<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended May 31, 1997
--------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from __________ to ___________
Commission File Number 0-19820
-------
VITALINK PHARMACY SERVICES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 37-0903482
------------------------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1250 EAST DIEHL ROAD, NAPERVILLE, ILLINOIS
SUITE 208 60563
------------------------------------------- -----------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (630) 245-4800
--------------
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
- -------------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
----- -----
<PAGE>
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates was
$218,551,024 as of August 14, 1997 based upon a closing price of $19.50 per
share.
The number of shares of Vitalink's Common Stock outstanding at August 14,
1997 was 25,386,553.
DOCUMENTS INCORPORATED BY REFERENCE:
PART II 1997 Annual Report to Stockholders
PART III Proxy Statement pertaining to 1997 Annual Meeting of Stockholders
2
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Vitalink Pharmacy Services, Inc. (the "Company" or "Vitalink") provides
institutional pharmacy services to nursing facilities and other institutions.
Vitalink directly or through its wholly owned subsidiaries presently operates 57
institutional pharmacies (including four regional infusion pharmacies), and
other pharmacy related businesses which, among other things, 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), infusion therapy and
other ancillary products and services. The Company also 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, Inc. (Manor
Care, Inc. or its subsidiary are referred to hereafter as "Manor Care"), one of
the nation's largest publicly owned providers of long-term care services.
Vitalink was included in the acquisition of Americana Healthcare Corporation,
which had incorporated the predecessor of Vitalink in 1967. The Company changed
its name from TotalCare Pharmacy Services, Inc. in January 1992.
Vitalink sold 2,475,000 shares of its common stock in an initial public
offering in 1992. As of May 31, 1997, Manor Care owned approximately 51.2% of
Vitalink's common stock par value $.01 per share (the "Common Stock").
On February 12, 1997, the Company acquired TeamCare, Inc. ("TeamCare"), the
institutional pharmacy business of GranCare, Inc., a California corporation
("Old GranCare"), in a merger (the "Merger") for consideration consisting of:
(i) 0.478 of a share of Common Stock of the Company, for each share of Old
GranCare common stock, par value $.001 per share, outstanding at the time of the
Merger; (ii) the incurrence or assumption by the Company on behalf of Old
GranCare of approximately $109 million of indebtedness; and (iii) the issuance
by the Company of options to purchase approximately 1,121,030 shares of the
Company's Common Stock (in connection with the assumption by the Company of
certain options granted to employees or former employees of Old GranCare). The
purchase price paid by the Company in connection with the Merger is
approximately $351 million.
In connection with the Merger, the Company acquired approximately 33
institutional pharmacies and several related pharmacy businesses. The Merger was
accounted for using the purchase method of accounting. Unless the context
requires otherwise, as used hereafter, the terms "Company" or "Vitalink" refer
to the Company as comprised following the completion of the Merger.
In connection with the Merger, Old GranCare's skilled nursing business was
transferred to New GranCare, Inc., a Delaware corporation ("New GranCare"), then
a wholly owned subsidiary of Old GranCare, and all of New GranCare's common
stock was distributed at the time of the Merger to the shareholders of Old
GranCare (referred to hereafter as the "Spin-Off"). Following the Spin-Off, the
name of New GranCare was changed to "GranCare, Inc.," which became an
independent company as of the time of the Merger. Unless the context otherwise
requires, all references to "GranCare" hereafter refer to the company resulting
from the Spin-Off, following the aforementioned name change.
On July 14, 1997, the Company acquired substantially all of the assets of
Nationwide Pharmacies located in Upper Marlboro, Maryland, for approximately
$5,550,000 in cash and future contingent payments based on the achievement of
certain future profitability objectives.
On July 31, 1996, the Company acquired the institutional pharmacy business
of Medisco Pharmacies, Inc. located in San Bernardino, California for (i)
$5,291,000 in cash; (ii) the assumption of $2,510,000 in liabilities and (iii)
future payments totaling $1,150,000.
3
<PAGE>
INSTITUTIONAL PHARMACY INDUSTRY
Institutional pharmacies purchase and distribute prescription and non-
prescription medications for residents in institutional settings, including
nursing facilities, assisted living facilities, correctional facilities,
retirement centers and other institutions. 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 long-term care and institutional pharmacy industries, 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
The Company provided institutional pharmacy services to facilities with
approximately 172,000 beds from 56 institutional pharmacies, including four
regional infusion pharmacies, as of May 31, 1997. (A 57th pharmacy was acquired
in July 1997.) The Company 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 and other
institutions within a radius of up to 150 miles, depending on demographics and
travel times.
Vitalink has expanded from three pharmacies in 1981 to 57 institutional
pharmacies, including four regional infusion pharmacies, as of July 1997. The
pharmacies are located in 20 states: California, Colorado, Florida, Illinois,
Indiana, Iowa, Kentucky, Maryland, Michigan, New Jersey, New York, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Texas, Virginia
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 new customers; (ii) infusion
therapy revenue generation created by targeting specific nursing facilities and
home health care agencies; and (iii) acquisitions of pharmacies that can be
consolidated with existing Company pharmacies or serve as a more rapid entry
into new markets.
The table below sets forth the number of beds serviced by the Company
during the past three fiscal years:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
-----------------------
1995 1996 1997
----- ----- ----
<S> <C> <C> <C>
Manor Care Affiliated Beds....... 16,000 19,300 23,000
GranCare Affiliated Beds......... -- -- 15,000
Non-Manor Care and Non-GranCare
Affiliated Beds................ 26,400 30,600 134,000
------ ------ -------
Total beds serviced.... 42,400 49,900 172,000
====== ====== =======
</TABLE>
In the past five fiscal years, the Company has acquired TeamCare, as well
as eight other institutional pharmacies and one regional infusion pharmacy.
SERVICES OFFERED BY THE COMPANY
Pharmacy Services - The basic service provided by the Company is the
customized filling of prescription and non-prescription medications for
individual patients pursuant to physician orders delivered to nursing
facilities. The Company 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. The Company 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
4
<PAGE>
service to its nursing facility customers, the Company maintains and documents
ancillary orders such as diet orders, therapy orders and activity orders. The
Company 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 - The Company 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.
The Company, 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. The Company charges 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 (by tube, catheter or intravenous
means). 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.
The Company prepares the product to be administered, delivers the product
and, in most cases, trains others in administering infusion therapy.
Other Ancillary Services The Company also provides its customers with
wound care products and services, disposable medical supplies and durable
medical equipment such as orthotics and prosthetics. In fiscal 1997, ancillary
products and services accounted for approximately 6% of the Company's net
revenues.
PURCHASING
The Company purchases the drugs and supplies used in its pharmacies
directly from national wholesale distributors, based on prices obtained through
membership in purchasing groups and directly from pharmaceutical manufacturers.
Direct purchases from drug manufacturers generally 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 the
Company's inventory of drugs and supplies.
REIMBURSEMENT AND BILLING
The Company's computerized billing system enables it to bill for products
and services in a variety of ways. Charges for pharmacy services provided to
patients who are eligible for Medicare Part A are billed by the Company to
nursing facilities. The nursing facility, in turn, bills these charges 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, the Company 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.
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
5
<PAGE>
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. For
patients who qualify under Medicare Part B and receive PEN (parenteral and
enteral) therapies and certain other products and services, Vitalink bills
Medicare Part B directly.
For patients qualifying for Medicaid reimbursement in all states in which
the Company has a pharmacy, 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.
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 its fiscal year 1997, the Company received approximately 63% of its net
revenues from private pay sources, including commercial insurance, managed care
and Medicare Part A patients; 5% of net revenues from Medicare Part B direct
bill; and 32% of net revenues from Medicaid direct bill. Following the Merger,
the Company received approximately 60% of its net revenues from private pay
sources, 5% from Medicare Part B and 35% from Medicaid.
DEPENDENCE ON KEY CUSTOMERS
Net revenue from Manor Care and its patients (including revenues pursuant
to government reimbursement programs) accounted for approximately 29%, 48% and
49% of total net revenues in fiscal 1997, 1996 and 1995, respectively. In
connection with the Merger, the Company assumed existing pharmaceutical supply
agreements between TeamCare and GranCare to provide pharmaceutical supplies and
services to substantially all of GranCare's nursing facilities. Included in the
Company's net revenues for fiscal 1997 are net revenues from GranCare facilities
and their patients of approximately $20,369,000.
Under various master agreements with Manor Care discussed below, the
Company 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. Each master agreement, however, may be limited or
terminated under certain circumstances including with respect to any nursing
facilities disposed of by Manor Care. Additionally, while the Company hopes to
extend the duration of the master agreements, there can be no assurance that the
Company will be able to do so, or that, if it is able, the extended or new
agreements will be on terms no less favorable to the Company. Any material loss
of business from Manor Care would have a material adverse effect on the Company.
Pursuant to four agreements with Manor Care entered into on June 1, 1991,
the Company 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. The Company is not restricted from providing
similar services to non-Manor Care facilities. The agreements have an initial
term of ten years.
Pursuant to the master agreement for pharmacy services and the master
agreement for infusion therapy services, the Company has the option to provide
pharmaceutical and infusion therapy products and services to nursing facilities
owned or licensed by Manor Care.
6
<PAGE>
Pursuant to the master pharmacy consulting agreement, the Company provides
pharmacy consultant services to nursing facilities owned or licensed by Manor
Care that the Company is able to service. Each nursing facility is billed
monthly by the Company based on the number of beds serviced.
Pursuant to the pharmacy services consultant agreement, the Company assists
Manor Care at the corporate level in establishing uniform pharmacy delivery
standards for all of its nursing facilities including those not serviced by the
Company. Manor Care pays the Company an annual fee based on the number of
nursing facility beds operated by Manor Care.
The Company does not believe that its present contractual arrangements with
Manor Care and GranCare with respect to the length of term are comparable to
those obtainable from third parties. Contracts with nursing facilities not
affiliated with Manor Care or GranCare are generally for a period of one to two
years and are terminable by either party for any reason upon thirty days notice.
Pursuant to certain pharmaceutical supply agreements between TeamCare and
GranCare discussed above, the Company provides substantially all pharmaceutical
supplies and services to substantially all GranCare nursing facilities and the
residents thereof. The agreements referred to in the prior sentence have a
variety of commencement dates and five-year rolling terms. Depending upon the
payor source, either the Company will bill the payor source directly or the
Company will bill the nursing facility, which will then bill the payor source
directly. Any material loss of business from GranCare would have a material
adverse affect on the Company.
COMPETITION
The Company competes with numerous local and regional institutional
pharmacies, as well as the pharmacy operations owned by long-term care
providers. These competitors or potential competitors provide product and
service offerings similar to those provided by the Company. Two competitors are
larger and have greater financial resources than the Company. 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. The Company
currently has size, purchasing power, technical capabilities and financial
resources to compete in each of these areas, although there can be no assurance
that technological or market changes, consolidation in the long-term care and
institutional pharmacy industries or intensified competition will not affect the
Company's ability to maintain its current competitive position.
QUALITY ASSURANCE
The Company maintains high standards of pharmaceutical dispensing and
record keeping. The Company 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 each 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
administration.
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. The Company's pharmacies are each
licensed by the states in which they operate and are registered with the federal
government pursuant to regulations covering controlled substances. The nursing
facilities served by the Company 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.
7
<PAGE>
Given that a substantial number of nursing facility patients are covered by
the Medicare and Medicaid programs, the Company 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 the Company's outstanding common stock,
the Company 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.
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 the Company's business.
Various federal and state laws provide nursing facility patients with the
freedom to choose their own pharmacy provider. The Company 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 the Company's business.
EMPLOYEES
At May 31, 1997, the Company had approximately 3,300 employees. The Company
believes it enjoys a good relationship with its employees. Automated
Pharmaceutical Services ("APS"), a subsidiary of the Company which recently
merged with TeamCare, is party to a collective bargaining agreement dated August
29, 1994, with the AFL-CIO covering approximately 50 employees. In addition, in
March 1996, an election was held at APS in Whippany, New Jersey among APS's
delivery drivers seeking representation by the International Laborers Union of
America. The drivers voted in favor of such representation and the Company
challenged the validity and result of such election. The National Labor
Relations Board certified the results of the election on August 21, 1996. The
Company commenced bargaining in late 1996 which continued until August 1997 but
no collective bargaining agreement was reached. As of August 22, 1997, the
Company received evidence that the union no longer has the majority support of
the Company's drivers. As a result, the Company no longer recognizes the union
as representative of its employees. The Company cannot predict the effect
continued union representation or organizational activities will have on the
Company's future activities. However, the Company has never experienced any
work stoppages as a result of such activity.
INSURANCE
Until the time of the Merger, insurance coverage was principally maintained
through Manor Care. The cost of the coverage was allocated entirely to the
Company when the coverage was specific to the Company and otherwise was
allocated between Manor Care and the Company. After the Merger, all insurance
except certain group health insurance was obtained directly by Vitalink. In the
opinion of the Company, its current coverage is adequate given the risks
associated with the operation of an institutional pharmacy business of the
Company's size.
ITEM 2. PROPERTIES.
The Company's corporate offices are located in Naperville, Illinois. As of
May 31, 1997, Vitalink had 56 leased pharmacies (including the four regional
infusion pharmacies) located in 20 states. The Company considers its physical
properties to be in good operating condition and suitable for the purposes for
which they are used.
ITEM 3. 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.
8
<PAGE>
On June 17, 1997 Vitalink and Manor Care filed a lawsuit against GranCare
to enforce a non-competition agreement which the parties entered into on
February 12, 1997 as part of the Vitalink/GranCare Merger. The agreement
specifically prohibits GranCare and Manor Care from becoming involved, directly
or indirectly in the institutional pharmacy business for three years.
On August 7, 1997 Vice Chancellor Jack B. Jacobs of the Delaware Court of
Chancery granted a preliminary injunction in favor of Vitalink and Manor Care.
Vice Chancellor Jacobs also denied GranCare's motion for summary judgment. The
decision is on appeal by GranCare before the Delaware Supreme Court.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year ended May 31, 1997.
EXECUTIVE OFFICERS OF VITALINK PHARMACY SERVICES, INC.
The name, age, title, present principal occupation, and other material
occupations, positions, offices and employment of each of the executive officers
of the Company are set forth below. The business address of Ms. DeNardo, Mr.
Horner, Mr. Macomber and Mr. Thompson is 1250 East Diehl Road, Suite 208
Naperville, Illinois 60563. Mr. Bainum's address is 11555 Darnestown Road,
Gaithersburg, Maryland 20878.
Stewart Bainum, Jr. (51) is Chairman of the Board of Directors of the
Company, a position he has held since February 1997. He has served as Vice
Chairman of the Company since December 1994. He was Chairman of the Company 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 the Company since 1991, of Manor Care, Inc. since 1981 and of
ManorCare Health Services, Inc. (a wholly owned subsidiary of Manor Care, Inc.,
formerly known as Manor Healthcare Corp.) since 1976.
Donna L. DeNardo (45) is President and Chief Operating Officer of the
Company, a position she has held since September 1991. She also served as a
Director of the Company from September 1991 to February 1997. She was Vice
President and General Manager of the Company from December 1989 to September
1991; Vice President of Manor Healthcare Corp. from December 1989 to September
1991 and has held various management positions with Manor Healthcare Corp. from
1977 through December 1989, including Senior Regional Director of Nursing
Facility Operations and Nursing Facility Administrator.
Robert W. Horner, III (36) is Senior Vice President, General Counsel and
Secretary of the Company, positions he has held since April 1997, November 1996
and January 1997 respectively. Mr. Horner served as Director of Legal Affairs
and Secretary with In Home Health, Inc. from April 1996 to November 1996. From
August 1994 to April 1996 he served as an in house counsel with Manor Care.
From 1991 to 1993 he practiced as a corporate and health care attorney with the
law firms of Arter and Hadden and Ice, Miller, Donadio and Ryan.
Scott T. Macomber (42) is Senior Vice President, Chief Financial Officer
and Treasurer of the Company, positions he has held since April 1997, September
1991 and December 1996, respectively. Mr. Macomber served as Vice President,
Finance from September 1991 to February 1997. 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 (42) is Senior Vice President, Human Resources and
Administration of the Company, a position he has held since July 1997. Mr.
Thompson served as Vice President, Human Resources and Administration of the
Company from August 1995 to July 1997. He was Senior Director, Professional
Relations, of the Company from March 1992 to August 1995, and held human
resources positions with Manor Care, Inc. and Manor Healthcare Corp. from 1986
to 1992.
9
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The shares of Vitalink's Common Stock are traded on the New York Stock
Exchange. Information on the high and low sales prices of Vitalink's Common
Stock during the past two years is included on page 33 of the 1997 Annual Report
and is incorporated herein by reference.
As of August 14, 1997, there were 475 record holders and approximately
4,500 beneficial holders of Vitalink Common Stock.
The Company has not paid, and does not anticipate paying for the
foreseeable future, any dividends to holders of its Common Stock.
<TABLE>
<CAPTION>
PAGES
<S> <C> <C>
ITEM 6. SELECTED FINANCIAL DATA. Preceding 1
The required information is included in the specified pages of the 1997
Annual Report and is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF 34-35
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The required information is included on the specified pages of the 1997
Annual Report and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 19-35
The required information is included in the specified pages of the 1997
Annual Report and is incorporated herein by reference. See Item 14 for
index to financial statements and schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. "SECTION 16(A) BENEFICIAL
The required information on directors is included under the OWNERSHIP REPORTING
specified heading of the Proxy Statement pertaining to the 1997 COMPLIANCE" AND "THE
Annual Meeting of Stockholders and is incorporated herein by NOMINATION AND ELECTION OF
reference. DIRECTORS"
ITEM 11. EXECUTIVE COMPENSATION. "COMPENSATION OF EXECUTIVE
The required information is included under the specified heading of OFFICERS"
the Proxy Statement pertaining to the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS "SECURITY OWNERSHIP OF
AND MANAGEMENT. PRINCIPAL STOCKHOLDERS AND
The required information on directors is included under the MANAGEMENT"
specified heading of the Proxy Statement pertaining to the 1997
Annual Meeting of Stockholders and is incorporated herein by
reference
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS "CERTAIN TRANSACTIONS"
The required information is included under the specified heading of
the Proxy Statement pertaining to the 1997 Annual Meeting of
Stockholders and is incorporated herein by reference.
</TABLE>
11
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
(a) 1. Financial Statements
Included on the following pages of the 1997
Annual Report:
Report of Independent Public Accountants 19
Consolidated Statements of Income 20
Consolidated Balance Sheets 21
Consolidated Statements of Stockholders' Equity 22
Consolidated Statements of Cash Flows 23
Notes to Consolidated Financial Statements 24-33
2. Financial Statement Schedule
The following Report and Schedule are filed
herewith on the pages indicated:
Report of Independent Public Accountants
Schedule.......................................... A-1
Schedule II - Valuation and Qualifying
Accounts......................................... A-2
3. Exhibits
2.1 Agreement and Plan of Merger dated as of September 3, 1996 (as
amended), between the Company and GranCare, Inc. Annex B to
Registration Statement No. 333-19097 is incorporated herein by
reference.
2.2 Amended and Restated Agreement and Plan of Distribution, dated
as of September 3, 1996, between GranCare, Inc. and the Company.
Annex C to Registration Statement No. 333-19097 is incorporated
herein by reference.
2.3 Voting Agreement, dated as of September 3, 1996, between Manor
Care, Inc. and GranCare, Inc. Exhibit 2.3 to Registration
Statement No. 333-19097 is incorporated herein by reference.
2.4 Shareholders Agreement, dated February 12, 1997, between the
Company and Manor Care, Inc.
2.5 Non-Competition Agreement, among the Company, Manor Care, Inc.
and GranCare, Inc., dated as of February 12, 1997.
2.6 Form of Interim Services Agreement between the Company and
GranCare. Exhibit 2.6 to Registration Statement No. 333-19097 is
incorporated herein by reference.
2.7 Tax Allocation and Indemnification Agreement, between the
Company and GranCare, Inc. dated as of February 12, 1997.
3.1 Restated Articles of Incorporation. Exhibit 3.1 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
12
<PAGE>
3.2 By-Laws. Exhibit 3.2 to Registration Statement No. 33-43261 is
incorporated herein by reference.
4.1 Form of Old GranCare, Inc.'s 9-3/8% Senior Subordinated Notes
due 2005 (the "Senior Subordinated Notes") which were assumed by
the Company by operation of law as a consequence of the Merger
(as filed with Old GranCare's Quarterly Report on Form 10-Q for
the quarterly period ended September 30, 1995 and incorporated
herein by reference).
4.2 Indenture from Old GranCare to Marine Midland Bank, as Trustee,
dated November 15, 1995 (as filed with Old GranCare's Quarterly
Report on Form 10-Q for the quarterly period ended September 30,
1995 and incorporated herein by reference).
10.1 Administrative Services Agreement, dated as of June 1, 1991,
by and between the Company and Manor Care, Inc. Exhibit 10.1 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
10.2 Tax Agreement, dated as of June 1, 1991, by and between the
Company and Manor Care, Inc. Exhibit 10.2 to Registration
Statement No. 33-43261 is incorporated herein by reference.
10.3 Intercompany Debt and Credit Agreement, dated as of June 1,
1991, by and between the Company and Manor Care, Inc. Exhibit
10.3 to Registration Statement No. 33-43261 is incorporated
herein by reference.
10.4 Lease Agreement, dated as of June 1, 1991 by and between the
Company and Manor Healthcare Corp. Exhibit 10.5 to Registration
Statement No. 33-43261 is incorporated herein by reference.
10.5 Master Agreement for Pharmacy Services, dated as of June 1,
1991, by and between the Company and Manor Healthcare Corp.
Exhibit 10.6 to Registration Statement No. 33-43261 is
incorporated herein by reference.
10.6 Master Pharmacy Consulting Agreement, dated as of June 1, 1991,
by and between the Company and Manor Healthcare Corp. Exhibit
10.7 to Registration Statement No. 33-43261 is incorporated
herein by reference.
10.7 Pharmacy Services Consultant Agreement, dated as of June 1,
1991, by and between the Company and Manor Healthcare Corp.
Exhibit 10.8 to Registration Statement No. 33-43261 is
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. Exhibit 10.9 to
Registration Statement No. 33-43261 is incorporated herein by
reference.
10.9 Key Executive Stock Option and Appreciation Rights Plan. Exhibit
10.10 to Registration Statement No. 33-43261 is incorporated
herein by reference.
10.10 Amendment to Key Executive Stock Option and Appreciation Rights
Plan. Annex A to the Proxy Statement dated August 20, 1993 is
incorporated herein by reference.
10.11 Form of Executive Cash Incentive Plan. Exhibit 10.11 to Form
10-K for the year ended May 31, 1995 is incorporated herein by
reference.
10.12 Employment Agreement dated June 5, 1995, between Vitalink
Pharmacy Services, Inc. and Donna L. DeNardo. Exhibit 10.12 to
Form 10-K for the year ended May 31, 1995 is incorporated
herein by reference.
10.13 Employment Agreement dated January 23, 1997, between the
Company and Robert W. Horner, III.
10.14 Employment Agreement dated January 23, 1997, between the
Company and Scott T. Macomber.
10.15 Employment Agreement dated November 30, 1995, between Vitalink
Pharmacy Services, Inc. and Harold Blumenkrantz. Exhibit 10.15
to Form 10-K for the year ended May 31, 1996 is incorporated
herein by reference.
10.16 Separation Agreement and Mutual General Release dated July
24, 1997, between the Company and Gene E. Burleson.
10.17 Vitalink Pharmacy Services, Inc. 1997 Non-Employee Director
Stock Compensation Plan.
10.18 Vitalink Pharmacy Services, Inc. Amended and Restated 1996
Long Term-Incentive Plan.
13
<PAGE>
10.19 Stock Grant Plan for Key Management Employees. Exhibit 10.14 to
Form 10-K for the year ended May 31, 1996 is incorporated
herein by reference.
10.20 Guarantee Agreement dated December 15, 1995, between Vitalink
Pharmacy Services, Inc. and Harold Blumenkrantz. Exhibit 10.16
to Form 10-K for the year ended May 31, 1996 is incorporated
herein by reference.
10.21 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
(as filed with Old GranCare's Registration Statement No. 33-
42595 and incorporated herein by reference).
10.22 Master Lease Document, dated December 28, 1990, between HRPT
and AMS (as filed with Old GranCare's Registration Statement
No. 33-42595 and incorporated herein by reference).
10.23 Form of Guaranty, dated December 28, 1990, by American Medical
Services, Inc. and each of its subsidiaries in favor of HRPT
(as filed with Old GranCare's Registration Statement No. 33-
42595 and incorporated herein by reference).
10.24 Amendment to Master Lease between HRPT and AMS, dated as of
December 29, 1993 (as filed with Old GranCare's Current Report
on Form 8-K dated January 13, 1994 and incorporated herein by
reference).
10.25 Amendment to Master Lease between HRPT and GCI Healthcare
Centers, Inc. ("GCI"), dated as of December 29, 1993 (as filed
with Old GranCare's Current Report on Form 8-K dated January
13, 1994 and incorporated herein by reference).
10.26 Asset Purchase Agreement among Old GranCare, Long-Term Care
Pharmaceutical Services Corporation, Long-Term Care
Pharmaceutical Services Corporation III, CompuPharm LTC, Inc.,
Lawrence H. Garatoni, individually and as Trustee, Anthony
Wright and Edward Spartz, individuals, dated as of June 30,
1994, with Exhibits (as filed with Old GranCare's Form 10-Q for
the quarterly period ended June 30, 1994 and incorporated
herein by reference).
10.27 Asset Purchase Agreement between CompuPharm, Inc., GCI
Innovative Pharmacy, Inc. and Innovative Pharmacy Services,
Inc. dated as of September 15, 1995 (as filed with Old
GranCare's Form 10-Q for the quarterly period ended September
30, 1995 and incorporated herein by reference).
10.28 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. Exhibit 10.48 to Old GranCare's Form 10-K for the year
ended December 31, 1995 is incorporated herein by reference.
10.29 Consent and Amendment to Transaction Documents dated as of
December 31, 1996, among HRPT, AMS, GCI and GranCare, Inc.
10.30 Limited Guaranty between the Company and HRPT.
13 1997 Annual Report to Stockholders.
21 Subsidiaries of the Registrant.
23 Consent of Independent Public Accountants.
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the last quarter of the fiscal
year ended May 31, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: August 29, 1997 VITALINK PHARMACY SERVICES, INC.
By: /s/ Robert W. Horner, III
------------------------------------
Robert W. Horner, III
Senior Vice President,
General Counsel and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ DONNA L. DENARDO President and Chief Operating August 29, 1997
- ----------------------------- Officer (principal executive
DONNA L. DENARDO officer)
/s/ SCOTT T. MACOMBER Senior Vice President, August 29, 1997
- ----------------------------- Chief Financial Officer and
SCOTT T. MACOMBER Treasurer (principal
financial and
accounting officer)
/s/ STEWART BAINUM, JR. Chairman and Director August 29, 1997
- -----------------------------
STEWART BAINUM, JR.
Director
- -----------------------------
ESSEL W. BAILEY, JR.
/s/ JOSEPH R. BUCKLEY Director August 29, 1997
- -----------------------------
JOSEPH R. BUCKLEY
Director
- -----------------------------
JOEL S. KANTER
/s/ JAMES A. MACCUTCHEON Director August 29, 1997
- -----------------------------
JAMES A. MACCUTCHEON
/s/ ROBERT L. PARKER Director August 29, 1997
- -----------------------------
ROBERT L. PARKER
/s/ JAMES H. REMPE Director August 29, 1997
- -----------------------------
JAMES H. REMPE
/s/ GARY U. ROLLE Director August 29, 1997
- -----------------------------
GARY U. ROLLE
</TABLE>
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF VITALINK PHARMACY SERVICES, INC.:
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements included in Vitalink Pharmacy Services,
Inc.'s annual report to shareholders incorporated by reference in this
Form 10-K, and have issued our report thereon dated June 27, 1997. Our audits
were made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in the index in Item 14(a)2 is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the consolidated
financial statements. The schedule has been subjected to the auditing procedures
applied in the audits of the consolidated financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the consolidated financial statements taken
as a whole.
ARTHUR ANDERSEN LLP
Washington, D.C.,
June 27, 1997
16
<PAGE>
VITALINK PHARMACY SERVICES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS OF DOLLARS)
SCHEDULE II
<TABLE>
<CAPTION>
Additions
--------------------
BALANCE AT CHARGED BALANCE AT
BEGINNING TO PROFIT WRITE- END OF
Description OF PERIOD AND LOSS OTHER 1 OFFS PERIOD
- --------------------------------- ---------- --------- --------- -------- ----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts
Year ended May 31, 1997 $2,163 $4,411 -- $(1,702) $4,872
Year ended May 31, 1996 1,378 2,412 -- (1,627) 2,163
Year ended May 31, 1995 2,113 1,772 $(1,019) (1,488) 1,378
</TABLE>
__________
1 In fiscal year 1995, represents reclassification as discussed in
Registrant's consolidated financial statements included in its 1995 Annual
Report.
17
<PAGE>
EXHIBIT 2.4
SHAREHOLDERS AGREEMENT
----------------------
AGREEMENT, dated as of February 12, 1997 (the "Agreement"), by and
between Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"),
and Manor Care, Inc., a Delaware corporation ("Manor Care").
RECITALS
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") dated September 3, 1996 between Vitalink and
GranCare, Inc., a California corporation ("GranCare"), Vitalink and GranCare
will combine their respective pharmacy businesses and GranCare will be merged
with and into Vitalink (the "Merger") and Vitalink 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, Manor Care, Inc. currently owns beneficially 11,500,000
shares of Vitalink Common Stock, par value $.01 per share (collectively with any
Vitalink Common Stock acquired hereafter, the "Shares"); and
WHEREAS, to induce GranCare to enter into the Merger Agreement, Manor
Care as the majority stockholder of Vitalink 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 Vitalink;
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. Manor Care 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 GranCare (including successors as
provided in Section 1.3 below, the
<PAGE>
"GranCare Nominees"), and the remaining number of whom shall be designated by
Manor Care as set forth in Section 1.4 of the Merger Agreement. Manor Care 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 GranCare Nominees. Manor Care
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 GranCare
Nominees.
Section 1.2. Removal. Manor Care 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 GranCare Nominee, unless such removal shall be
requested as set forth in the following sentence. Manor Care agrees that if (a)
a majority of the GranCare Nominees request removal of a GranCare Nominee in
writing or (b) a majority of the full Board of Directors requests the removal of
a Director for cause, Manor Care 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 GranCare Nominee:
(a) The remaining GranCare Nominees shall designate another individual
(the "Nominee") to fill such vacancy and serve as a director of the Surviving
-------
Corporation; and
(b) Manor Care, 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. Manor Care 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, Manor Care will use al1 commercially reasonable efforts to cause
board members who are not GranCare Nominees to approve amendments
2
<PAGE>
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 Manor Care will not 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, Manor Care
---------------
may, with the prior written consent of a majority of the GranCare 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 Manor Care shall not Transfer in a private transaction or series of
private transactions more than 10% of the outstanding Vitalink 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 Vitalink
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 Manor Care. Manor Care 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. Manor Care has the requisite corporate power
and other authority to enter into
3
<PAGE>
this Agreement and consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by Manor Care and the consummation of
the transactions contemplated hereby have been duly authorized by all necessary
corporate action on the part of Manor Care. This Agreement has been duly
executed and delivered by Manor Care and constitutes a valid and binding
obligation of Manor Care enforceable against it in accordance with its terms.
Section 3.1. Representations and Warranties of Vitalink. Vitalink 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. Vitalink 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 Vitalink
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Vitalink. This
Agreement has been duly executed and delivered by Vitalink and constitutes a
valid and binding obligation of Vitalink, enforceable against it in accordance
with its terms.
ARTICLE IV
MISCELLANEOUS
Section 4.1. Governinq 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 GranCare 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 GranCare Nominee
taking action reasonably believed to be consistent with enforcing the provisions
of this Agreement shall be
4
<PAGE>
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 Vitalink.
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 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 Vitalink and Manor Care.
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
5
<PAGE>
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.
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the date above written.
MANOR CARE, INC.
By: /s/ James H. Rempe
-------------------------------------
Name: James H. Rempe
Title: Senior Vice President
VITALINK PHARMACY SERVICES, INC.
By: /s/ Scott T. Macomber
-------------------------------------
Name: Scott T. Macomber
Title: Vice President, Finance
6
<PAGE>
EXHIBIT 2.5
NON-COMPETITION AGREEMENT
-------------------------
AGREEMENT, dated as of February 12, 1997 (the "Agreement"), by and
among Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"),
Manor Care, Inc., a Delaware corporation ("Manor Care") and New GranCare, Inc.,
a Delaware corporation ("New GranCare").
RECITALS
WHEREAS, in accordance with the terms of an Amended and Restated
Agreement and Plan of Distribution dated September 3, 1996 (the "Distribution
Agreement") between GranCare, Inc. and New GranCare, the Skilled Nursing
Businesses currently conducted by GranCare Inc., a California corporation
("GranCare"), will be restructured such that all such businesses will be held by
New GranCare (capitalized terms used herein and not defined shall have the
meaning set forth in the Distribution Agreement); and
WHEREAS, pursuant to an Amended and Restated Agreement and Plan of
Merger (the "Merger Agreement") dated September 3, 1996 between Vitalink and
GranCare, Vitalink and GranCare will combine their respective pharmacy
businesses and GranCare will be merged with and into Vitalink (the "Merger")
with Vitalink the surviving corporation; and
WHEREAS, pursuant to the Distribution Agreement, immediately prior to
the Merger the stockholders of GranCare will receive as a dividend one share of
common stock of New GranCare for each share of GranCare common stock currently
held by them as of the Distribution Record Date; and
WHEREAS, to induce GranCare to enter into the Merger Agreement and the
Distribution Agreement, Manor Care, New GranCare and Vitalink 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>
ARTICLE I
NON-COMPETITION - PHARMACY BUSINESS
Section 1.1 Non-competition. Manor Care and New GranCare acknowledge
---------------
that: the principal business of Vitalink is, and will be following the Merger,
the institutional pharmacy business (the "Institutional Pharmacy Business"), the
Institutional Pharmacy Business of Vitalink is national in scope and Vitalink
will suffer substantial and irreparable harm in the event Manor Care or New
GranCare should engage in the Institutional Pharmacy Business in competition
with Vitalink. Accordingly, for a period of three years from the Effective Time
neither Manor Care nor New GranCare will, directly or indirectly, own, manage,
operate, join, control or participate in the ownership, management, operation or
control of any person (other than Vitalink) 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. Manor Care and New GranCare 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 Manor Care and New GranCare 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) Vitalink recognizes that Manor Care and New GranCare 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. Vitalink agrees that Manor Care or New GranCare may make
such an Acquisition so long as it complies with the terms of this Section 1.3.
The proposed acquiror (Manor Care or New GranCare, as the case may be, the
"Acquiror") shall, not less than 30 days prior to the proposed closing date of
the Acquisition, give written notice (the "Purchase Notice") to Vitalink 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
2
<PAGE>
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 Vitalink 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. Vitalink
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. Vitalink and the Acquiror shall
negotiate in good faith regarding the other terms of the purchase of such
Institutional Pharmacy Business by Vitalink 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 Vitalink 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 Vitalink 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 Vitalink.
(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 Vitalink (the "Sale Notice"), which Sale Notice
shall 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 Vitalink 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 Vitalink of the Sale Notice,
Vitalink shall give written notice to the Acquiror if Vitalink elects to
purchase such Institutional Pharmacy Business (the "Acceptance Notice"). If the
Acquiror does not receive the Acceptance Notice from Vitalink within such ten
business-day period, Vitalink shall be deemed to have declined to purchase such
Institutional Pharmacy Business and the
3
<PAGE>
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 Vitalink 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 Vitalink's right of first offer pursuant to this
Section 1.3(c), the Acquiror and Vitalink shall be legally obligated to
consummate the purchase and sale contemplated thereby. The Acquiror and Vitalink
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 New GranCare 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. Vitalink acknowledges that: one of the
---------------
principal businesses of each of Manor Care and New GranCare is the construction
and management of skilled nursing facilities (the "Skilled Nursing Business");
that the Skilled Nursing Business of Manor Care and New GranCare is national in
scope and that Manor Care and New GranCare will suffer substantial and
irreparable harm in the event Vitalink should enter into competition with Manor
Care and New GranCare. Accordingly, for a period of three years from the
Effective Time Vitalink 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. Vitalink 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 Vitalink 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.
4
<PAGE>
Section 2.3 Notification. Vitalink 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 Manor
Care and New GranCare upon its acquisition thereof of the nature of such assets
or company. Vitalink 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 Manor Care. Manor Care
--------------------------------------------
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. Manor Care 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 Manor Care
and the consummation of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Manor Care. This
Agreement has been duly executed and delivered by Manor Care and constitutes a
valid and binding obligation of Manor Care enforceable against it in accordance
with its terms.
Section 3.2 Representations and Warranties of Vitalink. Vitalink 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. Vitalink 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 Vitalink and the consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of Vitalink.
This Agreement has been duly executed and delivered by Vitalink and constitutes
a valid and binding obligation of Vitalink, enforceable against it in accordance
with its terms.
Section 3.3 Representations and Warranties of New GranCare. New
----------------------------------------------
GranCare 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. New GranCare 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 New GranCare and the consummation of the transactions contemplated
hereby have been
5
<PAGE>
duly authorized by all necessary corporate action on the part of New GranCare.
This Agreement has been duly executed and delivered by New GranCare and
constitutes a valid and binding obligation of New GranCare, 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.
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 Manor Care and
Vitalink) and in the Distribution Agreement (in the case of New GranCare).
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 Vitalink, New GranCare and Manor
Care.
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this agreement as
of the date above written.
MANOR CARE, INC.
By: /s/ James H. Rempe
------------------------------------
Name: James H. Rempe
Title: Senior Vice President
VITALINK PHARMACY SERVICES, INC.
By: /s/ Scott T. Macomber
------------------------------------
Name: Scott T. Macomber
Title: Vice President, Finance
NEW GRANCARE, INC.
By:
------------------------------------
Name:
Title:
7
<PAGE>
EXHIBIT 2.7
TAX ALLOCATION AND INDEMNIFICATION AGREEMENT
This Tax Allocation and Indemnification Agreement dated as of February __, 1997,
is entered into by and among GranCare, Inc., a California corporation ("GCI"),
New GranCare, Inc., a Delaware corporation, and the successor by merger to GCI
Properties, Inc., a California corporation, ("New GranCare"), and each of the
following corporations:
TeamCare, Inc., a Delaware corporation, and the successor by merger to each of
the following corporations: GranCare Health Services, Inc. a California
corporation; TCI, Inc., a Delaware corporation that formerly was known as
TeamCare, Inc. and, prior to that, CompuPharm, Inc.; TeamCare of New Jersey,
Inc., a New Jersey corporation that formerly was known as CompuPharm New
Jersey, Inc.; CompuPharm of Southern California, Inc., a California
corporation that formerly was known as GCI-Cal Pharmacies, Inc.; Drug Systems,
Inc., a California corporation; TeamCare of Wisconsin, Inc., a Wisconsin
corporation that formerly was known as TeamCare Pharmacy, Inc.; CapCare Health
Services, Inc., an Illinois corporation; Winyah Dispensary, LTC of North
Carolina, Inc., a North Carolina corporation; and TeamCare of South Carolina,
Inc., a South Carolina corporation that formerly was known as GCI-Winyah,
Inc.; ("TeamCare")
TeamCare Clinical Services, Inc., a New Jersey corporation that formerly was
known as CompuPharm Clinical Services, Inc. ("TCSI")
CompuPharm of Northern California, Inc., a California corporation that
formerly was known as CompuPharm Diagnostics, Inc., and the successor by
merger to Patient Therapy Systems, Inc., a California corporation,
("CompuPharm NC")
TeamCare of Indiana, Inc., an Indiana corporation that formerly was known as
CompuPharm LTC, Inc. ("TeamCare Indiana")
TeamCare of Virginia, Inc., a Virginia corporation that formerly was known as
CompuPharm of Virginia, Inc. ("TeamCare VA")
CompuPharm Ohio Pharmacy, Inc., an Ohio corporation ("CompuPharm Ohio")
GCI Innovative Pharmacy, Inc., a Wisconsin corporation ("GCI Innovative")
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")
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")
<PAGE>
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
("Renaissance")
Coordinated Home Health Services, Inc., a California corporation ("CHHS")
GranCare Nursing Services and Hospice, Inc., a Wisconsin corporation ("GCNSH")
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")
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., an inactive corporation ("HSFSI")
Sterling Health Care, Inc., an inactive corporation ("SHCI")
EH Resources, Inc., a Georgia corporation ("EHRI")
Evergreen Retirement Management Company, a Delaware corporation ("ERMC")
GCI Health Care Centers, Inc., a Delaware corporation ("GCI-HCC")
GC Services, Inc., a California corporation ("GC-Services")
GranCare Trading, Inc., a Georgia corporation ("Trading")
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")
StoneCreek Management Company, Inc. a Missouri corporation ("StoneCreek")
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")
GranCare GPO Services, Inc., a Georgia corporation ("GranCare GPO")
GCI Simi Valley Healthcare Center, Inc., a California corporation ("GCI-Simi")
Professional Health Care Management, Inc., a Michigan corporation ("PHCM")
Cambridge Bedford, Inc., a Michigan corporation ("CBI")
2
<PAGE>
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")
(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 September 3, 1996 (the "Distribution
Agreement"), whereby it contemplates a distribution to its shareholders of all
the outstanding common stock of New GranCare, a corporation which will hold
(directly or indirectly) its skilled nursing facilities business and certain
other non-pharmacy businesses (the "Distribution"), and GCI and New GranCare
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, New GranCare and the
Subsidiaries that will become members of the New GranCare 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
WHEREAS, GCI, New GranCare, 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, New GranCare, and the Subsidiaries, in consideration of
the mutual covenants contained herein, agree as follows:
3
<PAGE>
ARTICLE I.
