmacies and four regional infusion pharmacies as of September 1996. The
pharmacies are located in 14 states: California, Colorado, Florida, Illinois,
Indiana, Iowa, Maryland, New Jersey, Pennsylvania, Ohio, Oklahoma, Oregon,
Texas and Wisconsin.
Management has developed a focused growth strategy that includes (i)
continued penetration of existing markets through selling more products to
existing customers and marketing directed to non-Manor Care nursing
facilities; (ii) expansion into additional markets in which there is a
sufficient base of Manor Care or New GranCare beds to support a Vitalink
pharmacy; (iii) infusion therapy revenue generation created by targeting
specific nursing facilities and home health care agencies; and (iv)
acquisitions of pharmacies that can be consolidated with existing Vitalink
pharmacies or serve as a more rapid entry into new markets. Subsequent to
September 3, 1996 (the date the Merger Agreement was executed), Vitalink has
not entered into any agreements with respect to future acquisitions.
29
<PAGE>
The table below sets forth the number of beds serviced by Vitalink during
the past three fiscal years and at August 31, 1996:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------- AUGUST 31,
1994 1995 1996 1996
------ ------ ------ ----------
<S> <C> <C> <C> <C>
Manor Care Affiliated Beds...................... 14,300 16,000 19,300 19,800
Non-Manor Care Affiliated Beds.................. 25,100 26,400 30,600 33,100
------ ------ ------ ------
Total beds serviced........................... 39,400 42,400 49,900 52,900
====== ====== ====== ======
</TABLE>
Since June 1, 1991, Vitalink has acquired eight institutional pharmacies and
one regional infusion pharmacy with contracts to service approximately 25,000
non-Manor Care facility beds.
Services Offered by Vitalink
Pharmacy Services--The basic service provided by Vitalink is the customized
filling of prescription and non-prescription medications for individual
patients pursuant to physician orders delivered to nursing facilities.
Vitalink maintains a 24-hour on-call availability for clinical consultation
and emergency delivery of medications as well as maintaining a provision of
emergency and contingency doses of medications at each nursing facility.
Vitalink uses a computerized medical records system that generates monthly
nursing facility medical records including preprinted physician order forms,
medication administration records and treatment records. As an additional
service to its nursing facility customers, Vitalink maintains and documents
ancillary orders such as diet orders, therapy orders and activity orders.
Vitalink has nurse consultants on staff to observe medication administration
procedures, consult on medical records and conduct in-service training
programs as well as intravenous certification programs.
Consultant Pharmacist Services--Vitalink provides to its nursing facility
customers trained consultant pharmacists whose primary responsibility is to
monitor and report on prescription drug therapy to help ensure quality patient
care. For a nursing facility to participate in the Medicare and Medicaid
reimbursement programs, it is required to have the services of a consultant
pharmacist.
Vitalink, in response to regulatory demands on nursing facilities, has
defined the primary responsibilities of its consultant pharmacists to include:
(i) monthly drug regimen reviews of each patient; (ii) participation on key
nursing facility committees; (iii) monthly inspection of medication carts and
storage rooms; (iv) monthly written review of facility medication
administration systems and practices; (v) development and maintenance of a
pharmaceutical policy and procedures manual; (vi) on-site educational
seminars; and (vii) assistance to the nursing facility in complying with state
and federal regulations on patient care. Vitalink bills nursing facilities for
consultant pharmacist services.
Infusion Therapy Products and Services--Infusion therapy basically consists
of a product (nutrient, antibiotic, chemotherapy or other drugs or fluids) and
the administration of the product (tube, catheter or intravenous). Patients
can receive these therapies at home or in a nursing facility at a cost that is
substantially less than hospital-based care. The trend toward delivery of
health care in the lowest cost setting and the increasing ability to treat
certain illnesses outside of hospitals represents an opportunity for nursing
facilities to attract infusion therapy patients.
Vitalink prepares the product to be administered, delivers the product and
trains others in administering infusion therapy. Vitalink does not itself
administer the therapy.
Purchasing
Vitalink purchases the drugs and supplies used in its pharmacies directly
from national wholesale distributors, through membership in purchasing groups
and from pharmaceutical manufacturers. Direct purchases from drug
manufacturers allow greater price discounts than purchases through wholesale
distributors but require
30
<PAGE>
a significant lead time between order and actual delivery. Vitalink has
negotiated pricing directly with pharmaceutical manufacturers on specific
drugs and such prices are reflected in the amounts billed from the wholesale
distributor. The advantage of buying through wholesale distributors is daily
delivery and the ability to more efficiently manage Vitalink's inventory of
drugs and supplies. Vitalink has not experienced material delays or shortages
in obtaining pharmaceutical products.
Reimbursement and Billing
Vitalink's computerized billing system enables it to bill for products and
services in a variety of ways. The pharmacy generally bills the responsible
party directly.
Charges for pharmacy services provided to patients who are eligible for
Medicare Part A are billed by the nursing facility directly to Medicare. Under
Part A, Medicare categorizes most of the expenses related to pharmacy products
as ancillary services, which are not subject to the cost reimbursement
ceilings under Medicare regulations. However, Vitalink and Manor Care are
subject to related party regulations that could result in reimbursements for
pharmacy services provided to Medicare Part A patients in Manor Care nursing
facilities equal to Vitalink's permitted fully allocated costs of the
services. When ancillary services such as pharmacy services are provided to
Medicare patients in nursing facilities owned by a company deemed to be
"related" to the ancillary service provider, the Health Care Financing
Administration ("HCFA") reimbursement regulations provide that the "related-
party" provider may only charge those patients the provider's costs or the
normal market-based charges, whichever is lower. In other words, the "related-
party" ancillary service provider's profit margin on the transaction is
eliminated so that HCFA is only reimbursing the facility owner the actual cost
of the product and service. Historically, Vitalink and Manor Care have been
considered related parties and Vitalink has reduced its charges for sales to
Medicare Part A patients in Manor Care facilities to Vitalink's fully
allocated costs. Fully allocated costs include the costs of the product or
service together with allocated overhead but do not include Vitalink's usual
profit margin. Since it is not clear to Vitalink at what point an exception to
the related party regulations can be obtained, the resulting reduced
reimbursement to Vitalink may continue indefinitely. An exception would have a
positive impact on Vitalink's revenue.
For patients who are eligible for Blue Cross/Blue Shield or other insurance,
the insurer is billed directly by the nursing facility or by Vitalink.
Patients not covered by insurance, Medicare or Medicaid are generally billed
directly by Vitalink.
For patients qualifying for Medicaid reimbursement in all states in which
Vitalink provides services, Vitalink bills Medicaid directly, as the nursing
facility cannot obtain reimbursement from Medicaid for pharmacy services.
Medicaid is a cooperative state-federal program for medical assistance to the
medically and categorically needy.
For patients who qualify under Medicare Part B and receive PEN (parenteral
and enteral) therapies, Vitalink's specialized PEN billing subsidiary bills
Medicare Part B directly.
The federal Medicare program provides for reimbursement under two separate
programs, Part A and Part B. Part A provides benefits covering inpatient
hospital, nursing facility and home health services. Reimbursement for nursing
facility services under Part A is restricted to those eligible for Part A
coverage who have been discharged within thirty days from an acute care
hospital after a stay of at least three days and are in need of daily skilled
nursing or rehabilitation services.
Part B provides coverage for physician services and general outpatient
services, including therapies, as well as durable medical equipment. Certain
Vitalink infusion therapy products are eligible for Part B reimbursement based
on Medicare-approved payment amounts. Part B coverage is generally subject to
an annual deductible of $100 and a statutorily mandated co-payment thereafter.
31
<PAGE>
For its 1996 fiscal year, Vitalink received approximately 65% of its net
revenues from private pay sources, including commercial insurance, managed
care and Medicare Part A patients; 6% of net revenues from Medicare Part B
direct bill; and 29% of net revenues from Medicaid direct bill.
Dependence on Key Customer
Net revenue from Manor Care and its patients (including revenues pursuant to
government reimbursement programs) accounted for approximately 48%, 49% and
47% of total net revenues in fiscal 1996, 1995 and 1994, respectively. Under
various master agreements with Manor Care discussed below, Vitalink may at its
option provide pharmaceutical, consulting and infusion therapy products and
services to any and all nursing facilities owned or operated by Manor Care
through May 2001 according to the terms of the agreements and subject to each
patient's right to designate his or her own pharmacy or infusion therapy
provider. In the event that Vitalink elects to provide such products and
services, subject to the patient's rights referred to in the preceding
sentence, Manor Care may not enter into agreements with alternative providers
of such products and services. Each master agreement, however, may be limited
or terminated under certain circumstances including with respect to any
nursing facilities disposed of by Manor Care. However, Vitalink hopes to
extend the duration of the master agreements. See "Risk Factors--Dependence on
Key Customer."
Pursuant to four agreements with Manor Care entered into on June 1, 1991,
Vitalink provides pharmaceutical products and services, enteral and parenteral
therapy supplies and services, urological and ostomy products, intravenous
products and services and pharmacy consulting services to nursing facilities
operated by Manor Care. Net revenues from the Master Agreement for Pharmacy
Services, Master Agreement for Infusion Therapy, Master Pharmacy Consulting
Agreement and the Pharmacy Services Consulting Agreement were $43.1 million,
$21.2 million, $2.5 million and $.3 million respectively, in fiscal 1996,
representing approximately 30%, 15%, 2% and .2% respectively, of Vitalink's
total revenues for fiscal 1996. Vitalink is not restricted from providing
similar services to non-Manor Care facilities. The agreements have an initial
term of ten years. See "Relationship between Vitalink and Manor Care."
Pursuant to the Master Agreement for Pharmacy Services and the Master
Agreement for Infusion Therapy Services, Vitalink has the option to provide
pharmaceutical and infusion therapy products and services to nursing
facilities owned or licensed by Manor Care. Through the end of fiscal year
1995, Vitalink paid each Manor Care nursing facility an administrative fee
equal to 3% of the private pay revenues derived from that facility for the
facility's agreement to bill and collect for services and for assuming the
risk of uncollectable accounts. Effective June 1, 1995, Vitalink no longer
pays Manor Care the 3% administrative fee as Vitalink assumed the billing and
collecting of private pay revenues derived from Manor Care facilities. The
change did not have a material effect on Vitalink's results of operations.
Pursuant to the Master Pharmacy Consulting Agreement, Vitalink provides
consultant pharmacy services to nursing facilities owned or licensed by Manor
Care that Vitalink is able to service. Each nursing facility is billed monthly
by Vitalink based on the number of licensed beds in each facility serviced.
Pursuant to the Pharmacy Services Consultant Agreement, Vitalink assists
Manor Care at the corporate level in establishing uniform pharmacy delivery
standards for all of Manor Care's nursing facilities, including those not
serviced by Vitalink. Manor Care pays Vitalink an annual fee based on the
number of nursing facility beds operated by Manor Care.
Vitalink does not believe that its present contractual arrangements with
Manor Care with respect to the length of term are comparable to those
obtainable from third parties. Contracts with nursing facilities not
affiliated with Manor Care are generally for a period of one to two years and
are terminable by either party for any reason upon thirty days notice. In
contrast, the Master Agreements have a ten year term and are generally, only
terminable upon sale of a facility to a third party.
32
<PAGE>
Competition
Vitalink competes with numerous local and regional institutional pharmacies,
as well as the pharmacy operations owned by long-term care providers other
than Manor Care. These competitors provide product and service offerings
similar to those provided by Vitalink. A number of competitors are larger or
have greater financial resources than Vitalink.
Quality Assurance
Vitalink maintains high standards of pharmaceutical dispensing and record
keeping. Vitalink conducts monthly quality assurance audits at each nursing
facility it services to assess the quality and accuracy of pharmacy services
to nursing facilities.
The consultant pharmacist visits the nursing facility routinely and makes
recommendations to the nursing staff concerning various phases of the
pharmaceutical services and patient care programs. The consultant pharmacist
reviews each patient's drug regimen monthly on-site to ensure the patient drug
therapy is appropriate and the facility is complying with state and federal
regulations. The consultant pharmacist reports irregularities to the patient's
attending physician and the nursing facility's director of nursing and
administrator.
Government Regulation
Institutional pharmacies and nursing facilities are subject to various
federal and state regulations covering qualifications and day-to-day
operations, including documentation of activities. Among other regulations,
Vitalink's pharmacies are regulated under the Food, Drug and Cosmetics Act and
the Prescription Drug Marketing Act, each of which are administered by the
United States Food and Drug Administration ("FDA"). Vitalink's pharmacies are
each licensed by the states in which they operate and, pursuant to the
Comprehensive Drug Abuse Prevention and Control Act of 1970 administered by
the United States Drug Enforcement Administration ("DEA"), are registered with
the Federal government. The nursing facilities served by Vitalink are
separately required to be licensed by the states in which they operate, and if
they serve Medicare or Medicaid patients, are required to be certified by the
Federal government.
Given that a substantial number of nursing facility patients are covered by
the Medicare and Medicaid programs, Vitalink is subject to extensive
regulation under the programs, including regulation relating to persons
covered, amount of coverage, reimbursement and pricing. As a result of Manor
Care's ownership of a substantial portion of Vitalink's outstanding common
stock, Vitalink and Manor Care are subject to related party regulations that
could result in reimbursement for pharmacy services provided to Medicare Part
A patients in Manor Care nursing facilities equal to Vitalink's permitted
fully-allocated costs of the services. See "--Reimbursement and Billing."
Changes in Medicare and Medicaid programs, regulations, reimbursements or
interpretations of existing programs, regulations or reimbursements, including
changes intended to limit or decrease the growth of Medicare and Medicaid
expenditures, or changes in the state and federal laws regulating
institutional pharmacies could adversely affect Vitalink's business.
Various federal and state laws provide nursing facility patients with the
freedom to choose their own pharmacy provider. Vitalink markets its services
primarily to nursing facilities and acts as the pharmacy provider to the
patients in such facilities that do not otherwise choose their own provider.
Increases in the percentage of patients choosing their own provider or changes
in freedom-of-choice laws may adversely affect Vitalink's business.
Vitalink believes that it and each of its pharmacies is in substantial
compliance with all applicable Federal and state regulations.
33
<PAGE>
Employees
At May 31, 1996, Vitalink had approximately 945 employees. Vitalink believes
it enjoys a good relationship with its employees. None of Vitalink's employees
are covered by a collective bargaining agreement.
Insurance
Insurance coverage is principally maintained through Manor Care. The cost of
the coverage is allocated entirely to Vitalink when the coverage is specific
to Vitalink and otherwise allocated between Manor Care and Vitalink. In the
opinion of Vitalink, based on its historical loss experience, its current
insurance coverage is adequate given the risks associated with the operation
of an institutional pharmacy business of Vitalink's size. Vitalink also
believes that the limits and coverage of the insurance maintained are
consistent with that of other companies in the industry.
Properties
Vitalink leases its corporate offices which are located in Naperville,
Illinois. As of August 31, 1996, Vitalink had 24 leased pharmacies (including
the four regional infusion pharmacies) located in Appleton, Wisconsin;
Monticello, Elgin and Hickory Hills, Illinois; Indianapolis, Indiana;
Bettendorf, Iowa; Baltimore, Maryland; Allentown, Bridgeville, York and
Williamsport, Pennsylvania; Copley, Ohio; Deerfield Beach and St. Petersburg,
Florida; Ocean, New Jersey; Portland and Eugene, Oregon; Santa Rosa, San
Bernardino and Los Angeles, California; Northglenn and Loveland, Colorado;
Oklahoma City, Oklahoma; and San Antonio, Texas. The Company also leases
administrative office space in Calumet City, Illinois and Allentown,
Pennsylvania. All of Vitalink's leases are immaterial in amount. Vitalink
considers all of its physical properties to be in good operating condition and
suitable for the purposes for which they are being used.
Legal Proceedings
Vitalink is subject to regulatory and legal investigations, actions or
claims for damages that arise from time to time in the ordinary course of
business. Vitalink is defending any such investigations, actions and claims
against it and believes that these proceedings will not have a material
adverse effect on its financial condition.
GRANCARE'S INSTITUTIONAL PHARMACY BUSINESS
General
GranCare currently owns and operates, through its wholly-owned subsidiary
TeamCare, 25 institutional pharmacies serving customers in 24 states and the
District of Columbia. In addition, TeamCare operates eight satellite
pharmacies, which are smaller pharmacies used to service outlying regions and
which do not carry the full complement of drugs available from the
institutional pharmacies, and six related businesses involving x-ray, vascular
testing and durable medical equipment and computerized record keeping.
TeamCare was formed through the acquisition strategy of its parent, GranCare.
The first pharmacy was acquired by GranCare in December 1990 in connection
with GranCare's acquisition of American Medical Services, Inc. ("AMS") and
served approximately 1,800 beds. As of September 30, 1996, TeamCare services
approximately 113,800 beds (i.e., the aggregate number of beds at various
facilities as to which TeamCare provides pharmaceutical goods and services).
This growth was achieved through the acquisition of various institutional
pharmacies by GranCare from 1991 through the present as well as through same
store growth. Significant acquisitions include the acquisition of Long Term
Care Pharmaceutical Services I and III in July 1994, the acquisition of Winyah
Dispensary LTC of North Carolina and Winyah Dispensary--Midlands, Inc. in June
1993, and the merger with CompuPharm, Inc. ("CompuPharm") in December 1993.
Smaller pharmacy acquisitions during the previous 12-month period have
included Innovative Pharmacy Services, Inc. in October 1995, PharmCare, Inc.
and American Pharmaceutical, Inc. in December 1995 and Emery Pharmacy, Inc. in
July 1996. Prior to April 1996, "TeamCare" operated under the "CompuPharm"
name.
34
<PAGE>
Institutional Pharmacy Industry
Institutional pharmacies purchase and distribute prescription and non-
prescription medications for residents in institutional settings, including
nursing facilities, correctional facilities and retirement centers.
Institutional pharmacies also provide consultant services, including
evaluation of individual patient drug therapy and monitoring of nursing
facility drug administration, storage and control practices to help ensure a
sound pharmaceutical delivery system and compliance with state and federal
regulations.
A number of factors are expected to contribute to the continuing expansion
of the nursing facility segment, including the growth in, and the greater
affluence of, the U.S. elderly population, the trend toward delivery of cost-
efficient health care in non-hospital settings and the increasing practice of
early patient discharge from hospitals due to cost containment measures.
Pharmacy Operations
TeamCare currently owns and operates 25 institutional pharmacies with eight
satellite locations and six related businesses serving customers in the states
of Arizona, Colorado, California, Delaware, Georgia, Iowa, Illinois, Indiana,
Kentucky, Louisiana, Maryland, Mississippi, Michigan, North Carolina, New
Jersey, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Texas,
Virginia, Wisconsin, West Virginia and the District of Columbia. The
pharmacies provide long-term care facilities, acute care hospitals and other
institutions a variety of products and services including: (i) prescription
drugs; (ii) pharmacy consulting; (iii) computerized medical record
administration; (iv) enteral, urological and IV therapies; and (v) wound care
management. TeamCare currently services substantially all of GranCare's
facilities. Revenues from GranCare's facilities accounted for only 18.1% of
TeamCare's revenues for the year ended December 31, 1995 and 22.1% for the
six-month period ended June 30, 1996.
TeamCare has expanded its pharmacy capabilities to include IV therapy. The
types of IV therapy provided by TeamCare include total parenteral nutrition,
antibiotics, hydration, pain management and chemotherapy. TeamCare's ongoing
expansion of its pharmacy operations enables it to provide a broad range of
services and products, including wound care management, diabetes care, durable
medical equipment and orthotics and prosthetics.
TeamCare's management has developed a growth strategy that includes: (i)
continued penetration of existing markets through selling more products to
existing customers, increasing same store growth and marketing directed to
non-GranCare nursing facilities; (ii) expansion into additional markets in
which there is a sufficient base of GranCare beds to support a TeamCare
pharmacy; (iii) infusion therapy revenue generation created by targeting
specific nursing facilities and home health care agencies; and (iv)
acquisitions of pharmacies that can be consolidated with existing TeamCare
pharmacies or serve as a more rapid entry into new markets.
The table below sets forth the approximate number of beds serviced by
TeamCare during the past three fiscal years and the period ended August 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------ AUGUST 31,
1993 1994 1995 1996
------- ------- -------- ------------
<S> <C> <C> <C> <C>
GranCare Affiliated Beds.................. 7,400 7,000 17,000 17,000
Non-GranCare Affiliated Beds.............. 49,600 80,300 86,000 96,800
------- ------- -------- -------
Total beds serviced..................... 57,000 87,300 103,000 113,800
======= ======= ======== =======
</TABLE>
Services Offered by TeamCare
The basic service provided by TeamCare is the customized filling of
prescription and non-prescription medications for individual patients pursuant
to physician orders from nursing facilities. TeamCare maintains a 24-hour on-
call availability for clinical consultation and emergency delivery of
medications, as well as
35
<PAGE>
maintaining a provision of emergency and contingency doses of medications at
each nursing facility. TeamCare uses a computerized medical records system
that generates monthly nursing facility medical records, including preprinted
physician order forms, medication administration records and treatment
records. As an additional service to its nursing facility customers, TeamCare
maintains and documents ancillary orders such as diet orders, therapy orders
and activity orders.
TeamCare provides to its nursing facility customers trained consultant
pharmacists whose primary responsibility is to monitor and report on
prescription drug therapy to help ensure quality patient care. For a nursing
facility to participate in the Medicare and Medicaid reimbursement programs,
it is required to have the services of a consultant pharmacist.
TeamCare, in response to regulatory demands on nursing facilities, has
defined the primary responsibilities of its consultant pharmacists to include:
(i) monthly drug regimen reviews of each patient; (ii) participation on key
nursing facility committees; (iii) monthly inspection of medication carts and
storage rooms; (iv) monthly written review of facility medication
administration systems and practices; (v) development and maintenance of a
pharmaceutical policy and procedures manual; (vi) on-site educational
seminars; and (vii) assistance to the nursing facility in complying with state
and federal regulations on patient care. TeamCare bills nursing facilities for
consultant pharmacist services.
Infusion therapy basically consists of a product (nutrient, antibiotic,
chemotherapy or other drugs or fluids) and the administration of the product
(tube, catheter or intravenous). Patients can receive these therapies at home
or in a nursing facility at a cost that is substantially less than hospital-
based care. The trend toward delivery of health care in the lowest cost
setting and the increasing ability to treat certain illnesses outside of
hospitals represents an opportunity for nursing facilities to attract infusion
therapy patients.
TeamCare prepares the product to be administered, delivers the product and
trains others in administering infusion therapy. TeamCare does not itself
administer the therapy.
Purchasing
TeamCare purchases the drugs and supplies used in its pharmacies directly
from national wholesale distributors, through membership in purchasing groups
and from pharmaceutical manufacturers. Direct purchases from drug
manufacturers allow greater price discounts than purchase through wholesale
distributors, but require a significant lead time between order and actual
delivery. The advantage of buying through wholesale distributors is daily
delivery and the ability to more efficiently manage TeamCare's inventory of
drugs and supplies. TeamCare has not experienced material delays or shortages
in obtaining pharmaceutical products.
Reimbursement and Billing
TeamCare's computerized billing system enables it to bill for products and
services in a variety of ways. The pharmacy generally bills the responsible
party directly.
Charges for pharmacy services provided to patients who are eligible for
Medicare Part A are billed by the nursing facility directly to Medicare. Under
Part A, Medicare categorizes most of the expenses related to pharmacy products
as ancillary services, which are not subject to the cost reimbursement
ceilings under Medicare regulations.
For patients who are eligible for Blue Cross/Blue Shield or other insurance,
the insurer is billed directly by the nursing facility or by TeamCare.
Patients not covered by insurance, Medicare or Medicaid are generally billed
directly by TeamCare.
For patients qualifying for Medicaid reimbursement, the pharmacy bills
Medicaid directly, as the nursing facility cannot obtain reimbursement from
Medicaid for pharmacy services. Medicaid is a cooperative state-federal
program for medical assistance to the medically and categorically needy.
36
<PAGE>
The federal Medicare program provides for reimbursement under two separate
programs, Part A and Part B. Part A provides benefits covering inpatient
hospital, nursing facility and home health services. Reimbursement for nursing
facility services under Part A is restricted to those eligible for Part A
coverage who have been discharged within 30 days from an acute care hospital
after a stay of at least three days and are in need of daily skilled nursing
or rehabilitation services.
Part B provides coverage for physician services and general outpatient
services, including therapies, as well as durable medical equipment. Certain
TeamCare infusion therapy products are eligible for Part B reimbursement based
on Medicare-approved payment amounts. Part B coverage is generally subject to
an annual deductible of $100 and a statutorily mandated co-payment thereafter.
For patients who qualify under Medicare Part B and receive PEN (parenteral
and enteral) therapies, TeamCare bills Medicare Part B directly.
For its fiscal year 1995, TeamCare received approximately 29.9% of its net
revenues from private pay sources, including commercial insurance and managed
care; 25.7% from Medicare sources including Part A paid to the facilities and
Part B; and 44.4% from Medicaid sources.
Net revenue from GranCare and its patients (including revenues pursuant to
government reimbursement programs) accounted for approximately 18.1%, 11.6%
and 15.1% of total net revenues at December 31, 1995, 1994 and 1993,
respectively and 22.1% for the six month period ended June 30, 1996.
Dependence on Key Customer
Substantially all of the GranCare facilities owned and operated by GranCare
prior to the Effective Time of the Merger have a Supply Agreement with
TeamCare.
TeamCare believes that the Supply Agreements with GranCare are comparable to
pharmaceutical supply agreements that GranCare would be able to obtain from an
independent third party, except with respect to the term of the Supply
Agreements which is longer than the terms generally contained in contracts
with independent third parties. The Supply Agreements provide for a five year
term that is automatically extended each year for an additional year unless a
termination notice is timely received. See "Existing Contractual Arrangements
between TeamCare and New GranCare--Terms of the Pharmaceutical Supply
Agreements." Most of TeamCare's other pharmacy supply agreements are
terminable at will or generally range from one to two years. The loss of
substantially all of the Supply Agreements with GranCare would have a material
adverse effect on TeamCare's results of operations. For a discussion of the
principal terms of the Supply Agreements, see "Existing Contractual
Arrangements between Team Care and New GranCare--Terms of the Pharmaceutical
Supply Agreements."
In February 1996, TeamCare reacquired a contract to provide pharmaceutical
services to 17 New Jersey state facilities (the "New Jersey Contract"), which
TeamCare previously lost in January 1995. The New Jersey Contract expires on
January 31, 2000. The New Jersey Contract accounted for 19%, 14% and 1% (the
year in which the New Jersey Contract was lost) of TeamCare's revenues in
1993, 1994 and 1995, respectively.
Competition
TeamCare's pharmacies currently operate in 24 states and the District of
Columbia. Based on the total number of beds served, TeamCare believes that it
is the third largest provider of comprehensive pharmacy services to long-term
care facilities and competes with other pharmacies, some of which have a
stronger local market position in certain markets than TeamCare. The
competition among pharmacies for long-term care customers and other patients
has intensified in recent years. Institutional pharmacies compete on the basis
of price, quality of service, breadth of service offerings and payment terms.
TeamCare currently has the size, purchasing power, technical capabilities and
financial resources to compete in each of these areas, although there
37
<PAGE>
can be no assurance that technological or market changes, consolidation in the
long-term care institutional pharmacy business or intensified competition will
not affect TeamCare's ability to maintain its current competitive position.
Quality Assurance
TeamCare maintains high standards of pharmaceutical dispensing and record
keeping. TeamCare conducts monthly quality assurance audits at each nursing
facility it services to assess the quality and accuracy of pharmacy services
to nursing facilities.
The consultant pharmacist visits the nursing facility routinely and makes
recommendations to the nursing staff concerning various phases of the
pharmaceutical services and patient care programs. The consultant pharmacists
review each patient's drug regimen monthly on-site to ensure that patient drug
therapy is appropriate and that the facility is complying with state and
federal regulations. The consultant pharmacist reports irregularities to the
patient's attending physician and the nursing facility's director of nursing
and administrator.
Pharmacy Regulation
Pharmacy operations are subject to regulation by the various states in which
TeamCare conducts its business as well as by the federal government.
TeamCare's pharmacies are regulated under the Food, Drug and Cosmetic Act and
the Prescription Drug Marketing Act, which are administered by the FDA. Under
the Comprehensive Drug Abuse Prevention and Control Act of 1970, which is
administered by the DEA, the pharmacies, as dispensers of controlled
substances, must register with the DEA, file reports of inventories and
transactions and provide adequate security measures. Failure to comply with
such requirements could result in civil or criminal penalties. TeamCare
believes that its pharmacy operations are in substantial compliance with such
regulations.
Given that a substantial number of nursing facility patients are covered by
the Medicare and Medicaid programs, TeamCare is subject to extensive
regulation under these programs, including regulation relating to persons
covered, amount of coverage, reimbursement and pricing.
Changes in Medicare and Medicaid programs, regulations, reimbursements or
interpretations of existing programs, regulations or reimbursements, including
changes intended to limit or decrease the growth of Medicare and Medicaid
expenditures, or changes in the state and federal laws regulating
institutional pharmacies could adversely affect TeamCare's business.
Various federal and state laws provide nursing facility patients with the
freedom to choose their own pharmacy provider. TeamCare markets its services
primarily to nursing facilities and acts as the pharmacy provider to the
patients in such facilities that do not otherwise choose their own provider.
Increases in the percentage of patients choosing their own provider or changes
in freedom-of-choice laws may adversely affect TeamCare's business.
Employees
At August 31, 1996, TeamCare had approximately 2,300 employees. TeamCare's
Automated Pharmaceutical Services ("APS") subsidiary is party to a collective
bargaining agreement dated August 29, 1994 with the AFL-CIO covering
approximately 50 employees. In addition, in March of 1996, an election was
held at APS in Whippany, New Jersey among APS's delivery drivers seeking
representation by the International Brotherhood of Teamsters union. The
drivers voted in favor of such representation and TeamCare has challenged the
validity and results of such election. TeamCare's challenge to the election
results is currently before the National Labor Relations Board. TeamCare
cannot predict the effect continued union representation or organizational
activities will have on TeamCare's future activities. However, TeamCare has
never experienced any work stoppages and believes that its relations with its
employees is good.
38
<PAGE>
Insurance; Legal Proceedings
GranCare maintains, on behalf of itself and its subsidiaries, including
TeamCare, annual Blanket Property Damage/Business Interruption insurance in
the amount of $750.0 million and annual General/Professional Liability
insurance in the amount of $100.0 million, both of which policies are on an
occurrence form. GranCare, through its wholly-owned subsidiary, GCI Indemnity,
Inc. ("GCI Indemnity"), maintains a captive insurance company for the purposes
of paying worker's compensation claims and maintains reinsurance contracts to
minimize its insurance exposure. From time to time, TeamCare is a party to
various legal proceedings in the ordinary course of its business. In the
opinion of TeamCare, there are currently no proceedings which, individually or
in the aggregate, after taking into account the insurance coverage maintained
by GranCare, would have a material adverse effect on TeamCare's financial
position or results of operations.
On September 9, 1996, a shareholder of GranCare 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. Kenney, 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 GranCare's shareholders by failing to take all
reasonable steps necessary to ensure that GranCare shareholders receive
maximum value for their shares of GranCare Common Stock in connection with the
proposed Distribution and Merger. The complaint further alleges that the
directors of GranCare acted in concert as part of a scheme to deprive the
plaintiffs unfairly of their investment in GranCare 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 plaintiffs 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.
On December 19, 1996, a Conditional Agreement and Stipulation of Settlement
(the "Settlement Agreement") was reached in the above referenced litigation.
The settlement is subject to notice to the proposed class, a hearing (as
outlined below), final consideration by the court and satisfaction of certain
other conditions and considerations.
Class counsel and counsel for the defendants intend to seek Final Approval
(as defined in the Settlement Agreement) of the proposed settlement and
dismissal of the claims that have been or could have been asserted in the
litigation by plaintiff and the Settlement Class (as defined below).
Plaintiff's counsel investigated the facts and circumstances underlying the
issues raised in the complaint and researched the law applicable thereto. The
investigation by plaintiff's counsel included a review and analysis of
GranCare's public disclosures, an analysis of its financial statements, a
review of other non-public information and a review of drafts of this Proxy
Statement/Prospectus. Plaintiff's counsel submitted suggestions regarding the
disclosure pertaining to the proposed Transactions which have been considered
in the context of the overall disclosure contained in this Proxy
Statement/Prospectus. As a result of comments received from plaintiff's
counsel and the Commission, a number of disclosure enhancements have been made
regarding the proposed Transactions. GranCare and the plaintiff believe that
these disclosure enhancements will aid the shareholders in their understanding
and consideration of the proposed Transactions.
The defendants have vigorously denied all liability and allegations of
wrongdoing, and the settlement is not to be construed for any purpose as an
inference or admission of liability or wrongdoing by them. The plaintiffs and
defendants have concluded that it is desirable to settle the action to avoid
the further expense, burden and uncertainty of this litigation, and to put to
rest all controversies which were or could have been asserted in connection
with any of the matters set forth in the complaint.
39
<PAGE>
In connection with the settlement the class shall be defined as set forth
below (the "Settlement Class"):
All persons and entities who owned at any time one or more
shares of GranCare Common Stock, from and including September
2, 1996 through and including December 19, 1996, excluding the
following: the defendants; members of the families of the
defendants; any entity in which any defendant owns or holds a
controlling interest; and the legal representatives, heirs,
successors or assigns of any such excluded parties.
The settlement also provides, in summary, that the plaintiff's or
plaintiff's counsel may submit an application, subject to Court review and
approval, seeking an award of attorney's fees and expenses in an aggregate
amount of not more than $350,000. The defendants will not oppose such
application to the extent the application does not seek more than $350,000 and
GranCare will pay the amount the court awards up to $350,000, which is the
maximum possible payment exposure of GranCare under the Settlement Agreement.
The effect of the proposed settlement will be to extinguish the claims
contained in the action, along with granting of a general release from other
claims, whether asserted or not, as allowed by law.
Current shareholders of record will receive notice of a hearing to determine
whether the proposed settlement of this action is fair, reasonable and
adequate and should be approved by the court. As of this time, the hearing
date has not been set.
Under the proposed Settlement Agreement, class members will be given the
opportunity to be excluded from the Settlement Class, subject to certain
conditions. If the proposed Settlement is approved in final form by the court,
it will be binding on all class members who have not previously been excluded
from the Settlement Class.
Properties
As of August 31, 1996, TeamCare operated 25 institutional pharmacies with
eight satellite locations serving 24 states and the District of Columbia. All
of TeamCare's physical properties are leased and TeamCare considers its
physical properties to be in good operating condition and suitable for the
purposes for which they are being used.
TeamCare's corporate headquarters are located in Atlanta, Georgia. In
addition, TeamCare maintains Eastern, Midwestern and Western management
offices. TeamCare's space for its corporate headquarters and regional offices
is leased; all such leases are immaterial in amount.
40
<PAGE>
SELECTED HISTORICAL COMBINED FINANCIAL DATA OF TEAMCARE, INC.
(IN THOUSANDS)
The following selected historical combined financial data of TeamCare have
been derived from the historical financial statements and should be read in
conjunction with the financial statements and notes included herein.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------------------ -----------------------
1991(1) 1992(1) 1993(1) 1994(1) 1995(1) 1995(1) 1996(1)
----------- ----------- -------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $68,282 $91,425 $122,238 $171,195 $194,898 $142,768 $194,624
Expenses:
Operating expenses
(excluding items
shown below)......... 58,587 76,824 101,138 147,774 172,288 126,548 168,529
Interest expense and
financing charges.... 1,906 1,842 2,373 664 497 356 449
Depreciation and
amortization......... 1,870 1,988 2,368 3,524 4,705 3,365 4,980
Nonrecurring costs--
merger, other........ -- 1,114(2) 4,573(1) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Income before income
taxes and
extraordinary charge.. 5,919 9,657 11,786 19,233 17,408 12,499 20,666
Income taxes........... 1,465 3,700 6,628 7,700 7,000 5,000 8,266
------- ------- -------- -------- -------- -------- --------
Income before
extraordinary charge.. 4,454 5,957 5,158 11,533 10,408 7,499 12,400
Extraordinary charge--
loss on early
extinguishment of
debt, net of income
tax benefit of $856... -- -- 1,285(2) -- -- -- --
------- ------- -------- -------- -------- -------- --------
Net income............. $ 4,454 $ 5,957 $ 3,873 $ 11,533 $ 10,408 $ 7,499 $ 12,400
======= ======= ======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash .................. $ -- $ 8,575 $ 7,671 $ 2,884 $ 2,840 -- $ 868
Working capital........ 10,823 19,538 26,729 34,269 40,319 -- 43,414
Total assets........... 26,303 36,614 56,001 115,191 139,773 -- 164,333
Long-term debt,
including current
portions.............. 17,420 16,835 5,733 6,454 8,400 -- 12,348
Shareholder's equity... (983) 5,174 12,923 61,917 72,325 -- 84,725
</TABLE>
- --------
(1) All acquisitions, except for CompuPharm, Inc. ("CompuPharm"), are reflected
from the date of acquisition in the historical operating results of TeamCare
and the assets and liabilities relating to these acquisitions are included
in the balance sheet of TeamCare since that time. The merger with CompuPharm
was accounted for as a pooling of interests and, accordingly, the combined
financial statements of TeamCare include the historical balances as if
TeamCare and CompuPharm had always been combined. The $4.6 million Merger
costs in 1993 relate to the CompuPharm Merger. See note 4 to the combined
financial statements of TeamCare.
(2) The $1.1 million non-recurring charge in 1992 consisted of expenses related
to a retirement agreement with an employee of CompuPharm and expenses
relating to terminated negotiations regarding the possible sale of
CompuPharm. Such expenses were incurred prior to the merger of GranCare and
CompuPharm in December 1993 after which CompuPharm became a wholly-owned
subsidiary of GranCare. The extraordinary debt extinguishment charge of $1.3
million in 1993 resulted from debt repayments associated with the merger
with CompuPharm.
41
<PAGE>
TEAMCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
TeamCare was formed through the acquisition of various pharmacies by
TeamCare's parent, GranCare. GranCare purchased its first institutional
pharmacy in December 1990 in connection with the acquisition of AMS.
Initially, GranCare's pharmacy operations serviced approximately 1,800 beds.
As of September 30, 1996, TeamCare serviced approximately 113,800 beds.
In December 1993, in connection with the acquisition of CompuPharm, GranCare
consolidated its pharmacy operations under the "CompuPharm" name. In April
1996, as part of a new marketing strategy, GranCare began marketing its
Institutional Pharmacy Business under the TeamCare name.
TeamCare currently owns and operates 25 institutional pharmacies serving 24
states and the District of Columbia. In addition, TeamCare operates eight
satellite pharmacies, which are smaller pharmacies used to service outlying
regions and which do not carry the full complement of drugs available from the
institutional pharmacies, and six related businesses involving x-ray, vascular
testing, durable medical equipment and computerized record keeping. TeamCare
has achieved this growth through a strategy that focuses on (i) continued
penetration of existing markets through selling more products to existing
customers, increasing same store growth and marketing directed to non-GranCare
nursing facilities; (ii) expansion into additional markets in which there is a
sufficient base of GranCare beds to support a TeamCare pharmacy; (iii)
infusion therapy revenue generation created by targeting specific nursing
facilities and home health care agencies; and (iv) acquisitions of pharmacies
that can be consolidated with existing TeamCare pharmacies or serve as a more
rapid entry into new markets.
RESULTS OF OPERATIONS
Nine Months ended September 30, 1996 Compared to Nine Months ended September
30, 1995
TeamCare's net revenues for the nine month period ended September 30, 1996
amounted to $194.6 million compared to $142.8 million for the same nine month
period in 1995, an increase of $51.8 million, or 36.3%. This increase is
attributable to acquisitions completed in the fourth quarter of 1995
(accounting for $27.1 million of net revenue, or 19.0%), the restoration of
the New Jersey Contract in February 1996 and an increase in same-store growth.
Same store growth includes only those business units that have been included
in results of operations for consistent time periods for purposes of
comparison. On a same-store basis, net revenues increased $8.9 million, or
6.2%, for the nine month period ended September 30, 1996 versus the same
period in 1995. Same-store revenue growth is primarily attributable to a rise
in revenue per bed due to an increase in net revenues from TeamCare's
ancillary product lines -- enteral, urological, wound care, IV therapy and the
addition of orthotics in January 1996 -- which result in higher patient
billings due to the higher acuity patients utilizing these products. For the
nine-month period ended September 30, 1996, TeamCare's net revenues from the
New Jersey Contract amounted to $15.8 million. In 1996, TeamCare derived 22.2%
of its revenues from GranCare facilities and their patients as compared to
18.1% in 1995. The increase in revenues from affiliates is attributable to the
addition of facilities acquired in connection with GranCare's merger with
Evergreen Healthcare, Inc. ("Evergreen") in July 1995, which TeamCare
commenced servicing in the latter part of 1995 upon the integration of
Evergreen into GranCare's operations.
Total beds served at September 30, 1996 amounted to approximately 113,800
compared to approximately 89,300 at September 30, 1995, an increase of 24,500
beds, or 27.4%. This increase is attributable to approximately 8,000 beds
associated with the New Jersey Contract and the acquisitions of Emery
Pharmacy, Inc., Innovative Pharmacy Services Inc., PharmaCare Inc. and
American Pharmaceutical, Inc.
Gross profit for the nine month period ended September 30, 1996 was $101.8
million compared to $70.9 million for the same period in 1995, an increase of
$30.9 million, or 43.6%. The gross profit margin for the nine
42
<PAGE>
month period ended September 30, 1996 amounted to 52.3% compared to 49.7% for
the same period in 1995. The increase in gross profit margin for the nine
month period ended September 30, 1996 is attributed to the continued shift in
revenues to higher profit margin product lines and enhanced pricing obtained
from major vendors due to strategic alliances that were created.
Total operating expenses for the nine months ended September 30, 1996 were
$75.7 million compared to $54.7 million for the same period in 1995, an
increase of $21.0 million, or 38.4%. This increase is attributable to salary
and related expenses increasing to $53.0 million through September 30, 1996
from $35.4 million in 1995, an increase of $17.6 million, or 49.7%, while
selling, general and administrative expenses increased to $22.7 million for
the nine months ended September 30, 1996 from $19.3 million in 1995, an
increase of $3.4 million, or 17.6%. The increases from these items are
attributable to the continued acquisition strategy of TeamCare and the support
required to maintain premium service levels to TeamCare's customers.
Depreciation and amortization expenses for the nine month period ended
September 30, 1996 were $5.0 million compared to $3.4 million for the same
period in 1995, an increase of $1.6 million, or 47.1%. This increase is the
result of depreciation and amortization expenses attributable to businesses
acquired and additions to property and equipment.
Interest expense and financing charges were $0.4 million for the nine month
periods ended September 30, 1996 and 1995.
Income taxes in 1996 were $8.3 million for the nine month period ended
September 30, 1996 compared to $5.0 million for the same period in 1995.
As a result of the foregoing, net income for the nine month period ended
September 30, 1996 was $12.4 million compared to $7.5 million for the same
period in 1995, an increase of $4.9 million, or 65.3%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
TeamCare's net revenues for 1995 amounted to $194.9 million compared to
$171.2 million in 1994, an increase of $23.7 million, or 13.8%. The increase
is primarily attributable to the July 1, 1994 Long Term Care Pharmaceutical
Services Corporation I and Long Term Care Pharmaceutical Services Corporation
III (collectively, "LTC") and other acquisitions (which added $38.2 million to
net revenues) and to a lesser extent same-store growth. On a same-store basis,
net revenues increased $3.3 million, or 13.9% primarily due to a rise in
revenue per bed due to an increase in revenues from TeamCare's ancillary
product lines: enteral; urological; wound care; and IV therapy. These gains
were offset by the loss of the New Jersey Contract, which reduced 1995
revenues by $21.1 million. At December 31, 1995, TeamCare derived 18.1% of its
revenue from GranCare facilities and their patients as compared to 11.6% at
December 31, 1994. The increase in net revenues from affiliates is
attributable to the addition of facilities acquired in connection with the
acquisition of Evergreen in July 1995, which TeamCare commenced servicing in
the latter part of 1995 upon the integration of Evergreen into GranCare's
operations.
Total beds served at December 31, 1995 amounted to approximately 103,000
compared to approximately 87,300 at December 31, 1994, an increase of 15,700
beds, or 18%. TeamCare attained this increase in spite of the loss of
approximately 8,000 beds in 1995 associated with the New Jersey Contract. The
loss from the New Jersey Contract was offset by additional beds acquired in
three acquisitions; Innovative Pharmacy Services, Inc., PharmaCare, Inc. and
American Pharmaceutical, Inc. which serve, in total, almost 20,000 beds, and
the growth in other ancillary product lines (enteral, urological, wound care
and IV therapy).
Gross profit for 1995 was $97.4 million compared to $86.5 million in 1994,
an increase of $10.9 million, or 12.6%. The gross profit margin in 1995
amounted to 50.0% compared to 50.5% in 1994. The decline in gross profit
percentage in 1995 is primarily attributable to the loss of certain other
revenues of $0.7 million related to the New Jersey Contract, which affected
gross profit by 0.4%, coupled with declines in the reimbursement rates
43
<PAGE>
in the states of New Jersey and Wisconsin. This decline was offset by the
continued focus of TeamCare on its more highly profitable product lines
coupled with completing key strategic alliances with major vendors.
Total operating expenses for 1995 were $74.8 million compared to $63.1
million in 1994, an increase of $11.7 million, or 18.5%. This increase is
attributable to salary and related expenses rising from $40.2 million in 1994
to $48.4 million in 1995, an increase of $8.2 million, or 20.4%, while
selling, general and administrative expenses increased to $26.5 million in
1995 from $22.9 million in 1994, an increase of $3.6 million, or 15.7%. The
increase in these items is attributable to the continued acquisition strategy
of TeamCare and the support necessary to maintain services.
Depreciation and amortization expenses for 1995 were $4.7 million compared
to $3.5 million in 1994, an increase of $1.2 million, or 34.3%. This increase
is the result of depreciation and amortization expenses attributable to
businesses acquired and normal additions to property and equipment.
Interest expense and financing charges for 1995 were $0.5 million, compared
to $0.7 million in 1994, a decrease of $0.2 million, or 28.6%.
Income taxes for 1995 were $7.0 million compared to $7.7 million in 1994.
As a result of the foregoing, net income for 1995 was $10.4 million compared
to $11.5 million in 1994, a decrease of $1.1 million, or 9.6%.
Year End December 31, 1994 Compared to Year Ended December 31, 1993
TeamCare's net revenues for 1994 amounted to $171.2 million compared to
$122.2 million in 1993, an increase of $49.0 million, or 40.1%. This increase
is attributable to acquisitions completed (which added $37.8 million to net
revenue), and a rise in same-store growth. On a same-store basis, net revenues
increased $6.1 million, or 5.3% for fiscal 1994 as compared to fiscal 1993.
Same-store revenue increased due to a rise in revenue per bed primarily due to
an increase in revenue from TeamCare's ancillary product lines and, to a
lesser extent, an improvement in payor mix. At December 31, 1994, TeamCare
derived 11.6% of its revenue from GranCare facilities and their patients as
compared to 15.1% at December 31, 1993.
Total beds served at December 31, 1994 amounted to approximately 87,300 as
compared to approximately 57,000 at December 31, 1993, an increase of 30,300
beds, or 53.2%. This increase is attributable to the 1994 acquisition of PPCP,
Inc. LTC, Merit Pharmacy, Inc. and Ricketts Drug, Inc.
Gross profit for 1994 was $86.5 million compared to $63.0 million in 1993,
an increase of $23.5 million, or 37.3%. The gross profit margin in 1994
amounted to 50.5% compared to 51.5% in 1993. The decline of gross profit
percentage in 1994 as compared to 1993 is attributable to a decline in
reimbursement rates in various states. In the latter part of 1994, TeamCare
started focusing on more highly profitable product lines, as well as creating
strategic alliances with major vendors to offset the decline in the gross
profit percentage.
Total operating expenses for 1994 were $63.1 million compared to $41.9
million in 1993, an increase of $21.2 million, or 50.6%. This increase is
attributable to salary and related expenses increasing from $28.7 million in
1993 to $40.2 million in 1994, an increase of $11.5 million, or 40.1%, while
selling, general and administrative expenses increased to $22.9 million in
1994 from $13.2 million in 1993, an increase of $9.7 million, or 73.5%. These
increases are attributable to the continued acquisition strategy of TeamCare
and the support necessary to maintain services.
Depreciation and amortization expenses for 1994 were $3.5 million compared
to $2.4 million in 1993, an increase of $1.1 million, or 45.8%. This increase
is the result of depreciation and amortization expenses attributable to those
businesses acquired and normal additions to property and equipment.
44
<PAGE>
Interest expense and financing charges for 1994 were $0.7 million compared
to $2.4 million in 1993, a decline of $1.7 million, or 70.8%. The decline is
attributable to interest and finance charges on debt from the merger with
CompuPharm, Inc. in 1993, which was accounted for as a pooling of interest
business combination. In connection with the merger, the CompuPharm debt was
paid off by TeamCare.
Income taxes for 1994 were $7.7 million compared to $6.6 million in 1993.
In 1993, TeamCare recorded $4.6 million of costs related to the CompuPharm,
Inc. merger, as well as $1.3 million of charges related to the early
extinguishment of CompuPharm, Inc. debt. Similar amounts were not recorded in
1994.
As a result of the foregoing, net income for 1994 was $11.5 million compared
to $3.9 million in 1993, an increase of $7.6 million.
LIQUIDITY AND CAPITAL RESOURCES
TeamCare's primary source of liquidity at September 30, 1996 was $0.9
million of cash compared to $2.8 million at December 31, 1995, a decrease of
$1.9 million. The decrease of cash was primarily due to purchases of property
and equipment, acquisitions of businesses which were funded by GranCare and
the repayment of certain acquisition debt offset by cash flow generated from
operations. From time to time, TeamCare borrows funds from a line of credit
established by GranCare. After GranCare is merged with Vitalink, it is not
anticipated that this practice will continue. Such amounts are not subject to
repayment terms and are repaid from excess operating cash. Payments received
by TeamCare from the Medicaid and Medicare programs are TeamCare's largest
source of cash flow from operations.
Net accounts receivable at September 30, 1996 were $47.1 million compared to
$37.7 million at December 31, 1995, an increase of $9.4 million or 24.9%.
TeamCare's net accounts receivable include receivables from private pay
sources as well as third party reimbursement programs such as Medicaid and
Medicare. The increase in net accounts receivable at September 30, 1996 as
compared to December 31, 1995 is attributable to increases from all payor
sources including Medicaid, Medicare, insurance, and private pay, largely the
result of acquisitions.
In addition to principal payments on certain of its non-affiliated
acquisition indebtedness, TeamCare has rent obligations related to its leased
facilities, as well as property expenses consisting principally of property
taxes and insurance. TeamCare's principal payments, cash interest payments,
and rent and property expense obligations were $1.4, $0.5 and $4.4 million in
1995, respectively. Principal payments, cash interest payments, and rent and
property expense obligations for 1996 are estimated to be $1.2, $0.6 and $5.2
million, respectively. As of September 30, 1996, total acquisition
indebtedness to GranCare was $24.7 million, compared to $20.2 million at
December 31, 1995. To date no amounts have been paid to GranCare in respect of
acquisition indebtedness funded by GranCare. The amounts owed to GranCare for
its long-term acquisition indebtedness will not be assumed by Vitalink as part
of the Merger.
TeamCare's operations require capital expenditures to continue to meet the
needs of its customers. The Institutional Pharmacy Business is not capital
intensive and therefore the principal capital expenditures relate to medical
carts, cassettes and vehicles used in daily delivery of TeamCare's products to
its customers. Total capital expenditures were $3.9 million and $2.2 million
for the nine month period ended September 30, 1996 and the year ended December
31, 1995, respectively.
Subsequent to the Merger, TeamCare's fixed obligations and capital
expenditures will be funded by Vitalink's net working capital and net cash
provided from operations in addition to available borrowings under the
Vitalink Credit Facility. Vitalink believes such sources of capital will be
sufficient to meet TeamCare's (i.e., Vitalink's upon consummation of the
Merger) anticipated short-term and long-term working capital requirements
which consist primarily of principal and interest payments on its
indebtedness, acquisitions, if any, rent
45
<PAGE>
obligations and capital expenditures. Although the Vitalink Credit Facility
can provide financing for certain acquisitions, to the extent Vitalink pursues
future acquisitions there can be no assurance that Vitalink's current sources
of capital will be sufficient. Vitalink may be required to obtain additional
financing in the event of an acquisition and although management believes such
additional financing will be available, there can be no assurance that such
financing will be available or, if available, available on terms management
believes to be reasonable.
IMPACT OF INFLATION
The pharmacy industry is labor intensive. Salaries and related costs are
especially sensitive to inflation. In addition, TeamCare operates many of its
facilities under operating leases which contain provisions for increased rent
based upon inflation. Increases in salaries and related expenses and rent
expenses, as a result of inflation, without a corresponding increase in
Medicaid and Medicare reimbursement rates, could adversely impact TeamCare.
46
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial statements
give pro forma effect to the Transactions and all other acquisitions made by
Vitalink since June 1, 1995 as though they occurred on June 1, 1995. The
unaudited pro forma combined balance sheet at August 31, 1996 gives effect to
the Transactions as if they occurred at that date. This pro forma information
has been prepared utilizing the unaudited (audited in the case of the
statement of income for the twelve month period ended May 31, 1996) historical
consolidated financial statements of Vitalink and the unaudited historical
combined financial statements of TeamCare for the twelve month period ended
May 31, 1996 and the unaudited historical consolidated financial statements of
TeamCare for the period ended August 31, 1996. This information should be read
in conjunction with the historical financial statements and notes thereto of
Vitalink, which are incorporated by reference in this Proxy
Statement/Prospectus and of TeamCare, which appear elsewhere herein. Reference
is also made to the pro forma financial statements appearing in Annex A
reflecting the spin-off of TeamCare from GranCare. The pro forma financial
data are provided for comparative purposes only and do not purport to be
indicative of the results which would have been obtained if the Merger had
been effected during the periods presented.
The pro forma financial information is based on the purchase method of
accounting for the Merger. The pro forma adjustments are described in the
accompanying notes to the unaudited pro forma combined condensed financial
statements.
PRO FORMA COMBINED STATEMENT OF INCOME
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MAY 31, 1996
------------------------------------------------------------------------
HISTORICAL PRO FORMA (UNAUDITED)
------------------------------ ----------------------------------------
MERGER ACQUISITION
VITALINK TEAMCARE TOTAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
-------- ----------- -------- -------------- -------------- ---------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $141,115 $219,824 $360,939 $ -- $12,538 $373,477
Cost of goods sold...... 71,122 106,629 177,751 -- 6,642 184,393
-------- -------- -------- -------- ------- --------
Gross profit............ 69,993 113,195 183,188 -- 5,896 189,084
-------- -------- -------- -------- ------- --------
Payroll and benefits.... 29,255 57,250 86,505 -- 3,845 90,350
Selling, general &
administrative......... 11,662 24,317 35,979 -- 1,834 37,813
Provision for doubtful
accounts............... 2,412 4,271 6,683 -- 118 6,801
Depreciation &
amortization........... 4,363 5,560 9,923 6,567 (c) 267 16,757
-------- -------- -------- -------- ------- --------
47,692 91,398 139,090 6,567 6,064 151,721
-------- -------- -------- -------- ------- --------
Income from operations.. 22,301 21,797 44,098 (6,567) (168) 37,363
Interest income......... 1,003 -- 1,003 -- -- 1,003
Interest expense........ (51) (583) (634) (6,000)(d) -- (6,634)
-------- -------- -------- -------- ------- --------
Pretax income........... 23,253 21,214 44,467 (12,567) (168) 31,732
Provision for income
taxes.................. 9,383 8,486 17,869 (2,392)(e) (67) 15,410
-------- -------- -------- -------- ------- --------
Net income.............. $ 13,870 $ 12,728 $ 26,598 $(10,175) $ (101) $ 16,322
======== ======== ======== ======== ======= ========
Earnings per share...... $ 0.99 $ 0.64
======== ========
Weighted average common
shares outstanding..... 13,976 11,600 (f) 25,576
======== ======== ========
</TABLE>
See accompanying notes
47
<PAGE>
PRO FORMA COMBINED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST 31, 1996
----------------------------------------------------------------------
HISTORICAL (UNAUDITED) PRO FORMA (UNAUDITED)
---------------------------- ----------------------------------------
MERGER ACQUISITION
VITALINK TEAMCARE TOTAL ADJUSTMENTS(A) ADJUSTMENTS(B) PRO FORMA
-------- -------- -------- -------------- -------------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Net revenues............ $39,373 $67,606 $106,979 $ -- $1,945 $108,924
Cost of goods sold...... 20,005 32,352 52,357 -- 1,182 53,539
------- ------- -------- ------- ------ --------
Gross profit............ 19,368 35,254 54,622 -- 763 55,385
------- ------- -------- ------- ------ --------
Payroll and benefits.... 8,198 18,236 26,434 -- 636 27,070
Selling, general &
administrative......... 3,342 7,176 10,518 -- 303 10,821
Provision for doubtful
accounts............... 616 1,338 1,954 -- 20 1,974
Depreciation &
amortization........... 1,247 1,693 2,940 1,642 (c) 30 4,612
------- ------- -------- ------- ------ --------
13,403 28,443 41,846 1,642 989 44,477
------- ------- -------- ------- ------ --------
Income from operations.. 5,965 6,811 12,776 (1,642) (226) 10,908
Interest income......... 264 -- 264 -- -- 264
Interest expense........ (11) (146) (157) (1,500)(d) -- (1,657)
------- ------- -------- ------- ------ --------
Pretax income........... 6,218 6,665 12,883 (3,142) (226) 9,515
Provision for income
taxes.................. 2,506 2,666 5,172 (598)(e) (89) 4,485
------- ------- -------- ------- ------ --------
Net income.............. $ 3,712 $ 3,999 $ 7,711 $(2,544) (137) $ 5,030
======= ======= ======== ======= ====== ========
Earnings per share...... $ 0.27 $ 0.20
======= ========
Weighted average common
shares outstanding..... 13,980 11,600 (f) 25,580
======= ======= ========
</TABLE>
See accompanying notes
48
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA COMBINED BALANCE SHEET
AT AUGUST 31, 1996
---------------------------------------------------
HISTORICAL (UNAUDITED) PRO FORMA (UNAUDITED)
-------------------------- ------------------------
VITALINK TEAMCARE TOTAL ADJUSTMENTS PRO FORMA
-------- -------- -------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
Cash...................... $ 471 $ 456 $ 927 $ 20,879 (g) $ 11,806
(10,000)(m)
(100,000)(k)
100,000 (k)
Receivables............... 22,096 46,628 68,724 -- 68,724
Inventories............... 8,795 15,389 24,184 -- 24,184
Deferred income taxes..... 1,430 2,821 4,251 -- 4,251
Other..................... 343 3,338 3,681 -- 3,681
-------- -------- -------- --------- --------
Total current assets.. 33,135 68,632 101,767 10,879 112,646
Due from Parent........... 14,761 -- 14,761 -- 14,761
Property and equipment.... 8,717 13,373 22,090 -- 22,090
Pharmacy contracts and
other intangibles........ 6,351 1,970 8,321 34,262 (n) 42,583
Goodwill.................. 35,558 74,784 110,342 247,833 (j) 304,495
100,000 (k)
116 (j)
(40,296)(h)
(46,378)(h)
(36,581)(h)
(20,879)(g)
18,000 (i)
(3,400)(l)
10,000 (m)
(34,262)(n)
Other assets.............. 4,198 3,625 7,823 -- 7,823
-------- -------- -------- --------- --------
Total Assets.......... $102,720 $162,384 $265,104 $ 239,294 $504,398
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Accounts payable.......... 5,160 19,323 24,483 -- 24,483
Accrued expenses.......... 2,784 4,388 7,172 18,000 (i) 25,172
Interest payable.......... -- 271 271 -- 271
State income taxes
payable.................. 980 -- 980 -- 980
Notes payable and current
maturities of long-term
debt..................... -- 1,669 1,669 -- 1,669
-------- -------- -------- --------- --------
Total current
liabilities.......... 8,924 25,651 34,575 18,000 52,575
-------- -------- -------- --------- --------
Deferred income taxes &
other long-term
liabilities.............. 3,785 3,703 7,488 -- 7,488
-------- -------- -------- --------- --------
Due to Parent............. -- 40,296 40,296 (40,296)(h) 0
-------- -------- -------- --------- --------
Long-term debt............ -- 9,774 9,774 100,000 (k) 106,374
(3,400)(1)
-------- -------- -------- --------- --------
Stockholders' Equity
Common stock............ 140 1 141 116 (j) 257
Contributed capital..... 38,155 46,378 84,533 247,833 (j) 285,988
(46,378)(h)
Retained earnings....... 51,716 36,581 88,297 (36,581)(h) 51,716
-------- -------- -------- --------- --------
Total stockholders'
equity............... 90,011 82,960 172,971 164,990 337,961
-------- -------- -------- --------- --------
Total Liabilities and
Stockholders'
Equity............... $102,720 $162,384 $265,104 $ 239,294 $504,398
======== ======== ======== ========= ========
</TABLE>
See accompanying notes
49
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Introduction
On September 3, 1996, Vitalink and GranCare entered into a definitive
agreement to merge GranCare's Institutional Pharmacy Business, conducted
through its TeamCare subsidiary, with and into Vitalink. Subsequent to
GranCare's spin-off of its skilled nursing business, Vitalink will issue (i)
approximately 11.6 million shares of Vitalink Common Stock in exchange for all
of the outstanding shares and stock options of GranCare, (ii) will refinance
GranCare's $100.0 million outstanding Senior Subordinated Notes and (iii) will
assume existing long-term debt of TeamCare of approximately $8.0 million
(consisting of approximately $11.4 million of TeamCare long-term debt at
August 31, 1996 plus current maturities, less approximately $3.4 million of
debt to be retired by GranCare prior to the Merger). The merger will be
accounted for using the purchase method of accounting and, accordingly, the
purchase price will be allocated to the net assets acquired based on their
estimated fair value at the date of acquisition. The fair market value per
share of Vitalink Common Stock used in calculating the preliminary purchase
price was $21.375, the published closing price on September 4, 1996, the date
the merger was announced. The components of the purchase price are presented
below:
<TABLE>
<S> <C>
Vitalink Common Stock (11.6 million shares at $21.375 per
share)...................................................... $247,950
Face amount of 9 3/8% Senior Subordinated Notes refinanced... 100,000
Vitalink portion of Shared Transaction Costs................. 11,000
Non-shared merger related costs.............................. 7,000
Consent Fee paid to HRPT..................................... 10,000
Closing payment from New GranCare to Vitalink................ (20,879)
--------
Purchase Price............................................. $355,071
========
</TABLE>
The excess of the purchase price over the estimated fair value of net assets
acquired is expected to approximate $194 million and will be recorded as
goodwill and amortized over 40 years. A summary of the preliminary purchase
price allocation is as follows:
<TABLE>
<S> <C>
Working capital................................................. $ 42,981
Property and equipment.......................................... 13,373
Pharmaceutical Supply Agreement................................. 34,262
Other assets.................................................... 80,379
Goodwill........................................................ 194,153
Other liabilities............................................... (10,077)
--------
Purchase Price................................................ $355,071
========
</TABLE>
Pro Forma Adjustments
A description of the pro forma adjustments in the Pro Forma Combined
Statements of Income (a) through (f) and the Pro Forma Combined Balance Sheet
(g) through (n) follow:
(a) Represents the pro forma effects of the Merger as though it occurred on
June 1, 1995.
(b) Represents the pro forma effects of all acquisitions made by Vitalink
since June 1, 1995 as though they occurred on June 1, 1995.
(c) Represents the amortization of approximately $194 million of the excess of
the purchase price over the estimated fair value of net assets acquired at
August 31, 1996 and the amortization of approximately $34 million
representing the estimated fair value of the Pharmaceutical Supply
Agreements based on the straight line method over 40 and 20 years,
respectively.
(d) Estimated interest expense that would have been incurred on $100 million
of borrowings from Vitalink's Credit Facility used to refinance GranCare's
$100 million 9 3/8% Senior Subordinated Notes tendered in connection with
the merger. Interest expense is based on a rate of 6% (current six-month
LIBOR plus 40 basis points).
50
<PAGE>
(e) Represents income tax effects on tax deductible pro forma adjustments
using Vitalink's statutory tax rate of 39.875%, which reflects the rates
in effect for the periods presented.
(f) Represents the 11.6 million shares of Vitalink Common Stock issued
pursuant to the Merger Agreement in exchange for all of the issued and
outstanding shares of GranCare Common Stock.
(g) Estimated payment to Vitalink from New GranCare pursuant to a formula in
the Distribution Agreement. See the "Distribution Agreement--Treatment of
Certain Indebtedness," "--Expenses" and "--Terms of the Distribution
Agreement." The estimated payment, which is accounted for as consideration
received in calculating the acquisition purchase price, is calculated as
follows:
<TABLE>
<S> <C>
Agreed value of initial debt to be assumed....................... $88,383
TeamCare acquisitions subsequent to June 1, 1996................. 7,925
Shared Transaction Expense settlement amount..................... 400
TeamCare cash and cash equivalents at August 31, 1996............ 456
-------
97,164
-------
Less actual debt assumed or refinanced by Vitalink:
Senior Subordinated Notes...................................... 100,000
TeamCare long-term debt plus current maturities at
August 31, 1996............................................... 11,443
Consent Fee paid to HRPT....................................... 10,000
Retirement of Winyah debt by GranCare prior to merger.......... (3,400)
-------
118,043
-------
Estimated closing payment to Vitalink............................ $20,879
-------
-------
</TABLE>
(h) Elimination of the capital accounts of TeamCare and the intercompany
account between TeamCare and GranCare.
(i) Represents the accrual of estimated merger costs as follows:
<TABLE>
<S> <C>
Tender premium on $100 million Senior Subordinated Notes........ $ 9,000
Redemption premium on $60 million Convertible Debentures(a)..... 2,730
Investment banker fees.......................................... 4,000
Other professional fees and merger related costs................ 6,270
-------
Total Shared Transaction Expenses............................. 22,000
Less costs to be paid by GranCare............................. (11,000)
-------
Net Shared Transaction Expenses............................... 11,000
Other non-shared merger related costs:
Legal fees and other.......................................... 2,000
Employee severance and contract terminations.................. 5,000
-------
Total estimated merger costs.................................... $18,000
=======
</TABLE>
--------
(a) The amount of the redemption premium will be reduced by
$.39 million if the Convertible Debentures are redeemed
after January 15, 1997.
(j) Represents the increase in stockholders' equity in connection with the
issuance of 11.6 million shares of Vitalink Common Stock as discussed in
note (f).
(k) The pro forma financial statements assume tender of 100% of the 9 3/8%
Senior Subordinated Notes. The $100 million represents the refinancing of
the Notes with funds provided by the Vitalink Credit Facility, a five-year
revolving facility. See "Description of the Vitalink Credit Facility". The
Senior Subordinated Notes and related interest expense are not reflected
in TeamCare's historical financial statements because they are obligations
of GranCare. A tender offer for the notes at 109% is being made
concurrently with the
51
<PAGE>
Merger. See "the Distribution Agreement--Treatment of Certain Indebtedness".
Vitalink will make the payment for the tendered Senior Subordinated Notes,
including the $9 million premium which is a Shared Transaction Expense as
presented in note (i). The pro forma interest expense is based on a $100
million borrowing under the Vitalink Credit Facility at a 6.0% interest rate
(current six-month LIBOR plus 40 basis points) as shown below:
<TABLE>
<S> <C>
Vitalink Credit Facility borrowings to refinance the $100 million
Senior Subordinated Notes....................................... 100,000
Interest rate.................................................... 6%
-------
Annual pro forma interest expense................................ 6,000
=======
</TABLE>
In the event that less than all the Senior Subordinated Notes are tendered,
New GranCare will pay Vitalink an "interest rate differential" representing
the present value of the payment difference between the 9 3/8% coupon rate
and the borrowing rate under Vitalink's Credit Facility. The payment will be
amortized as a reduction to interest expense over the term of the notes.
(l) Represents the retirement of Winyah debt by GranCare prior to the Merger.
(m) Represents the payment of the Consent Fee to HRPT.
(n) Represents the estimated fair value of the Pharmaceutical Supply Agreements
between TeamCare and New GranCare. See "Existing Contractual Arrangements
between TeamCare and New GranCare". The value of the Pharmaceutical Supply
Agreements will be amortized over 20 years using the straight line method.
52
<PAGE>
THE SPECIAL MEETING
DATE, TIME AND PLACE
The Special Meeting will be held on January , 1997 at 11:00 a.m., local
time, at the offices of GranCare located at One Ravinia Drive, Suite 1500,
Atlanta, Georgia.
PURPOSE OF SPECIAL MEETING
This Proxy Statement/Prospectus is being furnished to the shareholders of
GranCare in connection with the solicitation of proxies on behalf of the Board
of Directors of GranCare for use at the Special Meeting to be held on January
, 1997 at the time and place specified in the accompanying Notice of Special
Meeting of Shareholders, or any adjournments or postponements thereof. At the
Special Meeting the shareholders of GranCare will be asked to vote upon:
(i) approval and adoption of the Distribution Agreement and the
transactions contemplated by the Distribution Agreement, including (a) the
Restructuring, pursuant to which all of GranCare's Skilled Nursing Business
will be transferred to New GranCare and (b) the Distribution, pursuant to
which all of the New GranCare Common Stock will be distributed to the
shareholders of GranCare (the "Distribution Proposal");
(ii) approval and adoption of the Merger Agreement pursuant to which
GranCare (whose sole remaining business after the Distribution will consist
of the Institutional Pharmacy Business) will merge with and into Vitalink
with Vitalink as the surviving corporation (the "Merger Proposal");
(iii) the approval and adoption of the 1996 New GranCare Plan (the "1996
New GranCare Plan Proposal");
(iv) the approval and adoption of the New GranCare Annual Incentive Plan
and Stockholder Value Program to be administered under the 1996 New
GranCare Plan (together with the 1996 New GranCare Plan Proposal, the
"Incentive Plan Proposals");
(v) the approval of the possible adjournment of the Special Meeting for
the purpose of soliciting additional votes in favor of proposals (i)
through (iv) above, if deemed appropriate (the "Adjournment Proposal"); and
(vi) such other business as may properly come before the Special Meeting
or any adjournments or postponements thereof.
Immediately prior to the Effective Time of the Merger, GranCare will
distribute all of the New GranCare Common Stock to holders of GranCare Common
Stock, whereby each shareholder of GranCare will receive a dividend of one
share of New GranCare Common Stock for each share of GranCare Common Stock
held by such shareholder as of the Distribution Record Date. See "The
Distribution Agreement--Consummation of the Distribution; Treatment of
GranCare Stock Options." Pursuant to the Merger Agreement, at the Effective
Time, GranCare will merge with and into Vitalink, with Vitalink as the
surviving corporation, and each share of GranCare Common Stock outstanding
prior to the Merger will be canceled and converted into the right to receive
0.478 of a share of Vitalink Common Stock. See "The Merger Agreement--
General."
The Distribution Proposal and the Merger Proposal will be considered and
voted on separately by GranCare shareholders, but neither the Merger nor the
Distribution will be effected unless both Transactions are approved by
GranCare shareholders. The Distribution will not take place unless and until
all other conditions to the Merger (other than the occurrence of the
Distribution itself and the filing of a Certificate of Merger with the
Delaware Secretary of State, the California Secretary of State and the
Franchise Tax Board) have been satisfied, including shareholder approval of
both the Distribution Proposal and the Merger Proposal. It is anticipated that
the Distribution will not be effected until immediately prior to the Effective
Time of the Merger. Additionally, the Incentive Plan Proposals will not be
implemented if the Merger and Distribution are not effected.
THE BOARD OF DIRECTORS OF GRANCARE HAS UNANIMOUSLY APPROVED THE DISTRIBUTION
PROPOSAL AND THE MERGER PROPOSAL AND UNANIMOUSLY RECOMMENDS THAT ALL
SHAREHOLDERS VOTE FOR THE APPROVAL OF SUCH PROPOSALS.
53
<PAGE>
SPECIAL MEETING RECORD DATE; VOTING RIGHTS; PROXIES
GranCare shareholders of record at the close of business on December 10,
1996 are entitled to notice of and to vote at the Special Meeting or any
adjournment or postponement thereof. Each shareholder is entitled to one vote
per share of GranCare Common Stock held of record on the Special Meeting
Record Date with respect to each of the Distribution Proposal, the Merger
Proposal, the Incentive Plan Proposals and each other matter properly
submitted for consideration at the Special Meeting. As of the Special Meeting
Record Date, there were 23,677,925 shares of GranCare Common Stock outstanding
and entitled to vote which were held by approximately 1,035 holders of record.
GranCare shareholders are entitled to cast their votes at the Special Meeting
in person or by properly executed proxies.
VOTING OF PROXIES
All properly executed proxies received prior to or at the Special Meeting
from holders of GranCare Common Stock who are entitled to vote and are
represented at the Special Meeting and not revoked will be voted at such
meeting in accordance with the instructions indicated in such proxies. If no
instructions are indicated, such proxies will be voted FOR approval and
adoption of the Distribution Proposal, the Merger Proposal and the Incentive
Plan Proposals.
There is a possibility that a motion may be considered at the Special
Meeting which would adjourn the Special Meeting for the purpose of soliciting
additional proxies in favor of the Distribution Proposal, the Merger Proposal
and the Incentive Plan Proposals. Accordingly, shareholders of GranCare are
being asked to vote in favor of any such proposal that may be brought before
the Special Meeting.
If any other matters are properly presented at the Special Meeting for
consideration, the persons named in the enclosed form of proxy, and acting
thereunder, will have discretion to vote on such matters in accordance with
their best judgment (unless authorization to use such discretion is withheld).
GranCare is not aware of any matters expected to be presented at the Special
Meeting other than as described in its Notice of Special Meeting of
Shareholders.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of GranCare (including by telegram or facsimile), before
the taking of the vote at the Special Meeting, a written notice of revocation
bearing a later date than the date of the proxy or by giving notice of
revocation in open meeting, (ii) duly executing a later-dated proxy relating
to the same shares of GranCare Common Stock and delivering it to the Secretary
of GranCare (including by telegram or facsimile) before the taking of the vote
at the Special Meeting, or (iii) attending the Special Meeting and voting in
person. In order to vote in person at the Special Meeting, GranCare
shareholders must attend the meeting and cast their votes in accordance with
the voting procedures established for such meeting. Attendance at the Special
Meeting will not in and of itself constitute a revocation of a proxy. Any
written notice of revocation or subsequent proxy must be sent to: GranCare,
Inc., One Ravinia Drive, Suite 1500, Atlanta, GA 30346, Attention: Secretary.
GranCare shareholders who require assistance in changing or revoking a proxy
should contact M. Henry Day by telephone at (770) 673-2515.
REQUIRED VOTE
Under the CGCL, the affirmative vote of a majority of the issued and
outstanding shares of GranCare Common Stock is required to approve the Merger
Proposal. The GranCare Board of Directors is also soliciting the affirmative
vote of a majority of the issued and outstanding shares of GranCare Common
Stock for approval of the Distribution Proposal in accordance with the terms
of the Merger Agreement. The affirmative vote of a majority of the shares of
GranCare Common Stock present and entitled to vote at the Special Meeting is
required to approve the Incentive Plan Proposals and the Adjournment Proposal.
The presence, either in person or by properly executed proxy, of a majority of
the outstanding shares of GranCare Common Stock as of the Special Meeting
Record Date is necessary to constitute a quorum at the Special Meeting.
Abstentions will be counted for purposes of determining whether a quorum is
present at the Special Meeting.
54
<PAGE>
Abstentions and broker non-votes (i.e., shares of GranCare Common Stock held
in record name by brokers or nominees as to which (i) instructions have not
been received from the beneficial owners or persons entitled to vote, (ii) the
broker or nominee does not have discretionary voting power, or (iii) the
record holder has indicated on the proxy card or otherwise notified GranCare
that such record holder does not have authority to vote on that matter) are
counted for purposes of determining the presence or absence of a quorum for
the transaction of business. In accordance with the CGCL and the GranCare
Articles of Incorporation and the Bylaws of GranCare, abstentions and broker
non-votes will have the effect of a vote against a proposal.
Under the CGCL, holders of the GranCare Common Stock are entitled to
appraisal rights in connection with the Transactions. See "Comparative Rights
of Stockholders--Appraisal Rights."
PROXY SOLICITATION
GranCare will pay for the cost of solicitation of proxies on behalf of the
Board of Directors of GranCare, except that expenses incurred in printing,
mailing and filing this Proxy Statement/Prospectus will be a Shared
Transaction Expense. In addition to soliciting proxies by mail, directors,
officers and employees of GranCare may solicit proxies in person or by
telephone, telecopy, telegram or other means of communication. Arrangements
will also be made with brokerage firms and other custodians, nominees and
fiduciaries for the forwarding of proxy solicitation material to beneficial
owners of shares of GranCare Common Stock held of record by such persons as of
the Record Date, and GranCare may reimburse such custodians, nominees and
fiduciaries for reasonable expenses incurred in connection therewith. GranCare
has retained Morrow & Co. as a proxy solicitor at an estimated cost not to
exceed $6,500, plus reimbursement of expenses, to assist in its solicitation
of proxies from shareholders.
55
<PAGE>
DESCRIPTION OF THE TRANSACTIONS
BACKGROUND OF THE TRANSACTIONS
The terms of the Merger Agreement resulted from arm's length negotiations
between representatives of GranCare, Manor Care and Vitalink.
During 1995 and continuing into 1996, management of GranCare did not believe
that the trading prices for GranCare Common Stock fully reflected the
intrinsic value of the Institutional Pharmacy Business operated through
GranCare's wholly-owned subsidiary, TeamCare. GranCare management believed
that investors in equity securities issued by companies that are primarily in
the skilled nursing and related lines of business focused on increasing
regulation and regulatory and reimbursement uncertainty, which resulted in
lower trading multiples being applied to the publicly traded equity securities
of such companies than the trading multiples that were applied to the publicly
traded equity securities of companies that were engaged primarily in the
institutional pharmacy business. GranCare management, after repeated attempts
at communicating to equity analysts the comparative value embedded in its
Institutional Pharmacy Business, concluded that shareholder value could be
enhanced if steps were taken to permit the market to focus on the intrinsic
value imbedded in the TeamCare Institutional Pharmacy Business in a manner
separate and distinct from the Skilled Nursing Business.
GranCare management believed that in connection with any separation of
TeamCare as a free-standing publicly traded company, it was important that
there exist a reasonably liquid trading market for the equity securities of
TeamCare. Furthermore, GranCare management believed that shareholder interests
would be best served if the total market capitalization of the equity
resulting from any such separation was of a sufficient size to make it likely
that independent research regarding the business and prospects of TeamCare
would be available. In late 1995, GranCare management began exploring
alternative means of realizing the value of its Institutional Pharmacy
Business, including a spinoff to shareholders, an initial public offering of
TeamCare capital stock or a merger with another institutional pharmacy
company. In connection therewith, GranCare senior management began to discuss
with representatives of PaineWebber a possible spinoff of the Institutional
Pharmacy Business.
In January 1996, as a result of preliminary contacts made by PaineWebber,
Gene E. Burleson and Everett W. Benton, the Chairman and Chief Executive
Officer and Executive Vice President and General Counsel, respectively, of
GranCare, met with Stewart Bainum, Jr. and James A. MacCutcheon, the Chairman
and Chief Executive Officer and Chief Financial Officer, respectively, of
Manor Care, in Washington, D.C. to discuss generally the possibility of
combining TeamCare with Manor Care's approximately 82.3% owned, publicly
traded institutional pharmacy subsidiary--Vitalink.
Additional meetings were held (i) on February 26, 1996 in Atlanta, Georgia
between Mr. MacCutcheon; Scott Macomber, the Chief Financial Officer of
Vitalink; Messrs. Burleson, Benton and Jerry A. Schneider, GranCare's Chief
Financial Officer; and representatives of PaineWebber and (ii) on March 21,
1996 in Silver Spring, Maryland between Mr. MacCutcheon and Joseph R. Buckley
(Executive Vice President--Manor Care) for Manor Care; Mr. Macomber for
Vitalink; Messrs. Burleson, Benton and Schneider for GranCare; and
representatives of PaineWebber. During each of these meetings, preliminary
consideration was given to the feasibility of a combination of Vitalink and
GranCare and various possible transaction structures. During such meetings,
Manor Care made it clear that it was unwilling to pursue a transaction unless
GranCare's other businesses were first separated from the Institutional
Pharmacy Business. In April 1996, the parties executed reciprocal
confidentiality agreements and commenced detailed due diligence investigations
regarding each other's business and financial matters. At the same time,
representatives of PaineWebber continued their financial due diligence and
their review of possible transaction structures and, in meetings in May in
Washington, D.C. and Atlanta, Georgia, Messrs. Burleson, Benton and Schneider
for GranCare; Messrs. Bainum, Buckley, MacCutcheon and Mr. Macomber for Manor
Care and Vitalink, representatives of PaineWebber, and counsel for each of
GranCare and Vitalink discussed the possibility of effecting the separation of
TeamCare pursuant to a combination of GranCare (following the spinoff of the
Skilled Nursing Business) and Vitalink in which Vitalink would be the
surviving corporation.
56
<PAGE>
Negotiations ensued during May and June 1996 principally between Messrs.
Bainum, Buckley and MacCutcheon for Manor Care; Mr. Macomber and Donna L.
DeNardo (President and Chief Operating Officer--Vitalink) for Vitalink;
Messrs. Burleson, Benton and Schneider for GranCare; and representatives of
PaineWebber; and representatives of each of Manor Care's, Vitalink's and
Grancare's respective outside legal counsel. During such negotiations the
respective values of TeamCare and Vitalink, the extent of the dilution of
Manor Care's ownership position in Vitalink that Manor Care would accept, the
allocation of certain items of GranCare indebtedness, transaction expenses and
the method of accomplishing the TeamCare separation in a manner that would be
tax-free to GranCare shareholders were discussed.
By late June 1996, GranCare's management decided to pursue the possibility
of distributing GranCare's various non-institutional pharmacy businesses in a
tax-free distribution. GranCare's management believed that the resulting
skilled nursing company would have a total market capitalization that would
provide the basis for a reasonably liquid trading market for such company's
publicly traded securities. Management of GranCare and management of Vitalink
also determined that numerous synergies would potentially result from the
combination of Vitalink and TeamCare and that the revenue base and resulting
market capitalization of the combined companies would be such that the
resulting company would be one of the leading institutional pharmacy
operations in the United States. In late June, GranCare also held preliminary
discussions with First Union National Bank and Chase Manhattan Bank regarding
the likely terms of a new credit facility for New GranCare.
In an extended meeting on July 1-2, 1996, the GranCare Board of Directors
discussed with management various possible transaction structures that would
have the effect of enabling GranCare shareholders to realize the intrinsic
value of the Institutional Pharmacy Business, including (i) a business
combination with Vitalink and (ii) an initial public offering of TeamCare
capital stock. At this meeting, PaineWebber discussed the strategic rationale
and possible structure and terms for a spinoff of GranCare's Skilled Nursing
Business and a business combination of GranCare's Institutional Pharmacy
Business with Vitalink, and another investment banking firm discussed a
proposal to manage an underwritten public offering of TeamCare's capital
stock. The latter possibility was rejected in light of a perceived weakening
in the market for initial public offerings and the resulting uncertainty with
respect to the valuation of TeamCare's capital stock. In addition, the
GranCare Board of Directors was concerned about a limited trading market for
the TeamCare capital stock and that the TeamCare capital stock would therefore
not trade at an acceptable level.
Following extended deliberation during the course of the July 1-2 meeting,
the GranCare Board of Directors authorized management to pursue negotiations
with Vitalink regarding a transaction pursuant to which GranCare, after the
spinoff of its Skilled Nursing Business, would merge with and into Vitalink
and GranCare shareholders would receive Vitalink Common Stock and common stock
of the entity that would conduct the Skilled Nursing Business in a tax-free
transaction. GranCare management was authorized to negotiate the definitive
terms of such transaction subject to certain requirements articulated by the
GranCare directors regarding the management structure of the resulting
combined company which the GranCare directors believed were necessary in the
context of a "merger of equals" transaction. Tentative approval of the
proposed terms of a credit facility in the aggregate amount of $300.0 million
with First Union National Bank of North Carolina acting as Administrative
Agent and The Chase Manhattan Bank acting as Syndication Agent (the "New
Credit Facility") for New GranCare was also given and GranCare management was
authorized to negotiate the definitive terms of such facility.
Following the July 1-2, 1996 meeting of GranCare's Board of Directors,
Messrs. Benton and Schneider for GranCare; Messrs. Buckley, and Wallace E.
Boston, Jr. (Senior Vice President--Mergers and Acquisitions--Manor Care) for
Manor Care; and Mr. Macomber as the principal representative of Vitalink,
along with their respective counsel and representatives of PaineWebber, began
to negotiate the definitive terms of the proposed transaction in a series of
meetings held in New York on July 10-11, July 22-24 and August 26-28, 1996 and
in Atlanta on August 20, 1996. While PaineWebber made no recommendation during
such negotiations regarding the amount of consideration to be paid in the
Merger, PaineWebber subsequently delivered its opinion to the GranCare Board
of Directors as referred to below. On September 3, 1996, the GranCare Board of
Directors received a detailed presentation of the legal and financial terms of
the proposed transaction from Messrs. Benton
57
<PAGE>
and Schneider and Powell, Goldstein, Frazer & Murphy, outside counsel to
GranCare. As part of these presentations, representatives of PaineWebber
reviewed their financial analysis of the proposed transaction and delivered
PaineWebber's opinion that the consideration to be received by the
shareholders of GranCare pursuant to the Distribution and the Merger taken
together, was fair, from a financial point of view, to the shareholders of
GranCare, each as described under the caption "Opinion of GranCare's Financial
Advisor" below.
After reviewing the drafts of the principal agreements that had been
prepared and receiving such presentations, the outside directors of GranCare
(Charles M. Blalack, Antoinette Hubenette, M.D., Joel S. Kanter, Ronald G.
Kenny, Robert L. Parker, William G. Petty, Jr., Edward V. Regan and Gary U.
Rolle) dismissed the GranCare management representatives participating in the
meeting, as well as Mr. Burleson, and met in executive session with
representatives of Powell Goldstein, and PaineWebber to discuss the proposed
Transactions, management considerations regarding New GranCare and Vitalink
and the interests of members' of GranCare management in the proposed
Transactions, other than their interests as GranCare shareholders generally,
which may cause potential conflicts of interest. See "--Interests of Certain
Persons in the Transactions." In connection therewith, the GranCare Board of
Directors confirmed that GranCare management did not intend to recommend any
material changes to management compensation arrangements for New GranCare
management following completion of the Distribution. In addition, the GranCare
Board of Directors confirmed that the maximum amount that could become payable
pursuant to management incentive plans and employment agreements upon the
occurrence of a change of control which would occur upon consummation of the
proposed Transactions was approximately $14.0 million, of which approximately
$7.0 million was the maximum amount payable pursuant to change in control
provisions in executive officer employment agreements. However, the outside
directors of GranCare also confirmed that any person who was a party to an
employment agreement would waive his or her rights to any payments thereunder
as a condition to obtaining employment with New GranCare or Vitalink following
the completion of the Transactions and it was expected that this would
significantly reduce the amounts payable by GranCare pursuant to such
agreements. Following completion of this discussion, Mr. Burleson and various
GranCare management representatives rejoined the meeting and additional
discussion ensued regarding management and related issues.
Upon completion of this discussion, the GranCare directors, having concluded
that their previously articulated requirements regarding the management
structure of Vitalink following the Merger had been fulfilled, unanimously
approved the Merger and the Distribution and the forms of the various
principal agreements that had been presented to the directors for
consideration in connection therewith. The GranCare Board of Directors also
authorized GranCare's appropriate officers to execute and deliver the Merger
Agreement and the Distribution Agreement.
THE DISTRIBUTION AND THE MERGER
Following the approval and adoption of the Distribution Proposal and Merger
Proposal by the requisite vote of the shareholders of GranCare and the
satisfaction or waiver of the other conditions to the Merger, (i) on the
Distribution Date, GranCare shall effect the Distribution and (ii) GranCare
will be merged with and into Vitalink, with Vitalink continuing as the
surviving corporation. The Merger will become effective upon (i) the filing of
the certificate of satisfaction with the Franchise Tax Board in accordance
with the provisions of Section 1103 of the CGCL and the Bank and Corporation
Tax Law; (ii) the filing of a certified copy of the Merger Agreement with the
Secretary of State of the State of California in accordance with Section 1108
of the CGCL; and (iii) the filing with the Secretary of State of the State of
Delaware a duly executed certificate of merger (the "Certificate of Merger"),
in the form required by and in accordance with the DGCL.
GRANCARE'S REASONS FOR THE MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF
GRANCARE
The Board of Directors of GranCare believes the Transactions constitute a
significant strategic opportunity for both GranCare's Institutional Pharmacy
Business and Skilled Nursing Business. The Board of Directors of GranCare
believes that the terms of the Transactions are fair to and in the best
interests of GranCare and its shareholders. In reaching this determination,
the GranCare Board of Directors consulted with GranCare
58
<PAGE>
management as well as financial and legal advisors, and considered the
following factors which were viewed as material:
(i) The combined pharmacy company resulting from the Merger is expected
to benefit from several operational efficiencies including, but not limited
to (a) greater purchasing power with distributors and manufacturers, (b)
elimination of duplicate administrative and accounting functions, (c)
consolidation of local pharmacy operations where service areas overlap and
(d) the integration of information systems and related personnel.
(ii) The Surviving Corporation (as defined in the Merger Agreement) will
possess greater managerial, operational and financial resources than
TeamCare. As a result of its greater financial resources, the Surviving
Corporation may be expected to have enhanced access to capital on more
favorable terms than were previously available to TeamCare.
(iii) The size and market capitalization of the Surviving Corporation is
expected to increase shareholder liquidity as well as the market visibility
of the combined pharmacy operations.
(iv) Separating GranCare's Institutional Pharmacy Business from
GranCare's Skilled Nursing Business will enhance the ability of GranCare
shareholders to participate in the pharmacy industry's rapid consolidation
through an accelerated acquisition program. The institutional pharmacy
business currently is highly fragmented, but the few large industry
participants are acquiring and merging with smaller, independent pharmacy
operators. GranCare has historically found that some sellers of independent
pharmacies prefer, for various reasons, to combine with a pure pharmacy
company rather than a full-spectrum post-acute care company, and GranCare
management believes that sellers of small, independent pharmacy operations
may be more willing to accept as consideration for the purchase of their
businesses equity in a publicly traded pure pharmacy company than equity in
a predominantly long-term care company with a pharmacy component.
(v) The Surviving Corporation will have broader geographic coverage than
TeamCare, which is expected to enhance the ability of the Surviving
Corporation to serve customers with geographically diverse operations and
compete in an increasingly managed care-oriented marketplace.
(vi) The expanded customer base of the Surviving Corporation is expected
to increase the potential return from investments GranCare has made in the
development of clinical information systems, pharmacy formularies and its
group purchasing organization. A substantial amount of the investment in
these development projects, which expand TeamCare's (and, following the
Merger, Vitalink's) product and service offerings, has already been made.
As a result, future returns are expected to exhibit the benefits of
economies of scale.
(vii) Vitalink has invested in such programs as disease state management
protocols and patient outcome monitoring designed to help customers deliver
the most appropriate medical treatment to their patients and optimize costs
within contracted arrangements with managed care providers. The Merger will
allow the combined pharmacy to offer these benefits to TeamCare's customers
while deriving financial benefit from any related cost or marketing
advantages.
(viii) The Merger structure facilitates both a tax-free realization of
the value of GranCare's Institutional Pharmacy Business and an approximate
$86.3 million reduction in the outstanding debt remaining with New
GranCare.
(ix) The Transactions allow GranCare shareholders to receive fair value
for GranCare's Institutional Pharmacy Business and to retain their
investment in both the Institutional Pharmacy Business (through Vitalink)
and the Skilled Nursing Business to be conducted by New GranCare.
In approving the Merger Agreement, the Distribution Agreement and the
transactions contemplated thereby, and in recommending that GranCare's
shareholders approve the Merger and the Distribution, the GranCare Board of
Directors also considered, the proposed structure of the Merger and provisions
relating to corporate governance and ownership control of Vitalink following
the Merger and determined that the provisions in the Shareholders Agreement
regarding the obligation of Manor Care to vote its shares of Vitalink Common
Stock in
59
<PAGE>
favor of the election of the GranCare Nominees was sufficient, when coupled
with the restrictions on Manor Care's ability to dispose of its Vitalink
Common Stock, to ensure that the interests of GranCare's shareholders
following the Merger and the Distribution will be protected. The allocation of
the consideration received from Vitalink was primarily a function of the
amount of dilution Manor Care was willing to incur with respect to its equity
interest in Vitalink. Once the general value of TeamCare was agreed upon by
the parties, the difference in the agreed upon value of TeamCare and the value
of the maximum number of shares of Vitalink Common Stock that Manor Care was
willing to permit Vitalink to issue in the Merger was compensated for by the
assumption of GranCare indebtedness by Vitalink as a consequence of the
Merger. As a result, the Board of Directors concluded that the amount of
Vitalink Common Stock to be received in the Merger was fair given the then
prevailing market price of Vitalink Common Stock when taken together with the
amount of GranCare indebtedness to be assumed by Vitalink as a consequence of
the Merger. The GranCare Board of Directors also determined that the
consideration to be paid in the Merger, as a multiple of EBITDA of the
Institutional Pharmacy Business, was comparable to multiples of EBITDA
associated with certain comparable transactions deemed to be relevant. The
GranCare directors also determined that the conditions under which the Merger
Agreement may be terminated and fees payable upon such termination would not
preclude a third party acquiror from submitting a competing offer that might
provide more value to GranCare's shareholders and that the amount of fees
payable upon termination were, on a per share basis, not inconsistent with the
termination fees that were applicable in comparable transactions. Furthermore,
the GranCare directors also believed that the reciprocal nature of the
termination provisions was appropriate, given the structure of the Merger as a
merger of equals. In the view of the GranCare Board of Directors, the
PaineWebber fairness opinion, to the effect that the consideration to be
received by the GranCare shareholders pursuant to the Distribution and the
Merger, taken as a whole, is fair to such holders from a financial point of
view, further supports the determination by the GranCare Board of Directors
that the consideration to be received by GranCare shareholders is fair. The
GranCare Board of Directors may elect, but is not required, to seek an updated
fairness opinion from PaineWebber. It is not presently contemplated that
GranCare will seek an updated fairness opinion in the absence of unanticipated
material developments relating to the Skilled Nursing Business, the
Institutional Pharmacy Business, or Vitalink's business or material revisions
to the financial terms of the Merger Agreement. In this regard, GranCare
believes that the fact that no potential acquiror has contacted GranCare
subsequent to the public announcement of the Transactions and made an offer to
acquire the Institutional Pharmacy Business indicates that an updated fairness
opinion is unnecessary.
The GranCare Board of Directors considered a number of potentially negative
factors in its deliberations concerning the Transactions. It was noted that a
substantial amount of goodwill would be created by the Merger which would have
a dilutive effect on Vitalink's earnings per share. The GranCare directors
concluded, however, that the effect of the additional goodwill created as a
consequence of the Merger was offset by the operating synergies and other
benefits that would be generated by the Transactions noted in subparagraphs
(i), (ii), (v), (vi) and (vii) above. Furthermore, the GranCare directors were
cognizant that goodwill was purely an accounting concept and, as a result,
would not have a tangible negative effect on operations. The GranCare Board of
Directors also viewed Manor Care's substantial control of Vitalink to be a
negative factor but concluded that the provisions in the Shareholders
Agreement pertaining to the obligation of Manor Care to vote its shares of
Vitalink Common Stock in favor of the election of the GranCare Nominees and
the limitations on Manor Care's ability to dispose of its Vitalink Common
Stock, together with the appointment of Gene E. Burleson as Vitalink's Chief
Executive Officer, appropriately mitigated any risks with respect to Manor
Care's control of Vitalink. The GranCare Board of directors also considered
the matters discussed under "--Interests of Certain Persons in the
Transactions" and determined such interests did not significantly affect the
Board's recommendation since such interests largely related to the vesting of
outstanding options or rights under existing incentive plans and employment
agreements which were not expected to be material in amount, rather than
interests or affiliations with Vitalink. Similarly, the GranCare directors
confirmed that substantially all of the members of GranCare's management team
(other than Messrs. Burleson, Reynolds and Finney) presently intended to
continue employment with New GranCare. As a condition to such employment, each
GranCare officer who was a party to an employment agreement would waive his or
her rights to any benefits under such agreement thereby reducing significantly
the amount of payments that GranCare would be required to make upon a change
of control such as
60
<PAGE>
would occur upon completion of the Transactions. In addition, the GranCare
Board of Directors determined that Mr. Burleson's employment agreement with
Vitalink did not create any significant conflicts of interest since the terms
of such agreement were substantially similar to the terms of his existing
employment agreement with Grancare and since Mr. Burleson had agreed to waive
severance benefits pursuant to his existing employment agreement with GranCare
in connection with negotiating his agreement with Vitalink. Finally, the
GranCare directors considered the risks associated with operating the Skilled
Nursing Business as a separate company, primarily the impact of reduced size
and market capitalization on New GranCare's access to funding. The GranCare
directors concluded that New GranCare would still be of a sufficient size to
have adequate access to capital on competitive terms, which conclusion is
supported by New GranCare's ability to obtain the New Credit Facility. The
GranCare Board of Directors also concluded that the spin-off would permit New
GranCare management to focus on the Skilled Nursing Business and would
eliminate the operational conflict of managing two different businesses.
The foregoing discussion of the information and factors considered and given
weight by the GranCare Board of Directors is not intended to be exhaustive but
includes the material factors considered by the GranCare Board of Directors.
In addition, in reaching the determination to approve and recommend the
Transactions, in view of the wide variety of factors considered in connection
with its evaluation of the proposed Transactions, the GranCare Board of
Directors did not find it practical to and did not quantify or otherwise
attempt to assign any relative or specific weights to the foregoing factors,
and individual directors may have given different weights to different
factors.
THE BOARD OF DIRECTORS OF GRANCARE UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF
GRANCARE COMMON STOCK THAT THE DISTRIBUTION AND MERGER AND THE TRANSACTIONS
CONTEMPLATED THEREBY BE APPROVED.
OPINION OF GRANCARE'S FINANCIAL ADVISOR
PaineWebber has delivered its written opinion to the Board of Directors of
GranCare (the "Opinion"), to the effect that, as of September 3, 1996, and
based on its review and assumptions and subject to the limitations summarized
and set forth therein, the consideration to be received by the holders of
GranCare Common Stock pursuant to the Distribution and the Merger, taken
together, is fair to such holders from a financial point of view.
THE FULL TEXT OF THE OPINION OF PAINEWEBBER, DATED SEPTEMBER 3, 1996, WHICH
SETS FORTH THE ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX D TO THIS PROXY
STATEMENT/PROSPECTUS. GRANCARE'S SHAREHOLDERS ARE URGED TO READ SUCH OPINION
CAREFULLY AND IN ITS ENTIRETY. THE SUMMARY OF THE PAINEWEBBER OPINION SET
FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
GranCare retained PaineWebber as its exclusive financial advisor in
connection with the Distribution and the Merger. In connection with such
engagement, GranCare requested PaineWebber to render an opinion as to whether
the consideration to be received by the holders of GranCare Common Stock
pursuant to the Distribution and the Merger, taken together, is fair to such
holders from a financial point of view.
The Opinion was directed to the Board of Directors of GranCare and does not
constitute a recommendation to any holder of GranCare Common Stock as to how
any such shareholder should vote with respect to the Merger and Distribution.
In arriving at its Opinion, PaineWebber, among other things: (i) reviewed,
among other public information, GranCare's Annual Reports, Forms 10-K and
related financial information for the three fiscal years ended December 31,
1995 and GranCare's Form 10-Q and the related unaudited financial information
for the quarters ended March 31, 1996 and June 30, 1996; (ii) reviewed, among
other public information, Vitalink's Annual Reports, Forms 10-K and related
financial information for the three fiscal years ended May 31, 1996; (iii)
reviewed certain information, including financial forecasts, relating to the
business, earnings, cash flow, assets
61
<PAGE>
and prospects of each of GranCare and Vitalink, furnished to PaineWebber by
GranCare and Vitalink, respectively; (iv) conducted discussions with members
of senior management of GranCare and Vitalink concerning their respective
businesses and prospects; (v) reviewed the historical market prices and
trading activity of the GranCare Common Stock and the Vitalink Common Stock
and compared such prices and trading histories with those of certain publicly
traded companies which PaineWebber deemed to be relevant; (vi) compared the
financial position and operating results of GranCare and Vitalink with that of
certain publicly traded companies which PaineWebber deemed to be relevant;
(vii) compared the financial terms of the Merger with the financial terms of
certain other business combinations which PaineWebber deemed to be relevant;
(viii) considered the potential pro forma effects of the Merger and the
Distribution on Vitalink's and New GranCare's respective projected earnings
per share and capitalization; (ix) reviewed drafts of the Distribution
Agreement and Merger Agreement, and other ancillary agreements as PaineWebber
deemed relevant, dated August 28, 1996; and (x) reviewed such other financial
studies and analyses and performed such other investigations and took into
account such other matters as PaineWebber deemed necessary including its
assessment of regulatory, general economic, market and monetary conditions.
In preparing the Opinion, PaineWebber relied on the accuracy and
completeness of all information that was publicly available, supplied or
otherwise communicated to PaineWebber by GranCare and Vitalink and PaineWebber
did not assume any responsibility to independently verify such information.
PaineWebber assumed that the financial forecasts examined by it were
reasonably prepared on bases reflecting the best currently available estimates
and good faith judgments of the management of GranCare, New GranCare and
Vitalink as to the future performance of New GranCare and Vitalink,
respectively. PaineWebber also relied upon assurances of the management of
GranCare and Vitalink that they were unaware of any facts that would make the
information or financial forecasts provided to PaineWebber incomplete or
misleading. PaineWebber also assumed, with the consent of the Board of
Directors of GranCare, that (i) the Merger will be accounted for under the
purchase method of accounting; and (ii) any material liabilities (contingent
or otherwise, known or unknown) of GranCare and Vitalink were as set forth in
the consolidated financial statements of GranCare and Vitalink, respectively.
PaineWebber also assumed that the transaction described in the Merger
Agreement and the Distribution Agreement would be consummated on the terms set
forth therein without any waiver and that there would not be any material
taxes payable by GranCare as a result of any such transactions. PaineWebber
did not make an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of GranCare or Vitalink, nor was
PaineWebber furnished with any such evaluations or appraisals. The Opinion is
based upon regulatory, economic, monetary and market conditions existing on
the date thereof.
The Opinion does not address the relative merits of the Merger, the
Distribution and any other transactions or business strategies considered by
the Board of Directors of GranCare as alternatives to the Merger and
Distribution or the decision of the Board of Directors of GranCare to proceed
with the Merger and Distribution. PaineWebber expressed no opinion as to the
price or trading range at which shares of Vitalink Common Stock or New
GranCare Common Stock will trade after consummation of the Merger and
Distribution. PaineWebber was not requested to solicit, and did not solicit,
potential proposals from any third parties for the acquisition of GranCare's
Institutional Pharmacy Business.
The following paragraphs summarize the material analyses performed by
PaineWebber in arriving at the Opinion and was provided by PaineWebber for
inclusion herein.
Skilled Nursing Facility Business--New GranCare
Stock Trading History--PaineWebber reviewed the history of the trading
prices and volume for GranCare Common Stock during the one-year period ending
on August 29, 1996, separately and in relation to the market prices of (i) the
Standard & Poor's 500 Index (the "S&P 500"), and (ii) an index of skilled
nursing facility companies (the "Skilled Nursing Facility Index") consisting
of the following companies: Arbor Health Care Company; Beverly Enterprises,
Inc.; Genesis Health Ventures, Inc.; Health Care and Retirement Corp.;
Horizon/CMS HealthCare Corp.; Horizon Mental Health Management, Inc.;
Integrated Health Services, Inc.; Living Centers of America, Inc.; Manor Care,
Inc.; Mariner Health Group, Inc.; The Multicare Companies, Inc.;
62
<PAGE>
Regency Health Services, Inc.; Retirement Care Associates, Inc.; Sun
Healthcare Group, Inc.; Theratx, Inc. and Vencor, Inc. Such review indicated
that during such period, the GranCare Common Stock performed comparably to the
Skilled Nursing Facility Index but underperformed the S&P 500.
Selected Comparable Public Company Analysis--Using publicly available
information, PaineWebber compared selected projected financial and operating
data of New GranCare to the corresponding data of a group of publicly traded
companies that PaineWebber deemed to be similar. These companies included:
Beverly Enterprises, Inc.; Living Centers of America, Inc.; Regency Health
Services, Inc.; Retirement Care Associates, Inc. and Vencor, Inc.
(collectively the "Comparable Skilled Nursing Facility Companies").
PaineWebber calculated multiples of total enterprise value (market value plus
total debt less cash and cash equivalents) to latest twelve months ("LTM")
earnings before interest, taxes, depreciation and amortization ("EBITDA").
PaineWebber also calculated multiples of estimated December 31, 1996 and
December 31, 1997 earnings per share ("EPS") (adjusted to reflect a December
year end) based on information provided by the Institutional Brokers Estimate
System ("I/B/E/S"). The low, high and median multiples of LTM EBITDA were
4.7x, 9.7x (excluding Retirement Care Associate's 11.6x EBITDA) and 7.8x,
respectively. The low, high and median multiples of estimated December 31,
1996 EPS were 10.0x, 17.1x and 13.8x, respectively. The low, high and median
multiples of estimated December 1997 EPS were 8.0x, 14.0x and 12.1x,
respectively.
PaineWebber applied the low, high and median multiples of the Comparable
Skilled Nursing Facility Companies to New GranCare's estimated December 31,
1996 EBITDA and estimated December 31, 1996 and December 31, 1997 EPS (based
on GranCare's management estimates) and estimated a range of implied fully
diluted equity values per share. PaineWebber noted that on an EBITDA basis,
the low and high multiples of 4.7x and 9.7x (excluding Retirement Care
Associates' 11.6x EBITDA multiple) of the Comparable Skilled Nursing Facility
Companies produced a range of implied fully diluted equity values per share of
$4.58 to $18.92, with the median multiple of 7.8x implying a value of $13.43
per share. On an estimated 1996 EPS basis, the low and high multiples of 10.0x
and 17.1x produced a range of implied fully diluted equity values per share of
$7.70 to $13.17, with a median multiple of 13.8x implying a value of $10.63
per share. On an estimated 1997 EPS basis, the low and high multiples of 8.0x
and 14.0x produced a range of implied fully diluted equity values per share of
$7.52 to $13.16, with a median multiple of 12.1x implying a value of $11.37
per share.
Discounted Cash Flow Analysis--PaineWebber performed a discounted cash flow
analysis of the projected financial performance of New GranCare based upon a
five-year forecast for New GranCare provided by GranCare's management. The
discounted cash flow analysis estimated the discounted present value of the
unleveraged after-tax cash flows generated over the five-year period and then
added a terminal value based upon two methodologies: (i) a range of EBITDA
multiples from 7.4x to 8.0x and (ii) a range of perpetual growth rates from
1.0% to 4.0%. The unleveraged after-tax cash flows and terminal value were
discounted using a range of discount rates from 9.50% to 10.25%. Based on this
analysis, the derived hypothetical fully diluted equity values on an EBITDA
exit multiple methodology basis was estimated ranging from $15.50 to $16.50
per share of GranCare Common Stock, and the hypothetical fully diluted equity
values on a perpetual growth methodology basis was estimated ranging from
$8.25 to $11.25 per share of GranCare Common Stock.
The Pharmacy Business--TeamCare
Stock Trading History--PaineWebber reviewed the history of the trading
prices and volume for GranCare Common Stock and Vitalink Common Stock, both
separately and in relation to the prices of (i) the S&P 500 during the one-
year period ending August 29, 1996 and (ii) an index for GranCare consisting
of NCS Healthcare, Inc. ("NCS"), Omnicare, Inc. ("Omnicare") and Vitalink
during the period commencing February 14, 1996 and ending August 29, 1996, and
(iii) an index for Vitalink consisting of NCS and Omnicare during the period
commencing February 14, 1996 and ending August 29, 1996. Such reviews
indicated that during the respective periods referred to in the immediately
preceding sentence, (i) the GranCare Common Stock underperformed the S&P 500
and the performance of NCS but outperformed Omnicare and Vitalink, (ii) the
Vitalink Common Stock outperformed the S&P 500 and the performance of Omnicare
but underperformed NCS.
63
<PAGE>
Comparable Public Company Analysis--PaineWebber noted that GranCare's stock
price was $19.25 and $17.88 based on its August 29, 1996 closing price and on
a 120 day average as of August 29, 1996, respectively. PaineWebber subtracted
the value range implied for New GranCare under the "Selected Comparable Public
Company Analysis" referred to above from the GranCare stock price to calculate
the implied TeamCare market valuation ("Implied TeamCare Market Valuation").
The Implied TeamCare Market Valuation produces a range of values from $8.25 to
$11.25 per GranCare share based on GranCare's August 29, 1996 closing price of
$19.25 per share, and values of $6.88 to $9.88 per share of GranCare Common
Stock based on its 120 day average closing price of $17.88 per share. Using
the Exchange Ratio of 0.478 and Vitalink's closing stock price per share on
August 29, 1996 of $22.88 and its stock price based on a 120 day average as of
August 29, 1996 of $23.03, then the implied value of TeamCare stock would
range from $10.93 to $11.01 per share. Comparing these results to the Implied
TeamCare Market Valuation yields a (discount) or premium range of (2.8)% to
32.5%, based on stock prices as of August 29, 1996, and a premium range of
11.4% to 60.0%, based on the 120 average as of August 29, 1996.
PaineWebber noted that based on TeamCare's LTM results as of May 31, 1996
the Transactions, if consummated on this date, would imply multiples of total
enterprise value to revenue, EBITDA and EBIT of 1.65x, 13.3x and 16.6x,
respectively. Further, it would imply multiples of equity value to LTM net
income, estimated December 31, 1996 net income and estimated December 31, 1997
net income of 21.9x, 21.2x and 16.7x, respectively.
Discounted Cash Flow Analysis--PaineWebber performed a discounted cash flow
analysis of the projected financial performance of TeamCare and compared it to
the discounted cash flow analysis of the projected financial performance of
the combined Vitalink/TeamCare, based upon the Exchange Ratio of 0.478. Such
projected financial performances were based upon five-year forecasts for
TeamCare and Vitalink provided by GranCare's and Vitalink's management's,
respectively. For TeamCare, on a stand-alone basis, the discounted cash flow
analysis estimated the discounted present value of the unleveraged after-tax
cash flows generated over the five-year period and then added a terminal value
based upon two methodologies: (i) a range of EBITDA multiples from 11.0x to
12.5x and (ii) a range of perpetual growth rates from 1.0% to 4.0%. The
unleveraged after-tax cash flows and terminal value were discounted using a
range of discount rates from 11.25% to 12.00%. Based on this analysis, the
derived hypothetical fully diluted equity values on an EBITDA exit multiple
methodology basis was estimated from $18.50 to $19.50 per share of GranCare
Common Stock and the hypothetical fully diluted equity values on a perpetual
growth methodology basis was estimated from $7.50 to $8.75 per share of
GranCare Common Stock. For the combined Vitalink/TeamCare similar
methodologies were used: (i) a range of EBITDA multiples from 11.0x to 12.5x
and (ii) a range of perpetual growth rates from 1.0% to 4.0%. The unleveraged
after-tax cash flows and terminal value were discounted using a range of
discount rates from 12.25% to 13.00%. Based on this analysis, the derived
hypothetical fully diluted equity values on an EBITDA exit multiple
methodology basis was estimated ranging from $74.90 to $75.10 per share of
Vitalink Common Stock and the hypothetical fully diluted equity values on a
perpetual growth methodology basis of $29.00 to $32.50 per share of Vitalink
Common Stock. Using the Exchange Ratio of 0.478 resulted in a range of
hypothetical fully diluted equity values on an EBITDA exit multiple
methodology basis of approximately $35.80 to $35.90 per share of GranCare
Common Stock and on a perpetual growth basis methodology of approximately
$13.80 to $15.50 per share of GranCare Common Stock.
Contribution Analysis--PaineWebber analyzed TeamCare's and Vitalink's
relative contribution to the combined entity with respect to historical net
income and EBITDA. On a historical basis for December 31, 1993, 1994, 1995 and
the LTM period ended May 31, 1996 TeamCare would have contributed 51.9%,
49.1%, 41.8% and 43.8%, respectively, of the pro forma combined entity's net
income. On an EBITDA basis the relative contribution for December 31, 1993,
1994, 1995 and the LTM period ended May 31, 1996 was 55.1%, 50.6%, 45.2%,
48.3%, respectively.
Pro Forma Dilution Analysis--PaineWebber performed an analysis of the
potential pro forma effect of the Merger on Vitalink's projected EPS for the
fiscal year ending May 31, 1997. In performing this analysis, PaineWebber
assumed (i) the Merger will provide 0.478 of a share of Vitalink Common Stock
in exchange for
64
<PAGE>
each share of GranCare Common Stock; (ii) the Merger would be accounted for
under the purchase method of accounting, (iii) GranCare and Vitalink
management's estimate of $10.0 million in cost savings would be achieved and
(iv) that the Merger was consummated pro forma May 31, 1996. PaineWebber
combined the projected operating results of Vitalink (provided by Vitalink
management) with the corresponding projected operating results of TeamCare
(provided by GranCare management) to arrive at the combined company projected
net income. The projected net income was then divided by the pro forma shares
outstanding to arrive at a combined company estimated EPS. PaineWebber then
compared the combined company EPS to Vitalink's projected stand-alone EPS
(provided by Vitalink management) to determine the pro forma impact on
Vitalink's EPS.
The preparation of a fairness opinion involves various determinations as to
the most appropriate and relevant quantitative methods of financial analyses
and the application of those methods to the particular circumstances and,
therefore, such an opinion is not readily susceptible to partial analysis or
summary description. Accordingly, PaineWebber believes that its analysis must
be considered as a whole and that considering any portion of such analysis and
of the factors considered, without considering all analyses and factors, could
create a misleading or incomplete view of the process underlying the Opinion.
In its analyses, PaineWebber made numerous assumptions with respect to
industry performance, general business and economic conditions and other
matters, many of which are beyond the control of GranCare and Vitalink. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses
relating to the value of businesses do not purport to be appraisals or to
reflect the prices at which businesses may actually be sold. Accordingly, such
analyses and estimates are inherently subject to substantial uncertainty and
none of GranCare, Vitalink, PaineWebber assume responsibility for the accuracy
of such analyses and estimates.
PaineWebber's analysis of New GranCare and TeamCare and implied per share
values for the businesses using various analytic techniques do not constitute
an opinion or estimate as to the value of the shares of New GranCare and
Vitalink Common Stock, or the market value of the shares of New GranCare and
Vitalink as of the date of the Merger and Distribution or any other date.
PaineWebber noted that the actual market value of the Vitalink and New
GranCare Common Stock as of any date will likely depend on, and fluctuate
based on the financial condition, results and prospects for Vitalink, New
GranCare, general industry, market and economic conditions, and other factors
that generally influence the market prices of securities. PaineWebber also
noted that trading in shares of Vitalink and New GranCare for a period
following the completion of the Merger and Distribution is likely to be
characterized by a redistribution of the shares of Vitalink and New GranCare
from former GranCare shareholders (including those who invested in whole or in
part in GranCare Common Stock based on the Institutional Pharmacy Business or
Skilled Nursing Business) to other investors and that, accordingly, during
such period the shares of Vitalink Common Stock and New GranCare Common Stock
are likely to trade at prices below those at which they would trade on a
fully-distributed basis. PaineWebber also noted that any estimate of the
market value of the securities is subject to uncertainties and contingencies,
all of which are difficult to predict and are beyond its control.
GranCare selected PaineWebber to be its financial advisor in connection with
the Merger and Distribution because PaineWebber is a prominent investment
banking and financial advisory firm with experience in the valuation of
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, secondary distributions of securities, private
placements and valuations for corporate purposes.
Pursuant to an engagement letter between GranCare and PaineWebber dated
August 28, 1996 PaineWebber was paid a retention fee of $500,000 and a fee of
$200,000 for the delivery of its written Opinion on September 3, 1996. In
addition, PaineWebber will receive a transaction fee, payable upon completion
of the Merger and Distribution, equal to $4,000,000 and will be reimbursed for
certain of its related expenses. Any fee that has been paid prior to the
consummation of the Merger and Distribution, including the $700,000 of fees
noted above, will be credited against the transaction fee. PaineWebber will
not be entitled to any additional fees or compensation in the event the Merger
and Distribution are not approved or otherwise consummated. GranCare also
agreed to indemnify PaineWebber, its affiliates and each of its directors,
officers, agents and employees and
65
<PAGE>
each person, if any, controlling PaineWebber or any of its affiliates against
certain liabilities, including liabilities under federal securities laws.
In the past, PaineWebber and its affiliates have provided financial advisory
services and financing services for GranCare, and have received fees for the
rendering of these services. PaineWebber is also serving as dealer manager in
connection with the Tender Offer. PaineWebber may provide financial advisory
services to, and may act as underwriter or placement agent for, the combined
company or New GranCare in the future. In the ordinary course of PaineWebber's
business, PaineWebber may actively trade the securities of GranCare and
Vitalink for its own account and for the accounts of its customers and,
accordingly, may at any time hold long or short positions in such securities.
VITALINK'S REASONS FOR THE MERGER
The Board of Directors of Vitalink believes that the terms of the Merger are
consistent with, and in furtherance of, the long-term business strategies of
Vitalink, and are fair to and in the best interests of Vitalink and its
stockholders. In reaching this decision Vitalink's Board of Directors heard
reports from management regarding the Merger and its decision was based in
large part upon balancing the risks and benefits of the Merger. The Vitalink
Board of Directors has unanimously approved the Merger. Additionally, Manor
Care, as owner of approximately 82.3% of the voting power of Vitalink Common
Stock, will vote to approve the Merger on January , 1997 and pursuant to the
DGCL no other approval of Vitalink's stockholders is necessary to effect the
Merger.
In it deliberations and in making its determination, the Vitalink Board of
Directors considered a number of factors, the following of which were
material:
(i) The Vitalink Board of Directors' knowledge of the business,
operations, properties, assets, competitive positions, financial condition,
operating results, share prices, strategic objectives and prospects of
Vitalink and GranCare;
(ii) The Vitalink Board of Directors' evaluation of GranCare's
Institutional Pharmacy Business, including the properties and future
prospects of such businesses;
(iii) The Vitalink Board of Directors' belief that competition in the
institutional pharmacy business is leading increasingly to consolidation of
such businesses and that institutional pharmacies must be able to compete
in broader geographic regions and have the resources to support such
geographic expansion. The Merger will result in geographic expansion of
Vitalink by increasing the number of markets serviced by Vitalink;
(iv) The Vitalink Board of Directors' belief that the combination of
Vitalink and GranCare's Institutional Pharmacy Business would result in a
major institutional pharmacy business and that the combined companies would
create operational synergies in addition to increasing Vitalink's market
share;
(v) The proposed structure of the transaction as a "merger of equals" and
the other terms and conditions of Merger Agreement and the related
agreements;
(vi) The fact that under certain circumstances Vitalink could be required
to pay termination fees to GranCare or entitled to receive such termination
fees from GranCare pursuant to the terms of the Merger Agreement. See "The
Merger Agreement--Termination";
(vii) The Vitalink Board of Directors' belief that the combination of
Vitalink and the Institutional Pharmacy Business of GranCare will give
Vitalink greater resources and distribution capacity to more effectively
service its customers and that such customers will benefit by receiving
more services due, in part, to the increased financial, human and clinical
information resources which will be available to develop new and innovative
programs to help its customers deliver cost effective care to their
patients. This increased distribution capacity will make Vitalink more
accessible to its customers and, therefore, more responsive to their needs;
and
66
<PAGE>
(viii) The Board of Directors' belief that Vitalink will gain greater
appeal in the capital markets and that the liquidity of the Vitalink Common
Stock will be enhanced. The approximately 11.6 million new shares of
Vitalink Common Stock which will be issued to the GranCare shareholders
will significantly increase the liquidity of Vitalink's stock and will
decrease Manor Care's 82.3% ownership to approximately 45%.
The Vitalink Board of Directors also evaluated the importance of (i)
completing the Transactions on a tax-free basis; (ii) the importance of
eliminating the related party discount that Vitalink is required to take with
respect to the profits on Medicare business transacted with Manor Care; (iii)
achieving overhead savings on a timely basis subsequent to the Merger in order
to avoid earnings dilution; and (iv) the importance of GranCare's contract to
service approximately 8,000 beds for the State of New Jersey.
In the deliberations, Vitalink's Board of Directors and management noted a
combination could have certain possible adverse effects on Vitalink's
stockholders in the event that (i) the two companies fail to integrate well or
achieve synergies sufficient to avoid earnings dilution; (ii) Vitalink, as a
more leveraged company, operates with reduced flexibility and allocates a
significant portion of its cash flow to debt service; (iii) the loss of the
relationship and certain contracts Vitalink had with Manor Care results in
increased operating expenses for Vitalink; (iv) Vitalink fails to eliminate
the related party discount that Vitalink is required to take with respect to
profits on the Medicare business transacted with Manor Care and (v) the
Transactions are not consummated on a tax-free basis. After considering the
possibility of such adverse effects and the possible benefits of the Merger,
the Vitalink Board of Director's determined the Merger was in the best
interest of Vitalink's stockholders.
The foregoing discussion of the information and factors considered and given
weight by Vitalink's Board of Directors is not intended to be exhaustive. In
view of the variety of factors considered in connection with its evaluation of
the Merger, the Vitalink Board of Directors did not find it practicable to,
and did not, quantify or otherwise assign relative weights to the specific
factors considered in reaching its determination. In addition, individual
members of the Vitalink Directors may have given different weights to
different factors.
OPINION OF VITALINK'S FINANCIAL ADVISOR
Vitalink engaged Chase as financial advisor in connection with the proposed
merger of Vitalink with the Institutional Pharmacy Business of GranCare. On
October 2, 1996, Chase delivered its written opinion to the Vitalink Board
that, as of such date and subject to the assumptions made, general procedures
followed, factors considered and limitations on the review undertaken set
forth therein, the Exchange Ratio is fair, from a financial point of view, to
Vitalink.
THE FULL TEXT OF THE CHASE OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY CHASE IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX E AND IS
INCORPORATED HEREIN BY REFERENCE. THE SUMMARY OF THE OPINION SET FORTH BELOW
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE CHASE
OPINION. HOLDERS OF VITALINK COMMON STOCK ARE URGED TO READ THE CHASE OPINION
CAREFULLY AND IN ITS ENTIRETY. TERMS DEFINED HEREIN SHALL HAVE SUCH MEANING
SOLELY FOR PURPOSES OF THIS SUMMARY OF THE CHASE OPINION.
No limitations were imposed by Vitalink on the scope of Chase's
investigation or the procedures to be followed by Chase in rendering its
opinion. Chase was not requested to and did not make any recommendation to the
Vitalink Board as to the form or amount of the consideration to be paid in the
Merger, which was determined through arm's-length negotiations between
Vitalink and GranCare. In arriving at its opinion, Chase did not render an
opinion as to a specific range of values for TeamCare, but made its
determination as to the fairness, from a financial point of view, of the
Exchange Ratio on the basis of the financial and comparative analyses
described below. The Chase Opinion was rendered for the use and benefit of the
Vitalink Board in its evaluation of the Merger and does not constitute a
recommendation to any stockholder of Vitalink as to how such stockholder
should vote with respect to the Merger or the transactions related thereto.
Chase was not requested to opine as to, and its opinion does not in any manner
address, Vitalink's underlying business decision to proceed with or effect the
Merger.
67
<PAGE>
In connection with its opinion, Chase reviewed and analyzed, among other
things: (i) the Merger Agreement and the Distribution Agreement, (ii) publicly
available business and financial information concerning Vitalink and TeamCare
and the respective industries in which they operate and (iii) certain internal
non-public financial and operating data provided to Chase by the managements
of Vitalink and GranCare relating to the businesses of Vitalink and TeamCare,
including projections of future financial results of such businesses prepared
by Vitalink and GranCare. Chase also had discussions with members of the
senior managements of Vitalink and GranCare concerning the operations,
historical financial statements and future prospects of Vitalink and TeamCare,
before and after giving effect to the Distribution and the Merger, as well as
their views of the business, operational and strategic benefits and other
implications of the Distribution and the Merger, including the level of
synergies reasonably obtainable upon consummation of the Merger. Chase also
compared the financial and operating performance of Vitalink and TeamCare with
publicly available information concerning certain other companies Chase deemed
comparable, reviewed the relevant historical stock prices and trading volumes
of the Vitalink Common Stock, to the extent Chase deemed relevant, the
GranCare Common Stock and certain publicly traded securities of such other
companies, reviewed the financial terms of certain recent business
combinations and acquisition transactions it deemed reasonably comparable to
the Merger and otherwise relevant to its inquiry and made such other analyses
and examinations as it deemed necessary or appropriate.
Chase assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for it, or publicly
available for purposes of its opinion and further relied upon the assurances
of management of Vitalink and GranCare that they are not aware of any facts
that will make such information inaccurate or misleading. Chase did not make
or obtain any independent evaluations or appraisals of the assets or
liabilities of Vitalink or TeamCare and did not conduct a physical inspection
of the properties and facilities of Vitalink or TeamCare. Chase assumed that
the financial projections and estimates of reasonably obtainable synergies
provided to Chase by Vitalink and GranCare were reasonably determined on bases
reflecting the best then currently available estimates and judgments of the
managements of Vitalink and GranCare as to the future financial performance of
Vitalink or TeamCare, as the case may be (including after taking account of
the impact of the Distribution and the Merger), and Chase expressed no view as
to such projections and estimates of reasonably obtainable synergies or the
assumptions on which they were based.
In arriving at its opinion, Chase assumed, with Vitalink's consent, that the
synergies described by Vitalink as being reasonably obtainable will be
obtained and that the representations and warranties of each party to the
Merger Agreement contained therein are true and correct, that each party to
the Merger Agreement and to the Distribution Agreement will perform all of the
covenants and agreements required to be performed by such party under such
agreements and that all conditions to the consummation of the Merger
(including, without limitation, the completion of the Distribution) will be
satisfied without waiver thereof. Chase also assumed that all material
governmental, regulatory or other consents and approvals will be obtained in
connection with the Distribution and the Merger and that in the course of
obtaining any necessary governmental, regulatory or other consents and
approvals, or any amendments, modifications or waivers to any documents to
which either Vitalink or GranCare is a party, no restrictions will be imposed
or amendments, modifications or waivers made that would have any material
adverse effect on the contemplated benefits to Vitalink of the Merger. Chase
based its opinion on market, economic and other conditions as they existed on,
and could be evaluated as of, the date of its opinion.
The following is a summary of the financial analyses utilized by Chase and
does not purport to be a complete description of the analyses performed by
Chase. The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth below, without
considering the analysis as a whole, could create an incomplete view of the
processes underlying Chase's opinion. In arriving at its fairness
determination, Chase considered the results of all such analyses. The analyses
were prepared solely for the purposes of enabling Chase to render its opinion
to the Vitalink Board as to the fairness, from a financial point of view, to
Vitalink of the Exchange Ratio. Analyses based upon forecasts of future
results are not necessarily indicative of actual future values, which may be
significantly more or less favorable than suggested by such analyses.
68
<PAGE>
Comparable Public Company Analysis--Chase reviewed certain publicly
available financial and operating data of selected publicly traded
institutional pharmacy companies to determine a range of multiples for such
companies. To determine a reference range of values for TeamCare, Chase
compared those multiples with the implied multiples for TeamCare based on the
consideration to be paid by Vitalink for TeamCare in the Merger (the "Merger
Consideration"), which was calculated based on the Exchange Ratio, a Vitalink
Common Stock price of $23.00 (the closing share price on the day prior to the
transaction announcement) and Vitalink's assumption in the Merger of
$107,000,000 aggregate indebtedness for borrowed money. The selected
institutional pharmacy companies (collectively, the "Institutional Pharmacy
Comparable Group") were Capstone Pharmacy Services, Inc. ("Capstone
Pharmacy"), NCS HealthCare, Inc. ("NCS HealthCare"), Omnicare, Inc.
("Omnicare") and Vitalink. For each company in the Institutional Pharmacy
Comparable Group, Chase calculated a range of multiples of Market Value of
Common Equity (market price of common stock multiplied by the number of
outstanding shares) to net income from continuing operations for the latest
twelve months and for 1996 (except in the case of Vitalink for the year ending
May 31, 1997, in each case based on mean analyst earnings estimates
("Estimated 1996")). Chase also calculated a range of multiples of Adjusted
Market Value (Market Value of Common Equity plus the book value of
indebtedness for borrowed money and preferred stock less cash and equivalents)
for revenues, EBITDA (earnings before interest, taxes, depreciation,
amortization and non-recurring items) and EBIT (earnings before interest,
taxes and non-recurring items) for each company in the Institutional Pharmacy
Comparable Group, in each case for the latest twelve months.
For the Institutional Pharmacy Comparable Group, the following range of
multiples (excluding extreme outliers) of Market Value of Common Equity were
calculated: low of 22.7x to high of 56.9x with a mean of 39.8x and median of
39.8x as a multiple of net income from continuing operations for the latest
twelve months and low of 20.6x to high of 68.8x with a mean of 49.2x and
median of 53.8x net income from continuing operations for Estimated 1996. For
the Institutional Pharmacy Comparable Group, the following range of multiples
(excluding extreme outliers) of Adjusted Market Value were calculated: low of
2.0x to high of 3.8x with a mean of 2.9x and a median of 2.9x as a multiple of
latest twelve months revenues; low of 11.1x to high of 36.6x with a mean of
27.4x and a median of 31.0x as a multiple of latest twelve months EBITDA; and
low of 13.3x to high of 49.5x with a mean of 31.3x and a median of 31.1x as a
multiple of latest twelve months EBIT.
Based on the Merger Consideration and financial information prepared by
GranCare, the following implied multiples of Market Value of Common Equity
were calculated for TeamCare: 16.3x as a multiple of net income from
continuing operations for the twelve months ended May 31, 1996 and 14.4x as a
multiple of net income from continuing operations as estimated by GranCare for
the twelve months ending December 31, 1996. The following implied multiples of
Adjusted Market Value were calculated for TeamCare: for the twelve months
ended May 31, 1996 (based on financial information prepared by GranCare), 1.7x
as a multiple of revenues, 13.7x as a multiple of EBITDA and 17.2x as a
multiple of EBIT; and for the twelve months ending December 31, 1996 (based on
estimates prepared by GranCare), 1.5x as a multiple of estimated revenues,
10.0x as a multiple of estimated EBITDA and 12.1x as a multiple of estimated
EBIT.
Because of the lack of truly comparable companies due to the inherent
differences between the businesses, operations and prospects of TeamCare and
the businesses, operations and prospects of the companies included in the
Institutional Pharmacy Comparable Group, Chase believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning differences between the financial and operating characteristics of
TeamCare and the companies in the Institutional Pharmacy Comparable Group that
would affect the public trading values of such other companies.
Comparable Transaction Analysis--Chase reviewed certain publicly available
information regarding 14 selected institutional pharmacy industry transactions
(the "Transaction Comparables") announced since October 1992. Because a
majority of these transactions involved the sale of private companies,
however, limited financial data was publicly available. Chase analyzed the
transaction prices realized in these transactions, expressed as a multiple of
selected operating and financial data of the acquired companies, for the
purpose of determining a reference range of values for TeamCare. The
Transaction Comparables reviewed were Capstone Pharmacy's
69
<PAGE>
acquisition of Symphony Pharmacy Services, Inc., Genesis Health Ventures,
Inc.'s acquisition of NeighborCare Pharmacies, Inc., Capstone Pharmacy's
acquisition of IMD Corporation, Capstone Pharmacy's acquisition of Geri-Care
Systems, Inc., NCS HealthCare's acquisition of The Apothecary, Inc., NCS
HealthCare's acquisition of Corinthian Healthcare Systems, Inc., NCS
HealthCare's acquisition of Quality HealthCare of Indiana, NCS HealthCare's
acquisition of Hunsicker's Pharmacy Long Term Care Division, Inc. and
Hunsicker's HealthCare, Inc., Living Centers of America, Inc.'s acquisition of
the 51% interest in Abbey Pharmaceutical Services, Inc. which it did not
previously own, GranCare's acquisition of Long Term Care Pharmaceutical
Services Corporation I and Long Term Care Pharmaceutical Services Corporation
III, Omnicare's acquisition of Evergreen Pharmaceutical, Inc. and Evergreen
Pharmaceutical East, Inc., GranCare's acquisition of CompuPharm, Inc.,
Vitalink's acquisition of West End Family Pharmacy, Inc. and Omnicare's
acquisition of Westhaven Services Co. To the extent such information was
publicly available, Chase calculated multiples of the consideration paid
("Purchase Price") to the most recent pre-acquisition twelve-month net income
from continuing operations of the acquired company and the Transaction Value
(Purchase Price plus the book value of indebtedness for borrowed money and
preferred stock less cash and equivalents) to the most recent pre-acquisition
twelve-month revenues, EBITDA and EBIT of the acquired company.
The following range of multiples (excluding extreme outliers) of Purchase
Price were calculated: low of 10.2x to high of 60.1x with a mean of 25.3x and
a median of 15.5x as a multiple of latest twelve months pre-acquisition net
income from continuing operations. The following range of multiples (excluding
extreme outliers) of Transaction Value were calculated: low of 0.7x to high of
1.8x with a mean of 1.1x and a median of 1.0x as a multiple of latest twelve
months pre-acquisition revenues; low of 5.2x to high of 16.2x with a mean of
10.6x and a median of 10.1x as a multiple of latest twelve months pre-
acquisition EBITDA; and low of 5.7x to high of 22.8x with a mean of 13.3x and
a median of 11.9x as a multiple of latest twelve months pre-acquisition EBIT.
Based upon the Merger Consideration and financial information prepared by
GranCare, the following implied multiples of Purchase Price were calculated
for TeamCare: 16.3x as a multiple of net income from continuing operations for
the twelve months ended May 31, 1996 and 14.4x as a multiple of net income
from continuing operations as estimated by GranCare for the twelve months
ending December 31, 1996. The following implied multiples of Transaction Value
were calculated for TeamCare: for the twelve months ended May 31, 1996 (based
on financial information prepared by GranCare), 1.7x as a multiple of
revenues, 13.7x as a multiple of EBITDA and 17.2x as a multiple of EBIT; and
for the twelve months ending December 31, 1996 (based on estimates prepared by
GranCare), 1.5x as a multiple of estimated revenues, 10.0x as a multiple of
estimated EBITDA and 12.1x as a multiple of estimated EBIT.
Because the market conditions, rationale and circumstances surrounding each
of the transactions analyzed were specific to each transaction and because of
the inherent differences between the businesses, operations and prospects of
TeamCare and the acquired businesses analyzed, Chase believed that a purely
quantitative comparable transaction analysis would not be particularly
meaningful in the context of the Merger. Chase believed that an appropriate
use of a comparable transaction analysis in this instance would involve
qualitative judgments concerning differences between the characteristics of
these transactions and the Merger that would affect the acquisition values of
TeamCare and such acquired companies.
Discounted Cash Flow Analysis--Chase performed a discounted cash flow
analysis of TeamCare based upon certain financial projections provided to
Chase by GranCare for the years 1997 through 2000. Utilizing such projections,
Chase calculated a range of values for TeamCare based upon the discounted net
present value of the sum of (i) the projected stream of unlevered free cash
flows (calculated as EBITDA less taxes less changes in working capital less
capital expenditures) to TeamCare through the year 2000 and (ii) the projected
terminal value of TeamCare at the year 2000 based upon a range of multiples of
projected EBITDA. Chase applied discount rates ranging from 12.0% to 13.0% and
multiples of EBITDA ranging from 10.0x to 12.0x. Based on the foregoing, Chase
calculated the implied firm value of TeamCare to be in a range between $397.2
million and $480.9 million.
70
<PAGE>
Contribution Analysis--Chase reviewed the estimated revenues, EBITDA and
EBIT for Vitalink and TeamCare based on historical information and projections
as to future financial results provided to Chase by Vitalink and GranCare for
each respective company. Based on such review, Chase analyzed the relative
financial contributions of each of Vitalink and TeamCare to the pro forma
consolidated entity for the twelve month periods ending May 31, 1996, 1997,
1998 and 1999. Based on such analysis, Chase determined that Vitalink's
contributions to the pro forma consolidated revenues for the twelve month
periods ending May 31, 1996, 1997, 1998 and 1999 were 37.6%, 40.4%, 42.2% and
43.7%; Vitalink's contributions to the pro forma consolidated EBITDA for the
twelve month periods ending May 31, 1996, 1997, 1998 and 1999 were 46.8%,
41.9%, 41.6% and 43.6%; and Vitalink's contributions to the pro forma
consolidated EBIT for the twelve month periods ending May 31, 1996, 1997, 1998
and 1999 were 47.4%, 45.7%, 44.7% and 46.1%. Chase noted, after giving effect
to the issuance of Vitalink shares in the Merger and based on the outstanding
shares of Vitalink as of May 31, 1996, that the Vitalink shareholders would
own 54.8% and that the GranCare shareholders would own 45.2% of Vitalink on a
pro forma basis after giving effect to the Merger.
Pro Forma Merger Analysis--Chase reviewed certain financial information
provided to Chase by Vitalink and GranCare, including projections as to future
financial results of Vitalink and TeamCare, on a stand-alone basis. Chase
combined the projected operating results of Vitalink with the corresponding
projected operating results of TeamCare to arrive at the consolidated company
projected net income. In performing this analysis, Chase assumed that the
Merger was consummated on May 31, 1996 for the Merger Consideration, and that
the estimates by Vitalink and GranCare of revenue enhancement and purchasing
and operating synergy contributions would be achieved. Such analysis indicated
that, based on the foregoing, the Merger would be dilutive to Vitalink's
projected net income for the fiscal year ended May 31, 1997 and accretive to
Vitalink's projected net income in the fiscal years thereafter.
Other Analyses--Chase reviewed the performance of historical trading prices
and volume of GranCare Common Stock and Vitalink Common Stock for certain
periods, and compared such per share market price movements to the Standard &
Poor's 500 Index and, with respect to Vitalink, an index of selected publicly
traded institutional pharmacy companies.
Pursuant to the terms of an engagement letter between Chase and Vitalink, a
fee of $250,000 was payable to Chase upon delivery of the Chase Opinion. In
addition, Vitalink has agreed to reimburse Chase for its reasonable out-of-
pocket expenses, including fees and disbursements of its counsel, and to
indemnify Chase against certain liabilities relating to or arising out of its
engagement.
Chase, as part of its financial advisory business, is continually engaged in
the valuation of businesses and their securities in connection with mergers
and acquisitions and valuations for estate, corporate and other purposes.
Vitalink selected Chase as its financial advisor based on Chase's experience
and expertise.
The Chase Manhattan Corporation and its affiliates, including Chase
Securities Inc., in the ordinary course of business, have, from time to time,
provided, and in the future may continue to provide, commercial and investment
banking services to Vitalink and GranCare, including serving as sole agent
bank under a senior credit facility of Manor Care, Inc., the controlling
shareholder of Vitalink, and acting as co-arranger and syndication agent under
a senior credit facility of GranCare for which a commitment has been
delivered. In the ordinary course of business, Chase or its affiliates may
trade in the debt and equity securities of Vitalink and GranCare for their own
accounts and for the accounts of their customers and, accordingly, may at any
time hold a long or short position in such securities.
71
<PAGE>
DIRECTORS AND OFFICERS OF VITALINK FOLLOWING THE MERGER
At the Effective Time of the Merger the directors and executive officers of
Vitalink will be as set forth below. Directors and executive officers of
Vitalink are elected to serve until they resign or are removed, or are
otherwise disqualified to serve, or until their successors are elected and
qualified. At the Effective Time four of the directors will be appointed by
Vitalink and four of the directors will be appointed by GranCare pursuant to
the terms of the Shareholders Agreement. See "Description of the
Transactions--Terms of the Shareholders Agreement."
<TABLE>
<CAPTION>
NAME AGE POSITION WITH VITALINK
---- --- ----------------------
<S> <C> <C>
Stewart Bainum, Jr...... 50 Chairman of the Board of Directorsa
Gene E. Burleson........ 55 Chief Executive Officer and Directorb
Donna L. DeNardo........ 44 President and Chief Operating Officer
Arlen B. Reynolds....... 55 Executive Vice President
Vincent C. DiTrapano.... 50 Senior Vice President, Operations
Scott T. Macomber....... 41 Vice President, Finance and Chief Financial Officer
Stephen A. Thompson..... 41 Vice President, Human Resources and Administration
Joseph R. Buckley....... 48 Directora
Joel S. Kanter.......... 39 Directorb
James A. MacCutcheon.... 44 Directora
Robert L. Parker........ 62 Directorb
James H. Rempe.......... 66 Directora
Gary U. Rolle........... 53 Directorb
</TABLE>
- --------
(a) Member of Vitalink Board of Directors designated by Vitalink.
(b) Member of Vitalink Board of Directors designated by GranCare, pursuant to
the terms of the Shareholders Agreement. See "The Distribution Agreement--
Terms of the Shareholders Agreement."
Stewart Bainum, Jr. will serve as Chairman of the Board of Directors of
Vitalink. He has served as Vice Chairman of the Board of Directors of Vitalink
since December 1994. He was Chairman of Vitalink from September 1991 to
December 1994, Chief Executive Officer from March 1989 to December 1994 and
President from March 1987 to September 1991. Mr. Bainum has been Chairman of
the Board and Chief Executive Officer of Manor Care, Inc. since March 1987 and
President of Manor Care, Inc. since June 1989. He has served as a Director of
Vitalink since 1991, of Manor Care since 1981 and of Manor Healthcare Corp.
("Healthcare") since 1976.
Gene E. Burleson will serve as Chief Executive Officer and a Director of
Vitalink. He has served as Chairman of the Board, President and Chief
Executive Officer of GranCare since January 1994 and will continue as Chairman
after the Merger. Additionally, Mr. Burleson has served as Chief Executive
Officer of GranCare since December 1990. Mr. Burleson has served as President
and a Director of GranCare since October 1989. From 1974 to September 1989,
Mr. Burleson was employed by American Medical International, Inc. ("AMI"), a
provider of health care services, where from early 1988 to March 1989 he
served as President while continuing his role as Chief Operating Officer, a
position he assumed in 1986. Prior to serving as President of the parent
company, Mr. Burleson was President and Chief Executive Officer of American
Medical International--European Operations for nine years. Mr. Burleson will
cease acting as President and Chief Executive Officer of New GranCare upon
completion of the Distribution and the Merger but will continue to serve as
Chairman of the Board and as a director of New GranCare.
Donna L. DeNardo will continue to serve as President and Chief Operating
Officer of Vitalink, a position she has held since September 1991. She has
also served as a Director of Vitalink since September 1991 but will cease to
serve as a Director of Vitalink upon completion of the Merger. She was Vice
President and General Manager of Vitalink from December 1989 to September
1991; Vice President of Manor Healthcare Corp. (a wholly owned subsidiary of
Manor Care, Inc.) from December 1989 to September 1991; various management
positions with Manor Healthcare Corp. from 1977 through December 1989,
including Senior Regional Director of Nursing Facility Operations and Nursing
Facility Administrator.
72
<PAGE>
Arlen B. Reynolds will serve as Executive Vice President of Vitalink
following the completion of the Distribution and the Merger. Mr. Reynolds
joined GranCare in September 1995 as Senior Vice President of GranCare and
President of TeamCare. From 1993 to September 1995, Mr. Reynolds was the
administrator and Chief Operating Officer of Brookwood Medical Center in
Alabama. From 1988 to 1993, he served in several capacities with AMI,
including Chief Executive Officer and President of an acute care hospital.
Vincent C. DiTrapano will continue to serve as Senior Vice President,
Operations of Vitalink, a position he has held since January 1994. He served
as Regional Vice President, Operations-Eastern Region from June 1993 to
January 1994. He previously was employed by Geriatric Pharmacy Services, Inc.
for seven years, including as President and Chief Executive Officer.
Scott T. Macomber will continue to serve as Vice President, Finance and
Chief Financial Officer of Vitalink, a position he has held since September
1991. He was Vice President, Corporate Finance for Manor Care from June 1990
to March 1992 and previously held various acquisition and development
positions within Manor Care for more than 10 years.
Stephen A. Thompson will continue to serve as Vice President, Human
Resources and Administration of Vitalink, a position he has held since August
1995. He was Senior Director, Professional Relations, of Vitalink from March
1992 to August 1995, and held human resources positions with Manor Care and
Healthcare from 1986 to 1992.
Joseph R. Buckley will serve as a Director of Vitalink. He has served as
Executive Vice President, Manor Care, Inc. since March 1996; President,
Assisting Living Division of Manor Healthcare Corp. from June 1995 to March
1996; Senior Vice President, Manor Care, Inc. from June 1990 to March 1996 and
Director of In Home Health, Inc. since October 1995.
Joel S. Kanter will serve as a Director of Vitalink. He became a Director of
GranCare in December 1990 and will continue as a Director of GranCare
following the completion of the Merger. From 1986 to the present, Mr. Kanter
has been the President of Windy City, Inc., a private investment company, and
from 1988 to February 27, 1995 he served as a consultant to Walnut Capital
Corporation ("WCC"), a closely held investment management and advisory firm.
