<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 26, 1997
REGISTRATION NO. 333-
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
LIVING CENTERS OF AMERICA, INC.
TO BE RENAMED PARAGON HEALTH NETWORK, INC. UPON CONSUMMATION OF THE
RECAPITALIZATION MERGER DESCRIBED HEREIN
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 8051 74-2012902
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
15415 KATY FREEWAY, SUITE 800
HOUSTON, TEXAS 77094
(281) 578-4600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
SUSAN THOMAS WHITTLE, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
15415 KATY FREEWAY, SUITE 800
HOUSTON, TEXAS 77094
(281) 578-4600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
ROBERT V. JEWELL, ESQ. VICTOR I. LEWKOW, ESQ.
ANDREWS & KURTH L.L.P. CLEARY, GOTTLIEB, STEEN & HAMILTON
600 TRAVIS STREET, SUITE 4200 ONE LIBERTY PLAZA
HOUSTON, TEXAS 77002 NEW YORK, NEW YORK 10006-1470
(713) 220-4200 (212) 225-2000
RICHARD H. MILLER, ESQ. JEFF C. DODD, ESQ.
MAYOR, DAY, CALDWELL & KEETON, L.L.P.
POWELL, GOLDSTEIN, FRAZER & MURPHY LLP
191 PEACHTREE STREET N.E. 700 LOUISIANA, SUITE 1900
ATLANTA, GEORGIA 30303 HOUSTON, TEXAS 77002-2778
(404) 572-6600 (713) 225-7000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the recapitalization of Living Centers of America, Inc. ("LCA")
by the merger of an affiliate of Apollo Management, L.P. ("Apollo Sub") with
and into LCA and the merger of GranCare, Inc. ("GranCare") with a wholly owned
subsidiary of Paragon pursuant to the Merger Agreements described herein have
been satisfied or waived.
If the securities being registered on this form are offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE REGISTRATION FEE
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock, $.01 par
value....................... 11,719,067(1) $309,908,582(2) $93,912(3)
- ------------------------------------------------------------------------------
</TABLE>
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(1) Based on the maximum number of shares of Paragon Common Stock (defined
hereafter). Includes 5,925,926 shares to be issued to the shareholders of
Apollo Sub upon consummation of the Recapitalization Merger (defined
hereafter), 45,441 shares to be issued in connection with the cancellation
of LCA Rights (defined hereafter) immediately prior to the
Recapitalization Merger pursuant to the Recapitalization Merger Agreement
(defined hereafter) and 5,747,700 shares to be issued to the stockholders
of GranCare upon consummation of the GranCare Merger (defined hereafter).
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended (the
"Securities Act"), and computed pursuant to Rule 457(f) under the
Securities Act using: (i) $40.84, the average of the high and low sales
prices of LCA's common stock on September 25, 1997 reported on the New
York Stock Exchange (with respect to the 45,441 shares to be issued in
connection with the cancellation of LCA Rights); (ii) $11.84, the average
of the high and low sales prices of GranCare's common stock on September
25, 1997 reported on the New York Stock Exchange (with respect to the
5,747,700 shares to be issued to GranCare stockholders); and (iii) $40.50,
the effective per share price to be paid by the Apollo Investors (defined
hereafter) for the shares of Paragon Common Stock (with respect to the
5,925,926 shares to be issued to the Apollo Investors).
(3) Pursuant to Rule 457(b), the required fee is offset entirely by an
aggregate fee of $247,457 previously paid at the times of filing of
preliminary proxy materials in connection with this transaction on June 6,
1997, and September 18, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
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<PAGE>
[LOGO OF LIVING CENTERS APPEARS HERE]
SEPTEMBER 26, 1997
Dear Stockholders:
A Special Meeting of Stockholders of Living Centers of America, Inc. ("LCA")
will be held on October 28, 1997 at 10:00 a.m., local time, at the Houston
Marriott-Westside hotel, 13210 Katy Freeway, Houston, Texas.
At this very important meeting, stockholders will be asked to consider and
vote upon several interrelated proposals in connection with the proposed
recapitalization of LCA and merger with GranCare, Inc. ("GranCare"). Upon
consummation of these transactions, approximately 90.54% of the outstanding
shares of LCA common stock will be cancelled in exchange for $40.50 per share
in cash, and the remaining 9.46% of the outstanding LCA shares will remain
outstanding and be retained by current stockholders. Following the
transactions, the LCA shares that are retained by LCA stockholders will
represent about 14.1% of the LCA stock that will then be outstanding. Several
investment funds managed by Apollo Management, L.P. ("Apollo"), together with
certain other investors (together, the "Apollo Investors"), will acquire about
44.0% of the LCA stock that will be outstanding for $40.50 per share (or a
total of about $240 million). The remaining 41.9% of the LCA shares will be
owned by current GranCare stockholders who will receive LCA stock.
LCA will continue as a newly recapitalized and expanded company and be
renamed Paragon Health Network, Inc., and is referred to herein as "Paragon."
Paragon will conduct the current business of both LCA and GranCare under
management that includes individuals who have not previously been affiliated
with either GranCare or LCA as well as executives of both companies, and it
will have substantially more debt and related "leverage" than is currently
maintained by LCA.
One feature of the recapitalization permits LCA stockholders to elect,
subject to proration, the number of LCA shares that they wish to retain (and,
as a result, the amount of cash they wish to receive) in the recapitalization.
The actual cash consideration you will receive and the number of LCA shares
you will retain will depend on: (i) whether you make an affirmative election
(an "LCA Stock Election") to retain LCA shares, (ii) how many LCA Stock
Elections are made by other LCA stockholders and (iii) the application of a
proration procedure, as explained in detail in the Joint Proxy
Statement/Prospectus accompanying this letter. AS A RESULT OF POSSIBLE
PRORATION, (A) IF YOU DO NOT MAKE AN LCA STOCK ELECTION, YOU MAY NEVERTHELESS
RETAIN SOME LCA SHARES AND (B) IF YOU MAKE AN LCA STOCK ELECTION, YOU MAY NOT
RETAIN ALL OF THE LCA SHARES YOU ELECT TO RETAIN, AS SUMMARIZED BELOW.
If neither you nor any of the other LCA stockholders make an LCA Stock
Election, then in the recapitalization you would receive $40.50 per share in
cash for approximately 90.54% of your LCA shares and you would retain
approximately 9.46% of your shares. Essentially, under those circumstances,
for each outstanding LCA share you own, you would receive $36.67 in cash and
retain .0946 of a share. It is expected that stock of Paragon (including LCA
shares retained by current LCA stockholders) will continue to be listed on the
New York Stock Exchange, and you will be able to purchase or sell such stock
in the same way as at present.
If you do not make an LCA Stock Election, but such elections are made by
other stockholders for more than 9.46% of the outstanding LCA shares, then you
would receive $40.50 per share in cash for all your shares. If you do not make
an LCA Stock Election, and other stockholders make such elections for fewer
than approximately 9.46% of the outstanding LCA shares, then you would receive
$40.50 per share for more than 90.54% of your shares and would retain some,
but less than 9.46%, of your shares (with the precise allocation depending on
the number of LCA Stock Elections made).
<PAGE>
If you make an LCA Stock Election with respect to some or all of your LCA
shares, you will retain all LCA shares as to which you make such election,
unless LCA Stock Elections are made by other stockholders for more than 9.46%
of the outstanding LCA shares, in which event the number of shares you would
retain would be reduced proportionately (depending on the number of LCA Stock
Elections made), and you would receive $40.50 per share in cash for those
shares you do not retain.
These provisions, and the proposed transactions generally, are complex, and
I urge you to read the enclosed material carefully.
As part of the transactions, you are also being asked to approve certain
important amendments to LCA's current certificate of incorporation. These
amendments, as well as certain amendments to LCA's bylaws and a Stockholders
Agreement with the Apollo Investors, all as described in the enclosed
material, will significantly affect the rights of stockholders who retain LCA
shares.
The LCA Board of Directors has unanimously approved all of the proposed
transactions and related proposals described in the attached Joint Proxy
Statement/Prospectus and has determined that the proposed transactions are
fair to and in the best interests of LCA and its stockholders. THE BOARD OF
DIRECTORS OF LCA UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF LCA VOTE IN FAVOR
OF EACH OF THE PROPOSALS SET FORTH IN THE ATTACHED NOTICE AND JOINT PROXY
STATEMENT/ PROSPECTUS. The LCA Board of Directors makes no recommendation as
to whether or not you should make an LCA Stock Election. You should make your
own decision, in consultation with your own financial and tax advisors, as to
whether or not to make such an election.
The consummation of the proposed transactions is contingent upon numerous
conditions described in the attached Joint Proxy Statement/Prospectus. Among
such conditions are approval by the LCA stockholders at the LCA Special
Meeting of: (i) the agreement with Apollo providing for the recapitalization
of LCA; (ii) the issuance of LCA shares to GranCare stockholders in the merger
with GranCare; and (iii) certain amendments to LCA's current certificate of
incorporation, all as described in the Joint Proxy Statement/Prospectus.
Consummation of the proposed transactions is also subject to approval by
GranCare stockholders of the merger with GranCare and the availability of
contemplated financing. None of the transactions will be consummated unless
all of these conditions are satisfied or waived.
In the material accompanying this letter, you will find the Notice of
Special Meeting of Stockholders, the Joint Proxy Statement/Prospectus, a Proxy
Card and a Form of LCA Stock Election (to be used if you wish to make an LCA
Stock Election.) The Joint Proxy Statement/Prospectus more fully describes the
recapitalization of LCA, the GranCare merger and the amendments to the LCA
certificate of incorporation. It also includes information about LCA, GranCare
and Paragon.
All LCA stockholders as of September 2, 1997 are cordially invited to attend
the LCA special meeting in person. However, whether or not you plan to attend
the LCA special meeting, please promptly complete, sign, date and mail the
enclosed Proxy Card (and, if you wish to make an LCA Stock Election, the
enclosed Form of LCA Stock Election) in the enclosed return envelope(s), which
require no postage if mailed in the United States. The Form of LCA Stock
Election must be received no later than 5:00 p.m. New York City time on the
business day immediately preceding the day on which the vote at the LCA
special meeting is to be taken (or any adjournment thereof) if you wish to
make an LCA Stock Election. If you attend the LCA special meeting, you may
vote in person if you wish to do so, even if you have previously sent in your
Proxy Card. It is important that your shares be represented and voted at the
special meeting.
SINCE THE PROPOSAL TO AMEND THE LCA CERTIFICATE OF INCORPORATION (WHICH MUST
BE APPROVED AS A CONDITION OF THE RECAPITALIZATION) REQUIRES THE AFFIRMATIVE
VOTE OF TWO-THIRDS OF ALL OUTSTANDING LCA SHARES, A FAILURE TO VOTE IS THE
SAME AS A NEGATIVE VOTE. ACCORDINGLY, EVERY VOTE IS ESSENTIAL AND I URGE YOU
TO PROMPTLY SIGN AND RETURN THE ENCLOSED PROXY CARD.
Sincerely,
/s/ Edward L. Kuntz
--------------------------------
Edward L. Kuntz
Chairman of the Board
and Chief Executive Officer
<PAGE>
LIVING CENTERS OF AMERICA, INC.
15415 KATY FREEWAY, SUITE 800
HOUSTON, TEXAS 77094
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 28, 1997
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "LCA
Special Meeting") of Living Centers of America, Inc., a Delaware corporation
("LCA"), will be held on October 28, 1997 at 10:00 a.m., local time, at the
Houston Marriott-Westside hotel, 13210 Katy Freeway, Houston, Texas to
consider and vote upon the following matters more fully described in the
accompanying Joint Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus"):
(1) The approval and adoption of an Agreement and Plan of Merger among
Apollo Management, L.P., on behalf of one or more of its managed investment
funds (collectively, "Apollo"), Apollo LCA Acquisition Corp. ("Apollo Sub")
and LCA dated as of May 7, 1997, as amended and restated as of September
17, 1997 (the "Recapitalization Merger Agreement"), pursuant to which
Apollo Sub will be merged with and into LCA (the "Recapitalization Merger")
with LCA as the surviving corporation and to be renamed Paragon Health
Network, Inc. ("Paragon"). In the Recapitalization Merger (i) each issued
and outstanding share of Apollo Sub common stock (which shares in the
aggregate will have been purchased for not less than $240 million in cash
by Apollo and certain other purchasers at a price of $40.50 per share)
shall be converted into one share of common stock, par value $.01 per
share, of Paragon (the "Paragon Common Stock") and (ii) each issued and
outstanding share of the common stock of LCA, par value $0.01 per share
("LCA Common Stock"), will either (x) remain an issued and outstanding
share of common stock of Paragon (the "LCA Retained Shares") or (y) be
converted into the right to receive $40.50 in cash from Paragon. In the
aggregate, as a result of the Recapitalization Merger, approximately 9.46%
of the outstanding shares of LCA Common Stock will remain outstanding and
approximately 90.54% of the outstanding shares of LCA Common Stock will be
converted into the right to receive $40.50 per share in cash. The actual
cash consideration received and the number of shares retained by each LCA
stockholder will depend on stockholder elections regarding LCA Retained
Shares and the application of proration procedures contained in the
Recapitalization Merger Agreement, as explained in detail in the Proxy
Statement/Prospectus accompanying this Notice.
(2) The approval of the issuance of shares of Paragon Common Stock (the
"LCA Stock Issuance") to the stockholders of GranCare, Inc. ("GranCare")
pursuant to the Agreement and Plan of Merger among LCA, GranCare and Apollo
dated as of May 7, 1997, as amended and restated as of September 17, 1997
(the "GranCare Merger Agreement"), pursuant to which (i) GranCare will
merge with LCA Acquisition Sub, Inc. ("LCA Sub"), a wholly owned subsidiary
of Paragon (the "GranCare Merger"), with GranCare surviving and continuing
as a wholly owned subsidiary of Paragon and (ii) each of the shares of
issued and outstanding GranCare common stock, par value $.001 per share,
will be cancelled and converted into the right to receive 0.2346 of a share
of Paragon Common Stock.
(3) The approval of certain amendments to the Restated Certificate of
Incorporation of LCA (the "LCA Charter") as contemplated by the
Recapitalization Merger Agreement. Such proposed amendments include, among
other things, provisions regarding (i) the number, elimination of
classification, election and removal of directors, (ii) the ability of
stockholders to take action by written consent and to call special meetings
of stockholders, (iii) the elimination of special voting requirements set
forth in the LCA Charter for certain business combinations and (iv)
stockholder voting requirements for future amendments to the LCA Charter.
(4) Such other business as may properly come before the LCA Special
Meeting or any adjournment or postponement thereof.
<PAGE>
Consummation of the Recapitalization Merger and the GranCare Merger are each
conditioned on approval of each of the proposals described above.
THE BOARD OF DIRECTORS OF LCA UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF
LCA VOTE IN FAVOR OF EACH OF THE ABOVE PROPOSALS.
Only holders of record of LCA Common Stock as of September 2, 1997 are
entitled to notice of and to vote at the LCA Special Meeting, or any
adjournment or postponement thereof.
Holders of LCA Common Stock who do not vote in favor of the Recapitalization
Merger will be entitled to dissenters' rights of appraisal under Section 262
of the Delaware General Corporation Law. For a more complete description of
dissenters' rights, see "Stockholders' Rights of Appraisal" in the attached
Proxy Statement/Prospectus.
By order of the Board of Directors,
/s/ Susan Thomas Whittle
---------------------------
Susan Thomas Whittle
Vice President, General
Counsel and Secretary
September 26, 1997
THE APPROVAL OF THE RECAPITALIZATION MERGER AGREEMENT REQUIRES THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF LCA
COMMON STOCK. THE APPROVAL OF THE LCA STOCK ISSUANCE REQUIRES THE AFFIRMATIVE
VOTE OF THE MAJORITY OF THE SHARES OF LCA COMMON STOCK ACTUALLY PRESENT AND
VOTING AT THE LCA SPECIAL MEETING. THE APPROVAL OF THE PROPOSED AMENDMENTS TO
THE LCA CHARTER REQUIRES THE AFFIRMATIVE VOTE OF NOT LESS THAN 66 2/3% OF THE
ISSUED AND OUTSTANDING SHARES OF LCA COMMON STOCK. THEREFORE, FAILURE TO VOTE
WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE RECAPITALIZATION MERGER AND
THE AMENDMENTS TO THE LCA CHARTER. WHETHER OR NOT YOU PLAN TO ATTEND THE LCA
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
FORM OF LCA STOCK ELECTION (IF YOU WISH TO MAKE AN LCA STOCK ELECTION) AND
MAIL THEM PROMPTLY IN THE ENCLOSED RETURN ENVELOPES, WHICH REQUIRE NO POSTAGE
IF MAILED IN THE UNITED STATES. IF YOU ATTEND THE LCA SPECIAL MEETING, YOU MAY
VOTE IN PERSON IF YOU WISH TO DO SO EVEN IF YOU HAVE PREVIOUSLY SENT IN YOUR
PROXY CARD.
2
<PAGE>
[LOGO OF GRANCARE APPEARS HERE]
September 26, 1997
Dear Stockholders:
A Special Meeting of Stockholders (the "GranCare Special Meeting") of
GranCare, Inc., a Delaware corporation ("GranCare"), will be held on October
28, 1997 at 11:00 a.m., local time, at the corporate offices of GranCare
located at One Ravinia Drive, Suite 1500, Atlanta, Georgia.
At this very important meeting, GranCare stockholders will be asked to
consider and vote upon an Agreement and Plan of Merger (the "GranCare Merger
Agreement") pursuant to which GranCare will be merged (the "GranCare Merger")
with LCA Acquisition Sub, Inc. ("LCA Sub"), a wholly owned subsidiary of
Living Centers of America, Inc. ("LCA"), with GranCare surviving and
continuing as a wholly owned subsidiary of LCA (which, immediately prior to
the GranCare Merger, shall have completed a recapitalization as described
below and will be renamed Paragon Health Network, Inc. and is referred to
herein as "Paragon"). Upon consummation of the GranCare Merger, each of the
issued and outstanding shares of GranCare common stock, par value $.001 per
share (the "GranCare Common Stock"), will be cancelled and converted into the
right to receive 0.2346 of a share of the common stock, par value $.01 per
share, of Paragon (the "Paragon Common Stock"). Immediately prior to the
effective time of the GranCare Merger, LCA will be recapitalized in a
transaction (the "Recapitalization Merger") with Apollo Management, L.P., on
behalf of one or more of its managed investment funds, and certain other
investors (collectively, the "Apollo Investors") in which Apollo will
contribute not less than $240 million in exchange for shares of Paragon Common
Stock. Following the completion of the Recapitalization Merger and the
GranCare Merger, the Apollo Investors will own approximately 44.0% of the
outstanding Paragon Common Stock, the existing stockholders of GranCare will
own approximately 41.9% of the outstanding Paragon Common Stock and the
existing stockholders of LCA will own approximately 14.1% of the outstanding
Paragon Common Stock.
Paragon will conduct the current business of both GranCare and LCA under
management that includes individuals who have not previously been affiliated
with either GranCare or LCA as well as current executives of both companies,
and it will have substantially more debt and related "leverage" than is
currently maintained by GranCare.
It is expected that shares of Paragon Common Stock will be listed on the New
York Stock Exchange, and that you will be able to purchase and sell such stock
in the same way as shares of GranCare Common Stock are presently purchased and
sold.
The proposed transactions are complex, and I urge you to read the enclosed
material carefully.
The Board of Directors of GranCare has approved the GranCare Merger
Agreement and the related transactions described in the attached Proxy
Statement/Prospectus and has determined that the proposed transactions are
fair to and in the best interests of GranCare and its stockholders. THE BOARD
OF DIRECTORS OF GRANCARE RECOMMENDS THAT THE STOCKHOLDERS OF GRANCARE VOTE IN
FAVOR OF THE GRANCARE MERGER AGREEMENT.
The consummation of the GranCare Merger is contingent upon numerous
conditions described in the attached Proxy Statement/Prospectus. Among such
conditions are: (i) approval of the GranCare Merger Agreement at the GranCare
Special Meeting; (ii) approval of all of the matters submitted at a
contemporaneous special meeting of LCA stockholders; and (iii) the
availability of contemplated financing. The GranCare Merger will not be
consummated unless all of these conditions are satisfied or waived.
<PAGE>
In the material accompanying this letter, you will find a Notice of Special
Meeting of Stockholders, a Proxy Statement/Prospectus relating to, among other
things, the actions to be taken by the GranCare stockholders at the GranCare
Special Meeting and a Proxy Card to allow you to vote your shares at the
GranCare Special Meeting. The Proxy Statement/Prospectus more fully describes
the proposed mergers and includes information about GranCare, LCA and Paragon.
All GranCare stockholders of record as of September 2, 1997 are cordially
invited to attend the GranCare Special Meeting in person. However, whether or
not you plan to attend the GranCare Special Meeting, please complete, sign,
date and return the Proxy Card in the postage prepaid envelope enclosed
herewith. If you attend the GranCare Special Meeting, you may vote in person
if you wish, even if you have previously returned your Proxy Card. It is
important that your shares be represented and voted at the GranCare Special
Meeting.
Sincerely,
LOGO
M. Scott Athans
President and Chief
Executive Officer
<PAGE>
GRANCARE, INC.
ONE RAVINIA DRIVE, SUITE 1500
ATLANTA, GEORGIA 30346
----------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON OCTOBER 28, 1997
----------------
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "GranCare
Special Meeting") of GranCare, Inc., a Delaware corporation ("GranCare"), will
be held on October 28, 1997 at 11:00 a.m., local time, at the corporate
offices of GranCare located at One Ravinia Drive, Suite 1500, Atlanta, Georgia
to consider and vote upon the following matters more fully described in the
accompanying Joint Proxy Statement/Prospectus (the "Proxy
Statement/Prospectus"):
(1) The approval and adoption of an Agreement and Plan of Merger among
Living Centers of America, Inc. ("LCA"), GranCare, Apollo Management, L.P.,
on behalf of one or more of its managed investment funds (collectively,
"Apollo") and LCA Acquisition Sub, Inc. ("LCA Sub"), a wholly owned
subsidiary of LCA, dated as of May 7, 1997, as amended and restated as of
September 17, 1997 (the "GranCare Merger Agreement") pursuant to which,
among other things: (i) GranCare will be merged with LCA Sub (the "GranCare
Merger"), with GranCare surviving and continuing as a wholly owned
subsidiary of LCA (which shall have completed a recapitalization merger
immediately prior to the GranCare Merger as described in the attached Proxy
Statement/Prospectus and, following such transactions, to be renamed
Paragon Health Network, Inc. and referred to herein as "Paragon"); and (ii)
each share of GranCare common stock, par value $.001 per share (the
"GranCare Common Stock"), issued and outstanding immediately prior to the
effective time of the GranCare Merger will be cancelled and converted as of
the effective time of the GranCare Merger into the right to receive 0.2346
of a share of the common stock of Paragon, par value $.01 per share
("Paragon Common Stock"); and
(2) Such other business as may properly come before the GranCare Special
Meeting or any adjournment or postponement thereof.
Only holders of record of GranCare Common Stock as of September 2, 1997 are
entitled to notice of and to vote at the GranCare Special Meeting, or any
adjournment or postponement thereof.
THE BOARD OF DIRECTORS OF GRANCARE RECOMMENDS THAT THE STOCKHOLDERS OF
GRANCARE VOTE IN FAVOR OF THE PROPOSAL DESCRIBED ABOVE.
Holders of GranCare Common Stock are not entitled to dissenters' rights of
appraisal under Section 262 of the Delaware General Corporation Law.
By order of the Board of Directors,
/s/ Evrett W. Benton
---------------------------------
Evrett W. Benton
Executive Vice President, General
Counsel and Secretary
September 26, 1997
THE APPROVAL OF THE GRANCARE MERGER AGREEMENT REQUIRES THE AFFIRMATIVE VOTE
OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF GRANCARE COMMON STOCK.
THEREFORE, FAILURE TO VOTE WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE
GRANCARE MERGER AGREEMENT. WHETHER OR NOT YOU PLAN TO ATTEND THE GRANCARE
SPECIAL MEETING, PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND
MAIL IT PROMPTLY IN THE ENCLOSED RETURN ENVELOPE, WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES. IF YOU ATTEND THE GRANCARE SPECIAL MEETING, YOU
MAY VOTE IN PERSON IF YOU WISH TO DO SO, EVEN IF YOU HAVE PREVIOUSLY SENT IN
YOUR PROXY CARD.
<PAGE>
JOINT PROXY STATEMENT/PROSPECTUS
----------------
LIVING CENTERS OF AMERICA, INC.
GRANCARE, INC.
JOINT PROXY STATEMENT FOR SPECIAL MEETINGS OF STOCKHOLDERS
TO BE HELD ON OCTOBER 28, 1997.
----------------
PROSPECTUS OF LIVING CENTERS OF AMERICA, INC.
(TO BE RENAMED PARAGON HEALTH NETWORK, INC. UPON CONSUMMATION OF THE MERGERS
DESCRIBED HEREIN)
This Joint Proxy Statement/Prospectus ("Proxy Statement/Prospectus") is
being furnished to the holders of common stock, par value $.01 per share ("LCA
Common Stock"), of Living Centers of America, Inc., a Delaware corporation
("LCA"), in connection with the solicitation of proxies by the Board of
Directors of LCA (the "LCA Board") for use at a Special Meeting of
Stockholders of LCA to be held at the Houston Marriott-Westside hotel, 13210
Katy Freeway, Houston, Texas on October 28, 1997 at 10:00 a.m., local time,
and at any and all adjournments or postponements thereof (the "LCA Special
Meeting"). Only holders of record of LCA Common Stock as of the close of
business on September 2, 1997 (the "LCA Record Date") will be entitled to
notice of and to vote at the LCA Special Meeting.
This Proxy Statement/Prospectus is also being furnished to the holders of
common stock, par value $.001 per share ("GranCare Common Stock"), of
GranCare, Inc., a Delaware corporation ("GranCare"), in connection with the
solicitation of proxies by the Board of Directors of GranCare (the "GranCare
Board") for use at a Special Meeting of Stockholders of GranCare to be held at
the corporate offices of GranCare located at One Ravinia Drive, Suite 1500,
Atlanta, Georgia on October 28, 1997 at 11:00 a.m., local time, and at any and
all adjournments or postponements thereof (the "GranCare Special Meeting" and,
together with the LCA Special Meeting, the "Special Meetings"). Only holders
of record of GranCare Common Stock as of the close of business on September 2,
1997 (the "GranCare Record Date") will be entitled to notice of and to vote at
the GranCare Special Meeting.
LCA Proposals. At the LCA Special Meeting, holders of LCA Common Stock will
be asked to consider and vote upon: (i) a proposal (the "Recapitalization
Proposal") to approve and adopt the Agreement and Plan of Merger dated as of
May 7, 1997, as amended and restated as of September 17, 1997 (the
"Recapitalization Merger Agreement") among LCA, Apollo Management, L.P., on
behalf of one or more of its managed investment funds (collectively "Apollo"),
and Apollo LCA Acquisition Corp. ("Apollo Sub") which provides for the
recapitalization of LCA by the merger (the "Recapitalization Merger") of
Apollo Sub with and into LCA with LCA as the surviving corporation to be
renamed Paragon Health Network, Inc. and referred to herein as "Paragon;" (ii)
a proposal to approve the issuance of shares of Paragon Common Stock (as
defined) to GranCare stockholders (the "LCA Stock Issuance Proposal") pursuant
to the GranCare Merger Agreement (as defined); and (iii) a proposal to approve
certain amendments to the Restated Certificate of Incorporation of LCA (the
"LCA Charter") as contemplated by the Recapitalization Merger Agreement (the
"Amendment Proposal"). The Amendment Proposal would effect a number of changes
to the existing LCA Charter including, among other things, the following: (a)
increasing the maximum number of members of the board of directors; (b)
eliminating the classified board of directors; (c) providing that directors
may be removed with or without cause by a two-thirds stockholder vote; (d)
eliminating the prohibition on stockholder action by written consent and the
calling of special meetings by stockholders; (e) eliminating certain
provisions restricting certain business combinations between LCA and persons
holding 10% or more of the voting securities of Paragon; and (f) changing the
minimum stockholder vote requirements with respect to the approval of future
amendments to certain provisions of the LCA Charter. The Recapitalization
Proposal, the LCA Stock Issuance Proposal and the Amendment Proposal are
referred to collectively herein as the "LCA Proposals."
Prior to the Recapitalization Merger, Apollo and certain other investors
(collectively, the "Apollo Investors") will contribute not less than $240
million in cash to Apollo Sub in exchange for approximately 5.9 million shares
of common stock of Apollo Sub at a price of $40.50 per share. Pursuant to the
terms of the Recapitalization Merger Agreement, the shares of common stock of
Apollo Sub will be converted on a one-for-one basis into shares of Paragon
Common Stock.
Cover Page continued
<PAGE>
Conversion and Retention of LCA Common Stock. Pursuant to the election and
proration procedures described below, a total of 1,905,748 shares of LCA
Common Stock outstanding immediately prior to the effective time of the
Recapitalization Merger will remain outstanding after the effective time of
the Recapitalization Merger (and following the GranCare Merger) as shares of
Paragon Common Stock (the "LCA Retained Shares"). Each other share of LCA
Common Stock outstanding immediately prior to the effective time of the
Recapitalization Merger will be converted into the right to receive $40.50 per
share in cash (the "LCA Cash Price"). Each record holder of shares of LCA
Common Stock at 5:00 p.m. New York City time on the business day immediately
preceding the day on which the vote on the Recapitalization Merger is taken at
the LCA Special Meeting (or any adjournment thereof) (the "LCA Election
Deadline") (and any holder of LCA stock options or other LCA Rights (as
defined below) that will be cancelled and converted into the right to receive
shares of LCA Common Stock immediately prior to the effective time of the
Recapitalization Merger) may, by following the procedures set forth under "The
Recapitalization Merger Agreement--Merger Consideration and Proration," make
an election (an "LCA Stock Election") with respect to some or all of such
shares (the "LCA Electing Shares") to retain such shares as LCA Retained
Shares. Any such election shall be subject to the proration provisions of the
Recapitalization Merger Agreement described below.
If the aggregate number of LCA Electing Shares is more than 1,905,748 (the
"LCA Retained Share Number"), then pursuant to the Recapitalization Merger
Agreement (i) each share of LCA Common Stock other than LCA Electing Shares
will be converted into the right to receive the LCA Cash Price, and (ii) each
LCA stockholder making an LCA Stock Election will be entitled to retain that
number of LCA Retained Shares as is equal to the product of (x) the number of
LCA Electing Shares of such LCA stockholder and (y) a fraction, the numerator
of which is the LCA Retained Share Number and the denominator of which is the
aggregate number of LCA Electing Shares and (iii) each other LCA Electing
Share held by such LCA stockholder will be converted into the right to receive
the LCA Cash Price.
If the aggregate number of LCA Electing Shares is less than the LCA Retained
Share Number, then pursuant to the Recapitalization Merger Agreement (i) each
LCA Electing Share will remain outstanding as an LCA Retained Share, (ii) in
addition to such LCA Retained Shares, each LCA stockholder (including LCA
stockholders who made LCA Stock Elections with respect to some, but not all,
of their shares of LCA Common Stock) will be required to retain as LCA
Retained Shares that number of shares as is equal to the product of (x) the
excess of the LCA Retained Share Number over the aggregate number of LCA
Electing Shares and (y) a fraction, the numerator of which is the number of
shares of LCA Common Stock (other than LCA Electing Shares) held by such LCA
stockholder and the denominator of which is the aggregate number of
outstanding shares of LCA Common Stock other than LCA Electing Shares, and
(iii) each other share of LCA Common Stock held by such LCA stockholder will
be converted into the right to receive the LCA Cash Price. Pursuant to this
proration procedure, if no LCA Stock Elections are made, each LCA stockholder
would receive $40.50 per share with respect to approximately 90.54% of such
stockholder's shares and would retain approximately 9.46% of such
stockholder's shares as LCA Retained Shares. Thus, under such assumption, each
LCA stockholder would receive and retain in the Recapitalization Merger, for
each share of LCA Common Stock, approximately $36.67 (90.54% of $40.50) in
cash and 0.0946 of an LCA Retained Share. Any stockholder who would otherwise
retain a fraction of an LCA Retained Share will receive a cash payment in lieu
thereof.
LCA has prepared and mailed a form of election (a "Form of LCA Stock
Election") with this Proxy Statement/Prospectus to the record holders of
shares of LCA Common Stock as of the LCA Record Date, which Form of LCA Stock
Election must be completed and submitted by each such record holder of LCA
Common Stock who wishes to make an LCA Stock Election. In addition, LCA will
use commercially reasonable efforts to make the Form of LCA Stock Election and
this Proxy Statement/Prospectus available to all persons who become holders of
shares of LCA Common Stock during the period between the LCA Record Date and
the LCA Election Deadline referred to above. Copies of the Form of LCA Stock
Election can be obtained by LCA stockholders by calling D.F. King & Co., Inc.
at (800) 628-8509. Stockholders who do not vote in favor of the
Recapitalization Merger or make an LCA Stock Election will be entitled to
dissenters' rights of appraisal under Section 262 of the Delaware General
Corporation Law ("DGCL"). See "Stockholders' Rights of Appraisal."
BECAUSE OF THE PRORATION PROCEDURES DESCRIBED HEREIN, LCA STOCKHOLDERS MAY
NOT RECEIVE THE AMOUNT OF CASH AND RETAIN THE NUMBER OF SHARES OF PARAGON
COMMON STOCK THAT THEY ELECT. THE LCA BOARD MAKES NO RECOMMENDATION AS TO
WHETHER LCA STOCKHOLDERS SHOULD OR SHOULD NOT MAKE AN LCA STOCK ELECTION. EACH
LCA STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION, IN CONSULTATION WITH HIS
OR HER OWN FINANCIAL TAX ADVISORS, AS TO WHETHER OR NOT TO MAKE AN LCA STOCK
ELECTION.
GranCare Merger Proposal. At the GranCare Special Meeting, holders of
GranCare Common Stock will be asked to consider and vote upon a proposal (the
"GranCare Merger Proposal" and, together with the LCA Proposals, the
"Proposals") to approve and adopt an Agreement and Plan of Merger dated as of
May 7, 1997 as amended and restated as of September 17, 1997 (the "GranCare
Merger Agreement") among LCA, GranCare, Apollo and LCA Acquisition Sub, Inc.,
a wholly owned subsidiary of LCA ("LCA Sub"), which provides for the merger
(the "GranCare Merger") of GranCare with LCA Sub, with GranCare surviving and
continuing as a wholly owned subsidiary of Paragon. In accordance with the
terms and conditions of the GranCare Merger Agreement, each share of GranCare
Common Stock outstanding immediately prior to the effective time of the
GranCare Merger will be converted as of the effective time of the GranCare
Merger into the right to receive 0.2346 (the "Exchange Ratio") of a share of
the common stock, par value $.01 per share, of Paragon (the "Paragon Common
Stock"). The per share consideration to be received in the GranCare Merger by
stockholders of GranCare is referred to herein as the "GranCare Merger
Consideration". Cash will be paid in lieu of any fractional share of Paragon
Common Stock.
Cover Page continued
(ii)
<PAGE>
Votes Required. The Recapitalization Proposal requires the affirmative vote
of a majority of the issued and outstanding shares of LCA Common Stock.
Approval of the LCA Stock Issuance Proposal requires the affirmative vote of
the majority of the shares of LCA Common Stock actually present and voting at
the LCA Special Meeting (provided that at least 50% of the outstanding shares
of LCA Common Stock are actually voted on the proposal). Approval of the
Amendment Proposal requires the affirmative vote of not less than 66 2/3% of
the issued and outstanding shares of LCA Common Stock, which vote with respect
to the amendments to Articles Tenth and Eleventh of the LCA Charter must also
include the affirmative vote of not less than 66 2/3% of the issued and
outstanding shares of LCA Common Stock excluding those shares beneficially
owned by any "Related Person," which definition as set forth in the LCA Charter
encompasses Mr. Donald C. Beaver, Vice Chairman of the Board and a director of
LCA. For purposes of the vote on the Amendment Proposal, shares held by a
foundation established by Mr. Beaver will be treated as if they are owned by
him, resulting in the exclusion from such vote of 3,579,482 shares, or
approximately 18%, of the outstanding shares of LCA Common Stock. The GranCare
Merger Proposal requires the affirmative vote of a majority of the issued and
outstanding shares of GranCare Common Stock.
A failure to vote, either by abstention or non-vote (including a broker non-
vote), will have the same effect as, with respect to LCA stockholders, a vote
against approval of the Recapitalization Proposal and the Amendment Proposal
and, with respect to GranCare stockholders, a vote against approval of the
GranCare Merger Proposal.
Conditions. The Recapitalization Merger is conditioned upon satisfaction or
waiver of all conditions to the GranCare Merger, and the GranCare Merger is
conditioned upon the consummation of the Recapitalization Merger (the
Recapitalization Merger and the GranCare Merger being referred to collectively
herein as the "Mergers"). Accordingly, under no circumstance will either Merger
be consummated unless the other Merger is also consummated. The consummation of
the Mergers is subject, among other things, to (i) the approval of the LCA
Proposals at the LCA Special Meeting; (ii) the receipt of necessary financing;
(iii) the receipt of certain regulatory approvals and the expiration of
statutory waiting periods; and (iv) the approval and adoption of the GranCare
Merger Proposal at the GranCare Special Meeting.
Ownership of Paragon. It is contemplated that the Recapitalization Merger
will occur immediately prior to the GranCare Merger and that immediately
following the effective times of such Mergers the Apollo Investors will own
approximately 44.0%, existing GranCare stockholders will own approximately
41.9% and existing LCA stockholders will retain approximately 14.1% of the
outstanding shares of Paragon Common Stock.
General. A conformed copy of the Recapitalization Merger Agreement is
attached hereto as Annex I, a conformed copy of the GranCare Merger Agreement
is attached hereto as Annex II, the form of the Amended and Restated
Certificate of Incorporation (the "Paragon Charter") of Paragon (as proposed to
be amended by the Amendment Proposal) is attached hereto as Annex III, a
conformed copy of the Paragon Bylaws is attached hereto as Annex IV and the
form of Stockholders Agreement (as defined) is attached hereto as Annex V.
SEE "RISK FACTORS" COMMENCING ON PAGE 25 FOR A DESCRIPTION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY LCA AND GRANCARE STOCKHOLDERS IN CONNECTION WITH
THEIR CONSIDERATION OF THE PROPOSALS.
This Proxy Statement/Prospectus also constitutes the Prospectus of LCA filed
as part of a Registration Statement on Form S-4 (the "Registration Statement")
with the Securities and Exchange Commission (the "SEC" or the "Commission")
under the Securities Act of 1933, as amended (the "Securities Act"), relating
to the shares of Paragon Common Stock to be issued to holders of GranCare
Common Stock in connection with the GranCare Merger, to the Apollo Investors in
connection with the Recapitalization Merger and to officers, directors and
employees of LCA and certain other persons in connection with the termination
of certain rights and options to purchase LCA Common Stock. See "The
Recapitalization Merger Agreement--LCA Rights."
LCA Common Stock is listed for trading under the symbol "LCA" on the New York
Stock Exchange (the "NYSE"). GranCare Common Stock is listed for trading under
the symbol "GC" on the NYSE. On May 7, 1997, the last trading day prior to the
announcement of the execution of the original merger agreements, the last sales
prices of LCA Common Stock and GranCare Common Stock, as reported on the NYSE
Composite Tape, were $36.50 and $7.75, respectively. On September 25, 1997, the
last trading day prior to the date of this Proxy Statement/Prospectus, the last
sales prices of LCA Common Stock and GranCare Common Stock, as reported on the
NYSE Composite Tape, were $40.75 and $11.75, respectively. The market price of
LCA Common Stock prior to the consummation of the Mergers may not be indicative
of the market price for Paragon Common Stock following the Mergers.
Cover Page continued
(iii)
<PAGE>
This Proxy Statement/Prospectus, together with the applicable Notices of
Special Meetings of Stockholders and Letters to Stockholders, Form of Election
(in the case of LCA stockholders) and the accompanying Proxy Cards, are first
being mailed to the stockholders of LCA and GranCare on or about September 29,
1997.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROXY
STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROXY STATEMENT/PROSPECTUS IS SEPTEMBER 26, 1997.
(iv)
<PAGE>
AVAILABLE INFORMATION
LCA and GranCare are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith file reports and other information with the Commission
relating to their business, financial position, results of operations and
other matters. Such reports, proxy statements and other information can be
inspected and copied at the Public Reference Section maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549
and at its Regional Offices located at The Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511, and 7 World Trade Center,
New York, New York 10048. Copies of such material also can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. Both LCA Common Stock and
GranCare Common Stock are listed on the NYSE. Such reports, proxy statements
and other materials can also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. Such reports, proxy
statements and other information can be reviewed through the Commission's
Electronic Data Gathering Analysis and Retrieval System, which is publicly
available through the Commission's web site (http://www.sec.gov).
LCA has filed with the Commission a Registration Statement under the
Securities Act with respect to the Paragon Common Stock offered hereby. This
Proxy Statement/Prospectus does not contain all the information set forth in
the Registration Statement, certain parts of which are omitted in accordance
with the rules and regulations of the Commission. Reference is made to the
Registration Statement and to the exhibits relating thereto for further
information with respect to LCA, GranCare and the Paragon Common Stock offered
hereby.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY LCA, GRANCARE OR ANY OTHER PERSON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
NOT LAWFUL TO MAKE ANY SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR ANY DISTRIBUTION
OF THE SECURITIES MADE UNDER THIS PROXY STATEMENT/PROSPECTUS SHALL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF LCA OR GRANCARE SINCE THE DATE OF THIS PROXY STATEMENT/PROSPECTUS.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
THIS PROXY STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS AND
INCORPORATES BY REFERENCE CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE
MEANING OF THE SECURITIES ACT, EXCHANGE ACT AND PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 WITH RESPECT TO THE FINANCIAL CONDITION, RESULTS OF
OPERATIONS AND BUSINESS OF LCA, GRANCARE AND PARAGON, INCLUDING STATEMENTS
UNDER THE CAPTIONS "PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS,"
"LCA'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" (INCORPORATED BY REFERENCE HEREIN), "GRANCARE MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
"DESCRIPTION OF THE TRANSACTIONS--BUSINESS OF PARAGON FOLLOWING THE MERGERS,"
"DESCRIPTION OF THE TRANSACTIONS--OPINIONS OF LCA FINANCIAL ADVISORS" AND
"DESCRIPTION OF THE TRANSACTIONS--OPINIONS OF GRANCARE FINANCIAL ADVISORS."
THESE FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES. NO
ASSURANCE CAN BE GIVEN THAT SUCH RESULTS WILL BE REALIZED. FACTORS THAT MAY
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY SUCH
FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS, THE FOLLOWING: (1) EFFECTS
OF THE SUBSTANTIAL INCREASE IN LEVERAGE AS A RESULT OF THE CONTEMPLATED
MERGERS AND TRANSACTIONS AND EFFECTS OF LIMITATIONS ON LIQUIDITY, EITHER OF
WHICH COULD ADVERSELY AFFECT PARAGON'S PLANNED STRATEGIES; (2) EXPECTED COST
SAVINGS FROM THE MERGERS MAY NOT BE FULLY REALIZED; (3) COMPETITIVE PRESSURE
IN PARAGON'S INDUSTRY COULD INCREASE SIGNIFICANTLY; (4) COSTS OR DIFFICULTIES
RELATED TO THE INTEGRATION OF THE BUSINESSES OF LCA AND GRANCARE COULD BE
GREATER THAN EXPECTED; (5) GOVERNMENTAL FUNDING FOR HEALTH CARE PROGRAMS,
WHICH IS SUBJECT TO STATUTORY AND REGULATORY CHANGES, COULD MATERIALLY
DECREASE OR THE GOVERNMENT COULD MATERIALLY DECREASE PROGRAM REIMBURSEMENT TO
HEALTH CARE FACILITIES AND PROGRAMS; (6) INCREASED SCRUTINY BY GOVERNMENTAL
AUTHORITIES OF HEALTH CARE PROVIDERS WHO PARTICIPATE IN THE MEDICARE/MEDICAID
REIMBURSEMENT PROGRAMS COULD RESULT IN INCREASED COSTS TO MAINTAIN COMPLIANCE;
AND (7) GENERAL ECONOMIC CONDITIONS MAY BE LESS FAVORABLE THAN EXPECTED.
FURTHER INFORMATION ON SUCH FACTORS AND OTHER FACTORS WHICH COULD AFFECT THE
FINANCIAL RESULTS OF PARAGON AFTER THE MERGERS AND SUCH FORWARD-LOOKING
STATEMENTS IS INCLUDED IN THE SECTION HEREIN ENTITLED "RISK FACTORS."
(v)
<PAGE>
INCORPORATION OF DOCUMENTS BY REFERENCE
The following documents filed with the Commission by LCA (File No. 1-10968)
pursuant to the Exchange Act are incorporated by reference in this Proxy
Statement/Prospectus:
1. LCA's Annual Report on Form 10-K (as amended by Form 10-K/A filed
September 17, 1997) for the fiscal year ended September 30, 1996;
2. LCA's Quarterly Reports on Form 10-Q for the quarters ended December
31, 1996, March 31, 1997 and June 30, 1997; and
3. LCA's Current Report on Form 8-K dated May 8, 1997.
All documents and reports filed by LCA pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Proxy Statement/Prospectus
and prior to the date of the LCA Special Meeting shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and to be a part
hereof from the dates of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE RELATING
TO LCA WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS
(OTHER THAN EXHIBITS TO SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY
INCORPORATED BY REFERENCE) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER OF LCA COMMON STOCK OR GRANCARE COMMON STOCK,
TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS DELIVERED, ON WRITTEN OR ORAL
REQUEST TO LIVING CENTERS OF AMERICA, INC., 15415 KATY FREEWAY, SUITE 800,
HOUSTON, TEXAS 77094, ATTN: SECRETARY (TELEPHONE NUMBER (281) 578-4600). IN
ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUESTS SHOULD BE MADE
BY OCTOBER 20, 1997, SIX BUSINESS DAYS BEFORE THE LCA SPECIAL MEETING.
(vi)
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION................ v
CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS.......... v
INCORPORATION OF DOCUMENTS BY
REFERENCE........................... vi
SUMMARY.............................. 1
RISK FACTORS......................... 25
LCA SPECIAL MEETING.................. 30
General............................. 30
Record Date, Voting Rights and Vote
Required........................... 31
Proxies; Revocation of Proxies...... 32
GRANCARE SPECIAL MEETING............. 33
General............................. 33
Record Date, Voting Rights and Vote
Required........................... 33
Proxies; Revocation of Proxies...... 34
SOURCES AND USES OF FUNDS............ 35
DESCRIPTION OF THE TRANSACTIONS...... 36
Overview of Structure .............. 36
Background of the Transactions...... 37
Reasons for the Transactions;
Recommendations of the Boards of
Directors.......................... 46
Opinions of LCA Financial Advisors.. 51
Opinions of GranCare Financial
Advisors........................... 59
Business of Paragon Following the
Mergers............................ 69
Delisting and Deregistration of
GranCare Common Stock.............. 70
Resales of Paragon Common Stock..... 70
THE RECAPITALIZATION MERGER
AGREEMENT........................... 71
General............................. 71
Apollo Investors Equity Investment.. 71
Merger Consideration and Proration.. 71
Conditions to the Consummation of
the Recapitalization Merger........ 73
Accounting Treatment................ 74
Certain Federal Income Tax
Consequences....................... 74
Conduct of Business of LCA Prior to
the Recapitalization Merger........ 77
Governmental and Regulatory
Approvals.......................... 78
Other Approvals and Consents........ 78
Effect on LCA Employee Benefit Plans
and Employee Agreements............ 78
LCA Rights.......................... 79
Stock Exchange Listing.............. 80
No Solicitation of Acquisition
Transactions....................... 81
Termination of Rights Agreement..... 81
Amendments to LCA Charter........... 81
Termination......................... 81
Termination Fees; Expenses.......... 82
Amendment and Waiver................ 82
Representations and Warranties...... 83
THE GRANCARE MERGER AGREEMENT........ 84
General............................. 84
Merger Consideration ............... 84
Exchange of Certificates............ 84
Conditions to the Consummation of
the GranCare Merger................ 84
Accounting Treatment................ 86
Certain Federal Income Tax
Consequences....................... 86
Governmental and Regulatory
Approvals.......................... 88
Other Approvals and Consents........ 88
Effect on GranCare Employee Benefit
Plans and Employee Agreements...... 89
GranCare Stock Options.............. 90
Restrictions on Resales by
Affiliates......................... 90
</TABLE>
<TABLE>
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Conduct of Business of GranCare
Prior to the GranCare Merger..... 91
Conduct of Business of LCA Prior
to the GranCare Merger........... 91
No Solicitation of Acquisition
Transactions..................... 92
Termination....................... 93
Termination Fees; Expenses........ 94
Amendment and Waiver.............. 94
Representations and Warranties.... 95
AMENDMENTS TO LCA CHARTER.......... 95
Amendment to Corporate Name....... 95
Amendments to Provisions Relating
to the Board of Directors of
Paragon.......................... 95
Amendments to Provisions Relating
to Stockholder Meetings.......... 96
Amendments to Provisions Relating
to Business Combinations......... 96
Amendments to Provisions Relating
to Charter Amendments............ 96
INTERESTS OF CERTAIN PERSONS IN THE
TRANSACTIONS...................... 97
General........................... 97
Management and Share Ownership.... 97
LCA Stock Plans................... 97
LCA Deferred Plans and Other
Employee Benefit Plans........... 98
LCA Employment Agreements......... 98
Compensation Paid to LCA Special
Committee........................ 100
Indemnification of LCA and
GranCare Employees and
Directors........................ 100
GranCare Stock Plans.............. 100
GranCare Executive Deferred
Compensation Plan................ 101
GranCare Executive Life Insurance
Plan............................. 101
GranCare Employment Agreements.... 102
GranCare Annual and Long Term
Incentives....................... 102
Certain Investments in Paragon.... 103
Employment Agreements and Other
Benefits of Paragon Officers..... 104
DESCRIPTION OF FINANCING........... 105
Equity Financing.................. 105
Description of Senior Credit
Facility......................... 105
Description of Senior Subordinated
Debt............................. 107
Treatment of Certain Existing LCA
and GranCare Indebtedness........ 109
CERTAIN OTHER AGREEMENTS........... 114
Stockholders Agreement............ 114
Registration Rights Agreement..... 114
STOCKHOLDERS' RIGHTS OF APPRAISAL.. 115
LIVING CENTERS OF AMERICA, INC. PRO
FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.............. 118
Living Centers of America, Inc.
Pro Forma Condensed Consolidated
Balance Sheets................... 119
Living Centers of America, Inc.
Pro Forma Condensed Consolidated
Statement of Income Year Ended
September 30, 1996............... 121
Living Centers of America, Inc.
Pro Forma Condensed Consolidated
Statement of Income Nine Months
Ended June 30, 1997.............. 123
DIRECTORS AND OFFICERS OF PARAGON
FOLLOWING THE MERGERS............. 125
Directors and Officers............ 125
</TABLE>
(vii)
<PAGE>
<TABLE>
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Compensation of Executive Officers of
Paragon............................. 128
CERTAIN INFORMATION CONCERNING LCA.... 129
General Development of the Business.. 129
Long-Term Care Services.............. 129
Rehabilitation Services.............. 130
Institutional Pharmaceutical
Services............................ 131
Specialty Care Services.............. 131
Sources of Revenue................... 132
Properties........................... 133
Regulation........................... 134
Competition.......................... 140
Employees............................ 140
Legal Proceedings.................... 140
CERTAIN INFORMATION CONCERNING
GRANCARE............................. 143
General.............................. 143
Long-Term Care Industry.............. 143
Skilled Nursing Services and Subacute
Care................................ 144
Contract Management.................. 145
Other Services....................... 145
Marketing and Development of Payor
Sources............................. 146
Legal Proceedings.................... 146
Indiana Disposition.................. 147
Competition.......................... 148
Regulation........................... 148
Properties........................... 154
Contract Management and Home Health.. 155
Employee Training and Development.... 155
Employees............................ 155
Insurance............................ 155
GRANCARE MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................ 156
General.............................. 156
Results of Operations................ 157
Liquidity and Capital Resources...... 163
Impact of Inflation.................. 167
Certain Relationships and
Transactions........................ 168
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT OF
GRANCARE............................. 171
ADDITIONAL INFORMATION REGARDING
GRANCARE'S MANAGEMENT................ 174
Stock Options........................ 174
</TABLE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DESCRIPTION OF LCA CAPITAL STOCK... 175
LCA Common Stock.................. 175
Rights to Purchase Preferred
Stock............................ 175
Preferred Stock................... 175
COMPARISON OF STOCKHOLDER RIGHTS... 177
General........................... 177
Preferred Stock Purchase Rights... 177
Classified Board of Directors..... 177
Number of Directors; Removal of
Directors; Filling Vacancies on
the Board of Directors........... 178
Adjournment and Notice of
Stockholder Meetings............. 178
Call of Special Stockholder
Meetings......................... 179
Stockholder Consent in Lieu of
Meeting.......................... 180
Business Combinations............. 180
Super-Majority Vote Requirements.. 181
Indemnification of Officers and
Directors........................ 182
Director Liability................ 183
Amendments to Bylaws.............. 183
LEGAL OPINIONS..................... 184
EXPERTS............................ 184
STOCKHOLDER PROPOSALS.............. 184
GLOSSARY OF SELECT TERMS........... 185
INDEX TO FINANCIAL STATEMENTS...... F-1
</TABLE>
<TABLE>
<S> <C>
LIST OF ANNEXES
Annex I - Amended and Restated
Agreement and Plan of Merger
(Recapitalization Merger Agreement)
Annex II - Amended and Restated
Agreement and Plan of Merger
(GranCare Merger Agreement)
Annex III - Form of Amended and
Restated Certificate of
Incorporation of Paragon (as
proposed to be amended by the
Amendment Proposal)
Annex IV - Form of Amended and
Restated Bylaws of Paragon
Annex V - Form of Stockholders
Agreement
Annex VI - Opinion of Credit Suisse
First Boston Corporation
Annex VII - Opinion of NationsBanc
Capital Markets, Inc.
Annex VIII - Opinion of Smith Barney
Inc.
Annex IX - Opinion of Chase
Securities Inc.
Annex X - Section 262 of the
Delaware General Corporation Law
</TABLE>
(viii)
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus, including the Annexes hereto, or in the documents
incorporated herein by reference. A GLOSSARY OF CERTAIN DEFINED ITEMS USED
HEREIN APPEARS BEGINNING ON PAGE 185 HEREOF. Certain other terms used herein
are defined elsewhere in this Proxy Statement/Prospectus. Reference is made to,
and this summary is qualified in its entirety by, the more detailed information
contained elsewhere in this Proxy Statement/Prospectus, the Annexes hereto and
the documents incorporated by reference herein. Stockholders of LCA and
GranCare are urged to read this Proxy Statement/Prospectus, the Annexes hereto
and the documents incorporated herein by reference in their entirety.
Stockholders should carefully consider the information set forth below under
the heading "Risk Factors" beginning on page 25 hereof.
For financial reporting purposes, GranCare is the successor to GranCare,
Inc., a California corporation ("Old GranCare"). Effective February 12, 1997,
Vitalink Pharmacy Services, Inc. ("Vitalink") acquired Old GranCare's
institutional pharmacy business ("TeamCare" or the "Institutional Pharmacy
Business") through the merger (the "Vitalink Merger") of Old GranCare with and
into Vitalink. Immediately prior to the Vitalink Merger, all of Old GranCare's
non-institutional pharmacy businesses, including its skilled nursing, home
health care, assisted living and contract management businesses and related
assets (collectively, the "Skilled Nursing Business"), were transferred to
GranCare (then a wholly owned subsidiary of Old GranCare) and all of the then
outstanding common stock, par value $.001, of GranCare was distributed (the
"Distribution") to the shareholders of Old GranCare. Unless the context
otherwise requires, "GranCare" refers to GranCare, Inc., a California
corporation, and its subsidiaries for periods on or prior to February 12, 1997
and to GranCare, Inc., a Delaware corporation, and its subsidiaries for periods
subsequent to February 12, 1997. As used herein, the term "Paragon" refers to
LCA following the consummation of the Mergers and the other transactions
contemplated thereby, including the various financing transactions and approval
of the Amendment Proposal (collectively, the "Transactions"). Except where the
context otherwise indicates, all references to "LCA," "Paragon" or "GranCare"
are intended to include the operating subsidiaries of LCA, Paragon and
GranCare, respectively, through which the services described herein are
directly provided.
THE COMPANIES
LCA. LCA provides, through its operating subsidiaries, a diverse range of
health care services across the health care continuum. It has organized its
operations into four operating groups: long-term care services, rehabilitation
services, institutional pharmaceutical services and specialty care services. As
one of the largest long-term care providers in the United States, LCA's long-
term care services are provided through 201 long-term care centers with in
excess of 23,000 licensed beds in 13 states as of June 30, 1997. Long-term care
includes skilled nursing, assisted living services, subacute care and care for
individuals with Alzheimer's disease. LCA's rehabilitation therapy group
provides services to over 600 skilled nursing and other health care facilities,
offers therapy program management services to long-term health care companies,
manages hospital rehabilitation departments and operates approximately 133
outpatient clinics in 18 states as of June 30, 1997. The institutional
pharmaceutical group operates 34 institutional pharmacies in 11 states and
supplies various product lines to approximately 1,000 long-term care centers
with more than 100,000 long-term health care beds as of June 30, 1997. LCA's
specialty care services group is currently expanding and developing its home
health care, hospice and geriatric physician management services businesses.
Since 1992, when LCA became a publicly-traded company, through the fiscal year
ended September 30, 1996, LCA's annual net revenues have increased from $511
million to $1.1 billion.
GRANCARE. GranCare is a leading provider of comprehensive post-acute health
care services, primarily skilled nursing care, subacute and medically complex
care, long-term acute hospital care, inpatient/outpatient
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therapy, hospital contract management, assisted living, hospice, home health
care and adult day care. GranCare provides these services through 126 long-term
care facilities (122 skilled nursing facilities and four assisted living
facilities) in 15 states, and 12 home health care agencies providing home
health, hospice and private duty services in four states as of June 30, 1997.
Through its contract management business, GranCare, as of June 30, 1997, also
manages approximately 145 programs in acute care hospitals. In select markets,
GranCare seeks to operate these businesses as an interrelated network of
services providing a continuum of cost-effective, long-term care.
PARAGON
After the Mergers, Paragon Health Network, Inc. will be one of the largest
providers of long-term care in the United States, offering a full range of
post-acute and long-term care services. Paragon's management expects that the
Mergers will allow it to "cluster" markets in select geographic areas in which
LCA and GranCare currently operate facilities and provide services. Paragon's
management intends to pursue a strategy enabling Paragon to become a leading
provider of specialty medical and subacute services in these "cluster" markets.
This strategy includes building on its concentration of facilities, related
services and its local expertise in these markets to capture additional
healthcare expenditures, to negotiate more effectively with large contract
payors (including managed care companies), to offer a broader range of
Paragon's ancillary services to its patients and to achieve other operating
efficiencies. Paragon also intends to focus its efforts on increasing the level
of specialty medical and ancillary services (which generally provide higher
revenues than routine nursing care) by attracting higher acuity patients.
Additionally, Paragon's management will place strategic emphasis on
establishing relationships with physicians and acute care hospitals, from which
a substantial portion of its patients are referred. Paragon's management
believes that the concentration of facilities in discrete geographic areas, and
its ability to offer contract management for subacute medical units in under-
utilized acute care hospitals and for hospital rehabilitation departments, will
allow it to strengthen physician and hospital relationships. Management will
continue to evaluate Paragon's portfolio of long-term care centers and the
services they provide and to pursue a strategy of selective acquisitions,
divestitures, partnering arrangements and the construction of new facilities.
LCA SPECIAL MEETING
TIME, DATE AND PLACE; MATTERS TO BE CONSIDERED. The LCA Special Meeting will
be held at the Houston Marriott-Westside hotel, 13210 Katy Freeway, Houston,
Texas on October 28, 1997 at 10:00 a.m., local time, to consider and vote upon
(i) the Recapitalization Proposal, (ii) the LCA Stock Issuance Proposal, (iii)
the Amendment Proposal and (iv) such other matters as may be properly brought
before the LCA Special Meeting. Only holders of record of shares of LCA Common
Stock at the LCA Record Date, which is the close of business on September 2,
1997, will be entitled to receive notice of and to vote at the LCA Special
Meeting.
REQUIRED VOTE; QUORUM. At the close of business on the LCA Record Date, there
were 20,266,431 shares of LCA Common Stock outstanding, each of which entitles
the registered holder thereof to one vote. At the close of business on the LCA
Record Date, LCA directors and executive officers beneficially owned an
aggregate of 4,424,943 shares of LCA Common Stock, or approximately 22% of the
then outstanding shares of LCA Common Stock. A majority of the outstanding
shares of LCA Common Stock entitled to vote, represented in person or by proxy,
will constitute a quorum at the LCA Special Meeting.
Approval of the Recapitalization Proposal will require the affirmative vote
of the holders of a majority of the outstanding shares of LCA Common Stock.
Approval of the LCA Stock Issuance Proposal will require the affirmative vote
of a majority of the shares of LCA Common Stock actually present and voting at
the LCA Special Meeting (provided that at least 50% of the issued and
outstanding shares of LCA Common Stock are actually voted on the proposal).
Approval of the Amendment Proposal will require the affirmative vote of not
less than 66 2/3% of the outstanding shares of LCA Common Stock, which vote
with respect to the amendments to Articles Tenth and Eleventh of the LCA
Charter must also include the affirmative vote of not less than 66 2/3% of the
issued and outstanding shares of LCA Common Stock, excluding those shares owned
by any "Related
2
<PAGE>
Person," which definition as set forth in the LCA Charter encompasses Mr.
Donald C. Beaver, Vice Chairman of the Board and a director of LCA. For
purposes of the vote on the Amendment Proposal, in addition to Mr. Beaver's
shares, shares held by a foundation established by Mr. Beaver will be treated
as if they are owned by him, resulting in the exclusion for this purpose of
3,579,482 shares, or approximately 18%, of the outstanding LCA Common Stock. A
failure to vote, either by abstention or non-vote (including a broker non-
vote), will have the same effect as a vote against the approval of the
Recapitalization Proposal and the Amendment Proposal. Consummation of the
Recapitalization Merger and of the GranCare Merger are each contingent on
approval of each of the LCA Proposals and the GranCare Merger Proposal. The
directors of LCA, who, as of the LCA Record Date, owned approximately 21% of
the outstanding LCA Common Stock, have indicated to LCA that they intend to
vote their shares in favor of the LCA Proposals. See "LCA Special Meeting--
Record Date, Voting Rights and Vote Required" and "--Proxies; Revocation of
Proxies."
GRANCARE SPECIAL MEETING
TIME, DATE AND PLACE; MATTERS TO BE CONSIDERED. The GranCare Special Meeting
is scheduled to be held at the corporate offices of GranCare located at One
Ravinia Drive, Suite 1500, Atlanta, Georgia on October 28, 1997 at 11:00 a.m.,
local time, to consider and vote upon (i) the GranCare Merger Proposal and (ii)
such other matters as may be properly brought before the GranCare Special
Meeting. Only holders of record of shares of GranCare Common Stock at the
GranCare Record Date, which is the close of business on September 2, 1997, will
be entitled to notice of and to vote at the GranCare Special Meeting.
REQUIRED VOTE; QUORUM. At the close of business on the GranCare Record Date,
there were 23,972,545 shares of GranCare Common Stock outstanding, each of
which entitles the registered holder thereof to one vote. At the close of
business on the GranCare Record Date, GranCare directors and executive officers
beneficially owned an aggregate of 3,381,453 shares of GranCare Common Stock,
or approximately 13.3% of the then outstanding shares of GranCare Common Stock.
A majority of the outstanding shares of GranCare Common Stock entitled to vote,
represented in person or by proxy, will constitute a quorum at the GranCare
Special Meeting.
Approval and adoption of the GranCare Merger Proposal will require the
affirmative vote of the holders of a majority of the outstanding shares of
GranCare Common Stock. A failure to vote, either by abstention or non-vote
(including a broker non-vote), will have the same effect as a vote against the
approval of the GranCare Merger Proposal. Consummation of the GranCare Merger
and the Recapitalization Merger are each contingent on approval of each of the
GranCare Merger Proposal and the LCA Proposals. The directors of GranCare, who,
as of the GranCare Record Date, owned approximately 9.8% of the outstanding
GranCare Common Stock, have indicated that they intend to vote their shares in
favor of the GranCare Merger Proposal. See "GranCare Special Meeting--Record
Date; Voting Rights and Votes Required" and "--Proxies; Revocation of Proxies."
RISK FACTORS
In considering whether to approve the Proposals, the stockholders of LCA and
GranCare, as applicable, should consider the following: (i) Paragon will have a
large amount of debt and a high degree of "leverage" and a portion of such debt
will bear interest at variable rates; (ii) the Apollo Investors will own
approximately 44.0% of the outstanding Paragon Common Stock, and Apollo will
have the right to designate nominees for a majority of the Board of Directors
of Paragon (the "Paragon Board") and will have the ability to exert substantial
influence over Paragon and (iii) there can be no assurance that the management
of Paragon which will include a new chief executive officer and may include
other officers who have not had prior involvement in the operations of either
LCA or GranCare, will be successful in integrating the operations of GranCare
and LCA. For additional information on these and other factors to consider
before deciding on the Proposals, see "Risk Factors."
3
<PAGE>
PLAN OF FINANCING
In order to: (i) finance payments of the LCA Cash Price to LCA stockholders
in the Recapitalization Merger, (ii) refinance existing LCA and GranCare
indebtedness, and (iii) pay fees and expenses (including severance payments to
certain LCA and GranCare officers and employees), a total of approximately
$1.44 billion will be required. These funds are expected to come from the
sources described below. See "Sources and Uses of Funds" and "Description of
Financing."
EQUITY FINANCING. Prior to the Recapitalization Merger, the Apollo Investors
will contribute not less than $240 million in cash to Apollo Sub in exchange
for approximately 5.9 million shares of common stock of Apollo Sub at a price
of $40.50 per share. See "Description of Financing--Equity Financing." Pursuant
to the terms of the Recapitalization Merger Agreement, the shares of common
stock of Apollo Sub will be converted on a one-for-one basis into shares of
Paragon Common Stock.
SENIOR CREDIT FACILITY. A commitment letter has been obtained (the "Financing
Commitment Letter") from The Chase Manhattan Bank ("CMB") and Chase Securities
Inc. ("Chase") whereby, among other things, CMB has agreed to provide to
Paragon an $840 million credit facility (the "New Credit Facility") which will
include the Revolving Credit Facility (as defined below). See "Description of
Financing--Description of Senior Credit Facility."
SENIOR SUBORDINATED DEBT. Paragon intends to issue at the time of the
consummation of the Recapitalization Merger senior subordinated notes (the
"Senior Subordinated Notes") and senior subordinated discount notes (the
"Discount Notes" and collectively with the Senior Subordinated Notes, the
"Notes"), the aggregate proceeds of which are anticipated to be $500 million.
It is anticipated that the Notes will be issued in a private placement exempt
from registration under Rule 144A. In the event that the offering of the Notes
is not consummated on or prior to the consummation of the Recapitalization
Merger, pursuant to the Financing Commitment Letter, CMB has agreed to provide
to Paragon a standby senior subordinated credit facility (the "Standby Senior
Subordinated Credit Facility" and collectively with the Notes, the "Senior
Subordinated Debt") in the aggregate amount of $450 million. CMB may be
entitled to receive warrants to purchase up to 7 1/2% of the fully diluted
Paragon Common Stock outstanding as of the closing date at an exercise price of
$0.01 per share under certain circumstances principally related to the sale of
the indebtedness incurred by Paragon under this facility at or below par by the
initial lenders beginning six months following the closing of the Transactions.
See "Description of Financing--Description of Senior Subordinated Debt." The
New Credit Facility and the Senior Subordinated Debt are collectively referred
to as the "Debt Financing."
DESCRIPTION OF THE TRANSACTIONS
The Transactions consist of (i) a recapitalization of LCA pursuant to which
(A) approximately 90.54% of the existing LCA Common Stock will be converted
into $40.50 cash per share and approximately 9.46% will remain outstanding as
shares of Paragon Common Stock and (B) the Apollo Investors will contribute not
less than $240 million in cash and will acquire common stock of Paragon at
$40.50 per share, (ii) a merger of GranCare with LCA Sub pursuant to which (A)
each share of GranCare Common Stock will be converted into the right to receive
0.2346 of a share of Paragon Common Stock and (B) GranCare will become a wholly
owned subsidiary of Paragon (iii) an amendment and restatement of the LCA
Charter (as amended and restated and referred to herein as the "Paragon
Charter") to increase the number and eliminate the classification of the
Paragon Board, to permit, among other things, stockholders of Paragon to take
action by written consent and to call special meetings of the stockholders, to
eliminate special voting requirements for certain business combinations and to
modify stockholder voting requirements for future amendments to the Paragon
Charter and (iv) the Debt Financing.
4
<PAGE>
Chart indicating that following the Transactions, the Apollo Investors will own
approximately 44.0%, the former GranCare stockholders will own approximately
41.9% and the former LCA stockholders will own approximately 14.1% of the
outstanding Paragon Common Stock. The chart also indicates that the Apollo
Investors will contribute $240 million to Paragon in return for their Paragon
Common Stock, that the former LCA stockholders will receive an aggregate of $743
million in cash for approximately 90.54% and retain approximately 9.46% of the
LCA Common Stock outstanding prior to the consummation of the Mergers, that all
of the GranCare Common Stock outstanding prior to the GranCare Merger will be
exchanged for Paragon Common Stock, and that GranCare will become a wholly owned
subsidiary of Paragon, with all of GranCare's subsidiaries existing prior to the
GranCare Merger remaining as direct and indirect subsidiaries of GranCare and
Paragon, respectively.
5
<PAGE>
LCA'S REASONS FOR THE TRANSACTIONS AND RECOMMENDATION OF THE LCA BOARD. The
LCA Board unanimously recommends that the LCA stockholders vote FOR the
approval of the Recapitalization Proposal, FOR the approval of the LCA Stock
Issuance Proposal and FOR the approval of the Amendment Proposal.
In its deliberations and in making its determination and recommendation, the
LCA Board considered a number of factors including, among others, the following
principal factors: (i) the LCA Board's knowledge of the business and prospects
of LCA and of changes in the health care industry; (ii) the discussions held by
Credit Suisse First Boston Corporation ("CSFB") and NationsBanc Capital
Markets, Inc. ("NationsBanc") (collectively, the "LCA Financial Advisors") with
various third parties potentially interested in acquiring LCA or entering into
another extraordinary transaction with LCA; (iii) the various strategic
alternatives available to LCA, including continuing without any extraordinary
transaction; (iv) the presentations of the LCA Financial Advisors and their
respective opinions that as of September 16, 1997 the consideration per share
of LCA Common Stock to be received and retained in the Transactions by LCA
stockholders holding shares of LCA Common Stock prior to the Transactions is
fair to such stockholders from a financial point of view; (v) the fact that if
no LCA stockholder makes an LCA Stock Election, all stockholders would receive
$36.67 in cash and retain .0946 shares for each share of LCA Common Stock
currently owned, and the belief of the LCA Board that the total consideration
per share of LCA Common Stock was greater than the total consideration per
share of LCA Common Stock available pursuant to the other offers that had been
received; (vi) that the implied value of the consideration to be received and
retained in the Recapitalization Merger represented a substantial premium over
trading prices for LCA Common Stock prior to the commencement of the
exploration of strategic alternatives for LCA; (vii) that LCA stockholders
would have the right to make or not make LCA Stock Elections; (viii) the terms
and conditions of the Merger Agreements; (ix) the anticipated tax treatment of
the Mergers to LCA stockholders; (x) the governance arrangements for Paragon
and the anticipated composition of the Paragon Board; (xi) the substantial
investment to be made by the Apollo Investors and the role to be played by
Apollo in the governance of Paragon; and (xii) the fact that two LCA directors
who collectively own approximately 20% of the outstanding LCA Common Stock were
in favor of the Transactions. See "Description of the Transactions--Reasons for
the Transactions; Recommendations of the Boards of Directors."
THE LCA BOARD MAKES NO RECOMMENDATION AS TO WHETHER LCA STOCKHOLDERS SHOULD
OR SHOULD NOT MAKE AN LCA STOCK ELECTION. EACH LCA STOCKHOLDER SHOULD MAKE HIS
OR HER OWN DECISION, IN CONSULTATION WITH HIS OR HER OWN FINANCIAL AND TAX
ADVISORS, AS TO WHETHER OR NOT TO MAKE AN LCA STOCK ELECTION.
GRANCARE'S REASONS FOR THE TRANSACTIONS AND RECOMMENDATION OF THE GRANCARE
BOARD. The GranCare Board recommends that the GranCare stockholders vote FOR
the approval of the GranCare Merger Proposal.
In its deliberations and in making its determination and recommendation, the
GranCare Board considered a number of factors including, among others, the
following principal factors: (i) the familiarity of the GranCare Board with
GranCare's business, operations and prospects and its review of the financial
performance and prospects of LCA; (ii) the fact that the stockholders of
GranCare would initially own, immediately after the effective time of the
GranCare Merger, a substantial percentage of the outstanding shares of Paragon
Common Stock and would be able to participate in a larger and more diversified
company; (iii) the opinions of GranCare's financial advisors, Smith Barney Inc.
("Smith Barney") and Chase Securities Inc. ("Chase," and collectively with
Smith Barney, the "GranCare Financial Advisors") to the effect that, as of the
date of such opinions and based upon and subject to certain matters stated
therein, the Exchange Ratio was fair to holders of GranCare Common Stock from a
financial point of view; (iv) the fact that the value of the shares of Paragon
Common Stock to be received for shares of GranCare Common Stock (based on the
$40.50 price per share which the Apollo Investors will pay for the shares of
Paragon Common Stock acquired pursuant to the Recapitalization Merger and the
Exchange Ratio of 0.2346 of a share of Paragon Common Stock for each share of
GranCare Common Stock) implies that the GranCare Common Stock is valued at
$9.50 per share of GranCare Common Stock, which represented a substantial
premium over the $7.75 closing price for the GranCare Common Stock
6
<PAGE>
on the day before the public announcement on May 8, 1997 of the execution of
the GranCare Merger Agreement and a premium over the closing prices, which
ranged from $7.625 to $8.50, during the thirty-day period preceding the
announcement of the Mergers (although the GranCare Board was aware that no
assurance could be given as to the price at which shares of Paragon Common
Stock would actually trade); (v) the fact that the terms of the GranCare Merger
Agreement and Recapitalization Merger Agreement were negotiated at arms-length,
including the provision expressly permitting GranCare to terminate the GranCare
Merger Agreement subject to the payment of certain fees and expenses in order
to enter into a business combination with a third party; (vi) an analysis of
the potential business synergies and significant cost savings anticipated to be
available by integrating the relative strengths of the two companies; (vii) the
tax free nature of the GranCare Merger Consideration; (viii) the Paragon
capital structure and its high degree of leverage, which will reduce the
flexibility of Paragon to respond to changing business and economic conditions;
and (ix) the degree of control that will be held by Apollo over the management
and policies of Paragon. See "Description of the Transactions--Reasons for the
Transactions; Recommendations of the Boards of Directors."
OPINIONS OF LCA FINANCIAL ADVISORS
CREDIT SUISSE FIRST BOSTON CORPORATION. CSFB was retained as financial
advisor to the special committee of the LCA Board (the "LCA Special Committee")
in connection with the Transactions and has delivered to the LCA Board a
written opinion dated September 17, 1997 to the effect that, as of the date of
such opinion and based upon and subject to the assumptions, limitations and
qualifications set forth therein, the consideration per share of LCA Common
Stock to be received and retained in the Transactions by the stockholders of
LCA holding shares of LCA Common Stock prior to the Transactions is fair to
such stockholders from a financial point of view. The full text of the written
opinion of CSFB dated September 17, 1997, which sets forth the assumptions
made, matters considered and limitations on the review undertaken, is attached
as Annex VI to this Proxy Statement/Prospectus and should be read carefully in
its entirety. The opinion of CSFB is for the information of the LCA Board and
relates only to the fairness from a financial point of view of the
consideration to be received and retained in the Transactions by the
stockholders of LCA holding shares of LCA Common Stock prior to the
Transactions, does not address any other aspect of the Transactions and does
not constitute a recommendation to any LCA stockholder as to what actions such
stockholder should take with respect to, or how such stockholder should vote
on, the LCA Proposals or whether any stockholder should make an LCA Stock
Election. See "Description of the Transactions--Opinions of LCA Financial
Advisors--Opinion of Credit Suisse First Boston Corporation."
NATIONSBANC CAPITAL MARKETS, INC. NationsBanc was retained as financial
advisor to the LCA Special Committee in connection with the Transactions and
has delivered to the LCA Board a written opinion dated September 17, 1997 that
states, as of the date of such opinion and based on the analyses and
limitations stated in the opinion, that the consideration per share of LCA
Common Stock to be received and retained in the Transactions by the
stockholders of LCA holding LCA Common Stock prior to the Transactions is fair,
from a financial point of view. The full text of the written opinion of
NationsBanc, dated September 17, 1997 which includes the analyses and review
limitations, is attached as Annex VII to this Proxy Statement/Prospectus and
should be read in its entirety. The opinion of NationsBanc is for the
information of the LCA Board and does not constitute a recommendation to any
LCA stockholder as to what actions such stockholder should take with respect to
or how such stockholder should vote on, the LCA Proposals or whether any
stockholder should make an LCA Stock Election. See "Description of the
Transactions--Opinions of LCA Financial Advisors--Opinion of NationsBanc
Capital Markets, Inc."
In connection with the rendering of their opinions and the other services
described herein, CSFB and NationsBanc will receive a fee aggregating
approximately $7.0 million, which will be shared equally between them, with
$2.85 million of CSFB's fee and $3.0 million of NationsBanc's fee being
contingent upon the consummation of the Transactions.
7
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OPINIONS OF GRANCARE FINANCIAL ADVISORS
SMITH BARNEY INC. Smith Barney has acted as financial advisor to GranCare in
connection with the GranCare Merger and has delivered to the GranCare Board a
written opinion dated September 16, 1997 to the effect that, as of the date of
such opinion and based upon and subject to certain matters stated therein, the
Exchange Ratio was fair, from a financial point of view, to the holders of
GranCare Common Stock. The full text of the written opinion of Smith Barney,
which sets forth the assumptions made, matters considered and limitations on
the review undertaken, is attached as Annex VIII to this Proxy
Statement/Prospectus and should be read carefully in its entirety. The opinion
of Smith Barney is directed to the GranCare Board and relates only to the
fairness of the Exchange Ratio from a financial point of view, does not address
any other aspect of the GranCare Merger or related transactions and does not
constitute a recommendation to any GranCare stockholder as to how such
stockholder should vote at the GranCare Special Meeting. In connection with the
rendering of its opinion and the other services described herein, Smith Barney
will receive a $3.0 million fee, $2.5 million of which is contingent upon the
consummation of the GranCare Merger. See "Description of the Transactions--
Opinions of GranCare Financial Advisors--Opinion of Smith Barney Inc."
CHASE SECURITIES INC. Chase has acted as financial advisor to GranCare in
connection with the GranCare Merger and has delivered its written opinion (the
"Chase Opinion") dated September 15, 1997 to the GranCare Board to the effect
that, based upon and subject to the various considerations set forth therein,
as of the date of such opinion, the Exchange Ratio in the GranCare Merger is
fair from a financial point of view to the holders of GranCare Common Stock.
The full text of the Chase Opinion, which sets forth a description of the
assumptions made, general procedures followed, factors considered and
limitations on the review undertaken by Chase in rendering its opinion, is
attached as Annex IX to this Proxy Statement/Prospectus. Holders of GranCare
Common Stock are urged to read the Chase Opinion carefully and in its entirety.
The Chase Opinion was rendered for the use and benefit of the GranCare Board in
its evaluation of the GranCare Merger, does not express an opinion as to any
aspect of the Recapitalization Merger and does not constitute a recommendation
to any GranCare stockholder as to how such stockholder should vote with respect
to the GranCare Merger. In connection with the rendering of its opinion and the
other services described herein, Chase will receive a $3.0 million fee, $2.775
million of which is contingent upon the consummation of the GranCare Merger.
See "Description of the Transactions--Opinions of GranCare Financial Advisors--
Opinion of Chase Securities Inc."
THE RECAPITALIZATION MERGER AGREEMENT
LCA, Apollo and Apollo Sub have entered into the Recapitalization Merger
Agreement (attached hereto as Annex I) pursuant to which Apollo Sub will merge
with and into LCA with LCA as the surviving corporation, which will change its
name to Paragon Health Network, Inc.
To effect the recapitalization of LCA, the Apollo Investors will contribute
not less than $240 million in cash to Apollo Sub in exchange for approximately
5.9 million shares of common stock of Apollo Sub at a price of $40.50 per
share, which shares will be converted on a one-for-one basis into shares of
Paragon Common Stock in the Recapitalization Merger.
Pursuant to the election and proration procedures described below, a total of
1,905,748 shares of LCA Common Stock (referred to as the "LCA Retained Share
Number") outstanding immediately prior to the effective time of the
Recapitalization Merger will remain outstanding after the effective time of the
Recapitalization Merger (and following the GranCare Merger) as shares of
Paragon Common Stock. Each other share of LCA Common Stock outstanding
immediately prior to the effective time of the Recapitalization Merger will be
converted into the right to receive the LCA Cash Price of $40.50 per share.
Each person who is a record holder of shares of LCA Common Stock at the LCA
Election Deadline of 5:00 p.m. New York City time on the business day
immediately preceding the day on which the vote on the Recapitalization
Proposal is taken at the
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LCA Special Meeting (or any adjournment thereof) (and any holder of LCA stock
options or other LCA Rights (as defined below) that will be cancelled and
converted into the right to receive shares of LCA Common Stock immediately
prior to the effective time of the Recapitalization Merger) may, by following
the procedures set forth under "The Recapitalization Merger Agreement--Merger
Consideration and Proration," make an LCA Stock Election with respect to some
or all of such shares to retain such shares as LCA Retained Shares. Any such
election will be subject to the proration provisions of the Recapitalization
Merger Agreement described below.
If the aggregate number of LCA Electing Shares is more than the LCA Retained
Share Number of 1,905,748, then (i) all shares of LCA Common Stock other than
LCA Electing Shares will be converted into the right to receive the LCA Cash
Price, (ii) each LCA Stockholder making an LCA Stock Election will be entitled
to retain that number of LCA Retained Shares as is equal to the product of (x)
the number of LCA Electing Shares of such LCA stockholder and (y) a fraction,
the numerator of which is the LCA Retained Share Number and the denominator of
which is the aggregate number of LCA Electing Shares and (iii) each other LCA
Electing Share held by such LCA stockholder will be converted into the right to
receive the LCA Cash Price.
If the aggregate number of LCA Electing Shares is less than the LCA Retained
Share Number, then (i) each LCA Electing Share will remain outstanding as an
LCA Retained Share, (ii) in addition to such LCA Retained Shares, each LCA
stockholder (including LCA stockholders who made LCA Stock Elections with
respect to some, but not all, of their shares of LCA Common Stock) will be
required to retain as LCA Retained Shares that number of shares as is equal to
the product of (x) the excess of the LCA Retained Share Number over the
aggregate number of LCA Electing Shares and (y) a fraction, the numerator of
which is the number of shares of LCA Common Stock (other than LCA Electing
Shares) held by such LCA stockholder and the denominator of which is the
aggregate number of outstanding shares of LCA Common Stock other than LCA
Electing Shares, and (iii) each other share of LCA Common Stock held by such
LCA stockholder will be converted into the right to receive the LCA Cash Price.
Pursuant to this proration procedure, if no LCA Stock Elections are made, each
LCA stockholder would receive $40.50 per share with respect to approximately
90.54% of such stockholder's shares and would retain approximately 9.46% of
such stockholder's shares as LCA Retained Shares. Thus, under such assumption,
each LCA stockholder would receive and retain in the Recapitalization Merger,
for each share of LCA Common Stock, approximately $36.67 (90.54% of $40.50) in
cash and 0.0946 of an LCA Retained Share. Any stockholder who would otherwise
retain a fraction of an LCA Retained Share will receive a cash payment in lieu
thereof.
BECAUSE OF THE PRORATION PROCEDURES DESCRIBED HEREIN, LCA STOCKHOLDERS MAY
NOT RECEIVE THE AMOUNT OF CASH AND RETAIN THE NUMBER OF SHARES OF PARAGON
COMMON STOCK THAT THEY ELECT.
CONDITIONS TO THE CONSUMMATION OF THE RECAPITALIZATION MERGER. The respective
obligations of each party to effect the Recapitalization Merger are subject to
the satisfaction or waiver (under certain circumstances) of numerous
conditions, including the following: (i) the Recapitalization Proposal shall
have been approved by the requisite vote of the holders of LCA Common Stock;
(ii) the conditions to each party's obligations to affect the GranCare Merger,
including approval of the LCA Stock Issuance Proposal, shall have been
satisfied or waived; (iii) the applicable waiting periods under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall
have expired or been earlier terminated (which waiting periods expired on July
25, 1997) and (iv) the conditions set forth in the Financing Commitment Letter
shall have been satisfied or waived. For a description of certain litigation
seeking to enjoin the GranCare Merger, see "Certain Information Concerning
GranCare--Legal Proceedings."
The obligations of Apollo and Apollo Sub to effect the Recapitalization
Merger are also subject to the satisfaction or waiver of additional conditions,
including the following: (i) the Amendment Proposal shall have been approved by
the requisite vote of the holders of LCA Common Stock; (ii) no action or
proceeding brought
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by any governmental authority or commission shall be pending that would be
reasonably likely to make the Recapitalization Merger illegal or prohibit its
consummation; and (iii) since September 30, 1996, with respect to LCA, and
since December 31, 1996, with respect to GranCare, no change shall have
occurred or been threatened in the business, operations, prospects, properties
or condition (financial or otherwise) that would have or would be reasonably
expected to have a Material Adverse Effect (as defined in the Recapitalization
Merger Agreement).
The obligations of LCA to effect the Recapitalization Merger are also subject
to the satisfaction or waiver by LCA of additional conditions, including the
receipt by the LCA Board of a solvency letter from an independent third party
attesting to various issues regarding the solvency of Paragon. See "The
Recapitalization Merger Agreement--Conditions to the Consummation of the
Recapitalization Merger."
LCA RIGHTS. Immediately prior to the effective time of the Recapitalization
Merger, LCA will take all necessary action to cancel options, warrants or
rights to acquire shares of LCA Common Stock (including, without limitation,
any stock option or rights granted in connection therewith, stock purchase,
restricted stock or other plan), whether or not such options or rights are then
vested or exercisable (the "LCA Rights"), subject to the rights of holders of
such options or rights to exercise their LCA Rights. Each holder of an LCA
Right so cancelled will be entitled to receive, immediately prior to the
effective time of the Recapitalization Merger, that number of shares of LCA
Common Stock as is equal to the product of (i) the total number of shares of
LCA Common Stock subject to such holder's LCA Rights, multiplied by (ii) the
excess, if any, of (x) $40.50 over (y) the exercise price per share of LCA
Common Stock previously subject to each such LCA Right and multiplied by (iii)
0.02469 upon cancellation of such LCA Right, and shall be entitled to make an
LCA Stock Election with respect thereto. At June 30, 1997, LCA had outstanding
LCA Rights consisting of stock options to purchase 1,349,194 shares of LCA
Common Stock at per share exercise prices ranging from $13.25 to $38.75. See
"The Recapitalization Merger Agreement--LCA Rights" and "--Merger Consideration
and Proration."
NO SOLICITATION OF ACQUISITION TRANSACTIONS. On May 8, 1997, LCA terminated
all existing activities, discussions and negotiations with third parties (other
than GranCare and Apollo) with respect to any possible LCA Acquisition
Transaction. LCA has also agreed not to, initiate, solicit or encourage,
directly or indirectly, any discussions or negotiations with respect to an LCA
Acquisition Transaction. See "The Recapitalization Merger Agreement--No
Solicitation of Acquisition Transactions."
TERMINATION. The Recapitalization Merger Agreement may be terminated at any
time prior to the effective time of the Recapitalization Merger upon the
occurrence of certain events or if the Recapitalization Merger is not
consummated by November 17, 1997. Under certain circumstances generally related
to the presence of an LCA Acquisition Transaction, or withdrawal by the LCA
Board of its recommendation of the LCA Proposals, termination of the
Recapitalization Merger Agreement will result in the payment of a fee of $20
million by LCA to Apollo and reimbursement of Apollo's expenses. Pursuant to a
letter agreement between Apollo and GranCare, dated May 7, 1997 and amended and
restated as of June 12, 1997, relating to the reimbursement by GranCare of
certain expenses incurred by Apollo (the "Apollo Letter"), Apollo has agreed to
share a portion of such fee with GranCare. See "The Recapitalization Merger
Agreement--Termination" and "--Termination Fees; Expenses."
ACCOUNTING TREATMENT. The Recapitalization Merger will be accounted for as a
recapitalization. Accordingly, the historical basis of LCA's assets and
liabilities will not be affected by the Recapitalization Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The Recapitalization Merger should
be treated as a purchase by the Apollo Investors of a portion of the
outstanding LCA Common Stock and a redemption by LCA of a portion of the
outstanding LCA Common Stock. In general, an LCA stockholder who receives cash
pursuant to the Recapitalization Merger in exchange for such stockholder's LCA
Common Stock should be treated as
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disposing of such LCA Common Stock in a taxable sale so long as its
proportionate interest in LCA is reduced (even by a small percentage) as a
result of the Recapitalization Merger and the GranCare Merger. Accordingly,
such a stockholder would generally recognize gain or loss on such LCA Common
Stock. The Recapitalization Merger will have no U.S. federal income tax
consequences to stockholders who do not receive cash pursuant to the
Recapitalization Merger. See "The Recapitalization Merger Agreement--Certain
Federal Income Tax Consequences."
AMENDMENT AND WAIVER. At any time prior to the effective time of the
Recapitalization Merger, each of the parties to the Recapitalization Merger
Agreement may (i) extend the time of the performance of any of the obligations
or other acts of the other parties thereto, (ii) waive any inaccuracies in the
representations and warranties contained therein or in any document delivered
pursuant thereto, or (iii) waive compliance with any of the agreements or
conditions contained therein. The Recapitalization Merger Agreement may be
further amended by the parties at any time before or after approval thereof by
the LCA stockholders; provided that no amendment may be made after such
stockholder approval that decreases the consideration to be received by the LCA
stockholders or that adversely affects the rights of the LCA stockholders
without the approval of such stockholders. In the event that an amendment or
waiver by LCA is contemplated that requires stockholder approval as provided in
the prior sentence or under applicable law, a supplement to this Proxy
Statement/Prospectus will be distributed to stockholders and proxies will be
resolicited. If following stockholder approval, a waiver is contemplated, the
LCA Board will determine (based on the materiality of such waiver and other
facts and circumstances) whether to seek stockholder approval. See "The
Recapitalization Merger Agreement--Amendment and Waiver."
THE GRANCARE MERGER AGREEMENT
LCA, GranCare, Apollo and LCA Sub have entered into the GranCare Merger
Agreement (attached hereto as Annex II), which provides that GranCare will
merge with LCA Sub with GranCare becoming a wholly owned subsidiary of Paragon.
Each share of GranCare Common Stock outstanding as of the effective time of
the GranCare Merger will be converted into the right to receive 0.2346
(referred to herein as the "Exchange Ratio") of a share of Paragon Common
Stock. Any GranCare stockholder who would otherwise receive a fraction of a
share of Paragon Common Stock will receive a cash payment in lieu thereof.
CONDITIONS TO THE CONSUMMATION OF THE GRANCARE MERGER. The respective
obligations of each party to effect the GranCare Merger are subject to the
satisfaction or, in certain cases, waiver of numerous conditions, including the
following: (i) the GranCare Merger Proposal shall have been approved by the
requisite vote of the holders of GranCare Common Stock and the Recapitalization
Merger and the LCA Stock Issuance shall have been approved by the requisite
vote of the holders of LCA Common Stock; (ii) the Recapitalization Merger shall
have been consummated; (iii) all material filings required to be made with, and
all material consents, approvals, authorizations and permits required to be
obtained prior to the effective time of the GranCare Merger from any
governmental authority in connection with the consummation of the GranCare
Merger shall have been made or obtained; and (iv) GranCare and LCA shall have
received an opinion of GranCare's counsel to the effect that the GranCare
Merger will qualify as a reorganization pursuant to Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code") and that GranCare, LCA
and the LCA Sub will each be a "party to a reorganization" within the meaning
of Section 368(b) of the Code.
The obligation of GranCare to effect the GranCare Merger also is subject to
the satisfaction or waiver by each of GranCare and Apollo of additional
conditions including the following: (i) no action shall have been taken and be
continuing, and no statute, rule, regulation, judgment, administrative
interpretation, order or injunction shall have been enacted that would make
illegal or prohibit the consummation of the GranCare Merger; and (ii)
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since September 30, 1996, no change shall have occurred or been threatened in
the business, operations, prospects, properties or condition (financial or
other) of LCA or any of its subsidiaries that would have or would be reasonably
expected to have a Material Adverse Effect (as defined in the GranCare Merger
Agreement). For a description of certain litigation seeking to enjoin the
GranCare Merger, see "Certain Information Concerning GranCare--Legal
Proceedings."
The obligations of LCA and LCA Sub to effect the GranCare Merger are subject
to the satisfaction or waiver by LCA, LCA Sub and Apollo of additional
conditions including the following: (i) no action shall have been taken and be
continuing, and no statute, rule, regulation, judgment, administrative
interpretation, order or injunction shall have been enacted that would make
illegal or prohibit the consummation of the GranCare Merger; and (ii) since
December 31, 1996, no change shall have occurred or been threatened in the
business, operations, prospects, properties or condition (financial or other)
of GranCare or any of its subsidiaries that could have or could be reasonably
expected to have a Material Adverse Effect. See "The GranCare Merger
Agreement--Conditions to the Consummation of the GranCare Merger."
GRANCARE STOCK OPTIONS. At the effective time of the GranCare Merger, each
option to purchase shares of GranCare Common Stock ("GranCare Options") issued
pursuant to GranCare's 1996 Replacement Stock Option Plan, 1996 Stock Incentive
Plan or Outside Directors Stock Incentive Plan (the "GranCare Plans") will be
terminated in consideration of the issuance of Replacement Options (as defined
below) to purchase shares of Paragon Common Stock. The terms of the Replacement
Options will be identical to the terms of the terminated GranCare Options
except that: (i) the Replacement Options will be fully vested; (ii) the number
of Replacement Options will be derived by multiplying the number of shares
subject to each GranCare Option by the Exchange Ratio; and (iii) the exercise
price of each Replacement Option will be derived by dividing the existing
exercise price of the GranCare Option by the Exchange Ratio. As of June 30,
1997, there were outstanding options to purchase 2,581,511 shares of GranCare
Common Stock, 2,033,689 of which are currently exercisable, at prices ranging
from $0.30 to $8.25 per share, convertible, in the aggregate, to options to
purchase 605,622 shares of Paragon Common Stock, all of which will be
exercisable, at prices ranging from $1.28 to $35.17 per share. See "The
GranCare Merger Agreement--GranCare Stock Options."
NO SOLICITATION OF ACQUISITION TRANSACTIONS. On May 8, 1997, GranCare
terminated all existing activities, discussions and negotiations with third
parties (other than LCA and Apollo) with respect to any possible GranCare
Acquisition Transaction, GranCare has also agreed not to knowingly initiate,
solicit or encourage, directly or indirectly, any discussions or negotiations
with respect to a GranCare Acquisition Transaction. See "The GranCare Merger
Agreement--No Solicitation of Acquisition Transactions."
TERMINATION. The GranCare Merger Agreement may be terminated at any time
prior to the effective time of the GranCare Merger upon the occurrence of
certain conditions or if the Recapitalization Merger is not consummated by
November 17, 1997. Under certain circumstances, generally related to the
presence of a GranCare Acquisition Transaction or withdrawal by the GranCare
Board of its recommendation to GranCare stockholders to approve the GranCare
Merger, termination of the GranCare Merger Agreement will result in the payment
of a fee of $20 million by GranCare to LCA and reimbursement of LCA's expenses
and, in accordance with the Apollo Letter, the payment of a fee of $5 million
by GranCare to Apollo and reimbursement of Apollo's expenses. See "The GranCare
Merger Agreement--Termination" and "--Termination Fees; Expenses."
ACCOUNTING TREATMENT. The GranCare Merger will be treated by Paragon for
accounting purposes in accordance with the rules for purchase accounting, as a
result of which the assets and liabilities of GranCare will be recorded on
Paragon's books at their estimated fair market values with the remaining
purchase price reflected as goodwill.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. Powell, Goldstein, Frazer & Murphy
LLP and Andrews & Kurth L.L.P., counsel to GranCare, have delivered to GranCare
their opinions, based upon customary
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representations of LCA and GranCare that: (i) the GranCare Merger will qualify
as a reorganization within the meaning of Section 368(a) of the Code; and (ii)
GranCare, LCA Sub and LCA will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code with respect to the GranCare Merger.
Accordingly, no gain or loss will be recognized by GranCare, LCA Sub, or LCA,
or by the holders of GranCare Common Stock, except with respect to cash
received in lieu of the issuance of fractional shares of Paragon Common Stock
to such holders of GranCare Common Stock as a result of the GranCare Merger.
See "The GranCare Merger Agreement--Certain Federal Income Tax Consequences."
AMENDMENT AND WAIVER. At any time prior to the effective time of the GranCare
Merger, each of the parties to the GranCare Merger Agreement may: (i) extend
the time of the performance of any of the obligations or other acts of the
other parties thereto; (ii) waive any inaccuracies in the representations and
warranties contained therein or in any document delivered pursuant thereto; or
(iii) waive compliance with any of the agreements or conditions contained
therein. The GranCare Merger Agreement may be amended by the parties at any
time before or after approval by the stockholders of GranCare and the approval
thereof by the stockholders of LCA of the issuance of shares of Paragon Common
Stock to GranCare stockholders; provided that no amendment may be made after
such stockholder approval that decreases the GranCare Merger Consideration or
that adversely affects the rights of GranCare stockholders, without the
approval of such stockholders. In the event that an amendment or waiver is
contemplated that requires stockholder approval as provided in the prior
sentence or under applicable law, a supplement to this Proxy
Statement/Prospectus will be distributed to stockholders and proxies will be
resolicited. If following stockholder approval, a waiver is contemplated, the
GranCare Board or the LCA Board, as the case may be, will determine (based on
the materiality of such waiver and other facts and circumstances) whether to
seek stockholder approval. See "The GranCare Merger Agreement--Amendment and
Waiver."
AMENDMENTS TO LCA CHARTER
In connection with the Recapitalization Merger, the Amendment Proposal is
being submitted to the LCA stockholders in order to amend the LCA Charter to,
among other things: (i) increase the maximum number of directors to between
five and fifteen, as determined from time to time by a resolution approved by
two-thirds of the entire Board of Directors; (ii) eliminate the classified
board of directors; (iii) provide that directors may be removed, with or
without cause, by a two-thirds stockholder vote; (iv) eliminate the prohibition
on stockholder action by written consent and the calling of special meetings by
stockholders; (v) eliminate certain provisions restricting certain business
combinations; and (vi) modify the stockholder voting requirements for future
amendments to the LCA Charter so that a two-thirds vote is required for
amendments to the provisions relating to removal of directors, liability of
directors and the alteration of bylaws by stockholder action (as well as for
further amendments to the requirements for amending the LCA Charter). See
"Amendments to LCA Charter" and Annex III for the form of the LCA Charter as
proposed to be amended.
RESOLUTION OF DISPUTES WITH VITALINK AND MANOR CARE
On September 3, 1997, GranCare entered into a Termination and Release
Agreement ("TRA") with Vitalink and Manor Care, Inc. ("Manor Care") that
provided for the termination of a Non-Competition Agreement among GranCare,
Vitalink and Manor Care (the "Non-Competition Agreement") and the resolution of
all of the claims asserted by Vitalink and Manor Care against GranCare
associated therewith. The Non-Competition Agreement was entered into in
connection with the Vitalink Merger and prohibits GranCare and Manor Care from
engaging in the institutional pharmacy business within the United States prior
to February 12, 2000 except temporarily in connection with future acquisitions
of healthcare businesses that also include an institutional pharmacy business
or an interest therein. Similarly, Vitalink may not engage in the skilled
nursing business during the term of the Non-Competition Agreement. The TRA
provides for the termination of the Non-Competition Agreement before or
simultaneously with the effective time of the Mergers upon payment by GranCare
to Vitalink and Manor Care of $18.5 million and $500,000, respectively (the
"Termination Fee"). As a consequence of the TRA, the legal action that had been
commenced by Vitalink and Manor Care against GranCare will be eliminated and
the preliminary injunction that had prohibited the consummation of the GranCare
Merger was vacated. See "Certain Information Concerning GranCare--Legal
Proceedings."
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RESTRUCTURING OF HRPT FINANCING
On September 26, 1997, GranCare executed a non-binding letter agreement with
Health and Retirement Properties Trust, a significant GranCare landlord
("HRPT"), setting forth the material terms and conditions of an agreement in
principal whereby HRPT will restructure its relationship with GranCare (the
"HRPT/GranCare Restructuring") and consent to the consummation of the GranCare
Merger and related transactions. As a result of the restructuring, Paragon and
certain of its subsidiaries will guaranty GranCare's obligations to HRPT (which
guaranty will replace the current Vitalink guaranty and will be secured by a
$15 million cash deposit (the "Cash Collateral Deposit")). The terms of the
various leases relating to all of the facilities that GranCare leases from HRPT
will be extended until January 30, 2013 and the aggregate annual rental
obligation in respect of all such leases will be increased by $500,000. In
addition, GranCare will prepay two mortgages held by HRPT in the aggregate
principal amount of $11.5 million (the "HRPT Loan") and will then engage in
like-kind exchanges of certain facilities. Following such exchange GranCare
will lease back the facilities transferred to HRPT. HRPT will also agree to
waive its rights of first refusal to provide future financing to GranCare,
release GranCare from its obligation to provide to HRPT $25 million of new
financing transactions and consent to an omnibus amendment to its current
relationship with GranCare whereby Paragon or any of its affiliates or
successors other than the Tenant Entities (as defined below) may enter into any
type of recapitalization, restructuring or change of control transaction
without HRPT's consent unless such transaction results in the encumbrance of
any of HRPT's collateral or constitutes an event of default under the
restructured arrangements or a breach of a lease. In consideration of the
foregoing, GranCare will pay HRPT a one time restructuring payment of $10
million. The HRPT/GranCare Restructuring will be consummated simultaneously
with the effective time of the GranCare Merger. See "Description of Financing--
Treatment of Certain Existing LCA and GranCare Indebtedness--HRPT Obligations."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
Certain members of LCA's and GranCare's management and the LCA Board and
GranCare Board may be deemed to have interests in the Transactions, in addition
to their interests as LCA stockholders and GranCare stockholders generally,
that may cause potential conflicts of interest. The LCA Board and GranCare
Board were aware of these factors and considered them, among others, in
approving the Transactions. Among these factors are: (i) the acceleration of
the vesting of currently unvested GranCare Options and the acceleration of the
vesting and cashing out of all LCA Rights as a result of the consummation of
the Mergers as described under "The GranCare Merger Agreement--GranCare Stock
Options," and "The Recapitalization Merger Agreement--LCA Rights;" (ii) the
indemnification provisions of the Merger Agreements and the obligation of
Paragon to maintain directors' and officers' liability insurance for current
LCA and GranCare directors and officers as described under "The GranCare Merger
Agreement--Effect on GranCare Employee Benefit Plans and Employee Agreements,"
and "The Recapitalization Merger Agreement--Effect on LCA Employee Benefit
Plans and Employee Agreements;" (iii) the right of certain members of
management to receive cash payments as a result of the early termination of
certain LCA and GranCare incentive compensation plans; and (iv) the right of
certain executives to receive certain payments under employment agreements if
no longer employed. See "Interests of Certain Persons in the Transactions."
Certain of the directors and executive officers of LCA and GranCare will be
executive officers and directors of Paragon. See "Directors and Officers of
Paragon Following the Mergers."
CERTAIN OTHER AGREEMENTS
In connection with the Transactions, the Apollo Investors and Paragon will
enter into a stockholders agreement (the "Stockholders Agreement") which, among
other things: (i) provides for the nomination of certain persons designated by
Apollo for election to the Paragon Board, which designated persons will
constitute a majority of the Paragon Board; (ii) requires the Apollo Investors
to vote in favor of the Paragon Board's nominees for election as directors of
Paragon; and (iii) contains certain "standstill" provisions limiting the Apollo
Investors' ability to purchase additional shares of Paragon Common Stock. In
addition, Paragon and the
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Apollo Investors will enter into a Registration Rights Agreement. See "Certain
Other Agreements" and Annex V for a copy of the Stockholders Agreement.
STOCKHOLDERS' RIGHTS OF APPRAISAL
Holders of shares of LCA Common Stock who do not vote in favor of the
Recapitalization Proposal and who perfect their appraisal rights in accordance
with Section 262 of the DGCL will be entitled to receive following completion
of the Recapitalization Merger in lieu of the LCA Cash Price and LCA Retained
Shares, following a statutory appraisal proceeding in the Delaware Court of
Chancery, cash in the amount of the fair value of their shares (exclusive of
any element of value arising from the accomplishment or expectation of the
Recapitalization Merger), as determined by the court in such appraisal
proceeding, plus interest, if any, at such rate as shall be determined by such
court. See "Stockholders' Rights of Appraisal" and Annex X hereto. Because of
the complexity of the procedures for exercising these rights, LCA stockholders
who consider exercising such rights are urged to seek the advice of counsel. If
an LCA stockholder returns a signed proxy but does not specify a vote against
the approval and adoption of the Recapitalization Proposal, or a direction to
abstain, the proxy will be voted FOR the approval and adoption of such
proposal, which will have the effect of waiving that stockholder's appraisal
rights. An LCA stockholder who makes an LCA Stock Election will be deemed to
have accepted the consideration to be paid pursuant to the Recapitalization
Merger Agreement and to have waived appraisal rights with respect to such
holder's LCA Electing Shares. FAILURE TO TAKE ANY REQUIRED STEP ON A TIMELY
BASIS IN CONNECTION WITH THE EXERCISE OF APPRAISAL RIGHTS MAY RESULT IN THE
TERMINATION OR WAIVER OF SUCH RIGHTS. SEE "STOCKHOLDERS' RIGHTS OF APPRAISAL."
GranCare stockholders will not have the right to an appraisal of the value of
their shares in connection with the GranCare Merger under the provisions of
Section 262 of the DGCL.
STOCK EXCHANGE LISTING
LCA, GranCare and Apollo have agreed to use commercially reasonable efforts
to cause the Paragon Common Stock to continue to be listed for trading on the
NYSE following the effective time of the Mergers. At the effective time of the
GranCare Merger, the GranCare Common Stock will cease trading and be delisted
from the NYSE.
DIFFERENCES IN RIGHTS OF STOCKHOLDERS
Upon consummation of the Recapitalization Merger, LCA stockholders who retain
LCA Retained Shares will continue as stockholders in Paragon, but their rights
will be altered as a result of the Amendment Proposal, contemplated bylaw
amendments and the provisions of the Stockholders Agreement. Upon consummation
of the GranCare Merger, GranCare stockholders will become Paragon stockholders,
and their rights will be governed by the Paragon Charter and Bylaws, which will
differ from the GranCare charter and bylaws, and will be affected by the
provisions of the Stockholders Agreement. For a discussion of the material
differences between the rights of holders of GranCare Common Stock, holders of
LCA Common Stock (prior to the effectiveness of the changes to the LCA Charter
to be implemented upon adoption of the Amendment Proposal) and holders of
Paragon Common Stock, see "Comparison of Stockholder Rights."
15
<PAGE>
LIVING CENTERS OF AMERICA, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of LCA
with respect to each year in the five-year period ended September 30, 1996, is
derived from the consolidated financial statements of LCA. Such consolidated
financial statements have been audited by Ernst & Young LLP, independent
auditors. The financial information of LCA for the nine months ended June 30,
1997 and 1996 has been derived from unaudited consolidated financial statements
contained in the quarterly report on Form 10-Q for the periods ending June 30,
1997 and 1996 and is qualified in its entirety by such documents, which, in the
opinion of LCA's management, includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of such
information for the unaudited interim periods. The operating results for the
nine months ended June 30, 1997 are not necessarily indicative of results for
the full fiscal year. This information should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations of LCA and the Consolidated Financial Statements of LCA and the
Notes thereto incorporated by reference into this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30, YEAR ENDED SEPTEMBER 30,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ---------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:(1)
Net revenues............ $853,953 $829,653 $1,114,491 $893,869 $708,873 $576,140 $511,838
Costs and expenses:
Operating expenses,
excluding items shown
below................. 715,690 699,043 942,596 756,356 601,458 486,932 432,419
Rent................... 31,801 33,442 44,185 36,876 31,875 29,727 29,081
Depreciation and
amortization.......... 30,480 28,784 39,214 31,158 26,072 21,017 19,470
Non-recurring
items(2).............. -- -- (1,060) 12,474 -- -- --
-------- -------- ---------- -------- -------- -------- --------
Income from operations.. 75,982 68,384 89,556 57,005 49,468 38,464 30,868
Interest expense........ 16,302 12,286 20,128 18,322 16,043 12,458 13,697
Interest income......... (3,378) (3,297) (7,667) (7,505) (5,149) (3,460) (2,696)
-------- -------- ---------- -------- -------- -------- --------
Income before income
taxes and equity
earnings/minority
interest............... 63,058 59,395 77,095 46,188 38,574 29,466 19,867
Income taxes............ 26,445 23,199 33,759 21,750 13,561 10,149 6,828
Equity earnings/minority
interest............... (405) (69) (156) (204) 1,603 1,582 1,210
-------- -------- ---------- -------- -------- -------- --------
Net Income.............. $ 36,208 $ 36,127 $ 43,180 $ 24,234 $ 26,616 $ 20,899 $ 14,249
======== ======== ========== ======== ======== ======== ========
PRO FORMA INCOME TAX
DATA:
Income before income
taxes and equity
earnings/minority
interest............... NA NA NA 46,188 38,574 29,466 19,867
Pro forma taxes(3)...... NA NA NA 22,349 14,460 11,048 7,554
Equity earnings/minority
interest............... NA NA NA (204) 1,603 1,582 1,210
-------- -------- -------- --------
Pro forma net
income(3).............. NA NA NA 23,635 25,717 20,000 13,523
======== ======== ======== ========
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE:
Earnings per share...... $ 1.84 $ 1.77 $ 2.13 $ 1.27 $ 1.56 $ 1.32 $ 0.92
Pro forma earnings per
share(3)............... NA NA NA $ 1.24 $ 1.51 $ 1.26 $ 0.87
Weighted average number
of common and common
equivalent shares
outstanding............ 19,728 20,434 20,315 19,034 17,080 15,824 15,551
STATISTICAL DATA:
Number of centers (end
of period)............. 201 294 206 294 288 267 261
Weighted average
licensed beds.......... 23,101 25,757 25,498 26,355 26,617 24,341 24,200
Average occupancy rate.. 83% 84% 84% 85% 85% 85% 82%
<CAPTION>
JUNE 30, SEPTEMBER 30,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ---------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $154,585 $ 55,636 $ 101,091 $ 34,631 $ 14,955 $ 15,960 $ 17,258
Total assets............ 881,557 793,122 821,734 730,708 525,639 376,248 354,974
Long term debt,
including current
portion................ 313,204 227,219 276,448 216,910 206,097 135,409 145,956
Stockholders' equity.... 366,818 341,736 329,315 303,596 172,018 119,432 105,521
Total capitalization.... 680,022 568,955 605,763 520,506 378,115 254,841 251,477
</TABLE>
- -------
(1) Years prior to 1994 have been restated to reflect the implementation of
SFAS 109.
(2) 1996 includes a $(22.5) million gain on the sale of Living Centers-DevCon,
Inc., $20.5 million charge for impairment of long-lived assets from the
adoption of SFAS 121, and other non-recurring items of $.9 million, net.
1995 includes $12.5 million of non-recurring merger and acquisition and
related costs associated with The Brian Center Corporation merger. See
Notes to Consolidated Financial Statements.
(3) A pro forma income tax provision has been provided to reflect the estimated
federal and state income taxes as if all BCC S-corporations were taxable
entities. See Note 1 to Consolidated Financial Statements.
16
<PAGE>
GRANCARE, INC.
SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
The following selected historical consolidated financial information of
GranCare with respect to each fiscal year in the five-year period ended
December 31, 1996, is derived from the consolidated financial statements of
GranCare. Such consolidated financial statements have been audited by Ernst &
Young LLP, independent auditors. The financial information of GranCare for the
six months ended June 30, 1997 and 1996 has been derived from the unaudited
consolidated financial statements included elsewhere herein and is qualified in
its entirety by such document, which, in the opinion of GranCare's management,
includes all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such information for the unaudited interim
periods. The operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results for the full year. This information
should be read in conjunction with GranCare Management's Discussion and
Analysis of Financial Condition and Results of Operations and the Consolidated
Financial Statements of GranCare and the Notes thereto included elsewhere in
this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
------------------ --------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- ---------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AND STATISTICAL DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA
(1&2):
Net revenues............ $423,857 $477,282 $1,003,123 $816,462 $717,471 $611,689 $434,638
Expenses:
Operating expenses
(excluding items shown
below)................ 365,291 395,990 813,446 669,512 589,245 506,542 357,189
Rent and property...... 25,579 27,731 56,895 51,206 44,291 42,446 35,998
Depreciation and
amortization.......... 11,013 12,672 25,949 21,611 16,440 12,349 6,922
Interest expense and
financing charges..... 16,319 17,067 35,659 27,054 21,481 19,601 7,908
Nonrecurring costs--
other (1996 & 1992);
merger and other
(1997, 1995 and
1993)(3).............. 28,300 -- 18,400 11,750 -- 4,573 1,114
Restructuring
costs(4).............. -- -- -- -- 8,200 -- --
-------- -------- ---------- -------- -------- -------- --------
Total expenses......... 446,502 453,460 950,349 781,133 679,657 585,511 409,131
-------- -------- ---------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary charge... (22,645) 23,822 52,774 35,329 37,814 26,178 25,507
Income taxes............ (893) 9,052 20,054 14,765 13,524 10,089 8,701
-------- -------- ---------- -------- -------- -------- --------
Income (loss) before
extraordinary charge... (21,752) 14,770 32,720 20,564 24,290 16,089 16,806
Extraordinary charge--
loss on extinguishments
of debt(5)............. 4,831 -- -- -- -- 1,285 --
-------- -------- ---------- -------- -------- -------- --------
Net income (loss)....... $(26,583) $ 14,770 $ 32,720 $ 20,564 $ 24,290 $ 14,804 $ 16,806
======== ======== ========== ======== ======== ======== ========
PRO FORMA INCOME TAX
DATA(6):
Income before income
taxes and extraordinary
charge................. NA NA NA NA NA $ 26,178 $ 25,507
Income taxes............ NA NA NA NA NA 10,874 10,157
-------- --------
Income before
extraordinary
charge(5).............. NA NA NA NA NA 15,304 15,350
Extraordinary
charge(5).............. NA NA NA NA NA 1,285 --
-------- --------
Pro forma net income.... NA NA NA NA NA $ 14,019 $ 15,350
======== ========
NET INCOME (LOSS) PER
COMMON AND COMMON
EQUIVALENT SHARE(4):
Primary:
Income (loss) before
extraordinary item.... $ (0.91) $ 0.62 $ 1.36 $ 0.86 $ 1.07 $ 0.84 $ 0.97
Extraordinary item..... (0.20) -- -- -- -- (.07) --
-------- -------- ---------- -------- -------- -------- --------
Net income (loss)...... $ (1.11) $ 0.62 $ 1.36 $ 0.86 $ 1.07 $ 0.77 $ 0.97
======== ======== ========== ======== ======== ======== ========
Fully diluted:
Income (loss) before
extraordinary item.... $ (0.91) $ 0.61 $ 1.33 $ 0.86 $ 1.07 $ 0.80 $ 0.90
Extraordinary item..... (0.20) -- -- -- -- (.07) --
-------- -------- ---------- -------- -------- -------- --------
Net income (loss)...... $ (1.11) $ 0.61 $ 1.33 $ 0.86 $ 1.07 $ 0.73 $ 0.90
======== ======== ========== ======== ======== ======== ========
STATISTICAL DATA (1&2):
Number of centers (end
of period)............ 126 137 140 136 141 137 116
Average licensed beds.. 15,946 16,078 16,097 16,148 16,112 15,103 11,358
Average occupancy...... 84% 85% 85% 87% 88% 87% 86%
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
----------------- --------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
(1&2): (IN THOUSANDS)
Working capital......... $196,917 $178,072 $200,569 $123,030 $ 89,626 $ 59,688 $ 31,483
Total assets............ 637,909 711,392 748,039 645,161 520,193 390,881 242,656
Long term debt,
including current
portion................ 365,111 378,499 389,777 339,605 243,231 202,650 96,770
Stockholders' equity.... 140,450 192,030 214,300 172,599 161,417 86,971 54,230
Partners equity......... -- -- -- -- -- -- 4,988
Total capitalization.... 505,561 570,529 604,077 512,204 404,648 289,621 155,988
</TABLE>
- -------
(1) All acquisitions which occurred in 1997, 1996, 1995, 1994, 1993 and 1992,
except for the CompuPharm Merger (defined below) and the Evergreen Merger
(defined below) are reflected from the date of each acquisition in the
historical operating results of GranCare and the assets and liabilities
relating to these acquisitions are included in the balance sheets of
GranCare since that time. See Notes 1 and 4 of Notes to the GranCare
Consolidated Financial Statements for a discussion of the Evergreen Merger.
(2) All years have been restated for the December 28, 1993 CompuPharm Merger
and for the July 20, 1995 Evergreen Merger. See Notes 1 and 4 of Notes to
the GranCare Consolidated Financial Statements for a description of these
combinations.
(3) The $28.3 million non-recurring charge in 1997 relates to the spin-off of
GranCare's Institutional Pharmacy Business in February 1997. The $18.4
million charge in 1996 relates to one-time charges for the planned
disposition of assets and leasehold improvements and closure of certain
long-term care facilities and the write off of notes receivable related
thereto; amounts required to present TeamCare's separate financial
statements on a stand-alone basis in connection with the Vitalink Merger;
and other one-time costs. The $11.80 million charge in 1995 relates to the
merger with Evergreen Healthcare, Inc. in July 1995 (the "Evergreen
Merger") and other one-time costs. The $4.6 million of merger costs in 1993
relate to the merger of GranCare and CompuPharm, Inc. ("CompuPharm") in
December 1993 (the "CompuPharm Merger"). The $1.1 million non-recurring
charge in 1992 consisted of expenses related to a retirement agreement
reached with an employee of CompuPharm, and terminated negotiations
regarding the possible sale of CompuPharm. Such expenses were incurred
prior to the CompuPharm Merger, after which CompuPharm became a wholly-
owned subsidiary of GranCare.
(4) The $8.2 million restructuring charge in 1994 is related to GranCare's
formal plan of restructuring announced in August 1994. See Note 13 of Notes
to the Consolidated Financial Statements for information on the 1994
restructuring.
(5) The $4.8 million extraordinary debt extinguishment charge in 1997 resulted
from debt repayments associated with the Vitalink Merger. GranCare's $1.3
million charge in 1993 resulted from debt repayments associated with the
CompuPharm Merger.
(6) Prior to June 30, 1993, the Evergreen predecessor entity consisted of two
partnerships and, accordingly, Evergreen was not subject to federal or
state income taxes. For informational purposes, the selected historical
consolidated financial data for the years 1992 through 1993 include a pro
forma presentation that includes a provision for income taxes as if
Evergreen had been a taxable corporation for these periods. Such pro forma
calculations were based on the income tax laws and rates in effect during
those periods and FASB Statement No. 109. Earnings per share for 1993 and
1992 are based on pro forma net income.
18
<PAGE>
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table sets forth certain unaudited pro forma consolidated
financial data for LCA as of and for the fiscal year ended September 30, 1996
and the nine-month period ended June 30, 1997 and reflects the pro forma effect
of the Vitalink Merger and the Transactions.
The selected income statement data gives pro forma effect to the Transactions
as if they had occurred on October 1, 1995. The selected balance sheet data
gives pro forma effect to the Transactions as if they had occurred on June 30,
1997. The selected unaudited pro forma consolidated financial data do not
purport to be indicative of the results of operations or financial position of
LCA that would have actually been obtained had the Transactions and the
Vitalink Merger been completed as of the assumed dates and for the periods
presented, or which may be obtained in the future. The selected unaudited pro
forma consolidated financial data (i) have been derived from and should be read
in conjunction with the Unaudited Pro Forma Condensed Consolidated Financial
Statements and the notes thereto included elsewhere in this Proxy
Statement/Prospectus and (ii) should be read in conjunction with the separate
historical consolidated financial statements of LCA and GranCare, and the notes
thereto, and Management's Discussion and Analysis of Results of Operations and
Financial Condition of the two companies appearing elsewhere in or incorporated
by reference into this Proxy Statement/Prospectus.
19
<PAGE>
LIVING CENTERS OF AMERICA, INC.
SELECTED UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
STANDBY SENIOR SUBORDINATED
CREDIT FACILITY(1) NOTE OFFERING(2)
------------------------------- -------------------------------
PRO FORMA PRO FORMA PRO FORMA PRO FORMA
YEAR ENDED NINE MONTHS ENDED YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30,
1996 1997 1996 1997
------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net revenues........... $1,863,201 $1,449,039 $1,863,201 $1,449,039
Depreciation and
amortization.......... 63,106 49,353 63,106 49,353
Interest expense and
financing charges..... 133,917 100,437 124,619 93,464
Income from
operations............ 139,957 74,829 139,957 74,829
Net income (loss)
before extraordinary
charge................ 8,631 (21,254) 14,209 (17,069)
Earnings (loss) per
share before
extraordinary charge.. $ 0.63 $ (1.55) $ 1.04 $ (1.25)
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30,
1997(1)(2)
-----------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents...................... $ 25,496
Working capital................................ 358,021
Total assets................................... 1,707,464
Long-term debt................................. 1,288,037
Shareholders' equity........................... $ 77,181
<CAPTION>
PRO FORMA PRO FORMA
YEAR ENDED NINE MONTHS ENDED
SEPTEMBER 30, JUNE 30,
1996(1)(2) 1997(1)(2)
------------- -----------------
<S> <C> <C>
OTHER OPERATING DATA:
EBITDA(3)...................................... $199,010 $ 152,482
</TABLE>
- --------
(1) Adjusted to reflect the effects of the Transactions as if they occurred on
October 1, 1995 for the income statements and on June 30, 1997 for the
Balance Sheet, and assuming the Transactions are funded under the Standby
Senior Subordinated Credit Facility.
(2) Adjusted to reflect the effects of the Transactions as if they occurred on
October 1, 1995 for the income statements and on June 30, 1997 for the
Balance Sheet, and assuming the Transactions are funded through the
issuance of $500 million of Notes.
(3) Management and industry analysts generally consider EBITDA to be one
measure of the financial performance of a company that provides a relevant
basis for comparison among companies, and it is presented to assist
investors in analyzing the performance of LCA and its ability to service
debt. Investors should note that this calculation of EBITDA may differ from
similarly titled measures of other companies. As calculated herein, EBITDA
represents the sum of earnings before net interest expense, income taxes,
depreciation, amortization, minority interest, non-recurring/extraordinary
items, and financing charges. Management does not believe it is appropriate
to include non-recurring items in its calculation of EBITDA since such
items by their nature are difficult to anticipate and do not recur and
therefore are not particularly helpful to investors in analyzing a
company's ability to service debt. EBITDA should not be considered as a
substitute for income from operations, net income or cash flow from
operating activities (as determined in accordance with generally accepted
accounting principles), for the purpose of analyzing LCA's operating
performance, financial position and cash flows.
20
<PAGE>
EBITDA COMPUTATION TABLE
(IN THOUSANDS)
<TABLE>
<CAPTION>
STANDBY SENIOR
SUBORDINATED CREDIT FACILITY(1) NOTE OFFERING(2)
-------------------------------- --------------------------------
PRO FORMA PRO FORMA
PRO FORMA NINE MONTHS PRO FORMA NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, 1996 JUNE 30, 1997 SEPTEMBER 30, 1996 JUNE 30, 1997
------------------ ------------- ------------------ -------------
<S> <C> <C> <C> <C>
Net income (loss)
before extraordinary
charges.............. $ 8,631 $(21,254) $ 14,209 $(17,069)
Minority interest..... 156 405 156 405
Income taxes.......... 11,763 3,382 15,483 6,170
Interest income....... (14,510) (8,141) (14,510) (8,141)
Interest expense...... 133,917 100,437 124,619 93,464
Non-recurring items,
net.................. (4,053) 28,300 (4,053) 28,300
Depreciation and
amortization......... 63,106 49,353 63,106 49,353
-------- -------- -------- --------
EBITDA............... $199,010 $152,482 $199,010 $152,482
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
PRO FORMA NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1996(3) JUNE 30, 1997(3)
--------------------- ----------------
<S> <C> <C>
Cash Flow Data:
Net cash used in operating
activities........................... $ (52,391) $ (68,218)
Net cash used in investing
activities........................... (1,603) (77,944)
Net cash used in financing
activities........................... (99,424) (22,085)
--------- ---------
Net decrease in cash and cash
equivalents.......................... $(153,418) $(168,247)
========= =========
</TABLE>
- --------
(1) Adjusted to reflect the effects of the Transactions as if they had occurred
on October 1, 1995 and assuming the Transactions are funded under the
Standby Senior Subordinated Credit Facility.
(2) Adjusted to reflect the effects of the Transactions as if they had occurred
on October 1, 1995 and assuming the Transactions are funded through the
issuance of $500 million of Notes.
(3) Reflects issuance of $500 million of Notes. In the event Paragon is
required to fund the Transactions under the Standby Senior Subordinated
Credit Facility rather than issuing the Notes, pro forma net decrease in
cash and cash equivalents would have been $(156,718) and $(170,722) for the
year ended September, 30, 1996 and the nine months ended June 30, 1997,
respectively.
21
<PAGE>
COMPARATIVE MARKET PRICE AND DIVIDEND INFORMATION
LCA Common Stock is quoted on the NYSE under the symbol "LCA." GranCare
Common Stock is quoted on the NYSE under the symbol "GC." The following table
sets forth the high and low sale prices of LCA Common Stock and GranCare Common
Stock as reported on NYSE Composite Tape for the quarterly periods ending on
the dates indicated.
<TABLE>
<CAPTION>
PRO FORMA
LCA GRANCARE(/1/) GRANCARE(/2/)
-------------- ------------------ --------------------
HIGH LOW HIGH LOW HIGH LOW
---- ---- ------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
LCA FISCAL YEAR 1995
December 31, 1994....... $34 1/4 $29 1/4 $ 18 5/8 $14 3/4 $ 7 1/8 $6 7/32
March 31, 1995.......... $38 1/4 $32 3/4 $18 5/8 $14 7/8 $ 8 7/8 $7 1/8
June 30, 1995........... $37 1/2 $25 1/4 $17 3/8 $15 1/4 $ 8 3/8 $7 1/4
September 30, 1995...... $34 7/8 $26 7/16 $19 1/8 $15 1/2 $ 9 1/8 $7 3/4
LCA FISCAL YEAR 1996
December 31, 1995....... $ 35 $25 1/2 $17 3/8 $12 3/4 $ 8 3/8 $6
March 31, 1996.......... $ 41 $31 1/2 $19 1/4 $13 $ 9 1/4 $6 1/4
June 30, 1996........... $39 1/4 $32 5/8 $19 7/8 $16 5/8 $ 9 1/2 $8
September 30, 1996...... $28 1/8 $20 3/4 $21 5/8 $16 $ 10 3/8 $7 5/8
LCA FISCAL YEAR 1997
December 31, 1996....... $28 1/4 $27 5/8 $19 1/4 $17 1/8 $ 9 1/2 $8 1/4
March 31, 1997.......... $35 1/4 $33 3/4 $ 20 $ 8 $ 8 5/8 $8 1/2
June 30, 1997........... $39 3/4 $38 3/4 $ 10 13/16 $ 7 1/2 N/A(/1/) N/A(/1/)
September 30, 1997
(through September 25,
1997).................. $40 15/16 $37 5/8 $ 12 9/16 $ 10 1/8 N/A(/1/) N/A(/1/)
</TABLE>
- --------
(1) GranCare's common stock began trading on the NYSE on February 13, 1997
under the symbol "GC." Prior to that, Old GranCare's common stock also
traded on the NYSE under the symbol "GC." However, Old GranCare's stock
price also reflected the ownership by Old GranCare of TeamCare, Inc., which
was Old GranCare's institutional pharmacy business and which was acquired
by Vitalink on February 12, 1997 (on which date Old GranCare ceased to
trade on the NYSE) in connection with the Vitalink Merger.
(2) The pro forma information with respect to GranCare's stock price is based
on the exchange ratio in the Vitalink Merger of 0.478 of a share of
Vitalink common stock issued in exchange for each share of Old GranCare
common stock applied throughout the periods presented.
On March 3, 1997, the date immediately prior to the public announcement by
LCA that it was exploring strategic alternatives, the last reported sale price
for LCA Common Stock on the NYSE Composite Tape was $32 1/8. On May 7, 1997,
the last full day of trading prior to the announcement of the original merger
agreements, the last reported sale prices for LCA Common Stock and GranCare
Common Stock on the NYSE Composite Tape were $36.50 and $7.75, respectively, or
a pro forma equivalent per share of GranCare Common Stock of $8.56 (based on
the 0.2346 Exchange Ratio). This pro forma equivalent trading price may not be
an accurate indicator of market price because it does not take into account the
stock issuance to the Apollo Investors, and the fact that on consummation of
the Recapitalization Merger, 90.54% of LCA Common Stock will be exchanged for
cash.
On September 25, 1997, the last trading day prior to the date of this Proxy
Statement/Prospectus, the last reported sales prices for LCA Common Stock and
GranCare Common Stock on the NYSE Composite Tape were $40.75 and $11.75,
respectively. The market price of LCA Common Stock prior to the Mergers may not
be indicative of the market price for Paragon Common Stock following the Merger
since only 9.46% of LCA Common Stock will remain outstanding. Since all
outstanding shares of GranCare Common Stock will be converted (except for
fractional shares) into Paragon Common Stock in the GranCare Merger (resulting
in an
22
<PAGE>
aggregate ownership by existing GranCare Stockholders of 41.9%), the trading
price of GranCare Common Stock subsequent to announcement of the Merger
Agreements may to some extent be indicative of the price at which Paragon
Common Stock might trade, although no assurances to this effect can be given.
Each outstanding share of GranCare Common Stock will be converted into 0.2346
of a share of Paragon Common Stock in the GranCare Merger. Accordingly, to the
extent that the price of GranCare Common Stock may reflect the anticipated
market price of Paragon Common Stock, based on the September 25, 1997 closing
price of GranCare Common Stock, the pro forma equivalent trading price of
Paragon Common Stock would have been $50.09 on such date.
Stockholders are encouraged to obtain current information about the market
price of both LCA Common Stock and GranCare Common Stock.
On the LCA Record Date and the GranCare Record Date, there were approximately
467 holders of record of LCA Common Stock and approximately 741 holders of
record of GranCare Common Stock, respectively.
It is presently contemplated that no dividends will be paid on shares of
Paragon Common Stock following the Mergers. Paragon intends to retain any
earnings to provide funds for the operation and expansion of its business.
Additionally, it is contemplated that certain covenants in the New Credit
Facility as well as covenants relating to the Senior Subordinated Debt will
limit the ability of Paragon to pay dividends.
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COMPARATIVE PER SHARE DATA
The following table sets forth certain historical and pro forma combined per
share data, giving effect to the Recapitalization Merger on a recapitalization
accounting basis and the GranCare Merger on a purchase accounting basis as
described more fully in the notes to the "Unaudited Condensed Consolidated Pro
Forma Financial Statements." The data should be read in conjunction with the
selected historical consolidated financial statements of LCA and GranCare and
notes thereto included or incorporated by reference in this Proxy
Statement/Prospectus, as well as the information set forth under "Living
Centers of America, Inc.--Pro Forma Condensed Consolidated Financial
Statements." The pro forma condensed consolidated financial data is not
necessarily indicative of the operating results that would have been achieved
had the Transactions been in effect at the beginning of the periods presented
and should not be considered indicative of future operations.
<TABLE>
<CAPTION>
STANDBY SENIOR
SUBORDINATED CREDIT
FACILITY(1) NOTE OFFERING(2)
------------------------- -------------------------
HISTORICAL PRO FORMA COMBINED PRO FORMA COMBINED
------------------------- ------------------------- -------------------------
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30,
1996 1997 1996 1997 1996 1997
------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LCA PER SHARE DATA
Net income (loss) from continuing
operations............................... $ 2.13 $1.84 $0.63 $(1.55) $1.04 $(1.25)
Book value at period end.................. $16.89 $18.76 N/A $5.72 N/A $ 5.72
<CAPTION>
PRO FORMA PRO FORMA
HISTORICAL HISTORICAL, ADJUSTED(3) EQUIVALENT(1)(4) EQUIVALENT(2)(4)
----------------------- ------------------------- ------------------------- -------------------------
SIX MONTHS SIX MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, JUNE 30, DECEMBER 31, JUNE 30, SEPTEMBER 30, JUNE 30, SEPTEMBER 30, JUNE 30,
1996 1997 1996 1997 1996 1997 1996 1997
------------ ---------- ------------- ----------- ------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GRANCARE PER SHARE
DATA
Net income (loss)
from continuing
operations....... $1.33 $(1.11) $ 0.60 $(1.12) $0.15 $(0.36) $0.24 $(0.29)
Book value at pe-
riod end......... $9.05 $ 5.83 $ 6.07 $ 5.84 N/A $ 1.34 N/A $ 1.34
</TABLE>
Neither LCA nor GranCare declared any cash dividends on LCA Common Stock or
the GranCare Common Stock, respectively, for the periods presented.
- --------
(1) The unaudited pro forma per share data of LCA for the fiscal year ended
September 30, 1996 and the nine month period ended June 30, 1997 gives
effect to the Mergers as if such transactions had occurred on October 1,
1995, assumes the Transactions are funded through the Standby Senior
Subordinated Credit Facility and includes certain non-recurring items, but
does not include any synergies or shares issued upon the exercise of
warrants as described under "Description of Financing--Description of
Senior Subordinated Debt" and utilizes the GranCare pro forma per share
data presented above calculated as provided in footnote 4 below.
(2) The unaudited pro forma per share data of LCA for the fiscal year ended
September 30, 1996 and the nine month period ended June 30, 1997 gives
effect to the Mergers as if such transactions had occurred on October 1,
1995, assumes the Transactions are funded through the issuance of $500
million of Notes and includes certain non-recurring items, but does not
include any synergies and utilizes the GranCare pro forma per share data
presented above calculated as provided in footnote 4 below.
(3) The historical, adjusted per share data of GranCare for the fiscal year
ended December 31, 1996 and the six month period ended June 30, 1997 gives
effect to the Vitalink Merger and Distribution as if such transactions had
occurred on December 31, 1995.
(4) The GranCare pro forma equivalent data is derived by multiplying LCA's
unaudited pro forma per share data by the Exchange Ratio.
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<PAGE>
RISK FACTORS
In considering whether to approve the Proposals, the stockholders of LCA and
GranCare should consider the following matters in addition to the other
matters set forth or incorporated by reference in this Proxy
Statement/Prospectus.
LEVERAGE AND LIQUIDITY
In connection with the Transactions, LCA will enter into the Debt Financing
(i) to finance the cash consideration to be paid to the holders of LCA Common
Stock in the Recapitalization Merger, (ii) to refinance certain outstanding
indebtedness of LCA and GranCare, (iii) to pay expenses relating to the
Mergers and (iv) to provide working capital for Paragon. Upon completion of
the Debt Financing, Paragon's consolidated indebtedness (including capitalized
leases) will exceed $1.3 billion. The increased indebtedness and higher debt-
to-equity ratio of Paragon in comparison to that of either LCA or GranCare on
a historical basis will reduce the flexibility of Paragon to respond to
changing business and economic conditions, as well as limit capital
expenditures and acquisitions by Paragon. Although the definitive terms of the
debt instruments to be issued in connection with the Debt Financing have not
been finalized as of the date of this Proxy Statement/Prospectus, LCA expects
that such terms will include significant operating and financial covenants and
restrictions, such as limits on Paragon's ability to incur additional
indebtedness or to declare dividends on, or repurchase shares of, its capital
stock.
A substantial portion of the indebtedness to be incurred by Paragon is
expected to bear interest at variable rates. While Paragon may enter into one
or more interest rate protection agreements to limit its exposure to increases
in such interest rates, such agreements would not entirely eliminate such
exposure. In the event that LCA is not able to consummate an offering of the
Notes prior to the effective times of the Mergers, Paragon will be required to
rely on the Standby Senior Subordinated Credit Facility, which facility
accrues interest at a floating rate (which rate increases over time subject to
certain limitations). Any increase in the interest rates on Paragon's
indebtedness will reduce funds available to Paragon for its operations and
future business opportunities and will exacerbate the consequences of
Paragon's leveraged capital structure.
Paragon's high degree of leverage may have important consequences including
the following: (i) the ability of Paragon to obtain additional financing for
acquisitions, working capital, capital expenditures or other purposes, if
necessary, may be impaired or such financing may not be on terms favorable to
Paragon; (ii) a substantial portion of Paragon's cash flow will be used to pay
Paragon's interest expense, which will reduce the funds that would otherwise
be available to Paragon for its operations and future business opportunities;
(iii) a substantial decrease in operating cash flow or an increase in expenses
of Paragon could make it difficult for Paragon to meet its debt service
requirements and force it to modify its operations; (iv) Paragon's high level
of debt and resulting interest expense may place it at a competitive
disadvantage with respect to certain competitors with lower amounts of
indebtedness; and (v) Paragon's high degree of leverage may make it more
vulnerable to a downturn in its business or the economy generally.
Paragon's ability to service its additional indebtedness will depend upon
Paragon's ability to manage its cash flows and working capital. In this
regard, both LCA and GranCare have experienced significant increases in their
accounts receivable during the current year partially unrelated to increases
in revenue, as more fully discussed in LCA's and GranCare's respective
Management's Discussion and Analysis of Financial Condition and Results of
Operations incorporated by reference or included elsewhere herein. Management
of both companies have increased their scrutiny of their accounts receivable
and collection policies. In light of the increases in receivables for both LCA
and GranCare, it is expected that the management of Paragon will continue the
increased focus on Paragon's accounts receivable. As more fully discussed in
its Management's Discussion and Analysis of Financial Condition and Results of
Operations, GranCare increased its allowance for doubtful accounts in the
quarter ended June 30, 1997. GranCare believes that its current allowances are
appropriate. However, GranCare is continuing to monitor trends in its accounts
receivable, and to review its collection procedures (including the timing of
filing claims for reimbursement) and allowance policy, which could result in
future increases to its allowances for doubtful accounts.
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<PAGE>
Any inability of Paragon to service its indebtedness or obtain additional
financing, as needed, or to comply with the financial covenants expected to be
contained in the debt instruments relating to the Debt Financing, could have a
material adverse effect on Paragon and the market value of the shares of
Paragon Common Stock.
CHALLENGES OF BUSINESS INTEGRATION
The full benefits of a business combination of LCA and GranCare will require
the integration of each company's administrative, finance, sales and marketing
organizations, the coordination of each company's sales efforts and the
implementation of appropriate operations, financial and management systems and
controls in order to realize the efficiencies and the cost reductions that are
expected to result from the GranCare Merger. This will require substantial
attention from Paragon's management, which will include a new chief executive
officer and other officers who have not had prior involvement in the
operations of either LCA or GranCare. Although the anticipated management team
of Paragon has experience integrating acquisitions, none of the prior
acquisitions have been of comparable magnitude to the Transactions. The
diversion of management attention, as well as any other difficulties which may
be encountered in the transition and integration process, could have an
adverse impact on the revenue and operating results of Paragon. There can be
no assurance that Paragon will be able to integrate the operations of LCA and
GranCare successfully or that anticipated synergies between the companies will
be realized or, if realized, the timing thereof.
RISKS RELATED TO GROWTH STRATEGY
Paragon's growth strategy will in part be to acquire long-term health care
facilities and related businesses in its existing markets and in other
targeted geographic areas in which regulatory and reimbursement policies are
favorable and where opportunities exist to improve operational efficiencies.
Due to possible rapid growth through acquisitions, Paragon will be subject to
the uncertainties and risks associated with any expanding business such as the
continuing need of capital to fund acquisitions, the need to successfully
integrate the operations of acquired businesses in order to realize economies
of scale, the need to obtain synergies from the disparate operations and the
need to hire and incentivize competent, growth-oriented management. Paragon's
expected growth may place significant demands on Paragon's financial resources
and management. In addition, there can be no assurance that Paragon will be
successful in its efforts to make such acquisitions since certain competitors,
some of which possess greater financial resources than Paragon, will likely be
pursuing the same available opportunities as Paragon.
RELATIONSHIP WITH VITALINK
As a result of the Vitalink Merger, Vitalink acquired the right to provide
pharmaceutical supplies and services and related consulting services to all
GranCare skilled nursing facilities operated by GranCare as of the effective
time of the Vitalink Merger. All pharmaceutical supplies and consulting
services are provided pursuant to pharmaceutical supply agreements and
consulting agreements (collectively, "Pharmacy Agreements") which have five
year terms that are automatically extended for an additional year on March 1
of each year unless timely notice of intent to terminate has been previously
given. These arrangements will generally prevent GranCare's skilled nursing
facilities from contracting with other institutional pharmacies (including
APS, Paragon's pharmacy subsidiary) except under certain circumstances when
Vitalink elects not to provide such services to a facility. GranCare may also
be required to pay liquidated damages to Vitalink in certain circumstances,
primarily when a skilled nursing facility is transferred to a third-party
prior to the expiration of the term of the Pharmacy Agreement and the
transferee declines to assume the Pharmacy Agreement. For a discussion of the
material terms of GranCare's relationship with Vitalink since the effective
time of the Vitalink Merger and going forward see "GranCare Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Certain Relationships and Transactions."
CONTROL BY APOLLO
Upon completion of the Mergers, approximately 44.0% of the outstanding
shares of Paragon Common Stock will be owned by the Apollo Investors. Pursuant
to a Proxy and Voting Agreement to be entered into by
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<PAGE>
the Apollo Investors, voting control of all such shares will be held by
Apollo. In addition, Paragon will enter into the Stockholders Agreement with
the Apollo Investors, which will provide, among other things, that Apollo will
be able to designate six of the 11 members of the Paragon Board of Directors,
provided that no more than four of such nominees may be Apollo affiliates.
Accordingly, Apollo will have significant influence and may be able to direct
the management and policies of Paragon, other than with respect to certain
matters which require a super-majority vote of the Paragon Board. Apollo may,
however, be able to prevent certain actions from being taken that require such
a super-majority vote. See "Amendments to LCA Charter," "Certain Other
Agreements--Stockholders Agreement" and "Comparison of Stockholder Rights."
Although the Apollo Investors will be subject to the "standstill" provisions
of the Stockholders Agreement, Apollo will be able to transfer all or a
portion of the Paragon Common Stock beneficially owned by the Apollo Investors
to a third party of Apollo's choosing, who will not be obligated to offer to
purchase the remaining shares of Paragon Common Stock on the same terms or on
any terms. In light of the significant ownership of Paragon Common Stock by
the Apollo Investors, it is unlikely that a change of control transaction
could be effected without Apollo's consent.
FRAUDULENT TRANSFER CONSIDERATIONS
The payment of the cash consideration to the stockholders of LCA pursuant to
the Recapitalization Merger, as well as any cash paid in lieu of fractional
shares to stockholders of LCA and GranCare pursuant to the Mergers, may be
subject to review under federal or state fraudulent transfer laws in the event
Paragon or GranCare is the subject of a bankruptcy filing. Under such laws, if
a court in a lawsuit by a creditor or a representative of creditors of Paragon
or GranCare, such as a trustee in bankruptcy or Paragon or GranCare as debtor-
in-possession, were to find that, at the time of, or after giving effect to,
the Transactions, Paragon or GranCare (i) was insolvent or rendered insolvent
thereby, (ii) was engaged in a business or transaction for which its remaining
assets constituted an unreasonably small amount of capital, (iii) intended to
incur, or believed that it would incur, debts beyond its ability to pay as
they matured, or (iv) intended to hinder, delay or defraud creditors and, in
the case of clauses (i), (ii) and (iii), that Paragon or GranCare did not
receive reasonably equivalent value or fair consideration in the Transactions,
such court could void all or a part of the payment of the cash received by
stockholders in the Mergers and require that the stockholders, including
stockholders exercising appraisal rights, return such consideration to Paragon
or GranCare or to a fund for the benefit of their respective creditors. In
addition, if a court were to find that Paragon or GranCare came within any of
clauses (i) through (iv) above, Paragon or GranCare, or their respective
creditors or the trustee in bankruptcy, could seek to avoid the grant of
security interests to the lenders under the New Credit Facility. This would
result in an event of default with respect to indebtedness incurred under such
facilities which, under the terms of such indebtedness (subject to applicable
law), would allow the lenders to terminate their obligations thereunder and to
accelerate repayment of such indebtedness.
The measure of insolvency for purposes of the foregoing will vary depending
upon the law of the jurisdiction which is being applied. Generally, however, a
company would be considered insolvent for purposes of the foregoing if (i) the
sum of such company's debts including contingent liabilities is greater than
all such company's property at a fair valuation, (ii) the present fair
saleable value of such company's assets is less than the amount that will be
required to pay its probable liability on its existing debts as they become
absolute and matured or (iii) the company incurred obligations beyond its
ability to pay as such obligations become due. It is a condition to
consummation of the Recapitalization Merger that LCA receive a solvency
opinion, which is expected to be delivered by Valuation Research Corporation.
Such solvency opinion would not be binding on a court and there can be no
assurance that a court would not determine that Paragon or GranCare was
insolvent at the time of or after giving effect to the Transactions.
GOVERNMENT REGULATION
The federal government and all states in which Paragon will operate regulate
various aspects of the skilled nursing facility business. In particular, the
operation of long-term care facilities and the provision of specialty medical
services are subject to federal, state and local laws relating to the adequacy
of medical care, resident rights, equipment, personnel, operating policies,
fire prevention, rate-setting and compliance with building codes and
environmental and other laws. The facilities to be operated by Paragon are
subject to periodic inspection by
27
<PAGE>
governmental and other regulatory authorities to assure continued compliance
with various standards and to provide for their continued licensing under
state law and certification under the Medicare and Medicaid programs. In the
past, from time to time such facilities have received statements of
deficiencies from regulatory agencies. Should Paragon receive such statements
of deficiency in the future, Paragon expects to implement plans of correction
with respect to any such statement to address any alleged deficiencies. While
Paragon will endeavor to comply with federal, state and local regulatory
requirements for the maintenance and operation of its facilities, there can be
no assurance that all facilities will always be operated in full compliance.
The failure to obtain or renew any required regulatory approvals or licenses
could have a materially adverse affect on Paragon's operations.
Paragon will also be subject to federal and state laws that govern financial
and other arrangements between health care providers. These laws prohibit
certain direct and indirect payments or fee-splitting arrangements between
health care providers that are designed to induce or encourage the referral of
patients to, or the recommendation of, a particular provider for medical
products and services. Such laws include the anti-kickback provisions of the
federal Medicare and Medicaid Patient and Program Protection Act of 1987 and
the physician self-referral provisions of the Omnibus Budget Reconciliation
Act as expanded in 1993 (commonly referred to as "Stark II"). The anti-
kickback provisions prohibit, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. Stark II prohibits, in part, physicians
from making any Medicare or Medicaid referrals for certain "designated health
services" to any entity with which the physician has a "financial
relationship." In addition to these anti-kickback and self-referral
prohibitions, there are various federal and state laws prohibiting other types
of fraud by health care providers, including criminal provisions which
prohibit filing false claims or making false statements to receive payment or
certification under Medicare or Medicaid, or failing to refund overpayments or
improper payments. Violation of this statute is a felony punishable by up to
five years imprisonment and/or $25,000 fines. Civil provisions prohibit the
knowing filing of a false claim or the knowing use of false statements to
obtain payment; the penalties for a violation are fines of not less than
$5,000 nor more than $10,000, plus treble damages, for each claim filed. State
and federal governments are devoting increasing attention and resources to
anti-fraud initiatives against healthcare providers. The Accountability Act
and the Balanced Budget Act of 1997 expand the penalties for healthcare fraud,
including broader provisions for the exclusion of providers from the Medicare
and Medicaid program. While GranCare and LCA believe that their billing
practices are consistent with Medicare and Medicaid criteria, those criteria
are often vague and subject to interpretation. There can be no assurance that
aggressive anti-fraud enforcement actions will not adversely affect the
business of Paragon. The Health Insurance Portability and Accountability Act
of 1996 (the "Accountability Act") significantly expanded the scope of the
federal fraud and abuse provisions, broadening the anti-kickback provisions to
include all federal health care programs, in addition to Medicare and
Medicaid. The Accountability Act also expanded the scope of the sanctions for
fraud and abuse violations by increasing the size of the civil monetary
penalty provisions and broadening the mandatory exclusion provisions such that
any individual convicted of any felony in connection with the delivery of a
health care item or service under a federal, state or local health care
program is mandatorily excluded from Medicare/Medicaid participation. The
Balanced Budget Act of 1997 (the "Balanced Budget Act") further expanded
certain of these fraud and abuse provisions, including establishing civil
money penalties for violations of the anti-kickback provisions. In addition,
many states have similar fraud and abuse provisions and other laws that
prohibit business corporations from providing, or holding themselves out as
providers of, medical care. These laws vary from state to state and have
seldom been interpreted by the courts or regulatory agencies. While neither
GranCare nor LCA have any reason to believe that they are in violation or have
violated such statutes, the federal government has been actively investigating
health care providers for potential abuses. See "Certain Information
Concerning LCA--Regulation" and "Certain Information Concerning GranCare--
Regulation."
Each of LCA and GranCare has in the past received inquiries, and LCA has
been a party to litigation, alleging violations of fraud and abuse laws. For a
description of certain currently pending matters, see "Certain Information
Concerning LCA--Legal Proceedings" and "Certain Information Concerning
GranCare--Regulation--Referral Restrictions." There can be no assurance that
substantial amounts will not be expended in
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<PAGE>
connection with the investigation or defense of any such matters. If LCA,
GranCare or Paragon are found to be, or have been, in violation of these laws,
Paragon could be materially adversely affected.
UNCERTAINTY ASSOCIATED WITH HEALTH CARE LEGISLATION
In addition to extensive government health care regulation, there are
numerous initiatives on federal and state levels for comprehensive reforms
affecting the payment for and availability of health care services. The
recently-enacted Balanced Budget Act seeks to achieve a balanced federal
budget by, among other things, reducing federal spending on the Medicare and
Medicaid programs. The law contains numerous changes in the methodology of
Medicare payments to skilled nursing facilities, home health agencies, therapy
providers, and hospices, and, among other things, repeals the federal payment
standard for Medicaid nursing facilities and hospitals. There can be no
assurance that these changes will not adversely affect Paragon. See "--Risk
Involved with Reimbursement by Third Party Payors." In addition, there can be
no assurance that currently proposed or future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have an adverse effect on Paragon. Concern about the
potential effects of the proposed reform and budget reduction measures may
have contributed to the volatility of prices of securities of companies in
health care and related industries, including LCA and GranCare, and may
similarly affect the price of Paragon Common Stock in the future. See "Certain
Information Concerning LCA--Regulation" and "Certain Information Concerning
GranCare--Regulation."
RISK INVOLVED WITH REIMBURSEMENT BY THIRD PARTY PAYORS
For the year ended September 30, 1996, LCA on a pro forma basis after giving
effect to the GranCare Merger derived approximately 32% and 40% of its net
patient revenues from Medicare and Medicaid, respectively. Paragon expects to
continue to derive a significant portion of its revenue from such federal and
state reimbursement programs. There can be no assurance that Paragon will
achieve or improve this payor revenue mix in the future. Both governmental and
private payor sources have instituted cost containment measures designed to
limit payments made to health care providers. Most recently, the Balanced
Budget Act requires the establishment of a prospective payment system ("PPS")
for Medicare skilled nursing facilities under which facilities will be paid a
federal per diem rate for virtually all covered nursing facility services in
lieu of the current cost-based reimbursement rate. This change will reward
efficient providers and penalize those that are inefficient. A similar PPS is
required to be established for home health services. The law contains numerous
other changes that will adversely affect payments to Medicare and Medicaid
providers. In addition, prior to the enactment of the Balanced Budget Act,
federal law required state Medicaid programs to reimburse nursing facilities
for the costs that are incurred by efficiently and economically operated
providers in order to meet quality and safety standards. The Balanced Budget
Act repealed this payment standard, effective for services provided on or
after October 1, 1997, thereby granting states greater flexibility in
establishing payment rates. There can be no assurance that budget constraints
or other factors will not cause states to reduce Medicaid reimbursement to
nursing facilities or that payments to nursing facilities will be made on a
timely basis. Any such efforts to reduce Medicaid payment rates or failure of
states to meet their Medicaid obligations on a timely basis would have a
material adverse effect on Paragon. See "Certain Information Concerning LCA--
Regulation" and "Certain Information Concerning GranCare--Regulation."
Furthermore, government reimbursement programs are subject to additional
statutory and regulatory changes, retroactive rate adjustments, administrative
rulings and government funding restrictions, all of which could materially
decrease the rates paid to Paragon for its future services or the services for
which Paragon will be able to seek reimbursement. Neither LCA nor GranCare can
predict whether any of these additional proposals will be adopted or, if
adopted and implemented, what effect such proposals would have on Paragon.
There can be no assurance that payments under state or federal governmental
programs will remain at levels comparable to present levels or will be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs, particularly with respect to individual, state-
administered Medicaid programs, which generally provide lower reimbursement
rates than does the Medicare program and will have greater flexibility in
establishing payment rates in the future. In addition, there can be no
assurance that the facilities to be operated by Paragon and the services and
supplies to be provided by Paragon will meet or continue to meet the
requirements for participation in such programs.
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<PAGE>
In addition, several states are considering various health care reforms,
including reforms through Medicaid managed care demonstration projects.
Several states in which Paragon will operate have applied for, or received,
approval from the U.S. Department of Health and Human Services for waivers
from certain Medicaid requirements that were generally required for managed
care projects. Although these demonstration projects generally exempt
institutional care, including long-term care facilities, no assurance can be
given that these waiver projects ultimately will not change the reimbursement
system for long-term care from fee-for service to managed care negotiated or
capitated rates. Furthermore, the Balanced Budget Act now allows states to
mandate enrollment in managed care systems without going through the federal
waiver process as long as certain standards are met. It is not possible to
predict which reforms of state health care systems will be adopted and the
effect, if any, that the reforms will have on Paragon's business. The business
prospects of Paragon will be significantly affected by general economic
factors affecting the California, Colorado, Illinois, Michigan, North
Carolina, South Carolina, Texas and Wisconsin health care industries and by
the laws and regulatory environment in these states, including Medicaid
reimbursement rates.
LCA and GranCare have in the past had fiscal intermediaries deliver notice
that they intend to disallow, and have disallowed, certain costs for which LCA
and GranCare have requested reimbursement. If LCA and GranCare (or Paragon in
the future) do not prevail on such matters, these disallowances or future
disallowances could have a material adverse effect on Paragon.
COMPETITION
The long-term care industry is highly competitive. Paragon will compete with
other providers on the basis of the breadth and quality of its services, the
quality of its facilities and, to a limited extent, price. Paragon will also
compete with other providers in the acquisition and development of additional
facilities. Paragon's long-term care competitors will include national,
regional and local operators of long-term care facilities, acute care
hospitals and rehabilitation hospitals, extended care centers, retirement
centers, community home health agencies and similar institutions and
pharmaceutical businesses, many of which have significantly greater financial
and other resources than will Paragon. In addition, Paragon will compete with
a number of tax-exempt nonprofit organizations which can finance acquisitions
and capital expenditures on a tax-exempt basis or receive charitable
contributions unavailable to Paragon. There can be no assurance that Paragon
will not encounter increased competition which could adversely affect its
business, results of operations or financial condition.
LCA SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of LCA
Common Stock as of the LCA Record Date in connection with the solicitation of
proxies by the LCA Board for use at the LCA Special Meeting to be held on
October 28, 1997 at 10:00 a.m., local time at the Houston Marriott-Westside
hotel, 13210 Katy Freeway, Houston, Texas and at any adjournment or
postponement thereof.
At the LCA Special Meeting, holders of LCA Common Stock as of the LCA Record
Date will be asked to consider and vote upon a proposal to approve and adopt
the (i) Recapitalization Proposal, (ii) the LCA Stock Issuance Proposal and
(iii) the Amendment Proposal. LCA stockholders also will consider and vote
upon such other matters as may properly come before the LCA Special Meeting.