DEFINITIONS
-----------
For purposes of this Agreement, the following definitions shall apply:
I.1 "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
I.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.
I.3 "Date of Distribution" or "Distribution Date" means the date on which
the stock of New GranCare is distributed by GCI to its shareholders.
I.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.
I.5 "Expenses" means out-of-pocket expenses paid to third parties and
shall not include any overhead or indirect costs.
I.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 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.
I.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.
I.8 "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 February ___, 1997 , unless
either (a) New GranCare consents in writing to such action, or (b) New GranCare
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.
4
<PAGE>
I.9 "IRS" means the Internal Revenue Service.
I.10 "Merger" shall have the same meaning as given that term in the
Distribution Agreement.
I.11 "New GranCare Group" means New GranCare, any subsidiaries that become
members of the New GranCare consolidated group after the Distribution Date, and
the following Subsidiaries:
GCI-Cal Therapies AMS-GT EHAC II
GCI Therapies Am-Cal EHAC III
Cornerstone HMI HOLI
StoneCreek GC-SC HRI
HostMasters GCI-PC NHPI
GCI-Colter GCI-EV HSFSI
GCI-Indemnity GCI Realty SHCI
GCI Bella Vita GCI-JA EHRI
GCI-Wisconsin GCI-PG ERMC
GCI-Ashland GCI-SV GCI-HCC
GCI-North Shore GCI-VG GC-Services
GCI-Hillside GCI FN Trading
GCI-Family GCI Rehab GCI-VM
GranCare GPO GCI-Cal HCC GCI-Camelia
GCI-Simi GCI-Cal HH HNHI
PHCM Renaissance MNCI
CBI CHHS MNHI
CEI GCNSH MHNHI
CNI AMS-Properties NENCI
CSI Evergreen SANHI
CNHI NHRI IHCMI
CHCI OICC IXRI
FNHI EHAC I
I.12 "New GranCare Tainting Act" means any breach by New GranCare or any
member of the New GranCare 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 New GranCare and the members of the New GranCare
Group in connection with the Tax Certificate dated February __, 1997, unless
either (a) GCI consents in writing to such action, or (b) GCI is provided (at
New GranCare'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.
I.13 "Party" or "Parties" means any of the parties to this Agreement.
I.14 "Post-Distribution GCI Group" means GCI and the following
Subsidiaries:
5
<PAGE>
TeamCare TCSI
CompuPharm NC TeamCare Indiana
TeamCare VA CompuPharm Ohio
GCI Innovative Span
I.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.
I.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" 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.
I.17 "Tax Benefit" means any Tax Item which decreases Taxes paid or
payable.
I.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.
I.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.
I.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.
I.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
----------------------
II.1 Consolidated Returns. (a) New GranCare shall prepare and timely file
--------------------
any Consolidated Return which includes one or more, but only, members of the GCI
Group for any taxable
6
<PAGE>
period which ends on or prior to the Distribution Date. The Consolidated Return
shall be prepared by New GranCare 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 New GranCare and with prior Consolidated Returns (to the
extent applicable). Not later than 60 days prior to the due date for filing the
Consolidated Return (including extensions), New GranCare 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 New GranCare 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 New GranCare. If a written objection is
made by GCI, the tax managers of GCI and New GranCare 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 New GranCare 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 New GranCare
provided that GCI has received a letter from the chief financial officer of New
GranCare that, after consultation with its tax adviser, substantial authority
exists for the tax treatment being accorded the item by New GranCare. New
GranCare will provide GCI with a copy of the Consolidated Return as filed, along
with documentation establishing proof of timely filing.
(b) New GranCare 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 New GranCare 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 New GranCare and with prior
Consolidated Returns (to the extent applicable). GCI shall provide New GranCare
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), New GranCare 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 New GranCare 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
7
<PAGE>
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
New GranCare. If a written objection is made by GCI, the tax managers of GCI and
New GranCare 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
New GranCare 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 New GranCare provided that GCI has received a letter
from the chief financial officer of New GranCare that, after consultation with
its tax adviser, substantial authority exists for the tax treatment being
accorded the item by New GranCare.. New GranCare 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) New GranCare shall be responsible for preparing and filing any
Consolidated Return which includes only members of the New GranCare Group.
II.2 Separate Returns. (a) New GranCare 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 New GranCare 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, New GranCare 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 New GranCare 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 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
New GranCare. If a written objection is made by GCI, the tax managers of GCI
and New GranCare 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
8
<PAGE>
be chosen by GCI and New GranCare 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 New GranCare provided that GCI has received a letter
from the chief financial officer of New GranCare that, after consultation with
its tax adviser, substantial authority exists for the tax treatment being
accorded the item by New GranCare. New GranCare 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) New GranCare shall be responsible for preparing and filing all Tax
Returns for any member of the New GranCare Group.
II.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, New GranCare, 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
-----------------------------------
III.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 New GranCare and
the other members of the New GranCare 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
9
<PAGE>
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 New GranCare and the other
members of the New GranCare 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) New GranCare 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 New GranCare 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 New GranCare. Any failure to provide such objection shall be
considered acceptance by GCI of the allocation as prepared by New GranCare.
If a written objection is made by GCI, the tax managers of GCI and New
GranCare 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 resolve all disagreements with respect to the allocation, then one of
the "Big Six" certified public accounting firms will be chosen by GCI and
New GranCare 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, New GranCare
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 New GranCare to GCI or its
successor within ten (10) days after GCI or its successor provides to
New GranCare a written statement that such "excess parachute payments"
have been made together with
10
<PAGE>
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 New GranCare 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 New GranCare within ten (10) days after New
GranCare 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 New GranCare 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 public accounting
firms will be chosen by GCI or its successor and New GranCare 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.
III.2 Tax Payments or Benefits. New GranCare 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 New GranCare or any
member of the New GranCare 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. New GranCare 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 New GranCare 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 New GranCare has been
allocated the Tax liability in accordance with Section 3.1 of this Agreement.
III.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
11
<PAGE>
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 New GranCare 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
New GranCare 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 New GranCare
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 New GranCare 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 New GranCare shall be entitled to
receive (and which shall be paid to New GranCare) 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 New GranCare
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 New GranCare 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. In the event that any
member of the Post-Distribution GCI 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 New GranCare shall be entitled to receive (and which shall be
paid to New GranCare) 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 New GranCare 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 New GranCare
Group under this Section 3.3.
ARTICLE IV.
RESTRUCTURING TAXES AND OTHER LIABILITIES
-----------------------------------------
IV.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 New GranCare 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 New GranCare
12
<PAGE>
Tainting Act, then New GranCare 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 New GranCare 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 New GranCare 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:
(i) A merger or liquidation of New GranCare, or an acquisition of the
outstanding stock of New GranCare which acquisition the New GranCare 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 New GranCare and its subsidiaries to continue the
active conduct of their businesses for at least two years after the
Distribution Date;
(iii) A failure by New GranCare 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 New GranCare' assets (taking
into account the stock of its subsidiaries) within two years of the
Distribution Date; and
(vi) A repurchase by New GranCare 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 New GranCare Tainting Act and a GCI Tainting Act, or
(2) a complete absence of New GranCare 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 New GranCare; provided, however,
that the maximum liability that shall be borne by GCI under this Section 4.1(b)
13
<PAGE>
shall be $10 million. Notwithstanding the foregoing, if there is a complete
absence of New GranCare 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 New GranCare.
(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 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 TeamCare 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 TeamCare
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 TeamCare' 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
-------------------------
V.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.
14
<PAGE>
V.2 Other GCI Taxes. Any sales, use, transfer, recordation, excise, and
---------------
similar Taxes with respect to the business or assets of GCI, New GranCare, 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
-----------------
VI.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 New GranCare 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.
VI.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;
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,
15
<PAGE>
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 representatives, 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.
VI.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.
VI.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
---------------
16
<PAGE>
VII.1 Indemnification for Taxes. (a) New GranCare and the other members
-------------------------
of the New GranCare 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) New GranCare and the other members of the New GranCare 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 New GranCare or any member of the New GranCare Group in accordance with
Article IV of this Agreement.
(c) New GranCare and the other members of the New GranCare 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 New GranCare or any member of the New GranCare
Group.
(d) GCI agrees to pay, and to indemnify and to hold New GranCare and each
member of the New GranCare 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 New GranCare and each
member of the New GranCare 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
----------------------------------------------------------
VIII.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
17
<PAGE>
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.
VIII.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 New GranCare
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 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 New
GranCare 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
New GranCare Group (or another corporation which has become the common parent
that includes the New GranCare Group) is the issuer of such stock, then GCI
shall pay to New GranCare, 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 New GranCare 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 New GranCare
Group (or another corporation which has become the common parent that includes
the New GranCare 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
18
<PAGE>
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 New GranCare 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
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
--------
IX.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.
IX.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.
IX.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
19
<PAGE>
realized by the recipient from the payment of the item at issue (net of the
Taxes and related Expenses described in the preceding sentence).
IX.4 Notice. The Parties shall give each other prompt notice of any payment
------
that may be due under this Agreement.
ARTICLE X.
ADMINISTRATIVE PROVISIONS
-------------------------
X.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.
X.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
-------------
XI.1 Prior Agreement. This Agreement supersedes and terminates the Tax
---------------
Sharing Agreement dated December 29, 1993, between GCI and TeamCare.
XI.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.
XI.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.
XI.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).
XI.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
20
<PAGE>
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.
XI.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:
a) in the case of GCI and/or a member of the Post-Distribution GCI Group:
GranCare, Inc.
c/o Vitalink Pharmacy Services, Inc.
1250 E. Diehl Road
Naperville, Illinois 60563
b) in the case of New GranCare and/or a member of the New GranCare Group:
New GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, GA 30346
21
<PAGE>
XI.7 Effect of Headings. The paragraph headings herein are for convenience
------------------
only and shall not affect the construction hereof.
XI.8 Governing Law. The governing law provision of this Agreement shall be
-------------
identical to the governing law provision of the Distribution Agreement.
XI.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:
--------------------------- -----------------------------
NEW GRANCARE, INC.
By: Date:
--------------------------- -----------------------------
TEAMCARE, INC.
TEAMCARE CLINICAL SERVICES, INC.
COMPUPHARM OF NORTHERN CALIFORNIA, INC.
TEAMCARE OF INDIANA, INC.
TEAMCARE OF VIRGINIA, INC.
COMPUPHARM OHIO PHARMACY, INC.
GCI INNOVATIVE PHARMACY, INC.
SPAN PURCHASING, INC.
GCI-CAL THERAPIES, INC.
GCI THERAPIES, INC.
AMS GREEN TREE, INC.
AMERICAN-CAL MEDICAL SERVICES, INC.,
HMI CONVALESCENT CARE, INC.
GRANCARE SOUTH CAROLINA, INC.
GCI PALM COURT, INC.
GCI EAST VALLEY MEDICAL & REHABILITATION CENTER, INC.
GCI REALTY, INC.
GCI JOLLEY ACRES, INC.
GCI PRINCE GEORGE, INC.
GCI SPRINGDALE VILLAGE, INC.
22
<PAGE>
GCI VILLAGE GREEN, INC.
GCI FAITH NURSING HOME, INC.
GCI REHAB, INC.
GCI-CAL HEALTH CARE CENTERS, INC.
GRANCARE HOME HEALTH SERVICES, INC.
RENAISSANCE MENTAL HEALTH CENTER, INC.
COORDINATED HOME HEALTH SERVICES, INC.
GRANCARE NURSING SERVICES AND HOSPICE, INC.
AMS PROPERTIES, INC.
EVERGREEN HEALTH CARE, INC.
NATIONAL HERITAGE REALTY, INC.
OMEGA/INDIANA CARE CORPORATION
EH ACQUISITION CORP., INC.
EH ACQUISITION CORP. II, INC.
EH ACQUISITION CORP. III, INC.
HERITAGE OF LOUISIANA, INC.
HEALTH RESOURCES, INC.
NATIONAL HERITAGE PHARMACY, INC.
HERITAGE STERLING FINANCIAL SERVICES, INC.
STERLING HEALTH CARE, INC.
EH RESOURCES, INC.
EVERGREEN RETIREMENT MANAGEMENT COMPANY
GCI HEALTH CARE CENTERS, INC.
GC SERVICES, INC.
GRANCARE TRADING, INC.
GCI VALLEY MANOR HEALTH CARE CENTER, INC.
GCI CAMELIA CARE CENTER, INC.
CORNERSTONE HEALTH MANAGEMENT COMPANY
STONECREEK MANAGEMENT COMPANY, INC.
HOSTMASTERS, INC.
GCI COLTER VILLAGE, INC.
GCI INDEMNITY, INC.
GCI BELLA VITA, INC.
GCI WISCONSIN PROPERTIES, INC.
GCI ASHLAND HEALTH CARE CENTER, INC.
GCI NORTH SHORE HEALTH CARE CENTER, INC.
GCI HILLSIDE HEALTH CARE CENTER, INC.
GCI FAMILY NURSING HOME AND REHABILITATION CENTER, INC.
GRANCARE GPO SERVICES, INC.
GRANCARE SIMI VALLEY HEALTHCARE CENTER, INC.
PROFESSIONAL HEALTH CARE MANAGEMENT, INC.
CAMBRIDGE BEDFORD, INC.
CAMBRIDGE EAST, INC.
CAMBRIDGE NORTH, INC.
CAMBRIDGE SOUTH, INC.
CLINTONAIRE NURSING HOME, INC.
23
<PAGE>
CRESTMONT HEALTH CENTER, INC.
FRENCHTOWN NURSING HOME, INC.
HERITAGE NURSING HOME, INC.
MADONNA NURSING CENTER, INC.
MIDDLEBELT NURSING HOME, INC.
MIDDLEBELT-HOPE NURSING HOME, INC.
NIGHTINGALE EAST NURSING CENTER, INC.
ST. ANTHONY NURSING HOME, INC.
INTERNATIONAL HEALTH CARE MANAGEMENT, INC.
INTERNATIONAL X-RAY, INC.
24
<PAGE>
Schedule 2.2
------------
<TABLE>
<CAPTION>
Corporation(s): Returns:
- --------------- --------
<S> <C>
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 withholding
All members of the Post-Distribution GCI Group Quarterly and annual unemployment tax returns
</TABLE>
25
<PAGE>
EXHIBIT 10.13
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this 23rd day of January, 1997 between
Vitalink Pharmacy Services, Inc. ("Employer" or "Vitalink"), a Delaware
corporation, with its principal office at One Ravina Drive, Suite 1240, Atlanta,
Georgia 30346 ("Principal Office"), and Robert W. Horner, III ("Employee"),
sets forth the terms and conditions governing the employment relationship
between Employee and Vitalink.
1. Employment. During the term of this Agreement, as hereinafter defined,
Employer hereby employs Employee as General Counsel and Secretary. Employee
hereby accepts such employment upon the terms and conditions hereinafter set
forth and agrees to faithfully and to the best of his/her ability perform such
duties as may be from time to time assigned by Employer, its Board of Directors
or its designees, such duties at all times to be rendered at the Principal
Office of Employer and to be consistent with the duties customarily associated
with Employee's position and title.
2. Term. Subject to the provisions for termination hereinafter provided,
the term of this Agreement shall begin on January 23, 1997 and shall terminate
three (3) years thereafter. Upon expiration of said period, the parties may
extend the term if they mutually agree to do so.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation which shall be increased by the action of Employer's Board of
Directors subsequent to the consummation of that certain merger of and with
GranCare, Inc.:
a) Salary. A base salary of One Hundred Ten Thousand Dollars
($110,000.00) per annum payable in accordance with Employer's standard
payroll practices from time to time in effect. Such salary shall be
reviewed annually and may be increased in accordance with Employer's
standard practices.
b) Incentive Bonus. Employee shall have the opportunity to earn a
percentage of the base salary set forth in subparagraph 3(a) above in
Employer's bonus plans as adopted from time to time by Employer's Board of
Directors.
c) Automobile. Employer shall provide Employee with the use of a
suitable
<PAGE>
automobile during the term of this Agreement, and shall provide
gas, oil, maintenance, insurance and other operating expenses for such
automobile, or may provide a car allowance in lieu of the foregoing, in
accordance with Employer's standard practices.
d) Stock Options. Employee shall be eligible to receive options
under the Vitalink Pharmacy Services, Inc. 1996 Long Term Incentive Plan,
or similar plan, to purchase common shares of Vitalink or receive stock
appreciation rights in accordance with the policy of the Vitalink Board of
Directors as in effect from time to time.
e) Other Benefits. Employee shall, when eligible, be entitled to
participate in all other fringe benefits accorded headquarters employees by
Employer as are in effect from time to time.
4. Extent of Services. Employee shall devote his/her full time,
attention, and energies to the business of Employer, and shall not during the
term of this Agreement be engaged in any other business activity whether or not
such business activity is pursued for gain, profit, or other pecuniary
advantage; but this shall not be construed as preventing Employee from investing
his/her assets in the securities of public companies, or the securities of
private companies or limited partnerships, if such holdings are passive
investments of One Percent (1%) of less of outstanding securities and Employee
does not hold positions of director, officer, employee or general partner of
such company or partnership. Employee warrants and represents that he/she has
no contracts or obligations to others which would materially inhibit the
performance of his/her services under this Agreement.
5. Disclosure of Use of Information. Employee recognizes and
acknowledges that Employer's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
Employer's business. Throughout the term of this Agreement and for a period of
two (2) years after its termination or expiration for whatever cause or reason,
Employee shall not directly or indirectly, or cause others to : (1) make use of
or disclose to others any information relating to the business of Employer that
has not otherwise been made public, including but not limited to Employer's and
its affiliates' present or prospective clients, contracts, development plans,
operating data and policies; or (2) without Employer's prior written consent,
offer employment to or employ on behalf of Employee or any other person, any
person who at any time is or has been within the preceding one (1) year an
employee of Employer or any affiliate of Employer, or induce such person
directly to leave his or her employment. In the event of an actual or threatened
breach by Employee of the provisions of this
<PAGE>
paragraph, Employer shall be entitled to injunctive relief restraining Employee
from committing such breach or threatened breach. Nothing herein stated shall be
construed as preventing Employer from pursuing any other remedies available to
Employer for such breach or threatened breach, including the recovery of damages
from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified, registered or overnight mail
to his/her residence in the case of Employee, or to the Principal Office in the
case of the Employer.
7. Elective Position. Nothing contained in this Agreement is intended to
nor shall be construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove Employee as
General Counsel and/or Secretary, with or without just cause, during the term of
this Agreement or to elect someone other than Employee as General Counsel and/or
Secretary as provided by law and the By-Laws of Employer; provided, however,
that if Employee is so removed without cause, it is expressly understood and
agreed, in the event any one or combination of the foregoing occurs, Employee's
rights under this Agreement shall in no way be prejudiced, and Employee shall be
entitled to immediately receive the total compensation referred to in paragraph
3 above, except ungranted stock options, provided that he is ready, willing and
able to perform the duties and responsibilities set forth above.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
Agreement shall insure to the benefit of and shall be binding upon the
successors and assigns of Employer. The obligations of Employee hereunder may
not be assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following events and conditions:
(a) Upon expiration of its term.
(b) For just cause, including but not limited to refusal to carry out
duties and instructions relative to this position, dishonesty, violation of
this Agreement, and any willful acts or omissions inimical to or contrary
to policies of Employer not arbitrarily applied in the case of Employee.
Just cause shall also include solicitation by Employee of offers of
<PAGE>
employment from others prior to the last year of this Agreement, and
solicitation by Employee of the services of, or positive response by
Employee to solicitation by, professional search or executive recruitment
organizations prior to the last year of this Agreement. Employee shall be
entitled to fourteen (14) days advance written notice of termination,
except where the basis for termination constitutes conduct on the part of
Employee involving dishonesty or bad faith, in which case the termination
shall be effective upon the sending of notice.
(c) In the event that Employee is unable to perform the services
called for hereunder by reason of incapacity or disablement for more than
six (6) months (whether or not consecutive) in any period of twenty-four
(24) consecutive months, Employer shall have the right to terminate this
Agreement by written notice to Employee. Notwithstanding such termination,
Employee shall be entitled to any disability benefits accorded headquarters
employees pursuant to paragraph 3(e) above. In the event of such
termination, all non-vested obligations of Employer to Employee pursuant to
this Agreement shall terminate.
(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Georgia, and any litigation shall be conducted in the State of Georgia.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Employer:
Attest: VITALINK PHARMACY SERVICES, INC.
By: /s/ Donald C. Tomasso
- ----------------------------- ------------------------------------
President and Chief Operating Donald C. Tomasso
Officer Chairman and
Chief Executive Office
Witness: Employee:
/s/ Robert W. Horner, III
- ----------------------------- ----------------------------------------
Robert W. Horner, III
<PAGE>
EXHIBIT 10.14
EMPLOYMENT AGREEMENT
This Agreement ("Agreement") dated this 23rd day of January, 1997 between
Vitalink Pharmacy Services, Inc. ("Employer" or "Vitalink"), a Delaware
corporation, with its principal office at 1250 E. Diehl Road, Suite 208,
Naperville, Illinois 60563 ("Principal Office"), and Scott T. Macomber
("Employee"), sets forth the terms and conditions governing the employment
relationship between Employee and Vitalink.
1. Employment. During the term of this Agreement, as hereinafter defined,
Employer hereby employs Employee as Chief Financial Officer and Treasurer.
Employee hereby accepts such employment upon the terms and conditions
hereinafter set forth and agrees to faithfully and to the best of his/her
ability perform such duties as may be from time to time assigned by Employer,
its Board of Directors or its designees, such duties at all times to be rendered
at the Principal Office of Employer and to be consistent with the duties
customarily associated with Employee's position and title.
2. Term. Subject to the provisions for termination hereinafter provided,
the term of this Agreement shall begin on January 23, 1997 and shall terminate
three (3) years thereafter. Upon expiration of said period, the parties may
extend the term if they mutually agree to do so.
3. Compensation. For all services rendered by Employee under this
Agreement during the term thereof, Employer shall pay Employee the following
compensation which shall be increased by the action of Employer's Board of
Directors subsequent to the consummation of that certain merger of and with
GranCare, Inc.:
a) Salary. A base salary of One Hundred Thirty-Five Thousand Two
Hundred Ninety-Nine Dollars and Eighty-Four Cents ($135,299.84) per annum
payable in accordance with Employer's standard payroll practices from time
to time in effect. Such salary shall be reviewed at least annually and may
be increased in accordance with Employer's standard practices.
b) Incentive Bonus. Employee shall have the opportunity to earn a
percentage of the base salary set forth in subparagraph 3(a) above in
Employer's bonus plans as adopted from time to time by Employer's Board of
Directors.
c) Automobile. Employer shall provide Employee with the use of a
suitable
<PAGE>
automobile during the term of this Agreement, and shall provide
gas, oil, maintenance, insurance and other operating expenses for such
automobile, or may provide a car allowance in lieu of the foregoing, in
accordance with Employer's standard practices.
d) Stock Options. Employee shall be eligible to receive options
under the Vitalink Pharmacy Services, Inc. 1996 Long Term Incentive Plan,
or similar plan, to purchase common shares of Vitalink or receive stock
appreciation rights in accordance with the policy of the Vitalink Board of
Directors as in effect from time to time.
e) Other Benefits. Employee shall, when eligible, be entitled to
participate in all other fringe benefits accorded headquarters employees by
Employer as are in effect from time to time.
4. Extent of Services. Employee shall devote his/her full time,
attention, and energies to the business of Employer, and shall not during the
term of this Agreement be engaged in any other business activity whether or not
such business activity is pursued for gain, profit, or other pecuniary
advantage; but this shall not be construed as preventing Employee from investing
his/her assets in the securities of public companies, or the securities of
private companies or limited partnerships, if such holdings are passive
investments of One Percent (1%) of less of outstanding securities and Employee
does not hold positions of director, officer, employee or general partner of
such company or partnership. Employee warrants and represents that he/she has
no contracts or obligations to others which would materially inhibit the
performance of his/her services under this Agreement.
5. Disclosure of Use of Information. Employee recognizes and
acknowledges that Employer's and its affiliates' present and prospective
clients, contracts, development plans, operating data, policies and personnel,
as they may exist from time to time, are valuable, special and unique assets of
Employer's business. Throughout the term of this Agreement and for a period of
two (2) years after its termination or expiration for whatever cause or reason,
Employee shall not directly or indirectly, or cause others to : (1) make use of
or disclose to others any information relating to the business of Employer that
has not otherwise been made public, including but not limited to Employer's and
its affiliates' present or prospective clients, contracts, development plans,
operating data and policies; or (2) without Employer's prior written consent,
offer employment to or employ on behalf of Employee or any other person, any
person who at any time is or has been within the preceding one (1) year an
employee of Employer or any affiliate of Employer, or induce such person
directly to leave his or her employment. In the event of an actual or threatened
breach by Employee of the provisions of this
<PAGE>
paragraph, Employer shall be entitled to injunctive relief restraining Employee
from committing such breach or threatened breach. Nothing herein stated shall be
construed as preventing Employer from pursuing any other remedies available to
Employer for such breach or threatened breach, including the recovery of damages
from Employee.
6. Notices. Any notice, request or demand required or permitted to be
given under this Agreement shall be in writing, and shall be delivered
personally to the recipient or sent by certified, registered or overnight mail
to his/her residence in the case of Employee, or to the Principal Office in the
case of the Employer.
7. Elective Position. Nothing contained in this Agreement is intended to
nor shall be construed to abrogate, limit or affect the powers, rights and
privileges of the Board of Directors or stockholders to remove Employee as Chief
Financial Officer and/or Treasurer, with or without just cause, during the term
of this Agreement or to elect someone other than Employee as Chief Financial
Officer and/or Treasurer as provided by law and the By-Laws of Employer;
provided, however, that if Employee is so removed without cause, it is expressly
understood and agreed, in the event any one or combination of the foregoing
occurs, Employee's rights under this Agreement shall in no way be prejudiced,
and Employee shall be entitled to immediately receive the total compensation
referred to in paragraph 3 above, except ungranted stock options, provided that
he/she is ready, willing and able to perform the duties and responsibilities set
forth above.
8. Waiver of Breach. The waiver of either party of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
9. Assignment. The rights and obligations of Employer under this
Agreement shall insure to the benefit of and shall be binding upon the
successors and assigns of Employer. The obligations of Employee hereunder may
not be assigned or delegated.
10. Termination of Agreement. This Agreement shall terminate upon the
following events and conditions:
(a) Upon expiration of its term.
(b) For just cause, including but not limited to refusal to carry out
duties and instructions relative to this position, dishonesty, violation of
this Agreement, and any willful acts or omissions inimical to or contrary
to policies of Employer not arbitrarily applied in the case of Employee.
Just cause shall also include solicitation by Employee of offers of
<PAGE>
employment from others prior to the last year of this Agreement, and
solicitation by Employee of the services of, or positive response by
Employee to solicitation by, professional search or executive recruitment
organizations prior to the last year of this Agreement. Employee shall be
entitled to fourteen (14) days advance written notice of termination,
except where the basis for termination constitutes conduct on the part of
Employee involving dishonesty or bad faith, in which case the termination
shall be effective upon the sending of notice.
(c) In the event that Employee is unable to perform the services
called for hereunder by reason of incapacity or disablement for more than
six (6) months (whether or not consecutive) in any period of twenty-four
(24) consecutive months, Employer shall have the right to terminate this
Agreement by written notice to Employee. Notwithstanding such termination,
Employee shall be entitled to any disability benefits accorded headquarters
employees pursuant to paragraph 3(e) above. In the event of such
termination, all non-vested obligations of Employer to Employee pursuant to
this Agreement shall terminate.
(d) In the event of Employee's death during the term of this
Agreement, the Agreement shall terminate as of the date thereof.
11. Entire Agreement. This instrument contains the entire agreement of
the parties. It may be changed only by an agreement in writing signed by the
party against whom enforcement of any waiver, change, modification, extension,
or discharge is sought. This Agreement shall be governed by the laws of the
State of Illinois, and any litigation shall be conducted in the State of
Illinois.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first set forth above.
Employer:
Attest: VITALINK PHARMACY SERVICES, INC.
By: /s/ Donald C. Tomasso
- ------------------------------ ---------------------------------------
Secretary Donald C. Tomasso
Chairman and
Chief Executive Office
Witness: Employee:
/s/ Scott T. Macomber
- ------------------------------ -------------------------------------------
Scott T. Macomber
<PAGE>
EXHIBIT 10.16
SEPARATION AGREEMENT AND MUTUAL GENERAL RELEASE
This Separation Agreement and Mutual General Release ("Agreement") is made
by and between Gene E. Burleson ("Employee") and Vitalink Pharmacy Services,
Inc. ("Vitalink"), this 24th day of July 1997.
In consideration of the covenants undertaken and the mutual releases
contained in this Agreement, and other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the Employee and Vitalink agree as
follows:
1. Resignation Date. The Employee acknowledges that his last day of
employment with Vitalink shall be August 1, 1997 ("Separation Resignation Date")
and that this document acknowledges Employee's resignation of his position as
Chief Executive Officer of Vitalink and his position from the Vitalink Board of
Directors effective as of the sooner of the conclusion of the scheduled Vitalink
Board Meeting on the Separation Resignation Date or 11:59 p.m. on the Separation
Resignation Date provided, however, in no event shall such resignation become
effective until the payments due under Paragraphs 2(A) and 2(B) hereof have been
received by Employee in accordance with the wire transfer instructions specified
on Exhibit A-1.
2. Severance Consideration. In full consideration of executing the
Agreement, Vitalink will, upon the expiration of the revocation period set forth
in paragraph 4(e), pay or provide to Employee the following benefits:
A) The sum of $2,340,000 less lawful withholding paid in accord with
Vitalink's standard payroll practices and less any remaining health and
dental insurance premiums for this calendar year (as set forth in
Subparagraph 2D, below) as set forth on Exhibit A attached hereto.
B) Earned but unused vacation pay through the Resignation Date less lawful
withholding paid in accord with Vitalink's standard payroll practices,
as set forth on Exhibit A attached hereto.
C) All reasonable attorney's fees and expenses paid or owed by Employee
which are or were incurred in relation to Vitalink actions regarding
Employee and/or preparation of this Agreement and which are or were
incurred prior to August 2, 1997. Such legal fees and expenses shall not
exceed $75,000, and shall be paid by Vitalink within fifteen (15) days
after receiving an invoice from Troutman Sanders LLP with respect to
such fees and expenses. Such invoice will not contain detailed time
entries, but will provide a recapitulation of the respective attorneys'
hours billed and hourly rates.
D) Health and dental insurance coverage for the Employee, consistent with
present Vitalink coverage, until July 31, 2002. Employee shall continue
to be responsible for the co-payments, contributions, etc. for which
similarly situated Vitalink employees are currently responsible and/or
will become responsible under the terms of such insurance programs. Such
responsibility shall continue so long as Vitalink is responsible for
providing such insurance. In order to retain his rights to such
insurance, Employee shall pay to Vitalink at the beginning of each
calendar year a lump sum payment equal to the total amount of Employee's
contribution obligations for such insurance for that calendar year.
Employee shall make such payment by delivering a check made payable to
Vitalink Pharmacy Services, Inc. to the Vitalink Senior Vice President
<PAGE>
of Human Resources. Vitalink will provide annual written notice to
Employee of the amount of such payment and Employee shall remit payment
within fifteen (15) days of after the date receipt of such written
notice. In the event Employee fails to make the required payment within
the required time, Vitalink may, at its sole discretion, terminate
Employee's insurance. Vitalink shall, upon such termination, have no
continuing obligation to Employee under this Paragraph, except as
otherwise required by law.
E) Assignment of Employee's split-dollar life insurance policy to Employee
on or before the Separation Resignation Date. A copy of such policy and
the assignment documentation is attached hereto as Exhibit B.
F) Use of the office space and office furnishings and equipment currently
used by Employee and his assistant. Such space, furnishings and
equipment shall be provided to Employee until August 31, 1997.
G) Employee shall have until July 31, 1999 to exercise the stock options
set forth on Exhibit C, attached hereto. Such options are fully vested
and unrestricted.
3. Complete Release. The Employee, on behalf of himself and his heirs,
executors, administrators, assigns, and successors, hereby convenants not to sue
and fully releases, dismisses and forever discharges Vitalink and its affiliated
entities, as well as its and their trustees, directors, officers, agents,
employees, stockholders, attorneys, insurers, representatives, predecessors,
assigns, successors, and transferees (hereinafter collectively referred to as
"Vitalink"), from any and all actions, causes of action, lawsuits, claims,
counterclaims, demands, debts, obligations, damages, judgments, orders, and
liabilities of whatever nature, whether known or unknown, which he now owns or
holds or has at any time owned or held or may in the future own or hold, arising
out of or in any way connected, directly or indirectly, with his employment
relationship, employment contract and/or directorship with Vitalink or the
termination thereof, or any other occurrences, acts or omissions or any loss,
damage or injury whatsoever, known or unknown, occurring on or before the
Resignation Date, including, without limiting the generality of the foregoing,
any claim for breach of contract, wrongful discharge, torts of any kind, any
common law claims now or hereafter recognized, and any claims arising under
federal, state or local laws or ordinances, including but not limited to, Title
VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act of
1967, the Older Workers Benefits Protection Act, the Americans With Disabilities
Act, the Civil Rights Act of 1991, the Family and Medical Leave Act, the
Rehabilitation Act of 1973, the Employee Retirement Income Security Act of 1974,
the Consolidated Omnibus Budget Reconciliation Act, the Worker Adjustment and
Retraining Notification Act, and the Occupational Safety and Health Act, except
with respect to any claims related to criminal activity by Vitalink. This
release does not in any way impair Employee's rights to be indemnified to the
fullest extent allowed by law in accordance with Paragraph 14 hereof.
Vitalink, and its affiliated entities (hereinafter collectively referred to
as "Vitalink") hereby convenants not to sue and fully releases, dismisses and
forever discharges Employee and his heirs, executors, administrators, assigns,
and successors, from any and all actions, causes of action, lawsuits, claims,
counterclaims, demands, debts, obligations, damages, judgments, orders, and
liabilities of whatever nature, whether known or unknown, which they now own or
hold or have at any time owned or held or may in the future own or hold, arising
out of or in any way connected, directly or indirectly, with Employee's
employment relationship, employment contract and/or directorship with Vitalink
or the termination thereof, or any other occurrences, acts or omissions or any
loss, damage or injury whatsoever, known or unknown, occurring on or before the
Resignation Date, including, without limiting the generality of the
2
<PAGE>
foregoing, any claim for breach of contract, torts of any kind, any common law
claims now or hereafter recognized, and any claims arising under federal, state
or local laws or ordinances, except with respect to any claims related to
criminal activity by Employee.
Notwithstanding the above, the mutual releases contained in Paragraph 3
hereof specifically exclude any and all obligations of the parties under this
Agreement.
4. Compliance with Law. The Employee hereby acknowledges and agrees that
this Agreement and the termination of his employment and all actions taken in
connection therewith are in compliance with all applicable laws, including, but
not limited to, the Age Discrimination in Employment Act and the Older Workers'
Benefits Protection Act and that the release set forth in this Agreement shall
apply, without limitation, to any claims brought under any such laws. The
Employee further expressly acknowledges and agrees that:
a. The release given by the Employee in this Agreement is given solely in
exchange for the consideration set forth in paragraph 2 of this Agreement and
such consideration is in addition to anything of value to which he was already
entitled to receive before entering into this Agreement;
b. By entering into this Agreement, the Employee does not waive rights or
claims that may arise from actions by Vitalink after the date this Agreement is
executed. Likewise, Vitalink does not waive rights or claims that may arise
from actions by Employee after the date this Agreement is executed;
c. The Employee acknowledges that he has consulted with an attorney of his
choice before signing this Agreement;
d. The Employee has had at least twenty-one (21) days within which to
consider the Agreement;
e. The Employee has seven (7) days following the execution of this
Agreement in which to revoke the Agreement. Any revocation of the Agreement
must be in writing and delivered to Robert W. Horner, III at Vitalink Pharmacy
Services, Inc., One Ravinia Drive, Suite 1240, Atlanta, GA 30346 during the
revocation period. This Agreement will become effective and enforceable seven
(7) days following execution by the Employer unless revoked as provided for
herein during the seven-day period.
5. Reason for Separation. The Employee's employment records will show
that he resigned from Vitalink.
6. Non-Admission. The Employee agrees and acknowledges that neither this
Agreement nor Vitalink's offer to enter into this Agreement should be construed
as an admission by Vitalink that it has acted wrongfully towards the Employee or
anyone else, and that Vitalink expressly denies any liability to or having
engaged in any wrongful acts or omissions against the Employee.
Vitalink agrees and acknowledges that neither this Agreement nor Employee's
offer to enter into this Agreement should be construed as an admission by
Employee that he has
3
<PAGE>
acted wrongfully towards Vitalink or anyone else, and that Employee expressly
denies any liability to or having engaged in any wrongful acts or omissions
against Vitalink.
7. Return of Property. The Employee agrees to return any and all Vitalink
property to the Vitalink General Counsel on or before August 5, 1997 with the
exception of the Vitalink office furnishings now in Employee's possession which
will be returned to the Vitalink General Counsel on or before August 31, 1997.
Employee shall not transfer, sell or otherwise dispose of Vitalink property in
any manner prior to the Separation Resignation Date.
8. Confidential Information. The Employee acknowledges that by reason of
his positions and his employment agreement with Vitalink, and pursuant to his
obligations and fiduciary duties related thereto with Vitalink, he has been
given access to lists of accounts, customers, prices, plans and similar
confidential materials or information respecting Vitalink's business affairs.
The Employee represents that he has held all such materials and information
confidential and will continue to do so, and will not use such information for
any business purpose without the prior written consent of Vitalink, except as
required by law and except if such information is disclosed to the public by a
third party who is unrelated to Employee, not in violation of a confidentiality
agreement and not in violation of a fiduciary or other duty.
9. Non-Solicitation. Employee agrees not to solicit any current or future
employees of Vitalink during their employment with Vitalink for employment with
Employee or any company or entity otherwise affiliated with Employee.
10. Statements Regarding Vitalink. The Employee agrees not to make any
written or verbal derogatory statements in any form concerning Vitalink, his
employment with Vitalink, his role as a member of the Board of Directors of
Vitalink, or the termination of his employment with Vitalink to any person or
entity, except as required by law.
11. Statements Regarding Employee. Vitalink agrees, and agrees to cause
its employees, directors, officers, agents and affiliates, not to make any
written or verbal derogatory statements in any form concerning the Employee, his
employment with Vitalink, his role as a member of the Board of Directors of
Vitalink, or the termination of his employment with Vitalink to any person or
entity, except as required by law.
12. Confidentiality. The Employee agrees to keep the terms,
conditionsterms, conditions, negotiations leading to and fact of this Agreement
completely confidential and except that he may disclose information which is
contained in a mutually agreed upon press release which is attached hereto as
Exhibit C. Employee agrees not to disclose any information concerning this
Agreement, except as required by law, to any other person, except the Employee's
immediate family, personal financial advisor, tax advisor and attorney, provided
they agree to keep this information confidential. Without limiting the
generality of the foregoing, the Employee will not respond to or in any way
participate in or contribute to any public discussion, notice or publicity
concerning or in any way related to the execution of this Agreement or the
events (including any negotiations) which led to its execution. In addition,
without limiting the generality of the foregoing, the Employee specifically
agrees not to disclose information regarding this Agreement or the fact of this
Agreement to any current or former employee of Vitalink. The Employee agrees
that the disclosure by him of the fact of this Agreement or any of its terms and
conditions in violation of the foregoing will constitute a material breach of
this Agreement. The provisions of this Paragraph do not apply to information
regarding this Agreement which Vitalink has disclosed
4
<PAGE>
to the public and/or which a third party, unrelated to Employee, not in
violation of a confidentiality agreement and not in violation of a fiduciary or
other duty, has disclosed to the public.
Vitalink agrees to keep the terms, conditions and facts of this Agreement
completely confidential, except that information which is contained in a
mutually agreed upon press release which is attached hereto as Exhibit C.