From February 27, 1995 to the present, Mr. Kanter has served as the President
of WCC and Walnut Financial Services, a provider of financial and consulting
services. Prior to 1986, Mr. Kanter was Managing Director of the Investors'
Washington Service, an investment advisory company specializing in providing
advice to institutional clients about the impact of federal legislative and
regulatory decisions on debt and equity markets. Mr. Kanter serves on the
board of directors of five other publicly held companies: I-Flow Corporation
(a home infusion pump manufacturer), TransGlobal Services, Inc. (an
engineering personnel temporary firm), Walnut Financial Services, Inc. (a
provider of small business financial and consulting services), Healthcare
Acquisition Corp. (a corporation involved in acquiring healthcare related
companies) and Osteoimplant Technology, Inc. (a manufacturer of shoulder and
hip implant devices), and several privately held companies, and will continue
to serve as a Director of New GranCare following the completion of the
Distribution and Merger.
James A. MacCutcheon will serve as a Director of Vitalink. He has served as
Executive Vice President, Chief Financial Officer and Treasurer of Choice
Hotels International, Inc. since October, 1996. He has served as Treasurer of
Vitalink since 1992 and Senior Vice President--Finance, Chief Financial
Officer and Treasurer of Manor Care, Inc. since October 1987.
Robert L. Parker will be a Director of Vitalink. He has served as a Director
of GranCare since July 1995 and will continue as a Director of GranCare
following the completion of the Merger. Mr. Parker served as Chairman of the
Board of Directors of Omega Healthcare Investors, Inc. ("Omega") from March
1992 to July 1995 and was a Managing Director of Omega Capital, Ltd., a
private health care investment fund ("Omega Capital"), from 1986 to 1992. From
1972 through 1983, Mr. Parker was a senior officer of Beverly Enterprises. At
the time of his retirement in 1983, Mr. Parker was Executive Vice President of
Beverly Enterprises.
73
<PAGE>
Mr. Parker is a registered architect, licensed in California and Oklahoma. Mr.
Parker continues to serve as a Director of Omega and also serves as a Director
of National Bank of Bethany, Oklahoma, a private commercial bank, and will
continue to serve as a Director of New GranCare following the completion of
the Distribution and the Merger.
James H. Rempe will serve as a Director of Vitalink. He has served as
Secretary of Vitalink since 1991; Senior Vice President, General Counsel and
Secretary of Manor Care, Inc. since December 1980 and Director of In Home
Health, Inc. since October 1995.
Gary U. Rolle will serve as a Director of Vitalink. He has served as a
director of GranCare since February 1994 and will continue to serve as a
Director of GranCare following the completion of the Merger. From 1983 to the
present, Mr. Rolle has been the Executive Vice President and Chief Investment
Officer of Transamerica Investment Services, a subsidiary of Transamerica
Corp., a financial services company. Mr. Rolle is currently the Chairman and
President of Transamerica Income Shares, Director of Transamerica Investors,
Transamerica Occidental Life Insurance Company, Transamerica Life Insurance &
Annuity, Transamerica Assurance Company, Transamerica Realty Services and
Arbor Life Insurance Company and Chairman of Separate Account Funds B & L and
will continue to serve as a Director of New GranCare following the completion
of the Distribution and the Merger. Mr. Rolle is also a member of the Board of
Trustees of Harvey Mudd College.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain members of GranCare's management and the GranCare Board of Directors
may be deemed to have interests in the Transactions in addition to their
interests as GranCare shareholders generally, which may cause potential
conflicts of interest. The GranCare Board of Directors was aware of these
factors and considered them, among other factors, in approving the
Transactions. Among these factors are (i) the acceleration of the vesting of
currently unvested GranCare Options as a result of the consummation of the
Merger as described under "The Merger Agreement--Effect of Merger on GranCare
Adjusted Options," (ii) the treatment of GranCare Options in the Distribution
and the Merger as described under "The Merger Agreement--Effect of Merger on
GranCare Adjusted Options," and "The Distribution Agreement--Consummation of
the Distribution; Treatment of GranCare Stock Options," (iii) the
indemnification provisions of the Merger Agreement and the Distribution
Agreement as described under "The Merger Agreement--Indemnification;
Insurance" and "The Distribution Agreement--Terms of the Distribution
Agreement", respectively, (iv) the payment by Vitalink of a portion of the
premiums for directors' and officers' liability insurance for current GranCare
directors and officers as described under "The Merger Agreement--
Indemnification; Insurance" and (v) cash payments as a result of the early
termination of certain GranCare incentive compensation plans and employment
agreements. Substantially all of the directors and executive officers of
GranCare will be directors and executive officers of New GranCare following
the Distribution except for Arlen Reynolds, who will be Executive Vice
President of Vitalink, Gene E. Burleson, who will be Chief Executive Officer
and a director of Vitalink as well as Chairman of the Board and a director of
New GranCare. Four individuals who are presently serving as directors of
GranCare will be appointed as directors of Vitalink as of the Effective Time
of the Merger. See "Description of the Transaction--Directors and Officers of
Vitalink Following the Merger" and "Management--Certain Relationships and
Related Party Transactions" in the Prospectus.
In addition, pursuant to the Shareholders Agreement to be entered into by
Manor Care and Vitalink, Manor Care has agreed, for a period of three years
from the Effective Time of the Merger, to vote all of the shares of Vitalink
Common Stock beneficially owned by Manor Care in favor of the election of the
four GranCare Nominees (or any successor to any such nominee designated by a
majority of the remaining GranCare Nominees) as directors of Vitalink. Each of
the individuals that have been so designated is presently a GranCare director.
As of November 30, 1996, the 29 executive officers and directors of GranCare
(as a group) beneficially owned an aggregate of 2,118,460 shares of GranCare
Common Stock (excluding shares subject to outstanding stock options). All such
shares will be treated in the Merger and the Distribution in the same manner
as shares of GranCare Common Stock held by other shareholders of GranCare.
74
<PAGE>
As of November 30, 1996, the executive officers of GranCare (as a group)
also held options to purchase an aggregate of 1,622,871 shares of GranCare
Common Stock pursuant to GranCare's stock option plans, 759,990 of which were
not currently exercisable. In addition, as of September 30, 1996, the non-
employee directors of GranCare (as a group) held options to purchase an
aggregate of 251,740 shares of GranCare Common Stock. Upon the consummation of
the Merger, all of the options held by such executive officers and non-
employee directors will immediately become exercisable in full. The treatment
of such options is described under "The Merger Agreement--Effect of Merger on
GranCare Adjusted Options" and "The Distribution Agreement--Consummation of
the Distribution; Treatment of GranCare Stock Options."
GranCare's executive officers participate in certain cash incentive plans
initiated by GranCare that provide for annual cash bonuses (the "Annual
Incentive Plan") and long term cash bonuses (the "Shareholder Value Program")
based upon the performance of GranCare. Both the Annual Incentive Plan and
Shareholder Value Program provide that the benefits under such plans vest upon
a change in control. In addition, each of GranCare's executive officer's
employment agreement provides for the payment of benefits upon the occurrence
of a change in control. The Merger constitutes a change in control under
GranCare's incentive plans as well as its employment agreements. The maximum
amount of payments that GranCare may be required to make pursuant to such
incentive plans and employment agreements is approximately $11.5 million
(assuming every executive officer elects to exercise the change in control
provisions of his or her employment agreement). The GranCare Board of
Directors has determined that upon consummation of the Transactions the
Shareholder Value Program will be paid out at the "Superior" level. In
addition, shares of restricted GranCare Common Stock held by non-officers of
GranCare which are unvested will vest as a consequence of the change of
control event that will occur upon completion of the Merger. Such restricted
stock has a value of approximately $2.5 million.
GranCare has determined that no benefits will be payable under the Annual
Incentive Plan because costs associated with the Transactions will not allow
the participants to attain the required performance goals. Under the
Shareholder Value Program, however, as a result of the Merger, Messrs.
Burleson, Athans, Benton, Schneider and Finney (GranCare's chief executive
officer and four most highly compensated executive officers) will receive cash
payments of $852,000, $420,000, $420,000, $330,000 and $234,000, respectively,
upon the vesting of benefits under this program. Other executive officers will
receive in the aggregate $2.25 million under this program, for an aggregate
payout under the Shareholder Value Program of $4.5 million which is included
in the $11.5 million referenced above.
To the extent an executive officer of GranCare is not employed by New
GranCare or Vitalink following the consummation of the Transactions, such
individual will be entitled to the change of control payments specified in
such individual's employment agreement, which will be triggered by the Merger
(six months base salary for Vice Presidents, one year's base salary for Senior
Vice Presidents and three year's base salary for Executive Vice Presidents).
Any executive officer who is a party to an employment agreement will be
required to waive his or her rights under such agreement as a condition to
obtaining a replacement employment agreement with New GranCare or Vitalink
following the consummation of the Transactions.
Messrs. Burleson and Athans have agreed to waive their change of control
payments under their employment agreements in exchange for entering into new
employment agreements with Vitalink and New GranCare, respectively. Mr. Finney
has resigned from GranCare effective January 1, 1997. Under the terms of Mr.
Finney's resignation, he will receive a payment of $240,000 (one year's base
salary) regardless of whether the Merger occurs. Assuming Messrs. Benton and
Schneider were to elect not to be employed by New GranCare, they would receive
$1,050,000 (three times base salary) and $825,000 (three times bases salary),
respectively, under the change in control provisions of their employment
agreements.
Immediately following the consummation of the Merger, GranCare's Chief
Executive Officer, Gene E. Burleson, will become Vitalink's Chief Executive
Officer and a member of Vitalink's Board of Directors. Mr. Burleson has an
employment agreement with GranCare which became effective January 1, 1994
which will be assumed by Vitalink. The employment agreement will be extended
for a five year term commencing at the Effective Time and provide for annual
adjustments in base salary as determined by a management compensation
75
<PAGE>
committee. Mr. Burleson's base salary has been established at $430,000 for
1996. The agreement also provides for severance compensation upon termination
of employment by Vitalink for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of three years' base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of five years' base salary and accelerated vesting of all options held
by Mr. Burleson.
ACCOUNTING TREATMENT
Vitalink will account for the Merger using the purchase method of accounting
under generally accepted accounting principles and the rules and regulations
of the Commission. Under the purchase method of accounting Vitalink will be
treated as the acquiror of GranCare and, as a result, the assets of GranCare
will be recorded on Vitalink's books at their estimated fair value. See
"Unaudited Pro Forma Combined Condensed Financial Statements."
EXPENSES
New GranCare (on behalf of itself and GranCare) and Vitalink will each be
responsible for one-half of the total documented fees, expenses and other
items of cost (other than legal fees) which are incurred by New GranCare,
GranCare and Vitalink in connection with the consummation of the various
transactions contemplated by the Merger Agreement and the Distribution
Agreement and the various other agreements contemplated thereby (the "Shared
Transaction Expenses"). The Shared Transaction Expenses include various
commitment and related fees incurred in connection with New GranCare obtaining
the New Credit Facility, the redemption of the Convertible Debentures, the
premium and costs relating to the Tender Offer, financial advisory and
investment banking fees, accounting fees, the cost of maintaining GranCare's
directors' and officers' liability insurance coverage for a three year period
following the Effective Time of the Merger and miscellaneous fees and expenses
such as printing fees and filing fees with various federal and state
regulatory authorities. Vitalink and GranCare estimate that the fees and
expenses constituting Shared Transaction Expenses will be approximately $22.0
million.
DISSENTERS' RIGHTS
Under the CGCL, with respect to certain reorganizations, appraisal rights
are only available if, among other things: (i) the shares of the corporation
are not either (A) listed on any national securities exchange or (B) listed on
the list of OTC margin stocks issued by the Board of Governors of the Federal
Reserve System, and proper notice is given to shareholders; provided that this
provision (i) does not apply to any shares with respect to which there exists
any restriction on transfer imposed by the corporation or by any law or
regulation; and provided further that this provision does not apply to any
class of shares described above in (A) or (B) if demands for payment are filed
with respect to 5% or more of the outstanding shares of that class; and (ii)
the shares were outstanding on the date for the determination of shareholders
entitled to vote on the reorganization and (x) were not voted in favor of the
reorganization or, (y) if described in subpart (A) or (B) of provision (i)
above (without regard to the provisos therein), were voted against the
reorganization, or were held of record on the effective date of a short form
merger, provided however, that subpart (x) rather than subpart (y) of this
subsection (ii) applies in any case in which approval was sought by written
consent rather than at a meeting. Accordingly, under the CGCL, the GranCare
shareholders are entitled to dissenters' rights with respect to the
Transactions, if such shareholder is a holder of restricted shares or if
demands for payment are filed with respect to 5% or more of the outstanding
shares.
THE FOLLOWING DISCUSSION IS NOT A COMPLETE STATEMENT OF THE LAW PERTAINING
TO DISSENTERS' RIGHTS UNDER THE CGCL AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF CHAPTER 13 OF THE CGCL ATTACHED AS APPENDIX F
AND INCORPORATED HEREIN BY REFERENCE. SHAREHOLDERS ARE URGED TO CONSULT LEGAL
COUNSEL WITH RESPECT TO DISSENTERS' RIGHTS.
Under Chapter 13 of the CGCL, if a corporation calls a shareholder meeting
at which a plan of reorganization to which such corporation is a party is to
be voted upon, the notice of the meeting must inform
76
<PAGE>
each shareholder of the right to dissent and must include a copy of Chapter 13
of the CGCL and a brief description of the procedure to be followed under such
sections. This Proxy Statement/Prospectus constitutes such notice. ANY
SHAREHOLDER WHO WISHES TO EXERCISE SUCH DISSENTERS' RIGHTS OR WHO WISHES TO
PRESERVE HIS OR HER RIGHT TO DO SO SHOULD REVIEW THE CGCL CAREFULLY BECAUSE
FAILURE TO TIMELY AND PROPERLY COMPLY WITH THE PROCEDURES SPECIFIED WILL
RESULT IN THE LOSS OF DISSENTERS' RIGHTS UNDER THE CGCL.
The Merger Proposal must be approved by the holders of a majority of the
outstanding shares of GranCare Common Stock. In addition, the GranCare Board
of Directors is soliciting the approval of the Distribution Proposal by the
affirmative vote of the holders of a majority of the outstanding shares of
GranCare Common Stock in accordance with the requirements of the Merger
Agreement. Shareholders who elect to exercise dissenters' rights must satisfy
each of the following conditions: (i) such holders must file with GranCare,
before the taking of the vote with respect to the Transactions, notice of
their intention to demand payment of the fair value of their shares (this
written notice must be in addition to and separate from any vote against the
Transactions, neither voting against nor a failure to vote for the
Transactions will constitute such a notice); and (ii) such holders must vote
against the Transactions. Shareholders who fail to comply with either of these
conditions will have no dissenters' rights with respect to their shares.
Moreover, dissenters' rights will be available only if demands for payment are
filed by 5% or more of the outstanding shares of GranCare Common Stock.
All written notices should be addressed to: GranCare, Inc., One Ravinia
Drive, Suite 1500, Atlanta, Georgia 30346, Attention: M. Henry Day, Jr.,
Assistant General Counsel, and should be executed by, or with the consent of,
the holder of record. The notice must identify the shareholder, state the
number of shares held of record by the shareholder that the shareholder
demands that GranCare purchase the shares held by such holder and indicate the
intention of such shareholder to demand payment of the fair value of such
shares. The notice should state the shareholder's name as it appears on his or
her certificates.
After a vote approving the Transactions, and assuming the Transactions are
to be consummated, if demands for payment have been filed by 5% or more of the
outstanding shares of GranCare Common Stock, GranCare must give written notice
that the Transactions have been approved within 10 days to each shareholder
who filed a written notice of intent to demand payment for such shareholder's
shares of GranCare Common Stock and who did not vote in favor of the
Transactions. Such notice will specify the procedure to be followed if the
shareholder desires to exercise such shareholder's dissenters' rights, a
statement of the price determined by the corporation to represent the fair
market value of dissenting shares and a copy of Chapter 13 of the CGCL. In
order to receive the fair value of his or her shares, a dissenting shareholder
must, within 30 days after the date of such notice from GranCare, submit such
shareholder's certificates to GranCare at its principal office or at the
office of any transfer agent. After a valid demand for payment and the related
certificates are received, GranCare must remit within 30 days to each
dissenting shareholder who has complied with the above-referenced requirements
the amount agreed to by GranCare and the shareholder to be the fair value of
that shareholder's shares.
If GranCare and the shareholder fail to agree upon whether the shares are
dissenting shares or the fair market value of the shares, then the shareholder
demanding purchase of such shares as dissenting shares or any interested
corporation, within six months after the date on which notice of the approval
by the outstanding shares, but not thereafter, may file a complaint in the
superior court of the proper county requesting that the court determine
whether such shares are dissenting shares or the fair market value of the
dissenting shares or both. The court shall thereafter determine the issues or
appoint one or more impartial appraisers to determine the fair market value of
the shares.
The costs and expenses of such a proceeding, including the expenses and
compensation of any appraisers appointed by the court, will be assessed as the
court considers equitable, unless the court determines that the appraisal
price exceeds the price offered by the corporation, in which case the
corporation shall pay the costs.
77
<PAGE>
Dissenting shares will lose their status as dissenting shares and holders
thereof will cease to be entitled to require GranCare to purchase their shares
if (a) the Transactions are abandoned, (b) the shares are transferred prior to
their submission for endorsement, (c) the dissenting shareholder and GranCare
do not agree upon the status of the shares as dissenting shares or upon the
purchase price of the shares, and neither files a complaint or intervenes
within six months after notice of the approval of the Transactions was mailed
to the shareholders, or (d) the dissenting shareholder, with GranCare's
consent, withdraws the shareholder's demand for purchase of the dissenting
shares.
78
<PAGE>
THE MERGER AGREEMENT
GENERAL
The following is a brief summary of certain provisions, including all
material terms, of the Merger Agreement. This summary is qualified in its
entirety by reference to the Merger Agreement, which is attached as Annex B to
this Proxy Statement/Prospectus and is incorporated herein by reference in its
entirety.
The Merger Agreement provides that, following the approval and adoption of
the Merger Agreement by the requisite vote of the shareholders of GranCare and
the satisfaction or waiver of the other conditions to the Merger, GranCare
will be merged with and into Vitalink, with Vitalink continuing as the
Surviving Corporation. Following the filing of the certificate of satisfaction
with the Franchise Tax Board in accordance with the provisions of Section 1103
of the CGCL and the Bank and Corporation Tax Law, and the filing of a
certified copy of the Merger Agreement with the Secretary of State of
California in accordance with the provisions of Section 1108 of the CGCL, the
Merger will become effective upon filing with the Secretary of State of the
State of Delaware a duly executed Certificate of Merger, in the form required
by and in accordance with Section 252 of the DGCL, or at such time thereafter
as is provided in the Certificate of Merger.
The Certificate of Incorporation and By-laws of Vitalink as in effect
immediately prior to the Effective Time shall be the Certificate of
Incorporation and By-laws 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 Vitalink Common Stock from 30,000,000 to
80,000,000, then the Certificate of Incorporation of Vitalink shall be amended
to reflect such change. Manor Care, in its capacity as the beneficial owner of
approximately 82.3% of the outstanding Vitalink Common Stock, approved an
increase in the number of authorized shares of Vitalink Common Stock from
30,000,000 to 80,000,000 by written consent on January , 1997.
Exchange of Common Stock--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 and instructions for use in effecting the surrender of
the Certificates for exchange. GRANCARE SHAREHOLDERS SHOULD NOT SEND IN THEIR
CERTIFICATES UNTIL THEY RECEIVE A TRANSMITTAL FORM. Upon surrender to Vitalink
of a Certificate, together with such letter of transmittal duly executed
together with any other required documents, the holder of such Certificate
shall be entitled to receive from Vitalink in exchange therefor that number of
shares of Vitalink Common Stock which such holder has the right to receive
under the Merger Agreement, 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 the Merger Agreement,
each Certificate shall represent, for all purposes, the right to receive .478
shares if Vitalink Common Stock for each share of GranCare Common Stock
evidenced by such Certificate, without any interest thereon (the "Closing
Consideration"). Under Delaware law, failure of a GranCare shareholder to
surrender his or her Certificates shall not result in the forfeiture of the
right to receive dividends or to vote the Vitalink Common Stock issuable to
such shareholder pursuant to the terms of the Merger Agreement.
NO FRACTIONAL VITALINK COMMON STOCK
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 dividends on or vote such
fractional share and shall receive, in lieu of such fractional share, cash in
an amount equal to such fraction
79
<PAGE>
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 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 this Proxy Statement/Prospectus. The fractional
share interests of each GranCare shareholder will be aggregated, and no
GranCare shareholder will receive cash in an amount equal to or greater than
the value of one full share of Vitalink Common Stock. Except for the
discussions under "Summary--The Distribution Agreement--Certain Federal Income
Tax Consequences," all references in this Proxy Statement/Prospectus 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 the
Merger Agreement.
EFFECT OF MERGER ON GRANCARE ADJUSTED OPTIONS
As of the Effective Time, by virtue of the Merger and without any action on
the part of the holders thereof, each Adjusted GranCare Option that is
outstanding under the applicable GranCare employee benefit plan immediately
prior to the Effective Time, whether or not exercisable, shall be assumed by
Vitalink in such manner that each such option shall be exercisable upon the
same terms and conditions as under the applicable GranCare employee benefit
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 into which the number of shares of GranCare Common Stock subject
to such option immediately prior to the Effective Time would be converted as
described above 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 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. The exercise price of each
outstanding GranCare Option shall be adjusted pursuant to the Employee Benefit
Agreement to reflect the Distribution. In addition, each holder of a GranCare
Option shall receive, in connection with the Distribution, an option to
purchase two shares of New GranCare Common Stock for every option to purchase
three shares of GranCare Common Stock held by such option holder immediately
prior to the Distribution. See "The Distribution Agreement--Consummation of
the Distribution; Treatment of GranCare Stock Options."
All outstanding GranCare Options that have not vested contain change of
control provisions that provide that such options will become fully vested and
exercisable upon the occurrence of a change of control transaction such as the
Merger. See "The Distribution Agreement--Consummation of the Distribution;
Treatment of GranCare Stock Options" and "Description of the Transactions--
Interests of Certain Persons in the Transactions."
Prior to the Effective Time, GranCare shall (i) obtain any consents from
holders of outstanding options to purchase GranCare Common Stock granted under
the applicable GranCare employee benefit plans and (ii) make any amendments to
the terms of the applicable GranCare employee benefit plans or any award
granted thereunder that, in the case of either (i) or (ii), are necessary to
give effect to the transactions contemplated by the first paragraph of "--
Effect of Merger on GranCare Adjusted Options" above.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains certain customary representations and
warranties by each of Vitalink and GranCare (as to such party) concerning: the
organization and qualification of Vitalink and GranCare and their respective
subsidiaries; the capitalization of each of Vitalink and GranCare; the
authority of each of Vitalink and GranCare relative to the execution and
delivery of, and performance of its respective obligations under the Merger
Agreement; the authority of GranCare relative to the execution and delivery
and performance of their obligations under the Distribution Agreement; and
approval by the Board of Directors of each of Vitalink and GranCare regarding
certain related matters; obtaining necessary approvals to consummate the
transactions contemplated by the Merger Agreement and, in the case of
GranCare, the Distribution Agreement, and the absence of any conflict with, or
violations of, the corporate documents and certain binding instruments of each
of Vitalink and GranCare or their respective subsidiaries or with or of any
statute, rule, regulation, order or
80
<PAGE>
decree of courts or governmental entities, subject to certain exceptions; the
accuracy of reports and documents filed by each of Vitalink and GranCare with
the Commission since May 31, 1992 and December 31, 1992, respectively, and
certain financial statements of each company; the absence of undisclosed
liabilities or obligations of Vitalink, GranCare and each of their respective
subsidiaries; the absence of material changes in the business of Vitalink and
its subsidiaries since May 31, 1996 and the absence of material changes in the
business of GranCare and its subsidiaries since December 31, 1995; the absence
of litigation involving either Vitalink or GranCare or their respective
subsidiaries that would have a material adverse effect on the business of
either party; compliance by each of Vitalink and GranCare and their respective
subsidiaries with applicable laws and agreements.
In addition, the Merger Agreement contains representations and warranties of
GranCare concerning: (i) GranCare's title, leasehold interest or other right
to use, subsequent to the Restructuring, all of the assets, properties,
intellectual property and licenses which are material to the conduct of the
Institutional Pharmacy Business as previously conducted by GranCare; (ii) the
receipt of the Opinion of PaineWebber; and (iii) delivery to Vitalink of a
letter identifying all persons who may be deemed "affiliates" of GranCare for
the purpose of Rule 145 under the Securities Act and the written agreement of
each such person.
COVENANTS
The Merger Agreement provides that, except as contemplated by the Merger
Agreement, the Distribution Agreement or as otherwise previously disclosed to
Vitalink, GranCare and each of its subsidiaries will be obligated to conduct
its business in the ordinary course of business consistent with past practice
including specific covenants as to certain permissible activities. The Merger
Agreement also requires that, except as provided in the Merger Agreement, the
Voting Agreement, the Shareholders Agreement or as otherwise previously
disclosed to GranCare, Vitalink and each of its subsidiaries will be obligated
to conduct its business in the ordinary course of business consistent with
past practice including specific covenants as to certain permissible
activities.
NO SOLICITATION
Each of Vitalink and GranCare has agreed that, prior to the Effective Time,
it and its subsidiaries shall not, and shall not give authorization or
permission to any of its or its subsidiaries' directors, officers, employees,
agents or representatives to, and shall use all commercially reasonable
efforts to see that such persons do not, directly or indirectly solicit,
initiate, facilitate or encourage (including by way of furnishing or
disclosing information): (i) any merger, consolidation, other business
combination involving either Vitalink or its subsidiaries or GranCare or its
subsidiaries (except to the extent such merger, consolidation or other
business combination relates exclusively to GranCare's Skilled Nursing
Business), (ii) any acquisition of all or any substantial portion of the
assets or capital stock of either Vitalink and its subsidiaries taken as a
whole or GranCare and its subsidiaries (except to the extent such acquisition
relates exclusively to GranCare's Skilled Nursing Business), or (iii)
inquiries or proposals concerning or which may reasonably be expected to lead
to, any of the foregoing (each an "Acquisition Transaction") or negotiate,
explore or otherwise communicate in any way with any third party (other than
GranCare or its affiliates in the case of Vitalink and Vitalink and its
affiliates in the case of GranCare) with respect to any 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 expressly contemplated by the Merger Agreement, or
contemplated to be a material part thereof; provided that in the event that
there is an unsolicited written proposal for an Acquisition Transaction from a
bona fide financially capable third party, the party receiving such proposal,
in its discretion, shall be permitted to furnish non-public information to and
negotiate with any such third party only if (i) three business days' written
notice shall have been given to the other party; and (ii)(A) the Board of
Directors of the party receiving such proposal shall have been advised in
writing by its investment banker that such third party is financially capable
of consummating an Acquisition Transaction that would yield a higher value to
such party's stockholders than will the Merger, (B) the Board of Directors of
the party receiving such proposal shall have been advised, by the written
opinion of outside counsel to such party, that any failure to provide such
non-public information to such
81
<PAGE>
third party would be inconsistent with the Board of Directors' fiduciary
duties to the stockholders and (C) the Board of Directors of the party
receiving such proposal, in good faith, after weighing such advice, determines
that taking such action is more likely than not to lead to an Acquisition
Transaction with such third party that would yield a higher value to the
stockholders of the party receiving such proposal than will the Merger and
that failing to furnish such information would be inconsistent with the
Board's fiduciary duties.
Each of Vitalink and GranCare has agreed immediately to advise the other
party in writing of the receipt of any inquiries or proposals relating to an
Acquisition Transaction and any actions taken pursuant to the preceding
paragraph.
OUTSTANDING GRANCARE DEBT
Prior to the Effective Time, GranCare has agreed to (i) call for redemption
all of the outstanding Convertible Debentures, (ii) consummate the Tender
Offer for the Senior Subordinated Notes and obtain the consent (the "Consent")
of holders thereof to certain amendments to the indenture pertaining to the
Senior Subordinated Notes, and (iii) obtain all necessary consents, approvals,
waivers or other agreements by the holders of other indebtedness of GranCare
to the assignment and the assumption by New GranCare of such indebtedness at
the time of the Distribution. Vitalink will incur indebtedness under the
Vitalink Credit Facility to refinance GranCare's Senior Subordinated Notes
which are tendered pursuant to the Tender Offer which commenced on December
18, 1996 and Vitalink will assume any Senior Subordinated Notes not so
tendered. It is estimated that Vitalink will incur or assume approximately
$118.0 million of indebtedness (including the Consent Fee) prior to an
offsetting payment by New GranCare pursuant to a formula set forth in the
Distribution Agreement currently estimated to be approximately $20.9 million.
Substantially all of GranCare's remaining indebtedness, consisting of $60.0
million aggregate principal amount of the Convertible Debentures and $88.9
million outstanding under GranCare's Existing Credit Facility (as defined
below) will be repaid from borrowings under GranCare's New Credit Facility (as
defined below). The remaining GranCare indebtedness of approximately $302.8
million associated with the Skilled Nursing Business will be assumed by New
GranCare. See "The Distribution Agreement--Treatment of Certain Indebtedness."
The consummation of the Transaction is conditioned upon consummation of the
Tender Offer, obtaining the Consent and redeeming the Convertible Debentures.
See "--Conditions."
CONDITIONS
Mutual Conditions
The obligations of each party to effect the Merger are subject to, among
other things, the fulfillment or waiver of the following conditions: the
effectiveness of the Registration Statement of which this Proxy
Statement/Prospectus is a part and the New GranCare Registration Statement in
accordance with the provisions of the Securities Act; the requisite vote of
the shareholders of GranCare at the Special Meeting necessary to consummate
the Merger, the Distribution and the transactions contemplated thereby;
holders of not more than 5% of the GranCare Common Stock issued and
outstanding as of the record date for the Special Meeting demanding payment
pursuant to the provisions of Chapter 13 of the CGCL; the execution of the
Distribution Agreement and the completion of the Distribution; the Vitalink
Common Stock issuable in the Merger shall have been authorized for quotation
on Nasdaq or listed on the NYSE subject to official notice of issuance; no
writ, order, decree or injunction of a court of competent jurisdiction or
governmental entity shall have been entered against Vitalink or GranCare, and
no proceedings shall have been threatened or commenced by any governmental
entity which seek to prohibit or restrict the consummation of the Merger or
Distribution; the obtaining of all necessary consents and approvals and the
expiration or termination of any waiting period applicable to the consummation
of the Merger under the HSR Act; the redemption of all of the outstanding
Convertible Debentures; consummation of the Tender Offer and obtaining the
Consent; and the receipt of opinions of Powell, Goldstein, Frazer & Murphy and
Cahill Gordon & Reindel that for federal income tax purposes, the distribution
of the New GranCare Common Stock is tax-free to GranCare and the shareholders
of GranCare, the Restructuring is tax-free and the Merger constitutes a tax-
free reorganization.
82
<PAGE>
Conditions to Vitalink's Obligations
The obligation of Vitalink to consummate the Merger is further subject to
the fulfillment or waiver of, among other things, the following conditions:
the representations and warranties of GranCare contained in the Merger
Agreement and the Distribution Agreement shall be true and correct in all
material respects; GranCare shall have performed and complied in all material
respects with all of its agreements, obligations and conditions required by
the Merger Agreement and the Distribution Agreement; and 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 a material adverse
effect on GranCare; GranCare shall furnish various certificates of its
officers to Vitalink; Vitalink shall have received an auditors' letter from
GranCare's independent auditors; and Vitalink shall have received an
irrevocable letter of credit supporting its guaranty of New GranCare's
obligations with respect to HRPT.
Conditions to GranCare's Obligations
The obligation of GranCare to consummate the Merger is further subject to
the fulfillment or waiver of, among other things, the following conditions:
the representations and warranties of Vitalink contained in the Merger
Agreement shall be true and correct in all material respects; Vitalink shall
have performed and complied in all material respects with all of its
agreements, obligations and conditions required by the Merger Agreement; 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 a
material adverse effect on Vitalink; Vitalink shall furnish various
certificates of its officers to GranCare; GranCare shall have received an
auditors' letter from Vitalink's independent auditors; and Manor Care and
Vitalink shall have executed the Shareholders Agreement and each such party
shall have performed and complied with its obligations under such Shareholders
Agreement.
TERMINATION
Mutual Consent or by Either Party
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval by the shareholders 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; (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, and such
order, decree, ruling or other action shall have become final and
nonappealable; or (d) by either Vitalink or GranCare, if the requisite
shareholder approval of the shareholders of GranCare at the Special Meeting of
shareholders is not obtained with respect to each of the Merger and the
Distribution.
Notwithstanding anything contained in clause (b) of the preceding paragraph,
in the event this Proxy Statement/Prospectus or the New GranCare Registration
Document has not been declared effective by the Commission by November 1,
1996, then the date referred to in clause (b) of the preceding paragraph shall
be automatically extended for a period of two months from the later of the
declaration of effectiveness by the Commission of the Proxy
Statement/Prospectus or New GranCare Registration Document but in no event
shall such date be extended to a date later than three months from such date
referenced in clause (b) of the preceding paragraph.
Termination by Vitalink Only
The Merger 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 IV of the Merger
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 the Merger Agreement or
Distribution Agreement such that the closing
83
<PAGE>
conditions set forth in Section 7.01 of the Merger Agreement would not be
satisfied; provided, however, that if such breach or breaches are capable of
being cured prior to the Effective Time, such breach or 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 furnish or disclose non-
public information to or commence negotiations with a third party with respect
to any Acquisition Transaction, or shall have resolved to do 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, the Merger Agreement, the Merger or the other transactions
contemplated thereby or shall have resolved to do any of the foregoing and
publicly disclosed such resolution, or (e) a definitive agreement with respect
to a 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 investor banker that such Vitalink Business
Combination Transaction 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 and
(B) by the written opinion of outside counsel to Vitalink that failure to
terminate the Merger 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 the Merger
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) and that prior to terminating the
Merger Agreement Vitalink shall have made all the Vitalink Payments. See "--
Termination Fees and Expenses."
The term "Vitalink Business Combination Transaction" is defined as any of
the following involving Vitalink or any subsidiary that is material to the
business, results of operation, prospects or financial condition of Vitalink
and its subsidiaries taken as a whole: (1) any merger, consolidation, share
exchange, business combination or other similar transaction (other than the
Merger); (2) any sale, lease, exchange, transfer or other disposition of 25%
or more of the assets of Vitalink and its subsidiaries, taken as a whole, in a
single transaction or series of transactions; or (3) the acquisition by a
person or entity, or any "group" (as such term is defined under Section 13(d)
of the Exchange Act and the rules and regulations thereunder) of beneficial
ownership of 33 1/3% or more of Vitalink Common Stock, whether by tender
offer, exchange offer or otherwise.
Termination by GranCare Only
The Merger 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
shareholders of GranCare, by action of the Board of 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 IV of the Merger
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 the Merger Agreement such
that the closing conditions in favor of GranCare would not be satisfied;
provided, however, that if such breach or breaches are capable of being cured
prior to the Effective Time, such breach or breaches shall not have been cured
within 15 days of delivery to Vitalink of written notice of such breach or
breaches, (c) Vitalink shall have furnished or disclosed non-public
information to, or commenced negotiations with, a third party with respect to
a Vitalink Acquisition Transaction or shall have resolved to do either of the
foregoing and publicly disclosed such resolution, (d) the Board of Directors
of Vitalink shall have withdrawn, changed, modified in any manner or taken
action inconsistent with its recommendation of 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 could
yield a higher value to GranCare's shareholders than will the Merger and the
other party to such agreement is financially capable of consummating such
GranCare Business Combination Transaction and (B) by the written opinion of
outside counsel to GranCare that failure to terminate
84
<PAGE>
the Merger Agreement would be inconsistent with the Board's fiduciary duties
to the shareholders of GranCare, and (ii) after weighing such advice, shall
determine in good faith that failure to terminate the Merger 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) and that prior to terminating the Merger
Agreement GranCare shall have made all the GranCare Payments, or (f) Manor
Care shall have breached its obligations pursuant to Section 1.2 of the Voting
Agreement. See "The Distribution Agreement--Terms of the Voting Agreement."
The term "GranCare Business Combination Transaction" is defined as any of
the following involving GranCare or any Pharmacy Subsidiary (as defined in the
Merger Agreement) 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 (as
defined in the Merger Agreement), 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.
TERMINATION FEES AND EXPENSES
Except as set forth below, each of Vitalink and GranCare shall bear their
respective expenses incurred in connection with the Merger except that
expenses incurred in printing, mailing and filing this Proxy
Statement/Prospectus shall be shared equally by Vitalink and GranCare.
If the Merger Agreement is terminated (i) by mutual consent or by either
party pursuant to the first paragraph of "--Termination" above (except clause
(a)) and prior to such termination any person shall have made a bona fide
proposal concerning a GranCare Business Combination Transaction, or (ii) by
Vitalink pursuant to the third paragraph of "--Termination" above (except
clause (e)) or (iii) by GranCare pursuant to clause (e) of the fifth paragraph
of "--Termination" above, then, GranCare shall promptly pay Vitalink by wire
transfer of immediately available funds to an account specified by Vitalink up
to $2.5 million to reimburse Vitalink for all documented fees and expenses
(including the fees and expenses of counsel, accountants, consultants and
advisors) in connection with the Merger Agreement and the transactions
contemplated thereby and if terminated pursuant to clause (e) of the third
paragraph of "--Termination" above, 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) $10.0
million by either, at GranCare's discretion, (x) delivery to Vitalink of an
irrevocable letter of credit for $10.0 million or (y) deposit of $10.0 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 $10.0 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, the
"GranCare Payments"). To the extent a GranCare Termination Payment has not
already become payable and been paid and if, prior to any termination by
mutual consent or by either party pursuant to the first paragraph of "--
Termination" above (except clause (a)) or by Vitalink only pursuant to the
third paragraph of "--Termination" above (except clause (e)), any person shall
have submitted a bona fide proposal concerning a GranCare Business Combination
Transaction and within eighteen months after the termination of the Merger
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
85
<PAGE>
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.
If the Merger Agreement is terminated (i) by mutual consent of either party
pursuant to the first paragraph of "--Termination" above (except clause (a))
and prior to such termination any person shall have made a bona fide proposal
concerning a Vitalink Business Combination Transaction (as defined below), or
(ii) by GranCare pursuant to the fifth paragraph of "--Termination" above
(except clause (e)) or (iii) by Vitalink pursuant to clause (e) of the third
paragraph of "--Termination" above, then Vitalink shall pay GranCare by wire
transfer of immediately available funds to an account specified by GranCare up
to $2.5 million to reimburse GranCare for its documented fees and expenses
(including the fees and expenses of counsel, accountants, consultants and
advisors) in connection with the Merger Agreement, the Distribution Agreement
and the transactions contemplated thereby. If the Merger Agreement is
terminated by Vitalink pursuant to clause (e) of the third paragraph of "--
Termination" above, 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) $10.0 million by
either, at Vitalink's discretion, (x) delivery to GranCare of an irrevocable
letter of credit for $10.0 million or (y) deposit of $10.0 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 $10.0 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 a Vitalink Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to the first paragraph of
"--Termination" above (except clause (a)) or the fifth paragraph of "--
Termination" above (except clause (e)), any person shall have submitted a bona
fide proposal concerning a Vitalink Business Combination Transaction and
within eighteen months after the termination of the Merger 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 proposed execution of a definitive agreement for a 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 a 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.
INDEMNIFICATION; INSURANCE
Vitalink shall cause the Surviving Corporation to indemnify, defend and hold
harmless the present and former officers and directors 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 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 of the Merger Agreement.
For a period of three years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by GranCare (provided
that the Surviving Corporation may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no
less advantageous) with respect to claims arising from facts or events which
occurred before the Effective Time; provided, however, that if the premiums
with respect to such insurance
86
<PAGE>
exceed 150% of the annual premiums paid as of the date of the Merger Agreement
by GranCare for such insurance, the Surviving Corporation shall be obligated
to purchase directors' and officers' liability insurance with a maximum
coverage as can be obtained at an annual premium equal to 150% of the annual
premiums paid by GranCare as of the date of the Merger Agreement.
AMENDMENT
Subject to applicable law, the Merger 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
therein; provided, however, that, after the Merger Agreement is adopted by the
shareholders of GranCare, no such amendment or modification shall change the
amount or form of the consideration to be delivered in respect of shares of
GranCare Common Stock.
WAIVERS; CONSENTS
Any failure of Vitalink, on the one hand, or GranCare, on the other hand, to
comply with any obligation, covenant, agreement or condition contained in the
Merger Agreement may be waived by Vitalink or GranCare, respectively, only by
a written instrument signed by the party granting such waiver, but such waiver
or failure to insist upon strict compliance with such obligation, covenant,
agreement or condition shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure. Whenever the Merger Agreement
requires or permits consent by or on behalf of any party to the Merger
Agreement, such consent shall be given in writing pursuant to the terms
thereof.
YEAR END TREATMENT OF THE TRANSACTIONS FOR TAX AND FINANCIAL REPORTING
PURPOSES
Under the terms of the Merger Agreement, GranCare and Vitalink are required
to take all reasonable actions necessary in order to cause the Merger to be
treated as consummated as of December 31, 1996 for financial reporting and tax
purposes.
87
<PAGE>
THE DISTRIBUTION AGREEMENT
This section of the Proxy Statement/Prospectus describes certain aspects of
the proposed Distribution as well as certain contractual arrangements that
will exist between New GranCare and Vitalink following the completion of the
Distribution and the Merger. For information describing certain aspects of the
Merger, see "Description of the Transactions" and "The Merger Agreement"
herein. The descriptions of the various agreements contained herein,
including, without limitation, the Distribution Agreement, the Employee
Benefits Agreement, the Non-competition Agreement, the Shareholders Agreement,
the Interim Services Agreement, the Supply Agreements and the Tax Allocation
Agreement (each as defined below), do not purport to be complete and are
qualified in their entirety by reference to forms of such agreements which are
attached either as annexes hereto or filed as an exhibit to the registration
statement of which this Proxy Statement/Prospectus is a part, which annexes
and exhibits, as the case may be, are incorporated herein by reference. All
GranCare shareholders are urged to read such agreements in their entirety.
CONTRIBUTION OF SKILLED NURSING BUSINESS TO NEW GRANCARE
Prior to the Distribution Record Date, GranCare will engage in an internal
reorganization pursuant to which all the assets and liabilities relating to
the Skilled Nursing Business will be reorganized in various tax-free
transactions such that upon completion of such reorganization, the Skilled
Nursing Business will be conducted by New GranCare, a direct subsidiary of
GranCare, and various direct and indirect subsidiaries of New GranCare. At the
same time, the assets and liabilities of GranCare relating primarily to the
Institutional Pharmacy Business will be reorganized so that upon completion of
the internal reorganization the Institutional Pharmacy Business will be
conducted by TeamCare, a direct subsidiary of GranCare, and various direct and
indirect subsidiaries of TeamCare. In connection with the consummation of the
transactions contemplated by the Distribution Agreement and the Merger
Agreement, GranCare, New GranCare and Vitalink will enter into additional
agreements and arrangements designed to further effect the separation of the
GranCare's Skilled Nursing Business from its Institutional Pharmacy Business
and to establish the parameters of certain intercompany relationships
subsequent to the completion of the Merger. Among these agreements are (i) the
Employee Benefits Agreement (the "Employee Benefits Agreement") between
GranCare and New GranCare, (ii) the Tax Allocation Agreement (the "Tax
Allocation Agreement") between GranCare and New GranCare, (iii) the Non-
competition Agreement (the "Non-competition Agreement") between Manor Care,
Vitalink and New GranCare, (iv) the Shareholders Agreement (the "Shareholders
Agreement") between Vitalink and Manor Care, (v) the Interim Services
Agreement (the "Interim Services Agreement") between New GranCare and
Vitalink, (vi) the Pharmaceutical Supply Agreements by and between TeamCare
and substantially all of GranCare's facilities (the "Supply Agreements") and
(vii) the Voting Agreement (the "Voting Agreement") between Manor Care and the
Company.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, GranCare will take certain actions as the sole shareholder of
New GranCare or will ratify action taken by officers and directors of New
GranCare in connection with establishing New GranCare as an independent
company. These actions include (i) merging GCI Properties, Inc., a California
corporation ("GCI") and wholly-owned subsidiary of the Company, with and into
New GranCare, with New GranCare being the surviving entity (all of the assets
pertaining to the Company's Skilled Nursing Business will then be contributed
to New GranCare following such merger), (ii) adopting the Certificate of
Incorporation and Bylaws of New GranCare to be in effect at the Time of
Distribution (as defined in the Distribution Agreement), (iii) electing as
directors of New GranCare the individuals named in the Prospectus and causing
the appointment of officers of New GranCare to serve in such capacities
following the Distribution and (iv) adopting various incentive compensation
plans for the benefit of directors, officers and employees of New GranCare to
be in effect following the Distribution. For information concerning a
comparison of California and Delaware law and the Charter and Bylaws of New
GranCare, see "Description of New GranCare Capital Stock--The Charter and
Bylaws of the Company and New GranCare" and "Significant Differences Between
the Corporation Laws of California and Delaware" in the Prospectus. For
information concerning the individuals who may serve as directors and
executive officers of New GranCare
88
<PAGE>
following the Distribution and certain compensatory arrangements for their
benefit, including stock incentive plans, see "Management--Executive Officers
and Directors--Compensation of Directors" and "--Compensation of Executive
Officers" in the Prospectus.
Pursuant to the Distribution Agreement, New GranCare will acquire the right
to use the name "GranCare" in connection with continuing the conduct of the
Skilled Nursing Business. It is anticipated that immediately following the
Merger, New GranCare will change its name to "GranCare, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF GRANCARE STOCK OPTIONS
The Distribution will be effected immediately prior to the Merger. However,
the Distribution will not be effected unless the Merger Proposal is approved
by GranCare's shareholders and is about to occur. Shareholder approval of the
Distribution Proposal is being sought pursuant to the requirements of the
Merger Agreement and to ensure that the objectives of GranCare's shareholders
are consistent with the objectives sought to be accomplished by GranCare's
Board of Directors pursuant to the Distribution and the Merger. The Board of
Directors of GranCare has not yet established the Distribution Record Date,
although it is anticipated that the Distribution Record Date will be the date
on which the Distribution occurs and will be immediately prior to the
Effective Time of the Merger.
On the Distribution Date (as such term is defined in the Distribution
Agreement) GranCare's Board of Directors will cause GranCare to pay a dividend
to GranCare's shareholders as of the Distribution Record Date, which dividend
will be payable in shares of New GranCare Common Stock. Each shareholder of
GranCare as of the Distribution Record Date will receive one share of New
GranCare Common Stock for each share of GranCare Common Stock held as of the
Distribution Record Date. Immediately following the completion of the
Distribution, New GranCare will be a publicly-owned corporation and it is
contemplated that the shares of New GranCare Common Stock will be listed on
the NYSE. See "--Listing of New GranCare Common Stock; Restrictions on Resale"
in the Prospectus.
Following the completion of the Distribution, GranCare will merge with and
into Vitalink with Vitalink being the surviving corporation in the Merger.
Each shareholder of GranCare will receive 0.478 of a share of Vitalink Common
Stock in exchange for each share of GranCare Common Stock held by a
shareholder of GranCare as of the Effective Time of the Merger. As a result of
the Merger, the Institutional Pharmacy Business will be conducted through
various direct and indirect subsidiaries of Vitalink.
As a consequence of the Distribution, each holder of GranCare Options will
receive options to purchase such number of shares of New GranCare Common Stock
as is equal to the number of shares of GranCare Common Stock subject to
GranCare Options held by such holder as of the Distribution Record Date. The
exercise price of a New GranCare Option will be equal to a percentage of the
exercise price of the existing GranCare Option, while the current exercise
price of existing GranCare Options will be correspondingly adjusted downward
by the amount allocated as the exercise price of the New GranCare Option. The
allocation of the exercise price between the existing GranCare Options and the
New GranCare Options will be determined pursuant to the following formula
which is intended to apportion such exercise price in a manner that reflects
the value received by GranCare's shareholders in respect of the Institutional
Pharmacy Business (in the case of the portion of the exercise price allocated
to the existing GranCare Options) and the remaining portion of the exercise
price is intended to reflect the implied value of GranCare's Skilled Nursing
Business (in the case of the portion of the exercise price allocated to the
New GranCare Options). The option exercise price allocation formula is as
follows: (i) multiply the Average Vitalink Stock Price (as defined below) by
the Exchange Ratio and (ii) divide the product so obtained by the Average
GranCare Stock Price (defined below) to obtain the "GranCare Option Allocation
Percentage". The percentage of the exercise price of each existing GranCare
Option that will be allocated to the New GranCare Option issued with respect
to such GranCare Option (the "New GranCare Option Allocation Percentage") is
equal to 1.00 minus the GranCare Option Allocation Percentage. For purposes of
the foregoing exercise price allocation calculation, the Average Vitalink
Stock Price and the Average Company Stock Price were determined to be $23.03
and $17.88, respectively, constituting the average closing price per
89
<PAGE>
share for Vitalink Common Stock and GranCare Common Stock for the 120
consecutive trading day period ending on August 29, 1996. As a result of the
foregoing process, the GranCare Option Allocation Percentage will be
approximately 61.568% of the exercise price of each existing GranCare Option
and the New GranCare Option Allocation Percentage will be approximately
38.432% of the exercise price of each existing GranCare Option. As a result of
the Merger, the exercise price of the Adjusted GranCare Options (as defined
below) will be further adjusted to give effect to the 0.478 Exchange Ratio.
As a result of the foregoing, the exercise price of each existing GranCare
Option will be adjusted by multiplying the exercise price by the GranCare
Option Allocation Percentage (the "Adjusted GranCare Option"). As a
consequence of the Merger, each holder of an Adjusted GranCare Option as of
the Effective Time of the Merger will receive an option to purchase such
number of shares of Vitalink Common Stock as is equal to the number of shares
of GranCare Common Stock issuable upon exercise of the Adjusted GranCare
Option multiplied by the 0.478 Exchange Ratio. The exercise price of each
Adjusted GranCare Option will be further adjusted by dividing such exercise
price by the 0.478 Exchange Ratio.
The terms and conditions of the New GranCare Options and the Adjusted
GranCare Options will be substantially the same as the terms of the GranCare
Options prior to the Distribution. Options to purchase 2,355,250 shares of
GranCare Common Stock were outstanding as of October 1, 1996 of which options
to purchase 988,934 shares of GranCare Common Stock were unvested and not
exercisable. However, all of such unvested GranCare Options contain change of
control provisions that provide that such options will become fully vested and
exercisable upon the occurrence of a change of control transaction such as the
Merger. The option agreements also provide that such GranCare Options do not
expire upon a termination of employment following a change of control. Thus,
even if the holder of a GranCare Option does not become an employee of the
Institutional Pharmacy Business following the Merger, such employee will
continue to have the right to exercise Adjusted GranCare Options following the
Merger until the expiration date of such option. Conversely, an employee of
the Institutional Pharmacy Business who does not become an employee of the
Skilled Nursing Business following the Merger will continue to have the right
to exercise New GranCare Options following the Merger until the expiration
date of such options. The existing GranCare Options, which were granted at
fair market value at the time of grant, have exercise prices ranging from
$1.61 to $21.00 per share.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that upon the formal declaration by GranCare's Board of
Directors of the Distribution that the Distribution will be made on the
Distribution Date to shareholders of record of GranCare Common Stock as of the
Distribution Record Date. The Merger is expected to take place promptly
following the satisfaction of certain conditions set forth in the Merger
Agreement and is expected to occur prior to December 31, 1996. The
Distribution will not take place unless all of the conditions to effecting the
Merger (other than the completion of the Distribution) have been fulfilled,
and there can be no assurance as to the timing or consummation of the
Distribution. GranCare's transfer agent, American Stock Transfer & Trust
Company, will act as the Distribution Agent for the Distribution and will
deliver certificates for New GranCare Common Stock as soon as practicable to
holders of record of GranCare Common Stock as of the close of business on the
Distribution Record Date on the basis of two shares of New GranCare Common
Stock for every three shares of GranCare Common Stock held on the Distribution
Record Date. Fractional shares will not be distributed in the Distribution.
Fractional shares will be aggregated and sold in the public market by the
Distribution Agent and the aggregate net cash proceeds will be distributed
ratably to shareholders entitled to fractional interests. All shares of New
GranCare Common Stock will be fully paid and non-assessable and the holders
thereof will not be entitled to preemptive rights. See "Description of Capital
Stock" in the Prospectus. Following the completion of the Distribution New
GranCare will operate as an independent public company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW GRANCARE COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR GRANCARE COMMON STOCK CERTIFICATES IN ORDER TO RECEIVE
SHARES OF NEW GRANCARE COMMON STOCK IN THE DISTRIBUTION. THE
90
<PAGE>
DISTRIBUTION AGENT WILL SEND YOU YOUR NEW GRANCARE STOCK CERTIFICATES
FOLLOWING THE CONSUMMATION OF THE DISTRIBUTION.
LISTING OF NEW GRANCARE COMMON STOCK; RESTRICTIONS ON RESALE
New GranCare will apply for listing the New GranCare Common Stock on the
NYSE. The New GranCare Common Stock received pursuant to the Distribution will
be freely transferable under the Securities Act, except for shares of New
GranCare Common Stock received by any persons who may be deemed to be an
"affiliate" of New GranCare within the meaning of Rule 144 promulgated under
the Securities Act. Persons who may be deemed to be affiliates of New GranCare
after the Distribution generally include individuals or entities that control,
are controlled by, or are under common control with New GranCare, and may
include the directors and executive officers of New GranCare as well as any
principal stockholders of New GranCare. Persons who are affiliates of New
GranCare will be permitted to sell their New GranCare Common Stock received
pursuant to the Distribution only pursuant to an effective registration
statement under the Securities Act or pursuant to an exemption from the
registration requirements of such act. The registration statement associated
with the Prospectus will not cover resales of New GranCare Common Stock by
affiliates of New GranCare. See "Shares Eligible for Future Sales" in the
Prospectus.
TREATMENT OF CERTAIN INDEBTEDNESS
Senior Subordinated Notes--As of November 30, 1996, there was $100 million
aggregate principal amount of Senior Subordinated Notes outstanding. The
Senior Subordinated Notes bear interest at the rate of 9 3/8% per annum,
mature on September 15, 2005 and are not redeemable prior to September 15,
2000. The Senior Subordinated Notes are senior subordinated obligations of
GranCare ranking subordinate in right of payment to all senior indebtedness of
GranCare (including indebtedness outstanding under the Existing Credit
Facility) and senior in right of payment to all subordinated indebtedness
(including the Convertible Debentures). GranCare must make an offer to
repurchase the Senior Subordinated Notes upon certain change of control events
at a purchase price of 101% of the principal amount thereof. The Note
Indenture contains certain restrictive covenants including: (i) a limitation
on additional indebtedness; (ii) a limitation on other senior subordinated
debt; (iii) a limitation on liens; (iv) a limitation on the issuance of
preferred stock by GranCare's subsidiaries; (v) a limitation on transactions
with affiliates; (vi) a limitation on restricted payments; (vii) a restriction
on the application of proceeds from certain asset sales; (viii) a limitation
on restrictions on subsidiary dividends; (ix) a restriction on mergers,
consolidations and the transfer of all or substantially all of the assets of
GranCare to another person; (x) a limitation on investments and loans and (xi)
a limitation on lines of business. As certain of these covenants may be
breached by the Distribution, and in order to ensure greater operating
flexibility for Vitalink following the Merger, it is a condition to the Merger
that the Tender Offer be consummated and the Consent be obtained.
Tender offer materials describing GranCare's tender offer for all of the
outstanding Senior Subordinated Notes at a price of $1,090 per $1,000
principal amount of the Senior Subordinated Notes were mailed to holders
thereof on December 18, 1996. The materials include a description of the
Consent, which holders of the Senior Subordinated Notes are required to sign
as a condition to tendering their Senior Subordinated Notes, which provides
for an amendment (the "Proposed Amendment") to the Note Indenture which would
delete the covenants described in the preceding paragraph (other than those
described in clauses (iii) and (vii)). The Proposed Amendment requires the
consent of holders of a majority in aggregate principal amount of the Senior
Subordinated Notes then outstanding. Holders of approximately $43.4 million
aggregate principal amount of Senior Subordinated Notes have agreed to tender
their Senior Subordinated Notes and consent to the Proposed Amendment, and
PaineWebber (as Dealer Manager for the Tender Offer) has advised GranCare that
holders of an additional approximately $17 million aggregate principal amount
of Senior Subordinated Notes have indicated their intention to tender their
Senior Subordinated Notes and consent to the Proposed Amendment, representing
in the aggregate approximately 60.4% of the outstanding aggregate principal
amount of Senior Subordinated Notes, which would be sufficient for the
approval of the Proposed Amendment. The Proposed Amendment will become
effective immediately prior to the consummation of the Transactions. There can
be no assurance that the
91
<PAGE>
holders of the Senior Subordinated Notes will tender all of the outstanding
Senior Subordinated Notes or Consent to the Proposed Amendment. The
consummation of the Transactions is conditioned upon consummation of the
Tender Offer and obtaining the Consent.
Vitalink will refinance the indebtedness represented by the Senior
Subordinated Notes tendered in the Tender Offer through borrowings under the
Vitalink Credit Facility. In connection with the assumption by Vitalink of any
untendered Senior Subordinated Notes, New GranCare has agreed to pay Vitalink
a fee with respect to such Senior Subordinated Notes (which amount is a Shared
Transaction Expense (as defined below), see "--Expenses") representing the
present value (discounted back to the Effective Time of the Merger from the
date the Senior Subordinated Notes first become redeemable) of the estimated
interest rate differential between the Senior Subordinated Notes and the
borrowing cost that would be incurred by Vitalink in connection with the
issuance of similar securities. In addition, any premium paid in connection
with the Tender Offer of the Senior Subordinated Notes (and all related
expenses) will be a Shared Transaction Expense.
Convertible Debentures--The Distribution Agreement and the Merger Agreement
also require that the Company take commercially reasonable efforts to call for
redemption prior to the Distribution Date all of the Company's outstanding
Convertible Debentures. The Convertible Debentures are issued pursuant to the
terms of an Indenture dated January 29, 1993 between the Company and First
Union National Bank (the "Debenture Indenture") and are presently redeemable
at a redemption price of 104.55% of the principal amount of the Convertible
Debentures plus accrued and unpaid interest to the date of redemption. There
are currently $60.0 million in aggregate principal amount of Convertible
Debentures outstanding resulting in an aggregate redemption premium of
approximately $2.73 million which will also be a Shared Transaction Expense
(such premium will be reduced by $390,000 if the redemption occurs after
January 15, 1997). See "--Expenses."
Existing Credit Facility--GranCare currently has in place a revolving credit
facility which permits borrowings of up to $150.0 million (the "Existing
Credit Facility"). The Existing Credit Facility was established pursuant to a
Credit Agreement dated as of March 31, 1995 (as heretofore amended, the
"Existing Credit Agreement"), by and among GranCare, as borrower, First Union
National Bank of North Carolina, as Agent (in such capacity, the "Existing
Agent") and letter of credit bank, and the financial institutions signatory
thereto as lenders. The Existing Credit Facility includes a $45.0 million
subfacility for working capital loans. Incorporated as part of the working
capital line is a $10.0 million subline for standby letters of credit and a
$5.0 million swingline from the Existing Agent. As of September 30, 1996,
$88.9 million was outstanding under the Existing Credit Facility.
The Existing Credit Agreement provides that all outstanding principal under
the Existing Credit Facility on June 30, 1998 (the "Term Conversion Date")
will be converted to term loans which mature four years after the Term
Conversion Date. Such term loans are to be amortized in sixteen equal
quarterly installments prior to maturity.
The obligations of GranCare under the Existing Credit Facility are
guaranteed by GranCare's direct and indirect subsidiaries other than GCI
Indemnity, Inc. (the "Existing Subsidiary Guaranty Obligations") and are
secured by a pledge of all of the capital stock of GranCare's direct
subsidiaries and a security interest in all or substantially all of the
otherwise unencumbered assets of GranCare. The Existing Subsidiary Guaranty
Obligations are secured by a pledge of all of the capital stock of GranCare's
indirect subsidiaries (other than GCI Indemnity, Inc.) and a security interest
in all or substantially all of the otherwise unencumbered assets of such
indirect subsidiaries.
Loans outstanding from time to time under the Existing Credit Facility bear
interest at either the Base Rate (defined below) or at the Eurodollar Rate
(defined below) (at the Company's option), in each case plus the applicable
margin. The "Base Rate" is defined as the higher of (i) the prime rate
announced from time to time by First Union National Bank of North Carolina or
(ii) the effective Federal Funds Rate, plus 0.50% per annum. The Existing
Credit Agreement defines the "Eurodollar Rate" as the average London Interbank
Offered Rate ("Libor") of one, two, three or six-month Eurodollar deposits.
Interest is payable in arrears.
92
<PAGE>
The Existing Credit Facility contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include (but
are not limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, GranCare is required to comply with certain
financial covenants governing, among other things, the ratio of debt to equity
and earnings to interest expense that must be maintained by GranCare.
New Credit Facility--In order to effect the Distribution, GranCare will be
required to replace its Existing Credit Facility and currently has a
commitment letter from First Union National Bank of North Carolina, as
Administrative Agent ("First Union"), and The Chase Manhattan Bank, as
Syndication Agent ("Chase"), and First Union Capital Markets Corp. and Chase
Securities Inc., as Arrangers, whereby each of such banks has agreed to
provide GranCare for the benefit of New GranCare a replacement credit facility
(the "New Credit Facility") in the aggregate amount of $300.0 million (with
First Union and Chase each committing $150.0 million). The New Credit Facility
will consist of two components: a $200.0 million five-year revolving credit
facility (which includes a $25.0 million sub-limit for the issuance of standby
letters of credit) and a $100.0 million five-year term loan. Borrowings for
working capital and general corporate purposes may not exceed $75.0 million.
It is anticipated that the initial use of the New Credit Facility will be to
redeem the Convertible Debentures, to repay outstanding balances under the
Existing Credit Facility and to pay for expenses in connection with the
Distribution and Merger.
The obligations of New GranCare under the New Credit Facility will be
guaranteed by New GranCare's present and future direct and indirect
subsidiaries other than GCI Indemnity, Inc. (the "New Subsidiary Guaranty
Obligations") and will be secured by a pledge of all of the capital stock of
New GranCare's present and future direct subsidiaries, a security interest in
all or substantially all of the otherwise unencumbered assets of New GranCare
and a pledge of all intercompany notes held by New GranCare. The New
Subsidiary Guaranty Obligations are to be secured by a pledge of all of the
capital stock of the indirect subsidiaries of New GranCare (other than GCI
Indemnity, Inc.), a security interest in all or substantially all of the
otherwise unencumbered assets of such indirect subsidiaries and a pledge of
all intercompany notes held by such subsidiaries.
The revolving credit portion of the New Credit Facility will mature in five
years. The term loan portion of the New Credit Facility will be amortized in
ten quarterly installments of $7.0 million each commencing two years after the
New Credit Facility closes, thereafter increasing to $10.0 million per
quarter. All remaining principal and accrued and unpaid interest shall be due
and payable in full on the fifth anniversary of the closing date of the New
Credit Facility.
Interest on outstanding borrowings shall accrue, at the option of New
GranCare, at the Base Rate (defined below) or at the Eurodollar Rate (defined
below) plus, in each case, an applicable margin. The "Base Rate" is defined as
the higher of (i) First Union's prime rate or (ii) the effective Federal Funds
Rate, plus 0.50% per annum. The Eurodollar Rate is defined as the published
rate or the arithmetic mean of rates at which Eurodollar deposits are offered
for periods of one, two, three or six-months. Interest is payable in arrears.
The applicable margin (as defined in the New Credit Facility) varies in
accordance with a pricing matrix based upon New GranCare's ratio of
Consolidated Senior Debt (as defined in the New Credit Facility) to EBITDA and
varies depending on the type of interest rate selected by New GranCare. For
Base Rate loans, the applicable margin ranges from 0.000% (for a Consolidated
Senior Debt to EBITDA ratio of less than 2.5) to 0.500% (for a Consolidated
Senior Debt to EBITDA ratio of greater than 4.0. The applicable margin for
Eurodollar Rate loans ranges from 0.75% to 1.75% for the same Consolidated
Senior Debt to EBITDA ratios set forth above. In order to qualify for the
lowest applicable margin for Base Rate loans or Eurodollar Rate loans, New
GranCare's Total Debt to EBITDA must also be less than 3.0). Initially, the
applicable margins will be 0.25% for Base Rate loans and 1.25% for Eurodollar
Rate loans until New GranCare delivers its financial statements for the
quarter ended September 30, 1996. Thereafter, the applicable margins will be
adjusted in accordance with the pricing matrix referred to above, except that
the applicable margin for Eurodollar Rate loans cannot be adjusted to less
than 1.25% until New GranCare delivers its financial statements for the
quarter ended March 31, 1997.
93
<PAGE>
All of the net proceeds of asset sales (subject to certain customary
exceptions) and the issuance of subordinated debt must be applied to
permanently reduce outstanding borrowings and commitments under the New Credit
Facility. However, if at least $100.0 million of subordinated debt is issued,
New GranCare will be permitted (though it will not be obligated) to apply up
to $35.0 million of the proceeds of such issuance to the repurchase of New
GranCare capital stock. The remaining balance of such proceeds are to be
applied pro rata to reduce the outstanding balance on the term loan portion of
the New Credit Facility, and thereafter to the outstanding balance on the
revolving loan portion of the New Credit Facility. To the extent amounts
prepaid on the revolving loan portion of the New Credit Facility are not re-
employed to fund permitted acquisitions within six months, the revolving loan
commitment will be permanently reduced.
The New Credit Facility will contain representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants will include
(but not be limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, New GranCare will be required to comply with
certain financial covenants governing, among other things, the ratio of debt
to equity and earnings to interest expense which must be maintained by New
GranCare.
The funding of the New Credit Facility is subject, among other things, to
the satisfactory completion of due diligence, obtaining all necessary consents
and the execution of satisfactory loan documentation.
HRPT Obligations--HRPT is the holder of a mortgage loan to AMS Properties,
Inc., a wholly-owned Subsidiary of GranCare, dated October 1, 1994, in the
original principal amount of $11.5 million (the "HRPT Loan"). The HRPT Loan is
secured, in part by mortgage and security agreements dated as of March 31,
1995 (collectively, the "Mortgages") in favor of HRPT and encumbering two
nursing facilities in Wisconsin owned by AMS Properties, Inc. The HRPT Loan
was incurred in connection with the acquisition and lease by AMS Properties,
Inc. of several nursing facilities in Wisconsin, California, Colorado and
Illinois pursuant to an Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 28, 1990 (as amended, the "HRPT
Acquisition Agreement"). The remaining balance under the HRPT Loan is due
December 31, 2010 and may be prepaid upon the payment of certain prepayment
penalties, which penalties essentially provide that HRPT will receive the
future value of the amounts owed. HRPT has also leased 7 nursing facilities
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc. ("GCIHCC") under a master lease agreement dated as of June 30, 1992 (the
"GCIHCC Lease"). Pursuant to Section 9.15A of the Acquisition Agreement, the
consent of HRPT is required in order to permit the Transactions. As a
condition to granting the HRPT Consent and in consideration of HRPT releasing
GranCare and its subsidiaries (other than New GranCare and its subsidiaries),
which will become subsidiaries of Vitalink following the Merger, from all
obligations to HRPT, Vitalink will (a) pay the Consent Fee to HRPT in the
amount of $10.0 million which will be promptly reimbursed by New GranCare
immediately following the consummation of the Transactions and enter into a
limited guaranty (not to exceed $15.0 million in the aggregate) which will
guaranty payment by New GranCare, AMS Properties and GCIHCC under the
Mortgages, the GCIHCC Lease, and the HRPT Loan (collectively, the "HRPT
Obligations") for so long as such obligations remain outstanding or until the
New GranCare Letter of Credit (as defined below) is drawn upon by Vitalink.
New GranCare, AMS Properties, Inc. and GCIHCC will retain primary liability
for the HRPT Obligations and will retain sole liability under the HRPT
Acquisition Agreement. To support Vitalink's limited guaranty of the foregoing
obligations, New GranCare will provide an irrevocable letter of credit in the
amount of $15.0 million payable to Vitalink in the event Vitalink makes any
payments under the limited guaranty (the "New GranCare Letter of Credit"). New
GranCare has also agreed that for so long as Vitalink's limited guaranty is in
effect, New GranCare will not terminate any of the Pharmaceutical Supply
Agreements. As a result, it is anticipated that the Pharmaceutical Supply
Agreements may extend through December 31, 2010, the date when all present
HRPT Obligations will be satisfied, unless the New GranCare Letter of Credit
is drawn upon earlier by Vitalink or certain other conditions are satisfied.
See "Existing Contractual Arrangements Between TeamCare and New GranCare--
Terms of the Pharmaceutical Supply Agreements."
94
<PAGE>
EXPENSES
New GranCare (on behalf of itself and GranCare) and Vitalink will each be
responsible for one-half of the total documented fees, expenses and other items
of cost (other than legal fees) which are incurred by New GranCare, GranCare
and Vitalink in connection with the consummation of the various transactions
contemplated by the Distribution Agreement, the Merger Agreement and the
various other agreements contemplated thereby (the "Shared Transaction
Expenses"). The Shared Transaction Expenses include various commitment and
related fees incurred in connection with the New Credit Facility, the
redemption premium that will be incurred in connection with the redemption of
the Convertible Debentures and, any premium that may be paid in connection with
a tender offer and consent solicitation pertaining to, the Senior Subordinated
Notes, various consent fees incurred by New GranCare and GranCare, financial
advisory and investment banking fees, accounting fees, the cost of maintaining
the Company's directors' and officers' liability insurance coverage for a three
year period following the Effective Time of the Merger and miscellaneous fees
and expenses such as printing fees and filing fees that will be payable to
various federal and state regulatory authorities. GranCare estimates that the
fees and expenses constituting Shared Transaction Expenses will approximate
$22.0 million. In addition to the Shared Transaction Expenses, GranCare
estimates that the Distribution and Merger will result in an additional $19.0
million of expenses which will be incurred by GranCare.
CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, shareholder approval of the Distribution. The completion of the
Distribution is also a condition to the consummation of the Merger and GranCare
does not presently intend to consummate the Distribution unless and until all
of the conditions to the consummation of the Merger (other than the completion
of the Distribution) have been satisfied. The consummation of the Merger is
subject to a number of conditions set forth in the Merger Agreement. See "The
Merger Agreement--Conditions."
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement between Vitalink
and GranCare, New GranCare and GranCare executed the Distribution Agreement.
Following the Merger, Vitalink will succeed to GranCare's obligations arising
pursuant to the Distribution Agreement by operation of law following the Merger
of the Company into Vitalink. The Distribution Agreement provides a general
framework for allocating GranCare's assets and liabilities pursuant to the
Internal Restructuring Plan (attached as Exhibit A to the Distribution
Agreement) to segregate the Skilled Nursing Business from the Institutional
Pharmacy Business prior to the Distribution Date in preparation for the
Distribution and Merger. The Distribution Agreement also sets forth the general
terms on which GranCare will conduct its business prior to the Distribution
Date as well as the terms regarding certain relationships between Vitalink and
New GranCare following the Distribution.
The Distribution Agreement provides that the Distribution will be effected by
distributing to each holder of GranCare Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
GranCare Common Stock for each share of GranCare Common Stock held by such
holder as of such time. See "--Manner of Effecting the Distribution."
The Distribution Agreement provides that prior to the Distribution Date all
intercompany accounts existing between GranCare and any of its subsidiaries
(other than the Pharmacy Subsidiaries) (as such term is defined in the
Distribution Agreement), on the one hand, and the Pharmacy Subsidiaries, on the
other hand, will be netted out, in each case in such manner and amount as may
be agreed to in writing by duly authorized representatives of GranCare,
Vitalink and New GranCare. It is expected that a resulting net balance will be
due from the Pharmacy Subsidiaries to GranCare and certain of GranCare's other
subsidiaries. The amount of such net balance due shall be contributed by
GranCare or the appropriate subsidiaries of GranCare to which such amount is
owing to the appropriate Pharmacy Subsidiaries as additional capital.
95
<PAGE>
The Distribution Agreement also provides for the payment by Vitalink of
Senior Subordinated Notes tendered in the Tender Offer, for the assumption by
Vitalink (as part of the Merger) of the Company's outstanding indebtedness
associated with the Institutional Pharmacy Business, and assumption of the
Senior Subordinated Notes not tendered in the Tender Offer. See "--Treatment of
Certain Indebtedness." In connection therewith, GranCare will make an
offsetting payment to Vitalink. The offsetting payments will be determined
pursuant to a formula under which GranCare will make a payment to Vitalink in
an amount based on the excess of (i) the amount of indebtedness assumed or
incurred by Vitalink in the Merger (currently estimated to be $118.0 million
including the $10.0 million Consent Fee) over (ii) the sum of $88.4 million
plus the acquisition price of any institutional pharmacy businesses acquired by
GranCare subsequent to June 1, 1996 (currently estimated to be $7.9 million)
plus certain cash and cash equivalents held by TeamCare. This payment will be
further adjusted to ensure that each party shares equally the Shared
Transaction Expenses. This formula is designed to ensure that Vitalink emerges
from the Transactions with a predetermined amount of net debt (assumed or
incurred indebtedness offset by cash, cash equivalents and new assets).
The Distribution Agreement provides that from and after the Distribution
Date, Vitalink will indemnify, defend and hold harmless New GranCare and its
subsidiaries as well as the directors and officers of New GranCare and the
various New GranCare subsidiaries (collectively, the "New GranCare
Indemnitees") from and against all losses arising out of or relating to (i) the
Institutional Pharmacy Liabilities (as defined in the Distribution Agreement),
(ii) any breach, whether before or after the Distribution Date, by the Company
or the Pharmacy Subsidiaries of any provision of the Distribution Agreement or
any Ancillary Agreement (as defined in the Distribution Agreement) and (iii)
this Proxy Statement/Prospectus to the extent that any such loss relates to or
arises out of information contained in this Proxy Statement/Prospectus that
specifically relates to Vitalink.
Following the Distribution Date, New GranCare has agreed pursuant to the
Distribution Agreement to indemnify, defend and hold harmless, GranCare, each
Pharmacy Subsidiary, and the directors and officers of GranCare and the
Pharmacy Subsidiaries from and against losses arising out of or resulting from
(i) the Skilled Nursing Liabilities (as defined in the Distribution Agreement),
(ii) the breach, whether before or after the Distribution Date, by New GranCare
or any New GranCare subsidiary, of any provision of the Distribution Agreement
or any Ancillary Agreement, (iii) any claims arising out of the Prospectus or
the registration statement pertaining thereto, and (iv) this Proxy
Statement/Prospectus to the extent that such loss relates to or arises out of
information contained in this Proxy Statement/Prospectus that specifically
relates to New GranCare or GranCare. See "The Merger Agreement--
Indemnification; Insurance" for information regarding Vitalink's
indemnification obligations arising pursuant to the Merger Agreement.
For a period of three years following the Effective Time of the Merger,
Vitalink will maintain in effect GranCare's policies of directors' and
officers' liability insurance with respect to claims arising from facts or
events occurring prior to the Effective Time of the Merger. The cost of
maintaining such coverage in effect is a Shared Transaction Expense. See "--
Expenses." Notwithstanding the foregoing, if during such three year "tail"
period, premiums for such coverage increase by more than 150% of the annual
premiums paid as of the date of the Merger Agreement, Vitalink is only required
to obtain the maximum amount of directors' and officers' liability insurance
coverage as can then be purchased for an annual premium equal to 150% of the
annual premium being paid by GranCare as of the date of the Merger Agreement.
GranCare will maintain in effect through the Distribution Date all insurance
that was in force as of the date of execution of the Distribution Agreement.
Following the Distribution Date, Vitalink shall be responsible for providing
such insurance coverage as it may deem appropriate with respect to the assets
and business of the Institutional Pharmacy Business. Similarly, New GranCare
shall be responsible for maintaining such insurance coverage as it deems
appropriate with respect to the assets and business of the Skilled Nursing
Business. Following the Distribution Date, New GranCare shall retain the
responsibility for administering any and all claims asserted prior to the
Distribution Date with respect to the Institutional Pharmacy Business or the
Skilled Nursing Business. In such capacity, New GranCare shall also be
responsible for any premiums, deductibles and retentions in respect of such
insurance policies and the cost of any such claims shall be the sole
responsibility
96
<PAGE>
and obligation of New GranCare. Any resulting actuarial gains or losses
relating to pre-Distribution Date claims shall inure solely to New GranCare.
Following the Distribution Date, Vitalink shall file with New GranCare all
claims asserted subsequent to the Distribution Date that relate to occurrences
prior to the Distribution Date arising out of or in connection with the
Institutional Pharmacy Business and New GranCare shall be responsible for
notifying the appropriate insurance carrier and providing Vitalink with copies
of all correspondence relating to such notification. Thereafter, Vitalink shall
be responsible for administering all such claims wherein New GranCare is not
named as a co-defendant. To the extent that both New GranCare and Vitalink are
co-defendants in any such claim, each party will be entitled to direct its own
defense at its own cost. New GranCare shall be responsible for administering
all insurance proceeds received pursuant to insurance coverage in effect prior
to the Distribution Date and shall pay such proceeds, as appropriate, to
Vitalink with respect to Institutional Pharmacy Liabilities and retain such
proceeds that relate to Skilled Nursing Liabilities except with respect to
proceeds received in respect of claims asserted prior to the Distribution Date,
which shall be retained by New GranCare.
Prior to the consummation of the Merger, the Distribution Agreement may only
be amended with the consent of GranCare, New GranCare and Vitalink.
TERMS OF THE EMPLOYEE BENEFITS AGREEMENT
On the Distribution Date, GranCare and New GranCare will execute and deliver
the Employee Benefits Agreement pursuant to which the responsibility for the
rights and claims of employees of the Skilled Nursing Business and the
Institutional Pharmacy Business will be allocated. The Employee Benefits
Agreement provides that New GranCare will assume all of GranCare's tax
qualified plans which include a 401(k) plan as well as the AMS Pension Plan
(the termination of which was approved by the Board of Directors of the Company
at the September 17, 1996 meeting of the Board of Directors). Following the
Merger, the employees of the Institutional Pharmacy Business will be able to
participate in a separate 401(k) plan sponsored by Vitalink into which New
GranCare will transfer the assets relating to the accounts of such employees.
New GranCare will also assume GranCare's self-funded health and dental plans
including all "run-out liability" attributable to GranCare's participants who
are employees of the Institutional Pharmacy Business. GranCare will retain
certain insured welfare plans relating specifically to employees of the
Institutional Pharmacy Business.
GranCare will retain all existing non-qualified benefit plans and New
GranCare will adopt new non-qualified plans and assume the liability for all
employees of the Skilled Nursing Business who release GranCare from liability
under existing plans. GranCare will cause the existing rabbi trust funding
benefit entitlements under such plans to transfer to a new rabbi trust
established by New GranCare a proportionate part of the assets in the existing
trust to fund benefit entitlements of New GranCare employees. Rabbi trusts are
irrevocable with respect to assets contributed to the trust, except in the case
of bankruptcy, in which case assets contributed to the trust are subject to and
become a part of the bankruptcy estate of the settlor. New GranCare will also
adopt new flexible spending accounts as well as a replacement executive life
insurance plan.
GranCare will amend its existing incentive equity plans to provide that the
Distribution will not cause a termination of employment with respect to
outstanding stock grants. New GranCare will adopt certain new incentive equity
plans and will grant to each holder of GranCare Options as of the Distribution
Date an option to purchase an equivalent number of shares of New GranCare
Common Stock for every option to purchase three shares of GranCare Common Stock
held by such holder. The exercise price of each GranCare Option will be
allocated between the New GranCare Options and the Adjusted GranCare Options
pursuant to the formula described above. The exercise price of the New GranCare
Options will be further adjusted to reflect the manner of Distribution
discussed above. As a consequence of the Merger, all outstanding Adjusted
GranCare Options and the relevant exercise prices thereof will be converted at
the Exchange Ratio such that following the Merger such options will be
exercisable for shares of Vitalink Common Stock. See "--Consummation of the
Distribution; Treatment of GranCare Stock Options."
97
<PAGE>
The annual performance goals under GranCare's annual incentive bonus plan
will be adjusted to reflect the Distribution and the annual incentive bonus
plan will be amended to provide that the Distribution will not cause a
termination of employment for purposes of such plan. Similarly, GranCare's
Shareholder Value Program will be amended to provide that the Distribution will
not be deemed to cause a termination of employment. However, the effect of the
Distribution and the Merger will constitute a change of control which will
cause an acceleration of the payouts under such plans. See "Management--Long
Term Incentive Plans; Awards in Last Fiscal Year" in the Prospectus.
The Employee Benefits Agreement provides that New GranCare will offer
employment agreements to each employee of GranCare who is a party to an
employment agreement as of the Distribution Date other than those specified
employees who will become employees of Vitalink following the Merger. Any New
GranCare employee executing a new employment agreement will simultaneously
release GranCare from any liability under such employee's prior agreement. Any
employee that does not execute an appropriate release and asserts a claim for
payment under his or her existing employment agreement will be paid such
amounts as are required to be paid under such agreement and such agreement will
not be replaced or superseded. It is anticipated that any employee of the
Skilled Nursing Business who asserts a claim for payment under his or her
existing employment agreement will not be offered employment with New GranCare
following the completion of the Distribution and the Merger. See "Management--
Employment Agreements" in the Prospectus.
New GranCare employees will be given full credit for service with GranCare
and its affiliates for purposes of determining benefit entitlements under
benefit plans sponsored by New GranCare. Any benefit plans not specifically
addressed in the Employee Benefits Agreement will be assumed by New GranCare.
TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Manor Care, Vitalink and
New GranCare will enter into a Non-competition Agreement whereby Manor Care and
New GranCare will agree not to engage in the institutional pharmacy business
within the United States during the three year term of such agreement except
temporarily in connection with future acquisitions of skilled nursing
businesses that have an established pharmacy operation imbedded in the acquired
skilled nursing business. Similarly, Vitalink will agree not to engage in the
skilled nursing business during the three year term of such agreement.
In the event that Manor Care or New GranCare shall, during the term of the
Non-competition Agreement, acquire a skilled nursing business that has as a
component, a pharmacy operation, the acquiror must offer to sell such pharmacy
operation to Vitalink at a purchase price not to exceed 120% of the product of
(i) EBITDA for such pharmacy component of the acquisition basis and (ii) a
fraction, the numerator of which is the aggregate purchase price for the
proposed acquisition and the denominator of which is the EBITDA for the
proposed acquisition taken as a whole. If the parties do not agree on a
purchase price for such pharmacy operations, then the acquiror (Manor Care or
New GranCare, as appropriate) may complete the proposed acquisition but must
use its commercially reasonable efforts to divest the pharmacy operations so
acquired within one year. Any sale of such pharmacy operations to a third party
must be at a purchase price that is equal to or greater than the formula
purchase price referenced above. If the proposed sale to a third party is at a
price less than the price derived pursuant to the formula purchase price
discussed above then Vitalink shall have a right of first refusal at such
lesser price.
In the event Vitalink acquires a skilled nursing business in conjunction with
the acquisition of a pharmacy business, Vitalink must use its commercially
reasonable efforts to divest itself of such skilled nursing business within one
year.
TERMS OF THE SHAREHOLDERS AGREEMENT
As of the Effective Time of the Merger, Vitalink and Manor Care will execute
the Shareholders Agreement which provides for continuity in the composition of
the Vitalink Board of Directors during the three year term of
98
<PAGE>
such agreement. Manor Care is currently the beneficial owner of approximately
82.3% of the issued and outstanding Vitalink Common Stock. Following completion
of the Merger, Manor Care will be the beneficial owner of approximately 45% of
the issued and outstanding Vitalink Common Stock.
During the term of the Shareholders Agreement, Manor Care will vote all
shares of Vitalink Common Stock beneficially owned by Manor Care in favor of
four nominees designated by GranCare prior to the Merger (the "GranCare
Nominees"). GranCare has nominated Gene E. Burleson, Joel S. Kanter, Gary U.
Rolle^ and Robert L. Parker as GranCare's Nominees. Following the Effective
Time of the Merger, Manor Care will vote its Vitalink Common Stock in favor of
any successor to any GranCare Nominee designated by a majority of the then
remaining GranCare Nominees. Any vacancy on the Vitalink Board of Directors
created by the departure of a GranCare Nominee will be filled by the nominee
selected by a majority of the then remaining GranCare Nominees.
Pursuant to the Shareholders Agreement, Manor Care has also agreed that it
will not vote its shares of Vitalink Common Stock in favor of the removal of a
GranCare Nominee unless requested to do so by a majority of the GranCare
Nominees. Furthermore, during the term of such agreement, Manor Care will vote
its shares of Vitalink Common Stock in favor of the removal of any director if
such removal is for cause and is recommended by a majority of Vitalink's
directors.
The Shareholders Agreement also requires Manor Care to limit sales of its
Vitalink Common Stock to (i) sales complying with the volume limitations set
forth in Rule 144 promulgated under the Securities Act, (ii) sales pursuant to
a registered secondary offering, (iii) private sales in an amount not in excess
of 10% of the total number of shares of issued and outstanding Vitalink Common
Stock and (iv) private sales in an amount in excess of 10% of the total number
of shares of issued and outstanding Vitalink Common Stock if the purchaser
thereof becomes a party to the Shareholders Agreement.
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New GranCare and GranCare will execute the
Interim Services Agreement which establishes a framework for New GranCare to
provide to Vitalink, as the successor to GranCare following the Effective Time
of the Merger, certain services as may be requested by Vitalink to ensure an
orderly transition. The contemplated services are generally expected to be
those that were historically provided by GranCare on a centralized basis to the
Institutional Pharmacy Business such as cash management, compensation and
benefits, management information systems and legal. The term of the agreement
is for one year unless earlier terminated by mutual agreement. New GranCare
shall be reimbursed for all direct and indirect costs and expenses incurred in
connection with providing any services as well as the allocated portion of the
base salaries of the New GranCare employees actually providing services.
TERMS OF THE VOTING AGREEMENT
GranCare and Manor Care have entered into a Voting Agreement dated as of
September 3, 1996. The Voting Agreement requires Manor Care to vote its
approximate 82.3% of the issued and outstanding Vitalink Common Stock in favor
of the Merger.
TERMS OF THE TAX ALLOCATION AGREEMENT
In connection with the Distribution, GranCare, New GranCare and their
respective subsidiaries will enter into the Tax Allocation Agreement, which
sets forth each party's rights and obligations with respect to the allocation
and payment of tax liabilities and entitlements to refunds, if any, for any
federal, state, local or foreign taxes for periods before and after the
Effective Time of the Merger. The Tax Allocation Agreement also provides for
related matters such as the allocation of responsibility and the provision for
cooperation in connection with the preparation and filing of any tax returns
and the conduct of proceedings related to taxes and certain other matters.
99
<PAGE>
In general, the Tax Allocation Agreement provides for the allocation and
payment (or reimbursement) with respect to the following: (a) any and all taxes
resulting from the failure of the Distribution to qualify as a tax-free
reorganization and distribution within the meaning of Sections 368(a)(1)(D) and
355 of the Code, as well as any claims resulting therefrom, ("Restructuring
Taxes"); (b) the loss resulting from the disallowance of a tax deduction for
payments made to certain employees which are classified as "excess parachute
payments" under the provisions of Section 280G of the Code ("Lost Parachute
Payment Tax Benefits"); (c) the tax benefit resulting from the exercise of an
Adjusted Company Option or a New GranCare Option, or the disqualifying
disposition of the stock received upon such exercise by an employee ("Stock
Option Tax Benefits"); and (d) all other taxes ("Other Taxes"). The Tax
Allocation Agreement also assigns to the parties to the agreement
responsibility for preparing tax returns (generally, with limited exceptions,
New GranCare will be responsible for preparing all consolidated or combined tax
returns which include GranCare and/or any of its subsidiaries for any period
which ends on or before the Distribution Date), and defines the parties' rights
and responsibilities with respect to the carryback of losses after the
Distribution Date to taxable periods ending on or before the Distribution Date
(generally, New GranCare may carryback only those losses which it is required
to carryback by law and may carryback certain capital losses to periods during
which it was a member of a group of corporations that filed a consolidated or
combined return that included GranCare or any of its subsidiaries after the
Distribution Date). The Tax Allocation Agreement also provides that to the
extent one of the parties to the Tax Allocation Agreement is responsible (as
set forth below) for any liability covered under such agreement, that party
shall indemnify and hold the other parties to the Tax Allocation Agreement
harmless from such liability.
Under the Tax Allocation Agreement, Vitalink, as the successor to GranCare
following the Merger is responsible for (i) any and all liability which might
arise for Restructuring Taxes if Vitalink or any of the GranCare's subsidiaries
after the Distribution Date (the "Post Distribution Vitalink Group") undertakes
or fails to undertake one or more specified acts (a "Vitalink Tainting Act"),
provided that New GranCare or any of its subsidiaries after the Distribution
(the "New GranCare Group") has not previously undertaken or failed to undertake
one or more specified acts (a "New GranCare Tainting Act"), (ii) any and all
liability which might arise for Restructuring Taxes if the Post Distribution
Vitalink Group undertakes or fails to undertake an act (other than a Vitalink
Tainting Act) which gives rise to such liability for Restructuring Taxes,
provided that the New GranCare Group has neither committed a New GranCare
Tainting Act nor taken an act or failed to take an act (other than a New
GranCare Tainting Act) which gives rise to such liability for Restructuring
Taxes, (iii) one-half ( 1/2) of any and all liability for Restructuring Taxes
that arise due to a retroactive change in the law, provided that there is a
complete absence of Vitalink Tainting Acts and New GranCare Tainting Acts, and
a complete absence of any other acts or failures to act (other than Vitalink
Tainting Acts and New GranCare Tainting Acts) by both the Post Distribution
Vitalink Group and the New GranCare Group which give rise to such liability for
Restructuring Taxes, (iv) one-half ( 1/2) of any and all liability for
Restructuring Taxes, but not in excess of $10.0 million, if the liability for
Restructuring Taxes is the result of either multiple acts or failures to act
(other than Vitalink Tainting Acts and New GranCare Tainting Acts) by both the
Post Distribution Vitalink Group and the New GranCare Group which give rise to
such liability for Restructuring Taxes or there is a complete absence of any
acts or failures to act (including Vitalink Tainting Acts and New GranCare
Tainting Acts) and the liability for Restructuring Taxes is not the result of a
retroactive change in the law, (v) paying to New GranCare the Lost Parachute
Tax Benefits to the extent that such Lost Parachute Tax Benefits relate to
payments made to Gene E. Burleson or Arlen Reynolds if such payments would have
been deductible, but for the provisions of Code Section 280G, on or before the
closing, (vi) paying to New GranCare the Stock Option Tax Benefits to the
extent that such Stock Option Tax Benefits arise as a result of the exercise of
a stock option with respect to New GranCare Stock by an employee of the Post
Distribution Vitalink Group, or the disqualifying disposition by such employee
of such stock, and (vii) any and all liability for Other Taxes of the Post
Distribution Vitalink Group to the extent those Other Taxes are allocable to
any period or portion thereof beginning after the Distribution Date.
Under the Tax Allocation Agreement, New GranCare is responsible for (i) any
and all liability which might arise for Restructuring Taxes if any member of
the New GranCare Group commits a New GranCare Tainting Act, provided that the
Post Distribution Vitalink Group has not previously committed a Vitalink
Tainting Act,
100
<PAGE>
(ii) any and all liability which might arise for Restructuring Taxes if the New
GranCare Group undertakes or fails to undertake an act (other than a New
GranCare Tainting Act) which gives rise to such liability for Restructuring
Taxes, provided that the Post Distribution Vitalink Group has neither committed
a Vitalink Tainting Act nor taken an act or failed to take an act (other than a
Vitalink Tainting Act) which gives rise to such liability for Restructuring
Taxes, (iii) one-half ( 1/2) of any and all liability for Restructuring Taxes
that arise due to a retroactive change in the law, provided that there is a
complete absence of Vitalink Tainting Acts and New GranCare Tainting Acts, and
a complete absence of any other acts or failures to act (other than Vitalink
Tainting Acts and New GranCare Tainting Acts) by both the Post Distribution
Vitalink Group and the New GranCare Group which give rise to such liability for
Restructuring Taxes, (iv) one-half ( 1/2) of the first $20.0 million of any and
all liability for Restructuring Taxes, plus all liability for such
Restructuring Taxes that are in excess of $20.0 million, if the liability for
Restructuring Taxes is the result of either multiple acts or failures to act
(other than Vitalink Tainting Acts and New GranCare Tainting Acts) by both the
Vitalink Post Distribution Group and the New GranCare Group which give rise to
such liability for Restructuring Taxes or there is a complete absence of any
acts or failures to act (including Vitalink Tainting Acts and New GranCare
Tainting Acts) and the liability for Restructuring Taxes is not the result of a
retroactive change in the law, (v) paying to Vitalink the Lost Parachute Tax
Benefits to the extent that such Lost Parachute Tax Benefits relate to payments
made to employees of the Post GranCare Distribution Vitalink Group, other than
Gene E. Burleson or Arlen Reynolds, if such payments would have been
deductible, but for the provisions of Code Section 280G, after the closing,
(vi) paying to Vitalink the Stock Option Tax Benefits to the extent that such
Stock Option Tax Benefits arise as a result of the exercise of a stock option
with respect to the Vitalink Common Stock by an employee of the New GranCare
Group, or the disqualifying disposition by such employee of such stock,
(vii) any and all liability for Other Taxes of GranCare or any of its
subsidiaries (prior to the Distribution) to the extent those Other Taxes are
allocable to any period or portion thereof ending on or before the Distribution
Date, and (viii) any and all liability for Other Taxes of the New GranCare
Group to the extent those Other Taxes are allocable to any period or portion
thereof beginning after the Distribution Date.
101
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary description of the material federal income tax
consequences of the Transactions. This summary is for general informational
purposes only and is not intended as a complete description of all of the tax
consequences of the Transactions and does not discuss tax consequences under
the laws of state or local governments or of any other jurisdiction. Moreover,
the tax treatment of a stockholder may vary depending upon his, her or its
particular situation. In this regard, certain stockholders (including
(i) insurance companies, tax-exempt organizations, financial institutions or
broker-dealers, and persons who are not citizens or residents of the United
States or who are foreign corporations, foreign partnerships or foreign trusts
or estates as defined for United States federal income tax purposes, and (ii)
stockholders that hold shares as part of a position in a "straddle" or as part
of a "hedging" or "conversion" transaction for United States federal income
tax purposes and stockholders with a "functional currency" other than the
United States dollar) may be subject to special rules not discussed below. In
addition, this summary applies only to shares which are held as capital
assets. The following discussion may not be applicable to a stockholder who
acquired his or her shares pursuant to the exercise of stock options or
otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON CURRENTLY EXISTING PROVISIONS OF THE
CODE, TREASURY REGULATIONS THEREUNDER AND CURRENT ADMINISTRATIVE RULINGS AND
COURT DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE WHICH MAY OR MAY
NOT BE RETROACTIVE, AND ANY SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES
DESCRIBED HEREIN. SEE "POSSIBLE FUTURE LEGISLATION" BELOW.
NO RULINGS HAVE BEEN OR WILL BE REQUESTED FROM THE INTERNAL REVENUE SERVICE
("IRS") WITH RESPECT TO THE MATTERS DISCUSSED HEREIN.
EACH STOCKHOLDER IS URGED TO CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO
THE PARTICULAR TAX CONSEQUENCES TO HIM, HER OR IT OF THE TRANSACTION DESCRIBED
HEREIN, INCLUDING, THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN
TAX LAWS, AND THE POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
TAX OPINIONS
In the opinion of Powell, Goldstein, Frazer & Murphy and Cahill Gordon &
Reindel, counsel to GranCare and Vitalink, respectively:
(i) the distribution of the New GranCare Common Stock will be tax-free
for federal income tax purposes to GranCare under Section 355(c)(1) of the
Code and to the shareholders 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)(1) 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.
An opinion of counsel is not binding on the IRS or the courts. Moreover, the
tax opinions are based upon, among other things, certain representations as to
factual matters made by GranCare and Vitalink, which representations if
incorrect or incomplete in certain material respects, would jeopardize the
conclusions reached in the opinions. Representations as to factual matters
include a representation that there is no plan or intention on the part of any
shareholder of GranCare who beneficially owns five percent or more of GranCare
capital stock, and to the best knowledge of GranCare management, there is no
plan or intention on the part of the remaining GranCare shareholders, to sell,
exchange or otherwise dispose of a number of shares of Vitalink Common Stock
received in the Merger that would reduce the GranCare shareholders' ownership
of Vitalink Common Stock to a
102
<PAGE>
number of shares having a value, as of the Merger Effective Time, of less than
50 percent of the value of all of the shares of GranCare Common Stock formerly
outstanding as of the Merger Effective Time. For purposes of the foregoing
representation, shares of GranCare Common Stock surrendered by holders who
demand appraisal rights or exchanged for cash in lieu of fractional shares of
Vitalink Common Stock have been treated as outstanding GranCare Common Stock
as of the Merger Effective Time. Moreover, shares of GranCare Common Stock and
Vitalink Common Stock held by GranCare shareholders and otherwise sold,
redeemed or disposed of prior to or subsequent to the Merger Effective Time
have been considered in making the foregoing representation.
THE DISTRIBUTION
It is expected that the Distribution will qualify as a tax-free distribution
under Section 355 of the Code. Assuming that the Distribution so qualifies,
(i) the holders of GranCare Common Stock will not recognize gain or loss upon
receipt of shares of New GranCare Common Stock, (ii) each holder of GranCare
Common Stock will allocate his, her or its aggregate tax basis in the GranCare
Common Stock immediately before the Distribution among the GranCare Common
Stock and New GranCare Common Stock in proportion to their respective fair
market values, (iii) the holding period of each holder of GranCare Common
Stock for the New GranCare Common Stock will include the holding period for
his, her or its GranCare Common Stock, provided that the GranCare Common Stock
is held as a capital asset at the time of the Distribution, and (iv) GranCare
will not recognize any gain or loss on its distribution of the New GranCare
Common Stock to its shareholders.
No fractional shares of New GranCare Common Stock will be distributed in the
Distribution. A holder of GranCare Common Stock who, pursuant to the
Distribution, receives cash in lieu of fractional shares of New GranCare
Common Stock will be treated as having received such fractional shares of New
GranCare Common Stock pursuant to the Distribution and then as having received
such cash in a sale of such fractional shares of New GranCare Common Stock.
Such holders will generally recognize capital gain or loss pursuant to such
demand sale equal to the difference between the amount of cash received and
such holders' adjusted tax basis in the fractional share of New GranCare
Common Stock received. Such gain or loss will be capital (provided the
GranCare Common Stock is held as a capital asset at the time of the
Distribution) and will be treated as a long-term capital gain or loss if the
holding period for the fractional shares of New GranCare Common Stock deemed
to be received and then sold is more than one year.
If the Distribution does not qualify as a tax-free distribution under
Section 355 of the Code, then each holder of GranCare Common Stock who
received shares of New GranCare Common Stock in the Distribution will be
treated as if such shareholder received a taxable distribution in an amount
equal to the fair market value of the New GranCare Common Stock received. Such
distribution will be treated as (i) a dividend to the extent paid out of
GranCare current and accumulated earnings and profits, then (ii) a reduction
in such shareholder's basis in GranCare Common Stock to the extent the amount
received exceeds the amount referenced in clause (i), and then (iii) gain from
the sale or exchange of GranCare Common Stock to the extent the amount
received exceeds the sum of the amounts referenced in clauses (i) and (ii).
Each shareholder's basis in his, her or its New GranCare Common Stock would be
equal to the fair market value of such stock at the time of the Distribution.
In addition, if the Distribution were not to qualify as a tax-free
distribution under Section 355 of the Code, then, in general, a corporate
level federal income tax would be payable by the consolidated group of which
GranCare is the common parent, which tax would be based upon the gain
(computed as the difference between the fair market value of the stock
distributed and the distributing corporation's adjusted basis on such stock)
realized by GranCare upon its distribution of the stock of New GranCare to its
shareholders in the Transaction.
THE MERGER
It is expected that the Merger will constitute a reorganization within the
meaning of Section 368(a)(1)(A) of the Code. If the Merger so qualifies, (i)
GranCare shareholders will not recognize gain or loss upon the receipt of
Vitalink Common Stock in exchange for their shares of GranCare Common Stock,
(ii) each holder of GranCare Common Stock will carry over his, her or its tax
basis in the GranCare Common Stock (as determined
103
<PAGE>
immediately following the Distribution) to the Vitalink Common Stock, (iii)
each GranCare shareholder's holding period for GranCare Common Stock will
carry over to the Vitalink Common Stock, provided that the GranCare Common
Stock is held as a capital asset immediately prior to the Effective Time of
the Merger, and (iv) any GranCare shareholder receiving cash in lieu of
fractional shares will recognize capital gain or loss (provided the shares of
GranCare Common Stock surrendered are held as capital assets immediately prior
to the Effective Time of the Merger) equal to the difference between the
amount of cash received and the portion of such shareholder's basis in the
shares of GranCare Common Stock allocable to such fractional share interests
and such capital gain or loss will be long-term capital gain or loss if the
holding period for such shares is more than one year.
If the Merger does not qualify as a reorganization within the meaning of
Section 368(a) of the Code, the GranCare shareholders will recognize gain or
loss upon the receipt of the Vitalink Common Stock in exchange for their
GranCare Common Stock equal to the difference between the fair market value of
the Vitalink Common Stock received and their basis in their GranCare Common
Stock. In this regard, the failure of the Merger to qualify as a
reorganization within the meaning of Code Section 368(a) of the Code may also
cause the Distribution to not qualify as a tax-free distribution under Section
355 of the Code, in which case (as described in the third paragraph under "--
The Distribution" above) each holder of GranCare Common Stock who receives
shares of New GranCare Common Stock in the Distribution, will be treated as if
such shareholder received a taxable distribution in an amount equal to the
fair market value of the New GranCare Common Stock received. Such distribution
would be treated as (i) a dividend to the extent paid out of GranCare's
current and accumulated earnings and profits, then (ii) a reduction in such
shareholder's basis in GranCare Common Stock to the extent the amount received
exceeds the amount referenced in clause (i), and then (iii) gain from the sale
or exchange of GranCare Common Stock to the extent the amount received exceeds
the sum of the amounts referenced in clauses (i) and (ii). Each shareholder's
basis in the New GranCare Common Stock would be equal to the fair market value
of such stock at the time of the Distribution.
POSSIBLE FUTURE LEGISLATION
The Clinton Administration's Budget Proposal issued March 19, 1996 contains
several revenue proposals, including a proposal (the "Anti-Morris Trust
Proposal") which would require a distributing corporation in a transaction
otherwise qualifying as a tax-free distribution under Section 355 of the Code
to recognize gain on the distribution of the stock of the controlled
corporation unless the direct and indirect stockholders of the distributing
corporation own more than 50 percent of the distributing corporation and
controlled corporation at all times during the four year period commencing two
years prior to the distribution. The Anti-Morris Trust Proposal would apply to
any distributions occurring after March 19, 1996, unless such distribution was
(i) pursuant to a binding contract on such date, (ii) described in a ruling
request submitted to the IRS on or before such date, or (iii) described in a
public announcement or Commission on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee, and Congressman Bill Archer, Chairman of the House Ways & Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the
effect that should certain of the revenue proposals included in the Clinton
Administration's Budget, including the Anti-Morris Trust Proposals, be
enacted, that its effective date will be no earlier than the date of
"appropriate Congressional action." As of the date of this Merger Proxy, no
legislation has been introduced relating to the Anti-Morris Trust Proposal.
There can be no assurances that Congress will not adopt Anti-Morris Trust
legislation which would apply to the Distribution.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of GranCare Common Stock,
unless the shareholder (i) is a corporation or comes with certain other exempt
categories, and, when required, demonstrates these facts, or (ii) provides a
correct taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the
104
<PAGE>
backup withholding rules. A shareholder who does not supply GranCare with his,
her or its correct taxpayer identification number may be subject to penalties
imposed by the IRS. Any amount withheld under these rules will be refunded or
credited against the shareholder's federal income tax liability. Shareholders
should consult their tax advisers as to their qualification for exemption from
backup withholding and the procedure for obtaining such an exemption. If
information reporting requirements apply to a shareholder, the amount of
dividends paid with respect to such shares will be reported annually to the
IRS and to such shareholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
RELATIONSHIP BETWEEN VITALINK AND MANOR CARE
GENERAL
Vitalink is currently an 82.3% owned subsidiary of Manor Care. Vitalink
maintains a variety of corporate relationships with Manor Care. Manor Care is
expected to own approximately 45% of the outstanding shares of Common Stock of
Vitalink after the consummation of the Merger. In connection with Vitalink's
initial public offering in February 1992, Vitalink and Manor Care entered into
a number of agreements described below for the purpose of defining their
ongoing relationship. Since Manor Care controls Vitalink, these agreements
were not the result of arm's length negotiations. Certain of the agreements
will be terminated following the completion of the Merger. See "--Anticipated
Changes in the Relationship Between Vitalinks and Manor Care."
ADMINISTRATIVE SERVICES AGREEMENT
Vitalink and Manor Care entered into an administrative services agreement
(the "Administrative Services Agreement"), pursuant to which Manor Care
provides Vitalink with various services such as maintenance of employee
benefit plans, payroll, legal, insurance, financial, accounting, tax and
information systems. It is anticipated that this agreement will be terminated
following the Merger. See "--Anticipated Changes in the Relationship Between
Vitalink and Manor Care." Pursuant to the Administrative Services Agreement
Vitalink agrees to reimburse Manor Care for the direct costs of rendering
services to Vitalink. Where such direct costs cannot be separately measured,
Vitalink will pay a portion of the total cost based on Manor Care's current
practices for allocating those costs among its subsidiaries. Manor Care
charges Vitalink for services rendered at the end of each month based on
budgeted expenditures determined from prior fiscal year actual experience. The
respective Audit Committees of Vitalink and Manor Care meet at the end of each
fiscal year to review the time allocations and services provided during the
previous fiscal year and agree on the charges for those services in accordance
with the second preceding sentence, as well as the budget for the next fiscal
year. A year-end adjustment is made to the financial statements of Vitalink to
reflect allocated reimbursed expenses.
Allocations of costs to Vitalink that are not separately measured are based
on professional employees in each administrative department making quarterly
estimates of time spent during the prior quarter on various Manor Care
subsidiaries (including Vitalink), and each department's costs (including
overhead) being allocated in accordance with such estimated time and
allocations of certain common costs based on appropriate relative factors,
such as numbers of employees. Such common costs include an allocable portion
of the base compensation of the officers of Manor Care who serve as officers
of Vitalink. Manor Care and Vitalink believe that the allocation system is
reasonable in view of the costs of implementing a more precise system,
although it may reflect higher or lower charges for services provided to
Vitalink than Vitalink might obtain from third parties.
The Administrative Services Agreement is terminable by Vitalink or by Manor
Care as of the end of any month on 180 days' written notice. There can be no
assurances that Vitalink could obtain such services from third parties at the
same or lower cost as provided by Manor Care.
105
<PAGE>
Manor Care makes available to employees of Vitalink the benefit and health
plans in effect for employees of Manor Care. Vitalink reimburses Manor Care
based on the per participant rates associated with providing such plans to
employees of Vitalink. The Administrative Services Agreement also provides
that Manor Care furnish additional services as may be reasonably requested by
Vitalink on similar terms.
TAX AGREEMENTS
Vitalink and Manor Care have entered into a tax agreement (the "Tax
Agreement") providing for (i) the payment of federal income taxes and
remittance of funds for periods during which Vitalink and Manor Care are
included in the same consolidated group for federal income tax purposes; (ii)
the allocation of responsibility for the filing of such tax returns; (iii) the
conduct of tax audits and the handling of tax controversies; and (iv) various
related matters. It is anticipated that this agreement will be terminated
following the Merger. See "--Anticipated Changes in the Relationship Between
Vitalink and Manor Care." For the periods during which Vitalink is included in
Manor Care's consolidated federal income tax returns, Vitalink is required to
pay Manor Care its federal income tax liability (determined without taking
into account any surtax exemption, alternative minimum tax exemption amount or
exemption of an amount from the tax imposed under Section 59A of the Code),
and is entitled to receive refunds, determined as if Vitalink and its
subsidiaries had filed a separate federal income tax return. Under the Tax
Agreement, Manor Care has the power and authority to make the ultimate
decisions as to reporting on tax returns and calculations of taxes.
The Tax Agreement applies to Vitalink for all years in which Vitalink is
included in Manor Care's consolidated return. The same principles shall apply
in the event Manor Care and Vitalink or any of its subsidiaries join in filing
any combined or consolidated state or local income or franchise tax returns.
INTERCOMPANY DEBT AND CREDIT AGREEMENT
Vitalink and Manor Care are subject to an intercompany debt and credit
agreement (the "Intercompany Debt and Credit Agreement") pursuant to which
Manor Care provides Vitalink with a line of credit (the "Line of Credit") of
$10,000,000. It is anticipated that this agreement will be terminated
following the Merger. See "--Anticipated Changes in the Relationship Between
Vitalink and Manor Care." The Intercompany Debt and Credit Agreement, dated
June 1, 1991, was initially for a five-year term with an evergreen provision.
Manor Care will pass through the charges under its own credit facility for the
Line of Credit, which charges include a 1/4 percentage point fee on the unused
funds and a 1/8 percentage point fee on the entire amount under the Line of
Credit. The interest rate charged on borrowed funds is LIBOR plus 5/8
percentage points.
Pursuant to the Intercompany Debt and Credit Agreement Vitalink will lend
all its excess cash to Manor Care, which cash will earn interest at the three-
month Treasury bill rate plus 100 basis points, as determined monthly by
averaging the secondary market rate per the Federal Reserve statistical
release for the first and last day so published. There can be no assurances
that Vitalink could not obtain more favorable terms from third parties.
If any significant deterioration occurred in Manor Care's financial
condition, Vitalink would be exposed to additional risk because of its
agreement to loan all its excess cash to Manor Care on an unsecured basis.
MANOR CARE PHARMACY, INFUSION THERAPY AND CONSULTING SERVICES AGREEMENTS
Pursuant to four agreements with Manor Care, Vitalink provides
pharmaceutical products and services, enteral and parenteral therapy supplies
and services, urological and ostomy products, intravenous products and
services and pharmacy consulting services to nursing facilities operated by
Manor Care. Vitalink is not restricted from providing similar services to non-
Manor Care facilities.
MASTER AGREEMENT FOR PHARMACY SERVICES
On June 1, 1991 Vitalink and Manor Care entered into a Master Agreement for
Pharmacy Services (the "Master Agreement for Pharmacy Services") pursuant to
which Vitalink has the option to provide pharmaceutical services to any and
all nursing facilities owned or licensed by Manor Care. The option is
exercisable from time to time as Vitalink establishes the capability to serve
additional facilities operated by
106
<PAGE>
Manor Care. The Master Agreement for Pharmacy Services calls for each
individual nursing facility to enter into a separate agreement with Vitalink
which defines the scope of services, duties and obligations of Vitalink and
compensation. Pricing for services and products is determined on a market-by-
market basis and is subject to reimbursement limitations depending on the payor
source. The initial term of the Master Agreement and the individual facility
agreements is ten years, with automatic renewals for successive five-year
periods unless either party gives notice at least 180 days prior to the end of
the initial term or any renewal term that it desires to terminate the
agreement. The individual facility agreements can be terminated early by the
facility under various circumstances, including if Vitalink fails to provide
services which conform to generally accepted pharmacy practices or upon 30
days' notice in the event Manor Care will no longer own or hold the license to
the facility upon its sale to a third party.
MASTER AGREEMENT FOR INFUSION THERAPY SERVICES
On June 1, 1991, Vitalink and Manor Care entered into a Master Agreement for
Infusion Therapy Services (the "Master Agreement for Infusion Therapy
Services") pursuant to which Vitalink has the option to provide infusion
therapy products and services to any and all nursing facilities owned or
licensed by Manor Care. The option is exercisable from time to time as Vitalink
establishes the capability to serve additional facilities operated by Manor
Care. The Master Agreement for Infusion Therapy Services calls for each
individual nursing facility to enter into a separate agreement with Vitalink
which defines the scope of services, duties and obligations of Vitalink and
compensation. Pricing for services and products is determined by on a market-
by-market basis. The initial term of the Master Agreement and the individual
facility agreements is ten years, with automatic renewals for successive five-
year periods unless either party gives notice at least 180 days prior to the
end of the initial term or any renewal term that it desires to terminate the
agreement. The individual facility agreements can be terminated early by the
facility under various circumstances, including if Vitalink fails to provide
services which conform to generally accepted pharmacy practices or upon 30
days' notice in the event Manor Care will no longer own or hold the license to
the facility upon its sale to a third party.
MASTER PHARMACY CONSULTING AGREEMENT
On June 1, 1991 Vitalink and Manor Care entered into a Master Pharmacy
Consulting Agreement (the "Master Pharmacy Consulting Agreement") whereby
Vitalink has agreed to develop and implement a program to provide for all
needed consultant pharmacy services to any and all nursing facilities owned or
licensed by Manor Care that Vitalink has the capability of servicing. The
Master Pharmacy Consulting Agreement calls for each individual nursing facility
to enter into a separate Consultant Pharmacy Services Agreement (the
"Consultant Pharmacy Services Agreement") with Vitalink which defines the
duties and obligations of Vitalink and the compensation for services. Each
nursing facility is billed monthly by Vitalink based on its number of licensed
beds. The initial term of the Master Pharmacy Consulting Agreement and the
individual Consultant Pharmacy Services Agreement is ten years with automatic
renewal for successive five-year periods, unless either party gives notice at
least 180 days prior to the end of the initial term or any renewal term that it
desires to terminate the agreement. The individual facility agreements can be
terminated early by the facility under various circumstances, including if
Vitalink fails to provide services which conform to generally accepted pharmacy
practices or upon 30 days' notice in the event Manor Care will no longer own or
hold the license to the facility upon its sale to a third party.
PHARMACY SERVICES CONSULTANT AGREEMENT
On June 1, 1991, Vitalink and Manor Care entered into a Pharmacy Services
Consultant Agreement (the "Pharmacy Services Consultant Agreement") whereby
Vitalink agreed to assist Manor Care at the corporate level in establishing
uniform pharmacy delivery standards for all of its nursing facilities including
those not serviced by Vitalink. Such assistance takes the form of advising
Manor Care on compliance with applicable laws, rules and regulations, providing
in-services to Manor Care corporate staff on all phases of pharmacy services,
and consulting with Manor Care at the corporate level on all operating policies
and procedures concerning administration and record keeping of pharmaceuticals
at its nursing facilities. No pharmacy consulting services are provided to
individual nursing facilities under this agreement. For the services provided
under the Pharmacy
107
<PAGE>
Services Consultant Agreement, Manor Care pays Vitalink an annual fee,
initially $10.00 per nursing facility bed operated by Manor Care. The initial
term of the agreement is ten years, with automatic renewal for successive five-
year periods; however, either party may notify the other of its intent not to
so renew upon 90 days' written notice. At August 31, 1996, Manor Care operated
approximately 24,000 nursing facility beds.
ANTICIPATED CHANGES IN THE RELATIONSHIP BETWEEN VITALINK AND MANOR CARE
Following the Merger it is anticipated that Vitalink will terminate the
Administrative Services Agreement with Manor Care and will develop the internal
capability to perform the services currently provided by Manor Care.
Additionally, as a result of the Merger Vitalink will no longer be considered
an affiliated company of Manor Care for tax purposes and, therefore, will not
be part of Manor Care's consolidated group. Vitalink expects to terminate the
Tax Agreement and will file a separate consolidated tax return following the
Merger. Vitalink also plans to obtain its own credit facility from an
independent commercial bank following the Merger and expects to terminate the
existing Intercompany Debt and Credit Agreement with Manor Care. All other
existing agreements between Vitalink and Manor Care will remain in place
following the Merger.
EXISTING CONTRACTUAL ARRANGEMENTS BETWEEN
TEAMCARE AND NEW GRANCARE
TERMS OF THE PHARMACEUTICAL SUPPLY AGREEMENTS
Substantially all of the New GranCare facilities existing prior to the
Effective Time of the Merger have entered into a Pharmaceutical Supply
Agreement (the "Supply Agreement") with TeamCare. The terms of such agreements
are for five years and are automatically extended for an additional year on
each anniversary of the commencement date thereof unless written notice to the
contrary is given not more than 120 days and not less than 90 days prior to any
such anniversary. The supplies and services to be provided pursuant to such
agreements include all pharmaceutical and related goods required by each New
GranCare facility and the residents thereof. Pharmaceutical supplies include
prescription and non-prescription medications. Related goods include all
nutritional supplements, intravenous solutions and supplies, parenteral and
enteral supplies and equipment, orthotic and prosthetic devices, ostomy
supplies, urological supplies, wound care supplies and equipment, and personal
care items. All goods and services are to be provided in accordance with all
applicable requirements of federal, state and local laws and regulations.
Depending upon the payor source, either TeamCare will bill the payor source
directly or the skilled nursing facility will bill the payor source and then
pay TeamCare. In the event that TeamCare does not service at least 90% of the
residents of a skilled nursing facility during a given month, the skilled
nursing facility will pay to TeamCare an additional $10 per month for each
resident not serviced by TeamCare; provided, however, that if TeamCare has
elected not to furnish pharmaceutical goods or related goods for any resident,
such resident will be disregarded for purposes of this calculation.
New GranCare cannot transfer ownership or control of a skilled nursing
facility during the term of the Supply Agreement relating to such facility
unless and until the proposed transferee (i) agrees to accept and comply with
the Supply Agreement or (ii) an agreement is reached between TeamCare and New
GranCare for the payment of damages by New GranCare to TeamCare to compensate
TeamCare for losses over the remaining term of the subject Supply Agreement.
In the event of a material breach by TeamCare of its obligations under the
terms of the Supply Agreement, New GranCare must give TeamCare written notice
detailing such breach and TeamCare will have 30 days in which to cure any such
alleged breach. If TeamCare fails to cure the alleged breach within such time,
New GranCare may obtain services from another pharmacy provider; provided,
however, that TeamCare may, in its discretion, contest the allegation of breach
via arbitration as specified within the Supply Agreement. In the event that it
is determined that TeamCare has not committed a material breach of its duties
under the Supply Agreement, New GranCare shall be liable to TeamCare for the
net revenue lost by TeamCare as a result of New GranCare and/or New GranCare's
residents having obtained goods and/or services from another pharmacy provider.
108
<PAGE>
Upon any subsequent acquisition by New GranCare of a skilled nursing
business, New GranCare shall have no obligation to contract with Vitalink or
TeamCare to provide pharmaceutical supplies and services at such facility and
New GranCare will not be required to terminate any then existing agreements
providing for the provision of pharmaceutical supplies and services to such
facility by an alternative supplier. See "The Distribution Agreement--Non-
competition Agreement" for a description of New GranCare's obligations upon
acquiring a skilled nursing business that includes a pharmacy operation.
Notwithstanding the foregoing, it is New GranCare's intent to consolidate its
requirements for pharmaceutical supplies and services with Vitalink or TeamCare
for so long as Vitalink and TeamCare are viewed as superior providers based on
prevailing industry standards including, without limitation, pricing, service
and quality. In addition, New GranCare has agreed that for so long as
Vitalink's limited guaranty of the HRPT Obligations is in effect, New GranCare
will not terminate any of the Pharmaceutical Supply Agreements. As a result, it
is anticipated that the Pharmaceutical Supply Agreements may extend through
December 31, 2010, the date when all present HRPT Obligations will be
satisfied, unless the New GranCare Letter of Credit is drawn upon earlier by
Vitalink or certain other conditions are satisfied. See "The Distribution
Agreement--Treatment of Certain Indebtedness--HRPT Obligations."
DESCRIPTION OF THE VITALINK CREDIT FACILITY
Simultaneously with the consummation of the Transactions, Vitalink expects to
enter into a Senior Revolving Credit Facility (the "Vitalink Credit Facility")
with The Chase Manhattan Bank, as agent, and the lenders party thereto,
pursuant to which the lenders will provide a $200 million revolving credit
facility to Vitalink, subject to the conditions set forth therein. Vitalink and
The Chase Manhattan Bank have entered into a commitment letter with respect to
the Vitalink Credit Facility and are in the process of negotiating the
definitive agreement. The following summary of the definitive terms of the
Vitalink Credit Facility is based upon the commitment letter. The material
terms of the definitive agreement are not expected to vary in any material
respects from the terms described in the following summary which is subject to,
and qualified in its entirety by, the Vitalink Credit Facility.
The Vitalink Credit Facility will consist of a $200 million senior revolving
credit facility, including sub limit of an amount to be determined which will
be available for letters of credit. The aggregate of the revolving credit
facility will be available at any time prior to the final maturity and amounts
repaid under the facility may be reborrowed. The final maturity date for the
Vitalink Credit Facility will be five years from the Effective Time of the
Merger.
Borrowings under the Vitalink Credit Facility are expected to initially bear
interest at Adjusted LIBOR (as defined in the Vitalink Credit Facility) plus
0.25% or at Vitalink's option, ABR (as defined in the Vitalink Credit
Facility).
The Vitalink Credit Facility is expected to provide for (i) a facility fee of
0.15% per annum (the "Facility Fee") initially on the aggregate amount of the
senior revolving credit facility, payable quarterly in arrears. Subsequent to
the Effective Time of the Merger the spread over adjusted LIBOR is expected to
be adjusted between 0.40% and 0.20% and the Facility Fee is expected to be
adjusted between 0.225% and 0.100%. Both the spread over LIBOR and Facility Fee
are expected to adjust, based on Vitalink's Ratio of Total Debt to EBITDA.
The Vitalink Credit Facility will contain customary covenants with respect
to, among other things, (i) maintenance of certain minimum interest coverage
ratios, maximum ratios of Total Debt to EBITDA, and minimum Net Worth Tests,
and (ii) restrictions on the incurrence of additional liens or indebtedness, in
addition to limitations on payments of dividends, capital expenditures,
mergers, acquisitions and asset sales. See "TeamCare Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Vitalink Credit Facility is expected to contain representations and
warranties of Vitalink and its subsidiaries, and contain conditions to funding,
customary in credit facilities of this type.
109
<PAGE>
CONFLICTS OF INTEREST
The nature of the respective businesses of and the relationship between
Vitalink and Manor Care and its affiliates could give rise to conflicts of
interest between the two companies. Vitalink and Manor Care and its affiliates
have had significant intercompany transactions and agreements in the past, and
expect to continue to have such arrangements in the future. Vitalink does not
believe that its present contractual arrangements with Manor Care are
comparable to those obtainable from third parties but Vitalink intends that
the terms of any future transactions and agreements between Vitalink and Manor
Care and its affiliates, taken as a whole, will be comparable to those that
could be obtained from third parties. No assurances can be given that this
will result.
RESTRICTIONS ON RESALE OF VITALINK COMMON STOCK
The shares of Vitalink Common Stock to be issued to shareholders of GranCare
pursuant to the Merger Agreement have been registered under the Securities
Act, thereby allowing such shares to be freely traded without restrictions by
persons who will not be "affiliates" (as defined in the Securities Act) of
Vitalink or who were not "affiliates" of GranCare prior to the Merger.
Directors and executive officers of GranCare may be deemed to have been
"affiliates" of GranCare within the meaning of the Securities Act. Any such
person will not be able to resell the Vitalink Common Stock received by him or
her in the Merger unless such stock is registered for resale or an exemption
from registration under the Securities Act is available, such as Rule 145. All
such persons should carefully consider the limitations imposed by Rule 145
under the Securities Act prior to effecting any resales of Vitalink Common
Stock. In general, under Rule 145 as currently in effect, persons who may be
deemed affiliates (as that terms is described in the Securities Act) of
GranCare as of the Special Meeting would be entitled to sell within any three-
month period a number of shares of Vitalink Common Stock that does not exceed
the greater of 1% of the then outstanding shares of Vitalink Common Stock or
the average weekly trading volume during the four calendar weeks preceding a
sale by such person. Sales under Rule 145 are also subject to certain
provisions relating to the manner of sale and availability of current
information about Vitalink. Such limitations would generally cease to apply to
non-affiliates of Vitalink following the second anniversary of the Effective
Time provided that Vitalink meets certain public information requirements or
the third anniversary of the Effective Time otherwise. This Proxy
Statement/Prospectus does not cover any resales of Vitalink Common Stock
received by affiliates of GranCare or by certain of their family members or
related interests.
Pursuant to the Merger Agreement, prior to the Effective Time, GranCare
shall cause to be prepared and delivered to Vitalink a list (reasonably
satisfactory to counsel for Vitalink) identifying all persons who, at the time
of the Special Meeting, may be deemed to be "affiliates" of GranCare as that
term is defined in Rule 145 under the Securities Act. GranCare shall use its
reasonable best efforts to cause each person identified as an affiliate in
such list to deliver to Vitalink on or prior to the Effective Time a written
agreement (in a form previously approved by GranCare and Vitalink) that such
affiliate will not sell, transfer, or otherwise dispose of any shares of
Vitalink Common Stock issued to such possible affiliate pursuant to the Merger
except pursuant to an effective registration statement or in compliance with
Rule 145 or an exemption from the registration requirements of the Securities
Act and it is a condition to the obligation of Vitalink to close the Merger
that it received such written agreements.
110
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF VITALINK
The following table sets forth certain information with respect to the
beneficial ownership (or deemed beneficial ownership determined pursuant to
the rules and regulations of the Commission) of Vitalink's Common Stock as of
November 15, 1996 on a pro forma basis taking into account the Transactions by
(i) each person known to Vitalink to own beneficially more than 5% of the
outstanding shares of Vitalink Common Stock, (ii) each of Vitalink's
directors, (iii) each of Vitalink's executive officers and (iv) all directors
and executive officers of Vitalink as a group. Except as otherwise stated,
each of the persons named in the table below has sole voting and investment
power with respect to all shares of Vitalink Common Stock beneficially owned
by him or her as set forth opposite his or her name. Unless otherwise
indicated, the address of each stockholder and officer is c/o Vitalink, 1250
East Diehl Road, Naperville, Illinois 60563.
<TABLE>
<CAPTION>
POST MERGER
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
VITALINK COMMON STOCK VITALINK COMMON STOCK
-------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIAL OWNER OWNED OWNED OWNED OWNED(1)
- ---------------- -------------- -------------------------- ------------
<S> <C> <C> <C> <C>
Manor Care, Inc. ....... 11,500,000 82.3 11,500,000 45.0
11555 Darnestown Road
Gaithersburg, MD 20878-
3200
Stewart Bainum, Jr...... 0 0 0 0
Gene E. Burleson........ 0 0 416,845(7) 1.5
Donna L. DeNardo........ 58,166(2) * 58,166(2) *
Arlen B. Reynolds....... 0 0 18,941(8) *
Vincent C. DiTrapano.... 8,283(3) * 8,283(3) *
Scott T. Macomber....... 33,950(4) * 33,950(4) *
Stephen A. Thompson..... 2,100(5) * 2,100(5) *
Joseph R. Buckley....... 0 0 0 0
Joel S. Kanter.......... 0 0 150,575(9) *
James A. MacCutcheon.... 0 0 0 0
Robert L. Parker........ 0 0 110,233(10) *
James H. Rempe.......... 0 0 0 0
Gary U. Rolle........... 0 0 82,598(11) *
All directors and
executive officers as a
group (13 persons)..... 102,499(6) * 881,691(12) 3.4
</TABLE>
- --------
* Indicates beneficial ownership of less than 1% of the issued and
outstanding Vitalink Common Stock.
(1) Determined on a pro forma basis for the anticipated shares of Vitalink
Common Stock that would have been outstanding on November 15, 1996 giving
effect to the conversion of the GranCare Common Stock outstanding at such
date using the Exchange Ratio.
(2) Represents 58,166 shares which Ms. DeNardo has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after November 15, 1996.
(3) Includes 8,183 shares which Mr. DiTrapano has the right to acquire
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after November 15, 1996.
(4) Includes 1,200 shares owned by minor children of Mr. Macomber, for which
he is custodian. Beneficial ownership of such shares is disclaimed. Also
includes 32,750 shares which Mr Macomber has the right to acquire pursuant
to stock options which are presently exercisable or which become
exercisable within 60 days after November 15, 1996.
(5) Represents 2,100 shares which Mr. Thompson has the right to exercise
pursuant to stock options which are presently exercisable or which become
exercisable within 60 days after November 15, 1996.
(6) Includes a total of 101,999 shares which the officers, nominees and
directors included in the group have the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after November 15, 1996.
(7) Includes a total of 140,895 shares which Mr. Burleson will have the right
to acquire pursuant to stock options at the Effective Time of the Merger.
(8) Includes a total of 18,941 shares which Mr. Reynolds will have the right
to acquire pursuant to stock options at the Effective Time of the Merger.
111
<PAGE>
(9) Includes a total of 11,472 shares which Mr. Kanter will have the right to
acquire pursuant to stock options at the Effective Time of the Merger.
(10) Includes a total of 7,648 shares which Mr. Parker will have the right to
acquire pursuant to stock options at the Effective Time of the Merger.
(11) Includes a total of 10,516 shares which Mr. Rolle will have the right to
acquire pursuant to stock options at the Effective Time of the Merger.
(12) Includes a total of 291,471 shares which the officers, nominees and
directors included in the group have the right to acquire pursuant to
stock options which are presently exercisable or which become exercisable
within 60 days after November 15, 1996
DESCRIPTION OF VITALINK CAPITAL STOCK
The authorized capital stock of Vitalink consists of 30,000,000 shares of
Common Stock, par value $.01 per share (such amount shall be increased to
80,000,000 shares of Common Stock, par value $.01 per share immediately prior
to the Effective Time of the Merger), and 10,000,000 shares of Preferred
Stock, par value $.01 per share (the "Preferred Stock"). As of August 26,
1996, there were 13,979,700 shares of Vitalink Common Stock issued and
outstanding. No shares of Preferred Stock are currently issued or outstanding.
COMMON STOCK. Subject to any limitations prescribed in connection with the
issuance of any outstanding shares of Preferred Stock, dividends, as
determined by the Board of Directors of Vitalink, may be declared and paid on
Vitalink Common Stock from time to time out of any funds legally available
therefor. The holders of Vitalink Common Stock are entitled to one vote per
share and do not have cumulative voting rights or preemptive rights. The
Vitalink Common Stock is not subject to further calls and all of the
outstanding shares of Vitalink Common Stock are fully paid and non-assessable.
PREFERRED STOCK. The Board of Directors of Vitalink is empowered to cause
shares of Preferred Stock to be issued in one or more series, with the number
of shares in each series and the rights, preferences and limitations of each
series determined by it. The ability of the Board of Directors of Vitalink to
issue Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the voting stock of Vitalink. Vitalink has no
present plans to issue any of the Preferred Stock.
The Transfer Agent and Registrar for Vitalink Common Stock is ChaseMellon
Shareholder Services, L.L.C.
112
<PAGE>
COMPARATIVE RIGHTS OF STOCKHOLDERS
GENERAL
Vitalink is a Delaware corporation and, accordingly, is governed by the DGCL
and its Delaware Restated Certificate of Incorporation (the "Vitalink
Certificate") and Bylaws (the "Vitalink Bylaws"). GranCare is a California
corporation and, accordingly, has been and will be, through the Effective Date
of the Merger, governed by the CGCL and by its California Articles of
Incorporation (the "GranCare Articles") and Bylaws (the "GranCare Bylaws").
Upon consummation of the Merger and the Distribution, except for those persons
who dissent and perfect dissenters' rights under the CGCL, the shareholders of
GranCare will become stockholders of Vitalink and New GranCare, both of which
will be Delaware corporations.
The following is a general comparison of material differences between the
rights of Vitalink stockholders (currently, the holders of Vitalink Common
Stock) under the DGCL, the Vitalink Certificate, and Vitalink Bylaws, on the
one hand, and the rights of GranCare shareholders (currently, the holders of
GranCare Common Stock) under the CGCL, the GranCare Articles and GranCare
Bylaws, on the other. This discussion is only a summary of certain provisions
and does not purport to be a complete description of such similarities and
differences, and is qualified in its entirety by reference to the DGCL, the
CGCL, the California Financial Code, the common law thereunder, and the full
text of the Vitalink Certificate, Vitalink Bylaws, GranCare Articles, and
GranCare Bylaws.
The provisions in the Vitalink Certificate and the Vitalink Bylaws discussed
below could make it more difficult and time-consuming to change control of the
Vitalink Board of Directors, and it is also conceivable that certain
provisions may deter efforts to seek control of Vitalink on a basis which some
shareholders might deem favorable. Such provisions are designed to encourage
any person attempting a change in control to enter into negotiations with the
Board of Directors of Vitalink.
SIZE OF THE BOARD OF DIRECTORS
Under California law, although changes in the number of directors must in
general, be approved by a majority of the outstanding shares, the Board of
Directors may fix the exact number of directors within a stated minimum and
maximum number (the "range") set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. Delaware
law permits the Board of Directors alone to change the authorized number, or
the range, of directors by amendment to the bylaws, unless the certificate of
incorporation otherwise provides or unless the directors are not authorized to
amend the bylaws or the number of directors is fixed in the certificate of
incorporation (in which case a change in the number of directors may be made
only by amendment to the certificate of incorporation approved by the
stockholders). The Certificate of Incorporation of Vitalink provides that the
number of directors shall be as specified in the Bylaws and authorizes the
Board of Directors to make, alter, amend or repeal the Vitalink Bylaws. The
Board of Directors of Vitalink may therefore change the authorized range, as
well as the exact number, of directors.
CUMULATIVE VOTING
Both the CGCL and the GranCare Bylaws provide for the cumulative voting of
shares by any shareholder in any election of directors provided that (i) the
name of the candidate for whom the shareholder wishes to cumulate votes has
been placed in nomination prior to the relevant meeting and (ii) the
shareholder has given notice at the meeting of his, her or its intent to
cumulate votes. If any shareholder has given the notice set forth in clause
(ii) above, all shareholders are entitled to cumulate votes. Under cumulative
voting, each share is entitled to a number of votes equal to the number of
directors to be elected. Votes may be cast for a single candidate or may be
distributed among two or more candidates in such proportions as the
shareholder may determine. The candidates receiving the highest number of
votes, up to the number of directors to be elected, are elected. Under
cumulative voting, shareholders who own far less than a majority of a
corporation's outstanding stock can obtain representation on the Board of
Directors. If voting is not conducted by cumulative voting, each share is
entitled to one vote and the holders of a majority of shares voting at the
meeting can elect all of the
113
<PAGE>
directors if they choose to do so, and the other shareholders cannot elect any
director. On all other matters, each share of GranCare Common Stock has one
vote.
Under the DGCL, the stockholders of Vitalink are not entitled to cumulate
their votes in the election of directors unless Vitalink's Certificate of
Incorporation so provides. The Vitalink Certificate does not provide for
cumulative voting, thus the election of directors is determined by a plurality
vote. Accordingly, following the Merger, the former shareholders of GranCare
will no longer be entitled to cumulative voting.
CHANGE IN NUMBER OF DIRECTORS
Under the CGCL, a change in the range of Directors as provided in GranCare's
Bylaws must be approved by the GranCare shareholders. Under the GranCare
Bylaws, although the GranCare Board of Directors may fix the exact number
within the range, any change in the range must be approved by the vote of 85%
of the outstanding shares of all classes of stock.
Under the DGCL, the number of directors are fixed by, or in the manner
provided in, the bylaws, unless the certificate of incorporation otherwise
provides or fixes the number of directors, in which case a change in the
number or permissible range of directors may be made only by amendment to the
certificate. Under the Vitalink Bylaws, the number of members of the Board of
Directors will be fixed and changed by a majority of the total number of
directors Vitalink would have if there were no vacancies. The Vitalink Bylaws
currently provide that the Board of Directors shall consist of not less than 3
or more than 9 directors. Following the Merger, and subject to the
Shareholders Agreement which fixes the size of the Vitalink Board of Directors
at eight for a three year period following the Merger, the Vitalink Board of
Directors will be able to increase or decrease the size of the Vitalink Board
of Directors without stockholder approval.
REMOVAL OF DIRECTORS
Under Sections 303 and 304 of the CGCL, any director or the entire board of
directors may be removed without cause by a majority of the outstanding shares
entitled to vote, provided, however, that the shares voted against such
removal would not be sufficient to elect the director under California's
cumulative voting rules, and a director may be removed for cause by the
Superior Court in a suit by shareholders holding at least ten percent (10%) of
the outstanding shares of any class. In addition, Section 302 of the CGCL
permits a corporation's board to remove directors declared of unsound mind by
a court or convicted of a felony. The GranCare Bylaws are governed by the
provisions of the CGCL.
Under the DGCL, a director of a corporation that does not have a classified
board of directors or cumulative voting may be removed with or without cause
with the approval of a majority of the outstanding shares entitled to vote at
an election of directors. In the case of a Delaware corporation having
cumulative voting, if less than the entire board is to be removed, a director
may not be removed without cause if the number of shares voted against such
removal would be sufficient to elect the director under cumulative voting. A
director of a corporation with a classified board of directors may be removed
only for cause, unless the certificate of incorporation provides otherwise.
The Vitalink Certificate of Incorporation does not provide for a classified
board of directors or for cumulative voting. As a result, Vitalink directors
may be removed with or without cause with the approval of a majority of the
shares entitled to vote at an election of directors. Although the definition
of "cause" has not been clearly established under Delaware law, courts in
various states have found "cause" to include malfeasance while in office,
gross misconduct or false or fraudulent misrepresentations inducing the
directors' appointment, willful conversion of corporate funds, a breach of the
obligation to make full disclosure, incompetency, gross inefficiency and moral
turpitude.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Except for a vacancy created by the removal of a director which may only be
filled by approval of the shareholders, the GranCare Bylaws provide that
vacancies on the Board of Directors may be filled by approval
114
<PAGE>
of the board of directors or, if the number of directors then in office is
less than quorum, by the unanimous written consent of the directors then in
office, by the affirmative vote of a majority of the remaining directors then
in office, or by a sole remaining director. Each director so elected shall
hold office until his successor is elected at an annual or special
shareholders' meeting. The GranCare shareholders may elect a director at any
time to fill any vacancy not filled by the directors. Any such election by
written consent requires the consent of a majority of the outstanding shares
entitled to vote. In addition, CGCL provides that if, after the filling of any
vacancy by the directors, the directors then in office who have been elected
by the shareholders shall constitute less than a majority of the directors
then in office, then (a) any holder or holders of an aggregate of five percent
(5%) or more of the total of number of shares at the time outstanding having
the right to vote for such directors may call a special meeting of
shareholders, or (b) the California Superior Court of the proper county shall,
upon application of such shareholder or shareholders, summarily order a
special meeting of shareholders to be held to elect the entire Board of
Directors.
The Vitalink Bylaws provide that a vacancy on the Board of Directors
occurring during the course of the year, including a vacancy created by an
increase in the number of directors, may be filled by the remaining directors
then in office, although less than a quorum, or by a sole remaining director.
These provisions further provide that any directors so appointed will serve
until the next annual stockholders meeting and until his successor is duly
elected and qualified. Under the DGCL, however, if at the time of filling any
vacancy or newly created directorship the directors then in office constitute
less than a majority of the entire board of directors (as constituted
immediately prior to any such increase), the Delaware Court of Chancery may,
upon application of any stockholder or stockholders holding at least 10
percent of the total number of shares at the time outstanding having the right
to vote for such directors, summarily under certain circumstances, order an
election to be held to fill any such vacancies or newly created directorships
or to replace the directors chosen by the directors then in office.
Additionally, when a director has been removed from office with or without
cause by the stockholders, the stockholders have the right under the
Shareholders Agreement to fill such vacancy by the affirmative vote of at
least a majority of the voting power of the then outstanding stock. See "The
Distribution Agreement--Terms of the Shareholders Agreement." The Shareholders
Agreement provides that in the event of a vacancy on the Vitalink Board of
Directors created by the death, removal or resignation of a GranCare Nominee,
Manor Care will cause its shares of Vitalink Common Stock to be voted in favor
of the election of the nominee appointed by a majority of the then remaining
GranCare Nominees. See "The Distribution Agreement--Terms of the Shareholders
Agreement."
AMENDMENT OF CERTIFICATE
Neither the GranCare Articles nor the GranCare Bylaws contain any provisions
relating to amendments to the GranCare Articles. The CGCL provides that the
GranCare Articles may be amended if such amendment is approved by the Board of
Directors and by the holders of a majority (or, in certain instances, a super
majority) of the outstanding shares of GranCare.
Under the DGCL, the Vitalink Certificate may be amended if such amendment is
approved by the Board of Directors and by the holders of a majority of the
shares of stock outstanding entitled to vote thereon. In addition, if Vitalink
were to have more than one class of stock outstanding, amendments that would
adversely affect the rights of any class would require the vote of a majority
of the shares of that class.
AMENDMENT OF THE BYLAWS
The GranCare Bylaws may be amended or repealed or new bylaws may be adopted
by either the GranCare Board of Directors or by the holders of GranCare Common
Stock entitled to exercise a majority of the voting power, provided that (i)
any change to the bylaws relating to the authorized number of directors must
be approved by the holders of at least 85% of the outstanding shares of all
classes of GranCare capital stock and (ii) the authority of the GranCare Board
of Directors to amend or repeal bylaws or adopt new bylaws is subject to the
authority of the GranCare shareholders.
115
<PAGE>
The Vitalink Certificate of Incorporation provides that the directors of
Vitalink are expressly authorized to make, alter, amend, change or repeal the
Vitalink Bylaws. Section 109 of the DGCL also provides that the shareholders
entitled to vote shall have the right to adopt, amend or repeal bylaws.
The Vitalink Bylaws provide that special meetings of stockholders may be
called by the Chairman of the Board, the Vice Chairman or the President, and
shall be called by the President or the Secretary at the request in writing of
a majority of the Board of Directors.
ACTION BY WRITTEN CONSENT
Both the Delaware and California law permit stockholders, unless
specifically prohibited by the certificate or articles of incorporation, to
take action without a meeting by the written consent of the holders of at
least the number of shares necessary to authorize or take such action at a
meeting at which all shares entitled to vote therein were present and voted.
Action by written consent may, in some circumstances, permit the taking of
stockholder action opposed by the board of directors more rapidly than would
be possible if a meeting of stockholders were required.
INDEMNIFICATION AND ELIMINATION OF DIRECTORS' MONETARY LIABILITY FOR BREACH OF
DUTY OF CARE
California and Delaware have similar laws respecting indemnification by a
corporation of its officers, directors, employees and other agents. The laws
of both states permit, with certain exceptions, a corporation to adopt charter
provisions eliminating the liability of a director to the corporation or its
shareholders for monetary damages for breach of the director's fiduciary duty.
There are nonetheless certain differences between the laws of the two states
respecting indemnification and limitation of liability.
The GranCare Articles eliminate the liability of directors to the
corporation to the fullest extent permissible under California law. California
law does not permit the elimination of monetary liability where such liability
is based on: (a) intentional misconduct or knowing and culpable violation of
law; (b) acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders, or that involve the absence
of good faith on the part of the director; (c) receipt of an improper personal
benefit; (d) acts or omissions that show reckless disregard for the director's
duty to the corporation or its shareholders, where the director in the
ordinary course of performing a director's duties should be aware of a risk of
serious injury to the corporation or its shareholders; (e) acts or omissions
that constitute an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation and its shareholders; (f)
transactions between the corporation and a director who has a material
financial interest in such transaction; and (g) liability for improper
distributions, loans or guarantees.
The Vitalink Certificate also eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director to the fullest extent permissible under Delaware law, as
such law exists currently or as it may be amended in the future. Delaware law
does not permit the elimination or limitation of a director's monetary
liability where such liability is based on: (a) breaches of the director's
duty of loyalty to the corporation or its stockholders; (b) acts or omissions
not in good faith or involving intentional misconduct or knowing violations of
law; (c) the payment of unlawful dividends or unlawful stock repurchases or
redemptions; or (d) transactions in which the director received an improper
personal benefit. Such limitation of liability provisions also may not limit a
director's liability for violation of, or otherwise relieve Vitalink or its
directors from the necessity of complying with federal or state securities
laws, or affect the availability of non-monetary remedies such as injunctive
relief or rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (a) no
indemnification may be made when a person is adjudged liable to the
corporation in the performance of that person's duty to the corporation and
its shareholders unless a court determines such person is entitled to
indemnity for expenses, and then such indemnification may be made only to the
extent that such court shall determine and (b) no indemnification may be made
without court approval in
116
<PAGE>
respect of amounts paid or expenses incurred in settling or otherwise
disposing of a pending action or amounts incurred in defending a pending
action that is settled or otherwise disposed of without court approval.
California law requires indemnification when the individual has defended
successfully the action on the merits while Delaware law requires
indemnification relating to a successful defense on the merits or otherwise.
Delaware law generally permits indemnification of expenses, including
attorney's fees, actually and reasonably incurred in the defense or settlement
of a derivative or third-party action, provided there is a determination by a
majority vote of a disinterested quorum of the directors, by independent legal
counsel or by majority vote of a quorum of the stockholders that the person
seeking indemnification acted in good faith and in a manner reasonably
believed to be in (or in contrast to California law not opposed to) the best
interests of the corporation. Without court approval, however, no
indemnification may be made in respect of any derivative action in which such
person is adjudged liable for negligence or misconduct in the performance of
his or her duty to the corporation. Delaware law requires indemnification of
expenses when the individual being indemnified has successfully defended any
action, claim, issue, or matter therein, on the merits or otherwise.