The LCA Board has unanimously approved the Recapitalization Merger
Agreement, the GranCare Merger Agreement (including the LCA Stock Issuance
Proposal contemplated therein) and the Amendment Proposal and has determined
that the proposed Transactions are fair to and in the best interests of LCA
and its stockholders. THE LCA BOARD UNANIMOUSLY RECOMMENDS THAT THE LCA
STOCKHOLDERS VOTE IN FAVOR OF EACH OF THE LCA PROPOSALS SET FORTH ABOVE. The
LCA Board makes no recommendation as to whether LCA stockholders should or
should not make an LCA Stock Election. Each
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<PAGE>
stockholder should make his or her own decision, in consultation with his or
her own financial and tax advisors, as to whether or not to make an LCA Stock
Election.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
The LCA Board has fixed the close of business on September 2, 1997 as the
LCA Record Date for the determination of holders of LCA Common Stock entitled
to notice of, and to vote at, the LCA Special Meeting. Only holders of record
of LCA Common Stock at the close of business on the LCA Record Date will be
entitled to notice of, and to vote at, the LCA Special Meeting. LCA Common
Stock was the only outstanding class of voting securities of LCA on the LCA
Record Date, and each share of LCA Common Stock is entitled to one vote on
each matter to be acted upon or which may come before the LCA Special Meeting.
Votes may be cast at the LCA Special Meeting in person or by properly executed
proxy. See "--Proxies; Revocation of Proxies."
On the LCA Record Date, 20,266,431 shares of LCA Common Stock were
outstanding and were held by 467 holders of record. On the LCA Record Date,
4,424,943 shares of LCA Common Stock, or approximately 22% of the outstanding
shares of LCA Common Stock, were beneficially owned by LCA directors and
executive officers.
The presence at the LCA Special Meeting, either in person or by proxy, of
the holders of a majority of the shares of LCA Common Stock entitled to vote
on the LCA Proposals is necessary to constitute a quorum to transact business
at the LCA Special Meeting. Abstentions of shares that are present at the LCA
Special Meeting and broker non-votes (i.e., shares held by brokers in street
name that are not entitled to a vote at the LCA Special Meeting due to the
absence of specific instructions from the beneficial owners of such shares)
are counted for the purpose of determining the presence of a quorum for the
transaction of business. If a quorum is not present at the LCA Special
Meeting, the stockholders who are present and entitled to vote at the LCA
Special Meeting may, by majority vote, adjourn the LCA Special Meeting from
time to time without notice, other than announcement at the LCA Special
Meeting, until a quorum is present.
Approval of the Recapitalization Proposal requires the affirmative vote of a
majority of the issued and outstanding shares of LCA Common Stock. Approval of
the LCA Stock Issuance Proposal requires the affirmative vote of the majority
of the shares of LCA Common Stock actually present and voting at the LCA
Special Meeting (provided that at least 50% of the issued and outstanding
shares of LCA Common Stock are actually voted on the LCA Stock Issuance
Proposal at the LCA Special Meeting). Approval of the Amendment Proposal
requires the affirmative vote of not less than 66 2/3% of the issued and
outstanding shares of LCA Common Stock, which vote with respect to the
amendments to Articles Tenth and Eleventh of the LCA Charter must also include
the affirmative vote of not less than 66 2/3% of the issued and outstanding
shares of LCA Common Stock excluding those shares beneficially owned by any
"Related Person," which definition as set forth in the LCA Charter,
encompasses the shares held by Mr. Donald C. Beaver, Vice Chairman of the LCA
Board and a director of LCA. For purposes of the vote on the Amendment
Proposal, shares held by a foundation established by Mr. Beaver will be
treated as if they are owned by him, resulting in the exclusion of 3,579,482
shares, or approximately 18%, of the issued and outstanding shares of LCA
Common Stock. A failure to vote, either by abstentions or broker non-votes,
will have the same effect as a vote against approval of the Recapitalization
Proposal and the Amendment Proposal. THE LCA BOARD UNANIMOUSLY RECOMMENDS THAT
LCA STOCKHOLDERS VOTE FOR APPROVAL OF EACH OF THE LCA PROPOSALS BY SIGNING AND
RETURNING THE ENCLOSED PROXY CARD WHETHER OR NOT STOCKHOLDERS PLAN TO ATTEND
THE LCA SPECIAL MEETING. The LCA directors, who, as of the LCA Record Date,
owned approximately 21% of the outstanding LCA Common Stock, have indicated
that they intend to vote in favor of the LCA Proposals.
LCA stockholders who do not vote in favor of the Recapitalization Merger
Proposal will be entitled to dissenters' rights of appraisal under Section 262
of the DGCL in connection with the Recapitalization Merger. See "Stockholders
Rights of Appraisal."
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<PAGE>
PROXIES; REVOCATION OF PROXIES
Shares of LCA Common Stock represented by properly executed proxies received
prior to or at the LCA Special Meeting and not revoked will be voted in
accordance with the instructions indicated in such proxies. If a stockholder
does not return a properly executed proxy, and does not attend and vote at the
LCA Special Meeting, such stockholder's shares will not be voted, which will
have the same effect as a vote against approval of the Recapitalization
Proposal and the Amendment Proposal. If signed and returned, the proxy will
authorize the persons named as proxy to vote on the matters referred to
therein. It is not expected that any matter other than those referred to
herein will be brought before the LCA Special Meeting; however, if other
matters are properly presented, the persons named as proxies will vote shares
subject to such proxies in accordance with their judgment with respect to such
matters. EXECUTED PROXY CARDS THAT CONTAIN NO INSTRUCTIONS TO THE CONTRARY
WILL BE VOTED FOR APPROVAL OF THE LCA PROPOSALS.
Any LCA stockholder who executes and returns a Proxy Card may revoke it at
any time before it is voted at the LCA Special Meeting by (i) delivering to
the Secretary of LCA at LCA's principal offices before the LCA Special Meeting
an instrument of revocation bearing a later date or time than the date or time
of the proxy being revoked; (ii) submitting a duly executed Proxy Card bearing
a later date or time than the date or time of the proxy being revoked; or
(iii) voting in person at the LCA Special Meeting. A stockholder's attendance
at the LCA Special Meeting will not by itself revoke a proxy given by such
stockholder.
The LCA Board does not know of any matters other than those described in the
notice of the LCA Special Meeting that are to come before the LCA Special
Meeting. If any other matters are properly brought before the LCA Special
Meeting, including, among other things, a motion to adjourn or postpone the
LCA Special Meeting to another time and/or place for the purpose of soliciting
additional proxies in favor of the LCA Proposals or to permit the
dissemination of information regarding material developments relating to the
LCA Proposals or otherwise germane to the LCA Special Meeting, one or more
persons named in the LCA form of proxy will vote the shares represented by
such proxy upon such matter as determined in their discretion; provided,
however, that no proxy that is voted against any one or more of the LCA
Proposals will be voted in favor of any such adjournment or postponement for
the purpose of soliciting additional proxies. At any subsequent reconvening of
the LCA Special Meeting, all proxies will be voted in the same manner as such
proxies would have been voted at the original convening of the meeting (except
for any proxies which theretofore have been effectively revoked or withdrawn),
notwithstanding that they may have been effectively voted on the same or any
other matter at a previous portion of such reconvened meeting.
The cost of soliciting proxies from LCA stockholders will be borne entirely
by LCA. LCA has retained D.F. King & Co., Inc. to aid in the solicitation of
proxies from its stockholders. The fees of D.F. King & Co., Inc. are estimated
to be approximately $10,000 plus reimbursement of out-of-pocket expenses. In
addition to soliciting proxies by mail, proxies may be solicited by LCA's
directors, officers and other employees by personal interview, telephone,
telegram, facsimile or other means of communication. Such persons will receive
no additional compensation for such services, but may receive reimbursement
for out-of-pocket expenses incurred in connection therewith. If undertaken,
the expense of such solicitation would be nominal. LCA will also request
persons, firms and companies holding shares in their names or in the name of
their nominees, which are beneficially owned by others, to send proxy
materials to and obtain proxies from such beneficial owners.
HOLDERS OF LCA COMMON STOCK WHO WISH TO MAKE AN LCA STOCK ELECTION ARE
REQUIRED TO SEND STOCK CERTIFICATES WITH THEIR FORMS OF LCA STOCK ELECTION.
LCA STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF LCA STOCK
CERTIFICATES WILL BE MAILED TO LCA STOCKHOLDERS WHO DO NOT MAKE AN LCA STOCK
ELECTION SHORTLY AFTER THE EFFECTIVE TIME OF THE RECAPITALIZATION MERGER.
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GRANCARE SPECIAL MEETING
GENERAL
This Proxy Statement/Prospectus is being furnished to the holders of
GranCare Common Stock as of the GranCare Record Date in connection with the
solicitation of proxies by the GranCare Board for use at the GranCare Special
Meeting to be held on October 28, 1997 at 11:00 a.m., local time at the
corporate offices of GranCare located at One Ravinia Drive, Suite 1500,
Atlanta, Georgia, and at any adjournment or postponement thereof.
At the GranCare Special Meeting, holders of GranCare Common Stock as of the
GranCare Record Date will be asked to consider and vote upon the GranCare
Merger Proposal. GranCare stockholders also will consider and vote upon such
other matters as may properly come before the GranCare Special Meeting.
The GranCare Board has approved the GranCare Merger Agreement and has
further determined that the proposed transactions are fair to and in the best
interests of GranCare and its stockholders. THE GRANCARE BOARD RECOMMENDS THAT
THE GRANCARE STOCKHOLDERS VOTE IN FAVOR OF THE GRANCARE MERGER PROPOSAL.
RECORD DATE, VOTING RIGHTS AND VOTE REQUIRED
The GranCare Board has fixed the close of business on September 2, 1997 as
the GranCare Record Date for the determination of holders of GranCare Common
Stock entitled to notice of, and to vote at, the GranCare Special Meeting.
Only holders of record of GranCare Common Stock at the close of business on
the GranCare Record Date will be entitled to notice of, and to vote at, the
GranCare Special Meeting. GranCare Common Stock is the only outstanding class
of voting securities of GranCare, and each share of GranCare Common Stock is
entitled to one vote on each matter to be acted upon or which may come before
the GranCare Special Meeting. Votes may be cast at the GranCare Special
Meeting in person or by properly executed proxy. See "--Proxies; Revocation of
Proxies."
On the GranCare Record Date, 23,972,545 shares of GranCare Common Stock were
outstanding and were held by 741 holders of record. On the GranCare Record
Date, 3,381,453 shares of GranCare Common Stock, or approximately 13.3% of the
outstanding shares of GranCare Common Stock, were beneficially owned by
GranCare directors and executive officers.
The presence at the GranCare Special Meeting, either in person or by proxy,
of the holders of a majority of the shares of GranCare Common Stock entitled
to vote on the GranCare Merger Proposal is necessary to constitute a quorum to
transact business at the GranCare Special Meeting. Abstentions of shares that
are present at the GranCare Special Meeting and broker non-votes are counted
for the purpose of determining the presence of a quorum for the transaction of
business. If a quorum is not present at the GranCare Special Meeting, the
stockholders who are present and entitled to vote at the GranCare Special
Meeting may, by majority vote, adjourn the GranCare Special Meeting from time
to time without notice, other than announcement at the GranCare Special
Meeting, until a quorum is present.
Approval of the GranCare Merger Proposal requires the affirmative vote of
the holders of a majority of the issued and outstanding shares of GranCare
Common Stock. The failure to vote, either by abstentions or broker non-votes,
will have the same effect as a vote against approval of the GranCare Merger
Proposal. THE GRANCARE BOARD RECOMMENDS THAT GRANCARE STOCKHOLDERS VOTE FOR
APPROVAL OF THE GRANCARE MERGER PROPOSAL BY SIGNING AND RETURNING THE ENCLOSED
PROXY WHETHER OR NOT STOCKHOLDERS PLAN TO ATTEND THE GRANCARE SPECIAL MEETING.
The GranCare directors, who, as of the GranCare Record Date beneficially owned
approximately 9.8% of the outstanding GranCare Common Stock, have indicated
that they intend to vote in favor of the GranCare Merger Proposal.
Under the DGCL, holders of GranCare Common Stock are not entitled to
dissenters' rights of appraisal with respect to the GranCare Merger.
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<PAGE>
PROXIES; REVOCATION OF PROXIES
Shares of GranCare Common Stock represented by properly executed proxies
received prior to or at the GranCare Special Meeting and not revoked will be
voted in accordance with the instructions indicated in such proxies. If a
stockholder does not return a properly executed proxy, and does not attend and
vote at the GranCare Special Meeting, such stockholder's shares will not be
voted, which will have the same effect as a vote against approval of the
GranCare Merger Proposal. If signed and returned, the proxy will authorize the
persons named as proxy to vote on the matters referred to therein. It is not
expected that any matter other than those referred to herein will be brought
before the GranCare Special Meeting; however, if other matters are properly
presented, the persons named as proxies will vote shares subject to such
proxies in accordance with their judgment with respect to such matters.
EXECUTED PROXIES THAT CONTAIN NO INSTRUCTIONS TO THE CONTRARY WILL BE VOTED
FOR APPROVAL OF THE GRANCARE MERGER PROPOSAL.
Any GranCare stockholder who executes and returns a proxy may revoke it at
any time before it is voted at the GranCare Special Meeting by: (i) delivering
to the Secretary of GranCare at GranCare's principal offices before the
GranCare Special Meeting an instrument of revocation bearing a later date or
time than the date or time of the proxy being revoked; (ii) submitting a duly
executed proxy bearing a later date or time than the date or time of the proxy
being revoked; or (iii) voting in person at the GranCare Special Meeting. A
stockholder's attendance at the GranCare Special Meeting will not by itself
revoke a proxy given by such stockholder.
The GranCare Board does not know of any matters other than those described
in the notice of the GranCare Special Meeting that are to come before the
GranCare Special Meeting. If any other matters are properly brought before the
GranCare Special Meeting, including, among other things, a motion to adjourn
or postpone the GranCare Special Meeting to another time and/or place for the
purpose of soliciting additional proxies in favor of the GranCare Merger
Agreement or to permit the dissemination of information regarding material
developments relating to the GranCare Merger Agreement or otherwise germane to
the GranCare Special Meeting, one or more persons named in the GranCare form
of proxy will vote the shares represented by such proxy upon such matter as
determined in their discretion; provided, however, that no proxy that is voted
against the GranCare Merger Proposal will be voted in favor of any such
adjournment or postponement for the purpose of soliciting additional proxies.
At any subsequent reconvening of the GranCare Special Meeting, all proxies
will be voted in the same manner as such proxies would have been voted at the
original convening of the meeting (except for any proxies which theretofore
have been effectively revoked or withdrawn), notwithstanding that they may
have been effectively voted on the same or any other matter at a previous
meeting.
The cost of soliciting proxies from GranCare stockholders will be borne
entirely by GranCare. GranCare has retained Morrow & Company, Inc. to aid in
the solicitation of proxies from its stockholders. The fees of Morrow &
Company, Inc. to be paid by GranCare are estimated to be approximately $7,500
plus reimbursement of out-of-pocket expenses. In addition to soliciting
proxies by mail, proxies may be solicited by GranCare's directors, officers
and other employees by personal interview, telephone, telegram, facsimile or
other means of communication. Such persons will receive no additional
compensation for such services. If undertaken, the expense of such
solicitation is expected to be nominal. GranCare will also request persons,
firms and companies holding shares in their names or in the names of nominees,
which are beneficially owned by others, to send proxy material to and obtain
proxies from such beneficial owners.
GRANCARE STOCKHOLDERS SHOULD NOT FORWARD ANY STOCK CERTIFICATES WITH THEIR
PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF
GRANCARE STOCK CERTIFICATES WILL BE MAILED TO GRANCARE STOCKHOLDERS SHORTLY
AFTER THE EFFECTIVE TIME OF THE GRANCARE MERGER.
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<PAGE>
SOURCES AND USES OF FUNDS
The sources and uses of funds for the Transactions are expected to be as set
forth below. See "Description of Financing."
SOURCES OF FUNDS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Term Loans(1).................................................. $ 690,000
Senior Subordinated Notes(2)................................... 350,000
Senior Subordinated Discount Notes (2)......................... 150,000
Common Equity Investment by the Apollo Investors(3)............ 240,000
Existing Cash.................................................. 7,570
----------
Total Sources................................................ $1,437,570
==========
</TABLE>
USES OF FUNDS
(DOLLARS IN THOUSANDS)
<TABLE>
<S> <C>
Cash Paid to LCA Stockholders in the Recapitalization Merg-
er(4)....................................................... $ 738,983
Retirement of LCA Debt....................................... 305,004
Retirement of GranCare Debt.................................. 271,911
Security Deposit to Lessor................................... 15,000
Costs Related to Transactions................................ 106,672
----------
Total Uses................................................. $1,437,570
==========
</TABLE>
- --------
(1) The Term Loans will consist of (i) a 6 1/2-year term loan facility in an
aggregate principal amount of $240 million, (ii) a 7 1/2-year term loan
facility in an aggregate principal amount of $225 million and (iii) an 8
1/2-year term loan facility in an aggregate principal amount of $225
million. The Term Loans will also be part of the New Credit Facility.
Approximately $150 million will be available under the Revolving Credit
Facility, which will be part of the New Credit Facility.
(2) In the event Paragon has not received the proceeds from the sale of the
Notes on or prior to the effective time of the Recapitalization Merger,
Paragon has a commitment for a Standby Senior Subordinated Credit Facility.
(3) Represents the acquisition of approximately 5.9 million shares of Paragon
Common Stock (approximately 44.0% of the outstanding Paragon Common Stock
after giving effect to the Mergers) at a per share price of $40.50.
(4) Repurchase of approximately 90.54% of LCA Common Shares and retirement of
LCA treasury stock, assuming no payments are made to dissenting
stockholders.
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<PAGE>
DESCRIPTION OF THE TRANSACTIONS
OVERVIEW OF STRUCTURE
The Transactions consist of (i) a recapitalization of LCA pursuant to which
(A) approximately 90.54% of the existing shares of LCA Common Stock will be
converted into $40.50 cash per share and approximately 9.46% will remain
outstanding as shares of Paragon Common Stock and (B) the Apollo Investors
will contribute not less than $240 million in cash and will acquire common
stock of Paragon at $40.50 per share, (ii) a merger of GranCare with LCA Sub
pursuant to which (A) each share of GranCare Common Stock will be converted
into the right to receive 0.2346 of a share of Paragon Common Stock, and (B)
GranCare, will become a wholly owned subsidiary of Paragon, (iii) an amendment
and restatement of the LCA Charter to increase the number and eliminate the
classification of the Paragon Board, to permit, among other things,
stockholders of Paragon to take action by written consent and to call special
meetings of the stockholders, to eliminate special voting requirements for
certain business combinations and to modify stockholder voting requirements
for future amendments to the Paragon Amended and Restated Certificate of
Incorporation and (iv) the Debt Financing.
Apollo Investors Equity Investment. To effect the recapitalization of LCA,
the Apollo Investors will, immediately prior to the effective time of the
Recapitalization Merger, contribute not less than $240 million in cash to
Apollo Sub in exchange for approximately 5.9 million shares of common stock of
Apollo Sub, par value $.01 per share (the "Apollo Sub Shares"), at a price of
$40.50 per share. See "Description of Financing." Pursuant to the terms of the
Recapitalization Merger Agreement, the Apollo Sub Shares will be converted on
a one-for-one basis into Paragon Common Stock, which will result in the
ownership by the Apollo Investors of approximately 44.0% of the outstanding
Paragon Common Stock after giving effect to the Mergers.
LCA Merger Consideration. Pursuant to the election and proration procedures
described below, a total of 1,905,748 shares of LCA Common Stock (referred to
as the "LCA Retained Share Number") outstanding immediately prior to the
Recapitalization Merger will remain outstanding after the effective time of
the Recapitalization Merger (and following the GranCare Merger) as LCA
Retained Shares. Each other share of LCA Common Stock outstanding immediately
prior to the effective time of the Recapitalization Merger will be converted
into the right to receive the LCA Cash Price of $40.50 per share. Each person
who is a record holder of shares of LCA Common Stock at the LCA Election
Deadline (and any holder of LCA stock options or other LCA Rights that will be
cancelled and converted into the right to receive shares of LCA Common Stock
immediately prior to the effective time of the Recapitalization Merger) may,
by following the procedures set forth under "The Recapitalization Merger
Agreement--Merger Consideration and Proration," make an LCA Stock Election to
retain some or all of such shares as LCA Retained Shares. Any such election
shall be subject to the proration procedures of the Recapitalization Merger
Agreement described below.
If the aggregate number of LCA Electing Shares is more than the LCA Retained
Share Number of 1,905,748, then pursuant to the Recapitalization Merger
Agreement (i) each share of LCA Common Stock other than LCA Electing Shares
will be converted in the Recapitalization Merger into the right to receive the
LCA Cash Price, (ii) each LCA Stockholder making an LCA Stock Election will be
entitled to retain that number of LCA Retained Shares as is equal to the
product of (x) the number of LCA Electing Shares of such LCA stockholder and
(y) a fraction, the numerator of which is the LCA Retained Share Number and
the denominator of which is the aggregate number of LCA Electing Shares and
(iii) each other LCA Electing Shares held by such LCA stockholder will be
converted in the Recapitalization Merger into the right to receive the LCA
Cash Price.
If the aggregate number of LCA Electing Shares is less than the LCA Retained
Share Number then pursuant to the Recapitalization Merger Agreement (i) each
LCA Electing Share will remain outstanding as an LCA Retained Share, (ii) in
addition to such LCA Retained Shares, each LCA stockholder (including LCA
stockholders who made LCA Stock Elections with respect to some, but not all,
of their shares of LCA Common Stock) will be required to retain as LCA
Retained Shares in the Recapitalization Merger that number of shares
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<PAGE>
as is equal to the product of (x) the excess of the LCA Retained Share Number
over the aggregate number of LCA Electing Shares and (y) a fraction, the
numerator of which is the number of shares of LCA Common Stock (other than LCA
Electing Shares) held by such LCA stockholder and the denominator of which is
the aggregate number of outstanding shares of LCA Common Stock other than LCA
Electing Shares, and (iii) each other share of LCA Common Stock will be
converted into the right to receive the LCA Cash Price. Pursuant to this
allocation procedure, if no LCA Stock Elections are made, each LCA stockholder
would receive $40.50 per share in cash with respect to approximately 90.54% of
such stockholder's shares and would retain approximately 9.46% of such
stockholder's shares as LCA Retained Shares. Thus, under such assumption, each
LCA stockholder would receive and retain in the Recapitalization Merger
approximately $36.67 (90.54% of $40.50), in cash, and 0.0946 of an LCA
Retained Share for each share of LCA Common Stock.
Any LCA stockholder who would otherwise retain a fraction of an LCA Retained
Share will receive a cash payment in lieu thereof.
BECAUSE OF THE PRORATION PROCEDURES DESCRIBED HEREIN, LCA STOCKHOLDERS MAY
NOT RECEIVE THE AMOUNT OF CASH AND RETAIN THE NUMBER OF SHARES OF PARAGON
COMMON STOCK THAT THEY ELECT.
GranCare Merger Consideration. Each share of GranCare Common Stock
outstanding as of the effective time of the GranCare Merger will be cancelled
and converted into the right to receive 0.2346 (referred to as the Exchange
Ratio) of a share of Paragon Common Stock for each share of GranCare Common
Stock. Any GranCare stockholder who would otherwise receive a fraction of a
share of Paragon Common Stock will receive a cash payment in lieu thereof.
Paragon Ownership. As a result of the consummation of the Mergers, the
Apollo Investors will own approximately 44.0%, the existing GranCare
stockholders will own approximately 41.9% and the existing LCA Stockholders
will retain approximately 14.1% of the outstanding Paragon Common Stock.
Financing. To finance the cash payments to be made to LCA stockholders in
the Recapitalization Merger, refinance existing LCA and GranCare indebtedness,
and pay fees and expenses, in addition to the equity investment by the Apollo
Investors, Paragon will borrow approximately $690 million under the New Credit
Facility and will incur approximately $500 million in Senior Subordinated
Debt. See "Source and Uses of Funds."
BACKGROUND OF THE TRANSACTIONS
In November 1996, Edward L. Kuntz, Chairman and Chief Executive Officer and
a Director of LCA, and Leroy D. Williams, President, Chief Operating Officer
and a Director of LCA (together, the "Management Directors") informed the
other members of the LCA Board that they were working with a specified
leveraged buyout firm (the "Initial LBO Firm") and expected to be in a
position to make an offer to the LCA Board to acquire LCA in a leveraged
buyout promptly after the LCA Board authorized the Initial LBO Firm to conduct
limited diligence with respect to LCA. The Management Directors indicated that
they and the Initial LBO Firm would be prepared to offer Donald C. Beaver,
Vice Chairman and a director of LCA, who beneficially owns approximately 18%
of the outstanding shares of LCA Common Stock, the opportunity to exchange a
portion of his LCA Common Stock for an equity interest in the post-buyout
entity.
In November 1996, the LCA Board also appointed the LCA Special Committee to
determine whether to make information available to the Initial LBO Firm, how
to respond to any such offer that might be received and to consider other
strategic alternatives that might be available to LCA. The LCA Special
Committee consisted of Anthony M. Frank (Chairman), Mr. Beaver, Roger J.
Bulger, Robert H. Hurlbut and Eddy J. Rogers, Jr., constituting all members of
the LCA Board other than the Management Directors. Although Mr. Beaver is Vice
Chairman of LCA and has an employment agreement with LCA (see "Interests of
Certain Persons in the Transactions"), he is not actively involved in the day-
to-day management of LCA and, prior to joining the LCA Special Committee,
advised the other members that, after meeting with the Initial LBO Firm, he
had decided
37
<PAGE>
that he would not want to be an equity participant in such proposed leveraged
buyout, but would want to be treated on the same basis as other LCA
stockholders.
The LCA Special Committee retained outside counsel and on December 11, 1996
authorized the Initial LBO Firm to perform limited due diligence with respect
to LCA. The LCA Special Committee subsequently retained CSFB and NationsBanc
as the LCA Financial Advisors.
On January 15, 1997, the LCA Financial Advisors made a presentation to the
LCA Special Committee in which the LCA Financial Advisors described a
preliminary reference range with respect to the value of LCA based on work
performed and information available at that time and analyzed and discussed
various strategic alternatives available to LCA. The strategic alternatives
included: continuing as a publicly-traded company without any extraordinary
transaction; continuing as a publicly-traded company and reevaluating
strategic alternatives in one to two years; a leveraged recapitalization;
divestiture of American Pharmaceutical Services, LCA's pharmaceutical services
subsidiary ("APS"), to the public in an initial public offering; spinning-off
APS; spinning-off both APS and American Rehabilitation Services, Inc., LCA's
rehabilitation services subsidiary ("ARS"); entering into a transaction in
which APS would be spun-off and the remainder of LCA would be merged with a
third party in a stock-for-stock transaction; entering into a merger or sale
transaction with a strategic buyer; or selling LCA to a financial buyer.
Although the LCA Financial Advisors informed the LCA Special Committee that
the Initial LBO Firm had indicated a price in the "low 30's," neither the
price nor any other aspect of a potential offer from the Initial LBO Firm were
addressed in the LCA Financial Advisors' January 15 presentation, the focus of
which was the variety and consequences of the strategic alternatives available
to LCA. The Initial LBO Firm's price indication was near or below the low end
of the preliminary reference range described by the LCA Financial Advisors in
their presentation. The LCA Special Committee considered, with the advice of
the LCA Financial Advisors and counsel to the LCA Special Committee, the
possible advantages and disadvantages of each strategic option. Based on the
foregoing considerations and the indications of price that the Initial LBO
Firm had provided to the LCA Financial Advisors, the LCA Special Committee
determined to advise the Initial LBO Firm and the Management Directors that
the LCA Special Committee did not wish to receive an offer from the Initial
LBO Firm and determined to terminate discussions with the Initial LBO Firm.
The LCA Special Committee also decided to consider further at a subsequent
meeting, with input from the Management Directors, the various strategic
alternatives available to LCA.
At a January 22, 1997 meeting of the LCA Special Committee, a portion of
which was also attended by the Management Directors, the LCA Special Committee
determined to authorize the LCA Financial Advisors to contact a limited number
of potential strategic and financial buyers (some of which had theretofore
expressed interest in acquiring LCA) to ascertain if they would be interested
in pursuing an acquisition transaction or other transaction involving LCA and,
if so, to request that they provide an initial indication of their potential
valuation of LCA. The LCA Special Committee determined that such indications
of interest would provide a sense of the level of interest in LCA and assist
the directors in further considering LCA's strategic alternatives, but made no
decision as to whether LCA would enter into (or propose to enter into) an
extraordinary transaction of any type.
During February and March 1997, the LCA Financial Advisors contacted, or
were contacted by, a total of 15 entities, including Apollo and GranCare,
about their possible interest in a transaction with LCA. The entities
contacted by the LCA Financial Advisors included industry participants that
the LCA Financial Advisors had reason to believe might be interested in a
possible transaction with LCA and certain leveraged buyout firms that in the
past had expressed an interest in participating in the health care services
industry. A total of six preliminary indications of value were received by the
LCA Special Committee during this period.
Following receipt of the preliminary indications of value, the LCA Special
Committee authorized various parties (including GranCare) to conduct limited
diligence and then provide a more specific non-binding proposal and price
range with respect to a possible transaction with LCA. In February and March
1997, GranCare and five other parties signed customary confidentiality
agreements with LCA relating to the information to be provided by LCA (which
agreements, among other things, prohibited such parties from making an
unsolicited
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acquisition proposal for LCA, or engaging in certain other activities relating
to control of LCA, for a two year period).
On March 4, 1997, LCA publicly announced that it was exploring its strategic
alternatives, including the possibility of a merger or sale of LCA.
On March 11, 1997, Apollo contacted Mr. William G. Petty, Jr., a director of
GranCare and the chairman of the Finance Committee of the GranCare Board (the
"GranCare Finance Committee"), to ascertain whether GranCare would be
interested in participating with Apollo in a transaction in which Apollo would
acquire LCA. Also on March 11, 1997, the GranCare Finance Committee, which
also included Gene E. Burleson, Joel S. Kanter and Gary U. Rolle, met with
GranCare's management and the GranCare Financial Advisors to review the
financial elements of a potential transaction with LCA, including sources and
uses of funds. On March 15, 1997, the GranCare Board met and was updated as to
a possible transaction with LCA. The GranCare Board discussed the benefits of
a merger with LCA, including the ability to expand and diversify its long-term
care business and the potential business synergies and significant cost
savings anticipated to be available by integrating the operations of the two
companies. The GranCare Board also was updated on the results of the GranCare
Finance Committee's meeting on March 11, 1997 and the inquiry that had been
received from Apollo. The GranCare Board authorized the GranCare Finance
Committee and management to enter into discussions with Apollo and identify
and solicit other potential partners with respect to a transaction with LCA.
On March 20, 1997, the GranCare Board authorized the GranCare Financial
Advisors to submit on GranCare's behalf a preliminary non-binding bid
indicating a range of $38 to $40 per share of LCA Common Stock. The LCA
Special Committee received five non-binding proposals on March 20, 1997
(including such non-binding proposal from GranCare) ranging from a low range
of $34-36 per share of LCA Common Stock to a high range of $40-42 per share of
LCA Common Stock. The LCA Special Committee authorized four parties (including
GranCare) to conduct more detailed diligence and submit final binding offers
by May 2, 1997. The LCA Special Committee decided not to pursue discussions
with the fifth bidder since the top of such bidder's range was significantly
lower than the top of the range proposed by the next lowest bidder and was
never reduced to writing. Prospective bidders were advised that a cash
transaction would be received most favorably and that in connection with any
final offer they should include, among other things, commitments for all
necessary financing. Prospective bidders also were informed that no decision
had been made as to whether to engage in any transaction and that LCA reserved
the right to reject all offers. GranCare determined that a cash transaction
would require an additional equity investment, and therefore chose to join
Apollo in connection with a potential Apollo/GranCare/LCA Transaction (as
defined below). Apollo and GranCare conducted due diligence on LCA, and Apollo
conducted due diligence on GranCare. No other potential financial partner with
whom GranCare held discussions regarding LCA was prepared to provide as much
equity or was prepared to offer as high a price for LCA. All such discussions,
other than with Apollo, were preliminary in nature and never progressed to the
level of determining the structure of a proposed transaction.
The GranCare Finance Committee and the GranCare Board subsequently met on
April 29, 1997 and April 30, 1997, respectively, to discuss strategic
alternatives for GranCare, including a possible recapitalization of LCA by
Apollo followed by an LCA-GranCare merger (an "Apollo/GranCare/LCA
Transaction"). The GranCare Board compared a possible Apollo/GranCare/LCA
Transaction to a theoretical range of values for other types of business or
transaction alternatives available to GranCare discussed with the GranCare
Financial Advisors and concluded that such a transaction would provide the
greatest return to GranCare stockholders. On May 2, 1997, the GranCare Board
authorized GranCare to join with Apollo in the submission of an offer (the
"Initial Apollo/GranCare Offer") for an Apollo/GranCare/LCA Transaction
pursuant to which LCA stockholders would receive $39.00 per share in cash for
92.5% of their shares and GranCare stockholders would receive shares of LCA
Common Stock for all their outstanding shares (without a GranCare Cash
Election) based on an implied $10.00 per share value of GranCare Common Stock
(based on the price to be paid by Apollo for Paragon Common Stock multiplied
by the proposed exchange ratio at which shares of GranCare Common Stock would
be converted into Paragon Common Stock). The GranCare Board also gave the
GranCare Finance
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Committee the authority to increase the cash price payable to LCA stockholders
in the Recapitalization Merger to as much as $40.00 per share of LCA Common
Stock which would result in a decrease in such exchange ratio.
The amount and structure of the Initial Apollo/GranCare Offer was determined
by Apollo and GranCare in consultation with their accounting advisors and the
GranCare Financial Advisors and was based on a price that (i) would be
acceptable to LCA, (ii) would allow Apollo to receive an appropriate return on
its investment through its ownership of Paragon Common Stock and (iii) would
result in the GranCare stockholders receiving Paragon Common Stock based upon
an exchange ratio that, in a tax-free transaction, presented a substantial
premium over recent reported sales prices of the GranCare Common Stock. The
Recapitalization Merger involves a purchase of shares of Paragon Common Stock
by the Apollo Investors for $40.50 per share in cash. The Initial
Apollo/GranCare Offer was structured so that the Recapitalization Merger would
be treated as a recapitalization for accounting purposes. This would result in
a carryover basis for the LCA assets, while the basis in the GranCare assets
would be their fair market value following the GranCare Merger. A cash
purchase by GranCare of all the LCA Common Stock instead of constituting a
recapitalization would have required the LCA assets to be "written-up" to
their fair market value, creating a substantial amount of additional goodwill
that would adversely affect New LCA's earnings in the future.
On May 2, 1997, LCA received the Initial Apollo/GranCare Offer and two other
offers. One of the two other bidders was a company affiliated with leveraged
buyout firm. This firm agreed together with another major leveraged buyout
firm, to provide a substantial amount of equity capital. This bidder also
arranged for debt commitment letters from such other major leveraged buyout
firm and another major institutional lender in respect of additional debt
capital that would be required to complete its proposed transaction. This
offer included a proposal of $36 in cash per share of LCA Common Stock. The
third bidder (the "Other Bidder") was a major leveraged buyout firm which
agreed to contribute a substantial amount of capital and had arranged for debt
commitment letters from major institutional lenders in respect of additional
debt capital that would be required to complete its proposed transaction. The
Other Bidder made two alternative proposals (the "Other Bidder's Final
Offers"): (a) to acquire all outstanding shares of LCA Common Stock in a
tender offer and merger for $38.00 per share in cash, or (b) if Mr. Beaver
would agree to retain approximately 390,000 shares of his LCA Common Stock, to
acquire all other shares of LCA Common Stock for $38.50 per share in cash. All
three bidders' offers were reviewed preliminarily by the LCA Special Committee
on May 2, 1997. The LCA Special Committee authorized the LCA Financial
Advisors and counsel to the LCA Special Committee to have further discussions
and negotiations with representatives of Apollo/GranCare and with
representatives of the Other Bidder and determined not to pursue discussions
with respect to the lowest offer.
Between May 3 and May 5, 1997, negotiations took place among LCA, Apollo and
GranCare, during which Apollo indicated that it would be prepared to increase
the cash price payable to LCA stockholders pursuant to the Initial
Apollo/GranCare Offer to $40.00 per share of LCA Common Stock and GranCare
indicated that the GranCare Board was likely to approve such an increase.
Subsequently, Apollo and the GranCare Finance Committee authorized the cash
consideration in the proposed recapitalization merger to be increased to
$40.00 per share for 93% of the outstanding shares of LCA Common Stock. On May
6, the GranCare Finance Committee met by telephone with representatives of
Apollo and the GranCare Financial Advisors and determined that the
contemplated transactions presented the best return reasonably available to
the GranCare stockholders at a price per share of LCA Common Stock of up to
$41.00 (the cash price to be received by LCA stockholders and the price at
which Apollo would purchase shares). The GranCare Finance Committee also
concluded that the implied $10.00 per share exchange value for the GranCare
Common Stock (based upon the cash consideration of $40.00 to $41.00 per share
to be paid by Apollo for the Paragon Common Stock multiplied by the proposed
exchange ratio) represented a significant premium over the then current
trading price of the GranCare Common Stock. On May 7, 1997, the day prior to
the public announcement of the Transactions, the last reported sales prices of
the GranCare Common Stock and the LCA Common Stock on the New York Stock
Exchange were $7.75 and $36.50 per share, respectively. On the basis of $40.50
cash consideration per share of LCA Common Stock being paid by the Apollo
Investors and the then proposed 0.2469 exchange ratio, the implied exchange
value per share of GranCare Common Stock was $10.00, which represented a 29%
premium
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over the $7.75 price of the GranCare Common Stock on May 7, 1997, and a
premium over the closing prices of the GranCare Common Stock, which ranged
from $7.625 and $8.50, during the thirty-day period preceding the announcement
of the Mergers.
Following such discussions and negotiations by LCA with Apollo/GranCare and
discussions and negotiations by LCA with the Other Bidder, including
negotiations of the proposed merger agreements and of proposed definitive
agreements with the Other Bidder, the LCA Board and the GranCare Board met
separately on May 7, 1997. At the GranCare Board meeting, the GranCare Board
reviewed in detail with GranCare's management, legal advisors and the GranCare
Financial Advisors the terms of the transactions as then proposed (in which
each outstanding share of GranCare Common Stock would be exchanged for 0.2469
of a share of Paragon Common Stock) and authorized the cash price per share of
LCA Common Stock payable in the Recapitalization Merger to be increased to
$40.50 per share of LCA Common Stock as had already been approved by Apollo.
The GranCare Board directed Smith Barney to communicate that revised offer on
behalf of Apollo and GranCare to CSFB on behalf of LCA, during the course of
the LCA Board meeting described below. In the alternative, as discussed below,
Apollo and the GranCare Board authorized the cash price (and price per share
to be paid by Apollo) in the proposed recapitalization merger to be increased
to $41.00 per share of LCA Common Stock if no Standby Senior Subordinated
Credit Facility was required to be obtained.
At its May 7, 1997 meeting, the GranCare Board reviewed the material terms
of the proposed merger agreements and its fiduciary duties in connection with
such proposed transactions with its outside counsel. The GranCare Financial
Advisors rendered their respective oral opinions (which opinions were
subsequently confirmed by delivery of written opinions dated May 7, 1997) to
the effect that, as of such date and based upon and subject to certain matters
stated in such opinions, the then proposed 0.2469 per share exchange ratio was
fair to holders of GranCare Common Stock from a financial point of view. After
full discussion of the terms of the proposed transactions and the Third Party
Proposal to GranCare described below, and considering the advice of the
GranCare Financial Advisors and the advice of GranCare's outside counsel, the
GranCare Board unanimously approved the original GranCare Merger Agreement and
the transactions contemplated thereby.
At an LCA Board meeting held on May 7, 1997, the LCA Board, with the
information, analysis and advice supplied by the LCA Financial Advisors,
counsel to the LCA Special Committee (which acted as special counsel to the
LCA Board) and other LCA outside counsel, discussed in detail and evaluated
the offers (as revised to date) received from both Apollo/GranCare and from
the Other Bidder and briefly reviewed the various other strategic alternatives
available to LCA as discussed at the January 15 and January 22, 1997 LCA
Special Committee meetings. The LCA Board decided not to pursue the other
strategic alternatives available to LCA since the LCA Board continued to
believe, based on the presentations made by the LCA Financial Advisors, that
the value to be obtained by LCA stockholders in the Transactions or pursuant
to the Other Bidder's Final Offers, would exceed the values likely to be
received by LCA stockholders if any of the other strategic alternatives were
pursued.
At the LCA Board meeting, Mr. Kuntz reported that (with the prior approval
of the Chairman of the LCA Special Committee after consultation with the LCA
Special Committee's counsel and the LCA Financial Advisors) he had met the
previous day with Apollo and with the Other Bidder and had discussed with each
of them his potential management role following a transaction, and stated that
no agreement or understanding had been reached with either of the bidders. Mr.
Beaver also reported on meetings that he had held (with the same prior
approval) the prior day with Apollo and with the Other Bidder and stated that
he had reached no agreement with either of the bidders. The LCA Financial
Advisors informed the LCA Board that the Other Bidder had indicated that the
Other Bidder's Final Offers represented its final offers.
In response to further efforts during the course of the concurrent May 7 LCA
Board and GranCare Board meetings by the LCA Financial Advisors to attempt to
have Apollo/GranCare further increase their offer, a representative of Smith
Barney, as instructed by Apollo/GranCare, informed CSFB that if LCA would
eliminate the requirement that all necessary financing be committed and not
require Apollo/GranCare to obtain (and thus be in a position to utilize) a
commitment from CMB for the Standby Senior Subordinated Credit Facility,
Apollo/GranCare would be prepared to increase the LCA Cash Price in the
proposed Recapitalization Merger by
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$0.50 to $41.00 per share of LCA Common Stock. The LCA Board, with the advice
of the LCA Financial Advisors and counsel to the LCA Special Committee and
LCA's outside counsel, considered circumstances in which the Standby Senior
Subordinated Credit Facility might be utilized and determined that elimination
of such facility would increase the risk of non-consummation of the
Transactions, and considered the potential impact of any non-consummation on
LCA and the LCA stockholders. The LCA Board concluded that it was in the best
interests of LCA and the LCA stockholders to require that Apollo/GranCare
obtain a commitment from CMB for the Standby Senior Subordinated Credit
Facility and to effect the Transactions at the $40.50 LCA Cash Price per share
of LCA Common Stock in the Recapitalization Merger.
At the May 7 LCA Board meeting after full discussion of the final
Apollo/GranCare offer and the Other Bidder's Final Offers, and after
considering the advice of the LCA Financial Advisors, counsel to the LCA
Special Committee and LCA's outside counsel, and the oral opinions of the LCA
Financial Advisors that, based upon and subject to the assumptions,
limitations and qualifications set forth therein, as of the date of such
opinions, the per share consideration to be received and retained in the
Transactions by the LCA stockholders holding shares of LCA Common Stock prior
to the Transactions (which consideration was calculated by the LCA Financial
Advisors on the assumption that no LCA stockholders would make the LCA Stock
Election and therefore, based on the terms then contemplated, all LCA
stockholders would receive and retain per share consideration of approximately
$37.665 in cash and 0.07 shares of Paragon Common Stock) was fair to such
stockholders from a financial point of view, the LCA Board unanimously
approved the original Merger Agreements and the transactions contemplated
thereby.
Subsequent to the commencement of the due diligence review by GranCare
regarding the feasibility of entering into the Transactions with LCA, GranCare
received unsolicited expressions of interest from two third parties (both
healthcare industry participants listed on the NYSE) regarding the possible
acquisition of all of the issued and outstanding capital stock of GranCare.
One of the third parties expressed an interest in a transaction with GranCare
between $10 and $12 per share, but the GranCare Finance Committee believed,
after consultation with the GranCare Financial Advisors, that such third party
would be unable to obtain the financing necessary to consummate such a
transaction. The expressions of interest were both presented to the GranCare
Board on April 30, 1997 and, following discussion, the GranCare Board
instructed GranCare senior management to engage in discussions with
representatives of the other third party in an attempt to ascertain the actual
terms of the transaction that such third party had indicated it was prepared
to propose. However, the GranCare Board was cognizant of the requirement to
submit its final offer to LCA on May 6, 1997 and, as a result, on May 3, 1997
the third party was informed that to be considered, any proposal regarding a
transaction with GranCare must be received by May 6, 1997.
On May 5, 1997, representatives of the third party and GranCare, together
with their respective legal and financial advisors met to commence discussions
regarding the terms of a transaction to be proposed by the third party.
GranCare and the third party executed a confidentiality agreement (which
agreement, among other things, generally prohibited such third party from
making an unsolicited acquisition proposal for GranCare or engaging in certain
other activities relating to control of GranCare) and the third party was
permitted to initiate a due diligence review of GranCare. In connection
therewith, GranCare made available documentation regarding GranCare's
operations, budgets, prospects and related matters as well as permitting
representatives of the third party to engage in interviews of members of
GranCare's senior management team.
On May 6, 1997, the third party informed GranCare that it needed more time
to analyze its due diligence findings prior to submitting any proposal for an
acquisition transaction. During the evening of May 6, 1997, the GranCare
Finance Committee met with members of GranCare's senior management, the
GranCare Financial Advisors and GranCare's legal advisors to evaluate the
alternatives available to GranCare. Following discussion, the GranCare Finance
Committee determined that in view of the benefits expected to be realized from
the Transactions (See "--Reasons for the Transactions; Recommendations of the
Boards of Directors--GranCare's Reasons for the Transactions") and the
requirement by LCA that final bids be received no later than May 6, 1997,
GranCare was not able to provide the third party additional time to prepare
its proposal. The GranCare Finance Committee, however, instructed GranCare's
senior management to meet immediately with
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representatives of the third party in an attempt to obtain a written proposal
containing the specific terms of any acquisition transaction that the third
party was then prepared to propose.
Following the GranCare Finance Committee meeting, members of GranCare's
senior management, together with GranCare's legal and financial advisors, met
with representatives of the third party and its financial advisors. During the
course of this meeting the third party was again informed that GranCare was
required to submit its final bid to LCA regarding the Transactions on May 6
but had obtained an extension of such deadline until late morning on May 7,
1997. GranCare advised the third party that if it wished to pursue an
acquisition transaction with GranCare, the third party would need to deliver a
written proposal by 9:00 a.m. on May 7, 1997. GranCare also informed the third
party that such proposal should set forth a firm price to be paid to GranCare
stockholders, specify the form of consideration to be received by GranCare
stockholders and, to the greatest extent possible, be free of contingencies.
Finally, in view of the significant value the GranCare Board believed to be
inherent in the Transactions, GranCare advised the third party that the
proposal should also address the manner in which the third party would
compensate GranCare for the lost opportunity in the event GranCare determined
not to pursue the Transactions in favor of the any proposal submitted by the
third party and subsequently the third party failed to complete its proposed
transaction with GranCare.
After 10:00 a.m. on May 7, 1997, GranCare received a proposal from the third
party (the "Third Party Proposal") regarding an acquisition transaction in
which GranCare stockholders would receive $12.00 cash (or cash and securities)
for each share of GranCare Common Stock. The proposal indicated, however, that
it was conditioned on several factors including, without limitation,
satisfactory completion of due diligence and obtaining financing, the terms of
which would be acceptable to the third party. The proposal also failed to
address the concern of the GranCare Finance Committee regarding compensation
payable to GranCare to forego the opportunity represented by the Transactions
in the event the third party subsequently failed to consummate its proposed
transaction with GranCare because of the failure to satisfy any contingency,
including obtaining financing on terms acceptable to the third party.
During the course of the meeting of the GranCare Board on May 7, 1997, the
terms of the Third Party Proposal were presented to and discussed by the
GranCare Board. Following discussion, the GranCare Board determined that the
(i) Third Party Proposal was not a definitive offer, lacked sufficient
specificity and contained unacceptable contingencies such that there was
significant doubt that the proposed transaction would be completed and (ii) by
accepting the Third Party Proposal, GranCare would be required to abandon its
efforts to complete the Transactions. On the other hand, the proposed terms of
the GranCare Merger Agreement preserved GranCare's ability to accept a
materially higher offer and terminate the transactions with LCA upon payment
of a termination fee. The GranCare Board determined that the flexibility
contained in the GranCare Merger Agreement was preferable to the Third Party
Proposal, which would effectively preclude the Transactions. Based on the
foregoing and in view of the significant benefits perceived to accrue from the
Transactions as discussed above, the GranCare Board instructed GranCare senior
management to submit to LCA the final offers of Apollo/GranCare regarding the
Transactions and to terminate discussions with the third party.
As of May 7, 1997, the parties entered into the Financing Commitment Letter
and original Merger Agreements (the "Original Merger Agreements"), pursuant to
which 93% of the outstanding shares of LCA Common Stock would be converted
into the right to receive the LCA Cash Price and 7% of the outstanding shares
of LCA Common Stock would be retained as shares of Paragon Common Stock and
all the outstanding shares of GranCare Common Stock would be exchanged for
shares of Paragon Common Stock at an exchange ratio of 0.2469.
Apollo subsequently indicated a willingness to increase its level of equity
investment in Paragon from $200 million to $228 million provided that certain
corporate governance provisions could be established to reflect appropriately
Apollo's increased level of equity commitment. GranCare determined that
permitting Apollo to increase its equity participation in Paragon was
desirable for several reasons, including the fact that the cash resulting from
such additional equity investment could be used to establish an election (no
longer included in the terms of the GranCare Merger Agreement) pursuant to
which GranCare stockholders could elect in the aggregate
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to receive $10.00 per share in cash (subject to proration) for 10% of GranCare
Common Stock in connection with the GranCare Merger (the "GranCare Cash
Election Option") as well as further substantiating the appropriateness of
recapitalization accounting treatment for the Recapitalization Merger.
Representatives of Apollo, GranCare and LCA met periodically in Atlanta,
Georgia on June 4 through June 12 and negotiated revised governance provisions
whereby Apollo would have the right to appoint six of Paragon's then
contemplated 10 directors. Apollo was also willing to increase its equity
participation since it would then be able to involve co-investors while still
maintaining a significant direct level of investment for Apollo.
On June 12, 1997, at separate meetings, the LCA Board and the GranCare Board
met with their respective advisors and reviewed the proposed revisions to the
Transactions and proposed amendments of the Merger Agreements. Following such
discussion and analysis, and (i) receipt of updated opinions from the LCA
Financial Advisors to the LCA Board that, based upon and subject to the
assumptions, limitations and qualifications set forth therein, as of the date
of such opinions, the per share consideration to be received and retained in
the Transactions by the LCA stockholders holding shares of LCA Common Stock
prior to the Transactions (which consideration was calculated by the LCA
Financial Advisors on the assumption that no LCA stockholders would make the
LCA Stock Election and therefore all LCA stockholders would receive and retain
the then proposed per share consideration of approximately $37.665 in cash and
0.07 shares of Paragon Common Stock) was fair to such stockholders from a
financial point of view, and (ii) receipt of updated opinions from the
GranCare Financial Advisors to the GranCare Board to the effect that, as of
such date and based upon and subject to certain matters stated in such
opinions, the then proposed consideration to be received by the holders of
GranCare Common Stock in the GranCare Merger (which at that time included the
GranCare Cash Election Option) consisting of 0.2469 of a share of Paragon
Common Stock for 90% of the GranCare shares and $10.00 in cash for 10% of the
GranCare Common Stock, was fair, from a financial point of view, to the
holders of GranCare Common Stock, the LCA Board unanimously approved the
amended and restated Recapitalization Merger Agreement dated as of June 12,
1997 (the "June 12 Recapitalization Merger Agreement") and the amended and
restated GranCare Merger Agreement dated as of June 12, 1997 (the "June 12
GranCare Merger Agreement," collectively with the June 12 Recapitalization
Merger Agreement, the "June 12 Merger Agreements") and the GranCare Board
approved the June 12 GranCare Merger Agreement. Subsequently, as of June 12,
1997, the parties executed and delivered such amended and restated Merger
Agreements.
At the June 12, 1997 meeting of the GranCare Board, the GranCare Board
received a presentation from its legal advisors regarding the potential
conflicts of interest that could arise regarding the four members of the
GranCare Board who were also members of the Vitalink Board (Messrs. Burleson
(also Vitalink's Chief Executive Officer), Kanter, Parker and Rolle).
Following discussion, the GranCare Board unanimously determined to form the
Merger Oversight Committee ("GranCare MOC") of the GranCare Board, which
committee was comprised of all the GranCare directors other than the directors
who were also members of the Vitalink Board. The GranCare MOC was delegated
all of the authority of the GranCare Board, to the maximum extent permitted by
Delaware law, regarding all matters related to the proposed GranCare Merger.
In connection with the selection of Mr. Keith B. Pitts to serve as the Chief
Executive Officer of Paragon, the parties agreed that it was appropriate to
increase the size of Paragon's Board to 11 members and to appoint Mr. Pitts to
the Paragon Board and to the nominating committee of the Paragon Board. In
addition, the form of the Stockholders Agreement was revised to provide for
certain rights between Apollo and the other Apollo Investors. On September 2,
1997 the GranCare MOC unanimously approved, and recommended that the full
GranCare Board approve, the amendments to the June 12 GranCare Merger
Agreement (which amendments deal with matters relating to the selection of Mr.
Pitts and increasing the size of the Paragon Board) and on September 9, 1997,
the GranCare Board met and approved the amendments to the June 12 GranCare
Merger Agreement. On August 30, 1997 the LCA Board unanimously approved (with
two members absent) the amendments to the June 12 Merger Agreements, which
amendments with respect to the June 12 Recapitalization Merger Agreement are
similar to the amendments to the June 12 GranCare Merger Agreement. At this
meeting the LCA Board also determined to consent to GranCare's entering into
the TRA and to join as a party to the TRA. At the LCA Board Meeting on August
30, 1997, the LCA Financial Advisors advised the LCA Board that having
reviewed the TRA, the TRA
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would not cause the LCA Financial Advisors to change their opinion as
previously issued. Subsequently, as of September 9, 1997, the parties executed
and delivered amendments to the June 12 Merger Agreements.
On September 5, 1997, Apollo contacted GranCare to discuss the effect of
certain developments occurring subsequent to the execution of the June 12
GranCare Merger Agreement, principally (i) the terms of the TRA that require,
before or simultaneously with the consummation of the GranCare Merger, the
payment by GranCare of $18.5 million and $500,000, respectively, to Vitalink
and Manor Care in connection with the termination of the Non-Competition
Agreement (the "Termination Fee") (see "Certain Information Concerning
GranCare--Legal Proceedings") and (ii) the financial consequences of a likely
restructuring of GranCare's relationship with Health and Retirement Properties
Trust, a significant GranCare landlord ("HRPT"), to be undertaken in
connection with obtaining HRPT's consent to the GranCare Merger. See
"Description of Financing--Treatment of Certain Existing LCA and GranCare
Indebtedness--HRPT Obligations." Apollo believed that such developments would
increase the costs related to consummation of the Transactions and, as a
result, Apollo recommended the following adjustments to the Transactions (as
described below, the "Proposed Revisions"). After preliminary discussions with
GranCare regarding the Proposed Revisions, on September 8, 1997 Apollo
contacted LCA to discuss these matters.
With respect to the June 12 Recapitalization Merger Agreement, Apollo
proposed that the consideration to be paid under such agreement be adjusted to
increase the amount of stock to be received by LCA stockholders (while
maintaining the aggregate implied value of the consideration to be received by
such stockholders at $40.50 per share based on the $40.50 per share price of
Paragon Common Stock being paid by the Apollo Investors in the
Recapitalization Merger). Specifically, Apollo proposed that if no LCA Stock
Elections are made, each LCA stockholder would receive $40.50 per share in
cash with respect to approximately 90.54% (instead of 93%) of such
stockholder's shares and would retain approximately 9.46% (instead of 7%) of
such stockholder's shares as LCA Retained Shares.
With respect to the June 12 GranCare Merger Agreement, Apollo proposed that
the consideration to be paid under such agreement be adjusted to (i) provide
for an exchange ratio of 0.2346 (instead of 0.2469) of a share of Paragon
Common Stock for each outstanding share (instead of 90% of the shares) of
GranCare Common Stock and (ii) eliminate the GranCare Cash Election Option
(which would have paid GranCare stockholders $10.00 per share for 10% of
outstanding GranCare Common Stock). The proposed adjustments would cause
GranCare stockholders to receive in the GranCare Merger shares of Paragon
Common Stock having an implied value of $9.50 (based on the $40.50 per share
price of Paragon Common Stock being paid by the Apollo Investors in the
Recapitalization Merger), a decrease of $0.50 per share in the value of the
consideration to be received by GranCare stockholders as compared to the value
provided for by the previous versions of the GranCare Merger Agreement.
In order to maintain a minimum desired percentage of equity ownership
interest in Paragon, Apollo also proposed to increase the Apollo Investors'
equity investment from $228 million to $240 million. One effect of the
proposed adjustments to the components of the consideration to be received by
LCA and GranCare stockholders as well as the Apollo Investors' increased
equity investment would be to increase Paragon's equity by approximately $44
million from the amount that would have resulted from the transactions as
contemplated in the June 12 Merger Agreements. In addition, Apollo proposed
extending the date after which any party can terminate the Merger Agreements
from November 3, 1997 to November 17, 1997.
On September 9, 1997, the GranCare Board met with its advisors and reviewed
the Proposed Revisions. At the outset of such meeting, Mr. Petty explained to
the GranCare Board the nature of an investment in Paragon that two healthcare
funds with which Mr. Petty is affiliated are presently negotiating with Apollo
and stated that in light of such potential investment, he would recuse himself
from the deliberation and any formal action regarding the Proposed Revisions.
See "Interests of Certain Persons in the Transactions--Certain Investments in
Paragon." The GranCare Financial Advisors informed the GranCare Board that,
subject to review of the final form of the GranCare Merger Agreement and
certain other customary matters, the GranCare Financial Advisors would be in a
position to render to the GranCare Board, prior to the execution of such
amendment and restatement, their respective opinions to the effect that, as of
the date of such opinions and based upon and
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subject to certain matters stated therein, the Exchange Ratio was fair to
holders of GranCare Common Stock from a financial point of view. See "Opinions
of GranCare Financial Advisors." The GranCare Board also determined that the
implied value of $9.50 per share for the GranCare Common Stock continued to
represent a significant premium over the closing prices of GranCare Common
Stock, which ranged from $7.625 to $8.50 during the 30-day period preceding
the announcement of the Mergers. GranCare's legal advisors noted that the
elimination of the GranCare Cash Election Option would also eliminate the
uncertainty associated with the fulfillment of the condition in the June 12
GranCare Merger Agreement that not more than 10% of GranCare stockholders
exercise appraisal rights (as a result of the fact that the elimination of the
GranCare Cash Election Option also eliminates any dissenters' rights of
appraisal under the DCGL). In addition, elimination of the GranCare Cash
Election Option would also allow the form of the GranCare Merger to be
returned to a "reverse" merger wherein LCA Sub would merge with and into
GranCare with GranCare as the surviving corporation (which was the form set
forth in the Original GranCare Merger Agreement). The "reverse" merger
structure was initially contemplated in order to simplify certain licensure
and regulatory issues. The "forward" merger form was adopted in connection
with the addition of the GranCare Cash Election Option and was memorialized in
the June 12 GranCare Merger Agreement in order to retain the tax free nature
of the GranCare Merger (which would not have been available in a "reverse"
merger because of the GranCare Cash Election Option.) After full discussion of
the Proposed Revisions proposed by Apollo and considering the advice of
GranCare's Financial Advisors and legal advisors, the GranCare Board
determined that even though the GranCare Merger Consideration was effectively
being reduced by $0.50 per share of GranCare Common Stock, in light of the
factors discussed above, including the increased costs related to consummation
of the Transactions, approving the Proposed Revisions was still in the best
interests of GranCare's stockholders. Accordingly, the GranCare Board approved
the Proposed Revisions subject only to receiving the written opinions of the
GranCare Financial Advisors to the effect described above.
On September 12, 1997, the LCA Board (with one director absent) met with the
LCA Financial Advisors and outside counsel and reviewed the Proposed
Revisions. At this meeting, the LCA Financial Advisors (i) indicated that they
had utilized a per share market value range of $35 to $55 for the Paragon
Common Stock based on recent trading prices of LCA Common Stock and GranCare
Common Stock and current publicly available information regarding the proposed
Transactions, which range represented a significant discount from and a modest
premium to, respectively, the market value of Paragon Common Stock implied by
such trading prices, and (ii) advised the LCA Board that, based on the per
share value range described above and having reviewed the terms of the
Proposed Revisions, their analysis suggested that the aggregate value of the
consideration to be received and retained by the LCA stockholders in the
Transactions pursuant to the Proposed Revisions was substantially equal to the
value of the consideration to be received and retained by such stockholders
under the Transactions as proposed as of June 12, 1997, as previously approved
by the LCA Board. At the meeting, after full discussion of the Proposed
Revisions and after considering the advice of counsel and the advice of the
LCA Financial Advisors that the Proposed Revisions would not cause the LCA
Financial Advisors to change their opinions as previously issued, the LCA
Board approved the Merger Agreements (as amended to reflect the Proposed
Revisions) and the transactions contemplated thereby, subject to the LCA
Financial Advisors confirming their advice in written opinions, On September
17, 1997, the LCA Financial Advisors rendered their written opinions to the
effect that, based upon and subject to the assumptions, limitations and
qualifications set forth therein, as of the date of such opinions, the per
share consideration to be received and retained in the Transactions by the LCA
stockholders holding shares of LCA Common Stock prior to the Transactions
(which consideration was calculated by the LCA Financial Advisors on the
assumption that no LCA stockholders would make the LCA Stock Election and
therefore, based on the terms of the Proposed Revisions, all LCA stockholders
would receive and retain per share consideration of approximately $36.67 in
cash and 0.0946 shares of Paragon Common Stock) is fair to such stockholders
from a financial point of view. Subsequently, as of September 17, 1997, the
parties executed and delivered the amended and restated Merger Agreements as
described in this Proxy Statement/Prospectus.
REASONS FOR THE TRANSACTIONS; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
LCA Reasons for the Transactions. The LCA Board of Directors has unanimously
determined that the Transactions, are fair to and in the best interests of LCA
and its stockholders and recommend that holders of
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LCA Common Stock vote FOR approval of the LCA Proposals. THE LCA BOARD MAKES
NO RECOMMENDATION AS TO WHETHER LCA STOCKHOLDERS SHOULD OR SHOULD NOT MAKE AN
LCA STOCK ELECTION. EACH LCA STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION,
IN CONSULTATION WITH HIS OR HER OWN FINANCIAL AND TAX ADVISORS, AS TO WHETHER
TO MAKE AN LCA STOCK ELECTION.
In its deliberations and in making its determination and recommendation and
in authorizing the Original Merger Agreements on May 7, 1997, the LCA Board
consulted with the LCA Financial Advisors and counsel to the LCA Special
Committee (which acted as special counsel to the LCA Board) and LCA's outside
counsel, and considered a number of factors including, among others, the
following principal factors:
(i) The LCA Board's knowledge of the business, operations, properties,
assets, financial condition, operating results and prospects of LCA and of
changes in the health care industry, including increasing government
regulation and increasing competition.
(ii) The discussions held by the LCA Financial Advisors with various
third parties potentially interested in effecting an extraordinary
transaction with LCA as described under "--Background of Transactions"
above, including the terms, conditions and anticipated timing of the other
two offers that were received and a comparison of such terms, conditions
and anticipated timing with the terms, conditions and anticipated timing of
the Transactions (including the likelihood that the Other Bidder's Final
Offers would be able to be consummated more quickly than the Transactions
could be consummated).
(iii) The various strategic alternatives available to LCA, including
continuing without any extraordinary transaction, which alternatives are
set forth under "--Background of Transactions" above.
(iv) The presentations of the LCA Financial Advisors and their respective
oral opinions that, based upon and subject to the limitations,
qualifications and assumptions set forth therein, as of the date of such
opinions, the per share consideration to be received and retained in the
Transactions by the LCA stockholders holding shares of LCA Common Stock
prior to the Transactions is fair to such stockholders from a financial
point of view. See "--Opinions of LCA Financial Advisors" for a discussion
of the factors considered in rendering such opinions. The subsequent
opinions dated September 17, 1997, substantially identical to the May 7,
1997 opinions except for such revisions as were necessary to reflect
developments since May 7, 1997, are included as Annexes VI and VII hereto,
and should be read in their entirety.
(v) The fact that, pursuant to the Original Merger Agreements, if no LCA
stockholders make an LCA Stock Election, all stockholders would receive
approximately $37.665 in cash and retain 0.07 of a share of Paragon Common
Stock for each share of LCA Common Stock currently owned, and the belief of
the LCA Board, after consultation with the LCA Financial Advisors, that
such total consideration per share of LCA Common Stock was greater than the
total consideration per share of LCA Common Stock available pursuant to the
other offers that had been received or the values that could otherwise
likely be obtained at the present time or in the near future (including
such values that might result from continuing without any extraordinary
transaction). In this regard, the LCA Board noted that the Apollo Investors
would be purchasing Paragon Common Stock at $40.50 per share. Assuming that
the value of the LCA Retained Shares was equal to such $40.50 per share
price paid by the Apollo Investors, the LCA Board noted that LCA
stockholders would receive $40.50 in value for all their shares, which was
substantially in excess of the price contained in the Other Bidder's Final
Offers. As discussed below under "Opinions of LCA Financial Advisors," as
of May 7, 1997 the LCA Financial Advisors arrived at a range of
approximately $1.00 to $3.00 for each such 0.07 shares of Paragon Common
Stock by utilizing a trading value analysis and a fundamental valuation
analysis. The LCA Board noted that, even at the low end of this range, the
value of the consideration payable in the Transactions would exceed the
cash price per share payable pursuant to the Other Bidder's Final Offers.
(vi) The fact that the Apollo Investors would be acquiring shares of
Paragon Common Stock at a cash price of $40.50 per share and that, based on
such valuation, the value of the Transactions would be $40.50 per share of
LCA Common Stock for existing LCA stockholders, which represents a premium
of approximately 11.7% over the closing market price of LCA Common Stock of
$36.25 per share on May 6,
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1997, the last trading day prior to the May 7, 1997 LCA Board meeting, and
approximately 57.3% over the closing market price of LCA Common Stock of
$25.75 per share on December 16, 1996, the date of the first meeting
between the LCA Special Committee and the LCA Financial Advisors, and
represents a substantial premium over the market prices of LCA Common Stock
during the second half of 1996, which prices had ranged from $21.875 per
share to $27.625 per share (after trading as high as $40.50 in late
February 1996). In addition, the LCA Board considered that even if the
Paragon Common Stock traded following consummation of the Transactions at
less than such $40.50 per share price, the per share value of the
Transactions to LCA Stockholders pursuant to the Original Merger Agreements
of $37.665 in cash plus 0.07 of a share of Paragon Common Stock would still
represent a substantial premium to the market prices described above.
(vii) The fact that LCA stockholders would have the right to make or not
make LCA Stock Elections, which right would allow those LCA stockholders
who might desire to retain more than 7% of their LCA Common Stock after the
Transactions (the aggregate percentage provided for in the Original Merger
Agreements) to be able to do so (subject to possible proration). The LCA
Board also considered that pursuant to the Original Merger Agreements), LCA
stockholders not wishing to retain any Paragon Common Stock following the
Transactions might be required to retain up to 7% of their LCA Common Stock
as Paragon Common Stock in the Transactions and that there could be no
assurance as to the price at which such LCA Retained Shares could be sold.
The LCA Board was also aware that, since LCA stockholders would receive
cash in respect of 93% of their shares, their interest in Paragon would be
substantially less than their existing interest in LCA and, therefore, the
LCA Board did not give significant weight to GranCare's business and to the
benefits and detriments of combining that business with LCA's business. The
LCA Board also noted that Paragon would be highly leveraged with the risks
to stockholders which are associated with such degree of leverage. See
"Risk Factors--Leverage and Liquidity."
(viii) The terms and conditions of the Merger Agreements, including the
fact that consummation of the Transactions is subject, among other things,
to the availability of the Financing and to the affirmative vote of the
holders of a majority of the outstanding shares of GranCare Common Stock
(as well as the requisite vote of the holders of the outstanding shares of
LCA Common Stock on the LCA Proposals). With regard to financing, the LCA
Board also considered the terms and conditions of the Financing Commitment
Letter that Apollo and GranCare arranged and the risk that such conditions
might not be satisfied and the financing might not be obtained, as well as
the identities of the parties providing such commitments. The LCA Board
also considered the provisions of the Merger Agreements that prohibit
GranCare and LCA from soliciting acquisition proposals from third parties
but that permit (in the case of LCA, only during the period of 45 days from
the date of the Original Merger Agreements) either to respond to, or
negotiate with, a third party if the applicable Board of Directors, after
consultation with outside counsel, determines that it is required to do so
in the exercise of its fiduciary duties. The LCA Board also considered that
the Transactions would be subject to the approval by the GranCare
stockholders of the GranCare Merger Proposal and took into account that
there could be no assurance that such approval would be obtained. In this
regard, the LCA Board also considered the provisions of the GranCare Merger
Agreement that would require GranCare to pay LCA a $20 million fee (and
reimburse LCA's expenses) under certain circumstances if the GranCare Board
accepts a third party offer or withdraws its recommendation of the GranCare
Merger or if the GranCare stockholders do not approve the GranCare Merger
after a third party makes an offer to acquire GranCare and GranCare is
thereafter acquired under certain circumstances, and the provisions of the
Recapitalization Merger Agreement that would require LCA to pay Apollo a
$20 million fee (and reimburse up to $7 million of Apollo expenses) under
certain circumstances if the LCA Board accepts a third party offer or
withdraws its recommendations of the LCA Proposals or if the LCA
stockholders do not approve such proposals after a third party makes an
offer to acquire LCA and LCA is thereafter acquired under certain
circumstances.
(ix) The substantial investment to be made by the Apollo Investors and
the significant role to be played by Apollo in the governance of Paragon.
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(x) The anticipated tax treatment of the Transactions to LCA
stockholders. See "The Recapitalization Merger Agreement--Certain Federal
Income Tax Consequences" and "The GranCare Merger Agreement--Certain
Federal Income Tax Consequences."
(xi) The fact that both Mr. Beaver and Mr. Hurlbut, who own approximately
18% and 2%, respectively, of the outstanding LCA Common Stock, were in
favor of the Transactions.
In unanimously approving the amendments to the Original Merger Agreements on
June 12, 1997 (with one director absent) and on August 30, 1997, the LCA Board
consulted with counsel and the LCA Financial Advisors and considered, among
other things, the following principal factors: (i) GranCare's relationship
with Vitalink, the terms of the TRA and the terms of the consent that LCA
proposed to give GranCare; (ii) the LCA Financial Advisors' written opinions,
dated June 12, 1997, that, pursuant to the June 12 Merger Agreements and based
upon and subject to the limitations, qualifications and assumptions set forth
therein, as of such date, the per share consideration to be received and
retained in the Transactions by the LCA stockholders holding shares of LCA
Common Stock prior to the Transactions was fair to such stockholders from a
financial point of view; and (iii) the governance arrangements with respect to
Paragon (the proposed Paragon Charter and Bylaws and the Stockholders
Agreement), the additional investment by the Apollo Investors and the
anticipated makeup of Paragon's Board following the Transactions.
In approving the Proposed Revisions and the amended and restated Merger
Agreements, on September 12, 1997 the LCA Board consulted with the LCA
Financial Advisors and counsel and considered, among other things: (i) the LCA
Financial Advisors' advice that, based on an assumed per share market value
range of $35 to $55 for the Paragon Common Stock, the aggregate value of the
consideration to be received and retained by the LCA stockholders in the
Transactions pursuant to the Proposed Revisions would be substantially equal
to the aggregate value of the consideration to be received and retained by the
LCA stockholders in the Transactions pursuant to the June 12 Merger
Agreements; (ii) the LCA Financial Advisors' advice that the terms of the
Proposed Revisions would not cause the LCA Financial Advisors to change their
opinions as previously issued that the per share consideration to be received
and retained by the LCA stockholders in the Transactions, as amended by the
Proposed Revisions, was fair from a financial point of view; and (iii) the
increased equity investment in Paragon by Apollo and by current LCA and
GranCare stockholders pursuant to the Proposed Revisions. The LCA Board (with
one director absent) voted to approve the Proposed Revisions with two
directors voting against the Proposed Revisions. However, both such directors
indicated that they continued to consider the Transactions (after giving
effect to the Proposed Revisions) fair and in the best interests of LCA
stockholders, and voted with the other directors to recommend the Transactions
to the LCA stockholders.
The foregoing discussion of the information and factors considered by the
LCA Board is not intended to be exhaustive but includes all material factors
considered by the LCA Board. In view of the variety of factors considered in
connection with its evaluation of the Transactions, the LCA Board did not find
it practicable to, and did not, quantify or otherwise assign relative weights
to the specific factors considered in reaching its determination. In addition,
individual members of the LCA Board may have given different weights to
different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF LCA. FOR THE FOREGOING REASONS,
THE BOARD OF DIRECTORS OF LCA BELIEVES THAT THE MERGERS ARE FAIR TO AND IN THE
BEST INTERESTS OF LCA AND ITS STOCKHOLDERS AND HAS APPROVED THE MERGERS AND
THE OTHER TRANSACTIONS CONTEMPLATED HEREBY AND UNANIMOUSLY RECOMMENDS THAT THE
LCA STOCKHOLDERS VOTE FOR THE APPROVAL OF EACH OF THE LCA PROPOSALS. THE BOARD
OF DIRECTORS MAKES NO RECOMMENDATION AS TO WHETHER LCA STOCKHOLDERS SHOULD OR
SHOULD NOT MAKE AN LCA STOCK ELECTION. EACH LCA STOCKHOLDER SHOULD MAKE HIS OR
HER OWN DECISION, IN CONSULTATION WITH HIS OR HER OWN FINANCIAL AND TAX
ADVISORS, AS TO WHETHER OR NOT TO MAKE AN LCA STOCK ELECTION.
GranCare Reasons for the Transactions. At its meetings on May 7, 1997, June
12, 1997 and September 9, 1997, the Board of Directors of GranCare determined
that the GranCare Merger is fair to and in the best interests of GranCare and
its stockholders. Accordingly, it recommends approval of the GranCare Merger
Agreement and the GranCare Merger and the other transactions contemplated
thereby to the GranCare stockholders and
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recommends a vote FOR the approval of the GranCare Merger Proposal. In
reaching this conclusion and in authorizing the execution of the amendments to
the GranCare Merger Agreement, GranCare's Board of Directors consulted with
GranCare's management and legal advisors and the GranCare Financial Advisors,
and considered a number of factors, including the following principal factors:
(i) the familiarity of the Board of Directors of GranCare with GranCare's
business, operations and prospects and its review of the financial
performance and prospects of LCA, including the prospects of Paragon after
giving effect to the GranCare Merger;
(ii) the fact that the stockholders of GranCare receiving Paragon Common
Stock in the GranCare Merger would initially own, immediately after the
effective time of the GranCare Merger, a substantial percentage of the
outstanding shares of Paragon Common Stock and will be able to participate
in a larger and more diversified long-term care and medical services
company with a more diversified geographic coverage than GranCare on a
stand-alone basis;
(iii) the opinions of GranCare's Financial Advisors to the effect that,
as of the date of such opinions and based upon and subject to certain
matters stated therein, the Exchange Ratio was fair to the holders of
GranCare Common Stock from a financial point of view. See "--Opinions of
GranCare Financial Advisors;"
(iv) the fact that the value of the shares of Paragon Common Stock to be
received for shares of GranCare Common Stock (based on the $40.50 price per
share which the Apollo Investors will pay for the shares of Paragon Common
Stock acquired pursuant to the Recapitalization Merger and the Exchange
Ratio of 0.2346 of a share of Paragon Common Stock for each share of
GranCare Common Stock) implies that the GranCare Common Stock is valued at
$9.50 per share, which represented a substantial premium over the $7.75
closing price of the GranCare Common Stock on the day before the public
announcement on May 8, 1997 of the execution of the GranCare Merger
Agreement and a premium over the closing prices of the GranCare Common
Stock, which ranged from $7.625 to $8.50 during the thirty-day period
preceding such announcement (although the GranCare Board was aware that no
assurance could be given as to the price at which shares of Paragon Common
Stock would actually trade);
(v) the fact that the terms of the GranCare Merger Agreement and the
Recapitalization Merger Agreement were negotiated at arm's length,
including the provision in the GranCare Merger Agreement expressly
permitting GranCare to terminate the GranCare Merger Agreement, subject to
the payment of certain fees and expenses, in order to enter into a business
combination with a third party;
(vi) although the GranCare Board did not focus on specific amounts, an
analysis of the potential business synergies and significant cost savings
anticipated to be available by integrating the relative strengths of the
two companies (which management preliminarily estimated at the May 7
GranCare Board meeting could approximate $9.8 million for the remainder of
the first full calendar year following the Mergers, assuming that the
transactions had closed on June 30, 1997), particularly in respect of
customer base, geographic areas and operational strengths, thus creating
opportunities for revenue and profit margin enhancement (although the
GranCare Board was aware that no assurance could be given that such
synergies and opportunities could be realized or the timing or amount
thereof. See "Cautionary Statement Regarding Forward-Looking Statements");
(vii) the tax free nature of the Paragon Common Stock to be received as
GranCare Merger Consideration;
(viii) the Paragon capital structure and its high degree of leverage
which will reduce the flexibility of Paragon to respond to changing
business and economic conditions;
(ix) the degree of control that will be exercised by Apollo over the
management and policies of Paragon; and
(x) the belief of the GranCare Board, after consultation with counsel,
that the Transactions will not violate the Non-Competition Agreement with
Vitalink and Manor Care.
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In approving the amendments to the GranCare Merger Agreement on June 12,
1997, and September 9, 1997, the GranCare Board consulted with the GranCare
Financial Advisors and outside counsel. The GranCare Board considered, in
addition to the factors described above, (i) the adjustment in the form and
amount of the GranCare Merger Consideration reflected in the Proposed
Revisions; (ii) the increase in the costs related to consummation of the
Transaction including the Termination fee, the restructuring of the HRPT
relationship and obtaining the HRPT consent; (iii) the increased equity
investment by Apollo Investors; (iv) the opinions of the GranCare Financial
Advisors described below under "--Opinions of the GranCare Financial
Advisors;" (v) the fact that the revised structure of the GranCare Merger will
allow (x) the elimination of the uncertainty associated with the fulfillment
of the condition in the June 12 GranCare Merger Agreement that not more than
10% of GranCare Stockholders exercise appraisal rights and (y) the
simplification of certain licensure and regulatory issues arising in
connection with the GranCare Merger and (vi) the governance arrangements with
respect to Paragon (the proposed Paragon Charter and Bylaws and Stockholders
Agreement) and the anticipated makeup of Paragon's Board of Directors
following the consummation of the Transactions.
The foregoing discussion of the information and factors considered by the
GranCare Board is not intended to be exhaustive. In view of the variety of
factors considered in connection with its evaluation of the Transactions, the
GranCare Board did not find it practicable to, and did not, quantify or
otherwise assign relative weights to the specific factors considered in
reaching its determination. In addition, individual members of the GranCare
Board may have given different weights to different factors.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GRANCARE. FOR THE FOREGOING
REASONS, THE BOARD OF DIRECTORS OF GRANCARE BELIEVES THAT THE GRANCARE MERGER
IS FAIR TO, AND IN THE BEST INTERESTS OF, GRANCARE AND ITS STOCKHOLDERS AND
HAS APPROVED THE GRANCARE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED
THEREBY AND RECOMMENDS THAT THE GRANCARE STOCKHOLDERS VOTE FOR THE APPROVAL OF
THE GRANCARE MERGER PROPOSAL.
OPINIONS OF LCA FINANCIAL ADVISORS
Opinion of Credit Suisse First Boston Corporation
CSFB was retained by LCA to act as financial advisor to the LCA Special
Committee. In connection with such engagement, the LCA Special Committee
requested that CSFB evaluate the fairness, from a financial point of view, to
the LCA stockholders holding shares of LCA Common Stock prior to the
Transactions of the consideration per share of LCA Common Stock to be received
and retained in the Transactions by such stockholders.
On May 7, 1997, at a meeting of the LCA Board held to evaluate the
Transactions (as originally constituted), CSFB delivered an oral opinion
subsequently confirmed by delivery of a written opinion dated May 7, 1997 to
the LCA Board to the effect that, based upon and subject to the assumptions,
qualifications and limitations set forth therein, as of such date, the
consideration per share of LCA Common Stock to be received and retained in the
Transactions by the LCA stockholders holding shares of LCA Common Stock prior
to the Transactions is fair to such stockholders from a financial point of
view. On June 12, 1997, CSFB delivered its written opinion, dated the date
thereof which was substantially identical to CSFB's May 7, 1997 opinion except
for revisions to reflect the amendments to the June 12, 1997 Merger
Agreements. On September 16, 1997 CSFB delivered its opinion, which is
substantially identical to CSFB's June 12, 1997 opinion except for revisions
to reflect the TRA, the amendments to the June 12 Merger Agreements and the
Proposed Revisions. No limitations were imposed by LCA with respect to the
investigations made or the procedures followed by CSFB in rendering its
opinion.
THE FULL TEXT OF THE OPINION OF CSFB, DATED SEPTEMBER 16, 1997, WHICH SETS
FORTH ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY CSFB, IS ATTACHED HERETO AS ANNEX VI
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AND SHOULD BE READ CAREFULLY IN ITS ENTIRETY. CSFB HAS CONSENTED TO THE
REPRODUCTION OF ITS FAIRNESS OPINION AS ANNEX VI AND TO THE INCLUSION OF THE
SUMMARY THEREOF HEREIN. IN GIVING SUCH CONSENT, CSFB DOES NOT ADMIT THAT IT
COMES WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER SECTION 7
OF THE SECURITIES ACT, OR THE RULES AND REGULATIONS OF THE COMMISSION
THEREUNDER, NOR DOES IT THEREBY ADMIT THAT IT IS AN EXPERT WITH RESPECT TO ANY
PART OF THE REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS
A PART WITHIN THE MEANING OF THE TERM "EXPERTS" AS USED IN THE SECURITIES ACT,
OR THE RULES AND REGULATIONS OF THE COMMISSION THEREUNDER. CSFB'S OPINION WAS
FOR THE INFORMATION OF THE LCA BOARD IN CONNECTION WITH THE LCA BOARD'S
CONSIDERATION OF THE TRANSACTIONS AND DOES NOT CONSTITUTE A RECOMMENDATION TO
ANY LCA STOCKHOLDER AS TO WHAT ACTIONS SUCH STOCKHOLDER SHOULD TAKE WITH
RESPECT TO, OR HOW SUCH STOCKHOLDER SHOULD VOTE ON, THE LCA PROPOSALS OR
WHETHER ANY LCA STOCKHOLDER SHOULD MAKE AN LCA STOCK ELECTION. THE SUMMARY OF
THE OPINION OF CSFB SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO THE FULL TEXT OF SUCH OPINION.
In arriving at its opinions, CSFB reviewed certain publicly available
business and financial information relating to LCA, as well as: (i) the Merger
Agreements; (ii) the TRA; and (iii) this Proxy Statement/Prospectus. CSFB also
reviewed certain other information, including financial forecasts, provided to
CSFB by LCA and met with LCA's management to discuss the business and
prospects of LCA. In addition, CSFB performed a limited review of, and
discussed with GranCare management and its advisors, certain publicly
available and other information, including information regarding GranCare and
Paragon, provided to CSFB by GranCare and its advisors. CSFB also considered
certain financial and stock market data of LCA and GranCare, compared that
data with similar data for other publicly held companies in businesses similar
to those of LCA, GranCare and Paragon and considered, to the extent publicly
available, the financial terms of certain other business combinations and
other transactions which have recently been effected. CSFB also considered
such other information, financial studies, analyses and investigations and
financial, economic, regulatory and market criteria as it deemed relevant.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the foregoing information and relied on its
being complete and accurate in all material respects. With respect to the
financial forecasts, CSFB assumed that they were reasonably prepared in good
faith on bases reflecting the best currently available estimates and judgments
of LCA's management, or GranCare's management, as the case may be, as to the
future financial performance of LCA and GranCare. CSFB did not make an
independent evaluation or appraisal of the assets or liabilities (contingent
or otherwise) of LCA or GranCare, nor were they furnished with any such
evaluations or appraisals.
CSFB's opinions were necessarily based upon financial, economic, market and
other conditions as they existed and could be evaluated on the dates of the
respective opinions. In addition, for purposes of rendering its opinions, CSFB
assumed that, in the Transactions, none of the LCA stockholders will make an
LCA Stock Election and, accordingly, that all LCA stockholders will receive
$40.50 in cash per LCA share for approximately 90.54% (in the September 17
opinion) 93% (in the May 7 and June 12 opinions) or of their shares of LCA
Common Stock and retain 9.46% (in the September 17 opinion) approximately 7%
(in the May 7 and June 12 opinions) or of their shares of LCA Common Stock
(resulting in a consideration per share of LCA Common Stock of approximately
approximately $36.67 and .0946% shares of Paragon Common Stock at the time of
the September 17 opinion) $37.665 in cash and 0.07 shares of Paragon Common
Stock at the time of May 7 and June 12 opinions and CSFB did not express any
opinion regarding the price at which shares of Paragon Common Stock will trade
subsequent to the Transactions.
Opinion of NationsBanc Capital Markets, Inc.
NationsBanc was retained by LCA to act as financial advisor to the LCA
Special Committee in connection with the Transactions. In connection with such
engagement, the LCA Board requested that NationsBanc evaluate the fairness,
from a financial point of view, to the LCA stockholders holding shares of LCA
Common Stock prior to the Transactions of the consideration per share of LCA
Common Stock to be received and retained in the Transactions by the LCA
stockholders.
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On May 7, 1997, at a meeting of the LCA Board held to evaluate the
Transactions (as originally constituted), NationsBanc delivered an oral
opinion (subsequently confirmed by delivery of a written opinion dated May 7,
1997) to the LCA Board to the effect that, subject to the assumptions,
qualifications and limitations set forth therein, as of the date of the
opinion, the per share consideration of LCA Common Stock to be received and
retained in the Transactions by the LCA stockholders holding shares of LCA
Common Stock prior to the Transactions is fair to the LCA stockholders from a
financial point of view. On June 12, 1997, NationsBanc delivered its written
opinion dated the date thereof, which was substantially identical to
NationsBanc's May 7, 1997 opinion except for revisions to reflect the
amendments to the Original Merger Agreements. On September 17, 1997
NationsBanc delivered its opinion, which is substantially identical to
NationsBanc's June 12, 1997 opinion except for revisions to reflect the TRA,
the amendments to the June 12 Merger Agreements and the Proposed Revisions. No
limitations were imposed by LCA with respect to the investigations made or the
procedures followed by NationsBanc in rendering its opinion.
THE FULL TEXT OF THE OPINION OF NATIONSBANC, DATED SEPTEMBER 17, 1997, WHICH
SETS FORTH ASSUMPTIONS, MATTERS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY NATIONSBANC, IS ATTACHED HERETO AS ANNEX VII AND SHOULD BE READ
CAREFULLY IN ITS ENTIRETY. NATIONSBANC HAS CONSENTED TO THE REPRODUCTION OF
ITS FAIRNESS OPINION AS ANNEX VII AND TO THE INCLUSION OF THE SUMMARY THEREOF
HEREIN. IN GIVING SUCH CONSENT, NATIONSBANC DOES NOT ADMIT THAT IT COMES
WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER SECTION 7 OF
THE SECURITIES ACT OR THE RULES AND REGULATIONS OF THE COMMISSION THEREUNDER,
NOR DOES IT THEREBY ADMIT THAT IT IS AN EXPERT WITH RESPECT TO ANY PART OF THE
REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART
WITHIN THE MEANING OF THE TERM "EXPERTS" AS USED IN THE SECURITIES ACT, OR THE
RULES AND REGULATIONS OF THE COMMISSION THEREUNDER. THE OPINION OF NATIONSBANC
WAS FOR THE INFORMATION OF THE LCA BOARD IN CONNECTION WITH THE LCA BOARD'S
CONSIDERATION OF THE TRANSACTIONS AND DID NOT CONSTITUTE A RECOMMENDATION TO
ANY LCA STOCKHOLDER AS TO WHAT ACTIONS SUCH STOCKHOLDER SHOULD TAKE WITH
RESPECT TO, OR HOW SUCH STOCKHOLDER SHOULD VOTE ON, THE LCA PROPOSALS OR
WHETHER ANY LCA STOCKHOLDER SHOULD MAKE AN LCA STOCK ELECTION. THE SUMMARY OF
THE OPINION OF NATIONSBANC SET FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In the course of rendering its opinions, NationsBanc reviewed certain
publicly available business and financial information regarding LCA as well
as: (i) the Merger Agreements; (ii) the TRA; and (iii) this Proxy
Statement/Prospectus. NationsBanc also reviewed LCA's business plans through
information provided to NationsBanc by LCA management and held a number of
meetings with executive corporate, regional and divisional management of LCA,
with whom NationsBanc discussed LCA and its future prospects. NationsBanc
reviewed certain financial projections, and assumed that such projections were
reasonably prepared in good faith on bases reflecting management's best
currently available estimates and judgments as to the future financial
performance of LCA. In addition, NationsBanc performed a limited review of,
and discussed with GranCare management and its advisors, certain publicly
available and other information regarding GranCare and Paragon provided to
NationsBanc by GranCare prior to the date of the Original Merger Agreement.
NationsBanc also reviewed the publicly available financial and business data
and stock market performance of public companies that NationsBanc deemed
generally comparable to LCA, GranCare and Paragon and considered, to the
extent publicly available, the financial terms of recent acquisition
transactions that NationsBanc deemed comparable to the Transactions.
NationsBanc further reviewed such other financial studies and information,
performed such other analyses, inquiries and investigations and took into
account such other matters as NationsBanc deemed appropriate, including its
assessment of general economic, market, regulatory and monetary conditions as
they existed as of the date of the opinion.
In addition, for purposes of rendering its opinions, NationsBanc assumed
that, in the Transactions, none of the LCA stockholders will make an LCA Stock
Election and, accordingly, that all LCA stockholders will receive $40.50 in
cash per share of LCA Common Stock for approximately 90.54% (in the September
17 opinion) or 93% (in the May 7 and June 12 opinions) of their LCA shares and
retain approximately 9.46% (in the September 17 opinion) or 7% (in the May 7
and June 12 opinions) of their shares of LCA Common Stock (resulting in
consideration per share of LCA Common Stock of approximately $36.67 and .0946
shares of Paragon Common Stock (at the time of the September 17 opinion) or
$37.665 in cash and 0.07 shares of Paragon Common Stock
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(at the time of the May 7 and June 12 opinions). It should be understood that,
although subsequent developments may affect its opinion, NationsBanc does not
have any obligation to update, revise or reaffirm its opinion. NationsBanc
expressed no opinion as to the price at which Paragon Common Stock will
actually trade at any time. NationsBanc's opinion did not address the relative
merits of the Transactions and the other business strategies being considered
by the LCA Board, nor did it address the LCA Board decision to proceed with
the Transactions. NationsBanc's opinion did not make any recommendation to any
stockholder as to what actions such stockholder would take with respect to, or
how such stockholder should vote on the LCA Proposals.
Analyses Performed by the LCA Financial Advisors
The following is a summary of the presentation by the LCA Financial Advisors
at the May 7, 1997 meeting of the LCA Board of certain financial and
comparative analyses, performed in connection with their respective opinions.
Because each firm initiated its financial analysis independently, each of the
LCA Financial Advisors rendered its own opinion to LCA. However, prior to
making their May 7 presentation to the LCA Board, the LCA Financial Advisors
met and agreed upon an appropriate joint presentation, which is summarized
below.
The LCA Financial Advisors arrived at a range of values for LCA by utilizing
three principal valuation methodologies: a discounted cash flow analysis, a
comparable company analysis and a comparable acquisition analysis. These
valuation methodologies were applied to LCA as an integrated entity and to its
individual operational business units (long-term care ("LTC"), ARS and APS).
Based on the foregoing analyses, the LCA Financial Advisors determined an
overall pre-tax enterprise reference range of $1 billion to $1.15 billion, to
which the LCA Financial Advisors made a debt adjustment to determine an equity
value per share reference range of $34 to $42 for LCA. Discounted cash flow
analysis provides insight into the intrinsic value of a company based on
projected earnings and capital requirements and the subsequent cash flows
generated by the assets of the target company. Comparable company analysis
analyzes a company's operating performance and outlook relative to a group of
publicly traded peers to determine an implied unaffected market trading value.
Comparable acquisition analysis provides a valuation range based upon
financial information of companies in the same or similar industries as the
target which have been acquired in selected recent transactions. No company
used in the comparable company analyses described below is identical to LCA
and no transaction used in the comparable acquisition analyses described below
is identical to the Transactions. Accordingly, an analysis of the results of
analyses described below necessarily involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value or
the acquisition value of the companies to which they are being compared.
LCA as Integrated Entity
Discounted Cash Flow Analysis. The LCA Financial Advisors performed
discounted cash flow analyses of the projected unlevered free cash flows of
LCA for the fiscal years 1997 through 2001 based on (i) the internal financial
projections in its three main business lines (LTC (including corporate
overhead), ARS and APS) (the "Case 1 financial projections") and (ii)
financial projections for LCA based on management projections, adjusted to
reflect no incremental reduction of overhead, flat or declining margins,
slower sales growth and no working capital investment improvements (the "Case
2 financial projections"). In conducting the discounted cash flow analysis,
the LCA Financial Advisors assumed discount rates of 11.0% to 14.0% (with
particular focus on discount rates of 12.0% to 13.0%) and terminal multiples
of year 2001 EBITDA of 6x to 9x (with particular focus on multiples of 7x to
8x), terminal multiples of year 2001 unlevered net income of 13x to 19x (with
particular focus on multiples of 15x and 17x) and terminal values at a cash
flow perpetuity growth rate of 6.0% to 9.0% (with a particular focus on rates
of 7.0% to 8.0%). This analysis resulted in an enterprise value range for LCA
of $1.055 billion to $1.225 billion based on the Case 1 financial projections
and $880 million to $1.025 billion based on the Case 2 financial projections.
Comparable Company Analysis. The LCA Financial Advisors compared, among
other things, the market values and trading multiples of LCA with the
following group of long-term care companies (the "Selected
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Companies"): Arbor Health Care, Beverly Enterprises, Inc., Genesis Health
Ventures, Inc., GranCare, Health Care and Retirement Corporation, Horizon/CMS
Healthcare Corporation, Integrated Health Services, Manor Care, Inc., Mariner
Health Group, Inc., Multicare Companies, Inc., National Healthcare L.P.,
Regency Health Services, Inc., Summit Care Corporation, Sun Healthcare Group,
Inc. and Vencor, Inc. The Selected Companies were chosen because they are
publicly-traded companies with operations that for purposes of analysis may be
considered most similar to LCA. The multiples and ratios for LCA were based on
information provided by LCA management and the multiples for each of the
Selected Companies were based on the most recent publicly available
information or on estimates of selected investment banking firms. The LCA
Financial Advisors compared adjusted market values (i.e., market value of
common equity plus value of debt less cash) as multiples of latest twelve
months ("LTM") revenues, LTM earnings before interest, taxes, depreciation and
amortization ("EBITDA") and LTM earnings before interest and taxes ("EBIT").
CSFB's analyses of the Selected Companies indicated multiples of LTM revenue
which ranged from 0.6x to 2.1x, LTM EBITDA which ranged from 6.1x to 14.4x and
LTM EBIT which ranged from 8.4x to 25.3x. The LCA Financial Advisors also
considered for the Selected Companies market value as a multiple of tangible
book value which ranged from 0.9x to 11.9x, LTM price/earnings ("P/E")
multiples which ranged from 6.3x to 24.6x, and estimated calendar year 1997
P/E multiples, which ranged from 9.9x to 21.3x. The ratio of estimated
calendar year 1997 P/E to the estimated five-year growth rate ranged from
54.8% to 118.2% for the Selected Companies. The ratio of the current stock
price to the LTM high price ranged from 35.3% to 104.2% for the Selected
Companies. Based on such analysis, the LCA Financial Advisors determined a
pre-tax enterprise value range of $900 million to $1.025 billion for LCA.
Comparable Acquisition Analysis. The LCA Financial Advisors analyzed certain
information relating to the following 24 selected transactions
(target/acquiror) in the long-term care industry in reverse chronological
order of announcement date since mid-1993: Northport Health Services/GranCare,
Horizon/CMS Healthcare/HealthSouth, Retirement Care Associates/Sun Healthcare
Group, Allegis Health Services/Mariner Health Group, Geriatric &
Medical/Genesis Health Ventures, ADS Group/Multicare Companies, National
Healthcare Affiliates/Genesis Health Ventures, Liberty Healthcare L.P./Regency
Health Services, Glenmark Associates/Multicare Companies, McKerley Health Care
Centers/Genesis Health Ventures, Evergreen HealthCare/GranCare, The Hillhaven
Corporation/Vencor, Inc., The Brian Center Corporation/LCA, Nationwide
Care/The Hillhaven Corporation, CSI/Mariner Health Group, People CARE
Heritage/Horizon Healthcare, Providence Health Care, Inc./The Multicare
Companies, Pinnacle Care Corporation/Mariner Health Group, The Mediplex Group
Inc./Sun Healthcare Group Inc., Care Enterprises, Inc./Regency Health
Services, Inc., Central Park Lodges/Integrated Health Services, Meridian
Healthcare, Inc./Genesis Health Ventures, Greenery Rehabilitation
Group/Horizon Healthcare and Vari-Care/LCA (the "Selected Transactions"). Such
analysis indicated that for the Selected Transactions, excluding multiples
that were not available or not meaningful, (i) adjusted purchase price (i.e.,
equity value plus debt and minority interest less cash) as a multiple of (a)
LTM Sales ranged from 0.5x to 2.3x, (b) LTM EBITDA ranged from 7.4x to 23.6x
and (c) LTM EBIT ranged from 9.4x to 68.7x and (ii) equity purchase price as a
multiple of (a) LTM net income ranged from 13.2x to 39.5x and (b) LTM book
value ranged from 1.4x to 11.8x. Based on such analysis, the LCA Financial
Advisors determined a pre-tax enterprise value range of $1 billion to $1.25
billion.
Operational Business Unit Analysis
The LCA Financial Advisors applied a comparable company analysis, a
comparable acquisition analysis and a discounted cash flow analysis to each of
the LTC, ARS and APS operational business unit to arrive at a pre-tax
enterprise reference range for each such operational business unit. After
adjusting for corporate overhead, the LCA Financial Advisors determined a pre-
tax enterprise reference range of $995 million to $1.225 billion based on the
operational business unit analysis.
LTC. Based on the following valuation analyses, the LCA Financial Advisors
determined a pre-tax enterprise reference range of $625 million to $750
million for LTC.
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Discounted Cash Flow Analysis. The LCA Financial Advisors performed
discounted cash flow analyses of the projected unlevered free cash flows of
LTC for the fiscal years 1997 through 2001 based on (i) the Case 1 financial
projections and (ii) the Case 2 financial projections. In conducting the
discounted cash flow analysis, CSFB assumed discount rates of 11% to 14% (with
particular focus on discount rates of 12% to 13%) and terminal multiples of
year 2001 EBITDA of 5x to 8x (with particular focus on multiples of 6x to 7x),
terminal multiples of year 2001 unlevered net income of 11x to 17x and
terminal values at a cash flow perpetuity growth rate of 4.5% to 7.5%.
Comparable Company Analysis. The LCA Financial Advisors compared, among
other things, the market values and trading multiples of the Selected
Companies. The LCA Financial Advisors' analyses of the Selected Companies
indicated multiples of LTM revenue which ranged from 0.6x to 2.1x, LTM EBITDA
which ranged from 6.1x to 14.4x and LTM EBIT which ranged from 8.4x to 25.3x.
The LCA Financial Advisors also considered for the Selected Companies market
value as a multiple of tangible book value which ranged from 0.9x to 11.9x,
LTM P/E multiples which ranged from 6.3x to 24.6x and estimated calendar year
1997 P/E multiples which ranged from 9.9x to 21.3x. The ratio of estimated
calendar year 1997 P/E to the estimated five-year growth rate ranged from
54.8% to 118.2% for the Selected Companies. The ratio of the current stock
price to the LTM high price ranged from 35.3% to 104.2% for the Selected
Companies.
Comparable Acquisition Analysis. The LCA Financial Advisors analyzed certain
information relating to the Selected Transactions. Such analysis indicated
that for the Selected Transactions, excluding multiples that were not
available or not meaningful, (i) adjusted purchase price as a multiple of (a)
LTM Sales ranged from 0.5x to 2.3x, (b) LTM EBITDA ranged from 7.4x to 23.6x
and (c) LTM EBIT ranged from 9.4x to 68.7x and (ii) equity purchase price as a
multiple of (a) LTM net income ranged from 13.2x to 39.5x and (b) LTM book
value managed from 1.4x to 11.8x.
ARS. Based on the following valuation analysis, the LCA Financial Advisors
determined a pre-tax enterprise reference range of $200 million to $250
million for ARS.
Discounted Cash Flow Analysis. The LCA Financial Advisors performed
discounted cash flow analyses of the projected unlevered free cash flows of
ARS for the fiscal years 1997 through 2001 based on (i) the Case 1 financial
projections and (ii) the Case 2 financial projections. In conducting the cash
flow analysis, CSFB assumed discount rates of 12% to 15% (with particular
focus on discount rates of 13% to 14%) and terminal multiples of year 2001
EBITDA of 6x to 9x (with particular focus on multiples of 7x to 8x), terminal
multiples of year 2001 unlevered net income of 13x to 19x and terminal values
at a cash flow perpetuity growth rate of 5.0% to 8.0%.
Comparable Company Analysis. The LCA Financial Advisors compared, among
other things, market values and trading multiples of the following publicly-
traded rehabilitation companies: HealthSouth Rehabilitation Corporation,
Novacare Inc., Rehabcare Corp. and U.S. Physical Therapy, Inc. (the
"Rehabilitation Companies"). The LCA Financial Advisors' analyses of the
Rehabilitation Companies indicated adjusted market values as multiples of LTM
revenue which ranged from 1.1x to 3.4x, of LTM EBITDA which ranged from 8.7x
to 12.7x and of LTM EBIT which ranged from 10.9x to 23.0x. For the
Rehabilitation Companies, excluding multiples that were not meaningful, market
value as a multiple of tangible book value ranged from 5.6x to 55.5x, LTM P/E
multiples ranged from 20.0x to 29.7x, estimated calendar year 1997 P/E
multiples ranged from 15.1x to 22.3x, the ratio of estimated calendar year
1997 P/E to the estimated five-year growth rate ranged from 50.3% to 126.9%
and the ratio of the current stock price to LTM high price ranged from 79.2%
to 103.7%.
Comparable Acquisition Analysis. The LCA Financial Advisors analyzed certain
information relating to the following ten selected transactions
(target/acquiror) in the rehabilitation industry in reverse chronological
order of announcement date since mid-1993: TheraTx/Vencor, Pacific
Rehabilitation & Sports Medicine/Horizon/CMS Healthcare Corporation,
Professional Sports Care Management/HealthSouth Corp., Advantage Health
Corp./HealthSouth Corp., Rehability/Living Centers of America, Caremark
Orthopedic Services, Inc. (Caremark)/HealthSouth Corp., Rehab Systems Co.
(NovaCare)/HealthSouth Corp., Relife,
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Inc./HealthSouth Corp., RehabClinics/ NovaCare and Rehabilitation Hospital
Corporation of America/NovaCare (the "Rehabilitation Transactions"). Such
analysis indicated that for the Rehabilitation Transactions, excluding
multiples that were not available, (i) adjusted market value as a multiple of
(a) LTM Sales ranged from 0.7x to 2.8x, (b) LTM EBITDA ranged from 9.0x to
29.7x and (c) LTM EBIT ranged from 11.0x to 71.9x and (ii) equity market value
as a multiple of LTM net income ranged from 16.1x to 37.9x and (b) LTM book
value ranged from 0.8% to 13.1%.
APS. Based on the following valuation analyses, the LCA Financial Advisors
determined a pre-tax enterprise reference range of $350 million to $425
million for APS.
Discounted Cash Flow Analysis. The LCA Financial Advisors performed
discounted cash flow analyses of the projected unlevered free cash flows of
APS for the fiscal years 1997 through 2001 based on (i) the Case 1 financial
projections and (ii) the Case 2 financial projections. In conducting the cash
flow analysis, the LCA Financial Advisors assumed discount rates of 13% to 16%
(with particular focus on discount rates of 14% to 15%) and terminal multiples
of year 2001 EBITDA of 9x to 12x (with particular focus on multiples of 10x to
11x), terminal multiples of year 2001 unlevered net income of 17x to 23x and
terminal values at a cash flow perpetuity growth rate of 9.0% to 12.0%.
Comparable Company Analysis. The LCA Financial Advisors compared, among
other things, market values and trading multiples of the following publicly
traded institutional pharmacy companies: American Medserve Corporation,
Capstone Pharmacy Services Inc., NCS Healthcare Inc., Omnicare Inc. and
Vitalink Pharmacy Services (the "Pharmacy Companies"). The LCA Financial
Advisors' analyses of the Pharmacy Companies indicated, excluding multiples
that were not meaningful, adjusted market values as multiples of LTM revenue
which ranged from 1.0x to 3.3x, of LTM EBITDA which ranged from 9.1x to 35.0x
and of LTM EBIT which ranged from 12.9x to 28.2x. For the Pharmacy Companies,
market value as a multiple of tangible book value ranged from 3.1x to 11.3x,
LTM P/E multiples ranged from 16.7x to 50.0x, estimated calendar year 1997 P/E
multiples ranged from 13.8x to 33.5x, the ratio of estimated calendar year
1997 P/E to the estimated five-year growth rate ranged from 69.1% to 134.2%
and the ratio of the current stock price to LTM high price ranged from 57.9%
to 81.5%.
Comparable Acquisition Analysis. The LCA Financial Advisors analyzed certain
information relating to the following six selected transactions
(target/acquiror) in the institutional pharmacy industry in reverse
chronological order of announcement date since August 1994: PCA (Beverly
Entertainment)/Capstone Pharmacy, Owen Healthcare/ Cardinal Health Inc.,
TeamCare/Vitalink Pharmacy, Symphony Pharmacy Services (Integrated Health
Services)/Capstone Pharmacy Services, Evergreen Pharmaceutical/Omnicare and
Abbey Pharmaceutical Services/Living Centers of America (the "Pharmacy
Transactions"). Such analysis indicated that for the Pharmacy Transactions,
excluding multiples that were not available, (i) adjusted market value as a
multiple of (a) LTM Sales ranged from 0.9x to 1.7x, (b) LTM EBITDA ranged from
6.2x to 18.8x and (c) LTM EBIT ranged from 7.2x to 28.4x and (ii) equity
market value as a multiple of LTM net income ranged from 11.2x to 46.1x.
Consideration Valuation. In analyzing the value of the consideration, the
LCA Financial Advisors assumed that no LCA stockholders would make an LCA
Stock Election. The LCA Financial Advisors performed their analysis based on
an Apollo/GranCare bid of $40.00 in cash per share of LCA Common Stock for
approximately 92.5% of the shares of LCA Common Stock. This would have caused
each LCA stockholder to receive $37.00 in cash and 0.075 shares of Paragon
Common Stock per present share of LCA Common Stock. During the course of the
LCA Financial Advisors' May 7, 1997 presentation to the LCA Board,
Apollo/GranCare's proposal was changed slightly, which the LCA Financial
Advisors concluded had no negative impact on fairness. The LCA Financial
Advisors thus arrived at a range of values of approximately $1.00 to $3.00 for
each 0.07 share of Paragon Common Stock by utilizing a trading value analysis
and a fundamental valuation analysis and assuming that the Recapitalization
Merger would qualify for recapitalization accounting treatment. Under the
trading value analysis, the LCA Financial Advisors projected Paragon's income
statement under different scenarios and applied a P/E multiple to estimate an
equity trading value. Under the fundamental
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valuation analysis, the LCA Financial Advisors added an estimated value of
LCA, GranCare and potential synergies, and subtracted estimated transaction
costs to arrive at a fundamental valuation for Paragon.
General. The summary set forth above does not purport to be a complete
description of the analyses performed by the LCA Financial Advisors. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. The LCA Financial
Advisors believe that their analyses must be considered as a whole and that
selecting portions of their analyses and other factors considered by them,
without considering all factors and analyses, would create an incomplete view
of the process underlying its opinion. No company or transaction used in the
above analyses as a comparison is directly comparable to LCA or GranCare or
the contemplated transaction. The LCA Financial Advisors did not quantify the
effect of each factor upon their valuation. In performing their analyses, the
LCA Financial Advisors made numerous assumptions with respect to industry
performance, general business and economic conditions and other matters, many
of which are beyond the control of LCA or the LCA Financial Advisors. The
analyses performed by the LCA Financial Advisors are not necessarily
indicative of actual values, which may be significantly more or less favorable
than suggested by such analyses. Additionally, analyses relating to the values
of businesses do not purport to be appraisals or to reflect the prices at
which such businesses actually may be sold. The analyses performed were
prepared solely as part of the LCA Financial Advisors' analysis of the
fairness of the consideration to be received and retained in the Transactions
by LCA stockholders holding shares of LCA Common Stock prior to the
Transactions and were provided to the LCA Board in connection with the
delivery of the LCA Financial Advisors' opinions. Because such analyses are
inherently subject to uncertainty, none of LCA, the LCA Board or management,
the LCA Financial Advisors or any other person assumes responsibility if
future events do not conform to the judgments reflected in the respective
opinion of the LCA Financial Advisors.
Engagement of LCA Financial Advisors. The LCA Special Committee retained the
LCA Financial Advisors based upon their experience and expertise. Both CSFB
and NationsBanc are nationally recognized investment banking and advisory
firms. CSFB and NationsBanc, as part of their respective investment banking
businesses, are continuously engaged in the valuation of businesses and
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive biddings, secondary distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes. The LCA Financial Advisors have provided, and continue to provide,
certain other financial advisory, investment banking and agency services to
LCA and its affiliates. In the ordinary course of business, the LCA Financial
Advisors and their affiliates may actively trade the debt and equity
securities of both LCA and GranCare for their own account and for the accounts
of customers and, accordingly, may at any time hold a long or short position
in such securities.
In addition, with the consent of the LCA Board, CSFB has agreed to act as
one of the initial purchasers or co-managers of the proposed offering of Notes
expected to be issued to finance the Transactions.
Atlantic Equity Corporation ("AEC"), an affiliate of NationsBanc, owns an
approximate 1.5% limited partnership interest in Apollo Investment Fund III,
L.P., one of the funds under management of Apollo with respect to which AEC
has no investment discretion. Accordingly, AEC will indirectly own
approximately a 1.5% interest in Apollo's investment in Paragon. In addition,
Apollo has indicated to NationsBanc that NationsBanc and/or its affiliates may
provide certain financing relating to the Transactions.
Pursuant to engagement letter agreements between LCA and each of the LCA
Financial Advisors (the "Engagement Letters"), the LCA Financial Advisors
agreed to act as financial advisors to the LCA Special Committee in connection
with the Transactions and will receive fees for their services (including
rendering their opinions), aggregating approximately $7 million, which will be
shared equally between the two LCA Financial Advisors with $2.85 million of
CSFB's fee and $3.0 million of NationsBanc's fee being contingent upon the
consummation of the Transactions (or consummation of certain other types of
transactions involving LCA). In addition, the Engagement Letters provide that
LCA will reimburse the LCA Financial Advisors for their reasonable out-of-
pocket expenses and will indemnify each of the LCA Financial Advisors against
certain liabilities incurred in connection with their services.
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OPINIONS OF GRANCARE FINANCIAL ADVISORS
Opinion of Smith Barney Inc.
Smith Barney was retained by GranCare to act as its financial advisor in
connection with the proposed GranCare Merger. In connection with such
engagement, GranCare requested that Smith Barney evaluate the fairness, from a
financial point of view, to the holders of GranCare Common Stock of the
consideration to be received by such holders in the GranCare Merger. On May 7,
1997, at a meeting of the GranCare Board held to evaluate the proposed
GranCare Merger, Smith Barney delivered an oral opinion (subsequently
confirmed by delivery of a written opinion dated May 7, 1997) to the GranCare
Board to the effect that, as of the date of such opinion and based upon and
subject to certain matters stated therein, the then contemplated exchange
ratio was fair, from a financial point of view, to the holders of GranCare
Common Stock. Smith Barney subsequently confirmed such opinion by delivery of
written opinions dated June 12, 1997 (with respect to the then contemplated
exchange ratio) and September 17, 1997 (with respect to the Exchange Ratio),
the dates on which the amendments to the original GranCare Merger Agreement
were executed. The description of Smith Barney's opinion set forth below
relates to Smith Barney's opinion dated September 17, 1997.
In arriving at its opinion, Smith Barney reviewed the GranCare Merger
Agreement and held discussions with certain senior officers, directors and
other representatives and advisors of GranCare and certain senior officers and
other representatives and advisors of LCA concerning the businesses,
operations and prospects of GranCare and LCA. Smith Barney examined certain
publicly available business and financial information relating to GranCare and
LCA as well as certain financial forecasts and other information and data for
GranCare and LCA which were provided to or otherwise discussed with Smith
Barney by the respective managements of GranCare and LCA, including
information relating to certain strategic implications and operational
benefits anticipated to result from the GranCare Merger. Smith Barney reviewed
the financial terms of the GranCare Merger in relation to, among other things:
current and historical market prices and trading volumes of GranCare Common
Stock and LCA Common Stock; the historical and projected earnings and other
operating data of GranCare and LCA; and the capitalization and financial
condition of GranCare and LCA. Smith Barney also considered, to the extent
publicly available, the financial terms of certain other similar transactions
recently effected which Smith Barney considered relevant in evaluating the
GranCare Merger and analyzed certain financial, stock market and other
publicly available information relating to the businesses of other companies
whose operations Smith Barney considered relevant in evaluating those of
GranCare and LCA. Smith Barney also evaluated the potential pro forma
financial impact of the GranCare Merger on LCA. In addition to the foregoing,
Smith Barney conducted such other analyses and examinations and considered
such other financial, economic and market criteria as Smith Barney deemed
appropriate in arriving at its opinion. Smith Barney noted that its opinion
was necessarily based upon information available, and financial, stock market
and other conditions and circumstances existing and disclosed, to Smith Barney
as of the date of its opinion.
In rendering its opinion, Smith Barney assumed and relied, without
independent verification, upon the accuracy and completeness of all financial
and other information and data publicly available or furnished to or otherwise
reviewed by or discussed with Smith Barney. With respect to financial
forecasts and other information and data furnished to or otherwise reviewed by
or discussed with Smith Barney, the managements of GranCare and LCA advised
Smith Barney that such forecasts and other information and data were
reasonably prepared reflecting the best currently available estimates and
judgments of the managements of GranCare and LCA as to the future financial
performance of GranCare and LCA and the strategic implications and operational
benefits anticipated to result from the Mergers. Smith Barney assumed, with
the consent of the GranCare Board, that the Recapitalization Merger will occur
immediately prior to, or concurrently with, the consummation of the GranCare
Merger in accordance with the terms of the Recapitalization Merger Agreement
and as described to Smith Barney by representatives of GranCare and, to the
extent relevant to the analyses of Smith Barney, evaluated LCA after giving
effect to the Recapitalization Merger. Smith Barney also assumed, with the
consent of the GranCare Board, that the GranCare Merger will be treated as a
tax-free reorganization for federal income tax purposes. Smith Barney's
opinion, as set forth therein, relates to the relative values of GranCare and
LCA. Smith Barney did not express any opinion as to what the value of the New
Paragon Common Stock actually will
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be when issued to GranCare stockholders pursuant to the GranCare Merger or the
price at which the Paragon Common Stock will trade or otherwise be
transferable subsequent to the GranCare Merger. Smith Barney did not make and
was not provided with an independent evaluation or appraisal of the assets or
liabilities (contingent or otherwise) of GranCare or LCA nor did Smith Barney
make any physical inspection of the properties or assets of GranCare or LCA.
In connection with its engagement, Smith Barney was not requested to, and did
not, generally solicit third party indications of interest in a possible
acquisition of GranCare. Although Smith Barney evaluated the GranCare Merger
Consideration from a financial point of view, Smith Barney was not asked to
and did not recommend the specific consideration payable in the GranCare
Merger, which was determined through negotiation between GranCare and LCA. No
other limitations were imposed by GranCare on Smith Barney with respect to the
investigations made or procedures followed by Smith Barney in rendering its
opinion.
THE FULL TEXT OF THE WRITTEN OPINION OF SMITH BARNEY DATED SEPTEMBER 17,
1997, WHICH SETS FORTH THE ASSUMPTIONS MADE, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED HERETO AS ANNEX VIII AND
SHOULD BE READ CAREFULLY IN ITS ENTIRETY. SMITH BARNEY HAS CONSENTED TO THE
INCLUSION OF ITS OPINION LETTER AS ANNEX VIII AND TO THE INCLUSION OF THE
SUMMARY THEREOF HEREIN. IN GIVING SUCH CONSENT, SMITH BARNEY DOES NOT ADMIT
THAT IT COMES WITHIN THE CATEGORY OF PERSONS WHOSE CONSENT IS REQUIRED UNDER
SECTION 7 OF THE SECURITIES ACT, OR THE RULES AND REGULATIONS OF THE
COMMISSION THEREUNDER, NOR DOES IT THEREBY ADMIT THAT IT IS AN EXPERT WITH
RESPECT TO ANY PART OF THE REGISTRATION STATEMENT OF WHICH THIS PROXY
STATEMENT/PROSPECTUS IS A PART WITHIN THE MEANING OF THE TERM "EXPERTS" AS
USED IN THE SECURITIES ACT, OR THE RULES AND REGULATIONS OF THE COMMISSION
THEREUNDER. THE OPINION OF SMITH BARNEY IS DIRECTED TO THE BOARD OF DIRECTORS
OF GRANCARE AND RELATES ONLY TO THE FAIRNESS OF THE GRANCARE MERGER
CONSIDERATION FROM A FINANCIAL POINT OF VIEW, DOES NOT ADDRESS ANY OTHER
ASPECT OF THE GRANCARE MERGER OR RELATED TRANSACTIONS AND DOES NOT CONSTITUTE
A RECOMMENDATION TO ANY GRANCARE STOCKHOLDER AS TO HOW SUCH STOCKHOLDER SHOULD
VOTE AT THE GRANCARE SPECIAL MEETING. THE SUMMARY OF THE OPINION OF SMITH
BARNEY SET FORTH IN THIS PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH OPINION.
In preparing its opinion, Smith Barney performed a variety of financial and
comparative analyses, including those described below. The summary of such
analyses does not purport to be a complete description of the analyses
underlying Smith Barney's opinion. The preparation of a fairness opinion is a
complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to summary description. Accordingly, Smith Barney
believes that its analyses must be considered as a whole and that selecting
portions of its analyses and factors, without considering all analyses and
factors, could create a misleading or incomplete view of the processes
underlying such analyses and opinion. In its analyses, Smith Barney made
numerous assumptions with respect to GranCare, LCA, Paragon, industry
performance, general business, economic, market and financial conditions and
other matters, many of which are beyond the control of GranCare and LCA. The
estimates contained in such analyses and the valuation ranges resulting from
any particular analysis are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or
less favorable than those suggested by such analyses. In addition, analyses
relating to the value of businesses or securities do not purport to be
appraisals or to reflect the prices at which businesses or securities actually
may be sold. Accordingly, such analyses and estimates are inherently subject
to substantial uncertainty. Smith Barney's opinion and analyses were only one
of many factors considered by the GranCare Board in its evaluation of the
GranCare Merger and should not be viewed as determinative of the views of the
GranCare Board or management of GranCare with respect to the GranCare Merger
Consideration or the proposed GranCare Merger.
Selected Company Analysis. Using publicly available information, Smith
Barney analyzed, among other things, the market values and trading multiples
of GranCare, LCA and 22 selected publicly traded companies in the long-term
care, rehabilitation and institutional pharmacy industries, consisting of (i)
14 long-term care companies: Arbor; Beverly; Extendicare; Genesis; Health Care
& Retirement; Horizon/CMS; Integrated; Manor Care; Mariner; Multicare;
Regency; Summit; Sun; and Vencor (the "Long-Term Care Companies"); (ii) four
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rehabilitation companies: HEALTHSOUTH Corporation; NovaCare Corporation;
RehabCare Group Inc.; and U.S. Physical Therapy, Inc. (the "Rehabilitation
Companies"); and (iii) five institutional pharmacy companies: American
Medserve Corporation; Capstone Pharmacy Services, Inc.; NCS Healthcare, Inc.;
Omnicare, Inc.; and Vitalink Pharmacy Services, Inc. (the "Institutional
Pharmacy Companies" and, together with the Long-Term Care Companies and the
Rehabilitation Companies, the "Selected Companies"). With respect to the
Selected Companies, Smith Barney focused primarily on the Long-Term Care
Companies, the operations of which Smith Barney considered to be the most
similar to those of GranCare. Smith Barney also compared the estimated market
value and trading multiples of New LCA with those of the Selected Companies.
Smith Barney compared market values as multiples of, among other things,
estimated calendar 1997 and 1998 net income, adjusted market values (equity
market value, plus total debt, minority interest and the book value of
preferred stock, less cash and cash equivalents) as multiples of, among other
things, latest 12 months revenue and earnings before interest, taxes,
depreciation and amortization ("EBITDA"), and adjusted enterprise values
(adjusted market value, plus rents capitalized at 12.5%) as a multiple of,
among other things, latest 12 months earnings before interest, taxes
depreciation and amortization and rents ("EBITDAR"). Net income projections
for the Selected Companies were based on estimates of selected investment
banking firms and net income projections for GranCare, LCA and New LCA were
based on internal estimates of the respective managements of GranCare and LCA.
In the case of GranCare, net income projections were also evaluated after
applying a 10% discount to management estimates in the event that such
estimates are not fully realized. All multiples were based on closing stock
prices as of September 12, 1997. Applying a range of multiples for the Long-
Term Care Companies of estimated calendar 1997 and 1998 net income of 10.9x to
24.7x (with a median of 18.2x) and 9.6x to 20.6x (with a median of 15.3x),
respectively, and latest 12 months revenue, EBITDA and EBITDAR of 0.60x to
2.50x (with a median of 1.30x), 6.2x to 14.7x (with a median of 9.5x) and 6.7x
to 14.3x (with a median of 9.8x), respectively, to corresponding financial
data for LCA (after giving effect to the Recapitalization Merger) and New LCA
resulted in equity reference ranges for LCA and New LCA of approximately
$13.84 to $150.14 per share (with a median of approximately $68.47 per share)
and $9.98 to $134.74 per share (with a median of approximately $59.44 per
share), respectively, as compared to the consideration payable for New LCA
Common Stock in the Recapitalization Merger of $40.50 per share. Applying
these multiples to corresponding financial data for GranCare resulted in an
equity reference range for GranCare of approximately $5.76 to $27.97 per share
(with a median of approximately $14.89 per share), as compared to the equity
value implied by the GranCare Merger Consideration of $9.50 per share based on
the consideration payable by Apollo for New LCA Common Stock in the
Recapitalization Merger of $40.50 per share.
Selected Merger and Acquisition Transactions Analysis. Using publicly
available information, Smith Barney reviewed, among other things, the implied
transaction multiples paid or proposed to be paid in the following 28 selected
transactions in the long-term care industry, consisting of (acquiror/target):
Integrated Health Services, Inc./Community Care of America, Inc.; Sun
Healthcare Group, Inc./Regency Healthcare Services, Inc.; Genesis Health
Ventures Inc./ The Multicare Companies, Inc.; Vencor Inc./Transitional
Hospitals Corp.; Sun Healthcare Group, Inc./Retirement Care Associates;
HEALTHSOUTH Corporation/Horizon/CMS Healthcare Corporation; Vencor,
Inc./TheraTx, Inc.; Genesis Health Ventures, Inc./Geriatric & Medical Company,
Inc.; The Multicare Companies, Inc./ADS Group, Inc.; Marriott International,
Inc./Forum Group, Inc.; The Multicare Companies, Inc./Concord Health Group,
Inc.; Manor Care, Inc./Beverly Enterprises, Inc.; LCA/Rehability Company;
GranCare/Evergreen Healthcare, Inc.; Vencor, Inc./The Hillhaven Corporation;
LCA/The Brian Center Corporation; The Hillhaven Corporation/Nationwide Care,
Inc.; Mariner Health Group, Inc./Convalescent Services, Inc.; Horizon
Healthcare Corporation/peopleCare Heritage Group, Inc.; TheraTx,
Inc./PersonaCare, Inc.; Regency Health Services, Inc./Care Enterprises, Inc.;
The Multicare Companies, Inc./Providence Health Care, Inc.; Mariner Health
Group, Inc./Pinnacle Care Corporation; Sun Healthcare Group, Inc./Mediplex
Group, Inc.; Integrated Health Services, Inc./Central Park Lodges; Genesis
Health Ventures, Inc./Meridian Healthcare Group, Inc.; Horizon Healthcare
Corporation/Greenery Rehabilitation Group, Inc.; and LCA/Vari-Care, Inc. (the
"Selected Transactions"). Smith Barney compared, among other things,
transaction values as a multiple of, among other things, EBITDA, and adjusted
transaction values as multiples of latest 12 months revenue and EBITDAR. All
multiples for the Selected Transactions were based on information available at
the time of announcement of such transaction. Applying a range of multiples
for the Selected Transactions
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(excluding outliers) of latest 12 months EBITDA, revenue and EBITDAR of 7.4x
to 13.9x, 1.06x to 2.60x and 7.4x to 13.9x, respectively, to corresponding
financial data for LCA (after giving effect to the Recapitalization Merger)
and New LCA resulted in equity reference ranges for LCA and New LCA of
approximately $21.23 to $184.21 per share and $18.15 to $172.75 per share,
respectively, as compared to the consideration payable by Apollo for New LCA
Common Stock in the Recapitalization Merger of $40.50 per share. Applying
these multiples to corresponding financial data for GranCare resulted in an
equity reference range for GranCare of approximately $8.05 to $42.24 per
share, as compared to the equity value implied by the GranCare Merger
Consideration of $9.50 per share based on the consideration payable by Apollo
for New LCA Common Stock in the Recapitalization Merger of $40.50 per share.
No company, transaction or business used in the "Selected Company Analysis"
or "Selected Merger and Acquisition Transactions Analysis" as a comparison is
identical to GranCare, LCA, New LCA or the GranCare Merger. Accordingly, an
analysis of the results of the foregoing is not entirely mathematical; rather,
it involves complex considerations and judgments concerning differences in
financial and operating characteristics and other factors that could affect
the acquisition, public trading or other values of the Selected Companies, the
Selected Transactions or the business segment, company or transaction to which
they are being compared.
Discounted Cash Flow Analysis. Smith Barney performed discounted cash flow
analyses of the projected free cash flows of GranCare, LCA (after giving
effect to the Recapitalization Merger) and New LCA for the fiscal years 1998
through 2002 based on internal estimates of the managements of GranCare and
LCA and assuming certain cost savings and other potential synergies
anticipated by such managements to result from the GranCare Merger were
achieved. The stand-alone discounted cash flow analyses of GranCare, LCA and
New LCA were determined by (i) adding (x) the present value of the projected
free cash flows of such companies over the five-year period from 1998 to 2002
and (y) the present value of the estimated terminal values of such companies
in year 2002 and (ii) subtracting the current net debt of such companies. The
range of estimated terminal values at the end of the five-year period was
calculated by applying terminal multiples ranging from 8.0x to 9.0x to the
projected 2002 EBITDA of such companies, representing the estimated values of
such companies beyond the year 2002. Estimated cash flows and terminal values
were discounted to present value using discount rates ranging from 13.0% to
15.0%, with particular focus on a discount rate of 14.0%. Based on such
terminal value multiples and a discount rate of 14.0%, this analysis resulted
in equity reference ranges for LCA and New LCA of approximately $63.63 to
$79.49 per share and $59.55 to $74.35 per share, respectively, as compared to
the consideration payable for LCA Common Stock in the Recapitalization Merger
of $40.50 per share. Utilizing these terminal value multiples and a 14.0%
discount rate with respect to GranCare resulted in an equity reference range
for GranCare of approximately $10.87 to $13.34 per share, as compared to the
equity value implied by the GranCare Merger Consideration of $9.50 per share
based on the consideration payable by Apollo for New LCA Common Stock in the
Recapitalization Merger of $40.50 per share.
Contribution Analysis. Smith Barney analyzed the respective contributions of
GranCare and LCA (after giving effect to the Recapitalization Merger) to the
estimated revenue, EBITDAR, EBITDA and net income of New LCA for fiscal years
1997 through 2001 based on internal estimates of the managements of GranCare
and LCA, both before and after giving effect to certain cost savings and other
potential synergies anticipated by such managements to result from the
GranCare Merger. This analysis indicated that (i) before giving effect to such
cost savings and other potential synergies, in fiscal year 1997, GranCare
would contribute approximately 40.1% of revenue, 36.9% of EBITDAR, 32.8% of
EBITDA and 42.0% of net income, of New LCA, with such percentages decreasing
in fiscal year 2001 to approximately 38.2% of revenue, 35.8% of EBITDAR, 33.0%
of EBITDA and 35.5% of net income and (ii) after giving effect to such cost
savings and other potential synergies and assuming all such cost savings and
other potential synergies were fully attributable to LCA, in fiscal year 1997,
GranCare would contribute approximately 40.1% of revenue, 36.9% of EBITDAR,
32.8% of EBITDA and 42.0% of net income, of New LCA, with such percentages
decreasing in fiscal year 2001 to approximately 38.2% of revenue, 33.4% of
EBITDAR, 30.2% of EBITDA and 29.8% of net income. Based on the GranCare Merger
Consideration, immediately following consummation of the GranCare Merger,
stockholders of GranCare and LCA (including Apollo after giving to the
Recapitalization Merger) would own approximately 41.9% and 58.1%,
respectively, of New LCA.
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Pro Forma Merger Analysis. Smith Barney analyzed certain pro forma effects
resulting from the GranCare Merger, including, among other things, the impact
of the GranCare Merger on GranCare's projected EPS for fiscal years 1997
through 2001 relative to GranCare on a stand-alone basis, based on internal
estimates of the managements of GranCare and LCA and assuming certain cost
savings and other potential synergies anticipated by such managements to
result from the GranCare Merger were achieved. The results of the pro forma
merger analysis suggested that the GranCare Merger could be dilutive to
GranCare's EPS in fiscal 1997 and accretive to GranCare's EPS in fiscal years
1998 through 2001 relative to GranCare on a stand-alone basis. The actual
results achieved by Paragon may vary from projected results and the variations
may be material.
Exchange Ratio Analysis. Smith Barney compared the GranCare Merger
Consideration with the historical ratio of the daily closing prices of
GranCare Common Stock and LCA Common Stock during the period February 13, 1997
(the date of the Distribution) through May 7, 1997 (the last trading day prior
to public announcement of the Mergers). The median exchange ratios of the
daily closing prices of one share of GranCare Common Stock to one share of LCA
Common Stock during such period was 0.2389, as compared to the GranCare Merger
Consideration of 0.2346.
Premium Analysis. Smith Barney analyzed the implied premium payable with
respect to the GranCare Common Stock in the GranCare Merger and the premiums
paid in the following 17 selected mergers of equals transactions: Morgan
Stanley Group, Inc./Dean Witter Discover & Co.; Health Systems International,
Inc./Foundation Health Corporation; Office Depot Inc./Staples Inc.; NYNEX
Corporation/Bell Atlantic Corporation; Chase Manhattan Corp./Chemical Banking
Corp.; Southwestern Public Service Company/Public Service Company of Colorado;
First Chicago Corporation; (Illinois)/NBD Bancorp (Michigan); First Financial
Management Corporation/First Data Corporation; FirstFed Michigan
Corporation/Charter One Financial Inc.; Northern States Power
Company/Wisconsin Energy Corporation; ALC Communications/Frontier Corporation;
The Hillhaven Corporation/Vencor, Inc.; Lockheed Corporation/Martin Marietta
Inc.; Kendall International Inc./Tyco International Inc.; Mediplex Group,
Inc./Sun Healthcare Corporation; HCA Hospital Corporation/Columbia Healthcare
Corporation; and Advanced Telecommunications/LDDS Communications. The mean and
median premiums paid in such transactions based on the closing stock price of
the acquired company one day prior, 30 days prior, and 90 days prior, to
public announcement of the transaction were approximately 13.9% (mean) and
12.6% (median) one day prior, approximately 21.8% (mean) and 19.9% (median) 30
days prior, and approximately 23.8% (mean) and 23.1% (median) 90 days prior,
to public announcement of the transaction, as compared to the implied premium
payable in the GranCare Merger one day prior, 30 days prior, and 90 days
prior, to public announcement of the GranCare Merger of approximately 29.0%,
17.6% and 14.3%, respectively, based on closing stock prices of GranCare
Common Stock as of such dates and the consideration payable for New LCA Common
Stock in the Recapitalization Merger.
Other Factors and Comparative Analyses. In rendering its opinion, Smith
Barney considered certain other factors and conducted certain other
comparative analyses, including, among other things, a review of (i)
historical and projected financial results of GranCare and LCA and projected
financial results of New LCA; (ii) theoretical per share values of Paragon
Common Stock, theoretical per share values of GranCare Common Stock under
various business and transaction alternatives, and potential rates of returns
on an investment in GranCare Common Stock assuming the Transactions occur;
(iii) the history of trading prices and volume for GranCare Common Stock and
LCA Common Stock and the relationship between movements of such common stock
and movements of the common stock of the Long-Term Care Companies; and (iv)
selected published analysts' reports on GranCare and LCA, including growth
rate estimates of such analysts with respect to GranCare and LCA.
Pursuant to the terms of Smith Barney's engagement, GranCare has agreed to
pay Smith Barney for its services in connection with the GranCare Merger an
aggregate financial advisory fee of $3.0 million, $2.5 million of which is
contingent upon the consummation of the Transactions. GranCare has also agreed
to reimburse Smith Barney for travel and other out-of-pocket expenses incurred
by Smith Barney in performing its services, including the fees and expenses of
its legal counsel, and to indemnify Smith Barney and related persons against
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certain liabilities, including liabilities under the federal securities laws,
arising out of Smith Barney's engagement.
Smith Barney has advised GranCare that, in the ordinary course of business,
Smith Barney and its affiliates may actively trade or hold the securities of
GranCare and LCA for their own account or for the account of customers and,
accordingly, may at any time hold a long or short position in such securities.
Smith Barney has in the past provided investment banking and financial
advisory services to GranCare and LCA unrelated to the proposed Mergers, and
may participate in the financing for the Recapitalization Merger, for which
services Smith Barney has received or would receive compensation. In addition,
Smith Barney and its affiliates (including Travelers Group Inc. and its
affiliates) may maintain relationships with GranCare and LCA.
Smith Barney is an internationally recognized investment banking firm and
was selected by GranCare based on its experience, expertise and familiarity
with GranCare and its business. Smith Barney regularly engages in the
valuation of businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive bids, secondary
distributions of listed and unlisted securities, private placements and
valuations for estate, corporate and other purposes.
Opinion of Chase Securities Inc.
GranCare engaged Chase as financial advisor in connection with the proposed
GranCare Merger after giving effect to the Recapitalization Merger. On
September 15, 1997, Chase delivered a written opinion (the "Chase Opinion") to
the GranCare Board that, as of such date and subject to the assumptions made,
general procedures followed, factors considered and limitations on the review
undertaken set forth therein, the Exchange Ratio is fair, from a financial
point of view, to the holders of GranCare Common Stock.
THE FULL TEXT OF THE CHASE OPINION, WHICH SETS FORTH THE ASSUMPTIONS MADE,
GENERAL PROCEDURES FOLLOWED, FACTORS CONSIDERED AND LIMITATIONS ON THE REVIEW
UNDERTAKEN BY CHASE IN RENDERING ITS OPINION, IS ATTACHED AS ANNEX IX AND IS
INCORPORATED HEREIN BY REFERENCE. CHASE HAS CONSENTED TO THE INCLUSION OF ITS
OPINION LETTER AS ANNEX IX AND TO THE INCLUSION OF THE SUMMARY THEREOF HEREIN.
IN GIVING SUCH CONSENT, CHASE DOES NOT ADMIT THAT IT COMES WITHIN THE CATEGORY
OF PERSONS WHOSE CONSENT IS REQUIRED UNDER SECTION 7 OF THE SECURITIES ACT, OR
THE RULES AND REGULATIONS OF THE COMMISSION THEREUNDER, NOR DOES IT THEREBY
ADMIT THAT IT IS AN EXPERT WITH RESPECT TO ANY PART OF THE REGISTRATION
STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART WITHIN THE
MEANING OF THE TERM "EXPERTS" AS USED IN THE SECURITIES ACT OR THE RULES AND
REGULATIONS OF THE COMMISSION THEREUNDER. THE SUMMARY OF THE OPINION SET FORTH
BELOW IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF THE CHASE
OPINION. HOLDERS OF GRANCARE COMMON STOCK ARE URGED TO READ THE CHASE OPINION
CAREFULLY AND IN ITS ENTIRETY. TERMS DEFINED HEREIN SHALL HAVE SUCH MEANING
SOLELY FOR PURPOSES OF THIS SUMMARY OF THE CHASE OPINION.
In connection with its opinion, Chase reviewed and analyzed, among other
things: (i) a draft of an amendment and restatement of the GranCare Merger
Agreement containing the Proposed Revisions, subsequently dated as of
September 17, 1997; (ii) a draft of an amendment and restatement of the
Recapitalization Merger Agreement containing the Proposed Revisions,
subsequently dated as of September 17, 1997; (iii) publicly available business
and financial information concerning GranCare and LCA that Chase deemed
relevant to GranCare and LCA and the respective industries in which they
operate; and (iv) certain internal non-public financial and operating data
provided to Chase by the managements of GranCare and LCA relating to GranCare
and LCA (before and after giving effect to the Recapitalization Merger and the
GranCare Merger), including information provided by such managements and by
Apollo relating to the capitalization of Paragon after giving effect to the
Recapitalization Merger and certain forecast and projection information as to
future financial results of such businesses and information concerning the
expected business, operational and strategic benefits of the Mergers,
including the level of synergies reasonably obtainable. Chase also had
discussions with members of the senior managements of GranCare, LCA and Apollo
concerning the operations, historical financial statements and future
prospects of GranCare and LCA, before and after giving effect to the Mergers,
as well as their views of the business, operational and strategic benefits and
other implications of the Mergers, including the level of synergies reasonably
obtainable as well as such other matters as deemed
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necessary and appropriate. Chase also compared the financial and operating
performance of GranCare and LCA with publicly available information concerning
certain other companies Chase deemed comparable, reviewed the relevant
historical stock prices and trading volumes of the GranCare Common Stock, the
LCA Common Stock and certain publicly traded securities of such other
companies, reviewed the financial terms of certain recent business
transactions it deemed reasonably comparable to the GranCare Merger and
otherwise relevant to its inquiry and made such other analyses and
examinations as it deemed necessary or appropriate.
Chase assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for it, or publicly
available for purposes of its opinion and further relied upon the assurances
of the managements of GranCare and LCA that they were not aware of any facts
that would make such information inaccurate or misleading. Chase did not make
or obtain any independent evaluations or appraisals of the assets or
liabilities of GranCare or LCA and did not conduct a physical inspection of
the properties and facilities of GranCare or LCA. Chase assumed that the
financial forecast and projection information provided to it by GranCare and
LCA as well as the information concerning the expected business, operational
and strategic benefits of the Mergers had been reasonably determined on bases
reflecting the best currently available estimates and judgments of the
managements of GranCare and LCA, as the case may be, as to the future
financial performance of GranCare and LCA (before and after giving effect to
the Mergers), as the case may be. Chase expressed no view as to such forecast,
projection or benefits information or the assumptions on which they were
based. Chase assumed that the GranCare Merger will be accounted for on a
purchase basis and that the receipt of shares of Paragon Common Stock in the
GranCare Merger will be tax-free to each of GranCare and LCA and their
respective stockholders. Chase relied as to all legal, accounting and tax
matters with respect to the Mergers on legal counsel and accountants to
GranCare. Chase was not requested to and did not generally solicit offers from
third parties to acquire all or part of GranCare.
In arriving at its opinion, Chase assumed in all respects material to its
analysis that the representations and warranties of each party to the Merger
Agreements contained therein are true and correct, that each party to the
Merger Agreements will perform all of the covenants and agreements required to
be performed by such party under such agreements and that all conditions to
the consummation of the GranCare Merger will be satisfied without waiver
thereof. Chase also assumed that all material governmental, regulatory or
other consents and approvals will be obtained in connection with the Mergers
and that in the course of obtaining any necessary governmental, regulatory or
other consents and approvals, or any amendments, modifications or waivers to
any documents to which either GranCare or LCA is a party as contemplated by
the Merger Agreements, no restrictions will be imposed or amendments,
modifications or waivers made that would have any material adverse effect on
the contemplated benefits of the GranCare Merger to the holders of GranCare
Common Stock. Chase based its opinion on market, economic and other conditions
as they existed on, and could be evaluated as of, the date of its opinion.
Chase was not requested to and did not make any recommendation to the
GranCare Board as to the form or amount of the consideration to be paid in the
GranCare Merger, which was determined through arm's-length negotiations
between GranCare and LCA. In arriving at its opinion, Chase did not render an
opinion as to the likely trading range for the GranCare Common Stock or LCA
Common Stock following the announcement or consummation of the GranCare
Merger, but made its determination as to the fairness, from a financial point
of view, of the Exchange Ratio on the basis of the financial and comparative
analyses described below. The Chase Opinion was rendered for the use and
benefit of the GranCare Board in its evaluation of the GranCare Merger and
does not constitute a recommendation to any stockholder of GranCare as to how
such stockholder should vote with respect to the GranCare Merger or the
transactions related thereto. The Chase Opinion is limited to the fairness
from a financial point of view to the GranCare stockholders of the Exchange
Ratio in the GranCare Merger and does not express an opinion as to any aspect
of the Recapitalization Merger or as to the merits of the underlying decision
by GranCare to engage in the GranCare Merger. No other limitations were
imposed by GranCare on Chase with respect to the investigations made or the
procedures followed by Chase in rendering its opinion.
The following is a summary of the financial analyses utilized by Chase and
does not purport to be a complete description of the analyses performed by
Chase. The preparation of a fairness opinion is a complex
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process and is not necessarily susceptible to partial analysis or summary
description. Selecting portions of the analyses or of the summary set forth
below, without considering the analysis as a whole, could create an incomplete
view of the processes underlying Chase's opinion. In arriving at its fairness
determination, Chase considered the results of all such analyses. The analyses
were prepared solely for the purposes of enabling Chase to render its opinion
to the GranCare Board as to the fairness, from a financial point of view, to
holders of GranCare Common Stock of the Exchange Ratio in the GranCare Merger.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future values, which may be significantly more or less favorable
than suggested by such analyses.
Comparable Public Company Analysis. Chase reviewed certain publicly
available financial and operating data of selected publicly traded long-term
care companies to determine a range of multiples for such companies.
To determine a reference range of values for LCA, Grancare, and Paragon, the
selected long-term care companies (collectively, the "Comparable Group") were
Advocat Inc. ("Advocat"), Arbor Health Care Company ("Arbor"), Beverly
Enterprises, Inc. ("Beverly"), Extendicare Inc. ("Extendicare"), Genesis
Health Ventures, Inc. ("Genesis"), Harborside Healthcare Corporation
("Harborside"), Health Care and Retirement Corporation ("Health Care and
Retirement"), Integrated Health Services, Inc. ("Integrated"), Manor Care,
Inc. ("Manor Care"), Mariner Health Group, Inc. ("Mariner"), National
HealthCare L.P. ("National HealthCare"), Summit Care Corporation ("Summit"),
Sun Healthcare Group, Inc. ("Sun"), Unison Healthcare Corporation ("Unison")
and Vencor, Inc. ("Vencor"). For each company in the Comparable Group, Chase
calculated (i) the multiple of earnings per share ("EPS") for the latest
twelve months with respect to the market price of common stock multiplied by
the number of outstanding shares ("Market Value of Equity"), (ii) the multiple
of 1997 estimated EPS with respect to Market Value of Equity, (iii) the
multiple of 1998 estimated EPS with respect to Market Value of Equity, (iv)
the multiple of earnings before interest, taxes and non-recurring items
("EBIT") for the latest twelve months with respect to Market Value of Equity
plus the book value of indebtedness for borrowed money and preferred stock
less cash and cash equivalents ("Adjusted Market Value"), (v) the multiple of
earnings before interest, taxes, depreciation, amortization and non-recurring
items ("EBITDA") for the latest twelve months with respect to Adjusted Market
Value and (vi) the multiple of earnings before interest, taxes, depreciation,
amortization, operating rent and non-recurring items ("EBITDAR") for the
latest twelve months with respect to Adjusted Market Value plus the product of
operating rent multiplied by eight ("Normalized Adjusted Market Value").
For the Comparable Group, the following range of multiples (excluding
extreme outliers) with respect to Market Value of Equity was calculated: low
of 11.7x to high of 31.1x with a mean of 21.8x as a multiple of EPS for the
latest twelve months, low of 11.2x to high of 24.7x with a mean of 18.2x as a
multiple of EPS as estimated for the year ended December 31, 1997 and low of
9.7x to high of 20.9x with a mean of 15.9x as a multiple of EPS as estimated
for the year ended December 31, 1998. For the Comparable Group, the following
range of multiples (excluding extreme outliers) with respect to Normalized
Adjusted Market Value was calculated: low of 7.3x to high of 13.5x with a mean
of 10.2x as a multiple of latest twelve months EBITDAR. The following range of
multiples (excluding extreme outliers) with respect to Adjusted Market Value
was calculated: low of 6.5x to high of 13.8x with a mean of 10.6x as a
multiple of latest twelve months EBITDA; and low of 8.2x to high of 18.4x with
a mean of 14.5x as a multiple of latest twelve months EBIT.
Based on the Exchange Ratio and financial information prepared by LCA, and
the multiples calculated for the Comparable Group, Chase calculated a range of
Adjusted Market Values for LCA. The analyses indicated an Adjusted Market
Value of (i) $1,491.3 million based on a mean EBITDAR multiple of 10.2x,
(ii) $1,446.6 million based on a mean EBITDA multiple of 10.6x, (iii) $1,392.0
million based on a mean EBIT multiple of 14.5x, (iv) $1,283.3 million based on
a mean multiple of EPS for the latest twelve months of 21.8x and (v) $1,257.3
million based on a mean 1997 EPS multiple of 18.2x. From such Adjusted Market
Values, Chase derived a range of implied Adjusted Market Values for LCA
ranging from $1,150.0 million to $1,350.0 million equating to an implied price
per share on a fully diluted basis of $42.18 to $52.11.
Based on the Exchange Ratio and financial information prepared by GranCare
and the multiples calculated for the Comparable Group, Chase calculated a
range of Adjusted Market Values for GranCare. The analyses
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indicated Adjusted Market Value of (i) $891.1 million based on a mean EBITDAR
multiple of 10.2x, (ii) $827.6 million based on a mean EBITDA multiple of
10.6x, (iii) $835.7 million based on a mean EBIT multiple of 14.5x, and (iv)
$670.4 million based on a mean 1997 EPS multiple of 18.2x. From such Adjusted
Market Values, Chase derived a range of implied Adjusted Market Values for
GranCare ranging from $575.0 million to $775.0 million equating to an implied
price per share on a fully diluted basis of $9.21 to $17.22.
Based on the Exchange Ratio and financial information prepared by GranCare
and LCA and the multiples calculated for the Comparable Group, Chase
calculated a range of Adjusted Market Values for Paragon. The analyses
indicated Adjusted Market Value of (i) $2,414.9 million based on a mean
EBITDAR multiple of 10.2x, (ii) $2,316.0 million based on a mean EBITDA
multiple of 10.6x, and (iii) $1,814.8 million based on a mean 1998 EPS
multiple of 15.9x. From such Adjusted Market Values, Chase derived a range of
implied Adjusted Market Values for New LCA ranging from $1,825.0 million to
$2,350.0 million equating to an implied price per share of GranCare Common
Stock on a fully diluted basis of $9.70 to $18.70.
Because of the lack of truly comparable companies due to the inherent
differences between the businesses, operations and prospects of LCA, GranCare
and Paragon and the businesses, operations and prospects of the companies
included in the Comparable Group, Chase believed that it was inappropriate to,
and therefore did not, rely solely on the quantitative results of the
analysis, and accordingly also made qualitative judgments concerning
differences between the financial and operating characteristics of LCA,
GranCare and Paragon and the companies in the Comparable Group that would
affect the public trading values of such other companies.
Comparable Transaction Analysis. Chase reviewed certain publicly available
information regarding 18 selected long-term care industry transactions (the
"Transaction Comparables") announced since January 1994. Chase analyzed the
transaction prices realized in these transactions expressed as a multiple of
selected operating and financial data of the acquired companies for the
purpose of determining a reference range of values for LCA and GranCare. The
Transaction Comparables reviewed were Integrated Health Services, Inc.'s
pending acquisition of Community Care of America, Inc., Sun Healthcare Group,
Inc.'s pending acquisition of Regency Health Services, Inc., Genesis Health
Ventures, Inc.'s, The Cypress Group L.L.C.'s and TPG Partners II, L.P.'s
pending acquisition of The Multicare Companies, Inc., HealthSouth
Corporation's pending acquisition of Horizon/CMS Healthcare, Vencor, Inc.'s
acquisition of TheraTx Incorporated, Genesis Health Ventures, Inc.'s
acquisition of Geriatric & Medical Companies, Inc., Genesis Health Ventures,
Inc.'s acquisition of National Health Care Affiliates, Inc., Mariner Health
Group, Inc.'s acquisition of Regency Health Care Centers, Inc., GranCare's
acquisition of Evergreen Healthcare, Inc., Vencor, Inc.'s acquisition of The
Hillhaven Corporation, LCA's acquisition of Brian Center Corporation, The
Hillhaven Corporation's acquisition of Nationwide Care, Inc., Mariner Health
Group, Inc.'s acquisition of Convalescent Services Inc., Community Care of
America, Inc.'s acquisition of MeritWest, Horizon Healthcare Corporation's
acquisition of peopleCare Heritage Group, TheraTx, Incorporated's acquisition
of PersonaCare, Inc., Mariner Health Group, Inc.'s acquisition of Pinnacle
Care Corp. and Sun Healthcare Group, Inc.'s acquisition of The Mediplex Group,
Inc. To the extent such information was publicly available for each acquired
company, Chase calculated (i) multiples of EBITDA and EBIT for the latest
twelve months prior to the acquisition with respect to the consideration paid
plus the book value of indebtedness for borrowed money and preferred stock
less cash and cash equivalents ("Transaction Value") and (ii) multiples of
EBITDAR for the latest twelve months prior to the acquisition with respect to
Transaction Value plus the product of operating rent multiplied by eight
("Normalized Transaction Value").
The following range of multiples (excluding extreme outliers) with respect
to Normalized Transaction Value was calculated: low of 7.9x to high of 13.2x
with a mean of 10.2x as a multiple of latest twelve months pre-acquisition
EBITDAR. The following range of multiples (excluding extreme outliers) with
respect to Transaction Value was calculated: low of 7.9x to high of 14.8x with
a mean of 10.4x as a multiple of latest twelve months pre-acquisition EBITDA;
and low of 10.5x to high of 24.2x with a mean of 14.2x as a multiple of latest
twelve months pre-acquisition EBIT.
Based upon the Exchange Ratio and financial information prepared by LCA and
the multiples calculated for the Transaction Comparables, Chase calculated a
range of Adjusted Market Values for LCA. The analyses indicated Adjusted
Market Value of (i) $1,492.9 million based on a mean EBITDAR multiple of
10.2x, (ii)
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$1,424.2 million based on a mean EBITDA multiple of 10.4x and (iii) $1,362.8
million based on a mean EBIT multiple of 14.2x. From such Adjusted Market
Values, Chase derived a range of implied Adjusted Market Values for LCA
ranging from $1,325.0 million to $1,425.0 million equating to an implied price
per share on a fully diluted basis of $50.87 to $55.83.
Based upon the Exchange Ratio and financial information prepared by GranCare
and the multiples calculated for the Transaction Comparables, Chase calculated
a range of Adjusted Market Values for GranCare. The analyses indicated
Adjusted Market Value of (i) $892.1 million based on a mean EBITDAR multiple
of 10.2x, (ii) $814.7 million based on a mean EBITDA multiple of 10.4x and
(iii) $818.1 million based on a mean EBIT multiple of 14.2x. From such
Adjusted Market Values, Chase derived a range of implied Adjusted Market
Values for GranCare ranging from $725.0 million to $825.0 million equating to
an implied price per share on a fully diluted basis of $15.22 to $19.23.
Because of the lack of truly comparable companies due to the inherent
differences between the businesses, operations and prospects of LCA, GranCare,
and Paragon and the businesses, operations and prospects of the companies
included in the respective Transaction Comparables, Chase believed that it was
inappropriate to, and therefore did not, rely solely on the quantitative
results of the analysis, and accordingly also made qualitative judgments
concerning differences between the financial and operating characteristics of
LCA, GranCare, and Paragon and the companies in the respective Transaction
Comparables that would affect the acquisition values of such other companies.
Discounted Cash Flow Analysis. Chase performed a discounted cash flow
analysis of LCA, based upon certain financial projections provided to Chase by
LCA for the years 1998 through 2002. Utilizing such projections, Chase
calculated a range of values for LCA based upon the discounted net present
value of the sum of (i) the projected stream of unlevered free cash flows
(calculated as EBITDA less taxes less changes in working capital less capital
expenditures) to LCA through the year 2002 and (ii) the projected terminal
value of LCA at the year 2002 based upon a range of multiples of projected
EBITDA. Chase applied discount rates ranging from 11.0% to 13.0% and terminal
multiples of EBITDA ranging from 7.0x to 9.0x. Based on the foregoing, Chase
calculated the implied equity value of LCA to be in a range between $43.24 and
$62.05 per share.
Chase performed a discounted cash flow analysis of GranCare based upon
certain financial projections provided to Chase by GranCare for the years 1998
through 2002. Utilizing such projections, Chase calculated a range of values
for GranCare based upon the discounted net present value of the sum of (i) the
projected stream of unlevered free cash flows to GranCare through the year
2002 and (ii) the projected terminal value of GranCare at the year 2002 based
upon a range of multiples of projected EBITDA. Chase applied discount rates
ranging from 11.0% to 13.0% and terminal multiples of EBITDA ranging from 7.0x
to 9.0x. Based on the foregoing, Chase calculated the implied equity value of
GranCare to be in a range between $10.88 and $18.43 per share.
Chase performed a discounted cash flow analysis of New LCA based upon
certain financial projections provided to Chase by GranCare and LCA for the
years 1998 through 2002. Utilizing such projections, Chase calculated a range
of values for Paragon based upon the discounted net present value of the sum
of (i) the projected stream of unlevered free cash flows to Paragon through
the year 2002 and (ii) the projected terminal value of New LCA at the year
2002 based upon a range of multiples of projected EBITDA. Chase applied
discount rates ranging from 11.0% to 13.0% and terminal multiples of EBITDA
ranging from 7.0x to 9.0x. Based on the foregoing, Chase calculated the
implied equity value of Paragon to be in a range between $10.81 and $21.06 per
share of GranCare Common Stock.
Contribution Analysis. Chase reviewed the estimated revenues, EBITDAR,
EBITDA and EBIT for GranCare and LCA based on historical information and
projections as to future financial results provided to Chase by GranCare and
LCA for each respective company. Based on such review, Chase analyzed the
relative financial contributions of each of GranCare and LCA to the pro forma
consolidated entity for the twelve month periods ending September 30, 1998,
1999, 2000, 2001 and 2002. Based on such analysis, Chase determined that
GranCare's contributions to the pro forma consolidated revenues for the twelve
month periods ending
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September 30, 1998, 1999, 2000, 2001 and 2002 were 38.7%, 38.4%, 38.3%, 38.2%
and 38.3%, respectively; GranCare's contributions to the pro forma
consolidated EBITDAR for the twelve month periods ending September 30, 1998,
1999, 2000, 2001 and 2002 were 33.4%, 33.1%, 33.5%, 33.8% and 34.4%,
respectively; and GranCare's contributions to the pro forma consolidated
EBITDA for the twelve month periods ending September 30, 1998, 1999, 2000,
2001 and 2002 were 29.1%, 29.0%, 29.9%, 30.5%, and 31.5%, respectively. Chase
noted, after giving effect to the issuance of shares of Paragon Common Stock
in the Mergers that LCA's stockholders would own 14.1%, the GranCare
stockholders would own 41.9% and Apollo would own 44.0% of New LCA Common
Stock, respectively, on a pro forma basis after giving effect to the Mergers.