Vitalink agrees not to disclose any information concerning this Agreement other
than that set forth in Exhibit C, or as required by law, to any other persons,
except the Board of Directors, CEO and General Counsel of Vitalink, provided
they agree to keep this information confidential. Without limiting the
generality of the foregoing, Vitalink and its directors, officers, agents,
employees and affiliates will not respond to or in any way participate in or
contribute to any public discussion, notice or publicity concerning or in any
way related to the execution of this Agreement or the events (including any
negotiations) which led to its execution. In addition, without limiting the
generality of the foregoing, Vitalink specifically agrees not to disclose
information regarding this Agreement to any current or former employee of
Vitalink except as provided above. Vitalink agrees that the disclosure by it of
the fact of this Agreement or any of its terms and conditions in violation of
the foregoing will constitute a material breach of this Agreement.
13. Participation in Other Actions. The Employee agrees not to
participate in any action of any kind by any other employee or former employee
of Vitalink and will not testify or otherwise provide evidence in any
investigation, hearing, or trial of any such action, except under valid
subpoena. The Employee also agrees not to solicit, counsel, advise, suggest,
assist, or encourage any claims, demands, rights, or causes of action of any
kind of other persons against Vitalink. Employee further agrees to reasonably
assist Vitalink in any lawsuit or claim arising from circumstances that took
place during Employee's employment, to the extent reasonably necessary to
protect Vitalink's interests.
14. Indemnification. To the maximum extent permitted by law, Vitalink
hereby indemnifies and agrees to hold harmless Employee from any costs or
expenses incurred by him on account of the fact Employee becomes a party, or is
threatened to be made a party, to any threatened, pending or contemplated
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that Employee is or was a director,
officer, employee or agent of Vitalink or any parent or subsidiary of Vitalink.
Such costs and expenses shall include, without limitation, expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding.
To the maximum extent permitted by and subject to any requirements of law,
expenses incurred by Employee in defending a civil or criminal action, suit or
proceeding shall be paid by Vitalink as bills for such services are presented by
Employee to Vitalink. In any such matter, Employee shall be entitled to select
his own counsel.
The obligations herein shall bind any successor corporation to Vitalink
(whether direct or indirect, by merger, consolidation or otherwise) so that
Employee shall stand in the same position under this Agreement with respect to
any successor corporation as Employee would have with respect to Vitalink if its
separate existence had continued. Vitalink's obligations under this Paragraph
shall survive termination of this Agreement and shall survive indefinitely with
respect to any costs or liability incurred by Employee on account of any actual
or alleged action or inaction by the Employee while employed by Vitalink.
5
<PAGE>
15. Re-employment. The Employee agrees not to apply for, seek, or
otherwise attempt to obtain employment with Vitalink or any of its subsidiaries
nor seek a position as a director on Boards of the same. Employee further
agrees that neither Vitalink or any of its affiliates or successors shall be
under any obligation to re-employ the Employee or appoint him to a director
position.
16. Merger of Understanding. This instrument constitutes and contains the
entire agreement and understanding concerning the Employee's employment, the
termination thereof and the other matters addressed herein between the parties,
and supersedes and replaces all prior negotiations and all employment agreements
proposed or otherwise, whether written or oral, concerning the subject matter
hereof. This Agreement shall not be modified, altered, changed or amended in
any respect unless in writing and signed by both parties.
17. Vitalink shall continue paying to Robin Holtson her salary and other
benefits, including all health and dental coverage, through January 31, 1998.
While Ms. Holtson will be an independent contractor of Vitalink, her sole duties
will be continue as Employee's assistant through such date. If, however, Ms.
Holtson accepts employment with another employer (other than Employee) at any
time prior to January 31, 1998, Vitalink's obligations under this Paragraph 17
shall cease on the date Ms. Holtson commences such new employment.
18. Savings Clause. If any provision of this Agreement or the
application thereof is held invalid, the invalidity will not affect other
provisions or applications of the Agreement which can be given effect without
the invalid provisions or applications and to this end the provisions of this
Agreement are declared to be severable.
19. Governing Law. The rights and obligations of the parties hereunder
will be construed and enforced in accordance with, and governed by, the laws of
the State of Delaware without regard to principles of conflict of laws.
20. Execution in Counterparts. This Agreement may be executed in
counterparts, and each counterpart, when executed, will have the efficacy of a
signed original. Photographic copies of such signed counterparts may be used in
lieu of the originals for any purpose.
21. Costs and Expenses. In the event of litigation in connection with
or concerning the subject matter of this Agreement, the prevailing party will be
entitled to recover all costs and expenses incurred by such party in connection
therewith, including reasonable attorneys' fees.
22. Failure to Enforce. The failure of either party to enforce strictly
any provision of this Agreement shall not be construed as a waiver thereof or as
excusing the other party from future performance.
23. Notice. Any notices required or permitted by this Agreement shall
be sent by certified or registered mail, return receipt requested or by a
national overnight delivery service, addressed as follows:
If to VITALINK: Vitalink Pharmacy Services, Inc.
ATTN: Senior Vice President of Human Resources
1250 East Diehl Road, Suite 208
Naperville, Illinois 60563
6
<PAGE>
With a copy to: Vitalink Pharmacy Services, Inc.
ATTN: General Counsel
One Ravinia Drive, Suite 1240
Atlanta, Georgia 30346
If to EMPLOYEE: Gene E. Burleson
320 Argonne Dr., N.W.
Atlanta, Georgia 30305
With a copy to: Walter Jospin
Troutman Sanders LLP
NationsBank Plaza
600 Peachtree Street, NE, Ste. 5200
Atlanta, Georgia 30308-2216
and shall be deemed received when actually delivered to such address.
THE EMPLOYEE ACKNOWLEDGES AND REPRESENTS THAT HE HAS READ AND ACCEPTS AND
AGREES TO THE PROVISIONS OF THIS AGREEMENT AND HAS HAD SUFFICIENT TIME AND
OPPORTUNITY TO CONSULT WITH INDIVIDUALS OF THE EMPLOYEE'S OWN CHOICE, AS LIMITED
BY PARAGRAPH 12 OF THIS AGREEMENT. THE EMPLOYEE EXECUTES THIS AGREEMENT
VOLUNTARILY WITH FULL UNDERSTANDING OF ITS CONSEQUENCES.
EXECUTED THIS 24TH DAY OF JULY, 1997.
EMPLOYEE
/s/ Gene E. Burleson
--------------------------------
Gene E. Burleson
EXECUTED THIS 24TH DAY OF JULY, 1997.
VITALINK PHARMACY SERVICES, INC.
By: /s/ Robert W. Horner, III
------------------------------------
Robert W. Horner, III
Senior Vice President,
General Counsel
7
<PAGE>
ACKNOWLEDGMENT
--------------
I, Gene E. Burleson, hereby acknowledge that I was given twenty-one (21)
days to consider the foregoing Agreement and voluntarily chose to sign the
Agreement prior to the expiration of the 21-day period.
EXECUTED as of this 24th day of July 1997.
/s/ Gene E. Burleson
------------------------------------
Gene E. Burleson
8
<PAGE>
EXHIBIT A-1
-----------
First Union National Bank of Georgia, Troutman Sanders LLP Trust A, Account
Number 002052700184683, ABA #061000227, Contact: Robin Huisman Private Banking
(404-865-2346).
9
<PAGE>
Exhibit 10.17
VITALINK PHARMACY SERVICES, INC.
1997 NON-EMPLOYEE DIRECTOR
STOCK COMPENSATION PLAN
Vitalink Pharmacy Services, Inc. has adopted and established a stock
compensation plan for Non-Employee Directors in accordance with the following
terms and conditions.
SECTION ONE
DESIGNATION AND PURPOSE OF THE PLAN
A. Designation. This plan is designated the "Vitalink Pharmacy Services, Inc.
Non-Employee Director Stock Compensation Plan."
B. Purpose. The purpose of this Plan is to implement a stock-based component
of Non-Employee Director compensation so as to encourage stock ownership by Non-
Employee Directors and to further align the interests of Non-Employee Directors
and stockholders.
SECTION TWO
DEFINITIONS
As used in the Plan, the following terms mean:
A. "Award" means restricted stock granted hereunder.
B. "Board" means the Board of Directors of the Company.
C. "Company" means Vitalink Pharmacy Services, Inc.
D. "Custodial Account" means the account described in Section 7(A) herein.
E. "Disability" means a permanent and total disability within the meaning of
Section 22(e)(3) of the Internal Revenue Code of 1986 as amended.
F. "Non-Employee Director" means a member of the Board of the Company who is
not an employee of the Company or any of its subsidiaries.
G. "Participant" means any Non-Employee Director who is granted an Award as
provided in this Plan.
H. "Plan" means this Non-Employee Director Stock Compensation Plan.
I. "Retirement" means termination of service as a Director for either of the
following reasons: (i) after attaining age 65 years of age or (ii) failure to be
re-elected as a Director by the shareholders of the Company at the Annual
Meeting of Stockholders.
J. "Stock" means the common stock of Vitalink Pharmacy, Inc.
SECTION THREE
EFFECTIVE DATE, DURATION AND BOARD APPROVAL
The Plan shall be effective upon the approval of the Plan by a majority of the
shareholders of the Company.
A-1
<PAGE>
SECTION FOUR
ADMINISTRATION OF THIS PLAN
This Plan shall be administered by the Board. The Board shall have all the
powers vested in it by the terms of this Plan, such powers to include authority
(within the limitation described herein) to prescribe the form of the agreement
embodying Awards made under this Plan. Subject to the provisions of this Plan,
the Board shall have the power to construe this Plan, to determine all questions
arising thereunder, and to adopt and amend such rules and regulations for the
administration of this Plan as it may deem desirable. Any decision of the
Board regarding the administration of this Plan, as described herein, shall be
final and conclusive. The Board may act only by a majority of its members in
office, except that the members thereof may authorize any one or more of their
number or the Secretary or any other officer of the Company to execute and
deliver documents on behalf of the Board.
SECTION FIVE
GRANT OF AWARDS AND LIMITATION OF
NUMBER OF SHARES SUBJECT TO AWARD
A. Compensation in Common Stock. Subject to the Board Approval and
effective immediately upon such approval, each Non-Employee Director shall be
granted 450 shares of restricted stock. Upon election as a Non-Employee
Director at Annual Meeting of Stockholders, each Non-Employee Director shall,
in addition to any Board retainer and attendance fees, be granted 450 of
Restricted Stock on the date of each annual meeting.
B. Total Number of Shares. Subject to any adjustment pursuant to Section
8, the total number of shares of Stock which may awarded under this Plan is
20,000 shares. The maximum number of shares authorized may be increased from
time to time by approval of the Board and, if required pursuant to Rule 16-3 of
the Securities and Exchange Commission or its successor or the applicable rules
of any stock exchange, or the stockholders of the Company.
To the extent that an Award lapses or the rights of the Participant to whom
it was granted terminate, expire or are canceled for any other reason, in whole
or in part, shares of Stock (or remaining shares) subject to such Award shall
again be available for the grant of an Award under the Plan. Shares delivered
by the Company under the Plan may be authorized and unissued Stock, Stock held
in the treasury of the Company or Stock purchased on the open market (including
private purchases) in accordance with applicable securities laws.
C. Insufficient Number of Shares. In the event that the number of shares
of Stock available for future Awards under this Plan is insufficient to make all
Awards required to be made on any date, then all Participants entitled to an
Award in such date shall share ratably in the number of shares of Stock which
may be included in Awards granted to Participants under this Plan.
SECTION SIX
ELIGIBILITY
Each Non-Employee Director shall be eligible to receive an Award in
accordance with Section Five. Each Award granted under this Plan shall be
evidenced by an agreement in such form as the Board shall prescribe from time to
time in accordance with this Plan and shall comply with the terms and conditions
set forth in Section 7. Such an agreement shall incorporate the provisions of
this Plan by reference.
A-2
<PAGE>
SECTION SEVEN
RESTRICTIONS ON SHARES
A. Custodial Account. The shares shall be held by the Company in a
Custodial Account on behalf of the Participant until such time as the shares
have vested pursuant to the terms of Section 7(B) of this Plan.
B. Vesting. The shares held by the Company shall remain in the Custodial
Account until vesting which shall occur. All such shares granted shall vest
following the expiration of one year from the date of the Award.
Upon vesting, the shares shall be distributed to the Participant within a
reasonable period of time not to exceed ninety (90) days from the date of
vesting and the Custodial Account shall be terminated as to such shares.
C. Forfeiture. Subject to Section 7(E) below, if the Participant ceases
to be a Non-Employee Director for any reason prior to vesting, the Participant
shall forfeit the shares, and the Custodial Account shall be terminated as to
such shares. Ownership of the forfeited shares shall revert back to the
Company.
D. No Assignment. The shares granted under the Plan, while held by the
Company pursuant to the Custodial Account, shall not be transferred, assigned,
pledged, or hypothecated in any way (whether by operation of law or otherwise),
and shall not be subject to execution, attachment, or similar process. Upon any
attempt to so transfer, assign, pledge, hypothecate, or otherwise dispose of the
shares, or of any right or privilege conferred thereby, contrary to the
provisions hereof, or upon the levy of any attachment or similar process upon
such rights and privileges, the Participant shall forfeit the shares and
ownership of the forfeited shares shall revert back to the Company.
E. Death, Disability and Board Retirement. A Participant who ceases to
serve on the Board by reason of (i) death, (ii) Disability, or (iii) Retirement,
shall be vested in his or her entire Award notwithstanding the limitation of
Section 7(B) above.
SECTION EIGHT
CHANGES IN CAPITAL STRUCTURE
In the event of any reorganization, merger, consolidation,
recapitalization, liquidation, reclassification, stock dividend, stock split,
combination of shares, rights offering, or extraordinary dividend or divestiture
(including a spin-off), or any other change in the capital structure or shares
of the Company, the Board shall make adjustments, determined by the Board in its
discretion to be appropriate, as to the number and kind of securities subject
to this Plan and specified in Section 5 of this Plan and as to the number and
kind of securities covered by each outstanding Award and, where applicable, the
price per share thereunder.
SECTION NINE
RIGHTS AS A STOCKHOLDER
The Participant shall be entitled to vote the shares held by the Company in
the Custodial Account. Any cash or non-cash dividend payable with respect to
shares held in the Custodial Account will remain in the Custodial Account
subject to risk of forfeiture until such time as the shares with respect to
which such cash or non-cash dividend, as the case may be, was declared is either
distributed to the Participant or forfeited by the Participant.
Notwithstanding anything to the contrary contained herein, no Stock or cash
dividends shall be transferred by the Company to a Custodial Account prior to
the date of Stockholder Approval, and no Non-Employee Director shall be entitled
to any rights as a stockholder with respect to any Stock granted hereunder,
including, without limitation voting rights until such Stock has been
transferred to a Custodial Account.
A-3
<PAGE>
SECTION TEN
TITLE
Subject to Section 13 herein, the shares held by the Company in a Custodial
Account shall be held in the name of the Participant until such shares are (a)
distributed to the Participant; (b) forfeited by the Participant; or (c)
transferred to a grantor "Rabbi Trust" in accordance with this Plan.
Notwithstanding anything to the contrary contained herein, no Non-Employee
Director shall be entitled to any rights as a stockholder with respect to any
Stock granted hereunder, including, without limitation voting rights, until such
Stock has been transferred to a Custodial Account.
SECTION ELEVEN
RISK OF LOSS
The Participant agrees to assume all risks in connection with any decrease
in the value of the shares granted to the Participant placed into the Custodial
Account for the benefit of the Participant.
SECTION TWELVE
NOTICE TO COMPANY
The Participant shall notify the Company immediately if he or she elects to
make an election under Section 83(b) of the Internal Revenue Code or upon the
occurrence of any other event resulting in the value of the shares being
included in the Participant's gross income prior to vesting.
SECTION THIRTEEN
DEFERRAL
Participant, provided he or she has not made the election referred to in
Section 12 herein, may elect by written notice to defer payment on all or a
portion of the shares held in the Custodial Account prior to any vesting,
subject to the following conditions;
A. Such election shall be irrevocable. An election to defer payment shall
be made a least sixty (60) days prior to any vesting for which the election to
defer payment is made. Participant may elect to defer the receipt of the
shares held in the Custodial Account prior to any vesting for a period of time
which ends no sooner than the earlier of (i) a date at least twenty-four (24)
months from the date of any such vesting or (ii) cessation of service as a Non-
Employee Director. During such deferral period, Participant shall not be
entitled to (i) vote the shares granted to him or her for which a deferral has
been elected, and (ii) currently receive cash dividends or non-cash dividends.
B. The Company shall establish a grantor "Rabbi Trust" and shall establish
thereunder on behalf of the Participant upon a deferral election a liability
account (the "Deferred Compensation Account") which shall be credited with any
shares, cash dividends, and non-cash dividends subject to such deferral
election. Any shares transferred from the Custodial Account to the Deferred
Compensation Account shall be retitled and held in the name of the trustee of
the grantor "Rabbi Trust".
C. There shall be credited to the Deferred Compensation Account an
additional amount with respect to the cash dividends (i.e., in addition to the
items credited pursuant to paragraph (B) hereof) equal to the earnings generated
through the investment of the cash dividends by the trustee of the grantor
trust.
D. The Company will provide an annual statement of the Deferred
Compensation Account to the Participant showing amounts credited to his or her
account in accordance with paragraph (C).
E. Nothing contained in this Plan and no action taken pursuant to the
provisions of this Plan shall create or be construed to create a trust of any
kind other than a grantor "Rabbi Trust", or a fiduciary relationship
A-4
<PAGE>
between the Company and the Participant, his or her designated beneficiary or
any other person. Any amounts deferred under the provisions of this Plan shall
continue for all purposes to be a part of the general assets of the Company. To
the extent that Participant acquires a right to receive payment from the Company
under this Plan, such right shall be no greater than the right of any unsecured
general creditor of the Company.
F. The right of the Company or any other person to the payment of deferred
compensation or other benefits under this Plan shall not be assigned,
transferred, pledged, or encumbered except by will or by the laws of descent and
distribution.
SECTION FOURTEEN
GENDER
Where applicable, words in the feminine shall include the masculine, words in
the neuter shall include the masculine and feminine, and words in the singular
shall include the plural, and vice versa.
SECTION FIFTEEN
SUCCESSORS
This Plan shall be binding upon and inure to the benefit of the Company and
its subsidiaries, its successors and assigns and the Participant and his or her
heirs, executors, administrators and legal representatives.
SECTION SIXTEEN
NO RIGHT TO CONTINUE AS A DIRECTOR
Neither the Plan, nor the granting of an Award, nor any other action taken
pursuant to the Plan, shall constitute or be evidence of any agreement or
understanding, express or implied, that the Company will retain a Non-Employee
Director for any period of time, or at any particular rate of compensation.
Nothing in this Plan shall in any way limit or affect the right of the Board or
the stockholders of the Company to remove any Non-Employee Director or otherwise
terminate his or her service as a director of the Company.
SECTION SEVENTEEN
MISCELLANEOUS PROVISIONS
A. Government and Other Regulations. The obligation of the Company to make
payment of Awards in Stock or otherwise shall be subject to all applicable laws,
rules, and regulations, and to such approvals by any government agencies as may
be required. The Company shall be under no obligation to register under the
Securities Act of 1933, as amended ("Act"), any of the shares of Stock issued,
delivered or paid in settlement under the Plan. If Stock awarded under the Plan
may in certain circumstances be exempt from registration under the Act, the
Company may restrict its transfer in such manner as it deems advisable to ensure
such exempt status.
B. Governing Law. All matters relating to the Plan or to Awards granted
hereunder shall be governed by the laws of the State of Maryland, without regard
to its principles of conflict of laws.
C. Titles and Headings. The titles and headings of the sections in the Plan
are for convenience of reference only, and in the event of any conflict, the
text of the Plan, rather than such titles and headings, shall control.
SECTION EIGHTEEN
AMENDMENT AND TERMINATION
A-5
<PAGE>
This Plan may be terminated or amended at any time and from time to time by
the Board as the Board shall deem advisable, provided however, that (a) no such
amendment shall be effective without approval of the stockholders of the
Company, if stockholder approval of the amendment is then required pursuant to
Rule 16b-3 under the Securities Exchange Act of 1934 or its successor, or the
applicable rules of any securities exchange, and (b) to the extent prohibited by
such Rule 16b-3 or its successors, the Plan may not be amended more than once
every six months, other than to comport with changes in the Internal Revenue
Code of 1986, as amended, or the regulations thereunder, or the Employee
Retirement Income Security Act of 1974, as amended, or the regulations
thereunder. No modification or amendment of this plan shall, without the written
consent of the Participant, materially and adversely affect his or her rights
under this Plan.
A-6
<PAGE>
EXHIBIT 10.18
AMENDED AND RESTATED
VITALINK PHARMACY SERVICES, INC.
1996 LONG-TERM INCENTIVE PLAN
SECTION ONE
DESIGNATION AND PURPOSE OF PLAN
The purpose of the Amended and Restated Vitalink Pharmacy Services, Inc.
1996 Long-Term Incentive Plan (the "Plan") is to increase the ownership of
Company Stock by those officers, non-employee directors, professional staff and
other key employees who are mainly responsible for the continued growth and
development and financial success of Vitalink Pharmacy Services, Inc. (the
"Company") and its subsidiaries. Such stock ownership gives such employees and
non-employee directors a proprietary interest in the Company which induces them
to continue in its employ and/or aligns their interests with the interests of
the Company's stockholders. The Plan also enables the Company to attract and
retain such employees non-employee directors and reward them for the continued,
profitable performance of Vitalink Pharmacy Services, Inc.
SECTION TWO
DEFINITIONS
The following definitions are applicable herein:
A. "Award" - Individually or collectively, Options, Stock Appreciation
Rights, Performance Shares or Restricted Stock granted hereunder.
B. "Award Period" - the period of time during which a Stock Appreciation
Right which has not been granted pursuant to an Option may be exercised. The
Award Period shall be set forth in the document issuing the Stock Appreciation
Right to the selected Eligible Employee.
C. "Board" - the Board of Directors of the Company.
D. "Book Value" - the book value of a share of Stock determined in
accordance with the Company's regular accounting practices as of the last
business day of the month immediately preceding the month in which a Stock
Appreciation Right is exercised as provided in Section Nine D.
E. "Code" - the Internal Revenue Code of 1986, as amended. Reference in
the Plan to any section of the Code shall be deemed to include any amendments or
successor provisions to such section and any regulations promulgated thereunder.
<PAGE>
F. "Committee" - the Key Executive Stock Option Plan Committee appointed
to administer the Plan pursuant to Section Four.
G. "Company" - Vitalink Pharmacy Services, Inc., including any present or
future "subsidiary corporation" as such term is defined in Section 424(f) of the
1986 Internal Revenue Code, as amended.
H. "Covered Employee" - an individual described in Section 162(m)(3) of
the Code.
I. "Date of Grant" - the date on which the granting of an Award is
authorized by the Committee or such later date as may be specified by the
Committee in such authorization.
J. "Eligible Participant" - any person employed by the Company or a
Subsidiary on a regularly scheduled basis who satisfies all of the requirements
of Section Six or any non-employee director of the Company (a non-employee
director shall include those directors of the Company who are not otherwise
employees of the Company or the Company's parent Company Manor Care, Inc.).
K. "Exercise Period" - the period or periods during which a Stock
Appreciation Right is exercisable as described in Section Nine B.
L. "Fair Market Value" - the fair market value of the Stock as determined
in accordance with Section Eight D.
M. "Incentive Stock Option" - an incentive stock option within the meaning
of Section 422 of the Code.
N. "Option" or "Stock Option" - either a nonqualified stock option or an
Incentive Stock Option granted under Section Eight. It also means any Option
which remains after a Participant has exercised his Option with respect to part
of the shares covered by a Stock Option Agreement as described in Section Eight
B.
O. "Option Period" or "Option Periods" - the period or periods during
which an Option is exercisable as described in Section Eight E.
P. "Option Price" - the price, expressed on a per share basis, for which
the Company Stock can be acquired by the holder of an Option pursuant to the
exercise of such Option.
Q. "Participant" - an Eligible Participant of the Company or a Subsidiary
who has been granted an Option, a Stock Appreciation Right, a Performance Share
Award or a Restricted Stock Award under this Plan.
<PAGE>
R. "Performance Share" - an Award granted under Section Ten.
S. "Restricted Stock" - an Award granted under Section Seven.
T. "Stock" and "Company Stock" - the common stock of the Company.
U. "Stock Appreciation Right" - an Award granted under Section Nine.
V. "Subsidiary" - any corporation of which fifty percent (50%) or more of
its outstanding voting stock or voting power is beneficially owned, directly or
indirectly, by the Company.
W. "Ten Percent Shareholder" - a Participant who, at the Date of Grant,
owns directly or indirectly (within the meaning of Section 424(d) of the
Internal Revenue Code) stock possessing more then ten percent (10%) of the total
combined voting power of all classes of stock of the Company or a subsidiary
thereof.
X. Wherever appropriate, words used in this Plan in the singular may mean
the plural, the plural may mean the singular and the masculine may mean the
feminine.
SECTION THREE
EFFECTIVE DATE, DURATION AND STOCKHOLDER APPROVAL
A. Effective Date and Stockholder Approval. Subject to the approval of
---------------------------------------
the Plan by a majority of the outstanding shares of Stock voted at the 1997
Annual Meeting of Stockholders, the Plan shall be effective as of July 14,
1997.
B. Period for Grant of Awards. Awards may be made as provided herein for
--------------------------
a period of ten (10) years after July 14, 1997.
SECTION FOUR
ADMINISTRATION
A. Appointment of Committee. The Board of Directors shall maintain a
------------------------
Compensation Committee which shall consist of not less than two (2) members of
such Board of Directors and which members shall be Non-Employee Directors as
defined in Rule 16b-3 under the Securities Exchange Act of 1934, as amended (or
such greater number of members which may be required by said Rule 16b-3) and
Outside Directors as defined in Treas. Reg. (S) 1.162-27(e) as promulgated by
the Internal Revenue Service. In addition, such Board of Directors shall
designate a member of the Committee to act as Chairman of the Committee, and
such Board of Directors may remove any member of the Committee at any time and
appoint any director to fill any vacancy on the Committee.
<PAGE>
B. Committee Meetings. The Committee shall hold its meetings at such
------------------
times and places as specified by the Committee Chairman. A majority of the
Committee shall constitute a quorum. All actions of the Committee shall be
taken by all of the members of the meeting duly called by its Chairman;
provided, however, any action taken by a written document signed by a majority
of the members of the Committee shall be as effective as action taken by the
Committee at a meeting duly called and held.
C. Committee Powers. Subject to the provisions of this Plan, the
----------------
Committee shall have full authority in its discretion to (i) designate the
Participants to whom Awards shall be granted, (ii) determine the number of
shares to be made available under each such Award, (iii) determine the period or
periods in which the Participant may exercise such Award, (iv) determine the
date when such Award expires, (v) determine the price for Stock under such
Award, and (vi) determine the grounds of forfeiture of an Award. The Committee
shall have all powers necessary to administer the Plan in accordance with its
terms, including the power to interpret this Plan and resolve all questions
arising thereunder. The Committee may prescribe such rules and regulations for
administering this Plan as the Committee deems appropriate.
SECTION FIVE
GRANT OF AWARDS AND
LIMITATION OF NUMBER OF SHARES SUBJECT TO AWARD
The Committee may, from time to time, grant Awards to one or more Eligible
Participants, provided that (i) subject to any adjustment pursuant to Section
Eleven, the aggregate number of shares of Stock subject to Stock Options, Stock
Appreciation Rights, Performance Share Awards or Restricted Stock Awards under
this Plan may not exceed 1,493,900 shares; (ii) to the extent that a Stock
Option, Stock Appreciation Right, Performance Share Award or Restricted Stock
Award lapses or the rights of the Participant to whom it was granted terminate,
expire or are cancelled for any other reason, in whole or in part, shares of
Stock (or remaining shares) subject to such Award shall again be available for
the grant of an Award under the Plan; and (iii) Shares delivered by the Company
under the Plan may be authorized and unissued Stock, Stock held in the treasury
of the Company or Stock purchased on the open market (including private
purchases) in accordance with applicable securities laws. In determining the
size of Awards, the Committee shall take into account the responsibility level,
performance, potential, and cash compensation level of a Participant, and the
Fair Market Value of the Stock at the time of Awards, as well as such other
considerations it deems appropriate.
SECTION SIX
ELIGIBILITY
Key employees of the Company and its Subsidiaries and non-employee
directors of the Company who, in the opinion of the Committee, are mainly
responsible for the continued growth and development and financial success of
the business of the Company or one or more of its Subsidiaries, and non-
<PAGE>
employee directors of the Company shall be eligible to be granted Awards under
the Plan. Subject to the provisions of the Plan, the Committee may from time to
time select from such Eligible Participants those to whom Awards shall be
granted and determine the nature and amount of each Award. No employee of the
Company or its Subsidiaries shall have any right to be granted an Award under
this Plan.
SECTION SEVEN
RESTRICTED STOCK AWARDS
A. Grants of Shares of Restricted Stock. An Award made pursuant to this
------------------------------------
Section Seven shall be granted in the form of shares of Stock, restricted as
provided in this Section Seven. Shares of the Restricted Stock shall be issued
to the Participant without the payment of consideration by the Participant. The
shares of Restricted Stock shall be issued in the name of the Participant and
shall bear a restrictive legend prohibiting sale, transfer, pledge or
hypothecation of the shares of Restricted Stock until the expiration of the
restriction period.
The Committee may also impose such other restrictions and conditions on the
shares of Restricted Stock as it deems appropriate.
B. Restriction Period. At the time a Restricted Stock Award is made, the
------------------
Committee may establish a restriction period applicable to such Award which
shall not be more than ten (10) years. Each Restricted Stock Award may have a
different restriction period, at the discretion of the Committee. In addition
to or in lieu of a restriction period, the Committee may establish a performance
goal which must be achieved as a condition to the retention of the Restricted
Stock. The performance goal may be based on the attainment of specified types
of performance measurement criteria, which may differ as to various Participants
or classes or categories of Participants. Such criteria may include, without
limitation, the attainment of certain performance levels by the individual
Participant, the Company, a department or division of the Company and/or a group
or class of participants. Any such performance goals, together with the ranges
of Restricted Stock Awards for which the Participants may be eligible shall be
set from time to time by the Committee and shall be timely communicated to the
Eligible Participants in advance of the commencement of the performance of
services to which such performance goals relate. The total number of shares of
Restricted Stock which may be granted to any single Covered Employee under this
Plan during any calendar year shall be limited to 100,000.
C. Forfeiture or Payout of Award. In the event a Participant ceases
-----------------------------
employment during a restriction period, or in the event performance goals
attributable to a Restricted Stock Award are not achieved, subject to the terms
of each particular Restricted Stock Award, and subject to discretionary action
by the Committee as set forth below in Section Thirteen, a Restricted Stock
Award is subject to forfeiture of the shares of stock which had not previously
been removed from restriction under the terms of the Award.
<PAGE>
Any shares of Restricted Stock which are forfeited will be transferred to
the Company.
Upon completion of the restriction period and satisfaction of any
performance-goal criteria, all restrictions upon the Award will expire and new
certificates representing the Award will be issued without the restrictive
legend described in Section Seven A. As a condition precedent to receipt of the
new certificates, the Participant (or the designated beneficiary or personal
representative of the Participant) will agree to make payment to the Company in
the amount of any taxes, payable by the Participant, which are required to be
withheld with respect to such shares of Stock.
SECTION EIGHT
STOCK OPTIONS
A. Grant of Option. One or more Options may be granted to any Eligible
---------------
Participant; provided that only Eligible Participants who are employees of the
Company or a Subsidiary may be granted Incentive Stock Options. Upon the grant
of an Option to an Employee, the Committee shall specify whether the Option is
intended to constitute a non-qualified stock option or an Incentive Stock
Option. The total number of shares of Stock subject to Options which may be
granted to any single Covered Employee under this Plan during any calendar year
shall be limited to 100,000.
B. Stock Option Agreement. Each Option granted under the Plan shall be
----------------------
evidenced by a written "Stock Option Agreement" between the Company and the
Participant containing such terms and conditions as the Committee determines,
including, without limitation, provisions to qualify Incentive Stock Options as
such under Section 422 of the Code. Such agreements shall incorporate the
provisions of this Plan by reference. The date of granting an Option is the
date specified in the written Stock Option Agreement which is signed by the
Participant and the Company.
C. Determination of Option Price. The Option price for Stock shall be
-----------------------------
not less than 100% of the fair market value of the Stock on the date of grant.
Notwithstanding the foregoing, in the case of an Option which is designed to
qualify as an Incentive Stock Option (as defined in Section 422 of the Code)
which is granted to a Ten Percent Shareholder, the Option Price shall not be
less than 110% of such fair market value.
D. Determination of Fair Market Value. The fair market value of the Stock
----------------------------------
on the date of granting an Option shall be the mean of the high and low prices
at which the Stock was sold on the market on such date. In the event no such
sales of Stock occurred on such date, the fair market value of the Stock shall
be determined by the Committee in accordance with applicable Regulations of the
Internal Revenue Service.
E. Term of Option. The term of an Option may vary within the Committee's
--------------
discretion; provided, however, that the term of an Option shall not exceed ten
(10) years
<PAGE>
from the date of granting the Option to the Participant, and, to this end, all
Options granted pursuant to this Plan must provide that each such Option cannot
be exercised after the expiration of ten (10) years from the date each such
Option is granted. Notwithstanding the foregoing, in the case of any Option
which is designed to qualify as an Incentive Stock Option (as defined in Section
422 of the Code) which is granted to a Ten Percent Shareholder, the term of such
Option may not exceed five (5) years from the date of grant of such Option.
F. Limitation on Exercise of Option. The Committee may limit an Option by
--------------------------------
restricting its exercise in whole or in part for specified periods.
G. Method of Exercising an Option. Subject to the terms of a particular
------------------------------
Option, a Participant may exercise it in whole or in part by written notice to
the Secretary of the Company stating in such written notice the number of shares
of Stock such Participant elects to purchase under his Option.
H. No Obligation to Exercise Option. A Participant is under no obligation
--------------------------------
to exercise an Option or any part thereof.
I. Payment for Option Stock. Stock purchased pursuant to an Option shall
------------------------
be paid in full at the time of purchase. Payment may be made (a) in cash, (b)
with the approval of the Committee, by delivery to the Company of shares of
Stock which have been held by the Participant for at least six months having an
aggregate fair market value equal to the exercise price, or (c) a combination of
(a) and (b). Payment may also be made, in the discretion of the Committee, by
delivery (including by facsimile transmission) to the Company or its designated
agent of an executed irrevocable Option exercise form together with irrevocable
instructions to a broker-dealer to sell (or margin) a sufficient portion of the
shares and deliver the sale (or margin loan) proceeds directly to the Company to
pay for the exercise price. Upon receipt of payment and subject to paragraph J
of this Section Eight, the Company shall, without transfer or issue tax to the
Participant or other person entitled to exercise the Option, deliver to the
Participant (or other person entitled to exercise the Option) a certificate or
certificates for such shares.
J. Delivery of Stock to Participant. The Company shall undertake and
--------------------------------
follow all necessary procedures to make prompt delivery of the number of shares
of Stock which the Participant elects to purchase upon exercise of an Option
granted under this Plan. Such delivery, however, may be postponed, at the sole
discretion of the Company, to enable the Company to comply with any applicable
procedures, regulations or listing requirements of any government agency, stock
exchange or regulatory authority.
K. Failure to Accept Delivery of Stock. If a Participant refuses to pay
-----------------------------------
for Stock which he has elected to purchase under his Option, in accordance with
the terms of payment, which had previously been agreed upon, his Option shall
thereupon, at the sole discretion of the Committee, terminate, and such funds
previously paid for unissued Stock
<PAGE>
shall be refunded. Stock which has been previously issued to the Participant and
been fully paid for shall remain the property of the Participant and shall be
unaffected by such termination.
L. Non-Transferability of Options. During the lifetime of a Participant,
------------------------------
an Incentive Stock Option granted to him may be exercised only by him. It may
not be sold, assigned, pledged or otherwise transferred except by will or by the
laws of descent and distribution. In the case of Options which are not
Incentive Stock Options, the Committee may impose such restrictions on
transferability, if any, as it may in its sole discretion determine.
M. Purchase for Investment
-----------------------
(a) Written Agreement by Participants. Unless a registration
---------------------------------
statement under the Securities Act of 1933 is then in effect with respect to the
Stock a Participant receives upon exercise of his Option, a Participant shall
acquire the Stock he receives upon exercise of his Option for investment and not
for resale or distribution and he shall furnish the Company with a written
statement to that effect when he exercises his Option and a reference to such
investment warranty shall be inscribed on the Stock certificate(s).
(b) Registration Requirement. Each Option shall be subject to the
------------------------
requirement that, if at any time the Board determines that the listing,
registration or qualification of the shares subject to the Option upon any
securities exchange or under any state or Federal law is necessary or desirable
as a condition of, or in connection with, the issuance of shares thereunder, the
Option may not be exercised in whole or in part unless such listing,
registration or qualification shall have been effected or obtained (and the same
shall have been free of any conditions not acceptable to the Board).
N. Special Limitations on Exercise of Incentive Stock Options. The
----------------------------------------------------------
aggregate fair market value (determined at the time the Incentive Stock Option
is granted) of the Stock with respect to which any Incentive Stock Option is
first exercisable during any calendar year shall not exceed $100,000.
SECTION NINE
STOCK APPRECIATION RIGHTS
A. Grant of Stock Appreciation Rights. Stock Appreciation Rights may be
----------------------------------
granted under the Plan in conjunction with an Option either at the time of grant
or by amendment or may be separately awarded. Stock Appreciation Rights shall
be subject to such terms and conditions not inconsistent with the Plan as the
Committee shall impose. However, the total number of Stock Appreciation Rights
which may be granted to a single Covered Employee under this Plan during any
calendar year shall be limited to 100,000.
<PAGE>
B. Right to Exercise; Exercise Period. A Stock Appreciation Right issued
----------------------------------
pursuant to an Option shall be exercisable to the extent the Option is
exercisable. A Stock Appreciation Right issued independent of an Option shall
be exercisable pursuant to such terms and conditions established in the grant.
C. Automatic Redemption of Unexercised Stock Appreciation Rights. If on
--------------------------------------------------------------
the last day of the Option Period, in the case of a Stock Appreciation Right
granted pursuant to an Option, or the specified Award Period, in the case of a
Stock Appreciation Right issued independent of an Option, the Participant has
not exercised such Stock Appreciation Right, then such Stock Appreciation Right
shall be automatically redeemed by the Company for an amount equal to the
payment that would otherwise have been made to the Participant if the
Participant had chosen to exercise the Stock Appreciation Right on the last day
of the Option Period or the specified Award Period, as the case may be.
D. Rights Upon Exercise. An exercisable Stock Appreciation Right granted
--------------------
pursuant to an Option shall entitle the Participant to surrender unexercised the
Option or any portion thereof to which the Stock Appreciation Right is attached,
and to receive in exchange for the Stock Appreciation Right a payment (in cash
or Stock or a combination thereof as described below) equal to the Fair Market
Value of one share of Stock at the date of exercise minus the Option Price times
the number of shares called for by the Stock Appreciation Right (or portion
thereof) which is so exercised. With respect to the issuance of Stock
Appreciation Rights which are not granted pursuant to an Option, the Committee
shall specify upon the Date of the Grant of the Stock Appreciation Right whether
the Stock Appreciation Right is a "regular" Stock Appreciation Right or a "book
value" Stock Appreciation Right. Upon the exercise of a regular Stock
Appreciation Right, the Participant will receive a payment equal to the Fair
Market Value of one share of Stock at the date of exercise minus the Fair Market
Value of one share of Stock as of the Date of Grant of the Stock Appreciation
Right times the number of shares called for by the Stock Appreciation Right (or
portion thereof) which is so exercised. Upon the exercise of a book value Stock
Appreciation Right, the Participant will receive a payment equal to the Book
Value of one share of Stock at the date of exercise minus the Book Value of one
share of Stock as of the Date of the Grant of the Stock Appreciation Right times
the number of shares called for by the Stock Appreciation Right (or portion
thereof) which is so exercised.
The value of any Stock to be received upon exercise of a Stock Appreciation
Right shall be the Fair Market Value of the Stock on such date of exercise. To
the extent that a Stock Appreciation Right issued pursuant to an Option is
exercised, such Option shall be deemed to have been exercised, and shall not be
deemed to have lapsed.
E. Transferability. The Committee may impose such restrictions on
---------------
transferability of Stock Appreciation Rights, if any, as it may in its sole
discretion determine.
<PAGE>
SECTION TEN
PERFORMANCE SHARES
A. Grant of Performance Share Units. Awards made pursuant to this Section
--------------------------------
Ten shall be granted in the form of Performance Shares, subject to such terms
and conditions not inconsistent with the Plan as the Committee shall impose.