Expenses incurred by an officer or director in defending an action may be
paid in advance, under Delaware law and California law, if such director or
officer undertakes to repay such amounts if it is ultimately determined that
he or she is not entitled to indemnification. In addition, the laws of both
states authorize a corporation's purchase of indemnity insurance for the
benefit of its officers, directors, employees and agents whether or not the
corporation would have the power to indemnify against the liability covered by
the policy.
California law permits a California corporation to provide rights to
indemnification beyond those provided therein to the extent such additional
indemnification is authorized in the corporation's articles of incorporation.
Thus, if so authorized, rights to indemnification may be provided pursuant to
agreements or bylaw provisions which make mandatory the permissive
indemnification provided by California law. Under California law, there are
two limitations on such additional rights to indemnification: (i) such
indemnification is not permitted for acts, omissions or transactions from
which a director of a California corporation may not be relieved of personal
liability, as described above and (ii) such indemnification is not permitted
in circumstances where California law expressly prohibits indemnification, as
described above. GranCare's Articles of Incorporation permit indemnification
beyond that expressly mandated by the California Corporations Code and limit
director monetary liability to the extent permitted by California law.
Delaware law also permits a Delaware corporation to provide indemnification
in excess of that provided by statute. By contrast to California law, Delaware
law does not require authorizing provisions in the certificate of
incorporation and does not contain express prohibitions on indemnification in
certain circumstances; however, based on principles of public policy
limitations on indemnification may be imposed by a court.
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. The
indemnification and limitation of liability provisions of California law, and
not Delaware law, will apply to actions of the directors and officers of
GranCare taken prior to the Distribution and the Merger.
SHAREHOLDER VOTE FOR MERGERS AND OTHER REORGANIZATIONS
Both California and Delaware law generally require that the holders of a
majority in voting power of the outstanding shares of stock of both
constituent corporations entitled to vote approve mergers. Delaware law does
not require a stockholder vote of the surviving corporation in a merger
(unless the corporation provides otherwise in its certificate of
incorporation) if (a) the merger agreement does not amend the existing
certificate of incorporation; (b) each share of the stock of the surviving
corporation outstanding immediately before the effective date of the merger is
an identical outstanding or treasury share after the merger; and (c) either no
shares of common stock of the surviving corporation and no shares, securities
or obligations convertible into such stock are to be issued or delivered under
the plan of merger, or the authorized unissued shares or the treasury shares
of common stock of the surviving corporation to be issued or delivered under
the plan of merger plus those initially
117
<PAGE>
issuable upon conversion of any other shares, securities or obligations to be
issued or delivered under such plan do not exceed twenty percent (20%) of the
shares of common stock of such constituent corporation outstanding immediately
prior to the effective date of the merger. California law contains a similar
exception to its voting requirements for reorganizations where shareholders or
the corporation itself, or both, immediately prior to the reorganization will
own immediately after the reorganization equity securities constituting more
than five-sixths of the voting power of the surviving or acquiring corporation
or its parent entity.
Both California law and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. In contrast, Delaware
law generally does not require class voting (unless otherwise required in a
corporation's certificate of incorporation), except in certain transactions
involving an amendment to the certificate of incorporation that adversely
affects a specific class of shares. As a result, stockolder approval of such
transactions may be easier to obtain under Delaware law for companies which
have more than one class of shares outstanding.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than fifty percent (50%) but less than ninety percent (90%) of
such common stock or its affiliate unless all of the holders of such common
stock consent to the transaction. This provision of California law may have
the effect of making a "cash-out" merger by a majority shareholder more
difficult to accomplish. Although Delaware law does not parallel California
law in this respect, under some circumstances, Section 203 does provide
similar protection against coercive two-tiered bids for a corporation in which
the stockholders are not treated equally, provided the corporation has not
opted out of this provision in its original certificate of incorporation or in
an amendment thereto or to the bylaws which amendment may be approved by a
majority of the shares entitled to vote.
California law provides that, except in certain circumstances, when a tender
offer or a proposal for reorganization or for a sale of assets is made by an
interested party (generally a controlling or managing person of the target
corporation), an affirmative opinion in writing as to the fairness of the
consideration to be paid to the shareholders must be delivered to
shareholders. This fairness opinion requirement does not apply to a
corporation that does not have shares held of record by at least 100 persons,
or to a transaction that has been qualified under California state securities
laws. Furthermore, if a tender of shares or vote is sought pursuant to an
interested party's proposal and a later proposal is made by another party at
least ten days prior to the date of acceptance of the interested party
proposal, the shareholders must be informed of the later offer and be afforded
a reasonable opportunity to withdraw any vote, consent or proxy, or to
withdraw any tendered shares. Delaware law has no comparable provision.
STOCKHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS
In the last several years, a number of states (but not California) have
adopted special laws designed to make certain kinds of "unfriendly" corporate
takeovers or other transactions involving a corporation and one or more of its
significant shareholders more difficult. Under Section 203 of the Delaware
General Corporation Law ("Section 203"), certain "business combinations" with
"interested stockholders" of Delaware corporations are subject to a three-year
moratorium unless specified conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
time that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliated associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
118
<PAGE>
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the interested stockholder (except for transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or any receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if (i) prior to the time when such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the time when such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66 2/3%) of the voting stock not
owned by the interested stockholder.
Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, quoted on an
interdealer quotation system such as Nasdaq or held of record by more than
2,000 stockholders. However, a Delaware corporation may elect not to be
governed by Section 203 by a provision in its original certificate of
incorporation or an amendment thereto or to the bylaws, which amendment must
be approved by a majority of the shares entitled to vote and, in the case of a
bylaw amendment, may not be further amended by the board of directors. New
GranCare does not intend to elect not to be governed by Section 203; therefore
Section 203 will apply to New GranCare.
Vitalink believes that Section 203 will have the effect of encouraging any
potential acquiror to negotiate with Vitalink's Board of Directors. Section
203 should also discourage certain potential acquirors unwilling to comply
with its provisions.
INTERESTED DIRECTOR TRANSACTIONS
Under both California and Delaware law, certain contracts or transactions in
which one or more of a corporation's directors has an interest are not void or
voidable because of such interest provided that certain conditions, such as
obtaining the required approval and fulfilling the requirements of good faith
and full disclosure, are met. With certain exceptions, the conditions are
similar under California and Delaware law. Under California and Delaware law,
either (a) the shareholders or the board of directors must approve any such
contract or transaction after full disclosure of the material facts, and, in
the case of board approval, the contract or transaction must also be "just and
reasonable" (in California) or "fair" (in Delaware) to the corporation or (b)
the contract or transactions must have been just and reasonable or fair as to
the corporation at the time it was approved. In the latter case, California
law explicitly places the burden of proof on the interested director. Under
California law, if shareholder approval is sought, the interested director is
not entitled to vote his shares at a shareholder meeting with respect to any
action regarding such contract or transaction. If board approval is sought,
the contract or transaction must be approved by a majority vote of a quorum of
the directors, without counting the vote of any interested directors (except
that interested directors may be counted for purposes of establishing a
quorum). Under Delaware law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors
(even if the disinterested directors are less than a quorum). Therefore,
certain transactions that the Board of Directors of GranCare might not be able
to approve because of the number of interested directors, could be approved by
a majority of the disinterested directors of Vitalink, although less
119
<PAGE>
than a majority of a quorum. Vitalink is not aware of any plans to propose any
transaction involving directors of the Company that could not be so approved
under California law but could be so approved under Delaware law.
SHAREHOLDER DERIVATIVE SUITS
California law provides that a shareholder bringing a derivative action on
behalf of a corporation need not have been a shareholder at the time of the
transaction in question, provided that certain tests are met. Under Delaware
law, a stockholder may bring a derivative action on behalf of the corporation
only if the stockholder was a stockholder of the corporation at the time the
transaction in question occurred or if his or her stock thereafter devolved
upon him or her by operation of law. California law also provides that the
corporation or the defendant in a derivative suit may make a motion to the
court for an order requiring the plaintiff shareholder to furnish a security
bond. Delaware does not have a similar bonding requirement.
APPRAISAL RIGHTS
Under both California and Delaware law, a shareholder of a corporation
participating in certain major corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair market value of his or
her shares in lieu of the consideration he or she would otherwise receive in
the transaction. Under Delaware law, such fair market value is determined
exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation. In addition, such appraisal rights
under Delaware law are not available (a) with respect to the sale, lease or
exchange of all or substantially all of the assets of a corporation; (b) with
respect to a merger or consolidation by a corporation the shares of which are
either listed on a national securities exchange or are held of record by more
than 2,000 holders if such stockholders receive only shares of the surviving
corporation or shares of any other corporation that are either listed on a
national securities exchange or held of record by more than 2,000 holders,
plus cash in lieu of fractional shares of such corporation; or (c) to
stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
under certain provisions of Delaware law.
The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Under California law, a
shareholder of a corporation participating in certain transactions may, under
certain circumstances, receive the fair value of his shares in cash, in lieu
of the consideration he would otherwise have received in the transaction.
California law recognizes dissenters' rights in connection with certain
reorganizations, including without limitation merger reorganizations, exchange
reorganizations (for the acquiring corporation), sale-of-assets
reorganizations, and share exchange tender offers (for the acquiring
corporation) for which those shareholders of the corporation immediately prior
to the reorganization subsequently hold five-sixths or less of the voting
power of the surviving or acquiring corporation or parent party after the
reorganization. Dissenters' rights are only available, among other things: (i)
if the shares of the corporation are not either (A) listed on any national
securities exchange or (B) listed on the list of OTC margin stocks issued by
the Board of Governors of the Federal Reserve System, and proper notice is
given to shareholders; provided that this provision (i) does not apply to any
shares with respect to which there exists any restriction on transfer imposed
by the corporation or by any law or regulation; and provided further that this
provision does not apply to any class of shares described above in (A) or (B)
if demands for payment are filed with respect to 5% or more of the outstanding
shares of that class; and (ii) if the shares were outstanding on the date for
the determination of shareholders entitled to vote on the reorganization and
(x) were not voted in favor of the reorganization or, (y) if described in
subpart (A) or (B) of provision (i) above (without regard to the provisos
therein), were voted against the reorganization, or were held of record on the
effective date of a short form merger; provided however, that subpart (x)
rather than subpart (y) of this subsection (ii) applies in any case in which
approval was sought by written consent rather than at a meeting.
DISSOLUTION
Under California law, shareholders holding fifty percent (50%) or more of
the total voting power may authorize a corporation's dissolution, with or
without the approval of the corporation's board of directors, and
120
<PAGE>
this right may be modified by the articles of incorporation. Under Delaware
law, unless the board of directors approves the proposal to dissolve, the
dissolution must be approved by all the stockholders entitled to vote thereon.
Only if the dissolution is initially approved by the board of directors may it
be approved by a simple majority of the outstanding shares of the
corporation's stock entitled to vote. In the event of such a board-initiated
dissolution, Delaware law allows a Delaware corporation to include in its
certificate of incorporation a super majority (greater than a simple majority)
voting requirement in connection with dissolutions. However, Vitalink's
Certificate of Incorporation contains no such super majority voting
requirement, thus a majority of the outstanding shares entitled to vote,
voting at a meeting at which a quorum is present, would be sufficient to
approve a dissolution of Vitalink that had previously been approved by its
Board of Directors.
INSPECTION OF SHAREHOLDER LISTS
Both California and Delaware law allow any shareholder to inspect the
shareholder list for a purpose reasonably related to such person's interest as
a shareholder. California law provides, in addition, for an absolute right to
inspect and copy the corporation's shareholder list by persons holding an
aggregate of five percent (5%) or more of the corporation's voting shares, or
shareholders holding an aggregate of one percent (1%) or more of such shares
who have filed a Schedule 14B with the Commission. Under California law, such
absolute inspection rights also apply to a corporation formed under the laws
of any other state if its principal executive offices are in California or if
it customarily holds meetings of its board in California. Delaware law also
provides for the right to inspect a list of stockholders entitled to vote at a
meeting within a ten day period preceding a stockholders' meeting for any
purpose germane to the meeting. However, Delaware law contains no provisions
comparable to the absolute right of inspection provided by California law to
certain shareholders.
ANTI-TAKEOVER MEASURES
Delaware law has been widely viewed as permitting a corporation greater
flexibility in governing its internal affairs and its relationships with
stockholders and other parties than do the laws of many other states. In
particular, Delaware law permits a corporation to adopt a number of measures,
not currently permitted under California law, which are designed to reduce a
corporation's vulnerability to takeover attempts. Among these measures,
discussed below, are the establishment of a classified board of directors,
elimination of cumulative voting, elimination of the right of stockholders to
call special meetings of stockholders, and acquisition proposals by interested
parties.
CLASSIFIED BOARD OF DIRECTORS
Delaware law permits, but does not require, that the certificate of
incorporation, the initial bylaws or a bylaw adopted by vote of the
Stockholders may provide for a classified board of directors pursuant to which
the directors may be divided into as many as three classes with staggered
terms of office. Because the terms of office of each class expire in
successive years, only one class of directors would be elected each year.
Classification of the board of directors could make it more difficult for any
person desiring to acquire Vitalink to obtain immediate control of the board.
Under California law, unless the corporation is a listed corporation and the
corporation's articles and bylaws provide for a classified board, directors
must be elected annually.
SPECIAL MEETINGS OF STOCKHOLDERS
Under California law, a special meeting of shareholders may be called by the
board of directors, the chairman of the board, the president, the holders of
shares entitled to cast not less than 10% of the votes at the special meeting
or such additional person as may be provided in the articles of incorporation
or bylaws. Under Delaware law, a special meeting of stockholders may be called
by the board of directors or by such other person authorized to do so in the
certificate of incorporation or bylaws. The Vitalink Bylaws do not currently
provide that such meetings may be called by the stockholders. Thus, under
Delaware law, it may be more difficult for stockholders to initiate action
that may be opposed by the board of directors.
121
<PAGE>
APPLICATION OF GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE CORPORATIONS
Under Section 2115 of the CGCL, certain foreign corporations (i.e.
corporations not organized under California law) are placed in a special
category if they have characteristics of ownership and operation which
indicate that they have significant contacts with California. So long as
Delaware or other foreign corporation is in this special category, and it does
not qualify for one of the statutory exemptions, it is subject to a number of
key provisions of the CGCL applicable to corporations incorporated in
California. Among the more important provisions are those relating to the
election and removal of directors, cumulative voting, standards of liability
and indemnification of directions, distributions, dividends and repurchases of
shares, shareholder meetings, approval of certain corporate transactions,
dissenters' and appraisal right and inspection of corporate records.
Exemptions from Section 2115 of the CGCL are provided for corporations whose
shares are listed on a major national securities exchange or are traded on the
Nasdaq and which have 800 or more shareholders of record. Following the
Merger, the Vitalink Common Stock will be traded on the Nasdaq and held
beneficially by more than 800 stockholders as of the Effective Time and,
accordingly, Vitalink will be exempt from Section 2115.
DIVIDENDS AND REPURCHASES OF SHARES; PAR VALUE, CAPITAL AND SURPLUS
California law dispenses with the concepts of par value of shares, as well
as statutory definitions of capital, surplus and the like. Under California
law, with certain exceptions related to employee benefit plans, distributions
to shareholders of a California corporation (including redemptions and
dividends, other than stock dividends) are limited, in general, either to
retained earnings or to an amount that would leave the corporation with
tangible assets one-and-one quarter times its tangible liabilities and current
assets at least equal to its current liabilities. In addition, California law
provides that a corporation may not make any distribution that would render
the corporation unable to meet its liabilities, and such a distribution may
not be made if, as a result, the excess of the corporation's assets over its
liabilities would be less than the liquidation preference of all shares having
a preference on liquidation over the class or series to which the distribution
is made. Such tests are applied to California corporations on a consolidated
basis.
The concepts of par value, capital and surplus are retained under Delaware
law. A Delaware corporation may make repurchases or redemptions that do not
impair capital and may pay dividends out of any surplus account or out of net
profits of the current and preceding fiscal years (provided that the amount of
capital of the corporation is not less than the aggregate amount of the
capital represented by all outstanding stock having a preference upon the
distribution of assets). The ability of a Delaware corporation to pay
dividends or to make repurchases of redemptions of its shares is dependent on
the financial status of the corporation solely, not on a consolidated basis.
Under Delaware law, surplus may be created by a reduction of capital and may
be distributed by board action, as long as capital is maintained in an amount
not less than the aggregate par value of the remaining outstanding shares plus
the stated value of any shares not having par value.
ADOPTION AND APPROVAL OF NEW GRANCARE 1996 STOCK INCENTIVE PLAN
GENERAL
The initial New GranCare Board of Directors has adopted the New GranCare
1996 Plan and GranCare, as the sole shareholder of New GranCare prior to the
Distribution, has approved the 1996 New GranCare Plan. The Board of Directors
of GranCare has determined that it is in the best interest of GranCare and its
shareholders to seek shareholder approval of the 1996 New GranCare Plan in
view of the federal tax provisions contained in Section 162(m) of the Code.
Under Code Section 162(m), New GranCare may be prohibited from deducting the
expense of compensation accrued or paid to any officer, key employee or
consultant to the extent such compensation exceeds $1 million for any taxable
year of New GranCare. An exception to this deduction limit exists for
performance-based compensation such as an award granted under the 1996 New
GranCare Plan if the specific terms of the performance-based compensation to
the officer, key employee or consultant are disclosed to
122
<PAGE>
and approved by the shareholders. Your approval of the 1996 New GranCare Plan
is sought in order that awards granted under the 1996 New GranCare Plan will
not count toward the $1 million deductible compensation limit under Code
Section 162(m).
The purpose of the 1996 New GranCare Plan is to allow New GranCare to
attract and retain qualified officers, key employees and consultants and to
provide these individuals with an additional incentive to devote themselves to
the future success of New GranCare. Additionally, New GranCare believes that
awards under the 1996 New GranCare Plan will more closely align the interests
of its personnel with those of its stockholders.
The following is a description of the 1996 New GranCare Plan. The 1996 New
GranCare Plan replaces the incentive plans that were available for the grant
of incentive awards to officers, key employees and consultants of GranCare,
pursuant to which awards were granted in the form of qualified and non-
qualified stock options, stock appreciation rights ("SARs") and shares of
restricted stock, all of which types of awards will continue to be available
under the 1996 New GranCare Plan. In addition, the 1996 New GranCare Plan
provides for several types of equity-based incentive compensation awards not
currently available under GranCare's existing incentive plans, namely
performance units, performance shares, phantom stock, unrestricted bonus stock
and dividend equivalent rights.
The 1996 New GranCare Plan thus increases New GranCare's flexibility in
structuring equity-based incentive compensation by broadening the types of
incentive awards that may be made under such plan. The Board of Directors of
New GranCare believes that a flexible plan is needed to fashion equity-based
incentives consistent with New GranCare's philosophy of linking executive
compensation to total shareholder returns and the long-term financial
performance of New GranCare.
The 1996 New GranCare Plan will be administered by the Management
Compensation Committee of the Board of Directors of New GranCare (the
"Committee"). The Committee will determine the persons to whom, and the times
at which, awards will be granted, the type of awards to be granted and all
other related terms and conditions of the awards, subject to the limitations
described below and as set forth in the 1996 New GranCare Plan. The terms and
conditions of each award will be set forth in a written agreement with a
participant or a written program established by the Committee. All officers
and key employees of New GranCare and its affiliates are eligible to
participate in the 1996 New GranCare Plan. It is currently estimated that
approximately 33 individuals are eligible to participate.
A total of 1,500,000 shares of New GranCare Common Stock are reserved for
issuance pursuant to the 1996 New GranCare Plan, of which no more than 500,000
shares may be used for restricted stock and stock bonus grants. The number of
shares of New GranCare Common Stock reserved under the 1996 GranCare Plan is
subject to adjustment in the event of stock dividends, stock splits,
recapitalization and similar events.
The per share exercise price of any option may not be less than the fair
market value of a share of New GranCare Common Stock at the time of grant.
Once an option is granted, the exercise price may not be reduced by amendment
and an option may not be exchanged for a new option with a lower exercise
price. No incentive stock option may be granted on or after the tenth
anniversary of the date the 1996 New GranCare Plan was approved by the Board
of Directors of New GranCare.
The Committee shall determine whether stock appreciation rights, performance
unit awards, dividend equivalent rights, performance share awards and phantom
stock awards shall be settled in cash or in shares of New GranCare Common
Stock valued at fair market value on the date of payment. The Committee also
shall be authorized to accelerate the vesting, exercisability and settlement
of awards and to permit the exercise price of an option to be paid in cash or
by the delivery or withholding of shares.
The Board of Directors of New GranCare may amend or terminate the 1996 New
GranCare Plan without the approval of shareholders, but may condition any
amendment on shareholder approval if the Board believes it is necessary or
advisable to comply with any applicable tax or regulatory requirement. No
termination or
123
<PAGE>
amendment of the 1996 New GranCare Plan without the consent of the holder of
an award shall adversely affect the rights of that participant.
The Committee may provide with respect to any award that, in the event of a
Change in Control (as defined in the 1996 New GranCare Plan) of New GranCare,
the award shall be cashed out in an amount based on the fair market value of
the New GranCare Common Stock without regard to the exercisability of the
award or any other conditions or restrictions.
FEDERAL INCOME TAX CONSEQUENCES OF THE 1996 NEW GRANCARE PLAN
A participant will not recognize income upon the grant of an option or at
any time prior to the exercise of an option. At the time the participant
exercises a non-qualified option, he or she will recognize compensation
taxable as ordinary income in an amount equal to the excess of the fair market
value of the New GranCare Common Stock on the date the option is exercised
over the price paid for the New GranCare Common Stock, and New GranCare will
then be entitled to a corresponding deduction.
A participant who exercises an incentive stock option will not be taxed at
the time he or she exercises his or her option or a portion thereof. Instead,
he or she will be taxed at the time he or she sells the New GranCare Common
Stock purchased pursuant to the option. The participant will be taxed on the
excess of the amount for which he or she sells the stock over the price he or
she had paid for the stock. If the participant does not sell the stock prior
to two years from the date of grant of the option and one year from the date
the stock is transferred to him or her, the gain will be capital gain and New
GranCare will not get a corresponding deduction. If the participant sells the
stock prior to that time, the difference between the amount the participant
paid for the stock and the lesser of the fair market value on the date of
exercise or the amount for which the stock is sold, will be taxed as ordinary
income and New GranCare will be entitled to a corresponding deduction. If the
participant sells the stock for less than the amount he or she paid for the
stock prior to the one or two year periods indicated, no amount will be taxed
as ordinary income and the loss will be taxed as a capital loss. Exercise of
an incentive option may subject a participant to, or increase a participant's
liability for, the federal alternative minimum income tax.
A participant generally will not recognize income upon the grant of any
stock appreciation right, dividend equivalent right, performance unit award,
performance share award or phantom share. At the time a participant receives
payment under any such award, he or she generally will recognize compensation
taxable as ordinary income in an amount equal to the cash or the fair market
value of the New GranCare Common Stock received, and New GranCare will then be
entitled to a corresponding deduction.
A participant will not be taxed upon the grant of a stock award if such
award is not transferable by the participant or is subject to a "substantial
risk of forfeiture," as defined in the Code. However, when the shares of New
GranCare Common Stock that are subject to the stock award are transferable by
the participant and are no longer subject to a substantial risk of forfeiture,
the participant will recognize compensation taxable as ordinary income in an
amount equal to the fair market value of the stock subject to the stock award,
less any amount paid for such stock, and New GranCare will then be entitled to
a corresponding deduction.
The Plan is not qualified under Section 401(a) of the Code.
THE BOARD OF DIRECTORS OF GRANCARE UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF
GRANCARE COMMON STOCK THE ADOPTION AND APPROVAL OF THE NEW GRANCARE 1996 STOCK
INCENTIVE PLAN.
124
<PAGE>
ADOPTION AND APPROVAL OF THE NEW GRANCARE ANNUAL INCENTIVE
PLAN AND STOCKHOLDER VALUE PROGRAM
ANNUAL INCENTIVE PLAN
The Board of Directors of New GranCare has adopted, and GranCare as its sole
shareholder prior to the Distribution has approved, the Annual Incentive Plan
(the "Annual Incentive Plan"). The Board of Directors of New GranCare has
determined that it is in the best interest of New GranCare and its
shareholders to seek shareholder approval of the Annual Incentive Plan in view
of the federal tax provisions contained in Section 162(m) of the Code. Under
Code Section 162(m), New GranCare may be prohibited from deducting the expense
of compensation accrued or paid to any officer or key employee to the extent
such compensation exceeds $1 million for any taxable year of New GranCare. An
exception to this deduction limit exists for performance-based compensation,
such as an award under the Annual Incentive Plan, if the specific terms of the
performance-based compensation awarded to the officer or key employee are
disclosed to and approved by the shareholders of New GranCare. Your approval
of the Annual Incentive Plan is sought in order that awards granted under the
Annual Incentive Plan will not count toward that $1 million deductible
compensation limit under Section 162(m) of the Code.
The Annual Incentive Plan is a bonus plan intended to link the amount of
annual cash bonuses paid to New GranCare's officers and key employees to
corporate performance based on the relative responsibility of the individual
for whom the bonus is to be awarded. Awards are based on predetermined
performance goals established by the Committee within the first ninety days of
each fiscal year of New GranCare. The Annual Incentive Plan replaces the
annual incentive plan that is in effect for officers and key employees of
GranCare prior to the Merger and Distribution and the terms of the Annual
Incentive Plan are similar in all material respects to the terms of GranCare's
annual incentive plan.
The primary performance goal for most participants in the Annual Incentive
Plan will be based on New GranCare's earnings per share. Corporate earnings
per share targets are the sole performance standard by which bonuses will be
measured for the Chief Executive Officer, President and Executive Vice
Presidents. The annual bonus for Divisional Presidents will be based 50% on
the corporate earnings per share targets and 50% on the targeted improvements
for the applicable division in earnings before interest, taxes, depreciation,
amortization and rents ("EBITDAR").
Bonus awards will be payable based upon the attainment of one of three
different levels of performance: threshold, target and superior. No bonus
award will be payable with respect to a performance goal unless the threshold
level of performance is achieved. At the threshold, target and superior
performance levels, 50%, 100% and 150% of the targeted bonus amount allocated
to that performance goal is payable, respectively. The maximum yearly bonus
payable to any individual under the Annual Incentive Plan will be $600,000 per
year.
Payment of annual incentive awards will be made in cash unless the employee
elects, within the first ninety days of the fiscal year, to have payment of
the award made in shares of New GranCare Common Stock. In the event that an
employee makes such an election, he or she will receive New GranCare Common
Stock under the Annual Incentive Plan having a fair market value equal to 125%
of the cash award. These shares will be subject to forfeiture in the event the
employee terminates employment with New GranCare prior to the third
anniversary of the end of the fiscal year for which the shares were awarded
for any reason other than death or disability. All restricted shares shall
vest and become nonforfeitable upon a change of control of New GranCare.
During the period in which the New GranCare Common Stock is subject to
forfeiture, an employee may not sell or otherwise transfer the New Grancare
Common Stock.
FEDERAL INCOME TAX CONSEQUENCES OF THE ANNUAL INCENTIVE PLAN
An employee will recognize ordinary income on the amount he or she receives
under the Annual Incentive Plan and New GranCare will be entitled to a
corresponding deduction. If an employee makes an election to receive his or
her Annual Incentive Plan payment in New GranCare Common Stock, the employee
will generally
125
<PAGE>
recognize ordinary income when the New GranCare Common Stock is no longer
subject to a substantial risk of forfeiture. At this time the employee will
then recognize ordinary income in an amount equal to the then fair market
value of the New GranCare Common Stock and New GranCare will be entitled to a
corresponding deduction. Alternatively, the employee may elect to include the
fair market value of the New GranCare Common Stock in income at the time that
the employee receives the New GranCare Common Stock and New GranCare will then
be entitled to a corresponding deduction.
STOCKHOLDER VALUE PROGRAM
The Board of Directors of New GranCare has adopted, and GranCare as its sole
shareholder prior to the Distribution has approved, the Stockholder Value
Program (the "Stockholder Value Program"). The Board of Directors of New
GranCare has determined that it is in the best interest of New GranCare and
its shareholders to seek shareholder approval of the Stockholder Value Program
in view of the federal tax provisions contained in Section 162(m) of the Code.
Under Code Section 162(m), New GranCare may be prohibited from deducting the
expense of compensation accrued or paid to any officer to the extent such
compensation exceeds $1 million for any taxable year of New GranCare. An
exception to this deduction limit exists for performance-based compensation
such as an award granted under the Stockholder Value Program if the specific
terms of the performance-based compensation awarded to the officer are
disclosed to and approved by the shareholders. Your approval of the
Stockholder Value Program is sought in order that awards granted under the
Stockholder Value Program will not count toward the $1 million deductible
compensation limit under Section 162(m) of the Code.
The Stockholder Value Program is designed to tie long-term bonus awards to
New GranCare's performance. Participants in the Stockholder Value Program will
be the officers of New GranCare nominated by the Committee. The Stockholder
Value Program is intended to reward participants based upon New GranCare's
return to shareholders over time relative to that of a defined comparison peer
group. The Stockholder Value Program replaces the shareholder value program
that is in effect for the officers of GranCare prior to the Merger and the
Distribution and the terms of the Stockholder Value Program are similar in all
material respects to the terms of GranCare's shareholder value program.
Under the Stockholder Value Program, as of the beginning of a performance
period, a participant will be granted that number of performance units as the
Committee determines, up to a maximum of 4,000 units. The value of each
performance unit at the end of a three-year performance period will be based
upon the relative rank of New GranCare's Total Stockholder Return ("TSR") as
compared with a peer group of other companies at the end of the performance
period. The value of each performance unit as of the end of a performance
period will be determined based on the following schedule:
<TABLE>
<CAPTION>
TSR PERCENTILE PERFORMANCE UNIT VALUE
-------------- ----------------------
<S> <C>
Less than 50 0
50 $ 500
55 $ 750
60 $1,000
65 $1,300
70 $1,600
75 $1,950
80 $2,300
85 $2,650
90 or more $3,000
</TABLE>
In the event that New GranCare's TSR percentile for a particular performance
period falls between the percentile ranks listed above, the value attributed
to a performance unit for the performance period will be determined by the
Committee based on an interpolation of the values contained in the chart
above.
As soon as practicable after the end of a performance period, a participant
who is employed with New GranCare as of the last day of the performance period
for which performance units were granted or who died,
126
<PAGE>
became disabled or was terminated without cause during this period, will
receive the value of the performance units awarded to the participant. In the
event of a change of control (as defined in the Stockholder Value Program) of
New GranCare, all performance units will vest. Awards will be payable in cash
on a pro rated basis based on New GranCare's relative performance as of the
date of the change of control and the number of months elapsed in the
performance period.
The payment of the value of the performance units will be made in cash
unless a participant makes an election, within the first ninety days of a
performance period, to have payment of the value of any performance unit
awards made in shares of New GranCare Common Stock. In the event that a
participant makes such an election, the electing participant will receive
restricted New GranCare Common Stock having a fair market value equal to 125%
of the value of the performance units for which payment was made for any
reason other than death or disability. All restricted stock awards paid to a
participant under the Stockholder Value Program may contain any other terms
and conditions, not inconsistent with the terms of such plan, as the Committee
determines.
FEDERAL INCOME TAX CONSEQUENCES OF THE STOCKHOLDER VALUE PROGRAM
A participant generally will not recognize income upon the grant of a
performance unit under the New GranCare Stockholder Value Program. Generally,
at the time a participant receives payment for any participation units awarded
under the Stockholder Value Program, the participant will recognize
compensation taxable as ordinary income in an amount equal to the cash or the
fair market value of the property received and will then be entitled to a
corresponding deduction. A participant will not, however, be taxed on the
receipt of a New GranCare Common Stock award, in lieu of a cash payment for a
performance unit, if the New GranCare Common Stock award is not transferable
by the participant or is subject to a "substantial risk of forfeiture," as
defined in the Code. However, when the shares of New GranCare Common Stock
received under the Stockholder Value Program are no longer subject to a
substantial risk of forfeiture, the participant will recognize compensation
taxable as ordinary income in an amount equal to the fair market value of the
New GranCare Common Stock received, and New GranCare will then be entitled to
a corresponding deduction. If a participant so elects, at the time of receipt
of an award of New GranCare Common Stock, the participant may include the fair
market value of the New GranCare Common Stock in income at that time, and New
GranCare also will be entitled to a corresponding deduction.
THE BOARD OF DIRECTORS OF GRANCARE UNANIMOUSLY RECOMMENDS TO THE HOLDERS OF
GRANCARE COMMON STOCK THE ADOPTION AND APPROVAL OF THE NEW GRANCARE ANNUAL
INCENTIVE PLAN AND STOCKHOLDER VALUE PROGRAM.
SHAREHOLDER PROPOSALS
Shareholders of GranCare are entitled to submit proposals which they believe
should be voted upon at a shareholders meeting. The Commission has adopted
regulations which govern the inclusion of such proposals in annual proxy
materials. All such proposals were required to have been submitted to the
Secretary of GranCare no later than November 21, 1996 in order to be
considered for inclusion in GranCare's 1997 proxy materials (if any). GranCare
will hold an annual meeting of shareholders in 1997 only if the Transactions
are not approved at the Special Meeting.
Stockholders of Vitalink are entitled to submit proposals which they believe
should be voted upon at a stockholders' meeting. The Commission has adopted
regulations which govern the inclusion of such proposals in annual proxy
material. Vitalink's 1997 Annual Meeting is presently proposed to be held on
October 9, 1997. Stockholder proposals must be submitted to the Secretary of
Vitalink no later than May 9, 1997, in order to be eligible for inclusion in
Vitalink's proxy materials for such meeting.
127
<PAGE>
LEGAL MATTERS
Certain legal matters in connection with the Vitalink Common Stock being
offered hereby will be passed upon for Vitalink by Cahill Gordon & Reindel (a
partnership including a professional corporation), New York, New York.
EXPERTS
The consolidated financial statements and schedules of Vitalink at May 31,
1996 and 1995 and for each of the three years in the period ended May 31, 1996
included or incorporated by reference in Vitalink's Annual Report on Form 10-K
for the year ended May 31, 1996 have been audited by Arthur Andersen LLP,
independent auditors, as set forth in their reports with respect thereto
included or incorporated by reference therein and incorporated herein by
reference. Such financial statements are incorporated herein in reliance upon
the authority of such firm as experts in accounting and auditing.
The consolidated financial statements and schedule of GranCare, Inc. at
December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, incorporated by reference in this Prospectus and
Registration Statement have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon which is also incorporated
herein, and which, as to the years 1994 and 1993, is based in part on the
report of KPMG Peat Marwick LLP, independent auditors. The financial
statements and schedules referred to above are incorporated herein by
reference in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
The combined financial statements of TeamCare, Inc. (a wholly-owned
subsidiary of GranCare, Inc.) at December 31, 1995 and 1994, and for each of
the three years in the period ended December 31, 1995, included in the Proxy
Statement of GranCare, Inc., which is referred to and made a part of this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report appearing elsewhere herein,
and are included in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing.
128
<PAGE>
INDEX TO FINANCIAL STATEMENTS
TEAMCARE, INC.
<TABLE>
<S> <C>
Report of Independent Auditors........................................... F-2
Audited Combined Financial Statements
Combined Balance Sheets as of December 31, 1995 and 1994................. F-3
Combined Statements of Income for the Years ended December 31, 1995, 1994
and 1993................................................................ F-4
Combined Statements of Shareholder's Equity for the Years ended December
31, 1995, 1994 and 1993................................................. F-5
Combined Statements of Cash Flows for the Years ended December 31, 1995,
1994 and 1993........................................................... F-6
Notes to Combined Financial Statements................................... F-7
Unaudited Combined Financial Statements
Condensed Combined Balance Sheet as of September 30, 1996................ F-16
Condensed Combined Statements of Income for the nine month periods ended
September 30, 1996 and 1995............................................. F-17
Condensed Combined Statements of Cash Flows for the nine month periods
ended September 30, 1996 and 1995....................................... F-18
Notes to Condensed Combined Financial Statements......................... F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
GranCare, Inc.
We have audited the combined balance sheets of TeamCare, Inc. (representing
the institutional pharmacy and related businesses of GranCare, Inc.), a wholly
owned subsidiary of GranCare, Inc., as of December 31, 1995 and 1994, and the
related combined statements of income, shareholder's equity, and cash flows
for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of TeamCare, Inc. at
December 31, 1995 and 1994, and the combined results of its operations and its
cash flows for each of the three years in the period ended December 31, 1995
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
September 25, 1996
F-2
<PAGE>
TEAMCARE, INC.
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash................................................. $ 2,840 $ 2,884
Accounts receivable, less allowance for doubtful
accounts (1995--$8,844 and 1994--$6,168)............ 37,741 30,680
Inventories.......................................... 11,401 10,563
Prepaid expenses and other current assets............ 1,259 525
Deferred income taxes (Note 8)....................... 3,339 2,722
----------- -----------
Total current assets............................... 56,580 47,374
Property and equipment, net of accumulated depreciation
(Note 2).............................................. 11,524 10,973
Goodwill (accumulated amortization: 1995--$3,268;
1994--$1,219) (Note 4)................................ 66,573 52,621
Other intangibles (accumulated amortization: 1995--
$1,047; 1994--$1,154)................................. 2,093 2,498
Other assets (Note 2).................................. 3,003 1,725
----------- -----------
Total assets........................................... $ 139,773 $ 115,191
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Acquisition payable.................................. $ 1,913 $ --
Accounts payable and accrued expenses................ 6,033 7,599
Accrued wages and related liabilities................ 4,516 3,158
Other current liabilities............................ 1,569 1,094
Interest payable..................................... 64 62
Notes payable and current maturities of long-term
debt (Notes 4 and 5)................................ 2,166 1,192
----------- -----------
Total current liabilities.............................. 16,261 13,105
Long-term debt (Notes 4 and 5)......................... 6,234 5,262
Deferred income taxes (Note 8)......................... 2,326 1,333
Due to parent (Note 3)................................. 41,873 31,827
Other.................................................. 754 1,747
Commitments and contingencies (Notes 6 and 7)
Shareholder's equity:
Common stock; $0.01 par value; 10,000 shares
authorized, 100 shares issued and outstanding....... -- --
Contributed capital.................................. 46,379 46,379
Retained earnings.................................... 25,946 15,538
----------- -----------
72,325 61,917
----------- -----------
Total liabilities and shareholder's equity............. $ 139,773 $ 115,191
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
TEAMCARE, INC.
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net revenues (Note 3):
Non-affiliates and their patients................ $159,682 $151,268 $103,821
Affiliates and their patients.................... 35,216 19,927 18,417
-------- -------- --------
194,898 171,195 122,238
Cost of goods sold................................. 97,480 84,667 59,237
-------- -------- --------
Gross profit....................................... 97,418 86,528 63,001
Operating expenses
Salary and related............................... 48,357 40,213 28,686
Selling, general and administrative expenses..... 26,451 22,894 13,215
-------- -------- --------
Total operating expenses....................... 74,808 63,107 41,901
Depreciation and amortization...................... 4,705 3,524 2,368
Interest expense and financing charges............. 497 664 2,373
Nonrecurring costs--merger (Note 4)................ -- -- 4,573
-------- -------- --------
Income before income taxes and extraordinary
charge............................................ 17,408 19,233 11,786
Income taxes....................................... 7,000 7,700 6,628
-------- -------- --------
Income before extraordinary charge................. 10,408 11,533 5,158
Extraordinary charge--loss on early extinguishment
of debt, net of income tax benefit of $856........ -- -- 1,285
-------- -------- --------
Net income......................................... $ 10,408 $ 11,533 $ 3,873
======== ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
TEAMCARE, INC.
COMBINED STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON CONTRIBUTED RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ----------- -------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Balances at January 1, 1993................ $-- $ 5,042 $ 132 $ 5,174
Parent company capital contribution........ -- 3,876 -- 3,876
Net income................................. -- -- 3,873 3,873
---- ------- ------- -------
Balances at December 31, 1993.............. -- 8,918 4,005 12,923
Parent company capital contribution........ -- 37,461 -- 37,461
Net income................................. -- -- 11,533 11,533
---- ------- ------- -------
Balances at December 31, 1994.............. -- 46,379 15,538 61,917
Net income................................. -- -- 10,408 10,408
---- ------- ------- -------
Balances at December 31, 1995.............. $-- $46,379 $25,946 $72,325
==== ======= ======= =======
</TABLE>
See accompanying notes.
F-5
<PAGE>
TEAMCARE, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income....................................... $10,408 $11,533 $ 3,873
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts................ 4,688 5,050 1,562
Depreciation and amortization.................. 4,705 3,524 2,368
(Gain) loss on sale of assets.................. 54 (136) --
Deferred income taxes.......................... 380 132 197
Operating increase (decrease) in due to parent,
net........................................... (17,822) (13,404) 19,546
Changes in operating assets and liabilities net
of effects of acquisitions (Note 4):
Accounts receivable.......................... (9,342) (12,709) (7,019)
Other current assets......................... (369) 1,004 (1,240)
Accounts payable, accrued wages and other
accrued expenses............................ (922) 2,741 (748)
Interest payable............................. 2 (83) (398)
Other........................................ (1,575) (2,576) 1,033
------- -------- --------
Net cash (used in) provided by operating activi-
ties............................................ (9,793) (4,924) 19,174
INVESTING ACTIVITIES
Increases in due to parent-acquisition of busi-
ness............................................ 13,584 5,894 754
Acquisition of businesses........................ -- -- (1,823)
Purchases of property and equipment.............. (2,246) (3,845) (2,215)
Other............................................ (630) -- (186)
------- -------- --------
Net cash provided by (used in) investing
activities...................................... 10,708 2,049 (3,470)
FINANCING ACTIVITIES
Payments of debt................................. (1,372) (2,487) (18,529)
Proceeds from long-term debt borrowings.......... 413 575 1,921
------- -------- --------
Net cash used in financing activities............ (959) (1,912) (16,608)
------- -------- --------
Net decrease in cash............................. (44) (4,787) (904)
Cash at beginning of year........................ 2,884 7,671 8,575
------- -------- --------
Cash at end of year.............................. $ 2,840 $ 2,884 $ 7,671
======= ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Acquisitions
GranCare has funded the acquisitions of TeamCare (Note 4). TeamCare has
reflected the net assets of these acquired entities as a contribution to
capital or an increase in due to parent, as shown in the table below:
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fair values of assets acquired (net of cash re-
ceived)......................................... $19,591 $ 48,122 $ 12,698
Fair values of liabilities assumed............... (6,007) (4,767) (8,068)
------- -------- --------
13,584 43,355 4,630
Contribution of capital.......................... -- (37,461) (3,876)
------- -------- --------
Additions in due to parent....................... $13,584 $ 5,894 $ 754
======= ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
TeamCare, Inc. ("TeamCare") is a wholly-owned subsidiary of GranCare, Inc.
("GranCare"), a California Corporation, which changed its name from
CompuPharm, Inc. in April 1996. These combined financial statements include
the institutional pharmacy business of GranCare which is engaged primarily in
the distribution of pharmaceuticals, related pharmacy management services and
medical supplies to long-term care facilities in the United States. In
addition, TeamCare includes a business primarily engaged in the development of
computerized Clinical Management Information as prescribed by statutory
requirements. Hereinafter, "TeamCare" refers to the GranCare institutional
pharmacy and related businesses which are proposed to be merged with Vitalink
Pharmacy Services, Inc. in accordance with an Agreement and Plan of Merger
dated September 3, 1996. The combined financial statements reflect the
elimination of all significant intercompany balances and transactions among
the TeamCare entities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Inventories
Inventories consist primarily of purchased phamaceuticals and medical
supplies and are stated at the lower of cost or market, using the first-in
first-out method.
Property and Equipment
The components of property and equipment at December 31, are as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Land................................................... $ 74 $ --
Leasehold improvements................................. 2,224 1,814
Furniture, fixtures and equipment...................... 13,611 12,168
Computer equipment..................................... 5,996 5,167
Vehicles............................................... 1,675 1,319
-------- -------
23,580 20,468
Less accumulated depreciation.......................... (12,056) (9,495)
-------- -------
$ 11,524 $10,973
======== =======
</TABLE>
Property and equipment is stated at cost. Expenditures for maintenance,
repairs or renewals, and betterment that do not materially prolong the useful
lives of assets are charged to expense. Upon sale or retirement of property
and equipment, the cost and related accumulated depreciation are eliminated
from the accounts and a gain or loss is recorded. Depreciation is computed by
the straight-line method over the estimated useful lives of the assets as
stated below. Leases and leasehold improvements that have been capitalized are
amortized over the lives of the leases. Amortization of these assets is
included in depreciation expense.
<TABLE>
<S> <C>
Leasehold improvements......................................... 5-35 years
Furniture, fixtures and equipment.............................. 5-15 years
Computer equipment............................................. 5- 7 years
Vehicles....................................................... 3- 5 years
</TABLE>
F-7
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and Other Intangibles
In connection with TeamCare's acquisitions, all tangible and intangible
assets and liabilities are identified by management. Costs in excess of the
amounts assigned, based on management's estimates of fair value, to
specifically identifiable assets acquired less liabilities assumed are
recorded as goodwill. Goodwill is amortized on a straight-line basis
principally over a period of 35 years. The carrying value of goodwill is
reviewed if the facts and circumstances suggest it may be impaired. If this
review indicates goodwill will not be recoverable, as determined based on
undiscounted cash flows of the acquired entity over the remaining amortization
period, TeamCare's carrying value of the goodwill is reduced by the estimated
shortfall of cash flows.
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which must be adopted by TeamCare on January 1, 1996, requires
an undiscounted approach in determining if goodwill is impaired, but requires
measurement of impairment based on fair value. In management's opinion, no
impairment of long-lived assets exists at December 31, 1995, 1994 or 1993.
Other intangibles, which primarily were obtained in connection with
TeamCare's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
TeamCare also capitalizes internally and externally developed software costs
in accordance with SFAS No. 86, "Accounting for the Costs of Software to Be
Sold, Leased or Otherwise Marketed." Unamortized computer software development
costs of $2,278,000 and $1,536,000 at December 31, 1995 and 1994,
respectively, are included in other assets at the lower of unamortized cost or
the net realizable value. Amortization expense is not significant for any
periods presented.
Revenue Recognition
Revenues are reported in the period in which services are provided. A
significant portion of TeamCare's revenues from the sales of pharmaceutical
products and medical supplies is reimbursable from Medicaid and Medicare
programs. TeamCare monitors its receivables from these reimbursement sources
under policies established by management and reports such revenue at the
estimated net realizable value expected to be received from these third-party
payors.
A summary of net revenues by payor source for the years ended December 31
follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Medicaid...................................... $ 86,535 $ 86,029 $ 65,814
Medicare...................................... 50,028 36,318 27,293
Private pay, nursing facilities and other..... 58,335 48,848 29,131
-------- -------- --------
$194,898 $171,195 $122,238
======== ======== ========
</TABLE>
Accounts receivable outstanding on the combined balance sheets from the
Medicaid and Medicare programs were 22% and 13%, respectively, of net accounts
receivable at December 31, 1995 and 22% and 14%, respectively, of net accounts
receivable at December 31, 1994.
For fiscal years ended December 31, 1995, 1994 and 1993, 1%, 14% and 19%,
respectively, of TeamCare's combined net revenues were derived from a pharmacy
contract between TeamCare and the State of New Jersey (the "New Jersey
Contract") pursuant to which TeamCare supplied the pharmaceutical needs of all
extended care facilities operated by the State of New Jersey. The New Jersey
Contract expired on January 1, 1995. (See Note 9).
F-8
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
TeamCare is included in GranCare's consolidated Federal income tax return.
The income tax provisions reported in the financial statements are an
allocation of the parent company's total income tax provision. TeamCare's
allocation was determined based on a calculation of income taxes as if
TeamCare were a separate taxpayer, in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
3. RELATED PARTY TRANSACTIONS
TeamCare provides pharmacy products and services including pharmaceutical
dispensing, infusion therapy, wound care management, clinical information
systems and durable medical equipment to long-term health care facilities
owned and operated by GranCare and patients of these facilities. Sales of
pharmaceutical and infusion therapy products and services to GranCare's
facilities are made at prices which approximate amounts charged to other
customers. Revenues from sales to GranCare nursing facilities and patients,
which are included in net revenues in the combined statements of income, were
$35,216,000, $19,927,000 and $18,417,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
GranCare provides various services to TeamCare including, among others,
financial, legal, merger and acquisition, insurance, information systems,
employee benefit plans and certain administrative services, as required. The
combined financial statements reflect charges for certain corporate general
and administrative expenses from the GranCare corporate office to TeamCare.
Such corporate charges represent allocations based on determinations
management believes to be reasonable. Administrative costs charged by GranCare
were $800,000, $750,000 and $700,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
GranCare obtains and provides insurance coverage for health, life and
disability, auto, general liability and workers' compensation through its
self-insurance and outside insurance programs and allocates costs to TeamCare
based on the relative percentage of insurance costs incurred by GranCare on
behalf of TeamCare. Total insurance costs allocated were $1,229,000, $833,000
and $257,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
TeamCare participates in the various benefit plans of GranCare, primarily
the profit sharing and 401(k) plans. These plans include matching provisions
for employee contributions to the 401(k) plan. The TeamCare financials reflect
charges for benefits attributable to TeamCare employees. Such amounts were not
significant for the periods presented.
Under a cash management facility provided by GranCare, certain operating
expenses, capital expenditures, benefit contributions, direct costs associated
with acquisitions (see Note 4) and other cash requirements of TeamCare are
paid by GranCare and are charged to TeamCare.
Concurrent with the December 1993 CompuPharm merger discussed in Note 4,
GranCare repaid certain indebtedness, related interest and prepayment fees on
behalf of CompuPharm. Such amounts totalled $16,602,000 and are reflected as
an increase in the due to parent amount.
The net result of these intercompany transactions along with tax allocations
from GranCare (see Note 8) are included in the due to parent classification in
the accompanying combined balance sheets. There are no set repayment terms nor
do such amounts bear interest. Amounts due to GranCare at December 31, 1995
and 1994 were $41,873,000 and $31,827,000, respectively; the weighted average
amounts due during 1995, 1994 and 1993 were $32,193,000, $24,504,000 and
$13,018,000, respectively. Such amounts are classified as noncurrent
liabilities because there have been no settlements and these amounts will be
contributed to TeamCare in connection with the Agreement and Plan of Merger.
F-9
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. MERGERS AND ACQUISITIONS
1993 Mergers and Acquisitions
On April 19, 1993, TeamCare acquired the operations of Patient Therapy
Systems, Inc., which provides therapy beds and therapy services to patients
directly and under agreements and arrangements with nursing facilities in
California, for $400,000 in cash. The purchase price, net of $150,000
representing noncompetition agreements with certain key executives, was
allocated to the fair values of the assets and liabilities acquired. In
connection with this acquisition, $125,000 was recorded as goodwill.
On June 23, 1993, TeamCare acquired all of the capital stock of Brim Medical
Equipment and Supplies, Inc., an enteral and urological supply company in
California, for $1,400,000, payable in various amounts. At December 31, 1995,
substantially all of this obligation has been settled. In connection with this
acquisition, TeamCare incurred $214,000 in transaction costs and recorded
$1,315,000 as goodwill.
On June 30, 1993, TeamCare acquired all of the capital stock of Winyah
Dispensary LTC of North Carolina, Inc. and Winyah Dispensary Midlands, Inc.,
for $2,500,000 in convertible promissory notes (see Note 5), and the
operations of Winyah Dispensary, Inc. for $3,650,000 in cash and adjustable
promissory notes in the aggregate sum of $2,600,000 (collectively, "Winyah").
Winyah provides institutional pharmacy services in North and South Carolina.
Under the terms of the Winyah Dispensary, Inc. Asset Purchase Agreement (the
"Winyah Agreement"), TeamCare may be obligated to make deferred conditional
purchase price adjustments, not to exceed $5,000,000, based on certain
profitability goals as outlined in the Winyah Agreement.
In connection with these acquisitions, TeamCare incurred $351,000 in
transaction costs and recorded $8,218,000 as goodwill.
On September 30, 1993, TeamCare acquired the operations of Medication
Delivery Systems, Inc. ("MDS"), a provider of institutional pharmacy services
in New Jersey, for $1,750,000 in cash. Goodwill and other intangibles of
$1,411,000 was originally recorded in connection with this transaction. Under
the terms of the Asset Purchase Agreement, TeamCare is required to make
additional purchase price payments to the former owner of MDS based on the
number of beds serviced during the three year period ended September 30, 1996
up to a maximum of $400,000 per year not to exceed $1,200,000 in aggregate.
Through December 31, 1995, TeamCare has made $766,000 of contingent payments
under the terms of this agreement which has been recorded as additional
goodwill.
The 1993 acquisitions described above were all accounted for as purchases
and, accordingly, the combined financial statements of TeamCare include the
operations of such acquired entities since the respective dates of their
acquisition.
On December 28, 1993, GranCare acquired, through merger, all of the
outstanding common stock of CompuPharm, Inc. ("CompuPharm"), an institutional
pharmacy services company in New Jersey, in exchange for 2,462,795 shares of
GranCare's common stock. GranCare's merger with CompuPharm was accounted for
as a pooling-of-interests business combination and accordingly, the combined
TeamCare financial statements include the historical balances as if the two
companies had always been combined. In connection with the merger, GranCare
and CompuPharm incurred non-recurring merger costs of $2,149,000 and
$2,424,000, respectively.
F-10
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of combined total revenues, extraordinary charge, net
income, and shareholder's equity to amounts applicable to the separate
companies prior to the date of combination (effectively, December 31, 1993) is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Total revenues:
TeamCare......................................................... $48, 385
CompuPharm....................................................... 73,853
--------
$122,238
========
Extraordinary charge:
TeamCare......................................................... $ --
CompuPharm....................................................... 1,285
--------
$ 1,285
========
Net income:
TeamCare......................................................... $ 3,686
CompuPharm....................................................... 187
--------
$ 3,873
========
Shareholder's equity:
TeamCare......................................................... $ 8,947
CompuPharm(1).................................................... 3,976
--------
$ 12,923
========
</TABLE>
- --------
(1) Consists of $2,132,000 retained earnings and $1,844,000 contributed
capital. Note: There were no intercompany transactions between TeamCare and
CompuPharm prior to the date of combination.
1994 Acquisitions
On March 1, 1994, TeamCare acquired the operations of PPCP, Inc. ("PPCP"), a
provider of institutional pharmacy services in Ohio, for $3,800,000 in cash
and adjustable subordinated promissory notes in the aggregate sum of
$1,449,000. In December 1995, the notes were adjusted upward by $125,000 as a
result of the terms outlined in the purchase agreement. TeamCare also assumed
and concurrently paid PPCP's indebtedness to National City Bank in the amount
of $471,000. In connection with this acquisition, $4,518,000 was recorded as
goodwill.
On April 1, 1994, TeamCare acquired the operations of Merit Pharmacy
Services, Inc. ("Merit"), a provider of institutional pharmacy services in
California, for $600,000 in cash and a subordinated promissory note for
$1,184,000. The principal balance of the promissory note was adjusted downward
in the amount of $22,500 due to net operating revenues for the twelve-month
period following the closing date being less than the required amount set
forth in the purchase agreement. In connection with this acquisition, TeamCare
incurred $98,000 in transaction costs and recorded $1,817,000 as goodwill.
Effective July 1, 1994, TeamCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, "LTC"), a provider of institutional pharmacy services in
Indiana, for $16,000,000
F-11
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
cash and 1,000,000 shares of GranCare common stock valued at a guaranteed
price of $20 per share, or $20,000,000. The purchase agreement also contains a
contingent earn-out provision, in the form of a subordinated promissory note,
under which an additional $5,500,000 is required to be paid provided certain
future operating results are attained for the two year period ended June 30,
1996; any amounts which may be due have not yet been determined. In connection
with this acquisition, TeamCare incurred $432,000 in transaction costs and
recorded $27,402,000 as goodwill.
Also effective July 1, 1994, TeamCare acquired the operations of Ricketts
Drug, Inc., a provider of institutional pharmacy services in Virginia, for
$4,111,000 in cash. In connection with this acquisition, TeamCare incurred
$64,000 in transaction costs and recorded $2,355,000 as goodwill.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the combined financial statements of TeamCare include the
operations of such acquired entities since the respective dates of their
acquisition.
1995 Acquisitions
On October 1, 1995, TeamCare acquired the operations of Innovative Pharmacy
Services, Inc. ("Innovative"), a provider of institutional pharmacy services
in Wisconsin, for $3,000,000 cash, GranCare common stock valued at $4,000,000,
a three-year adjustable subordinated promissory note for $2,000,000 and a
three-year unsecured subordinated promissory note for $1,000,000. The
principal balance of the adjustable promissory note will be adjusted downward
in the event certain profitability goals are not achieved during the first 12
months following the acquisition. In connection with this acquisition,
TeamCare recorded $9,555,000 as goodwill.
Effective December 1, 1995, TeamCare acquired the operations of both
Pharmacare, Inc. and American Pharmaceutical, Inc., which provide
institutional pharmacy services in Northern California, for $6,200,000 in
cash. In connection with these acquisitions, TeamCare incurred $67,000 in
transaction costs and recorded $5,408,000 as goodwill.
Summarized below are the unaudited pro forma consolidated results of
operations for TeamCare had the 1993 Winyah and 1994 LTC acquisitions occurred
as of January 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Total revenues................................... $ 191,518 $ 166,316
Income before extraordinary charge............... 12,886 8,250
Net income....................................... 12,886 6,965
</TABLE>
Pro forma information for 1995 and other 1994 and 1993 acquisitions is not
presented because their operating results, either individually or in the
aggregate, do not have a material effect on the pro forma operating results
presented above.
The above results are based upon certain assumptions and estimates which
TeamCare believes are reasonable, and do not reflect any benefit which might
be achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they necessarily
indicative of the results of future combined operations.
F-12
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. DEBT
Debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
9% convertible note issued in connection with the
Winyah acquisition, final maturity in 1998......... $ 2,400 $ 2,400
8% promissory notes issued in connection with the
Winyah acquisition, final maturity in 1999......... 981 995
8% promissory note issued in connection with the
Innovative acquisition, payable in annual
installments through 1998.......................... 2,904
6% promissory note issued in connection with the
Merit acquisition, payable in annual installments
through 2001....................................... 1,060 1,154
8% promissory note issued in connection with the
PPCP acquisition, due in 1996...................... 550 1,574
Other notes payable................................. 417 172
Capitalized lease obligations, less imputed
interest........................................... 88 159
----------- -----------
Total debt.......................................... 8,400 6,454
Less short-term notes payable and current maturities
of long-term debt.................................. 2,166 1,192
----------- -----------
$ 6,234 $ 5,262
=========== ===========
</TABLE>
In connection with the 1993 Winyah acquisition, as described in Note 4,
GranCare issued $2,500,000 in convertible promissory notes to the former
owners of Winyah. The notes are convertible into fully paid and nonassessable
shares of common stock of GranCare based on a predetermined conversion price.
In 1993, $100,000 of the notes were converted into GranCare common stock.
Total interest payments made in 1995, 1994 and 1993 amounted to $495,000,
$747,000 and $2,771,000, respectively. The carrying amounts of TeamCare's
various notes payable approximate fair value.
Maturities of debt at December 31, 1995 are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996..................................... $2,166
1997..................................... 1,194
1998..................................... 3,573
1999..................................... 1,117
2000..................................... 177
Thereafter............................... 173
------
Total obligations.......................... $8,400
======
</TABLE>
6. COMMITMENTS--OPERATING LEASES
TeamCare's future minimum lease payments under noncancellable operating
leases at December 31, 1995, are summarized as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1996.................................... $ 3,021
1997.................................... 3,159
1998.................................... 2,844
1999.................................... 1,811
2000.................................... 1,310
Thereafter.............................. 1,088
-------
Total minimum lease payments.............. $13,233
=======
</TABLE>
F-13
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense for all operating leases aggregated $3,077,000, $2,052,000 and
$1,607,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
7. CONTINGENCIES
TeamCare is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, that the ultimate resolution of these matters will not have a
material adverse effect on TeamCare's combined financial position or results
of operations. No material liabilities have been recorded for probable loss
contingencies.
8. INCOME TAXES
Effective January 1, 1993 TeamCare prospectively adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." There
was no cumulative effect of adopting SFAS No. 109.
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................ $ 5,394 $ 6,196 $ 5,221
State.......................................... 1,226 1,372 1,210
------- ------- -------
6,620 7,568 6,431
Deferred:
Federal........................................ 395 81 155
State.......................................... (15) 51 42
------- ------- -------
380 132 197
------- ------- -------
$ 7,000 $ 7,700 $ 6,628
======= ======= =======
</TABLE>
At December 31, 1995, TeamCare entities have various state income tax net
operating loss carryforwards and state tax credit carryforwards none of which
individually are significant.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Fixed asset basis differences.................. $ 783 $ 740
Intangible asset basis differences............. 2,008 796
----------- -----------
Total deferred income tax liabilities............ 2,791 1,536
Deferred income tax assets:
Vacation and compensation accruals............. 800 626
Accounts receivable reserves................... 2,428 1,927
Net operating loss and credit carryforwards.... 465 204
Other.......................................... 111 168
----------- -----------
Total deferred income tax assets................. 3,804 2,925
----------- -----------
Deferred income tax assets....................... $ 1,013 $ 1,389
=========== ===========
</TABLE>
F-14
<PAGE>
TEAMCARE, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Differences between TeamCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows for the years ended
December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory rate..... $6,093 35.0% $6,732 35.0% $4,125 35.0%
State tax, net of federal bene-
fit............................. 784 4.5 923 4.8 829 7.0
Merger costs..................... -- -- -- -- 1,600 13.6
Other............................ 123 0.7 45 0.2 74 0.6
------ ---- ------ ---- ------ ----
$7,000 40.2% $7,700 40.0% $6,628 56.2%
====== ==== ====== ==== ====== ====
</TABLE>
Management believes no valuation reserves are needed for deferred income tax
assets and there has been no valuation allowance during the three-year period
ended December 31, 1995. It is management's belief that it is more likely than
not that the results of future operations will generate sufficient taxable
income to realize the deferred tax assets.
9. SUBSEQUENT EVENTS
Under the terms of an Assignment and Assumption Agreement (the "Agreement")
between TeamCare and HPI Health Care Services, Inc. ("HPI") dated February 1,
1996, TeamCare agreed to provide pharmacy services to the State of New Jersey
as a subcontractor under a contract that was awarded to HPI. Under the terms
of the Agreement, TeamCare assumed all the contractual provisions of the HPI
contract for the period February 1, 1996 through January 31, 1998. TeamCare
has also been awarded an additional two year contract beginning February 1,
1998 with the State of New Jersey.
On July 1, 1996, TeamCare acquired the operations of Emery Pharmacy, Inc., a
provider of institutional pharmacy services in New York, for $5,200,000 in
cash and an adjustable promissory note. The note is subject to revision based
on inventory purchased, net revenues for the twelve month period following the
closing date, and other matters.
TeamCare is currently negotiating under a letter of intent with an
institutional pharmacy provider in California for the purchase of its
operations. The transaction will be accounted for under the purchase method of
accounting.
On September 3, 1996, GranCare, TeamCare's parent, announced it has reached
a definitive agreement to merge TeamCare with Vitalink Pharmacy Services, Inc.
F-15
<PAGE>
TEAMCARE, INC.
CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS
Current assets:
Cash.................................................. $ 868
Accounts receivable, less allowance for doubtful ac-
counts............................................... 47,099
Inventories........................................... 15,573
Prepaid expenses and other current assets............. 2,749
Deferred income taxes................................. 3,338
--------
Total current assets.................................. 69,627
Property and equipment, net of accumulated deprecia-
tion................................................... 13,444
Goodwill, net of accumulated amortization............... 75,621
Other intangibles, net of accumulated amortization...... 1,930
Other assets............................................ 3,711
--------
Total assets............................................ $164,333
========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses................. $ 19,921
Accrued wages and related liabilities................. 4,362
Interest payable...................................... 261
Notes payable and current maturities of long-term
debt................................................. 1,669
--------
Total current liabilities............................... 26,213
Long-term debt.......................................... 10,679
Deferred income taxes................................... 3,171
Due to parent........................................... 39,015
Other................................................... 530
SHAREHOLDER'S EQUITY:
Common stock: $0.01 par value: 10,000 shares
authorized, 100 shares issued and outstanding........ --
Contributed capital................................... 46,379
Retained earnings..................................... 38,346
--------
84,725
--------
Total liabilities and shareholder's equity.............. $164,333
========
</TABLE>
See accompanying notes.
F-16
<PAGE>
TEAMCARE, INC.
CONDENSED COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1996 1995
--------------- ---------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Net revenues:
Non-affiliates and their patients............ $ 151,497 $ 121,350
Affiliates and their patients................ 43,127 21,418
--------------- ---------------
194,624 142,768
Cost of goods sold............................. 92,847 71,846
--------------- ---------------
Gross profit................................... 101,777 70,922
Operating expenses
Salary and related........................... 53,027 35,440
Selling, general and administrative ex-
penses...................................... 22,655 19,262
--------------- ---------------
Total operating expenses..................... 75,682 54,702
Depreciation and amortization.................. 4,980 3,365
Interest expense and financing charges......... 449 356
--------------- ---------------
Income before income taxes..................... 20,666 12,499
Income taxes................................... 8,266 5,000
--------------- ---------------
Net income..................................... $ 12,400 $ 7,499
=============== ===============
</TABLE>
See accompanying notes.
F-17
<PAGE>
TEAMCARE, INC.
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1996 1995
---------------- ---------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income................................. $ 12,400 $ 7,499
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for doubtful accounts.......... 2,942 3,264
Depreciation and amortization............ 4,980 3,365
(Gain) loss on sale of assets............ (350) --
Deferred income taxes.................... 846 377
Operating decrease in due to parent,
net..................................... (11,762) (1,533)
Changes in operating assets and liabili-
ties net of effects of acquisitions:
Accounts receivable.................... (12,300) (6,939)
Other current assets................... (5,129) (1,527)
Accounts payable and accrued expenses.. 8,783 (943)
Interest payable....................... 197 (16)
Other.................................. (932) (2,027)
---------------- ---------------
Net cash (used in) provided by operating
activities................................ (325) 1,520
INVESTING ACTIVITIES
Increase in due to parent--acquisition of
businesses................................ 4,452 --
Purchases of property and equipment........ (3,876) (1,831)
Other...................................... (1,133) (867)
---------------- ---------------
Net cash used in investing activities...... (557) (2,698)
FINANCING ACTIVITIES
Payments of debt........................... (1,090) (1,564)
Proceeds from long-term debt borrowings.... -- 244
---------------- ---------------
Net cash used in financing activities...... (1,090) (1,320)
---------------- ---------------
Net decrease in cash....................... (1,972) (2,498)
Cash at beginning of year.................. 2,840 2,884
---------------- ---------------
Cash at end of year........................ $ 868 $ 386
================ ===============
</TABLE>
See accompanying notes.
F-18
<PAGE>
TEAMCARE, INC.
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed combined financial statements do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the nine month period ended September 30, 1996 are not necessarily
indicative of the results that may be expected for the year ending December
31, 1996. For further information, refer to the consolidated combined
financial statements and the footnotes thereto for the year ended December 31,
1995 attached hereto. TeamCare, Inc. ("TeamCare") is a wholly-owned subsidiary
of GranCare, Inc. ("GranCare"), a California corporation, which changed its
name from CompuPharm, Inc. in April 1996. These combined financial statements
include the institutional pharmacy business of GranCare, which is engaged
primarily in the distribution of pharmaceuticals, related pharmacy management
services and medical supplies to long-term care facilities in the United
States. In addition, TeamCare includes a business primarily engaged in the
development of computerized Clinical Management Information as prescribed by
statutory requirements. Hereinafter, "TeamCare" refers to the GranCare
institutional pharmacy and related businesses which are proposed to be merged
with Vitalink Pharmacy Services, Inc. in accordance with an Agreement and Plan
of Merger dated September 3, 1996. The combined financial statements reflect
the elimination of all significant intercompany balances and transactions
among the TeamCare entities. In July 1996, the Company completed the
acquisition of Emery Pharmacy, Inc., an institutional pharmacy located in New
York for $5.2 million. In September 1996, the Company completed the
acquisition of RX Corporation, an institutional pharmacy located in southern
California for $2.8 million.
NOTE B--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 earn-out
provision for the two-year period ended June 30, 1996. An additional $5.5
million could be paid to LTC provided certain operating results were obtained
for this period. Management has completed its analysis of the amount payable
under this provision and believes that the amount owing to LTC is $2.1
million, which amount has been disputed by LTC.
NOTE C--STATE OF NEW JERSEY CONTRACT
Under the terms of an Assignment and Assumption Agreement (the "Agreement")
between TeamCare and HPI Health Care Services, Inc. ("HPI") dated February 1,
1996, TeamCare agreed to provide pharmacy services to the State of New Jersey
as a subcontractor under a contract (the "New Jersey Contract") that was
awarded to HPI. Under the terms of the Agreement, TeamCare assumed all the
contractual provisions of the HPI contract for the period February 1, 1996
through January 31, 1998. TeamCare has also been awarded an additional two
year contract beginning February 1, 1998 with the State of New Jersey.
In connection with this Agreement, TeamCare paid $4 million in cash for
certain inventory and property and equipment. Under the terms of the
Agreement, TeamCare may be obligated to make deferred conditional purchase
price adjustments, not to exceed $400,000. TeamCare received $4.7 million from
HPI in consideration of TeamCare's assumption of the New Jersey Contract as
TeamCare will incur certain transition costs and costs to be incurred in
managing operations and personnel during the remainder of the subcontract
period. TeamCare has recognized $3.3 million of the $4.7 million as net
revenues and a reduction in operating expenses for the nine month period ended
September 30, 1996; unamortized deferred income of $1.4 million at September
30, 1996 is reported in accounts payable and accrued expenses in the
accompanying balance sheet.
F-19
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION DATED DECEMBER 31, 1996
NEW GRANCARE, INC.
COMMON STOCK
PAR VALUE $0.001 PER SHARE
This Prospectus covers up to 24,000,000 shares of the common stock, par value
$.001 per share ("New GranCare Common Stock), of New GranCare, Inc., a Delaware
corporation ("New GranCare"). This Prospectus is being furnished to the
shareholders of GranCare, Inc., a California corporation (the "Company"), the
sole stockholder of New GranCare, in connection with the proposed distribution
(the "Distribution") to the Company's shareholders of all the outstanding
shares of New GranCare Common Stock, pursuant to the terms of an Amended and
Restated Agreement and Plan of Distribution, dated as of September 3, 1996, by
and between the Company and New GranCare (the "Distribution Agreement"). The
Company is proposing to make the Distribution in connection with and as part of
a proposed reorganization that also involves the merger of the Company (the
"Merger") with and into Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), immediately following the Distribution, pursuant to
an Agreement and Plan of Merger by and between Vitalink and the Company dated
September 3, 1996, as amended through the date hereof (the "Merger Agreement"),
a copy of which is attached as Annex B to the Proxy Statement/Prospectus (the
"Proxy Statement/Prospectus") of the Company and Vitalink relating to the
solicitation of proxies in order to obtain shareholder approval of the
Distribution and Merger which accompanies this Prospectus. Immediately
following the Merger, New GranCare will change its name to "GranCare, Inc." The
Merger is conditioned upon the successful completion of the Distribution. The
completion of both the Merger and the Distribution is subject to the approval
of the shareholders of the Company.
One share of New GranCare Common Stock will be distributed for each share of
common stock of the Company (the "Distribution Ratio"), without par value
("Company Common Stock"), issued and outstanding on the date established by the
Board of Directors of GranCare for determining shareholders of record entitled
to receive New GranCare Common Stock in the Distribution (the "Distribution
Record Date").
At the time of the Distribution, New GranCare will own all of the Company's
businesses and assets other than the Company's institutional pharmacy business
(the "Institutional Pharmacy Business"), currently operated through the
Company's TeamCare, Inc. subsidiary ("TeamCare"). The businesses to be owned
and operated by New GranCare include the Company's skilled nursing facilities,
home health and assisted living operations and contract management businesses
(the "Skilled Nursing Business").
No consideration will be paid by the Company's shareholders for the shares of
New GranCare Common Stock to be received by them in the Distribution. There is
currently no public trading market for the shares of New GranCare Common Stock.
New GranCare intends to list the New GranCare Common Stock on the New York
Stock Exchange, Inc. ("NYSE").
The consummation of the Distribution is a condition to, among other things,
the Company's and Vitalink's respective obligations to consummate the Merger.
SHAREHOLDERS OF THE COMPANY AS OF THE DISTRIBUTION RECORD DATE SHOULD
CAREFULLY CONSIDER THE INFORMATION SET FORTH UNDER THE CAPTION "RISK FACTORS"
ON PAGE 12 HEREOF.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------
The date of this Prospectus is , 1996.
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
2
<PAGE>
NEW GRANCARE, INC. PROSPECTUS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 5
RISK FACTORS.............................................................. 12
BUSINESS.................................................................. 17
General................................................................. 17
Long-Term Care Industry................................................. 17
Business Strategy....................................................... 18
Marketing and Development of Payor Sources.............................. 22
Competition............................................................. 22
Regulation.............................................................. 23
Employee Training and Development....................................... 27
Employees............................................................... 28
Insurance............................................................... 28
Legal Proceedings....................................................... 28
THE DISTRIBUTION.......................................................... 30
Reasons for the Distribution............................................ 30
Contribution of Skilled Nursing Business to New GranCare................ 30
Consummation of the Distribution; Treatment of Company Stock Options.... 31
Manner of Effecting the Distribution.................................... 32
Listing of New GranCare Common Stock; Restrictions on Resale............ 33
Interests of Certain Persons in the Distribution and Merger............. 33
Treatment of Certain Indebtedness....................................... 35
Expenses................................................................ 38
Conditions.............................................................. 39
Terms of the Distribution Agreement..................................... 39
Terms of Employee Benefits Agreement.................................... 41
Terms of the Non-competition Agreement.................................. 42
Terms of Shareholders Agreement......................................... 42
Terms of the Interim Services Agreement................................. 43
Terms of the Pharmaceutical Supply Agreements........................... 43
Terms of the Voting Agreement........................................... 44
Terms of the Tax Allocation Agreement................................... 44
CERTAIN FEDERAL INCOME TAX CONSEQUENCES................................... 46
Consequences of the Distribution........................................ 46
Consequences of the Merger to the Company, Vitalink and the Company
Shareholders........................................................... 46
Possible Future Legislation............................................. 47
Back-up Witholding Requirements......................................... 47
</TABLE>
3
<PAGE>
NEW GRANCARE, INC. PROSPECTUS
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CAPITALIZATION........................................................... 48
DIVIDEND POLICY.......................................................... 49
UNAUDITED PRO FORMA GRANCARE, INC. FINANCIAL STATEMENTS.................. 49
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA.......................... 55
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 57
General................................................................ 57
Results of Operations.................................................. 58
Liquidity and Capital Resources........................................ 62
Impact of Inflation.................................................... 66
PROPERTIES............................................................... 67
Long-Term Health Care Facilities....................................... 67
Contract Management.................................................... 72
Home Health............................................................ 72
MANAGEMENT............................................................... 73
Executive Officers and Directors....................................... 73
Committees of the Board of Directors................................... 77
Compensation of Directors.............................................. 77
Compensation of Executive Officers..................................... 79
Stock Options.......................................................... 85
Long-Term Incentive Plans--Awards Since December 31, 1995.............. 87
Company Annual Incentive Plan.......................................... 87
Certain Relationships and Related Party Transactions................... 87
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....... 90
DESCRIPTION OF NEW GRANCARE CAPITAL STOCK................................ 93
New GranCare Common Stock.............................................. 93
Preferred Stock........................................................ 93
The Charters and Bylaws of the Company and New GranCare................ 93
Significant Differences Between the Corporation Laws of California and
Delaware.............................................................. 94
Application of the General Corporation Law of California to Delaware
Corporations.......................................................... 100
SHARES ELIGIBLE FOR FUTURE SALES......................................... 101
AVAILABLE INFORMATION.................................................... 101
LEGAL MATTERS............................................................ 102
EXPERTS.................................................................. 102
INDEX TO FINANCIAL STATEMENTS............................................ F-1
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
This Prospectus is furnished to shareholders of the Company together with the
Proxy Statement/Prospectus. The following summary is qualified in its entirety
by the more detailed information and financial statements, including the notes
thereto, appearing elsewhere in this Prospectus and the Proxy
Statement/Prospectus. Except where otherwise indicated, the description of New
GranCare and its businesses contained herein assumes the completion of the
Distribution and the Merger.
NEW GRANCARE
New GranCare is currently a wholly-owned subsidiary of the Company
incorporated under the laws of the State of Delaware. In order to effect the
Distribution, all of the assets and businesses of the Company, other than those
used primarily in the conduct of its Institutional Pharmacy Business, will be
contributed to New GranCare prior to the Distribution. The mailing address of
the Company's principal executive offices is One Ravinia Drive, Suite 1500,
Atlanta, Georgia 30346, and the telephone number at such address is (770) 393-
0199. Following the Distribution, New GranCare's principal executive offices
and phone number will be the same as indicated above. In addition, immediately
following the Distribution and the Merger, New GranCare will change its name to
"GranCare, Inc.".
THE TRANSACTIONS
The Company has entered into the Merger Agreement whereby, upon the terms and
subject to the conditions set forth therein, the Company will be merged with
and into Vitalink, with Vitalink as the surviving corporation. As a condition
to and in order to facilitate the Merger, the Company has agreed to effect the
Distribution, pursuant to which all of the outstanding shares of New GranCare
Common Stock will be distributed to the Company's shareholders on the basis of
one share of New GranCare Common Stock for each share of Company Common Stock
held by a shareholder as of the Distribution Record Date. The Distribution is
intended to be tax-free to the Company's shareholders for federal income tax
purposes. See "Certain Federal Income Tax Consequences."
Pursuant to the Merger Agreement, at the effective time of the Merger (the
"Effective Time") each issued and outstanding share of Company Common Stock
(other than shares of Company Common Stock that are owned by the Company as
treasury stock and any shares of Company Common Stock that are owned by
Vitalink or any wholly-owned subsidiary of Vitalink, which will be cancelled)
shall be converted into the right to receive 0.478 (the "Exchange Ratio") of a
share of common stock, par value $0.01 per share, of Vitalink (the "Vitalink
Common Stock") as described under "Description of the Transactions--Merger
Terms" in the Proxy Statement/Prospectus. The Merger Agreement also requires
the Company and Vitalink to take all reasonable actions necessary to cause the
Distribution and the Merger to be treated as consummated as of December 31,
1996 for financial reporting and tax purposes. In addition, as a consequence of
the Merger, Vitalink's consolidated indebtedness will increase by approximately
$108.0 million (prior to an offsetting compensatory payment by the Company) due
to the assumption or funding of the discharge of the obligations of the Company
in respect of the $100.0 million principal amount of 9 3/8% Senior Subordinated
Notes due 2005 (the "9 3/8% Notes") issued by the Company. In order to obtain a
third party consent of Health and Retirement Properties Trust ("HRPT"), a
creditor and landlord the Company, required in connection with the Distribution
and Merger, Vitalink will pay a consent fee of $10.0 million, which will be
promptly reimbursed by New GranCare following the consummation of the
Distribution and Merger. Vitalink will also enter into a limited guaranty of
certain obligations of New GranCare to HRPT. To support Vitalink's limited
guaranty of New GranCare's obligations, New GranCare will provide an
irrevocable letter of credit in the amount of $15.0 million payable to Vitalink
in the event Vitalink makes any payments under the limited guaranty. See "The
Distribution--Treatment of Certain Indebtedness."
As a consequence of the Distribution and in accordance with the terms of the
Agreement Respecting Employee Benefit Matters by and between the Company and
New GranCare (the "Employee Benefits
5
<PAGE>
Agreement"), each holder of an option to purchase shares of Company Common
Stock (the "Company Options") will receive an option (the "New GranCare
Options") to purchase a number of shares of New GranCare Common Stock as is
equal to the number of shares of Company Common Stock subject to
Company Options held by such holder as of the Distribution Record Date. The
exercise price of all Company Options will be allocated between the New
GranCare Options issued in respect of such Company Options and the existing
Company Options pursuant to a formula. As a result of the application of such
formula, subsequent to the Distribution approximately 61.568% of the exercise
price of each Company Option will be allocated to, and shall become, the
exercise price of each existing Company Option (the "Adjusted Company Options")
and 38.432% of the exercise price of each Company Option will be allocated to
each New GranCare option. The terms and conditions of the New GranCare Options
will be the same as the terms of the Company Options prior to the Distribution.
As a result of the Merger, Vitalink will assume all of the Adjusted Company
Options. Each Adjusted Company Option will be exercisable upon the same terms
and conditions as under the applicable Company plan and the applicable option
agreement issued thereunder, except that (i) each such option shall be
exercisable for that number of shares of Vitalink Common Stock as is equal to
the number of shares of Company Common Stock that would have been acquired upon
exercise of such option as of the Effective Time of the Merger multiplied by
the Exchange Ratio. As a result of the Merger, the exercise price of each
Adjusted Company Option will be further adjusted by dividing such exercise
price by the Exchange Ratio. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
The terms of the Company Options provide that upon the occurrence of certain
events (a "Change of Control"), all unvested Company Options shall vest and
become fully and immediately exercisable. The Merger constitutes a Change of
Control for purposes of the Company Options. Furthermore, the consummation of
the Merger will not constitute a termination of employment and holders of
Adjusted Company Options will continue to be able to exercise such options
following the completion of the Merger even if such holder is not an employee
of Vitalink. As a result of the foregoing, approximately 2,355,250 shares of
New GranCare Common Stock will be issuable upon the exercise of New GranCare
Options and 1,125,809 shares of Vitalink Common Stock will be issuable upon the
exercise of Adjusted Company Options following the completion of the
Distribution and the Merger.
Pursuant to the Distribution Agreement, prior to the Distribution the Company
will transfer or cause to be transferred to New GranCare all of the Company's
assets and liabilities relating to the Skilled Nursing Business other than (i)
the capital stock of the Pharmacy Subsidiaries (as defined in the Distribution
Agreement), (ii) the assets and liabilities used or arising primarily in
connection with the conduct of the Institutional Pharmacy Business and (iii)
the payment obligations in respect of the Company's 9 3/8% Notes. In addition,
pursuant to the Distribution Agreement, the Company and its subsidiaries other
than the Pharmacy Subsidiaries, on the one hand, and the Pharmacy Subsidiaries,
on the other hand, will net out all intercompany accounts and the expected net
balance due from the Pharmacy Subsidiaries to the Company and the Company's
subsidiaries will be contributed by the Company or the appropriate subsidiary
of the Company to which such amount (or portion thereof) is owing, to the
appropriate Pharmacy Subsidiary as additional capital.
In accordance with the terms of the Distribution Agreement and the Tax
Allocation and Indemnification Agreement (the "Tax Allocation Agreement") by
and among the Company, New GranCare and certain subsidiaries of the Company,
the Company and New GranCare have agreed to indemnify one another after the
Distribution Date (as defined in the Distribution Agreement) with respect to
certain losses, damages, claims and liabilities arising from their respective
businesses or as a consequence of the occurrence of certain events following
the Distribution Date that result in the proposed transactions not being
accorded tax-free treatment. See "The Distribution--Terms of the Tax Allocation
Agreement."
The foregoing is a brief summary of certain terms of the Distribution and the
Merger. A more complete description of the Merger and the Merger Agreement may
be found in the Proxy Statement/Prospectus under "The Merger Agreement." The
Distribution and the Distribution Agreement are more fully described herein
under "The Distribution." The Merger Agreement and the Distribution Agreement
are attached as Annexes B and C to the Proxy Statement/Prospectus,
respectively. Copies of the Tax Allocation Agreement and the Employee Benefits
Agreement have been filed as exhibits to the Registration Statement of which
this Prospectus is a part.
6
<PAGE>
THE DISTRIBUTION
<TABLE>
<S> <C>
Distributing Corporation.......... The Company.
Distributed Corporation........... New GranCare, which, by the Distribution
Date, will hold all of the assets of, and
will have assumed all of the liabilities
associated with, the Skilled Nursing
Business.
Distribution Ratio................ One share of New GranCare Common Stock for
each share of Company Common Stock owned as
of the Distribution Record Date. See "The
Distribution--Manner of Effecting the
Distribution;" and "--Terms of the
Distribution Agreement."
Federal Income Tax Consequences... It is the opinion of Powell, Goldstein,
Frazer & Murphy (the "Tax Opinion"), that
the Distribution will qualify as a tax-free
reorganization pursuant to Section 355 of
the Internal Revenue Code of 1986, as
amended (the "Code"), the Merger will
qualify as a tax-free reorganization within
the meaning of Section 368(a) of the Code
and that no gain or loss will be recognized
by shareholders of the Company in
connection with their receipt of New
GranCare Common Stock and Vitalink Common
Stock in the Distribution and the Merger,
respectively, except with respect to cash
received in lieu of fractional shares of
Vitalink Common Stock. See "Certain Federal
Income Tax Consequences."
Trading Market and Symbol......... There is currently no public market for New
GranCare Common Stock. New GranCare intends
to apply for the listing of New GranCare
Common Stock on the NYSE under the Trading
Symbol "GC".
Indemnification Obligations After
the Distribution and Merger...... The Company and New GranCare (and Vitalink
as the successor to the Company following
the Merger) have agreed to indemnify each
other after the Distribution with respect
to certain losses, damages, claims and
liabilities arising primarily from their
respective businesses, including certain
tax liabilities. See "Risk Factors--
Relationship with Vitalink" and "The
Distribution--Terms of the Distribution
Agreement" and "--Terms of the Tax
Allocation Agreement."
Relationship With Vitalink After
the Distribution and the Merger.. As of the Effective Time of the Merger, New
GranCare, Vitalink and Manor Care, Inc., a
Delaware corporation ("Manor Care") and the
beneficial owner of approximately 82.3% of
the issued and outstanding shares of
Vitalink Common Stock prior to the
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Effective Time of the Merger, will enter
into a Non-competition Agreement (the "Non-
competition Agreement") pursuant to which
New GranCare and Manor Care will agree not
to engage in the institutional pharmacy
business for a period of three years and
Vitalink will agree not to engage in the
skilled nursing business for a similar
period of time. See "The Distribution--
Terms of the Non-competition Agreement."
Following the Merger, Manor Care will own
approximately 45% of the issued and
outstanding Vitalink Common Stock. In
addition, as a consequence of the Merger,
Vitalink will succeed to the various
pharmaceutical supply agreements between
TeamCare and substantially all of New
GranCare's skilled nursing and other
facilities. New GranCare has agreed that
for so long as Vitalink's limited guaranty
of certain obligations of New GranCare to
HRPT is in effect, New GranCare will not
terminate any such agreements. As a result,
New GranCare anticipates that these
pharmaceutical supply agreements may extend
through December 31, 2010, depending on
certain circumstances. See "The
Distribution--Terms of the Pharmaceutical
Supply Agreements" and "--Treatment of
Certain Indebtedness--HRPT Obligations."
Distribution Record Date.......... It is expected that the Distribution Record
Date will be immediately prior to the
Effective Time of the Merger.
Distribution Agent, Transfer Agent
and Registrar.................... American Stock Transfer & Trust Company.
Risk Factors...................... Shareholders should carefully evaluate
certain considerations in evaluating the
securities offered hereby, including New
GranCare's debt and lease obligations, the
uncertainty associated with health care
reform and government regulations, the risk
associated with reimbursement by third
party payers, New GranCare dependence on
acquisitions for growth, competition in the
skilled nursing business and the absence of
a prior trading market in New GranCare
Common Stock. See "Risk Factors."
</TABLE>
8
<PAGE>
NEW GRANCARE STOCK OPTION PLANS
New GranCare will have various employee benefit plans pursuant to which
shares or options to purchase shares of New GranCare Common Stock will be
issued or issuable to or for the benefit of employees, former employees and
directors. It is expected that a total of 2,355,250 shares will be reserved and
issued under the Replacement Stock Option Plan (the "Replacement Plan")
pursuant to which current holders of Company Options will be granted New
GranCare Options in connection with the Distribution. See "The Distribution --
Consummation of the Distribution; Treatment of Company Stock Options." In
addition, New GranCare has adopted, and the Company as its sole shareholder has
approved, the 1996 Stock Incentive Plan (the "New GranCare Plan") pursuant to
which New GranCare will be able to make stock incentive awards to its officers,
directors and key employees on a going forward basis. See "Management--
Compensation of Executive Officers--1996 Stock Incentive Plan." New GranCare
has reserved 1,500,000 shares of New GranCare Common Stock for issuance under
the New GranCare Plan. The New GranCare Plan will be submitted for the approval
of the stockholders of New GranCare in connection with the Proxy/Statement
Prospectus. Approximately 500,000 shares are expected to be used for options
granted to officers and key employees shortly after the date of the
Distribution. New GranCare has also reserved up to 200,000 shares to cover
stock options to be granted to non-employee directors under a separate plan
(the "Directors Plan"), of which approximately 90,000 shares are expected to be
used for options granted to non-employee directors shortly after the date of
the Distribution. See "Management--Compensation of Directors--Directors Plan."
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
The following summary historical consolidated financial data of the Company
has been derived from the historical financial statements and should be read in
conjunction with such financial statements and notes thereto, which are
included elsewhere herein. The Company data for the nine months ended September
30, 1995 and 1996 have been derived from the unaudited consolidated financial
statements which are also included elsewhere herein. The pro forma adjusted
data gives retroactive effect to the Merger and reflects the recapitalization/
reorganization of the Company, the contribution to TeamCare's capital of the
Company's receivable from TeamCare, and the redemption or assumption of certain
indebtedness. The pro forma adjusted financial operating information gives
effect to the Merger as if the transaction had occurred on January 1, 1995. The
pro forma adjusted balance sheet data gives retroactive effect to the Merger as
if it had occurred on September 30, 1996. The pro forma adjusted data should be
read in conjunction with the pro forma balance sheet, pro forma statements of
income, and notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------- -----------------
1991(4) 1992(5) 1993(5) 1994(5) 1995(5) 1995(5) 1996(5)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $290,958 $434,638 $611,689 $717,471 $816,462 $604,569 $745,653
Depreciation and
amortization.......... 5,064 6,922 12,349 16,440 21,611 14,785 19,400
Interest expense and
financing charges..... 7,256 7,908 19,601 21,481 27,054 19,557 26,228
Income from continuing
operations:
Before income taxes
and extraordinary
charge............... 12,297 25,507 26,178 37,814 35,329 23,571 38,971
Before extraordinary
charge(1)............ 8,347 16,806 16,089 24,290 20,564 13,274 24,162
Net income............. $ 11,275 $ 16,806 $ 14,804 $ 24,290 $ 20,564 $ 13,274 $ 24,162
======== ======== ======== ======== ======== ======== ========
Pro forma net
income(1)............. $ 9,994 $ 15,350 $ 14,019 $ N/A $ N/A $ N/A $ N/A
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED PRO FORMA, AS ADJUSTED
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
1995 (2)(3) 1996 (2)(3)
----------------------- -------------------------------
<S> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $639,780 $577,165
Depreciation and
amortization.......... 16,906 14,420
Interest............... 19,275 20,104
Income from continuing
operations before
income taxes.......... 25,203 23,980
Net income............. 14,525 15,167
Earnings per share..... 0.61 0.63
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA, AS ADJUSTED
SEPTEMBER 30, 1996 (2)
----------------------
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 34,882
Working capital......................................... 135,446
Total assets............................................ 584,988
Long-term debt, including current portion............... 298,148
Shareholders' equity.................................... 137,945
</TABLE>
(Footnotes appear on following page)
10
<PAGE>
(Footnotes from the previous page)
- --------
(1) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the pro forma net income
for the years 1991 through 1993 includes a pro forma provision for income
taxes as if Evergreen had been a taxable corporation for these periods.
Such pro forma calculations were based on the income tax laws and rates in
effect during those periods, and FASB Statement No. 109.
(2) Adjusted to reflect the redemption or assumption of the Company's
Convertible Debentures (defined hereafter) and 9 3/8% Notes as if such
amounts were redeemed or assumed as of January 1, 1995 for income statement
data and as of September 30, 1996 for balance sheet data.
(3) Does not reflect Merger related costs estimated at $30.0 million which are
expected to be recognized by the Company in the results of operations for
the fourth quarter of 1996.
(4) The ARA Living Centers--Pacific, Inc. ("ARA") acquisition occurred on
September 27, 1991 and, therefore, (i) the operating results of the ARA
facilities are included in the historical operating results of the Company
for the fourth quarter of 1991 and (ii) the assets and liabilities of the
ARA facilities, as adjusted for related financing transactions, are
included in the balance sheet of the Company as of December 31, 1991.
(5) All acquisitions which occurred in 1992, 1993, 1994, 1995 and 1996 except
for the CompuPharm, Inc. ("CompuPharm") acquisition and the merger with
Evergreen (defined below), are reflected from the date of each acquisition
in the historical operating results of the Company and the assets and
liabilities relating to these acquisitions are included in the balance
sheets of the Company since that time. All years presented includes
CompuPharm and Evergreen which were combined with the Company in pooling-
of-interests transactions.
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be considered carefully in evaluating New GranCare
before making any decisions with respect to the New GranCare Common Stock to
be received in the Distribution.
SIGNIFICANT DEBT AND LEASE OBLIGATIONS
New GranCare will have substantial indebtedness in relation to its
stockholder's equity. It is expected that immediately following the
Distribution and the Merger, New GranCare will have total consolidated long-
term indebtedness of approximately $300.3 million (net of current maturities),
accounting for 69.3% of its total capitalization. New GranCare will also have
significant lease obligations with respect to the facilities operated pursuant
to long-term non capitalized or operating leases. During the 12 months
following the Distribution and the Merger, New GranCare's rent and property
expenses are expected to be approximately $43.0 million and $9.8 million,
respectively. New GranCare's leverage, rent and property expenses could have
important consequences to holders of the New GranCare Common Stock, including
the following: (i) New GranCare's ability to obtain financing in the future
for working capital, capital expenditures, acquisitions or general corporate
purposes may be impaired; (ii) a substantial portion of New GranCare's cash
flow from operations may be dedicated to the payment of principal and interest
on its indebtedness and rent and property expenses, thereby reducing the funds
available to New GranCare for its operations; (iii) certain of New GranCare's
borrowings are expected to bear variable rates of interest, which may expose
New GranCare to increases in interest rates; and (iv) certain of New
GranCare's indebtedness is expected to contain financial and other restrictive
covenants, including those restricting the incurrence of additional
indebtedness, the creation of liens, the payment of dividends and sales of
assets and imposing minimum net worth requirements. Although the Company's
cash flows from its operations have been sufficient to meet its debt service
obligations and rent and property expenses in the past, and although the Pro
Forma Financial Information indicates that New GranCare's cash flows from
operations should be sufficient to meet such obligations going forward, there
can be no assurance that New GranCare's operating results will be sufficient
to make payments with respect to New GranCare's indebtedness and other
expenses in the future. See "Unaudited Pro Forma GranCare, Inc. Financial
Statements" and "The Distribution--Treatment of Certain Indebtedness."
UNCERTAINTY ASSOCIATED WITH HEALTH CARE REFORM.
In addition to extensive government health care regulation, there are
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. It is not
clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals may have on New GranCare's future business. Aspects
of certain of these health care proposals such as cutbacks in Medicare and
Medicaid programs, containment of health care costs on an interim basis by
means that could include a short-term freeze on rates paid to health care
providers, and permitting greater flexibility to the states in the
administration of Medicaid could adversely affect New GranCare. See "--
Reimbursement by Third-Party Payors." There can be no assurance that currently
proposed or future health care legislation or other changes in the
administration or interpretation of governmental health care programs will not
have an adverse effect on New GranCare. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in health care and related industries, including the
Company, and may similarly affect the price of the New GranCare Common Stock
in the future. See "Business--Regulation."
RISK INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS.
For the year ended December 31, 1995, the Company derived approximately
44.7% and 30.2%, of its net patient revenues from Medicare and Medicaid,
respectively, and New GranCare expects to derive a significant portion of its
revenue from such federal and state reimbursement programs. There can be no
assurance that New GranCare will achieve or improve this payor revenue mix.
Both governmental and private payor sources have instituted cost containment
measures designed to limit payments made to long-term care providers, and
there can be no assurance that future measures will not adversely affect both
the timing and amount of reimbursement to
12
<PAGE>
New GranCare. Furthermore, government reimbursement programs are subject to
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which could materially
decrease the rates paid to New GranCare for its future services or the
services for which New GranCare is able to seek reimbursement. There have
been, and New GranCare expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term health care services. New
GranCare cannot predict at this time whether any of these proposals will be
adopted or, if adopted and implemented, what effect such proposals would have
on New GranCare. There can be no assurance that payments under state or
federal governmental programs will remain at levels comparable to present
levels or will be sufficient to cover the costs allocable to patients eligible
for reimbursement pursuant to such programs, particularly with respect to
individual, state-administered Medicaid programs, which generally provide
lower reimbursement rates than does the Medicare program. In addition, there
can be no assurance that the facilities to be operated by New GranCare and the
services and supplies to be provided by New GranCare will meet or continue to
meet the requirements for participation in such programs.
Federal law requires state Medicaid programs to reimburse nursing facilities
for the costs that are incurred by efficiently and economically operated
providers in order to meet quality and safety standards. Nursing facilities
may seek to enforce this requirement in the state or federal courts.
Nevertheless, there can be no assurance that budget constraints or other
factors will not cause states to reduce Medicaid reimbursement to nursing
facilities or that litigation to prevent such reductions will be successful.
As a result, there can be no assurance that states in which New GranCare will
operate will continue to meet their Medicaid obligations on a timely basis.
Any failure by such states to meet their Medicaid obligations on a timely
basis could have a material adverse effect on New GranCare.
In addition, several states are considering various health care reforms,
including reforms through Medicaid managed care demonstration projects.
Several states in which the Company operates and in which New GranCare will
operate have applied for, or received, approval from the U.S. Department of
Health and Human Services for waivers from certain Medicaid requirements which
are generally required for managed care projects. Although these demonstration
projects generally exempt institutional care, including long-term care
facilities, no assurance can be given that these waiver projects ultimately
will not change the reimbursement system for long-term care from fee-for-
service to managed care negotiated or capitated rates. It is not possible to
predict which reforms of the health care system will be adopted and the
effect, if any, the reforms will have on New GranCare's business.
RISKS RELATED TO GROWTH STRATEGY.
New GranCare's growth strategy is to acquire long-term health care
facilities and related businesses in its existing markets and in other
targeted geographic areas in which regulatory and reimbursement policies are
favorable and where opportunities exist to improve operational efficiencies.
Due to possible rapid growth through acquisitions, New GranCare may be subject
to the uncertainties and risks associated with any expanding business such as
the continuing need of capital to fund acquisitions, the need to successfully
integrate the operations of acquired businesses in order to realize economies
of scale, the need to obtain synergies from the disparate operations and the
need to hire and incentivize competent, growth-oriented management. New
GranCare's expected growth may place significant demands on New GranCare's
financial resources and management. Most facilities to be operated by New
GranCare were acquired in groups, some of which have not met their expected
strategic or performance objectives.
GOVERNMENT REGULATION.
The federal government and all states in which New GranCare will operate
regulate various aspects of the Skilled Nursing Business to be operated by New
GranCare. In particular, the operation of long-term care facilities and the
provision of specialty medical services are subject to federal, state and
local laws relating to the adequacy of medical care, equipment, personnel,
operating policies, fire prevention, rate-setting and compliance with building
codes and environmental and other laws. The facilities to be operated by New
GranCare are subject to periodic inspection by governmental and other
regulatory authorities to assure continued compliance with various standards
and to provide for their continued licensing under state law and certification
under the
13
<PAGE>
Medicare and Medicaid programs. In the past, from time to time such facilities
have received statements of deficiencies from regulatory agencies. Should New
GranCare receive such statements of deficiency in the future, New GranCare
expects to implement plans of correction with respect to any such statement to
address any alleged deficiencies. While New GranCare will endeavor to comply
with federal, state and local regulatory requirements for the maintenance and
operation of its facilities, there can be no assurance that all facilities
will always be operated in full compliance. The failure to obtain or renew any
required regulatory approvals or licenses could adversely affect New
GranCare's operations.
New GranCare will also be subject to federal and state laws that govern
financial and other arrangements between health care providers. These laws
often prohibit certain direct and indirect payments or fee-splitting
arrangements between health care providers that are designed to induce or
encourage the referral of patients to, or the recommendation of, a particular
provider for medical products and services. Such laws include the anti-
kickback provisions of the federal Medicare and Medicaid Patients and Program
Protection Act of 1987. These provisions prohibit, among other things, the
offer, payment, solicitation or receipt of any form of remuneration in return
for the referral of Medicare and Medicaid patients. In addition, many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. These laws vary from state to state and have seldom
been interpreted by the courts or regulatory agencies. Additionally, federal
enactments that expand the list of health care services subject to existing
federal referral prohibitions became effective on January 1, 1995. See
"Business--Regulation."
GEOGRAPHIC PAYOR CONCENTRATION.
A significant portion of New GranCare's total operating revenues are
expected to be derived from operations in California, Michigan and Wisconsin
and, in particular, from the California, Michigan and Wisconsin Medicaid
programs. Additionally, a significant portion of New GranCare's total revenues
will be attributable to New GranCare's operations in Indiana and Illinois. The
table below presents historical total operating revenues derived from the
Company's business in California, Illinois, Indiana, Michigan and Wisconsin as
a percentage of net patient revenues for the nine-month period ended September
30, 1996.
<TABLE>
<CAPTION>
PRIVATE PAY
MEDICAID MEDICARE AND OTHER TOTAL
-------- -------- ----------- -----
<S> <C> <C> <C> <C>
California........................... 6.9% 12.1% 5.6% 24.6%
Illinois............................. 2.8% 1.5% 1.7% 6.0%
Indiana.............................. 4.6% 3.3% 1.8% 9.7%
Michigan............................. 3.8% 6.9% 2.3% 13.0%
Wisconsin............................ 5.9% 4.1% 2.5% 12.5%
</TABLE>
Although New GranCare expects that geographic concentration will provide
operational advantages and efficiencies, the business prospects of New
GranCare will be significantly affected by general economic factors affecting
the California, Illinois, Indiana, Michigan and Wisconsin health care
industries and by the laws and regulatory environment in these states,
including Medicaid reimbursement rates. Medicaid reimbursement programs are
administered at the state level but subject to requirements imposed by the
federal government. Medicare is a federal program and reimbursement by private
pay and other payors is subject to market and/or negotiated rates.
COMPETITION.
The long-term care industry is highly competitive. New GranCare will compete
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a limited extent, price. New GranCare
will also compete with other providers in the acquisition and development of
additional facilities. New GranCare's long-term care competitors will include
national, regional and local operators of long-term care facilities, acute
care hospitals and rehabilitation hospitals, extended care centers, retirement
centers and community home health agencies, and similar institutions, many of
which have significantly greater financial and other resources than New
GranCare. In addition, New GranCare will compete with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital
expenditures on a tax-exempt basis or receive
14
<PAGE>
charitable contributions unavailable to New GranCare. There can be no
assurance that New GranCare will not encounter increased competition which
could adversely affect its business, results of operations or financial
condition.
ABSENCE OF PRIOR TRADING MARKET.
There is no existing trading market for the New GranCare Common Stock to be
received by the Company's shareholders in the Distribution and there can be no
assurance as to the establishment of an active trading market. New GranCare
expects to list its common stock on the NYSE. New GranCare's management
expects that approximately 23,401,992 shares of New GranCare Common Stock will
be outstanding after the Distribution. New GranCare Common Stock may
experience volatility following the Distribution until trading values become
established. As a result, it could be difficult to make purchases or sales of
New GranCare Common Stock in the market at any particular time. There can be
no assurance either as to the price at which New GranCare Common Stock will
trade following the consummation of the Distribution and the Merger or whether
such price will be significantly below the book value per share of New
GranCare Common Stock.
CERTAIN INDEMNIFICATION OBLIGATIONS.
Pursuant to the Distribution Agreement and Tax Allocation Agreement, New
GranCare has agreed to indemnify Vitalink with respect to certain losses,
damages, claims and liabilities which may arise from the consummation of the
transactions described herein, the conduct of the Skilled Nursing Business
prior to the Distribution Date and certain tax liabilities. Pursuant to the
Tax Allocation Agreement, New GranCare has agreed, upon the occurrence of
certain circumstances (all of which are under New GranCare's control), to
indemnify Vitalink from any losses in the event the proposed transactions are
not accorded tax-free treatment. See "The Distribution--Terms of the Tax
Allocation Agreement."
CERTAIN LEASE TERMS.
Eighteen of the facilities which New GranCare expects to operate in Indiana
and West Virginia are currently leased from an outside group of affiliated
entities. These leases are scheduled to expire in 1999, but negotiations are
currently under way with the lessors to extend the lease term for all 18
facilities. Unless concluded prior to the Distribution, New GranCare intends
to continue these negotiations. The leases for 14 of these facilities grant
the lessors the right, upon termination thereof, to purchase certain operating
assets which will be owned by New GranCare, at a price equal to the book value
of such assets. New GranCare does not anticipate that the lessors will
exercise this purchase right because Medicaid reimbursement available to those
facilities would be markedly reduced in the event of any such purchase.
Although New GranCare believes that the current leases will be extended or new
leases for such properties will be negotiated, in either case, upon acceptable
terms, there can be no assurance that either the Company or New GranCare will
be able to do so or that the lessors will not exercise their purchase rights.
RELATIONSHIP WITH VITALINK.
Following the Distribution and Merger, New GranCare will be prohibited from
competing with Vitalink in the institutional pharmacy business for a period of
three years. See "The Distribution--Terms of the Non-competition Agreement."
In the past, a significant portion of the Company's net income has been
derived from the Institutional Pharmacy Business. In 1995, the Company derived
approximately 51% of its net income from the Institutional Pharmacy Business.
The Non-competition Agreement will therefore restrict New GranCare's ability
to pursue a line of business that has historically contributed a significant
portion of the Company's net income.
Upon completion of the Merger, Vitalink will succeed to all of the Company's
existing pharmaceutical supply agreements with substantially all of the
Company's facilities, which facilities will be operated by New GranCare after
the Merger. These agreements are for five year terms. However, New GranCare
has agreed that for so long as Vitalink's limited guaranty of certain
obligations of New GranCare to HRPT is in effect, New
15
<PAGE>
GranCare will not terminate any of such pharmaceutical supply agreements.
Accordingly, it is anticipated that such pharmaceutical supply agreements may
extend through December 31, 2010, the date when all present New GranCare
obligations to HRPT will be satisfied, subject to certain conditions. Gene E.
Burleson, Chairman of New GranCare, will become Chief Executive Officer of
Vitalink upon consummation of the Merger. Mr. Burleson and three other
directors of New GranCare will become directors of Vitalink upon the
consummation of the Merger. See "The Distribution--Terms of the Pharmaceutical
Supply Agreements" and "Management--Certain Relationships and Related Party
Transactions."
16
<PAGE>
BUSINESS
GENERAL
The Company is, and New GranCare expects to be, a leading provider of
comprehensive post-acute health care services, primarily skilled nursing care,
subacute and medically complex care, long-term acute hospital care,
inpatient/outpatient therapy, hospital contract management, assisted living,
hospice, home health care and adult day care. At present, New GranCare expects
to provide these services through 140 long-term care facilities (136 skilled
nursing facilities and four assisted living facilities), and twelve agencies
currently operated by the Company's home health division (home health, hospice
and private duty, each in the States of California, Indiana, Michigan and
Wisconsin). The Company continues to evaluate certain long-term care
facilities which are underperforming or do not fit within the Company's or New
GranCare's long-term strategic plans. All or a portion of these facilities may
be divested in the future. In addition, New GranCare will, through the
contract management business to be assumed by it, manage approximately 145
medical programs in acute care hospitals. In selected markets, the Company has
sought and New GranCare will continue to seek to operate these businesses as
an interrelated network of services to provide a continuum of cost-effective,
post-acute care. New GranCare's vision is to become the preeminent health care
provider in select markets by offering a full continuum of care to address the
needs of patients from the time of their discharge from acute care hospitals
until their recovery.
New GranCare's anticipated focus on the post-acute level of health care,
like the approach historically taken by the Company, will respond to general
demographic trends and health care cost containment initiatives of third-party
payors. As the number of people over the age of 65 continues to grow
significantly faster than the overall population, and advances in medicine and
technology continue to increase life expectancies, New GranCare anticipates
that the need for long-term care facilities and related services will continue
to increase. Additionally, the growing emphasis on cost containment measures
in the health care industry has caused third-party payors to seek lower cost
alternatives to hospital-based care. The subacute care and other post-acute
services to be provided by New GranCare respond to cost containment
initiatives of third-party payors by providing a lower cost alternative for
patients who continue to require a high level of medical and nursing care, but
whose medical condition permits discharge from the traditional acute care
hospital setting. Based on the Company's experience, New GranCare believes the
long-term care facilities that it plans to operate will have lower capital and
operating costs than acute care hospitals. New GranCare believes that it will
be able to offer complex subacute medical services to these patients generally
at a lower cost than acute care hospitals.
New GranCare's strategy will be to: (i) develop "cluster markets," comprised
of a significant concentration of skilled nursing and subacute beds and/or the
provision of diverse subacute services in selected markets, (ii) provide a
continuum of post-acute care comprised of medical and rehabilitative
treatments in a variety of alternative sites, (iii) establish collaborative
relationships with acute care hospitals and physicians in order to increase
referrals and provide a basis for the provision of higher margin services,
(iv) continue to shift to a higher acuity and higher quality mix patient
population, (v) grow through new construction of assisted living and skilled
nursing facilities in select clusters, and (vi) continue to grow through
selective acquisitions and (vii) expand specialty medical services, including
rehabilitation, respiratory, psychiatric, home health, hospice and adult day
care. Of particular importance to New GranCare's future growth will be (i) New
GranCare's ability to improve margins at existing facilities through portfolio
management, accelerated reserve enhancement through aggressive expansion of
the range of specialty medical services and programs offered by New GranCare
and the rollout of new systems and best operating practices, (ii) selective
acquisitions in targeted cluster markets and (iii) the de novo construction of
assisted living and skilled nursing facilities and acute care programs in
targeted cluster markets.
LONG-TERM CARE INDUSTRY
The demand for long-term health care is increasing because acute care
hospitals are driven by third-party payor cost containment initiatives to
discharge patients at earlier stages of recovery and because an increasing
number of patients have ailments that require extended recovery periods. This
is due not only to general demographic trends in the United States but also to
advances in medical technology. New technologies are
17
<PAGE>
increasing the life expectancy of a growing number of patients who require a
high degree of care traditionally not available outside of acute care
hospitals. As life expectancies increase, the likelihood of contracting
diseases or ailments involving a protracted period of medical care and
recovery increases. As a result, individuals over the age of 65, particularly
those over 85, are the primary recipients of long-term post-acute care.
Although demand is increasing, industry data indicate that the total supply of
licensed skilled nursing beds available in the United States, currently
approximately 1.7 million, is growing substantially slower than the overall
population. Also, the addition of new beds in long-term care facilities is
presently restricted by regulation in many states, most of which require
entities that desire to enter the local long-term care market to apply for and
obtain Certificates of Need ("CON") or other approvals. The application and
approval process for a CON generally involves approval by a state regulatory
agency of the construction, acquisition or closure of a long-term care
facility, the addition or reduction of beds at a facility, or the addition of
services provided by a facility. The significant construction costs and start-
up expenses in some markets may further limit the number of new beds. Market
share data reflect that the industry is fragmented, with the 30 largest
operators accounting for approximately 25% of the total beds available.
According to the U.S. Bureau of the Census, approximately 1.4% of the people
65-74 years of age received care in long-term care facilities in 1990; this
percentage increased to 6% for people 75-84 years of age and to 25% for those
85 years of age and over. In addition, according to the U.S. Bureau of the
Census, the number of individuals over age 75 was approximately 11 million
(4.62% of the total population in the U.S.), in 1993. Additional increases are
expected in this segment of the population by the year 2000. Although there is
limited growth projected for the population of individuals over 65 years of
age between 1990 and 2000, a significant increase in the proportion of people
over age 85 is anticipated. The segment of the population over 85 years of
age, which comprises the largest percentage of residents at long-term care
facilities (53%), is the fastest-growing segment of the population, projected
to increase by more than 26%, from approximately 3.4 million, or 1.3% of the
total population in the U.S., in 1993, to more than 4.3 million, or 1.6% of
the total population, in the year 2000. By 2050, it is anticipated that the
nursing home population of those 85 years of age and older will be triple its
1990 level.
These demographic changes, coupled with increasing cost containment
initiatives by governmental and managed care payors have changed medical
practices, resulting in an increasing proportion of complex medical care being
delivered outside the acute care hospital setting. The health care industry
has responded by developing a range of post-acute care services, including
skilled nursing care and home health therapy to provide care following a
patient's hospital-based acute care treatment. The complex medical care and
intensive nursing care provided to patients with higher acuity disorders are
categorized as subacute care. This level of care is appropriately delivered in
a skilled nursing environment where New GranCare believes clinical outcomes
compare favorably to those achieved in acute care settings and where the cost
structure is significantly lower. New GranCare believes that subacute care
provided in a skilled nursing facility is often less expensive than hospital-
based care. Skilled nursing facilities are significantly less capital
intensive and do not require the specialized equipment used in acute care
hospitals. Labor costs are also lower than hospitals', which typically have a
higher physician to nursing staff ratio and significantly more administrative
personnel, including nursing staff not fully dedicated to providing care. As a
result of the ability of subacute care providers to achieve successful
outcomes at a significantly lower cost than acute care hospitals are generally
able to provide, hospital discharge planners, physicians and managed care and
insurance company case managers are referring an increasing number of patients
to long-term care facilities.
BUSINESS STRATEGY
New GranCare's principal objective will be to continue developing a
continuum of post-acute health care services in order to address market
demands created by ongoing changes in the health care delivery system, changes
in patient demographics, and pressures to contain the cost of delivering care.
In order to take advantage of the growth of the post-acute health care market,
New GranCare's strategy is to:
. Develop Cluster Markets. The Company has sought and New GranCare will
continue to seek to establish a significant presence in regional markets
by establishing clusters of skilled nursing facilities
18
<PAGE>
and related specialty medical businesses that together form a continuum
of care. Each cluster will be developed where relationships with key
acute care hospitals and physicians provide a strong referral base and
where other favorable market characteristics exist. New GranCare will
evaluate the needs within each cluster and address these demands by
developing specialized programs in facilities most capable of serving a
particular market need. New GranCare believes, and the Company's
experience indicates, that local expertise coupled with a critical mass
of facilities will allow New GranCare to negotiate more effectively with
large contract payors (including managed care organizations), achieve
operating efficiencies, and gain access to critical referral sources.
Once a cluster market is developed with one or more services, additional
services can be introduced to further expand the continuum of care. New
GranCare intends to expand the eight cluster markets developed by the
Company located in Arizona, Colorado, Northern and Southern California,
Illinois, Wisconsin, Michigan, and South Carolina. New GranCare will
also operate concentrations of facilities in Indiana, Iowa and
Mississippi that will form the base for the expansion of services in
these areas.
. Provide a Continuum of Care. New GranCare's services will focus on the
needs of patients with medically complex conditions who do not require
acute care hospitalization. To serve these patients' needs fully, New
GranCare will aim to offer a full continuum of care whereby New GranCare
will provide medical and rehabilitative treatments in a variety of
alternative sites. These settings include skilled nursing and assisted
living facilities, subacute care and other specialty care units operated
in conjunction with acute care hospitals and home health. As patients
progress through stages of recovery, they may be served by different
elements of the continuum. Medical services provided include physical,
occupational, speech, respiratory and psychological therapies;
pharmaceutical treatments; and laboratory and radiology services. The
primary benefit of offering a full continuum of care is to provide
patients and payor sources with the most appropriate level of care in
the most cost-effective setting.
. Establish Collaborative Relationships. The Company has placed and New
GranCare will continue to place strategic emphasis on establishing
referral relationships with acute care hospitals and physicians. Based
on the Company's experience, New GranCare expects that a substantial
portion of its patients will be admitted upon discharge from acute care
hospitals. As part of its effort to strengthen the relationships
established with acute care hospitals by the Company, New GranCare
expects to continue a variety of collaborative programs originally
established by the Company. The most extensive of these programs are
contract management relationships whereby New GranCare will operate a
subacute medical unit in under-utilized space within an acute care
hospital. In this manner, New GranCare expects to work with, rather than
compete with, key referral sources. As such, New GranCare expects that
this contract business will strengthen its relationship with a given
hospital, while allowing the hospital or its physicians to place a
patient in a lower cost environment and expanding New GranCare's revenue
base. The acquisition of Cornerstone Health Management Company
("Cornerstone"), significantly increased the Company's presence in this
area and is expected to benefit New GranCare through the acquisition of
over 100 contracts to manage subacute, geriatric, psychiatric and
primary care programs for acute care hospitals in 17 states. Cornerstone
is a company that specializes in implementing and managing subacute and
other specialized medical programs.
. Improve Payor Mix. By expanding its subacute and home health care
services, New GranCare intends to shift its payor mix away from state-
reimbursed Medicaid programs toward a higher quality mix consisting of
Medicare, managed care and private-pay business. Generally, the
profitability of caring for private-pay and Medicare patients is higher
than that of Medicaid. Historically, the Company has been successful in
increasing the quality of its payor mix (Medicare, private, and other
pay) as a percent of total revenues from 48% in 1994 to 55% in 1995. New
GranCare believes that opportunities still exist to continue to improve
the quality of the Company's current payor mix.
. Grow through New Construction. In 1995 the Company expanded its capital
improvements program to include the development of newly constructed
facilities. With over $82.6 million in capital improvements since 1991,
the Company gained significant experience in facility development. In
19
<PAGE>
September 1996 the Company opened SouthPointe HealthCare Center, its
first newly constructed facility in Milwaukee, Wisconsin. Several other
projects are under various stages of review. The Company and New
GranCare believe that an aggressive program to build new skilled nursing
and assisted living facilities as well as new programs such as long term
acute care wings in its existing facilities in selective cluster markets
will have a significant positive impact on New GranCare's operations.
New skilled nursing and assisted living facilities generally experience
a higher occupancy rate than older facilities and receive a greater
percentage of revenue from private pay sources. Additionally, the
Company and New GranCare believe that having a significant number of new
skilled nursing and assisted living facilities has the intangible
benefit of bettering the overall reputation of a company.
. Grow through Acquisitions. New GranCare intends to pursue a strategy of
growth through selected acquisitions in order to accelerate the
achievement of its objectives. During 1995, the Company completed two
significant transactions--the acquisition of Cornerstone and the merger
with Evergreen Healthcare, Inc. ("Evergreen"). New GranCare intends to
continue pursuing acquisitions in order to further develop its continuum
of care in existing markets and expand into new markets where
demographics, economic conditions, and regulatory and reimbursement
policies are considered favorable.
. Expand Specialty Medical Services. New GranCare intends to continue to
increase the specialty medical services currently provided by the
Company so as to further expand the continuum of care. The existing
specialty medical services currently provided by the Company include
providing home health care, laboratory, radiology, subacute care,
pharmacy and other specialized services. The Company is, and New
GranCare will continue, expanding subacute services by developing
innovative programs with managed care providers, acute care hospitals
and physician groups, which may include sharing the costs and benefits
of providing subacute services. New GranCare believes that providing a
higher level of care through the expansion of its specialty medical
services should improve New GranCare's payor mix, expand its customer
base and generate increased operating margins for its skilled nursing
divisions. While the Merger will have the effect of lowering New
GranCare's percentage of revenue derived from specialty medical services
from the level achieved by the Company in the past, New GranCare
believes that significant opportunities will exist to expand the
percentage of its revenue derived from specialty medical services other
than pharmacy. See "The Distribution--Terms of Non-competition
Agreement."
Skilled Nursing Services and Subacute Care
As of November 30, 1996, the Company operates 140 long-term care facilities,
including 136 skilled nursing and four assisted living facilities, with 17,597
licensed beds in 15 states, all of which are currently operated by the
Company. The Company continues to evaluate certain long-term care facilities
which are underperforming or do not fit within the Company's or New GranCare's
long-term strategic plans. All or a portion of these facilities may be
divested in the future. All of the long-term care facilities to be operated by
New GranCare are certified as "skilled nursing facilities" by appropriate
regulatory agencies, other than the four assisted living facilities, which are
located in states that do not require such certification. The facilities to be
operated by New GranCare focus on the care of medically dependent patients
with multiple medical or behavioral problems requiring continuing special care
and treatment. Skilled nursing care is rendered in such facilities 24 hours a
day by registered, licensed practical or vocational nurses and nurses' aides
administering prescribed medical services. Patients in the facilities to be
operated by New GranCare also receive assistance in matters such as bathing,
dressing, medication and diet. All patients in such facilities receive routine
care which includes basic nursing care, room and board, housekeeping and
laundry services and dispensing of medication. These basic services are a
platform for the delivery of more intensive medical rehabilitative and
subacute care. New GranCare expects to provide physical, occupational, speech,
respiratory and psychological therapy services in each of its long-term care
facilities, a majority of which will be outsourced. The Company currently
provides the aforementioned services on a similar basis. The four assisted
living facilities to be operated by New GranCare
20
<PAGE>
provide furnished rooms and suites designed for individuals who are either
able to live independently within a sheltered community or who require minimal
nursing attention. The ADL services (assistance with activities of daily life)
currently provided by the Company in the assisted living facilities include
protective oversight, food, shelter, bathing, dressing, eating,
transportation, toiletry and related services that enhance the quality of a
resident's life. New GranCare intends to continue providing these services.
The Company has implemented and New GranCare will continue certain specialty
medical programs in all of its skilled nursing facilities certified to provide
care to Medicare patients (including more extensive subacute programs) in
order to provide additional services and accelerate growth and profitability.
New GranCare also expects to operate 34 specialized units with 710 beds
located in certain long-term care facilities, currently being operated by the
Company, which provide higher acuity, subacute and other care to medically
complex patients. These units presently include transitional rehabilitation
programs and specialized units for cancer, HIV and wound care patients, as
well as Alzheimer's care, subacute rehabilitation and hospice care. These
specialized units will compete with acute care and rehabilitation hospitals
which New GranCare believes typically charge rates that are often twice the
rates historically charged by the Company for comparable services. New
GranCare intends to expand its capabilities in this area through collaborative
efforts with acute care specialists. After giving effect to the Distribution
and Merger, it is anticipated that New GranCare's skilled nursing facilities,
on a pro forma basis, accounted for 86.7% of its net revenues for the 6 months
ended June 30, 1996.
Contract Management
Through the acquisition of Cornerstone by the Company in April 1995, New
GranCare will benefit from a contract management business that specializes in
the implementation and management of geriatric specialty programs for acute
care hospitals. The Company's contract management business which will be
assumed by New GranCare includes approximately 145 programs in acute care
hospitals located in 20 states (with an additional approximately 10 contracts
pending) as of November 30, 1996. Programs managed on behalf of acute care
hospitals include subacute skilled nursing, geriatric mental health, specialty
acute hospitals and geriatric primary care networks and other ancillary
programs. Cornerstone is generally responsible for managing the clinical and
operational aspects, including quality control, of the programs it
administers. Cornerstone receives a monthly management fee, typically based on
the number of beds it manages under a contract. Program design and
implementation is handled by a team of clinical, financial and reimbursement
experts employed by Cornerstone. Following implementation, Cornerstone
provides a program administrator who is supported by a centralized staff of
experts, who are employed by Cornerstone, with care being provided primarily
by employees of the hospital. The number of experts provided by Cornerstone
depends on the type of program being administered, with routine subacute
skilled nursing generally requiring only a Cornerstone program administrator
who oversees the hospitals' employees, and geriatric mental health generally
requiring a Cornerstone program administrator as well as up to seven
Cornerstone experts who administer care.
Other Services
The home health care operation to be assumed by New GranCare was established
by the Company in 1992 to provide skilled nursing services, rehabilitation
therapy and home health aides. This operation is comprised of home health care
agencies located in California, Indiana, Michigan and Wisconsin encompassing
twelve agencies (home health, hospice and private duty in each of the
aforementioned states). Services include intermittent visits, hourly care,
infusion therapy and a specialty program for terminally ill patients. New
GranCare believes that following the Distribution and Merger, it will be well
positioned to expand these existing home health services as well as adult day
care operations in current and additional markets. The Company acquired one
home health care agency and one hospice in Michigan and one home health agency
in Indiana during 1996 and New GranCare intends to evaluate opportunities in
other states where it will have operations.
The Company is developing and New GranCare intends to continue developing a
variety of laboratory services at several facilities, including pathology and
gastrointestinal analysis. New GranCare will operate a wholly-owned subsidiary
that will provide such services in South Carolina. It will also have an equity
ownership
21
<PAGE>
interest in an X-ray provider which serves certain of the facilities to be
operated by it in Michigan. Further, New GranCare will provide a variety of
therapy services to patients at its facilities and to outpatients at certain
of its facilities. These services (which are currently being provided by the
Company) include physical, occupational, speech, respiratory and psychological
therapies.
MARKETING AND DEVELOPMENT OF PAYOR SOURCES
New GranCare's marketing strategy is to establish and maintain cooperative
relationships and networks with physicians, acute care hospitals and other
health care providers, with an emphasis on specialists who treat ailments
involving long-term care and rehabilitation. These referral networks will form
a strong basis for increasing occupancy levels at skilled nursing facilities
to be operated by New GranCare for improving the payor mix of such facilities.
New GranCare intends to continue the incentive program created by the Company
which motivates facility administrators to spend time in the community
developing relationships in order to increase awareness of facilities and
services to be offered by New GranCare. New GranCare will employ promotional
literature focusing on its philosophy of care, service capabilities, quality
of employees and family assistance programs to support local marketing
efforts.
Most of the facilities to be operated by New GranCare are currently operated
as part of a marketing cluster by the Company. The marketing program of each
cluster will be tailored to the health care needs, referral sources and
demographic and economic characteristics of the local market in which the
cluster is located. Each facility administrator will be expected to contribute
to the development of a detailed strategic plan and specific operating goals
for each cluster. Local managers of Cornerstone and home health operations to
be operated by New GranCare also will be expected to participate in the
strategic planning and marketing process to coordinate New GranCare's efforts
across the continuum of post-acute care. Moreover, each of the regional
service centers will be expected to coordinate the activities of the clusters
within the region, as well as manage key relationships with managed care
providers and promote New GranCare's expertise in rehabilitation and subacute
services. New GranCare's therapy providers will also be expected to promote
the capabilities of its facilities within their local market area, in addition
to promoting their individual therapy services.
New GranCare also plans to take advantage of other opportunities for
increased profitability, including joint ventures with health care providers
such as health maintenance organizations ("HMOs"). The Company is establishing
relationships with managed care providers which it believes will increase its
subacute care business, which are anticipated to benefit New GranCare. The
cluster market approach is expected to give New GranCare the enhanced ability
to serve large providers of managed care within its targeted markets.
Typically, patients referred by managed care providers (including HMOs and
preferred provider organizations) generate significantly higher revenues per
patient day. New GranCare's ability to provide subacute and specialty medical
services at a lower cost than acute care hospitals will be a competitive
advantage in becoming the provider of choice for these managed care providers.
Following the Distribution and Merger, New GranCare expects to derive an
increasing proportion of its business from managed care and similar sources.
COMPETITION
New GranCare will be one of the largest publicly traded nursing home
companies in the country in terms of the number of beds owned, managed or
leased. The long-term care facilities to be operated by New GranCare compete
in fifteen states on a local and regional basis with other long-term health
care providers. Some competing operators have greater financial resources than
New GranCare will have following the Distribution and Merger and some are non-
profit or charitable organizations. The management of New GranCare, based on
its experience with the Company, expects that significant competitive factors
will include the quality and spectrum of care and services provided, the
reputation of the medical personnel employed, the physical appearance of the
facilities and, in the case of private-pay patients, the level of charges for
services. The management of New GranCare also believes that New GranCare's
facilities will compete on a local and regional basis, rather than on a
national basis. As a result, New GranCare will seek to meet competition in
each locality or region, as the case may be, by improving the quality and type
of services provided in and the appearance of
22
<PAGE>
its facilities, by establishing a reputation within the local medical
communities for providing quality care, and by responding appropriately to
regional variations in demographics and preferences. Each facility to be
operated by New GranCare will have a Medical Director who will assess patient
needs, coordinate care plans, and, as a member of the local medical community
will be familiar with local health care concerns. Historically, regulations
such as building code requirements and CON requirements have often deterred
the construction of long-term care facilities. Recently, one state in which
the Company operates, Indiana, has eased its CON requirements to allow
construction based on a standard other than "need," which may result in
increased competition in the long-term care market. There is no price
competition with respect to Medicare and Medicaid patients since revenues for
services administered to such patients are based on strictly controlled fixed
rates and cost reimbursement principles.
Cornerstone is one of the nation's premier contract providers of specialty
healthcare services for the elderly. This division, which will be operated by
New GranCare, will manage approximately 145 programs (with approximately 10
additional contracts pending) with acute care hospitals in 20 states.
Cornerstone develops, manages and operates specialty geriatric programs which
include subacute skilled care, mental health, senior health centers, rural
health clinics and ancillary services. In addition, Cornerstone operates four
long-term acute care hospitals through lease or management arrangements.
Cornerstone is generally recognized as the only "full service" geriatric
provider within the industry. Although the Company and New GranCare are not
aware of any companies that compete with Cornerstone on a national basis or
which offer the same array of services provided by Cornerstone, other contract
management companies may compete with Cornerstone in some markets along
discrete product lines.
Home health currently has a market presence and operations in four states.
The competition among home health organizations is intense and is based on
quality and breadth of service and price. Competitors vary from large national
chains to regional and local agencies as well as hospital-based organizations.
New program development in infusion therapy with Vitalink and adult day care
will offer integrated services not currently being provided by New GranCare's
competitors in these states.
REGULATION
Licensing. All of the long-term care facilities and home health agencies to
be operated by New GranCare are required to be licensed on an annual basis by
state health care agencies and are subject to extensive federal, state, and
local regulatory and inspection requirements. License and certification
standards vary from jurisdiction to jurisdiction and undergo periodic
revision. These requirements relate to, among other things, the quality of the
professional care provided, the qualification of administrative personnel and
professional or licensed staff, the adequacy of the facility and its
equipment, and continuing compliance with laws and regulations relating to the
operation of the facilities. The failure to obtain, renew or maintain any of
the required regulatory approvals or licenses could adversely affect expansion
of New GranCare's business and could prevent the location involved from
offering services to patients. The Company believes it is currently in
substantial compliance with licensing requirements; however, there can be no
assurance that New GranCare will be able to maintain such licenses for its
facilities or that New GranCare will not be required to expend significant
funds in order to meet such requirements.
Medicare and Medicaid. New GranCare expects to derive a significant portion
of its revenues from federal and state reimbursement programs. Substantially
all of the skilled nursing facilities and home health agencies to be operated
by New GranCare are certified to receive benefits under Medicare and under
joint federal and state funded programs administered by the various states to
provide health care assistance to low income individuals, generally known as
"Medicaid." These programs are highly regulated and subject to periodic
change.
Medicare utilizes a cost-based reimbursement system for nursing facilities
and home health agencies which, subject to limits fixed for the particular
geographic area, reimburse nursing facilities and home health agencies for
reasonable direct and indirect allowable costs incurred in providing "routine
services" (as defined by the program) as well as capital costs and ancillary
costs. The Company is filing Routine Cost Limit Exception
23
<PAGE>
appeals for the facilities which exceed the limits and fit the criteria as
exception candidates. New GranCare may benefit from exceptions to the routine
cost limits. Allowed costs include nursing, administrative and general,
dietary, housekeeping, laundry, social services, activities, central supply,
maintenance and plant operations as well as ancillary and capital costs.
For federal fiscal years 1994 and 1995, the Omnibus Budget Reconciliation
Act of 1993 ("OBRA '93") froze the routine cost limits for nursing facilities
and the per visit limits on reasonable costs imposed on home health agencies.
In addition, OBRA '93 imposed new restrictions on the amount of relief which
can be realized through the Routine Cost Limit Exception appeal process. For
fiscal 1996, the 1993 imposed freeze on routine cost limits was lifted. In
addition, the inflation indexes were adjusted which lowered the routine cost
limits for 1996 and prior years.
Medicaid programs currently exist in all of the states in which the Company
has and New GranCare will have health care facilities. While these programs
differ in certain respects from state to state, they are all subject to
requirements imposed by the federal government, which provides approximately
50% of the funds available under these programs. California provides
reimbursement for skilled nursing services at a flat daily rate, as determined
by the responsible state agency. In all other states in which New GranCare
expects to operate, payments are based upon specific cost reimbursement
formulas established by that state, which formulas are generally based on
historical costs with adjustments for inflation.
For the years ended December 31, 1994 and 1995 and the nine months ended
September 30, 1996 the Company derived approximately 24.7%, 30.2% and 38.6%,
respectively, of its net patient revenues from Medicare and approximately
51.6%, 44.7% and 38.6% of its net patient revenues from Medicaid, and New
GranCare expects to derive a significant portion of its revenue from such
federal and state reimbursement programs. Both governmental and private-payor
sources have instituted cost containment measures designed to limit payments
made to long-term health care providers, and there can be no assurance that
future measures will not adversely affect reimbursements to New GranCare.
Furthermore, government reimbursement programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which could materially decrease the
service covered or the rates paid to New GranCare for its services. There has
been, and New GranCare expects that under the current and future presidential
administrations there will continue to be, a number of proposals to limit
Medicare and Medicaid reimbursement for long-term care services and other
services to be provided by New GranCare. Proposals to reduce the growth in
Medicare and Medicaid expenditures are under active consideration in the
current session of Congress. New GranCare cannot predict at this time whether
any of these proposals will be adopted or, if adopted and implemented, what
effect such proposals would have on New GranCare. There can be no assurance
that payments under state or federal governmental programs will remain at
levels comparable to present levels or will be sufficient to cover the costs
allocable to patients eligible for reimbursement pursuant to such programs,
particularly with respect to the Medicaid programs, which generally provide
lower reimbursement rates than the Medicare program. In addition, there can be
no assurance that facilities to be operated by, and the services and supplies
to be provided by, New GranCare will meet or continue to meet the requirements
for participation in such programs.
Although federal regulations do not recognize state budget deficiencies as a
legitimate ground to curtail funding of their Medicaid cost reimbursement
programs, states have nevertheless curtailed such funding in the past. No
assurance can be given that states will not do so in the future or that the
future funding of Medicaid programs will remain at levels comparable to
present levels. Federal law currently recognizes that Medicaid and Medicare
reimbursement rates for nursing facilities must be reasonable and adequate to
meet the costs that must be incurred by efficiently operated facilities in
order to provide care and services in conformity with applicable laws,
regulations and quality and safety standards. However, legislative proposals
in Congress which have been endorsed by the National Governors' Association
would eliminate that protection. Medicare and Medicaid programs are subject to
statutory and regulatory changes, administrative rulings and interpretations,
determinations by reimbursement intermediaries, and governmental funding
restrictions, all of which may materially increase or decrease the rate of
program payments to long-term care facilities expected to be operated
24
<PAGE>
by New GranCare. In addition, there can be no assurance that facilities owned,
leased or managed by New GranCare, now or in the future, will initially meet
or continue to meet the requirements for participation in such programs.
New GranCare believes that the facilities to be operated by it are in
substantial compliance with the various Medicare and Medicaid regulatory
requirements currently applicable to them, including the requirements of the
Omnibus Budget Reconciliation Act of 1987 ("OBRA"). In the ordinary course of
its business, however, the Company has received and New GranCare may receive
notices of deficiencies for failure to comply with various regulatory
requirements. New GranCare will review such notices and take appropriate
corrective action. Historically, in most cases, the Company and the reviewing
agency have been able to agree upon the steps to be taken to bring a facility
into compliance with regulatory requirements. In some cases or upon repeat
violations, the reviewing agency may take a number of actions against a
facility. Effective October 1, 1990, OBRA increased the enforcement powers of
state and federal certification agencies. Additional sanctions have been
authorized to correct noncompliance with regulatory requirements, including
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicare or Medicaid programs and,
in extreme circumstances, revocation of a facility's license. In certain
circumstances, conviction of abusive or fraudulent behavior with respect to
one facility may subject other facilities under common control or ownership to
disqualification from participation in Medicare and Medicaid programs. In the
past, notices of deficiencies and citations have not had a material adverse
effect on the Company.
The Department of Health and Human Services ("DHS") has released new survey
and certification regulations under OBRA, which went into effect July 1, 1995.
These new regulations make significant changes in the process of surveying
skilled nursing facilities under Medicare and Medicaid and for certifying
these facilities to meet federal requirements for participation in the
Medicare and Medicaid programs and impose a graduated system of penalties to
match the severity of violations of laws passed by Congress and DHS which
implement health, safety and quality standards for residents of long-term care
facilities. These new regulations also set forth a number of alternative
remedies, in addition to those set forth above, which may be imposed by
surveying agencies on facilities that do not comply with the federal
requirements (instead of, or in addition to, termination of such facilities'
participation in Medicare and Medicaid) and specify remedies for state survey
agencies that do not meet surveying requirements. These regulations have not
had a material adverse effect on the Company's operations and New GranCare
does not believe that they will have a material adverse effect on New
GranCare's operations.
Certificate of Need. Of the states in which New GranCare expects to operate
skilled nursing facilities, Tennessee, Mississippi, West Virginia, Iowa, Ohio,
Michigan, Wisconsin, South Carolina, and Georgia have a CON statute. In states
that have such statutes, approval by the appropriate state health regulatory
agencies must be obtained and a CON or similar authorization issued prior to
certain changes in the management of a long-term care facility, the addition
of new beds or services or the making of certain capital expenditures. To the
extent CON approvals are required for expansion of New GranCare's operations,
such expansion may be delayed or otherwise affected. Furthermore, certain
states, including Mississippi, Ohio, West Virginia, and Wisconsin, have now or
in the past imposed moratoriums on the development of new nursing facility
beds. Some states require separate approval to obtain Medicare and Medicaid
reimbursement for facility costs. Some states also require approval of capital
expenditures under Section 1122 of the Social Security Act and provide
Medicare and Medicaid reimbursements of capital costs (depreciation, interest
and lease expense) for approved capital expenditures only.
Referral Restrictions. New GranCare will also be subject to federal and
state laws which govern financial and other arrangements between health care
providers. These laws often prohibit certain direct and indirect payments or
fee splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Such laws include the
anti-kickback provisions of the federal Medicare and Medicaid Patients and
Program Protection Act of 1987. These provisions prohibit, among other things,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. In addition, some states restrict
25
<PAGE>
certain business relationships between physicians and pharmacies, and many
states prohibit business corporations from providing, or holding themselves
out as a provider of, Medicaid care. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs as well as civil and criminal
penalties. These laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies. Additionally, OBRA '93
contains provisions that expand the list of health care services subject to
existing federal referral prohibitions. This expanded referral ban became
effective on January 1, 1995.
OBRA '93 also contains referral restrictions related to physician ownership
interests, and restricts referrals by a physician to an entity with which he
has a "compensation arrangement," which is broadly defined to include any
arrangement involving "remuneration." However, there are a number of
exceptions for certain type of compensation arrangements, including exceptions
for personal service arrangements, space and equipment leases, employment
relationships, certain prepaid health plans, isolated transactions and certain
other payment arrangements that are consistent with the fair market value, so
long as these arrangements meet certain specific criteria. With respect to
physician ownership interests, an exception exists for ownership of investment
securities that may be purchased on terms generally available to the public
and that are listed on a national exchange (including the NYSE) or any
regional exchange, provided that the corporation issuing such investment
securities has at the end of its most recent fiscal year, or on average for
its previous three fiscal years, shareholders' equity exceeding $75.0 million.
New GranCare anticipates that the New GranCare Common Stock will be traded on
the NYSE and that its shareholders' equity will exceed the minimum
shareholders' equity. Although it is possible that certain arrangements
between New GranCare and physicians will be affected by these referral
restrictions, New GranCare does not believe that the restrictions will have a
material adverse effect on revenues.
The Medicare program reimburses skilled nursing facility services, pharmacy
services and home health services based on reasonable costs of care, subject
to certain limitations. In determining allowable costs, the Medicare program
will not recognize as allowable the charge made for services provided to the
skilled nursing facility or home health agency by an entity that is related
through substantial ownership or substantial control, unless it qualifies for
an exception. Instead, Medicare will recognize as allowable only the
supplier's cost of (rather than its charge for) supplying the service.
Contract Management Regulation. Contract managers of geriatric mental health
centers, subacute care units, specialty acute hospitals and senior health
centers are not typically subject to direct regulation, although New GranCare
may be held responsible for violation of certain federal and state laws, such
as the referral restrictions described above. Further, the facilities to be
managed by New GranCare are subject to regulation. Management contracts with
these facilities may hold New GranCare accountable in certain instances to a
facility which is cited for non-compliance with regulatory requirements.
Further, there can be no assurance that the facilities to be managed by New
GranCare will not be subject to statutory or regulatory changes which might
adversely impact these facilities and, indirectly, New GranCare's contract
management business.
Home Health Regulation. Home health agencies must be certified by HCFA to
receive reimbursement for services and supplies from Medicare and Medicaid. As
a condition of participation in the Medicare and Medicaid home health care
program, HCFA requires compliance with certain standards with respect to
personnel, services and supervision; the preparation of annual budgets, cost
reports, and quarterly cost and visit analyses; and the establishment of a
professional advisory group that includes at least one practicing physician,
one registered nurse and other representatives from related disciplines or
consumer groups. Home health agencies are surveyed for compliance with these
requirements at least once every 15 months. Failure to comply may result in
termination of the agency's Medicare and Medicaid provider agreements. In
1989, Congress directed the Department of Health and Human Services ("DHS") to
develop and implement a range of intermediate, or alternative, sanctions for
home health agencies. DHS published proposed rules to implement this authority
in 1991; however, these rules have not been finalized and thus have not taken
effect. The proposed sanctions would include civil monetary penalties,
temporary management, suspension of payment for new admissions, and other
sanctions.
26
<PAGE>
Health Care Reform. While neither the present administration's health care
reform proposals nor alternative health care reform proposals introduced by
certain members of Congress were adopted in 1995, the Health Insurance
Portability and Accountability Act of 1996 (the "Accountability Act") was
passed by Congress and signed into law by President Clinton on August 21, 1996
and will generally take effect July 1, 1997. While the Accountability Act
contains provisions regarding health insurance or health plans, such as
portability and limitations on pre-existing condition exclusions, guaranteed
availability and renewability, it also contains several anti-fraud measures
that significantly change health care fraud and abuse provisions. Some of
those provisions include (i) creation of an anti-fraud and abuse trust fund
and coordination of fraud and abuse efforts by federal, state and local
authorities, (ii) extension of the criminal anti-kickback statute to all
federal health programs, (iii) expansion of and increase in the amount of
civil monetary penalties and establishment of a knowledge standard for
individuals or entities potentially subject to civil monetary penalties, and
(iv) revisions to current sanctions for fraud and abuse, including mandatory
and permissive exclusion from participation in the Medicare or Medicaid
programs. Additionally, the Accountability Act provides mechanisms for further
guidance to health care providers on health care fraud and abuse issues in the
form of additional safe harbors or modifications to existing safe harbors,
fraud alerts and the issuance of advisory opinions by DHS. New GranCare does
not believe that the Accountability Act will have a material adverse effect on
New GranCare's operations.
Health care reform remains an issue for health care providers. Many states
are currently evaluating various proposals to restructure the health care
delivery system within their jurisdictions. It is uncertain at this time what
legislation on health care reform will ultimately be implemented or whether
other changes in the administration or interpretation of governmental health
care programs will occur. New GranCare anticipates that federal and state
legislatures will continue to review and assess various health care reform
proposals and alternative health care systems and payment methodologies. New
GranCare is unable to predict the ultimate impact of any federal or state
restructuring of the health care system, but such changes could have a
material adverse impact on the operations, financial condition and prospects
of New GranCare.
EMPLOYEE TRAINING AND DEVELOPMENT
As a policy matter, New GranCare believes that nursing and professional
staff retention and development will be a critical factor in the success of
New GranCare. Accordingly, New GranCare's compensation program will provide
ongoing performance evaluations and salary reviews. Additionally, New GranCare
will provide financial incentives to its employees to encourage facility staff
motivation and productivity and to reduce turnover rates. New GranCare
believes that wage rates for professional nursing staff currently being used
by the Company are commensurate with market rates. New GranCare also intends
to provide employee benefit programs that New GranCare believes, as a package,
will exceed industry standards. In the past, the Company has not experienced
any significant difficulty in attracting or retaining qualified personnel, and
New GranCare does not anticipate any difficulty in this regard in the future.
In addition, New GranCare intends to continue the ongoing informal training
and education programs currently provided by the Company for its nursing
staff, both professional and non-professional, as well as its non-nursing
staff, both professional and non-professional. With respect to education and
training programs conducted by entities other than New GranCare, New GranCare
expects to provide tuition reimbursement to all levels of staff to encourage
continual learning in all aspects of facility operations.
Examples of training, development and education programs offered by the
Company, and which will be offered by New GranCare to its management employees
include the following: (i) communication skills, (ii) supervisory skills,
(iii) conflict-resolution skills, (iv) diversity training, (v) performance
management skills, and (vi) hiring skills.
The Company has been offering certification programs to its nursing
assistants for a considerable period of time. This three-week program,
conducted on site at the Company's facilities consists of two weeks of
classroom work and one week of clinical preparation. Upon completion,
graduates are generally hired into one of the Company's facilities located
near the facility where the certification course was offered. The program also
will be continued by New GranCare.