Pro Forma Merger Analysis. Chase reviewed certain financial information
provided by GranCare and LCA, including projections as to future financial
results of GranCare and LCA, on a stand-alone basis. Chase combined the
projected operating results of GranCare with the corresponding projected
operating results of LCA to arrive at the consolidated company projected net
income. In performing this analysis, Chase gave effect to the GranCare Merger
as if it had been consummated on September 30, 1997 and assumed that the
following estimates by GranCare and LCA of synergy contributions to net income
would be achieved: approximately $8.1 million for the twelve months ended
September 30, 1998; approximately $16.2 million for the twelve months ended
September 30, 1999; approximately $16.8 million for the twelve months ended
September 30, 2000; approximately $17.6 million for the twelve months ended
September 30, 2001; and approximately $18.5 million for the twelve months
ended September 30, 2002. Such analysis indicated that, based on the
foregoing, the GranCare Merger would be accretive to GranCare's projected net
income by 1.8%, 3.1%, 4.5%, 6.7% and 8.0% for the fiscal years ending
September 30, 1998, 1999, 2000, 2001 and 2002, respectively.
Other Analyses. Chase reviewed the performance of historical trading prices
and volume of GranCare Common Stock and the LCA Common Stock for certain
periods, and compared such per share market price movements to the Standard &
Poor's 500 Index and an index of selected publicly traded long-term care
companies. Chase also analyzed the historical implied exchange ratio based on
the ratio of the closing prices of GranCare Common Stock and LCA Common Stock
for the period from February 13, 1997 through May 7, 1997. Chase calculated
the mean historical implied exchange ratio for such period to be approximately
0.24.
Pursuant to the terms of an engagement letter between Chase and GranCare,
Chase is entitled to receive a fee of $3.0 million, $2.775 million of which is
contingent upon the consummation of the GranCare Merger. In addition, GranCare
has agreed to reimburse Chase for its reasonable out-of-pocket expenses,
including fees and disbursements of its counsel, and to indemnify Chase
against certain liabilities (including liabilities under the federal
securities laws) relating to or arising out of its engagement.
Chase, as a part of its financial advisory business, is continually engaged
in the valuation of businesses and their securities in connection with mergers
and acquisitions and valuations for estate, corporate and other purposes.
GranCare selected Chase as its financial advisor based on Chase's experience
and expertise.
The Chase Manhattan Corporation and its affiliates, including, Chase
Securities Inc., in the ordinary course of business, have, from time to time,
provided, and in the future may continue to provide, commercial and investment
banking services to GranCare and LCA and will provide the New Credit Facility
(for which The Chase Manhattan Bank is acting as agent bank), if necessary,
the Standby Subordinated Credit Facility to LCA in connection with the Mergers
and is expected to make a $35 million equity investment in Paragon as one of
the Apollo Investors in connection with the Mergers. In the ordinary course of
business, Chase or its affiliates may trade in the debt and equity securities
of GranCare and LCA for their own accounts and for the accounts of their
customers and, accordingly, may at any time hold a long or short position in
such securities.
BUSINESS OF PARAGON FOLLOWING THE MERGERS
After the Mergers, Paragon will be one of the largest providers of long-term
care in the United States, offering a full range of post-acute and long-term
care services. Paragon's management expects that the Mergers
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will allow it to "cluster" markets in select geographic areas in which LCA and
GranCare currently operate facilities and provide services. Paragon's
management intends to pursue a strategy enabling Paragon to become a leading
provider of specialty medical and subacute services in these "cluster"
markets. This strategy includes building on its concentration of facilities,
related services and its local expertise in these markets to capture
additional healthcare expenditures, to negotiate more effectively with large
contract payors (including managed care companies), to offer a broader range
of Paragon's ancillary services to its patients and to achieve other operating
efficiencies. Paragon also intends to focus its efforts on increasing the
level of specialty medical and ancillary services (which generally provide
higher revenues than routine nursing care) by attracting higher acuity
patients. Additionally, Paragon's management has placed strategic emphasis on
establishing relationships with physicians and acute care hospitals, from
which a substantial portion of its patients are referred. Paragon's management
believes that the concentration of facilities in discrete geographic areas,
and its ability to offer contract management for subacute medical units in
under-utilized acute care hospitals and for hospital rehabilitation
departments, will allow it to strengthen physician and hospital relationships.
Management will continue to evaluate Paragon's portfolio of long-term care
centers and the services they provide and to pursue a strategy of selective
acquisitions, divestitures, partnering arrangements and the construction of
new facilities.
The principal executive offices of Paragon will be located at One Ravinia
Drive, Suite 1500, Atlanta, Georgia 30346.
DELISTING AND DEREGISTRATION OF GRANCARE COMMON STOCK
Following the consummation of the GranCare Merger, the GranCare Common Stock
will be delisted from the New York Stock Exchange and deregistered under the
Exchange Act.
RESALES OF PARAGON COMMON STOCK
Shares of Paragon Common Stock issued in connection with the Mergers will be
freely tradeable except for shares issued to the Apollo Investors or
affiliates of GranCare, which will be subject to the provisions of Rule 145
promulgated under the Securities Act and such shares must be disposed of in
accordance with Rule 145 or pursuant to a valid registration statement.
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THE RECAPITALIZATION MERGER AGREEMENT
GENERAL
Apollo, Apollo Sub and LCA have entered into the Recapitalization Merger
Agreement which provides that, subject to the satisfaction of the conditions
thereof (see "--Conditions to the Consummation of the Recapitalization
Merger"), Apollo Sub will be merged with and into LCA with LCA as the
surviving corporation and referred to herein as Paragon. As soon as
practicable after the closing under the Recapitalization Merger Agreement, a
Certificate of Merger will be filed with the Secretary of State of the State
of Delaware, and the time of such filing will be the effective time of the
Recapitalization Merger unless otherwise provided in the Certificate of
Merger.
THE DESCRIPTION OF THE RECAPITALIZATION MERGER AGREEMENT CONTAINED IN THIS
PROXY STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
RECAPITALIZATION MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS ANNEX I TO
THIS PROXY STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN BY
THIS REFERENCE.
APOLLO INVESTORS EQUITY INVESTMENT
To effect the recapitalization of LCA, the Apollo Investors will immediately
prior to the effective time of the Recapitalization Merger contribute not less
than $240 million in cash to Apollo Sub in exchange for approximately 5.9
million shares of Apollo Sub Shares at a price of $40.50 per share. Pursuant
to the terms of the Recapitalization Merger Agreement, the Apollo Sub Shares
will be converted on a one-for-one basis into shares of Paragon Common Stock,
which will result in the ownership by the Apollo Investors of approximately
44.0% of the outstanding Paragon Common Stock after giving effect to the
Mergers.
MERGER CONSIDERATION AND PRORATION
Pursuant to the election and proration procedures described below, a total
of 1,905,748 shares of LCA Common Stock (referred to as the "LCA Retained
Share Number") outstanding immediately prior to the Recapitalization Merger
will remain outstanding as LCA Retained Shares after the effective time of the
Recapitalization Merger (and following the GranCare Merger) as shares of
Paragon Common Stock. Each other share of LCA Common Stock outstanding
immediately prior to the effective time of the Recapitalization Merger will be
converted into the right to receive the LCA Cash Price of $40.50 per share.
Each person who is a record holder of shares of LCA Common Stock at the LCA
Election Deadline of 5:00 p.m. New York City time on the business day
immediately preceding the day on which the vote on the Recapitalization Merger
is taken at the LCA Special Meeting (or any adjournment thereof) (and any
holder of LCA stock options or other LCA Rights that will be cancelled and
converted into the right to receive shares of LCA Common Stock immediately
prior to the effective time of the Recapitalization Merger) may, by following
the procedures set forth under "--Election Procedures" prior to the LCA
Election Deadline make an LCA Stock Election to retain some or all of such
shares as LCA Retained Shares. Any such election shall be subject to the
proration provisions of the Recapitalization Merger Agreement described below.
If the aggregate number of LCA Electing Shares is more than the LCA Retained
Share Number of 1,905,748, then pursuant to the Recapitalization Merger
Agreement (i) each share of LCA Common Stock other than LCA Electing Shares
will be converted in the Recapitalization Merger into the right to receive the
LCA Cash Price, (ii) each LCA stockholder making an LCA Stock Election will be
entitled to retain that number of LCA Retained Shares as is equal to the
product of (x) the number of LCA Electing Shares of such LCA stockholder and
(y) a fraction, the numerator of which is the LCA Retained Share Number and
the denominator of which is the aggregate number of LCA Electing Shares, and
(iii) each other LCA Electing Shares held by such LCA stockholder will be
converted in the Recapitalization Merger into the right to receive the LCA
Cash Price.
If the aggregate number of LCA Electing Shares is less than the LCA Retained
Share Number of, then pursuant to the Recapitalization Merger Agreement (i)
each LCA Electing Share will remain outstanding as a
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LCA Retained Share, (ii) in addition to such LCA Retained Shares, each LCA
stockholder (including LCA stockholders who made LCA Stock Elections with
respect to some, but not all, of their shares of LCA Common Stock) will be
required to retain as LCA Retained Shares in the Recapitalization Merger that
number of shares as is equal to the product of (x) the excess of the LCA
Retained Share Number over the aggregate number of LCA Electing Shares and (y)
a fraction, the numerator of which is the number of shares of LCA Common Stock
(other than LCA Electing Shares) held by such LCA stockholder and the
denominator of which is the aggregate number of outstanding shares of LCA
Common Stock (other than LCA Electing Shares), and (iii) each other shares of
LCA Common Stock will be converted into the right to receive the LCA Cash
Price. Pursuant to this allocation procedure, if no LCA Stock Elections are
made, each LCA stockholder would receive $40.50 per share with respect to
approximately 90.54% of such stockholder's shares and would retain
approximately 9.46% of such stockholder's shares as LCA Retained Shares. Thus,
under such assumption, each LCA stockholder would receive and retain in the
Recapitalization Merger, for each share of LCA Common Stock, approximately
$36.67 (90.54% of $40.50 in cash) and 0.0946 of an LCA Retained Share.
Because of the proration procedures described herein, LCA stockholders may
not receive the amount of cash and retain the number of shares of Paragon
Common Stock that they elect.
Election Procedures. An LCA Stock Election may be made by any person who is
a record holder of LCA Common Stock on or before the LCA Election Deadline (or
who is the holder of an LCA option or other LCA Right to be cancelled
immediately prior to the effective time of the Recapitalization Merger
pursuant to the terms of the Recapitalization Merger Agreement). An LCA Stock
Election may be made regardless of whether such person returns a proxy or
votes for or against the approval and adoption of the Recapitalization Merger
Agreement or abstains from voting at the LCA Special Meeting. LCA Stock
Elections may be made only by properly completing, executing and delivering
the Form of LCA Stock Election duly endorsed by the record holder representing
the shares of LCA Common Stock subject to the LCA Stock Election and
accompanied by certificates for the LCA Electing Shares to which such Form of
LCA Stock Election relates (or a validly executed notice of guaranteed
delivery), to American Stock Transfer & Trust Company (the "Paying Agent") by
5:00 p.m., New York City time, on the business day before the day on which the
vote is taken on the LCA Proposal at the LCA Special Meeting (the "LCA
Election Deadline"). LCA stockholders who own their shares beneficially but
not of record must make a timely request to the bank, broker or other person
or entity through which such stockholder owns such shares in order to make a
valid LCA Stock Election. All LCA Stock Elections that are properly executed
and returned on the Form of LCA Stock Election to the Paying Agent will be
honored by LCA subject to proration among LCA Electing Shares to the extent
necessary to reduce the number of LCA Electing Shares to the LCA Retained
Share Number. An LCA stockholder who makes an LCA Stock Election will be
deemed to have accepted the consideration to be paid pursuant to the
Recapitalization Merger Agreement and to have waived appraisal rights with
respect to such holder's LCA Electing Shares. If the Paying Agent determines
that any LCA Stock Election was not properly made, the shares subject to such
election will be treated by the Paying Agent as shares that are not LCA
Electing Shares. Any LCA Stock Election may be revoked by any LCA stockholder
who has given written notice received by the Paying Agent (i) prior to the LCA
Election Deadline or (ii) after the date of the LCA Special Meeting, if (and
to the extent that) the Paying Agent is legally required to permit revocations
and the effective time of the Recapitalization Merger shall not have occurred
prior to such date. Subject to the proration provisions of the
Recapitalization Merger Agreement, shares of LCA Common Stock as to which LCA
Stock Elections have not been made or have been revoked or which exceed the
LCA Retained Share Number will automatically be converted into the right to
receive the LCA Cash Price.
Fractional Shares. Notwithstanding any of the foregoing, each LCA
stockholder who would otherwise have been entitled or required to retain a
fraction of an LCA Retained Share (after taking into account all shares of LCA
Common Stock delivered by such holder) will receive, in lieu thereof, a cash
payment (without interest) equal to such fraction multiplied by $40.50.
As soon as practicable after the effective time of the Recapitalization
Merger, each holder of an outstanding certificate or certificates which prior
thereto represented shares of LCA Common Stock and was not previously
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surrendered to the Paying Agent in connection with an LCA Stock Election, upon
surrender to the Paying Agent and acceptance thereof by the Paying Agent, will
be entitled to a certificate or certificates representing the number of LCA
Retained Shares, if any, to be retained by such person and the amount of cash,
if any, into which the shares of LCA Common Stock previously represented by
the surrendered certificates will have been converted pursuant to the
Recapitalization Merger Agreement. The Paying Agent will accept such
certificates upon compliance with such reasonable terms and conditions as the
Paying Agent may impose to effect an orderly exchange in accordance with
normal exchange practices.
CONDITIONS TO THE CONSUMMATION OF THE RECAPITALIZATION MERGER
The respective obligations of each party to effect the Recapitalization
Merger are subject to the satisfaction (or, under certain circumstances,
waiver) at or prior to the effective time of the Recapitalization Merger of
the following conditions: (i) the Recapitalization Merger Proposal and the LCA
Stock Issuance Proposal shall have been approved by the requisite vote of the
holders of LCA Common Stock; (ii) no statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered, promulgated or
enforced by any court or governmental authority against Apollo, Apollo Sub or
LCA that makes the consummation of the Recapitalization Merger illegal or
would otherwise prohibit or restrict the consummation of the Recapitalization
Merger; (iii) the conditions to each party's obligations to effect the
GranCare Merger (other than the consummation of the Recapitalization Merger),
including approval of the LCA Stock Issuance Proposal shall have been
satisfied or waived provided that LCA and Paragon may not waive such
conditions without the prior consent of Apollo; (iv) the applicable waiting
periods under the HSR Act shall have expired or been earlier terminated and
all filings required to be made prior to the effective time of the
Recapitalization Merger with, and all consents, approvals, authorizations and
permits required to be obtained prior to the effective time of the
Recapitalization Merger from, any governmental authority in connection with
the consummation of the Recapitalization Merger shall have been made or
obtained, as the case may be, except where the failure to obtain such consents
would not be reasonably likely to result in a Material Adverse Effect (as
defined in the Recapitalization Merger Agreement) on LCA or materially
adversely affect the consummation of the Recapitalization Merger; and (v) the
conditions set forth in the Financing Commitment Letter will have been
satisfied or waived.
The obligations of Apollo and Apollo Sub to effect the Recapitalization
Merger also are subject to the satisfaction or waiver by Apollo and Apollo Sub
prior to the effective time of the Recapitalization Merger of the following
additional conditions: (i) the Amendment Proposal shall have been approved by
the requisite vote of the holders of LCA Common Stock; (ii) no action or
proceeding brought by any governmental, regulatory or administrative agency,
authority or commission shall have been instituted and be pending that would
be reasonably likely to make the Recapitalization Merger illegal or prohibit
its consummation or render Apollo or Apollo Sub unable to effect the
Recapitalization Merger; (iii) there shall be no proceeding or other action
pending or threatened against LCA, GranCare or their respective subsidiaries
brought by any governmental, regulatory or administrative agency, authority or
commission that is reasonably likely to have a Material Adverse Effect; (iv)
during the 30 calendar day period ending on the date of the closing of the
Recapitalization Merger, there shall not have occurred and be continuing any
event that has had or would have a significant adverse effect on the
functioning of the financial markets, banks and other lending institutions in
the United States (as more fully described in the Recapitalization Merger
Agreement); (v) since September 30, 1996, with respect to the obligations of
LCA, and since December 31, 1996, with respect to the obligations of GranCare,
no change shall have occurred or been threatened in the business, operations,
prospects, properties or condition (financial or other) of the respective
party or any of its subsidiaries that would have or would be reasonably
expected to have a Material Adverse Effect; (vi) LCA shall have executed and
delivered the Stockholders Agreement, amended the Rights Agreement as
contemplated in the Recapitalization Merger Agreement and shall have performed
or complied with in all material respects its agreements and covenants
contained in the Recapitalization Merger Agreement required to be performed or
complied with at or prior to the effective time of the Recapitalization Merger
and the representations and warranties by LCA contained in the
Recapitalization Merger Agreement shall be true in all material respects when
made and on and as of the effective time of the Recapitalization Merger with
the same force and effect as if made on and as of such date; and (v) the
transactions contemplated by the
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Financing Commitment Letter shall have been consummated, any other
refinancings, amendments or consents relating to existing financing made or
obtained in connection with the Mergers shall be reasonably satisfactory to
Apollo and all proceeds received by Paragon on the closing date pursuant to
the Financing Commitment Letter and as a result of the Recapitalization Merger
shall be used solely to consummate the transactions contemplated by the Merger
Agreements.
The obligations of LCA to effect the Recapitalization Merger are subject to
the fulfillment or waiver by LCA prior to the effective time of the
Recapitalization Merger of the following additional conditions: (i) Apollo
shall have used commercially reasonable efforts to deliver to the LCA Board,
prior to the consummation of the Recapitalization Merger, a solvency letter
from an independent third party selected by Apollo and reasonably satisfactory
to LCA attesting that, immediately after the effective time of the
Recapitalization Merger, Paragon (A) will be solvent (in that both the fair
value of its assets is not less than the sum of its debts and that the present
fair saleable value of its assets will not be less than the amount required to
pay its probable liability on its debts as they become absolute and matured),
(B) will have adequate capital with which to engage in its business and (C)
will not have incurred and will not be planning to incur debts beyond its
ability to pay as they become absolute and matured, based upon the proposed
financing structure for the Mergers and certain other financial information to
be provided by LCA and Apollo to the independent third party that prepares the
solvency letter and after giving effect to any changes in Paragon's assets and
liabilities as a result of the Mergers and the financing relating thereto; and
(ii) Apollo Sub shall have amended its Bylaws as contemplated in the
Recapitalization Merger Agreement, Apollo and Apollo Sub shall have executed
and delivered the Stockholders Agreement and shall each have performed or
complied with in all material respects its agreements and covenants contained
in the Recapitalization Merger Agreement required to be performed or complied
with at or prior to the effective time of the Recapitalization Merger and the
representations and warranties by Apollo and Apollo Sub contained in the
Recapitalization Merger Agreement will be true and correct in all material
respects when made and on and as of the effective time with the same force and
effect as if made on and as of such date.
ACCOUNTING TREATMENT
The Recapitalization Merger will be accounted for as a recapitalization.
Accordingly, the historical basis of LCA's assets and liabilities will not be
impacted by the Recapitalization Merger in the Transactions.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Mayor, Day, Caldwell & Keeton, L.L.P., counsel to LCA, the
following are the material U.S. federal income tax considerations generally
applicable to the Recapitalization Merger. An opinion of counsel is based on
counsel's analysis of the facts and law and expresses what counsel believes a
court would properly hold if presented with such issue, but is not in any way
binding on the Internal Revenue Service ("IRS") or the courts. Counsel's
opinion is based upon current law which is subject to change by future
legislation or rules or new interpretations by the IRS or by the courts. Such
changes could be applied retroactively to completed transactions. The tax
treatment described herein may vary depending upon each stockholder's
particular circumstances. Certain stockholders (including insurance companies,
tax-exempt organizations, financial institutions or broker-dealers, foreign
corporations, persons who are not citizens or residents of the United States,
stockholders who do not hold their shares as capital assets and stockholders
who have acquired their stock upon the exercise of options or otherwise as
compensation) may be subject to special rules not discussed below. No ruling
from the IRS will be applied for with respect to the U.S. federal income tax
consequences discussed herein and, accordingly, there can be no assurance that
the IRS will agree with the conclusions stated herein. This discussion is
based upon the Code and regulations, rulings and judicial decisions thereunder
as of the date hereof, and such authorities may be repealed, revoked or
modified so as to result in tax consequences different from those discussed
below. In addition, this discussion does not consider the effect of any
applicable foreign, state, local or other tax laws. BECAUSE CERTAIN TAX
CONSEQUENCES OF THE RECAPITALIZATION MERGER MAY VARY DEPENDING ON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, EACH STOCKHOLDER IS URGED TO
CONSULT TAX ADVISORS AS TO THE PARTICULAR U.S. FEDERAL (AS WELL AS ANY
FOREIGN, STATE, LOCAL OR OTHER) TAX CONSEQUENCES OF THE RECAPITALIZATION
MERGER.
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Characterization of the Recapitalization Merger. For U.S. federal income tax
purposes, Apollo Sub will be disregarded as a transitory entity and the
Recapitalization Merger of Apollo Sub with and into LCA will be treated as a
purchase by the Apollo Investors of a portion of the outstanding LCA Common
Stock and as a redemption by LCA of a portion of the outstanding LCA Common
Stock.
Stockholders Receiving Cash. As described more fully below, the U.S. federal
income tax consequences of the Recapitalization Merger with respect to a
particular stockholder will depend upon, among other things, (i) whether the
stockholder received any cash proceeds pursuant to the Recapitalization
Merger, (ii) the extent to which the stockholder is deemed to have sold part
of its LCA Common Stock to the Apollo Investors and is deemed to have had the
remainder of its LCA Common Stock redeemed by LCA, and (iii) whether the
redemption of a stockholder's LCA Common Stock by LCA will qualify as a sale
under Section 302 of the Code. First, an LCA stockholder who receives cash
consideration will allocate such consideration between a sale to the Apollo
Investors and a redemption by LCA based on the respective proportions of the
total cash consideration contributed by the Apollo Investors to Apollo Sub and
provided by LCA (including amounts provided by proceeds of the Debt
Financing). To the extent that a stockholder is deemed to have sold LCA Common
Stock to the Apollo Investors, such stockholder will recognize either capital
gain or loss (assuming the stock is held as a capital asset) equal to the
difference between the cash proceeds allocated to such sale and the
stockholder's adjusted tax basis in the LCA Common Stock deemed sold to the
Apollo Investors. Second, with respect to the redemption part of the
transaction, if the redemption qualifies as a sale, a stockholder will
recognize gain or loss equal to the difference between the cash proceeds
received by the stockholder in respect of its LCA Common Stock in the
redemption and the stockholder's adjusted tax basis in the LCA Common Stock
being redeemed. Under Section 302 of the Code, a redemption of stock will be
treated as a sale if such redemption (a) is "substantially disproportionate"
with respect to the stockholder, (b) results in a complete redemption of the
stockholder's interest in the company or (c) is "not essentially equivalent to
a dividend" with respect to the stockholder. As discussed below, if a
stockholder owns only a small amount of LCA Common Stock, so long as its
proportionate interest in LCA is reduced (even by a de minimis amount) after
taking into account the Recapitalization Merger and the GranCare Merger, the
stockholder's receipt of cash pursuant to the redemption by LCA should be
treated as a sale of the redeemed LCA Common Stock.
Gain or loss recognized from a sale of LCA Common Stock generally will be
long-term capital gain or loss if the LCA Common Stock has been held as a
capital asset by the stockholder for a required length of time. The Taxpayer
Relief Act of 1997 reduces the long-term capital gains rate for individuals to
not more than 28% effective for sales on or after May 7, 1997 but also
increases the holding period required to receive the most favorable long-term
capital gains rate of not more than 20% from more than twelve months to more
than eighteen months for certain assets sold after July 28, 1997.
In determining whether any of the tests under Section 302 of the Code is
satisfied, a stockholder must take into account not only the LCA Common Stock
which the stockholder actually owns, but also LCA Common Stock which is
constructively owned by the stockholder under Section 318 of the Code. Under
Section 318 of the Code, a stockholder may constructively own LCA Common Stock
actually owned, and in some cases constructively owned, by certain related
individuals or entities, and LCA Common Stock which the stockholder has the
right to acquire by exercise of an option or by conversion. Contemporaneous
dispositions or acquisitions of LCA Common Stock by a stockholder or related
individuals or entities may be deemed to be part of a single integrated
transaction which will be taken into account in determining whether any of the
tests under Section 302 of the Code has been satisfied.
The redemption of a stockholder's LCA Common Stock will be "substantially
disproportionate" with respect to such stockholder if, among other things, the
percentage of Paragon Common Stock actually and constructively owned by such
stockholder immediately following the Mergers is less than 80% of the
percentage of LCA Common Stock actually and constructively owned by such
stockholder immediately prior to the Mergers. Stockholders should consult
their tax advisors with respect to the application of the "substantially
disproportionate" test to their particular facts and circumstances.
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The receipt of cash by an LCA stockholder pursuant to the Recapitalization
Merger will be a "complete redemption" if immediately after the
Recapitalization Merger either (i) the stockholder does not own, actually or
constructively, any Paragon Common Stock or (ii) the stockholder (a) does not
actually own any Paragon Common Stock, (b) constructively owns Paragon Common
Stock only by reason of the family attribution rules of Section 318(a)(1) of
the Code and (c) waives such constructive ownership by complying with the
procedures described in Section 302(c) of the Code.
Even if the redemption of a stockholder's LCA Common Stock fails to satisfy
the "substantially disproportionate" test and the "complete redemption" test
described above, the redemption of a stockholder's LCA Common Stock may
nevertheless satisfy the "not essentially equivalent to a dividend" test if
the stockholder's redemption of LCA Common Stock pursuant to the
Recapitalization Merger results in a "meaningful reduction" in such
stockholder's proportionate equity interest in LCA after giving effect to the
Mergers. Whether the receipt of cash by a stockholder will be considered "not
essentially equivalent to a dividend," will depend upon such stockholder's
facts and circumstances. In certain circumstances, in the context of a small
stockholder in a public company, even a slight reduction in a stockholder's
proportionate equity interest may satisfy this test. For example, the IRS has
indicated in a published ruling that a 3.3% reduction in the proportionate
interest of a small minority (substantially less than 1%) shareholder in a
publicly-held corporation who exercises no control over corporate affairs
constitutes such a "meaningful reduction." Stockholders should consult with
their tax advisors as to the application of this test in their particular
situation.
If a stockholder cannot satisfy any of the three tests described above, cash
received by the stockholder in redemption of its LCA Common Stock would be
treated as a dividend to the extent it is treated as paid from LCA's earnings
and profits. Such amount would be includible in gross income as ordinary
income in its entirety (without reduction for the tax basis in the redeemed
LCA Common Stock), no loss would be recognized, and the stockholder's basis in
the redeemed LCA Common Stock would be added to such stockholder's tax basis
in its remaining holdings of LCA Common Stock, if any. To the extent the cash
received is not treated as a dividend due to insufficient earnings and
profits, the stockholder's tax basis in its LCA Common Stock will be reduced
by the non-dividend amount, and any non-dividend amount in excess of such tax
basis will be treated as capital gain from the sale of LCA Common Stock.
Corporate Holder Dividend Treatment. To the extent a corporate stockholder's
receipt of cash pursuant to the Recapitalization Merger is taxable as a
dividend, (i) it will be eligible for a dividends-received deduction (subject
to the minimum holding period requirements under Section 246(c) of the Code
and other applicable limitations) and (ii) it will be subject to the
"extraordinary dividend" provisions of the Code which, if applicable, would
require a corporate stockholder to reduce its tax basis in any LCA Common
Stock held by the nontaxed portion of any such dividend. The Taxpayer Relief
Act of 1997 requires a corporate stockholder to recognize gain to the extent
that the nontaxed portion of any such dividend exceeds the stockholder's basis
in its redeemed shares of LCA Common Stock.
Stockholders Retaining LCA Common Stock and Receiving No Cash. The
Recapitalization Merger will have no U.S. federal income tax consequences for
stockholders who retain their LCA Common Stock and receive no cash.
Foreign Stockholders--Withholding. The following is a general discussion of
certain U.S. federal income tax consequences of the Recapitalization Merger
with respect to foreign stockholders. For this purpose, a foreign stockholder
is any person who is, for U.S. federal income tax purposes, a foreign
corporation, a non-resident alien individual, a foreign partnership or a
foreign estate or trust. If a foreign stockholder certifies, in a manner
satisfactory to LCA, the Paying Agent or another withholding agent, that its
redemption of LCA Common Stock qualifies as a sale rather than as a dividend
for U.S. federal income tax purposes, LCA, the Paying Agent or such other
withholding agent will not withhold U.S. federal income tax on the cash
distributed to the foreign stockholder in the Recapitalization Merger. Such a
foreign stockholder generally will not be subject to U.S. federal income tax
in respect of gain recognized on such a sale unless (i) such gain is
effectively connected with a trade or business conducted by such foreign
stockholder within the United States (in which case the branch
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profits tax may also apply if the foreign stockholder is a foreign
corporation), (ii) in the case of a foreign stockholder that is an individual,
such holder is present in the United States for a period or periods
aggregating 183 days or more in the taxable year of the sale and certain other
conditions are satisfied, or (iii) LCA is or has been a "United States real
property holding corporation" at any time during the five-year period ending
on the date of the sale and, at any time during such five-year period, the
foreign stockholder actually or constructively owned more than five percent of
the outstanding LCA Common Stock.
If a foreign stockholder who receives cash in the Recapitalization Merger
does not certify that the redemption of its LCA Common Stock in the
Recapitalization Merger qualifies as a sale for U.S. federal income tax
purposes, LCA, the Paying Agent or another withholding agent will withhold 30%
of the amount paid to redeem the LCA Common Stock of such stockholder in order
to satisfy certain U.S. withholding requirements, unless such foreign
stockholder proves in a manner satisfactory to LCA, the Paying Agent or
another withholding agent that either (i) the foreign stockholder is eligible
for a reduced tax treaty rate with respect to U.S. source dividends and
establishes its entitlement to the reduced rate, in which case the withholding
agent will withhold at the reduced treaty rate or (ii) no U.S. withholding is
otherwise required. Foreign stockholders should consult their tax advisors
regarding the application of these withholding rules.
If LCA, the Paying Agent or another withholding agent collects U.S.
withholding tax on the distribution of cash to a foreign stockholder in the
Recapitalization Merger, a foreign stockholder may be eligible to obtain a
refund of such tax from the IRS if it establishes that the Recapitalization
Merger does not give rise to dividend income or otherwise establishes a
complete or partial exemption from such withholding tax.
Backup Withholding. A stockholder may be subject to backup withholding on
any cash that it receives in the Recapitalization Merger, unless (i) such
stockholder is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable backup withholding rules.
CONDUCT OF BUSINESS OF LCA PRIOR TO THE RECAPITALIZATION MERGER
LCA has agreed that, prior to the effective time of the Recapitalization
Merger, LCA will, and will cause its subsidiaries to, carry on their
respective operations in the ordinary and usual course of business and will
use commercially reasonable efforts consistent with past practice to preserve
intact in all material respects their current business organizations, keep
available the services of their current officers and key employees and
maintain their existing relationship with those having significant business
relationships with them, in each case in all material respects. In addition,
LCA has agreed that, prior to the effective time of the Recapitalization
Merger, subject to certain exceptions, except as expressly contemplated by the
Recapitalization Merger Agreement or unless Apollo shall otherwise consent in
writing (which consent will not be unreasonably withheld), LCA will not, and
will cause each of its subsidiaries, not to, among other things: (i) except
for issuances of capital stock of LCA's subsidiaries to LCA or a wholly owned
subsidiary of LCA, issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) LCA Securities or Subsidiary Securities (as
defined in the Recapitalization Merger Agreement), in each case, other than
LCA Common Stock issuable upon exercise or vesting of the LCA Rights or
allocations or issuances pursuant to the LCA Stock Plans, or (B) any other
securities in respect of, in lieu of or in substitution for LCA Common Stock
outstanding on the date of the Recapitalization Merger Agreement; (ii)
otherwise acquire or redeem, directly or indirectly, any LCA Securities or
Subsidiary Securities (including LCA Common Stock); (iii) split, combine or
reclassify its capital stock or declare, set aside, make or pay any dividend
or distribution (whether in cash, stock or property) on any shares of capital
stock of LCA or any of its subsidiaries (other than cash dividends paid to LCA
by its wholly owned subsidiaries with regard to their capital stock); (iv) (A)
make any acquisition, by means of a merger or otherwise, of assets or
securities, or any sale, lease, encumbrance or other disposition of assets or
securities, in each case involving the payment or receipt of consideration of
$10 million or more outside the ordinary and usual course of business
consistent with past practice in all material respects, or (B) other than in
the ordinary course of business, enter into a material contract or grant any
release or relinquishment of any material contract rights; (v)
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incur or assume any long-term debt for borrowed money except for debt incurred
in the ordinary course of business consistent in all material respects with
past practice; (vi) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations
of any other person except wholly owned subsidiaries of LCA, except in the
ordinary course of business consistent in all material respects with past
practice; (vii) except in connection with transactions permitted by (iv)
above, make any loans, advances or capital contributions to, or investments
in, any other person (other than wholly owned subsidiaries of LCA) in the
aggregate in excess of $10 million except in the ordinary course of business
consistent in all material respects with past practice; (viii) change any of
the accounting principles or practices used by it or any of its subsidiaries,
except as required by the Commission or required by United States generally
accepted accounting principles; (ix) adopt any amendments to the Restated
Certificate of Incorporation or Bylaws (or similar documents) of LCA (except
for the Proposed Amendments) or any Subsidiary; (x) except as may be required
under any previously existing agreement or LCA Stock Plan, grant any stock
related awards; (xi) enter into any new, or amend any existing, employee
benefit, pension or other plan (whether or not subject to ERISA) or
employment, severance, consulting or salary continuation agreements with any
officers, directors or key employees, or grant any increases in the
compensation or benefits to officers, directors and key employees; (xii) enter
into, amend, or extend any material collective bargaining or other labor
agreement, except as required by law; (xiii) adopt, make any material
amendment to or terminate any material employee benefit plan, except as
required by law or to maintain tax qualified status or as requested by the IRS
in order to receive a determination letter for such employee benefit plan;
(xiv) merge or consolidate with or transfer all or substantially all of its
assets to another corporation or other business entity or individual; (xv)
liquidate, wind-up or dissolve (or suffer any liquidation or dissolution); or
(xvi) agree in writing or otherwise to take any of the foregoing actions.
GOVERNMENTAL AND REGULATORY APPROVALS
The Recapitalization Merger is subject to the requirements of the HSR Act.
The HSR Act requires, among other things, that certain information regarding
the Recapitalization Merger be furnished to the Antitrust Division and the
FTC. The required waiting period expired on July 25, 1997. The
Recapitalization Merger may be subject to applicable local, state and federal
requirements for notice and/or review of the transaction, or the post-merger
operation of LCA and/or GranCare health care facilities and businesses, which
can encompass permits, licenses, certificates of need, third party payor
certifications and contracts, and/or other requirements, all as may be
mandated by the applicable jurisdiction within which any facility or business
is located. Other than the foregoing, neither LCA nor GranCare is aware of any
other governmental or regulatory approvals required for the consummation of
the Recapitalization Merger. Neither LCA nor GranCare believe that satisfying
such requirements will prevent or delay the consummation of the Transactions.
OTHER APPROVALS AND CONSENTS
LCA is required to obtain consents to the Recapitalization Merger from
certain lenders as well as from several parties with respect to lease
agreements. In addition, LCA is required to furnish certain parties with
notification of the Recapitalization Merger. LCA does not anticipate any
difficulties in obtaining such consents or furnishing such notifications.
EFFECT ON LCA EMPLOYEE BENEFIT PLANS AND EMPLOYEE AGREEMENTS
Benefit Maintenance. From and after the effective time of the
Recapitalization Merger, Paragon and its subsidiaries will honor in accordance
with their terms all existing employment, severance, consulting and salary
continuation agreements between LCA or any of its subsidiaries and any current
or former officer, director, employee or consultant of LCA or any of its
subsidiaries or group of such officers, directors, employees or consultants.
In addition to honoring the agreements referred to above, and subject to
Paragon's right to discontinue contributions or otherwise amend the Deferred
Plans (as hereafter defined) in accordance with the terms of the
Recapitalization Merger Agreement, until the first anniversary of the
effective time of the Recapitalization Merger, Paragon and its subsidiaries
will provide or will cause to be provided to each current or former employee
(presently entitled to benefits) of LCA or its subsidiaries (excluding
employees covered by
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collective bargaining agreements) (i) employee compensation, benefit plans,
programs, policies and arrangements that are no less favorable in the
aggregate than those currently provided by LCA and its subsidiaries to each
such employee and former employee and (ii) severance benefits that are in the
aggregate no less favorable to any employee of LCA or any of its subsidiaries
than those currently provided to each such employee.
Service Credit. To the extent permitted under applicable law, each employee
of LCA or its subsidiaries will be given credit for all service with LCA or
its subsidiaries (or service credited by LCA or its subsidiaries) under all
employee benefit plans, programs, policies and arrangements maintained by
Paragon in which they participate or in which they become participants for
purposes of eligibility, vesting and benefit accrual, including, without
limitation, for purposes of determining (i) short-term and long-term
disability benefits, (ii) severance benefits, (iii) vacation benefits and (iv)
benefits under any retirement plan.
Indemnification and Insurance. Apollo Sub has agreed that Paragon will
indemnify the present and former directors, officers and employees of LCA and
its subsidiaries, as provided in the LCA Charter or LCA Bylaws (or similar
documents) of LCA or any subsidiary and the indemnification agreements between
LCA (or any of its subsidiaries) and its directors, officers and employees in
effect on the date of the Recapitalization Merger Agreement for a period of
not less than the statute of limitations applicable to such matters covered by
such documents and which have occurred prior to the effective time of the
Recapitalization Merger. For six years from the effective time of the
Recapitalization Merger, Paragon will maintain in effect the policies of
directors' and officers' liability insurance being maintained by LCA as of the
date of the Recapitalization Merger Agreement (or policies providing similar
coverage). Further, Paragon will indemnify and hold harmless (and will advance
expenses to), to the fullest extent permitted under applicable law, each
director, officer, employee, fiduciary and agent of LCA or any subsidiary of
LCA against any costs and expenses (including reasonable attorneys' fees),
judgments, fines, losses, claims, damages, liabilities and amounts paid in
settlement in connection with any claim, action, suit, proceeding or
investigation relating to any of the transactions contemplated by the
Recapitalization Merger Agreement and will pay all reasonable costs and
expenses (including reasonable attorneys' fees), that may be incurred by any
indemnified parties in enforcing the indemnity and other obligations provided
for in the Recapitalization Merger Agreement. In the event Paragon or any of
its successors or assigns (A) consolidates with or merges into any other
person and is not the continuing or surviving corporation or entity of such
consolidation or merger or (B) transfers all or substantially all of its
properties and assets to any person, Paragon will make proper provisions so
that its successors and assigns assume the obligations set forth in the
Recapitalization Merger Agreement with respect to indemnification and
insurance.
In addition, the officers of LCA may be entitled to certain change in
control payments under their employment agreements as well as certain
additional cash benefits pursuant to a supplemental benefit program (which are
generally available to LCA's middle management). Additionally, Messrs. Kuntz
and Williams are being paid certain cash amounts upon closing of the
Recapitalization Merger in connection with their employment agreements. LCA's
employees will also be entitled to their entire account balances under LCA's
Deferred Retirement Income Plan and Retirement Savings 401(k) Plan. See
"Interests of Certain Persons in the Transactions."
LCA RIGHTS
Immediately prior to the effective time of the Recapitalization Merger, LCA
will take the necessary action to cancel (i) each outstanding option
(including stock purchase rights and options granted to outside directors) or
warrant to purchase shares of LCA Common Stock, (ii) each right to receive
shares of LCA Common Stock subject to vesting, settlement or other conditions,
(iii) each election by an employee on or before the effective time of the
Recapitalization Merger to purchase shares of LCA Common Stock under a stock
purchase arrangement in effect on or before the effective time of the
Recapitalization Merger (regardless of whether such shares of LCA Common Stock
have been purchased or have been allocated from treasury stock in response to
such election or whether the settlement or allocation of such shares of LCA
Common Stock is subject to vesting or other conditions, but, in the case of
the salary reduction plans, only with respect to shares of LCA Common Stock to
be allocated with respect to reductions in salary if such salary reduction
relates to the period prior to the
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effective time of the Recapitalization Merger), and (iv) each share of LCA
Common Stock subject to vesting or other restrictions pursuant to any employee
benefit or stock plan (including, without limitation, any stock option, stock
purchase, restricted stock or other plan) (the "LCA Stock Plans"), whether or
not such options or rights are then vested or exercisable, or such elections
have been fulfilled or honored or such restrictions have lapsed or terminated
(the "LCA Rights"), subject in each case to the rights of participants under
the LCA Stock Plans to exercise their LCA Rights pursuant to the terms of such
LCA Stock Plans prior to such cancellation. Each holder of an LCA Right so
cancelled will be entitled to receive, immediately prior to the effective time
of the Recapitalization Merger, that number of shares of LCA Common Stock as
is equal to the product of (i) the total number of shares of LCA Common Stock
subject to such holder's LCA Rights, multiplied by (ii) the excess, if any, of
(x) $40.50 over (y) the exercise price per share of LCA Common Stock
previously subject to each such LCA Right and multiplied by (iii) 0.02469 (the
"Right Consideration") upon cancellation of such LCA Rights, and such holder
will be given the opportunity to make the elections described in "--Merger
Consideration and Proration--Election Procedures" above (subject to proration
as described in "Merger Consideration and Proration") with respect to the
shares of LCA Common Stock to be issued as such Right Consideration. For
example, the holder of a stock option to purchase 1,000 shares of LCA Common
Stock at an exercise price of $30.00 per share would be entitled to receive
259.25 shares of LCA Common Stock by application of the above formula, which
would be applied by taking (i) 1,000 multiplied by (ii) 10.50 (which is the
result of $40.50 minus $30.00) and then multiplied by (iii) 0.02469. At June
30, 1997, LCA had outstanding LCA Rights consisting of stock options to
purchase 1,349,194 shares of LCA Common Stock at per share exercise prices
ranging from $13.25 to $38.75. With respect to any person subject to Section
16 of the Exchange Act, the Right Consideration will be paid on but not before
the first business day following the expiration of six months after any such
LCA Right was granted (LCA, Apollo Sub and Apollo have agreed not to assert
Section 16 liability against any such person). In all other instances, Apollo
and Paragon will cause the LCA Right Consideration to be paid within five
business days after the effective time of the Recapitalization Merger. The
surrender of a LCA Right to LCA in exchange for the LCA Right Consideration
will be deemed a release of any and all rights the holder had or may have had
in respect of such LCA Right. Prior to the effective time of the
Recapitalization Merger, LCA shall use all reasonable efforts to obtain all
necessary consents or releases from holders of LCA Rights under the LCA Stock
Plans or otherwise and take all such other action requested by Apollo Sub,
consistent with applicable law and the terms of the LCA Stock Plans and the
LCA Rights as may be necessary to give effect to the transactions contemplated
by this paragraph. The foregoing shall not limit or affect any provision of a
LCA Stock Plan that would accelerate the vesting of any Right or prevent the
acceleration, settlement, or exercise of any Right that would otherwise be
required or permitted pursuant to the terms of a LCA Stock Plan (whether by
reason of the consummation of the Offer or otherwise). No salaries shall be
reduced with respect to employment subsequent to the effective time of the
Recapitalization Merger pursuant to stock purchase elections under the salary
reduction plan.
Deferred Compensation Plans. At the effective time of the Recapitalization
Merger, each participant in the Living Centers of America, Inc. Deferred
Retirement Income Plan and each participant in LCA's Retirement Savings 401(k)
Plan (the "Deferred Plans") will become vested in his or her entire account
balances under each such plan including, without limitation, any portion of
such account balance maintained in shares of LCA Common Stock or units as
provided under such Deferred Plans. Prior to the effective time of the
Recapitalization Merger, LCA may continue to match deferrals of compensation
with shares of LCA Common Stock as provided pursuant to the Deferred Plans.
Subject to the terms described above after the effective time of the
Recapitalization Merger, Paragon may discontinue contributions or otherwise
amend the Deferred Plans; provided that Paragon will continue to maintain in
full force and effect, or otherwise preserve the tax benefits provided by,
such Deferred Plans.
STOCK EXCHANGE LISTING
Each party to the Recapitalization Merger Agreement has agreed to use
commercially reasonable efforts to retain the listing for trading of the
shares of Paragon Common Stock following the effective time of the
Recapitalization Merger.
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NO SOLICITATION OF ACQUISITION TRANSACTIONS
On May 8, 1997, LCA terminated all existing activities, discussions and
negotiations with third parties (other than Apollo, Apollo Sub and GranCare)
with respect to any possible LCA Acquisition Transaction (as defined below)
with all parties other than GranCare and Apollo. LCA has also agreed not to,
and to cause its subsidiaries, affiliates, employees, agents and
representatives not to, knowingly initiate, solicit or encourage, directly or
indirectly, any discussions or negotiations with respect to any merger,
consolidation, business combination, liquidation, reorganization, sale of
substantial assets, sale of shares of capital stock or similar transactions
involving LCA or any material subsidiary of LCA (each an "LCA Acquisition
Transaction"); provided, however, that, if during the 45 days following the
date of the Recapitalization Merger Agreement as originally entered into on
May 7, 1997 (which 45 day period has expired), the LCA Board determined, after
consultation with counsel, that it was required to do so in the exercise of
the fiduciary duties of LCA's directors to LCA or its stockholders, the LCA
Board would have been permitted to respond to, or engage in discussions with
respect to, a written offer for an LCA Acquisition Transaction during such 45
day period; and provided further, that LCA or its Board may take or disclose
to the stockholders of LCA a position with respect to any LCA Acquisition
Transaction that, in the judgment of the LCA Board, as determined in good
faith by the LCA Board based upon the advice of counsel, is required by
applicable law.
TERMINATION OF RIGHTS AGREEMENT
LCA has agreed to terminate the Rights Agreement dated as of November 17,
1994 (the "Rights Agreement Amendment") and to redeem or extinguish the rights
without any additional payment to the LCA stockholders. For a description of
the Rights Agreement, see "Description of LCA Capital Stock--Rights to
Purchase Preferred Stock."
AMENDMENTS TO LCA CHARTER
In conjunction with the Recapitalization Merger, LCA has agreed to amend and
restate the LCA Charter in the form attached hereto as Annex III. Approval of
the Amendment Proposal is a condition to Apollo's obligation to consummate the
Recapitalization Merger Agreement. See "The Recapitalization Merger
Agreement--Conditions to the Consummation of the Recapitalization Merger,"
"Amendments to LCA Charter" and "Description of LCA Capital Stock" and Annex
III hereto.
TERMINATION
The Recapitalization Merger Agreement may be terminated at any time prior to
the effective time of the Recapitalization Merger (i) by mutual written
consent of the LCA Board and of Apollo; (ii) by either Apollo or LCA if the
Recapitalization Merger shall not have been consummated on or before November
17, 1997, provided that such right will not be available to any party whose
failure to fulfill any obligation under the Recapitalization Merger Agreement
has been the cause of or resulted in the failure of the Recapitalization
Merger to occur on or before such date; (iii) by either Apollo or LCA if
either is prohibited by a final and non-appealable order, decree, ruling or
other action by any court of competent jurisdiction in the United States or
other United States governmental body from consummating the Recapitalization
Merger; (iv) prior to the approval of the LCA Proposals by the LCA
stockholders, by Apollo if the LCA Board withdraws or modifies in a manner
adverse to Apollo or Apollo Sub its favorable recommendation of the
Recapitalization Merger or has recommended an LCA Acquisition Transaction with
a party other than Apollo or any of its affiliates; (v) by LCA if (a) any of
the representations and warranties of Apollo or Apollo Sub contained in the
Recapitalization Merger Agreement were untrue in any material respect when
made or have since become, and at the time of termination remain, untrue in
any material respect, or (b) Apollo or Apollo Sub has breached or failed to
comply in any material respect with any of its obligations under the
Recapitalization Merger Agreement and, with respect to a representation or
warranty, such breach or failure to comply continues unremedied for 10 days
after Apollo or Apollo Sub has received written notice from LCA of the
occurrence of such breach or failure; (vi) prior to the approval of the LCA
Proposals, by LCA, if LCA receives a written offer with respect to any LCA
Acquisition
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Transaction with a third party or such third party has commenced a tender
offer which, in either case, the LCA Board believes in good faith is more
favorable to LCA's stockholders than the Recapitalization Merger; (vii) by
Apollo if (a) any of the representations and warranties of LCA contained in
the Recapitalization Merger Agreement were untrue in any material respect when
made or have since become, and at the time of termination remain, untrue in
any material respect, or (b) LCA has breached or failed to comply in any
material respect with any of its obligations under the Recapitalization Merger
Agreement (other than as a result of a breach by Apollo or Apollo Sub of any
of their obligations thereunder) and, with respect to a representation or
warranty, such breach shall continue unremedied for 10 days after LCA has
received written notice from Apollo or Apollo Sub of the occurrence of such
breach or failure; (viii) by Apollo or LCA if the GranCare Merger Agreement is
terminated; (ix) by Apollo or LCA if LCA fails to obtain stockholder approval
of the Recapitalization Merger Proposal or the LCA Stock Issuance Proposal; or
(x) by Apollo if LCA fails to obtain stockholder approval of the Amendment
Proposal.
TERMINATION FEES; EXPENSES
If the Recapitalization Merger is consummated, Paragon will reimburse Apollo
for all costs and expenses incurred in connection with all transactions
contemplated by the Recapitalization Merger Agreement. Except as provided in
paragraphs (a) through (c) below, if the Recapitalization Merger is not
consummated, all such costs and expenses will be paid by the party incurring
such cost or expense.
(a) If the Recapitalization Merger Agreement is terminated as described
in clause (iv) or (vi) of "Termination" above, LCA will promptly, but in no
event later than one business day after termination of this Agreement, pay
to Apollo a fee (the "Recapitalization Termination Fee") equal to $20
million in same day funds, plus interest on such amount from the date
payable until paid at a rate equal to 9% per annum;
(b) If the Recapitalization Merger Agreement is terminated as described
in clause (ix) or (x) of "Termination" above and, at the time of such
stockholder vote referred to therein, any person has made (or publicly
disclosed an intention to make) a proposal to effect an LCA Acquisition
Transaction with respect to LCA (and shall not have irrevocably withdrawn
such proposal), and within 180 days after such termination an LCA
Acquisition Transaction shall be consummated with respect to LCA, then LCA
will promptly, but in no event later than one business day after such
consummation, pay the Recapitalization Termination Fee.
(c) If the Recapitalization Merger Agreement is terminated as described
in clause (iv), (vi), (vii), (ix) or (x) of "Termination" above, LCA will
also pay the out-of-pocket fees and expenses reasonably incurred by Apollo
and Apollo Sub in connection with the Recapitalization Merger Agreement,
provided that such fees and expenses shall not exceed $6 million (plus
reasonable fees of up to $1 million in connection with any litigation with
respect to the Recapitalization Merger Agreement).
Pursuant to the Apollo letter, Apollo has agreed to pay to GranCare fifty-
five percent (after deducting any amount paid to any other financing source)
of any payment made by LCA pursuant to paragraph (a) or (b) above.
AMENDMENT AND WAIVER
The Recapitalization Merger Agreement may be amended by the parties at any
time before or after approval thereof by the stockholders of LCA; provided
that no amendment may be made after any such approval that decreases the
consideration to be received by the stockholders of LCA or that adversely
affects the rights of the LCA stockholders without the approval of such
stockholders. At any time prior to the effective time of the Recapitalization
Merger, each of the parties to the Recapitalization Merger Agreement may (i)
extend the time of the performance of any of the obligations or other acts of
the other parties thereto, (ii) waive any inaccuracies in the representations
and warranties contained therein or in any document delivered pursuant
thereto, or (iii) waive compliance with any of the agreements or conditions
contained therein. If following stockholder approval, a waiver is
contemplated, the LCA Board will determine (based on the materiality of such
waiver and other facts and circumstances) whether to seek stockholder
approval.
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REPRESENTATIONS AND WARRANTIES
The Recapitalization Merger Agreement contains customary representations and
warranties of LCA and Apollo relating to, among other things, (a)
organization, good standing, capitalization, qualification to do business and
other corporate matters, (b) the authorization, execution, delivery and
enforceability of the Recapitalization Merger Agreement, the actions taken by
the LCA Board and Apollo with respect thereto and related matters, (c)
information supplied by each of LCA and Apollo for inclusion in the
registration statement, of which this Proxy Statement/Prospectus is a part,
(d) required consents and approvals, (e) brokers, and (f) the absence of
certain litigation. The Recapitalization Merger Agreement also contains
additional customary representations of LCA relating to (i) capitalization,
(ii) the absence of certain changes or events since the end of LCA's last
fiscal year, (iii) reports filed by LCA with the Commission and the financial
statements included therein, (iv) employee benefit matters, (v) environmental
compliance, (vi) insurance, (vii) the required vote of LCA's stockholders,
(viii) compliance with laws and (ix) tax matters. Further, the
Recapitalization Merger Agreement contains additional customary
representations of Apollo relating to the Apollo Equity Commitment and
Apollo's ownership of shares of LCA Common Stock.
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THE GRANCARE MERGER AGREEMENT
GENERAL
LCA, GranCare, Apollo and LCA Sub have entered into the GranCare Merger
Agreement, as amended and restated, which provides that, subject to the
satisfaction of the conditions thereof and subject to the successful
completion of the Recapitalization Merger (see "--Conditions to the
Consummation of the GranCare Merger"), GranCare will be merged with LCA Sub
with GranCare surviving and continuing as a wholly owned subsidiary of
Paragon. The time of filing of the certificate of merger with the Secretary of
State of the State of Delaware will be the effective time of the GranCare
Merger unless otherwise provided in the Certificate of Merger. It is
anticipated that the effective time of the GranCare Merger will be immediately
after the effective time of the Recapitalization Merger.
THE DESCRIPTION OF THE GRANCARE MERGER AGREEMENT CONTAINED IN THIS PROXY
STATEMENT/PROSPECTUS IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE GRANCARE
MERGER AGREEMENT, A COPY OF WHICH IS INCLUDED AS ANNEX II TO THIS PROXY
STATEMENT/PROSPECTUS AND IS INCORPORATED IN ITS ENTIRETY HEREIN BY THIS
REFERENCE.
MERGER CONSIDERATION
Each share of GranCare Common Stock outstanding as of the effective time of
the GranCare Merger shall be converted into the right to receive 0.2346
(referred to as the "Exchange Ratio") of a share of Paragon Common Stock. Each
GranCare stockholder who would otherwise have been entitled or required to
receive a fraction of a share of Paragon Common Stock (after taking into
account all shares of GranCare Common Stock delivered by such holder) will
receive, in lieu thereof, a cash payment (without interest) equal to such
fraction multiplied by $9.50.
EXCHANGE OF CERTIFICATES
As soon as reasonably practicable after the effective time of the GranCare
Merger, American Stock Transfer & Trust Company, (the "Exchange Agent") will
mail to each holder of record of a certificate or certificates which,
immediately prior to the effective time of the GranCare Merger, represented
outstanding shares of GranCare Common Stock (the "GranCare Certificates"): (i)
a letter of transmittal; and (ii) instructions for use in effecting the
surrender of the GranCare Certificates in exchange for certificates
representing shares of Paragon Common Stock. Upon surrender of a GranCare
Certificate for cancellation (or a validly executed notice of guaranteed
delivery) to the Exchange Agent or to such other agent or agents as may be
appointed by LCA, together with such letter of transmittal, duly executed, and
any other required documents, the holder of such GranCare Certificate will be
entitled to receive in exchange therefor a certificate representing that
number of whole shares of Paragon Common Stock which such holder has the right
to receive and cash in lieu of fractional shares of Paragon Common Stock, and
the GranCare Certificate so surrendered shall forthwith be cancelled.
No dividends or other distributions with respect to Paragon Common Stock
declared or made after the effective time of the GranCare Merger with a record
date after the effective time of the GranCare Merger will be paid to the
holder of any unsurrendered GranCare Certificate with respect to the right to
receive shares of Paragon Common Stock represented thereby and no cash payment
in lieu of fractional shares will be paid to any such holder until the holder
of such GranCare Certificate shall surrender such GranCare Certificate.
CONDITIONS TO THE CONSUMMATION OF THE GRANCARE MERGER
The respective obligations of each party to effect the GranCare Merger are
subject to the satisfaction or waiver at or prior to the effective time of the
GranCare Merger of the following conditions: (i) the GranCare Merger Proposal
shall have been approved by the requisite vote of the holders of GranCare
Common Stock and the LCA Stock Issuance Proposal shall have been approved by
the requisite vote of the holders of LCA Common
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Stock; (ii) the Recapitalization Merger shall have been consummated; (iii) no
action shall have been taken and no statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered, promulgated or
enforced by any court or governmental authority against LCA, GranCare or LCA
Sub that makes the consummation of the GranCare Merger illegal or would
otherwise prohibit or restrict the consummation of the GranCare Merger; (iv)
the registration statement of which this Proxy Statement/Prospectus is a part
shall have become effective under the Securities Act and such registration
statement shall not be the subject of any stop order or proceedings seeking a
stop order, and any material "blue sky" and other state securities laws
applicable to the registration of the Paragon Common Stock shall have been
complied with; (v) the conditions to each party's obligations to effect the
Recapitalization Merger (other than the consummation of the GranCare Merger)
shall have been satisfied or waived; (vi) the applicable waiting periods under
the HSR Act shall have expired or been earlier terminated; (vii) all filings
required to be made with, and all consents, approvals, authorizations and
permits required to be obtained prior to the effective time of the GranCare
Merger from, any governmental authority in connection with the consummation of
the GranCare Merger shall have been made or obtained, except where the failure
to obtain such consents, approvals, authorizations and permits would not be
reasonably likely to result in a Material Adverse Effect (as defined in the
GranCare Merger Agreement) on GranCare or to materially adversely affect the
consummation of the GranCare Merger; and (viii) GranCare and LCA shall have
received an opinion from GranCare's counsel to the effect that the GranCare
Merger will qualify as a tax-free reorganization within the meaning of Section
368(a) of the Code and that GranCare, LCA and LCA Sub will each be a "party to
a reorganization" within the meaning of Section 368(b) of the Code.
The obligations of GranCare to effect the GranCare Merger also are subject
to the satisfaction or waiver by each of GranCare and Apollo, at or prior to
the effective time of the GranCare Merger, of the following additional
conditions: (i) no action shall have been taken and be continuing, and no
statute, rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted that would make illegal or prohibit the
consummation of the GranCare Merger or render GranCare unable to effect the
GranCare Merger; (ii) no action or proceeding brought by any governmental,
regulatory or administrative agency, authority or commission shall have been
instituted and be pending that would be reasonably likely to make the GranCare
Merger illegal or prohibit the consummation of the GranCare Merger or render
GranCare unable to effect the GranCare Merger, and there shall be no
proceeding or other action pending or threatened against LCA or its
subsidiaries that is reasonably likely to have a Material Adverse Effect;
(iii) during the 30 day period ending on the Closing Date, there shall not
have occurred and be continuing any event that has had or would have a
significant adverse effect on the functioning of the financial markets, banks
and other lending institutions in the United States; (iv) since September 30,
1996, no change shall have occurred or been threatened in the business,
operations, prospects, properties or condition (financial or other) of LCA or
any of its subsidiaries that would have or would be reasonably expected to
have a Material Adverse Effect; and (v) LCA and LCA Sub shall have performed
in all material respects their agreements and covenants contained in the
GranCare Merger Agreements required to be performed at or prior to the
effective time of the GranCare Merger and the representations and warranties
of LCA and LCA Sub contained in the GranCare Merger Agreement shall be true
and correct in all material respects when made and on and as of the effective
time of the GranCare Merger with the same force and effect as if made on and
as of such date.
The obligations of LCA and LCA Sub to effect the GranCare Merger are subject
to the satisfaction or waiver by LCA, LCA Sub and Apollo, at or prior to the
effective time of the GranCare Merger, of the following additional conditions:
(i) no action shall have been taken and be continuing, and no statute, rule,
regulation, judgment, administrative interpretation, order or injunction shall
have been enacted that would make illegal or prohibit the consummation of the
GranCare Merger or render LCA unable to effect the GranCare Merger; (ii) no
action or proceeding brought by any governmental, regulatory or administrative
agency, authority or commission shall have been instituted and be pending that
would be reasonably likely to make the GranCare Merger illegal or prohibit the
consummation of the GranCare Merger or render LCA unable to effect the
GranCare Merger, and there shall be no proceeding or other action pending or
threatened against GranCare or its subsidiaries that is reasonably likely to
have a Material Adverse Effect; (iii) there shall not have occurred any event
that has had or would have a significant adverse effect on the functioning of
the financial markets, banks and other lending
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institutions in the United States; (iv) since December 31, 1996, no change
shall have occurred or been threatened in the business, operations, prospects,
properties or condition (financial or other) of GranCare or any of its
subsidiaries that would have or would be reasonably expected to have a
Material Adverse Effect; (v) the agreements of Rule 145 affiliates (See
"Restrictions on Resales by Affiliates") required to be delivered to LCA
pursuant to the GranCare Merger Agreement shall have been furnished; and (vi)
GranCare shall have performed in all material respects with its agreements and
covenants contained in the GranCare Merger Agreement required to be performed
at or prior to the effective time of the GranCare Merger and the
representations and warranties of GranCare contained in the GranCare Merger
Agreement shall be true and correct in all material respects when made and on
and as of the effective time of the GranCare Merger with the same force and
effect as if made on and as of such date.
ACCOUNTING TREATMENT
The GranCare Merger will be treated for accounting purposes in accordance
with the rules for purchase accounting. Accordingly, the assets and
liabilities of GranCare will be recorded on Paragon's books at their estimated
fair market values with the remaining purchase price reflected as goodwill.
See the "Notes to the Living Centers of America, Inc. Pro Forma Condensed
Consolidated Financial Statements" included elsewhere in this Proxy
Statement/Prospectus.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinions of Powell, Goldstein, Frazer & Murphy LLP and Andrews &
Kurth L.L.P., counsel to GranCare, the following are the material federal
income tax consequences of the GranCare Merger. An opinion of counsel is based
on counsel's analysis of the facts and law, and expresses what counsel
believes a court would properly hold if presented with such issue, but is not
in any way binding on the IRS or the courts. Counsels' opinions are based upon
current law which is subject to change by future legislation, new rules or
interpretations of the IRS or the courts. Such changes could be applied
retroactively to completed transactions. This discussion is being provided for
general informational purposes only and is not intended to be a complete
description of all of the tax consequences of the GranCare Merger and does not
discuss state or local tax consequences. Moreover, the tax treatment of a
stockholder may vary depending upon his particular situation. In this regard,
certain stockholders (including (i) insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, and persons who are
not citizens or residents of the United States or who are foreign
corporations, foreign partnerships or foreign trusts or estates as defined for
United States federal income tax purposes, (ii) stockholders who hold shares
as part of a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for United States federal income tax purposes and
(iii) stockholders with a "functional currency" (other than the United States
dollar) may be subject to special rules not discussed in this summary. In
addition, this summary applies only to shares which are held as capital assets
and may not be applicable to a stockholder who acquired his shares pursuant to
the exercise of stock options or otherwise as compensation.
THE FOLLOWING DISCUSSION IS BASED ON EXISTING PROVISIONS OF THE CODE,
TREASURY REGULATIONS THEREUNDER AND ADMINISTRATIVE RULINGS AND COURT
DECISIONS. ALL OF THE FOREGOING ARE SUBJECT TO CHANGE AND THAT CHANGE MAY OR
MAY NOT BE RETROACTIVE, AND SUCH CHANGES COULD AFFECT THE TAX CONSEQUENCES SET
FORTH IN THIS SUMMARY.
NO RULINGS HAVE BEEN OR WILL BE REQUESTED FROM THE IRS WITH RESPECT TO THE
MATTERS DISCUSSED IN THIS SUMMARY.
EACH STOCKHOLDER IS URGED TO CONSULT HIS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO HIM OF THE GRANCARE MERGER, INCLUDING, THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND THE
POSSIBLE EFFECTS OF CHANGES OF APPLICABLE TAX LAWS.
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Tax Opinions. GranCare will receive opinions of Powell, Goldstein, Frazer &
Murphy LLP and Andrews & Kurth L.L.P., dated immediately prior to the
effective time of the GranCare Merger that:
(i) the GranCare Merger will qualify as a "reorganization" within the
meaning of Section 368(a) of the Code; and
(ii) GranCare, LCA Sub and LCA will each be a "party to a reorganization"
within the meaning of Section 368(b) of the Code with respect to the
GranCare Merger.
Such firms have also rendered opinions that the GranCare Merger will not
cause the Restructuring (as defined below) or the Distribution to be taxable
transactions. An opinion of counsel is not binding on the IRS or the courts.
Moreover, the tax opinions are based upon, among other things, certain
representations as to factual matters made by GranCare and LCA which, if
incorrect or incomplete in any material respect, would change the conclusions
reached in the opinions.
The GranCare Merger. If the GranCare Merger qualifies as a reorganization
within the meaning of Section 368(a) of the Code, the following federal income
tax consequences will result with respect to GranCare stockholders who receive
solely Paragon Common Stock (disregarding cash received for fractional
shares): (i) GranCare stockholders will not recognize gain or loss upon the
receipt of Paragon Common Stock in exchange for their shares of GranCare
Common Stock pursuant to the GranCare Merger, (ii) each holder of GranCare
Common Stock will have a basis in the Paragon Common Stock equal to his tax
basis in the GranCare Common Stock (reduced by any amount allocated to a
fractional share of Paragon Common Stock with respect to which cash is
received, as described below) and (iii) each GranCare stockholder's holding
period for his Paragon Common Stock will include the holding period in his
GranCare Common Stock, provided that the GranCare Common Stock is held as a
capital asset immediately prior to the effective time of the GranCare Merger.
Any GranCare stockholder receiving cash in lieu of fractional shares will
recognize capital gain or loss (provided the shares of GranCare Common Stock
surrendered are held as capital assets immediately prior to the effective time
of the GranCare Merger) equal to the difference between the amount of cash
received and the portion of such stockholder's basis in the shares of GranCare
Common Stock allocable to such fractional share interests, and such capital
gain or loss will be long-term capital gain or loss if the holding period for
such shares is more than a required length of time. Under recent changes made
by the Taxpayer Relief Act of 1997, long-term capital gain from the sale of
stock (which is a capital asset) that has been held for more than one year is
taxed at a maximum rate of 28%, and long-term capital gain from the sale of
stock (which is a capital asset) that has been held for more than 18 months is
taxed at a maximum rate of 20%.
If the GranCare Merger does not qualify as a reorganization within the
meaning of Section 368(a) of the Code, the GranCare stockholders will
recognize gain or loss upon the receipt of the Paragon Common Stock in
exchange for their GranCare Common Stock equal to the difference between the
fair market value of the Paragon Common Stock plus the amount of cash received
and their basis in the GranCare Common Stock.
Effect of GranCare Merger on Tax Consequences of Previous Transactions. On
February 12, 1997, Old GranCare and GranCare engaged in certain transactions
(the "Restructuring") prior to the Distribution. Powell, Goldstein, Frazer and
Murphy LLP rendered its opinion, based on certain representations and
assumptions, that (i) the Distribution would be tax-free for federal income
tax purposes to Old GranCare under Section 355(c)(1) of the Code and to the
stockholders of Old GranCare under Section 355(a) of the Code and (ii) the
Restructuring would be tax-free for federal income tax purposes under Sections
361(a)(1) and 368(a)(1)(D) of the Code.
Pursuant to the terms of the Distribution and the Restructuring, Old
GranCare agreed to indemnify GranCare and its stockholders from any resulting
tax liability in the event the Restructuring and the Distribution were not
accorded tax-free treatment as a result of certain events that would include
the GranCare Merger.
GranCare will receive opinions of Powell, Goldstein, Frazer & Murphy LLP and
Andrews & Kurth L.L.P. immediately prior to the effective time of the GranCare
Merger to the effect that the GranCare Merger will not
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cause the Restructuring or the Distribution to be other than tax-free
transactions, and these opinions will be based on certain assumptions and
representations of the management of GranCare and LCA. Those will include a
representation that, at the time of the Distribution and the Restructuring,
there was no plan or intention to effect the GranCare Merger or to otherwise
dispose of the GranCare Common Stock. The opinions will represent the law
firms' best legal judgment and will not be binding on the IRS or the courts.
If the IRS were to successfully challenge the federal income tax treatment of
the Restructuring or the Distribution as a result of the GranCare Merger,
GranCare would be liable pursuant to its indemnity obligation for substantial
amounts related to taxes likely to be incurred by Old GranCare and for any
liability of Old GranCare to the stockholders of Old GranCare at the time of
the Distribution. Such liability could have a material adverse effect on
Paragon.
Back-up Withholding Requirements. United States federal tax code information
requirements and backup withholding at the rate of 31% may apply with respect
to dividends paid on, and proceeds from the taxable sale, exchange or other
disposition of GranCare Common Stock, unless the stockholder (i) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates these facts, or (ii) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A stockholder who does not supply GranCare with his correct
taxpayer identification number may be subject to penalties imposed by the IRS.
Any amount withheld under these rules will be refunded or credited against the
stockholder's federal income tax liability. Stockholders should consult their
tax advisers as to their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption. If information reporting
requirements apply to a stockholder, the amount of dividends paid with respect
to such shares will be reported annually to the IRS and to such stockholder.
These backup withholding tax and information reporting rules currently are
under review by the United States Treasury Department, and proposed Treasury
Regulations issued on April 15, 1996 would modify certain of such rules
generally with respect to payments made after December 31, 1997. Accordingly,
the application of such rules could be changed.
GOVERNMENTAL AND REGULATORY APPROVALS
The GranCare Merger is subject to the requirements of the HSR Act. The HSR
Act requires, among other things, that certain information regarding the
GranCare Merger be furnished to the Antitrust Division and the FTC. The
required waiting period expired on July 25, 1997. The GranCare Merger may be
subject to applicable local, state and federal requirements for notice and/or
review of the transaction, or the post-merger operation of LCA and/or GranCare
health care facilities and businesses, which can encompass permits, licenses,
certificates of need, third party payor certifications and contracts, and/or
other requirements, all as may be mandated by the applicable jurisdiction
within which any facility or business is located. Other than the foregoing,
neither LCA nor GranCare is aware of any other governmental or regulatory
approvals required for the consummation of the GranCare Merger. Neither LCA
nor GranCare believe that satisfying such requirements will prevent or delay
the consummation of the Transactions.
OTHER APPROVALS AND CONSENTS
In certain instances, the GranCare Merger or the subsidiary guarantees and
subsidiary liens contemplated under the New Credit Facility, or both, will
require the consent of third-party creditors, to the extent the obligations
then owed to such creditors will not be refinanced with proceeds of the New
Credit Facility or Senior Subordinated Debt. Certain of such creditors hold
liens on significant assets of GranCare and its subsidiaries, under
documentation which does not currently permit prepayment or which would permit
prepayment only upon terms which GranCare deems to be prohibitively expensive.
GranCare is in the process of contacting the creditors whose obligations are
currently expected to survive the consummation of the Mergers, with regard to
obtaining such consents, but has not yet determined whether such consents will
be granted or upon what terms such consents may be available. No assurances
can be given with regard to the ultimate likelihood of obtaining such
consents, or the economic and other terms upon which any such consent might be
conditioned, or the materiality
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thereof. The inability of GranCare to obtain certain of such consents could
adversely affect GranCare's ability to consummate the GranCare Merger. See
"Description of Financing--Treatment of Certain Existing LCA and GranCare
Indebtedness--HRPT Obligations."
In addition to the foregoing third-party creditor consents, GranCare and its
subsidiaries may be required to obtain consents from various landlords in
connection with the granting of the liens alluded to in the immediately
preceding paragraph (and, in a few cases, in connection with the GranCare
Merger). While consents of a similar nature were obtained from many such
landlords in connection with the Existing GranCare Credit Facility, no
assurances can be given as to the likelihood of obtaining such consents in the
context of the Recapitalization, or as to the economic and other terms upon
which any such consent might be conditioned, or the materiality thereof.
EFFECT ON GRANCARE EMPLOYEE BENEFIT PLANS AND EMPLOYEE AGREEMENTS
Benefit Maintenance. The GranCare Merger Agreement provides that from and
after the effective time of the GranCare Merger, Paragon and its subsidiaries
will honor in accordance with their terms all existing employment, severance,
consulting and salary continuation agreements between GranCare or any of its
subsidiaries and any current or former officer, director, employee or
consultant of GranCare or any of its subsidiaries.
In addition to honoring the agreements, and subject to Paragon's right to
discontinue contributions or otherwise amend such agreements, until the first
anniversary of the effective time of the GranCare Merger, Paragon and its
subsidiaries will provide or will cause to be provided to each current or
former employee (presently entitled to benefits) of GranCare or its
subsidiaries (excluding employees covered by collective bargaining agreements)
(i) employee compensation, benefit plans, programs, policies and arrangements,
that are in the aggregate no less favorable than those currently provided by
GranCare and its subsidiaries to each such employee and former employees; and
(ii) severance benefits that are in the aggregate no less favorable to any
employee of GranCare or any of its subsidiaries than those currently provided
to each such employee.
Service Credit. To the extent permitted under applicable law, each employee
of GranCare or its subsidiaries will be given credit for all service with
GranCare or its subsidiaries (or service credited by GranCare or its
subsidiaries) under all employee benefit plans, programs, policies and
arrangements maintained by Paragon in which they participate or in which they
become participants for purposes of eligibility, vesting and benefit accrual
including, without limitation, for purposes of determining (i) short-term and
long-term disability benefits, (ii) severance benefits, (iii) vacation
benefits and (iv) benefits under any retirement plan.
Indemnification and Insurance. LCA and LCA Sub have agreed to indemnify the
present and former directors, officers and employees of GranCare and its
subsidiaries, as provided in the Certificate of Incorporation or Bylaws (or
similar documents) of GranCare or any subsidiary and the indemnification
agreements between GranCare (or any of its subsidiaries) and its directors,
officers and employees in effect on the date of the GranCare Merger Agreement
for a period of not less than the statute of limitations applicable to matters
covered by such documents and which have occurred prior to the effective time
of the GranCare Merger. For six years from the effective time of the GranCare
Merger, Paragon will maintain in effect the policies of directors' and
officers' liability insurance being maintained by GranCare as of the date of
the GranCare Merger Agreement (or policies providing similar coverage).
Further, Paragon has agreed to indemnify and hold harmless (and will advance
expenses to), to the fullest extent permitted under applicable law, each
director, officer, employee, fiduciary and agent of GranCare or any subsidiary
of GranCare against any costs and expenses (including reasonable attorney's
fees), judgments, fines, losses, claims, damages, liabilities and amounts paid
in settlement in connection with any claim, action, suit, proceeding or
investigation relating to any of the transactions contemplated by the GranCare
Merger Agreement and will pay all reasonable costs and expenses (including
reasonable attorney's fees) that may be incurred by any indemnified parties in
enforcing the indemnity and other obligations provided for in the GranCare
Merger Agreement. In the event Paragon or any of its successors or assigns
(A) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger
or (B) transfers all or substantially all of its properties and assets to any
person, Paragon has agreed to make proper provisions so that its successors
and assigns assume the obligations set forth in the GranCare Merger Agreement
with respect to indemnification and insurance.
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In addition, the officers of GranCare may be entitled to certain change in
control payments under their employment agreements as well as certain cash
benefits under the GranCare Annual Incentive Plan and Stockholder Value
Program.
GRANCARE STOCK OPTIONS
Each GranCare Option issued and outstanding immediately prior to the
effective time of the GranCare Merger, will be cancelled at the effective time
of the GranCare Merger in exchange for the issuance of fully vested options to
purchase shares of Paragon Common Stock (the "Replacement Options"). Each
Replacement Option will constitute an option to acquire, on the same terms and
conditions as were applicable under the cancelled GranCare Option, the number
of shares of Paragon Common Stock equal to the product of the Exchange Ratio
and the number of shares of GranCare Common Stock subject to the cancelled
GranCare Option, at a price per share equal to the amount obtained by dividing
the exercise price of the cancelled GranCare Option by the Exchange Ratio. As
soon as practicable following the effective time of the GranCare Merger, but
in no event later than 15 days following the effective time of the GranCare
Merger, Paragon will deliver to holders of the cancelled GranCare Options
appropriate option agreements representing the fully vested right to acquire
shares of Paragon Common Stock on the same terms and conditions as contained
in the cancelled GranCare Options. LCA has agreed to file and cause to be
effective as of the effective time of the GranCare Merger a registration
statement on Form S-8 or other appropriate form, with respect to shares of
Paragon Common Stock that will be subject to the Replacement Options and use
commercially reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
contained therein) for so long as such Replacement Options remain outstanding.
There are currently outstanding options to purchase 2,666,061 shares of
GranCare Common Stock, 2,069,439 of which are currently exercisable at prices
ranging from $0.30 to $8.25 per share, convertible, in the aggregate, to
options to purchase 605,622 shares of Paragon Common Stock, all of which will
be exercisable at prices ranging from $1.28 to $35.17 per share. Also, certain
non-officer employees of GranCare have been granted awards of restricted
shares under the 1996 Stock Incentive Plan that have not yet been issued, all
of which will be issued prior to the effective time of the GranCare Merger
pursuant to GranCare's standard Restricted Stock Award Agreement, which
provides for acceleration of vesting in the event of a "Change in Control" (as
defined therein), which the GranCare Merger constitutes.
RESTRICTIONS ON RESALES BY AFFILIATES
LCA has registered under the Securities Act the shares of Paragon Common
Stock that the stockholders of GranCare will be entitled to receive upon
consummation of the GranCare Merger. Those GranCare stockholders who are not
deemed to be "affiliates" of GranCare may freely sell the shares of Paragon
Common Stock they receive in the GranCare Merger, without additional
registration under the Securities Act or an exemption from the registration
requirements thereunder (including Rule 145 promulgated under the Securities
Act). Stockholders of GranCare who are deemed to be "affiliates" of GranCare
may resell the shares of Paragon Common Stock received in the GranCare Merger
in transactions in compliance with Rule 145 under the Securities Act, pursuant
to an effective registration statement under the Securities Act or in
transactions exempt from registration, and may not use this Proxy
Statement/Prospectus to effect resales of the shares of Paragon Common Stock
that they receive.
Rule 145, as currently in effect, imposes restrictions on the manner in
which such affiliates of GranCare may make resales and also on the volume of
resales that such affiliates, and others with whom they may act in concert,
may make in any three-month period. The term "affiliates" as defined in the
Securities Act includes any person who, directly or indirectly, controls, is
controlled by, or is under common control with, GranCare at the time the
GranCare Merger is submitted to a vote of the stockholders of GranCare.
Certain executive officers and directors of GranCare will be deemed
"affiliates" of GranCare for purposes of the Securities Act, each of whom has
pursuant to the GranCare Merger Agreement, agreed to use commercially
reasonable efforts to cause each such person to have delivered an affiliate's
agreement to LCA on or prior to the effective time of the GranCare Merger in
the form to be approved by the parties to the GranCare Merger Agreement.
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CONDUCT OF BUSINESS OF GRANCARE PRIOR TO THE GRANCARE MERGER
GranCare has agreed that, prior to the effective time of the GranCare
Merger, GranCare will, and will cause its subsidiaries to, carry on their
respective operations in the ordinary and usual course of business and
consistent with past practice and will use commercially reasonable efforts
consistent with prudent business practice to preserve intact in all material
respects their current business organizations, keep available the services of
their current officers and key employees and maintain their existing
relationships with those having significant business relationships with them,
in each case in all material respects. In addition, GranCare has agreed that,
prior to the effective time of the GranCare Merger, subject to certain
exceptions, except as expressly contemplated by the GranCare Merger Agreement
or unless LCA shall otherwise consent in writing (which consent will not be
unreasonably withheld), GranCare will not, and will cause each of its
subsidiaries not to, among other things: (i) except for issuances of capital
stock of GranCare's subsidiaries to GranCare or a wholly owned subsidiary of
GranCare, issue, sell or pledge, or authorize or propose the issuance, sale or
pledge of (A) GranCare Securities or Subsidiary Securities (as both terms are
defined in the GranCare Merger Agreement), in each case, other than GranCare
Common Stock issuable upon exercise or vesting of the GranCare Options or
allocations or issuances pursuant to the GranCare Plans, or (B) any other
securities in respect of, in lieu of or in substitution for GranCare Common
Stock outstanding on the date of the GranCare Merger Agreement; (ii) otherwise
acquire or redeem, directly or indirectly, any GranCare Securities or
Subsidiary Securities (including GranCare Common Stock); (iii) split, combine
or reclassify its capital stock or declare, set aside, make or pay any
dividend or distribution (whether in cash, stock or property) on any shares of
capital stock of GranCare or any of its subsidiaries (other than cash
dividends paid to GranCare by its wholly-owned subsidiaries with regard to
their capital stock); (iv) (A) make any acquisition, by means of a merger or
otherwise, of assets or securities, or any sale, lease, encumbrance or other
disposition of assets or securities, in each case involving the payment or
receipt of consideration of $10 million or more outside the ordinary and usual
course of business consistent with past practice in all material respects, or
(B) other than in the ordinary course of business, enter into a material
contract or grant any release or relinquishment of any material contract
rights; (v) incur or assume any long-term debt for borrowed money except for
debt incurred in the ordinary course of business consistent in all material
respects with past practice; (vi) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person except wholly owned subsidiaries of
GranCare, except in the ordinary course of business consistent in all material
respects with past practice; (vii) except in connection with transactions
permitted by (iv) above, make any loans, advances or capital contributions to,
or investments in, any other person (other than wholly owned subsidiaries of
GranCare) in the aggregate in excess of $10 million; (viii) change any of the
accounting principles or practices used by it or any of its subsidiaries,
except as required by the Commission or required by United States generally
accepted accounting principles; (ix) adopt any amendments to the Certificate
of Incorporation or Bylaws (or similar documents) of GranCare or any
subsidiary; (x) except as may be required under any previously existing
agreement or GranCare Plan, grant any stock related awards; (xi) enter into
any new, or amend any existing, employee benefit, pension or other plan
(whether or not subject to ERISA) or employment, severance, consulting or
salary continuation agreements with any officers, directors or key employees,
or grant any increases in the compensation or benefits to officers, directors
and key employees; (xii) enter into, amend, or extend any material collective
bargaining or other labor agreement, except as required by law and except in
the ordinary course of business consistent in all material respects with past
practice; (xiii) adopt, make any material amendment to or terminate any
material employee benefit plan, as required by law or to maintain tax
qualified status or as requested by the IRS in order to receive a
determination letter for such employee benefit plan; (xiv) merge or
consolidate with or transfer all or substantially all of it assets to another
corporation or other business entity or individual; (xv) liquidate, wind-up or
dissolve (or suffer any liquidation or dissolution); or (xvi) agree in writing
or otherwise to take any of the foregoing actions.
CONDUCT OF BUSINESS OF LCA PRIOR TO THE GRANCARE MERGER
LCA has agreed that, prior to the effective time of the GranCare Merger, LCA
will, and will cause its subsidiaries to, carry on their respective operations
in the ordinary and usual course of business and consistent
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with past practice and will use commercially reasonable efforts consistent
with prudent business practice to preserve intact their current business
organizations, keep available the services of their current officers and key
employees and maintain their existing relationship with those having
significant business relationships with them, in each case in all material
respects. In addition, LCA has agreed that, prior to the effective time of the
GranCare Merger, subject to certain exceptions, except as expressly
contemplated by the GranCare Merger Agreement or unless GranCare shall
otherwise consent in writing (which consent will not be unreasonably
withheld), LCA will not, and will cause each of its subsidiaries not to, among
other things: (i) except for issuances of capital stock of LCA's subsidiaries
to LCA or a wholly owned subsidiary of LCA, issue (as defined in the Grancare
Merger Agreement), sell or pledge, or authorize or propose the issuance, sale
or pledge of (A) LCA Securities or Subsidiary Securities (as both terms are
defined in the GranCare Merger Agreement), in each case, other than LCA Common
Stock issuable upon exercise or vesting of the LCA Rights or allocations or
issuances pursuant to the LCA Plans, or (B) any other securities in respect
of, in lieu of or in substitution for LCA Common Stock outstanding on the date
of the GranCare Merger Agreement; (ii) otherwise acquire or redeem, directly
or indirectly, any LCA Securities or Subsidiary Securities (including LCA
Common Stock); (iii) split, combine or reclassify its capital stock or
declare, set aside, make or pay any dividend or distribution (whether in cash,
stock or property) on any shares of capital stock of LCA or any of its
subsidiaries (other than cash dividends paid to LCA by its wholly owned
subsidiaries with regard to their capital stock); (iv) (A) make any
acquisition, by means of a merger or otherwise, of assets or securities, or
any sale, lease, encumbrance or other disposition of assets or securities, in
each case involving the payment or receipt of consideration of $10 million or
more outside the ordinary and usual course of business consistent with past
practice in all material respects, or (B) other than in the ordinary course of
business, enter into a material contract or grant any release or
relinquishment of any material contract rights; (v) incur or assume any long-
term debt for borrowed money except for debt incurred in the ordinary course
of business consistent in all material respects with past practice; (vi)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
except wholly owned subsidiaries of LCA, except in the ordinary course of
business consistent in all material respects with past practice; (vii) except
in connection with transactions permitted by (iv) above, make any loans,
advances or capital contributions to, or investments in, any other person
(other than wholly owned subsidiaries of LCA) in the aggregate in excess of
$10 million; (viii) change any of the accounting principles or practices used
by it or any of its subsidiaries, except as required by the Commission or
required by United States generally accepted accounting principles; (ix) adopt
any amendments to the LCA Charter or LCA Bylaws (or similar documents) of LCA
or any subsidiary; (x) except as may be required under any previously existing
agreement or LCA Plan, grant any stock related awards; (xi) enter into any
new, or amend any existing, employee benefit, pension or other plan (whether
or not subject to ERISA) or employment, severance, consulting or salary
continuation agreements with any officers, directors or key employees, or
grant any increases in the compensation or benefits to officers, directors and
key employees; (xii) enter into, amend, or extend any material collective
bargaining or other labor agreement, except as required by law and except in
the ordinary course of business consistent in all material respects with past
practice; (xiii) adopt, make any material amendment to or terminate any
material employee benefit plan, except as required by law or to maintain tax
qualified status or as requested by the IRS in order to receive a
determination letter for such employee benefit plan; (xiv) merge or
consolidate with or transfer all or substantially all of its assets to another
corporation or other business entity or individual; (xv) liquidate, wind-up or
dissolve (or suffer any liquidation or dissolution); or (xvi) agree in writing
or otherwise to take any of the foregoing actions.
NO SOLICITATION OF ACQUISITION TRANSACTIONS
No Solicitation by GranCare. On May 8, 1997, GranCare terminated all
existing activities, discussions and negotiations with third parties (other
than LCA) with respect to any merger, consolidation, business combination,
liquidation, reorganization, sale of substantial assets, sale of shares of
capital stock or similar transactions involving GranCare or any material
subsidiary of GranCare (each a "GranCare Acquisition Transaction"). GranCare
has also agreed not to, and to use all reasonable efforts to cause its
subsidiaries, affiliates, employees, agents and representatives not to,
knowingly initiate, solicit or encourage, directly or indirectly, any
discussions or negotiations with any third party with respect to a GranCare
Acquisition
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Transaction; provided, however, that if GranCare's Board determines after
consultation with counsel, that it is required to do so in the exercise of the
fiduciary duties of GranCare's directors to GranCare or its stockholders, the
GranCare Board may respond to, or engage in discussions with respect to, a
written offer for a GranCare Acquisition Transaction; and provided further,
that GranCare or the GranCare Board may take and disclose to the stockholders
of GranCare a position with respect to any GranCare Acquisition Transaction
that, in the judgment of the GranCare Board, as determined in good faith by
the Board based upon the advice of counsel, is required by applicable law.
GranCare has also agreed to promptly communicate to LCA the terms of any
proposal for a GranCare Acquisition Transaction that it receives and to keep
LCA informed as to the status of any such matters.
No Solicitation by LCA. On May 8, 1997, LCA terminated all existing
activities, discussions and negotiations with third parties (other than
GranCare and Apollo) with respect to any possible LCA Acquisition Transaction.
LCA has also agreed not to, and to cause its subsidiaries, affiliates,
employees, agents and representatives not to, knowingly initiate, solicit or
encourage, directly or indirectly, any discussions or negotiations with
respect to an LCA Acquisition Transaction; provided, however, that, if during
the 45 days following the date of the GranCare Merger Agreement as originally
entered into on May 7, 1997 (which 45 day period has expired) LCA's Board
determined, after consultation with counsel, that it was required to do so in
the exercise of the fiduciary duties of LCA's directors to LCA or its
stockholders, the LCA Board would have been permitted to respond to, or engage
in discussions with respect to, a written offer for an LCA Acquisition
Transaction during such 45 day period; and provided further, that LCA or the
LCA Board of Directors may take or disclose to the stockholders of LCA a
position with respect to any such LCA Acquisition Transaction that, in the
judgment of the LCA Board, as determined in good faith by the LCA Board based
upon the advice of counsel, is required by applicable law. LCA has also agreed
to promptly communicate to GranCare the terms of any proposal for an LCA
Acquisition Transaction that it receives and to keep GranCare informed as to
the state of any such matters.
TERMINATION
The GranCare Merger Agreement may be terminated at any time prior to the
effective time of the GranCare Merger Agreement (i) by mutual written consent
of the Boards of Directors of LCA and GranCare, (ii) by either LCA or GranCare
if the GranCare Merger shall not have been consummated on or before November
17, 1997, provided that such right will not be available to any party whose
failure to fulfill any obligation under the GranCare Merger Agreement has been
the cause of or resulted in the failure of the GranCare Merger to occur on or
before such date; (iii) by either LCA or GranCare if either is prohibited by a
final and non-appealable order, decree, ruling or other action by any court of
competent jurisdiction in the United States or other United States
governmental body from consummating the GranCare Merger; (iv) by GranCare if
(a) any of the representations and warranties of LCA or LCA Sub contained in
the GranCare Merger Agreement were untrue in any material respect when made or
have since become, and at the time of termination remain, untrue in any
material respect, or (b) LCA or LCA Sub has breached or failed to comply in
any material respect with any of its obligations under the GranCare Merger
Agreement and, with respect to a representation or warranty, such breach
continues unremedied for 10 days after LCA or LCA Sub has received written
notice from GranCare of the occurrence of such breach or failure; (v) prior to
LCA stockholder approval of the GranCare Merger, by LCA if the GranCare Board
withdraws or modifies in a manner adverse to LCA or LCA Sub its favorable
recommendation of the GranCare Merger or has recommended a GranCare
Acquisition Transaction with a party other than LCA or any of its affiliates;
(vi) prior to GranCare stockholder approval by GranCare if GranCare receives a
written offer with respect to any GranCare Acquisition Transaction with a
third party or such third party has commenced a tender offer which, in either
case, the GranCare Board believes in good faith is more favorable to
GranCare's stockholders than the GranCare Merger; (vii) by LCA if (a) any of
the representations and warranties of GranCare contained in the GranCare
Merger Agreement were untrue in any material respect when made or have since
become, and at the time of termination remain, untrue in any material respect,
or (b) GranCare has breached or failed to comply in any material respect with
any of its obligations under the GranCare Merger Agreement (other than as a
result of a breach by LCA or LCA Sub of any of its obligations thereunder)
and, with respect to
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a representation or warranty, such breach shall continue unremedied for 10
days after GranCare has received written notice from LCA or LCA Sub of the
occurrence of such breach or failure; (viii) by LCA or GranCare if the
Recapitalization Merger Agreement is terminated; or (ix) by LCA if GranCare
fails to obtain its stockholders' approval of the GranCare Merger at the
meeting held for such purpose (or any adjournment thereof) or (b) by GranCare
if LCA fails to obtain its stockholders' approval of the LCA Stock Issuance
Proposal at the meeting held for such purpose (or any adjournment thereof).
TERMINATION FEES; EXPENSES
Except as provided in paragraphs (a) through (d) below, whether or not the
GranCare Merger is consummated, all costs and expenses incurred in connection
with the GranCare Merger, the GranCare Merger Agreement and the transactions
contemplated thereby will be paid by the party incurring such cost or expense.
(a) If (i) GranCare terminates the GranCare Merger Agreement as described
in clause (vi) of "Termination" above or (ii) LCA terminates the GranCare
Merger Agreement as described in clause (v) of "Termination" above,
GranCare will promptly, but in no event later than one business day after
termination of the GranCare Merger Agreement pay to LCA a fee (the
"GranCare Termination Fee") equal to $20 million in same day funds, plus
interest on such amount from the date payable until paid at a rate equal to
9% per annum.
(b) If LCA terminates the GranCare Merger Agreement as described in
clause (ix)(a) of "Termination" above, and, at the time of the stockholder
vote referred to therein, any person has made (or publicly disclosed an
intention to make) a proposal to effect a GranCare Acquisition Transaction
with respect to GranCare (and shall not have irrevocably withdrawn such
proposal), and within 180 days after such termination a GranCare
Acquisition Transaction shall be consummated with respect to GranCare, then
GranCare will promptly (but in no event later than one business day) after
such consummation, pay the GranCare Termination Fee.
(c) If LCA terminates the GranCare Merger Agreement as described in
clause (ii) of "Termination" above, and no vote shall have been taken with
respect to the GranCare Merger Proposal, and a proposal to effect a
GranCare Acquisition Transaction with respect to GranCare is pending at any
time between October 15, 1997 and November 17, 1997 (a "No Vote
Termination") and within 180 days after such termination a GranCare
Acquisition Transaction shall be consummated, then GranCare will promptly
(but in no event later than one business day) after such consummation, pay
the GranCare Termination Fee.
(d) If the GranCare Merger Agreement is terminated as described in clause
(v), (vi), (vii) or (ix)(a) of "Termination" above or pursuant to a "No
Vote Termination," GranCare will also pay the out-of-pocket fees and
expenses reasonably incurred by LCA and LCA Sub in connection with the
GranCare Merger Agreement.
Pursuant to the Apollo Letter, in the event the GranCare Merger is
terminated in a manner as described in paragraphs (a), (b) or (c) above,
GranCare will also promptly, but in no event later than one day after such
termination, pay a fee to Apollo in cash equal to $5 million. GranCare has
also agreed to reimburse Apollo for certain fees and expenses to the extent
that LCA does not reimburse Apollo pursuant to the Recapitalization Merger
Agreement.
AMENDMENT AND WAIVER
The GranCare Merger Agreement may be amended by the parties at any time
before or after approval thereof by the stockholders of GranCare and the
approval by the LCA stockholders of the issuance of the Paragon Common Stock
in connection with the GranCare Merger; provided that, no amendment may be
made after any such approval that decreases the GranCare Merger Consideration
or that adversely affects the rights of GranCare stockholders, without the
approval of such stockholders. At any time prior to the effective time of the
GranCare Merger, each of the parties to the GranCare Merger Agreement may (i)
extend the time of the performance of any of the obligations or other acts of
the other parties thereto, (ii) waive any inaccuracies in the representations
and warranties contained therein or in any document delivered pursuant
thereto, or (iii) waive compliance with
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any of the agreements or conditions contained therein. If, following
stockholder approval, a waiver is contemplated, the GranCare Board, or the LCA
Board, as the case may be, will determine (based on the materiality of such
waiver and other facts and circumstances) whether to seek stockholder
approval.
REPRESENTATIONS AND WARRANTIES
The GranCare Merger Agreement contains customary representations and
warranties of LCA and GranCare relating to, among other things, (a)
organization, good standing, qualification to do business and other corporate
matters, (b) capitalization, (c) the authorization, execution, delivery and
enforceability of the GranCare Merger Agreement, the actions taken by the LCA
and GranCare Boards with respect thereto and related matters, (d) the absence
of certain changes or events since the end of each company's last fiscal year,
(e) reports filed by each company with the Commission and the financial
statements included therein, (f) information supplied by each company for
inclusion in the registration statement of which this Proxy
Statement/Prospectus is a part, (g) required consents and approvals, (h)
brokers, (i) employee benefit matters, (j) the absence of certain litigation,
(k) tax matters, (l) environmental compliance, (m) ownership of shares and (n)
the receipt by each company of the opinions discussed above under "Description
of Transactions--Opinions of GranCare Financial Advisors" and "Description of
Transactions--Opinions of LCA Financial Advisors." The GranCare Merger
Agreement also contains additional customary representations of GranCare
relating to (i) employee benefit plans, (ii) insurance and (iii) the required
vote of GranCare's stockholders.
AMENDMENTS TO LCA CHARTER
The obligation of Apollo to consummate the Recapitalization Merger is
dependent upon the approval by the stockholders of LCA of certain amendments
to the LCA Charter. Set forth below is a discussion of the proposed amendments
to the LCA Charter. Certain of the proposed amendments to the LCA Charter will
change or remove provisions that may currently deter a third party from
initiating a proxy contest, making a tender offer or otherwise attempting to
obtain control of Paragon, even though such a transaction could be beneficial
to Paragon and its stockholders. For a discussion of the effect of the
proposed amendments to the LCA Charter on the rights of stockholders, see
"Comparison of Stockholder Rights." The proposed amendments to the LCA Charter
are set forth as the Paragon Charter in the form of Amended and Restated
Certificate of Incorporation of LCA included as Annex III hereto. Stockholders
are encouraged to review the full text of the Paragon Charter in connection
with their consideration of the Amendment Proposal. In addition, a number of
matters concerning corporate governance will, after the effective time of the
Recapitalization Merger, be covered by the Paragon Bylaws and the Stockholders
Agreement with Apollo. See "Certain Other Agreements," "Comparison of
Stockholder Rights" and the Paragon Bylaws and Stockholders Agreement attached
hereto Annex IV and Annex V, respectively.
AMENDMENT TO CORPORATE NAME
Article First of the LCA Charter provides that the name of the corporation
is Living Centers of America, Inc. Under the Paragon Charter, the name of the
corporation would be Paragon Health Network, Inc.
AMENDMENTS TO PROVISIONS RELATING TO THE BOARD OF DIRECTORS OF PARAGON
Subparagraph (A) of Article Fifth of the LCA Charter provides that the LCA
Board shall consist of not less than three nor more than nine directors. Under
the Paragon Charter, the minimum number of directors would be set at five and
the maximum number of directors would be set at 15. Additionally, under the
Paragon Charter, any future adjustment to the range of the number of members
of the Paragon Board will require the vote of two-thirds of the entire Paragon
Board instead of the vote of three-quarters of the entire LCA Board as
currently required under the LCA Charter.
Subparagraph (A) of Article Fifth of the LCA Charter also provides for a
classified Board of Directors, with the entire Board of Directors being
divided into three classes, with each director being elected to serve for a
term ending on the date of the third annual meeting following the annual
meeting at which such director was elected. Under the Paragon Charter, the
classified Board of Directors is eliminated and the entire Paragon Board will
stand for election at any given annual meeting of stockholders, with each
director serving until the next annual meeting of stockholders or until his
successor has been duly elected and qualified.
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Subparagraph (B) of Article Fifth of the LCA Charter provides that a
director of LCA may not be removed during his term of office without cause.
The Paragon Charter revises this provision to allow directors to be removed
with or without cause upon the affirmative vote of two-thirds of the combined
voting power of all then outstanding voting securities entitled to vote in the
election of directors, voting together as a single class (such securities are
referred to herein as "voting securities").
AMENDMENTS TO PROVISIONS RELATING TO STOCKHOLDER MEETINGS
Article Ninth of the LCA Charter prohibits stockholders of LCA from taking
action by written consent. Article Ninth also provides that special meetings
of stockholders may be called at any time by the LCA Board, or by a committee
thereof that has been duly granted such power pursuant to resolutions adopted
by the entire LCA Board or the Bylaws of LCA. No other person or persons are
permitted to call special meetings of stockholders. Under the terms of the
Paragon Charter special meetings of stockholders shall be held as set forth in
the Paragon Bylaws which provide that such meetings may be called at any time
by the Paragon Board of Directors, by a committee thereof whose authority
includes the right to call such meetings and by one or more stockholders
holding an aggregate of at least 25% of the outstanding shares of Paragon
Common Stock. The Paragon Charter does not prohibit stockholder action by
written consent.
AMENDMENTS TO PROVISIONS RELATING TO BUSINESS COMBINATIONS
Article Tenth of the LCA Charter contains a "fair price" provision that
requires the approval of holders of not less than 66 2/3% of the outstanding
voting securities of LCA (including not less than 66 2/3% of the outstanding
shares of voting securities not owned, directly or indirectly, by persons who
are 10% or greater stockholders of LCA and their affiliates ("Related
Persons") unless the business combination is approved by the holders of not
less than 90% of the voting securities of LCA) as a condition for mergers,
consolidations and certain other business combinations involving LCA and any
Related Person. The 66 2/3% voting requirement of the "fair price" provision
is not applicable to a business combination involving a holder of 10% or more
of LCA's outstanding voting securities if: (i) the acquisition by such holder
of such stock or the transaction is approved in advance of such person
becoming a holder of 10% of LCA's outstanding voting securities by not less
than 75% of the directors of LCA then holding office; (ii) the business
combination is between LCA and another corporation of which LCA owns 100% of
the outstanding voting securities, or (iii) all of the following conditions
are met: (a) the transaction is a merger or consolidation proposed to occur
within one year of the time such holder acquired 10% of LCA's outstanding
voting securities and the price to be paid to holders of LCA Common Stock is
at least as high as the highest price paid by such holder in acquiring any of
its LCA Common Stock, (b) the consideration to be paid in the transaction is
cash or the same form of consideration paid by such holder to acquire a
majority of its holdings of LCA Common Stock, (c) between the date of the
acquisition by such holder of 10% of LCA's voting securities in the
transaction, there has been no failure to declare or pay preferred quarterly
stock dividends and no reduction in LCA Common Stock dividends (except as
approved by the majority of the unaffiliated directors), no further
acquisition of voting securities by such holder and no benefit, direct or
indirect, is received by such holder through loans or other financial
assistance from LCA or tax credits or other tax advantages provided by LCA,
and (d) a proxy statement shall have been mailed to stockholders of record at
least 30 days prior to the consummation of the transaction for the purpose of
soliciting general stockholder approval of such transaction.
The Paragon Charter does not contain a similar "fair price" provision.
AMENDMENTS TO PROVISIONS RELATING TO CHARTER AMENDMENTS
Article Eleventh of the LCA Charter provides that the vote of two-thirds of
all voting securities is required in order to amend the provisions contained
in Article Eleventh and Article Sixth (concerning the amendment of the bylaws
of LCA by stockholders), Seventh (concerning liability of directors), Ninth
(concerning the prohibition against stockholder action without meetings), and
Tenth (concerning the 66 2/3% vote of stockholders
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required in connection with certain business combinations between LCA and
Related Persons). Article Eleventh of the LCA Charter further provides that no
action imposing cumulative voting in the election of directors may be taken,
unless approved by the affirmative vote of two-thirds of all shares of voting
securities.
Article Eleventh of the Paragon Charter provides that the provisions set
forth in Articles Fifth (dealing with removal of directors), Sixth (dealing
with the bylaws of Paragon by stockholders), Seventh (dealing with liability
of directors) and Eleventh (dealing with amendments), may be amended or
repealed only with the affirmative vote of not less than 66 2/3% of the then
outstanding voting securities of Paragon.
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS
GENERAL
Certain members of LCA's and GranCare's management and the LCA Board and
GranCare Board may be deemed to have interests in the Transactions in addition
to their interests as LCA and GranCare stockholders generally, which may cause
potential conflicts of interest. Each of the LCA Board and GranCare Board was
aware of these factors and considered them, among other factors, in approving
the Transactions. Among these factors are (i)(a) the acceleration of the
vesting of currently unvested LCA Rights, as well as the cashing out of all
LCA Rights and (b) the termination of all existing GranCare Options in respect
of the issuance of fully vested Replacement Options as a result of the
consummation of the Mergers as described under "The GranCare Merger
Agreement--GranCare Stock Options," and "The Recapitalization Merger
Agreement--LCA Rights;" (ii) the indemnification provisions of the Merger
Agreements as described under "The GranCare Merger Agreement--Effect on
GranCare Employee Benefit Plans and Employee Agreements" and "The
Recapitalization Merger Agreement--Effect on LCA Employee Benefit Plans and
Employee Agreements;" (iii) the payment by Paragon of the premiums for
directors' and officers' liability insurance for current LCA and GranCare
directors and officers as described under "The GranCare Merger Agreement--
Effect on GranCare Employee Benefit Plans and Employee Agreements," and "The
Recapitalization Merger Agreement--Effect on LCA Employee Benefit Plans and
Employee Agreements;" (iv) cash payments in the event of any early termination
of certain LCA and GranCare incentive compensation plans and (v) cash
severance payments which certain LCA and GranCare executive officers will be
entitled to in certain circumstances pursuant to their employment agreements.
Certain of the executive officers of LCA and GranCare will be executive
officers of Paragon.
MANAGEMENT AND SHARE OWNERSHIP
For a list of the individuals who will serve as executive officers of
Paragon following the Mergers, see "Directors and Officers of Paragon
Following the Mergers."
In addition, pursuant to the Stockholders Agreement to be entered into by
the Apollo Investors and Paragon, the Apollo Investors have agreed for a
period not to exceed 10 years from the effective time of the Mergers to vote
all of the shares of Paragon Common Stock beneficially owned by the Apollo
Investors in favor of the election of the nominees of the Paragon Board's
nominating committee. See "Certain Other Agreements."
As of the LCA Record Date and GranCare Record Date, the executive officers
and directors of LCA (23 persons) and the executive officers and directors of
GranCare (29 persons) beneficially owned (excluding shares subject to
outstanding stock options) an aggregate of 3,441,418 shares, or approximately
20%, of the issued and outstanding LCA Common Stock and 3,381,453 shares, or
13.3%, of the issued and outstanding shares of GranCare Common Stock,
respectively. All such shares will be treated in the Transactions in the same
manner as shares of LCA and GranCare held by other stockholders of LCA and
GranCare.
LCA STOCK PLANS
The Recapitalization Merger Agreement provides that immediately prior to the
effective time of the Recapitalization Merger, all LCA Rights, including LCA
Rights held by directors and executive officers, will be
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cancelled immediately prior to the effective time of the Recapitalization
Merger, subject to the rights of participants under the LCA Stock Plans to
exercise their LCA Rights pursuant to the terms of such LCA Stock Plans. Each
holder of LCA Rights will be entitled to receive that number of shares of LCA
Common Stock equal to the product of (i) the total number of shares of LCA
Common Stock subject to such holder's LCA Rights, multiplied by (ii) the
excess, if any, of $40.50 over the exercise price per share previously subject
to such LCA Rights, multiplied by (iii) 0.02469, and such holder shall be
given the opportunity to make the elections pursuant to the Recapitalization
Merger Agreement with respect to the shares of LCA Common Stock to which he or
she is entitled. See "The Recapitalization Merger Agreement--LCA Rights."
As of the LCA Record Date, the number of shares of LCA Common Stock subject
to LCA Rights held by each of the five most highly compensated executive
officers of LCA and each director of LCA was: Edward L. Kuntz (114,385), Leroy
D. Williams (55,975), William R. Korslin (8,750), Keith Krein, M.D. (24,010)
and Susan Thomas Whittle (16,450), Donald C. Beaver (5,750), Eddy J. Rogers,
Jr. (5,400), Anthony M. Frank (5,400), Dr. Roger J. Bulger (5,400) and Robert
H. Hurlburt (3,800). The executive officers of LCA (18 persons) held options
to purchase an aggregate of 689,550 shares of LCA Common Stock, 370,760 of
which were not currently exercisable, but will vest and become exercisable
upon the closing of the Recapitalization Merger. In addition, the non-employee
directors of LCA (five persons) held options to purchase an aggregate of
71,750 shares of LCA Common Stock, 25,000 of which were not currently
exercisable, but will vest and become exercisable upon the closing of the
Recapitalization Merger.
LCA DEFERRED PLANS AND OTHER EMPLOYEE BENEFIT PLANS
The Recapitalization Merger Agreement provides that at the effective time of
the Recapitalization Merger, each participant, including executive officers,
in LCA's Deferred Plans shall become vested in his or her entire account
balances under each such plan, including, without limitation, any portion of
such account balance maintained in shares of LCA Common Stock or units of LCA
Common Stock as provided under such Deferred Plans. Prior to the effective
time of the Recapitalization Merger, LCA may continue to match deferrals of
compensation with shares of LCA Common Stock as provided pursuant to the
Deferred Plans. See "The Recapitalization Merger Agreement--LCA Rights."
The Recapitalization Merger Agreement also provides that until the first
anniversary of the effective time of the Recapitalization Merger, Paragon and
its subsidiaries will (subject to their right to discontinue matching
deferrals or otherwise amend its Deferred Plans) provide or will cause to be
provided to each current or former employee (presently entitled to benefits)
of LCA or its subsidiaries (excluding employees covered by collective
bargaining agreements) (i) employment compensation, benefit plans, programs,
policies and arrangements that are no less favorable in the aggregate than
those currently provided by LCA and its subsidiaries to each such employee and
former employee and (ii) severance benefits that are in the aggregate no less
favorable to any employee of LCA or any of its subsidiaries than those
currently provided to each such employee. See "The Recapitalization Merger
Agreement--Effect on LCA Employee Benefit Plans and Employee Agreements."
LCA EMPLOYMENT AGREEMENTS
Executive Officers. The Recapitalization Merger Agreement provides that
after the effective time of the Recapitalization Merger, Paragon will honor
all existing employment, severance, consulting and salary continuation
agreements between LCA and its directors, officers and employees, including
the employment agreements with LCA's five most highly compensated executive
officers as reflected in the proxy statement for its most recent annual
stockholders meeting: Messrs. Kuntz, Williams, Korslin, Dr. Krein and Ms.
Whittle. LCA also has employment agreements with thirteen other executive
officers. All of these employment agreements were amended pursuant to
resolutions adopted by the LCA Board of Directors on May 7, 1997 after
reviewing recommendations and analyses of LCA's management and outside
compensation consultants to LCA's Compensation Committee and information
provided by CSFB. As amended, such agreements generally provide for certain
severance payments to be made to an employee if, within six months prior to or
24 months following a "change of control," such employee is terminated
"without cause" (as defined in the employment agreements)
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or resigns after the occurrence of one of a number of specified changes in
such employee's employment, including a diminution in title, job
responsibilities or pay or a requirement to work primarily at a location more
than 20 miles from the employee's business location as of May 7, 1997. Such
employment agreements (as amended) also generally provide that in the event a
change of control occurs and a person becomes entitled to receive any
payments, all such payments shall be made in a lump sum immediately upon
accrual and LCA will provide or cause to be provided, at LCA's sole cost and
expense, outplacement services to all such employees (other than Mr. Kuntz).
Upon consummation of the Mergers, a "change of control" will have occurred
under each of the employment agreements.
Severance payments, when payable, will be made pursuant to two separate
provisions: a standard severance payment and an additional change of control
payment. As described below, each of Messrs. Kuntz and Williams has waived any
right to continue after his date of termination to receive his base salary for
the remainder of the term of his employment agreement. Messrs. Kuntz and
Williams would still be entitled to payment of a current year bonus as accrued
to the date of termination and payment for accrued but unused vacation days.
In addition, such persons receive continued coverage under certain medical and
other benefit plans for the remainder of the term of their employment
agreements. Each of Mr. Korslin, Dr. Krein and Ms. Whittle would be entitled
to standard severance payments based on their years of service as follows: (i)
a payment ranging from six to 24 months' of current base salary, (ii) payment
of a current year bonus to the date of termination and (iii) payment for
accrued but unused vacation days. In addition, such persons receive continued
coverage under certain medical and other benefit plans for up to 24 months.
With respect to the standard severance payment based on years of service, it
is anticipated that Mr. Korslin and Dr. Krein would be entitled to the maximum
of 24 months' and Ms. Whittle would be entitled to 12 months' of base salary.
Each of Messrs. Kuntz and Williams would also be entitled to a change of
control payment equal to three times the total of his current annual base
salary plus the average of his annual bonus over the prior three years. Each
of Mr. Korslin, Dr. Krein and Ms. Whittle would also be entitled to a change
of control payment equal to 12 months' of current base salary plus current
base bonus.
Each of the other executive officers of LCA would be entitled under their
employment agreements to the same standard severance and additional change in
control payments (and other payments and benefits) as Mr. Korslin, Dr. Krein
and Ms. Whittle.
In the event that any of the following persons is terminated or resigns and
is entitled to severance and change in control payments following the
consummation of the Mergers, then based on current salaries and bonuses, the
following approximate payments would be made: Mr. Kuntz, $2,514,680; Mr.
Williams, $1,722,526; Mr. Korslin, $912,000; Dr. Krein, $774,000; Ms. Whittle,
$471,900 and all executive officers as a group (18 persons), $12,644,388. Mr.
Kuntz will not be an officer of Paragon; accordingly he will receive the
payments indicated. Messrs. Kuntz and Williams will also be entitled to other
payments in connection with their employment agreements. See "--Additional
Payments to Messrs. Kuntz and Williams."
To the extent an employee is liable for payment of any excise taxes under
Section 4999 of the Code with respect to these severance and change in control
payments, an additional "gross up" amount would be paid in order to make such
employee whole.
Middle Managers. In connection with making recommendations regarding
amending the employment agreements for the officers, the Compensation
Committee on May 7, 1997 reviewed the terms of a proposed supplemental "change
in control" benefit program to amend LCA's existing severance plan to provide
additional benefits to certain members of LCA's middle management who did not
have employment agreements based on their length of service to LCA. Following
such review and the LCA Board's consideration of recommendations from the
Compensation Committee and outside compensation consultants, the LCA Board
approved such program. As adopted, this program is designed to pay (upon
circumstances similar to those provided in employment agreements described
above) eligible employees a supplemental payment of between zero and one
hundred percent of each such employee's "base severance" (determined in
accordance with the terms of LCA's existing severance policy), depending on
such employee's length of service.
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Additional Payments to Messrs. Kuntz and Williams. Also on May 7, 1997, the
LCA Board agreed to pay to Messrs. Kuntz and Williams at the closing of the
Mergers the amounts of $1,000,000 and $500,000, respectively, in consideration
of (i) the agreement by each of them to waive any right to receive, in the
event of a termination thereof in connection with a change of control,
continuation of his base salary as described above, (ii) the services rendered
to LCA by Messrs. Kuntz and Williams after LCA became public by expanding
LCA's operations and enhancing value to the stockholders and (iii) the
services rendered to LCA by Messrs. Kuntz and Williams in connection with the
Transactions.
Employment Agreement with Mr. Beaver. Mr. Beaver as Vice Chairman of the
Board also has an employment agreement with LCA in substantially the same form
as the agreements with Messrs. Kuntz and Williams. A "change of control" will
have occurred under Mr. Beaver's employment agreement upon consummation of the
Mergers. Like Messrs. Kuntz and Williams, Mr. Beaver has waived any right to
continue after his date of termination to receive his base salary for the
remainder of the term of his employment but would still be entitled to receive
payment of a current year bonus to the date of termination and payment for
accrued but unused vacation days. In addition, he would receive continued
medical and other benefits. Mr. Beaver would also be entitled to a change of
control payment equal to three times the total of his current annual base
salary plus the average of his annual bonus over the prior three years
(actually, a shorter period since he entered into the agreement in August
1995). It is currently anticipated that Mr. Beaver will resign and be entitled
to severance and change of control payments following the consummation of the
Mergers of approximately $766,667. An additional "gross up" amount would also
be paid in the event Mr. Beaver is liable for payment of any excise taxes
under Section 4999 of the Code.
COMPENSATION PAID TO LCA SPECIAL COMMITTEE
In consideration of their service on the LCA Special Committee during the
course of several months preceding the execution of the Merger Agreements,
each of the directors of LCA who served on such committee was paid the
following fees: Mr. Frank, chairman of the committee, received $75,000, Mr.
Rogers received $50,000 and each other member of the committee (Messrs.
Beaver, Bulger and Hurlbut) received $45,000.
INDEMNIFICATION OF LCA AND GRANCARE EMPLOYEES AND DIRECTORS
Pursuant to the Recapitalization and GranCare Merger Agreements, all rights
to indemnification existing in favor of present or former directors, officers
and employees of LCA or GranCare or any of their respective subsidiaries as
provided in applicable articles of incorporation, bylaws or indemnification
agreements with respect to matters occurring prior to the effective time of
the Mergers shall survive and continue for a period of not less than the
statutes of limitations applicable to such matters, and Paragon shall comply
fully with its obligations thereunder. In addition, Paragon will maintain for
a period of six years after the effective times of the Mergers officers' and
directors' liability insurance and fiduciary liability insurance on terms no
less advantageous to the indemnified parties than existing insurance. Paragon
is also required to indemnify and hold harmless (and shall advance expenses
to), to the fullest extent permitted under applicable law, each director,
officer, employee, fiduciary and agent of LCA or GranCare or their respective
subsidiaries against any costs, expenses, amounts paid in settlement or other
liabilities in connection with any claims relating to the Transactions. See
"The Recapitalization Merger Agreement--Effect on LCA Employee Benefit Plans
and Employee Agreements" and "The GranCare Merger Agreement--Effect on
GranCare Employee Benefit Plans and Employee Agreements."
GRANCARE STOCK PLANS
As of the GranCare Record Date, the executive officers of GranCare (as a
group) held options to purchase an aggregate of 1,477,760 shares of GranCare
Common Stock pursuant to GranCare's stock option plans, 367,160 of which were
not currently exercisable. In addition, the non-employee directors of GranCare
(as a group) held options to purchase an aggregate of 681,500 shares of
GranCare Common Stock, 135,000 of which were not currently exercisable. In
connection with the consummation of the GranCare Merger, all of the options
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held by such executive officers and non-employee directors will immediately be
terminated in consideration of the issuance of Replacement Options to purchase
shares of Paragon Common Stock. The treatment of such options is described
under "The GranCare Merger Agreement--GranCare Stock Options."
As a result of the GranCare Merger, Mr. Burleson, GranCare's Chairman of the
Board of Directors and former President and Chief Executive Officer through
February 12, 1997, will become fully vested in unvested options to purchase
15,000 shares of GranCare Common Stock, Mr. Athans GranCare's Chief Operating
Officer, will become fully vested in unvested options to purchase 109,560
shares of GranCare Common Stock, and Evrett W. Benton, GranCare's Executive
Vice President, Chief Administrative Officer and Secretary, will become fully
vested in unvested options to purchase 61,600 shares of GranCare Common Stock.
These options are in addition to other vested options held by each of Messrs.
Burleson, Athans and Benton. All unvested options held by Messrs. Schneider
and Finney were terminated upon their resignations from GranCare effective
July 31, 1997 and January 1, 1997, respectively. Following is a table showing
the number of vested and unvested options held on June 30, 1997 by Messrs.
Burleson, Athans and Benton and the number of Replacement Options that will be
held by such individuals following the GranCare Merger:
EFFECT ON GRANCARE OPTIONS
<TABLE>
<CAPTION>
PARAGON
REPLACEMENT OPTIONS
OPTIONS OUTSTANDING OUTSTANDING POST-
AS OF JUNE 30, 1997 GRANCARE MERGER(2)
--------------------- ----------------------
VESTED UNVESTED(1) VESTED UNVESTED
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Gene E. Burleson.............. 294,760 15,000 72,670 0
M. Scott Athans............... 253,000 109,560 85,057 0
Evrett W. Benton.............. 278,000 61,600 79,670 0
All executive officers and
directors as a group......... 1,477,760 502,160 464,489 0
</TABLE>
- --------
(1) All of the options in this column were granted on February 12, 1997
following the consummation of the Vitalink Merger at an exercise price of
$8.25 per share which exercise price, following the GranCare Merger, will
become $35.17 per share with respect to all such unexercised options.
(2) The number of Replacement Options in this column give effect to the
GranCare Merger and were calculated by multiplying the number of options
by the Exchange Ratio.
GRANCARE EXECUTIVE DEFERRED COMPENSATION PLAN
GranCare maintains the GranCare, Inc. Executive Deferred Compensation Plan,
which is a nonqualified, unfunded plan of deferred compensation. Executive
officers and other highly compensated employees of GranCare are permitted to
participate. Under the Executive Deferred Compensation Plan, participants can
make pre-tax contributions and receive GranCare matching contributions in an
amount determined in the discretion of GranCare. Employees become vested in
GranCare matching contributions after they have been employed for three years
or upon a change of control. The GranCare Merger will constitute a change of
control for purposes of this plan. Upon a change of control, all benefits owed
to participants under this plan are to be funded in a "rabbi trust."
Thereafter, distributions from the rabbi trust are made as provided under the
plan, generally upon termination of employment. As a result of the GranCare
Merger, Mr. Athans will become vested in a GranCare matching contribution of
$6,461. Messrs. Benton, Burleson and Finney are not presently entitled to any
matching contributions under this plan. Mr. Schneider is no longer employed by
GranCare. Upon consummation of the GranCare Merger, the executive officers of
GranCare as a group will become vested in GranCare matching contributions of
$21,986, collectively.
GRANCARE EXECUTIVE LIFE INSURANCE PLAN
Certain executive officers of GranCare participate in the GranCare, Inc.
Executive Life Insurance Plan. Under that plan, in return for GranCare's
funding of certain cash value life insurance policies owned by a
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participant, the participant promises to repay to GranCare out of the policy
cash surrender value the amount advanced by GranCare towards policy premiums
and enters into a collateral assignment of his or her life insurance policy to
GranCare to secure repayment of the amount funded by GranCare. If the
participant retires from GranCare or is involuntarily terminated without cause
(as defined in the split dollar agreement), the participant is entitled to
retain the entire cash surrender value of the policy and the collateral
assignment is released. If within three years following a change of control of
GranCare, a participant is terminated without cause (as defined in the
applicable split dollar agreement), or terminates for "good reason" (as
defined in the applicable split dollar agreement), the obligation to repay
GranCare from the cash surrender value of the policy is forgiven and the
collateral assignment is released. The GranCare Merger will constitute a
change of control under the GranCare Executive Life Insurance Plan and as a
result Messrs. Burleson, Athans and Benton will each become vested in the full
cash surrender value of their policy and the obligation to repay GranCare will
be forgiven in the amounts of $229,309, $108,797, and $84,594, respectively,
as of June 30, 1997. The policies of Messrs. Finney and Schneider were
terminated in connection with their resignation from GranCare.
GRANCARE EMPLOYMENT AGREEMENTS
Most of the executive officers of GranCare intend to enter into an
employment agreement with GranCare. Under the employment agreements, if the
executive officers are terminated without cause (as defined in the agreement)
or if they terminate employment for good reason because the employment
agreement is breached by GranCare or their position, authority or
responsibilities are adversely changed, they will be entitled to change in
control payments equal to one year's base salary for Vice Presidents, no less
than one year's and no more than two year's base salary for Senior Vice
Presidents and three years' base salary for Executive Vice Presidents and the
Chief Executive Officer. Upon consummation of the GranCare Merger, Messrs.
Athans and Benton will be entitled to three years' salary and benefit
continuation and, if such executive's date of termination is after the first
six months of a fiscal year, a prorata bonus. In addition, all stock options,
warrants, rights and other stock awards become fully vested. Upon a change of
control, as defined in the employment agreements, similar provisions still
apply but the events which constitute good reason for the executive to
terminate and receive salary and benefit continuation and other benefits is
expanded to include a reduction in base salary or annual bonus opportunity, a
change of more than 50 miles in where the executive is based or the failure of
the successor entity to assume the employment agreement. The GranCare Merger
constitutes a change of control under the employment agreements. If Messrs.
Athans and Benton were to be terminated after the GranCare Merger without
cause or they terminate employment for good reason, the total salary
continuation and bonus payable to them would be $1,245,000 and $1,050,000,
respectively. Mr. Burleson's employment agreement was assumed by Vitalink in
connection with the Vitalink Merger and Mr. Burleson does not currently have
an employment agreement with GranCare. Messrs. Schneider's and Finney's
employment agreements were terminated in connection with their resignations.
Upon the consummation of the GranCare Merger, the GranCare executive officers
as a group will be entitled to change in control payments under their
employment agreements equal to approximately $5.7 million (excluding certain
payments that the Company may be required to make to reimburse Messrs. Athans
and Benton for any excise taxes that may be payable pursuant to Section 280G
of the Internal Revenue Code, the amount of which, if any, cannot be presently
determined).
GRANCARE ANNUAL AND LONG TERM INCENTIVES
GranCare's executive officers participate in certain cash incentive plans
maintained by GranCare that provide for annual cash bonuses (the "Annual
Incentive Plan") and long term cash bonuses (the "Stockholder Value Program")
based upon the performance of GranCare. Both the Annual Incentive Plan and
Stockholder Value Program provide that the benefits under such plans vest upon
a change in control. The maximum amount of payments that GranCare may be
required to make pursuant to such incentive plans is approximately $2 million
(assuming that the Annual Incentive Plan and Stockholder Value Program are
paid out of the target and 50th percentile levels). In addition, shares of
restricted GranCare Common Stock held by non-officers of GranCare which are
unvested will vest as a consequence of the change of control event that will
occur upon completion of the GranCare Merger. Such restricted stock has a
value of approximately $1.2 million.
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Payments of benefits under the Annual Incentive Plan will depend on
GranCare's attainment at the effective time of the GranCare Merger of pre-
determined earnings per share ("EPS") targets. Each year, the Management
Compensation Committee (the "Committee") establishes EPS goals at the
threshold, target and superior levels. Increasing percentages of a
participant's salary are paid based on whether GranCare's EPS equals or
exceeds the threshold, target and superior level goals. At the effective time
of the GranCare Merger, GranCare's EPS for the portion of the fiscal year then
ended will be compared to a pro-rata portion of the EPS goals in order to
determine if awards under the Annual Incentive Plan are payable. Assuming that
awards under the Annual Incentive Plan are paid at the target level upon
consummation of the Transactions, based on a full fiscal year of GranCare's
performance, Messrs. Athans and Benton will be entitled to receive $273,900
and $215,600, respectively, and all executive officers as a group would
receive payments of $1,452,700. Mr. Burleson does not participate in the
Annual Incentive Plan. Messrs. Finney and Schneider are no longer employed by
GranCare.
Under the Stockholder Value Program, as of the beginning of a performance
period, a participant is granted that number of performance units as the
Committee determines, up to a maximum of 4,000 units. The value of each
performance unit at the end of a three-year performance period is then based
upon the relative rank of GranCare's Total Stockholder Return ("TSR") as
compared with a peer group of other companies and the S & P 500 at the end of
the performance period. The value of each performance unit as of the end of a
performance period is then determined based on the following schedule:
<TABLE>
<CAPTION>
PERFORMANCE
TSR PERCENTILE UNIT VALUE
-------------- -----------
<S> <C>
Less than 50................................................... $ 0
50........................................................... 500
55........................................................... 750
60........................................................... 1,000
65........................................................... 1,300
70........................................................... 1,600
75........................................................... 1,950
80........................................................... 2,300
85........................................................... 2,650
90 or more................................................... 3,000
</TABLE>
Upon the effectiveness of the GranCare Merger, a pro-rata portion of the
performance units will vest (based on the number of months that have elapsed
since the performance units were granted divided by 36) and will be paid out
based on GranCare's TSR vis a vis the peer group and the S&P 500. Assuming
that the Stockholder Value Program is paid at the 50th percentile and assuming
9 months of service have elapsed under the plan, Messrs. Athans and Benton
will receive $34,250 and $19,252, respectively and the executive officers as a
group would receive $321,250. Mr. Burleson does not participate in the
Stockholder Value Program. Messrs. Finney and Schneider are no longer employed
by GranCare.
CERTAIN INVESTMENTS IN PARAGON
Two private investment funds, Healthcare Equity Partners, L.P. and
Healthcare Equity QP Partners, L.P. (together, the "Healthcare Funds"), that
are affiliates of William G. Petty, Jr., a director of GranCare, are expected
to make a $10 million equity investment in Paragon as Apollo Investors in
connection with the Mergers. Mr. Petty is a principal of Beecken, Petty &
Company, L.L.C., the general partner of each of the Healthcare Funds, and
indirectly owns less than 1% of the limited partnership interests in the
Healthcare Funds. Any such investment would be made by purchasing Apollo Sub
Shares at a price of $40.50 per share with each such share to be converted
into one share of Paragon Common Stock in the Recapitalization Merger.
Walnut Growth Partners, L.P., a private investment fund and an affiliate of
Gene E. Burleson's and Joel S. Kanter's, both GranCare directors and, in the
case of Mr. Burleson, Chairman of the Board of GranCare, may make up to a $1
million equity investment in Paragon as one of the Apollo Investors in
connection with the Mergers.
In addition, Keith B. Pitts, who will be Chairman of the Paragon Board and
Chief Executive Officer of Paragon, is expected to make up to a $2 million
equity investment in Paragon as one of the Apollo Investors in connection with
the Mergers. Mr. Pitts is not currently an officer or director of either LCA
or GranCare; he has become a consultant to Apollo in connection with the
Transactions.
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EMPLOYMENT AGREEMENTS AND OTHER BENEFITS OF PARAGON OFFICERS
Following the Mergers, certain officers of LCA and GranCare will become
employees of Paragon. See "Directors and Officers of Paragon Following the
Mergers." It is expected that such officers will be employed on substantially
the same terms as under their present employment arrangements with adjustments
in certain cases (including compensation) to reflect changes in
responsibilities or duties. To the extent that officers of LCA and GranCare
have employment agreements with their respective companies, the Merger
Agreements provide that Paragon will honor such agreements. It is also
anticipated that the individuals who will serve as officers of Paragon will
receive options to purchase shares of Paragon Common Stock and participate in
other bonus plans following the Mergers, although plans in this regard have
not yet been finalized.
Following the consummation of the Transactions, Paragon intends to enter
into an employment agreement with Mr. Pitts providing for a four-year term,
with annual automatic extensions of the term for an additional year unless Mr.
Pitts or Paragon elects not to have the term so extended. It is anticipated
that the employment agreement will provide a base salary to Mr. Pitts of
$700,000 per year, with annual adjustments as determined by the Compensation
Committee of Paragon, and will permit Mr. Pitts to earn an annual bonus of up
to 150% of his annual base salary if certain performance standards,
established by the Compensation Committee of Paragon, are achieved. The Board
of Directors of Paragon intends to recommend to the Compensation Committee of
Paragon that Mr. Pitts be granted, on the date the Transactions are
consummated, stock options to purchase 3.3% of the fully diluted common shares
of Paragon at a price of $40.50 per share or, if greater, the fair market
value per share on the date the options are granted.
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DESCRIPTION OF FINANCING
EQUITY FINANCING
Pursuant to the terms of the Recapitalization Merger Agreement and subject
to its terms and conditions, the Apollo Investors will contribute not less
than $240 million and, at Apollo's sole election, up to $250 million in cash
to Apollo Sub in exchange for shares of common stock of Apollo Sub at a price
of $40.50 per share with each such share to be converted into one share of
Paragon Common Stock in the Recapitalization Merger. The Apollo Investors may
transfer shares of Apollo Sub common stock to certain other purchasers at a
purchase price of $40.50 per share. For a discussion of the conditions to
closing of the Recapitalization Merger, see "The Recapitalization Merger
Agreement--Conditions to the Consummation of the Recapitalization Merger."
DESCRIPTION OF SENIOR CREDIT FACILITY
In order to finance a portion of the cash consideration to be paid pursuant
to the Recapitalization Merger, LCA will replace its existing $500 million
credit facility with a syndicate of banks (the "Existing LCA Credit
Facility"), with a $840 million credit facility to be provided by CMB and
other banks (the "New Credit Facility") pursuant to the Financing Commitment
Letter.
The Existing LCA Credit Facility includes a $350 million five-year revolving
credit and competitive advance facility ("Tranche A") and a $150 million 364-
day revolving credit facility with a four-year term out ("Tranche B"). The
Existing LCA Credit Facility allows LCA to borrow at the base rate in effect
at NationsBanc of Texas, N.A. or at LIBOR plus an applicable margin ranging
from 0.25% to 0.65% and also provides for a facility fee of 0.15% to 0.225%.
The applicable margin and facility fee are subject to quarterly adjustment
depending on LCA's leverage ratio at the quarter end immediately preceding the
borrowing. As of May 31, 1997, approximately $278 million was outstanding
under the Existing LCA Credit Facility.
The New Credit Facility will consist of four components: a 6 1/2-year term
loan facility in an aggregate principal amount equal to $240 million (the
"Tranche A Term Loan Facility"); a 7 1/2-year term loan facility in an
aggregate principal amount equal to $225 million (the "Tranche B Term Loan
Facility"); an 8 1/2-year term loan facility in an aggregate principal amount
equal to $225 million (the "Tranche C Term Loan Facility"); and a 6 1/2-year
revolving credit facility in the maximum amount of $150 million (the
"Revolving Credit Facility"). Loans made under the Tranche A Term Loan
Facility ("Tranche A Term Loans"), loans made under the Tranche B Term Loan
Facility ("Tranche B Term Loans"), and loans made under the Tranche C Term
Loan Facility ("Tranche C Term Loans") are sometimes collectively referred to
herein as "Term Loans." Advances under the Revolving Credit Facility are
sometimes referred to as "Revolving Loans."
The obligations of Paragon under the New Credit Facility and any related
interest rate protection agreements will be guaranteed by all or substantially
all of the subsidiaries of Paragon (including, without limitation, GranCare
and substantially all of its subsidiaries other than any subsidiaries that are
party to any direct borrowing or other financing arrangements that prohibit
guarantees of parent company obligations). Paragon's obligations in connection
with the New Credit Facility and the obligations of the subsidiary guarantors
will be secured by liens on all or substantially all of their respective
tangible and intangible assets to the maximum extent possible, including, but
not limited to mortgages on owned unencumbered real property, blanket security
interests in personal property and pledges of substantially all of the capital
stock of Paragon's subsidiaries.
The Term Loans will be drawn in full on the closing date of the New Credit
Facility to finance a portion of the Recapitalization Merger and GranCare
Merger (i.e., the LCA Cash Price for shares of LCA Common Stock and the Cash
Election Price GranCare Common Stock) , to refinance existing LCA and GranCare
indebtedness and to pay related fees and expenses incurred in connection with
the consummation of the Mergers. Subject to compliance with customary
conditions precedent, the Revolving Credit Facility will be available to be
drawn from time to time by Paragon for working capital and general corporate
purposes (including permitted acquisitions) in the ordinary course of
business. The Revolving Credit Facility will also contain a sub-limit (in an
as yet undetermined amount) for the issuance of letters of credit.
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The Tranche A Term Loans will be amortized in quarterly installments in
amounts to be agreed upon. The other Term Loans will be amortized in nominal
quarterly installments for the first six years (in the case of the Tranche B
Term Loans) or seven years (in the case of the Tranche C Term Loans), and
thereafter in substantial quarterly installments until their maturity dates.
Principal amounts outstanding under the Revolving Credit Facility will be due
and payable in full at maturity, approximately 6 1/2-years after the closing
date of the New Credit Facility.
Interest on outstanding borrowings will accrue, at the option of Paragon, at
the ABR or at the Eurodollar Rate plus, in each case, the Applicable Margin
(as those terms are hereinafter defined). "ABR" is defined as the highest of
(i) the rate of interest publicly announced by CMB from time to time as its
prime rate, (ii) the secondary market rate for three-month certificates of
deposit (adjusted for statutory reserve requirements), plus 1.00% and (iii)
the federal funds effective rate from time to time plus 0.5%. The term
"Eurodollar Rate" means the rate (adjusted for statutory reserve requirements
for eurocurrency liabilities) at which Eurodollar deposits for one, two, three
or six months (as selected by Paragon) are offered to CMB in the interbank
Eurodollar market. The term "Applicable Margin" means a percentage that will
vary in accordance with a pricing matrix based upon operating performance
targets and step-downs to be agreed upon with CMB. For the first six months
after the closing date of the New Credit Facility, however, the Applicable
Margin for Revolving Loans and Tranche A Term Loans will equal 1.25% for loans
based on ABR ("ABR Loans") and 2.25% for loans based on the Eurodollar Rate
("Eurodollar Loans"); for Tranche B Term Loans, 1.50% in the case of ABR Loans
and 2.50% in the case of Eurodollar Loans; and for Tranche C Term Loans, 1.75%
in the case of ABR Loans and 2.75% in the case of Eurodollar Loans. Interest
on ABR Loans will be due and payable quarterly in arrears. Interest on
Eurodollar Loans will be due and payable on the last day of the applicable
one, two, three or six-month interest period (and, in the case of Eurodollar
Loans having an interest period longer than three months, on each successive
date three months after the first day of such interest period).
In addition to paying interest on outstanding principal under the New Credit
Facility, Paragon will be required to pay a commitment fee to the lenders in
the Revolving Credit Facility, calculated on the average daily unused portion
of the Revolving Credit Facility at a rate equal to a percentage that will
vary in accordance with a pricing matrix based upon operating performance
targets and step-downs to be agreed upon with CMB and Chase. For the first six
months after the closing date of the New Credit Facility, however, the
commitment fee will be calculated at the rate of 0.5%. Paragon will also pay
letter of credit commissions on the outstanding stated amount of all letters
of credit issued under the Revolving Credit Facility at a rate equal to the
Applicable Margin for Eurodollar Loans under the Revolving Credit Facility,
plus a 25-basis point fronting fee to the bank issuing such letters of credit
and the customary administrative, issuance, drawing, payment, negotiation and
amendment charges of the issuing bank. All commitment fees, letter of credit
commissions and fronting fees will be due and payable quarterly in arrears.
Loans under the New Credit Facility may be prepaid and commitments may be
reduced by Paragon in minimum amounts to be agreed upon. Optional prepayments
of the Term Loans will be applied pro rata to the unmatured installments of
the Tranche A Term Loans, the Tranche B Term Loans and the Tranche C Term
Loans; provided, however, that so long as any Tranche A Term Loans remain
outstanding each holder of a Tranche B Term Loan or a Tranche C Term Loan will
have the right to refuse any such optional prepayment otherwise allocable to
it, in which case the amount so refused will be applied as an additional
prepayment of the Tranche A Term Loans. Optional prepayments of the Terms
Loans may not be reborrowed.
Subject in each case to certain exceptions to be agreed upon between Paragon
and CMB, the following amounts are required to be applied, as mandatory
prepayments, to prepay the Term Loans: (a) 75% of the net cash proceeds of the
sale or issuance of equity by Paragon or any of its subsidiaries; (b) 100% of
the net cash proceeds of the incurrence of certain indebtedness after the
closing date of the New Credit Facility by Paragon or any of its subsidiaries;
(c) 75% of the net cash proceeds of any sale or other disposition by Paragon
or any of its subsidiaries of any assets (excluding the sale of inventory and
obsolete or worn-out property, and subject to a limited exception, in an
amount not yet determined, for reinvestment of such proceeds within 12
months); and
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(d) 75% of excess cash flow (the definition thereof to be agreed upon with
CMB) for each fiscal year, which percentage will be reduced to 50% upon the
achievement by Paragon of certain performance targets to be agreed upon.
Mandatory prepayments will be applied to the Term Loans in a similar manner to
optional prepayments as described above and may not be reborrowed.
The New Credit Facility will contain representations and warranties,
affirmative covenants, reporting covenants, negative covenants, financial
covenants and events of default customary for similar financing transactions.
Negative covenants will include (but will not necessarily be limited to)
certain restrictions on indebtedness; liens; guarantee obligations;
acquisitions; mergers, consolidations, liquidations and dissolutions; sales of
assets; leases; dividends and other payments in respect of capital stock;
capital expenditures; investments, loans and advances; optional payments and
modifications of subordinated debt instruments; transactions with affiliates;
sale-leasebacks; negative pledge clauses and clauses restricting subsidiary
distributions; and changes in lines of business. All of the foregoing
covenants will be subject to customary exceptions. Financial covenants will
include minimum net worth, a minimum interest coverage ratio, a minimum fixed
charge coverage ratio and a maximum leverage ratio.
Events of default will include (but will not necessarily be limited to)
nonpayment of principal when due; nonpayment of interest, fees or other
amounts after a grace period to be agreed upon; material inaccuracy of
representations and warranties; violation of covenants (subject, in certain
cases, to a notice and cure period to be agreed upon); cross-default;
bankruptcy events; certain ERISA events; material judgments; invalidity of any
guarantee, security interest or subordination provision; and a change of
control (the definition of which is to be agreed upon).
The funding of the New Credit Facility is subject to a variety of conditions
customary for facilities of this nature, including, among other things, to
obtaining all necessary third-party consents, a satisfactory solvency opinion
and all other financing required to effect the Recapitalization Merger and the
negotiation, execution and delivery of satisfactory loan documentation.
DESCRIPTION OF SENIOR SUBORDINATED DEBT
Notes. The Notes will consist of (i) $350 million aggregate principal amount
of Senior Subordinated Notes that will have a ten year term and will bear
interest from the date of issuance at the prevailing market rate for a high
yield debt issue of similar quality, which interest will be payable
semiannually and (ii) Discount Notes that will be issued at a discount to
their aggregate principal amount at maturity to generate gross proceeds to
Paragon of $150 million on the issuance date and will have a ten year term,
which notes will accrete in value until five years after the issuance date
(and not pay interest during such period) and thereafter such notes will
accrue interest that will be payable semiannually. The Notes will be issued
pursuant to a private placement under Rule 144A (the "Notes Offering") that is
expected to be consummated concurrently with the closing of the Mergers,
although no assurance to this effect can be given. In the event that the Notes
Offering is not consummated concurrently with the closing of the Mergers, the
Standby Senior Subordinated Facility (described in detail below) will be made
available at the time of the consummation of the Transactions, which would
result in the incurrence of additional interest expense by Paragon. See
"Living Centers of America, Inc.--Pro Forma Condensed Consolidated Statement
of Income."
The Notes will be senior subordinated obligations of Paragon, subordinated
to all existing and future senior indebtedness, including indebtedness
pursuant to the New Credit Facility. The Notes will be guaranteed on a senior
subordinated basis by most of Paragon's domestic subsidiaries.
The Notes will be redeemable for cash at the option of Paragon, in whole or
in part, on or after a date certain in 2002, at redemption prices to be
determined, together with accrued and unpaid interest to such date.
In the event of a Change of Control (as such term will be defined in the
Notes Indenture), Paragon will be required to make an offer to purchase the
Notes at a purchase price equal to 101% of the principal amount (or the then
current accreted value) thereof, plus accrued and unpaid interest to the date
of purchase.
The Indentures relating to the Notes will contain certain covenants, that,
among other things, limit the ability of the Paragon to: (i) incur additional
indebtedness unless certain coverage ratios to be determined are met;
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(ii) incur other subordinated indebtedness; (iii) create certain liens; (iv)
permit the issuance of preferred stock by certain subsidiaries; (v) enter into
certain transactions with affiliates; (vi) pay dividends or permit certain
subsidiaries to pay dividends or issue preferred stock; or (vii) enter into
certain mergers, consolidations and agreements to sell assets. In addition,
under certain circumstances Paragon will be required to offer to purchase the
Notes at a price equal to 100% of the principal amount (or then current
accreted value) thereof, plus accrued and unpaid interest to the date of
purchase, with the proceeds of certain asset sales.
Paragon will, concurrently with the issuance of the Notes (if such Notes are
privately placed), enter into a registration rights agreement with the initial
purchasers of the Senior Subordinated Notes and the Discount Notes pursuant to
which Paragon will agree to file a registration statement with respect to an
offer to exchange the Senior Subordinated Notes and the Discount Notes for new
issues of debt securities of Paragon registered under the Securities Act, with
terms identical to those of the Senior Subordinated Notes and the Discount
Notes, respectively. Under certain circumstances, Paragon will be required to
provide a shelf registration statement to cover resales of the Senior
Subordinated Notes and Discount Notes by the holders thereof. If Paragon fails
to satisfy these registration obligations, it will be required to pay
liquidated damages to the holders of Senior Subordinated Notes and Discount
Notes under certain circumstances.
Standby Senior Subordinated Facility. In the event that the offering of the
Notes is not consummated on or prior to the consummation of the
Recapitalization Merger, pursuant to the Financing Commitment Letter CMB has
agreed to provide to Paragon a senior subordinated credit facility (the
"Standby Senior Subordinated Credit Facility") in the aggregate amount of $450
million.
The loans under the Standby Senior Subordinated Credit Facility will mature
one year from the date of issue (the "Initial Maturity Date"). Interest on the
loans under the Standby Senior Subordinated Credit Facility will accrue at a
floating rate which increases over time until the Initial Maturity Date,
subject to absolute and cash caps. As of June 30, 1997, the interest rate on
loans issued under the Standby Senior Subordinated Credit Facility would have
been 11.3125%. The loans under the Standby Senior Subordinated Credit Facility
may be prepaid in whole or in part by Paragon at any time.
The Standby Senior Subordinated Credit Facility will contain representations
and warranties, affirmative covenants, reporting covenants, negative
covenants, mandatory prepayment requirements upon the occurrence of certain
events such as the sale of equity securities and events of default customary
for similar financing transactions. Covenants will include (but not
necessarily be limited to) certain restrictions on indebtedness, liens,
guaranty obligations, mergers, consolidations, liquidations and dissolutions,
sales of assets, dividends and other payments in respect of capital stock,
transactions with affiliates, sale leasebacks, clauses restricting subsidiary
distributions, and changes in lines of business, all subject to customary
exceptions.
The loans under the Standby Senior Subordinated Credit Facility will be due
and payable in a single installment on the Initial Maturity Date. With respect
to any amounts not repaid on or prior to the Initial Maturity Date, the
lenders under the Standby Senior Subordinated Credit Facility will have the
option to receive exchange notes ("Exchange Notes") in a principal amount
equal to the principal amount of the loans under the Standby Senior
Subordinated Credit Facility then outstanding, and any amounts not so
exchanged will automatically be extended to mature on the tenth anniversary of
the consummation of the Recapitalization Merger. The Exchange Notes will
mature on the tenth anniversary of the Recapitalization Merger and will
initially bear interest at a rate determined in a customary manner (but no
less than 0.50% above the then existing interest rate of loans under the
Standby Senior Subordinated Credit Facility), which rate will increase over
time, subject to absolute and cash caps. All outstanding loans under the
Standby Senior Subordinated Credit Facility after the Initial Loan Maturity
Date will accrue interest at the same rate as the Exchange Notes. The
indenture relating to the Exchange Notes will include covenants customary for
a high yield senior subordinated note issue of this type. The covenants and
other provisions of the Standby Senior Subordinated Credit Facility will
automatically be modified so as to be consistent with the Exchange Notes and
such loans will be pari passu for all purposes with the Exchange Notes.
In the event of a change of control (the definition of which is to be
agreed), Paragon will be required to offer to purchase the loans under the
Standby Senior Subordinated Credit Facility and, if issued, the Exchange
Notes, at a purchase price equal to 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of purchase.
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Paragon will be required to provide a shelf registration statement to cover
resales of the Exchange Notes by the holders thereof or to effect a registered
exchange offer of registered notes identical to the Exchange Notes for all
outstanding Exchange Notes and any outstanding loans under the Standby Senior
Subordinated Credit Facility. If Paragon fails to satisfy these registration
obligations, it will be required to pay liquidated damages to the holders of
Exchange Notes.
In the event loans are incurred under the Standby Senior Subordinated Credit
Facility, Paragon has agreed that on the closing date of the Transactions,
Paragon will place in an escrow account warrants to purchase shares of Paragon
Common Stock, at the exercise price of $0.01 per share, which will represent
7.5% of the fully diluted Paragon Common Stock outstanding as of the closing
date of the Transactions. Paragon will be required to enter into a
registration rights agreement with respect to such warrants. In the event the
loans under the Standby Senior Subordinated Credit Facility are paid in full
within six months following the closing date of the Transactions, the warrants
will not be released from escrow and will be returned to Paragon for
cancellation. The purpose of such warrants is to compensate the holders of
initial loans under the Standby Senior Subordinated Credit Facility (an
"Initial Loan") or Exchange Notes if the Standby Senior Subordinated Credit
Facility is not repaid within six months following the closing date of the
Transactions. Such warrants may be released from escrow in two circumstances:
(i) in the event a holder of an Initial Loan or Exchange Note desires to sell
such Initial Loan or Exchange Note in an arms length transaction at or below
par (a "Resale"); and (ii) pursuant to an "earn-in" formula in the event such
holders hold the Initial Loans or Exchange Notes through the Initial Maturity
Date. Six months following the closing date of the Transactions, 33 1/3% of
such warrants will be made available for use in Resales in each three month
period until twelve months following the closing date of the Transactions,
when all of the warrants will be available for use in connection with Resales.
The "earn-in" provision provides that following the Initial Maturity Date,
holders of Initial Loans or Exchange Notes will receive a pro-rata portion of
any remaining warrants in each three month period thereafter until the period
which is 18 months following the Initial Maturity Date, when all remaining
warrants will be released to such holders.
The funding of the Standby Senior Subordinated Credit Facility is subject,
among other things, to conditions comparable to those applicable to the
funding of the New Credit Facility, including obtaining all necessary consents
and the execution of satisfactory loan documentation.
TREATMENT OF CERTAIN EXISTING LCA AND GRANCARE INDEBTEDNESS
In General. A portion of the proceeds of the New Credit Facility will be
issued by Paragon to refinance substantially all of the existing indebtedness
of LCA and GranCare, except for (i) certain indebtedness owed by GranCare or
its subsidiaries to various REITs (including HRPT and Omega), currently
outstanding in the approximate aggregate principal amount of $90.5 million,
and (ii) certain other existing indebtedness which is either not subject to
prepayment or redemption under the terms of the applicable financing or which
senior management of Paragon deems to be economically undesirable to refinance
(the "Other Non-Refinanced Indebtedness"), currently estimated to range
between approximately $10 million and $12 million.
Existing LCA Credit Facility--LCA presently has an unsecured $500 million
senior revolving credit facility, which was established pursuant to a Credit
Agreement dated as of August 19, 1996, among LCA, as borrower, NationsBanc,
N.A. (as successor to NationsBanc of Texas, N.A.), as Administrative Agent and
lead lender, and certain other financial institutions signatory thereto, as
lenders. The Existing LCA Credit Facility consists of a $350 million Tranche A
revolving loan commitment, of which $275 million is outstanding as of June 30,
1997, and a $150 million Tranche B revolving loan commitment, none of which is
currently outstanding. Loans under such Tranche A commitment ("Tranche A LCA
Loans") mature on August 19, 2001. Subsequent to June 30, 1997, $140 million
of the Tranche A LCA Loans were converted to a term loan due in 2001.
Loans under the Existing LCA Credit Facility bear interest, at LCA's option,
either at the "base rate," the "competitive bid rate" or the "eurodollar
rate," plus, in the latter two cases, a spread which varies based upon the
Company's leverage ratio as at the end of the most recent fiscal quarter. That
spread can range from 25 basis points to 57.5 basis points for Tranche A LCA
Loans, and from 30 basis points to 65 points for Tranche B LCA Loans. The
current applicable spreads are 50 basis points and 57.5 basis points for
Tranche A LCA Loans and Tranche B LCA Loans, respectively. Commitment fees on
the undrawn portion of the Existing LCA Credit Facility are also based on
LCA's leverage ratio and range from 15 to 30 basis points for Tranche A, and
from 10
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to 22.5 basis points for Tranche B. At present, the commitment fees are 25
basis points and 17.5 basis points, for Tranche A LCA Loans and Tranche B LCA
Loans, respectively.
LCA Private Placement Debt--On October 1, 1993, LCA borrowed $20 million
from SouthTrust Bank of Alabama, NA which was used to repay debt of an
acquired entity. The note is unsecured and bears interest at the rate of
6.95%, payable semi-annually. The principal is repayable in five annual
payments of $4 million beginning October 1, 1998.
In January 1994, LCA issued, in a private placement, a $10 million note to
American General Insurance Company that was later sold to The Variable Annuity
Life Insurance Company ("Variable Annuity Life") at a fixed rate of interest
of 7.79%. The note is unsecured and will mature in a single payment due
January, 2004.
LCA Synthetic Lease--In October 1996 LCA entered into a master lease
arrangement providing for the acquisition, development, and construction of
skilled nursing and assisted living facilities for a total amount not to
exceed $100.0 million. The lease is an unconditional "triple net" lease for
all facilities covered for a period of seven years. LCA guarantees a
substantial portion of the residual value of the facilities covered and has an
option to purchase the facilities at any time prior to the maturity date. At
June 30, 1997 approximately $20 million of this arrangement was utilized.
LCA Line of Credit--In May 1994, LCA executed a promissory note (payable on
demand or by September 29, 1997) with NationsBanc of Texas, N.A. in the
principal amount of $10 million. Subject to such bank's prior approval of any
request for an advance, LCA may borrow, repay and reborrow principal amount in
increments such that the unpaid principal balance at anytime shall not exceed
$10 million. The interest rate on each advance is quoted separately based on
market conditions that exist at that time. At June 30, 1997 there was $10
million outstanding under the note agreement.
Existing GranCare Credit Facility--GranCare has an existing $300 million
term and revolving credit facility which was established pursuant to a Credit
Agreement dated as of February 12, 1997 and amended as of April 18, 1997 (the
"Existing GranCare Credit Facility"), by and among GranCare, as borrower,
First Union National Bank of North Carolina, as administrative agent and
letter of credit bank ("First Union"), CMB as syndication agent, and the
financial institutions signatory thereto. The Existing GranCare Credit
Facility is guaranteed by substantially all of GranCare's subsidiaries and is
secured by pledges of the stock of most of GranCare's subsidiaries, by blanket
liens on the personal property assets of GranCare and most of GranCare's
subsidiaries, and by mortgages on two skilled nursing facilities. The
revolving credit commitment also contains a $5 million swing line commitment
from First Union.
The Existing GranCare Credit Facility consists of a $100 million term loan,
all of which is outstanding at the present time (the "Existing GranCare Term
Loans"), and a $200 million revolving loan commitment, of which $136 million
is outstanding as of June 30, 1997. No more than $75 million may be advanced
and outstanding at any time under the revolving loan commitment for working
capital and other general corporate purposes (the "Working Capital
Commitment"). The remainder of the revolving credit commitment is available
for financing permitted acquisitions. Advances under the revolving credit
commitment of the Existing GranCare Credit Facility are sometimes hereinafter
referred to as "Existing GranCare Revolving Loans." The revolving credit
commitment also contains a $90 million sublimit for standby letters of credit.
$25 million in aggregate stated amount of standby letters of credit are
outstanding as of June 30, 1997 under the Existing GranCare Credit Facility.
All Existing GranCare Revolving Loans are due and payable on February 28,
2002. The Existing GranCare Term Loans will be amortized in 10 quarterly
installments of $7 million each, commencing February 28, 1999, and continuing
on the last day of each third calendar month thereafter (increasing to $10
million per quarter beginning August 31, 2001). All unpaid Existing GranCare
Term Loans will mature on February 28, 2002.
Loans under the Existing GranCare Credit Facility bear interest, at
GranCare's option, either at the "base rate" or the "eurodollar rate," plus in
each case a spread which varies based upon GranCare's ratio of consolidated
senior debt to EBITDA as at the end of the most recent fiscal quarter. The
aforementioned spread
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can range from zero to 75 basis points for base rate loans, and from 75 basis
points to 200 basis points for eurodollar loans. The current applicable
spreads are 50 basis points and 175 basis points, for base rate loans and
eurodollar loans, respectively. Commitment fees on the undrawn portion of the
revolving credit commitment under the Existing GranCare Credit Facility are
also based on GranCare's ratio of consolidated senior debt to EBITDA and range
from 25 to 50 basis points. The commitment fees are currently 37.5 basis
points per annum on the total amount of the revolving credit commitment.
GranCare has the option under the Existing GranCare Credit Facility to prepay
the loans thereunder and terminate the facility in whole or in part at any
time, upon one to three days' notice to First Union, depending upon whether
the outstanding loans are "base rate" loans or "eurodollar rate" loans. No
prepayment premium is required under these circumstances; however, if the
prepayment of any loans bearing interest based on the "eurodollar rate" occurs
on a day other than the last day of the applicable interest period, GranCare
would be required to reimburse its lenders under the Existing GranCare Credit
Facility for any "breakage costs" incurred as a result.
HRPT Obligations--Health and Retirement Properties Trust ("HRPT") is the
holder of a mortgage loan to AMS Properties, Inc., a wholly owned subsidiary
of GranCare ("AMS Properties"), dated October 1, 1994, in the aggregate
principal amount of $11.5 million as of the date of this Proxy
Statement/Prospectus (the "HRPT Loan"). The HRPT Loan is secured, in part by
mortgage and security agreements dated as of March 31, 1995 (collectively, the
"HRPT Mortgage") in favor of HRPT and encumbering two nursing facilities in
Wisconsin owned by AMS Properties. The HRPT Loan was incurred in connection
with the acquisition and lease by AMS Properties of several nursing facilities
in Wisconsin, California, Colorado and Illinois pursuant to an Acquisition
Agreement, Agreement to Lease and Mortgage Loan Agreement dated as of December
28, 1990 (the "HRPT Acquisition Agreement"). The remaining balance under the
HRPT Loan is due December 31, 2010 and may be prepaid upon the payment of
certain prepayment penalties, which are essentially in the nature of "make
whole" provisions providing that HRPT will receive the future value of the
amounts owed. HRPT has also leased 7 nursing facilities located in Arizona,
California and South Dakota to GCI Health Care Centers, Inc. ("GCIHCC") under
a master lease agreement dated as of June 30, 1992 (the "GCIHCC Lease").