Performance Shares shall be issued to the Participant without the payment of
consideration by the Participant. Awards shall be based on the attainment of
specified types and combination of performance measurement criteria, which may
differ as to various Participants or classes or categories of Participants.
Such criteria may include, without limitation, the attainment of certain
performance levels by the individual Participant, the Company, a department or
division of the Company and/or a group or class of Participants. Such criteria,
together with the ranges of Performance Shares from which employees may be
eligible shall be set from time to time by the Committee and shall be
communicated to the Eligible Participants. The total number of Performance
Shares which may be granted to any single Covered Employee under this Plan
during any calendar year shall be limited to 100,000.
B. Performance Period. The measuring period to establish the performance
------------------
criteria set forth in a Performance Share Award shall be determined by the
Committee. A Performance Share Award may initially provide, or the Committee
may at any time thereafter, but no more frequently than once in any six (6)
month period, amend it to provide, for waiver or reduction of the measuring
period and, if appropriate, for adjustment of the performance criteria set forth
in the Performance Share Award, upon the occurrence of events determined by the
Committee in its sole discretion to justify such waiver, reduction or
adjustment.
C. Form of Payment. Upon the completion of the applicable measuring
---------------
period, a determination shall be made by the Committee in accordance with the
Award as to the number of shares of Stock to be awarded to the Participant. The
appropriate number of shares of Stock shall thereupon be issued to the
Participant in accordance with the Award in satisfaction of such Performance
Share Award.
SECTION ELEVEN
CHANGES IN CAPITAL STRUCTURE OR SHARES
In the event any reorganization, merger, consolidation, recapitalization,
liquidation, reclassification, stock dividend, stock split, combination of
shares, rights offering, or extraordinary dividend or divestiture (including a
spin-off), or any other change in the capital structure or shares of the
Company, the Committee, shall make adjustments, determined by the Committee in
its discretion to be appropriate, as to the number and kind of securities
subject to this Plan and specified in Section Five of this Plan and as to the
number and kind of securities covered by each outstanding Award and, where
applicable,
<PAGE>
the price per share thereunder; provided, however, that with respect to
Incentive Stock Options, such adjustments shall be made in accordance with
Section 424(h) of the Code unless the Committee determines otherwise.
SECTION TWELVE
CORPORATE REORGANIZATION OR DISSOLUTION
A. Discontinuation of the Plan. The Plan shall be discontinued in the
---------------------------
event of the dissolution or liquidation of the Company or in the event of a
Reorganization (as hereinafter defined) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a wholly-
owned subsidiary of another company after the effective date of the
Reorganization and no plan or agreement respecting the Reorganization is
established which specifically provides for the continuation of the Plan and the
change, conversion, or exchange of the stock relating to existing Awards under
this Plan for securities of another corporation. Upon the dissolution of the
Plan in connection with an event described in this Paragraph A, all Awards shall
become fully vested and all outstanding Options and Stock Appreciation Rights
shall become immediately exercisable by the holder thereof. Any Options or
Stock Appreciation Rights granted under the Plan may be terminated as of a date
fixed by the Committee, provided that no less than fifteen (15) days written
notice of the date so fixed shall be given to each Participant and each such
Participant shall have the right during such period to exercise all or any
portion of such Options or Stock Appreciation Rights. Any Stock Appreciation
Rights not so exercised shall be redeemed.
B. Continuation of the Plan Upon a Reorganization. In the event of a
----------------------------------------------
Reorganization (as hereinafter defined) (i) in which the Company is not the
surviving or acquiring company, or in which the Company is or becomes a wholly-
owned subsidiary of another company after the effective date of the
Reorganization, and (ii) with respect to which there is a reorganization
agreement which undertakes to continue the Plan and to provide for the change,
conversion or exchange of the Stock attributable to outstanding Awards for
securities of another corporation, then the Plan shall continue and the
Committee shall adjust the shares under such outstanding Awards (and shall
adjust the shares remaining under the Plan which are then to be available for
the grant of additional Awards under the Plan, if the reorganization agreement
makes specific provisions therefor), in a manner not inconsistent with the
provisions of the reorganization agreement and this Plan for the adjustment,
change, conversion or exchange of such Awards.
The term "Reorganization" as used in this Section Twelve shall mean any
statutory merger, statutory consolidation, sale of all or substantially all of
the assets of the Company, or sale, pursuant to an agreement with the Company,
of securities of the Company pursuant to which the Company is or becomes a
wholly-owned subsidiary of another company after the effective date of the
Reorganization.
<PAGE>
C. Adjustments and Determinations. Adjustments and determinations under
------------------------------
this Section Twelve shall be made by the Committee, whose decisions as to what
adjustments or determinations shall be made, and the extent thereof, shall be
final, binding, and conclusive.
SECTION THIRTEEN
RETIREMENT AND DISABILITY
The Committee may, in its discretion, waive the forfeiture, termination, or
lapse of an Award in the event of retirement or disability of a Participant
(each as determined by the Committee, in its discretion). Exercise of such
discretion by the Committee in any individual case, however, shall not be deemed
to require, or to establish a precedent suggesting such exercise in any other
case.
SECTION FOURTEEN
MISCELLANEOUS PROVISIONS
A. Nontransferability. The Committee may impose such restrictions on the
------------------
transferability of an Award, if any, as it may in its sole discretion determine.
B. No Employment Right. Neither this Plan nor any action taken hereunder
-------------------
shall be construed as giving any right to be retained as an officer or employee
of the Company or any of its Subsidiaries.
C. Tax Withholding. Either the Company or a Subsidiary, as appropriate,
---------------
shall have the right to deduct from all Awards paid in cash any federal, state
or local taxes as it deems to be required by law to be withheld with respect to
such cash payments. In the case of Awards paid in Stock, the employee or other
person receiving such Stock may be required to pay to the Company or a
Subsidiary, as appropriate, the amount of any such taxes which the Company or
Subsidiary is required to withhold with respect to such Stock. At the request
of a Participant, or as required by law, such sums as may be required for the
payment of any estimated or accrued income tax liability may be withheld and
paid over to the governmental entity entitled to receive the same. The
Committee may from time to time establish procedures for withholding of Stock.
D. Fractional Shares. Any fractional shares concerning Awards shall be
-----------------
eliminated at the time of payment by rounding down for fractions of less than
one-half and rounding up for fractions of equal to or more than one-half. No
cash settlements shall be made with respect to fractional shares eliminated by
rounding.
E. Government and Other Regulations. The obligation of the Company to
--------------------------------
make payment of Awards in Stock or otherwise shall be subject to all applicable
laws, rules, and regulations, and to such approvals by any government agencies
as may be required. The Company shall be under no obligation to register under
the Securities Act of 1933, as
<PAGE>
amended ("Act"), any of the shares of Stock issued, delivered or paid in
settlement under the Plan. If Stock awarded under the Plan may in certain
circumstances be exempt from registration under the Act, the Company may
restrict its transfer in such manner as it deems advisable to ensure such exempt
status.
F. Severance. Subject to the provision of Paragraph B of this Section
---------
Fourteen, in the event a Participant's employment with the Company terminates,
his rights under any Award which constitutes an Option or a Stock Appreciation
Right terminate one (1) month from the date of such termination of employment.
Such rights shall be exercisable only to the extent the Participant was entitled
to exercise such rights under the Award on the date of such termination of
employment.
G. Death. If a Participant dies prior to the full exercise of his Option
-----
and/or Stock Appreciation Right, his Option to purchase Stock under such Option
and/or Stock Appreciation Right may be exercised to the extent, if any, that
Participant would be entitled to exercise it at the date of the death of the
Participant by the person to whom the Option and/or Stock Appreciation Right
shall pass by will or by the laws of descent and distribution within twelve (12)
months of the death of the Participant or the expiration of the term of the
Option and/or Stock Appreciation Right whichever date is sooner.
H. Limitation. In no event may an Option be exercised by anyone after the
----------
expiration date provided for in Section Eight of the Plan.
I. Limits on Discretion. Anything in this Plan to the contrary
--------------------
notwithstanding, if the Award so provides, the Committee shall not have any
discretion to increase the amount of compensation payable under the Award to the
extent such discretion would cause the Award to lose its qualification as
performance-based compensation for purposes of Section 162(m)(4)(c) of the Code
and the regulations thereunder.
J. Governing Law. All matters relating to the Plan or to Awards granted
-------------
hereunder shall be governed by the laws of the State of Maryland, without
regard to its principles of conflict of laws.
K. Titles and Headings. The titles and headings of the sections in the
-------------------
Plan are for convenience of reference only, and in the event of any conflict,
the text of the Plan, rather than such titles and headings, shall control.
SECTION FIFTEEN
AMENDMENT OF PLAN
A. Discretion of the Board. The Board may at any time and from time to
-----------------------
time alter, amend, suspend or terminate the Plan in whole or in part, except (i)
any such action affecting Options granted or to be granted under this Plan which
are intended to qualify as Incentive Stock Options shall be subject to
stockholder approval to the extent such
<PAGE>
stockholder approval is required pursuant to Section 422 of the Internal Revenue
Code and (ii) no such action may be taken without the consent of the Participant
to whom any Award shall theretofore have been granted, which adversely affects
the rights of such Participant concerning such Award, except as such termination
or amendment of the Plan is required by statute, or rules and regulations
promulgated thereunder.
B. Automatic Termination. This Plan shall terminate on July 14, 2007.
---------------------
Awards may be granted under this Plan at any time and from time to time prior to
the termination of the Plan. Any Award outstanding at the time the Plan is
terminated shall remain in effect until said Award is exercised or expires.
<PAGE>
EXHIBIT 10.29
CONSENT AND AMENDMENT
TO TRANSACTION DOCUMENTS
CONSENT AND AMENDMENT TO TRANSACTION DOCUMENTS dated as of December 31,
1996 among HEALTH AND RETIREMENT PROPERTIES TRUST (f/k/a "Health and
Rehabilitation Properties Trust") (known in Wisconsin as "Health and Retirement
Properties REIT"), a real estate investment trust formed under the laws of the
State of Maryland ("HRP"), GRANCARE, INC. (f/k/a AMS Holding Co.), a California
---
corporation ("GranCare"), AMS PROPERTIES, INC., a Delaware corporation ("AMS
-------- ---
Properties"), GCI HEALTH CARE CENTERS, INC., a Delaware corporation ("GCIHCC"),
- ---------- ------
and NEW GRANCARE, INC., a Delaware corporation and wholly-owned subsidiary of
GranCare ("New GranCare").
------------
W I T N E S S E T H
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
---
GranCare, American Medical Services, Inc., a Wisconsin corporation ("AMS") and
---
AMS Properties have entered into an Acquisition Agreement, Agreement to Lease
and Mortgage Loan Agreement dated as of December 28, 1990, as amended (as so
amended, the "Acquisition Agreement"), under which, inter alia, (A) HRP has
--------------------- ----- ----
leased 18 nursing properties located in Wisconsin, California, Colorado and
Illinois to AMS Properties pursuant to the several Facility Leases (as amended,
the "AMS Properties Facility Leases"), each incorporating a Master Lease
------------------------------
Document General Terms and Conditions dated as of December 28, 1990 (as amended,
the "AMS Properties Master Lease") between HRP, as landlord, and AMS Properties,
---------------------------
as tenant, and (B) HRP has made a mortgage loan to AMS Properties in the
original principal amount of $11,500,000, the payment of which is currently
evidenced by a Promissory Note dated as of October 1, 1994 by AMS Properties to
HRP (the "Mortgage Note") and is secured, inter alia by Mortgage and Security
------------- ----------
Agreements dated as of March 31, 1995 (collectively, the "Mortgages") by AMS
---------
Properties in favor of HRP encumbering the two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMS; and (b) in
December 1993, AMS, which previously had owned all the outstanding common stock
of AMS Properties, and AMS Rehab, Inc., a Delaware corporation and a wholly-
owned subsidiary of GranCare, each merged into AMS Properties, with AMS
Properties as the surviving corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCIHCC pursuant to the
several Facility Leases (as amended, the "GCIHCC Facility Leases"), each
----------------------
incorporating a Master Lease Document General
<PAGE>
Terms and Conditions dated as of June 30, 1992 (as amended, the "GCIHCC Master
-------------
Lease") between HRP, as landlord, and GCIHCC, as tenant;
- -----
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS Properties and GCIHCC, proposes to transfer all
of its skilled nursing, home health care, assisted living and contract
management business (including, without limitation, such capital stock), and
related assets, to New GranCare, with GranCare thereafter distributing New
GranCare common stock to GranCare shareholders (collectively, the
"Distribution"), pursuant to an Agreement and Plan of Distribution dated as of
------------
September 3, 1996 between GranCare and New GranCare (the "Distribution
------------
Agreement");
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into Vitalink Pharmacy Services, Inc., a Delaware corporation ("Vitalink"),
--------
with Vitalink as the surviving corporation (the "Merger"), pursuant to an
------
Amended and Restated Agreement and Plan of Merger dated as of September 3, 1996
between Vitalink and GranCare (the "Merger Agreement"); and
----------------
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release Vitalink and its subsidiaries (including any remaining
Subsidiary of GranCare that becomes a subsidiary of Vitalink as a result of the
Merger) and their respective successors and assigns from and against any and all
claims, liabilities and obligations, as successor by merger to GranCare, under
(A) the Acquisition Agreement, (B) the Representation Letter and Indemnification
Agreement dated June 30, 1992 by GCIHCC, AMS Properties and GranCare to HRP (the
"GCIHCC Indemnity Agreement"), (C) the Guaranty, dated as of December 28, 1990,
--------------------------
as amended, by GranCare in favor of HRP in respect of the obligations of AMS
Properties (the "AMS Properties Guaranty"), (D) the Guaranty dated as of June
-----------------------
30, 1992, as amended, by GranCare in favor of HRP in respect of the obligations
of GCIHCC (the "GCIHCC Guaranty"), (E) the Pledge Agreement, dated as of
---------------
December 28, 1990, as amended, by GranCare in favor of HRP (the "AMS Properties
--------------
Pledge Agreement"), (F) the Pledge Agreement, dated as of June 30, 1992 as
- ----------------
amended, by GranCare in favor of HRP (the "GCIHCC Pledge Agreement"), (G) the
-----------------------
Subordination Agreement, dated as of December 28, 1990, as amended, among
GranCare, as subordinate creditor, AMS Properties, as debtor and HRP, as senior
creditor (the "AMS Properties Subordination Agreement"), (H) the Subordination
--------------------------------------
Agreement, dated as of June 30, 1992, as amended, among GranCare, as subordinate
creditor, GCIHCC, as debtor and HRP, as senior creditor (the "GCIHCC
------
Subordination Agreement"), and (I) any other agreements, instruments or
- -----------------------
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions hereof, willing to so agree;
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein contained, the parties hereto agree as follows:
2
<PAGE>
SECTION 1. CONSENT TO DISTRIBUTION AND MERGER; RELEASE OF VITALINK.
-------------------------------------------------------
Effective as of the Effective Time (as defined in Section 3 hereof), HRP
---------
hereby:
(1) consents to the terms of the Distribution Agreement and Merger
Agreement, and the consummation of the transactions contemplated thereby;
(2) releases Vitalink and its successors and assigns from and against any
and all claims, liabilities and obligations, as successor by merger to GranCare,
under (i) the Acquisition Agreement, (ii) the GCIHCC Indemnity Agreement, (iii)
the AMS Properties Guaranty, (iv) the GCIHCC Guaranty, (v) the AMS Properties
Pledge Agreement, (vi) the GCIHCC Pledge Agreement, (vii) the AMS Properties
Subordination Agreement, (viii) the GCIHCC Subordination Agreement and (ix) any
other agreements, instruments or understandings, written or oral, of GranCare
with HRP or any of its affiliates relating to or arising out of the transactions
contemplated by the agreements described in clauses (i) through (viii) above;
(3) agrees to execute and deliver to Vitalink, at the sole cost and expense
of Vitalink, such instruments and documents, including UCC-3 financing
statements and other instruments of termination or release as may be reasonably
requested by Vitalink in order to effectuate the agreement in paragraph (b)
above; and
(4) agrees that it will, at the request of New GranCare, and without the
payment of any additional consideration by New GranCare (except for the out of
pocket cost and expense of HRP in connection therewith, which shall be at the
sole expense of New GranCare), to enter into a consent, waiver and estoppel
agreement and an intercreditor agreement in connection with New Credit Facility
(as that term is defined in the Preliminary Prospectus for New GranCare, Inc.
included in the Schedule 14A filed with the Securities Exchange Commission on
November __, 1996 (the "Schedule 14A")), in each case in substantially the form
------------
of the Consent, Waiver and Estoppel Agreement and an Intercreditor Agreement,
each dated March 31, 1995, executed by HRP in connection with the Credit
Agreement dated as of March 31, 1995 among GranCare, certain lenders and First
Union National Bank of North Carolina, as agent.
3
<PAGE>
SECTION 2. AMENDMENT OF TRANSACTION DOCUMENTS
----------------------------------
The parties hereto hereby agree, effective as of the Effective Time (as
defined in Section 3 hereof), that:
---------
(1) The Acquisition Agreement, each other "Transaction Document", as such
term is defined in Section 1.1 of the Acquisition Agreement (hereinafter the
"AMS Transaction Documents") and each "Transaction Document" as such term is
- --------------------------
defined in Article 1 of the GCIHCC Master Lease (hereinafter the "GCI
---
Transaction Documents", and with the AMS Transaction Documents, the "Transaction
- --------------------- -----------
Documents") shall be amended such that each reference therein to "GranCare,
- ---------
Inc.," "GranCare," "AMS Holding Co.," "AMSHC" or words of like import referring
to GranCare, Inc. shall mean and be a reference to New GranCare.
(2) HRP shall send Vitalink (at its address set forth in the Vitalink
Guaranty, as hereinafter defined) copies of any notice of default sent to New
GranCare, AMS Properties or GCIHCC under any Transaction Document at the time
that such notice is sent to New GranCare, AMS Properties or GCIHCC.
(3) The Acquisition Agreement shall be amended in the following respects:
(1) Section 1.1 is amended to add the following new definitions
thereto:
New GranCare - New GranCare, Inc., a Delaware corporation,
------------
together with its permitted successors and assigns.
Old GranCare - GranCare, Inc., a California corporation, together
------------
with its permitted successors and assigns.
Supply Contracts - agreements or arrangements between Vitalink
----------------
and AMS Properties providing for pharmaceuticals or other supplies or
services to be furnished to any facility operated by AMS Properties;
provided that each such agreement or arrangement shall provide that it
shall be terminated and of no further force and effect, and all
obligations and liabilities thereunder released and terminated (other
than obligations to pay for services or supplies previously rendered
or furnished), at any time upon notice to Vitalink by HRP after either
(i) HRP terminates any lease of such facility with AMS Properties,
accelerates the maturity of any promissory note of AMS Properties or
GCIHCC, or forecloses upon or exercises remedies of like effect in
respect of the stock of GCIHCC or AMS Properties pledged to HRP, or
(ii) the occurrence of an Event of Default hereunder or under any
other Transaction Document involving the bankruptcy or insolvency of
AMS Properties, GCIHCC, New GranCare or Vitalink.
4
<PAGE>
Vitalink - Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
(2) Section 1.1 is further amended by amending the definitions
"Security Documents" and "Transaction Documents" in full to read as
follows:
Security Documents - each of the mortgages, leasehold mortgages
------------------
or deeds of trust, security agreements, pledge agreements, voting
trust agreements, collateral assignments of contracts and permits,
stock powers and Uniform Commercial Code financing statements listed
on Schedule 1.1 hereto, as each of the same has been or may be
amended, amended and restated, modified or supplemented from time to
time.
Transaction Documents - means, collectively, (a) those documents
---------------------
listed on Schedule 1.1 hereto, in each case as such documents have
been or may be amended, amended and restated, modified or supplemented
from time to time, together with any and all other documents executed
in connection with, relating to, evidencing, or creating or perfecting
collateral or security for, any such document and (b) all GCIHCC
Transaction Documents.
(3) Section 9.17 is amended by amending paragraphs (b), (c) and (e)
thereof in full to read as follows:
(b) unsecured Indebtedness consisting of accounts payable,
accruals and similar items incurred in the ordinary course of business
in accordance with reasonable and customary trade practices, that are
neither owed to any Affiliate nor constitute Indebtedness for money
borrowed or a Guarantee thereof;
(c) Indebtedness for taxes, assessments, governmental charges or
levies to the extent that payment thereof shall not at the time be
required to be made in accordance with the provisions of Section 9.5
-----------
hereof or of the other applicable provisions of the Transaction
Documents;
(e) unsecured Indebtedness (including without limitation, accrued
and unpaid management fees) of AMS Properties (i) owed to GranCare or
any wholly-owned Subsidiary of GranCare (provided that the payment of
such Indebtedness shall be subject to the terms of a subordination
agreement in form and substance satisfactory to HRP among AMS
Properties as debtor, GranCare or such wholly-owned Subsidiary as
subordinate creditor and HRP as senior creditor) or (ii) owed to
Vitalink under any Supply Contract.
(4) The Acquisition Agreement is further amended by adding a new
Schedule 1.1 thereto to read as set forth in Exhibit E hereto.
---------
5
<PAGE>
(4) The AMS Properties Master Lease shall be amended in the following
respects:
(1) Article I is amended by amending the definitions "Guarantor" and
"Transaction Documents" in full to read as follows:
Guarantor shall mean any guarantor of Tenant's obligations under
---------
the applicable Lease, including, without limitation, New GranCare,
Inc., a Delaware corporation and GCI Health Care Centers, Inc., a
Delaware corporation (but excluding in any event, Vitalink), in each
case together with their respective successors and assigns.
Transaction Documents shall mean those documents listed on
---------------------
Schedule I hereto, and shall also include all documents constituting
Transaction Documents as such term is defined in the Acquisition
Agreement, in each case as such documents may be modified, amended or
supplemented from time to time, together with any and all other
documents executed in connection with, relating to, evidencing, or
creating collateral or security for, any Lease.
(2) Section 1.1 is further amended to add the following new
definitions thereto:
Vitalink shall mean Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
Vitalink Guaranty shall mean the Limited Guaranty delivered by
-----------------
Vitalink in favor of Landlord pursuant to Consent and Amendment to
Transaction Documents dated as of December 31, 1996 among Tenant,
Landlord, GranCare, Inc., New GranCare, Inc. and GCI Health Care
Centers, Inc., as such Limited Guaranty may be amended, modified or
supplemented from time to time.
(3) Section 12.1 is amended by adding the word "or" immediately after
the semicolon at the end of paragraph (o) thereof, and by adding a new
paragraph (p) thereto to read as follows:
(p) the occurrence of a Guarantor Event of Default (as such term
is defined in the Vitalink Guaranty) at any time prior to the Release
Date (as such term is defined in the Vitalink Guaranty);
(5) The GCIHCC Master Lease shall be amended in the following respects:
(1) Article I is further amended by amending the definition
"Guarantor" and "Transaction Documents" in full to read as follows:
6
<PAGE>
Guarantor shall mean any guarantor of Tenant's obligations under
---------
the applicable Lease, including, without limitation, New GranCare,
Inc., a Delaware corporation, and AMS Properties, Inc., a Delaware
corporation (but excluding in any event, Vitalink), in each case
together with their respective successors and assigns.
Transaction Documents shall mean those documents listed on
---------------------
Schedule I hereto, and shall also include all documents constituting
Transaction Documents as such term is defined in the Acquisition
Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of
December 28, 1990, as amended, among Landlord, HostMasters, Inc., a
California corporation, GranCare, Inc., American Medical Services,
Inc., a Wisconsin corporation and AMS Properties, Inc., a Delaware
corporation, in each case as such documents may be modified, amended
or supplemented from time to time, together with any and all other
documents executed in connection with, relating to, evidencing, or
creating collateral or security for, any Lease.
(2) Section 1.1 is further amended to add the following new
definitions thereto:
Supply Contracts - agreements or arrangements between Vitalink
----------------
and Tenant providing for pharmaceuticals or other supplies or services
to be furnished to any facility operated by Tenant; provided that each
such agreement or arrangement shall provide that it shall be
terminated and of no further force and effect, and all obligations and
liabilities thereunder released and terminated (other than obligations
to pay for services or supplies previously rendered or furnished), at
any time upon notice to Vitalink by Landlord after either (i) Landlord
terminates any Lease of such facility with Tenant, accelerates the
maturity of any promissory note of AMS Properties, Inc. or Tenant, or
forecloses upon or exercises remedies of like effect in respect of the
stock of Tenant or AMS Properties, Inc. pledged to Landlord, or (ii)
the occurrence of an Event of Default hereunder or under any other
Transaction Document involving the bankruptcy or insolvency of Tenant,
AMS Properties, Inc., GranCare or Vitalink.
Vitalink - shall mean Vitalink Pharmacy Services Inc., a Delaware
--------
corporation, together with its permitted successors and assigns.
Vitalink Guaranty shall mean the Limited Guaranty delivered by
-----------------
Vitalink in favor of Landlord pursuant to the Consent and Amendment to
Transaction Documents dated as of December 31, 1996 among Tenant,
Landlord, GranCare, Inc., New GranCare, Inc. and AMS Properties, Inc.,
as such Limited Guaranty may be amended, modified or supplemented from
time to time.
7
<PAGE>
(3) Section 12.1 is amended by adding the word "or" immediately after
the semicolon at the end of paragraph (o) thereof, and by adding a new
paragraph (p) thereto to read as follows:
(p) the occurrence of a Guarantor Event of Default (as such term
is defined in the Vitalink Guaranty) at any time prior to the Release
Date (as such term is defined in the Vitalink Guaranty);
(4) Section 23.7 is amended by deleting paragraph (e) thereof in its
entirety and by amending paragraphs (b) and (f) thereof in full read as
follows:
(b) unsecured Indebtedness consisting of accounts payable,
accruals and similar items incurred in the ordinary course of business
in accordance with reasonable and customary trade practices, that are
neither owed to any Affiliate nor constitute Indebtedness for money
borrowed or a Guarantee thereof;
(f) unsecured Indebtedness (including without limitation, accrued
and unpaid management fees) of Tenant (i) owed to GranCare or any
wholly-owned Subsidiary of GranCare (provided that the payment of such
Indebtedness shall be subject to the terms of a subordination
agreement in form and substance satisfactory to Landlord among Tenant
as debtor, GranCare or such wholly-owned Subsidiary as subordinate
creditor and Landlord as senior creditor) or (ii) owed to Vitalink
under any Supply Contract;
(5) The GCIHCC Master Lease is further amended by amending Schedule 1
thereto in full to read as set forth in Exhibit F hereto.
---------
(6) Each of the Transaction Documents remain in full force and effect and
is hereby ratified and confirmed in all respects, except as specifically
modified hereby or by the other Vitalink Documents (as hereinafter defined).
The amendments set forth herein (i) do not constitute an amendment, waiver or
modification of any term, condition or covenant of any Transaction Document, or
any of the instruments or documents referred to therein, other than as
specifically set forth herein, and (ii) shall not prejudice any rights which HRP
or its successors and assigns may now or hereafter have under or in connection
with any Transaction Document, as amended hereby, or any of the instruments or
documents referred to therein.
SECTION 3. EFFECTIVENESS
-------------
Sections 1 and 2 of this Agreement shall become effective on the date and
---------- -
time (the "Effective Time") that a counterpart to this Agreement shall have been
--------------
executed by each of the parties hereto and each of the following conditions
shall have been satisfied (provided that the Effective Time may not be later
than March 31, 1997):
8
<PAGE>
(1) Vitalink shall have paid HRP a non-refundable $10,000,000 lease
modification fee in immediately available funds to reflect the change in
guarantors;
(2) Vitalink shall have executed and delivered to HRP a Guaranty in the
form attached hereto as Exhibit A (the "Vitalink Guaranty");
--------- -----------------
(3) New GranCare shall have executed and delivered to HRP an Assumption
Agreement in the form attached hereto as Exhibit B (the "Assumption Agreement,"
--------- --------------------
and together with this Agreement, the Vitalink Guaranty and each other
agreement, instrument or other document delivered by any party pursuant to this
Section 3, collectively, the "Vitalink Documents"; the Vitalink Documents and
- --------- ------------------
the Transaction Documents, as amended hereby, are collectively referred to
herein as the "Documents"), which Assumption Agreement shall have been accepted
---------
by GranCare for the limited purpose specified therein;
(4) the Distribution and the Merger shall have occurred substantially
concurrently with the Effective Time, in accordance with the description of the
Distribution and Merger in the Schedule 14A;
(5) giving effect to the Distribution and the Merger, and occurrence of the
Effective Time, no Event of Default, or event or condition that with the giving
of notice or the lapse of time or both would become an Event of Default, shall
have occurred and be continuing under any Document, and all warranties and
representations contained in each Vitalink Document shall be true and correct at
the Effective Time as if made at such time;
(6) HRP shall have received a certificate of a senior executive officer of
New GranCare and Vitalink confirming satisfaction of the conditions described in
paragraphs (d) and (e) above;
- -------------- ---
(7) HRP shall have received opinions addressed to it, each dated the
Effective Time, from counsel to GranCare and New GranCare, and from Cahill
Gordon & Reindel, counsel to Vitalink, covering the matters set forth in
Exhibits C and D respectively, and otherwise in form and substance reasonably
- ---------- -
satisfactory to HRP; and
(8) New GranCare or Vitalink shall have paid all costs, expenses and taxes
provided for in Section 4 hereof, as well as all fees and expenses currently
---------
payable by New GranCare, Vitalink, GranCare, AMS Properties and GCIHCC under any
Document.
SECTION 4. COSTS, EXPENSES AND TAXES
-------------------------
New GranCare, AMS Properties and GCIHCC hereby jointly and severally agrees
to pay all costs and expenses of HRP in connection with the preparation,
reproduction, execution and delivery, and administration, of this Agreement,
including the reasonable fees and expenses of Sullivan & Worcester LLP, special
counsel to HRP with respect thereto and the payment of all
9
<PAGE>
recording fees, real estate transfer taxes, title insurance premiums and other
expenses related to the satisfaction of the conditions in Section 3 hereof.
---------
SECTION 5. AMENDMENTS
----------
No provision of this Agreement may be amended or modified without the
written consent of the Person entitled to the benefits thereof.
SECTION 6. GOVERNING LAW
-------------
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL SUBSTANTIVE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
SECTION 7. NO LIABILITY OF TRUSTEES
------------------------
THE DECLARATION OF TRUST OF HRP, DATED OCTOBER 9, 1986, A COPY OF WHICH,
TOGETHER WITH ALL AMENDMENTS THERETO (THE "DECLARATION"), IS DULY FILED IN THE
OFFICE OF THE DEPARTMENT OF ASSESSMENTS AND TAXATION OF THE STATE OF MARYLAND,
PROVIDES THAT THE NAME "HEALTH AND RETIREMENT PROPERTIES TRUST" REFERS TO THE
TRUSTEES UNDER THE DECLARATION COLLECTIVELY AS TRUSTEES, BUT NOT INDIVIDUALLY OR
PERSONALLY, AND THAT NO TRUSTEE, OFFICER, SHAREHOLDER, EMPLOYEE OR AGENT OF HRP
SHALL BE HELD TO ANY PERSONAL LIABILITY, JOINTLY OR SEVERALLY, FOR ANY
OBLIGATION OF, OR CLAIM AGAINST, HRP. ALL PERSONS DEALING WITH HRP, IN ANY WAY,
SHALL LOOK ONLY TO THE ASSETS OF HRP FOR THE PAYMENT OF ANY SUM OR THE
PERFORMANCE OF ANY OBLIGATION.
10
<PAGE>
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the date
first above written.
HEALTH AND RETIREMENT
PROPERTIES TRUST (f/k/a "Health and Rehabilitation
Properties Trust") (known in
Wisconsin as "Health and
Retirement Properties REIT")
By:
----------------------------
Its:
GRANCARE, INC.
(f/k/a AMS Holding Co.)
By:
-----------------------------
Its:
AMS PROPERTIES, INC.
By:
-------------------------------
Its:
GCI HEALTH CARE CENTERS, INC.
By:
-----------------------------
Its:
NEW GRANCARE, INC.
By:
-----------------------------
Its:
11
<PAGE>
LIMITED GUARANTY
----------------
LIMITED GUARANTY (this "Guaranty") dated as of February 12, 1997, made by
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Guarantor"), in
favor of HEALTH AND RETIREMENT PROPERTIES TRUST, a real estate investment trust
formed under the laws of the State of Maryland (together with its successors and
assigns, "HRP").
WITNESSETH
----------
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
GranCare, Inc. (f/k/a AMS Holding Co.), a California corporation ("GranCare") ,
American Medical Services, Inc., a Wisconsin corporation ("AMSI") and AMS
Properties, Inc., a Delaware corporation ("AMS") have entered into an
Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended (as so amended, the "Acquisition Agreement"),
under which, inter alia, (A) HRP has leased 18 nursing properties located in
Wisconsin, California, Colorado and Illinois to AMS pursuant to the several
Facility Leases (as amended, the "AMS Facility Leases"), each incorporating a
Master Lease Document General Terms and Conditions dated as of December 28, 1990
(as amended, the "AMS Master Lease") between HRP, as landlord, and AMS, as
tenant, and (B) HRP has made a mortgage loan to AMS in the original principal
amount of $11,500,000, the payment of which is currently evidenced by a
Promissory Note dated as of October 1, 1994 by AMS to HRP (the "AMS Note") and
is secured, inter alia by Mortgage and Security Agreements dated as of March 31,
1995 (collectively, the "AMS Mortgages") by AMS in favor of HRP encumbering the
two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMSI; and (b) in
December 1993, AMSI, which previously had owned all the outstanding common stock
of AMS, and AMS Rehab, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare, each merged into AMS, with AMS as the surviving
corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc., a Delaware corporation ("GCI") pursuant to the several Facility Leases (as
amended, the "GCI Facility Leases"), each incorporating a Master Lease Document
General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCI
Master Lease") between HRP, as landlord, and GCI, as tenant;
12
<PAGE>
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS and GCI, proposes to transfer all of its
skilled nursing, home health care, assisted living and contract management
business (including, without limitation, such capital
13
<PAGE>
stock), and related assets, to New GranCare, Inc., a Delaware corporation and a
wholly-owned subsidiary of GranCare ("New GranCare"), with GranCare thereafter
distributing New GranCare common stock to GranCare shareholders (collectively,
the "Distribution");
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into the Guarantor, with the Guarantor as the surviving corporation (the
"Merger");
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release the Guarantor and its subsidiaries (including any
remaining Subsidiary of GranCare that becomes a subsidiary of the Guarantor as a
result of the Merger) and their respective successors and assigns from and
against any and all claims, liabilities and obligations, as successor by merger
to GranCare, under (A) the Acquisition Agreement, (B) the Representation Letter
and Indemnification Agreement dated June 30, 1992 by GCI, AMS and GranCare to
HRP (the "GCI Indemnity Agreement"), (C) the Guaranty, dated as of December 28,
1990, as amended, by GranCare in favor of HRP in respect of the obligations of
AMS (the "AMS Guaranty"), (D) the Guaranty dated as of June 30, 1992, as
amended, by GranCare in favor of HRP in respect of the obligations of GCI (the
"GCI Guaranty"), (E) the Pledge Agreement, dated as of December 28, 1990, as
amended, by GranCare in favor of HRP (the "AMS Pledge Agreement"), (F) the
Pledge Agreement, dated as of June 30, 1992 as amended, by GranCare in favor of
HRP (the "GCI Pledge Agreement"), (G) the Subordination Agreement, dated as of
December 28, 1990, as amended, among GranCare, as subordinate creditor, AMS, as
debtor and HRP, as senior creditor (the "AMS Subordination Agreement"), (H) the
Subordination Agreement, dated as of June 30, 1992, as amended, among GranCare,
as subordinate creditor, GCI, as debtor and HRP, as senior creditor (the "GCI
Subordination Agreement"), and (I) any other agreements, instruments or
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions of the Consent and Amendment to Transaction Documents dated as of
December 31, 1996 among GranCare, New GranCare, AMS, GCI and HRP (the
"Amendment"), willing to so agree, subject to, inter alia, the execution and
delivery of this Guaranty by the Guarantor;
NOW, THEREFORE, in consideration of the premises contained herein and to
induce HRP to consent to the Distribution and Merger, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
SECTION 8. Defined Terms. Unless otherwise defined herein, terms which are
defined in the AMS Master Lease and used herein are so used as so defined.
In addition, the following terms shall have the meanings set forth below:
"Applicable Law" shall mean shall mean any law of any governmental
authority, whether domestic or foreign, including without limitation all
federal and state laws, to
14
<PAGE>
which the Person in question is subject or by which it or any of its
property is bound, and including without limitation any: (a)
administrative, executive, judicial, legislative or other action, code,
consent decree, constitution, decree, directive, enactment, finding,
guideline, injunction, interpretation, judgment, law, order, ordinance,
policy statement, proclamation, promulgation, regulation, requirement,
rule, rule of law, rule of public policy, settlement agreement, statute, or
writ, of any governmental authority, domestic or foreign, whether or not
having the force of law; (b) common law or other legal or quasi-legal
precedent; or (c) arbitrator's, mediator's or referee's award, decision,
finding or recommendation, or, in any case, any particular section, part or
provision thereof.
"Assumption Agreement" shall mean the Assumption Agreement dated as of
even date herewith by New GranCare in favor of HRP, as the same may be
amended, amended and restated, supplemented or modified from time to time,
pursuant to which New GranCare has agreed to assume the obligations of
GranCare under, inter alia, the Acquisition Agreement, the GCI Indemnity
Agreement, the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement.
the GCI Pledge Agreement, the AMS Subordination Agreement and the GCI
Subordination Agreement.
"Bankruptcy Code" means Title 11 of the United States Code.
"Consolidated Net Worth" of any Person shall mean, at any date as of
which the amount thereof shall be determined, the consolidated total assets
of such Person and its Subsidiaries, minus all obligations that should, in
accordance with GAAP, be classified as liabilities on the consolidated
balance sheet of such Person and its Subsidiaries, including in any event
all Indebtedness.
"Contingent Obligation" shall mean, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person (i)
with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring
the Contingent Obligation is to provide assurance to the obligee of such
obligation of another that such obligation of another will be paid or
discharged, or that any agreements relating thereto will be complied with,
or that the holders of such obligation will be protected (in whole or in
part) against loss in respect thereof, or (ii) with respect to any letter
of credit issued for the account of that Person or as to which that Person
is otherwise liable for reimbursement of drawings. Contingent Obligations
shall include, without limitation (a) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to
make take-or-pay or similar payments if required regardless of non-
performance by any other party or parties to an agreement and (c) any
liability of such Person for the obligation of another through any
agreement (contingent or otherwise) (X) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form
of
15
<PAGE>
loans, advances, stock purchases, capital contributions or otherwise) or
(Y) to maintain the solvency or any balance sheet item, level of income or
financial condition of another if, in the case of any agreement described
under subclauses (X) or (Y) of this sentence, the primary purpose or intent
thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be equal to the amount of the obligation so
guaranteed or otherwise supported or, if less, the amount to which such
Contingent Obligation is specifically limited.
"Default Amount" shall mean $15,000,000 or such lesser amount to which
the Guarantor's maximum liability hereunder has been reduced pursuant to
the second paragraph of Section 2 hereof.
"Default Rate" shall mean 18% per annum.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"GranCare Companies" shall mean, collectively, New GranCare, AMS, GCI
and all Subsidiaries of any thereof (after giving effect to the Merger and
the Distribution), whether now existing or hereafter created, and any
successors of any thereof (individually, a "GranCare Company").
"GranCare Default" shall mean any GranCare Event of Default and any
event or condition which with the passage of time or giving of notice, or
both, would become a GranCare Event of Default.
"GranCare Documents" shall mean, collectively,
(1) the Acquisition Agreement, the GCI Indemnity Agreement, the AMS
Leases, the AMS Master Lease, the AMS Note, the GCI Leases, the
GCI Master Lease, all Security Documents (as such term is defined
in the Acquisition Agreement, and including, without limitation,
the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement and
the GCI Pledge Agreement, in each case as modified by the
Assumption Agreement) and the Assumption Agreement, in each case
as from time to time in effect; and
(2) any other present or future undertaking, agreement or instrument
of any kind whatsoever from time to time entered into by one or
more GranCare Companies with HRP (and any applicable third
parties), or to or for the benefit of HRP (and any applicable
third parties), each as from time to time in effect (and, in each
case, whether or not related to any transaction contemplated by
any documents, instruments or agreements listed in subparagraph
(i) above).
16
<PAGE>
"GranCare Event of Default" shall mean an "Event of Default" under and
as defined in any GranCare Document.
"Guarantor Default" shall mean any Guarantor Event of Default and any
event or condition which with the passage of time or giving of notice, or
both, would become a Guarantor Event of Default.
"Guarantor Event of Default" shall mean an Event of Default under and
as defined in Section 15 hereof.