27
<PAGE>
EMPLOYEES
As of September 30, 1996, the Company had approximately 16,000 full-time and
part-time employees, with 300 full-time employees at its corporate and
regional offices. Following the Distribution and Merger, New GranCare will
have approximately 13,800 full-time and part-time employees, with 250 full-
time employees at its corporate and regional offices. New GranCare estimates
that approximately 20% of these employees will be physicians, nurses and
professional staff. In addition, New GranCare will have collective bargaining
agreements with unions representing employees at 21 facilities. Currently, the
Company is negotiating two collective bargaining contracts involving
facilities in two states. In October 1995, the Company reached a settlement
with the Service Employees International Union ("SEIU"), the labor union
representing the majority of the unionized employees that will be employed by
New GranCare, pursuant to which the SEIU has agreed to refrain from organizing
activities at certain of the facilities to be operated by New GranCare until
January 1, 1997. New GranCare cannot predict the effect continued union
representation or organizational activities will have on New GranCare's future
activities. However, the Company has never experienced any material work
stoppages and New GranCare believes that its relations with its employees and
the SEIU will continue to be good.
INSURANCE
The Company maintains, and New GranCare will continue to maintain, on behalf
of itself and its subsidiaries, annual Blanket Property Damange/Business
Interruption insurance in the amount of $750.0 million and annual
General/Professional Liability insurance in the amount of $100.0 million, both
of which policies are on an occurrence form. New GranCare will also require
that physicians practicing at its long-term care facilities carry medical
malpractice insurance to cover their individual practice. New GranCare expects
to maintain a captive insurance company for the purposes of paying worker's
compensation claims as well as reinsurance contracts to minimize its insurance
exposure.
LEGAL PROCEEDINGS
From time to time, the Company has been a party to various legal proceedings
in the ordinary course of its business. In the opinion of New GranCare, except
as described below, there are currently no proceedings which, individually or
in the aggregate, after taking into account the insurance coverage maintained
by the Company (and to be maintained by New GranCare) would have a material
adverse effect on New GranCare's financial position or results of operations.
On September 9, 1996, a shareholder of the Company filed a civil complaint
in the Superior Court of the State of California, County of Los Angeles:
Howard Gunty Profit Sharing v. Gene E. Burleson, Charles M. Blalack,
Antoinette Hubenette, Joel S. Kanter, Ronald G. Kenny, Robert L. Parker,
William G. Petty, Jr., Edward V. Regan, Gary U. Rolle and GranCare, Inc., Case
No. DC156996. This complaint alleges, generally, that the defendants have
breached their fiduciary duties owed to the Company's shareholders by failing
to take all reasonable steps necessary to ensure that the Company's
shareholders receive maximum value for their shares of Company Common Stock in
connection with the proposed Distribution and Merger. The complaint further
alleges that the directors of the Company acted in concert as part of a scheme
to deprive the plaintiffs unfairly of their investment in the Company and to
unjustly enrich themselves. The plaintiffs are seeking (i) an injunction
prohibiting the consummation of the proposed Distribution and Merger or
(ii) alternatively, if the proposed Distribution and Merger are consummated,
to have such transactions rescinded and set aside and an order requiring the
defendants to account to the plaintiff for all profits realized as a result of
the proposed Distribution and Merger. In addition, the plaintiffs are seeking
unspecified compensatory damages, costs and to have the complaint certified as
a class action. The Company intends to vigorously defend this lawsuit.
On December 19, 1996, a Conditional Agreement and Stipulation of Settlement
(the "Settlement Agreement") was reached in the above referenced litigation.
Completion of the settlement is subject to notice to the proposed class and a
hearing, as outlined below, and final consideration by the court, among other
conditions and considerations.
28
<PAGE>
Class counsel and counsel for the defendants intend to seek Final Approval
(as defined in the Settlement Agreement) of the proposed settlement and
dismissal of the claims that have been or could have been asserted in the
litigation by plaintiff and the Settlement Class (as defined below).
Plaintiff's counsel investigated the facts and circumstances underlying the
issues raised in the Complaint and researched the law applicable thereto. The
investigation by plaintiff's counsel has included a review and analysis of the
Company's public disclosures, an analysis of its financial statements, a
review of other non-public information and a review of the draft Proxy
Statement/Prospectus submitted to the Securities and Exchange Commission in
anticipation of the Distribution and Merger. Plaintiff's counsel submitted
suggestions regarding the disclosure pertaining to the proposed Distribution
and Merger which have been considered in the context of the overall disclosure
contained in the Proxy Statement/Prospectus. As a result of comments received
from plaintiff's counsel and the Securities and Exchange Commission, a number
of disclosure enhancements have been made regarding the proposed Distribution
and Merger and related transactions. The Company and the plaintiff believe
that these disclosure enhancements will aid the shareholders in their
understanding and consideration of the proposed Distribution and Merger and
related transactions.
The Defendants have vigorously denied all liability and allegations of
wrongdoing, and the settlement is not to be construed for any purpose as an
inference or admission of liability or wrongdoing by them. The plaintiffs and
defendants have concluded that it is desirable to settle the action to avoid
the further expense, burden and uncertainty of this litigation, and to put to
rest all controversies which were or could have been asserted in connection
with any of the matters set forth in the Complaint.
In connection with the settlement the class shall be defined as set forth
below (the "Settlement Class"):
All persons and entities who owned at any time one or more shares of
Company Common Stock, from and including September 2, 1996 through and
including December 19, 1996, excluding the following: the defendants,
members of the families of the defendants; any entity in which any
defendant owns or holds a controlling interest; and the legal
representatives, heirs, successors or assigns of any such excluded parties.
The settlement also provides, in summary, that the plaintiff or his counsel
may submit an application, subject to court review and approval, seeking an
award of attorney's fees and expenses in an aggregate amount of no more than
$350,000. Defendants will not oppose such application to the extent the
application does not seek more than $350,000, and the Company will pay the
amount the court awards up to $350,000, which is the maximum possible payment
exposure of the Company under the Settlement Agreement.
The effect of the proposed settlement will be to extinguish the claims
contained in the action, along with granting of a general release from other
claims, whether asserted or not, as allowed by law.
Current shareholders of record will receive notice of a hearing to determine
whether the proposed settlement of this action is fair, reasonable and
adequate and should be approved by the court. As of this time, the hearing
date has not been set.
Under the proposed settlement agreement, class members will be given the
opportunity to be excluded from the Settlement Class, subject to certain
conditions. If the proposed Settlement Agreement is approved in final form by
the court, it will be binding on all class members who have not previously
been excluded from the Settlement Class.
29
<PAGE>
THE DISTRIBUTION
This section of the Prospectus describes certain aspects of the proposed
Distribution. For information describing certain aspects of the Merger, see
"Description of the Transactions" and "The Merger Agreement" in the Proxy
Statement/Prospectus. The descriptions of the various agreements contained
herein, including, without limitation, the Distribution Agreement, Employee
Benefits Agreement, Non-competition Agreement, Shareholders Agreement and the
Tax Allocation Agreement, do not purport to be complete and are qualified in
their entirety by reference to forms of such agreements which are attached
either as annexes to the Proxy Statement/Prospectus or filed as an exhibit to
the Registration Statement of which this Prospectus is a part, which annexes
and exhibits, as the case may be, are incorporated herein by reference. All
Company shareholders are urged to read such agreements in their entirety.
REASONS FOR THE DISTRIBUTION
Because the assets and liabilities relating to the Institutional Pharmacy
Business conducted by the Company are the only assets that Vitalink is willing
to acquire in the Merger, the Company determined to effect the Distribution.
Both the Distribution and the Merger are intended to be tax-free to the
Company's shareholders for federal income tax purposes, except to the extent
that cash payments are received for fractional shares.
For information concerning the background and reasons for the Distribution
and the Merger, see "Description of the Transactions--GranCare's Reasons for
the Merger; Recommendation of the Board of Directors of GranCare" and "--
Vitalink's Reasons for the Merger" in the Proxy Statement/Prospectus. As
indicated therein, the Company believes that the Distribution and the Merger
are fair to and in the best interests of the Company's shareholders for a
number of reasons including that Company shareholders will be able to
participate as equity owners in a significantly larger institutional pharmacy
business, which the Company believes will generate financial and operational
synergies and other financial benefits. At the same time, shareholders will
continue to participate as equity owners in the Skilled Nursing Business to be
conducted by New GranCare.
CONTRIBUTION OF SKILLED NURSING BUSINESS TO NEW GRANCARE
Prior to the Distribution Record Date, the Company will engage in an
internal reorganization pursuant to which all the assets and liabilities
relating to the Skilled Nursing Business will be reorganized in various tax-
free transactions such that upon completion of such reorganization, the
Skilled Nursing Business will be conducted by New GranCare, a direct
subsidiary of the Company, and various direct and indirect subsidiaries of New
GranCare. At the same time, the assets and liabilities relating primarily to
the Institutional Pharmacy Business will be reorganized so that upon
completion of the internal reorganization the Institutional Pharmacy Business
will be conducted by TeamCare, a direct subsidiary of the Company, and various
direct and indirect subsidiaries of TeamCare. In connection with the
consummation of the transactions contemplated by the Distribution Agreement
and the Merger Agreement, the Company, New GranCare and Vitalink will enter
into additional agreements and arrangements designed to further effect the
separation of the Company's Skilled Nursing Business from its Institutional
Pharmacy Business and to establish the parameters of certain intercompany
relationships subsequent to the completion of the Merger. Among these
agreements are (i) the Employee Benefits Agreement, (ii) the Tax Allocation
Agreement, (iii) the Non-competition Agreement, (iv) the Shareholders
Agreement (the "Shareholders Agreement") between Vitalink and Manor Care, (v)
the Interim Services Agreement (the "Interim Services Agreement") between New
GranCare and Vitalink, and (vi) the Voting Agreement (the "Voting Agreement")
between Manor Care and the Company.
As provided in the Distribution Agreement, prior to the consummation of the
Distribution, the Company will take certain actions as the sole stockholder of
New GranCare or will ratify actions taken by officers and directors of New
GranCare in connection with establishing New GranCare as an independent
company. These actions include (i) merging GCI Properties, Inc., a California
corporation ("GCI") and wholly-owned subsidiary of the Company, with and into
New GranCare, with New GranCare being the surviving entity (all of the assets
30
<PAGE>
pertaining to the Company's Skilled Nursing Business will then be contributed
to New GranCare following such merger), (ii) adopting the Certificate of
Incorporation and Bylaws of New GranCare in the form submitted herewith as
Exhibits 3.1 and 3.2, respectively, to be in effect at the Time of
Distribution (as defined in the Distribution Agreement), (iii) electing as
directors of New GranCare the individuals named in this Prospectus and causing
the appointment of officers of New GranCare to serve in such capacities
following the Distribution and (iv) adopting various incentive compensation
plans for the benefit of directors, officers and employees of New GranCare to
be in effect following the Distribution. For information concerning a
comparison of California and Delaware law and the Charter and Bylaws of New
GranCare, see "Description of New GranCare Capital Stock--The Charter and
Bylaws of the Company and New GranCare" and "Significant Differences Between
the Corporation Laws of California and Delaware." For information concerning
the individuals who may serve as directors and executive officers of New
GranCare following the Distribution and certain compensatory arrangements for
their benefit, including stock incentive plans, see "Management--Executive
Officers and Directors--Compensation of Directors" and "--Compensation of
Executive Officers."
Pursuant to the Distribution Agreement, New GranCare will acquire the right
to use the name "GranCare" in connection with continuing the conduct of the
Skilled Nursing Business. It is anticipated that immediately following the
Merger, New GranCare will change its name to "GranCare, Inc."
CONSUMMATION OF THE DISTRIBUTION; TREATMENT OF COMPANY STOCK OPTIONS
The Distribution will be effected immediately prior to the Merger. Although
the Distribution will not be effected unless the Merger is approved by the
Company's shareholders and is about to occur, the Distribution is separate
from the Merger and the New GranCare Common Stock to be received by holders of
Company Common Stock in the Distribution does not constitute part of the
Merger Consideration. While the Company does not believe that shareholder
approval of the Distribution is required under California law, such approval
is being sought pursuant to the requirements of the Merger Agreement and to
ensure that the objectives of the Company's shareholders are consistent with
the objectives sought to be accomplished by the Company's Board of Directors
pursuant to the Distribution and the Merger. The Board of Directors of the
Company has not yet established the Distribution Record Date. It is
anticipated that the Distribution Date will be the date on which the
Distribution occurs and will be immediately prior to the Effective Time of the
Merger.
On the Distribution Date, the Company's Board of Directors will cause the
Company to pay a dividend to the Company's shareholders as of the Distribution
Record Date, which dividend will be payable in shares of New GranCare Common
Stock. Each shareholder of the Company as of the Distribution Record Date will
receive one share of New GranCare Common Stock for each share of Company
Common Stock held as of the Distribution Record Date. Immediately following
the completion of the Distribution, New GranCare will be a publicly-owned
corporation and it is contemplated that the shares of New GranCare Common
Stock will be listed on the NYSE. See "--Listing of New GranCare Common Stock;
Restrictions on Resale."
Following the completion of the Distribution, the Company will merge with
and into Vitalink with Vitalink being the surviving corporation in the Merger.
Each shareholder of the Company will receive 0.478 of a share of Vitalink
Common Stock in exchange for each share of Company Common Stock held by a
shareholder of the Company as of the Effective Time of the Merger. As a result
of the Merger, the Institutional Pharmacy Business will be conducted through
various direct and indirect subsidiaries of Vitalink.
As a consequence of the Distribution, each holder of Company Options will
receive options to purchase such number of shares of New GranCare Common Stock
as is equal to the number of shares of Company Common Stock subject to Company
Options held by such holder as of the Distribution Record Date. The exercise
price of a New GranCare Option will be equal to a percentage of the exercise
price of the existing Company Option, while the current exercise price of
existing Company Options will be correspondingly adjusted downward by the
amount allocated as the exercise price of the New GranCare Option. The
allocation of the exercise price between the existing Company Options and the
New GranCare Options will be determined pursuant to a formula which is
intended to apportion such exercise price in a manner that reflects the value
received by the Company's shareholders in respect of the Institutional
Pharmacy Business (in the case of the
31
<PAGE>
portion of the exercise price allocated to the existing Company Options) and
the remaining portion of the exercise price is intended to reflect the implied
value of the Company's Skilled Nursing Business (in the case of the portion of
the exercise price allocated to the New GranCare Options). The option exercise
price allocation formula is as follows: (i) multiply the Average Vitalink
Stock Price (as defined below) by the Exchange Ratio and (ii) divide the
product so obtained by the Average Company Stock Price (defined below) to
obtain the "Company Option Allocation Percentage". The percentage of the
exercise price of each existing Company Option that will be allocated to the
New GranCare Option issued with respect to such Company Option (the "New
GranCare Option Allocation Percentage") is equal to 1.00 minus the Company
Option Allocation Percentage. For purposes of the foregoing exercise price
allocation calculation, the "Average Vitalink Stock Price" and the "Average
Company Stock Price" were determined to be $23.03 and $17.88, respectively,
constituting the average closing price per share for Vitalink Common Stock and
Company Common Stock for the 120 consecutive trading day period ending on
August 29, 1996. As a result of the foregoing process, the Company Option
Allocation Percentage will be approximately 61.568% of the exercise price of
each existing Company Option and the New GranCare Option Allocation Percentage
will be approximately 38.432% of the exercise price of each existing Company
Option. As a result of the Merger, the exercise price of the Adjusted Company
Options (as defined below) will be adjusted to give effect to the 0.478
Exchange Ratio.
As a result of the foregoing, the exercise price of each existing Company
Option will be adjusted by multiplying the exercise price by the Company
Option Allocation Percentage (the "Adjusted Company Option"). As a consequence
of the Merger, each holder of an Adjusted Company Option as of the Effective
Time of the Merger will receive an option to purchase such number of shares of
Vitalink Common Stock as is equal to the number of shares of Company Common
Stock issuable upon exercise of the Adjusted Company Option multiplied by the
0.478 Exchange Ratio. The exercise price of each Adjusted Company Option will
be further adjusted by dividing such exercise price by the 0.478 Exchange
Ratio.
The terms and conditions of the New GranCare Options and the Adjusted
Company Options will be substantially the same as the terms of the Company
Options prior to the Distribution. Options to purchase 2,355,250 shares of
GranCare Common Stock were outstanding as of November 30, 1996 of which
options to purchase 930,227 shares of GranCare Common Stock were unvested and
not exercisable. However, all of such unvested Company Options contain change
of control provisions that provide that such options will become fully vested
and exercisable upon the occurrence of a change of control transaction such as
the Merger. The option agreements also provide that such Company Options do
not expire upon a termination of employment following a change of control.
Thus, even if the holder of a Company Option does not become an employee of
the Institutional Pharmacy Business following the Merger, such employee will
continue to have the right to exercise Adjusted Company Options following the
Merger until the expiration date of such option. Conversely, an employee of
the Institutional Pharmacy Business who does not become an employee of the
Skilled Nursing Business following the Merger will continue to have the right
to exercise New GranCare Stock Options following the Merger until the
expiration date of such options. The existing Company Options, which were
granted at fair market value at the time of grant, have exercise prices
ranging from $1.61 to $21.00 per share.
MANNER OF EFFECTING THE DISTRIBUTION
It is expected that upon the formal declaration by the Company's Board of
Directors of the Distribution that the Distribution will be made on the
Distribution Date to shareholders of record of the Company Common Stock as of
the Distribution Record Date. The Merger is expected to take place promptly
following the satisfaction of certain conditions set forth in the Merger
Agreement and is expected to occur on January , 1997. In order to receive
shares of Vitalink Common Stock pursuant to the Merger, holders of Company
Common Stock must surrender the certificates representing such stock held by
them. Following the Merger, all outstanding shares of Company Common Stock
will represent the right to receive shares of Vitalink Common Stock, in
accordance with the terms of the Merger Agreement. The Distribution will not
take place unless all of the conditions to effecting the Merger (other than
the completion of the Distribution) have been fulfilled, and there can be no
assurance as to the timing or consummation of the Distribution. The Company's
transfer agent, American Stock Transfer & Trust Company, will act as the
Distribution Agent for the Distribution and will deliver certificates for New
GranCare Common Stock as soon as practicable to holders of record of Company
Common Stock as of
32
<PAGE>
the close of business on the Distribution Record Date on the basis of one
share of New GranCare Common Stock for each share of Company Common Stock held
on the Distribution Record Date. All shares of New GranCare Common Stock will
be fully paid and non-assessable and the holders thereof will not be entitled
to preemptive rights. See "Description of Capital Stock." Following the
completion of the Distribution New GranCare will operate as an independent
public company.
YOU WILL NOT BE REQUIRED TO PAY ANY CASH OR OTHER CONSIDERATION FOR THE
SHARES OF NEW GRANCARE COMMON STOCK RECEIVED IN THE DISTRIBUTION NOR WILL YOU
NEED TO SURRENDER YOUR COMPANY COMMON STOCK CERTIFICATE IN ORDER TO RECEIVE
SHARES OF NEW GRANCARE COMMON STOCK IN THE DISTRIBUTION. THE DISTRIBUTION
AGENT WILL SEND YOU YOUR NEW GRANCARE STOCK CERTIFICATES FOLLOWING THE
CONSUMMATION OF THE DISTRIBUTION.
LISTING OF NEW GRANCARE COMMON STOCK; RESTRICTIONS ON RESALE
New GranCare will apply for listing the New GranCare Common Stock on the
NYSE. The New GranCare Common Stock received pursuant to the Distribution will
be freely transferable under the Securities Act of 1933, as amended (the
"Securities Act"), except for shares of New GranCare Common Stock received by
any persons who may be deemed to be an "affiliate" of New GranCare within the
meaning of Rule 144 under the Securities Act. Persons who may be deemed to be
affiliates of New GranCare after the Distribution generally include
individuals or entities that control, are controlled by, or are under common
control with New GranCare, and may include the directors and executive
officers of New GranCare as well as any principal stockholders of New
GranCare. Persons who are affiliates of New GranCare will be permitted to sell
their New GranCare Common Stock received pursuant to the Distribution only
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from the registration requirements of such act. This
Registration Statement will not cover resales of New GranCare Common Stock by
affiliates of New GranCare. See "Shares Eligible for Future Sales."
INTERESTS OF CERTAIN PERSONS IN THE DISTRIBUTION AND MERGER
Certain members of the Company's management and the Company's Board of
Directors may be deemed to have interests in the Distribution and Merger in
addition to their interests as Company shareholders generally, which may cause
potential conflicts of interest. The Company's Board of Directors was aware of
these factors and considered them, among other factors, in approving the
Distribution Agreement and the transactions contemplated thereby. Among these
factors are (i) the acceleration of the vesting of currently unvested Company
Options as a result of the consummation of the Merger as described under "--
Consummation of the Distribution; Treatment of Company Stock Options," (ii)
the treatment of Company Options in the Distribution and the Merger as
described under "--Consummation of the Distribution; Treatment of Company
Stock Options," (iii) the indemnification provisions of the Distribution
Agreement as described under "--Terms of the Distribution Agreement" (iv) the
payment by Vitalink of a portion of the premiums for directors' and officers'
liability insurance for current Company directors and officers as described
under "--Terms of the Distribution Agreement" and (v) cash payments as a
result of the early termination of certain incentive compensation plans of the
Company and employment agreements. See also, "Description of the
Transactions--Interests of Certain Persons in the Transactions" in the Proxy
Statement/Prospectus. It is expected that substantially all of the directors
and executive officers of the Company will be directors and executive officers
of New GranCare following the Distribution except for Gene E. Burleson, who
will be Chief Executive Officer and a director of Vitalink as well as Chairman
of the Board and a director of New GranCare, and Arlen B. Reynolds, who will
be Executive Vice President of Vitalink. See "Management--Certain
Relationships and Related Party Transactions" herein and "Description of the
Transactions--Directors and Officers of Vitalink Following the Merger" in the
Proxy Statement/ Prospectus.
As of November 30, 1996, the 29 executive officers and directors of the
Company (as a group) beneficially owned an aggregate of 2,118,460 shares of
Company Common Stock (excluding shares subject to outstanding stock options).
All such shares will be treated in the Merger and the Distribution in the same
manner as shares of Company Common Stock held by other shareholders of the
Company.
33
<PAGE>
As of November 30, 1996, the executive officers of the Company (as a group)
also held options to purchase an aggregate of 1,622,871 shares of Company
Common Stock pursuant to the Company's stock option plans, of which 759,900
are not currently exercisable. In addition, as of November 30, 1996, the non-
employee directors of the Company (as a group) held options to purchase an
aggregate of 251,740 shares of Company Common Stock. Upon the consummation of
the Merger, all of the options held by such executive officers and non-
employee directors will immediately become exercisable in full. The treatment
of such options is described under "--Consummation of the Distribution;
Treatment of Company Stock Options."
The Company's executive officers participate in certain cash incentive plans
initiated by the Company that provide for annual cash bonuses (the "Annual
Incentive Plan") and long term cash bonuses (the "Shareholder Value Program")
based upon the performance of the Company. Both the Annual Incentive Plan and
Shareholder Value Program provide that the benefits under such plans vest upon
a change in control. In addition, each of the Company's executive officer's
employment agreements provides for the payment of benefits upon the occurrence
of a change in control. The Merger constitutes a change in control under the
Company's incentive plans as well as its employment agreements. The maximum
amount of payments that the Company may be required to make pursuant to such
incentive plans and employment agreements is approximately $11.5 million
(assuming every executive officer elects to exercise the change in control
provisions of his or her employment agreement). The Company's Board of
Directors has determined that upon consummation of the Distribution and the
Merger the Shareholder Value Program will be paid out at the "Superior" level.
In addition, shares of restricted Company Common Stock held by non-officers of
the Company which are unvested will vest as a consequence of the change of
control event that will occur upon completion of the Merger. Such restricted
stock has a value of approximately $2.5 million.
The Company has determined that no benefits will be payable under the Annual
Incentive Plan because costs associated with the Distribution and Merger will
not allow the participants to attain the required performance goals. Under the
Shareholder Value Program, however, as a result of the Merger, Messrs.
Burleson, Athans, Benton, Schneider and Finney (the individuals named in the
Summary Compensation Table on page 79) will receive cash payments of $852,000,
$420,000, $420,000, $330,000 and $234,000, respectively, upon the vesting of
benefits under this program. Other executive officers will receive in the
aggregate $2.25 million under this program for an aggregate payout under the
Shareholder Value Program of $4.5 million which is included in the $11.5
million referenced above.
Messrs. Burleson and Athans have agreed to waive their change in control
payments under their employment agreements in exchange for entering into new
employment agreements with Vitalink and New GranCare, respectively. Mr. Finney
has resigned from the Company effective January 1, 1997. Under the terms of
Mr. Finney's resignation, he will receive a payment of $240,000 (one year's
base salary) regardless of whether the Merger occurs. Assuming Messrs. Benton
and Schneider were to elect not to be employed by New GranCare, they would
receive $1,050,000 (three times base salary) and $825,000 (three times base
salary), respectively, under the change in control provisions of their
employment agreements.
To the extent an executive officer of the Company is not employed by New
GranCare or Vitalink following the consummation of the Distribution and
Merger, such individual will be entitled to the change of control payments
specified in such individual's employment agreement, which will be triggered
by the Merger (six month's base salary for Vice Presidents, one year's base
salary for Senior Vice Presidents and three year's base salary for Executive
Vice Presidents). Any executive officer who is a party to an employment
agreement will be required to waive his or her rights under such agreement as
a condition to obtaining a replacement employment agreement with New GranCare
following the Distribution. See "Management--Compensation of Executive
Officers--Employment Agreements."
Immediately following the consummation of the Merger, the Company's Chief
Executive Officer, Gene E. Burleson, will become Vitalink's Chief Executive
Officer and a member of Vitalink's Board of Directors. Mr. Burleson has an
employment agreement with the Company that became effective January 1, 1994,
which will be assumed by Vitalink. The employment agreement will be extended
for a five year term commencing at
34
<PAGE>
the Effective Time and provide for annual adjustments in base salary as
determined by a management compensation committee. Mr. Burleson's base salary
has been established at $430,000 for 1996. The agreement also provides for
severance compensation upon termination of employment by Vitalink for any
reason other than for "Cause," as defined in the agreement, consisting of a
minimum of three years' base salary and, in the event of a change-in-control,
as defined in the agreement, payment of a minimum of five year's base salary
and accelerated vesting of all options held by Mr. Burleson.
TREATMENT OF CERTAIN INDEBTEDNESS
9 3/8% Notes--As of November 30, 1996, there was $100 million aggregate
principal amount of 9 3/8% Notes outstanding. The 9 3/8% Notes bear interest
at the rate of 9 3/8% per annum, mature on September 15, 2005 and are not
redeemable prior to September 15, 2000. The 9 3/8% Notes are senior
subordinated obligations of the Company ranking subordinate in right of
payment to all senior indebtedness of the Company (including indebtedness
outstanding under the Existing Credit Facility (defined below)) and senior in
right of payment to all subordinated indebtedness (including the Convertible
Debentures). The Indenture dated as of September 15, 1995, between the Company
and Marine Midland Bank pertaining to the Notes (the "Note Indenture")
contains certain restrictive covenants including: (i) a limitation on
additional indebtedness; (ii) a limitation on other senior subordinated debt;
(iii) a limitation on liens; (iv) a limitation on the issuance of preferred
stock by the Company's subsidiaries; (v) a limitation on transactions with
affiliates; (vi) a limitation on restricted payments, (vii) a restriction on
the application of proceeds from certain asset sales; (viii) a limitation on
restrictions on subsidiary dividends; (ix) a restriction on mergers,
consolidations and the transfer of all or substantially all of the assets of
the Company to another person; (x) a limitation on investments and loans and
(xi) a limitation on lines of business. As certain of these covenants may be
breached by the Distribution, and in order to ensure greater operating
flexibility for Vitalink following the Merger, it is a condition to the Merger
that the tender offer be consummated and the Consent (defined below) be
obtained.
Tender offer materials describing the Company's tender offer for all of the
outstanding 9 3/8% Notes at a price of $1,090 per $1,000 principal amount of
the 9 3/8% Notes have been mailed previously to holders thereof. The materials
include a description of the consent (the "Consent"), which holders of the 9
3/8% Notes are required to sign as a condition to tendering their 9 3/8%
Notes, which provides for an amendment (the "Proposed Amendment") to the Note
Indenture which would delete the covenants described in the preceding
paragraph (other than those described in clauses (iii) and (vii)). The
Proposed Amendment requires the consent of holders of a majority in aggregate
principal amount of the 9 3/8% Notes then outstanding. Holders of
approximately $43.4 million aggregate principal amount of 9 3/8% Notes have
agreed to tender their 9 3/8% Notes and consent to the Proposed Amendment, and
PaineWebber (as Dealer Manager for the Tender Offer) has advised the Company
that holders of an additional approximately $17 million aggregate principal
amount of 9 3/8% Notes have indicated their intention to tender their 9 3/8%
Notes and consent to the Proposed Amendment, representing in the aggregate
approximately 60.4% of the outstanding aggregate principal amount of 9 3/8%
Notes, which would be sufficient for the approval of the Proposed Amendment.
The Proposed Amendment will become effective immediately prior to the
consummation of the Distribution and Merger. There can be no assurance that
the holders of the 9 3/8% Notes will tender all of the outstanding 9 3/8%
Notes.
Vitalink will refinance the indebtedness represented by the 9 3/8% Notes
tendered in the tender offer through borrowings under a credit facility
available to Vitalink. In connection with the assumption by Vitalink of any
untendered 9 3/8% Notes, New GranCare has agreed to pay Vitalink a fee with
respect to such 9 3/8% Notes representing the present value (discounted back
to the effective time of the Merger from the date the 9 3/8% Notes first
become redeemable) of the estimated interest rate differential between the 9
3/8% Notes and the borrowing cost that would be incurred by Vitalink in
connection with the issuance of similar securities. In addition, any premium
paid in connection with the tender offer of the 9 3/8% Notes (and all related
expenses) will be a Shared Transaction Expense.
Convertible Debentures. The Distribution Agreement and the Merger Agreement
also require that the Company take commercially reasonable efforts to call for
redemption prior to the Distribution Date all of the
35
<PAGE>
Company's outstanding 6 1/2% Convertible Subordinated Debentures due 2003 (the
"Convertible Debentures"). Under the Merger Agreement, the failure of the
Company to comply with requirement set forth in the previous sentence may give
rise to a right of Vitalink to terminate the Merger Agreement. At present, the
Company does not foresee any difficulty in completing the redemption of the
Convertible Debentures. The Convertible Debentures are issued pursuant to the
terms of an Indenture dated January 29, 1993 between the Company and First
Union National Bank (the "Debenture Indenture") and are presently redeemable
at a redemption price of 104.55% of the principal amount of the Convertible
Debentures plus accrued and unpaid interest to the date of redemption. There
are currently $60.0 million in aggregate principal amounts of Convertible
Debentures outstanding resulting in an aggregate redemption premium of
approximately $2.73 million which will also be a Shared Transaction Expense
(such premium shall be reduced by $390,000 in the event the redemption occurs
after January 15, 1997). See "--Expenses."
Existing Credit Facility. The Company currently has in place a revolving
credit facility which permits borrowings of up to $150.0 million (the
"Existing Credit Facility"). The Existing Credit Facility was established
pursuant to a Credit Agreement dated as of March 31, 1995 (as heretofore
amended, the "Existing Credit Agreement"), by and among the Company, as
borrower, First Union National Bank of North Carolina, as Agent (in such
capacity, the "Existing Agent") and letter of credit bank, and the financial
institutions signatory thereto as lenders. As of September 30, 1996,
approximately $88.9 million was outstanding under the Existing Credit
Facility. The Existing Credit Facility includes a $45.0 million subfacility
for working capital loans. Incorporated as part of the working capital line is
a $10.0 million subline for standby letters of credit and a $5.0 million
swingline from the Existing Agent.
The Existing Credit Agreement provides that all outstanding principal under
the Existing Credit Facility on June 30, 1998 (the "Term Conversion Date")
will be converted to term loans which mature four years after the Term
Conversion Date. Such term loans are to be amortized in sixteen equal
quarterly installments prior to maturity.
The obligations of the Company under the Existing Credit Facility are
guaranteed by the Company's direct and indirect subsidiaries other than GCI
Indemnity, Inc. (the "Existing Subsidiary Guaranty Obligations") and are
secured by a pledge of all of the capital stock of the Company's direct
subsidiaries and a security interest in all or substantially all of the
otherwise unencumbered assets of the Company. The Existing Subsidiary Guaranty
Obligations are secured by a pledge of all of the capital stock of the
Company's indirect subsidiaries (other than GCI Indemnity, Inc.) and a
security interest in all or substantially all of the otherwise unencumbered
assets of such indirect subsidiaries.
Loans outstanding from time to time under the Existing Credit Facility bear
interest at either the Base Rate or at the Eurodollar Rate (defined below) (at
the Company's option), in each case plus the applicable margin. The Base Rate
is defined as the higher of (i) the prime rate announced from time to time by
First Union National Bank of North Carolina or (ii) the effective Federal
Funds Rate, plus 0.50% per annum (the "Base Rate"). The Existing Credit
Agreement defines the Eurodollar Rate as the average London Interbank Offered
Rate ("Libor") of one, two, three or six-month Eurodollar deposits (the
"Eurodollar Rate"). Interest is payable in arrears.
The Existing Credit Facility contains representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants include (but
are not limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, the Company is required to comply with certain
financial covenants governing, among other things, the ratio of debt to equity
and earnings to interest expense that must be maintained by the Company.
New Credit Facility. In order to effect the Distribution, the Company will
be required to replace its Existing Credit Facility and currently has a
commitment letter from First Union National Bank of North Carolina, as
Administrative Agent ("First Union"), and The Chase Manhattan Bank, as
Syndication Agent ("Chase"), and First Union Capital Markets Corp. and Chase
Securities Inc., as Arrangers, whereby each of such banks has agreed to
provide to the Company for the benefit of New GranCare a replacement credit
facility (the "New
36
<PAGE>
Credit Facility") in the aggregate amount of $300.0 million (with First Union
and Chase each committing $150.0 million). The New Credit Facility will
consist of two components: a $200.0 million five-year revolving credit
facility (which includes a $40.0 million sub-limit for the issuance of standby
letters of credit) and a $100.0 million five-year term loan. Borrowings for
working capital and general corporate purposes may not exceed $75.0 million.
The first $25.0 million of exposure for letters of credit issued under the
letter of credit sub-facility will correspondingly reduce availability under
the working capital sub-facility. It is anticipated that the initial use of
the New Credit Facility will be to redeem the Convertible Debentures, to repay
outstanding balances under the Existing Credit Facility and to pay for
expenses related to the Transactions.
The obligations of New GranCare under the New Credit Facility will be
guaranteed by New GranCare's present and future direct and indirect
subsidiaries other than GCI Indemnity, Inc. (the "New Subsidiary Guaranty
Obligations") and will be secured by a pledge of all of the capital stock of
New GranCare's present and future direct subsidiaries, a security interest in
all or substantially all of the otherwise unencumbered assets of New GranCare
and a pledge of all intercompany notes held by New GranCare. The New
Subsidiary Guaranty Obligations are to be secured by a pledge of all of the
capital stock of the indirect subsidiaries of New GranCare (other than GCI
Indemnity, Inc.), a security interest in all or substantially all of the
otherwise unencumbered assets of such indirect subsidiaries and a pledge of
all intercompany notes held by such subsidiaries.
The revolving credit portion of the New Credit Facility will mature in five
years. The term loan portion of the New Credit Facility will be amortized in
ten quarterly installments of $7.0 million each commencing two years after the
New Credit Facility closes, thereafter increasing to $10.0 million per
quarter. All remaining principal and accrued and unpaid interest shall be due
and payable in full on the last day of the calendar month during which the
fifth anniversary of the closing date of the New Credit Facility occurs.
Interest on outstanding borrowings shall accrue, at the option of New
GranCare, at the Base Rate or at the Eurodollar Rate plus, in each case, an
applicable margin. The Base Rate is defined as the higher of (i) First Union's
prime rate or (ii) the effective Federal Funds Rate, plus 0.50% per annum. The
Eurodollar Rate is defined as the published rate or the arithmetic mean of
rates at which Eurodollar deposits are offered for periods of one, two, three
or six-months. Interest is payable in arrears. The applicable margin varies in
accordance with a pricing matrix based upon New GranCare's ratio of
Consolidated Senior Debt to EBITDA and varies depending on the type of
interest rate selected by New GranCare. For Base Rate loans, the applicable
margin ranges from 0.000% (for a Consolidated Senior Debt to EBITDA ratio of
less than 2.5) to 0.500% (for a Consolidated Senior Debt to EBITDA ratio of
greater than 4.0). The applicable margin for Eurodollar loans ranges from
0.75% to 1.75% for the same Consolidated Senior Debt to EBITDA ratios set
forth above. In order to qualify for the lowest applicable margin for Base
Rate Loans or Eurodollar loans, New GranCare's Total Debt to EBITDA must also
be less than 3.0. Initially, the applicable margins will be 0.25% for Base
Rate loans and 1.50% for Eurodollar loans until New GranCare delivers its
financial statements for the quarter ended December 31, 1996. Thereafter, the
applicable margins will be adjusted in accordance with the pricing matrix
referred to above, except that the applicable margin for Eurodollar loans
cannot be adjusted to less than 1.25% until New GranCare delivers its
financial statements for the quarter ended March 31, 1997.
All of the net proceeds of (i) asset sales (subject to certain customary
exceptions) (ii) issuances of subordinated debt and (iii) certain equity
issuances must be applied to permanently reduce outstanding borrowings and
commitments under the New Credit Facility. However, if at least $100.0 million
of subordinated debt is issued, New GranCare will be permitted (though it will
not be obligated) to apply up to $35.0 million of the proceeds of such
issuance to the repurchase of New GranCare capital stock. The remaining
balance of such proceeds are to be applied pro rata to reduce the outstanding
balance on the term loan portion of the New Credit Facility, and thereafter to
the outstanding balance on the revolving loan portion of the New Credit
Facility. To the extent amounts prepaid on the revolving loan portion of the
New Credit Facility are not re-employed to fund permitted acquisitions within
six months, the revolving loan commitment will be permanently reduced.
The New Credit Facility will contain representations and warranties,
affirmative covenants, reporting covenants, negative covenants and events of
default customary for similar financing transactions. Covenants will
37
<PAGE>
include (but not be limited to) certain restrictions on acquisitions, capital
expenditures, debt incurrence, contingent obligations, liens, investments,
consolidations, mergers and asset sales, payment of dividends, the purchase or
redemption of capital stock, and the purchase, payment or other retirement of
subordinated debt. In addition, New GranCare will be required to comply with
certain financial covenants governing, among other things, the ratio of debt
to equity, earnings to interest expense and rent expense, and debt to earnings
which must be maintained by New GranCare, as well as maximum limits on rental
expense.
The funding of the New Credit Facility is subject, among other things, to
the satisfactory completion of due diligence, obtaining all necessary consents
and the execution of satisfactory loan documentation.
HRPT Obligations. HRPT is the holder of a mortgage loan to AMS Properties,
Inc., a wholly-owned Subsidiary of the Company, dated October 1, 1994, in the
original principal amount of $11.5 million (the "HRPT Loan"). The HRPT Loan is
secured, in part by mortgage and security agreements dated as of March 31,
1995 (collectively, the "Mortgages") in favor of HRPT and encumbering two
nursing facilities in Wisconsin owned by AMS Properties, Inc. The HRPT Loan
was incurred in connection with the acquisition and lease by AMS Properties,
Inc. of several nursing facilities in Wisconsin, California, Colorado and
Illinois pursuant to an Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 28, 1990 (as amended, the "HRPT
Acquisition Agreement"). The remaining balance under the HRPT Loan is due
December 31, 2010 and may be prepaid upon the payment of certain prepayment
penalties, which penalties essentially provide that HRPT will receive the
future value of the amounts owed. HRPT has also leased 7 nursing facilities
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc. ("GCIHCC") under a master lease agreement dated as of June 30, 1992 (the
"GCIHCC Lease"). Pursuant to Section 9.15A of the Acquisition Agreement, HRPT
the consent of HRPT is required in order to permit the Distribution, Merger
and related transactions (the "HRPT Consent"). As a condition to granting the
HRPT Consent and in consideration of HRPT releasing the Company and its
subsidiaries (other than New GranCare and its subsidiaries), which will become
subsidiaries of Vitalink following the Merger from all obligations to HRPT,
Vitalink will (a) pay a consent fee to HRPT in the amount of $10.0 million
(the "Consent Fee"), which will be reimbursed by New GranCare promptly
following the consummation of the Distribution and Merger and (b) enter into a
limited guaranty (not to exceed $15.0 million in the aggregate) which will
guaranty payment by New GranCare, AMS Properties and GCIHCC under the
Mortgages, the GCIHCC Lease, and the HRPT Loan (collectively, the "HRPT
Obligations") for so long as such obligations remain outstanding or until the
New GranCare Letter of Credit (as defined below) is drawn upon by Vitalink.
New GranCare, AMS Properties, Inc. and GCIHCC will retain primary liability
for the HRPT Obligations and will retain sole liability under the HRPT
Acquisition Agreement. To support Vitalink's limited guaranty of the foregoing
obligations, New GranCare will provide an irrevocable letter of credit in the
amount of $15.0 million payable to Vitalink in the event Vitalink makes any
payments under the limited guaranty (the "New GranCare Letter of Credit"). New
GranCare has also agreed that for so long as Vitalink's limited guaranty is in
effect, New GranCare will not terminate any of the Supply Agreements. As a
result, it is anticipated that the pharmaceutical supply agreements may extend
through December 31, 2010, the date when all present HRPT Obligations will be
satisfied, unless the New GranCare Letter of Credit is drawn upon earlier by
Vitalink or certain other conditions are satisfied. See "The Distribution--
Terms of the Pharmaceutical Supply Agreements."
EXPENSES
New GranCare (on behalf of itself and the Company) and Vitalink will each be
responsible for one-half of the total documented fees, expenses and other
items of cost (other than legal fees) which are incurred by New GranCare, the
Company and Vitalink in connection with the consummation of the various
transactions contemplated by the Distribution Agreement, the Merger Agreement
and the various other agreements contemplated thereby (the "Shared Transaction
Expenses"). The Shared Transaction Expenses include various commitment and
related fees incurred in connection with the New Credit Facility, the
redemption premium that will be incurred in connection with the redemption of
the Convertible Debentures and any premium that may be paid in connection with
a tender offer of, or consent solicitation pertaining to, the 9 3/8% Notes,
various consent fees incurred by New GranCare and the Company, financial
advisory and investment banking fees, accounting fees, the cost of maintaining
the Company's directors' and officers' liability insurance coverage for a
three year
38
<PAGE>
period following the Effective Time of the Merger and miscellaneous fees and
expenses such as printing fees and filing fees that will be payable to various
federal and state regulatory authorities. The Company estimates that the fees
and expenses constituting Shared Transaction Expenses will approximate $22.0
million. In addition to the Shared Transaction Expenses, the Company estimates
that the Transactions will result in an additional $19.0 million of expenses
which will be incurred by the Company.
CONDITIONS
The Merger Agreement requires, as a condition to the consummation of the
Merger, shareholder approval of the Distribution. The completion of the
Distribution is also a condition to the consummation of the Merger and the
Company does not presently intend to consummate the Distribution unless and
until all of the conditions to the consummation of the Merger (other than the
completion of the Distribution) have been satisfied. The consummation of the
Merger is subject to a number of conditions set forth in the Merger Agreement.
See "The Merger Agreement--Conditions" in the Proxy Statement/Prospectus.
TERMS OF THE DISTRIBUTION AGREEMENT
Simultaneously with the execution of the Merger Agreement between Vitalink
and the Company, New GranCare and the Company executed the Distribution
Agreement. Following the Merger of the Company into Vitalink, Vitalink will
succeed to the Company's obligations arising pursuant to the Distribution
Agreement by operation of law. The Distribution Agreement provides a general
framework for allocating the Company's assets and liabilities pursuant to the
Internal Restructuring Plan (attached as Exhibit A to the Distribution
Agreement) to segregate the Skilled Nursing Business from the Institutional
Pharmacy Business prior to the Distribution Date in preparation for the
Distribution and Merger. The Distribution Agreement also sets forth the
general terms on which the Company will conduct its business prior to the
Distribution Date as well as the terms regarding certain relationships between
Vitalink and New GranCare following the Distribution.
The Distribution Agreement provides that the Distribution will be effected
by distributing to each holder of Company Common Stock as of the close of
business on the Distribution Date certificates representing one share of New
GranCare Common Stock for each share of Company Common Stock held by such
holder as of such time. See "--Manner of Effecting the Distribution."
The Distribution Agreement provides that prior to the Distribution Date all
intercompany accounts existing between the Company and any of its subsidiaries
(other than the Pharmacy Subsidiaries), on the one hand, and the Pharmacy
Subsidiaries, on the other hand, will be netted out, in each case in such
manner and amount as may be agreed to in writing by duly authorized
representatives of the Company, Vitalink and New GranCare. It is expected that
a resulting net balance will be due from the Pharmacy Subsidiaries to the
Company and certain of the Company's other subsidiaries. The amount of such
net balance due shall be contributed by the Company or the appropriate
subsidiaries of the Company to which such amount is owing, to the appropriate
Pharmacy Subsidiaries as additional capital.
The Distribution Agreement also provides for the payment by Vitalink of the
costs of purchasing the 9 3/8% Notes tendered in the tender offer undertaken
by the Company with respect to such notes and for the assumption by Vitalink
(as part of the Merger) of the Company's outstanding indebtedness associated
with the Institutional Pharmacy Business and the 9 3/8% Notes not tendered in
the tender offer. See "-- Treatment of Certain Indebtedness." In connection
therewith, the Company will make an offsetting payment to Vitalink. The
offsetting payment will be determined pursuant to a formula under which the
Company will make a payment to Vitalink in an amount based on the excess of
(i) the amount of indebtedness assumed or incurred by Vitalink by operation of
law in the Merger (currently estimated to be $118.0 million including the
Consent Fee) over (ii) the sum of $88.4 million plus the acquisition price of
any institutional pharmacy business acquired by the Company subsequent to June
1, 1996 (currently estimated to be $7.9 million) plus certain cash and cash
equivalents held by TeamCare. This payment will be further adjusted to ensure
that each party shares equally the Shared Transaction Expenses. This formula
is designed to ensure that Vitalink emerges from the Distribution and Merger
with a predetermined amount of net debt (assumed or incurred indebtedness
offset by cash, cash equivalents and new assets).
39
<PAGE>
The Distribution Agreement provides that from and after the Distribution
Date, Vitalink will indemnify, defend and hold harmless New GranCare and its
subsidiaries as well as the directors and officers of New GranCare and the
various New GranCare subsidiaries (collectively, the "New GranCare
Indemnitees") from and against all losses arising out of or relating to (i)
the Institutional Pharmacy Liabilities (as defined in the Distribution
Agreement), (ii) any breach, whether before or after the Distribution Date, by
the Company or the Pharmacy Subsidiaries of any provision of the Distribution
Agreement or any Ancillary Agreement (as defined in the Distribution
Agreement) and (iii) the Proxy Statement/Prospectus to the extent that any
such loss relates to or arises out of information contained in the Proxy
Statement/Prospectus that specifically relates to Vitalink.
Following the Distribution Date, New GranCare has agreed pursuant to the
Distribution Agreement to indemnify, defend and hold harmless, the Company,
each Pharmacy Subsidiary, and the directors and officers of the Company and
the Pharmacy Subsidiaries from and against losses arising out of or resulting
from (i) the Skilled Nursing Liabilities (as defined in the Distribution
Agreement), (ii) the breach, whether before or after the Distribution Date, by
New GranCare or any New GranCare subsidiary, of any provision of the
Distribution Agreement or any Ancillary Agreement, (iii) any claims arising
out of this Prospectus or the Registration Statement of which this Prospectus
is a part, and (iv) the Proxy Statement/Prospectus to the extent that such
loss relates to or arises out of information contained in the Proxy
Statement/Prospectus that specifically relates to New GranCare or the Company.
See "The Merger Agreement--Indemnification; Insurance" in the Proxy
Statement/Prospectus for information regarding Vitalink's indemnification
obligations arising pursuant to the Merger Agreement.
For a period of three years following the Effective Time of the Merger,
Vitalink will maintain in effect the Company's policies of directors' and
officers' liability insurance with respect to claims arising from facts or
events occurring prior to the Effective Time of the Merger. The cost of
maintaining such coverage in effect is a Shared Transaction Expense. See "--
Expenses." Notwithstanding the foregoing, if during such three year "tail"
period, premiums for such coverage increase by more than 150% of the annual
premiums paid as of the date of the Merger Agreement, Vitalink is only
required to obtain the maximum amount of directors' and officers' liability
insurance coverage as can then be purchased for an annual premium equal to
150% of the annual premium being paid by the Company as of the date of the
Merger Agreement.
The Company will maintain in effect through the Distribution Date all
insurance that was in force as of the date of execution of the Distribution
Agreement. Following the Distribution Date, Vitalink shall be responsible for
providing such insurance coverage as it may deem appropriate with respect to
the assets and business of the Institutional Pharmacy Business. Similarly, New
GranCare shall be responsible for maintaining such insurance coverage as it
deems appropriate with respect to the assets and business of the Skilled
Nursing Business. Following the Distribution Date, New GranCare shall retain
the responsibility for administering any and all insurance claims asserted
prior to the Distribution Date with respect to the Institutional Pharmacy
Business or the Skilled Nursing Business. In such capacity, New GranCare shall
also be responsible for any premiums, deductibles and retentions in respect of
such insurance policies and the cost of any such claims shall be the sole
responsibility and obligation of New GranCare. Any resulting actuarial gains
or losses relating to pre-Distribution Date claims shall inure solely to New
GranCare.
Following the Distribution Date, Vitalink shall file with New GranCare all
claims asserted subsequent to the Distribution Date that relate to occurrences
prior to the Distribution Date arising out of or in connection with the
Institutional Pharmacy Business and New GranCare shall be responsible for
notifying the appropriate insurance carrier and providing Vitalink with copies
of all correspondence relating to such notification. Thereafter, Vitalink
shall be responsible for administering all such claims wherein New GranCare is
not named as a co-defendant. To the extent that both New GranCare and Vitalink
are co-defendants in any such claim, each party will be entitled to direct its
own defense at its own cost. New GranCare shall be responsible for
administering all insurance proceeds received pursuant to insurance coverage
in effect prior to the Distribution Date and shall pay such proceeds, as
appropriate, to Vitalink with respect to Institutional Pharmacy Liabilities
and retain such proceeds that relate to Skilled Nursing Liabilities except
with respect to proceeds received in respect of claims asserted prior to the
Distribution Date, which shall be retained by New GranCare.
40
<PAGE>
Prior to the consummation of the Merger, the Distribution Agreement may only
be amended with the consent of the Company, New GranCare and Vitalink.
TERMS OF EMPLOYEE BENEFITS AGREEMENT
On the Distribution Date, the Company and New GranCare will execute and
deliver the Employee Benefits Agreement pursuant to which the responsibility
for the rights and claims of employees of the Skilled Nursing Business and the
Institutional Pharmacy Business will be allocated. The Employee Benefits
Agreement provides that New GranCare will assume all of the Company's tax
qualified plans which include a 401(k) plan as well as the AMS Pension Plan
(the termination of which was approved by the Board of Directors of the
Company at the September 17, 1996 meeting of the Board of Directors).
Following the Merger, the employees of the Institutional Pharmacy Business
will be able to participate in a separate 401(k) plan sponsored by Vitalink
into which New GranCare will transfer the assets relating to the accounts of
such employees. New GranCare will also assume the Company's self-funded health
and dental plans including all "run-out liability" attributable to the
Company's participants who are employees of the Institutional Pharmacy
Business. The Company will retain certain insured welfare plans relating
specifically to employees of the Institutional Pharmacy Business.
The Company will retain all existing non-qualified benefit plans and New
GranCare will adopt new non-qualified plans and assume the liability for all
employees of the Skilled Nursing Business who release the Company from
liability under existing plans. The Company will cause the existing rabbi
trust funding benefit entitlements under such plans to transfer to a new rabbi
trust established by New GranCare a proportionate part of the assets in the
existing trust to fund benefit entitlements of New GranCare employees. Rabbi
trusts are irrevocable with respect to assets contributed to the trust, except
in the case of bankruptcy, in which case assets contributed to the trust are
subject to and become a part of the bankruptcy estate of the settlor. New
GranCare will also adopt new flexible spending accounts as well as a
replacement executive life insurance plan.
The Company will amend its existing incentive equity plans to provide that
the Distribution will not cause a termination of employment with respect to
outstanding stock grants. New GranCare will adopt certain new incentive equity
plans and will grant to each holder of a Company Option as of the Distribution
Date an option to purchase an equivalent number of shares of New GranCare
Common Stock. The exercise price of each Company Option will be allocated
between the New GranCare Options and the Adjusted Company Options pursuant to
the formula described above. As a consequence of the Merger, all outstanding
Adjusted Company Options and the relevant exercise prices thereof will be
converted at the Exchange Ratio such that following the Merger such options
will be exercisable for shares of Vitalink Common Stock. See "--Consummation
of the Distribution; Treatment of Company Stock Options."
The annual performance goals under the Company's annual incentive bonus plan
will be adjusted to reflect the Distribution and the annual incentive bonus
plan will be amended to provide that the Distribution will not cause a
termination of employment for purposes of such plan. Similarly, the Company's
Shareholder Value Program (as defined hereafter) will be amended to provide
that the Distribution will not be deemed to cause a termination of employment.
However, the consummation of the Merger will constitute a change of control
which will cause an acceleration of the payouts under such plans. See
"Management--Long Term Incentive Plans; Awards in Last Fiscal Year."
The Employee Benefits Agreement provides that New GranCare will offer
employment agreements to each employee of the Company who is a party to an
employment agreement as of the Distribution Date other than those specified
employees who will become employees of Vitalink following the Merger. Any New
GranCare employee executing a new employment agreement will simultaneously
release the Company from any liability under such employee's prior agreement.
Any employee that does not execute an appropriate release and asserts a claim
for payment under his or her existing employment agreement will be paid such
amounts as are required to be paid under such agreement and such agreement
will not be replaced or superseded. It is anticipated that any employee of the
Skilled Nursing Business who asserts a claim for payment under his or her
existing employment agreement will not be offered employment with New GranCare
following the completion of the Distribution and the Merger. See "Management--
Compensation of Executive Officers--Employment Agreements."
41
<PAGE>
New GranCare employees will be given full credit for service with the
Company and its affiliates for purposes of determining benefit entitlements
under benefit plans sponsored by New GranCare. Any benefit plans not
specifically addressed in the Employee Benefits Agreement will be assumed by
New GranCare.
TERMS OF THE NON-COMPETITION AGREEMENT
In connection with the Distribution and the Merger, Manor Care, Vitalink and
New GranCare will enter into a Non-competition Agreement whereby Manor Care
and New GranCare will agree not to engage in the institutional pharmacy
business within the United States during the three year term of such agreement
except temporarily in connection with future acquisitions of skilled nursing
businesses that have an established pharmacy operation imbedded in the
acquired skilled nursing business. Similarly, Vitalink will agree not to
engage in the skilled nursing business during the three year term of such
agreement.
In the event that Manor Care or New GranCare shall, during the term of the
Non-competition Agreement, acquire a skilled nursing business that has as a
component, a pharmacy operation, the acquiror must offer to sell such pharmacy
operation to Vitalink at a purchase price not to exceed 120% of the product of
(i) EBITDA for such pharmacy component of the acquisition and (ii) a fraction,
the numerator of which is the aggregate purchase price for the proposed
acquisition and the denominator of which is the EBITDA for the proposed
acquisition taken as a whole. If the parties do not agree on a purchase price
for such pharmacy operations, then the acquiror (Manor Care or New GranCare,
as appropriate) may complete the proposed acquisition but must use its
commercially reasonable efforts to divest the pharmacy operations so acquired
within one year. Any sale of such pharmacy operations to a third party must be
at a purchase price that is equal to or greater than the formula purchase
price referenced above. If the proposed sale to a third party is at a price
less than the price derived pursuant to the formula purchase price discussed
above then Vitalink shall have a right of first refusal at such lesser price.
In the event Vitalink acquires a skilled nursing business in conjunction
with the acquisition of a pharmacy business, Vitalink must use its
commercially reasonable efforts to divest itself of such skilled nursing
business within one year.
TERMS OF SHAREHOLDERS AGREEMENT
As of the Effective Time of the Merger, Vitalink and Manor Care will execute
the Shareholders Agreement which provides for continuity in the composition of
the Vitalink Board of Directors during the three year term of such agreement.
Manor Care is currently the beneficial owner of approximately 82.3% of the
issued and outstanding Vitalink Common Stock. Following completion of the
Merger, Manor Care will be the beneficial owner of approximately 45% of the
issued and outstanding Vitalink Common Stock.
During the term of the Shareholders Agreement, Manor Care will vote all
shares of Vitalink Common Stock beneficially owned by Manor Care in favor of
four nominees designated by the Company prior to the Merger (the "Company
Nominees"). The Company has nominated Gene E. Burleson, Joel S. Kanter, Gary
U. Rolle and Robert L. Parker as the Company's Nominees. Following the
Effective Time of the Merger, Manor Care will vote its Vitalink Common Stock
in favor of any successor to any Company Nominee designated by a majority of
the then remaining Company Nominees. Any vacancy on the Vitalink Board of
Directors created by the departure of a Company Nominee will be filled by the
nominee selected by a majority of the then remaining Company Nominees.
Pursuant to the Shareholders Agreement, Manor Care has also agreed that it
will not vote its shares of Vitalink Common Stock in favor of the removal of a
Company Nominee unless requested to do so by a majority of the Company
Nominees. Furthermore, during the term of such agreement, Manor Care will vote
its shares of Vitalink Common Stock in favor of the removal of any director if
such removal is for cause and is recommended by a majority of Vitalink's
directors.
42
<PAGE>
The Shareholders Agreement also requires Manor Care to limit sales of its
Vitalink Common Stock to (i) sales complying with the volume limitations set
forth in Rule 144 under the Securities Act, (ii) sales pursuant to a
registered secondary offering, (iii) private sales in an amount not in excess
of 10% of the total number of shares of issued and outstanding Vitalink Common
Stock and (iv) private sales in an amount in excess of 10% of the total number
of shares of issued and outstanding Vitalink Common Stock if the purchaser
thereof becomes a party to the Shareholders Agreement.
TERMS OF THE INTERIM SERVICES AGREEMENT
Prior to the Distribution Date, New GranCare and the Company will execute
the Interim Services Agreement which establishes a framework for New GranCare
to provide to Vitalink, as the successor to the Company following the
Effective Time of the Merger, certain services as may be requested by Vitalink
to ensure an orderly transition. The contemplated services are generally
expected to be those that were historically provided by the Company on a
centralized basis to the Institutional Pharmacy Business such as cash
management, compensation and benefits, management information systems and
legal. The term of the agreement is for one year unless earlier terminated by
mutual agreement. New GranCare shall be reimbursed for all direct and indirect
costs and expenses incurred in connection with providing any services as well
as the allocated portion of the base salaries of the New GranCare employees
actually providing services.
TERMS OF THE PHARMACEUTICAL SUPPLY AGREEMENTS
Substantially all of the New GranCare facilities existing prior to the
Effective Time of the Merger have entered into Pharmaceutical Supply
Agreements (the "Supply Agreements") with TeamCare. The terms of such
agreements are for five years and are automatically extended for an additional
year on each anniversary of the commencement date thereof unless written
notice to the contrary is given not more than 120 days and not less than 90
days prior to any such anniversary. The supplies and services to be provided
pursuant to such agreements include all pharmaceutical and related goods
required by each New GranCare facility and the residents thereof.
Pharmaceutical supplies include prescription and non-prescription medications.
Related goods include all nutritional supplements, intravenous solutions and
supplies, parenteral and enteral supplies and equipment, orthotic and
prosthetic devices, ostomy supplies, urological supplies, wound care supplies
and equipment, and personal care items. All goods and services are to be
provided in accordance with all applicable requirements of federal, state and
local laws and regulations.
Depending upon the payor source, either TeamCare will bill the payor source
directly or the skilled nursing facility will bill the payor source and then
pay TeamCare. In the event that TeamCare does not service at least 90% of the
residents of a skilled nursing facility during a given month, the skilled
nursing facility will pay to TeamCare an additional $10 per month for each
resident not serviced by TeamCare; provided, however, that if TeamCare has
elected not to furnish pharmaceutical goods or related goods for any resident,
such resident will be disregarded for purposes of this calculation.
New GranCare cannot transfer ownership or control of a skilled nursing
facility during the term of the Supply Agreement relating to such facility
unless and until the proposed transferee (i) agrees to accept and comply with
the Supply Agreement or (ii) an agreement is reached between TeamCare and New
GranCare for the payment of damages by New GranCare to TeamCare to compensate
TeamCare for losses over the remaining term of the subject Supply Agreement.
In the event of a material breach by TeamCare of its obligations under the
terms of the Supply Agreement, New GranCare must give TeamCare written notice
detailing such breach and TeamCare will have 30 days in which to cure any such
alleged breach. If TeamCare fails to cure the alleged breach within such time,
New GranCare may obtain services from another pharmacy provider; provided,
however, that TeamCare may, in its discretion, contest the allegation of
breach via arbitration as specified within the Supply Agreement. In the event
that it is determined that TeamCare has not committed a material breach of its
duties under the Supply Agreement, New GranCare shall
43
<PAGE>
be liable to TeamCare for the net revenue lost by TeamCare as a result of New
GranCare and/or New GranCare's residents having obtained goods and/or services
from another pharmacy provider.
Upon any subsequent acquisition by New GranCare of a skilled nursing
business, New GranCare shall have no obligation to contract with Vitalink or
TeamCare to provide pharmaceutical supplies and services at such facility and
New GranCare will not be required to terminate any then existing agreements
providing for the provision of pharmaceutical supplies and services to such
facility by an alternative supplier. See "--Non-competition Agreement" for a
description of New GranCare's obligations upon acquiring a skilled nursing
business that includes a pharmacy operation. Notwithstanding the foregoing, it
is New GranCare's intent to consolidate its requirements for pharmaceutical
supplies and services with Vitalink or TeamCare for so long as Vitalink and
TeamCare are viewed as superior providers based on prevailing industry
standards including, without limitation, pricing, service and quality. In
addition, New GranCare has agreed that for so long as Vitalink's limited
guaranty of certain obligations of the HRPT Obligations is in effect, New
GranCare will not terminate any of the Supply Agreements. It is anticipated
that the Supply Agreements may extend through December 31, 2010, the date when
all present HRPT Obligations will be satisfied, unless the New GranCare Letter
of Credit is drawn upon earlier by Vitalink or certain other conditions are
satisfied. See "The Distribution--Treatment of Certain Indebtedness--HRPT
Obligations."
TERMS OF THE VOTING AGREEMENT
The Company and Manor Care have entered into a Voting Agreement dated as of
September 3, 1996. The Voting Agreement requires Manor Care to vote its
approximate 82.3% of the issued and outstanding Vitalink Common Stock in favor
of the Merger.
TERMS OF THE TAX ALLOCATION AGREEMENT
In connection with the Distribution, the Company, New GranCare and their
respective subsidiaries will enter into the Tax Allocation Agreement, which
sets forth each party's rights and obligations with respect to the allocation
and payment of tax liabilities and entitlements to refunds, if any, for any
federal, state, local or foreign taxes for periods before and after the
Effective Time of the Merger. The Tax Allocation Agreement also provides for
related matters such as the allocation of responsibility and the provision for
cooperation in connection with the preparation and filing of any tax returns
and the conduct of proceedings related to taxes and certain other matters.
In general, the Tax Allocation Agreement provides for the allocation and
payment (or reimbursement) with respect to the following: (a) any and all
taxes resulting from the failure of the Distribution to qualify as a tax-free
reorganization and distribution within the meaning of Sections 368(a)(1)(D)
and 355 of the Code, as well as any claims resulting therefrom,
("Restructuring Taxes"); (b) the loss resulting from the disallowance of a tax
deduction for payments made to certain employees which are classified as
"excess parachute payments" under the provisions of Section 280G of the Code
("Lost Parachute Payment Tax Benefits"); (c) the tax benefit resulting from
the exercise of an Adjusted Company Option or a New GranCare Option, or the
disqualifying disposition of the stock received upon such exercise by an
employee ("Stock Option Tax Benefits"); and (d) all other taxes ("Other
Taxes"). The Tax Allocation Agreement also assigns to the parties to the
agreement responsibility for preparing tax returns (generally, with limited
exception, New GranCare will be responsible for preparing all consolidated or
combined tax returns which include the Company and/or any of its subsidiaries
for any period which ends on or before the Distribution Date), and defines the
parties' rights and responsibilities with respect to the carryback of losses
after the Distribution Date to taxable periods ending on or before the
Distribution Date (generally, New GranCare may carryback only those losses
which it is required to carryback by law and may carry back certain capital
losses to periods during which it was a member of a group of corporations that
filed a consolidated or combined return that included the Company or any of
its subsidiaries after the Distribution Date). The Tax Allocation Agreement
also provides that to the extent one of the parties to the Tax Allocation
Agreement is responsible (as set forth below) for any liability covered under
such agreement, that party shall indemnify and hold the other parties to the
Tax Allocation Agreement harmless from such liability.
Under the Tax Allocation Agreement, Vitalink, as the successor to the
Company following the Merger is responsible for (i) any and all liability
which might arise for Restructuring Taxes if Vitalink or any of the Company's
subsidiaries after the Distribution Date (the "Post Distribution Vitalink
Group") undertakes or fails
44
<PAGE>
to undertake one or more specified acts (a "Vitalink Tainting Act"), provided
that New GranCare or any of its subsidiaries after the Distribution (the "New
GranCare Group") has not previously undertaken or failed to undertake one or
more specified acts (a "New GranCare Tainting Act"), (ii) any and all
liability which might arise for Restructuring Taxes if the Post Distribution
Vitalink Group undertakes or fails to undertake an act (other than a Vitalink
Tainting Act) which gives rise to such liability for Restructuring Taxes,
provided that the New GranCare Group has neither committed a New GranCare
Tainting Act nor taken an act or failed to take an act (other than a New
GranCare Tainting Act) which gives rise to such liability for Restructuring
Taxes, (iii) one- half ( 1/2) of any and all liability for Restructuring Taxes
that arise due to a retroactive change in the law, provided that there is a
complete absence of Vitalink Tainting Acts and New GranCare Tainting Acts, and
a complete absence of any other acts or failures to act (other than Vitalink
Tainting Acts and New GranCare Tainting Acts) by both the Post Distribution
Vitalink Group and the New GranCare Group which give rise to such liability
for Restructuring Taxes, (iv) one-half ( 1/2) of any and all liability for
Restructuring Taxes, but not in excess of $10.0 million, if the liability for
Restructuring Taxes is the result of either multiple acts or failures to act
(other than Vitalink Tainting Acts and New GranCare Tainting Acts) by both the
Post Distribution Vitalink Group and the New GranCare Group which give rise to
such liability for Restructuring Taxes or there is a complete absence of any
acts or failures to act (including Vitalink Tainting Acts and New GranCare
Tainting Acts) and the liability for Restructuring Taxes is not the result of
a retroactive change in the law, (v) paying to New GranCare the Lost Parachute
Tax Benefits to the extent that such Lost Parachute Tax Benefits relate to
payments made to Gene E. Burleson or Arlen Reynolds if such payments would
have been deductible, but for the provisions of Code Section 280G, on or
before the closing, (vi) paying to New GranCare the Stock Option Tax Benefits
to the extent that such Stock Option Tax Benefits arise as a result of the
exercise of a stock option with respect to New GranCare Stock by an employee
of the Post Distribution Vitalink Group, or the disqualifying disposition by
such employee of such stock, and (vii) any and all liability for Other Taxes
of the Post Distribution Vitalink Group to the extent those Other Taxes are
allocable to any period or portion thereof beginning after the Distribution
Date.
Under the Tax Allocation Agreement, New GranCare is responsible for (i) any
and all liability which might arise for Restructuring Taxes if any member of
the New GranCare Group commits a New GranCare Tainting Act, provided that the
Post Distribution Vitalink Group has not previously committed a Vitalink
Tainting Act, (ii) any and all liability which might arise for Restructuring
Taxes if the New GranCare Group undertakes or fails to undertake an act (other
than a New GranCare Tainting Act) which gives rise to such liability for
Restructuring Taxes, provided that the Post Distribution Vitalink Group has
neither committed a Vitalink Tainting Act nor taken an act or failed to take
an act (other than a Vitalink Tainting Act) which gives rise to such liability
for Restructuring Taxes, (iii) one-half ( 1/2) of any and all liability for
Restructuring Taxes that arise due to a retroactive change in the law,
provided that there is a complete absence of Vitalink Tainting Acts and New
GranCare Tainting Acts, and a complete absence of any other acts or failures
to act (other than Vitalink Tainting Acts and New GranCare Tainting Acts) by
both the Post Distribution Vitalink Group and the New GranCare Group which
give rise to such liability for Restructuring Taxes, (iv) one-half ( 1/2) of
the first $20.0 million of any and all liability for Restructuring Taxes, plus
all liability for such Restructuring Taxes that are in excess of $20.0
million, if the liability for Restructuring Taxes is the result of either
multiple acts or failures to act (other than Vitalink Tainting Acts and New
GranCare Tainting Acts) by both the Vitalink Post Distribution Group and the
New GranCare Group which give rise to such liability for Restructuring Taxes
or there is a complete absence of any acts or failures to act (including
Vitalink Tainting Acts and New GranCare Tainting Acts) and the liability for
Restructuring Taxes is not the result of a retroactive change in the law,
(v) paying to Vitalink the Lost Parachute Tax Benefits to the extent that such
Lost Parachute Tax Benefits relate to payments made to employees of the post
Spin-Off post Distribution Vitalink or its subsidiaries, other than Gene E.
Burleson or Arlen Reynolds, if such payments would have been deductible, but
for the provisions of Code Section 280G, after the closing, (vi) paying to
Vitalink the Stock Option Tax Benefits to the extent that such Stock Option
Tax Benefits arise as a result of the exercise of a stock option with respect
to the Vitalink Common Stock by an employee of the New GranCare Group, or the
disqualifying disposition by such employee of such stock, (vii) any and all
liability for Other Taxes of the Company or any of its subsidiaries (prior to
the Distribution) to the extent those Other Taxes are allocable to any period
or portion thereof ending on or before
45
<PAGE>
the Distribution Date, and (viii) any and all liability for Other Taxes of the
New GranCare Group to the extent those Other Taxes are allocable to any period
or portion thereof beginning after the Distribution Date.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material federal income tax
consequences of the Distribution and the Merger to the holders of Company
Common Stock. The federal income tax discussion set forth below is for general
information only and may not apply to particular categories of holders of
Company Common Stock who are subject to special treatment under the Code,
including, without limitation, foreign holders and holders whose Company
securities were acquired pursuant to the exercise of any employee stock option
or otherwise as compensation. EACH HOLDER OF COMPANY COMMON STOCK IS URGED TO
CONSULT HIS TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE
DISTRIBUTION, AND THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE,
LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
CONSEQUENCES OF THE DISTRIBUTION
GranCare has received an opinion from Powell, Goldstein, Frazer & Murphy
("Counsel"), to the effect that, based upon certain assumptions, and upon the
representations of the management of GranCare and New GranCare, as to certain
facts, for federal income tax purposes:
1. The Distribution of New GranCare Common Stock will be tax-free for
federal income tax purposes to the Company under Section 355(c)(1) of the
Code and to Company shareholders under Section 355(a) of the Code.
2. The Restructuring will be tax-free for federal income tax purposes
under Sections 361(a)(1) and 368(a)(1)(D) of the Code.
Current Treasury Regulations require that each Company shareholder who
receives New GranCare Common Stock pursuant to the Distribution attach to his
or her federal income tax return for the year in which the Distribution occurs
a detailed statement setting forth such information as may be appropriate in
order to demonstrate the applicability of Section 355 of the Code to the
Distribution. The Company or its successor, Vitalink, will convey the
appropriate information to each Company shareholder of record as of the
Distribution Record Date.
CONSEQUENCES OF THE MERGER TO THE COMPANY, VITALINK AND THE COMPANY
SHAREHOLDERS
Immediately after the Distribution, the Company will merge with and into
Vitalink pursuant to the Merger Agreement, and the Company will, prior to the
Distribution and the Merger, receive an opinion from Counsel to the effect
that, based upon certain assumptions, and upon the representations of the
management of GranCare and Vitalink, as to certain facts, for federal income
tax purposes:
1. The Merger will qualify as a tax-free reorganization within the
meaning of Section 368(a) of the Code.
2. Vitalink and the Company will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to the
Merger.
Counsel's opinion is based upon certain representations and assumptions and
represents Counsels' best legal judgment, and is not binding upon the Internal
Revenue Service (the "IRS") or the courts. If any representation or assumption
relied upon in rendering Counsel's opinion with respect to the Distribution is
materially inaccurate, or if the IRS were to challenge successfully the
federal income tax treatment of the Distribution set forth in Counsel's
opinion, then, in general, although not entirely free from doubt, for federal
income tax
46
<PAGE>
purposes it is likely that (i) each Company shareholder would be required to
recognize income or gain on the receipt of the shares of New GranCare Common
Stock in the Distribution in an amount up to the fair market value of the
shares of New GranCare Common Stock received in the Distribution and (ii) the
Company would be required to recognize gain on the Distribution. If the IRS
were to challenge successfully the federal income tax treatment of the Merger
set forth in Counsel's opinion, although not entirely free from doubt, it is
likely that, for federal income tax purposes, (i) each Company shareholder
would be required to recognize gain or loss equal to the difference between
the fair market value of the Vitalink shares that are received in exchange for
the Company shares in the Merger and the basis in his or her Company Common
Stock, and (ii) the Company would recognize gain or loss as if it had sold its
assets, subject to its liabilities, to Vitalink in a taxable transaction.
POSSIBLE FUTURE LEGISLATION
The Clinton Administration's Budget Proposal issued March 19, 1996 contains
several revenue proposals, including a proposal (the "Anti-Morris Trust
Proposal") which would require a distributing corporation in a transaction
otherwise qualifying as a tax-free distribution under Section 355 of the Code
to recognize gain on the distribution of the stock of the controlled
corporation unless the direct and indirect shareholders of the distributing
corporation own more than 50 percent of the distributing corporation and
controlled corporation at all times during the four year period commencing two
years prior to the distribution. The Anti-Morris Trust Proposal would apply to
any distributions occurring after March 19, 1996, unless such distribution was
(i) pursuant to a binding contract on such date, (ii) described in a ruling
request submitted to the IRS on or before such date, or (iii) described in a
public announcement or SEC filing on or before such date.
On March 29, 1996, Senator William V. Roth, Chairman of the Senate Finance
Committee and Congressman Bill Archer, Chairman of the House Ways & Means
Committee, issued a joint statement (the "Roth-Archer Statement") to the
effect that should certain of the revenue proposals included in the
Administration's Budget Proposal, including the Anti-Morris Trust Proposal, be
enacted, the effective date of such proposals will be no earlier than the date
of "appropriate Congressional action." As of the date of this Prospectus, no
legislation has been introduced relating to the Anti-Morris Trust Proposal.
There can be no assurances that Congress will not adopt Anti-Morris Trust
legislation which would apply to the Distribution.
BACK-UP WITHHOLDING REQUIREMENTS
United States information reporting requirements and backup withholding at
the rate of 31% may apply with respect to dividends paid on, and proceeds from
the taxable sale, exchange or other disposition of Company Common Stock,
unless the shareholder (i) is a corporation or comes within certain other
exempt categories, and, when required, demonstrates these facts, or (ii)
provides a correct taxpayer identification number, certifies as to no loss of
exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. A shareholder who does not
supply the Company with his, her or its correct taxpayer identification number
may be subject to penalties imposed by the Internal Revenue Service ("IRS").
Any amount withheld under these rules will be refunded or credited against the
shareholder's federal income tax liability. Shareholders should consult their
tax advisers as to their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. If information reporting
requirements apply to a shareholder, the amount of dividends paid with respect
to such shares will be reported annually to the IRS and to such shareholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
47
<PAGE>
CAPITALIZATION
Following the Distribution and the Merger, New GranCare will change its name
to GranCare, Inc. and will be treated as the continuation of the Company for
financial reporting purposes. See "Unaudited Pro Forma GranCare, Inc.
Financial Statements" and the consolidated financial statements of the Company
and notes thereto included elsewhere herein. The following table sets forth
the Company's historical and pro forma capitalization as of September 30, 1996
and as adjusted to give effect to the Distribution and Merger:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
----------------------
HISTORICAL AS ADJUSTED
---------- -----------
(UNAUDITED, IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Current portion of long-term debt..................... $ 4,219 $ 2,550
-------- --------
Long-term debt, less current portion:
Credit Agreement(1)................................... $ 88,850 159,543
Mortgages............................................. 124,015 124,015
6 1/2% Convertible Subordinated Debentures due
2003(2).............................................. 60,000 --
9 3/8% Senior Subordinated Notes due 2005(3).......... 100,000 --
Other................................................. 12,040 12,040
-------- --------
Total long-term debt................................ $384,905 $295,598
-------- --------
Shareholder's equity:
Preferred Stock; 2,000,000 shares authorized as Series
A, B, C or D; no shares outstanding.................. -- --
Common Stock; 50,000,000 shares authorized;
23,401,992 shares issued and outstanding(4).......... 125,401 --
Common Stock; $0.001 par value; 50,000,000 shares
authorized; 23,401,992 shares issued and
outstanding(4)....................................... -- 23
Paid in capital(4).................................... -- 120,348
Treasury stock, (200,000 shares)(5)................... (5,030) --
Equity component of minimum pension liability......... (465) (465)
Unrealized gain on investment, net income taxes
($3,963)............................................. 5,747 5,747
Retained earnings..................................... 76,021 12,292
-------- --------
Total shareholders' equity............................ $201,674 $137,945
======== ========
Total capitalization.................................. $590,798 $433,543
======== ========
Long-term debt as a percentage of total capitaliza-
tion(6)................................................ 65.2% 69.3%
</TABLE>
- --------
(1) The current $150 million credit facility with First Union National Bank of
North Carolina, as agent will be repaid and replaced with a $300 million
credit facility with First Union National Bank of North Carolina and the
Chase Manhattan Bank which will fund required new borrowings.
(2) Will be redeemed at a redemption price of 104.55% of the principal amount
plus accrued and unpaid interest to the date of redemption.
(3) The Company has undertaken a tender offer for the 9 3/8% Senior
Subordinated Notes at a purchase price of 109% of the principal amount
plus accrued and unpaid interest to the date of purchase. As a result of
the Merger, Vitalink will succeed to the obligations of the Company with
respect to any 9 3/8% Senior Subordinated Notes not purchased in the
tender offer.
(4) One for one conversion of GranCare Common Stock for New GranCare Common
Stock.
(5) Cancellation and retirement of GranCare Common Stock held in treasury
immediately prior to the conversion for New GranCare Common Stock.
(6) See "Risk Factors--Significant Debt and Lease Obligations."
48
<PAGE>
DIVIDEND POLICY
New GranCare does not expect to pay any dividends for the foreseeable
future. Rather, New GranCare expects that it will reinvest any earnings into
funding future acquisitions and growth. Any future payments of dividends and
the amount thereof will be dependent upon New GranCare's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Board of Directors of New GranCare from time to
time.
UNAUDITED PRO-FORMA GRANCARE, INC. FINANCIAL STATEMENTS
GranCare, Inc. ("GranCare") has entered into an Agreement and Plan of Merger
between Vitalink Pharmacy Services, Inc. ("Vitalink") and GranCare dated as of
September 3, 1996, as amended. The form of the proposed transactions are: (1)
GranCare's skilled nursing facilities, along with this contract management and
home health businesses are to be reorganized into New GranCare, Inc. ("New
GranCare") all of the shares of common stock of New GranCare distributed to
the GranCare shareholders in a tax-free spin-off; (2) GranCare (then
consisting solely of the institutional pharmacy and related business known as
TeamCare) would merge into and be acquired by Vitalink through a tax-free
exchange of shares of common stock of Vitalink for shares of common stock of
GranCare; and (3) New GranCare would become a public company upon the
effectiveness of its initial registration statement. Notwithstanding the legal
structure of the proposed transactions, for accounting/financial reporting
purposes such transactions will be treated as the spin-off of TeamCare in the
form of a dividend of the Vitalink Common Stock to be received and
reorganization/recapitalization of GranCare into New GranCare as New GranCare
will continue the majority of the GranCare businesses. New GranCare will
change its name to and be treated as the continuation of GranCare. No gain
will be recognized as a result of the Distribution for the difference between
the market value of the Vitalink Common Stock received and the carrying value
of the net assets of TeamCare. New GranCare will continue to reflect the
historical cost basis of assets and liabilities of the Company. The closing
under the Merger Agreement is subject to a number of conditions, including
approval of GranCare's shareholders. The accompanying unaudited pro-forma
balance sheet at September 30, 1996 gives effect to the transactions as if
they occurred at that date. The accompanying unaudited income statements for
the year ended December 31, 1995 and for the nine months ended September 30,
1996 give effect to the transactions as if they occurred on January 1, 1995.
The unaudited pro forma financial statements are not necessarily indicative of
the operating results that would have been achieved had the spin-off and
reorganization/ recapitalization been consummated as of those dates, nor are
they necessarily indicative of future operating results. The unaudited pro-
forma financial statements should be read in conjunction with the consolidated
financial statements of GranCare and the related notes thereto.
49
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
---------------------------------------------------------
GRANCARE TEAMCARE OTHER PRO FORMA GRANCARE
HISTORICAL HISTORICAL(1) ADJUSTMENTS PRO FORMA
---------- ------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 25,750 $ (868) $ 88,628 (3) $ 34,882
84,772 (6a)
(160,000)(6b)
(3,400)(6b)
Accounts receivable,
less allowance for
doubtful accounts.... 218,529 (47,099) -- 171,430
Inventories........... 17,833 (15,573) -- 2,260
Prepaid expenses and
other current
assets............... 41,034 (2,749) -- 38,285
Deferred income
taxes................ 11,599 (3,338) 3,800 (7) 13,543
1,482 (8)
-------- --------- -------- --------
Total current assets.... 314,745 (69,627) 15,282 260,400
Property and equipment.. 276,441 (28,150) -- 248,291
Less accumulated
depreciation......... (67,111) 14,706 -- (52,405)
-------- --------- -------- --------
209,330 (13,444) -- 195,886
Other assets:
Investments, at fair
value................ 36,359 -- -- 36,359
Goodwill.............. 129,863 (75,621) -- 54,242
Other intangibles..... 8,573 (1,930) -- 6,643
Other................. 39,068 (3,711) 39,015 (2) 31,458
(88,628)(3)
84,725 (4)
(35,112)(5)
(3,899)(8)
-------- --------- -------- --------
Total assets............ $737,938 $(164,333) $ 11,383 $584,988
======== ========= ======== ========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and
accrued expenses..... $ 84,291 $ (19,921) $ -- $ 64,370
Merger costs payable.. -- -- 30,000 (7) 30,000
Accrued wages and
related liabilities.. 20,461 (4,362) -- 16,099
Interest payable...... 5,137 (261) -- 4,876
Income taxes payable.. 7,059 -- -- 7,059
Notes payable and
current maturities of
long-term debt....... 4,219 (1,669) -- 2,550
-------- --------- -------- --------
Total current
liabilities............ 121,167 (26,213) 30,000 124,954
Long-term debt.......... 384,905 (10,679) 84,772 (6a) 295,598
(160,000)(6b)
(3,400)(6b)
Due to/from parent...... -- (39,015) 39,015 (2) --
Deferred income taxes... 15,628 (3,171) 12,457
Other................... 14,564 (530) 14,034
Commitments and
contingencies
Shareholders' equity:
Common stock; no par
value................ 125,401 (46,379) 46,379 (4) --
(125,401)(9)
Common stock; $0.001
par value............ -- -- 23 (9) 23
Paid in capital....... -- -- 120,348 (9) 120,348
Treasury stock........ (5,030) -- 5,030 (9) --
Equity component of
minimum pension
liability............ (465) -- -- (465)
Unrealized gain on
investments, net of
income taxes......... 5,747 -- -- 5,747
Retained earnings..... 76,021 (38,346) 38,346 (4) 12,292
(35,112)(5)
(26,200)(7)
(2,417)(8)
-------- --------- -------- --------
201,674 (84,725) 20,996 137,945
-------- --------- -------- --------
Total liabilities and
shareholders' equity... $737,938 $(164,333) $ 11,383 $584,988
======== ========= ======== ========
</TABLE>
50
<PAGE>
Pro Forma Adjustments:
Adjustments affecting assets, liabilities and shareholders' equity to reflect
dividend of TeamCare assets and liabilities pursuant to Merger:
(1) Reflects elimination of historical stand-alone amounts of TeamCare,
Inc.
(2) Contribution of Teamcare due to Company amount to TeamCare capital
(3) Retirement of debt and reduction in investment in TeamCare in relation
to cash payment (reflecting incremental debt assumed/refinanced) received
from Vitalink upon consummation of Merger:
<TABLE>
<S> <C>
Cash received from Vitalink upon consummation of merger:
Agreed value of initial debt to be assumed by Vitalink........ $88,383
Additional debt assumed for TeamCare acquisitions subsequent
to
June 1, 1996................................................. 7,925
Shared transaction expense settlement amount.................. 400
TeamCare cash and cash equivalents at September 30, 1996...... 868
Retirement of Winyah debt prior to merger..................... 3,400
Less: Existing debt on TeamCare balance sheet at September 30,
1996......................................................... (12,348)
--------
Retirement of debt upon consummation of merger/decrease in
investment in TeamCare..................................... $88,628
========
</TABLE>
(4) Adjustment to investment in TeamCare to reflect net equity balance
(5) Elimination of net investment in TeamCare reflects: TeamCare historical
equity--$84,725; plus contribution to capital of due to GranCare balance--
$39,015; less cash payment (incremental debt assumed/refinanced by
Vitalink) received upon consummation of Merger--$88,628.
Other Merger related adjustments:
<TABLE>
<S> <C>
(6) Retirement of debt instruments and incremental borrowing under
line of credit:
(a) Incremental new borrowings under line of credit:
</TABLE>
<TABLE>
<S> <C>
Estimated Merger costs......................................... $30,000
Less: Amounts to be funded from current cash balances.......... (20,000)
-------
New borrowings under line of credit to fund Merger costs..... 10,000
New borrowings to fund retirement of debt:
$60 million Convertible Debentures........................... 60,000
$100 million Senior Subordinated Notes....................... 100,000
-------
160,000
Less: retirement of debt from Vitalink upon consummation of
Merger/decrease in investment in TeamCare................... (88,628)
-------
New borrowings under line of credit to fund subordinated debt
retirement.................................................. 71,372
New borrowings under line of credit to fund retirement of
Winyah debt................................................... 3,400
-------
Total new borrowings under line of credit.................. 84,772
-------
(a) Retirement of debt:
</TABLE>
<TABLE>
<S> <C>
Retirement of subordinated debt:
$60 million Convertible Debentures............................ 60,000
$100 million Senior Subordinated Notes........................ 100,000
-------
160,000
-------
Retirement of Winyah debt....................................... $ 3,400
-------
</TABLE>
51
<PAGE>
(7) Accrual of estimated Merger costs, net of income tax effect (assumes
$10,000 of total cost is deductible for tax purposes, 38% assumed tax
rate), components of estimated Merger charge consists of the following
(amounts to be recognized in operations of New GranCare upon consummation
of Merger):
<TABLE>
<S> <C>
Shared Transaction costs:
Redemption premium--$100 million Senior Subordinated Notes .... $ 9,000
Redemption premium--$60 million Convertible Subordinated
Debentures(a)................................................. 2,730
Investment banker fees......................................... 4,000
Other professional fees and merger related costs............... 6,270
-------
Total shared Merger costs....................................... 22,000
Less costs to be paid by Vitalink............................... (11,000)
-------
GranCare portion of shared Transaction costs.................... 11,000
Other Transaction related costs:
Consent fee paid to landlord................................... 10,000
Amounts payable under GranCare Shareholder Value Plan.......... 4,500
Amounts payable under Restricted Stock Plan.................... 2,500
Other employee severance and other related costs(b)............ 2,000
-------
30,000
Less: Income taxes............................................. (3,800)
-------
Total estimated Merger costs, net of income taxes(a)............ $26,200
=======
</TABLE>
--------
(a) The amount of the redemption premium shall be reduced by $.39
million in the event the redemption occurs after January 15, 1997.
(b) additional amounts of up to $5.0 million could be paid if
additional officers elect to exercise the change of control provision.
(8) Elimination of deferred financing fees related to the Convertible
Debentures and 9 3/8% Senior Subordinated Notes, net of income tax effect
at assumed 38% tax rate
(9) One to one conversion of Company Common Stock for New GranCare Common
Stock and cancellation and retirement of Company Common Stock held in
treasury immediately prior to the conversion for New GranCare Common Stock
52
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED, EXCEPT AS NOTED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
------------------------------
GRANCARE TEAMCARE OTHER PRO FORMA GRANCARE
HISTORICAL HISTORICAL (1) ADJUSTMENTS PRO FORMA
---------- -------------- --------------- ---------
(AUDITED)
<S> <C> <C> <C> <C>
Net revenues............ $816,462 $(194,898) $18,216 (2) $639,780
Expenses:
Operating expenses
(excluding items
shown below)......... 669,512 (168,173) 18,216 (3) 519,555
Rent and property
expenses............. 51,206 (4,115) -- 47,091
Depreciation and
amortization......... 21,611 (4,705) -- 16,906
Interest expense and
financing charges.... 27,054 (497) (7,282)(4) 19,275
Nonrecurring costs--
merger and other
costs................ 11,750 -- -- 11,750
-------- --------- ------- --------
Total expenses...... 781,133 (177,490) 10,934 614,577
-------- --------- ------- --------
Income before income
taxes.................. 35,329 (17,408) 7,282 25,203
Income taxes............ 14,765 (7,000) 2,913 (5) 10,678
-------- --------- ------- --------
Net income.............. $ 20,564 $ (10,408) $ 4,369 $ 14,525
======== ========= ======= ========
Net income per common
and common equivalent
share:
Primary............... $ 0.86 $ 0.61 (6)
======== ========
Fully diluted......... $ 0.86 N/A (6)
======== ========
Weighted average number
of common and common
equivalent
shares outstanding:
Primary............... 23,794 23,794 (6)
======== ========
Fully diluted......... 23,919 N/A (6)
======== ========
Pro Forma Adjustments:
(1)Reflects elimination of historical stand-alone amounts of
TeamCare, Inc.
(2)Revenues--pro forma adjustments for revenues are as follows:
Add back intercompany revenues of TeamCare which are eliminated
in GranCare historical amounts................................. $ 18,216
========
(3)Operating expenses--pro forma adjustments for operating
expenses are as follows:
Add back intercompany cost of sales of TeamCare which are
eliminated in GranCare historical amounts...................... $ 18,216
========
(4)Interest expense--pro forma adjustments for interest expense
are as follows:
Elimination of interest expense on $60 million 6.5% Convertible
Subordinated Debentures........................................ $ (3,900)
Elimination of interest expense on $100 million 9 3/8% Senior
Subordinated Notes............................................. (9,375)
Elimination of amortization of deferred financing fees related
to the Convertible Debentures and 9 3/8% Senior Subordinated
Notes.......................................................... (155)
Interest expense on incremental new borrowings under line of
credit (estimated at $86.0 million, reflects net impact of
redemption of $100 and $60 million subordinated debt
instruments less cash received/incremental debt assumed upon
consummation of Merger) at 7.25%--average interest rate under
existing credit facility....................................... 6,148
--------
$ (7,282)
========
</TABLE>
(5) Income taxes are adjusted to reflect tax provision for elimination of
pharmacy amounts and other pro forma adjustments.
(6) Income per share amounts are based on the combined weighted average shares
adjusted for retirement of the Company's 6.5% Convertible Debentures. Pro
forma fully diluted earnings per share are not presented as the difference
in primary and fully diluted amounts is less than 3% after the assumed
retirement of the $60 million Convertible Debentures.
53
<PAGE>
GRANCARE, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
--------------------------
OTHER
GRANCARE TEAMCARE PRO FORMA GRANCARE
HISTORICAL HISTORICAL (1) ADJUSTMENTS PRO FORMA
---------- -------------- ----------- ---------
<S> <C> <C> <C> <C>
Net revenues............... $745,653 $(194,624) $26,136 (2) $577,165
Expenses:
Operating expenses
(excluding items shown
below).................. 599,958 (164,615) 26,136 (3) 461,479
Rent and property
expenses................ 42,696 (3,914) -- 38,782
Depreciation and
amortization............ 19,400 (4,980) -- 14,420
Interest expense and
financing charges....... 26,228 (449) (5,675)(4) 20,104
One-time charges......... 18,400 -- -- 18,400
-------- --------- ------- --------
Total expenses......... 706,682 (173,958) 20,461 553,185
-------- --------- ------- --------
Income before income
taxes..................... 38,971 (20,666) 5,675 23,980
Income taxes............... 14,809 (8,266) 2,270 (5) 8,813
-------- --------- ------- --------
Net income................. $ 24,162 $ (12,400) $ 3,405 $ 15,167
======== ========= ======= ========
Net income per common and
common equivalent share:
Primary.................. $ 1.01 $ 0.63(6)
======== ========
Fully diluted............ $ 0.98 N/A(6)
======== ========
Weighted average number of
common and common
equivalent shares
outstanding:
Primary.................. 24,021 24,021(6)
======== ========
Fully diluted............ 26,653 N/A(6)
======== ========
Pro Forma Adjustments:
(1) Reflects elimination of historical stand-alone amounts of
TeamCare
(2) Revenues--pro forma adjustments for revenues are as follows:
Add back intercompany revenues of TeamCare which are eliminated
in GranCare historical amounts................................ $ 26,136
========
(3) Operating expenses--pro forma adjustments for operating
expenses are as follows:
Add back intercompany cost of sales of TeamCare which are
eliminated in GranCare historical amounts..................... $ 26,136
========
(4)Interest expense--pro forma adjustments for interest expense
are as follows:
Elimination of interest expense on $60 million 6.5% Convertible
Subordinated Debentures....................................... $ (2,925)
Elimination of interest expense on $100 million 9 3/8% Senior
Subordinated Notes............................................ (7,031)
Elimination of amortization of deferred financing fees related
to the Convertible Debentures and 9 3/8% Senior Subordinated
Notes......................................................... (330)
Interest expense on incremental new borrowings under line of
credit (estimated at $86.0 million, reflects net impact of
redemption of $100 and $60 million subordinated debt
instruments less cash received/incremental debt assumed upon
consummation of Merger) at 7.25%--average interest rate under
existing credit facility...................................... 4,611
--------
$ (5,675)
========
</TABLE>
(5) Income taxes are adjusted to reflect tax provision for elimination of
pharmacy amounts and other pro forma adjustments.
(6) Income per share amounts are based on the combined weighted average shares
adjusted for retirement of the Company's 6.5% Convertible Debentures. Pro
forma fully diluted earnings per share are not presented as the difference
in primary and fully diluted amounts is less than 3% after the assumed
retirement of the $60 million Convertible Debentures.
54
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
The following selected historical consolidated financial data of GranCare
have been derived from the historical financial statements and should be read
in conjunction with the financial statements and notes included herein.
GranCare data for the nine months ended September 30, 1995 and 1996 have been
derived from the unaudited consolidated financial statements which are also
included herein.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------- -----------------
1991 (7) 1992 (8) 1993 (8) 1994 (8) 1995 (8) 1995 (8) 1996 (8)
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(9):
Net revenues........... $290,958 $434,638 $611,689 $717,471 $816,462 $604,569 $745,653
Expenses:
Operating expenses
(excluding items shown
below)................ 239,057 357,189 506,542 589,245 669,512 496,918 599,957
Rent and property...... 27,284 35,998 42,446 44,291 51,206 37,988 42,697
Depreciation and
amortization.......... 5,064 6,922 12,349 16,440 21,611 14,785 19,400
Interest expense and
financing charges..... 7,256 7,908 19,601 21,481 27,054 19,557 26,228
Nonrecurring costs--
other (1992 & 1996);
merger and other (1993
& 1995)(1)............ -- 1,114 4,573 -- 11,750 11,750 18,400
Restructuring
costs(2).............. -- -- -- 8,200 -- -- --
-------- -------- -------- -------- -------- -------- --------
Total expenses......... 278,661 409,131 585,511 679,657 781,133 580,998 706,682
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes and
extraordinary charge.. 12,297 25,507 26,178 37,814 35,329 23,571 38,971
Income taxes........... 3,950 8,701 10,089 13,524 14,765 10,297 14,809
-------- -------- -------- -------- -------- -------- --------
Income before
extraordinary charge.. 8,347 16,806 16,089 24,290 20,564 13,274 24,162
Extraordinary charge--
gain on settlement of
debt (1991); loss on
extinguishment of debt
(1993)(3)............. (2,928) -- 1,285 -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............. $ 11,275 $ 16,806 $ 14,804 $ 24,290 $ 20,564 $ 13,274 $ 24,162
======== ======== ======== ======== ======== ======== ========
Pro forma income tax
data(4):
Income before income
taxes and
extraordinary charge.. $ 12,297 $ 25,507 $ 26,178 n/a n/a n/a n/a
Income taxes........... 4,060 10,157 10,874 n/a n/a n/a n/a
-------- -------- --------
Income before
extraordinary
charge(5)............. 8,237 15,350 15,304 n/a n/a n/a n/a
Extraordinary
charge(5)............. (1,757) -- 1,285 n/a n/a n/a n/a
-------- -------- --------
Pro forma net income.... $ 9,994 $ 15,350 $ 14,019 n/a n/a n/a n/a
======== ======== ========
Net income per common
and common equivalent
share(4):
Primary:
Income before
extraordinary item... $0.59 $0.97 $0.84 $1.07 $0.86 $0.55 $1.01
Extraordinary item.... 0.24 -- (.07) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............ $0.83 $0.97 $0.77 $1.07 $0.86 $0.55 $1.01
======== ======== ======== ======== ======== ======== ========
Fully diluted:
Income before
extraordinary item... $0.53 $0.90 $0.80 $1.07 $0.86 $0.55 $0.98
Extraordinary item.... 0.22 -- (.07) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income............ $0.75 $0.90 $0.73 $1.07 $0.86 $0.55 $0.98
======== ======== ======== ======== ======== ======== ========
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
---- ------ ------ ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATISTICAL DATA(9):
Average licensed beds.. -- (6) 11,358 15,103 16,112 16,148 16,263 16,097
Average occupancy...... -- (6) 86% 87% 88% 87% 87% 85%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
1991 (7) 1992 (8) 1993 (8) 1994 (8) 1995 (8) SEPTEMBER 30, 1996 (8)
-------- -------- -------- -------- -------- ------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA(9):
Working capital........ $ 22,821 $31,483 $59,688 $89,626 $123,030 $193,578
Total assets........... 115,437 242,656 390,881 520,193 645,161 737,938
Long-term debt,
including current
portion............... 52,948 96,770 202,650 243,231 339,605 389,124
Shareholders' equity... 12,760 54,230 86,971 161,417 172,599 201,674
Partners equity........ 320 4,988 -- -- -- --
</TABLE>
(Footnotes from the preceding page)
- --------
(1) The $1.1 million non-recurring charge in 1992 consisted of expenses
related to a retirement agreement reached with an employee of CompuPharm
and terminated negotiations regarding the possible sale of CompuPharm.
Such expenses were incurred prior to the merger of GranCare and CompuPharm
in December 1993 (the "CompuPharm Merger"), after which CompuPharm became
a wholly owned subsidiary of GranCare. The $4.6 million merger costs in
1993 relate to the CompuPharm Merger. The $11.75 million charge in 1995
relates to the Evergreen Merger and other one time costs. The $18.4
million charge in 1996 relates to one-time charges for the planned
disposition of assets and leasehold improvements or closure of certain
long-term care facilities and write off of notes receivable related
thereto; amounts required to present TeamCare's separate financial
statements on a stand-alone basis in connection with the Vitalink merger
and other one-time costs.
(2) The $8.2 million restructuring charge in 1994 is related to the Company's
formal plan of restructuring announced in August 1994. See Note 12 of
Notes to the Consolidated Financial Statements for information on the 1994
restructuring.
(3) The $2.9 million extraordinary gain in 1991 resulted from an Evergreen
settlement of debt. The Company's extraordinary debt extinguishment charge
of $1.3 million in 1993 resulted from debt repayments associated with the
CompuPharm Merger.
(4) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the selected historical
consolidated financial data for the years 1991 through 1993 include a pro
forma presentation that includes a provision for income taxes as if
Evergreen had been a taxable corporation for these periods. Such pro forma
calculations were based on the income tax laws and rates in effect during
those periods, and FASB Statement No. 109. Earnings per share for 1991,
1992 and 1993 are based on pro forma net income.
(5) See note (3) above relating to the extraordinary items. The pro forma
reduction to the 1991 gain is due to an income tax provison adjustment
resulting from the fact that Evergreen was not a taxable entity during
1991.
(6) These numbers are not available from Evergreen for fiscal 1991 and,
accordingly, the Company is unable to report such numbers on a
consolidated basis.
(7) The ARA Living Centers-Pacific, Inc. ("ARA") acquisition occurred on
September 27, 1991 and, therefore, (i) the operating results of the ARA
facilities are included in the historical operating results of the Company
for the fourth quarter of 1991 and (ii) the assets and liabilities of the
ARA facilities, as adjusted for related financing transactions, are
included in the balance sheet of the Company as of December 31, 1991.
(8) All acquisitions which occurred in 1992, 1993, 1994, 1995 and 1996, except
for the CompuPharm, Inc. ("CompuPharm") acquisition and Evergreen merger,
are reflected from the date of each acquisition in the historical
operating results of the Company and the assets and liabilities relating
to these acquisitions are included in the balance sheets of the Company
since that time. See note (9) below and Note 3 to the consolidated
financial statements for a discussion of the CompuPharm and Evergreen
mergers.
(9) All years have been restated for the December 28, 1993 merger with
CompuPharm and for the July 20, 1995 merger with Evergreen. See Notes 1
and 3 to the consolidated financial statements for a description of these
combinations.
56
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion is based upon and should be read in conjunction
with the Selected Historical Consolidated Financial Data, Pro Forma Financial
Information and the historical consolidated financial statements of GranCare
and the notes thereto, included or incorporated elsewhere herein.
GENERAL
The Company was incorporated in September 1987. Since its inception, the
Company has grown rapidly through acquisitions of long-term care facilities
and specialty medical businesses such as institutional pharmacy operations. In
April 1995, the Company acquired Cornerstone, a contract management firm that
specializes in the implementation and management of subacute and other
specialized medical programs in acute care hospitals. In addition, on July 20,
1995, the Company acquired Evergreen Healthcare, Inc. ("Evergreen") by merger
in a transaction accounted for as a pooling-of-interests for financial
reporting purposes. During 1996 the Company acquired RN Health Care Services,
Inc., a home health agency in Michigan and Jennings Visiting Nurse
Association, Inc., a home health agency in Indiana. Also in 1996, the Company
acquired Emery Pharmacy, Inc., a provider of institutional pharmacy services
in upstate New York and RX Corporation, a provider of institutional pharmacy
services in southern California.
At the time of the merger with Evergreen the Company operated 78 long-term
care facilities and Evergreen operated 64 long-term care facilities. As a
result of the Cornerstone acquisition, the Company acquired 92 contracts with
acute care hospitals to manage subacute skilled nursing units, geriatric
mental health programs and geriatric primary care networks.
The Company's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. Government payors, such as state-administered Medicaid programs and,
to a lesser extent, the federal Medicare program, generally provide more
restricted coverage and lower reimbursement rates than private pay sources.
For the year ended December 31, 1995, the percentage of the Company's revenues
derived from Medicaid and Medicare programs were 44.7% and 30.2%,
respectively, of the Company's net revenues. For the nine-months ended
September 30, 1996, the percentage of the Company's net patient revenues
derived from Medicaid and Medicare programs were 38.6% and 38.6%,
respectively, of the Company's total revenues.
Excluding the Institutional Pharmacy Business, for the year ended December
31, 1995, the percentage of the Company's revenues derived from the Medicaid
and Medicare programs were 44.8% and 31.5%, respectively, of the Company's net
revenues. Excluding the Institutional Pharmacy Business for the nine months
ended September 30, 1996, the percentage of the Company's revenues derived
from the Medicaid and Medicare programs were 37.4% and 40.7%, respectively, of
the Company's total revenues.
The Company derives its revenues by providing (i) skilled nursing, (ii)
pharmacy, therapy, subacute and other specialty medical services and (iii)
contract management of specialty medical programs for acute care hospitals. In
general, the Company generates higher revenues and profitability from the
provision of specialty medical services than from routine skilled nursing
care, and the Company believes that this trend will continue. The Company
seeks to enhance its operating margins by increasing the proportion of its
revenues derived from specialty medical services.
While the initial results of the Merger will be a decrease in the percentage
of revenue from specialty medical services received by New GranCare from the
percentage of specialty medical services revenue received by the Company
because of the loss of the revenue from the Institutional Pharmacy Business,
the Company believes that opportunities exist for New GranCare to increase the
percentage of its revenue derived from specialty medical services from sources
other than the Institutional Pharmacy Business such as specialty medical
service revenue from therapy and subacute care.
57
<PAGE>
RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
revenue data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1995 1994(1) 1993 1996 1995
------- --------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Skilled nursing and subacute
care:
Routine services.............. 53.8% 57.6% 60.2% 44.7% 54.8%
Therapy, subacute and other
ancillary services(2)........ 19.8 18.3 19.9 25.9 19.4
------- ------- ------- -------- --------
73.6% 75.9% 80.1% 70.6 74.2
------- ------- ------- -------- --------
Pharmacy(2).................... 23.5 23.8 19.6 25.9 23.3
Contract management............ 2.9 0.3 0.3 3.5 2.5
------- ------- ------- -------- --------
100.0% 100.0% 100.0% 100.0% 100.0%
======= ======= ======= ======== ========
</TABLE>
REVENUES PER PATIENT DAY DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------
1995 1994(1) 1993 1996 1995
------- ------- ------- --------- ---------
<S> <C> <C> <C> <C> <C>
Routine skilled nursing............ $ 87.07 $ 79.52 $ 78.07 $ 89.35 $ 87.02
Specialty medical services(3)...... 35.65 27.69 27.59 58.89 34.05
------- ------- ------- --------- ---------
$122.72 $107.21 $105.66 $148.24 $121.07
======= ======= ======= ========= =========
</TABLE>
- --------
(1) Excludes results of operations from August 1 through December 31, 1994 for
facilities divested or to be divested as part of the restructuring plan.
(2) Before elimination of intercompany sales.
(3) Excludes pharmacy and other specialty medical revenue from beds not
operated by the Company.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
The Company's net revenues for the nine-month period ended September 30,
1996 were $745.7 million, compared to $604.6 million for the same period in
1995, a net increase of $141.1 million, or 23.3%. Included in net revenues and
classified as investment and other revenue for the nine month period ended
September 30, 1996 is the approximate $18 million gain on the sale of the
Company's investment in an unconsolidated affiliate which occurred in the
third quarter of 1996. Of the foregoing change, $75.5 million resulted from
acquisitions and $69.0 million was attributable to same-store growth. Those
increases were partially offset by loss of net revenue of $21.4 million from
facilities divested. Specialty medical revenues increased $123.6 million over
the same period in 1995. This was primarily the result of the growth in the
number of Medicare residents which utilize higher margin ancillary services
(physical, respiratory, occupational and speech therapy).
Excluding the Institutional Pharmacy Business, the Company's net revenues
for the nine-month period ended September 30, 1996 were $577.2 million,
compared to $474.2 million for the same period in 1995, a net increase of
$103.0 million, or 21.7%. Of the foregoing change, $18 million resulted from
the gain on sale of the Company's investment in an unconsolidated affiliate.
$44.3 million resulted from same store growth and $62.1 million resulted from
acquisitions. Those increases were partially offset by loss of net revenue of
$21.4 million from facilities divested. Specialty medical revenues increased
$71.7 million over the same period in 1995. This was primarily the result of
the growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
Operating expenses for the nine-month period ended September 30, 1996, were
$642.7 million compared to $534.9 million for the same period in 1995, a net
increase of $107.8 million, or 20.2%. Of the foregoing increase,
58
<PAGE>
$66.0 million resulted from acquisitions and $62.1 million was attributable to
same-store growth increases in expenses. These increases were partially offset
by a reduction of expenses of $20.3 million from facilities divested.
Specialty medical revenues generate additional costs from the higher staffing
levels required to care for the higher acuity Medicare residents. The
additional ancillary services (physical, respiratory, occupational and speech
therapy) utilized generate additional costs in line with the growth realized
in the specialty medical revenues.
Excluding the Institutional Pharmacy Business, operating expenses for the
nine-month period ended September 30, 1996, were $500.3 million, compared to
$420.8 million for the same period in 1995, a net increase of $79.5 million,
or 18.9%. Of the foregoing increase, $47.2 was attributable to same store
increases in expenses and $52.6 million resulted from acquisitions. These
increases were partially offset by a reduction of expenses of $20.3 million
from facilities divested.
Depreciation and amortization expenses for the nine-month period ended
September 30, 1996 were $19.4 million compared to $14.8 million for the same
period in 1995, an increase of $4.6 million, or 31.1%. This increase was
primarily the result of depreciation and amortization expenses attributable to
businesses acquired and additions to property and equipment.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for the nine-month period ended September 30, 1996 were $14.4 million
compared to $11.4 million for the same period in 1995, an increase of $3.0
million, or 26.3%.
Interest expense and financing charges for the nine-month period ended
September 30, 1996, were $26.2 million compared to $19.6 million for the same
period in 1995, an increase of $6.6 million, or 33.7%. These increases were
primarily due to interest on additional indebtedness incurred in connection
with acquisitions, the issuance of $100 million of 9 3/8% Notes (the "9 3/8%
Notes") and to a lesser extent, borrowings to fund working capital.
Excluding the Institutional Pharmacy Business, interest expense and
financing charges for the nine-month period ended September 30, 1996, were
$25.8 million compared to $19.2 million for the same period in 1995, an
increase of $6.6 million, or 34.4%.
During the third quarter of 1996, the Company recorded exit and other one-
time costs of $18.4 million as a charge to operations. Approximately $10.6
million of this charge relates to management's decision to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The $10.6 million
reflects the remaining net book value of leasehold improvements at the dates
of closure and the remaining rent due to the landlord for periods after the
dates of closure. The revenues and net operating losses of these facilities
are not significant. Approximately $3 million of the charge relates to the
write-off of notes receivable for loans made by the Company to a sublease
lessee to fund working capital. Accounts receivable from the facility under
lease serve as collateral for the working capital loans. During the third
quarter of 1996, the loans to the lessee began to significantly exceed the
collateral, indicating that the loan would not be recoverable. Accordingly,
the Company decided to terminate the sublease arrangement and to write off the
loans which it concluded would not be recoverable. In addition, in the third
quarter of 1996, the Company recorded $4.8 million of other charges which
included $2.9 million of additional bad debt expense related to TeamCare. The
charge for bad debt expense was necessary to provide for the increased risk of
collection resulting from the deterioration in the financial condition of
certain customers in the third quarter of 1996. These charges do not have a
negative effect on short-term cash flow. In the third quarter of 1995, the
Company incurred certain costs related to the completion of the pooling-of-
interests with Evergreen on July 20, 1995 and other one-time costs.
Income taxes for the nine month period ended September 30, 1996, were $14.8
million compared to $10.3 million for the same period in 1995, an increase of
$4.5 million.
Excluding the Institutional Pharmacy Business, income taxes for the nine-
month period ended September 30, 1996, were $6.5 million compared to $5.3
million for the same period in 1995, an increase of $1.2 million.
59
<PAGE>
As a result of the foregoing, net income for the nine-month period ended
September 30, 1996, was $24.2 million compared to $13.3 million for the same
period in 1995, an increase of $10.9 million.
Excluding the Institutional Pharmacy Business, net income for the nine-month
period ended September 30, 1996, was $11.8 million compared to $5.8 million
for the same period in 1995, an increase of $6.0 million.
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance
with Statement No. 121, the Company records impairment losses on long-lived
assets used in operations when events and circumstances indicate the assets
might be impaired and the undiscounted cash flows estimated to be generated by
those assets may be less than the carrying amounts of those assets. The
Company adopted Statement No. 121 and it had no effect on the financial
statements.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
The Company's net revenues for 1995 were $816.5 million compared to $717.5
million for 1994, an increase of $99.0 million, or 13.8%. $112.0 million of
the increase is attributable to acquisitions completed. Same-store growth
increased $27.8 million from increases in specialty medical services provided
and an increase in average daily rates due to an improved payor mix, but was
adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased $88.6 million over the same period in 1994. This was the result of
growth in the number of Medicare residents which utilize higher margin
ancillary services (physical, respiratory, occupational and speech therapy).
The overall increase was partially offset by a $40.8 million decrease in
revenues resulting from the divestiture of certain business units and the loss
of the pharmacy division's contract with the State of New Jersey. Included in
net revenues for 1995 and 1994 were $1.8 million and $0.8 million,
respectively, relating to routine cost limit exceptions. While the Company has
applied for these exceptions, and has only recognized a portion of the
estimated recovery, there can be no assurance that the actual revenues from
routine cost limit exceptions will equal those amounts recognized by the
Company in 1994 and 1995.
Excluding the Institutional Pharmacy Business, the Company's net revenues
for 1995 were $639.8 million compared to $559.0 million for 1994, an increase
of $80.8 million, or 14.5%. Of the foregoing change $33.4 million resulted
from same store growth and $67.1 million resulted from acquisitions. The
overall increase was partially offset by a $19.7 million decrease in revenues
resulting from the divestiture of certain business units. Specialty medical
revenues increased $64.9 million over the same period in 1994. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy).
Operating expenses (excluding rent and property expenses) for 1995 were
$669.5 million compared to $589.2 million for 1994, an increase of $80.3
million, or 13.6%. $92.6 million of the increase was attributable to
acquisitions, as well as costs associated with an increase of specialty
medical services provided, and the duplicate Evergreen overhead incurred prior
to the merger of the Company with Evergreen. On a same-store basis, operating
expenses increased $29.2 million. The increases were partially offset by
reduction of expenses of $41.5 million from facilities divested. Specialty
medical revenues generate additional costs from the higher staffing levels
required to care for the higher acuity Medicare residents. The additional
ancillary services (physical, respiratory, occupational and speech therapy)
utilized generate additional costs in line with the growth realized in the
specialty medical revenues. This increase was partially offset by a reduction
in costs from more appropriate staffing given patient acuity levels at skilled
nursing facilities and an increased use of third-party vendors for therapy
services.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1995 were $519.5 million compared to $457.0
million for 1994, an increase of $62.5 million, or 13.7%. Of the foregoing
increase, $31.0 million was attributable to same-store increases in expenses
and $51.0 million was attributable to acquisitions completed. These increases
were partially offset by a reduction of expenses of $19.5 million from the
divestiture of certain business units.
Rent and property expenses for 1995 were $51.2 million compared to $44.3
million for 1994, an increase of $6.9 million, or 15.6%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
60
<PAGE>
Excluding the Institutional Pharmacy Business, rent and property expenses
for 1995 were $47.1 million compared to $41.5 million for 1994, an increase of
$5.6 million, or 13.5%.
Depreciation and amortization expenses for 1995 were $21.6 million compared
to $16.4 million for 1994, an increase of $5.2 million, or 31.7%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1995 were $16.9 million compared to $12.9 million for 1994, an
increase of $4.0 million, or 31.0%.
Interest expense and financing charges for 1995 were $27.1 million compared
to $21.5 million in 1994, an increase of $5.6 million, or 26.0%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions, the issuance of $100 million of Senior
Subordinated Notes and, to a lesser extent, borrowings to fund working
capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1995 were $26.6 million compared to $20.8 million for
1994, an increase of $5.8 million, or 27.9%.
In 1995, the Company recorded a merger and other one-time costs charge of
$11.8 million. Those costs include professional fees (legal, accounting and
investment bankers) of $5.1 million, personnel costs (severance and
relocation) of $3.2 million, a directors and officers policy of $0.5 million,
other deferred acquisition costs of $1.1 million, a divestiture charge of $1.5
million for certain Evergreen facilities which do not fit the Company's
strategy and another charge of $0.4 million relating to TeamCare converting
Evergreen's pharmacy to their system. In 1994, the Company recorded a
restructuring charge of $8.2 million in connection with a restructuring plan
adopted by the Board of Directors in August 1994. See "Liquidity and Capital
Resources."
Income taxes for 1995 were $14.8 million compared to $13.5 million for 1994.
Excluding the Institutional Pharmacy Business, income taxes for 1995 were
$7.8 million compared to $5.8 million for 1994.
As a result of the foregoing, net income for 1995 was $20.6 million compared
to $24.3 million for 1994, a decrease of $3.7 million, or 15.2%.
Excluding the Institutional Pharmacy Business, net income for 1995 was
$10.2 million compared to $12.8 million for 1994, a decrease of $2.6 million,
or 20.3%.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
The Company's net revenues for 1994 were $717.5 million compared to $611.7
million for 1993, an increase of $105.8 million, or 17.3%. This increase is
primarily attributable to acquisitions completed and, to a lesser extent,
same-store growth. On a same-store basis, net revenues increased 6.7%. Same-
store revenue growth resulted from increases in specialty medical services
provided and an increase in average daily rates due to an improved payor mix,
but was adversely affected by a decrease in the level of reimbursement rates
implemented in the State of Indiana in August 1994. Specialty medical revenues
increased to 42.4% compared to 39.8% for the same period in 1993. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy). The overall increase was partially offset by a decrease in revenues
resulting from the divestiture of certain business units. Included in net
revenues for 1994 and 1993 were $0.8 million and $1.9 million, respectively,
relating to routine cost limit exceptions.
61
<PAGE>
Operating expenses (excluding rent and property expenses) for 1994 were
$589.2 million compared to $506.5 million for 1993, an increase of $82.7
million, or 16.3%. This increase was primarily attributable to acquisitions,
as well as costs associated with an increase of specialty medical services
provided, and a $1.0 million charge in connection with the relocation of the
Company's corporate offices. Specialty medical revenues generate additional
costs from the higher staffing levels required to care for the higher acuity
Medicare residents. The additional ancillary services (physical, respiratory,
occupational and speech therapy) utilized generate additional costs in line
with the growth realized in the specialty medical revenues. This increase was
partially offset by a reduction in costs from the dispositions of certain
business units, more appropriate staffing given patient acuity levels at
skilled nursing facilities and an increased use of third-party vendors for
therapy services.
Rent and property expenses for 1994 were $44.3 million compared to $42.4
million for 1993, an increase of $1.9 million, or 4.5%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Depreciation and amortization expenses for 1994 were $16.4 million compared
to $12.3 million for 1993, an increase of $4.1 million, or 33.3%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Interest expense and financing charges for 1994 were $21.5 million compared
to $19.6 million in 1993, an increase of $1.9 million, or 9.7%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions and, to a lesser extent, borrowings to fund
working capital. Higher rates on floating rate debt also increased interest
expense.
In 1994 the Company recorded a restructuring charge of $8.2 million in
connection with a restructuring plan adopted by the Board of Directors in
August 1994. See "Liquidity and Capital Resources."
Income taxes for 1994 were $13.5 million compared to $10.1 million for 1993.
As a result of the foregoing, net income for 1994 was $24.3 million compared
to $14.8 million for 1993, an increase of $9.5 million, or 64.2%.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary source of liquidity at September 30, 1996 was $25.8
million in cash and cash equivalents compared to $17.7 million at December 31,
1995, an increase of $8.1 million. On August 5, 1996, the Company sold its
entire interest in Alternative Living Services, Inc. ("ALS"), resulting in net
proceeds to the Company of approximately $24.6 million and an approximate
$18.0 million gain on the sale. The increase in cash and cash equivalents was
due primarily to proceeds realized from the sale of ALS. Payments received by
the Company from the Medicaid and Medicare programs are the Company's largest
source of cash from operations.
Accounts receivable at September 30, 1996 were $218.5 million compared to
$173.1 million at December 31, 1995, an increase of $45.4 million or 26.2%.
The Company's accounts receivable include receivables from third-party
reimbursement programs, primarily Medicaid and Medicare settlements. The
Company receives payment for skilled nursing services based on rates set by
individual state Medicaid programs. Although payment cycles for these programs
vary, payments generally are made within 30 to 60 days of services provided,
except in Illinois, where the Medicaid program delays payments for 120 days.
The federal Medicare program, a cost-reimbursement system, pays interim rates,
based on estimated costs of services, on a 30 to 45-day basis. Final cost
settlements, based on the difference between audited costs and interim rates,
are paid following final cost report audits by Medicare fiscal intermediaries.
Because of the cost report and audit process, final settlement may not occur
until up to 24 months after services are provided. The Company accounts for
such
62
<PAGE>
open cost reports by taking appropriate reserves to offset potential audit
adjustments. Management has no knowledge of any material pending claims or
unsettled matters pertaining to such cost reports. Specialty medical services
generally increase the amount of payments received on a delayed basis.
Excluding the Institutional Pharmacy Business, accounts receivable at
September 30, 1996 were $171.4 million compared to $135.3 million at December
31, 1995, an increase of $36.1 million.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as the Company for health care services provided under their
respective Medicaid programs.
In addition to principal and interest payments on its long-term
indebtedness, the Company has significant rent obligations relating to its
leased facilities, as well as property expenses (principally property taxes
and insurance) relating to all of its facilities. The Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1996 are approximately $100.0 million.
Excluding the Institutional Pharmacy Business, the Company's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1996 are approximately $87.0 million.
The Company's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. Total capital
expenditures for the year ended December 31, 1995 were $23.5 million,
excluding $2.5 million of capital expenditures reimbursed by Health and
Retirement Properties Trust ("HRPT"). Total capital expenditures for the nine-
month period ended September 30, 1996, were $24.0 million. The Company
estimates that capital expenditures for the year ending December 31, 1996,
will be approximately $32.0 million.
Excluding the Institutional Pharmacy Business, total capital expenditures
for the year ended December 31, 1995 and the nine-month period ended September
30, 1996, were $21.2 million and $20.1 million, respectively.
The Company maintains a $150.0 million credit facility (the "Existing Credit
Facility") with a syndicate of banks for whom First Union National Bank of
North Carolina ("First Union") acts as lead bank, which may be used for
working capital, other general corporate purposes and acquisitions. As of
September 30, 1996, approximately $88.9 million was outstanding under the
Existing Credit Facility. The Company will be able to borrow under the
Existing Credit Facility through June 1998, at which time it will convert to a
term loan, unless it is refinanced or extended. Upon conversion, the amount
then outstanding will be payable in equal quarterly installments through June
2002. See "The Distribution--Treatment of Certain Indebtedness--Existing
Credit Facility." Shortly before the Distribution, the Company will contribute
the stock of its skilled nursing facility subsidiaries to New GranCare.
Immediately prior to the Distribution, New GranCare plans to enter into the
New Credit Facility with a syndicate of banks, certain proceeds from which
will be paid by New GranCare on behalf of its subsidiaries to the Company in
satisfaction of intercompany debt owed by New GranCare and its skilled nursing
facility subsidiaries to the Company and the TeamCare subsidiaries. Amounts so
paid by New GranCare to the Company will be applied to satisfy various third-
party debt of the Company (including the Existing Credit Facility and the
Convertible Debentures). See "The Distribution--Treatment of Certain
Indebtedness--New Credit Facility."
In September 1995, the Company completed an offering of $100.0 million
aggregate principal amount of its 9 3/8% Notes. The net proceeds from this
offering were used to repay outstanding amounts under the Existing Credit
Facility. The Distribution Agreement provides that Vitalink will assume such
Notes by operation of law. See "The Distribution--Treatment of Certain
Indebtedness--9 3/8% Notes."
63
<PAGE>
The Company believes that its cash from operations, existing working capital
and available borrowings under its line of credit will be sufficient to fund
the fixed obligations, capital expenditures and other obligations referred to
above, as well as to repay certain indebtedness when due. At this time the
Company believes that any additional required financing could be obtained at
market rates on terms that are acceptable to the Company, although no
assurance can be given regarding the terms or availability of additional
financing in the future.
In conjunction with a 1990 acquisition, the Company borrowed $15.0 million
under a promissory note agreement with HRPT. The note is secured by mortgages
on two facilities and 1,000,000 shares of HRPT common stock owned by the
Company. The HRPT note had a balance of $8.7 million, with an interest rate of
13.75% at December 31, 1994. During 1995, the Company renegotiated the note
with HRPT, whereby the principal balance of the promissory note was increased
to $11.5 million, resulting in additional proceeds to the Company. Minimum
interest on the note is 11.5% per year payable monthly in arrears. Additional
interest is payable commencing on January 1, 1996, in an amount equal to 75%
of the percentage increase in the Consumer Price Index, with certain defined
limitations. Principal payments will begin two years after the date of the
note on a 30-year direct reduction basis, with the remaining balance due
December 31, 2010.
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents.
Subsequent to December 31, 1994, the existing Master Lease Documents were
amended. Under the amended lease arrangements, minimum rent for the aggregate
facilities is the annual sum of $11,550,000, payable in equal monthly
installments. In addition, beginning January 1, 1996, the amended lease
agreement provides for additional rent to be paid monthly, in advance, based
on 75% of the increase in the Consumer Price Index multiplied by the minimum
rent due, provided, however, that the maximum rent (minimum rent plus
additional rent) each January shall be limited to a 2% increase over the total
monthly rent paid in the prior December. The operating leases for 17
facilities expire on December 28, 2010, and there are two 10 year renewal
options. The leases for seven facilities expire in June 2006 and there are two
10 1/2-year renewal options. The Company has subleased seven of the 24
facilities to unrelated parties. Following the Distribution and Merger, New
GranCare will succeed to the obligations of the Company to HRPT.
The Company is a beneficial owner of 1,000,000 shares of stock of HRPT,
which are held in trust and pledged as collateral for the obligations of two
of the Company's subsidiaries under mortgage notes and lease obligations with
HRPT. The pledge agreement strictly limits the Company's ability to sell the
shares until its obligations to HRPT are satisfied, which will not be until
the year 2010. As a result, these shares cannot be sold to meet other
financial obligations. In addition, such mortgage notes and lease obligations
contain provisions that restrict, upon the occurrence of an event of default
thereunder, the ability of such subsidiaries to make dividends, loans or
advances to the Company. In accordance with FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the HRPT
stock is carried at fair market value, with unrealized gains and losses
reported as a separate component of equity. The Existing Credit Facility and
indenture pursuant to which the 9 3/8 Notes were issued also contain
restrictions on the ability of the Company to pay dividends to its
shareholders upon the failure to satisfy certain financial covenants.
The Company maintains a captive insurance subsidiary to provide reinsurance
for its obligations under workers' compensation and general and professional
liability plans. These obligations are funded with long-term, fixed income
investments, which are not available to satisfy other obligations of the
Company. It is expected that following the Distribution and Merger that New
GranCare will succeed to the aforementioned fixed income investments and
operate such captive insurance subsidiary.
As of December 31, 1995, the Company had recorded the following charges
against the $8.2 million restructuring reserve recognized in the third quarter
of 1994: (i) the write-off of certain unamortized financing fees; (ii)
operating gains and losses from the facilities to be divested for the period
of August 1, 1994 through December 31, 1995; (iii) gains and losses from the
sale of facilities and; (iv) severance and other personnel-related costs. The
net restructuring reserve balance at December 31, 1995 is $500,000. The
Company believes that the provisions for the restructuring continue to be
adequate and will not require material adjustment in future periods.
64
<PAGE>
The following transactions affecting the liquidity and capital resources of
both the Company and New GranCare have been entered into or contemplated in
connection with the proposed Distribution and Merger.
New Credit Facility. In order to affect the Distribution, the Company will
be required to replace its Existing Credit Facility and currently has a
commitment letter from First Union and Chase, whereby each of such banks has
agreed to provide the Company, for the benefit of New GranCare, a replacement
credit facility in the aggregate amount of $300.0 million (with First Union
and Chase each committing to $150.0 million). The New Credit Facility will
consist of two components: a $200.0 million 5-year revolving credit facility
(which includes a $40.0 million sub-limit for the issuance of standby letters
of credit) and a $100.0 million 5-year term loan. Borrowings for working
capital and general corporate purposes may not exceed $75.0 million. The first
$25.0 million of exposure for letters of credit issued under the letter of
credit sub-facility will correspondingly reduce availability under the working
capital sub-facility. Following the consummation of the Distribution and
Merger, the Company anticipates that New GranCare will have approximately
$24.0 million outstanding under the working-capital sub-facility. The
revolving credit portion of the New Credit facility will mature in five years.
The term loan portion of the New Credit Facility will be amortized in ten
quarterly installments of $7.0 million each commencing two years after the New
Credit Facility closes, thereafter increasing to $10.0 million per quarter.
All remaining principal and accrued, unpaid interest shall be due and payable
in full on the fifth anniversary of the closing date of the New Credit
Facility. Interest on outstanding borrowing shall accrue, at the option of New
GranCare, at the Base Rate or at the Eurodollar Rate plus, in each case, an
applicable margin. See "The Distribution--Treatment of Certain Indebtedness--
New Credit Facility."
9 3/8% Notes. The Company has commenced a consent solicitation to obtain the
approval of holders of the required principal amount of the Company's
outstanding 9 3/8% Notes to the transactions contemplated by the Distribution
Agreement and the Merger Agreement and to such modifications of certain
covenants contained in the Note Indenture as Vitalink, as the successor
obligor to the Company, may reasonably request. In connection with the
assumption by Vitalink of the Company's 9 3/8% Notes and related obligations
arising pursuant to the Note Indenture, the Company has agreed to pay Vitalink
a fee based on a formula described in "The Distribution--Terms of the
Distribution Agreement" (which fee is a Shared Transaction Expense). The
Company has also undertaken a tender offer for at least 50% of the outstanding
principal balance of the 9 3/8% Notes. A condition of the Company's obligation
to complete the tender offer is that every tendering noteholder must consent
to the requested covenant modifications referenced above. Any premium paid and
expenses incurred in connection with any such tender offer will be a Shared
Transaction Expense. See "The Distribution--Treatment of Certain
Indebtedness--9 3/8% Notes."
Convertible Debentures. The Distribution Agreement and the Merger Agreement
also require that the Company take commercially reasonable efforts to call for
redemption prior to the Distribution Record Date all of the Company's 6 1/2%
outstanding convertible debentures (the "Convertible Debentures"). The
Convertible Debentures are currently redeemable at a redemption price of
104.55% of the principal amount of the Convertible Debentures plus accrued and
unpaid interest to the date of redemption. There are currently $60.0 million
in aggregate principal amount of Convertible Debentures outstanding which will
result in an aggregate redemption premium of approximately $2.73 million which
shall be a Shared Transaction Expense (such premium shall be reduced by
$390,000 in the event the redemption occurs after January 15, 1997).
New GranCare Capital Resources. Following the Distribution and Merger, New
GranCare believes that its cash from operations, existing working capital and
available borrowings under the New Credit Facility will be sufficient to fund
the fixed obligations, capital expenditures and other obligations referred to
above, as well as to repay any required indebtedness when due, and further
expand New GranCare's business. Also in connection with the Distribution and
Merger, Vitalink has agreed to assume (as part of the Merger) certain items of
the Company's consolidated indebtedness aggregating approximately $108.0
million (which includes the Company's obligations in respect of the 9 3/8%
Notes). However, in the event that New GranCare continues to grow through
acquisitions, New GranCare may need to raise additional capital, either
through borrowings, sale-leaseback financings or the sale of debt or equity
securities, to finance the acquisition price and any additional working
65
<PAGE>
capital and capital expenditure requirements related to such acquisitions. At
this time, the Company believes that any additional required financing may be
obtained at market rates on terms that are acceptable to New GranCare,
although no assurance can be given regarding the terms that are available of
additional financing in the future.
IMPACT OF INFLATION
The health care industry is labor-intensive. Wages and other labor costs are
especially sensitive to inflation. In addition, the Company operates and New
GranCare intends to operate a majority of its facilities pursuant to operating
leases which contain provisions for increased rent, based upon inflation.
Increases in wages and other labor costs and rent expense as a result of
inflation, without a corresponding increase in Medicare and Medicaid
reimbursement rates, could adversely impact the Company or New GranCare.
Both the Medicare and Medicaid programs operate under routine cost limits or
targeted ceilings. These limits are usually adjusted on an annual basis
utilizing numerous inflation indexes. Each State can operate under a different
index resulting in the adjustments to the targeted ceilings being different in
each State. The Company cannot predict the level of the expected increase each
year and each of these programs is subject to changes in regulation,
retroactive rate adjustments and government funding which could adversely
affect the amounts paid to New GranCare. See "Risk Factors--Risk Involved with
Reimbursement by Third Party Payors."
66
<PAGE>
PROPERTIES
As of July 31, 1996, the Company operated 137 long-term care facilities (133
skilled nursing facilities and four assisted living facilities), which will be
operated by New GranCare. New GranCare believes the aforementioned physical
properties will be in good operating condition and suitable for the purposes
for which they are intended to be used when it assumes the operation of such
properties. New GranCare will operate 37 long-term care facilities, including
one assisted living facility and rehabilitation center, all of which will be
included in the collateral which secures certain financial obligations to
creditors and lessors to be assumed by New GranCare. Ninety-two other
facilities (including three assisted living facilities) will be operated by
New GranCare under long-term leases. New GranCare expects to pledge all of its
leasehold interests to certain creditors. See "The Distribution--Treatment of
Certain Indebtedness--New Credit Facility." Seven of the Company's long-term
care facilities will be managed by New GranCare.
LONG-TERM HEALTH CARE FACILITIES
The following chart shows the geographic distribution of the facilities to
be operated by New GranCare:
<TABLE>
<CAPTION>
PERCENTAGE
STATE FACILITIES(1) BEDS OF TOTAL BEDS
----- ------------- ------ -------------
<S> <C> <C> <C>
Arizona(1)................................... 7 982 5.7%
California(1)................................ 28 3,181 18.5
Colorado..................................... 4 661 3.8
Georgia...................................... 1 100 0.6
Illinois..................................... 20 2,089 12.1
Indiana...................................... 19 3,057 17.8
Iowa......................................... 7 547 3.2
Louisiana.................................... 3 240 1.4
Michigan..................................... 13 1,863 10.8
Mississippi.................................. 10 1,104 6.4
Ohio......................................... 1 100 0.6
South Carolina............................... 8 832 4.8
Tennessee.................................... 2 226 1.3
West Virginia................................ 1 164 1.1
Wisconsin.................................... 13 2,052 11.9
--- ------ -----
Total...................................... 137 17,198 100.0%
=== ====== =====
<CAPTION>
CLASSIFICATION
- --------------
<S> <C> <C> <C>
Owned........................................ 38 4,794 27.9%
Leased....................................... 91 11,067 64.3
Managed...................................... 8 1,337 7.8
--- ------ -----
Total...................................... 137 17,198 100.0%
=== ====== =====
</TABLE>
- --------
(1) Includes two assisted living facilities in the State of Arizona comprising
170 licensed beds and two assisted living facilities in the State of
California comprising 218 licensed beds.
67
<PAGE>
The following facilities are organized by state, and in California by region:
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ------------- -------- -------------
<S> <C> <C> <C>
ARIZONA
Colter Village Health Care and
Rehabilitation Center(2) Glendale 186 91.6%
Colter Village Retirement Center(4)(2) Glendale 105 72.5
GranCare Medical Center of Paradise
Valley Phoenix 200 93.1
East Valley Medical & Rehabilitation
Center Mesa 174 57.2
La Mesa Rehabilitation and Care Center Yuma 125 89.9
Sunquest Village of Yuma(4) Yuma 65 62.3
Village Green Care Center Phoenix 127 92.8
----- ----
TOTAL ARIZONA 982 81.7%
NORTHERN CALIFORNIA
Almaden HealthCare Center San Jose 77 91.2%
Driftwood HealthCare Center--Santa Cruz Santa Cruz 92 88.5
Driftwood HealthCare Center--Hayward Hayward 88 93.5
Excell Health Care Center(2) Oakland 99 91.6
Florin Health Care Center Sacramento 122 94.0
Fremont HealthCare Center Fremont 122 90.4
Fruitvale HealthCare Center Oakland 140 98.0
Hayward Hills Health Care Center Hayward 74 92.4
La Salette Rehabilitation and
Convalescent Hospital Stockton 120 89.5
Parkview Health Care Center Hayward 121 84.7
Skyline HealthCare Center -- San Jose San Jose 253 96.5
Vale HealthCare Center San Pablo 202 91.1
----- ----
TOTAL NORTHERN CALIFORNIA 1,510 92.3%
SOUTHERN CALIFORNIA
Autumn Hills Convalescent Hospital Glendale 99 97.2%
Driftwood Health Care Center Torrance 99 96.5
El Rancho Vista Health Care Center Pico Rivera 86 93.3
Flagship Health Care Center Newport Beach 167 95.2
Inglewood Health Care Center Inglewood 99 95.0
Lancaster Health Care Center Lancaster 99 91.4
Laurelwood HealthCare Center N. Hollywood 99 88.6
Monterey Palms Health Care Center(3) Palm Desert 99 88.0
Newport Villa(4) Newport Beach 109 83.8
Newport Villa West(4) Newport Beach 109 82.6
Santa Monica Health Care Center Santa Monica 59 91.2
Skyline Health Care Center Los Angeles 99 94.1
Tarzana Extended Care & Rehabilitation
Center Tarzana 173 92.9
Thousand Oaks Health Care Center Thousand Oaks 125 95.5
Van Nuys Health Care Center Van Nuys 58 95.1
Verdugo Vista Health Care Center La Crescenta 92 95.7
----- ----
TOTAL SOUTHERN CALIFORNIA 1,671 92.4
TOTAL CALIFORNIA OPERATIONS 3,181 92.3%
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ------------ -------- --------------
<S> <C> <C> <C>
COLORADO
Camelia HealthCare Center Aurora 150 87.7%
Cedars HealthCare Center Lakewood 175 95.0
Cherrelyn Manor HealthCare Center Littleton 236 88.8
Red Rocks HealthCare Center(2) Denver 100 87.7
----- ----
TOTAL COLORADO 661 90.0%
GEORGIA
Lafayette Health Care(2) Lafayette 100 91.6%
----- ----
TOTAL GEORGIA 100 91.6%
ILLINOIS
Birchwood HealthCare Center(2) Casey 75 91.7%
LaSalle HealthCare Center LaSalle 101 93.8
Litchfield HealthCare Center Litchfield 123 78.4
Charleston Manor(2) Charleston 62 78.3
Crestview HealthCare Center(2) Clinton 103 89.7
Dixon Health Care Center(2) Dixon 110 88.1
Fairview HealthCare Center(2) Belvidere 80 94.4
Flora HealthCare Center Flora 99 94.0
Good Samaritan HealthCare Center East Peoria 120 75.4
Havana Healthcare Center(2) Havana 98 83.8
Montebello HealthCare Center(2) Hamilton 139 81.9
Nature Trail HealthCare Center(2) Mount Vernon 74 98.8
Odin HealthCare Center(2) Odin 99 93.4
Parkway Healthcare Center(2) Wheaton 69 88.9
Rochelle Healthcare Center(2) Rochelle 50 95.7
Rochelle Healthcare Center--East(2) Rochelle 74 88.6
Rockford Healthcare Center(2) Rockford 81 92.3
Community HealthCare Center Naperville 153 76.5
Springfield Healthcare Center Springfield 170 93.6
Wynscape HealthCare Center(5) Wheaton 209 92.4
----- ----
TOTAL ILLINOIS 2,089 89.1%
INDIANA
Anderson HealthCare Center(5) Anderson 175 55.8%
Anthony Wayne HealthCare Center Fort Wayne 126 65.8
Beech Grove Healthcare Center Beech Grove 189 65.3
Central Healthcare Center Indianapolis 147 75.5
Chelsea Healthcare Center(5) Elkhart 157 45.9
Country Trace Healthcare Center Indianapolis 49 73.5
Eagle Valley Healthcare Center Indianapolis 120 85.3
Forest Park Healthcare Center Kokomo 188 92.5
Lafayette Healthcare Center(5) Lafayette 202 40.0
Monticello Healthcare Center Monticello 206 77.6
New Castle Healthcare Center(5) New Castle 171 77.9
Noblesville Healthcare and Alzheimer's
Special Care Center Noblesville 195 71.5
Pine Tree HealthCare Center Indianapolis 179 71.6
Universal HealthCare Center(5) Franklin 123 61.3
Southside HealthCare Center Indianapolis 155 49.2
Wabash Healthcare Center(5) Wabash 101 63.0
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ---------------- -------- --------------
<S> <C> <C> <C>
INDIANA (CONTINUED)
Washington HealthCare Center(5) Evansville 199 58.4%
Willowbrook HealthCare Center Clarkville 195 88.3
Willow Ridge HealthCare Center Fort Wayne 180 57.2
----- ----
TOTAL INDIANA 3,057 67.5%
IOWA
Altoona HealthCare Center Altoona 114 86.1%
Carroll HealthCare Center Carroll 51 91.9
Granger HealthCare Center Granger 71 85.2
Heritage HealthCare Center--Des
Moines(2) Des Moines 99 86.4
Jefferson HealthCare Center Jefferson 93 94.0
Norwalk HealthCare Center Norwalk 51 86.2
Polk City HealthCare Center Polk City 68 89.4
----- ----
TOTAL IOWA 547 92.8%
LOUISIANA
Alexandria HealthCare Center Alexandria 75 67.0%
Heritage HealthCare Center--Crowley Crowley 57 93.4
Heritage HealthCare Center--Hammond Hammond 108 85.1
----- ----
TOTAL LOUISIANA 240 82.0%
MICHIGAN
Bedford Villa HealthCare Center(2) Southfield 61 83.3%
Cambridge East HealthCare Center(2) Madison Heights 160 93.8
Cambridge North HealthCare Center(2) Clawson 120 95.8
Cambridge South HealthCare Center(2) Beverly Hills 102 95.7
Clinton-Aire HealthCare Center(2) Clinton Township 150 95.0
Crestmont HealthCare Center(2) Fenton 132 93.7
Frenchtown HealthCare Center(2) Monroe 229 76.9
Heritage Manor HealthCare Center(2) Flint 180 92.3
Hope HealthCare Center(2) Westland 142 94.3
Madonna HealthCare Center(2) Detroit 138 88.5
Middlebelt HealthCare Center(2) Livonia 162 95.1
Nightingale HealthCare Center(2) Warren 185 95.6
St. Anthony HealthCare Center(2) Warren 102 90.5
----- ----
TOTAL MICHIGAN 1,863 91.8%
MISSISSIPPI
Heritage HealthCare Center--Cleveland Cleveland 75 94.3%
Heritage HealthCare Center--Clinton Clinton 135 96.2
Heritage HealthCare Center--Columbia Columbia 119 95.6
Heritage HealthCare Center--Corinth Corinth 95 94.9
Heritage HealthCare Center--Greenwood Greenwood 110 94.9
Heritage HealthCare Center--Grenada Grenada 137 95.3
Heritage HealthCare Center--Holly
Springs Holly Springs 120 93.9
Heritage HealthCare Center--Indianola Indianola 75 98.0
Trace Haven HealthCare Center Natchez 58 93.4
Heritage HealthCare Center--Yazoo
City Yazoo City 180 95.3
----- ----
TOTAL MISSISSIPPI 1,104 95.2%
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
LICENSED OCCUPANCY
FACILITY LOCATION BEDS PERCENTAGE(1)
-------- ---------------- -------- --------------
<S> <C> <C> <C>
OHIO
Rosegate HealthCare Center West Worthington 100 84.7%
------ -----
TOTAL OHIO 100 84.7%
TENNESSEE
Heritage HealthCare Center--
Collierville Collierville 114 101.2%
Heritage HealthCare Center--Memphis Memphis 112 89.0
------ -----
TOTAL TENNESSEE 226 95.1%
SOUTH CAROLINA
Faith HealthCare Center Florence 124 93.0%
Hallmark HealthCare Center Summerville 88 98.3
Jolley Acres HealthCare Center Orangeberg 60 92.6
Lake City Scranton HealthCare Center Scranton 88 98.9
Oakbrook Health and Rehabilitation
Center Summerville 88 97.3
Prince George HealthCare Center Georgetown 148 83.6
St. George HealthCare Center St. George 88 97.1
Springdale HealthCare Center Camden 148 95.6
------ -----
TOTAL SOUTH CAROLINA 832 93.5%
WEST VIRGINIA
Parkview HealthCare Center Parkersburg 164 90.8%
------ -----
TOTAL WEST VIRGINIA 164 90.8%
WISCONSIN
Ashland Health and Rehabilitation
Center(2) Ashland 121 87.0%
Audubon Health Care Center(2) Bayside 282 96.6
Christopher East HealthCare Center Milwaukee 215 91.5
Greentree Health and Rehabilitation
Center Clintonville 78 76.3
Hillside Health Care Center(2) Milwaukee 39 94.0
Northwest Health Care Center(2) Milwaukee 102 88.0
Park Manor Health Care Center Milwaukee 118 87.1
Pine Manor Health Care Center Clintonville 109 82.2
River Hills West Health Care
Center(2) Pewaukee 237 92.9
Sunny Hill Health Care Center Madison 73 89.8
The Shores Transitional Care and
Rehabilitation Center(2) Glendale 347 84.5
The Virginia Health Care Center Waukesha 105 96.4
Woodland HealthCare Center Brookfield 226 96.4
------ -----
TOTAL WISCONSIN 2,052 90.2%
------ -----
TOTAL GRANCARE OPERATIONS 17,198 86.6%
====== =====
</TABLE>
- --------
(1) Average occupancy rate for the seven months ended July 1996, for all
facilities. See notes below.
(2) Facilities owned by the Company.
(3) Facility is managed by outside facility management company.
(4) Facilities operated as retirement living centers.
(5) Facilities managed by the Company.