GCIHCC and AMS Properties have guaranteed each others' obligations to HRPT.
GranCare has also guaranteed the obligations of its subsidiaries to HRPT.
In connection with the transactions effected in February 1997, whereby Old
GranCare effectively transferred its institutional pharmacy business
(generally operating under the TeamCare name) to Vitalink on a tax-advantaged
basis (the "GranCare Morris Trust Transactions"), and as a condition to
granting its consent to the GranCare Morris Trust Transactions and releasing
Old GranCare and certain of Old GranCare's subsidiaries (which became
subsidiaries of Vitalink) from all obligations to HRPT, Vitalink (a) paid a
consent fee to HRPT in the amount of $10 million, which was promptly
reimbursed by GranCare immediately following the consummation of the GranCare
Morris Trust Transactions and (b) entered into a limited guaranty (not to
exceed $15 million in the aggregate) of the obligations by GranCare, AMS
Properties and GCIHCC under the HRPT Mortgages, the GCIHCC Lease, and the HRPT
Loan (collectively, the "HRPT Obligations") for so long as such obligations
remain outstanding. GranCare, AMS Properties and GCIHCC retained primary
liability for the HRPT Obligations and retained sole liability under the HRPT
Acquisition Agreement. To support Vitalink's limited guaranty of the foregoing
obligations, GranCare caused First Union to issue an irrevocable letter of
credit under the Existing GranCare Credit Facility in the amount of $15
million payable to Vitalink in the event Vitalink makes any payments under the
limited guaranty (the "HRPT Letter of Credit").
Pursuant to the HRPT Acquisition Agreement, the consent of HRPT is also
required in order to permit the GranCare Merger. On September 26, 1997,
GranCare and HRPT executed a non-binding letter agreement setting forth the
material terms and conditions pursuant to which HRPT will restructure its
relationship with GranCare (the "HRPT/GranCare Restructuring"). As a part of
the HRPT/GranCare Restructuring, HRPT will consent to the consummation of the
GranCare Merger and the transactions related thereto as more fully described
below. In addition, Vitalink's guaranty of the HRPT Obligations will be
released and the HRPT Letter of Credit will be terminated and replaced with an
unlimited guaranty by GranCare, Paragon and all subsidiaries of GranCare and
Paragon having an ownership interest in AMS and/or GCIHCC (individually, a
"Tenant Entity" and collectively, the "Tenant Entities"), which guaranty will
be secured by the Cash Collateral Deposit of
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$15 million, the earned interest on which will be retained by HRPT. The
performance by the Tenant Entities of their respective obligations to HRPT
will continue to be secured by a pledge of one million shares of HRPT common
stock beneficially owned by GranCare and, as part of the HRPT/GranCare
Restructuring, GranCare will agree to waive the ability to request a release
of such collateral upon the attainment of certain financial conditions. The
terms of the leases between HRPT and the Tenant Entities will be extended to
January 30, 2013, constituting lease extensions ranging from 3 to 7 years and
the aggregate base rental for all facilities leased from the HRPT (excluding
the Exchange Facilities (as defined below)) will increase by $500,000 per
year. AMS Properties will also prepay the $11.5 million HRPT Loan and HRPT
will release the HRPT Mortgage. Following the consummation of the
Transactions, the Tenant Entities will exchange, in a transaction structured
as a like-kind exchange transaction (the "Exchange Transaction"), five nursing
facilities (the two nursing facilities previously subject to the HRPT Mortgage
and three nursing facilities currently owned by LCA (collectively the
"Exchange Facilities") for four nursing facilities owned by HRPT. Following
completion of the Exchange Transaction, the Tenant Entities will lease back
the Exchange Facilities for an aggregate annual rent amount equal to the
aggregate rent on the four HRPT facilities.
As a part of the HRPT/GranCare Restructuring, HRPT will (i) waive its rights
of first refusal with respect to any purchase, sale, lease, sale/leaseback or
other financing transaction by GranCare or any of its affiliates with any real
estate investment trust ("First Refusal Rights") and (ii) release GranCare
from the obligation under the HRPT Acquisition Agreement to provide HRPT with
$25 million of new financing transactions or, in the event such financing
transactions are not provided to HRPT, to make certain annual payments to HRPT
until such new transactions have been completed ("New Financings"). HRPT will
also agree to an omnibus amendment to its relationship with GranCare whereby
Paragon or any of its affiliates or successors other than the Tenant Entities
may enter into mergers, acquisitions, sales, recapitalizations, restructurings
or other significant transactions that may constitute a change of control
without any additional consent or approval of HRPT (the "Omnibus Consents"),
provided that HRPT's consent will be required if (i) as a result of any such
transaction, a lien on any collateral held by HRPT is granted to or imposed by
any other party (except for the liens to be granted to Chase in connection
with the consummation of the Transactions as described below) or (ii) such
transaction results in any action or condition that constitutes an event of
default under the restructured HRPT/GranCare financing arrangements or any of
the leases between HRPT and such Tenant Entity or any other agreement then in
effect between HRPT and Paragon and its subsidiaries. Finally, HRPT will
consent to the creation of junior liens and security interests in the personal
property and capital stock of the Tenant Entities as collateral for the New
Credit Facility and the execution by the Tenant Entities of guarantees of the
obligation of Paragon and its affiliates arising pursuant to the Notes or the
Standby Senior Subordinated Credit Facility, subject in each case to the terms
and conditions of an intercreditor agreement that will be substantially
similar to the extent applicable to the Intercreditor Agreement between HRPT
and First Union dated as of February 12, 1997.
In consideration of the HRPT/GranCare Restructuring, GranCare will pay HRPT
a one time restructuring payment of $10 million. The HRPT/GranCare
Restructuring will be consummated simultaneously with the effective time of
the GranCare Merger. The overall impact of the HRPT/GranCare Restructuring is
not expected to have any material effect on Paragon's operations or cash flows
following the completion of the Transactions.
Omega Obligations--A wholly owned subsidiary of GranCare, Professional
Healthcare Management, Inc. ("PHCMI"), is the borrower under a $58.8 million
mortgage note executed on August 14, 1992 (the "Omega Note") in favor of Omega
Healthcare Investors, Inc. ("Omega"), and under the related Michigan Loan
Agreement dated as of June 7, 1992 as amended, (the "Omega Loan Agreement").
All $58.8 million is outstanding at the present time. Proceeds of the Omega
loan (the "Omega Loan") were used by PHCMI to acquire 17 skilled nursing
facilities in the State of Michigan (the "PHCMI Facilities"). With the
exception of four PHCMI Facilities since divested, PHCMI owns the PHCMI
Facilities and leases them to various of its wholly owned subsidiaries under
separate lease agreements. The Omega Loan is secured by a mortgage and
security agreement executed by PHCMI with respect to the PHCMI Facilities and
cash collateral of approximately $5.3 million (the "Cash Deposit"). PHCMI has
assigned its interest in the aforementioned subsidiary leases to Omega as
additional security for the Omega Loan. In addition, in February 1997, in
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connection with the Vitalink Merger consummated in February 1997, the PHCMI
subsidiaries executed and delivered guarantees of the Omega Loan and pledged
their personal property assets to Omega as security for such guarantees.
The Omega Loan bears interest at a rate which is adjusted annually based on
either (a) changes in the Consumer Price Index or (b) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by 58.8 million, whichever produces the higher interest rate, but in
any event subject to a maximum rate not to exceed 105% of the interest rate in
effect for the Omega Loan for the prior calendar year. The current interest
rate is 14.5% per annum. The Omega Loan currently requires monthly, interest-
only payments. Additional interest accrues on the outstanding principal of the
Omega Loan at the rate of 1% per annum. Such interest is compounded annually
and is due and payable on a pro rata basis at the time of each principal
payment or prepayment. Beginning October 1, 2002, quarterly amortizing
installments of principal in the amount of $1,470,000 each will also become
due and payable on the first day of each calendar quarter. The entire
outstanding principal amount of the Omega Loan is due and payable on August
13, 2007. The Omega Loan may be prepaid without penalty during the first 180
days following August 14, 2002, upon 30 days' written notice, but is not
otherwise subject to optional prepayment. Payment of Omega Loan after
acceleration upon the occurrence of an event of default will result in a
prepayment penalty in the nature of a "make whole" premium.
In addition to the interest on the Omega Loan described in the preceding
paragraph, as a condition to obtaining Omega's consent to the Distribution in
connection with the Vitalink Merger, the Existing GranCare Credit Facility and
other transactions related thereto, PHCMI agreed to pay additional interest to
Omega in the amount of $20,500 per month, through and including July 1, 2002.
If the principal balance of the Omega Loan for any reason becomes due and
payable prior to that date, there will be added to the indebtedness owned by
PHCMI (i) the sum of $1,000,000, plus (ii) interest thereon at 11% per annum
to the prepayment date, less (iii) the amount of such additional interest paid
to Omega prior to the prepayment date.
As substitute collateral for the four divested PHCMI Facilities, and as
consideration for granting its consent to such divesture, Omega required
GranCare, among other things, to cause First Union to issue its letter of
credit in favor of Omega in the amount of $9.0 million pursuant to the
existing GranCare Credit Facility (the "Omega Letter of Credit"). The Omega
Letter of Credit can be drawn upon following the occurrence of any event of
default under the Omega loan documents, if the Omega Letter of Credit is not
renewed or extended at least 30 days prior to its scheduled expiration date
(currently March 31, 1998), or if certain representations, warranties or
covenants of PHCMI under the Omega loan documents are breached and such
breaches are not cured within the prescribed time after notice. It is expected
that Paragon will cause the Omega Letter of Credit to be replaced with a new
standby letter of credit to be issued under the New Credit Facility.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10 million, increased or decreased by
25% of PHCMI's net income (but in no event less than $10 million). GranCare
has agreed to contribute additional equity to PHCMI if, as and when necessary
to assure that such minimum tangible net worth test is met. As of December 31,
1996, PHCMI's tangible net worth exceeded the current minimum adjusted
tangible net worth requirement.
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CERTAIN OTHER AGREEMENTS
STOCKHOLDERS AGREEMENT
In connection with the Recapitalization Merger, the Apollo Investors and
Paragon will enter into a Stockholders Agreement which will provide Apollo
with the right to nominate six of the 11 nominees to the Paragon Board;
provided that no more than four of such nominees will be partners, directors,
officers or employees of Apollo. If the Apollo Investors transfer more than
one-third of the shares of Paragon Common Stock they acquire in connection
with the Recapitalization Merger, then Apollo's right to nominate directors
will be limited to four directors, and if the Apollo Investors transfer more
than one-half of such shares, then Apollo's right to nominate directors will
be limited to two. If the Apollo Investors transfer more than three-fourths of
such shares, Apollo will no longer have any right to nominate directors
pursuant to the Stockholders Agreement. In addition, Apollo will lose its
right to name more than four nominees to the Paragon Board if, after the third
anniversary of the effective time of the Recapitalization Merger, the Apollo
Investors' stock ownership percentage is less than 40% of the total number of
shares of Paragon Common Stock then outstanding. If the size of the Paragon
Board is increased, Apollo has the right to nominate additional members of the
Paragon Board if and to the extent necessary to make the number of Apollo
nominees as compared to the total number of directors not less than the Apollo
Investors' percentage ownership of Paragon Common Stock. The Apollo nominees
must approve any increase in the size of the Paragon Board. The Apollo
Investors may transfer their rights to designate directors in connection with
the transfer of at least two-thirds of their initial investment of Paragon
Common Stock, with the approval of a majority of the seven directors who are
not Apollo partners, directors, officers or employees (the "Non-Apollo
Affiliate Directors"). Any such approval will also constitute an approval
referred to in Section 203(a)(1) of the Delaware General Corporation Law,
which exempts a purchaser covered by such approval from the restrictions
imposed by such section. The Stockholders Agreement does not prohibit or
restrict sales of Paragon Common Stock by the Apollo Investors.
Because Apollo's nominees represent greater than one-third of the entire
Paragon Board, Apollo may be able to prevent certain actions from being taken
that require a super-majority vote of the Paragon Board. See "Comparison of
Stockholder Rights--Super-Majority Vote Requirements."
Apollo also has agreed to vote its shares in favor of election of all
nominees of the Paragon Board's Nominating Committee, and not to vote its
shares for the removal of any such nominee. Apollo will have the right to
select two of the five members of the Nominating Committee. In connection with
the Stockholders Agreement, the Apollo Investors (other than Apollo) will
grant Apollo an irrevocable proxy with respect to all shares of Paragon Common
Stock acquired by such persons in the Recapitalization Merger for a three-year
period ending on the third anniversary of the effective date of the
Recapitalization Merger.
The Stockholders Agreement prohibits the Apollo Investors from acquiring
additional shares of Paragon Common Stock that would increase the Apollo
Investors' ownership above the lesser of an additional 5% of the total
outstanding shares of Paragon Common Stock or 49% of the total number of
outstanding shares of Paragon Common Stock, except with the prior approval of
a majority of the Non-Apollo Affiliate Directors, and limits the ability of
the Apollo Investors to participate in any solicitation of proxies or any
election contest. These restrictions will lapse after 10 years or, at Apollo's
option, at the end of six years and upon the occurrence of certain other
events. Although the Apollo Investors will be subject to the "standstill"
provisions of the Stockholders Agreement, Apollo will be able to transfer all
or a portion of the Paragon Common Stock beneficially owned by the Apollo
Investors to a third party of Apollo's choosing.
The Stockholders Agreement will be in substantially the form of Annex V
attached hereto. The foregoing summary is qualified in its entirety by
reference to such Annex V.
REGISTRATION RIGHTS AGREEMENT
In connection with the Recapitalization Merger, Apollo is entitled to
require Paragon to register under the Securities Act of 1933 the shares of
Paragon Common Stock acquired by the Apollo Investors in the
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Recapitalization Merger (the "Registrable Shares") under the terms of an
agreement between Paragon and the Apollo Investors (the "Registration Rights
Agreement") a copy of which is filed as an exhibit to the registration
statement of which this Proxy Statement/Prospectus is a part and is
incorporated by reference herein. The Registration Rights Agreement also
entitles the Apollo Investors, subject to certain exceptions, to include the
Registrable Shares (as defined in the Registration Rights Agreement) in any
registration of equity securities of Paragon under the Securities Act.
However, the principal underwriter of any such offering may exclude some or
all of such Registrable Shares from such registration. Paragon is generally
required to bear the expenses of all such registrations, except underwriting
discounts and commissions.
STOCKHOLDERS' RIGHTS OF APPRAISAL
Pursuant to Section 262 of the DGCL ("Section 262"), any holder of LCA
Common Stock who does not wish to accept the consideration to be paid pursuant
to the Recapitalization Merger Agreement may dissent from the Recapitalization
Merger and elect to have the fair value of such stockholder's shares of LCA
Common Stock (exclusive of any element of value arising from the
accomplishment or expectation of the Recapitalization Merger) judicially
determined and paid to such stockholder in cash, together with a fair rate of
interest. The following discussion is not a complete statement of the law
pertaining to appraisal rights under Delaware law, and is qualified in its
entirety by the full text of Section 262, which is set forth in its entirety
as Annex X to this Proxy Statement/Prospectus, and any future amendments
thereto.
GranCare stockholders will not have the right to an appraisal of the value
of their shares in connection with the GranCare Merger under Section 262 of
the DGCL.
Any LCA stockholder who wishes to exercise such appraisal rights or who
wishes to preserve the right to do so should review carefully Annex X to this
Proxy Statement/Prospectus because failure to comply with the procedures
specified in Section 262 in a proper and timely fashion will result in the
loss of appraisal rights. Moreover, because of the complexity of the
procedures for exercising the right to seek appraisal of the LCA Common Stock,
LCA recommends that LCA stockholders who consider exercising such rights seek
the advice of counsel.
Any holder of LCA Common Stock wishing to exercise the right to dissent from
the Recapitalization Merger, respectively, and demand appraisal under Section
262 must satisfy each of the following conditions:
(i) LCA stockholders wishing to dissent from the Recapitalization Merger,
must deliver to LCA a written demand for appraisal of such stockholder's
shares before the votes on the Recapitalization Proposal at the LCA Special
Meeting. LCA stockholders should forward demands for appraisal to Living
Centers of America, Inc., 15415 Katy Freeway, Suite 800, Houston, Texas,
77094, Attention: Secretary. Written demands for appraisal must be in
addition to and separate from any proxy or vote against the
Recapitalization Merger Agreement; merely voting against, abstaining from
voting or failing to vote in favor of approval and adoption of the
Recapitalization Merger Agreement will not constitute a demand for
appraisal within the meaning of Section 262.
(ii) LCA stockholders wishing to dissent from the Recapitalization Merger
must not vote for approval and adoption of the Recapitalization Proposal. A
failure to vote by an LCA stockholder will satisfy this requirement, but a
vote in favor of the Recapitalization Proposal by proxy or in person, or
the return of a signed proxy that does not specify a vote against approval
and adoption of the Recapitalization Proposal or a direction to abstain in
connection with such proposals, will constitute a waiver of such LCA
stockholder's right of appraisal and will nullify any previously filed
written demand for appraisal because, in the absence of express contrary
instructions, such shares will be voted in favor of the Recapitalization
Proposal. Accordingly, a stockholder who desires to perfect appraisal
rights with respect to any of such stockholder's shares of LCA Common Stock
must, as one of the procedural steps involved in such perfection, either
(i) refrain from executing and returning the enclosed proxy card and from
voting in person in favor of the proposal to approve the Recapitalization
Proposal or (ii) check either the "Against" or the "Abstain" box next to
the Recapitalization Proposal on the LCA proxy card or vote in person
against the Recapitalization Proposal or register in person an abstention
with respect thereto.
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(iii) LCA stockholders wishing to dissent from the Recapitalization
Merger must continuously hold their shares of LCA Common Stock from the
date of making their demand through the effective time of the
Recapitalization Merger. Accordingly, a stockholder who is the record
holder of shares of LCA Common Stock on the date the written demand for
appraisal is made but who thereafter transfers such shares prior to the
effective time of the Recapitalization Merger will lose any right to
appraisal in respect of such shares.
A demand for appraisal should be executed by or on behalf of the stockholder
of record, fully and correctly, as such stockholder's name appears on such
stockholder's stock certificates, should specify the stockholder's name and
mailing address, the number of shares of LCA Common Stock owned and that such
stockholder intends thereby to demand appraisal of such stockholder's stock.
However, such demand will be sufficient if it reasonably informs LCA of the
stockholder's identity and intent to demand the appraisal of his shares. If
the shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that
capacity, and if the shares of the LCA Common Stock are owned of record by
more than one person, as in a joint tenancy or tenancy in common, the demand
should be executed by or on behalf of all joint owners. An authorized agent,
including one or more joint owners, may execute a demand for appraisal on
behalf of a holder of record; however, the agent must identify the record
owner or owners and expressly disclose the fact that in executing the demand
for appraisal, the agent is agent for such owner or owners. A record holder
such as a broker who holds shares of LCA Common Stock as a nominee for several
beneficial owners may exercise appraisal rights with respect to the shares of
LCA Common Stock held for one or more beneficial owners while not exercising
such rights with respect to the shares of LCA Common Stock held for other
beneficial owners; in such case, the written demand should set forth the
number of shares as to which appraisal is sought and where no number of shares
is expressly mentioned, the demand will be presumed to cover all shares of LCA
Common Stock held in the name of the record owner. Holders of shares of LCA
Common Stock who hold their shares in brokerage accounts or nominee form and
who wish to exercise appraisal rights are urged to consult promptly with their
broker or nominee to determine the appropriate procedures for the making of a
demand for appraisal by such broker or nominee.
Within ten days after the effective time of the Recapitalization Merger,
Paragon must give written notice that the Recapitalization Merger or, has
become effective to each stockholder who has filed a written demand meeting
the requirements of Section 262. Within 120 days after the effective time of
the Recapitalization Merger, but not thereafter, either Paragon or any former
LCA stockholder who has complied with the requirements of Section 262 may file
a petition in the Delaware Court of Chancery demanding a determination of the
value of the shares of LCA Common Stock held by all dissenting stockholders of
LCA. LCA does not presently intend to file such a petition, and LCA
stockholders seeking to exercise appraisal rights should not assume that
Paragon will file such petition or that Paragon will initiate any negotiations
with respect to the fair value of such shares. Accordingly, LCA stockholders
who desire to have their shares appraised should initiate any petition
necessary for the perfection of their appraisal rights within the time periods
and in the manner prescribed in Section 262. Inasmuch as Paragon does not have
an obligation to file such a petition, the failure of an LCA stockholder to do
so within the period specified could nullify such stockholder's previous
written demand for appraisal.
Stockholders who make an LCA Stock Election will be deemed to have accepted
the consideration to be paid pursuant to the Recapitalization Merger Agreement
and to have waived appraisal rights with respect to their LCA Electing Shares.
Within 120 days after the effective time of the Recapitalization Merger, any
LCA stockholder who has complied with the provisions of Section 262 to that
point in time will be entitled to receive from Paragon, upon written request,
a statement setting forth the aggregate number of shares not voted in favor of
the Recapitalization Proposal and the aggregate number of holders of such
shares. Paragon must mail such statement to the requesting stockholder within
10 days of receipt of such request or within ten days of the expiration of the
period for delivery of demands for appraisal.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Chancery Court will determine which stockholders are
entitled to appraisal rights and will appraise the "fair value" of their
shares, exclusive of any element of value arising from the accomplishment or
expectation of the Recapitalization
116
<PAGE>
Merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. The costs of the action may be
determined by the Delaware Chancery Court and taxed upon the parties as the
Delaware Chancery Court deems equitable. Upon application of a stockholder,
the Delaware Chancery Court may also order that all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and
expenses of experts, be charged pro rata against the value of all of the
shares entitled to appraisal. LCA STOCKHOLDERS CONSIDERING SEEKING APPRAISAL
WITH RESPECT TO THEIR SHARES OF LCA COMMON STOCK SHOULD BE AWARE THAT THE FAIR
VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION 262 COULD BE MORE THAN, THE
SAME AS OR LESS THAN THE CONSIDERATION THEY WOULD RECEIVE PURSUANT TO THE
RECAPITALIZATION MERGER AGREEMENT IF THEY DID NOT SEEK APPRAISAL OF THEIR
SHARES.
In determining fair value, the Delaware Chancery Court is to take into
account all relevant factors. The Delaware Supreme Court has discussed the
factors that can be considered in determining fair value in an appraisal
proceeding, stating that "proof of value by any techniques or methods which
are generally considered acceptable in the financial community and otherwise
admissible in court" should be considered, and that "fair price obviously
requires consideration of all relevant factors involving the value of a
company." The Delaware Supreme Court has stated that, in making this
determination of fair value, the court must consider market value, asset
value, dividends, earnings prospects, the nature of the enterprise and any
other facts which could be ascertained as of the date of the merger that throw
any light on future prospects of the merged corporation. The Delaware Supreme
Court has also stated that "elements of future value, including the nature of
the enterprise, which are known or susceptible of proof as of the date of the
merger and not the product of speculation, may be considered."
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time of the Recapitalization Merger,
be entitled to vote the shares subject to such demand for any purpose or be
entitled to the payment of dividends or other distributions on those shares
(except dividends or other distributions payable to holders of record of
shares as of a record date prior to the effective time of the Recapitalization
Merger) unless the demand is withdrawn or the appraisal rights are not
perfected.
At any time within 60 days after the effective time of the Recapitalization
Merger any stockholder who has demanded appraisal rights will have the right
to withdraw such demand for appraisal and to accept the terms offered in the
Recapitalization Merger Agreement; after this period, the stockholder may
withdraw such demand for appraisal only with the consent of Paragon. If no
petition for appraisal is filed with the Delaware Chancery Court within 120
days after the effective time of the Recapitalization Merger, or if such
stockholder has withdrawn such demand for appraisal as discussed in the
preceding sentence, such stockholder's rights to appraisal shall cease, and
all holders of shares of LCA Common Stock will be entitled to receive the
merger consideration applicable thereto. Any stockholder may withdraw such
stockholder's demand for appraisal by delivering to Paragon a written
withdrawal of such stockholder's demand for appraisal and acceptance of the
terms of the Recapitalization Merger Agreement, except that (i) any such
attempt to withdraw made more than 60 days after the effective time of the
Recapitalization Merger will require written approval of Paragon and (ii) no
appraisal proceeding in the Delaware Chancery Court shall be dismissed as to
any stockholder without the approval of the Delaware Chancery Court, and such
approval may be conditioned upon such terms as the Delaware Chancery Court
deems just.
FAILURE TO COMPLY STRICTLY WITH THE PROCEDURES SET FORTH IN SECTION 262 WILL
RESULT IN THE LOSS OF AN LCA STOCKHOLDER'S STATUTORY APPRAISAL RIGHTS WITH
RESPECT TO SHARES OF LCA COMMON STOCK. CONSEQUENTLY, ANY LCA STOCKHOLDER
WISHING TO EXERCISE APPRAISAL RIGHTS IS URGED TO CONSULT LEGAL COUNSEL BEFORE
ATTEMPTING TO EXERCISE SUCH RIGHTS.
117
<PAGE>
LIVING CENTERS OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Apollo, Apollo Sub and LCA have entered into the Recapitalization Merger
Agreement, which provides that Apollo Sub will be merged with and into LCA
with LCA as the surviving corporation (which shall be renamed Paragon Health
Network, Inc. following the Recapitalization Merger). In connection with such
merger, 1,905,748 shares of LCA Common stock will remain outstanding as LCA
Retained Shares at the effective time and each other share of LCA Common Stock
outstanding immediately prior to the effective time of the Recapitalization
Merger will, by virtue of the Recapitalization Merger and subject to
proration, be converted into the LCA Cash Price. See "The Recapitalization
Merger Agreement--Merger Consideration and Proration."
LCA, GranCare, Apollo and LCA Sub have entered into the GranCare Merger
Agreement, which provides that LCA Sub will be merged with and into GranCare
with GranCare as the surviving corporation and a wholly owned subsidiary of
Paragon. Except for shares owned by LCA or any subsidiary of GranCare or LCA
(which will be cancelled at the effective time of the GranCare Merger) and
fractional interests, each share of GranCare Common Stock will be converted
into the right to receive 0.2346 of a share of Paragon Common Stock.
The accompanying unaudited income statements for the year ended September
30, 1996 and for the nine months ended June 30, 1997 give effect to the
transactions as if they occurred on October 1, 1995. The accompanying
unaudited pro forma balance sheet gives effect to the transactions as if they
occurred on June 30, 1997. The unaudited pro forma financial statements are
not necessarily indicative of the operating results that would have been
achieved had the Mergers been consummated as of those dates, nor are they
necessarily indicative of future operating results. The unaudited pro forma
financial statements should be read in conjunction with the consolidated
financial statements of LCA and the related notes thereto.
118
<PAGE>
LIVING CENTERS OF AMERICA, INC
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
LCA GRANCARE PRO FORMA LCA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
------
Current assets:
Cash and cash
equivalents .......... $ 13,288 $ 19,778 $1,190,000 (1a) $ 25,496
240,000 (1b)
(738,983)(1c)
(305,004)(1d)
(271,911)(2a)
(39,175)(2b)
(52,497)(3)
(15,000)(4)
(15,000)(6)
Accounts receivable,
less allowance for
doubtful accounts..... 229,871 234,435 464,306
Inventories............ 20,395 1,838 -- 22,233
Notes receivable....... 2,928 24,520 -- 27,448
Prepaid expenses and
other current assets
...................... 10,107 17,502 -- 27,609
Deferred income taxes
...................... 20,264 5,887 15,600 (3) 41,751
--------- -------- ---------- ----------
Total current assets
..................... 296,853 303,960 8,030 608,843
Property and equipment .. 504,607 254,773 -- 759,380
Less accumulated
depreciation ......... (205,187) (57,798) -- (262,985)
--------- -------- ---------- ----------
299,420 196,975 -- 496,395
Other assets:
Restricted investments,
at fair value ........ 56,151 38,175 -- 94,326
Goodwill............... 194,167 59,550 88,393 (2c) 379,510 (2c)
17,400 (3)
20,000 (4)
Other.................. 34,966 39,249 39,175 (2b) 128,390
15,000 (6)
--------- -------- ---------- ----------
Total assets.......... $ 881,557 $637,909 $ 187,998 $1,707,464
========= ======== ========== ==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
---------------------
Current liabilities:
Accounts payable and
accrued expenses ..... $ 62,756 $ 82,555 $ 5,000 (4) 150,311
Accrued wages and
related liabilities .. 62,936 16,405 -- 79,341
Income taxes payable... 8,089 -- -- 8,089
Interest payable....... 4,750 4,968 -- 9,718
Notes payable and
current maturities of
long-term............. 3,737 3,115 (1,105)(1d) 3,363 (5)
(2,384) (2a)
--------- -------- ---------- ----------
Total current
liabilities ......... 142,268 107,043 1,511 250,822
Long-term debt........... 309,467 361,996 1,190,000 (1a) 1,288,037 (5)
(303,899)(1d)
(269,527)(2a)
Minority interests....... 449 -- -- 449
Deferred income taxes ... 20,442 17,531 -- 37,973
Long-term insurance
reserves and other...... 42,113 10,889 -- 53,002
Commitments and
contingencies
Shareholders' equity:
Preferred stock; $0.01
par value............. -- -- -- --
Series A--Junior
participating
preferred stock; $0.01
par value ............ -- -- -- --
Common stock; $0.01 par
value ................ 203 24 59 (1b) 135
(184)(1c)
57 (2c)
(24)(2c)
Paid in capital........ 228,105 124,970 239,941 (1b) (60,475)
(757,307)(1c)
(124,970)(2c)
228,786 (2c)
Treasury stock at
cost.................. (18,508) -- 18,508 (1c) --
Equity component of
minimum pension
liability ............ -- (542) 542 (2c) --
Unrealized gain on
investments, net of
income taxes.......... 77 6,831 (6,831)(2c) 77
Retained earnings...... 156,941 9,167 (9,167)(2c) 137,444
(19,497)(3)
--------- -------- ---------- ----------
366,818 140,450 (430,087) 77,181
--------- -------- ---------- ----------
Total liabilities and
shareholders'
equity............... $ 881,557 $637,909 $ 187,998 $1,707,464
========= ======== ========== ==========
</TABLE>
119
<PAGE>
- --------
Pro Forma Adjustments:
Adjustments affecting assets, liabilities and shareholders' equity to reflect
the recapitalization of LCA and subsequent merger with GranCare are as
follows:
(1) Recapitalization of and investment by the Apollo Investors in LCA pursuant
to the Recapitalization Merger:
(a) New borrowings by LCA to fund share repurchase and retirement of debt.
(b) Infusion of capital into LCA by the Apollo Investors in exchange for 5.9
million shares of Paragon Common Stock.
(c) Repurchase of an approximate 18.2 million shares of LCA Common Stock and
retirement of LCA treasury stock.
(d) Retirement of existing LCA debt via proceeds from new borrowings.
(2) Merger of LCA Sub into GranCare pursuant to the GranCare Merger:
(a) Retirement of certain existing GranCare debt via proceeds from new
borrowings.
(b) Payment of deferred financing fees on new debt.
(c) Exchange and retirement of GranCare Common Stock for Paragon Common Stock
valued at $228.8 million (5,650,435 shares of Paragon Common Stock to be
received by GranCare stockholders at an estimated fair value of $40.50
per share, based upon the price to be paid by the Apollo Investors for
shares of Paragon Common Stock in the Recapitalization Merger), and
resulting elimination of GranCare equity and allocation of purchase price
in excess of net assets to goodwill. The allocation of purchase price is
preliminary and no adjustment has been made to revalue GranCare's assets
and liabilities to fair value nor to assign value to identifiable
intangible assets. This preliminary allocation is not expected to
materially differ from the final allocation. Such adjustment will occur
upon consummation of the GranCare Merger. Pro forma goodwill represents
23% of pro forma total assets. The carrying value of goodwill is reviewed
if the facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, the carrying
value of the goodwill is reduced by the estimated shortfall of cash flows
as determined by comparing the carrying amount of the asset to its fair
value. Fair value is based on market prices where available, an estimate
of market value, or determined by various valuation techniques (including
discounted cash flows).
(3) Estimated recapitalization and related costs of $23.5 million, net of
related income tax benefits of $4.0 million and settlement and lease
restructuring costs of $29.0 million, (consisting of the $19.0 million
Termination Fee payable to Vitalink and Manor Care as well as the $10
million restructuring payment to HRPT), net of related income tax benefits
of $11.6 million. The settlement and lease restructuring costs are being
paid in connection with the GranCare Merger.
(4) Estimated costs totalling $20.0 million related to change of control and
severance payments and other related merger expenses are to be paid in
connection with the GranCare Merger. $15.0 million of these costs are
expected to be paid upon consummation of the Merger and the remaining $5.0
million paid subsequent to closing. Not included in such estimated costs
is up to $11.0 million that certain parties allege will be due upon
consummation of the Mergers as accelerated "earnouts" under acquisition
agreements to which LCA is a party. LCA intends to vigorously defend
against any claim for accelerated payment of such amounts. See "Certain
Information Concerning LCA--Legal Proceedings."
(5) The annual maturities of total long-term debt in the next five fiscal
years are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1998.................. $ 3,363
1999.................. 29,412
2000.................. 50,868
2001.................. 53,313
2002.................. 52,810
Thereafter............ 1,101,634
</TABLE>
The classification of current and non-current portions of pro forma long-
term debt is based on the actual maturities of retained debt, the stated
terms of each tranche of the Revolving Credit Facility, the contemplated
10-year term of the Notes, and the terms of Standby Senior Subordinated
Credit Facility. See "Description of Financing."
(6) Payment of security deposit to lessor.
120
<PAGE>
LIVING CENTERS OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED SEPTEMBER 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
STANDBY SENIOR
SUBORDINATED
CREDIT FACILITY(1) NOTE OFFERING(2)
--------------------------- ---------------------------
OTHER PRO OTHER PRO
LCA GRANCARE TEAMCARE FORMA LCA PRO FORMA LCA PRO
HISTORICAL HISTORICAL(3) HISTORICAL(4) ADJUSTMENTS(5) FORMA(6) ADJUSTMENTS(5) FORMA(6)
---------- ------------- ------------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $1,114,491 $977,787 $(229,077) $ -- $1,863,201 $ -- $1,863,201
Operating expenses
(excluding items shown
below)................. 942,596 824,178 (189,359) -- 1,577,415 -- 1,577,415
Rent.................... 44,185 46,163 (4,072) 500 (7) 86,776 500 (7) 86,776
Depreciation and
amortization........... 39,214 25,949 (6,250) 4,193 (8) 63,106 4,193 (8) 63,106
Non-recurring items,
net.................... (1,060) (93) (2,900) -- (4,053) -- (4,053)
---------- -------- --------- -------- ---------- -------- ----------
Income from
operations ......... 89,556 81,590 (26,496) (4,693) 139,957 (4,693) 139,957
Interest expense and
finance charges........ 20,128 35,659 (838) 78,968 (9) 133,917 69,670 (9) 124,619
Interest income......... (7,667) (6,843) -- -- (14,510) -- (14,510)
---------- -------- --------- -------- ---------- -------- ----------
Income before income
taxes and equity
earnings/minority
interest............... 77,095 52,774 (25,658) (83,661) 20,558 (74,363) 29,848
Income taxes............ 33,759 20,054 (10,263) (31,787)(10) 11,763 (28,068)(10) 15,483
Equity earnings/minority
interest............... (156) -- -- -- (156) -- (156)
---------- -------- --------- -------- ---------- -------- ----------
Net income.............. $ 43,180 $ 32,720 $ (15,395) $(51,874) $ 8,631 $(46,295) $ 14,209
========== ======== ========= ======== ========== ======== ==========
Net income per common
and common equivalent
share:
Primary................ $ 2.13 $ 1.36 $ 0.63 $ 1.04
========== ======== ========== ==========
Fully diluted.......... N/A $ 1.33 N/A (11) N/A
========== ======== ========== ==========
Weighted average number
of common and common
equivalent shares
outstanding:
Primary................ 20,315 24,084 13,683 13,683
========== ======== ========== ==========
Fully diluted.......... N/A 26,527 N/A N/A
========== ======== ========== ==========
</TABLE>
- -------
Pro Forma Adjustments:
(1) Reflects borrowings of $450 million pursuant to the Standby Senior
Subordinated Credit Facility and $45 million pursuant to the Revolving
Credit Facility rather than the issuance of the Notes. See "Description of
Financing."
(2) Reflects issuance of $500 million of Notes.
(3) Reflects twelve month period ended December 31, 1996.
(4) Reflects elimination of TeamCare operating results for twelve month period
ended December 31, 1996. TeamCare was spun-off by GranCare in February,
1997.
(5) Excludes estimated pre-tax recapitalization and related costs of $52.5
million, which amount includes the $19 million Termination Fee payable to
Vitalink and Manor Care as well as the $10 million restructuring payment
to HRPT, each of which will be paid upon consummation of the Transactions.
See "Certain Information Concerning GranCare--Legal Proceedings" and
"Description of Financing--Treatment of Certain Existing LCA and GranCare
Indebtedness--HRPT Obligations."
(6) Upon consummation of the Mergers, management anticipates achieving annual
cost savings as a result of elimination of duplicative overhead costs of
approximately $18.0 million. Management believes additional opportunities
exist for cost savings and revenue enhancements as a result of the Merger.
However, there can be no assurance that these cost savings or revenue
enhancements will be realized. There also can be no assurance that other
costs and expenses of Paragon will not increase, thereby lowering or
offsetting management's estimated cost savings.
(7) Rent--Pro Forma Adjustments for rent are as follows:
<TABLE>
<S> <C>
Incremental rent on lease restructuring............................. $ 500
======
(8) Depreciation and amortization--Pro Forma Adjustments for depreciation and
amortization are as follows:
Goodwill amortization on transaction goodwill based on 30 year
period............................................................. $4,193
======
</TABLE>
121
<PAGE>
(9) Interest expense--Pro Forma Adjustments for interest expense are as
follows:
<TABLE>
<CAPTION>
STANDBY SENIOR
SUBORDINATED NOTE
CREDIT FACILITY OFFERING
--------------- --------
<S> <C> <C>
Elimination of amortization of deferred financing
fees included in historical amounts.............. $ (745) $ (745)
Amortization of deferred financing fees on new
debt over a weighted average 8.4 year period..... 4,154 4,656
Elimination of historical interest expense on debt
replaced with new debt........................... (41,854) (41,854)
Commitment fees on unused portion of Revolving
Credit Facility.................................. 525 750
Interest expense on $1.19 billion in new debt at
an average estimated interest rate of 8.98%
(9.86% in the event the Standby Senior
Subordinated Credit Facility is drawn upon rather
than issuing the Notes).......................... 116,888 106,863
-------- --------
$ 78,968 $ 69,670
======== ========
</TABLE>
Because interest rates in connection with the financing of the Mergers have
not been determined as of the date of this Proxy Statement/Prospectus, this
presentation is based on LCA's best current estimate of interest expense.
The "average estimated interest rate" was calculated by dividing the total
interest expense on the new debt by total new debt ($1.19 billion). The
estimated interest rates used for the calculation were as follows:
<TABLE>
<CAPTION>
INTEREST RATE BASED ON
Senior Debt: ------------- --------
<S> <C> <C>
Tranche A 8.25% Eurodollar Rate plus 2.25%
Tranche B 8.50% Eurodollar Rate plus 2.50%
Tranche C 8.75% Eurodollar Rate plus 2.75%
Revolving
Credit
Facility 8.25% Eurodollar Rate plus 2.25%
Subordinated
Debt:
Senior
Subordinated
Notes 9.35% 10-year treasury rate plus 3.00%
Senior
Subordinated
Discount
Notes 10.35% 10-year treasury rate plus 4.00%
Standby Senior
Subordinated
Credit
Facility 12.13% Eurodollar Rate a blended spread of 6.13%
</TABLE>
A 12.5 basis point increase or decrease in the average interest rate on the
debt issued in connection with the Mergers would change pro forma interest
expense and finance charges by $1.5 million, pro forma net income by $.900
million and pro forma primary net income net income per share by $.07.
(10) Income taxes are adjusted to reflect tax provision effect of pro forma
adjustments less non-deductible goodwill at an estimated effective tax
rate of 40%.
(11) No adjustment has been made in respect of the possible issuance of
warrants to purchase up to 7.5% of Paragon's fully diluted common stock
in connection with the Standby Senior Subordinated Credit Facility. See
"Description of Financing--Description of Senior Subordinated Debt." In
the event that the warrants are issued, Paragon would record additional
financing expenses associated with such issuances.
122
<PAGE>
LIVING CENTERS OF AMERICA, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
NINE MONTHS ENDED JUNE 30, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
STANDBY SENIOR SUBORDINATED
CREDIT FACILITY(1) NOTE OFFERING(2)
---------------------------- ----------------------------
OTHER PRO OTHER PRO
LCA GRANCARE TEAMCARE FORMA LCA FORMA LCA
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS(3) PRO FORMA(4) ADJUSTMENTS(3) PRO FORMA(4)
---------- ---------- ---------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $853,953 $676,564 $(81,478) $ -- $1,449,039 $ -- $1,449,039
Operating expenses
(excluding items shown
below)................. 715,690 585,370(5) (68,309) -- 1,232,751 -- 1,232,751
Rent.................... 31,801 33,187 (1,557) 375 (6) 63,806 375 (6) 63,806
Depreciation and
amortization........... 30,480 17,562 (1,834) 3,145 (7) 49,353 3,145 (7) 49,353
Non-recurring items:
Merger and other
costs................. -- 28,300 -- -- 28,300 -- 28,300
-------- -------- -------- -------- ---------- -------- ----------
Income from operations.. 75,982 12,145 (9,778) (3,520) 74,829 (3,520) 74,829
Interest expense and
financing charges...... 16,302 25,750 (1,397) 59,782 (8) 100,437 52,809 (8) 93,464
Interest income......... (3,378) (4,763) -- -- (8,141) -- (8,141)
-------- -------- -------- -------- ---------- -------- ----------
Income (loss) before
income taxes, equity
earnings/minority
interest and
extraordinary charge... 63,058 (8,842) (8,381) (63,302) (17,467) (56,329) (10,494)
Income taxes............ 26,445 4,352 (3,353) (24,062)(9) 3,382 (21,274)(9) 6,170
Equity earnings/minority
interest............... (405) -- -- -- (405) -- (405)
-------- -------- -------- -------- ---------- -------- ----------
Net income (loss) before
extraordinary charge... $ 36,208 $(13,194) $ (5,028) $(39,240) (21,254) $(35,055) $ (17,069)
======== ======== ======== ======== ========== ======== ==========
Net income (loss) before
extraordinary charge
per common and common
equivalent share:
Primary................ $ 1.84 $ (0.55) $ (1.55) $ (1.25)
======== ======== ========== ==========
Fully diluted.......... N/A $ (0.55) N/A N/A
======== ======== ========== ==========
Weighted average number
of common and common
equivalent shares
outstanding:
Primary................ 19,728 23,925 13,683 13,683
======== ======== ========== ==========
Fully diluted.......... N/A 23,925 N/A N/A
======== ======== ========== ==========
</TABLE>
- -------
Pro Forma Adjustments:
(1) Reflects borrowings of $450 million pursuant to the Standby Senior
Subordinated Credit Facility and $45 million pursuant to the Revolving
Credit Facility rather than the issuance of the Notes. See "Description of
Financing."
(2) Reflects issuance of $500 million of Notes.
(3) Excludes estimated pre-tax recapitalization and related costs of $52.5
million, which amount includes the $19 million Termination Fee payable to
Vitalink and Manor Care as well as the $10 million restructuring payment
to HRPT, each of which will be paid upon consummation of the Transactions.
See "Certain Information Concerning GranCare--Legal Proceedings" and
"Description of Financing--Treatment of Certain Existing LCA and GranCare
Indebtedness--HRPT Obligations."
(4) Upon consummation of the Mergers, management anticipates achieving annual
cost savings as a result of elimination of duplicative overhead costs of
approximately $18 million. Management believes additional opportunities
exist for cost savings and revenue enhancements as a result of Mergers.
However, there can be no assurance that these cost savings or revenue
enhancements will be realized. There also can be no assurance that other
costs and expenses of Paragon will not increase, thereby lowering or
offsetting management's estimated cost savings.
(5) Includes $8 million pre-tax charge associated with change in accounting
estimate related to allowance for doubtful accounts.
(6) Rent-Pro Forma Adjustments for rent are as follows:
<TABLE>
<S> <C>
Incremental rent on lease restructuring............................. $ 375
======
(7) Depreciation and amortization--Pro Forma Adjustments for depreciation and
amortization are as follows:
Goodwill amortization on transaction goodwill based on 30 year
period............................................................. $3,145
======
</TABLE>
123
<PAGE>
(8) Interest expense--Pro Forma Adjustments for interest expense are as
follows:
<TABLE>
<CAPTION>
STANDBY SENIOR
SUBORDINATED NOTE
CREDIT FACILITY OFFERING
--------------- --------
<S> <C> <C>
Elimination of amortization of deferred financing
fees included in historical amounts.............. $ (447) $ (447)
Amortization of deferred financing fees on new
debt over a weighted average 8.4 year period..... 3,116 3,492
Elimination of historical interest expense on debt
replaced with new debt........................... (30,946) (30,946)
Commitment fees on unused portion of Revolving
Credit Facility.................................. 394 563
Interest expense on $1.19 billion in new debt at
an average estimated interest rate of 8.98%
(9.86% in the event the Standby Senior
Subordinated Credit Facility is drawn upon rather
than issuing the Notes).......................... 87,665 80,147
-------- --------
$59,782 $ 52,809
======== ========
</TABLE>
Because interest rates in connection with the financing of the Mergers have
not been determined as of the date of this Proxy Statement/Prospectus, this
presentation is based on LCA's best current estimate of interest expense.
The "average estimated interest rate" was calculated by dividing the total
interest expense on the new debt by total new debt ($1.19 billion). The
estimated interest rates used for the calculation were as follows:
<TABLE>
<CAPTION>
INTEREST RATE BASED ON
Senior Debt: ------------- --------
<S> <C> <C>
Tranche A 8.25% Eurodollar Rate plus 2.25%
Tranche B 8.50% Eurodollar Rate plus 2.50%
Tranche C 8.75% Eurodollar Rate plus 2.75%
Revolving
Credit
Facility 8.25% Eurodollar Rate plus 2.25%
Subordinated
Debt:
Senior
Subordinated
Notes 9.35% 10-year treasury rate plus 3.00%
Senior
Subordinated
Discount
Notes 10.35% 10-year treasury rate plus 4.00%
Standby
Senior
Subordinated
Credit
Facility 12.13% Eurodollar Rate plus a blended spread of 6.13%
</TABLE>
A 12.5 basis point increase or decrease in the average interest rate on the
debt issued in connection with the Mergers would change pro forma interest
expense and finance charges by $1.1 million, pro forma net income by $.660
million and pro forma primary net income net income per share by $.05.
(9) Income taxes are adjusted to reflect tax provision effect of pro forma
adjustments, less non-deductible goodwill, at an estimated effective tax
rate of 40%.
124
<PAGE>
DIRECTORS AND OFFICERS OF PARAGON
FOLLOWING THE MERGERS
DIRECTORS AND OFFICERS
Immediately following the consummation of the Mergers, certain of the
initial directors and officers of Paragon will be as set forth below. LCA,
GranCare and Apollo are collectively continuing to evaluate director
candidates and their management team as part of an on-going program to
identify and recruit potential candidates to serve as directors and for
additional management positions.
Directors and officers of Paragon are elected to serve until they resign or
are removed, or otherwise disqualified to serve, or until their successors are
elected and qualified. In addition, pursuant to the terms of the Stockholders
Agreement, the Apollo Investors have agreed to vote their shares of Paragon
Common Stock so that the Board of Directors of Paragon will consist of 11
members, of whom six members will be designees of Apollo and of whom five
members (three of whom will initially be designees of GranCare, one of whom
will initially be a designee of LCA and one of whom will be the Chief
Executive Officer) will be nominated by the nominating committee of the
Paragon Board of Directors. See "Certain Other Agreements--Stockholders
Agreement." Of the five directors remaining to be nominated, two will be
nominated by Apollo, two will be nominated by GranCare and will be individuals
currently serving on the GranCare Board and one will be nominated by LCA and
will be an individual currently serving on the LCA Board.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH PARAGON
---- --- ---------------------
<C> <C> <S>
Keith B. Pitts 40 Chairman of the Board, Chief Executive
Officer, President and Director
Leroy D. Williams 55 President--Long Term Care Division
Dennis G. Johnston President--
49 Specialty Health Services Division
William R. Korslin 47 President--Pharmaceutical Services Division
Charles B. Carden 51 Executive Vice President and Chief Financial
Officer
Laurence M. Berg 31 Director
Peter P. Copses 39 Director
John H. Kissick 55 Director
William G. Petty, Jr. 51 Director
Robert L. Rosen 56 Director
</TABLE>
Keith B. Pitts will serve as Chairman of the Board, Chief Executive Officer
and President of Paragon. Since July 1997 Mr. Pitts has served as a consultant
to Apollo in connection with the Transactions. Mr. Pitts served as the
Executive Vice President and Chief Financial Officer of OrNda HealthCorp, a
healthcare service provider in the United States, from August 1992 until its
merger with Tenet Healthcare Corp. in January 1997. Prior to joining OrNda
HealthCorp, from July 1991 to August 1992, Mr. Pitts was a partner in Ernst &
Young LLP's Southeast Region Health Care Consulting Group, and from January
1988 to July 1991 he was a partner and Regional Director in Ernst & Young
LLP's Western Region Health Care Consulting Group. Mr. Pitts is a director of
Horizon Mental Health Management, Inc.
Leroy D. Williams will serve as President--Long Term Care Division of
Paragon. Mr. Williams currently serves as President, Chief Operating Officer
and as a Director of LCA. Mr. Williams became a Director of LCA in January
1992, Chief Operating Officer of LCA in August 1995, and President in February
1996. Mr. Williams served as Executive Vice President of LCA from December
1991 to February 1996. Mr. Williams joined LCA in 1978 as Regional Controller
of LCA--Eastern Region. From May 1983 to February 1985, Mr. Williams was
Financial Vice President for LCA--Texas. In March 1985, he was appointed Vice
President--Finance and became Senior Vice President--Finance in January 1991.
125
<PAGE>
Dennis G. Johnston will serve as President--Specialty Health Services
Division of Paragon. Mr. Johnston currently serves as a Senior Vice President
and as President of Cornerstone Health Management Company, a wholly-owned
subsidiary of GranCare. Mr. Johnston joined GranCare as President of
Cornerstone in April 1995 and became Senior Vice President of GranCare in July
1995. Mr. Johnston was the co-founder of Cornerstone in 1990 and served as its
President and Chief Executive Officer from 1990 to 1995. From 1984 to 1989,
Mr. Johnston held various positions with the management subsidiary of Republic
Health Corporation, including that of Senior Development Officer.
William R. Korslin will serve as President--Pharmaceutical Services Division
of Paragon. Mr. Korslin has served as President of APS since May 1994. Mr.
Korslin joined APS in July 1987 as General Manager Enteral Services. From 1989
through 1992, he served as Eastern Area Vice President of APS and, from 1992
to 1994, Mr. Korslin was Senior Vice President in charge of all field
operations of APS. He was appointed as a Vice President of Living Centers in
September 1995.
Charles B. Carden will serve as Executive Vice President and Chief Financial
Officer of Paragon. Mr. Carden has served as Executive Vice President and
Chief Financial Officer of LCA since October 1996. Prior to this, he was Chief
Financial Officer of Leaseway Transportation Corp., where he was employed for
14 years. He also has held various supervisory and analytical positions in
corporate finance with Ford Motor Company.
Laurence M. Berg will serve as a director of Paragon. Mr. Berg has been
associated since 1992 and a principal since 1995 with Apollo Advisors, L.P.
which, together with an affiliate, acts as managing general partner of Apollo
Investment Fund, L.P., AIF II, L.P. and Apollo Investment Fund III, L.P.,
private securities investment funds, and with Lion Advisors, L.P. which acts
as financial advisor to and representative for certain institutional investors
with respect to securities investments. Mr. Berg is a director of Continental
Graphics Holdings, Inc. and CWT Specialty Stores, Inc. Mr. Berg will serve as
one of Apollo's designees on the Paragon Board.
Peter P. Copses will serve as a director of Paragon. Mr. Copses has been a
principal since 1990 of Apollo Advisors, L.P. which, together with an
affiliate, acts as managing general partner of Apollo Investment Fund, L.P.,
AIF II, L.P. and Apollo Investment Fund III, L.P., private securities
investment funds, and of Lion Advisors, L.P., which acts as financial advisor
to and representative for certain institutional investors with respect to
securities investments. Mr. Copses is a director of Dominicks Supermarkets,
Inc., Family Restaurants, Inc., Food 4 Less Holdings, Inc. and Zale
Corporation. Mr. Copses will serve as one of Apollo's designees on the Paragon
Board.
John H. Kissick will serve as a director of Paragon. Mr. Kissick has been a
principal since 1992 of Apollo Advisors, L.P. which, together with an
affiliate, acts as managing general partner of Apollo Investment Fund, L.P.,
AIF II, L.P. and Apollo Investment Fund III, L.P., private securities
investment funds, and of Lion Advisors, L.P., which acts as financial advisor
to and representative for certain institutional investors with respect to
securities investments. From 1990 to 1991, Mr. Kissick was a consultant with
Kissick & Associates, a private investment advisory firm. Mr. Kissick serves
as a director of Continental Graphics Holdings, Inc., Converse, Inc.,
Florsheim Group, Inc. and Food 4 Less Holdings, Inc. Mr. Kissick will serve as
one of Apollo's designees on the Paragon Board.
William G. Petty, Jr. will serve as a director of Paragon. Mr. Petty has
served as a Director of GranCare since July 1995 by virtue of GranCare's
merger with Evergreen Healthcare, Inc. ("Evergreen"). Since July 1, 1996, Mr.
Petty has been a principal of Beecken, Petty & Company LLC, which is the
general partner of Healthcare Equity Partners, a venture capital partnership.
Mr. Petty served as Chairman of the Board of Directors, President and Chief
Executive Officer of Evergreen from June 30, 1993 to July 1995. He served as
Chairman of the Board, Chief Executive Officer and President of National
Heritage, Inc. from October 1992 to June 1993. From 1988 to 1992, he served as
President and Chief Executive Officer of Evergreen Healthcare Ltd., L.P., an
affiliate of Evergreen, and has been a Managing Director of Omega Capital,
Ltd., a private health care
126
<PAGE>
investment fund since 1986. Mr. Petty has been the Chairman of the Board of
Alternative Living Services, Inc. ("ALS") since 1993. Mr. Petty also served as
the Chief Executive Officer of ALS from 1993 until February 1996. Mr. Petty
will serve as one of GranCare's designees on the Paragon Board.
Robert L. Rosen will serve as a director of Paragon. Mr. Rosen is Managing
General Partner of RLR Partners, L.P., a private investment partnership
founded in April 1987. Since 1987, Mr. Rosen has been a director of the
Municipal Advantage Fund, Inc., Municipal Partners Fund, Inc., Municipal
Partners Fund II, Inc., Spring Mountain Group, Culligan Water Technologies,
Inc., and Samsonite Corporation. Mr. Rosen will serve as one of Apollo's
designees on the Paragon Board.
127
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS OF PARAGON
SUMMARY COMPENSATION TABLE
The following table sets forth certain summary information concerning
compensation paid or accrued by LCA (in respect of Messrs. Williams and
Korslin) or GranCare (in respect of Mr. Johnston), as the case may be, to the
individuals who are currently expected to serve as executive officers of
Paragon. The amounts shown are for the fiscal year ended September 30 (in the
case of LCA) or December 31 (in the case of GranCare) in 1996, 1995 and 1994.
Mr. Pitts, who will serve as Paragon's Chairman of the Board, Chief Executive
Officer and President, has not previously been employed by either LCA or
GranCare. For a description of Mr. Pitts current employment agreement see
"Interests of Certain Persons in the Transactions--Employment Agreements and
Other Benefits of Paragon Officers." Mr. Carden, who will serve as Paragon's
Executive Vice President and Chief Financial Officer, was not employed by LCA
during its last fiscal year. Mr Carden's employment with LCA commenced October
1, 1996, at an annual salary of $245,000, with a target bonus for fiscal 1997
of $98,000.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM
($) COMPENSATION
--------------------- ------------ ---
SECURITIES
OTHER UNDERLYING ALL OTHER
NAME AND PRINCIPAL SALARY BONUS ANNUAL OPTIONS/ COMPENSATION
POSITION YEAR ($) ($) COMPENSATION SARS (#) ($)
------------------ ---- -------- -------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Leroy D. Williams 1996 $332,553 $120,252 $ -- 45,250 $ 7,981(1)
President--Long-Term
Care 1995 235,539 146,276 -- 6,375 8,564
Division 1994 215,000 123,443 -- 8,625 8,550
William R. Korslin 1996 $188,301 $ 99,940 $ -- 8,750 $ --
President-- 1995 159,212 44,007 -- 15,000 --
Pharmaceutical Services
Division 1994 135,802 74,108 -- 10,000 --
Dennis G. Johnston 1996 $225,000(2) $ 89,368 $ -- 14,625 $33,812(3)
President-- 1995 168,750(4) -- 25,000 18,030
Specialty Health
Services Division 1994 -- -- -- -- --
</TABLE>
- --------
(1) Represents primarily the value (in LCA Common Stock based on the closing
market price on September 30, 1996, 1995 or 1994, as the case may be) of
matching contributions made by LCA on behalf of the individual as a result
of participation in the LCA Deferred Retirement Income Plan.
(2) GranCare has a deferred compensation program (the "Deferred Compensation
Program") that is applicable to compensation paid or payable to eligible
employees of GranCare. Under such program GranCare may elect to match a
portion of any compensation amounts deferred. Deferred salary amounts are
reported in this table under the "Salary" column and matching amounts paid
or accrued are reported in this table under the "All Other Compensation"
column.
(3) Represents GranCare's contribution of $1,500 to its 401(k) plan, $47 for
group term life insurance and $6,314 for long-term disability insurance.
Also includes $25,951 under the executive split dollar life insurance
plan. The amount of benefit received under the executive split dollar life
insurance plan was determined by subtracting the total premiums paid under
the plan during 1996 ($12,900) from the increase in the cash surrender
value of the plan from December 31, 1995 to December 31, 1996 ($38,851).
(4) Mr. Johnston became employed by GranCare in April 1996. Accordingly, his
salary reflects a partial year of service.
128
<PAGE>
CERTAIN INFORMATION CONCERNING LCA
GENERAL DEVELOPMENT OF THE BUSINESS
LCA provides through its operating subsidiaries, a diverse range of health
care services in the health care continuum. It has organized its operations
into four groups: long-term care services, rehabilitation services,
institutional pharmaceutical services and specialty care services. As one of
the largest long-term care providers in the U.S., LCA's long-term care
services are provided through 201 long-term care centers with in excess of
23,000 licensed beds in 13 states as of June 30, 1997. Long-term care includes
skilled nursing, assisted living services, subacute care and care for
individuals with Alzheimer's disease. LCA's rehabilitation therapy group
provides services to over 600 skilled nursing and other health care
facilities, offers therapy program management services to long-term health
care companies, manages hospital rehabilitation departments and operates
approximately 133 outpatient clinics in 18 states as of June 30, 1997. The
institutional pharmaceutical group operates 34 institutional pharmacies in 11
states and supplies various product lines to approximately 1,000 long-term
care centers with more than 100,000 long-term health care beds as of June 30,
1997. LCA's specialty care services group includes home health care, hospice
and geriatric physician management services businesses.
When LCA began its operations as a separate, publicly-traded company in
1992, it provided primarily long-term nursing services. From fiscal year 1992
through fiscal year 1995 it grew rapidly through acquisitions, adding
specialty care services, rehabilitation therapy, and pharmaceutical services,
as well as additional long-term care facilities. During this period, LCA's net
revenue increased from $351 million to $894 million and its net income,
adjusted for non-recurring merger and acquisition costs in 1995, increased
from $10.5 million to $36.1 million. During the fiscal year ending September
30, 1995, LCA completed several significant acquisitions including The Brian
Center Corporation ("BCC"), Rehability Corporation ("Rehability") and Therapy
Management Innovations ("TMI"). Accordingly, the fiscal year ended September
30, 1996 was the first year that fully reflected the financial results from
all of LCA's major acquisitions. LCA's net revenue for the fiscal year ended
September 30, 1996 increased to $1.1 billion and net income, excluding non-
recurring items, increased to $45.0 million.
During the fiscal year ended September 30, 1996, LCA turned its focus to
integrating the BCC, Rehability, and TMI operations and divesting its Living
Centers-DevCon, Inc. subsidiary ("DevCon") which provided training and
habilitation services to individuals with mental retardation and developmental
disabilities. During fiscal year 1996, LCA finalized a plan originating in
June 1995 to restructure the operations and exit certain activities of its
rehabilitation services group, which operates through its subsidiaries as
American Rehability Services, Inc. (including its subsidiaries, "ARS"),
including closing or downsizing unprofitable clinics and offsite contracts.
The divestiture of DevCon was completed in September 1996 through the
recapitalization and subsequent sale of the majority of DevCon's stock for
$47.5 million in cash. LCA's results for the fiscal year ended September 30,
1996 and prior years reflect the inclusion of the DevCon operations. DevCon's
net revenue and income from operations for fiscal year 1996 were $47.6 million
and $5.7 million, respectively. LCA expects its reported earnings to reflect
the effects of this divestiture until the proceeds from the divestiture are
reinvested.
LONG-TERM CARE SERVICES
Long-Term Nursing Services. LCA is one of the largest operators of long-term
care facilities in the United States and is the first or second largest
provider of long-term care services in its key markets of Texas, North
Carolina and Colorado. The long-term care group is organized into three
regionally concentrated operating units: the Southeast Area (Alabama, Florida,
Georgia, Louisiana, Mississippi, North Carolina, South Carolina, and
Virginia); the Texas Area; and the Rocky Mountain Area (Arizona, Colorado,
Nebraska, and Wyoming).
LCA's facilities provide a continuum of care designed to accommodate
patients' and residents' needs as their acuity levels change. Services
provided include skilled nursing care, assisted living services, care for
individuals with Alzheimer's disease and subacute care services, although not
all services are provided at each facilities. All facilities must meet
comprehensive state licensing requirements, and those participating in
Medicare or Medicaid programs must also meet federal and state certification
standards (see "--Regulation").
129
<PAGE>
LCA's facilities are generally equally distributed between urban and non-urban
areas and typically compete only with other facilities in their respective
local markets.
Assisted Living Centers. LCA provides assisted living services in 35 of its
long-term care centers and in five freestanding facilities with approximately
1,350 beds collectively to residents who need assistance with the basic
activities of daily living, but whose care needs have not yet reached a level
that requires 24-hour nursing care. LCA's assisted living development program
is focused on markets where LCA has a skilled nursing facility presence so
that as these residents' needs change and require higher acuity services, they
can be accommodated in one of LCA's nursing facilities. These newly
constructed assisted living facilities are intended to be exclusively private
pay.
Subacute Care Services. Since 1993, LCA has developed its Progressive Care
Centers program in which distinct units of certain designated long-term care
facilities are dedicated to subacute nursing care and rehabilitation services
for patients with higher acuity levels. At Progressive Care Centers, specially
trained staff members offer care to patients with higher acuity levels in a
technologically advanced facility as an alternative to more expensive patient
treatment in the acute care hospital setting. Services offered by LCA in
Progressive Care Centers include physical therapy, occupational therapy,
speech therapy, enteral therapy, IV therapy, respiratory therapy, specialized
wound management, ventilator care, and tracheostomy care, although not all
services are provided at each Progressive Care Center. LCA operates a total of
approximately 250 beds in 14 facilities under its Progressive Care Centers
program.
Alzheimer's Care Services. LCA is a provider of long-term care to residents
with Alzheimer's disease. Within specially designated and designed portions of
certain of its long-term care centers, LCA operates over 60 units with
approximately 1,700 beds dedicated to addressing the problems of
disorientation and perceptual confusion typically experienced by residents
with Alzheimer's disease. The Alzheimer's care units also provide education
and support to the residents' families. LCA provides specially trained
activity directors and nursing staffs to these units and employs a Director of
Alzheimer's Programming to supervise program development and staff training.
LCA intends to continue its commitment to Alzheimer's care through
implementation of Alzheimer's programs in more of its long-term care
facilities as well as in association with its planned free standing assisted
living centers.
LCA recently formed an affiliation with the University of Texas Medical
Branch in Galveston, Texas to construct and develop a 150-bed Alzheimer's and
mental dementia facility for research, treatment and training in these and
related areas. The facility will be located near the hospital on Galveston
Island.
Living Centers-DevCon Divestiture. In September 1996, LCA divested its
DevCon subsidiary which provided training and habilitation services to
individuals with mental retardation and developmental disabilities. See Note 2
to the Consolidated Financial Statements of LCA incorporated by reference
herein. DevCon operated over 80 centers and group homes with approximately 400
beds in Florida and 1,750 beds in Texas and relied primarily on Medicaid for
reimbursement. In recent years the revenues for this operation had grown at a
slower rate than those associated with LCA's skilled nursing business. This
divestiture was consistent with LCA's strategy of focusing on its senior
health care services business.
REHABILITATION SERVICES
In June 1995, LCA acquired Rehability which became the foundation for the
rehabilitation services group of LCA. In July 1995, LCA acquired Med-Therapy
Rehabilitation Services, Inc. ("Med-Therapy"), as part of LCA's acquisition of
BCC. In August 1995, LCA acquired Therapy Management Innovations, Inc.
("TMI"). These three entities were subsequently combined to form LCA's
rehabilitation services group which operates through its subsidiaries as ARS.
During fiscal year 1996, LCA reorganized ARS into four distinct operating
divisions aligned along service lines as opposed to the previous organization
which was largely along geographic lines. The ARS service continuum includes
nursing facility based rehabilitation, outpatient clinics, hospital
130
<PAGE>
department rehabilitation management, and therapy management consulting. The
following describes these four operating divisions:
American Therapy Services. American Therapy Services ("ATS") employs
licensed therapists to provide physical, occupational, and speech therapy to
nursing facility residents through contracts with over 600 skilled nursing
facilities throughout the United States (approximately 500 of which are
unaffiliated with LCA). The ultimate payor for these services is typically
Medicare; in some instances ATS invoices the skilled nursing facility which in
turn bills Medicare, in other instances ATS invoices Medicare directly.
Rehability Health Services. Rehability Health Services operates
approximately 133 outpatient rehabilitation clinics in 18 states. The primary
focus of the clinics is rehabilitation services related to occupational and
sports injuries. The primary payor for these services is typically private
employers (or their insurance carriers) for benefits associated with
occupational injuries or worker's compensation claims.
Rehability Hospital Services. Rehability Hospital Services manages
approximately 45 hospital rehabilitation departments on a contract basis.
Therapy Management Innovations. TMI provides a variety of rehabilitation
management consulting services to subacute and long-term care facilities.
These consulting services focus on enhancing the quality of rehabilitation
therapy and include supervision of clinical procedures, documentation and
billing protocols, as well as monitoring of patient outcomes. Prior to its
acquisition by LCA, TMI managed substantially all of LCA's rehabilitation
therapy programs in its long-term care facilities.
INSTITUTIONAL PHARMACEUTICAL SERVICES
American Pharmaceutical Services, Inc. ("APS"), a wholly-owned subsidiary of
LCA, operates the institutional pharmaceutical services group of LCA,
specializes in meeting the needs of health care providers in subacute and
long-term care settings by providing pharmaceutical supplies and programs. APS
and its subsidiaries provide services and products to approximately 1,000
long-term care centers with more than 100,000 long-term care beds through 34
full-service institutional pharmacies. APS provides pharmacy dispensing,
infusion therapy and specialty patient care products such as urologicals,
wound care products and other ancillary supplies. APS also offers a
comprehensive array of services and supplies to meet the needs of patients
with higher acuity levels, such as intravenous and enteral therapy. In 1996,
APS expanded its product line to include respiratory therapy and orthotic
supplies and services. In addition, APS provides pharmacy consulting services,
specializing in long-term care drug regimen reviews, medication procedures and
regulatory monitoring. APS provides full clinical support for its products
through long-term care facility staff education and quality assurance
programs.
SPECIALTY CARE SERVICES
American Senior Health Services, Inc. ("ASHS"), a wholly owned subsidiary of
LCA, operates LCA's speciality care services group, which includes, home
health care, hospice and geriatric physician management services businesses.
Home Health Care. Currently LCA provides home health care through agencies
in Colorado, Tennesse, and Corpus Christi, Texas. LCA plans to expand its home
health care business through the acquisition and development of agencies in
its key markets. The expansion of home health complements LCA's initiative to
provide a complete continuum of senior health care in its targeted markets.
Additionally, these home care businesses will be potential customers for LCA's
rehabilitation therapy and pharmacy operations. During the second quarter of
fiscal 1997, ASHS opened home care branches in Denver, Colorado; Colorado
Springs, Colorado; and Gainsboro, Tennessee.
Hospice Care. Hospice care is increasingly recognized as a preferred method
of care for those patients diagnosed with a terminal illness and certified
with a life expectancy of less than six months. Hospice services
131
<PAGE>
are designed to provide comfort for the physical and emotional needs of
terminally ill patients. Hospice services focus on maximizing the quality of
life of terminally ill patients as opposed to curing an illness; as a result,
this modality of care is typically a more cost-effective alternative to more
aggressive medical treatment. An estimated four to eight percent of nursing
facility residents potentially require hospice services. During fiscal year
1996 LCA expanded its hospice initiative by purchasing a 50 percent interest
in Heart of America Hospice ("Heart of America") of Kansas City, Missouri.
LCA's existing hospice operation was combined with Heart of America, to become
LCA's hospice provider. Subsequent to September 30, 1996, LCA purchased the
remaining 50 percent ownership interest in Heart of America. Additionally, LCA
entered into a venture relationship with San Jacinto Methodist Hospital, an
affiliate of the Methodist Health Care system in Texas, for the provision of
hospice services in the Houston metropolitan area.
Geriatric Physician Management Services. Effective September 30, 1996 LCA
purchased a 75 percent interest in American Geriatric Management Services,
Inc. ("AGMS"). AGMS is a management services organization created to provide
support services, record keeping, administrative management, budget
development, and managed care contracting services to geriatric and long-term
care physician group practices. Geriatric and long-term care physicians whose
professional practices are managed by AGMS make their professional medical
services available on-site at skilled nursing, nursing, subacute, hospice and
assisted living facilities. LCA expects that its association with AGMS will
assist in expanding the complex care capabilities of its facilities. LCA
intends to participate in the development of several regionally concentrated
management service organizations which will provide services to long-term care
physicians in LCA's key geographic markets.
SOURCES OF REVENUE
Nursing home revenues are derived from two basic sources: routine services
($630.7 million or 81.2% in fiscal year 1996) and ancillary services ($145.8
million or 18.8% in fiscal year 1996) and are a function of occupancy rates in
the long-term care facilities and the payor mix. Occupancy rates, as
identified in the following table, decreased in fiscal year 1996 partially due
to an increase in hospital-operated skilled units in key markets. LCA has
invested in the marketing and managed care areas and has implemented an
aggressive marketing program to increase census and improve quality mix.
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
--------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Weighted average licensed bed count..................... 25,498 26,355 26,617
Total average residents................................. 21,405 22,428 22,669
Average occupancy....................................... 83.9% 85.1% 85.2%
</TABLE>
Payor mix is the source of payment for the services provided and consists of
private pay, Medicare and Medicaid. Private pay includes revenue from
individuals who pay directly for services without governmental assistance,
managed care companies, commercial insurers, health maintenance organizations,
and Veteran's administration contractual payments. Managed care as a payor
source to health care providers is expected to increase over the next several
years. LCA has increased its managed care contracting capabilities and has
created a system which allows the centralized case management of these
patients within targeted markets. However, the financial impact to LCA of this
increasing payor source is not significant and can not be determined at this
time.
Reimbursement rates from government sponsored programs, such as Medicare and
Medicaid, are strictly regulated and subject to funding appropriations from
federal and state governments. As of June 30, 1997, distinct part units in 188
of LCA's 201 long-term care centers were certified to participate in the
Medicare program. To the extent unfavorable changes in economic conditions
impact payments under governmental or third-party payor programs, LCA would be
adversely affected. See "--Regulation." Revenues derived from LCA's pharmacy
and therapy groups are also derived from the various sources of payment for
the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED
SEPTEMBER 30,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Private pay................................................ 31.9% 25.5% 23.7%
Medicare................................................... 25.5% 23.9% 17.5%
Medicaid................................................... 42.6% 50.6% 58.8%
</TABLE>
132
<PAGE>
The increasing trend in the percentage of revenues derived from private pay
and Medicare sources is attributable primarily to the growth in LCA's pharmacy
and therapy operations. The revenue from these operations, which is generated
primarily from private pay and Medicare sources, results in a reduction of the
percentage of net revenue derived from the Medicaid program. In addition,
average reimbursement rates for Medicare patients have increased more rapidly
than for Medicaid residents due primarily to the higher reimbursement rates
associated with the increase in acuity levels. Although cost reimbursement for
Medicare residents generates a higher level of revenue per patient day,
profitability is not proportionally increased due to the additional costs
associated with the required higher level of care and other services for such
residents.
PROPERTIES
Long-Term Care Centers. As of June 30, 1997, LCA operated 201 long-term care
and assisted living centers with 23,068 licensed beds in 13 states.
The following table lists, at June 30, 1997 by state, the total number of
licensed beds and the number of centers owned, leased or managed by LCA.
Licensed beds represent the number of beds for which a license has been issued
and may vary from the actual beds available for use.
<TABLE>
<CAPTION>
OWNED LEASED MANAGED TOTAL
-------------- ------------- ------------ --------------
STATE CENTERS BEDS CENTERS BEDS CENTERS BEDS CENTERS BEDS
----- ------- ------ ------- ----- ------- ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Texas ............. 48 5,558 42 4,640 1 120 91 10,318
North Carolina .... 29 3,429 3 458 -- -- 32 3,887
Colorado .......... 18 1,926 8 819 -- -- 26 2,745
Louisiana ......... -- -- 6 1,260 -- -- 6 1,260
Georgia ........... 3 329 6 706 -- -- 9 1,035
Alabama ........... 7 848 -- -- -- -- 7 848
Arizona ........... 2 215 5 545 -- -- 7 760
Nebraska........... 7 612 -- -- -- -- 7 612
Florida............ 2 295 -- -- 1 51 3 346
Wyoming............ 3 385 2 140 -- -- 5 525
South Carolina..... 2 265 -- -- -- -- 2 265
Virginia........... -- -- 5 343 -- -- 5 343
Mississippi ....... 1 124 -- -- -- -- 1 124
--- ------ --- ----- --- --- --- ------
Total............ 122 13,986 77 8,911 2 171 201 23,068
=== ====== === ===== === === === ======
</TABLE>
Certain of the above properties serve as collateral for various mortgage
debt instruments or capitalized lease obligations. LCA's lease arrangements
are generally "triple net" leases, as is typical in the industry, whereby LCA
rather than the landlord is responsible for all property taxes, insurance
coverages and maintenance on the property. The average remaining life of the
leases, including renewal options exercisable solely by LCA, is 11.3 years at
June 30, 1997. The centers are generally refurbished or remodeled on a five to
seven-year cycle.
On April 2, 1997, LCA converted six facilities containing 620 licensed beds
in Colorado from leased from individual landlord to its synthetic lease
program, pursuant to which the facilities are treated as leased for financial
accounting purposes and owned for federal income tax purposes. See
"Description of Financing -- Treatment of Certain Existing GranCare and LCA
Indebtedness."
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In addition to long-term care centers, at June 30, 1997 LCA operated 133
outpatient rehabilitation clinics in 18 states and 31 institutional pharmacies
in 11 states, as follows:
<TABLE>
<CAPTION>
OUTPATIENT INSTITUTIONAL
STATE CLINICS PHARMACIES
----- ---------- -------------
<S> <C> <C>
Alabama........................................... -- 1
Arizona........................................... 1 1
California........................................ 5 --
Colorado.......................................... -- 2
Connecticut....................................... 3 --
Florida........................................... 17 9
Georgia........................................... 1 2
Illinois.......................................... -- 1
Indiana........................................... -- 1
Kansas............................................ 7 --
Kentucky.......................................... 1 --
Louisiana......................................... 6 2
Maryland.......................................... 2 --
Mississippi....................................... 7 --
Missouri.......................................... 4 --
Nevada............................................ 1 --
New Jersey........................................ -- 1
North Carolina.................................... 22 2
South Carolina.................................... 9 --
Tennessee......................................... 10 --
Texas............................................. 27 9
Virginia.......................................... 7 --
Washington........................................ 1 --
--- ---
Total........................................... 133 31
=== ===
</TABLE>
Substantially all of LCA's outpatient rehabilitation clinics and
institutional pharmacy facilities are leased under "triple net" leases. LCA
considers its properties to be in good operating condition and suitable for
the purposes for which they are being used. In connection with the Rehability
acquisition, LCA adopted a restructuring plan in which it closed a total of 30
outpatient rehabilitation centers prior to March 31, 1997. See Note 9 to the
Consolidated Financial Statements of LCA incorporated by reference herein.
Certain of the above properties serve as collateral for various mortgage
debt instruments or capitalized lease obligations. See Note 5 to the LCA
Consolidated Financial Statements of LCA incorporated by reference herein.
REGULATION
Various aspects of LCA's business are regulated by the federal government
and by the states where LCA has operations. Regulatory activities affect LCA's
business activities by controlling its growth, requiring licensure and
certification for its facilities and health care services, and controlling
reimbursement for services provided. LCA believes it is in substantial
compliance with these regulatory requirements, but there can be no assurance
that LCA will be able to maintain such compliance, or will not be required to
expend significant amounts to do so.
Medicare and Medicaid. The Medicare program was enacted in 1965 to provide a
nationwide, federally funded health insurance program for the elderly. The
program is divided into Part A and Part B, each of which has separate rules
and requirements and separate funding sources. Medicare Part A, the Hospital
Insurance Program (42 U.S.C. (S) 1395c et seq.) is financed primarily through
mandatory taxes on workers' wages. Part A
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pays for hospital, skilled nursing, home health agency, hospice, and dialysis
services determined to be medically necessary for the individual patient.
Medicare Part B, the Supplementary Medical Insurance program (42 U.S.C. (S)
1395j et seq.), is a voluntary medical benefits plan in which eligible
individuals can enroll to receive benefits in addition to those available
under Part A. Under Part B, each beneficiary must pay a monthly premium, meet
a deductible towards the cost of covered items and services determined to be
medically necessary, and pay 20 percent of the Medicare allowable charge as
coinsurance on most covered items. Non-institutional services, including
physician services, outpatient hospital services, durable medical equipment,
and laboratory services, among others, are paid under Medicare Part B. In
addition, the Balanced Budget Act adds a new Medicare Part C, which provides
Medicare beneficiaries with additional health plan choices, such as managed
care plans and medical savings accounts.
The Medicare program is administered by the Health Care Financing
Administration ("HCFA") of the U.S. Department of Health and Human Services
("HHS"). HCFA adopts regulations, and issues interpretive memoranda and
program manuals providing detailed explanation, of the Medicare program. The
payment operations of the Medicare program are handled by intermediaries
(under Part A) and carriers (under Part B) who are insurance companies and
Blue Cross/Blue Shield plans which contract with the Secretary of HHS to make
Medicare payments to providers in a particular geographic region. Individual
intermediaries and carriers issue transmittals, bulletins, notices, and
general instructions to providers and suppliers in their respective areas to
facilitate the administration of the Medicare program, but are required to
follow the Medicare statute, HCFA regulations, HCFA transmittals, and the
program manuals.
Within these requirements, intermediaries and carriers are granted broad
discretion to establish particular guidelines and procedures for making
Medicare coverage determinations and payments, including prior approval,
utilization limits, and specific documentation.
The Medicaid program is a joint federal-state cooperative arrangement
established for the purpose of enabling states to furnish medical assistance
on behalf of aged, blind, or disabled individuals, or members of families with
dependent children, whose income and resources are insufficient to meet the
costs of necessary medical services. The federal and state governments share
the costs of such aid pursuant to statutory formulae. The Secretary of HHS
(the "Secretary") has primary federal responsibility for administering the
Medicaid program. The responsibility has been delegated to HCFA, whose
Medicaid Bureau carries out this delegation. States are not required to
participate in the Medicaid program. States which choose to participate,
however, must administer their Medicaid programs in accordance with federal
law, the implementing regulations and policies of the Secretary and their
approved state plans. A state becomes eligible to receive federal funds by
submitting to the Secretary a state plan for medical assistance. The federal
Medicaid statute establishes minimum standards for state plans in such areas
as administration, eligibility, coverage of services, quality and provision of
services, and payment for services. States have significant latitude, within
these standards, to determine the mix of services and structure of their state
Medicaid programs. The state plan must be amended by appropriate submission to
the Secretary whenever necessary to reflect changes in federal statutes,
regulations, policies, court decisions, or material changes in any phase of
state law, policy, or operations.
All of LCA's nursing facilities, assisted living facilities, home health and
hospice agencies, pharmacies, and rehabilitation clinics are licensed under
applicable state law and are certified or approved (other than its assisted
living facilities) as providers or suppliers under one or more of the Medicare
or Medicaid programs, as applicable. Licensure and certification standards may
vary from jurisdiction to jurisdiction, but generally focus upon physical
environment and plant safety, administration, staffing and personnel,
professional and support services, patient rights, and quality. Once a
facility or service provider becomes licensed and certified, it must continue
to comply with federal, state and local license requirements in addition to
local building and life-safety codes.
Long-term care facilities must comply with certain requirements to
participate either as a skilled nursing facility under Medicare or a nursing
facility under Medicaid. Regulations effective October 1, 1990, pursuant to
the Omnibus Budget Reconciliation Act of 1987, obligate facilities to
demonstrate compliance with requirements relating to resident rights, resident
assessment, quality of care, quality of life, physician services, nursing
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services, pharmacy services, dietary services, rehabilitation services,
infection control, physical environment, and administration. Survey,
certification, and enforcement procedures to be used by state and federal
survey agencies to determine facilities' level of compliance with the
participation requirements for Medicare and Medicaid were adopted by HCFA
regulations effective July 1, 1995. The requirements include (i) that surveys
focus on residents' outcomes of care and (ii) that all deviations from
participation requirements will be considered deficiencies, but that not all
deficiencies will constitute noncompliance. The regulations identify remedies
against noncompliant facilities and specify the categories of deficiencies for
which they will be applied. These remedies include: termination as a
participating provider; temporary management; denial of payment for new
admissions; denial of payment for all residents; civil money penalties of $50
to $10,000 per day of violation; facility closure and/or transfer of residents
in emergencies; directed plans of correction; and directed in-service
training.
The facilities and service providers operated by LCA's subsidiaries in the
normal course of business are subject to annual inspections and complaint
investigations. LCA has developed a management system to test compliance with
the various standards and requirements, including training on regulatory
requirements, and initiating and maintaining on-going quality assessment and
improvement programs. LCA believes that its facilities and service providers
are in substantial compliance with applicable regulatory requirements. From
time to time, however, LCA receives notice of noncompliance with various
requirements for Medicare/Medicaid participation or state licensure. LCA
reviews such notices for factual correctness, and based on such review, either
takes appropriate corrective action or challenges the stated basis for the
allegation of noncompliance. In most cases, LCA and the reviewing agency will
agree upon the measure to be taken to bring the facility or provider service
into compliance. Under certain circumstances, however, such as repeat
violations or perceived severity of the violations, the federal and/or state
agencies have the authority to take adverse actions against a facility or
provider, including the imposition of monetary fines, or the threatened
decertification of a facility or provider from participation in the Medicare
and/or Medicaid programs, or licensure revocation. While in certain instances
facilities or providers have been fined, decertified, or had licensure
sanctions imposed, LCA has been able to reinstate the certifications and
satisfactorily resolve the fines and licensure sanctions. No such enforcement
action against a facility or provider has had a material adverse impact on
LCA. In all cases during fiscal year 1996, cited deficiencies were remedied
before any facilities or providers were decertified or threatened licensure
sanctions became effective.
Medicare and Medicaid payments historically have been determined from annual
cost reports filed by LCA for its nursing facilities, home health and hospice
agencies and rehabilitation clinics. Medicare fiscal intermediaries under
contract with the Secretary make initial payment determinations after review
or audit of the cost reports and often make adjustments to the costs that are
claimed in the cost reports. The initial payment determinations may be
appealed administratively within HHS and ultimately to federal court by the
providers.
Issues in LCA's Medicare skilled nursing facility ("SNF") cost reports
currently under review include costs for respiratory therapy services which
are provided by hospitals with which the facilities have transfer agreements.
One of the LCA fiscal intermediaries has indicated it intends to allow costs
for respiratory therapy services for periods during fiscal years ended 1995
and 1996, but has indicated it may reopen such cost reporting periods at a
future date to review whether the subject hospitals have provided such
services in compliance with the applicable requirements. With regard to LCA's
costs for certain drugs, supplies and services and therapy services management
which are provided under contracts with other LCA subsidiaries, LCA has
received notice from one of its fiscal intermediaries that it intends to
disallow certain costs for periods during fiscal years ended 1995 and 1996
relating to services of APS as a "related party" provider of pharmaceutical
goods and services and ARS as a "related party" provider of therapy and
management services to LCA SNFs. Until Notices of Program Reimbursement
("NPRs") are issued by the intermediary, LCA will not know the details of any
possible disallowances. LCA believes that the claimed amounts are allowable
costs under applicable regulations and program manuals; however, there can be
no assurance that the responsible intermediaries will not make adjustments to
these amounts in their initial payment determinations. Provisions for cost
report adjustments have been recorded to reflect historical levels of
adjustments that have resulted from previous audits and reviews of cost
reports. There can be no assurance that future adjustments to LCA's cost
reports will not exceed historical
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levels which could have a material adverse effect on LCA's operating results
or that LCA will not be required to spend significant amounts to pursue
administrative and judicial appeals of any such adjustments.
The Balanced Budget Act, signed into law on August 5, 1997, makes numerous
changes to the Medicare and Medicaid programs which could potentially
adversely affect New LCA. With respect to the Medicare program, the new law
requires the establishment of a PPS for SNF services, under which facilities
will be paid a federal per diem rate for virtually all covered services in
lieu of the current cost-based reimbursement rate. This change will reward
efficient providers and penalize those that are inefficient. The PPS will be
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The Balanced Budget Act also
institutes consolidated billing for SNF services, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
SNF care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement or under
any other contracting or consulting arrangement, effective for items or
services furnished on or after July 1, 1998. Likewise, the Balanced Budget Act
requires the Secretary to establish a PPS for home health services, to be
implemented beginning October 1, 1999. The legislation also requires home
health agencies to submit claims for all services, and all payments will be
made to the home health agencies regardless of whether the item or service was
furnished by the agency, by others under arrangement or under any other
contracting or consulting arrangement. The law also contains provisions
affecting outpatient rehabilitation agencies and providers, including a 10
percent reduction in operating and capital costs for 1998, a fee schedule for
therapy services beginning in 1999, and the application of per beneficiary
therapy caps currently applicable to independent therapists to all outpatient
rehabilitation services, beginning in 1999. With regard to hospices, the
Balanced Budget Act limits reimbursement by setting payment rate increases at
market basket minus 1.0 percentage points for fiscal years 1998 through 2002.
The law also institutes a number of reforms of the hospice benefit, including
a requirement that hospices can be reimbursed based on the location where care
is furnished (rather than the location of the hospice), effective for cost
reporting periods beginning on or after October 1, 1997. Other provisions
limit Medicare payments for certain drugs and biologicals, durable medical
equipment, and parenteral and enteral nutrients and supplies.
The Balanced Budget Act also contains a number of changes affecting the
Medicaid program. Significantly, the law repeals the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that must be incurred by efficiently and economically
operated providers in order to meet quality and safety standards. Effective
for Medicaid services provided on or after October 1, 1997, states will have
considerable flexibility in establishing payment rates. LCA is not able to
predict whether any states will adopt changes in their Medicaid reimbursement
systems, or, if adopted and implemented, what effect such initiatives would
have on LCA or Paragon. Accordingly, there can be no assurance that such
changes in Medicaid reimbursement to nursing facilities will not have an
adverse effect on LCA or Paragon. Further, the Balanced Budget Act allows
states to mandate enrollment in managed care systems without seeking approval
from the Secretary for waivers from certain Medicaid requirements as long as
certain standards are met. Although historically these managed care programs
have exempted institutional care, no assurance can be given that these waiver
provisions ultimately will not change the reimbursement system for long-term
care facilities from fee-for-service to managed care negotiated or capitated
rates or otherwise affect the levels of payments to LCA or Paragon.
The Medicare and Medicaid anti-kickback statute, 42 U.S.C. (S) 1320a-7(b),
prohibits the knowing and willful solicitation or receipt of any remuneration
"in return for" referring an individual, or for recommending or arranging for
the purchase, lease, or ordering, of any item or service for which payment may
be made under Medicare or a state health care program. In addition, the
statute prohibits the offer or payment of remuneration "to induce" a person to
refer an individual, or to recommend or arrange for the purchase, lease, or
ordering of any item or service for which payment may be made under the
Medicare or state health care programs. The statute contains exceptions for
certain discounts, group purchasing organizations, employment relationships,
waivers of coinsurance by community health centers, health plans, and
practices defined in regulatory safe harbors.
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False claims are prohibited pursuant to criminal and civil statutes.
Criminal provisions at 42 U.S.C. (S) 1320a-7b prohibit filing false claims or
making false statements to receive payment or certification under Medicare or
Medicaid, or failing to refund overpayments or improper payments; offenses for
violation are felonies punishable by up to five years imprisonment, and/or
$25,000 fines. Civil provisions at 31 U.S.C. (S) 3729 prohibit the knowing
filing of a false claim or the knowing use of false statements to obtain
payment; penalties for violations are fines of not less than $5,000 nor more
than $10,000, plus treble damages, for each claim filed.
The Ethics in Patient Referrals Act, ("Stark I"), effective January 1, 1992,
generally prohibited physicians from referring Medicare patients to clinical
laboratories for testing, if the referring physician (or a member of the
physician's immediate family) had a "financial relationship", through
ownership or compensation, with the laboratory. The Omnibus Budget
Reconciliation Act of 1993 contains provisions ("Stark II") expanding Stark I
by prohibiting physicians from referring Medicare and Medicaid patients to an
entity for the furnishing of a list of "designated health services" including
physical therapy, occupational therapy, home health services, and others. If
such a financial relationship exists, the entity is generally prohibited from
claiming payment for such services under the Medicare or Medicaid programs.
Compensation arrangements are generally exempted from the Stark provisions if,
among other things, the compensation to be paid is set in advance, does not
exceed fair market value and is not determined in a manner that takes into
account the volume or value of any referrals or other business generated
between the parties.
Other provisions in the Social Security Act authorize other penalties,
including exclusion from participation in Medicare and Medicaid, for various
billing-related offenses. HHS can also initiate permissive exclusion actions
for such improper billing practices as submitting claims "substantially in
excess" of the provider's usual costs or charges, failure to disclose
ownership and officers, or failure to disclose subcontractors and suppliers.
Executive Order 12549 prohibits any corporation or facility from participating
in federal contracts if it or its principals have been disbarred, suspended or
are ineligible, or have been voluntarily excluded, from participating in
federal contracts. A principal has been defined as an officer, director,
owner, partner, key employee or other person with primary management or
supervisory responsibilities.
Additionally, the Health Insurance Portability and Accountability Act of
1996 granted expanded enforcement authority to HHS and the U.S. Department of
Justice ("DOJ"), and provided enhanced resources to support the activities and
responsibilities of the Office of Inspector General ("OIG") of HHS and DOJ by
authorizing large increases in funding for investigating fraud and abuse
violations relating to health care delivery and payment. On January 24, 1997,
the OIG issued guidelines for the Fraud and Abuse Control Program as mandated
by the Act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application of the anti-
kickback statute and certain other fraud and abuse laws. The recently-enacted
Balance Budget Act also includes numerous health fraud provisions, including:
new exclusion authority for the transfer of ownership or control interest in
an entity to an immediate family or household member in anticipation of, or
following, a conviction, assessment, or exclusion; increased mandatory
exclusion periods for multiple health fraud convictions, including permanent
exclusion for those convicted of three health care-related crimes; authority
for the Secretary to refuse to enter into Medicare agreements with convicted
felons; new civil money penalties for contracting with an excluded provider or
violating the Medicare and Medicaid anti-kickback statute; new surety bond and
information disclosure requirements for certain providers and suppliers; and
an expansion of the mandatory and permissive exclusions added by the Health
Insurance Portability and Accountability Act of 1996 to any federal health
care program (other than the Federal Employees Health Benefits Program).
LCA expects that business practices of providers and financial relationships
between providers will be subject to increased scrutiny as health care reform
efforts continue at federal and state levels. LCA believes that its
contractual arrangements with health care providers are not in violation of
these federal and state laws, but cannot be certain that they will always be
interpreted in a manner consistent with LCA's practices.
In the summer of 1995, a major anti-fraud demonstration project, "Operation
Restore Trust," was announced by the OIG. A primary purpose for the project is
to scrutinize the activities of health care providers
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who are reimbursed under the Medicare and Medicaid programs. Initial
investigative efforts have focused on skilled nursing facilities, home health
and hospice agencies, and durable medical equipment suppliers in Texas,
Florida, New York, Illinois and California. With the exception of Louisiana,
the states were targeted because they collectively compromise 40% of Medicare
and Medicaid beneficiaries. On May 20, 1997, HHS announced that Operation
Restore Trust will be expanded during the next two years to include 12
additional states (Arizona, Colorado, Georgia, Louisiana, Massachusetts,
Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, and
Washington), as well as several other types of health care services. Over the
longer term, Operation Restore Trust investigative techniques will be used in
all 50 states, and will be applied throughout the Medicare and Medicaid
programs. The OIG has issued, and will continue to issue, special Fraud Alert
bulletins identifying "suspect" characteristics of potentially illegal
practices by providers, and illegal arrangements between providers. The
bulletins contain hot line numbers and encourage Medicare beneficiaries,
health care company employees, competitors, and others to call to report
suspected violations. The OIG has indicated that among the practices under
scrutiny are excessive services to residents in nursing homes, "drop
shipments" of supplies for a resident that has not been properly assessed,
billing for services not rendered, billing for equipment or supplies which
were not used, the use of untrained staff, falsified plans of care, forged
physician signatures and kickbacks. Identified problems will result in
increased audit scrutiny, letter inquiries or subpoenas for data and records,
and onsite investigations. Enforcement actions could include criminal
prosecutions, suit for civil penalties and/or Medicare and Medicaid program
exclusion. While LCA does not believe that it is in violation of any such
laws, there can be no assurance that substantial amounts will not be expended
to cooperate with any such investigation or to defend allegations arising
therefrom. If it were found that any of LCA's practices failed to comply with
the anti-fraud provisions, LCA could be materially adversely affected. LCA is
unable to predict the effect of future administrative or judicial
interpretations of these laws, whether other legislation or regulations on the
federal or state level in any of these areas will be adopted, what form such
legislation or regulations may take, or their impact on LCA. There can be no
assurance that such laws will ultimately be interpreted in a manner consistent
with LCA's practices.
Home Health. On September 15, 1997, President Clinton imposed a first-ever
six month moratorium on the entry of new home health agencies into the
Medicare program in order to allow new regulations to be written that will
attempt to curb fraud and abuse within the home health care industry. HHS will
have authority to grant exceptions from the moratorium for areas of the
country with no access to home health care services. In addition to the
moratorium, the Clinton administration will also require, among other things,
that home health agencies re-enroll in the Medicare program every three years
and, at the time of re-enrollment, to submit to an independent audit of their
records and practices. Finally, the President pledged to double the number of
audits conducted of home health agencies, while at the same time HCFA will
increase the number of claims reviewed by 25%. Until the new regulations are
released, LCA is unable to predict what impact, if any, the new regulations
will have on Paragon.
Certificate of Need. Certificate of Need ("CON") statutes and regulations
control the development and expansion of health care services and facilities
in certain states. The CON process is intended to promote quality health care
at the lower possible cost and to avoid the unnecessary duplication of
services, equipment and facilities. CON or similar laws generally require that
approval must be obtained from the designated state health planning agency for
certain acquisitions and capital expenditures, and determine that a need
exists prior to the expansion of existing facilities, construction of new
facilities, addition of beds, acquisition of major items of equipment or
introduction of new services. State approvals are generally issued for a
specified maximum expenditure and require implementation of the proposal
within a specified period of time. Failure to obtain the necessary state
approval can result in the inability to provide the service, to operate the
facility, to complete the acquisition, addition or other change, and can also
result in the imposition of sanctions or adverse action on the facility's
license and adverse reimbursement action. Most states in which LCA operates
have adopted CON or similar laws that regulate the locations operated by LCA's
subsidiaries, and/or the services provided. Some states, however, including,
but not limited to Colorado, Texas, and Wyoming, do have other state laws
which control the addition of nursing facility beds in a service area. CONs or
other approvals may be required in connection with LCA's future acquisitions
and/or expansions. There can be no assurance that LCA will be able to obtain
the CONs or other approvals necessary for any or all such projects.
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Environmental Laws. Certain federal and state laws govern the handling and
disposal of medical, infectious and hazardous waste. Failure to comply with
those laws or the regulations promulgated thereunder could subject an entity
covered by these laws to fines, criminal penalties and other enforcement
actions. LCA has developed policies with respect to the handling and disposal
of medical, infectious and hazardous waste to assure compliance by each of its
centers with those laws and regulations. LCA believes that it is in material
compliance with applicable laws and regulations governing medical, infectious
and hazardous waste.
OSHA. Federal regulations promulgated by the Occupational Safety and Health
Administration impose additional requirements on LCA with regard to protecting
employees from hazards in the workplace, including exposure to blood-borne
pathogens. LCA cannot predict the frequency of compliance monitoring or
enforcement actions that it may be subject to by governing agencies and there
can be no assurance that the regulations will not adversely affect the
operations of LCA and other long-term care providers.
Work Opportunity Credits. The targeted jobs credit expired on December 31,
1994. The 1996 Small Business Act (P.L. 104-188), Section 1201, replaced the
targeted jobs credit under Section 51 with the work opportunity credit. The
credit is available on an elective basis for employers hiring individuals from
one or more of eight targeted groups, and generally, is equal to 35% of
qualified first-year wages. However, no credit is allowed for wages paid
unless the individual is employed by the employer for at least 180 days or 400
hours. In addition, the individual is not treated as a member of a targeted
group unless certification requirements are met. The credit is available for
wages paid or incurred to a qualified individual who begins work for an
employer after September 30, 1996, and before October 1, 1997.
COMPETITION
The long-term health care industry is segmented into a variety of
competitive areas which market similar services. These competitors include
nursing homes, hospitals, extended care centers, retirement centers and
communities, and home health and hospice agencies. LCA's centers historically
have competed on a local basis with other long-term care providers, and LCA's
competitive position has varied from center to center within the various
communities it serves. During fiscal year 1996, however, LCA invested in the
development of a Marketing and Managed Care Department, led by a Corporate
Vice President of Marketing, to assist facilities-based staff to increase the
occupancies of LCA's long-term care centers. Several new systems are in the
process of implementation which are designed to enhance census development and
retention. Significant competitive factors include the quality of care
provided, reputation, location and physical appearance of the long-term care
centers and, in the case of private pay residents, charges for services. Since
there is little price competition with respect to Medicaid and Medicare
residents, the range of services provided by LCA's centers that is covered by
Medicaid and Medicare and the location and physical condition of the centers
significantly affect a center's competitive position in its market.
Competition in the institutional pharmaceutical and the rehabilitation
services markets ranges from small local operators to companies which are
national in scope and distribution capability. LCA cannot assure that its
marketing initiative and the implementation of marketing systems will result
in significant increases in census at its long-term care centers.
EMPLOYEES
LCA employs approximately 28,000 individuals, including approximately 5,000
registered and licensed practical nurses, 9,000 nursing assistants, 2,000
therapists, 180 pharmacists and 800 employees who work at the corporate and
field offices.
LEGAL PROCEEDINGS
As is typical in the health care industry, LCA is subject to claims that its
services have resulted in resident injury or other adverse effects, the risks
of which are greater for higher acuity residents receiving services from LCA
than for other long-term care residents. LCA has, from time to time, been
subject to such negligence claims and other litigation. In addition, resident,
visitor and employee injuries also subject LCA to risk of litigation.
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While LCA believes that the ultimate resolution of pending legal proceedings
will not have a material adverse effect on LCA's business or financial
condition, there can be no assurance that any current or future claims will
not have a material adverse effect on LCA's business or financial condition.
Although LCA maintains insurance with coverages it deems appropriate in
respect of such potential liabilities, there can be no assurance that such
insurance will continue to be available at acceptable rates or that claims in
excess of the current insurance coverages or claims not covered by insurance
will not be asserted against LCA. Moreover, insurance coverage in certain
states is not available to cover punitive damages, and proceedings involving
claims of punitive damages are pending in certain of these states. See
"Liquidity and Capital Resources" included in LCA's Management's Discussion
and Analysis of Financial Condition and Results of Operations incorporated by
reference herein.
LCA received a letter dated September 5, 1997 from an Assistant United
States Attorney ("AUSA") in the United States Attorney's Office for the
Eastern District of Texas (Beaumont) advising that that office is involved in
an investigation of allegations that services provided at some of LCA's
facilities may violate the Civil False Claims Act, which provides for treble
damages and penalties of $5,000 to $10,000 for each false claim. The AUSA
informed LCA that the investigation is the result of a qui tam complaint
(which involves a private citizen requesting the federal government to
intervene in an action because of an alleged violation of federal statutes)
filed under seal against LCA, and the AUSA is investigating the allegations in
order to determine if the United States will intervene in the proceedings.
Because LCA has only recently received the AUSA letter and the information
available to it is very limited, and since LCA is still awaiting the
Department of Justice decision on whether to intervene, LCA is unable to
assess at this point in time the nature or magnitude of the allegations.
An attorney in the Civil Division of the United States Department of Justice
has advised LCA that a complaint under the Civil False Claims Act has been
filed, under seal, against BCC and one of its subsidiaries, MedTherapy, in the
federal district court for the Western District of North Carolina. The
Department of Justice has reviewed the sealed complaint and advised counsel
for BCC and MedTherapy that the plaintiff alleges, in general, that BCC and
MedTherapy caused certain therapists to make improper therapy record entries
with respect to therapy screening services and that any claims filed with
Medicare for payments which are based upon such improper record entries should
be viewed as false claims under the Civil False Claims Act. Under the Civil
False Claims Act, any person who knowingly files false claims is liable for
treble damages and penalties ranging from $5,000 to $10,000 for each false
claim. Because the complaints are under seal, LCA does not know the number of
claims alleged or the specific factual allegations set forth in such
complaints. The Department of Justice has the right to intervene and pursue
the claim on behalf of the plaintiffs, but to LCA's knowledge has not made a
decision on intervention as of the date hereof. If the Department of Justice
does not intervene, the plaintiff may continue to pursue the claim
individually. BCC and MedTherapy have advised the Department of Justice that,
based upon the information disclosed thus far by the Department of Justice,
they dispute, and will vigorously contest, the claims of the plaintiff. No
assurances can be given that, if the plaintiff were to prevail in his claim,
the resulting judgment would not have a material adverse effect upon the
Company. Moreover, in connection with LCA's acquisition of BCC, the primary
stockholder (Donald C. Beaver) agreed to indemnify and hold harmless LCA from
and against any and all loss, expense, damage, penalty and liability which
could result from this claim, subject to further adjustment. Mr. Beaver's
indemnity requires any payment to LCA to be in the form of shares of LCA
Common Stock.
LCA was served with a Petition, Cause No. 97-1500-G, Community Healthcare
Services of America, Inc. v. Rehability Health Services, Inc. and Living
Centers of America, Inc., in the 319th Judicial District Court of Nueces
County, Texas, seeking $5.0 million in damages, filed by Community Health
Services, Inc. ("Community"), in connection with a home health agency
management agreement entered into between Community and a subsidiary of
Rehability, the predecessor of LCA's rehabilitation subsidiary company, ARS.
The Rehability subsidiary operated a Texas home health agency which Community
managed. LCA is vigorously defending the allegations of Community that LCA
breached the agreement by terminating Community's management services and has
filed a lawsuit against Community for breach of the agreement. Cause No. 97-
03569; Rehability Health Services, Inc. v. Community Healthcare Services,
Inc., in the 353rd Judicial District Court of Travis County, Texas. It is
anticipated that the two pending actions will be consolidated.
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Former owners of Lahr Pharmacy, Inc. ("Lahr"), Eldercare Medical Products
and Systems, Inc. and Pharm EZ Corp. (together, "PharmEZ"), and Total Medical
Services and Supplies, Inc. ("Total Medical"), some of whom are now currently
APS employees, have delivered written demands to APS alleging that the
consummation of the Mergers will result in a change in control of LCA as
defined in the separate acquisition agreements between Lahr, PharmEZ and Total
Medical and APS relating to the APS purchase of their pharmacy businesses. The
former owners of Lahr, PharmEZ and Total Medical assert that such a change of
control of LCA will result in the acceleration of "earnout" amounts
aggregating approximately $11 million provided for in their respective
acquisition agreements. Although LCA intends to vigorously defend any
resulting litigation, no assurance can be given that LCA will prevail in such
defense. APS also entered into other acquisition agreements with provisions
for earnout payments that could be alleged to accelerated upon certain change
in control events as defined in those agreements, and no assurance can be
given that former owners of these other acquired businesses will not make
similar claims.
The Estate of Donald Wortley had delivered a written demand to LCA alleging
that it is entitled to have issued to it approximately 48,000 shares of LCA
Common Stock (which based on the September 25, 1997 closing price of $40.75
would have an aggregate value of approximately $2.0 million) pursuant to
certain "earnout" provisions of an acquisition agreement relating to LCA's
purchase of a rehabilitation business from Mr. Wortley. Although LCA intends
to vigorously defend any resulting litigation, no assurance can be given that
LCA will prevail in such defense.
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CERTAIN INFORMATION CONCERNING GRANCARE
GENERAL
GranCare is a leading provider of comprehensive post-acute health care
services, primarily skilled nursing care, subacute and medically complex care,
long-term acute hospital care, inpatient/outpatient therapy, hospital contract
management, assisted living, hospice, home health care and adult day care.
GranCare provides these services through 126 long-term care facilities (122
skilled nursing facilities and four assisted living facilities) in 15 states
as of June 30, 1997, and 12 home health care agencies providing home health,
hospice and private duty services in four states. Through its contract
management business, GranCare as of June 30, 1997 also manages approximately
145 programs in acute care hospitals. In select markets, GranCare seeks to
operate these businesses as an interrelated network of services to provide a
continuum of cost-effective, post-acute care. GranCare's vision is to become
the preeminent health care provider in select markets by offering a full
continuum of care to address the needs of patients from the time of their
discharge from acute care hospitals until their recovery.
To focus on its core businesses and to capitalize on the ongoing
consolidation in the long-term care industry, GranCare completed the Vitalink
Merger and Distribution, the practical effect of which was to transfer
GranCare's Institutional Pharmacy Business to Vitalink. GranCare's
Institutional Pharmacy Business represented approximately 24% of net patient
revenues for the year ended December 31, 1996. As a result of the Vitalink
Merger and Distribution, the outstanding consolidated indebtedness of GranCare
was reduced by approximately $85.0 million.
GranCare's focus on the post-acute level of health care responds to general
demographic trends and health care cost containment initiatives of third-party
payors. As the number of people over the age of 65 continues to grow
significantly faster than the overall population, and advances in medicine and
technology continue to increase life expectancies, GranCare anticipates that
the need for long-term care facilities and related services will continue to
increase. Additionally, the growing emphasis on cost containment measures in
the health care industry has caused third-party payors to seek lower cost
alternatives to hospital-based care. The subacute care and other post-acute
services provided by GranCare respond to cost containment initiatives of
third-party payors by providing a lower cost alternative for patients who
continue to require a high level of medical and nursing care, but whose
medical condition permits discharge from the traditional acute care hospital
setting. Based on its experience, GranCare believes the long-term care
facilities that it operates have substantially lower capital and operating
costs than acute care hospitals. GranCare believes that it is able to offer
complex subacute medical services to these patients generally at a lower cost
than acute care hospitals.
GranCare has successfully expanded its revenue base beyond routine skilled
nursing care to include higher margin specialty medical revenue from subacute,
rehabilitation and other services provided to patients in its facilities, as
well as from home health and other services provided to patients outside its
facilities. For the year ended December 31, 1996 and six-month period ended
June 30, 1997, specialty medical services (excluding institutional pharmacy)
accounted for 40% and 44%, respectively, of net patient revenue compared to
33% and 39% for the year ended December 31, 1995 and six-month period ended
June 30, 1996, respectively.
LONG-TERM CARE INDUSTRY
The demand for long-term health care is increasing because acute care
hospitals are driven by third-party payor cost containment initiatives to
discharge patients at earlier stages of recovery and because an increasing
number of patients have ailments that require extended recovery periods. This
is due not only to general demographic trends in the United States but also to
advances in medical technology. New technologies are increasing the life
expectancy of a growing number of patients who require a high degree of care
traditionally not available outside of acute care hospitals. As life
expectancies increase, the likelihood of contracting diseases or ailments
involving a protracted period of medical care and recovery increases. As a
result, individuals over the age of 65, particularly those over 85, are the
primary recipients of long-term post-acute care. Although
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demand is increasing, industry data indicates that the total supply of
licensed skilled nursing beds available in the United States, currently
approximately 1.7 million, is growing substantially slower than the overall
population. Also, the addition of new beds in long-term care facilities is
presently restricted by regulation in many states, most of which require
entities that desire to enter the local long-term care market to apply for and
obtain Certificates of Need ("CON") or other approvals. The application and
approval process for a CON generally involves approval by a state regulatory
agency of the construction, acquisition or closure of a long-term care
facility, the addition or reduction of beds at a facility, or the addition of
services provided by a facility. The significant construction costs and start-
up expenses in some markets may further limit the number of new beds. Market
share data reflects that the industry is fragmented, with the 25 largest
operators accounting for approximately 25% of the total beds available.
According to the U.S. Bureau of the Census, approximately 1.4% of the people
65 to 74 years of age received care in long-term care facilities in 1990. This
percentage increased to 6% for people 75-84 years of age and to 25% for those
85 years of age and over. According to the U.S. Bureau of the Census, the
number of individuals over age 75 was approximately 11 million (4.6% of the
total population in the United States) in 1993. Although there is limited
growth projected for the population of individuals over 65 years of age
between 1990 and 2000, a significant increase in the proportion of people over
age 85 is anticipated. The segment of the population over 85 years of age,
which comprises the largest percentage of residents at long-term care
facilities (53%), is the fastest-growing segment of the population, projected
to increase by more than 26%, from approximately 3.4 million, or 1.3% of the
total population in the United States in 1993, to more than 4.3 million, or
1.6% of the total population in the U.S. in the year 2000.
These demographic changes, coupled with increasing cost containment
initiatives by governmental and managed care payors have changed medical
practices, resulting in an increasing proportion of complex medical care being
delivered outside the acute care hospital setting. The health care industry
has responded by developing a range of post-acute care services, including
skilled nursing care and home health therapy to provide care following a
patient's hospital-based acute care treatment. The complex medical care and
intensive nursing care provided to patients with higher acuity disorders are
categorized as subacute care. This level of care is appropriately delivered in
a skilled nursing environment where GranCare believes clinical outcomes
compare favorably to those achieved in acute care settings and where the cost
structure is significantly lower. GranCare believes that subacute care
provided in a skilled nursing facility is often less expensive than hospital-
based care. Skilled nursing facilities are significantly less capital
intensive and do not require the specialized equipment used in acute care
hospitals. Labor costs are also lower than in hospitals, which typically have
a higher physician-to-nursing staff ratio and significantly more
administrative personnel, including nursing staff not fully dedicated to
providing care. GranCare believes that sub-acute care providers are able to
achieve successful outcomes at a lower cost than acute care hospitals.
Accordingly, hospital discharge planners, physicians and managed care and
insurance company case managers are referring an increasing number of patients
to long-term care facilities.
SKILLED NURSING SERVICES AND SUBACUTE CARE
As of June 30, 1997, GranCare operated 126 long-term care facilities,
including 122 skilled nursing and four assisted living facilities, with 15,195
licensed beds in 15 states. Revenues from skilled nursing and subacute care
(including revenue from service centers and rehabilitation services)
represented 67% and 84% of net patient revenues for the year ended December
31, 1996 and for the six-month period ended June 30, 1997, respectively. All
of GranCare's long-term care facilities are certified as "skilled nursing
facilities" by appropriate regulatory agencies, other than the four assisted
living facilities. GranCare's facilities focus on the care of medically
dependent patients with multiple medical or behavioral problems requiring
continuing special care and treatment. Skilled nursing care is rendered in
such facilities 24 hours a day by registered, licensed practical or vocational
nurses and nurses' aides administering prescribed medical services. Patients
in the facilities also receive assistance in matters such as bathing,
dressing, medication and diet. All patients in such facilities receive routine
care which includes basic nursing care, room and board, housekeeping and
laundry services, and dispensing of medication. These basic services are a
platform for the delivery of more intensive medical rehabilitative and
subacute care. GranCare provides physical, occupational, speech, respiratory,
and psychological therapy services
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in each of its long-term care facilities, a majority of which are outsourced.
Each facility operated by GranCare has a medical director who assesses patient
needs, coordinates care plans and, as a member of the local medical community,
is familiar with the local health care concerns. The assisted living
facilities operated by GranCare provide furnished rooms and suites designed
for individuals who are either able to live independently within a sheltered
community or who require minimal nursing attention. The ADL services
(assistance with activities of daily life) provided in the assisted living
facilities include protective oversight, food, shelter, bathing, dressing,
eating, transportation, toiletry, and related services that enhance the
quality of a resident's life.
GranCare has implemented certain specialty medical programs in all of its
skilled nursing facilities certified to provide care to Medicare patients
(including more extensive subacute programs) in order to provide additional
services and accelerate growth and profitability. GranCare also operates
specialized units located in certain long-term care facilities, which provide
higher acuity, subacute and other care to medically complex patients. These
units presently include transitional rehabilitation programs and specialized
units for cancer, HIV and wound care patients, as well as Alzheimer's care,
subacute rehabilitation and hospice care. These specialized units compete with
acute care and rehabilitation hospitals which GranCare believes charge rates
that are often twice the rates historically charged by GranCare for comparable
services. GranCare intends to expand its capabilities in this area through
collaborative efforts with acute care specialists.
CONTRACT MANAGEMENT
Through Cornerstone Health Management Company ("Cornerstone"), GranCare's
contract management subsidiary, GranCare manages, as of June 30, 1997,
approximately 145 medical programs in acute care hospitals located in 20
states (with an additional approximately 10 contracts pending). Revenues from
contract management services represented 6% and 7% of net patient revenues for
the year ended December 31, 1996 and for the six-month period ended June
30, 1997, respectively. Cornerstone develops, manages and operates specialty
geriatric programs on behalf of acute care hospitals which include subacute
skilled nursing, geriatric mental health, specialty acute hospitals and
geriatric primary care networks and other ancillary programs. In addition,
Cornerstone operates four long-term acute care hospitals through lease or
management arrangements. Cornerstone is generally responsible for managing the
clinical and operational aspects, including quality control, of the programs
it administers. Cornerstone receives a monthly management fee, typically based
on the number of beds it manages under a contract. Program design and
implementation is handled by a team of clinical, financial and reimbursement
experts employed by Cornerstone. Following implementation, Cornerstone
provides a program administrator who is supported by a centralized staff of
experts, who are employed by Cornerstone, with care being provided primarily
by employees of the hospital. The number of experts provided by Cornerstone
depends on the type of program being administered, with routine subacute
skilled nursing programs generally requiring only a Cornerstone program
administrator who oversees the hospitals' employees, and geriatric mental
health programs generally requiring a Cornerstone program administrator as
well as up to seven Cornerstone experts who administer care.
OTHER SERVICES
GranCare's home health care operation was established in 1992 to provide
skilled nursing services, rehabilitation therapy and home health aides.
Revenues from other services represented 3% and 4% of net patient revenues for
both the year ended December 31, 1996 and for the six-month period ended June
30, 1997. This operation is comprised of home health care agencies located in
California, Indiana, Michigan and Wisconsin encompassing twelve agencies (home
health, hospice and private duty in each of the aforementioned states).
Services include intermittent visits, hourly care, infusion therapy and a
specialty program for terminally ill patients. GranCare believes that it is
positioned to expand these existing home health services as well as adult day
care operations in current and additional markets.
GranCare is developing a variety of laboratory services at several
facilities, including pathology and gastrointestinal analysis. GranCare
operates a wholly-owned subsidiary that provides such services in South
Carolina. It also has an equity ownership interest in an X-ray provider which
serves certain of the facilities
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operated by it in Michigan. Additionally, GranCare provides a variety of
therapy services to outpatients at certain of its facilities. These services
include physical, occupational, speech, respiratory and psychological
therapies.
MARKETING AND DEVELOPMENT OF PAYOR SOURCES
GranCare's marketing strategy is to establish and maintain cooperative
relationships and networks with physicians, acute care hospitals and other
health care providers, with an emphasis on specialists who treat ailments
involving long-term care and rehabilitation. GranCare maintains an incentive
program that motivates facility administrators to spend time in the community
developing relationships in order to increase awareness of facilities and
services that are offered by GranCare. GranCare utilizes promotional
literature focusing on its philosophy of care, service capabilities, quality
of employees and family assistance programs to support local marketing
efforts.
Most of the facilities operated by GranCare are currently operated as part
of a marketing cluster. The marketing program of each cluster is tailored to
the health care needs, referral sources and demographic and economic
characteristics of the local market in which the cluster is located. Each
facility administrator is expected to contribute to the development of a
detailed strategic plan and specific operating goals for each cluster. Local
managers of Cornerstone and home health operations are expected to participate
in the strategic planning and marketing process to coordinate GranCare's
efforts across the continuum of post-acute care. Moreover, each of the
regional service centers is expected to coordinate the activities of the
clusters within the region, as well as manage key relationships with managed
care providers and promote GranCare's expertise in rehabilitation and subacute
services. GranCare's therapy providers are also expected to promote the
capabilities of its facilities within their local market area, in addition to
promoting their individual therapy services.
GranCare also plans to take advantage of other opportunities for increased
profitability, including joint ventures with health care providers such as
health maintenance organizations ("HMOs"). GranCare is establishing
relationships with managed care providers which it believes will increase its
subacute care business. The cluster market approach is expected to enhance
GranCare's ability to serve large providers of managed care within its
targeted markets. Typically, patients referred by managed care providers
(including HMOs and preferred provider organizations) generate higher revenues
per patient day than Medicaid patients. GranCare believes that its ability to
provide subacute and specialty medical services at a lower cost than acute
care hospitals will be a competitive advantage in becoming the provider of
choice for managed care providers.
LEGAL PROCEEDINGS
From time to time, GranCare has been a party to various legal proceedings in
the ordinary course of its business. In the opinion of GranCare, except as
described below, there are currently no proceedings which, individually or in
the aggregate, after taking into account the insurance coverage maintained by
GranCare (and to be maintained by Paragon) would have a material adverse
effect on GranCare's or Paragon's financial position or results of operations.
On June 10, 1997, a GranCare stockholder filed a civil complaint in state
district court in Harris County, Texas: Howard Gunty, Inc. Profit Sharing Plan
v. Gene E. Burleson, Charles M. Blalack, Antoinette Hubenette, Joel S. Kanter,
Ronald G. Kenny, Robert L. Parker, William G. Petty, Jr., Edward V. Regan,
Gary U. Rolle and GranCare, Inc. This complaint alleges, generally, that the
defendants have breached their fiduciary duties owed to GranCare's
stockholders by failing to take all reasonable steps necessary to ensure that
GranCare's stockholders receive maximum value for their shares of GranCare
Common Stock in connection with the GranCare Merger. The plaintiffs are
seeking (i) an injunction prohibiting the consummation of the GranCare Merger
or (ii) alternatively, if the GranCare Merger is consummated, to have such
transaction rescinded and set aside. In addition, the plaintiffs are seeking
unspecified compensatory damages, costs and to have the complaint certified as
a class action. GranCare intends to vigorously defend this action.
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The absence of any injunctions against the consummation of the GranCare
Merger is a condition to the closing of such Merger. Thus, if a court grants
an injunction, there is a risk that the Transactions may not be consummated.
On June 17, 1997, Vitalink and its controlling stockholder, Manor Care,
filed a civil complaint in the Court of Chancery of the State of Delaware in
and for New Castle County (the "Court"): Vitalink Pharmacy Services Inc., a
Delaware corporation, and Manor Care, Inc., a Delaware corporation v.
GranCare, Inc., a Delaware corporation, Civil Action No. 15744. The complaint
alleged that the consummation of the GranCare Merger would violate certain
provisions of the non-competition agreement between Vitalink, GranCare and
Manor Care (the "Non-Competition Agreement") and cause Vitalink to suffer
irreparable harm. The plaintiffs sought: (i) an injunction prohibiting
GranCare from completing the GranCare Merger; (ii) specific performance of the
Non-Competition Agreement; and (iii) a declaration by the Court setting forth
the parties' rights under the Non-Competition Agreement and a determination
that the GranCare Merger violates such Agreement. On August 8, 1997, the Court
entered an order granting the plaintiffs' request for a preliminary injunction
and denying GranCare's motion for summary judgment. On August 18, 1997, the
Delaware Supreme Court agreed to hear GranCare's appeal of the Court's order
and scheduled a hearing for October 15, 1997.
On September 3, 1997, GranCare Vitalink and Manor Care resolved all of the
claims asserted by Vitalink and Manor Care in their complaint. As a result of
this resolution, GranCare has dismissed its appeal to the Delaware Supreme
Court and Vitalink and Manor Care have consented to the entry of an order in
the Court that vacated the preliminary injunction, subject to a stipulation
that GranCare will not consummate the Transactions with LCA and Apollo unless
GranCare shall have consummated the transactions contemplated by the
agreement.
The Termination and Release Agreement among GranCare, Vitalink and Manor
Care (the "TRA") was unanimously approved by the MOC at a meeting on August
24, 1997 and provides for the payment by GranCare to Vitalink and Manor Care
of Termination Fee of $18.5 million and $500,000, respectively, in
consideration of the agreement of Vitalink and Manor Care to terminate the
Non-Competition Agreement. The Termination Fee will be paid before or
simultaneously with the consummation of the GranCare Merger and will be
accounted for as a merger expense. The TRA also contains a mutual release
among the parties to the litigation, Apollo and LCA (although GranCare, LCA
and Apollo are not releasing one another) from and against any claims that any
of the releasing parties might have against any of the other parties relating
to or arising out of the Non-Competition Agreement. The only conditions to the
consummation of the transactions contemplated by the TRA are: (i) the
fulfillment or waiver by GranCare of all of the conditions precedent to the
completion of the GranCare Merger; (ii) the termination of the Shareholders
Agreement, dated as of February 12, 1997, between Vitalink and Manor Care (the
"Vitalink Shareholders Agreement"); and (iii) the termination of the Non-
Competition Agreement which occurs automatically upon the payment of the
Termination Fee. The Vitalink Shareholders Agreement and the Non-Competition
Agreement each have three year terms and during the term of the Vitalink
Shareholders Agreement, Manor Care is required to support the election of
certain individuals initially sponsored by GranCare as members of the Vitalink
Board of Directors. For a discussion of the material terms of GranCare's
relationship with Vitalink since the effective time of the Vitalink Merger and
going forward see "GranCare Management's Discussion and Analysis of Financial
Condition and Results of Operations--Certain Relationships and Transactions."
INDIANA DISPOSITION
In connection with GranCare's ongoing review of its portfolio of facilities
to identify those which are underperforming or no longer fit within GranCare's
strategic focus, GranCare disposed of 18 facilities effective April 1, 1997 by
entering into a Release and Settlement Agreement with the lessor thereof
pursuant to which the leases for such facilities were assigned to a third
party (the "Indiana Disposition"). These facilities, 17 of which are located
in Indiana and one in West Virginia, were obtained by GranCare as part of its
acquisition of Evergreen in July 1995. These facilities generally experienced
lower occupancy rates, lower operating margins, and a less favorable payor mix
than GranCare's other facilities. Costs associated with the Indiana
Disposition were included in the $18.4 million charge to operations recognized
in the third quarter of 1996. GranCare
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continues to evaluate certain long-term care facilities which are
underperforming or do not fit within GranCare's long-term strategic plans. All
or a portion of these facilities may be divested in the future.
COMPETITION
GranCare is one of the largest publicly traded nursing home companies in the
country in terms of the number of beds owned, managed or leased. The long-term
care facilities operated by GranCare compete in fifteen states on a local and
regional basis with other long-term health care providers. Some competing
operators have greater financial resources than GranCare and some are non-
profit or charitable organizations. GranCare's management expects that
significant competitive factors will include the quality and spectrum of care
and services provided, the reputation of the medical personnel employed, the
physical appearance of the facilities and, in the case of private-pay
patients, the level of charges for services. GranCare's management also
believes that GranCare's facilities compete on a local and regional basis,
rather than on a national basis. As a result, GranCare seeks to meet
competition in each locality or region, as the case may be, by improving the
quality and type of services provided, by improving the appearance of its
facilities, by establishing a reputation within the local medical communities
for providing quality care, and by responding appropriately to regional
variations in demographics and preferences. Historically, regulations such as
building code requirements and CON requirements have often deterred the
construction of long-term care facilities. There is no price competition with
respect to Medicare and Medicaid patients since revenues for services
administered to such patients are based on strictly controlled fixed rates and
cost reimbursement principles.
Cornerstone is a contract provider of specialty health care services for the
elderly and is generally recognized as the only "full service" geriatric
provider within the industry. Although GranCare is not aware of any companies
that compete with Cornerstone on a national basis or which offer the same
array of services provided by Cornerstone, other contract management companies
may compete with Cornerstone in some markets along discrete product lines.
GranCare's home health care operations currently operate in four states. The
competition among home health organizations is intense and is based on quality
and breadth of service and price. Competitors vary from large national chains
to regional and local agencies as well as hospital-based organizations.
REGULATION
Licensing. All of the long-term care facilities and home health agencies and
certain hospices operated by GranCare are required to be licensed on an annual
basis by state health care agencies and are subject to extensive federal,
state, and local regulatory and inspection requirements. License and
certification standards vary from jurisdiction to jurisdiction and undergo
periodic revision. These requirements relate to, among other things, the
quality of the professional care provided, the qualification of administrative
personnel and professional or licensed staff, the adequacy of the facility and
its equipment, and continuing compliance with laws and regulations relating to
the operation of the facilities. The failure to obtain, renew or maintain any
of the required regulatory approvals or licenses could adversely affect
expansion of GranCare's business and could prevent the location involved from
offering services to patients. GranCare believes it is currently in
substantial compliance with licensing requirements; however, there can be no
assurance that GranCare will be able to maintain such licenses for its
facilities or that GranCare will not be required to expend significant funds
in order to meet such requirements.
Medicare and Medicaid. GranCare derives a significant portion of its
revenues from federal and state reimbursement programs. Substantially all of
the skilled nursing facilities, home health agencies and hospices operated by
GranCare are certified to receive benefits under Medicare and under joint
federal and state funded programs administered by the various states to
provide health care assistance to low income individuals, generally known as
"Medicaid." These programs are highly regulated and subject to periodic
change.
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Currently, Medicare utilizes a cost-based reimbursement system for nursing
facilities, long-term acute care hospitals and home health agencies which,
subject to limits fixed for the particular geographic area, reimburse nursing
facilities and home health agencies for reasonable direct and indirect
allowable costs incurred in providing "routine services" (as defined by the
program) as well as capital costs and ancillary costs. GranCare is filing
Routine Cost Limit Exception appeals for the facilities which exceed the
limits and fit the criteria as exception candidates. GranCare may benefit from
exceptions to the routine cost limits. Allowed costs include nursing,
administrative and general, dietary, housekeeping, laundry, social services,
activities, central supply, maintenance and plant operations as well as
ancillary and capital costs.
For federal fiscal years 1994 and 1995, the Omnibus Budget Reconciliation
Act of 1993 ("OBRA '93") froze the routine cost limits for nursing facilities
and the per visit limits on reasonable costs imposed on home health agencies.
In addition, OBRA '93 imposed new restrictions on the amount of relief which
can be realized through the Routine Cost Limit Exception appeal process. For
fiscal 1996, the 1993 imposed freeze on routine cost limits expired.
The Balanced Budget Act, signed into law on August 5, 1997, makes numerous
changes to the Medicare and Medicaid programs which could potentially
adversely affect GranCare. With respect to the Medicare program, the new law
required the establishment of a PPS for SNF services, under which facilities
will be paid a federal per diem rate for virtually all covered services in
lieu of the current cost-based reimbursement rate. This change will reward
efficient providers and penalize those that are inefficient. The PPS will be
phased in over three cost reporting periods, starting with cost reporting
periods beginning on or after July 1, 1998. The Balanced Budget Act also
institutes consolidated billing for SNF services, under which payments for
non-physician Part B services for beneficiaries no longer eligible for Part A
SNF care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement or under
any other contracting or consulting arrangement, effective for items or
services furnished on or after July 1, 1998. Likewise, the Balanced Budget Act
requires the Secretary to establish a PPS for home health services, to be
implemented beginning October 1, 1999. In addition, during the period from
October 1, 1997 to September 30, 1999, the legislation imposes interim cost
limits on home health agencies. The legislation also disallows any market
basket updates for the limits that occurred during the cost reporting periods
from July 1994 through June 1996. The legislation also requires home health
agencies to submit claims for all services, and all payments will be made to
the home health agencies regardless of whether the item or service was
furnished by the agency, by others under arrangement or under any other
contracting or consulting arrangement. The law also contains provisions
affecting outpatient rehabilitation agencies and providers, including a 10
percent reduction in operating and capital costs for 1998, a fee schedule for
therapy services beginning in 1999, and the application of per beneficiary
therapy caps currently applicable to independent therapists to all outpatient
rehabilitation services, beginning in 1999. With regard to hospices, the
Balanced Budget Act limits reimbursement by setting payment rate increases at
market basket minus 1.0 percentage points for fiscal years 1998 through 2002.
The law also institutes a number of reforms of the hospice benefit, including
a requirement that hospices can be reimbursed based on the location where care
is furnished (rather than the location of the hospice), effective for cost
reporting periods beginning on or after October 1, 1997. Other provisions
limit Medicare payments for certain drugs and biologicals, durable medical
equipment, parenteral and enteral nutrients and supplies.
The Balanced Budget Act also contains a number of changes affecting the
Medicaid program. Significantly, the law repeals the so-called Boren
Amendment, which required state Medicaid programs to reimburse nursing
facilities for the costs that are incurred by efficiently and economically
operated providers in order to meet quality and safety standards. Effective
for Medicaid services provided on or after October 1, 1997, states will have
considerable flexibility in establishing payment rate. GranCare is not able to
predict whether any states will adopt changes in their Medicaid reimbursement
systems, or, if adopted and implemented, what effect such initiatives would
have on GranCare. Nevertheless, there can be no assurance that such changes in
Medicaid reimbursement to nursing facilities will not have an adverse effect
on GranCare. Further, the Balanced Budget Act allows states to mandate
enrollment in managed care systems without seeking approval from the Secretary
for waivers from certain Medicaid requirements as long as certain standards
are met. Although historically these
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managed care programs have exempted institutional care, no assurance can be
given that these waiver provisions ultimately will not change the
reimbursement system for long-term care facilities from fee-for-service to
managed care negotiated or capitated rates or otherwise affect the levels of
payments to GranCare.
Medicaid programs currently exist in all of the states in which GranCare has
health care facilities. While these programs differ in certain respects from
state to state, they are all subject to requirements imposed by the federal
government, which provides approximately 50% of the funds available under
these programs. California provides reimbursement for skilled nursing services
at a flat daily rate, as determined by the responsible state agency. In all
other states in which GranCare operates, payments are based upon specific cost
reimbursement formulas established by that state, which formulas are generally
based on historical costs with adjustments for inflation.
For the years ended December 31, 1994, 1995 and 1996 and for the six-month
period ended June 30, 1997, GranCare derived approximately 25%, 30%, 39% and
45%, respectively, of its gross patient revenues from Medicare and
approximately 52%, 45%, 38% and 34%, respectively, of its gross patient
revenues from Medicaid. Both governmental and private-payor sources have
instituted cost containment measures designed to limit payments made to long-
term health care providers, and there can be no assurance that future measures
will not adversely affect reimbursements to GranCare. Furthermore, government
reimbursement programs are subject to statutory and regulatory changes,
retroactive rate adjustments, administrative rulings and government funding
restrictions, all of which could materially decrease the services covered or
the rates paid to GranCare for its services. The Balanced Budget Act affected
a number of changes in the Medicare and Medicaid Programs and GranCare expects
that there will continue to be proposals to limit Medicare and Medicaid
reimbursement for long-term care services and other services provided by
GranCare. There can be no assurance that payments under state or federal
governmental programs will remain at levels comparable to present levels or
will be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs, particularly with respect to the
Medicaid programs, which generally provide lower reimbursement rates than the
Medicare program. In addition, there can be no assurance that facilities
operated by, and the services and supplies provided by, GranCare will meet or
continue to meet the requirements for participation in such programs.
GranCare believes that the facilities it operates are in substantial
compliance with the various Medicare and Medicaid regulatory requirements
currently applicable to them, including the requirements of the Omnibus Budget
Reconciliation Act of 1987 ("OBRA"). In the ordinary course of its business,
however, GranCare has received notices of deficiencies for failure to comply
with various regulatory requirements. GranCare reviews such notices and takes
appropriate corrective action. Historically, in most cases, GranCare and the
reviewing agency have been able to agree upon the steps to be taken to bring a
facility into compliance with regulatory requirements. In some cases or upon
repeat violations, the reviewing agency may take a number of actions against a
facility. Effective October 1, 1990, OBRA increased the enforcement powers of
state and federal certification agencies. Additional sanctions have been
authorized to correct noncompliance with regulatory requirements, including
fines, temporary suspension of admission of new patients to the facility,
decertification from participation in the Medicare or Medicaid programs and,
in extreme circumstances, revocation of a facility's license. In certain
circumstances, conviction of abusive or fraudulent behavior with respect to
one facility may subject other facilities under common control or ownership to
disqualification from participation in Medicare and Medicaid programs.
HHS released new survey and certification regulations under OBRA, which
became effective July 1, 1995. These new regulations make significant changes
in the process of surveying nursing facilities under Medicare and Medicaid
federal requirements for participation in the Medicare and Medicaid programs
and impose a graduated system of penalties to match the severity of violations
of laws passed by Congress which implement health, safety and quality
standards for residents of long-term care facilities. These regulations also
set forth a number of alternative remedies, in addition to those set forth
above, which may be imposed by surveying agencies on facilities that do not
comply with the federal requirements (instead of, or in addition to,
termination of such facilities' participation in Medicare and Medicaid) and
specify remedies for state survey agencies that do
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not meet surveying requirements. These regulations have not had a material
adverse effect on GranCare's operations.
Certificate of Need. Of the states in which GranCare operates long-term care
facilities, Georgia, Iowa, Michigan, Mississippi, North Carolina, Ohio, South
Carolina, Tennessee and Wisconsin have a CON statute. In states that have such
statutes, approval by the appropriate state health regulatory agencies must be
obtained and a CON or similar authorization issued prior to certain activities
being taken, including in some states, changes in the management of a long-
term care facility, the addition of new beds or services or the making of
certain capital expenditures. To the extent CON approvals are required for
expansion of GranCare's operations, such expansion may be delayed or otherwise
affected. Furthermore, certain states, including Mississippi, North Carolina,
Ohio, and Wisconsin have now or in the past imposed moratoriums on the
development of new nursing facility beds. Some states require separate
approval to obtain Medicare and Medicaid reimbursement for facility costs.
Referral Restrictions. GranCare is also subject to federal and state laws
which govern financial and other arrangements between health care providers.
These laws often prohibit certain direct and indirect payments or fee
splitting arrangements between health care providers that are designed to
induce or encourage the referral of patients to, or the recommendation of, a
particular provider for medical products and services. Such laws include the
anti-kickback provisions of the federal Medicare and Medicaid Patient and
Program Protection Act of 1987. These provisions prohibit, among other things,
payment, solicitation or receipt of any form of remuneration in return for the
referral of Medicare and Medicaid patients. In addition, some states restrict
certain business relationships between physicians and pharmacies, and many
states prohibit business corporations from providing, or holding themselves
out as a provider of, Medicaid care. Possible sanctions for violation of any
of these restrictions or prohibitions include loss of licensure or eligibility
to participate in reimbursement programs as well as civil and criminal
penalties. These laws vary from state to state and have seldom been
interpreted by the courts or regulatory agencies. Additionally, OBRA '93
contains provisions that expand the list of health care services subject to
existing federal referral prohibitions. This expanded referral ban became
effective on January 1, 1995.
OBRA '93 also contains referral restrictions related to physician ownership
interests, and restricts referrals by a physician to an entity with which he
has a "compensation arrangement," which is broadly defined to include any
arrangement involving "remuneration." However, there are a number of
exceptions for certain types of compensation arrangements, including
exceptions for personal service arrangements, space and equipment leases,
employment relationships, certain prepaid health plans, isolated transactions
and certain other payment arrangements that are consistent with the fair
market value, so long as these arrangements meet certain specific criteria.
With respect to physician ownership interests, an exception exists for
ownership of investment securities that may be purchased on terms generally
available to the public and that are listed on a national exchange, including
the NYSE or any regional exchange, provided that the corporation issuing such
investment securities has at the end of its most recent fiscal year, or on
average for its previous three fiscal years, shareholders' equity exceeding
$75.0 million. GranCare's Common Stock is traded on the NYSE and its
shareholders' equity exceeds these equity requirements. Although it is
possible that certain arrangements between GranCare and physicians may be
affected by these referral restrictions, such restrictions have not had a
material adverse effect on revenues in the past.
The Medicare program has historically reimbursed skilled nursing facility
services, pharmacy services and home health services based on reasonable costs
of care, subject to certain limitations. In determining allowable costs, the
Medicare program will not recognize as allowable the charge made for services
provided to the skilled nursing facility or home health agency by an entity
that is related through substantial ownership or substantial control, unless
it qualifies for an exception. Instead, Medicare will recognize as allowable
only the supplier's cost of (rather than its charge for) supplying the
service.
In the summer of 1995, a major anti-fraud demonstration project, "Operation
Restore Trust," was announced by the OIG. A primary purpose for the project is
to scrutinize the activities of health care providers who are reimbursed under
the Medicare and Medicaid programs. Initial investigative efforts have focused
on
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skilled nursing facilities, home health and hospice agencies, and durable
medical equipment suppliers in Texas, Florida, New York, Illinois and
California. These states were targeted because they collectively comprise 40%
of Medicare and Medicaid beneficiaries. On May 20, 1997, HHS announced that
Operation Restore Trust will be expanded during the next two years to include
12 additional states (Arizona, Colorado, Georgia, Louisiana, Massachusetts,
Missouri, New Jersey, Ohio, Pennsylvania, Tennessee, Virginia, and
Washington), as well as several other types of health care services. Over the
longer term, Operation Restore Trust investigative techniques will be used in
all 50 states, and will be applied throughout the Medicare and Medicaid
programs. The OIG has issued, and will continue to issue, special Fraud Alert
bulletins identifying "suspect" characteristics of potentially illegal
practices by providers, and illegal arrangements between providers. The
bulletins contain hot- line numbers and encourage Medicare beneficiaries,
health care company employees, competitors, and others to call to report
suspected violations. The OIG has indicated that it is specifically looking
for evidence of excessive services to residents in nursing homes, "drop
shipments" of supplies for a resident that has not been properly assessed,
billing for services not rendered, billing for equipment or supplies which
were not used, the use of untrained staff, falsified plans of care, forged
physician signatures and kickbacks. Identified problems will result in
increased audit scrutiny, letter inquiries or subpoenas for data and records,
and onsite investigations. Enforcement actions could include criminal
prosecutions, suit for civil penalties and/or Medicare and Medicaid program
exclusion. One of GranCare's skilled nursing facilities has been subjected to
an Operation Restore Trust audit. It appears that the facility was selected
for an audit through a random process, rather than on the basis of any
information of wrongdoing. The audit did not result in any findings of fraud
or abuse. While GranCare does not believe that it is in violation of
applicable laws, there can be no assurance that substantial amounts will not
be expended to cooperate with any such audit or investigation or to defend
allegations arising therefrom. If it were found that any of GranCare's
practices failed to comply with the anti-fraud provisions, GranCare could be
materially adversely affected. GranCare is unable to predict the effect of
future administrative or judicial interpretations of these laws, whether other
legislation or regulations on the federal or state level in any of these areas
will be adopted, what form such legislation or regulations may take, or their
impact on GranCare. There can be no assurance that such laws will ultimately
be interpreted in a manner consistent with GranCare's practices.
Contract Management Regulation. Contract managers of geriatric mental health
centers, subacute care units, specialty acute hospitals and senior health
centers are not typically subject to direct regulation, although GranCare may
be held responsible for violations of certain federal and state laws, such as
the referral restrictions described above. Further, the facilities managed by
GranCare are subject to regulation. Management contracts with these facilities
may hold GranCare accountable in certain instances to a facility which is
cited for non-compliance with regulatory requirements. Further, there can be
no assurance that the facilities managed by GranCare will not be subject to
statutory or regulatory changes which might adversely impact these facilities
and, indirectly, GranCare's contract management business.
GranCare furnishes therapy services on a contract basis to certain
providers, and the providers bill Medicare for reimbursement of the amounts
paid to GranCare for these services. HCFA has the authority to establish
limits on the amount Medicare reimburses for therapy services. For services
other than inpatient hospital services, these limits are equivalent to the
reasonable amount that would have been paid if provider employees had
furnished the services. HCFA has exercised this authority by publishing
"salary equivalency guidelines" for physical therapy and respiratory therapy
services. HCFA does not currently have salary equivalency guidelines for other
therapy services, but Medicare auditors may nonetheless impose disallowances
if particular rates paid to these therapists are substantially greater than
the rates paid to other contract therapy companies by other providers in the
same locality. On March 28, 1997, HCFA issued a proposed regulation that would
revise the salary equivalency guidelines for physical therapy and respiratory
therapy and establish salary equivalency guidelines for speech-language
pathology and occupational therapy services. HCFA estimates that the proposed
regulation would increase the reimbursement rates for physical therapy by 30.5
percent and for respiratory therapy by 8.1 percent. The proposed salary
equivalency rates for occupational therapy and speech-language pathology,
however, would reduce current reimbursement rates by 42.7 percent and 28.1
percent, respectively. GranCare cannot predict whether this proposed
regulation will be adopted or, if adopted, the effect they would have on
GranCare.
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Home Health and Hospice Regulation. Home health agencies must be certified
by HCFA to receive reimbursement for services and supplies from Medicare and
Medicaid. As a condition of participation in the Medicare and Medicaid home
health care program, HCFA requires compliance with certain standards with
respect to personnel, services and supervision; the preparation of annual
budgets, cost reports, and quarterly cost and visit analyses; and the
establishment of a professional advisory group that includes at least one
practicing physician, one registered nurse and other representatives from
related disciplines or consumer groups. Home health agencies are surveyed for
compliance with these requirements at least once every 15 months. Failure to
comply may result in termination of the agency's Medicare and Medicaid
provider agreements. In 1989, Congress directed HHS to develop and implement a
range of intermediate, or alternative, sanctions for home health agencies. HHS
published proposed rules to implement this authority in 1991; however, these
rules have not been finalized and thus have not taken effect. The proposed
sanctions would include civil monetary penalties, temporary management,
suspension of payment for new admissions, and other sanctions. Hospices are
subject to annual surveys and may be terminated from participation in the
Medicare and Medicaid programs for failure to maintain substantial compliance
with program requirements.
Home Health. On September 15, 1997, President Clinton imposed a first-ever
six month moratorium on the entry of new home health agencies into the
Medicare program in order to allow new regulations to be written that will
attempt to curb fraud and abuse within the home health care industry. HHS will
have authority to grant exceptions from the moratorium for areas of the
country with no access to home health care services. In addition to the
moratorium, the Clinton administration will also require, among other things,
that home health agencies re-enroll in the Medicare program every three years
and, at the time of re-enrollment, to submit to an independent audit of their
records and practices. Finally, the President pledged to double the number of
audits conducted of home health agencies, while at the same time HCFA will
increase the number of claims reviewed by 25%. Until the new regulations are
released, GranCare is unable to predict what impact, if any, the new
regulations will have on Paragon.
Health Care Reform. The Health Insurance Portability and Accountability Act
of 1996 (the "Accountability Act") was passed by Congress, signed into law by
President Clinton on August 21, 1996 and took effect July 1, 1997. While the
Accountability Act contains provisions regarding health insurance or health
plans, such as portability and limitations on pre-existing condition
exclusions, guaranteed availability and renewability, it also contains several
anti-fraud measures that significantly change health care fraud and abuse
provisions. Some of those provisions include (i) creation of an anti-fraud and
abuse trust fund and coordination of fraud and abuse efforts by federal, state
and local authorities, (ii) extension of the criminal anti-kickback statute to
all federal health programs, (iii) expansion of and increase in the amount of
civil monetary penalties and establishment of a knowledge standard for
individuals or entities potentially subject to civil monetary penalties, and
(iv) revisions to current sanctions for fraud and abuse, including mandatory
and permissive exclusion from participation in the Medicare or Medicaid
programs. Additionally, the Accountability Act provides mechanisms for further
guidance to health care providers on health care fraud and abuse issues in the
form of additional safe harbors or modifications to existing safe harbors,
fraud alerts and the issuance of advisory opinions by HHS. The Health
Insurance Portability and Accountability Act of 1996 granted expanded
enforcement authority to HHS and DOJ, and provided enhanced resources to
support the activities and responsibilities of OIG and DOJ by authorizing
large increases in funding for investigating fraud and abuse violations
relating to health care delivery and payment. On January 24, 1997, the OIG
issued guidelines for the Fraud and Abuse Control Program as mandated by the
act, and on February 19, 1997 issued an interim final rule establishing
procedures for seeking advisory opinions on the application of the anti-
kickback statute and certain other fraud and abuse laws. The recently-enacted
Balanced Budget Act also includes numerous health fraud provisions, including:
new exclusion authority for the transfer of ownership or control interest in
an entity to an immediate family or household member in anticipation of, or
following, a conviction, assessment, or exclusion; increased mandatory
exclusion periods for multiple health fraud convictions, including permanent
exclusion for those convicted of three health care-related crimes; authority
for the Secretary to refuse to enter into Medicare agreements with convicted
felons; new civil money penalties for contracting with an excluded provider or
violating the Medicare and Medicaid anti-kickback statute; new surety bond and
information disclosure
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requirements for certain providers and suppliers; and an expansion of the
mandatory and permissive exclusions added by the Health Insurance Portability
and Accountability Act of 1996 to any federal health care program (other than
the Federal Employees Health Benefits Program). GranCare does not believe that
the Accountability Act will have a material adverse effect on GranCare's
operations.
Health care reform remains an issue for health care providers. Many states
are currently evaluating various proposals to restructure the health care
delivery system within their jurisdictions. It is uncertain at this time what
legislation on health care reform will ultimately be implemented or whether
other changes in the administration or interpretation of governmental health
care programs will occur. GranCare anticipates that federal and state
legislatures will continue to review and assess various health care reform
proposals and alternative health care systems and payment methodologies.
GranCare is unable to predict the ultimate impact of any federal or state
restructuring of the health care system, but such changes could have a
material adverse impact on the operations, financial condition and prospects
of GranCare.
PROPERTIES
As of June 30, 1997, GranCare operated 126 long-term care facilities (122
skilled nursing facilities and four assisted living facilities). The average
occupancy rate for GranCare's long-term health care facilities (based on
number of operating beds) was 87.9% for the year ended December 31, 1996
(89.6% after giving effect to the Indiana Disposition). GranCare owns 39 of
the long-term care facilities that it operates, including one assisted living
facility and rehabilitation center. Eighty-five other facilities (including
three assisted living facilities) are operated under long-term leases.
The following chart shows the geographic distribution of the facilities
operated by GranCare as of June 30, 1997:
<TABLE>
<CAPTION>
PERCENTAGE OF
STATE FACILITIES(1) BEDS TOTAL BEDS
----- ------------- ------ -------------
<S> <C> <C> <C>
Arizona(1).............................. 7 982 6.5%
California(1)........................... 31 3,480 22.8
Colorado................................ 4 661 4.3
Georgia................................. 1 100 0.7
Illinois................................ 20 2,089 13.8
Indiana................................. 3 471 3.1
Iowa.................................... 7 547 3.6
Louisiana............................... 3 240 1.6
Michigan................................ 13 1,863 12.2
Mississippi............................. 10 1,104 7.3
North Carolina.......................... 1 142 0.9
Ohio.................................... 1 100 0.7
South Carolina.......................... 9 964 6.3
Tennessee............................... 2 226 1.5
Wisconsin............................... 14 2,226 14.7
--- ------ -----
Total................................. 126 15,195 100.0%
=== ====== =====
CLASSIFICATION
Owned................................... 39 4,974 32.7%
Leased.................................. 86 10,012 65.4
Managed................................. 1 209 1.9
--- ------ -----
Total................................. 126 15,195 100.0%
=== ====== =====
</TABLE>
- --------
(1) Includes two assisted living facilities in the State of Arizona comprising
170 licensed beds and two assisted living facilities in the State of
California comprising 218 licensed beds.
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CONTRACT MANAGEMENT AND HOME HEALTH
Subject to the exceptions set forth below, GranCare's contract management
business enters into contracts with acute care hospitals for the management of
geriatric specialty programs, generally located inside such hospitals. Such
management contracts do not generally involve the lease or purchase of any
property. Cornerstone does, however, lease two properties in connection with
its operations. The two leased facilities are The Specialty Hospital of Austin
(Texas) and The Specialty Hospital of Houston (Texas), which as of the end of
fiscal 1996 had 104 beds and 45 beds, respectively, and an average occupancy
rate of 42.8% and 45.4%, respectively. Cornerstone's corporate headquarters
are located in Dallas, Texas.
GranCare owns and operates home health, private duty and hospice agencies
located in California, Michigan, Wisconsin and Indiana. The agencies are
operated by subsidiaries of GranCare and lease the space for their operations;
all such leases are immaterial in amount.
EMPLOYEE TRAINING AND DEVELOPMENT
As a policy matter, GranCare believes that nursing and professional staff
retention and development is a critical factor in the success of GranCare.
Accordingly, GranCare's compensation program provides ongoing performance
evaluations and salary reviews. Additionally, GranCare provides financial
incentives to its employees to encourage facility staff motivation and
productivity and to reduce turnover rates. GranCare believes that its wage
rates for professional nursing staff currently being used by GranCare are
commensurate with market rates. GranCare also provides employee benefit
programs that GranCare believes, as a package, exceed industry standards. In
the past, GranCare has not experienced any significant difficulty in
attracting or retaining qualified personnel, and GranCare does not anticipate
any difficulty in this regard in the future.
In addition, GranCare provides for ongoing informal training and education
programs for its nursing staff, both professional and non-professional, as
well as its non-nursing staff, both professional and non-professional. With
respect to education and training programs conducted by entities other than
GranCare, GranCare provides tuition reimbursement to all levels of staff to
encourage continual learning in all aspects of facility operations.
Examples of training, development and education programs offered by GranCare
to its management employees include the following: (i) communication skills,
(ii) supervisory skills, (iii) conflict-resolution skills, (iv) diversity
training, (v) performance management skills, and (vi) hiring skills.
GranCare has offered certification programs to its nursing assistants for a
considerable period of time. This three-week program, conducted on site at
GranCare's facilities, consists of two weeks of classroom work and one week of
clinical preparation. Upon completion, graduates are generally hired into one
of GranCare's facilities located near the facility where the certification
course was offered.
EMPLOYEES
As of June 30, 1997, GranCare had approximately 17,102 full-time and part-
time employees, with 250 employees at its corporate and regional offices.
Approximately 23% of these employees are physicians, nurses and professional
staff. In addition, GranCare has collective bargaining agreements with unions
representing employees at 25 facilities and with employee councils at two of
its facilities. GranCare cannot predict the effect continued union
representation or organizational activities will have on its future
activities. However, GranCare has never experienced any material work
stoppages and believes that its relations with its employees and the Service
Employees International Union are good.
INSURANCE
GranCare maintains, on behalf of itself and its subsidiaries, annual Blanket
Property Damage/Business Interruption insurance in the amount of $720.5
million and annual General/Professional Liability insurance in the amount of
$100.0 million, subject to certain deductibles, exclusions and other terms.
Both of these policies are on an occurrence form. GranCare also requires that
physicians practicing at its long-term care facilities carry medical
malpractice insurance to cover their individual practice. GranCare maintains a
captive insurance company for the purposes of paying worker's compensation
claims as well as reinsurance contracts to minimize its insurance exposure.
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GRANCARE MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
On February 12, 1997, GranCare completed the Vitalink Merger and
Distribution, the practical effect of which was to transfer on a tax
advantaged basis GranCare's Institutional Pharmacy Business to Vitalink and
distribute the consideration for such transfer to GranCare's shareholders. For
financial reporting purposes, GranCare is the successor to GranCare, Inc., a
California corporation.
Old GranCare was incorporated in September 1987. Since inception, GranCare
has grown rapidly through acquisitions of long-term care facilities and
specialty medical businesses such as institutional pharmacy operations. During
1996 Old GranCare acquired RN Health Care Services, Inc., a home health agency
in Michigan and Jennings Visiting Nurse Association, Inc., a home health
agency in Indiana. Also in 1996, Old GranCare acquired Emery Pharmacy, Inc., a
provider of institutional pharmacy services in upstate New York and RX
Corporation, a provider of institutional pharmacy services in Southern
California.
GranCare's revenues and profitability are affected by ongoing efforts of
third-party payors to contain health care costs by limiting reimbursement
rates, increasing case management review and negotiating reduced contract
pricing. Government payors, such as state-administered Medicaid programs and,
to a lesser extent, the federal Medicare program, generally provide more
restricted coverage and lower reimbursement rates than private pay sources.
For the year ended December 31, 1996, the percentage of GranCare's total gross
patient revenues derived from Medicaid and Medicare programs were 38% and 39%,
respectively and for the three months ended June 30, 1997, the percentage of
GranCare's total gross patient revenues derived from Medicaid and Medicare
programs were 34% and 46%, respectively.
Excluding the Institutional Pharmacy Business, for the year ended December
31, 1996, the percentage of GranCare's total patient revenues derived from the
Medicaid and Medicare programs were 37% and 41%, respectively.
GranCare derives its revenues by providing (i) skilled nursing, (ii)
pharmacy (through January 31, 1997), therapy, subacute and other specialty
medical services and (iii) contract management of specialty medical programs
for acute care hospitals. In general, GranCare generates higher revenues and
profitability from the provision of specialty medical services than from
routine skilled nursing care, and GranCare believes that this trend will
continue. GranCare seeks to enhance its operating margins by increasing the
proportion of its revenues derived from specialty medical services.
In April 1997, GranCare disposed of 18 underperforming facilities that no
longer fit within GranCare's strategic focus. GranCare continues to evaluate
certain long-term care facilities which are underperforming or do not fit
within GranCare's long-term strategic plans. All or a portion of these
facilities may be divested in the future whether or not the Transactions are
consummated.
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RESULTS OF OPERATIONS
The following tables set forth, as a percentage of patient revenues, certain
revenue data for the periods indicated:
REVENUE COMPOSITION/PERCENTAGE OF PATIENT REVENUES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER SIX MONTHS
31, ENDED JUNE 30,
--------------------- ---------------
1996 1995 1994(1) 1997(2) 1996(2)
----- ----- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Skilled nursing and subacute care:
Routine services....................... 44.4% 53.8% 57.6% 56.3% 60.8%
Therapy, subacute and other ancillary
services(3)........................... 26.1 19.8 18.3 39.4 34.5
----- ----- ----- ----- -----
70.5 73.6 75.9 95.7 95.3
----- ----- ----- ----- -----
Pharmacy(3).............................. 26.1 23.5 23.8 -- --
Contract management...................... 3.4 2.9 0.3 4.3 4.7
----- ----- ----- ----- -----
Total.................................. 100.0% 100.0% 100.0% 100.0% 100.0%
===== ===== ===== ===== =====
</TABLE>
REVENUES PER PATIENT DAY DERIVED FROM SKILLED NURSING AND SUBACUTE CARE
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
----------------------- ---------------
1996 1995 1994(1) 1997(2) 1996(2)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Routine skilled nursing................ $ 89.67 $ 87.07 $ 79.52 $ 93.24 $ 89.09
Specialty medical services(4).......... 59.84 35.65 27.69 65.32 50.51
------- ------- ------- ------- -------
Total................................ $149.51 $122.72 $107.21 $158.56 $139.60
======= ======= ======= ======= =======
</TABLE>
- --------
(1) Excludes results of operations from August 1 through December 31, 1994 for
facilities divested or to be divested as part of the restructuring plan.