"Indebtedness" of any Person at any date shall mean, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (excluding current trade liabilities incurred
in the ordinary course of business and payable in accordance with customary
practices, but including any class of capital stock of such Person with
fixed payment obligations or with redemption at the option of the holder),
or which is evidenced by a note, bond, debenture or similar instrument, (b)
all obligations of such Person under leases that should be treated as
capitalized leases in accordance with GAAP, (c) all obligations of such
Person in respect of acceptances issued or created for the account of such
Person, and all reimbursement obligations (contingent or otherwise) of such
Person in respect of any letters of credit issued for the account of such
Person, and (d) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Lien" means any lien, mortgage, pledge, assignment, security
interest, charge or encumbrance of any kind (including any conditional sale
or other title retention agreement, any lease in the nature thereof, and
any agreement to give any security interest) and any option, trust or other
preferential arrangement having the practical effect of any of the
foregoing.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or
prospects of the Guarantor, or of the Guarantor and its Subsidiaries taken
as a whole, (b) the ability of the Guarantor to perform its obligations
under this Guaranty, or (c) the validity or enforceability of this
Guaranty, or the rights of HRP hereunder.
"Obligations" shall mean the payment and performance of each and every
obligation and liability of any GranCare Company to HRP under any GranCare
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, payment
of the principal, premium or prepayment fee and interest (including,
without limitation, Minimum Interest and Additional Interest, as such terms
are defined in
17
<PAGE>
the AMS Note) under any promissory note payable to HRP, and the payment of
rent under any lease with HRP as landlord (including, without limitation,
any Minimum Rent, Additional Rent and Additional Charges, as such terms are
defined in the AMS Leases or the GCI Leases).
"Person" shall mean any individual, corporation, firm, unincorporated
organization, association, partnership, trust, business trust, joint stock
company, joint venture or other organization, entity or business, or any
governmental organization or authority.
"Subsidiary" shall mean any Person of which any specified Person shall
at the time, directly or indirectly through one or more of its
Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold
at least 50% of the partnership, joint venture or similar interests or (c)
be a general partner or joint venturer.
SECTION 9. Guaranty. The Guarantor hereby unconditionally and irrevocably
guarantees to HRP the prompt and complete payment and performance by the
GranCare Companies (and each of them), when due (whether at stated
maturity, by acceleration or otherwise), of the Obligations. The Guarantor
further agrees to pay any and all expenses (including, without limitation,
all reasonable fees and disbursements of counsel to HRP) which may be paid
or incurred by HRP in enforcing, or obtaining advice of counsel in respect
of, any of its rights under this Guaranty. This Guaranty is a guaranty of
payment and not of collectibility and is absolute and in no way conditional
or contingent. The Guarantor's liability hereunder is direct and
unconditional and may be enforced after nonpayment or nonperformance by any
GranCare Company of any Obligation without requiring HRP to resort to any
other Person (including without limitation such GranCare Company) or any
other right, remedy or collateral. This Guaranty shall remain in full
force and effect until the Obligations are paid in full.
Notwithstanding the aggregate amount of the Obligations at any time or from
time to time payable or to be payable by the GranCare Companies to HRP, the
liability of the Guarantor to HRP under this Section 2 shall not exceed the
principal sum of Fifteen Million Dollars ($15,000,000) in the aggregate less
amounts paid by the Guarantor hereunder in respect of such principal sum;
provided that whenever, at any time, or from time to time, Guarantor shall make
any payment to HRP on account of its liability hereunder, it will notify HRP in
writing that such payment is made under this Guaranty for such purpose. The
Guarantor agrees that the Obligations may at any time and from time to time
exceed the amount of the liability of the Guarantor hereunder without impairing
this Guaranty or affecting the rights and remedies of HRP hereunder. No payment
or payments made by any GranCare Company or any other Person or received or
collected by HRP from any GranCare Company or any other Person by virtue of any
action or proceeding or any set-off or appropriation or application, at any time
or from time to time, in reduction of or in payment of the Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of the
Guarantor hereunder which shall, notwithstanding any such
18
<PAGE>
payment or payments, remain liable for the amount of the Obligations until the
Obligations are paid in full (but subject as provided in this paragraph).
SECTION 10. Costs and Expenses of Collection. The Guarantor agrees, as
principal obligor and not as a guarantor only, to pay to HRP forthwith upon
demand, in immediately available funds, all costs and expenses (including,
without limitation, all court costs and all fees and disbursements of
counsel to HRP) incurred or expended by HRP in connection with the
enforcement of this Guaranty, together with interest on amounts recoverable
under this Guaranty from the time such amounts become due until payment at
the Default Rate. The Guarantor's covenants and agreements set forth in
this Section 3 shall survive the termination of this Guaranty.
SECTION 11. Right of Setoff. Regardless of the adequacy of any collateral or
other means of obtaining repayment of the Obligations, HRP is hereby
authorized, without notice to the Guarantor or compliance with any other
condition precedent now or hereafter imposed by Applicable Law (all of
which are hereby expressly waived to the extent permitted by Applicable
Law) and to the fullest extent permitted by Applicable Law, to set off and
apply the Deposit Balance (as hereinafter defined), interest thereon, and
any other monies, securities, deposits or other property now or hereafter
delivered to HRP as collateral pursuant hereto, and all proceeds of any
thereof, against the obligations of the Guarantor under this Guaranty,
whether or not HRP shall have made any demand under this Guaranty, at any
time and from time to time after the occurrence of a Guarantor Event of
Default, in such manner as HRP in its sole discretion may determine, and
the Guarantor hereby grants HRP a continuing security interest in such
Deposit Balance, interest, monies, securities, deposits and property as
collateral for the payment and performance of such obligations.
SECTION 12. Subrogation and Contribution. Until the Obligations shall have
been paid and performed in full, the Guarantor irrevocably and
unconditionally waives any and all rights to which it may be entitled, by
operation of law or otherwise, to be subrogated, with respect to any
payment made by the Guarantor hereunder, to the rights of HRP against any
GranCare Company, or otherwise to be reimbursed, indemnified or exonerated
by any GranCare Company in respect thereof or to receive any payment, in
the nature of contribution or for any other reason, from any other
guarantor of the Obligations with respect to any payment made by the
Guarantor hereunder (provided that the foregoing shall not prevent the
Guarantor from drawing (and retaining any amounts so drawn) under any
letter of credit issued by a bank for the account of any Person). Until the
Obligations shall have been paid and performed in full, the Guarantor
waives any defense it may have based upon any election of remedies by HRP
which impairs the Guarantor's subrogation rights or the Guarantor's rights
to proceed against any GranCare Company for reimbursement (including
without limitation any loss of rights the Guarantor may suffer by reason of
any rights, powers or remedies of such GranCare Company in connection with
any anti-deficiency laws or any other laws limiting, qualifying or
discharging any
19
<PAGE>
indebtedness to HRP). Until the Obligations shall have been paid, performed
and satisfied in full, the Guarantor further waives any right to enforce
any remedy which HRP now has or may in the future have against any GranCare
Company, any other guarantor or any other Person and any benefit of, or any
right to participate in, any security whatsoever now or in the future held
by HRP.
SECTION 13. Effect of Bankruptcy Stay. If acceleration of the time for
payment or performance of any of the Obligations is stayed upon the
insolvency, bankruptcy or reorganization of any GranCare Company or any
other Person or otherwise, all such amounts otherwise subject to
acceleration shall nonetheless be payable by the Guarantor under this
Guaranty forthwith upon demand.
SECTION 14. Receipt of GranCare Documents, etc. The Guarantor confirms,
represents and warrants to HRP that (i) it has received true and complete
copies of all existing GranCare Documents from the GranCare Companies, has
read the contents thereof and reviewed the same with legal counsel of its
choice; (ii) no representations or agreements of any kind have been made to
the Guarantor which would limit or qualify in any way the terms of this
Guaranty; (iii) HRP has made no representation to the Guarantor as to the
creditworthiness of any GranCare Company; and (iv) the Guarantor has
established adequate means of obtaining from each GranCare Company on a
continuing basis information regarding such GranCare Company's financial
condition. The Guarantor agrees to keep adequately informed from such
means of any facts, events, or circumstances which might in any way affect
the Guarantor's risks under this Guaranty, and the Guarantor further agrees
that HRP shall have no obligation to disclose to the Guarantor any
information or documents acquired by HRP in the course of its relationship
with the GranCare Companies.
SECTION 15. Amendments, etc. with Respect to the Obligations. The obligations
of the Guarantor under this Guaranty shall remain in full force and effect
without regard to, and shall not be released, altered, exhausted,
discharged or in any way affected by any circumstance or condition (whether
or not any GranCare Company shall have any knowledge or notice thereof),
including without limitation (a) any amendment or modification of or
supplement to any GranCare Document, or any obligation, duty or agreement
of the GranCare Companies or any other Person thereunder or in respect
thereof; (b) any assignment or transfer in whole or in part of any of the
Obligations; any furnishing, acceptance, release, nonperfection or
invalidity of any direct or indirect security or guaranty for any of the
Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of
any GranCare Document, or any exercise or nonexercise of any right, remedy,
power or privilege under or in respect of any such instrument (whether by
operation of law or otherwise); (d) any bankruptcy, insolvency,
reorganization, arrangement, readjustment, composition, liquidation or
similar proceeding with respect to any GranCare Company or any other Person
or any of their respective properties or creditors or any
20
<PAGE>
resulting release or discharge of any Obligation (including without
limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or
for the benefit of any GranCare Company; (f) the merger or consolidation of
any GranCare Company with or into any other Person or of any other Person
with or into any GranCare Company; (g) the voluntary or involuntary sale or
other disposition of all or substantially all the assets of any GranCare
Company or any other Person; (h) the voluntary or involuntary liquidation,
dissolution or termination of any GranCare Company or any other Person; (i)
any invalidity or unenforceability, in whole or in part, of any term hereof
or of any GranCare Document, or any obligation, duty or agreement of any
GranCare Company or any other Person thereunder or in respect thereof; (j)
any provision of any applicable law or regulation purporting to prohibit
the payment or performance by any GranCare Company or any other Person of
any Obligation; (k) any failure on the part of any GranCare Company or any
other Person for any reason to perform or comply with any term of any
GranCare Document or any other agreement; or (l) any other act, omission or
occurrence whatsoever, whether similar or dissimilar to the foregoing. The
Guarantor authorizes each GranCare Company, each other guarantor in respect
of the Obligations and HRP at any time in its discretion, as the case may
be, to alter any of the terms of any of the Obligations.
SECTION 16. Guarantor as Principal. If for any reason the GranCare Companies,
or any of them, or any other Person is under no legal obligation to
discharge any Obligation, or if any other moneys included in the
Obligations have become unrecoverable from the GranCare Companies, or any
of them, or any other Person by operation of law or for any other reason,
including, without limitation, the invalidity or irregularity in whole or
in part of any Obligation or of any GranCare Document, the legal disability
of any GranCare Company or any other obligor in respect of Obligations, any
discharge of or limitation on the liability of any GranCare Company or any
other Person or any limitation on the method or terms of payment under any
Obligation, or of any GranCare Document, which may now or hereafter be
caused or imposed in any manner whatsoever (whether consensual or arising
by operation of law or otherwise), this Guaranty shall nevertheless remain
in full force and effect and shall be binding upon the Guarantor to the
same extent as if the Guarantor at all times had been the principal obligor
on all Obligations (subject as provided in Section 2 hereof).
SECTION 17. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to
the extent not prohibited by applicable law, all presentments, demands for
performance, notice of nonperformance, protests, notices of protests and
notices of dishonor in connection with the Obligations or any GranCare
Document, including but not limited to (a) notice of the existence,
creation or incurring of any new or additional obligation or of any action
or failure to act on the part of any GranCare Company, HRP, any endorser or
creditor of any GranCare Company or any other Person; (b) any notice of any
indulgence, extensions or renewals granted to any obligor with respect to
the Obligations; (c) any requirement of
21
<PAGE>
diligence or promptness in the enforcement of rights under any GranCare
Document, or any other agreement or instrument directly or indirectly
relating thereto or to the Obligations; (d) any enforcement of any present
or future agreement or instrument relating directly or indirectly thereto
or to the Obligations; (e) notice of any of the matters referred to in
Section 9 above; (f) any defense of any kind which the Guarantor may now
have with respect to his liability under this Guaranty; (g) any right to
require HRP, as a condition of enforcement of this Guaranty, to proceed
against any GranCare Company or any other Person or to proceed against or
exhaust any security held by HRP at any time or to pursue any other right
or remedy in HRP's power before proceeding against the Guarantor; (h) any
defense that may arise by reason of the incapacity, lack of authority,
death or disability of any other Person or Persons or the failure of HRP to
file or enforce a claim against the estate (in administration, bankruptcy,
or any other proceeding) of any other Person or Persons; (i) any defense
based upon an election of remedies by HRP; (j) any defense arising by
reason of any "one action" or "anti-deficiency" law or any other law which
may prevent HRP from bringing any action, including a claim for deficiency,
against the Guarantor, before or after HRP's commencement of completion of
any foreclosure action, either judicially or by exercise of a power of
sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose
to the Guarantor any facts HRP may now or hereafter know about any GranCare
Company or any other obligor in respect of Obligations; (m) any defense
arising because of an election made by HRP under Section 1111(b)(2) of the
Federal Bankruptcy Code; (n) any defense based on any borrowing or grant of
a security interest under Section 364 of the Federal Bankruptcy Code; (o)
and any defense based upon or arising out of any defense which any GranCare
Company or any other Person may have to the payment or performance of the
Obligations (including but not limited to failure of consideration, breach
of warranty, fraud, payment, accord and satisfaction, strict foreclosure,
statute of frauds, bankruptcy, infancy, statute of limitations, lender
liability and usury). Guarantor acknowledges and agrees that each of the
waivers set forth herein on the part of the Guarantor is made with
Guarantor's full knowledge of the significance and consequences thereof and
that, under the circumstances, the waivers are reasonable. If any such
waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent not prohibited by such Applicable Law.
SECTION 18. Reinstatement. This Guaranty shall continue to be effective, or
be reinstated, as the case may be, if at any time payment, or any part
thereof, of any of the Obligations or the payment of the Deposit Amount (as
hereinafter defined) is rescinded or must otherwise be restored or returned
by HRP upon the insolvency, bankruptcy, dissolution, liquidation or
reorganization of any GranCare Company or upon or as a result of the
appointment of a receiver, intervenor or conservator of, or trustee or
similar officer for, any GranCare Company or any substantial part of its
property, or otherwise, all as though such payments had not been made.
22
<PAGE>
SECTION 19. Payments. The Guarantor hereby agrees that the Obligations, and
all amounts payable hereunder, will be paid to HRP without set-off or
counterclaim in U.S. Dollars at the office of HRP located at 400 Centre
Street, Newton, Massachusetts 02158, or to such other location as HRP shall
notify the Guarantor.
SECTION 20. Representations and Warranties. The Guarantor represents and
warrants that:
(1) Corporate Existence. The Guarantor is a corporation duly
incorporated and validly existing under the laws of the jurisdiction of its
incorporation, and is duly licensed or qualified as a foreign corporation
in all states wherein the nature of its property owned or business
transacted by it makes such licensing or qualification necessary, except
where the failure to be licensed or to so qualify could not have a Material
Adverse Effect.
(2) No Violation. The execution, delivery and performance of this
Guaranty will not contravene any provision of law, statute, rule or
regulation to which the Guarantor or any of its Subsidiaries is subject or
any judgment, decree, franchise, order or permit applicable to the
Guarantor or any of its Subsidiaries, or conflict or be inconsistent with
or result in any breach of, any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of
the property or assets of the Guarantor or any of its Subsidiaries pursuant
to the terms of any agreement or instrument to which the Guarantor or any
of its Subsidiaries is party, or violate any provision of the respective
corporate charters or bylaws of the Guarantor or any of its Subsidiaries.
(3) Corporate Authority and Power. The execution, delivery and
performance of this Guaranty is within the corporate powers of the
Guarantor and has been duly authorized by all necessary corporate action.
(4) Enforceability. This Guaranty has been duly executed and
delivered by the Guarantor, and this Guaranty constitutes the valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and
except as enforceability may be subject to general principles of equity,
whether such principles are applied in a court of equity or at law.
(5) Governmental Approvals. No order, permission, consent, approval,
license, authorization, registration or validation of, or filing with, or
exemption by, any governmental authority is required to authorize, or is
required in connection with, the execution, delivery and performance of
this Guaranty, or the taking of any action contemplated hereby or thereby.
23
<PAGE>
(6) Financial Statements. The financial statements of the Guarantor
contained in the Guarantor's Registration Statement on Form S-4 filed in
connection with the Merger, fairly present the consolidated financial
condition of the Guarantor and its Subsidiaries as of their date of
presentation, and the consolidated results of their operations and their
consolidated cash flows for the respective fiscal period then ended. The
Financial Statements (including in each case the related schedules and
notes) (i) have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as disclosed therein), (ii) are
true, complete and correct, and (iii) do not omit any material fact
necessary to make them not misleading.
(7) No Adverse Change. Other than as set forth in or contemplated by
the Guarantor's Registration Statement on Form S-4 filed in connection with
the Merger, since May 31, 1996, there has been no change in the business
operations, management or properties, or in the condition, financial or
other, of the Guarantor and its Subsidiaries taken as a whole that has had
or could have a Material Adverse Effect.
(8) Litigation. The Guarantor has no notice or knowledge of any
action, suit or proceeding pending or threatened against or affecting it at
law or in equity or before or by any governmental department, court,
commission, board, bureau, agency or instrumentality, domestic or foreign,
or before any arbitrator of any kind that would, to the best of its
knowledge, information or belief, materially and adversely affect its
ability to perform its obligations under this Guaranty.
(9) No Restrictions. Neither the Guarantor nor any of its
Subsidiaries has entered into any agreement or arrangement, written or
oral, direct or indirect, with any GranCare Company that either now or in
the future would have the effect of restricting the ability of any GranCare
Company, or would conflict with the right of any GranCare Company, to (a)
enter into any new or additional mortgage or lease financing, or any other
transaction, with HRP (including, without limitation, any transaction
contemplated by Section 9.27 of the Acquisition Agreement), (b) extend or
renew the term of any mortgage or lease financing with HRP, (c) exercise
any option to purchase property from HRP or (d) take any other action
permitted or required to be taken by any GranCare Company pursuant to the
terms of any GranCare Document.
SECTION 21. Covenants. The Guarantor hereby covenants and agrees with HRP
that, from and after the date of this Guaranty until the Obligations are
paid in full or until the Release Date (as defined in Section 16 hereof):
(1) the Guarantor shall not enter into any transaction of merger or
consolidation, or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or
otherwise dispose of in one transaction or a series of transactions, all or
substantially all of its business, property or fixed assets, whether now owned
or hereafter
24
<PAGE>
acquired, except that the Guarantor may merge or consolidate with any Person, or
convey, transfer or lease substantially all of its assets so long as
(1) no condition or event shall exist, either before or immediately
after giving effect to such merger or consolidation, or such conveyance,
transfer or lease, that constitutes a Guarantor Default;
(2) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of nationally recognized
independent counsel, or other independent counsel reasonably satisfactory
to HRP, to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof; and
(1) if the survivor of any such merger is the Guarantor, the
Consolidated Net Worth of the Guarantor giving effect to such
merger shall not be less than $100,000,000; or
(2) if the successor formed by such consolidation or the survivor of
such merger, if other than the Guarantor, or the Person that
acquires by conveyance, transfer or lease substantially all of
the assets of the Guarantor as an entirety, as the case may be,
giving effect to such consolidation or merger, or such
conveyance, transfer or lease, has either (x) a Consolidated Net
Worth of not less than $100,000,000 or (y) (A) paid HRP an amount
in immediately available funds equal to the Default Amount, free
and clear of claims of third parties, to be held by HRP as cash
collateral for the payment of the Guarantor's obligations
hereunder (such amounts to be applied by HRP to the payment and
performance of the obligations of the Guarantor (and its
successors) hereunder as and when the same become due and payable
in accordance with the provisions of this Guaranty) and (B)
executed and delivered a cash collateral pledge agreement in
favor of HRP in respect of such cash collateral (together with
UCC-1 financing statements or similar instruments if requested by
HRP, and in form satisfactory to HRP), which cash collateral
pledge agreement shall be in form and substance satisfactory to
HRP in its sole discretion.
25
<PAGE>
(2) The Guarantor shall not, and shall not permit any of its Subsidiaries
to, enter into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that would have the effect of restricting
the ability of any GranCare Company, or would conflict with the right of any
GranCare Company, to (a) enter into any new or additional mortgage or lease
financing, or any other transaction, with HRP (including, without limitation,
any transaction contemplated by Section 9.27 of the Acquisition Agreement), (b)
extend or renew the term of any mortgage or lease financing with HRP, (c)
exercise any option to purchase property from HRP or (d) take any other action
permitted or required to be taken by any GranCare Company pursuant to the terms
of any GranCare Document.
SECTION 22. Guarantor Events of Default. If one or more of the following
events (a "Guarantor Event of Default") shall have occurred:
(1) the Guarantor shall fail to make punctual payment of any amount
payable hereunder as the same shall become due and payable; or
(2) any representation or warranty of the Guarantor contained in this
Guaranty, or any statement or certificate furnished pursuant to any
provision of this Guaranty or the Amendment, shall have been false,
incorrect or misleading in any material respect when made or so certified
to; or
(3) the Guarantor shall breach any of the provisions of, or fail duly
to observe or perform any covenant, agreement or provision contained in,
this Guaranty; or
(4) any obligation of the Guarantor in respect of any Indebtedness or
any Contingent Obligation with an aggregate amount of principal outstanding
(whether or not due) exceeding $10,000,000 (but excluding, in any event,
the obligations of the Guarantor hereunder) shall be declared to be or
shall become due and payable prior to the stated maturity thereof, or such
Indebtedness or Contingent Obligation shall not be paid as and when the
same becomes due and payable, or there shall occur and be continuing any
default under any instrument, agreement or evidence of indebtedness
relating to any such Indebtedness the effect of which is to permit the
holder or holders of such instrument, agreement or evidence of
indebtedness, or a trustee, agent or other representative on behalf of such
holder or holders, to cause such Indebtedness to become due prior to its
stated maturity; or
(5) the Guarantor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property, make a general
assignment for the benefit of its creditors, commence a voluntary case
under the Bankruptcy Code, file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or readjustment of debts, fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against
it in an involuntary case under
26
<PAGE>
the Bankruptcy Code, or take any corporate action for the purpose of
effecting any of the foregoing; or
(6) a proceeding or case shall be commenced, without the application
or consent of the Guarantor thereof in any court of competent jurisdiction,
seeking its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment of its debts, the appointment of a trustee,
receiver, custodian, liquidator or the like of the Guarantor or of all or
any substantial part of its assets, or similar relief in respect of the
Guarantor under any law relating to bankruptcy, insolvency, reorganization,
winding-up, or composition or adjustment of debts, and such proceeding or
case shall continue undismissed, or an order, judgment or decree approving
or ordering any of the foregoing shall be entered and continue unstayed and
in effect, for a period of 60 days; or an order for relief against the
Guarantor shall be entered in an involuntary case under the Bankruptcy
Code; or
(7) A judgment or judgments for the payment of money in excess of
$[10,000,000] (net of insurance proceeds) in the aggregate shall be
rendered against the Guarantor and any such judgment or judgments shall not
have been vacated, discharged, stayed or bonded pending appeal within
thirty (30) days from the entry thereof;
THEN, notwithstanding that no GranCare Event of Default may then have occurred
and be continuing, (a) in the event of a Guarantor Event of Default described in
paragraph (E) or (F) above, there shall become due and payable to HRP, and the
Guarantor shall immediately pay HRP, without notice or demand of any kind
whatsoever, an amount in immediately available funds equal to the Default
Amount, and (b) in the event of any other Guarantor Event of Default, upon
notice from HRP specifying such Guarantor Event of Default, there shall become
due and payable to HRP, and the Guarantor shall immediately pay HRP, an amount
in immediately available funds equal to Default Amount. The amounts so paid to
HRP shall be held as collateral for the payment of the Guarantor's obligations
hereunder. Such amounts shall be applied by HRP to the payment and performance
of the obligations of the Guarantor hereunder as and when the same become due
and payable in accordance with the provisions of this Guaranty.
SECTION 23. Payment of Default Amount. Notwithstanding anything herein to
the contrary, upon the Guarantor's (i) payment to HRP of an amount in
immediately available funds equal to the Default Amount, free and clear of
claims of third parties, to be held by HRP as cash collateral for the
payment of the Guarantor's obligations hereunder (such amounts to be
applied by HRP to the payment and performance of the obligations of the
Guarantor (and its successors) hereunder as and when the same become due
and payable in accordance with the provisions of this Guaranty) and (ii)
execution and delivery of a cash collateral pledge agreement in favor of
HRP in respect of such cash collateral (together with executed UCC-1
financing statements or similar instruments if requested by HRP, and in
form satisfactory to HRP), which cash collateral pledge agreement shall be
in form and substance satisfactory to HRP in its sole discretion (the date
upon which the
27
<PAGE>
conditions in clauses (i) and (ii) have been satisfied, the "Release
Date"), Sections 14 and 15 hereof shall have no further force and effect,
and (subject to Section 11 hereof) HRP shall look solely to such cash
collateral for payment of the Guarantor's obligations hereunder (so long as
such cash collateral shall not thereafter become subject to any Lien or
other claim of any Person, other than the rights of the Guarantor
hereunder). Without limiting the foregoing, such cash collateral pledge
agreement shall provide that (A) the amount paid to HRP pursuant to this
Section 16 , less amounts applied by HRP from time to time to the payment
of the Obligations (the "Deposit Balance"), shall bear interest at a per
annum rate equal to the lesser of eight percent (8%) per annum or the T-
Bill Rate (as hereinafter defined), which interest shall be payable to the
Guarantor or to its order on each anniversary of the date of the payment of
such amount to HRP (the "Deposit Payment Date") so long as no GranCare
Event of Default shall have occurred and be continuing on such interest
payment date, (B) the Deposit Balance, together with accrued but unpaid
interest thereon, shall be released to the Guarantor or to its order upon
the payment in full of the Obligations, and (C) the Deposit Balance and
accrued interest thereon may be commingled with the general assets of HRP.
The term "T-Bill Rate" means, with respect to the Deposit Balance, the
yield to maturity implied by (i) the yields reported as of 10:00 A.M. (New
York City time) on the Deposit Payment Date on the display designated as
"Page 678" on the Telerate Access Service (or such other display as may
replace Page 678 on Telerate Access Service) for 30-year U.S. Treasury
securities, or (ii) if such yields are not reported as of such time or the
yields reported as of such time are not ascertainable, the Treasury
Constant Maturity Series Yields reported, for the latest day for which such
yields have been so reported as of the Deposit Payment Date in Federal
Reserve Statistical Release H.15 (519) (or any comparable successor
publication) for 30-year U.S. Treasury securities. Such implied yield will
be determined, if necessary, by converting U.S. Treasury bill quotations to
per annum bond-equivalent yields in accordance with accepted financial
practice.
SECTION 24. Supply Contracts. The Guarantor agrees that all agreements or
arrangements between the Guarantor and its Subsidiaries or representative
or agents on the one hand, and AMS or GCI on the other, providing for
pharmaceuticals or other supplies or services to be furnished to any
facility operated by AMS or GCI, shall provide that each such agreement or
arrangement shall be terminated and of no further force and effect, and all
obligations and liabilities thereunder released and terminated (other than
obligations to pay for services or supplies previously rendered or
furnished), at any time upon notice to the Guarantor by HRP after either
(i) HRP terminates such lease with AMS or GCI, accelerates the maturity of
any promissory note of AMS or GCI, or forecloses upon or exercises remedies
of like effect in respect of the stock of GCI or AMS pledged to HRP or (ii)
the occurrence of an Event of Default hereunder or under any other GranCare
Document involving the bankruptcy or insolvency of New GranCare, AMS, GCI
or the Guarantor.
28
<PAGE>
SECTION 25. Severability. Any provision of this Guaranty which is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
SECTION 26. Additional Guaranties. This Guaranty shall be in addition to any
other guaranty or other security for the Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security.
SECTION 27. Paragraph Headings. The paragraph headings used in this Guaranty
are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation
hereof.
SECTION 28. No Waiver, Cumulative Remedies. HRP shall not by any act (except
by a written instrument pursuant to Paragraph 22 hereof), delay,
indulgence, omission or otherwise, be deemed to have waived any right or
remedy hereunder or to have acquiesced in any Default or in any breach of
any of the terms and conditions hereof. No failure to exercise, nor any
delay in exercising, on the part of HRP, any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise
of any right, power or privilege hereunder shall preclude any other or
further exercise thereof or the exercise of any other right, power or
privilege. A waiver by HRP of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which HRP
would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and
are not exclusive of any rights or remedies provided by law.
SECTION 29. Waivers and Amendments; Successors and Assigns. None of the
terms or provisions of this Guaranty may be waived, amended, supplemented
or otherwise modified except by a written instrument executed by the
Guarantor and HRP, provided that any provision of this Guaranty may be
waived by HRP in a letter or agreement executed by HRP or by telecopy from
HRP. This Guaranty shall be binding upon the successors and assigns of the
Guarantor and shall inure to the benefit of HRP and its successors and
assigns.
SECTION 30. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW.
THE GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER
HAVE TO A JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF
OR BY REASON OF THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY AND THEREBY.
29
<PAGE>
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY
ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE
BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
SECTION 31. Notices. All notices under this Guaranty shall be in writing,
and shall be delivered by hand, by a nationally recognized commercial
overnight delivery service, by first class mail or by telecopy, delivered,
addressed or transmitted, if to HRP, at 400 Centre Street, Newton,
Massachusetts 02158, Attention: President (telecopy no. 617-332-2261), with
a copy to Sullivan & Worcester LLP, One Post Office Square, Boston,
Massachusetts 02109, Attention: Alexander A. Notopoulos, Esq. (telecopy no.
617-338-2880), and if to the Guarantor, at its address or telecopy number
set out below its signature in this Guaranty. Such notices shall be
effective: in the case of hand deliveries, when received; in the case of an
overnight delivery service, on the next business day after being placed in
the possession of such delivery service, with delivery charges prepaid; in
the case of mail, three days after deposit in the postal system, first
class postage prepaid; and in the case of telecopy notices, when electronic
indication of receipt is received. Either party may change its address and
telecopy number by written notice to the other delivered in accordance with
the provisions of this Section.
30
<PAGE>
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be
duly executed and delivered as of the date first above written.
VITALINK PHARMACY SERVICES, INC.
By:
--------------------------------
Title:
--------------------------
Address for Notices:
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60563
Attention: President
Telecopy: (630) 245-4800
31
<PAGE>
EXHIBIT E TO CONSENT
AND AMENDMENT
SCHEDULE 1.1 TO ACQUISITION AGREEMENT, AGREEMENT TO LEASE
AND MORTGAGE LOAN AGREEMENT
SCHEDULE OF TRANSACTION DOCUMENTS
---------------------------------
(1) The Acquisition Agreement, Agreement to Lease and Mortgage Loan
Agreement dated as of December 28, 1990 among HRP, HMI, GranCare, AMS and AMS
Properties;
(2) The Facility Leases dated as of December 28, 1990 or March 27, 1992
between HRP, as landlord, and AMS Properties, as tenant;
(3) A Master Lease Document General Terms and Conditions dated as of
December 28, 1990 between HRP, as landlord, and AMS Properties, as tenant;
(4) A Promissory Note dated as of October 1, 1994 by AMS Properties to HRP
in the original principal amount of $11,500,000;
(5) A Guaranty, dated as of December 28, 1990, from Old GranCare in favor
of HRP pursuant to which all obligations of AMS Properties are guaranteed; the
obligations and liabilities under such Guaranty having been assumed by New
GranCare pursuant to the Assumption Agreement;
(6) A Limited Guaranty from Vitalink in favor of HRP pursuant to which the
obligations of New GranCare, AMS Properties and GCIHCC are guaranteed as
provided therein;
(7) A Guaranty, Cross Default and Cross Collateralization Agreement, dated
as of June 30, 1992, from AMS Properties and GCIHCC in favor of HRP;
(8) Memoranda of Lease, each dated as of December 28, 1990 or March 27,
1992 recorded with the Registry of Deeds of the appropriate county with respect
to each Leased Property;
(9) Precautionary UCC Financing Statements by AMS Properties, showing AMS
Properties, as lessee, and HRP, as lessor, filed with the appropriate State and
County UCC filing office with respect to each Leased Property;
(10) Amended and Restated HRP Shares Pledge Agreement, dated as of June 30,
1992, between HRP and AMS Properties, pursuant to which AMS Properties has
pledged the HRP Shares to HRP to secure its obligations to HRP;
32
<PAGE>
(11) Amended and Restated Voting Trust Agreement, dated as of June 30, 1992
from AMS Properties to HRPT Advisors, Inc., as voting trustee;
(1) Voting Trust Certificate;
(2) Stock Power;
(12) The Mortgage and Security Agreements each dated as of March 31, 1995
by AMS Properties as mortgagor in favor of HRP as mortgagee with respect to the
Northwest and River Hills West Mortgaged Properties;
(13) A Security Agreement, dated as of December 28, 1990 from AMS
Properties to HRP, granting HRP a security interest in all now owned and
hereafter acquired tangible personal property and all accounts receivable,
contract rights and general intangibles of AMS Properties;
(14) A Collateral Assignment of Contracts and Permits, dated as of December
28, 1990 from AMS Properties to HRP, assigning to HRP all contracts and permits
of AMS Properties;
(15) UCC Financing Statements/Fixture Filings by AMS Properties, showing
AMS Properties, as debtor, and HRP, as secured party, filed with the appropriate
UCC filing office and registries of deeds to perfect the interests of HRP as a
secured creditor under the security instruments referred to above;
(16) An Amended and Restated Renovation Funding Agreement dated as of
January 13, 1992, between AMS Properties and HRP;
(17) A Memorandum of Option and Right of First Refusal dated as of March
30, 1995, between AMS Properties and HRP relating to the option to purchase the
Mortgaged Properties granted by AMS Properties to HRP (the "Option Agreement");
----------------
(18) Renovation Loan Agreement, dated as of March 28, 1992, by and between
AMS Properties and HRP relating to certain renovations to be made at the
Christopher East Health Care Center, Milwaukee, Wisconsin;
(19) Promissory Note, dated as of March 28, 1992, in the original principal
amount of $1,250,000, executed by AMS Properties and accepted by HRP;
(20) Security Agreement, dated as of March 28, 1992, made by AMS Properties
in favor of HRP;
(21) A Pledge Agreement dated as of December 28, 1990, as supplemented by a
Pledge Agreement Supplement dated as of December 29, 1993, from Old GranCare (as
successor to AMS) to HRP pursuant to which all shares of capital stock of AMS
Properties are pledged to HRP, together with certificates relating to the AMS
Properties shares and stock powers relating to such shares; the obligations and
liabilities under such Pledge Agreement and Pledge Agreement Supplement having
been assumed by New GranCare pursuant to the Assumption Agreement;
33
<PAGE>
(22) A Subordination Agreement dated as of December 28, 1990 among GranCare
as subordinate creditor, AMS Properties as debtor, and HRP as senior creditor;
the obligations and liabilities under such Subordination Agreement having been
assumed by New GranCare pursuant to the Assumption Agreement;
(23) A Subordination Agreement dated as of December 28, 1990 among HMI as
subordinate creditor, AMS Properties as debtor and HRP as senior creditor;
(24) A Subordination Agreement dated as of December 28, 1990 among AMS
Green Tree as subordinate creditor, AMS Properties as debtor and HRP as senior
creditor;
(25) A Subordination Agreement dated as of December 28, 1990 among Am-Cal
as subordinate creditor, AMS Properties as debtor and HRP as senior creditor;
(26) Assignment of Sublease Documents dated ___________, 1992 between AMS
Properties and HRP, re: Friendship Manor Sublease;
(27) Consent Letter dated __________, 1992 by HRP and consented to by
GranCare and AMS Properties re: Friendship Manor Sublease;
(28) Assignment of Leases and Rents dated __________, 1992 by AMS
Properties re: Friendship Manor Sublease;
(29) Consent Letter dated March 31, 1995 by HRP and consented to by
GranCare, AMS Properties and GCIHCC re: Subleases;
(30) Assignment of Sublease Documents dated March 31, 1995 between AMS
Properties and HRP;
(31) Assignment of Leases and Rents dated March 31, 1995 by AMS Properties
re: Subleases;
(32) The Consent and Amendment to Transaction Documents dated as of
December __, 1996 among AMS Properties, GCIHCC, Old GranCare and New GranCare;
(33) An Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 29, 1993 among Old GranCare, AMS Properties,
GCIHCC and HRP;
(34) A Rescission Agreement and Amendment to Transaction Documents dated as
of October 1, 1994 among Old GranCare, AMS Properties, GCIHCC and HRP; and
(35) The Assumption Agreement by New GranCare, Inc. in favor of HRP.
34
<PAGE>
EXHIBIT F TO CONSENT
AND AMENDMENT
SCHEDULE 1 TO MASTER LEASE AGREEMENT,
GENERAL TERMS AND CONDITIONS
SCHEDULE OF TRANSACTION DOCUMENTS
---------------------------------
(36) Letter Agreement dated April 25, 1992, from HRP to GranCare, accepted
by GranCare;
(37) Closing Escrow Agreement, dated May 29, 1992, among HRP, Samaritan,
Samaritan Arizona, Samaritan California, Samaritan South Dakota and GCI and the
Title Company, as escrow agent, delivering various closing documents and
providing information and instructions regarding delivery and recording of such
documents;
(38) Master Lease Document, dated as of June 30, 1992, between HRP as
Landlord and GCI as Tenant;
(39) Facility Leases, each dated as of June 30, 1992, between HRP as
Landlord and GCI as Tenant, for each Facility;
(40) Amended and Restated HRP Shares Pledge Agreement, dated as of June 30,
1992, between HRP and AMS, pursuant to which AMS has pledged the HRP Shares to
HRP to secure its obligations to HRP;
(41) Amended and Restated Voting Trust Agreement, dated as of June 30, 1992
from AMS to HRPT Advisors, Inc., as voting trustee;
(1) Voting Trust Certificate
(2) Stock Power;
(42) Guaranty, Cross Default and Cross Collateralization Agreement, dated
as of June 30, 1992, from AMS and GCI, in favor of HRP;
(43) A Guaranty, dated as of June 30, 1992 from GranCare in favor of HRP
pursuant to which all obligations of AMS are guaranteed; the obligations and
liabilities under such Guaranty having been assumed by New GranCare, Inc.
pursuant to the Assumption Agreement referenced below;
(44) A Limited Guaranty from Vitalink Pharmacy Systems, Inc. in favor of
HRP pursuant to which the obligations of New GranCare, Inc., AMS and GCI are
guaranteed as provided therein;
35
<PAGE>
(45) Security Agreement, dated as of June 30, 1992, from GCI to HRP,
granting HRP a security interest in all tangible and intangible personal
property and including all accounts receivable, contract rights and general
intangibles;
(46) Assignment of Contracts, Licenses and Permits, dated as of June 30,
1992, from GCI to HRP, assigning to HRP, all contracts, licences and permits
used in connection with the operation of the Facilities;
(47) Pledge Agreement, dated as of June 30, 1992 Date, from GranCare
pursuant to which all of the capital stock of GCI is pledged to HRP to secure
the obligations of GCI;
(1) Stock power relating to pledged shares;
(48) A Subordination Agreement dated as of June 30, 1992 among GranCare as
subordinate creditor, GCI as debtor, and HRP as senior creditor; the obligations
and liabilities under such Subordination Agreement having been assumed by New
GranCare pursuant to the Assumption Agreement;
(49) Subordination Agreement, dated as of June 30, 1992, among AMS as
subordinated creditor, GCI, as debtor and HRP as senior creditor, pursuant to
which all obligations of GCI to the subordinated creditor are subordinated;
(50) Representation Letter and Indemnification Agreement, dated June 30,
1992, from GranCare, AMS and GCI, with respect to, inter alia, the continued
----- ----
effectiveness of the representations and warranties made by GranCare and GCI in,
and the absence of any Defaults under, the Transaction Documents;
(51) Consent Letter dated March 31, 1995 by HRP and consented to by GCI,
GranCare and AMS re: HealthQuest Subleases;
(52) Assignment of Sublease Documents dated March 31, 1995 between GCI and
HRP re: HealthQuest Subleases;
(53) Assignment of Leases and Rents dated March 31, 1995 by GCI re:
HealthQuest Subleases;
(54) Amendment to Acquisition Agreement, Agreement to Lease and Mortgage
Loan Agreement dated as of December 29, 1993 among GranCare, AMS, GCI and HRP;
(55) Rescission Agreement and Amendment to Transaction Documents dated as
of October 1, 1994 among GranCare, AMS, GCI and HRP;
(56) Consent and Amendment to Transaction Documents dated as of December
__, 1996 among AMS, GCI, Old GranCare and New GranCare; and
36
<PAGE>
(57) Assumption Agreement by New GranCare, Inc. in favor of HRP (the
"Assumption Agreement").