71
<PAGE>
CONTRACT MANAGEMENT
Subject to the exceptions set forth below, the Company's contract management
business, which will be owned and operated by New GranCare after the
Distribution, enters into contracts with acute care hospitals for the
management of geriatric specialty programs, generally located inside such
hospitals. Such management contracts do not generally involve the lease or
purchase of any property. Cornerstone does, however, lease two properties in
connection with its operations. The two leased facilities are The Specialty
Hospital of Austin (Texas) and The Specialty Hospital of Houston (Texas),
which as of the end of fiscal 1995 had 104 beds and 45 beds, respectively, and
an average occupancy rate of 35.4% and 55%, respectively. Cornerstone's
corporate headquarters is located in Dallas, Texas.
HOME HEALTH
The Company owns and operates home health, private duty and hospice agencies
located in California, Michigan, Wisconsin and Indiana, which will be owned
and operated by New GranCare following the Distribution. The agencies are
operated by subsidiaries of the Company and lease the space for their
operations; all such leases are immaterial in amount.
72
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS.
The executive officers and directors of the Company, as well as their ages
as of September 12, 1996, are listed below, followed by brief accounts of
their business experience and certain other information. Although the
contemplated restructuring of the Company may result in the elimination of
certain management positions filled by persons listed below, it is expected
that most, if not all, of the officers listed below will be asked to continue
their employment with New GranCare in substantially the same capacity as such
individuals have served the Company. It is also expected that the present
directors of the Company will continue as directors of New GranCare. Certain
of the executive officers listed below have employment agreements with the
Company that provide for certain payments in the event of a "change of
control" of the Company (as such term is defined in the relevant employment
agreements). Executives entitled to payments in connection with a change of
control under their current Company employment contracts will be asked to
waive any change of control payments to which they are entitled in
consideration of grants of New GranCare Options and as a condition to entering
into a new employment contract with New GranCare. It is contemplated that the
employment agreements to be entered into between such executives and New
GranCare will provide for certain payments in the event of a "change of
control" (as such term will be defined in the relevant New GranCare employment
agreements) of New GranCare. The current directors of New GranCare are Messrs.
Athans, Benton and Schneider. Immediately following the Distribution, Messrs.
Benton and Schneider will resign from the Board of Directors of New GranCare
and will be replaced by the current directors of the Company. Mr. Athans will
continue to serve on the Board of Directors of New GranCare. New GranCare will
reevaluate the size and composition of its Board of Directors at the next
annual meeting of stockholders. Mr. Athans also will become President and
Chief Executive Officer of New GranCare following the Distribution. Other than
Mr. Athans, no assurance can be given that any of the officers or directors
listed below will accept any offered positions with New GranCare or that the
management team of New GranCare will remain substantially the same as the
Company's management team. Gene E. Burleson, currently the Chairman, President
and Chief Executive Officer of the Company, will become Chief Executive
Officer and a director of Vitalink following the Distribution and the Merger,
and will continue to act as Chairman of the Board and a director of New
GranCare. Arlen B. Reynolds, currently a Senior Vice President of the Company
and President of TeamCare, will become Executive Vice President of Vitalink
following the Distribution and the Merger.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Gene E. Burleson......... 55 Chairman, President and Chief Executive Officer
Charles M. Blalack....... 69 Director
Antoinette Hubenette,
M.D..................... 46 Director
Joel S. Kanter........... 39 Director
Ronald G. Kenny.......... 40 Director
Robert L. Parker......... 62 Director
William G. Petty, Jr..... 50 Director
Edward V. Regan.......... 66 Director
Gary U. Rolle............ 53 Director
M. Scott Athans.......... Executive Vice President and Chief Operating
50 Officer (present director of New GranCare)
Evrett W. Benton......... 47 Executive Vice President, General Counsel and
Secretary (present director of New GranCare)
Jerry A. Schneider....... Executive Vice President and Chief Financial
48 Officer (present director of New GranCare)
Kay L. Brown............. 43 Senior Vice President and Director of Corporate
Communications and Investor Relations
Donald D. Finney(/1/).... Senior Vice President and President of Long-
49 Term Care Division
Dennis J. Hansen......... 49 Senior Vice President, Chief Information
Officer
Dennis G. Johnston....... 48 Senior Vice President, President of Cornerstone
Health Management Company
Patricia D. Pawelski..... 51 Senior Vice President, Strategic Planning
Arlen B. Reynolds........ 55 Senior Vice President and President of TeamCare
Richard J. Spinello...... Senior Vice President, Director of Risk
49 Management
Keith J. Yoder........... 44 Senior Vice President, Controller and Treasurer
Thomas J. Benes.......... Vice President, Director of Materials
43 Management
David R. Borchers........ 45 Vice President, Director of Facility Management
M. Henry Day, Jr......... Vice President, Assistant General Counsel and
43 Assistant Secretary
Victoria A. Eberle....... 32 Vice President, Director of Tax
Clark D. Hettinga........ 31 Vice President, Assistant Controller
Helayne R. O'Keiff....... Vice President, President of GranCare Home
42 Health Services
Sandra L. Long........... 44 Vice President, Sales and Marketing
Michael H. Rosen......... Vice President, Director of Business Compliance
47 and Controls
Mark H. Rubenstein....... 51 Vice President, Director of Human Resources
</TABLE>
- -------
(1) Mr. Finney resigned from his positions with the Company effective January
1, 1997.
73
<PAGE>
Gene E. Burleson has served as Chairman of the Board of the Company since
January 1994. Additionally, Mr. Burleson has served as President and Chief
Executive Officer of the Company since December 1990. Mr. Burleson will cease
acting as President and Chief Executive Officer upon completion of the
Distribution and the Merger. Mr. Burleson has served as President and a
Director of the Company since October 1989. From 1974 to September 1989, Mr.
Burleson was employed by American Medical International, Inc. ("AMI"), a
provider of health care services, where from early 1988 to March 1989 he
served as President while continuing his role as Chief Operating Officer, a
position he assumed in 1986. Prior to serving as President of AMI,
Mr. Burleson was President and Chief Executive Officer of American Medical
International--European Operations for nine years. Mr. Burleson currently
serves on the boards of directors of three other public companies: Alternative
Living Services, Inc. ("ALS"), a developer and manager of assisted living
facilities; Deckers Outdoor Corp., a footwear manufacturer; and Walnut
Financial Services, a provider of financial services.
Charles M. Blalack became a director of the Company in March 1989. From
March 1993 to the present, Mr. Blalack has been Chairman and Chief Executive
Officer of Blalack & Company, a member of the National Association of
Securities Dealers, Inc. ("NASD"). From September 1969 to March 1993, Mr.
Blalack was Chairman of the Board and Chief Executive Officer of Blalack-Loop,
Incorporated, a member of the NASD and a registered investment advisor. Mr.
Blalack was a director of Beverly Enterprises, Inc. ("Beverly Enterprises"),
the largest operator of long-term care facilities in the United States, from
1964 to 1975, and he currently serves on the board of directors of Advanced
Micro Devices, Inc., a publicly held company.
Antoinette Hubenette, M.D. became a director of the Company in April 1992.
Dr. Hubenette is a medical doctor who specializes in internal medicine and
geriatric care. Since 1982, Dr. Hubenette has been a partner with the Medical
Group of Beverly Hills, and recently became the President of the group. In
1968, Dr. Hubenette received her bachelor's degree from the University of
California, Berkeley, and in 1976 completed her M.D. at George Washington
University. Currently, Dr. Hubenette serves on the board of directors of
Cedars-Sinai Medical Care Foundation and is a member of several professional
organizations, including the American Medical Association.
Joel S. Kanter became a director of the Company in December 1990. From 1986
to the present, Mr. Kanter has been the President of Windy City, Inc., a
private investment company, and from 1988 to February 27, 1995 he served as a
consultant to Walnut Capital Corporation ("WCC"), a closely held investment
management and advisory firm. From February 27, 1995 to the present, Mr.
Kanter has served as the President of WCC and Walnut Financial Services. Prior
to 1986, Mr. Kanter was Managing Director of the Investors' Washington
Service, an investment advisory company specializing in providing advice to
institutional clients about the impact of federal legislative and regulatory
decisions on debt and equity markets. Mr. Kanter serves on the board of
directors of five other publicly held companies, I-Flow Corporation (a home
infusion pump manufacturer), TransGlobal Services, Inc. (an engineering
personnel temporary firm), Walnut Financial Services, Inc. (a provider of
small business financial and consulting services), Healthcare Acquisition
Corp. (a corporation involved in acquiring healthcare related companies) and
Osteoimplant Technology, Inc. (a manufacturer of shoulder and hip implant
devices), and several privately held companies.
Ronald G. Kenny became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Mr. Kenny served as a director of
Evergreen from June 1993 up to the time of the Evergreen merger and currently
serves as Vice President--Finance of Huizenga Capital Management, a privately
held investment management company, since 1990. Mr. Kenny was a director of
National Heritage, Inc. ("NHI") from October 1992 to June 1993. Mr. Kenny
serves on the board of directors of Alternative Living Services, Inc. ("ALS"),
a public corporation that owns and manages assisted living facilities.
Robert L. Parker became a director of the Company in July 1995 in connection
with the Company's merger with Evergreen. Mr. Parker served as Chairman of the
Board of Directors of Omega Healthcare Investors, Inc., a real estate
investment trust ("Omega") from March 1992 to July 1995 and was a Managing
Director of Omega Capital, Ltd., a private health care investment fund ("Omega
Capital"), from 1986 to 1992. From 1972 through
74
<PAGE>
1983, Mr. Parker was a senior officer of Beverly Enterprises. At the time of
his retirement in 1983, Mr. Parker was Executive Vice President of Beverly
Enterprises. Mr. Parker is a registered architect, licensed in California and
Oklahoma. Mr. Parker continues to serve as a director of Omega and also serves
as a director of First National Bank of Bethany, Oklahoma, a private
commercial bank.
William G. Petty, Jr. became a director of the Company in July 1995 in
connection with the Company's merger with Evergreen. Since July 1, 1996, Mr.
Petty has been a principal of Beecken, Petty & Company LLC, which is the
general partner of Healthcare Equity Partners, a venture capital partnership.
Mr. Petty served as Chairman of the Board of Directors, President and Chief
Executive Officer of Evergreen from June 30, 1993 to July 1995. He served as
Chairman of the Board, Chief Executive Officer and President of NHI from
October 1992 to June 1993. From 1988 to 1992, he served as President and Chief
Executive Officer of Evergreen Healthcare Ltd., L.P. ("EHL"), an affiliate of
Evergreen, and has been a Managing Director of Omega Capital, Ltd., a private
health care investment fund since 1986. Mr. Petty has been the Chairman of the
Board of ALS since 1993. Mr. Petty also served as the Chief Executive Officer
of ALS from 1993 until February 1996.
Edward V. Regan became a director of the Company in January 1994. From 1979
to 1993, Mr. Regan served as New York State Comptroller. From 1992 to the
present, Mr. Regan has been associated with the Jerome Levy Economics
Institute, a non-partisan research center generating public policy
alternatives through the study of economics. Mr. Regan is a member of the U.S.
Competitiveness Policy Council. From 1988 to 1992, Mr. Regan was an adjunct
professor at New York University's Stern Graduate School of Business. Mr.
Regan currently serves on the board of directors of the Oppenheimer Funds,
Inc. and River Bank America, a publicly held company and Offitbank, a
professional money management firm and a publicly held company.
Gary U. Rolle became a director of the Company in February 1994. From 1983
to the present, Mr. Rolle has been the Executive Vice President and Chief
Investment Officer of Transamerica Investment Services, a subsidiary of
Transamerica Corp., a financial services company. Mr. Rolle is currently the
Chairman and President of Transamerica Income Shares, director of Transamerica
Investors, Transamerica Occidental Life Insurance Company, Transamerica Life
Insurance & Annuity, Transamerica Assurance Company, Transamerica Realty
Services and Arbor Life Insurance Company and Chairman of Separate Account
Funds B & C. Mr. Rolle is also a member of the Board of Trustees of Harvey
Mudd College.
M. Scott Athans joined the Company in November 1993 as Executive Vice
President and Chief Operating Officer. Prior to joining the Company, Mr.
Athans was the Chief Operating Officer of Healthfield Inc., a home health care
business with operations in Georgia, Tennessee, Alabama, Massachusetts and
Florida. From March 1990 to July 1991, Mr. Athans served as the Chief
Executive Officer of the Georgia Baptist Medical Center. Prior to that, Mr.
Athans spent six years as Senior Vice President and Regional Director of AMI.
Evrett W. Benton joined the Company in January 1992 and shortly thereafter
became Executive Vice President, General Counsel and Secretary. Prior to
joining the Company, he was with a national law firm, Andrews & Kurth L.L.P.,
where he began his legal career in Houston in 1975. In 1989, he moved to the
firm's Los Angeles office where he served as managing partner. His practice
specialized in business law, with an emphasis on finance, mergers and
acquisitions and general corporate law.
Jerry A. Schneider joined the Company in January 1995 as Executive Vice
President and Chief Financial Officer. Mr. Schneider served as President of
J&K Alan Company, Ltd., London, England, an investment management company,
from 1991 to 1994. From 1985 to 1991, Mr. Schneider was the Chief Financial
Officer and Legal Counsel to Eugene V. Klein, dba Del Rayo Racing Stables, a
major thoroughbred racing and breeding operation. Prior to 1985, he spent
seven years as the Vice President of Taxes and International Chief Financial
Officer of AMI.
Kay L. Brown, a Senior Vice President since February 1993, is Director of
Corporate Communications and Investor Relations of the Company. From June 1992
through February 1993, Ms. Brown was Vice President, Home Health of the
Company. Prior to joining the Company in 1992, from December 1988 to June 1992
Ms. Brown served as President and Chief Executive Officer of Visiting Nurse
Associations of America ("VNAA"), the organization representing visiting nurse
associations throughout the United States. From February 1987 to December
1988, Ms. Brown was VNAA's Vice President and Chief Operating Officer.
75
<PAGE>
Dennis J. Hansen joined the Company in February 1993 as the Director of
Reimbursement and in August 1993 became the Director of Reimbursement and
Management Information Services. Currently, Mr. Hansen serves as Senior Vice
President and Chief Information Officer. In January 1994, Mr. Hansen was
promoted to Vice President and in January 1995 he became a Senior Vice
President of the Company. Prior to joining the Company, Mr. Hansen spent ten
years as the Corporate Vice President, Director of Reimbursement Services of
AMI.
Dennis G. Johnston joined the Company as President of Cornerstone in April
1995 and became Senior Vice President of the Company in July 1995.
Mr. Johnston was the co-founder of Cornerstone in 1990, and served as its
President and Chief Executive Officer from 1990 to 1995. From 1984 to 1989,
Mr. Johnston held various positions with the management subsidiary of Republic
Health Corporation, including that of Senior Development Officer.
Arlen B. Reynolds joined the Company in September 1995 as Senior Vice
President and President of TeamCare. In connection with the Merger, Mr.
Reynolds will resign as an officer of the Company and become an Executive Vice
President of Vitalink. From 1993 to September 1995, Mr. Reynolds was the
administrator and Chief Operating Officer of Brookwood Medical Center in
Alabama. From 1988 to 1993, he served in several capacities with AMI,
including Chief Executive Officer and President of an acute care hospital.
Patricia D. Pawelski became Senior Vice President of the Company in May
1995. Previously, Ms. Pawelski served as Vice President of Operations Support
from January 1994 after serving as Vice President of Operations--Michigan from
January 1993 and as Director of Operations--Michigan from October 1992. Prior
to joining the Company, Ms. Pawelski served as the President of International
Health Care Management since 1984.
Richard J. Spinello became a Senior Vice President in January 1996. Prior to
this, he served as Vice President and Director of Risk Management since
January 1993 and in various other capacities with the Company from the time he
joined the Company in 1991. Prior to joining the Company, Mr. Spinello was
Director of both Professional Liability Claims and Loss Control at AMI.
Keith J. Yoder joined the Company in July 1995 as Senior Vice President,
Controller and Treasurer. He previously served as Vice President, Chief
Financial Officer of Evergreen since January 1992, Secretary of Evergreen
since June 1993 and as Treasurer of Evergreen since December 1993. He served
as Vice President of NHI from December 1992 to June 1993 and as the Chief
Financial Officer and Secretary of NHI from January 1993 to June 1993. Prior
to joining Evergreen, Mr. Yoder served as Area Controller for ARA from 1989 to
1992.
Thomas J. Benes joined the Company in March 1995 as Director of Materials
Management. In January 1996, Mr. Benes was promoted to Vice President. Prior
to joining the Company, Mr. Benes served in several capacities with Main Line
Health, Inc. from 1987 to 1994.
David R. Borchers joined the Company in November 1993, as Director of
Facility Management, and became Vice President in January 1995. Prior to
joining the Company, Mr. Borchers served as Vice President of Facilities
Development and Engineering for Dole Food Company since 1988.
M. Henry Day, Jr. became a Vice President of the Company in January 1996.
Prior to this, he served as Assistant General Counsel and Assistant Secretary
of the Company since September 1994. Before joining the Company, Mr. Day was
General Counsel of Life Care Centers of America, Inc., a privately-owned
Cleveland, Tennessee based long-term healthcare provider.
Victoria A. Eberle joined the Company in January 1992 as Corporate Tax
Manager and became Vice President in January 1994. Prior to joining the
Company, Ms. Eberle worked for the accounting firm of Deloitte & Touche LLP
for five years.
76
<PAGE>
Clark D. Hettinga was elected Vice President in January 1996. Previously,
Mr. Hettinga served as Director of Accounting, Assistant Controller, Director
of Financial Reporting and Corporate Reporting and SEC Compliance Supervisor
for the Company from 1992 to present. From 1989 to 1992, Mr. Hettinga was an
auditor with Ernst & Young LLP in Milwaukee, Wisconsin.
Sandra L. Long became Vice President, Sales and Marketing of the Company in
October 1995 after serving as Director of Operations--Midwest Region since
1993. Previously, Ms. Long served as the Executive Director of The Shores
Transitional Care and Rehabilitation Institute during 1992 and 1993.
Helayne R. O'Keiff joined the Company in April 1995 as the President of
GranCare Home Health Services. In January 1996, Ms. O'Keiff became a Vice
President of the Company. From 1992 to 1995 Ms. O'Keiff served as the Chief
Operating Officer of Home Technology Healthcare, Inc., a Nashville, Tennessee
based home care services provider. From 1987 to 1992, Ms. O'Keiff was Director
of Home Health Services at Barnes Hospital in St. Louis, Missouri.
Michael H. Rosen joined the Company in October 1991 as Controller. In
January 1994 he was promoted to Vice President of the Company. In 1995, Mr.
Rosen became Director of Business Compliance and Controls.
Mark H. Rubenstein was employed by AMS for eleven years and joined the
Company as Vice President, Director of Human Resources in connection with the
acquisition of AMS in December 1990.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company presently has a total of five standing committees of its Board
of Directors including an Audit Committee, a Finance Committee, a Management
Compensation Committee, a Nominating Committee and a Quality Committee. It is
anticipated that New GranCare will establish similar committees of its Board
of Directors. A brief description of the responsibilities of each of the
standing committees of the Company's Board of Directors and the members of
each such committee is set forth below.
Messrs. Kanter (Chairman), Regan and Kenny are the members of the Company's
Audit Committee. The Audit Committee is responsible for coordinating matters
with independent auditors, reviewing internal accounting controls and
recommending the engagement of independent accountants to the Board of
Directors.
The Finance Committee consists of Messrs. Petty (Chairman), Burleson, Kanter
and Rolle. The Finance Committee is responsible for evaluating financing
alternatives and advising management on financial strategies and major
financial transactions.
Messrs. Rolle (Chairman), Blalack, Parker and Dr. Hubenette are the members
of the Management Compensation Committee. The Management Compensation
Committee is charged with administering the Company's incentive programs and
reviewing and making recommendations to the Board of Directors with respect to
the compensation of all officers of the Company and all issuances of equity
securities of the Company to the Company's directors, officers, employees and
consultants.
The Nominating Committee consists of Messrs. Burleson (Chairman), Blalack
and Petty. The Nominating Committee is responsible for selecting and
nominating individuals to fill vacancies on the Board of Directors, and
appointing officers. The Nominating Committee will consider nominees
recommended by shareholders pursuant to the notice and other provisions set
forth in the Company's Bylaws.
The Quality Committee is comprised of Dr. Hubenette (Chairperson) and
Messrs. Burleson and Blalack. The Quality Committee is responsible for
evaluating the quality of patient care and services provided at the Company's
facilities.
COMPENSATION OF DIRECTORS
The initial New GranCare Board of Directors (which consists of Messrs.
Athans, Benton and Schneider prior to the Distribution) has adopted, and the
Company, the sole stockholder of New GranCare prior to the Distribution, has
approved a compensation program for its outside directors (the "New GranCare
Directors
77
<PAGE>
Plan") that is identical to the program that is currently used by the Company
(the "GranCare Directors Plan"). As part of this program, New GranCare has
adopted, and the Company has approved, the Outside Directors Stock Incentive
Plan, pursuant to which New GranCare is authorized to issue up to 200,000
shares of New GranCare Common Stock subject to options granted in connection
with the New GranCare Directors Plan. Of the shares authorized to be issued
under the New GranCare Directors Plan, options for 90,000 shares of New
GranCare Common Stock will be issued immediately after the Distribution to
replace options granted under the GranCare Directors Plan maintained by the
Company prior to the Distribution. As a result of the Distribution and the
Merger, outstanding options to purchase Company Common Stock awarded under the
program currently used by the Company will be treated in the same manner as
all other Company Options. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
Stock Awards
The New GranCare Directors Plan provides for the automatic annual grant of
shares of New GranCare Common Stock to each non-employee director. The number
of shares of New GranCare Common Stock issued to each non-employee director
will equal the result obtained by dividing 12,000 by the fair market value of
the shares of New GranCare Common Stock on the first trading day in April
1997, (the "Effective Date"). On the third anniversary of the Effective Date
of the Directors Plan and each third anniversary thereafter, the denominator
of the formula will be revised so that it equals the fair market value of the
New GranCare Common Stock on the first trading date in April of such year. The
terms of the stock awards discussed above are identical to the terms contained
in the GranCare Directors Plan.
Option Awards
Under the New GranCare Directors Plan, each non-employee director will also
receive options to purchase 10,000 shares of New GranCare Common Stock upon
his or her initial appointment as a director and will receive options to
purchase an additional 6,000 shares of New GranCare Common Stock at each of
the next two annual meetings of shareholders. After a non-employee director
has received options to purchase 22,000 shares of New GranCare Common Stock,
he or she will then receive options to purchase an additional 2,000 shares of
New GranCare Common Stock at each succeeding annual meeting of shareholders.
The exercise price of all of such options will be the fair market value of the
New GranCare Common Stock on the date of grant and such options will vest in
equal annual increments over a three year period.
In the event of the death or disability of a non-employee director while
serving as a member of the New GranCare Board of Directors, or upon the
occurrence of a "change in control" (as defined in the New GranCare Directors
Plan) of New GranCare, all outstanding options granted under the New GranCare
Directors Plan vest and become immediately exercisable. Each option expires
ten years from the date of grant, but expires earlier to the extent not vested
upon the cessation of a non-employee director's service on the New GranCare
Board of Directors for reasons other than death or disability. In the event
that a change in control of New GranCare occurs as a result of certain "tender
offers" (as defined in the New GranCare Directors Plan), all outstanding
options will be surrendered in exchange for a cash payment by New GranCare.
The terms of the stock awards discussed above are identical to the terms
contained in the GranCare Directors Plan.
Tax Consequences
A New GranCare director will not be taxed on the receipt of an option. A
director will be taxed, however upon the exercise of an option in an amount
equal to the difference between the exercise price of the option and the fair
market value of the New GranCare Common Stock subject to the exercised option
on date of exercise, and New GranCare will then be entitled to a corresponding
deduction.
Cash Awards
The non-employee directors will also receive annual cash compensation of
$12,000 consisting of four payments of $3,000 each for each of the four
regularly scheduled Board Meetings attended. Each non-employee director will
also receive $1,000 per day for committee meetings attended on a date when a
regular board meeting or retreat is not also scheduled.
78
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain summary information concerning
compensation paid or accrued by the Company on behalf of the Chief Executive
Officer and the four most highly compensated executive officers of the Company
other than the Chief Executive Officer for the fiscal years ended December 31,
1993, 1994 and 1995. Mr. Gene E. Burleson, currently the Chairman of the
Board, Chief Executive Officer and President of the Company, will become Chief
Executive Officer of Vitalink following the Merger and will not be an
executive officer of New GranCare. New GranCare presently intends to continue
the compensation policies and practices of the Company following the
Distribution although there can be no assurance that changes to or
modification of such practices and policies will not be implemented if deemed
appropriate by the New GranCare Board of Directors and management.
COMPANY SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION OPTIONS/SARS COMPENSATION
POSITION YEAR ($)(1) ($) ($) (#) ($)(1)(2)
------------------ ---- -------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson 1995 $385,000 -- $ -- -- $65,263(3)
Chairman of the Board, 1994 350,000 -- 180,542(4) -- 66,933
Chief 1993 350,000 -- -- 200,000(5) 66,815
Executive Officer and
President
M. Scott Athans 1995 $330,000 -- $ -- -- $55,756(6)
Executive Vice 1994 300,000 -- -- -- 13,312
President and 1993 50,000(7) -- -- 225,000(5) 200
Chief Operating Officer
Evrett W. Benton 1995 $330,000 -- $ --(8) -- $33,163(9)
Executive Vice 1994 300,000 -- -- -- 32,657
President, 1993 300,000 -- -- 150,000(5) 27,160
General Counsel and
Secretary
Jerry A. Schneider 1995 $239,583(10) -- $ 34,375(11) 125,000(12) $13,417(13)
Executive Vice 1994 -- -- -- -- --
President and 1993 -- -- -- -- --
Chief Financial Officer
Donald D. Finney(14) 1995 $217,405(15) $ -- $ 80,500(16) 25,000(17) $ 1,227(18)
Senior Vice President 1994 189,035(19) 119,843(19) -- 42,004(19) 1,169(19)
and President 1993 156,365(19) 66,197(19) -- 8,857(19) 348(19)
of Long Term Care
Division
</TABLE>
- --------
(1) The Company has a deferred compensation program (the "Deferred
Compensation Program") that is applicable to compensation paid or payable
to eligible employees of the Company. Under such program the Company may
elect to match a portion of any compensation amounts deferred. Deferred
salary amounts are reported in this table under the Salary column and
matching amounts paid or accrued are reported in this table under the All
Other Compensation column.
(2) The amounts shown in this column include the Company's contributions in
respect of the Company's profit sharing plan (the "Profit Sharing Plan");
all non-union employees who have completed two years of employment with
the Company can participate in the Profit Sharing Plan. The Company makes
an annual contribution to the Profit Sharing Plan in an amount equal to
2% of each participating employee's salary for the previous year, plus an
additional 2% of any portion of the employee's salary that exceeds one-
half of the social security wage base, subject to certain limitations.
Amounts shown also include the Company's payment in respect of the
Company's 401(k) Plan; all non-union employees who have completed one
year of employment with the Company can participate in the 401(k) Plan.
Eligible employees may contribute from 1% to 15% percent of their salary
to the 401(k) Plan, subject to certain limitations. The Company
contributes a matching amount each year to the 401(k) Plan equal to 25%
of the first 4% of each participant's contribution for that year. This
column also includes payments made by the Company relating
79
<PAGE>
to premiums with respect to the Executive Split Dollar Life Insurance Plan,
for which only the Company's officers are eligible ("Executive Life
Insurance"), and long-term disability insurance and Group Life Term
Insurance, which is provided to all of the Company's employees ("Group Term
Life Insurance"). The Executive Split Dollar Life Insurance Plan became
effective in fiscal year 1993.
(3) Represents the Company's contribution of $2,310 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, and the Company's payment of premiums
of $56,200 for Executive Life Insurance, $47 for Group Term Life
Insurance and $1,318 for long-term disability insurance. Under the
Executive Split Dollar Life Insurance Plan, should Mr. Burleson remain in
the Company's employ until age 65, Mr. Burleson will be eligible to
receive the cash surrender value of the policy maintained by the Company
on Mr. Burleson's behalf. Assuming Mr. Burleson continues at his present
salary until age 65, the remaining aggregate cost of the premiums
required to be paid by the Company is $562,000 or $56,200 per year.
(4) Represents $162,542 in relocation expense and $18,000 in car allowance.
(5) Represents stock options granted on October 26, 1993 at an exercise price
of $13.25 per share.
(6) Represents the Company's contribution of $2,310 to the 401(k) Plan,
$1,789 pursuant to the Company's Deferred Compensation Program, the
Company's payment of premiums of $51,200 for Executive Life Insurance,
$47 for Group Term Life Insurance and $410 for long-term disability
insurance. Under the Executive Split Dollar Life Insurance Plan, should
Mr. Athans remain in the Company's employ until age 65, Mr. Athans will
be eligible to receive the cash surrender value of the policy maintained
by the Company on Mr. Athans' behalf. Assuming Mr. Athan continues at his
present salary until age 65, the remaining aggregate cost of the premiums
required to be paid by the Company is $819,200 or $51,200 per year.
(7) Mr. Athans joined the Company in November 1993 and his salary for 1993
reflects a partial year of service.
(8) Mr. Benton received certain benefits in 1995 that are properly not
reflected in this table. For a description of these benefits, see
"Related Party Transactions."
(9) Represents the Company's contribution of $2,009 to the 401(k) Plan and
$5,388 to the Profit Sharing Plan, and the Company's payment of premiums
of $19,800 for Executive Life Insurance, $47 for Group Term Life
Insurance and $5,919 for long-term disability insurance. Under the
Executive Split Dollar Life Insurance Plan, should Mr. Benton remain in
the Company's employ until age 65, Mr. Benton will be eligible to receive
the cash surrender value of the policy maintained by the Company on Mr.
Benton's behalf. Assuming Mr. Benton continues at his present salary
until age 65, the remaining aggregate cost of the premiums required to be
paid by the Company is $356,400 or $19,800 per year.
(10) Mr. Schneider joined the Company in January 1995 and his salary for 1995
reflects a partial year of service.
(11) Represents $20,000 paid to Mr. Schneider in respect of relocation
expenses and $14,375 in respect of Mr. Schneider's car allowance.
(12) Represents stock options granted on January 27, 1995 at an exercise price
of $15.75 per share.
(13) Represents the Company's payment of premiums of $9,650 for Executive Life
Insurance, $35 for Group Term Life Insurance, $750 for long-term
disability insurance and the Company's contribution of $2,982 to the
Company's Deferred Compensation Program. Under the Executive Split Dollar
Life Insurance Plan, should Mr. Schneider remain in the Company's employ
until age 65, Mr. Schneider will be eligible to receive the cash
surrender value of the policy maintained by the Company on Mr.
Schneider's behalf. Assuming Mr. Schneider continues at his present
salary until age 65, the remaining aggregate cost of the premiums
required to be paid by the Company is $656,200 or $38,600 per year.
(14) Resigned effective January 1, 1997.
80
<PAGE>
(15) Mr. Finney became an employee of the Company on July 21, 1995 in
connection with the merger with Evergreen, which was treated as a pooling
of interests for financial reporting purposes. Represents $98,436
received from the Company after the merger with Evergreen and $118,969
received from Evergreen prior to such merger. The amounts shown for the
years 1993 and 1994 were paid entirely by Evergreen.
(16) Includes $71,700 paid to Mr. Finney in connection with the termination of
his employment agreement with Evergreen and $8,800 in respect of Mr.
Finney's car allowance.
(17) Represents stock options granted on July 21, 1995 at an exercise price of
$17.25.
(18) Represents the Company's payment of premiums of $142 for Group Term Life
Insurance, $410 for long-term disability insurance and the Company's
contribution of $675 to the 401(k) Plan.
(19) Represents amounts and options paid by Evergreen, the acquisition of
which was treated as a pooling of interests for financial reporting
purposes.
Employment Agreements
Following the Distribution and the Merger, New GranCare intends to enter
into employment agreements with most of the executive officers who have
employment agreements with the Company as of the Distribution Date. As a
condition to any executive officer executing an employment agreement with New
GranCare or Vitalink, each executive officer must agree to waive his or her
rights to certain change of control payments granted under any existing
employment agreement with the Company which may be triggered by the
Distribution and the Merger. Although the specific terms of employment
agreements to be entered into between New GranCare and its executive officers
have not yet been determined, it is anticipated that such employment
agreements will be substantially similar to the existing agreements with the
Company and will provide for certain payments to executive officers in the
event of a "change of control" (as such term is defined in the relevant New
GranCare employment agreements) of New GranCare.
Mr. Burleson has a five-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Management Compensation Committee (the
"Committee"). The employment agreement provides for annual automatic
extensions of the term year for an additional year unless the Board or Mr.
Burleson elects not to have the term so extended. The Committee previously
established Mr. Burleson's base salary at $430,000 for 1996. The agreement
also provides for severance compensation upon termination of employment by the
Company for any reason other than for "Cause," as defined in agreement,
consisting of a minimum of three year's base salary and, in the event of a
change-in-control, as defined in the agreement, payment of a minimum of five
years base salary and accelerated vesting of all options held by Mr. Burleson.
Following the Merger, Mr. Burleson will become an employee of Vitalink. It is
anticipated that Vitalink will assume Mr. Burleson's existing employment
contract on substantially the same terms as those described above.
Mr. Athans has a three-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement provides for
annual automatic extensions of the term for an additional year unless the
Board or Mr. Athans elects not to have the term so extended. The Committee
previously established Mr. Athans' base salary at $350,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Athans.
Mr. Benton has a three-year employment agreement with the Company which
became effective January 1, 1994 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement also provides
for annual automatic extensions of the term for an additional year unless the
Board or Mr. Benton elects not to have the term so extended. The Committee
previously established Mr. Benton's base salary at $350,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Benton.
81
<PAGE>
Mr. Schneider has a three year employment agreement with the Company, which
became effective January 16, 1995 and provides for annual adjustments in base
salary as determined by the Committee. The employment agreement also provides
for annual automatic extensions of the term for an additional year unless the
Board or Mr. Schneider elects not to have the term so extended. The Committee
previously established Mr. Schneider's base salary at $275,000 for 1996. The
agreement also provides for severance compensation upon termination of
employment by the Company for any reason other than for "Cause," as defined in
the agreement, consisting of a minimum of two year's base salary and, in the
event of a change-in-control, as defined in the agreement, payment of a
minimum of three years base salary and accelerated vesting of all options held
by Mr. Schneider.
Mr. Finney has a two-year employment agreement with the Company which became
effective July 20, 1995 and provides for annual adjustments in base salary as
determined by the Committee. The employment agreement also provides for annual
automatic extensions of the term for an additional year unless the Board or
Mr. Finney elects not to have the term so extended. The agreement provided for
a minimum base salary of $240,000 for 1995 which is also Mr. Finney's base
salary for 1996. The agreement also provides for severance compensation upon
termination of employment by the Company for any reason other than for
"Cause," as defined in the agreement, consisting of a minimum of one year's
base salary and, in the event of a change-in-control, as defined in the
agreement, payment of a minimum of one years base salary and accelerated
vesting of all options held by Mr. Finney. Mr. Finney has resigned from his
position with the Company effective January 1, 1997. In connection therewith,
the Company has agreed to pay Mr. Finney $240,000 (one year's salary),
regardless of whether the Merger occurs.
New GranCare Replacement Stock Option Plan
The New GranCare Board has adopted, and the Company, as the sole stockholder
of New GranCare prior to the Distribution, has approved, the 1996 Replacement
Plan (the "Replacement Plan"). The Replacement Plan was adopted solely for the
purpose of granting options to executives of the Company in connection with
the Distribution. All options granted pursuant to the Replacement Plan will be
fully vested and exercisable on substantially the same terms, other than
price, as the related Company Options outstanding as of the Distribution
Record Date. Under the terms of the Replacement Plan, New GranCare Options
will be exercisable for a limited period following the termination of an
executive's employment with New GranCare.
1996 Stock Incentive Plan
The initial New GranCare Board of Directors has adopted, and the Company, as
the sole stockholder of New GranCare prior to the Distribution, has approved,
the 1996 Stock Incentive Plan (the "New GranCare Plan"). The purpose of the
New GranCare Plan is to allow New GranCare to attract and retain qualified
officers, key employees and consultants and to provide these individuals with
additional incentive to devote themselves to the future success of New
GranCare. Additionally, New GranCare believes that awards under the New
GranCare Plan will more closely align the interests of its personnel with
those of its stockholders.
The New GranCare Plan replaces the incentive plans that were available for
the grant of incentive awards to officers, key employees and consultants of
the Company, pursuant to which awards were granted in the form of qualified
and non-qualified stock options, stock appreciation rights ("SARs") and shares
of restricted stock, all of which types of awards will continue to be
available under the New GranCare Plan. In addition, the New GranCare Plan
provides for several types of equity-based incentive compensation awards not
currently available under the Company's existing incentive plans, namely
performance units, performance shares, phantom stock, unrestricted bonus stock
and dividend equivalent rights.
The New GranCare Plan thus increases New GranCare's flexibility in
structuring equity-based incentive compensation by broadening the types of
incentive awards that may be made. The Board of Directors of New GranCare
believes that a flexible plan is needed to fashion equity-based incentives
consistent with New GranCare's philosophy of linking executive compensation to
total shareholder returns and the long-term financial performance of New
GranCare.
The New GranCare Plan will be administered by the Management Compensation
Committee of the Board of Directors of New GranCare (the "Committee"), and it
is intended that each member of the Committee will
82
<PAGE>
be "disinterested" within the meaning of Rule 16b-3 under the Securities
Exchange Act of 1934. As a practical matter, directors who are employees of
New GranCare are not eligible to serve as members of the Committee. The
Committee will determine the persons to whom, and the times at which, awards
will be granted, the type of awards to be granted and all other related terms
and conditions of the awards, subject to the limitations described below and
as set forth in the New GranCare Plan. The terms and conditions of each award
will be set forth in a written agreement with a participant or a written
program established by the Committee. All officers and key employees of New
GranCare and its affiliates are eligible to participate in the New GranCare
Plan. It is currently estimated that approximately 33 individuals are eligible
to participate.
A total of 1,500,000 shares of New GranCare Common Stock are reserved for
issuance pursuant to the New GranCare Plan, of which no more than 500,000
shares may be used for restricted stock and stock bonus grants. The number of
shares of New GranCare Common Stock reserved under the New GranCare Plan is
subject to adjustment in the event of stock dividends, stock splits,
recapitalizations and similar events.
The per share exercise price of any options may not be less than the fair
market value of a share of New GranCare Common Stock at the time of grant.
Once an option is granted, the exercise price may not be reduced by amendment
and an option may not be exchanged for a new option with a lower exercise
price. No incentive stock option may be granted on or after the tenth
anniversary of the date the New GranCare Plan was approved by the Board of
Directors of New GranCare.
The Committee shall determine whether stock appreciation rights, performance
unit awards, dividend equivalent rights, performance share awards and phantom
stock awards shall be settled in cash or in shares of New GranCare Common
Stock valued at fair market value on the date of payment. The Committee also
shall be authorized to accelerate the vesting, exercisability and settlement
of awards and to permit the exercise price of an option to be paid in cash or
by the delivery or withholding of shares.
The Board of Directors of New GranCare may amend or terminate the New
GranCare Plan without the approval of the shareholders, but may condition any
amendment on shareholder approval if the Board believes it is necessary or
advisable to comply with any applicable tax or regulatory requirement. No
termination or amendment of the New GranCare Plan without the consent of the
holder of an award shall adversely affect the rights of that participant.
The Committee may provide with respect to any award that, in the event of a
Change in Control (as defined in the New GranCare Plan) of New GranCare, the
award shall be cashed out in an amount based on the fair market value of the
New GranCare Common Stock without regard to the exercisability of the award or
any other conditions or restrictions.
Federal Income Tax Consequences. A participant will not recognize income
upon the grant of an option or at any time prior to the exercise of an option.
At the time the participant exercises a non-qualified option, he or she will
recognize compensation taxable as ordinary income in an amount equal to the
excess of the fair market value of the New GranCare Common Stock on the date
the option is exercised over the price paid for the New GranCare Common Stock,
and New GranCare will then be entitled to a corresponding deduction.
A participant who exercises an incentive stock option will not be taxed at
the time he or she exercises his or her option or a portion thereof. Instead,
he or she will be taxed at the time he or she sells the New GranCare Common
Stock purchased pursuant to the option. The participant will be taxed on the
excess of the amount for which he or she sells the stock over the price he or
she had paid for the stock. If the participant does not sell the stock prior
to two years from the date of grant of the option and one year from the date
the stock is transferred
83
<PAGE>
to him or her, the gain will be capital gain and New GranCare will not get a
corresponding deduction. If the participant sells the stock prior to that
time, the difference between the amount the participant paid for the stock and
the lesser of the fair market value on the date of exercise or the amount for
which the stock is sold, will be taxed as ordinary income and New GranCare
will be entitled to a corresponding deduction. If the participant sells the
stock for less than the amount he or she paid for the stock prior to the one
or two year periods indicated, no amount will be taxed as ordinary income and
the loss will be taxed as a capital loss. Exercise of an incentive option may
subject a participant to, or increase a participant's liability for, the
federal alternative minimum income tax.
A participant generally will not recognize income upon the grant of any
stock appreciation right, dividend equivalent right, performance unit award,
performance share award or phantom share. At the time a participant receives
payment under any such award, he or she generally will recognize compensation
taxable as ordinary income in an amount equal to the cash or the fair market
value of the New GranCare Common Stock received, and New GranCare will then be
entitled to a corresponding deduction.
A participant will not be taxed upon the grant of a stock award if such
award is not transferable by the participant or is subject to a "substantial
risk of forfeiture," as defined in the Internal Revenue Code. However, when
the shares of New GranCare Common Stock that are subject to the stock award
are transferable by the participant and are no longer subject to a substantial
risk of forfeiture, the participant will recognize compensation taxable as
ordinary income in an amount equal to the fair market value of the stock
subject to the stock award, less any amount paid for such stock, and New
GranCare will then be entitled to a corresponding deduction.
The Plan is not qualified under Section 401(a) of the Internal Revenue Code
of 1986.
Annual Incentive Plan
The Board of Directors of New GranCare has adopted, and the Company as its
sole stockholder prior to the Distribution has approved, the Annual Incentive
Plan (the "Annual Incentive Plan"). The Annual Incentive Plan is a bonus plan
intended to link the amount of annual cash bonuses paid to New GranCare's
officers and key employees to corporate performance based on the relative
responsibility of the individual for whom the bonus is to be awarded. Awards
are based on predetermined performance goals established by the Committee
within the first ninety days of each fiscal year of New GranCare. The Annual
Incentive Plan replaces the annual incentive plan that is in effect for
officers and key employees of the Company prior to the Distribution and Merger
and the terms of the Annual Incentive Plan are similar in all material
respects to the terms of Company's annual incentive plan.
The primary performance goal for most participants in the Annual Incentive
Plan will be based on New GranCare's earnings per share. Corporate earnings
per share targets are the sole performance standard by which bonuses will be
measured for the Chief Executive Officer, President and Executive Vice
Presidents. The annual bonus for Divisional Presidents will be based 50% on
the corporate earnings per share targets and 50% on the targeted improvement
for the applicable division in earnings before interest, taxes, depreciation,
amortization and rents ("EBITDAR").
Bonus awards will be payable based upon the attainment of one of three
different levels of performance: threshold, target and superior. No bonus
award will be payable with respect to a performance goal unless the threshold
level of performance is achieved. At the threshold, target and superior
performance levels, 50%, 100% and 150% of the targeted bonus amount allocated
to that performance goal is payable, respectively. The maximum yearly bonus
payable to any individual under the Annual Incentive Plan will be $600,000 per
year.
Payment of annual incentive awards will be made in cash unless the employee
elects, within the first ninety days of the fiscal year, to have payment of
the award made in shares of New GranCare Common Stock. In the event that an
employee makes such an election, he or she will receive New GranCare Common
Stock under the Plan having a fair market value equal to 125% of the value of
the cash award. These shares will be subject to
84
<PAGE>
STOCK OPTIONS
The following tables provide information on options to purchase Company
Common Stock granted to the executive officers named in the Summary
Compensation Table above since December 31, 1995 and summarize the value of
Company Options held by the executive officers named in the Summary
Compensation Table as of September 30, 1996. As a result of the Distribution
and the Merger, all outstanding Company Options will be adjusted as described
under "The Distribution--Consummation of the Distribution; Treatment of
GranCare Stock Options."
AGGREGATED OPTION/SAR EXERCISES SINCE DECEMBER 31, 1995
AND VALUE OF OPTIONS AT SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
SHARES FISCAL YEAR-END(2) FISCAL YEAR-END($)(2)(3)
ACQUIRED ON VALUE -------------------------- -------------------------
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson........ 0 $ 0 158,000 136,760 $1,076,250 $735,420
Evrett W. Benton........ 0 0 190,000 88,000 1,477,500 486,000
M. Scott Athans......... 2,000 1,000 133,000 118,000 798,000 666,000
Jerry A. Schneider...... 0 0 52,083 94,917 182,290 354,209
Donald D. Finney(4)..... 0 0 58,152(5) 33,309 437,544 105,618
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) All outstanding options become exercisable as a result of the
Distribution and Merger. See "The Distribution--Consummation of the
Distribution; Treatment of Company Stock Options."
(3) Calculated on the basis of the closing price of the underlying securities
on September 30, 1996 ($19.25 per share) minus the exercise price.
(4) Resigned effective January 1, 1997.
(5) Represents options to acquire Evergreen common stock held by Mr. Finney
prior to the merger with Evergreen that were converted into options to
acquire GranCare Common Stock in connection with the merger with
Evergreen.
85
<PAGE>
OPTION/SAR GRANTS SINCE DECEMBER 31, 1993
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF
SECURITIES STOCK PRICE
UNDERLYING % OF TOTAL EXERCISE APPRECIATION FOR
OPTIONS/SARS OPTIONS/SARS OR BASE OPTION TERM
GRANTED GRANTED IN PRICE EXPIRATION --------------------
NAME (#)(1) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
---- ------------ ------------ -------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Gene E. Burleson
1996................... 56,760(1) 14.1% $14.75 1/23/06 $526,732 $1,334,427
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
Evrett W. Benton
1996................... 28,000(1) 7.0 14.75 1/23/06 259,840 658,280
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
M. Scott Athans
1996................... 28,000(1) 7.0 14.75 1/23/06 259,840 658,280
1995................... 0 0 -- -- -- --
1994................... 0 0 -- -- -- --
Jerry A. Schneider
1996................... 22,000(1) 5.5 14.75 1/23/06 204,160 517,220
1995................... 125,000(2) 34 15.75 1/27/05 1,238,136 3,137,680
1994................... -- -- -- -- -- --
Donald D. Finney(3)
1996................... 15,600(1) 3.9 14.75 1/23/06 144,768 366,756
1995................... 25,000(4) 6.8 17.25 7/21/05 271,210 687,301
1994................... -- -- -- -- -- --
</TABLE>
- --------
(1) Represents options granted January 23, 1996.
(2) Represents options granted to Mr. Schneider on January 27, 1995 upon his
initial employment with the Company.
(3) Resigned effective January 1, 1997.
(4) Represents options granted to Mr. Finney on July 21, 1995 upon his
initial employment with the Company.
86
<PAGE>
LONG-TERM INCENTIVE PLANS--AWARDS SINCE DECEMBER 31, 1995
The Senior Executive Shareholder Value Program for the Company's senior
level executive officers and the Shareholder Value Program for all other
executive officers and employees (collectively the "Shareholder Value
Program") were adopted by the Board of Directors in January 1996 and approved
by the shareholders at the 1996 annual meeting. The Shareholder Value Program
provides for the payment of cash incentives based upon the performance of the
Company over a three year performance period vis-a-vis a peer group and the
S&P 500. After the performance period, the value of each unit is determined by
comparing the Company's stock price to the stock prices of the companies
comprising the peer group and S&P 500. At the threshold level (50%), each unit
is worth $500. At the superior level (95%), each unit is worth $3,000. The
Shareholder Value Program vests upon a "Change of Control," which the Merger
constitutes.
The Board of Directors of the Company has determined that upon consummation
of the Merger, each of the above-named executives will receive payment under
the Senior Executive Shareholder Value Program at the superior level,
resulting in payments of $852,000, 420,000, 420,000, 330,000 and 234,000 to
Messrs. Burleson, Athans, Benton, Schneider and Finney, respectively, and all
other plan participants would receive, in the aggregate, approximately $2.2
million.
COMPANY ANNUAL INCENTIVE PLAN
The Company maintains an Annual Incentive Plan that provides for the payment
of annual cash bonuses to its officers and key employees upon the attainment
by the Company of certain pre-determined performance criteria. The criteria
utilized by the Company for the annual incentive plan is earnings per share.
The Company does not anticipate making any payments under the Annual Incentive
Plan as the Company believes that costs associated with the Distribution and
Merger that will be recognized in the fourth quarter will have a negative
effect on earnings per share, which is the standard by which awards under the
annual incentive plan are determined.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Upon completion of the Merger, Vitalink will succeed to all of the Company's
existing pharmaceutical supply agreements with the various facilities that
will be operated by New GranCare. These agreements are generally for a term of
five years and are automatically extended on an annual basis for an additional
one year unless timely notice of intent to terminate is given. Gene E.
Burleson, Chairman of New GranCare, will become Chief Executive Officer of
Vitalink upon consummation of the Merger. Mr. Burleson and three other
directors of New GranCare (Messrs. Parker, Kanter & Rolle) will become
directors of Vitalink upon the consummation of the Merger. See "The
Distribution--Terms of the Pharmaceutical Supply Agreements" herein, and
"Descriptions of the Transactions--Interests of Certain Persons" and
"Relationship between Vitalink and GranCare" in the Proxy
Statement/Prospectus. Following the Distribution and Merger, New GranCare will
not compete with Vitalink in the institutional pharmacy business for a period
of three years. See "The Distribution--Terms of the Non-competition
Agreement."
In connection with the consolidation of the Company's headquarters in
Atlanta, Georgia, the Company assisted certain of its senior level executive
officers with their relocations to Atlanta. The assistance was in the form of
loans to and, in certain instances, the purchase of residences from, the
affected senior level executive officers. New GranCare will be the obligee
under these loans following the Distribution and the Merger.
In connection with Mr. Benton's (the Company's Executive Vice President,
General Counsel and Secretary) relocation to Atlanta from the Company's former
corporate headquarters in Culver City, California, the Company purchased Mr.
Benton's California residence for $747,500 in lieu of paying Mr. Benton's
relocation expenses. Mr. Benton purchased this residence for $885,000 in
August 1989. The Company subsequently sold Mr. Benton's residence for
$584,777. Additionally, the Company loaned Mr. Benton $100,000. The loan is
evidenced by a promissory note that bears interest at the prime rate and is
due January 15, 1997. The loan is
87
<PAGE>
secured by the proceeds from the Executive Split Dollar Life Insurance policy
that the Company maintains on Mr. Benton's behalf.
In connection with Kay Brown's (the Company's Senior Vice President and
Director of Corporate Communications and Investor Relations) relocation to
Atlanta from the Company's former corporate headquarters in Culver City,
California, the Company purchased Ms. Brown's residence for $515,440 and
subsequently sold Ms. Brown's residence for $440,440. In connection with this
loss, Ms. Brown executed a $75,000 promissory note that bears interest at the
prime rate and is due January 15, 1997. The loan is secured by the proceeds
from the Executive Split Dollar Life Insurance policy that the Company
maintains on Ms. Brown's behalf.
Robert L. Parker was formerly Chairman of the Board of Directors of Omega
Healthcare Investors, Inc. ("Omega"), a creditor of the Company. In connection
with his appointment to the Board of Directors of the Company, Mr. Parker
resigned as Chairman of the Board of Directors of Omega but continues to serve
as a director of Omega. Omega is the mortgagee on the Company's facilities
located in the State of Michigan. The Company's indebtedness to Omega as of
December 31, 1995 was approximately $58.8 million. During the years ended
December 31, 1995, 1994, 1993 and for the last three months of 1992, the
Company made or accrued interest payments to Omega totaling approximately $8.2
million, $8.0 million, $7.0 million and $1.9 million, respectively. New
GranCare will be the obligee under this loan following the Distribution and
Merger and it is expected that Mr. Parker will be a member of New GranCare's
Board of Directors and the Vitalink Board of Directors.
Mr. Gene E. Burleson, the Company's Chairman of the Board, President and
Chief Executive Officer and, following the Distribution and the Merger,
Chairman of the Board and a director, of New GranCare, and Messrs. Ronald G.
Kenny and William G. Petty, Jr., both directors of the Company and, following
the Distribution and the Merger, directors of New GranCare, are also directors
of Alternative Living Services, Inc. ("ALS"). The Company previously owned a
19% equity interest in ALS, which the Company sold in August 1996 in
connection with the initial public offering of ALS's common stock. In
addition, Mr. Petty is Chairman of the Board and was formerly Chief Executive
Officer of ALS. ALS owns and manages assisted living facilities. The Company
has entered into discussions with ALS pursuant to which ALS will conduct
feasibility studies for the Company on the development of assisted living
facilities at various sites. If these feasibility studies render positive
results, it is contemplated that ALS will develop and manage such facilities
on behalf of the Company. The Company has not yet determined whether to
construct any such facilities. At the time of the ALS public offering, Mr.
Kenny owned .5% of a limited liability corporation that owned a 63% equity
interest in ALS and Mr. Kenny's employer, Huizenga Capital Management, owned
5.0% of such corporation.
In December 1993 the Company sold two of its long-term care facilities and
related accounts receivable to Charles H. Hargis, who was engaged by the
Company during 1993 to act as a consultant on various acquisitions and
divestitures. The Company financed $1,050,000 of the $1,250,000 purchase price
of the facilities, and the Company financed the entire $1,100,000 purchase
price of the accounts receivable. On October 1, 1996, the Company (i)
repurchased one of the long-term care facilities it sold to Charles H. Hargis
in December 1993 for $3,110,000 in cash, and (ii) purchased from an entity
owned or controlled by Mr. Hargis the management agreement for a long-term
care facility leased by the Company for $100,000 in cash. As part of the
aforesaid transaction, Mr. Hargis and entities owned or controlled by him
entered into a three year non-competition agreement with the Company, and the
Company entered into a three year consulting agreement with an entity owned or
controlled by Mr. Hargis providing for payments of $108,000 per year.
Subsequent to October 1, 1996, Mr. Hargis satisfied all obligations to the
Company.
On March 31, 1994, the Company subleased a facility to Joseph M. Higdon, a
former Vice President of the Company for $1,400,000, of which $210,000 was
paid in cash at closing and $1,190,000 of which was financed by the Company
over seven years at 6% per annum over the first two years and 7% per annum
over the remaining five years. In addition, Mr. Higdon purchased $450,000 of
the subject facility's accounts receivable, which purchase was financed by the
Company over three years at 7% per annum.
88
<PAGE>
On April 29, 1994, the Company subleased two facilities to Mr. Higdon for
$1,600,000, of which $240,000 was paid in cash at closing and $1,360,000 of
which was financed by the Company over seven years at 6% per annum over the
first two years and 7% per annum over the remaining five years. In addition,
Mr. Higdon purchased $450,000 of the subject facilities' accounts receivable,
which purchase was financed by the Company over three years at 7% per annum.
89
<PAGE>
COMMON STOCK OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
New GranCare will be a wholly-owned subsidiary of the Company until the
consummation of the Distribution. Because all of the shares of New GranCare
Common Stock now held by the Company will be distributed to shareholders of
the Company in connection with the Distribution, the number of shares of New
GranCare Common Stock shown below to be owned beneficially by each director
and by all directors and officers as a group will depend upon the number of
shares held by such persons at the time of the Distribution. This table
assumes that each of the executive officers set forth below will (i) be
offered a position with New GranCare and (ii) accept such position if offered.
In order to present estimated beneficial ownership of the persons and entities
set forth below immediately following the Distribution, the following table
shows: (i) the number of shares of Company Common Stock beneficially owned by
such person or entities as of October 1, 1996 (including, if applicable,
shares underlying Company Options exercisable within 60 days of such date) and
(ii) the number of shares of New GranCare Common Stock that such persons or
entities would own immediately following the Distribution (including, if
applicable, shares underlying New GranCare Options exercisable within 60 days
of such date), assuming none of such persons or entities disposes of any
shares of Company Common Stock prior to the Distribution and Merger.
<TABLE>
<CAPTION>
POST DISTRIBUTION
BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF NEW GRANCARE
COMPANY COMMON STOCK COMMON STOCK
------------------------------- -------------------------------
NUMBER OF NUMBER OF
SHARES PERCENTAGE SHARES PERCENTAGE
BENEFICIAL OWNER OWNED(1) OWNED(1) OWNED(1) OWNED(1)
---------------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Wellington Management 1,615,776(2) 6.9% 1,615,776 6.9%
Company................
75 State Street
Boston, Massachusetts
02109
Gene E. Burleson........ 735,300(3) 3.1% 872,060(17) 3.7%
Chairman of the Board,
President and Chief
Executive Officer
Charles M. Blalack...... 59,347(4) * 61,014(18) *
Director
Antoinette Hubenette, 23,133(5) * 24,800(19) *
M.D. ..................
Director
Joel S. Kanter.......... 313,343(6) * 315,010(20) 1.3%
Director
Ronald G. Kenny......... 50,937(7) * 55,937(21) *
Director
Robert L. Parker........ 225,613(8) 1.0% 230,613(22) *
Director
William G. Petty, Jr. .. 728,011(9) 3.1% 733,011(23) 3.1%
Director
Edward V. Regan......... 17,800(10) * 22,800(24) *
Director
Gary U. Rolle........... 167,800(11) * 172,800(25) *
Director
M. Scott Athans......... 165,000(12) * 253,000(26) 1.1%
Executive Vice
President and Chief
Operating Officer
Evrett W. Benton........ 204,130(13) * 292,130(27) 1.2%
Executive Vice
President, General
Counsel and Secretary
Donald D. Finney........ 175,371(14) * 207,638(28) *
Senior Vice President
and President of
Long Term Care Division
Jerry A. Schneider...... 64,791(15) * 154,500(29) *
Executive Vice Presi-
dent and Chief Finan-
cial Officer
All directors and
executive officers as a
group (29 persons)..... 3,203,171(16) 13.6% 3,993,071(30) 17%
</TABLE>
90
<PAGE>
- --------
*Less than 1%.
(1) In determining the number of issued and outstanding shares of the Company
as of October 1, 1996, the Company Common Stock obtainable upon
conversion of the outstanding common stock of Evergreen and National
Heritage, Inc., a predecessor of Evergreen, have been assumed to be
shares of issued and outstanding Company Common Stock. In addition, the
number of shares of New GranCare Common Stock outstanding following the
Distribution include all Company Options, which vest upon a Change in
Control. Except as otherwise indicated, each of the persons included in
the table above has sole voting and investment power over the shares
owned except as to the rights of his or her spouse under applicable
community property laws.
(2) Wellington Management Company ("WMC") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. As of October 1, 1996, 1996, WMC, in its
capacity as investment adviser, may be deemed to have beneficial
ownership of 1,615,776 shares that are owned by numerous investment
advisory clients, none of which is known to have such interest with
respect to more than five percent of the class. As of October 1, 1996,
WMC had voting power and investment power as follows:
<TABLE>
<S> <C>
Sole Voting Power: 0 shares
Shared Voting Power: 658,276 shares
Sole Investment Power: 0 shares
Shared Investment Power: 1,615,776 shares
</TABLE>
(3) Includes 158,000 shares which may be acquired within 60 days after
October 1, 1996, pursuant to the exercise of stock options.
(4) Includes 22,333 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options.
(5) Includes 22,333 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options.
(6) Includes 22,333 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options. Also includes 47,400
shares owned by Windy City, Inc, 200,000 shares owned by Walnut Capital
Corporation and 40,110 shares owned by the Kanter Family Foundation. Mr.
Kanter serves as President and Director of such companies. In addition,
the number includes 400 shares held by the Ricki Kanter IRA, 1,050 shares
owned by 21 Club Trust I, 150 shares owned by 21 Club Trust II and 100
shares owned by 21 Club Trust III. The beneficiaries of such trusts are
Mr. Kanter's minor children. Mr. Kanter has shared voting and investment
powers in the shares held by such corporations, such foundation and such
trusts. Mr. Kanter disclaims beneficial ownership of such shares.
(7) Includes 11,000 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options. Also includes 4,560
shares held by trusts for the benefit of Mr. Kenny's children. Mr. Kenny
has no voting or investment power over such shares and disclaims
beneficial ownership of such shares. In addition, 387 shares are held by
the Ronald Kenny IRA over which Mr. Kenny has sole voting and investment
power.
(8) Includes 11,000 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options. Also includes 13,438
shares of Common Stock held by the Parker Charitable Trust of 1991. Mr.
Parker has shared voting and investment power with respect to such shares
and disclaims beneficial ownership of such shares.
(9) Includes 98,740 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options. Also includes 415,147
shares held by a trust of which Mr. Petty is a beneficiary. Also includes
150,894 shares owned by Mr. Petty's wife, over which Mr. Petty has shared
voting and investment power. Mr. Petty disclaims beneficial ownership of
shares. Also includes 62,430 shares held by trusts for the benefit of Mr.
Petty's children over which Mr. Petty has shared voting and investment
power. Mr. Petty disclaims beneficial ownership of such shares.
(10) Includes 17,000 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options.
91
<PAGE>
(11) Includes 17,000 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options. Also includes 150,000
shares of Common Stock owned by Transamerica Investment Services
("Transamerica"). Mr. Rolle is the Chief Investment Officer of
Transamerica and in such capacity, he has voting and management authority
over such shares.
(12) Includes 163,000 shares which may be acquired within 60 days after
October 1, 1996, pursuant to the exercise of stock options.
(13) Includes 190,000 shares which may be acquired within 60 days after
October 1, 1996, pursuant to the exercise of stock options.
(14) Includes 59,194 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options.
(15) Includes 57,291 shares which may be acquired within 60 days after October
1, 1996, pursuant to the exercise of stock options.
(16) Includes 1,084,710 shares which may be acquired within 60 days after
October 1, 1996, pursuant to the exercise of stock options.
(17) Indicates the shares reflected in Note 3, plus an additional
136,760 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(18) Indicates the shares reflected in Note 4, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(19) Indicates the shares reflected in Note 5, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(20) Indicates the shares reflected in Note 6, plus an additional 1,667 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(21) Indicates the shares reflected in Note 7, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(22) Indicates the shares reflected in Note 8, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(23) Indicates the shares reflected in Note 9, plus an additional 5,000 shares
obtainable pursuant to the exercise of options that will vest upon the
consummation of the Merger.
(24) Indicates the shares reflected in Note 10, plus an additional
5,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(25) Indicates the shares reflected in Note 11, plus an additional
5,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(26) Indicates the shares reflected in Note 12, plus an additional
88,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(27) Indicates the shares reflected in Note 13, plus an additional
88,000 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(28) Indicates the shares reflected in Note 14, plus an additional
32,267 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(29) Indicates the shares reflected in Note 15, plus an additional
89,709 shares obtainable pursuant to the exercise of options that will
vest upon the consummation of the Merger.
(30) Indicates the shares reflected in Note 16, plus an additional 789,901
shares obtainable pursuant to the exercise of options that will vest upon
the consummation of the Merger.
There are no arrangements known to the Company the operation of which may,
at a subsequent date, result in a change in control of New GranCare.
92
<PAGE>
DESCRIPTION OF NEW GRANCARE CAPITAL STOCK
The authorized capital stock of New GranCare will consist of 50,000,000
shares of New GranCare Common Stock, par value $0.001 per share, and 2,000,000
shares of Preferred Stock, par value $0.001 per share ("Preferred Stock").
Immediately following the Distribution there are expected to be approximately
23,401,992 shares of New GranCare Common Stock outstanding and held of record
by approximately 1,042 persons, and approximately 2,355,250 shares of New
GranCare Common Stock issuable upon the exercise of New GranCare Options based
upon the capitalization and record holders of the Company as of November 30,
1996. No shares of Preferred Stock have been issued by New GranCare.
NEW GRANCARE COMMON STOCK
Holders of New GranCare Common Stock will be entitled to one vote for each
share held of record on all matters on which stockholders may vote, including
the election of directors. The holders of New GranCare Common Stock will be
entitled to participate in cash dividends, when, as and if declared by the New
GranCare Board of Directors out of funds legally available therefor, subject
to any dividend preference which may be attributable to any series of
Preferred Stock which may be outstanding. Such holders will not have any
statutory preemptive or other rights to subscribe for additional shares.
Subject to the rights of holders of Preferred Stock of New GranCare, if any,
all holders of New GranCare Common Stock will be entitled to share ratably in
any assets available for distribution to stockholders upon the liquidation,
dissolution or winding up of New GranCare. There are no conversion, redemption
or sinking fund provisions applicable to New GranCare Common Stock.
PREFERRED STOCK
The New GranCare Certificate of Incorporation will permit the New GranCare
Board of Directors, without further action by the shareholders, to issue up to
2,000,000 shares of Preferred Stock in one or more series and fix and
determine the relative rights, voting powers, preferences and limitations of
each series so authorized. The issuance of any shares of Preferred Stock could
adversely affect the voting power of the holders of New GranCare Common Stock
or could have the effect of discouraging or making more difficult any attempt
by a person or group to obtain control of New GranCare. As of the date of this
Prospectus, it is not expected that New GranCare will issue any shares of
Preferred Stock in the near future.
THE CHARTERS AND BYLAWS OF THE COMPANY AND NEW GRANCARE
The provisions of the New GranCare Certificate of Incorporation and Bylaws
are similar to those of the Company's Articles of Incorporation and Bylaws in
most respects. New GranCare is a Delaware corporation, and Delaware law
permits the implementation of certain provisions in a corporation's
certificate of incorporation or bylaws which would alter some of the rights of
shareholders and the powers of management that are different from those of a
California company. Although the Board of Directors of New GranCare has no
current plan to implement these changes, certain changes could be implemented
in the future by amendment of the Certificate of Incorporation of New GranCare
(following stockholder approval) and certain changes could be implemented by
amendment of the Bylaws of New GranCare without stockholder approval. For a
discussion of such changes, see "Significant Differences Between the
Corporation Laws of California and Delaware." This discussion of the
Certificate of Incorporation and Bylaws of New GranCare is qualified in its
entirety by reference to Exhibits 3.1 and 3.2 hereto, respectively.
Authorized Stock. The Articles of Incorporation of the Company authorize
fifty million shares of Common Stock without par value and two million shares
of undesignated Preferred Stock. The Certificate of Incorporation of New
GranCare authorizes New GranCare to issue fifty million shares of Common
Stock, $0.001 par value, as well as two million shares of undesignated
Preferred Stock, $0.001 par value.
93
<PAGE>
Number of Directors. The Bylaws of the Company authorize the directors to
fix the number of directors within a range from seven to 15, with the number
of directors currently set at nine. Delaware law permits a corporation to set
forth the means of determining the number of directors in the bylaws. In
contrast to the Bylaws of the Company, the Bylaws of New GranCare permit the
board of directors to fix the number of directors by resolution without
further stockholder approval. See "Significant Differences Between the
Corporation Laws of California and Delaware--Size of the Board of Directors."
Initially, the Board of Directors of New GranCare will consist of ten members.
Monetary Liability of Directors. The Articles of Incorporation of the
Company and the Certificate of Incorporation of New GranCare both provide for
the elimination of personal monetary liability of directors to the fullest
extent permissible under the laws of each corporation's respective state of
incorporation. The provision eliminating monetary liability of directors set
forth in the Certificate of Incorporation of New GranCare is potentially more
expansive in that it incorporates future amendments to Delaware law with
respect to the elimination of such liability.
SIGNIFICANT DIFFERENCES BETWEEN THE CORPORATION LAWS OF CALIFORNIA AND
DELAWARE
The General Corporation Laws of California and Delaware differ in many
respects. While not all of such differences are summarized in this Prospectus,
a number of the principal differences which could materially affect the rights
of shareholders are discussed below.
Size of the Board of Directors. Under California law, although changes in
the number of directors must in general be approved by a majority of the
outstanding shares, the Board of Directors may fix the exact number of
directors within a stated range set forth in the articles of incorporation or
bylaws, if that stated range has been approved by the shareholders. Delaware
law permits a board of directors alone to change the authorized number, or the
range, of directors by amendment to the bylaws, unless the directors are not
authorized to amend the bylaws or the number of directors is fixed in the
certificate of incorporation (in which case a change in the number of
directors may be made only by amendment to the certificate of incorporation
approved by the stockholders) or pursuant to the provisions of the certificate
of incorporation. The Certificate of Incorporation of New GranCare provides
that the number of directors shall be as specified in the Bylaws and
authorizes the Board of Directors to make, alter, amend or repeal the Bylaws.
The Board of Directors of New GranCare may therefore change the authorized
number of directors.
Cumulative Voting. Under California law, if any shareholder gives notice of
his or her intention to cumulate votes for the election of directors, any
other shareholder of the corporation is also entitled to cumulate his or her
votes at such election. Under Delaware law, cumulative voting in the election
of directors is not mandatory and may exist only if provided for in the
corporation's certificate of incorporation. The Certificate of Incorporation
of New GranCare does not provide for cumulative voting, and therefore
stockholders of New GranCare will have no cumulative voting rights. The
elimination of cumulative voting would limit the ability of minority
stockholders to obtain representation on the Board of Directors.
Classified Board of Directors. A classified board is one on which a certain
number of the directors, but not all, are elected on a rotating basis each
year. Under California law, directors must be elected annually, unless the
corporation is a listed corporation and such corporation's articles or bylaws
provide for a classified board. Neither the Company's articles nor bylaws
currently provide for a classified board. Delaware law permits, but does not
require, a classified board of directors, with staggered terms under which
one-third of the directors are elected for terms of three years. This method
of electing directors makes changes in the composition of the board of
directors, and thus a change in control of a corporation, a more difficult
process. The New GranCare Certificate of Incorporation and Bylaws do not
provide for a classified board of directors. The establishment of a classified
board following the Distribution would require the approval of the
stockholders of New GranCare.
Power to Call Special Shareholders' Meetings. Under California law, a
special meeting of shareholders may be called by the board of directors, the
chairman of the board, the president, the holders of shares entitled to cast
not less than ten percent of the votes at such meeting and such additional
persons as are authorized by the articles of incorporation or the bylaws.
Under Delaware law, a special meeting of stockholders may be called by
94
<PAGE>
the board of directors or by any other person authorized to do so in the
certificate of incorporation or the bylaws. The Certificate of Incorporation
of New GranCare provides that special meetings of stockholders may be called
only by the board of directors or the chairman of the board pursuant to a
resolution adopted by a majority of the total number of directors.
Action by Written Consent. Both the Delaware and California law permit
stockholders, unless specifically prohibited by the certificate or articles of
incorporation, to take action without a meeting by the written consent of the
holders of at least the number of shares necessary to authorize or take such
action at a meeting at which all shares entitled to vote therein were present
and voted. Action by written consent may, in some circumstances, permit the
taking of stockholder action opposed by the Board of Directors more rapidly
than would be possible if a meeting of stockholders were required. Although
the Bylaws of the Company currently provide for shareholder action by written
consent, the Certificate of Incorporation of New GranCare includes a
prohibition on stockholder action by written consent without a meeting.
Stockholder Approval of Certain Business Combinations. In the last several
years, a number of states have adopted special laws designed to make certain
kinds of "unfriendly" corporate takeovers, or other transactions involving a
corporation and one or more of its significant shareholders, more difficult.
Under Section 203 of the Delaware General Corporation Law ("Section 203"),
certain "business combinations" with "interested stockholders" of Delaware
corporations are subject to a three-year moratorium unless specified
conditions are met.
Section 203 prohibits a Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for three years following the
time that such person becomes an interested stockholder. With certain
exceptions, an interested stockholder is a person or group who or which owns
15% or more of the corporation's outstanding voting stock (including any
rights to acquire stock pursuant to an option, warrant, agreement, arrangement
or understanding, or upon the exercise of conversion or exchange rights, and
stock with respect to which the person has voting rights only), or is an
affiliated associate of the corporation and was the owner of 15% or more of
such voting stock at any time within the previous three years.
For purposes of Section 203, the term "business combination" is defined
broadly to include mergers with or caused by the interested stockholder; sales
or other dispositions to the interested stockholder (except proportionately
with the corporation's other stockholders) of assets of the corporation or a
subsidiary equal to ten percent or more of the aggregate market value of the
corporation's consolidated assets or its outstanding stock; the issuance or
transfer by the corporation or a subsidiary of stock of the corporation or
such subsidiary to the interested stockholder (except for transfers in a
conversion or exchange or a pro rata distribution or certain other
transactions, none of which increase the interested stockholder's
proportionate ownership of any class or series of the corporation's or such
subsidiary's stock); or any receipt by the interested stockholder (except
proportionately as a stockholder), directly or indirectly, of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation or a subsidiary.
The three-year moratorium imposed on business combinations by Section 203
does not apply if (i) prior to the time when such stockholder becomes an
interested stockholder the board of directors approves either the business
combination or the transaction which resulted in the person becoming an
interested stockholder; (ii) the interested stockholder owns 85% of the
corporation's voting stock upon consummation of the transaction which made him
or her an interested stockholder (excluding from the 85% calculation shares
owned by directors who are also officers of the target corporation and shares
held by employee stock plans which do not permit employees to decide
confidentially whether to accept a tender or exchange offer); or (iii) on or
after the time when such person becomes an interested stockholder, the board
approves the business combination and it is also approved at a stockholder
meeting by sixty-six and two-thirds percent (66 2/3%) of the voting stock not
owned by the interested stockholder.
Section 203 applies only to Delaware corporations which have a class of
voting stock that is listed on a national securities exchange, are quoted on
an interdealer quotation system such as NASDAQ or are held of record by more
than 2,000 stockholders. However, a Delaware corporation may elect not to be
governed by
95
<PAGE>
Section 203 by a provision in its original certificate of incorporation or an
amendment thereto or to the bylaws, which amendment must be approved by a
majority of the shares entitled to vote and, in the case of a bylaw amendment,
may not be further amended by the board of directors. New GranCare does not
intend to elect not to be governed by Section 203, therefore, Section 203 will
apply to New GranCare.
The Company believes that Section 203 will have the effect of encouraging
any potential acquiror to first negotiate with New GranCare's Board of
Directors in connection with contemplated "business combinations." Section 203
should also discourage certain potential acquirors unwilling to comply with
its provisions.
California law requires that in certain transactions involving tender offers
or acquisition proposals made to a target corporation's shareholders by a
person who either (a) controls the target corporation, (b) is an officer or
director of the target or is controlled by an officer or director, or (c) is
an entity in which a director or executive officer of the target has a
material financial interest, a written opinion of an independent expert be
provided as to the fairness of the consideration to the shareholders of the
target corporation. The statute also provides that if a competing proposal is
made at least ten (10) days before shareholders are to vote or shares are to
be purchased under the pending offer by the affiliated party, the latter offer
must be communicated to shareholders and they must be given a reasonable
opportunity to revoke their vote or withdraw their shares, as the case may be.
Removal of Directors. Under California law, any director or the entire board
of directors may be removed, with or without cause, with the approval of a
majority of the outstanding shares entitled to vote; however, no individual
director may be removed (unless the entire board is removed) if the number of
votes cast against such removal would be sufficient to elect the director
under cumulative voting. Under Delaware law, a director of a corporation that
does not have a classified board of directors or cumulative voting may be
removed with or without cause. The Certificate of Incorporation of New
GranCare does not provide for a classified Board of Directors. Consequently
the entire Board of Directors may be removed, with or without cause, with the
approval of a majority of the outstanding shares of capital stock entitled to
vote.
Filling Vacancies on the Board of Directors. Under California law, any
vacancy on the board of directors, other than one created by removal of a
director, may be filled by the board. If the number of directors is less than
a quorum, a vacancy may be filled by the unanimous written consent of the
remaining directors in office, or the affirmative vote of a majority of the
remaining directors at a meeting. A vacancy created by removal of a director
may be filled by the board only if so authorized by a corporation's articles
of incorporation or by a bylaw approved by the corporation's shareholders. The
Company's Bylaws do not permit directors to fill vacancies created by removal
of a director. Under Delaware law, vacancies and newly created directorships
may be filled by a majority of the directors then in office (even though less
than a quorum) unless otherwise provided in the certificate of incorporation
or bylaws. The Bylaws of New GranCare provide that any vacancy on New
GranCare's Board of Directors may be filled only by majority vote of the
directors then in office (even though less than a quorum) even if the vacancy
is created by the removal of a director by the stockholders.
Loans to Officers and Employees. Pursuant to California law and the Bylaws
of the Company, the Board of Directors of the Company is currently authorized
to approve loans or guaranties to or on behalf of officers (whether or not
such officers are directors) if the Board of Directors determines that such
loans or guaranties may reasonably be expected to benefit the corporation.
Under Delaware law, a corporation, its officers or other employees may make
loans to, guarantee the obligations of or otherwise assist its officers or
other employees of those or its subsidiaries (including directors who are also
officers or employees) when such action, in the judgment of the directors, may
reasonably be expected to benefit the corporation.
Indemnification and Limitation of Liability. California and Delaware have
similar laws respecting indemnification by a corporation of its officers,
directors, employees and other agents. The laws of both states also permit a
corporation to adopt a provision in its articles of incorporation or
certificate of incorporation eliminating the liability of a director to the
corporation or its shareholders for monetary damages for breach of the
director's fiduciary duty in certain circumstances. There are nonetheless
certain differences between the laws of the two states respecting
indemnification and limitation of liability.
96
<PAGE>
The Articles of Incorporation of the Company eliminate the liability of
directors for monetary damages to the fullest extent permissible under
California law.
California law does not permit the elimination of monetary liability where
such liability is based on: (i) intentional misconduct or knowing and culpable
violation of law; (ii) acts or omissions that a director believes contrary to
the best interests of the corporation or its shareholders, or that involve the
absence of good faith on the part of the director; (iii) receipt of an
improper personal benefit; (iv) acts or omissions that show reckless disregard
for the director's duty to the corporation or its shareholders, where the
director in the ordinary course of performing a director's duties should be
aware of a risk of serious injury to the corporation or its shareholders; (v)
acts or omissions that constitute an unexcused pattern of inattention that
amounts to an abdication of the director's duty to the corporation and its
shareholders; (vi) interested transactions between the corporation and a
director in which a director has a material financial interest; or (vii)
liability for improper distributions, loans or guarantees.
The Certificate of Incorporation of New GranCare also eliminates the
liability of directors to the fullest extent permissible under Delaware law,
as such law exists currently or as it may be amended in the future. Under
Delaware law, such a provision may not eliminate or limit director monetary
liability for (i) breaches of the director's duty of loyalty to the
corporation or its stockholders; (ii) acts or omissions not in good faith or
involving intentional misconduct or knowing violations of law; (iii) the
payment of unlawful dividends or unlawful stock repurchases or redemptions; or
(iv) transactions in which the director received an improper personal benefit.
Such a limitation of liability provision also may not limit a director's
liability for violation of, or otherwise relieve New GranCare or its directors
from the necessity of complying with, federal or state securities laws or
affect the availability of non-monetary remedies such as injunctive relief or
rescission.
California law permits indemnification of expenses incurred in derivative or
third-party actions, except that with respect to derivative actions (i) no
indemnification may be made without court approval when a person is adjudged
liable to the corporation in the performance of that person's duty to the
corporation and its shareholders, unless a court determines that person is
entitled to indemnity for expenses, and then such indemnification may be made
only to the extent that the court so determines, and (ii) no indemnification
may be made without court approval in respect of amounts paid or expenses
incurred in settling or otherwise disposing of a threatened or pending action
or in respect of amounts incurred in defending a pending action which is
settled or otherwise disposed of without court approval.
Indemnification is permitted by California law only for acts taken in good
faith and believed to be in the best interests of the corporation and its
shareholders, as determined by a majority vote of a disinterested quorum of
the directors, independent legal counsel (if a quorum of independent directors
is not obtainable), a majority vote of a quorum of the shareholders (excluding
shares owned by the indemnified party), or the court handling the action.
California law requires indemnification when the individual has successfully
defended the action on the merits (as opposed to Delaware law which requires
indemnification relating to any successful defense, whether on the merits or
otherwise).
Delaware law generally permits indemnification of expenses (including
attorneys' fees) incurred in the defense or settlement of a derivative or
third-party action, provided there is a determination by a majority vote of
the disinterested directors (even though less than a quorum), by independent
legal counsel or by stockholders that the person seeking indemnification acted
in good faith and in a manner reasonably believed to be in or (in contrast to
California law) not opposed to the best interests of the corporation. Without
court approval, however, no indemnification may be made in respect of any
derivative action in which such person is adjudged liable for negligence or
misconduct in the performance of his or her duty to the corporation. Delaware
law also requires indemnification of expenses when the individual being
indemnified has successfully defended the action on the merits or otherwise.
California corporations may include in their articles of incorporation a
provision which extends the scope of indemnification through agreements,
bylaws or other corporate action beyond that specifically authorized by
statute. The Articles of Incorporation of the Company include such a
provision.
97
<PAGE>
A provision of Delaware law states that the indemnification provided by
statute shall not be deemed exclusive of any other rights under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise. As a
result, Delaware law permits indemnification agreements between a Company and
its officers and directors. At this time, New GranCare does not have any such
indemnification agreements in place, but may enter into them in the future.
The Certificate of incorporation of New GranCare provides for mandatory
indemnification of directors and officers to the fullest extent permitted by
law.
The indemnification and limitations of liability provisions of California
law, and not Delaware law, will apply to actions of the directors and officers
of the Company taken prior to the Distribution and Merger.
Inspection of Shareholder's List. Both California and Delaware law allow any
shareholder to inspect a corporation's shareholders' list for a purpose
reasonably related to such person's interest as a shareholder. California law
provides, in addition, an absolute right to inspect and copy the corporation's
shareholders' list to persons holding an aggregate of 5% or more of a
corporation's voting shares, or shareholders holding an aggregate of 1% or
more of such shares who have filed a Schedule 14B with the Securities and
Exchange Commission relating to the election of directors. Delaware law does
not provide for any such absolute right of inspection, and no such right is
granted under the Certificate of Incorporation or Bylaws of New GranCare.
Dividends and Repurchases of Shares. California law dispenses with the
concepts of par value of shares as well as statutory definitions of capital,
surplus and the like. The concepts of par value, capital and surplus are
retained under Delaware law.
Under California law, a corporation may not make any distribution (including
dividends, whether in cash or other property, and repurchases of its shares)
unless either the corporation's retained earnings immediately prior to the
proposed distribution equal or exceed the amount of the proposed distribution
or, immediately after giving effect to such distribution, the corporation's
assets (exclusive of goodwill, capitalized research and development expenses
and deferred charges) would be at least equal to 1-1/4 times its liabilities
(not including deferred taxes, deferred income and other deferred credits),
and the corporation's current assets would be at least equal to its current
liabilities (or 1-1/4 times its current liabilities if the average pre-tax and
pre-interest expense earnings for the preceding two fiscal years were less
than the average expense for such years). Under California law, there are
exceptions to the foregoing rules for repurchases of shares in connection with
certain rescission actions or pursuant to certain employee stock plans.
Delaware law permits a corporation to declare and pay dividends out of
"surplus" or, if there is no surplus, out of net profits for the fiscal year
in which the dividend is declared and/or for the preceding fiscal year as long
as the amount of "capital" of the corporation following the declaration and
payment of the dividend is not less than the aggregate amount of the capital
represented by the issued and outstanding stock of all classes having a
preference upon the distribution of assets. In addition, Delaware law
generally provides that a corporation may redeem or repurchase its shares only
if such redemption or repurchase would not impair the capital of the
corporation.
To date, the Company has not paid cash dividends on its capital stock. Its
is the current policy of the Board of Directors to retain earnings for use in
the Company's business, and therefore, neither the Company nor New GranCare
anticipate paying cash dividends on their common stock in the foreseeable
future.
Shareholder Voting. Both California and Delaware law generally require that
the holders of a majority in voting power of the outstanding shares of stock
of both constituent corporations entitled to vote approve mergers. Delaware
law does not require a stockholder vote of the surviving corporation in a
merger (unless the corporation provides otherwise in its certificate of
incorporation) if (i) the merger agreement does not amend the existing
certificate of incorporation, (ii) each share of the surviving corporation
outstanding before the merger is an identical outstanding or treasury share
after the merger, and (iii) the number of shares to be issued by the surviving
corporation in the merger does not exceed 20% of the shares outstanding
immediately prior to the merger. California law contains a similar exception
to its voting requirements for reorganizations where
98
<PAGE>
shareholders or the corporation itself, or both, immediately prior to the
reorganization will own immediately after the reorganization equity securities
constituting more than five-sixths of the voting power of the surviving or
acquiring corporation or its parent entity.
Both California and Delaware law also require that a sale of all or
substantially all of the assets of a corporation be approved by a majority of
the outstanding voting shares of the corporation transferring such assets.
With certain exceptions, California law also requires that mergers,
reorganizations, certain sales of assets and similar transactions be approved
by a majority vote of each class of shares outstanding. By contrast, Delaware
law generally does not require class voting (unless otherwise required by a
corporation's certificate of incorporation), except in certain transactions
involving an amendment to the certificate of incorporation which adversely
affects a specific class or series of shares.
California law also requires that holders of nonredeemable common stock
receive nonredeemable common stock in a merger of the corporation with the
holder of more than 50% but less than 90% of such common stock or its
affiliate unless all of the holders of such common stock consent to the
transaction. This provision of California law may have the effect of making a
"cash-out" merger by a majority shareholder more difficult to accomplish.
Delaware law has no comparable provision.
California law also provides that except in certain circumstances, when a
tender offer or a proposal for a reorganization or for a sale of assets is
made by an interested party (generally, a controlling or managing party of the
target corporation), an affirmative opinion in writing as to the fairness of
the consideration to be paid to the shareholders must be delivered to
shareholders. This fairness opinion requirement does not apply to a
corporation which does not have shares held of record by at least 100 persons,
or to a transaction which has been qualified under California state securities
laws. Furthermore, if a tender of shares or vote is sought pursuant to an
interested party's proposal and a later proposal is made by another party at
least ten days prior to the date of acceptance of the interested party
proposal, the shareholders must be informed of the later offer and be afforded
a reasonable opportunity to withdraw any vote, consent or proxy, or to
withdraw any tendered shares. Again, Delaware law has no comparable provision.
Interested Director Transactions. Under both California and Delaware law,
certain contracts or transactions in which one or more of a corporation's
directors has an interest are not void or voidable solely because of such
interest provided that certain conditions, such as obtaining the required
approval and fulfilling the requirements of good faith and full disclosure,
are met. With certain exceptions, the conditions are similar under California
and Delaware law. Under California and Delaware law, either (a) the
shareholders or the board of directors must approve any such contract or
transaction after full disclosure of the material facts (and in the case of
board approval the contract or transaction must also be "just and reasonable"
in California), or (b) the contract or transaction must have been "just and
reasonable" (in California) or "fair" (in Delaware), as applicable, to the
corporation at the time it was approved. In the latter case, California law
explicitly places the burden of proof on the interested director. Under
California law, if shareholder approval is sought, the interested director is
not entitled too vote his shares at a shareholder meeting with respect to any
action regarding such contract or transaction. If board approval is sought,
the contract or transaction must be approved by a majority vote of a quorum of
the directors, without counting the vote of any interested directors (except
that interested directors may be counted for purposes of establishing a
quorum). Under Delaware law, if board approval is sought, the contract or
transaction must be approved by a majority of the disinterested directors
(even though less than a majority of a quorum). Therefore, certain
transactions that the Board of Directors of the Company might not be able to
approve because of the number of interested directors, or the exclusion of
interested director shares, could be approved by a majority of the
disinterested directors of New GranCare, although less than a quorum, or by a
majority of all voting shares, which might not include the holder of a
majority of the disinterested shares. Neither the Company nor New GranCare is
aware of any plans to propose any transaction involving directors of the
Company which could not be so approved under California law but could be so
approved under Delaware law.
99
<PAGE>
Shareholder Derivative Suits. California law provides that, under certain
circumstances, a shareholder bringing a derivative action on behalf of a
corporation need not have been a shareholder at the time of the transaction in
question, provided that certain tests are met. Under Delaware law, a
stockholder may only bring a derivative action on behalf of the corporation if
the stockholder was a stockholder of the corporation at the time of the
transaction in question or his or her stock thereafter devolved upon him or
her by operation of law. California law also provides that the corporation or
the defendant in a derivative suit may make a motion to the court for an order
requiring the plaintiff shareholder to furnish a security bond. Delaware does
not have a similar bonding requirement.
Appraisal Rights. Under both California and Delaware law, a shareholder of a
corporation participating in certain corporate transactions may, under varying
circumstances, be entitled to appraisal rights pursuant to which such
shareholder may receive cash in the amount of the fair value of his or her
shares in lieu of the consideration he or she would otherwise receive in the
transaction. Under Delaware law unless the certificate of incorporation
otherwise provides, such appraisal rights are not available (i) with respect
to the sale, lease or exchange of all or substantially all of the assets of a
corporation, (ii) with respect to a merger or consolidation by a corporation
the shares of which are either listed on a national securities exchange (or
authorized for quotation on the Nasdaq National Market System) or are held of
record by more than 2,000 holders if such stockholders receive only shares of
the surviving corporation or shares of any other corporation which are either
listed on a national securities exchange (or authorized for quotation on the
Nasdaq National Market System) or held of record by more than 2,000 holders,
plus cash in lieu of fractional shares, or any combination thereof, or (iii)
to stockholders of a corporation surviving a merger if no vote of the
stockholders of the surviving corporation is required to approve the merger
because the merger agreement does not amend the existing certificate of
incorporation, each share of the surviving corporation outstanding prior to
the merger is an identical outstanding or treasury share after the merger, and
the number of shares to be issued in the merger does not exceed 20% of the
shares of the surviving corporation outstanding immediately prior to the
merger and if certain other conditions are met.
The limitations on the availability of appraisal rights under California law
are different from those under Delaware law. Shareholders of a California
corporation whose shares are listed on a national securities exchange or on a
list of over-the-counter margin stocks issued by the Board of Governors of the
Federal Reserve System generally do not have such appraisal rights unless the
holders of at least 5% of the class of outstanding shares perfect the right
pursuant to the provisions of the CGCL or unless the corporation or any law
restricts the transfer of such shares. Appraisal rights are unavailable,
however, if the shareholders of a corporation or the corporation itself, or
both, immediately prior to the reorganization will own immediately after the
reorganization equity securities constituting more than five-sixths of the
voting power of the surviving or acquiring corporation or its parent entity.
In general, California law affords appraisal rights in sale of assets
reorganizations.
While shareholders of the Company have appraisal rights under California
law, the Certificate of Incorporation of New GranCare does not provide for
such rights and, accordingly, appraisal rights will not be available to
shareholders of New GranCare.
Dissolution. Under California law, shareholders holding 50% or more of the
total voting power may authorize a corporation's dissolution, with or without
the approval of the corporation's board of directors, and this right may not
be modified by the articles of incorporation. Under Delaware law, unless the
board of directors approves the proposal to dissolve, the dissolution must be
approved by stockholders holding 100% of the total voting power of the
corporation. Only if the dissolution is initiated by the board of directors
may it be approved by a simple majority of the corporation's stockholders. In
the event of such a board-initiated dissolution, a majority of shares
outstanding and entitled to vote would be required to approve a dissolution of
New GranCare which had previously been approved by its Board of Directors.
APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE
CORPORATIONS
Under Section 2115 of the California General Corporation Laws ("CGCL") ,
certain foreign corporations (i.e. corporations not organized under California
law) are placed in a special category if they have characteristics
100
<PAGE>
of ownership and operation which indicate that they have significant contacts
with California. So long as a Delaware or other foreign corporation is in this
special category, and it does not qualify for one of the statutory exemptions,
it is subject to a number of key provisions of the CGCL applicable to
corporations incorporated in California. Among the more important provisions
are those relating to the election and removal of directors, cumulative
voting, standards of liability and indemnification of directors,
distributions, dividends and repurchases of shares, shareholder meetings,
approval of certain corporate transactions, dissenters' and appraisal rights
and inspection of corporate records. See "Significant Differences Between the
Corporation Laws of California and Delaware" above.
Exemptions from Section 2115 of the CGCL are provided for corporations whose
shares are listed on a major national securities exchange or are traded in the
NASDAQ National Market System and which have 800 or more shareholders of
record. Following the Distribution, the New GranCare Common Stock will
continue to be traded on the NYSE, and held beneficially by more than 800
stockholders as of the Distribution Date, and, accordingly, New GranCare will
be exempt from Section 2115 of the CGCL.
SHARES ELIGIBLE FOR FUTURE SALES
Upon completion of the Distribution, New GranCare will have an estimated
23,401,992 shares of New GranCare Common Stock outstanding, all of which will
be freely tradable without restriction or further registration under the
Securities Act, except to the extent such shares are held by "affiliates" of
New GranCare, which will be subject to the limitations of Rule 144 promulgated
under the Securities Act. In general, under Rule 144 as currently in effect,
beginning 90 days after the date of this Prospectus, persons who may be deemed
affiliates of New GranCare, as that term is defined in the Securities Act
would be entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of New
GranCare Common Stock (approximately 234,020 shares immediately after the
Distribution) or the average weekly trading volume during the four calendar
weeks preceding a sale by such person. Sales under Rule 144 are also subject
to certain provisions relating to the manner and notice of sale and
availability of current public information about New GranCare. Following the
Distribution, 2,355,250 shares of New GranCare Common Stock will be issuable
upon the exercise of options held by directors and employees of New GranCare
and former employees of the Company.
AVAILABLE INFORMATION
New GranCare has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the shares of New GranCare Common Stock described in
this Prospectus. This Prospectus, which is a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement or the exhibits and schedules thereto, certain portions
having been omitted pursuant to the rules and regulations of the Commission.
Statements made in this Prospectus as to the contents of any contract or other
document are not necessarily complete with respect to each such contract or
other document filed with the Commission as an exhibit to the Registration
Statement. Reference is made to such exhibits for a more complete description
of the matter involved, and each such statement shall be deemed qualified in
its entirety by such reference.
The Registration Statement and the exhibits and schedules thereto filed with
the Commission may be inspected and copied (at prescribed rates) at the Public
Reference Section of the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
located at 7 World Trade Center, 13th Floor, New York, New York, 10048, and
the Citicorp Center, 500 West Madison, Suite 1400, Chicago, Illinois 60661-
2511.
101
<PAGE>
New GranCare intends to list the New GranCare Common Stock on the NYSE.
Future reports of New GranCare filed pursuant to either the Securities Act or
the Securities Exchange Act of 1934, as amended (the "Exchange Act") may be
inspected at such exchange and may also be reviewed through the Commission's
Electronic Data Gathering Analysis and Retrieval System, which is publicly
available through the Commission's Web site (http://www.sec.gov).
New GranCare intends to furnish its shareholders with annual reports
containing audited financial statements and quarterly reports containing
unaudited financial information for each of the first three quarters of each
fiscal year.
LEGAL MATTERS
The validity of the shares of New GranCare Common Stock offered hereby and
the status of the Distribution and Merger as tax-free transactions will be
passed upon for New GranCare by Powell, Goldstein, Frazer & Murphy, Atlanta,
Georgia.
EXPERTS
The consolidated financial statements and schedule of GranCare, Inc. at
December 31, 1995 and 1994, and for each of the three years in the period
ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by Ernst & Young LLP, independent auditors, as set
forth in their report thereon appearing elsewhere herein, which, as to the
years 1994 and 1993, is based in part on the report of KPMG Peat Marwick LLP,
independent auditors. The financial statements and schedule referred to above
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.
The balance sheet of New GranCare, Inc. at September 30, 1996, appearing in
this Prospectus and Registration Statement has been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and is included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GRANCARE, INC.
Reports of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994............. F-4
Consolidated Statements of Income for the years ended December 31, 1995,
1994 and 1993........................................................... F-5
Consolidated Statements of Shareholders' and Partners' Equity for the
years ended December 31, 1995, 1994 and 1993............................ F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1995, 1994 and 1993..................................................... F-7
Notes to Consolidated Financial Statements............................... F-9
Schedule II--Valuation and Qualifying Accounts........................... F-27
Unaudited Condensed Consolidated Balance Sheet as of September 30, 1996.. F-28
Unaudited Condensed Consolidated Statements of Income for the nine-month
periods ended September 30, 1996 and 1995............................... F-30
Unaudited Condensed Consolidated Statements of Cash Flows for the nine-
month periods ended September 30, 1996 and 1995 ........................ F-31
Notes to Unaudited Condensed Consolidated Financial Statements........... F-33
NEW GRANCARE, INC.
Report of Independent Auditors........................................... F-35
Balance Sheet as of September 30, 1996................................... F-36
Note to Balance Sheet.................................................... F-37
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
GranCare, Inc.
We have audited the consolidated balance sheets of GranCare, Inc. (the
Company) as of December 31, 1995 and 1994, and the related consolidated
statements of income, shareholders' and partners' equity, and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Evergreen Healthcare,
Inc., (Evergreen) which became a wholly-owned subsidiary in 1995, as of
December 31, 1994 and for the years ended December 31, 1994 and 1993. The
Evergreen amounts represent 21% of the consolidated total assets at December
31, 1994, and 38% and 26% of consolidated net income for the years ended
December 31, 1994 and 1993, respectively. The financial statements were
audited by other auditors, whose reports have been furnished to us, and our
opinion, with respect to the consolidated financial statements as of and for
the years ended December 31, 1994 and 1993, insofar as it relates to data
included for Evergreen, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the reports of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of GranCare, Inc. at
December 31, 1995 and 1994, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1995 in conformity with generally accepted accounting principles.
As discussed in Note 7 to the consolidated financial statements, effective
January 1, 1993, the Company changed its method of accounting for income
taxes. Also, as discussed in Note 2 to the consolidated financial statements,
effective December 31, 1993, the Company changed its method of accounting for
its marketable equity security investments.
Ernst & Young LLP
Atlanta, Georgia
February 27, 1996
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors Evergreen Healthcare, Inc.:
We have audited the consolidated balance sheet of Evergreen Healthcare, Inc.
and subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
ended December 31, 1994 and the six-month period ended December 31, 1993 and
the related combined statements of operations, partners' equity and cash flows
of Evergreen Healthcare LTD, L.P., Predecessor to Evergreen Healthcare, Inc.,
for the six month period ended June 30, 1993 (not presented separately
herein). These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated and combined financial statements referred
to above present fairly, in all material respects, the financial position of
Evergreen Healthcare, Inc. and subsidiaries as of December 31, 1994 and the
results of operations and cash flows of Evergreen Healthcare, Inc. and
subsidiaries for the year ended December 31, 1994, and the six-month period
ended December 31, 1993 and the related combined statements of operations,
partners' equity and cash flows of Evergreen Healthcare LTD., L.P.,
predecessor to Evergreen Healthcare, Inc., for the six month period ended June
30, 1993, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
August 17, 1995
F-3
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 17,738 $ 28,611
Accounts receivable, less allowance for doubtful
accounts (1995--$10,856 and 1994--$9,892)........... 173,068 128,121
Inventories.......................................... 13,527 11,125
Prepaid expenses and other current assets............ 16,498 14,344
Deferred income taxes (Note 7)....................... 10,933 7,395
---------- ----------
Total current assets................................... 231,764 189,596
Property and equipment:
Land and improvements................................ 10,238 10,937
Buildings and improvements........................... 192,875 185,293
Equipment............................................ 66,929 53,662
---------- ----------
270,042 249,892
Less accumulated depreciation........................ (55,689) (42,042)
---------- ----------
214,353 207,850
Other assets:
Investments, at fair value (Notes 4 and 11).......... 30,305 20,353
Goodwill (accumulated amortization: 1995--$5,535;
1994--$1,959)....................................... 120,946 58,418
Other intangibles (accumulated amortization: 1995--
$8,051; 1994--$5,940)............................... 9,793 11,501
Other (Note 2)....................................... 38,000 32,475
---------- ----------
Total assets........................................... $ 645,161 $ 520,193
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 72,935 $ 59,411
Accrued wages and related liabilities................ 24,069 22,643
Interest payable..................................... 6,793 3,683
Income taxes payable (Note 7)........................ -- 2,667
Notes payable and current maturities of long-term
debt (Notes 3, 4 and 11)............................ 4,937 11,566
---------- ----------
Total current liabilities.............................. 108,734 99,970
Long-term debt (Notes 3, 4 and 11)..................... 334,668 231,665
Deferred income taxes (Note 7)......................... 16,735 15,496
Other.................................................. 12,425 11,645
Commitments and contingencies (Notes 5 and 6)
Shareholders' equity (Notes 2 and 8):
Common stock; no par value; 50,000,000 shares
authorized (shares issued: 1995--23,948,728 and
1994--23,173,429)................................... 134,699 132,141
Treasury stock, at cost (1995--915,000 shares and
1994--200,000 shares)............................... (18,700) (5,030)
Equity component of minimum pension liability........ (465) (364)
Unrealized gain on investments (net of income taxes:
1995--$3,453; 1994--$2,250)......................... 5,206 3,375
Retained earnings.................................... 51,859 31,295
---------- ----------
172,599 161,417
---------- ----------
Total liabilities and shareholders' equity............. $ 645,161 $ 520,193
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ----------
DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
REVENUES
Net patient revenues......................... $ 811,402 $ 701,783 $ 609,250
Investment and other income.................. 5,060 15,688 2,439
---------- ---------- ----------
Total revenues............................... 816,462 717,471 611,689
EXPENSES
Operating expenses:
Salary and related......................... 360,530 322,471 289,276
Rent and property.......................... 51,206 44,291 42,446
Other operating............................ 308,982 266,774 217,266
---------- ---------- ----------
720,718 633,536 548,988
Depreciation and amortization................ 21,611 16,440 12,349
Interest expense and financing charges....... 27,054 21,481 19,601
Nonrecurring costs--merger and other costs... 11,750 -- 4,573
Restructuring costs (Note 12)................ -- 8,200 --
---------- ---------- ----------
Total expenses............................... 781,133 679,657 585,511
---------- ---------- ----------
Income before income taxes and extraordinary
charge...................................... 35,329 37,814 26,178
Income taxes................................. 14,765 13,524 10,089
---------- ---------- ----------
Income before extraordinary charge........... 20,564 24,290 16,089
Extraordinary charge--loss on early
extinguishment of debt, net of income tax
benefit of $856............................. -- -- 1,285
---------- ---------- ----------
Net income................................... $ 20,564 $ 24,290 $ 14,804
========== ========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE
Primary:
Income before extraordinary charge......... $ 0.86 $ 1.07 $ 0.88
Extraordinary charge....................... -- -- (.07)
---------- ---------- ----------
Net income................................. $ 0.86 $ 1.07 $ 0.81
Fully diluted:
Income before extraordinary charge......... $ 0.86 $ 1.07 $ 0.84
Extraordinary charge....................... -- -- (.07)
---------- ---------- ----------
Net income................................. $ 0.86 $ 1.07 $ 0.77
========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary.................................... 23,794 22,631 18,205
========== ========== ==========
Fully diluted.............................. 23,919 24,966 19,241
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
COMPUPHARM EQUITY
CONVERTIBLE COMPONENT UNREALIZED
COMMON PREFERRED TREASURY OF MINIMUM GAIN ON RETAINED PARTNERS'
STOCK STOCK STOCK PENSION LIABILITY INVESTMENTS EARNINGS EQUITY TOTAL
-------- ------------ -------- ------------------ ------------ --------- ---------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1993................... $ 65,039 $ 24 $ (6,221) $(294) $ -- $(4,318) $ 5,550 $ 59,780
Issuance of 170,284
shares of common stock
on exercise of
warrants and options
(Note 8).............. 884 -- -- -- -- -- -- 884
Issuance of 6,000
shares of common
stock................. 80 -- -- -- -- -- -- 80
Dividends on CompuPharm
convertible preferred
stock................. -- -- -- -- -- (182) -- (182)
GranCare and CompuPharm
pooling transactions
(Note 3):
Retirement of
CompuPharm treasury
stock................. (1,191) -- 1,191 -- -- -- -- --
Conversion of
CompuPharm convertible
preferred stock....... 24 (24) -- -- -- -- -- --
Conversion of
CompuPharm convertible
debt.................. 350 -- -- -- -- -- -- 350
Exercise of CompuPharm
warrants.............. 1,660 -- -- -- -- -- -- 1,660
Exercise of CompuPharm
non-compensatory
options............... 150 -- -- -- -- -- -- 150
Reverse acquisition
transaction (Note 3):
Issuance of common
stock for partnership
interest.............. 6,656 -- -- -- -- -- (6,656) --
Issuance of common
stock for assets of
affiliated
partnership........... 2,105 -- -- -- -- -- -- 2,105
Issuance of common
stock for acquisition
of minority interest
of NHI................ 5,693 -- -- -- -- -- -- 5,693
Final distribution to
former general and
limited partners...... (490) -- -- -- -- -- -- (490)
Distributions to
partners.............. -- -- -- -- -- -- (864) (864)
Unrealized gain on
investments, net of
income taxes of
$2,800................ -- -- -- -- 4,200 -- -- 4,200
Net income............. -- -- -- -- -- 12,834 1,970 14,804
Four months of
CompuPharm 1993 net
income included in
both 1992 and 1993
(Note 3).............. -- -- -- -- -- (1,329) -- (1,329)
Minimum pension
liability adjustment.. -- -- -- 130 -- -- -- 130
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1993................... 80,960 -- (5,030) (164) 4,200 7,005 -- 86,971
Issuance of 221,655
shares of common stock
on exercise of
warrants and options
(Note 8).............. 1,603 -- -- -- -- -- -- 1,603
Issuance of 1,000,000
shares of common stock
in connection with LTC
acquisition (Note 3).. 20,000 -- -- -- -- -- -- 20,000
Issuance of 5,048
shares of common stock
on conversion of debt
issued in connection
with Winyah
acquisition (Note 3).. 100 -- -- -- -- -- -- 100
Issuance of 2,421,875
shares of common stock
in public offering.... 28,478 -- -- -- -- -- -- 28,478
Issuance of 77,500
shares of common stock
in connection with HS
Healthcare acquisition
(Note 3).............. 1,000 -- -- -- -- -- -- 1,000
Unrealized loss on
investments, net of
income taxes of $550.. -- -- -- -- (825) -- -- (825)
Net income............. -- -- -- -- -- 24,290 -- 24,290
Minimum pension
liability adjustment.. -- -- -- (200) -- -- -- (200)
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1994................... 132,141 -- (5,030) (364) 3,375 31,295 -- 161,417
Issuance of 769,799
shares of common stock
on exercise warrants
and options (Note 8).. 2,476 -- -- -- -- -- -- 2,476
Issuance of 5,500
shares of common
stock................. 82 -- -- -- -- -- -- 82
Repurchase of 715,000
shares of common
stock................. -- -- (13,670) -- -- -- -- (13,670)
Unrealized gain on
investments, net of
income taxes of
$1,203................ -- -- -- -- 1,831 -- -- 1,831
Net income............. -- -- -- -- -- 20,564 -- 20,564
Minimum pension
liability adjustment.. -- -- -- (101) -- -- -- (101)
-------- ----- -------- ----- ------ ------- ------- --------
Balances at December 31,
1995................... $134,699 $ -- $(18,700) $(465) $5,206 $51,859 $ -- $172,599
======== ===== ======== ===== ====== ======= ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
--------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income...................................... $ 20,564 $ 24,290 $ 14,804
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for doubtful accounts............... 6,281 7,918 3,592
Depreciation and amortization................. 21,611 16,440 12,349
Gain on sale of assets........................ (829) (12,518) (1,672)
Deferred income taxes......................... 1,171 (333) 922
Amortization of deferred financing costs...... 531 522 373
Restructuring costs........................... -- 8,200 --
Changes in operating assets and liabilities
net of effects of acquisitions (Note 3):
Accounts receivable......................... (49,018) (33,491) (29,548)
Prepaid expenses and other current assets... (3,215) 1,992 (4,270)
Accounts payable, accrued wages and other
accrued expenses........................... 15,388 2,145 6,461
Interest payable............................ 3,110 769 2,704
Income taxes payable........................ (3,199) (883) (5,870)
Other....................................... (3,400) (1,320) 714
--------- -------- --------
Net cash provided by operating activities....... 8,995 13,731 559
INVESTING ACTIVITIES
Acquisition of businesses (net of cash acquired
of $2,469 in 1994 and
$10 in 1993)................................... (68,467) (49,414) (19,273)
Purchases of property and equipment............. (23,495) (14,938) (20,918)
Proceeds from disposition of assets............. 4,155 13,726 374
Purchases of investments........................ (6,944) (6,978) (4)
Repayments (advances) of notes receivable....... 943 (1,610) 3,009
Other........................................... (1,972) (2,212) (1,251)
--------- -------- --------
Net cash used in investing activities........... (95,780) (61,426) (38,063)
FINANCING ACTIVITIES
Issuance of stock............................... 82 29,063 1,140
Payment of stock issuance costs................. -- (585) --
Proceeds from exercise of warrants and options.. 2,776 1,603 584
Purchase of treasury stock...................... (13,670) -- --
Long-term debt payments......................... (177,870) (23,207) (14,580)
Proceeds from long-term debt borrowings......... 270,018 44,787 66,900
Advances (repayments) of short-term notes
payable........................................ -- (600) 2,598
Payment of debt issuance costs.................. (5,424) (1,136) (3,763)
Payment of dividends on preferred stock......... -- -- (261)
Distributions to former general and limited
partners....................................... -- -- (1,354)
--------- -------- --------
Net cash provided by financing activities....... 75,912 49,925 51,264
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (10,873) 2,230 13,760
Less CompuPharm increase in cash for period
January 1, 1993 through
April 30, 1993 (Note 3)........................ -- -- (1,687)
Cash and cash equivalents at beginning of year.. 28,611 26,381 14,308
--------- -------- --------
Cash and cash equivalents at end of year........ $ 17,738 $ 28,611 $ 26,381
========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest paid................................. $ 22,566 $ 20,712 $ 15,300
========= ======== ========
Income taxes paid............................. $ 17,964 $ 14,406 $ 12,035
========= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITIONS
The 1995, 1994 and 1993 acquisitions (see Note 3) had the following effects
on cash:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Fair values of assets acquired (net of cash
received)...................................... $(75,317) $(90,713) $(48,392)
Fair values of liabilities assumed.............. 6,850 20,299 29,119
-------- -------- --------
(68,467) (70,414) (19,273)
Issuance of stock............................... -- 21,000 --
-------- -------- --------
Net effect on cash.............................. $(68,467) $(49,414) $(19,273)
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS
In connection with the acquisition of Professional Health Care Management,
Inc. (PHCM) in October 1992, GranCare issued 45,000 shares of GranCare Series D
Exchangeable Preferred Stock (the Series D Preferred Stock), which had an
aggregate liquidation preference of $9,000,000. In January 1993, the Series D
Preferred Stock was converted into two promissory notes and, in April 1993,
GranCare prepaid the notes using proceeds from its 6.5% Subordinated Debenture
offering.
As part of the 1993 NHI reverse acquisition (see Note 3), approximately
7,200,000 common shares (GranCare equivalent), which is net of treasury shares
retired, were issued.
Plant and equipment acquired under financing notes and capital lease
arrangements aggregated approximately $1,021,000, $3,222,000, and $4,904,000 in
1995, 1994, and 1993 respectively.
See accompanying notes.
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
GranCare, Inc. (GranCare or the Company) merged with Evergreen Healthcare,
Inc. (Evergreen) on July 20, 1995 (the Merger). On that date, GranCare issued
approximately 9,673,000 shares of its common stock in exchange for the
approximately 12,500,000 shares of Evergreen common stock then outstanding
based on an exchange ratio of its shares of GranCare common stock for each
share of Evergreen common stock.
The consolidated financial statements give retroactive effect to the Merger,
which has been accounted for using the pooling-of-interests method and, as a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The consolidated statements of shareholders' and partners' equity
also reflect retroactive combination of the accounts of GranCare and Evergreen
for all periods presented, with adjustments to outstanding shares based on the
exchange ratio.
Prior to the June 30, 1993 National Heritage, Inc. (NHI) reverse acquisition
transaction described in Note 3, the historical Evergreen entity included in
these consolidated financial statements consisted of: (a) Evergreen Healthcare
Ltd., L.P. (ELP), a limited partnership and; (b) Omega/Indiana Pharmacy, L.P.
(OLP), also a limited partnership. Prior to the June 30, 1993 transaction, ELP
had a September 30 fiscal year-end and OLP had a calendar year-end.
Evergreen amounts for the 1994 and 1993 consolidated financial statements
have been conformed to the Company's December 31 year-end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation The Company operates approximately 136 leased and
owned long-term health care facilities that provide skilled nursing and
residential care services in 15 states. In addition, the Company also owns and
operates or serves 30 institutional pharmacies, a specialty hospital geriatric
services company, which manages approximately 100 geriatric care units in
acute hospitals in 18 states, and home health operations in three states.
The facilities and pharmacy divisions represented approximately 72% and 23%,
respectively, of the total net revenues of the Company. Substantially all of
the facilities and pharmacies receive benefits under the Medicare and Medicaid
programs. These programs are highly regulated and subject to periodic change.
The consolidated financial statements include the accounts of GranCare and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliates in which the
Company has less than a 50% interest are accounted for by the equity method.
Use of Estimates The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
Inventories Inventories are stated at the lower of cost, using the first-in,
first-out method, or market value. Inventories consist primarily of purchased
pharmaceuticals and various medical equipment of the pharmacies and supplies
used in the care of residents in long-term care facilities.
Property and Equipment Property and equipment are recorded at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets as stated below. Leases and leasehold
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
improvements that have been capitalized are amortized over the lives of the
leases. Amortization of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings and improvements..................................... 8-35 years
Equipment...................................................... 5-7 years
</TABLE>
Investments In May 1993, the FASB issued Statement of Financial Accounting
Standards No. 115 (Statement No. 115), "Accounting for Certain Investments in
Debt and Equity Securities." As permitted under Statement No. 115, GranCare
elected the early adoption of provisions of the new standard as of December
31, 1993, and recognized the unrealized gain ($4,200,000, net of income taxes)
as a direct component of equity (see Note 11). Evergreen adopted the new
standard on July 1, 1994.
Goodwill and Other Intangibles In connection with the Company's
acquisitions, costs in excess of the amounts assigned to identifiable assets
acquired, less liabilities assumed, are recorded as goodwill. Goodwill is
amortized on a straight-line basis principally over a period of 35 years.
Goodwill recorded in the Cornerstone acquisition (unamortized balance of
$48,721,000 at December 31, 1995) is being amortized over 25 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on undiscounted cash flows of the acquired
entity over the remaining amortization period, the Company's carrying value of
the goodwill is reduced by the estimated shortfall of cash flows.
Other intangibles, which primarily were obtained in connection with the
Company's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
Other Assets The Company defers financing costs incurred to obtain long-term
debt and amortizes such costs using the straight-line method over the term of
the related obligation. An investment in an unconsolidated affiliate at
December 31, 1995 consists of a 28% owned interest in Alternative Living
Services, Inc. (ALS), which is recorded using the equity method. In 1994, the
Company's 53% interest in ALS was consolidated with the Company. The remaining
other assets are individually not significant in their impact to the Company.
Stock Based Compensation The Company grants stock options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and intends to continue to do so.
Net Patient Revenues Patient revenues are reported in the period in which
services are provided. Net patient revenues reflect contractual discounts and
the results of other arrangements for providing services at less than
established rates. Contractual adjustments include differences between
established billing rates and amounts estimated by management as reimbursable
under various cost reimbursement formulas or service contracts.
The administrative procedures related to the Medicare and Medicaid cost
reimbursement programs, in effect, generally preclude final determination of
amounts due the Company until cost reimbursement reports, filed by the
Company, are audited or otherwise reviewed and settled with the applicable
administrative agencies. Normal estimation differences between final
settlements and amounts accrued in previous years are reported in current net
patient revenues. Actual results could differ from these estimates. Included
in accounts receivable are settlement amounts due from Medicare and Medicaid
programs totalling $45,764,000 and $20,204,000 at December 31, 1995 and 1994,
respectively. In the opinion of management, adequate provision has been made
for adjustments, if any, that might result from subsequent review. The
Medicare and Medicaid cost reimbursement programs approximated 75%, 76% and
77% of net patient revenues for the years ended December 31, 1995, 1994 and
1993, respectively.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Earnings Per Share Earnings per share are computed based on the weighted
average common and (if dilutive) common equivalent shares outstanding, which
include options and warrants, and in the case of fully diluted earnings per
share, convertible subordinated debentures. The earnings per share amounts are
based on the combined historical weighted average common and dilutive common
equivalent shares of GranCare and Evergreen pre-merger adjusted for the .775
exchange ratio. Also, Evergreen's pre-merger historical amounts for periods in
which it was a partnership are based on the equivalent shares of Evergreen
common stock using the terms of the Evergreen exchange transaction described
in Note 3.
Pro forma earnings per share for 1993 is computed by dividing pro forma net
income by the weighted average number of common and common equivalent shares
outstanding for the period.
Pro Forma Income Taxes As indicated in Note 1, prior to June 30, 1993, the
Evergreen predecessor entity consisted of two partnerships and, accordingly,
Evergreen was not subject to federal or state income taxes. The following
table presents unaudited pro forma financial information for the year ended
December 31, 1993, that includes a provision for income taxes as if Evergreen
had been a taxable corporation for the period. Such pro forma calculation was
based on the income tax laws and rates in effect during the period, and FASB
Statement No. 109.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1993
---------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
Pro Forma data (unaudited):
Income before income taxes and extraordinary
charge........................................... $26,178
Income taxes...................................... 10,874
Income before extraordinary charge................ 15,304
Extraordinary charge.............................. 1,285
-------
Net income........................................ $14,019
=======
Net income per common and common equivalent share:
Primary........................................... $ .77
-------
Fully diluted..................................... $ .73
=======
</TABLE>
Impact of Recently Issued Accounting Standards In March 1995, the FASB
issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," which requires impairment losses
to be recorded on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. Statement No. 121 also addresses the accounting for long-
lived assets that are expected to be disposed of. The Company will adopt
Statement No. 121 in the first quarter of 1996 and, based on current
circumstances, does not believe the effect of adoption will be material.
NOTE 3. ACQUISITIONS, DISPOSITIONS AND MERGERS
1993 Acquisitions and Dispositions Effective January 1, 1993, GranCare
acquired all of the capital stock of Coordinated Home Health, Inc., and the
operations of Coordinated Nursing Services, Inc. and Infusion Plus, Inc.
(collectively, Coordinated) for $1,600,000 in cash and a promissory note for
$485,000.
On January 28, 1993, GranCare completed the acquisition of Colter Village,
two health care facilities consisting of a skilled nursing facility and a
retirement living center for $6,750,000.
On March 31, 1993, GranCare acquired Bella Vita, a 126-bed skilled nursing
facility in Colorado, for $3,740,000.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On April 1, 1993, GranCare acquired all of the capital stock of Pacific
Therapies, Inc., and the operations of Pacific Therapies Co. (collectively,
Pacific Therapies), which provide physical, occupational and speech therapy
services, for $1,000,000 in cash and a promissory note for $384,000.
On April 19, 1993, GranCare acquired the operations of Patient Therapy
Systems, Inc., which provides therapy beds and therapy services to patients
directly and under agreements and arrangements with nursing facilities, for
$400,000 in cash.
On April 30, 1993, GranCare acquired four skilled nursing facilities located
in Wisconsin for $3,500,000 in cash and $13,000,000 in mortgage notes.
On June 23, 1993, GranCare acquired all of the capital stock of Brim Medical
Equipment and Supplies, Inc., an enteral and urological supply company, for
$1,400,000, payable in installments of various amounts, without interest
through July 1, 1998.
On June 30, 1993, GranCare acquired all of the capital stock of Winyah
Dispensary, LTC of North Carolina and Winyah Dispensary-Midlands, Inc., for
$2,500,000 in convertible promissory notes, and the operations of Winyah
Dispensary for $3,650,000 in cash and promissory notes in the aggregate sum of
$2,600,000 (collectively, Winyah). Winyah provides institutional pharmacy
services in North and South Carolina. In connection with these transactions,
GranCare recorded $8,218,000 in goodwill.
On September 30, 1993, CompuPharm acquired the operations of Medication
Delivery Systems, Inc. (MDS), an institutional pharmacy, for a purchase price
of $1,750,000 plus transaction costs.
NHI Reverse Acquisition Effective June 30, 1993, Evergreen became a public
company and acquired the remaining 90% common stock ownership of NHI, an
existing public company, in a reverse acquisition transaction. (Note:
Evergreen had previously acquired 10% of NHI in October 1992.) The following
transactions were part of the reverse acquisition:
. The partners of the Evergreen partnerships (i.e., ELP and OLP as referred
to in Note 1) and an affiliated partnership under common control (ERP)
received 5,032,108 common shares (restated to GranCare equivalent
shares), which was net of 1,240,000 shares held in treasury that were
retired, in exchange for their partnership interests in the three
partnerships.
. The ERP partnership, which previously was not part of the historical
Evergreen entity, transferred its assets to Evergreen as part of the
exchange. Such assets consisted of: (i) a limited partnership interest in
the Evergreen partnerships, and (ii) a 48% ownership in NHI. (Note: ERP
had also acquired its interest in NHI in October 1992.)
. The remaining 42% owners of NHI received 2,141,325 common shares
(restated to GranCare equivalent shares), excluding shares held in
treasury by NHI.
The exchange of common stock for partnership interests in predecessor
partnerships (i.e., ELP and OLP) was recorded at book value, because it was
merely a legal restructuring. The receipt of ERP assets for common stock also
was recorded at book value, because this was a transfer among entities under
common control. ERP's book value included $2,100,000 in goodwill recorded in
connection with its purchase of a 48% interest in NHI.
The acquisition of the NHI 42% minority stockholders' interests was
accounted for as a purchase and, in connection therewith, $2,691,000 in
goodwill was recorded. The operations of NHI have been included in the
consolidated results of Evergreen from June 30, 1993 forward.
The 1993 acquisitions described above were all accounted for as purchases
and, accordingly, the consolidated financial statements of the Company include
the operations of such acquired entities since the respective dates of their
acquisition.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During 1993, GranCare also divested nine facilities.
1994 Acquisitions and Dispositions On March 1, 1994, GranCare acquired the
operations of PPCP, Inc. (PPCP), which provides institutional pharmacy
services, for $3,800,000 in cash and adjustable subordinated promissory notes
in the aggregate sum of $1,449,000. In connection with this transaction,
$4,518,000 was recorded as goodwill.
On April 1, 1994, GranCare acquired the operations of Merit Pharmacy, Inc.
(Merit), which provides institutional pharmacy services, for $600,000 in cash
and a subordinated promissory note for $1,184,000. In connection with this
transaction, GranCare recorded $1,817,000 in goodwill.
On June 7, 1994, Evergreen acquired substantially all of the assets of two
Illinois limited partnerships, Health Care Fund Limited Partnership and Health
Care Fund II Limited Partnership, as well as two related companies, H.S.
Healthcare, Inc. and H.S. Systems, Inc. (collectively referred to as HS
Healthcare). Evergreen paid approximately $22,571,000 cash (of which
$7,687,000 was financed through revolving credit borrowings) in exchange for
the assets acquired and liabilities assumed. The Company also paid $3,000,000
in cash and issued 77,500 shares (restated) of common stock valued at
$1,000,000 to the general partners of the partnerships and sole shareholders
of the related companies in consideration for their agreement not to compete
with the Company for a period of ten years.
Effective July 1, 1994, GranCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, LTC), an institutional pharmacy business based in Indiana, for
$16,000,000 cash and 1,000,000 shares of GranCare common stock valued at $20
per share, or $20,000,000. In the event the market price of the common stock
was not at least equal to $20 per share at a specified date in 1995, the
Company was obligated to issue additional consideration to bring the value of
the common stock to $20,000,000. The purchase agreement also contains a
contingent earnout provision, in the form of a subordinated promissory note,
under which an additional $5,500,000 could be paid-provided certain future
operating results are attained. In connection with this transaction, GranCare
recorded $27,402,000 goodwill.
Also effective July 1, 1994, GranCare acquired the operations of Ricketts
Drug, Inc., an institutional pharmacy based in Virginia, for $4,111,000 in
cash. In connection with this transaction, GranCare recorded $2,355,000 in
goodwill.
Effective July 25, 1994, GranCare acquired leasehold interests in two long-
term health care facilities in South Carolina for $38,000.
Effective September 30, 1994, GranCare acquired leasehold interests in five
additional long-term health care facilities in South Carolina for $150,000.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1994, GranCare also divested three facilities (exclusive of the
restructuring described in Note 12) and Pacific Therapies, acquired in 1993.
The sale of Pacific Therapies to an unrelated entity for approximately
$11,700,000 in cash and assumption of approximately $1,100,000 in debt and
certain other liabilities resulted in a gain of approximately $8,800,000. The
gain is reported in investment and other income in the Consolidated Statements
of Income.
1995 Acquisitions and Dispositions In January 1995, GranCare acquired a
leasehold interest in a long-term facility in Arizona for $150,000.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In April 1995, GranCare acquired Cornerstone Health Management Company
(Cornerstone), a management company specializing in the implementation and
management of geriatric specialty programs for acute care hospitals, for
$53,213,000.
In November 1995, GranCare acquired Innovative Pharmacy Services, Inc., an
institutional pharmacy based in Wisconsin, for $10,000,000 in cash and stock.
In December 1995, GranCare acquired the operations of both Pharmcare, Inc.
and American Pharmaceutical Inc., two institutional pharmacies based in
Northern California, for $4,700,000 and $1,200,000, respectively.
During 1995, GranCare also divested one facility (exclusive of the
restructuring described in Note 12).
In July 1995, in accordance with contractual obligation to the former owners
of LTC, the Company repurchased 715,000 shares of its common stock.
Summarized below are the unaudited pro forma consolidated results of
operations for GranCare had the 1995 Cornerstone acquisition occurred as of
January 1, 1994, and the 1994 LTC and HS Healthcare acquisitions and the June
30, 1993 NHI reverse acquisition occurred as of January 1, 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C>
Total revenues................................... $ 786,846 $ 711,622
Income before extraordinary charge............... 26,738 19,926
Net income....................................... 26,738 18,641
Net income per share:
Primary........................................ 1.15 .91
Fully diluted.................................. 1.15 .87
</TABLE>
Pro forma information for other 1995, 1994 and 1993 acquisitions and
divestitures is not presented because their operating results, either
individually or in the aggregate, do not have a material effect on the pro
forma operating results presented above.
The above results are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit which might be
achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
MERGERS
CompuPharm Merger On December 28, 1993, GranCare acquired, through merger,
all of the outstanding common stock of CompuPharm, Inc. ("CompuPharm") in
exchange for 2,462,795 shares of GranCare's common stock. CompuPharm is a
provider of institutional pharmacy services.
GranCare's merger with CompuPharm was accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements for all periods prior to the merger have been restated to include
the historical balances of GranCare and CompuPharm as if the two companies had
always been combined. For purposes of restating the December 31, 1992
financial statements to reflect the merger, CompuPharm's annual financial
statements for the fiscal year ended April 30, 1993 were used. The 1993
consolidated financial statements, however, include CompuPharm balances as of,
and for the year ended, December 31, 1993. As such, both the 1993 and 1992
consolidated financial statements include operating results
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and cash flows relating to CompuPharm for the four months ended April 30,
1993, (consisting of revenues and net income of $24,200,000 and $1,300,000,
respectively) which are adjusted through a separate line item in the
consolidated statements of shareholders' equity and cash flows.
A reconciliation of consolidated total revenues, income before extraordinary
charge and net income to amounts applicable to the separate companies prior to
the date of combination (effectively, December 31, 1993) is presented together
with the Evergreen merger table included below.
Evergreen Merger On July 20, 1995, GranCare acquired, through merger,
substantially all of the outstanding common stock of Evergreen in exchange for
approximately 9,673,000 shares of GranCare common stock based on a .775
exchange ratio. The Evergreen merger is accounted for as a pooling-of-
interests business combination and, accordingly, the consolidated financial
statements of all periods prior to the merger have been restated to include
the historical balances of GranCare and Evergreen as if the two companies had
always been combined.
The Company incurred certain costs relating to completion of the Merger and
other one-time costs and recognized an $11.8 million charge in the third
quarter of 1995, as required under the pooling-of-interests accounting method.
The following is a summary of the Merger and other one-time costs:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
DOLLARS IN
THOUSANDS
<S> <C>
Merger costs:
Investment banking fees.................................... $ 4,100
Legal and other fees....................................... 1,469
Executive severance........................................ 1,100
Planned divestitures of certain facilities................. 1,500
Other one-time costs:
Relocation................................................. 1,626
Integration................................................ 850
Other deferred acquisition costs........................... 1,105
-------
Total........................................................ $11,750
=======
</TABLE>
As of December 31, 1995, the remaining reserve balance relating to the
Merger and other one-time costs was $2.4 million.
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of consolidated total revenues, income before extraordinary
charge, and net income to amounts applicable to the separate pooled companies
prior to the dates of combination (including both the December 1993 CompuPharm
and July 1995 Evergreen mergers) is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C> <C>
TOTAL REVENUES
GranCare............................................. $ 549,220 $ 434,117
CompuPharm........................................... -- 73,853
----------- -----------
GranCare, pre-Evergreen merger....................... 549,220 507,970
Evergreen............................................ 168,251 103,719
----------- -----------
$ 717,471 $ 611,689
=========== ===========
INCOME BEFORE EXTRAORDINARY CHARGE(1)
GranCare............................................. $ 15,179 $ 10,697
CompuPharm........................................... -- 1,472
----------- -----------
GranCare, pre-Evergreen merger....................... 15,179 12,169
Evergreen(2)......................................... 9,111 3,920
----------- -----------
$ 24,290 $ 16,089
=========== ===========
NET INCOME
GranCare............................................. $ 15,179 $ 10,697
CompuPharm........................................... -- 187
----------- -----------
GranCare, pre-Evergreen merger....................... 15,179 10,884
Evergreen(2)......................................... 9,111 3,920
----------- -----------
$ 24,290 $ 14,804
=========== ===========
NET INCOME PER SHARE (FULLY-DILUTED BASIS)
GranCare............................................. $ 1.08 $ 1.03
CompuPharm(3)........................................ n/a n/a
GranCare, pre-Evergreen merger....................... 1.08 .83
Evergreen(4)......................................... .82 n/a
----------- -----------
$ 1.07 $ .77
=========== ===========
</TABLE>
- --------
(1) After non-recurring merger costs of $2,149,000 for GranCare and $2,424,000
for CompuPharm in 1993.
(2) Evergreen's income before extraordinary charge and net income exclude
Merger and other costs of approximately $11,750,000. This charge was
recorded by the Company in the third quarter of 1995.
(3) Earnings per share for CompuPharm prior to the merger was not applicable
because it was not a public company.
(4) Earnings per share for Evergreen prior to June 30, 1993 was not applicable
because it was not a public company.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
SENIOR DEBT
Mortgage notes payable:
Omega.............................................. $ 58,800 $ 58,800
Other (principally HRPT and FINOVA) in installments
which include interest ranging from 8% to 11.5%... 32,376 31,477
Revolving loan under bank credit facility bearing
interest based on LIBOR or prime rate............... 37,700 45,900
Evergreen Credit Facility............................ -- 12,686
Evergreen revenue bonds.............................. 13,445 13,850
Notes payable in installments which include interest
ranging from 6.9% to 13.75%; final maturities in
1996 through 2010................................... 28,991 10,788
Capitalized lease obligations (less imputed interest
of $570 in 1995 and $421 in 1994)................... 4,622 4,964
Other................................................ 2,400 3,385
----------- -----------
Total senior debt.................................. 178,334 181,850
SUBORDINATED DEBT
Senior subordinated notes; interest due semi-annually
at 9 3/8%, principal due September 15, 2005......... 100,000 --
Convertible subordinated debentures; interest due
semi-annually at 6.5%, principal due January 15,
2003................................................ 60,000 60,000
Other notes payable.................................. 1,271 1,381
----------- -----------
Total subordinated debt................................ 161,271 61,381
----------- -----------
Total debt............................................. 339,605 243,231
Less short-term notes payable and current maturities of
long-term debt........................................ 4,937 11,566
----------- -----------
$ 334,668 $ 231,665
=========== ===========
</TABLE>
On August 14, 1992, PHCM entered into a $58,800,000 loan agreement with
Omega Healthcare Investors, Inc. (Omega). The loan is secured by mortgages on
certain health care facilities, and by the personal property used in
connection with the operation of those facilities, as well as certain other
intangibles, including the licenses for these facilities, to the extent
permitted by Michigan law, and accounts receivable in excess of $1,000,000.
The minimum interest rate on the loan is 13% per year, of which 12% is payable
monthly in cash and 1% is deferred. The cash interest rate will increase in
each subsequent year based upon a specified formula tied to either; (i) the
percentage change in the Consumer Price Index published by the United States
Department of Labor, or; (ii) the change in Gross Revenues (as defined in the
loan agreement); however, the increase cannot be more than the interest for
the prior fiscal year multiplied by 1.05. The 1% of deferred interest will
accrue on an annual basis and will be cumulative on an annual basis as long as
the loan remains outstanding. Quarterly principal payments of $1,470,000 are
required beginning October 1, 2002, with the remaining balance plus the
deferred interest due in August 2007. The loan agreement also contains certain
restrictive covenants, including, but not limited to, restrictions on PHCM
incurring additional debt, prepayment and minimum net worth requirements. As
of December 31, 1995, the interest rate was 13.9%, including the 1% deferred
interest.
In conjunction with a 1990 acquisition, GranCare borrowed $15,000,000 under
a promissory note agreement with HRPT. The note is secured by mortgages on two
facilities and 1,000,000 shares of HRPT common stock
F-17
<PAGE>
owned by GranCare. The HRPT note had a balance of $8,750,000, with an interest
rate of 13.75% at December 31, 1994.
During 1995, GranCare renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11,500,000, resulting in
additional proceeds to GranCare. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is payable commencing on
January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments
will begin two years after the date of the note on a 30-year direct reduction
basis, with the remaining balance due December 31, 2010.
On January 29, 1993, GranCare completed a public offering of $60,000,000
aggregate principal amount of its 6.5% Convertible Subordinated Debentures due
2003 (the Debentures). The Debentures are convertible into common stock of
GranCare at any time prior to redemption or final maturity, at a conversion
price of $27.145 per share, subject to adjustment upon the occurrence of
certain events. Interest on the Debentures is payable semi-annually on January
and July 15th. Approximately $15,600,000 of the net proceeds of $57,700,000
was used to repay certain indebtedness, and the remaining $42,100,000 was used
for general corporate purposes, including the further expansion of specialty
medical services and acquisitions.
In conjunction with the 1993 acquisition of four skilled nursing facilities
in Wisconsin, as described in Note 3, GranCare entered into an $11,000,000
mortgage loan agreement with FINOVA. Interest accrues on the mortgage note at
an adjustable rate of 2% over prime, with installments of principal and
interest due monthly through April 2001, with final payment due May 2001. The
mortgage note cannot be prepaid until 90 days prior to the end of the term
without a prepayment penalty.
At the end of 1993, a subsidiary of GranCare, GranCare Health Services, Inc.
entered into a $50,000,000 revolving credit agreement with a syndicate of
banks. In 1994, the agreement was amended to increase the line of credit to
$80,000,000. This credit agreement terminated on March 29, 1995.
On March 29, 1995, the Company entered into an agreement with First Union
National Bank of North Carolina (First Union) pursuant to which First Union
provided the Company with a $175 million revolving line of credit (the Credit
Facility). The Company has used the proceeds from the Credit Facility to pay
off its previous line of credit, fund the acquisition of Cornerstone and for
general working capital purposes. In September 1995, concurrent with the High
Yield Debt offering the Credit Facility was reduced to $150 million. Amounts
outstanding under the Credit Facility bear interest based on LIBOR or prime
rates (7.6% and 8.85%, respectively, at December 31, 1995). Amounts
outstanding as of June 30, 1998 may convert to a term loan with equal
quarterly installments due through the final maturity date of June 30, 2002.
No principal payments are required under the Credit Facility prior to the June
30, 1998 conversion date.
Evergreen maintained a revolving credit facility and a working capital
facility (the Evergreen Credit Facility) in the aggregate maximum amount of
$55,000,000 from a syndicate of banks, $45,000,000 of which was to be used for
acquisitions and $10,000,000 of which was to be used for working capital
purposes. The Evergreen Credit facility was terminated at the merger. Six
nursing home facilities were refinanced via mortgage debt in March 1995 for
$16,500,000, including the facilities held as collateral under the revolving
credit facility. Therefore, the Company has classified the borrowings under
the revolving credit facility as long-term debt in the Company's consolidated
balance sheet at December 31, 1994. The Evergreen Credit Facility described
above was entered into on June 7, 1994, as a refinancing of an existing
$6,000,000 revolving credit facility with the same bank.
On September 29, 1995, the Company closed the sale of $100 million aggregate
principal amount if its' 9 3/8% Senior Subordinated Notes due 2005 (Notes) in
an underwritten public offering (Notes Offering). After paying underwriter
fees and commissions, the approximately $96 million realized by the Company
from the sale of the Notes was used to pay outstanding indebtedness under its'
Credit Facility.
The Evergreen revenue bonds include a $9,100,000 Series 1993A taxable
adjustable demand issue that requires semiannual interest payments at a
variable rate (5.95% at December 31, 1995) and annual principal
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
payments through August 15, 2013. The remaining revenue bonds bear interest at
fixed rates ranging from 7.75% to 9.5% through 2001--2002, and which are
subject to change after such dates. These bonds mature in 2015; however, they
may be redeemed by the bondholders on various dates in the years 2001, 2002,
2011 and 2012.
Certain of these notes payable and related agreements contain covenant
restrictions on additional debt, intercompany loans, dividends and the
maintenance of certain financial ratios. The Company has pledged certain
accounts receivable, leasehold interests and substantially all property and
equipment as collateral under the various debt agreements.
Maturities of debt and obligations under capital leases at December 31,
1995, are summarized as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES TOTAL
-------- -------------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Year ending December 31,
1996..................................... $ 3,331 $2,053 $ 5,384
1997..................................... 2,477 1,302 3,779
1998..................................... 6,443 1,140 7,583
1999..................................... 1,785 659 2,444
2000..................................... 8,959 38 8,997
Thereafter................................. 311,988 -- 311,988
-------- ------ --------
Total minimum payments..................... 334,983 5,192 340,175
Less amounts representing interest......... -- 570 570
-------- ------ --------
Total obligations.......................... $334,983 $4,622 $339,605
======== ====== ========
</TABLE>
NOTE 5. OPERATING LEASES
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents.
Subsequent to December 31, 1994, the existing Master Lease Documents were
amended. Under the amended lease arrangements, minimum rent for the aggregate
facilities is the annual sum of $11,550,000, payable in equal monthly
installments. In addition, beginning January 1, 1996, the amended lease
agreement provides for additional rent to be paid monthly, in advance, based
on 75% of the increase in the Consumer Price Index multiplied by the minimum
rent due, provided, however, that the maximum rent (minimum rent plus
additional rent) each January shall be limited to a 2% increase over the total
monthly rent paid in the prior December. The operating leases for 17
facilities expire on December 28, 2010, and there are two 10 year renewal
options. The leases for seven facilities expire in June 2006 and there are two
10 1/2-year renewal options. The Company has subleased seven of the 24
facilities to unrelated parties.
The Company leases additional health care facilities, certain other
facilities, office space, and equipment from other unrelated parties.
Substantially all the leases are operating leases which expire at various
dates and generally contain options to renew for various terms. Certain leases
also contain purchase options. Rents generally are subject to increase based
on the Consumer Price Index, occupancy rates, Medicaid reimbursement rates or
at stated amounts specified in the lease agreements.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of GranCare's minimum commitments under operating leases at
December 31, 1995, follows:
<TABLE>
<CAPTION>
YEAR ENDING DOLLARS IN
DECEMBER 31, THOUSANDS
------------ ----------
<S> <C>
1996........................................................... $ 43,310
1997........................................................... 43,069
1998........................................................... 42,331
1999........................................................... 37,510
2000........................................................... 26,175
Thereafter...................................................... 179,066
--------
Total minimum lease payments.................................... $371,461
========
</TABLE>
Aggregate future minimum lease payments to be received under noncancelable
subleases are $5,263,000 for the year ended December 31, 1996 and $43,675,000
thereafter.
Total rent expense for all operating leases, net of sublease income,
aggregated $41,058,000, $35,632,000 and $34,872,000 for the years ended
December 31, 1995, 1994 and 1993, respectively.
The Company is currently having discussions with the landlord of 18 of its'
skilled nursing facilities. The Company expects to receive a favorable
adjustment to current lease commitments in return for an additional capital
investment and extension of the lease term.
NOTE 6. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
The Company, through its wholly-owned subsidiary, GCI Indemnity, Inc.,
maintains a captive insurance company for the purpose of paying worker's
compensation claims. The Company maintains reinsurance contracts to minimize
its insurance exposure.The Company accepts the first $350,000 of loss and loss
adjustment expense liability per occurrence for worker's compensation risks.
The Company estimates this liability on case-basis estimates of losses
reported prior to the date of the balance sheets and includes estimates of
losses for claims incurred but not reported. The Company's estimated liability
for worker's compensation claims is reported in the accompanying balance
sheets as other long term liabilities. Investments held by the captive
insurance company are reported in other assets section of the accompanying
balance sheets.
NOTE 7. INCOME TAXES
Effective January 1, 1993, the Company, except for CompuPharm and Evergreen,
prospectively adopted FASB Statement of Financial Accounting Standards No. 109
(Statement No. 109), "Accounting for Income Taxes." CompuPharm and Evergreen
adopted Statement No. 109 on May 1, 1991 and July 1, 1993, respectively. The
Company (excluding CompuPharm and Evergreen) previously accounted for income
taxes under FASB Statement No. 96. There was no cumulative effect of adopting
Statement No. 109.
As described in Note 1, prior to June 30, 1993, the predecessor Evergreen
entities were partnerships and as such were not subject to corporate income
taxes. Accordingly, the accompanying 1993 Consolidated Statement of Income
does not include any income tax expense relating to $1,970,000 of pre-tax
income earned by these partnerships.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal........................................... $11,880 $11,025 $ 7,388
State............................................. 1,714 2,832 1,779
------- ------- -------
13,594 13,857 9,167
DEFERRED
Federal........................................... 1,133 (317) 778
State............................................. 38 (16) 144
------- ------- -------
1,171 (333) 922
------- ------- -------
$14,765 $13,524 $10,089
======= ======= =======
</TABLE>
At December 31, 1995, the Company and its subsidiaries have approximately
$19,900,000 of federal net operating loss carryforwards (including the
remaining $970,000 NHI NOL acquired by Evergreen) and various state income tax
net operating loss carryforwards expiring at various dates through 2008.
Approximately $11,340,000 of such amount represents acquired federal net
operating loss carryforwards, the use of which is subject to both annual
dollar limitations and the general requirements that such carryforwards be
offset only against the taxable income of the acquired operations. The portion
of the net operating loss carryforwards not relating to acquired operations is
also subject to various limitations because of previous ownership changes. The
valuation allowance at December 31, 1995, pertains to nonacquired net
operating loss carryforwards.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
DEFERRED INCOME TAX LIABILITIES
Fixed asset basis differences.................. $ 17,318 $ 16,687
Workers' compensation insurance................ -- 359
Deferred rent.................................. -- 349
Investments.................................... 3,276 2,250
Intangible asset basis differences............. 1,648 --
Deferred gain on sale of assets................ 1,263 --
Other.......................................... 266 690
----------- -----------
Total deferred income tax liabilities............ 23,771 20,335
DEFERRED INCOME TAX ASSETS
Vacation and compensation accruals............. 4,103 2,630
Deferred gain on sale of assets................ -- 1,382
Accounts receivable reserves................... 5,981 1,351
Deferred rent.................................. 426 587
Voluntary employees' benefit association....... 507 190
Net operating loss carryforwards............... 7,367 8,124
Intangible asset basis differences............. -- 117
Accrued merger costs........................... 886 --
Workers' compensation and other insurance...... 2,088 --
Other.......................................... -- 1,567
----------- -----------
Total deferred income tax assets................. 21,358 15,948
Valuation allowance for deferred income tax
assets.......................................... (3,389) (3,714)
----------- -----------
Net deferred income tax assets................... 17,969 12,234
----------- -----------
Net deferred income tax liabilities.............. $ 5,802 $ 8,101
=========== ===========
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The valuation allowance decreased as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Recognition of NOL carryforwards as a reduction in
income tax expense................................. $ 325 $ 325 $ 1,370
Initial recognition of deductible temporary
differences as a reduction in income tax expense... -- 665 --
Recognition of acquired NOLs and deductible
temporary differences as a reduction to goodwill... -- 2,548 1,200
------- -------- --------
$ 325 $ 3,538 $ 2,570
======= ======== ========
</TABLE>
Differences between GranCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT 1993 AMOUNT PERCENT
- ----------------------- ----------- ------- ----------- ------- ----------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
rate................... $12,365 35.0% $13,236 35.0% $ 9,163 35.0%
State tax, net of
federal benefit........ 1,135 3.2 1,958 5.2 1,384 5.2
Nontaxable partnership
income................. -- -- -- -- (690) (2.6)
Merger costs............ 1,435 4.1 -- -- 1,600 6.1
Federal NOL--current.... (277) (.8) (277) (.7) (681) (2.6)
Federal NOL--deferred... -- -- -- -- (689) (2.6)
Reduction in valuation
allowance.............. -- -- (665) (1.8) -- --
State NOL, net of
federal benefit........ (48) (.1) (48) (.1) (131) (.5)
Federal tax credits..... (88) (.3) (458) (1.2) (290) (1.1)
Other................... 243 .7 (222) (.6) 423 1.6
------- ---- ------- ---- ------- ----
$14,765 41.8% $13,524 35.8% $10,089 38.5%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE 8. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
The 2,462,795 shares of GranCare's common stock issued upon completion of
the December 28, 1993, merger with CompuPharm consisted of the following:
<TABLE>
<S> <C>
Outstanding shares of CompuPharm prior to merger................. 601,885
Convertible CompuPharm debt converted to stock simultaneously
with the merger................................................. 736,648
Convertible CompuPharm preferred stock converted to stock
simultaneously with the merger.................................. 283,816
CompuPharm common stock options exercised simultaneously with the
merger.......................................................... 195,891
CompuPharm common stock warrants exercised simultaneously with
the merger...................................................... 644,555
---------
2,462,795
=========
</TABLE>
In connection with the Evergreen merger, 9,672,806 shares of GranCare common
stock were issued in the exchange.