(2) In February 1997, GranCare merged its pharmacy division with Vitalink. For
comparative purposes the pharmacy results have been excluded from the six
months ended June 30, 1997 and 1996.
(3) Before elimination of intercompany sales.
(4) Excludes pharmacy and other specialty medical revenue from beds not
operated by GranCare.
Three and Six Months Ended June 30, 1997 Compared to Three and Six Months
Ended June 30, 1996
GranCare's net revenues for the three and six month periods ended June 30,
1997 were $199.3 and $423.9 million, respectively, compared to $247.3 and
$477.3 million for the same periods in 1996, a decrease of $48.0 and $53.4
million, respectively, or 19.4% and 11.2%.
Excluding the Institutional Pharmacy Business, GranCare's net revenues for
the three and six month periods ended June 30, 1997 were $199.3 and $403.0
million, respectively, compared to $188.2 and $365.7 million for the same
periods in 1996, an increase of $11.1 and $37.3 million, respectively, or 5.9%
and 10.2%. These increases are partially offset by the April 1997 divestiture
of certain underperforming businesses. Same-store growth increased $10.7 and
$23.8 million for the three and six month periods ended June 30, 1997,
respectively, from increases in specialty medical services provided and an
increase in average daily rates due to an improved payor mix. Specialty
medical revenues increased $11.3 and $32.8 million over the same periods in
1996. This was the result of growth in the number of Medicare residents which
utilize higher margin ancillary services (physical, respiratory, occupational
and speech therapy). Included in net revenues for the three and six month
periods ended June 30, 1997 and 1996 were $1.5 and $2.4 million, respectively,
compared to $2.0 and $2.4 million for the same periods in 1996, relating to
routine cost limit exceptions. While GranCare has applied for
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these exceptions, and has only recognized a portion of the estimated recovery,
there can be no assurance that the actual revenues from routine cost limit
exceptions will equal those amounts recognized by GranCare in the three and
six month periods ended June 30, 1997 and 1996.
Operating expenses (excluding rent and property expenses) for the three and
six month periods ended June 30, 1997 were $175.2 and $365.3 million,
respectively, compared to $204.4 and $396.0 million for the same periods in
1996, a decrease of $29.2 and $30.7 million, respectively.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for the three and six month periods ended June 30,
1997 were $175.2 and $347.1 million, respectively, compared to $155.7 and
$304.1 million for the same periods in 1996, an increase of $19.5 and $43.0
million, respectively, or 12.6% and 14.1%. $11.5 and $21.5 million of the
increase for the three and six month periods ended June 30, 1997,
respectively, was attributable to acquisitions, as well as costs associated
with an increase of specialty medical services provided. On a same-store
basis, operating expenses increased $10.6 and $22.1 million for the three and
six month periods ended June 30, 1997, respectively, over the same periods in
1996. $8.0 million of the increase for the three and six months ended June 30,
1997 was attributable to GranCare's change in accounting estimate in the
second quarter of 1997 related to its estimation of allowances for doubtful
accounts. These increases are partially offset by the divestiture of certain
businesses in 1997. Specialty medical services result in the incurrence of
additional costs from the higher staffing levels required to provide the
higher acuity care. The additional ancillary services (physical, respiratory,
occupational and speech therapy) utilized generate additional costs in line
with the growth realized in specialty medical revenues. This increase was
partially offset by a reduction in costs from more appropriate staffing given
patient acuity levels at skilled nursing facilities and an increased use of
third-party vendors for therapy services.
Rent and property expenses for the three and six month periods ended June
30, 1997 were $11.8 and $25.6 million, respectively, compared to $14.2 and
$27.7 million for the same periods in 1996, a decrease of $2.4 and $2.1
million, respectively, or 16.9% and 7.6%.
Excluding the Institutional Pharmacy Business, rent and property expenses
for the three and six month periods ended June 30, 1997 were $11.8 and $25.1
million, respectively, compared to $12.9 and $25.2 million for the same
periods in 1996, a decrease of $1.1 and $0.1 million, respectively. This
decrease was primarily the result of rent and property expenses attributable
to businesses divested in 1997 offset in part by scheduled increases in rental
expense.
Depreciation and amortization expenses for the three and six month periods
ended June 30, 1997 were $5.3 and $11.0 million, respectively, compared to
$6.5 and $12.7 million for the same periods in 1996, a decrease of $1.2 and
$1.7 million, respectively, or 18.5% and 13.4%.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for the three and six month periods ended June 30, 1997 were $5.3 and
$10.5 million, respectively, compared to $4.8 and $9.5 million for the same
periods in 1996, an increase of $0.5 and $1.0 million, respectively, or 10.4%
and 10.5%. This increase was primarily the result of depreciation and
amortization expenses attributable to businesses divested in 1997 offset by
additions to property and equipment.
Interest expense and financing charges for the three and six month periods
ended June 30, 1997 were $7.8 and $16.3 million, respectively, compared to
$8.9 and $17.1 million for the same periods in 1996, a decrease of $1.1 and
$0.8 million, respectively, or 12.4% and 4.7%.
Excluding the Institutional Pharmacy Business, interest expense and
financing charges for the three and six month periods ended June 30, 1997 were
$7.8 and $15.3 million, respectively, compared to $8.8 and $16.8 million for
the same periods in 1996, a decrease of $1.0 and $1.5 million, respectively,
or 11.4% and 8.9%. This decrease was due primarily from a reduction in
indebtedness related to debt extinguished in the Vitalink Merger offset in
part by interest on additional indebtedness to fund working capital.
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During the first quarter of 1997, in conjunction with the Vitalink Merger,
GranCare recorded merger and other one-time costs of $36.0 million (See Note B
of Notes to Condensed Consolidated Financial Statements). Of this aggregate
charge, $28.3 million is reflected as a charge to operations with the
remaining $7.7 million pertaining to costs associated with the early
extinguishment of debt being reflected as an extraordinary charge. The
components of the merger charge and extraordinary charge recognized in the
first quarter of 1997 consist of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Shared transaction costs:
Redemption premium--$100 million Senior
Subordinated Notes....................................... $ 9,000
Redemption premium--$60 million Convertible
Subordinated Debentures.................................. 2,430
Investment banker fees.................................... 4,200
Consent fee paid to HRPT.................................. 5,500
Other professional fees and merger related costs.......... 5,470
-------
Total shared costs......................................... 26,600
Less costs to be paid by Vitalink.......................... (13,300)
-------
GranCare portion of shared transaction costs............... 13,300
Other transaction related costs:
Consent fee paid to HRPT.................................. 4,500
Write-off to deferred financing fees...................... 5,441
Amounts payable under GranCare Shareholder
Value Program............................................ 4,500
Amounts payable under Restricted Stock Plan............... 2,200
Other employee severance and other related costs.......... 6,059
-------
36,000
Less: Income taxes......................................... (6,000)
-------
Total costs, net of income taxes........................... $30,000
=======
</TABLE>
Income taxes for the three and six month periods ended June 30, 1997 were
$(0.3) and $(3.9) million compared to $5.0 and $9.1 million for the same
periods in 1996. Income taxes in 1997 are affected by approximately $19.0
million in non-deductible merger expenses.
Excluding the Institutional Pharmacy Business, income taxes for the three
and six month periods ended June 30, 1997 were $(0.3) and $(4.0) million,
respectively, compared to $2.2 and $3.9 million for the same periods in 1996.
As a result of the foregoing, net income (loss) for the three and six month
periods ended June 30, 1997 was $(0.4) and $(26.6) million compared to $8.2
and $14.8 million for the same periods in 1996. Excluding the Institutional
Pharmacy Business, net income (loss) for the three and six month periods ended
June 30, 1997 was $(0.4) and $(26.8) million compared to $3.8 and $6.3 million
for the same periods in 1996.
During the fourth quarter of 1996, GranCare received final settlement on its
1994 cost reports for its California long-term health care facilities. The
final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs ($1.8
million) based on their interpretation of the Medicare prudent buyer concept.
In addition, the intermediary has reopened the 1993 cost reports for two
additional facilities ($0.7 million) for the same issue. GranCare has
furnished therapy services to patients under arrangements with outside therapy
contractors. The contracts with the outside contractors contain
indemnification clauses regarding denial of payment for services provided. The
intermediary asserts that GranCare did not act as a prudent buyer of therapy
services as GranCare should have hired therapists instead of
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contracting for their services. In the absence of prudent buyer documentation
to the contrary, the intermediary determined reasonable costs for therapy
services based on internally developed survey data and other factors.
GranCare, in conjunction with a therapy company and another long-term care
company, has filed an expedited
group appeal to the Provider Reimbursement Review Board regarding these 1994
audit adjustments. A hearing took place during GranCare's second quarter.
GranCare is awaiting the outcome of this hearing. Management (based on the
advice of outside counsel) believes that it has a strong position in this
matter and will ultimately prevail; therefore no accrual for losses has been
made. It is possible that the intermediary will attempt to apply the same
interpretation for other GranCare facilities and for other periods. If the
hearing results in an unfavorable outcome to GranCare and if GranCare does not
ultimately prevail on this matter, it could have a material adverse impact on
net income of a particular future quarter or year.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
GranCare's net revenues for 1996 were $1,003.1 million compared to $816.5
million for 1995, an increase of $186.6 million, or 22.9%. Included in net
revenues and classified as investment and other revenue is the approximate
$18.4 million gain on the sale of GranCare's investment in an unconsolidated
affiliate that occurred in the third quarter of 1996. On a gross basis, $103.5
million of the increase is attributable to acquisitions completed, which
includes $22.3 million due to the acquisition of TeamCare's contract with the
State of New Jersey. Same-store growth increased, on a gross basis, $123.0
million from increases in specialty medical services provided and an increase
in average daily rates due to an improved payor mix. Specialty medical
revenues increased, on a gross basis, $180.7 million over the same period in
1995. This was the result of growth in the number of Medicare residents which
utilize higher margin ancillary services (physical, respiratory, occupational
and speech therapy). Included in net revenues for 1996 and 1995 were $3.1
million and $1.8 million, respectively, relating to routine cost limit
exceptions. While GranCare has applied for these exceptions, and has only
recognized a portion of the estimated recovery, there can be no assurance that
the actual revenues from routine cost limit exceptions will equal those
amounts recognized by GranCare in 1996 and 1995.
Excluding the Institutional Pharmacy Business, GranCare's net revenues for
1996 were $774.0 million compared to $639.8 million for 1995, an increase of
$134.2 million, or 21.0%. Of the foregoing change $89.1 million resulted from
same store growth and $45.1 million resulted from acquisitions. Specialty
medical revenues increased $110.9 million over the same period in 1995. This
was the result of growth in the number of Medicare residents which utilize
higher margin ancillary services (physical, respiratory, occupational and
speech therapy).
Operating expenses (excluding rent and property expenses) for 1996 were
$813.4 million compared to $669.5 million for 1995, an increase of $143.9
million, or 21.5%. On a gross basis, $88.2 million of the increase was
attributable to acquisitions, as well as costs associated with an increase of
specialty medical services provided. On a same-store basis, operating expenses
increased $79.1 million, on a gross basis. Specialty medical revenues generate
additional costs from the higher staffing levels required to care for the
higher acuity Medicare residents. The additional ancillary services (physical,
respiratory, occupational and speech therapy) utilized generate additional
costs in line with the growth realized in the specialty medical revenues. This
increase was partially offset by a reduction in costs from more appropriate
staffing given patient acuity levels at skilled nursing facilities and an
increased use of third-party vendors for therapy services.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1996 were $625.3 million compared to $519.5
million for 1995, an increase of $105.8 million, or 20.4%. Of the foregoing
increase, $67.1 million was attributable to same-store increases in expenses
and $38.7 million was attributable to acquisitions completed.
Rent and property expenses for 1996 were $56.9 million compared to $51.2
million for 1995, an increase of $5.7 million, or 11.1%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense.
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Excluding the Institutional Pharmacy Business, rent and property expenses
for 1996 were $51.6 million compared to $47.1 million for 1995, an increase of
$4.5 million, or 9.6%.
Depreciation and amortization expenses for 1996 were $25.9 million compared
to $21.6 million for 1995, an increase of $4.3 million, or 19.9%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1996 were $19.7 million compared to $16.9 million for 1995, an
increase of $2.8 million, or 16.6%.
Interest expense and financing charges for 1996 were $35.7 million compared
to $27.1 million in 1995, an increase of $8.6 million, or 31.7%. This increase
was primarily due to interest on additional indebtedness incurred in
connection with acquisitions, the issuance of $100 million of Senior
Subordinated Notes in September 1995 and borrowings to fund working capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1996 were $34.8 million compared to $26.6 million for
1995, an increase of $8.2 million, or 30.8%.
During the third quarter of 1996, GranCare recorded exit and other one-time
costs of $18.4 million as a charge to operations. Approximately $10.6 million
of this charge relates to management's decision to close five facilities which
are operated under long term operating leases, as these facilities did not fit
GranCare's operating strategies. The $10.6 million reflects the remaining net
book value of leasehold improvements at the dates of closure and the remaining
rent due to the landlord for periods after the dates of closure. On March 6,
1997, GranCare modified its plan from closing five Indiana facilities to
terminating most of its lease obligations and operations in Indiana involving
a total of 18 facilities. This modification did not significantly impact the
exit costs previously accrued in the third quarter of 1996. Management
completed the lease terminations effective April 1, 1997. The revenues and
income before taxes of these facilities and related regional offices during
1996 were $57.1 million and $0.7 million, respectively. Approximately $3
million of the charge relates to the write-off of notes receivable for loans
made by GranCare to a sublease lessee to fund working capital. Accounts
receivable from the facility under lease serve as collateral for the working
capital loans. During the third quarter of 1996, the loans to the lessee began
to significantly exceed the collateral, indicating that the loan would not be
recoverable. Accordingly, GranCare decided to terminate the sublease
arrangement and to write off the loans which it concluded would not be
recoverable. In addition, in the third quarter of 1996, GranCare recorded
$4.8 million of other charges which included $2.9 million of additional bad
debt expense related to TeamCare. The charge for bad debt expense was
necessary to provide for the increased risk of collection resulting from the
deterioration in the financial condition of certain customers in the third
quarter of 1996. (See Note 13 to the Consolidated Financial Statements.) These
charges do not have a negative effect on short-term cash flow. In the third
quarter of 1995, GranCare incurred certain costs related to the completion of
the pooling-of-interests with Evergreen on July 20, 1995 and other one-time
costs.
Income taxes for 1996 were $20.1 million compared to $14.8 million for 1995.
Excluding the Institutional Pharmacy Business, income taxes for 1996 were
$9.7 million compared to $7.8 million for 1995.
As a result of the foregoing, net income for 1996 was $32.7 million compared
to $20.6 million for 1995, an increase of $12.1 million, or 58.7%.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
GranCare's net revenues for 1995 were $816.5 million compared to $717.5
million for 1994, an increase of $99.0 million, or 13.8%. $112.0 million of
the increase is attributable to acquisitions completed. Same-store growth
increased $27.8 million from increases in specialty medical services provided
and an increase in average daily rates due to an improved payor mix, but was
adversely affected by a decrease in the level of reimbursement
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rates implemented in the State of Indiana in August 1994. Specialty medical
revenues increased $88.6 million over the same period in 1994. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy). The overall increase was partially offset by a $40.8 million
decrease in revenues resulting from the divestiture of certain business units
and the loss of the pharmacy division's contract with the State of New Jersey.
Included in net revenues for 1995 and 1994 were $1.8 million and $0.8 million,
respectively, relating to routine cost limit exceptions. While GranCare has
applied for these exceptions, and has only recognized a portion of the
estimated recovery, there can be no assurance that the actual revenues from
routine cost limit exceptions will equal those amounts recognized by GranCare
in 1994 and 1995.
Excluding the Institutional Pharmacy Business, GranCare's net revenues for
1995 were $639.8 million compared to $559.0 million for 1994, an increase of
$80.8 million, or 14.5%. Of the foregoing change $33.4 million resulted from
same store growth and $67.1 million resulted from acquisitions. The overall
increase was partially offset by a $19.7 million decrease in revenues
resulting from the divestiture of certain business units. Specialty medical
revenues increased $64.9 million over the same period in 1994. This was the
result of growth in the number of Medicare residents which utilize higher
margin ancillary services (physical, respiratory, occupational and speech
therapy).
Operating expenses (excluding rent and property expenses) for 1995 were
$669.5 million compared to $589.2 million for 1994, an increase of $80.3
million, or 13.6%. $92.6 million of the increase was attributable to
acquisitions, as well as costs associated with an increase of specialty
medical services provided, and the duplicate Evergreen Health Care, Inc.
("Evergreen") overhead incurred prior to the merger of GranCare with
Evergreen. On a same-store basis, operating expenses increased $29.2 million.
The increases were partially offset by reduction of expenses of $41.5 million
from facilities divested. Specialty medical revenues generate additional costs
from the higher staffing levels required to care for the higher acuity
Medicare residents. The additional ancillary services (physical, respiratory,
occupational and speech therapy) utilized generate additional costs in line
with the growth realized in the specialty medical revenues. This increase was
partially offset by a reduction in costs from more appropriate staffing given
patient acuity levels at skilled nursing facilities and an increased use of
third-party vendors for therapy services.
Excluding the Institutional Pharmacy Business, operating expenses (excluding
rent and property expenses) for 1995 were $519.5 million compared to $457.0
million for 1994, an increase of $62.5 million, or 13.7%. Of the foregoing
increase, $31.0 million was attributable to same-store increases in expenses
and $51.0 million was attributable to acquisitions completed. These increases
were partially offset by a reduction of expenses of $19.5 million from the
divestiture of certain business units.
Rent and property expenses for 1995 were $51.2 million compared to $44.3
million for 1994, an increase of $6.9 million, or 15.6%. This increase was
primarily attributable to additional facilities operated and scheduled
increases in rental expense, partially offset by the divestiture of certain
business units.
Excluding the Institutional Pharmacy Business, rent and property expenses
for 1995 were $47.1 million compared to $41.5 million for 1994, an increase of
$5.6 million, or 13.5%.
Depreciation and amortization expenses for 1995 were $21.6 million compared
to $16.4 million for 1994, an increase of $5.2 million, or 31.7%. This
increase was primarily the result of depreciation and amortization expenses
attributable to businesses acquired and additions to property and equipment,
partially offset by depreciation and amortization expenses related to divested
business units.
Excluding the Institutional Pharmacy Business, depreciation and amortization
expenses for 1995 were $16.9 million compared to $12.9 million for 1994, an
increase of $4.0 million, or 31.0%.
Interest expense and financing charges for 1995 were $27.1 million compared
to $21.5 million in 1994, an increase of $5.6 million, or 26.0%. This increase
was primarily due to interest on additional indebtedness
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incurred in connection with acquisitions, the issuance of $100 million of
Senior Subordinated Notes and, to a lesser extent, borrowings to fund working
capital.
Excluding the Institutional Pharmacy Business, interest expenses and
financing charges for 1995 were $26.6 million compared to $20.8 million for
1994, an increase of $5.8 million, or 27.9%.
In 1995, GranCare recorded a merger and other one-time costs charge of $11.8
million. Those costs include professional fees (legal, accounting and
investment bankers) of $5.1 million, personnel costs (severance and
relocation) of $3.2 million, a directors and officers policy of $0.5 million,
other deferred acquisition costs of $1.1 million, a divestiture charge of $1.5
million for certain Evergreen facilities which do not fit GranCare's strategy
and another charge of $0.4 million relating to TeamCare converting Evergreen's
pharmacy to their system. In 1994, GranCare recorded a restructuring charge of
$8.2 million in connection with a restructuring plan adopted by the Board of
Directors in August 1994. See "Liquidity and Capital Resources."
Income taxes for 1995 were $14.8 million compared to $13.5 million for 1994.
Excluding the Institutional Pharmacy Business, income taxes for 1995 were
$7.8 million compared to $5.8 million for 1994.
As a result of the foregoing, net income for 1995 was $20.6 million compared
to $24.3 million for 1994, a decrease of $3.7 million, or 15.2%.
Excluding the Institutional Pharmacy Business, net income for 1995 was $10.2
million compared to $12.8 million for 1994, a decrease of $2.6 million, or
20.3%.
LIQUIDITY AND CAPITAL RESOURCES
GranCare's primary source of liquidity at June 30, 1997 was $19.8 million in
cash and cash equivalents compared to $14.5 million at December 31, 1996, an
increase of $5.3 million. The increase in cash and cash equivalents was due
primarily to proceeds from the disposition of TeamCare and long-term debt
borrowings offset by an increase in accounts receivable. Payments received by
GranCare from the Medicaid and Medicare programs are GranCare's largest source
of cash from operations.
Accounts receivable at June 30, 1997 were $234.4 million compared to $233.3
million at December 31, 1996, an increase of $1.1 million. Excluding the
Institutional Pharmacy Business, accounts receivable at June 30, 1997 were
$234.4 million compared to $184.3 million at December 31, 1996, an increase of
$50.1 million or 27.2%. This increase was due to increases in revenues and the
timing of certain settlement payments. During the quarter ended June 30, 1997,
total receivables grew by approximately $20 million with $11 million of the
increase being in the greater than 90 day category. The deterioration was
primarily attributable to facility personnel turnover resulting in
inconsistent application of billing policies and procedures and the resultant
difficulty in complying with certain time limits imposed by third party payors
regarding reimbursement requests and supporting documentation relating
thereto. The effect of the foregoing was to cause delays and, ultimately,
result in certain accounts being uncollectable, including Medicare and
Medicaid accounts. GranCare has recently implemented systems to ensure the
consistent application of existing policies and procedures to both timely
qualify patients for reimbursement purposes and to respond to requests by
payors for supplemental documentation. GranCare believes that these systems
will reduce the internal delays previously encountered and minimize the
potential for disallowance by payors of GranCare's outstanding receivables.
As a result of GranCare's review of its outstanding receivables, conducted
in an effort to assess the risk of uncollectability related to the growth in
receivables during the quarter ended June 30, 1997, management concluded that
the specific identification method of identifying doubtful accounts was no
longer appropriate and that a more disciplined method for estimating doubtful
accounts was necessary. Therefore, for the quarter ended June 30, 1997,
GranCare adopted the percentage methodology for estimating doubtful accounts,
which method
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initially results in a higher percentage of older receivables being classified
as doubtful accounts although the ultimate amount of the estimate of doubtful
accounts generated by application of either methodology will be substantially
similar. GranCare believes that the percentage methodology is consistent with
industry practices and provides management with a disciplined approach for
estimating the allowance for doubtful accounts.
Since December 31, 1996, and to a greater extent in the second quarter of
1997, GranCare experienced delays in its payments for services rendered under
the Medicare program. In the State of Michigan the Medicare fiscal
intermediary placed a number of facilities under focus review. This delays the
payment cycle because under focus review each claim must receive a medical
review. GranCare has not received a material number of denials for services
rendered, only a delay in payment which is in the 60-90 day range. In
addition, as a consequence of the Vitalink Merger, terminating Medicare cost
reports were required to be filed for all of GranCare facilities and certain
other businesses. Normally, cost reports are filed based on the fiscal year
end, but as a result of the Vitalink Merger, they were filed for a thirteen
month period ended January 31, 1997, which has delayed the cost settlements,
the difference between audited costs and interim rates, by 30-60 days. In
addition, as a consequence of filing thirteen month cost reports, GranCare has
not received 1997 Medicare rate increases, and as such, differences between
interim and expected rates have continued to increase settlement balances.
Finally, GranCare has continued to experience significant growth in Medicare
business (41% for 1996 to 46% six months ended June 30, 1997). Final cost
settlements, based on the difference between audited costs and interim rates,
are paid following final cost report audits by Medicare fiscal intermediaries.
Because of the cost report and audit process, final settlement may not occur
until up to 24 months after services are provided. GranCare accounts for such
open cost reports by taking appropriate reserves to offset potential audit
adjustments. Specialty medical services generally increase the amount of
payments received on a delayed basis. GranCare receives payment for skilled
nursing services based on rates set by individual state Medicaid programs.
Although payment cycles for these programs vary, payments generally are made
within 30 to 60 days of services provided, except in Illinois, where the
Medicaid program delays payments for 120 days. The federal Medicare program, a
cost-reimbursement system, pays interim rates, based on estimated costs of
services, on a 30 to 45-day basis. GranCare has implemented certain policies
and procedures to assist in the collection of accounts receivable and to help
mitigate the impact of the delays noted above. However, in recognition of the
delays, and the growth in other receivables GranCare has increased its
allowance for doubtful accounts to provide for potential losses changing from
a specific identification method to a percentage method based on the age of
the receivable and quality of payor. This change in accounting estimate
resulted in an $8.0 million increase in the allowance for doubtful accounts at
June 30, 1997, and a corresponding charge to operations in the second quarter
of 1997.
While federal regulations do not provide states with grounds to curtail
payments under their Medicaid reimbursement programs due to state budget
deficiencies or delays in enactment of new budgets, states have nevertheless
curtailed payments in such circumstances in the past. In particular, some
states have delayed the payment of significant amounts owed to health care
providers such as GranCare for health care services provided under their
respective Medicaid programs.
In addition to principal and interest payments on its long-term
indebtedness, GranCare has significant rent obligations relating to its leased
facilities, as well as property expenses (principally property taxes and
insurance) relating to all of its facilities. GranCare's estimated principal
payments, cash interest payments, rent and property expense obligations for
1997 are approximately $83.2 million.
Excluding the Institutional Pharmacy Business, GranCare's estimated
principal payments, cash interest payments, rent and property expense
obligations for 1997 are approximately $81.7 million.
GranCare's operations require capital expenditures for renovations of
existing facilities in order to continue to meet regulatory requirements, to
upgrade facilities for the treatment of subacute patients and to accommodate
the addition of specialty medical services, and to improve the physical
appearance of its facilities for marketing purposes. Total capital
expenditures for the year ended December 31, 1996 were $32.4 million.
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Excluding the Institutional Pharmacy Business, total capital expenditures
for the year ended December 31, 1996 were $27.2 million. GranCare estimates
that capital expenditures for the year ending December 31, 1997, will be
approximately $35.0 million.
GranCare maintained a $150.0 million credit facility (the "Predecessor
Credit Facility") with a syndicate of banks for whom First Union acted as lead
bank, which was used for working capital, other general corporate purposes and
acquisitions. In order to complete the Vitalink Merger and related
transactions, GranCare replaced the Predecessor Credit Facility with the
Existing GranCare Credit Facility in the aggregate amount of $300.0 million,
with First Union and Chase each committing to $150.0 million. The Existing
GranCare Credit Facility consists of two components: a $200.0 million 5-year
revolving credit facility (which includes a $40.0 million sub-limit for the
issuance of standby letters of credit and a $5.0 million swing-line commitment
from First Union) and a $100.0 million 5-year term loan. Borrowings for
working capital and general corporate purposes may not exceed $75.0 million.
The first $25.0 million of exposure for letters of credit issued under the
letter of credit sub-facility will correspondingly reduce availability under
the working capital sub-facility. As of June 30, 1997, GranCare had
approximately $50.0 million outstanding under the working capital sub-facility
and $25.0 million in letters of credit. While GranCare currently has no
availability under the working capital sub-facility, GranCare believes that
its cash from operations will be sufficient to meet GranCare's working capital
requirements in the near future. The revolving credit portion of the Existing
GranCare Credit Facility matures in February 2002. The term loan portion of
the Existing GranCare Credit Facility will be amortized in ten quarterly
installments of $7.0 million each commencing in February 1999, thereafter
increasing to $10.0 million per quarter. All remaining principal and accrued,
unpaid interest shall be due and payable in full in February 2002. Interest on
outstanding borrowing shall accrue, at the option of GranCare, at the base
rate or at the Eurodollar rate plus, in each case, an applicable margin. As of
June 30, 1997, approximately $236.0 million was outstanding under the Existing
GranCare Credit Facility. On April 18, 1997, GranCare amended the Existing
GranCare Credit Facility in order to provide GranCare with greater flexibility
to pursue potential acquisitions. The Existing GranCare Credit Facility
contains restrictions on the ability of GranCare to pay dividends to its
stockholders upon the failure to satisfy certain financial covenants.
In connection with the February 12, 1997 Distribution and Vitalink Merger,
GranCare completed a tender offer for its 9 3/8% Senior Subordinated Notes due
2005 (the "9 3/8% Notes"), substantially all of which were purchased in the
tender offer with funds provided by Vitalink. The remaining 9 3/8% Notes
became obligations of Vitalink in connection with the Vitalink Merger. Also in
connection with the Distribution and Vitalink Merger, GranCare redeemed all of
its outstanding 6 1/2% Convertible Debentures due 2003 (the "Convertible
Debentures"). Accordingly, neither the 9 3/8% Notes nor the Convertible
Debentures remain obligations of GranCare following the Vitalink Merger.
In April 1997, GranCare paid the seller of Long Term Care Pharmaceutical
Services Corporation I and Long Term Care Pharmaceutical Services Corporation
III (collectively, "LTC") $5.4 million in settlement of a contingent earnout
provision in the purchase agreement relating to GranCare's 1994 acquisition of
LTC. Pursuant to the Distribution Agreement, Vitalink funded $2.5 million of
this payment.
GranCare previously announced a pending acquisition with respect to the
purchase of 18 nursing facilities and ancillary businesses from an affiliated
group in the State of Alabama. GranCare has subsequently announced that it
will not consummate the aforementioned acquisition.
In conjunction with a 1990 acquisition, AMS Properties, Inc., a wholly owned
subsidiary of GranCare ("AMS"), obtained a mortgage loan in the amount of
$15.0 million from HRPT. The note is secured by mortgages on two facilities
and 1,000,000 shares of HRPT common stock owned by AMS. Such note had a
balance of $8.7 million, with an interest rate of 13.75% at December 31, 1994.
During 1995, the terms of such note were renegotiated with HRPT, whereby the
principal balance of the promissory note was increased to $11.5 million.
Minimum interest on the note is 11.5% per year payable monthly in arrears.
Additional interest is
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payable commencing on January 31, 1996, in an amount equal to 75% of the
percentage increase in the Consumer Price Index, subject to certain
limitations. Commencing on March 31, 1997, and thereafter on the last day of
each calendar month until December 31, 2010, AMS is required to make monthly
payments of principal and interest in an amount sufficient to amortize the
principal amount of the note over a thirty year period on a direct reduction
basis. The balance of such principal amount, together with interest and all
other amounts payable thereunder, is due and payable on December 31, 2010.
GranCare, through certain of its subsidiaries, has operating leases for 24
facilities, including land, buildings, and equipment from HRPT under two
Master Lease Documents. On October 1, 1994, the existing Master Lease
Documents were amended. Under the amended lease arrangements, minimum rent for
the leased facilities is based on formulas set forth in the amendments. Under
such formulas, the aggregate yearly minimum rent for such facilities was
approximately $13.7 million initially payable in equal monthly installments.
In addition, beginning January 1, 1996, the amended lease agreements provide
for additional rent to be paid monthly, in advance, based on 75% of the
increase in the Consumer Price Index multiplied by the minimum rent due,
provided, however, that the maximum rent (minimum rent plus additional rent)
each January shall be limited to a 2% increase over the total monthly rent
paid in the prior December. The operating leases for 17 facilities expire on
December 28, 2010, and there are two 10 year renewal options. The leases for
seven facilities expire in June 2006 and there are two 10 1/2 year renewal
options. GranCare has subleased six of the 24 facilities to unrelated parties.
AMS is a beneficial owner of 1,000,000 shares of stock of HRPT, which are
held in trust and pledged as collateral for certain obligations owed to HRPT.
The pledge agreement strictly limits AMS' ability to sell the shares until its
obligations to HRPT are satisfied. As a result, these shares cannot be sold to
meet other financial obligations. In addition, such mortgage notes and lease
obligations contain provisions that restrict, upon the occurrence of an event
of default thereunder, the ability of such subsidiaries to make dividends,
loans or advances to GranCare. In accordance with FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the HRPT
stock is carried at fair market value, with unrealized gains and losses
reported as a separate component of equity.
A wholly-owned subsidiary of GranCare, PHCMI, is the borrower under a $58.8
million mortgage note executed on August 14, 1992 in favor of Omega, and under
the related Michigan Loan Agreement dated as of June 7, 1992. All $58.8
million is outstanding at the present time. Proceeds of the Omega Loan were
used by PHCMI to acquire the 17 PHCMI Facilities. With the exception of four
PHCMI Facilities since divested, PHCMI owns and leases the PHCMI Facilities to
various of its wholly-owned subsidiaries under separate lease agreements (the
"PHCMI Subsidiary Leases"). The Omega Loan is secured by a mortgage and
security agreement executed by PHCMI with respect to the PHCMI Facilities and
the Cash Deposit. PHCMI has assigned its interest in the PHCMI Subsidiary
Leases to Omega as additional security for the Omega Loan. In addition, in
February 1997, the PHCMI subsidiaries executed and delivered guarantees of the
Omega Loan and pledged their personal property assets to Omega as security for
such guarantees.
The Omega Loan bears interest at a rate which is adjusted annually based on
either (a) changes in the Consumer Price Index, or (b) a percentage of the
change in gross revenues of PHCMI and its subsidiaries from year to year,
divided by $58.8 million, whichever produces the higher interest rate, but in
any event subject to a maximum rate not to exceed 105% of the interest rate in
effect for the Omega Loan for the prior calendar year. The current interest
rate is 14.5% per annum. The Omega Loan currently requires monthly, interest-
only payments. Additional interest accrues on the outstanding principal of the
Omega Loan at the rate of 1% per annum. Such additional interest is compounded
annually and is due and payable on a pro rata basis at the time of each
principal payment or prepayment. Beginning October 1, 2002, quarterly
amortizing installments of principal in the amount of $1,470,000 each will
also become due and payable on the first day of each calendar quarter. The
entire outstanding principal amount of the Omega Loan is due and payable on
August 13, 2007. The Omega Loan may be prepaid within the first 180 days
following August 14, 2002, upon 30 days' notice, but
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is not otherwise subject to optional prepayment. Payment of the Omega Loan
following acceleration upon the occurrence of an event of default or at any
other time will result in a prepayment penalty in the nature of a "make whole"
premium.
In addition to the interest on the Omega Loan described in the preceding
paragraph, as a condition to obtaining Omega's consent to the Vitalink Merger,
the Existing GranCare Credit Facility and other transactions related thereto,
PHCMI agreed to pay additional interest to Omega in the amount of $20,500 per
month, through and including July 1, 2002. If the principal balance of the
Omega Loan for any reason becomes due and payable prior to that date, there
will be added to the indebtedness owed by PHCMI (i) the sum of $1,000,000,
plus (ii) interest thereon at 11% per annum to the prepayment date, less (iii)
the amount of such additional interest paid to Omega prior to the prepayment
date.
As substitute collateral for the four divested PHCMI Facilities, and as
consideration for granting its consent to such divestiture, Omega required
GranCare, among other things, to cause First Union to issue its letter of
credit in favor of Omega in the amount of $9.0 million pursuant to the
Existing GranCare Credit Facility. The Omega Letter of Credit can be drawn
upon following the occurrence of any event of default under the Omega loan
documents, if the Omega Letter of Credit is not renewed or extended at least
30 days prior to its scheduled expiration date (currently March 31, 1998), or
if certain representations, warranties or covenants of PHCMI under the Omega
loan documents are breached and such breaches are not cured within the
prescribed time after notice. It is expected that Paragon will cause the Omega
Letter of Credit to be replaced with a new standby letter of credit to be
issued under the New Credit Facility.
The Omega Loan Agreement obligates PHCMI, among other things, to maintain a
minimum tangible net worth of at least $10.0 million, increased or decreased
by 25% of PHCMI's net income (but in no event less than $10.0 million).
GranCare has agreed to contribute additional equity to PHCMI if, as and when
necessary to assure that such minimum tangible net worth test is met. As of
December 31, 1996, PHCMI's tangible net worth exceeded the current minimum
adjusted tangible net worth requirement.
GranCare maintains a captive insurance subsidiary to provide reinsurance for
its obligations under workers' compensation and general and professional
liability plans. These obligations are funded with long-term, fixed income
investments, which are not available to satisfy other obligations of GranCare.
Capital Resources. GranCare believes that its cash from operations, existing
working capital and available borrowings under the Credit Facility will be
sufficient to fund the fixed obligations, capital expenditures and other
obligations referred to above, as well as to repay any required indebtedness
when due, and further expand GranCare's business. Also in connection with the
Distribution and Vitalink Merger, Vitalink assumed (as part of the Vitalink
Merger) certain items of Old GranCare's consolidated indebtedness aggregating
approximately $108.0 million (which includes Old GranCare's obligations in
respect of the 9 3/8% Notes). However, in the event that the Mergers are not
consummated and GranCare continues to grow through acquisitions, GranCare may
need to raise additional capital, either through borrowings, sale-leaseback
financings or the sale of debt or equity securities, to finance the
acquisition price and any additional working capital and capital expenditure
requirements related to such acquisitions. At this time, GranCare believes
that any additional required financing may be obtained at market rates on
terms that are acceptable to GranCare, although no assurance can be given
regarding the terms of additional financing that may be available in the
future.
IMPACT OF INFLATION
The health care industry is labor-intensive. Wages and other labor costs are
especially sensitive to inflation. In addition, GranCare operates a majority
of its facilities pursuant to operating leases which contain provisions for
increased rent, based upon inflation. Increases in wages and other labor costs
and rent expense as a result of inflation, without a corresponding increase in
Medicare and Medicaid reimbursement rates, could adversely impact GranCare.
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Both the Medicare and Medicaid programs operate under routine cost limits or
targeted ceilings. These limits are usually adjusted on an annual basis
utilizing numerous inflation indices. Each state can operate under a different
index resulting in the adjustments to the targeted ceilings being different in
each state. GranCare cannot predict the level of the expected increase each
year and each of these programs is subject to changes in regulation,
retroactive rate adjustments and government funding which could adversely
affect the amounts paid to GranCare.
CERTAIN RELATIONSHIPS AND TRANSACTIONS
Vitalink
All of GranCare's skilled nursing facilities existing prior to the effective
time of the Vitalink Merger (the "Facilities") either became parties to or
entered into Pharmacy Agreements with Vitalink in connection with the Vitalink
Merger. The supplies and services to be provided to a Facility pursuant to the
Pharmacy Agreements include all pharmaceutical and related goods required by
each such Facility and the residents thereof and pharmacy consulting services
with respect thereto. Pharmaceutical supplies include prescription and non-
prescription medications. Related goods include all nutritional supplements,
intravenous solutions and supplies, parenteral and enteral supplies and
equipment, orthotic and prosthetic devices, ostomy supplies, urological
supplies, wound care supplies and equipment, and personal care items. All
goods and services are to be provided in accordance with all applicable
requirements of federal, state and local laws and regulations. The terms of
the Pharmacy Agreements are for five years and are automatically extended for
an additional year on each anniversary of the commencement date thereof unless
written notice to the contrary is given not more than 120 days and not less
than 90 days prior to any such anniversary. For purposes of uniformity, the
anniversary date for all Pharmacy Agreements is deemed to be March 1.
Vitalink has agreed that following the GranCare Merger, and during the terms
of the Pharmacy Agreements, in the event Vitalink or any of its affiliates
elect not to provide all or certain pharmaceutical supplies and services to
any Facility, LCA's institutional pharmacy unit, APS, will be given the first
option to provide the required pharmaceutical supplies and services to such
Facility. In the event APS declines to provide such supplies and services, the
Facility may contract with or otherwise obtain the necessary supplies and
services from any other institutional pharmacy it deems appropriate. A
Facility's service contract with APS or any alternative institutional pharmacy
must be terminable on not more than 30 days or 60 days written notice,
respectively, which Vitalink can require GranCare to deliver if at any time
Vitalink or any of its affiliates chooses to commence providing pharmaceutical
supplies and services to that Facility.
In the event GranCare transfers ownership or control of a Facility (a
"Transferred Facility") during the term of the Pharmacy Agreements relating to
such Facility and the transferee does not accept and comply with the Pharmacy
Agreements applicable to such Facility, GranCare must pay Vitalink liquidated
damages to compensate Vitalink for losses over the remaining terms of the
subject Pharmacy Agreements. The formula for measuring Vitalink's liquidated
damages requires GranCare to make monthly payments to Vitalink in an amount
approximating the historical monthly pre-tax cash flow realized by Vitalink
pursuant to the Pharmacy Agreements with the Transferred Facility over the 12
months preceding the date such Facility became a Transferred Facility. During
the remaining term of the subject Pharmacy Agreements, GranCare has the option
to replace the Transferred Facility with an alternative facility not
previously subject to Pharmacy Agreements (a "Replacement Facility") and
suspend the monthly liquidated damages payments subject to certain annual
adjustments to ensure that the annual pre-tax cash flow realized by Vitalink
pursuant to the provision of supplies and services to such Replacement
Facility (the "Replacement Earnings") is equal to at least 90% of the annual
pre-tax cash flow realized by Vitalink from the provision of supplies and
services to the Transferred Facility such Replacement Facility replaced (the
"Minimum Replacement Cash Flow Amount"). In the event the Replacement Earnings
exceed 110% of the Minimum Replacement Cash Flow Amount realized by Vitalink,
then such excess will offset on a dollar-for-dollar basis the amount of any
shortfall in Replacement Earnings below the Minimum Replacement Cash Flow
Amount experienced by any Replacement Facility in the immediately
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preceeding 12 months. These liquidated damages provisions also apply if
GranCare fails to terminate at Vitalink's request another service contract
with APS or any other alternative institutional pharmacy in order to allow
Vitalink to commence providing pharmaceutical supplies and services to a
Facility.
Upon any acquisition by GranCare or Paragon of any additional skilled
nursing facility, neither GranCare nor Paragon shall have any obligation to
contract with Vitalink to provide pharmaceutical supplies and services at such
facility and GranCare will not be required to terminate any then existing
agreements providing for the provision of pharmaceutical supplies and services
to such facility by an alternative supplier.
In connection with the Vitalink Merger, Manor Care, Vitalink and GranCare
entered into the Non-Competition Agreement whereby Manor Care and GranCare
agreed not to engage in the institutional pharmacy business within the United
States prior to February 12, 2000 except temporarily in connection with future
acquisitions of healthcare businesses that also included an institutional
pharmacy business or an interest therein. Similarly, Vitalink agreed not to
engage in the skilled nursing business. The TRA provides for the termination
of the Non-Competition Agreement simultaneously with the effective time of the
Mergers upon payment of the agreed upon amounts. See "Certain Information
Concerning GranCare--Legal Proceedings."
Upon consummation of the Vitalink Merger, Gene E. Burleson, Chairman of the
GranCare Board, became Chief Executive Officer and a director of Vitalink and
three other directors of GranCare (Messrs. Parker, Kanter & Rolle) became
directors of Vitalink. Following approval by its Management Compensation
Committee, GranCare entered into a three-year consulting agreement with Mr.
Burleson in the amount of $100,000 per year in order to induce Mr. Burleson to
assist GranCare during its transition to a new chief executive officer.
Officer Relocations
In connection with the consolidation of GranCare's headquarters in Atlanta,
Georgia in 1994, GranCare assisted certain of its senior level executive
officers with their relocations to Atlanta. The assistance was in the form of
loans to and, in certain instances, the purchase of residences from, the
affected senior level executive officers.
In connection with Mr. Benton's (GranCare's Executive Vice President, Chief
Administrative Officer, General Counsel and Secretary) relocation to Atlanta
from GranCare's former corporate headquarters in Culver City, California,
GranCare loaned Mr. Benton $100,000. Prior to the consummation of the Vitalink
Merger, this loan to Mr. Benton was forgiven. Mr. Benton will recognize
taxable income on this forgiven loan.
Other
Robert L. Parker was formerly Chairman of the Board of Directors of Omega
Healthcare Investors, Inc. ("Omega"), a creditor of GranCare. In connection
with his appointment to the Board of Directors of GranCare, Mr. Parker
resigned as Chairman of the Board of Directors of Omega but continues to serve
as a director of Omega. Omega is the mortgagee on GranCare's facilities
located in the State of Michigan. GranCare's indebtedness to Omega as of
December 31, 1996 was approximately $58.8 million. During the year ended
December 31, 1996, GranCare made or accrued interest payments to Omega
totaling approximately $8.5 million.
Mr. Gene E. Burleson, GranCare's Chairman of the Board, (and prior to the
Vitalink Merger, Chairman of the Board, President and Chief Executive Officer
of Old GranCare) and Messrs. Ronald G. Kenny and William G. Petty, Jr., both
directors of GranCare (and prior to the Vitalink Merger, directors of Old
GranCare) are also directors of Alternative Living Services, Inc. ("ALS").
GranCare previously owned a 19% equity interest in ALS, which GranCare sold in
August 1996 in connection with the initial public offering of ALS's common
stock. In addition, Mr. Petty is Chairman of the Board and was formerly Chief
Executive Officer of ALS. ALS owns and manages assisted living facilities. At
the time of the ALS public offering, Mr. Kenny owned .5% of a limited
liability corporation that owned a 63% equity interest in ALS and Mr. Kenny's
employer, Huizenga Capital Management, owned 5.0% of such corporation.
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Consulting Agreements
Kay L. Brown, Jerry A. Schneider and Keith J. Yoder resigned from GranCare
effective June 30, 1997, July 31, 1997 and May 1, 1997, respectively. Mr.
Yoder rejoined GranCare effective August 1, 1997 as its Chief Financial
Officer. In order to obtain their assistance in transitioning their former
positions and for assisting GranCare in connection with the Mergers
contemplated herein, GranCare entered into consulting agreements with Ms.
Brown and Messrs. Yoder and Schneider. The term of Ms. Brown's consulting
agreement is from July 1, 1997 through December 31, 1997. During this term,
Ms. Brown will be paid $2,500 per month in return for which she will work two
days on GranCare's behalf and $1,000 per day thereafter, up to a maximum
amount of $8,500 per month (if Ms. Brown works for eight or more days for
GranCare). Mr. Yoder's consulting agreement terminated on July 31, 1997 upon
his rejoining GranCare as Chief Financial Officer. Mr. Yoder's consulting
agreement provided for the payment to Mr. Yoder of $125 per hour for each hour
that he worked for GranCare. During the term of such agreement, Mr. Yoder
received payments under such agreement aggregating approximately $56,000. The
term of Mr. Schneider's consulting agreement is August 1, 1997 through January
31, 1999. During the term of such agreement, Mr. Schneider will be paid $500
per month.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GRANCARE
The following table sets forth, as of September 2, 1997 (the GranCare Record
Date) the number and percentage of shares of GranCare Common Stock
beneficially owned (as defined in Rule 13d-4 adopted under the Securities
Exchange Act of 1934) by (a) all persons known to GranCare to own beneficially
more than 5% of any class of voting security of GranCare, (b) each of
GranCare's directors, (c) GranCare's chief executive officer and four most
highly compensated executive officers as of December 31, 1996 who are
currently employed by GranCare and (d) all directors and executive officers of
GranCare as a group. Jerry A. Schneider and Donald D. Finney are not included
in the following table because they resigned from GranCare effective July 31,
1997 and January 1, 1997, respectively, and are accordingly no longer required
to report their ownership of GranCare Common Stock. At the time of their
resignations, Mr. Finney beneficially owned 116,177 shares of GranCare Common
Stock, 65,435 of which could be acquired within 60 days pursuant to the
exercise of options and Mr. Schneider beneficially owned 154,500 shares of
GranCare Common Stock, 147,000 of which could be acquired within 60 days
pursuant to the exercise of options. Similar information regarding LCA is
incorporated by reference herein. See "Incorporation of Documents by
Reference."
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENTAGE
BEEFICIAL OWNERN OWNED(1) OWNED(1)
- ---------------- --------- ----------
<S> <C> <C>
Peter A. Hochfelder
Robert J. Sobel
Mitchell A. Kuflik
Brahman Management, LLC (2)........................... 2,145,300 8.9%
277 Park Avenue, 26th Floor
New York, New York 10172
Wellington Management Company......................... 1,217,400(3) 5.1%
75 State Street
Boston, Massachusetts 02109
Gene E. Burleson...................................... 867,060(4) 3.6%
Chairman of the Board (Chairman of the Board,
President and Chief Executive Officer through
February 12, 1997)
Charles M. Blalack.................................... 61,014(5) *
Director
Antoinette Hubenette, M.D. ........................... 24,800(6) *
Director
Joel S. Kanter........................................ 315,010(7) 1.3%
Director
Ronald G. Kenny....................................... 55,937(8) *
Director
Robert L. Parker...................................... 219,162(9) 1%
Director
William G. Petty, Jr. ................................ 665,981(10) 2.8%
Director
Edward V. Regan....................................... 22,800(11) *
Director
Gary U. Rolle......................................... 172,800(12) *
Director
M. Scott Athans....................................... 255,100(13) 1.1%
President, Chief Executive Officer and Director
(Executive Vice President and Chief Operating Officer
through February 12, 1997)
Evrett W. Benton...................................... 292,130(14) 1.2%
Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary (Executive
Vice President, General Counsel and Secretary through
February 12, 1997)
Dennis J. Johnston.................................... 49,625(15) *
Senior Vice President, President of Cornerstone
Health Management Company
All directors and executive officers as a group (29
persons)............................................. 3,381,453(16) 13.3%
</TABLE>
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- --------
* Less than 1%.
(1) In determining the number of issued and outstanding shares of GranCare
Common Stock, the GranCare Common Stock obtainable upon conversion of the
outstanding common stock of Evergreen and National Heritage, Inc., a
predecessor of Evergreen, have been assumed to be shares of issued and
outstanding GranCare Common Stock. Except as otherwise indicated, each of
the persons included in the table above has sole voting and investment
power over the shares owned except as to the rights of his or her spouse
under applicable community property laws.
(2) Based on a Schedule 13D Amendment filed with the Commission on August 22,
1997, Peter A. Hochfelder, Robert J. Sobel and Mitchell A. Kuflik may be
deemed to be the beneficial owners of 2,145,300, or 8.9%, of the GranCare
Common Stock through several affiliated investment companies and
partnerships (Brahman Partners II, L.P., Brahman Institutional Partners,
L.P., BY Partners, L.P., Brahman Management, LLC ("Brahman Management")
and Brahman Capital Corp.) over which they have shared voting and
investment power (with respect to all such shares). Of the foregoing
investment entities, only Brahman Management beneficially owns over 5% of
the GranCare Common Stock, 1,602,600 shares or 6.7%. Brahman Management
has shared voting and investment power with respect to all such shares.
(3) Wellington Management Company ("WMC") is an investment adviser registered
with the Securities and Exchange Commission under the Investment Advisers
Act of 1940, as amended. As of January 15, 1997, WMC, in its capacity as
investment adviser, may be deemed to have beneficial ownership of
1,222,005 shares that are owned by numerous investment advisory clients,
none of which is known to have such interest with respect to more than
five percent of the class. As of January 15, 1997, WMC had voting power
and investment power as follows:
<TABLE>
<S> <C>
Sole Voting Power....... 0 shares
Shared Voting Power..... 271,605 shares
Sole Investment Power... 0 shares
Shared Investment Pow-
er..................... 1,222,005 shares
</TABLE>
(4) Includes 294,760 which may be acquired within 60 days after September 2,
1997, pursuant to the exercise of stock options.
(5) Includes 24,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(6) Includes 24,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(7) Includes 24,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options. Also
includes 47,400 shares owned by Windy City, Inc, 200,000 shares owned by
Walnut Capital Corporation and 40,000 shares owned by the Kanter Family
Foundation. Mr. Kanter serves as President and Director of such
companies. In addition, the number includes 400 shares held by the Ricki
Kanter IRA, 1,000 shares owned by 21 Club Trust I, 150 shares owned by 21
Club Trust II and 150 shares owned by 21 Club Trust III. The
beneficiaries of such trusts are Mr. Kanter's minor children. Mr. Kanter
has shared voting and investment powers in the shares held by such
corporations, such foundation and such trusts. Mr. Kanter disclaims
beneficial ownership of such shares.
(8) Includes 16,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options. Also
includes 4,650 shares held by trusts for the benefit of Mr. Kenny's
children. Mr. Kenny has no voting or investment power over such shares
and disclaims beneficial ownership of such shares. In addition, 387
shares are held by the Ronald Kenny IRA over which Mr. Kenny has sole
voting and investment power.
(9) Includes 16,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options. Also
includes 13,438 shares of Common Stock held by the Parker Charitable
Trust of 1991. Mr. Parker has shared voting and investment power with
respect to such shares and disclaims beneficial ownership of such shares.
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(10) Includes 103,740 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options. Also
includes 410,547 shares held by a trust of which Mr. Petty is a
beneficiary. Also incudes 150,894 shares owned by Mr. Petty's wife, over
which Mr. Petty has shared voting and investment power. Mr. Petty
disclaims beneficial ownership of such shares.
(11) Includes 22,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(12) Includes 22,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to exercise of stock options. Also includes
150,000 shares of Common Stock owned by Transamerica Investment Services
("Transamerica"). Mr. Rolle is the Chief Investment Officer of
Transamerica and in such capacity, he has voting and management authority
over such shares.
(13) Includes 253,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(14) Includes 278,000 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(15) Includes 39,625 shares which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
(16) Includes 1,477,760 share which may be acquired within 60 days after
September 2, 1997, pursuant to the exercise of stock options.
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ADDITIONAL INFORMATION REGARDING GRANCARE'S MANAGEMENT
Certain additional information regarding an executive officer of GranCare
who will serve as an executive officer of Paragon as required to be disclosed
pursuant to Commission rules is set forth below. Such information regarding
the executive officers of LCA who will serve as executive officers of Paragon
is incorporated by reference herein. See "Incorporation of Documents by
Reference."
STOCK OPTIONS
The following tables provide information on options to purchase GranCare
Common Stock granted to Mr. Johnston since December 31, 1995 and summarize the
value of options to acquire GranCare Common Stock held by Mr. Johnston as of
June 30, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM
--------------------------------------------- ---------------------
NUMBER OF
SECURITIES % OF TOTAL
UNDERLYING OPTIONS/SARS EXERCISE
OPTIONS/SARS GRANTED TO OR BASE
GRANTED EMPLOYEES IN PRICE EXPIRATION
NAME (#) FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- ---- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Dennis G. Johnston...... 14,625(1) .05 5.675 1/23/06 52,211 132,210
31,200(2) .05 8.25 2/12/07 161,928 410,280
</TABLE>
GRANCARE OPTION/SAR GRANTS IN LAST FISCAL YEAR
- --------
(1) Represents options granted January 23, 1996.
(2) Represents options granted February 12, 1997.
AGGREGATE OPTION/SAR EXERCISES SINCE DECEMBER 31, 1995 AND VALUE OF GRANCARE
OPTIONS AT JUNE 30, 1997
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
SECURITIES UNDERLYING IN-THE-MONEY
OPTIONS/SARS AT OPTIONS/SARS AT
FISCAL YEAR-END FISCAL YEAR-END($)(2)
------------------------- -------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Dennis G. Johnston...... 0 0 39,625 31,200 179,672 79,872
</TABLE>
- --------
(1) Calculated on the basis of the fair market value of the underlying
securities at the exercise date minus the exercise price.
(2) Calculation on the basis of the closing price of the underlying securities
on June 30, 1997 ($10.81 per share) minus the exercise price.
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DESCRIPTION OF LCA CAPITAL STOCK
The following descriptions of certain provisions of the LCA Charter and LCA
Bylaws (the "LCA Bylaws") are necessarily general and do not purport to be
complete and are qualified in their entirety by reference to the LCA Charter
and LCA Bylaws, which are included as exhibits to the Registration Statement
of which this Proxy Statement/Prospectus is a part.
LCA COMMON STOCK
The authorized capital stock of LCA consists of 75,000,000 shares of common
stock, par value, $0.01 per share. As of June 30, 1997, there were 20,266,431
shares of LCA Common Stock issued and outstanding and approximately 467
holders of record of LCA Common Stock. The holders of LCA Common Stock are
entitled to one vote for each share on all matters submitted to a vote of
stockholders, and, except as described below, a majority vote is required for
all action to be taken by stockholders. Holders of LCA Common Stock are
entitled to such dividends as may be declared from time to time by the LCA
Board out of funds legally available therefor, subject to the dividend and
liquidation rights of any preferred stock of LCA that may be issued, and
subject to the dividend restrictions in certain LCA credit facilities and
various other note agreements. See "--Preferred Stock." In the event of
liquidation, dissolution or winding-up of LCA, the holders of LCA Common Stock
are entitled to share equally and ratably in the assets of LCA, if any,
remaining after provision for payment of all debts and liabilities of LCA and
satisfaction of the liquidation preference of any shares of preferred stock of
LCA that may be outstanding. The holders of LCA Common Stock have no
preemptive, subscription, redemptive or conversion rights. The outstanding
shares of LCA Common Stock are fully paid and nonassessable.
RIGHTS TO PURCHASE PREFERRED STOCK
On November 17, 1994, LCA declared a dividend of one right to purchase
preferred stock (a "Preferred Stock Purchase Right") for each outstanding
share of LCA Common Stock to stockholders of record at the close of business
on December 5, 1994. Rights are issuable in respect of all shares of LCA
Common Stock issued after such record date but prior to the earliest of (i)
the Distribution Date (as defined below), (ii) the date on which the Preferred
Stock Purchase Rights are redeemed as provided below and (iii) November 17,
2004. Each Preferred Stock Purchase Right entitles the registered holder to
purchase from LCA a unit consisting of one one-hundredth of a share (a
"Fractional Share") of Series A Junior Participating Preferred Stock, par
value $.01 per share (the "Series A Preferred Stock"), at a purchase price of
$160 per Fractional Share, subject to adjustment (the "Purchase Price"), or
under certain circumstances, the right to purchase shares of LCA Common Stock
or other securities at one-half their market price. See "--Preferred Stock--
Series A Preferred." The description and terms of the Preferred Stock Purchase
Rights are set forth in a Rights Agreement dated as of November 17, 1994, as
it may from time to time be supplemented or amended (the "LCA Rights
Agreement") between LCA and Chemical Bank, as Preferred Stock Purchase Rights
Agent. The Preferred Stock Purchase Rights may have certain anti-takeover
effects, including deterring someone from acquiring control of LCA in a manner
or on terms not approved by the LCA Board. The Preferred Stock Purchase Rights
should not interfere with any merger or other business combination approved by
the LCA Board.
LCA has agreed to amend the LCA Rights Agreement so as to cause the
Preferred Stock Purchase Rights to no longer be effective after the Mergers.
LCA has amended the definition of "Acquiring Person" in the Rights Agreements
(and made certain related amendments) to permit the acquisition of LCA shares
by Apollo pursuant to the Recapitalization Merger and consummation of the
GranCare Merger without causing the Preferred Stock Purchase Rights to become
exerciseable.
PREFERRED STOCK
LCA is authorized to issue 5,000,000 shares of preferred stock, par value
$.01 per share ("Preferred Stock"), of which 350,000 shares have been
designated as Series A Preferred Stock. No shares of Preferred Stock were
outstanding at the date of this Proxy Statement/Prospectus. The Board of
Directors has authority,
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without stockholder approval, to issue shares of Preferred Stock in one or
more series and to determine the number of shares, designations, dividend
rights, conversion rights, voting power, redemption rights, liquidation
preferences and other terms of any such series. The issuance of Preferred
Stock, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
power of holders of LCA Common Stock and the likelihood that such holders will
receive dividend payments and payments upon liquidation and could have the
effect of delaying deferring or preventing a change in control of LCA. LCA has
no present plans for any issuance of Preferred Stock, other than the reserved
shares of Series A Preferred Stock issuable pursuant to the Rights.
Any shares of Series A Preferred Stock that may be issued upon exercise of
the Rights will be redeemable in whole or part for cash in a per share amount
equal to 100 times the market price of a share of LCA Common Stock. The
holders of shares of Series A Preferred Stock will be entitled to receive,
when, as and if declared, a preferential quarterly dividend in an amount per
share effectively equal to the greater of $1.00 per share or 100 times any
cash dividend or other distribution declared on the LCA Common Stock, in like
kind. In the event of liquidation, the holder of the Series A Preferred Stock
will be entitled to receive a liquidation payment per share in an amount
effectively equal to the greater of $100 per share or 100 times the per share
amount distributed to holders of LCA Common Stock. In the event of any merger,
consolidation or other transaction in which shares of LCA Common Stock are
exchanged, the holder of the shares of Series A Preferred Stock will be
entitled to receive per share 100 times the amount received per share of LCA
Common Stock. Holders of Series A Preferred Stock will have 100 votes per
share of Series A Preferred Stock and, except as otherwise provided in the LCA
Charter or required by law, will vote together with holders of LCA Common
Stock as a single class. The rights of the Series A Preferred Stock as to
dividends, liquidation and voting are protected by anti-dilution provisions.
Whenever dividend payments on the Series A Preferred Stock are in arrears, LCA
may not (i) purchase or redeem any shares of Series A Preferred Stock or
shares ranking on a parity with respect to the Series A Preferred Stock except
in accordance with a purchase offer to all holders, (ii) declare or pay
dividends on or purchase or redeem any shares of stock ranking junior to the
Series A Preferred Stock or (iii) declare or pay dividends on or purchase or
redeem any shares of stock ranking on a parity with the Series A Preferred
Stock except dividends paid ratably on the Series A Preferred Stock and all
such parity stock and except purchases or redemptions of such parity stock in
exchange for junior stock. If dividend payments on the Series A Preferred
Stock are in arrears for six quarters, the holders of the Series A Preferred
Stock (together with holders of any other Preferred Stock with similar rights)
will have the right to elect two directors of LCA.
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COMPARISON OF STOCKHOLDER RIGHTS
GENERAL
In connection with the GranCare Merger, holders of GranCare Common Stock
will become stockholders of Paragon, and the rights of such former GranCare
stockholders and the rights of the LCA stockholders will thereafter be
governed by the DGCL and the LCA Charter (as amended by the Amendment
Proposal) and LCA Bylaws (as amended as described below), which pursuant to
the Recapitalization Merger Agreement will become the Charter and Bylaws of
Paragon (the "Paragon Charter" and "Paragon Bylaws," respectively). The LCA
Charter is proposed to be amended and restated pursuant to the Amendment
Proposal as described under "Amendments to LCA Charter." Immediately following
the consummation of the Mergers, the Paragon Board will amend and restate the
current LCA Bylaws in a form agreed to in advance by Apollo, LCA and GranCare
pursuant to provisions of the Merger Agreements. Such amendments are described
below. The Paragon Charter and Paragon Bylaws as proposed to be amended and in
effect following the consummation of the Mergers are attached hereto as Annex
III and Annex IV. Also described below is the Stockholders Agreement attached
hereto as Annex V. See "Certain Other Agreements--Stockholders Agreement." The
rights of the holders of GranCare Common Stock are presently governed by the
GranCare Certificate of Incorporation, as amended (the "GranCare Charter") and
the GranCare Bylaws (the "GranCare Bylaws") and the DGCL.
The following summary, which does not purport to be a complete statement of
the differences between the GranCare Charter and Bylaws, the LCA Charter and
Bylaws and the Paragon Charter and Paragon Bylaws, is qualified in its
entirety by reference to the full text of each of such documents, the
Stockholders Agreement and the DGCL. For information as to how such documents
may be obtained, see "Available Information" and "Incorporation of Documents
by Reference."
PREFERRED STOCK PURCHASE RIGHTS
As described above ("Description of LCA Capital Stock--Rights to Purchase
Preferred Stock") each present outstanding share of LCA Common Stock has an
associated Preferred Stock Purchase Right. Such Preferred Stock Purchase Right
may deter some takeover attempts and give the LCA Board the ability,
consistent with its fiduciary duties, to respond to a takeover attempt in what
the LCA Board believes to be the best interests of LCA and its stockholders.
GranCare has no similar plan. The LCA Rights Plan will be amended in
connection with the Mergers to no longer be effective.
CLASSIFIED BOARD OF DIRECTORS
Section 141(d) of the DGCL provides that a corporation's board of directors
may be divided into various classes with staggered terms of offices. Unlike
the GranCare Charter and GranCare Bylaws, which do not provide for a
classified board, the LCA Charter and LCA Bylaws presently provide that the
LCA Board be divided into three classes of directors, as nearly equal in
number as possible. At each annual meeting of stockholders, one class of
directors is elected for a three-year term.
Classification of directors has the effect of making it more difficult for
stockholders to change the composition of the board of directors. With a board
classified into three classes, at least two annual meetings of stockholders,
instead of one, will generally be required to effect a change in the majority
of the board of directors. Such a delay may help ensure that LCA's directors,
if confronted by a person attempting to force a proxy contest, a tender or
exchange offer or other extraordinary corporate transaction, would have
sufficient time to review the proposal as well as any available alternative to
the proposal and to act in what they believe to be the best interests of the
stockholders. The classification provisions could also have the effect of
discouraging a third party from initiating a proxy contest, making a tender
offer or otherwise attempting to obtain control of LCA, even though such a
transaction could be beneficial to LCA and its stockholders.
The Paragon Charter will not provide for a classified board. Instead, as is
the case currently for GranCare, all directors will be elected annually for a
one-year term.
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NUMBER OF DIRECTORS; REMOVAL OF DIRECTORS; FILLING VACANCIES ON THE BOARD OF
DIRECTORS
The GranCare Bylaws provide that the GranCare Board will set the number of
directors, which number is currently set at eleven. The LCA Charter and LCA
Bylaws provide that the LCA Board shall consist of such number of directors,
not less than three or more than nine, as may be determined from time to time
by resolution adopted by a vote of at least three-fourths of the entire LCA
Board, which number is currently set at seven. The Paragon Charter and Paragon
Bylaws provide that Paragon Board shall consist of such number of directors,
not less than five nor more than 15, as may be determined from time to time by
resolution adopted by a vote of at least two-thirds of the entire Paragon
Board. Following the consummation of the Mergers, Apollo, LCA and GranCare
have agreed that the Paragon Board shall consist of 11 members, six of whom
shall initially be appointed by Apollo, three of whom shall be initially
appointed by GranCare, one of whom shall initially be appointed by LCA and one
of whom will be Mr. Keith B. Pitts (Paragon's Chief Executive Officer). See
"Certain Other Agreements." The Paragon Bylaws will provide for all
nominations to be made by the Nominating Committee.
The GranCare Bylaws provide that any vacancies (including newly created
directorships resulting from any increase in the authorized number of
directors) shall be filled by a majority of the directors then in office,
though less than a quorum, or by an affirmative vote at any annual or special
meeting of the stockholders, called for the purpose of filling such
directorship, of the holders of a majority of the outstanding shares of each
class of capital stock then entitled to vote. Each successor director so
chosen shall hold office until the next election and until his respective
successor shall have been duly elected and qualified. The LCA Bylaws provide
that any vacancies and newly created directorships shall be filled by the
affirmative vote of a majority of the directors then in office unless the
number of directors voting constitutes less than two-thirds of the number
previously authorized, then by the affirmative vote of all directors then in
office, though less than a quorum, or by a sole remaining director. The
Paragon Bylaws provide that vacancies and newly created directorships
resulting from any increase in the authorized number of directors may be
filled by the affirmative vote of at least a two-thirds majority of the entire
nominating committee, although by virtue of the Stockholders Agreement to be
entered into by Apollo and Paragon, if any vacancy is caused by the death,
resignation or removal of an Apollo designee, or if any such vacancy results
from an increase in the number of directors such that the number of Apollo
designees as compared to the total number of directors is less than Apollo's
percentage ownership of Paragon Common Stock outstanding then Apollo will
designate a person to fill such vacancy. Apollo will be able to designate such
number of additional directors as will cause its percentage of the directors
to be not less than its percentage ownership of Paragon Common Stock
outstanding.
The GranCare Bylaws provide that directors can be removed with or without
cause at any annual or special meeting of stockholders, upon the affirmative
vote of the holders of a majority in voting power of the outstanding shares of
each class of capital stock then entitled to vote in person or by proxy at an
election of directors, provided that notice of the intention to act upon such
matter shall have been given in the notice calling such meeting. The LCA
Charter provides that a director may not be removed during his term without
cause. The Paragon Charter will provide that any member of the Paragon Board
may be removed with or without cause by the affirmative vote of the holders of
at least two-thirds of the combined voting power of all of the then
outstanding shares of capital stock of Paragon entitled to vote in the
election of directors, voting together as a single class.
ADJOURNMENT AND NOTICE OF STOCKHOLDER MEETINGS
The GranCare Bylaws provide that if a quorum is not present, in person or by
proxy, at any meeting of stockholders, the stockholders entitled to vote
thereat who are present, in person or by proxy (or if no stockholder entitled
to vote is present, any officer of GranCare), may adjourn the meeting from
time to time without notice other than announcement at the meeting of the time
and place of the adjourned meeting unless the GranCare Board, after such
adjournment, fixes a new record date for the adjourned meeting), until a
quorum shall be present in person or by proxy, provided that, if the
adjournment is for more than 30 days or if after the adjournment a new record
date is fixed for the adjourned meeting, a notice of the adjourned meeting
shall be given to each stockholder of record entitled to vote at the adjourned
meeting. The LCA Bylaws and the Paragon Bylaws provide that, if a quorum in
not present or represented at any meeting of the stockholders, the
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stockholders entitled to vote, present in person or represented by proxy, have
the power to adjourn the meeting from time to time without notice other than
announcement at the meeting, until a quorum is present or represented.
The GranCare Bylaws establish advance notice procedures in connection with
the nomination of candidates for election as directors and with regard to
certain matters to be brought before an annual meeting of stockholders. These
procedures provide that the notice of proposed stockholder nominations for the
election of directors must be timely given in writing to the Secretary of
GranCare prior to the meeting at which directors are to be elected. The
procedures also provide that at any annual meeting and subject to any other
applicable requirements, only such business may be conducted as has been
brought before the meeting, by, or at the direction of, the Board of Directors
or by a stockholder who has given timely prior written notice to the Secretary
of GranCare of such stockholders' intention to bring such business before the
meeting. In all cases, to be timely, notice must be received by the Secretary
of GranCare at the principal executive offices of GranCare not later than the
close of business on the 60th day nor earlier than the close of business on
the 90th day prior to the first anniversary of the preceding year's annual
meeting; provided, however, that in the event that the date of the annual
meeting is more than 30 days before or more than 60 days after such
anniversary date, notice by the stockholder to be timely must be so delivered
not earlier than the close of business on the ninetieth day prior to such
annual meeting and not later than the close of business on the later of the
sixtieth day prior to such annual meeting or the tenth day following the day
on which public announcement of the date of such meeting is first made by
GranCare. In no event shall the public announcement of an adjournment of an
annual meeting commence a new time period for the giving of a stockholder's
notice as described above. The notice must contain certain information
specified in the GranCare Bylaws.
Each of the LCA Bylaws and Paragon Bylaws establish advance notice
procedures with regard to the nomination, other than by or at the direction of
the LCA Board or Paragon Board, as the case may be, of candidates for election
as directors and with regard to certain matters to be brought before an annual
meeting of stockholders. These procedures provide that the notice of proposed
stockholder nominations for the election of directors must be timely given in
writing to the Secretary of LCA or Paragon, as the case may be, prior to the
meeting at which directors are to be elected. The procedures also provide that
at any annual meeting, and subject to any other applicable requirements, only
such business may be conducted as has been brought before the meeting by, or
at the direction of, the Board of Directors or by a stockholder who has given
timely prior written notice to the Secretary of LCA or Paragon, as the case
may be, of such stockholder's intention to bring such business before the
meeting. In all cases, to be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of LCA or
Paragon, as the case may be, not less than 30 days nor more than 60 days prior
to the meeting as originally scheduled; provided, however, that if less than
40 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later than the close of business on the tenth day following the
day on which such notice of the date of the annual meeting was mailed or such
public disclosure was made. Any adjournment(s) or postponement(s) of the
original meeting whereby the meeting will reconvene within 30 days from the
original date shall be deemed for purposes of notice to be a continuation of
the original meeting and no business may be brought before any such reconvened
meeting unless timely notice of such business was given to the Secretary of
LCA or Paragon, as the case may be, for the meeting as originally scheduled.
The notice must contain certain information specified in the LCA Bylaws or
Paragon Bylaws, as the case may be.
CALL OF SPECIAL STOCKHOLDER MEETINGS
The GranCare Charter and GranCare Bylaws provide that special meetings of
stockholders may be called only by the GranCare Board pursuant to a resolution
adopted by a majority of the directors then serving, by the Chairman of the
Board, if such office has been filled, or by the Chief Executive Officer, if
the office of the Chairman has not been filled. The LCA Charter and LCA Bylaws
and the Paragon Bylaws provide that special meetings of stockholders may be
called at any time by the Board of Directors or by a committee of the Board of
Directors that has been duly designated by the Board of Directors and whose
power and authority, as provided in the resolution of the Board of Directors
or in the LCA Bylaws or Paragon Bylaws, as the case may be,
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include the power to call such meetings. Special meetings of the stockholders
of Paragon may also be called by one or more stockholders holding in the
aggregate no less than 25% of the then outstanding shares of the Paragon
Common Stock. Special meetings of the stockholders of LCA or Paragon may not
be called by any other person or persons. Business transacted at any special
meeting of the stockholders shall be limited to the purposes stated in the
notice.
STOCKHOLDER CONSENT IN LIEU OF MEETING
The GranCare Charter provides that no action that is required or permitted
to be taken by the stockholders of GranCare at any annual or special meeting
of the stockholders may be effected by written consent of stockholders in lieu
of a meeting of stockholders, unless the action to be effected by written
consent of stockholders and the taking of such action by such written consent
has expressly been approved in advance by the GranCare Board. The LCA Charter
provides that no action may be taken by its stockholders except at an annual
or special meeting of such stockholders and stockholders of LCA may not act by
written consent. The Paragon Charter does not restrict stockholder action by
written consent. The Paragon Bylaws provide that stockholder action permitted
to be taken at an annual or at a special meeting of stockholders may be taken
by written consent if such consent is signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote on such action were present.
BUSINESS COMBINATIONS
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the date
that such stockholder becomes an interested stockholder unless certain
conditions are satisfied. One of the conditions includes prior approval by the
board of directors of either the transaction in which a person became an
"interested stockholder" or the "business combination."
Generally, Section 203 of the DGCL prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless (i) prior to the
date of the business combination, the transaction is approved by the board of
directors of the corporation, (ii) upon consummation of the transaction which
resulted in the stockholder becoming an interested stockholder, the interested
stockholder owns at least 85% of the outstanding voting stock or (iii) on or
after such date the business combination is approved by the board and by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder. A "business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit
to the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or if such stockholder is an affiliate or
associate, within three years, did own) 15% or more of the corporation's
voting stock.
The Paragon Bylaws provide that any transaction whereby Apollo will transfer
its rights under the Stockholders Agreement to another person (who would
thereby become an "interested stockholder") must be approved by both a two-
thirds vote of the entire board of directors and by a majority of the
directors not having a financial interest in the transaction, and any such
approval will be deemed approval under Section 203 of the DGCL.
While the Recapitalization Merger (the transaction by which Apollo will
become an "interested stockholder") has been approved by LCA Board of
Directors, and thus the limitations on Apollo's effecting a "business
combination" under Section 203 of the DGCL will not apply, the Paragon Bylaws
provide that any transaction that Apollo proposes to enter into with Paragon
that would have otherwise constituted a "business combination" must be
approved by both two-thirds of the entire board of directors and by a majority
of the directors who do not have a financial interest in the transaction.
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The LCA Charter contains a "fair price" provision that requires the approval
of holders of not less than 66 2/3% of the outstanding shares of voting stock
of LCA (including not less than 66 2/3% of the outstanding shares of voting
stock not owned, directly or indirectly, by persons who are Related Persons
(as defined below) unless the business combination is approved by the holders
of not less than 90% of the outstanding shares of voting stock of LCA) as a
condition for mergers, consolidations and certain other business combinations
involving LCA and any Related Person. Related Persons include holders of 10%
or more of LCA's outstanding voting stock and any affiliate of such person.
The 66 2/3% voting requirement of the "fair price" provision is not applicable
to a business combination involving a holder of 10% or more of LCA's
outstanding voting stock if (i) the acquisition by such holder of such stock
or the transaction is approved in advance of such person becoming a holder of
10% of LCA's outstanding voting stock by not less than 75% of the directors of
LCA then holding office; (ii) the business combination is between LCA and a
wholly owned subsidiary; or (iii) all the following conditions are met: (a)
the transaction is a merger or consolidation proposed to occur within one year
of the time such holder acquired 10% of LCA's outstanding voting stock and the
price to be paid to holders of LCA Common Stock is at least as high as the
highest price paid by such holder in acquiring any of its Common Stock, (b)
the consideration to be paid in the transaction is cash or the same form of
consideration paid by such holder to acquire a majority of its holdings of LCA
Common Stock, (c) between the date of the acquisition by such holder of 10% of
LCA's outstanding voting stock and the transaction there has been no failure
to declare and pay preferred quarterly stock dividends and no reduction in LCA
Common Stock dividends (except as approved by a majority of the unaffiliated
directors), no further acquisition of voting stock by such holder and no
benefit, direct or indirect, received by such holder through loans or other
financial assistance from LCA or tax credits or other tax advantages provided
by LCA, and (d) a proxy statement shall have been mailed to stockholders of
record at least 30 days prior to the consummation of the transaction for the
purpose of soliciting stockholder approval of such transaction.
The Paragon Charter will not contain the "fair price" provision of the LCA
Charter described above.
SUPER-MAJORITY VOTE REQUIREMENTS
Unless otherwise specified in the certificate of incorporation, the DGCL
permits a corporation's certificate of incorporation to be amended by the
affirmative vote of a majority of the outstanding stock entitled to vote and a
majority of the outstanding stock of each class entitled to vote as a class.
The LCA Charter provides that the vote of two-thirds of all shares of stock
entitled to vote in the election of directors is required in order to amend
the provisions regarding cumulative voting for and classification and number
of directors, amendment of the LCA Bylaws, liability of directors, stockholder
action without a meeting, and the stockholder vote required for certain
business combinations. All other provisions of the LCA Charter may be amended
as provided by statute.
The GranCare Charter provides that it may be amended by the holders of a
majority of the outstanding stock of each class of stock entitled to vote.
The Paragon Charter will provide that the vote of two-thirds of all shares
of stock entitled to vote in the election of directors will be required in
order to amend the provisions regarding removal of directors, liability of
directors, the alteration of bylaws by stockholder action and the procedures
for amendments to the Paragon Charter.
The Paragon Bylaws require the affirmative vote of at least two-thirds of
the entire Paragon Board (determined by rounding such percentage of the entire
Paragon Board to the nearest whole number) to authorize (i) certain business
combinations including those involving Apollo, (ii) investments in lines of
business other than those operated by LCA on June 1, 1997, (iii) the
incurrence of new indebtedness in a principal amount in excess of $25,000,000,
with specified exceptions, (iv) the issuance of equity securities and the
declaration of dividends or distributions on equity securities otherwise than
pursuant to employee benefit plans approved by the Board of Directors, (v)
amendments to the Paragon Charter or the Paragon Bylaws, (vi) the designation
of committees of the Board of Directors, (vii) the dissolution or liquidation
of Paragon (or the filing of a
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petition for relief under the United States Bankruptcy Code), (viii) the
giving of approvals under Section 203 of the DGCL, (ix) election or removal of
officers of Paragon, (x) entering into any transaction with an officer or
director of Paragon unless approval of the transaction has been delegated by
vote two thirds of the entire Board of Directors to a committee which does not
include such officer or director as a member, and (xi) any amendments or
supplements to the Stockholders Agreement with Apollo.
Because Apollo's nominees represent greater than one-third of the entire
Paragon Board, Apollo may be able to prevent certain actions from being taken
that require a super-majority vote of the Paragon Board. See "Certain Other
Agreements--Stockholders Agreement."
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the DGCL permits a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a
manner they reasonably believed to be in, or not opposed to, the best interest
of the corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. Sections 145(e) and 145(g),
respectively, of the DGCL provide that a corporation may advance expenses of
defense (upon receipt of a written undertaking to reimburse the corporation if
indemnification is not appropriate) and must reimburse a successful defendant
for expenses, including attorney's fees, actually and reasonably incurred, and
permits a corporation to purchase and maintain liability insurance for its
directors and officers. Section 145(b) of the DGCL provides that
indemnification may not be made for any claim, issue or matter as to which a
person has been adjudged by a court of competent jurisdiction, after
exhaustion of all appeals therefrom, to be liable to the corporation, except
only to the extent a court determines that the person is entitled to indemnity
for such expenses that such court deems proper.
The GranCare Charter provides that to the extent not prohibited by law,
GranCare shall indemnify any person who is or was made, or threatened to be
made, a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative,
including, without limitation, an action by or in the right of GranCare to
procure a judgment in its favor, by reason of the fact that such person, or a
person of whom such person is the legal representative, is or was a director
or officer of GranCare, or is or was serving in such capacity at the request
of GranCare for any other corporation, partnership, joint venture, limited
liability company, trust, employee benefit plan or other legal entity or
enterprise against judgments, fines, penalties, excise taxes, amounts paid in
settlement and costs, charges and expenses (including attorneys' fees and
disbursements). Persons who are not directors or officers of GranCare may be
similarly indemnified in respect of service to GranCare to the extent the
Board of Directors of GranCare at any time specifies that such persons are
entitled to such benefits. GranCare shall, from time to time, reimburse or
advance to any director or officer or other person entitled to
indemnification, the funds necessary for payment of expenses, including
attorneys' fees and disbursements, incurred in connection with defending any
above-mentioned proceeding, in advance of the final disposition of such
proceeding; provided, however, that, if then required by the DGCL, such
expenses incurred by or on behalf of any director or officer or other person
may be paid in advance of the final disposition of such proceeding only upon
receipt by GranCare of an undertaking, by or on behalf of such director or
officer (or other indemnified person), to repay any such amount so advanced,
if it shall ultimately be determined that such director, officer or other
person is not entitled to be indemnified for such expenses under existing law.
The indemnification rights conferred by the GranCare Bylaws are not exclusive
of any other right to which a person seeking indemnification may be entitled
under any law, bylaw, agreement, vote of stockholders or disinterested
directors or otherwise. GranCare is authorized to purchase and maintain
insurance on behalf of its directors, officers, employees and agents.
Each of the LCA Charter and LCA Bylaws and the Paragon Charter and Paragon
Bylaws contain similar provisions relating to indemnification. Specifically,
the LCA Bylaws and the Paragon Bylaws provide that such corporation shall
indemnify any person who was or is an authorized representative of such
corporation and who was or is a party, or is threatened to be made a party to
any third party or corporate proceeding by reason of the fact that such person
was or is an authorized representative of such corporation, against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such third party or corporate
proceeding if such person acted in good faith and in a manner such person
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reasonably believed to be in, or not opposed to, the best interests of such
corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
proceeding by judgement, order, settlement, indictment, conviction or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the authorized representative did not act in good faith and
in a manner which such person reasonably believed to be in, or not opposed to,
the best interests of such corporation, and, with respect to any criminal
third party proceeding, had reasonable cause to believe that such conduct was
unlawful. However, with respect to corporate proceedings no indemnification
shall be made in respect to any claim, issue or matter as to which such person
shall have been adjudged to be liable to such corporation unless and only to
the extent that the Court of Chancery or the court in which such corporate
proceeding was brought shall determine upon application that, despite the
adjudication of liability but in view of all the circumstances of the case,
such authorized representative is fairly and reasonably entitled to indemnity
for such expenses which the Court of Chancery or such other court shall deem
proper. Expenses actually and reasonably incurred by an officer or director or
authorized representative in defending any third party proceeding or corporate
proceeding shall be paid on behalf of an officer or director or authorized
representative by such corporation in advance of the final disposition of such
third party proceeding or corporate proceeding upon receipt of an undertaking
by or on behalf of such officer or director or authorized representative to
repay such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by such corporation. Each such corporation is
authorized to purchase and maintain insurance on behalf of its directors,
officers, employees and agents.
DIRECTOR LIABILITY
Section 102(b)(7) of the DGCL permits a corporation to include a provision
in its certificate of incorporation eliminating or limiting the personal
liability of a director to the corporation or its stockholders for damages for
breach of the director's fiduciary duty subject to certain limitations. Each
of the GranCare Charter, the LCA Charter and the Paragon Charter include such
a provision, as set forth below, to the maximum extent permitted by law.
The GranCare Charter provides that a director will not be personally liable
to the corporation or its stockholders of monetary damages for breach of
fiduciary duty as a director, except to the extent such exemption from
liability or limitation thereof is not permitted under the DGCL. Each of the
LCA Charter and the Paragon Charter provide that a director will not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the DGCL, which concerns unlawful payments of dividends, stock purchases or
redemption or (iv) for any transaction from which the director derived an
improper personal benefit. While these provisions provide directors with
protection from liability for monetary damages for breaches of their duty of
care, they do not eliminate such duty. Accordingly, these provisions will have
no effect on the availability of equitable remedies such as an injunction or
rescission based on a director's breach of his or her duty of care. The
provisions described above apply to an officer of the corporation only if he
or she is a director of the corporation and is acting in his or her capacity
as director, and do not apply to officers of the corporation who are not
directors.
AMENDMENTS TO BYLAWS
Delaware law provides that the stockholders, and, if provided in the
charter, the directors, are entitled to amend the bylaws. The GranCare Charter
and GranCare Bylaws provide that the Board of Directors may make, alter or
repeal the GranCare Bylaws subject to the right of the stockholders entitled
to vote thereon to adopt, alter, amend, and repeal bylaws made by the GranCare
Board or to make new bylaws provided, however, that the stockholders may
adopt, alter, amend or repeal bylaws made by the GranCare Board or make new
bylaws only upon the affirmative vote of the holders of a majority of the
outstanding shares of each class of capital stock of GranCare entitled to
vote. The LCA Bylaws provide that the LCA Board may make, alter or repeal the
LCA Bylaws at any regular meeting of the stockholders or the LCA Board or at
any special meeting of the
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stockholders or the LCA Board if notice of such alteration, amendment, repeal
or adoption of new bylaws is contained in the notice of such special meeting,
but, that changes to the LCA Bylaws may not be made, or such bylaws may not be
repealed, altered, amended or rescinded by the stockholders except by the vote
of the holders of not less than 66 2/3% of the total voting power of all
shares of stock entitled to vote in the election of directors, considered for
these purposes as one class.
The Paragon Charter provides that the stockholders may amend the Paragon
Bylaws by a vote of two-thirds of the total voting power of all the shares of
stock entitled to vote in the election of directors considered as a single
class and the Paragon Bylaws provide that the Paragon Board may amend such
bylaws by affirmative vote of directors constituting at least two-thirds of
the entire board of directors.
LEGAL OPINIONS
The legality of the Paragon Common Stock will be passed upon for LCA by
Mayor, Day, Caldwell & Keeton, L.L.P., counsel to LCA.
Mayor, Day, Caldwell & Keeton, L.L.P., counsel to LCA, and Powell,
Goldstein, Frazer & Murphy LLP, and Andrews & Kurth L.L.P., counsel to
GranCare, have delivered opinions concerning certain federal income tax
consequences of the Mergers.
Mr. Rogers, a member of the LCA Board, is a partner in the firm of Mayor,
Day, Caldwell & Keeton, L.L.P.
EXPERTS
The consolidated financial statements and schedules of Living Centers of
America, Inc. and GranCare, Inc. appearing or incorporated by reference in
this Proxy Statement/Prospectus have been audited by Ernst & Young LLP,
independent auditors, to the extent indicated in their reports thereon also
appearing elsewhere herein or incorporated herein by reference, which with
respect to the report pertaining to the financial statements of GranCare for
the fiscal year ended December 31, 1994, is based in part on the report of
KPMG Peat Marwick LLP, independent auditors. Such consolidated financial
statements and schedules have been included herein or incorporated herein by
reference in reliance upon such reports given upon the authority of such firms
as experts in accounting and auditing.
STOCKHOLDER PROPOSALS
Whether or not the Mergers are consummated, any stockholder proposal
intended to be presented at LCA's or Paragon's 1998 annual meeting of
stockholders, must have been received by LCA by August 29, 1997, in order to
be included in the company's proxy statement. If the GranCare Merger is not
consummated, any GranCare Stockholder proposal to be presented at GranCare's
1998 annual meeting, must be received by GranCare by March 14, 1998 in order
to be included in GranCare's proxy statement.
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GLOSSARY OF SELECT TERMS
<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
Accountability Act............... The Health Insurance Portability and
Accountability Act of 1996 (Risk Factors)
Amendment Proposal............... Proposal for LCA stockholders to approve
amendments to the LCA Charter as
contemplated by the Recapitalization Merger
Agreement (Prospectus Cover Pages)
AMS Properties................... AMS Properties, Inc., a wholly owned
subsidiary of GranCare (Description of
Financing)
Annual Incentive Plan............ Certain cash incentive plans maintained by
GranCare that provide for annual cash
bonuses (Amendments to LCA Charter)
Apollo........................... Apollo Management, L.P. on behalf of one or
more of its managed investment funds
(Prospectus Cover Pages)
Apollo Investors................. Apollo and certain other purchasers of
Paragon Common Stock in connection with the
Recapitalization Merger (Prospectus Cover
Pages)
Apollo Letter.................... A letter agreement between Apollo and
GranCare, dated May 7, 1997, relating to
the reimbursement by GranCare of certain
expenses incurred by Apollo (Summary)
Apollo Sub....................... A new wholly-owned subsidiary of Apollo
Management, L.P. (Prospectus Cover Page)
Apollo Sub Shares................ Common stock of Apollo Sub, par value $.01
per share (Description of the Transactions)
APS.............................. American Pharmaceutical Services, LCA's
pharmaceutical services subsidiary (Risk
Factors)
ARS.............................. American Rehabilitation Services, Inc.,
LCA's rehabilitation services subsidiary
(Description of the Transactions)
BCC.............................. The Brian Center Corporation (Certain
Information Concerning LCA)
Chase............................ Chase Securities Inc. (Summary)
Chase Opinion.................... Chase's written opinion dated September 15,
1997 (Summary)
CMB.............................. The Chase Manhattan Bank (Summary)
Code............................. The Internal Revenue code of 1986, as
amended (Summary)
Commission....................... Securities and Exchange Commission
(Prospectus Cover Pages)
CON.............................. Certificate of Need (Certain Information
Concerning LCA)
Convertible Debentures........... GranCare's outstanding 6.5% convertible
debentures due 2003 (GranCare Management's
Discussion And Analysis Of Financial
Condition And Results Of Operations)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
Credit Facility.................. New credit facility in the aggregate amount
of $300 million that has replaced the
Predecessor Credit Facility (GranCare
Management's Discussion And Analysis Of
Financial Condition And Results Of
Operations)
CSFB............................. Credit Suisse First Boston Corporation
(Summary)
Debt Financing................... The New Credit Facility and the Senior
Subordinated Debt (Summary)
Deferred Compensation Program.... GranCare's deferred compensation program
for eligible employees of GranCare
(Director's And Officers Of Paragon
Following The Merger)
Deferred Plans................... The LCA Deferred Retirement Income Plan and
Retirement Savings 401(k) Plan (The
Recapitalization Merger Agreement)
DGCL............................. The Delaware General Corporation Law
(Prospectus Cover Pages)
Discount Notes................... Senior Subordinated Discount Notes due 2007
(Summary)
Distribution..................... Distribution of all of the outstanding
shares of GranCare's outstanding Common
Stock to the shareholders of Old GranCare
prior to the Vitalink Merger (Summary)
Exchange Act..................... Securities Exchange Act of 1934, as amended
(Available Information)
Exchange Agent................... American Stock Transfer & Trust Company
(The GranCare Merger Agreement)
Exchange Ratio................... The exchange ratio at which a share of
GranCare Common Stock will be converted
into 0.2346 of a share of Paragon Common
Stock in the GranCare Merger Agreement
(Summary)
Existing GranCare Credit Facility An existing $300 million term and revolving
................................ credit facility pursuant to the Existing
GranCare Credit Agreement (Description of
Financing)
Existing GranCare Term Loans..... A $100 million term loan all of which is
outstanding (Description of Financing)
Existing LCA Credit Agreement.... A Credit Agreement dated as of August 19,
1996 relating to a $500 million unsecured
senior revolving credit facility
(Description of Financing)
Existing LCA Credit Facility..... LCA's existing $500 million credit facility
with a syndicate of banks (Description of
Financing)
Financing Commitment Letter...... Commitment letter obtained from CMB and
Chase (Summary)
Form of LCA Stock Election....... A form of election prepared and mailed by
LCA to be used by LCA stockholders for
making an LCA Stock Election (Prospectus
Cover Pages)
GCIHCC........................... GCI Health Care Centers, Inc. (Description
of Financing)
GCIHCC Lease..................... A master lease agreement dated as of June
30, 1992 between HRPT and GCIHCC
(Description of Financing)
GranCare......................... GranCare, Inc. (Prospectus Cover Page)
GranCare Acquisition Any merger, consolidation, business
Transaction..................... combination, liquidation, reorganization,
sale of substantial assets, sale of shares
of capital stock or similar transactions
involving GranCare or any material
subsidiary of GranCare (The GranCare Merger
Agreement)
</TABLE>
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<TABLE>
<CAPTION>
TERM DEFINED AS (IN WHICH SECTION)
---- -----------------------------
<C> <S>
GranCare Board................... Board of Directors of GranCare (Prospectus
Cover Pages)
GranCare Bylaws.................. The GranCare Bylaws (Description Of LCA's
Capital Stock)
GranCare Cash Election Option.... An election (no longer included in the
terms of the GranCare Merger) pursuant to
which GranCare stockholders could elect in
the aggregate to receive $10 per share in
cash (subject to proration) for 10% of
GranCare Common Stock in connection with
the GranCare Merger (Background)
GranCare Certificates............ Certificates representing outstanding
shares of GranCare Common Stock (The
GranCare Merger Agreement)
GranCare Charter................. The GranCare Certificate of Incorporation,
as amended (Description Of LCA's Capital
Stock)
GranCare Common Stock............ Common stock of GranCare par value $.001
per share (Prospectus Cover Pages)
GranCare Financial Advisors...... Smith Barney and Chase (Summary)
GranCare Merger.................. The merger of GranCare with and into LCA
Sub with GranCare as the surviving
corporation, as a wholly-owned subsidiary
of Paragon (Prospectus Cover Pages)
GranCare Merger Agreement........ Agreement and Plan of Merger dated as of
May 7, 1997 as amended and restated as of
September 17, 1997 (Prospectus Cover Pages)
GranCare Merger Consideration.... The right of each share of GranCare Common
Stock to be converted into the right to
receive 0.2346 shares of Paragon Common
Stock (Summary)
GranCare Merger Proposal......... A proposal for GranCare Stockholders to
approve and adopt the GranCare Merger
Agreement (Prospectus Cover Pages)
GranCare Options................. Options to purchase shares of GranCare
Common Stock (Summary)
GranCare Plans................... GranCare's 1996 Replacement Stock Option
Plan, 1996 Stock Incentive Plan or Outside
Directors' Stock Incentive Plan (Summary)
GranCare Record Date............. Close of business on September 2, 1997
(Prospectus Cover Pages)
GranCare Special Meeting......... Special meeting of Stockholders of GranCare
to be held in Atlanta, Georgia on October
28, 1997, at 11 a.m., local time, and any
and all adjournments or postponements
thereof (Prospectus Cover Pages)
GranCare Termination Fee......... A fee payable by GranCare to LCA upon
termination of the GranCare Merger
Agreement under certain circumstances (The
GranCare Merger Agreement)
HRPT............................. Health and Rehabilitation Properties Trust
(Description of Financing)
HRPT Acquisition Agreement....... An Acquisition Agreement, Agreement to
Lease and Mortgage Loan Agreement dated as
of December 28, 1990 (Description of
Financing)
HRPT/GranCare Restructuring...... The restructuring of GranCare's
relationship with HRPT (Summary)
HRPT Letter of Credit............ An irrevocable letter of credit issued by
First Union under the Existing GranCare
Credit Facility in the amount of
$15,000,000 payable to Vitalink in the
event Vitalink makes any payments under the
limited guaranty (Description of Financing)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
HRPT Loan........................ A mortgage loan to AMS Properties in the
original principal amount of $11,500,000 of
which HRPT is the holder (Description of
Financing)
HRPT Mortgage.................... Mortgage and security agreements dated as
of March 31, 1995 that, in part, secure the
HRPT Loan (Description of Financing)
HRPT Obligations................. Limited guaranty by Vitalink of the
obligations or GranCare, AMS Properties,
and GCIHCC and under the HPRT Mortgages,
the GCIHCC Lease, and HRPT Loan
(Description of Financing)
HSR Act.......................... The Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended
(Summary)
Initial Maturity Date............ 1 year from the date of issue of the
Standby Senior Subordinated Credit Facility
(Description of Financing)
Institutional Pharmacy Business.. Old GranCare's institutional pharmacy
business (also called TeamCare) (Summary)
IRS.............................. Internal Revenue Service (The
Recapitalization Merger Agreement)
June 12 GranCare Merger The GranCare Merger Agreement as amended
Agreement....................... and restated as of June 12, 1997
(Description of the Transactions)
June 12 Merger Agreements........ The Merger Agreements as amended and
restated as of June 12, 1997 (Description
of the Transactions)
June 12 Recapitalization
Merger Agreement................. The Recapitalization Merger Agreement as
amended and restated as of June 12, 1997
(Description of the Transactions)
LCA.............................. Living Centers of America, Inc. (Prospectus
Cover Pages)
LCA Acquisition Transaction...... Any merger, consolidation, business
combination, liquidation, reorganization,
sale of substantial assets, sale of shares
of capital stock or similar transactions
involving LCA or any material subsidiary of
LCA (The Recapitalization Merger Agreement)
LCA Bylaws....................... LCA Bylaws (Description Of LCA's Capital
Stock)
LCA Board........................ Board of Directors of LCA (Prospectus Cover
Pages)
LCA Cash Price................... $40.50 per share of LCA Common Stock in
cash (Prospectus Cover Pages)
LCA Charter...................... Restated Certificate of Incorporation of
LCA (Prospectus Cover Pages)
LCA Common Stock................. Common stock of LCA, par value $.01 per
share (Prospectus Cover Pages)
LCA Electing Shares.............. LCA Common Stock in respect of which an LCA
Stock Election has been made (Prospectus
Cover Pages)
LCA Election Deadline............ 5:00 p.m. New York City time on the
business day immediately preceding the day
on which the vote on the Recapitalization
Merger is taken at the LCA Special Meeting
(or any adjournment thereof) (Prospectus
Cover Pages)
LCA Financial Advisors........... CSFB and NationsBanc (Summary)
LCA Proposals.................... The Recapitalization Proposal, the LCA
Stock Issuance Proposal and the Amendment
Proposal (Prospectus Cover Pages)
LCA Record Date ................. Close of business on September 2, 1997
(Prospectus Cover Pages)
LCA Retained Share Number........ 1,905,748 shares of LCA Common Stock
(Prospectus Cover Pages)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
LCA Retained Shares.............. The 1,905,748 shares of LCA Common Stock
outstanding immediately prior to the
effective time of the Recapitalization
Merger to remain outstanding as shares of
Paragon Common Stock (Prospectus Cover
Pages)
LCA Rights....................... Options, warrants or rights to acquire
shares of LCA Common Stock (including,
without limitation, any stock option, stock
purchase, restricted stock or other plan),
whether or not such options or rights are
then vested or exercisable (Summary)
LCA Rights Agreement............. A Rights Agreement dated as of November 17,
1994, as it may from time to time be
supplemented or amended between LCA and
Chemical Bank (Description Of LCA's Capital
Stock)
LCA Special Committee............ The special committee of the LCA Board
(Summary)
LCA Special Meeting ............. Special meeting of Stockholders of LCA to
be held in Houston, Texas on October 28,
1997 at 10:00 a.m., local time, and any or
all adjournments or postponements thereof
(Prospectus Cover Pages)
LCA Stock Election............... An election by an LCA stockholder to retain
LCA Common Stock as LCA Retained Shares
(Prospectus Cover Pages)
LCA Stock Issuance Proposal...... Proposal for LCA stockholders to approve
the issuance of shares of Paragon Common
Stock to Grancare stockholders (Prospectus
Cover Pages)
LCA Stock Plans.................. Any LCA employee benefit or stock plan
(including, without limitation, any stock
option, stock purchase, restricted stock or
other plan) (The Recapitalization Merger
Agreement)
LCA Sub.......................... LCA Acquisition Sub, Inc., a wholly owned
subsidiary of LCA (Prospectus Cover Pages)
Manor Care....................... Manor Care, Inc. (Summary)
Medicaid......................... Healthcare assistance to low income
individuals (Certain Information Concerning
GranCare)
Mergers.......................... The Recapitalization Merger and the
GranCare Merger (Prospectus Cover Pages)
NationsBanc...................... NationsBanc Capital Markets, Inc. (Summary)
New Credit Facility.............. $840 million credit facility to replace the
existing LCA Credit Facility (Description
of Financing)
Non-Apollo Affiliate Directors... Seven of the 11 Paragon directors who are
not Apollo partners, officers, directors or
employees or otherwise associated with
Apollo (Certain Other Agreements)
Non-Competition Agreement........ GranCare's non-competition agreement
entered into with Vitalink and Manor Care
in connection with the Vitalink Merger
(Summary)
Notes............................ Senior Subordinated Notes and Senior
Subordinated Discount Notes
NYSE............................. New York Stock Exchange (Prospectus Cover
Pages)
OBRA............................. The Omnibus Budget Reconciliation Act of
1987 (Certain Information Concerning
GranCare)
OBRA '93......................... Omnibus Budget Reconciliation Act of 1993
(Certain Information Concerning GranCare)
Old GranCare..................... GranCare, Inc., a California corporation
and the predecessor to the current
"GranCare" entity and from which the
current "GranCare" entity was spun off in
February 1997 in the Distribution. Old
GranCare was merged into Vitalink following
this Spin-off (Summary)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
Omega............................ Omega Healthcare Investors, Inc.
(Description of Financing)
Omega Loan....................... A loan granted by Omega to PHCMI
(Description of Financing)
Omega Loan Agreement............. The Omega Notes and the related Michigan
Loan Agreement dated as of June 7, 1992, as
amended (Description of Financing)
Omega Note....................... A $58,800,000 mortgage note executed by
PHCMI on August 14, 1992 in favor of Omega
(Description of Financing)
Original Merger Agreements....... The GranCare Merger Agreement dated as of
May 7, 1997 and the Recapitalization Merger
Agreement dated as of May 7, 1997 (Summary)
Other Bidder's Final Offers...... Indication by the Other Bidder that its
latest offers represented its final offers
(Description of the Transactions)
Paragon.......................... Paragon Health Network, Inc. as the
surviving corporation in the
Recapitalization Merger (Prospectus Cover
Pages)
Paragon Board.................... The Board of Directors of Paragon (Summary)
Paragon Bylaws................... The LCA Bylaws (as they would be amended at
the effective time of the Recapitalization
Merger), which pursuant to the
Recapitalization Merger Agreement will
become the Bylaws of Paragon (Description
Of LCA's Capital Stock)
Paragon Charter.................. The proposed Amended and Restated
Certificate of Incorporation of Paragon
(Prospectus Cover Pages)
Paragon Common Stock............. Common stock of Paragon, par value $.01 per
share (Prospectus Cover Pages)
Paying Agent..................... American Stock Transfer & Trust Company
(The Recapitalization Merger Agreement)
Pharmacy Agreements.............. GranCare's agreements with Vitalink
pursuant to which Vitalink will supply
certain pharmaceutical supplies and
consulting services to GranCare skilled
nursing facilities (Risk Factors)
Preferred Stock.................. 5,000,000 shares of preferred stock, par
value $.01 per share, of LCA (Description
Of LCA's Capital Stock)
Preferred Stock Purchase Right... A dividend of one right to purchase
preferred stock (Description Of LCA's
Capital Stock)
Proposals........................ The GranCare Merger Proposal together with
the LCA Proposals (Prospectus Cover Pages)
Proposed Revisions............... The revisions to the June 12 Merger
Agreements as amended as of September 9,
1997 as proposed by Apollo (Description of
the Transactions--Background to the
Transactions)
Proxy Statement/Prospectus....... This Joint Proxy Statement/Prospectus of
LCA and GranCare (Prospectus Cover Pages)
Recapitalization Merger.......... Recapitalization of LCA by the merger of
Apollo Sub with and into LCA with LCA as
the surviving corporation to be renamed
Paragon (Prospectus Cover Pages)
Recapitalization Merger The Agreement and Plan of Merger dated as
Agreement....................... of May 7, 1997, as amended and restated as
of September 17, 1997 (Prospectus Cover
Pages)
</TABLE>
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<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
Recapitalization Proposal........ Proposal for LCA Stockholders to adopt and
approve the Recapitalization Merger
Agreement (Prospectus Cover Pages)
Recapitalization Termination A fee payable by LCA to Apollo upon
Fee............................. termination of the Recapitalization Merger
Agreement under certain circumstances (The
Recapitalization Merger Agreement)
Registerable Shares.............. The shares of Paragon Common Stock acquired
by Apollo Investors in the Recapitalization
Merger (Certain Other Agreements)
Registration Rights Agreement.... An agreement between Paragon and the Apollo
Investors entitling Apollo to require
Paragon to register the shares of Paragon
Common Stock acquired by the Apollo
Investors in the Recapitalization Merger
(Certain Other Agreements)
Registration Statement........... The Registration Statement on Form S-4 of
which this Proxy Statement/Prospectus is a
part (Prospectus Cover Pages)
Related Persons.................. Persons who are beneficial owners of 10% or
more of LCA Common Stock and any of their
affiliates (Amendments to LCA Charter)
Replacement Options.............. A fully vested option to purchase shares of
Paragon Common Stock to replace the
GranCare Options (The GranCare Merger
Agreement)
Restructuring.................... Certain transactions engaged in by Old
GranCare and GranCare on February 12, 1997
(The GranCare Merger Agreement)
Revolving Credit Facility........ A 6.5 year revolving credit facility in the
maximum amount of $150,000,000 of LCA
(Description of Financing)
Revolving Loans.................. Advances under the Revolving Credit
Facility (Description of Financing)
Right Consideration.............. The formula consideration to be received by
holders of LCA Rights (The Recapitalization
Merger Agreement)
Rights Agreement Amendment....... An amendment to the LCA Rights Agreement
(The Recapitalization Merger Agreement)
Section 262...................... Section 262 of the DGCL (Stockholders'
Rights Of Appraisal)
Securities Act................... Securities Act of 1933, as amended (Cover
Page)
Senior Subordinated Debt......... The Notes and the Standby Senior
Subordinated Credit Facility (Summary)
Senior Subordinated Discount Senior subordinated discount notes due 2007
Notes........................... issued in a principal amount to yield
proceeds of $200 million (Summary)
Senior Subordinated Notes........ $300 million of senior subordinated notes
due 2007 (Summary)
Skilled Nursing Business......... All of Old GranCare non-institutional
pharmacy business, skilled nursing, home
health care, assisted living and contract
management businesses and related costs
(Summary)
Smith Barney..................... Smith Barney Inc. (Summary)
Special Meetings................. GranCare Special Meeting together with the
LCA Special Meeting (Prospectus Cover
Pages)
</TABLE>
191
<PAGE>
<TABLE>
<CAPTION>
DEFINED AS (PART OF PROXY
TERM STATEMENT/PROSPECTUS)
---- -------------------------
<C> <S>
Standby Senior Subordinated
Credit Facility.................. A standby senior subordinated credit
facility in the aggregate amount of $500
million that CMB has agreed to provide to
Paragon in the event that the offering of
the Senior Subordinated Notes is not
consummated (Summary)
Stockholders Agreement........... The Stockholder agreement to be entered
into between The Apollo Investors and
Paragon with respect to the governance of
Paragon (Summary)
TeamCare......................... Old GranCare's institutional pharmacy
business (also called Institutional
Pharmacy Business) (Summary)
Tenant Entities.................. AMS Properties, Inc. and GCI Health Care
Centers, Inc. (Description of Financing)
Term Loans ...................... Tranche A Term Loans, Tranche B Term Loans
and Tranche C Term Loans (Description of
Financing)
Termination Fee.................. A fee payable to Vitalink and ManorCare in
consideration of the early termination of
the Non-Competition Agreement (Summary)
TRA.............................. Termination and Release Agreement dated
September 3, 1997 (Summary)
Transactions..................... The Mergers, including the New Credit
Facility, the Senior Subordinated Notes,
the Standby Senior Subordinated Credit
Facility and approval of the Amendment
Proposal (Summary)
Vitalink......................... Vitalink Pharmacy Services, Inc. (Summary)
Vitalink Merger.................. The merger of Old GranCare with and into
Vitalink (Summary)
Working Capital Commitment....... Up to $75 million that may be advanced to
GranCare and be outstanding at any time
under the revolving loan commitment for
working capital and other general corporate
purposes (Description of Financing)
</TABLE>
192
<PAGE>
INDEX TO FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<S> <C>
GRANCARE, INC.
Reports of Independent Auditors........................................... F-2
Audited Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1996 and 1995............ F-4
Consolidated Statements of Income for the years ended December 31, 1996,
1995 and 1994.......................................................... F-5
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1996, 1995
and 1994............................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1995 and 1994.................................................... F-7
Notes to Consolidated Financial Statements.............................. F-9
Schedule II--Valuation and Qualifying Accounts.......................... F-31
Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheet as of June 30, 1997...... F-32
Unaudited Condensed Consolidated Statements of Income for the three and
six-month periods ended June 30, 1997 and 1996......................... F-33
Unaudited Condensed Consolidated Statements of Shareholders' Equity as
of June 30, 1997....................................................... F-34
Unaudited Condensed Consolidated Statements of Cash Flows for the three
and six-month periods ended June 30, 1997 and 1996..................... F-35
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-36
LIVING CENTERS OF AMERICA, INC.
</TABLE>
The financial statements of LCA have been incorporated by reference into
this Proxy Statement/Prospectus. See "Incorporation of Documents by
Reference."
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
GranCare, Inc.
We have audited the consolidated balance sheets of GranCare, Inc. (the
Company) as of December 31, 1996 and 1995, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits. We did
not audit the financial statements of Evergreen Healthcare, Inc. (Evergreen)
which became a wholly-owned subsidiary in 1995, as of December 31, 1994 and
for the year then ended. The Evergreen amounts represent 21% of the
consolidated total assets at December 31, 1994 and 38% of consolidated net
income for the year then ended. The financial statements were audited by other
auditors, whose report has been furnished to us, and our opinion, with respect
to the consolidated financial statements as of and for the year ended
December 31, 1994, insofar as it relates to data included for Evergreen, is
based solely on the report of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of GranCare, Inc. at
December 31, 1996 and 1995, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
Ernst & Young LLP
Atlanta, Georgia
February 25, 1997, except for Note 13 as to which the date is March 6, 1997
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Evergreen Healthcare, Inc.
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of Evergreen Healthcare, Inc. and subsidiaries (Company)
for the year ended December 31, 1994 (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated statements referred to above present fairly,
in all material respects, the results of operations and the cash flows of
Evergreen Healthcare, Inc. and subsidiaries for the year ended December 31,
1994, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Indianapolis, Indiana
August 17, 1995
F-3
<PAGE>
GRANCARE, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
DOLLARS IN THOUSANDS
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 14,512 $ 17,738
Accounts receivable, less allowance for doubtful ac-
counts (1996--$11,209 and 1995--$10,856)............ 233,335 173,068
Inventories.......................................... 17,312 13,527
Notes receivable (Notes 4 and 13).................... 24,520 4,100
Prepaid expenses and other current assets............ 18,786 12,398
Deferred income taxes (Note 8)....................... 9,239 10,933
---------- ----------
Total current assets................................... 317,704 231,764
Property and equipment:
Land and improvements................................ 10,382 10,238
Buildings and improvements........................... 176,846 192,875
Equipment............................................ 84,308 66,929
---------- ----------
271,536 270,042
Less accumulated depreciation........................ (64,387) (55,689)
---------- ----------
207,149 214,353
Other assets:
Investments, at fair value (Notes 5 and 12).......... 38,933 30,305
Goodwill (accumulated amortization: 1996--$10,332;
1995--$5,535)....................................... 133,152 120,946
Other intangibles (accumulated amortization: 1996--
$9,700; 1995--$8,051)............................... 11,613 9,793
Other (Note 2)....................................... 39,488 38,000
---------- ----------
Total assets........................................... $748,039 $ 645,161
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 79,824 $ 72,935
Accrued wages and related liabilities................ 21,541 24,069
Interest payable..................................... 8,235 6,793
Notes payable and current maturities of long-term
debt (Notes 4, 5 and 12)............................ 7,535 4,937
---------- ----------
Total current liabilities.............................. 117,135 108,734
Long-term debt (Notes 4, 5 and 12)..................... 382,242 334,668
Deferred income taxes (Note 8)......................... 23,084 16,735
Other.................................................. 11,278 12,425
Commitments and contingencies (Notes 6 and 7)
Shareholders' equity (Note 9):
Common stock; no par value; 50,000,000 shares autho-
rized (shares issued: 1996--23,677,825 and 1995--
23,948,728)......................................... 123,378 134,699
Treasury stock, at cost (1995--915,000 shares)....... -- (18,700)
Equity component of minimum pension liability........ (542) (465)
Unrealized gain on investments (net of income taxes:
1996--$4,573; 1995--$3,453)......................... 6,885 5,206
Retained earnings.................................... 84,579 51,859
---------- ----------
214,300 172,599
---------- ----------
Total liabilities and shareholders' equity............. $748,039 $ 645,161
========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
----------- ---------- ----------
DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA
<S> <C> <C> <C>
REVENUES
Net patient revenues........................ $ 977,787 $ 811,402 $ 701,783
Investment and other income (Note 2)........ 25,336 5,060 15,688
----------- ---------- ----------
Total revenues.............................. 1,003,123 816,462 717,471
EXPENSES
Operating expenses:
Salary and related........................ 417,046 360,530 322,471
Rent and property......................... 56,895 51,206 44,291
Other operating........................... 396,400 308,982 266,774
----------- ---------- ----------
870,341 720,718 633,536
Depreciation and amortization............... 25,949 21,611 16,440
Interest expense and financing charges...... 35,659 27,054 21,481
Nonrecurring costs--exit, merger and other
costs (Notes 4 and 13)..................... 18,400 11,750 --
Restructuring costs (Note 13)............... -- -- 8,200
----------- ---------- ----------
Total expenses.............................. 950,349 781,133 679,657
----------- ---------- ----------
Income before income taxes.................. 52,774 35,329 37,814
Income taxes................................ 20,054 14,765 13,524
----------- ---------- ----------
Net income.................................. $ 32,720 $ 20,564 $ 24,290
=========== ========== ==========
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE:
Primary................................... $ 1.36 $ 0.86 $ 1.07
=========== ========== ==========
Fully diluted............................. $ 1.33 $ 0.86 $ 1.07
=========== ========== ==========
Weighted average number of common and common
equivalent shares outstanding:
Primary................................... 24,084 23,794 22,631
=========== ========== ==========
Fully diluted............................. 26,527 23,919 24,966
=========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
EQUITY
COMPONENT
OF
MINIMUM UNREALIZED
COMMON TREASURY PENSION GAIN ON RETAINED
STOCK STOCK LIABILITY INVESTMENTS EARNINGS TOTAL
-------- -------- --------- ----------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1994................... $ 80,960 $(5,030) $(164) $4,200 $ 7,005 $ 86,971
Issuance of 221,655
shares of common stock
on exercise of
warrants and options
(Note 9).............. 1,603 -- -- -- -- 1,603
Issuance of 1,000,000
shares of common stock
in connection with LTC
acquisition (Note 4).. 20,000 -- -- -- -- 20,000
Issuance of 5,048
shares of common stock
on conversion of debt
issued in connection
with a 1993
acquisition........... 100 -- -- -- -- 100
Issuance of 2,421,875
shares of common stock
in public offering.... 28,478 -- -- -- -- 28,478
Issuance of 77,500
shares of common stock
in connection with HS
Healthcare acquisition
(Note 4).............. 1,000 -- -- -- -- 1,000
Unrealized loss on
investments, net of
income taxes of $550.. -- -- -- (825) -- (825)
Net income............. -- -- -- -- 24,290 24,290
Minimum pension
liability adjustment.. -- -- (200) -- -- (200)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1994................... 132,141 (5,030) (364) 3,375 31,295 161,417
Issuance of 769,799
shares of common stock
on exercise warrants
and options (Note 9).. 2,476 -- -- -- -- 2,476
Issuance of 5,500
shares of common
stock................. 82 -- -- -- -- 82
Repurchase of 715,000
shares of common
stock................. -- (13,670) -- -- -- (13,670)
Unrealized gain on
investments, net of
income taxes of
$1,203................ -- -- -- 1,831 -- 1,831
Net income............. -- -- -- -- 20,564 20,564
Minimum pension
liability adjustment.. -- -- (101) -- -- (101)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1995................... 134,699 (18,700) (465) 5,206 51,859 172,599
Issuance of 448,573
shares of common stock
on exercise warrants
and options (Note 9).. 3,897 -- -- -- -- 3,897
Issuance of 95,524
shares of common stock
under stock incentive
plans................. 1,619 -- -- -- -- 1,619
Issuance of 100,000
shares of common stock
in connection with
Innovative
acquisition........... 1,863 -- -- -- -- 1,863
Cancellation of 915,000
shares of common stock
held in treasury...... (18,700) 18,700 -- -- -- --
Unrealized gain on
investments, net of
income taxes of
$1,120................ -- -- -- 1,679 -- 1,679
Net income............. -- -- -- -- 32,720 32,720
Minimum pension
liability adjustment.. -- -- (77) -- -- (77)
-------- ------- ----- ------ ------- --------
Balances at December 31,
1996................... $123,378 $ -- $(542) $6,885 $84,579 $214,300
======== ======= ===== ====== ======= ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................. $ 32,720 $ 20,564 $ 24,290
Adjustments to reconcile net income to net
cash (used in) provided by operating
activities:
Provision for doubtful accounts........... 7,318 6,281 7,918
Depreciation.............................. 18,266 15,258 13,843
Amortization.............................. 7,683 6,353 2,597
Gain on sale of investments and other as-
sets..................................... (19,135) (829) (12,518)
Deferred income taxes..................... (754) 1,171 (333)
Amortization of deferred financing costs.. 947 531 522
Restructuring costs....................... -- -- 8,200
Non-cash one-time charges................. 17,100 -- --
Changes in operating assets and liabilities net of
effects of acquisitions
(Note 4):
Accounts receivable..................... (74,745) (49,018) (33,491)
Prepaid expenses and other current as-
sets................................... (696) (6,414) 1,109
Accounts payable, accrued wages and
other accrued expenses................. (2,067) 15,388 2,145
Interest payable........................ 1,442 3,110 769
Other................................... (10,271) (3,400) (1,320)
-------- -------- --------
Net cash (used in) provided by operating ac-
tivities................................... (22,192) 8,995 13,731
INVESTING ACTIVITIES
Acquisition of businesses (net of cash ac-
quired of $2,469 in 1994).................. (16,451) (68,467) (49,414)
Purchases of property and equipment......... (32,420) (23,495) (14,938)
Proceeds from disposition of property and
equipment.................................. 994 4,155 13,726
Purchases of investments.................... (4,416) (6,944) (6,978)
Proceeds from sale of unconsolidated affili-
ate........................................ 24,600 -- --
Other....................................... (1,275) (1,029) (3,822)
-------- -------- --------
Net cash used in investing activities....... (28,968) (95,780) (61,426)
FINANCING ACTIVITIES
Issuance of stock........................... -- 82 29,063
Payment of stock issuance costs............. -- -- (585)
Proceeds from exercise of warrants and op-
tions...................................... 3,897 2,776 1,603
Purchase of treasury stock.................. -- (13,670) --
Long-term debt payments..................... (29,690) (177,870) (23,207)
Proceeds from long-term debt borrowings..... 74,400 270,018 44,787
Repayments of short-term notes payable...... -- -- (600)
Payment of debt issuance costs.............. (673) (5,424) (1,136)
-------- -------- --------
Net cash provided by financing activities... 47,934 75,912 49,925
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents................................ (3,226) (10,873) 2,230
Cash and cash equivalents at beginning of
year....................................... 17,738 28,611 26,381
-------- -------- --------
Cash and cash equivalents at end of year.... $ 14,512 $ 17,738 $ 28,611
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFOR-
MATION
Interest paid............................. $ 32,432 $ 22,566 $ 20,712
======== ======== ========
Income taxes paid......................... $ 24,917 $ 17,964 $ 14,406
======== ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
GRANCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS--(CONTINUED)
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITIONS
The 1996, 1995 and 1994 acquisitions (see Note 4) had the following effects
on cash:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Fair values of assets acquired (net of cash
received)...................................... $(21,954) $(75,317) $(90,713)
Fair values of liabilities assumed.............. 3,640 6,850 20,299
-------- -------- --------
(18,314) (68,467) (70,414)
Issuance of stock............................... 1,863 -- 21,000
-------- -------- --------
Net effect on cash.............................. $(16,451) $(68,467) $(49,414)
======== ======== ========
</TABLE>
NONCASH TRANSACTIONS
During 1996, the Company issued 95,524 shares of common stock to employees
under various stock incentive and award plans.
In conjunction with the sale of the four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided
purchase money financing in the amount of $17,550,000 evidenced by an interest
bearing promissory note due and payable in 1997.
Plant and equipment acquired under financing notes and capital lease
arrangements aggregated approximately $2,364,000, $1,021,000, and $3,222,000
in 1996, 1995, and 1994 respectively.
See accompanying notes.
F-8
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
GranCare, Inc. (GranCare or the Company) merged with Evergreen Healthcare,
Inc. (Evergreen) on July 20, 1995 (the Merger). On that date, GranCare issued
approximately 9,673,000 shares of its common stock in exchange for the
approximately 12,500,000 shares of Evergreen common stock then outstanding
based on an exchange ratio of its shares of GranCare common stock for each
share of Evergreen common stock.
The consolidated financial statements give retroactive effect to the Merger,
which has been accounted for using the pooling-of-interests method and, as a
result, the financial position, results of operations and cash flows are
presented as if the combining companies had been consolidated for all periods
presented. The consolidated statements of shareholders' equity also reflect
retroactive combination of the accounts of GranCare and Evergreen for all
periods presented, with adjustments to outstanding shares based on the
exchange ratio.
Evergreen amounts for the 1994 consolidated financial statements have been
conformed to the Company's December 31 year-end.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business and Consolidation The Company operates approximately 140 leased and
owned long-term health care facilities that provide skilled nursing and
residential care services in 15 states. In addition, the Company also owns and
operates or serves 33 institutional pharmacies operating under the name
"TeamCare", a specialty hospital geriatric services company, which manages
approximately 145 geriatric care units in acute hospitals in 20 states, and
home health operations in four states.
The facilities and pharmacy divisions represented approximately 67% and 24%,
respectively, of the total net patient revenues of the Company. Substantially
all of the facilities and pharmacies receive benefits under the Medicare and
Medicaid programs. These programs are highly regulated and subject to periodic
change.
The consolidated financial statements include the accounts of GranCare and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in affiliates in which the
Company has less than a 50% interest are accounted for by the equity method.
Use of Estimates The preparation of the financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Cash Equivalents The Company considers all highly liquid instruments
purchased with original maturity dates of three months or less to be cash
equivalents.
Inventories Inventories are stated at the lower of cost, using the first-in,
first-out method, or market value. Inventories consist primarily of purchased
pharmaceuticals and various medical equipment of the pharmacies and supplies
used in the care of residents in long-term health care facilities.
Property and Equipment Property and equipment are recorded at cost.
Depreciation is computed by the straight-line method over the estimated useful
lives of the assets as stated below. Leases and leasehold improvements that
have been capitalized are amortized over the lives of the leases. Amortization
of these assets is included in depreciation expense.
<TABLE>
<S> <C>
Buildings and improvements.................... 8-35 years
Equipment..................................... 5-7 years
</TABLE>
F-9
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and Other Intangibles In connection with the Company's
acquisitions, costs in excess of the amounts assigned to identifiable assets
acquired, less liabilities assumed, are recorded as goodwill. Goodwill is
amortized on a straight-line basis principally over a period of 35 years.
Goodwill recorded in the Cornerstone acquisition (unamortized balance of
$46,721,000 at December 31, 1996) is being amortized over 25 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the present value of estimated future cash
flows using a discount rate commensurate with the risks involved, the
Company's carrying value of the goodwill is reduced by the estimated shortfall
of cash flows.
Other intangibles, which primarily were obtained in connection with the
Company's acquisitions, mainly represent covenants not to compete and lease
contract rights that are amortized over the terms of the noncompetition
agreements and leases, respectively.
Other Assets The Company defers financing costs incurred to obtain long-term
debt and amortizes such costs using the straight-line method over the term of
the related obligation. An investment in an unconsolidated affiliate at
December 31, 1995 consisted of a 28% owned interest in Alternative Living
Services, Inc. (ALS), which was recorded using the equity method. In 1994, the
Company's 53% interest in ALS was consolidated with the Company. The remaining
other assets are individually not significant in their impact to the Company.
On August 5, 1996, the Company sold its entire interest in ALS, resulting in
net proceeds to the Company of approximately $24.6 million and an approximate
$18.0 million gain on the sale. The gain is reported in investment and other
income in the accompanying Consolidated Statements of Income.
Reserve for Worker's Compensation Losses and Loss Adjustment Expenses The
reserve for worker's compensation losses and loss adjustment expenses
represents the estimated ultimate net cost of all reported and unreported
losses incurred through the date of the balance sheet. Such estimates are
based on case-basis estimates of losses reported prior to the date of the
balance sheet, estimates (based on actuarial projections of historical loss
development) of losses incurred but not reported, and estimates of expenses
for investigation and adjustment of all incurred and unadjusted losses (and
estimates of expected salvage and subrogation receipts from such losses).
Given the inherent degree of variability in any such estimates, management
believes that the reported reserves are a reasonable estimate of the Company's
ultimate losses and loss adjustment expenses to be incurred to discharge the
Company's obligations. Reserves are continually reviewed and adjusted as
necessary as experience develops or new information becomes known; such
adjustments are included in current operations (see Note 7).
Net Patient Revenues Patient revenues are reported in the period in which
services are provided. Net patient revenues reflect contractual discounts and
the results of other arrangements for providing services at less than
established rates. Contractual adjustments include differences between
established billing rates and amounts estimated by management as reimbursable
under various cost reimbursement formulas or service contracts.
The administrative procedures related to the Medicare and Medicaid cost
reimbursement programs in effect, generally preclude final determination of
amounts due the Company until cost reimbursement reports, filed by the
Company, are audited or otherwise reviewed and settled with the applicable
administrative agencies. The Company is contesting certain issues raised in
audits of prior year cost reports (see Note 7). Normal estimation differences
between final settlements and amounts accrued in previous years are reported
in current net patient revenues. Actual results could differ from these
estimates. Included in accounts receivable are settlement amounts due from
Medicare and Medicaid programs totalling $49,725,000 and $45,764,000 at
December 31, 1996 and 1995, respectively. In the opinion of management,
adequate provision has been made for adjustments, if any, that might result
from subsequent review. The Medicare and Medicaid cost reimbursement programs
approximated 77%, 75% and 77% of net patient revenues for the years ended
December 31, 1996, 1995 and
F-10
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1994, respectively. Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that
it is in compliance with all applicable laws and regulations and is not aware
of any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs.
Earnings Per Share Earnings per share are computed based on the weighted
average common and (if dilutive) common equivalent shares outstanding, which
include options and warrants, and in the case of fully diluted earnings per
share, convertible subordinated debentures. The earnings per share amounts are
based on the combined historical weighted average common and dilutive common
equivalent shares of GranCare and Evergreen pre-merger adjusted for the .775
exchange ratio. Additionally, interest costs related to such debentures were
added, net of tax, to net income for the purpose of calculating fully diluted
income per share. Such amount for the year ended December 31, 1996 was
$2,559,000. Fully diluted net income per share for the years ended December
31, 1995 and 1994 was the same as primary because the effect of the assumed
conversion of the debentures was not dilutive.
Change in Accounting Principle During the first quarter of 1996, the Company
adopted as required FASB Statement No. 121 (Statement No. 121), "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." In accordance with Statement No. 121, the Company records
impairment losses on long-lived assets used in operations when events and
circumstances indicate the assets might be impaired and the undiscounted cash
flows estimated to be generated by those assets may be less than the carrying
amounts of those assets. This new standard had no effect on the financial
statements.
Reclassifications Certain reclassifications have been made in the 1995
financial statements to conform with the 1996 presentation.
NOTE 3. TEAMCARE MERGER
GranCare has entered into an Agreement and Plan of Merger between Vitalink
Pharmacy Services, Inc. (Vitalink) and GranCare dated as of September 3, 1996.
The form of the transactions are: (1) GranCare's skilled nursing facilities,
along with its contract management and home health businesses are to be
reorganized into New GranCare, Inc. (New GranCare) and all of the shares of
New GranCare distributed to the GranCare shareholders in a tax-free spin-off;
(2) GranCare (then consisting solely of the institutional pharmacy and related
business known as TeamCare) would merge into and be acquired by Vitalink
through a tax-free exchange of shares of common stock of Vitalink for shares
of common stock of GranCare; and (3) New GranCare would become a public
company upon the effectiveness of its initial registration statement.
Notwithstanding the legal structure of the transactions, for
accounting/financial reporting purposes such transactions will be treated as
the spin-off of TeamCare in the form of a dividend of the Vitalink Common
Stock to be received and reorganization/recapitalization of GranCare into New
GranCare as New GranCare will continue the majority of the GranCare
businesses. No gain will be recognized as a result of the distribution for the
difference between the market value of the Vitalink Common Stock received and
the carrying value of the net assets of TeamCare. New GranCare will continue
to reflect the historical cost basis of assets and liabilities of the Company.
These transactions were approved by the GranCare shareholders on February 11,
1997 and the transactions closed on February 12, 1997; the spin-off of
TeamCare will be reflected in the first quarter of 1997.
In addition, as a consequence of the merger, the Company redeemed its 6 1/2%
Convertible Subordinated Debentures (the Debentures) due January 15, 2003
effective as of the closing date. GranCare has deposited the
F-11
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
redemption price and accrued interest on each outstanding Debenture with the
trustee for the Debentures and interest ceased to accrue as of February 12,
1997. GranCare also completed a tender offer for its 9 3/8% Senior
Subordinated Notes (Senior Notes) due 2005. GranCare accepted $98 million
aggregate principal amount of Senior Notes (representing 98% of the
outstanding Senior Notes) for purchase pursuant to GranCare's cash tender
offer at a purchase price of $1,090 per $1,000 principal amount plus accrued
and unpaid interest up to, but not including, the payment date.
In February 1997, the Company recognized a merger charge and extraordinary
charge related to debt extinguishment in connection with the aforementioned
transactions. The components of the merger charge and extraordinary charge to
be recognized in New GranCare's operations in the first quarter of 1997
consist of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Shared transaction costs:
Redemption premium--$100 million Senior
Subordinated Notes............................. $ 9,000
Redemption premium--$60 million Convertible
Subordinated Debentures........................ 2,430
Investment banker fees.......................... 4,200
Consent fee paid to HRPT........................ 5,500
Other professional fees and merger related
costs.......................................... 5,470
--------
Total shared costs................................ 26,600
Less costs to be paid by Vitalink................. (13,300)
--------
GranCare portion of shared transaction costs...... 13,300
Other transaction related costs:
Consent fee paid to HRPT........................ 4,500
Write-off of deferred financing fees............ 5,441
Amounts payable under GranCare Shareholder Value
Program........................................ 4,500
Amounts payable under Restricted Stock Plan..... 2,200
Other employee severance and other related
costs.......................................... 6,059
--------
36,000
Less: Income taxes................................ (6,000)
--------
Total costs, net of income taxes.................. $ 30,000
========
</TABLE>
Amounts included in the $7.8 million gross extraordinary charge recognized
by the Company are: redemption premium on $100 million Senior Subordinated
Notes--$9.0 million; redemption premium on $60 million Convertible
Subordinated Debentures--$2.4 million; and write-off of deferred financing
fees--$5.4 million, less amounts paid by Vitalink--$9.0 million.
F-12
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table shows the unaudited pro forma effect of this transation
on the historical consolidated balance sheet of the Company at December 31,
1996 as if such transaction had occurred on that date:
<TABLE>
<CAPTION>
HISTORICAL BALANCE PROFORMA
SHEET AT HISTORICAL OTHER PRO FORMA BALANCE SHEET AT
DECEMBER 31, 1996 TEAMCARE ADJUSTMENTS DECEMBER 31, 1996
------------------ ---------- --------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 14,512 $ -- $ 16,337 $ 30,849
Other current assets.... 303,192 (69,238) 6,000 239,954
Property and equipment.. 207,149 (14,337) -- 192,812
Other assets............ 223,186 (83,236) -- 139,950
-------- --------- -------- --------
$748,039 $(166,811) $ 22,337 $603,565
======== ========= ======== ========
Current liabilities..... $117,135 $ (28,904) $ 36,000 $124,231
Long-term debt.......... 382,242 (3,944) (71,467) 306,831
Due to/from parent...... -- (38,823) 38,823 --
Other long-term
liabilities............ 34,362 (5,680) -- 28,682
Shareholders' equity:
Common stock; no par
value................ 123,378 (46,379) (76,999) --
Common stock; $0.001
par value............ -- -- 24 24
Paid in capital....... -- -- 123,354 123,354
Equity component on
minimum pension
liability............ (542) -- -- (542)
Unrealized gain on
investments, net of
income taxes......... 6,885 -- -- 6,885
Retained earnings..... 84,579 (43,081) (27,398) 14,100
-------- --------- -------- --------
Total shareholders'
equity................. 214,300 ( 89,460) 18,981 143,821
-------- --------- -------- --------
$748,039 $(166,811) $ 22,337 $603,565
======== ========= ======== ========
</TABLE>
Excluding TeamCare, GranCare's total net revenues, pre-tax income and
primary earnings per share for 1996, 1995 and 1994, respectively, would have
been: $774,000,000, $24,000,000 and $0.60; $640,000,000, $18,000,000 and
$0.43; and $559,000,000, $19,000,000 and $0.56.
The above transactions resulted in certain commitments of New GranCare.
These are described in Note 7.
NOTE 4. ACQUISITIONS, DISPOSITIONS AND MERGER
1994 Acquisitions and Dispositions On March 1, 1994, GranCare acquired the
operations of PPCP, Inc., which provides institutional pharmacy services, for
$3,800,000 in cash and adjustable subordinated promissory notes in the
aggregate sum of $1,449,000. In connection with this transaction, $4,518,000
was recorded as goodwill.
On April 1, 1994, GranCare acquired the operations of Merit Pharmacy, Inc.,
which provides institutional pharmacy services, for $600,000 in cash and a
subordinated promissory note for $1,184,000. In connection with this
transaction, GranCare recorded $1,817,000 in goodwill.
On June 7, 1994, Evergreen acquired substantially all of the assets of two
Illinois limited partnerships, Health Care Fund Limited Partnership and Health
Care Fund II Limited Partnership, as well as two related companies, H.S.
Healthcare, Inc. and H.S. Systems, Inc. (collectively referred to as HS
Healthcare). Evergreen
F-13
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
paid approximately $22,571,000 cash in exchange for the assets acquired and
liabilities assumed. The Company also paid $3,000,000 in cash and issued
77,500 shares (restated) of common stock valued at $1,000,000 to the general
partners of the partnerships and sole shareholders of the related companies in
consideration for their agreement not to compete with the Company for a period
of ten years.
Effective July 1, 1994, GranCare acquired substantially all of the assets
and assumed certain liabilities of Long Term Care Pharmaceutical Services
Corporation I and Long Term Care Pharmaceutical Services Corporation III
(collectively, LTC), an institutional pharmacy business based in Indiana, for
$16,000,000 cash and 1,000,000 shares of GranCare common stock valued at $20
per share, or $20,000,000. In the event the market price of the common stock
was not at least equal to $20 per share at a specified date in 1995, the
Company was obligated to issue additional consideration to bring the value of
the common stock to $20,000,000. In connection with this transaction, GranCare
recorded $27,402,000 goodwill. The purchase agreement also contains a
contingent earnout provision for the two year period ended June 30, 1996. An
additional $5,500,000 could be paid provided certain operating results were
obtained for this period. Subsequent to December 31, 1996, GranCare agreed to
pay $2.9 million and Vitalink agreed to pay $2.5 million to the sellers in
settlement of the earnout.
Also effective July 1, 1994, GranCare acquired the operations of Ricketts
Drug, Inc., an institutional pharmacy based in Virginia, for $4,111,000 in
cash. In connection with this transaction, GranCare recorded $2,355,000 in
goodwill.
Effective July 25, 1994, GranCare acquired leasehold interests in two long-
term health care facilities in South Carolina for $38,000.
Effective September 30, 1994, GranCare acquired leasehold interests in five
additional long-term health care facilities in South Carolina for $150,000.
The above-described 1994 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1994, GranCare also divested three facilities (exclusive of the
restructuring described in Note 13) and Pacific Therapies, acquired in 1993.
The sale of Pacific Therapies to an unrelated entity for approximately
$11,700,000 in cash and assumption of approximately $1,100,000 in debt and
certain other liabilities resulted in a gain of approximately $8,800,000. The
gain is reported in investment and other income in the accompanying
Consolidated Statements of Income.
1995 Acquisitions and Dispositions In January 1995, GranCare acquired a
leasehold interest in a long-term health care facility in Arizona for
$150,000.
In April 1995, GranCare acquired Cornerstone Health Management Company
(Cornerstone), a management company specializing in the implementation and
management of geriatric specialty programs for acute care hospitals, for
$53,213,000.
In November 1995, GranCare acquired Innovative Pharmacy Services, Inc.
(Innovative), an institutional pharmacy based in Wisconsin, for $10,000,000 in
cash and stock. GranCare common stock was distributed in January 1996. In
connection with this transaction, the Company recorded $9,555,000 in goodwill.
In December 1995, GranCare acquired the operations of both Pharmcare, Inc.
and American Pharmaceutical Inc., two institutional pharmacies based in
Northern California, for $4,700,000 and $1,200,000, respectively. In
connection with these transactions, the Company recorded $5,408,000 in
goodwill.
F-14
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The above-described 1995 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
During 1995, GranCare also divested one facility (exclusive of the
restructuring described in Note 13).
In July 1995, in accordance with a contractual obligation to the former
owners of LTC, the Company repurchased 715,000 shares of its common stock.
During the second quarter of 1996, the Company cancelled these shares held in
treasury.
1996 Acquisitions and Dispositions
In January 1996, the Company completed the acquisition of RN Health Care
Services, Inc. (RN Services), a home health care business located in Detroit,
Michigan, for $2,350,000 in cash. In conjunction with the acquisition, the
Company advanced $2,500,000 to the former owners in the form of a short-term
note secured by RN Services' accounts receivable.
In April 1996, the Company completed the acquisition of Jennings Visiting
Nurse Association, Inc., a home health care business based in North Vernon,
Indiana, for $937,000 in cash and a promissory note for $250,000.
In July 1996, the Company completed the acquisition of Emery Pharmacy, Inc.,
an institutional pharmacy located in Utica, New York, for $3,672,000 in cash
and a promissory note in the amount of $1,488,000. In connection with this
transaction, GranCare recorded $5,747,000 in goodwill.
In September 1996, the Company completed the acquisition of RX Corporation,
an institutional pharmacy located in southern California, for $1,800,000 in
cash and a promissory note for $925,000. In connection with this transaction,
the Company recorded $2,908,000 in goodwill.
During 1996, the Company acquired leasehold interests in two long-term
health care facilities in South Carolina and one long-term health care
facility in California for an aggregate $3,210,000.
The above-described 1996 acquisitions were all accounted for as purchases
and, accordingly, the financial statements of the Company include the
operations of such acquired entities since the respective dates of their
acquisition.
Under the terms of an Assignment and Assumption Agreement (the Agreement)
between TeamCare and HPI Health Care Services, Inc. (HPI) dated February 1,
1996, TeamCare agreed to provide pharmacy services to the State of New Jersey
as a subcontractor under a contract (the New Jersey Contract) that was awarded
to HPI. Under the terms of the Agreement, TeamCare assumed all the contractual
provisions of the HPI contract for the period February 1, 1996 through January
31, 1998. TeamCare has also been awarded an additional two year contract
beginning February 1, 1998 with the State of New Jersey. In connection with
this Agreement, GranCare paid $4 million in cash for certain inventory and
property and equipment. Under the terms of the Agreement, TeamCare may be
obligated to make deferred conditional purchase price adjustments, not to
exceed $400,000. GranCare received $4.7 million from HPI in consideration of
TeamCare's assumption of the New Jersey Contract as GranCare will incur
certain transition costs and costs to be incurred in managing operations and
personnel during the remainder of the subcontract period. GranCare recognized
$4.5 million of the $4.7 million as net revenues and a reduction in operating
expenses for the year ended December 31, 1996.
In conjunction with the sale of four long-term health care facilities
located in Michigan in the first quarter of 1996, the Company provided
purchase money financing in the amount of $17,550,000 evidenced by an
interest-bearing promissory note, due and payable in 1997. This note is
included in notes receivable in the accompanying Consolidated Balance Sheets.
F-15
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Summarized below are the unaudited pro forma consolidated results of
operations for GranCare had the 1995 Cornerstone acquisition and the 1994 LTC
and HS Healthcare acquisitions occurred as of January 1, 1994:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1994
---------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
Total revenues......... $786,846
Net income............. $ 26,738
Net income per share:
Primary.............. $ 1.15
Fully diluted........ $ 1.15
</TABLE>
The above results are based upon certain assumptions and estimates which the
Company believes are reasonable, and do not reflect any benefit which might be
achieved from combined operations. The unaudited pro forma results do not
necessarily represent results which would have occurred if the acquisitions
had taken place on the basis assumed above, nor are they indicative of the
results of future combined operations.
Pro forma information for 1996 and other 1995 and 1994 acquisitions and
divestitures is not presented because their operating results, either
individually or in the aggregate, do not have a material effect on the pro
forma operating results presented above.
MERGER
On July 20, 1995, GranCare acquired, through merger, substantially all of
the outstanding common stock of Evergreen in exchange for approximately
9,673,000 shares of GranCare common stock based on a .775 exchange ratio. The
Evergreen merger is accounted for as a pooling-of-interests business
combination and, accordingly, the consolidated financial statements of all
periods prior to the merger have been restated to include the historical
balances of GranCare and Evergreen as if the two companies had always been
combined.
The Company incurred certain costs relating to completion of the Merger and
other one-time costs and recognized an $11.8 million charge in the third
quarter of 1995. The following is a summary of the Merger and other one-time
costs:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1995
--------------------
DOLLARS IN THOUSANDS
<S> <C>
Merger costs:
Investment banking fees............................ $ 4,100
Legal and other fees............................... 1,469
Executive severance................................ 1,100
Planned divestitures of certain facilities......... 1,500
Other one-time costs:
Relocation......................................... 1,626
Integration........................................ 850
Other deferred acquisition costs................... 1,105
-------
Total................................................ $11,750
=======
</TABLE>
As of December 31, 1996, all amounts provided under this charge had been
paid.
F-16
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of consolidated total revenues and net income to amounts
applicable to the separate pooled companies prior to the date of combination is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
----------------------------
DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA
<S> <C>
TOTAL REVENUES
GranCare.................................. $549,220
Evergreen................................. 168,251
--------
$717,471
========
NET INCOME
GranCare.................................. $ 15,179
Evergreen................................. 9,111
--------
$ 24,290
========
NET INCOME PER SHARE (FULLY-DILUTED BASIS)
GranCare.................................. $ 1.08
Evergreen................................. .82
--------
$ 1.07
========
</TABLE>
NOTE 5. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
SENIOR DEBT
Mortgage notes payable:
Omega................................................ $ 58,800 $ 58,800
Other (principally HRPT and FINOVA) in installments
which include interest ranging from 8% to 11.5%..... 31,782 32,376
Revolving loan under bank credit facility bearing in-
terest based on LIBOR or prime rate.................. 90,850 37,700
Evergreen revenue bonds............................... 13,038 13,445
Notes payable in installments which include interest
ranging from 6.0% to 13.75%; final maturities in 1996
through 2010......................................... 27,244 28,991
Capitalized lease obligations (less imputed interest
of $540 in 1996 and $570 in 1995).................... 4,520 4,622
Other................................................. 2,400 2,400
----------- -----------
Total senior debt.................................. 228,634 178,334
SUBORDINATED DEBT
Senior subordinated notes; interest due semi-annually
at 9 3/8%, principal due September 15, 2005.......... 100,000 100,000
Convertible subordinated debentures; interest due
semi-annually at 6.5%, principal due January 15,
2003................................................. 60,000 60,000
Other notes payable................................... 1,143 1,271
----------- -----------
Total subordinated debt............................ 161,143 161,271
----------- -----------
Total debt............................................. 389,777 339,605
Less short-term notes payable and current maturities of
long-term debt........................................ 7,535 4,937
----------- -----------
$ 382,242 $ 334,668
=========== ===========
</TABLE>
F-17
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On August 14, 1992, Professional Health Care Management, Inc. (PHCM,
acquired by GranCare in 1992) entered into a $58,800,000 loan agreement with
Omega Healthcare Investors, Inc. (Omega). The loan is secured by mortgages on
certain health care facilities, and by the personal property used in
connection with the operation of those facilities, as well as certain other
intangibles, including the licenses for these facilities, to the extent
permitted by Michigan law, and accounts receivable in excess of $1,000,000.
The minimum interest rate on the loan is 13% per year, of which 12% is payable
monthly in cash and 1% is deferred. The cash interest rate will increase in
each subsequent year based upon a specified formula tied to either; (i) the
percentage change in the Consumer Price Index published by the United States
Department of Labor, or; (ii) the change in Gross Revenues (as defined in the
loan agreement); however, the increase cannot be more than the interest for
the prior fiscal year multiplied by 1.05. The 1% of deferred interest will
accrue on an annual basis and will be cumulative on an annual basis as long as
the loan remains outstanding. Quarterly principal payments of $1,470,000 are
required beginning October 1, 2002, with the remaining balance plus the
deferred interest due in August 2007. The loan agreement also contains certain
restrictive covenants, including, but not limited to, restrictions on PHCM
incurring additional debt, prepayment and minimum net worth requirements. As
of December 31, 1996, the interest rate was 14.5%, including the 1% deferred
interest.
In conjunction with a 1990 acquisition, GranCare borrowed $15,000,000 under
a promissory note agreement with HRPT. The note is secured by mortgages on two
facilities and 1,000,000 shares of HRPT common stock owned by GranCare. The
HRPT note had a balance of $8,750,000, with an interest rate of 13.75% at
December 31, 1994.
During 1995, GranCare renegotiated the note with HRPT, whereby the principal
balance of the promissory note was increased to $11,500,000, resulting in
additional proceeds to GranCare. Minimum interest on the note is 11.5% per
year payable monthly in arrears. Additional interest is payable commencing on
January 1, 1996, in an amount equal to 75% of the percentage increase in the
Consumer Price Index, with certain defined limitations. Principal payments
will begin two years after the date of the note on a 30-year direct reduction
basis, with the remaining balance due December 31, 2010.
On January 29, 1993, GranCare completed a public offering of $60,000,000
aggregate principal amount of its 6.5% Convertible Subordinated Debentures due
2003. The Debentures are convertible into common stock of GranCare at any time
prior to redemption or final maturity, at a conversion price of $27.145 per
share, subject to adjustment upon the occurrence of certain events. Interest
on the Debentures is payable semi-annually on January and July 15th.
Approximately $15,600,000 of the net proceeds of $57,700,000 was used to repay
certain indebtedness, and the remaining $42,100,000 was used for general
corporate purposes, including the further expansion of specialty medical
services and acquisitions. The Debentures were redeemed in February 1997 in
connection with the TeamCare merger described in Note 3.
In conjunction with the 1993 acquisition of four skilled nursing facilities
in Wisconsin, GranCare entered into an $11,000,000 mortgage loan agreement
with FINOVA. Interest accrues on the mortgage note at an adjustable rate of 2%
over prime, with installments of principal and interest due monthly through
April 2001, with final payment due May 2001. The mortgage note cannot be
prepaid until 90 days prior to the end of the term without a prepayment
penalty.
At the end of 1993, a subsidiary of GranCare, GranCare Health Services, Inc.
entered into a $50,000,000 revolving credit agreement with a syndicate of
banks. In 1994, the agreement was amended to increase the line of credit to
$80,000,000. This credit agreement terminated on March 29, 1995.
On March 29, 1995, the Company entered into an agreement with First Union
National Bank of North Carolina (First Union) pursuant to which First Union
provided the Company with a $175 million revolving line of credit (the Credit
Facility). The Company has used the proceeds from the Credit Facility to pay
off its previous
F-18
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
line of credit, fund the acquisition of Cornerstone and for general working
capital purposes. In September 1995, concurrent with the High Yield Debt
offering the Credit Facility was reduced to $150 million. Amounts outstanding
under the Credit Facility bear interest based on LIBOR or prime rates (7.23%
and 8.35%, respectively, at December 31, 1996). Amounts outstanding as of June
30, 1998 may convert to a term loan with equal quarterly installments due
through the final maturity date of June 30, 2002. No principal payments are
required under the Credit Facility prior to the June 30, 1998 conversion date.
This Credit Facility was repaid in February 1997 in connection with the
TeamCare merger described in Note 3.
Evergreen maintained a revolving credit facility and a working capital
facility (the Evergreen Credit Facility) in the aggregate maximum amount of
$55,000,000 from a syndicate of banks, $45,000,000 of which was to be used for
acquisitions and $10,000,000 of which was to be used for working capital
purposes. The Evergreen Credit Facility was terminated at the merger. Six
long-term health care facilities were refinanced via mortgage debt in March
1995 for $16,500,000, including the facilities held as collateral under the
revolving credit facility. The Evergreen Credit Facility described above was
entered into on June 7, 1994, as a refinancing of an existing $6,000,000
revolving credit facility with the same bank.
On September 29, 1995, the Company closed the sale of $100 million aggregate
principal amount of its 9 3/8% Senior Subordinated Notes due 2005 in an
underwritten public offering. After paying underwriter fees and commissions,
the approximately $96 million realized by the Company from the sale of the
Senior Notes was used to pay outstanding indebtedness under its Credit
Facility. The Notes were redeemed in February 1997 in connection with the
TeamCare merger described in Note 3.
The Evergreen revenue bonds include a $9,100,000 Series 1993A taxable
adjustable demand issue that requires semiannual interest payments at a
variable rate (5.45% at December 31, 1996) and annual principal payments
through August 15, 2013. The remaining revenue bonds bear interest at fixed
rates ranging from 7.75% to 9.5% through 2001--2002, and which are subject to
change after such dates. These bonds mature in 2015; however, they may be
redeemed by the bondholders on various dates in the years 2001, 2002, 2011 and
2012.
Certain of these notes payable and related agreements contain covenant
restrictions on additional debt, intercompany loans, dividends and the
maintenance of certain financial ratios. The Company has pledged certain
accounts receivable, leasehold interests and substantially all property and
equipment as collateral under the various debt agreements.
Maturities of debt and obligations under capital leases at December 31,
1996, are summarized as follows:
<TABLE>
<CAPTION>
DEBT CAPITAL LEASES TOTAL
-------- -------------- --------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Year ending December 31,
1997..................................... $ 5,881 $ 1,942 $ 7,823
1998..................................... 4,879 1,787 6,666
1999..................................... 2,552 1,044 3,596
2000..................................... 7,481 203 7,684
2001..................................... 1,860 84 1,944
Thereafter................................. 362,604 -- 362,604
-------- ------- --------
Total minimum payments..................... 385,257 5,060 390,317
Less amounts representing interest......... -- 540 540
-------- ------- --------
Total obligations.......................... $385,257 $ 4,520 $389,777
======== ======= ========
</TABLE>
F-19
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In connection with the TeamCare merger described in Note 3, subsequent to
year end the Company replaced its Credit Facility with a new credit facility
in the aggregate amount of $300,000,000 (the New Credit Facility). The New
Credit Facility will consist of two components: a $200,000,000 5-year
revolving credit facility (which includes a $40,000,000 sub-limit for the
issuance of standby letters of credit) and a $100,000,000 5-year term loan.
Borrowings for working capital and general corporate purposes may not exceed
$75,000,000. The first $25,000,000 of exposure for letters of credit issued
under the letter of credit sub-facility will correspondingly reduce
availability under the working capital sub-facility. The revolving credit
portion of the New Credit Facility will mature in five years. The term loan
portion of the New Credit Facility will be amortized in ten quarterly
installments of $7,000,000 each commencing February 12, 1999, thereafter
increasing to $10,000,000 per quarter. All remaining principal and accrued,
unpaid interest shall be due and payable in full on the fifth anniversary of
the closing date of the New Credit Facility. Interest on outstanding
borrowings shall accrue, at the option of the Company, at the base rate or at
the Eurodollar rate plus, in each case, an applicable margin.
NOTE 6. OPERATING LEASES
The Company has operating leases for 24 facilities, including land,
buildings, and equipment from HRPT under two Master Lease Documents. In 1995,
the existing Master Lease Documents were amended. Under the amended lease
arrangements, minimum rent for the aggregate facilities is the annual sum of
$11,550,000, payable in equal monthly installments. In addition, beginning
January 1, 1996, the amended lease agreement provides for additional rent to
be paid monthly, in advance, based on 75% of the increase in the Consumer
Price Index multiplied by the minimum rent due, provided, however, that the
maximum rent (minimum rent plus additional rent) each January shall be limited
to a 2% increase over the total monthly rent paid in the prior December. The
operating leases for 17 facilities expire on December 28, 2010, and there are
two 10 year renewal options. The leases for six facilities expire in June 2006
and there are two 10 1/2-year renewal options. The Company has subleased six
of the 24 facilities to unrelated parties.
The Company leases additional health care facilities, certain other
facilities, office space, and equipment from other unrelated parties.
Substantially all the leases are operating leases which expire at various
dates and generally contain options to renew for various terms. Certain leases
also contain purchase options. Rents generally are subject to increase based
on the Consumer Price Index, occupancy rates, Medicaid reimbursement rates or
at stated amounts specified in the lease agreements. The Company is required
to obtain the consent of HRPT with respect to certain transactions.
A summary of GranCare's minimum commitments under operating leases at
December 31, 1996, follows:
<TABLE>
<CAPTION>
YEAR ENDING DOLLARS IN
DECEMBER 31, THOUSANDS
------------ ----------
<S> <C>
1997........................................................ $ 47,089
1998........................................................ 46,049
1999........................................................ 41,019
2000........................................................ 29,581
2001........................................................ 26,585
Thereafter.................................................... 161,100
--------
Total minimum lease payments.................................. $351,423
========
</TABLE>
F-20
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6. OPERATING LEASES
Aggregate future minimum lease payments to be received under noncancelable
subleases are $4,955,000 for the year ended December 31, 1997 and $46,717,000
thereafter.
Total rent expense for all operating leases, net of sublease income,
aggregated $46,163,000, $41,058,000 and $35,632,000 for the years ended
December 31, 1996, 1995 and 1994, respectively.
Subsequent to year end, the Company entered into an agreement with the
owners of 17 of its long-term health care facilities located in Indiana and
one in West Virginia to terminate the Company's lease obligations related to
such facilities effective April 1, 1997 (see Note 13). Future minimum
commitments under operating leases in the amount of $20,269,000 related to
these facilities are included in the above table.
NOTE 7. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in legal proceedings arising in the normal course of
business. Management believes, based in part upon discussions with legal
counsel, the ultimate resolution of these matters will not have a material
adverse effect on the Company's consolidated financial position or results of
operations.
THIRD PARTY SETTLEMENT APPEAL
During the fourth quarter of 1996, the Company received final settlement on
its 1994 cost reports for its California long-term health care facilities. The
final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs ($1.8
million) based on their interpretation of Medicare prudent buyer concept. In
addition, the intermediary has reopened the 1993 cost reports for two
facilities ($0.7 million) for the same issue. The Company has furnished
therapy services to patients under arrangements with outside therapy
contractors. The contracts with the outside contractors contain
indemnification clauses regarding denial of payment for services provided. The
intermediary asserts that the Company did not act as a prudent buyer of
therapy services as the Company should have hired therapists instead of
contracting for their services. In the absence of prudent buyer documentation
to the contrary, the intermediary determined reasonable costs for therapy
services based on internally developed survey data and other factors. The
Company, in conjunction with a therapy company and another long-term care
company, has filed an expedited group appeal to the Provider Reimbursement
Review Board regarding these 1994 audit adjustments. A hearing is scheduled to
take place during the Company's second quarter. Management (based on the
advise of outside counsel) believes that it has a strong position in this
matter and will ultimately prevail; therefore no accrual for losses has been
made. It is possible that the intermediary will attempt to apply the same
interpretation for other GranCare facilities and for other periods. However,
the intermediary has recently notified GranCare that it will not apply such
interpretation to 1993. If the hearing results in an unfavorable outcome to
the Company and if the Company does not ultimately prevail on this matter,
these adjustments could have a material adverse impact to net income of a
particular future quarter or year.