- ---------------------
37
<PAGE>
EXHIBIT 10.30
LIMITED GUARANTY
----------------
LIMITED GUARANTY (this "Guaranty") dated as of February 12, 1997, made by
VITALINK PHARMACY SERVICES, INC., a Delaware corporation (the "Guarantor"), in
favor of HEALTH AND RETIREMENT PROPERTIES TRUST, a real estate investment trust
formed under the laws of the State of Maryland (together with its successors and
assigns, "HRP").
WITNESSETH
----------
WHEREAS, HRP, HostMasters, Inc., a California corporation ("HMI"),
GranCare, Inc. (f/k/a AMS Holding Co.), a California corporation ("GranCare") ,
American Medical Services, Inc., a Wisconsin corporation ("AMSI") and AMS
Properties, Inc., a Delaware corporation ("AMS") have entered into an
Acquisition Agreement, Agreement to Lease and Mortgage Loan Agreement dated as
of December 28, 1990, as amended (as so amended, the "Acquisition Agreement"),
under which, inter alia, (A) HRP has leased 18 nursing properties located in
Wisconsin, California, Colorado and Illinois to AMS pursuant to the several
Facility Leases (as amended, the "AMS Facility Leases"), each incorporating a
Master Lease Document General Terms and Conditions dated as of December 28, 1990
(as amended, the "AMS Master Lease") between HRP, as landlord, and AMS, as
tenant, and (B) HRP has made a mortgage loan to AMS in the original principal
amount of $11,500,000, the payment of which is currently evidenced by a
Promissory Note dated as of October 1, 1994 by AMS to HRP (the "AMS Note") and
is secured, inter alia by Mortgage and Security Agreements dated as of March 31,
1995 (collectively, the "AMS Mortgages") by AMS in favor of HRP encumbering the
two nursing facilities in Wisconsin;
WHEREAS, the terms defined in the Acquisition Agreement are used herein as
therein defined, unless otherwise defined herein;
WHEREAS, (a) in May 1991, the AMSHC Exchange (as defined in the Acquisition
Agreement) took place, whereby GranCare, which previously had been a wholly-
owned subsidiary of HMI, became the sole stockholder of HMI and AMSI; and (b) in
December 1993, AMSI, which previously had owned all the outstanding common stock
of AMS, and AMS Rehab, Inc., a Delaware corporation and a wholly-owned
subsidiary of GranCare, each merged into AMS, with AMS as the surviving
corporation;
WHEREAS, HRP has leased 7 nursing and/or residential living properties
located in Arizona, California and South Dakota to GCI Health Care Centers,
Inc., a Delaware corporation ("GCI") pursuant to the several Facility Leases (as
amended, the "GCI Facility Leases"), each incorporating a Master Lease Document
General Terms and Conditions dated as of June 30, 1992 (as amended, the "GCI
Master Lease") between HRP, as landlord, and GCI, as tenant;
WHEREAS, GranCare, which holds beneficially and of record all of the
outstanding capital stock of AMS and GCI, proposes to transfer all of its
skilled nursing, home health care, assisted living and contract management
business (including, without limitation, such capital
<PAGE>
stock), and related assets, to New GranCare, Inc., a Delaware corporation and a
wholly-owned subsidiary of GranCare ("New GranCare"), with GranCare thereafter
distributing New GranCare common stock to GranCare shareholders (collectively,
the "Distribution");
WHEREAS, immediately following the Distribution, GranCare shall merge with
and into the Guarantor, with the Guarantor as the surviving corporation (the
"Merger");
WHEREAS, GranCare has requested that HRP agree to (a) waive the provisions
of Section 9.15A of the Acquisition Agreement to permit the Distribution and
Merger and (b) release the Guarantor and its subsidiaries (including any
remaining Subsidiary of GranCare that becomes a subsidiary of the Guarantor as a
result of the Merger) and their respective successors and assigns from and
against any and all claims, liabilities and obligations, as successor by merger
to GranCare, under (A) the Acquisition Agreement, (B) the Representation Letter
and Indemnification Agreement dated June 30, 1992 by GCI, AMS and GranCare to
HRP (the "GCI Indemnity Agreement"), (C) the Guaranty, dated as of December 28,
1990, as amended, by GranCare in favor of HRP in respect of the obligations of
AMS (the "AMS Guaranty"), (D) the Guaranty dated as of June 30, 1992, as
amended, by GranCare in favor of HRP in respect of the obligations of GCI (the
"GCI Guaranty"), (E) the Pledge Agreement, dated as of December 28, 1990, as
amended, by GranCare in favor of HRP (the "AMS Pledge Agreement"), (F) the
Pledge Agreement, dated as of June 30, 1992 as amended, by GranCare in favor of
HRP (the "GCI Pledge Agreement"), (G) the Subordination Agreement, dated as of
December 28, 1990, as amended, among GranCare, as subordinate creditor, AMS, as
debtor and HRP, as senior creditor (the "AMS Subordination Agreement"), (H) the
Subordination Agreement, dated as of June 30, 1992, as amended, among GranCare,
as subordinate creditor, GCI, as debtor and HRP, as senior creditor (the "GCI
Subordination Agreement"), and (I) any other agreements, instruments or
understandings, written or oral, of GranCare with HRP or any of its affiliates
relating to or arising out of the transactions contemplated by the agreements
described in clauses (A) through (H) above; and HRP is, subject to the terms and
provisions of the Consent and Amendment to Transaction Documents dated as of
December 31, 1996 among GranCare, New GranCare, AMS, GCI and HRP (the
"Amendment"), willing to so agree, subject to, inter alia, the execution and
delivery of this Guaranty by the Guarantor;
NOW, THEREFORE, in consideration of the premises contained herein and to
induce HRP to consent to the Distribution and Merger, and for other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the Guarantor hereby agrees with HRP as follows:
1. Defined Terms. Unless otherwise defined herein, terms which are
defined in the AMS Master Lease and used herein are so used as so defined. In
addition, the following terms shall have the meanings set forth below:
"Applicable Law" shall mean shall mean any law of any governmental
authority, whether domestic or foreign, including without limitation all
federal and state laws, to which the Person in question is subject or by
which it or any of its property is bound, and including without limitation
any: (a) administrative, executive, judicial, legislative or other action,
code, consent decree, constitution, decree, directive, enactment, finding,
guideline,
2
<PAGE>
injunction, interpretation, judgment, law, order, ordinance, policy
statement, proclamation, promulgation, regulation, requirement, rule, rule
of law, rule of public policy, settlement agreement, statute, or writ, of
any governmental authority, domestic or foreign, whether or not having the
force of law; (b) common law or other legal or quasi-legal precedent; or
(c) arbitrator's, mediator's or referee's award, decision, finding or
recommendation, or, in any case, any particular section, part or provision
thereof.
"Assumption Agreement" shall mean the Assumption Agreement dated as of
even date herewith by New GranCare in favor of HRP, as the same may be
amended, amended and restated, supplemented or modified from time to time,
pursuant to which New GranCare has agreed to assume the obligations of
GranCare under, inter alia, the Acquisition Agreement, the GCI Indemnity
Agreement, the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement.
the GCI Pledge Agreement, the AMS Subordination Agreement and the GCI
Subordination Agreement.
"Bankruptcy Code" means Title 11 of the United States Code.
"Consolidated Net Worth" of any Person shall mean, at any date as of
which the amount thereof shall be determined, the consolidated total assets
of such Person and its Subsidiaries, minus all obligations that should, in
accordance with GAAP, be classified as liabilities on the consolidated
balance sheet of such Person and its Subsidiaries, including in any event
all Indebtedness.
"Contingent Obligation" shall mean, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person (i)
with respect to any Indebtedness, lease, dividend or other obligation of
another if the primary purpose or intent thereof by the Person incurring
the Contingent Obligation is to provide assurance to the obligee of such
obligation of another that such obligation of another will be paid or
discharged, or that any agreements relating thereto will be complied with,
or that the holders of such obligation will be protected (in whole or in
part) against loss in respect thereof, or (ii) with respect to any letter
of credit issued for the account of that Person or as to which that Person
is otherwise liable for reimbursement of drawings. Contingent Obligations
shall include, without limitation (a) the direct or indirect guaranty,
endorsement (otherwise than for collection or deposit in the ordinary
course of business), co-making, discounting with recourse or sale with
recourse by such Person of the obligation of another, (b) the obligation to
make take-or-pay or similar payments if required regardless of non-
performance by any other party or parties to an agreement and (c) any
liability of such Person for the obligation of another through any
agreement (contingent or otherwise) (X) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide
funds for the payment or discharge of such obligation (whether in the form
of loans, advances, stock purchases, capital contributions or otherwise) or
(Y) to maintain the solvency or any balance sheet item, level of income or
financial condition of another if, in the case of any agreement described
under subclauses (X) or (Y) of this sentence, the primary purpose or intent
thereof is as described in the preceding sentence. The amount of any
Contingent Obligation shall be
3
<PAGE>
equal to the amount of the obligation so guaranteed or otherwise supported
or, if less, the amount to which such Contingent Obligation is specifically
limited.
"Default Amount" shall mean $15,000,000 or such lesser amount to which
the Guarantor's maximum liability hereunder has been reduced pursuant to
the second paragraph of Section 2 hereof.
"Default Rate" shall mean 18% per annum.
"GAAP" shall mean generally accepted accounting principles,
consistently applied.
"GranCare Companies" shall mean, collectively, New GranCare, AMS, GCI
and all Subsidiaries of any thereof (after giving effect to the Merger and
the Distribution), whether now existing or hereafter created, and any
successors of any thereof (individually, a "GranCare Company").
"GranCare Default" shall mean any GranCare Event of Default and any
event or condition which with the passage of time or giving of notice, or
both, would become a GranCare Event of Default.
"GranCare Documents" shall mean, collectively,
(1) the Acquisition Agreement, the GCI Indemnity Agreement, the AMS
Leases, the AMS Master Lease, the AMS Note, the GCI Leases, the
GCI Master Lease, all Security Documents (as such term is defined
in the Acquisition Agreement, and including, without limitation,
the AMS Guaranty, the GCI Guaranty, the AMS Pledge Agreement and
the GCI Pledge Agreement, in each case as modified by the
Assumption Agreement) and the Assumption Agreement, in each case
as from time to time in effect; and
(2) any other present or future undertaking, agreement or instrument
of any kind whatsoever from time to time entered into by one or
more GranCare Companies with HRP (and any applicable third
parties), or to or for the benefit of HRP (and any applicable
third parties), each as from time to time in effect (and, in each
case, whether or not related to any transaction contemplated by
any documents, instruments or agreements listed in subparagraph
(i) above).
"GranCare Event of Default" shall mean an "Event of Default" under and
as defined in any GranCare Document.
"Guarantor Default" shall mean any Guarantor Event of Default and any
event or condition which with the passage of time or giving of notice, or
both, would become a Guarantor Event of Default.
4
<PAGE>
"Guarantor Event of Default" shall mean an Event of Default under and
as defined in Section 15 hereof.
"Indebtedness" of any Person at any date shall mean, (a) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services (excluding current trade liabilities incurred
in the ordinary course of business and payable in accordance with customary
practices, but including any class of capital stock of such Person with
fixed payment obligations or with redemption at the option of the holder),
or which is evidenced by a note, bond, debenture or similar instrument, (b)
all obligations of such Person under leases that should be treated as
capitalized leases in accordance with GAAP, (c) all obligations of such
Person in respect of acceptances issued or created for the account of such
Person, and all reimbursement obligations (contingent or otherwise) of such
Person in respect of any letters of credit issued for the account of such
Person, and (d) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Lien" means any lien, mortgage, pledge, assignment, security
interest, charge or encumbrance of any kind (including any conditional sale
or other title retention agreement, any lease in the nature thereof, and
any agreement to give any security interest) and any option, trust or other
preferential arrangement having the practical effect of any of the
foregoing.
"Material Adverse Effect" means a material adverse effect on (a) the
business, operations, property, condition (financial or otherwise) or
prospects of the Guarantor, or of the Guarantor and its Subsidiaries taken
as a whole, (b) the ability of the Guarantor to perform its obligations
under this Guaranty, or (c) the validity or enforceability of this
Guaranty, or the rights of HRP hereunder.
"Obligations" shall mean the payment and performance of each and every
obligation and liability of any GranCare Company to HRP under any GranCare
Document, whether now existing or hereafter arising or created, joint or
several, direct or indirect, absolute or contingent, due or to become due,
matured or unmatured, liquidated or unliquidated, arising by contract,
operation of law or otherwise, and including, without limitation, payment
of the principal, premium or prepayment fee and interest (including,
without limitation, Minimum Interest and Additional Interest, as such terms
are defined in the AMS Note) under any promissory note payable to HRP, and
the payment of rent under any lease with HRP as landlord (including,
without limitation, any Minimum Rent, Additional Rent and Additional
Charges, as such terms are defined in the AMS Leases or the GCI Leases).
"Person" shall mean any individual, corporation, firm, unincorporated
organization, association, partnership, trust, business trust, joint stock
company, joint venture or other organization, entity or business, or any
governmental organization or authority.
5
<PAGE>
"Subsidiary" shall mean any Person of which any specified Person shall
at the time, directly or indirectly through one or more of its
Subsidiaries, (a) own at least 50% of the outstanding capital stock (or
other shares of beneficial interest) entitled to vote generally, (b) hold
at least 50% of the partnership, joint venture or similar interests or (c)
be a general partner or joint venturer.
2. Guaranty. The Guarantor hereby unconditionally and irrevocably
guarantees to HRP the prompt and complete payment and performance by the
GranCare Companies (and each of them), when due (whether at stated maturity, by
acceleration or otherwise), of the Obligations. The Guarantor further agrees to
pay any and all expenses (including, without limitation, all reasonable fees and
disbursements of counsel to HRP) which may be paid or incurred by HRP in
enforcing, or obtaining advice of counsel in respect of, any of its rights under
this Guaranty. This Guaranty is a guaranty of payment and not of collectibility
and is absolute and in no way conditional or contingent. The Guarantor's
liability hereunder is direct and unconditional and may be enforced after
nonpayment or nonperformance by any GranCare Company of any Obligation without
requiring HRP to resort to any other Person (including without limitation such
GranCare Company) or any other right, remedy or collateral. This Guaranty shall
remain in full force and effect until the Obligations are paid in full.
Notwithstanding the aggregate amount of the Obligations at any time or from
time to time payable or to be payable by the GranCare Companies to HRP, the
liability of the Guarantor to HRP under this Section 2 shall not exceed the
principal sum of Fifteen Million Dollars ($15,000,000) in the aggregate less
amounts paid by the Guarantor hereunder in respect of such principal sum;
provided that whenever, at any time, or from time to time, Guarantor shall make
any payment to HRP on account of its liability hereunder, it will notify HRP in
writing that such payment is made under this Guaranty for such purpose. The
Guarantor agrees that the Obligations may at any time and from time to time
exceed the amount of the liability of the Guarantor hereunder without impairing
this Guaranty or affecting the rights and remedies of HRP hereunder. No payment
or payments made by any GranCare Company or any other Person or received or
collected by HRP from any GranCare Company or any other Person by virtue of any
action or proceeding or any set-off or appropriation or application, at any time
or from time to time, in reduction of or in payment of the Obligations shall be
deemed to modify, reduce, release or otherwise affect the liability of the
Guarantor hereunder which shall, notwithstanding any such payment or payments,
remain liable for the amount of the Obligations until the Obligations are paid
in full (but subject as provided in this paragraph).
3. Costs and Expenses of Collection. The Guarantor agrees, as principal
obligor and not as a guarantor only, to pay to HRP forthwith upon demand, in
immediately available funds, all costs and expenses (including, without
limitation, all court costs and all fees and disbursements of counsel to HRP)
incurred or expended by HRP in connection with the enforcement of this Guaranty,
together with interest on amounts recoverable under this Guaranty from the time
such amounts become due until payment at the Default Rate. The Guarantor's
covenants and agreements set forth in this Section 3 shall survive the
termination of this Guaranty.
4. Right of Setoff. Regardless of the adequacy of any collateral or other
means of obtaining repayment of the Obligations, HRP is hereby authorized,
without notice to the
6
<PAGE>
Guarantor or compliance with any other condition precedent now or hereafter
imposed by Applicable Law (all of which are hereby expressly waived to the
extent permitted by Applicable Law) and to the fullest extent permitted by
Applicable Law, to set off and apply the Deposit Balance (as hereinafter
defined), interest thereon, and any other monies, securities, deposits or other
property now or hereafter delivered to HRP as collateral pursuant hereto, and
all proceeds of any thereof, against the obligations of the Guarantor under this
Guaranty, whether or not HRP shall have made any demand under this Guaranty, at
any time and from time to time after the occurrence of a Guarantor Event of
Default, in such manner as HRP in its sole discretion may determine, and the
Guarantor hereby grants HRP a continuing security interest in such Deposit
Balance, interest, monies, securities, deposits and property as collateral for
the payment and performance of such obligations.
5. Subrogation and Contribution. Until the Obligations shall have been
paid and performed in full, the Guarantor irrevocably and unconditionally waives
any and all rights to which it may be entitled, by operation of law or
otherwise, to be subrogated, with respect to any payment made by the Guarantor
hereunder, to the rights of HRP against any GranCare Company, or otherwise to be
reimbursed, indemnified or exonerated by any GranCare Company in respect thereof
or to receive any payment, in the nature of contribution or for any other
reason, from any other guarantor of the Obligations with respect to any payment
made by the Guarantor hereunder (provided that the foregoing shall not prevent
the Guarantor from drawing (and retaining any amounts so drawn) under any letter
of credit issued by a bank for the account of any Person). Until the Obligations
shall have been paid and performed in full, the Guarantor waives any defense it
may have based upon any election of remedies by HRP which impairs the
Guarantor's subrogation rights or the Guarantor's rights to proceed against any
GranCare Company for reimbursement (including without limitation any loss of
rights the Guarantor may suffer by reason of any rights, powers or remedies of
such GranCare Company in connection with any anti-deficiency laws or any other
laws limiting, qualifying or discharging any indebtedness to HRP). Until the
Obligations shall have been paid, performed and satisfied in full, the Guarantor
further waives any right to enforce any remedy which HRP now has or may in the
future have against any GranCare Company, any other guarantor or any other
Person and any benefit of, or any right to participate in, any security
whatsoever now or in the future held by HRP.
6. Effect of Bankruptcy Stay. If acceleration of the time for payment or
performance of any of the Obligations is stayed upon the insolvency, bankruptcy
or reorganization of any GranCare Company or any other Person or otherwise, all
such amounts otherwise subject to acceleration shall nonetheless be payable by
the Guarantor under this Guaranty forthwith upon demand.
7. Receipt of GranCare Documents, etc. The Guarantor confirms, represents
and warrants to HRP that (i) it has received true and complete copies of all
existing GranCare Documents from the GranCare Companies, has read the contents
thereof and reviewed the same with legal counsel of its choice; (ii) no
representations or agreements of any kind have been made to the Guarantor which
would limit or qualify in any way the terms of this Guaranty; (iii) HRP has made
no representation to the Guarantor as to the creditworthiness of any GranCare
Company; and (iv) the Guarantor has established adequate means of obtaining from
each GranCare Company on a continuing basis information regarding such GranCare
Company's financial
7
<PAGE>
condition. The Guarantor agrees to keep adequately informed from such means of
any facts, events, or circumstances which might in any way affect the
Guarantor's risks under this Guaranty, and the Guarantor further agrees that HRP
shall have no obligation to disclose to the Guarantor any information or
documents acquired by HRP in the course of its relationship with the GranCare
Companies.
8. Amendments, etc. with Respect to the Obligations. The obligations of
the Guarantor under this Guaranty shall remain in full force and effect without
regard to, and shall not be released, altered, exhausted, discharged or in any
way affected by any circumstance or condition (whether or not any GranCare
Company shall have any knowledge or notice thereof), including without
limitation (a) any amendment or modification of or supplement to any GranCare
Document, or any obligation, duty or agreement of the GranCare Companies or any
other Person thereunder or in respect thereof; (b) any assignment or transfer in
whole or in part of any of the Obligations; any furnishing, acceptance, release,
nonperfection or invalidity of any direct or indirect security or guaranty for
any of the Obligations; (c) any waiver, consent, extension, renewal, indulgence,
settlement, compromise or other action or inaction under or in respect of any
GranCare Document, or any exercise or nonexercise of any right, remedy, power or
privilege under or in respect of any such instrument (whether by operation of
law or otherwise); (d) any bankruptcy, insolvency, reorganization, arrangement,
readjustment, composition, liquidation or similar proceeding with respect to any
GranCare Company or any other Person or any of their respective properties or
creditors or any resulting release or discharge of any Obligation (including
without limitation any rejection of any lease pursuant to Section 365 of the
Federal Bankruptcy Code); (e) any new or additional financing arrangements
entered into by any GranCare Company or by any other Person on behalf of or for
the benefit of any GranCare Company; (f) the merger or consolidation of any
GranCare Company with or into any other Person or of any other Person with or
into any GranCare Company; (g) the voluntary or involuntary sale or other
disposition of all or substantially all the assets of any GranCare Company or
any other Person; (h) the voluntary or involuntary liquidation, dissolution or
termination of any GranCare Company or any other Person; (i) any invalidity or
unenforceability, in whole or in part, of any term hereof or of any GranCare
Document, or any obligation, duty or agreement of any GranCare Company or any
other Person thereunder or in respect thereof; (j) any provision of any
applicable law or regulation purporting to prohibit the payment or performance
by any GranCare Company or any other Person of any Obligation; (k) any failure
on the part of any GranCare Company or any other Person for any reason to
perform or comply with any term of any GranCare Document or any other agreement;
or (l) any other act, omission or occurrence whatsoever, whether similar or
dissimilar to the foregoing. The Guarantor authorizes each GranCare Company,
each other guarantor in respect of the Obligations and HRP at any time in its
discretion, as the case may be, to alter any of the terms of any of the
Obligations.
9. Guarantor as Principal. If for any reason the GranCare Companies, or
any of them, or any other Person is under no legal obligation to discharge any
Obligation, or if any other moneys included in the Obligations have become
unrecoverable from the GranCare Companies, or any of them, or any other Person
by operation of law or for any other reason, including, without limitation, the
invalidity or irregularity in whole or in part of any Obligation or of any
GranCare Document, the legal disability of any GranCare Company or any other
obligor in respect of Obligations, any discharge of or limitation on the
liability of any GranCare Company or any other
8
<PAGE>
Person or any limitation on the method or terms of payment under any Obligation,
or of any GranCare Document, which may now or hereafter be caused or imposed in
any manner whatsoever (whether consensual or arising by operation of law or
otherwise), this Guaranty shall nevertheless remain in full force and effect and
shall be binding upon the Guarantor to the same extent as if the Guarantor at
all times had been the principal obligor on all Obligations (subject as provided
in Section 2 hereof).
10. Waiver of Demand, Notice, Etc. The Guarantor hereby waives, to the
extent not prohibited by applicable law, all presentments, demands for
performance, notice of nonperformance, protests, notices of protests and notices
of dishonor in connection with the Obligations or any GranCare Document,
including but not limited to (a) notice of the existence, creation or incurring
of any new or additional obligation or of any action or failure to act on the
part of any GranCare Company, HRP, any endorser or creditor of any GranCare
Company or any other Person; (b) any notice of any indulgence, extensions or
renewals granted to any obligor with respect to the Obligations; (c) any
requirement of diligence or promptness in the enforcement of rights under any
GranCare Document, or any other agreement or instrument directly or indirectly
relating thereto or to the Obligations; (d) any enforcement of any present or
future agreement or instrument relating directly or indirectly thereto or to the
Obligations; (e) notice of any of the matters referred to in Section 9 above;
(f) any defense of any kind which the Guarantor may now have with respect to his
liability under this Guaranty; (g) any right to require HRP, as a condition of
enforcement of this Guaranty, to proceed against any GranCare Company or any
other Person or to proceed against or exhaust any security held by HRP at any
time or to pursue any other right or remedy in HRP's power before proceeding
against the Guarantor; (h) any defense that may arise by reason of the
incapacity, lack of authority, death or disability of any other Person or
Persons or the failure of HRP to file or enforce a claim against the estate (in
administration, bankruptcy, or any other proceeding) of any other Person or
Persons; (i) any defense based upon an election of remedies by HRP; (j) any
defense arising by reason of any "one action" or "anti-deficiency" law or any
other law which may prevent HRP from bringing any action, including a claim for
deficiency, against the Guarantor, before or after HRP's commencement of
completion of any foreclosure action, either judicially or by exercise of a
power of sale; (k) any defense based upon any lack of diligence by HRP in the
collection of any Obligation; (l) any duty on the part of HRP to disclose to the
Guarantor any facts HRP may now or hereafter know about any GranCare Company or
any other obligor in respect of Obligations; (m) any defense arising because of
an election made by HRP under Section 1111(b)(2) of the Federal Bankruptcy Code;
(n) any defense based on any borrowing or grant of a security interest under
Section 364 of the Federal Bankruptcy Code; (o) and any defense based upon or
arising out of any defense which any GranCare Company or any other Person may
have to the payment or performance of the Obligations (including but not limited
to failure of consideration, breach of warranty, fraud, payment, accord and
satisfaction, strict foreclosure, statute of frauds, bankruptcy, infancy,
statute of limitations, lender liability and usury). Guarantor acknowledges and
agrees that each of the waivers set forth herein on the part of the Guarantor is
made with Guarantor's full knowledge of the significance and consequences
thereof and that, under the circumstances, the waivers are reasonable. If any
such waiver is determined to be contrary to Applicable Law such waiver shall be
effective only to the extent not prohibited by such Applicable Law.
9
<PAGE>
11. Reinstatement. This Guaranty shall continue to be effective, or be
reinstated, as the case may be, if at any time payment, or any part thereof, of
any of the Obligations or the payment of the Deposit Amount (as hereinafter
defined) is rescinded or must otherwise be restored or returned by HRP upon the
insolvency, bankruptcy, dissolution, liquidation or reorganization of any
GranCare Company or upon or as a result of the appointment of a receiver,
intervenor or conservator of, or trustee or similar officer for, any GranCare
Company or any substantial part of its property, or otherwise, all as though
such payments had not been made.
12. Payments. The Guarantor hereby agrees that the Obligations, and all
amounts payable hereunder, will be paid to HRP without set-off or counterclaim
in U.S. Dollars at the office of HRP located at 400 Centre Street, Newton,
Massachusetts 02158, or to such other location as HRP shall notify the
Guarantor.
13. Representations and Warranties. The Guarantor represents and warrants
that:
(1) Corporate Existence. The Guarantor is a corporation duly
incorporated and validly existing under the laws of the jurisdiction of its
incorporation, and is duly licensed or qualified as a foreign corporation
in all states wherein the nature of its property owned or business
transacted by it makes such licensing or qualification necessary, except
where the failure to be licensed or to so qualify could not have a Material
Adverse Effect.
(2) No Violation. The execution, delivery and performance of this
Guaranty will not contravene any provision of law, statute, rule or
regulation to which the Guarantor or any of its Subsidiaries is subject or
any judgment, decree, franchise, order or permit applicable to the
Guarantor or any of its Subsidiaries, or conflict or be inconsistent with
or result in any breach of, any of the terms, covenants, conditions or
provisions of, or constitute a default under, or result in the creation or
imposition of (or the obligation to create or impose) any Lien upon any of
the property or assets of the Guarantor or any of its Subsidiaries pursuant
to the terms of any agreement or instrument to which the Guarantor or any
of its Subsidiaries is party, or violate any provision of the respective
corporate charters or bylaws of the Guarantor or any of its Subsidiaries.
(3) Corporate Authority and Power. The execution, delivery and
performance of this Guaranty is within the corporate powers of the
Guarantor and has been duly authorized by all necessary corporate action.
(4) Enforceability. This Guaranty has been duly executed and
delivered by the Guarantor, and this Guaranty constitutes the valid and
binding obligation of the Guarantor enforceable against the Guarantor in
accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or similar
laws affecting the enforcement of creditors' rights generally and except as
enforceability may be subject to general principles of equity, whether such
principles are applied in a court of equity or at law.
(5) Governmental Approvals. No order, permission, consent, approval,
license, authorization, registration or validation of, or filing with, or
exemption by, any
10
<PAGE>
governmental authority is required to authorize, or is required in
connection with, the execution, delivery and performance of this Guaranty,
or the taking of any action contemplated hereby or thereby.
(6) Financial Statements. The financial statements of the Guarantor
contained in the Guarantor's Registration Statement on Form S-4 filed in
connection with the Merger, fairly present the consolidated financial
condition of the Guarantor and its Subsidiaries as of their date of
presentation, and the consolidated results of their operations and their
consolidated cash flows for the respective fiscal period then ended. The
Financial Statements (including in each case the related schedules and
notes) (i) have been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as disclosed therein), (ii) are
true, complete and correct, and (iii) do not omit any material fact
necessary to make them not misleading.
(7) No Adverse Change. Other than as set forth in or contemplated by
the Guarantor's Registration Statement on Form S-4 filed in connection with
the Merger, since May 31, 1996, there has been no change in the business
operations, management or properties, or in the condition, financial or
other, of the Guarantor and its Subsidiaries taken as a whole that has had
or could have a Material Adverse Effect.
(8) Litigation. The Guarantor has no notice or knowledge of any
action, suit or proceeding pending or threatened against or affecting it at
law or in equity or before or by any governmental department, court,
commission, board, bureau, agency or instrumentality, domestic or foreign,
or before any arbitrator of any kind that would, to the best of its
knowledge, information or belief, materially and adversely affect its
ability to perform its obligations under this Guaranty.
(9) No Restrictions. Neither the Guarantor nor any of its
Subsidiaries has entered into any agreement or arrangement, written or
oral, direct or indirect, with any GranCare Company that either now or in
the future would have the effect of restricting the ability of any GranCare
Company, or would conflict with the right of any GranCare Company, to (a)
enter into any new or additional mortgage or lease financing, or any other
transaction, with HRP (including, without limitation, any transaction
contemplated by Section 9.27 of the Acquisition Agreement), (b) extend or
renew the term of any mortgage or lease financing with HRP, (c) exercise
any option to purchase property from HRP or (d) take any other action
permitted or required to be taken by any GranCare Company pursuant to the
terms of any GranCare Document.
14. Covenants. The Guarantor hereby covenants and agrees with HRP that,
from and after the date of this Guaranty until the Obligations are paid in full
or until the Release Date (as defined in Section 16 hereof):
(1) the Guarantor shall not enter into any transaction of merger or
consolidation, or liquidate, wind-up or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, lease, sub-lease, transfer or
otherwise dispose of in one transaction or a series of transactions, all or
substantially all of its business, property or fixed assets, whether now owned
or hereafter
11
<PAGE>
acquired, except that the Guarantor may merge or consolidate with any Person, or
convey, transfer or lease substantially all of its assets so long as
(1) no condition or event shall exist, either before or immediately
after giving effect to such merger or consolidation, or such conveyance,
transfer or lease, that constitutes a Guarantor Default;
(2) the successor formed by such consolidation or the survivor of such
merger or the Person that acquires by conveyance, transfer or lease
substantially all of the assets of the Guarantor, as the case may be, shall
be a corporation organized and existing under the laws of the United States
or any State thereof (including the District of Columbia), and, if the
Guarantor is not such corporation, (i) such corporation shall have executed
and delivered to HRP its assumption of the due and punctual performance and
observance of each covenant and condition of this Guaranty to the same
extent and with the same effect as though such corporation was a party
hereto and was named and defined as the "Guarantor" herein and (ii) shall
have caused to be delivered to HRP an opinion of nationally recognized
independent counsel, or other independent counsel reasonably satisfactory
to HRP, to the effect that all agreements or instruments effecting such
assumption are enforceable in accordance with their terms and comply with
the terms hereof; and
(1) if the survivor of any such merger is the Guarantor, the
Consolidated Net Worth of the Guarantor giving effect to such
merger shall not be less than $100,000,000; or
(2) if the successor formed by such consolidation or the survivor of
such merger, if other than the Guarantor, or the Person that
acquires by conveyance, transfer or lease substantially all of
the assets of the Guarantor as an entirety, as the case may be,
giving effect to such consolidation or merger, or such
conveyance, transfer or lease, has either (x) a Consolidated Net
Worth of not less than $100,000,000 or (y) (A) paid HRP an amount
in immediately available funds equal to the Default Amount, free
and clear of claims of third parties, to be held by HRP as cash
collateral for the payment of the Guarantor's obligations
hereunder (such amounts to be applied by HRP to the payment and
performance of the obligations of the Guarantor (and its
successors) hereunder as and when the same become due and payable
in accordance with the provisions of this Guaranty) and (B)
executed and delivered a cash collateral pledge agreement in
favor of HRP in respect of such cash collateral (together with
UCC-1 financing statements or similar instruments if requested by
HRP, and in form satisfactory to HRP), which cash collateral
pledge agreement shall be in form and substance satisfactory to
HRP in its sole discretion.
(2) The Guarantor shall not, and shall not permit any of its Subsidiaries
to, enter into any agreement or arrangement, written or oral, direct or
indirect, with any GranCare Company that would have the effect of restricting
the ability of any GranCare Company, or would conflict
12
<PAGE>
with the right of any GranCare Company, to (a) enter into any new or additional
mortgage or lease financing, or any other transaction, with HRP (including,
without limitation, any transaction contemplated by Section 9.27 of the
Acquisition Agreement), (b) extend or renew the term of any mortgage or lease
financing with HRP, (c) exercise any option to purchase property from HRP or (d)
take any other action permitted or required to be taken by any GranCare Company
pursuant to the terms of any GranCare Document.
15. Guarantor Events of Default. If one or more of the following events
(a "Guarantor Event of Default") shall have occurred:
(1) the Guarantor shall fail to make punctual payment of any amount
payable hereunder as the same shall become due and payable; or
(2) any representation or warranty of the Guarantor contained in this
Guaranty, or any statement or certificate furnished pursuant to any
provision of this Guaranty or the Amendment, shall have been false,
incorrect or misleading in any material respect when made or so certified
to; or
(3) the Guarantor shall breach any of the provisions of, or fail duly
to observe or perform any covenant, agreement or provision contained in,
this Guaranty; or
(4) any obligation of the Guarantor in respect of any Indebtedness or
any Contingent Obligation with an aggregate amount of principal outstanding
(whether or not due) exceeding $10,000,000 (but excluding, in any event,
the obligations of the Guarantor hereunder) shall be declared to be or
shall become due and payable prior to the stated maturity thereof, or such
Indebtedness or Contingent Obligation shall not be paid as and when the
same becomes due and payable, or there shall occur and be continuing any
default under any instrument, agreement or evidence of indebtedness
relating to any such Indebtedness the effect of which is to permit the
holder or holders of such instrument, agreement or evidence of
indebtedness, or a trustee, agent or other representative on behalf of such
holder or holders, to cause such Indebtedness to become due prior to its
stated maturity; or
(5) the Guarantor shall apply for or consent to the appointment of, or
the taking of possession by, a receiver, custodian, trustee or liquidator
of itself or of all or a substantial part of its property, make a general
assignment for the benefit of its creditors, commence a voluntary case
under the Bankruptcy Code, file a petition seeking to take advantage of any
other law relating to bankruptcy, insolvency, reorganization, winding-up,
or composition or readjustment of debts, fail to controvert in a timely and
appropriate manner, or acquiesce in writing to, any petition filed against
it in an involuntary case under the Bankruptcy Code, or take any corporate
action for the purpose of effecting any of the foregoing; or
(6) a proceeding or case shall be commenced, without the application
or consent of the Guarantor thereof in any court of competent jurisdiction,
seeking its liquidation, reorganization, dissolution or winding-up, or the
composition or readjustment
13
<PAGE>
of its debts, the appointment of a trustee, receiver, custodian, liquidator
or the like of the Guarantor or of all or any substantial part of its
assets, or similar relief in respect of the Guarantor under any law
relating to bankruptcy, insolvency, reorganization, winding-up, or
composition or adjustment of debts, and such proceeding or case shall
continue undismissed, or an order, judgment or decree approving or ordering
any of the foregoing shall be entered and continue unstayed and in effect,
for a period of 60 days; or an order for relief against the Guarantor shall
be entered in an involuntary case under the Bankruptcy Code; or
(7) A judgment or judgments for the payment of money in excess of
$[10,000,000] (net of insurance proceeds) in the aggregate shall be
rendered against the Guarantor and any such judgment or judgments shall not
have been vacated, discharged, stayed or bonded pending appeal within
thirty (30) days from the entry thereof;
THEN, notwithstanding that no GranCare Event of Default may then have occurred
and be continuing, (a) in the event of a Guarantor Event of Default described in
paragraph (E) or (F) above, there shall become due and payable to HRP, and the
Guarantor shall immediately pay HRP, without notice or demand of any kind
whatsoever, an amount in immediately available funds equal to the Default
Amount, and (b) in the event of any other Guarantor Event of Default, upon
notice from HRP specifying such Guarantor Event of Default, there shall become
due and payable to HRP, and the Guarantor shall immediately pay HRP, an amount
in immediately available funds equal to Default Amount. The amounts so paid to
HRP shall be held as collateral for the payment of the Guarantor's obligations
hereunder. Such amounts shall be applied by HRP to the payment and performance
of the obligations of the Guarantor hereunder as and when the same become due
and payable in accordance with the provisions of this Guaranty.
16. Payment of Default Amount. Notwithstanding anything herein to the
contrary, upon the Guarantor's (i) payment to HRP of an amount in immediately
available funds equal to the Default Amount, free and clear of claims of third
parties, to be held by HRP as cash collateral for the payment of the Guarantor's
obligations hereunder (such amounts to be applied by HRP to the payment and
performance of the obligations of the Guarantor (and its successors) hereunder
as and when the same become due and payable in accordance with the provisions of
this Guaranty) and (ii) execution and delivery of a cash collateral pledge
agreement in favor of HRP in respect of such cash collateral (together with
executed UCC-1 financing statements or similar instruments if requested by HRP,
and in form satisfactory to HRP), which cash collateral pledge agreement shall
be in form and substance satisfactory to HRP in its sole discretion (the date
upon which the conditions in clauses (i) and (ii) have been satisfied, the
"Release Date"), Sections 14 and 15 hereof shall have no further force and
effect, and (subject to Section 11 hereof) HRP shall look solely to such cash
collateral for payment of the Guarantor's obligations hereunder (so long as such
cash collateral shall not thereafter become subject to any Lien or other claim
of any Person, other than the rights of the Guarantor hereunder). Without
limiting the foregoing, such cash collateral pledge agreement shall provide that
(A) the amount paid to HRP pursuant to this Section 16 , less amounts applied by
HRP from time to time to the payment of the Obligations (the "Deposit Balance"),
shall bear interest at a per annum rate equal to the lesser of eight percent
(8%) per annum or the T-Bill Rate (as hereinafter defined), which interest shall
be payable to the Guarantor or to its order on each anniversary of the date of
the payment of such amount to HRP
14
<PAGE>
(the "Deposit Payment Date") so long as no GranCare Event of Default shall have
occurred and be continuing on such interest payment date, (B) the Deposit
Balance, together with accrued but unpaid interest thereon, shall be released to
the Guarantor or to its order upon the payment in full of the Obligations, and
(C) the Deposit Balance and accrued interest thereon may be commingled with the
general assets of HRP. The term "T-Bill Rate" means, with respect to the Deposit
Balance, the yield to maturity implied by (i) the yields reported as of 10:00
A.M. (New York City time) on the Deposit Payment Date on the display designated
as "Page 678" on the Telerate Access Service (or such other display as may
replace Page 678 on Telerate Access Service) for 30-year U.S. Treasury
securities, or (ii) if such yields are not reported as of such time or the
yields reported as of such time are not ascertainable, the Treasury Constant
Maturity Series Yields reported, for the latest day for which such yields have
been so reported as of the Deposit Payment Date in Federal Reserve Statistical
Release H.15 (519) (or any comparable successor publication) for 30-year U.S.
Treasury securities. Such implied yield will be determined, if necessary, by
converting U.S. Treasury bill quotations to per annum bond-equivalent yields in
accordance with accepted financial practice.
17. Supply Contracts. The Guarantor agrees that all agreements or
arrangements between the Guarantor and its Subsidiaries or representative or
agents on the one hand, and AMS or GCI on the other, providing for
pharmaceuticals or other supplies or services to be furnished to any facility
operated by AMS or GCI, shall provide that each such agreement or arrangement
shall be terminated and of no further force and effect, and all obligations and
liabilities thereunder released and terminated (other than obligations to pay
for services or supplies previously rendered or furnished), at any time upon
notice to the Guarantor by HRP after either (i) HRP terminates such lease with
AMS or GCI, accelerates the maturity of any promissory note of AMS or GCI, or
forecloses upon or exercises remedies of like effect in respect of the stock of
GCI or AMS pledged to HRP or (ii) the occurrence of an Event of Default
hereunder or under any other GranCare Document involving the bankruptcy or
insolvency of New GranCare, AMS, GCI or the Guarantor.
18. Severability. Any provision of this Guaranty which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
19. Additional Guaranties. This Guaranty shall be in addition to any
other guaranty or other security for the Obligations, and it shall not be
prejudiced or rendered unenforceable by the invalidity of any such other
guaranty or security.