Also in connection with the CompuPharm and Evergreen mergers, CompuPharm and
Evergreen stock options that remained outstanding were exchanged for options
to purchase GranCare stock with the same terms, except as adjusted for the
common stock exchange ratio. The GranCare options issued in connection with
the CompuPharm and Evergreen exchanges totaled approximately 587,200 and
214,000, respectively, and are included in the option table presented below,
based on their original issuance date by CompuPharm and Evergreen.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The warrants and options exercised at the time of the CompuPharm merger are
also shown in the accompanying warrant and option tables presented below based
on their converted share values.
On June 30, 1993, in connection with Evergreen's NHI acquisition, warrants
to purchase 46,500 common shares at $6.45 per share were issued to a former
NHI executive. These warrants are exercisable at any time prior to June 30,
1996. Through December 31, 1995, all had been exercised.
During 1989, 1990 and 1991, GranCare issued warrants to purchase shares of
common stock exercisable over periods from four to ten years after date of
issuance. The exercise prices are to be adjusted automatically upon the
occurrence of certain dilutive events. The following summarizes the warrants'
activity for the three years ended December 31, 1995 (including the CompuPharm
and NHI warrants described above):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1994 1993
--------------- --------------- ---------------
<S> <C> <C> <C>
Warrants outstanding at
beginning of year......... 765,033 890,016 1,549,355
Warrant price.............. $.001 to $10.00 $.001 to $10.00 $.001 to $10.00
Warrant issued............. -- -- 46,500
Warrant price.............. -- -- $6.45
Warrants exercised......... (413,161) (124,983) (705,839)
Warrant price.............. $.10 to $10.00 $.10 to $6.77 $1.00 to $6.77
Warrants outstanding at end
of year................... 351,872 765,033 890,016
Warrant price.............. $.001 to $6.77 $.001 to $10.00 $.001 to $10.00
Warrants exercisable at end
of year................... 351,872 765,033 890,016
</TABLE>
GranCare has a Stock Incentive Plan, adopted in 1991 and amended in 1992
(the 1991 Plan), which provides for the direct sale of shares, the granting of
stock options and the granting of limited stock appreciation rights to
selected employees, officers, directors and consultants of GranCare. The total
number of common shares that may be issued under the 1991 Plan is 2,500,000.
The direct sale of common shares under the 1991 Plan shall be at a price not
less than 85% of the fair market value of the common stock on the date the
right to purchase shares is granted.
Under the 1991 Plan, options are granted at an exercise price of not less
than 100% of fair market value at the date of grant, except for nonstatutory
options which are granted at an exercise price of not less than 85% of the
fair market value on the date of the grant.
Certain options are exercisable immediately, while others are subject to
vesting provisions whereby the options will be fully vested three to four
years after the date of grant. All options are non-transferable and expire
five to 10 years from the date of the grant. The Board of Directors, or a
committee appointed by the Board of Directors, may grant limited stock
appreciation rights in tandem with any stock options granted under the 1991
Plan. Limited stock appreciation rights are only exercisable with the consent
of the Board of Directors on and for the 60-day period following certain
events as defined in the 1991 Plan, and are payable in cash. No limited stock
appreciation rights have been issued under the 1991 Plan.
On May 3, 1994, GranCare adopted a Stock Option/Stock Issuance Plan (the
1994 Plan) which provides for the granting of incentive stock options, the
granting of limited stock appreciation rights, a salary reduction grant
program, and a stock issuance program for selected employees of GranCare. The
1994 Plan has an automatic grant program for the granting of options to non-
employee directors. The total number of common shares issuable under the 1994
Plan is 1,135,623 shares. The 1994 Plan contains a provision that provides
that each year, commencing with the 1995 calendar year, the common stock
available for grant under the 1994 Plan will automatically increase by an
amount equal to 1% of the shares of common stock outstanding on December 31st
of the immediately preceding calendar year.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The exercise price per share for incentive stock options cannot be less than
100% of the fair market value per share of GranCare's common stock on the
grant date. For non-statutory options, the exercise price per share may not be
less than 85% of such fair market value. No option shall have a maximum term
in excess of ten years from the grant date. The Plan Administrator, as
designated by the Board of Directors, will have complete discretion to grant
incentive stock options and limited stock appreciation rights, and to choose
individuals to participate in the salary reduction grant program. The Plan
Administrator may, at its discretion, sell shares of GranCare's common stock
at a price per share not less than 85% of fair market value in accordance with
the stock issuance program. Shares may also be issued solely as a bonus for
past services.
The Plan Administrator may, at its discretion, grant an employee with
incentive stock options the right to surrender all or part of an unexercised
option in exchange for a distribution from GranCare, or "limited stock
appreciation rights." The distribution will be an amount equal to the excess
of the fair market value of the number of shares on the surrender date, over
the aggregate price payable for such vested shares. No limited stock
appreciation rights have been issued under the 1994 Plan.
A summary of the activity under the plans (including the exchanged
CompuPharm and Evergreen options mentioned above) for the three years ended
December 31, 1995, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1995 1994 1993
---------------- ---------------- ---------------
<S> <C> <C> <C>
Options outstanding at
beginning of year....... 2,267,618 1,808,742 1,172,092
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $12.50
Options granted.......... 387,000 583,681 957,541
Exercise price........... $13.00 to $17.33 $12.90 to $20.50 $1.61 to $21.00
Options cancelled........ (155,605) (28,133) (16,000)
Exercise price........... $9.875 to $21.00 $9.875 to $13.25 $9.875
Options exercised........ (356,638) (96,672) (304,891)
Exercise price........... $ 1.53 to $16.50 $ 1.53 to $16.50 $0.76 to $9.875
Options outstanding at
end of year............. 2,142,375 2,267,618 1,808,742
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $21.00
Options exercisable...... 1,185,709 1,116,869 700,769
Exercise price........... $ 0.76 to $21.00 $ 0.76 to $21.00 $0.76 to $21.00
</TABLE>
At December 31, 1995, an aggregate of 1,097,921 shares was available for
future grant under GranCare's stock incentive plans. Together with the
2,142,375 stock options and 351,872 warrants outstanding on that date, and the
2,210,351 issuable upon the conversion of GranCare's 6.5% convertible
subordinated debentures (see Note 4), approximately 5,800,000 shares of common
stock were reserved for future issuance.
NOTE 9. EMPLOYEE BENEFIT PLANS
The Company currently has two separate benefit plans covering employees of
GranCare. The defined benefit plan, which was amended as of December 31, 1986
to freeze benefits for all but certain unionized employees, covers certain
employees after reaching age 21 and completion of one year of service. During
1990, the accrual of benefits was suspended for the employees who continued to
accrue benefits after December 31, 1986.
At December 31, 1995 and 1994, the projected benefit obligations were
$588,000 and $497,000 respectively. Adjustments to recognize minimum pension
liability have been reflected in the Consolidated Statements of Shareholders'
and Partners' Equity.
Other employees of the Company are covered by various defined contribution
plans. Company contributions are based on a certain percentage of wages, a
matching percentage of the participants' voluntary contributions,
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
or at the Company's discretion. During 1995, 1994 and 1993, the Company
recognized $1,645,000, $1,145,000 and $914,000, respectively, of expense
related to these plans.
NOTE 10. RELATED-PARTY TRANSACTIONS
In connection with various acquisitions, GranCare has incurred debt payable
to former owners who are now employees of GranCare. Such debt totaled
$3,779,000 and $3,856,000 at December 31, 1995 and 1994, respectively.
In 1994, GranCare sold three of its long-term care facilities to a former
employee of GranCare at an aggregate sales price of $3,000,000. GranCare
provided financing of $2,550,000 on these sales and recognized a total gain of
$2,373,000. In 1993, GranCare sold two of its long-term care facilities to an
individual previously engaged by GranCare as a consultant on various
acquisitions and divestitures. The sales price of the facilities sold in 1993
was $1,250,000, for which GranCare provided financing of $1,050,000 and
recognized a gain of $841,000.
Included in other assets in the accompanying Consolidated Balance Sheets at
December 31, 1995 and 1994, is a $2,850,000 and $1,500,000 note receivable,
respectively, resulting from working capital advances made to the owner of
certain facilities currently managed by the Company. The Company can advance
up to $3,000,000 under the agreement. The loan bears interest payable monthly
at 1% above the prime rate and is secured by the accounts receivable,
inventory and equipment of the managed facilities.
Evergreen had a management contract with NHI for the period from October 14,
1992 to June 30, 1993. Total amounts received from NHI under this management
contract approximated $1,000,000 for the six months ended June 30, 1993 and
are included in the 1993 Consolidated Statement of Income. This agreement
terminated upon consummation of the reverse acquisition on June 30, 1993, as
discussed in Note 3.
NOTE 11. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value. Cash equivalents at
December 31, 1994 include $1,200,000 in commercial paper securities. There
were no commercial paper securities at December 31, 1995.
Investments The carrying amount reported in the balance sheet for
investments approximates fair value. The investments in municipal bonds are
held by GranCare's captive insurance subsidiary and are restricted to use by
only that subsidiary, and are not available for general corporate purposes.
All investments are classified as "available for sale" for accounting purposes
and, therefore, are carried at fair value with unrealized gains and losses
recorded directly in equity.
In 1994, a gain of $1,561,000 was realized on the sale of an Evergreen
equity security that had no carrying value. There were no significant realized
gains or losses on sales of investments during 1995 and 1993. The investments
in municipal bonds generally mature within six years (e.g., 2000 to 2001).
Notes Payable and Long-Term Debt The carrying amounts of GranCare's
borrowing under the revolving loan and various mortgages and notes payable
approximate fair value. The fair value of GranCare's convertible subordinated
debentures and senior subordinated notes is based on their quoted market
price.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost basis and estimated fair values of GranCare's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT 1995 COST BASIS ESTIMATED FAIR VALUE 1994 COST BASIS ESTIMATED FAIR VALUE
-------------------- --------------- -------------------- --------------- --------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 17,738 $17,738 $ 28,611 $ 28,611
Investments:
Marketable equity
securities........... 9,506 17,695 7,750 13,375
Municipal bonds....... 12,166 12,610 6,978 6,978
-------- ------- -------- --------
21,672 30,305 14,728 20,353
Notes payable and long-
term debt:
Revolving loan and
other debt........... 179,605 179,605 183,231 183,231
Convertible
subordinated
debentures........... 60,000 52,200 60,000 50,400
Senior Subordinated
Notes................ 100,000 103,000 -- --
</TABLE>
- --------
Note: The cost basis is the carrying amount for all financial instruments
except for investments, as noted above.
NOTE 12. RESTRUCTURING
In August 1994, GranCare adopted and publicly announced a formal plan of
restructuring which includes the reorganization of GranCare's operations and
the sale of certain under-performing and non-strategic long-term health care
facilities. In connection with its commitment to this formal plan, GranCare
recognized an $8,200,000 restructuring charge in the third quarter of 1994,
consisting of the following components:
<TABLE>
<S> <C>
Actual and projected net operating losses of the facilities to be
sold, from the commitment date to their anticipated disposal
dates........................................................... $2,620,000
Less: Estimated gains from the sale of the facilities............ 2,250,000
----------
370,000
Personnel costs--termination and severance....................... 3,700,000
Professional fees--legal, accounting and appraisals--and other
exit costs...................................................... 1,100,000
Write-off of unamortized financing fees resulting from
restructuring................................................... 2,400,000
Other............................................................ 630,000
----------
Total restructuring costs........................................ $8,200,000
==========
</TABLE>
The termination and severance benefits cover approximately 50 employees who
work or worked in the facilities to be divested or GranCare's corporate or
regional offices. As of the end of 1995, substantially all termination and
severance benefits have been paid to those employees.
Charges against the restructuring reserve in 1995 and 1994 included the
write-off of unamortized financing fees and operating gains and losses of the
facilities sold.
At December 31, 1995, the Company believes that the provisions for the
restructuring continue to be adequate and will not require material adjustment
in future periods.
NOTE 13. SUBSEQUENT EVENTS
In January 1996, the Company completed the acquisition of RN Services for
$2,350,000 in cash. RN Services provides home health services in the metro
Detroit area.
In February 1996, the Company, through its pharmacy divisions, regained a
major contract with the state of New Jersey to provide pharmaceuticals to
7,800 beds.
F-26
<PAGE>
GRANCARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO CHARGED TO BALANCE
AT BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ------------ ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1993:
Allowance for doubtful
accounts.............. 2,404 4,254 2,830(2) 2,429(1) 7,059
Year ended December 31,
1994:
Allowance for doubtful
accounts.............. 7,059 8,290 1,182(2) 6,639(1) 9,892
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ -- 8,200 -- 3,658(3) 4,542
Year ended December 31,
1995:
Allowance for doubtful
accounts.............. 9,892 6,281 572(2) 5,889(1) 10,856
Restructuring reserve
for estimated losses
on
reorganization and
divestiture of facil-
ities................ 4,542 -- -- 4,042(3) 500
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances recorded at date of acquisition.
(3) Writeoff of deferred loan and other related costs, operating results of the
facilities to be divested and gain or loss on the sale of those facilities.
F-27
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 25,750
Accounts receivable, less allowance for doubtful accounts
(1996--$13,848)................................................. 218,529
Inventories...................................................... 17,833
Prepaid expenses and other current assets........................ 41,034
Deferred income taxes............................................ 11,599
--------
Total current assets............................................ 314,745
Property and equipment............................................ 276,441
Less accumulated depreciation.................................... (67,111)
--------
209,330
Other assets:
Investments, at fair value....................................... 36,359
Goodwill, less accumulated amortization
(1996--$9,184).................................................. 129,863
Other intangibles, less accumulated amortization
(1996--$9,788).................................................. 8,573
Other............................................................ 39,068
--------
Total assets.................................................... $737,938
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-28
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses........................... $ 84,291
Accrued wages and related liabilities........................... 20,461
Interest payable................................................ 5,137
Income taxes payable............................................ 7,059
Notes payable and current maturities of long-term debt.......... 4,219
--------
Total current liabilities...................................... 121,167
Long-term debt................................................... 384,905
Deferred income taxes............................................ 15,628
Other............................................................ 14,564
Shareholders' equity:
Common stock; no par value; 50,000,000 shares authorized
(shares issued: 1996--23,401,992).............................. 125,401
Treasury stock (1996--200,000 shares)........................... (5,030)
Equity component of minimum pension liability................... (465)
Unrealized gain on investments net of income taxes (1996--
$3,963)........................................................ 5,747
Retained earnings............................................... 76,021
--------
201,674
--------
Total liabilities and shareholders' equity....................... $737,938
========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-29
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(Dollars And Shares In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Net patient revenues....................................... $722,074 $600,195
Investment and other revenue............................... 23,579 4,374
-------- --------
Net revenues.............................................. 745,653 604,569
Expenses:
Operating expenses......................................... 642,654 534,906
Depreciation and amortization.............................. 19,400 14,785
Interest expense and financing charges..................... 26,228 19,557
Merger and other one-time charges.......................... 18,400 11,750
-------- --------
Total expenses............................................ 706,682 580,998
-------- --------
Income before income taxes.................................. 38,971 23,571
Income taxes................................................ 14,809 10,297
-------- --------
Net income................................................ $ 24,162 $ 13,274
======== ========
Net income per common and common equivalent share:
Primary.................................................... $ 1.01 $ 0.55
======== ========
Fully diluted.............................................. $ 0.98 $ 0.55
======== ========
Weighted average number of common and common equivalent
shares outstanding:
Primary.................................................... 24,021 24,226
======== ========
Fully diluted.............................................. 26,653 24,267
======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-30
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars In Thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income.............................................. $ 24,162 $ 13,274
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Provision for doubtful accounts........................ 5,132 4,321
Depreciation and amortization.......................... 19,400 14,785
Gain on sale of investments and other assets........... (19,077) (600)
Non-cash one-time charges.............................. 17,100 --
Amortization of deferred financing costs............... 689 481
Changes in assets and liabilities net of effect of
acquisitions:
Accounts receivable................................... (55,785) (24,073)
Other current assets.................................. (8,604) (3,571)
Other noncurrent assets............................... (8,614) (11,901)
Accounts payable and accrued expenses................. (1,785) 15,933
Accrued wages and related liabilities................. (3,896) (1,587)
Interest payable...................................... (1,656) 579
Income taxes payable.................................. 7,591 (487)
Other noncurrent liabilities.......................... 27 1,799
--------- ---------
Net cash (used in) provided by operating activities.. (25,316) 8,953
INVESTING ACTIVITIES
Acquisition of businesses............................... (11,231) (54,287)
Purchases of property and equipment..................... (24,014) (17,022)
Proceeds from disposition of property and equipment..... 994 4,155
Repayments of notes receivable.......................... -- 943
Net purchases and sales of investments.................. (3,365) (5,077)
Proceeds from sale of investment in unconsolidated
affiliate.............................................. 24,600 --
Other................................................... (1,581) (435)
--------- ---------
Net cash used in investing activities................ (14,597) (71,723)
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options.......... 2,284 1,242
Purchase of treasury stock.............................. -- (13,670)
Long-term debt payments................................. (5,259) (176,303)
Proceeds from long-term debt borrowings................. 51,150 256,350
Payment of debt issuance costs.......................... (250) (4,447)
--------- ---------
Net cash provided by financing activities............ 47,925 63,172
--------- ---------
Net increase in cash and cash equivalents............... 8,012 402
Cash and cash equivalents at beginning of period........ 17,738 28,611
--------- ---------
Cash and cash equivalents at end of period.............. $ 25,750 $ 29,013
========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-31
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
SUPPLEMENTAL SCHEDULE OF INVESTING ACTIVITIES:
In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. ("RN Services"), a home health care business located in Detroit,
Michigan, for $2,350 in cash. In conjunction with the acquisition, the Company
advanced $2,500 to the former owners in the form of a short-term note secured
by RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc. ("Jennings"), a home health care business based in
North Vernon, Indiana, for $937 in cash and a promissory note for $250.
In July 1996, the Company completed the acquisition of Emery Pharmacy, Inc.
("Emery"), an institutional pharmacy located in Utica, New York, for $3,672 in
cash and a promissory note in the amount of $1,488.
In September 1996, the Company completed the acquisition of RX Corporation,
an institutional pharmacy located in southern California, for $1,800 in cash
and a promissory note for $925.
The above 1996 acquisitions had the following effect on cash:
<TABLE>
<CAPTION>
<S> <C>
Fair value of assets acquired $(14,531)
Fair value of liabilities assumed 3,300
--------
Net effect on cash $(11,231)
========
</TABLE>
In conjunction with the sale of four long-term health care facilities located
in Michigan in the first quarter of 1996, the Company provided purchase money
financing in the amount of $17,550 evidenced by an interest-bearing promissory
note, due and payable in 1997.
See Notes to Condensed Consolidated Financial Statements.
F-32
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the nine month period ended September 30,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to the
consolidated financial statements and the footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1995.
NOTE B - CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 1996, the Company adopted as required FASB
Statement No. 121 ("Statement No. 121"), Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed Of. In accordance with
Statement No. 121, the Company records impairment losses on long-lived assets
used in operations when events and circumstances indicate the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets may be less than the carrying amounts of those assets. This new standard
had no effect on the financial statements.
NOTE C - TREASURY STOCK
During the second quarter of 1996, the Company cancelled 715,000 shares of
treasury stock which the Company had repurchased in July, 1995.
NOTE D - CONTINGENT EARN-OUT PROVISION
The purchase agreement with respect to the 1994 acquisition of Long Term Care
Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC"), contains a contingent earnout
provision for the two year period ended June 30, 1996. An additional $5.5
million could be paid to LTC provided certain operating results were obtained
for this period. Management has completed its analysis of the amount payable
under this provision and believes that the amount owing to LTC is $2.1 million,
which amount has been disputed by LTC.
NOTE E - EXIT, MERGER AND OTHER ONE-TIME CHARGES
During the third quarter of 1996, management decided to close five facilities
which are operated under long term operating leases, as these facilities did
not fit the Company's operating strategies. The plan to exit these activities,
including providing appropriate notice as required by regulations to residents,
employees and authorities has commenced. The facilities will be closed and
operating activities will cease. The remaining net book value of leasehold
improvements at the dates of closure and the remaining rent due to the landlord
for periods after the dates of closure have been charged to operations.
Management expects to complete these closings in the first quarter of 1997. The
revenues and net operating losses of these facilities are not significant. In
addition, in the third quarter of 1996, the Company recorded other charges as
set forth in the following table, including a charge for additional bad debt
expense related to TeamCare. The charge for bad debt expense is attributable to
the increased risk of collection resulting from the deterioration in the
financial condition of certain customers. The notes receivable written off are
for loans made by the Company to a sublease lessee to fund working capital.
Accounts receivable from the facility under lease serve as collateral for the
working capital loans. During the third quarter of 1996, the loans to the
lessee began to significantly exceed the collateral,
F-33
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
indicating that the loan would not be recoverable. Accordingly, the Company
decided to terminate the sublease arrangement and to write off the loans which
it concluded would not be recoverable. The write-off of leasehold improvements,
notes receivable and bad debt expense are reflected in the accompanying balance
sheet as a direct reduction of the related asset. Rent expense and costs
related to the termination of the frozen pension plan and other items has been
reflected in accrued expenses as the accompanying balance sheet. The following
is a summary of the exit and other one-time charges (dollars in thousands):
<TABLE>
<S> <C>
Exit costs:
Rent expense for periods subsequent to closing.................. $ 9,400
Book value of leasehold improvements at date of closing......... 1,200
Other:
TeamCare bad debt expense....................................... 2,900
Write-off of notes receivable................................... 3,000
Termination of frozen pension plan and other items.............. 1,900
-------
$18,400
=======
</TABLE>
NOTE F - PROPOSED TRANSACTION
The Company has entered into an Agreement and Plan of Merger between Vitalink
and the Company dated as of September 3, 1996. The form of the proposed
transactions are (1) the Company's skilled nursing facilities, along with its
contract management and home health businesses are to be reorganized into New
GranCare, Inc., a wholly-owned subsidiary of the Company ("New GranCare"), and
all of the shares of common stock of New GranCare are to be distributed to the
Company's shareholders in a tax-free spin-off; (2) the Company (then consisting
solely of the institutional pharmacy and related business known as TeamCare)
would merge into and be acquired by Vitalink through a tax-free exchange of
shares of common stock of Vitalink for shares of common stock of the Company;
and (3) New GranCare would become a public company upon the effectiveness of
its initial registration statement. Notwithstanding the legal structure of the
proposed transactions, for accounting/financial reporting purposes such
transactions will be treated as the spin-off of TeamCare and
reorganization/recapitalization of the Company into New GranCare as New
GranCare will continue the majority of the Company's businesses. New GranCare
will change its name to "GranCare, Inc." and be treated as the continuation of
the Company. The closing under the Agreement and Plan of Merger is subject to a
number of conditions, including approval of the transactions by the Company's
shareholders.
F-34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
New GranCare, Inc.
We have audited the accompanying balance sheet of New GranCare, Inc. (a
wholly-owned subsidiary of GranCare, Inc., the "Company") as of September 30,
1996. This financial statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of New GranCare, Inc. as of September 30, 1996, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
October 7, 1996
F-35
<PAGE>
NEW GRANCARE, INC.
(A WHOLLY-OWNED SUBSIDIARY OF GRANCARE, INC.)
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash.................................................................. $1,000
------
Total assets.......................................................... $1,000
======
STOCKHOLDER'S EQUITY
Stockholder's Equity:
Common stock--$0.001 par value; issued and outstanding, 1,000 shares
(Note 1)............................................................. $1,000
------
Total stockholder's equity............................................ $1,000
======
</TABLE>
See Note to Balance Sheet.
F-36
<PAGE>
NOTE TO BALANCE SHEET
SEPTEMBER 30, 1996
1. New GranCare, Inc. ("New GranCare") was incorporated in September 1996, as a
wholly-owned subsidiary of GranCare, Inc. ("GranCare"). New GranCare was
formed in connection with the execution of an Agreement and Plan of
Distribution (the "Distribution Agreement") by and between New GranCare and
GranCare dated as of September 3, 1996. The form of the proposed
transactions contemplated by the Distribution Agreement are: (1) the skilled
nursing facilities, along with the contract management; assisted living and
home health services businesses of GranCare are to be reorganized into New
GranCare and shares of New GranCare distributed to the GranCare shareholders
in a tax-free spin-off; (2) GranCare (then consisting solely of the
institutional pharmacy and related business known as TeamCare) would merge
into and be acquired by Vitalink Pharmacy Services, Inc. ("Vitalink")
through a tax-free exchange of shares of common stock of Vitalink for
GranCare shares of common stock, all as contemplated by an Agreement and
Plan of Merger by and between GranCare and Vitalink dated as of September 3,
1996 (the "Merger Agreement"); and (3) New GranCare would become a public
company upon the effectiveness of this registration statement.
Notwithstanding the legal structure of the proposed transactions, for
accounting/financial reporting purposes such transactions will be treated as
the spin-off of TeamCare and a reorganization/recapitalization of GranCare
into New GranCare as New GranCare will continue the majority of the GranCare
businesses. No gain will be recognized as a result of the spin-off for the
difference between the market value of the Vitalink shares received and the
carrying value of the net assets of TeamCare. New GranCare will continue to
reflect the historical cost basis of assets and liabilities of GranCare. New
GranCare will then change its name to, and be treated as the continuation
of, GranCare. The closing under the Merger Agreement is subject to a number
of conditions, including approval of GranCare's shareholders.
F-37
<PAGE>
ANNEX B
AGREEMENT AND PLAN
OF MERGER
BY AND BETWEEN
VITALINK PHARMACY SERVICES, INC.
AND
GRANCARE, INC.
DATED AS OF SEPTEMBER 3, 1996 (AS AMENDED)
B-1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
ARTICLE I
THE MERGER
<C> <S> <C>
Section 1.01. The Merger.............................................. B-7
Section 1.02. Effective Time.......................................... B-7
Section 1.03. Certificate of Incorporation and By-Laws of Surviving
Corporation............................................ B-7
Section 1.04. Directors and Officers of Surviving Corporation......... B-7
Section 1.05. Stockholders' Meeting................................... B-7
Section 1.06. Filing of Certificate of Merger......................... B-8
Section 1.07. Further Assurances...................................... B-8
ARTICLE II
CONVERSION OF SHARES
Section 2.01. Shares.................................................. B-8
Section 2.02. Exchange of Shares...................................... B-9
Section 2.03. Effect on GranCare Options.............................. B-9
Section 2.04. Fractional Shares....................................... B-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VITALINK
Section 3.01. Organization and Qualification.......................... B-10
Section 3.02. Authority Relative to This Agreement.................... B-11
Section 3.03. Consents, No Conflicts.................................. B-11
Section 3.04. Board Recommendation.................................... B-12
Section 3.05. State Antitakeover Statutes............................. B-12
Section 3.06. No Existing Violation, Default, Etc..................... B-12
Section 3.07. Licenses and Permits.................................... B-12
Section 3.08. Registration Statement; Information Statement........... B-12
Section 3.09. Finders or Brokers...................................... B-13
Section 3.10. SEC Filings............................................. B-13
Section 3.11. Financial Statements.................................... B-13
Section 3.12. Absence of Undisclosed Liabilities...................... B-14
Section 3.13. Absence of Changes or Events............................ B-14
Section 3.14. Capitalization.......................................... B-14
Section 3.15. Capital Stock of Subsidiaries........................... B-15
Section 3.16. Litigation.............................................. B-15
Section 3.17. Insurance............................................... B-15
Section 3.18. Title to and Condition of Properties.................... B-16
Section 3.19. Leases.................................................. B-16
Section 3.20. Contracts and Commitments............................... B-16
Section 3.21. Labor Matters........................................... B-17
Section 3.22. No Change of Control Puts............................... B-17
Section 3.23. Employment and Labor Contracts.......................... B-17
Section 3.24. Intellectual Property Rights............................ B-18
Section 3.25. Taxes................................................... B-18
Section 3.26. Employee Benefit Plans; ERISA........................... B-19
Section 3.27. Environmental Matters................................... B-21
Section 3.28. Directors, Officers and Compensation of Employees....... B-23
Section 3.29. Banks................................................... B-23
Section 3.30. Disclosure.............................................. B-23
Section 3.31. Institutional Pharmacy Business......................... B-23
</TABLE>
B-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF GRANCARE
<C> <S> <C>
Section 4.01. Organization and Qualification.......................... B-24
Section 4.02. Authority Relative to This Agreement.................... B-25
Section 4.03. Consents, No Conflicts.................................. B-25
Section 4.04. Board Recommendation.................................... B-26
Section 4.05. State Antitakeover Statutes............................. B-26
Section 4.06. No Existing Violation, Default, Etc..................... B-26
Section 4.07. Affiliates.............................................. B-26
Section 4.08. Licenses and Permits.................................... B-26
Section 4.09. Registration Statement; Proxy Statement; SNFCo
Registration Documents................................. B-27
Section 4.10. Finders or Brokers...................................... B-27
Section 4.11. SEC Filings............................................. B-27
Section 4.12. Financial Statements.................................... B-28
Section 4.13. Absence of Undisclosed Liabilities...................... B-28
Section 4.14. Absence of Changes or Events............................ B-28
Section 4.15. Capitalization.......................................... B-28
Section 4.16. Capital Stock of Subsidiaries........................... B-29
Section 4.17. Litigation.............................................. B-30
Section 4.18. Insurance............................................... B-30
Section 4.19. Title to and Condition of Properties.................... B-30
Section 4.20. Leases.................................................. B-31
Section 4.21. Contracts and Commitments............................... B-31
Section 4.22. Labor Matters........................................... B-32
Section 4.23. No Change of Control Puts............................... B-32
Section 4.24. Employment and Labor Contracts.......................... B-32
Section 4.25. Intellectual Property Rights............................ B-32
Section 4.26. Taxes................................................... B-33
Section 4.27. Employee Benefit Plans; ERISA........................... B-33
Section 4.28. Environmental Matters................................... B-36
Section 4.29. Directors, Officers and Compensation of Employees....... B-37
Section 4.30. Banks................................................... B-37
Section 4.31. Disclosure.............................................. B-37
Section 4.32. Institutional Pharmacy Business......................... B-37
Section 4.33. Fairness Opinion........................................ B-38
Section 4.34. Sufficiency of Assets................................... B-38
ARTICLE V
COVENANTS
Section 5.01. Conduct of Business of GranCare......................... B-38
Section 5.02. Conduct of Business of Vitalink......................... B-40
Section 5.03. No Solicitation by GranCare............................. B-42
Section 5.04. No Solicitation by Vitalink............................. B-42
Section 5.05. Access to Information................................... B-43
Section 5.06. Registration Statement and Proxy Statement.............. B-43
Section 5.07. Commercially Reasonable Efforts; Other Actions.......... B-43
Section 5.08. Public Announcements.................................... B-44
Section 5.09. Notification of Certain Matters......................... B-44
Section 5.10. Indemnification......................................... B-44
</TABLE>
B-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 5.11. Expenses.................................................. B-45
Section 5.12. Stock Exchange Listings................................... B-45
Section 5.13. GranCare and Subsidiary Actions........................... B-45
Section 5.14. Vitalink and Subsidiary Actions........................... B-45
Section 5.15. Environmental Matters..................................... B-45
Section 5.16. Actions Regarding Outstanding Debt........................ B-46
ARTICLE VI
CONDITIONS TO THE OBLIGATIONS
OF VITALINK AND GRANCARE
Section 6.01. Registration Statements................................... B-46
Section 6.02. Stockholder Approval...................................... B-46
Section 6.03. Listings.................................................. B-46
Section 6.04. Certain Proceedings....................................... B-46
Section 6.05. Consents and Approvals.................................... B-46
Section 6.06. Distribution.............................................. B-47
Section 6.07. Dissenting Shares......................................... B-47
Section 6.08. Opinions.................................................. B-47
Section 6.09. Existing Indebtedness..................................... B-47
ARTICLE VII
CONDITIONS TO THE OBLIGATIONS OF VITALINK
Section 7.01. Representations and Warranties True....................... B-47
Section 7.02. Performance............................................... B-48
Section 7.03. Certificates.............................................. B-48
Section 7.04. Material Adverse Change................................... B-48
Section 7.05. Pharmacy Financial Statements............................. B-48
Section 7.06. Auditors' Letter.......................................... B-48
Section 7.07. Letter of Credit.......................................... B-48
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
Section 8.01. Representations and Warranties True....................... B-48
Section 8.02. Performance............................................... B-48
Section 8.03. Certificates.............................................. B-49
Section 8.04. Material Adverse Change................................... B-49
Section 8.05. Shareholders' Agreement................................... B-49
Section 8.06. Auditors' Letter.......................................... B-49
ARTICLE IX
CLOSING
Section 9.01. Time and Place............................................ B-49
Section 9.02. Filings at the Closing.................................... B-49
ARTICLE X
TERMINATION AND ABANDONMENT
Section 10.01. Termination............................................... B-49
Section 10.02. Termination by Vitalink................................... B-50
</TABLE>
B-4
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
Section 10.03. Termination by GranCare................................... B-50
Section 10.04. Procedure for Termination................................. B-51
Section 10.05. Effect of Termination and Abandonment..................... B-51
ARTICLE XI
DEFINITIONS
Section 11.01. Terms Defined in This Agreement........................... B-53
ARTICLE XII
MISCELLANEOUS
Section 12.01. Amendment and Modification................................ B-55
Section 12.02. Waiver of Compliance; Consents............................ B-55
Section 12.03. Survivability; Investigations............................. B-55
Section 12.04. Notices................................................... B-55
Section 12.05. Assignment................................................ B-56
Section 12.06. Governing Law............................................. B-56
Section 12.07. Counterparts.............................................. B-56
Section 12.08. Severability.............................................. B-56
Section 12.09. Interpretation............................................ B-57
Section 12.10. Entire Agreement.......................................... B-57
Signatures................................................................ B-57
</TABLE>
EXHIBITS
Exhibit A Form of Distribution Agreement
Exhibit B Form of Voting Agreement
Exhibit C Form of Affiliate Letter
Exhibit D Shareholders Agreement
Exhibit E List of Directors
Exhibit F List of Officers
Exhibit G Opinions
B-5
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of September 3, 1996 (the
"Agreement"), by and between Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), and GranCare, Inc., a California corporation
("GranCare"). Vitalink and GranCare are hereinafter sometimes collectively
referred to as the "Constituent Corporations."
RECITALS
WHEREAS, Vitalink and GranCare desire to combine their respective pharmacy
businesses, and Vitalink does not want to own the Skilled Nursing Businesses
(as hereinafter defined) of GranCare;
WHEREAS, prior to the Merger (as hereinafter defined), GranCare and its
Subsidiaries (as hereinafter defined) will transfer on the terms and subject
to the conditions set forth in the Distribution Agreement between GranCare and
a previously existing corporation ("SNFCo") in the form attached hereto as
Exhibit A (including the Ancillary Agreements as defined therein, the
"Distribution Agreement"), all of the Skilled Nursing Assets and Skilled
Nursing Liabilities of GranCare and its Subsidiaries (each as defined in the
Distribution Agreement) to SNFCo (the "Restructuring"); following which all of
the capital stock of SNFCo (the "SNFCo Stock") will be distributed (the
"Distribution") immediately prior to the Merger to the shareholders of
GranCare.
WHEREAS, after the Distribution GranCare will own only the Institutional
Pharmacy Assets, and be subject only to the Institutional Pharmacy Liabilities
(each as defined in the Distribution Agreement);
WHEREAS, the Board of Directors of GranCare has determined that the Merger
and the Distribution are advisable on the terms and conditions contained in
this Agreement and the Distribution Agreement, and that each of the other
transactions contemplated herein or in the Distribution Agreement is
consistent with and in furtherance of the long-term business strategy of
GranCare and is fair to, and in the best interests of, GranCare and GranCare's
shareholders, and has approved and adopted this Agreement and the Distribution
Agreement and each of the other transactions contemplated herein and intends
to recommend the approval and adoption of this Agreement and the Distribution
Agreement by the shareholders of GranCare;
WHEREAS, the Board of Directors of Vitalink has determined that the Merger
is advisable on the terms and conditions contained in this Agreement and that
each of the other transactions contemplated herein is consistent with and in
furtherance of the long-term business strategy of Vitalink and is fair to, and
in the best interests of, Vitalink and Vitalink's shareholders, and has
approved and adopted this Agreement and each of the other transactions
contemplated herein and intends to recommend the approval and adoption of this
Agreement by the shareholders of Vitalink;
WHEREAS, Manor Care, Inc., a Delaware corporation, and Vitalink's majority
stockholder ("Parent"), has committed to vote in favor of approving this
Agreement and the transactions contemplated hereby and has agreed not to
approve or support any competing transaction, all as provided in the form
attached hereto as Exhibit B (the "Voting Agreement");
WHEREAS, Vitalink and GranCare intend that at the Effective Time (as
hereinafter defined) the Board of Directors of Vitalink shall consist equally
of individuals designated by Vitalink and by GranCare and that the Chief
Executive Officer of GranCare shall become the Chief Executive Officer of
Vitalink; and
WHEREAS, Vitalink and GranCare desire to make certain representations,
warranties, covenants and agreements in connection with the merger of Vitalink
and GranCare and the Distribution by GranCare.
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
B-6
<PAGE>
ARTICLE I.
THE MERGER
Section 1.01 The Merger. (a) In accordance with the provisions of this
Agreement, the General Corporation Law of the State of Delaware (the "Delaware
Act") and the General Corporation Law of the State of California (the
"California Act"), at the Effective Time, GranCare shall be merged (the
"Merger") with and into Vitalink, and Vitalink shall be the surviving
corporation (hereinafter sometimes called the "Surviving Corporation") and
shall continue its corporate existence under the laws of the State of
Delaware. At the Effective Time, the separate existence of GranCare shall
cease.
(b) The Merger shall have the effects on Vitalink and GranCare as
constituent corporations of the Merger as provided under the Delaware Act and
the California Act.
Section 1.02 Effective Time. Following filing of the certificate of
satisfaction with the Franchise Tax Board in accordance with the provisions of
(S) 1103 of the California Act and the Bank and Corporation Tax Law, the
filing of a certified copy of this Agreement, in the form required by and
executed in accordance with the California Act, with the Secretary of State of
the State of California in accordance with the provisions of (S) 1108 of the
California Act (the "Certified Agreement"), the Merger shall become effective
at the time of filing of, or at such later time specified in, a certificate of
merger, in the form required by and executed in accordance with the Delaware
Act, with the Secretary of State of the State of Delaware in accordance with
the provisions of (S) 252 of the Delaware Act (the "Certificate of Merger").
The date and time when the Merger shall become effective is herein referred to
as the "Effective Time."
Section 1.03 Certificate of Incorporation and By-Laws of Surviving
Corporation. (a) The Certificate of Incorporation of Vitalink, as in effect
immediately prior to the Effective Time, shall be the Certificate of
Incorporation of the Surviving Corporation until thereafter amended as
provided by law; provided, however, that if prior to the Effective Time the
stockholders of Vitalink shall have approved an increase in the number of
authorized shares of Common Stock from 30,000,000 to 80,000,000, then Article
4 of the Certificate of Incorporation shall read as follows: "4. The total
number of shares which this corporation shall have authority to issue is
90,000,000 shares, consisting of 10,000,000 shares of Preferred Stock, par
value $.01 per share (the "Preferred Stock") and 80,000,000 shares of Common
Stock, par value $.01 per share (the "Common Stock")" (the "Amendment").
(b) The By-Laws of Vitalink, as in effect immediately prior to the Effective
Time, shall be the By-Laws of the Surviving Corporation until thereafter
amended as provided by law.
Section 1.04 Directors and Officers of Surviving Corporation. The
individuals identified on Exhibit E shall comprise all of the members of the
Board of Directors of the Surviving Corporation at the Effective Time. The
individuals identified on Exhibit F shall comprise all of the senior officers
of the Surviving Corporation at the Effective Time and shall hold the
positions set forth opposite their names.
Section 1.05 Stockholders' Meeting. (a) GranCare will take all action
necessary in accordance with applicable law and its Restated Articles of
Incorporation and By-Laws to convene a special meeting of its stockholders
(the "Special Meeting") as soon as practicable to consider and vote upon the
approval of this Agreement, the Distribution Agreement and the other
transactions contemplated by this Agreement and the Distribution Agreement.
GranCare, through its Board of Directors, shall recommend to its stockholders
approval of this Agreement, the Distribution Agreement and the other
transactions contemplated by this Agreement and the Distribution Agreement
(which recommendation shall be contained in the Proxy Statement (as
hereinafter defined)) and shall use all commercially reasonable efforts to
solicit from its stockholders proxies in favor of approval and adoption of
this Agreement, the Distribution Agreement and the other transactions
contemplated by this Agreement and the Distribution Agreement. GranCare's
Board of Directors shall not withdraw, change, modify in any manner or take
action inconsistent with its recommendation of the Distribution, the
Distribution
B-7
<PAGE>
Agreement, the Merger, this Agreement or the other transactions contemplated
hereby or thereby and shall not resolve to do any of the foregoing and
publicly disclose such resolution; provided, however, that GranCare's Board of
Directors may withdraw, change, modify in any manner or take action
inconsistent with such recommendation or resolve to do any of the foregoing
and publicly disclose such resolution in the event that there is an
unsolicited written proposal for a GranCare Acquisition Transaction from a
bona fide financially capable third party only if (i) three business days'
written notice shall have been given to Vitalink; (ii) GranCare's Board of
Directors shall have been advised (A) in writing by its investment banker that
such third party is financially capable of consummating a GranCare Acquisition
Transaction that would yield a higher value to GranCare's stockholders than
will the Merger and (B) by the written opinion of outside counsel to GranCare
that recommending this Agreement to the stockholders of GranCare or failing to
take the action proposed would be inconsistent with GranCare's Board of
Directors' fiduciary duties to such stockholders (in providing such opinion
GranCare's counsel may assume that California law is not materially different
from Delaware law); and (iii) after weighing such advice, GranCare's Board of
Directors shall determine that failure to take the proposed action would be
inconsistent with such Board of Directors' fiduciary duties.
(b) Vitalink will take all action necessary in accordance with applicable
law and its Certificate of Incorporation and By-Laws to obtain as soon as
practicable the approval of its stockholders of this Agreement and the
transactions contemplated hereby through, at the election of Vitalink, written
consents or a stockholders meeting (the "Stockholder Approval"). Vitalink,
through its Board of Directors, shall recommend to its stockholders approval
of this Agreement (which recommendation shall be contained in the Vitalink
Information Statement (as hereinafter defined)) and the transactions
contemplated hereby, including the Amendment.
Section 1.06 Filing of Certificate of Merger. At the Closing (as hereinafter
defined), Vitalink and GranCare shall cause a Certificate of Merger to be
executed and filed with the Secretary of State of the State of Delaware as
provided in (S) 252 of the Delaware Act and the Certified Agreement to be
executed and filed with the Secretary of State of the State of California as
provided in (S) 1108 of the California Act, and shall take any and all other
lawful actions and do any and all other lawful things to cause the Merger to
become effective.
Section 1.07 Further Assurances. If, at any time after the Effective Time,
the Surviving Corporation shall consider or be advised that any deeds, bills
of sale, assignments, assurances or any other actions or things are necessary
or desirable to vest, perfect or confirm of record or otherwise in the
Surviving Corporation its right, title or interest in, to or under any of the
rights, properties or assets of either of the Constituent Corporations
acquired or to be acquired by the Surviving Corporation as a result of, or in
connection with, the Merger or otherwise to carry out this Agreement, the
officers and directors of the Surviving Corporation shall be authorized to
execute and deliver, in the name and on behalf of each of the Constituent
Corporations or otherwise, all such deeds, bills of sale, assignments and
assurances and to take and do, in the name and on behalf of each of the
Constituent Corporations or otherwise, all such other actions and things as
may be necessary or desirable to vest, perfect or confirm any and all right,
title and interest in, to and under such rights, properties or assets in the
Surviving Corporation or otherwise to carry out this Agreement.
ARTICLE II.
CONVERSION OF SHARES
Section 2.01 Shares. (a) Each share of common stock, without par value, of
GranCare (the "GranCare Common Stock") issued and outstanding immediately
prior to the Effective Time (except for Dissenting Shares (as hereinafter
defined), shares owned by GranCare as treasury stock or shares owned by any
Subsidiary of GranCare) shall, by virtue of the Merger and without any action
on the part of the holder thereof, be converted into the right to receive .478
of one share (the "Exchange Ratio") of common stock, par value $.01 per share,
of Vitalink ("Vitalink Common Stock"). The shares of Vitalink Common Stock
delivered in exchange for shares of GranCare Common Stock pursuant to this
Section 2.01(a) are hereinafter sometimes called the "Closing
B-8
<PAGE>
Consideration." In the event of any change in Vitalink Common Stock or
GranCare Common Stock by reason of any stock split, readjustment, stock
dividend, exchange of shares, reclassification, recapitalization or otherwise
(other than the Distribution), the Exchange Ratio shall be correspondingly
adjusted.
(b) All shares of GranCare Common Stock, by virtue of the Merger and without
any action on the part of the holders thereof, shall no longer be outstanding
and shall be cancelled and retired and shall cease to exist, and each holder
of a certificate representing any such shares of GranCare Common Stock shall
thereafter cease to have any rights with respect to such shares of GranCare
Common Stock, except the right to receive the Closing Consideration for such
shares of GranCare Common Stock as specified in the foregoing clause (a) upon
the surrender of such certificate in accordance with Section 2.02 and the
right to receive the SNFCo capital stock distributed with respect to such
shares of GranCare Common Stock in accordance with the terms of the
Distribution Agreement.
(c) Notwithstanding anything in this Agreement to the contrary, shares of
GranCare Common Stock which are outstanding immediately prior to the Effective
Time and which are held by stockholders who (i) shall not have voted such
shares in favor of the Merger and the Distribution and (ii) shall have
delivered the certificates representing such shares marked to indicate such
shares are dissenting shares or a written demand for appraisal of such shares
in the manner provided in Sections 1300 and 1302 of the California Act (the
"Dissenting Shares") shall not be converted as described in Section 2.01(a),
but instead the holders thereof shall be entitled to payment of the appraised
value of such shares in accordance with the provisions of such Section 1300.
Section 2.02 Exchange of Shares. (a) Promptly after the Effective Time,
Vitalink shall mail to each record holder, as of the Effective Time, of an
outstanding certificate or certificates which immediately prior to the
Effective Time represented shares of GranCare Common Stock (the
"Certificates") a form letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates
shall pass, only upon proper delivery of the Certificates to Vitalink) and
instructions for use in effecting the surrender of the Certificates for
exchange thereof. Upon surrender to Vitalink of a Certificate, together with
such letter of transmittal duly executed, the holder of such Certificate shall
be entitled to receive in exchange therefor that number of shares of Vitalink
Common Stock which such holder has the right to receive under this Article II,
and such Certificate shall forthwith be cancelled. If any shares of Vitalink
Common Stock are to be issued to a person other than the person in whose name
the Certificate surrendered is registered, it shall be a condition of exchange
that the Certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such exchange shall
pay any transfer or other taxes required by reason of the exchange of the
Certificate surrendered to a person other than the registered holder or such
person shall establish to the satisfaction of the Surviving Corporation that
such tax has been paid or is not applicable. Until surrendered in accordance
with the provisions of this Section 2.02, each Certificate shall represent,
for all purposes, the right to receive the Closing Consideration in respect of
the number of shares of GranCare Common Stock evidenced by such Certificate,
without any interest thereon.
(b) From and after the Effective Time there shall be no transfers on the
stock transfer books of the Surviving Corporation of the shares of GranCare
Common Stock which were outstanding immediately prior to the Effective Time.
If, after the Effective Time, Certificates are presented to the Surviving
Corporation, they shall be cancelled and exchanged as provided in this Article
II.
(c) The Surviving Corporation shall not be liable to any holder of shares of
GranCare Common Stock delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law.
Section 2.03 Effect on GranCare Options. (a) As of the Effective Time, by
virtue of the Merger and without any action on the part of the holders
thereof, each option to purchase shares of GranCare Common Stock that is
outstanding under the GranCare Plans (as hereinafter defined) immediately
prior to the Effective Time, whether or not exercisable, shall be assumed by
Vitalink and each such option shall be exercisable upon the same terms and
conditions as under the applicable GranCare Plan and the applicable option
agreement issued thereunder, except that (i) each such option shall be
exercisable for that number of shares of Vitalink Common
B-9
<PAGE>
Stock (rounded in accordance with established mathematical convention to the
nearest whole share) into which the number of shares of GranCare Common Stock
subject to such option immediately prior to the Effective Time determined
after giving effect to the adjustments set forth in the Employee Benefit
Agreement (as defined in the Distribution Agreement), would be converted under
Section 2.01(a) if such option were exercised prior to the Effective Time, and
(ii) the option price per share of Vitalink Common Stock determined after
giving effect to the adjustments set forth in the Employee Benefit Matters
Agreement (as defined in the Distribution Agreement), shall be an amount equal
to such adjusted option price per share of GranCare Common Stock subject to
such option in effect immediately prior to the Effective Time divided by the
Exchange Ratio (rounded in accordance with established mathematical convention
to the nearest whole cent).
(b) Prior to the Effective Time, GranCare shall (i) obtain any consents from
holders of outstanding options to purchase GranCare Common Stock granted under
the GranCare Plans and (ii) make any amendments to the terms of the GranCare
Plans or any award granted thereunder that are necessary to give effect to the
transactions contemplated by this Section 2.03 and the Employee Benefits
Matters Agreement referred to in clause (a) above.
Section 2.04 Fractional Shares. Notwithstanding any other provision of this
Agreement, each holder of shares of GranCare Common Stock who upon surrender
of Certificates would be entitled to receive a fraction of a share of Vitalink
Common Stock shall not be entitled to receive any dividends on or vote such
fractional share and shall receive, in lieu of such fractional share, cash in
an amount equal to such fraction multiplied by the Average Market Value.
"Average Market Value" shall mean the arithmetic average of the last reported
sale price per share of Vitalink Common Stock as reported on the National
Association of Securities Dealers Automated Quotation System (NASDAQ)
("Nasdaq") for the fifteen (15) consecutive trading days ending with the last
trading day prior to the scheduled date of the Special Meeting specified in
the Proxy Statement. The fractional share interests of each GranCare
stockholder will be aggregated, and no GranCare stockholder will receive cash
in an amount equal to or greater than the value of one full share of Vitalink
Common Stock. All references in this Agreement to shares of Vitalink Common
Stock to be issued as Closing Consideration shall be deemed to include any
cash in lieu of fractional shares payable pursuant to this Section 2.04.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES
OF VITALINK
Except as set forth in the Vitalink Disclosure Statement delivered by
Vitalink to GranCare at or prior to the execution of this Agreement (the
"Vitalink Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), Vitalink
represents and warrants to GranCare as follows:
Section 3.01 Organization and Qualification. Each of Vitalink and its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has the
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Vitalink SEC Reports (as hereinafter
defined). Each of Vitalink and its Subsidiaries is duly qualified to transact
business as a foreign corporation and is in good standing in each jurisdiction
in which the conduct of its business or the ownership, leasing or operation of
its property requires such qualification, except for failures to be so
qualified or in good standing which would not, singly or in the aggregate with
all such other failures, have an Vitalink Material Adverse Effect. "Vitalink
Material Adverse Effect" means, (i) with respect to any event, occurrence,
failure of event or occurrence, change, effect, state of affairs, breach,
default, violation, fine, penalty or failure to comply (each, a
"circumstance"), individually or taken together with all other circumstances
contemplated by or in connection with any or all of the representations and
warranties made in this Agreement, a material adverse effect on the business,
properties, assets, condition (financial or otherwise), results of operations
or prospects of Vitalink and its Subsidiaries, taken as a whole or (ii)
circumstances resulting in the impairment of Vitalink's ability to perform its
obligations under this Agreement and to consummate the
B-10
<PAGE>
transactions contemplated hereby. Neither Vitalink nor any of its Subsidiaries
is in violation of any of the provisions of its certificate of incorporation
(or other applicable charter document) or By-Laws. True and complete copies of
the Certificate of Incorporation and By-Laws, as currently in effect, of
Vitalink and of each Subsidiary of Vitalink have been previously delivered or
made available to GranCare. No amendments to the articles of incorporation (or
other similar charter documents) and By-Laws of Vitalink have been authorized
since December 31, 1995.
Section 3.02 Authority Relative to This Agreement. Vitalink has full
corporate power and authority to execute and deliver this Agreement and, upon
obtaining the approval of a majority of the outstanding shares of Vitalink
Common Stock through the Stockholder Approval to consummate the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement and the consummation of the Merger and the other transactions
contemplated hereby have been duly and validly authorized by the Board of
Directors of Vitalink and no other corporate proceedings on the part of
Vitalink are necessary to authorize this Agreement or to consummate the Merger
and the other transactions contemplated hereby (other than, with respect to
the Merger, the Amendment and the issuance of the additional Vitalink Common
Stock at the Effective Time, the approval of a majority of the outstanding
shares of Vitalink Common Stock). This Agreement has been duly and validly
executed and delivered by Vitalink and, assuming the due authorization,
execution and delivery hereof by GranCare, constitutes a valid and binding
agreement of Vitalink, enforceable against Vitalink in accordance with its
terms, except to the extent that its enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.
Section 3.03 Consents, No Conflicts. (a) Except for the filings of the
Certificate of Merger, the Certified Agreement and the Vitalink Information
Statement (as hereinafter defined), the filing and effectiveness of the
Registration Statement (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by Vitalink of the Merger, the
adoption of the Amendment or the other transactions contemplated hereby except
such as are set forth in Section 3.03(a) of the Vitalink Disclosure Statement,
which will have been obtained or made prior to the Effective Time and will
then be in full force and effect or which would not, singly or in the
aggregate with all other such consents which have not been obtained, have an
Vitalink Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
consummation of the Merger, the adoption of the Amendment and the other
transactions contemplated hereby and compliance by Vitalink with any of the
provisions hereof do not and will not (i) subject to obtaining the approval of
a majority of the outstanding shares of Vitalink Common Stock, conflict with
or result in any breach or violation of any provision of the Certificate of
Incorporation (or other comparable charter documents) or By-Laws of Vitalink
or any of its Subsidiaries, (ii) result in (1) a breach or violation of, a
default under or an event triggering any payment or other obligation pursuant
to any of Vitalink's existing pension plans, welfare plans, multiemployer
plans, employee benefit plans, benefit arrangements or similar plans,
arrangements or policies including bonus, incentive, deferred compensation,
stock purchase, stock option, stock appreciation right, health or group
insurance, severance pay, retirement or other benefit plans, and all similar
arrangements or policies of Vitalink and its Subsidiaries (the "Vitalink
Compensation and Benefit Plans") or any grant or award made under any of the
foregoing, (2) a breach, violation or event triggering a right of termination
of, a default under, or the acceleration of any obligation or the creation of
a lien, pledge, security interest or other encumbrance on assets (with or
without the giving of notice or the lapse of time or both) pursuant to any
provision of, any agreement, lease of real or personal property, marketing
agreement, contract, note, mortgage, indenture, arrangement or other
obligation of Vitalink or any of its Subsidiaries ("Vitalink Contracts") or
any law, rule, ordinance or regulation or judgment, decree, order or award to
which Vitalink or any of its Subsidiaries is subject or any governmental
B-11
<PAGE>
or non-governmental authorization, consent, approval, registration, franchise,
license or permit under which Vitalink or any of its Subsidiaries conducts any
of its business, or (3) any other change in the rights or obligations of any
party under any of the Vitalink Contracts.
Section 3.04 Board Recommendation. The Board of Directors of Vitalink has,
by a unanimous vote at a meeting of such Board duly held on September 3, 1996,
approved and adopted this Agreement, the Merger, the Amendment and the other
transactions contemplated hereby. At such meeting, the Board of Directors of
Vitalink determined that the consideration to be paid by Vitalink pursuant to
the Merger is fair to the holders of shares of Vitalink Common Stock and
recommended that the holders of such shares approve and adopt this Agreement,
the Merger, the Amendment and the other transactions contemplated hereby.
Section 3.05 State Antitakeover Statutes. Vitalink has granted all approvals
and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of (S)
203 of the Delaware Act and any other state antitakeover statute or regulation
such that none of the other provisions of such "business combination,"
"moratorium," "control share" or other state antitakeover statute or
regulation (x) prohibits or restricts either Vitalink's ability to perform its
obligations under this Agreement or its ability to consummate the Merger and
the other transactions contemplated hereby, (y) would have the effect of
invalidating or voiding this Agreement or any provision hereof, or (z) would
subject GranCare to any material impediment or condition in connection with
the exercise of any of its rights under this Agreement.
Section 3.06 No Existing Violation, Default, Etc. None of Vitalink or its
Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have an Vitalink
Material Adverse Effect) of (A) any applicable law, ordinance, administrative
or governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over Vitalink or any
of its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default
exists under any Vitalink Contract or any lease, permit, license or other
agreement or instrument to which Vitalink or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties,
assets or operations of Vitalink or any of its Subsidiaries is subject (except
for any events of default or other defaults which would not, singly or in the
aggregate with all such other defaults, have an Vitalink Material Adverse
Effect).
Section 3.07 Licenses and Permits. Each of Vitalink and its Subsidiaries has
such certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations and clearances from appropriate governmental agencies and
bodies ("Vitalink Licenses") as are necessary to own, lease or operate its
properties and to conduct its business in the manner described in the Vitalink
SEC Reports and as presently conducted and all such Vitalink Licenses are
valid and in full force and effect, other than any failure to have any such
Vitalink License or any failure of any such Vitalink License to be valid and
in full force and effect as would not, singly or in the aggregate with all
such other failures, have an Vitalink Material Adverse Effect. Each of
Vitalink and its Subsidiaries is and, within the period of all applicable
statutes of limitation, has been in compliance with its obligations under such
Vitalink Licenses and no event has occurred that allows, or after notice or
lapse of time would allow, revocation or termination of such Vitalink
Licenses, other than any such failure to be in compliance with such
obligations or any such revocation or termination as would not, singly or in
the aggregate with all such other failures, revocations or terminations, have
an Vitalink Material Adverse Effect. Vitalink has no knowledge of any facts or
circumstances that could reasonably be expected to result in an inability of
Vitalink or any of its Subsidiaries to renew any Vitalink License. Neither the
execution and delivery by Vitalink of this Agreement nor the consummation of
any of the transactions contemplated herein will result in any revocation or
termination of any Vitalink License. Set forth in Section 3.07 of the Vitalink
Disclosure Statement is a true and complete list of all Vitalink Licenses
which are necessary for the conduct of the business presently conducted by
Vitalink and its Subsidiaries.
Section 3.08 Registration Statement; Information Statement. None of the
information supplied by Vitalink for inclusion or incorporation by reference
in (i) the registration statement registering under the Securities Act of
1933, as amended, and the rules and regulations promulgated thereunder (the
"Securities Act") the Vitalink Common Stock to be issued at the Effective Time
(such registration statement as amended by any
B-12
<PAGE>
amendments thereto being referred to herein as the "Registration Statement")
or (ii) the information statement or proxy statement to be sent to the
stockholders of Vitalink in connection with the Stockholder Approval,
including all amendments and supplements thereto (the "Vitalink Information
Statement"), shall, in the case of the Registration Statement, at (i) the time
the Registration Statement becomes effective and (ii) the Effective Time, and
in the case of the Vitalink Information Statement, on the date the Vitalink
Information Statement is first mailed to stockholders, at the date of the
Stockholder Approval and at the Effective Time, contain any untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
If at any time prior to the Effective Time any event with respect to Vitalink
or any of its Subsidiaries shall occur which is required to be described in
the Registration Statement, the Vitalink Information Statement or the Proxy
Statement (as hereinafter defined), such event shall be so described, and an
amendment or supplement shall be promptly filed with the Securities and
Exchange Commission (the "SEC") and, as required by law, disseminated to the
stockholders of Vitalink and GranCare. The Registration Statement and the
Vitalink Information Statement will (with respect to Vitalink) comply as to
form in all material respects with the applicable provisions of the Securities
Act and the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), as the case may be.
Section 3.09 Finders or Brokers. Neither Vitalink nor any Subsidiary of
Vitalink has employed any investment banker, broker, finder or intermediary in
connection with the transactions contemplated hereby who might be entitled to
a fee or any commission the receipt of which is conditioned upon consummation
of the Merger.
Section 3.10 SEC Filings. (a) Vitalink has filed with the SEC all required
forms, reports and documents required to be filed by it with the SEC since May
31, 1992 (collectively, the "Vitalink SEC Reports"), all of which complied as
to form when filed in all material respects with the applicable provisions of
the Securities Act and the Exchange Act, as the case may be. As of their
respective dates the Vitalink SEC Reports (including documents incorporated by
reference therein) did not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they
were made, not misleading.
(b) Vitalink will deliver to GranCare as soon as they become available true
and complete copies of any report or statement mailed by Vitalink to its
securityholders generally or filed by it with the SEC, in each case subsequent
to the date hereof and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by GranCare, as to which Vitalink makes no representation) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
audited consolidated financial statements and unaudited consolidated interim
financial statements of Vitalink and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of Vitalink and its Subsidiaries as of the
dates thereof and the consolidated results of operations and consolidated cash
flow for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they
may not include footnotes or may be condensed or summary statements).
Section 3.11 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of Vitalink
and its Subsidiaries included or incorporated by reference in the Vitalink SEC
Reports have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis during the periods involved, and
fairly presented the consolidated financial position of Vitalink and its
Subsidiaries as of the dates thereof and the consolidated results of
operations and consolidated cash flows for the periods then ended (subject, in
the case of any unaudited interim financial statements, to normal year-end
adjustments and to the extent they may not include footnotes or may be
condensed or summary statements) and such audited financial statements have
been certified as such (without exception) by Vitalink's independent
accountants.
B-13
<PAGE>
Section 3.12 Absence of Undisclosed Liabilities. Neither Vitalink nor any of
its Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the Vitalink Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with
past practice since May 31, 1996 that would not, singly or in the aggregate,
be reasonably expected to have an Vitalink Material Adverse Effect.
Section 3.13 Absence of Changes or Events. (a) Since May 31, 1996 (i)
Vitalink and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement
or other transaction that is not in the ordinary course of business (other
than the Voting Agreement, the Shareholders Agreement (as hereinafter defined)
and this Agreement) or that could reasonably be expected to result in any
Vitalink Material Adverse Effect; (ii) neither Vitalink nor its Subsidiaries
have sustained any material loss or interference with their business or
properties from fire, flood, windstorm, accident, strike or other calamity
(whether or not covered by insurance); (iii) there has been no material change
in the indebtedness of Vitalink and its Subsidiaries, no change in the capital
stock of Vitalink and no dividend or distribution of any kind declared, paid
or made by Vitalink on any class of its capital stock; (iv) there has been no
event or condition which has caused an Vitalink Material Adverse Effect, nor
any development, occurrence or state of facts or circumstances that could,
singly or in the aggregate, reasonably be expected to result in an Vitalink
Material Adverse Effect; (v) there has been no amendment, modification or
supplement to any material term of any Vitalink Contract required to be
identified in Section 3.20 of the Vitalink Disclosure Statement or any equity
security; and (vi) there has been no material change by Vitalink in its
accounting principles, practices or methods.
(b) Since May 31, 1996, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
Vitalink, to its officers or key employees, or any amendment of any of the
Vitalink Compensation and Benefit Plans.
Section 3.14 Capitalization. (a) The authorized capital stock of Vitalink
consists of 30,000,000 shares of Vitalink Common Stock and 10,000,000 shares
of Preferred Stock (the "Vitalink Preferred Stock"). As of August 26, 1996,
there were 13,979,700 shares of Vitalink Common Stock and no shares of
Vitalink Preferred Stock outstanding and no shares of Vitalink Common Stock
were held in Vitalink's treasury; and except for shares which were reserved
for issuance and which may have been issued pursuant to the following sentence
there have been no issuances of capital stock of Vitalink since August 26,
1996. As of August 26, 1996, 1,070,300 shares of Vitalink Common Stock were
reserved for issuance upon the exercise of outstanding options and options
(the "Vitalink Options") which may be granted under the stock option plans of
Vitalink (the "Vitalink Option Plans"), 100,000 shares of Vitalink Common
Stock were reserved for issuance to four former shareholders of an acquired
business, and no other shares of Vitalink Common Stock are reserved for any
purpose. Except for the Vitalink Common Stock reserved for issuance upon
exercise of the Vitalink Options and as contemplated by this Agreement, there
are not any existing options, warrants, calls, subscriptions, or other rights
or other agreements or commitments obligating Vitalink to issue, transfer or
sell any shares of capital stock of Vitalink or any of its Subsidiaries or any
other securities convertible into or evidencing the right to subscribe for any
such shares. There are no outstanding stock appreciation rights with respect
to the capital stock of Vitalink or any of its Subsidiaries. All issued and
outstanding shares of Vitalink Common Stock are duly authorized and validly
issued, fully paid and nonassessable and have not been issued in violation of
(nor are any of the authorized shares of capital stock of, or other equity
interests in, Vitalink subject to) any preemptive or similar rights created by
statute, the Certificate of Incorporation or By-Laws of Vitalink or any
agreement to which Vitalink is a party or bound. The Vitalink Common Stock to
be issued in accordance with Section 2.01 of this Agreement, when so issued,
will be duly authorized and validly issued, fully paid and nonassessable.
(b) There are no obligations, contingent or otherwise, of Vitalink to (i)
repurchase, redeem or otherwise acquire any shares of Vitalink Common Stock;
or (ii) provide funds to, or make any investment in (in the form
B-14
<PAGE>
of a loan, capital contribution or otherwise), or provide any guarantee with
respect to the obligations of, any other person. There are no agreements,
arrangements or commitments of any character (contingent or otherwise)
pursuant to which any person is or may be entitled to receive any payment
based on the revenues or earnings, or calculated in accordance therewith, of
Vitalink. Except for the Voting Agreement and the Shareholders Agreement (as
hereinafter defined), there are no voting trusts, proxies or other agreements
or understandings to which Vitalink is a party or by which Vitalink is bound
with respect to the voting of any shares of capital stock of Vitalink.
(c) Vitalink has delivered or made available to GranCare complete and
correct copies of each of the Vitalink Option Plans, including all amendments
thereto. Section 3.14(c) of the Vitalink Disclosure Statement sets forth a
complete and correct list of all outstanding options, setting forth (i) the
exercise price of each outstanding Vitalink Option, (ii) the number of
Vitalink Options, (iii) the date of grant of each such Vitalink Option.
Section 3.14(c) of the Vitalink Disclosure Statement sets forth a complete and
correct list of all restricted stock awards including the recipients and the
number of shares of Vitalink Common Stock received or to be received by each.
Section 3.15 Capital Stock of Subsidiaries. The only direct or indirect
Subsidiaries of Vitalink are those listed in Section 3.15 of the Vitalink
Disclosure Statement. Vitalink is directly or indirectly the record (except
for directors' qualifying shares as reflected in such Section 3.15) and
beneficial owner (including all such qualifying shares) of all of the
outstanding shares of capital stock of each of its Subsidiaries, there are no
proxies with respect to such shares, and there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating Vitalink or any of such Subsidiaries to issue, transfer
or sell any shares of capital stock of such Subsidiary or any other securities
convertible into or evidencing the right to subscribe for any such shares. All
of such shares beneficially owned by Vitalink are duly authorized and validly
issued, fully paid, nonassessable and free of preemptive rights with respect
thereto and are owned by Vitalink free and clear of any claim, lien or
encumbrance of any kind with respect thereto. Vitalink does not directly or
indirectly own any interest in any corporation, partnership, joint venture or
other business association or entity.
Section 3.16 Litigation. There are no pending actions, suits, proceedings
or, to the best knowledge of Vitalink after due inquiry, investigations by,
against or affecting Vitalink, any of its Subsidiaries or any of their
properties, assets or operations, or with respect to which Vitalink or any of
its Subsidiaries is responsible by way of indemnity or otherwise. No pending
or, to the knowledge of Vitalink, threatened actions, suits, proceedings or
investigations by, against or affecting Vitalink, any of its Subsidiaries or
any of their properties, assets or operations, or with respect to which they
are responsible by way of indemnity or otherwise, whether or not disclosed in
such Vitalink SEC Reports, would, singly or in the aggregate with all such
other actions, suits, investigations or proceedings, reasonably be expected to
have an Vitalink Material Adverse Effect; and, to the best knowledge of
Vitalink after due inquiry, no such actions, suits, proceedings or
investigations which would reasonably be expected to have an Vitalink Material
Adverse Effect are threatened or contemplated and there is no reasonable
basis, to the best knowledge of Vitalink after due inquiry, for any such
action, suit, proceeding or investigation whether or not threatened or
contemplated.
Section 3.17 Insurance. Vitalink has insurance policies and fidelity bonds
covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of Vitalink
and such Subsidiaries. All premiums due and payable under all such policies
and bonds have been paid, and Vitalink is otherwise in full compliance with
the terms and conditions of all such policies and bonds, except where the
failure to have made payment or to be in full compliance would not, singularly
or in the aggregate with all such other failures, have an Vitalink Material
Adverse Effect. The reserves established by Vitalink in respect of all matters
as to which Vitalink self-insures or carries retention and/or deductibles,
including for workers' medical coverage and workers' compensation, are
adequate and appropriate in light of Vitalink's experience since May 31, 1992
with respect thereto and Vitalink is not aware, after due inquiry, of any
facts or circumstances existing as of the date hereof that could reasonably be
expected to cause such reserves to be inadequate or inappropriate. Section
3.17 of the Vitalink Disclosure Statement sets forth a true and complete list
of all insurance policies, including retention and/or deductible programs, and
fidelity bonds of Vitalink.
B-15
<PAGE>
Section 3.18 Title to and Condition of Properties. Vitalink and its
Subsidiaries have good title to all of the real property and personal property
reflected on Vitalink's May 31, 1996 audited consolidated balance sheet
contained in Vitalink's Form 10-K for the fiscal year ended May 31, 1996 filed
with the SEC (the "Vitalink Balance Sheet") except for property since sold or
otherwise disposed of in the ordinary course of business and consistent with
past practice. Set forth in Section 3.18(a) of the Vitalink Disclosure
Statement is a true and complete list of all real properties owned by Vitalink
and its Subsidiaries, all of which real properties are reflected on the
Vitalink Balance Sheet. No such real or personal property is subject to
claims, liens or other encumbrances of any kind or character, including,
without limitation, mortgages, pledges, liens, conditional sale agreements,
charges, security interests, easements, restrictive covenants, rights of way
or options, except for (i) liens for taxes not yet delinquent or which are
being contested in good faith by appropriate proceedings and in respect of
which Vitalink or its appropriate Subsidiary has set aside on its books
adequate reserves in accordance with generally accepted accounting principles;
(ii) mechanics', carriers', workers', repairers', materialmen's and other
similar statutory liens incurred in the ordinary course of business for
obligations not yet delinquent or the validity of which is being contested in
good faith by appropriate proceedings and in respect of which Vitalink or its
appropriate Subsidiary has set aside on its books adequate reserves in
accordance with generally accepted accounting principles; (iii) in the case of
real property, easements, rights of way, restrictions, minor defects or
irregularities in title that do not individually or in the aggregate have a
material adverse effect on the value or use of the real property encumbered
thereby as currently used in the operation of the business of Vitalink or its
Subsidiaries; or (iv) those which would not materially interfere with the
conduct of the business of Vitalink and its Subsidiaries or impair Vitalink's
ability to perform its obligations under this Agreement and to consummate the
transactions contemplated hereby (the encumbrances described in clauses (i)
through (iv) of this sentence, collectively, the "Vitalink Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to
Vitalink's knowledge, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably
be expected to have a material adverse effect on the value or use of such
property as currently used in the operation of the business of Vitalink or its
Subsidiaries. To the knowledge of Vitalink, (i) the real properties and the
improvements located thereon (including the roof and structural portions of
each building) are in good operating order and condition, subject to ordinary
wear and tear, (ii) there are no structural, mechanical or other defects of a
material nature in any improvements located on the real properties, (iii) all
building systems in respect of the real properties are in all material
respects in good condition and working order, subject to ordinary wear and
tear, and (iv) the real properties are served by all utilities required or
necessary for the present use thereof. Vitalink has made available to GranCare
true and correct copies of all title insurance commitments, title insurance
policies and surveys in the possession of Vitalink or its Subsidiaries
relating to its real properties set forth in Section 3.18(a) of the Vitalink
Disclosure Statement.
Section 3.19 Leases. There have been delivered or made available to GranCare
true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected
to be, at least $100,000 per annum pursuant to which real or personal property
is held under lease by Vitalink or any of its Subsidiaries, and true and
complete copies of each lease pursuant to which Vitalink or any of its
Subsidiaries leases real or personal property to others. Section 3.19 of the
Vitalink Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the business
conducted by Vitalink and its Subsidiaries. All of the leases so listed are
valid and subsisting and in full force and effect with respect to Vitalink and
its Subsidiaries, as the case may be, and, to Vitalink's knowledge, with
respect to any other party thereto and Vitalink or its Subsidiaries, as the
case may be, have valid leasehold interests in all properties leased
thereunder free and clear of all liens created by, through or under Vitalink
or its Subsidiaries other than Vitalink Permitted Encumbrances. The leased
real properties are in good operating order and condition, subject to ordinary
wear and tear.
Section 3.20 Contracts and Commitments. Neither Vitalink nor any of its
Subsidiaries is a party to any existing contract, obligation or commitment of
any type in any of the following categories:
(a) contracts for the purchase by Vitalink or any of its Subsidiaries of
medicines, materials, supplies or equipment which are not cancellable upon
30 days' or less notice and which either (i) have not been
B-16
<PAGE>
entered into in the ordinary course of business and consistent with past
practice or (ii) provide for purchase prices substantially greater than
those presently prevailing for such materials, supplies or equipment, or
(iii) contracts obligating Vitalink or its Subsidiaries to make capital
expenditures in excess of $200,000;
(b) contracts under which Vitalink has, except by way of endorsement of
negotiable instruments for collection in the ordinary course of business
and consistent with past practice, become absolutely or contingently or
otherwise liable for (i) the performance of any other person, firm or
corporation under a contract, or (ii) the whole or any part of the
indebtedness or liabilities of any other person, firm or corporation;
(c) powers of attorney outstanding from Vitalink other than as issued in
the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
(d) contracts under which any amount payable by Vitalink is dependent
upon, or calculated in accordance with, the revenues or profits of Vitalink
or any of its Subsidiaries;
(e) contracts with any director, officer or employee of Vitalink other
than in such person's capacity as a director, officer or employee of
Vitalink;
(f) contracts which limit or restrict where Vitalink or any of its
Subsidiaries may conduct its business or the type or line of business which
Vitalink or any of its Subsidiaries may engage in;
(g) contracts with any party for the loan of money or availability of
credit to or from Vitalink or any of its Subsidiaries (except credit
extended by Vitalink or any of its Subsidiaries to its customers in the
ordinary course of business and consistent with past practice); or
(h) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments
listed in Section 3.20 of the Vitalink Disclosure Statement have been
delivered or made available to GranCare. All such contracts are in full force
and effect. None of Vitalink or its Subsidiaries or, to the best of Vitalink's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than Vitalink and its Subsidiaries which would not, singly or in
the aggregate with all other such breaches, have an Vitalink Material Adverse
Effect.
Section 3.21 Labor Matters. None of Vitalink or its Subsidiaries is a party
to any union contract or other collective bargaining agreement. Each of
Vitalink and its Subsidiaries is in compliance in all material respects with
all applicable laws respecting employment and employment practices, terms and
conditions of employment, safety, wages and hours, and neither Vitalink nor
any of its Subsidiaries is engaged in any unfair labor practice. There is no
labor strike, slowdown or stoppage pending (or, to the best knowledge of
Vitalink, any labor strike or stoppage threatened) against or affecting
Vitalink or any of its Subsidiaries. To the best of Vitalink's knowledge, no
union organizing activities with respect to any of its or its Subsidiaries'
employees are occurring or threatened.
Section 3.22 No Change of Control Puts. Neither the execution and delivery
by Vitalink of this Agreement nor the consummation of any of the transactions
contemplated hereby gives rise to any obligation of Vitalink or any of its
Subsidiaries to, or any right of any holder of any security of Vitalink or any
of its Subsidiaries to, require Vitalink to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
Section 3.23 Employment and Labor Contracts. Neither Vitalink nor any of its
Subsidiaries is a party to any employment, management services, consultation
or other contract or agreement with any past or present officer, director or
employee or, to the best of Vitalink's knowledge, any entity affiliated with
any past or present officer, director or employee, other than the agreements
executed by employees generally, the forms of which have been provided to
GranCare.
B-17
<PAGE>
Section 3.24 Intellectual Property Rights. Vitalink or its Subsidiaries own
or have the right to use all Intellectual Property Rights (as hereinafter
defined) necessary to the conduct of their respective businesses. Section 3.24
of the Vitalink Disclosure Statement contains a worldwide list of all patents,
trade names, registered and unregistered copyrights, trademarks and service
marks, mask works and applications for the foregoing owned by Vitalink or its
Subsidiaries. Vitalink and/or its Subsidiaries have clear and unencumbered
title to the Intellectual Property Rights set forth in such Section 3.24 and
such title has not been challenged (pending or threatened) by others except
for the encumbrances listed therein. Such Section 3.24 also contains a list of
unpatented inventions used or planned for use by Vitalink or its Subsidiaries.
No rights or licenses to use Intellectual Property Rights have been granted or
acquired by Vitalink or its Subsidiaries. There have been no claims or
assertions made by others that Vitalink has infringed any Intellectual
Property Rights of others by the sale of products or any other activity in the
preceding six-year period and, to the knowledge of Vitalink, there has been no
such infringement by Vitalink or any of its Subsidiaries during this period.
Vitalink has no knowledge of any infringement of Intellectual Property Rights
of Vitalink or any of its Subsidiaries by others. All such patents, registered
trademarks, service marks and copyrights owned by Vitalink or its Subsidiaries
are in good standing, and are recorded on the public record in the name of
Vitalink or its Subsidiaries. True and complete copies of all material listed
in Section 3.24 of the Vitalink Disclosure Statement have been delivered or
made available to GranCare.
"Intellectual Property Rights" shall mean and include rights relating to
patents, trademarks, service marks, trade names, copyrights, mask works,
inventions, processes, trade secrets, know-how, confidentiality agreements,
consulting agreements, software and any documentation relating to the
manufacture, marketing and maintenance of products.
Section 3.25 Taxes. (i) Vitalink and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax (as hereinafter defined) returns and
reports (Tax returns and reports are hereinafter collectively referred to as
"Tax Returns") required to be filed by them on or before the Effective Time,
taking into account any extension of time to file granted to or obtained on
behalf of Vitalink and/or its Subsidiaries (copies of which for the past three
fiscal years have been delivered or made available to GranCare); (ii) all
Taxes of Vitalink and its Subsidiaries have been paid in full to the proper
authorities or fully accrued for with respect to fiscal periods for which
there are publicly available financial statements and otherwise on the books
of Vitalink, other than such Taxes as are being contested in good faith by
appropriate proceedings and are adequately reserved for in accordance with
generally accepted accounting principles; (iii) all deficiencies asserted in
writing as a result of Tax examinations of federal, state and foreign income,
sales and franchise and all other Tax Returns filed by Vitalink and its
Subsidiaries have either been paid or adequately reserved for in accordance
with generally accepted accounting principles; (iv) to the best knowledge of
Vitalink, no unpaid deficiency has been asserted or assessed against Vitalink
or any of its Subsidiaries, and no examination of Vitalink or any of its
Subsidiaries is pending or threatened for any material amount of Tax by any
taxing authority (with respect to any such action, Section 3.25 of the
Vitalink Disclosure Statement sets forth the periods at issue and the category
of Tax, and the examining authority's and any corresponding revenue agents'
reports relating to the issue have been delivered or made available to
GranCare); (v) no extension of the period for assessment or collection of any
Tax of Vitalink or any of its Subsidiaries is currently in effect and no
extension of time within which to file any Tax Return of Vitalink or any of
its Subsidiaries has been requested, which Tax Return has not since been
filed; (vi) no Tax liens have been filed with respect to any Taxes of Vitalink
or any of its Subsidiaries except for property taxes which have accrued but
with respect to which penalty for nonpayment has not occurred; (vii) neither
Vitalink nor any of its Subsidiaries has agreed to make any adjustment by
reason of a change in its accounting methods that would affect the taxable
income or deductions of Vitalink or any of its Subsidiaries for any period
ending after the Effective Time; (viii) Vitalink and its Subsidiaries have
made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which Vitalink or any Subsidiary will have any obligation
or liability on or after the Effective Time; (x) Vitalink and its Subsidiaries
have no foreign losses as defined in Section 904(f)(2) of the Internal Revenue
Code of 1986, as amended (the "Code"); (xi) to the best knowledge of Vitalink,
there are no
B-18
<PAGE>
transfer pricing agreements made by or on behalf of Vitalink or any of its
Subsidiaries with any taxation authority; (xii) no asset of Vitalink or any of
its Subsidiaries is held in an arrangement for which partnership Tax Returns
are being filed and neither Vitalink nor any of its Subsidiaries is a partner
in any partnership; (xiii) neither Vitalink nor any of its Subsidiaries owns
any interest in any "controlled foreign corporation" (within the meaning of
Section 957 of the Code), "passive foreign investment company" (within the
meaning of Section 1296 of the Code) or other entity the income of which is
required to be included in the income of Vitalink or such Subsidiary; (xiv)
neither Vitalink nor any of its Subsidiaries has made an election under
Section 341(f) of the Code; and (xv) neither Vitalink nor any of its
Subsidiaries is obligated to make any payments that would constitute excess
parachute payments within the meaning of Section 280G of the Code.
"Tax" or "Taxes" shall mean all federal, state, local and foreign taxes,
duties, levies, charges and assessments of any nature, including social
security payments and deductibles relating to wages, salaries and benefits and
payments to subcontractors (to the extent required under applicable Tax law),
and also including all interest, penalties and additions imposed with respect
to such amounts.
Section 3.26 Employee Benefit Plans; ERISA. (a) There are no "employee
pension benefit plans" as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA"), covering employees (or
former employees) employed in the United States, maintained or contributed to
by Vitalink or any of its Subsidiaries or any of their ERISA Affiliates (as
hereinafter defined), or to which Vitalink or any of its Subsidiaries or any
of their ERISA Affiliates contributes or is obligated to make payments
thereunder or otherwise may have any liability ("Vitalink Pension Benefit
Plans"). For purposes of this Agreement, "ERISA Affiliate" shall mean any
person (as defined in Section 3(9) of ERISA) that is a member of any group of
persons described in Section 414(b), (c), (m) or (o) of the Code which
includes the referent person or its Subsidiaries.
(b) Vitalink has delivered or made available to GranCare true and complete
copies of all "welfare benefit plans" (as defined in Section 3(1) of ERISA)
covering employees (or former employees) employed in the United States,
maintained or contributed to by Vitalink or any of its Subsidiaries ("Vitalink
Welfare Plans"), all multiemployer plans (as defined in Section 3(37) of
ERISA) covering employees (or former employees) employed in the United States
to which Vitalink or any of its Subsidiaries or any of their ERISA Affiliates
is required to make contributions or otherwise may have any liability, and, to
the extent covering employees (or former employees) employed in the United
States, all stock bonus, stock option, restricted stock, stock appreciation
right, stock purchase, bonus, incentive, deferred compensation, severance and
vacation plans maintained or contributed to by Vitalink or a Subsidiary of
Vitalink.
(c) Vitalink and each of its Subsidiaries, and each of the Vitalink Pension
Benefit Plans and Vitalink Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be
expected to have an Vitalink Material Adverse Effect.
(d) All contributions to, and payments from, the Vitalink Pension Benefit
Plans which are required to have been made in accordance with the Vitalink
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section
412 of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(e) The Vitalink Pension Benefit Plans intended to qualify under Section 401
of the Code have been determined by the Internal Revenue Service ("IRS") to be
so qualified and nothing has occurred with respect to the operation of such
Vitalink Pension Benefit Plans which would cause the loss of such
qualification or exemption or the imposition of any material liability,
penalty or tax under ERISA or the Code. Such plans have been or will be
amended on a timely basis to comply with changes to the Code made by the Tax
Reform Act of 1986 and other applicable legislative, regulatory or
administrative requirements.
B-19
<PAGE>
(f) There are (i) no investigations pending, to the best knowledge of
Vitalink, by any governmental entity involving the Vitalink Pension Benefit
Plans or Vitalink Welfare Plans, (ii) no termination proceedings involving the
Vitalink Pension Benefit Plans and (iii) no pending or, to the best of
Vitalink's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any Vitalink Pension Benefit Plan or
Vitalink Welfare Plan, against the assets of any of the trusts under any
Vitalink Pension Benefit Plan or Vitalink Welfare Plan or against any
fiduciary of any Vitalink Pension Benefit or Vitalink Welfare Plan with
respect to the operation of such plan or asserting any rights or claims to
benefits under any Vitalink Pension Benefit Plan or against the assets of any
trust under such plan, except for those which would not, singly or in the
aggregate, give rise to any liability which would reasonably be expected to
have an Vitalink Material Adverse Effect, nor, to the best of Vitalink's
knowledge, are there any facts which would give rise to any liability except
for those which would not, singly or in the aggregate, reasonably be expected
to have an Vitalink Material Adverse Effect in the event of any such
investigation, claim, suit or proceeding.
(g) None of Vitalink, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the Vitalink Pension
Benefit Plans or Vitalink Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA) which would be reasonably likely to result in a tax or penalty
on Vitalink or any of its Subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA, except any such event which would not, singly or in
the aggregate, reasonably be expected to have an Vitalink Material Adverse
Effect.
(h) Neither the Vitalink Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of ERISA and the regulations
thereunder) with respect to either thereof, except any such event which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect nor has there been any event with respect to any
Vitalink Pension Benefit Plan requiring disclosure under Section 4063(a) of
ERISA or any event with respect to any Vitalink Pension Benefit Plan requiring
disclosure under Section 4041(c)(3)(C) of ERISA, except any such event which
would not, singly or in the aggregate, reasonably be expected to have an
Vitalink Material Adverse Effect.
(i) Neither Vitalink nor any Subsidiary of Vitalink nor any ERISA Affiliate
has incurred any currently outstanding liability to the Pension Benefit
Guaranty Corporation (the "PBGC") or to a trustee appointed under Section
4042(b) or (c) of ERISA other than for the payment of premiums, all of which
have been paid when due. No Vitalink Pension Benefit Plan has applied for, or
received, a waiver of the minimum funding standards imposed by Section 412 of
the Code. The information supplied to the actuary by Vitalink or any of its
Subsidiaries for use in preparing the most recent actuarial report for the
Vitalink Pension Benefit Plans is complete and accurate in all material
respects.
(j) Neither Vitalink, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in
the United States.
(k) With respect to each of the Vitalink Pension Benefit Plans and Vitalink
Welfare Plans, true, correct and complete copies of the following documents
have been delivered or made available to GranCare: (i) the current plans and
related trust documents, including amendments thereto, (ii) any current
summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither Vitalink, any of its Subsidiaries, any organization to which
Vitalink is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability therefor would not, singly or in the aggregate, reasonably be
expected to have an Vitalink Material Adverse Effect.
B-20
<PAGE>
(m) None of the Vitalink Welfare Plans maintained by Vitalink or any of its
Subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of
a participant following termination of employment, except as may be required
under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended
("COBRA"), or except at the expense of the participant or the participant's
beneficiary. Vitalink and each of its Subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have an Vitalink Material Adverse Effect.
(n) No liability under any Vitalink Pension Benefit Plan or Vitalink Welfare
Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which Vitalink or any
of its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this Agreement will
not result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee of Vitalink or any of its
Subsidiaries.
(p) Vitalink has disclosed to GranCare in Section 3.26 of the Vitalink
Disclosure Statement each of Vitalink's material Foreign Plans (as hereinafter
defined) to the extent the benefits provided thereunder are not mandated by
the laws of the applicable foreign jurisdiction. Vitalink and each of its
Subsidiaries and each of such Foreign Plans are in compliance with applicable
laws and all required contributions have been made to the Foreign Plans,
except where the failure to comply or make contributions would not, singly or
in the aggregate, reasonably be expected to have an Vitalink Material Adverse
Effect. For purposes of this Agreement, the term "Foreign Plan" shall mean any
plan, program, policy, arrangement or agreement maintained or contributed to
by, or entered into with, a person or any of its Subsidiaries with respect to
employees (or former employees) employed outside the United States.
Section 3.27 Environmental Matters. (a) Except as would not, singly or in
the aggregate with all other such non-compliances, have an Vitalink Material
Adverse Effect, Vitalink and its Subsidiaries are, and within the period of
all applicable statutes of limitation have been, in compliance with all
applicable Environmental Laws (as hereinafter defined), which compliance
includes, without limitation, the possession of all licenses, permits,
registrations and other governmental authorizations (collectively,
"Environmental Authorizations") required under applicable Environmental Laws,
and compliance with the terms and conditions thereof, and there are no
circumstances of which Vitalink is aware which may materially prevent or
interfere with compliance in the future. To Vitalink's knowledge, all
Environmental Authorizations currently held by Vitalink and its Subsidiaries
pursuant to Environmental Laws are identified in Section 3.27(a)(1) of the
Vitalink Disclosure Statement and represent all Environmental Authorizations
necessary for the conduct of the businesses of Vitalink and its Subsidiaries
as currently conducted. Neither Vitalink nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any such Environmental
Authorizations will be modified, suspended or revoked or cannot be renewed or
otherwise maintained in the ordinary course of business. To Vitalink's
knowledge after due inquiry, the execution and delivery of this Agreement and
the consummation by Vitalink of the transactions contemplated hereby will not
affect the validity or require the transfer of any Environmental
Authorizations, and will not require any notification, registration,
reporting, filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices (as hereinafter defined) that,
singularly or in the aggregate, reasonably could be expected to have an
Vitalink Material Adverse Effect (i) pending or, to the best knowledge of
Vitalink, threatened against Vitalink or any of its Subsidiaries, (ii) to
Vitalink's knowledge pending or threatened against any person or entity whose
liability for such Environmental Notice may have been retained or assumed by
or could reasonably be imputed or attributed by law or contract to Vitalink or
any of its Subsidiaries, (iii) that to Vitalink's knowledge could subject
Vitalink to any material risk of liability, loss or damages, or (iv) that to
Vitalink's knowledge could reasonably be expected to require investigation,
removal or remedial or
B-21
<PAGE>
corrective action by Vitalink or any of its Subsidiaries. Since May 31, 1996,
neither Vitalink nor any of its Subsidiaries has received any Environmental
Notice alleging that Vitalink or any of its Subsidiaries is subject to
liability under any Environmental Law or that Vitalink or any of its
Subsidiaries is not in full compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or, to the best knowledge of Vitalink, investigation pending or
threatened under any Environmental Law (i) against Vitalink or any of its
Subsidiaries, or (ii) to the knowledge of Vitalink against any person or
entity in connection with which liability could reasonably be imputed or
attributed by law or contract to Vitalink or any of its Subsidiaries, except
with respect to each of clause (i) and (ii) for such demands, claims, notices
of violation, notice or demand letters or requests for information which
singly or in the aggregate could not reasonably be expected to have a GranCare
Material Adverse Effect.
(d) No property or facility presently or to the knowledge of Vitalink
formerly owned, operated or leased by Vitalink or any of its present
Subsidiaries, or to the knowledge of Vitalink any of its former Subsidiaries,
or any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated
under the Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), or on any comparable list established under any
Environmental Law, nor has Vitalink or any of its Subsidiaries received any
written notification of potential or actual liability or any request for
information under CERCLA or any comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any Hazardous
Materials (as hereinafter defined) generated, used, owned, stored or
controlled by Vitalink, or to Vitalink's knowledge any of its Subsidiaries or
any of their respective predecessors in interest, on, at or under any property
presently or formerly owned, leased or operated by Vitalink, or to Vitalink's
knowledge its Subsidiaries, or any predecessors in interest, and to Vitalink's
knowledge there are no Hazardous Materials located in, at, on or under, or in
the vicinity of, any such facility or property, or at any other location, that
(i) could reasonably be expected to subject Vitalink to a material risk of
liability, loss or damages, or result in the incurrence by Vitalink of costs
under Environmental Laws, (ii) could reasonably be expected to form the basis
of any Environmental Notice against or with respect to Vitalink or any of its
Subsidiaries, or against any person or entity whose liability for any
Environmental Notice may have been retained or assumed by or could be imputed
or attributed by law or contract to Vitalink or any of its Subsidiaries or
(iii) could reasonably be expected to require investigation, removal or
remedial or corrective action by Vitalink or any of its Subsidiaries, that in
any case singularly or in the aggregate, reasonably could be expected to have
an Vitalink Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
Vitalink's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other
disposal areas containing Hazardous Materials, located on, at or under
property owned, operated or leased by Vitalink, any of its Subsidiaries or any
of their respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased
by Vitalink or any of its Subsidiaries, and (iii) there is no asbestos
contained in or forming part of any building, building component, structure or
office space owned, operated or leased by Vitalink or any of its Subsidiaries.
(g) To Vitalink's knowledge no lien has been recorded under Environmental
Laws with respect to any properties, assets or facilities owned, operated or
leased by Vitalink or any of its Subsidiaries.
(h) In accordance with Section 5.05, Vitalink has given GranCare and its
authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
Vitalink or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by Vitalink or any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
B-22
<PAGE>
For purposes of this Agreement:
(i) "Environment" shall mean any surface water, groundwater or drinking
water supply, land surface or subsurface strata or ambient air and
includes, without limitation, any indoor location.
(ii) "Environmental Laws" shall mean CERCLA, the Resource Conservation
and Recovery Act of 1976, as amended, and any other federal, state, local
or foreign statute, rule, regulation, order, judgment, directive, decree or
common law, as now or previously in effect and regulating, relating to or
imposing liability or standards of conduct concerning air emissions, water
discharges, noise emissions, the release or threatened release or discharge
of any Hazardous Material into the environment, the generation, handling,
treatment, storage, transport or disposal of any Hazardous Material or
otherwise concerning pollution or the protection of the outdoor or indoor
environment, or employee health or safety. The term shall also include laws
governing the transfer of real property that require notification,
registration, reporting, filing, investigation or remediation prior to,
concurrent with or following sale or transfer of control of any property,
facility or establishment in connection with the actual or threatened
presence or release of Hazardous Materials at such property, facility or
establishment.
(iii) "Environmental Notice" shall mean any written communication, notice
or claim by any Governmental Authority or other third party alleging civil
or criminal liability (including, without limitation, liability for
investigatory costs, cleanup costs, governmental costs, compliance costs or
harm, injuries or damages to any person, property, natural resources, or
any fines or penalties) or alleging noncompliance arising out of, based
upon, resulting from or relating to any Environmental Law.
(iv) "Hazardous Material" shall mean any pollutant, contaminant or
hazardous, toxic or dangerous waste, substance, constituent or material
defined or regulated as such in, or for purposes of, any Environmental Law,
including, without limitation, any medical waste, any biochemical waste,
any asbestos, radon, any petroleum, oil (including crude oil or any
fraction thereof), any radioactive substance, any polychlorinated
biphenyls, any toxin, chemical, virus, infectious disease agent and any
other substance that can give rise to liability under any Environmental
Law.
Section 3.28 Directors, Officers and Compensation of Employees. There is set
forth in Section 3.28 of the Vitalink Disclosure Statement a true and complete
list showing (a) the names and addresses of all directors and officers of
Vitalink and its Subsidiaries and (b) the names of all salaried persons whose
aggregate compensation for purposes of federal income tax reporting from
Vitalink and its Subsidiaries in the fiscal year ended May 31, 1996 was, or in
the fiscal year ending May 31, 1997 is expected to be, U.S. $100,000 or more
per year, together with a statement of the full amount expected to be paid to
such person for services in all capacities to be rendered in the fiscal year
ending May 31, 1997, and the basis thereof, separately including the amounts
paid or payable, or expected to be paid or payable during such fiscal years,
under bonus or incentive arrangements, if any.
Section 3.29 Banks. There is set forth in Section 3.29 of the Vitalink
Disclosure Statement a true and complete list showing the account numbers and
name of each bank in which Vitalink or any of its Subsidiaries has an account
or safe deposit box and the names of all persons authorized to draw thereon or
to have access thereto.
Section 3.30 Disclosure. No representation or warranty by Vitalink and no
statement or information relating to Vitalink or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of Vitalink
to GranCare in connection herewith contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 3.31 Institutional Pharmacy Business. (a) Section 3.31 of the
Vitalink Disclosure Statement lists each Pharmacy utilized by Vitalink in
connection with its pharmacy business and indicates (i) the location of each
such Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest. No other
B-23
<PAGE>
person or entity has any beneficial ownership or interest in or to any such
Pharmacy nor does any other person or entity have any right or option to
acquire any beneficial ownership or interest in or to any such Pharmacy.
(b) Section 3.31 of the Vitalink Disclosure Statement lists all of the
customers to which Vitalink and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts. Vitalink has not been informed and has
no reason to believe that any Vitalink Pharmacy Contract will be terminated
for or without cause.
(c) Vitalink has not violated, and is not now in violation of, the Medicare
and Medicaid fraud and abuse provisions of the Social Security Act, the Civil
Monetary Penalties Law of the Social Security Act, or any other federal or
state law, statute, rule or regulation relating to Vitalink and its
Subsidiaries.
(d) Vitalink is duly licensed to provide pharmacy services in all states in
which it does business, and is also a participant in the Medicare program and
the Medicaid programs of the states listed in Section 3.07 of the Vitalink
Disclosure Statement. Vitalink is in compliance with all laws, rules and
regulations affecting or in connection with the Pharmacies, Vitalink and their
licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) Vitalink has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To
the best of Vitalink's knowledge all such billings were for goods actually
provided, and at appropriate charges or costs, and Vitalink has appropriate
documentation to support such billing requests.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF GRANCARE
Except as set forth in the GranCare Disclosure Statement delivered by
GranCare to Vitalink at or prior to the execution of this Agreement (the
"GranCare Disclosure Statement") (each section of which qualifies the
correspondingly numbered representation and warranty and covenant), GranCare
represents and warrants to Vitalink as follows:
Section 4.01 Organization and Qualification. Each of GranCare and its
Pharmacy Subsidiaries (as defined in the Distribution Agreement) is a
corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation and has the corporate power and
authority to own, lease and operate its properties and to conduct its business
as described in the GranCare SEC Reports (as hereinafter defined). Each of
GranCare and its Pharmacy Subsidiaries is duly qualified to transact business
as a foreign corporation and is in good standing in each jurisdiction in which
the conduct of its business or the ownership, leasing or operation of its
property requires such qualification, except for failures to be so qualified
or in good standing which would not, singly or in the aggregate with all such
other failures, have a GranCare Material Adverse Effect. "GranCare Material
Adverse Effect" means (i) with respect to any event, occurrence, failure of
event or occurrence, change, effect, state of affairs, breach, default,
violation, fine, penalty or failure to comply (each, a "circumstance"),
individually or taken together with all other circumstances contemplated by or
in connection with any or all of the representations and warranties made in
this Agreement, (a) a material adverse effect on the business, properties,
assets, condition (financial or otherwise), results of operations or prospects
of the Institutional Pharmacy Business, taken as a whole, or (b) an impairment
on the ability of SNFCo to conduct as a going concern the Skilled Nursing
Business (as defined in the Distribution Agreement) subsequent to the
Distribution or (ii) circumstances resulting in the impairment of GranCare's
ability to perform its obligations under this Agreement or the Distribution
Agreement and to consummate the transactions contemplated hereby and thereby.
Neither GranCare nor any of its Pharmacy Subsidiaries is in violation of any
of the provisions of its articles of incorporation (or other applicable
charter document) or by-laws. True and complete copies of the Restated
Articles of Incorporation and By-Laws, as currently in effect, of GranCare and
of each Pharmacy
B-24
<PAGE>
Subsidiary of GranCare have been previously delivered or made available to
Vitalink. No amendments to the articles of incorporation (or other similar
charter documents) and By-Laws of GranCare have been authorized since December
31, 1995.
Section 4.02 Authority Relative to This Agreement. GranCare has full
corporate power and authority to execute and deliver this Agreement and the
Distribution Agreement and, upon obtaining the approval of a majority of the
outstanding shares of GranCare Common Stock at the Special Meeting or
adjournment thereof, as may be required by the California Act to consummate
the Merger, the Distribution and complete the other transactions contemplated
hereby. The execution and delivery of this Agreement and the Distribution
Agreement and the consummation of the Merger, the Distribution and the other
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of GranCare and no other corporate proceedings on the part
of GranCare are necessary to authorize this Agreement and the Distribution
Agreement or to consummate the Merger, the Distribution and the other
transactions contemplated hereby (other than, with respect to the Merger and
the Distribution, the approval of a majority of the outstanding shares of
GranCare Common Stock at the Special Meeting or any adjournment thereof as
required by the California Act and, with respect to the Distribution, the
declaration by the GranCare Board of Directors of the Distribution). This
Agreement and the Distribution Agreement have been duly and validly executed
and delivered by GranCare and, assuming, in the case of this Agreement and the
Distribution Agreement, the due authorization, execution and delivery of each
such agreement by Vitalink, constitute valid and binding agreements of
GranCare, enforceable against GranCare in accordance with their terms, except
to the extent that their enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other laws affecting the
enforcement of creditors' rights generally or by general equitable principles.
Section 4.03 Consents, No Conflicts. (a) Except for the filings of the
Certificate of Merger, the Certified Agreement and the Proxy Statement, the
filing and effectiveness of the Registration Statement and the SNFCo
Registration Document (as hereinafter defined) and the filings required under
and in connection with the applicable requirements of the HSR Act, and filings
required pursuant to any state securities or "blue sky" laws, no filing or
registration with, notification or disclosure to, or permit, authorization,
consent or approval of, (i) any court, (ii) any government agency or body or
(iii) any third party, whether acting in an individual, fiduciary or other
capacity, is required for the consummation by GranCare of the Merger, the
Distribution or the other transactions contemplated hereby or by the
Distribution Agreement except such as are set forth in Section 4.03(a) of the
GranCare Disclosure Statement, which will have been obtained or made prior to
the Effective Time and will then be in full force and effect or which would
not, singly or in the aggregate with all other such consents which have not
been obtained, have a GranCare Material Adverse Effect.
(b) The execution, delivery and performance of this Agreement, the
Distribution Agreement, the consummation of the Distribution, the Merger and
the other transactions contemplated hereby (or thereby) and compliance by
GranCare with any of the provisions hereof (or thereof) do not and will not
(i) subject to obtaining the approval of a majority of the outstanding shares
of GranCare Common Stock at the Special Meeting or any adjournment thereof as
required by the California Act, conflict with or result in any breach or
violation of any provision of the Restated Articles of Incorporation (or other
comparable charter documents) or By-Laws of GranCare or any of its Pharmacy
Subsidiaries, (ii) result in (1) a breach or violation of, a default under or
an event triggering any payment or other obligation pursuant to any of
GranCare's existing pension plans, welfare plans, multiemployer plans,
employee benefit plans, benefit arrangements or similar plans, arrangements or
policies, including bonus, incentive, deferred compensation, stock purchase,
stock option, stock appreciation right, health or group insurance, severance
pay, retirement or other benefit plans, and all similar arrangements or
policies of GranCare and its Subsidiaries (the "GranCare Compensation and
Benefit Plans") or any grant or award made under any of the foregoing in any
case for which GranCare or any of the Pharmacy Subsidiaries would be
responsible after the Distribution, (2) a breach, violation or event
triggering a right of termination of, a default under, the acceleration of any
obligation, or the creation of a lien, pledge, security interest or other
encumbrance on assets (with or without the giving of notice or the lapse of
time or both) pursuant to any provision of any agreement, lease of real or
personal property, marketing agreement, contract, note, mortgage,
B-25
<PAGE>
indenture, arrangement or other obligation of GranCare or any of its Pharmacy
Subsidiaries ("GranCare Contracts") or any law, rule, ordinance or regulation
or judgment, decree, order or award to which GranCare or any of its Pharmacy
Subsidiaries is subject or any governmental or non-governmental authorization,
consent, approval, registration, franchise, license or permit under which
GranCare or any of its Pharmacy Subsidiaries conducts the Institutional
Pharmacy Business, or (3) any other change in the rights or obligations of any
party under any of the GranCare Contracts.
Section 4.04 Board Recommendation. The Board of Directors of GranCare has,
by a unanimous vote at a meeting of such Board duly held on September 3, 1996,
approved and adopted this Agreement, the Distribution Agreement, the Merger
and the other transactions contemplated hereby or by the Distribution
Agreement, determined that the consideration to be received by the holders of
shares of GranCare Common Stock pursuant to the Merger is fair to the holders
of such shares and recommended that the holders of such shares approve and
adopt this Agreement, the Distribution Agreement, the Merger and the other
transactions contemplated hereby.
Section 4.05 State Antitakeover Statutes. GranCare has granted all approvals
and taken all other steps necessary to exempt the Merger and the other
transactions contemplated hereby from the requirements and provisions of any
state antitakeover statute or regulation such that none of the provisions of
such "business combination," "moratorium," "control share," or other state
antitakeover statute or regulation (x) prohibits or restricts GranCare's
ability to perform its obligations under this Agreement or its ability to
consummate the Merger and the other transactions contemplated hereby, (y)
would have the effect of invalidating or voiding this Agreement or any
provision hereof, or (z) would subject Vitalink to any material impediment or
condition in connection with the exercise of any of their respective rights
under this Agreement.
Section 4.06 No Existing Violation, Default, Etc. None of GranCare or any of
its Subsidiaries is in violation (except for any violations which would not,
singly or in the aggregate with all such other violations, have a GranCare
Material Adverse Effect) of (A) any applicable law, ordinance, administrative
or governmental rule or regulation or (B) any order, decree or judgment of any
court or governmental agency or body having jurisdiction over GranCare or any
of its Subsidiaries. No event of default or event that, but for the giving of
notice or the lapse of time or both, would constitute an event of default
exists under any GranCare Contract or any lease, permit, license or other
agreement or instrument to which GranCare or any of its Subsidiaries is a
party or by which any of them is bound or to which any of the properties,
assets or operations of GranCare or any of its Subsidiaries is subject (except
for any events of default or other defaults which would not, singly or in the
aggregate with all such other defaults, have a GranCare Material Adverse
Effect).
Section 4.07 Affiliates. GranCare has delivered to Vitalink a letter
identifying all persons who, as of the date hereof, may be deemed to be
"affiliates" of GranCare for purposes of Rule 145 under the Securities Act
("Affiliates") and the written agreement of each such person, substantially in
the form of Exhibit C hereto.
Section 4.08 Licenses and Permits. Each of GranCare and its Subsidiaries has
such certificates, permits, licenses, franchises, consents, approvals, orders,
authorizations and clearances from appropriate governmental agencies and
bodies ("GranCare Licenses") as are necessary to own, lease or operate its
properties and to conduct its business in the manner described in the GranCare
SEC Reports and as presently conducted and all such GranCare Licenses are
valid and in full force and effect, other than any failure to have any such
GranCare License or any failure of any such GranCare License to be valid and
in full force and effect as would not, singly or in the aggregate with all
such other failures, have a GranCare Material Adverse Effect. Each of GranCare
and its Subsidiaries is, and within the period of all applicable statutes of
limitation has been, in compliance with its obligations under such GranCare
Licenses and no event has occurred that allows, or after notice or lapse of
time would allow, revocation or termination of such GranCare Licenses, other
than any such failure to be in compliance with such obligations or any such
revocation or termination as would not, singly or in the aggregate with all
such other failures, revocations or terminations, have a GranCare Material
Adverse Effect. GranCare has no knowledge of any facts or circumstances that
could reasonably be expected to result in an inability of GranCare or any of
its Pharmacy Subsidiaries to renew any GranCare License. Neither the execution
and delivery by GranCare of this Agreement or the Distribution Agreement nor
the consummation of the Distribution, the
B-26
<PAGE>
Merger or any of the other transactions contemplated herein will result in any
revocation or termination of any GranCare License or any requirement that the
Surviving Corporation be licensed in respect of any of the GranCare Licenses.
Set forth in Section 4.08 of the GranCare Disclosure Statement is a true and
complete list of all GranCare Licenses which are necessary for the conduct of
the Institutional Pharmacy Business as presently conducted by GranCare and its
Subsidiaries and which are, or will subsequent to the Reorganization be, held
by GranCare and the Pharmacy Subsidiaries.
Section 4.09 Registration Statement; Proxy Statement; SNFCo Registration
Documents. (a) None of the information supplied by GranCare for inclusion or
incorporation by reference in (i) the Registration Statement, (ii) the proxy
statement/prospectus to be sent to the shareholders of GranCare in connection
with the Special Meeting, including all amendments and supplements thereto
(the "Proxy Statement"), or (iii) the Vitalink Information Statement,
including all amendments and supplements thereto, shall, in the case of the
Registration Statement, at (i) the time the Registration Statement becomes
effective and (ii) the Effective Time and, in the case of the Proxy Statement
or the Vitalink Information Statement, on the date the Proxy Statement or the
Vitalink Information Statement is first mailed to stockholders, at the time of
the Special Meeting and at the Effective Time, contain any untrue statement of
a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading.
If at any time prior to the Effective Time any event with respect to GranCare
or any of its Subsidiaries shall occur which is required to be described in
the Registration Statement, the Proxy Statement or the Vitalink Information
Statement, such event shall be so described, and an amendment or supplement
shall be promptly filed with the SEC and, as required by law, disseminated to
the shareholders of GranCare and Vitalink. The Registration Statement and
Proxy Statement will (with respect to GranCare and its Subsidiaries) comply as
to form in all material respects with the applicable provisions of the
Exchange Act.
(b) The Form S-1 or 10 or other appropriate filing to be made to register
the SNFCo Common Stock under the Securities Act or the Exchange Act, as
appropriate, as such filing may be, amended or supplemented (the "SNFCo
Registration Document"), will not, at the date the SNFCo Registration Document
(or any amendment or supplement thereto), at the time that the SNFCo
Registration Document becomes effective, at the time of the Special Meeting
and at the Effective Time, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements made therein not misleading. The SNFCo
Registration Document will comply as to form in all material respects with the
applicable provisions of the Securities Act or the Exchange Act, as the case
may be.
Section 4.10 Finders or Brokers. Except for PaineWebber Incorporated,
neither GranCare nor any Subsidiary of GranCare has employed any investment
banker, broker, finder or intermediary in connection with the transactions
contemplated hereby who might be entitled to a fee or any commission the
receipt of which is conditioned upon consummation of the Merger or the
Distribution.
Section 4.11 SEC Filings. (a) GranCare has filed with the SEC all required
forms, reports and documents required to be filed by it with the SEC since
December 31, 1992 (collectively, the "GranCare SEC Reports"), all of which
complied as to form when filed in all material respects with the applicable
provisions of the Securities Act and the Exchange Act, as the case may be. As
of their respective dates the GranCare SEC Reports (including documents
incorporated by reference therein) did not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(b) GranCare will deliver to Vitalink as soon as they become available true
and complete copies of any report or statement mailed by GranCare to its
securityholders generally or filed by it with the SEC, in each case subsequent
to the date hereof and prior to the Effective Time. As of their respective
dates, such reports and statements (excluding any information therein provided
by Vitalink, as to which GranCare makes no representation) will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they are made, not misleading and will
comply in all material respects with all applicable requirements of law. The
B-27
<PAGE>
audited consolidated financial statements and unaudited consolidated interim
financial statements of GranCare and its Subsidiaries to be included or
incorporated by reference in such reports and statements will be prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods involved and will fairly present the
consolidated financial position of GranCare and its Subsidiaries as of the
dates thereof and the consolidated results of operations and consolidated cash
flow for the periods then ended (subject, in the case of any unaudited interim
financial statements, to normal year-end adjustments and to the extent they
may not include footnotes or may be condensed or summary statements).
Section 4.12 Financial Statements. The audited consolidated financial
statements and unaudited consolidated interim financial statements of GranCare
and its Subsidiaries included or incorporated by reference in the GranCare SEC
Reports and the unaudited Institutional Pharmacy Business Financial Statements
as set forth in Section 4.12 of the GranCare Disclosure Schedule have been
prepared in accordance with generally accepted accounting principles applied
on a consistent basis during the periods involved, and fairly presented the
consolidated financial position of GranCare and its Subsidiaries and the
Institutional Pharmacy Business, respectively, as of the dates thereof and the
consolidated results of operations and consolidated cash flows for the periods
then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements) and such audited
financial statements have been certified as such (without exception) by
GranCare's independent accountants.
Section 4.13 Absence of Undisclosed Liabilities. Neither GranCare nor its
Subsidiaries has any liabilities or obligations of any nature, whether
absolute, accrued, unmatured, contingent or otherwise, or any unsatisfied
judgments or any leases of personalty or realty or unusual or extraordinary
commitments, except the liabilities recorded on the GranCare Balance Sheet (as
hereinafter defined) and the notes thereto, and except for liabilities or
obligations incurred in the ordinary course of business and consistent with
past practice since December 31, 1995 that would not, singly or in the
aggregate, be reasonably expected to have a GranCare Material Adverse Effect.
Section 4.14 Absence of Changes or Events. (a) Since December 31, 1995 (i)
GranCare and its Subsidiaries have conducted their business in the ordinary
course and have not incurred any material liability or obligation (indirect,
direct or contingent) or entered into any material oral or written agreement
or other transaction that is not in the ordinary course of business (other
than the Distribution Agreement and this Agreement) or that could reasonably
be expected to result in any GranCare Material Adverse Effect; (ii) neither
GranCare nor its Pharmacy Subsidiaries have sustained any material loss or
interference with their business or properties from fire, flood, windstorm,
accident, strike or other calamity (whether or not covered by insurance);
(iii) there has been no material change in the indebtedness of GranCare and
its Pharmacy Subsidiaries, no change in the authorized capital stock of
GranCare and no dividend or distribution of any kind declared, paid or made by
GranCare on any class of its capital stock other than the Distribution; (iv)
there has been no event or condition which has caused a GranCare Material
Adverse Effect, nor any development, occurrence or state of facts or
circumstances that could, singly or in the aggregate, reasonably be expected
to result in a GranCare Material Adverse Effect; (v) there has been no
amendment, modification or supplement to any material term of any GranCare
Contract to which a Pharmacy Subsidiary is a party required to be identified
in Section 4.21 of the GranCare Disclosure Statement or any equity security;
and (vi) there has been no material change by GranCare in its accounting
principles, practices or methods.
(b) Since December 31, 1995, other than in the ordinary course of business
consistent with past practice, there has not been any increase in the
compensation or other benefits payable, or which could become payable, by
GranCare, to its officers or key employees, or any amendment of any of the
GranCare Compensation and Benefit Plans.
Section 4.15 Capitalization. (a) The authorized capital stock of GranCare
consists of 50,000,000 shares of GranCare Common Stock and 2,000,000 shares of
Preferred Stock (the "GranCare Preferred Stock"), of which (i) 390,000 shares
have been authorized as Series A Convertible Preferred, (ii) 175,000 shares
have been
B-28
<PAGE>
authorized as Series B Mandatorily Redeemable Preferred Stock, (iii) 665,000
shares have been authorized as Series C Convertible Preferred Stock and (iv)
4,500 shares have been authorized as Series D Exchangeable Preferred Stock. As
of August 26, 1996, there are 23,370,693 shares of GranCare Common Stock
(including shares in respect of Evergreen Healthcare, Inc. common stock and
National Heritage, Inc. common stock for which certificates have not been
tendered for exchange), no shares of GranCare Preferred Stock outstanding and
200,100 shares of GranCare Common Stock owned by a wholly-owned subsidiary of
GranCare; and except for shares which were reserved for issuance and which may
have been issued pursuant to the following sentence there have been no
issuances of capital stock of GranCare since August 26, 1996. As of August 26,
1996, 2,355,250 shares of GranCare Common Stock were reserved for issuance
upon the exercise of outstanding options (the "GranCare Options") granted
under the stock option plans of GranCare (the "GranCare Option Plans"),
2,210,351 shares were reserved for issuance upon conversion of GranCare's 6-
1/2% Convertible Subordinated Debentures due 2003 (the "Convertible
Debentures"), 2,500 shares were committed to be issued to employees of
GranCare and its subsidiaries in recognition of 25 years of service, 304,803
shares were reserved for issuance upon the exercise of GranCare's Series D, E
and F warrants and no other shares of GranCare Common Stock are reserved for
any purpose. Except for the foregoing, there are not any existing options,
warrants, calls, subscriptions, or other rights or other agreements or
commitments obligating GranCare to issue, transfer or sell any shares of
capital stock of GranCare or any of its Subsidiaries or any other securities
convertible into or evidencing the right to subscribe for any such shares.
There are no outstanding stock appreciation rights with respect to the capital
stock of GranCare or any of its Subsidiaries. All issued and outstanding
shares of GranCare Common Stock are duly authorized and validly issued, fully
paid and non-assessable and have not been issued in violation of (nor are any
of the authorized shares of capital stock of, or other equity interests in,
GranCare subject to) any preemptive or similar rights created by statute, the
Restated Articles of Incorporation or By-Laws of GranCare or any agreement to
which GranCare is a party or bound.
(b) There are no obligations, contingent or otherwise, of GranCare to (i)
repurchase, redeem or otherwise acquire any shares of GranCare Common Stock;
or (ii) provide funds to, or make any investment in (in the form of a loan,
capital contribution or otherwise except for transactions described in Exhibit
A to the Distribution Agreement), or provide any guarantee with respect to the
obligations of, any other person. There are no agreements, arrangements or
commitments of any character (contingent or otherwise) pursuant to which any
person is or may be entitled to receive any payment based on the revenues or
earnings, or calculated in accordance therewith, of GranCare. There are no
voting trusts, proxies or other agreements or understandings to which GranCare
is a party or by which GranCare is bound with respect to the voting of any
shares of capital stock of GranCare.
(c) GranCare has delivered or made available to Vitalink complete and
correct copies of each of the GranCare Option Plans, including all amendments
thereto. Section 4.15(c) of the GranCare Disclosure Statement sets forth a
complete and correct list of all outstanding options setting forth (i) the
exercise price of each outstanding GranCare Option, (ii) the number of
GranCare Options, (iii) the date of grant of each such GranCare Option.
Section 4.15(c) of the GranCare Disclosure Statement sets forth a complete and
correct list of all restricted stock awards including the recipients and the
number of shares of GranCare Common Stock received or to be received by each.
Section 4.16 Capital Stock of Subsidiaries. The only direct or indirect
Subsidiaries of GranCare are those listed in Section 4.16 of the GranCare
Disclosure Statement, which Section 4.16 separately sets forth the Pharmacy
Subsidiaries. GranCare is directly or indirectly the record (except for
directors' qualifying shares as reflected in such Section 4.16) and beneficial
owner (including all such qualifying shares) of all of the outstanding shares
of capital stock of each of its Pharmacy Subsidiaries, there are no proxies
with respect to such shares, and there are not any existing options, warrants,
calls, subscriptions, or other rights or other agreements or commitments
obligating GranCare or any of such Subsidiaries to issue, transfer or sell any
shares of capital stock of such Subsidiary or any other securities convertible
into or evidencing the right to subscribe for any such shares. All of such
shares beneficially owned by GranCare are duly authorized and validly issued,
fully paid, nonassessable and free of preemptive rights with respect thereto
and are owned by GranCare free and
B-29
<PAGE>
clear of any claim, lien or encumbrance of any kind with respect thereto.
GranCare does not directly or indirectly own any interest in any corporation,
partnership, joint venture or other business association or entity.
Section 4.17 Litigation. There are no pending actions, suits, proceedings
or, to the best knowledge of GranCare after due inquiry, investigations by,
against or affecting GranCare, any of its Pharmacy Subsidiaries or any of
their properties, assets or operations, or with respect to which GranCare or
any of its Pharmacy Subsidiaries is responsible by way of indemnity or
otherwise. No pending or, to the knowledge of GranCare, threatened actions,
suits, proceedings or investigations by, against or affecting GranCare, any of
its Subsidiaries or any of their properties, assets or operations, or with
respect to which they are responsible by way of indemnity or otherwise,
whether or not disclosed in such GranCare SEC Reports, would, singly or in the
aggregate with all such other actions, suits, investigations or proceedings,
reasonably be expected to have a GranCare Material Adverse Effect; and, to the
best knowledge of GranCare after due inquiry, no actions, suits, proceedings
or investigations which would reasonably be expected to have a GranCare
Material Adverse Effect are threatened or contemplated and there is no
reasonable basis, to the best knowledge of GranCare after due inquiry, for any
such action, suit, proceeding or investigation, whether or not threatened or
contemplated.
Section 4.18 Insurance. GranCare has insurance policies and fidelity bonds
covering it and its Subsidiaries' assets, business, equipment, properties,
operations, employees, officers and directors of the type and in amounts
customarily carried by persons conducting business similar to that of GranCare
and such Subsidiaries. All premiums due and payable under all such policies
and bonds have been paid, and GranCare is otherwise in full compliance with
the terms and conditions of all such policies and bonds, except where the
failure to have made payment or to be in full compliance would not, singly or
in the aggregate with all such other failures, have a GranCare Material
Adverse Effect. The reserves established by GranCare in respect of all matters
as to which GranCare self-insures or carries retentions and/or deductibles,
including for workers' medical coverage and workers' compensation, are
adequate and appropriate in light of GranCare's experience since December 31,
1992 with respect thereto and GranCare is not aware, after due inquiry, of any
facts or circumstances existing as of the date hereof that could reasonably be
expected to cause such reserves to be inadequate or inappropriate. Section
4.18 of the GranCare Disclosure Statement sets forth a true and complete list
of all insurance policies including retention and/or deductible programs, and
fidelity bonds of GranCare.
Section 4.19 Title to and Condition of Properties. GranCare and its Pharmacy
Subsidiaries have good title to all of the real property and personal property
which is reflected on GranCare's December 31, 1995 audited consolidated
balance sheet contained in GranCare's Form 10-K for the fiscal year ended
December 31, 1995 filed with the SEC (the "GranCare Balance Sheet") except for
property since sold or otherwise disposed of in the ordinary course of
business and consistent with past practice. Set forth in Section 4.19(a) of
the GranCare Disclosure Statement is a true and complete list of all real
properties owned by GranCare and its Pharmacy Subsidiaries and used in
connection with the Institutional Pharmacy Business, all of which real
properties are reflected on the GranCare Balance Sheet. No such real or
personal property is subject to claims, liens or other encumbrances of any
kind or character, including, without limitation, mortgages, pledges, liens,
conditional sale agreements, charges, security interests, easements,
restrictive covenants, rights of way or options, except for (i) liens for
taxes not yet delinquent or which are being contested in good faith by
appropriate proceedings and in respect of which GranCare or its appropriate
Subsidiary has set aside on its books adequate reserves in accordance with
generally accepted accounting principles; (ii) mechanics', carriers',
workers', repairers', materialmen's and other similar statutory liens incurred
in the ordinary course of business for obligations not yet delinquent or the
validity of which are being contested in good faith by appropriate proceedings
and in respect of which GranCare or its appropriate Subsidiary has set aside
on its books adequate reserves in accordance with generally accepted
accounting principles; (iii) in the case of real property, easements, rights
of way, restrictions, minor defects or irregularities in title that do not
individually or in the aggregate have a material adverse effect on the value
or use of the real property encumbered thereby as currently used in the
operation of the business of GranCare or its Subsidiaries; or (iv) those which
would not materially interfere with the conduct of the business of GranCare
and its Pharmacy Subsidiaries or impair GranCare's ability to perform its
obligations under this Agreement and to consummate the transactions
contemplated hereby (the encumbrances described in clauses (i)
B-30
<PAGE>
through (iv) of this sentence, collectively, the "GranCare Permitted
Encumbrances"). There are no eminent domain proceedings pending or, to the
knowledge of GranCare, threatened against any owned property or any material
portion thereof which proceedings (if resulting in a taking) could reasonably
be expected to have a material adverse effect on the value or use of such
property as currently used in the operation of the pharmacy business of
GranCare or its Subsidiaries. To the knowledge of GranCare, (i) the real
properties and the improvements located thereon (including the roof and
structural portions of each building) are in good operating order and
condition, subject to ordinary wear and tear, (ii) there are no structural,
mechanical or other defects of a material nature in any improvements located
on the real properties, (iii) all building systems in respect of the real
properties are in all material respects in good condition and working order,
subject to ordinary wear and tear, and (iv) the real properties are served by
all utilities required or necessary for the present use thereof. GranCare has
made available to Vitalink true and correct copies of all title insurance
commitments, title insurance policies and surveys in the possession of
GranCare or its Subsidiaries relating to the real properties set forth in
Section 4.19(a) of the GranCare Disclosure Statement.
Section 4.20 Leases. There have been delivered or made available to Vitalink
true and complete copies of each lease requiring the payment of rentals
aggregating, or pursuant to which the annual rentals are reasonably expected
to be, at least $100,000 per annum pursuant to which real or personal property
is held under lease by GranCare (other than those properties held by GranCare
and utilized solely with respect to the Skilled Nursing Business) or any of
its Pharmacy Subsidiaries, and true and complete copies of each lease pursuant
to which GranCare or any of its Pharmacy Subsidiaries leases real or personal
property to others for use in a pharmacy related business. Section 4.20 of the
GranCare Disclosure Statement sets forth a true and complete list of all such
leases and such leases are the only leases that are material to the current
operations of the Institutional Pharmacy Business. All of the leases so listed
are valid and subsisting and in full force and effect with respect to GranCare
and the Pharmacy Subsidiaries, as the case may be, and, to GranCare's
knowledge, with respect to any other party thereto and GranCare or its
Pharmacy Subsidiaries, as the case may be, have valid leasehold interests in
all properties leased thereunder free and clear of all liens created by,
through or under GranCare or its Pharmacy Subsidiaries other than GranCare
Permitted Encumbrances. The leased real properties are in good operating order
and condition, subject to ordinary wear and tear.
Section 4.21 Contracts and Commitments. Neither GranCare nor the Pharmacy
Subsidiaries are a party to any existing contract, obligation or commitment of
any type in any of the following categories:
(a) contracts for the purchase by GranCare or any of its Pharmacy
Subsidiaries of medicine, materials, supplies or equipment which are not
cancellable upon 30 days' or less notice and which either (i) have not been
entered into in the ordinary course of business and consistent with past
practice or (ii) provide for purchase prices substantially greater than
those presently prevailing for such materials, supplies or equipment, or
(iii) contracts obligating GranCare or any of its Pharmacy Subsidiaries to
make capital expenditures in excess of $200,000;
(b) contracts under which GranCare or any Pharmacy Subsidiary has, except
by way of endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past practice, become
absolutely or contingently or otherwise liable for (i) the performance of
any other person, firm or corporation under a contract, or (ii) the whole
or any part of the indebtedness or liabilities of any other person, firm or
corporation, except in either case for any such contracts for which
GranCare and its Pharmacy Subsidiaries would not be responsible after the
Distribution;
(c) powers of attorney outstanding from GranCare other than as issued in
the ordinary course of business and consistent with past practice with
respect to customs, insurance, patent, trademark or tax matters, or to
agents for service of process;
(d) contracts under which any amount payable by GranCare is dependent
upon, or calculated in accordance with, the revenues or profits of
GranCare, any of its Subsidiaries or SNFCo;
(e) contracts with any director, officer or employee of GranCare other
than in such person's capacity as a director, officer or employee of
GranCare;
B-31
<PAGE>
(f) contracts which limit or restrict where GranCare or any of its
Pharmacy Subsidiaries may conduct its or their business or the type or line
of business which GranCare or any of its Subsidiaries may engage in;
(g) other than attached as exhibits to the Distribution Agreement, any
contracts, obligations or commitments which will exist following the
Distribution between GranCare or the Pharmacy Subsidiaries on the one hand,
and the Non-Institutional Pharmacy Business on the other;
(h) contracts with any party for the loan of money or availability of
credit to or from GranCare or any of its Pharmacy Subsidiaries (except
credit extended by GranCare or any of its Pharmacy Subsidiaries to its or
their customers in the ordinary course of business and consistent with past
practice); or
(i) any hedging, option, derivative or other similar transaction.
True and complete copies of all contracts, obligations and commitments listed
in Section 4.21 of the GranCare Disclosure Statement have been delivered or
made available to Vitalink. All such contracts are in full force and effect.
None of GranCare or its Pharmacy Subsidiaries or, to the best of GranCare's
knowledge, any other party is in breach of or default under any such contracts
(and no facts or circumstances exist which could reasonably support the
assertion of any such breach or default) except for breaches and defaults by
parties other than GranCare and its Pharmacy Subsidiaries which would not,
singly or in the aggregate with all other such breaches, have a GranCare
Material Adverse Effect.
Section 4.22 Labor Matters. None of GranCare or any of its Pharmacy
Subsidiaries is a party to any union contract or other collective bargaining
agreement, true and complete copies of which contracts have been delivered to
Vitalink. Each of GranCare and its Pharmacy Subsidiaries is in compliance in
all material respects with all applicable laws respecting employment and
employment practices, terms and conditions of employment, safety, wages and
hours, and neither GranCare nor any of its Pharmacy Subsidiaries is engaged in
any unfair labor practice. There is no labor strike, slowdown or stoppage
pending (or, to the best knowledge of GranCare, any labor strike or stoppage
threatened) against or affecting GranCare or any of its Pharmacy Subsidiaries.
To the best of GranCare's knowledge, no union organizing activities with
respect to any of its or its Pharmacy Subsidiaries' employees are occurring or
threatened.
Section 4.23 No Change of Control Puts. Neither the execution and delivery
by GranCare of this Agreement or the Distribution Agreement nor the
consummation of the Distribution, the Merger or any of the other transactions
contemplated hereby gives rise to any obligation of GranCare or any of its
Subsidiaries to, or any right of any holder of any security of GranCare or any
of its Subsidiaries to, require GranCare to purchase, offer to purchase,
redeem or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
Section 4.24 Employment and Labor Contracts. Neither GranCare nor any of its
Pharmacy Subsidiaries is a party to any employment, management services,
consultation or other contract or agreement (except for any such contracts or
agreements for which GranCare would not be responsible after the Distribution)
with any past or present officer, director or employee or, to the best of
GranCare's knowledge, any entity affiliated with any past or present officer,
director or employee, in each case true and complete copies of which contracts
have been delivered to Vitalink, and other than the agreements executed by
employees generally, the forms of which have been provided to Vitalink.
Section 4.25 Intellectual Property Rights. GranCare or its Pharmacy
Subsidiaries own or have the right to use all Intellectual Property Rights
necessary to the conduct of their respective businesses. Section 4.25 of the
GranCare Disclosure Statement contains a worldwide list of all patents, trade
names, registered and unregistered copyrights, trademarks and service marks,
mask works and applications for the foregoing owned by GranCare or its
Pharmacy Subsidiaries. GranCare and/or its Pharmacy Subsidiaries have clear
and unencumbered title to the Intellectual Property Rights set forth in such
Section 4.25 and such title has not been challenged (pending or threatened) by
others except for the encumbrances listed therein. Such Section 4.25 also
contains a list of unpatented inventions used or planned for use by GranCare
or its Pharmacy Subsidiaries. No rights or licenses
B-32
<PAGE>
to use Intellectual Property Rights have been granted or acquired by GranCare
or its Pharmacy Subsidiaries. There have been no claims or assertions made by
others that GranCare has infringed any Intellectual Property Rights of others
by the sale of products or any other activity in the preceding six year period
and, to the knowledge of GranCare, there has been no such infringement by
GranCare or any of its Pharmacy Subsidiaries during this period. GranCare has
no knowledge of any infringement of Intellectual Property Rights of GranCare
or any of its Pharmacy Subsidiaries by others. All such patents, registered
trademarks, service marks, and copyrights owned by GranCare or its Pharmacy
Subsidiaries are in good standing, and are recorded on the public record in
the name of GranCare or its Pharmacy Subsidiaries. True and complete copies of
all material listed in Section 4.25 of the GranCare Disclosure Statement have
been delivered or made available to Vitalink.
Section 4.26 Taxes. (i) GranCare and its Subsidiaries have prepared and
timely filed or will timely file with the appropriate governmental agencies
all franchise, income and all other Tax Returns required to be filed by them
on or before the Effective Time, taking into account any extension of time to
file granted to or obtained on behalf of GranCare and/or its Subsidiaries
(copies of which for the past three fiscal years have been delivered or made
available to Vitalink); (ii) all Taxes of GranCare and its Subsidiaries have
been paid in full to the proper authorities or fully accrued for with respect
to fiscal periods for which there are publicly available financial statements
and otherwise on the books of GranCare, other than such Taxes as are being
contested in good faith by appropriate proceedings and are adequately reserved
for in accordance with generally accepted accounting principles; (iii) all
deficiencies asserted in writing as a result of Tax examinations of federal,
state and foreign income, sales and franchise and all other Tax Returns filed
by GranCare and its Subsidiaries have either been paid or adequately reserved
for in accordance with generally accepted accounting principles; (iv) to the
best knowledge of GranCare, no unpaid deficiency has been asserted or assessed
against GranCare or any of its Subsidiaries, and no examination of GranCare or
any of its Subsidiaries is pending or threatened for any material amount of
Tax by any taxing authority (with respect to any such action, Section 4.26 of
the GranCare Disclosure Statement sets forth the periods at issue and the
category of Tax, and the examining authority's and any corresponding revenue
agents' reports relating to the issue have been delivered or made available to
Vitalink); (v) no extension of the period for assessment or collection of any
Tax of GranCare or any of its Subsidiaries is currently in effect and no
extension of time within which to file any Tax Return of GranCare or any of
its Subsidiaries has been requested, which Tax Return has not since been
filed; (vi) no Tax liens have been filed with respect to any Taxes of GranCare
or any of its Subsidiaries except for property taxes which have accrued but
with respect to which penalty for non-payment has not occurred; (vii) neither
GranCare nor any of its Subsidiaries has agreed to make any adjustment by
reason of a change in their accounting methods that would affect the taxable
income or deductions of GranCare or any of its Subsidiaries for any period
ending after the Effective Time; (viii) GranCare and its Subsidiaries have
made timely payments of the Taxes required to be deducted and withheld from
the wages paid to their employees; (ix) there are no Tax sharing agreements or
arrangements under which GranCare or any Subsidiary will have any obligation
or liability on or after the Effective Time; (x) GranCare and its Subsidiaries
have no foreign losses as defined in Section 904(f)(2) of the Code; (xi) to
the best knowledge of GranCare, there are no transfer pricing agreements made
by or on behalf of GranCare or any of its Subsidiaries with any taxation
authority; (xii) no assets of GranCare or any of its Subsidiaries is held in
an arrangement for which partnership Tax Returns are being filed and neither
GranCare nor any of its Subsidiaries is a partner in any partnership; (xiii)
neither GranCare nor any of its Subsidiaries owns any interest in any
"controlled foreign corporation" (within the meaning of Section 957 of the
Code), "passive foreign investment company" (within the meaning of Section
1296 of the Code) or other entity the income of which is required to be
included in the income of GranCare or such Subsidiary; (xiv) neither GranCare
nor any of its Subsidiaries has made an election under Section 341(f) of the
Code; and (xv) neither GranCare nor any of its Subsidiaries is obligated to
make any payments that would constitute excess parachute payments within the
meaning of Section 280G of the Code.
Section 4.27 Employee Benefit Plans; ERISA. (a) There are no "employee
pension benefit plans" as defined in Section 3(2) of ERISA covering employees
(or former employees) employed in the United States, maintained or contributed
to by GranCare or any of its Subsidiaries or any of their ERISA Affiliates, or
to which GranCare or any of its Subsidiaries or any of their ERISA Affiliates
contributes or is obligated to make payments thereunder or otherwise may have
any liability ("GranCare Pension Benefit Plans").
B-33
<PAGE>
(b) GranCare has delivered or made available to Vitalink true and complete
copies of all "welfare benefit plans" (as defined in Section 3(1) of ERISA)
covering employees (or former employees) employed in the United States,
maintained or contributed to by GranCare or any of its Subsidiaries (other
than fully insured welfare benefit plans that will be assumed by SNFCo)
("GranCare Welfare Plans"), all multiemployer plans (as defined in Section
3(37) of ERISA) covering employees (or former employees) employed in the
United States to which GranCare or any of its Subsidiaries or any of their
ERISA Affiliates is required to make contributions or otherwise may have any
liability, and, to the extent covering employees (or former employees)
employed in the United States, all stock bonus, stock option, restricted
stock, stock appreciation right, stock purchase, bonus, incentive, deferred
compensation, severance and vacation plans maintained or contributed to by
GranCare or a Subsidiary of GranCare.
(c) GranCare and each of its Subsidiaries, and each of the GranCare Pension
Benefit Plans and GranCare Welfare Plans, are in compliance with the
applicable provisions of ERISA and other applicable laws except where the
failure to comply would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(d) All contributions to, and payments from, the GranCare Pension Benefit
Plans which are required to have been made in accordance with the GranCare
Pension Benefit Plans and, when applicable, Section 302 of ERISA or Section
412 of the Code have been timely made except where the failure to make such
contributions or payments on a timely basis would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(e) The GranCare Pension Benefit Plans intended to qualify under Section 401
of the Code have been determined by the IRS to be so qualified and nothing has
occurred with respect to the operation of such GranCare Pension Benefit Plans
which would cause the loss of such qualification or exemption or the
imposition of any material liability, penalty or tax under ERISA or the Code.
Such plans have been or will be amended on a timely basis to comply with
changes to the Code made by the Tax Reform Act of 1986 and other applicable
legislative, regulatory or administrative requirements.
(f) There are (i) no investigations pending, to the best knowledge of
GranCare, by any governmental entity involving the GranCare Pension Benefit
Plans or GranCare Welfare Plans, (ii) no termination proceedings involving the
GranCare Pension Benefit Plans and (iii) no pending or, to the best of
GranCare's knowledge, threatened claims (other than routine claims for
benefits), suits or proceedings against any GranCare Pension Benefit Plan or
GranCare Welfare Plan, against the assets of any of the trusts under any
GranCare Pension Benefit Plan or GranCare Welfare Plan or against any
fiduciary of any GranCare Pension Benefit Plan or GranCare Welfare Plan with
respect to the operation of such plan or asserting any rights or claims to
benefits under any GranCare Pension Benefit Plan or against the assets of any
trust under such plan, except for those which would not, singly or in the
aggregate, give rise to any liability which would reasonably be expected to
have a GranCare Material Adverse Effect, nor, to the best of GranCare's
knowledge, are there any facts which would give rise to any liability except
for those which would not, singly or in the aggregate, reasonably be expected
to have a GranCare Material Adverse Effect in the event of any such
investigation, claim, suit or proceeding.
(g) None of GranCare, any of its Subsidiaries or any employee of the
foregoing, nor any trustee, administrator, other fiduciary or any other "party
in interest" or "disqualified person" with respect to the GranCare Pension
Benefit Plans or GranCare Welfare Plans, has engaged in a "prohibited
transaction" (as such term is defined in Section 4975 of the Code or Section
406 of ERISA) which would be reasonably likely to result in a tax or penalty
on GranCare or any of its Subsidiaries under Section 4975 of the Code or
Section 502(i) of ERISA, except any such event which would not, singly or in
the aggregate, reasonably be expected to have a GranCare Material Adverse
Effect.
(h) Neither the GranCare Pension Benefit Plans subject to Title IV of ERISA
nor any trust created thereunder has been terminated nor have there been any
"reportable events" (as defined in Section 4043 of
B-34
<PAGE>
ERISA and the regulations thereunder) with respect to either thereof, except
any such event which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect nor has there been any
event with respect to any GranCare Pension Benefit Plan requiring disclosure
under Section 4063(a) of ERISA or any event with respect to any GranCare
Pension Benefit Plan requiring disclosure under Section 4041(c)(3)(C) of
ERISA, except any such event which would not, singly or in the aggregate,
reasonably be expected to have a GranCare Material Adverse Effect.
(i) Neither GranCare nor any Subsidiary of GranCare nor any ERISA Affiliate
has incurred any currently outstanding liability to the PBGC or to a trustee
appointed under Section 4042(b) or (c) of ERISA other than for the payment of
premiums, all of which have been paid when due. No GranCare Pension Benefit
Plan has applied for, or received, a waiver of the minimum funding standards
imposed by Section 412 of the Code. The information supplied to the actuary by
GranCare or any of its Subsidiaries for use in preparing the most recent
actuarial report for the GranCare Pension Benefit Plans is complete and
accurate in all material respects.
(j) Neither GranCare, any of its Subsidiaries nor any of their ERISA
Affiliates has any liability (including any contingent liability under Section
4204 of ERISA) with respect to any multiemployer plan, within the meaning of
Section 3(37) of ERISA, covering employees (or former employees) employed in
the United States.
(k) With respect to each of the GranCare Pension Benefit Plans and GranCare
Welfare Plans, true, correct and complete copies of the following documents
have been delivered or made available to Vitalink: (i) the current plans and
related trust documents, including amendments thereto, (ii) any current
summary plan descriptions, (iii) the most recent Forms 5500, financial
statements and actuarial reports, if applicable, and (iv) the most recent IRS
determination letter, if applicable.
(l) Neither GranCare, any of its Subsidiaries, any organization to which
GranCare is a successor or parent corporation, within the meaning of Section
4069(b) of ERISA, nor any of their ERISA Affiliates has engaged in any
transaction, within the meaning of Section 4069(a) of ERISA, except where the
liability for which would not, singly or in the aggregate, reasonably be
expected to have a GranCare Material Adverse Effect.
(m) None of the GranCare Welfare Plans maintained by GranCare or any of its
Subsidiaries are retiree life or retiree health insurance plans which provide
for continuing benefits or coverage for any participant or any beneficiary of
a participant following termination of employment, except as may be required
under COBRA or except at the expense of the participant or the participant's
beneficiary. GranCare and each of its Subsidiaries which maintain a "group
health plan" within the meaning of Section 5000(b)(1) of the Code have
complied with the notice and continuation requirements of Section 4980B of the
Code, COBRA, Part 6 of Subtitle B of Title I of ERISA and the regulations
thereunder except where the failure to comply would not, singly or in the
aggregate, reasonably be expected to have a GranCare Material Adverse Effect.
(n) No liability under any GranCare Pension Benefit Plan or GranCare Welfare
Plan has been funded nor has any such obligation been satisfied with the
purchase of a contract from an insurance company as to which GranCare or any
of its Subsidiaries has received notice that such insurance company is in
rehabilitation.
(o) The consummation of the transactions contemplated by this Agreement will
not result in an increase in the amount of compensation or benefits or
accelerate the vesting or timing of payment of any benefits or compensation
payable to or in respect of any employee of GranCare or any of its
Subsidiaries.
(p) GranCare has disclosed to Vitalink in Section 4.27 of the GranCare
Disclosure Statement each of GranCare's material Foreign Plans to the extent
the benefits provided thereunder are not mandated by the laws of the
applicable foreign jurisdiction. GranCare and each of its Subsidiaries and
each of such Foreign Plans are in compliance with applicable laws and all
required contributions have been made to such Foreign Plans, except where the
failure to comply or make contributions would not, singly or in the aggregate,
reasonably be expected to have a GranCare Material Adverse Effect.
B-35
<PAGE>
Section 4.28 Environmental Matters. (a) Except as would not, singly or in
the aggregate with all other such non-compliances, have a GranCare Material
Adverse Effect, GranCare and its Subsidiaries are, and within the period of
all applicable statutes of limitation have been, in compliance with all
applicable Environmental Laws, which compliance includes, without limitation,
the possession of all Environmental Authorizations required under applicable
Environmental Laws, and compliance with the terms and conditions thereof, and
there are no circumstances of which GranCare is aware which may materially
prevent or interfere with compliance in the future. To GranCare's knowledge
GranCare and its Subsidiaries have all Environmental Authorizations necessary
for the conduct of the businesses of GranCare and its Subsidiaries as
currently conducted. Neither GranCare nor any of its Subsidiaries has been
notified, or has any reasonable basis to believe, that any such Environmental
Authorizations will be modified, suspended or revoked or cannot be renewed or
otherwise maintained in the ordinary course of business. To GranCare's
knowledge after due inquiry, the execution and delivery of this Agreement and
the consummation by GranCare of the Merger, the Distribution and the other
transactions contemplated hereby will not affect the validity or require the
transfer of any Environmental Authorizations associated with the Institutional
Pharmacy Business, and will not require any notification, registration,
reporting, filing, investigation or remediation under any Environmental Law.
(b) There are no Environmental Notices that, singularly or in the aggregate,
could reasonably be expected to have a GranCare Material Adverse Effect (i)
pending or, to the best knowledge of GranCare, threatened against GranCare or
any of its Subsidiaries, (ii) to GranCare's knowledge pending or threatened
against any person or entity whose liability for such Environmental Notice may
have been retained or assumed by or could reasonably be imputed or attributed
by law or contract to GranCare or any of its Subsidiaries, (iii) that to
GranCare's knowledge could subject GranCare to any material risk of liability,
loss or damages, or (iv) that to GranCare's knowledge could reasonably be
expected to require investigation, removal or remedial or corrective action by
GranCare or any of its Subsidiaries. Since May 31, 1996, neither GranCare nor
any of its Subsidiaries has received any Environmental Notice alleging that
GranCare or any of its Subsidiaries is subject to liability under any
Environmental Law or that GranCare or any of its Subsidiaries is not in full
compliance with Environmental Laws.