WORKER'S COMPENSATION
The Company, through its wholly-owned subsidiary, GCI Indemnity, Inc.,
maintains a captive insurance company for the purpose of paying worker's
compensation claims. The Company maintains reinsurance contracts to minimize
its insurance exposure. The Company accepts the first $350,000 of loss and
loss adjustment expense liability per occurrence for worker's compensation
risks. The Company's estimated liability for worker's compensation claims is
reported in the accompanying Consolidated Balance Sheets as other long term
liabilities. Investments held by the captive insurance company are reported in
other assets section of the accompanying Consolidated Balance Sheets. These
investments serve as collateral for worker's compensation loss and loss
adjustment expense reserves.
F-21
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PHARMACEUTICAL SUPPLY AGREEMENTS
In connection with the transactions described in Note 3, New GranCare has
agreed to purchase for use at substantially all of its long-term health care
facilities all its pharmaceutical supplies and related goods from TeamCare.
The terms of the pharmaceutical supply agreements are for five years. Such
agreements are terminable only upon material breach by TeamCare and a failure
to cure such breach within 30 days of receipt of notice. However, New GranCare
has agreed that for so long as Vitalink's limited guaranty of certain
obligations of New GranCare to HRPT is in effect, New GranCare will not
terminate any of the pharmaceutical supply agreements. Accordingly, the
pharmaceutical supply agreements may extend through December 31, 2010, the
date when all present New GranCare obligations to HRPT will be satisfied.
LETTERS OF CREDIT
To support Vitalink's guaranty of New GranCare's obligations, effective
February 12, 1997 New GranCare provided an irrevocable letter of credit
payable in the amount of $15,000,000 to Vitalink in the event Vitalink makes
any payments under the limited guaranty.
In connection with the sale of four long-term health care facilities located
in Michigan (see Note 4), the Company obtained a letter of credit in the
amount of $9,000,000 for the benefit of Omega. This letter of credit is due to
expire on March 22, 1998. At December 31, 1996, no amounts are outstanding
under this letter of credit.
NOTE 8. INCOME TAXES
The provision for income taxes consists of the following for the years ended
December 31:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
------- ------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
CURRENT
Federal....................................... $17,586 $11,880 $11,025
State......................................... 3,222 1,714 2,832
------- ------- -------
20,808 13,594 13,857
DEFERRED
Federal....................................... (544) 1,133 (317)
State......................................... (210) 38 (16)
------- ------- -------
(754) 1,171 (333)
------- ------- -------
$20,054 $14,765 $13,524
======= ======= =======
</TABLE>
At December 31, 1996, the Company and its subsidiaries have approximately
$6,600,000 of federal net operating loss carryforwards and various state
income tax net operating loss carryforwards expiring at various dates through
2008. The use of the acquired federal net operating loss carryforwards is
subject to both annual dollar limitations and the general requirements that
such carryforwards be offset only against the taxable income of the acquired
operations.
The portion of the net operating loss carryforwards not relating to acquired
operations is also subject to various limitations because of previous
ownership changes. The valuation allowance at December 31, 1995, pertained to
nonacquired net operating loss carryforwards.
F-22
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The tax effects of the
cumulative temporary differences are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
<S> <C> <C>
DEFERRED INCOME TAX LIABILITIES
Fixed asset basis differences................... $ 15,932 $ 17,318
Deferred rent................................... 558 --
Investments..................................... 4,791 3,276
Intangible asset basis differences.............. 4,035 1,648
Deferred gain on sale of assets................. 668 1,263
Other........................................... 216 266
----------- -----------
Total deferred income tax liabilities............. 26,200 23,771
DEFERRED INCOME TAX ASSETS
Vacation and compensation accruals.............. 3,898 4,103
Accounts receivable............................. 1,119 5,981
Deferred rent................................... -- 426
Voluntary employees' benefit association........ 588 507
Net operating loss and credit carryforwards..... 4,284 7,367
Accrued one-time costs.......................... 1,374 --
Accrued merger costs............................ -- 886
Workers' compensation and other insurance....... 328 2,088
Prepaid expenses and other current assets....... 764 --
----------- -----------
Total deferred income tax assets.................. 12,355 21,358
Valuation allowance for deferred income tax
assets........................................... -- (3,389)
----------- -----------
Net deferred income tax assets.................... 12,355 17,969
----------- -----------
Net deferred income tax liabilities............... $ 13,845 $ 5,802
=========== ===========
</TABLE>
The valuation allowance decreased as shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1996 1995 1994
-------- ---------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C>
Recognition of NOL carryforwards as a reduction in
income tax expense............................... $ 514 $ 325 $ 325
NOL which will not be recognized due to
expiration....................................... 2,875 -- --
Initial recognition of deductible temporary
differences as a reduction in income tax
expense.......................................... -- -- 665
Recognition of acquired NOLs and deductible
temporary differences as a reduction to
goodwill......................................... -- -- 2,548
-------- ------ --------
$ 3,389 $325 $ 3,538
======== ====== ========
</TABLE>
F-23
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Differences between GranCare's income tax expense and the amount calculated
utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 AMOUNT PERCENT 1995 AMOUNT PERCENT 1994 AMOUNT PERCENT
----------- ------- ----------- ------- ----------- -------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C> <C> <C>
Income tax at statutory
rate................... $18,471 35.0% $12,365 35.0% $13,236 35.0%
State tax, net of
federal benefit........ 1,958 3.7 1,135 3.2 1,958 5.2
Merger costs............ -- -- 1,435 4.1 -- --
Federal NOL current..... (277) (.5) (277) (.8) (277) (.7)
Reduction in valuation
allowance, net of
write-off of expired
NOL.................... (237) (.5) -- -- (665) (1.8)
State NOL, net of
federal benefit........ -- -- (48) (.1) (48) (.1)
Federal tax credits..... -- -- (88) (.3) (458) (1.2)
Other................... 139 .3 243 .7 (222) (.6)
------- ---- ------- ---- ------- ----
$20,054 38.0% $14,765 41.8% $13,524 35.8%
======= ==== ======= ==== ======= ====
</TABLE>
NOTE 9. SHAREHOLDERS' EQUITY, STOCK OPTIONS AND WARRANTS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
GranCare has a Stock Incentive Plan, adopted in 1991 and amended in 1992
(the 1991 Plan), which provides for the direct sale of shares, the granting of
stock options and the granting of limited stock appreciation rights to
selected employees, officers, directors and consultants of GranCare. The total
number of common shares that may be issued under the 1991 Plan is 2,500,000.
The direct sale of common shares under the 1991 Plan shall be at a price not
less than 85% of the fair market value of the common stock on the date the
right to purchase shares is granted.
Under the 1991 Plan, options are granted at an exercise price of not less
than 100% of fair market value at the date of grant, except for nonstatutory
options which are granted at an exercise price of not less than 85% of the
fair market value on the date of the grant.
Certain options are exercisable immediately, while others are subject to
vesting provisions whereby the options will be fully vested three to four
years after the date of grant. All options are non-transferable and expire
five to 10 years from the date of the grant. The Board of Directors, or a
committee appointed by the Board of Directors, may grant limited stock
appreciation rights in tandem with any stock options granted under the 1991
Plan. Limited stock appreciation rights are only exercisable with the consent
of the Board of Directors on and for the 60-day period following certain
events as defined in the 1991 Plan, and are payable in cash. No limited stock
appreciation rights have been issued under the 1991 Plan.
F-24
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On May 3, 1994, GranCare adopted a Stock Option/Stock Issuance Plan (the
1994 Plan) which provides for the granting of incentive stock options, the
granting of limited stock appreciation rights, a salary reduction grant
program, and a stock issuance program for selected employees of GranCare. The
1994 Plan has an automatic grant program for the granting of options to non-
employee directors. The total number of common shares issuable under the 1994
Plan is 1,363,960 shares. The 1994 Plan contains a provision that provides
that each year, commencing with the 1995 calendar year, the common stock
available for grant under the 1994 Plan will automatically increase by an
amount equal to 1% of the shares of common stock outstanding on December 31 of
the immediately preceding calendar year.
The exercise price per share for incentive stock options cannot be less than
100% of the fair market value per share of GranCare's common stock on the
grant date. For nonstatutory options, the exercise price per share may not be
less than 85% of such fair market value. No option shall have a maximum term
in excess of ten years from the grant date. The Plan Administrator, as
designated by the Board of Directors, will have complete discretion to grant
incentive stock options and limited stock appreciation rights, and to choose
individuals to participate in the salary reduction grant program. The Plan
Administrator may, at its discretion, sell shares of GranCare's common stock
at a price per share not less than 85% of fair market value in accordance with
the stock issuance program. Shares may also be issued solely as a bonus for
past services.
The Plan Administrator may, at its discretion, grant an employee with
incentive stock options the right to surrender all or part of an unexercised
option in exchange for a distribution from GranCare, or limited stock
appreciation rights. The distribution will be an amount equal to the excess of
the fair market value of the number of shares on the surrender date, over the
aggregate price payable for such vested shares. No limited stock appreciation
rights have been issued under the 1994 Plan.
On January 1, 1996, GranCare adopted an Outside Directors Stock Incentive
Plan (the 1996 Plan) which provides the granting of stock options and common
stock for non-employee directors. The 1996 Plan provides for the automatic
annual grant of shares of common stock to each non-employee director. The
total number of common shares issuable under the 1996 Plan is 250,000 shares.
Under the Plan, each non-employee director will also receive stock option
awards granted at various intervals. The exercise price of all of such options
will be the fair market value of common stock on the date of grant and such
options will vest in equal annual increments over a three year period.
Proforma information regarding net income and earnings per share is required
by Statement No. 123, which also requires that the information be determined
as if the Company has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1996 and 1995, respectively: risk-free interest rates of 5.77
% and 6.91%; volatility factors of the expected market price of the Company's
common stock of .424 and .451; and a weighted-average expected life of the
option of 8 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimated, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-25
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995
----------- -----------
DOLLARS IN THOUSANDS
EXCEPT
EARNINGS PER SHARE DATA
<S> <C> <C>
Pro forma net income................................ $ 31,753 $ 19,968
Pro forma net income per share:
Primary........................................... $ 1.32 $ 0.84
Fully diluted..................................... $ 1.29 $ 0.83
</TABLE>
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
future years.
In connection with the Evergreen merger, 9,672,806 shares of GranCare common
stock were issued in the exchange. Additionally, Evergreen stock options that
remained outstanding were exchanged for options to purchase GranCare stock
with the same terms, except as adjusted for the common stock exchange ratio.
The GranCare options issued in connection with the Evergreen exchange totaled
approximately 214,000 and are included in the option table presented below,
based on their original issuance date by Evergreen.
A summary of the Company's warrants activity for the three years ended
December 31, 1996 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994
----------------------- ----------------------- -----------------------
(WARRANTS IN THOUSANDS)
WEIGHTED - WEIGHTED - WEIGHTED -
AVERAGE AVERAGE AVERAGE
WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE WARRANTS EXERCISE PRICE
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 352 $ 5 765 $ 3 890 $ 4
Exercised............... (352) 5 (413) 2 (125) 5
---- ---- ----
Outstanding at end of
year................... -- -- 352 5 765 3
==== ==== ====
Exercisable at end of
year................... -- -- 352 5 765 3
==== ==== ====
</TABLE>
A summary of the Company's stock option activity (including the exchanged
Evergreen options mentioned above) for the three years ended December 31,
1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1995 1994
---------------------- ---------------------- ----------------------
(OPTIONS IN THOUSANDS)
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,142 $12 2,268 $11 1,809 $ 9
Granted................. 410 15 387 16 584 15
Cancelled............... (101) 16 (156) 16 (28) 8
Exercised............... (96) 14 (357) 5 (97) 4
----- ----- -----
Outstanding at end of
year................... 2,355 13 2,142 12 2,268 11
===== ===== =====
Exercisable at end of
year................... 1,436 11 1,186 10 1,117 7
===== ===== =====
Weighted-average fair
value of options
granted during the
year................... $ 9 $10
</TABLE>
F-26
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996, an aggregate of 611,000 shares was available for
future grant under GranCare's stock incentive plans. Together with the
2,355,000 stock options outstanding on that date, approximately 2,966,000
shares of common stock were reserved for future issuance. In connection with
the TeamCare merger described in Note 3, New GranCare has adopted a
replacement plan whereby 2,355,000 options were issued and fully vested and
are exercisable on substantially the same terms as the GranCare options
discussed above.
Information with respect to the range of exercise prices for options
outstanding at December 31, 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE CONTRACTUAL
OPTIONS PRICE LIFE
-------------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
$0.77...................................... 196 $ 0.77 7
$1.23-$1.61................................ 118 1.29 7
$9.875-$14.75.............................. 1,343 13.18 7
$15.75-$21.00.............................. 698 16.95 8
-----
2,355
=====
</TABLE>
As a result of the TeamCare merger, all options outstanding are fully vested
and exercisable effective February 12, 1997.
NOTE 10. EMPLOYEE BENEFIT PLANS
The Company currently has two separate benefit plans covering employees of
GranCare. The defined benefit plan, which was amended as of December 31, 1986
to freeze benefits for all but certain unionized employees, covers certain
employees after reaching age 21 and completion of one year of service. During
1990, the accrual of benefits was suspended for the employees who continued to
accrue benefits after December 31, 1986. In September 1996, the Board of
Directors approved termination of this plan effective December 31, 1996.
At December 31, 1996 and 1995, the projected benefit obligations were
$675,000 and $588,000 respectively. Adjustments to recognize minimum pension
liability have been reflected in the accompanying Consolidated Statements of
Shareholders' Equity.
Other employees of the Company are covered by various defined contribution
plans. Company contributions are based on a certain percentage of wages, a
matching percentage of the participants' voluntary contributions, or at the
Company's discretion. During 1996, 1995 and 1994, the Company recognized
$2,000,000, $1,645,000 and $1,145,000 respectively, of expense related to
these plans.
On May 14, 1996 GranCare adopted the Senior Executive Shareholder Value
Program for the Company's senior level executive officers and the Shareholder
Value Program for all other executive officers and employees (collectively the
Shareholder Value Program). The Shareholder Value Program provides for the
payment of cash incentives based on the performance of the Company over a
three year performance period vis-a-vis a peer group. The Shareholder Value
Program vests upon a "Change in Control", which the TeamCare merger described
in Note 3 constitutes. The Board of Directors of the Company has determined
that upon consummation of the merger, the senior executives and all other plan
participants would receive $2.3 million and $2.2 million, respectively (see
Note 3).
NOTE 11. RELATED-PARTY TRANSACTIONS
In connection with various acquisitions, GranCare has incurred debt payable
to former owners who are now employees of GranCare. Such debt totaled
$6,189,000 and $3,779,000 at December 31, 1996 and 1995, respectively.
F-27
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On October 1, 1996, the Company repurchased for $3,110,000 in cash one of
the two long-term health care facilities it sold in December 1993 to an
individual previously engaged by GranCare as a consultant on various
acquisitions and divestitures. Subsequent to this date, the individual
satisfied to the Company all obligations remaining in connection with the 1993
sale.
In 1994, GranCare sold three of its long-term health care facilities to a
former employee of GranCare at an aggregate sales price of $3,000,000.
GranCare provided financing of $2,550,000 on these sales and recognized a
total gain of $2,373,000.
Included in notes receivable in the accompanying Consolidated Balance Sheets
at December 31, 1996 and 1995, is a $5,720,000 and $2,850,000 note receivable,
respectively, resulting from working capital advances made to the owner of
certain facilities currently managed by the Company. The loan bears interest
payable monthly at 1% above the prime rate and is secured by the accounts
receivable, inventory and equipment of the managed facilities. The 1996 amount
reflects a $3,000,000 write-off which was a component of the $18,400,000 exit
and other one-time costs charge recorded in the third quarter of 1996 (see
Note 13).
NOTE 12. FAIR VALUES OF FINANCIAL INSTRUMENTS AND INVESTMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments.
Cash and Cash Equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates fair value.
Investments The carrying amount reported in the balance sheet for
investments approximates fair value. The investments in municipal bonds are
held by GranCare's captive insurance subsidiary and are restricted to use by
only that subsidiary, and are not available for general corporate purposes.
All investments are classified as "available for sale" for accounting purposes
and, therefore, are carried at fair value with unrealized gains and losses
recorded directly in equity. Fair market values are based on quoted market
prices.
There were no significant realized gains or losses on sales of investments
during 1996, 1995 and 1994. The investments in municipal bonds generally
mature within six years (e.g., 2001 to 2002).
Notes Payable and Long-Term Debt The carrying amounts of GranCare's
borrowing under the revolving loan and various mortgages and notes payable
approximate fair value. The fair value of GranCare's convertible subordinated
debentures and senior subordinated notes is based on their quoted market
price.
The cost basis and estimated fair values of GranCare's financial instruments
at December 31 are as follows:
<TABLE>
<CAPTION>
FINANCIAL INSTRUMENT 1996 COST BASIS ESTIMATED FAIR VALUE 1995 COST BASIS ESTIMATED FAIR VALUE
-------------------- --------------- -------------------- --------------- --------------------
DOLLARS IN THOUSANDS
<S> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 14,512 $ 14,512 $ 17,738 $ 17,738
Investments:
Marketable equity
securities........... 10,233 21,532 9,506 17,695
Municipal bonds....... 17,240 17,401 12,166 12,610
-------- -------- -------- --------
27,473 38,933 21,672 30,305
Notes payable and long-
term debt:
Revolving loan and
other debt........... 229,777 229,777 179,605 179,605
Convertible
subordinated
debentures........... 60,000 61,500 60,000 52,200
Senior Subordinated
Notes................ 100,000 106,750 100,000 103,000
</TABLE>
Note: The cost basis is the carrying amount for all financial instruments
except for investments, as noted above.
F-28
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. EXIT, RESTRUCTURING AND OTHER ONE-TIME CHARGES
EXIT AND OTHER ONE-TIME CHARGES
During the third quarter of 1996, management decided to close five
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The plan to exit
these activities, including providing appropriate notice as required by
regulations to residents, employees and authorities has commenced. The
facilities will be closed and operating activities will cease. The remaining
net book value of leasehold improvements at the dates of closure have been
charged to operations. On March 6, 1997, the Company modified its plan to
close five Indiana facilities to terminate its lease obligations and
operations of a total of 18 facilities. This modification did not
significantly impact the exit costs previously accrued in the third quarter of
1996. Management expects to complete the lease terminations in the first
quarter of 1997. The revenues and income before taxes of these facilities and
related regional offices during 1996 were $57,140,000 and $677,000,
respectively. In addition, in the third quarter of 1996, the Company recorded
other charges as set forth in the following table, including a charge for
additional bad debt expense related to TeamCare. The charge for bad debt
expense is attributable to the increased risk of collection resulting from the
deterioration in the financial condition of certain customers. The notes
receivable written off are for loans made by the Company to a sublease lessee
to fund working capital. Accounts receivable from the facility under lease
serve as collateral for the working capital loans. During the third quarter of
1996, the loans to the lessee began to significantly exceed the collateral,
indicating that the loan would not be recoverable. Accordingly, the Company
decided to terminate the sublease arrangement and to write off the loans which
it concluded would not be recoverable. The write-off of leasehold
improvements, notes receivable and bad debt expense are reflected in the
accompanying Consolidated Balance Sheets as a direct reduction of the related
asset. Costs related to the termination of the frozen pension plan and other
items have been reflected in accrued expenses in the accompanying Consolidated
Balance Sheets. The following is a summary of the exit and other one-time
charges:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
EXIT COSTS:
Write-off of leasehold improvements in connection
with the terminated leases......................... $10,600
OTHER:
TeamCare bad debt expense........................... 2,900
Write-off of notes receivable....................... 3,000
Termination of frozen pension plan and other items.. 1,900
-------
$18,400
=======
</TABLE>
RESTRUCTURING
In August 1994, GranCare adopted and publicly announced a formal plan of
restructuring which includes the reorganization of GranCare's operations and
the sale of certain under-performing and non-strategic long-term health care
facilities. In connection with its commitment to this formal plan, GranCare
recognized an $8,200,000 restructuring charge in the third quarter of 1994,
consisting of the following components:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Actual and projected net operating losses of the
facilities to be sold, from the commitment date to
their anticipated disposal dates...................... $2,620
Less: Estimated gains from the sale of the facilities.. 2,250
------
370
Personnel costs--termination and severance............. 3,700
Professional fees--legal, accounting and appraisals--
and other exit costs.................................. 1,100
Write-off of unamortized financing fees resulting from
restructuring......................................... 2,400
Other.................................................. 630
------
Total restructuring costs.............................. $8,200
======
</TABLE>
F-29
<PAGE>
GRANCARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The termination and severance benefits cover approximately 50 employees who
work or worked in the facilities to be divested or GranCare's corporate or
regional offices. Charges against the restructuring reserve in 1996, 1995 and
1994 included the write-off of unamortized financing fees and operating gains
and losses of the facilities sold. At December 31, 1996, all amounts provided
under this charge had been paid.
NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED)
The following table presents the Company's quarterly financial results of
operations for the years ended December 31, 1996 and 1995:
<TABLE>
<CAPTION>
NET INCOME
(LOSS) PER
REVENUES NET INCOME SHARE
------------------- ------------------ --------------
1996 1995 1996 1995 1996 1995
--------- --------- ------- ------- --------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
First Quarter........ $ 230,011 $ 191,681 $ 6,590 $ 6,079 $ 0.28 $ 0.25
Second Quarter....... 247,271 204,426 8,180 7,713 0.34 0.32
Third Quarter........ 268,371 208,462 9,392(2) (518)(1) 0.39 (0.02)
Fourth Quarter....... 257,470 211,893 8,558 7,290 0.35 0.31
</TABLE>
- --------
(1) Includes merger and other one-time costs of $11.8 million (see Note 4).
(2) Includes the effects before income taxes of (a) $18.0 million gain on the
sale of the Company's interest in ALS (see Note 2) and (b) exit and other
one-time costs of $18.4 million (see Note 13).
F-30
<PAGE>
GRANCARE, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS DEDUCTIONS OF YEAR
----------- ---------- ---------- ---------- ---------- -------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
1994:
Allowance for doubtful
accounts................. 7,059 8,290 1,182(2) 6,639(1) 9,892
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... -- 8,200 -- 3,658(3) 4,542
Year ended December 31
1995:
Allowance for doubtful
accounts................. 9,892 6,281 572(2) 5,889(1) 10,856
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... 4,542 -- -- 4,042(3) 500
Year ended December 31,
1996:
Allowance for doubtful
accounts................. 10,856 7,318 -- 6,965(1) 11,209
Restructuring reserve for
estimated losses on
reorganization and
divestiture of
facilities............... 500 -- -- 500(3) --
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowances recorded at date of acquisition.
(3) Writeoff of deferred loan and other related costs, operating results of the
facilities to be divested and gain or loss on the sale of those facilities.
F-31
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED) (NOTE)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................ $ 19,778 $ 14,512
Accounts receivable, less allowance for doubtful ac-
counts (1997--$14,918
and 1996--$11,209).................................. 234,435 233,335
Inventories.......................................... 1,838 17,312
Notes receivable..................................... 24,520 24,520
Prepaid expenses and other current assets............ 17,502 18,786
Deferred income taxes................................ 5,887 9,239
-------- --------
Total current assets................................ 303,960 317,704
Property and equipment................................ 254,773 271,536
Less accumulated depreciation........................ (57,798) (64,387)
-------- --------
196,975 207,149
Other assets:
Investments, at fair value........................... 38,175 38,933
Goodwill, less accumulated amortization (1997--$6,010
and 1996--$10,332).................................. 59,550 133,152
Other intangibles, less accumulated amortization
(1997--$5,378 and 1996--$9,700)..................... 9,497 11,613
Other................................................ 29,752 39,488
-------- --------
Total assets.......................................... $637,909 $748,039
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................ $ 82,555 $ 79,824
Accrued wages and related liabilities................ 16,405 21,541
Interest payable..................................... 4,968 8,235
Notes payable and current maturities of long-term
debt................................................ 3,115 7,535
-------- --------
Total current liabilities........................... 107,043 117,135
Long-term debt........................................ 361,996 382,242
Deferred income taxes................................. 17,531 23,084
Other................................................. 10,889 11,278
Stockholders' equity:
Common stock; $0.001 par value; 50,000,000 shares au-
thorized
(shares issued: 1997--24,088,697)................... 24 --
Paid in capital...................................... 124,970 --
Common stock; no par value; 50,000,000 shares
authorized
(shares issued: 1996--23,677,825)................... -- 123,378
Equity component of minimum pension liability........ (542) (542)
Unrealized gain on investments net of income taxes
(1997--$4,554 and 1996--$4,573)..................... 6,831 6,885
Retained earnings.................................... 9,167 84,579
-------- --------
140,450 214,300
-------- --------
Total liabilities and stockholders' equity........... $637,909 $748,039
======== ========
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date. See Notes to Condensed Consolidated
Financial Statements.
F-32
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
------------------ ------------------
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
REVENUES:
Net patient revenues................... $197,925 $245,427 $420,851 $474,254
Investment and other revenue........... 1,416 1,844 3,006 3,028
-------- -------- -------- --------
Net revenues.......................... 199,341 247,271 423,857 477,282
EXPENSES:
Operating expenses..................... 187,016 218,646 390,870 423,721
Depreciation and amortization.......... 5,262 6,514 11,013 12,672
Interest expense and financing
charges............................... 7,782 8,918 16,319 17,067
Nonrecurring costs-merger and other
costs................................. -- -- 28,300 --
-------- -------- -------- --------
Total expenses........................ 200,060 234,078 446,502 453,460
-------- -------- -------- --------
Income (loss) before income taxes and
extraordinary charge................... (719) 13,193 (22,645) 23,822
Income taxes............................ (273) 5,013 (893) 9,052
-------- -------- -------- --------
Income (loss) before extraordinary
charge................................. (446) 8,180 (21,752) 14,770
Extraordinary charge--loss on early
extinguishment of debt, net of income
tax benefit of $2,961.................. -- -- 4,831 --
-------- -------- -------- --------
Net income (loss)..................... $ (446) $ 8,180 $(26,583) $ 14,770
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON AND COMMON
EQUIVALENT SHARE:
Primary:
Income (loss) before extraordinary
charge............................... $ (0.02) $ 0.34 $ (0.91) $ 0.62
Extraordinary charge.................. -- -- (0.20) --
-------- -------- -------- --------
Net income (loss)..................... $ (0.02) $ 0.34 $ (1.11) $ 0.62
======== ======== ======== ========
Fully diluted:
Income (loss) before extraordinary
charge............................... $ (0.02) $ 0.33 $ (0.91) $ 0.61
Extraordinary charge.................. -- -- (0.20) --
-------- -------- -------- --------
Net income (loss)..................... $ (0.02) $ 0.33 $ (1.11) $ 0.61
======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Primary................................ 24,028 24,077 23,925 23,932
======== ======== ======== ========
Fully diluted.......................... 24,028 26,570 23,925 26,484
======== ======== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-33
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
EQUITY
COMMON COMPONENT
COMMON STOCK, OF MINIMUM UNREALIZED
STOCK, NO $0.001 PAID IN PENSION GAIN ON RETAINED
PAR PAR CAPITAL LIABILITY INVESTMENTS EARNINGS TOTAL
--------- ------ -------- ---------- ----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at January 1,
1997................... $123,378 $ -- $ -- $(542) $6,885 $ 84,579 $214,300
TeamCare Merger
transactions:
Conversion of Common
Stock................. (123,378) 24 123,354 -- -- -- --
Dividend of TeamCare... -- -- -- -- -- (48,829) (48,829)
Issuance of 410,872
shares of common stock
on exercise of
options............... -- -- 1,616 -- -- -- 1,616
Unrealized loss on
investments........... -- -- -- -- (54) -- (54)
Net income (loss)...... -- -- -- -- -- (26,583) (26,583)
-------- ---- -------- ----- ------ -------- --------
Balances at June 30,
1997................... -- $ 24 $124,970 $(542) $6,831 $ 9,167 $140,450
======== ==== ======== ===== ====== ======== ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-34
<PAGE>
GRANCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
--------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................ $ (26,583) $ 14,770
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Provision for doubtful accounts......................... 10,381 3,607
Depreciation and amortization........................... 11,013 12,672
Gain on sale of assets.................................. (187) (114)
Non-cash one-time charges............................... 5,916 --
Amortization of deferred financing costs................ 310 468
Changes in assets and liabilities net of effect of ac-
quisitions:
Accounts receivable.................................... (59,406) (44,728)
Other current assets................................... (1,212) (4,096)
Other noncurrent assets................................ (767) (3,641)
Accounts payable and accrued expenses.................. 17,830 1,682
Accrued wages and related liabilities.................. (987) (469)
Interest payable....................................... (3,133) 1,433
Income taxes payable................................... -- 1,928
Other noncurrent liabilities........................... 96 76
--------- --------
Net cash used in operating activities..................... (46,729) (16,412)
INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired........... 163 (5,929)
Purchases of property and equipment....................... (11,758) (16,364)
Net proceeds from disposition of TeamCare................. 88,233 --
Proceeds from disposition of property and equipment....... -- 994
Net purchases and sales of investments.................... 586 (5,119)
Other..................................................... (546) (1,400)
--------- --------
Net cash provided by (used in) investing activities....... 76,678 (27,818)
FINANCING ACTIVITIES
Proceeds from exercise of warrants and options............ 1,616 1,992
Long-term debt payments................................... (262,794) (4,571)
Proceeds from long-term debt borrowings................... 239,000 42,250
Payment of debt issuance costs............................ (2,505) (250)
--------- --------
Net cash (used in) provided by financing activities....... (24,683) 39,421
--------- --------
Net increase (decrease) in cash and cash equivalents...... 5,266 (4,809)
Cash and cash equivalents at beginning of period.......... 14,512 17,738
--------- --------
Cash and cash equivalents at end of period................ $ 19,778 $ 12,929
========= ========
</TABLE>
See Notes to Condensed Consolidated Financial Statements
F-35
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and six month
periods ended June 30, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and the footnotes
thereto included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B--VITALINK MERGER
GranCare entered into an Amended and Restated Agreement and Plan of Merger
with Vitalink Pharmacy Services, Inc. (Vitalink) dated as of September 3,
1996. The form of the transactions were: (1) GranCare's skilled nursing
facilities, along with its contract management and home health businesses were
reorganized into New GranCare, Inc. (New GranCare) and all of the shares of
New GranCare distributed to the GranCare shareholders in a tax-free spin off
(the Distribution); (2) GranCare (then consisting solely of the institutional
pharmacy and related business known as TeamCare) merged into and was acquired
by Vitalink (Vitalink Merger) through a tax-free exchange of shares of common
stock of Vitalink for shares of common stock of GranCare; and (3) New GranCare
became a public company upon consummation of the Distribution. Notwithstanding
the legal structure of the transactions, for accounting/financial reporting
purposes such transactions have been treated as the spin-off of TeamCare in
the form of a dividend and the reorganization/recapitalization of GranCare
into New GranCare as New GranCare has continued the majority of the GranCare
businesses. No gain has been recognized as a result of the distribution for
the difference between the market value of the Vitalink Common Stock received
and the carrying value of the net assets of TeamCare. New GranCare continued
to reflect the historical cost basis of assets and liabilities of GranCare.
These transactions were approved by the GranCare shareholders on February 8,
1997 and the transactions closed on February 12, 1997 (the Closing Date); the
spin-off of TeamCare was reflected in the first quarter of 1997.
In addition, as a consequence of the Vitalink Merger, the Company redeemed
its 6% Convertible Subordinated Debentures (the Debentures) due January 15,
2003 effective as of the Closing Date. GranCare deposited the redemption price
and accrued interest on each outstanding Debenture with the trustee for the
Debentures and interest ceased to accrue as of February 12, 1997. GranCare
also completed a tender offer for its 9 3/8% Senior Subordinated Notes (Senior
Notes) due 2005. GranCare accepted $98 million aggregate principal amount of
Senior Notes (representing 98% of the outstanding Senior Notes) for purchase
pursuant to GranCare's cash tender offer at a purchase price of $1,090 per
$1,000 principal amount plus accrued and unpaid interest up to, but not
including, the payment date.
F-36
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1997, the Company recognized a merger charge and extraordinary
charge related to debt extinguishment in connection with the aforementioned
transactions. The components of the merger charge and extraordinary charge
recognized in New GranCare's operations in the first quarter of 1997 consist
of the following:
<TABLE>
<CAPTION>
DOLLARS IN THOUSANDS
--------------------
<S> <C>
Shared transaction costs:
Redemption premium--$100 million Senior
Subordinated Notes............................. $ 9,000
Redemption premium--$60 million Convertible
Subordinated Debentures........................ 2,430
Investment banker fees.......................... 4,200
Consent fee paid to HRPT........................ 5,500
Other professional fees and merger related
costs.......................................... 5,470
-------
Total shared costs................................ 26,600
Less costs to be paid by Vitalink................. (13,300)
-------
GranCare portion of shared transaction costs...... 13,300
Other transaction related costs:
Consent fee paid to HRPT........................ 4,500
Write-off to deferred financing fees............ 5,441
Amounts payable under GranCare Shareholder Value
Program........................................ 4,500
Amounts payable under Restricted Stock Plan..... 2,200
Other employee severance and other related
costs.......................................... 6,059
-------
36,000
Less: Income taxes................................ (6,000)
-------
Total costs, net of income taxes.................. $30,000
=======
</TABLE>
Amounts included in the $7.8 million gross extraordinary charge recognized
by the Company are: redemption premium on $100 million Senior Subordinated
Notes--$9.0 million; redemption premium on $60 million Convertible
Subordinated Debentures--$2.4 million; and write-off of deferred financing
fees--$5.4 million, less amounts paid by Vitalink--$9.0 million.
Excluding TeamCare, the Vitalink Merger and extraordinary charges,
GranCare's total net revenues, pre-tax income and primary earnings per share
for the six month periods ended June 30, 1997 and 1996, respectively, would
have been $403,060,000, $5,166,000 and $0.13 and $365,790,000, $6,333,000 and
$0.26.
NOTE C--CONTINGENT EARN-OUT PROVISION
The purchase agreement with respect to the 1994 acquisition of Long Term
Care Pharmaceutical Services Corporation I and Long Term Care Pharmaceutical
Services Corporation III (collectively, "LTC"), contained a contingent earnout
provision for the two year period ended June 30, 1996. In April 1997, the
Company paid the seller of LTC $5.4 million in settlement of the earnout
provision. Of this settlement, Vitalink is obligated to fund $2.5 million.
This settlement has been reflected in the accompanying financial statements as
an increase to GranCare's investment in TeamCare thereby increasing the amount
of the dividend recorded in connection with the TeamCare spin-off.
F-37
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE D--NON-RECURRING CHARGE
During the third quarter of 1996, the Company recorded exit and other one-
time costs of $18.4 million as a charge to operations. Approximately $10.6
million of this charge relates to management's decision to close five Indiana
facilities which are operated under long term operating leases, as these
facilities did not fit the Company's operating strategies. The $10.6 million
reflects the remaining net book value of leasehold improvements at the dates
of closure and the remaining rent due to the landlord for periods after the
dates of closure. On March 6, 1997, the Company modified its plan from closing
five Indiana facilities to terminating most of its lease obligations and
operations in Indiana involving a total of 18 facilities. This modification
did not significantly impact the exit costs previously accrued in the third
quarter of 1996. Management completed the lease terminations effective April
1, 1997. Approximately $3 million of the charge relates to the write-off of
notes receivable for loans made by the Company to a sublease lessee to fund
working capital. Accounts receivable from the facility under lease serve as
collateral for the working capital loans. During the third quarter of 1996,
the loans to the lessee began to significantly exceed the collateral,
indicating that the loan would not be recoverable. Accordingly, the Company
decided to terminate the sublease arrangement and to write off the loans which
it concluded would not be recoverable. In addition, in the third quarter of
1996, the Company recorded $4.8 million of other charges which included $2.9
million of additional bad debt expense related to TeamCare. The charge for bad
debt expense was necessary to provide for the increased risk of collection
resulting from the deterioration in the financial condition of certain
customers in the third quarter of 1996.
NOTE E--THIRD PARTY SETTLEMENT APPEAL
During the fourth quarter of 1996, the Company received final settlement on
its 1994 cost reports for its California long-term health care facilities. The
final settlements made by the intermediary for seven facilities included
disallowances of a portion of speech and occupational therapy costs ($1.8
million) based on their interpretation of the Medicare prudent buyer concept.
In addition, the intermediary has reopened the 1993 cost reports for two
additional facilities ($0.7 million) for the same issue. The Company has
furnished therapy services to patients under arrangements with outside therapy
contractors. The contracts with the outside contractors contain
indemnification clauses regarding denial of payment for services provided. The
intermediary asserts that the Company did not act as a prudent buyer of
therapy services as the Company should have hired therapists instead of
contracting for their services. In the absence of prudent buyer documentation
to the contrary, the intermediary determined reasonable costs for therapy
services based on internally developed survey data and other factors. The
Company, in conjunction with a therapy company and another long-term care
company, has filed an expedited group appeal to the Provider Reimbursement
Review Board regarding these 1994 audit adjustments. A hearing took place
during the Company's second quarter. The Company is awaiting the outcome of
this hearing. Management (based on the advise of outside counsel) believes
that it has a strong position in this matter and will ultimately prevail;
therefore no accrual for losses has been made. It is possible that the
intermediary will attempt to apply the same interpretation for other Company
facilities and for other periods. If the hearing results in an unfavorable
outcome to the Company and if the Company does not ultimately prevail on this
matter, it could have a material adverse impact on net income of a particular
future quarter or year.
NOTE F--CREDIT FACILITY
In connection with the Vitalink Merger described in Note B, the Company
replaced its existing credit facility with a new credit facility in the
aggregate amount of $300,000,000 (the New Credit Facility). The New Credit
Facility consists of two components: a $200,000,000 5-year revolving credit
facility (which includes a $40,000,000 sub-limit for the issuance of standby
letters of credit) and a $100,000,000 5-year term loan. Borrowings for working
capital and general corporate purposes may not exceed $75,000,000. The first
$25,000,000 of exposure for letters of credit issued under the letter of
credit sub-facility will correspondingly
F-38
<PAGE>
GRANCARE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
reduce availability under the working capital sub-facility. The revolving
credit portion of the New Credit Facility will mature in five years. The term
loan portion of the New Credit Facility will be amortized in ten quarterly
installments of $7,000,000 each commencing February 12, 1999, thereafter
increasing to $10,000,000 per quarter. All remaining principal and accrued and
unpaid interest shall be due and payable in full on the fifth anniversary of
the closing date of the New Credit Facility. Interest on outstanding
borrowings shall accrue, at the option of the Company, at the base rate or at
the Eurodollar rate plus, in each case, an applicable margin.
NOTE G--TAXES
For the six-months ended June 30, 1997, the provision for income taxes is
affected by $19.0 million of merger expenses that are not tax deductible for
income tax purposes. Without the effect of such non-deductible expenses, the
effective tax rate for the 1997 period is approximately 39% compared to 38%
for the same period in 1996.
NOTE H--FASB STATEMENT NO. 128
During the first quarter of 1997, the FASB released FASB Statement No. 128
(Statement No. 128), Earnings Per Share. As required, the Company intends to
adopt Statement No. 128 in the fourth quarter of 1997 and will restate
earnings per share for prior periods in conformity with the new rules. The
Company has not yet determined the earning per share impact of adopting
Statement No. 128.
NOTE I--RELATED PARTY TRANSACTION
Effective April 1, 1997, the Company acquired Connerwood Healthcare, Inc.
("Connerwood"), a long-term care company operating seven skilled nursing
facilities in Indiana. These facilities were subleased to Connerwood in 1993
and have been managed by the Company since that date. Four of the seven
facilities acquired were subsequently divested in conjunction with the Indiana
lease termination described in Note D. In connection with this acquisition
transaction, the Company recorded $3.9 million in goodwill.
NOTE J--CHANGE IN ACCOUNTING ESTIMATE
Since December 31, 1996, and to a greater extent in the second quarter of
1997, the Company has experienced delays in its collection of certain third
party and other accounts receivable. In recognition of these delays, the
Company has increased its allowance for doubtful accounts. The effect of this
change in accounting estimate for the three and six months ended June 30, 1997
was to increase operating expenses by $8.0 million and net loss by $4.6
million, or $0.20 per share.
F-39
<PAGE>
ANNEXES TO THE
PROXY STATEMENT/PROSPECTUS
<TABLE>
<C> <S>
Amended and Restated Agreement and Plan of Merger (Recapitalization
Annex I Merger Agreement)
Amended and Restated Agreement and Plan of Merger (GranCare Merger
Annex II Agreement)
Annex III Form of Amended and Restated Certificate of Incorporation of Living
Centers of America, Inc. (as proposed to be amended by the Amend-
ment Proposal)
Annex IV Form of Amended and Restated Bylaws of Paragon
Annex V Form of Stockholders Agreement
Annex VI Opinion of Credit Suisse First Boston Corporation
Annex VII Opinion of NationsBanc Capital Markets, Inc.
Annex VIII Opinion of Smith Barney Inc.
Annex IX Opinion of Chase Securities Inc.
Annex X Section 262 of the Delaware General Corporation Law
</TABLE>
<PAGE>
ANNEX I
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of May 7, 1997, amended as of June 12, 1997 and September 9, 1997 and
amended and restated as of September 17, 1997 (this "Amended and Restated
Agreement") among Apollo Management, L.P., a Delaware limited partnership on
behalf of one or more managed investment funds (the "Parent"), Apollo LCA
Acquisition Corp., a Delaware corporation and a subsidiary of Parent (the
"Sub"), and Living Centers of America, Inc., a Delaware corporation (the
"Company").
RECITALS
WHEREAS, the Parent, the Sub and the Company entered into that certain
Agreement and Plan of Merger dated as of May 7, 1997 (the "Original Merger
Agreement" and as amended and restated as of June 12, 1997 and further amended
as of September 9, 1997, the "Amended Original Merger Agreement");
WHEREAS, subsequent to the date of the Amended Original Merger Agreement,
the Parent, the Sub and the Company have each determined that it is in the
best interests of each of the foregoing entities to enter into this Agreement,
which amends and restates the Amended Original Merger Agreement;
WHEREAS, the Board of Directors of each of the Sub and the Company has
determined that it is fair and in the best interests of their respective
stockholders for the Sub to merge with and into the Company (the "Merger")
pursuant to Section 251 of the Delaware General Corporation Law ("DGCL") upon
the terms and subject to the conditions set forth herein;
WHEREAS, a condition of the Merger is satisfaction of all other conditions
to a merger (the "GranCare Merger") of a wholly-owned subsidiary of the
Company with and into GranCare, Inc., a Delaware corporation ("GranCare") ;
WHEREAS, the Board of Directors of the Company has adopted resolutions
approving the Merger, this Agreement, the issuance of shares of common stock
of the Company, $.01 par value (the "Shares") in connection with the GranCare
Merger, certain amendments to the Company's Certificate of Incoporation and
the transactions contemplated hereby, and has agreed to recommend that the
Company's stockholders approve the Merger, this Agreement, such issuance of
Shares, and such amendments;
WHEREAS, the Sub and the Company have agreed (subject to the terms and
conditions of this Agreement), as soon as practicable following the approval
by the stockholders of the Company, to effect the Merger, as more fully
described herein;
WHEREAS, the Sub and the Company desire to make certain representations,
warranties, covenants and agreements in connection with this Agreement; and
WHEREAS, it is intended that the Merger be recorded as a recapitalization
for financial reporting purposes;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.01 The Merger.
Upon the terms and subject to the conditions hereof, and in accordance with
the relevant provisions of the DGCL, the Sub shall be merged with and into the
Company as soon as practicable following the satisfaction or waiver, if
permissible, of the conditions set forth in Article VI hereof.
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The Company shall be the surviving corporation in the Merger (in such
capacity, sometimes referred to herein as the "Surviving Corporation") under
the name Living Centers of America, Inc. (or such other name as the parties
shall agree) and shall continue its existence under the laws of Delaware. The
separate corporate existence of the Sub shall cease.
Section 1.02 Consummation of the Merger.
Subject to the provisions of this Agreement, the parties hereto shall cause
the Merger to be consummated by filing with the Secretary of State of the
State of Delaware a duly executed and verified certificate of merger, as
required by the DGCL, and shall take all such other and further actions as may
be required by law to make the Merger effective as promptly as practicable.
Prior to the filing referred to in this Section, a closing (the "Closing")
will be held at the offices of Cleary, Gottlieb, Steen & Hamilton, One Liberty
Plaza, New York, New York (or such other place as the parties may agree) for
the purpose of confirming all the foregoing. The time the Merger becomes
effective in accordance with applicable law is referred to as the "Effective
Time."
Section 1.03 Effects of the Merger.
The Merger shall have the effects set forth in the applicable provisions of
the DGCL and set forth herein.
Section 1.04 Certificate of Incorporation and Bylaws.
At the Effective Time, the Certificate of Incorporation of the Company shall
be amended and restated to read in its entirety as set forth in Exhibit A (and
the amendments effected thereby shall be submitted to the stockholders of the
Company as contemplated by Section 1.06) and, as so amended, shall be the
Certificate of Incorporation of the Surviving Corporation. At the Effective
Time, the Bylaws of the Sub, as in effect immediately prior thereto (after
giving effect to Section 5.15 hereof), shall be the Bylaws of the Surviving
Corporation.
Section 1.05 Directors and Officers.
The directors of the Sub immediately prior to the Effective Time (after
giving effect to Section 5.12 hereof) and the officers of the Company
immediately prior to the Effective Time shall be the directors and officers,
respectively, of the Surviving Corporation until their respective successors
are duly elected and qualified.
Section 1.06 Company Actions.
The Company hereby represents and warrants that (a) its Board of Directors
(at a meeting duly called and held), has (i) determined that the Merger is
fair to and in the best interests of the stockholders of the Company, (ii)
resolved to approve (A) this Agreement, the Merger, the issuance of Shares to
the stockholders of the Sub in connection with the Merger (B) the amendment of
the Company's Certificate of Incorporation as contemplated by Section 1.04
(the "Amendment Proposal"), and (C) the issuance of Shares (the "Stock
Issuance Proposal") pursuant to the GranCare Merger contemplated by the
amended and restated agreement and plan of merger (the "GranCare Merger
Agreement") by and among GranCare, the Company, a wholly-owned subsidiary of
the Company ("Merger Sub") and the Parent, and to recommend (subject to its
fiduciary duties as advised by legal counsel) approval of this Agreement, the
Amendment Proposal and the Stock Issuance Proposal (collectively, the
"Stockholder Approvals") by the stockholders of the Company, (iii) taken all
necessary steps to render Section 203 of the DGCL and Article Tenth of the
Company's Restated Certificate of Incorporation inapplicable to the Merger,
(iv) resolved to elect not to be subject, to the extent permitted by law, to
any state takeover law other than Section 203 of the DGCL that may purport to
be applicable to the Merger, or the transactions contemplated by this
Agreement and (v) approved the Rights Agreement Amendment (as defined below),
and (b) Credit Suisse First Boston ("CSFB") and NationsBanc Capital Markets,
Inc. ("NationsBanc"), the Company's financial advisors, have advised the
Company's Board of Directors that, in their opinion, the consideration to be
paid to or retained by the Company's stockholders in the Merger and the
GranCare Merger is fair, from a financial point of view, to such stockholders.
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ARTICLE II
EFFECTS OF THE MERGER
Section 2.01 Conversion of Shares.
(a) Each Share issued and outstanding immediately prior to the Effective
Time (other than Shares owned by the Parent, the Sub or any subsidiary of the
Parent or the Sub or held in the treasury of the Company (collectively
"Excluded Shares"), all of which shall be canceled and cease to exist, without
consideration being payable therefore and Dissenting Shares (as defined in
Section 2.06)) shall, by virtue of the Merger, remain outstanding or be
converted at the Effective Time into the following (the "Merger
Consideration"), upon the surrender of the certificate representing such
Shares as provided in Section 2.07 and subject to Section 2.03 hereof:
(i) for each Share with respect to which an election to retain such Share
has been effectively made and not revoked or lost, pursuant to Sections
2.02(c), (d) and (e) ("Electing Shares"), the right to retain one fully
paid and nonassessable share of Common Stock of the Surviving Corporation
(a "Retained LCA Share"); and
(ii) for each such Share (other than Retained LCA Shares), the right to
receive in cash from the Company following the Merger an amount equal to
$40.50 (the "Cash Election Price").
(b) As of the Effective Time of the Merger, all Shares (other than Excluded
Shares and Retained LCA Shares) issued and outstanding immediately prior to
the Effective Time of the Merger, shall no longer be outstanding and shall
automatically be canceled and retired and shall cease to exist and each holder
of a certificate representing any such Shares shall, to the extent such
certificate represents such Shares, cease to have any rights with respect
thereto, except the right to receive cash, including such in lieu of
fractional shares to be issued or paid in consideration therefor upon
surrender of such certificate in accordance with Section 2.07 and except for
the rights of Dissenting Shares as provided in Section 262 of the DGCL.
Section 2.02 Elections.
(a) Each person who, on or prior to the Election Date referred to in
paragraph (c) below, is a record holder of Shares will be entitled, with
respect to all or any portion of his Shares, to make an unconditional election
(an "LCA Stock Election") on or prior to such Election Date to retain Retained
LCA Shares (subject to Section 2.03), on the basis hereinafter set forth.
(b) Prior to the mailing of the Proxy Statement (as defined below), the Sub
shall appoint a bank or trust company to act as paying agent (the "Paying
Agent") for the payment of the Merger Consideration.
(c) The Company shall prepare and mail a form of election, which form shall
be subject to the reasonable approval of the Sub (the "Form of Election"),
with the Proxy Statement to the record holders of Shares as of the record date
for the Stockholders Meeting (as defined below), which Form of Election shall
be used by each record holder of Shares who wishes to make an LCA Stock
Election for any or all Shares held, subject to the provisions of Section 2.03
hereof, by such holder. The Company will use commercially reasonable efforts
to make the Form of Election and the Proxy Statement available to all persons
who become holders of Shares during the period between such record date and
the Election Date referred to below. Any such holder's election to retain
Retained LCA Shares shall have been properly made only if the Paying Agent
shall have received at its designated office, by 5:00 p.m., New York City time
on the business day (the "Election Date") next preceding the day on which the
vote on the Stockholder Approvals is taken at the Stockholders Meeting a Form
of Election properly completed and signed and accompanied by certificates for
the Shares to which such Form of Election relates (or by an appropriate
guarantee of delivery of such certificates as set forth in such Form of
Election from a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States, provided such certificates are in fact delivered to the Paying
Agent within three (3) NYSE trading days after the date of execution of such
guarantee of delivery).
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(d) Any Form of Election may be revoked by the stockholder submitting it to
the Paying Agent only by written notice received by the Paying Agent (i) prior
to 5:00 p.m., New York City time on the Election Date or (ii) after the date
of the Stockholders Meeting, if (and to the extent that) the Paying Agent is
legally required to permit revocations and the Effective Time of the Merger
shall not have occurred prior to such date. In addition, all Forms of Election
shall automatically be revoked if the Paying Agent is notified in writing by
the Sub and the Company that the Merger has been abandoned. If a Form of
Election is revoked, the certificate or certificates (or guarantees of
delivery, as appropriate) for the Shares to which such form of Election
relates shall be promptly returned to the stockholder submitting the same to
the Paying Agent.
(e) The determination of the Paying Agent shall be binding whether or not
elections to retain Retained LCA Shares have been properly made or revoked
pursuant to this Section 2.02 with respect to Shares and when elections and
revocations were received by it. If the Paying Agent determines that any
election to retain Retained LCA Shares was not properly made with respect to
Shares, such Shares shall be treated by the Paying Agent as Shares which were
not Electing Shares at the Effective Time of the Merger, and such Shares shall
be exchanged in the Merger for cash pursuant to Section 2.01(a)(ii). The
Paying Agent shall also make all computations as to the allocation and the
proration contemplated by Section 2.03, and any such computation shall be
conclusive and binding on the holders of Shares. The Paying Agent may, with
the mutual agreement of the Sub and the Company, make such rules as are
consistent with this Section 2.02 for the implementation of the elections
provided for herein as shall be necessary or desirable fully to effect such
elections.
Section 2.03 Proration.
(a) Notwithstanding anything in this Agreement to the contrary, the
aggregate number of Shares to remain outstanding as Retained LCA Shares in the
Surviving Corporation at the Effective Time of the Merger shall be equal to
1,905,748, (the "Retained Share Number").
(b) If the number of Electing Shares exceeds the Retained Share Number, then
each Electing Share shall be converted into the right to retain Retained LCA
Shares or receive cash in accordance with the terms of Section 2.01(a) in the
following manner:
(i) A proration factor (the "Non-Cash Proration Factor") shall be
determined by dividing the Retained Share Number by the total number of
Electing Shares.
(ii) Subject to Section 2.07(e), the number of Electing Shares covered by
each LCA Stock Election to be retained (on a consistent basis among
stockholders who made the election referred to in Section 2.01(a)(i) pro
rata to the number of shares as to which they made such elections) shall be
equal to the product of the Non-Cash Proration Factor multiplied by the
total number of Electing Shares.
(iii) Subject to Section 2.07(e), each Electing Share other than those
shares retained as Retained LCA Shares in accordance with Section
2.03(b)(ii), shall be converted into the right to receive the cash price
(on a consistent basis among stockholders who made the election referred to
in Section 2.01(a)(i), pro rata to the number of shares as to which they
made such election) as if such shares were not Electing Shares in
accordance with the terms of Section 2.01(a)(ii).
(c) If the number of Electing Shares is less than the Retained Share Number,
then:
(i) All Electing Shares shall remain outstanding as Retained LCA Shares
in New LCA in accordance with the terms of Section 2.01(a))(i);
(ii) Subject to Section 2.07(e), additional Shares other than Electing
Shares shall be retained (on a consistent basis among stockholders who held
Shares as to which they did not make the election referred to in Section
2.01(a)(i) pro rata to the number of such Shares as to which no such
election had been made) as Retained LCA Shares in accordance with the terms
of Section 2.01(a) in the following manner: the number of Shares in
addition to Electing Shares to be retained as Retained LCA Shares (the
"Non-Electing Retained LCA Shares") (on a basis consistent among
stockholders who held Shares as to which they did not make the election
referred to in Section 2.01(a)(i) pro rata to the number of such Shares as
to which no such election had been made) shall be equal to the excess of
the Retained Share Number over the number of Electing Shares.
(iii) Each other Share shall be converted into the right to receive the
cash price.
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Section 2.04 Conversion of Common Stock of the Sub.
Each share of common stock, par value $.01 per share, of the Sub issued and
outstanding immediately prior to the Effective Time shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into and become at the Effective Time one share of common stock of the
Surviving Corporation.
Section 2.05 Stockholders' Meeting.
Subject to applicable law, the Company, acting through its Board of
Directors, shall, in accordance with applicable law, duly call, give notice
of, convene and hold a special meeting (which, as may be duly adjourned, shall
be referred to as the "Special Meeting" or the "Stockholders Meeting") of its
stockholders as soon as practicable for the purpose of obtaining the
Stockholder Approvals and, subject to the fiduciary duties of its Board of
Directors under applicable law as determined by such directors in good faith
after consultation with and based upon the advice of Cleary, Gottlieb, Steen &
Hamilton, as legal counsel to the Company, include in the joint proxy
statement (the "Proxy Statement") of each of the Company and GranCare for use
in connection with the stockholders meeting of each of the Company and
GranCare, the recommendation of the Company's Board of Directors that
stockholders of the Company vote in favor of the Stockholder Approvals. The
Parent, the Sub and the Company agree to use commercially reasonable efforts
to cause the Special Meeting to occur within forty-five (45) days after the
Company has responded to all SEC comments with respect to the preliminary
Proxy Statement as provided in Section 5.07.
Section 2.06 Dissenting Shares.
Notwithstanding anything in this Agreement to the contrary, Shares which are
issued and outstanding immediately prior to the Effective Time and which are
held by stockholders who did not vote in favor of the Merger and who comply
with all of the relevant provisions of Section 262 of the DGCL (the
"Dissenting Shares") shall not be converted into or be exchangeable for the
right to receive the Merger Consideration (but instead shall be converted into
the right to receive payment from the Surviving Corporation with respect to
such Dissenting Shares in accordance with the DGCL), unless and until such
holders shall have failed to perfect or shall have effectively withdrawn or
lost their rights to appraisal under the DGCL. If any such holder shall have
failed to perfect or shall have effectively withdrawn or lost such right, such
holder's Shares shall be treated at the Company's sole discretion as either
(i) a Share (other than an Electing Share) that had been converted as of the
Effective Time of the Merger into the right to receive Merger Consideration in
accordance with Section 2.01(a) or (ii) an Electing Share. The Company shall
give prompt notice to the Sub of any demands received by the Company for
appraisal of Shares, and the Sub and Parent shall have the right to
participate in and direct all negotiations and proceedings with respect to
such demands. The Company shall not, except with the prior written consent of
the Sub and Parent, make any payment with respect to, or settle or offer to
settle, any such demands.
Section 2.07 Exchange of Certificates.
(a) As soon as reasonably practicable as of or after the Effective Time of
the Merger, the Corporation shall deposit with the Paying Agent, for the
benefit of the holders of Shares, for exchange in accordance with this Article
II, the cash portion of the Merger Consideration.
(b) As of or promptly after the Effective Time of the Merger, each holder of
an outstanding certificate or certificates which prior thereto represented
Shares shall, upon surrender to the Paying Agent of such certificate or
certificates and acceptance thereof by the Paying Agent, be entitled to a
certificate or certificates representing the number of full shares in the
Surviving Corporation, if any, to be retained by the holder thereof as
Retained LCA Shares pursuant to this Agreement and the amount of cash, if any,
into which the number of Shares previously represented by such certificate or
certificates surrendered shall have been converted pursuant to this Agreement.
The Paying Agent shall accept such certificates upon compliance with such
reasonable terms and conditions as the Paying Agent may impose to effect an
orderly exchange thereof in accordance with normal exchange practices. After
the Effective Time of the Merger, there shall be no further transfer on the
records of the Company or its transfer agent of certificates representing (i)
Shares which have been converted, in whole or in part, pursuant to this
Agreement into the right to receive cash, and if such certificates are
presented to the Company for transfer, they shall be canceled against delivery
of cash and, if appropriate, certificates for Retained
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LCA Shares. If any certificate for such Retained LCA Shares is to be issued
in, or if cash is to be remitted to, a name other than that in which the
certificate for Shares surrendered for exchange is registered, it shall be a
condition of such exchange that the certificate so surrendered shall be
properly endorsed, with signature guaranteed or otherwise in proper form for
transfer and that the person requesting such exchange shall pay to the Company
or its transfer agent any transfer or other taxes required by reason of the
issuance of certificates for such Retained LCA Shares in a name other than
that of the registered holder of the certificate surrendered, or establish to
the satisfaction of the Company or its transfer agent that such tax has been
paid or is not applicable. Until surrendered as contemplated by this Section
2.07(b), each certificate for Shares shall be deemed at any time after the
Effective Time of the Merger to represent only the right to receive upon such
surrender the Merger Consideration as contemplated by Section 2.01.
(c) No dividends or other distributions with respect to Retained LCA Shares
with a record date after the Effective Time of the Merger shall be paid to the
holder of any unsurrendered certificate for Shares with respect to the
Retained LCA Shares represented thereby and no cash payment in lieu of
fractional Shares shall be paid to any such holder pursuant to Section 2.07(e)
until the surrender of such certificate in accordance with this Article II.
Subject to the effect of applicable laws, following surrender of any such
certificate, there shall be paid to the holder of the certificate representing
whole Retained LCA Shares issued in connection therewith, without interest (i)
at the time of such surrender, the amount of any cash payable in lieu of a
fraction of a Retained LCA Share to which such holder is entitled pursuant to
Section 2.07(e) and the proportionate amount of dividends or other
distributions with a record date after the Effective Time of the Merger
therefor paid with respect to such Retained LCA Shares, and (ii) at the
appropriate payment date, the proportionate amount of dividends or other
distributions with a record date after the Effective Time of the Merger but
prior to such surrender and a payment date subsequent to such surrender
payable with respect to such whole Retained LCA Shares.
(d) All cash paid upon the surrender for exchange of certificates
representing Shares in accordance with the terms of this Article II (including
any cash paid pursuant to Section 2.07(e) shall be deemed to have been issued
(and paid) in full satisfaction of all rights pertaining to the Shares
exchanged for cash theretofore represented by such certificates.
(e) Notwithstanding any other provision of this Agreement, each holder of
Retained LCA Shares retained pursuant to the Merger who would otherwise have
been entitled to retain a fraction of a Retained LCA Share (after taking into
account all Shares delivered by such holder) shall receive, in lieu thereof, a
cash payment (without interest) equal to such fraction multiplied by $40.50.
(f) Any portion of the Merger Consideration deposited with the Paying Agent
pursuant to this Section 2.07 (the "Exchange Fund") which remains
undistributed to the holders of the certificates representing Shares for six
months after the Effective Time of the Merger shall be delivered to the
Surviving Corporation and any holders of Shares prior to the Merger who have
not theretofore complied with this Article II shall thereafter look only to
the Surviving Corporation and only as general creditors thereof for payment of
their claim for cash, if any.
(g) None of the Sub or the Company or the Paying Agent shall be liable to
any person in respect of any cash from the Exchange Fund delivered to a public
office pursuant to any applicable abandoned property, escheat or similar law.
If any certificates representing Shares shall not have been surrendered prior
to one year after the Effective Time of the Merger (or immediately prior to
such earlier date on which any cash in respect of such certificate would
otherwise escheat to or become the property of any Governmental Authority),
any such cash in respect of such certificate shall, to the extent permitted by
applicable law, become the property of the Surviving Corporation, free and
clear of all claims or interest of any person previously entitled thereto.
(h) The Paying Agent shall invest any cash included in the Exchange Fund, as
directed by the Company, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Company. To the extent
that there are losses with respect to such investments, or the Exchange Fund
diminishes for other reasons below the level required to make prompt payments
of the Merger Consideration as contemplated hereby, the Parent shall promptly
replace or restore the portion of the Exchange Fund lost through investments
or other events so as to ensure that the Exchange Fund is, at all times,
maintained at a level sufficient to make such payments.
(i) The Company shall pay all charges and expenses of the Paying Agent.
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Section 2.08 Rights Under Stock Right Plans.
Immediately prior to the Effective Time, the Company shall take such action
as may be necessary so that each then outstanding option, warrant, or right
(including stock purchase rights and options granted to outside directors) to
purchase Shares, each holder of any other right to receive Shares subject to
vesting, settlement or other conditions (whether or not conditioned upon the
payment of consideration by such holder), each employee who has made an
election on or before the date hereof to purchase Shares under a stock
purchase arrangement in effect on or before the date hereof (regardless of
whether such Shares have been purchased or have been allocated from treasury
stock in response to such election or whether the settlement or allocation of
such Shares is subject to vesting or other conditions, but, in the case of the
salary reduction plans, only with respect to Shares to be allocated with
respect to reductions in salary if such salary reduction relates to the period
prior to the Effective Time), and each holder of Shares subject to vesting or
other restrictions pursuant to any employee benefit or stock plan (including,
without limitation, any stock option, stock purchase, restricted stock or
other plan) (all of the options, warrants, rights, elections to purchase,
whether through salary reduction or otherwise, and plans referred to above
being defined as the "Stock Right Plans"), whether or not such options or
rights are then vested or exercisable, or such elections have been fulfilled
or honored or such restrictions have lapsed or terminated (the "Rights"),
shall be cancelled by the Company, and each holder of a Right to be cancelled
shall be entitled to receive that number of Shares as is equal to the product
of (i) the total number of Shares subject to such holder's Rights, and (ii)
the excess, if any, of (x) $40.50 over (y) the exercise price per Share
previously subject to each such Right, and (iii) 0.02469 (the "Right
Consideration") upon cancellation of such Rights immediately prior to the
Effective Time, and such holder shall be given the opportunity to make the
elections described in Section 2.02 (subject to proration as provided in
Section 2.03) with respect to the Shares to be issued as such Right
Consideration; provided, however, that with respect to any person subject to
Section 16 of the Exchange Act, to the extent that the payment or the right to
receive payment with respect to the Rights (or the Shares relating thereto)
would cause such person to have any liability under Section 16 of the Exchange
Act, any such amount shall be paid on (and shall not be payable until) the
first business day following the expiration of six months after any such Right
was granted and shall not be due and payable prior thereto (and the Parent,
the Sub and the Company agree, for the benefit of such persons, not to assert
that any such person has any liability pursuant to Section 16(b) of the
Exchange Act with respect to any such amount). In all other instances, the
Parent and the Surviving Corporation shall cause the Right Consideration to be
paid within five business days after the Effective Time. The surrender of a
Right to the Company in exchange for the Right Consideration shall be deemed a
release of any and all rights the holder had or may have had in respect of
such Right. Prior to the Effective Time, the Company shall use all reasonable
efforts to obtain all necessary consents or releases from holders of Rights
under the Stock Right Plans or otherwise and take all such other action
requested by the Sub, consistent with applicable law and the terms of the
Stock Right Plans and the Rights as may be necessary to give effect to the
transactions contemplated by this Section 2.08. The foregoing shall not limit
or affect any provision of a Stock Right Plan that would accelerate the
vesting of any Right or prevent the acceleration, settlement, or exercise of
any Right that would otherwise be required or permitted pursuant to the terms
of a Stock Right Plan (whether by reason of the consummation of the Offer or
otherwise). No salaries shall be reduced with respect to employment subsequent
to the Effective Time pursuant to stock purchase elections under the salary
reduction plan.
Section 2.09 Nonqualified Deferred Compensation Plan.
At the Effective Time, each participant in the Living Centers of America,
Inc. Deferred Retirement Income Plan and each participant in the Company's
Retirement Savings 401(k) Plan (the "Deferred Plans") shall become vested in
his or her entire account balances under each Deferred Plan including, without
limitation, any portion of such account balance maintained in Shares or Shares
Units as provided under such Deferred Plans. Prior to the Effective Time, the
Company may continue to match deferrals of compensation with Shares as
provided pursuant to the Deferred Plans. Subject to Section 5.6, after the
Effective Time, the Surviving Corporation may discontinue contributions or
otherwise amend the Deferred Plans; provided that the Surviving Corporation
shall continue to maintain in full force and effect, or otherwise preserve the
tax benefits provided by, such Deferred Plans.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as of the date hereof (or such other
date as shall be expressly specified) to the Parent and the Sub as follows:
Section 3.01 Organization and Qualification.
Each of the Company and its subsidiaries is a duly organized and validly
existing corporation in good standing under the laws of its jurisdiction of
incorporation, with all requisite corporate power and other authority to own
its properties and conduct its business as it is being conducted on the date
hereof, and is duly qualified and in good standing as a foreign corporation
authorized to do business in each of the jurisdictions in which the character
of the properties owned or held under lease by it or the nature of the
business transacted by it makes such qualification necessary. The Company has
heretofore made available to the Sub accurate and complete copies of the
Certificates of Incorporation and Bylaws as currently in effect of the Company
and its subsidiaries.
Section 3.02 Capitalization.
(a) The authorized capital stock of the Company consists of 75,000,000
Shares and 5,000,000 shares of preferred stock, par value $.01 (the "Preferred
Stock"), of which 350,000 shares have been designated as Series A Junior
Participating Preferred Stock (the "Junior Preferred Stock"). As of the close
of business on March 31, 1997 (the "Capitalization Date"): 19,547,616 Shares
were issued and outstanding; no shares of Preferred Stock were issued and
outstanding; 720,304 Shares were held in the Company's treasury; and there
were outstanding Rights with respect to 1,635,447 Shares as set forth in
Section 3.02(a) of the disclosure letter, dated the date hereof, delivered by
the Company to the Parent on May 7, 1997 setting forth certain matters
referred to in this Agreement (the "Disclosure Letter"); and there were
outstanding rights (the "Rights Agreement Rights") under the Rights Agreement
dated November 17, 1994 between the Company and Chemical Bank, as amended by
an amendment dated as of July 31, 1995 (the "Rights Agreement"). Since the
Capitalization Date, except as set forth in Section 3.02(a) of the Disclosure
Letter or in the SEC Reports (as defined in Section 3.05) filed prior to May
7, 1997, the Company (i) has not issued any Shares other than upon the
exercise or vesting of Rights outstanding on such date, (ii) has not granted
any options or rights to purchase or acquire Shares (under the Stock Right
Plans or otherwise) and (iii) has not split, combined or reclassified any of
its shares of capital stock. All of the outstanding Shares have been duly
authorized and validly issued and are fully paid and nonassessable and are
free of preemptive rights. Except as set forth in this Section 3.02 or in
Section 3.02(a) of the Disclosure Letter or in the SEC Reports filed prior to
May 7, 1997, there are outstanding (i) no shares of capital stock or other
voting securities of the Company, (ii) no securities of the Company
convertible into or exchangeable for shares of capital stock or voting
securities of the Company and (iii) no options, warrants, rights, or other
agreements or commitments to acquire from the Company, and no obligation of
the Company to issue, any capital stock, voting securities or securities
convertible into or exchangeable for capital stock or voting securities of the
Company, and no obligation of the Company to grant, extend or enter into any
subscription, warrant, option, right, convertible or exchangeable security or
other similar agreement or commitment (the items in clauses (i), (ii) and
(iii) being referred to collectively as the "Company Securities"). Except as
set forth in Section 3.02(a) of the Disclosure Letter, there are no
outstanding obligations of the Company or any subsidiary to repurchase, redeem
or otherwise acquire any Company Securities. There are no voting trusts or
other agreements or understandings to which the Company or any of its
subsidiaries is a party with respect to the voting of capital stock of the
Company or any of its subsidiaries. Notwithstanding the foregoing, the Company
will issue Shares pursuant to the Equity Commitment (as hereinafter defined)
and also will issue shares pursuant to the GranCare Merger.
(b) Except as set forth in Section 3.02(b) of the Disclosure Letter or in
the SEC Reports filed prior to May 7, 1997, the Company is, directly or
indirectly, the record and beneficial owner of all the outstanding shares of
capital stock of each of its subsidiaries, free and clear of any lien,
mortgage, pledge, charge, security interest or encumbrance of any kind, and
there are no irrevocable proxies with respect to any such shares. Except as
set forth in Section 3.02(b) of the Disclosure Letter or in the SEC Reports
filed prior to May 7, 1997, there are no
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outstanding (i) securities of the Company or any subsidiary convertible into
or exchangeable for shares of capital stock or other voting securities or
ownership interests in any subsidiary, or (ii) options or other rights to
acquire from the Company or any of its subsidiaries, and no other obligation
of the Company or any of its subsidiaries to issue, any capital stock, voting
securities or other ownership interests in, or any securities convertible into
or exchangeable for any capital stock, voting securities or ownership
interests in, any of its subsidiaries, or any other obligation of the Company
or any of its subsidiaries to grant, extend or enter into any subscription,
warrant, right, convertible or exchangeable security or other similar
agreement or commitment (the items in clauses (i) and (ii) being referred to
collectively as the "Subsidiary Securities"). There are no outstanding
obligations of the Company or any of its subsidiaries to repurchase, redeem or
otherwise acquire any outstanding Subsidiary Securities.
Section 3.03 Authority for this Agreement.
The Company has the requisite corporate power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by the Company and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by the Board of Directors of the Company and no
other corporate proceedings on the part of the Company are necessary to
authorize this Agreement or to consummate the transactions so contemplated,
other than the approval and adoption of the agreement of merger (as such term
is used in Section 251 of the DGCL) contained in this Agreement and the
approval of the Merger by the holders of a majority of the outstanding Shares.
This Agreement has been duly and validly executed and delivered by the Company
and, assuming this Agreement constitutes a valid and binding obligation of
each of the Parent and the Sub, constitutes a valid and binding agreement of
the Company, enforceable against the Company in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and to
general principles of equity (whether considered in a proceeding in equity or
at law).
Section 3.04 Absence of Certain Changes.
Except as disclosed in the SEC Reports filed prior to May 7, 1997 or as set
forth in the capitalization information set forth in Section 3.02 of the
Disclosure Letter from September 30, 1996 through the date hereof, (i) the
Company and its subsidiaries have not suffered any Material Adverse Effect (as
defined in Section 5.11), (ii) the Company and its subsidiaries have, in all
material respects, conducted their respective businesses only in the ordinary
course consistent with past practice, except in connection with the
negotiation and execution and delivery of this Agreement and the solicitation
or receipt of other offers to acquire the Company, and (iii) there has not
been (a) any declaration, setting aside or payment of any dividend or other
distribution in respect of the Shares or any repurchase, redemption or other
acquisition by the Company or any of its subsidiaries of any Company
Securities or Subsidiary Securities; or (b) any action by the Company which if
taken after the date hereof, would constitute a breach of Section 5.01 hereof.
Except as disclosed in the SEC Reports filed prior to May 7, 1997 or in
Section 3.04 of the Disclosure Letter, since September 30, 1996, there has not
been any change by the Company in accounting methods, principles or practices
except as permitted by United States generally accepted accounting principles.
Section 3.05 Reports.
(a) The Company has timely filed with the SEC all forms, reports and
documents required to be filed by it pursuant to the federal securities laws
and the SEC rules and regulations thereunder on and after September 30, 1995,
all of which have heretofor been filed or are hereafter filed (the "SEC
Reports") have complied or will comply in form as of their respective filing
dates in all material respects with all applicable requirements of the
Exchange Act and the rules promulgated thereunder applicable thereto. None of
the SEC Reports, at the time filed, contained or will contain any untrue
statement of a material fact or omitted or will omit to state a material fact
required to be stated or incorporated by reference therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(b) As of their respective dates, the audited and unaudited consolidated
financial statements of the Company included (or incorporated by reference) in
the SEC Reports were prepared (or will have been prepared) in all
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material respects in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods therein
indicated (except as may be indicated in the notes thereto) and presented
fairly the consolidated financial position of the Company, and the
consolidated results of operations and changes in consolidated financial
position or cash flows for the periods presented therein, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein which were not
expected to have a Material Adverse Effect.
(c) As of March 31, 1997, neither the Company nor any of its subsidiaries
had any liabilities of any nature, whether accrued, absolute, contingent or
otherwise, whether due or to become due that are required to be recorded or
reflected on a balance sheet under United States generally accepted accounting
principles, except as reflected or reserved against or disclosed in the
financial statements of the Company included in the SEC Reports filed prior to
May 7, 1997 or the Disclosure Letter or as otherwise disclosed in the SEC
Reports filed prior to May 7, 1997 or the Disclosure Letter.
Section 3.06 Information Supplied.
Any documents to be filed by the Company with the SEC or any other
governmental or regulatory authority in connection with the Merger and the
other transactions contemplated hereby will not, on the date of its filing or,
with respect to the Proxy Statement, as supplemented if necessary, on the date
it is sent or given to stockholders, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation is made by the Company with respect to information supplied in
writing by or on behalf of the Parent, the Sub or GranCare expressly for
inclusion therein and information incorporated by reference therein from
documents filed by GranCare with the SEC. The Proxy Statement and any such
other documents filed by the Company with the SEC under the Exchange Act or
with any other governmental or regulatory authority under applicable law will
comply as to form in all material respects with the provisions of the Exchange
Act and the rules and regulations thereunder.
Section 3.07 Consents and Approvals; No Violation.
Neither the execution and delivery of this Agreement by the Company nor the
consummation of the transactions contemplated hereby will conflict with or
result in any breach of any provision of the respective Certificate of
Incorporation or Bylaws (or other similar governing documents) of the Company
or any of its subsidiaries and except as disclosed in Section 3.07 of the
Disclosure Letter and except for filings, permits, authorizations, notices,
consents and approvals as may be required under, and other applicable
requirements of, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), the Exchange Act, the DGCL, and the "takeover" or
blue sky laws of various states and consents, approvals, authorizations or
filings under laws of jurisdictions outside the United States, and filings,
notices, consents, authorizations and approvals as may be required by local,
state, and federal regulatory agencies, commissions, boards, or public
authorities with jurisdiction over health care facilities and providers, (i)
require any consent, approval, authorization or permit of, or filing with or
notification to, any Governmental or regulatory authority, except where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have a Material
Adverse Effect or have a material adverse effect on the ability of the Company
to consummate the transactions contemplated hereby; (ii) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, license, agreement or
other instrument or obligation to which the Company is a party or by which the
Company or any of its assets or subsidiaries may be bound, except for such
defaults (or rights of termination, cancellation or acceleration) which would
not in the aggregate have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby, (iii) result in the creation or imposition of any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
on any asset of the Company or any of its subsidiaries which, in the
aggregate, would have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby; or (iv) violate any order, writ, injunction, agreement,
contract, decree, statute, rule or regulation applicable to the
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Company, any of its subsidiaries or by which any of their respective assets
are bound, except for violations which would not in the aggregate have a
Material Adverse Effect or have a material adverse effect on the ability of
the Company to consummate the transactions contemplated by this Agreement.
Section 3.08 Brokers.
No broker, finder or other investment banker (other than CSFB and
NationsBanc, a copy of whose engagement letters have been furnished to the
Parent) is entitled to receive any brokerage, finder's or other fee or
commission in connection with this Agreement or the transactions contemplated
hereby based upon agreements made by or on behalf of the Company.
Section 3.09 Employee Benefit Matters.
(a) For purposes of this Agreement, the term "Plan" shall refer to the
following maintained by the Company, any of its subsidiaries or any of their
respective ERISA Affiliates (as defined below), or with respect to which the
Company, any of its subsidiaries or any of their respective ERISA Affiliates
contributes or has any obligation to contribute or has any liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar agreement): any plan, program,
arrangement, agreement or commitment, whether written or oral, which is an
employment, consulting, deferred compensation or change-in-control agreement,
or an executive compensation, incentive bonus or other bonus, employee
pension, profit-sharing, savings, retirement, stock option, stock purchase,
severance pay, change-in-control, life, health, disability or accident
insurance plan, or other employee benefit plan, program, arrangement,
agreement or commitment, whether written or oral, including, without
limitation, any "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Section
3.09(a) of the Disclosure Letter sets forth each employment agreement with a
person who is entitled to receive at least $100,000 per year from the Company
or any of its subsidiaries (other than an employment agreement terminable
without material liability (not otherwise disclosed) on no more than sixty
(60) days' notice).
(b) Except as set forth in Section 3.09(b) of the Disclosure Letter, none of
the Company, its subsidiaries nor any of their respective ERISA Affiliates
maintains or contributes to, nor have they maintained or contributed to, any:
(A) defined benefit plan subject to Title IV of ERISA; or
(B) "Multiemployer plan" as defined in Section 4001 of ERISA.
(c) No event has occurred and no condition or circumstance currently exists,
in connection with which the Company, any of its subsidiaries, their
respective ERISA Affiliates or any Plan, directly or indirectly, are likely to
be subject to any liability under ERISA, the Code or any other law, regulation
or governmental order applicable to any Plan which would be reasonably likely
to have a Material Adverse Effect.
(d) With respect to each Plan, (A) all material payments due from the
Company or any of its subsidiaries to date have been made and all material
amounts properly accrued to date or as of the Effective Time as liabilities of
the Company or any of its subsidiaries which have not been paid have been
properly recorded on the books of the Company; (B) each such Plan which is an
"employee pension benefit plan" (as defined in Section 3(2) of ERISA) and
intended to qualify under Section 401 of the Code has either received a
favorable determination letter from the Internal Revenue Service with respect
to such qualification as of the date specified in Section 3.09(d) of the
Disclosure Letter or has filed for such a determination letter with the
Internal Revenue Service within the time permitted under Rev. Proc. 95-12
(December 29, 1994), 1995-3 IRB 24, and nothing has occurred since the date of
such letter that has resulted in or is likely to result in a tax qualification
defect which would have a Material Adverse Effect; and (C) there are no
material actions, suits or claims pending (other than routine claims for
benefits) or, to the best of the Company's knowledge, threatened with respect
to such Plan or against the assets of such Plan.
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(e) The Company has made available to the Parent, with respect to each Plan
for which the following exists:
(A) a copy of the most recent annual report on Form 5500, with respect to
such Plan including any Schedule B thereto;
(B) a copy of the Summary Plan Description, together with each Summary of
Material Modifications with respect to such Plan and, unless the Plan is
embodied entirely in an insurance policy to which the Company or any of its
subsidiaries is a Party, a true and complete copy of such Plan; and
(C) if the Plan is funded through a trust or any third party funding
vehicle (other than an insurance policy), a copy of the trust or other
funding agreement and the latest financial statements thereof.
(f) Except as disclosed in Section 3.09(g) of the Disclosure Letter or in
the SEC Reports filed prior to May 7, 1997, neither the Company nor any of its
subsidiaries has any announced plan or legally binding commitment to create
any additional material Plans or to make any material amendment or
modification to any existing Plan, except in the ordinary course of business
in accordance with its customary practices or as required by law or as
necessary to maintain tax-qualified status.
(g) For purposes of this Section 3.09, ERISA Affiliates include each
corporation that is a member of the same controlled group as the Company or
any of its subsidiaries within the meaning of Section 414(b) of the Code, any
trade or business, whether or not incorporated, under common control with the
Company or any of its subsidiaries within the meaning of Section 414(c) of the
Code and any member of an affiliated service group that includes the Company,
any of its subsidiaries and any of the corporations, trades or business
described above, within the meaning of Section 414(m) of the Code.
Section 3.10 Litigation, etc.
Except as set forth in Section 3.10 of the Disclosure Letter or as disclosed
in the SEC Reports filed prior to May 7, 1997, as of the date hereof there is
no pending audit, claim, action, proceeding or citizen's suit and, to the
knowledge of the Company, no audit, claim, action, proceeding or citizen's
suit or governmental investigation has been threatened against the Company or
any of its subsidiaries before any court or governmental or regulatory
authority which, in the aggregate, (i) would have a Material Adverse Effect or
(ii) would have a material adverse effect on the ability of the Company to
consummate the transactions contemplated by this Agreement. Except as set
forth in Section 3.10 of the Disclosure Letter or as disclosed in the SEC
Reports, filed prior to May 7, 1997 neither the Company nor any subsidiary of
the Company is subject to any outstanding judicial, administrative or
arbitration order, writ, injunction or decree that (i) has had a Material
Adverse Effect or (ii) would have a material adverse effect on the ability of
the Company to consummate the transactions contemplated by this Agreement.
Section 3.11 Tax Matters.
The Company and each of its subsidiaries has duly filed all tax returns and
reports required to be filed by it, or requests for extensions to file such
returns or reports have been timely filed and granted and have not expired,
except to the extent that such failures to file, in the aggregate, would not
have a Material Adverse Effect, and such returns and reports are true, correct
and complete in all material respects. The Company and each of its
subsidiaries has duly paid in full (or the Company has paid on its behalf) or
made adequate provision in the Company's accounting records for all taxes for
all past and current periods for which the Company or any of its Subsidiaries
is liable. The most recent financial statements contained in the SEC Reports
filed prior to May 7, 1997 reflect adequate reserves for all taxes payable by
the Company and its subsidiaries for all taxable periods and portions thereof
accrued through the date of such financial statements, and no deficiencies for
any taxes have been proposed, asserted or assessed against the Company or any
of its subsidiaries that are not adequately reserved for, except for
inadequately reserved taxes and inadequately reserved deficiencies that would
not, in the aggregate, have a Material Adverse Effect. No requests for waivers
of the time to assess any taxes against the Company or any of its subsidiaries
have been granted or are pending, except for requests with respect to such
taxes that have been adequately reserved for in the most recent financial
statements contained in the SEC
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Reports filed prior to May 7, 1997, or, to the extent not adequately reserved,
the assessment of which would not, in the aggregate, have a Material Adverse
Effect. Except as set forth in Section 3.11 of the Disclosure Letter, neither
the Company nor any of its subsidiaries has made any payments, or is obligated
to make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Internal Revenue Code. Neither the
Company nor any of its subsidiaries has been a United States real property
holding corporation within the meaning of Section 897(c)(2) of the Internal
Revenue Code during the applicable period specified in Section
897(c)(1)(A)(ii) of the Internal Revenue Code. As used in this Agreement the
term "taxes" includes all federal, state, local and foreign income, franchise,
property, sales, use, excise and other taxes, including without limitation
obligations for withholding taxes from payments due or made to any other
person and any interest, penalties or additions to tax.
Section 3.12 Compliance with Law.
Except as set forth in Section 3.12 of the Disclosure Letter or in the SEC
Reports filed prior to May 7, 1997, neither the Company nor any of its
subsidiaries is in conflict with, or in default or violation of, any law,
rule, regulation, order, judgment or decree applicable to the Company or any
subsidiary or by which any property or asset of the Company or any subsidiary
is bound or affected, except for any such conflicts, defaults or violations
that would not in the aggregate have a Material Adverse Effect. Except as set
forth in Section 3.12 of the Disclosure Letter or in the SEC Reports filed
prior to May 7, 1997, the Company and its subsidiaries have all permits,
licenses, authorizations, consents, approvals and franchises from governmental
agencies required to conduct their businesses as now being conducted (the
"Company Permits"), except for such permits, licenses, authorizations,
consents, approvals and franchises the absence of which would not in the
aggregate have a Material Adverse Effect. Except as set forth in Section 3.12
of the Disclosure Letter or in the SEC Reports filed prior to May 7, 1997, the
Company and its subsidiaries are in compliance with the terms of the Company
Permits, except where the failure so to comply would not in the aggregate have
a Material Adverse Effect.
Section 3.13 Environmental Compliance.
Except as set forth in Section 3.13 of the Disclosure Letter or in the SEC
Reports filed prior to May 7, 1997, (i) the assets, properties, businesses and
operations of the Company and its subsidiaries are in compliance with
applicable Environmental Laws (as defined in Section 8.11 hereof), except for
such non-compliance which has not had and will not have a Material Adverse
Effect; (ii) the Company and its subsidiaries have obtained and, as currently
operating, are in compliance with all Company Permits necessary under any
Environmental Law for the conduct of the business and operations of the
Company and its subsidiaries in the manner now conducted except for such non-
compliance which has not had and will not have a Material Adverse Effect; and
(iii) neither the Company nor any of its subsidiaries nor any of their
respective assets, properties, businesses or operations has received or is
subject to any outstanding order, decree, judgment, complaint, agreement,
claim, citation, notice, or proceeding indicating that the Company or any of
its subsidiaries is or may be (a) liable for a violation of any Environmental
Law or (b) liable for any Environmental Liabilities and Costs, where in each
case such liability would have a Material Adverse Effect.
Section 3.14 Insurance.
Except as set forth in the SEC Reports filed prior to May 7, 1997, the
Company and each of its Subsidiaries maintains, and through the Closing Date
will maintain, insurance with reputable insurers (or pursuant to prudent self-
insurance programs) in such amounts and covering such risks as are in
accordance with normal industry practice for companies engaged in businesses
similar to those of the Company and each of its Subsidiaries and owning
property in the same general areas in which the Company and each of its
Subsidiaries conducts their businesses. The Company and each of its
Subsidiaries may terminate each of its insurance policies or binders at or
after the closing and will incur no material penalties or other material costs
in doing so. None of such policies or binders was obtained through the use of
false or misleading information or the failure to provide the insurer with all
information requested in order to evaluate the liabilities and risks insured.
There is no material default
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with respect to any provision contained in any such policy or binder, nor has
the Company or any of its Subsidiaries failed to give any material notice or
present any material claim under any such policy or binders in due and timely
fashion. There are no billed but unpaid premiums past due under any such
policy or binder, the failure of which to be paid would result in the
cancellation of such policy or binder. Except as otherwise set forth in the
SEC Reports filed prior to May 7, 1997 or the Disclosure Letter, (a) there are
no outstanding claims (in excess of normal retentions) that are not covered
under any such policies or binders and, to the best knowledge of the Company,
there has not occurred any event that might reasonably form the basis of any
claim (in excess of normal retentions) that are not covered against or
relating to the Company or any of its Subsidiaries that is not covered by any
of such policies or binders; (b) no notice of cancellation or non-renewal of
any such policies or binders has been received; and (c) there are no
performance bonds outstanding with respect to the Company or any of its
Subsidiaries.
Section 3.15 Vote Required.
Assuming the accuracy of the representations by the Parent and the Sub in
Section 4.08, the affirmative vote of holders of a majority of the outstanding
Shares is the only vote of the holders of any class or series of the Company's
capital stock or other voting securities necessary to approve this Agreement
and the Merger; approval of the Stock Issuance Proposal requires the
affirmative vote of the majority of the Shares actually present and voting at
the Special Meeting at which such proposal is submitted (provided that at
least 50% of the issued and outstanding Shares are actually voted on the Stock
Issuance Proposal at such special meeting); and approval of the Amendment
Proposal requires the affirmative vote of not less than 66 2/3% of the
outstanding Shares, which vote with respect to the amendments to Articles
Tenth and Eleventh of the Certificate of Incorporation must also include the
affirmative vote of not less than 66 2/3% of the issued and outstanding Shares
excluding those shares beneficially owned by any "Related Person" (as defined
in the Certificate of Incorporation).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUB
The Parent and the Sub, jointly and severally, represent and warrant to the
Company as of the date hereof (or such other date as shall be expressly
specified) as follows:
Section 4.01 Organization and Qualification.
Each of the Parent and the Sub is duly organized and validly existing in
good standing under the laws of the state of its organization, with all
requisite power and authority to own its properties and conduct its business.
All of the current issued and outstanding capital stock of the Sub is owned
directly by the Parent, free and clear of any lien, mortgage, pledge, charge,
security interest or encumbrance of any kind, and at the Effective Time the
Sub will be a direct or indirect subsidiary of Parent.
Section 4.02 Authority Relative to this Agreement.
Each of the Parent and the Sub has full power and authority to execute and
deliver this Agreement and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement by the Parent and the Sub and the
consummation by the Parent and the Sub of the transactions contemplated hereby
have been duly and validly authorized by all necessary action. This Agreement
has been duly and validly executed and delivered by the Parent and the Sub
and, assuming this Agreement constitutes the valid and binding obligation of
the Company, this Agreement constitutes a valid and binding agreement of each
of the Parent and the Sub, enforceable against each of the Parent and the Sub
in accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity (whether considered in a
proceeding in equity or at law).
Section 4.03 Consents and Approvals; No Violation.
The execution and delivery of this Agreement by each of the Parent or the
Sub and the consummation of the transactions contemplated hereby will not (i)
conflict with or result in any breach of any provision of the respective
Certificates of Incorporation or Bylaws (or other similar governing documents)
of the Parent, the Sub or any of their subsidiaries; (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (A) in connection with the HSR
Act,
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(B) pursuant to the Exchange Act, (C) the filing of a certificate of merger
pursuant to the DGCL, (D) any applicable filings under state securities, blue
sky or "takeover" laws, (E) consents, approvals, authorizations or filings
under laws of jurisdictions outside the United States, (F) filings, notices,
consents, authorizations and approvals as may be required by local, state and
federal regulatory agencies, commissions, boards or public authorities with
jurisdiction over health care facilities and providers or (G) where the
failure to obtain such consent, approval, authorization or permit, or to make
such filing or notification, would not in the aggregate have an adverse effect
on the financial condition, business or results of operation of the Parent or
the Sub and their subsidiaries which is material to the Parent and its
subsidiaries taken as a whole or has a material adverse effect on the ability
of the Parent or the Sub to consummate the transactions contemplated hereby,
(iii) result in a default (or give rise to any right of termination,
cancellation or acceleration) under any of the terms, conditions or provisions
of any note, license, agreement or other instrument or obligation to which the
Parent or the Sub or any of their subsidiaries is a party or by which any of
its subsidiaries or any of their respective assets may be bound, except for
such defaults (or rights of termination, cancellation or acceleration) as to
which requisite waivers or consents have been obtained or which would not in
the aggregate have an adverse effect on the financial condition, business or
results of operations of the Parent or the Sub and their subsidiaries which is
material to the Parent and its subsidiaries taken as a whole or has a material
adverse effect on the ability of the Parent or the Sub to consummate the
transactions contemplated hereby; (iv) result in the creation or imposition of
any mortgage, lien, pledge, charge, security interest or encumbrance of any
kind on any asset of the Parent or the Sub or any of their subsidiaries which,
individually or in the aggregate, would have a material adverse effect on the
ability of the Parent or the Sub to consummate the transactions contemplated
hereby; or (v) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Parent, the Sub or any of their subsidiaries or
any of their respective assets, except for violations which would not in the
aggregate have an adverse effect on the financial condition, business or
results of operations of the Parent or the Sub and their subsidiaries which is
material to the Parent and its subsidiaries taken as a whole or has a material
adverse effect on the ability of the Parent or the Sub to consummate the
transactions contemplated hereby.
Section 4.04 Financing.
Subject to the conditions set forth in Sections 6.01 and 6.03, the Parent
will make, or cause a subsidiary to make, the Sub Equity Contribution
described in Section 5.14 (the "Equity Commitment"). The Parent has received a
binding written commitment, addressed to the Parent, the Sub and the Company
from Chase Securities, Inc. and The Chase Manhattan Bank (the "Debt
Commitment"), a true and correct copy of which was furnished to the Company,
to obtain, subject to the terms and conditions of the Debt Commitment, the
financing necessary (together with the Sub Equity Contribution (as defined in
Section 5.14)) to pay the Cash Election Price pursuant to the Merger, to pay
(or provide the funds for the Company to pay) all amounts contemplated by
Section 2.08 and Section 5.06 when due, to refinance any indebtedness or other
obligation of the Company, GranCare and their respective subsidiaries which
may become due as a result of this Agreement, the GranCare Merger Agreement or
any of the transactions contemplated hereby or thereby, and to pay all related
fees and expenses, which Debt Commitment is in full force and affect as of the
date hereof. Such Debt Commitment has been affirmed in writing as of
September , 1997 (and the term "Debt Commitment" refers to such commitment
as so affirmed). It is the good faith belief of Parent and its affiliates, as
of the date of this Amended and Restated Agreement, that the financing
contemplated by the Debt Commitment will be obtained, and the Parent shall use
commercially reasonable efforts to obtain such financing, including using
commercially reasonable efforts to fulfill or cause the fulfillment of any of
the conditions thereto. If such financing is not available, the Parent shall
(notwithstanding the provisions of Section 6.03(e)) use commercially
reasonable efforts to obtain other financing.
Section 4.05 Brokers.
No broker, finder or other investment banker is entitled to receive any
brokerage, finder's or other fee or commission in connection with this
Agreement or the transactions contemplated hereby based upon agreements made
by or on behalf of the Parent or the Sub.
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Section 4.06 Litigation, etc.
As of the date hereof there is no claim, action, proceeding or governmental
investigation pending or, to the best knowledge of the Parent or the Sub,
threatened against the Parent or any of its subsidiaries, including the Sub,
before any court or governmental or regulatory authority which, in the
aggregate would have a material adverse effect on the ability of the Parent or
the Sub to consummate the transactions contemplated by this Agreement. Neither
the Parent nor any of its subsidiaries, including the Sub is subject to any
outstanding order, writ, injunction or decree that would have a material
adverse effect on the ability of the Parent or the Sub to consummate the
transactions contemplated by this Agreement.
Section 4.07 Information Supplied.
The information supplied in writing by or on behalf of the Parent and the
Sub expressly for inclusion in the Proxy Statement, as supplemented if
necessary, and any other documents to be filed by the Company with the SEC or
any other governmental or regulatory authority in connection with the Merger
or the GranCare Merger and the other transactions contemplated hereby will
not, on the date of its filing or, with respect to the Proxy Statement, on the
date first sent or given to stockholders of the Company and stockholders of
GranCare contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made,
not misleading.
Section 4.08 Ownership of Shares.
As of the date hereof, none of the Parent, the Sub or their affiliates
beneficially owns (within the meaning of Rule l3d-3 under the Exchange Act)
any Shares.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business of the Company.
Except as contemplated by this Agreement and in the Disclosure Letter,
during the period from the date of this Agreement to the Effective Date, the
Company and its subsidiaries will each conduct its operations according to its
ordinary and usual course of business and consistent with past practice and
will use all commercially reasonable efforts consistent with prudent business
practice to preserve intact the business organization of the Company and each
of its subsidiaries, to keep available the services of its and their current
officers and key employees and to maintain existing relationships with those
having significant business relationships with the Company and its
subsidiaries, in each case in all material respects. Without limiting the
generality of the foregoing, except as set forth in Section 5.01 of the
Disclosure Letter and except as otherwise expressly provided in or
contemplated by this Agreement or the Disclosure Letter, prior to the time
specified in the preceding sentence, neither the Company nor any of its
subsidiaries, as the case may be, will, without the prior written consent of
the Parent (not to be unreasonably withheld), (i) except for issuances of
capital stock of the Company's subsidiaries to the Company or a wholly-owned
subsidiary of the Company, issue, sell or pledge, or authorize or propose the
issuance, sale or pledge of (A) Company Securities or Subsidiary Securities,
in each case, other than Shares issuable upon exercise or vesting of the
Rights or allocations or issuances pursuant to the Stock Plans or the exercise
of rights under any Plan or any agreement referred to in Section 3.02 of the
Disclosure Letter, or (B) any other securities in respect of, in lieu of or in
substitution for Shares outstanding on the date hereof; (ii) otherwise acquire
or redeem, directly or indirectly, any Company Securities or Subsidiary
Securities (including the Shares); (iii) split, combine or reclassify its
capital stock or declare, set aside, make or pay any dividend or distribution
(whether in cash, stock or property) on any shares of capital stock of the
Company or any of its subsidiaries (other than cash dividends paid to the
Company by its wholly-owned subsidiaries with regard to their capital stock);
(iv) (A) make any acquisition, by means of a merger or otherwise, of assets or
securities, or any sale, lease, encumbrance or other disposition of assets or
securities, in each case involving the payment or receipt of consideration of
$10,000,000 or more outside the ordinary and usual course of business
consistent with past practice in all material respects, or (B) other than in
the ordinary course of
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business, enter into a material contract or grant any release or
relinquishment of any material contract rights; (v) incur or assume any long-
term debt for borrowed money except for debt incurred in the ordinary course
of business consistent in all material respects with past practice; (vi)
assume, guarantee, endorse or otherwise become liable or responsible (whether
directly, contingently or otherwise) for the obligations of any other person
except wholly-owned subsidiaries of the Company, except in the ordinary course
of business consistent in all material respects with past practice; (vii)
except in connection with transactions permitted by (iv) above, make any
loans, advances or capital contributions to, or investments in, any other
person (other than wholly-owned subsidiaries of the Company) the aggregate in
excess of $10,000,000, except in the ordinary course of business consistent in
all material respects with past practice; (viii) change any of the accounting
principles or practices used by it or any of its subsidiaries, except as
required by the SEC or required by United States generally accented accounting
principles; (ix) adopt any amendments to the Certificate of Incorporation or
Bylaws (or similar documents) of the Company or any subsidiary; (x) except as,
may be required under any previously existing agreement or Plan, grant any
stock related awards; (xi) enter into any new, or amend any existing, employee
benefit, pension or other plan (whether or not subject to ERISA), employment,
severance, consulting or salary continuation agreements with any officers,
directors or key employees, or grant any increases in the compensation or
benefits to officers, directors and key employees; (xii) enter into, amend, or
extend any material collective bargaining or other labor agreement, except as
required by law; (xiii) adopt, make any material amendment to or terminate any
material employee benefit plan except as required by law or to maintain tax
qualified status or as requested by the Internal Revenue Service in order to
receive a determination letter for such employee benefit plan; (xiv) merge or
consolidate with or transfer all or substantially all of its assets to another
corporation or other business entity or individual, (xv) liquidate, wind-up or
dissolve (or suffer any liquidation or dissolution); or (xvi) agree in writing
or otherwise to take any of the foregoing actions.
Section 5.02 No Solicitation.
Immediately following the execution of this Agreement, the Company will
terminate any and all existing activities, discussions and negotiations with
third parties (other than Parent and GranCare) with respect to any possible
Acquisition Transaction (as defined below). The Company and its subsidiaries
and their respective officers, directors and employees shall not, and the
Company and its subsidiaries will use all reasonable efforts to cause their
representatives, agents or affiliates not to, directly or indirectly,
knowingly encourage, solicit, or initiate any discussions or negotiations
with, any corporation, partnership, person or other entity or group (other
than the Parent, the Sub and GranCare and any affiliate or associate of the
Parent, the Sub and GranCare and any of their respective directors, officers,
employees, representatives and agents) concerning any merger, consolidation,
business combination, liquidation, reorganization, sale of substantial assets,
sale of shares of capital stock or similar transactions involving the Company
or any material subsidiary of the Company (each an "Acquisition Transaction");
provided, however, that if during the 45 days following the date of this
Agreement, the Company's Board of Directors determines, after consultation
with counsel, that it is required to do so in the exercise of its fiduciary
duties to the Company or its stockholders, the Board of Directors may respond
to, or engage in discussions with respect to, a written offer for an
Acquisition Transaction during such 45 day period; and provided further that
nothing contained in this Section 5.02 shall prohibit the Company or its Board
of Directors from taking and disclosing to the Company's stockholders a
position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or from making such
other disclosure to the Company's stockholders which, as advised by outside
counsel, is required under applicable law. The Company will promptly
communicate to Parent the terms and conditions of any proposal for an
Acquisition Transaction that it may receive and will keep Parent informed as
to the status of any actions, including any discussions, taken pursuant to
such proposed or contemplated Acquisition Transaction.
Section 5.03 Access to Information.
(a) Between the date of this Agreement and the Effective Time, the Company
will, upon reasonable notice to an executive officer of the Company, (i) give
the Parent and the Sub and their authorized representatives access (during
regular business hours), in a manner so as not to interfere with the normal
operations of the Company and its subsidiaries and subject to reasonable
restrictions imposed by an executive officer of the Company, to all
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key employees, offices and other facilities and to all books and records of
the Company and its subsidiaries and cause the Company's and its subsidiaries'
independent public accountants to provide access to their work papers and such
other information as the Parent or the Sub may reasonably request, (ii) permit
the Parent and the Sub to make such inspections as they may reasonably require
and (iii) cause its officers and those of its subsidiaries to furnish the
Parent and the Sub with such financial and operating data and other
information with respect to the business, properties and personnel of the
Company and its subsidiaries as the Parent or the Sub may from time to time
reasonably request.
(b) Information obtained by the Parent or the Sub or their respective
representatives pursuant to this Section 5.03 shall be subject to the
provisions of the letter agreement between GranCare and the Company (the
"Confidentiality Agreement") the terms of which are incorporated herein by
reference.
Section 5.04 Reasonable Efforts, Filings.
Subject to the terms and conditions herein provided for and to the fiduciary
duties of the Board of Directors of the Company under applicable law as
advised by legal counsel each of the parties hereto agrees to use commercially
reasonable efforts to take, or cause to be taken, all appropriate action, and
to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective, as soon as
practicable, the transactions contemplated by this Agreement. In connection
with and without limiting the foregoing, (a) (i) the Company, the Parent and
the Sub shall use all reasonable efforts to make promptly any required
submissions under the HSR Act which the Company and the Parent or the Sub
determines should be made, in each case, with respect to the Merger, and the
transactions contemplated by this Agreement (ii) the Company, the Parent and
the Sub shall use all reasonable efforts to respond as promptly as practicable
to all inquiries received from the Federal Trade Commission (the "FTC") and
the Antitrust Division of the Department of Justice (the "Antitrust Division")
for additional information or documentation and to respond as promptly as
practicable to all inquiries and requests received from any State Attorney
General or other governmental authority in connection with antitrust matters,
and (iii) if required by the FTC, the Antitrust Division, any State Attorney
General or any other governmental authority, or if otherwise necessary or
required in order to consummate the Merger, Parent agrees promptly to take all
commercially reasonable steps (including executing agreements and submitting
to judicial or administrative orders) to effect the sale or other disposition
of, or to hold separate assets or businesses of Parent or the Company or any
of their respective subsidiaries or affiliates (including, without limitation,
pursuant to arrangements which limit or prohibit access to such assets or
businesses) unless such sale or other disposition would have a Material
Adverse Effect on the Company, (b) the Parent, the Sub and the Company will
take all such action as may be necessary under federal and state securities
laws applicable or necessary for, and will file and, if appropriate, use all
reasonable efforts to have declared effective or approved all documents and
notifications with the SEC and other governmental or regulating bodies which
the Parent, the Sub and the Company determines, in each case, is necessary for
the consummation of the Merger and the transactions contemplated hereby and
each party shall give the other information requested by it which is
reasonably necessary to enable it to take such action, (c) the Parent, the Sub
and the Company will, and will cause each of their respective subsidiaries to,
use commercially reasonable efforts to obtain consents of all third parties
and governmental bodies (other than with respect to healthcare regulatory
licenses, certifications or permits or provider agreements) necessary or, in
the reasonable opinion of the Parent or the Company, advisable to consummate
the Merger and the transactions contemplated by this Agreement and (d) prior
to the Effective Time, the Parent, Sub and the Company will take, and cause
their respective subsidiaries to take, such actions to apply for such
governmental approvals or consents, or make filings with governmental bodies,
with respect to healthcare regulatory licenses, certifications, or permits or
provider agreements as may be required by applicable law. In case at any time
after the Effective Time any further action is necessary or desirable to carry
out the purposes of this Agreement, the Parent shall cause the proper officers
and directors of the Surviving Corporation, the Parent or the Sub, as the case
may be to take all such necessary action.
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Section 5.05 Indemnification and Insurance.
(a) The Sub agrees that all rights to indemnification existing in favor of
the present or former directors, officers and employees of the Company (as
such) or any of its subsidiaries or present or former directors of the Company
or any of its subsidiaries serving or who served at the Company's or any of
its subsidiaries' request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, as provided in the Company's Certificate of Incorporation or
Bylaws, or the articles of incorporation, bylaws or similar documents of any
of the Company's subsidiaries and the indemnification agreements with such
present and former directors, officers and employees as in effect as of the
date hereof with respect to matters occurring at or prior to the Effective
Time shall survive the Merger and shall continue in full force and effect and
without modification (other than modifications which would enlarge the
indemnification rights) for a period of not less than the statutes of
limitations applicable to such matters, and the Surviving Corporation shall
comply fully with its obligations hereunder and thereunder. Without limiting
the foregoing, the Company shall, and after the Effective Time, the Surviving
Corporation shall periodically advance expenses as incurred with respect to
the foregoing (including with respect to any action to enforce rights to
indemnification or the advancement of expenses) to the fullest extent
permitted under applicable law; provided, however, that the person to whom the
expenses are advanced provides an undertaking (without delivering a bond or
other security) to repay such advance if it is ultimately determined that such
person is not entitled to indemnification.
(b) For a period of six (6) years after the Effective Time, the Surviving
Corporation shall maintain officers' and directors' liability insurance and
fiduciary liability insurance covering the persons described in paragraph (a)
of this Section 5.05 (whether or not they are entitled to indemnification
thereunder) who are currently covered by the Company's existing officers' and
directors' or fiduciary liability insurance policies on terms no less
advantageous to such indemnified parties than such existing insurance.
(c) The Surviving Corporation shall indemnify and hold harmless (and shall
advance expenses to), to the fullest extent permitted under applicable law,
each director, officer, employee, fiduciary and agent of the Company or any
subsidiary of the Company including, without limitation, officers and
directors, serving as such on the date hereof against any costs and expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation relating to any of the
transactions contemplated hereby, and in the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) the Surviving Corporation shall pay the reasonable fees
and expenses of counsel selected by the indemnified parties, promptly as
statements therefor are received and (ii) the parties hereto will cooperate in
the defense of any such matter; provided, however, that the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent, which consent shall not unreasonably be withheld.
(d) The Surviving Corporation shall pay all reasonable costs and expenses,
including attorneys' fees, that may be incurred by any indemnified parties in
enforcing the indemnity and other obligations provided for in this Section
5.05.
(e) In the event the Surviving Corporation or any of its respective
successors or assigns (i) consolidates with or merges into any other person
and is not the continuing or surviving corporation or entity of such
consolidation or merger or (ii) transfers all or substantially all of its
properties and assets to any person, proper provisions shall be made so that
the successors and assigns of the Surviving Corporation assumes the
obligations set forth in this Section 5.05.
(f) This Section 5.05, which shall survive the consummation of the Merger at
the Effective Time and shall continue for the periods specified herein, is
intended to benefit the Company, the Surviving Corporation, and any person or
entity referenced in this Section 5.05 or indemnified hereunder each of whom
may enforce the provisions of this Section 5.05 (whether or not parties to
this Agreement).
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Section 5.06 Employee Plans and Benefits and Employment Contracts.
(a) From and after the Effective Time, the Surviving Corporation and its
subsidiaries will honor in accordance with their terms all existing
employment, severance, consulting and salary continuation agreements between
the Company or any of its subsidiaries and any current or former officer,
director, employee or consultant of the Company or any of its subsidiaries or
group of such officers, directors, employees or consultants described in
Sections 3.09 and 5.06(a) of the Disclosure Letter.
(b) In addition to honoring the agreements referred to in Section 5.06(a),
until the first anniversary of the Effective Time, the Surviving Corporation
and its subsidiaries will provide or will cause to be provided to each current
or former employee (presently entitled to benefits) of the Company or its
subsidiaries (excluding employees covered by collective bargaining agreements)
(i) employee compensation, benefit plans, programs, policies and arrangements,
that are no less favorable in the aggregate than those currently provided by
the Company and its subsidiaries to each such employees and former employee;
and (ii) severance benefits that are in the aggregate no less favorable to any
employee of the Company or any of its subsidiaries than those currently
provided to each such employee. Nothing in this Section 5.06(b) shall be
deemed to prevent the Surviving Corporation or any of its subsidiaries from
making any change required by law.
(c) To the extent permitted under applicable law, each employee of the
Company or its subsidiaries shall be given credit for all service with the
Company or its Subsidiaries (or service credited by the Company or its
subsidiaries) under all employee benefit plans, programs, policies and
arrangements maintained by the Surviving Corporation in which they participate
or in which they become participants for purposes of eligibility, vesting and
benefit accrual including, without limitation, for purposes of determining (i)
short-term and long-term disability benefits, (ii) severance benefits, (iii)
vacation benefits and (iv) benefits under any retirement plan.
(d) This Section 5.06, which shall survive the consummation of the Merger at
the Effective Time and shall continue without limit, is intended to benefit
and bind the Company, the Surviving Corporation and any person or entity
referenced in this Section 5.06, each of whom may enforce the provisions of
this Section 5.06 whether or not parties to this Agreement. Except as provided
in clause (a) above, nothing contained in this Section 5.06 shall create any
beneficiary rights in any employee or former employee (including any dependent
thereof) of the Company, any of its subsidiaries or the Surviving Corporation
in respect of continued employment for any specified period of any nature or
kind whatsoever.
Section 5.07 Proxy Statement.
The Company shall prepare and file with the SEC, as soon as practicable, a
preliminary Proxy Statement relating to the Stockholder Approvals as required
by the Exchange Act and the rules and regulations thereunder. The Company,
GranCare, the Parent and the Sub will cooperate with each other in the
preparation of the preliminary Proxy Statement. The Company shall use all
reasonable efforts to respond promptly, together with GranCare, to any
comments made by the SEC with respect to the preliminary Proxy Statement, and
to cause the Proxy Statement to be mailed to the Company's stockholders and
GranCare's stockholders at the earliest practicable date.
Section 5.08 Notification of Certain Matters.
The Company shall give prompt notice to the Parent and the Sub, and the
Parent or the Sub, as the case may be, shall give prompt notice to the
Company, of (i) the occurrence, or non-occurrence, of any event the effect of
which is likely to cause any representation or warranty of such party
contained in this Agreement to be untrue or inaccurate in any material respect
at or prior to the Effective Time and (ii) any material failure of such party
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 5.08 shall not limit or otherwise affect the
remedies available hereunder to any of the parties receiving such notice.
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Section 5.09 Rights Agreement Amendment.
Subject to the terms and conditions of this Agreement, (a) the Company shall
promptly enter into an amendment to the Rights Agreement (the "Rights
Agreement Amendment") pursuant to which the Rights Agreement and the Rights
Agreement Rights will not be applicable to the Merger, shall not result in a
"Distribution Date" under the Rights Agreement and consummation of the Merger
shall not result in the Parent or the Sub or their affiliates being an
"Acquiring Person" or result in the occurrence of a "Flip-In Event" or a
"Flip-Over Event" thereunder, and (b) the Company shall cause the Rights
Agreement to be further amended at or prior to the Effective Time to provide
that the Effective Date shall constitute the "Expiration Date" thereunder.
Section 5.10 Solvency Letter.
(a) The Parent shall use commercially reasonable efforts to deliver to the
Board of Directors of the Company prior to the consummation of the Merger, a
letter (the "Solvency Letter") from an independent third party selected by the
Parent and reasonably satisfactory to the Company (the "Appraiser") attesting
that, immediately after the Effective Time, the Surviving Corporation: (i)
will be solvent (in that both the fair value of its assets is not less than
the sum of its debts and that the present fair saleable value of its assets
will not be less than the amount required to pay its probable liability on its
debts as they become absolute and matured), (ii) will have adequate capital
with which to engage in its business; and (iii) will not have incurred and
does not plan to incur debts beyond its ability to pay as they become absolute
and matured, based upon the proposed financing structure for the Mergers and
certain other financial information to be provided to the Appraiser by the
Parent and the Company and after giving effect to any changes in the Company's
assets and liabilities as a result of the Merger, the GranCare Merger and the
financing relating thereto. Subject to the foregoing, the Solvency Letter
shall be in form and substance reasonably satisfactory to the Company. Except
with the prior written consent of the Company's Board of Directors, the Parent
will not consummate the Merger unless and until such Board shall have received
the Solvency Letter (the "Solvency Letter Conditions").
(b) The Parent will request the Appraiser to deliver the Solvency Letter as
promptly as practicable. The parties agree to cooperate with the Appraiser in
connection with the preparation of the Solvency Letter, including, without
limitations providing the Appraiser with any information reasonably available
to them necessary for the Appraiser's preparation of such letter.
(c) The Sub shall provide to the Board any appraisals, opinions or other
statements relating to the solvency and adequate capitalization of the
Surviving Corporation and the Surviving Corporation's ability to pay its
debts, at the same time that such materials are given to any banks or other
lenders in connection with the Merger.
Section 5.11 New York Stock Exchange Listing.
Each party agrees to use commercially reasonable efforts to retain the
listing of the Retained LCA Shares on the New York Stock Exchange following
the Effective Time.
Section 5.12 Election to the Company's Board of Directors; Stockholders
Agreement.
Prior to the Effective Time of the Merger, the Sub shall increase the size
of its board of directors to eleven and cause to be elected as directors of
Sub (and to be in office immediately prior to the Effective Time) six nominees
of Parent (in compliance with the requirements of the Stockholders Agreement
referred to below), three nominees of GranCare, one of the current directors
of the Company (mutually satisfactory to Parent and the Company) and Keith B.
Pitts, the Chief Executive Officer of the Surviving Corporation. In addition,
at the Effective Time, the Surviving Corporation and the Parent shall enter
into a stockholders agreement substantially in the form of Exhibit C hereto
(the "Stockholders Agreement").
Section 5.13 Registration Rights Agreement.
Prior to the Effective Time, the Company shall execute and deliver to Parent
a registration rights agreement (the "Registration Rights Agreement") in a
form mutually acceptable to Parent and the Company, such agreement to provide
Parent with two demand registration rights and ancillary registration rights
for its Shares all subject to customary terms and provisions.
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Section 5.14 Capitalization of Sub.
Subject to the terms and conditions of this Agreement, the Parent agrees to
contribute, or cause to be contributed, to Sub not less than $240 million and,
at Parent's sole election, up to $250 million (the total amount actually so
contributed being referred to as the "Sub Equity Contribution") in exchange
for shares of the Sub at a price of $40.50 per share (and such shares of the
Sub shall be converted into shares of the Surviving Corporation pursuant to
Section 2.04). As of the date hereof, and at all times on and before the
Effective Time, the Sub (i) has not issued and will not issue any shares
(except for a minimal number of shares for minimal consideration, which shares
shall be cancelled prior to the Effective Time); (ii) has not granted and will
not grant any options or rights to purchase or acquire shares; (iii) has not
granted or entered into and will not grant or enter into any options,
warrants, rights, or other agreements or commitments to issue, any capital
stock, voting securities or securities convertible into or exchangeable for
capital stock or voting securities of the Sub; and (iv) does not have and will
not have any obligation to grant, extend or enter into any subscription,
warrant, option, right, convertible or exchangeable security or other similar
agreement or commitment, other than that number of shares of common stock of
the Sub as is equal to the Sub Equity Contribution divided by $40.50.
Section 5.15 Sub Bylaws.
The Sub shall, prior to the Effective Time, amend its Bylaws to read in
their entirety as set forth in Exhibit B hereto, with such changes as shall be
approved in advance by the Parent, GranCare and the Company.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 6.01 Conditions to Each Party's Obligation to Effect the Merger.
The respective obligations of each party to effect the Merger are subject to
the satisfaction or waiver, where permissible, prior to the proposed Effective
Time, of the following conditions:
(a) Company stockholder approval of this Agreement and the Stock Issuance
Proposal shall have been obtained as required by and in accordance with
applicable law and the Company's Certificate of Incorporation;
(b) no statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
governmental authority against the Parent, the Sub or the Company and be in
effect that prohibits or restricts the consummation of the Merger or makes
such consummation illegal (each party agreeing to use commercially
reasonable efforts to have any such prohibition lifted);
(c) the conditions to each party's obligations to effect the GranCare
Merger (other than the consummation of the Merger) shall have been
satisfied or waived; provided, however, that neither the Company nor the
Surviving Corporation may waive any such condition or modify or amend the
terms of such merger agreement without the prior written consent of Parent;
and
(d) the waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated and all filings required
to be made prior to the Effective Time with, and all consents, approvals,
authorizations and permits required to be obtained prior to the Effective
Time from, any Governmental Authority in connection with the consummation
of the Merger shall have been made or obtained (as the case may be), except
where the failure to obtain such consents, approvals, authorizations and
permits would not be reasonably likely to result in a Material Adverse
Effect on the Company or to materially adversely affect the consummation of
the Merger.
(e) no action shall have been taken and be continuing, and no statute,
rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted, promulgated, entered, enforced or
deemed applicable to the Merger, which would make illegal or prohibit the
consummation of the Merger; and
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(f) the conditions set forth in the Debt Commitment shall have been
satisfied or waived (other than the conditions relating to the consummation
of the Merger and the GranCare Merger);
Section 6.02 Additional Condition to the Company's Obligation to Effect the
Merger.
The obligation of the Company to effect the Merger is subject to the
satisfaction or waiver by the Company, prior to the proposed Effective Time,
of the following conditions:
(a) the Solvency Letter Condition; and
(b) the representations and warranties of the Parent and the Sub set
forth in Article III shall be true and correct in all material respects as
of the Effective Time as though made on and as of that time, and the Parent
and the Sub shall have (i) executed and delivered the Stockholders
Agreement, (ii) amended its Bylaws as contemplated by Section 5.15, and
(iii) performed in all material respects all other covenants and agreements
required to be performed by it under this Agreement at or prior to the
Effective Time.
Section 6.03 Additional Conditions to the Parent's and the Sub's Obligations
to Effect the Merger.
The obligations of the Parent and the Sub to effect the Merger shall be
subject to the satisfaction or waiver by the Parent and the Sub, prior to the
proposed Effective Time, of the following conditions:
(a) no action or proceeding brought by any governmental, regulatory or
administrative agency, authority or commission shall have been instituted
and be pending that would be reasonably likely to result in any of the
consequences referred to in clauses (b) or (e) of Section 6.01 above and
there shall be no proceeding or other action (including, without
limitation, relating to health care, regulatory, environmental and pension
matters) pending or threatened against the Company, GranCare or their
respective subsidiaries brought by any governmental, regulatory or
administrative agency, authority or commission which is reasonably likely
to have a Material Adverse Effect;
(b) during the 30 calendar day period ending on the date of the Closing,
there shall not have occurred (i) any general suspension of trading in, or
limitation on prices for, securities on any national securities exchange or
in the over-the-counter market in the United States, (ii) the declaration
of any banking moratorium or any suspension of payments in respect of banks
or any material limitation (whether or not mandatory) on the extension of
credit by lending institutions in the United States, (iii) the commencement
of a war, material armed hostilities or any other material international or
national calamity involving the United States having a significant adverse
effect on the functioning of the financial markets in the United States, or
(iv) in the case of any of the foregoing existing at the time of the
execution of the Merger Agreement, a material acceleration or worsening
thereof;
(c) since September 30, 1996, with respect to the Company, and December
31, 1996, with respect to GranCare, no change shall have occurred or have
been threatened in the business, operations, prospects, properties or
condition (financial or other) of the Company, GranCare or any of their
respective subsidiaries that would have or would be reasonably likely to
have a Material Adverse Effect provided, that the transactions contemplated
by the Recapitalization Agreement and the Merger Agreement shall not be
deemed to be such a materially adverse change;
(d) the representations and warranties of the Company set forth in
Article IV shall be true and correct in all material respects as of the
Effective Time as though made on and as of that time, and the Company shall
have (i) executed and delivered the Stockholders Agreement, (ii) amended
the Rights Agreement as contemplated by clause (b) of Section 5.09, and
(iii) performed in all material respects all other covenants and agreements
required to be performed by them under this Agreement at or prior to the
Effective Time;
(e) the transactions contemplated by the Debt Commitment shall have been
consummated pursuant to definitive agreements in form and substance
reflecting the terms of the Debt Commitment and otherwise reasonably
satisfactory to Parent; any other refinancings, or amendments or consents
relating to existing financing of the Company or GranCare made or obtained
in connection with the Merger or the GranCare
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Merger shall be reasonably satisfactory to Parent; and all proceeds
received by the Surviving Corporation on the Closing Date under or as a
result of the transactions contemplated by the Debt Commitment and as a
result of the Merger shall be used (or shall be usable) solely to
consummate the transactions contemplated by this Agreement and the GranCare
Merger Agreement, including payment of fees and expenses thereof, the
refinancing of existing indebtedness and to provide working capital to the
Surviving Corporation and its subsidiaries;
(f) the Company's stockholders shall have approved the Amendment
Proposal, including specifically the affirmative vote of not less than 66
2/3% of the outstanding Shares as of the record date (including as to the
amendments to Articles Tenth and Eleventh of the Company's Certificate of
Corporation, as in effect prior to such vote, the affirmative vote of not
less than 66 2/3% of such shares excluding Shares owned by a "Related
Person" as defined in such Company Certificate of Incorporation).
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.01 Termination.
This Agreement may be terminated and the Merger may be abandoned at any time
notwithstanding approval thereof by the stockholders of the Company, but prior
to the Effective Time:
(a) by mutual written consent of the Boards of Directors of the Company
and the Parent;
(b) by the Parent or the Company if the Effective Time shall not have
occurred on or before November 17, 1997 (provided that the right to
terminate this Agreement under this Section 7.01(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of or resulted in the failure of the Effective Time to
occur on or before such date);
(c) by the Parent or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have
issued an order, decree or ruling, or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
(d) prior to obtaining the Stockholder Approvals, by the Parent if the
Board of Directors of the Company withdraws or modifies in a manner adverse
to the Parent or the Sub its favorable recommendation with respect to the
Stockholder Approvals or shall have recommended an Acquisition Transaction
with a party other than the Parent or any of its affiliates;
(e) by the Company if (i) any of the representations and warranties of
the Parent or the Sub contained in this Agreement were untrue in any
material respect when made or have since become, and at the time of
termination remain, untrue in any material respect, or (ii) the Parent or
the Sub shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement and such breach or failure
shall continue unremedied for ten (10) business days after the Parent or
the Sub has received written notice from the Company of the occurrence of
such breach or failure;
(f) prior to obtaining Stockholder Approvals, by the Company if the
Company receives a written offer with respect to any Acquisition
Transaction with a party other than the Parent or its affiliates or such
other party has commenced a tender offer which, in either case, the Board
of Directors of the Company believes in good faith is more favorable to the
Company's stockholders than the transactions contemplated by this
Agreement;
(g) by the Parent, if (x) any of the representations and warranties of
the Company contained in this Agreement shall fail to be true and correct
in any material respect, in each case either as of when made or have since
become, and at the time of termination remain, untrue in any material
respect, or (y) the Company shall have breached or failed to comply in any
material respect with any of its obligations under this Agreement (other
than as a result of a breach by the Parent or the Sub of any of their
obligations under this Agreement) and, with respect to a representation or
warranty, such breach shall continue unremedied for ten (10) days after the
Company has received written notice from the Parent or the Sub of the
occurrence of such breach or failure;
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(h) by the Parent or the Company if the GranCare Merger Agreement is
terminated; or
(i) by the Parent or the Company if the Company fails to obtain approval
of its stockholders of this Agreement or the Stock Issuance Proposal, or by
the Parent, if the Company fails to obtain approval of its stockholders of
the Amendment Proposal, in either case at the meeting held for such purpose
(or any adjournment thereof).
Section 7.02 Effect of Termination.
If this Agreement is terminated and the Merger is abandoned pursuant to
Section 7.01 hereof, this Agreement, except for the provisions of Sections
5.03(b), this Section 7.02 and 8.10 hereof, shall forthwith become void and
have no effect, without any liability on the part of any party or its
directors, officers or stockholders. The Confidentiality Agreement shall
remain in full force and effect following any termination of this Agreement.
If this Agreement is terminated pursuant to Section 7.01(d) or (f), the
Company promptly, but in no event later than one business day after
termination of this Agreement will pay to the Parent a fee (the "Termination
Fee") equal to $20 million in same day funds, plus interest on such amount
from the date payable until paid at a rate equal to 9% per annum. If this
Agreement is terminated pursuant to Section 7.01(i) and, at the time of the
stockholder vote referred to herein, any person has made (or publicly
disclosed an intention to make) a proposal to effect an Acquisition
Transaction (and shall not have irrevocably withdrawn such proposal), and
within 180 days after such termination an Acquisition Transaction shall be
consummated, the Company shall promptly, but in no event later than one
business day after such consummation, pay the Termination Fee. If this
Agreement is terminated pursuant to Section 7.01(d), (f), (g) or (i), the
Company shall also pay the out-of-pocket fees and expenses reasonably incurred
by the Parent and the Sub in connection with this Agreement, provided that
such fees and expenses shall not exceed $6,000,000 expenses (plus reasonable
fees and of up to $1,000,000 in connection with any litigation with respect to
this Agreement). Nothing in this Section 7.02 shall relieve any party to this
Agreement of liability for breach of this Agreement.
Section 7.03 Amendment.
To the extent permitted by applicable law, this Agreement may be amended by
action taken by or on behalf of the Boards of Directors of the Company, the
Parent and the Sub at any time before or after adoption of this Agreement by
the stockholders of the Company but, after any such stockholder approval, no
amendment shall be made which decreases the Merger Consideration or which
adversely affects the rights of the Company's stockholders hereunder without
the approval of the stockholders of the Company. This Agreement may not be
amended except by an instrument in writing signed on behalf of all of the
parties.
Section 7.04 Extension; Waiver.
At any time prior to the Effective Time, the parties hereto, by action taken
by or on behalf of the respective Boards of Directors of the Company, the
Parent and the Sub may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein by any
other applicable party or in any document, certificate or writing delivered
pursuant hereto by any other applicable party or (iii) waive compliance with
any of the agreements or conditions contained herein. Any agreement on the
part of any party to any such extension or waiver shall be valid only if set
forth in an instrument in writing signed on behalf of such party.
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ARTICLE VIII
MISCELLANEOUS
Section 8.01 Survival of Representations and Warranties.
The representations and warranties made in Articles III and IV shall not
survive beyond the Effective Time. This Section 8.01 shall not limit any
covenant or agreement of the parties hereto which by its terms contemplates
performance after the Effective Time.
Section 8.02 Entire Agreement; Assignment.
Except for the Confidentiality Agreement and the Disclosure Letter, this
Agreement (a) constitutes the entire agreement between the parties with
respect to the subject matter hereof and supersedes all other prior agreements
and understandings, both written and oral, between the parties with respect to
the subject matter hereof and (b) shall not be assigned by operation of law or
otherwise; provided, however, that the Parent or the Sub may assign any of its
rights and obligations (i) to any subsidiary of the Parent or the Sub
incorporated in Delaware, or (ii) the right to purchase, directly or
indirectly, up to 40% of the issued and outstanding shares of the Sub
immediately prior to the Effective Time, but no such assignment shall relieve
the Parent or the Sub, as the case may be, of its obligations hereunder.
Section 8.03 Enforcement of the Agreement; Jurisdiction.
The parties hereto agree that irreparable damage would occur in the event
that any of the provisions of this Agreement were not performed in accordance
with their specific terms or were otherwise breached. It is accordingly agreed
that the parties shall be entitled to an injunction or injunctions to prevent
breaches of this Agreement and to enforce specifically the terms and
provisions hereof in any federal or state court located in the State of
Delaware, this being in addition to any other remedy to which they are
entitled at law or in equity.
The parties hereto consent and agree that the state or federal courts
located in Delaware shall have exclusive jurisdiction to hear and determine
any claims or disputes pertaining to this Agreement or to any matter arising
out of or related to this Agreement and each party hereto waives any objection
that it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens and hereby consents to the granting of such legal or
equitable relief as is deemed appropriate by such court.
Section 8.04 Validity.
The invalidity or unenforceability of any provision of this Agreement shall
not affect the validity or enforceability of any other provisions of this
Agreement, which shall remain in full force and effect.
Section 8.05 Notices.
All notices, requests, claims, demands and other communications hereunder
shall be in writing and shall be deemed to have been duly given when delivered
in person, by facsimile transmission with confirmation of receipt, or by
registered or certified mail (postage prepaid, return receipt requested) to
the respective parties as follows:
if to the Parent or the Sub:
c/o Apollo Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
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with a copy to:
Sidley & Austin
555 W. Fifth Street, Suite 4000
Los Angeles, California 90013
Attention: Robert W. Kadlec, Esq.
if to the Company:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attention: Susan Thomas Whittle, Esq., General Counsel
Sydney K. Boone, Jr., Esq., Associate General Counsel
with copies to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Mayor, Day, Caldwell & Keeton L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002
Attention: Jeff C. Dodd, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 8.06 Governing Law.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware regardless of the laws that might otherwise
govern under principles of conflicts of laws applicable thereto.
Section 8.07 Descriptive Headings.
The descriptive headings herein are inserted for convenience of reference
only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
Section 8.08 Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of each
party hereto, and nothing in this Agreement, express or implied, is intended
to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement except for Sections 2.08, 5.05
and 5.06 (which are intended to be for the benefit of the persons referred to
therein, and may be enforced by any such persons).
Section 8.09 Counterparts.
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one and the same
agreement.
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Section 8.10 Fees and Expenses.
If the Merger is not consummated, all costs and expenses incurred in
connection with the transactions contemplated by this Agreement shall be paid
by the party incurring such expenses, except as provided expressly to the
contrary herein. If the Merger is consummated, the Surviving Corporation shall
reimburse Parent for all such costs and expenses.
Section 8.11 Certain Definitions;Interpretation
(a) "business day" shall mean any day that is not a Saturday, Sunday or
other day on which banking institutions in New York, New York are authorized
or required by law or executive order to close;
(b) "Environmental Law" means any law, regulation, decree, judgment, permit
or authorization relating to works or public safety and the indoor and outdoor
environment, including, without limitation, pollution, contamination, clean-
up, regulation and protection of the air, water or soils in the indoor or
outdoor environment;
(c) "Environmental Liabilities and Costs" means all damages, penalties,
obligations or clean-up costs assessed or levied pursuant to any Environmental
Law;
(d) "Material Adverse Effect" shall mean any adverse change in the business,
prospects, financial condition or results of operations of the Company and its
subsidiaries that is material to the Company and its subsidiaries taken as a
whole, excluding any such adverse change that is due to events, occurrences,
facts, conditions, changes, developments or effects which affect the economy
generally; and
(e) "subsidiary" shall mean, when used with reference to an entity, any
other entity of which securities or other ownership interests having ordinary
voting power to elect a majority of the board of directors or other persons
performing similar functions, or a majority of the outstanding voting
securities of which, are owned directly or indirectly by such entity.
Section 8.12 Disclosure Letter.
Any disclosure under one section of the Disclosure Letter shall be deemed
disclosure under all sections of the Disclosure Letter. Disclosure of any
matter in the Disclosure Letter shall not constitute an expression of a view
that such matter is material or is required to be disclosed pursuant to this
Agreement.
Section 8.13 Press Releases.
Subject to the proviso to this sentence, the Parent, the Sub and the Company
will consult with each other before issuing any press release or otherwise
making any public statements with respect to the transactions contemplated
hereby and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law or by
obligations pursuant to the rules of The New York Stock Exchange, Inc. and any
other appropriate exchange.
Section 8.14 Obligation of the Parent.
Whenever this Agreement requires Sub to take any action, such requirement
shall be deemed to include an undertaking on the part of Parent to cause Sub
to take such action.
Section 8.15. No Waiver.
Any reference in this Agreement to the "date hereof," the "date of this
Agreement" or the "date of execution of this Agreement" shall be deemed to
refer to May 7, 1997, the date of the Original Merger Agreement, but any
reference to the "date of this Amended and Restated Agreement" or the "date of
execution of this Amended and Restated Agreement" shall refer to September 17,
1997. The parties' execution and delivery of this Amended and Restated
Agreement (or any previously executed and delivered amendment and/or
restatement of the Original Merger Agreement) shall not constitute a waiver of
any rights that any of the parties hereto may have by reason of any event,
condition, misrepresentation or breach of covenant of the Original Merger
Agreement having occurred prior to the date of execution and delivery of this
Amended and Restated Agreement (or any previously executed and delivered
amendment and/or restatement of the Original Merger Agreement), whether or not
known to any or all of the parties hereto. No representation or warranty of
any party in this Agreement shall be affected or limited by reason of the
knowledge of any other party at any time that such representation or warranty
is not, or may not be, true and correct.
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized.
APOLLO MANAGEMENT, L.P.
By: AIF III Management, Inc.
Its General Partner
/s/ Peter P. Copses
By: _________________________________
Name: Peter P. Copses
Title: Vice President
APOLLO LCA ACQUISITION CORP.
/s/ Peter P. Copses
By: _________________________________
Name: Peter P. Copses
Title: President
LIVING CENTERS OF AMERICA, INC.
/s/ Edward L. Kuntz
By: _________________________________
Name: Edward L. Kuntz
Title: Chief Executive Officer
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ANNEX II
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated
as of May 7, 1997, amended as of June 12, 1997 and September 9, 1997 and
amended and restated as of September 17, 1997 (the "Amended and Restated
Agreement") among Living Centers of America, Inc., a Delaware corporation (the
"Parent"), GranCare, Inc., a Delaware corporation (the "Company"), Apollo
Management, L.P., a Delaware limited partnership, on behalf of one or more
funds under management (collectively, "Apollo"), and LCA Acquisition Sub,
Inc., is a Delaware corporation wholly owned by Parent (the "Sub").
RECITALS
WHEREAS, the Parent, the Company and Apollo entered into that certain
Agreement and Plan of Merger dated as of May 7, 1997 (the "Original Merger
Agreement" and as amended and restated as of June 12, 1997 and further amended
as of September 9, 1997, the "Amended Original Merger Agreement");
WHEREAS, subsequent to the date of the Amended Original Merger Agreement,
the Board of Directors of the Parent, the Company and Apollo has each
determined that it is in the best interests of each of the foregoing entities
to enter into this Agreement which amends and restates the Amended Original
Merger Agreement;
WHEREAS, the Board of Directors of the Parent, the Board of Directors of the
Company and Apollo have determined that it is in the best interests of their
respective stockholders for the Sub to merge with and into the Company (the
"Merger") pursuant to Section 251 of the Delaware General Corporation Law
("DGCL") upon the terms and subject to the conditions set forth herein;
WHEREAS, the Board of Directors of each of the Parent and the Company has
adopted resolutions approving the Merger of the Sub with and into the Company,
in accordance with applicable Delaware law upon the terms and subject to the
conditions set forth herein, and the Parent's Board of Directors has agreed to
recommend that the Parent's stockholders approve the issuance of the Parent
Common Stock pursuant to the this Agreement and the Company's Board of
Directors has agreed to recommend that the Company's stockholders approve the
Merger and this Agreement;
WHEREAS, the Parent and the Company have agreed (subject to the terms and
conditions of this Agreement), as soon as practicable following the approval
by the stockholders of the Company and the Parent, to effect the Merger as
more fully described herein;
WHEREAS, a condition of the Merger is the successful completion of the
recapitalization of Parent pursuant to the merger of Parent with a subsidiary
of Apollo (the "Recapitalization Merger");
WHEREAS, for federal income tax purposes, it is intended that the Merger
shall qualify as a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "Code");
WHEREAS, the Parent, the Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with this
Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements set
forth herein, the parties hereto agree as follows:
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ARTICLE I
CERTAIN DEFINITIONS
Section 1.01 Certain Definitions.
For purposes of this Agreement:
"Business Day" means any day that is not a Saturday, Sunday or other day on
which banking institutions in New York, New York are authorized or required by
law or executive order to close;
"Environmental Law" means any law, regulation, decree, judgment, permit or
authorization relating to worker or public safety and the indoor and outdoor
environment, including, without limitation, pollution, contamination, cleanup,
regulation and protection of the air, water or soils in the indoor or outdoor
environment;
"Environmental Liabilities and Costs" means all damages, penalties,
obligations or clean-up costs assessed or levied pursuant to any Environmental
Law;
"Material Adverse Effect" means, with respect to the Parent or the Company,
as the case may be, any adverse change in the respective business, prospects,
financial condition or results of operations of the Parent or the Company and
their respective subsidiaries that is material to the Parent or the Company
and their respective subsidiaries taken as a whole, excluding any such adverse
change that is due to events, occurrences, facts, conditions, changes,
developments or effects which affect the economy generally;
"Recapitalization Merger Agreement" means that Amended and Restated
Agreement and Plan of Merger, dated as of May 7, 1997 and amended and restated
as of September 16, 1997.
"Securities Act" means the Securities Act of 1933, as amended and in effect
from time to time; and
"Subsidiary" means, when used with reference to an entity, any other entity
of which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other persons performing
similar functions, or a majority of the outstanding voting securities of
which, are owned directly or indirectly by such entity.
ARTICLE II
THE MERGER
Section 2.01 The Merger. Upon the terms and subject to the conditions
hereof, and in accordance with the relevant provisions of the DGCL, the Sub
shall be merged with and into the Company as soon as practicable following the
satisfaction or waiver, if permissible, of the conditions set forth in Article
VI hereof. The Company shall be the surviving corporation in the Merger (the
"Surviving Corporation") under the name GranCare, Inc. (or such other name as
the parties shall agree) and shall continue its existence under the laws of
Delaware. The separate corporate existence of the Sub shall cease.
Section 2.02 Consummation of the Merger. Subject to the provisions of this
Agreement, the parties hereto shall cause the Merger to be consummated by
filing with the Secretary of State of the State of Delaware a duly executed
and verified certificate of merger, as required by the DGCL, and shall take
all such other and further actions as may be required by law to make the
Merger effective as promptly as practicable. Prior to the filing referred to
in this Section, a closing (the "Closing") will be held at the offices of
Cleary, Gottlieb, Steen & Hamilton, One Liberty Plaza, New York, New York (or
such other place as the parties may agree) for the purpose of confirming all
the foregoing. The time the Merger becomes effective in accordance with
applicable law is referred to as the "Effective Time."
Section 2.03 Effects of the Merger. The Merger shall have the effects set
forth in the applicable provisions of the DGCL and set forth herein.
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Section 2.04 Certificate of Incorporation and Bylaws. The Certificate of
Incorporation and the Bylaws of the Sub, in each case as in effect immediately
prior to the Effective Time, shall be the Certificate of Incorporation and
Bylaws of the Surviving Corporation; provided, however, that Article I of the
Certificate of Incorporation of the Surviving Corporation shall be amended to
read in its entirety as follows: "ARTICLE I. The name of the Corporation is
GranCare, Inc." (or such other name as the parties shall agree).
Section 2.05 Directors and Officers. The directors of the Sub immediately
prior to the Effective Time and the officers of the Company immediately prior
to the Effective Time shall be the directors and officers, respectively, of
the Surviving Corporation until their respective successors are duly elected
and qualified.
Section 2.06 Conversion of Shares. At the Effective Time, by virtue of the
Merger and without any action on the part of Sub, the Company, or the holders
of any of the shares of Common Stock, par value $.001 per share, of the
Company ("Company Common Stock"):
(a) Each share of Company Common Stock issued and outstanding immediately
prior to the Effective Time (other than the shares of Company Common Stock
owned by the Parent, the Sub or any of their Subsidiaries or held in the
treasury of the Company, all of which shall be cancelled and cease to exist,
without consideration being payable therefore, shall, by virtue of the Merger,
be converted into, exchanged for and represent the right to receive (without
interest) 0.2346 (the "Exchange Ratio") of a share of common stock, par value
$.01 per share, of the Parent (the "Parent Common Stock") (the "Merger
Consideration").
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(b) Each share of Company Common Stock held in the treasury of the Company
and each share owned by Sub, Parent or any direct or indirect wholly owned
subsidiary of Parent or the Company immediately prior to the Effective Time
shall be cancelled without any conversion thereof and no payment or
distribution shall be made with respect thereto.
Section 2.07 Conversion of Common Stock of the Sub. Each share of common
stock of the Sub issued and outstanding immediately prior to the Effective
Time shall, by virtue of the Merger and without any action on the part of the
holder thereof, be converted into and become at the Effective Time one share
of common stock of the Surviving Corporation.
Section 2.08 Company Actions. The Company hereby represents and warrants
that (a) its Board of Directors (at a meeting duly called and held), has (i)
determined that the Merger is fair to and in the best interests of the
stockholders of the Company, (ii) resolved to approve the Merger and recommend
(subject to its fiduciary duties as advised by legal counsel) approval and
adoption of this Agreement by such stockholders of the Company, (iii) taken
all necessary steps to render Section 203 of the DGCL inapplicable to the
Merger, and (iv) resolved to elect not to be subject, to the extent permitted
by law, to any state takeover law other than Section 203 of the DGCL that may
purport to be applicable to the Merger, or the transactions contemplated by
this Agreement, and (b) Chase Securities, Inc. and Smith Barney Inc., the
Company's financial advisors, have rendered their respective opinions to the
Company's Board of Directors to the effect that, as of the date of this
Amended and Restated Agreement, the Merger Consideration is fair from a
financial point of view, to the holders of Company Common Stock.
Section 2.09 Stockholders' Meetings. Subject to applicable law, each of the
Parent and the Company, acting through its respective Board of Directors,
shall, in accordance with applicable law, duly call, give notice of, convene
and hold a special meeting (which, as may be duly adjourned, shall be referred
to as the "Special Meetings" or "Stockholders Meetings") of its respective
stockholders as soon as practicable for the purpose (in the case of the
Company) of approving and adopting the agreement of merger (within the meaning
of Section 251 of the DGCL) set forth in this Agreement and approving the
Merger (the "Company Stockholder Approval") or (in the case of the Parent) the
issuance of the shares of Parent Common Stock to the stockholders of the
Company in the Merger (the "Parent Stockholder Approval" and together with the
Company Stockholder Approval, the "Stockholder Approvals"), and, subject to
the fiduciary duties of their respective Boards of Directors under applicable
law as determined by such directors in good faith after consultation with and
based upon the advice of outside counsel, include in the Proxy Statement (as
defined in Section 5.07) of each of the Company and the Parent for use in
connection with the Special Meeting of each of the Company and the Parent, the
recommendation of their Boards of Directors that stockholders vote in favor of
the Company Stockholder Approval or the Parent Stockholder Approval, as the
case may be. The Parent, the Sub and the Company agree to use commercially
reasonable efforts to cause the Special Meetings to occur within forty-five
(45) days after the Parent and the Company have responded to all SEC comments
with respect to the preliminary Proxy Statement.
Section 2.10 Rights Under Stock Plans.
(a) Each option to purchase shares of Company Common Stock ("Company
Options") issued pursuant to the Company's 1996 Replacement Stock Option Plan,
1996 Stock Incentive Plan or Outside Directors Stock Incentive Plan (the
"Company Plans"), all of which issued and outstanding Company Options are set
forth on Section 3.02(a) of the Company Disclosure Letter, shall, at the
Effective Time, be assumed by Parent and shall constitute an option to
acquire, on the same terms and conditions as were applicable under such
assumed Company Option, a number of shares of Parent Common Stock equal to the
product of the Exchange Ratio and the number of shares of Company Common Stock
subject to such Company Option, at a price per share equal to the amount
obtained by dividing the exercise price of such Company Option by the Exchange
Ratio. As soon as practicable following the Effective Time, but in no event
later than 15 days following the Effective Time, Parent shall deliver to
holders of Company Options appropriate option agreements representing the
right to acquire shares of Parent Common Stock on the same terms and
conditions as contained in the outstanding Company Options.
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(b) Parent shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of its common stock for delivery upon exercise
of the Company Options assumed in accordance with this Section 2.10. Parent
shall file and cause to be effective as of the Effective Time a registration
statement on Form S-8 or other appropriate form, with respect to shares of
Parent Common Stock that will be subject to the Company Options and use
commercially reasonable efforts to maintain the effectiveness of such
registration statement (and maintain the current status of the prospectus
contained therein) for so long as such Company Options remain outstanding.
(c) Certain non-officer employees have been granted awards of restricted
shares under the 1996 Stock Incentive Plan that have not yet been issued, all
of which awards of restricted stock are set forth on Section 3.02(a) of the
Company Disclosure Letter (the "Restricted Shares," together with the Company
Options, the "Rights"). All of such Restricted Shares will be issued prior to
the Effective Time pursuant to the Company's standard Restricted Stock Award
Agreement, which provides for acceleration of vesting in the event of a
"Change in Control" (as defined therein), which the Merger constitutes.
Section 2.11 Exchange of Certificates.
(a) As of, or promptly after, the Effective Time, Parent shall deposit with
a bank or trust company designated by Parent to act as paying agent (the
"Paying Agent") for the benefit of the holders of shares of Company Common
Stock, for exchange in accordance with this Article II, certificates
representing the shares of Parent Common Stock (such shares of Parent Common
Stock, together with any dividends or distributions with respect thereto and
cash to be paid pursuant to Section 2.11(e) with respect to any fraction of a
share of Parent Common Stock, being hereinafter referred to as the "Exchange
Fund") issuable pursuant to Section 2.06 in exchange for outstanding shares of
Company Common Stock. The Paying Agent shall, pursuant to irrevocable
instructions, deliver the Parent Common Stock contemplated to be issued
pursuant hereto out of the Exchange Fund. The Exchange Fund shall not be used
for any other purpose.
(b) As soon as reasonably practicable after the Effective Time, the Paying
Agent shall mail to each holder of record of a certificate or certificates
which, immediately prior to the Effective Time, represented outstanding shares
of Company Common Stock (the "Certificates"): (i) a letter of transmittal
(which shall specify that delivery shall be effected and risk of loss and
title to the Certificates shall pass only upon delivery of the Certificates to
the Paying Agent, and shall be in such form and have such other provisions as
Parent may reasonably specify); and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for certificates representing shares
of Parent Common Stock. Upon surrender of a Certificate for cancellation to
the Paying Agent or to such other agent or agents as may be appointed by
Parent, together with such letter of transmittal, duly executed, and any other
required documents, the holder of such Certificate shall be entitled to
receive in exchange therefor a certificate representing that number of whole
shares of Parent Common Stock which such holder has the right to receive
pursuant to the provisions of this Article II and cash in lieu of fractional
shares of Parent Common Stock as contemplated by Section 2.11(e), and the
Certificate so surrendered shall forthwith be canceled. In the event of a
transfer of ownership of Company Common Stock which is not registered in the
transfer records of the Company, a certificate representing the appropriate
number of shares of Parent Common Stock may be issued to a transferee if the
Certificate representing such Company Common Stock is presented to the Paying
Agent accompanied by all documents required to evidence and effect such
transfer and by evidence that any applicable stock transfer taxes have been
paid. Until surrendered as contemplated by this Section 2.11, each Certificate
shall be deemed at any time after the Effective Time to represent only the
right to receive upon such surrender the certificate representing shares of
Parent Common Stock and cash in lieu of any fractional shares of Parent Common
Stock as contemplated by this Section 2.11. The Paying Agent shall not be
entitled to vote or exercise any rights of ownership with respect to the
Parent Common Stock held by it from time to time hereunder, except that it
shall receive and hold all dividends or other distributions paid or
distributed with respect thereto for the account of persons entitled thereto.
(c) No dividends or other distributions with respect to shares of Parent
Common Stock with a record date after the Effective Time shall be paid to the
holder of any unsurrendered certificate for shares of Company
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Common Stock with respect to the shares of Parent Common Stock represented
thereby and no cash payment in lieu of fractional shares of Parent Common
Stock shall be paid to any such holder pursuant to Section 2.11(e) until the
surrender of the certificate for shares of Company Common Stock with respect
to the shares of Parent Common Stock represented thereby in accordance with
this Article II. Subject to the effect of applicable laws, following surrender
of any such certificates, these shall be paid to the holder of the certificate
representing whole shares of Parent Common Stock issued in connection
therewith, without interest (i) at the time of such surrender the amount of
any cash payable in lieu of a fractional retained share to which such holder
is entitled pursuant to Section 2.11(e) and the proportionate amount of
dividends or other distributions with a record date after the Effective Time
theretofor paid with respect to such shares of Parent Common Stock, and (ii)
at the appropriate payment date, the proportionate amount of dividends or
other distributions with a record date after the Effective Time but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such whole shares of Parent Common Stock.
(d) All shares of Parent Common Stock issued upon the surrender for exchange
of certificates representing shares of Company Common Stock in accordance with
the terms of this Article II (including any cash paid pursuant to Section
2.11(c) or 2.11(e)) shall be deemed to have been issued (and paid) in full
satisfaction of all rights pertaining to the shares of Company Common Stock
exchanged for cash theretofore represented by such certificates.
(e) Notwithstanding any other provision of this Agreement, each holder of
shares of Company Common Stock retained pursuant to the Merger who would
otherwise have been entitled to retain a fraction of a share of Parent Common
Stock (after taking into account all shares of Company Common Stock delivered
by such holder) shall receive, in lieu thereof, a cash payment (without
interest) equal to such fraction multiplied by $9.50.
(f) Any portion of the Merger Consideration deposited with the Paying Agent
pursuant to this Section 2.11 which remains undistributed to the holders of
the certificates representing shares of Company Common Stock for six months
after the Effective Time shall be delivered to New LCA and any holders of
shares of Company Common Stock prior to the Effective Time who have not
theretofore complied with this Article II shall thereafter look only to New
LCA and only as general creditors thereof for payment of their claim for cash
or shares of Parent Common Stock, if any.
(g) None of the Sub or the Company or the Parent or the Paying Agent shall
be liable to any person in respect of any cash or Parent Common Stock from the
Exchange Fund delivered to a public office pursuant to any applicable
abandoned property, escheat or similar law. If any certificates representing
Shares shall not have been surrendered prior to one year after the Effective
Time (or immediately prior to such earlier date on which any cash in respect
of such certificate would otherwise escheat to or become the property of any
Government Authority), any such cash or Parent Common Stock in respect of such
certificate shall, to the extent permitted by applicable law, become the
property of the Surviving Corporation, free and clear of all claims or
interest of any person previously entitled thereto.
(h) The Paying Agent shall invest any cash included in the Exchange Fund, as
directed by the Company, on a daily basis. Any interest and other income
resulting from such investments shall be paid to the Company. To the extent
that there are losses with respect to such investments, or the Exchange Fund
diminishes for other reasons below the level required to make prompt payments
of the Merger Consideration as contemplated hereby, the Parent shall promptly
replace or restore the portion of the Exchange Fund lost through investments
or other events so as to ensure that the Exchange Fund is, at all times,
maintained at a level sufficient to make such payments.
(i) The Company shall pay all charges and expenses of the Paying Agent.
Section 2.12 Formation of Sub. Promptly after the date of this Amended and
Restated Agreement, Parent shall cause Sub to be formed and to become a party
to this Agreement.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants as of the date of this Agreement (or
such other date as shall be expressly specified) to the Parent, the Sub and
Apollo as follows:
Section 3.01 Organization and Qualification. Each of the Company and its
subsidiaries is a duly organized and validly existing corporation in good
standing under the laws of its jurisdiction of incorporation, with all
requisite corporate power and other authority to own its properties and
conduct its business as it is being conducted on the date hereof and is duly
qualified and in good standing as a foreign corporation authorized to do
business in each of the jurisdictions in which the character of the properties
owned or held under lease by it or the nature of the business transacted by it
makes such qualification necessary. The Company has heretofore made available
to the Sub accurate and complete copies of the Certificates of Incorporation
and Bylaws as currently in effect of the Company and its subsidiaries.
Section 3.02 Capitalization. (a) The authorized capital stock of the Company
consists of 50,000,000 shares of Company Common Stock and 2,000,000 shares of
preferred stock, par value $0.001 per share. As of the close of business on
May 5, 1997 (the "Capitalization Date"): 23,815,695 shares of Company Common
Stock were issued and outstanding; no shares of Preferred Stock were issued
and outstanding; no shares of Company Common Stock were held in the Company's
treasury; and there were outstanding Rights with respect to 2,929,408 shares
of Company Common Stock as set forth in Section 3.02(a) of the disclosure
letter dated the date hereof and delivered by the Company to the Parent on May
7, 1997 setting forth certain matters referred to in this Agreement (the
"Company Disclosure Letter"). Since the Capitalization Date, except as set
forth in Section 3.02(a) of the Company Disclosure Letter or in the Company
SEC Reports (as defined in Section 3.05), filed prior to May 7, 1997 the
Company (i) has not issued any Company Common Stock other than upon the
exercise or vesting of Rights outstanding on such date, (ii) has not granted
any options or rights to purchase or acquire Company Common Stock (under the
Company's Stock Plans or otherwise) and (iii) has not split, combined or
reclassified any of its shares of capital stock. All of the outstanding shares
of Company Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable and are free of preemptive rights. Except as set
forth in this Section 3.02 or in Section 3.02(a) of the Company Disclosure
Letter or in the Company SEC Reports filed prior to May 7, 1997, there are
outstanding (i) no shares of capital stock or other voting securities of the
Company, (ii) no securities of the Company convertible into or exchangeable
for shares of capital stock or voting securities of the Company and (iii) no
options, warrants, rights, or other agreements or commitments to acquire from
the Company, and no obligation of the Company to issue, any capital stock,
voting securities or securities convertible into or exchangeable for capital
stock or voting securities of the Company, and no obligation of the Company to
grant, extend or enter into any subscription, warrant, option, right,
convertible or exchangeable security or other similar agreement or commitment
(the items in clauses (i), (ii) and (iii) being referred to collectively as
the "Company Securities"). Except as set forth in Section 3.02(a) of the
Company Disclosure Letter, there are no outstanding obligations of the Company
or any Subsidiary to repurchase, redeem or otherwise acquire any Company
Securities. There are no voting trusts or other agreements or understandings
to which the Company or any of its subsidiaries is a party with respect to the
voting of capital stock of the Company or any of its subsidiaries.
(b) Except as set forth in Section 3.02(b) of the Company Disclosure Letter
or in the Company SEC Reports filed prior to May 7, 1997, the Company is,
directly or indirectly, the record and beneficial owner of all the outstanding
shares of capital stock of each of its subsidiaries, free and clear of any
lien, mortgage, pledge, charge, security interest or encumbrance of any kind,
and there are no irrevocable proxies with respect to any such shares. Except
as set forth in Section 3.02(b) of the Company Disclosure Letter or in the
Company SEC Reports filed prior to May 7, 1997, there are no outstanding (i)
securities of the Company or any Subsidiary convertible into or exchangeable
for shares of capital stock or other voting securities or ownership interests
in any Subsidiary, or (ii) options or other rights to acquire from the Company
or any of its subsidiaries, and no other obligation of the Company or any of
its subsidiaries to issue, any capital stock, voting securities or other
ownership interests in,
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<PAGE>
or any securities convertible into or exchangeable for any capital stock,
voting securities or ownership interests in, any of its subsidiaries, or any
other obligation of the Company or any of its subsidiaries to grant, extend or
enter into any subscription, warrant, right, convertible or exchangeable
security or other similar agreement or commitment (the items in clauses (i)
and (ii) being referred to collectively as the "Subsidiary Securities"). There
are no outstanding obligations of the Company or any of its subsidiaries to
repurchase, redeem or otherwise acquire any outstanding Subsidiary Securities.
Section 3.03 Authority for this Agreement. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions so contemplated, other than the approval and adoption of the
agreement of merger (as such term is used in Section 251 of the DGCL)
contained in this Agreement and the approval of the Merger by the holders of a
majority of the outstanding shares of Company Common Stock. This Agreement has
been duly and validly executed and delivered by the Company and, assuming this
Agreement constitutes a valid and binding obligation of each of the Parent and
the Sub, constitutes a valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms, except as such
enforceability may be limited by applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally and to general principles of equity
(whether considered in a proceeding in equity or at law).
Section 3.04 Absence of Certain Changes. Except as disclosed in the Company
SEC Reports filed prior to May 7, 1997 or in Section 3.04 of the Company
Disclosure Letter, from December 31, 1996 through the date hereof, (i) the
Company and its subsidiaries have not suffered any Material Adverse Effect,
(ii) the Company and its subsidiaries have, in all material respects,
conducted their respective businesses only in the ordinary course consistent
with past practice, except in connection with the negotiation and execution
and delivery of this Agreement and the solicitation or receipt of other offers
to acquire the Company, and (iii) there has not been (a) any declaration,
setting aside or payment of any dividend or other distribution in respect of
the shares of Company Common Stock or any repurchase, redemption or other
acquisition by the Company or any of its subsidiaries of any Company
Securities or Subsidiary Securities; or (b) any action by the Company which if
taken after the date hereof would constitute a breach of Section 5.01(a)
hereof. Except as disclosed in the Company SEC Reports filed prior to May 7,
1997 or in Section 3.04 of the Company Disclosure Letter, since December 31,
1996, there has not been any change by the Company in accounting methods,
principles or practices except as permitted by United States generally
accepted accounting principles.