20. Paragraph Headings. The paragraph headings used in this Guaranty are
for convenience of reference only and are not to affect the construction hereof
or be taken into consideration in the interpretation hereof.
21. No Waiver, Cumulative Remedies. HRP shall not by any act (except by a
written instrument pursuant to Paragraph 22 hereof), delay, indulgence, omission
or otherwise, be deemed to have waived any right or remedy hereunder or to have
acquiesced in any Default or in
15
<PAGE>
any breach of any of the terms and conditions hereof. No failure to exercise,
nor any delay in exercising, on the part of HRP, any right, power or privilege
hereunder shall operate as a waiver thereof. No single or partial exercise of
any right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. A
waiver by HRP of any right or remedy hereunder on any one occasion shall not be
construed as a bar to any right or remedy which HRP would otherwise have on any
future occasion. The rights and remedies herein provided are cumulative, may be
exercised singly or concurrently and are not exclusive of any rights or remedies
provided by law.
22. Waivers and Amendments; Successors and Assigns. None of the terms or
provisions of this Guaranty may be waived, amended, supplemented or otherwise
modified except by a written instrument executed by the Guarantor and HRP,
provided that any provision of this Guaranty may be waived by HRP in a letter or
agreement executed by HRP or by telecopy from HRP. This Guaranty shall be
binding upon the successors and assigns of the Guarantor and shall inure to the
benefit of HRP and its successors and assigns.
23. WAIVER OF JURY TRIAL; CONSENT TO JURISDICTION; GOVERNING LAW. THE
GUARANTOR HEREBY EXPRESSLY WAIVES ANY RIGHT IT MAY NOW OR HEREAFTER HAVE TO A
JURY TRIAL IN ANY SUIT, ACTION OR PROCEEDING WHICH ARISES OUT OF OR BY REASON OF
THIS GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY AND
THEREBY.
BY ITS EXECUTION AND DELIVERY OF THIS GUARANTY, THE GUARANTOR (1) ACCEPTS
FOR ITSELF AND IN CONNECTION WITH ITS PROPERTIES, GENERALLY AND UNCONDITIONALLY,
THE NONEXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT OF COMPETENT
JURISDICTION IN THE COMMONWEALTH OF MASSACHUSETTS IN ANY ACTION, SUIT OR
PROCEEDING OF ANY KIND AGAINST IT WHICH ARISES OUT OF OR BY REASON OF THIS
GUARANTY, ANY GRANCARE DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR
THEREBY, IN ADDITION TO ANY OTHER COURT IN WHICH SUCH ACTION, SUIT OR PROCEEDING
MAY BE BROUGHT; (2) IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED BY
ANY SUCH COURT IN ANY SUCH ACTION, SUIT OR PROCEEDING IN WHICH IT SHALL HAVE
BEEN SERVED WITH PROCESS IN THE MANNER HEREINAFTER PROVIDED; (3) TO THE EXTENT
THAT IT MAY LAWFULLY DO SO, WAIVES AND AGREES NOT TO ASSERT, BY WAY OF MOTION,
AS A DEFENSE OR OTHERWISE, IN SUCH ACTION, SUIT OR PROCEEDING ANY CLAIM THAT IT
IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF SUCH COURT, THAT ITS PROPERTY
IS EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT THE ACTION, SUIT OR
PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER; AND (4) AGREES THAT PROCESS MAY BE SERVED UPON IT IN ANY SUCH ACTION,
SUIT OR PROCEEDING IN THE MANNER PROVIDED BY CHAPTER 223A OF THE GENERAL LAWS OF
MASSACHUSETTS, RULE 4 OF THE MASSACHUSETTS RULES OF CIVIL PROCEDURE OR RULE 4 OF
THE FEDERAL RULES OF CIVIL PROCEDURE.
16
<PAGE>
THIS GUARANTY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS.
24. Notices. All notices under this Guaranty shall be in writing, and
shall be delivered by hand, by a nationally recognized commercial overnight
delivery service, by first class mail or by telecopy, delivered, addressed or
transmitted, if to HRP, at 400 Centre Street, Newton, Massachusetts 02158,
Attention: President (telecopy no. 617-332-2261), with a copy to Sullivan &
Worcester LLP, One Post Office Square, Boston, Massachusetts 02109, Attention:
Alexander A. Notopoulos, Esq. (telecopy no. 617-338-2880), and if to the
Guarantor, at its address or telecopy number set out below its signature in this
Guaranty. Such notices shall be effective: in the case of hand deliveries, when
received; in the case of an overnight delivery service, on the next business day
after being placed in the possession of such delivery service, with delivery
charges prepaid; in the case of mail, three days after deposit in the postal
system, first class postage prepaid; and in the case of telecopy notices, when
electronic indication of receipt is received. Either party may change its
address and telecopy number by written notice to the other delivered in
accordance with the provisions of this Section.
IN WITNESS WHEREOF, the undersigned has caused this Guaranty to be
duly executed and delivered as of the date first above written.
VITALINK PHARMACY SERVICES, INC.
By:
------------------------------------
Title:
Address for Notices:
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road
Naperville, Illinois 60563
Attention: President
Telecopy: (630) 245-4800
17
<PAGE>
Growing Together.
Vitalink Pharmacy Services 1997 Annual Report
<PAGE>
<TABLE>
<CAPTION>
Financial Highlights
<S> <C> <C> <C> <C> <C>
Net Revenues (in millions)
97 $ 274.0
96 $ 141.1
95 $ 112.3
94 $ 98.6
93 $ 65.7
Income From Operations (in millions)
97 $ 33.1
96 $ 22.3
95 $ 18.7
94 $ 15.0
93 $ 11.3
Net Income (in millions)
97 $ 18.3
96 $ 13.9
95 $ 11.7
94 $ 9.2
93 $ 7.3
Selected Financial Data (in thousands, except per share data)
Year Ended May 31: 1997 1996 1995 1994 1993
Net Revenues $274,038 $141,115 $112,257 $98,569 $65,714
Income From Operations 33,109 22,301 18,726 14,995 11,305
Net Income 18,317 13,870 11,680 9,204 7,341
Earnings Per Share 1.03 .99 .84 .66 .53
Total Assets 516,805 95,923 80,713 69,587 57,425
Working Capital 74,006 22,830 15,202 14,103 9,938
Due From Affiliate 1,053 16,910 16,888 8,167 10,276
Stockholders' Equity 348,531 86,299 72,379 60,699 51,495
Average Shares Outstanding 17,727 13,976 13,975 13,975 13,975
</TABLE>
<PAGE>
Our Mission -- To be the leader in the delivery of high quality health care
products and services to our customers and the individuals in their care -- To
realize this mission by providing innovative products and services to our
customers which will exceed their expectations -- To attract, empower and retain
competent employees who will grow with our organization and provide us with a
competitive advantage in our markets -- Through the pursuit of this mission
Vitalink will create a partnership with our customers and employees which will
result in the enhancement of shareholder value.
<PAGE>
The Vitalink Difference
Information Systems
Financial Systems
Clinical Systems
Operating Systems
<PAGE>
Corporate Profile -- Vitalink Pharmacy Services, one of the nation's leading
institutional pharmacy companies, provides pharmaceutical dispensing of
individual medications, infusion therapy and other ancillary products and
services and clinical consulting to its customers. Vitalink's customers are
nursing facilities as well as other institutions and their patients and home
infusion patients. Vitalink currently operates 57 institutional pharmacies, four
regional infusion pharmacies and enteral distribution facilities. Through these
operations Vitalink provides services to patients in 36 states.
CONTENTS
To Our Shareholders 2 Financial Information 19
Vitalink Growing Together 4 Management's Discussion & Analysis 34
Vitalink Pharmacy Locations 18 Corporate Information 36
<PAGE>
TO OUR SHAREHOLDERS.
Fiscal 1997 was a pivotal year for Vitalink. Although Vitalink grew by over 250%
between 1992 and 1996 through small acquisitions and internal growth, we had not
attained the size to be a dominant player in our rapidly consolidating
industry. In addition, we were disadvantaged by a very small stock float. Both
issues were addressed by our merger with TeamCare, the pharmacy subsidiary of
GranCare, Inc. Our annual revenues are now approaching $500 million positioning
Vitalink as the third largest institutional pharmacy company in the country and
providing us with the market share and leverage that have become critical to
success in the changing health care arena. Our stock float has increased by more
than five times and Vitalink shares now trade on the New York Stock Exchange
providing you, our shareholders, with greater liquidity.
Vitalink began the year with 23 institutional pharmacies located in 14 states
and ended the year with 57 institutional pharmacies located in 20 states.
Through these pharmacies, our four strategically located regional infusion
pharmacies and our enteral distribution business, we now provide services to
customers located in 36 states. Although our merger with TeamCare consumed much
of management's time in fiscal 1997, the combined companies completed three
other acquisitions during the year, two in California and one in New York. We do
not intend to slow our pace in 1998 as proven by our mid-July acquisition of
Nationwide Pharmacies located in Maryland.
Acquisitions are not the only factor driving our growth. Our marketing and sales
efforts are producing results as well. During fiscal 1997 the combined sales
teams of Vitalink and TeamCare added new accounts with over 20,000 beds. We now
have over 50 sales professionals working with an even greater number of
clinicians with sales responsibility to drive our internal growth. New business
is coming from both our traditional setting, new nursing facility accounts or
more products sold to existing accounts, as well as non-traditional settings
such as assisted living facilities, acute hospitals and correctional facilities.
Our product development team has designed a product to meet the needs of
assisted living facilities which has been well received in our markets. We now
service assisted living facilities with over 8,000 beds, a market that was
virtually untapped by institutional pharmacies only two years ago. We provide
pharmacy services to two long-term acute care hospitals and in July signed a
contract to provide pharmacy services to the sub-acute wing of a hospital in
South Carolina. With the experience and knowledge base of our employees, we have
the ability to identify customer needs and market opportunities and design
programs and products around these needs and opportunities.
2
<PAGE>
The most significant benefit of the merger is the depth and breadth of human
resources which Vitalink now possesses. Both the Vitalink and TeamCare
organizations have dedicated employees committed to providing quality products
and services to their customers. The cultures and missions of the two
organizations are very similar which has made the post merger transition much
less difficult. The successes that each organization brought to the table are
now shared throughout the entire organization. The OPTIMA/SM/ programs developed
by Vitalink to manage specific disease states are now offered by more pharmacies
in more markets. TeamCare's successful wound care management program is now
offered throughout the much larger Vitalink network of pharmacies. With our
significantly greater market presence we are able to leverage our investments in
programs and product development.
At the time we announced the merger, we identified certain opportunities which
would result from the transaction. I would like to give you a brief status
report. By the end of fiscal 1997 Vitalink has commenced service to Manor Care
and GranCare owned facilities with over 3,200 beds as a direct result of the
merger. Vitalink executed a new wholesaler agreement with Cardinal Health which
became effective February 1, 1997. All of Vitalink's pharmacies were using
Cardinal as their primary wholesaler by the end of the fiscal year. Consistent
with our objective of having all pharmacies on one operating system, Vitalink
has started the system conversion process and we expect to have all pharmacies
converted by the end of fiscal 1998. Shortly after the merger we implemented a
new organizational structure with nine operating regions. Each regional vice
president is charged with maximizing business opportunities and operating
efficiencies in their markets through adoption of standardized operating
practices, consolidation of duplicate functions and, where practical,
consolidation of pharmacies. This process commenced in the fourth quarter and
the benefits are expected to be realized over fiscal 1998.
As we review the proposals now being considered in Washington which may impact
our industry, it seems clear to us that our primary customers, nursing
facilities, are facing a major change in reimbursement. The timing is not
certain at this point nor are all the issues fully resolved. However, we are
preparing Vitalink to be a valuable partner to our customers in an environment
where efficiency is critical to their success and information is a valuable
tool. We are confident that with our financial and human resources, we will
prosper in this evolving industry.
I would like to take this opportunity to thank four valued Directors of Vitalink
who left the Vitalink Board at the time of the merger, Harold Blumenkrantz, Anil
Gupta, Don Tomasso and Marvin Wilensky. Their leadership and counsel over the
past years is greatly appreciated. Finally, I would like to welcome our new
employees to Vitalink and thank all of our employees for their dedication and
commitment. And to our shareholders and customers, we thank you for your support
and belief in our company.
Sincerely,
/s/ Donna L. De Nardo
Donna L. De Nardo, President and Chief Operating Officer
3
<PAGE>
VITALINK. GROWING TOGETHER.
Vitalink Pharmacy Services is committed to serving the evolving needs of
nursing, assisted living and independent living facilities, as well as other
institutions. For customers such as these, Vitalink has established a nationwide
support structure, built on information, and stretching far beyond the simple
dispensing of medication.
Traditionally, Vitalink has provided customers with pharmaceutical dispensing
and distribution, infusion therapy and other specialized services, medical
supplies and consultant pharmacy services. By outsourcing these functions,
Vitalink customers can redirect internal resources to focus on their core
competencies and gain advantages that can be provided only by a company with
Vitalink's capabilities and range of expertise.
PHARMACEUTICAL DISPENSING AND DISTRIBUTION
Currently, the largest share of Vitalink's business is devoted to purchasing,
repackaging and dispensing pharmaceuticals in a unit dose format. Prescriptions
ordered by the physician are delivered by Vitalink to the customer by the next
scheduled dose, in daily or multiple day dosages. As part of this service,
Vitalink maintains 24-hour clinical consultation and emergency delivery.
INFUSION THERAPY AND SPECIALIZED SERVICES
Infusion therapy and specialized services include compounding, equipment and
supplies for infusion, parenteral and enteral nutrition therapy, respiratory
therapy and wound care management. In addition to preparing the product and
delivering it to the customer, Vitalink can help train and certify nursing staff
to administer the therapies. These specialized services represent the fastest
growing segment of Vitalink's business.
MEDICAL SUPPLIES
Vitalink distributes disposable medical supplies to customers, principally in
the areas of wound care, urological, ostomy and nutritional support. Vitalink
also provides durable medical equipment for its nursing facility customers.
[Graphic Omitted]
"Vitalink is highly responsive to customer needs, and they make the same
investments in our facilities as we do. When we have a need--whether in the
pharmacy, for consultation or education--Vitalink always comes through. They are
there for us."
Dave Devereaux, Customer, ManorCare Health Services
[Graphic Omitted]
4
<PAGE>
CONSULTANT PHARMACY SERVICES
Vitalink offers customers the services of trained consultant pharmacists who
monitor prescription drug therapy and support the highest levels of patient
care. These consultant pharmacists routinely visit customer facilities and make
recommendations to the nursing staff concerning drug storage and administration
as well as patient care. They also review the patient drug regimen to ensure
that therapy is appropriate and in compliance with federal and state
regulations.
In addition, Vitalink nurse consultants work on-site with customers to observe
medication administration procedures, confer on medical records and conduct in-
service training programs.
"Simply delivering product--in the case of Vitalink, pharmaceuticals--is not a
differentiator. It's an expectation. And the future of our business will be
built on providing other services, distinctive services that are backed by our
sophisticated information systems, trained personnel and a powerful quality
assurance mission. These services are good for our customers, and they provide
Vitalink with a long-term competitive advantage."
Marty Lasak, Vice President, Product Development
BEYOND FILLING PRESCRIPTIONS.
Though our traditional business has been in the area of pharmaceutical
dispensing and distribution, Vitalink is increasingly called upon to provide our
customers with services that go far beyond simply filling prescriptions.
MEDICATION REVIEW AND CONSULTATION
Vitalink consultants work closely with customers and they carefully analyze
patient information to eliminate unnecessary drugs by selecting the most
efficacious treatment options. The total cost of patient care is based on much
more than the price of medication--and even effective medications can produce
adverse drug reactions. These reactions, in the final analysis, may be largely
attributable to inappropriate and unmonitored drug therapy. And the costs
associated with these reactions are avoidable with effective monitoring and
accurate information. Careful evaluation and management of prescriptions can
dramatically reduce a patient's long-term, non-drug-related expenses.
On an on-going basis, our licensed consultant pharmacists use our powerful
information systems to evaluate each resident's medication records to check for
duplicate drugs, allergies and adverse drug reactions. With access to medical
diagnosis data, Vitalink pharmacists can then apply their broad-based knowledge
of the unique needs of the chronically ill patient to make recommendations
concerning the next month's drug program.
5
<PAGE>
"Vitalink delivers high-quality customer service by very simply asking customers
what they need. Vitalink doesn't try to force prepared solutions on customers--
instead, they tailor their approach o match the unique requirements of each
customer. This is an approach to customer service that is guaranteed to
succeed--and it has proven very successful for Vitalink."
Aruna Podatoori, Customer, GranCare
[Graphic Omitted]
This review helps enhance patient health and minimize bills by reducing or
eliminating unnecessary drugs. And since we track and monitor all medications
taken by residents, the Vitalink pharmacist can often prevent drug-related
hospitalization. In addition, the pharmacist performs monthly on-site reviews of
each patient's progress by evaluating clinical records and consulting with the
physician and other caregivers.
ON-SITE SERVICES
At customer facilities, Vitalink provides a number of services to improve
operational efficiencies and quality of care.
Aside from providing educational support for nursing staff, the Vitalink
pharmacist makes sure all nursing stations store, handle and dispense drugs
properly. This is a critical service because it enables nurses to spend less
time monitoring packaging and dispensing systems and more time caring for
patients.
The Vitalink pharmacist is always available for emergencies, and questions from
nurses can be answered on a 24 hour basis, every day of the year.
COMPLIANCE AND PAYOR RELATIONS
Vitalink nurse consultants and pharmacists work with nursing staff on medication
review and administration to ensure compliance with all federal and state
guidelines.
Vitalink also assumes responsibility for medication billing. Vitalink's expert
billing staff invoices the responsible party, whether Medicaid, Medicare Part B,
a private insurance company, the facility or the patient.
6
<PAGE>
"We are growing in a lot of ways--and one of those ways is through vendor-
partner relationships. We just formed a partnership with Kinetic Concepts Inc.,
a maker of therapy beds, to deliver and maintain support services for these
beds. Coupled with our clinical components, this represents the first venture of
its kind in our marketplace. This partnership is good for our customers because
they have to call only one company for both services; it helps both Vitalink and
our customers enter into new markets; and for Vitalink, it provides a growing
revenue source."
Cheryl Musial, Vice President, Sales and Marketing
LEVERAGE THAT COMES FROM SIZE.
MERGER WITH TEAMCARE
In February 1997, Vitalink completed its merger with TeamCare--the institutional
pharmacy business of GranCare--in what was the largest transaction of its kind
in the institutional pharmacy industry. As a result of this merger, Vitalink has
now become the third largest institutional pharmacy company in the country.
BED GROWTH (in thousands)
97 172
96 50
95 42
94 39
93 31
The merger of Vitalink with TeamCare represents the union of two very strong
companies with complementary strengths. Vitalink had established itself as a
company with extensively integrated systems and a high level of operational
standardization. TeamCare, on the other hand, brought to Vitalink a coordinated
marketing effort, integrated through sales and operations, and spearheaded by a
sales force committed to a customer-focused, team selling approach. Moreover,
TeamCare provided Vitalink with a number of additional product lines, including
orthotics and wound care.
An important strength of Vitalink today is our preferred provider relationship
with ManorCare Health Services and GranCare. Our long-term service agreements
with
7
<PAGE>
these companies result in a reduced risk profile for Vitalink, and they provide
both a growing and predictable cash flow. In addition, the new shares issued in
the merger have increased Vitalink's float by approximately 400%, creating
greater liquidity for Vitalink shareholders. At the time of the merger, Vitalink
moved to the New York Stock Exchange, which broadens our potential shareholder
base.
The merger with TeamCare also makes possible broadened geographic distribution
of Vitalink's pharmaceutical services and increased market penetration. As of
May 31, 1997, Vitalink now provides services in 36 states from pharmacy
locations in 20 states. In addition to the advantage we gain from our long-term
service agreements with ManorCare Health Services and GranCare, Vitalink
continues to maintain high quality revenue as shown by our payor and product
mixes.
PAYOR MIX PRODUCT MIX
[CHART HERE] [CHART HERE]
* Includes private, Medicare Part A, insurance and other third party payors
** Includes Medicare Part B only
One immediate initiative following the merger has been the redesign of the
Vitalink sales force. Modeled on a team selling approach, Vitalink clinical
specialists, nurse consultants, pharmacists and pharmacy managers work closely
with sales representatives to develop more specific programs for customers in
targeted areas.
Consistent with Vitalink's objective to have all of our pharmacies on a single
operating system, management has started to convert former TeamCare pharmacies
to the Vitalink system. This conversion process will continue throughout fiscal
1998, and all pharmacies are planned to be fully converted by the start of
fiscal 1999.
In fiscal 1998, Vitalink will implement a new financial and accounting system to
facilitate management of an increasingly complex business. Vitalink's
substantial resources in the area of information technology--enhanced by the
merger--ensure the successful implementation of this system.
8
<PAGE>
As part of the movement toward standardization, Vitalink has implemented
VitalCONSULT on a company-wide basis. VitalCONSULT is Vitalink's proprietary
consulting information system that enables pharmacists and nurse consultants to
store and access patient information to improve clinical outcomes and quality of
life. VitalCONSULT enables pharmacies to provide sophisticated clinical support
on a continuous, real-time basis. Such technology is particularly important for
meeting the demands of the Omnibus Budget Reconciliation Act of 1987, which
requires a pharmacist to perform a drug regimen review for patients at least
monthly. Using the large and growing electronic data resources provided by
VitalCONSULT, our pharmacy consultants can make recommendations to the care-
giving team based on continuously updated and accurate data.
This steady flow of information supports clinical decision making and proactive
recommendations. In addition, Vitalink's information systems can be used to
print drug information on charting documents, query medical records for the
entire population served, quality check clinical processes and design cost
reduction initiatives. Because VitalCONSULT is used across all Vitalink
pharmacies, patients can be tracked as they move through multiple service
settings, which helps avoid potentially hazardous drug interactions while
ensuring informed, consistent care. Such a unified information system is
important not only because it is required if we are to provide consistently
high-quality service to our customers, but also because such common practices
are essential for generating data that can be used by customers all across the
system. For instance, VitalCONSULT enables Vitalink to monitor what medications
were dispensed and when they were dispensed, which enhances Vitalink's ability
to track pharmaceutical outcomes. As prospective payment systems become the
norm, and cost of care becomes more critical, Vitalink will have detailed and
complete outcomes data to be a more valuable partner with our customers.
The merger with TeamCare--and the subsequent integration of systems--gives
Vitalink a powerful presence in the institutional pharmacy industry, enhances
service to our customers, and provides a solid platform for continued growth.
"The beauty of this merger is that each of us has brought different strengths
to the table. Vitalink has been very strong in human resources and putting
logical systems in place. Historically, TeamCare has been more entrepreneurial,
a little more coordinated in their sales efforts. What we now have is a balance
between this solid foundation and a passionate drive to build business."
Steve Thompson, Senior Vice President, Human Resources & Administration
9
<PAGE>
ECONOMIES OF SCALE
Vitalink operates through both hub and satellite pharmacies. Hub pharmacies
serve an approximately 150 mile radius and provide the full array of services,
including support for satellite pharmacies. By locating satellite pharmacies
closer to the customer, service levels are enhanced and market reach is
extended. Hub and satellite pharmacies enable Vitalink to achieve significant
economies of scale.
Building on the strength of the merger with TeamCare, Vitalink is now
strategically positioned ahead of many smaller, fragmented competitors who
cannot adequately meet the challenges of this tightly regulated, rapidly
consolidating environment.
Size enables institutional pharmacy providers such as Vitalink to exercise
increased leverage to secure attractively priced purchasing contracts with
wholesale drug suppliers and manufacturers. Vitalink receives volume discounts
from manufacturers, who gain enhanced market penetration for their products.
Vitalink, in turn, can leverage economies of scale in our markets to realize
higher rates of return for our shareholders.
HIGHER QUALITY INFORMATION, HIGHER QUALITY CARE.
FOCUS ON PREVENTION
With the advent of managed care, and the anticipated move by Medicare toward a
prospective payment system of reimbursement, nursing facilities are becoming
increasingly motivated to manage the cost of caring for their patients. Assisted
living facilities are equally eager to retain their residents and help them "age
in place." The way to achieve these goals--and reduce future costs--is through
careful monitoring of medication and constant gathering and evaluation of
information about patients with chronic illnesses.
[Graphic Omitted]
"We recently transitioned from unit fill to cycle fill, and before that
changeover, Vitalink came out to meet with physicians and nurses, they mapped
out the whole process, managed the transition, and followed-through to make sure
everything happened as planned. Vitalink proactively looks for ways to improve,
and when they say they will do something, they will not only do it, they will do
it in a way that goes beyond expectations."
Daryl Fisher, Customer, Pinnacle Healthcare Group
[Graphic Omitted]
10
<PAGE>
This focus on prevention--on assessing the patient's current and probable future
condition--is made possible through a refined information system that unites all
Vitalink pharmacies. Because Vitalink can access data from all pharmacies,
comprehensive data about a large and growing population can be used to develop
new services and provide valuable resources to state and federal organizations
and professional bodies.
"Many of our largest competitors don't have a single, unified communications
platform. Vitalink's common platform enables us to create a system-wide,
decentralized data warehouse that makes details of patient management available
for analysis, refinement and, ultimately, better patient care."
Chip Phillips, Vice President, Information Technology
DELIVERING ENHANCED PATIENT CARE
Vitalink provides customers with a computerized medical documentation system.
This system generates monthly medical reports as well as preprinted physician
order forms, medication administration documentation and treatment records. As
an additional service to customers, Vitalink maintains and documents orders for
ancillary services, such as patient diet and therapy orders. These services
enhance the quality of patient care through improved accuracy of medication
management--and they ease the burden of providing government-required reports
concerning patient drug utilization.
"This is a company with a future. We're getting bigger, and we're headed in the
right direction, and the course we are choosing is away from simply filling
prescriptions and toward providing the consultation services that will help the
customer--and Vitalink--prosper."
Paul Bergeron, Director of Marketing Communications
HELPING CUSTOMERS DO BETTER BUSINESS
To meet federal regulations, nursing facility operators must document the drug
regimens of each of their patients. Because the average nursing facility patient
requires up to eight medications every day, the facility operator faces
significant costs for conducting monthly drug regimen reviews and tracking
utilization levels. Therefore, both
11
<PAGE>
nursing facilities and payors have found it advantageous to contract with
Vitalink--a company that offers a comprehensive understanding of regulatory
issues and the information management capabilities to formulate patient reports
on a timely basis.
"We started as a distribution company, and we were very successful as a
distribution company. But the future of Vitalink is not going to be on the
product distribution side. The future of Vitalink will be in providing the
medical data that we are now beginning to gather under the Vitalink OPTIMA/SM/
servicemark. This is what separates us from our competitors: our databank and
our emphasis on wellness and prevention as opposed to simply the reactive
treatment of conditions."
Donna De Nardo, President and Chief Operating Officer
A MARKET THAT CONTINUES TO GROW.
It's been estimated that while the nursing facility segment of the institutional
pharmacy industry alone is over $4 billion in size, the assisted living segment
adds another one-half billion dollars to the market. Given the demographics of
an aging population, the increasing acuity levels of nursing facility residents,
and the growth in assisted living facilities, this market is estimated to
sustain annual growth of 10-15% over the next three to five years.
AN AGING POPULATION
Since 1950, the number of Americans aged 65 and older has doubled; similarly,
the number of those aged 85 and older has quadrupled in size. According to the
U.S. Bureau of Census, this group of 85 and older citizens will increase by 43%
from 1990 to 2000. As our country's 77 million "baby boomers" reach retirement
age, the trend toward an aging population will accelerate. These older
individuals--many of whom are residents in nursing, assisted living and other
similar facilities--are served by Vitalink.
INCREASING ACUITY LEVELS
Many medical conditions become more acute as patients age. Because Americans are
living longer, more patients with chronic conditions are currently receiving
medical care, and these patients typically require more medication. Vitalink has
the experience and support structure in place to help nursing facilities care
for patients.
More importantly, however, Vitalink has the systems in place to help monitor and
manage therapy to help reduce the likelihood that the patient will ever reach
these higher acuity levels.
12
<PAGE>
"As our market and our company grow, the best people in the business are coming
to work with us. The Vitalink pharmacist is not interested in just counting
pills--the Vitalink pharmacist wants to use his or her expertise to manage the
health care of a select population group. We have a lot to offer professionally,
and we are attracting the best talent in the industry--which is very important
to our future."
Scott Macomber, Senior Vice President and Chief Financial Officer
SETTING A STANDARD OF QUALITY.
As Vitalink and its markets grow, the challenge is to maintain--and, when
possible, to improve--the standards of quality that have contributed to
Vitalink's leadership position.
OPTIMA/SM/
In 1995, Vitalink established a Clinical Information Services (CIS) board to
monitor and help improve the clinical and economic efficacy of drug therapies
administered to its patients. OPTIMA/SM/, which stands for "Optimizing Patient
Therapy in Medication Administration," is a proprietary patient care program CIS
uses to effect the best treatment for individual diseases. OPTIMA/SM/ provides
facility operators with disease-specific practice guidelines and formularies to
reduce the incidence and associated costs of chronic diseases, such as atrial
fibrillation, osteoporosis, hypertension and diabetes. Vitalink formulates these
protocols by analyzing clinical, demographic and cost information in Vitalink's
data repository. Vitalink then tracks the economic and health outcomes resulting
from the implementation of these protocols.
Clearly, health care is progressing beyond disease management to disease
prevention or wellness. Vitalink's increased market presence--reinforced by the
recent merger--has made Vitalink an attractive partner for other industry
leaders in the common goal of preventing disease and enhancing wellness. In
addition, the systems that Vitalink has put in place provide pharmaceutical
companies, payors and managed care organizations with valuable data they can
use. Vitalink designs drug therapy protocols to improve care and collect
valuable outcomes data. Our on-line partner companies share these protocols,
which puts Vitalink in a commanding position with manufacturers, who want their
products included in the protocols.
In August, Vitalink introduced an innovative osteoporosis fracture prevention
program in conjunction with pharmaceutical leaders Merck and Novartis, currently
the #1 and #2 drug companies in the world. Osteoporosis, though not considered a
critical condition, can lead to broken bones and hips which, due to infection,
can cause potentially life-threatening conditions and higher medical costs. Hip
fractures are problematic enough, but when combined with related complications,
they cost the medical industry well over one billion dollars annually.
Vitalink's new osteoporosis program assesses the risk of osteoporosis in our
existing population of over 170,000 patients and provides, at
13
<PAGE>
a minimum, calcium and vitamin D supplements--as well as continuous monitoring--
to help ensure these patients do not develop osteoporosis. For patients who have
already demonstrated some bone mass loss due to osteoporosis, our pharmacists
and staff administer and monitor therapies that might include drugs or hormones.
The Vitalink osteoporosis program concept has been reviewed by the National
Osteoporosis Foundation.
Prior to the establishment of the osteoporosis program, Vitalink implemented an
anticoagulation and stroke prevention program. Patients who have demonstrated a
tendency to blood clotting are at higher risk for stroke, which may occur when
clots lodge in the brain. As part of the anticoagulation and stroke prevention
program, Vitalink uses enhanced information systems to identify patients at risk
for stroke who might be receiving inappropriate therapy. To support this
program, Vitalink has established education programs for patients and a
preferred formulary designed to limit drug interaction.
As a key player in the integrated health system, Vitalink provides risk
assessment to target early intervention and measure outcomes. Early intervention
helps reduce downstream non-drug related costs associated with long-term patient
care.
"OPTIMA/SM/ is the cornerstone of our case management initiative. As the
administration of managed care becomes more complex, our clinicians become gate-
keepers, and OPTIMA/SM/ provides the clinical services, outcomes measurements
and quality standards other companies just talk about but can't actually
provide."
Mary Daschner, Vice President, Product Standards
PHARMACY BENEFITS MANAGEMENT
Vitalink has developed a Pharmacy Benefits Management program (PBM) for seniors
and employee groups that offers formulary management services, Drug Utilization
Review (DUR), disease state management and network administration. Our PBM
program will extend Vitalink's market to include employee groups and non-
institutionalized seniors, and it positions Vitalink with managed care
organizations, enabling us greater access to patients and greater opportunity to
bundle other Vitalink products and services to managed care customers. In
addition, our PBM program enables Vitalink to access utilization data for
patient populations not currently served by Vitalink. This data will be critical
to structuring future contracts, particularly in an environment where
prospective payment is the norm. Finally, our PBM gives Vitalink the ability to
provide tighter management services for all customers. Increased use of
therapeutic interchange, prior authorizations and extended management of medical
benefits are all part of Vitalink's PBM strategy. Whoever assumes the risk for
pharmaceutical costs will eventually control pharmacy purchasing and
management--and our PBM ultimately positions Vitalink as a leader in the area of
managed risk.
14
<PAGE>
QUALITY ASSURANCE AUDITS
As part of a continuing effort to evaluate and improve the quality and accuracy
of pharmacy practices, Vitalink performs quality assurance audits at each
pharmacy it operates.
Dedicated corporate staff and multidisciplinary teams from our pharmacies
perform these audits to identify areas for improvement, focus on continuous
enhancement of services and ensure consistency across the system. Vitalink is
the only company of its kind to provide such system-wide quality assurance. Our
customers trust that a drug from one of our Illinois Vitalink pharmacies will be
compounded to meet exactly the same specifications as it would in a California
pharmacy, and that a disease management program in Florida will be operated in
an identical fashion to a similar program in Oklahoma. This consistency is
especially appealing to multi-facility customers who enjoy a national presence.
The Vitalink CARE group has developed company-wide policies and procedures for
all our pharmacies. These standard policies and procedures ensure not only
operational efficiency but also brand leverage.
Through an internal certification program, Vitalink pharmacists are extensively
trained in a range of clinical processes, and they consistently demonstrate
above-average competency in customer communications, government regulations and
drug utilization evaluation. This certification program is based on professional
standards to ensure that Vitalink pharmacists thoroughly understand disease
progression, and that they can put this expertise to use in improving patient
outcomes--consistently--in the still evolving managed care environment.
[Graphic Omitted]
"Vitalink is a great company to partner with, not only because of their
pharmaceutical distribution capabilities, but more importantly because of their
wellness or preventative programs. Since meeting with them, we've been able to
use their resources and creativity to focus on wellness. Now, instead of
providing just medication, we provide education, which might ultimately reduce
patients' reliance on medication. Vitalink is a company of paradigm-breakers--
they think outside the box."
Jim Murphy, Customer, Freedom Group
[Graphic Omitted]
15
<PAGE>
[Graphic Omitted]
16
<PAGE>
"Every Vitalink Consultant Pharmacist follows a consistently applied customer
service philosophy. They are ready to put in long hours for us, and they are
always there for us--part of the team. Our residents, in fact, see no separation
between Vitalink and having our own in-house pharmacy. There's a seamless
connection between our operations and Vitalink and this kind of connection is
possible because Vitalink subscribes to the same high quality standards that we
do."
Rick Dillon, Customer, Genesis Healthcare
[Graphic Omitted]
ALWAYS GROWING.
Though our business is firmly grounded in pharmaceutical dispensing and
distribution, our future clearly lies in the development of specialized services
that utilize comprehensive information systems. And as Vitalink grows, the size
and sophistication of our information system grows, providing more complete,
more accessible data for use by ourselves, our partners and our customers. This
expanding database enables us to serve an ever increasing range of customer
needs--and to provide increasingly higher levels of care to patients.
With the completion of nine acquisitions over the past five years, and the
recent TeamCare merger, Vitalink has a stronger market position than ever in its
history. This, coupled with a very solid balance sheet, provides increased
opportunity for future growth.
Vitalink, today, is full of opportunity and promise. Our markets and our
capabilities are growing rapidly and the momentum is building to expand even
further the scope of our offerings and the services we provide our customers.
"As we grow, the need for consistency rises. For instance, from the customer's
perspective, if I run a chain of nursing facilities, I want to be sure
my service provider does things the same way across all of them so that
I can predict cost patterns and anticipate service levels. Vitalink provides
consistency of operating performance through our CARE Group Standards--we
operate the same way in all of our sites."
Donna De Nardo, President and Chief Operating Officer
17
<PAGE>
Vitalink Pharmacy Locations
[MAP GRAPHIC HERE]
CALIFORNIA
Cerritos
Hayward
Los Angeles
Palm Desert
San Bernardino*
Santa Rosa
Stockton
Van Nuys
COLORADO
Denver
Loveland**
Northglenn
FLORIDA
Deerfield Beach
St. Petersburg
ILLINOIS
Elgin
Hickory Hills*
Monticello
INDIANA
Evansville
Fort Wayne
Indianapolis (2)
South Bend
IOWA
Bettendorf
KENTUCKY
Louisville
MARYLAND
Baltimore
Upper Marlboro
MICHIGAN
Detroit (2)
Kalamazoo
Lansing
NEW JERSEY
Moorestown
Ocean
Whippany
NEW YORK
Clinton
Utica
NORTH CAROLINA
Aberdeen
Charlotte
Hendersonville
OHIO
Cleveland
Copley
OKLAHOMA
Oklahoma City
OREGON
Eugene
Portland
PENNSYLVANIA
Allentown*
Bridgeville
Williamsport
York
SOUTH CAROLINA
Florence
Georgetown
TEXAS
San Antonio
VIRGINIA
Orange
Portsmouth
Richmond
WISCONSIN
Appleton
Janesville
Madison
Menomonie
Menomonee Falls
* includes regional infusion pharmacy
** regional infusion pharmacy only
18
<PAGE>
Report of Independent Public Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF VITALINK PHARMACY SERVICES, INC.:
We have audited the accompanying consolidated balance sheets of Vitalink
Pharmacy Services, Inc. (a Delaware Corporation) and subsidiaries as of May 31,
1997 and 1996, and the related consolidated statements of income, stockholders'
equity and cash flows for each of the three years in the period ended May 31,
1997. 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 an 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 financial position of Vitalink Pharmacy Services,
Inc. and subsidiaries as of May 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
May 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Washington, D.C.