(c) There is no civil, criminal or administrative action, suit, demand,
claim, hearing, notice of violation, notice or demand letter or request for
information or to the best knowledge of GranCare, investigation pending or
threatened under any Environmental Law (i) against GranCare or any of its
Subsidiaries, or (ii) to the knowledge of GranCare, against any person or
entity in connection with which liability could reasonably be imputed or
attributed by law or contract to GranCare or any of its Subsidiaries except
with respect to each of clause (i) and (ii) for such demands, claims, notices
of violation, notice or demand letters or requests for information which
singly or in the aggregate could not reasonably be expected to have a GranCare
Material Adverse Effect.
(d) No property or facility presently or to the knowledge of GranCare
formerly owned, operated or leased by GranCare or any of its present
Subsidiaries, or to the knowledge of GranCare any of its former Subsidiaries,
or any of their respective predecessors in interest, is listed or proposed for
listing on the National Priorities List or the Comprehensive Environmental
Response, Compensation and Liability Information System, both promulgated
under CERCLA, or on any comparable list established under any Environmental
Law, nor has GranCare or any of its Subsidiaries received any written
notification of potential or actual liability or any request for information
under CERCLA or any comparable foreign, state or local law.
(e) There has been no disposal, spill, discharge or release of any Hazardous
Materials generated, used, owned, stored or controlled by GranCare, or to
GranCare's knowledge any of its Subsidiaries, or any of their respective
predecessors in interest, on, at or under any property presently or formerly
owned, leased or operated by GranCare, or to GranCare's knowledge its
Subsidiaries, or any predecessors in interest, and to GranCare's knowledge
there are no Hazardous Materials located in, at, on or under, or in the
vicinity of, any such facility or property, or at any other location, that (i)
could reasonably be expected to subject GranCare to a material risk of
liability, loss or damages, or result in the incurrence by GranCare of costs
under Environmental Laws, (ii) could
B-36
<PAGE>
reasonably be expected to form the basis of any Environmental Notice against
or with respect to GranCare or any of its Subsidiaries, or against any person
or entity whose liability for any Environmental Notice may have been retained
or assumed by or could be imputed or attributed by law or contract to GranCare
or any of its Subsidiaries or (iii) could reasonably be expected to require
investigation, removal or remedial or corrective action by GranCare or any of
its Subsidiaries, that in any case singularly or in the aggregate reasonably
could be expected to have a GranCare Material Adverse Effect.
(f) Without in any way limiting the generality of the foregoing, to
GranCare's knowledge (i) there are and have been no underground or aboveground
storage tanks or other storage receptacles, or related piping or other
disposal areas containing Hazardous Materials, located on, at or under
property owned, operated or leased by GranCare, any of its Subsidiaries or any
of their respective predecessors in interest, (ii) there are and have been no
polychlorinated biphenyls located on any properties owned, operated or leased
by GranCare or any of its Subsidiaries, and (iii) there is no asbestos
contained in or forming part of any building, building component, structure or
office space owned, operated or leased by GranCare or any of its Subsidiaries.
(g) To GranCare's knowledge no lien has been recorded under Environmental
Laws with respect to any properties, assets or facilities owned, operated or
leased by GranCare or any of its Subsidiaries.
(h) In accordance with Section 5.05, GranCare has given Vitalink and its
authorized representatives access to all records and files in its possession
or control relating to actual or potential compliance or liability issues of
GranCare or its Subsidiaries and any of their respective predecessors in
interest under Environmental Laws, including, without limitation, all reports,
studies, analyses, tests or monitoring results pertaining to the existence of
Hazardous Material or any other environmental concern relating to properties,
assets or facilities currently or formerly owned, operated, managed, leased,
used or controlled by GranCare any of its Subsidiaries, or otherwise
concerning compliance with or liability under Environmental Laws.
Section 4.29 Directors, Officers and Compensation of Employees. There is set
forth in Section 4.29 of the GranCare Disclosure Statement a true and complete
list showing, to the extent they are expected to become directors, officers or
employees of Vitalink subsequent to the Effective Date, (a) the names and
addresses of all such directors and officers of GranCare and its Pharmacy
Subsidiaries and (b) the names of all salaried persons whose aggregate
compensation for purposes of Federal income tax reporting from GranCare and
its Pharmacy Subsidiaries in the fiscal year ended December 31, 1995 was, or
in the fiscal year ending December 31, 1996 is expected to be, U.S. $100,000
or more per year, together with a statement of the full amount expected to be
paid to such person for services in all capacities to be rendered in the
fiscal year ending December 31, 1996, and the basis thereof, separately
including the amounts paid or payable during such fiscal years, or expected to
be paid or payable, under bonus or incentive arrangements, if any.
Section 4.30 Banks. There is set forth in Section 4.30 of the GranCare
Disclosure Statement a true and complete list showing the account numbers and
name of each bank in which any of the Pharmacy Subsidiaries has an account or
safe deposit box and the names of all persons authorized to draw thereon or to
have access thereto.
Section 4.31 Disclosure. No representation or warranty by GranCare and no
statement or information relating to GranCare or any of its Subsidiaries
contained herein, or in any certificate furnished by or on behalf of GranCare
to Vitalink in connection herewith contains or will contain any untrue
statement of a material fact or omits or will omit to state a material fact
necessary in order to make the statements herein or therein, in light of the
circumstances under which they were made, not misleading.
Section 4.32 Institutional Pharmacy Business. (a) Section 4.32 of the
GranCare Disclosure Statement lists each Pharmacy utilized by GranCare in
connection with its pharmacy business and indicates (i) the location of such
Pharmacy and (ii) whether such Pharmacy is owned or held pursuant to a
leasehold interest. No other person or entity has any beneficial ownership or
interest in or to any such Pharmacy nor does any other person or entity have
any right or option to acquire any beneficial ownership or interest in or to
any such Pharmacy.
B-37
<PAGE>
(b) Section 4.32 of the GranCare Disclosure Statement lists all of the
customers to which GranCare and its Subsidiaries provide pharmacy services
pursuant to oral or written contracts ("GranCare Pharmacy Contracts").
GranCare has not been informed and has no reason to believe that any GranCare
Pharmacy Contract will be terminated for or without cause. Each of the
Subsidiaries of GranCare involved in the Skilled Nursing Business listed on
Schedule 4.16 of the GranCare Disclosure Schedule has agreements for the
provision of institutional pharmacy services in form and substance equivalent
to the form of agreement set forth in Section 4.32 of the GranCare Disclosure
Schedule (each a "Pharmacy Agreement").
(c) GranCare has not violated, and is not now in violation of, the Medicare
and Medicaid fraud and abuse provisions of the Social Security Act, the Civil
Monetary Penalties Law of the Social Security Act, or any other Federal or
State law, statute, rule or regulation relating to GranCare and its
Subsidiaries.
(d) GranCare is duly licensed to provide pharmacy services in all states in
which it does business, and is also a participant in the Medicare program and
the Medicaid programs of the states listed in Section 4.08 of the GranCare
Disclosure Statement. GranCare is in compliance with all laws, rules and
regulations affecting or in connection with the Pharmacies, GranCare and their
licenses with respect thereto and their participation in the Medicare and
Medicaid programs.
(e) GranCare has delivered or made available true and correct billing
requests for reimbursement and underlying information to all governmental
programs, including but not limited to the Medicare and Medicaid programs, in
compliance with all rules, regulations, policies and procedures of such
governmental programs and of the fiscal intermediaries of such programs. To
the best of GranCare's knowledge all such billings were for goods actually
provided, and at appropriate charges or costs, and GranCare has appropriate
documentation to support such billing requests.
Section 4.33 Fairness Opinion. GranCare has received the opinion of
PaineWebber Incorporated to the effect that as of the date hereof the
financial terms of the Merger are fair to GranCare's stockholders from a
financial point of view.
Section 4.34 Sufficiency of Assets. Subsequent to the Restructuring,
GranCare and its Pharmacy Subsidiaries will own, lease, hold or otherwise have
the right to use all of the assets, properties, Intellectual Property Rights
and GranCare Licenses which are material to the conduct of the Institutional
Pharmacy Business as presently conducted by GranCare and its Subsidiaries.
ARTICLE V.
COVENANTS
Section 5.01 Conduct of Business of GranCare. Except as contemplated by this
Agreement, the Distribution Agreement and the GranCare Disclosure Statement or
as expressly agreed to in writing by Vitalink, during the period from the date
of this Agreement to the Effective Time, GranCare will and will cause its
Subsidiaries each to conduct its operations according to its ordinary and
usual course of business consistent with past practice, and will use all
commercially reasonable efforts to preserve intact its business organization,
to keep available the services of its officers and employees and to maintain
satisfactory relationships with suppliers, distributors, customers and others
having business relationships with it and will take no action which would
adversely affect its ability to consummate the Merger, the Distribution or the
other transactions contemplated hereby. Without limiting the generality of the
foregoing, and except as otherwise expressly contemplated by this Agreement,
the Distribution Agreement or the GranCare Disclosure Statement, prior to the
Effective Time, neither GranCare nor any of its Subsidiaries will, without the
prior written consent of Vitalink which shall not be unreasonably withheld:
(a) amend its Restated Articles of Incorporation (or other applicable
charter document) or By-Laws, other than the charter and by-laws of SNFCo;
B-38
<PAGE>
(b) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of GranCare or its Subsidiaries or any securities
convertible into or exchangeable or exercisable for shares of any class of
capital stock of GranCare or its Subsidiaries, other than (i) pursuant to
and in accordance with the terms of GranCare Options outstanding on the
date hereof under the GranCare Option Plans listed in Section 4.15 of the
GranCare Disclosure Statement or (ii) except as set forth in Schedule
5.01(b) of the GranCare Disclosure Schedule;
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries except as may be
necessary to consummate the Restructuring or the Distribution;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person except wholly owned Pharmacy
Subsidiaries in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person, other than indebtedness, obligations,
loans, advances or investments in any other person that are to be assigned
to and assumed by SNFCo prior to the Effective Time and as to which
GranCare will be relieved of liability with respect thereto prior to the
Effective Time;
(e) with respect to GranCare and its Pharmacy Subsidiaries, (i) increase
in any manner the compensation of any of its directors or officers, except
in the ordinary course of business and consistent with past practice or
increase in any manner the compensation of any of its other employees; (ii)
pay or agree to pay any pension, retirement allowance or other employee
benefit not required, or enter into or agree to enter into any agreement or
arrangement with any of its past or present employees relating to any such
pension, retirement allowance or other employee benefit, except as required
under currently existing agreements, plans or arrangements; (iii) grant any
severance or termination pay to, or enter into any employment or severance
agreement with, any of its past or present employees; (iv) except to the
extent permitted by the foregoing clause (i), enter into any contract,
agreement or understanding with any of its past or present directors or
officers; or (v) except in the ordinary course of business and consistent
with past practice or as may be required to comply with applicable law,
become obligated (other than pursuant to any new or renewed collective
bargaining agreement) under any new pension plan, welfare plan,
multiemployer plan, employee benefit plan, benefit arrangement, or similar
plan, arrangement or policy which was not in existence on the date hereof,
including any bonus, incentive, deferred compensation, stock purchase,
stock option, stock appreciation right, health or group insurance,
severance pay, retirement or other benefit plan, agreement or arrangement,
or employment or consulting agreement with or for the benefit of any
person, or amend any of such plans or any of such agreements in existence
on the date hereof other than as contemplated by the Employee Benefits
Matters Agreement (as defined in the Distribution Agreement);
(f) except in the ordinary course of business and consistent with past
practice, as disclosed in Section 5.01(f) of the GranCare Disclosure
Statement or as otherwise expressly contemplated hereby or the Distribution
Agreement, with respect to GranCare and its Pharmacy Subsidiaries sell,
transfer, lease, license, pledge, mortgage, or otherwise dispose of, or
encumber, or agree to sell, transfer, lease, license, pledge, mortgage or
otherwise dispose of or encumber, any material properties, real, personal
or mixed;
(g) except as otherwise expressly contemplated hereby, with respect to
GranCare and its Pharmacy Subsidiaries enter into any other agreements,
commitments or contracts, except agreements, commitments or contracts for
the purchase, sale or lease of goods or services in the ordinary course of
business and consistent with past practice and having a term of no more
than one year;
(h) authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution,
B-39
<PAGE>
any acquisition of a material amount of assets or securities, any
disposition of a material amount of assets or securities or any material
change in its capitalization, or any entry into a material contract or any
amendment or modification of any material contract or any release or
relinquishment of any material contract rights not in the ordinary course
of business and consistent with past practice except as expressly
contemplated by this Agreement or the Distribution Agreement;
(i) except as previously approved by GranCare prior to the date hereof
and as identified to Vitalink prior to the date hereof, authorize or commit
to make capital expenditures in excess of $200,000 for which GranCare or
any of its Pharmacy Subsidiaries would be responsible subsequent to the
Merger;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and following
written notice to Vitalink;
(k) maintain its books and records in a manner not in the ordinary course
of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any bad
debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business;
(o) make any changes in their prior practices of allocating interest,
corporate overhead, cost of legal, insurance and other staff functions or
other inter-company charges; (p) make any changes in their current cash
management practices; (q) cancel, compromise, settle or reduce any inter-
company accounts except by the payment of cash for the full amount thereof;
(r) permit any cash paid as the exercise price of outstanding GranCare
Options to be retained by SNFCo or any of its Subsidiaries;
(p) cancel any Pharmacy Agreement or amend, alter, waive or otherwise
modify the terms thereof; and
(q) agree to do any of the foregoing.
Section 5.02 Conduct of Business of Vitalink. Except as contemplated by this
Agreement, the Voting Agreement, the Shareholder Agreement (as hereinafter
defined) or the Vitalink Disclosure Statement or as expressly agreed to in
writing by GranCare, during the period from the date of this Agreement to the
Effective Time, Vitalink and its Subsidiaries will each conduct its operations
according to its ordinary and usual course of business consistent with past
practice, and will use all commercially reasonable efforts to preserve intact
its business organization, to keep available the services of its officers and
employees and to maintain satisfactory relationships with suppliers,
distributors, customers and others having business relationships with it and
will take no action which would adversely affect its ability to consummate the
Merger or the other transactions contemplated hereby. Without limiting the
generality of the foregoing, and except as otherwise expressly contemplated by
this Agreement or the Vitalink Disclosure Statement, prior to the Effective
Time, neither Vitalink nor any of its Subsidiaries will, without the prior
written consent of GranCare which shall not be unreasonably withheld:
(a) amend its Certificate of Incorporation (or other applicable charter
document) or By-Laws;
(b) authorize for issuance, issue, sell, deliver, grant any options for,
or otherwise agree or commit to issue, sell or deliver any shares of any
class of capital stock of Vitalink or its Subsidiaries or any securities
convertible into or exchangeable or exercisable for shares of any class of
capital stock of Vitalink or its Subsidiaries, other than pursuant to and
in accordance with the terms of the Vitalink Option Plans listed in Section
3.14 of the Vitalink Disclosure Statement;
B-40
<PAGE>
(c) split, combine or reclassify any shares of its capital stock,
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock or purchase, redeem or otherwise acquire any shares of its
own capital stock or that of any of its Subsidiaries;
(d) except in the ordinary course of business and consistent with past
practice (i) create, incur, assume, maintain or permit to exist any long-
term debt or any short-term debt for borrowed money other than under
existing lines of credit; (ii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise)
for the obligations of any other person except wholly owned Subsidiaries of
Vitalink in the ordinary course of business and consistent with past
practices; or (iii) make any loans, advances or capital contributions to,
or investments in, any other person;
(e) (i) increase in any manner the compensation of any of its directors
or officers, except in the ordinary course of business and consistent with
past practice or increase in any manner the compensation of any of its
other employees; (ii) pay or agree to pay any pension, retirement allowance
or other employee benefit not required, or enter into or agree to enter
into any agreement or arrangement with any of its past or present employees
relating to any such pension, retirement allowance or other employee
benefit, except as required under currently existing agreements, plans or
arrangements; (iii) grant any severance or termination pay to, or enter
into any employment or severance agreement with, any of its past or present
employees; (iv) except to the extent permitted by the foregoing clause (i),
enter into any contract, agreement or understanding with any of its past or
present directors or officers; or (v) except in the ordinary course of
business and consistent with past practice or as may be required to comply
with applicable law, become obligated (other than pursuant to any new or
renewed collective bargaining agreement) under any new pension plan,
welfare plan, multiemployer plan, employee benefit plan, benefit
arrangement, or similar plan, arrangement or policy which was not in
existence on the date hereof, including any bonus, incentive, deferred
compensation, stock purchase, stock option, stock appreciation right,
health or group insurance, severance pay, retirement or other benefit plan,
agreement or arrangement, or employment or consulting agreement with or for
the benefit of any person, or amend any of such plans or any of such
agreements in existence on the date hereof;
(f) except in the ordinary course of business and consistent with past
practice or as otherwise expressly contemplated hereby, sell, transfer,
lease, license, pledge, mortgage, or otherwise dispose of, or encumber, or
agree to sell, transfer, lease, license, pledge, mortgage or otherwise
dispose of or encumber, any material properties, real, personal or mixed;
(g) except as otherwise expressly contemplated hereby, enter into any
other agreements, commitments or contracts, except agreements, commitments
or contracts for the purchase, sale or lease of goods or services in the
ordinary course of business and consistent with past practice and having a
term of no more than one year;
(h) authorize, recommend, propose or announce an intention to authorize,
recommend or propose, or enter into any agreement in principle or an
agreement with respect to, any plan of liquidation or dissolution, any
acquisition of a material amount of assets or securities, any disposition
of a material amount of assets or securities or any material change in its
capitalization, or any entry into a material contract or any amendment or
modification of any material contract or any release or relinquishment of
any material contract rights not in the ordinary course of business and
consistent with past practice except as expressly contemplated by this
Agreement;
(i) except as previously approved by the Board of Directors of Vitalink
prior to the date hereof and as identified to GranCare prior to the date
hereof, authorize or commit to make capital expenditures in excess of
$200,000;
(j) permit any insurance policy naming it as a beneficiary or a loss
payee to be cancelled, terminated or materially altered, except in the
ordinary course of business and consistent with past practice and following
written notice to Vitalink;
B-41
<PAGE>
(k) maintain its books and records in a manner not in the ordinary course
of business and consistent with past practice;
(l) enter into any hedging, option, derivative or other similar
transaction;
(m) change any assumption underlying, or method of calculating, any bad
debt, contingency, provision or other reserve;
(n) pay, discharge or satisfy any claims, liabilities or obligations
(absolute, accrued, contingent or otherwise), other than the payment,
discharge or satisfaction of liabilities (including accounts payable) in
the ordinary course of business and consistent with past practice, or
collect, or accelerate the collection of, any amounts owed (including
accounts receivable) other than the collection in the ordinary course of
business; or
(o) agree to do any of the foregoing.
Section 5.03 No Solicitation by GranCare. (a) GranCare agrees that, prior to
the Effective Time, it shall not, and shall not authorize or permit any of its
Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or
disclosing information) any merger, consolidation, other business combination
involving GranCare or its Subsidiaries (except to the extent such merger,
consolidation or other business combination relates exclusively to GranCare's
Skilled Nursing Business), acquisition of all or a substantial portion of the
assets or capital stock of GranCare and its Subsidiaries (except to the extent
such acquisition relates exclusively to GranCare's Skilled Nursing Business)
or inquiries or proposals concerning or which may reasonably be expected to
lead to, any of the foregoing (a "GranCare Acquisition Transaction") or
negotiate, explore or otherwise communicate in any way with any third party
(other than Vitalink or its affiliates) with respect to any GranCare
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. GranCare
shall immediately advise Vitalink of any inquiries or proposals relating to a
GranCare Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an unsolicited
written proposal for a GranCare Acquisition Transaction from a bona fide
financially capable third party, GranCare may furnish non-public information
to, and negotiate with, such third party only if (i) three business days'
written notice shall have been given to Vitalink; and (ii)(A) GranCare's Board
of Directors shall have been advised in writing by its investment banker that
such third party is financially capable of consummating a GranCare Acquisition
Transaction that would yield a higher value to GranCare's stockholders than
will the Merger, (B) GranCare's Board of Directors shall have been advised, by
the written opinion of outside counsel to GranCare, that any failure to
provide such non-public information to, or negotiate with, such party would be
inconsistent with GranCare's Board of Directors' fiduciary duties to the
stockholders of GranCare (in providing such opinion GranCare's counsel may
assume that California law is not materially different from Delaware law) and
(C) GranCare's Board of Directors in good faith, after weighing such advice,
determines that taking such action is more likely than not to lead to a
GranCare Acquisition Transaction with such third party that would yield a
higher value to GranCare's stockholders than will the Merger and that failing
to furnish such information, or to commence negotiations would be inconsistent
with the Board's fiduciary duties.
Section 5.04 No Solicitation by Vitalink. (a) Vitalink agrees that, prior to
the Effective Time, it shall not, and shall not authorize or permit any of its
Subsidiaries or any of its or its Subsidiaries' directors, officers,
employees, agents or representatives to, directly or indirectly, solicit,
initiate, facilitate or encourage (including by way of furnishing or
disclosing information) any merger, consolidation, other business combination
involving Vitalink or its Subsidiaries, acquisition of all or any substantial
portion of the assets or capital stock of Vitalink and its Subsidiaries taken
as a whole, or inquiries or proposals concerning or which may reasonably be
expected to lead to, any of the foregoing (a "Vitalink Acquisition
Transaction") or negotiate, explore or otherwise communicate in any way with
any third party (other than GranCare or its affiliates) with respect to any
Vitalink
B-42
<PAGE>
Acquisition Transaction or enter into any agreement, arrangement or
understanding requiring it to abandon, terminate or fail to consummate the
Merger or any other transactions contemplated by this Agreement. Vitalink
shall immediately advise GranCare of any inquiries or proposals relating to a
Vitalink Acquisition Transaction.
(b) Notwithstanding the foregoing, in the event that there is an unsolicited
written proposal for a Vitalink Acquisition Transaction from a bona fide
financially capable third party, Vitalink may furnish non-public information
to, and negotiate with, such third party only if (i) three business days'
written notice shall have been given to GranCare; and (ii)(A) Vitalink's Board
of Directors shall have been advised in writing by its investment banker that
such third party is financially capable of consummating a Vitalink Acquisition
Transaction that would yield a higher value to Vitalink's stockholders than
will the Merger, (B) Vitalink's Board of Directors shall have been advised, by
the written opinion of outside counsel to Vitalink, that any failure to
provide such non-public information to, or negotiate with, such party would be
inconsistent with GranCare's Board of Directors' fiduciary duties to the
stockholders of Vitalink and (C) Vitalink's Board of Directors in good faith,
after weighing such advice, determines that taking such action is more likely
than not to lead to an Vitalink Acquisition Transaction with such third party
that would yield a higher value to Vitalink's stockholders than will the
Merger and that failing to furnish such information, or to commence
negotiations would be inconsistent with the Board's fiduciary duties.
Section 5.05 Access to Information. (a) From the date of this Agreement
until the Effective Time, GranCare will give Vitalink and its authorized
representatives (including counsel, environmental and other consultants,
accountants, auditors, and intellectual property counsel and agents)
reasonable access in light of the terms of this Agreement during normal
business hours to all facilities, personnel and operations and to all books
and records of GranCare and its Subsidiaries, will permit Vitalink to make
such inspections as it may reasonably require (including without limitation
any air, water or soil testing or sampling deemed necessary by it) and will
cause its officers and those of its Subsidiaries to furnish Vitalink with such
financial and operating data and other information with respect to the
businesses and properties of GranCare and its Subsidiaries as Vitalink may
from time to time reasonably request.
(b) From the date of this Agreement until the Effective Time, Vitalink will
give GranCare and its authorized representatives (including counsel,
environmental and other consultants, accountants, auditors, and intellectual
property counsel and agents) reasonable access in light of the terms of this
Agreement during normal business hours to all facilities, personnel and
operations and to all books and records of Vitalink and its Subsidiaries, will
permit GranCare to make such inspections as it may reasonably require
(including without limitation any air, water or soil testing or sampling
deemed necessary by them) and will cause its officers and those of its
Subsidiaries to furnish GranCare with such financial and operating data and
other information with respect to the businesses and properties of Vitalink
and its Subsidiaries as GranCare may from time to time reasonably request.
Section 5.06 Registration Statement and Proxy Statement. GranCare shall file
with the SEC as soon as is reasonably practicable after the date hereof the
SNFCo Registration Document and the Proxy Statement and Vitalink shall file
with the SEC the Vitalink Information Statement and the Registration Statement
in which the Proxy Statement shall be included. Vitalink and GranCare shall
use all commercially reasonable efforts to have the Registration Statement
declared effective by the SEC and the Proxy Statement and the Vitalink
Information Statement cleared by the staff of the SEC as promptly as
practicable. GranCare shall use all commercially reasonable efforts to have
the SNFCo Registration Document declared effective by the SEC. Vitalink shall
also take any action required to be taken under applicable state blue sky or
securities laws in connection with shares of Vitalink Common Stock to be
issued as Closing Consideration. Vitalink and GranCare shall promptly furnish
to each other all information, and take such other actions (including without
limitation using all commercially reasonable efforts to provide any required
consents of their respective independent auditors and investment banking
advisors), as may reasonably be requested in connection with any action by any
of them in connection with the preceding sentences of this Section 5.06.
Section 5.07 Commercially Reasonable Efforts; Other Actions. (a) Subject to
the terms and conditions provided in this Agreement and the Distribution
Agreement, Vitalink and GranCare shall use all commercially reasonable efforts
to take, or cause to be taken, all other actions and do, or cause to be done,
all other things
B-43
<PAGE>
necessary, proper or appropriate under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement
and the Distribution Agreement, including, without limitation, (i) the filing
of Notification and Report Forms under the HSR Act with the Federal Trade
Commission (the "FTC") and the Antitrust Division of the Department of Justice
(the "Antitrust Division") and using all commercially reasonable efforts to
respond as promptly as practicable to all inquiries received from the FTC or
the Antitrust Division for additional information or documentation, (ii) the
obtaining of all necessary consents, approvals or waivers, and (iii) the
lifting of any legal bar to the Merger or the Distribution. Vitalink shall not
take any action which would cause GranCare to fail to perform its obligations
hereunder or under the Distribution Agreement. GranCare shall not take any
action which would cause Vitalink to fail to perform its obligations hereunder
or under the Distribution Agreement.
(b) GranCare shall use all commercially reasonable efforts to cause to be
delivered to Vitalink a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to Vitalink and customary in scope
and substance for such letters in connection with similar registration
statements.
(c) Vitalink shall use all commercially reasonable efforts to cause to be
delivered to GranCare a comfort letter of its independent auditors, dated a
date within two business days of the effective date of the Registration
Statement, in form reasonably satisfactory to GranCare and customary in scope
and substance for such letters in connection with similar registration
statements.
(d) 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 to cause
the Merger and the Distribution to be treated as consummated as of December
31, 1996 for financial reporting and tax purposes, including, without
limitation, the execution of a mutually acceptable escrow agreement and
conducting a closing pursuant to the terms of such escrow agreement; provided,
however, that nothing contained in this Section 5.07(d) shall constitute a
waiver of or limitation on any of the conditions contained in Articles VI,
VII, or VIII of this Agreement or any other rights of the parties contained
herein.
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-44
<PAGE>
(b) For a period of three years after the Effective Time, the Surviving
Corporation shall cause to be maintained in effect the current policies of
directors' and officers' liability insurance maintained by GranCare (provided
that the Surviving Corporation may substitute therefor policies of at least
the same coverage and amounts containing terms and conditions which are no
less advantageous) with respect to claims arising from facts or events which
occurred before the Effective Time; provided, however, that if the premiums
with respect to such insurance exceed 150% of the annual premiums paid as of
the date hereof by GranCare for such insurance, the Surviving Corporation
shall be obligated to purchase directors' and officers' liability insurance
with the maximum coverage as can be obtained at an annual premium equal to
150% of the annual premiums paid by GranCare as of the date hereof.
Section 5.11 Expenses. Except as set forth in Section 10.05, Vitalink, on
the one hand, and GranCare, on the other hand, shall bear their respective
expenses incurred in connection with the Merger and the Distribution,
including, without limitation, the preparation, execution and performance of
this Agreement, the Distribution Agreement and the transactions contemplated
hereby and all fees and expenses of investment bankers, finders, brokers,
agents, representatives, counsel and accountants, except that expenses
incurred in printing, mailing and filing (including without limitation, SEC
filing fees, fees related to any state securities or "blue sky" laws and stock
exchange listing application fees) the Proxy Statement, the Vitalink
Information Statement, the SNFCo Reorganization Document and the Registration
Statement shall be shared equally by GranCare and Vitalink; provided, however,
that SNFCo will bear one half of the premiums associated with the directors'
and officers' insurance referred to in Section 5.10(b) hereof and all of
GranCare's legal fees and expenses and the fees and expenses associated with
obtaining the fairness opinion referred to in Section 4.33 hereof.
Section 5.12 Stock Exchange Listings. Vitalink shall use all commercially
reasonable efforts to have the Vitalink Common Stock to be issued in
connection with the Merger authorized for quotation on NASDAQ or listed on the
New York Stock Exchange subject to notice of issuance.
Section 5.13 GranCare and Subsidiary Actions. (a) GranCare shall not take or
omit to take, and shall not cause or permit any of its subsidiaries to take or
omit to take, any action which would cause a breach of any representation or
warranty of GranCare contained in this Agreement or the Distribution Agreement
such that the Closing condition set forth in Section 7.01 would not be
satisfied.
(b) GranCare shall not and shall not authorize or permit any of its
Subsidiaries or any of its Subsidiaries' directors, officers, employees,
agents or representatives to amend, modify, waive or withdraw any term of, the
Distribution Agreement prior to the Effective Time which amendment,
modification, waiver or withdrawal could, directly or indirectly, reasonably
be expected to have an adverse effect on the business, operations, assets,
condition (financial or otherwise) or prospects of the Surviving Corporation
following the Merger without the prior written consent of Vitalink.
Section 5.14 Vitalink and Subsidiary Actions. Vitalink shall not take or
omit to take, and shall not cause or permit any of its subsidiaries to take or
omit to take, any action which would cause a breach of any representation or
warranty of Vitalink contained in this Agreement such that the Closing
condition set forth in Section 8.01 would not be satisfied.
Section 5.15 Environmental Matters. (a) GranCare shall promptly provide
Vitalink with any Environmental Notices it receives and shall make all filings
and take all actions necessary to materially comply with all Environmental
Laws, including but not limited to those applicable to the Merger and other
non-routine transactions contemplated hereby. GranCare shall keep Vitalink
informed of all actions taken in connection with the foregoing and all such
actions shall be on terms and conditions satisfactory to Vitalink whose
consent to such actions shall not be unreasonably withheld.
(b) Vitalink shall promptly provide GranCare with any Environmental Notices
it receives and shall make all filings and take all actions necessary to
materially comply with all Environmental Laws, including but not
B-45
<PAGE>
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) consummate a tender offer (the
"Tender Offer") for GranCare's outstanding 9 3/8% Senior Subordinated Notes
due 2005 (the "Notes") which Tender Offer shall include a consent (the
"Consent") to certain amendments to the Indenture, dated as of September 15,
1995, between GranCare and Marine Midland Bank, governing the Notes (the "Note
Indenture") including a deletion of certain covenants and a consent to the
Restructuring and the Merger (including the assumption by the Surviving
Corporation of GranCare's obligations under the Notes and the Note Indenture)
as well as the other transactions contemplated hereby, which Tender Offer and
Consent shall be in form and substance reasonably satisfactory to Vitalink,
and (iii) obtain all necessary consents, approvals, waivers or other
agreements by the holders of other indebtedness of GranCare to the assignment
to and the assumption by SNFCo of such indebtedness at the time of the
Distribution.
ARTICLE VI.
CONDITIONS TO THE OBLIGATIONS OF VITALINK AND GRANCARE
The respective obligations of each party to effect the Merger shall be
subject to the fulfillment at or prior to the Closing of each of the following
conditions:
Section 6.01 Registration Statements. The Registration Statement and the
SNFCo Registration Statement shall have become effective in accordance with
the provisions of the Securities Act. No stop order suspending the
effectiveness of the Registration Statement and the SNFCo Registration
Statement shall have been issued by the SEC and remain in effect. All
necessary state securities or blue sky authorizations for the Merger and the
Distribution shall have been received.
Section 6.02 Stockholder Approval. The approval of the Merger and the
Distribution, including the execution and performance of this Agreement, the
Distribution Agreement and all of the transactions contemplated hereby or
thereby shall be approved by a majority of the outstanding shares of GranCare
Common Stock cast at the Special Meeting or any adjournment thereof shall have
been obtained.
Section 6.03 Listings. The Vitalink Common Stock issuable in the Merger
shall have been authorized for quotation on NASDAQ or listed on the New York
Stock Exchange subject to official notice of issuance.
Section 6.04 Certain Proceedings. No writ, order, decree or injunction of a
court of competent jurisdiction or governmental entity shall have been entered
against Vitalink or GranCare which, and no proceedings therefor shall have
been threatened or commenced by any governmental entity which seek to,
prohibit or restrict the consummation of the Merger or the Distribution or
would otherwise restrict Vitalink's or the Surviving Corporation's exercise of
full rights to own and operate the Institutional Pharmacy Business of
GranCare.
Section 6.05 Consents and Approvals. All necessary consents and approvals
of, and notifications and disclosures to, and filings and registrations with,
any United States or any other governmental authority or any other third party
required for the consummation of the Merger and the other transactions
contemplated hereby (including without limitation any consents, approvals,
notifications, disclosures, filings and registrations required
B-46
<PAGE>
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.
Section 6.09 Existing Indebtedness. The Debentures shall have been called
for redemption in accordance with the Indenture, GranCare shall have obtained
the Consent in form and substance reasonably satisfactory to GranCare and
Vitalink and GranCare shall have obtained the Consent and consummated the
Tender Offer at a price not in excess of $1,090 per $1,000 principal amount of
Notes.
ARTICLE VII.
CONDITIONS TO THE OBLIGATIONS OF VITALINK
The obligation of Vitalink to effect the Merger and to perform its other
obligations to be performed at or subsequent to the Closing shall be subject
to the fulfillment at or prior to the Closing of the following additional
conditions, any one or more of which may be waived by Vitalink:
Section 7.01 Representations and Warranties True. The representations and
warranties of GranCare contained herein and in the Distribution Agreement
(without regard to any materiality exceptions or provisos contained in this
Agreement or the Distribution Agreement) shall be true and correct in all
respects on the date of this Agreement, the date of the Distribution Agreement
and the Closing Date as though such representations and warranties were made
at and on such date, except (i) for those untruths or inaccuracies which would
not, singly or in the aggregate, reasonably be expected to have a GranCare
Material Adverse Effect and (ii) for changes expressly permitted or
contemplated by this Agreement or the Distribution Agreement.
B-47
<PAGE>
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.
Section 7.05 Pharmacy Financial Statements. GranCare shall have delivered
audited financial statements of the Institutional Pharmacy Business audited by
GranCares existing independent auditors which financial statements do not
reflect (i) reductions in the carrying values of assets, or increases in the
carrying values of the liabilities, as at May 31, 1996, of the Institutional
Pharmacy Business on a pro forma basis, in the aggregate of more than
$2,000,000 as compared to such carrying values as shown on the balance sheet
of the Institutional Pharmacy Business as at May 31, 1996 included in the
GranCare Disclosure Statement, (ii) a decrease of more than $500,000 in
earnings before interest, taxes, depreciation and amortization (as such terms
are defined in generally accepted accounting principles consistently applied
by GranCare, "EBITDA") for the twelve-month period ending December 31, 1995,
or a decrease of more than $250,000 in the EBITDA for the five-month period
ending May 31, 1996, on a pro forma basis as compared to the EBITDAs for the
same periods shown on the unaudited statements of income included in the
GranCare Disclosure Statement.
Section 7.06 Auditors' Letter. Vitalink shall have received from GranCare's
independent auditors a letter dated the Closing Date confirming the matters
set forth in the letter contemplated by Section 5.07(b).
Section 7.07 Letter of Credit. Vitalink shall have received an irrevocable
standby letter of credit issued by a bank reasonably satisfactory to Vitalink
as support for Vitalink entering into a guarantee arrangement concerning
Health and Rehabilitation Properties Trust in an amount of not less than
$15,000,000 which letter of credit shall be in form and substance satisfactory
to Vitalink.
ARTICLE VIII.
CONDITIONS TO THE OBLIGATIONS OF GRANCARE
The obligations of GranCare under this Agreement to effect the Merger shall
be subject to the fulfillment on or before the Closing Date of each of the
following additional conditions, any one or more of which may be waived by
GranCare:
Section 8.01 Representations and Warranties True. The representations and
warranties of Vitalink contained herein (without regard to any materiality
exceptions or provisos therein) shall be true and correct in all material
respects on the date of this Agreement and the Closing Date as though such
representations and warranties were made at and on such date, except (i) for
those untruths or inaccuracies which would not, singly or in the aggregate,
reasonably be expected to have an Vitalink Material Adverse Effect and (ii)
for changes permitted or contemplated by this Agreement.
Section 8.02 Performance. Vitalink shall have performed and complied in all
material respects with all agreements, obligations and conditions required by
this Agreement to be performed or complied with by it on or prior to the
Closing Date except for those failures to so perform or comply which would
not, singly or in the aggregate, reasonably be expected to have an Vitalink
Material Adverse Effect.
B-48
<PAGE>
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
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.
B-49
<PAGE>
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.
Section 10.02 Termination by Vitalink. This Agreement may be terminated and
the Merger may be abandoned by action of the Board of Directors of Vitalink,
at any time prior to the Effective Time, before or after the approval by the
stockholders of Vitalink, if (a) GranCare shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles
I and V of this Agreement to be complied with or performed by GranCare at or
prior to such date of termination, (b) there exists a breach or breaches of
any representation or warranty of GranCare contained in this Agreement or the
Distribution Agreement such that the Closing condition set forth in Section
7.01 would not be satisfied; provided, however, that if such breach or
breaches are capable of being cured prior to the Effective Time, such breaches
shall not have been cured within 15 calendar days of delivery to GranCare of
written notice of such breach or breaches, (c) GranCare shall have furnished
or disclosed non-public information to, or commenced negotiations with, a
third party with respect to a GranCare Acquisition Transaction or shall have
resolved to do either of the foregoing and publicly disclosed such resolution,
(d) the Board of Directors of GranCare shall have withdrawn, changed, modified
in any manner or taken action inconsistent with its recommendation of the
Distribution Agreement, the Distribution, this Agreement, the Merger or the
other transactions contemplated hereby or thereby or shall have resolved to do
any of the foregoing and publicly disclosed such resolution; or (e) a
definitive agreement with respect to an Vitalink Business Combination
Transaction (as hereinafter defined) shall have been negotiated and Vitalink's
Board of Directors (i) shall have been advised (A) in writing by its
investment banker that such Vitalink Business Combination Transaction (as
hereinafter defined) would yield a higher value to Vitalink's stockholders
than would the Merger and the other party to such agreement is financially
capable of consummating such Vitalink Business Combination Transaction (as
hereinafter defined) and (B) by the written opinion of outside counsel to
Vitalink that failure to terminate this Agreement would be inconsistent with
such Board's fiduciary duties to the stockholders of Vitalink, and (ii) after
weighing such advice, shall determine in good faith that failure to terminate
this Agreement would be inconsistent with such Board's fiduciary duties;
provided, however, that five business days prior written notice shall have
been given to GranCare (which notice shall include the material terms and
conditions and financing arrangements of, and the identity of the third party
proposing, the Vitalink Business Combination Transaction (as hereinafter
defined)) and that prior to terminating this Agreement Vitalink shall have
made all the Vitalink Payments required by the terms of Section 10.05(c)
hereof.
Section 10.03 Termination by GranCare. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval by the stockholders of GranCare, by action of the Board of
the Directors of GranCare, if (a) Vitalink shall have failed to comply in any
material respect with any of the covenants or agreements contained in Articles
I and V of this Agreement to be complied with or performed by Vitalink at or
prior to such date of termination, (b) there exists a breach or breaches of
any representation or warranty of Vitalink contained in this Agreement such
that the Closing condition set forth in Section 8.01 would not be satisfied;
provided, however, that if such breach or breaches are capable of being cured
prior to the Effective Time, such breaches shall not be cured within 15
calendar days of delivery to Vitalink of written notice of such breach or
breaches, (c) Vitalink shall have furnished or disclosed non-public
information to, or commenced negotiations with, a third party with respect to
a Vitalink Acquisition Transaction or shall have resolved to do either of the
foregoing and publicly disclosed such resolution or (d) the Board of Directors
of Vitalink shall have withdrawn, changed, modified in any manner or taken
action inconsistent with its recommendation of the Distribution Agreement, the
Distribution, this Agreement, the Merger or the other transactions
contemplated hereby or thereby or shall have resolved to do any of the
foregoing and publicly disclosed such resolution, (e) a definitive agreement
with respect to a GranCare Business Combination Transaction (as hereinafter
defined) shall have been negotiated and GranCare's Board of Directors (i)
shall have been advised (A) in writing by its investment banker that such
GranCare Business Combination Transaction (as
B-50
<PAGE>
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 terms of Section 10.05(b) hereof, or (f) Parent shall have
breached its obligations pursuant to Section 1.2 of the Voting Agreement.
Section 10.04 Procedure for Termination. In the event of termination and
abandonment of the Merger by Vitalink or GranCare pursuant to this Article X,
written notice thereof shall forthwith be given to the other.
Section 10.05 Effect of Termination and Abandonment. (a) In the event of
termination of this Agreement and abandonment of the Merger pursuant to this
Article X, no party hereto (or any of its directors or officers) shall have
any liability or further obligation to any other party to this Agreement,
except as provided in Section 5.11 and this Section 10.05 and except that
nothing herein shall relieve any party from liability for any breach of this
Agreement.
(b) In the event of (i) a termination of this Agreement pursuant to Section
10.01(b), (c) or (d) and if prior thereto any person shall have made a bona
fide proposal concerning a GranCare Business Combination Transaction (as
hereinafter defined) or (ii) any termination of this Agreement by Vitalink
pursuant to Section 10.02(a), (b), (c) or (d) or any termination of this
Agreement by GranCare pursuant to Section 10.03(e), then GranCare shall
promptly pay Vitalink by wire transfer of immediately available funds to an
account specified by Vitalink up to $2.5 million for all documented fees and
expenses incurred by Vitalink (including the fees and expenses of counsel,
accountants, consultants and advisors) in connection with this Agreement and
the transactions contemplated hereby. In the event of a termination of this
Agreement pursuant to Section 10.03(e), GranCare shall be obligated to pay
Vitalink an additional fee of $17.5 million (the "GranCare Termination
Payment") payable prior to and as a condition of such termination as follows:
(i) $7.5 million promptly by wire transfer of immediately available funds to
an account specified by Vitalink and (ii) $10 million by either, at GranCare's
discretion, (x) delivery to Vitalink of an irrevocable letter of credit for
$10 million or (y) deposit of $10 million in immediately available funds to an
escrow, in the case of each of clause (x) and (y) on terms satisfactory to
Vitalink with payment of such $10 million to be made to Vitalink in
immediately available funds immediately prior to and as a condition of
effecting the GranCare Business Combination Transaction contemplated by such
definitive agreement (the amount of such payments and the manner specified
herein for making such payments, the "GranCare Payments"). To the extent a
GranCare Termination Payment has not already become payable and been paid and
if, prior to any termination pursuant to Section 10.01(b), (c) or (d) or
10.02(a), (b), (c) or (d), any person shall have submitted a bona fide
proposal concerning a GranCare Business Combination Transaction and within
eighteen months after the termination of this Agreement, GranCare or any of
its Subsidiaries proposes to enter into a definitive agreement with a third
party with respect to a GranCare Business Combination Transaction or a
GranCare Business Combination Transaction is proposed to be effected, then
GranCare, prior to entering into any such definitive agreement or any such
GranCare Business Combination Transaction being effected, shall be obligated
to pay Vitalink an additional fee of $17.5 million payable as follows: (i) in
the case of the proposed execution of a definitive agreement for a GranCare
Business Combination Transaction, prior to and as a condition of entering into
such definitive agreement, GranCare shall have made all the GranCare Payments
and (ii) in the case of a GranCare Business Combination Transaction proposed
to be effected without any agreement, prior to and as a condition of effecting
such GranCare Business Combination Transaction, GranCare shall promptly pay
Vitalink $17.5 million by wire transfer of immediately available funds to an
account specified by Vitalink. As used in this Section 10.05, the term
"GranCare Business Combination
B-51
<PAGE>
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
Distribution Agreement and the transactions contemplated hereby or thereby. In
the event of a termination of this Agreement pursuant to Section 10.02(e)
Vitalink shall be obligated to pay GranCare an additional fee of $17.5 million
(the "Vitalink Termination Payment") payable prior to and as a condition of
such termination as follows: (i) $7.5 million promptly by wire transfer of
immediately available funds to an account specified by GranCare, (ii) $10
million by either, at Vitalink's discretion, (x) delivery to GranCare of an
irrevocable letter of credit for $10 million or (y) deposit of $10 million in
immediately available funds to an escrow, in the case of each of clause (x)
and (y) on terms satisfactory to GranCare with payment of such $10 million to
be made to GranCare in immediately available funds immediately prior to and as
a condition of effecting the Vitalink Business Combination Transaction
contemplated by such definitive agreement (the amount of such payments and the
manner specified herein for making such payments, the "Vitalink Payments"). To
the extent an Vitalink Termination Payment has not already become payable and
been paid and if, prior to any termination pursuant to Section 10.01(b), (c)
or (d) or 10.03(a), (b), (c), (d) or (f), any person shall have submitted a
bona fide proposal concerning an Vitalink Business Combination Transaction and
within eighteen months after the termination of this Agreement, Vitalink or
any of its Subsidiaries proposes to enter into a definitive agreement with a
third party with respect to a Vitalink Business Combination Transaction or a
Vitalink Business Combination Transaction is proposed to be effected, then
Vitalink, prior to entering into any such definitive agreement or any such
Vitalink Business Combination Transaction being effected, shall be obligated
to pay GranCare an additional fee of $17.5 million payable as follows: (i) in
the case of the proposed execution of a definitive agreement for an Vitalink
Business Combination Transaction, prior to and as a condition of entering into
such definitive agreement, Vitalink shall have made all the Vitalink Payments
and (ii) in the case of an Vitalink Business Combination Transaction proposed
to be effected without any agreement, prior to and as a condition of effecting
such Vitalink Business Combination Transaction, Vitalink shall promptly pay
GranCare $17.5 million by wire transfer of immediately available funds to an
account specified by GranCare. As used in this Section 10.05, the term
"Vitalink Business Combination Transaction" shall mean any of the following
involving Vitalink or any Subsidiary that is material to the business, results
of operation, prospects or financial condition of Vitalink and its
Subsidiaries taken as a whole: (1) any merger, consolidation, share exchange,
business combination or other similar transaction (other than the Merger); (2)
any sale, lease, exchange, transfer or other disposition of 25% or more of the
assets of Vitalink and its Subsidiaries, taken as a whole, in a single
transaction or series of transactions; or (3) the acquisition by a person or
entity, or any "group" (as such term is defined under Section 13(d) of the
Exchange Act and the rules and regulations thereunder) of beneficial ownership
of 33 1/3% or more of Vitalink Common Stock, whether by tender offer, exchange
offer or otherwise.
B-52
<PAGE>
ARTICLE XI.
DEFINITIONS
Section 11.01 Terms Defined in This Agreement. The following capitalized
terms used herein shall have the meanings ascribed in the indicated sections.
<TABLE>
<S> <C>
Affiliates................................................. 4.07
Agreement.................................................. First Paragraph
Amendment.................................................. 1.03
Antitrust Division......................................... 5.07
Average Market Value....................................... 2.04
California Act............................................. 1.01
CERCLA..................................................... 3.27
Certificate of Merger...................................... 1.02
Certificates............................................... 2.02
Certified Agreement........................................ 1.02
Closing.................................................... 9.01
Closing Consideration...................................... 2.01
Closing Date............................................... 9.01
COBRA...................................................... 3.26
Code....................................................... 3.25
Consent.................................................... 5.16
Constituent Corporations................................... First Paragraph
Debenture.................................................. 5.16
Delaware Act............................................... 1.01
Dissenting Shares.......................................... 2.01
Distribution............................................... Recitals
Distribution Agreement..................................... Recitals
Effective Time............................................. 1.02
Environment................................................ 3.27
Environmental Authorizations............................... 3.27
Environmental Laws......................................... 3.27
Environmental Notice....................................... 3.27
ERISA...................................................... 3.26
ERISA Affiliate............................................ 3.26
Exchange Act............................................... 3.08
Exchange Ratio............................................. 2.01
Foreign Plan............................................... 3.26
FTC........................................................ 5.07
GranCare................................................... First Paragraph
GranCare Acquisition Transaction........................... 5.03
GranCare Balance Sheet..................................... 4.19
GranCare Business Combination Transaction.................. 10.05
GranCare Common Stock...................................... 2.01
GranCare Compensation and Benefit Plans.................... 4.03
GranCare Contract.......................................... 4.03
GranCare Disclosure Statement.............................. Article IV
GranCare Licenses.......................................... 4.08
GranCare Material Adverse Effect........................... 4.01
GranCare Option Plans...................................... 4.15
GranCare Options........................................... 4.15
</TABLE>
B-53
<PAGE>
<TABLE>
<S> <C>
GranCare Payments.......................................... 10.05
GranCare Pension Benefit Plans............................. 4.27
GranCare Permitted Encumbrance............................. 4.19
GranCare Pharmacy Contracts................................ 4.32
GranCare Preferred Stock................................... 4.15
GranCare SEC Reports....................................... 4.11
GranCare Termination Payment............................... 10.05
GranCare Welfare Plans..................................... 4.27
Hazardous Material......................................... 3.27
HSR Act.................................................... 3.03
Indenture.................................................. 5.16
Institutional Pharmacy Business............................ Recitals
Intellectual Property Rights............................... 3.24
IRS........................................................ 3.26
Merger..................................................... 1.01
Multiemployer Plan......................................... 3.26
NASDAQ..................................................... 2.02
Note Indenture............................................. 5.16
Parent..................................................... Recitals
PBGC....................................................... 3.26
Pharmacy Agreement......................................... 4.32
Pharmacy Subsidiaries...................................... 4.01
Proxy Statement............................................ 4.09
Registration Statement..................................... 3.08
Restructuring.............................................. Recitals
SEC........................................................ 3.08
Securities Act............................................. 3.08
Shareholders Agreement..................................... 8.02
Skilled Nursing Assets..................................... Recitals
Skilled Nursing Business................................... 4.01
Skilled Nursing Liabilities................................ Recitals
Special Meeting............................................ 1.05
SNFCo...................................................... Recitals
SNFCo Registration Document................................ 4.09
SNFCo Stock................................................ Recitals
Stockholder Approval....................................... 1.05
Subsidiary................................................. 12.09
Surviving Corporation...................................... 1.01
Tax Returns................................................ 3.25
Taxes...................................................... 3.25
Tender Offer............................................... 5.16
Vitalink................................................... First Paragraph
Vitalink Acquisition Transaction........................... 5.04
Vitalink Balance Sheet..................................... 3.18
Vitalink Business Combination Transaction.................. 10.05
Vitalink Common Stock...................................... 2.01
Vitalink Compensation and Benefit Plans.................... 3.03
Vitalink Contracts......................................... 3.03
Vitalink Disclosure Statement.............................. Article III
Vitalink Information Statement............................. 3.08
Vitalink Licenses.......................................... 3.07
Vitalink Material Adverse Effect........................... 3.01
</TABLE>
B-54
<PAGE>
<TABLE>
<S> <C>
Vitalink Option Plans............................................. 3.14
Vitalink Options.................................................. 3.14
Vitalink Payments................................................. 10.05
Vitalink Pension Benefit Plans.................................... 3.26
Vitalink Permitted Encumbrance.................................... 3.18
Vitalink Pharmacy Contracts....................................... 3.31
Vitalink Preferred Stock.......................................... 3.14
Vitalink SEC Reports.............................................. 3.10
Vitalink Termination Payment...................................... 10.05
Vitalink Welfare Plans............................................ 3.26
Voting Agreement.................................................. Recitals
</TABLE>
ARTICLE XII.
MISCELLANEOUS
Section 12.01 Amendment and Modification. Subject to applicable law, this
Agreement may be amended, modified or supplemented only by written agreement
of Vitalink and GranCare at any time prior to the Effective Time with respect
to any of the terms contained herein; provided, however, that after this
Agreement is adopted by the stockholders of GranCare, no such amendment or
modification shall change the amount or form of the Closing Consideration.
Section 12.02 Waiver of Compliance; Consents. Any failure of Vitalink, on
the one hand, or GranCare, on the other hand, to comply with any obligation,
covenant, agreement or condition herein may be waived by GranCare or Vitalink,
respectively, only by a written instrument signed by the party granting such
waiver, but such waiver or failure to insist upon strict compliance with such
obligation, covenant, agreement or condition shall not operate as a waiver of,
or estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto,
such consent shall be given in writing in a manner consistent with the
requirements for a waiver of compliance as set forth in this Section 12.02.
Section 12.03 Survivability; Investigations. The respective representations
and warranties of Vitalink and GranCare contained herein or in any
certificates or other documents delivered prior to or at the Closing shall not
be deemed waived or otherwise affected by any investigation made by any party
hereto and shall not survive the Closing.
Section 12.04 Notices. All notices and other communications hereunder shall
be in writing and shall be delivered personally, by next-day courier or mailed
by registered or certified mail (return receipt requested) with first class
postage prepaid, or telecopied with written machine generated confirmation of
receipt, to the parties at the addresses specified below (or at such other
address for a party as shall be specified by like notice; provided, that
notices of a change of address shall be effective only upon receipt thereof).
Any such notice shall be effective upon receipt, if personally delivered or
telecopied, one day after delivery to a courier for next-day delivery, or
three days after mailing, if deposited in the U.S. mail, first class postage
prepaid.
B-55
<PAGE>
(a) if to GranCare, to
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
Telecopy: (770) 698-8199
Attention: Evrett W. Benton, Esq.
with a copy to
Powell, Goldstein, Frazer & Murphy
16th floor
191 Peachtree Street, N.E.
Atlanta, GA 30303
Telecopy: (409) 572-5958
Attention: Richard H. Miller, Esq.
(b) if to Vitalink, to
Vitalink Pharmacy Services, Inc.
10750 Columbia Pike
Silver Spring, MD 20901
Telecopy: (301) 905-4007
Attention: James H. Rempe, Esq.
with a copy to
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Telecopy: (212) 269-5420
Attention: W. Leslie Duffy, Esq.
Section 12.05 Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned by any
of the parties hereto without the prior written consent of the other parties,
nor is this Agreement intended to confer any rights or remedies hereunder upon
any other person except the parties hereto and, with respect to Section 5.10,
the officers and directors of GranCare.
Section 12.06 Governing Law. Except as the laws of the State of California
are by their terms applicable, this Agreement shall be governed by the laws of
the State of Delaware (regardless of the laws that might otherwise govern
under applicable Delaware principles of conflicts of law) as to all matters,
including but not limited to matters of validity, construction, effect,
performance and remedies.
Section 12.07 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 12.08 Severability. In case any one or more of the provisions
contained in this Agreement should be invalid, illegal or unenforceable in any
respect against a party hereto, the validity, legality and enforceability of
the remaining provisions contained herein shall not in any way be affected or
impaired thereby and such invalidity, illegality or unenforceability shall
only apply as to such party in the specific jurisdiction where such judgment
shall be made.
B-56
<PAGE>
Section 12.09 Interpretation. The article and section headings contained in
this Agreement are solely for the purpose of reference, are not part of the
agreement of the parties and shall not in any way affect the meaning or
interpretation of this Agreement. As used in this Agreement, (i) the term
"person" shall mean and include an individual, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof; and (ii) the term "Subsidiary" of any specified
corporation shall mean any corporation of which a majority of the outstanding
securities having ordinary voting power to elect a majority of the board of
directors is directly or indirectly beneficially owned by such specified
corporation or any other person of which a majority of the equity interests
therein is, directly or indirectly, owned by such specified corporation.
Section 12.10 Entire Agreement. This Agreement, including the exhibits
hereto and the documents and instruments referred to herein (including the
Confidentiality Agreement dated May 26, 1996 between Vitalink and GranCare),
embodies the entire agreement and understanding of the parties hereto in
respect of the subject matter contained herein and supersedes all prior
agreements and the understandings between the parties with respect to such
subject matter. There are no representations, promises, warranties, covenants,
or undertakings, other than those expressly set forth or referred to herein
and therein.
IN WITNESS WHEREOF, Vitalink and GranCare have caused this Agreement to be
signed by their respective duly authorized officers as of the date first above
written.
VITALINK PHARMACY SERVICES, INC.
By: /s/ Donald C. Tomasso
----------------------------------
Name: Donald C. Tomasso
Title: Chairman and Chief
Executive Officer
GRANCARE, INC.
By: /s/ Gene E. Burleson
----------------------------------
Name: Gene E. Burleson
Title: President
B-57
<PAGE>
ANNEX C
AMENDED AND RESTATED
AGREEMENT AND PLAN OF DISTRIBUTION
BY AND BETWEEN
GRANCARE, INC.
AND
NEW GRANCARE, INC.
DATED AS OF
SEPTEMBER 3, 1996
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE I. Definitions.................................................... 1
Section 1.1. General................................................. 1
Section 1.2. Incorporation of Merger Agreement Definitions........... 6
Section 1.3. References; Interpretation.............................. 6
ARTICLE II. Distribution and Other Transactions; Certain Covenants........ 6
Section 2.1. Transfer of Assets and Liabilities...................... 6
(a)Certain Transactions................................. 6
(b)Stock Dividend to GranCare........................... 6
(c)Charters; Bylaws..................................... 6
(d)Directors; Officers.................................. 6
(e)Certain Licenses and Permits......................... 6
(f)Transfer of Agreements............................... 10
(g)Services Agreement................................... 10
(h)Delivery of Shares to Transfer Agent................. 10
(i)Other Transactions................................... 10
Section 2.2. Certain Financial and Other Arrangements................ 8
(a)Intercompany Accounts................................ 8
(b)Operations in Ordinary Course........................ 8
Section 2.3. Assumption of Indebtedness; Allocation of Expenses...... 8
Section 2.4. Assumption and Satisfaction of Liabilities; Management
Responsibility for Shared Liabilities; Obligations,
Rights and Assets Relating to Shared Liabilities....... 9
Section 2.5. Resignations............................................ 10
Section 2.6. Further Assurances...................................... 10
Section 2.7. No Representations or Warranties........................ 11
Section 2.8. Guarantees.............................................. 11
Section 2.9. Witness Services........................................ 11
Section 2.10. Certain Post-Distribution Transactions.................. 12
Section 2.11. Directors and Officers Liability Insurance.............. 12
Section 2.12. Insurance............................................... 12
Section 2.13. Ancillary Agreements.................................... 12
ARTICLE III. Indemnification.............................................. 12
Section 3.1. Indemnification by GranCare............................. 12
Section 3.2. Indemnification by SNFCo................................ 12
Section 3.3. Limitations on Indemnification Obligations.............. 13
Section 3.4. Procedures for Indemnification.......................... 13
Section 3.5. Indemnification Payments................................ 14
Section 3.6. Other Adjustments....................................... 14
Section 3.7. Survival of Indemnities................................. 14
ARTICLE IV. Access to Information......................................... 15
Section 4.1. Provision of Corporate Records.......................... 15
Section 4.2. Access to Information................................... 15
Section 4.3. Reimbursement; Other Matters............................ 15
Section 4.4. Confidentiality......................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE V. Insurance..................................................... 16
Section 5.1. Policies and Rights Included Within Assets............. 16
Section 5.2. Post-Time of Distribution Claims Against SNFCo......... 16
Section 5.3. Administration; Other Matters.......................... 17
(b)Allocation of Insurance Proceeds.................... 17
Section 5.4. Agreement for Waiver of Conflict and Shared Defense.... 18
Section 5.5. Cooperation............................................ 18
ARTICLE VI. Dispute Resolution........................................... 18
ARTICLE VII. Miscellaneous............................................... 19
Section 7.1. Complete Agreement; Construction....................... 19
Section 7.2. Counterparts........................................... 19
Section 7.3. Survival of Agreements................................. 19
Section 7.4. Notices................................................ 19
Section 7.5. Waivers................................................ 19
Section 7.6. Amendments............................................. 19
Section 7.7. Assignment............................................. 20
Section 7.8. Successors and Assigns................................. 20
Section 7.9. Termination............................................ 20
Section 7.10. Subsidiaries........................................... 20
Section 7.11. Third Party Beneficiaries.............................. 20
Section 7.12. Attorney Fees.......................................... 20
Section 7.13. Title and Headings..................................... 20
Section 7.14. Schedules.............................................. 20
Section 7.15. Specific Performance................................... 20
Section 7.16. Governing Law.......................................... 21
Section 7.17. Severability........................................... 21
</TABLE>
ii
<PAGE>
AMENDED AND RESTATED AGREEMENT AND PLAN OF DISTRIBUTION
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF DISTRIBUTION (the
"Distribution Agreement"), dated as of September 3, 1996, by and between
GranCare, Inc., a California corporation (the "Company" or "GranCare"), and
New GranCare, Inc., a Delaware corporation ("SNFCo"), successor by reason of a
merger of GCI Properties, Inc., a California corporation, with and into SNFCo.
WITNESSETH:
WHEREAS, the Company and Vitalink Pharmacy Services, Inc., a Delaware
corporation ("Vitalink"), previously entered into an Agreement and Plan of
Merger, dated as of September 3, 1996 as amended, (the "Merger Agreement"),
providing for the merger (the "Merger") of the Company's Institutional
Pharmacy Business with Vitalink;
WHEREAS, prior to the Effective Time (as defined in the Merger Agreement) of
the Merger the Company intends to transfer its Skilled Nursing Business (as
hereinafter defined) to SNFCo in exchange for the issuance of shares of SNFCo
Common Stock;
WHEREAS, immediately prior to the Effective Time of the Merger, the
Company's Board of Directors, subject to the approval of the Company's
shareholders, expects to complete the Distribution (as hereinafter defined);
and
WHEREAS, the purpose of the Distribution is to make possible the Merger by
divesting the Company of the Skilled Nursing Business, with which Vitalink is
unwilling to merge, and this Distribution Agreement sets forth the various
agreements between GranCare and SNFCo relating to the separation of the
Institutional Pharmacy Business from the Skilled Nursing Business.
NOW, THEREFORE, in consideration of the premises and of the representations,
warranties, covenants and agreements set forth herein, and intending to be
legally bound (subject to shareholder approval), the parties hereto hereby
agree as follows:
ARTICLE I.
Definitions
Section 1.1. General. As used in this Agreement, the following terms shall
have the following meanings (such meanings to be equally applicable to both
the singular and plural forms of the terms defined):
"Action" shall mean any action, suit, claim, arbitration, inquiry,
proceeding or investigation by or before any court, any governmental or other
regulatory or administrative agency, body or commission or any arbitration
tribunal.
"Affiliate" shall mean, when used with respect to a specified Person,
another Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with
the Person specified.
"Ancillary Agreements" shall mean all of the written agreements,
instruments, understandings, assignments or other arrangements (other than
this Distribution Agreement and the Merger Agreement) entered into in
connection with the transactions contemplated hereby, including, without
limitation, the Transfer and Assumption Instruments, the Employee Benefits
Matters Agreement, the Tax Allocation Agreement, the Interim Services
Agreement and the Non-competition Agreement; provided, however, that in no
event shall any agreement constitute an Ancillary Agreement unless consented
to by each of GranCare, SNFCo and Vitalink.
C-1
<PAGE>
"Assignee" shall have the meaning as defined in Section 2.1(f)(ii).
"Claims Administration" shall mean the processing of claims made under the
Company Policies, including, without limitation, the reporting of claims to
the insurance carriers, as well as the management and defense of claims and
providing for appropriate releases upon settlement of claims.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
Treasury regulations promulgated thereunder, including any successor
legislation.
"Commission" shall mean the Securities and Exchange Commission.
"Company Policies" shall mean all Policies which are or at any time were
maintained by or on behalf of or for the benefit or protection of GranCare or
SNFCo or any of their respective predecessors or Subsidiaries which relate to
any Shared Liability, the Skilled Nursing Business or the Institutional
Pharmacy Business, or current or past directors, officers, employees or agents
of any of the foregoing businesses.
"D&O Insurance Policies" shall have the meaning as defined in Section 2.11.
"Distribution" shall mean the distribution on the Distribution Date to
holders of record of shares of GranCare Common Stock as of the Distribution
Record Date of the SNFCo Common Stock owned by GranCare on the basis of one
share of SNFCo Common Stock for each outstanding share of GranCare Common
Stock.
"Distribution Agreement Dispute" shall have the meaning as defined in
Article VI.
"Distribution Date" shall mean such date as may hereafter be determined by
GranCare's Board of Directors as the date of which the Distribution shall be
effected.
"Distribution Record Date" shall mean such date as may hereafter be
determined by GranCare's Board of Directors as the record date for determining
the shareholders of GranCare entitled to receive the Distribution.
"Employee Benefits Matters Agreement" shall mean the Agreement Respecting
Employee Benefit Matters dated as of the Time of Distribution among GranCare
and SNFCo setting forth the manner in which various employee benefit
entitlements will be treated in connection with the Distribution.
"GranCare Common Stock" shall mean the common stock, without par value per
share, of GranCare.
"GranCare Disclosure Statement" shall mean the Disclosure Statement
delivered by GranCare to Vitalink contemporaneously with GranCare's execution
and delivery of the Merger Agreement.
"GranCare Indemnitees" shall mean GranCare, each Pharmacy Subsidiary, the
directors and officers of GranCare and the Pharmacy Subsidiaries and each of
the heirs, executors, successors and assigns of any of the foregoing.
"HRPT" shall mean Health and Retirement Properties Trust
"HRPT Consent" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"Indemnifiable Losses" shall mean any and all losses, liabilities, claims,
damages, demands, reasonable costs or expenses (including, without limitation,
attorneys' fees and any and all out-of-pocket expenses) whatsoever reasonably
incurred in investigating, preparing for or defending against any Actions or
potential Actions.
C-2
<PAGE>
"Indemnifying Party" shall have the meaning as defined in Section 3.3.
"Indemnitee" shall have the meaning as defined in Section 3.3.
"Institutional Pharmacy Business" shall mean the business of providing
pharmaceutical supplies and services primarily to health care institutions
such as the Skilled Nursing Business conducted by GranCare and its Pharmacy
Subsidiaries.
"Institutional Pharmacy Assets" shall mean, collectively, all the rights and
assets of GranCare and its Subsidiaries that are used primarily in the conduct
of the Institutional Pharmacy Business, including, without limitation, (i) the
assets included on the balance sheet of GranCare as of May 31, 1996, prepared
on a pro forma basis giving effect to the Distribution and included in the
GranCare Disclosure Statement attached to the Merger Agreement, and not
disposed of in the ordinary course of business prior to the Time of
Distribution, (ii) any assets acquired by GranCare or any of its Subsidiaries
that are used primarily in the conduct of the Institutional Pharmacy Business
from May 31, 1996, to the Time of Distribution and not disposed of in the
ordinary course of business, (iii) all the outstanding capital stock or other
interests of GranCare in the Subsidiaries listed on Schedule 1.1(b), (iv)
rights arising pursuant to the Company Policies to the extent set forth in
Article V hereof and (v) the cash proceeds received upon exercise prior to the
Time of Distribution of any stock options to acquire GranCare Common Stock.
Notwithstanding the foregoing, the Institutional Pharmacy Assets shall not
include any assets retained by SNFCo or any of the SNFCo Subsidiaries pursuant
to the terms of any Ancillary Agreement.
"Institutional Pharmacy Liabilities" shall mean, collectively, (i) the
Liabilities included on the balance sheet of GranCare as of May 31, 1996,
prepared on a pro forma basis giving affect to the Distribution and included
in the GranCare Disclosure Statement attached to the Merger Agreement, and any
Liabilities of the same kind or nature incurred by GranCare or any of its
Subsidiaries relating primarily to or arising primarily in connection with the
conduct of the Institutional Pharmacy Business from May 31, 1996, to the Time
of Distribution other than indebtedness for borrowed money except as may
otherwise be provided for elsewhere herein, (ii) up to $10.0 million payable
to HRPT in order to obtain HRPT's consent with respect to the transactions
contemplated by this Agreement and the Merger Agreement (the "HRPT Consent"),
(iii) all the Liabilities of GranCare and the Pharmacy Subsidiaries, if any,
under this Distribution Agreement and any of the Ancillary Agreements, (iv)
all the Liabilities of GranCare or its Subsidiaries (whenever arising whether
prior to, at or following the Time of Distribution) to the extent the
Liabilities arise out of or in connection with or otherwise relate primarily
to (a) the management or conduct before or after the Time of Distribution of
the Institutional Pharmacy Business or (b) any properties owned, leased,
operated or otherwise used primarily in the conduct of the Institutional
Pharmacy Business, (v) the obligation of GranCare to promptly pay for any
Senior Subordinated Notes tendered pursuant to the Tender Offer (including any
premium related thereto) and to discharge the obligation arising in connection
with any Senior Subordinated Notes not so tendered, (vi) the indebtedness
outstanding at the Time of Distribution that is listed on Schedule 2.3 (the
Liabilities listed in clauses (i) through (vi) above being collectively
referred to as the "True GranCare Liabilities"), (vii) one-half ( 1/2) of the
amount of all Shared Liabilities unless otherwise allocated in this
Distribution Agreement and (viii) Liabilities as a result of the breach of
Vitalink's representations and warranties set forth in Section 3.08 of the
Merger Agreement. Notwithstanding the foregoing, Institutional Pharmacy
Liabilities shall not include any Liabilities arising in connection with
amounts payable to Long Term Care Pharmaceutical Services Corporation I and
Long Term Care Pharmaceutical Services Corporation III (collectively, "LTC")
by GranCare in excess of $2.5 million, ("LTC Liabilities") pursuant to the
terms of an agreement between LTC and GranCare (the "LTC Agreement").
"Insurance Administration" shall mean, with respect to each Company Policy,
the accounting for Insurance Proceeds, premiums, defense costs, indemnity
payments, deductibles and retentions, as appropriate, under the terms and
conditions of each of the Company Policies; and the report to excess insurance
carriers of any losses or claims which may cause the per-occurrence, per claim
or aggregate limits of any Company Policy to be exceeded, and the distribution
of Insurance Proceeds as contemplated by this Distribution Agreement.
C-3
<PAGE>
"Insurance Proceeds" shall mean those monies (i) received by an insured from
an insurance carrier or (ii) paid by an insurance carrier on behalf of an
insured.
"Insured Claims" shall mean those Liabilities that, individually or in the
aggregate, are covered within the terms and conditions of any of the Company
Policies, whether or not subject to deductibles, co-insurance,
uncollectability or premium adjustments, but only to the extent that such
Liabilities are within applicable Company Policy limits, including aggregates.
"Liabilities" shall mean any and all debts, liabilities and obligations,
absolute or contingent, matured or unmatured, liquidated or unliquidated,
accrued or unaccrued, known or unknown, whenever arising, including, without
limitation, those debts, liabilities and obligations arising under any law,
rule, regulation, Action, order or consent decree of any court, any
governmental or other regulatory or administrative agency or commission or any
award of any arbitration tribunal, and those arising under any contract,
guarantee, commitment or undertaking.
"LTC Agreement" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"LTC Liabilities" shall have the meaning set forth under the definition of
"Institutional Pharmacy Liabilities."
"Non-competition Agreement" shall mean the agreement dated as of the Time of
Distribution between Parent (as defined in the Merger Agreement), Vitalink and
SNFCo setting forth the basis for the intercompany relationships that shall
exist between and among the parties during the term of such agreement.
"Person" shall mean any natural person, corporation, business trust, joint
venture, association, company, partnership or government, or any agency or
political subdivision thereof.
"Pharmacy Subsidiaries" shall mean those subsidiaries of GranCare listed on
Schedule 1.1(b) hereto.
"Policies" shall mean insurance policies and insurance contracts of any kind
(other than life and benefits policies or contracts), including, without
limitation, primary, excess and umbrella policies, comprehensive general
liability, fiduciary liability, automobile, aircraft, property and casualty,
environmental, workers' compensation and employee dishonesty insurance
policies and bonds and captive insurance company arrangements, together with
the rights, benefits and privileges thereunder.
"Proxy Statement/Prospectus" shall mean the Proxy Statement/Prospectus
contained in the Registration Statement on Form S-4 relating to the shares of
Vitalink Common Stock to be issued in connection with the Merger sent to the
holders of shares of GranCare Common Stock in connection with obtaining
shareholder approval of, inter alia, the Distribution and the Merger,
including any amendment or supplement thereto.
"Records" shall have the meaning as defined in Section 4.1(a).
"Services Agreement" shall mean the Interim Services Agreement dated as of
the Time of Distribution by and between SNFCo and GranCare pursuant to which
SNFCo shall provide, for the benefit of Vitalink (as the successor to
GranCare), such services as may be requested from time to time by Vitalink as
were provided on a centralized basis by GranCare for the benefit of GranCare
and its Subsidiaries prior to the Distribution.
"Senior Subordinated Notes" shall have the meaning as defined in the Merger
Agreement.
"Settling Party" shall have the meaning as defined in Section 2.4(b).
"Shared Liability" means any Liability of the parties hereto or their
respective Subsidiaries (whether arising prior to, at or following the Time of
Distribution) (i) which is not a True GranCare Liability or True
C-4
<PAGE>
SNFCo Liability or (ii) the responsibility for which is allocated between
GranCare and SNFCo in this Distribution Agreement or the Ancillary Agreements.
Shared Liability includes, without limitation, the Shared Liabilities listed
on Schedule 1.1(c) hereto.
"Shared Transaction Expenses" shall have the meaning as defined in Section
2.3(d).
"Shared Transaction Expense Settlement Amount" shall have the meaning as
defined in Section 2.3(d).
"Skilled Nursing Assets" shall mean, collectively, all the rights and assets
of GranCare and its Subsidiaries immediately prior to the Time of Distribution
that are not Institutional Pharmacy Assets, including, without limitation, (i)
all outstanding capital stock or other interests of SNFCo in the SNFCo
Subsidiaries listed on Schedule 1.1(a), (ii) the right to the name "GranCare"
and the other trademarks, trade names, logos, symbols and similar marks listed
in Schedule 1.1(d) and (iii) rights arising pursuant to the Company Policies
to the extent set forth in Article V hereof. Notwithstanding the foregoing,
the Skilled Nursing Assets shall not include any assets retained by GranCare
or any of the Pharmacy Subsidiaries pursuant to the terms of any Ancillary
Agreement.
"Skilled Nursing Business" shall mean the skilled nursing, contract
management, home health and assisted living business conducted by GranCare,
SNFCo and their respective Subsidiaries and successors.
"Skilled Nursing Liabilities" shall mean, collectively, (i) all of the
Liabilities of GranCare and its Subsidiaries immediately prior to the Time of
Distribution (which shall include any LTC Liabilities and any Liabilities to
HRPT (other than the fees associated with obtaining the HRPT Consent) other
than the Institutional Pharmacy Liabilities, (ii) all the Liabilities of SNFCo
and the SNFCo Subsidiaries, if any, under this Distribution Agreement and any
of the Ancillary Agreements (the Liabilities listed in clauses (i) through
(ii) above being collectively referred to as the "True SNFCo Liabilities"),
(iii) one-half (1/2) of the amount of all Shared Liabilities, unless otherwise
allocated in this Distribution Agreement and (iv) Liabilities as a result of
the breach of GranCare's representations and warranties set forth in Section
4.09 of the Merger Agreement.
"SNFCo Common Stock" shall mean the common stock of SNFCo.
"SNFCo Indemnitees" shall mean SNFCo, each SNFCo Subsidiary, the directors
and officers of SNFCo and the SNFCo Subsidiaries and each of the heirs,
executors, successors and assigns of any of the foregoing.
"SNFCo Subsidiaries" shall mean all of the subsidiaries of GranCare other
than SNFCo and the Pharmacy Subsidiaries, including, without limitation, those
Subsidiaries listed on Schedule 1.1(a) hereto.
"Solicitation" shall have the meaning set forth in Section 2.3(b).
"Subsidiary" shall mean any Person of which another Person (i) owns,
directly or indirectly, ownership interests sufficient to elect a majority of
the Board of Directors (or persons performing similar functions (irrespective
of whether at the time any other class or classes of ownership interests of
such Person shall or might have such voting power upon the occurrence of any
contingency)) or (ii) is a general partner or an entity performing similar
functions (e.g., a trustee).
"Tax" shall mean all Federal, state, local and foreign taxes and assessments
of any kind, including all interest, penalties and additions imposed with
respect to such amounts.
"Tax Allocation Agreement" shall mean the Tax Allocation and Indemnification
Agreement dated as of the Time of Distribution among GranCare and SNFCo and
the other Subsidiaries of GranCare named therein.
"Tender Offer" shall have the meaning set forth in Section 2.3(b).
"Third Party Claim" shall have the meaning as set forth in Section 3.4.
C-5
<PAGE>
"Time of Distribution" shall mean the time on the Distribution Date as of
which the Distribution is effective, and unless otherwise agreed between the
parties, shall be immediately prior to the Effective Time.
"Transfer Agent" shall mean American Stock Transfer & Trust Company.
"Transfer and Assumption Instruments" shall mean, collectively, the various
agreements, instruments and other documents to be entered into among or
between any of GranCare, SNFCo, the Pharmacy Subsidiaries and the SNFCo
Subsidiaries and approved by Vitalink (which approval shall not be
unreasonably withheld) to effect the transfer of assets and the assumption of
Liabilities relating to the Skilled Nursing Business and the Institutional
Pharmacy Business in the manner contemplated by this Distribution Agreement,
including, without limitation, real estate transfer documents and leases and
all other instruments, documents and agreements delivered in accordance with
Section 2.6 hereof.
"True GranCare Liabilities" shall have the meaning as set forth under
"Institutional Pharmacy Liabilities."
"True SNFCo Liabilities" shall have the meaning as set forth under "Skilled
Nursing Liabilities."
"Vitalink Common Stock" shall mean the common stock, $.01 par value per
share, of Vitalink.
Section 1.2. Incorporation of Merger Agreement Definitions. Except to the
extent set forth herein, capitalized terms used herein shall have the same
definitions as such terms have in the Merger Agreement.
Section 1.3. References; Interpretation. References to a "Schedule" or an
"Exhibit" are, unless otherwise specified, to one of the Schedules or Exhibits
attached to this Distribution Agreement, and references to a "Section" are,
unless otherwise specified, to one of the Sections of this Distribution
Agreement.
ARTICLE II.
Distribution and Other Transactions; Certain Covenants
Section 2.1. Transfer of Assets and Liabilities.
(a) Certain Transactions. On or prior to the Distribution Date GranCare
shall, on behalf of itself and its Subsidiaries, transfer to SNFCo all of
GranCare's and its Subsidiaries' right, title and interest in the Skilled
Nursing Assets in the manner contemplated by the internal restructuring plan
attached hereto as Exhibit A and incorporated herein by reference and SNFCo
shall assume the Skilled Nursing Liabilities.
(b) Stock Dividend to GranCare. On or prior to the Distribution Date SNFCo
shall issue to GranCare as a stock dividend such number of shares of SNFCo
Common Stock as shall be required to effect the Distribution, as certified by
the Transfer Agent. In connection therewith GranCare shall deliver to SNFCo
for cancellation the share certificate currently held by GranCare representing
shares of SNFCo Common Stock.
(c) Charters; Bylaws. On or prior to the Distribution Date all necessary
actions shall have been taken to provide for the adoption of the form of
Articles of Incorporation and Bylaws to be filed by SNFCo with the Commission.
(d) Directors; Officers. On or prior to the Distribution Date, GranCare, as
the sole shareholder of SNFCo, (i) shall have taken all necessary action by
written consent to elect to the Board of Directors of SNFCo, the individuals
to be identified in the Proxy Statement/Prospectus as directors of SNFCo,
effective upon the Distribution, and (ii) shall have caused the directors of
SNFCo to elect as officers of SNFCo the individuals to be identified in the
Proxy Statement/Prospectus as the officers of SNFCo, effective upon the
Distribution.
(e) Certain Licenses and Permits. On or prior to the Distribution Date or as
soon as reasonably practicable thereafter, all transferrable licenses, permits
and authorizations issued by governmental or regulatory entities
C-6
<PAGE>
which relate to the Skilled Nursing Business but which are held in the name of
GranCare or any of the Pharmacy Subsidiaries which licenses, permits and
authorizations are listed on Schedule 2.1(e), shall be duly and validly
transferred by GranCare (or such Pharmacy Subsidiaries) to SNFCo or such SNFCo
Subsidiary as SNFCo may designate.
(f) Transfer of Agreements.
(i) On or prior to the Distribution Date or as soon as reasonably
practicable thereafter, subject to the limitations set forth in this
Section 2.1(f), GranCare will, and it will cause the Pharmacy Subsidiaries
to, assign, transfer and convey to SNFCo or such SNFCo Subsidiary as SNFCo
may designate, all of GranCare's or such Pharmacy Subsidiary's respective
right, title and interest in and to any and all agreements that do not
relate primarily to the Institutional Pharmacy Business, to the extent such
agreements were not previously so transferred in connection with the
transactions contemplated by Section 2.1(a) hereof.
(ii) The assignee of any agreement assigned, in whole or in part,
hereunder (an "Assignee") shall assume and agree to pay, perform, and fully
discharge all obligations of the assignor under such agreement and shall
indemnify the assignor against any and all liabilities in connection
therewith.
(iii) Notwithstanding anything in this Distribution Agreement to the
contrary, this Distribution Agreement shall not constitute an agreement to
assign any agreement, in whole or in part, or any rights thereunder if the
agreement to assign or any attempted assignment, without the consent of a
third party, would constitute a breach thereof or in any way adversely
affect the rights of the Assignee thereof; provided, however, that the
provisions of Section 2.6 shall be applicable thereto.
(g) Services Agreement. On or before the Distribution Date, GranCare and
SNFCo will execute and deliver the Services Agreement setting forth the terms
upon which SNFCo shall, subsequent to the Time of Distribution, provide such
centralized back office support services to GranCare (and Vitalink as the
successor to GranCare) as may be determined by the parties to be appropriate
and as may be requested by Vitalink from time to time until such time (not to
exceed the term established in such agreement) as Vitalink (as the successor
to GranCare) shall no longer require such services.
(h) Delivery of Shares to Transfer Agent. GranCare shall deliver to the
Transfer Agent the share certificates representing the shares of SNFCo Common
Stock issued to GranCare by SNFCo pursuant to Section 2.1(b) and shall
instruct the Transfer Agent to distribute, on or as soon as practicable
following the Time of Distribution, such SNFCo Common Stock to holders of
record of shares of GranCare Common Stock on the Distribution Record Date as
further contemplated by the Proxy Statement/Prospectus and herein. SNFCo shall
provide all share certificates that the Transfer Agent shall require in order
to effect the Distribution.
(i) Other Transactions.
(i) On or prior to the Distribution Date, or as soon thereafter as is
reasonably practical, GranCare will, and it will cause the Pharmacy
Subsidiaries (other than SNFCo or any of the SNFCo Subsidiaries) to,
assign, transfer and convey to SNFCo (or such SNFCo Subsidiary as SNFCo may
direct) all of GranCare's right, title and interest in and to (a) all items
of GranCare's intellectual property except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare, (b) all of the
various assets listed on GranCare's General Ledger Account Number 1.01
except for those specific assets listed on Schedule 2.1(i), which shall be
retained by GranCare, and (c) all real estate leases, utility accounts,
trade organization memberships, vendor service contracts, warranty
contracts and items of a similar nature except for those items listed on
Schedule 2.1(i), which shall be retained by GranCare.
(ii) On or prior to the Distribution Date, GranCare and the Pharmacy
Subsidiaries shall take or cause to be taken such action as shall be
necessary to assign and transfer all pending litigation, arbitration,
mediation and matters of a similar nature ("Pending Litigation Matters") to
SNFCo or such SNFCo Subsidiary as SNFCo may designate, including, without
limitation, instructing counsel of record to enter appropriate motions or
pleadings to accomplish the foregoing, except for such Pending Litigation
Matters
C-7
<PAGE>
as are listed on Schedule 2.1(i), which shall be retained by GranCare.
SNFCo and GranCare will each indemnify the other against any and all
liabilities, costs and expenses incurred in connection with any of the
Pending Litigation Matters for which it is responsible pursuant to this
Section 2.1(ii) following the Time of Distribution and each of GranCare and
SNFCo shall, subsequent to the Time of Distribution, be solely responsible
for the prosecution, defense, settlement or other conduct of Pending
Litigation Matters as are to be retained by each of them pursuant to this
Section 2.1(ii).
Section 2.2. Certain Financial and Other Arrangements.
(a) Intercompany Accounts. At the Time of Distribution, all intercompany
receivables, payables and loans (other than receivables, payables and loans
otherwise specifically provided for in any of the Ancillary Agreements or
hereunder), including, without limitation, in respect of any cash balances,
any cash balances representing deposited checks or drafts for which only a
provisional credit has been allowed or any cash held in any centralized cash
management system, between GranCare and any of its Subsidiaries (other than
the Pharmacy Subsidiaries), on the one hand, and the Pharmacy Subsidiaries, on
the other hand, shall be netted out, in each case in such manner and amount as
may be agreed in writing by duly authorized representatives of GranCare,
Vitalink and SNFCo and the resulting net balance due from the Pharmacy
Subsidiaries to GranCare and any of its Subsidiaries (other than the Pharmacy
Subsidiaries) shall be contributed to the appropriate Pharmacy Subsidiaries as
additional capital.
(b) Operations in Ordinary Course. Each of GranCare and SNFCo covenants and
agrees that, except as otherwise provided in any Ancillary Agreement, during
the period from the date of this Distribution Agreement through the Time of
Distribution, it will, and will cause any entity that is a Subsidiary of such
party at any time during such period to, conduct its business in a manner
substantially consistent with current and past operating practices and in the
ordinary course, including, without limitation, with respect to the payment
and administration of accounts payable and the collection and administration
of accounts receivable, the purchase of capital assets and equipment, the
management of inventories, cash management practices, the allocation of
interest, corporate overhead, costs of legal, insurance and other centralized
functions and shall, at all times prior to the Time of Distribution, conduct
its business in a manner consistent with the provisions of Section 5.01 of the
Merger Agreement.
Section 2.3. Assumption of Indebtedness; Allocation of Expenses.
(a) GranCare and SNFCo shall take such action as shall be necessary or
appropriate to cause SNFCo to assume all of the items of GranCare's
consolidated indebtedness other than those items listed on Schedule 2.3(a).
(b) Prior to the Time of Distribution, GranCare shall undertake an offer to
purchase (the "Tender Offer") all of its outstanding Senior Subordinated Notes
at a price not to exceed $1,090.00 for each $1,000 principal amount of such
Senior Subordinated Notes and, in connection therewith, to solicit (the
"Solicitation") consents to obtain the approval of the holders of the required
principal amount of such Senior Subordinated Notes to the transactions
contemplated by this Distribution Agreement and the Merger Agreement and to
such modifications in the covenants contained in the Note Indenture (as
defined in the Merger Agreement) as may be reasonably requested by Vitalink.
All of the fees, expenses and costs incurred in connection with the Tender
Offer and the Solicitation (including the premium payable upon repurchase of
the Senior Subordinated Notes repurchased in the Tender Offer) will constitute
Shared Transaction Expenses.
(c) On or prior to the Distribution Date, GranCare shall take such action as
shall be necessary to redeem the Debentures (as defined in the Merger
Agreement) at a redemption price not to exceed 104.55% of the outstanding
principal amount thereof as of the date of this Distribution Agreement plus
accrued and unpaid interest thereon to the date of redemption. The redemption
premium incurred by GranCare in connection with accomplishing such redemption
shall be shared equally by GranCare and SNFCo (and Vitalink as the successor
to GranCare) but SNFCo shall be solely responsible for the payment of any
accrued interest to the date of redemption.
C-8
<PAGE>
(d) In connection with accomplishing the various transactions contemplated
by the Merger Agreement, this Distribution Agreement and the Ancillary
Agreements, SNFCo (on behalf of itself and GranCare) and Vitalink each shall
be responsible for one-half of the total documented fees, expenses and other
items of cost of SNFCo, GranCare and Vitalink set forth on Schedule 2.3(d)
(the "Shared Transaction Expenses"). As soon as reasonably practical following
the Effective Time of the Merger, representatives of SNFCo and Vitalink each
shall submit to the other appropriate documentation substantiating the nature
and amount of all Shared Transaction Expenses actually incurred and paid by
SNFCo (on behalf of itself and GranCare) and Vitalink, respectively. The
amounts of Shared Transaction Expenses actually paid by each of SNFCo and
Vitalink shall be netted out in the manner hereinafter described and SNFCo or
Vitalink, whichever shall have paid the least amount of Shared Transaction
Expenses, shall reimburse the other pursuant to the provisions of Section
2.3(e) hereof in an amount (the "Shared Transaction Expense Settlement
Amount") equal to one-half of the difference between (i) the amount of Shared
Transaction Expenses paid by SNFCo minus (ii) the amount of Shared Transaction
Expenses paid by Vitalink. If the result obtained from the foregoing
calculation is a negative number, then SNFCo shall reimburse Vitalink pursuant
to the provisions of Section 2.3(e) hereof in an amount equal to one-half of
the aggregate difference so determined. All Shared Transaction Expenses
actually paid by GranCare prior to the Time of Distribution shall be deemed to
have been paid by SNFCo for purposes of this Section 2.3(d). Except as set
forth in Schedule 2.3(d) or as otherwise contemplated by Section 5.11 of the
Merger Agreement, GranCare and SNFCo, on the one hand, and Vitalink, in its
individual capacity and not as the successor to GranCare, will each be solely
responsible for their respective fees and expenses incurred in connection with
the transactions contemplated by the Merger Agreement, this Distribution
Agreement and the Ancillary Agreements.
(e) Immediately following the determination of the Shared Transaction
Expense Settlement Amount, representatives of Vitalink and SNFCo also shall
determine jointly the total outstanding indebtedness (determined in accordance
with generally accepted accounting principles consistently applied) of the
Institutional Pharmacy Business as of the Effective Time of the Merger being
assumed by Vitalink (which shall be deemed to include, without duplication,
$100.0 million representing the Senior Subordinated Notes tendered in the
Tender Offer or assumed in the Merger and up to $10.0 million in fees paid to
obtain the HRPT Consent), an amount equal to the amount of GranCare's
indebtedness incurred in connection with the acquisition of Institutional
Pharmacy Businesses during the period commencing on June 1, 1996 and ending at
the Time of Distribution (all of the foregoing amounts hereinafter referred to
collectively as "Closing Debt") and the amount of GranCare's cash and cash
equivalents as of the Effective Time of the Merger (excluding cash
attributable to the exercise of GranCare Options and warrants to purchase
GranCare Common Stock occurring after the date hereof and prior to the
Effective Time and excluding any cash attributable to checks or similar
instruments outstanding and subject to collection) ("Cash"). As soon as
practicable after the Effective Time of the Merger, Vitalink shall pay to
SNFCo an amount equal to the difference between (i) the sum of (A) $88,383,000
plus (B) the total purchase price paid by SNFCo in connection with the
acquisition of Institutional Pharmacy Businesses approved by Vitalink during
the period commencing on June 1, 1996 and ending at the Time of Distribution,
including, without limitation, the total purchase price paid in connection
with the acquisition of Emery Pharmacy, Inc., plus (C) the Shared Transaction
Expense Settlement Amount (or less such amount if such amount is a negative
number) plus (D) an amount equal to GranCare's Cash minus (ii) the 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
C-9
<PAGE>
(ii) SNFCo shall, and shall cause the SNFCo Subsidiaries and any and all
successors and assigns to assume, pay, perform and discharge all Skilled
Nursing Liabilities as and when due.
(b) GranCare and SNFCo (and Vitalink as successor to GranCare) shall each
direct its own defense of any Shared Liability at its own expense; provided,
however, that (i) each party shall provide the other with copies of all
pleading, motions, items of correspondence and other documentation pertaining
to any Shared Liability contemporaneously with the first release of any such
material and (ii) no party hereto (or its successor) will admit any liability
with respect to, or settle, compromise or discharge, any Shared Liability
without the other party's prior written consent (which consent shall not be
unreasonably withheld) except as hereinafter provided. Any party seeking to
settle, compromise or discharge a Shared Liability (a "Settling Party") shall
have the right to settle, compromise or discharge a Shared Liability without
the other party's consent if the Settling Party releases the non-settling
party from any obligation in respect of such Shared Liability and indemnifies
the non-settling party against any and all liabilities in connection therewith
and such settlement, compromise or discharge would not otherwise adversely
affect the non-settling party.
(c) Upon the compromise, settlement or other resolution of any Shared
Liability, SNFCo and GranCare (and Vitalink as the successor to GranCare)
shall share in any obligation or liability arising as a result thereof in the
same proportion in which the Shared Liability is shared. The parties hereto
shall share in any rights and assets (including, without limitation,
recoveries, claims, rights of subrogation and proceeds of asset sales) that
relate to Shared Liabilities in the same proportions in which the related
Shared Liability is shared.
Section 2.5. Resignations. GranCare shall cause all its officers who shall
not continue as employees of SNFCo subsequent to the Time of Distribution to
resign, effective as of the Time of Distribution, from all positions as
directors or officers of SNFCo or as officers or directors of any SNFCo
Subsidiary in which they serve. SNFCo shall cause all its officers who shall
not continue as employees of GranCare subsequent to the Time of Distribution
to resign, effective as of the Time of Distribution, from all positions as
directors or officers of GranCare or as officers or directors of any Pharmacy
Subsidiary in which they serve.
Section 2.6. Further Assurances.
(a) In case at any time after the Time of Distribution any further action is
reasonably necessary or desirable to carry out the purposes of this
Distribution Agreement and the Ancillary Agreements, the proper officers of
each party to this Distribution Agreement shall take, or cause the proper
officers of their respective Subsidiaries to take, all such necessary action.
Without limiting the foregoing, GranCare and SNFCo shall use their
commercially reasonable efforts to obtain all required consents and approvals
of third parties, to enter into all amendatory agreements and to make all
filings and applications that may be required for the consummation of the
transactions contemplated by this Distribution Agreement, the Merger Agreement
and the Ancillary Agreements, including, without limitation, all applicable
governmental and regulatory filings.
(b) In the event that subsequent to the Time of Distribution, GranCare or
any Pharmacy Subsidiaries shall either (i) receive written notice from SNFCo
that certain specified assets or Liabilities of GranCare or any Pharmacy
Subsidiaries which properly constitute Skilled Nursing Assets or Skilled
Nursing Liabilities were not transferred to SNFCo on or prior to the Time of
Distribution or (ii) determine that certain assets or Liabilities of GranCare
or any Pharmacy Subsidiaries which constitute Skilled Nursing Assets or
Skilled Nursing Liabilities were not transferred to SNFCo on or prior to the
Time of Distribution, then as promptly as practical thereafter, GranCare
shall, and shall cause the Pharmacy Subsidiaries to, take all steps reasonably
necessary to (A) transfer and deliver any and all of such assets to SNFCo
without the payment by SNFCo of any consideration therefor or (B) assign and
transfer any and all such Liabilities to SNFCo which shall assume and
discharge the same without payment to or by GranCare of any consideration in
respect thereof. In the event that, subsequent to the Time of Distribution,
SNFCo or any SNFCo Subsidiaries shall either (i) receive written notice from
GranCare or any of the Pharmacy Subsidiaries that certain specified assets or
Liabilities were transferred to SNFCo which properly constitute Institutional
Pharmacy Assets or Institutional Pharmacy Liabilities or (ii) determine that
certain assets or Liabilities of SNFCo which constitute Institutional Pharmacy
Assets or Institutional Pharmacy Liabilities were
C-10
<PAGE>
transferred to SNFCo, then as promptly as practicable thereafter, SNFCO shall,
and shall cause the SNFCo Subsidiaries to, take all steps reasonably necessary
to (A) transfer and deliver any and all such assets to GranCare or the
Pharmacy Subsidiaries without the payment by GranCare of any consideration
therefor or (B) assign and transfer any and all such liabilities to GranCare
which shall assume and discharge the same without payment to or by SNFCo of
any consideration in respect thereof.
(c) Nothing in this Distribution Agreement shall be deemed to require the
transfer of any assets or the assumption of any Liabilities which by their
terms or operation of law cannot be transferred; provided, however, that the
parties hereto and their respective Subsidiaries shall cooperate to seek to
obtain any necessary consents or approvals for the transfer of all assets and
Liabilities contemplated to be transferred pursuant to this Article II. In the
event that any such transfer of assets or Liabilities has not been consummated
as of the Time of Distribution, from and after the Time of Distribution the
party retaining such asset shall hold such asset in trust for the use and
benefit of the party entitled thereto (at the expense of the party entitled
thereto) or retain such Liability for the account of the party by whom such
Liability is to be assumed pursuant hereto, as the case may be, and take such
other action as may be reasonably requested by the party to whom such asset is
to be transferred, or by whom such Liability is to be assumed, as the case may
be, in order to place such party, insofar as is reasonably possible, in the
same position as would have existed had such asset or Liability been
transferred as contemplated hereby. As and when any such asset or Liability
becomes transferable, such transfer shall be effected forthwith. As of the
Time of Distribution, each party hereto shall be deemed to have acquired
complete and sole beneficial ownership over all of the assets held by it,
together with all rights, powers and privileges incident thereto, and shall be
deemed to have assumed in accordance with the terms of this Distribution
Agreement all of the Liabilities, and all duties, obligations and
responsibilities incident thereto, which such party is entitled to acquire or
required to assume pursuant to the terms of this Distribution Agreement.
Section 2.7. No Representations or Warranties. Each of the parties hereto
understands and agrees that, except as otherwise expressly provided in the
Merger Agreement, no party hereto is, in this Distribution Agreement or in any
other agreement or document contemplated by this Distribution Agreement or
otherwise, making any representation or warranty whatsoever, including,
without limitation, as to title, value or legal sufficiency. It is also agreed
and understood that all assets either transferred to or retained by the
parties, as the case may be, shall be "as is, where is" and that (subject to
Section 2.6) the party to which such assets are to be transferred hereunder
shall bear economic and legal risk that any conveyances of such assets shall
prove to be insufficient or that such party's or any Subsidiary's title to any
such assets shall be other than good and marketable and free from
encumbrances.
Section 2.8. Guarantees. Except as otherwise specified in any Ancillary
Agreement, each of GranCare and SNFCo shall use its commercially reasonable
efforts to have, on or prior to the Time of Distribution, or as soon as
practicable thereafter, (a) GranCare and any of the Pharmacy Subsidiaries
removed as guarantor of or obligor for any True SNFCo Liability and (b) SNFCo
and any of the SNFCo Subsidiaries removed as a guarantor of or obligor for any
True GranCare Liability, in each case, without the requirement that it pay any
additional consideration in connection with obtaining the same.
Section 2.9. Witness Services. At all times from and after the Distribution
Date, each of GranCare and SNFCo shall use their commercially reasonable
efforts to make available to the other, upon reasonable written request, its
and its Subsidiaries' officers, directors, employees and agents as witnesses
to the extent that (a) such persons may reasonably be required in connection
with the prosecution or defense of any Action in which the requesting party
may from time to time be involved and (b) there is no conflict of interest in
the Action between the requesting party and GranCare or SNFCo, as applicable.
A party providing witness services to the other party under this Section shall
be entitled to receive from the recipient of such services, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses and direct costs of
employees who are witnesses, as may be reasonably incurred in providing such
witness services.
C-11
<PAGE>
Section 2.10. Certain Post-Distribution Transactions.
(a) GranCare shall comply with and otherwise not take any action
inconsistent with each representation, covenant and statement made, or to be
made, to GranCare's tax counsel in connection with such firm's rendering of an
opinion to GranCare and SNFCo as to certain tax aspects of the Distribution.
(b) SNFCo shall comply with and otherwise not take any action inconsistent
with each representation, covenant and statement made, or to be made, to
SNFCo's tax counsel in connection with such firm's rendering of an opinion to
GranCare and SNFCo as to certain tax aspects of the Distribution.
Section 2.11. Directors and Officers Liability Insurance. From and after the
Time of Distribution to the third anniversary of the Distribution Date,
GranCare and SNFCo (and Vitalink as the successor to GranCare) will maintain
in full force and effect in such manner as is contemplated by Section 5.10 of
the Merger Agreement, all Company Policies providing directors and officers
liability insurance ("D&O Insurance Policies") (or, through the purchase of an
alternative policy, the full benefits and coverage of such D&O Insurance
Policies) and shall not consent to any amendment of the terms of such policies
that may be adverse to any persons covered by such insurance except as may
otherwise be permitted by Section 5.10 of the Merger Agreement. The provisions
of this Section 2.11 are intended for the benefit of, and shall be enforced
by, each of the persons covered by the D&O Insurance Policies.
Section 2.12. Insurance. Except as contemplated by Article V and Section
2.11 hereof, any and all omnibus coverage of GranCare and the Pharmacy
Subsidiaries under Company Policies will terminate (and will not be replaced)
as of the Time of Distribution and from and after the Time of Distribution
GranCare and SNFCo shall each obtain such continuing coverage as may be deemed
necessary or appropriate.
Section 2.13. Ancillary Agreements. Effective as of the Time of
Distribution, each of GranCare and SNFCo shall enter into, and/or (where
applicable) shall cause their respective Subsidiaries to enter into, the
Ancillary Agreements and, subject to Vitalink's prior approval, which shall
not be unreasonably withheld, any other agreements in respect of the
Distribution reasonably necessary or appropriate in connection with the
transactions contemplated hereby and thereby.
ARTICLE III.
Indemnification
Section 3.1. Indemnification by GranCare. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, GranCare (and
Vitalink as the successor to GranCare) shall indemnify, defend and hold
harmless the SNFCo Indemnitees from and against any and all Indemnifiable
Losses of the SNFCo Indemnitees arising out of, by reason of or otherwise in
connection with (a) the Institutional Pharmacy Liabilities, (b) the breach,
whether before or after the Time of Distribution, by GranCare or the Pharmacy
Subsidiaries of any provision of this Distribution Agreement or any Ancillary
Agreement or (c) the Proxy Statement/Prospectus to the extent that such
Indemnifiable Loss relates to or arises out of information contained in the
Proxy Statement/Prospectus that specifically relates to Vitalink.
Section 3.2. Indemnification by SNFCo. Subsequent to the Time of
Distribution, except as otherwise specifically set forth in any provision of
this Distribution Agreement or of any Ancillary Agreement, SNFCo shall
indemnify, defend and hold harmless the GranCare Indemnitees from and against
any and all Indemnifiable Losses of the GranCare Indemnitees arising out of,
by reason of or otherwise in connection with (a) the Skilled Nursing
Liabilities, (b) the breach, whether before or after the Time of Distribution,
by SNFCo or the SNFCo Subsidiaries of any provision of this Distribution
Agreement or any Ancillary Agreement, (c) the Spin Registration Document (as
defined in the Merger Agreement) that shall be prepared by SNFCo and filed
with the Commission pertaining to the registration of the SNFCo Common Stock
to be issued in the Distribution or (d) the Proxy Statement/Prospectus to the
extent that such Indemnifiable Loss relates to or arises out of information
contained in the Proxy Statement/Prospectus that specifically relates to SNFCo
or GranCare.
C-12
<PAGE>
Section 3.3. Limitations on Indemnification Obligations.
(a) The amount that any party (an "Indemnifying Party") is or may be
required to pay to any other person (an "Indemnitee") pursuant to Section 3.1
or Section 3.2, as applicable, shall be reduced (retroactively or
prospectively) by any Insurance Proceeds or other amounts actually recovered
by or on behalf of such Indemnitee in respect of the related Indemnifiable
Loss. If an Indemnitee shall have received the payment required by this
Distribution Agreement from an Indemnifying Party in respect of an
Indemnifiable Loss and shall subsequently receive Insurance Proceeds or other
amounts in respect of such Indemnifiable Loss, then such Indemnitee shall pay
to such Indemnifying Party a sum equal to the amount of such Insurance
Proceeds or other amounts actually received, up to the aggregate amount of any
payments received from such Indemnifying Party pursuant to this Distribution
Agreement in respect of such Indemnifiable Loss.
(b) Any loss, liability, claim, damage, demand, cost or expense relating to
or arising out of information contained in the Proxy Statement/Prospectus that
does not specifically relate to either Vitalink, on the one hand, or SNFCo or
GranCare, on the other hand, shall constitute a Shared Liability for purposes
of this Distribution Agreement and no party hereto or their successor shall be
entitled to indemnification in respect thereof.
Section 3.4. Procedures for Indemnification. If a claim or demand is made
against an Indemnitee by any person who is not a party to this Distribution
Agreement (a "Third Party Claim") as to which such Indemnitee is entitled to
indemnification pursuant to this Distribution Agreement, such Indemnitee shall
notify the Indemnifying Party in writing, and in reasonable detail, of the
Third Party Claim promptly (and in any event within 20 business days) after
receipt by such Indemnitee of written notice of the Third Party Claim;
provided, however, that failure to give such notification within such 20
business day period shall not affect the indemnification provided hereunder
except to the extent the Indemnifying Party shall have been actually
prejudiced as a result of such failure (except that the Indemnifying Party
shall not be liable for any expenses incurred during the period in which the
Indemnitee failed to give such notice). Thereafter, the Indemnitee shall
deliver to the Indemnifying Party, promptly (and in any event within 20
business days) after the Indemnitee's receipt thereof, copies of all notices
and documents (including court papers) received by the Indemnitee relating to
the Third Party Claim.
If a Third Party Claim is made against an Indemnitee, the Indemnifying Party
shall be entitled to participate in the defense thereof and, if it so chooses
and acknowledges in writing its obligation to indemnify the Indemnitee
therefor, to assume the defense thereof with counsel selected by the
Indemnifying Party; provided that such counsel is not reasonably objected to
by the Indemnitee. Should the Indemnifying Party so elect to assume the
defense of a Third Party Claim, the Indemnifying Party shall not be liable to
the Indemnitee for legal or other expenses subsequently incurred by the
Indemnitee in connection with the defense thereof except as otherwise
expressly provided for in Section 2.9 of this Distribution Agreement. If the
Indemnifying Party assumes such defense, the Indemnitee shall have the right
to participate in the defense thereof and to employ counsel, at its own
expense, separate from the counsel employed by the Indemnifying Party, it
being understood that the Indemnifying Party shall control such defense. The
Indemnifying Party shall be liable for the fees and expenses of counsel
employed by the Indemnitee (i) for any period during which the Indemnifying
Party has failed to assume the defense thereof (other than during the 20
business day period prior to the time the Indemnitee shall have given notice
of the Third Party Claim as provided above) or (ii) in the event the
Indemnitee reasonably determines, based on the advice of its counsel that
there shall exist a conflict of interest between the Indemnitee and the
Indemnifying Party or that there are defenses available to the Indemnitee that
are not available to the Indemnifying Party, the effect of which shall be to
make it impractical for the Indemnitee and the Indemnifying Party to be
jointly represented by the same counsel, in which case the Indemnifying Party
shall be liable for the fees and expenses of one counsel for all Indemnitees
in any single or series of related Actions. If the Indemnifying Party so
elects to assume the defense of any Third Party Claim, the Indemnitee shall
cooperate with the Indemnifying Party in the defense or prosecution thereof.
If the Indemnifying Party acknowledges in writing liability for
indemnification of a Third Party Claim, then in no event will the Indemnitee
admit any liability with respect to, or settle, compromise or discharge, any
Third
C-13
<PAGE>
Party Claim without the Indemnifying Party's prior written consent; provided,
however, that the Indemnitee shall have the right to settle, compromise or
discharge such Third Party Claim without the consent of the Indemnifying Party
if the Indemnitee releases the Indemnifying Party from its indemnification
obligation hereunder with respect to such Third Party Claim and such
settlement, compromise or discharge would not otherwise adversely affect the
Indemnifying Party. If the Indemnifying Party acknowledges in writing
liability for indemnification of a Third Party Claim, the Indemnitee will
agree to any settlement, compromise or discharge of a Third Party Claim that
the Indemnifying Party may recommend that by its terms (i) obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim, (ii) releases the Indemnitee completely in connection
with such Third Party Claim and (iii) would not otherwise adversely affect the
Indemnitee; provided, however, that the Indemnitee may refuse to agree to any
such settlement, compromise or discharge and may assume the defense of such
Third Party Claim if the Indemnitee agrees (A) that the Indemnifying Party's
indemnification obligation with respect to such Third Party Claim shall not
exceed the amount that would have been required to be paid by or on behalf of
the Indemnifying Party in connection with such settlement, compromise or
discharge and (B) to assume all costs and expenses thereafter incurred in
connection with the defense of such Third Party Claim (other than those
contemplated by subclause (A) herein above).
Notwithstanding the foregoing, the Indemnifying Party shall not be entitled
to assume the defense of any Third Party Claim (and shall be liable for the
fees and expenses of counsel incurred by the Indemnitee in defending such
Third Party Claim) if the Third Party Claim seeks an order, injunction or
other equitable relief or relief other than money damages against the
Indemnitee which the Indemnitee reasonably determines, based on the advice of
its counsel, cannot be separated from any related claim for money damages. If
such equitable or other relief portion of the Third Party Claim can be so
separated from the claim for money damages, the Indemnifying Party shall be
entitled to assume the defense of the portion relating to money damages.
Section 3.5. Indemnification Payments. Indemnification required by this
Article III shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
loss, liability, claim, damage or expense is incurred.
Section 3.6. Other Adjustments.
(a) The amount of any Indemnifiable Loss shall be (i) increased to take into
account any net Tax cost actually incurred by the Indemnitee arising from any
payments received from the Indemnifying Party (grossed up for such increase)
and (ii) reduced to take account of any net Tax benefit actually realized by
the Indemnitee arising from the incurrence or payment of any such
Indemnifiable Loss. In computing the amount of such Tax cost or Tax benefit,
the Indemnitee shall be deemed to recognize all other items of income, gain,
loss, deduction or credit before recognizing any item arising from the receipt
of any payment with respect to an Indemnifiable Loss or the incurrence or
payment of any Indemnifiable Loss.
(b) In addition to any adjustments required pursuant to Section 3.3 hereof
or clause (a) of this Section 3.6, if the amount of any Indemnifiable Loss
shall, at any time subsequent to the payment required by this Distribution
Agreement, be reduced by recovery, settlement or otherwise, the amount of such
reduction, less any expenses incurred in connection therewith, shall promptly
be repaid by the Indemnitee to the Indemnifying Party, up to the aggregate
amount of any payments received from such Indemnifying Party pursuant to this
Distribution Agreement in respect of such Indemnifiable Loss.
Section 3.7. Survival of Indemnities. The obligations of GranCare and SNFCo
under this Article III shall survive the sale or other transfer by either of
them of any assets or businesses or the assignment by either of them of any
Liabilities, with respect to any Indemnifiable Loss of any Indemnitee related
to such assets, businesses or Liabilities and shall be binding on the
successors and assigns of all, or substantially all, of their respective
assets and business.
C-14
<PAGE>
ARTICLE IV.
Access to Information
Section 4.1. Provision of Corporate Records.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
SNFCo for specific and identified agreements, documents, books, records or
files (collectively, "Records") relating to or affecting SNFCo, GranCare shall
arrange, as soon as reasonably practicable following the receipt of such
request, for the provision of appropriate copies of such Records (or the
originals thereof if SNFCo has a reasonable need for such originals) in the
possession of GranCare or any of its Subsidiaries, but only to the extent such
items are not already in the possession SNFCo.
(b) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, after the Distribution Date, upon the prior written request by
GranCare for specific and identified Records relating to or affecting
GranCare, SNFCo shall arrange, as soon as reasonably practicable following the
receipt of such request, for the provision of appropriate copies of such
Records (or the originals thereof if GranCare has a reasonable need for such
originals) in the possession of SNFCo or any of its Subsidiaries, but only to
the extent such items are not already in the possession of GranCare.
Section 4.2. Access to Information.
(a) Unless otherwise specified in the procedures set forth in Schedule
4.3(b) hereto, from and after the Distribution Date, each of GranCare and
SNFCo shall afford to the other and its authorized accountants, counsel and
other designated representatives reasonable access during normal business
hours, subject to appropriate restrictions for classified, privileged or
confidential information, to the personnel, properties, books and records of
such party and its Subsidiaries insofar as such access is reasonably required
by the other party.
(b) For a period of five years following the Distribution Date, each of
GranCare and SNFCo shall provide to the other, promptly upon request, all
documents that shall be publicly filed by it and by any of its respective
Subsidiaries with the Commission pursuant to the periodic and interim
reporting requirements of the Exchange Act, and the rules and regulations of
the Commission promulgated thereunder.
(c) Each of GranCare and SNFCo shall afford to the other access during
normal business hours to their respective properties, subject to appropriate
restrictions and limitations, and will consult and cooperate with each other
for the purpose of conducting air, water or soil testing reasonably necessary
in connection with the determination and fulfillment of indemnification
obligations or in connection with Shared Liabilities under this Distribution
Agreement.
Section 4.3. Reimbursement; Other Matters.
(a) Except to the extent otherwise contemplated by any Ancillary Agreement
and except as limited by any indemnification obligation set forth in this
Distribution Agreement, a party providing Records or access to information or
properties under this Article IV shall be entitled to receive from the
recipient, upon the presentation of invoices therefor, payments for such
amounts, relating to supplies, disbursements and other out-of-pocket expenses,
as may be reasonably incurred in providing such Records or access to
information or properties.
(b) The parties hereto shall comply with those document retention policies
as shall be set forth in Schedule 4.3(b) hereto.
Section 4.4. Confidentiality. Each of (a) GranCare and the Pharmacy
Subsidiaries and (b) SNFCo and the SNFCo Subsidiaries shall not use or permit
the use of (without the prior written consent of the other) and shall hold,
and shall cause its consultants and advisors to hold, in strict confidence,
all information concerning
C-15
<PAGE>
the other party in its possession, its custody or under its control (except to
the extent that (i) such information has been in the public domain through no
fault of such party or (ii) such information has been later lawfully acquired
from other sources by such party or (iii) this Distribution Agreement or any
other Ancillary Agreement or any other agreement entered into pursuant hereto
permits the use or disclosure of such information) to the extent such
information (A) relates to the period up to the Time of Distribution, (B)
relates to any Ancillary Agreement or (C) is obtained in the course of
performing pursuant to any Ancillary Agreement, and each party shall not
(without the prior written consent of the other) otherwise release or disclose
such information to any other person, except such party's auditors,
consultant's or attorneys, unless compelled to disclose such information by
judicial or administrative process or unless such disclosure is required by
law and such party has used commercially reasonable efforts to consult with
the other affected party prior to such disclosure. To the extent that a party
hereto is compelled by judicial or administrative process to disclose such
information under circumstances in which any evidentiary privilege would be
available, such party agrees to assert (or permit the other party a
commercially reasonable opportunity to assert) such privilege in good faith
prior to making such disclosure. Each of the parties hereto agrees to consult
with the other party in connection with any such judicial or administrative
process, including, without limitation, in determining whether any privilege
is available, and further agrees to allow such other party and its counsel to
participate in any hearing or other proceeding (including, without limitation,
any appeal of an initial order to disclose) in respect of such disclosure and
assertion of privilege.
ARTICLE V.
Insurance
Section 5.1. Policies and Rights Included Within Assets Maintenance of
Coverage.
(a) The Skilled Nursing Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of SNFCo contemplated by
this Article V, specifically including rights of indemnity and the right to be
defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the Skilled
Nursing Business which claims are asserted subsequent to the Distribution
Date.
(b) The Institutional Pharmacy Assets shall include any and all rights of an
insured party under each of the Company Policies, subject to the terms of such
Company Policies and any limitations or obligations of GranCare contemplated
by this Article V, specifically including rights of indemnity and the right to
be defended by or at the expense of the insurer, with respect to all claims,
suits, actions, proceedings, injuries, losses, liabilities, damages and
expenses incurred or claimed to have been incurred prior to the Time of
Distribution by any party in or in connection with the conduct of the
Institutional Pharmacy Business which claims are asserted subsequent to the
Distribution Date.
(c) Except as otherwise agreed to in writing between GranCare and SNFCo
(which agreement shall be acknowledged and consented to by Vitalink), GranCare
shall maintain in effect until the Time of Distribution all Company Policies
in effect as of the date hereof and the insurance coverages and limits will be
maintained at substantially the same levels as are reflected on the schedule
of Company Policies attached hereto as Schedule 5.1(c). Subsequent to the
Distribution Date, the parties hereto will be responsible for maintaining
their respective risk management programs.
Section 5.2. Post-Time of Distribution Claims Against SNFCo. If, subsequent
to the Time of Distribution, any person shall assert a claim against SNFCo or
any of the SNFCo Subsidiaries (including, without limitation, where SNFCo or
the SNFCo Subsidiaries are joint defendants with other persons) with respect
to any claim, suit, action, proceeding, injury, loss, liability, damage or
expense incurred or claimed to have been
C-16
<PAGE>
incurred prior to the Time of Distribution in or in connection with the
conduct of the Skilled Nursing Business, and which claim, suit, action,
proceeding, injury, loss, liability, damage or expense may arise out of an
insured or insurable occurrence under one or more of the Company Policies,
GranCare shall, at the time such claim is asserted, to the extent any such
Company Policy may require that Insurance Proceeds thereunder be collected
directly by the party against whom the Insured Claim is asserted, be deemed to
designate, without need of further documentation, SNFCo as the agent and
attorney-in-fact to assert and to collect any related Insurance Proceeds under
such Company Policy, and shall further be deemed to assign, without need of
further documentation, to SNFCo any and all rights of an insured party under
such Company Policy with respect to such asserted claim, specifically
including rights of indemnity and the right to be defended by or at the
expense of the insurer and the right to any applicable Insurance Proceeds
thereunder.
Section 5.3. Administration; Other Matters.
(a) From and after the Time of Distribution, SNFCo shall be responsible for
(i) Insurance Administration of the Company Policies and (ii) Claims
Administration under such Company Policies with respect to Institutional
Pharmacy Liabilities and Skilled Nursing Liabilities that relate to claims
asserted prior to the Distribution Date and SNFCo shall be responsible for any
premiums, deductibles and retentions in respect of such Company Policies and
the cost of any such claims shall be the sole responsibility and obligation of
SNFCo including, without limitation, claims (and related costs and expenses)
that exceed the limits of the applicable Company Policy or where the limits of
the applicable Company Policy have been exhausted, and any resulting actuarial
gains or losses shall inure solely to SNFCo. From and after the Time of
Distribution, GranCare shall file with SNFCo all claims asserted subsequent to
the Time of Distribution that relate to occurrences prior to the Time of
Distribution arising out of or in connection with the Institutional Pharmacy
Business and SNFCo shall be responsible for notifying the appropriate
insurance carrier and providing GranCare with copies of all correspondence
relating to such notification. Thereafter, GranCare shall be responsible for
Claims Administration relating to all such claims wherein SNFCo shall not be
named as a co-defendant and GranCare shall provide SNFCo with copies of all
correspondence, documents and other materials that may be material to an
understanding by SNFCo of the status of such claims; it being expressly
acknowledged and agreed that SNFCo's retention of the administrative
responsibilities for submitting notices of claims under the appropriate
Company Policies shall not relieve GranCare of the primary responsibility for
reporting such Insured Claim accurately, completely and in a timely manner.
Subject to the indemnification provisions of Article III, each of the parties
hereto shall administer and pay any costs relating to defending its respective
Insured Claims under Company Policies to the extent such defense costs are not
covered under such Company Policies and shall be responsible for obtaining or
reviewing the appropriateness of releases upon settlement of its respective
Insured Claims under Company Policies.
(b) Allocation of Insurance Proceeds. Except as otherwise provided in
Sections 5.2 and 5.3(a), Insurance Proceeds received with respect to claims,
costs and expenses under the Company Policies shall be paid to SNFCo, which
shall thereafter administer the Company Policies by paying the Insurance
Proceeds, as appropriate, to GranCare with respect to Institutional Pharmacy
Liabilities and retaining such proceeds that relate to Skilled Nursing
Liabilities (except for Insurance Proceeds that are received in respect of
Insured Claims asserted prior to the Time of Distribution relating to
occurrences arising prior to the Time of Distribution which Insurance Proceeds
will be retained by SNFCo). Payment of the allocable portions of indemnity
costs of Insurance Proceeds resulting from such Policies will be made by SNFCo
to GranCare where appropriate upon receipt from the insurance carrier. In the
event that the aggregate limits on any Company Policies are exceeded by the
aggregate outstanding Insured Claims by both of the parties hereto, such
parties shall agree on an equitable allocation of Insurance Proceeds based
upon their respective bona fide claims. The parties agree to use commercially
reasonable efforts to maximize available coverage under those Company Policies
applicable to it, and to take all commercially reasonable steps to recover
from all other responsible parties in respect of an Insured Claim to the
extent coverage limits under a Company Policy have been exceeded or would be
exceeded as a result of such Insured Claim.
C-17
<PAGE>
Section 5.4. Agreement for Waiver of Conflict and Shared Defense. With
respect to any claims asserted subsequent to the Time of Distribution that
relate to occurrences prior to the Time of Distribution arising out of or in
connection with the Institutional Pharmacy Business as to which GranCare shall
have, in accordance with Section 5.3(a), filed such claim with SNFCo for
purposes of giving notice to the appropriate insurance carrier, if GranCare
and SNFCo are named as co-defendants in respect of such claim then the Claims
Administration relating thereto will be shared equally by GranCare and SNFCo
and any conflict of interest necessary to the conduct of the joint defense
shall be deemed waived. Nothing in this Section 5.4 shall be construed to
limit or otherwise alter in any way the obligations of the parties to this
Distribution Agreement, including those created by this Distribution
Agreement, by operation of law or otherwise.
Section 5.5. Cooperation. The parties agree to use their commercially
reasonable efforts to cooperate with respect to the various insurance matters
contemplated by this Agreement.
ARTICLE VI.
Dispute Resolution
In the event of a controversy, dispute or claim arising out of, in
connection with, or in relation to the interpretation, performance,
nonperformance, validity or breach of this Distribution Agreement or otherwise
arising out of, or in any way related to this Distribution Agreement,
including, without limitation, any claim based on contract, tort, statute or
constitution (collectively, "Distribution Agreement Disputes"), the party
asserting the Distribution Agreement Dispute shall give written notice to the
other party of the existence and nature of such Distribution Agreement
Dispute. Thereafter, the general counsels of the respective parties shall
negotiate in good faith for a period no less than 60 days after the date of
the notice in an attempt to settle such Distribution Agreement Dispute. If
after such 60 calendar day period such general counsels are unable to settle
such Distribution Agreement Dispute, any party hereto may commence arbitration
by giving written notice to all other party that such Distribution Agreement
Dispute has been referred to the American Arbitration Association for
arbitration in accordance with the provisions of this Article.
All Distribution Agreement Disputes shall be settled by arbitration in
Atlanta, Georgia, before a single arbitrator in accordance with the rules of
the American Arbitration Association (the "Rules"). The arbitrator shall be
selected by the mutual agreement of all parties, but if they do not so agree
within twenty (20) days after the date of the notice of arbitration referred
to above, the selection shall be made pursuant to the Rules from the panels of
arbitrators maintained by the American Arbitration Association. The arbitrator
shall be an individual with substantial professional experience with regard to
resolving or settling sophisticated commercial disputes.
Any award rendered by the arbitrator shall be conclusive and binding upon
the parties hereto; provided, however, that any such award shall be
accompanied by a written opinion of the arbitrator giving the reasons for the
award. This provision for arbitration shall be specifically enforceable by the
parties and the decision of the arbitrator in accordance therewith shall be
final and binding and there shall be no right of appeal therefrom. The parties
agree to comply with any award made in any such arbitration proceedings that
has become final in accordance with the Rules, and agree to the entry of a
judgment in any jurisdiction upon any award rendered in such proceedings
becoming final under the Rules.
In the award the arbitrator shall allocate, in his or her discretion, among
the parties to the arbitration all costs of the arbitration, including,
without limitation, the fees and expenses of the arbitrator and reasonable
attorneys' fees, costs and expert witness expenses of the parties. Absent such
an allocation by the arbitrator, each party shall pay its own expenses of
arbitration, and the expenses of the arbitrator shall be equally shared.
Nothing contained in this Article shall prevent the parties from settling
any Distribution Agreement Dispute by mutual agreement at any time.
C-18
<PAGE>
ARTICLE VII.
Miscellaneous
Section 7.1. Complete Agreement; Construction. This Distribution Agreement,
including the Schedules and the Ancillary Agreements constitute the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all previous negotiations, commitments and writings with respect to
such subject matter. In the event of any inconsistency between this
Distribution Agreement and any Schedule hereto, the Schedule shall prevail. In
the event and to the extent that there shall be a conflict between the
provisions of this Distribution Agreement and the Schedules and the provisions
of (i) the Merger Agreement, the Merger Agreement shall control and (ii) an
Ancillary Agreement, such Ancillary Agreement shall control; provided,
however, that the provisions of this Distribution Agreement shall govern in
the event of and to the extent of any conflict between the provisions of this
Distribution Agreement and the provisions of the Transfer and Assumption
Instruments.
Section 7.2. Counterparts. This Distribution Agreement may be executed in
one or more counterparts, each of which shall be considered one and the same
agreement, and shall become effective when one or more such counterparts have
been signed by each of the parties and delivered to the other parties.
Section 7.3. Survival of Agreements. Except as otherwise contemplated by
this Distribution Agreement, all covenants and agreements of the parties
contained in this Distribution Agreement shall survive the Distribution Date.
Section 7.4. Notices. All notices and other communications hereunder shall
be in writing and hand delivered or mailed by registered or certified mail
(return receipt requested) or sent by any means of electronic message
transmission with delivery confirmed (by voice or automatic machine generated
confirmation) to the parties at the following address (or at such other
addresses for a party as shall be specified by like notice) and will be deemed
given on the date on which such notice is received:
To GranCare:
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
To SNFCo:
GCI Properties, Inc.
c/o GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Attn: General Counsel and Secretary
Telecopy: (770) 698-8199
Section 7.5. Waivers. The failure of either party to require strict
performance by the other party of any provision in this Distribution Agreement
will not waive or diminish that party's right to demand strict performance
thereafter of that or any other provision hereof.
Section 7.6. Amendments. Subject to the terms of Section 7.9 hereof, this
Distribution Agreement and the Ancillary Agreements may not be modified or
amended except by an agreement in writing signed by the parties and, for so
long as the Merger Agreement shall be in effect, approved by Vitalink.
C-19
<PAGE>
Section 7.7. Assignment. This Distribution Agreement shall be assignable in
whole in connection with a merger or consolidation or the sale of all or
substantially all the assets of a party hereto. Otherwise this Distribution
Agreement shall not be assignable, in whole or in part, directly or
indirectly, by any party hereto without the prior written consent of the other
party, and any attempt to assign any rights or obligations arising under this
Distribution Agreement without such consent shall be void.
Section 7.8. Successors and Assigns. The provisions of this Distribution
Agreement shall be binding upon, inure to the benefit of and be enforceable by
the parties and their respective successors and permitted assigns, including,
without limitation, Vitalink.
Section 7.9. Termination. This Agreement (including, without limitation,
Section 2.11 and Article III hereof) may be terminated and the Distribution
may be amended, modified or abandoned at any time prior to the Distribution by
and in the sole discretion of GranCare without the approval of SNFCo or the
shareholders of GranCare. In the event of such termination, no party shall
have any liability of any kind to any other party or any other person. After
the Distribution, this Distribution Agreement may not be terminated except by
an agreement in writing signed by the parties; provided, however, that Section
2.11 shall not be terminated or amended after the Distribution in respect of
the third party beneficiaries thereto without the consent of such persons.
Section 7.10. Subsidiaries. Each of the parties hereto shall cause to be
performed, and hereby guarantees the performance of, all actions, agreements
and obligations set forth herein to be performed by any Subsidiary of such
party or by any entity that is contemplated to be a Subsidiary of such party
on and after the Distribution Date.
Section 7.11. Third Party Beneficiaries. The parties expressly acknowledge
that at the Effective Time GranCare will be merged with and into Vitalink, all
obligations of GranCare hereunder shall become obligations of Vitalink, and
actions of GranCare hereunder to be taken after the Time of Distribution shall
be taken by Vitalink. Except as provided in Section 2.11 relating to directors
and officers liability insurance, this Distribution Agreement is solely for
the benefit of the parties hereto and their respective Subsidiaries and
Affiliates and permitted successors and assigns and shall not be deemed to
confer upon third parties any remedy, claim, liability, reimbursement, claim
of action or other right in excess of those existing without reference to this
Distribution Agreement.
Section 7.12. Attorney Fees. Except as contemplated by an arbitrator's
decision pursuant to Article VI hereof, a party in breach of this Distribution
Agreement shall, on demand, indemnify and hold harmless the other party hereto
for and against all reasonable out-of-pocket expenses, including, without
limitation, reasonable legal fees, incurred by such other party by reason of
the enforcement and protection of its rights under this Distribution
Agreement. The payment of such expenses is in addition to any other relief to
which such other party may be entitled hereunder or otherwise.
Section 7.13. Title and Headings. Titles and headings to sections herein are
inserted for the convenience of reference only and are not intended to be a
part of or to affect the meaning or interpretation of this Distribution
Agreement.
Section 7.14. Schedules. The Schedules shall be construed with and as an
integral part of this Distribution Agreement to the same extent as if the same
had been set forth verbatim herein.
Section 7.15. Specific Performance. Each of the parties hereto acknowledges
that there is no adequate remedy at law for failure by such parties to comply
with the provisions of this Distribution Agreement and that such failure would
cause immediate harm that would not be adequately compensable in damages, and
therefore agree that their agreements contained herein may be specifically
enforced without the requirement of posting a bond or other security, in
addition to all other remedies available to the parties hereto under this
Distribution Agreement.
C-20
<PAGE>
Section 7.16. Governing Law. This Distribution Agreement shall be governed
by and construed in accordance with the laws of the state of Georgia
applicable to contracts executed in and to be performed in that state.
Section 7.17. Severability. In the event any one or more of the provisions
contained in this Distribution Agreement should be held invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein and therein shall not in any way be
affected or impaired thereby. The parties shall endeavor in good faith
negotiations to replace the invalid, illegal or unenforceable provisions with
valid provisions, the economic effect of which shall, to the greatest extent
possible, approximate that of the invalid, illegal or unenforceable
provisions.
IN WITNESS WHEREOF, the parties have caused this Distribution Agreement to
be duly executed as of the day and year first written above.
GranCare, Inc.
By: /s/ Gene E. Burleson
---------------------------------
Name: Gene E. Burleson
Title: Chairman, President and
Chief Executive Officer
New GranCare, Inc.
By: /s/ M. Scott Athans
----------------------------------
Name: M. Scott Athans
Title: President and Chief
Executive Officer
C-21
<PAGE>
EXHIBIT A
INTERNAL SCOUT RESTRUCTURING PLAN
The following is an outline of the steps that will be taken prior to
undertaking the Distribution and the Merger.
1. GCI Properties, Inc., a California corporation ("GCI Properties"), a
first-tier subsidiary of GranCare Health Services, Inc., a California
corporation ("GCHS") and a second-tier subsidiary of GranCare, Inc., a
California corporation ("GCI"), and which will be the subsidiary whose stock
is distributed to the shareholders of GCI, will be reincorporated as New
GranCare, Inc., a Delaware corporation ("New GranCare") through the merger of
GCI Properties with and into New GranCare.
2. TeamCare, Inc., a Delaware corporation, will change its name to TCI, Inc.
("TCI").
3. GCHS will reincorporate as a Delaware corporation under the name
"TeamCare, Inc." ("TeamCare").
4. TCI, which is a first-tier subsidiary of TeamCare and a second-tier
subsidiary of GCI, will be merged with and into TeamCare, with TeamCare as the
survivor, so that the following corporations will become first-tier, wholly-
owned subsidiaries of TeamCare:
CompuPharm of Northern California, Inc., a California corporation
("CompuPharm NC")
CompuPharm of Southern California, Inc., a California corporation
("CompuPharm SC")
GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")
TeamCare of Indiana, Inc., an Indiana corporation ("TeamCare Indiana")
Drug Systems, Inc., a Colorado corporation ("DSI")
TeamCare of Virginia, Inc., a Virginia corporation ("TeamCare-VA")
TeamCare of Wisconsin, Inc., a Wisconsin corporation ("TeamCare of
Wisconsin")
CapCare Health Services, Inc., an Illinois corporation ("CapCare")
Renaissance Mental Health Center, Inc., a Wisconsin corporation
("Renaissance")
CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm-Ohio")
TeamCare Clinical Services, Inc. a New Jersey corporation ("TeamCare
Clinical Services")
5. TeamCare of New Jersey, Inc., a New Jersey corporation ("TeamCare of New
Jersey"), which is a first-tier subsidiary of TeamCare and a second-tier
subsidiary of GCI, will be merged with and into TeamCare, with TeamCare as the
survivor.
6. CompuPharm SC, DSI, TeamCare of Wisconsin and CapCare will be merged with
and into TeamCare.
7. TeamCare will transfer all the stock of the following corporations to New
GranCare:
AMS Green Tree, Inc., a Wisconsin corporation ("AMS-GT")
American-Cal Medical Services, Inc., a California corporation ("Am-Cal")
HMI Convalescent Care, Inc., a California corporation ("HMI")
GranCare South Carolina, Inc., a South Carolina corporation ("GC-SC")
GCI Palm Court, Inc., a California corporation ("GCI-PC")
GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona
corporation ("GCI-EV")
GCI Realty, Inc., a Delaware corporation ("GCI Realty")
GCI Jolley Acres, Inc., a South Carolina corporation ("GCI-JA")
GCI Prince George, Inc., a South Carolina corporation ("GCI-PG")
GCI Springdale Village., Inc., a South Carolina corporation ("GCI-SV")
GCI Village Green, Inc., a South Carolina corporation ("GCI-VG")
GCI Faith Nursing Home, Inc., a South Carolina corporation ("GCI-FN")
GCI Rehab, Inc., a California corporation ("GCI Rehab")
GCI-Cal Health Care Centers, Inc., a California corporation ("GCI-Cal
HCC")
GranCare Home Health Services, Inc., a California corporation ("GCI-Cal
HH")
Renaissance Mental Health Center, Inc., a Wisconsin corporation
8. TeamCare will distribute all of the stock of New GranCare to GCI.
C-22
<PAGE>
9. Winyah Dispensary, LTC of North Carolina, Inc., a North Carolina
corporation ("Winyah-NC"), and TeamCare of South Carolina, Inc., a South
Carolina corporation ("TeamCare South Carolina"), which are wholly owned by
GCI, will merge with and into TeamCare, with TeamCare as the survivor.
10. The pharmacy assets held by Omega/Indiana Pharmacy, L.P., a Delaware
limited partnership in which Omega/Indiana Care Corporation ("O/I Care"), a
wholly owned subsidiary of Evergreen Health Care, Inc., a Georgia corporation
("Evergreen") is the sole general partner and Evergreen is the sole limited
partner, will be sold at fair market value to TeamCare Indiana. Evergreen is a
wholly owned subsidiary of GCI.
11. The pharmacy assets held by Evergreen Healthcare Ltd., L.P., an Indiana
limited partnership in which O/I Care is the sole general partner and Evergreen
is the sole limited partner will be sold at fair market value to TeamCare.
12. Any institutional pharmacy assets owned by GCI or any of its subsidiaries
engaged in the skilled nursing facility business which are used or useful in
the conduct of the institutional pharmacy business will be sold to TeamCare at
a specified price determined to be fair market value and will be delivered to
TeamCare as they are identified.
13. GCI will transfer to New GranCare all the stock of the following
corporations along with any other assets that are owned by GCI or its then
existing pharmacy subsidiaries (TeamCare, CompuPharm-NC, GCI-Innovative,
TeamCare Indiana, TeamCare-VA, Renaissance, CompuPharm-Ohio, TeamCare Clinical
Services, Inc. and S.P.A.N. Purchasing, Inc.) that are not used or useful in
the conduct of the institutional pharmacy business.
AMS Properties, Inc., a Delaware corporation ("AMS-Properties")
Evergreen Healthcare, Inc., a Georgia corporation ("Evergreen")
GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC")
GC Services, Inc., a California corporation ("GC-Services")
GCI Valley Manor Health Care Center, Inc., a Colorado corporation ("GCI
Valley Manor")
GCI Camelia Care Center, Inc., a Colorado corporation ("GCI-Camelia")
Cornerstone Health Management Company, a Delaware corporation
("Cornerstone")
HostMasters, Inc., a California corporation ("HostMasters")
GCI-Colter Village, Inc., an Arizona corporation ("GCI-Colter")
GCI Indemnity, Inc., a Hawaii corporation ("GCI-Indemnity")
GCI-Bella Vita, Inc., a Colorado corporation ("GCI Bella Vita")
GCI-Wisconsin Properties, Inc., a Wisconsin corporation ("GCI-Wisconsin")
GranCare GPO Services, Inc., a Georgia corporation
GranCare Trading, Inc., a Georgia corporation
GCI Simi Valley Healthcare Center, Inc., a California corporation
Professional Health Care Management, Inc., a Michigan corporation
("PHCM")
[STEPS 1 THROUGH 12 WILL BE TAKEN AS SOON AS
PRACTICABLE ONCE THE MERGER AGREEMENT HAS BEEN SIGNED.]
14. Simultaneously with the approval of the transaction by GCI's
shareholders, it is estimated that New GranCare will borrow approximately $165
million from an unrelated third party. New GranCare will use the $165 million
to pay off any intercompany indebtedness owed to GCI, TeamCare, and/or any
TeamCare subsidiaries. Any cash in excess of the intercompany indebtedness will
be distributed as a dividend to GCI. The dividend will be eliminated from GCI's
taxable income under the provisions of the consolidated return regulations.
15. GCI will use all of the cash distributed to GCI by New GranCare which is
not used to pay down intercompany indebtedness to pay down third party
indebtedness (i.e., the convertible notes and the revolving credit agreement).
In order to ensure (for tax purposes) that the cash is in fact used to pay down
third party debt, an escrow or some other arrangement should be implemented
with respect to the receipt and disbursement of the cash in order to establish
that the cash was so used.
16. GCI will distribute all of the stock of New GranCare to GCI's
shareholders pro rata.
17. GCI will merge with and into Vitalink, with Vitalink as the survivor.
18. New GranCare will change its name to GranCare, Inc.
C-23
<PAGE>
ANNEX D
[LOGO OF PAINEWEBBER APPEARS HERE]
September 3, 1996
Board of Directors
GranCare, Inc.
One Ravinia Drive
Atlanta, Georgia 30346
Members of the Board of Directors:
GranCare, Inc. ("GranCare") proposes to undertake a series of transactions
whereby (i) GranCare's businesses and assets that are unrelated to GranCare's
institutional pharmacy business will be contributed to a wholly-owned
subsidiary of GranCare ("SNFCo") pursuant to the terms of an Agreement and Plan
of Distribution by and between GranCare and SNFCo (the "Distribution
Agreement"), and (ii) GranCare will be merged (the "Merger") with and into
Vitalink Pharmacy Services, Inc. ("Vitalink") pursuant to the terms of an
Agreement and Plan of Merger by and between GranCare and Vitalink (the "Merger
Agreement"). Prior to the Merger, GranCare will distribute (the "Distribution")
to the holders of GranCare common stock, without par value (the "GranCare
Stock"), all of its common equity interest in SNFCo. In the Merger, each
outstanding share of GranCare Stock will be converted into the right to receive
0.478 shares of common stock, par value $.01 per share, of Vitalink (the
"Vitalink Stock").
You have requested our opinion as to whether the consideration to be received
by the holders of the GranCare Stock pursuant to the Distribution and the
Merger, taken together, is fair to such holders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed, among other public information, GranCare's Annual
Reports, Forms 10-K and related financial information for the three
fiscal years ended December 31, 1995 and GranCare's Form 10-Q and the
related unaudited financial information for the quarters ended March 31,
1996 and June 30, 1996;
(2) Reviewed, among other public information, Vitalink's Annual
Reports, Forms 10-K and related financial information for the three
fiscal years ended May 31, 1996;
(3) Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets and prospects of
each of GranCare and Vitalink, furnished to us by GranCare and Vitalink,
respectively;
(4) Conducted discussions with members of senior management of
GranCare and Vitalink concerning their respective businesses and
prospects;
D-1
<PAGE>
(5) Reviewed the historical market prices and trading activity of the
GranCare Stock and the Vitalink Stock and compared such prices and
trading histories with those of certain publicly traded companies which
we deemed to be relevant;
(6) Compared the financial position and operating results of GranCare
and Vitalink with that of certain publicly traded companies which we
deemed to be relevant;
(7) Compared the financial terms of the Merger with the financial
terms of certain other business combinations which we deemed to be
relevant;
(8) Considered the potential pro forma effects of the Merger and the
Distribution on Vitalink's and SNFCo's respective projected earnings
per share and capitalization;
(9) Reviewed drafts of the Distribution Agreement and Merger
Agreement, and other ancillary agreements as we deemed relevant, dated
August 28, 1996; and
(10) Reviewed such other financial studies and analyses and performed
such other investigations and took into account such other matters as
we deemed necessary including our assessment of regulatory, general
economic, market and monetary conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information that was publicly available, supplied or otherwise communicated
to us by GranCare and Vitalink and we have not assumed any responsibility to
independently verify such information. We have assumed that the financial
forecasts examined by us were reasonably prepared on bases reflecting the best
currently available estimates and good faith judgments of the management of
GranCare and Vitalink as to the future performance of GranCare, SNFCo and
Vitalink, respectively. We have also relied upon assurances of the management
of GranCare and Vitalink that they are unaware of any facts that would make the
information or financial forecasts provided to us incomplete or misleading. We
have also assumed, with your consent, that: (i) the Merger will be accounted
for under the purchase method of accounting, and (ii) any material liabilities
(contingent or otherwise, known or unknown) of GranCare and Vitalink are as set
forth in the consolidated financial statements of GranCare and Vitalink,
respectively. We have also assumed that the transactions described in the
Merger Agreement and the Distribution Agreement will be consummated on the
terms set forth therein without any waiver and that there will not be any
material taxes payable by GranCare as a result of any such transactions. We
have not made an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of GranCare or Vitalink, nor have we been
furnished with any such evaluations or appraisals. Our opinion is based upon
economic, monetary and market conditions existing on the date hereof.
Furthermore, we express no opinion as to the price or trading range at which
the shares of Vitalink or SNFCo will trade subsequent to consummation of the
Merger and the Distribution, respectively.
Our opinion is directed to the Board of Directors of GranCare and does not
constitute a recommendation to any shareholder of GranCare as to how any such
shareholder should vote on the Merger. This opinion does not address the
relative merits of the Merger, the Distribution and other transactions or
business strategies discussed by the Board of Directors of GranCare as
alternatives to the Merger and the Distribution or the decision of the Board of
Directors of GranCare to proceed with the Merger and the Distribution.
PaineWebber Incorporated was not requested or authorized to solicit, and did
not solicit, potential proposals from any third parties for the acquisition of
GranCare's pharmacy business.
This opinion has been prepared for the use of the Board of Directors of
GranCare and shall not be reproduced, summarized, described or referred to or
given to any other person or otherwise made public without the prior written
consent of PaineWebber Incorporated; provided, however, that this letter may be
reproduced in full in a proxy statement/prospectus relating to the Merger.
PaineWebber Incorporated is currently acting as financial advisor to GranCare
in connection with the Merger and will receive a fee upon consummation of the
Merger. In the past, PaineWebber Incorporated and its affiliates have provided
investment banking services to GranCare and Vitalink and have received fees for
rendering these services.
D-2
<PAGE>
In the ordinary course of its business, PaineWebber Incorporated may trade
the securities of GranCare and Vitalink for its own account and for the
accounts of its customers and, accordingly, may at any time hold long or short
positions in such securities.
On the basis of, and subject to the foregoing, we are of the opinion that, as
of the date hereof, the consideration to be received by the holders of the
GranCare Stock pursuant to the Distribution and the Merger, taken together, is
fair to such holders from a financial point of view.
Very truly yours,
PAINEWEBBER INCORPORATED
D-3
<PAGE>
ANNEX E
[LOGO OF CHASE APPEARS HERE]
October 2, 1996
Board of Directors
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road, Suite 208
Naperville, Illinois 60563
Members of the Board:
You have informed us that GranCare, Inc. ("GranCare") and GCI Properties,
Inc. ("SNFCo") have entered into an Agreement and Plan of Distribution dated
as of September 3, 1996 (the "Distribution Agreement"), which provides, among
other things, for GranCare's transfer of all the assets and all the
liabilities of its Skilled Nursing Business (as defined therein) to SNFCo in
exchange for the issuance of shares of common stock of SNFCo (the
"Restructuring"). In addition, you have informed us that Vitalink Pharmacy
Services, Inc. ("Vitalink") and GranCare have entered into an Agreement and
Plan of Merger dated as of September 3, 1996 (the "Merger Agreement"), which
provides, among other things, for the merger of GranCare with and into
Vitalink (the "Merger"), with Vitalink as the surviving corporation, that
immediately prior to the consummation of the Merger, GranCare shall distribute
all of the capital stock of SNFCo to GranCare's shareholders (the
"Distribution", GranCare, after giving effect to the Distribution, sometimes
being referred to herein as "Post-Distribution GranCare"), and that at the
time of the Merger, Post-Distribution GranCare will not have any material
liabilities or contingencies other than no more than $107,000,000 of
indebtedness for borrowed money. As set forth more fully in the Merger
Agreement, as a result of the Merger, each share of common stock, without par
value, of GranCare (the "GranCare Common Stock") will be converted into the
right to receive .478 of one share (the "Exchange Ratio") of common stock, par
value $.01 per share, of Vitalink (the "Vitalink Common Stock"). You have also
informed us that the Restructuring, the Distribution and the Merger are
expected to be tax-free to each of Vitalink and GranCare and their respective
shareholders.