Section 3.05 Reports.
(a) Except as disclosed in Section 3.05 of the Company Disclosure Letter,
the Company has timely filed with the SEC all forms, reports and documents
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder, all of which have heretofore been filed or
are hereafter filed (the "Company SEC Reports") have complied or will comply
in form as of their respective filing dates in all material respects with all
applicable requirements of the Exchange Act and the rules promulgated
thereunder applicable thereto. None of the Company SEC Reports, at the time
filed, contained or will contain any untrue statement of a material fact or
omitted or will omit to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(b) As of their respective dates, the audited and unaudited consolidated
financial statements of the Company included (or incorporated by reference) in
the Company SEC Reports were prepared (or will have been prepared) in all
material respects in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods therein
indicated (except as may be indicated in the notes thereto) and presented
fairly the consolidated financial position of the Company, and the
consolidated results of operations and changes in consolidated financial
position or cash flows for the periods presented therein, subject, in the case
of the unaudited interim financial statements, to normal year-end audit
adjustments and any other adjustments described therein which were not
expected to have a Material Adverse Effect.
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(c) As of December 31, 1996, to the best of Company's knowledge, neither the
Company or any of its subsidiaries had any liabilities of any nature, whether
accrued, absolute, contingent or otherwise, whether due or to become due that
are required to be recorded or reflected on a balance sheet under United
States generally accepted accounting principles, except as reflected or
reserved against or disclosed in the financial statements of the Company
included in the Company SEC Reports filed prior to May 7, 1997 or as otherwise
disclosed in the Company SEC Reports filed prior to May 7, 1997 or as set
forth in the Company Disclosure Letter.
Section 3.06 Information Supplied. None of the information supplied or to be
supplied by the Company for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC by Parent in
connection with the issuance of shares of Parent Common Stock in the Merger
and as contemplated by Section 2.06 (the "S-4") will, at the time the S-4
becomes effective under the Securities Act or at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and none of the information supplied or to be supplied by the
Company and included or incorporated by reference in the Proxy Statement, as
supplemented if necessary, will, at the date mailed to stockholders of the
Company, or at the time of the meeting of such stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the time of such
meeting, any event with respect to the Company or any of its Subsidiaries, or
with respect to other information supplied by the Company for inclusion in the
Proxy Statement or S-4, shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, such event
shall be so described, and such amendment or supplement shall be promptly
filed with the SEC. The Proxy Statement, insofar as it relates to other
information supplied by the Company for inclusion therein, will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
Section 3.07 Consents and Approvals; No Violation. Neither the execution and
delivery of this Agreement by the Company nor the consummation of the
transactions contemplated hereby will conflict with or result in any breach of
any provision of the respective Certificates of Incorporation or Bylaws (or
other similar governing documents) of the Company or any of its subsidiaries,
and except as disclosed in Section 3.07 of the Company Disclosure Letter and
except for filings, permits, authorizations, notices, consents and approvals
as may be required under, and other applicable requirements of, the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"),
the Securities Act, the Exchange Act, the DGCL, and the "takeover" or blue sky
laws of various states and consents, approvals, authorizations or filings
under laws of jurisdictions outside the United States, and filings, notices,
consents, authorizations and approvals as may be required by local, state, and
federal regulatory agencies, commissions, boards, or public authorities with
jurisdiction over health care facilities and providers, (i) require any
consent, approval, authorization or permit of, or filing with or notification
to, any governmental or regulatory authority, except where the failure to
obtain such consent, approval, authorization or permit, or to make such filing
or notification, would not in the aggregate have a Material Adverse Effect or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby; (ii) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, license, agreement or other
instrument or obligation to which the Company is a party or by which the
Company or any of its assets or subsidiaries may be bound, except for such
defaults (or rights of termination, cancellation or acceleration) which would
not in the aggregate have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby; (iii) result in the creation or imposition of any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
on any asset of the Company or any of its subsidiaries which, in the
aggregate, would have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby; or (iv) violate any order, writ, injunction, agreement,
contract, decree, statute, rule or regulation applicable to the Company, any
of its subsidiaries or by which any of their respective assets are bound.
Section 3.08 Brokers. No broker, finder or investment banker (except as
disclosed to Parent and Apollo) is entitled to receive any brokerage, finder's
or other fee or commission in connection with this Agreement or the
transactions contemplated hereby based upon agreements made by or on behalf of
the Company.
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Section 3.09 Employee Benefit Matters.
(a) For purposes of this Agreement, the term "Plan" shall refer to the
following maintained by the Company, any of its subsidiaries or any of their
respective ERISA Affiliates (as defined below), or with respect to which the
Company or any of its subsidiaries or any of their respective ERISA Affiliates
contributes or has any obligation to contribute or has any liability
(including, without limitation, a liability arising out of an indemnification,
guarantee, hold harmless or similar agreement): any plan, program,
arrangement, agreement or commitment, whether written or oral, which is an
employment, consulting, deferred compensation or change-in-control agreement,
or an executive compensation, incentive bonus or other bonus, employee
pension, profit-sharing, savings, retirement, stock option, stock purchase,
severance pay, change-in-control, life, health, disability or accident
insurance plan, or other employee benefit plan, program, arrangement,
agreement or commitment, written or oral, including, without limitation, any
material "employee benefit plan" as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"). Section 3.09(a)
of the Company Disclosure Letter sets forth each employment agreement with a
person who is entitled to receive at least $100,000 per year from the Company
or any of its subsidiaries (other than an employment agreement terminable
without material liability (not otherwise disclosed) on no more than sixty
(60) days' notice).
(b) Except as set forth in Section 3.09(b) of the Company Disclosure Letter,
none of the Company, its subsidiaries nor any of their respective ERISA
Affiliates maintains or contributes to, nor have they maintained or
contributed to any:
(A) defined benefit plan subject to Title IV of ERISA; or
(B) "Multiemployer plan" as defined in Section 4001 of ERISA.
(c) No event has occurred and no condition or circumstance currently exists
in connection with which the Company, any of its subsidiaries, their
respective ERISA Affiliates or any Plan, directly or indirectly, are likely to
be subject to any liability under ERISA, the Code or any other law, regulation
or governmental order applicable to any Plan which would be reasonably likely
to have a Material Adverse Effect.
(d) With respect to each Plan, (A) all material payments due from the
Company or any of its subsidiaries to date have been made and all material
amounts properly accrued to date or as of the Effective Time as liabilities of
the Company or any of its subsidiaries which have not been paid have been
properly recorded on the books of the Company; (B) each such Plan which is an
"employee pension benefit plan" (as defined in Section 3(2) of ERISA) and
intended to qualify under Section 401 of the Code has either received a
favorable determination letter from the Internal Revenue Service with respect
to such qualification as of the date specified in Section 3.09(d) of the
Disclosure Letter or has filed for such a determination letter with the
Internal Revenue Service within the time permitted under Rev. Proc. 95-12
(December 29, 1994), 1995-3 IRB 24, and nothing has occurred since the date of
such letter that has resulted in or is likely to result in a tax qualification
defect which would have a Material Adverse Effect; and (C) there are no
material actions, suits or claims pending (other than routine claims for
benefits) or, to the best of Company's knowledge, threatened with respect to
such Plan or against the assets of such Plan.
(e) The Company has made available to the Parent, with respect to each Plan
for which the following exists:
(A) a copy of the most recent annual report on Form 5500, with respect to
such Plan including any Schedule B thereto;
(B) a copy of the Summary Plan Description, together with each Summary of
Material Modifications with respect to such Plan and, unless the Plan is
embodied entirely in an insurance policy to which the Company or any of its
subsidiaries is a Party, a true and complete copy of such Plan; and
(C) if the Plan is funded through a trust or any third party funding
vehicle (other than an insurance policy), a copy of the trust or other
funding agreement and the latest financial statements thereof.
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(f) Except as disclosed in Section 3.09(f) of the Company Disclosure Letter
or in the Company SEC Reports filed prior to May 7, 1997, neither the Company
nor any of its subsidiaries has any announced plan or legally binding
commitment to create any additional material Plans or to make any material
amendment or modification to any existing Plan, except in the ordinary course
of business in accordance with its customary practices or as required by law
or as necessary to maintain tax-qualified status.
(g) For purposes of this Section 3.09, ERISA Affiliates include each
corporation that is a member of the same controlled group as the Company or
any of its subsidiaries within the meaning of Section 414(b) of the Code, any
trade or business, whether or not incorporated, under common control with the
Company or any of its subsidiaries within the meaning of Section 414(c) of the
Code and any member of any affiliated service group that includes the Company,
any of its subsidiaries and any of the corporations, trades or businesses
described above, within the meaning of Section 414(m) of the Code.
Section 3.10 Litigation, etc. Except as set forth in Section 3.10 of the
Company Disclosure Letter or as disclosed in the Company SEC Reports filed
prior to May 7, 1997, as of the date hereof there is no pending audit, claim,
action, proceeding, citizen's suit and, to the knowledge of the Company, no
audit, claim, action, proceeding, citizen's suit or governmental investigation
has been threatened against the Company or any of its subsidiaries before any
court or governmental or regulatory authority which, in the aggregate, (i)
would have a Material Adverse Effect or (ii) would have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated by this Agreement. Except as set forth in Section 3.10 of the
Company Disclosure Letter or as disclosed in the Company SEC Reports filed
prior to May 7, 1997, neither the Company nor any Subsidiary of the Company is
subject to any outstanding judicial, administrative or arbitration order,
writ, injunction or decree that (i) has had a Material Adverse Effect or (ii)
would have a material adverse effect on the ability of the Company to
consummate the transactions contemplated by this Agreement.
Section 3.11 Tax Matters. The Company and each of its subsidiaries has duly
filed all tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and granted
and have not expired, except to the extent that such failures to file, in the
aggregate, would not have a Material Adverse Effect and such returns and
reports are true, correct and complete in all material respects. The Company
and each of its subsidiaries has duly paid in full (or the Company has paid on
its behalf) or made adequate provision in the Company's accounting records for
all taxes for all past and current periods for which the Company or any of its
subsidiaries is liable. The most recent financial statements contained in the
Company SEC Reports filed prior to May 7, 1997 reflect adequate reserves for
all taxes payable by the Company and its subsidiaries for all taxable periods
and portions thereof accrued through the date of such financial statements,
and no deficiencies for any taxes have been proposed, asserted or assessed
against the Company or any of its subsidiaries that are not adequately
reserved for, except for inadequately reserved taxes and inadequately reserved
deficiencies that would not, in the aggregate, have a Material Adverse Effect.
No requests for waivers of the time to assess any taxes against the Company or
any of its subsidiaries have been granted or are pending, except for requests
with respect to such taxes that have been adequately reserved for in the most
recent financial statements contained in the Company SEC Reports filed prior
to May 7, 1997, or, to the extent not adequately reserved, the assessment of
which would not, in the aggregate, have a Material Adverse Effect. Except as
set forth in Section 3.11 of the Company Disclosure Letter, neither the
Company nor any of its subsidiaries has made any payments, is obligated to
make any payments, or is a party to any agreement that under certain
circumstances could obligate it to make any payments that will not be
deductible under Section 280G of the Code. Neither the Company nor any of its
subsidiaries has been a United States real property holding corporation within
the meaning of Section 897(c)(2) of the Code during the applicable period
specified in Section 897(c)(1)(A)(ii) of the Code. As used in this Agreement
the term "taxes" includes all federal, state, local and foreign income,
franchise, property, sales, use, excise and other taxes, including without
limitation obligations for withholding taxes from payments due or made to any
other person and any interest, penalties or additions to tax.
Section 3.12 Compliance with Law. Except as set forth in Section 3.12 of the
Company Disclosure Letter or in the Company SEC Reports filed prior to May 7,
1997, neither the Company nor any of its subsidiaries is in
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conflict with, or in default or violation of, any law, rule, regulation,
order, judgment or decree applicable to the Company or any Subsidiary or by
which any property or asset of the Company or any Subsidiary is bound or
affected, except for any such conflicts, defaults or violations that would not
in the aggregate have a Material Adverse Effect. Except as set forth in
Section 3.12 of the Company Disclosure Letter or in the Company SEC Reports
filed prior to May 7, 1997, the Company and its subsidiaries have all permits,
licenses, authorizations, consents, approvals and franchises from governmental
agencies required to conduct their businesses as now being conducted (the
"Company Permits"), except for such permits, licenses, authorizations,
consents, approvals and franchises the absence of which would not in the
aggregate have a Material Adverse Effect. Except as set forth in Section 3.12
of the Company Disclosure Letter or in the Company SEC Reports filed prior to
May 7, 1997, the Company and its subsidiaries are in compliance with the terms
of the Company Permits, except where the failure so to comply would not in the
aggregate have a Material Adverse Effect.
Section 3.13 Environmental Compliance. Except as set forth in Section 3.13
of the Company Disclosure Letter or in the Company SEC Reports filed prior to
May 7, 1997, (i) the assets, properties, businesses and operations of the
Company and its subsidiaries are in compliance with applicable Environmental
Laws (as defined in Section 1.01 hereof), except for such non-compliance which
has not had and will not have a Material Adverse Effect; (ii) the Company and
its subsidiaries have obtained and, as currently operating, are in compliance
with all Company Permits necessary under any Environmental Law for the conduct
of the business and operations of the Company and its subsidiaries in the
manner now conducted except for such non-compliance which has not had and will
not have a Material Adverse Effect; and (iii) neither the Company nor any of
its subsidiaries nor any of their respective assets, properties, businesses or
operations has received or is subject to any outstanding order, decree,
judgment, complaint, agreement, claim, citation, notice, or proceeding
indicating that the Company or any of its subsidiaries is or may be (a) liable
for a violation of any Environmental Law or (b) liable for any Environmental
Liabilities and Costs, where in each case such liability would have a Material
Adverse Effect.
Section 3.14 Insurance. Except as set forth in the Company SEC Reports filed
prior to May 7, 1997, the Company and each of its Subsidiaries maintains, and
through the Closing Date will maintain, insurance with reputable insurers (or
pursuant to prudent self-insurance programs) in such amounts and covering such
risks as are in accordance with normal industry practice for companies engaged
in businesses similar to those of the Company and each of its Subsidiaries and
owning property in the same general areas in which the Company and each of its
Subsidiaries conducts their businesses. The Company and each of its
Subsidiaries may terminate each of its insurance policies or binders at or
after the Closing and will incur no material penalties or other material costs
in doing so. None of such policies or binders was obtained through the use of
false or misleading information or the failure to provide the insurer with all
information requested in order to evaluate the liabilities and risks insured.
There is no material default with respect to any provision contained in any
such policy or binder, nor has the Company or any of its subsidiaries failed
to give any material notice or present any material claim under any such
policy or binders in due and timely fashion. There are no billed but unpaid
premiums past due under any such policy or binder, the failure of which to be
paid would result in the cancellation of such policy or binder. Except as
otherwise set forth in the Company SEC Reports filed prior to May 7, 1997 or
in the Company Disclosure Letter, (a) there are no outstanding claims in
excess of normal retentions that are not covered under any such policies or
binders and, to the best knowledge of the Company, there has not occurred any
event that might reasonably form the basis of any claim in excess of normal
retentions that are not covered against or relating to the Company or any of
its subsidiaries that is not covered by any of such policies or binders; (b)
no notice of cancellation or non-renewal of any such policies or binders has
been received; and (c) there are no performance bonds outstanding with respect
to the Company or any of its subsidiaries.
Section 3.15 Vote Required. The affirmative vote of the holders of a
majority of the outstanding shares of the Company Common Stock is the only
vote of the holders of any class or series of the Company's capital stock or
other voting securities necessary to approve this Agreement, the Merger and
the transactions contemplated hereby.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SUB
The Parent and the Sub (effective upon its becoming a party hereto), jointly
and severally, represent and warrant as of the date of this Agreement (or such
other date as shall be expressly specified) to the Company and Apollo as
follows:
Section 4.01 Organization and Qualification. Each of the Parent and the Sub
is a duly organized and validly existing corporation in good standing under
the laws of its jurisdiction of organization, with all requisite corporate
power and other authority to own its properties and conduct its business as it
is being conducted on the date hereof and is duly qualified and in good
standing as a foreign corporation authorized to do business in each of the
jurisdictions in which the character of the properties owned or held under
lease by it or the nature of the business transacted by it makes such
qualification necessary. The Parent has heretofore made available to the
Company accurate and complete copies of the Certificates of Incorporation and
Bylaws as currently in effect of the Parent and its subsidiaries. All of the
issued and outstanding capital stock of the Sub is owned directly by the
Parent, free and clear of any lien, mortgage, pledge, charge, security
interest or encumbrance of any kind.
Section 4.02 Capitalization. (a) The authorized capital stock of the Parent
consists of 75,000,000 shares of Parent Common Stock and 5,000,000 shares of
preferred stock, par value $.01 (the "Preferred Stock"), of which 350,000
shares have been designated as Series A Junior Participating Preferred Stock
(the "Junior Preferred Stock"). As of the Capitalization Date, 19,547,616
shares of Parent Common Stock were issued and outstanding; no shares of
Preferred Stock were issued and outstanding; 720,304 shares of Parent Common
Stock were held in the Company's treasury; and there were outstanding Rights
with respect to 1,635,447 shares of Parent Common Stock as set forth in
Section 3.02(a) of the disclosure letter, dated May 7, 1997, delivered by the
Parent to the Company prior to the execution of this Agreement setting forth
certain matters referred to in this Agreement (the "Parent Disclosure
Letter"); and there were outstanding rights (the "Rights Agreement Rights")
under the Rights Agreement dated November 17, 1994 between the Company and
Chemical Bank, as amended by an amendment dated July 31, 1995 (the "Rights
Agreement"). Since the Capitalization Date, except as set forth in Section
3.02(a) of the Parent Disclosure Letter or in the Parent SEC Reports (as
defined in Section 4.05 filed prior to May 7, 1997), the Company (i) has not
issued any shares of Parent Common Stock other than upon the exercise or
vesting of Rights outstanding on such date, (ii) has not granted any options
or rights to purchase or acquire shares of Parent Common stock (under the
Parent's Stock Plans or otherwise) and (iii) has not split, combined or
reclassified any of its shares of capital stock. All of the outstanding shares
of Parent Common Stock have been duly authorized and validly issued and are
fully paid and nonassessable and are free of preemptive rights. Except as set
forth in this Section 4.02 or in Section 3.02(a) of the Parent Disclosure
Letter or in the Parent SEC Reports filed prior to May 7, 1997, there are
outstanding (i) no shares of capital stock or other voting securities of the
Parent, (ii) no securities of the Parent convertible into or exchangeable for
shares of capital stock or voting securities of the Parent and (iii) no
options, warrants, rights, or other agreements or commitments to acquire from
the Parent, and except as contemplated by the Recapitalization Merger, (A) no
obligation of the Parent to issue, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting
securities of the Parent, and (B) no obligation of the Parent to grant, extend
or enter into any subscription, warrant, option, right, convertible or
exchangeable security or other similar agreement or commitment (the items in
clauses (i), (ii) and (iii) being referred to collectively as the "Parent
Securities"). Except as set forth in Section 3.02(a) of the Parent Disclosure
Letter, there are no outstanding obligations of the Parent or any Subsidiary
to repurchase, redeem or otherwise acquire any Parent Securities. There are no
voting trusts or other agreements or understandings to which the Parent or any
of its subsidiaries is a party with respect to the voting of capital stock of
the Parent or any of its subsidiaries. Notwithstanding the foregoing, the
Parent has concurrently entered into the Recapitalization Merger Agreement,
including the issuance of shares of Parent Common Stock in connection
therewith.
(b) Except as set forth in Section 3.02(b) of the Parent Disclosure Letter
or in the Parent SEC Reports filed prior to May 7, 1997, the Parent is,
directly or indirectly, the record and beneficial owner of all the outstanding
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shares of capital stock of each of its subsidiaries, free and clear of any
lien, mortgage, pledge, charge, security interest or encumbrance of any kind,
and there are no irrevocable proxies with respect to any such shares. Except
as set forth in Section 3.02(b) of the Parent Disclosure Letter or in the
Parent SEC Reports filed prior to May 7, 1997, there are no outstanding (i)
securities of the Parent or any Subsidiary convertible into or exchangeable
for shares of capital stock or other voting securities or ownership interests
in any Subsidiary, or (ii) options or other rights to acquire from the Parent
or any of its subsidiaries, and no other obligation of the Parent or any of
its subsidiaries to issue, any capital stock, voting securities or other
ownership interests in, or any securities convertible into or exchangeable for
any capital stock, voting securities or ownership interests in, any of its
subsidiaries, or any other obligation of the Parent or any of its subsidiaries
to grant, extend or enter into any subscription, warrant, right, convertible
or exchangeable security or other similar agreement or commitment (the items
in clauses (i) and (ii) being referred to collectively as the "Parent
Subsidiary Securities"). There are no outstanding obligations of the Parent or
any of its subsidiaries to repurchase, redeem or otherwise acquire any
outstanding Parent Subsidiary Securities.
Section 4.03 Authority Relative to this Agreement. Each of the Parent and
the Sub has requisite corporate power and authority to execute and deliver
this Agreement and to consummate the transactions contemplated hereby. The
execution and delivery of this Agreement by the Parent and the Sub and the
consummation by the Parent and the Sub of the transactions contemplated hereby
have been duly and validly authorized by the Board of Directors of the Parent
and the Sub and no other corporate proceedings on the part of the Parent and
the Sub are necessary to authorize this Agreement or consummate the
transactions so contemplated, other than the Company Stockholder Approvals and
Parent Stockholder Approvals. This Agreement has been duly and validly
executed and delivered by the Parent and the Sub and, assuming this Agreement
constitutes the valid and binding obligation of the Company, this Agreement
constitutes a valid and binding agreement of each of the Parent and the Sub,
enforceable against each of the Parent and the Sub in accordance with its
terms, except as such enforceability may be limited by applicable bankruptcy,
insolvency and similar laws affecting creditors' rights generally and to
general principles of equity (whether considered in a proceeding in equity or
at law).
Section 4.04 Absence of Certain Changes. Except as disclosed in the Parent
SEC Reports filed prior to May 7, 1997 or in Section 3.04 of the Parent
Disclosure Letter, from September 30, 1996 through the date hereof, (i) the
Parent and its subsidiaries have not, to the best of the Parent's knowledge,
suffered any Material Adverse Effect, (ii) the Parent and its subsidiaries
have, in all material respects, conducted their respective businesses only in
the ordinary course consistent with past practice, except in connection with
the negotiation and execution and delivery of this Agreement, and (iii) there
has not been (a) any declaration, setting aside or payment of any dividend or
other distribution in respect of the Shares or any repurchase, redemption or
other acquisition by the Parent or any of its subsidiaries of any Parent
Securities; or (b) any action by the Parent which if taken after the date
hereof would constitute a breach of Section 5.01(b) hereof. Except as
disclosed in the Parent SEC Reports filed prior to May 7, 1997 or in Section
3.04 of the Parent Disclosure Letter, since September 30, 1996, there has not
been any change by the Parent in accounting methods, principles or practices
except as permitted by United States generally accepted accounting principles.
Section 4.05 Reports.
(a) The Parent has filed with the SEC all forms, reports and documents
required to be filed by it pursuant to the federal securities laws and the SEC
rules and regulations thereunder on and after September 30, 1995, all of which
have heretofor been filed or are hereafter filed (the "Parent SEC Reports")
have complied or will comply in form as of their respective filing dates in
all material respects with all applicable requirements of the Exchange Act and
the rules promulgated thereunder applicable thereto. None of the Parent SEC
Reports, at the time filed, contained or will contain any untrue statement of
a material fact or omitted or will omit to state a material fact required to
be stated or incorporated by reference therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading.
(b) As of their respective dates, the audited and unaudited consolidated
financial statements of the Parent included (or incorporated by reference) in
the Parent SEC Reports were prepared (or will have been prepared) in
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all material respects in accordance with United States generally accepted
accounting principles applied on a consistent basis during the periods therein
indicated (except as may be indicated in the notes thereto) and presented
fairly the consolidated financial position of the Parent, and the consolidated
results of operations and changes in consolidated financial position or cash
flows for the periods presented therein, subject, in the case of the unaudited
interim financial statements, to normal year-end audit adjustments and any
other adjustments described therein which were not expected to have a Material
Adverse Effect.
(c) As of March 31, 1997, neither the Parent nor any of its subsidiaries had
any liabilities of any nature, whether accrued, absolute, contingent or
otherwise, whether due or to become due that are required to be recorded or
reflected on a balance sheet under United States generally accepted accounting
principles, except as reflected or reserved against or disclosed in the
financial statements of the Parent included in the Parent SEC Reports filed
prior to May 7, 1997 or the Parent Disclosure Letter or as otherwise disclosed
in the Parent SEC Reports filed prior to May 7, 1997 or the Parent Disclosure
Letter.
Section 4.06 Information Supplied. None of the information supplied or to be
supplied by the Parent for inclusion or incorporation by reference in the
Registration Statement on Form S-4 to be filed with the SEC jointly by Parent
and Company in connection with the issuance of shares of Parent Common Stock
in the Merger and as contemplated by Section 2.06 will, at the time the S-4
becomes effective under the Securities Act or at the Effective Time, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading, and none of the information supplied or to be supplied by the
Parent and included or incorporated by reference in the Proxy Statement, as
supplemented if necessary, will, at the date mailed to stockholders of the
Parent, or at the time of the meeting of such stockholders to be held in
connection with the Merger, contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they are made, not misleading. If at any time prior to the time of such
meeting, any event with respect to the Parent or any of its Subsidiaries, or
with respect to other information supplied by the Parent for inclusion in the
Proxy Statement or S-4, shall occur which is required to be described in an
amendment of, or a supplement to, the Proxy Statement or the S-4, such event
shall be so described, and such amendment or supplement shall be promptly
filed with the SEC. The Proxy Statement, insofar as it relates to other
information supplied by the Parent for inclusion therein, will comply as to
form in all material respects with the provisions of the Exchange Act and the
rules and regulations thereunder.
Section 4.07 Consents and Approvals; No Violation. The execution and
delivery of this Agreement by each of the Parent or the Sub and the
consummation of the transactions contemplated hereby will not (i) conflict
with or result in any breach of any provision of the respective Certificates
of Incorporation or Bylaws (or other similar governing documents) of the
Parent, the Sub or any of their subsidiaries; (ii) require any consent,
approval, authorization or permit of, or filing with or notification to, any
governmental or regulatory authority, except (A) in connection with the HSR
Act, (B) pursuant to the Securities Act, the Exchange Act, (C) the filing of a
certificate of merger pursuant to the DGCL, (D) any applicable filings under
state securities, blue sky or "takeover" laws, (E) consents, approvals,
authorizations or filings under laws of jurisdictions outside the United
States, (F) consents, approvals, authorizations, permits, filings or
notifications required by local, state and federal regulatory agencies,
commissions, boards or public authorities with jurisdiction over health care
facilities and providers or (G) where the failure to obtain such consent,
approval, authorization or permit, or to make such filing or notification,
would not in the aggregate have a Material Adverse Effect on the Parent or the
Sub or has a material adverse effect on the ability of the Parent or the Sub
to consummate the transactions contemplated hereby, (iii) result in a default
(or give rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, license, agreement or
other instrument or obligation to which the Parent or the Sub or any of their
subsidiaries is a party or by which any of its subsidiaries or any of their
respective assets may be bound, except for such defaults (or rights of
termination, cancellation or acceleration) as to which requisite waivers or
consents have been obtained or which would not have a Material Adverse Effect
on the Parent or the Sub or has a material adverse effect on the ability of
the Parent or the Sub to consummate the transactions contemplated hereby; (iv)
result in the creation or imposition of any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind on any asset of the Parent or the
Sub or any of their
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subsidiaries which, individually or in the aggregate, would have a material
adverse effect on the ability of the Parent or the Sub to consummate the
transactions contemplated hereby; or (v) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Parent, the Sub or any
of their subsidiaries or any of their respective assets, except for violations
which would not in the aggregate have a Material Adverse Effect on the Parent
or the Sub or have a material adverse effect on the ability of the Parent or
the Sub to consummate the transactions contemplated hereby.
Section 4.08 Brokers. No broker, finder or other investment banker (other
than Credit Suisse First Boston Corporation and NationsBanc Capital Markets,
Inc.) is entitled to receive any brokerage, finder's or other fee or
commission in connection with this Agreement or the transactions contemplated
hereby based upon agreements made by or on behalf of the Parent or the Sub.
Section 4.09 Litigation, etc. As of the date hereof there is no claim,
action, proceeding or governmental investigation pending or, to the best
knowledge of the Parent or the Sub, threatened against the Parent or any of
its subsidiaries, including the Sub, before any court or governmental or
regulatory authority which, in the aggregate would have a material adverse
effect on the ability of the Parent or the Sub to consummate the transactions
contemplated by this Agreement. Neither the Parent nor any of its
subsidiaries, including the Sub, is subject to any outstanding order, writ,
injunction or decree that would have a material adverse effect on the ability
of the Parent or the Sub to consummate the transactions contemplated by this
Agreement.
Section 4.10 Ownership of Shares. As of the date hereof, neither the Parent
nor any of its Subsidiaries beneficially owns (within the meaning of Rule l3d-
3 under the Exchange Act) any Company Common Stock.
Section 4.11 Tax Matters. The Parent and each of its Subsidiaries has duly
filed all tax returns and reports required to be filed by it, or requests for
extensions to file such returns or reports have been timely filed and granted
and have not expired, except to the extent that such failures to file, in the
aggregate, would not have a Material Adverse Effect and such returns and
reports are true, correct and complete in all material respects. The Parent
and each of its Subsidiaries has duly paid in full (or the Parent has paid on
its behalf) or made adequate provision in the Company's accounting records for
all taxes for all past and current periods for which the Parent or any of its
Subsidiaries is liable. The most recent financial statements contained in the
Parent SEC Reports filed prior to May 7, 1997 reflect adequate reserves for
all taxes payable by the Parent and its Subsidiaries for all taxable periods
and portions thereof accrued through the date of such financial statements,
and no deficiencies for any taxes have been proposed, asserted or assessed
against the Parent or any of its Subsidiaries that are not adequately reserved
for, except for inadequately reserved taxes and inadequately reserved
deficiencies that would not, in the aggregate, have a Material Adverse Effect.
No requests for waivers of the time to assess any taxes against the Parent or
any of its Subsidiaries have been granted or are pending, except for requests
with respect to such taxes that have been adequately reserved for in the most
recent financial statements contained in the Parent SEC Reports filed prior to
May 7, 1997, or, to the extent not adequately reserved, the assessment of
which would not, in the aggregate, have a Material Adverse Effect. Except as
set forth in Section 3.11 of the Parent Disclosure Letter, neither the Parent
nor any of its Subsidiaries has made any payments, is obligated to make any
payments, or is a party to any agreement that under certain circumstances
could obligate it to make any payments that will not be deductible under
Section 280G of the Code. Neither the Parent nor any of its Subsidiaries has
been a United States real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
ARTICLE V
COVENANTS
Section 5.01 Conduct of Business.
(a) Except as contemplated by this Agreement and in the Company Disclosure
Letter, during the period from the date of this Agreement to the Effective
Date, the Company and its subsidiaries will each conduct its
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operations according to its ordinary and usual course of business and
consistent with past practice and will use all commercially reasonable efforts
consistent with prudent business practice to preserve intact the business
organization of the Company and each of its Subsidiaries, to keep available
the services of its and their current officers and key employees and to
maintain existing relationships with those having significant business
relationships with the Company and its Subsidiaries, in each case in all
material respects. Without limiting the generality of the foregoing, except as
set forth in the Company Disclosure Letter and except as otherwise expressly
provided in or contemplated by this Agreement or the Company Disclosure
Letter, prior to the time specified in the preceding sentence, neither the
Company nor any of its Subsidiaries, as the case may be, will, without the
prior written consent of the Parent (not to be unreasonably withheld), (i)
except for issuances of capital stock of the Company's Subsidiaries to the
Company or a wholly owned subsidiary of the Company, issue, sell or pledge, or
authorize or propose the issuance, sale or pledge of (A) Company Securities or
Subsidiary Securities, in each case, other than Company Common Stock issuable
upon exercise or vesting of the Rights or allocations or issuances pursuant to
the Stock Plans or the exercise of rights under any Plan or any agreement
referred to in Section 3.02 of the Company Disclosure Letter, or (B) any other
securities in respect of, in lieu of or in substitution for Company Common
Stock outstanding on the date hereof, (ii) otherwise acquire or redeem,
directly or indirectly, any Company Securities or Subsidiary Securities
(including the Company Common Stock); (iii) split, combine or reclassify its
capital stock or declare, set aside, make or pay any dividend or distribution
(whether in cash, stock or property) on any shares of capital stock of the
Company or any of its Subsidiaries (other than cash dividends paid to the
Company by its wholly owned subsidiaries with regard to their capital stock);
(iv) (1) make any acquisition, by means of a merger or otherwise, of assets or
securities, or any sale, lease, encumbrance or other disposition of assets or
securities, in each case involving the payment or receipt of consideration of
$10,000,000 or more outside the ordinary and usual course of business
consistent with past practice in all material respects, or (2) other than in
the ordinary course of business, enter into a material contract or grant any
release or relinquishment of any material contract rights; (v) incur or assume
any long-term debt for borrowed money except for debt incurred in the ordinary
course of business consistent in all material respects with past practice;
(vi) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person except wholly owned subsidiaries of the Company, except in the ordinary
course of business consistent in all material respects with past practice;
(vii) except in connection with transactions permitted by (iv) above, make any
loans, advances or capital contributions to, or investments in, any other
person (other than wholly owned subsidiaries of the Company) in the aggregate
in excess of $10,000,000; (viii) change any of the accounting principles or
practices used by it or any of its Subsidiaries, except as required by the SEC
or required by United States generally accepted accounting principles; (ix)
adopt any amendments to the Restated Certificate of Incorporation or Bylaws
(or similar documents) of the Company or any Subsidiary; (x) except as, may be
required under any previously existing agreement or Plan, grant any stock
related awards; (xi) enter into any new, or amend any existing, employee
benefit, pension or other plan (whether or not subject to ERISA) or
employment, severance, consulting or salary continuation agreements with any
officers, directors or key employees, or grant any increases in the
compensation or benefits to officers, directors and key employees; (xii) enter
into, amend, or extend any material collective bargaining or other labor
agreement, except as required by law and except in the ordinary course of
business consistent in all material respects with past practice; (xiii) adopt,
make any material amendment to or terminate any material employee benefit
plan, as required by law or to maintain tax qualified status or as requested
by the Internal Revenue Service in order to receive a determination letter for
such employee benefit plan; (xiv) merge or consolidate with or transfer all or
substantially all of its assets to another corporation or other business
entity or individual; (xv) liquidate, wind-up or dissolve (or suffer any
liquidation or dissolution); or (xvi) agree in writing or otherwise to take
any of the foregoing actions.
(b) Except as contemplated by this Agreement and in the Parent Disclosure
Letter, during the period from the date of this Agreement to the Effective
Date, the Parent and its subsidiaries will each conduct its operations
according to its ordinary and usual course of business and consistent with
past practice and will use all commercially reasonable efforts consistent with
prudent business practice to preserve intact the business organization of the
Parent and each of its subsidiaries, to keep available the services of its and
their current officers and key employees and to maintain existing
relationships with those having significant business
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relationships with the Parent and its subsidiaries, in each case in all
material respects. Without limiting the generality of the foregoing, except as
set forth in the Parent Disclosure Letter and except as otherwise expressly
provided in or contemplated by this Agreement or the Parent Disclosure Letter,
prior to the time specified in the preceding sentence, neither the Parent nor
any of its subsidiaries, as the case may be, will, without the prior written
consent of the Company (not to be unreasonably withheld), (i) except for
issuances of capital stock of the Parent's subsidiaries to the Parent or a
wholly owned subsidiary of the Parent, issue, sell or pledge, or authorize or
propose the issuance, sale or pledge of (A) Parent Securities or Subsidiary
Securities, in each case, other than Parent Common Stock issuable upon
exercise or vesting of the Rights or allocations or issuances pursuant to the
Stock Plans or the exercise of rights under any Plan or any agreement referred
to in Section 3.02 of the Parent Disclosure Letter, or (B) any other
securities in respect of, in lieu of or in substitution for Parent Common
Stock outstanding on the date hereof, (ii) otherwise acquire or redeem,
directly or indirectly, any Parent Securities or Subsidiary Securities
(including the Parent Common Stock); (iii) split, combine or reclassify its
capital stock or declare, set aside, make or pay any dividend or distribution
(whether in cash, stock or property) on any shares of capital stock of the
Parent or any of its subsidiaries (other than cash dividends paid to the
Parent by its wholly owned subsidiaries with regard to their capital stock);
(iv) (1) make any acquisition, by means of a merger or otherwise, of assets or
securities, or any sale, lease, encumbrance or other disposition of assets or
securities, in each case involving the payment or receipt of consideration of
$10,000,000 or more outside the ordinary and usual course of business
consistent with past practice in all material respects, or (2) other than in
the ordinary course of business, enter into a material contract or grant any
release or relinquishment of any material contract rights; (v) incur or assume
any long-term debt for borrowed money except for debt incurred in the ordinary
course of business consistent in all material respects with past practice;
(vi) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person except wholly owned subsidiaries of the Parent, except in the ordinary
course of business consistent in all material respects with past practice;
(vii) except in connection with transactions permitted by (iv) above, make any
loans, advances or capital contributions to, or investments in, any other
person (other than wholly owned subsidiaries of the Parent) in the aggregate
in excess of $10,000,000; (viii) change any of the accounting principles or
practices used by it or any of its Subsidiaries, except as required by the SEC
or required by United States generally accepted accounting principles; (ix)
adopt any amendments to the Restated Certificate of Incorporation or Bylaws
(or similar documents) of the Parent or any Subsidiary; (x) except as, may be
required under any previously existing agreement or Plan, grant any stock
related awards; (xi) enter into any new, or amend any existing, employee
benefit, pension or other plan (whether or not subject to ERISA) or
employment, severance, consulting or salary continuation agreements with any
officers, directors or key employees, or grant any increases in the
compensation or benefits to officers, directors and key employees; (xii) enter
into, amend, or extend any material collective bargaining or other labor
agreement, except as required by law and except in the ordinary course of
business consistent in all material respects with past practice; (xiii) adopt,
make any material amendment to or terminate any material employee benefit
plan, as required by law or to maintain tax qualified status or as requested
by the Internal Revenue Service in order to receive a determination letter for
such employee benefit plan; (xiv) merge or consolidate with or transfer all or
substantially all of its assets to another corporation or other business
entity or individual; (xv) liquidate, wind-up or dissolve (or suffer any
liquidation or dissolution); or (xvi) agree in writing or otherwise to take
any of the foregoing actions.
Section 5.02 No Solicitation.
(a) Immediately following the execution of this Agreement, the Company will
terminate any and all existing activities, discussions and negotiations with
third parties (other than the Parent) with respect to any possible Acquisition
Transaction (as defined below). The Company and its subsidiaries and their
respective officers, directors and employees shall not, and the Company and
its subsidiaries will use all reasonable efforts to cause their
representatives, agents or affiliates not to, directly or indirectly,
knowingly encourage, solicit, or initiate any discussions or negotiations
with, any corporation, partnership, person or other entity or group (other
than the Parent or the Sub or any affiliate or associate of the Parent or the
Sub or any of their respective directors, officers, employees, representatives
or agents) concerning any merger, consolidation, business combination,
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liquidation, reorganization, sale of substantial assets, sale of shares of
capital stock or similar transactions involving the Company or any material
Subsidiary of the Company (each an "Acquisition Transaction"); provided,
however, that if Company's Board of Directors determines after consultation
with counsel, that it is required to do so in the exercise of the fiduciary
duties of the Company's directors to the Company or its stockholders, the
Board of Directors may respond to, or engage in discussions with respect to, a
written offer for an Acquisition Transaction; and provided further that
nothing contained in this Section 5.02(a) shall prohibit the Company or its
Board of Directors from taking and disclosing to the Company's stockholders a
position with respect to a tender offer by a third party pursuant to Rules
14d-9 and 14e-2(a) promulgated under the Exchange Act or from making such
other disclosure to the Company's stockholders which, as advised by outside
counsel, is required under applicable law. The Company will promptly
communicate to Parent the terms and conditions of any proposal for an
Acquisition Transaction that it may receive and will keep Parent informed as
to the status of any action, including any discussions, taken pursuant to such
proposed or contemplated Acquisition Transaction.
(b) Immediately following the execution of this Agreement, the Parent will
terminate any and all existing activities, discussions and negotiations with
third parties (other than the Company and Apollo) with respect to any possible
Acquisition Transaction. The Parent and its subsidiaries and their respective
officers, directors and employees shall not, and the Parent and its
subsidiaries will use all reasonable efforts to cause their representatives,
agents or affiliates not to, directly or indirectly, knowingly encourage,
solicit, or initiate any discussions or negotiations with, any corporation,
partnership, person or other entity or group (other than the Company and
Apollo or any affiliate or associate of the Company and Apollo or any of their
respective directors, officers, employees, representatives or agents)
concerning any Acquisition Transaction; provided, however, that if during the
45 days following the date of this Agreement the Parent's Board of Directors
determines, after consultation with counsel, that it is required to do so in
the exercise of the fiduciary duties of the Parent's directors to the Parent
or its stockholders, the Board of Directors may respond to, or engage in
discussions with respect to, a written offer for an Acquisition Transaction
during such 45 day period; and provided further that nothing contained in this
Section 5.02(b) shall prohibit the Parent or its Board of Directors from
taking and disclosing to the Parent's stockholders a position with respect to
a tender offer by a third party pursuant to Rules 14d-9 and 14e-2(a)
promulgated under the Exchange Act or from making such other disclosure to the
Parent's stockholders which, as advised by outside counsel, is required under
applicable law. The Parent will promptly communicate to the Company the terms
and conditions of any proposal for an Acquisition Transaction that it may
receive and will keep the Company informed as to the status of any action,
including any discussions, taken pursuant to such proposed or contemplated
Acquisition Transaction.
Section 5.03 Access to Information.
(a) Between the date of this Agreement and the Effective Time, the Company
will, upon reasonable notice to an executive officer of the Company, (i) give
the Parent, the Sub and Apollo and their respective authorized representatives
access (during regular business hours), in a manner so as not to interfere
with the normal operations of the Company and its subsidiaries and subject to
reasonable restrictions imposed by an executive officer of the Company, to all
key employees, plants, offices, warehouses and other facilities and to all
books and records of the Company and its subsidiaries and cause the Company's
and its subsidiaries' independent public accountants to provide access to
their work papers and such other information as the Parent, the Sub or Apollo
may reasonably request, (ii) permit the Parent, the Sub and Apollo to make
such inspections as they may reasonably require and (iii) cause its officers
and those of its subsidiaries to furnish the Parent, the Sub or Apollo with
such financial and operating data and other information with respect to the
business, properties and personnel of the Company and its subsidiaries as the
Parent, the Sub or Apollo may from time to time reasonably request.
(b) Information obtained by the Parent or the Sub or their respective
representatives pursuant to this Section 5.03 shall be subject to the
provisions of the letter agreement between the Parent and the Company (the
"Confidentiality Agreement") the terms of which are incorporated herein by
reference.
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Section 5.04 Reasonable Efforts, Filings. Subject to the terms and
conditions herein provided for and to the fiduciary duties of the Board of
Directors of each of the Company and the Parent under applicable law as
advised by legal counsel, each of the parties hereto agrees to use
commercially reasonable efforts to take, or cause to be taken, all appropriate
action, and to do, or cause to be done, all things necessary, proper or
advisable under applicable laws and regulations to consummate and make
effective, as soon as practicable, the transactions contemplated by this
Agreement. In connection with and without limiting the foregoing, (a) (i) the
Company, the Parent and the Sub shall use all reasonable efforts to make
promptly any required submissions under the HSR Act which the Company and the
Parent or the Sub determine should be made, in each case, with respect to the
Merger, and the transactions contemplated by this Agreement, (ii) the Company,
the Parent and the Sub shall use all reasonable efforts to respond as promptly
as practicable to all inquiries received from the Federal Trade Commission
(the "FTC") and the Antitrust Division of the Department of Justice (the
"Antitrust Division") for additional information or documentation and to
respond as promptly as practicable to all inquiries and requests received from
any State Attorney General or other governmental authority in connection with
antitrust matters, and (iii) if required by the FTC, the Antitrust Division,
any State Attorney General or any other governmental authority, or if
otherwise necessary or required in order to consummate the Merger, Parent
agrees promptly to take all commercially reasonable steps (including executing
agreements and submitting to judicial or administrative orders) to effect the
sale or other disposition of, or to hold separate assets or businesses of
Parent or the Company or any of their respective subsidiaries or affiliates
(including, without limitation, pursuant to arrangements which limit or
prohibit access to such assets or businesses), unless such sale or other
disposition would have a Material Adverse Effect on the Company, (b) the
Parent, the Sub and the Company will take all such action as may be necessary
under federal and state securities laws applicable or necessary for, and will
file and, if appropriate, use all reasonable efforts to have declared
effective or approved all documents and notifications with the SEC and other
governmental or regulating bodies which the Parent, the Sub and the Company
determines, in each case, is necessary for the consummation of the Merger and
the transactions contemplated hereby and each party shall give the other
information requested by it which is reasonably necessary to enable it to take
such action, (c) the Parent, the Sub and the Company will, and will cause each
of their respective subsidiaries to, use commercially reasonable efforts to
obtain consents of all third parties and governmental bodies (other than with
respect to healthcare regulatory licenses, certifications or permits or
provider agreements) necessary or, in the reasonable opinion of the Parent or
the Company, advisable to consummate the Merger and the transactions
contemplated by this Agreement and (d) prior to the Effective Time, the
Parent, Sub and the Company will take, and cause their respective subsidiaries
to take, such actions to apply for such governmental approvals or consents, or
make filings with governmental bodies, with respect to healthcare regulatory
licenses, certifications, or permits or provider agreements as may be required
by applicable law. In case at any time after the Effective Time any further
action is necessary or desirable to carry out the purposes of this Agreement,
the Parent shall cause the proper officers and directors of the Surviving
Corporation, the Parent or the Sub, as the case may be to take all such
necessary action.
Section 5.05 Indemnification and Insurance.
(a) The Parent and the Sub agree that all rights to indemnification existing
in favor of the present or former directors, officers and employees of the
Company (as such) or any of its subsidiaries or present or former directors of
the Company or any of its subsidiaries serving or who served at the Company's
or any of its subsidiaries' request as a director, officer, employee or agent
of another corporation, partnership, joint venture, trust, employee benefit
plan or other enterprise, as provided in the Company's Certificate of
Incorporation or Bylaws, or the articles of incorporation, bylaws or similar
documents of any of the Company's subsidiaries and the indemnification
agreements with such present and former directors, officers and employees as
in effect as of the date hereof with respect to matters occurring at or prior
to the Effective Time shall survive the Merger and shall continue in full
force and effect and without modification (other than modifications which
would enlarge the indemnification rights) for a period of not less than the
statutes of limitations applicable to such matters, and the Surviving
Corporation shall comply fully with its obligations hereunder and thereunder.
Without limiting the foregoing, the Company shall, and after the Effective
Time, the Surviving Corporation shall periodically advance expenses as
incurred with respect to the foregoing (including with respect to any action
to enforce rights to
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indemnification or the advancement of expenses) to the fullest extent
permitted under applicable law; provided, however, that the person to whom the
expenses are advanced provides an undertaking (without delivering a bond or
other security) to repay such advance if it is ultimately determined that such
person is not entitled to indemnification.
(b) For a period of six (6) years after the Effective Time, the Surviving
Corporation shall maintain officers' and directors' liability insurance and
fiduciary liability insurance covering the persons described in paragraph (a)
of this Section 5.05 (whether or not they are entitled to indemnification
thereunder) who are currently covered by the Company's existing officers' and
directors' or fiduciary liability insurance policies on terms no less
advantageous to such indemnified parties than such existing insurance.
(c) The Surviving Corporation shall indemnify and hold harmless (and shall
advance expenses to), to the fullest extent permitted under applicable law,
each director, officer, employee, fiduciary and agent of the Company or any
Subsidiary of the Company including, without limitation, officers and
directors, serving as such on the date hereof against any costs and expenses
(including reasonable attorneys' fees), judgments, fines, losses, claims,
damages, liabilities and amounts paid in settlement in connection with any
claim, action, suit, proceeding or investigation relating to any of the
transactions contemplated hereby, and in the event of any such claim, action,
suit, proceeding or investigation (whether arising before or after the
Effective Time), (i) the Surviving Corporation shall pay the reasonable fees
and expenses of counsel selected by the indemnified parties, promptly as
statements therefor are received and (ii) the parties hereto will cooperate in
the defense of any such matter, provided, however, that the Surviving
Corporation shall not be liable for any settlement effected without its prior
written consent, which consent shall not unreasonably be withheld.
(d) The Surviving Corporation shall pay all reasonable costs and expenses,
including attorneys' fees, that may be incurred by any indemnified parties in
enforcing the indemnity and other obligations provided for in this Section
5.05.
(e) In the event the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger
or (ii) transfers all or substantially all of its properties and assets to any
person, proper provisions shall be made so that the successors and assigns of
the Surviving Corporation assume the obligations set forth in this
Section 5.05.
(f) This Section 5.05, which shall survive the consummation of the Merger at
the Effective Time and shall continue for the periods specified herein, is
intended to benefit the Company, the Surviving Corporation, and any person or
entity referenced in this Section 5.05 or indemnified hereunder each of whom
may enforce the provisions of this Section 5.05 (whether or not parties to
this Agreement).
Section 5.06 Employee Plans and Benefits and Employment Contracts.
(a) From and after the Effective Time, the Surviving Corporation and its
subsidiaries will honor in accordance with their terms all existing
employment, severance, consulting and salary continuation agreements between
the Company or any of its subsidiaries and any current or former officer,
director, employee or consultant of the Company or any of its subsidiaries or
group of such officers, directors, employees or consultants described in
Section 5.06(a) of the Company Disclosure Letter.
(b) In addition to honoring the agreements referred to in Section 5.06(a),
until the first anniversary of the Effective Time, the Surviving Corporation
and its subsidiaries will provide or will cause to be provided to each current
or former employee (presently entitled to benefits) of the Company or its
subsidiaries (excluding employees covered by collective bargaining agreements)
(i) employee compensation, benefit plans, programs, policies and arrangements,
that are in the aggregate no less favorable than those currently provided by
the Company and its subsidiaries to each such employee and former employee;
and (ii) severance benefits that are in the aggregate no less favorable to any
employee of the Company or any of its subsidiaries than those currently
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provided to each such employee. Nothing in this Section 5.06(b) shall be
deemed to prevent the Surviving Corporation or any of its subsidiaries from
making any change required by law.
(c) To the extent permitted under applicable law, each employee of the
Company or its subsidiaries shall be given credit for all service with the
Company or its Subsidiaries (or service credited by the Company or its
subsidiaries) under all employee benefit plans, programs, policies and
arrangements maintained by the Surviving Corporation in which they participate
or in which they become participants for purposes of eligibility, vesting and
benefit accrual including, without limitation, for purposes of determining (i)
short-term and long-term disability benefits, (ii) severance benefits, (iii)
vacation benefits and (iv) benefits under any retirement plan.
(d) This Section 5.06, which shall survive the consummation of the Merger at
the Effective Time and shall continue without limit, is intended to benefit
and bind the Company, the Surviving Corporation and any person or entity
referenced in this Section 5.06, each of whom may enforce the provisions of
this Section 5.06 (whether or not parties to this Agreement). Except as
provided in clause (a) above, nothing contained in this Section 5.06 shall
create any beneficiary rights in any employee or former employee (including
any dependent thereof) of the Company, any of its subsidiaries or the
Surviving Corporation in respect of continued employment for any specified
period of any nature or kind whatsoever.
Section 5.07 Proxy Statement and S-4. The Company and the Parent shall
promptly prepare and file with the SEC, as soon as practicable, a preliminary
joint proxy statement (the "Proxy Statement") and S-4 relating to the
Recapitalization Merger and the Merger as required by the Exchange Act and the
rules and regulations thereunder. Each of the Parent and the Company shall use
commercially reasonable efforts to have the S-4 declared effective under the
Securities Act as promptly as practicable after such filing. The Company, the
Parent and the Sub will cooperate with each other in the preparation of the
Proxy Statement. The Company and the Parent shall use all reasonable efforts
to respond promptly to any comments made by the SEC with respect to the Proxy
Statement, and to cause the Proxy Statement to be mailed to the Company's and
the Parent's stockholders at the earliest practicable date.
Section 5.08 Notification of Certain Matters. The Company shall give prompt
notice to the Parent and the Sub, and the Parent or the Sub, as the case may
be, shall give prompt notice to the Company, of (i) the occurrence, or non-
occurrence, of any event the effect of which is likely to cause any
representation or warranty of such party contained in this Agreement to be
untrue or inaccurate in any material respect at or prior to the Effective Time
and (ii) any material failure of such party to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to this
Section 5.08 shall not limit or otherwise affect the remedies available
hereunder to any of the parties receiving such notice.
Section 5.09 Rights Agreement Amendment. Subject to the terms and conditions
of this Agreement, the Parent shall promptly enter into an amendment to the
Rights Agreement (the "Rights Agreement Amendment") pursuant to which the
Rights Agreement and the Rights Agreement Rights will not be applicable to the
Merger, shall not result in a "Distribution Date" under the Rights Agreement
and consummation of the Merger shall not result in the Company or its
affiliates being an "Acquiring Person" or result in the occurrence of a "Flip-
In Event" or a "Flip-Over Event" thereunder.
Section 5.10 Agreements of Rule 145 Affiliates. Prior to the Effective Time,
the Company shall cause to be prepared and delivered to Parent a list
identifying all persons who, at the time of the Company stockholder meeting,
may be deemed to be "affiliates" of the Company, as that term is used in
paragraphs (c) and (d) of Rule 145 under the Securities Act (the "Rule 145
Affiliates"). The Company shall use its commercially reasonable efforts to
cause each person who is identified as a Rule 145 Affiliate in such list to
deliver to Parent, at or prior to the Effective Time, a written agreement, in
the form to be approved by the parties hereto, that such Rule 145 Affiliate
will not sell, pledge, transfer or otherwise dispose of any shares of Parent
Common Stock issued to such Rule 145 Affiliate pursuant to the Merger, except
pursuant to an effective registration statement or in compliance with Rule 145
or an exemption from the registration requirements of the Securities Act.
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Section 5.11 New York Stock Exchange Listing. Each party agrees to use
commercially reasonable efforts to retain the listing of the shares of Parent
Common Stock issued in connection with the Merger on the New York Stock
Exchange following the Effective Time.
Section 5.12 Election to the Parent's Board of Directors. At the Effective
Time of the Merger, the Parent shall cause its board of directors to be
constituted as contemplated by Section 5.12 of the Recapitalization Merger
Agreement.
ARTICLE VI
CONDITIONS TO CONSUMMATION OF THE MERGER
Section 6.01 Conditions to Each Party's Obligation to Effect the Merger. The
respective obligations of each party to effect the Merger are subject to the
satisfaction or waiver, where permissible, by each party hereto prior to the
proposed Effective Time, of the following conditions:
(a) the agreement of merger (as such term is used in Section 251 of the
DGCL) contained in this Agreement and the Merger, and the issuance of the
Parent Common Stock pursuant to the Merger, shall have been approved and
adopted by the affirmative vote of the stockholders of each of the Company
and the Parent, respectively, required by and in accordance with applicable
law and the Restated Certificates of Incorporation and Bylaws thereof (if
applicable);
(b) the Recapitalization Merger and the related agreement of merger (as
such term is used in section 251 of the DGCL) contained in the
Recapitalization Merger Agreement and the issuance of the Parent Common
Stock pursuant to the Merger shall have been approved by the affirmative
vote of the stockholders of the Parent required by and in accordance with
applicable law and the Parent's Restated Certificate of Incorporation, and
the Recapitalization Merger shall have been consummated;
(c) no statute, rule, regulation, executive order, decree or injunction
shall have been enacted, entered, promulgated or enforced by any court or
governmental authority against the Parent, the Sub or the Company and be in
effect that prohibits or restricts the consummation of the Merger or makes
such consummation illegal (each party agreeing to use all reasonable
efforts to have any such prohibition lifted);
(d) the S-4 shall have become effective, and any required post-effective
amendment shall have become effective, under the Securities Act, and shall
not be the subject of any stop order or proceedings seeking a stop order,
and any material "blue sky" and other state securities laws applicable to
the registration of the Parent Common Stock shall have been complied with;
(e) the conditions to each party's obligations to effect the
Recapitalization Merger other than the consummation of the Merger shall
have been satisfied or waived; and
(f) the waiting period applicable to the consummation of the Merger under
the HSR Act shall have expired or been terminated and all filings required
to be made prior to the Effective Time with, and all consents, approvals,
authorizations and permits required to be obtained prior to the Effective
Time from, any governmental authority in connection with the consummation
of the Merger shall have been made or obtained (as the case may be), except
where the failure to obtain such consents, approvals, authorizations and
permits would not be reasonably likely to result in a Material Adverse
Effect on the Company or to materially adversely affect the consummation of
the Merger.
(g) the Company and Parent shall have received an opinion from the
Company's counsel, reasonably acceptable to the Company and the Parent, to
the effect that (i) the Merger will qualify as a tax-free reorganization
within the meaning of Section 368(a) of the Code; and (ii) the Company, the
Parent and the Sub will each be a "party to a reorganization" within the
meaning of Section 368(b) of the Code with respect to the Merger.
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Section 6.02 Additional Conditions to the Company's Obligation to Effect the
Merger. The obligations of the Company to effect the Merger shall be subject
to the satisfaction or waiver by each of the Company and Apollo, except that
with respect to the conditions set forth in Section 6.02(f), such conditions
shall be subject to satisfaction or waiver by Apollo only) prior to the
proposed Effective Time, of the following conditions:
(a) no action shall have been taken and be continuing, and no statute,
rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted, promulgated, entered, enforced or
deemed applicable to the Merger, which would (i) make illegal or prohibit
the consummation of the Merger or (ii) render the Company unable to effect
the Merger;
(b) no action or proceeding brought by any governmental, regulatory or
administrative agency, authority or commission shall have been instituted
and be pending that would be reasonably likely to result in any of the
consequences referred to in clauses (i) or (ii) of Section 6.02(a) above;
and there shall be no proceeding or other action (including without
limitation, relating to health care, regulatory, environmental and pension
matters) pending or threatened against the Parent or its Subsidiaries which
is reasonably likely to have a Material Adverse Effect;
(c) during the 30 day period ending on the date of the Closing, there
shall not have occurred and be continuing (i) any general suspension of
trading in, or limitation on prices for, securities on any national
securities exchange or in the over-the-counter market in the United States,
(ii) the declaration of any banking moratorium or any suspension of
payments in respect of banks or any material limitation (whether or not
mandatory) on the extension of credit by lending institutions in the United
States, (iii) the commencement of a war, material armed hostilities or any
other material international or national calamity involving the United
States having a significant adverse effect on the functioning of the
financial markets in the United States, or (iv) in the case of any of the
foregoing existing at the time of the execution of the Merger Agreement, a
material acceleration or worsening thereof;
(d) the representations and warranties of the Parent and the Sub set
forth in Article IV shall be true and correct in all material respects as
of the Effective Time as though made on and as of that time, and the Parent
and the Sub shall have performed in all material respects all covenants and
agreements required to be performed by them under this Agreement at or
prior to the Effective Time; and
(e) since September 30, 1996, no change shall have occurred or been
threatened in the business, operations, prospects, properties or condition
(financial or other) of the Parent or any of its Subsidiaries that would
have or would be reasonably expected to have a Material Adverse Effect;
provided, that the transactions contemplated by the Recapitalization Merger
Agreement and this Agreement shall not be deemed to have caused Material
Adverse Effect.
Section 6.03 Additional Conditions to the Parent's and the Sub's Obligations
to Effect the Merger. The obligations of the Parent and the Sub to effect the
Merger shall be subject to the satisfaction or waiver by the Parent, the Sub
and Apollo, prior to the proposed Effective Time, of the following conditions:
(a) no action shall have been taken and be continuing, and no statute,
rule, regulation, judgment, administrative interpretation, order or
injunction shall have been enacted, promulgated, entered, enforced or
deemed applicable to the Merger, which would (i) make illegal or prohibit
the consummation of the Merger or (ii) render Parent unable to effect the
Merger;
(b) no action or proceeding brought by any governmental, regulatory or
administrative agency, authority or commission shall have been instituted
and be pending that would be reasonably likely to result in any of the
consequences referred to in clauses (i) or (ii) of Section 6.02(a) above;
and there shall be no proceeding or other action (including, without
limitation, relating to health care, regulatory, environmental and pension
matters) pending or threatened against the Company or its Subsidiaries
which is reasonably likely to have a Material Adverse Effect;
(c) during the 30 day period ending on the date of the Closing, there
shall not have occurred (i) any general suspension of trading in, or
limitation on prices for, securities on any national securities exchange
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or in the over-the-counter market in the United States, (ii) the
declaration of any banking moratorium or any suspension of payments in
respect of banks or any material limitation (whether or not mandatory) on
the extension of credit by lending institutions in the United States, (iii)
the commencement of a war, material armed hostilities or any other material
international or national calamity involving the United States having a
significant adverse effect on the functioning of the financial markets in
the United States, or (iv) in the case of any of the foregoing existing at
the time of the execution of the Merger Agreement, a material acceleration
or worsening thereof;
(d) since December 31, 1996, no change shall have occurred or have been
threatened in the business, operations, prospects, properties or condition
(financial or other) of GranCare or any of its Subsidiaries that would have
or would be reasonably expected to have a Material Adverse Effect;
provided, that the transactions contemplated by the Recapitalization Merger
Agreement and the Merger Agreement shall not be deemed to be such a
materially adverse change;
(e) the agreements of Rule 145 Affiliates required to be delivered to
Parent pursuant to Section 5.10 shall have been furnished as required by
Section 5.10; and
(f) the representations and warranties of the Company set forth in
Article III shall be true and correct in all material respects as of the
Effective Time as though made on and as of that time, and the Company shall
have performed in all material respects all covenants and agreements
required to be performed by it under this Agreement at or prior to the
Effective Time.
ARTICLE VII
TERMINATION; AMENDMENT; WAIVER
Section 7.01 Termination. This Agreement may be terminated and the Merger
may be abandoned at any time notwithstanding approval thereof by the
stockholders of each of the Company and the Parent, but prior to the Effective
Time:
(a) by mutual written consent of the Boards of Directors of the Company
and the Parent;
(b) by the Parent or the Company if the Effective Time shall not have
occurred on or before November 17, 1997 (provided that the right to
terminate this Agreement under this Section 7.01(b) shall not be available
to any party whose failure to fulfill any obligation under this Agreement
has been the cause of or resulted in the failure of the Effective Time to
occur on or before such date);
(c) by the Parent or the Company if any court of competent jurisdiction
in the United States or other United States governmental body shall have
issued an order, decree or ruling, or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree,
ruling or other action shall have become final and non-appealable;
(d) by the Company if (i) any of the representations and warranties of
the Parent or the Sub contained in this Agreement were untrue in any
material respect when made or have since become, and at the time of
termination remain, untrue in any material respect, or (ii) the Parent or
the Sub shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement and, with respect to a
representation or warranty, such breach shall continue unremedied for ten
(10) days after the Parent or the Sub has received written notice from the
Company of the occurrence of such breach of failure;
(e) prior to Stockholder Approval by the Parent if the Board of Directors
of the Company withdraws or modifies in a manner adverse to the Parent or
the Sub its favorable recommendation of the Merger or shall have
recommended an Acquisition Transaction with a party other than the Parent
or any of its affiliates;
(f) prior to Stockholder Approval by the Company if the Company receives
a written offer with respect to any Acquisition Transaction with a party
other than the Parent or its affiliates or such other party has
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commenced a tender offer which, in either case, the Board of Directors of
the Company believes in good faith is more favorable to the Company's
stockholders than the transactions contemplated by this Agreement;
(g) by the Parent, if (i) any of the representations and warranties of
the Company contained in this Agreement shall fail to be true and correct
in any material respect, in each case when made or have since become, and
of the time of termination remain, untrue in any material respect, (ii) the
Company shall have breached or failed to comply in any material respect
with any of its obligations under this Agreement (other than as a result of
a breach by the Parent or the Sub of any of their obligations under this
Agreement) and, with respect to a representation or warranty, such breach
shall continue unremedied for ten (10) days after the Company has received
written notice from the Parent or the Sub of the occurrence of such breach
or failure;
(h) by the Parent or the Company if the Recapitalization Merger Agreement
is terminated; or
(i)(x) by the Parent if the Company fails to obtain its stockholders'
approval of the Merger at the meeting held for such purpose (or any
adjournment thereof) or (y) by the Company if the Parent fails to obtain
its stockholders' approval of the issuance of Parent Common Stock to be
issued as part of the Merger at the meeting held for such purpose (or any
adjournment thereof).
Section 7.02 Effect of Termination. If this Agreement is terminated and the
Merger is abandoned pursuant to Section 7.01 hereof, this Agreement, except
for the provisions of Section 5.03(b), this Section 7.02 and Section 8.10
hereof, shall forthwith become void and have no effect, without any liability
on the part of any party or its directors, officers or stockholders. The
Confidentiality Agreement shall remain in full force and effect following any
termination of this Agreement. If this Agreement is terminated pursuant to
Section 7.01(e) or (f), the Company promptly, but in no event later than one
business day after termination of this Agreement will pay to the Parent a fee
(the "Termination Fee") equal to $20 million in same day funds, plus interest
on such amount from the date payable until paid at a rate equal to 9% per
annum. If this Agreement is terminated pursuant to Section 7.01(i)(x) and, at
the time of the stockholder vote referred to therein, any person has made (or
publicly disclosed an intention to make) a proposal to effect an Acquisition
Transaction with respect to the Company (and shall not have irrevocably
withdrawn such proposal), or, if this Agreement is terminated pursuant to
Section 7.01(b) and, as of November 17, 1997, the Company shall not have held
a stockholder vote and a proposal to effect an Acquisition Transaction with
respect to the Company shall have been in effect at any time between October
15 and November 17, 1997 (a "No Vote Termination") and, in either case, within
180 days after such termination an Acquisition Transaction shall be
consummated with respect to the Company, the Company shall promptly (but in no
event later than one business day) after such consummation, pay the
Termination Fee. If this Agreement is terminated pursuant to Section 7.01(e),
(f), (g) or (i)(x) or in a No Vote Termination, the Company shall also pay the
out-of-pocket fees and expenses reasonably incurred by the Parent and the Sub
in connection with this Agreement. Nothing in this Section 7.02 shall relieve
any party to this Agreement of liability for breach of this Agreement.
Section 7.03 Amendment. To the extent permitted by applicable law, this
Agreement may be amended by action taken by or on behalf of the Boards of
Directors of the Company, the Parent, the Sub and Apollo, at any time before
or after adoption of this Agreement by the stockholders of each of the
Company, the Parent and Apollo but, after any such stockholder approval, no
amendment shall be made which decreases the Exchange Ratio or which adversely
affects the rights of the Company's stockholders hereunder without the
approval of the stockholders of the Company. This Agreement may not be amended
except by an instrument in writing signed on behalf of all of the parties.
Section 7.04 Extension; Waiver. At any time prior to the Effective Time, the
parties hereto, by action taken by or on behalf of the respective Boards of
Directors of the Company, the Parent and the Sub may (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein by any other applicable party or in any document, certificate
or writing delivered pursuant hereto by any other applicable party or (iii)
waive compliance with any of the agreements or conditions contained herein.
Any agreement on the part of any party to any such extension or waiver shall
be valid only if set forth in an instrument in writing signed on behalf of
such party.
II-26
<PAGE>
ARTICLE VIII
MISCELLANEOUS
Section 8.01 Survival of Representations and Warranties. The representations
and warranties made in Articles III and IV shall not survive beyond the
Effective Time. This Section 8.01 shall not limit any covenant or agreement of
the parties hereto which by its terms contemplates performance after the
Effective Time.
Section 8.02 Entire Agreement; Assignment. Except for the Confidentiality
Agreement and the Disclosure Letter, this Agreement (a) constitutes the entire
agreement between the parties with respect to the subject matter hereof and
supersedes all other prior agreements and understandings, both written and
oral, between the parties with respect to the subject matter hereof and (b)
shall not be assigned by operation of law or otherwise; provided, however,
that the Parent or the Sub may assign any of its rights and obligations to any
wholly-owned subsidiary of the Parent or the Sub incorporated in Delaware, but
no such assignment shall relieve the Parent or the Sub, as the case may be, of
its obligations hereunder.
Section 8.03 Enforcement of the Agreement; Jurisdiction. The parties hereto
agree that irreparable damage would occur in the event that any of the
provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached. It is accordingly agreed that the
parties shall be entitled to an injunction or injunctions to prevent breaches
of this Agreement and to enforce specifically the terms and provisions hereof
in any federal or state court located in the State of Delaware, this being in
addition to any other remedy to which they are entitled at law or in equity.
The parties hereto consent and agree that the state or federal courts
located in Delaware shall have exclusive jurisdiction to hear and determine
any claims or disputes pertaining to this Agreement or to any matter arising
out of or related to this Agreement and each party hereto waives any objection
that it may have based upon lack of personal jurisdiction, improper venue or
forum non conveniens and hereby consents to the granting of such legal or
equitable relief as is deemed appropriate by such court.
Section 8.04 Validity. The invalidity or unenforceability of any provision
of this Agreement shall not affect the validity or enforceability of any other
provisions of this Agreement, which shall remain in full force and effect.
Section 8.05 Notices. All notices, requests, claims, demands and other
communications hereunder shall be in writing and shall be deemed to have been
duly given when delivered in person, by facsimile transmission with
confirmation of receipt, or by registered or certified mail (postage prepaid,
return receipt requested) to the respective parties as follows:
if to the Parent or the Sub:
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Attention: Susan Thomas Whittle, Esq., General Counsel
Sydney K. Boone, Jr., Esq., Associate General Counsel
with copies to:
Cleary, Gottlieb, Steen & Hamilton
One Liberty Plaza
New York, New York 10006
Attention: Victor I. Lewkow, Esq.
Mayor, Day, Caldwell & Keeton L.L.P.
700 Louisiana, Suite 1900
Houston, Texas 77002
Attention: Jeff C. Dodd, Esq.
II-27
<PAGE>
if to the Company:
GranCare, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Attention: Evrett Benton, Executive Vice President
with a copy to:
Andrews & Kurth L.L.P.
600 Travis, Suite 4200
Houston, Texas 77002
Attention: Robert V. Jewell, Esq.
if to Apollo:
Apollo Management, L.P.
1999 Avenue of the Stars, Suite 1900
Los Angeles, California 90067
Attention: Peter P. Copses
with a copy to:
Sidley & Austin
555 W. Fifth Street, Suite 4000
Los Angeles, California 90013
Attention: Robert W. Kadlec, Esq.
or to such other address as the person to whom notice is given may have
previously furnished to the others in writing in the manner set forth above
(provided that notice of any change of address shall be effective only upon
receipt thereof).
Section 8.06 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware regardless of
the laws that might otherwise govern under principles of conflicts of laws
applicable thereto.
Section 8.07 Descriptive Headings. The descriptive headings herein are
inserted for convenience of reference only and are not intended to be part of
or to affect the meaning or interpretation of this Agreement.
Section 8.08 Parties in Interest. This Agreement shall be binding upon and
inure solely to the benefit of each party hereto, and nothing in this
Agreement, express or implied, is intended to confer upon any other person any
rights or remedies of any nature whatsoever under or by reason of this
Agreement except for Sections 2.13, 5.05 and 5.06 (which are intended to be
for the benefit of the persons referred to therein, and may be enforced by any
such persons).
Section 8.09 Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original, but all of which shall
constitute one and the same agreement.
Section 8.10 Fees and Expenses. Whether or not the Merger is consummated,
all costs and expenses incurred in connection with the transactions
contemplated by this Agreement shall be paid by the party incurring such
expenses, except as provided expressly to the contrary herein.
Section 8.11 Disclosure Letter. Any disclosure under one section of the
Disclosure Letter shall be deemed disclosure under all sections of the
Disclosure Letter. Disclosure of any matter in the Disclosure Letter shall not
constitute an expression of a view that such matter is material or is required
to be disclosed pursuant to this Agreement.
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<PAGE>
Section 8.12 Press Releases. Subject to the proviso to this sentence, the
Parent, the Sub and the Company will consult with each other before issuing
any press release or otherwise making any public statements with respect to
the transactions contemplated hereby and shall not issue any such press
release or make any such public statement prior to such consultation, except
as may be required by law or by obligations pursuant to the rules of The New
York Stock Exchange, Inc. and any other appropriate exchange.
Section 8.13 Obligation of the Parent. Whenever this Agreement requires Sub
to take any action, such requirement shall be deemed to include an undertaking
on the part of Parent to cause Sub to take such action.
Section 8.14. Reference; No Waiver. Any reference in this Agreement to the
"date hereof," the "date of this Agreement" or the "date of execution of this
Agreement" shall be deemed to refer to May 7, 1997, the date of the Original
Merger Agreement, but any reference to the "date of this Amended and Restated
Agreement" or the "date of execution of this Amended and Restated Agreement"
shall refer to September 17, 1997. The parties' execution and delivery of this
Amended and Restated Agreement (or any previously executed and delivered
amendment and/or restatement of the Original Merger Agreement) shall not
constitute a waiver of any rights that any of the parties hereto may have by
reason of any event, condition, misrepresentation or breach of covenant of the
Original Merger Agreement having occurred prior to the date of execution and
delivery of this Amended and Restated Agreement (or any previously executed
and delivered amendment and/or restatement of the Original Merger Agreement)
whether or not known to any or all of the parties hereto. No representation or
warranty of any party in this Agreement shall be affected or limited by reason
of the knowledge of any other party at any time that such representation or
warranty is not, or may not be, true and correct.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized.
LIVING CENTERS OF AMERICA, INC.
By: /s/ Edward L. Kuntz
___________________________________
Name: Edward L. Kuntz
Title: Chief Executive Officer
GRANCARE, INC.
By: /s/ Evrett W. Benton
___________________________________
Name: Evrett W. Benton
Title: Executive Vice President
APOLLO MANAGEMENT, L.P.
By: AIF III Management, Inc.
Its General Partner
By: /s/ Peter P. Copses
___________________________________
Name: Peter P. Copses
Title: Vice President
LCA ACQUISITION SUB, INC.
By: /s/ Edward L. Kuntz
___________________________________
Name: Edward L. Kuntz
Title: Chief Executive Officer
II-29
<PAGE>
ANNEX III
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
PARAGON HEALTH NETWORK, INC.
FIRST: Corporate Name. The name of the Corporation is Paragon Health
Network, Inc. (the "Corporation").
SECOND: Registered Office. The registered office of the Corporation is
located at Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, in the County of New Castle, in the State of Delaware. The name of
its registered agent at that address is The Corporation Trust Company.
THIRD: Corporate Purpose. The purpose of the Corporation is to engage in any
lawful act or activity for which a corporation may be organized under the
General Corporation Law of Delaware.
FOURTH: Capital Stock.
(A) Authorized Amount. The aggregate number of shares of capital stock of
the Corporation (referred to herein as "Shares") which the Corporation shall
have authority to issue is 80 million (80,000,000) shares, divided into 75
million (75,000,000) shares of Common Stock, par value $.01 per share, and 5
million (5,000,000) shares of Preferred Stock, par value $.01 per share.
(B) Authority of Board to Fix Terms of Shares. The Board of Directors of the
Corporation shall have the full authority permitted by law to fix by
resolution full, limited, multiple or fractional, or no voting rights, and
such designations, preferences, privileges, limitations, options, conversion
rights and relative, participating or other special rights and the
qualifications, limitations or restrictions thereof of the Preferred Stock or
any series thereof that may be desired and that have not been fixed herein.
The Board of Directors is also authorized to increase or decrease the number
of shares of any series, subsequent to the issue of that series, but not below
the number of shares of such series then outstanding. In case the number of
shares of any series shall be so decreased, the shares constituting such
decrease shall resume the status which they had prior to the adoption of the
resolution originally fixing the number of shares of such series.
FIFTH: Board of Directors
(A) Number. The Board of Directors shall consist of such number of
directors, not less than 5 nor more than 15, as may be determined from time to
time by resolution adopted by a vote of at least two-thirds ( 2/3) of the
entire Board of Directors.
(B) Removal of Directors. A director of the Corporation may be removed
during his term with or without cause only by the affirmative vote of the
holders of not less than two-thirds ( 2/3) of the combined voting power of all
the then outstanding Shares entitled to vote generally in the election of
directors ("Voting Stock"), voting together as a single class. In the event of
any increase or decrease in the authorized number of directors, each director
then serving as such shall nevertheless continue as a director until the
expiration of his current term, or his prior death, resignation or removal.
(C) Election of Directors. Elections of directors need not be by written
ballot unless the Bylaws of the Corporation shall so provide.
SIXTH: Bylaws. The Board of Directors shall have the power, in addition to
the stockholders, to make, alter, or repeal the Bylaws of the Corporation, in
the manner and by the requisite vote as may be set forth in the Bylaws of the
Corporation from time to time. The Bylaws of the Corporation shall not be
made, repealed, altered, amended or rescinded by the stockholders of the
Corporation except by the vote of the holders of not less than two-thirds (
2/3) of the combined voting power of all the then outstanding Voting Stock,
voting together as a single class.
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<PAGE>
SEVENTH: Liability of Directors. A director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174
of the Delaware General Corporation Law, as the same exists or hereafter may
be amended, or (iv) for any transaction from which the director derived an
improper personal benefit. If the Delaware General Corporation Law is
hereafter amended to authorize corporate action further limiting or
eliminating the personal liability of directors, then the liability of a
director to the Corporation shall be limited or eliminated to the fullest
extent permitted by the Delaware General Corporation Law, as so amended from
time to time. Any repeal or modification of this Article SEVENTH shall be
prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the time of
such repeal or modification.
EIGHTH: Indemnification. The Corporation shall, to the fullest extent
permitted by the Delaware General Corporation Law, as the same may be amended
and supplemented, indemnify any and all past, present and future directors and
officers of the Corporation from and against any and all costs, expenses
(including attorneys' fees), damages, judgments, penalties, fines, punitive
damages, excise taxes assessed with respect to an employee benefit plan and
amounts paid in settlement in connection with any action, suit or proceeding,
whether by or in the right of the Corporation, a class of its security holders
or otherwise, in which the director or officer may be involved as a party or
otherwise, by reason of the fact that such person was serving as a director,
officer, employee or agent of the Corporation. Any repeal or modification of
this Article EIGHTH shall be prospective only, and shall not adversely affect
the right of a director or officer of the Corporation to receive
indemnification from the Corporation existing at the time of such repeal or
modification.
NINTH: Stockholder Meetings; Books and Records. Meetings of stockholders may
be held within or without the State of Delaware, as the Bylaws may provide.
The books and records of the Corporation may be kept outside the State of
Delaware at such place or places as may be designated from time to time
pursuant to the Bylaws of the Corporation.
TENTH: Perpetual Existence. The Corporation shall have perpetual existence.
ELEVENTH: Amendment of Certificate of Incorporation. The Corporation
reserves the right to amend, alter, change or repeal any provision contained
in this Amended and Restated Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, and all rights conferred upon stockholders
are granted subject to this reservation. The provisions set forth in this
Article ELEVENTH and in Articles FIFTH (dealing with removal of directors),
SIXTH (dealing with the alteration of by-laws by stockholders) and SEVENTH
(dealing with liability of directors) herein may not be repealed or amended in
any respect unless such action is approved by the affirmative vote of not less
than two-thirds ( 2/3) of the combined voting power of the then outstanding
Voting Stock, voting together as a single class.
III-2
<PAGE>
ANNEX IV
AMENDED AND RESTATED BYLAWS
OF
PARAGON HEALTH NETWORK, INC.
(A DELAWARE CORPORATION)
ARTICLE I.
OFFICES AND FISCAL YEAR
SECTION 1.01 Registered Office. The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware
until otherwise established by a vote of a majority of the board of directors
in office and a statement of such change is filed in the manner provided by
statute.
SECTION 1.02 Other Offices. The corporation may also have offices at such
other places within or without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation requires.
SECTION 1.03 Fiscal Year. The fiscal year of the corporation shall end on
the 30th of September in each year.
ARTICLE II.
MEETING OF STOCKHOLDERS
SECTION 2.01 Place of Meeting. All meetings of the stockholders of the
corporation shall be held at the registered office of the corporation or at
such other place within or without the State of Delaware as shall be
designated by the board of directors in the notice of such meeting.
SECTION 2.02 Annual Meeting. The board of directors may fix the date, time
and place of the annual meeting of the stockholders, and at said meeting the
stockholders then entitled to vote shall elect directors and shall transact
such other business as may properly be brought before the meeting.
SECTION 2.03 Special Meetings. Special meetings of the stockholders of the
corporation for any purpose or purposes for which meetings may lawfully be
called, may be called at any time by the board of directors or by a committee
of the board of directors which has been duly designated by the board of
directors and whose powers and authority, as provided in a resolution of the
board of directors or in these by-laws, include the power to call such
meetings. Special meetings of the stockholders of the corporation may also be
called by one or more stockholders holding in the aggregate no less than 25%
of the then outstanding shares of the corporation's common stock. Special
meetings of the stockholders of the corporation may not be called by any other
person or persons. Business transactions at any special meeting of the
stockholders shall be limited to the purpose stated in the notice.
SECTION 2.04 Notice of Meetings. Written notice of the place, date and hour
of every meeting of the stockholders, whether annual or special, shall be
given to each stockholder of record entitled to vote at the meeting not less
than ten nor more than sixty days before the date of the meeting. Every notice
of a special meeting shall state the purpose or purposes thereof.
SECTION 2.05 Quorum, Manner of Acting and Adjournment. The holders of a
majority of the stock issued and outstanding (not including treasury stock)
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, by the certificate of
incorporation or by these by-laws. If, however, such quorum shall not be
present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat,
IV-1
<PAGE>
present in person or represented by proxy, shall have power to adjourn the
meeting from time to time, without notice other than announcement of the
meeting, until a quorum shall be present or represented. At any such adjourned
meeting, at which a quorum shall be present or represented, any business may
be transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, of if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting. When a quorum is present at any meeting, the vote of the
holders of the majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the applicable
statute, the certificate of incorporation or these by laws, a different vote
is required in which case such express provision shall govern and control the
decision of such question. Except upon those questions governed by the
aforesaid express provisions, the stockholders present in person or by proxy
at a duly organized meeting can continue to do business until adjournment,
notwithstanding withdrawal of enough stockholders to leave less than a quorum.
SECTION 2.06 Organization. At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of a vacancy in the
office or absence of the chairman of the board, one of the following persons
present in the order stated: the vice chairman, if one has been appointed, the
president, the vice presidents in their order of rank or seniority, a chairman
designated by the board of directors or a chairman chosen by the stockholders
entitled to cast a majority of the votes which all stockholders present in
person or by proxy are entitled to cast, shall act as chairman, and the
secretary, or, in his absence, an assistant secretary, or in the absence of
the secretary and the assistant secretaries, a person appointed by the
chairman, shall act as secretary.
SECTION 2.07 Conduct of Business. Notwithstanding anything in these by-laws
to the contrary, no business shall be conducted at an annual meeting of the
stockholders except in accordance with the procedures hereinafter set forth in
this Section 2.07; provided, however, that nothing in this Section 2.07 shall
be deemed to preclude discussion by any stockholder of any business properly
brought before the annual meeting in accordance with said procedures.
At any annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before any annual meeting, business must be (1) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the board of directors, (2) otherwise properly brought before the meeting
by or at the direction of the board of directors or (3) otherwise properly
brought before the meeting by a stockholder. In addition to any other
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, such stockholder must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than 30 days nor more
than 60 days prior to the meeting as originally scheduled; provided, however,
that if less than 40 days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th
day following the day on which such notice of the date of the annual meeting
was mailed or such public disclosure was made. Any adjournment(s) or
postponement(s) of the original meeting whereby the meeting will reconvene
within 30 days from the original date shall be deemed for purposes of notice
to be a continuation of the original meeting and no business may be brought
before any such reconvened meeting unless timely notice of such business was
given to the secretary of the corporation for the meeting as originally
scheduled. A stockholder's notice to the secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting
and their reasons for conducting such business at the annual meeting, (ii) the
name and residence of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, and (iv) any material interest of the stockholder in such
business.
The chairman of an annual meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 2.07, and
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<PAGE>
if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
SECTION 2.08 Voting. Each stockholder shall at every meeting of the
stockholders be entitled to one vote in person or by proxy for each share of
capital stock having voting power held by such stockholder. The board of
directors, at its discretion, or the officer of the corporation or other
chairman presiding at the meeting of stockholders at his discretion, may
require that any votes cast at such meetings shall be cast by written ballot.
No proxy shall be voted or acted upon after three years from its date, unless
the proxy provides for a longer period. Every proxy shall be executed in
writing by the stockholder or by his duly authorized attorney-in-fact and
filed with the secretary of the corporation. A proxy, unless coupled with an
interest, shall be revocable at will, notwithstanding any other agreement or
any provision in the proxy to the contrary, but the revocation of a proxy
shall not be effective until notice thereof has been given to the secretary of
the corporation. A duly executed proxy shall be irrevocable if it states that
it is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the corporation generally. A
proxy shall not be resolved by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written notice of
such death or incapacity is given to the secretary of the corporation.
SECTION 2.09 Voting Lists. The officer who has charge of the stock ledger of
the corporation shall prepare and make, at least ten days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting. The list shall be arranged in alphabetical order showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.10 Stock Ledger. The stock ledger of the corporation shall be the
only evidence as to who are the stockholders entitled (i) to examine the stock
ledger, the list required by Section 2.09 of this Article II or the books of
the corporation and (ii) to vote in person or by proxy at any meeting of
stockholders.
SECTION 2.11 Inspectors of Election.
(a) In advance of any meeting of stockholders the board of directors may
appoint inspectors of election, who need not be stockholders, to act at such
meeting or any adjournment thereof. If inspectors of elections are not so
appointed, the chairman of any such meeting may, and upon the demand of any
stockholder or his proxy at the meeting and before voting begins shall,
appoint inspectors of election. The number of inspectors shall be either one
or three, as determined, in the case of inspectors appointed upon demand of a
stockholder, by stockholders present entitled to cast a majority of the votes
which all stockholders present are entitled to cast thereon. No person who is
a candidate for office shall act as an inspector. In case any person appointed
as an inspector fails to appear or fails or refuses to act, the vacancy may be
filled by appointment made by the board of directors in advance of the
convening of the meeting, or at the meeting by the chairman of the meeting.
(b) If inspectors of election are appointed as aforesaid, they shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, the
authenticity, validity and effect of proxies, receive votes or ballots, hear
and determine all challenges and questions in any way arising in connection
with the right to vote, count and tabulate all votes, determine the result,
and do such acts as may be proper to conduct the election or vote with
fairness to all stockholders. If there be three inspectors of election, the
decision, act or certificate of a majority shall be effective in all respects
as the decision, act or certificate of all.
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(c) On request of the chairman of the meeting or of any stockholder or his
proxy, the inspectors shall make report in writing of any challenge or
question or matter determined by them, and execute a certificate of any fact
found by them.
SECTION 2.12 Action by Consent of Stockholders.
(a) Any action required or permitted to be taken at any annual or special
meeting of stockholders may be taken without a meeting, without prior notice
and without a vote, if a consent in writing, setting forth the action so
taken, is signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote on such action were
present and voted.
(b) Every written consent shall bear the date of signature of each
stockholder (or his, her or its proxy) signing such consent. Prompt notice of
the taking of corporate action without a meeting of stockholders by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing. All such written consents shall be delivered to the
corporation at its registered office in the State of Delaware, at its
principal place of business or to the secretary of the corporation. Delivery
made to the corporation's registered office shall be by hand or by certified
or registered mail, return receipt requested. No written consent shall be
effective to authorize or take the corporate action referred to therein
unless, within 60 days of the earliest dated written consent delivered to the
corporation in the manner required by this Section 2.12, written consents
signed by a sufficient number of persons to authorize or take such action are
delivered to the corporation at its registered office in the State of
Delaware, at its principal place of business or to the secretary of the
corporation. All such written consents shall be filed with the minutes of
proceedings of the stockholders, and actions authorized or taken under such
written consents shall have the same force and effect as those authorized or
taken pursuant to a vote of the stockholders at an annual or special meeting.
ARTICLE III.
BOARD OF DIRECTORS
SECTION 3.01 Powers. The board of directors shall have full power to manage
the business and affairs of the corporation; and all powers of the
corporation, except those specifically reserved or granted to the stockholders
by statute, the certificate of incorporation or these by-laws, are hereby
granted to and vested in the board of directors.
SECTION 3.02 Number; Classification. The board of directors shall consist of
eleven members; unless a greater or lesser (but not less than 5 nor more than
15) number is determined from time to time by resolution adopted by a vote of
at least two-thirds of the entire board of directors.
SECTION 3.03 Vacancies.
(a) Vacancies and newly created directorships resulting from any increase in
the authorized number of directors may be filled by the affirmative vote of at
least a two-thirds majority of the entire nominating committee of the board of
directors (or, if the directors then serving on the nominating committee
constitute less than two-thirds of the number of directors previously
authorized to serve on the nominating committee by the board of directors, by
the affirmative vote of all directors then serving on the nominating
committee), and the directors so chosen shall hold office until the next
annual election of directors and until a successor is duly elected and
qualified, except in the event of death, resignation or removal. If there are
no directors in office, then an election of directors may be held in the
manner provided by statute.
(b) Whenever the holder of any class or classes of stock or series thereof
are entitled to elect one or more directors by the provisions of the
certificate of incorporation, vacancies and newly created directorships of
such
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class or classes or series may be filled by a majority of the directors
elected by such class or classes or series thereof then in office, or by a
sole remaining director so elected.
(c) If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a
majority of the entire board (as constituted immediately prior to any such
increase), the Court of Chancery may, upon application of any stockholder or
stockholders holding at least ten percent of the total number of shares at the
time outstanding having the right to vote for such directors, summarily order
an election to be held to fill any such vacancies or newly created
directorships, or to replace the directors chosen by the directors then in
office.
SECTION 3.04 Resignations. Any director of the corporation may resign at any
time by giving written notice to the president or the secretary of the
corporation. Such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary
to make it effective.
SECTION 3.05 Organization. At every meeting of the board of directors, the
chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: the vice chairman of the board, if there be one,
the chief executive officer, the president, the vice presidents in their order
of rank and seniority, or a chairman chosen by a majority of the directors
present, shall preside, and the secretary, or, in his absence, an assistant
secretary, or in the absence of the secretary and the assistant secretaries,
any person appointed by the chairman of the meeting, shall act as secretary.
SECTION 3.06 Place of Meeting. The board of directors may hold its meetings,
both regular and special, at such place or places within or without the State
of Delaware as the board of directors may from time to time appoint, or as may
be designated in the notice calling the meeting.
SECTION 3.07 Regular Meeting. Regular meetings of the board of directors may
be held without notice at such time and place as shall be designated from time
to time by resolution of the board of directors. At such meetings, the
directors shall transact such business as may properly be brought before the
meeting.
SECTION 3.08 Special Meetings. Special meetings of the board of directors
shall be held whenever called by the chairman of the board or by two or more
of the directors. Notice of each such meeting shall be given to each director
by telephone or in writing at least 24 hours (in the case of notice by
telephone) or 48 hours (in the case of notice by telegram or facsimile
transmission) or five days (in the case of notice by mail) before the time at
which the meeting is to be held. Each such notice shall state the time and
place of the meeting to be held.
SECTION 3.09 Quorum, Manner of Acting and Adjournment.
(a) At all meetings of the board of directors a majority of the directors
shall constitute a quorum for the transaction of business, provided that at
least two directors who are not "Stockholder Designees" (as that term is
defined in that certain Stockholders Agreement dated as of October , 1997 by
and among the Corporation, and the Stockholders therein named, hereinafter,
the "Stockholders Agreement") are present, and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute, by the certificate of incorporation or by these bylaws. If a quorum
shall not be present at any meeting of the board of directors, the directors
present thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present.
(b) Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors or of any committee thereof may be taken without a meeting,
if all members of the board consent thereto in writing, and the writing or
writings are filed with the minutes or proceedings of the board.
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(c) Notwithstanding any provisions to the contrary in these by-laws, no
action by the board of directors relating directly or indirectly to any of the
following matters shall be effective unless authorized by the affirmative vote
of directors constituting at least two-thirds of the entire board of
directors:
(1) any merger or consolidation of the corporation or any merger or
consolidation in which the corporation is a constituent corporation, any
sale of all or substantially all of the assets, or of a geographic
division, of the corporation or any of its subsidiaries (determined on a
consolidated basis), or any material acquisition or disposition of assets
of the corporation or any of its subsidiaries (determined on a consolidated
basis);
(2) any investment in excess of $ (whether by way of
purchase of stock or other securities or by loan of money or guarantee of
indebtedness) by the corporation or any of its subsidiaries in a "line of
business" (as that term is defined in the senior secured credit agreement)
dated as of October , 1997 by and among the corporation, one or more of
its subsidiary corporations, The Chase Manhattan Bank, as arranger, and the
lenders therein named), hereinafter the "Senior Credit Facility") other
than a line of business operated by the corporation or any of its
subsidiaries on June 1, 1997;
(3) the incurrence or assumption by the corporation or any of its
subsidiaries, directly or indirectly (including a guarantee, a capital
lease, a sale of receivables or the placing of a lien or encumbrance on
assets of the corporation or any of its subsidiaries), of any indebtedness
in a principal amount in excess of $25,000,000, other than indebtedness
incurred pursuant to the Senior Credit Facility or pursuant to any other
agreement approved by the board of directors of the corporation (i) prior
to the effectiveness of these restated by-laws or (ii) in accordance with
this Section 3.09.
(4) any issuance or sale of capital stock or other equity securities (or
securities convertible into capital stock or other equity securities) of
the corporation or any of its subsidiaries or of any rights, options or
warrants to acquire any such securities (collectively, "Equity
Securities"), other than (i) the issuance of Equity Securities to the
corporation or a subsidiary of the corporation by a subsidiary of the
corporation or (ii) the issuance of any Equity Securities pursuant to a
stock option or employee benefit plan approved by the board of directors of
the corporation in accordance with this Section 3.09.
(5) any amendment to the certificate of incorporation;
(6) any dissolution, liquidation, assignment for the benefit of creditors
or petition for relief under the United States Bankruptcy Code or any
similar statutes relating to relief from creditors, in each case by the
corporation or any of its subsidiaries;
(7) any dividends on, distributions with respect to, or repurchases or
redemptions of, Equity Securities (other than (x) dividends paid from
current earnings pro rata (in proportion to the number of shares held) on
Common Stock of the corporation (y) repurchases of Equity Securities
expressly authorized by the terms of stockholder approved employee benefit
plans, or (z) repurchases of Equity Securities in a transaction or related
series of transactions, which involves consideration payable by the
corporation of less than $500,000;
(8) election or removal of officers of the corporation;
(9) any amendments or supplements to the Stockholders Agreement;
(10) any approval given under Section 203(a) of the Delaware General
Corporation Law ("DGCL"); and
(11) any transaction with an officer or director of the corporation
(other than matters delegated by the affirmative vote of directors
constituting at least two-thirds of the entire board of directors to a
committee of the board of directors of which no officer of the corporation
is a member and which is approved by a two-thirds vote of such committee).
(d) In addition to the provisions of subsection (c) of this Section 3.09,
any action by the board of directors relating directly or indirectly to any of
the following matters shall not be effective unless authorized by the
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affirmative vote of a majority of the directors who do not have, directly or
indirectly, a material financial interest in such matter (each "Associate" of
"Apollo," as those terms are defined in the Stockholders Agreement, shall be
deemed to have a material financial interest in each matter in which Apollo,
or any Affiliate (as defined in the Stockholders Agreement) of Apollo, has a
material financial interest):
(1) any transaction involving Apollo or any Affiliate of Apollo which
would be deemed a "business combination" under the provisions of Section
203(c)(3)(i)-(iv) of the DGCL;
(2) any proposed assignment or transfer by the Stockholders of their
rights under Section 4 of the Stockholders Agreement to a transferee of
"Shares" and
(3) any transaction between the corporation or any subsidiary with an
officer or director of the corporation or with any Affiliate (as defined in
the Stockholders Agreement) of such person, except transactions delegated
by the affirmative vote of directors constituting at least two-thirds of
the entire board of directors to a committee of the board of directors of
which such officer or director is not a member, and which is approved by a
two-thirds vote of such committee.
SECTION 3.10 Executive and Other Committees.
(a) Subject to Subsection (c) hereof, the board of directors, may, by
resolution adopted by the affirmative vote of directors constituting at least
two-thirds of the entire board of directors, designate an executive committee
and one or more other committees, each committee to consist of one or more
directors. The board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the event that the board of directors establishes
a committee other than the nominating committee, the board shall designate the
directors serving on such committee in a manner that complies with Section
4.1(f) of the Stockholders Agreement.
(b) Any such committee, to the extent provided in the resolution
establishing such committee, shall have and may exercise all the power and
authority of the board of directors in the management of the business and
affairs of the corporation and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have
power or authority in reference to any matter on which action by the board of
directors is required to be taken by more than a majority of the directors,
unless expressly authorized by resolution adopted by the number of directors
required to take such action. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the board of directors. Each committee so formed shall keep regular minutes of
its meetings and report the same to the board of directors when required.
(c) The board of directors shall establish a nominating committee consisting
of five directors to nominate persons to be recommended by the board of
directors to the stockholders for election as directors at each annual
meeting, and to fill vacancies on the board of directors created by death,
resignations, removal or increase in the size of the board of directors.
Throughout the "Stockholder Designee Period" (as defined in the Stockholders
Agreement), the chief executive officer of the corporation (if he or she is a
director) shall be a member of the nominating committee and two other members
of the nominating committee shall consist of directors who are "Apollo
Directors" (as defined in the Stockholders Agreement) and if there are no
Apollo Directors, or there are not two Apollo Directors, the nominating
committee shall have no less nor more than two "Stockholder Designees" (as
defined in the Stockholders Agreement).
(d) Unless and except to the extent otherwise provided in these by-laws,
action by a majority vote of the entire committee shall constitute action of
the committee.
SECTION 3.11 Compensation of Directors. Unless otherwise restricted by the
certificate of incorporation, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a fixed sum for attendance at each meeting of the board of
directors or a stated salary as director. No such payment shall preclude any
director from serving the corporation in any other capacity and receiving
compensation
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therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
SECTION 3.12 Qualification and Election of Directors.
(a) All directors of the corporation shall be natural persons of full age,
but need not be residents of Delaware or stockholders in the corporation.
Except in the case of vacancies, directors shall be elected by the
stockholders by a plurality vote.
(b) Nominations for election of directors may be made at a meeting of
stockholders only (i) by or at the direction of the board of directors of the
corporation or (ii) by any stockholder entitled to vote for the election of
directors, provided that written notice (the "Notice") of such stockholder's
intent to nominate a director at the meeting is given by the stockholder and
received by the secretary of the corporation in the manner and within the time
specified in this subsection. The Notice shall be delivered to the secretary
of the corporation not less than 30 days nor more than 60 days prior to any
meeting of the stockholders called for the election of directors; provided,
however, that if less than 40 days' notice or prior public disclosure of the
date of the meeting is given or made to stockholders, the Notice shall be
delivered to the secretary of the corporation not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed or such public disclosure was made. Any adjournment(s)
or postponement(s) of the original meeting whereby the meeting will reconvene
within 30 days from the original date shall be deemed for purposes of notice
to be a continuation of the original meeting and no nominations by a
stockholder of persons to be elected directors of the corporation may be made
at any such reconvened meeting other than pursuant to a notice that was timely
for the meeting and date originally scheduled. In lieu of delivery to the
secretary of the corporation, the Notice may be mailed to the secretary of the
corporation by certified mail, return receipt requested, but shall be deemed
to have been given only upon actual receipt by the secretary of the
corporation.
(c) The Notice shall be in writing and shall contain or be accompanied by:
(1) the name and residence of such stockholder;
(2) a representation that the stockholder is a holder of record of the
corporation's voting stock and intends to appear in person or by proxy at
the meeting to nominate the person or persons specified in the Notice;
(3) such information regarding each nominee as would have been required
to be included in a proxy statement filed pursuant to Regulation 14A of the
rules and regulations established by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended (or pursuant to any
successor act or regulation), had proxies been solicited with respect to
such nominee by the management or board of directors of the corporation;
(4) a description of all arrangements or understandings among the
stockholder and each nominee and any other person or persons (naming such
person or persons) pursuant to which such nomination or nominations are to
be made by the stockholder; and
(5) the written consent of each nominee to serve as a director of the
corporation if so elected.
(d) Unless an inspector or inspectors of election shall have been appointed
pursuant to these bylaws, the chairman of the meeting may, if the facts
warrant, determine and declare to the meeting that any nomination made at the
meeting was not made in accordance with the foregoing procedures and, in such
event, the nomination shall be disregarded. Any decision by the chairman of
the meeting shall be conclusive and binding upon all stockholders of the
corporation for any purpose.
(e) The above procedures shall not apply to nominations with respect to
which proxies shall have been solicited pursuant to a proxy statement filed
pursuant to Regulation 14A of the rules and regulations adopted by the
Securities and Exchange Commission under the Securities Exchange Act of 1934,
as amended or pursuant to any successor act or regulation.
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SECTION 3.13 Whole Number. Whenever in this Article III the action of more
than a majority of the entire board of directors or any committee thereof is
required, such action must be taken by the lowest whole number of directors
which equals such super-majority percentage of the entire board or committee
rounded to the nearest whole number.
ARTICLE IV.
NOTICE--WAIVERS--MEETINGS
SECTION 4.01 Notice, What Constitutes. Whenever, under the provisions of the
statutes of Delaware or the certificate of incorporation or of these by-laws,
notice is required to be given to any director or stockholder, it shall not be
construed to mean personal notice, but such notice may be given in writing, by
mail, addressed to such director or stockholder, at his address as it appears
on the records of the corporation, with postage thereon prepaid, and such
notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given in
accordance with Section 3.08 of Article III hereof.
SECTION 4.02 Waivers of Notice. Whenever any written notice is required to
be given under the provisions of the certificate of incorporation, these by-
laws, or by statute, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice.
Attendance of a person, either in person or by proxy, at any meeting, shall
constitute a waiver of notice of such meeting, except where a person attends a
meeting for the express purpose of objecting to the transaction of any
business because the meeting was not lawfully called or convened.
SECTION 4.03 Exception to Requirements of Notice.
(a) Whenever notice is required to be given, under any provision of the DGCL
or of the certificate of incorporation or these by-laws, to any person with
whom communication is unlawful, the giving of such notice to such person shall
not be required and there shall be no duty to apply to any governmental
authority or agency for a license or permit to give such notice to such
person. Any action or meeting which shall be taken or held without notice to
any such person with whom communication is unlawful shall have the same force
and effect as if such notice had been duly given. In the event that the action
taken by the corporation is such as to require the filing of a certificate
under any section of the DGCL, the certificate shall state, if such is the
fact and if notice is required, that notice was given to all persons entitled
to receive notice except such persons with whom communication is unlawful.
(b) Whenever notice is required to be given, under any provision of the DGCL
or the certificate of incorporation or these by-laws, to any stockholder to
whom (i) notice of two consecutive annual meetings and all notices of meetings
to such person during the period between such two consecutive annual meetings,
or (ii) all, and at least two, payments (if sent by first class mail) of
dividends or interest on securities during a 12 month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required. Any action or meeting which shall be taken
or held without notice to such person shall have the same force and effect as
if such notice had been duly given. If any such person shall deliver to the
corporation a written notice setting forth his then current address, the
requirement that notice be given to such person shall be reinstated. In the
event that the action taken by the corporation is such as to require the
filing of a certificate under any section of the DGCL, the certificate need
not state that notice was not given to persons to whom notice was not required
to be given pursuant to this section.
SECTION 4.04 Conference Telephone Meetings. One or more directors may
participate in a meeting of the board of directors, or of a committee of the
board of directors, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this section shall
constitute presence in person at such meeting.
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ARTICLE V.
OFFICERS
SECTION 5.01 Number, Qualifications and Designation. The officers of the
corporation shall be chosen by the board of directors and shall be a chief
executive officer, a president, one or more vice presidents, a secretary, a
treasurer, and such other officers as may be elected in accordance with the
provisions of Section 5.03 of this Article V. One person may hold more then
one office. Officers may be, but need not be, directors or stockholders of the
corporation.
SECTION 5.02 Election and Term of Office. The officers of the corporation,
except those elected by delegated authority pursuant to Section 5.03 of this
Article V, shall be elected annually by the board of directors, and each such
officer shall hold his office until his successor shall have been elected and
qualified, or until his earlier resignation or removal. Any officer elected by
the board of directors may be removed at any time pursuant to Section 3.09(c)
hereof. Any officer may resign at any time upon written notice to the
corporation.
SECTION 5.03 Subordinate Officers, Committees and Agents. Subject to the
provisions of Section 3.09 hereof, the board of directors may from time to
time elect such other officers and appoint such committees, employees or other
agents as it deems necessary, who shall hold their offices for such terms and
shall exercise such powers and perform such duties as are provided in these
by-laws, or as the board of directors may from time to time determine. Subject
to the provisions of Section 3.09 hereof, the board of directors may delegate
to any officer or committee the power to elect subordinate officers and to
retain or appoint employees or other agents, or committees thereof, and to
prescribe the authority and duties of such subordinate officers, committees,
employees or other agents.
SECTION 5.04 The Chief Executive Officer. The chief executive officer of the
corporation shall have general supervision over the business and operations of
the corporation, subject, however, to the control of the board of directors.
He shall sign, execute, and acknowledge, in the name of the corporation,
deeds, mortgages, bonds, contracts or other instruments, authorized by the
board of directors, except in cases where the signing and execution thereof
shall be expressly delegated by the board of directors, or by these by-laws,
to some other officer or agent of the corporation; and, in general, shall
perform all duties incident to the office of chief executive officer, and such
other duties as from time to time may be assigned to him by the board of
directors.
SECTION 5.05 The President. The president shall be the chief operating
officer of the corporation and shall perform the duties of the chairman of the
board or chief executive officer in his absence and such other duties as may
from time to time be assigned to him by the board of directors or by the
chairman of the board.
SECTION 5.06 The Vice Presidents. The vice presidents shall perform the
duties of the chairman of the board and the president in their absence and
such other duties as may from time to time be assigned to them by the board of
directors or by the chairman of the board.
SECTION 5.07 The Secretary. The secretary, or an assistant secretary, shall
attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and of the directors and of
committees of the board of directors in a book or books to be kept for that
purpose; see that notices are given and records and reports properly kept and
filed by the corporation as required by law; be the custodian of the seal of
the corporation and see that it is affixed to all documents to be executed on
behalf of the corporation under its seal; and, in general, perform all duties
incident to the office of secretary, and such other duties as may from time to
time be assigned to him by the board of directors or the chairman of the
board.
SECTION 5.08 The Treasurer. The treasurer, or an assistant treasurer, shall
have or provide for the custody of the funds or other property of the
corporation and shall keep a separate book account of the same to his credit
as treasurer; collect and receive or provide for the collection and receipt of
moneys earned by or in any manner due to or received by the corporation;
deposit all funds in his custody as treasurer in such banks or other
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places of deposit as the board of directors may from time to time designate;
whenever so required by the board of directors, render an account showing his
transactions as treasurer and the financial condition of the corporation; and,
in general, discharge such other duties as may from time to time be assigned
to him by the board of directors or the chairman of the board.
SECTION 5.09 Officers' Bonds. No officer of the corporation need provide a
bond to guarantee the faithful discharge of his duties unless the board of
directors shall by resolution so require a bond in which event such officer
shall give the corporation a bond (which shall be renewed if and as required)
in such sum and with such surety or sureties as shall be satisfactory to the
board of directors for the faithful performance of the duties of his office.
SECTION 5.10 Salaries. The salaries of the officers and agents of the
corporation elected by the board of directors shall be fixed from time to time
by the board of directors.
ARTICLE VI.
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 6.01 Issuance. Each stockholder shall be entitled to a certificate
or certificates for shares of stock of the corporation owned by him upon his
request therefor. The stock certificates of the corporation shall be numbered
and registered in the stock ledger and transfer books of the corporation as
they are issued. They shall be signed by the chairman of the board, the
president or a vice president and by the secretary or an assistant secretary
or the treasurer or an assistant treasurer, and shall bear the corporate seal,
which may be a facsimile, engraved or printed. Any of or all the signatures
upon such certificate may be a facsimile, engraved or printed. In case any
officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent or registrar, before the certificate is issued,
it may be issued with the same effect as if he were such officer, transfer
agent or registrar at the date of its issue.
SECTION 6.02 Transfer. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate
to the person entitled thereto, cancel the old certificate and record the
transaction upon its books. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
SECTION 6.03 Stock Certificates. Stock certificates of the corporation shall
be in such form as provided by statute and approved by the board of directors.
The stock record books and the blank stock certificates books shall be kept by
the secretary or by any agency designated by the board of directors for that
purpose.
SECTION 6.04 Lost, Stolen, Destroyed or Mutilated Certificates. The board of
directors may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the corporation
alleged to have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming the certificate of stock to be
lost, stolen or destroyed. When authorizing such issue of a new certificate or
certificates, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as it shall require and/or to give the
corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the corporation with respect to the certificate
alleged to have been lost, stolen or destroyed.
SECTION 6.05 Record Holder of Shares. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not
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be bound to recognize any equitable or other claim to or interest in such
share or share on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
SECTION 6.06 Determination of Stockholders of Record.
(a) In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment
thereof, the board of directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted by the board of directors and which record date shall not be more than
sixty nor less than ten days before the date of such meeting. If no record
date is fixed by the board of directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day next preceding the day on which
notice is given, or, if notice is waived, at the close of business on the day
next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the board of directors may fix a new record date for the adjourned
meeting.
(b) In order that the corporation may determine the stockholders entitled to
receive payment of any dividend or other distribution or allotment of any
rights of the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other
lawful action, the board of directors may fix a record date, which record date
shall not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the board of directors adopts the resolution relating thereto.
ARTICLE VII.
INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
SECTION 7.01 Indemnification of Authorized Representatives in Third Party
Proceedings. The corporation shall indemnify any person who was or is an
authorized representative of the corporation and who was or is a party, or is
threatened to be made a party to any third party proceeding by reason of the
fact that such person was or is an authorized representative of the
corporation, against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such third
party proceeding if such person acted in good faith and in a manner such
person reasonably believed to be in, or not opposed to, the best interests of
the corporation and, with respect to any criminal third party proceeding, had
no reasonable cause to believe such conduct was unlawful. The termination of
any third party proceeding by judgment, order, settlement, indictment,
conviction or upon a plea of nolo contendere or its equivalent, shall not of
itself create a presumption that the authorized representative did not act in
good faith and in a manner which such person reasonably believed to be in, or
not opposed to, the best interests of the corporation, and, with respect to
any criminal third party proceeding, had reasonable cause to believe that such
conduct was unlawful.
SECTION 7.02 Indemnification of Authorized Representatives in Corporate
Proceedings. The corporation shall indemnify any person who was or is an
authorized representative of the corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding by reason of the
fact that such person was or is an authorized representative of the
corporation, against expenses actually and reasonably incurred by such person
in connection with the defense or settlement of such corporate proceeding if
such person acted in good faith and in a manner reasonably believed to be in,
or not opposed to, the best interests of the corporation, except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such corporate proceeding was brought shall determine upon application that,
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despite the adjudication of liability but in view of all the circumstances of
the case, such authorized representative is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 7.03 Mandatory Indemnification of Authorized Representatives. To the
extent that an authorized representative of the corporation has been
successful on the merits otherwise in defense of any third party proceeding or
corporate proceeding or in defense of any claim, issue or matter therein, such
person shall be indemnified against expenses actually and reasonably incurred
by such person in connection therewith.
SECTION 7.04 Determination of Entitlement to Indemnification. Any
indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless
ordered by a court) shall be made by the corporation only as authorized in the
specific case upon a determination that indemnification of the authorized
representative is proper in the circumstances because such person has either
met the applicable standard of conduct set forth in Section 7.01 or 7.02 or
has been successful on the merits, or otherwise as set forth in Section 7.03
and that the amount requested has been actually and reasonably incurred. Such
determination shall be made:
(1) By the board of directors by a majority of a quorum consisting of
directors who were not parties to such third party proceeding or corporate
proceeding, or
(2) If such a quorum is not obtainable, or, even if obtainable, a quorum
of disinterested directors so directs, by independent legal counsel in a
written opinion, or
(3) By the stockholders.
SECTION 7.05 Advancing Expenses.
(a) Expenses actually and reasonably incurred by an officer or director in
defending any third party proceeding or corporate proceeding shall be paid on
behalf of an officer or director by the corporation in advance of the final
disposition of such third party proceeding or corporate proceeding upon
receipt of an undertaking by or on behalf of such officer or director to repay
such amount if it shall ultimately be determined that such person is not
entitled to be indemnified by the corporation as authorized in this Article.
(b) Expenses actually and reasonably incurred in defending any third party
proceeding or corporate proceeding shall be paid on behalf of an authorized
representative other than an officer or director by the corporation in advance
of the final disposition of such third party proceeding or corporate
proceeding as authorized by the board of directors upon receipt of an
undertaking by or on behalf of such authorized representative to repay such
amount if it shall ultimately be determined that such person is not entitled
to be indemnified by the corporation as authorized in this Article.
(c) The financial ability of any authorized representative to make a
repayment contemplated by this Section shall not be a prerequisite to the
making of an advance.
SECTION 7.06 Definitions. For purposes of this Article:
(1) "authorized representative" shall mean a director or officer of the
corporation, or a person serving at the request of the corporation as a
director, officer or trustee of another corporation, partnership, joint
venture, trust or other enterprise, past, present or future;
(2) "corporation" shall include, in addition to the resulting
corporation, any constituent corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power
and authority to indemnify its directors, officers, employees or agents, so
that any person who is or was a director, officer, employee or agent of
such constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article with
respect to the resulting
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or surviving corporation as such person would have with respect to such
constituent corporation if its separate existence had continued;
(3) "corporate proceeding" shall mean any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor or investigative proceeding by the corporation;
(4) "criminal third party proceeding" shall include any action or
investigation which could or does lead to a criminal third party
proceeding;
(5) "expenses" shall include attorneys' fees and disbursements;
(6) "fines" shall include any excise taxes assessed on a person with
respect to an employee benefit plan;
(7) "not opposed to the best interests of the corporation" shall include
actions taken in good faith and in a manner the authorized representative
reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan;
(8) "other enterprises" shall include employee benefit plans;
(9) "party" shall include the giving of testimony or similar involvement;
(10) "serving at the request of the corporation" shall include any
service as a director, officer or employee of the corporation which imposes
duties on, or involves services by, such director, officer or employee with
respect to an employee benefit plan, its participants, or beneficiaries;
and
(11) "third party proceeding" shall mean any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative, or investigative, other than an action by or in the right
of the corporation.
SECTION 7.07 Insurance. The corporation may purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as
a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted
against him and incurred by him in any such capacity, or arising out of his
status as such, whether or not the corporation would have the power or the
obligation to indemnify such person against such liability under the
provisions of this Article.
SECTION 7.08 Scope of Article. The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any by-laws, statute, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in an official
capacity and as to action in another capacity while holding such office. The
indemnification and advancement of expenses provided by or granted pursuant to
this Article, shall, unless otherwise provided when authorized or ratified,
continue as to a person who has ceased to be an authorized representative and
shall inure to the benefit of the heirs, executors and administrators of such
a person.
SECTION 7.09 Reliance on Provisions. Each person who shall act as an
authorized representative of the corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article.
ARTICLE VIII.
GENERAL PROVISIONS
SECTION 8.01 Dividends. Dividends upon the capital stock of the corporation,
subject to the provisions of the certificate of incorporation and these by-
laws, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock of
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the corporation, subject to the provisions of the certificate of
incorporation. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
SECTION 8.02 Annual Statements. The board of directors shall present at each
annual meeting, and at any special meeting of the stockholders when called for
by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
SECTION 8.03 Contracts and Securities. Except as otherwise provided in these
by-laws, the board of directors may authorize any officer or officers
including the chairman and vice chairman of the board of directors, or any
agent or agents, to enter into any contract or to execute or deliver any
instrument on behalf of the corporation and such authority may be general or
confined to specific instances. Powers of attorney, proxies, waivers of notice
of meeting, consents and other instruments relating to securities owned by the
corporation may be executed in the name and on behalf of the corporation by
the Chief Executive Officer, the president or and any vice president and any
such officer may, in the name of and on behalf of the corporation, take all
such action as any such officer may deem advisable to vote in person or by
proxy at any meeting of security holders and at any such meeting shall possess
and may exercise any and all rights and powers incident to the ownership of
such securities and which, as the owner thereof, the corporation might have
exercised and possessed if present. The board of directors may, by resolution,
from time to time, confer like powers upon any other person or persons.
SECTION 8.04 Checks. All checks, notes, bills of exchange or other orders in
writing shall be signed by such person or persons as the board of directors
may from time to time designate.
SECTION 8.05 Corporate Seal. The corporate seal shall have inscribed thereon
the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
SECTION 8.06 Deposits. All funds of the corporation shall be deposited from
time to time to the credit of the corporation in such banks, trust companies,
or other depositories as the board of directors may approve or designate, and
all such funds shall be withdrawn only upon checks signed by such one or more
officers or employees as the board of directors shall from time to time
determine.
SECTION 8.07 Corporate Records.
(a) Every stockholder shall, upon written demand under oath stating the
purpose thereof, have a right to examine, in person or by agent or attorney,
during the usual hours for business, for any proper purpose, the stock ledger,
books or records of account, and records of the proceedings of the
stockholders and directors, and make copies or extracts therefrom. A proper
purpose shall mean a purpose reasonably related to such person's interest as a
stockholder. In every instance where an attorney or other agent shall be the
person who seeks the right to inspection, the demand under oath shall be
accompanied by a power of attorney or such other writing which authorizes the
attorney or other agent to so act on behalf of the stockholder. The demand
under oath shall be directed to the corporation at its registered office in
Delaware or at its principal place of business. Where the stockholder seeks to
inspect the books and records of the corporation, other than its stock ledger
or list of stockholders, the stockholder shall first establish (1) compliance
with the provisions of this section respecting the form and manner of making
demand for inspection of such document; and (2) that the inspection sought is
for a proper purpose. Where the stockholder seeks to inspect the stock ledger
or list of stockholders of the corporation and has complied with the
provisions of this assertion respecting the form and manner of making demand
for inspection of such documents, the burden of proof shall be upon the
corporation to establish that the inspection sought is for an improper
purpose.
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<PAGE>
(b) Any director shall have the right to examine the corporation's stock
ledger, a list of its stockholders and its other books and records for a
purpose reasonably related to his position as a director. The court may
similarly order the corporation to permit the director to inspect any and all
books and records, the stock ledger and the stock list and to make copies or
extracts therefrom. The court may, in its discretion, prescribe any
limitations or conditions with reference to the inspection, or award such
other and further relief as the court may deem just and proper.
SECTION 8.08 Amendment of Bylaws. These bylaws may be altered, amended or
repealed or new bylaws may be adopted by (i) the holders of at least 66-2/3%
of the total voting power of all shares of stock of the corporation entitled
to vote in the election of directors, considered for purposes of this Section
8.08 as one class, or (ii) the affirmative vote of directors constituting at
least two-thirds of the entire board of directors, when such power is
conferred upon the board of directors by the certificate of incorporation, at
any regular meeting of the stockholders or of the board of directors or at any
special meeting of the stockholders or of the board of directors if notice of
such alteration, amendment, repeal or adoption of new bylaws be contained in
the notice of such special meeting. In addition, the provisions of Section
3.09(d) and of this Section 8.08 may not be amended without the affirmative
vote of a majority of the directors who are not Affiliates or Associates of
any Stockholder.
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ANNEX V
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (the "Agreement"), dated as of October, 1997 by and
among (i) each of the stockholders listed on the signature pages attached
hereto (together with each other Person (defined below) who becomes a party to
this Agreement in accordance with the terms hereof, the "Stockholders"), and
(ii) Paragon Health Network, Inc., a Delaware corporation (the "Company").
W I T N E S S E T H:
WHEREAS, this Agreement shall become effective (the "Effective Date") on the
date of, and simultaneously with, the closing under the Amended and Restated
Agreement and Plan of Merger, dated as of June , 1997 among the Company,
Apollo Management, L.P., on behalf of one or more managed investment funds,
and Apollo LCA Acquisition Corp. (the "Merger Agreement");
WHEREAS, on the Effective Date, after giving effect to the transactions
contemplated by the Merger Agreement, each Stockholder shall beneficially own
the number of shares of common stock of the Company, par value $.01 per share
("Common Stock") set forth under its name on the signature pages attached
hereto, and the Stockholders shall collectively beneficially own shares of
Common Stock (collectively, the "Shares"); and
WHEREAS, the parties hereto desire to provide for certain rights and
obligations in respect to the Shares and the Company as hereinafter provided.
NOW THEREFORE, the parties hereto agree as follows:
ARTICLE I.
Definitions
Section 1.1 Definitions. Capitalized terms used herein and not otherwise
defined herein have the meaning ascribed to them in the Merger Agreement. In
addition, the following terms shall have the meaning ascribed to them below:
"Affiliate" of a Person shall have the meaning set forth in Rule 12b-2 of
the Exchange Act as in effect on the date of this Agreement, but shall not
include (i) any investment fund in which a Person has invested if the
Person does not otherwise control the investment fund or have, directly or
indirectly, voting or dispositive power over any securities owned by such
fund, (ii) any investor or limited partner of any Person who does not
otherwise have voting or dispositive power over securities owned by that
Person and not controlled by that Person, (iii) in the case of Chase Equity
Associates, L.P., any Person other than (A) Chase Capital Partners, its
sole general partner, and (B) the other investment partnerships or other
entities of which Chase Capital Partners is a general or managing partner
or member; or (iv) in the case of Healthcare Equity Partners, L.P. or
Healthcare Equity QP Partners, any Person other than (A) Beecken, Petty &
Company, L.L.C., the sole general partner of each of them, and (B) the
other investment partnerships of which Beecken, Petty & Company, L.L.C. is
a general or managing partner or member. It is expressly intended that any
Person who now or hereafter controls, directly or indirectly, any
Stockholder shall be subject to the terms of this Agreement as if it were a
Stockholder.
"Apollo" means collectively Apollo Management, L.P., its legal successors
and assigns, and each Person who controls, or is controlled by, Apollo
Management, L.P. including, without limitation, the Stockholders indicated
as such on the Apollo signature page attached hereto.
V-1
<PAGE>
"Associate" shall mean an officer, director, partner (other than a
limited partner) or executive employee of, or exclusive consultant to, any
Person.
"Beneficial ownership" by a Person of any Voting Securities shall be
determined in accordance with the terms "beneficial ownership" as defined
in Rule 13d-3 under the Exchange Act as in effect on the date of this
Agreement, and in addition, "beneficial ownership" shall include securities
which such Person has the right to acquire (irrespective of whether such
right is exercisable immediately or only after the passage of time,
including the passage of time in excess of sixty (60) days), or exclusive
right to vote, pursuant to any agreement, arrangement or understanding or
upon the exercise of conversion rights, exchange rights, warrants or
options, or otherwise. For purposes of this Agreement, a Stockholder shall
be deemed to beneficially own any Voting Securities beneficially owned by
its Affiliates, Associates or any Group of which such Stockholder or any
such Affiliate or Associate is a member.
"Board of Directors" shall mean the Board of Directors of the Company.
"Charter Documents" shall mean the Certificate of Incorporation and
Bylaws of the Company.
"Commission" shall mean the Securities and Exchange Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Group" shall mean a "group" as such term is used in Section 13(d)(3) of
the Exchange Act as in effect on the date of this Agreement.
"Laws" shall mean all applicable foreign, federal, state and local laws,
statutes, rules, regulations, codes and ordinances.
"Other Stockholders" shall mean the Stockholders other than Apollo.
"Person" shall mean any individual, Group, corporation, general or
limited partnership, limited liability company, governmental entity, joint
venture, estate, trust, association, organization or other entity of any
kind or nature.
"Recapitalization Merger" shall mean the merger of Apollo LCA Acquisition
Corp. with and into the Company.
"Securities Act" shall mean the Securities Act of 1933, as amended.
"Stockholder Designee" shall mean a person designated for election to the
Board of Directors by Apollo as provided in Section 4.1.
"Voting Securities" shall mean (x) any securities entitled, or which may
be entitled, to vote generally in the election of directors of the Company,
(y) any securities convertible or exercisable into or exchangeable for such
securities (whether or not the right to convert, exercise or exchange is
subject to the passage of time or contingencies or both), or (z) any direct
or indirect rights or options to acquire any such securities; provided that
unexercised options granted pursuant to any employment benefit or similar
plan and rights issued pursuant to any shareholder rights plan shall be
deemed not to be "Voting Securities" (or to have Voting Power).
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<PAGE>
In addition, the following terms have the definitions specified in the
Sections noted:
<TABLE>
<CAPTION>
TERM SECTION
---- -------
<S> <C>
Agreement recitals
Allocation Percentage 6.2
Apollo Directors 4.1(a)
Beneficial Ownership Threshold 4.1(a)
Common Stock recitals
Company recitals
Co-Sale 6.2
Drag Transaction 6.3(a)
Drag Transaction Closing Date 6.2(a)
Exempted Transfer 6.1
Merger Agreement recitals
Nominating Committee 4.1(d)
Notices 6.4
Proxy Statement 4.2
Purchaser 6.3(a)
Related Price 6.3(a)
Related Person 6.3(a)
Regulated Holder 6.4
Regulated Problem 6.4
Sale Notice 6.3(a)
Shares recitals
Standstill Period 5.1
Stockholders recitals
Stockholder Designee Period 4.1(a)
Third Party Sale 6.2
Third Party Sale Notice 6.1
Total Shares Outstanding 4.1(a)
Unaffiliated Directors 4.1(b)
Unauthorized Transfer 6.2
</TABLE>
ARTICLE II.
Representations and Warranties of the Company
The Company hereby represents and warrants to each of the Stockholders as
follows:
Section 2.1 Authority for this Agreement. The Company has the requisite
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by the Company and the consummation by the Company of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of the Company and no other corporate proceedings on the
part of the Company are necessary to authorize this Agreement or to consummate
the transactions so contemplated. This Agreement has been duly and validly
executed and delivered by the Company and, assuming this Agreement constitutes
a valid and binding obligation of the Stockholders, constitutes a valid and
binding agreement of the Company, enforceable against the Company in
accordance with its terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditors' rights
generally and to general principles of equity (whether considered in a
proceeding in equity or at law).
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<PAGE>
Section 2.2 Consents and Approvals; No Violation. Except as set forth on
Schedule 2.2, neither the execution and delivery of this Agreement by the
Company nor the consummation of the transactions contemplated hereby will (i)
conflict with or result in any breach of any provision of the respective
Restated Certificate of Incorporation or Bylaws (or other similar governing
documents) of the Company or any of its subsidiaries, (ii) require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental or regulatory authority, except where the failure to
obtain such consent, approval, authorization or permit, or to make such filing
or notification, would not in the aggregate have a Material Adverse Effect or
have a material adverse effect on the ability of the Company to consummate the
transactions contemplated hereby, (iii) result in a default (or give rise to
any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, license, agreement or other
instrument or obligation to which the Company is a party or by which the
Company or any of its assets or subsidiaries may be bound, except for such
defaults (or rights of termination, cancellation or acceleration) which would
not in the aggregate have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby, (iv) result in the creation or imposition of any
mortgage, lien, pledge, charge, security interest or encumbrance of any kind
on any asset of the Company or any of its subsidiaries which, in the
aggregate, would have a Material Adverse Effect or have a material adverse
effect on the ability of the Company to consummate the transactions
contemplated hereby, or (v) violate any order, writ, injunction, agreement,
contract, decree, statute, rule or regulation applicable to the Company, any
of its subsidiaries or by which any of their respective assets are bound,
except for violations which would not in the aggregate have a Material Adverse
Effect or have a material adverse effect on the ability of the Company to
consummate the transactions contemplated by this Agreement.
Section 2.3 No Inconsistent Agreements. As of the Effective Date, there is
no (and from and after the Effective Date the Company will not, and will cause
its subsidiaries not to enter into any) agreement with respect to any
securities of the Company or any of its subsidiaries (and from and after the
Effective Date the Company shall not take, or permit any of its subsidiaries
to take, any action) that is inconsistent in any material respect with the
rights granted to the Stockholders in this Agreement.
Without limiting the foregoing, except for this Agreement and the
Registration Rights Agreement, there are no other existing agreements relating
to the voting or, except as set forth on schedule 2.3, registration of any
equity securities of the Company or any of its subsidiaries.
ARTICLE III.
Representations and Warranties of the Stockholders
Each Stockholder severally as to itself, but not jointly or as to any other
Stockholder, represents and warrants to the Company as follows:
Section 3.1 Authority for this Agreement. The execution and delivery of this
Agreement by such Stockholder and the consummation by such Stockholder of the
transactions contemplated hereby have been duly and validly authorized by all
necessary action on its part. This Agreement has been duly and validly
executed and delivered by such Stockholder and, assuming this Agreement
constitutes a valid and binding obligation of the Company, constitutes a valid
and binding agreement of such Stockholder enforceable against such Stockholder
in accordance with the terms, except as such enforceability may be limited by
applicable bankruptcy, insolvency and similar laws affecting creditor's rights
generally and to general principals of equity (whether considered in a
proceeding in equity or at law).
Section 3.2 No Violation. Neither the execution and delivery of this
Agreement by such Stockholder nor the consummation of the transactions
contemplated hereby will conflict with or result in any breach of any
provision under such Stockholder's partnership agreement or similar governing
documents of such Stockholder.
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ARTICLE IV.
Board Representation and Voting
Section 4.1 Board Representation.
(a) On the Effective Date the size of the Board of Directors will be fixed
at eleven members and the Company will cause the persons named on Schedule 4.1
(or subject to Section 4.1(i), such other substitute persons as may be
designated by Apollo as Stockholder Designees) to be initially elected to the
Board of Directors by virtue of the Recapitalization Merger contemplated by
the Merger Agreement. Until the earlier of (i) the date on which the
Stockholders beneficially own, collectively, less than 25% of the Shares or
(ii) the date the Standstill Period ends by virtue of Section 5.2(g) hereof
(the "Stockholder Designee Period"), the Company agrees, subject to Section
4.1(i), to support the nomination of, and the Company's Nominating Committee
shall recommend to the Board of Directors the inclusion in the slate of
nominees recommended by the Board of Directors to stockholders for election as
directors at each annual meeting of stockholders of the Company (A) six
Stockholder Designees if the Stockholders beneficially own a number of shares
of Common Stock equal to 66 2/3% or more of the Shares, (B) four Stockholder
Designees if the Stockholders beneficially own a number of shares of Common
Stock equal to 50% or more but less than 66 2/3% of the Shares, or (C) two
Stockholder Designees if the Stockholders beneficially own 25% or more but
less than 50% of the Shares (each a "Beneficial Ownership Threshold");
provided, that in no event will more than four of such Stockholder Designees
be Associates of Apollo (each Stockholder Designee who is an Associate of
Apollo is hereafter referred to as an "Apollo Director"). Notwithstanding the
foregoing, if at any time after the third anniversary of the Effective Date,
the number of shares of Company Common Stock beneficially owned by the
Stockholders aggregate less than forty percent (40%) of the total number of
shares of the Company's Common Stock of all classes entitled to vote in the
election of directors as are then outstanding ("Total Shares Outstanding"),
the maximum number of Stockholder Designees shall be the lowest whole number
which when compared to the total number of directors of the Company (including
all vacancies) is equal to or greater than the percentage which the aggregate
number of shares of Company Common Stock beneficially owned by the
Stockholders bears to the Total Shares Outstanding.
(b) If any vacancy on the Company's Board of Directors occurs (by virtue of
the death, retirement, disqualification, removal from office or other cause of
a Stockholder Designee), prior to a meeting of the Company's stockholders, the
Nominating Committee shall appoint, subject to Section 4.1(i), a person
designated by Apollo to fill such vacancy (except if such vacancy occurs as a
result of the reduction of the number of Stockholder Designees entitled to be
included on the Board of Directors by reason of a decrease in the
Stockholders' beneficial ownership of Common Stock pursuant to Section 4.1(a))
and each such person shall be a Stockholder Designee for purposes of this
Agreement.
(c) In the event the size of the Company's Board of Directors is increased,
Apollo will have the right, subject to Section 4.1(i) hereof, to nominate such
additional number of persons to serve as Stockholder Designees such that the
total number of Stockholder Designees is equal to the lowest whole number
which when compared to the total number of directors (including all vacancies)
of the Company, is equal to or greater than the percentage which the aggregate
number of shares of Company Common Stock then beneficially owned by the
Stockholders bears to the Total Shares Outstanding.
(d) On the Effective Date, the Company will cause the persons indicated on
Schedule 4.1 to be initially named to a nominating committee (the "Nominating
Committee") of the Board of Directors and at all times during the Stockholder
Designee Period, (i) the size of the Nominating Committee will be fixed at
five members, two of whom will be Stockholder Designees who are Apollo
Directors and one of whom will be the Chief Executive Officer (if he or she is
a director), and (ii) nominees for director that are not Stockholder Designees
shall be designated exclusively by vote of not less than a majority of the
members of the Nominating Committee.
(e) Notwithstanding the foregoing, the Company shall have no obligation to
support the nomination, recommendation or election of any Stockholder Designee
pursuant to this Section 4.1 or any other obligation under this Section 4.1 if
the Stockholders are in breach of any material provision of this Agreement.
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(f) Other than any committee formed for the purpose of considering matters
relating to the Stockholders and as set forth below with respect to the
Nominating Committee, (i) if the Stockholders are entitled to include at least
four Stockholder Designees for election to the Board of Directors under this
Agreement, the Stockholders shall be entitled to have such number of
Stockholder Designees serve on each committee of the Board of Directors that
provides the Stockholders with representation (as a percentage) equal to no
less than the percentage which the number of shares of Company Common Stock
beneficially owned by the Stockholders bears to the Total Shares Outstanding,
provided that under no circumstances shall the Stockholders be entitled to
have their nominees serve as a majority of any committee; or (ii) if the
Stockholders are entitled to include two Stockholder Designees for election to
the Board of Directors under this agreement, the Stockholders shall be
entitled to have one Stockholder Designee serve on each committee of the Board
of Directors.
(g) Upon any decrease in the Stockholders' beneficial ownership of Common
Stock below any Beneficial Ownership Threshold, Apollo shall use its best
efforts to cause a number of Stockholder Designees to offer to immediately
resign from the Company's Board of Directors (subject to acceptance by the
Board of Directors) such that the number of Stockholder Designees serving on
the Board of Directors immediately thereafter will be equal to the number of
Stockholder Designees which Apollo would then be entitled to designate under
Section 4.1(a). Upon termination of the Stockholder Designee Period, Apollo
shall promptly offer to cause all of the Stockholder Designees to resign from
the Board of Directors (subject to acceptance by the Board of Directors)
thereof and the Company's obligations under this Section 4.1 shall terminate.
(h) The Company and each Stockholder shall use commercially reasonable
efforts to call, or cause the appropriate officers and directors of the
Company to call, a special meeting of stockholders of the Company and to vote
all of the shares of Company Common Stock owned or held of record by them for,
or to cause to be taken actions by written consent in lieu of any such meeting
necessary to cause, the removal (with or without cause) of any Stockholder
Designee if Apollo requests such director's removal in writing for any reason.
Except as provided in this Section 4.1(h), each Stockholder agrees that, at
any time that it is then entitled to vote for the election or removal of
directors, it will not vote in favor of the removal of any Stockholder
Designee unless (i) such removal shall be at the request of Apollo pursuant to
the provisions of Section 4.1(h), (ii) the right of the party who nominated
such director to do so has terminated in accordance with Section 4.1(a) above,
or (iii) such removal is in accordance with the requirements of Section 4.1(i)
below.
(i) Notwithstanding the provisions of this Section 4.1, Apollo shall not be
entitled to designate any person to the Company's Board of Directors (or any
committee thereof) in the event that (x) the Company receives a written
opinion of its outside counsel that such Stockholder Designee would not be
qualified under applicable law, rule or regulation to serve as a director of
the Company or (y) if the Nominating Committee objects to such Stockholder
Designee because such Stockholder Designee has been involved in any of the
events enumerated in Item 2(d) or (e) of Schedule 13D or such person is
currently the target of an investigation by any governmental authority or
agency relating to felonious criminal activity or is subject to any order,
decree, or judgment of any court or agency prohibiting service as a director
of any public company or providing investment or financial advisory services
and, in any such event, Apollo shall withdraw the designation of such proposed
Stockholder Designee and designate a replacement therefor (which replacement
Stockholder Designee shall also be subject to the requirements of this
Section). The Company shall use its reasonable best efforts to notify Apollo
of any objection to a Stockholder Designee sufficiently in advance of the date
on which proxy materials are mailed by the Company in connection with such
election of directors to enable Apollo to propose a replacement Stockholder
Designee in accordance with the terms of this Agreement. Apollo agrees to
remove any Stockholder Designee objected to by the Nominating Committee on the
grounds specified in clause (y) above.
(j) The Company shall not, and shall not permit any of its subsidiaries to,
without the consent of two-thirds of the entire Board of Directors of the
Company, take any action that under the Charter Documents or this Agreement
requires the approval of two-thirds of the entire Board of Directors of the
Company if any of the Stockholder Designees approving (and whose vote is
necessary to approve) such action are Persons whose
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removal from the Board of Directors has been requested at or prior to the time
of such action by Apollo pursuant to Section 4.1(a), unless such action has
been ratified by the reconstituted Board of Directors following such removal
and election of successors.
(k) Each Stockholder Designee serving on the Board of Directors shall be
entitled to all compensation and stock incentives granted to directors who are
not employees of the Company on the same terms provided to such directors.
(l) Notwithstanding anything in this Agreement to the contrary, in
connection with a Transfer of at least 66 2/3% of the Shares held by the
Stockholders on the Effective Date to a single transferee, whether by a single
transaction or a series of transactions, Apollo may, by written notice to the
Company, and with the affirmative approval of not less than two-thirds of the
entire Board of Directors of the Company (including a vote that complies with
Section 3.09(d)(2) of the Company's By-laws) assign all rights granted to
Apollo under this Section 4.1 to such transferee (to the exclusion of other
Stockholders) and, without limiting the foregoing, such transferee's rights to
designate directors under this Section 4.1 shall not be reduced until such
transferee ceases to beneficially own at least 66 2/3%, 50% or 25%, as the
case may be, of the number of Shares beneficially owned by the Stockholders on
the Effective Date or as such number of directors is otherwise reduced in
accordance with Section 4.1. Any approval to such Transfer by the requisite
vote of the Company's Board of Directors shall constitute the approval
referred to in Section 203(a)(1) of the Delaware General Corporation Law, as
amended.
Section 4.2 Voting. Each Stockholder agrees that during the Standstill
Period such Stockholder shall, and shall cause its Affiliates to, use
commercially reasonable efforts to be present, in person or represented by
proxy, at all meetings of stockholders of the Company so that all Voting
Securities beneficially owned by such Stockholder shall be counted for the
purpose of determining the presence of a quorum at such meetings. Each
Stockholder agrees that during the Standstill Period in connection with the
election of directors of the Company, such Stockholder shall vote or cause to
be voted all Voting Securities beneficially owned by such Stockholder to elect
all individuals nominated by the Nominating Committee, unless to do so would
violate the provisions of Section 4.1. Notwithstanding the foregoing, during
the effectiveness of the Proxy and Voting Agreement (the "Proxy Agreement"),
dated the date hereof, between Apollo Management, L.P. and the Stockholders,
the Stockholders may rely (in accordance with the terms thereof) on the proxy
designated therein to take any action required by this Section 4.2 on their
behalf.
ARTICLE V.
Standstill
Section 5.1 Standstill. During the period beginning on the date hereof and
ending the earliest to occur of (A) the tenth anniversary of the Effective
Date, (B) the date on which the Stockholders own, collectively, Voting
Securities which would represent less than 10% of the voting power in the
general election of directors of the Company, on a fully diluted basis, of all
Voting Securities then outstanding or (C) a Termination Event under any
subdivision of Section 5.2 (such period, the "Standstill Period"), each
Stockholder will not, and will cause each of its Affiliates and Associates
(provided, however, that this Section 5.1 shall not relate to Voting
Securities of Associates to the extent such Voting Securities were originally
acquired by such Associates pursuant to the Merger Agreement or the GranCare
Merger Agreement or were acquired prior to the date hereof) not to, directly
or indirectly:
(i) acquire, offer to acquire (by tender or exchange offer or otherwise),
or agree to acquire, by purchase or otherwise, any Voting Securities or
voting rights or direct or indirect rights or options to acquire any Voting
Securities of the Company or any of its Affiliates other than (A) the
exercise of convertible securities acquired in compliance with the terms of
this Agreement, or an acquisition as a result of a stock split, stock
dividend or similar recapitalization, (B) the acquisition of shares of
Common Stock pursuant to the Merger Agreement or the GranCare Merger
Agreement, (C) acquisitions by all Stockholders, their Affiliates and
Associates in the aggregate of Voting Securities representing up to the
lesser of (x) an additional 5% of the total number of Voting Securities
outstanding immediately after the Effective Time (as such number may
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be appropriately adjusted to reflect stock splits, reverse stock splits,
stock dividends or any other recapitalization of the Company) or (y) an
aggregate number of Voting Securities (including the Shares) equal to 49%
of the Total Shares Outstanding; (D) stock options or similar rights
granted by the Company to an Affiliate of such Stockholder as compensation
for performance as a director or officer of the Company or its subsidiaries
(and any shares issuable upon exercise thereof), (E) transfers among
Stockholders or (F) any rights which are granted to all stockholders of the
Company (and any share issuable upon exercise thereof); provided, however,
that if the Stockholders or any of their Affiliates or Associates in good
faith inadvertently acquire not more than 100,000 shares of Common Stock in
violation of these provisions and within 15 days after the first date on
which the Stockholders have actual knowledge (including by way of written
notice given by the Company) that a violation has occurred, the
Stockholders or any of their Affiliates or Associates shall have
transferred any shares of Common Stock held in violation of these
provisions to unrelated third parties so that the Stockholders and their
Affiliates or Associates no longer beneficially own any such shares or have
any agreement or understanding relating to such shares, this Section 5.1
shall be deemed not to have been violated; and provided further, that no
violation of this provision shall be deemed to have occurred by reason of
the indirect acquisition of beneficial ownership of securities resulting
from (aa) investments in investment funds as to which no Stockholder or
Affiliate or Associate thereof has control or power to control with respect
to voting or investment decisions or (bb) acquisitions of securities by a
limited partner in any Stockholder or Affiliates or Associates thereof as
to which limited partner no Stockholder or its Affiliates or Associates has
control or power to control;
(ii) except pursuant to this Agreement or the Proxy Agreement, form, join
or in any way participate in a Group with respect to any securities of the
Company or its Affiliates, other than with other Stockholders or Affiliates
or Associates of any Stockholder; provided, however, that in the case of
securities other than Voting Securities, Stockholders may participate in a
Group with respect thereto with the prior approval of two-thirds of the
entire Board of Directors (which approval is requested in a manner which
does not require disclosure publicly or to any third party);
(iii) grant a proxy to any Person other than (I) an Affiliate or
Associate of a Stockholder, (II) the proxy granted to Apollo pursuant to
the Proxy Agreement or (III) proxies designated by the Board of Directors
of the Company in connection with any contested election, or otherwise
make, or in any way cause or participate in, any "solicitation" of
"proxies" to vote (as those terms are defined in Regulation 14A under the
Exchange Act) with respect to the Company or its Affiliates, or communicate
with, seek to advise, encourage or influence any Person, in any manner,
with respect to the voting of, securities of the Company or its Affiliates,
or become a "participant" in any "election contest" (as those terms are
defined or used in Rule 14a-11 under the Exchange Act) with respect to the
Company or its Affiliates (other than (A) non-public communications with
other Stockholders or Affiliates or Associates of any Stockholder which
would not require public disclosure by any Person or (B) with the prior
approval of a two thirds majority of the entire Board of Directors (which
approval is requested in a manner which does not require disclosure
publicly or to any third party));
(iv) initiate, propose or, except with the prior approval of two-thirds
of the entire Board of Directors (which approval is requested in a manner
which does not require disclosure publicly or to any third parties)
otherwise solicit stockholders for the approval of one or more stockholder
proposals with respect to the Company or its Affiliates or induce or
attempt to induce any other Person to initiate any stockholder proposal or
seek election to or seek to place a representative on the Board of
Directors of the Company (except pursuant to Section 4.1 of this Agreement)
or its Affiliates or seek the removal of any member of the Board of
Directors of the Company or its Affiliates (for this purpose, the actions
of the Stockholder Designees in communicating (without public disclosure or
disclosure to third parties) with the Board of Directors in their capacity
as directors of the Company, and non-public communication by a Stockholder
with other Stockholders or Affiliates of any Stockholder which would not
require public disclosure by any Person, shall not be deemed to be in
contravention of this paragraph (iv)); or
(v) make any public announcement with respect to, or submit any proposal
for, any transaction involving the Company and Apollo or any Affiliates of
Apollo which would be deemed a "business
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combination" under the provisions of Section 203(c)(3)(i)-(iv) of the DGCL,
whether or not such proposal might require public disclosure by the
Company, unless such proposal is directed and disclosed solely to the
Board.
provided, that this Section 5.1 shall not restrict or inhibit the rights of a
Stockholder to exercise its voting rights as a stockholder of the Company
(subject to Section 4.2).
Section 5.2 Early Termination of Standstill. The obligations of the
Stockholders under Section 5.1 shall terminate at the election of the
Stockholders (by majority vote) upon the occurrence of any of the following
events (each a "Termination Event"):
(a) At least $ in indebtedness for monies borrowed by the Company or
its subsidiaries shall have been accelerated and payment therefor shall not
have been made with days after such acceleration, and the Company shall
not in good faith be contesting whether such amount is owed;
(b) A final judgment or judgments (not subject to appeal) for the payment
of money shall have been entered against the Company or any one or more of
its subsidiaries in an aggregate amount in excess of $ (exclusive of any
amounts fully covered by insurance (less any applicable deductible) or
indemnification) by a court or courts of competent jurisdiction, which
judgments remain unsatisfied, undischarged, unswayed or unbonded for a
period of days after the entry of such judgment or judgments;
(c) The Company or any material subsidiary shall file a petition in
bankruptcy or for reorganization or for an arrangement or any composition,
readjustment, liquidation, dissolution or similar relief pursuant to Title
11 of the United States Code or under any similar present or future federal
law or the law of any other jurisdiction or shall be adjudicated a bankrupt
or insolvent, or consent to the appointment of or taking possession by a
receiver, liquidator, assignee, trustee, custodian, sequestrator (or other
similar official) of the Company or for all or any substantial part of its
property, or shall make a general assignment for the benefit of its
creditors;
(d) A petition or answer shall be filed proposing the adjudication of the
Company or any material subsidiary as bankrupt or its reorganization or
arrangement, or any composition, readjustment, liquidation, dissolution or
similar relief with respect to it pursuant to Title 11 of the United States
Code or under any similar present or future law or the law or any other
jurisdiction, and the Company shall consent to or acquiesce in the filing
thereof, or such petition or answer shall not be discharged or denied
within 60 days after the filing thereof;
(e) The Company shall be in material breach of its obligations to the
Stockholders under their Registration Rights Agreement and such breach
shall not have been cured within 20 days after receipt by the Company from
the Stockholders of a written notice specifying such breach and requiring
it to be remedied, and the Company shall not in good faith be contesting
whether such breach has occurred;
(f) If the Company shall, in breach of its obligations under this
Agreement, fail to nominate for election to the Board of Directions any
Stockholder Designee who satisfies the requirements for designation to the
Board of Directors set forth in Section 4.1(I) or if the stockholders of
the Company shall fail to elect to the Board of Directors all Stockholder
Designees nominated in accordance with Section 4.1; or
(g) At any time after the expiration of six (6) years from the Effective
Date.
Section 5.3 Notice of Proposed Acquisitions. In order to enable the
Stockholders to comply with the provisions of Section 5.1, prior to the end of
the Standstill Period, none of the Other Stockholders shall acquire, offer to
acquire (by tender or exchange offer or otherwise), or agree to acquire, by
purchase or otherwise, any Voting Securities or voting rights or direct or
indirect rights or options to acquire any Voting Securities of the Company or
any of its Affiliates (other than as contemplated by Sections 5.1(i)(A), (B),
(D), (E) or (F) hereof) without prior written consent of Apollo.
ARTICLE VI.
Transfer
Section 6.1 Transfer. Subject to the provisions of the Proxy Agreement, the
Other Stockholders may sell, transfer, assign or otherwise dispose of any of
the Shares; provided, however, that no Other Stockholder
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shall sell, transfer, assign or otherwise dispose of any of the Shares unless
(i) such Other Stockholder delivers written notice to Apollo of its intent to
transfer Shares not less than five (5) business days prior to such transfer,
and (ii) if such transfer occurs other than pursuant to an Exempted Transfer
(as defined below), such transferee becomes a party to this Agreement
(whereupon such transferee shall become a "Stockholder" hereunder). Any
purported transfer in violation of the provisions of this Agreement (an
"Unauthorized Transfer") shall be null and void. The Company will not
register, recognize or give effect to an Unauthorized Transfer and the
purported transferee of any Shares pursuant to an Unauthorized Transfer will
not thereby acquire any rights in such Shares. The Company will, immediately
upon becoming aware of an actual or attempted Unauthorized Transfer, instruct
the transfer agent for the Shares to issue an appropriate stop transfer order
with regard to such transaction or attempted transaction.
An "Exempted Transfer" hereunder (which shall not be subject to the transfer
conditions set forth in clause (ii) of the first sentence of the preceding
paragraph) shall mean: (a) any transfer by any Other Stockholder to its
respective equity owners, whether by way of a distribution, return of capital,
dividend or otherwise, or (b) any sale of Shares by any Other Stockholder
either (1) pursuant to a registered public offering under the Securities Act,
(2) pursuant to Rule 144 or Rule 145 promulgated under the Securities Act or
(3) pursuant to a broker to broker sale executed on any national securities
exchange or traded on the National Market System of NASDAQ.
Section 6.2 Tag-Along Rights. If Apollo or any of their respective
Affiliates proposes to enter into an agreement with respect to or otherwise
enter into a bona fide sale transaction (a "Third-Party Sale") of Shares to a
third party other than an Affiliate of Apollo, Apollo shall first provide the
Company and each Other Stockholder a written notice (the "Third Party Sale
Notice") specifying (i) the nature and amount of consideration to be paid to
the Stockholders upon consummation of the Third Party Sale, (ii) the identity
of the third party purchaser, and (iii) all other material terms of such
proposed Third Party Sale, including the proposed closing date. If an Other
Stockholder delivers a written notice (a "Co-Sale Notice") to Apollo on or
prior to the fifth business day after the giving of the Third Party Sale
Notice, such Other Stockholder shall be permitted to sell, on the same terms
as Apollo, a portion of the total number of Shares sold in such Third Party
Sale equal to the lesser of (i) the amount specified by such Other Stockholder
in its Co-Sale Notice and (ii) the product of (A) such Other Stockholder's
Allocation Percentage and (B) the total number of Shares to be sold in such
Third Party Sale. The "Allocation Percentage" of each Other Stockholder at any
time will be a fraction, the numerator of which is the number of Shares owned
by such Other Stockholder and the denominator of which is the number of Shares
owned by all Stockholders desiring to include Shares in such Third Party Sale.
The provisions of this Section 6.2 shall not apply to any transfer to an
Affiliate of Apollo or pursuant to a public offering.
Section 6.3 Drag-Along Rights. (a) Each Stockholder shall transfer all, but
not less than all Shares then owned by such Stockholder, in connection and
together with the sale of all, but not less than all of the Shares then owned
by Apollo and its Affiliates and the Other Stockholders in a bona fide
transaction (a "Drag Transaction") to any person who is not an Affiliate of
Apollo (a "Purchaser"). Prior to consummating any Drag Transaction, Apollo
will deliver to each Other Stockholder a written notice (a "Sale Notice")
specifying (i) the nature and aggregate amount of consideration (the "Sale
Price") to be paid to the Stockholders upon the consummation of the Drag
Transaction, (ii) the identity of the Purchaser, and (iii) all other material
terms of such proposed Drag Transaction, including the proposed date of the
closing of the Drag Transaction (the "Drag Transaction Closing Date"). On the
Drag Transaction Closing Date, each Stockholder shall sell to the Purchaser
100% of the Shares then held by such Stockholder on the terms and subject to
the conditions set forth in the Sale Notice. If any Stockholder fails to
deliver certificates representing its Shares as required by this Section 6.3,
such Stockholder (i) shall not be entitled to the consideration it is to
receive in the Drag Transaction until it cures such failure (provided, that
after curing such failure it shall be so entitled to such consideration
without interest), (ii) shall for all purposes be deemed no longer to be a
stockholder of the Company and have no voting rights, (iii) shall not be
entitled to any dividends or other distributions declared after the Drag
Transaction Closing Date with respect to the Shares held by it, (iv) shall
have no other rights or privileges granted to Stockholders under this or any
future agreement and (v) in the event of liquidation of the Company, its
rights with respect to any consideration it would have received if it had
complied with this Section 6.3, if any, shall be subordinate to the rights of
any equity holder. This Section 6.3 shall inure to the benefit of, and be
enforceable
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by, Apollo and its Related Persons. "Related Person" means, with respect to
any person, (i) any Affiliate of such person, (ii) any investment manager,
investment advisor or general partner of such person, and (iii) any investment
fund, investment account or investment entity whose investment manager,
investment advisor or general partner is such person or a Related Person of
such person.
(b) The obligations of the Other Stockholders pursuant to this Section 6.3
are subject to the satisfaction of the following conditions:
(i) if any Stockholder is given an option as to the form and amount of
consideration to be received, all Stockholders will be given the same
option (except that no Stockholder shall be required in any circumstance to
accept consideration for its Shares in a form other than cash, cash
equivalents or securities listed for trading on any national securities
exchange or traded on the National Market System of NASDAQ);
(ii) no Other Stockholder shall be obligated to make any out-of-pocket
expenditure prior to the consummation of the Drag Transaction (excluding
modest expenditures for its own postage, copies, etc., and the fees and
expenses of its own counsel retained by it), and no Other Stockholder shall
be obligated to pay more than its or his pro rata share (based upon the
amount of consideration received for or with respect to its or his Shares)
of reasonable expenses incurred in connection with such Drag Transaction to
the extent such costs are incurred for the benefit of all Stockholders and
are not otherwise paid by the Company or the acquiring party (including the
costs of one counsel chosen by Apollo on behalf of the Stockholders and one
counsel chosen by the holders of a majority of the Shares held by the Other
Stockholders) (costs incurred by or on behalf of an Other Stockholder for
its or his sole benefit will not be considered costs of the transaction
hereunder); provided, however, that any Other Stockholder's liability for
its or his pro rata share of such allocated expenses shall be capped at the
total purchase price received by such Other Stockholder for its or his
Shares; and
(iii) (A) in the event that the Stockholders are required to provide any
representations or warranties in connection with the Drag Transaction, each
Other Stockholder shall only be required to represent and warrant as to its
or his title to its or his Shares, and such Other Stockholder's authority,
power, and right to enter into and consummate such other purchase agreement
without violating any other agreement or legal requirement, and (B) in the
event that the Other Stockholders are required to provide any indemnities
in connection with the Drag Transaction, then each Other Stockholder shall
not be liable for more than his pro rata share (based upon the amount of
consideration received for or with respect to its or his Shares) of any
liability for indemnity and such liability shall not exceed the total
purchase price received by such Other Stockholder for its or his Shares.
Section 6.4 Regulatory Compliance Cooperation.