June 27, 1997
19
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Income
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended May 31, 1997 1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Revenues $274,038 $141,115 $112,257
Cost of Goods Sold 140,426 71,122 56,280
Gross Profit 133,612 69,993 55,977
Operating Expenses
Payroll expenses 61,463 29,255 22,153
Selling, general and administrative expenses 25,102 11,662 9,573
Provision for doubtful accounts 4,411 2,412 1,772
Depreciation and amortization 9,527 4,363 3,753
Total operating expenses 100,503 47,692 37,251
Income from Operations 33,109 22,301 18,726
Interest Income and Other, Net 1,106 1,003 893
Interest Expense (2,154) (51) (57)
Income Before Income Taxes 32,061 23,253 19,562
Income Taxes 13,744 9,383 7,882
Net Income $ 18,317 $ 13,870 $ 11,680
Weighted Average Shares Outstanding 17,727 13,976 13,975
Earnings Per Share $ 1.03 $ .99 $ .84
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
20
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Balance Sheets
(in thousands, except share data)
<TABLE>
<CAPTION>
As of May 31, 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 3,660 $ 889
Receivables (net of allowances of $4,872 and $2,163) 79,745 20,093
Inventories 25,193 7,426
Deferred income taxes 9,590 1,138
Other 1,829 330
Total current assets 120,017 29,876
Due from Affiliate 1,053 16,910
Property and Equipment, at Cost, Net of Accumulated Depreciation 22,908 8,191
Pharmacy Contracts (net of amortization of $4,579 and $3,044) 39,313 6,187
Goodwill (net of amortization of $5,705 and $2,146) 326,884 31,194
Other Assets (net of amortization of $4,689 and $3,292) 6,630 3,565
- --------------------------------------------------------------------------------------------------
Total Assets $ 516,805 $ 95,923
==================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts payable $ 22,867 $ 3,918
Accrued expenses 20,979 2,403
Income taxes payable -- 725
Current portion of long-term debt 2,165 --
Total current liabilities 46,011 7,046
Long-Term Debt 104,873 --
Deferred Income Taxes ($15,352 and $1,916)
& Other Long-Term Liabilities 17,390 2,578
Stockholders' Equity
Common stock
(80,000,000 shares authorized, 25,402,510 and
13,979,700 shares issued, $.01 par value) 254 140
Contributed capital 281,956 38,155
Retained earnings 66,321 48,004
Total stockholders' equity 348,531 86,299
- --------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 516,805 $ 95,923
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
21
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Stockholders' Equity
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Common Stock Contributed Retained
Shares Amount Capital Earnings
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, May 31, 1994 13,975,000 $140 $ 38,105 $ 22,454
Net income -- -- -- 11,680
- ----------------------------------------------------------------------------------------------------
Balance, May 31, 1995 13,975,000 140 38,105 34,134
Net income -- -- -- 13,870
Exercise of stock options 4,700 -- 50 --
- ----------------------------------------------------------------------------------------------------
Balance, May 31, 1996 13,979,700 140 38,155 48,004
Net income -- -- -- 18,317
Exercise of stock options 54,583 -- 793 --
Tax benefit from exercise
of stock options -- -- 130 --
Stock issued for business acquired 11,368,227 114 242,878 --
- ----------------------------------------------------------------------------------------------------
Balance, May 31, 1997 25,402,510 $254 $281,956 $ 66,321
====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
22
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Year Ended May 31, 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 18,317 $ 13,870 $ 11,680
Reconciliation of net income to net cash provided
by operating activities:
Depreciation and amortization 9,527 4,363 3,753
Provision for doubtful accounts 4,411 2,412 1,772
Gain on sale of business -- -- (50)
Decrease (increase) in deferred taxes, net of acquisitions 2,076 712 (114)
Change in assets and liabilities, net of acquisitions
Change in receivables (22,341) (8,661) (1,731)
Change in inventories (1,690) (450) (1,103)
Change in other assets (1,055) 1,163) (21)
Change in accounts payable and accrued expenses (5,983) 1,559 242
Change in income taxes payable (725) (183) (84)
-----------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 2,537 12,459 14,344
-----------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Investment in property and equipment (4,648) (3,537) (2,163)
Proceeds from sale of business -- -- 144
Decrease (increase) in due from affiliate, net 15,857 (22) (8,721)
Acquisition of pharmacy businesses (102,691) (5,531) (2,451)
Deferred payments on previous acquisitions (1,856) (2,030) (1,400)
Other items, net (1,366) (644) (107)
- ---------------------------------------------------------------------------------------------------------
Net Cash (Used in) Investing Activities (94,704) (11,764) (14,698)
-----------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities
Principal payments of debt (3,255) (54) (56)
Exercise of stock options 793 50 --
Net borrowings under revolving credit agreement 97,400 -- --
- ---------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Financing Activities 94,938 (4) (56)
-----------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash 2,771 691 (410)
- ---------------------------------------------------------------------------------------------------------
Cash at Beginning of Period 889 198 608
- ---------------------------------------------------------------------------------------------------------
Cash at End of Period $ 3,660 $ 889 $ 198
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
23
<PAGE>
Vitalink Pharmacy Services, Inc. and Subsidiaries
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
Summary of Significant Accounting Policies
Organization
Vitalink Pharmacy Services, Inc. (the "Company" or "Vitalink") owns and
operates, directly or through its subsidiaries, institutional pharmacies. As of
May 31, 1997, Manor Care, Inc. ("Manor Care") owned 51.2% of the Company's
common stock. Manor Care, through its wholly-owned subsidiary ManorCare Health
Services, Inc., operates nursing facilities. Prior to Vitalink's February 12,
1997 acquisition of TeamCare, the institutional pharmacy business of GranCare,
Inc. ("the TeamCare Merger"--see Acquisitions), Manor Care's ownership interest
was 82.3%. Upon consummation of the TeamCare Merger, Manor Care's ownership was
reduced to approximately 45%. On May 21, 1997, Manor Care completed the
purchase, through a tender offer, of 1,500,000 shares of Vitalink stock at
$20.00 per share bringing its ownership to 51.2%. Unless the context otherwise
requires, Manor Care shall mean Manor Care and its subsidiaries other than the
Company.
Principles of Consolidation
The consolidated financial statements include the accounts of Vitalink Pharmacy
Services, Inc. and all of its subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
Revenue Recognition and Concentration of Credit Risk
The Company records revenues at the time services or supplies are provided.
Revenue is reported at the estimated net realizable amounts expected to be re-
ceived from individuals, third party payors or others for services and supplies
provided. Net revenues from Medicaid and Medicare programs were $87,432,000 and
$13,876,000, respectively, for the year ended May 31, 1997 and $40,250,000 and
$8,151,000, respectively, for the year ended May 31, 1996. Accounts receivable
outstanding on the consolidated balance sheets from Medicaid and Medicare
programs were 19% and 11%, respectively, of total accounts receivable at May 31,
1997 and 25% and 9%, respectively, of total accounts receivable at May 31, 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market and are comprised primarily of products held for resale.
Property and Equipment
The components of property and equipment at May 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
(in thousands)
<S> <C> <C>
Leasehold improvements $ 2,190 $ 1,125
Furniture, fixtures and equipment 18,137 6,907
Vehicles 2,765 1,553
Computer equipment 7,002 3,199
- -------------------------------------------------------
30,094 12,784
Less accumulated depreciation (7,186) (4,593)
- -------------------------------------------------------
Property and equipment $22,908 $ 8,191
=======================================================
</TABLE>
Property and equipment is recorded at cost, or if obtained through acquisition,
at the estimated fair market value at the date of acquisition. Depreciation and
amortization of property and equipment is computed using the straight-line
method over the following estimated useful lives:
Leasehold improvements 5-10 years
Furniture, fixtures and equipment
including computer equipment 3-8 years
Vehicles 2-3 years
Capitalization Policies
Maintenance, repairs and minor replacements are charged to expense. Major
renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is recorded.
Goodwill and Pharmacy Contracts
Goodwill arising from business acquisitions is amortized on the straight-line
basis over 40 years. Pharmacy contracts, principally representing the estimated
value of acquired contracts to service customers, are amortized over their
24
<PAGE>
estimated useful lives, not to exceed 20 years. The recoverability of these
assets is evaluated whenever events and circumstances indicate that the value of
assets may be impaired. The evaluation is based on comparing the carrying value
of the assets to the estimated undiscounted cash flows of the acquired business
or pharmacy contract. If the evaluation indicates that the carrying value of the
asset will not be fully recovered, the carrying value of the asset will be
adjusted accordingly. The Company adopted 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" in fiscal year 1997. Adoption of
this statement did not impact the Company's consolidated financial statements.
Amortization expense charged to operations for goodwill and pharmacy contracts,
respectively, was $3,559,000 and $1,535,000 in 1997, $786,000 and $928,000 in
1996 and $635,000 and $904,000 in 1995.
Earnings Per Common Share
Earnings per common share have been computed based on the weighted average
number of shares of common stock outstanding. The effect of outstanding stock
options on the computation is not material.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Impact of New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 128, Earnings Per Share ("SFAS 128"), which is effective for interim and
annual periods ending after December 15, 1997. Early adoption of SFAS 128 is
prohibited. The statement replaces primary earnings per share with basic
earnings per share, as defined by the statement. The Company plans to adopt SFAS
128 in fiscal 1998. Had the Company adopted SFAS 128 in fiscal 1997, basic
earnings per share would have been the same as reported earnings per share and
diluted earnings per share would have been no more than 2% less in each of the
three years ended May 31, 1997.
Related Party Transactions
Manor Care
The Company provides pharmaceutical dispensing, infusion therapy and pharmacy
consulting services to nursing facilities owned and operated by Manor Care and
the patients of these facilities. Revenues from sales to Manor Care nursing
facilities and patients, which are included in net revenues in the consolidated
statements of income, were $76,526,000, $64,302,000 and $52,449,000,
respectively, for the three years ended May 31, 1997. Fees from consulting
services to Manor Care and Manor Care facilities, which are included in net
revenues in the consolidated statements of in-come, are charged based on an
annual fee per bed and totaled $3,342,000, $2,764,000, and $2,285,000,
respectively, for the three years ended May 31, 1997. Prior to fiscal year 1996,
sales of pharmaceutical and infusion therapy products and services to Manor
Care's nursing facilities were made at prices charged to other customers less an
administrative fee equal to 3% of the private pay revenues derived from each
facility. The administrative fee was $485,000 for the year ended May 31, 1995.
Effective June 1, 1995, the Company ceased to pay Manor Care the 3%
administrative fee as the Company assumed the billing and collecting of private
pay revenues derived from Manor Care facilities.
The Company and Manor Care have entered into an Administrative Services
Agreement. Manor Care provides various services to the Company including, among
others, cash management, payroll and payables processing, employee benefit
plans, insurance, legal, accounting, tax, information systems and certain
administrative services, as required. Substantially all cash received by the
Company, with the exception of cash received by pharmacies acquired in the
TeamCare Merger, (the "TeamCare Pharmacies"), is immediately deposited in and
combined with Manor Care's corporate funds through its cash management system.
Similarly, operating expenses, capital expenditures and other cash requirements
of the Company, with the exception of the TeamCare Pharmacies, are paid by Manor
Care and charged to the Company. Administrative fees of $640,000, $595,000 and
$551,000, respectively, for the three years ended May 31, 1997, were charged
based on a time allocation method which Manor Care utilized to charge
administrative services to all of its subsidiaries. Management believes that the
foregoing charges are reasonable allocations of the costs incurred by Manor Care
25
<PAGE>
on the Company's behalf. It is anticipated that the Administrative Services
Agreement will be terminated within one year following the TeamCare Merger as
the Company will be assuming direct in-house responsibility for the services
provided.
Prior to the TeamCare Merger, Manor Care obtained and provided insurance
coverage for group health, auto, general liability, property casualty and
workers' compensation through its self-insurance and outside insurance programs
and charged the Company based on the relative percentage of insurance costs
incurred by Manor Care on the Company's behalf. After the TeamCare Merger, all
insurance except certain group health was obtained directly by Vitalink. Total
insurance costs allocated were $2,051,000, $1,777,000 and $1,360,000,
respectively, for the three years ended May 31, 1997. Management believes that
the foregoing charges are reasonable allocations of the costs incurred by Manor
Care on the Company's behalf.
The net result of all intercompany transactions, plus tax allocations as
discussed in the next footnote regarding income taxes, is included in the due
from affiliate amount in the consolidated balance sheets. Due from affiliate has
no set repayment terms. However, the balance due accrues interest and it is
expected that repayment will occur as the Company requires cash.
Manor Care credited the Company with interest income of $922,000, $972,000 and
$822,000, respectively, for the three years ended May 31, 1997 relating to the
average balance due from affiliate. The interest earned on the average balance
due from affiliate was calculated based on an average three-month Treasury Bill
rate plus 100 basis points. The average three-month Treasury Bill rate was
5.08%, 5.13% and 5.23% in the three years ended May 31, 1997.
Following the TeamCare Merger, the Company amended an Intercompany Debt and
Credit Agreement which, among other things, terminated a $10,000,000 line of
credit with Manor Care. There was no balance outstanding under this agreement at
May 31, 1997 or 1996.
The Company has entered into pharmacy, infusion therapy and consulting services
agreements with Manor Care, whereby the Company has the option to provide
pharmaceutical products and services, infusion therapy products and services and
pharmacy consulting services to Manor Care, Manor Care nursing facilities and
patients. The agreements have a ten-year term commencing June 1, 1991. The
Company will continue to charge Manor Care for consulting services as set forth
above.
GranCare
The Company's Board of Directors includes three Directors who are also Directors
of GranCare, Inc. ("GranCare"). In connection with the TeamCare Merger, the
Company assumed certain rights and obligations of an existing Pharmaceutical
Supply Agreement ("the Supply Agreement") between GranCare and TeamCare, whereby
the Company has rights to supply pharmaceutical and related goods to existing
GranCare facilities. The Supply Agreement has an initial term of five years and
is automatically renewed for an additional year upon each anniversary. Payment
terms under the Supply Agreement are 30 days. Included in net revenues for
fiscal 1997, are net revenues from GranCare facilities and their patients of
$20,369,000. Included in accounts receivable at May 31, 1997, are amounts due
from GranCare facilities of $7,185,000.
Vitalink and GranCare have entered into an Interim Services Agreement (the
"Interim Services Agreement") which requires GranCare to provide various
services to the Company including, among others, tax and information systems, as
required, for the benefit of the TeamCare Pharmacies. The term of the agreement
is for a one year period subsequent to the TeamCare Merger or for a lesser
period if mutually agreed to by both parties. The fees for the services are
based on the direct and indirect costs of providing such services.
26
<PAGE>
Other
The Company leases operating facilities from various employees. Rental expense
under the non-cancelable operating leases was approximately $353,000, $290,000
and $290,000, respectively, for the three years ended May 31, 1997. Future
minimum lease payments for the leases, which expire from 1998 to 2005, are
$2,417,000 at May 31, 1997.
Income Taxes
In prior years, an agreement existed whereby the Company joined with Manor Care
in the filing of a consolidated federal tax return. As a result of the TeamCare
Merger, the Company will file on a separate company basis effective with a short
period return for the period February 1, 1997 through May 31, 1997. Accordingly,
the Company has accrued taxes payable to or benefits receivable from Manor Care
in the due from affiliate account up until the time of the TeamCare Merger,
based on the statutory rate applied to income before taxes after considering
appropriate tax credits. Deferred taxes are recorded for the tax effect of
temporary differences between book and tax income.
The consolidated provisions for income taxes follows for the years ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------
(in thousands)
<S> <C> <C> <C>
Current
Federal $ 9,762 $7,459 $6,381
State 2,262 1,722 1,476
Deferred
Federal 1,396 164 20
State 324 38 5
- --------------------------------------------
Income taxes $13,744 $9,383 $7,882
============================================
</TABLE>
Deferred tax assets (liabilities) are comprised of the following at May 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------
(in thousands)
<S> <C> <C> <C>
Gross deferred tax liabilities
Depreciation $ (1,122) $ (941) $ (784)
Amortization of intangibles (17,906) (390) (269)
Other (999) (598) (266)
------------------------------------------------------------------
Total gross deferred tax liabilities (20,027) (1,929) (1,319)
==================================================================
Gross deferred tax assets
Reserve for doubtful accounts 7,813 964 747
Acquisition costs 3,864 0 0
Other 2,588 187 506
Total gross deferred tax assets 14,265 1,151 1,253
------------------------------------------------------------------
Net deferred tax liabilities $ (5,762) $ (778) $ (66)
====================================================================
The Company expects the deferred tax assets to be realized through future
taxable income.
Reconciliation of the Federal statutory income tax rate and the Company's
effective rate is as follows:
1997 1996 1995
- --------------------------------------------------------------
Federal income tax rate 35.0% 35.0% 35.0%
State income taxes,
net of Federal tax benefit 5.2% 4.9% 4.9%
Amortization of intangibles 2.4% 0.1% 0.2%
Other 0.3% 0.3% 0.2%
- --------------------------------------------------------------
Effective income tax rate 42.9% 40.3% 40.3%
==============================================================
</TABLE>
Cash paid for state income taxes was $1,975,000, $1,210,000 and $1,100,000,
respectively, for the three years ended May 31, 1997.
27
<PAGE>
Accrued Expenses
Accrued expenses were as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------
(in thousands)
<S> <C> <C>
Payroll and incentive
compensation $ 8,663 $2,064
Acquisition related accruals 6,251 243
Insurance 925 --
Other 5,140 96
Accrued expenses $20,979 $2,403
</TABLE>
Long-Term Debt
In connection with the TeamCare Merger, the Company entered into a five-year
$200 million revolving credit facility (the "Credit Facility"), which expires
February 12, 2002, with various banks. At May 31, 1997, the Company had drawn
$97,400,000 under the Credit Facility. The interest rate is LIBOR plus .25%. The
weighted average interest rate during fiscal 1997 was 6.05%.
Amounts drawn under the Credit Facility were used to redeem, through a tender
offer, $98,230,000 of GranCare's $100 million 9-3/8% senior subordinated notes.
The Company is subject to a 0.15% facility fee for the total amount of the
Credit Facility payable on a quarterly basis. The terms of the Credit Facility
contain, among other provisions, requirements for maintaining defined levels of
net worth, annual capital expenditures and interest coverage and consolidated
leverage ratios. At May 31, 1997, the Company was in compliance with the terms
of the Credit Facility.
In connection with the TeamCare Merger, the Company assumed $1,770,000 of
untendered GranCare 9-3/8% senior subordinated notes due September 15, 2005. The
notes require semi-annual interest payments. A premium of $600,000 has been
recorded to reflect the fair market value of the notes at the date of the
TeamCare Merger.
Also assumed in the TeamCare Merger were various notes payable totalling
$5,230,000 issued in connection with previously acquired pharmacy businesses.
The weighted average interest rate on the notes is 7.03% and their annual
maturities over the next five fiscal years are as follows: $1,850,000,
$1,942,000, $938,000, $211,000 and $173,000.
Vitalink has a $1,000,000 standby letter of credit related to contractual
requirements with the State of New Jersey. The Company is subject to an annual
fee of 0.375%, which is payable on a quarterly basis, on the letter of credit.
Interest paid was $1,538,000, $51,000 and $57,000, respectively, in the three
years ended May 31, 1997. The carrying amounts of Vitalink's long-term debt
approximate fair value.
Leases
The Company operates certain property and equipment under leases that have
initial or remaining terms in excess of one year. Rental expense under
noncancelable operating leases was $3,515,000, $1,373,000 and $1,086,000,
respectively, for the three years ended May 31, 1997. Future minimum lease
payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Fiscal Year ended May 31 Leases Leases
- ------------------------------------------------------------
(in thousands)
<S> <C> <C>
1998 $ 465 $ 4,642
1999 421 3,711
2000 411 3,059
2001 395 2,622
2002 84 1,929
Thereafter -- 1,152
Total minimum lease payments $1,776 $17,115
Less amount representing interest (378)
Present value of lease payments 1,398
Current portion (315)
Lease obligations included
in long-term debt $1,083
</TABLE>
28
<PAGE>
Acquisitions
Fiscal Year 1997
On February 12, 1997, the Company merged with TeamCare, GranCare's institutional
pharmacy business, by acquiring all of the outstanding shares of GranCare after
the spin-off of its skilled nursing business. The Company issued approximately
11.4 million shares of common stock and funded the redemption of $98,230,000 of
$100 million face value of GranCare senior subordinated notes. The merger was
accounted for using the purchase method of accounting with an effective date of
February 1, 1997 and, accordingly, the results of operations of TeamCare have
been included in the consolidated financial statements since February 1, 1997.
The purchase price of $351 million was allocated to the net assets acquired
based on their estimated fair values at the date of the merger. The excess of
the purchase price over the fair value of net assets acquired was approximately
$292 million and has been recorded as goodwill, which is being amortized on a
straight-line basis over 40 years.
The purchase price has been allocated to the net assets purchased and
liabilities assumed as presented below.
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Working capital $ 21,066
Property and equipment 12,832
Pharmaceutical Supply Agreement 34,262
Other assets 2,240
Goodwill 292,496
Other liabilities (11,896)
- ------------------------------------------------
Purchase price $351,000
================================================
</TABLE>
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and TeamCare as if the merger
had occurred at the beginning of fiscal 1996, after giving effect to
amortization of goodwill and pharmacy contracts, increased interest expense on
the acquisition debt and related income tax effects.
<TABLE>
<CAPTION>
Fiscal Year ended May 31 1997 1996
- -------------------------------------------------------------
(unaudited; in thousands, except per share data)
<S> <C> <C>
Net revenues $458,043 $360,939
Net income $ 21,630 $ 16,078
- ------------------------------------------------------------
Earnings per share $ 0.85 $ 0.63
============================================================
</TABLE>
The pro forma information is presented for informational purposes only and is
not necessarily indicative of results that would have occurred had the merger
been effective at the beginning of 1996, nor is the pro forma information
necessarily indicative of the results that will be obtained in the future.
On July 31, 1996, the Company acquired Medisco Pharmacies, Inc., located in San
Bernardino, California for $5,291,000 in cash plus the assumption of $2,510,000
in liabilities and future payments totaling $1,150,000.
Fiscal Year 1996
On November 3, 1995, the Company acquired the institutional pharmacy business of
Brentview Clinical Pharmacy, located in Los Angeles, California for $3,206,000
in cash plus the assumption of $45,000 in liabilities and future contingent
payments based on the achievement of future profitability objectives.
On July 6, 1995, the Company acquired the infusion therapy business of Home
Intravenous Care, Inc., located in Loveland, Colorado, for $2,325,000 in cash
plus the assumption of $105,000 in liabilities and future contingent payments
based on the achievement of certain future profitability objectives.
Fiscal Year 1995
On April 27, 1995, the Company acquired the institutional pharmacy business of
Parker's Pharmacy, Inc., located in San Antonio, Texas, for $2,451,000 in cash
plus the assumption of $107,000 in liabilities.
The above acquisitions are accounted for under the purchase method of accounting
with the net assets recorded at their estimated fair market values at the date
of acquisition. The fiscal 1996 and 1995 acquisitions are not material to the
Company's financial position or results of operations on a pro forma basis.
29
<PAGE>
The estimated fair market values of pharmacy contracts acquired are amortized
over their expected remaining lives not to exceed 20 years including estimated
contract renewals. Goodwill, representing the excess of acquisition costs over
the fair market value of acquired assets, is amortized over 40 years. Other
assets include noncompete covenants totaling $1,585,000 and $1,681,000,
respectively, at May 31, 1997 and 1996. Other assets are amortized over their
estimated useful lives ranging from 2 to 10 years.
Depreciation and amortization in the consolidated statements of income include
amortization of intangible assets of $6,491,000, $2,641,000 and $2,449,000,
respectively, for the three years ended May 31, 1997. The guaranteed value of
stock options granted to the sellers of acquired businesses was considered part
of the purchase price of the businesses. Included in deferred income taxes and
other long-term liabilities in the consolidated balance sheets at May 31, 1997
and 1996 is $656,000 representing the guaranteed value of stock options.
Capital Stock and Stock Options
In September 1991, the Company's sole shareholder and Board of Directors
authorized 10,000,000 shares of preferred stock at $.01 par value. None of the
preferred stock is issued and outstanding. The Board of Directors is authorized
to determine the rights of the preferred shares.
On July 10, 1996, the Board of Directors adopted and the shareholders
subsequently approved the Company's 1996 Long-Term Incentive Plan (the
"Incentive Plan"). The Incentive Plan provides for the granting of options,
stock appreciation rights, restricted and performance shares to key employees.
At May 31, 1997, 449,900 shares are reserved for issuance under the Incentive
Plan. Options issued are at prices equal to the market price at the date of
grant and have a term of ten years. Options that have been issued under the
Incentive Plan vest at a rate of 20% per year for the first five years after the
date of the grant.
In September 1991, the Board of Directors adopted the Company's 1991 Key
Executive Stock Option and Appreciation Rights Plan (the "Plan"). The 1991 Key
Executive Stock Option and Appreciation Rights Plan was terminated in fiscal
1997 in connection with the adoption of the 1996 Long-Term Incentive Plan.
Under the Plan, 420,000 shares were reserved for issuance upon exercise of
granted options. The Plan provided for the granting of options at prices equal
to the market value of the stock at grant date. In addition, a stock
appreciation right could be granted with a stock option. At the election of the
Board, the stock appreciation right may be paid in cash or shares of common
stock or a combination thereof in an amount equal to the difference between the
option exercise price and the then market value of the shares subject to the
option. Options granted are not exercisable during either the first one or two
years after the grant date and vest over periods of 48 to 96 months. The options
expire from 5 to 10 years after the grant date. In fiscal 1994, the Board
adopted and the shareholders approved an increase in the number of shares
reserved for issuance to 1,000,000.
In February 1997, in conjunction with the TeamCare Merger, the Company converted
GranCare stock options into 1,121,030 of Company stock options. These converted
options may be used to acquire Company stock and the option holders became fully
vested as of February 12, 1997. The options expire 10 years after the date of
the original grant.
30
<PAGE>
The following summarizes stock option transactions
for the three fiscal years ended May 31:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price Shares
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options outstanding, beginning
of year 501,400 $14.59 497,100 $13.23 398,600
Options exercised (54,583) 14.92 (4,700) 10.47 --
Options granted 55,000 23.75 109,000 19.12 126,000
Options converted from
GranCare options 1,121,030 16.31 -- -- --
Options cancelled (11,000) 14.34 (100,000) 13.00 (27,500)
Options outstanding,
end of year 1,611,847 $16.13 501,400 $14.59 497,100
Option price range at end
of year $ 0.99-$27.06 $10.06-$19.88 $10.06-$17.00
Option price range
of exercised shares $10.75-$17.00 $10.06-$12.75 --
Options available for grant
at end of year 449,900 493,900 503,500
Weighted average fair value
of options granted during year $12.60 $8.52 --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about
stock options outstanding as of May 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------
Weighted
Range of Number Average Remaining Weighted Average Number Weighted Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.99-$ 2.07 149,982 6.5 years $ 1.25 149,982 $ 1.25
10.06- 15.13 330,741 5.5 years 12.08 147,109 12.05
16.11- 22.33 1,036,450 7.0 years 18.78 899,590 18.85
23.36- 27.06 94,674 8.0 years 24.68 39,674 26.03
- --------------------------------------------------------------------------------------------------------------
1,611,847 16.13 1,236,355 18.45
- --------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
The Company has adopted the disclosure-only provisions of SFAS No. 123
"Accounting for Stock-Based Compensation" ("SFAS 123"). Had compensation expense
for the Company's stock options been recognized based on the grant date fair
value consistent with the provisions of SFAS 123, the Company's net earnings
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------
(in thousands, except per share data)
<S> <C> <C>
Net earnings--as reported $18,317 $13,870
Net earnings--pro forma $18,168 $13,721
Earnings per share--as reported $ 1.03 $ 0.99
Earnings per share--pro forma $ 1.02 $ 0.98
- ---------------------------------------------------------------------------
</TABLE>
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes option-pricing model. In computing these pro forma amounts,
the Company has assumed risk-free interest rates of 6.3% to 6.9%, expected
volatility of 44.6%, dividend yield of zero and expected option lives of four to
six years.
The effects of applying SFAS 123 on this pro forma disclosure are not likely to
be representative of the effects on reported net income in future years.
Additionally, SFAS 123 does not apply to awards granted prior to 1996;
additional awards are anticipated in future years.
In 1993, options were granted to four of the former shareholders of White, Mack
and Wart, Inc. to purchase 100,000 shares of common stock at $10.88 per share.
These options are not exercisable during the first two years after the date of
grant and then vest at the rate of 25% per year commencing at the end of year
two. The options expire six years after the date of grant.
Contingencies and Compensating Balances
On June 17, 1997, Vitalink filed a lawsuit against GranCare to enforce a non-
competition agreement between the parties entered into in connection with the
TeamCare Merger. The lawsuit seeks preliminary and permanent orders blocking the
proposed combination of GranCare with Living Centers of America, Inc.
The Company is subject to various legal actions or claims for damages that arise
in the ordinary course of business. In the opinion of management and counsel to
the Company, the ultimate outcome of the litigation with GranCare and other
litigation will not have a material adverse effect on the Company's financial
position or results of operations.
In connection with acquisitions, contingent purchase price payments exist up to
an aggregate maximum of $2,800,000, plus additional uncapped amounts based on
future performance.
In connection with the TeamCare Merger, Vitalink entered into a limited
guarantee with a term of 15 years to Health Retirement Properties Trust
("HRPT") of up to $15,000,000 for default mortgage obligations of GranCare
facility leases. In return, Vitalink is the beneficiary of a $15,000,000 letter
of credit from GranCare in the event that it defaults on any of its mortgages to
HRPT.
Compensating balances of $75,000 are required under certain debt agreements of
Manor Care.
Pension, Profit Sharing and Incentive Plans
The Company participates in the various pension and profit sharing plans of
Manor Care and contributes through Manor Care to certain welfare plans. The
provision for these plans amounted to $522,000, $433,000 and $317,000,
respectively, for the three years ended May 31, 1997. All vested benefits under
retirement plans are funded or accrued. In July 1997, the Company's Board of
Directors approved a new profit sharing plan for all Vitalink employees. All
participants in the Manor Care profit sharing plan will convert to the new
profit sharing plan in fiscal 1998. Subsequent to the TeamCare Merger, the
Company established an interim profit sharing plan for former TeamCare
employees, who will also convert to the new profit sharing plan in 1998. The
provision for the interim plan was $130,000 in fiscal 1997.
32
<PAGE>
The Company has incentive compensation plans for management personnel and
officers based primarily on new business development and achievement of certain
profitability levels. Incentive compensation expense was $1,538,000, $1,003,000
and $968,000, respectively, for the three years ended May 31, 1997.
Quarterly Financial Data
(unaudited)
The following table summarizes the quarterly financial data for the fiscal years
ended May 31, 1997 and 1996:
<TABLE>
<CAPTION>
Income
Quarter Net from Net Per
Ended Revenues Operations Income Share
- -------------------------------------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Fiscal 1997
- -----------
August $ 39,373 $ 5,965 $ 3,712 $ .27
November 43,346 6,257 3,886 .28
February 69,772 8,474 4,747 .27
May 121,547 12,413 5,972 .24
- -------------------------------------------------------------------------
$274,038 $33,109 $18,317 $1.03
- -------------------------------------------------------------------------
Fiscal 1996
- -----------
August $ 31,822 $ 5,070 $ 3,191 $ .23
November 33,998 5,390 3,366 .24
February 36,497 5,646 3,486 .25
May 38,798 6,195 3,827 .27
- -------------------------------------------------------------------------
$141,115 $22,301 $13,870 $ .99
- -------------------------------------------------------------------------
</TABLE>
* Does not add due to rounding and effect of weighted shares.
Market Price Data
Vitalink's common stock began trading on the New York Stock Exchange under the
symbol "VTK" effective February 13, 1997. Previously, the common stock was
traded on the NASDAQ Stock Market under the symbol "VTLK". The following table
sets forth the high and low sales price per share of Vitalink's common stock for
each quarter indicated, as reported in published financial sources (rounded to
the nearest cent):
<TABLE>
<CAPTION>
Market Price Per Share
Fiscal 1997 High Low
- ------------------------------------------------------------
<S> <C> <C>
August $25.00 $20.50
November 24.88 20.75
February 24.63 21.13
May 21.50 16.25
- ------------------------------------------------------------
Fiscal 1996 High Low
- ------------------------------------------------------------
August $17.50 $14.75
November 19.50 14.75
February 25.38 16.88
May 24.50 19.00
- ------------------------------------------------------------
</TABLE>
The Company has not paid, and does not anticipate paying in the foreseeable
future, any dividends to the holders of its common stock.
33
<PAGE>
MANAGEMENT'S DISCUSSION & ANALYSIS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenues for fiscal 1997 were $274,038,000, an increase of $132,923,000, or
94.2%, over fiscal 1996. The increase in net revenues was principally
attributable to the inclusion of the TeamCare revenues effective February 1,
1997.
Excluding TeamCare revenues, net revenues for fiscal 1997 were $38,357,000, or
27.2%, higher than fiscal 1996. The July 1996 acquisition of Medisco
Pharmacies, which served approximately 2,000 beds at the date of acquisition,
contributed $12,409,000 to the year-to-year increase in net revenues. At May 31,
1997, the Company provided services to approximately 172,000 institutional beds
versus 49,900 institutional beds at May 31, 1996. At the date of the TeamCare
Merger, TeamCare serviced approximately 113,000 institutional beds. Included in
fiscal 1997 net revenues are $3,342,000 in fees for consulting services provided
to Manor Care facilities and their patients versus $2,764,000 in fiscal 1996.
Gross profit for fiscal 1997 was $133,612,000, an increase of $63,619,000, or
90.9%, over fiscal 1996. The increase was largely attributable to the inclusion
of TeamCare results effective February 1, 1997. The gross profit margin declined
to 48.8% from 49.6% principally resulting from comparably less profitable new
accounts and reimbursement reductions from certain State Medicaid programs.
Operating expenses increased $52,811,000 to $100,503,000, or 36.7% of net
revenues in fiscal 1997 compared to $47,692,000, or 33.8% of net revenues in
fiscal 1996. The increase was principally attributable to the inclusion of
TeamCare results effective February 1, 1997. The increase in operating costs as
a percentage of net revenues is attributable to a variety of factors, including
TeamCare's higher payroll costs as a percentage of net revenues (25.3% v.
20.9%), TeamCare's higher selling, general and administration costs (10.7% v.
8.4%) and the amortization of goodwill and pharmacy contracts arising from the
TeamCare Merger ($3,090,000).
The increase in interest expense is largely attributable to interest expense
incurred on $97,400,000 drawn in February 1997 on the Vitalink Credit Facility
and used to consummate the TeamCare Merger. The effective income tax rate in
fiscal 1997 increased to 42.9% compared to 40.3% in fiscal 1996 due to the tax
non-deductibility of goodwill arising from the TeamCare Merger.
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenues for fiscal 1996 were $141,115,000, an increase of $28,858,000, or
25.7%, over fiscal 1995. The increase in net revenues was principally
attributable to increases in the number of nursing facility beds serviced by the
Company and increased revenues per bed from higher patient acuity levels. At May
31, 1996, the Company provided services to approximately 49,900 institutional
beds.
Increases in beds serviced were achieved through acquisitions, start-ups in
Oklahoma City and St. Petersburg and marketing efforts to customers in existing
markets. In the first quarter, the Company acquired Home Intravenous Care, Inc.,
located in Loveland, Colorado. Brentview Clinical Pharmacy, located in Los
Angeles, California, was acquired in the second quarter. In fiscal 1996, these
two acquisitions contributed net revenues of $1,821,000 and $3,305,000,
respectively. Included in fiscal 1996 revenues from Manor Care facilities and
their patients are $2,764,000 in fees charged for consulting services as
compared with $2,285,000 charged in fiscal 1995.
Gross profit for fiscal 1996 was $69,993,000, an increase of $14,016,000, or
25.0%, over fiscal 1995. The gross profit margin decreased slightly to 49.6% in
fiscal 1996 compared to 49.9% in fiscal 1995.
Operating expenses increased $10,441,000 to $47,692,000, or 33.8% of net
revenues in fiscal 1996 compared to $37,251,000, or 33.2% of net revenues in
fiscal 1995. Both payroll and selling, general and administrative expenses
increased to support the growth in beds serviced. Payroll, as a percentage of
net revenues, increased to 20.7% from 19.7%, primarily resulting from
investments in staff for information systems and selling efforts. The increase
in depreciation and amortization is the result of the amortization of pharmacy
contracts, goodwill and noncompete agreements obtained in connection with
acquired businesses as well as depreciation on capital expenditures from
existing pharmacies.
The increase in interest income and other, net, which consists principally of
interest earned on the balance due from affiliate, is primarily due to the
higher average monthly balance due from affiliate resulting
34
<PAGE>
from unused operating cash flows. The interest earned on the loan is equal to
the average three-month Treasury Bill rate plus 100 basis points. Interest
income and other, net for fiscal 1995 also includes a $50,000 gain on the sale
of the Company's retail operation located in Wisconsin.
LIQUIDITY AND CAPITAL RESOURCES
The Company meets its ongoing capital requirements and operating needs from
operating cash flows. Cash flows provided by operating activities were
$2,537,000 in fiscal 1997 compared to $12,459,000 in fiscal 1996. The reduction
in operating cash flows is largely the result of working capital changes related
to the TeamCare Merger. Prior to the TeamCare Merger, TeamCare did not carry a
receivable from the GranCare facilities they served as TeamCare was a wholly-
owned subsidiary of GranCare and all intercompany transactions were recorded in
an intercompany account. Subsequent to the TeamCare Merger, GranCare began to
make payments to Vitalink for services provided to GranCare facilities. At May
31, 1997, accounts receivable due from GranCare totaled approximately $7,185,000
and are included in accounts receivable on the consolidated balance sheet at May
31, 1997. Vitalink also made payments to reduce the level of TeamCare accounts
payable and accrued expenses by approximately $9,900,000 subsequent to the
TeamCare Merger. The Company does not anticipate any further material changes in
the relative level of its working capital at May 31, 1997. Operating cash flows
not used to acquire pharmacies or invest in new property and equipment is held
in the form of a receivable due from Manor Care. The balance due is classified
as due from affiliate on the consolidated balance sheets and totaled
approximately $1,053,000 at May 31, 1997.
Except for the TeamCare Merger, previously acquired businesses were paid for
with operating cash flows. The purchase contracts for previous acquisitions
generally stipulate future payments contingent upon achievement of future
profitability objectives.
In connection with the TeamCare Merger, the Company entered into the Vitalink
Credit Facility with various banks providing for unsecured borrowings of up to
$200 million. Funds to redeem $98,230,000 of GranCare's $100 million face value
senior subordinated notes were obtained through borrowings under the Credit
Facility. The $1,770,000 balance of the untendered notes was assumed by the
Company. Under the Credit Facility, the Company may borrow initially at LIBOR
plus 0.25%. A fee of 0.15% per annum is charged on the $200 million commitment.
The terms of the Credit Facility contain, among other provisions, requirements
for maintaining defined levels of net worth, annual capital expenditures and
consolidated leverage and debt-to-equity ratios. At May 31, 1997, there were
$97,400,000 in borrowings outstanding under the credit agreement and the Company
was in compliance with the terms of the Credit Facility.
On February 12, 1997, the Company amended its "Intercompany Debt and Credit
Agreement" with Manor Care to, among other things, terminate its $10,000,000
line of credit with Manor Care.
Funds from the Credit Facility, cash balances and amounts due from Manor Care
are available for general corporate purposes, including potential acquisitions
of pharmacies, the internal development of additional pharmacies, working
capital and capital expenditures. The Company believes that its cash balances,
amounts due from Manor Care, cash flows from operations and available credit
sources will be adequate to meet the Company's foreseeable capital and other
cash requirements.
35
<PAGE>
Corporate Information
OFFICERS
- -------------------------------------------------------------------------
DONNA L. DENARDO
President and Chief Operating Officer
ROBERT W. HORNER, III
Senior Vice President, Secretary and General Counsel
SCOTT T. MACOMBER
Senior Vice President, Chief Financial Officer and Treasurer
THOMAS J. SANTORO
Vice President and Corporate Controller
STEPHEN A. THOMPSON
Senior Vice President, Human Resources and Administration
DIRECTORS
- ------------------------------------------------------------------------
ESSEL W. BAILEY, JR.
Chairman and Chief Executive Officer,
Omega Healthcare Investors, Inc.
STEWART BAINUM, JR.
Chairman
Chairman and Chief Executive Officer,
Manor Care, Inc.
JOSEPH R. BUCKLEY
Executive Vice President,
Manor Care, Inc.
JOEL S. KANTER
President, Windy City, Inc.
(Investment Management Firm)
JAMES A. MACCUTCHEON
Executive Vice President,
Chief Financial Officer and Treasurer,
Choice Hotels International, Inc.
ROBERT L. PARKERU
Founder and Retired Chairman,
Omega Healthcare Investors, Inc.
JAMES H. REMPEU
Senior Vice President and General Counsel,
Manor Care, Inc.
GARY U. ROLLE
Executive Vice President and
Chief Investment Officer,
TransAmerica Investment Services, Inc.
- ---------------------------------------------------------------------------
CORPORATE HEADQUARTERS
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road, Suite 208
Naperville, Illinois 60563
Telephone: 630-245-4800
http://www.vitalink-pharmacy.com
AUDITORS
Arthur Andersen LLP
1666 K Street, N.W.
Washington, DC 20006
REGISTRAR & TRANSFER AGENT
ChaseMellon Shareholder Services
New York, New York 10001-2697
INVESTMENT INQUIRIES
For more information about Vitalink, please
contact the Investor Relations Department at
630-245-4800.
For changes of address, information concerning
transfer of stock, or miscellaneous requests,
shareholders may contact:
ChaseMellon Shareholder Services
450 West 33rd Street, 15th Floor
New York, New York 10001-2697
800-851-9677
36
<PAGE>
Vitalink Pharmacy Services, Inc.
1250 East Diehl Road, Suit 208 Naperville, Illinois 60563
Phone 603-215-4700 Fax 630-595-1319
http://www.vitalink-pharmacy.com
<PAGE>
EXHIBIT 21
List of Subsidiaries of Vitalink Pharmacy Services, Inc.
Name of Subsidiary State of Incorporation
------------------- ----------------------
1. TeamCare, Inc. Delaware
2. White, Mack & Wart, Inc. Oregon
(d/b/a Propac Pharmacy)
3. Vitalink Infusion Services, Inc. Delaware
4. Medisco Pharmacies, Inc. California
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our reports dated June 27, 1997, included in and incorporated by reference in
Vitalink Pharmacy Services, Inc.'s Form 10-K for the year ended May 31, 1997,
into the Company's previously filed Registration Statement Nos. 33-75310,
33-98992 and 333-19097.
ARTHUR ANDERSEN LLP
Washington, D.C.,
August ____, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 3,660
<SECURITIES> 0
<RECEIVABLES> 79,745
<ALLOWANCES> 4,872
<INVENTORY> 25,193
<CURRENT-ASSETS> 120,017
<PP&E> 22,908
<DEPRECIATION> 7,186
<TOTAL-ASSETS> 516,805
<CURRENT-LIABILITIES> 46,011
<BONDS> 99,170
0
0
<COMMON> 254
<OTHER-SE> 348,277
<TOTAL-LIABILITY-AND-EQUITY> 516,805
<SALES> 274,038
<TOTAL-REVENUES> 274,038
<CGS> 140,426
<TOTAL-COSTS> 100,503
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 4,411
<INTEREST-EXPENSE> 2,154
<INCOME-PRETAX> 32,061
<INCOME-TAX> 13,744
<INCOME-CONTINUING> 18,317
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,317
<EPS-PRIMARY> 1.03
<EPS-DILUTED> 1.03
</TABLE>