You have requested that we render our opinion as to the fairness, from a
financial point of view, to Vitalink of the Exchange Ratio in the Merger.
In arriving at the opinion set forth below, we have, among other things:
a. reviewed the Merger Agreement and the Distribution Agreement;
b. reviewed certain publicly available business and financial information
that we deemed relevant relating to Vitalink and Post-Distribution GranCare
and the respective industries in which they operate;
c. reviewed certain internal non-public financial and operating data
provided to us by managements of Vitalink and GranCare relating to the
businesses of Vitalink and Post-Distribution GranCare, including
projections of future financial results of such businesses prepared by
Vitalink and GranCare;
d. discussed with members of Vitalink's and GranCare's senior
managements, Vitalink's and Post-Distribution GranCare's operations,
historical financial statements and future prospects, before and after
giving effect to the Distribution and the Merger, as well as their views of
the business, operational and strategic benefits and other implications of
the Distribution and the Merger, including the level of synergies
reasonably obtainable upon consummation of the Merger;
e. compared the financial and operating performance of Vitalink and Post-
Distribution GranCare with publicly available information concerning
certain other companies we deemed comparable and reviewed the relevant
historical stock prices and trading volumes of the Vitalink Common Stock,
to the extent we deemed relevant, the GranCare Common Stock and certain
publicly traded securities of such other companies;
E-1
<PAGE>
f. reviewed the financial terms of certain recent business combinations
and acquisition transactions we deemed reasonably comparable to the Merger
and otherwise relevant to our inquiry; and
g. made such other analyses and examination as we have deemed necessary
or appropriate.
We have assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for us, or publicly
available for purposes of this opinion and have further relied upon the
assurances of management of Vitalink and GranCare that they are not aware of
any facts that will make such information inaccurate or misleading. We have
neither made nor obtained any independent evaluations or appraisals of the
assets or liabilities of Vitalink or GranCare, nor have we conducted a
physical inspection of the properties and facilities of Vitalink or GranCare.
We have assumed that the financial projections and estimates of reasonably
obtainable synergies provided to us by Vitalink and GranCare have been
reasonably prepared on bases reflecting the best currently available estimates
and judgments of the managements of Vitalink and GranCare as to future
financial performance of Vitalink and Post-Distribution GranCare, as the case
may be (including after taking account the impact of the Distribution and the
Merger). We express no view as to such projections and estimates of reasonably
obtainable synergies or the assumptions on which they were based.
For purposes of rendering our opinion we have assumed, with your consent,
that the synergies described by Vitalink as being reasonably obtainable will
be obtained and that the representations and warranties of each party to the
Merger Agreement contained therein are true and correct, that each party to
the Merger Agreement and to the Distribution Agreement will perform all of the
covenants and agreements required to be performed by such party under such
agreements and that all conditions to the consummation of the Merger
(including, without limitation, the completion of the Distribution) will be
satisfied without waiver thereof. We have also assumed that all material
governmental, regulatory or other consents and approvals will be obtained in
connection with the Distribution and the Merger and that in the course of
obtaining any necessary governmental, regulatory or other consents and
approvals, or any amendments, modifications or waivers to any documents to
which either of Vitalink or GranCare are party, no restrictions will be
imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to Vitalink of the
Merger.
Our opinion herein is necessarily based on market, economic and other
conditions as they exist and can be evaluated on the date of this letter. Our
opinion is limited to the fairness, from a financial point of view, to
Vitalink of the Exchange Ratio in the Merger and we express no opinion as to
the merits of the underlying decision by Vitalink to engage in the Merger.
This opinion does not constitute a recommendation to any Vitalink shareholder
as to how such shareholder should vote with respect to the Merger or the
transaction related thereto.
Chase Securities Inc., as part of its financial advisory business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. We have acted as financial advisor to Vitalink in
connection with the Merger and will receive a fee for our services, which fee
is payable upon our rendering this opinion. In addition, Vitalink has agreed
to indemnify us for certain liabilities arising out of our engagement. As we
have previously advised you, The Chase Manhattan Corporation and its
affiliates, including Chase Securities Inc., in the ordinary course of
business, have, from time to time, provided, and in the future may continue to
provide, commercial and investment banking services to Vitalink, GranCare and
SNFCo, including serving as agent bank under a senior credit facility of Manor
Care, Inc., the controlling shareholder of Vitalink, and acting as co-arranger
and syndication agent under a senior credit facility of GranCare for which a
commitment has been delivered. In the ordinary course of business, we or our
affiliates may trade in the debt and equity securities of Vitalink, GranCare
and SNFCo for our own accounts and for the accounts of our customers and,
accordingly, may at any time hold a long or short position in such securities.
E-2
<PAGE>
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Exchange Ratio in the Merger is fair, from a financial
point of view, to Vitalink.
This opinion is for the use and benefit of the Board of Directors of Vitalink
in its evaluation of the Merger and shall not be used for any other purpose
without the prior written consent of Chase Securities Inc.
Very truly yours,
CHASE SECURITIES INC.
E-3
<PAGE>
ANNEX F
CHAPTER 13 OF THE CALIFORNIA GENERAL CORPORATION LAW
DISSENTERS' RIGHTS
1300 SHORT FORM MERGER; PURCHASE OF SHARES AT FAIR MARKET VALUE; "DISSENTING
SHARES" AND DISSENTING SHAREHOLDER.
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to
vote on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair
market value the shares owned by the shareholder which are dissenting shares
as defined in subdivision (b). The fair market value shall be determined as of
the day before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appreciation or
depreciation in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
(1) Which were not immediately prior to the reorganization or short-form
merger either (A) listed on any national securities exchange certified by
the Commissioner of Corporations under subdivision (o) of Section 25100 or
(B) listed on the list of OTC margin stocks issued by the Board of
Governors of the Federal Reserve System, and the notice of meeting of
shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
(2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisos in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
(3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1309.
(4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(c) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
1301 DISSENTER'S RIGHTS; DEMAND ON CORPORATION FOR PURCHASE OF SHARES.
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such
sections. The statement of price constitutes an offer by the corporation to
purchase at the price stated any dissenting shares as defined in subdivision
(b) of Section 1300, unless they lose their status as dissenting shares under
Section 1300.
F-1
<PAGE>
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance
with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or shortform merger. The statement of fair market
value constitutes an offer by the shareholder to sell the shares at such
price.
1302 DISSENTING SHARES, STAMPING OR ENDORSING. Within 30 days after the date
on which notice of the approval by the outstanding shares or the notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the
shareholder shall submit to the corporation at its principal office or at the
office of any transfer agent thereof, (a) if the shares are certificated
securities, the shareholder's certificates representing any shares which the
shareholder demands that the corporation purchase, to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed or (b) if the
shares are uncertificated securities, written notice of the number of shares
which the shareholder demands that the corporation purchase. Upon subsequent
transfers of the dissenting shares on the books of the corporation the new
certificates, initial transaction statement, and other written statements
issued therefor shall bear a like statement, together with the name of the
original dissenting holder of the shares.
1303 DISSENTING SHAREHOLDER ENTITLED TO AGREED PRICE WITH INTEREST; TIME OF
PAYMENT. (a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the
fair market value of any dissenting shares as between the corporation and the
holders thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount
thereof has been agreed or within 30 days after any statutory or contractual
conditions to the reorganization are satisfied, whichever is later, and in the
case of certificated securities, subject to surrender of the certificates
therefor, unless provided otherwise by agreement.
1304 DISSENTERS ACTIONS; JOINDER; CONSOLIDATION; APPOINTMENT OF
APPRAISERS. (a) If the corporation denies that the shares are dissenting
shares, or the corporation and the shareholder fail to agree upon the fair
market values of the shares, then the shareholder demanding purchase of such
shares as dissenting shares or any interested corporation, within six months
after the date on which notice of the approval by the outstanding shares
(Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed
to the shareholder, but not thereafter, may file a complaint in the superior
court of the proper county praying the court to determine whether the shares
are dissenting shares or the fair market value of the dissenting shares or
both or may intervene in any action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
F-2
<PAGE>
1305 APPRAISERS DUTY AND REPORT; COURT JUDGEMENT; PAYMENT; APPEAL; COSTS OF
ACTION. (a) If the court appoints an appraiser or appraisers, they shall
proceed forthwith to determine the fair market value per shares. Within the
time fixed by the court, the appraisers, or a majority of them, shall make and
file a report in the office of the clerk of the court. Thereupon, on the
motion of any party, the report shall be submitted to the court and considered
on such evidence as the court considers relevant. If the court finds the
report reasonable, the court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time
as may be allowed by the court or the report is not confirmed by the court,
the court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market
value of each dissenting share multiplied by the number of dissenting shares
which any dissenting shareholder who is a party, or who has intervened, is
entitled to require the corporation to purchase, with interest thereon at the
legal rate from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for
the shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than
125 percent of the price offered by the corporation under subdivision (a) of
Section 1301).
1306 DISSENTING SHAREHOLDERS: EFFECT OF PREVENTION OF PAYMENT OF FAIRMARKET
VALUE. To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
1307 DISSENTING SHARES, DISPOSITION OF DIVIDENDS. Cash dividends declared
and paid by the corporation upon the dissenting shares after the date of
approval of the reorganization by the outstanding shares (Section 152) and
prior to payment for the shares by the corporation shall be credited against
the total amount to be paid by the corporation therefor.
1308 DISSENTING SHARES, RIGHTS AND PRIVILEGES. Except as expressly limited
in this chapter, holders of dissenting shares continue to have all the rights
and privileges incident to their shares, until the fair market value of their
shares is agreed upon or determined. A dissenting shareholder may not withdraw
a demand for payment unless the corporation consents thereto.
1309 DISSENTING SHARES, LOSS OF STATUS. Dissenting shares lose their status
as dissenting shares and the holders thereof cease to be dissenting
shareholders and cease to be entitled to require the corporation to purchase
their shares upon the happening of any of the following:
(a) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter
all necessary expenses incurred in such proceedings and reasonable
attorneys' fees.
(b) The shares are transferred prior to their submission for endorsement
in accordance with Section 1302 or are surrendered for conversion into
shares of another class in accordance with the articles.
F-3
<PAGE>
(c) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice
of the approval by the outstanding shares or notice pursuant to subdivision
(i) of Section 1110 was mailed to the shareholder.
(d) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
1310 SUSPENSION OF CERTAIN PROCEEDINGS WHILE LITIGATION IS PENDING. If
litigation is instituted to test the sufficiency or regularity of the votes of
the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
1311 CHAPTER INAPPLICABLE TO CERTAIN CLASSES OF SHARES. This chapter, except
Section 1312, does not apply to classes of shares whose terms and provisions
specifically set forth the amount to be paid in respect to such shares in the
event of a reorganization or merger.
1312 VALIDITY OF REORGANIZATION OR SHORT FORM MERGER, ATTACK ON;
SHAREHOLDERS' RIGHTS; BURDEN OF PROOF. (a) No shareholder of a corporation who
has a right under this chapter to demand payment of cash for the shares held
by the shareholder shall have any right at law or in equity to attack the
validity of the reorganization or short-form merger, or to have the
reorganization or short-form merger set aside or rescinded, except in an
action to test whether the number of shares required to authorize or approve
the reorganization have been legally voted in favor thereof; but any holder of
shares of a class whose terms and provisions specifically set forth the amount
to be paid in respect to them in the event of a reorganization or short-form
merger is entitled to payment in accordance with those terms and provisions
or, if the principal terms of the reorganization are approved pursuant to
subdivision (c) of Section 1202, is entitled to payment in accordance with the
terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder or such party who has not demanded payment of cash
for such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-
form merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand
payment of cash for the shareholder's shares pursuant to this chapter. The
court in any action attacking the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded shall not restrain or enjoin the consummation of the transaction
except upon 10 days prior notice to the corporation and upon a determination
by the court that clearly no other remedy will adequately protect the
complaining shareholder or the class of shareholders of which such shareholder
is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable
as to the shareholders of any party so controlled.
F-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Vitalink is a Delaware corporation. Reference is made to Section 145 of the
Delaware General Corporation Law (the "DGCL") which provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of such corporation), by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at its request in such capacity of another corporation or
business organization against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had no reasonable cause to believe that such
person's conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of a corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses that such officer or director actually and
reasonably incurred.
Reference is also made to Section 102(b)(7) of the DGCL, which permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of the director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Nine of the Restated Certificate of Incorporation of Vitalink
provides for the elimination of personal liability of a director for breach of
fiduciary duty as permitted by Section 102(b)(7) of the DGCL, and provides
that Vitalink shall indemnify its directors and officers to the full extent
permitted by Section 145 of the DGCL.
Vitalink maintains at its expense, a policy of insurance which insures its
directors and officers, subject to certain exclusions and deductions as are
usual in such insurance policies, against certain liabilities which may be
incurred in those capacities.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of September 3,
1996 (as amended), between the Registrant and GranCare,
Inc. (included as Annex B to the Proxy
Statement/Prospectus forming a part of this Registration
Statement).
2.2 Restated and amended Agreement and Plan of Distribution,
dated as of December 20, 1996, between GranCare, Inc. and
New GranCare Properties, Inc. (included as Annex C to the
Proxy Statement/Prospectus forming a part of this
Registration Statement).
2.3 Voting Agreement, dated as of September 3, 1996, between
Manor Care, Inc. and GranCare, Inc.
2.4 Form of Shareholders Agreement, to be dated as of the
Effective Time, between the Registrant and Manor Care,
Inc.
2.5 Form of Non-Competition Agreement, among Registrant,
Manor Care, Inc. and New GranCare Properties, Inc. to be
dated as of the Effective Time.
2.6 Form of Interim Services Agreement, between New GranCare
Properties, Inc. and GranCare to be dated as of the
Effective Time.
2.7 Form of Tax Allocation and Indemnification Agreement,
between GranCare, Inc. and New GranCare Properties to be
dated as of the Effective Time.
3.1 Restated Certificate of Incorporation of Registrant
(filed as Exhibit 3.1 of Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
3.2 Bylaws of Registrant (as filed as Exhibit 3.1 of
Registrant's Registration Statement on Form S-1
(Registration No. 33-43261).
4.1 Form of certificate for the Registrant's Common Stock,
par value $0.1 per share (filed as Exhibit 4.1 of
Registrant's Registration Statement on Form S-1
(Registration No.
33-43261) and incorporated herein by reference).
4.2 Indenture from GranCare, Inc. to First Fidelity Trust
Company, New York, as Trustee, dated as of January 29,
1993 (filed with GranCare, Inc.'s Registration Statement
on Form S-3 (Registration No. 33-56076) and incorporated
herein by reference).
4.3 Form of GranCare, Inc.'s 6 1/2% Convertible Subordinated
Debentures due 2003 (as filed with GranCare, Inc.'s
Registration Statement on Form S-3 (Registration No. 33-
56076) and incorporated herein by reference).
4.4 Form of GranCare, Inc.'s 9 3/8% Senior Subordinated Notes
due 2005 (the "Senior Subordinated Notes") (as filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
4.5 Indenture from GranCare, Inc. to Marine Midland Bank, as
Trustee, dated as of September 15, 1995 (as filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
5.1 Opinion of Cahill Gordon & Reindel regarding the legality
of the securities being registered hereby.
8.1 Opinion of Cahill Gordon & Reindel regarding certain tax
consequences of the Merger and Distribution.
8.2 Opinion of Powell, Goldstein, Frazer & Murphy regarding
certain tax consequences of the Merger and Distribution.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
8.3 Fairness Opinion of PaineWebber Incorporated (included as
Annex D to the Proxy Statement/Prospectus forming part of
this Registration Statement).
8.4 Fairness Opinion of Chase Securities Inc. (included as
Annex E to the Proxy Statement/Prospectus forming part of
this Registration Statement).
10.1 Administrative Services Agreement, dated as of June 1,
1991, by and between the Registrant and Manor Care, Inc.
(filed as Exhibit 10.1 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.2 Tax Agreement, dated as of June 1, 1991, by and between
the Registrant and Manor Care, Inc. (filed as Exhibit
10.2 to Registrant's Registration Statement on Form S-1
(Registration No. 33-43261) and incorporated herein by
reference).
10.3 Intercompany Debt and Credit Agreement, dated as of June
1, 1991, by and between the Registrant and Manor Care,
Inc. (filed as Exhibit 10.3 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.4 Lease Agreement, dated as of June 1, 1991 by and between
the Registrant and Manor Healthcare Corp. (filed as
Exhibit 10.5 to Registrant's Registration Statement on
Form S-1 (Registration No. 33-43261) and incorporated
herein by reference).
10.5 Master Agreement for Pharmacy Services, dated as of June
1, 1991, by and between the Registrant and Manor
Healthcare Corp. (filed as Exhibit 10.6 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-
43261) and incorporated herein by reference).
10.6 Master Pharmacy Consulting Agreement, dated as of June 1,
1991, by and between the Registrant and Manor Healthcare
Corp. (filed as Exhibit 10.7 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.7 Pharmacy Services Consultant Agreement, dated as of June
1, 1991, by and between the Registrant and Manor
Healthcare Corp. (filed as Exhibit 10.8 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-
43261) and incorporated herein by reference).
10.8 Master Agreement for Infusion Therapy Products and
Services, dated as of June 1, 1991, by and between
Vitalink Billing Services, Inc. and Manor Healthcare
Corp. (filed as Exhibit 10.9 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261 and
incorporated herein by reference).
10.9 Key Executive Stock Option and Appreciation Rights Plan
(filed as Exhibit 10.10 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261 and
incorporated herein by reference).
10.10 Amendment to Key Executive Stock Option and Appreciation
Rights Plan (filed as Annex A to the Registrant's Proxy
Statement dated August 20, 1993 and incorporated herein
by reference).
10.11 Form of Executive Cash Incentive Plan (filed as Exhibit
10.11 to Registrant's Form 10-K for the year ended May
31, 1995 and incorporated herein by reference).
10.12 Employment Agreement dated June 5, 1995, between the
Registrant and Donna L. DeNardo (filed as Exhibit 10.12
to Registrant's Form 10-K for the year ended May 31, 1995
and incorporated herein by reference).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
10.13 Employment Agreement dated June 5, 1995, between the
Registrant and Vincent C. DiTrapano (filed as Exhibit
10.13 to Registrant's Form 10-K for the year ended May
31, 1995 and incorporated herein by reference).
10.14 Operations Stock Plan for Key Management Employee (filed
as Exhibit 10.14 to GranCare's Annual Report on Form 10-K
for the annual period ended December 31, 1995 and
incorporated herein by reference).
10.15 Employment Agreement dated November 30, 1995, between the
Registrant and Harold Blumenkrantz (filed as Exhibit
10.15 to Registrant's Form 10-K for the year ended May
31, 1996 and incorporated herein by reference).
10.16 Guarantee Agreement dated December 15, 1995, between the
Registrant and Harold Blumentkrantz (filed as Exhibit
10.16 to Registrant's Form 10-K for the year ended May
31, 1996 and incorporated herein by reference).
10.17 Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement, dated December 28, 1990 by and among
Health and Rehabilitation Properties Trust ("HRPT") and
HostMasters, Inc., AMS Holding Co., American Medical
Services, Inc. and AMS Properties, Inc. ("AMS"), as
amended through December 29, 1993 (filed with GranCare
Inc.'s registration statement on Form S-1 (Registration
No. 33-42595) and incorporated herein by reference).
10.18 Master Lease Document, dated December 28, 1990, between
HRPT and AMS (filed with GranCare Inc.'s Registration
Statement on Form S-1 (Registration No. 33-42595) and
incorporated herein by reference).
10.19 Form of Guaranty, dated December 28, 1990, by American
Medical Services, Inc. and each of its subsidiaries in
favor of HRPT (filed with GranCare, Inc.'s Registration
Statement on Form S-1 (Registration No. 33-42595) and
incorporated herein by reference).
10.20 Amendment to Master Lease between HRPT and AMS, dated as
of December 29, 1993 (filed with GranCare, Inc.'s Current
Report on Form 8-K, on January 13, 1994, and incorporated
herein by reference).
10.21 Amendment to Master Lease between HRPT and GCI Health
Care Centers, Inc. ("GCI"), dated as of December 29, 1993
(filed with GranCare, Inc.'s Current Report on Form 8-K,
on January 13, 1994, and incorporated herein by
reference).
10.22 Employment Agreement, dated January 1, 1994, between Gene
E. Burleson and GranCare, Inc. (filed as Exhibit 10.48 of
GranCare Inc.'s Annual Report on Form 10-K for the annual
period ended December 31, 1995 and incorporated herein by
reference).
10.24 Asset Purchase Agreement among GranCare, Inc., Long Term
Care Pharmaceutical Services Corporation, Long Term Care
Pharmaceutical Services Corporation III, CompuPharm LTC,
Inc., Lawrence H. Garatoni, individually and as trustee,
and Anthony Wright and Edward Spartz, individuals, dated
as of June 30, 1994, with Exhibits (filed with GranCare,
Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1994 and incorporated herein by
reference).
10.25 Asset Purchase Agreement dated as of September 15, 1995,
between CompuPharm, Inc., GCI Innovative Pharmacy, Inc.
and Innovative Pharmacy Services, Inc. (filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
10.26 Assignment and Assumption Agreement, dated December 6,
1995, between CompuPharm, Inc. and HPI HealthCare
Services, Inc. regarding providing pharmaceutical
services to the State of New Jersey (filed as Exhibit
10.48 of GranCare, Inc.'s Annual Report on Form 10-K for
the annual period ended December 31, 1995 and
incorporated herein by reference).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
*10.27 Form of Consent and Amendment to Transaction Documents
dated as of December , 1996 among HRPT, AMS, GCI and New
GranCare, Inc.
*10.28 Form of Limited Guaranty between Registrant and HRPT.
*10.29 Form of Assumption Agreement dated as of December , 1996
by New GranCare, Inc. in favor of HRPT.
13.1 Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996 (filed with the Commission
on October 14, 1996 (Commission File No. 0-19820) and
incorporated herein by reference).
13.2 Registrant's Annual Report on Form 10-K/A for the year
ended May 31, 1996 (filed with the Commission on December
23, 1996. (Commission File No. 0-19820) and incorporated
herein by reference).
21.1 Subsidiaries of Registrant (filed with Registrant's Form
10-K for the year ended May 31, 1995 and incorporated
herein by reference).
23.1 Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).
23.2 Consent of Powell, Goldstein, Frazer & Murphy (included
in Exhibit 8.1).
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Ernst & Young LLP.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of PaineWebber Incorporated.
23.7 Consent of Chase Securities, Inc.
24.1 Powers of attorney (included on signature page to the
Registration Statement).
99.1 Form of proxy to be mailed to stockholders of GranCare,
Inc. in connection with the Merger.
</TABLE>
- --------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to the Registration Statement; (i) to include any
prospectus required by Section 10(a)(3) of the Securities Act of 1933, as
amended (the "Securities Act"); (ii) to reflect in the Proxy
Statement/Prospectus any facts or events arising after the effective date
of the Registration Statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration Statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) above do not
apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in periodic reports filed by the
Registrant with or furnished to the Securities and Exchange Commission
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act that
are incorporated by reference in the Registration Statement.
(2) That for the purpose of determining any liability under the
Securities Act each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be initial
bona fide offering thereof.
II-5
<PAGE>
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Exchange Act (and, where applicable, each filing of an employee benefit plan's
annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in the Registration Statement shall be deemed to be a
new Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(d) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed as
a part of an amendment to the registration statement and will not be used until
such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(e) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(f) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(g) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Gaithersburg, State of
Maryland, on the 31st day of December, 1996.
VITALINK PHARMACY SERVICES, INC.
/s/ Donald C. Tomasso
By: _________________________________
DONALD C. TOMASSO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears
below hereby constitutes James H. Rempe and Scott T. Macomber, and each of
them singly, such person's true and lawful attorneys, each with full power of
substitution to sign for such person and in such person's name and capacity
indicated below, any and all amendments to this Registration Statement,
including post-effective amendments thereto, and to file the same with the
Securities and Exchange Commission, hereby ratifying and confirming such
person's signature as it may be signed by said attorneys to any and all
amendments.
SIGNATURES TITLE DATE
/s/ Donald C. Tomasso Chief Executive December 31, 1996
- ------------------------------------- Officer Chairman,
(DONALD C. TOMASSO) Director and
(Principal
Executive Officer)
/s/ Stewart Bainum, Jr. Vice Chairman of the December 31, 1996
- ------------------------------------- Board and Director
(STEWART BAINUM, JR.)
/s/ Donna L. DeNardo Director, President December 31, 1996
- ------------------------------------- and Chief Operating
(DONNA L. DENARDO) Officer
/s/ Scott T. Macomber Vice President, December 31, 1996
- ------------------------------------- Finance and Chief
(SCOTT T. MACOMBER) Financial Officer
(Principal
Accounting and
Financial Officer)
Director and , 1996
- ------------------------------------- Treasurer
(JAMES A. MACCUTCHEON)
II-7
<PAGE>
SIGNATURES TITLE DATE
/s/ James H. Rempe Director and December 31, 1996
- ------------------------------------- Secretary
(JAMES H. REMPE)
/s/ Harold Blumenkrantz Director December 31, 1996
- -------------------------------------
(HAROLD BLUMENKRANTZ)
/s/ Anil K. Gupta Director December 31, 1996
- -------------------------------------
(ANIL K. GUPTA)
/s/ Marvin Wilensky Director December 31, 1996
- -------------------------------------
(MARVIN WILENSKY)
/s/ Joseph R. Buckley Director December 31, 1996
- -------------------------------------
(JOSEPH R. BUCKLEY)
II-8
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
2.1 Agreement and Plan of Merger, dated as of September 3,
1996 (as amended), between the Registrant and GranCare,
Inc. (included as Annex B to the Proxy
Statement/Prospectus forming a part of this Registration
Statement).
2.2 Restated and amended Agreement and Plan of Distribution,
dated as of December 20, 1996, between GranCare, Inc. and
New GranCare Properties, Inc. (included as Annex C to the
Proxy Statement/Prospectus forming a part of this
Registration Statement).
2.3 Voting Agreement, dated as of September 3, 1996, between
Manor Care, Inc. and GranCare, Inc.
2.4 Form of Shareholders Agreement, to be dated as of the
Effective Time, between the Registrant and Manor Care,
Inc.
2.5 Form of Non-Competition Agreement, among Registrant,
Manor Care, Inc. and New GranCare Properties, Inc. to be
dated as of the Effective Time.
2.6 Form of Interim Services Agreement, between New GranCare
Properties, Inc. and GranCare to be dated as of the
Effective Time.
2.7 Form of Tax Allocation and Indemnification Agreement,
between GranCare, Inc. and New GranCare Properties to be
dated as of the Effective Time.
3.1 Restated Certificate of Incorporation of Registrant
(filed as Exhibit 3.1 of Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
3.2 Bylaws of Registrant (as filed as Exhibit 3.1 of
Registrant's Registration Statement on Form S-1
(Registration No. 33-43261).
4.1 Form of certificate for the Registrant's Common Stock,
par value $0.1 per share (filed as Exhibit 4.1 of
Registrant's Registration Statement on Form S-1
(Registration No.
33-43261) and incorporated herein by reference).
4.2 Indenture from GranCare, Inc. to First Fidelity Trust
Company, New York, as Trustee, dated as of January 29,
1993 (filed with GranCare, Inc.'s Registration Statement
on Form S-3 (Registration No. 33-56076) and incorporated
herein by reference).
4.3 Form of GranCare, Inc.'s 6 1/2% Convertible Subordinated
Debentures due 2003 (as filed with GranCare, Inc.'s
Registration Statement on Form S-3 (Registration No. 33-
56076) and incorporated herein by reference).
4.4 Form of GranCare, Inc.'s 9 3/8% Senior Subordinated Notes
due 2005 (the "Senior Subordinated Notes") (as filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
4.5 Indenture from GranCare, Inc. to Marine Midland Bank, as
Trustee, dated as of September 15, 1995 (as filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
5.1 Opinion of Cahill Gordon & Reindel regarding the legality
of the securities being registered hereby.
8.1 Opinion of Cahill Gordon & Reindel regarding certain tax
consequences of the Merger and Distribution.
8.2 Opinion of Powell, Goldstein, Frazer & Murphy regarding
certain tax consequences of the Merger and Distribution.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
8.3 Fairness Opinion of PaineWebber Incorporated (included as
Annex D to the Proxy Statement/Prospectus forming part of
this Registration Statement).
8.4 Fairness Opinion of Chase Securities Inc. (included as
Annex E to the Proxy Statement/Prospectus forming part of
this Registration Statement).
10.1 Administrative Services Agreement, dated as of June 1,
1991, by and between the Registrant and Manor Care, Inc.
(filed as Exhibit 10.1 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.2 Tax Agreement, dated as of June 1, 1991, by and between
the Registrant and Manor Care, Inc. (filed as Exhibit
10.2 to Registrant's Registration Statement on Form S-1
(Registration No. 33-43261) and incorporated herein by
reference).
10.3 Intercompany Debt and Credit Agreement, dated as of June
1, 1991, by and between the Registrant and Manor Care,
Inc. (filed as Exhibit 10.3 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.4 Lease Agreement, dated as of June 1, 1991 by and between
the Registrant and Manor Healthcare Corp. (filed as
Exhibit 10.5 to Registrant's Registration Statement on
Form S-1 (Registration No. 33-43261) and incorporated
herein by reference).
10.5 Master Agreement for Pharmacy Services, dated as of June
1, 1991, by and between the Registrant and Manor
Healthcare Corp. (filed as Exhibit 10.6 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-
43261) and incorporated herein by reference).
10.6 Master Pharmacy Consulting Agreement, dated as of June 1,
1991, by and between the Registrant and Manor Healthcare
Corp. (filed as Exhibit 10.7 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261) and
incorporated herein by reference).
10.7 Pharmacy Services Consultant Agreement, dated as of June
1, 1991, by and between the Registrant and Manor
Healthcare Corp. (filed as Exhibit 10.8 to Registrant's
Registration Statement on Form S-1 (Registration No. 33-
43261) and incorporated herein by reference).
10.8 Master Agreement for Infusion Therapy Products and
Services, dated as of June 1, 1991, by and between
Vitalink Billing Services, Inc. and Manor Healthcare
Corp. (filed as Exhibit 10.9 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261 and
incorporated herein by reference).
10.9 Key Executive Stock Option and Appreciation Rights Plan
(filed as Exhibit 10.10 to Registrant's Registration
Statement on Form S-1 (Registration No. 33-43261 and
incorporated herein by reference).
10.10 Amendment to Key Executive Stock Option and Appreciation
Rights Plan (filed as Annex A to the Registrant's Proxy
Statement dated August 20, 1993 and incorporated herein
by reference).
10.11 Form of Executive Cash Incentive Plan (filed as Exhibit
10.11 to Registrant's Form 10-K for the year ended May
31, 1995 and incorporated herein by reference).
10.12 Employment Agreement dated June 5, 1995, between the
Registrant and Donna L. DeNardo (filed as Exhibit 10.12
to Registrant's Form 10-K for the year ended May 31, 1995
and incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
10.13 Employment Agreement dated June 5, 1995, between the
Registrant and Vincent C. DiTrapano (filed as Exhibit
10.13 to Registrant's Form 10-K for the year ended May
31, 1995 and incorporated herein by reference).
10.14 Operations Stock Plan for Key Management Employee (filed
as Exhibit 10.14 to GranCare's Annual Report on Form 10-K
for the annual period ended December 31, 1995 and
incorporated herein by reference).
10.15 Employment Agreement dated November 30, 1995, between the
Registrant and Harold Blumenkrantz (filed as Exhibit
10.15 to Registrant's Form 10-K for the year ended May
31, 1996 and incorporated herein by reference).
10.16 Guarantee Agreement dated December 15, 1995, between the
Registrant and Harold Blumentkrantz (filed as Exhibit
10.16 to Registrant's Form 10-K for the year ended May
31, 1996 and incorporated herein by reference).
10.17 Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement, dated December 28, 1990 by and among
Health and Rehabilitation Properties Trust ("HRPT") and
HostMasters, Inc., AMS Holding Co., American Medical
Services, Inc. and AMS Properties, Inc. ("AMS"), as
amended through December 29, 1993 (filed with GranCare
Inc.'s registration statement on Form S-1 (Registration
No. 33-42595) and incorporated herein by reference).
10.18 Master Lease Document, dated December 28, 1990, between
HRPT and AMS (filed with GranCare Inc.'s Registration
Statement on Form S-1 (Registration No. 33-42595) and
incorporated herein by reference).
10.19 Form of Guaranty, dated December 28, 1990, by American
Medical Services, Inc. and each of its subsidiaries in
favor of HRPT (filed with GranCare, Inc.'s Registration
Statement on Form S-1 (Registration No. 33-42595) and
incorporated herein by reference).
10.20 Amendment to Master Lease between HRPT and AMS, dated as
of December 29, 1993 (filed with GranCare, Inc.'s Current
Report on Form 8-K, on January 13, 1994, and incorporated
herein by reference).
10.21 Amendment to Master Lease between HRPT and GCI Health
Care Centers, Inc. ("GCI"), dated as of December 29, 1993
(filed with GranCare, Inc.'s Current Report on Form 8-K,
on January 13, 1994, and incorporated herein by
reference).
10.22 Employment Agreement, dated January 1, 1994, between Gene
E. Burleson and GranCare, Inc. (filed as Exhibit 10.48 of
GranCare Inc.'s Annual Report on Form 10-K for the annual
period ended December 31, 1995 and incorporated herein by
reference).
10.24 Asset Purchase Agreement among GranCare, Inc., Long Term
Care Pharmaceutical Services Corporation, Long Term Care
Pharmaceutical Services Corporation III, CompuPharm LTC,
Inc., Lawrence H. Garatoni, individually and as trustee,
and Anthony Wright and Edward Spartz, individuals, dated
as of June 30, 1994, with Exhibits (filed with GranCare,
Inc.'s Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1994 and incorporated herein by
reference).
10.25 Asset Purchase Agreement dated as of September 15, 1995,
between CompuPharm, Inc., GCI Innovative Pharmacy, Inc.
and Innovative Pharmacy Services, Inc. (filed with
GranCare, Inc.'s Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1995 and
incorporated herein by reference).
10.26 Assignment and Assumption Agreement, dated December 6,
1995, between CompuPharm, Inc. and HPI HealthCare
Services, Inc. regarding providing pharmaceutical
services to the State of New Jersey (filed as Exhibit
10.48 of GranCare, Inc.'s Annual Report on Form 10-K for
the annual period ended December 31, 1995 and
incorporated herein by reference).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PAGE
EXHIBIT NO. DESCRIPTION NUMBER
----------- ----------- ------
<C> <S> <C>
*10.27 Form of Consent and Amendment to Transaction Documents
dated as of December , 1996 among HRPT, AMS, GCI and New
GranCare, Inc.
*10.28 Form of Limited Guaranty between Registrant and HRPT.
*10.29 Form of Assumption Agreement dated as of December , 1996
by New GranCare, Inc. in favor of HRPT.
13.1 Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 31, 1996 (filed with the Commission
on October 14, 1996 (Commission File No. 0-19820) and
incorporated herein by reference).
13.2 Registrant's Annual Report on Form 10-K/A for the year
ended May 31, 1996 (filed with the Commission on December
23, 1996. (Commission File No. 0-19820) and incorporated
herein by reference).
21.1 Subsidiaries of Registrant (filed with Registrant's Form
10-K for the year ended May 31, 1995 and incorporated
herein by reference).
23.1 Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).
23.2 Consent of Powell, Goldstein, Frazer & Murphy (included
in Exhibit 8.1).
23.3 Consent of Arthur Andersen LLP.
23.4 Consent of Ernst & Young LLP.
23.5 Consent of KPMG Peat Marwick LLP.
23.6 Consent of PaineWebber Incorporated.
23.7 Consent of Chase Securities, Inc.
24.1 Powers of attorney (included on signature page to the
Registration Statement).
99.1 Form of proxy to be mailed to stockholders of GranCare,
Inc. in connection with the Merger.
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 2.3
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 { 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 Explorer
Common Stock, par value $.01 per share (collectively with any Explorer Common
Stock acquired hereafter, the "Shares").
C. To induce Scout 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 Scout) 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 Scout 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, or modification or waiver of, the Merger Agreement
in a
<PAGE>
-3-
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: /s/ Stewart Bainum, Jr.
__________________________
Name: Stewart Bainum, Jr.
Title: Chairman, President, and
Chief Executive Officer
GRANCARE, INC.
By: /s/ Gene E. Burleson
--------------------------
Name: Gene E. Burleson
Title: President
<PAGE>
EXHIBIT 2.4
SHAREHOLDERS AGREEMENT
----------------------
AGREEMENT, dated as of August , 1996 (the "Agreement"), by and between
[Explorer], a Delaware corporation ("Explorer"), and [Parent], a Delaware
corporation ("Parent").
RECITALS
WHEREAS, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") dated August , 1996 between Explorer and Scout, a California
corporation ("Scout"), Explorer and Scout will combine their respective pharmacy
businesses and Scout will be merged with and into Explorer (the "Merger") and
Explorer shall be the surviving corporation (capitalized terms used herein and
not otherwise defined shall have the meaning set forth in the Merger Agreement);
and
WHEREAS, Parent currently owns beneficially 11,500,000 shares of
Explorer Common Stock, par value $.01 per share (collectively with any Explorer
Common Stock acquired hereafter, the "Shares"); and
WHEREAS, to induce Scout to enter into the Merger Agreement, Parent as
the majority stockholder of Explorer has agreed to enter into this Agreement for
the purpose of regulating, for a period of three years from the Effective Time,
certain aspects of the relationships as a stockholder with respect to Explorer;
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
CORPORATE GOVERNANCE
Section 1.1 Composition of the Board. Parent acknowledges that,
------------------------
pursuant to the terms of the Merger Agreement, at the Effective Time the Board
of Directors of the Surviving Corporation (the "Board") shall consist of eight
directors, four of whom will be designated by Scout (including successors as
provided in Section 1.3 below, the "Scout Nominees"), and the remaining number
of whom shall be designated by Parent as set forth in Section 1.4 of the Merger
Agreement.
<PAGE>
-2-
Parent will, at all times during the term of this Agreement, vote the Shares or
execute consents, as the case may be, and take all other necessary action
(including, without limitation, any action required in order to satisfy any
quorum requirement) in order to elect or reelect the Scout Nominees. Parent
shall not vote the Shares or execute consents to change the number of Directors
unless such action shall have been recommended by a majority of the Scout
Nominees.
Section 1.2 Removal. Parent agrees that if, at any time, during the
-------
term of this Agreement it is then entitled to vote any of the Shares for the
removal of Directors of the Surviving Corporation, it will not vote any of the
Shares in favor of the removal of any Scout Nominee, unless such removal shall
be requested as set forth in the following sentence. Parent agrees that if (a) a
majority of the Scout Nominees request removal of a Scout Nominee in writing or
(b) a majority of the full Board of Directors requests the removal of a Director
for cause, Parent shall vote the Shares in favor of such removal.
Section 1.3 Vacancies. If, during the term of this Agreement, there
---------
shall exist or occur a vacancy of the Board and such vacancy shall be created by
the death, disability, retirement, resignation, removal of a Scout Nominee:
(a) The remaining Scout Nominees shall designate another individual
(the "Nominee") to fill such vacancy and serve as a director of the Surviving
-------
Corporation; and
(b) Parent, at all times during the term of this Agreement, will
vote its Shares, or execute a written consent, as the case may be, and take all
other necessary action (including, without limitation, any action required in
order to satisfy any quorum requirements) in order to ensure that the Nominee is
elected to the Board.
Section 1.4 Amendment of By-laws. Parent acknowledges that
--------------------
Vitalink's By-laws, in the form attached hereto as Annex 1 (the "By-laws"),
reflect the agreement between the parties to the Merger Agreement as to certain
matters of corporate governance. In furtherance of such agreement, during the
term of this Agreement, Parent will use all commercially reasonable efforts to
cause board members who are not GranCare Nominees to approve amendments to the
By-laws only if such amendments are approved by a majority of the GranCare
Nominees.
ARTICLE II
RESTRICTIONS ON TRANSFER OF
COMMON STOCK
Section 2.1 Restriction on Public Transfer. Other than as provided
------------------------------
in Section 2.2 below or in the manner and to the extent permitted by the volume
and manner or sale provisions of Rule 144 (or any successor provisions under the
Securities Act) during the term of this Agreement Parent will not
<PAGE>
-3-
sell, assign, transfer, pledge or otherwise dispose of (any such event, a
"Transfer") the Shares in the public market.
Section 2.2 Public Offering. During the term of this Agreement,
---------------
Parent may, with the prior written consent of a majority of the Scout Nominees,
Transfer the Shares in a public offering pursuant to a registration statement
declared effective by the SEC.
Section 2.3 Restriction on Private Transfer. During the term of this
-------------------------------
Agreement Parent shall not Transfer in a private transaction or series of
private transactions more than 10% of the outstanding Explorer Common Stock to
any Person or group (as such terms are used in Section 13(d) and the relevant
rules promulgated under the Exchange Act or any successor provision) unless
immediately prior to such Transfer such Person shall have executed and delivered
to the Surviving Corporation a written agreement pursuant to which such Person
shall be bound by the terms of this Agreement. The total outstanding Explorer
Common Stock shall be determined at the time of each transfer based on the most
recent Form 10-K or Form 10-Q available with respect to the Surviving
Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Representations and Warranties of Parent. 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 carry on its business as now
being conducted. Parent has the requisite corporate power and other authority to
enter into this Agreement and consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by Parent and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent. This Agreement has been duly executed
and delivered by Parent and constitutes a valid and binding obligation of Parent
enforceable against it in accordance with its terms.
Section 3.1 Representations and Warranties of Explorer. Explorer is
------------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted. Explorer has the requisite
<PAGE>
-4-
corporate power and other authority to enter into this Agreement and consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by Explorer and the consummation of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on the part
of Explorer. This Agreement has been duly executed and delivered by Explorer and
constitutes a valid and binding obligation of Explorer, enforceable against it
in accordance with its terms.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Governing Law. This Agreement shall be governed by the
-------------
laws of the State of Delaware (regardless of the law 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 4.2 Binding Effect. This Agreement shall be binding on and
--------------
inure to the benefit of the parties hereto and their respective legal
representatives, successor and assigns. Nothing in this Agreement, expressed or
implied is intended to confer on any persons other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement. Notwithstanding the foregoing,
any Scout Nominee shall have standing to assert any claim for any breach of this
Agreement or to otherwise take such action as may be deemed necessary or
appropriate to enforce the provisions of this Agreement. Any Scout Nominee
taking action reasonably believed to be consistent with enforcing the provisions
of this Agreement shall be indemnified for the consequences of such action to
the fullest extent permitted by law and any expenses incurred in connection
therewith shall be for the account of and paid promptly by Explorer.
Section 4.3 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
<PAGE>
-5-
unenforceability shall only apply as to such party in the specific jurisdiction
where such judgment shall be made.
Section 4.4 Recapitalization, Exchanges, Etc. All the provisions of
--------------------------------
this Agreement shall apply, to the full extent set forth herein with respect to
the Shares and any and all securities of the Surviving Corporation or any
successor or assign of the Surviving Corporation (whether by merger,
consolidation, sale of assets or otherwise) which may be issued in respect of,
in exchange for, or in substitution of the Shares or by reason of any stock
dividend, split, reverse split, combination, recapitalization, reclassification,
merger, consolidation or otherwise.
Section 4.5 Notices, Etc. All notices and other communications
------------
hereunder shall be in writing and shall be delivered in the manner and at the
address (unless subsequently notified to the contrary in the manner provided
therein) as provided in the Merger Agreement.
Section 4.6 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 4.7 Amendment. This Agreement may be amended, modified or
---------
supplemented only with the written agreement of Explorer and Parent.
Section 4.8 Termination. This Agreement shall terminate and have no
-----------
further force or effect on any party hereto on the date three years from the
Effective Time.
Section 4.9 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.
<PAGE>
-6-
IN WITNESS WHEREOF, the parties hereto have executed this agreement
as of the date above written.
[PARENT]
By: __________________________
Name:
Title:
[EXPLORER]
By: __________________________
Name:
Title:
<PAGE>
EXHIBIT 2.5
NON-COMPETITION AGREEMENT
AGREEMENT, dated as of ,1996 (the "Agreement"), by and among
Explorer, a Delaware corporation ("Explorer"), Parent, a Delaware corporation
("Parent") and SNFCo, a [ ] corporation ("SNFCo").
RECITALS
WHEREAS, in accordance with the terms of a Distribution Agreement
dated September , 1996 (the "Distribution Agreement") between Scout and SNFCo,
the Skilled Nursing Businesses currently conducted by Scout, a California
corporation ("Scout"), will be restructured such that all such businesses will
be held by SNFCo (capitalized terms used herein and not defined shall have the
meaning set forth in the Distribution Agreement); and
WHEREAS, pursuant to an Agreement and Plan of Merger (the "Merger
Agreement") dated September , 1996 between Explorer and Scout, Explorer and
Scout will combine their respective pharmacy businesses and Scout will be merged
with and into Explorer (the "Merger") with Explorer the surviving corporation;
and
WHEREAS, pursuant to the Distribution Agreement, immediately prior to
the Merger the stockholders of Scout will receive as a dividend one share of
common stock of SNFCo for each share of Scout common stock currently held by
them as of the Distribution Record Date; and
WHEREAS, to induce Scout to enter into the Merger Agreement and the
Distribution Agreement, Parent, SNFCo and Explorer have agreed to enter into
this Agreement for the purpose of regulating, for a period of three years from
the Effective Time, certain aspects of their business relationships;
NOW, THEREFORE, in consideration of the premises and the mutual
representations, warranties, covenants, agreements and conditions contained
herein, the parties hereto agree as follows:
<PAGE>
-2-
ARTICLE I
NON-COMPETITION - PHARMACY BUSINESS
Section 1.1 Non-competition. Parent and SNFCo acknowledge that: the
---------------
principal business of Explorer is, and will be following the Merger, the
institutional pharmacy business (the "Institutional Pharmacy Business"), the
Institutional Pharmacy Business of Explorer is national in scope and Explorer
will suffer substantial and irreparable harm in the event Parent or SNFCo should
engage in the Institutional Pharmacy Business in competition with Explorer.
Accordingly, for a period of three years from the Effective Time neither Parent
nor SNFCo will, directly or indirectly, own, manage, operate, join, control or
participate in the ownership, management, operation or control of any person
(other than Explorer) that is engaged in the Institutional Pharmacy Business in
the United States, other than temporarily as provided in Section 1.3 hereof.
Section 1.2 Severability. Parent and SNFCo acknowledge that the
------------
restricted period of time and geographical area under Section 1.1 hereof are
reasonable, in view of the nature of the Institutional Pharmacy Business, the
knowledge of Parent and SNFCo of the Institutional Pharmacy Business and
transactions contemplated by the Distribution Agreement and the Merger
Agreement. Notwithstanding the foregoing, if any provision, or any part thereof,
of this Article I is held to be unenforceable because of the duration thereof or
the area covered thereby, the parties agree that the court making the
determination shall have the power to reduce the duration or the area of such
provision or to delete specific words or phrases, and in its reduced or amended
form such provision shall then be enforceable and enforced.
Section 1.3 Option to Purchase.
------------------
(a) Explorer recognizes that Parent and SNFCo each (as it has in
the past) may in the future acquire healthcare businesses (an "Acquisition")
which also include an Institutional Pharmacy Business or an interest therein,
the ownership or possession of which would violate the terms of Section 1.1
hereof. Explorer agrees that Parent or SNFCo may make such an Acquisition so
long as it complies with the terms of this Section 1.3. The proposed acquiror
(Parent or SNFCo, as the case may be, the "Acquiror") shall, not less than 30
days prior to the proposed closing date of the Acquisition, give written
<PAGE>
-3-
notice (the "Purchase Notice") to Explorer of the terms of such Acquisition
including, the identity of the seller (the "Seller") and the proposed purchase
price for the Acquisition and audited historical financial statements of the
Acquisition and of the Institutional Pharmacy Business portion of the
Acquisition for a period of three fiscal years prior to the Acquisition to the
extent available and otherwise unaudited financial statements. The purchase
price for the Institutional Pharmacy Business to be paid by Explorer shall be
the price specified by the Acquiror ("Purchase Price") in the Purchase Notice,
which price shall not exceed an amount equal to 120 percent of the product of
(i) the earnings before interest, taxes, depreciation and amortization for the
most recent fiscal year determined in accordance with generally accepted
accounting principles consistently applied ("EBITDA") as reflected in the most
recent annual financial statement of the Institutional Pharmacy Business portion
of the Acquisition and (ii) a fraction, the numerator of which is the aggregate
purchase price for the Acquisition and the denominator of which is the EBITDA
for the most recent fiscal year as reflected in most recent annual financial
statement of the Acquisition. Explorer shall have the right to purchase the
Institutional Pharmacy Business portion of the Acquisition by giving written
notice to the Acquiror within 15 business days following receipt of the Purchase
Notice. Explorer and the Acquiror shall negotiate in good faith regarding the
other terms of the purchase of such Institutional Pharmacy Business by Explorer
with reference to the manner and under the terms and conditions as the
Acquisition and shall execute such documents reasonably required to document
such purchase.
(b) In the event Explorer elects not to purchase such Institutional
Pharmacy Business at the Purchase Price, the Acquiror nonetheless may complete
the Acquisition but use its commercially reasonable efforts to divest itself of
such Institutional Pharmacy Business within one year of the closing of the
Acquisition. In such event, the Acquiror may divest such Institutional Pharmacy
Business without further obligation to Explorer at a price payable in cash that
equals or exceeds the Purchase Price provided that the Institutional Pharmacy
Business is otherwise being sold on the same terms as it had been proposed to be
sold to Explorer.
(c) In the event that Acquiror determines to sell such
Institutional Pharmacy Business for a price less than the Purchase Price, the
Acquiror shall give prompt written notice to Explorer (the "Sale Notice"), which
Sale Notice shall
<PAGE>
-4-
contain (i) the proposed minimum sale price and (ii) all other material terms
and conditions of the proposed sale. Each Sale Notice shall be deemed and
irrevocable offer to sell, on the terms set forth in such Sale Notice and
herein, such Institutional Pharmacy Business and Explorer will have the
irrevocable and exclusive option, as hereinafter provided, to buy on the terms
set forth in such Sale Notice and herein, such Institutional Pharmacy Business.
Within 10 business days following receipt by Explorer of the Sale Notice,
Explorer shall give written notice to the Acquiror if Explorer elects to
purchase such Institutional Pharmacy Business (the "Acceptance Notice"). If the
Acquiror does not receive the Acceptance Notice from Explorer within such ten
business-day period, Explorer shall be deemed to have declined to purchase such
Institutional Pharmacy Business and the Acquiror shall be free to sell such
Institutional Pharmacy Business at a price equal to or exceeding the price and
on the terms specified in the Sale Notice. If Explorer elects to purchase such
Institutional Pharmacy Business, the Acceptance Notice shall be deemed to be an
irrevocable commitment to purchase such Institutional Pharmacy Business on the
terms set forth in such Sale Notice and herein. Upon exercise of Explorer's
right of first offer pursuant to this Section 1.3(c), the Acquiror and Explorer
shall be legally obligated to consummate the purchase and sale contemplated
thereby. The Acquiror and Explorer shall negotiate in good faith regarding the
other terms of the purchase and shall use all commercially reasonable efforts to
secure any approvals required in connection therewith and to close such purchase
and sale as soon as reasonably practicable.
(d) The parties hereto agree that the acquisition after the Time of
Distribution by SNFCo of the businesses code-named "Project Balloon" shall be
exempt from this Article I.
ARTICLE II
NON-COMPETITION-SKILLED NURSING BUSINESSES
Section 2.1 Non-competition. Explorer acknowledges that: one of the
---------------
principal businesses of each of Parent and SNFCo is the construction and
management of skilled nursing facilities (the "Skilled Nursing Business"); that
the Skilled Nursing Business of Parent and SNFCo is national in scope and that
Parent and SNFCo will suffer substantial and irreparable
<PAGE>
-5-
harm in the event Explorer should enter into competition with Parent and SNFCo.
Accordingly, for a period of three years from the Effective Time Explorer will
not, directly or indirectly, own, manage, operate, join, control or participate
in the ownership, management, operation or control of any business that is
engaged in the Skilled Nursing Business in the United States, other than
temporarily as provided in Section 2.3 hereof.
Section 2.2 Severability. Explorer acknowledges that the restricted
------------
period of time and geographical area under Section 2.1 hereof are reasonable, in
view of the nature of the Skilled Nursing Business, the knowledge of Explorer of
the Skilled Nursing Business and transactions contemplated by the Distribution
Agreement and the Merger Agreement. Notwithstanding the foregoing, if any
provision, or any part thereof, of this Article II is held to be unenforceable
because of the duration thereof or the area covered thereby, the parties agree
that the court making the determination shall have the power to reduce the
duration or the area of such provision or to delete specific words or phrases,
and in its reduced or amended form such provision shall then be enforceable and
enforced.
Section 2.3 Notification. Explorer hereby agrees that, in the event
------------
it acquires assets associated with the Skilled Nursing Business, or a company
engaged in the Skilled Nursing Business, as a result of the acquisition of one
or more businesses not in the Skilled Nursing Business, it will notify Parent
and SNFCo upon its acquisition thereof of the nature of such assets or company.
Explorer also agrees that it will divest itself of such assets or company within
one year of the acquisition thereof.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of Parent. 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 carry on its
business as now being conducted. Parent has the requisite corporate power and
other authority to enter into this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by Parent and
the consummation of the
<PAGE>
-6-
transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Parent. This Agreement has been duly executed
and delivered by Parent and constitutes a valid and binding obligation of Parent
enforceable against it in accordance with its terms.
Section 3.2 Representations and Warranties of Explorer. Explorer is
------------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has the requisite corporate power and authority to carry
on its business as now being conducted. Explorer has the requisite corporate
power and other authority to enter into this Agreement and consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
by Explorer and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Explorer.
This Agreement has been duly executed and delivered by Explorer and constitutes
a valid and binding obligation of Explorer, enforceable against it in accordance
with its terms.
Section 3.3 Representations and Warranties of SNFCo. SNFCo is duly
---------------------------------------
organized, validly existing and in good standing under the laws of the State of
[ ] and has the requisite corporate power and authority to carry on its
business as now being conducted. SNFCo has the requisite corporate power and
other authority to enter into this Agreement and consummate the transactions
contemplated hereby. The execution and delivery of this Agreement by SNFCo and
the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of SNFCo. This
Agreement has been duly executed and delivered by SNFCo and constitutes a valid
and binding obligation of SNFCo, enforceable against it in accordance with its
terms.
ARTICLE IV
MISCELLANEOUS
Section 4.1 Governing Law. This Agreement shall be governed by the
-------------
laws of the State of Delaware (regardless of the law 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.
<PAGE>
-7-
Section 4.2 Binding Effect. This Agreement shall be binding on and
--------------
inure to the benefit of the parties hereto and their respective legal
representatives, successor and assigns. Nothing in this Agreement, expressed or
implied is intended to confer on any persons other than the parties hereto or
their respective successors and assigns, any rights, remedies, obligations or
liabilities under or by reason of this Agreement .
Section 4.3 Notices, Etc. All notices and other communications
------------
hereunder shall be in writing and shall be delivered in the manner and at the
address (unless subsequently notified to the contrary in the manner provided
therein) as provided in the Merger Agreement (in the case of Parent and
Explorer) and in the Distribution Agreement (in the case of SNFCo).
Section 4.4 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 4.5 Amendment. This Agreement may be amended, modified or
---------
supplemented only with the written agreement of Explorer, SNFCo and Parent.
<PAGE>
-8-
IN WITNESS WHEREOF, the parties hereto have executed this agreement
as of the date above written.
PARENT
By: __________________________
Name:
Title:
EXPLORER
By: __________________________
Name:
Title:
SNFCo
By: __________________________
Name:
Title:
<PAGE>
EXHIBIT 2.6
INTERIM SERVICES AGREEMENT
THIS INTERIM SERVICES AGREEMENT (the "Agreement"), dated as of
______________ __, 1997, by and between Scout, Inc., a California corporation
(the "Company" or "Scout") and SNFCo, Inc. a California corporation ("SNFCo").
W I T N E S S E T H:
-------------------
WHEREAS, the company and Explorer, Corp., a Delaware corporation
("Explorer"), have entered 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 Explorer;
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, immediate prior to the Effective Time, the Company's Board of
Directors, subject to the approval of the Company's shareholders, expects to
complete the Distribution pursuant to the Agreement and Plan of Distribution
dated as of September 3, 1996 by and between Scout and SNFCo (the "Distribution
Agreement");
WHEREAS, the purpose of the Distribution is to make possible the Merger
by divesting the Company of the Skilled Nursing Business which Explorer is
unwilling to acquire; and
WHEREAS, in the interest of an orderly transition, SNFCo desires to
provide, and Scout (for the benefit of Explorer after the Effective Time)
desires to receive, certain support services from SNFCo, as hereinafter
specifically provided (collectively, the "Services" and, individually, a
"Service"), for a limited period after the date hereof, and the parties desire
to set forth herein the basis on which the Services shall be provided to SNFCo
(and Explorer following the Effective Time).
NOW, THEREFORE, in consideration of the mutual covenants and premises
contained herein, SNFCo and Scout agree as follows:
1. DEFINITIONS. Unless the context otherwise requires, capitalized
terms not otherwise defined herein shall have the respective meanings ascribed
to such terms pursuant to the Distribution Agreement.
<PAGE>
2. SERVICES. The specific Services to be provided by SNFCo to Scout
are comprised of the administrative services more particularly set forth on
ATTACHMENT 1 hereto. Subject to the terms of this Agreement, upon the written
request of the Chief Financial Officer of a Scout or a person designated to act
on his behalf in an instrument executed by the Scout Chief Financial Officer (a
"Scout Authorized Officer") and delivered to SNFCo, SNFCo will provide each of
the Services to Scout in the manner and to the same general extent as such
Services have been provided by Scout in connection with its Institutional
Pharmacy Business prior to the Distribution Date.
1. TERM. Except with respect to Section 13, the term of this Agreement
shall commence on the date hereof and terminate upon the first to occur of (a)
the first (1st) anniversary of the date hereof, or (b) the date on which the
parties hereto shall mutually agree in writing to terminate this Agreement (the
"Term"). Certain Services shall be provided only for the periods specified in
ATTACHMENT 1 hereto, unless otherwise agreed to by the parties. In addition,
Scout shall have the right to terminate a Service or Services upon sixty (60)
days prior written notice to SNFCo. Termination of one or more Services by Scout
shall not affect the obligation of SNFCo to furnish all other Services for the
remainder of the Term.
4. COST. Unless otherwise expressly agreed in writing executed by a
duly authorized officer of Scout and SNFCo, the Services shall be provided to
Scout at the costs specified for such services on ATTACHMENT 1 or ATTACHMENT 2
hereto. To the extent the Attachments hereto do not specify the cost of a
specific Service, Scout will pay SNFCo (i) the allocated portion of the base
salaries of SNFCo's employees providing such Service and (ii) the amount of
SNFCo's direct and indirect costs (excluding any amounts attributable to lost
productivity), expenses and disbursements incurred in connection with providing
such Service to Scout.
5. DELEGATION. SNFCo may retain Services of such third parties, either
by oral or written contract, s SNFCo may, from time to time, deem necessary or
appropriate to facilitate the expeditious discharge of SNFCo's responsibilities
hereunder, and SNFCo shall be entitled to full reimbursement from Scout on whose
behalf such third parties' Services were obtained for all fees and expenses paid
by SNFCo to such third parties as provided in Section 4 hereof.
6. TRANSITION SERVICES TEAM. To facilitate administration,
communication, and problem resolution related to the Services, Scout and SNFCo
shall appoint a transition services team ("Transition Services Team") consisting
of two (2) persons, one (1) of whom shall be appointed by Scout (the "Scout
Appointee") and one (1) of whom shall be appointed by Scout (the "SNFCo
Appointee"). The SNFCo Appointee shall be authorized to make all decisions
concerning the pricing, provision, continuation after the Term, and cessation of
Services on behalf of SNFCo. The Scout Appointee shall be authorized to make all
decisions concerning the pricing, provision, continuation after the Term, and
cessation of Services on behalf of Scout.
7. INDEPENDENCE. All employees and representatives of SNFCo providing
Services to Scout will be deemed for purposes of all compensation and employee
benefits to be employees or representatives of SNFCo and not employees or
representatives of Scout. In performing such Services, such employees or
representatives will be under the direction, control and supervision of SNFCo
(and not Scout) and SNFCo will have the sole right to exercise all authority
with respect to the employment (including termination of employment), assignment
and compensation of such
<PAGE>
employees and representatives. SNFCo shall be solely responsible for the payment
of all payroll and withholding taxes relating to its employees for services
provided to Scout during the Term.
8. IMPRACTICABILITY. SNFCo shall not be required to provide any
Service to the extent the performance of provision of such Service becomes
impracticable as a result of a cause or causes outside the reasonable control of
SNFCo including unfeasible technological requirements, or to the extent the
performance of such Service would require SNFCo to violate any applicable laws,
rules or regulations or result in the breach of any license, permit or
applicable contract.
9. ADDITIONAL RESOURCES. In providing the Services, SNFCo shall not be
obligated to: (i) hire any additional employees, (ii) maintain the employment of
any specific employee or (iii) purchase, lease or license any additional
equipment or software.
10. FORCE MAJEURE. The obligations of SNFCo under this Agreement,
except as to payment for Services actually provided, re subject to conditions of
Force Majeure, as below defined. "Force Majeure" means an act of God, strike or
walkout or other labor dispute, act of the public enemy, ware declared or
undeclared, blocked, revolution, riot, insurrection, civil commotion, lightning,
fire, storm, flood, earthquake, explosion, governmental action or restraint,
embargo, and any other cause, whether of the kind specifically enumerated above
or otherwise, which is not reasonably within the control of the party affected
thereby.
11. NONDISCLOSURE. In the event that, during the term hereof and in
connection with a party's performance of its obligations hereunder, either party
shall receive information concerning the other party hereto which the receiving
party knows, or has reason to believe, is confidential or proprietary to the
party to whom such information relates,the party receiving such information
shall take all reasonable steps to: (a) protect and hold such information in
confidence and prevent its disclosure to third parties unless such third parties
are under a duty of confidentiality to the party to which such information
relates,and (b) restrict its use to whose purposes consented to in writing by
the party to whom such information relates, except that the party receiving such
information shall not be required to protect or hold in confidence any
information or data which (a) is or becomes available to the public without the
fault of the receiving party, (b) is independently developed by the receiving
party, (c) is disclosed to the receiving party by a third party known to the
receiving party by a third party known to the receiving party not to be under
any duty of confidentiality to the party to whom such information relates with
respect to such information, or (d) except as may otherwise be required by law.
This Section 11 shall not limit the obligation of the parties under the
Distribution Agreement to provide access to records after the date hereof.
12. LIMITATION OF LIABILITY. SNFCo's liability to Scout in connection
with this Agreement and the Services to be provided by SNFCo hereunder shall be
limited to (i) actual damages arising from SNFCO's gross negligence or willful
misconduct in the performance of its duties and responsibilities hereunder, and
(ii) in all other cases of breach of this Agreement, repetition of a Service for
the purpose of correcting an error or omission where reasonable or appropriate
under the circumstances; provided that in no event shall SFNCo be liable for any
incidental or consequential damages.
-3-
<PAGE>
13. INDEMNITY.
(a) SNFCo agrees to defend, indemnify and hold Scout and its officers,
directors, employees and agents harmless from and against and all
liabilities, losses, claims, damages, and expenses of any nature, including
reasonable attorneys' fees, that are actually suffered by Scout arising out of
the performance of the Services hereunder, except where such liability, loss,
claim, damage or expense shall have been caused by Scout's gross negligence or
willful misconduct in the performance of its duties and responsibilities
hereunder. Nothing in this paragraph shall be construed to relieve Scout of its
responsibilities pursuant to this Agreement.
(b) Scout agrees to defend, indemnify and hold SNFCo and its officers,
directors, employees and agents harmless from and against any and all
liabilities, losses, claims, damages, and expenses of any nature, including
reasonable attorneys' fees, that are actually suffered by SNFCo arising out of
the performance of the Services hereunder, except where such liability, loss,
claim, damage or expense shall have been caused by SNFCo's gross negligence or
willful misconduct in the performance of its duties and responsibilities
hereunder. Nothing in this paragraph shall be construed to relieve SNFCo of its
responsibilities pursuant to this Agreement.
14. MUTUAL COOPERATION. Scout and SNFco will provide each other with
information and assistance reasonably necessary to investigate, defend or
prosecute any claims, suits, charges, including, but not limited to, equal
employment opportunity, workers compensation, personal injury, insurance and
similar claims brought by or against Scout or SNFCo relating to either of their
businesses. This provision shall survive the termination of this Agreement.
15. THIRD PARTY RIGHTS. Nothing in this Agreement, express or implied, is
intended to confer upon any person (including, without limitation, employees),
other than the parties hereto and their respective successors and assigns
(including, without limitation, Explorer as provided in Section 17 hereof), any
rights or remedies of any nature whatsoever under or by reason of this
Agreement.
16. RELATIONSHIP OF PARTIES. Nothing in this Agreement shall be deemed or
construed by the parties or any third party as creating the relationship of
principal and agent, partnership or joint venture between the parties, it being
understood and agreed that no provision contained herein, and no act of the
parties, shall be deemed to create any relationship between the parties other
than the relationship of independent contractor nor be deemed to vest any
rights, interest or claims in any third parties.
17. SUCCESSOR AND ASSIGNS. This Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties hereto,
provided that this Agreement may not be assigned by either of the parties hereto
without the prior written consent of the other. Explorer has entered into the
Merger Agreement pursuant to which Scout shall be merged with and into Explorer.
At the Effective Time, Explorer shall succeed to all of the rights and
obligations of Scout hereunder.
18. NOTICES. All notices and other communications pursuant to this
Agreement shall be in writing and shall be deemed to be sufficient if contained
in a written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized, overnight courier
-4-
<PAGE>
or mailed by registered or certified mail (return receipt requested), postage
prepaid, to the parties at the respective addresses set forth in the
Distribution Agreement (or at such other address for a party as shall be
specified by like notice). All such notices and other communications shall be
deemed to have been received (a) in the case of personal delivery, on the date
of such delivery, (b) in the case of a telecopy, when the party receiving such
telecopy shall have confirmed receipt of the communication, (c) in the case of
delivery by nationally-recognized, overnight courier, on the second Business Day
following dispatch and (d) in the case of mailing, on the fifth Business Day
following such mailing.
19. ENTIRE AGREEMENT; AMENDMENT OR WAIVER.
(a) This Agreement (together with all of the exhibits hereto, which
are incorporated by reference herein and constitute an integral part hereof)
constitutes the entire agreement and understanding among SNFCo and Scout with
respect to the subject matter hereof, and supersedes any and all prior oral and
written agreements, commitments and understandings among the parties hereto with
respect to such subject matter.
(b) This Agreement may be amended, supplemented or modified, and the
observance of any provision hereof may be waived, only by a written instrument
making specific reference to this Agreement, signed by the party (or parties)
against whom the enforcement of any amendment, supplement or modification or
waiver is sought. No waiver by any party of any condition, and no breach of any
provision, term, covenant, representation or warranty contained in this
Agreement (whether by conduct or otherwise) in any one or more instances, shall
be deemed to be a waiver of such condition for any other purpose, or, as the
case may be, a breach of any other provision, term, covenant, representation or
warranty set forth in this Agreement.
20. SEVERABILITY. If at any time subsequent to the date hereof, any
provision of this Agreement shall be held by any court of competent jurisdiction
to be invalid, void or otherwise unenforceable (whether as a matter of law or
equity) the invalidity or unenforceability of such provision shall have no
effect upon and shall not impair the validity or enforceability of any other
provision of this Agreement.
21. GOVERNING LAW. This Agreement shall be governed by, construed and
enforced in accordance with the laws of the State of Georgia without regard to
the conflict of laws principles of such state.
22. COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed to be an original, and all of which together shall
constitute but one and the same original instrument.
23. HEADINGS. The headings of the paragraphs and sections of this
Agreement have been inserted for convenience of reference only and are not
intended to, and shall not, restrict, modify or otherwise affect any of the
terms or provisions hereof.
-5-
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
SCOUT, INC.
------------------------------------
By:
---------------------------------
Title:
------------------------------
SNFCO, INC.
------------------------------------
By:
---------------------------------
Title:
------------------------------
-6-
<PAGE>
ATTACHMENT 1
------------
SERVICES
[DISCUSS EXTENT TO WHICH THESE FUNCTIONS ARE PROVIDED BY TEAMCARE NEW JERSEY
OPERATIONS TO BE ACQUIRED BY EXPLORER.]
1. Cash Management. Services include setting up or closing-out unit bank
---------------
accounts, drafting funds out of unit bank accounts, distribution of accounts
payable checks, reconciliation of accounts payable and payroll checking
accounts, investment of excess funds, handling credit card issues and other
banking services as required.
2. Compensation & Benefits. [TO BE DISCUSSED]
-----------------------
3. MIS. Includes all services related to the processing of computer systems
---
such as general ledger, [PAYROLL,] fixed assets, accounts receivable,
accounts payable, etc. Also includes the printing of all computer generated
reports.
4. License & Taxes. Services include handling anything to do with sales taxes,
---------------
business licenses, and personal property tax to include filing and payment
of taxes due on a timely basis.
5. MIS Support. Services associated with the implementation and support of
-----------
MIS data processing hardware, software and systems.
6. [HR SUPPORT. SERVICES ASSOCIATED WITH MAINTAINING THE HUMAN RESOURCES
-----------
SYSTEM.]
7. Risk Management. Services include procuring and maintaining insurance
---------------
coverage against risks as are ordinarily insured against by owners of an
Institutional Pharmacy Business and administering claims thereunder.
8. Legal. Services include providing legal advice and service to Scout in
-----
connection with the Institutional Pharmacy Business. In connection
therewith, SNFCo may retain the services of outside counsel, who may be
counsel to SNFCo, and bill Scout for the fees and expenses of such counsel.
<PAGE>
ATTACHMENT 2
------------
Schedule of Costs for administrtive Services
<PAGE>
EXHIBIT 2.7
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement dated as of _______
__, 1996, is entered into by and among GranCare, Inc., a California corporation
("GCI"), GCI Properties, Inc., a California corporation ("GCI Properties"), and
each of the following corporations:
GranCare Health Services, Inc., a California corporation ("GCHS")
CompuPharm, Inc., a Delaware corporation ("CompuPharm") #
Patient Therapy Systems, Inc., a California corporation ("PT Systems")
GCI-Cal Pharmacies, Inc., a California corporation ("GCI-Cal Pharmacies") #
GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")
CompuPharm LTC, Inc., an Indiana corporation ("CompuPharm LTC")
Drug Systems, Inc., a Colorado corporation ("DSI") #
CompuPharm of Virginia, Inc., a Virginia corporation ("CompuPharm-VA")
TeamCare Pharmacy, Inc., a Wisconsin corporation ("TeamCare") #
CapCare Health Services, Inc., an Illinois corporation ("CapCare") #
Renaissance Mental Health Center, Inc., a Wisconsin corporation
("Renaissance")
CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm-Ohio")
CompuPharm Clinical Services, Inc., a New Jersey corporation ("CCSI")
CompuPharm New Jersey, Inc., a New Jersey corporation ("CNJ") #
AMS Green Tree, Inc., a Wisconsin corporation ("AMS-GT")
American-Cal Medical Services, Inc., a California corporation ("Am-Cal")
HMI Convalescent Care, Inc., a California corporation ("HMI")
GranCare South Carolina, Inc., a South Carolina corporation ("GC-SC")
GCI Palm Court, Inc., a California corporation ("GCI-PC")
GCI East Valley Medical & Rehabilitation Center, Inc., an Arizona corporation
("GCI-EV")
GCI Realty, Inc., a Delaware corporation ("GCI Realty")
GCI Jolley Acres, Inc., a South Carolina corporation ("GCI-JA")
GCI Prince George, Inc, a South Carolina corporation ("GCI-PG")
GCI Springdale Village, Inc., a South Carolina corporation ("GCI-SV")
GCI Village Green, Inc., a South Carolina corporation ("GCI-VG")
GCI Faith Nursing Home, Inc., a South Carolina corporation ("GCI-FN")
GCI Rehab, Inc., a California corporation ("GCI Rehab")
GCI-Cal Health Care Centers, Inc., a California corporation ("GCI-Cal HCC")
GranCare Home Health Services, Inc., a California corporation ("GCI-Cal HH")
Coordinated Home Health Services, Inc., a California corporation ("CHHS")
GranCare Nursing Services and Hospice, Inc., a Wisconsin corporation ("GCNSH")
Winyah Dispensary, LTC of North Carolina, Inc., a North Carolina corporation
("Winyah-NC") #
GCI-Winyah, Inc., a South Carolina corporation ("GCI-Winyah") #
AMS Properties, Inc., a California corporation ("AMS-Properties")
Evergreen Health Care, Inc., a Georgia corporation ("Evergreen")
National Heritage Realty, Inc., a Louisiana corporation ("NHRI")
Omega/Indiana Care Corporation, a Delaware corporation ("OICC")
EH Acquisition Corp., Inc., a Georgia corporation ("EHAC I")
EH Acquisition Corp. II, Inc., a Georgia corporation ("EHAC II")
<PAGE>
EH Acquisition Corp. III, Inc., a Georgia corporation ("EHAC III")
Heritage of Louisiana, Inc., a Louisiana corporation ("HOLI")
Health Resources, Inc., a Nevada corporation ("HRI") @
National Heritage Pharmacy, Inc., a Nevada corporation ("NHPI") @
Heritage Sterling Financial Services, Inc., a _______ corporation ("HSFSI") @
Sterling Health Care, Inc., a _______ corporation ("SHCI") @
EH Resources, Inc., a Georgia corporation ("EHRI") @
GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC")
GC Services, Inc., a California corporation ("GC-Services")
GCI Valley Manor Health Care Center, Inc., a Colorado corporation ("GCI-VM")
GCI Camelia Care Center, Inc., a Colorado corporation ("GCI-Camelia")
Cornerstone Health Management Company, a Delaware corporation ("Cornerstone")
HostMasters, Inc., a California corporation ("HostMasters")
GCI Colter Village, Inc., an Arizona corporation ("GCI-Colter")
GCI Indemnity, Inc., a Hawaii corporation ("GCI-Indemnity")
GCI Bella Vita, Inc., a California corporation ("GCI Bella Vita")
GCI Wisconsin Properties, Inc., a Wisconsin corporation ("GCI-Wisconsin")
GCI Ashland Health Care Center, Inc., a Wisconsin corporation ("GCI-Ashland")
GCI North Shore Health Care Center, Inc., a Wisconsin corporation ("GCI-North
Shore")
GCI Hillside Health Care Center, Inc., a Wisconsin corporation ("GCI-
Hillside")
GCI Family Nursing Home and Rehabilitation Center, Inc., a Wisconsin
corporation ("GCI-Family")
Professional Health Care Management, Inc., a Michigan corporation ("PHCM")
Cambridge Bedford, Inc., a Michigan corporation ("CBI")
Cambridge East, Inc., a Michigan corporation ("CEI")
Cambridge North, Inc., a Michigan corporation ("CNI")
Cambridge South, Inc., a Michigan corporation ("CSI")
Clintonaire Nursing Home, Inc., a Michigan corporation ("CNHI")
Crestmont Health Center, Inc., a Michigan corporation ("CHCI")
Frenchtown Nursing Home, Inc., a Michigan corporation ("FNHI")
Heritage Nursing Home, Inc., a Michigan corporation ("HNHI")
Madonna Nursing Center, Inc., a Michigan corporation ("MNCI")
Middlebelt Nursing Home, Inc., a Michigan corporation ("MNHI")
Middlebelt-Hope Nursing Home, Inc., a Michigan corporation ("MHNHI")
Nightingale East Nursing Center, Inc., a Michigan corporation ("NENCI")
St. Anthony Nursing Home, Inc., a Michigan corporation ("SANHI")
International Health Care Management, Inc., a Michigan corporation ("IHCMI")
International X-Ray, Inc., a Michigan corporation ("IXRI")
Span Purchasing, Inc., a Virginia corporation ("Span")
GCI-Cal Therapies, Inc., a California corporation ("GCI-Cal Therapies")
GCI Therapies, Inc., a California corporation ("GCI Therapies")
-2-
<PAGE>
[MOST, IF NOT ALL, OF THE PHARMACY SUBSIDIARIES ARE CHANGING THEIR NAMES TO
---------------------------------------------------------------------------
INCLUDE THE TRADE NAME "TEAMCARE." ACCORDINGLY, SOME OF THE NAMES SET FORTH
---------------------------------------------------------------------------
ABOVE MAY CHANGE.]
------------------
[CERTAIN OF THE SUBSIDIARIES LISTED ABOVE, INCLUDING THOSE HIGHLIGHTED WITH
---------------------------------------------------------------------------
THE @ SYMBOL, ARE INACTIVE AND ARE IN THE PROCESS OF BEING LIQUIDATED.
-----------------------------------------------------------------------
ACCORDINGLY, THOSE SUBSIDIARIES WHICH ARE LIQUIDATED PRIOR TO THE EXECUTION
---------------------------------------------------------------------------
OF THIS AGREEMENT WILL BE ELIMINATED AS PARTIES TO THE AGREEMENT.]
------------------------------------------------------------------
[THOSE SUBSIDIARIES LISTED ABOVE WHICH HAVE A # SYMBOL NEXT TO THEM WILL BE
---------------------------------------------------------------------------
MERGED WITH OTHER SUBSIDIARIES AS PART OF THE INTERNAL RESTRUCTURING
---------------------------------------------------------------------------
UNDERTAKEN PRIOR TO THE SPIN-OFF. ACCORDINGLY, THOSE SUBSIDIARIES ALSO WILL
---------------------------------------------------------------------------
BE ELIMINATED AS PARTIES TO THE AGREEMENT.]
-------------------------------------------
(individually, sometimes referred to as a "Subsidiary" and, collectively, the
"Subsidiaries").
WITNESSETH:
WHEREAS GCI adopted a plan of distribution, as set forth in that certain
Agreement and Plan of Distribution dated _________ __, 1996 (the "Distribution
Agreement"), whereby it contemplates a distribution to its shareholders of all
the outstanding common stock of GCI Properties, a corporation which will hold
(directly or indirectly) its skilled nursing facilities business and certain
other non-pharmacy businesses (the "Distribution"), and GCI and GCI Properties
have agreed to enter into certain agreements, including the Distribution
Agreement and this Tax Allocation and Indemnification Agreement, setting forth
their respective rights, duties, and obligations with respect to liabilities of
the Parties, including Tax liabilities, attributable to events that occurred in
periods prior to the Distribution;
WHEREAS, as a consequence of the Distribution, GCI Properties and the
Subsidiaries that will become members of the GCI Properties Group (as
hereinafter defined) will no longer be members of the GCI Group (as hereinafter
defined) or of any other group of which GCI and the subsidiaries who are members
of the Post-Distribution GCI Group (as hereinafter defined) become members;
WHEREAS, pursuant to Treas. Reg. Section 1.1502-6, GCI and each Subsidiary
will be severally liable for the consolidated federal income tax liability of
the GCI Group for any period during which GCI and such Subsidiary were members
of the GCI Group during any part of a consolidated return year; and
-3-
<PAGE>
WHEREAS, GCI, GCI Properties, and the Subsidiaries desire to set forth
their rights and obligations with respect to foreign, federal, state and local
taxes for periods both before and after the Distribution and with respect to
certain tax liabilities that may be asserted in connection with the
Distribution.
NOW THEREFORE, GCI, GCI Properties, and the Subsidiaries, in consideration
of the mutual covenants contained herein, agree as follows:
ARTICLE I.
DEFINITIONS
-----------
For purposes of this Agreement, the following definitions shall apply:
1.1 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
1.2 "Consolidated Return" means a consolidated United States federal
income tax return or any consolidated or combined state, county, or local income
tax return which includes any Party to this agreement.
1.3 "Date of Distribution" or "Distribution Date" means the date on which
the stock of GCI Properties is distributed by GCI to its shareholders.
1.4 "Employee Benefits Matters Agreement" means that certain agreement of
even date herewith entitled Employee Benefit Matters Agreement which was entered
into by the Parties to this Agreement in connection with the Distribution
Agreement.
1.5 "Expenses" means out-of-pocket expenses paid to third parties and
shall not include any overhead or indirect costs.
1.6 "Final Determination" means the final resolution of liability for any
Tax for a taxable period (i) by IRS Form 870 or 870-AD (or any successor forms
thereto), on the date of acceptance by or on behalf of the IRS, or by a
comparable agreement or form under the laws of other jurisdictions, except that
a Form 870 or 870-AD or comparable form that reserves the right of the taxpayer
to file a claim for refund and/or the right of the taxing authority to assert a
further deficiency shall not constitute a Final Determination; (ii) by a
decision, judgment, decree, or other order by a court of competent jurisdiction
which has become final and unappealable; (iii) by a closing agreement or
compromise under Section 7121 or 7122 of the Code or any subsequently enacted
corresponding provisions of the Code, or comparable agreements under the laws of
other jurisdictions; (iv) by an allowance of a refund or credit in respect of an
overpayment of Tax, but only after the expiration of all periods during which
such
-4-
<PAGE>
refund may be recovered (including by way of offset) by the Tax-imposing
jurisdiction; or (v) by any other final disposition by reason of the expiration
of the applicable statutes of limitations.
1.7 "GCI Group" means the affiliated group (within the meaning of Section
1504(a) of the Code) of which GCI is the common parent, including periods before
GCI became the common parent.
1.8 "GCI Properties Group" means GCI Properties, any subsidiaries that
become members of the GCI Properties consolidated group after the Distribution
Date, and the following Subsidiaries:
Renaissance AMS-GT
Am-Cal HMI
GC-SC GCI-PC
GCI-EV GCI Realty
GCI-JA GCI-PG
GCI-SV GCI-VG
GCI-FN GCI Rehab
GCI-Cal HCC GCI-Cal HH
CHHS GCNSH
AMS-Properties Evergreen
GCI-HCC GC-Services
GCI-VM GCI-Camelia
Cornerstone HostMasters
GCI-Colter GCI-Indemnity
GCI Bella Vita GCI-Wisconsin
PHCM CBI
CEI CNI
CSI CNHI
CHCI FNHI
HNHI MNCI
MNHI MHNHI
NENCI SANHI
IHCMI IXRI
GCI-Cal Therapies GCI Therapies
NHRI OICC
EHAC I EHAC II
EHAC III HOLI
HRI NHPI
HSFSI SHCI
EHRI GCI-Ashland
GCI-North Shore GCI-Hillside
GCI-Family
-5-
<PAGE>
1.9 "GCI Properties Tainting Act" means any breach by GCI Properties or
any member of the GCI Properties Group of a representation or covenant relating
to the qualification of the Distribution as a distribution described in Section
355 of the Code which is given by GCI Properties and the members of the GCI
Properties Group in connection with the Tax Certificate dated __________ __,
1996 , unless either (a) GCI consents in writing to such action, or (b) GCI is
provided (at GCI Properties' expense) an IRS ruling that such action will not
cause the Distribution to fail to qualify as a distribution described in Section
355 of the Code.
1.10 "GCI Tainting Act" means any breach by GCI or any member of the Post-
Distribution GCI Group of a representation or covenant relating to the
qualification of the Distribution as a distribution described in Section 355 of
the Code which is given by GCI and the members of the Post-Distribution GCI
Group in connection with the Tax Certificate dated __________ __, 199_ , unless
either (a) GCI Properties consents in writing to such action, or (b) GCI
Properties is provided (at GCI's expense) an IRS ruling that such action will
not cause the Distribution to fail to qualify as a distribution described in
Section 355 of the Code.
1.11 "IRS" means the Internal Revenue Service.
1.12 "Merger" shall have the same meaning as given that term in the
Distribution Agreement.
1.13 "Party" or "Parties" means any of the parties to this Agreement.
1.14 "Post-Distribution GCI Group" means GCI and the following
Subsidiaries:
GCHS CompuPharm
PT Systems GCI-Cal Pharmacies
GCI Innovative CompuPharm LTC
DSI CompuPharm-VA
TeamCare CapCare
CompuPharm-Ohio CCSI
CNJ Winyah-NC
GCI-Winyah Span
1.15 "Personal and Real Property Taxes" mean all Taxes which are assessed
upon the value of real or personal property owned, leased, rented or used by any
of the Parties to this Agreement, including, but not limited to, real and
personal property taxes, use taxes, value added taxes or other ad valorem taxes.
1.16 "Restructuring Taxes" means any Taxes resulting from the failure of
the restructuring transactions contemplated by the Distribution Agreement to
qualify as a "tax-free"
-6-
<PAGE>
reorganization and distribution within the meaning of Sections 368(a)(1)(D) and
355 of the Code or otherwise as "tax-free" under the Code.
1.17 "Tax Benefit" means any Tax Item which decreases Taxes paid or
payable.
1.18 "Tax" or "Taxes" means all forms of taxation, whenever created or
imposed, whether domestic or foreign, and whether imposed by a nation, locality,
municipality, government, state, federation, or other body (a "Taxing
Authority"), and without limiting the generality of the foregoing, shall include
net income, alternative or add-on minimum tax, gross income, sales, use,
franchise, gross receipts, value added, ad valorem, profits, license, payroll,
withholding, social security, unemployment insurance, employment, property,
transfer, recording, excise, severance, stamp, occupation, premium, windfall
profit, custom duty, or other tax, governmental fee or other like assessment or
charge of any kind whatsoever, together with any related interest, penalties or
other additions to tax, or additional amounts imposed by any such Taxing
Authority.
1.19 "Tax Controversy" means any audit, examination, dispute, suit, action,
litigation or other judicial or administrative proceeding by or against the IRS
or any other Taxing Authority.
1.20 "Tax Item" means any item of income, gain, loss, deduction, credit,
recapture of credit or any other item, including, but not limited to, an
adjustment under Code Section 481 resulting from a change in accounting method,
which increases or decreases Taxes paid or payable.
1.21 "Tax Returns" means all reports, estimates, declarations of estimated
tax, information statements, returns or other documents required to be filed by
a Party in connection with any Taxes, including but not limited to requests for
extensions of time, information statements and reports, claims for refund, and
amended returns.
ARTICLE II.
TAX RETURN PREPARATION
----------------------
Consolidated Returns. (a) GCI Properties shall prepare and timely file
--------------------
any Consolidated Return which includes one or more, but only, members of the GCI
Group for any taxable period which ends on or prior to the Distribution Date.
The Consolidated Return shall be prepared by GCI Properties in compliance with
applicable tax laws and on a basis that is consistent with any IRS ruling or
opinion of tax counsel obtained by GCI or GCI Properties and with prior
Consolidated Returns (to the extent applicable). Not later than 60 days prior
to the due date for filing the
-7-
<PAGE>
Consolidated Return. GCI shall notify GCI Properties in writing of any
objections it has to the treatment of any Tax Item on the Consolidated Return
within 30 days after the receipt of the Consolidated Return; provided, however,
that when such objections relate to items which do not affect the Tax liability
of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment
of the Distribution or the Restructuring Taxes, the objections shall be set
forth in writing, specifically stating that there does not exist a reasonable
basis or substantial authority for the tax treatment being accorded such item.
Any failure to provide such objection shall be considered acceptance by GCI of
the Consolidated Return as prepared by GCI Properties. If a written objection is
made by GCI, the tax managers of GCI and GCI Properties will meet and try in
good faith to resolve all disagreements with respect to the treatment of the Tax
Item(s) in question within 5 days of the receipt of the written objection. If
the tax managers are unable to resolve all disagreements with respect to the
treatment of the Tax Item(s) in question, then one of the "Big Six" certified
public accounting firms will be chosen by GCI and GCI Properties to advise as to
the proper treatment of the Tax Item(s) in dispute; provided, however, that when
any disagreement which relates to an item which does not affect the Tax
liability of the Post-Distribution GCI Group or adversely affect the "tax-free"
treatment of the Distribution or the Restructuring Taxes, the item shall be
reported in accordance with the tax treatment determined by GCI Properties
provided that GCI has received a letter from the chief financial officer of GCI
Properties that, after consultation with its tax adviser, substantial authority
exists for the tax treatment being accorded the item by GCI Properties. GCI
Properties will provide GCI with a copy of the Consolidated Return as filed,
along with documentation establishing proof of timely filing.
(b) GCI Properties shall prepare and timely file any Consolidated Return
which includes one or more, but only, members of the GCI Group for any taxable
period which ends after the Distribution Date, but includes the Distribution
Date. The Consolidated Returns shall be prepared by GCI Properties in
compliance with applicable tax laws and on a basis that is consistent with any
IRS ruling or opinion of tax counsel obtained by GCI or GCI Properties and with
prior Consolidated Returns (to the extent applicable). GCI shall provide GCI
Properties with (i) separate, pro forma Tax Returns covering the period
beginning with the day after the Distribution Date and running through the close
of the taxable period reported on such Consolidated Return for each of the
members of the Post-Distribution GCI Group included in such Consolidated Return,
and (ii) any information in support of such separate, pro forma returns or which
might otherwise be necessary or helpful in the preparation of the Consolidated
Return. GCI shall provide such separate, pro forma returns and information not
later than 60 days prior to the due date of the Consolidated Return (including
extensions). Not later than 45 days prior to the due date for filing the
Consolidated Return (including extensions), GCI Properties shall provide a copy
of the Consolidated Return to GCI for its review and consent prior to the filing
of the Consolidated Return. GCI shall notify GCI Properties in writing of any
objections it has to the treatment of any Tax Item on the Consolidated Return
within 30 days after the receipt of the Consolidated Return; provided, however,
that when such objections relate to items which do not affect the Tax liability
of the Post-Distribution GCI Group or adversely affect the "tax-free" treatment
of the Distribution or the Restructuring Taxes, the objections shall
-8-
<PAGE>
be set forth in writing, specifically stating that there does not exist a
reasonable basis or substantial authority for the tax treatment being accorded
such item. Any failure to provide such objection shall be considered acceptance
by GCI of the Consolidated Return as prepared by GCI Properties. If a written
objection is made by GCI, the tax managers of GCI and GCI Properties will meet
and try in good faith to resolve all disagreements with respect to the treatment
of the Tax Item(s) in question within 5 days of the receipt of the written
objection. If the tax managers are unable to resolve all disagreements with
respect to the treatment of the Tax Item(s) in question, then one of the "Big
Six" certified public accounting firms will be chosen by GCI and GCI Properties
to advise as to the proper treatment of the Tax Item(s) in dispute; provided,
however, that when any disagreement which relates to an item which does not
affect the Tax liability of the Post-Distribution GCI Group or adversely affect
the "tax-free" treatment of the Distribution or the Restructuring Taxes, the
item shall be reported in accordance with the tax treatment determined by GCI
Properties provided that GCI has received a letter from the chief financial
officer of GCI Properties that, after consultation with its tax adviser,
substantial authority exists for the tax treatment being accorded the item by
GCI Properties.. GCI Properties will provide GCI with a copy of the Consolidated
Return as filed, along with documentation establishing proof of timely filing.
(c) GCI shall be responsible for preparing and filing any Consolidated
Return which includes any member of the Post-Distribution GCI Group for any
taxable period which begins after the Distribution Date.
(d) GCI Properties shall be responsible for preparing and filing any
Consolidated Return which includes only members of the GCI Properties Group.
2.2 Separate Returns. (a) GCI Properties shall prepare and file any Tax
----------------
Return required to be filed for any member of the Post-Distribution GCI Group
not listed on Schedule 2.2 hereto for all taxable periods which end on or before
the Distribution Date or which end after the Distribution Date, but include the
Distribution Date. If the Tax Return includes any period ending after the
Distribution Date, then GCI shall provide GCI Properties with (i) a separate,
pro forma Tax Return covering the period beginning with the day after the
Distribution Date and running through the close of the taxable period reported
on such Tax Return, and (ii) any information in support of such separate, pro
forma Tax Return or which might otherwise be necessary or helpful in the
preparation of the Tax Return. GCI shall provide such separate, pro forma Tax
Return and information not later than 60 days prior to the due date of the Tax
Return (including extensions). Not later than 45 days prior to the due date for
filing the Tax Return, GCI Properties shall provide a copy of the Tax Return to
GCI for its review and consent prior to the filing of the Tax Return (including
extensions). GCI shall notify GCI Properties in writing of any objections it
has to the treatment of any Tax Item on the Tax Return within 30 days after the
receipt of the Tax Return; provided, however, that when such objections relate
to items which do not affect the Tax liability of the Post-Distribution GCI
Group or adversely affect the "tax-free" treatment of the Distribution or the
Restructuring Taxes, the objections shall be set forth in writing, specifically
stating that there does not exist a reasonable basis or
-9-
<PAGE>
substantial authority for the tax treatment being accorded such item. Any
failure to provide such objection shall be considered acceptance by GCI of the
Tax Return as prepared by GCI Properties. If a written objection is made by GCI,
the tax managers of GCI and GCI Properties will meet and try in good faith to
resolve all disagreements with respect to the treatment of the Tax Item(s) in
question within 5 days of the receipt of the written objection. If the tax
managers are unable to resolve all disagreements with respect to the treatment
of the Tax Items in question, then one of the "Big Six" certified public
accounting firms will be chosen by GCI and GCI Properties to advise as to the
proper treatment of the Tax Item in dispute; provided, however, that when any
disagreement which relates to an item which does not affect the Tax liability of
the Post-Distribution GCI Group or adversely affect the "tax-free" treatment of
the Distribution or the Restructuring Taxes, the item shall be reported in
accordance with the tax treatment determined by GCI Properties provided that GCI
has received a letter from the chief financial officer of GCI Properties that,
after consultation with its tax adviser, substantial authority exists for the
tax treatment being accorded the item by GCI Properties. GCI Properties will
provide GCI with a copy of the Tax Return as filed, along with documentation
establishing proof of timely filing.
(b) GCI shall be responsible for causing the preparation and filing of any
Tax Return for any member of the Post-Distribution GCI Group listed on Schedule
2.2 hereto for any taxable period which ends on or includes the Distribution
Date.
(c) GCI shall be responsible for causing the preparation and filing of any
Tax Return for any member of the Post-Distribution GCI Group for any taxable
period which begins after the Distribution Date.
(d) GCI Properties shall be responsible for preparing and filing all Tax
Returns for any member of the GCI Properties Group.
2.3 Cooperation and Exchange of Information. Each Party shall be
---------------------------------------
responsible for the timely submission to each other Party of information of
which it has knowledge regarding any Tax Item which may properly be included in
any Tax Return to be filed by the other Party, and shall provide any and all
other information and documentation (including, but not by way of limitation,
working papers and schedules) reasonably requested by any Party for use in
connection with the preparation and filing of any Tax Returns or the handling of
any Tax Controversy. GCI, GCI Properties, and each Subsidiary shall execute
such consents, elections, attachments, and other documents, as well as the
Consolidated Return or Tax Return itself, that may be required or appropriate
for the proper filing of such Consolidated Return or Tax Return.
ARTICLE III.
CONSOLIDATED RETURN TAX LIABILITIES
-----------------------------------
-10-
<PAGE>
3.1 Allocation Method. In order to determine that portion of the Tax
-----------------
liability (other than Restructuring Taxes) due with respect to any Consolidated
Return which is the subject of this Agreement that is allocable to a Party, the
Parties agree to determine and allocate such Tax liability among themselves in
the following manner:
(a) All Consolidated Return Tax liabilities of any member or members
of the GCI Group for any taxable period (or portion thereof) ending on
or before the Distribution Date shall be allocated to GCI Properties
and the other members of the GCI Properties Group.
(b) All Consolidated Return Tax liabilities for taxable periods that
include but do not end on the Distribution Date ("Straddle Periods")
shall be allocated between that portion of the period that ends on the
Distribution Date and the subsequent portion of the period based upon
a closing of the books and computations of separate hypothetical Tax
liabilities for such portions. The Consolidated Return Tax liability
for the relevant Straddle Period shall be allocated to the portions of
the Straddle Period in the ratio of the portion's hypothetical Tax
liability to the sum of the portions' hypothetical Tax liabilities,
and then the portions allocated to each of such periods shall be
further allocated among the Parties in accordance with the method
described in Section 1552(a)(2) of the Code, except that all
Consolidated Return Tax liabilities allocable under this Section
3.1(b) to any member or members of the GCI Group for any taxable
period (or portion thereof) ending on the Distribution Date shall be
allocated to GCI Properties and the other members of the GCI
Properties Group.
(c) If the Tax liability with respect to a Consolidated Return is
adjusted for any taxable period, whether by means of an amended
return, claim for refund, or assessment by a taxing authority, the
liability of each Party shall be recomputed under this Section 3.1 of
the Agreement to give effect to such adjustment.
(d) GCI Properties shall provide each Party with a computation (and
such other workpapers and documentation supporting such computation)
of the allocation to each Party of the Tax liability with respect to a
Consolidated Return no later than 10 days prior to the filing of the
Consolidated Return. GCI may object to such computation or allocation
by presenting GCI Properties with a written explanation of such
objection(s) (which contains specific explanation of the reasons and
support for their objections) within 30 days after receiving the
computation and allocation from GCI Properties. Any failure to
provide such objection shall be considered acceptance by GCI of the
allocation as prepared by GCI Properties. If a written objection is
made by GCI, the tax managers of GCI and GCI Properties will meet and
try in good faith to resolve all disagreements with respect to the
allocation of Tax Liability. If the tax managers are unable to
-11-
<PAGE>
resolve all disagreements with respect to the allocation, then one of
the "Big Six" certified public accounting firms will be chosen by GCI
and GCI Properties to advise as to the proper treatment of the Tax
Item in dispute.
(e) Notwithstanding any provision in this Section 3.1 to the contrary:
(1) In the event that the Merger results in any "excess parachute
payments" within the meaning of Section 280G of the Code to any
persons other than Gene E. Burleson or Arlen Reynolds that would
be deductible after the Closing Date by GCI, any of its
Subsidiaries, or their successors but for the provisions of
Section 280G, GCI Properties shall pay to GCI or its successor an
amount in cash equal to the amount of such "excess parachute
payments" multiplied by the sum of (i) the highest federal income
tax rate under Code Section 11 (or any successor provision
thereto) applicable to a corporation that is in effect for the
year of the "excess parachute payment" and (ii) five percent
(5%). Such payment shall be made by GCI Properties to GCI or its
successor within ten (10) days after GCI or its successor
provides to GCI Properties a written statement that such "excess
parachute payments" have been made together with a calculation of
the amount of such "excess parachute payments."
(2) In the event that the Merger results in any "excess parachute
payments" within the meaning of Section 280G of the Code to Gene
E. Burleson or Arlen Reynolds that would be deductible on or
before the Closing Date by GCI or any of its Subsidiaries but for
the provisions of Section 280G, GCI or its successor shall pay to
GCI Properties an amount in cash equal to the amount of such
"excess parachute payments" multiplied by the sum of (i) the
highest federal income tax rate under Code Section 11 (or any
successor provision thereto) applicable to a corporation that is
in effect for the year of the "excess parachute payment" and (ii)
five percent (5%). Such payment shall be made by GCI or its
successor to GCI Properties within ten (10) days after GCI
Properties provides to GCI or its successor a written statement
that such "excess parachute payments" have been made together
with a calculation of the amount of such "excess parachute
payments."
(3) If the Party obligated to make payment under subsection (1)
or (2) above makes a written objection prior to the payment's due
date, the tax managers of GCI or its successor and GCI Properties
will meet and try in good faith to resolve all disagreements with
respect to the characterization and amount of such payment as an
"excess parachute payment" within five (5) days of the receipt of
the written objection. If the tax managers are unable to resolve
all disagreements, then one of the "Big Six" certified
-12-
<PAGE>
public accounting firms will be chosen by GCI or its successor and
GCI Properties to determine the proper characterization and amount
of such payment as an "excess parachute payment" which
determination shall be final and payment shall be made within ten
(10) days of such determination.
3.2 Tax Payments or Benefits. GCI Properties shall be responsible for
------------------------
paying or for making arrangements with GCI for the payment of any Tax liability,
including estimated tax liability and any liability which may be subsequently
assessed, with respect to a Consolidated Return allocated to GCI Properties or
any member of the GCI Properties Group in accordance with Section 3.1 of this
Agreement. Payments under this Section 3.2 are to be made no later than the
date on which payments must be made to the Taxing Authority. GCI Properties
shall be entitled to receive and retain any refund or overpayment (including any
interest received thereon), and GCI and/or any member of the GCI Group shall pay
over to GCI Properties such refund or overpayment received by GCI or such other
member, whether claimed on the originally filed return or an amended return,
with respect to a Consolidated Return to the extent that GCI Properties has been
allocated the Tax liability in accordance with Section 3.1 of this Agreement.
3.3 Carrybacks and Carry Forwards. If part or all of an unused
-----------------------------
consolidated net operating loss or tax credit is allocated to a Party pursuant
to Treasury Regulations Section 1.1502-79 (or comparable provision under
foreign, state, or local law) and is carried back or forward to a year in which
such Party was not a member of the Consolidated Return from which such tax
attribute arose, any refund or reduction in Tax liability arising from the
carryback or carryover shall be retained by such Party (if such refund or
reduction goes to a Party other than the Party entitled to the refund under this
Section 3.3, then such other Party shall pay over such amount to the Party
entitled to the refund under this Section 3.3).
If a member of the GCI Properties Group incurs a net operating loss or has
excess tax credits for a taxable year subsequent to the period in which such
member was a member of the GCI Group, and such net operating loss or tax credits
must be carried back to a Consolidated Return of the GCI Group, then such member
shall be permitted to carryback such tax attribute to such GCI Group
Consolidated Return; provided, however, that in the event that any member of the
GCI Properties Group incurs a capital loss which may, but need not, be carried
back to a period in which it was a member of the GCI Group, then such member
shall be permitted to carryback such capital loss to such GCI Group Consolidated
Return. GCI shall cooperate in the filing of a claim for refund relating to
such net operating loss or tax credit carryback. The member of the GCI
Properties Group possessing the tax attributes giving rise to the refund shall
be entitled to retain the full amount of such refund (and such amount shall be
paid over by GCI to such member), less an amount to cover any Expenses incurred
by GCI in connection with the filing of such claim for refund. Notwithstanding
the foregoing, in the event where any member of the GCI Properties Group incurs
a capital loss which is carried back to a period in which it was a member of the
GCI Group, the amount of the refund to which GCI Properties shall be
-13-
<PAGE>
entitled to receive (and which shall be paid to GCI Properties) shall be the
lesser of: (a) the actual Tax refund with respect to such loss carryback; or (b)
the amount of Taxes that would have been refunded if the amount of capital loss
carried back equalled only the capital gain generated by the members of the GCI
Properties Group for the years to which the capital loss is carried back
(calculated on a yearly basis); less an amount to cover a proportionate share
(based upon a ratio of the portion of the refund to be paid to GCI Properties to
the total refund received as a result of filing the claim) of any Expense
incurred by GCI in connection with the filing of the claim for refund. In the
event that any member of the Post-Distribution GCI Group, the amount of the
refund to which GCI Properties shall be entitled to receive (and which shall be
paid to GCI Properties) shall be the actual Tax refund with respect to such loss
carryback minus the amount of Taxes that would have been refunded if the amount
of capital loss carried back equalled only the capital gain generated by the
members of the Post-Distribution GCI Group for the years to which the capital
loss is carried back (calculated on a yearly basis), but not less then zero,
less an amount to cover a proportionate share (based upon a ratio of the portion
of the refund to be paid to GCI Properties to the total refund received as a
result of filing the claim) of any Expenses incurred by GCI in connection with
the filing of the claim for refund. GCI shall be entitled to retain any portion
of a refund which is not required to be paid to a member of the GCI Properties
Group under this Section 3.3.
ARTICLE IV.
RESTRUCTURING TAXES AND OTHER LIABILITIES
-----------------------------------------
4.1 Restructuring Taxes. Notwithstanding any other provision of this
-------------------
Agreement to the contrary, any liability with respect to Restructuring Taxes
shall be allocated as follows:
(a) Liability Resulting from a GCI Properties Tainting Act. In the event
------------------------------------------------------
that GCI is liable for Restructuring Taxes because the Distribution failed to
meet the requirements of Sections 368(a)(1)(D) and 355 of the Code for
nonrecognition of gain or loss due solely to a GCI Properties Tainting Act, then
GCI Properties shall be allocated all liability for: (1) the Restructuring
Taxes; (2) any claim against GCI or any member of the Post-Distribution GCI
Group for liability to shareholders of GCI arising out of the determination that
the Distribution failed to meet the requirements of Section 355 of the Code for
nonrecognition of gain or loss; and (3) any and all other liability that arises
as a direct consequence of, or would not have otherwise arisen but for, the
determination that GCI is liable for the Restructuring Taxes as a result of the
GCI Properties Tainting Act. For purposes of this Section 4.1, any failure of
the Distribution to meet the requirements of Code Sections 368(a)(1)(D) and 355
shall be treated as due solely to a GCI Properties Tainting Act if any of the
following items shall have occurred; provided, however, that none of the items
set forth in 4.1(c)(i)-(v) shall have occurred first:
-14-
<PAGE>
(i) A merger or liquidation of GCI Properties, or an acquisition
of the outstanding stock of GCI Properties which acquisition the GCI
Properties Board of Directors consents or otherwise agrees to, or a
contract or option for such a merger, liquidation, or acquisition, within
two years of the Distribution Date;
(ii) A failure by GCI Properties and its subsidiaries to continue
the active conduct of their businesses for at least two years after the
Distribution Date;
(iii) A failure by GCI Properties to satisfy the active business
requirement of Code Section 355(b);
(iv) A failure by GCI to satisfy the active business requirement
of Code Section 355(b), but only if such failure is not the result of GCI's
failure to satisfy the conditions set forth in Section 4.1(c)(ii)-(iv);
(v) The sale, exchange, or other disposition (in one or more
transactions) of more than fifty percent of GCI Properties' assets (taking
into account the stock of its subsidiaries) within two years of the
Distribution Date; and
(vi) A repurchase by GCI Properties of any of its outstanding
stock within two years of the Distribution Date other than stock
repurchases meeting the requirements of Section 4.05(1)(b) of Rev. Proc.
96-30.
(b) Multiple Tainting Acts or an Absence of Tainting Acts. In the event
-----------------------------------------------------
of a determination that the Distribution failed to meet the requirements of
Sections 368(a)(1)(D) and 355 of the Code for nonrecognition of gain or loss due
to (1) any combination of a GCI Properties Tainting Act and a GCI Tainting Act,
or (2) a complete absence of GCI Properties Tainting Acts and GCI Tainting Acts,
then all liability for: (i) the Restructuring Taxes; (ii) any claim against GCI
or any member of the Post-Distribution GCI Group for liability to shareholders
of GCI arising out of the determination that the Distribution failed to meet the
requirements of Section 355 of the Code for nonrecognition of gain or loss; and
(iii) any and all other liability that arises as a direct consequence of, or
would not have otherwise arisen, but for the determination that GCI or any
member of the GCI Group is liable for the Restructuring Taxes, shall be borne
one-half (1/2) by GCI and one-half (1/2) by GCI Properties; provided, however,
that the maximum liability that shall be borne by GCI under this Section 4.1(b)
shall be $10 million. Notwithstanding the foregoing, if there is a complete
absence of GCI Properties Tainting Acts and GCI Tainting Acts, and the liability
under this Section 4.1(b) arises as the result of a retroactive change in the
tax laws, then all liability under this Section 4.1(b) shall be borne one-half
(1/2) by GCI and one-half (1/2) by GCI Properties.
(c) Liability Resulting from a GCI Tainting Act. In the event that GCI
-------------------------------------------
is liable for Restructuring Taxes because the Distribution failed to meet the
requirements of Sections
-15-
<PAGE>
368(a)(1)(D) and 355 of the Code for nonrecognition of gain or loss due solely
to a GCI Tainting Act, then GCI shall be allocated all liability for: (1) the
Restructuring Taxes; (2) any claim against GCI or any member of the Post-
Distribution GCI Group for liability to shareholders of GCI arising out of the
determination that the Distribution failed to meet the requirements of Section
355 of the Code for nonrecognition of gain or loss; and (3) any and all other
liability that arises as a direct consequence of, or would not have otherwise
arisen but for, the determination that GCI is liable for the Restructuring Taxes
as a result of the GCI Tainting Act. For purposes of this Section 4.1, any
failure of the Distribution to meet the requirements of Code Sections
368(a)(1)(D) and 355 shall be treated as due solely to a GCI Tainting Act if any
of the following items shall have occurred; provided, however, that none of the
items set forth in 4.1(a)(i)-(vi) shall have occurred first:
(i) A taxable merger or a liquidation of any successor to GCI,
or a taxable acquisition of the outstanding stock of any successor to GCI
which acquisition the Board of Directors to GCI's successor consents or
otherwise agrees to, or a contract or option for such a merger,
liquidation, or acquisition, within two years of the Distribution Date;
(ii) A failure by GCHS to continue the active conduct of its
trade or business for at least two years after the Distribution Date;
(iii) A sale, exchange, or other disposition of the stock of GCHS
within two years of the Distribution Date;
(iv) The sale, exchange, or other disposition (in one or more
transactions) of more than fifty percent of GCHS' assets (taking into
account the stock of its subsidiaries) within two years of the Distribution
Date; and
(v) A repurchase by any successor of GCI of any of its
outstanding stock within two years of the Distribution Date other than
stock repurchases meeting the requirements of Section 4.05(1)(b) of Rev.
Proc. 96-30.
ARTICLE V.
ALL OTHER TAX LIABILITIES
-------------------------
5.1 Real and Personal Property Taxes. Liability for Real and Personal
--------------------------------
Property Taxes incurred with respect to the business or assets of GCI or any
member of the Post-Distribution GCI Group which relate to any period which
includes the Distribution Date shall be allocated between the period which ends
on the Distribution Date and the period which begins on the day after the
Distribution Date based upon a ratio of the number of days in each such period.
-16-
<PAGE>
5.2 Other GCI Taxes. Any sales, use, transfer, recordation, excise, and
---------------
similar Taxes with respect to the business or assets of GCI, GCI Properties, or
any member of the GCI Group shall be allocable to the period (i.e., pre- or
post- Distribution Date) in which the sale, transfer, assignment, or exchange or
other event giving rise to the liability for such Tax occurred.
ARTICLE VI.
TAX CONTROVERSIES
-----------------
6.1 Tax Controversies. (a) Except as otherwise provided in this Article
-----------------
VI, GCI shall have primary responsibility and discretion in handling, settling,
or contesting any Tax Controversy involving a Tax Return for which it has filing
responsibility under this Agreement, and GCI Properties shall have primary
responsibility and discretion in handling, settling, or contesting any Tax
Controversy involving a Tax Return for which it has filing responsibility under
this Agreement. Any expense incurred in handling, settling or contesting any
Tax Controversy shall be borne by the Party having primary responsibility and
discretion therefor.
(b) The Party primarily responsible for any Tax Controversy shall use
all reasonable efforts to resist any deficiency assertions by any Taxing
Authority regardless of which Party is ultimately responsible for any such Tax
under this Agreement, and shall not enter into any settlement that may
reasonably be expected to have an adverse effect on another Party without the
consent of that Party.
(c) Each Party shall give prompt notice to any other affected Party of
any communication (including, but not limited to, requests for information that
might affect the treatment of any Tax Item and notices of proposed adjustments
affecting the treatment of any Tax Item) with the IRS or other Taxing Authority
which may affect any Tax Item of the other Party. Such other Party shall have
the right to provide the Party having primary responsibility for the audit with
information and input as to the response to such communication as may be
appropriate under the circumstances. The Party having primary responsibility for
the Tax Controversy shall notify all affected Parties promptly if any Taxing
Authority proposes an assessment of Taxes for which any other Party to this
Agreement could be obligated to indemnify or a Party with direct responsibility
for payment of the Tax liability to the Taxing Authority is other than the Party
with responsibility for the handling of Tax Controversy.
6.2 Cooperation. (a) The Parties agree that they shall afford full
-----------
cooperation to each other in handling, settling, or contesting any Tax
Controversy including, without limitation:
i) the timely filing of appropriate claims for any refund which
may be available on account of an item of loss, deduction or
credit of any member of the GCI Group;
-17-
<PAGE>
ii) preparing and submitting responses to information requests
by any Taxing Authority;
iii) making available books, records and other documentation
(including, but not by way of limitation, working papers and
schedules) relevant to such proceeding, and systems support
for documentation furnished in electronic form;
iv) making directors, officers or employees available to appear
in person for interview or for testimony;
v) making employees available on a mutually convenient basis to
provide additional information and explanation of materials
provided hereunder;
vi) executing powers of attorney, tax information authorizations
and any other necessary or appropriate authorizations; and
vii) executing agreements with the Taxing Authority reasonably
necessary or appropriate for the settlement or pursuit of
the contest of such issue.
viii) executing and filing any petitions, memoranda, and/or such
other documentation with the Taxing Authority or any court
as may reasonably necessary or appropriate in pursuit of the
contest of such issue.
(b) The Party(ies) that may be affected by a Tax Controversy for which
another Party has responsibility and discretion in handling, settling, or
contesting shall have the right to have its representativesd, at its expense,
participate in (1) all conferences, meetings, or proceedings with any Taxing
Authority, and (2) all appearances before any court, the subject matter of which
includes an issue that may affect such Party.
(c) The right to participate referred to in Section 6.2(b) hereof shall
include right to review the submission and content of documentation, memoranda
of fact and law and briefs, to be present and submit input to the Party with
primary Tax Controversy responsibility, or its representatives, with respect to
the conduct of oral arguments or presentations, the selection of witnesses, and
the negotiation of stipulations of fact with respect to the issue.
6.3 Waiver of Indemnification. A Party with a right to indemnification
-------------------------
under this Agreement with respect to any Tax liability that does not have the
primary responsibility to handle, settle, or contest any Tax Controversy under
the provisions of this Section VI may waive the right to such indemnification
and assume the primary responsibility (at its expense) to handle, settle, or
contest that portion of the Tax Controversy for which such Party has primary
liability for the Tax liability.
-18-
<PAGE>
6.4 Record Retention. The Parties agree to retain all books, records,
----------------
returns, schedules, documents and all material papers or relevant items of
information for periods (or portions thereof) prior to the Date of Distribution
until the later of (i) seven (7) years after the Date of Distribution or (ii)
the expiration of the full periods of the applicable statutes of limitations,
including any extensions thereof.
ARTICLE VII.
INDEMNIFICATION
---------------
7.1 Indemnification for Taxes. (a) GCI Properties and the other members
-------------------------
of the GCI Properties Group agree to pay, and to indemnify and to hold GCI and
each member of the Post-Distribution GCI Group harmless from and against, any
and all Tax liability (other than a liability for Restructuring Taxes) of each
member of the GCI Group to the extent that such Tax liability relates to a
period (or portion thereof) which ends on or before the Distribution Date.
(b) GCI Properties and the other members of the GCI Properties Group
agree to pay, and to indemnify and to hold GCI and each member of the Post-
Distribution GCI Group harmless from and against, any and all Restructuring
Taxes allocable to GCI Properties or any member of the GCI Properties Group in
accordance with Article IV of this Agreement.
(c) GCI Properties and the other members of the GCI Properties Group
agree to pay, and to indemnify and to hold GCI and each member of the Post-
Distribution GCI Group harmless from and against, any and all Tax liability (in
accordance with Article III or V hereof) to GCI Properties or any member of the
GCI Properties Group.
(d) GCI agrees to pay, and to indemnify and to hold GCI Properties and
each member of the GCI Properties Group harmless from and against, any and all
Tax liability (other than a liability for Restructuring Taxes) allocable (in
accordance with Article III or V of this Agreement) to GCI or a member of the
Post-Distribution GCI Group to the extent that such Tax liability relates to a
period (or portion thereof) which begins after the Distribution Date.
(e) GCI agrees to pay, and to indemnify and to hold GCI Properties and
each member of the GCI Properties Group harmless from and against, any and all
Restructuring Taxes allocable to GCI or the Post-Distribution GCI Group in
accordance with Article IV of this Agreement.
ARTICLE VIII.
ALLOCATION OF TAX BENEFITS RELATED TO STOCK OPTION EXPENSE
----------------------------------------------------------
-19-
<PAGE>
8.1 Payroll Tax Reporting and Withholding. Upon the exercise of any
-------------------------------------
nonqualified stock option, or the disqualifying disposition of stock acquired
upon exercise of any incentive stock option, covered by the Employee Benefits
Matters Agreement, the employer of the employee exercising such option or making
such disqualifying disposition of stock shall be responsible for collecting from
the employee and timely remitting to the applicable Taxing Authority any
required income, employment, payroll, or other tax withholding with respect to
the income to be recognized by such employee as a result of such exercise or
disqualifying disposition, and shall include on such employee's annual wage
statement or other payroll tax reporting form for the calendar year in which the
option is exercised or the disqualifying disposition occurs the amount of such
income and withholdings. In addition, upon the exercise of any nonqualified
stock option, or the disqualifying disposition of stock acquired upon exercise
of any incentive stock option, covered by the Employee Benefits Matters
Agreement, the employer of the employee exercising such option or making such
disqualifying disposition of stock shall be responsible for paying to any
applicable Taxing Authority any Taxes imposed on an employer in connection with
such exercise or disqualifying disposition. If an employee exercises an option
with respect to, or makes a disqualifying disposition of, other than his or her
employer's stock, then the issuer of that stock shall be required to provide the
employer with information sufficient to allow the employer to satisfy its
withholding and reporting obligations, including, without limitation, the number
of option shares exercised or shares disposed of in a disqualifying disposition,
the fair market value of the issuer's stock on the date of exercise and, if
applicable, the date of disposition, and the option price paid for the stock.
The issuer of such stock shall retain the stock to be issued upon the exercise
of an option by a person who is not an employee of such issuer until such time
as both the exercise price for the stock has been paid and any required
withholding with respect to the income to be recognized by such person has been
remitted to his or her employer. The employer, if the employer is not the
issuer of the stock, shall promptly notify the issuer when such required
withholding has been remitted.
8.2 Tax Deduction and Allocation of Tax Benefit. The employer of an
-------------------------------------------
employee exercising a stock option, or making a disqualifying disposition of
stock acquired upon exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement shall be entitled to claim any and all
deductions, to the extent permitted, on any Tax Return for the income recognized
by such employee as a result of such exercise or disqualifying disposition. Not
later than ninety (90) days after the end of each calendar year during which a
stock option is exercised, or a disqualifying disposition of stock acquired upon
exercise of any incentive stock option occurs, which is covered by the Employee
Benefits Matters Agreement, the Post-Distribution GCI Group and the GCI
Properties Group shall each compute, and shall provide a schedule to the other
Party showing such computation, the total amount of income included in its
employees' annual wage statements or other payroll tax reporting forms for the
calendar year with respect to stock options, or disqualifying dispositions of
stock acquired upon the exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement which have been exercised or for which there
has been a disqualifying disposition during that calendar year for which no
member of the respective group (or another corporation which has become the
common parent that includes such group) is the issuer of such stock. If, for
such
-20-
<PAGE>
calendar year, the total amount of income included in the annual wage statements
or other payroll tax reporting forms of the employees of the Post-Distribution
GCI Group as a result of the exercise of stock options, or disqualifying
dispositions of stock acquired upon the exercise of any incentive stock option,
covered by the Employee Benefits Matters Agreement for which no member of the
Post-Distribution GCI Group (or another corporation which has become the common
parent that includes the Post-Distribution GCI Group) is the issuer of such
stock exceeds the total amount of income included in the annual wage statements
or other payroll tax reporting forms of the employees of the GCI Properties
Group as a result of the exercise of stock options or disqualifying dispositions
of stock acquired upon the exercise of any incentive stock option covered by the
Employee Benefits Matters Agreement for which no member of the GCI Properties
Group (or another corporation which has become the common parent that includes
the GCI Properties Group) is the issuer of such stock, then GCI shall pay to GCI
Properties, not later than ten (10) days after the exchange of such
computations, an amount equal to such excess times the sum of the highest
federal income tax rate under Code Section 11 (or any successor provision
thereto) applicable to a corporation that is in effect for the calendar year for
which such computation is being made plus five percent (5%). If, for such
calendar year, the total amount of income included in annual wage statements or
other payroll tax reporting forms of the employees of the GCI Properties Group
as a result of the exercise of stock options, or disqualifying dispositions of
stock acquired upon the exercise of any incentive stock option, covered by the
Employee Benefits Matters Agreement for which no member of the GCI Properties
Group (or another corporation which has become the common parent that includes
the GCI Properties Group) is the issuer of such stock exceeds the total amount
of income included in annual wage statements or other payroll tax reporting
forms of the employees of the Post-Distribution GCI Group as a result of the
exercise of stock options, or disqualifying dispositions of stock acquired upon
the exercise of any incentive stock option, covered by the Employee Benefits
Matters Agreement for which no member of the Post-Distribution GCI Group (or
another corporation which has become the common parent that includes the Post-
Distribution GCI Group) is the issuer of such stock, then GCI Properties shall
pay to GCI, not later than ten (10) days after the exchange of such
computations, an amount equal to such excess times the sum of the highest
federal income tax rate under Code Section 11 (or any successor provision
thereto) applicable to a corporation that is in effect for the calendar year for
which such computation is being made plus five percent (5%). In addition, each
Party shall reimburse the other Party for the payroll Taxes imposed on such
other Party under Code Section 3111(a) and (b) in respect of any income
recognized by its employees to the extent that such income was taken into
account in determining the payment to be made under either of the two previous
sentences. In determining the amount of such reimbursement payable to the other
Party, it shall be assumed that such income was the last item of income earned
by the employee during the applicable year. In the event that it is determined
as a result of a challenge by a Taxing Authority that a member of one of the
groups claiming a deduction as a result of an exercise of an option or a
disqualifying disposition of stock covered by this Article VIII is not entitled
to such deduction, and a member of the other group is entitled to claim such
deduction and receives a refund of or reduction in Taxes as a result of claiming
such deduction, then no payment with respect to such deduction shall be due
under this Section 8.2 (including any payment for
-21-
<PAGE>
reimbursement of payroll Taxes paid as an employer) or, if a payment has already
been made with respect to such deduction, then such payment (net of any
reimbursement for payroll Taxes) shall be returned to the Party who originally
made such payment. For purposes of this Article VIII, a person whose employment
has terminated prior to the time an option covered by the Employee Benefits
Matters Agreement is exercised shall be treated as an employee of the group by
which he or she was last employed.
ARTICLE IX.
PAYMENTS
--------
9.1 Payments in General. Except as otherwise provided in this Agreement,
-------------------
any amount required to be paid by one Party pursuant to this Agreement shall be
paid in immediately available funds within thirty (30) days after written demand
therefor from the other Party.
9.2 Interest on Late Payments. Any amount payable under this Agreement by
-------------------------
one Party to another Party shall, if not paid by the due date specified in this
Agreement, bear interest from such due date until the date paid at the
underpayment rates applicable under Section 6621 of the Code on and after the
due date.
9.3 Character and Effect of Payments. The Parties agree that for income
--------------------------------
and other Tax purposes all amounts paid pursuant to this Agreement by one Party
to the other Party (other than interest payments pursuant to Section 9.2) shall
be treated by the Parties as made directly to the third parties to which such
payment is due. If, notwithstanding such treatment by the Parties, any payment
by either Party is determined to be taxable to the other Party by any Taxing
Authority, the payor shall also indemnify the other Party for the amount of any
Taxes and related Expenses payable by the other Party by reason of the receipt
of such payment. In addition, the amount of any indemnity payment due under this
Agreement shall be computed by properly taking into account any Tax Benefit
actually realized by the recipient from the payment of the item at issue (net of
the Taxes and related Expenses described in the preceding sentence).
9.4 Notice. The Parties shall give each other prompt notice of any payment
------
that may be due under this Agreement.
ARTICLE X.
ADMINISTRATIVE PROVISIONS
-------------------------
10.1 Interest. Except as expressly provided herein, no obligation to pay or
--------
right to collect interest or other amounts shall arise by virtue of this
Agreement.
-22-
<PAGE>
10.2 Expenses. Except as expressly provided herein, each Party to this
--------
Agreement hereby agrees to be responsible for all of the expenses which it may
incur in carrying out its duties hereunder.
ARTICLE XI.
MISCELLANEOUS
-------------
11.1 Prior Agreement. This Agreement supersedes and terminates the Tax
---------------
Sharing Agreement dated December 29, 1993, between GCI and GCHS.
11.2 Modification of Agreement. No modification, amendment or waiver or any
-------------------------
provision of this Agreement shall be effective unless the same shall be in
writing, and signed by each of the Parties hereto and then such modification,
amendment or waiver shall be effective only in the specific instance and for the
purpose for which given.
11.3 Successors and Assigns. Except as hereinafter provided, neither this
----------------------
Agreement nor any rights hereunder shall be assignable or transferable by any
Party hereto, without the prior written consent of the other Parties hereto,
except by operation of law. Each Party hereby guarantees the performance of all
actions, agreements, and obligations provided for under this Agreement by each
of its Subsidiaries it has at the time such performance is required. Each Party
shall, upon the written request of any other Party, cause any of its
Subsidiaries formally to execute this Agreement. This Agreement shall be binding
upon, and shall inure to the benefit of, the successors and assigns of the
corporations bound hereby.
11.4 Term. This Agreement shall commence on the date of execution indicated
----
above and shall continue in effect until otherwise agreed to in writing by the
Parties or their successors. Notwithstanding any other provision in this
Agreement, this Agreement shall remain in effect and its provisions shall
survive for the full period of all applicable statutes of limitation (giving
effect to any extension, waiver, or mitigation thereof).
11.5 Rights Confined to Parties. Nothing expressed or implied herein is
--------------------------
intended or shall be constructed to confer upon or to give to any person firm or
corporation (other than the Parties hereto, and their successors and assigns)
any right, remedy or claim under or by reason of this Agreement or of any term,
covenant or condition hereof. All terms, covenants, conditions, promises and
agreements contained herein shall be for the sole and exclusive benefit of the
Parties hereto, and their successors and assigns.
11.6 Notices. All demands, notices, and communications under this Agreement
-------
shall be in writing and shall be deemed to have been duly given on the date on
which such demand, notice, or communication is personally delivered or sent by
certified or registered United States Mail, postage prepaid, to:
-23-
<PAGE>
a) in the case of GCI and/or a member of the GCI Group:
___________________
c/o ______________
___________________
___________________
b) in the case of GCI Properties and/or a member of the GCI
Properties Group:
____________________
c/o _______________
____________________
____________________
11.7 Effect of Headings. The paragraph headings herein are for convenience
------------------
only and shall not affect the construction hereof.
11.8 Governing Law. The governing law provision of this Agreement shall be
-------------
identical to the governing law provision of the Distribution Agreement.
11.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall, when so executed, be considered an original
and all of which, taken together, shall be considered one document.
IN WITNESS WHEREOF, the Parties hereto have caused their names to be
subscribed and executed by their respective authorized officers on the dates
indicated, effective as of the day first written above.
GRANCARE, INC.
By: __________________________ Date: ___________________________
GCI PROPERTIES, INC.
By: __________________________ Date: ___________________________
GRANCARE HEALTH SERVICES, INC.
By: __________________________ Date: ___________________________
-24-
<PAGE>
COMPUPHARM, INC.
By:______________________________ Date:__________________________
PATIENT THERAPY SYSTEMS, INC.
By:______________________________ Date:__________________________
GCI-CAL PHARMACIES, INC.
By:______________________________ Date:__________________________
GCI INNOVATIVE PHARMACY, INC.
By:______________________________ Date:__________________________
COMPUPHARM LTC, INC.
By:______________________________ Date:__________________________
DRUG SYSTEMS, INC.
By:______________________________ Date:__________________________
COMPUPHARM OF VIRGINIA, INC.
By:______________________________ Date:__________________________
TEAMCARE PHARMACY, INC.
By:______________________________ Date:__________________________
CAPCARE HEALTH SERVICES, INC.
-25-
<PAGE>
By:______________________________ Date:__________________________
RENAISSANCE MENTAL HEALTH CENTER, INC.
By:______________________________ Date:__________________________
COMPUPHARM OHIO PHARMACY, INC.
By:______________________________ Date:__________________________
COMPUPHARM CLINICAL SERVICES, INC.
By:______________________________ Date:__________________________
COMPUPHARM NEW JERSEY, INC.
By:______________________________ Date:__________________________
AMS GREEN TREE, INC.
By:______________________________ Date:__________________________
AMERICAN-CAL MEDICAL SERVICES, INC.,
By:______________________________ Date:__________________________
HMI CONVALESCENT CARE, INC.
By:______________________________ Date:__________________________
GRANCARE SOUTH CAROLINA, INC.
By:______________________________ Date:__________________________
GCI PALM COURT, INC.
-26-
<PAGE>
By:______________________________ Date:__________________________
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
By:______________________________ Date:__________________________
GCI REALTY, INC.
By:______________________________ Date:__________________________
GCI JOLLEY ACRES, INC.
By:______________________________ Date:__________________________
GCI PRINCE GEORGE, INC.
By:______________________________ Date:__________________________
GCI SPRINGDALE VILLAGE, INC.
By:______________________________ Date:__________________________
GCI VILLAGE GREEN, INC.
By:______________________________ Date:__________________________
GCI FAITH NURSING HOME, INC.
By:______________________________ Date:__________________________
GCI REHAB, INC.
By:______________________________ Date:__________________________
-27-
<PAGE>
GCI-CAL HEALTH CARE CENTERS, INC.
By:______________________________ Date:__________________________
GRANCARE HOME HEALTH SERVICES, INC.
By:______________________________ Date:__________________________
COORDINATED HOME HEALTH SERVICES, INC.
By:______________________________ Date:__________________________
GRANCARE NURSING SERVICES AND HOSPICE, INC.
By:______________________________ Date:__________________________
WINYAH DISPENSARY, LTC OF NORTH CAROLINA, INC.
By:______________________________ Date:__________________________
GCI-WINYAH, INC.
By:______________________________ Date:__________________________
AMS PROPERTIES, INC.
By:______________________________ Date:_________________________
EVERGREEN HEALTH CARE, INC.
By:______________________________ Date:__________________________
NATIONAL HERITAGE REALTY, INC.
-28-
<PAGE>
By:______________________________ Date:__________________________
OMEGA/INDIANA CARE CORPORATION
By:______________________________ Date:__________________________
EH ACQUISITION CORP., INC.
By:______________________________ Date:__________________________
EH ACQUISITION CORP. II, INC.
By:______________________________ Date:__________________________
EH ACQUISITION CORP. III, INC.
By:______________________________ Date:__________________________
HERITAGE OF LOUISIANA, INC.
By:______________________________ Date:__________________________
HEALTH RESOURCES, INC.
By:______________________________ Date:__________________________
NATIONAL HERITAGE PHARMACY, INC.
By:______________________________ Date:__________________________
HERITAGE STERLING FINANCIAL SERVICES, INC.
By:______________________________ Date:__________________________
-29-
<PAGE>
STERLING HEALTH CARE, INC.
By:______________________________ Date:__________________________
EH RESOURCES, INC.
By:______________________________ Date:__________________________
GCI HEALTH CARE CENTERS, INC.
By:______________________________ Date:__________________________
GC SERVICES, INC.
By:______________________________ Date:__________________________
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
By:______________________________ Date:__________________________
GCI CAMELIA CARE CENTER, INC.
By:______________________________ Date:__________________________
CORNERSTONE HEALTH MANAGEMENT COMPANY
By:______________________________ Date:__________________________
HOSTMASTERS, INC.
By:______________________________ Date:__________________________
GCI COLTER VILLAGE, INC.
By:______________________________ Date:__________________________
-30-
<PAGE>
GCI INDEMNITY, INC.
By:______________________________ Date:__________________________
GCI BELLA VITA, INC.
By:______________________________ Date:__________________________
GCI WISCONSIN PROPERTIES, INC.
By:______________________________ Date:__________________________
GCI ASHLAND HEALTH CARE CENTER, INC.
By:______________________________ Date:__________________________
GCI NORTH SHORE HEALTH CARE CENTER, INC.
By:______________________________ Date:__________________________
GCI HILLSIDE HEALTH CARE CENTER, INC.
By:______________________________ Date:__________________________
GCI FAMILY NURSING HOME AND REHABILITATION CENTER, INC.
By:______________________________ Date:__________________________
PROFESSIONAL HEALTH CARE MANAGEMENT, INC.
By:______________________________ Date:__________________________
CAMBRIDGE BEDFORD, INC.
-31-
<PAGE>
By:______________________________ Date:__________________________
CAMBRIDGE EAST, INC.
By:______________________________ Date:__________________________
CAMBRIDGE NORTH, INC.
By:______________________________ Date:__________________________
CAMBRIDGE SOUTH, INC.
By:______________________________ Date:__________________________
CLINTONAIRE NURSING HOME, INC.
By:______________________________ Date:__________________________
CRESTMONT HEALTH CENTER, INC.
By:______________________________ Date:__________________________
FRENCHTOWN NURSING HOME, INC.
By:______________________________ Date:__________________________
HERITAGE NURSING HOME, INC.
By:______________________________ Date:__________________________
MADONNA NURSING CENTER, INC.
By:______________________________ Date:__________________________
-32-
<PAGE>
MIDDLEBELT NURSING HOME, INC.
By:______________________________ Date:__________________________
MIDDLEBELT-HOPE NURSING HOME, INC.
By:______________________________ Date:__________________________
NIGHTINGALE EAST NURSING CENTER, INC.
By:______________________________ Date:__________________________
ST. ANTHONY NURSING HOME, INC.
By:______________________________ Date:__________________________
INTERNATIONAL HEALTH CARE MANAGEMENT, INC.
By:______________________________ Date:__________________________
INTERNATIONAL X-RAY, INC.
By:______________________________ Date:__________________________
SPAN PURCHASING, INC.
By:______________________________ Date:__________________________
GCI-CAL THERAPIES, INC.
By:______________________________ Date:__________________________
GCI THERAPIES, INC.
By:______________________________ Date:__________________________
-33-
<PAGE>
Schedule 2.2
------------
Corporation(s): Returns:
- -------------- -------
Compupharm LTC, Inc. All property tax returns
All members of the Post-Distribution GCI Group All Forms 1099
All members of the Post-Distribution GCI Group All payroll tax forms,
including Forms W-2
All members of the Post-Distribution GCI Group Quarterly and annual payroll
tax withholding
All members of the Post-Distribution GCI Group Quarterly and annual social
security tax withholding
All members of the Post-Distribution GCI Group Quarterly and annual
unemployment tax returns
-34-
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF CAHILL GORDON & REINDEL]
November 20, 1996
(212) 701-3000
Board of Directors
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60563
Re: Vitalink Pharmacy Services, Inc.
Registration Statement on Form S-4
----------------------------------
Ladies and Gentlemen:
This opinion is being rendered in connection with the Registration
Statement on Form S-4 (the "Registration Statement") filed by Vitalink Pharmacy
Services, Inc. (the "Company") with the Securities and Exchange Commission (the
"Commission") registering under the Securities Act of 1933, as amended (the
"Act") certain shares of the Company's common stock, par value $.01 per share
(the "Shares"), to be issued to holders of the common stock of GranCare, Inc., a
California corporation ("GranCare") upon the consummation of the merger of
GranCare with and into the Company, pursuant to an Agreement and Plan of Merger
dated September 3, 1996 by and between the Company and GranCare (the "Merger
Agreement").
<PAGE>
In that connection, we have examined copies of such corporate
records and made such inquiries as we have deemed necessary for purposes of
rendering the opinion set forth below.
Based upon the foregoing, in our opinion, the Shares to be issued
pursuant to the Registration Statement, when it becomes effective under the Act,
when issued in accordance with the terms of the Merger Agreement and in the
manner described in the Registration Statement will be duly and validly issued,
fully paid and non-assessable.
We hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement and to the reference to our firm
under the caption "Legal Matters" in said Registration Statement and the related
prospectus. In giving such consent, we do not admit that we are in the category
of persons whose consent is required under Section 7 of the Act.
Very truly yours,
<PAGE>
Exhibit 8.1
[LETTERHEAD OF CAHILL GORDON & REINDEL]
November 20, 1996
(212) 701-3000
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60578
Dear Sirs:
We hereby confirm the discussion set forth in the Information
Statement/Prospectus for Vitalink Pharmacy Services, Inc. ("Vitalink") and Proxy
Statement for GranCare, Inc. ("GranCare") dated November , 1996, contained in
the Registration Statement on Form S-4 of Vitalink, which discussion is set
forth under the heading "Certain Federal Income Tax Consequences," subject to
our receipt of the representations contemplated in the Merger Agreement by and
between Vitalink and GranCare dated as of September 3, 1996 and the Distribution
Agreement by and between GranCare and GCI Properties, Inc. dated as of September
3, 1996.
We hereby consent to the filing of this opinion as an exhibit to such
Registration Statement and the reference to the above-mentioned opinion under
"Certain Federal Income Tax Consequences." In giving such consent, we do not
admit that we are in the category of persons whose consent is required under
Section 7 of the Securities Act of 1993, as amended.
Very truly yours,
CAHILL GORDON & REINDEL
<PAGE>
[LETTERHEAD OF POWELL, GOLDSTEIN, FRAZER & MURPHY]
December 31, 1996
GranCare, Inc. Vitalink Pharmacy Service, Inc.
One Ravinia Drive 1250 East Diehl Road
Suite 1500 Naperville, Illinois 60563
Atlanta, Georgia 30346
Re: Registration Statement on Form S-4 of Vitalink Pharmacy Services,
Inc. ("Vitalink") containing the Information Statement/Prospectus
for Vitalink and the Proxy Statement for GranCare, Inc.
("GranCare") dated December 31, 1996 (the "Vitalink Registration
Statement") and Registration Statement on Form S-1 of New GranCare,
Inc. ("New GranCare") Pertaining to Shares of New GranCare Common
Stock, Par Value $.001 Per Share dated December 31, 1996 (the "New
GranCare Registration Statement" and together with the Vitalink
Registration Statement, the "Registration Statements")
Gentlemen:
You have requested our opinion concerning certain of the federal income
tax consequences of certain of the transactions described in the Registration
Statements; specifically, the "Distribution" and the "Merger" (as those terms
are defined in the Registration Statements). In connection with rendering this
opinion we have made certain assumptions and relied upon the representations of
the management of GranCare, New GranCare, and Vitalink as to the facts upon
which this opinion is based.
Based upon the assumptions and the representations, we confirm our
opinion as set forth in the Registration Statements under the heading "CERTAIN
FEDERAL INCOME TAX CONSIDERATIONS."
The opinion addresses only the effect under the federal income tax laws
of the Distribution and the Merger, and we express no opinion with respect to
the applicability thereto, or the effect thereon, of other federal laws,
the laws of any state or other jurisdiction, or as to any matters of
municipal law or the laws of any other local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such
Registration Statements and the reference to our firm and the above-mentioned
opinion under the heading "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" included
in the Registration Statements. In giving such consent, we do not thereby admit
that we are acting within the category of persons whose consent is required
under Section 7 of the Securities Act and the rules and regulations of the
Securities and Exchange Commission thereunder.
Very truly yours,
POWELL, GOLDSTEIN, FRAZER & MURPHY
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this registration statement of our reports dated June 25, 1996,
included and incorporated by reference in Vitalink Pharmacy Services, Inc.'s
Form 10-K\A for the year ended May 31, 1996 and to all references to our Firm
included in this registration statement.
Arthur Andersen LLP
Washington, D.C.
December 30, 1996
<PAGE>
Exhibit 23.4
Form S-4
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the caption "Experts" in the
Registration Statement on Form S-4 and related Prospectus of
Vitalink Pharmacy Services, Inc. for the registration of shares of its common
stock and (a) to the use of our report dated September 25, 1996 with respect to
the combined financial statements of TeamCare, Inc. (a wholly owned subsidiary
of GranCare, Inc.) as of December 31, 1995 and 1994 and for each of the three
years ended December 31, 1995, and (b) to the incorporation by reference of our
report dated February 27, 1996 with respect to the consolidated financial
statements and schedule of GranCare, Inc. included in its Annual Report (Form
10-K) for the year ended December 31, 1995.
ERNST & YOUNG LLP
Atlanta, Georgia
December 30, 1996
<PAGE>
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Evergreen Healthcare, Inc.:
We consent to incorporation by reference in the Registration Statement of
Vitalink Pharmacy Services, Inc. on Form S-4 of our report dated August 17,
1995, with respect to the consolidated balance sheet of Evergreen Healthcare,
Inc. and subsidiaries as of December 31, 1994 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year ended
December 31, 1994 and the six-month period ended December 31, 1993, and the
related combined statements of operations, partners' equity and cash flows of
Evergreen Healthcare LTD, L.P. Predecessor to Evergreen Healthcare, Inc. for the
six-month period ended June 30, 1993, which report is incorporated by reference
in the Annual Report on Form 10-K of GranCare, Inc. for the year ended December
31, 1995 dated March 29, 1995 and to the reference to our Firm under the heading
"Experts" in the prospectus.
Indianapolis, Indiana
December 30, 1996
<PAGE>
CONSENT OF PAINEWEBBER INCORPORATED
Board of Directors
GranCare, Inc.
One Ravinia Drive
Atlanta, GA 30346
Members of the Board of Directors:
We hereby consent to the use of our opinion letter dated September 3, 1996
to the Board of Directors of GranCare, Inc. ("GranCare") included as Annex D to
the Proxy Statement/Prospectus which forms a part of the Registration Statement
on Form S-4, dated as of the date hereof, relating to, among other things, the
proposed merger of GranCare with and into Vitalink Pharmacy Services, Inc., and
to the references to such opinion in such Proxy Statement/Prospectus under the
captions "SUMMARY -- The Transactions -- Opinion of GranCare's Financial
Advisor" and "DESCRIPTION OF THE TRANSACTIONS -- Opinion of GranCare's Financial
Advisor". In giving such consent, we do not admit that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act of 1933, as amended, or the rules and regulations issued by the Securities
and Exchange Commission thereunder.
Very truly yours,
PAINEWEBBER INCORPORATED
By /s/ Fuad Sawaya
----------------------------------
Managing Director
December 31, 1996
New York, New York
<PAGE>
[LETTERHEAD OF CHASE SECURITIES INC. APPEARS HERE]
EXIBIT 23.7
CONSENT OF CHASE SECURITIES INC.
We hereby consent to the inclusion in the Joint Proxy Statement/Prospectus
forming part of this Registration Statement on Form S-4 of our opinion dated
October 2, 1996 to the Board of Directors of Vitalink Pharmacy Services, Inc.
attached as Annex E to such Joint Proxy Statement/Prospectus and the reference
to such opinion in the Sections entitled "Summary--Opinion of Vitalink's
Financial Advisor" and "Description of the Transactions--Opinion of Vitalink's
Financial Advisor". In giving such consent, we do not admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended, or the rules and regulations thereunder, nor
do we admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "expert" as used in the Securities Act
of 1933, as amended, or the rules and regulations thereunder.
December 30,1996
CHASE SECURITIES INC.
By: /s/ Michael Goldberg
-------------------------
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
--
[X] PLEASE MARK
YOUR VOTE
AS THIS
--
FOR AGAINST ABSTAIN
1. To approve the Merger [_] [_] [_]
Agreement and the
transactions contemplated
thereby.
2. To approve the [_] [_] [_]
Distribution Agreement
and the transactions
contemplated thereby.
3. To approve the 1996 New [_] [_] [_]
GranCare Plan.
4. To approve the New [_] [_] [_]
GranCare Annual Incentive
Plan and Stockholder
Value Program.
5. To approve the possible [_] [_] [_]
adjournment of the
Special Meeting for the
purpose of soliciting
additional votes in favor
of proposals 1 through 4.
6. In their discretion, the proxies are authorized to vote upon such
other business as may properly come before the meeting. Each of
the above-named proxies present at said meeting, either in person
or by substitute, shall have and exercise all the powers of said
proxies hereunder. THIS PROXY WILL BE VOTED IN ACCORDANCE WITH
THE CHOICES SPECIFIED BY THE UNDERSIGNED. IF NO SPECIFICATIONS TO
THE CONTRARY ARE INDICATED HEREON, THIS PROXY WILL BE TREATED AS
A GRANT OF AUTHORITY TO VOTE FOR PROPOSALS 1, 2, 3, 4 AND 5.
PLEASE SIGN, DATE AND RETURN YOUR PROXY PROMPTLY IN THE POSTAGE
PREPAID ENVELOPE PROVIDED.
Signature(s) ______________Date _________________________________
NOTE: Please sign exactly as your name appears hereon. When signing
as attorney, executor, administrator, trustee or guardian,
please give full title as such. If shares are held jointly,
each holder should sign.
</TABLE>
<PAGE>
GRANCARE, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF SHAREHOLDERS -- JANUARY , 1997
The undersigned shareholder of GranCare, Inc., a California corporation (the
"Company"), acknowledges receipt of the Notice of Special Meeting of
Shareholders and Proxy Statement/Prospectus, each dated January , 1997, and
the undersigned revokes all other proxies and appoints Gene E. Burleson and
Evrett W. Benton, and each of them, the attorneys and proxies for the
undersigned, each with full power of substitution, to attend and act for the
undersigned at the Company's Special Meeting of Shareholders at 11:00 a.m.,
local time, January , 1997 and at any adjournments or postponements thereof
in connection therewith to vote and represent all of the shares of the
Company's Common Stock which the undersigned would be entitled to vote.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE)