(a) If a Regulated Holder (as defined below) determines that it has a
Regulatory Problem, the Company and the other Stockholders will (i) take all
such actions to avoid or cure such Regulatory Problem as are reasonably
requested by such Regulated Holder in order (A) to effectuate and facilitate a
Transfer by such Regulated Holder of any securities of the Company then held
by such Regulated Holder to any Person designated by such Regulated Holder,
(B) to permit such Regulated Holder (or any Affiliate of such Regulated
Holder) to exchange all or any portion of the Voting Securities of the Company
then held by such Person on a share-for-share basis for shares of a class of
nonvoting Securities of the Company, which nonvoting Securities shall be
identical in all respects to such Voting Securities, except that such
nonvoting Securities shall be nonvoting and shall be convertible into Voting
Securities of the Company on such terms as are requested by such Regulated
Holder in light of regulatory considerations then prevailing, and (C) to
preserve and continue the respective allocation of the voting interests and
powers with respect to the Company arising out of such Regulated Holder's
ownership of Voting Securities of the Company and as provided in this
Agreement before the transfers and amendments referred to above (including
entering into such additional agreements as are reasonably requested by such
Regulated Holder to permit a Person designated by such Regulated Holder to
exercise voting power relinquished by such Regulated Holder upon any exchange
of Voting Securities of the Company for nonvoting
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securities of the Company), and (ii) enter into such additional agreements,
adopt such amendments to this Agreement, the Charter Documents of the Company
and other relevant agreements and take such additional actions, in each case
as are reasonably requested by such Regulated Holder, in order to effectuate
the purpose and intent of the foregoing.
(b) If a Regulated Holder elects to transfer securities of the Company to
another Regulated Holder in order to avoid or cure a Regulatory Problem, the
Company and the other Stockholders shall enter into such agreements with such
other Regulated Holder and its Affiliates as it may reasonably request in
order to assist such other Regulated Holder and its Affiliates in complying
with all Applicable Laws. Such agreements may include restrictions on the
conversion, redemption, repurchase or retirement of securities of the Company
that would result or be reasonably expected to result in such Regulated Holder
or its Affiliates holding more Voting Securities or total equity interests in
the Company than it is permitted to hold under such Applicable Laws.
(c) If a Regulated Holder has the right or opportunity to acquire any of the
Company's or its Subsidiaries' securities (as the result of a preemptive
offer, pro-rata offer or otherwise), at such Regulated Holder's request the
Company will offer to sell (or if the Company is not the seller, to cooperate
with the seller and such Regulated Holder to permit such seller to sell) such
non-voting Securities on the same terms as would have existed had such
Regulated Holder acquired the securities so offered and immediately requested
their exchange for non-voting securities pursuant to Section 6.4(a).
(d) Each Stockholder agrees to cooperate with the Company in complying with
this Section 6.4, including voting to approve amending the Charter Documents
or this Agreement in a manner reasonably requested by the Regulated Holder
requesting such amendment.
(e) The Company and each Stockholder agree not to amend or waive the voting
or other provisions of the Company's certificate or articles of incorporation
or by-laws, or other constitutive and governing instruments and documents, or
this Agreement if in any such case such amendment or waiver would cause any
Regulated Holder to have a Regulatory Problem and such Regulated Holder has so
notified the Company that it would have a Regulatory Problem promptly after it
has notice of such proposed amendment or wavier.
(f) In this Agreement, the following capitalized terms have the meanings
given to them below:
"Regulated Holder" means any holder of the Company's securities that is
(or that is a subsidiary of a bank holding company that is) subject to the
various provisions of Regulation Y of the Board of Governors of the Federal
Reserve Systems. 12 C.F.R., Part 225 (or any successor to Regulation Y).
"Regulatory Problem" means (i) any set of facts or circumstances wherein
it has been asserted by any governmental regulatory agency (or a Regulated
Holder believes that there is a significant risk of such assertion) that
such Person (or any bank holding company that controls such Person) is not
entitled to hold, or exercise any material right with respect to, all or
any portion of the securities of the Company which such Person holds or
(ii) when such Person and its Affiliates would own, control or have power
(including voting rights) over a greater quantity of securities of the
Company than is permitted under any law or regulation or any requirement of
any governmental authority applicable to such Person or to which such
Person is subject.
Section 6.5 Legend. Each certificate issued to represent any Shares shall
bear the following (or a substantially equivalent) legend:
The transfer of these securities is subject to restrictions set forth in
a Stockholders Agreement, dated as of , 1997, a copy of which is
available for inspection at the office of the Corporation.
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon the
completion of a public distribution of securities of the Company represented
thereby) shall also bear such legend, unless the restrictions contained in
this Agreement are no longer in effect.
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ARTICLE VII.
Miscellaneous
Section 7.1 Amendment and Modification. Any provision of this Agreement may
be waived, provided that such waiver is set forth in a writing executed by the
party against whom the enforcement of such waiver is sought. This Agreement
may not be amended, modified or supplemented other than by a written
instrument signed by (a) the Company (in accordance with the approval of two-
thirds of the entire Board of Directors, including a majority of the directors
who are not an Affiliate or an Associate of any Stockholder), and (b) the
holders of a majority of the Shares held by the Stockholders; provided,
however, that so long as Apollo beneficially owns at least 25% of the Shares
held by Apollo on the Effective Date, without the consent of Apollo, no
amendment or modification which adversely affects the rights or duties of
Apollo hereunder may be effected; and provided, further, that no amendment or
modification that would have a material adverse effect on the rights or
obligations of any Other Stockholder without similarly and proportionately
(based on the respective number of Shares then owned by the Other Stockholders
hereunder) affecting the rights and obligations of all Other Stockholders
hereunder, or that would otherwise unfairly discriminate against any Other
Stockholder shall be effective as to such Other Stockholder unless such Other
Stockholder shall have consented in writing thereto. No course of dealing
between or among any Persons having any interest in this Agreement will be
deemed effective to modify, amend or discharge any part of this Agreement or
any rights or obligations of any Person under or by reason of this Agreement.
Section 7.2 Successors and Assigns: Entire Agreement.
(a) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns and executors, administrators and heirs; provided, that except as
otherwise specifically permitted pursuant to this Agreement, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by the Company without the prior written consent of each of the
Stockholders.
(b) This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof and merges and supersedes all
prior discussions, agreements and understandings of any and every nature among
them.
Section 7.3 Separability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid
or otherwise unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall not be affected except to the extent necessary to
delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
V-13
<PAGE>
Section 7.4 Notices. All notices, demands, requests, consents or approvals
(collectively, "Notices") required or permitted to be given hereunder or which
are given with respect to this Agreement shall be in writing and shall be
personally delivered or delivered by a reputable overnight courier service
with charges prepaid, or transmitted by hand delivery, telegram, telex or
facsimile, addressed as set forth below, or such other address as such party
shall have specified most recently by written notice. Notice shall be deemed
given or delivered on the date of service or transmission if personally served
or transmitted by telegram, telex or facsimile. Notice otherwise sent as
provided herein shall be deemed given or delivered on the next business day
following delivery of such notice to a reputable overnight courier service.
To the Company:
Paragon Health Network, Inc.
One Ravinia Drive, Suite 1500
Atlanta, Georgia 30346
Attn: Chief Executive Officer
Fax:
with a copy (which shall not constitute notice) to:
To Apollo:
c/o Apollo Advisors II, L.P.
2 Manhattanville Road
Purchase, New York 10577
Attn: Tony Tortorelli
Fax: (914) 694-8032
with a copy (which shall not constitute notice) to:
Sidley & Austin
555 West Fifth Street
Suite 4000
Los Angeles, California 90013
Attn: Robert W. Kadlec, Esq.
Fax: (213) 896-6600
To the Other Stockholders:
To the address specified on the signature page executed by such Other
Stockholder.
Section 7.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal law of the State of Delaware without giving
effect to principles of conflicts of law.
Section 7.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not constitute a part of this Agreement, nor shall
they affect their meaning, construction or effect.
Section 7.7 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and
all of which together shall constitute one and the same instrument.
Section 7.8 Further Assurances. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out
the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 7.9 Termination. Unless sooner terminated in accordance with its
terms or as otherwise herein provided, this Agreement shall terminate upon the
earlier to occur of (i) the mutual agreement by the parties hereto, (ii) with
respect to any Stockholder, such Stockholder ceasing to own any Shares or
(iii) the tenth anniversary of the Effective Date.
V-14
<PAGE>
Section 7.10 Remedies. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement
and granted by law. The parties agree that the provisions of this Agreement
shall be specifically enforceable, it being agreed by the parties that the
remedy at law, including monetary damages, for breach of any such provision
will be inadequate compensation for any loss and that any defense or objection
in any action for specific performance or injunctive relief that a remedy at
law would be adequate is waived.
Section 7.11 Pronouns. Whenever the context may require, any pronouns used
herein shall be deemed also to include the corresponding neuter, masculine or
feminine forms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
By:
----------------------------------
Name:
Title:
APOLLO:
APOLLO INVESTMENT FUND III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
APOLLO UK PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
V-15
<PAGE>
APOLLO OVERSEAS PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
OTHER STOCKHOLDERS
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
380 Madison Avenue
12th Floor
New York, New York 10017
Attention: Christopher C. Behrens
Telecopy No.: (212) 622-3101
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Michael F. Killea, Esq.
Telecopy No.: (212) 408-2420
HEALTHCARE EQUITY PARTNERS, L.P.
By: Beecken, Petty & Company, L.L.C.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
c/o Beecken, Petty & Company, L.L.C.
901 Warrenville Road, Suite 205
Lisle, Illinois 60532
Attention: David K. Beecken
Telecopy No.: (630) 435-0370
V-16
<PAGE>
HEALTHCARE EQUITY QP PARTNERS, L.P.
By: Beecken, Petty & Company, L.L.C.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
c/o Beecken, Petty & Company,
L.L.C.
901 Warrenville Road, Suite 205
Lisle, Illinois 60532
Attention: David K. Beecken
Telecopy No.: (630) 435-0370
KEY CAPITAL CORPORATION
By:
----------------------------------
Stephen R. Haynes
Vice President
Shares of Company Common Stock
Address:127 Public Square, 6th
Floor
Cleveland, OH 44114
Attention: Stephen R.
Haynes
Telecopy No.: (216) 689-
3204
KEY EQUITY PARTNERS 97
By:
----------------------------------
Stephen R. Haynes
Its: General Partner
Shares of Company Common Stock
Address:127 Public Square, 6th
Floor
Cleveland, OH 44114
Attention: Stephen R.
Haynes
Telecopy No.: (216) 689-
3204
V-17
<PAGE>
[LETTERHEAD OF CREDIT SUISSE FIRST BOSTON CORPORATION]
ANNEX VI
September 17, 1997
Board of Directors
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, TX 77094
Dear Sirs:
You have asked us to advise you with respect to the fairness to the
stockholders of Living Centers of America, Inc. (the "Company"), from a
financial point of view, of the consideration to be received and retained by
such stockholders pursuant to the terms of the Amended and Restated Agreement
and Plan of Merger, dated as of May 7, 1997, as amended and restated as of
September 16, 1997 (the "Recapitalization Merger Agreement"), among the
Company, Apollo Management, L.P. ("Parent") and Apollo LCA Acquisition
Corporation, a wholly owned subsidiary of Parent ("Sub"), and the Amended and
Restated Agreement and Plan of Merger, dated as of May 7, 1997, as amended and
restated as of September 17, 1997 (the "GranCare Merger Agreement" and,
together with the Recapitalization Merger Agreement, the "Merger Agreements")
among the Company, Grancare, Inc. ("GranCare"), Parent and, upon its execution
and delivery of a counterpart thereof, a subsidiary of the Company ("Sub II").
The Recapitalization Merger Agreement provides for the recapitalization of the
Company (the "Recapitalization") pursuant to which approximately 90.54% of the
outstanding shares of common stock, $0.01 par value, of the Company (the
"Shares") will be converted into the right to receive $40.50 per Share in cash
and the remaining outstanding Shares will remain outstanding as the stock of
the recapitalized Company ("New LCA"). The actual consideration received and
retained by each individual stockholder will depend on whether such
stockholder elects, and whether other stockholders elect, to retain Shares and
the application of pro rationing provisions contained in the Recapitalization
Merger Agreement (although, as described below, we have made certain
assumptions regarding such election). As part of the Recapitalization, Parent,
or certain other investors, will purchase not less than $240 million of newly
issued Shares from the Company at $40.50 per Share.
The GranCare Merger Agreement provides that, immediately following the
Recapitalization, Sub II will merge into GranCare (the "GranCare Merger"),
with GranCare surviving as a wholly-owned subsidiary of New LCA. Pursuant to
the GranCare Merger Agreement, each of the outstanding shares of GranCare
common stock, $0.001 par value, outstanding as of the effective time of the
GranCare Merger (the "GranCare Shares") will be cancelled and converted into
the right to receive 0.2346 of a share in New LCA. The Recapitalization and
the GranCare Merger are together referred to herein as the "Transactions."
Immediately following the Transactions, approximately 14.1% of the common
stock of New LCA (the "New LCA Shares") will be owned by former Company
stockholders.
In arriving at our opinion, we have reviewed certain publicly available
business and financial information relating to the Company and GranCare, the
September 17, 1997 draft of the letter agreement between GranCare and Health
and Retirement Properties Trust, as well as copies of the Merger Agreements,
the Termination and Release Agreement dated September 3, 1997 between Manor
Care, Inc., Vitalink Pharmacy Services, Inc. and GranCare and the Joint Proxy
Statement/Prospectus relating to the Transactions. We have also reviewed
certain other information, including financial forecasts, provided to us by
the Company and have met with the Company's management to discuss the business
and prospects of the Company. In addition, we have performed a limited review
of, and discussed with GranCare management and its advisors, certain other
information, including information regarding GranCare and New LCA, provided to
us by GranCare and its advisors.
We have also considered certain financial and stock market data of the
Company and GranCare, compared that data with similar data for other publicly
held companies in businesses similar to those of the Company,
VI-1
<PAGE>
GranCare and New LCA and considered, to the extent publicly available, the
financial terms of certain other business combinations and other transactions
which have recently been effected. We have also considered such other
information, financial studies, analyses and investigations and financial,
economic, regulatory and market criteria as we have deemed relevant.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied
on its being complete and accurate in all material respects. With respect to
the financial forecasts, we have assumed that they have been reasonably
prepared in good faith on bases reflecting the best currently available
estimates and judgments of the Company's management, or GranCare's management,
as the case may be, as to the future financial performance of the Company and
GranCare. In addition, we have not made an independent evaluation or appraisal
of the assets or liabilities (contingent or otherwise) of the Company or
GranCare, nor have we been furnished with any such evaluations or appraisals.
Our opinion is necessarily based upon financial, economic, market and other
conditions as they exist and can be evaluated on the date hereof. In addition,
for purposes of rendering our opinion, we have assumed that, in the
Recapitalization, none of the Company's stockholders will make an election to
retain Shares and, accordingly, that all stockholders will receive $40.50 in
cash per Share for approximately 90.54% of their Shares and retain
approximately 9.46% of their Shares (resulting in consideration per Share of
approximately $36.67 in cash and 0.0946 New LCA Shares). We are not expressing
any opinion regarding the price at which the New LCA Shares will trade
subsequent to the Transactions.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Transactions and will receive a fee for our services
(including rendering this opinion), a significant portion of which is
contingent upon the consummation of the Transactions. In addition, with your
consent, we have agreed to act as one of the initial purchasers or co-managers
of the proposed offering of senior subordinated debt securities to be issued
to finance the Transactions.
In the ordinary course of our business, Credit Suisse First Boston
Corporation and its affiliates may actively trade the debt and equity
securities of both the Company and GranCare for their own account and for the
accounts of customers and, accordingly, may at any time hold a long or short
position in such securities.
It is understood that this letter is for the information of the Board of
Directors of the Company in connection with its consideration of the
Transactions and does not constitute a recommendation to any stockholder as to
what actions such stockholder should take with respect to, or how such
stockholder should vote on, the proposed Recapitalization or the GranCare
Merger or whether any stockholder should make an election to retain Shares in
the Transactions. This opinion is not to be quoted or referred to, in whole or
in part, in any offer to purchase, registration statement, prospectus or proxy
statement, or in any other document used in connection with any offer to
purchase, offering or sale of securities, nor shall this letter be used for
any other purposes, without Credit Suisse First Boston Corporation's prior
written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the per Share consideration to be received and retained in the
Transactions by the stockholders of the Company holding Shares prior to the
Transactions is fair to such stockholders from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON
CORPORATION
VI-2
<PAGE>
[LETTERHEAD OF NATIONSBANC CAPITAL MARKETS INC.]
ANNEX VII
September 17, 1997
Board of Directors
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Dear Sirs:
You have asked our opinion as to the fairness from a financial point of view
to the stockholders of Living Centers of America, Inc. (the "Company") of the
consideration to be received and retained by such stockholders pursuant to the
terms of the Agreement and Plan of Merger dated as of May 7, 1997 as amended
and restated as of September 16, 1997 (the "Recapitalization Merger
Agreement"), among the Company, Apollo Management, L.P. ("Parent") and Apollo
LCA Acquisition Corporation, a wholly owned subsidiary of Parent ("Sub"), and
the Agreement and Plan of Merger dated as of May 7, 1997, as amended and
restated as of September 17, 1997 (the "GranCare Merger Agreement" and,
together with the Recapitalization Merger Agreement, the "Merger Agreements"),
among the Company, GranCare, Inc. ("GranCare"), Parent and, upon its execution
and delivery of a counterpart thereof, a subsidiary of the Company ("Sub II").
The Recapitalization Merger Agreement provides for the recapitalization of the
Company (the "Recapitalization") pursuant to which approximately 90.54% of the
outstanding shares of common stock, $0.01 par value, of the Company (the
"Shares") will be converted into the right to receive $40.50 per Share in cash
and the remaining outstanding Shares will remain outstanding as the stock of
the recapitalized Company ("New LCA"). The actual consideration received and
retained by each individual stockholder will depend on whether such
stockholder elects, and whether other stockholders elect, to retain Shares and
the application of pro rationing provisions contained in the Recapitalization
Merger Agreement (although, as described below, we have made certain
assumptions regarding such election). As part of the Recapitalization Parent,
or certain other investors (the "Investors"), will purchase not less than $240
million of newly issued Shares from the Company at $40.50 per Share.
The GranCare Merger Agreement provides that, immediately following the
Recapitalization, Sub II will merge with GranCare (the "GranCare Merger") with
GranCare surviving as a wholly owned subsidiary of New LCA. Pursuant to the
GranCare Merger Agreement, each of the outstanding shares of GranCare common
stock, $0.001 par value, outstanding as of the effective time of the GranCare
Merger (the "GranCare Shares") will be canceled and converted into the right
to receive 0.2346 of a share in New LCA. The Recapitalization and the GranCare
Merger are together referred to herein as the "Transactions." Immediately
following the Transactions, between 14% and 15% of the common stock of New LCA
(the "New LCA Shares") will be owned by former Company stockholders.
In the course of rendering our opinion, we have reviewed certain publicly
available business and financial information regarding the Company and
GranCare as well as the Merger Agreements, the Termination and Settlement
Agreement between Manor Care, Inc., Vitalink Pharmacy Services, Inc. and
GranCare dated September 3, 1997, the September 17, 1997 draft of the letter
agreement between GranCare and Health and Retirement Properties Trust and the
Joint Proxy Statement/Prospectus relating to the Transactions. We have also
reviewed the Company's business plans through information provided to us by
Company management and have held a number of meetings with executive
corporate, regional and divisional management of the Company, with whom we
discussed the Company and its future prospects. We have also reviewed certain
financial projections, and with respect to such financial projections, we have
assumed that they have been reasonably prepared in good faith on bases
reflecting management's best currently available estimates and judgments as to
the future financial performance of the Company. In addition, we have
performed a limited review of, and discussed with GranCare management and its
advisors, certain publicly available and other information regarding GranCare
and New LCA provided to us by GranCare and its advisors.
VII-1
<PAGE>
We have also reviewed the publicly available financial and business data and
stock market performance of public companies that we deemed generally
comparable to the Company, GranCare and New LCA and have considered, to the
extent publicly available, the financial terms of recent acquisition
transactions that we deemed comparable to the Transactions. We have further
reviewed such other financial studies and information, performed such other
analyses, inquiries and investigations and taken into account such other
matters as we deemed appropriate, including our assessment of general
economic, market, regulatory and monetary conditions as they existed as of the
date of this opinion.
In the course of our review, we have relied upon and assumed the accuracy
and completeness of the financial and other information reviewed by us,
including information provided by executive corporate, regional and divisional
management. We have also relied upon representations by the executive
corporate, regional and divisional management of the Company regarding the
current and future business prospects of the Company. We have also assumed
that the consideration and the material terms of the Transactions will not
change from those set forth in the Merger Agreements. We have not
independently verified the information provided to us, and we have further
relied on assurances by management of GranCare and the Company that they are
unaware of any facts that would make the information provided to us incomplete
or misleading. In arriving at our opinion, we have not performed any
independent appraisals of the Company, nor have we reviewed any appraisals of
the Company or of any of its assets.
In addition, for purposes of rendering our opinion, we have assumed that, in
the Transactions, none of the Company's stockholders will make an election to
retain Shares and, accordingly, that all the Company's stockholders will
receive $40.50 for approximately 90.54% of their Shares and retain
approximately 9.46% of their Shares (resulting in consideration per Share of
approximately $36.67 in cash and 0.0946 New LCA Shares).
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as
of, the date of this letter. It should be understood that although subsequent
developments may effect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
price at which the New LCA Shares will actually trade at any time. Our opinion
does not address the relative merits of the Transactions and the other
business strategies being considered by the Company's Board of Directors, nor
does it address the Board's decision to proceed with the Transactions.
We have acted as financial advisor to the Board of Directors of the Company
in connection with the Transactions, for which we will receive a fee,
including for rendering this opinion.
Atlantic Equity Corporation ("AEC"), an affiliate of NationsBanc Capital
Markets, Inc., owns an approximately 1.5% limited partnership interest in
Apollo Investment Fund III, L.P. ("Apollo III"). We understand that Apollo III
will be an Investor in Sub, and thus AEC will indirectly own an approximately
1.5% interest in Sub. In addition, Parent has verbally indicated to us that we
and/or our affiliates will play a significant role in providing certain
financing relating to the Transactions.
It is understood that this letter is for the information of the Board of
Directors of the Company with regard to its consideration of the Transactions.
This opinion does not make any recommendation to any stockholder as to what
actions such stockholder should take with respect to, or how such stockholder
should vote on, the proposed Recapitalization or the GranCare Merger or
whether any stockholder should make an election to retain Shares in the
Transactions. This opinion is not to be quoted or referred to, in whole or in
part, in any offer to purchase, registration statement, prospectus or proxy
statement, or in any other document used in connection with any offer to
purchase, offering or sale of securities, nor shall this letter be used for
any other purpose, without the prior written consent of NationsBanc Capital
Markets, Inc.
Based upon and subject to the foregoing (including, but not limited to, the
various assumptions set forth herein), it is our opinion that, as of the date
hereof, the per Share consideration to be received and retained in the
Transactions by the stockholders of the Company holding Shares prior to the
Transactions is fair to such stockholders from a financial point of view.
Very truly yours,
NationsBanc Capital Markets, Inc.
VII-2
<PAGE>
[LETTERHEAD OF SMITH BARNEY INC.]
ANNEX VIII
September 17, 1997
The Board of Directors
GranCare, Inc.
1 Ravinia Drive
Atlanta, Georgia 30346
Members of the Board:
You have requested our opinion as to the fairness, from a financial point of
view, to the holders of the common stock of GranCare, Inc. ("GranCare") of the
consideration to be received by such holders pursuant to the terms and subject
to the conditions set forth in the Amended and Restated Agreement and Plan of
Merger, dated as of May 7, 1997, and amended as of June 12, 1997 and September
9, 1997 and amended and restated as of September 17, 1997 (the "Merger
Agreement"), by and among Living Centers of America, Inc. ("LCA"), GranCare,
Apollo Management, L.P. ("Apollo"), and a newly formed corporation wholly
owned by LCA ("Sub"). As more fully described in the Merger Agreement, (i) Sub
will be merged with and into GranCare (the "Merger") and (ii) each outstanding
share of the common stock, par value $0.001 per share, of GranCare (the
"GranCare Common Stock") will be converted into the right to receive 0.2346
the ("Exchange Ratio") of a share of the common stock, par value $0.01 per
share, of LCA (the "LCA Common Stock"). We have been advised by
representatives of GranCare that the proposed recapitalization transaction
involving LCA and Apollo will occur immediately prior to, or concurrently
with, the consummation of the Merger (the "Recapitalization").
In arriving at our opinion, we reviewed the Merger Agreement and held
discussions with certain senior officers, directors and other representatives
and advisors of GranCare and certain senior officers and other representatives
and advisors of LCA concerning the businesses, operations and prospects of
GranCare and LCA. We examined certain publicly available business and
financial information relating to GranCare and LCA as well as certain
financial forecasts and other information and data for GranCare and LCA which
were provided to or otherwise discussed with us by the respective managements
of GranCare and LCA, including information relating to certain strategic
implications and operational benefits anticipated to result from the Merger.
We reviewed the financial terms of the Merger as set forth in the Merger
Agreement in relation to, among other things: current and historical market
prices and trading volumes of GranCare Common Stock and LCA Common Stock; the
historical and projected earnings and other operating data of GranCare and
LCA; and the capitalization and financial condition of GranCare and LCA. We
considered, to the extent publicly available, the financial terms of other
transactions recently effected which we considered relevant in evaluating the
Merger and analyzed certain financial, stock market and other publicly
available information relating to the businesses of other companies whose
operations we considered relevant in evaluating those of GranCare and LCA. We
also evaluated the potential pro forma financial impact of the Merger on LCA.
In addition to the foregoing, we conducted such other analyses and
examinations and considered such other financial, economic and market criteria
as we deemed appropriate in arriving at our opinion.
VIII-1
<PAGE>
The Board of Directors
GranCare, Inc.
September 17, 1997
Page 2
In rendering our opinion, we have assumed and relied, without independent
verification, upon the accuracy and completeness of all financial and other
information and data publicly available or furnished to or otherwise reviewed
by or discussed with us. With respect to financial forecasts and other
information and data provided to or otherwise reviewed by or discussed with
us, we have been advised by the managements of GranCare and LCA that such
forecasts and other information and data were reasonably prepared on bases
reflecting the best currently available estimates and judgments of the
managements of GranCare and LCA as to the future financial performance of
GranCare and LCA and the strategic implications and operational benefits
anticipated to result from the Merger. We have assumed, with your consent,
that the Recapitalization will occur immediately prior to, or concurrently
with, the consummation of the Merger in accordance with the terms of the
Recapitalization described to us by representatives of GranCare and, to the
extent relevant to our analysis, have evaluated LCA after giving effect to the
Recapitalization. We also have assumed, with your consent, that the Merger
will be treated as a tax-free reorganization for federal income tax purposes.
Our opinion, as set forth herein, relates to the relative values of GranCare
and LCA. We are not expressing any opinion as to what the value of the LCA
Common Stock actually will be when issued to GranCare stockholders pursuant to
the Merger or the price at which the LCA Common Stock will trade or otherwise
be transferable subsequent to the Merger. We have not made or been provided
with an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of GranCare or LCA nor have we made any physical
inspection of the properties or assets of GranCare or LCA. In connection with
our engagement, we were not requested to, and did not, generally solicit third
party indications of interest in a possible acquisition of GranCare. Our
opinion is necessarily based upon information available to us, and financial,
stock market and other conditions and circumstances existing and disclosed to
us, as of the date hereof.
Smith Barney has been engaged to render financial advisory services to
GranCare in connection with the proposed Merger and will receive a fee for
such services, a significant portion of which is contingent upon the
consummation of the Merger. We also will receive a fee in connection with the
delivery of this opinion. In the ordinary course of our business, we and our
affiliates may actively trade or hold the securities of GranCare and LCA for
our own account or for the account of our customers and, accordingly, may at
any time hold a long or short position in such securities. We have in the past
provided financial advisory and investment banking services to GranCare and
LCA unrelated to the proposed Merger, and are participating in the financing
for the Recapitalization, for which services we have received and will receive
compensation. In addition, we and our affiliates (including Travelers Group
Inc. and its affiliates) may maintain relationships with GranCare and LCA.
Our advisory services and the opinion expressed herein are provided for the
information of the Board of Directors of GranCare in its evaluation of the
proposed Merger, and our opinion is not intended to be and does not constitute
a recommendation to any stockholder as to how such stockholder should vote on
the proposed Merger. Our opinion may not be published or otherwise used or
referred to, nor shall any public reference to Smith Barney be made, without
our prior written consent.
Based upon and subject to the foregoing, our experience as investment bankers,
our work as described above and other factors we deemed relevant, we are of
the opinion that, as of the date hereof, the Exchange Ratio is fair, from a
financial point of view, to the holders of GranCare Common Stock.
Very truly yours,
SMITH BARNEY INC.
VIII-2
<PAGE>
ANNEX IX
September 15, 1997
Board of Directors GranCare, Inc. One Ravinia Drive, Suite 1500 Atlanta, GA
30346
Members of the Board:
You have informed us that Living Centers of America, Inc. ("LCA"), Merger
Sub, a wholly-owned subsidiary of LCA ("Sub"), GranCare, Inc. ("GranCare") and
Apollo Management, L.P., on behalf of one or more funds under management
(collectively, "Apollo") propose to enter into an Amended and Restated
Agreement and Plan of Merger dated as of a date in September 1997 (the
"GranCare Merger Agreement"), which provides, among other things, for the
merger of Sub with and into GranCare (the "GranCare Merger") after giving
effect to the recapitalization of LCA referred to below, and as a result of
which GranCare Merger (i) each share of issued and outstanding common stock,
par value $.001 per share, of GranCare ("GranCare Common Stock") will be
converted into the right to receive 0.2346 shares (the "Exchange Ratio") of
common stock, par value $.01 per share, of LCA ("LCA Common Stock"), (ii)
GranCare will survive in the GranCare Merger as a wholly owned subsidiary of
LCA, and (iii) Apollo and certain other investors (collectively, the "Apollo
Investors") will own after the GranCare Merger approximately 44.0% of the LCA
Common Stock, holders of GranCare Common Stock immediately prior to the
GranCare Merger will own after the GranCare Merger approximately 41.9% of the
LCA Common Stock and holders of LCA Common Stock (after the LCA
recapitalization but immediately prior to the GranCare Merger) will own after
the GranCare Merger approximately 14.1% of the LCA Common Stock. You have also
informed us that the GranCare Merger will be accounted for on a purchase basis
and is expected to be tax-free to each of GranCare and LCA and their
respective shareholders.
You have informed us that immediately prior to the GranCare Merger and as a
condition thereto, there will occur a recapitalization of LCA pursuant to the
merger of a wholly-owned subsidiary of Apollo into LCA (the "Recapitalization
Merger"). You have informed us that in connection with the Recapitalization
Merger, the Apollo Investors will make an equity contribution of approximately
$240 million and each holder of LCA Common Stock will have the right to elect
either to receive $40.50 in cash or to retain one share of LCA Common Stock,
subject to election and proration, such that 90.54% of the shares of LCA
Common Stock will be converted into cash and 9.46% of the shares of LCA Common
Stock will remain as such shares.
You have requested that we render our opinion as to the fairness, from a
financial point of view, to the holders of GranCare Common Stock of the
Exchange Ratio in the GranCare Merger.
In arriving at the opinion set forth below, we have, among other things:
(a) reviewed a draft of the GranCare Merger Agreement in the form
provided to us and have assumed that the final form of such agreement
will not vary in any regard that is material to our analysis;
(b) reviewed a draft of the Amended and Restated Agreement and Plan
of Merger providing for the Recapitalization Merger (the
"Recapitalization Merger Agreement") in the form provided to us and
have assumed that the final form of such agreement will not vary in any
regard that is material to our analysis;
IX-1
<PAGE>
(c) reviewed certain publicly available business and financial
information that we deemed relevant relating to GranCare and LCA and
the respective industries in which they operate;
(d) reviewed certain internal non-public financial and operating data
provided to us by the managements of GranCare and LCA relating to
GranCare and LCA (before and after giving effect to the
Recapitalization Merger and the GranCare Merger), including information
provided by such managements and by Apollo relating to the
capitalization of LCA after giving effect to the Recapitalization
Merger and certain forecast and projection information as to future
financial results of such businesses and information concerning the
expected business, operational and strategic benefits of the
Recapitalization Merger and the GranCare Merger, including the level of
synergies reasonably obtainable;
(e) discussed with members of GranCare's, LCA's and Apollo's senior
managements the foregoing, including GranCare's and LCA's operations,
historical financial statements and future prospects, before and after
giving effect to the Recapitalization Merger and the GranCare Merger,
and their views of the business, operational and strategic benefits and
other implications of the Recapitalization Merger and the GranCare
Merger, including the level of synergies reasonably obtainable, as well
as such other matters as we deemed necessary or appropriate;
(f) compared the financial and operating performance of GranCare and
LCA with publicly available information concerning certain other
companies we deemed comparable and reviewed the relevant historical
stock prices and trading volumes of the GranCare Common Stock, the LCA
Common Stock and certain publicly traded securities of such other
companies;
(g) reviewed the financial terms of certain recent transactions we
deemed reasonably comparable to the GranCare Merger and otherwise
relevant to our inquiry; and
(h) made such other analyses and examinations as we have deemed
necessary or appropriate.
We have assumed and relied upon, without assuming any responsibility for
verification, the accuracy and completeness of all of the financial and other
information provided to, discussed with, or reviewed by or for us, or publicly
available, for purposes of this opinion, and have further relied upon the
assurances of managements of GranCare and LCA that they are not aware of any
facts that will make such information inaccurate or misleading. We have
neither made nor obtained any independent evaluations or appraisals of the
assets or liabilities of GranCare or LCA, nor have we conducted a physical
inspection of the properties and facilities of GranCare or LCA. We have
assumed that the financial forecast and projection information provided to us
by GranCare and LCA as well as the information concerning the expected
business, operational and strategic benefits of the Recapitalization Merger
and the GranCare Merger have been reasonably determined on bases reflecting
the best currently available estimates and judgments of the managements of
GranCare and LCA, as the case may be, as to the future financial performance
of GranCare and LCA (before and after giving effect to the Recapitalization
Merger and the GranCare Merger), as the case may be. We express no view as to
such forecast, projection or benefits information or the assumptions on which
they were based. We have relied as to all legal, accounting and tax matters
with respect to the GranCare Merger and the Recapitalization Merger on legal
counsel and accountants to GranCare. We were not requested to, and did not,
generally solicit offers from third parties to acquire all or part of the
Company.
For purposes of rendering our opinion we have assumed, in all respects
material to our analysis, that the representations and warranties of each
party contained in the GranCare Merger Agreement and the Recapitalization
Merger Agreement are true and correct, that each party will perform all of the
covenants and agreements required to be performed by it under the GranCare
Merger Agreement and the Recapitalization Merger Agreement and that all
conditions to the consummation of the GranCare Merger will be satisfied
without waiver thereof. We have also assumed that all material governmental,
regulatory or other consents and approvals will be obtained and that in the
course of obtaining any necessary governmental, regulatory or other consents
and approvals, or any amendments, modifications or waivers to any documents to
which either of GranCare or LCA are party, as contemplated by the GranCare
Merger Agreement and Recapitalization Merger Agreement, no restrictions will
be imposed or amendments, modifications or waivers made that would have any
material adverse effect on the contemplated benefits to the holders of
GranCare Common Stock of the GranCare Merger.
IX-2
<PAGE>
Our opinion herein is necessarily based on market, economic and other
conditions as they exist and can be evaluated on the date of this letter. Our
opinion is limited to the fairness, from a financial point of view, to the
holders of GranCare Common Stock of the Exchange Ratio in the GranCare Merger
and we express no opinion as to any aspect of the Recapitalization Merger or
as to the merits of the underlying decision by GranCare to engage in the
GranCare Merger. This opinion does not constitute a recommendation to any
GranCare shareholder as to how such shareholder should vote with respect to
the GranCare Merger or the transactions related thereto. Our opinion
necessarily is based upon conditions as they exist and can be evaluated on the
date hereof, and we assume no responsibility to update or revise our opinion
based upon circumstances or events occurring after the date hereof. Our
opinion as expressed below does not imply any conclusion as to the likely
trading range for the common stock of GranCare or LCA following the
announcement or consummation of the GranCare Merger, which may vary depending
upon, among other factors, changes in interest rates, dividend rates, market
conditions, general economic conditions and other factors that generally
influence the price of securities.
Chase Securities Inc., as part of its financial advisory business, is
continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions and valuations for estate, corporate
and other purposes. We have acted as financial advisor to GranCare in
connection with the GranCare Merger and will receive a fee for our services,
including for rendering this opinion. In addition, GranCare has agreed to
indemnify us for certain liabilities arising out of our engagement. As we have
previously advised you, The Chase Manhattan Corporation and its affiliates,
including Chase Securities Inc., in the ordinary course of business, have,
from time to time, provided, and in the future may continue to provide,
commercial and investment banking services to GranCare and LCA and are
providing senior secured credit facilities (for which it is acting as agent
bank) and subordinated bridge financing to LCA and may make an equity
investment in connection with the Recapitalization Merger and the GranCare
Merger. In the ordinary course of business, we or our affiliates may trade in
the debt and equity securities of GranCare and/or LCA for our own accounts and
for the accounts of our customers and, accordingly, may at any time hold a
long or short position in such securities.
Based upon and subject to the foregoing, we are of the opinion, as of the
date hereof, that the Exchange Ratio in the GranCare Merger is fair, from a
financial point of view, to the holders of GranCare Common Stock.
This opinion is for the use and benefit of the Board of Directors of
GranCare in its evaluation of the GranCare Merger and shall not be used for
any other purpose without the prior written consent of Chase Securities Inc.
Very truly yours,
CHASE SECURITIES INC.
IX-3
<PAGE>
ANNEX X
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
DELAWARE--GENERAL CORPORATION LAW
(S) 262. APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing pursuant
to (S) 228 of this title shall be entitled to an appraisal by the Court of
Chancery of the fair value of his shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record in a stock corporation and
also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and
the words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited with the
depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to
be effected pursuant to (S)(S) 251 (other than a merger effected pursuant to
subsection (g) of (S) 251), 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on
a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more than
2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
X-1
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under (S) 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall
be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets
of the corporation. If the certificate of incorporation contains such a
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that appraisal rights
are available for any or all of the shares of the constituent corporations,
and shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation,
a written demand for appraisal of his shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the
appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing to
take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228
or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days
thereafter, shall notify each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal rights
of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy of
this section; provided that, if the notice is given on or after the
effective date of the merger or consolidation, such notice shall be given
by the surviving or resulting corporation to all such holders of any class
or series of stock of a constituent corporation that are entitled to
appraisal rights. Any stockholder entitled to appraisal rights may, within
twenty days after the date of mailing of such notice, demand in writing
from the surviving or resulting corporation the appraisal of such holder's
shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send a second notice to all such holders on or
within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only to be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of such
holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the
corporation that is required to give either notice that such notice has
been given shall in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the stockholders entitled
to receive such notice, each constituent corporation may fix in advance, a
record date that shall be not more than 10 days prior to the date the
notice is given; provided that, if the notice is given on or after the
effective date of the merger or consolidation,
X-2
<PAGE>
the record date shall be the effective date. If no record date is fixed and
the notice is given prior to the effective date, the record date shall be
the close of business on the next day preceding the day on which the notice
is given. If the merger or consolidation was approved pursuant to (S) 228
or 253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied
with subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger
or consolidation, any stockholder shall have the right to withdraw his demand
for appraisal and to accept the terms offered upon the merger or
consolidation. Within 120 days after the effective date of the merger or
consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which
demands for appraisal have been received and the aggregate number of holders
of such shares. Such written statement shall be mailed to the stockholder
within 10 days after his written request for such a statement is received by
the surviving or resulting corporation or within 10 days after expiration of
the period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper of
general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail and
by publication shall be approved by the Court, and the costs thereof shall be
borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled
to appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as
to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger
or consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account relevant factors. In determining the
fair rate of interest, the Court may consider all relevant factors, including
the rate of interest which the surviving or resulting corporation would have
had to pay to borrow money during the pendency of the
X-3
<PAGE>
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the Court
may, in its discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of the
stockholder entitled to an appraisal. Any stockholder whose name appears on
the list filed by the surviving or resulting corporation pursuant to
subsection (f) of this section and who has submitted his certificates of stock
to the Register in Chancery, if such is required, may participate fully in all
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to
the stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders of
shares represented by certificates upon the surrender to the corporation of
the certificates representing such stock. The Court's decree may be enforced
as other decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of any
state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed within
the time provided in subsection (e) of this section, or if such stockholder
shall deliver to the surviving or resulting corporation a written withdrawal
of his demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal
proceeding in the Court of Chancery shall be dismissed as to any stockholder
without the approval of the Court, and such approval may be conditioned upon
such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
X-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
LCA is a Delaware corporation. Reference is made to Section 145 of the
Delaware General Corporation Law (the "DGCL") which provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a part to any threatened, pending or completed action or proceeding,
whether civil, criminal, administrative or investigative (together than an
action by or in the right of such corporation, by reason of the fact that such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at its request in such capacity of another corporation or
business organization against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interest of the corporation and, with respect to any
criminal action or proceeding, had not reasonable cause to believe that such
person's conduct was unlawful. A Delaware corporation may indemnify officers
and directors in an action by or in the right of a corporation under the same
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the
corporation. Where an officer or director is successful on the merits or
otherwise in the defense of any action referred to above, the corporation must
indemnify him against the expenses that such officer or director actually and
reasonably incurred.
Reference is also made to Section 102(b)(7) of the DGCL, which permits a
corporation to provide in its certificate of incorporation that a director of
the corporation shall not be personally liable to the corporation or its
stockholders for monetary damages for breach of the director's fiduciary duty
as a director, except for liability (i) for any breach of the director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
Article Seventh of the Restated Certificate of Incorporation of LCA provides
for the elimination of personal liability of a director for breach of
fiduciary duty as permitted by Section 102(b)(7) of the DGCL. Article Eighth
of the Restated Certificate of Incorporation and the Bylaws of LCA provide
that LCA shall indemnify its directors and officers to the fullest extent
permitted by Section 145 of the DGCL.
LCA maintains at its expense, a policy of insurance which insures its
directors and officers, subject to certain exclusions and deductions as are
usual in such insurance policies, against certain liabilities which may be
incurred in those capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 17, 1997,
among Apollo Management, L.P., on behalf of one or more managed
investment funds ("Apollo"), Apollo LCA Acquisition Corp. ("Apollo
Sub") and Living Centers of America, Inc. ("LCA") (incorporated by
reference to Annex I hereto)
2.2 Agreement and Plan of Merger, dated as of September 17, 1997,
among LCA, Apollo, GranCare, Inc. and LCA Acquisition Sub, Inc.
(incorporated by reference to Annex II hereto)
4.1 Form of Common Stock Certificate of LCA (incorporated by reference
to Exhibit 4.1 to LCA's Registration Statement on Form S-1 filed
on February 12, 1992 (Registration No. 33-44726))
4.2 Restated Certificate of Incorporation of LCA (incorporated by
reference to Exhibit 4.1 to LCA's Form S-8 filed on August 7, 1996
(Registration No. 333-09707))
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
4.3 Bylaws of LCA (incorporated by reference to Exhibit 4.1 to LCA's
Form S-1 filed on February 12, 1992 (Registration No. 33-44726))
4.4 Form of Amended and Restated Certificate of Incorporation of
Paragon (incorporated by reference to Annex III hereto)
Form of Amended and Restated Bylaws of Paragon (incorporated by
4.5 reference to Annex IV hereto)
4.6 Form of Stockholders Agreement by and among Paragon, Apollo and
certain other investors (incorporated by reference to Annex V
hereto)
4.7* Form of Registration Rights Agreement between Paragon and certain
investors
4.8 Certificate of Designations of Series A Junior Participating
Preferred Stock of LCA (incorporated by reference to Exhibit 4.1
to LCA's Form 10-Q for the quarter ended December 31, 1994)
4.9 Rights Agreement dated as of November 17, 1994, between LCA and
Chemical Bank, as Rights Agent, specifying the terms of rights to
purchase LCA's Series A Junior Participating Preferred Stock, and
the exhibits thereto (incorporated by reference to Exhibit 1 to
LCA's Registration Statement on Form 8-A filed November 17, 1994)
as amended by Loan Agreement dated October 1, 1993 between LCA and
SouthTrust Bank of Alabama, N.A. (incorporated by reference to
Exhibit 4(d) to LCA's Form 8-K filed October 15, 1993)
Opinion of Mayor, Day, Caldwell & Keeton, L.L.P. regarding
5.1* securities being issued
Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding tax
8.1* matters
8.2* Opinion of Andrews & Kurth L.L.P. regarding tax matters
Opinion of Mayor, Day, Caldwell & Keeton, L.L.P. regarding tax
8.3* matters
23.1* Consent of Ernst & Young LLP, independent auditors (Atlanta)
23.2* Consent of Ernst & Young LLP, independent auditors (Houston)
23.3* Consent of KPMG Peat Marwick, LLP, independent auditors
Power of Attorney (included as part of the signature page on page
24.1 II-4 hereto.)
99.1* Consent of Credit Suisse First Boston Corporation
99.2* Consent of NationsBanc Capital Markets, Inc.
99.3* Consent of Smith Barney Inc.
99.4* Consent of Chase Securities Inc.
99.5* Form of LCA Proxy Card
99.6* Form of GranCare Proxy Card
99.7* Form of LCA Stock Election
Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in
99.8 Exhibit 8.1)
99.9 Consent of Andrews & Kurth L.L.P. (contained in Exhibit 8.2)
Consent of Mayor, Day, Caldwell & Keeton, L.L.P. (contained in
99.10 Exhibits 5.1 and 8.3)
99.11* Consent of Keith B. Pitts to be named as a director of Paragon
99.12* Consent of Robert L. Rosen to be named as a director of Paragon
99.13* Consent of Laurence M. Berg to be named as a director of Paragon
99.14* Consent of John H. Kissick to be named as a director of Paragon
99.15* Consent of Peter P. Copses to be named as a director of Paragon
Consent of William G. Petty, Jr. to be named as a director of
99.16* Paragon
</TABLE>
- --------
*Filed herewith.
(b)Financial Statement Schedules
1.Schedule II--Valuation and Qualifying Accounts (see page F-32 hereto)
II-2
<PAGE>
ITEM 22. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(b) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
(c) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (c) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(d) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(e) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the Proxy
Statement/Prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within
one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of
the Registration Statement through the date of responding to the request.
(f) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Houston, State of Texas,
on the 26th day of September, 1997.
Living Centers of America, Inc.
/s/ Edward L. Kuntz
By: ___________________________________
Edward L. Kuntz Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Edward L. Kuntz and Susan Thomas Whittle, and
each of them, each with full power to act without such person and in his name,
place and stead, in any and all capacities, to sign any or all further
amendments or supplements (including post-effective amendments) to this Form S-
4 Registration Statement and to file the same, with all exhibits thereto, and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto each of said attorneys-in-fact and agents full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully as to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each of said attorneys-in-fact and agents, or his substitutes, may
lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated below.
Signatures Title Date
/s/ Edward L. Kuntz Chief Executive September 26, 1997
- ------------------------------------ Officer, Chairman
Edward L. Kuntz and Director
(Principal
Executive Officer)
/s/ Leroy D. Williams (President, Chief September 26, 1997
- ------------------------------------ Operating Officer
Leroy D. Williams and Director)
/s/ Charles B. Carden Executive Vice September 26, 1997
- ------------------------------------ President and
Charles B. Carden Chief Financial
Officer (Principal
Financial and
Accounting
Officer)
/s/ Donald C. Beaver Vice Chairman and September 26, 1997
- ------------------------------------ Director
Donald C. Beaver
/s/ Roger J. Bulger Director September 26, 1997
- ------------------------------------
Roger J. Bulger, M.D. FACP
II-4
<PAGE>
Signatures Title Date
/s/ Anthony M. Frank Director September 26, 1997
- -------------------------------------
Anthony M. Frank
/s/ Eddy J. Rogers, Jr. Director September 26, 1997
- -------------------------------------
Eddy J. Rogers, Jr.
/s/ Robert H. Hurlbut Director
September 26, 1997
- -------------------------------------
Robert H. Hurlbut
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
2.1 Agreement and Plan of Merger, dated as of September 17, 1997,
among Apollo Management, L.P., on behalf of one or more managed
investment funds ("Apollo"), Apollo LCA Acquisition Corp. ("Apollo
Sub") and Living Centers of America, Inc. ("LCA") (incorporated by
reference to Annex I hereto)
2.2 Agreement and Plan of Merger, dated as of September 17, 1997,
among LCA, Apollo, GranCare, Inc. and LCA Acquisition Sub, Inc.
(incorporated by reference to Annex II hereto)
4.1 Form of Common Stock Certificate of LCA (incorporated by reference
to Exhibit 4.1 to LCA's Registration Statement on Form S-1 filed
on February 12, 1992 (Registration No. 33-44726))
4.2 Restated Certificate of Incorporation of LCA (incorporated by
reference to Exhibit 4.1 to LCA's Form S-8 filed on August 7, 1996
(Registration No. 333-09707))
4.3 Bylaws of LCA (incorporated by reference to Exhibit 4.1 to LCA's
Form S-1 filed on February 12, 1992 (Registration No. 33-44726))
4.4 Form of Amended and Restated Certificate of Incorporation of
Paragon (incorporated by reference to Annex III hereto)
Form of Amended and Restated Bylaws of Paragon (incorporated by
4.5 reference to Annex IV hereto)
4.6 Form of Stockholders Agreement by and among Paragon, Apollo and
certain investors (incorporated by reference to Annex V hereto)
4.7* Form of Registration Rights Agreement between Paragon and certain
investors
4.8 Certificate of Designations of Series A Junior Participating
Preferred Stock of LCA (incorporated by reference to Exhibit 4.1
to LCA's Form 10-Q for the quarter ended December 31, 1994)
4.9 Rights Agreement dated as of November 17, 1994, between LCA and
Chemical Bank, as Rights Agent, specifying the terms of rights to
purchase LCA's Series A Junior Participating Preferred Stock, and
the exhibits thereto (incorporated by reference to Exhibit 1 to
LCA's Registration Statement on Form 8-A filed November 17, 1994)
as amended by Loan Agreement dated October 1, 1993 between LCA and
SouthTrust Bank of Alabama, N.A. (incorporated by reference to
Exhibit 4(d) to LCA's Form 8-K filed October 15, 1993)
Opinion of Mayor, Day, Caldwell & Keeton, L.L.P. regarding
5.1* securities being issued
Opinion of Powell, Goldstein, Frazer & Murphy LLP regarding tax
8.1* matters
8.2* Opinion of Andrews & Kurth L.L.P. regarding tax matters
Opinion of Mayor, Day, Caldwell & Keeton, L.L.P. regarding tax
8.3* matters
23.1* Consent of Ernst & Young LLP, independent auditors (Atlanta)
23.2* Consent of Ernst & Young LLP, independent auditors (Houston)
23.3* Consent of KPMG Peat Marwick, LLP, independent auditors
24.1 Power of Attorney (included as part of the signature page on page II-4
hereto.)
99.1* Consent of Credit Suisse First Boston Corporation
99.2* Consent of NationsBanc Capital Markets, Inc.
99.3* Consent of Smith Barney Inc.
99.4* Consent of Chase Securities Inc.
99.5* Form of LCA Proxy Card
99.6* Form of GranCare Proxy Card
</TABLE>
<PAGE>
<TABLE>
<S> <C>
99.7* Form of LCA Stock Election
99.8 Consent of Powell, Goldstein, Frazer & Murphy LLP (contained in Exhibit 8.1)
99.9 Consent of Andrews & Kurth L.L.P. (contained in Exhibit 8.2)
99.10 Consent of Mayor, Day, Caldwell & Keeton, L.L.P. (contained in Exhibits 5.1 and 8.3)
99.11* Consent of Keith B. Pitts to be named as a director of Paragon
99.12* Consent of Robert L. Rosen to be named as a director of Paragon
99.13* Consent of Laurence M. Berg to be named as a director of Paragon
99.14* Consent of John H. Kissick to be named as a director of Paragon
99.15* Consent of Peter P. Copses to be named as a director of Paragon
99.16* Consent of William G. Petty, Jr. to be names as a director of Paragon
</TABLE>
- --------
*Filed herewith.
<PAGE>
EXHIBIT 4.7
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (the "Agreement"), dated as of October , 1997
by and among Paragon Health Network, Inc., a Delaware corporation (the
"Company"), and each other person executing this Agreement (the "Investors").
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. The following terms shall have the meanings
ascribed to them below:
"Apollo Holders" means, collectively, Apollo Investment Fund III, L.P.,
Apollo UK Partners III, L.P., and Apollo Overseas Partners III, L.P., and any
transferee of an Apollo Holder unless the transferor notifies the Company that
such transferee shall not be entitled to any of the rights of an Apollo Holder
under Section 2.1 hereof.
"Demanding Holder" means any Holder who has initiated a registration request
in compliance with Section 2.1(a); provided, that any action required or
permitted to be taken under this Agreement by any Demanding Holders shall be
taken by action of the holders of a majority of the Registrable Securities
held by such Demanding Holders.
"Demand Registration" means a registration of Registrable Securities under
the Securities Act pursuant to a request made under Section 2.1.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Effective Date" means the date of the closing under the Amended and
Restated Agreement and Plan of Merger, dated as of September 17, 1997, among
Apollo Management, L.P., on behalf of one or more managed investment funds,
Apollo LCA Acquisition Corp. and the Company.
"Holder" means each Investor that holds Registrable Securities and any party
who shall hereafter acquire from an Investor and hold Registrable Securities.
"Person" means any individual or a corporation, partnership, joint venture,
association, trust or any other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
"Prospectus" means the prospectus included in any Registration Statement
(including, without limitation, a prospectus that discloses information
previously omitted from a prospectus filed as part of an effective
registration statement in reliance on Rule 430A under the Securities Act), as
amended or supplemented by any prospectus supplement, with respect to the
terms of the offering of any portion of the Registrable Securities covered by
such Registration Statement and all other amendments and supplements to the
Prospectus, including post-effective amendments, and all materials
incorporated by reference or deemed to be incorporated by reference in such
Prospectus.
"Registrable Security" means each Share held by a Holder until (i) it has
been effectively registered under the Securities Act and disposed of pursuant
to an effective registration statement (other than the Registration Statement
on Form S-4 filed in connection with the Merger), (ii) it is sold under
circumstances in which all of the applicable conditions of Rule 144 (or any
similar provisions then in force) under the Securities Act are met, including
a sale pursuant to the provisions of Rule 144(k) or (iii) it has been
otherwise transferred and it may be resold by the person receiving such Share
without registration under the Securities Act.
<PAGE>
"Registration Statement" means any registration statement of the Company
that covers any of the Registrable Securities pursuant to the provisions of
this Agreement, including the Prospectus, amendments and supplements to such
registration statement, including post-effective amendments, all exhibits, and
all material incorporated by reference or deemed to be incorporated by
reference in such registration statement.
"Securities Act" means the Securities Act of 1933, as amended, and the rules
and regulations thereunder.
"Selling Holder" means a Holder who sells or proposes to sell Registrable
Securities pursuant to a registration statement under the Securities Act.
"Shares" means the shares of common stock, par value $.01 per share of the
Company.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal in an underwritten offering and not as part of such
dealer's market-making activities.
ARTICLE II
REGISTRATION RIGHTS
Section 2.1 Demand Registration.
(a) Request for Registration. At any time and from time to time on or after
the Effective Date the Apollo Holders collectively may make a total of two
written requests for a Demand Registration of not less than 10% of the
Registrable Securities held by the Apollo Holders; provided, that the Company
shall in no event be obligated to effect more than one Demand Registration in
any 12-month period. Each such request will specify the number of Registrable
Securities proposed to be sold and will also specify the intended method of
disposition thereof.
If Holders of a majority of the then outstanding Registrable Securities
requested to be included in such registration pursuant to Section 2.1(a)
request that such Demand Registration be a "shelf" registration pursuant to
Rule 415 under the Securities Act, the Company shall file such Demand
Registration under Rule 415 and shall keep the Registration Statement filed in
respect thereof effective for a period which shall terminate on the earlier of
(i) twelve months from the date on which the Commission declares such
Registration Statement effective and (ii) the date on which all Registrable
Securities covered by such Registration Statement have been sold pursuant to
such Registration Statement.
(b) Effective Registration. A registration will not be deemed to have been
effected as a Demand Registration unless it has been declared effective by the
Commission and the Company has complied in all material respects with its
obligations under this Agreement with respect thereto; provided that if, the
amount of Registrable Securities to be registered on behalf of the Demanding
Holders is reduced by more than 10% pursuant to Section 2.3(a) hereof or if
after such Demand Registration has become effective, the offering of
Registrable Securities pursuant to such registration is or becomes the subject
of any stop order, injunction or other order or requirement of the Commission
or any other governmental or administrative agency, or if any court prevents
or otherwise limits the sale of Registrable Securities pursuant to the
registration (for any reason other than the acts or omissions of the Holders),
such registration will be deemed not to have been effected. If (i) a
registration requested pursuant to this Section 2.1 is deemed not to have been
effected or (ii) the registration requested pursuant to this Section 2.1 does
not remain effective for a period of at least 200 days, or twelve months with
respect to a "shelf" registration, beyond the effective date thereof or until
the consummation of the distribution by the Holders of the Registrable
Securities included in such registration statement, then such registration
statement shall not count as one of the two Demand Registrations that may be
requested by the Demanding Holder(s) in question and the Company shall
continue to be obligated to effect a registration pursuant to this Section 2.
1.
2
<PAGE>
The Demanding Holders may withdraw all or any part of the Registrable
Securities from a Demand Registration at any time (whether before or after the
filing or effective date of such Demand Registration), and if all such
Registrable Securities are withdrawn, to withdraw the demand related thereto.
If at any time a Registration Statement is filed pursuant to a Demand
Registration, and subsequently a sufficient number of Registrable Securities
are withdrawn from the Demand Registration so that such Registration Statement
does not cover at least the required amounts specified by Section 2.1(a), and
an additional number of Registrable Securities is not so included, the Company
may (or shall, if requested by the Demanding Holders) withdraw the
Registration Statement, provided that if the Demanding Holders bear the
expenses associated with such withdrawn Registration Statement, such
Registration Statement will not count as a Demand Registration and the Company
shall continue to be obligated to effect a registration pursuant to this
Section 2.1. If the Demanding Holders determine to bear such expenses, such
expenses shall be borne by the Demanding Holder(s) whose withdrawal of
Registrable Securities resulted in such Registration Statement not covering
the specified required amounts.
(c) Selection of Underwriter. If the Demanding Holders so elect, the
offering of Registrable Securities pursuant to a Demand Registration shall be
in the form of an underwritten offering. The Demanding Holders shall select
one or more nationally recognized firms of investment bankers to act as the
book-running managing Underwriter or Underwriters in connection with such
offering and shall select any additional investment bankers and managers to be
used in connection with the offering.
Section 2.2 Piggy-Back Registration. If at any time the Company proposes to
file a Registration Statement under the Securities Act with respect to an
offering of equity securities by the Company for its own account or for the
account of any securityholders of any class of its equity securities (other
than (i) a registration statement on Form S-4 or S-8 (or any substitute form
that may be adopted by the Commission) or (ii) a registration statement filed
in connection with an exchange offer or offering of securities solely to the
Company's existing securityholders), including a Registration Statement
relating to a Demand Registration, then the Company shall give written notice
of such proposed filing to the Holders as soon as practicable (but in no event
less than 20 days before the anticipated filing date), and such notice shall
offer such Holders the opportunity to register such number of shares of
Registrable Securities as each such Holder may request (which request shall
specify the Registrable Securities intended to be disposed of by such Holder
and the intended method of distribution thereof) (a "Piggy-Back Registration")
.
The Company shall use its best efforts to cause the managing Underwriter or
Underwriters of a proposed underwritten offering to permit the Registrable
Securities requested by the Holders thereof to be included in a Piggy-Back
Registration (the "Piggy-Back Holders") to be included on the same terms and
conditions as any similar securities of the Company or any other
securityholder included therein and to permit the sale or other disposition of
such Registrable Securities in accordance with the intended method of
distribution thereof. Any Holder shall have the right to withdraw its request
for inclusion of its Registrable Securities in any registration statement
pursuant to this Section 2.2 by giving written notice to the Company of its
request to withdraw. Subject to the provisions of Section 2.1, the Company may
withdraw a Piggy-Back Registration at any time prior to the time it becomes
effective, provided that the Company shall reimburse the Piggy-Back Holders
for all reasonable out-of-pocket expenses (including counsel fees and
expenses) incurred prior to such withdrawal.
No registration effected under this Section 2.2, and no failure to effect a
registration under this Section 2.2, shall relieve the Company of its
obligations pursuant to Section 2.1, and no failure to effect a registration
under this Section 2.2 and to complete the sale of Shares in connection
therewith shall relieve the Company of any other obligation under this
Agreement (including, without limitation, the Company's obligations under
Sections 3.2 and 4.1).
Section 2.3 Reduction of Offering.
(a) Demand Registration. The Company may include in a Demand Registration
Shares for the account of the Company and Registrable Securities for the
account of the Piggy-Back Holders and Shares for the account
3
<PAGE>
of other holders thereof exercising contractual piggyback rights, on the same
terms and conditions as the Registrable Securities to be included therein for
the account of the Demanding Holders; provided, however, that (i) if the
managing Underwriter or Underwriters of any underwritten offering described in
Section 2.1 have informed the Company in writing that it is their opinion that
the total number of Shares which the Demanding Holders, the Company, any
Piggy-Back Holders and any such other holders intend to include in such
offering is such as to materially and adversely affect the success of such
offering, then (x) the number of Shares to be offered for the account of such
other holders shall be reduced (to zero, if necessary), in the case of this
clause (x) pro rata in proportion to the respective number of Shares requested
to be registered and (y) thereafter, if necessary, the number of Shares to be
offered for the account of the Company (if any) shall be reduced (to zero, if
necessary), to the extent necessary to reduce the total number of Shares
requested to be included in such offering to the number of Shares, if any,
recommended by such managing Underwriters (and if the number of Shares to be
offered for the account of each such Person has been reduced to zero, and the
number of Shares requested to be registered by the Demanding Holders and the
Piggy-Back Holders exceeds the number of Shares recommended by such managing
Underwriters, then the number of Shares to be offered for the account of the
Demanding Holders and the Piggy-Back Holders shall be reduced pro rata in
proportion to the respective number of Shares requested to be registered by
the Demanding Holders and the Piggy-Back Holders) and (ii) if the offering is
not underwritten, no other party (other than Piggy-Back Holders and any other
holders exercising contractual piggyback rights not subject to the reduction
contemplated by this clause (ii)), including the Company, shall be permitted
to offer securities under any such Demand Registration unless a majority of
the Shares held by the Demanding Holder or Holders consent to the inclusion of
such shares therein.
(b) Piggy-Back Registration.
(i) Notwithstanding anything contained herein, if the managing
Underwriter or Underwriters of any underwritten offering described in
Section 2.2 have informed, in writing, the Piggy-Back Holders that it is
their opinion that the total number of Shares that the Company and Holders
of Registrable Securities and any other Persons desiring to participate in
such registration intend to include in such offering is such as to
materially and adversely affect the success of such offering, then the
number of Shares to be offered for the account of the Piggy-Back Holders
and all such other Persons (other than the Company) participating in such
registration shall be reduced (to zero, if necessary) or limited pro rata
in proportion to the respective number of Shares requested to be registered
to the extent necessary to reduce the total number of Shares requested to
be included in such offering to the number of Shares, if any, recommended
by such managing Underwriters; provided, however, that (A) if such offering
is effected for the account of Demanding Holders pursuant to Section 2.1,
then the number of Shares to be offered for the account of each Person
shall be reduced in accordance with Section 2.3(a), and (B) if such
offering is effected for the account of any other securityholder of the
Company, pursuant to the demand registration rights of such securityholder,
then (x) the number of Shares to be offered for the account of the Piggy-
Back Holders and any other holders that have requested to include Shares in
such registration (but not such securityholders who have exercised their
demand registration rights) shall be reduced (to zero, if necessary), in
the case of this clause (x) pro rata in proportion to the respective number
of Shares requested to be registered and (y) thereafter, if necessary, the
number of Shares to be offered for the account of the Company (if any)
shall be reduced (to zero, if necessary), to the extent necessary to reduce
the total number of Shares requested to be included in such offering to the
number of Shares, if any, recommended by such managing Underwriters.
(ii) If the managing Underwriter or Underwriters of any underwritten
offering described in Section 2.2 notify the Piggy-Back Holders or other
Persons requesting inclusion in such offering that the kind of securities
that the Piggy-Back Holders, the Company and any other Persons desiring to
participate in such registration intend to include in such offering is such
as to materially and adversely affect the success of such offering, then
the Shares to be included in such offering by such Piggy-Back Holders shall
be reduced as described in clause (i) above or if such reduction would, in
the judgment of the managing Underwriter or Underwriters, be insufficient
to substantially eliminate the adverse effect that inclusion of the Shares
requested to be included would have on such offering, such Shares will be
excluded from such offering.
4
<PAGE>
ARTICLE III
REGISTRATION PROCEDURES
Section 3.1 Filings; Information. Whenever the Company is required to effect
or cause the registration of Registrable Securities pursuant to Section 2.1,
the Company will use its best efforts to effect the registration and the sale
of such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible prepare and file with the
Commission a Registration Statement on any form for which the Company then
qualifies or which counsel for the Company shall deem appropriate and which
form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the intended method of distribution
thereof, and use its best efforts to cause such filed Registration Statement
to become and remain effective for a period of not less than 200 days, or
[twelve months] with respect to a "shelf" registration (or such shorter period
as is required to complete the distribution of the shares); provided that the
Company may postpone the filing of a Registration Statement for a period of
not more than 90 days from the date of receipt of the request in accordance
with Section 2.1 if the Company reasonably determines that such a filing would
adversely affect any proposed financing or acquisition by the Company and
furnishes to the Demanding Holder a certificate signed by an executive officer
of the Company to such effect; provided that the Company shall only be
entitled to postpone any such filing one time in any twelve-month period. If
the Company postpones the filing of a Registration Statement, it shall
promptly notify the Purchasers in writing when the events or circumstances
permitting such postponement have ended.
(b) The Company will as expeditiously as possible prepare and file with the
Commission such amendments and supplements to such Registration Statement and
the Prospectus used in connection therewith as may be necessary to keep such
Registration Statement continuously effective (subject to the penultimate
paragraph of this Section 3.1) for a period of not less than 200 days, or
[twelve months] with respect to a "shelf" registration, or such shorter period
which will terminate when all securities covered by such Registration
Statement have been sold (but not before the expiration of the 90-day period
referred to in Section 4(3) of the Securities Act and Rule 174 thereunder, if
applicable) and comply with the provisions of the Securities Act with respect
to the disposition of all securities covered by such Registration Statement
during such period in accordance with the intended methods of disposition by
each Selling Holder thereof set forth in such Registration Statement.
(c) The Company will, prior to filing a Registration Statement or prospectus
or any amendment or supplement thereto (including documents that would be
incorporated or deemed to be incorporated therein by reference), furnish to
each Selling Holder, counsel representing such Selling Holders, and each
Underwriter, if any, of the Registrable Securities covered by such
Registration Statement copies of such Registration Statement as proposed to be
filed, together with exhibits thereto, which documents will be subject to
review and comment by the foregoing within five days after delivery, and
thereafter furnish to such Selling Holder, counsel and Underwriter, if any,
for their review and comment such number of copies of such Registration
Statement, each amendment and supplement thereto (in each case including all
exhibits thereto and documents incorporated by reference therein), the
Prospectus included in such Registration Statement and such other documents or
information as such Selling Holder, counsel or Underwriter may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Selling Holder.
(d) After the filing of the Registration Statement, the Company will
promptly notify each Selling Holder of Registrable Securities covered by such
Registration Statement, and (if requested by any such Selling Holder) confirm
such notice in writing, (i) when a Prospectus or any supplement thereto or
post-effective amendment has been filed and, with respect to a Registration
Statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the Commission or any other Federal or state
governmental authority for amendments or supplements to a Registration
Statement or related Prospectus or for additional information, (iii) of the
issuance by the Commission or any other Federal or state governmental
authority of any stop order suspending the effectiveness of a Registration
Statement or the initiation of any proceedings for that purpose,
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(iv) if at any time when a prospectus is required by the Securities Act to be
delivered in connection with sales of the Registrable Securities the
representations and warranties of the Company contained in any agreement
contemplated by Section 3.1(h) (including any underwriting agreement) cease to
be true and correct in all material respects, (v) of the receipt by the
Company of any notification with respect to the suspension of the
qualification or exemption from qualification of any of the Registrable
Securities for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose, (vi) of the happening of any event which
makes any statement made in such Registration Statement or related Prospectus
or any document incorporated or deemed to be incorporated therein by reference
untrue in any material respect or which requires the making of any changes in
a Registration Statement, Prospectus or documents incorporated therein by
reference so that, in the case of the Registration Statement, it will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, and that in the case of the Prospectus, it will not contain
any untrue statement of a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and (vii) of the Company's reasonable
determination that a post-effective amendment to a Registration Statement
would be necessary.
(e) The Company will use its best efforts to (i) register or qualify the
Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any Selling Holder reasonably (in light
of such Selling Holder's intended plan of distribution) requests, and (ii)
cause such Registrable Securities to be registered with or approved by such
other governmental agencies or authorities in the United States as may be
necessary by virtue of the business and operations of the Company and do any
and all other acts and things that may be reasonably necessary or advisable to
enable such Selling Holder to consummate the disposition of the Registrable
Securities owned by such Selling Holder; provided that the Company will not be
required to (A) qualify generally to do business in any jurisdiction where it
would not otherwise be required to qualify but for this paragraph (e), (B)
subject itself to taxation in any such jurisdiction or (C) consent to general
service of process in any such jurisdiction.
(f) The Company will take all reasonable actions required to prevent the
entry, or obtain the withdrawal, of any order suspending the effectiveness of
a Registration Statement, or the lifting of any suspension of the
qualification (or exemption from qualification) of any Registrable Securities
for sale in any jurisdiction, at the earliest moment.
(g) Upon the occurrence of any event contemplated by paragraph 3.1(d)(vi) or
3.1(d)(vii) above, the Company will (i) prepare a supplement or post-effective
amendment to such Registration Statement or a supplement to the related
Prospectus or any document incorporated therein by reference or file any other
required document so that, as thereafter delivered to the purchasers of the
Registrable Securities being sold thereunder, such Prospectus will not contain
an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
(ii) promptly make available to each Selling Holder any such supplement or
amendment.
(h) The Company will enter into customary agreements (including, if
applicable, an underwriting agreement in customary form and which is
reasonably satisfactory to the Company) and take such other actions as are
reasonably required in order to expedite or facilitate the disposition of such
Registrable Securities (the Selling Holders may, at their option, require that
any or all of the representations, warranties and covenants of the Company to
or for the benefit of such Underwriters also be made to and for the benefit of
such Selling Holders).
(i) The Company will make available to each Selling Holder (and will deliver
to their counsel) and each Underwriter, if any, subject to restrictions
imposed by the United States federal government or any agency or
instrumentality thereof, copies of all correspondence between the Commission
and the Company, its counsel or auditors and will also make available for
inspection by any Selling Holder, any Underwriter participating in any
disposition pursuant to such Registration Statement and any attorney,
accountant or other professional retained by any such Selling Holder or
Underwriter, all financial and other records, pertinent corporate documents
and
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properties of the Company (collectively, the "Records") as shall be reasonably
necessary to enable them to exercise their due diligence responsibility, and
cause the Company's officers and employees to supply all information
reasonably requested by any Inspectors in connection with such Registration
Statement. Each Selling Holder agrees that information obtained by it solely
as a result of such inspections (not including any information obtained from a
third party who, insofar as is known to the Selling Holder after reasonable
inquiry, is not prohibited from providing such information by a contractual,
legal or fiduciary obligation to the Company) shall be deemed confidential and
shall not be used by it as the basis for any market transactions in the
securities of the Company or its affiliates unless and until such information
is made generally available to the public. Each Selling Holder further agrees
that it will, upon learning that disclosure of such Records is sought in a
court of competent jurisdiction, give notice to the Company and allow the
Company, at its expense, to undertake appropriate action to prevent disclosure
of the Records deemed confidential.
(j) The Company will furnish to each Selling Holder and to each Underwriter,
if any, a signed counterpart, addressed to such Selling Holder or Underwriter,
of (i) an opinion or opinions of counsel to the Company, and (ii) a comfort
letter or comfort letters from the Company's independent public accountants,
each in customary form and covering such matters of the type customarily
covered by opinions or comfort letters, as the case may be, as the Selling
Holders or the managing Underwriter therefor reasonably requests.
(k) The Company will otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the Registration Statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(l) The Company will use its best efforts (a) to cause the Registrable
Securities to be listed on a national securities exchange (if such shares are
not already so listed) and on each additional national securities exchange on
which similar securities issued by the Company are then listed (if any), if
the listing of such Registrable Securities is then permitted under the rules
of such exchange or (b) to secure designation of all such Registrable
Securities covered by such registration statement as a NASDAQ "national market
system security" within the meaning of Rule 11Aa2-1 of the Commission or,
failing that, to secure NASDAQ authorization for such Registrable Securities
and, without limiting the generality of the foregoing, to arrange for at least
two market makers to register as such with respect to such Registrable
Securities with the National Association of Securities Dealers, Inc. (the
"NASD").
(m) The Company will appoint a transfer agent and registrar for all such
Registrable Securities covered by such registration statement not later than
the effective date of such Registration Statement.
(n) Prior to the effective date of the first Demand Registration or the
first Piggy-Back Registration, whichever shall occur first, (i) provide the
transfer agent with printed certificates for the Registrable Securities in a
form eligible for deposit with The Depository Trust Company, and (ii) provide
a CUSIP number for the Registrable Securities.
(o) In connection with an underwritten offering, the Company will
participate, to the extent reasonably requested by the managing Underwriter
for the offering or the Selling Holders, in customary efforts to sell the
securities under the offering, including, without limitation, participating in
"road shows."
The Company may require each Selling Holder to promptly furnish in writing
to the Company such information regarding the distribution of the Registrable
Securities by such Selling Holder as the Company may from time to time
reasonably request and such other information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the Commission or the NASD. The Company may
exclude from such registration any Holder who fails to provide such
information.
Each Selling Holder agrees that, upon receipt of any notice from the Company
of the happening of any event of the kind described in Sections 3.1(d)(iii),
(v), (vi) and (vii) hereof, such Selling Holder will forthwith
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discontinue disposition of Registrable Securities pursuant to the Registration
Statement covering such Registrable Securities until such Selling Holder's
receipt of the copies of the supplemented or amended Prospectus contemplated
by Section 3.1(g) hereof, and, if so directed by the Company, such Selling
Holder will deliver to the Company all copies, other than permanent file
copies, then in such Selling Holder's possession of the most recent Prospectus
covering such Registrable Securities at the time of receipt of such notice. In
the event the Company shall give such notice, the Company shall extend the
period during which such Registration Statement shall be maintained effective
(including the period referred to in Section 3.1(a) hereof) by the number of
days during the period from and including the date of the giving of notice
pursuant to Section 3.1(d)(iii), (v), (vi) or (vii) hereof to the date when
the Company shall make available to the Selling Holders a Prospectus
supplemented or amended to conform with the requirements of Section 3.1(g)
hereof.
In connection with any registration of Registrable Securities pursuant to
Section 2.2, the Company will take the actions contemplated by paragraphs (c),
(d), (e), (i), (j), (k), (1) and (n) above.
Section 3.2 Registration Expenses. In connection with the Demand
Registrations pursuant to Section 2.1 hereof, and any Registration Statement
filed pursuant to Section 2.2 hereof, the Company shall pay the following
registration expenses incurred in connection with the registration hereunder
(the "Registration Expenses"): (i) all registration and filing fees, (ii) fees
and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) printing expenses, (iv)
the Company's internal expenses (including, without limitation, all salaries
and expenses of its officers and employees performing legal or accounting
duties) and all fees and expenses incident to the performance of or compliance
with this Agreement by the Company, (v) the fees and expenses incurred in
connection with the listing of the Registrable Securities, (vi) reasonable
fees and disbursements of counsel for the Company and customary fees and
expenses for independent certified public accountants retained by the Company
(including the expenses of any comfort letters or costs associated with the
delivery by independent certified public accountants of a comfort letter or
comfort letters requested pursuant to Section 3.10) hereof), (vii) the
reasonable fees and expenses of any special experts retained by the Company in
connection with such registration, and (viii) reasonable fees and expenses of
one firm of counsel for the Holders (together with necessary local counsel
fees and expenses), which counsel shall be chosen by the Demanding Holders or,
if none, by the Holders of a majority of the Registrable Securities being
included in such Registration Statement. The Company shall have no obligation
to pay any underwriting fees, discounts or commissions attributable to the
sale of Registrable Securities.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
Section 4.1 Indemnification by the Company. The Company agrees to indemnify
and hold harmless each Selling Holder, its partners, officers, directors,
employees and agents, and each Person, if any, who controls such Selling
Holder within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, together with the partners, officers, directors, employees
and agents of such controlling Person (collectively, the "Controlling
Persons"), from and against any loss, claim, damage, liability, reasonable
attorneys' fee, cost or expense and costs and expenses of investigating and
defending any such claim (collectively, the "Damages"), joint or several, and
any action in respect thereof to which such Selling Holder, its partners,
officers, directors, employees and agents, and any such Controlling Person may
become subject under the Securities Act or otherwise, insofar as such Damages
(or proceedings in respect thereof) arise out of, or are based upon, any
untrue statement or alleged untrue statement of a material fact contained in
any Registration Statement or Prospectus relating to the Registrable
Securities or any preliminary Prospectus, or arises out of, or are based upon,
any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as the same are based upon information furnished in writing to
the Company by a Selling Holder or Underwriter expressly for use therein, and
shall reimburse each Selling Holder, its partners, officers, directors,
employees and agents, and each such Controlling Person for any legal
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and other expenses reasonably incurred by that Selling Holder, its partners,
officers, directors, employees and agents, or any such Controlling Person in
investigating or defending or preparing to defend against any such Damages or
proceedings; provided, however, that the Company shall not be liable to any
Selling Holder to the extent that (a) any such Damages arise out of or are
based upon an untrue statement or omission made in any preliminary prospectus
if (i) such Holder failed to send or deliver a copy of the final Prospectus
with or prior to the delivery of written confirmation of the sale by such
Selling Holder to the Person asserting the claim from which such Damages
arise, and (ii) the final Prospectus would have corrected such untrue
statement or such omission; or (b) any such Damages arise out of or are based
upon an untrue statement or omission in any Prospectus if (x) such untrue
statement or omission is corrected in an amendment or supplement to such
Prospectus, and (y) having previously been furnished by or on behalf of the
Company with copies of such Prospectus as so amended or supplemented, such
Holder thereafter fails to deliver such Prospectus as so amended or
supplemented prior to or concurrently with the sale of a Registrable Security
to the Person asserting the claim from which such Damages arise. The Company
also agrees to indemnify any Underwriters of the Registrable Securities, their
officers and directors and each Person who controls such Underwriters on
substantially the same basis as that of the indemnification of the Selling
Holders provided in this Section 4.1.
Section 4.2 Indemnification by Holders of Registrable Securities. Each
Selling Holder agrees, severally but not jointly, to indemnify and hold
harmless the Company, its officers, directors, employees and agents and each
Person, if any, who controls the Company within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, together with the
partners, officers, directors, employees and agents of such controlling
Person, to the same extent as the foregoing indemnity from the Company to such
Selling Holder, but only with reference to information related to such Selling
Holder, or its plan of distribution, furnished in writing by such Selling
Holder or on such Selling Holder's behalf expressly for use in any
Registration Statement or Prospectus relating to the Registrable Securities,
or any amendment or supplement thereto, or any preliminary Prospectus. In case
any action or proceeding shall be brought against the Company or its officers,
directors, employees or agents or any such controlling Person or its partners,
officers, directors, employees or agents, in respect of which indemnity may be
sought against such Selling Holder, such Selling Holder shall have the rights
and duties given to the Company, and the Company or its officers, directors,
employees or agents, controlling Person, or its partners, officers, directors,
employees or agents, shall have the rights and duties given to such Selling
Holder, under Section 4.1. Each Selling Holder also agrees to indemnify and
hold harmless each other Selling Holder and any Underwriters of the
Registrable Securities, and their respective officers and directors and each
Person who controls each such other Selling Holder or Underwriter on
substantially the same basis as that of the indemnification of the Company
provided in this Section 4.2. The Company shall be entitled to receive
indemnities from Underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the
same extent as provided above, with respect to information so furnished in
writing by such Persons specifically for inclusion in any Prospectus or
Registration Statement. In no event shall the liability of any Selling Holder
be greater in amount than the dollar amount of the proceeds (net of payment of
all expenses) received by such Selling Holder upon the sale of the Registrable
Securities giving rise to such indemnification obligation.
Section 4.3 Conduct of Indemnification Proceedings. Promptly after receipt
by any Person in respect of which indemnity may be sought pursuant to Section
4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the commencement
of any action, the Indemnified Party shall, if a claim in respect thereof is
to be made against the Person against whom such indemnity may be sought (an
"Indemnifying Party") notify the Indemnifying Party in writing of the claim or
the commencement of such action, provided that the failure to notify the
Indemnifying Party shall not relieve it from any liability except to the
extent of any material prejudice resulting therefrom. If any such claim or
action shall be brought against an Indemnified Party, and it shall notify the
Indemnifying Party thereof, the Indemnifying Party shall be entitled to
participate therein, and, to the extent that it wishes, jointly with any other
similarly notified Indemnifying Party, to assume the defense thereof with
counsel reasonably satisfactory to the Indemnified Party; provided, that the
Indemnifying Party acknowledges, in a writing in form and substance reasonably
satisfactory to such Indemnified Party, such Indemnifying Party's liability
for all Damages of such Indemnified Party to the extent specified in, and in
accordance with, this
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Article IV. After notice from the Indemnifying Party to the Indemnified Party
of its election to assume the defense of such claim or action, the
Indemnifying Party shall not be liable to the Indemnified Party for any legal
or other expenses subsequently incurred by the Indemnified Party in connection
with the defense thereof other than reasonable costs of investigation;
provided that the Indemnified Party shall have the right to employ separate
counsel to represent the Indemnified Party and its controlling Persons who may
be subject to liability arising out of any claim in respect of which indemnity
may be sought by the Indemnified Party against the Indemnifying Party, but the
fees and expenses of such counsel shall be for the account of such Indemnified
Party unless (i) the Indemnifying Party and the Indemnified Party shall have
mutually agreed to the retention of such counsel or (ii) in the reasonable
judgment of such Indemnified Party, representation of both parties by the same
counsel would be inappropriate due to actual or potential conflicts of
interest between them, it being understood, however, that the Indemnifying
Party shall not, in connection with any one such claim or action or separate
but substantially similar or related claims or actions in the same
jurisdiction arising out of the same general allegations or claims, be liable
for the fees and expenses of more than one separate firm of attorneys
(together with appropriate local counsel) at any time for all Indemnified
Parties, or for fees and expenses that are not reasonable. No Indemnifying
Party shall, without the prior written consent of the Indemnified Party,
effect any settlement of any claim or pending or threatened proceeding in
respect of which the Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Party
from all liability arising out of such claim or proceeding. Whether or not the
defense of any claim or action is assumed by the Indemnifying Party, such
Indemnifying Party will not be subject to any liability for any settlement
made without its consent, which consent will not be unreasonably withheld.
Section 4.4 Contribution. If the indemnification provided for in this
Article IV is unavailable to the Indemnified Parties in respect of any Damages
referred to herein, then each Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such Damages (i) as between the Company and
the Selling Holders on the one hand and the Underwriters on the other, in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Holders on the one hand and the Underwriters on the
other from the offering of the Registrable Securities, or if such allocation
is not permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits but also the relative fault of the
Company and the Selling Holders on the one band and of the Underwriters on the
other in connection with the statements or omissions which resulted in such
Damages, as well as any other relevant equitable considerations, and (ii) as
between the Company on the one hand and each Selling Holder on the other, in
such proportion as is appropriate to reflect the relative fault of the Company
and of each Selling Holder in connection with such statements or omissions, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Holders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering (net of underwriting discounts and
Commissions but before deducting expenses) received by the Company and the
Selling Holders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page or underwriting section of the prospectus. The relative fault of
the Company and the Selling Holders on the one hand and of the Underwriters on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
the Company and the Selling Holders or by the Underwriters. The relative fault
of the Company on the one hand and of each Selling Holder on the other shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such
party, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just and
equitable if contribution pursuant to this Section 4.4 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of
the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an
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Indemnified Party as a result of the Damages referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such
Indemnified Party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 4.4, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Registrable Securities underwritten by
it and distributed to the public were offered to the public exceeds the amount
of any damages which such Underwriter has otherwise been required to pay by
reason of such untrue or alleged untrue statement or omission or alleged
omission, and no Selling Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Registrable
Securities of such Selling Holder were offered to the public (less
underwriting discounts and commissions) exceeds the amount of any damages
which such Selling Holder has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No Person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any Person who was
not guilty of such fraudulent misrepresentation. Each Selling Holder's
obligation to contribute pursuant to this Section 4.4 is several and not
joint.
The indemnity, contribution and expense reimbursement obligations contained
in this Article IV are in addition to any liability any Indemnifying Party may
otherwise have to an Indemnified Party or otherwise. The provisions of this
Article IV shall survive, notwithstanding any transfer of the Registrable
Securities by any Holder or any termination of this Agreement.
ARTICLE V
MISCELLANEOUS
Section 5.1 Participation in Underwritten Registrations. No Person may
participate in any underwritten registration hereunder unless such Person (a)
agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to
approve such arrangements, and (b) completes and executes all questionnaires,
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements and these registration
rights; provided that (i) no Selling Holder shall be required to make any
representations or warranties except those which relate solely to such Holder
and its intended method of distribution, and (ii) the liability of each such
Holder to any Underwriter under such underwriting agreement will be limited to
liability arising from misstatements or omissions regarding such Holder and
its intended method of distribution and any such liability shall not exceed an
amount equal to the amount of net proceeds such Holder derives from such
registration; provided, however, that in an offering by the Company in which
any Holder requests to be included in a Piggy-Back Registration, the Company
shall use its best efforts to arrange the terms of the offering such that the
provisions set forth in clauses (i) and (ii) of this Section 5.1 are true;
provided further, that if the Company fails in its best efforts to so arrange
the terms, the Holder may withdraw all or any part of its Registrable
Securities from the Piggy-Back Registration and the Company shall reimburse
such Holder for all reasonable out-of-pocket expenses (including counsel fees
and expenses) incurred prior to such withdrawal.
Section 5.2 Rules 144 and 144A. The Company covenants that it will file any
reports required to be filed by it under the Securities Act and the Exchange
Act and that it will take such further action as any Holder may reasonably
request, all to the extent required from time to time to enable Holders to
sell Registrable Securities without registration under the Securities Act
within the limitation of the exemptions provided by (a) Rule 144 or Rule 144A
under the Securities Act, as such Rules may be amended from time to time, or
(b) any similar rule or regulation hereafter adopted by the Commission. Upon
the request of any Holder, the Company will deliver to such Holder a written
statement as to whether it has complied with such requirements.
Section 5.3 Holdback Agreements.
(a) Restrictions on Public Sale by Holder of Registrable Securities. Each
Holder agrees not to effect any public sale or distribution of the issue being
registered or of a similar security of the Company, or any securities
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convertible into or exchangeable or exercisable for such securities, including
a sale pursuant to Rule 144 or Rule 144A under the Securities Act, during the
14 days prior to, and during the 90-day period beginning on, the effective
date of any registration statement filed by the Company (except as part of
such registration), in the case of an underwritten public offering, if, and to
the extent, requested by the managing underwriter or underwriters.
The foregoing provisions shall not apply to any Holder that is prevented by
applicable statute or regulation from entering into any such agreement;
provided, however, that any such Holder shall undertake not to effect any
public sale or distribution of the class of securities covered by such
registration statement (except as part of such underwritten offering) during
such period unless it has provided 60 days' prior written notice of such sale
or distribution to the managing underwriter.
(b) Restrictions on Sale by the Company and Others. The Company agrees and
shall cause its Affiliates to agree (i) not to effect any public sale or
distribution of any securities similar to those being registered in accordance
with Section 2.1 hereof, or any securities convertible into or exchangeable or
exercisable for such securities, during the 14 days prior to, and during the
90-day period beginning on, the effective date of any Registration Statement
(except as part of such Registration Statement), in the case of an
underwritten offering, if, and to the extent, reasonably requested by the
managing Underwriter or Underwriters, and (ii) to use its best efforts to
ensure that any agreement entered into after the date hereof pursuant to which
the Company issues or agrees to issue any privately placed securities (other
than to officers or employees) shall contain a provision under which holders
of such securities agree not to effect any sale or distribution of any such
securities during the periods described in (i) above, in each case including a
sale pursuant to Rule 144 or Rule 144A under the Securities Act (except as
part of any such registration, if permitted); provided, however, that the
provisions of this paragraph (b) shall not prevent (x) the conversion or
exchange of any securities pursuant to their terms into or for other
securities or (y) the issuance of any securities to employees of the Company
or pursuant to any employee plan.
Section 5.4 Amendment and Modification. Any provision of this Agreement may
be waived, provided that such waiver is set forth in a writing executed by the
party against whom the enforcement of such waiver is sought. This Agreement
may not be amended, modified or supplemented other than by a written
instrument signed by (a) the Company, and (b) the holders of a majority of the
Registrable Securities held by the Holders; provided, however, that so long as
the Apollo Holders beneficially owns at least 25% of the Registrable
Securities held by the Apollo Holders on the Effective Date, without the
consent of the Apollo Holders, no amendment or modification which adversely
affects the rights or duties of the Apollo Holders hereunder may be effected;
and provided further, that no amendment or modification that would have a
material adverse effect on the rights or obligations of any Holder without
similarly and proportionately (based on the respective number of Shares then
owned by the Holders hereunder) affecting the rights and obligations of all
Holders hereunder, or that would otherwise unfairly discriminate against any
Holder, shall be effective as to such Holder unless such Holder shall have
consented in writing thereto. No course of dealing between or among any
Persons having any interest in this Agreement will be deemed effective to
modify, amend or discharge any part of this Agreement or any rights or
obligations of any Person under or by reason of this Agreement.
Section 5.5 Successors and Assigns: Entire Agreement.
(a) This Agreement and all of the provisions hereof shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns and executors, administrators and heirs; provided, that (i) except
as otherwise specifically permitted pursuant to this Agreement, neither this
Agreement nor any of the rights, interests or obligations hereunder shall be
assigned by the Company without the prior written consent of each of the
Holders and (ii) an Apollo Holder may assign a right to request a Demand
Registration in connection with a transfer of Registrable Securities held by
it.
(b) This Agreement sets forth the entire agreement and understanding between
the parties as to the subject matter hereof and merges and supersedes all
prior discussions, agreements and understandings of any and every nature among
them.
Section 5.6 Separability. In the event that any provision of this Agreement
or the application of any provision hereof is declared to be illegal, invalid
or otherwise unenforceable by a court of competent jurisdiction, the remainder
of this Agreement shall not be affected except to the extent necessary to
delete such illegal, invalid
12
<PAGE>
or unenforceable provision unless that provision held invalid shall
substantially impair the benefits of the remaining portions of this Agreement.
Section 5.7 Notices. All notices, demands, requests, consents or approvals
(collectively, "Notices") required or permitted to be given hereunder or which
are given with respect to this Agreement shall be in writing and shall be
personally delivered or delivered by a reputable overnight courier service
with charges prepaid, or transmitted by hand delivery, telegram, telex or
facsimile, addressed as set forth below, or such other address as such party
shall have specified most recently by written notice. Notice shall be deemed
given or delivered on the date of service or transmission if personally served
or transmitted by telegram, telex or facsimile. Notice otherwise sent as
provided herein shall be deemed given or delivered on the next business day
following delivery of such notice to a reputable overnight courier service.
To the Company:
Paragon Health Network, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346___
Attn:
Fax: (770) 698-8199
with a copy (which shall not constitute notice) to:
To Apollo Holders:
c/o Apollo Advisors II, L.P.
2 Manhattanville Road
Purchase, New York 10577
Attn: Tony Tortorelli
Fax: (914) 694-8032
with a copy (which shall not constitute notice) to:
Sidley & Austin
555 West Fifth Street
Suite 4000
Los Angeles, California 90013
Attn: Robert W. Kadlec, Esq.
Fax: (213) 896-6600
To the other Investors:
To the address specified on the signature page executed by such other
Investor.
Section 5.8 Governing Law. This Agreement shall be governed by and construed
in accordance with the internal law of the State of New York, without giving
effect to principles of conflicts of law.
Section 5.9 Headings. The headings in this Agreement are for convenience of
reference only and shall not constitute a part of this Agreement, nor shall
they affect their meaning, construction or effect.
Section 5.10 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original instrument and
all of which together shall constitute one and the same instrument.
13
<PAGE>
Section 5.11 Further Assurances. Each party shall cooperate and take such
action as may be reasonably requested by another party in order to carry out
the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 5.12 Termination. Unless sooner terminated in accordance with its
terms or as otherwise herein provided, this Agreement shall terminate upon the
earlier to occur of (i) the mutual agreement by the parties hereto, (ii) with
respect to any Holder, such Holder ceasing to own any Registrable Securities
or such Holder waiving, rescinding and terminating all of such Holder's rights
under this Agreement or (iii) the fifteenth anniversary of the Effective Date.
Section 5.13 Remedies. In the event of a breach or a threatened breach by
any party to this Agreement of its obligations under this Agreement, any party
injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement
and granted by law. The parties agree that the provisions of this Agreement
shall be specifically enforceable, it being agreed by the parties that the
remedy at law, including monetary damages, for breach of any such provision
will be inadequate compensation for any loss and that any defense or objection
in any action for specific performance or injunctive relief that a remedy at
law would be adequate is waived.
Section 5.14 Pronouns. Whenever the context may require, any pronouns used
herein shall be deemed also to include the corresponding neuter, masculine or
feminine forms.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
PARAGON HEALTH NETWORK, INC.
By:__________________________________
Name:
Title:
APOLLO HOLDERS
APOLLO INVESTMENT FUND III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:__________________________________
Name:
Title:
14
<PAGE>
APOLLO UK PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:__________________________________
Name:
Title:
APOLLO OVERSEAS PARTNERS III, L.P.
By: Apollo Advisors II, L.P.
Its General Partner
By: Apollo Capital Management II,
Inc.
Its General Partner
By:__________________________________
Name:
Title:
OTHER STOCKHOLDERS
CHASE EQUITY ASSOCIATES, L.P.
By: Chase Capital Partners
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
380 Madison Avenue
12th Floor
New York, New York 10017
Attention: Christopher C. Behrens
Telecopy No.: (212) 622-3101
with a copy to:
O'Sullivan Graev & Karabell, LLP
30 Rockefeller Plaza
New York, New York 10112
Attention: Michael F. Killea, Esq.
Telecopy No.: (212) 408-2420
15
<PAGE>
HEALTHCARE EQUITY PARTNERS, L.P.
By: Beecken, Petty & Company, L.L.C.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
c/o Beecken, Petty & Company, L.L.C.
901 Warrenville Road, Suite 205
Lisle, Illinois 60532
Attention: David K. Beecken
Telecopy No.: (630) 435-0370
HEALTHCARE EQUITY QP PARTNERS, L.P.
By: Beecken, Petty & Company, L.L.C.
Its General Partner
By:
----------------------------------
Name:
Title:
Shares of Common Stock
Address for Notice:
c/o Beecken, Petty & Company,
L.L.C.
901 Warrenville Road, Suite 205
Lisle, Illinois 60532
Attention: David K. Beecken
Telecopy No.: (630) 435-0370
16
<PAGE>
KEY CAPITAL CORPORATION
By:
----------------------------------
Stephen R. Haynes
Vice President
Shares of Company Common
Stock
Address:
127 Public Square, 6th Floor
Cleveland, OH 44114
Attention: Stephen R. Haynes
Telecopy No.: (216) 689-3204
KEY EQUITY PARTNERS 97
By:
----------------------------------
Stephen R. Haynes
Its: General Partner
Shares of Company Common
Stock
Address:
127 Public Square, 6th Floor
Cleveland, OH 44114
Attention: Stephen R. Haynes
Telecopy No.: (216) 689-3204
17
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF MAYOR, DAY, CALDWELL & KEETON, L.L.P.]
September 26, 1997
Living Centers of America, Inc.
15415 Katy Freeway
Houston, Texas 77094
Ladies and Gentlemen:
We have acted as counsel for Living Centers of America, Inc., a Delaware
corporation (the "Company"), in connection with the registration and proposed
issuance of up to an aggregate of 11,719,067 (the "Shares") of Common Stock,
par value $0.01 per share, of the Company ("Common Stock"), to be issued as
described in the Company's Registration Statement on Form S-4, filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
("Registration Statement"). In such capacity, we have familiarized ourselves
with the Articles of Incorporation, as amended to date, and Bylaws of the
Company, as amended to date, and have examined all statutes and other records,
instruments and documents pertaining to the Company that we have deemed
necessary to examine for the purposes of this opinion.
Based upon our examination as aforesaid, we are of the opinion that:
1. The Company is a corporation duly incorporated, validly existing and in
good standing under the laws of the State of Delaware; and
2. Upon the issuance of the Shares by the Company in accordance with the
terms of the Merger Agreements (as defined in the Registration
Statement), such Shares will be duly authorized, validly issued, fully
paid and nonassessable shares of Common Stock.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name in the Registration Statement at each place in which it appears.
Sincerely,
/s/ Mayor, Day Caldwell & Keeton,
L.L.P.
Mayor, Day, Caldwell & Keeton,
L.L.P.
<PAGE>
EXHIBIT 8.1
[Letterhead of Powell, Goldstein, Frazer & Murphy LLP]
September 26, 1997
GRANCARE, INC. ONE RAVINIA DRIVE SUITE 1500 ATLANTA, GEORGIA 30346
Re: Registration Statement on Form S-4 of Living Centers of America, Inc.
("LCA") containing the Proxy Statement/Prospectus for LCA and the Proxy
Statement/Prospectus for GranCare, Inc. ("GranCare") dated September
26, 1997 (the "Joint Proxy Statement/Prospectus")
Gentlemen:
You have requested our opinion concerning certain of the federal income tax
consequences of certain of the transactions described in the Joint Proxy
Statement/Prospectus; specifically, the tax consequences of the "GranCare
Merger" and the tax consequences of the GranCare Merger on the "Previous
Transactions" (as those terms are defined in the Joint Proxy
Statement/Prospectus). In connection with rendering this opinion we have made
certain assumptions and we have assumed that certain representations,
including representations of the management of GranCare and LCA, as to the
facts upon which this opinion is based will be made prior to the closing of
the GranCare Merger.
Based upon the assumptions and the representations, we confirm our opinions
as set forth in the Joint Proxy Statement/Prospectus under the headings "THE
GRANCARE MERGER AGREEMENT; CERTAIN FEDERAL INCOME TAX CONSEQUENCES--Tax
Opinions" and "Effect of GranCare Merger on Tax Consequences of Previous
Transactions."
The opinion addresses only the effect under the federal income tax laws of
the GranCare Merger and the tax consequences of the GranCare Merger on
Previous Transactions, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of other federal laws, the laws
of any state of other jurisdiction, or as to any matters of municipal law or
the laws of any other local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such Joint
Proxy Statement/Prospectus and the reference to our firm and the above-
mentioned opinion under the heading "CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
included in the Joint Proxy Statement/Prospectus. In giving such consent, we
do not thereby admit that we are acting within the category of persons whose
consent is required under Section 7 of the Securities Act and the rules and
regulations of the Securities and Exchange Commission thereunder.
Very truly yours,
/s/ Powell, Goldstein, Frazer & Murphy LLP
------------------------------------------
Powell, Goldstein, Frazer & Murphy LLP
<PAGE>
EXHIBIT 8.2
September 26, 1997
GranCare, Inc.
One Ravinia Drive
Suite 1500
Atlanta, Georgia 30346
Re: Registration Statement on Form S-4 of Living Centers of America,
Inc. ("LCA") containing the Joint Proxy Statement/Prospectus of LCA
and GranCare, Inc. ("GranCare") dated September 26, 1997 (the
"Registration Statement").
Gentlemen:
You have requested our opinion concerning certain of the federal income tax
consequences of certain of the transactions described in the Registration
Statement specifically the "GranCare Merger" (as such term is defined in the
Registration Statement). In connection with rendering this opinion, we have
made certain assumptions and we have assumed that certain representations of
the management of GranCare and LCA as to the facts upon which this opinion is
based will be made prior to the closing of the GranCare Merger.
Based upon the assumptions and the representations, we confirm our opinions
as set forth in the Registration Statement under the heading "The GranCare
Merger Agreement--Certain Federal Income Tax Consequences."
This opinion addresses only the effect under the federal income tax laws of
the GranCare Merger, and we express no opinion with respect to the
applicability thereto, or the effect thereon, of other federal laws, the laws
of any state or other jurisdiction, or as to any matters of municipal law or
the laws of any other local agencies within any state.
We hereby consent to the filing of this opinion as an exhibit to such
Registration Statement and the reference to our firm and the above-mentioned
opinion under the heading "The GranCare Merger Agreement--Certain Federal
Income Tax Consequences" included in the Registration Statement. In giving
such consent, we do not thereby admit that we are acting within the category
of persons whose consent is required under Section 7 of the Securities Act and
the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
/s/ Andrews & Kurth L.L.P.
_____________________________________
Andrews & Kurth L.L.P.
<PAGE>
EXHIBIT 8.3
[LETTERHEAD OF MAYOR, DAY, CALDWELL & KEETON, L.L.P.]
September 26, 1997
Living Centers of America, Inc.
15415 Katy Freeway, Suite 800
Houston, Texas 77094
Re: Registration Statement on Form S-4 of Living Centers of America, Inc.
Ladies and Gentlemen:
We have been requested to render this opinion in connection with a
transaction in which Living Centers of America, Inc. ("LCA") intends to
undertake the transactions described in the above-referenced Registration
Statement filed with the Securities and Exchange Commission that contains the
Joint Proxy Statement/Prospectus of LCA and GranCare, Inc. (the "Proxy
Statement/Prospectus"). Capitalized terms not defined herein have the meanings
ascribed to them in the Proxy Statement/Prospectus.
Based upon our review of the Recapitalization Merger Agreement, the GranCare
Merger Agreement and such other documents as we have deemed necessary, upon
and subject to the facts as set forth in the Proxy Statement/Prospectus and
upon representations made to us by LCA, we hereby confirm that our opinion set
forth under the heading "The Recapitalization Merger Agreement--Certain
Federal Income Tax Consequences" in the Proxy Statement/Prospectus addresses
the material U.S. federal income tax consequences generally applicable to the
Reorganization Merger, under currently applicable law, subject to the
qualifications stated in the Proxy Statement/Prospectus.
Our opinion is based on our analysis of the law and express what we believe
a court should properly hold if presented with such issues, but is not in any
way binding on the Internal Revenue Service ("Service") or the courts. Our
opinion is based on the Internal Revenue Code of 1986 and the regulations
promulgated thereunder, and court decisions and revenue rulings and procedures
of the Service, all as currently existing and in effect as of the date of this
opinion letter. Any of the foregoing authorities is subject to change either
prospectively or retroactively. Such changes could be applied retroactively to
completed transactions, and any such change could affect our opinion. Our
opinion is rendered as of the date hereof based on the facts in existence on
the date hereof, and we undertake no, and hereby disclaim any, obligation to
advise you of any changes or any new developments that may be brought to our
attention at a later date. We do not express any opinion concerning the tax
consequences of the Recapitalization Merger or the GranCare Merger other than
those expressly set forth above. This opinion letter is limited to the matters
stated herein and no opinion is implied or may be inferred beyond the matters
expressly stated herein.
We hereby consent to the filing of this opinion letter as an exhibit to the
Registration Statement on Form S-4 and to the use of our name under the
headings "The Recapitalization Merger Agreement--Certain Federal Income Tax
Consequences" and "Legal Opinions" in the Proxy Statement/Prospectus. In
giving this consent, we do not thereby admit that we come within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or the rules or regulations of the Commission.
Sincerely,
/s/ Mayor, Day, Caldwell & Keeton,
L.L.P.
_____________________________________
Mayor, Day, Caldwell & Keeton,
L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT AND REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 25, 1997 (except for Note 13 as to which
the date is March 6, 1997) with respect to the consolidated financial
statements of GranCare, Inc. included in the Proxy Statement of Living Centers
of America, Inc. that is made a part of the Registration Statement (Form S-4)
and Prospectus of Living Centers of America, Inc. for the registration of its
common stock.
We have audited the consolidated financial statements of GranCare, Inc. as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, and have issued our report thereon dated February 25,
1997 (except for Note 13 as to which the date is March 6, 1997) included
elsewhere in this Registration Statement. Our audits also included the
financial statement schedule listed in Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion based on our audits.
In our opinion, as of the dates of our report referred to in the preceding
paragraph, the financial statement schedule referred to above, when considered
in relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
_____________________________________
ERNST & YOUNG LLP
Atlanta, Georgia
September 25, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and
"Selected Historical Consolidated Financial Information" in the Registration
Statement (Form S-4) and related Prospectus of Living Centers of America, Inc.
for the registration of 11,719,067 shares of its common stock and to the
incorporation by reference therein of our report dated November 25, 1996, with
respect to the consolidated financial statements and schedule of Living
Centers of America, Inc. included in its Annual Report (Form 10-K/A) for the
year ended September 30, 1996, filed with the Securities and Exchange
Commission.
/s/ Ernst & Young LLP
_____________________________________
ERNST & YOUNG LLP
Houston, Texas
September 25, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Board of Directors
Evergreen Healthcare, Inc.
We consent to the use of our report included herein, and to the reference to
our Firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
_____________________________________
KPMG PEAT MARWICK LLP
Indianapolis, Indiana
September 26, 1997
<PAGE>
EXHIBIT 99.1
CONSENT OF CREDIT SUISSE FIRST BOSTON CORPORATION
We hereby consent to the use of Annex VI containing our opinion letter dated
September 17, 1997 to the Board of Directors of Living Centers of America,
Inc. (the "Company") in the Joint Proxy Statement-Prospectus constituting a
part of the Registration Statement on Form S-4 relating to the proposed
recapitalization of the Company and merger with GranCare, Inc. and to the
references to our firm in such Joint Proxy Statement-Prospectus. In giving
this consent, we do not admit that we come within the category of persons
whose consent is required under Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
CREDIT SUISSE FIRST BOSTON CORPORATION
/s/ Trygve Mikkelsen
By: ______________________________________
New York, New York
September 24, 1997
<PAGE>
EXHIBIT 99.2
CONSENT OF NATIONSBANK CAPITAL MARKETS, INC.
We hereby consent to the inclusion of our opinion letter to the board of
directors of Living Centers of America, Inc. ("LCA") as Appendix VII to the
Joint Proxy Statement/Prospectus of LCA and GranCare, Inc. relating to the
Transactions (as defined in such opinion). In giving such consent, we do not
admit that we come within the category of persons whose consent is required
under, and we do not admit that we are "experts" for purposes of, the
Securities Act of 1933 and the rules and regulations promulgated thereunder.
/s/ NationsBanc Capital Markets, Inc.
- -------------------------------------
NATIONSBANC CAPITAL MARKETS, INC.
Charlotte, North Carolina
September 24, 1997
<PAGE>
EXHIBIT 99.3
[SMITH BARNEY INC. LETTERHEAD]
The Board of Directors GranCare, Inc. 1 Ravinia Drive Atlanta, Georgia 30346
Members of the Board:
We hereby consent to the inclusion of our opinion letter to the Board of
Directors of GranCare, Inc. ("GranCare") as Annex VIII to the Joint Proxy
Statement/Prospectus of GranCare and Living Centers of America, Inc. ("LCA")
relating to the proposed merger transaction involving GranCare and LCA and
references thereto in such Joint Proxy Statement/Prospectus under the captions
"SUMMARY--Opinions of GranCare Financial Advisors--Smith Barney Inc." and
"DESCRIPTION OF THE TRANSACTIONS--Opinions of GranCare Financial Advisors--
Opinion of Smith Barney Inc." In giving such consent, we do not admit that we
come within the category of persons whose consent is required under, and we do
not admit that we are "experts" for purposes of, the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
By: /s/ Smith Barney Inc.
-------------------------------
SMITH BARNEY INC.
September 26, 1997
<PAGE>
EXHIBIT 99.4
[ON CHASE SECURITIES INC. LETTERHEAD]
We hereby consent to the use of our opinion letter dated September 15, 1997
to the Board of Directors of GranCare, Inc. ("GranCare") included as Annex IX
to the Proxy Statement/Prospectus which forms a part of the Registration
Statement on Form S-4 relating to the proposed merger of Sub, a wholly-owned
subsidiary of Living Centers of America, Inc., ("LCA") with and into GranCare
after giving effect to the recapitalization of LCA and to the references to
such opinion in such Proxy Statement/Prospectus. In giving such consent, we do
not admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder,
nor do we thereby admit that we are experts with respect to any part of such
Registration Statement within the meaning of the term "experts" as used in the
Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
CHASE SECURITIES INC.
By: /s/ Michael Goldberg
---------------------------------
<PAGE>
EXHIBIT 99.5
X PLEASE MARK YOUR VOTE AS THIS
- ---
ORF
AGAINST
ABSTAIN
1. To approve the Recapitalization Merger Agreement and the transactions
contemplated thereby.
2. To approve the LCA Stock Issuance and the transactions contemplated
thereby.
3. To approve the Amendment Proposal.
4. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting. Each of the above-named
proxies present at said meeting, either in person or by substitute, shall have
and exercise all the powers of said proxies hereunder. THIS PROXY WILL BE
VOTED IN ACCORDANCE WITH THE CHOICES SPECIFIED BY THE UNDERSIGNED. IF NO
SPECIFICATIONS TO THE CONTRARY ARE INDICATED HEREON, THIS PROXY WILL BE
TREATED AS A GRANT OF AUTHORITY TO VOTE FOR PROPOSALS 1, 2 and 3. PLEASE SIGN,
DATE AND RETURN YOUR PROXY PROMPTLY IN THE POSTAGE PREPAID ENVELOPE PROVIDED.
Signature(s) ______________Date _______________________________________________
NOTE: Please sign exactly as your name appears hereon. When signing as
attorney, executor, administrator, trustee or guardian, please give full
title as such. If shares are held jointly, each holder should sign.
<PAGE>
LIVING CENTERS OF AMERICA, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS -- OCTOBER 28, 1997
The undersigned stockholder of Living Centers of America, Inc., a Delaware
corporation (the "Company"), acknowledges receipt of the Notice of Special
Meeting of Stockholders and Joint Proxy Statement/Prospectus, dated September
26, 1997, and the undersigned revokes all other proxies and appoints Edward L.
Kuntz and Susan Thomas Whittle, and each of them, the attorneys and proxies
for the undersigned, each with full power of substitution, to attend and act
for the undersigned at the Company's Special Meeting of Stockholders at 10:00
a.m., local time, October 28, 1997 and at any adjournments or postponements
thereof in connection therewith to vote and represent all of the shares of the
Company's Common Stock which the undersigned would be entitled to vote.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE)
<PAGE>
EXHIBIT 99.6
X PLEASE MARK YOUR VOTE AS THIS
- ---
ORF
AGAINST
ABSTAIN
1. To approve the GranCare Merger Agreement and the transactions contemplated
thereby.
2. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting. Each of the above-named
proxies present at said meeting, either in person or by substitute, shall have
and exercise all the powers of said proxies hereunder. THIS PROXY WILL BE
VOTED IN ACCORDANCE WITH THE CHOICES SPECIFIED BY THE UNDERSIGNED. IF NO
SPECIFICATIONS TO THE CONTRARY ARE INDICATED HEREON, THIS PROXY WILL BE
TREATED AS A GRANT OF AUTHORITY TO VOTE FOR PROPOSAL 1. PLEASE SIGN, DATE AND
RETURN YOUR PROXY PROMPTLY IN THE POSTAGE PREPAID ENVELOPE PROVIDED.
Signature(s) ______________Date _______________________________________________
NOTE: Please sign exactly as your name appears hereon. When signing as
attorney, executor, administrator, trustee or guardian, please give full
title as such. If shares are held jointly, each holder should sign.
<PAGE>
GRANCARE, INC.
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
FOR SPECIAL MEETING OF STOCKHOLDERS -- OCTOBER 28, 1997
The undersigned stockholder of GranCare, Inc., a Delaware corporation (the
"Company"), acknowledges receipt of the Notice of Special Meeting of
Stockholders and Joint Proxy Statement/Prospectus, each dated September 26,
1997, and the undersigned revokes all other proxies and appoints Gene E.
Burleson and Evrett W. Benton, and each of them, the attorneys and proxies for
the undersigned, each with full power of substitution, to attend and act for
the undersigned at the Company's Special Meeting of Stockholders at 11:00
a.m., local time, October 28, 1997 and at any adjournments or postponements
thereof in connection therewith to vote and represent all of the shares of the
Company's Common Stock which the undersigned would be entitled to vote.
(CONTINUED AND TO BE SIGNED AND DATED ON REVERSE SIDE)
<PAGE>
EXHIBIT 99.7
FORM OF STOCK ELECTION
FOR HOLDERS OF SHARES OF
COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF
LIVING CENTERS OF AMERICA, INC.
DESIRING TO MAKE AN LCA STOCK ELECTION
PURSUANT TO AN
AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER
DATED AS OF SEPTEMBER 17, 1997
THE PAYING AGENT:
AMERICAN STOCK TRANSFER & TRUST COMPANY
BY MAIL: BY FACSIMILE: BY HAND OR OVERNIGHT COURIER:
40 WALL STREET (718) 234-5001 40 WALL STREET
46TH FLOOR 46TH FLOOR
NEW YORK, NY 10005 NEW YORK, NY 10005
CONFIRM BY TELEPHONE TO:
(718) 927-8200
OR (212) 936-5100
INFORMATION AGENT:
D.F. KING & CO., INC.
77 WATER STREET
NEW YORK, NY 10005
Tel: (800) 628-8509
This Form is to be completed by holders ("Holder") of common stock, par
value $0.01 ("Share") ("LCA Common Stock"), of Living Centers of America, Inc.
("LCA" or the "Company") and is to accompany the certificates for shares ("LCA
Electing Shares") of LCA Common Stock, if such certificates are submitted or
if delivery of LCA Electing Shares is to be made by book-entry transfer to the
account of American Stock Transfer & Trust Company (the "Paying Agent") at the
Depository Trust Company or the Philadelphia Depository Trust Company (each, a
"Book-Entry Transfer Facility" and, collectively, the Book-Entry Transfer
Facilities) following book-entry transfer procedures, pursuant to an election
(an "LCA Stock Election") to retain shares of LCA Common Stock as shares of
the recapitalized and merged LCA ("LCA Retained Shares") in connection with
the recapitalization of the Company by the merger (the "Recapitalization
Merger") of Apollo LCA Acquisition Corporation with and into LCA, with LCA as
the surviving corporation to be renamed Paragon Health Network, Inc.
("Paragon"), and the subsequent merger of GranCare, Inc. ("GranCare") with a
wholly-owned subsidiary of Paragon with GranCare surviving and continuing as a
wholly owned subsidiary of Paragon (the "GranCare Merger", and together with
the Recapitalization Merger and the transactions contemplated thereby, the
"Transactions").
HOLDERS OF LCA COMMON STOCK SHOULD ONLY SUBMIT THIS FORM IF THEY WISH TO
MAKE AN LCA STOCK ELECTION AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS ("PROXY STATEMENT") DATED SEPTEMBER 26, 1997. BECAUSE OF
THE PRORATION PROCEDURES DESCRIBED IN THE PROXY STATEMENT, STOCKHOLDERS WHO
MAKE AN LCA STOCK ELECTION MAY NOT RECEIVE THE AMOUNT OF CASH AND RETAIN THE
NUMBER OF LCA RETAINED SHARES THAT THEY ELECT. STOCKHOLDERS WHO DO NOT WISH TO
MAKE AN LCA STOCK ELECTION (ANY SUCH HOLDER, A "NON-ELECTING HOLDER") SHOULD
NOT SUBMIT THIS FORM. EACH SHARE OF LCA COMMON STOCK OWNED BY ANY SUCH NON-
ELECTING HOLDER WILL, SUBJECT TO THE ELECTION AND PRORATION PROCEDURES
DESCRIBED IN THE PROXY STATEMENT, BE CONVERTED INTO THE RIGHT TO RECEIVE
$40.50 IN CASH FROM PARAGON FOLLOWING THE MERGER.
HOLDERS WHO MAKE AN LCA STOCK ELECTION WILL BE DEEMED TO HAVE ACCEPTED THE
CONSIDERATION TO BE PAID IN THE RECAPITALIZATION MERGER AND TO HAVE WAIVED
APPRAISAL RIGHTS WITH RESPECT TO THEIR LCA ELECTING SHARES.
This Form of Stock Election is to be completed, signed and mailed or
delivered (or transmitted by telecopy facsimile) by Holders who desire to make
an LCA Stock Election to the Paying Agent, together with such Holders' share
certificates (or the attached Notice of Guaranteed Delivery of share
certificates), by 5:00 p.m. New York City time on the business day immediately
preceding the day on which the vote on the approval of the Recapitalization
Merger Agreement at the LCA Special Meeting is to be taken (or any adjournment
thereof) (the "LCA Election Deadline") in order to effect an LCA Stock
Election.
DELIVERY OF THIS FORM OF STOCK ELECTION AFTER SUCH DEADLINE OR TO ANY
ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
SEE INSTRUCTION A.
<PAGE>
The Instructions accompanying this Form of Stock Election should be read
carefully before this Form of Stock Election is completed and transmitted.
The LCA Board of Directors makes no recommendations as to whether or not you
should make an LCA Stock Election. You should make your own decision, in
consultation with your own financial and tax advisors, as to whether or not to
make an LCA Stock Election.
List below the certificates for Shares as to which this Form of Stock
Election relates. If the space below is inadequate, the certificate number and
number of shares should be listed on a separate signed schedule affixed
hereto.
DESCRIPTION OF CERTIFICATES SUBMITTED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND ADDRESS(ES) OF
REGISTERED HOLDER(S),
EXACTLY AS NAME(S) APPEAR(S) ON
CERTIFICATE(S) (1) CERTIFICATE(S)BEING SUBMITTED
(PLEASE FILL IN, IF BLANK) (ATTACH ADDITIONAL SIGNED LIST IF NECESSARY)
- ------------------------------------------------------------------------------
NUMBER OF SHARES
CERTIFICATE REPRESENTED BY NUMBER OF SHARES
NUMBER(S)* CERTIFICATE(S) SUBMITTED (2)
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
--------------------------------------------------
TOTAL SHARES
</TABLE>
(1) Only certificates registered in a single form may be deposited with this
Form of Stock Election. If certificates are registered in different forms
(e.g., John R. Doe and J. R. Doe), it will be necessary to fill in, sign
and submit as many separate Forms of Stock Election as these are different
registrations of certificates. Additional copies of the Form of Stock
Election may be obtained by contacting the Information Agent at the
address and telephone number set forth above.
(2) Unless otherwise indicated in the box set forth above, it will be assumed
that all shares related to a submitted certificate are to be treated as
having made an LCA Stock Election.
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
2
<PAGE>
PLEASE READ CAREFULLY INSTRUCTION A IF COMPLETING THE BOXES BELOW.
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if the cer-
To be completed ONLY if a check tificate for LCA Retained Shares
is to be made payable to someone is to be registered in the name
other than the registered hold- of, or a check is to be made pay-
er(s) of LCA Common Stock. All able to, the registered holder(s)
Stock certificates for LCA Re- of shares of LCA Common Stock,
tained Shares will be issued in but is to be sent to someone
the name of the registered holder other than the registered hold-
of the LCA Common Stock submitted er(s) or to an address other than
herewith. that shown under "Description of
Certificates Submitted."
Issue check to:
Mail certificate and/or check to:
Name: ____________________________ Name: ____________________________
(PLEASE PRINT OR TYPE) (PLEASE PRINT OR TYPE)
__________________________________ __________________________________
(PLEASE PRINT OR TYPE) (PLEASE PRINT OR TYPE)
Address: _________________________ Address: _________________________
__________________________________ __________________________________
__________________________________ __________________________________
(PRINT ADDRESS, INCLUDING ZIP (PRINT ADDRESS, INCLUDING ZIP
CODE) CODE)
__________________________________
(TAXPAYER IDENTIFICATION OR
SOCIAL SECURITY NO.)
(SEE ALSO SUBSTITUTE FORM W-9
ATTACHED)
[_] CHECK HERE IF SHARES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY SEPARATELY DELIVERED AND COMPLETE THE FOLLOWING:
Name(s) of Holder(s): _________________________________________________________
Date of Execution of Notice of Guaranteed Delivery: ___________________________
Name of Eligible Institution that Guaranteed Delivery: ________________________
If Shares are to be delivered by Book-Entry Transfer, check box of Book-Entry
Transfer Facility
[_] The Depository Trust Company [_] Philadelphia Depository Trust
Company
Account Number: ________________ Transaction Code Number: _________________
PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED DELIVERY.
[_] CHECK HERE IF YOU CANNOT LOCATE CERTIFICATES. UPON RECEIPT OF THIS FORM OF
STOCK ELECTION, THE PAYING AGENT WILL CONTACT YOU DIRECTLY WITH REPLACEMENT
INSTRUCTIONS.
[_] CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE
PAYING AGENT'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER FACILITIES AND
COMPLETE THE FOLLOWING:
Name of Electing Institution: _________________________________________________
[_] The Depository Trust Company [_] Philadelphia Depository Trust
Company
Account Number: ________________ Transaction Code Number: _________________
(DO NOT WRITE IN SPACES BELOW)
<TABLE>
<CAPTION>
SHARES
CONVERTED
INTO SHARES AMOUNT
SHARES SHARES RETAINED CERTIFICATE BLOCK CONVERTED CHECK OF
SUBMITTED ACCEPTED SHARES NO. NO. INTO CASH NO. CHECK
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
Delivery Prepared Checked By: __________ Dated: _______________
By: __________________
3
<PAGE>
HOLDER'S AGREEMENT
AMERICAN STOCK TRANSFER & TRUST COMPANY
THE PAYING AGENT
LADIES AND GENTLEMEN:
In connection with the recapitalization of Living Centers of America, Inc.
("LCA" or the "Company") by the merger (the "Recapitalization Merger") of
Apollo LCA Acquisition Corp. ("Apollo Sub") with and into LCA, with LCA as the
surviving corporation to be renamed Paragon Health Network, Inc. ("Paragon"),
and the subsequent merger of GranCare, Inc. ("GranCare"), with a wholly owned
subsidiary of Paragon ("Paragon Sub"), with GranCare being the surviving
corporation and continuing as a wholly owned subsidiary of Paragon (the
"GranCare Merger" and together with the Recapitalization Merger and the
transactions contemplated thereby the "Transactions"), the undersigned hereby
submits the certificate(s) for shares of LCA common stock, par value $0.01 per
share, of LCA ("Share") listed below, or hereby transfers ownership of such
share certificates on the account books maintained by the Book-Entry Transfer
Facility and elects (an "LCA Stock Election"), subject as set forth below, to
have all or a specified portion of the Shares represented by such certificates
as set forth below ("LCA Electing Shares") retained as shares of Paragon
Common Stock following the Transactions ("LCA Retained Shares").
The undersigned acknowledges that his or her LCA Stock Election and
submission of LCA Electing Shares is subject to the terms, conditions and
limitations set forth in (i) the Joint Proxy Statement/Prospectus, dated as of
September 26, 1997, as amended (the "Proxy Statement"), relating to the
Amended and Restated Agreement and Plan of Merger dated as of September 17,
1997 by and among Apollo Management, L.P., ("Apollo"), Apollo Sub and LCA (the
"Recapitalization Merger Agreement"), and the Amended and Restated Agreement
and Plan of Merger dated as of September 17, 1997, by and among LCA, GranCare,
Apollo and LCA Acquisition Sub, Inc. (the "GranCare Merger Agreement"),
receipt of which is acknowledged by the undersigned, (ii) the terms of the
Recapitalization Merger Agreement a conformed copy of which appears as Annex I
to the Proxy Statement and (iii) the accompanying Instructions.
The undersigned understands that the purpose of the election procedure is to
permit holders of Shares to express their preference for the type of
consideration they wish to receive or retain in the Transactions, and
understands that any LCA Stock Election is subject to the proration procedures
and other limitations described in the Recapitalization Merger Agreement, the
Proxy Statement and Instruction C.
THE UNDERSIGNED ACKNOWLEDGES THAT THE LCA BOARD OF DIRECTORS MAKES NO
RECOMMENDATION AS TO WHETHER OR NOT THE UNDERSIGNED SHOULD MAKE AN LCA STOCK
ELECTION. EACH STOCKHOLDER SHOULD MAKE HIS OR HER OWN DECISION, IN
CONSULTATION WITH HIS OR HER OWN FINANCIAL AND TAX ADVISORS, AS TO WHETHER OR
NOT TO MAKE AN LCA STOCK ELECTION.
The undersigned represents and warrants that the undersigned has full power
and authority to submit the Share certificate(s) submitted herewith or covered
by a Notice of Guaranteed Delivery, free and clear of any liens, claims,
charges or encumbrances whatsoever. The undersigned understands and
acknowledges that the method of delivery of the Share certificate(s) and all
other required documents is at the option and risk of the undersigned and that
the risk of loss and title to such Share certificate(s) shall pass only after
the Paying Agent has actually received the Share certificate(s). All questions
as to the election revocation, change and form of any election and surrender
of Share certificate(s) hereunder shall be determined by the Paying Agent in
its reasonable discretion, and such determination shall be binding and
conclusive. The undersigned, upon request, shall execute and deliver all
additional documents deemed by the Paying Agent or LCA to be necessary or
desirable to complete the sale, assignment, transfer, cancellation, and
retirement of the Shares delivered herewith.
The undersigned understands that in lieu of any fractional share, LCA will
pay to each stockholder who otherwise would be entitled to receive a
fractional share of an LCA Retained Share an amount in cash determined by
multiplying (i) $40.50 by (ii) the fractional interest in an LCA Retained
Share to which such holder would otherwise be entitled.
The undersigned authorizes and instructs you, as Paying Agent, to deliver
certificates of LCA Electing Shares to the Company and to receive on behalf of
the undersigned, in exchange for LCA Electing Shares represented thereby, any
certificate for LCA Retained Shares or any check for cash issuable in exchange
for the Shares represented by such certificates
4
<PAGE>
pursuant to the Recapitalization Merger Agreement. If certificates of LCA
Electing Shares are not delivered herewith, there is furnished herewith a
Notice of Guaranteed Delivery of such certificates representing LCA Electing
Shares from a member of a national securities exchange, a member of the
National Association of Securities Dealers, Inc. or a commercial bank or trust
company having an office in the United States duly endorsed in blank or
otherwise in form acceptable for transfer on the books of LCA.
The undersigned understands and agrees that the Paying Agent will issue any
certificate for LCA Retained Shares and/or (unless otherwise indicated in the
box entitled "Special Payment Instructions") any check issuable in exchange
for LCA Electing Shares represented by the certificates submitted hereby in
the name of the registered holder(s) of such LCA Electing Shares appearing in
the box "Description of Certificates Submitted." Similarly, unless otherwise
indicated in the box entitled "Special Delivery Instructions," the undersigned
understands and agrees that the Paying Agent will mail any certificate for LCA
Electing Shares and/or any check for cash issuable in exchange for LCA
Electing Shares represented by the certificates submitted hereby to the
registered holder(s) of the LCA Electing Shares at the address or addresses
appearing in the box entitled "Description of Certificates Submitted."
In the event that the boxes entitled "Special Payment Instructions" and
"Special Delivery Instructions" are both completed, the undersigned
understands and agrees that the Paying Agent will issue any check in the
name(s) of, and mail such check to, the person(s) so indicated.
PLEASE READ CAREFULLY THE ACCOMPANYING INSTRUCTIONS SET FORTH BELOW BEFORE
COMPLETING AND TRANSMITTING THIS FORM OF STOCK ELECTION.
5
<PAGE>
SIGNATURE OF HOLDER(S)
The undersigned represents that he or she is a Holder
as described in the Holder's Agreement set forth above
on Pages 4 and 5 hereof and has read and agrees to all
of the terms and conditions of such Holder's
Agreement.
SIGN HERE
.......................................................
.......................................................
(SIGNATURE(S) OF HOLDER(S))
Date: ..............................
(Must be signed by registered holder(s) exactly as
name(s) appear(s) on certificate(s) or on a security
position listing or by person(s) authorized to become
registered holder(s) by certificates and documents
transmitted herewith. If signature is provided by an
officer on behalf of a corporation or by an executor,
administrator, trustee, guardian, attorney, agent or
other person acting in a fiduciary or representative
capacity, please provide the following information.
See Instruction A.)
Name(s)................................................
................................................
(PLEASE PRINT)
Capacity (full title)..................................
Address................................................
................................................
(INCLUDE ZIP CODE)
Area Code and Telephone No.............................
Tax Identification or Social Security Number(s) .......
Dated: ........................ 1997
6
<PAGE>
SIGNATURE GUARANTEE
(If Required--See Instruction A)
The undersigned guarantees the signature(s) which
appear(s) on this Form of Stock Election and the
certificate(s) submitted pursuant to this Form of
Stock Election.
Authorized Signature...................................
Name...................................................
................................................
(PLEASE PRINT OR TYPE)
Title .................................................
Name of Firm ..........................................
Address................................................
................................................
(ADDRESS OF GUARANTEEING FIRM, INCLUDING ZIP
CODE)
Area Code and Telephone Number.........................
Tax Identification or Social Security Number(s) .......
Dated: ........................ 1997
TO PREVENT BACK-UP WITHHOLDING OF CASH PAYMENTS THAT ARE MADE WITH RESPECT TO
SHARES AS TO WHICH AN LCA STOCK ELECTION IS MADE PURSUANT TO THE
RECAPITALIZATION MERGER, A HOLDER MUST COMPLETE A FORM W-9, WHICH IS ENCLOSED.
REMEMBER TO ENCLOSE YOUR CERTIFICATES
7
<PAGE>
INSTRUCTIONS
Forming Part of the Terms and Conditions of the Proxy Statement,
the Recapitalization Merger Agreement and the Holder's Agreement
THE METHOD OF DELIVERY OF THE FORM OF STOCK ELECTION, CERTIFICATES FOR LCA
ELECTING SHARES AND ALL OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND RISK OF
THE HOLDER, BUT IF SENT BY MAIL, REGISTERED MAIL WITH THE RETURN RECEIPT
REQUESTED AND PROPERLY INSURED, IS STRONGLY RECOMMENDED. DELIVERY SHALL BE
EFFECTED, AND RISK OF LOSS OF CERTIFICATES SHALL PASS, ONLY AFTER PROPER
DELIVERY TO THE PAYING AGENT OF THE FORM OF STOCK ELECTION, CERTIFICATES FOR
SHARES OF LCA ELECTING SHARES, A FORM W-9 AND ALL OTHER REQUIRED DOCUMENTS.
A. GENERAL.
1. EXECUTION AND DELIVERY. This Form of Stock Election or a facsimile hereof
is to be used either if Share certificates are to be forwarded herewith, if
Share certificates are to be delivered by book-entry transfer pursuant to
book-entry transfer procedures, or if delivery of Shares is to be guaranteed
and must be properly filled in, dated and signed in the box entitled
"Signature of Holder(s)", and must be received (together with stock
certificates representing the shares of LCA Common Stock as to which the LCA
Stock Election is made or with a duly signed Notice of Guaranteed Delivery of
such certificates or confirmation of a book-entry transfer of such shares, if
such procedure is available, into the Paying Agent's account at a Book-Entry
Transfer Facility pursuant to book-entry transfer procedures) by the Paying
Agent at the address of the Paying Agent set forth on the first page hereof
prior to the LCA Election Deadline. If Share certificates are delivered to the
Paying Agent in multiple deliveries, a properly completed and duly executed
Form of Stock Election must accompany each such delivery. Holders whose Share
certificates are not immediately available and who cannot deliver their Share
certificates and all other required documents to the Paying Agent prior to the
LCA Election Deadline may deliver their Shares pursuant to the guaranteed
delivery procedure. Pursuant to such procedure: (i) any such delivery must be
made by an Eligible Institution; (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, in the form attached herewith must be received
by the Paying Agent prior to the LCA Election Deadline; and (iii) in the case
of a guarantee of Shares, the Share certificates in proper form for transfer,
or a confirmation of a book-entry transfer of Shares, if such procedure is
available, into the Paying Agent's account at one of the Book-Entry Transfer
Facilities together with a properly completed and duly executed Form of Stock
Election with any required signature guarantees, (or, in the case of book-
entry transfer, an Agent's Message as defined below) and any other documents
required by this Form of Stock Election, must be received by the Paying Agent
within three New York Stock Exchange trading days after the date of execution
of such Notice of Guaranteed Delivery. The term "Agent's Message" means a
message, transmitted by a Book-Entry Transfer Facility to, and received by,
the Paying Agent and forming a part of a book-entry confirmation, which states
that such a Book-Entry Transfer Facility has received an express
acknowledgement from a Book-Entry Transfer Facility participant delivering the
Shares, that such participant has received and agrees to be bound by the terms
of this form of Stock Election and that LCA may enforce such agreement against
the participant.
Holders of Shares who are nominees only may submit a separate Form of Stock
Election for each beneficial owner for whom such registered holder is a
nominee; provided, however, that at the request of the Paying Agent, such
Holder shall certify to the satisfaction of the Paying Agent that such Holder
holds such LCA Electing Shares as nominee for the beneficial owner thereof.
Each beneficial owner for whom a Form of Stock Election is submitted will be
treated as a separate Holder.
HOLDERS WHO DO NOT SUBMIT AN EFFECTIVE FORM OF STOCK ELECTION OR WHOSE FORM
OF STOCK ELECTION AND SHARE CERTIFICATES (OR APPROPRIATE NOTICES OF GUARANTEED
DELIVERY), ARE NOT RECEIVED PRIOR TO THE LCA ELECTION DEADLINE WILL BE DEEMED
NOT TO HAVE MADE AN LCA STOCK ELECTION.
2. NEW CERTIFICATES AND CHECKS IN SAME NAME. If this Form of Stock Election
is signed by the registered holder(s) of the certificates delivered herewith,
the signature(s) must correspond exactly with the name(s) as written on the
face(s) of the certificates without alteration, enlargement or any change
whatsoever. If any certificates surrendered hereby are owned of record by two
or more joint owners, all such owners must sign this Form of Stock Election.
If any of the Shares delivered herewith are registered in the names of
different Holders, it will be necessary to complete, sign and submit as many
separate Forms of Stock Election as there are different registrations of such
Shares.
No signature of this Form of Stock Election is required to be guaranteed if
(i) this Form of Stock Election is signed by the registered holder(s) of the
certificates surrendered herewith, unless such holder(s) have completed either
the box entitled
8
<PAGE>
"Special Payment Instructions" or the box entitled "Special Delivery
Instructions" or (ii) the certificates are tendered for the account of a firm
that is a member of a registered national securities exchange or of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States (each of
the foregoing firms, banks and trust companies being referred to as an
"Eligible Institution"). In all cases requiring a signature guarantee, all
signatures on this Form of Stock Election must be guaranteed by an Eligible
Institution. To be an Eligible Institution for purposes of a signature
guarantee, the financial institution must be a participant in the Securities
Transfer Agents Medallion Program or the Stock Exchanges Medallion Program.
3. CHECKS IN DIFFERENT NAME. When a check in respect of LCA Retained Shares
is to be payable to the order of anyone other than exactly the name that
appears on the certificate(s) representing shares of LCA Common Stock
delivered herewith, such payment shall not be made by the Paying Agent unless
the box entitled "Special Payment Instructions" is completed, and the
signature is guaranteed by an Eligible Institution. In addition, if this Form
of Stock Election is signed by a person other than the registered holder(s) of
the certificates listed and submitted herewith, the certificates must be
endorsed or accompanied by appropriate stock powers, in either case signed
exactly as the name(s) of the registered holder(s) appear(s) on such
certificates. Signatures on any such certificates or stock powers must also be
guaranteed by an Eligible Institution as described above, unless signed by an
Eligible Institution. See Instruction 2 above.
4. SPECIAL DELIVERY INSTRUCTIONS. If the checks or the certificates for LCA
Retained Shares are to be sent to someone other than the registered holder(s)
or to an address other than the address of the registered holder, it will be
necessary to indicate such person or address in the box entitled "Special
Delivery Instructions."
5. PARTIAL EXCHANGES. If fewer than all the shares represented by any
certificate delivered to the Paying Agent are to be submitted for exchange
into LCA Retained Shares, fill in the number of shares which are to be
submitted in the box entitled "Description of Certificates Submitted." In such
case, a new certificate will be sent to the registered owners as soon as
practicable following the LCA Election Deadline. ALL SHARES REPRESENTED BY
CERTIFICATES SUBMITTED HEREUNDER SHALL BE DEEMED TO HAVE BEEN SUBMITTED FOR
EXCHANGE INTO LCA RETAINED SHARES UNLESS OTHERWISE INDICATED.
6. EXECUTION BY REPRESENTATIVES. If this Form of Stock Election or any stock
certificate(s) are signed by a trustee, executor, administrator, guardian,
officer of a corporation, attorney-in-fact or any other person acting in a
representative or fiduciary capacity, the person signing must give such
person's full title in such capacity and appropriate evidence of authority to
act in such capacity must be forwarded with this Form of Stock Election.
7. MUTILATED, LOST, DESTROYED OR STOLEN CERTIFICATES. In the event that the
Holder is unable to deliver to the Paying Agent certificate(s) formerly
representing his or her Shares due to the mutilation, loss, theft or
destruction of such certificate(s), prior to the effective time of the
Recapitalization Merger, such Holder should promptly notify the Paying Agent
and check the box on page 3. The Holder will then be instructed as to the
steps that must be taken in order to replace the Share certificate(s). This
Form of Stock Election may nevertheless be submitted, together with any
documents which may be required, subject to acceptance at the discretion of
the Company, provided, among other requirements, that the Holder signs and
furnishes an affidavit of loss in form satisfactory to the Paying Agent and
the Company, which affidavit may be obtained from the Paying Agent.
8. FORM W-9. The Holder should provide the Paying Agent with a correct
Taxpayer Identification Number ("TIN") on Form W-9 to prevent backup
withholding on payments made with respect to such Holder's Shares. Failure to
provide the Form W-9 may subject the Holder to 31% backup withholding on any
payment made with respect to any Shares. A blank Form W-9 has been included
with the Form of Stock Election and should be completed, signed and returned
in order to prevent backup withholding. If a Form W-9 is not properly
completed, signed and returned to the Paying Agent by any Holder, the Paying
Agent will withhold 31% of any payment made with respect to such Holder's
Shares until a completed Form W-9 is provided to the Paying Agent by such
Holder.
Failure to complete the Substitute Form W-9 will not, by itself, cause LCA
Common Stock to be deemed invalidly tendered, but may require the Paying Agent
to withhold 31% of the amount of any payments made pursuant to the
Recapitalization Merger. Backup withholding is not an additional Federal
income tax. Rather, the Federal income tax liability of a person subject to
backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained.
9
<PAGE>
For further information concerning backup withholding and instructions for
completing the Substitute Form W-9 (including how to obtain a TIN if you do
not have one and how to complete the Substitute Form W-9 if Stock is held in
more than one name), consult the Guideline of the IRS for Certification of
Taxpayer Identification Number on Substitute Form W-9.
9. MISCELLANEOUS. A single check and/or a single stock certificate
representing LCA Retained Shares will be issued in respect of each certificate
submitted.
10. DEFECTS OR IRREGULARITIES. No shares of LCA Common Stock will be validly
surrendered unless all defects or irregularities in the Form of Stock Election
or the deposit of any certificates for Shares have been cured or are waived.
Neither LCA nor Paragon will incur any liability for failure to give
notification of any defects or irregularities in sufficient time for the
Holder to obtain any particular tax or other result. Each of LCA and Paragon
reserves the absolute right to reject any or all Forms of Stock Election or
deposits of certificates the acceptance of which would, in its judgment, be
unlawful. The interpretation by LCA and Paragon of the terms and conditions of
the Recapitalization Merger Agreement and this Form of Stock Election
(including these Instructions) will be final and binding. The Paying Agent
will return to the Holder as soon as practicable any certificates it receives
that are not deposited properly and as to which any defects or irregularities
have not been cured or waived.
11. STOCK TRANSFER TAXES. It will not be necessary for transfer tax stamps
to be affixed to the certificates listed in this Form of Stock Election. LCA
will bear the liability for any state stock transfer taxes applicable to the
issuance and delivery of checks and certificates in connection with the
Transactions, provided, however, that if any such check is to be issued in the
name other than that in which the Share certificates submitted in exchange
therefor are registered, it shall be a condition of such exchange, and the
issuance of any check, that the person requesting such exchange shall either:
(i) pay to the Paying Agent the amount of any stock transfer taxes (whether
imposed on the Holder or such person, payable on account of the transfer to
such person, or (ii) provide the Paying Agent with satisfactory evidence of
the payment of such taxes or exemption therefrom.
12. INADEQUATE SPACE. If the space provided herein under "Description of
Certificates Submitted" is inadequate, the Certificate Number(s), the Number
of Shares Represented by Certificate(s) and the Number of Shares Submitted
should be listed on a separate signed schedule and attached hereto.
13. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance or
additional copies of this Form of Stock Election may be made to the
Information Agent at the telephone number and address set forth above.
B. SPECIAL CONDITIONS.
1. TIME IN WHICH TO ELECT. To be effective, an election pursuant to the
terms and conditions set forth herein on this Form of Stock Election
accompanied by the above-described certificates representing LCA Electing
Shares or a proper Notice of Guaranteed Delivery thereof, must be received by
the Paying Agent, at the address set forth above, no later than the LCA
Election Deadline. Holders whose stock certificates are not immediately
available may also make an effective LCA Stock Election by completing this
Form of Stock Election and by having the box entitled "Notice of Guaranteed
Delivery" properly completed and duly executed (subject to the condition that
the certificates for which delivery is thereby guaranteed are in fact
delivered to the Paying Agent, duly endorsed in blank or otherwise in form
acceptable for transfer on the books of LCA, no later than 5:00 P.M., New York
City time, on the third New York Stock Exchange trading day after the date of
execution of such Notice of Guaranteed Delivery). Each share of LCA Common
Stock with respect to which the Paying Agent shall have not received an
effective LCA Stock Election prior to the LCA Election Deadline, or with
respect to which the proration procedures set forth below and in the Proxy
Statement pertain, outstanding at the effective time of the Recapitalization
Merger, will be converted into the right to receive $40.50 in cash from
Paragon following the Transactions. See Instruction C.
2. REVOCATION OF ELECTION. Any LCA Stock Election may be revoked or changed
by the person who submitted this Form of Stock Election to the Paying Agent
and the certificate(s) for LCA Electing Shares withdrawn by written notice
duly executed and received by the Paying Agent up to and immediately prior to
the LCA Election Deadline. Such notice must
10
<PAGE>
specify the person in whose name the LCA Electing Shares to be withdrawn had
been submitted, the number of shares to be withdrawn, the name of the
registered holder thereof, and the serial numbers shown on the certificate(s)
representing the shares to be withdrawn. If an LCA Stock Election is revoked,
and the certificate(s) for LCA Electing Shares withdrawn, the LCA Electing
Shares certificate(s) submitted therewith will be returned promptly by the
Paying Agent to the person who submitted such certificate(s).
3. TERMINATION OF RIGHT TO ELECT. If for any reason the Recapitalization
Merger is not consummated or is abandoned, all Forms of Stock Election will be
void and of no effect. Certificate(s) for LCA Electing Shares previously
received by the Paying Agent will be returned promptly by the Paying Agent to
the person who submitted such certificate(s).
C. ELECTION AND PRORATION PROCEDURES.
1. ELECTIONS. By completing this Form of Stock Election in accordance with
the instructions herein, an LCA stockholder will be entitled to make an LCA
Stock Election; provided that any LCA Stock Election is subject to the
proration procedures described below and in the Proxy Statement in the event
of an oversubscription of such LCA Stock Election. A Holder who makes an LCA
Stock Election will be deemed to have accepted the consideration to be paid
pursuant to the Recapitalization Merger Agreement and to have waived appraisal
rights with respect to such Holder's LCA Electing Shares.
IN CONNECTION WITH MAKING ANY LCA STOCK ELECTION, A HOLDER OF LCA COMMON
STOCK SHOULD READ CAREFULLY, AMONG OTHER MATTERS, THE AFORESAID DESCRIPTION
AND STATEMENTS AND THE INFORMATION CONTAINED IN THE PROXY STATEMENT UNDER "THE
RECAPITALIZATION MERGER AGREEMENT--CERTAIN FEDERAL INCOME TAX CONSEQUENCES"
FOR A DISCUSSION OF THE TAX TREATMENT OF THE RECEIPT OF CASH AS A RESULT OF
PRORATION OR FRACTIONAL SHARES BY A HOLDER WHO HAS MADE AN LCA STOCK ELECTION.
2. PRORATION. If the aggregate number of LCA Electing Shares is more than
1,905,748 (the "LCA Retained Share Number"), then pursuant to the
Recapitalization Merger Agreement (i) each share of LCA Common Stock other
than LCA Electing Shares will be converted into the right to receive $40.50
per share in cash (the "LCA cash price"), and (ii) each Holder making an LCA
Stock Election will be entitled to retain that number of LCA Retained Shares
as is equal to the product of (x) the number of LCA Electing Shares of such
Holder and (y) a fraction, the numerator of which is the LCA Retained Share
Number and the denominator of which is the aggregate number of LCA Electing
Shares and (iii) each other LCA Electing Share held by such Holder will be
converted into the right to receive the LCA Cash Price (as defined in the
Proxy Statement).
If the aggregate number of LCA Electing Shares is less than the LCA Retained
Share Number, then pursuant to the Recapitalization Merger Agreement (i) each
LCA Electing Share will remain outstanding as an LCA Retained Share, (ii) in
addition to such LCA Retained Shares each Holder (including Holders who made
LCA Stock Elections with respect to some, but not all, of their Shares) will
be required to retain as LCA Retained Shares that number of Shares as is equal
to the product of (x) the excess of the LCA Retained Share Number over the
aggregate number of LCA Electing Shares and (y) a fraction, the numerator of
which is the number of Shares (other than LCA Electing Shares) held by such
Holder and the denominator of which is the aggregate number of outstanding
Shares other than LCA Electing Shares, and (iii) each other Share held by such
Holder will be converted into the right to receive the LCA Cash Price.
Pursuant to this proration procedure, if no LCA Stock Elections are made (or
if LCA Stock Elections are made by all stockholders with respect to all
outstanding LCA Shares), each Holder would receive $40.50 per share with
respect to approximately 90.54% of such Holder's shares and would retain
approximately 9.46% of such shares as LCA Retained Shares. Thus, under such
assumption, each Holder would receive and retain in the Recapitalization
Merger, for each Share, approximately $36.67 (90.54% of $40.50) in cash and
0.0946 of an LCA Retained Share. Any Holder who would otherwise retain a
fraction of an LCA Retained Share will receive a cash payment in lieu thereof.
A description of the election and proration procedures is set forth in the
Proxy Statement under "The Recapitalization Merger Agreement--Merger
Consideration and Proration." A full statement of the election and proration
procedures is contained in Article II of the Recapitalization Merger Agreement
and all LCA Stock Elections are subject to compliance with such procedures.
AS A RESULT OF THE PRORATION PROCEDURES DESCRIBED ABOVE AND IN THE PROXY
STATEMENT, HOLDERS MAY NOT RECEIVE THE AMOUNT OF CASH AND RETAIN THE NUMBER OF
LCA RETAINED
11
<PAGE>
SHARES THAT THEY ELECT. SUCH HOLDERS WILL NOT BE ABLE TO CHANGE THE NUMBER OF
LCA RETAINED SHARES OR THE AMOUNT OF CASH ALLOCATED TO THEM PURSUANT TO SUCH
PROCEDURES.
3. NON-ELECTING SHARES. If no election is made by a Holder, such Holder
shall be deemed not to have made an LCA Stock Election. If LCA shall determine
that any election was not properly made with respect to any Shares, such
election shall be deemed to be not in effect, and the Holder covered by such
election shall, for the purposes of the Recapitalization Merger Agreement, be
deemed not to have made an LCA Stock Election.
D. RECEIPT OF LCA RETAINED SHARES OR CHECKS.
As soon as practicable after the effective time of the Recapitalization
Merger and after the LCA Election Deadline, the Paying Agent will mail
certificate(s) for LCA Retained Shares and/or cash payments by check to
Holders with respect to each LCA Electing Share that is included in any
effective LCA Stock Election. Holders who fail to make an effective LCA Stock
Election with respect to any or all of their Shares will receive, for each
such share, the right to receive $40.50 in cash, (or, if there is
undersubscription of LCA Stock Elections, a lesser amount plus certificates
for LCA Retained Shares, as a result of proration), as soon as practicable
after the certificate(s) representing such Shares have been submitted.
No fractional shares will be issued in connection with the Transactions. In
lieu thereof, the Paying Agent, as agent for the Holders who become entitled
to a fraction of an LCA Retained Share, shall promptly sell the aggregate of
the fractional share interests of such Holders and remit the net proceeds
thereof (after commissions, costs and expenses incurred in connection with
such sale) to such Holders according to their respective interests therein.
12
<PAGE>
IMPORTANT TAX INFORMATION
Under U.S. federal income tax law, a Holder surrendering certificates is
required to provide the Paying Agent with such Holder's correct TIN on
Substitute Form W-9 below. If such Holder is an individual, the TIN is the
Holder's social security number. The Certificate of Awaiting Taxpayer
Identification Number should be completed if the surrendering Holder has not
been issued a TIN and has applied for a number or intends to apply for a
number in the near future. If the Paying Agent is not provided with the
correct TIN, the Holder may be subject to a $50 penalty imposed by the
Internal Revenue Service. In addition, cash payments that are made to such
Holder with respect to surrendered certificates may be subject to backup
withholding.
Certain Holders (including, among others, all corporations and certain non-
U.S. individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as such an exempt
recipient, that Holder must submit a statement, signed under penalties of
perjury, attesting to that individual's exempt status. Such statements can be
obtained from the Paying Agent. See the enclosed Guidelines for Certification
of Taxpayer Identification Number on Substitute Form W-9 for additional
information.
If backup withholding applies, the Paying Agent is required to withhold 31%
of any cash amounts otherwise payable to the Holder. Backup withholding is not
an additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained from the Internal
Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on cash payments that are made to a Holder
with respect to shares of LCA Common Stock owned by such Holder, the Holder is
required to notify the Paying Agent of his or her correct TIN by completing
the form herein certifying that the TIN provided on Substitute Form W-9 is
correct (or that such Holder is awaiting a TIN) and that (i) such Holder has
not been notified by the Internal Revenue Service that he or she is subject to
backup withholding as a result of failure to report all interest or dividends
or (ii) the Internal Revenue Service has notified such Holder that he or she
is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE PAYING AGENT
Each Holder is required to give the Paying Agent the social security number
or employer identification number of the record Holder(s) of the
Certificate(s) evidencing shares of LCA Common Stock. If the Certificate(s) is
(are) in more than one name or is (are) not in the name of the actual Holder,
consult the enclosed Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to
report.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
If the tendering Holder has not been issued a TIN and has applied for a
number or intends to apply for a number in the near future, write "Applied
For" in the space for the TIN on Substitute Form W-9, sign and date the form
and the Certificate of Awaiting Taxpayer Identification Number and return them
to the Paying Agent. If such certificate is completed and the Paying Agent is
not provided with the TIN within 60 days, the Paying Agent will withhold 31%
of all cash payments made thereafter until a TIN is provided to the Paying
Agent.
SUBSTITUTE FORM W-9 REQUEST FOR
TAXPAYER IDENTIFICATION NUMBER AND CERTIFICATION
PAYOR'S NAME:
Name as shown on account (if joint, list first and circle name of the
person or entity whose number you enter below)
NAME _______________________________________________________________________
ADDRESS ____________________________________________________________________
CITY, STATE AND ZIP CODE ___________________________________________________
13
<PAGE>
TAXPAYER IDENTIFICATION
NO.--FOR ALL ACCOUNTS
SUBSTITUTE
Social Security No.
FORM W-9
Enter your taxpayer ----------------------
identification number in
the appropriate box.
DEPARTMENT OF
THE TREASURY
INTERNAL REVENUE
SERVICE
Employer Identification
No.
For most individuals this
is your social security
number. If you do not have
a number, see the enclosed
Guidelines.
----------------------
PAYER'S REQUEST FOR TAXPAYER IDENTIFICATION NO.
- --------------------------------------------------------------------------------
Certification--Under the penalties of perjury, I certify that:
Note: If the account is in
more than one name, see the
chart in the enclosed
Guidelines on which number
to give the payor.
(1) The number shown on this form is my correct Taxpayer Identification
Number (or I am waiting for a number to be issued to me); and
(2) I am not subject to backup withholding either because I have not been
notified by the Internal Revenue Service ("IRS") that I am subject to
backup withholding as a result of a failure to report all interests or
dividends, or the IRS has notified me that I am no longer subject to
backup withholding.
Certification Instruction--You must cross out Item (2) above if you have
been notified by the IRS that you are subject to backup withholding because
of under-reporting interest or dividends on your tax return. However, if
after being notified by the IRS that you were subject to backup withholding
you received another notification from the IRS that you are no longer
subject to backup withholding, do not cross out Item (2). (The certification
requirement does not apply to real estate transactions, mortgage interest
paid, the acquisition or abandonment of secured property, contributions to
an individual retirement account, and payments other than interest and
dividends. Also see Signing the Certification under Specific Instructions in
the enclosed Guidelines.)
SIGNATURE __________________________ DATE _______________________________
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN
BACKUP WITHHOLDING. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE
FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE
FOLLOWING CERTIFICATE IF YOU WROTE "APPLIED FOR" IN THE
SPACE FOR THE "TIN" ON SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(b) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number within
60 days, 31% of all reportable payments made to me thereafter will be
withheld until I provide a number.
---------------------------------- ----------------------------------
SIGNATURE DATE
14
<PAGE>
NOTICE OF GUARANTEED DELIVERY
for
Submission of Shares of Common Stock
of
Living Centers of America, Inc.
As set forth in the Form of LCA Stock Election, this Notice of Guaranteed
Delivery ("Notice") must be used if: (i) certificates evidencing shares of
common stock, par value $0.01 per share of LCA (the "Shares") are not
immediately available; (ii) the certificates evidencing Shares and all other
required documents cannot be delivered to the Paying Agent prior to the LCA
Election Deadline (as defined in the Form of LCA Stock Election); or (iii) the
procedure for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice may be transmitted by facsimile transmission or delivered
by hand or mail to the Paying Agent.
The Paying Agent is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
By Mail:
By Facsimile By Hand or Overnight
Transmission: Courier:
40 Wall Street 40 Wall Street
(for Eligible
Institutions)
46th Floor 46th Floor
New York, NY 10005 (718) 234-5001 New York, NY 10005
Confirm Facsimile by Telephone:
(718) 927-8200
or
(212) 936-5100
DELIVERY OF THIS NOTICE TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
This Notice is not to be used to guarantee signatures. If a signature on the
Form of LCA Stock Election is required to be guaranteed by an Eligible
Institution under the instructions thereto, the signature guarantee must
appear on the applicable space provided in the signature box in the Form of
LCA Stock Election.
THE GUARANTEE ON THE REVERSE SIDE MUST BE COMPLETED.
<PAGE>
NOTICE OF GUARANTEED DELIVERY
(TO BE USED ONLY IF CERTIFICATES ARE NOT SURRENDERED HEREWITH)
The undersigned firm, which is a member of a registered national securities
exchange or the National Association of Securities Dealers, Inc. or a
commercial bank or trust company having an office or correspondent in the
United States and is a participant in the Securities Transfer Agent's
Medallion Program or the Stock Exchanges Medallion Program, herewith
guarantees to deliver the certificates described above, duly endorsed in
blank or confirmation of book-entry transfer of the Shares into the Paying
Agent's account at the Depository Trust Company or the Philadelphia
Depository Trust Company or otherwise in form acceptable for transfer on the
books of LCA, to the Paying Agent in each case no later than 5:00 p.m. New
York City time on the third New York Stock Exchange trading day after the
date of execution of this Notice of Guaranteed Delivery.
Signature: ...................................................................
Name of Firm: ................................................................
Address: .....................................................................
Telephone Number (including area code): ......................................
Dated: .......................................................................
<PAGE>
EXHIBIT 99.11
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ Keith B. Pitts
_____________________________________
Keith B. Pitts
<PAGE>
EXHIBIT 99.12
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ Robert L. Rosen
_____________________________________
Robert L. Rosen
<PAGE>
EXHIBIT 99.13
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ Laurence M. Berg
_____________________________________
Laurence M. Berg
<PAGE>
EXHIBIT 99.14
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ John H. Kissick
_____________________________________
John H. Kissick
<PAGE>
EXHIBIT 99.15
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ Peter P. Copses
_____________________________________
Peter P. Copses
<PAGE>
EXHIBIT 99.16
CONSENT OF PERSON ABOUT TO BECOME A DIRECTOR
I hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of my name as a person who is
anticipated to become a director of Paragon Health Network, Inc. immediately
following the consummation of the offering that is the subject of this
Registration Statement.
September 26, 1997
/s/ William G. Petty, Jr.
_____________________________________
William G. Petty, Jr.
